The Autumn statement shows that economic stagnation is here to stay

One thing became clear today: economic stagnation is here to stay. There is no growth and no prospect of growth without a change of course that focuses on deregulation and targeted tax cuts. There is no trade-off between growth and deficit reduction. You can’t have one without the other.

The key is to go for private sector growth. Government regulation is smothering small and medium-sized businesses, and today’s rate relief announcement is not enough to help them. Employers' National Insurance is a tax on jobs and prevents the creation of over 500,000 jobs by small and medium businesses. It should be scrapped. The best way to stimulate the economy is to give small businesses a break.

The highlight of today’s budget is the rise in the tax-free personal allowance, which the Adam Smith Institute has long called for. It should be raised to the minimum wage level so that the poorest earners pay no tax at all. Scrapping of the fuel duty hike is a good thing, but we should not be too impressed at a Chancellor deciding not to raise taxes – we need cuts to regressive consumption taxes.

The government and media have focused on trivial changes in spending like the £5bn newly allocated to capital projects. Meanwhile, the state is borrowing that amount every two weeks – or another £331 million every day.

Deeper cuts to public spending are clearly needed to cut the deficit, but these are not possible without a fundamental shift away from socialistic monoliths like the NHS. The only way real cuts to expenditure can be made is by shifting to more efficient, market-based models of social insurance for healthcare and welfare. The claim that we can make substantial savings by ‘trimming waste’ is a lie – and we’re fast learning what a dangerous one it has been.

Minimum wages: examining the research

The Economist's Free Exchange column recently analyzed some of the existing research on minimum wages. They point out to a number of results that claim how moderate minimum wages do more harm than good for the economy, and can, in fact, have a net positive impact on total employment.

The argument from the left of the political and economic spectrum usually claims that employers tend to sometimes act as monopsonists and can set wages below a competitive rate. In addition minimum wages are supposed to solve the problem of wage inequality and increase the disposable income of lower paid workers. The Economist calls upon the results on two "noted labour economists", David Card and Alan Krueger, who accounted an increase of employment in New Jersey's fast-food restaurants to its newly legislated minimum wage. They used a DD (differences-in-differences) approach comparing total employment in February 1992 and in November 1992, so in two different points in time between which the (supposedly) only difference is the introduction of the minimum wage (in April 1992).

However, it is easy to dispute this type of research by referring to the omitted variable bias where the net employment effect was most likely affected by a factor that has nothing to do with the minimum wage law. Perhaps it was the general economic climate in the state during the observed period, or within-state differences that can explain the effect of employment increases at the given time in New Jersey. It's very hard and demanding to conclude of a causal relationship between a minimum wage law and employment, at least without taking into consideration a series of control measures. In addition there is a whole bunch of papers that can overrule the argument empirically and give it a completely different direction. This happens too often in the economics profession.

Something that empiricists often omit is the general effect a minimum wage could produce. Here’s a good point from a book by Jason Brennan: "Libertarianism, what everyone needs to know",

If Wal-Mart started to pay high wages, Wal-Mart jobs would become attractive to skilled workers. People who currently work as medical assistants or car mechanics would want Wal-Mart jobs. Since they are more productive and have more skills - since their labor is worth more - they will outcompete the kind of people who currently work at Wal-Mart. So, raising wages above market levels is unlikely to help unskilled workers. Instead, it causes job gentrification. (Imagine if Wal-Mart offered to pay its workers $100/hr. Then many of my colleagues would consider becoming Wal-Mart cashiers). (HT: Bryan Caplan)

This I fear is the problem. Even if an increase of the minimum wage could have a positive net effect on employment, as some research seems to show, the problem is re-specialization of people with higher skills for currently low-paying and low-skilled jobs.

It's interesting that the research by Card and Krueger (1993) actually did look at fast food restaurants. Increasing the minimum wage made this easily accessible job more attractive than the alternative of investing into gaining more skills or finding another, more demanding job.

The result is a reshuffling of the labour market towards certain types of jobs, rendering some higher paying jobs a lack of skilful employees, while the net effect for lower-skilled workers is negative. It would be interesting to observe the total effect on all industries during the observed periods, not just on one, favourable industry, to prove the employment effect of minimum wages.

In Britain, there are similar results:

"Britain’s experience offers another set of insights. The country’s national minimum wage was introduced at 46% of the median wage, slightly higher than America’s. A lower floor applied to young people. Both are adjusted annually on the advice of the Low Pay Commission. Before the law took effect, worries about potential damage to employment were widespread. Yet today the consensus is that Britain’s minimum wage has done little or no harm."

It is very difficult to conclude this based on the available evidence. Since the introduction of the minimum wage in 1999 Britain's economy experienced a boom decade which saw an upsurge of productivity and declining unemployment, but also an increase in labour costs and real wages. It is very hard to conclude that the minimum wage was a cause of all this. One can easily conclude that the labour market conditions improved despite the introduction of the minimum wage, not because of it. 

As for the effect on increasing the relative wage for the bottom 5% thus lowering wage inequality, it would have been arguably much better for both the employers and the employees to increase the personal allowance which would have lowered the tax burden for the employers and leave the employees with more disposable income.

It would require a careful empirical analysis to prove this, but I suggest that an increase of personal allowance would have had a similar if not better effect on lowering inequality in Britain, than what the minimum wage floor did. For simplicity, compare the current net minimum wage in Britain with a personal allowance of £12,875 p/y which the Adam Smith Institute has proposed on several occasions, and calculate whether or not low paid workers would benefit from it. This doesn't necessarily imply that every employer would pay his employees the upper limit of the personal allowance, but it would open up the market for lower-skilled workers much wider than it was with the minimum wage, contributing to the liberalization of the labour market, and better occupational heterogeneity.

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A refutation of the false propositions of the current tax avoidance debate

Multinationals pay taxes that UK companies also pay such as employer NICs or VAT.

Use by multinationals of infrastructure etc. provided by the UK government is perfectly legitimate as they make a major contribution to UK taxation. Moreover, that such an issue arises is simply an argument to eliminate state provision of infrastructure and thus avoid such 'third party payer' problems.

Multinationals have been accused of avoiding paying corporation tax, which is a tax on economic growth and should be abolished.

Corporations do not have a 'moral duty' to pay more tax than they are required to pay under UK law. Even if we were to assume that all UK tax laws are morally acceptable, the corporations concerned are not in breach of such laws. However, such corporations do owe a genuine duty to their shareholders to maximise returns. Remember that many shareholders are pension or insurance funds so you and I both benefit from increased returns and suffer for decreases.

The function of business activity is not to generate tax revenue. Any tax generated is merely a by-product of their success as businesses and is invariably an impediment to greater success. The function of firms is to satisfy the wants of their consumers. Higher taxation means that firms are less able to satisfy the wants of their consumers.

Higher taxation, whether by raising tax rates or by preventing firms in act legitimately to avoid tax, will ultimately result in higher costs passed onto the end consumer. This means either less consumption of the particular good being taxed, less consumption of other goods because they are foregone or less saving. Either way this leads to less economic growth.

Multinationals are paying taxes in other jurisdictions. If they were not, they would be caught by the rules on Controlled Foreign Companies and Transfer Pricing.

That multinationals are basing themselves in other jurisdictions is a clear indication that rates of corporate taxation in the UK are too high relative to other jurisdictions. If rates were lower — combined with other necessary supply-side reforms such as reduction of regulatory burdens — such multinationals would base in the UK and pay UK corporation tax.

To argue that the multinationals concerned should also pay corporation tax in the UK is to argue for the principle of double taxation - something that the large and complex array of international tax treaties specifically sets out to avoid. This would i) put multinationals at an unfair competitive disadvantage in the UK (possibly illegally?) and ii) potentially open UK-based multinationals to similar treatment by overseas jurisdictions.

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Financial thought crimes

Introduction

The most tangible policy response to the ‘main’ financial crisis of 2007-9 has been the series of (on-going) reforms of the system of financial regulation in those countries that were most affected by the crisis in question. The need for such reform, and the nature of the reform that is thought to be required, have both been adopted as received wisdom by the majority of policy-makers. However, given the risks normally posed by received interventionist wisdom, it is worth giving some thought as to whether or not the current approach is, in fact, the most appropriate one. Accordingly, the purpose of this article is to consider the nature of the current reforms, and then to set out some alternative, and rather different, policy prescriptions.

Litigious Albion

In the United Kingdom, the attention that the financial crisis has received has been intense. Accordingly, the political and official appetite for reform has not waned. For example, as of November 2012, the Financial Services Bill is before Parliament, a Parliamentary inquiry into ‘banking standards’ is under way, and the draft Banking Reform Bill has been published. In addition, a Financial Stability Board (FSB) working group, led by the Chairman of the Financial Services Authority (FSA), the main British financial regulator, has announced its intention to focus on the activities of the so-called ‘shadow banking system’.

The regulatory reforms that have been, and are being, implemented can be divided into two broad categories.

Firstly, those relating to conduct.

Secondly, those relating to stability.

In essence, conduct regulation relates to the way in which financial services providers interact with clients, counterparties and the public at large. Its range is very broad, covering virtually every aspect of financial businesses’ commercial activities, and applying to businesses ranging from a self employed financial advisor to a universal banking behemoth.

There are, of course, ample reasons for becoming exasperated with the way in which conduct regulation has developed. However, it is a subject that warrants substantive consideration in itself, and it is not intended for this article to cover it in anything other than summary form. Instead, the rest of this article will concentrate upon financial stability regulation.

Financial Stability

The financial crisis threatened the stability and survival of numerous financial businesses, of various types and sizes. However, the ones that were of most significance were the commercial banks, whether ‘pure’ commercial banks or the commercial banking arms of universal banks. The reason for their significance is the nature of some of the roles that commercial banks play in the modern economy, as follows.

Firstly, they provide the bedrock of the economy's payment transmission system.

Secondly, they are the creators and guardians of a substantial proportion of the economy's money supply.

These two factors explain the Government’s willingness, at the time of the crisis, to intervene in order to prevent the failure of individual commercial banks, and of the commercial banking system as a whole. After all, a full commercial banking collapse would have destroyed the bulk of the country's payments system, and would have caused a large proportion of the money supply to evaporate. Clearly, the consequences of such a failure would have been very serious indeed.

However, the Government’s intervention came at a heavy price. The most frequently cited cost is that of (re)capitalising certain banks. However, the total cost of the intervention was much higher, and the cost is an on-going one. After all, using monetary policy as a means of providing systemic subsidy will inevitably introduce serious distortion, as indeed will rescuing failing financial businesses.

Naturally, the Government is keen to avoid such costly intervention in the future, as well as avoiding the controversy and opprobrium of being seen to subsidise and rescue an extremely unpopular industry. That, alongside a desire to avoid the economic disruption that banking crises tend to entail, explains the Government’s interest in financial stability regulation.

In essence, stability regulation is regulation that is intended to ensure that financial businesses are less likely to fail, or at least are less likely to fail in a manner that causes widespread disruption. This applies both to individual businesses and to the financial system as a whole.

On a firm-specific basis, financial stability regulation effectively involves monitoring and intervening in the way in which a business is structured and run, in order to ensure that the business in question operates in a way that the regulators consider to be prudent. On an economy-wide basis, it effectively involves moulding the financial system's structure and activities, with the aim of ensuring that the system operates in a way that the regulators consider to be prudent, stable and orderly.

A Matter of Philosophy

The theory that underpins financial stability regulation is largely as follows.

The commercial banking system will eventually become unstable if it is left to operate in a normal commercial manner. Given that the wider economic costs of a systemic banking collapse are likely to be serious, the Government will always have a duty to ensure that the commercial banking system does not fail. Therefore, Government supervision of the system is required: firstly, to ensure that bank failures are less likely to occur; secondly, to ensure that any failure can be managed or contained; and thirdly, to ensure that the costs of any Government rescue are minimised, and preferably eliminated. Furthermore, Government supervision of the broader financial system is required, in order to ensure that the commercial banking system is not imperilled by the failure of other financial businesses.

Given what is known about the wisdom of Government regulation and intervention in general, the theory outlined above is not very reassuring. After all, replacing potential commercial misjudgements with potential regulatory misjudgements is hardly a recipe for success. Furthermore, the theory is thoroughly dispiriting in its myopia, pessimism and timidity.

Of course, it cannot be denied that commercial bank failures are, at present, a very serious threat. In addition, it cannot be denied that certain established features of commercial bank operations render such banks fundamentally unstable: fractional reserve banking; high leverage; and asset / liability mismatches all pose a threat to a commercial bank's stability. Furthermore, it is certainly the case that the status quo ante was not acceptable.

However, is there a plausible alternative to closer supervision and regulation? Arguably, there is.

In essence, the commercial banking system suffers from two major weaknesses.

Firstly, the system is highly concentrated.

Secondly, commercial banks currently operate in a manner that is too risky and unstable.

Those two weaknesses will now be considered in turn, and suggestions will be made as to how the situation might be improved.

Concentration

The most robust defence against a systemic collapse of the commercial banking system would be for the system in question to comprise a much larger number of participants, and for those participants to be somewhat more equal in size and ‘weight’. That would, of course, represent a marked change from the current situation, in which a small number of large banks dominate the system.

Therefore, one Government objective should be the fragmentation of, and increased competition within, the commercial banking system and market. After all, the rewards of such fragmentation and competition would be great indeed; the banking system would be more robust, and bank customers would enjoy the usual benefits of increased competition. To its credit, the Government does appear to be aware of this. However, more work is required.

The basic ‘problem’ that has led to the emergence of a small number of large banks is that commercial banking tends to benefit markedly from economies of scale, especially as far as ‘utility’ activities such as running a branch network, collecting deposits and transferring payments are concerned. However, technological developments do mean that smaller banks should now be better able to compete than was the case in the recent past; a large branch network is less important than used to be the case, and inter-bank payments are relatively simple and efficient. Therefore, there is certainly potential for the relative advantages derived from economies of scale to be eroded.

How might the Government encourage the fragmentation and increased competition referred to above?

Firstly, it should refrain from the temptation arbitrarily to decide on the ‘optimal’ structure of the commercial banking system. Competition law should certainly be used when appropriate, but of itself, competition law is not going to have much of an effect in the absence of more fundamental changes.

Secondly, it should ensure that small commercial banks are not arbitrarily prevented from obtaining direct access to the main inter-bank payment systems.

Thirdly, it should reduce the regulatory barriers to entering the commercial banking system and market. The commercial barriers are high enough as it is, but regulation is making the situation much more difficult than needs to be the case. Accordingly, bank regulatory requirements should be lightened, and the regulatory treatment of small banks should be particularly lenient.

Fourthly, it should implement those reforms that are necessary in order to reduce the tendency for commercial banks to be run in an unstable fashion; arguably, the tendency in question is more beneficial to larger banks than is the case for their smaller competitors. More precisely, the factors that contribute to that tendency are more beneficial to larger banks than they are to smaller ones.

Instability

As indicated above, certain features of commercial bank operations render such banks fundamentally unstable. Of course, it would be impossible to eliminate all of those features, for they are largely integral to the commercial bank business model. However, the degree of risk involved would almost certainly be reduced if commercial banks were subject to stronger commercial discipline.

One basic advantage that commercial banks enjoy is the fact that in ‘normal’ times, most of their creditors, and short term creditors especially, pay insufficient attention to those banks’ stability and creditworthiness. This allows commercial banks very easily and quickly to raise large amounts of debt capital at low rates of interest, thereby encouraging rapid growth and large amounts of leverage. It also tends to render such banks able and willing to acquire assets at rates and prices that do not fully reflect credit risk. In short, it encourages risky behaviour.

One reason for a lack of attention to bank creditworthiness is the trust that most members of the public have in commercial banks; after all, they are willing to treat commercial bank deposit liabilities as money. That, of course, is their choice. However, the situation is not helped by the fact that certain Government activities not only discourage vigilance on the part of bank creditors, but also encourage more aggressive and less disciplined action on the part of commercial banks. Accordingly, one of the most decisive steps that the Government could take in order to improve commercial bank stability would be to cease such activities.

The Government should take the following policy measures.

Firstly, it should be very clear that no commercial banks, or indeed any other financial businesses, would be rescued in future.

Secondly, it should eliminate Government-backed bank deposit insurance.

Thirdly, it should cease supporting the illusion that stability regulation can avoid bank failures.

Fourthly, it should avoid undermining the ordinary principles of insolvency law, as applicable to banks; a commercial bank is a business, and the failure of a commercial bank should be regarded as an ordinary business failure.

Finally, the Bank of England should eliminate its role as the lender of last resort; a central bank should regard the concept of emergency lending to a commercial bank with as much scepticism as the concept of emergency lending to a grocery shop.

Conclusion

Most of the policy measures outlined above are, by the standards of current received wisdom, highly unorthodox, and probably even heretical. However, it is to be hoped that they might, at the very least, encourage policy-makers to begin to regard commercial bank stability as an ordinary commercial problem, and one that might be solved by the sensible application of ordinary commercial and economic principles.

Sun, wind and tax

In the old fairytale the wind and sun wagered which of them might get the man's cloak off.  The wind blew with all his might, but the man fastened his cloak more tightly around him, so it stayed on despite the wind's full fury.  Then the sun came out and the man took his cloak off.

In the modern version the Treasury turned on its full force.  It employed extra civil servants to collect the extra taxes it thought were due.  It imposed new penalties and threatened retrospective laws to make taxpayers conform to its will.  But despite its fury, taxpayers clung tight to their accountants and lawyers, and moved assets and income offshore, and the Treasury was unable to part them from the extra resources it sought to remove.  Then the Chancellor came out and introduced simpler and lower taxes, and people paid them because it was no longer worth the trouble of avoiding them.

Well, I did say it was a fairytale.

Article: Financial thought crimes

The reforms to financial regulation that followed the 2008 crisis have been dead wrong, argues Deri Hughes. Interventionism and subsidies for established banks have choked competition and added even more layers of protection for established banks than existed before. The answer is to take the state out of the money and banking business.

The most tangible policy response to the ‘main’ financial crisis of 2007-9 has been the series of (on-going) reforms of the system of financial regulation in those countries that were most affected by the crisis in question. The need for such reform, and the nature of the reform that is thought to be required, have both been adopted as received wisdom by the majority of policy-makers. However, given the risks normally posed by received interventionist wisdom, it is worth giving some thought as to whether or not the current approach is, in fact, the most appropriate one. Accordingly, the purpose of this article is to consider the nature of the current reforms, and then to set out some alternative, and rather different, policy prescriptions.

Litigious Albion

In the United Kingdom, the attention that the financial crisis has received has been intense. Accordingly, the political and official appetite for reform has not waned. For example, as of November 2012, the Financial Services Bill is before Parliament, a Parliamentary inquiry into ‘banking standards’ is under way, and the draft Banking Reform Bill has been published. In addition, a Financial Stability Board (FSB) working group, led by the Chairman of the Financial Services Authority (FSA), the main British financial regulator, has announced its intention to focus on the activities of the so-called ‘shadow banking system’.

The regulatory reforms that have been, and are being, implemented can be divided into two broad categories.

Firstly, those relating to conduct.

Secondly, those relating to stability.

In essence, conduct regulation relates to the way in which financial services providers interact with clients, counterparties and the public at large. Its range is very broad, covering virtually every aspect of financial businesses’ commercial activities, and applying to businesses ranging from a self employed financial advisor to a universal banking behemoth. 

Continue reading this article...

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Booze and fags and fat bastards save the government money

It does get very annoying when we've all the usual prodnoses telling us that we must eat our five a day, stop puffing on the gaspers and limit ourself to one small brown ale a week for the sake of our livers. This is all to "save the NHS", or to save the public accounts from the costs of dealing with us cancerous lard tubs as the cirrhosis explodes. Other than the ghastly nonsense of the puritans (you know, the worry that someone, somewhere, might be having fun), the despicable reduction in the freedom and liberty to chart our own course the the inevitable grave, there's really only one other major problem with this point.

It ain't true.

Most certainly it's true that treating these diseases of a life well lived costs the NHS money. But not hacking out the pickled and fatty liver in our 50s costs the NHS much more. For people do go on to survive a decade or more of senile dementia, just as one alternative and even more awful fate. This costs more.

Some will recognise this as the argument that Philip Morris paid to be presented to the Czech Government. It was roundly condemned at the time as being a quite disgusting piece of pro-tobacco propaganda. It could even have been so but it did have the saving grace that it was actually true. For as a rough and ready guide, those things which kills us from chronic diseases around and about our retirement date cost the state much less than our surviving to a google old age does. And we've even got a Congressional Budget Office report making the case for us now:

In terms of the policy's effect on the budget, lower health care spending per capita would push down federal spending, but increased longevity would have the opposite effect. Throughout the first decade of the policy, reduced health care expenditures (primarily for Medicare and Medicaid) would mean that the federal government would spend less than it would have otherwise. The reduction in federal outlays would total $730 million over the period between 2013 and 2021. During the second decade, however, the effects on longevity would begin to dominate and federal spending would be higher than it would have been otherwise — an effect that would continue through 2085. The two principal drivers of that increase in spending would be Social Security and Medicare. Improvements in longevity from a reduction in smoking tend to have their greatest effect on the size of the elderly population and thus tend to boost spending on programs aimed at that population. Spending for Medicaid, by contrast, would be reduced throughout the period of the projection — a reflection of the wider age range of that program's beneficiaries.

The odds are that if you want to live a long life you shouldn't smoke. Nor eat nor drink as I do. But it still is really true that those of us who go out in our 50s and 60s from these diseases of an excess of indulgence save everyone else money by their not having to pay our pensions or health care bills for decades.

Stopping these behaviours may well produce longer lives: not that it's any of your damn business how other people decide to treat themselves. But it most certainly won't save any money.

On why we really do want a market inside the NHS

I know that this brings fits of the vapours to the more maiden auntish of the British left but there really is a very good reason why we want to have a more market orientated health care system in the UK

The NHS was criticised as having among the slowest processes in the world in dealing with new drugs and clinical trials, scientists and experts said at a conference in London organised by Novartis, the Swiss pharmaceutical giant. A source at the meeting of more than 100 clinicians and scientists said a key conclusion was that “NHS environment needs to embrace new medicines more rapidly, not as at present more slowly, than other countries.” In addition NHS “trusts and clinicians need to be supported to be able to carry out research, for example by freeing up senior consultant time to do research or by incentivising investigators to do research.”

The other way of describing this is that the NHS is slow at innovation: the process of actually using nerw inventions to do things rather than that creation of new inventions in the first place. And there's good economic research on this very point too.

William Baumol has been pointing out for years that either planned or market based systems can do that invention. But planned, centralised, systems are very bad indeed at getting that innovation going. People actually using those inventions to do new things, or old things better, faster or cheaper. Market based systems do that innovation vastly better.

Thus, given that we'd rather like new treatments, new drugs, new and better ways of doing things, to percolate though the NHS thus we'd like there to be a market structure there.

Note that this doesn't, necessarily, mean that the government has to stop financing it. But it does mean that we want to have competing suppliers: of any ownership structure you like. Co-ops, charitable, for profit, mutuals, that part of it really doesn't matter for this point. But we do want people competing in a marketplace, even if it is competition for tax funding. For that's what drives innovation, the existence of the market. And given that the NHS seems to be worse at this than everyone else, as well as being just about the only health service with no market at all in it, that all seems to tie up logically doesn't it? Introduce markets in order to make the NHS of tomorrow better than the one of today.

Saint Mark

Canada’s motto of “peace, order and good government” may not stir the blood as America’s “life, liberty and the pursuit of happiness” or France’s “liberté, égalité, fraternité” but, all things considered, the country’s not in a bad place compared with other advanced economies. The banking system is solid, government debt and borrowing manageable and growth and inflation about as good as could be expected from a major trading nation.

The UK government now hopes that Mark Carney, the current governor of the Bank of Canada, can sprinkle a bit of that Canadian angel dust over here as the next governor of the Bank of England. Mr Carney certainly fits the bill of everyone’s image of the ideal Canadian – modest, polite, no-nonsense – someone you can have a perfectly pleasant dinner with.

To get a sense of the man, check out two major interviews earlier this year on YouTube – BBC’s HARDtalk in August and Reuters TV in January.

Saviours seldom meet  mass expectations for salvation, especially when the sins have been so egregious and widespread. Mr Carney is no messiah, thankfully, but does know what the problems are, what it will take to fix them and what any central bank can actually do. That realism is what’s most needed now.

When asked his general view of the global economic situation, Mr Carney said:  “We’re going through a period of de-leveraging across the advanced economies. There has been a three-decade increase in the amount of debt of governments and households and in some cases corporations across the advanced economies, notably the US, the UK and some parts of Europe…There’s going to be a multi-year process, really measured in decades, of reducing that leverage.”

So, no quick fixes, Cameron & Osborne, Miliband & Balls, and don’t pretend otherwise.

What’s a central bank to do then? “Central banks cannot solve this crisis. Central banks have to focus on, first, delivering price stability. It’s absolutely in no one’s interest to have deflation or runaway inflation…Secondly, we have to do our bit, and it’s not  in its entirety, but our bit to keep the financial system functioning…Central banks can do all of that but just that…will not be sufficient to produce the growth and employment that people want. Other steps have to be taken by national governments.”

So, don’t go to your local central bank to cover the failings of your governments.

And what about Paul Krugman’s belief that central banks are too obsessed with controlling inflation and that a bit of inflation would be a good thing? “I think we’re appropriately obsessed with price stability. The risk in the UK has been deflation. And what the BOE did … (was provide)… additional stimulus through bond purchases - quantitative easing - in order to ensure that… there is not deflation in the UK. That price stability goes both ways…In order for (Krugman’s extra inflation) to make a difference …you have to get ahead of the bond market. You have to have a very large surprise, very quickly in order for it to make a difference on the fiscal side and it won’t work. “

How very Canadian – a sympathetic understanding of quantitative easing but no illusions about fooling financial markets on the dangers of inflation. Clearly a man who understands markets.

As a fellow countryman, I wish Mr Carney all the best and look forward to seeing this cool, calm and collected Canadian cope with Britain’s jumped-up politicians, hyper-active journalists and depressive citizenry.

A good man for an impossible job

Madsen comments on the new Governor of the Bank of England, Mark Carney. He is, says Madsen,

probably the best candidate to perform an impossible job.  He had a good record in Canada, which weathered the financial storm better than most.  He has sound views on controlling inflation, and on controlling public spending rather than distributing a largesse of newly printed and borrowed money.

His basic problem remains that the system of centralized control of a monopoly fiat currency may not be up to the task of servicing a modern economy without the wild swings induced by political oversight.  Competing currencies, some commodity-backed, and with market interest rates, might be a better model.  Carney would indeed go down in legend if he were able peacefully to transform the one system into the other.

To that I would add that Carney has been remarkably open-minded about both Austrian and NGDP-focused stories about the crisis. He certainly seems like a good appointment, but the task required of a central banker is a godlike one: to avoid disequilibrium between savings and borrowing, he must be omniscient about people's money demand and plans for the future. However able Carney might be, I'm not sure if that's a job that anyone can do.