The Pin Factory Blog

It wasn't long after the financial crisis that we had every lefty worth their name crawling out of the woodwork insisting that this just proved how wrongly banking was structured. We must move back to local banks. Banks which had local politicians on the boards so as to make sure that the wider interests of the community were considered. Other stakeholders, like the unions must be included. And we most certainly had to divorce any investment banking from retail banking

There were a number of problems with this set of ideas: for example, none of the banks that went down in the UK did so because of investment banking. It was the wholesale bank run (Northern Rock), corporate hubris (RBS) or plain and simple bad lending (HBOS, various building societies).

But let's leave that aside. Let's assume that we did indeed have a local banking system. One that didn't have anything at all to do with investment banking. No CDOs, no CDS, no "trading", just plain vanilla lending in their specific regions. And we'll bring on board the local worthies, the local politicians, the union chiefs. Heck, we'll even make them non-profit shall we? Perhaps they should be owned by charitable institutions?

What do we end up with? Actually, we end up with the Spanish banking system:

Bankia stands as a reminder that Spain's property bubble—and the banking crisis that is its aftermath—had its roots in the intertwining of government and finance. Until the crash, Spain's cajas were community institutions closely tied to regional governments, and bank boards and regulators were peopled by party insiders willing to overlook lenders' real-estate excesses. Spain will see more disasters like Bankia's until these links are fully wrung out.

Note that here in the UK a few banks went bust (and rightly so), a couple were rescued as too big to fail and the rest became illiquid but not insolvent. They needed temporary funding aid but that could be and was repaid. That's what happened with the capitalist shareholding investment and retail bank mixing national system in the UK.

In the Spanish localised, politically directed and not for shareholder profit system absolutely all of that banking system went resoundingly bankrupt. No, not just illiquid: bust. In such large numbers that it's bankrupting Spain itself. So that's another one of those trendy lefty ideas that crashes and burns then, eh?

Oh, by the way, the only three banks in Spain that are still standing are the shareholder owned, for profit, mixing investment and retail banking, national and international ones.

One part of the drivel we hear (or hear being repeatedly asserted perhaps) about the financial transactions tax is that lots of trading increases price volatility. Thus the tax, by reducing liquidity, will reduce price volatility which would be a good thing. So tax the markets and Hurrah!

There is one slight problem with this idea. It's only a teensie problem to be sure. The teensie weensie problem being that there's absolutely no evidence whatsoever that it's true.

It's entirely possible to construct theories in which it is true: that's certain. Assume that everyone's a momentum investor, just following the herd, and it quite possibly would be true for example. But it is always necessary to benchmark such theories against the real world. As an example, I've always been quite taken with the theory that The Moon is made of green cheese. That has indeed been tested and no, Neil Armstrong was not able to consume regolith on a Jacobs Cream Cracker. So it is with this idea that increasing liquidity in a market increases price volatility: or the inverse, that reducing it would reduce such.

Eric Hunsader at Nanex presents us with a nice start to 2013 markets — a no less than an 8 per cent drop and subsequent clawback in natgas futures during early Thursday trade: That’ll teach you for not waiting for a bit more liquidity later in the day.

Interesting, isn't it? How actual facts often upset the wilder suppositions put forward by those who would tax us all more?

Indeed, there's almost certainly a Ph.D thesis in there for someone who wants to do it. Take 20 or 50 different markets (and cover different things, stocks, bonds, derivatives, commodites), in different countries, with different holiday periods. Compare and contrast price volatility in those markets with those holiday periods and reduced volumes and liquidity.

My bet is that we'll see increased price volatility in circumstances of reduced liquidity. And to supporters of financial transactions taxes (and the idiocy that is the Robin Hood Tax) if you're so sure of your claim, why haven't you done this analysis already to prove your point to us?

The EU Federalists have already written the script for the UK’s new relationship as an “associate member”.  We will be subject to all the regulations and costs of EU membership without any influence or voting rights.  That is roughly the deal Norway currently has.

So is this decision time as we choose between attractive alternatives or derision time as we crawl pathetically back into our hutch?

The Federalists believe the UK has little negotiating room and Cameron will be out of office before the talks get tough.  At the next election, UKIP will not be taking many, if any, Westminster seats but they will be drawing away the key marginal voters.  Any Lib Dems remaining will undermine negotiations. 

So is the EU now a lost cause?  If it was left to the FCO, it certainly would be.  Our diplomats have no blueprint of an EU, nor of an exit, that we would like, nor any plan to achieve either of them.

What can we do?  Cameron needs to agree the seriousness of the issue with Milliband – forget Clegg.  The UK’s national interest needs a negotiating team and a strategy  that will survive the next election whatever the outcome.  The team should work in secret and bring together some of the more thoughtful MPs and MEPs, both Conservative and Labour, as well as the City – our most crucial economic interest.  Unfortunately it will also need diplomats, but retired ambassadors rather than serving civil servants, because it will be essential to know the extent to which we can bring other EU members along with us.

The team should be given a year, no more, to come up with an A and a B scenario to compare with scenario C, and plans to achieve A and B:
A. What is the best “staying in” deal we can reasonably expect to achieve?
B. What is the best “opting out” deal we can reasonably expect to achieve?
C. If we are blocked from both of those and continue to be dragged, whingeing, along, how will that look?

A referendum should be deferred until we are ready but that is easy.  If a premature referendum comes to the wrong answer, have another a year later.

We can win this campaign but not if we continue to deal with the EU in the manner we have for the last 40 years.  If we lose this campaign it will resemble our last Eurovision Song Contest entry: a tired old gent being derided by a bunch of countries with whom we have lost touch.

2013 is shaping up to be a good year for young fans of liberty. Here are some opportunities available to them.

Free Books for Schools
In October we began sending out books for A‐Level students studying politics, economics and philosophy. By December we mailed out over 1,000 books to Sixth Form students. The books available are listed below, and we can provide up to three copies of each to your school.

Freedom 101 (Free PDF)
Freedom 101 gives answers to 101 common errors made by opponents of free markets and open societies.

A Beginner’s Guide to Liberty (Free PDF)
A short, accessible introduction to liberal ideas from free trade to banking to legalized drugs.

The Condensed Wealth of Nations (Free PDF)
An explanation of Adam Smith's The Wealth of Nations that uses Smith's own words and explains them for a modern audience, point-by-point, to allow his great ideas to shine through.

Win £500 in our Young Writer on Liberty Competition
If you’re under 21, there is still time to enter our writing competition before the closing date on February 1st. The first prize includes £500 and an internship at the Adam Smith Institute. You can find more information here.

Independent Seminar on the Open Society (ISOS) March Student Conference
The Independent Seminar on the Open Society (ISOS) is a free one-day seminar for sixth-formers, held in London twice a year. This March the conference will focus on free market economics. Topics covered will include:

Limits of knowledge
The benefits of trade
The fallacy of evidence-based policy
The private supply of public goods
Debate: Should we be able to sell our organs?

Students are welcome to attend independently, or with teachers. Refreshments will be provided.

If you are interested in finding out more about any of these, do contact us at info@adamsmith.org.

David Cameron is expected to make his long awaited EU policy speech shortly.  We are told it will be radical and bold. The consequence, we are told again, will be a major renegotiation of our EU terms or departure with our head held high.  That choice will be for the UK to make on the basis of an in/out referendum.

Cameron is in the weakest negotiating position of any British Prime Minister since Edward Heath.  With her Bruges speech, Thatcher turned us from a respected contributor to a moaning Minnie, complaining at every step of the EU way and thereby alienating our friends.  Major dismantled what could have been a powerful trading partner for the EU leaving a rump EFTA today.  He led our potential allies into the arms of Brussels.  Now they want our money but not us.  Blair, to appease the unions, gave away John Major’s opt-outs and, to curry favour with new EU members, much of the Thatcher rebate. Brown handed City regulation over to Brussels.

So far Brussels has been helpful on Scottish independence because Spain is terrified that Catalonia will go the same way.  But if the Federalists can use Scottish independence as a further way to undermine the UK position, they surely will.

The track record of our City, regulators and civil servants has been weak.  Much of the EU treaty and regulatory wording has been drafted by our people.  They claim, naturally, that the treaties and regulations are better than they otherwise would have been. From the Federalist perspective these civil servants look remarkably like a Fifth Column, advancing the EU cause under British colours.

And finally consider the witlessness of our MPs. Have any have sat down and worked out what we are trying to achieve and how that can be done?  Bill Cash is thoughtful but no one listens to him any more. On fisheries, did we not sell most of our rights to Spanish fleets?  Will the courts allow us to repatriate those rights without compensation and will the compensation not be higher for an independent UK?

Our MPs and our media have further alienated Brussels and other member states by blaming them for UK intervention and undermining our sovereignty  when, for example, far more regulations have arisen from Whitehall and Westminster than ever came from Brussels.  Transparently, it has suited Whitehall to escape the odium that should be theirs.

In short, the UK will begin the negotiations with the worst possible background. 

Halfway through an MSc Economics at a well-respected department, I have found myself learning no new economics, but only struggling unpleasantly with a level of maths that seems relevant only for pure scientists.

The students, for their part, wish only to master the equations in order to pass the qualification and get good jobs. Broader economic ideas are seen as an optional module, rather than the core that they are. Microeconomics seems exclusively to rely on comparative statics (holding one variable constant whilst you assess another, in a state of equilibrium, using differential calculus).

But since we are not rational beings, the irrationality of this seems profound. The recent trend in "Behavioural Economics" is a step in the right direction (intertwining psychology into statistical assessments of activities), but again, one isn't certain if the exercise is just a ruse to further complicate the statistics.

I remain a fan of Schumpeter, and though for a time, he was head of the Econometric Society, he was also concerned to integrate more sociological understanding into his economic theories. The profession would not do too badly by trying to revitalise this (more integrationist) approach, utilising more of the core social scientific developments, and perhaps fewer of the natural science attempts at mapping certainty.

In order to be useful, the computationalists argue, we have to quantify our actions and be able to replicate them - anything else is simply hokum, and lacks both scientific rigour and logic. These, the theorists demand, is the key to everything. Maybe. But with increasing numbers of economists stemming from maths and engineering, what they are bringing with them is not economic understanding. Well-equipped critical thinkers are being discouraged from entering a discipline that is obsessed with the false certainty of mathematical analysis.

In a lifetime of work, study, family interactions and educational exposure, I have known very few people who are logical and rigorous, consistent and replicable. And the financial markets? Again, comes the argument, if we had cracked the phenomena of financial dynamics, software programmes that have automated actions following trends' analysis, we would not have brought august institutions to the ground in hours and there would probably be no business cycle.

And yet after decades of mathematical economics, we haven’t cracked these things. Institutions still fail, cycles persist and the human nature underlying it all remains just as unquantifiable. Perhaps by embracing the lack of clarity, the human “fuzziness” we can promote the contemplative again and start teaching and learning some real economics.

Damian Merciar is a Business Economist and Strategist, with 20 yrs experience of public and private sectors. He is also currently studying part time for an MSc Economics.

Speaking on Fox News Sunday following the U.S. presidential election, Bill Kristol, editor of The Weekly Standard, said that Republicans, having lost to the Democrats, could no longer hold out free market principles with respect to taxation.  ‘I think there is a very good chance that [President Obama will] pass major consequential legislation in the second term, and people like me won’t like it that much.  I think Republicans will have to give in much more than they think,’ he said.

Kristol elaborated on the GOP fallout:  ‘The Democrats picked up seats in the House and Senate, and the President is in good shape ... the Republicans in the House will be able to get some concessions and some compromises, but I think there will be a deep budget deal next year, it will be an Obama-type budget deal, much more than a Paul Ryan budget deal, type budget deal.  And elections have consequences.’

Read this article.

In between the turkey, spiced beef and mugs of hot port, I spent some of Christmas thinking about the state. Specifically, how to make it smaller.

Milton Friedman used to say that cutting taxes would force governments to cut spending to make ends meet. The last ten years has basically proved him wrong. Why cut spending when you can spend more, tax less and let the next lot pay the bill?

The old ‘tax cuts first’ strategy is dead. For a smaller state, we need to cut spending as we cut taxes, and avoid government borrowing as much as possible.

But it’s not quite that simple. The problem is that there aren’t many places you can cut without also changing quite a few other things as well. “Cut spending” sounds good, but, without much more fundamental reforms, almost any big spending cut would leave a lot of people high and dry.

The five biggest areas of government spending are health, welfare, pensions, education, and defence. To really shrink state spending, we need to cut all of these things. But without a complete overhaul of policy in general, no real cuts can be made.

The NHS is a socialist bureaucracy, but until we liberalize the healthcare market and make health insurance a viable alternative for NHS users, cutting the NHS might very well make patients’ lives a lot worse. A simple cut to the NHS would be bad because, thanks to the state, a lot of people depend on it for their healthcare.

The same goes for all the other big areas of spending. Want to cut education spending? Fine, but without something like school vouchers or private education tax credits, things will probably get worse. Some bits of welfare can and should be cut, but without planning reform to reduce the cost of rents and employment deregulation to increase the number of jobs going, people who genuinely cannot find work will suffer. And a tax system that takes £1,500 from a minimum wage worker is utterly morally bankrupt.

Try explaining to granny why her pension is being cut after spending her life paying National Insurance (under the impression that it was something other than a tax in disguise). And defence cuts – great, but not until we’re out of Afghanistan and servicemen’s lives won’t be threatened by a shortage of bullet-proof vests.

Of course deep spending cuts are needed. But, unless you’re happy to mess over people who rely on state services through no fault of their own, they can only work in conjunction with big changes in how we do things.

Spending cuts are a little bit like Brussels sprouts: quite good for you, but not very appealing on their own. But as part of a bigger meal, they can be wonderful. Deeper cuts are only possible with fundamental libertarian reforms of the state. That will be a bigger task than many would like.

We're all familiar with the screams of woe from the environmental movement. Peak oil, peak fertiliser, peak water, there's even a peak copper scare out there. The idea, if it can be flattered enough to be described as one, is that we're all using too much of whatever it is, there ain't no more and we're all going to die. Aieee!

And now we've got peak farmland approaching:

"We believe that humanity has reached Peak Farmland," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.

So there's no more land to grow more food on and we're all going to die Aieee! etc?

No, this is sensible people, not the usual envorinmental wailers. What they're actually saying is that given the increasing efficiency with which we use farmland we're not actually going to need any more. The true quote is:

"We believe that humanity has reached Peak Farmland, and that a large net global restoration of land to nature is ready to begin," said Jesse Ausubel, director of the Program for the Human Environment at the Rockefeller University in New York.

The one caveat is that we have to make sure we don't mess it up by growing biofuels: but even FoE and Greenpeace agree this is a bad idea now so we've only the politicians left to convince.

And it's entirely possible that this report is actually not optimistic enough. OK, this is the Mail but still: plantscrapers anyone?

Crops could soon be grown in greenhouses the size of skyscrapers in city centres across the country, it has been claimed. Birds Eye and other food producers are investigating building ‘plantscrapers’, which could accommodate hundreds of storeys worth of crops, in a bid to make farming more economical, sustainable and meet increasing demand.

Or another development, hydroponics using seawater as both the growing medium and the cooling necessary in a desert.

The old mantra was that we should buy land because they're not making it anymore. But the truth is, by making what land we do use more productive through the application of technology we are indeed making more of it. We're making more farmland, even if not more actual land.

One joy of this is that some good part of the land that is currently being farmed can be allowed to revert to nature. Which should of course please all those environmentalists: but it won't, they'll still be complaining. You see, hydroponics isn't organic. Ho hum.

We around here are pretty much in with the idea of free immigration. Even the scary statistics coming out of places like MigrationWatch show that there's a very small (about £4 a year I recall) benefit to the indigenous population. And of course the value to the immigrant is vast making it a definite pareto improvement. And as Bryan Caplan likes to point out, the immigration of low skilled immigrants still enables a more fine grained division of labour within the country to everyone's benefit.

But OK, let's be a tad political and realise that not everyone agrees with these obvious truths. That immigration must be limited in some manner. So, err, how have we ended up with a set of immigration restrictions that are so stupid?

The Royal Society says a separate government scheme introduced in 2011 to attract 1,000 top academics and artists had allowed only 50 people in.

That a government policy fails is hardly a surprise. But OK, they're trying to get top academics in. So why would the new rules have meant that one of our recent Nobel Laureates couldn't have got in?

Russian-born physicist Professor Sir Andre Geim said new restrictions on non-European Union immigrants, including minimum salary requirements of at least £31,000 and tighter student visa rules, are blocking the brightest academics from working at British institutions.

Well, you see, the thing is that British academics aren't all that well paid:

Sir Andre, 54, first arrived in the UK in the early 1990s as a Russian citizen with a permit to work as a post-doctoral fellow at Nottingham University. His salary would have been around £27,000 in today's money, meaning that he would have been barred from entry under the minimum salary requirement.

So the government wants to get all these top academics coming in, to the point where they've got a scheme to aid them in coming in. At the same time its own salaries that it pays to top academics (and yes, post-doctoral students are indeed that, they're all the people having the bright ideas. Professors are those who are old enough to have stopped having new ideas) mean that they cannot immigrate into this country under the requirements for immigrants to have a high salary.

Something of a facepalm moment that.

Which brings us to an important point. Government just isn't capable of doing these complicated things. Is incapable of the finesse necessary to achieve solutions to tricky problems. So we might well be better off if they didn't even try. You know, cut government back to the basics of defending the country and maintaining at least a semblance of law and order. Once they've shown they can manage that we might allow them to at least trying more difficult things. But not until they've shown they can master the basics.