In an interview on Keynes

And Justyn Walsh?

Walsh’s book is very interesting. It came out last year and is a fascinating account of Keynes’s career as an investor. It shows very well the link between Keynes’s experience as an investor, speculating on the markets, and his theory. As an investor Keynes became more and more aware of the market’s uncertainty and volatility. Justyn Walsh is a hedge fund manager and he makes the good point that the people who actually work in the financial system do not believe that people generally have correct expectations about the future. The insiders know they are gambling. So, why do they do it you might ask?

I might.

Well, if you’re an investor and you don’t know what’s going to happen you look for some assurance from asset managers who claim to know. But, of course, if you look back at their record you will probably find that at some point they have crashed very badly. This is what analysts do. If you are an investor you get a report every month saying: This is what’s happening, this is what’s going to happen. Pension funds invest money, give it to asset managers who say they know, they can predict what will happen. But it’s all rubbish. They don’t have a clue. Your money is always at risk but you need to feel reassured so the asset managers try to be like doctors. You go to the doctor in the hope that the doctor will assure you that your health is not as bad as you think. Keynes made a lot of money investing, but he lost a lot of money too and he came to the view that you shouldn’t speculate, that you should try to find a good solid company to invest in. Keynes said that he wanted to make the relationship between an investor and his share as permanent as marriage. That is no longer a suitable image as marriage is more of a one-night stand now, but you know what I mean.

You sound very convincing. So convincing that I can’t imagine what it was that Reagan and Thatcher thought. They must have known that the future is uncertain and volatile, surely?

No! They didn’t know! Reagan and Thatcher were operating on a more abstract plane. They were mainly driven by dislike of big government and therefore had to maintain that markets themselves were inherently more efficient than governments. They dismantled all Keynes’s barriers against untrammelled greed and, since then, there have been five big financial crises.

Because they removed the barriers?

Because they removed the barriers. Before Reagan and Thatcher there were much tighter financial regulations. Until 1999 retail banks were not allowed to invest depositors’ money. This was the last big barrier. The hedge funds that grew up were completely unregulated and their balance sheets were their own responsibility. The trouble is that things were not completely deregulated. After the Great Depression depositors were insured against loss but there was no regulation on what the banks could do. So the profits go to the bank owners but the losses are born by the tax payers.

You sound as though you think rescuing the banks is a bad thing then? Isn’t it Keynesian to rescue them?

I think you do have to rescue them. You can’t let everything just go kaput. If you are in that hole you have to get out of it. But you do have to put some restrictions on the activities of the banks.

Is that what’s happening now, along with the stimulus package?

Well, at first they were talking about implementing proper restrictions but now that the banks are more or less OK again they seem to be abandoning the plans. They might make some cosmetic changes but I fear they are just setting things up for the next crisis.