The Rhineland model

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There are various possible models of what we might loosley call capitalism. Say, our own Anglo Saxon vaguely free market one (anyone who says that we currently have anything close to "free markets" is of course deluded). There's also the Nordic model which, while it has eyewateringly high income tax rates, does get some things right. Business is taxed very lightly and almost never protected, being left to get on with creating the high paying jobs that can then be taxed to pay for the welfare state. A third alternative is what is known as Rhineland capitalism.

Instead of those secondary markets in shares and bonds (the "locusts and vultures" of the City) the banks are the primary source of finance. Decisions are long term, big business, big labour and big government plans things out so that all is for the best in an orderly manner. This is roughly the model that Will Hutton is always proposing.

Germany's economy shrank by 3.8pc in the first three months of the year - a record contraction that is almost double the fall of Britain's gross domestic product in the first quarter........The export-reliant country has been hit hard as world trade nose-dived in the latter months of last year. Charles Dumas of Lombard Street Research said: "German economic policy is bankrupt, and the Mediterranean countries stuck in EMU are also condemned to ongoing economic collapse. "Already we have real GDP levels that are up only about 3pc from 2000 in Germany and Italy – ie growth has been only a little over ¼pc a year – making this a lost decade for much of continental Europe on a worse scale than Japan in the 1990s."

Yes, yes, I know, something must be done and something must be seen to be done because we are, after all, in a recession. But why is it that people can, with a straight face, seriously propose that we move from our current system to a worse one? One like Rhineland capitalism, that produces less growth in the good times and a greater contraction of growth in the bad?

It would be absurd, wouldn't it? To insist that there must be more regulation, more central direction of the economy, more "planning", when the result is that there is less economic growth and thus less wealth to share around. Well, unless you were one of those who expected to be occupying the planning suites and the regulatory palaces of course.

Ahh, yes, that might be it.

Who should be the next speaker?

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One of the only positives to come out of the whole expenses scandal is the exposure that nobody (both in and out of Westminster) has faith left in the speaker of the House of Commons. Douglas Carswell MP has made the bold and brave first-step of calling for a motion of confidence in the Speaker – this should pick up speed next week when the headlines lose focus on the greed of individual MPs.

The speaker has to go if we are to help save any dying shreds of accountability or democracy within British politics. He has a track record of bias, dishonesty and incompetence. The current problems within our parliament cannot be solved if the figurehead, and coordinator are at their root.

Iain Dale conducted a poll on his blog with some conclusive results. 95% of those polled thought Martin should ‘step down now’, whilst only 1% thought he was doing an ‘excellent’ job. Those are the types of figures which should prompt swift and decisive actions within a democracy, but this may not happen under our current system.

The Speaker will have to leave eventually, and the appointment of his successor will have to play a central role in cleaning up Westminster. The next speaker will almost certainly be an older stalwart of Parliament who can control and command the respect of all. Amongst the names being thrown into the ring, Frank Field, Ming Campbell and Dennis Skinner seem to be frontrunners. Personally I feel an ex-party leader would not be suitable for the job, having already carved a strong personality within the media and public perception. Whoever is chosen, the next Speaker will need to wipe the slate clean and promote a new age of transparency within politics beyond expenses. They will need to be careful, Michael Martin has tarnished the role heavily, their first slip-up, bias or dishonesty will be pounced upon and not forgotten easily.

Blog Review 963

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Translating tax freedom day into hours in the day. You work for Gordon until after lunch each and every day.

It's not so much that Austrian theory explains the crash, it's that it explains the boom that led to the crash.

Economic geography comes back into fashion: although this time the limitation is the speed of light.

Amazing to find a government spending program actually even more expensive than welfare, isn't it?

On the different treatment for those who break the rules and those who break the law.

Inter generational mobility: maybe it's all in the genes anyway?

And finally, matters economic come full circle

 

Country by country reporting and arms length transactions

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Out on the wilder lefty shores of the blogosphere there is this idea that if only multinationals reported their results on a country by country basis then everything would be right with the world. You know the thing, mice would smile when caught by kittens because kittens are, after all, cute. I have to admit that I'm somewhat unconvinced for the idea depends upon another: that each and every transaction within a company should be valued and priced as if it was an arms' length transaction.

Which rather goes against Ronald Coases' justification for the existence of companies in the first place: transaction costs.

Put simply, the argument for which he won the Nobel Prize* was that the reason to have one organisation was that sometimes that is cheaper than having many. The cost of writing, monitoring, justifying, contracts is, or at least can be, substantial. So also can be the cost of having one organisation, there will be overheads and inefficiencies, after all. So, companies will exist when those contractual costs exceed the benefits of a more nebulous network of hirees, and that network will exist when the central costs outweigh the benefits.

But this idea that a company should be taxed as if it were not a company violates these Coasean assumptions. We've agreed that the company exists because it is cheaper for it to exist than to have arms length transactions: so why would we tax it as if it were composed of arms length transactions?

I fear that yet another bright idea from the left is refuted by the real world.

Odd how often that happens, eh?

 

*Yes, we know, not a real one, Swedish Bank in honour of and no, we don't care.

The Austrian counter-attack

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altThe IEA has this week fired a huge salvo into the idea that the current crisis resulted from a failure of free markets and an excess of unregulated greed. "Verdict on the Crash" is by a group of heavyweight authors who take apart, piece by piece and line by line, the idea that lenders, bankers, hedge funds and short-sellers ran amok and brought ruin down on all of us. On the contrary, the authors lay the blame squarely on the shoulders of governments with their central banks and regulators.

Central banks flooded the market with money and easy credit, fuelling an asset bubble and sending false signals to business. They distorted risk assessment through their regulatory approach, leading financial institutions to create ever more complex derivatives. Governments and their agencies (like Fannie Mae and Freddie Mac) pushed lending to those at high risk of non-repayment, while their tax and regulatory regimes encouraged complex and opaque methods of increased gearing. They created the illusion that regulation could replace trust and reputation in oiling the wheels of credit.

The IEA's book has deservedly received huge coverage. Its importance is that the powers that be (G20 and downwards) seem determined to misinterpret events and bring in more of the controls, regulations and interventions that lay behind the crisis in the first place. It is very important that the case should be made that this was a failure of governance, not of markets, and the IEA has done us all a favour by putting that case so convincingly. Their report and its summary are accessible on line.
 

Blog Review 962

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This is indeed the problem with anti-trust. Even lower prices are regarded as anti-competitive.

GM isn't just being hit by the current troubles. There's decades of bad management there too.

Taking note of the detail behind the stimulus plans: for example, it's taking an age to actually spend the money by which time we won't need to spend it, will we?

Sadly, troughing public sector employees is not a problem limited to the Westminster Parliament.

Sainsbury's profits rose, did they? That's Darling's VAT cut for you.

What we ought to be looking for in an economic theory.

And finally, unfair perhaps, but how some see the BBC.

Boom politics

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A report today by a committee of MPs – and we know what high standards they have – blames the banks' bonus culture as a major source of the financial crisis. The remuneration system, they say, worked to encourage bankers to go out and make deals, without worrying whether they were good or bad deals. They got the cash either way. But naturally, a lot of the deals they engineered were indeed bad.

That's true. But what brought on this bonus culture in the first place? The cause is actually down to the political system.

For the past twenty years, politicians really have believed that they were saving us from boom and bust. Any time there was a blip in the market, like the 1987 stock market slide, or after Russia defaulted on its debt, or most spectacularly after 9/11 – they 'saved' the system by flooding the world with cheap credit. Interest rates after 9/11, for example, came down from 6.5% to just 1%. With credit six times cheaper, people of course borrowed a lot more, buying houses, shares, securities, any asset they could. So many people were buying, that these assets shot up in value.

The response of the banks' management was rational. In this boom atmosphere, almost everything succeeded. Buy an asset today, it would be worth more tomorrow. Since all deals seemed to work, they naturally rewarded staff who made more deals. Of course, when the bubble burst, they all discovered just how dodgy some of these deals were.

But when you are looking at the causes of this crisis, you have to go behind the bonus culture, and not just stop there. What caused that culture was not 'greed' by the banks. They didn't all suddenly get together and decide to be really, really greedy. It was the politicians who engineered the boom that made this perverse culture seem perfectly rational. Physician, heal thyself.