The Pin Factory Blog

It will be a while before the inside story of the Co-op’s pull-out from the Lloyds HBOS deal emerges, if it ever does, but some aspects are immediately apparent.  The HM Treasury has failed, at least for now, to achieve their twin goals of downsizing Lloyds HBOS, as required by Brussels, and bringing competition to the retail banking sector.  The deal could have transformed the Co-op from a small player to a serious retail bank.

Any deal would be a commercial issue, but surely HM Treasury played some part.  Apparently excessive regulation is a major reason for the pull-out, a direct government responsibility. Whatever happened to de-regulation?  Yes the Financial Services Authority was eliminated but it was replaced by two further monsters, the Financial Conduct Authority and the Prudential Regulatory Authority.

As the IEA has pointed out, we do not need capital ratio regulations, or not now anyway and as this institute has pointed out, financial services markets are now global and therefore need global, not local, regulation.  The UK simply hobbles itself by adding its own unilateral regulations and regulators.

Capital Ratio regulation is a good example of the right medicine at the wrong time.  It was needed in the boom times up to 2008 but is counterproductive in recession: more capital means less lending.  It is like going to the doctor, asking for a cure for a throat infection and being given a prescription for piles because the doctor has suddenly realised that he should have provided that when you last visited.

Osborne also bungled by handing out cheap money for the banks to lend out only to find they put it in their own pockets.  The fact is that he does not understand banks, bankers or banking.

The Co-op has effectively told government that the climate is unattractive for this deal.  And since it has been in the works since last year, they must have been saying so for some time.  The collapse tells us that HM Treasury failed to deliver.

Lloyds HBOS won’t mind too much.  Yes they are under pressure to dispose of the packaged up TSB but they’d rather sell to a newcomer or a tiddler than create a serious competitor as the Co-op could have become.  It is nonsense to say that HM Treasury cannot manage the market since they contributed to the current mess and own, in effect, two of the big four. HM Treasury could have leaned on Lloyds HBOS to sweeten the deal to make it attractive to the Co-op but they evidently did not.  Another bungle.

Maybe some white knight will ride in and save the situation.  Let us hope so but I would not bet on it.   

"Most of the Irish establishment is sadly mistaken in thinking that our problems are rooted in rogue banking behaviour or lax political oversight. The real problem was systematically mispriced credit resulting from our EMU membership." So says Cormac Lucey at Liberal Ireland, who argues that the factors in Ireland's ruin all seem to have one point of origin — the euro. Here's a graph of Dublin property prices, before and after entry to the euro:

The problem is that nobody can know what the natural rate of interest should be to prevent excess savings or borrowing. I am probably in a minority of people who think that euro rates were both too low during the boom, and are now too high — the worst of both worlds and a major factor in the Eurozone's continued recession. Contrast that with a country like Sweden, which has managed to keep nominal GDP fairly steady over the last few years and has avoided the worst of the global recession. As a less-bad option, the case for lots of different central banks with their own currencies trying lots of different monetary policies grows.

George Osborne will derive little comfort from today's deficit figures, which show the public sector net borrowing requirement down only £0.3bn between the 2011/12 and 2012/13 financial years, after accounting for one-off effects. This puts borrowing at £120.6bn, after last year's £121bn, and ahead of 2014/15's projected £120bn. Total debt stands at £1.19 trillion, or 75.4 per cent of GDP, the ONS says up from £1.10 trillion, or 71.8 per cent of GDP a year before.

A tired – but apparently necessary, given public misconceptions, fuelled by confusions over the debt/deficit distinction from politicians of all strips – point, is that this shows just how much the debt is still going up despite the Treasury's Plan A. I wouldn't draw from this that austerity is not happening – some budgets are being cut very quickly, and overall spending is expected to fall a significant 2.7 per cent between 2010/11 and 2017/18. But debt is rising very quickly.

The revelation of the spreadsheet errors in Reinhart & Rogoff's influential paper (which said national debts above 90 per cent of GDP could slow growth) means we may have less reason to fear high debt will slow growth. But we may still have concerns about the redistributive effects of government debt, at least if we've read recently-departed Nobel laureate James Buchanan's work on public finance. Governments borrow to use resources without depriving the taxpayer. But these resources have to come from somewhere (assume full employment or a central bank meeting a nominal target).

Those who buy the gilts, or T-bills, or bunds, pony up the resources now, in return for a better investment opportunity than was available elsewhere. But assuming that households do not act as infinite dynasties, valuing future generations equally to themselves and therefore assuming households do not save now to pay for the inevitable future taxes (i.e. Ricardian Equivalence does not hold) – then future generations will shoulder the burden.

On the one hand, future generations are likely to be much richer than us. This is a trend that has gone on for at least 250 years in the UK, and for shorter periods elsewhere. In some countries it has gone in reverse (spectacularly in Argentina). But on the whole, we can expect future generations to be richer than us. So why shouldn't they shoulder the burden, given their broader shoulders?

This argument is fairly convincing, but it only goes so far. No one would suggest it would be fair to redistribute infinitely toward users of state-provided services and towards bond-buyers, away from future generations. After all, given the secular decline in growth we've seen since the Second World War, they may not be as much more prosperous than us than we are over our parents. As ever in numerical issues, the question may be one of finding the right balance.

Summary: EA car sales continued to fall in March, highlighting the weakness of domestic demand

What the chart shows: The chart shows registrations of new cars in the euro area as a whole and in the four largest countries. The series are three-month moving averages to smooth out monthly fluctuations and are set to an index with the 2008 average=100.

Why is the chart important: Cars and houses are the two biggest purchases households tend to make. Their fluctuations are therefore a good indicator of the ‘true’ state of household demand (ie, showing where households put their money, as opposed to what they say they feel). The importance of the latest numbers is primarily that it highlights the weakness of German car sales. These have fallen at a double-digit pace year on year since January 2012, ie for fifteen months. Bearing in mind that Germany is the strongest economy in the EA, this raises substantial concerns about EA growth in 2013.

Chart and comments provided by Stein Brothers (UK) www.steinbrothers.co.uk

The prospects for hydrocarbon production on the British mainland seem stronger than ever. On 10 April, Professor Richard Davies of Durham University's Energy Institute published a paper stating that fracking is not a significant source of detectible seismic events. Meanwhile, over the last year, there has been a series of leaks of the forthcoming report by the British Geological Survey which is to raise the UK’s estimated reserves of shale gas by some 300 times.

This is welcome news as it paves the way for a secure, domestic, low-cost solution to the thorny problem of replacing the UK’s obsolescent capacity to generate electricity, with a low-carbon footprint feedstock. Many of the deposits are in the North, which would benefit from the investment; but they are also present in the south. In order to make the most of the opportunity, new policy is in order.

HMG is trailing plans to share revenues to incentivise local authorities to welcome oil development. This is very much on the right track, though I would go further: let programs be configured to encourage local authorities to compete for funding, so that they share (say) ten percent of incremental tax receipts; and bid against each other for a further ten percent for development or remediation.

The Petroleum Act (1934) appropriated subterranean hydrocarbon rights from the land-owner to the Crown, at odds with other mineral rights. This anomaly was theoretical until now, as no substantial deposits had been discovered. In light of new technologies we need to reverse this policy which was recapitulated in the Petroleum Act (1998). The clauses concerned should be repealed so that the interests of land-owners are aligned with the public interest in low-cost energy.

This takes us to taxation. Oil prospecting is beset by a complex of penal taxes, compensating exemptions plus a history of opportunistic impositions. All of this adds to investment uncertainty. HMG should set itself to remove fiscal risk from the investment equation, by introducing a regime of simplified tax treatment for newly-lifted deposits of land-based hydrocarbons, to which it commits itself for at least the next ten years.

The cover of Figaro magazine says it all.  “They are leaving for London, Brussels or New York,” it says, and asks, “Why are they leaving France?”  It then talks of “the ravages of fiscal banishment” and “the youngsters who leave to succeed elsewhere.” The young people shown seem to be happily waving goodbye to France’s punitive taxes.  It bears remembering that there are misguided people in Britain who tell us that taxes do not make people change their behaviour…

It isn't after all, all that complimentary:

It's a remarkably ungenerous assessment of Soros' life, starting with the "predatory" in the lead.

However, what really interested me about it all was this comment from Matt Yglesias:

He believes his success as an investor reflects the fact that the stronger forms of the Efficient Markets Hypothesis are false, and that policy conclusions related to the undesirability of unconstrained financial markets follow from this falseness.

I too tend to think that the strong version of the EMH is not entirely true, while the weak is so obviously true as to be almost a tautology. However, that's a rather strange thing to say about a speculator and abitrageur like Soros. For of course it is the activities of speculators and arbitrageurs that make the EMH actually happen, make it true. It is by acting on information that they force prices to reflect said information. If we didn't have people speculating and arbitraging then prices would not reflect information, for there would be no one acting on that information to change the prices.

It may even be true that George Soros doesn't believe in the EMH. But it's most certainly true that the EMH believes in George Soros.

The Wall Street Journal picks up on the quite fascinatingly stupid imposition by the current government of a minimum price on carbon permits. This could only have been done by people entirely ignorant of how a cap and trade system works: not a wholly desirable attribute in those supposedly running a cap and trade system.

The European Parliament's rejection this week of the Commision's proposed carbon-permit price-fixing scheme is good news for economies across Europe—except for the U.K.'s, which is likely to suffer from the lower carbon-emissions prices that result...........The carbon price floor, which came into effect April 1, was supposed to increase investment in "green" energy projects in the U.K. by ensuring that carbon-permit prices could not fall below a certain level—starting at £16 per ton of carbon this year and rising to £30 per ton in 2020............The European Commission's idea for shoring up the price of carbon permits—withholding the supply of permits from the market—was voted down this week by the Parliament, and the permit price only fell farther. As of Thursday is stood at €2.80 (£2.40) a ton—just 15% of the Cameron government's floor.

I know, I know, many of you are more sensible than I am when it comes to this climate change thing. I'm still under the delusion that it's a problem we should do something about. But at least I do understand the role of price in a cap and trade system. In a carbon tax system, the other viable alternative action, it is the tax, the price of carbon emissions, that reduces them. In a cap and trade system it is instead the number of permits issued which reduces emissions. The price for such a permit is simply telling you how tough it is to meet that cap. Thus, the lower the price of the permit the better for all. It shows that reducing emissions is actually quite simple and quite cheap.

In this case, we're seeing that eliminating the marginal emissions necessary to stay under the cap costs less than £2.40 a tonne. Quite why the British government insists that everyone should pay £16 a tonne for it is known only to the more frenzied minds within it. In a cap and trade system a low price for permits is a good idea, a welcome sign that it's all less of a problem than we had thought.

As I say I do indeed think that carbon emissions are a problem that we ought to do something about. But I do also think that we should not use this as an excuse to do fascinatingly stupid things: like artificially raising a price that we are gloriously grateful about being low. The cost of reducing emissions that is.

I have taught A-Level Economics for twenty-five years. The economic crisis has pushed macroeconomics into the spotlight. Non-teaching friends often say that it must be a really interesting time to teach Economics. They are right, it is. However, it is also a frustrating time to be an A-Level Economics teacher. The source of my frustration pertains to the Keynesian bias that exists within the A-Level Economics specification, examination papers and marks schemes.  

Keynesian economists were unable to foresee the economic crisis that erupted in 2008. This view is not controversial. Unsurprisingly, Keynesian demand-side policy remedies have been unsuccessful. Despite fiscal stimulus and ultra-loose monetary policy, UK national income remains lower than what it was before the crisis. The Keynesian paradigm is under pressure. Unfortunately, students across the country are being taught this failing paradigm. 

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