SELF-DECEPTION is with us all the time but when the going gets tough it takes on a whole new form. It may be that I am a soft touch but I am prepared to believe that when those fizzy-brained geniuses in their red braces and wide stripes were dreaming up all those weird and temporarily wonderful financial derivatives they sincerely thought they were creating value. After all, were they not all founded on the immutable law of nature that US house prices never, ever, fall?
Investors do it too, deluding themselves that share prices must surely carry on upwards – if not for ever, at least for a while longer – and if necessary inventing new valuation metrics when the old ones become irritating.
The snag is that they c
an do this on the way down too. Now, the whole world is going to the dogs and there's nothing good to be said about anything.
Company directors are not immune either, forever falling for delusional pitches from image consultants, PR agencies and the like. If I could have just 1 per cent of the corporate money that has been frittered away over the years on stupid make-overs that achieve nothing other than make the business a laughing stock I could retire a happy man. Even those pillars of rectitude, economists, are sometimes able to fool themselves; after all I genuinely think I am pretty good at what I do…
So self-deception is everywhere but in mitigation it is usually accidental. If those bankers had been dishonest they would have covered their tracks better. If investors knew they were being daft they wouldn't keep falling for the classic dummy error of selling at the bottom and buying at the top. And maybe I would have understood much earlier where the credit crunch was taking us.
But there is one population group who take the whole concept to an entirely new level, at which it is well nigh impossible for anyone else to tell whether what we are looking at is self-delusion or rank dishonesty. At this exalted level statements and decisions emerge that are so far removed from rationality that the originators clearly must be barking mad or uttering terminological inexactitudes through their teeth. I refer, of course, to politicians in general and the UK government in particular.
Here are just two examples.
Think about those wicked banks that wouldn't pass on the 1.5 point cut in base rates. The Chancellor was subtly critical but the organ grinder wasn't. Government made it quite clear the banks were villains.
Let's look at some numbers. Banks do not borrow at base rate, they scramble for funds wherever they can get them. Recently some have issued short-term bonds, but look at the costs: issued at 0.25 per cent over Libor, they pay a 0.5 per cent fee to the government plus a variable amount based on past credit risk and another nifty little charge if the loan is non-sterling. It's a bit like thinking you can buy an air ticket for £1.
Those bonds are costing roughly 6 per cent but it's apparently all fine and dandy for the government to pillory the banks for not lending that money on to us at 3.5 per cent – all the while pocketing a hefty rake off to boot.
Memo to government: banks that borrow at 6 per cent and lend at 3.5 per cent go bust.
Defending banks probably doesn't raise my ratings, so let's look at borrowing. For years we've been fobbed off that borrowing to invest is a good thing.
Never mind that debt was going up and up when by rights it should have been going down; never mind that we have precious little to show for it. Did our then chancellor really believe that pouring money into an economy that was already hot while saving nothing for a rainy day was a good idea?
Maybe he did. After all, now that borrowings have broken through his own top limit he has the nerve to announce that because borrowings are "low" we can splurge yet more. But it's certainly hard to know; barking or – what? Your call.
My point is this: self-delusion always catches us in the end and we have to suffer.
But when we suspect that our pain stems from a mix of expediency and dishonesty it is so much harder to bear.
And I'm feeling a lot of pain right now.
• Peter Bickley is director of economics at Tilney Private Wealth Management
