The Pin Factory Blog

The general tenor of the screaming about the British banking system comes, of course, from the general ignorance of those doing the screaming. Apparently it's this mixture of casino banking with retail that caused all the bank falling over syndrome. That and the general greed of shareholder driven banking which must also be curbed.

Except, of course, it wasn't either of them: RBS fell apart over an expensive acquisition too far, Northern Rock didn't even have any casino banking, HBOS just lent too much into the property boom and got stuck by the bust and Lloyds gor shafted by merging with HBOS. Several mutuals fell over from the property bust too: and Lehmans didn't even have a retail arm so couldn't have been brought down by the mixture of that with casino banking.

But whatever, it's not what is true that matters it is what people believe is true which does. And there's very definitely a movement (from points Compass, nef and other idiot lefties) that what we really need is to stop having this capitalist banking at all. We should have regional, perhaps mutual perhaps state owned, banks. Run by a mixture of stakeholders and very definitely including local politicians so that the wider interests of society can be considered: not just the demands of Mammon.

Which brings us to The Guardian on the subject of the Spanish banking system:

Chairmen were often unqualified politicians, with academic investigators finding a close relationship between the size of a bank's bad loan book and the inexperience, lack of qualifications and degree of politicisation of the chairman.

Neatly illustrating one of the basic points of agreement of all of us here at the ASI. We do not say that markets are perfect. We do however say that all too often, any alternative to a market is worse.

In English terms the Spanish caja system was run on the basis that when not Mayor of London Ken might drop in to run the Bank of London. Or in an area controlled by the other lot, Boris. With perhaps Lee Jasper or Seb Coe running the audit committee. And there really has been a serious proposal that Prem Sikka, Richard Murphy and Anne Pettifor should be on the board of one or more such mooted regional banks.

We don't say that the City is perfect but Spain shows how much worse the alternatives can be.

As I've said here and elsewhere often enough those who preen upon how many green jobs they are creating simply do not understand the most basic point: jobs are a cost of a scheme, not a benefit. Thus the pointing at how many green jobhs are being created is really the squeals of the innumerate telling us all how expensive their schemes are. However, I've just found out that it could be considered worse than this. For here is what the US's Bureau of Labor Statistics defines as a green job:

Green jobs are either:
A. Jobs in businesses that produce goods or provide services that benefit the environment or conserve natural resources.
B. Jobs in which workers’ duties involve making their establishment’s production processes more environmentally friendly or use fewer natural resources.

What this means is that absolutely everyone who works at an oil refinery has a green job. For everyone who does work at an oil refinery is trying to "use fewer natural resources". In fact, everyone who works in anything at all of a capitalist or market nature now has a green job. For all of us are, always, attempting to reduce the resources we use in order to produce our output.

So we might in fact simply claim that the entire concept of a green job is so nonsensical that we should just abandon it. Or perhaps we shoud be cleverer about it than this?

It is indeed true that all of the 24 million private sector workers in the UK are at least attempting to reduce the inputs into whatever it is that they do. So therefore all 24 million private sector workers are in green jobs. It's the 6 million in the state sector who do not so concern themselves: which gives us the optimal path to maximal greenery. Move state workers into the private sector, where they will naturally concern themselves with economy of resources, of inputs, and we will have entirely greened the economy.

It's the sort of plan I could get behind you know.

I’m in today’s City AM debating about whether we can trust social networking sites with our data. My basic point is that, if we want it, they will provide it:

If people want privacy, the profit motive will give social networks a good incentive to offer it to them … Social networks have to constantly innovate and compete with each other to stay alive. If ever there was a good reason for other sites to improve security, losing users – valued for Facebook at $121 each – is it.

Against me is Big Brother Watch’s Nick Pickles, who I like very much and who has spoken at ASI events in the past. I won’t try to paraphrase his argument, but I strongly recommend reading his side too.

What I didn’t have space to discuss is my suspicion that most social networking users just don’t care about their privacy. Many might say they’re concerned about keeping their activity secret, but talk is cheap. When you look at actual user behaviour, the evidence that people really care about privacy is fairly thin.

Facebook is notorious for its difficult-to-understand privacy controls, yet it’s the most popular social network by a country mile. I couldn’t find any data about this online, but most active Twitter accounts seem to be public instead of private. When Google+ launched, it sold itself as a privacy-friendly alternative to Facebook, but has not succeeded despite massive backing and cross-product integration from Google. (As a Google fanboy, I’m a little disappointed by that!)

Diaspora, a community-built alternative to Facebook which has placed privacy protection at the centre of its mission has not attracted many users. True, the network strength of a Facebook or a Twitter mean that switching sites can be costly for users – a social network is only as valuable as its user base – but that didn’t save MySpace, Orkut or Bebo in countries where they were popular, and I strongly doubt it will save Facebook or Twitter when a genuinely superior service emerges.

Even security – not having your account hacked into – may not be very important to a lot of users. Many people still use awful passwords like, er, “password”, “123456”, “qwerty”, and so on. It’s possible that they’re just ignorant of the dangers, but given the media coverage for any large website security breach, this seems less to me than the idea that they just don’t really care if their LinkedIn account is hacked into.

Fundamentally, I see the relationship between users and social networking sites as being far more benign and positive than Nick and others who are concerned about privacy. Like when I give the bank my money for a trivial interest rate, I am effectively giving up my data in exchange for “free” services – ATM use from banks, and reasonably decent communication tools from Facebook and Twitter.

As I say in City AM, the great thing about these websites is that they’re utterly disposable. Nobody needs Twitter to lead a good life. Those social network users who want better privacy can go to the sites offering them. But, since most people don’t use social networks at all, maybe we have that divide already.

I'm looking forward to the release of a couple of interesting books.

One is The Golden Guinea by Michael Nevin, who runs a blog with the same name.

It is a sort of Greek Tragedy in three acts, describing the roots and (inevitable) resolution of the current euro-turmoil. First, in traditional Greek Tragedy style, comes hubris. Over-optimism and cheap credit fuelled a giant bubble, drove up asset prices, and made us all feel rich. But then, of course, comes nemesis, the fall, as the boom turns into an inevitable crash. The Golden Guinea records how the consequent collapse of asset prices red to a sharp rise in bad debts, driving banks into insolvency. Nevin congratulates world leaders for acting quickly to avert complete meltdown, but accepts that quantitative easing, even lower interest rates and all those keynesian make-work measures simply poured more cash into an insolvent system. As the euro leaders are doing right now.

The third act, catharsis, could turn out tragic – but maybe not. Nevin is reluctant to leave markets to sort things out unaided, but argues for the conditions to make markets work better – sound monetary policy, more sensible banking regulation, and common sense in the international monetary system. He's like to see a new currency – the Guinea – convertible into gold, so it could not be inflated into oblivion like the paper currencies of the US, the UK and the eurozone. It's an interesting idea.

The second book, coming out mid-August, is called Shadowbosses. If I tell you the subtitle is How Government Unions Control America and Rob Taxpayers Blind, I think you might get the sense of what it's about. The authors are US businessman, professor and political activist Mallory Factor and his lawyer wife Elizabeth. I liked the review by Fox News correspondent Michelle Malkin: "Coercion, Corruption. Violence. Secrecy. Special Waivers. Backroom deals. Featherbedding. And nationwide classroom indoctrination. Welcome to America's taxpayer-funded government-employee unions."

The authors have come up with some interesting statistics that are otherwise hidden in the public accounts, like just how much US taxpayers stump up for government-sector union officials to take paid time off on union business. It's an eye-watering sum. Not only are US government-sector unions a multi-billion dollar industry, but they are also protected by a wide range of state and federal laws that give them special privileges, that force workers to join or pay for union activity whether they want to or not, and give power to the union bosses that should rightly belong with individual workers. And then there is all the political activity of these rotten boroughs...

Shadowbosses is available for pre-order on Amazon.

Following his victory in the Texas primary last week, Mitt Romney is now effectively the candidate for the Republican Party (putting aside the issue of unbound delegates). Therefore, we can all look forward to an Obama vs. Romney showdown this November. Unfortunately, both candidates appear to agree with each other on all issues of importance.

On foreign policy, neither are concerned about following the Constitution and getting a declaration of war from Congress. Meanwhile, neither are willing to rule out a war with Iran. So whatever the outcome of the November election, America's foreign policy will be unchanged until at least 2016.

On social issues it’s difficult to compare the two, because both are prone to changing their minds. Whilst Senator Obama appeared to be quite ‘progressive’ on the issue of drugs, President Obama has been all too willing to keep the same drug laws in place that would have led to his own incarceration had he been caught smoking marijuana or using ‘a little blow’ earlier in his life. Indeed he hasn’t even been willing to defend the rights of states to allow patients to use medical marijuana.

Meanwhile, Romney’s flip-flopping on the issue of abortion is well documented. Having been pro-choice in Massachusetts, he then became pro-life during the Republican primary. Who knows what he would actually do as President? I don’t think it’s likely that he would repeal Roe v. Wade, and if not, the differences in their rhetoric on abortion means very little.

Nor is there much disagreement when it comes to anti-terror legislation. Both support The ‘Patriot’ Act (or as Ron Paul calls it, the Repeal the Fourth Amendment Act). They also both support the National Defence Authorization Act, which effectively throws the presumption of innocence out of the window, as it allows suspects to be detained indefinitely without a trial.

Both Obama and Romney supported the TARP bailouts - the biggest single transfer of wealth from the poor to the wealthy in human history. Mitt Romney is also committed to stimulus packages and quantitative easing being used to boost economic growth and employment, which are the same policies that Obama has pursued (which have failed to create growth or employment). Neither are even paying lip service to the idea of sound money or reigning in the corrupt Federal Reserve system. In short: both are corporatists, not capitalists. This is obvious to anybody who has looked at the top contributors to both campaigns – the same investment banks and other corporate interests are funding them both. The winner of the 2012 election has already been decided: it’s Goldman Sachs. Sorry taxpayers, you lose either way.

Last Wednesday's Newsnight was a Paul Krugman love-in, with the entire show devoted to the Nobel-prize winner (who happened to be in town promoting a book). The show was ludicrously unbalanced, treating everything Krugman said as gospel. Bizarrely, the show's producers decided to pitch Krugman against investor Jon Moulton and Tory MP Andrea Leadsom in the debate, instead of an academic economist. Obviously, Krugman knows a lot more about macroeconomics than these two, although he's wrong about most of it. (You can watch the debate above — Moulton and Leadsom come out of it surprisingly well, given the circumstances.)

I assume Krugman was given such an easy ride because the Newsnight producers agree with him. Since I'm forced to pay for the BBC through the licence fee, I submitted this complaint today:

Newsnight's programme of May 30th was heavily biased in favour of left-wing Keynesian views, and it provided a platform to Prof Paul Krugman, who was not challenged sufficiently. The significant bulk of the programme was devoted to Prof Krugman, who is currently promoting a book in the UK that makes a particular set of left-wing policy claims. Prof Krugman is not an impartial commentator and his views are not consensus among economists. Dedicating a full programme to Krugman was itself a serious example of bias – when has Newsnight ever done so for a free market economist, such as the Nobel-winning Gary Becker who was in the UK last year?

Most seriously, Krugman was not set in a debate against another economist – instead, he was pitched against an investor and a Conservative MP. Prof Krugman's knowledge of macroeconomics far outstrips either of these two guests, and it was entirely inappropriate to set up such a one-sided debate. Newsnight should have had a free market economist on (such as Tim Congdon, economic historian Niall Ferguson, or an American economist such as Scott Sumner, Roger Garrison or Robert Murphy). The failure to do so created a biased and misleading weighting of the debate towards Prof Krugman. A comparison might be to put Ed Balls in a debate against Nobel-winner Robert E Lucas. This would also be an unbalanced, biased debate. By giving Prof Krugman the full show & not challenging him sufficiently, Newsnight failed its duty to be impartial.

It won't come as a surprise to many readers that the BBC acted in this way, and I don't expect that my complaint will make any difference. Why would it, when they get my money either way? That's the thing about the BBC's bias. Nobody cares about bias on the pages of the Telegraph or the Guardian. If you don't like it, don't read them. I can't say the same for the BBC. If I get a response from them, I'll post it on the blog too.

I wrote about the BBC's biased coverage of our report on renewable energy back in December.

Update — Newsnight have replied:

Dear Mr Bowman

Thank you for contacting us regarding 'Newsnight' broadcast on 30 May.

I understand that you believe it was wrong for the programme to donate so much time to Professor Paul Krugman without having an equally respected alternative opinion.

Although I appreciate your feelings, it is not always possible or practical to reflect all the different opinions on a subject within individual programmes such as 'Newsnight'. Editors are charged to ensure that over a reasonable period they reflect the range of significant views, opinions and trends in their subject area.

The BBC does not seek to denigrate any view, nor to promote any view. It seeks rather to identify all significant views, and to test them rigorously and fairly on behalf of the audience. Among other evidence, audience research indicates widespread confidence in the impartiality of the BBC's reporting.

Again, I understand that you believe that in the interest of balance, the programme should have asked the opinions of leading free market economists and to that end I'd like to assure you that I've registered your concerns on our audience log. This is a daily report of audience feedback that's made available to many BBC staff, including members of the BBC Executive Board, programme makers, channel controllers and other senior managers.

The audience logs are seen as important documents that can help shape decisions about future programming and content.

Thank you once again for taking the trouble to share your views with us.

Kind Regards

Richard Carey

In other words: "Get lost".

As the Queen’s Diamond Jubilee celebrations wind down, it may be well to reflect on an aspect of public choice theory which supports constitutional monarchy — principally its rôle as a brake upon self-aggrandising politicians.

Public choice argues that, contrary to the myths propagated about the selfless motives of public servants, politicians and bureaucrats can be as self-interested in their public personas as they are as private citizens.

This is not the time to examine the unitive functions of the Crown, nor the acts of public service performed by the Royal Family — and how monarchy either refutes or conforms to the political landscape sketched out by public choice  theory (though I personally believe the opportunities for gain are very few, while the burdens are many).

Neither is this an argument for constitutional monarchy as against republican forms of government; indeed, this may be one of the few areas where both forms, when modelled on justice, are equally serviceable according to the respective country’s traditions and national character — quite in variance, by the way, with respect to economics, where all the arguments are in favour of classical liberal/Austrian theories and quite contrary to Keynesian prescriptions.

Moreover, let it be admitted that constitutional monarchy is rarely an active force in limiting the power of politicians (minority parliaments being one exception, where the Crown has legitimate avenues of intervention), but serves rather more as a passive agent in limiting the State.

First, the very hereditary nature of British constitutional monarchy — i.e., non-elective — disinclines government to aggrandise the Head of State.  Governments are reluctant to invoke public criticism for expenditures which do not in some way flatter the ‘heirs’ of democracy (especially when the House of Windsor is itself exceptionally well-endowed financially):  Witness the absence of a royal yacht when H.M.Y. Britannia was decommissioned.

Second, the constitutional role of the monarch in the Westminster parliamentary system means that the prime minister is a servant of the Crown and cannot therefore with impunity rise above his station.  It is at best to be guilty of lèse-majesté, and at worse an affront to the parliamentary party which can always be relied upon to remember that the inhabitant of No. 10 is simply primus inter pares.

The theoretical ground of this public choice defence is laid out by Austrian economist Hans-Hermann Hoppe who, while he may not necessarily be a monarchist, sees the unrestrained growth of elective governments as far more destructive of personal liberty and economic freedom.  When absolute monarchy reigned, Hoppe argues, the State and its appurtenances were held as private property, and husbanded wisely as a future inheritance; subjects were jealous of their rights and defended them tenaciously (arising from an awareness of ‘class consciousness’), leaving the Crown on guard not to exceed its authority.  Democracies, to the contrary, do not arouse a corresponding scepticism — Why, one day I too may be leader of the country! — but nor do they engender similar feelings of safeguarding wealth:  Without the responsibility of bequeathing royal estates to one’s children, politicians become mere ‘caretakers’, and the spoils of State become transitory gifts that must be enjoyed and shared with one’s cronies while the democratic gods shine (a form of present-orientedness that is reflected in citizens’ consumption rather than investment).

Arthur Seldon called this ‘the dilemma of democracy’, noting four weaknesses in popular government:  short-sighted with material resources; over-expansive with a tendency to ‘grow’; liable to conspiratorial patronage; and uncritical of majoritarian electoral decisions.

All of which leads me to wonder why classical liberals are so often enamoured of the republican ideal.  As Hoppe observes:

From the viewpoint of those who prefer less exploitation over more and who value farsightedness and individual responsibility above shortsightedness and irresponsibility, the historic transition from monarchy to democracy represents not progress but civilizational decline.

One can understand their inability to appreciate a Tory reverence for tradition and continuity, yet why do they so cavalierly dismiss the public choice arguments that demonstrate that limited government in the age of the Welfare State is held hostage to democratic fortune?

‘It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people, and to restrain their expence,’ wrote Adam Smith in The Wealth of Nations.  ‘They are themselves always, and without any exception, the greatest spendthrifts in the society.  Let them look well after their own expence, and they may safely trust private people with theirs.  If their own extravagance does not ruin the state, that of their subjects never will (II.iii.36).’

Let not the irony be lost:  Britain has gone from the time when a burgeoning representative democracy set in motion the end of the divine right of kings, transformed thus into constitutional monarchy — which itself has become the most visible restraint on elected politicians who behave as if themselves graced with divine sanction.  We may no longer fear kings, but their ministers remain a threat to our rights and freedoms.  Elizabeth II embodies the limits we must impose upon the political classes; her Diamond Jubilee an occasion to remember the State is the servant of the people.  God Save the Queen!

That's the upcoming collapse of the European banking system that is. George Soros says that the main cause of the current and coming problems is the very odd decision that the regulators made about capital weights on sovereign debts.

When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge.

I do take Soros to be a very bright man and a very knowledgeable financier. I don't take him to be quite the great economic guru that some seem to think he is.

But this does explain so much. I think it was Basel II which brought tis rule in: that soverign bonds needed no capital assigned to them and there was no haircut in repoing them with the ECB. And that does indeed explain why so many banks lent so much money at such low interest rates to countries that clearly were not as creditworthy as some others under the same rules.

It also explains why it all fell apart so quickly: as soon as the ECB was applying credit based haircuts to such bonds then the flood into the southern nations became a flood out again.

It also leaves us with a very important question. If it was indeed the regulators that caused this then what is the argument behind giving the regulators greater powers?

I'm as surprised as you are at my agreeing with them both but there is a great truth in this statement:

“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right....

Let us, just for a moment, adopt the Keynesian mindset, agree that the Great Man's works are indeed how the economy should be managed.....even accept that the economy should be managed at all. With that assumed then yes, of course this is true. Blow out the deficit in the slump so as to increase aggregate demand.

Excellent.

But then look at the other side of it: in the boom we should be running not just primary budget surpluses but actual full budget surpluses. No, not just to pay for past or future borrowing, but absolutely to manage, in fact to reduce, that aggregate demand that is excessive in that boom.

This has been managed how often since the immediate post war years? Under Lawson for a couple of years at the end of the 80s boom and under G. Brown for that brief period of time when he was following previous Tory budgets. But Keynes, and Keynesianism, would have had us running budget surpluses all the way from 2000, 2001, to the crash in 2008/9. Again, not so much to reduce the national debt, or to save up room for borrowing in the slump. But to take the top off, the froth off, that boom.

Didn't happen, did it? Even at the top, even the tail end, of the longest boom in modern economic history we were still running budget deficits.

At which point we can point out one of two things: Keyensianism doesn't work given the political system we've got which just won't allow such surpluses to be run: or Keynesianism just won't work with the politicians we've got because they cannot resist spending the cash to buy votes.

Either way, it doesn't work, not because spending in a slump is a terrible idea but because no one will, for any length of time, perform the other half of the necessary equation. Leaving us with the current situation of actually needing the austerity in a slump simply because we don't have the money to do anything else.

Thanks Gordon.

Gosh, this is just lovely. The Labour Party is going off to study the German economy and try to work out what makes it tick. So that it can be replicated here in the UK.

Hmm.

It argues that strong local and regional banks underwritten by local authorities have been crucial in providing loans to small and medium-sized enterprises, in contrast with the UK where the big four large remote banks have been repeatedly criticised for failing to fund industry.

Strange this: I don't see them mentioning that the German state bailout of the German banks was as, if not even more, expensive than the UK bailout of the UK banks. Nor that the part of the Spanish banking system, the cajas, which is falling over right now is in fact that part of it that was "strong local and regional banks underwritten by local authorities". Strange that really.

I also see no mention at all of the two things that have in fact kept the German economy motoring along. The first being a deliberately undervalued exchange rate so as to be able to run a large export surplus. The second being that Germany has just spent a decade deliberately screwing down the wages of the workers in order to further increase that exchange rate undervaluation.

That second not being a policy I'd expect any Labour politician to endorse, of course, but I'll not take their studying Germany seriously until they at least acknowledge that that is what was done.