Try Sam Brittan on: A cool look at the current deficit hysteria
http://www.ft.com/cms/s/0/4679c2be-aed0-11de-96d7-00144feabdc0.html?nclick_check=1

Leon Brittan, a cabinet minister in one of Mrs Thatcher’s governments and subsequently a member of the EU Commission, is Sam Brittan’s younger brother.

Because the Soviet Union loudly proclaimed itself, in the Soviet constitution, for example, to have a socialist economy that was supposed to be progressing towards communism, all according to the prescription in Lenin: The State and the Revolution. Marx was entirely obscure as to how a socialist or communist society was supposed to function.

I don’t know what “state capitalism” is supposed to be and suspect that it is just a lump of obfuscating jargon intended to camouflage the unpleasant-to-horrific reality of the regimes which have claimed to be applying socialist principles.

I’ve been posting for years – yes, years – that the only really free markets are to be found in the middle of the Sahara Desert or a tropical jungle where the writ of law doesn’t run. The fact is that observed functioning markets depend on de facto infrastructures of laws and regulations and law enforcement agencies to enforce property rights, to deter fraud and corruption and the rest. Risk premiums in transactions tend to soar in economies with deficient, erratic, or corrupt legal systems. The sensible debate is not about whether we should have Free Markets but about which of the many varieties of infrastructures of laws and regulations are most conducive in practice to growth in economic prosperity.

As you hint now, there are, in fact, many varieties of capitalism – in addition to many different varieties of governance. The ideologies of the “social market economies” of countries like Germany are distinctively different from both the Anglo-Saxon model, which is currently disgraced, and the so-called Nordic model, which includes the Netherlands.

Try: Globalisation and the reform of the European social models, prepared by André Sapir for the think-tank Bruegel and presented at the ECOFIN Informal Meeting in Manchester on 9 September 2005, which argued that there is not one European social model, but rather four – the Nordic, Anglo-Saxon, Mediterranean and the Continental:

• The Nordic model (welfare state, high level of social protection, high level of taxation, extensive intervention in the labour market, mostly in the form of job-seeking incentives)
• The Anglo-Saxon system (more limited collective provision of social protection merely to cushion the impact of events that would lead to poverty)
• The continental model (provision of social assistance through public insurance-based systems; limited role of the market in the provision of social assistance)
• The Mediterranean social welfare system (high legal employment protection; lower levels of unemployment benefits; spending concentrated on pensions)

http://www.euractiv.com/Article?tcmuri=tcm:29-146338-16&type=News

On Sapir’s assessment, only the Anglo-Saxon and Nordic models are sustainable over the longer term.

An updated memorandum relating Andre Sapir’s original paper on: Globalisation and the Reform of European Social Models (November 2005), is here:
http://www.bruegel.org/Public/fileDownload.php?target=/Files/media/PDF/Publications/Policy%20Briefs/PB200501_SocialModels.pdf

Note: the Nordic economies function reasonably well despite relatively high tax burdens and generous welfare benefits but that might be because each has a relatively small population so it easier to reach a national consensus on preferred national policy options.

Perhaps – although some readers may appreciate the links without wishing to contribute.

The substantive diagnostic and policy issues at stake in the financial crisis and the ensuing recession are anything but technically simple and straight forward.

I follow the news closely in any event. The motivation for the special interest is participation in a lively Current Affairs discussion group of the local branch of University of the Third Age (U3A):
http://www.u3a.org.uk/

The discussion group – which has been meeting twice monthly for the last seven years (!) – includes retired professionals from diverse backgrounds, such as a charge nurse, accountants, professional social workers, a business consultant, a graduate from the Sorbonne, the widow of the engineer who used to run that retired powerstation near Chelsea Bridge before it closed and so on.

Anyway, I’ve been reading and following Paul Krugman for years.

Whatever else, for any other ancient readers here, I thoroughly commend joining your local U3A branch.

“Britain was served notice by the International Monetary Fund today that reforms to healthcare and pensions will be needed to repair the long-term damage to public finances caused by the global recession.”
http://www.guardian.co.uk/politics/2009/oct/01/nhs-debt-imf-britain

Doubtless, this will be welcome news for the public spending cutters. How about leaving this to a bit of local initiative and enterprise to introduce local terminator stations to cut back on the numbers of the vulnerable and chronically sick pensioners?

It’s also worth knowing about the latest IMF World Economic Outlook in October 2009:
https://www.imf.org/external/pubs/ft/weo/2009/02/index.htm

One incidental but important value of these reports is that they have a potentially crucial public function in exposing lying by politicians.

Philip Hammond, the shadow secretary to the Treasury, has been going around claiming the recession in Britain is all due to Gordon Brown – which neatly fits a repeating media narrative on why Labour needs to dump Brown as leader.

Curious then about the recessions in all those other economies in Europe, North America and Japan, several of which have experienced greater hits on their national GDP than Britain has.

Btw in previous message #40: “Germany” should have read: “West Germany”.

The implict suggestion that risks are somehow avoided in some other unspecified systems – like “socialism” – is laughable, especially given the collapse of the socialist economies in eastern Europe in 1989. The centrally planned command economies, like the Soviet Union – famously with bonus payments paid to socialist enterprises which over-fulfilled planning targets – were notoriously inefficient with recurring product shortages alongside persistent surpluses of other products. Try the late Alec Nove on: The Soviet Economy.

What matters is not the prevalence of risk and uncertainty but how risk and uncertainty are accommodated in financial markets and by enterprises.

On the crucial differences between “risk” and “uncertainty”, see: Frank Knight: Risk, Uncertainty and Profit (1921)
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=306&Itemid=27

On the question as to why we observe firms, within which markets are subordinated to a hierarchy of managerial decisions, see Ronald Coase on: The Nature of the Firm (1937):
http://www.sonoma.edu/users/e/eyler/426/coase1.pdf

“The average price of a house in the UK is now the same as it was a year ago – or so says the Nationwide. But even estate agents are wary of calling the turn of the cycle. And for good reason.

“Of course, prices are still lower than they were – on average, prices in the Nationwide’s index have fallen 13.5% since their peak in October 2007. But if you’d wagered a year ago – when the world was ending in the financial markets – that house prices were going to stabilise about six months later and be back to the same level within a year, you would have found plenty of people happy to be on the other side of your bet. . . ”
http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/

Which so-called experts? When I started on the house-buying ladder all those decades ago, 100% (and higher) mortgages were regarded as ridiculously “imprudent” by financial institutions and that was when claimant count unemployment rates – the ILO standardised unemployment rate based on sample surveys hadn’t been devised then – were typically under 2%, or more likely under 1% in the region where I lived then.

Even so, with the cheap money of the early 1970s when interest rates were decided by the Chancellor in HM Treasury – not by the Bank of England – we had a house-price bubble. And another in the late 1980s as a consequence of Nigel Lawson’s monetary policy when Treasury-set interest rates were set lowish to keep the exchange rate of the Pound “competitive” – and recall that Lawson obviously regards himself as a policy expert. Note: in one job I had, one of my line managers, a very good economist, was effectively sacked from the Treasury by Lawson.

Apart from all that, there were increasing press reports in 2007 of first-time house buyers being encouraged to lie about their incomes to qualify for mortgages by bonus-motivated agents pushing mortgages. It was therefore hardly surprising when it turned out that the borrowers couldn’t afford to make the payments on the mortgages.

We also discovered that some banks had been borrowing heavily in the wholesale money markets to fund the mortgages which the banks had been pushing on gullible house-buyers. There was added risk for the banks contingent on the continued availability of funds on the wholesale markets at interest rates below their lending rates. But inter-bank borrowing on the wholesale money markets got scarce, with the flood of “Collateralised Debt Obligations” underpinned by subprime mortgages, and lending rates on the wholesale markets rose steeply – see above at #28.

Finance markets are riddled with “asymmetric information” – where knowledge about transactions risk differs between borrowers and lenders – which is widely recognised as another potential source of market failure. Nobel laureate Joe Stiglitz has a famous paper about this:
http://mcb.unlp.googlepages.com/StiglitzWeiss1981.pdf

Some make much of the issue of council housing in Britain but recall that in the 1950s, the German government of that time decided to leave the massive problem of housing reconstruction after WW2 to the private sector. The downstream outcome, when I last checked the figures a few years back, was that the majority of households in Germany were still living in rented housing, unlike Britain where 70+% of households live in owner-occupied housing. There was no house-price bubble in Germany recently.

The First Global Financial Crisis of the 21st Century, produced in 2008 by the Centre for Economic Policy Research:
http://www.voxeu.org/reports/subprime/report.pdf

“UK banks face stricter bonus rules than US”
http://www.ft.com/cms/s/0/9c43aaf4-ae01-11de-87e7-00144feabdc0.html?nclick_check=1

My general view of 20 years experience, is too much regulation turns peoples brains off, and thats what happened in the banking sector, regulation gave them a false sense of security.

Deary me, that is highly simplistic thinking.

As someone who has also worked in the highly regulated Civil Engineering sector, I can tell you that it is when firms DO NOT follow regulation (eg. on health & safety) that cock ups – and deaths – occur.

I agree that it is precisely when individuals take their eye off the ball – perhaps because inspection regimes have become more lax due to rampant, abstract ideology – that these incidents occur.

That leads to the opposite conclusion from the one you’re trying to reach. Following the rules may help (no such thing as certainty here) to keep people safer.

Laissez faire on the other hand exposes everyone to risk. Much of it huge.

“Britain’s five largest banks are to accept the curbs on bonuses agreed by G20 leaders at the recent Pittsburgh summit, Alistair Darling has announced.

“The five banks that have signed up to the new rules are Barclays, HSBC, Lloyds, RBS and Standard Chartered.

“While the curbs do not limit bonuses, the changes will include the banks having to disclose all such payments.”

And more . .
http://news.bbc.co.uk/1/hi/business/8283735.stm

SM Reinhart + Kenneth Rogoff: This Time is Different – Eight Centuries of Financial Folly (Princeton UP, 2009)

Rogoff, now at Harvard, was previously chief economist at the IMF.

Henry Kaufman: The Road to Financial Reformation (Wiley 2009)

Kaufman has long track record as an historian and analyst of financial markets.

Martin Wolf on regulating fiancial services in Wednesday’s FT is worth reading, as always:
http://www.ft.com/cms/s/0/34cbca0c-ad28-11de-9caf-00144feabdc0.html?nclick_check=1

One crucial insight in all this is that even state-owned banks make totally daft investments. The French experience with Crédit Lyonnais, a state-owned bank since 1945, is an object lesson demonstrating that public ownership of a bank guarantees absolutely nothing so long as banks operate under a precept of privatising gains from banking but socialising the losses:

“By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion.”
http://www.erisk.com/Learning/CaseStudies/CreditLyonnais.asp

At one stage, in pursuit of the fantasies of its management, this French, state-owned bank came to own the MGM studios in Hollywood, as well as making multi-million loans to that arch crook, Robert Maxwell.

Btw Dominique Strauss-Kahn is now MD of the IMF. Prior to his political career, he was a professor at École nationale d’administration (ENA) through which most of France’s political elite, such as Delors, Chirac, Dominique de Villepin, Eduard Balladur, Michel Rocard, Alain Juppé, Lionel Jospin etc etc passed as students – except for, amongst a few others, President Sarkozy.

Lets take 1980 and 2005 as the benchmark years and calculate how many regulatory hurdles you have to pass to set up a basic retail personal and business banking service.

I am not sure about 1980 in the UK, but to in the UK you would have to knock off around 12000 pages of regulation in 2005 (according to my MP who I wrote and asked) so thats hardly laisser faire is it?

I am not a banker, but i work in a highly regulated civil engineering field, in demolition as it happens, and I can tell you people, some very bright and highly educated work exclusively and blindly to the regulations and make big mistakes as they don’t apply common sense leading to error and sometimes death. There is no substitute for experience.

My general view of 20 years experience, is too much regulation turns peoples brains off, and thats what happened in the banking sector, regulation gave them a false sense of security.

“Mr Darling intends to legislate to ensure City bonuses are structured to reward long-term success, although new guidelines are already being put in place by the Financial Services Authority. He will tell bank remuneration committee chiefs next week to apply the new rules immediately – before the legislation comes into force – amid fears that rising bank profits could feed through to a politically embarrassing New Year bonus season.”
http://www.ft.com/cms/s/0/036ac7b2-ac90-11de-a754-00144feabdc0.html?nclick_check=1

Lord Turner is curently chairman of the Financial Services Authority (FSA). In earlier manifestations, he worked for the Chase Manhattan Bank and was later Director of the CBI 1995-9.

The fact is that London and South East resident taxpayers were bank rolling public spending in the other regions in Britain. Without those tax revenues, public spending will get cut back more in order to end the deficit.

The bankers then securitised those very mortgages and sold off bundles of subprime mortgages (= Collateralized Debt Obligations) into the finance markets with the blessings of credit rating agencies which had awarded the bundles starred ‘A’ credit ratings. Other bankers and hedge funds went on buying these duff bundled mortgages or used the bundles as collateral for inter-bank borrowing until the banks began to appreciate that the bundles could be worth a great deal less than the price paid or apparent value.
http://en.wikipedia.org/wiki/Collateralized_debt_obligation

As that realisation spread, banks curtailed their usual lending to other banks, for fear of being caught with duff collateral, and also became very wary about regular corporate lending to nonfinancial companies as well, partly because of bank balance sheets seriously weakened by their previous binge purchases of duff assets.

The seizing up of bank lending and mortgages availability collapsed house construction in Britain and caused commercial and industrial businesses to drastically curb intended business investment – all of which drove the economy into recession.

It would seem to follow logically that it’s the Police, and not the criminal law, who are really to blame for crime, from which we might conclude that the Police ought be sacked and relegated to prison.