I hear Berlin is a great place to live...

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It seems Gordon Brown's self-appointed role as global saviour is not acknowledged as universally as he might like...

Angela Merkel, German Chancellor:

Excessively cheap money in the US was a driver of today’s crisis. I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.

Steffen Kampeter, budget expert in Ms Merkel’s Christian Democratic Union:

I see the danger of creating a new bubble. Massive interest rate cuts and massive borrowing may bring about new problems.

How good is a policy package if it has to be changed every other week? How good is it for confidence? The latest British decisions on VAT and income tax, for instance, are inconsistent. Better to wait a bit longer and put forward more durable solutions.

Hat-tip to the FT's Westminster Blog, via Spectator CoffeeHouse

Blog Review 792

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Not so much the post as the first comment.

I do actually get very upset when I realise that I have lived out the best years of my life under the most deceitful, vindictive and unintelligent government of all time.

A rather rosy view of Obama's new economics team from one who knows them all.

Not everyone thinks this way. Why, for example, would anyone want to force farms to be lower than the size necessary for maximal efficiency.

Yes, we like this. Civil service and politician's pay should be cut in these straightened times.

It's not that GM makes cars no one wants to buy. It's that they make cars that no one wants to buy at that price.

Now here's a plan.

And finally, yes, this is the internet.

Night of the Living Gordon

However, there appears limited room for further revival, and lots for decline. Recession is on the way, and this will hurt the people as well as Gordon’s chances. The European Election in June is unlikely to be a strong point, and (just like the shopping mall scene in Dawn of the Dead) provides room to undermine his leadership: both from outside and within. More importantly, regardless of his recent jump, he remains an unpopular figure lacking in electoral magnetism. Some see him as a safe bet now, but they may still hope he is out of Number 10 when the sun (and government deficit) rises.

Finally, there may be one other problem, radicalisation. The ‘strange death of Labour’ may not yet be upon us, but the seeds of destruction for ‘New Labour’ are well planted. The recent pre-budget report shows the first signs of this shift back to old-fashioned socialism. This process will only accelerate as tired MPs call for change, and wrongfully blame Capitalism for causing the economic woes.

Overall, a Conservative victory still seems likely. However, as in all horror sagas, nothing is certain; the ugly head of socialism and the fist of big government may yet jump out... Booo! I am scared - are you?

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If you have ever watched the zombie classic Night of the Living Dead, the current political scene should appear quite familiar. Picture Dave C. and Georgie-o strolling blissfully through the landscape on a 28% lead (14th September 2008, IPS0S-MORI), as a pale faced man (zombie) lumbers towards them.

Gordon was recently raised from the dead, having lain in the detritus of his own failed policies and incompetent regulation of the financial sector. Despite the deep layer of failed policies covering his tomb, safely keeping him down, he was suddenly re-animated by the myth of world leadership. Now, with the Lord of Darkness at his side (since the 3rd October) he and his Darling have closed the gap on the Tories.

He has also secured his position within his own party.  The disputes I highlighted in August, have faded away, as has Bananas Miliband. Brown’s newfound identity has given him renewed confidence and purpose. With the public focusing on short-term action, and less on blame for continued failure or the long-term costs, he now markets himself as the experienced economic guardian of the UK, thus developing a viable election platform. Labour now seems less like a pack of sluggish George A. Romero zombies and more like a creature from 28 days later or I Am Legend. [Click 'read more' to continue]

Regulation and the financial crisis

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In a new ASI briefing paper – The Financial Crisis: Is Regulation Cure or Cause? – Tim Ambler examines demands for financial stability and security though increased regulation. The question the paper poses is whether existing regulation mitigated the 2008 financial crisis, had no impact, or exacerbated it. Answering this question is the key to deciding how we respond to the crisis.

A few main points:

  • The crisis may have begun in the US, where regulation introduced during the Carter and Clinton presidencies was a major contributing factor, but whatever the international aspects of the crisis there are clearly a number of home-grown elements that made the UK particularly susceptible to it.
  • The financial crisis was triggered by the bursting of a credit-fuelled bubble. Regulation and regulators did not cause this fatal bubble, but they did indirectly help it to grow by fostering the illusion of financial security. At no point did the UK's main regulatory institutions warn of the dangers ahead.
  • The over-regulation of traditional financial services shifted enterprise towards complex financial packages that were unknown to, unseen by, and not understood by the FSA or UK Treasury. In many instances, even bank directors did not know what they were investing in.
  • The regulation enforced by the FSA is predominantly legalistic and rules-based, and amounts to the micro-management of the way firms are structured and run their businesses. Compliance with rules was mistaken for the validation of business models and management practices – clearly a mistake. Regulation should focus more on principles and outcomes, not processes. We need better oversight, not more regulation.
  • The most important factor in the crisis was that the UK's financial regulators lacked a clear and simple remit. This led them to overlook the early signs of the crisis and hampered their response to it. The Treasury must take responsibility for the failings of the tri-partite system, since they were the architects of it.
  • The paper singles out the Bank of England for particular criticism, arguing that it was so pre-occupied with its first objective – monetary stability – that it failed to give due attention to its second one – the stability of the financial system. And even the Bank's focus on interest rates and inflation was rendered ineffective by the exclusion of property prices from their remit.
  • The main conclusion of the paper is that improving regulation will not provide more than modest help in future. The important thing is that the Bank of England, the FSA and the credit agencies do the jobs they are supposed to do more effectively. The paper suggests a number of structural modifications that should be made to allow this to happen.

Click here to download a PDF of the briefing paper.

What Alistair Darling should have done

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I've written a new think piece on Alistair Darling's pre-budget report, arguing that his so-called 'stimulus package' is really just a manifesto for wasteful and ineffective spending increases, record levels of government borrowing and public debt, and higher taxes in the long term. I suggest that Darling should instead have announced a substantial rise in the personal allowance to put more money in the private sector economy, and balanced that with public spending restraint.

Click here to read the whole piece, which comes in at just over 1000 words. We haven't published many think pieces this year, but they are something we are hoping to do more of in 2009.

Blog Review 791

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There really is a large black hole in the budget....unfortunately. It's a £100 billion hole too.

Thre's a good way and a bad way to get through this. Guess which we're currently following?

There's a certain similarity between these two political platforms.

Another person arguing that the banks need to be nationalised.

There is a positive side to this increase in piracy.

Yes, windmill owners really do need to pay people to take the electricity.

And finally, Belgium explained (and boy, does it need explaining).

New Labour would have listened to the ASI

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new-labour-would-have-listened-to-the-asi

With the dust beginning to settle after the pre-budget report – and not in a pattern that the government will like (see below) – it is interesting to note the question James Forsyth poses over on the Spectator's CoffeeHouse blog: what would a New Labour budget have looked like?

Needless to say, this is based on the assumption that yesterday's PBR did in fact signal the death of New Labour, as this Times leader brilliantly argues. It's not a bad assumption. It struck me as a resolutely Old Labour budget – the kind Dennis Healey could have been proud of. No more prudence, no more golden rules, no more acknowledgement that wealth creation is a necessary condition for 'social justice', rather than it's sworn enemy. Let's just spend and borrow to our heart's content, because someone else will be picking up the bill.

Anyway, James thinks he know what New Labour would have done:

New Labour might have lifted people out of income tax altogether — helping the poor but also sending out a low-tax message...

And they would have done this, he conjectures, by raising the personal allowance. Well, that's just what we suggested the Chancellor do in our brieifing paper Why Alistair Darling should raise the personal allowance. The paper called for a personal allowance of £12,000 for every UK taxpayer – a move which would take 7 million people out of tax altogether and make the average worker £100 per month better off.

James continues:

I suspect that this would have worked better both economically and politically.

Indeed it would. Are you listening, Mr Darling?

The reaction to the PBR

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The Times, Labour 1994-2008, Leader: The deep international crisis would have been difficult for any Government. For this one - with excessive borrowing already underway - the challenge is particularly severe. It has mortgaged the future on the ideas of the past

The Times,'Real' Labour regroups to fight the old battles, Rachel Sylvester:  “£150,000 may seem a lot in Edinburgh but it isn't a lot in Reading," one senior Labour figure said. “I fear that Gordon has just given a huge Christmas gift to the Tories. We are, to quote Lyndon Johnson, in danger of losing the South for a generation."

The Telegraph, Labour lands Britain in a £1 trillion hole, Leader:  Despite the best efforts of Alistair Darling to gild the lily - predicting a "shorter and shallower" recession as a result of his measures - the true enormity of the cataclysm that has engulfed us was finally laid bare.

The Telegraph, Why Gordon Brown the manic meddler had to take such a massive gamble, Boris Johnson:  The Government may treat the public like laboratory rats, but they are not entirely idiotic. They can see that this respite is only temporary. They can see that the tax rises are round the corner, and even as they tiptoe towards the cheese, they can see Alistair Darling waiting with his cosh.

The Independent: A monumental debt that takes us back to the 70s, Hamish McRae:  The Government is only raising about £7.50 in tax for every £10 it proposes to spend. That is back to the levels of the 1970s that led to us seeking a bailout from the International Monetary Fund (IMF).

The Sun, The Death of New Labour, Leader:  The clue is in the tax changes. All the CUTS are temporary. All the RISES are permanent.

The Sun, Cheat Brown has bungled the bung, Fergus Shanahan:  Gordon’s great “giveaway" amounts to no more than him acting like that loan shark on your doorstep or that drunk putting off the hangover.

The Financial Times, Say Goodbye to New Labour Again, Leader:  The pain of the Brown boom will be felt well beyond the recession.

The Daily Mail, 'I make no bones about taxing the rich': Darling resolute but Tories say radical rates cuts would be more effective, Leader:  Although the 800,000 people earning more than £100,000 will provide £3 billion of the £4 billion in extra income tax revenue, it was becoming ever clearer last night that average earners will be stung as well.

Dysfuntional dentistry

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It was reported in The Times yesterday that NHS dentists will be forced to pay back £120 million to the government for failing to fulfil their assigned quotas of cases seen. Once again we see evidence of government quotas creating a poor quality service, neglecting the areas which really matter.

According to the article, NHS dental treatments targets were missed by 5 million in the year 2007-2008. Previously, dentists were paid per treatment giving them greater economic incentives to provide a better quality service. But, under the current scheme dentists are given a set income for completing an agreed amount of NHS work. This set income minimises any incentives for dentists to provide a quality service, resulting in a ‘drill and fill’ scenario. As I have written before, the inefficiencies of the NHS mean that patients are seen as numbers, rather then people.

The inefficiencies of a quota system are clear, but if the dentists are punished for the governments failure we could see more and more dentists refusing to provide NHS treatment – already about 1,000 dentists have opted out of the NHS scheme meaning that 9,000 fewer patients have been treated – or a brain drain with dentists moving to countries such as the US where they will be rewarded more generously for their talents.

Left to the market this healthcare service would be provided in a much more efficient manner, with dentists responding to consumer needs both in terms of quality and volume of treatments.