The Pin Factory Blog

In all the discussion of the American sub-prime mortgage market, few people have pointed out that the US government actually compels banks to make loans to poor people in poor neighbourhoods – regardless of whether those loans are prudent and are likely to be repaid.

It started with the Community Reinvestment Act of 1977, which aimed to support community groups, but in 1995 the Act was extended and beefed up, giving regulators far more powers to punish banks who refused to lend to people in poor urban neighbourhoods – so-called ‘redlining’ – because they considered the risks too high in those particular areas.

Congress's idea, obviously, was to extend to poorer people the same rights and enjoyment of home ownership that the middle-class majority possessed. But in fact it precipitated the banks into giving loans to some rather shaky people. Quite simply, they feared retribution by the regulators if they did not.

As a result, sub-prime loans mushroomed in the late 1990s. Not too bad for as long as the US economy was booming. But booms inevitably burn out and then the banks started to realize the magnitude of their dodgy contracts. And now, the whole world is being sucked into this crisis, and ordinary, prudent bank customers find themselves and their money frighteningly exposed. That's the cost of American political correctness. Thanks, guys.

Just a few months after the capital gains tax farce, Gordon Brown made another embarrassing U-turn yesterday. With forty of his own MPs opposing the abolition of the ten percent tax band and local elections coming up next week, the prime minister announced that a 'compensation deal' for the losers from the tax changes would be unveiled in the autumn. The 10 percent starting rate of income tax will still be abolished, but the groups that stand to be left worse off – 60-64 year olds and low-paid workers without children – will get more winter fuel payments or new tax credits.

Once again, an attempt at simplification has ended up making the UK's tax code even more complicated and confused. It's already the longest in the world at 9,973 pages, while its administrative burden costs the UK £5.1bn a year. Nor is the government's quick fix (rushed out just in time for Prime Ministers Questions) likely to satisfy opponents of the tax change. The parliamentary rebellion may have been averted, but taxpayers will not be so easily satisfied. They don't want the hassle of filling out forms and applying for tax credits, they just want to pay less tax and keep more of their hard-earned cash in the first place.

A much better solution is to take the poor out of the tax system altogether. At the minimum, the personal allowance should be raised so that no one earning less than the minimum wage (about £12,000) a year pays any income tax at all. Then you could get rid of the labyrinthine tax credit system and all the bureaucracy that goes with it as well. 

Unfortunately I can't see the government going for such an obvious solution. They would rather tax you as much as they possibly can, and then give back only as much as they think you deserve.
 

100. "Nobody should be free to smoke in public places."

There are many things which people do in "public places" – a concept which now includes private property open to members of the public – which others find unpleasant. The question is whether they do significant harm to others. It seems well established that many smokers harm themselves, and are at risk of incurring diseases thereby. This does not justify state intervention, any more than our consumption of unhealthy food and drink justifies it. The state can warn us, but the behavioural decision in the light of that knowledge is our own. Most smokers do not appear to engage in criminal activity in support of or in consequence of their habit.

There is less evidence that passive smoke harms third parties. People who share living space over the years with heavy smokers might incur greater risks, but there is little to suggest that non-smoking patrons of bars and clubs stand a significantly greater health risk if others smoke. The bus which spews diesel fumes onto a crowded pavement, especially at the level at which children breathe, might well prompt greater health risks. Those who cough and sneeze in public places undoubtedly pose health risks to others, while the thoughtless use of mobile phones on trains and in restaurants might raise the stress levels of those who have to suffer it to health-damaging levels. Society usually takes the view that there must be a significant risk to others before it intervenes.

Some of those who support smoking bans claim that most smokers welcome them because it helps them to give up. Very few cigar smokers, also banned in public places, want to quit, though. And although many people would like to lose weight, few would regard this as a justification for society to ban caloric foods in order to help them diet. The principle should be consistent, and not single out smokers to ban.
 

On the State funding of political parties: why do they want more if they're already getting £1.75 billion? Isn't that enough?

All about bear raids, or, why Oxford shouldn't have a business school.

People lose weight when economic crisis strikes: so should we have some more economic crises to beat obesity?

For those worried that the US doesn't make anything any more: a list of what it does make.

One answer to why we haven't already rebuilt the energy infrastructure the way some would wish: given the regulatory burden, we couldn't even build the one we already have again.

Strange tort laws combined with regulatory burdens can be worse though.

And finally, Netsmith's life, loonie socialists and how to write a modern CV.

George Osborne's non-dom tax policy is now in tatters. It wasn't a bad policy, all in all, to make non-domiciled investors stump up a bit of cash to pay for the public services that they enjoy by dint of living here. The proposed burden was modest, and the policy had been tested out on the business community before it was announced. I don't think I would have proposed it (on the ground that the UK needs every investor it can get, and there are plenty of places round the planet who are willing to tear up the tax forms and welcome them in). But nobody really objected too much.

Indeed, it went down pretty well with the general public. Whereupon (unfortunately) Chancellor Alastair Darling thought that he too could stick these rich foreign investors for some cash to help fill his budget deficit – and, in haste to steal Osborne's halo and without any consultation, promptly overdid it.

So now we've had a stream of non-domiciled investors mumbling and grumbling that they might – or will – soon be leaving the country for more agreeable and lower-taxed places, like Bermuda or Switzerland, where policy is less fickle and arbitrary, and where you can plan your business for the longer term. The latest, according to reports, is Brevan Howard, a $22bn investment fund currently based in London's Pall Mall. But that's just the latest of dozens.

So at a stroke, Darling has killed off the UK's hard-won status as a buzzing international investment centre where non-dom enrepreneurs are welcome and left in peace to get on with making money for themselves and, indeed, all those Brits they work with and invest in.

To will back that status, Osborne – when Chancellor – will have to do far more than just promise a somewhat lower rate of tax. Investors' confidence in UK policy has, unfortunately, been shot away by the government's arbitrary, opportunistic attack on them. Osborne will have to say that he'll restore the status quo ante – and sign in blood that it won't change again during his term of office – before the big fund managers will think about returning.

99. "We should switch all our energy to derive from renewable sources."

This is not a practical proposition from the standpoint of either cost or technology. Wind-power is uneconomic without subsidies, and involves huge energy expenditure in construction and maintenance of its wind farms. Rooftop windmills in urban areas, for example, take more energy to produce than they themselves generate. Since winds are unreliable, wind power necessitates huge back-up sources to be on standby.

Solar technology used to use the silicon rejected by the computer industry, but now high purity silicon is being manufactured specifically for power generation. However, this is a heavily energy intensive process, undermining the energy payback from the technology. Although great strides are being made here and it looks as if solar power could be price competitive in a decade, it still won't provide a steady flow of power, nor the concentrations of power needed for industry.

Biofuels currently use food crops such as wheat and maize, and drive up prices, affecting poor people most. The US and the EU have gone for them as an easy option that pleases the farm lobby, but they are not efficient. The crops it takes to fill the tank of a 4x4 with biofuels would feed someone for a year. Many also maintain (Greenpeace and Friends of the Earth amongst them) that they produce more emissions than they replace. If technology can obtain biofuels from plant waste and cellulose, they will be a more viable source, but this might be years away.

A more realistic approach would accompany research into efficient renewable sources with technology to use fossil fuel cleanly so that coal-fired power stations, for example, can capture the carbon produced. Clean fossil fuel technology can give abundant, secure and low-cost energy, which renewable sources currently cannot.
 

There was a protest across the road from the ASI last night. Not directed at us, but rather at our neighbours, the Department for Children, Schools and Families.

There is plenty to protest about. Like the fact that Britain has plummeted down the international league tables of school performance in maths, literacy and science. Or the fact that 350,000 pupils a year fail to get five good GCSEs including maths and English. Or even the fact that children in deprived areas do far worse than those in wealthy ones, with the gap growing wider.

But the protestors weren’t there about that. They were protesting about one of the good things the department is doing – its city academies programme. More specifically, they were protesting against the new academy which is due to replace Pimlico School in September. Frankly, their opposition puzzles me.

After all, city academies (independently run state schools) do much better than the schools they replace. Their test scores and GCSE results are improving much faster than the national average, even though they admit more pupils with special educational needs or eligible for free school meals than their area average. Most tellingly, existing academies are three times oversubscribed, which is to say a lot of parents want to send their kids to them (a good indicator of quality, in my opinion).

The funny thing is, the reason the protestors don't like academies is also the main reason for their success: they are free from local authority control. They have more power to shape their own curriculum, to hire and reward staff, and to deal with unruly pupils than do other state schools. Rather than being weighed down by rules and regulations, they can innovate and tailor tuition to their pupils' needs.

Academies are not perfect, of course. They should be even freer from the state. They should focus less on fancy new buildings and more on teaching. Most importantly, they should be much easier to set up, so that more children get to attend them. But whatever the protestors say, the country needs more academies, not less.
 

According to Bloomberg, the Danes have developed an innovative new approach to caring for the elderly. Junksmith plans to retire there someday...

This is one way of looking at it: that the banks themselves are issuing new shares means that they think they are over-valued.

On bank and financial market regulation: should it be rules based or principles based?

Praise for the design of the credit market bail out.

How regulation has been effected. For example, marijuana wasn't made illegal in the US: you just had to have a licence and they wouldn't issue any licences.

Comparing the costs of locking up people from an area with the costs of policing an area to prevent the crime and thus the need to lock people up.

That decline in Russian oil production might not be peak oil you know?

And finally, imaginary animals, kosher or not? plus winning a caption competition.