The Great Crash of 2008: Are governments or markets to blame?

A transcription of economist Deepak Lal’s 2009 Adam Smith Annual Lecture, on the causes and lessons of the 2008 financial crash.

In the early 1980’s I was working as the Research Administrator at the World Bank, whilst the Third World was engulfed by a debt crisis. The current global financial crisis has eerie similarities, but different outcomes. Why?

First, both the crises arose because there was a surplus of savings in a number of countries- the oil producers in the 1970s, the Asian economies and commodity exporters today-which was recycled through the international banking system. Second, highly liquid banks imprudently funneled cheap credit to un- creditworthy borrowers: the fiscally challenged and inflation prone countries of Latin America and Africa in the 1970s, the ninja (those with no income, no jobs, no assets) sub prime mortgagees of the current crisis. Third, there was a rise in commodity prices and a worsening of the terms of trade of the OECD, posing the stagflation dilemma for their central banks, having aided and abetted the earlier asset boom. Fourth, the imprudent banks sought bailouts from taxpayers, claiming their demise would fatally damage the world’s financial system.

But, the outcomes have been different. The 1980’s crisis was finally solved after a prolonged cat and mouse game when the banks accepted substantial write downs of their Third World debt, sacked their imprudent mangers and shareholders suffered large losses. But no systemic threat to the world’s financial system (or the global economy) emerged. By contrast, today the Western financial system seems to be dissolving before our eyes, and with the US Fed’s ever expanding balance sheet, bailouts are no longer the exception but the norm. Many now foretell a deep and perhaps prolonged recession, with deflation, rising unemployment, and Keynes’ famed liquidity trap about to engulf the world’s major economies.

I

Changing Financial Structures

What explains this difference in outcomes? It cannot be purported ‘global imbalances’, which were the origins of both crises. It is the differences in financial structures within which these temporally separated but largely similar crises occurred. In the 1970’s the recycling of the global surpluses was undertaken by the offshore branches of Western money centre banks, which were neither supervised nor had access to the lender of last resort facilities of their parent country’s central bank. Hence, when their Third World Euro dollar loans went into ‘default’, there was no direct threat to the Western banking system.

The present crisis emerged in a radically different financial structure: the rise of universal banks from the UK’s Big Bang financial liberalization in the 1980s, and the Clinton era abolition of the Glass-Steagall Act, which had kept a firewall between the commercial and investment banking parts of the financial system since the 1930s. The former had implicit deposit insurance and access to the central banks’ lender of last resort facilities. The latter did not. It is worth explaining why this matters.

This distinction between what were previously non-bank financial intermediaries and banks is important because it is only clearing banks which can add to (or reduce) the stock of money. A clearing bank holds deposits in cash (legal tender base money) from non-banks, repaying deposits in notes, and making payments for depositors by settlements in cash through an account in the central bank. When a clearing bank extends a loan it adds to its assets and simultaneously creates deposit liabilities against itself, increasing the broad money supply at ‘the stroke of a pen’. This ability to create money ‘out of thin air’ is limited by the bank’s capital and cash. As cash can be borrowed from the central bank, the ultimate constraint on its ability to create money is its capital. But it is only because banks take in cash deposits – Keynes’ ‘widow’s cruse’ – that they can create money.

By contrast, a non-bank financial intermediary, say a mortgage lender, when it takes deposits or makes a mortgage loan has to ‘clear’ these through deposits held at the clearing banks. Thus when someone deposits ‘cash’ at an S&L this comes out of the depositor’s bank account with a clearing bank. Similarly when the S&L makes a loan to a mortgagee this comes from the S&L’s bank account with a clearing bank.

Thus the essential difference between non bank financial institutions and clearing banks is that they cannot create the bank deposit component of broad money (M2 or M4).

When the FDIC was created as part of Roosevelt’s New Deal, to prevent the bank runs which the earlier universal banks gambling had engendered, Marriner Eccles who redesigned the Federal Reserve system for FDR in the Great Depression, insisted that with deposit insurance the banking industry must be split in half: the public utility part of the financial system which constitutes the payments system must be kept separate from the gambling investment banking part, which is an essential part of a dynamic economy. For these gambles impart the dynamic efficiency through the cleansing processes of creative destruction. But if these gambles are protected against losses by taxpayers, as the payment system activities have to be because of deposit insurance, the gamblers will always win: keeping their gains when their gambles are correct and passing their losses onto taxpayers when their gambles turn sour. Hence the Glass-Steagall Act.

Given this ‘moral hazard’, many classical liberals have favored free banking. Banks combining the payment and investment functions and issuing their own notes, should be monitored by their depositors, who would stand to lose if their banks undertook imprudent lending. But with the near universality of deposits as a means of payment, there is little likelihood of this monitoring function being effectively exercised. Whilst the rise of Demos precludes any government being able to resist pressures to bail out imprudent banks to protect their depositors. This makes deposit insurance inevitable, and to prevent investment banks from gambling with the tax payer insured deposit base, something akin to Glass-Steagall remains essential.

II

Policy Errors

The recent emergence of universal banking was followed by a number of public policy mistakes on the path to the current crisis. The first was the bail out of LTCM in 1998. Its failure posed no obvious systemic threat. Its public salvation changed expectations of market participants that non bank financial institutions could also hope for bailouts. Next the infamous Greenspan ‘put’ which put a floor to the unwinding of the dotcom stock market bubble, promoted excessive risk taking. Third, the promotion of ‘affordable’ housing for the poor by the Clinton administration through the unreformed and failed Freddie mortgage twins, led to the development of subprime mortgages. Fourth, the Basle II capital adequacy requirements led banks to put their risky assets into off- balance sheet vehicles- the SIVs- leading to the opacity currently being bemoaned. Fifth, when the housing bubble burst, and the credit crunch began with the gambles taken during it turning sour, the Fed chose to bail out Bear Sterns, sending the signal that the Fed’s balance sheet was open to non-deposit taking ‘banks’ as signaled by the earlier LTCM bailout. Sixth, and most heinously given all that had gone before, the US authorities then chose not to bail out Lehman’s- like a fallen woman suddenly finding virtue. This dashing of the bailout expectations that the authorities had endorsed only in the spring, led to the intensification of the credit crunch. Seventh, as the authorities finally seemed to tackle the toxic subprime infected financial assets which caused the crisis through TARP, it calmed the markets. When TARP was changed to be used only to recapitalize banks, markets went into free fall. The essential step, of forcing banks to come clean on their balance sheets, and then removing the toxic assets they reveal into a newly created institutional ‘cordon sanitaire’, has still not been taken. Worse, instead of recreating a firewall between the payment part and the gambling part of the banking system, even the pure investment banks, like Goldman Sachs, were pushed into becoming universal banks with access to the Fed’s balance sheet and thence taxpayer’s money.

Given these public shortcomings the near universal calls for greater regulation and state intervention is astounding. Public agents, not private ones- who reacted rationally to the implicit or explicit ‘rules of the game’ promoted- are to blame for the crisis. It would be foolish to blame the puppets for the failings of the puppeteer.

III

Remedies

What of the remedies? In answering this it is essential to be clear of the nature of the crisis, and to view it from the correct theoretical perspective. Because of the association of Keynes’ name with the Great Depression, the crisis and its cures are being seen through ‘crass Keynesian’ lenses. Is this appropriate? To answer this question I briefly outline the alternative theoretical perspectives which seek to explain the current crisis as well as the remedies.

Here a personal note is in order. When I got my first academic job as a lecturer at Christ Church, Oxford, my senior colleague was Sir Roy Harrod- Keynes’ first biographer and keeper of his flame. On having to provide a reading list for my tutorials on “economic fluctuations and growth” I asked him what I should ask my pupils to read. I expected him to say Keynes, and his own work on trade cycles and growth. But after some reflection he said: Wicksell. So before I prescribed this to my pupils I immersed myself in Interest and Prices and Lectures on Political Economy. Since then I have been pleasantly surprised that most of the macro economic perspectives on offer really hark back to Wicksell.

Wicksell asked: how could the price level be anchored in a pure credit economy? Bagehot had observed in Lombard Street that the whole of the Bank of England’s note issue depended on a slender and declining gold ratio. What if this ratio went to zero, asked Wicksell? His answer was that, if the Bank rate were set at the natural rate of interest, which balances productivity with thrift, the price level could be kept constant. This is, of course, the theory underlying inflation targeting, as embodied in the Taylor rule. As John Taylor has noted, it was the failure of the Greenspan Fed to follow this rule which led to the credit bubble after the dotcom bust.

The reasons for this failure are provided by Hayek’s refurbished Austrian theory of the trade cycle. Hayek saw divergences between the Wicksellian natural and market rates of interest as causing booms and slumps. If increased bank credit led to market interest rates below the natural rate, businesses will undertake relatively more capital intensive projects with relatively low rates of return. There will also be an unsustainable boom, with more projects undertaken than can be completed, leading to resource scarcities which end the boom. The financial crash which follows will lead to the liquidation of these ‘maladjustments’, followed by an economic recovery with resources being reallocated in line with inter-temporal consumer preferences and resource availabilities. Whilst broadly accepting the quantity theory of money, Hayek argues that it assumed the absence of ‘injection’ effects, which even with prices stable could lead to false signals in the pattern of inter-temporal prices, and thence to maladjusted investments. The recent US housing boom, with a stable general price level, provides an example of these ‘maladjustments’.

But Hayek’s prescription that the slump should be allowed to run its course, came to be disowned even by his LSE circle led by Robbins in the 1930’s. As Gottfried Haberler (a close friend and member of Hayek’s Austrian circle) noted in his astute appraisal of Hayek’s business cycle theory: “Keynes, Robbins, and many others were correct: if a cyclical decline has been allowed to degenerate into a severe slump with mass unemployment, falling prices, and deflationary expectations, government deficit spending to inject money directly into the income stream is necessary. Moreover, Hayek himself has changed his mind on this point”. (The Cato Journal, Fall 1986, p. 422).

Though Keynes’ General Theory, unlike Hayek’s, provides no explanation for the boom preceding the slump, he was right in emphasizing “effective demand” failures in the face of a financial crash, and the need for deficit spending. Though not, as advocated by many current Keynesians, through counter cyclical public works. Thus Keynes wrote in 1942: “Organized public works at home and abroad, maybe the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organization (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle” (Collected Works, vol. XXVII, p.122). A point reinforced by the Congressional Budget Offices’ assessment of the planned Obama infra-structure spending.

Friedman, unlike Hayek, was closer to Wicksell in concentrating on the effects of divergences between the natural and market rate of interest on the general price level and not as Hayek’s theory presupposes on relative prices. With the real (natural) rate being determined by productivity and thrift, monetary expansion will only raise nominal interest rates through inflationary expectations. Given the natural rate of interest there will also be a corresponding natural rate of unemployment. Monetary policy can only lead to transitory deviations from these natural rates, if capital and labour markets are efficient. There is little about credit markets in Friedman, or in his successors of the New Classical and Real Business cycle schools. As the current New Neoclassical synthesis is based on these models (with some twists of Keynesian ‘imperfections’), but contains neither money nor finance, it is useless in explaining or providing cures for the current crisis.

Thus, though Hayek provides the best diagnosis of the cause of the current crisis, neither he nor Keynes provide an adequate explanation of the financial aspects of business cycles, assuming these are endogenous to the fluctuations in the real economy. It is Irving Fisher (“The Debt-Deflation Theory of Great Depressions”, Econometrica, 1933) who provides the correct diagnosis of the nature and cures for the current crisis. Fisher saw a ‘balance sheet recession’ as an essential element in the Great Depression. He argued that, whilst there were many cyclical factors behind trade cycles, for Great Depressions the two dominant factors are “over-indebtedness to start with and deflation following soon after (p.341). Like the Austrians he saw over indebtedness as caused by “easy money” (p.348). This provides a succinct explanation of the current crisis and pointers to its cure. We have a Hayekian recession with Fisherian consequences. Having learnt the lessons of Friedman and Schwartz’ work on the Great Depression, Ben Bernanke has made sure that the second leg of a Fisherian debt deflation will not occur. But, past and present US authorities have failed to adequately restore the balance sheets of over leveraged banks, firms and households. US banks urgently need to be restored to health, perhaps through temporary nationalization as in Sweden in 1992. Whilst, stimulus packages have failed to adopt the obvious means to restore household and firm balance sheets, by a massive across the board tax cut accompanied by an equivalent fiscal deficit. It is argued that most of this extra income will be saved not spent. But this is to be bewitched by the wholly inappropriate Keynesian income-expenditure analysis, which fails to deal with balance sheets. If this Fisherian aftermath of a Hayekian recession is caused by attempts to reduce unsustainable debt, the ‘savings’ generated by the tax cut (i.e. reducing liabilities to the government) will allow the necessary deleveraging, without a downward spiral in income and increased bankruptcies. By facilitating households to pay off their mortgage and credit card debts, it will prevent further impairment of bank assets. Instead, we have the dog’s breakfast of the Obama stimulus package and a dubious Geithner ‘plan’ to clean up the banking sector. This, like Nero, is to fiddle while Rome burns.

IV

A New Financial Oligarchy?

Finally, I want to consider who are the winners from this on- going global financial crisis? The answer is: China, India and Goldman Sachs!

Let us consider the latter. This also provides a clue to the political economy behind the current crisis in its epicenter the US. As in the numerous Third World financial crises the question to be asked is who are the ‘rent-seekers’ who created the crisis and whose reluctance to take a ‘hair cut’ prevents the domestic polity from accepting the obvious cures. So that ultimately the intervention of an external agency like the IMF is need to administer the necessary cures. The crisis was caused by financiers taking ever risky gambles with the complicity of the government. This is reflected in the changing share of US domestic corporate profits that have gone to the financial sector. From 1973 to 1985 it was 16%. In the 1990s it oscillated between 21-30%. In the last decade it reached 41%. This was accompanied by a dramatic increase in pay: which rose from 1999=108% of the average for all domestic private industries to 181% in 2007. This great increase and concentration of wealth has created a new financial oligarchy similar to the one in the early years of the last century, which has great political weight in the US. At its head is Goldman Sachs. It has provided the Treasury secretaries under the last 2 US presidents and numerous alumni have held and continue to hold influential posts in devising and implementing US economic policy. (see Simon Johnson: “The Quiet Coup”, The Atlantic Online, May 2009).

This explains some of the bailouts. Why for instance was Lehman allowed to go the wall but AIG was ‘saved’? Lehman had the misfortune of both being a major competitor to Goldman’s and being run and staffed by the ‘barrow boys’ from the Bronx rather than the Ivy League gentlemen manning its rival. AIG was saved I suspect because, as appeared when Congress forced AIG to disclose what it had done with its bail out money, it had to disclose that most if it was to pay off its counterparties, the major one being Goldman! It is ironic that just as the century old rise, decline and now fall of GM, which marked the era of American industrial ascendancy, with one of its chairman claiming that “what was good for GM was good for America”, should now be followed by an era in which seemingly “what is good for Goldman is good for America”, or more generally Wall Street.

V

Geopolitical Consequences

What of China and India? Though their growth rates have fallen with the backwash from the US crisis on global trade, they are still likely to grow robustly. This points to some important geo-political consequences of the current crisis.

The last two centuries have been dominated by two Anglo-Saxon empires (the British and the US) whose liberal international economic orders have allowed the wholly benign processes of globalization to bring untold global prosperity. The inter war imperial interregnum saw a period of grave disorder and the emergence of Fascism and Communism. Today, will the US be able and willing to maintain its hegemony, allowing globalization to continue?

On the 10 October 1916 in the middle of a British financial crisis, Keynes wrote a memorandum to the Treasury, noting that financial hegemony had passed across the Atlantic. (see R. Skidelsky: John Maynard Keynes, vol.1, p.335). Is the collapse of Lehman Brothers on 15 Sept. 2009 a similar turning point? For with the three high savings countries China, Japan and India as the major source of funding for the exploding US public debt, will the US have to adopt the policy Keynes recommended for Britain: ” not only to avoid any form of reprisal or even active irritation but also to conciliate and please”. ? And which of these countries is likely to replace or help US hegemony?

Japan because of its continuing reluctance to match its economic with military power and with its stagnant economy and demographics is an unlikely candidate. This leaves the two emerging Asian giants. George W. Bush’s most notable achievement was the strategic partnership he established with India, cemented by the Indo- US nuclear deal. But India’s economic and military power is at present dwarfed by China’s. As China has signaled that it is not planning to sell its holdings of US debt, it along with the Gulf State sovereign funds are the most likely source of finance for the exploding US budget deficit. So expect talk of Chinese ‘currency manipulation’ and lectures on human rights to diminish as the US faut mieux has to follow Keynes’ advice. Though, at present, it is impossible for China to take over the US’ hegemonic role, it will undoubtedly have increasing leverage over US foreign and domestic policy as the financier of the US.

This is likely to make the US’ war against the current totalitarian threat from militant Islam more difficult. For given China’s desire to assure supplies of primary products- particularly oil- for its rapid industrialization, China’s foreign policy is unlikely to antagonize many natural resource producing countries, like Iran and the Sudan, which continue to aid and abet international terrorism. Nor, given China’s historical support of the current crucible of jihadists, Pakistan, as a counter weight to its emerging Asian rival, India, can much help be expected in this quarter. This leaves India, which even more than the US (as the Mumbai attacks demonstrated), has to fear the rise of militant Islam and the impending implosion of the Pakistani state. In many ways it would be the natural partner of the US with its large army to accompany the technological wizardry of the US military. But is it able or willing to take on the role of a partner in the US Imperium?

Meanwhile, as the other potential partners of the US in sharing its imperial burden- the Europeans- have (apart form the British) clearly signaled, with their refusal to send more troops to Afghanistan that, they are going to continue to be free-riders, the US stands alone in maintaining global order. Will the aftermath of the current crisis leave it with the means and will to do so?

The parallel with Rome is instructive. The causes of Rome’s’ decline were ultimately economic. As the past rents acquired during the empires growth had been in part committed to a vast expansion of a welfare state without extending the domestic tax base, the empire faced an endemic fiscal crisis. It tried to close the deficit by levying the inflation tax by debasing the currency. Not being enough, taxes had to be raised, leading by the middle of the 4th century to tax evasion and avoidance by high officials and large landowners. The fiscal crisis also led to problems in maintaining the old military organization. Without the means to provide the Italici satisfactory treatment, recruitment was expanded to the provincials and in the late Empire to the barbarians. Having let them inside the gates the Empire sealed its doom.

That the US imperium is on a similar primrose path was pointed out in a dire warning by the former US Comptroller general David Walker in August 2007, when the US budget deficit was only projected to be under $500 billion. He explicitly drew parallels with Rome, including “declining moral values and political civility at home, an over confident and over extended military in foreign lands and fiscal irresponsibility by the central government” (Jeremy Grant: “Learn from the fall of Rome, US warned”, FT.com, 14 August 2007).

This irresponsibility has increased manifold with the current crisis. The 2007 report noted that, it was primarily the health entitlements which made the US budget unsustainable. This is the entitlement Obama is planning to enlarge. Walker also warned that, the crisis could not be solved by growing out of the problem, eliminating earmarks, wiping out fraud, ending the Iraq war or cutting defense expenditures, restraining discretionary spending or letting the Bush tax cuts expire (US, GAO-07-389T, p.18). These are the very policies that Obama is hoping will reverse exploding future deficits. With projected reductions in military spending, it seems likely that the US like its Roman predecessor will find it difficult to maintain the sinews of the forces which have maintained global order. With no obvious alternative to provide this global public good, I fear the ensuing erosion of global order, so essential for the processes of globalization to work, is likely to be the most serious long term consequence of the global financial crisis.

 Delivered as a speech at The Adam Smith Annual Lecture, St. Stephen’s Club, 4th June 2009.

A goal that can't be missed

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The G8 meeting in Italy is reported to have agreed yet more goals. An 80% reduction in carbon dioxide emissions by 2050 (from a baseline yet to be agreed) is more of the usual aspiration target-setting, with no agreement on hard shorter-term goals. The chances of India and China signing up to something similar are zero. The likelihood is that there will some form of agreement cobbled together in Copenhagen in December which will in practice be meaningless and will achieve nothing.

However, one further goal has been agreed which will be easy to reach. That is to keep average temperatures from rising by more than 2°C, which has now been taken as some line in the sand beyond which we cannot go without disastrous and irreversible consequences. In practice, we are extremely unlikely to get close to this goal whether or not anything is done about emissions control. So that's one goal they'll meet.

Elsewhere, Prince Charles, in his Richard Dimbleby lecture, has calculated that we have just 96 months to save the world, in what the Independent reported as a searing indictment of capitalist society. So, I assume he is going to take a lead by shutting down Duchy Originals. In the meantime, we can be comforted that the heir to the throne has such a sound grasp of maths.

For more information, visit the website of the Scientific Alliance.

Darling fluffs regulatory reform

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HM Treasury released yesterday 176 pages setting out the government’s regulatory response to the financial crisis. Quite how the global (as Darling still claims it is) crisis will be solved by a few pettifogging UK changes is unclear. More transparency for hedge funds, higher fines and capital ratios, and keeping an eye on bankers’ bonuses (presumably like Lord Myners and UKFI have kept an eye on those at RBS) are marginally useful. But the root causes of the crisis – notably, the failure of supervisors to supervise – are ignored.

The FSA is not penalised but rewarded. The Bank of England is given the responsibility for financial stability it always had.

The report includes a summary of the Impact Assessment but the Assessment itself is still (some hours after the report it is supposed to justify) unavailable. With the announcement being delayed a week they should have had plenty of time to issue the Assessment. It should show us the alternative means of meeting policy objectives and the comparative analysis of their advantages and disadvantages. For now, though, we are in the dark.

The summary shows the the five policy objectives, the third being to boost “boost consumer trust and confidence in financial markets". Most of us reckon that trust, misplaced as it was, to have been part of the problem. In financial terms, this policy objective is far the biggest and will save around £25 billion over 52 years. The other figures and proposals are no less fanciful. None of the other policy objectives seem to match up with the regulatory changes proposed. The White Paper is designed merely to get Darling to the next election.

(Un)common sense on climate change policy

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When so much which is said, written and done in the name of climate change mitigation is tinged with a zealotry which insists that drastic action must be taken, despite the improbability of it happening, it is particularly refreshing to see a remarkably sensible new report from the University of Oxford and LSE.

How to Get Climate Change Back on Course clearly and concisely demolishes the myth that the Kyoto protocol and any successor which might possibly emerge from the Copenhagen conference later this year will have the claimed effect on emissions. It also highlights the ludicrously ambitious targets of the UK Climate Change Act, which would require a sustained rate of decarbonisation over twice that ever seen. That Kyoto places binding obligations on Annex 1 countries and the Climate Change Act targets are legally enforceable is meaningless: no sactions can force compliance.

The authors of the report all subscribe to the view that carbon dioxide is the primary driver of climate change. These are not sceptics. However, they are realists, capable of independent thought and recognising that the current hypothesis may turn out to be false. They propose a policy which is lower cost, efficient and - most importantly - directly addresses the key issue of carbon intensity: a low, ring-fenced carbon tax to fund innovation policies. This is based on the simple truth that clean energy will only begin to dominate when it is cheaper to supply at the point of use than conventional sources. Such a carbon tax may turn out to be unnecessary, but it certainly beats the unholy mess of emissions control. This report should be required reading for all politicians.

For more detail, see the latest Scientific Alliance newsletter.

Prohibited from leaving the waiting room...

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..,especially if you need some assistance in making it through those heavy double doors underneath the exit sign. Lord McColl writing in The Daily Telegraph sets out arguments against Lord Falconer's proposal for people's non-prosecution of those who assist others seeking to be euthanised. Dying in Dignity have found that two-thirds of people actually think that Falconer's proposal is acceptable and wish to see the change in the law.

Lord McColl's arguments are admirable, but they fail to take into account one very important factor: that people have the rights over their own lives. While there may be a majority of doctors who do not wish to be involved in making a decision with regard to someone's life, there will be others willing to help. After all patients wishes should be respected. For years Jehovah Witnesses have refused blood transfusions, much to the detriment of their own health; those wishes remain respected though. How is it that those with a god have power on their side yet the rest of us meek mortals are subservient to the politician's and medical profession's whims.

At a previous point a person has made a rational choice that they are, or will no longer be, happy with the level of life they will find themselves in. Therefore they wish to end it all. It's time that we grew up in this country and respected individual choices over our lives. We have advanced little in the intervening years since the Suicide Act was passed in 1961 when the state finally relinquished its totalitarian grasp on people's lives. Those who assist in purveying a person to carry out their wishes should not be punished unless there is a highly suspicious reason to. Obviously it would be far easier if euthanasia was available here and we had a system organized that protected the vulnerable from abuse. It will be a while longer before the state cedes total control to us to hold open the doors, as the House of Lords voted against the amendment on Tuesday.

Freezing public sector pay

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It’s unusual for me to be in support a policy of Alistair Darling’s; in fact I can’t remember when I last agreed with him, but if he carried through his signalled intentions to freeze public sector pay, this would be an uncharacteristically prudent move.

It is estimated that a freeze in public sector pay could save £5billion for the public coffers – every little saving counts at the moment and any politician signalling cuts in public expenditure is a step in the right direction. But this would not be the sole benefit of the pay freeze. It could signal the beginnings of a culture of change in the public sector towards efficiency mirroring the private sector.

Currently, and for the past decade, civil servants have enjoyed the best of both worlds. They have received good pay, comfortable working conditions, bonuses, unparalleled job security and huge pensions with very little downside. This has resulted in a stagnation of public services with no incentive to cut costs or boost productivity with no external and very little internal competition. Long-gone are the days when a public sector job was done in the vein of public-interest. A freeze in pay would send out messages that the public sector needs to really earn our money rather than automatically receiving it.

The chances are Alistair Darling won’t carry out his threat of freezing public sector pay. If David Cameron comes into power, he has already stated that he won’t be cracking down on public sector pay as ‘that is not the way we do pay in this country’ (whatever that means…). Even if this warning gives some departments a nudge in the right direction, I fear it will be a long time before we see a much-needed large-scale review of efficiency, waste and spending in the public sector.

How to undermine volunteering

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Volunteering is an activity that the government does not understand. For politicians, the populace is seen in crude terms, often through the lens of focus groups.

A report from CFE entitiled Cultural Volunteering in the East Midlands, paid for by a collection of publicly funded bodies, apparently demonstrates the “value of volunteering both to the individual and the organisations they volunteer for". This is not exactly a revelation.

The policy recommendations make depressing reading. It argues for the development of a regional policy and strategy on volunteering. While local government “is expected to facilitate an environment in which volunteering is increased and ensure local people can identify opportunities to volunteer and thus fulfil an active role within their communities".

Included in the recommendations is the suggestion that “Local authorities could maximise the engagement of cultural organisations and volunteers by providing volunteer managers in cultural organisations with appropriate information about services, polices and decisions". In essence this is a blueprint for undermining volunteering in the East Midlands.

By its very nature volunteering is set apart from the coercive state. Although usually well intentioned, politicians are taking away the autonomy of charities and with it the values that make them distinct from politics. It is a pity that many charities are happy to lap up public funds not realising that they are drinking poisoned water. Further, they are undermining those charities that know better.