One reason not to trust a priest for financial advice

Cardinal Cormac Murphy O’Connor claims that capitalism died last year. Nonsense, says John Stepek. The crash shows it is alive and kicking. The biggest threat now is that governments will drag out the bust with their ill-advised attempts to spend their way out of it.

Everyone and his dog has an opinion on the credit crunch and what it means for the world. And some of them attract a disproportionate amount of attention.

Yet another churchman is in the news this morning for propounding his theories on the economy. Apparently Cardinal Cormac Murphy O'Connor, head of the Catholic Church in England and Wales, has told guests at a private fund-raising dinner that while communism died in 1989 with the fall of the Berlin wall, "capitalism had died" last year.

I suspect the remark has been a bit overblown, but in any case, who cares? You would no more go to a priest for financial advice than you'd ask your plumber to hear your confession. They might like to get their pictures in the paper and drum up a few bums on pews by pronouncing on the big issues of the day, but I doubt that anyone really pays them much heed on financial topics.

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Sadly we can't say the same for a much more dangerous idea that seems to have been swallowed whole-heartedly by the nation the idea that the Government offers our only route out of this crisis...

There will be a lot more Government intervention in 2009

2009 isn't proving the easiest year to make forecasts about. With volatility so high and the stability of the financial system still very much in question, it's hard to say where share prices will be at this time next week, let alone this time next year.

But there's one prediction we can make with nigh-on absolute certainty. We'll be seeing a lot more Government intervention in the economy this year. And lots of people seem to think this is a good thing or at least, a necessary evil.

The notion that yet more Government spending is what will save us from the credit crunch seems to have few challengers. The public and the political establishment across the world seem to have embraced the idea that already profligate, bloated public sectors should become even more profligate and bloated in order to offset the worst affects of the recession.

Commentators and politicians not unlike churchmen like to frame the decision on what to do as some sort of moral question. Gordon Brown tells us that "something must be done". Under his spin on it, it would be immoral not to spend Government money to prevent people from losing their jobs.

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Yet on the other hand, pundits also like to claim that those who oppose massive Government spending are 'puritans'. The idea that saving, paying off debt, and yes, rising unemployment in the short term, might be necessary conditions for recovery, is seen as a nave, overly moralising position, that has no place in the modern world.

What the pundits seem to argue is that we can either spend the money now, and everything will be OK; or we can unnecessarily don hair-shirts and beat ourselves up about our past profligacy.

As the Government spends more, the economy becomes less efficient

But those who argue against Government intervention are not masochists. If higher spending was the consequence-free answer to all our problems, then no one would have a problem with it. But it does have consequences. There's no such thing as a free lunch. The more the Government spends, the more it squeezes out the private sector, and the less efficient the economy becomes.

And everyone seems to ignore the fact that the Government will be increasing its spending anyway. As more people are made redundant, more of them will need to claim benefits, which are there precisely for the purpose of tiding people over for periods when they are unable to find work.

Like it or not, industries and individual companies do reach the end of their usefulness if the Government has any role in employment at all, it should be to support people while the economy rebalances, not to prop up dinosaur industries and zombie companies.

In fact, despite what our religious leaders might say, the crunch is evidence that capitalism is in fact alive and kicking. When too much poor investment occurs in housing that nobody wants, or complicated financial products that nobody understands then that has to be unwound. And that's now happening, despite the best efforts of our governments to prevent it. The more interference that happens now, the longer it'll take for the economy to recover fully.

Thankfully, not everyone is buying the 'more spending' solution. Peter Schiff of Euro Pacific Capital had an excellent piece in the Wall Street Journal over the Christmas period which, though US-focused, explains very well why Government spending is no way out of the credit crisis I highly recommend you read it: There's no pain-free cure for recession.

Our recommended article for today:

Obama's bid to rescue America's Ponzi economy

Barack Obama could spend up to $750 billion to restore confidence in America's broken economy. But the best we can expect is a small stock market bounce.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.