Purge or splurge

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purge-or-splurge

I can recommend a number of good articles on the current financial crisis by John Stepek over at MoneyWeek. Well worth a read to purge you of the largely ropey and misdirected media coverage.

In an article entitled The government can't stop the recession - but it can make it worse written following the nationalisation of Fannie and Freddie, he drew attention to the oft ignored fact that: “Fannie and Freddie had the implicit backing of the US government. That meant they could borrow money almost as cheaply as the government. That meant they could buy up more loans than anyone else. That's why they now dominate the US mortgage market. And that's why the government – which first created them – has now had to bring the prodigals back onto its balance sheet".

In another article entitled Short-sellers didn't cause this crisis - the government and bankers did, Stepek gets it right by making this analogy: “Bankers may well have acted as if they’ve been sitting in the casino during the boom years. But it was a state-owned casino, with governments as the croupiers, and central bankers behind the bar giving out free booze".

A couple of days ago, Stepek dealt with the rather pointless question that seems to tapping at the nation’s zeitgeist: Is this the death of capitalism?: “What's the solution? Ideally, I'd say just ditch central banks and let the market set interest rates. Central banks, regardless of how ostensibly independent they are, are instruments of the government. The government wants happy voters, and free money makes people happy. So there's always the temptation to keep the money flowing freely". Is Stepek calling for the Denationalisation of Money. If so, a timely lesson attributable to the great Hayek.

Education or social justice?

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education-or-social-justice

With a target of 50 percent of school leavers going to university by 2010, the government is encouraging more students than ever before to enter higher education. As with any target setting, there will be a divergent relationship between the quantity and the quality of education received by students.

But this target is not the only way in which the government is meddling with university admissions. They are constantly encouraging universities to accept more applicants from ‘lower-income’ backgrounds. The argument is that they may not have been able to afford the private school fees or tuition that middle class children may have benefited from. But by interfering with such blunt schemes the government is inevitably disadvantaging other students. The latest addition to the UCAS (University and Colleges Admission Services) form is a declaration of the students’ parents’ occupations – as if this gives any indication as to the aptitude of a candidate to study!

Why does the government continue to disadvantage certain young people of equal opportunities? If a child receives extra football coaching outside of school they aren’t told they must play with their shoelaces tied together to make it fair on the opposition!

As the Vice-Chancellor of Cambridge University stated recently, universities are designed for educating students rather than acting as ‘engines for promoting social justice’. Essentially, the government is trying to cover up its poor performance in education, but by making it easier for certain students to gain university entrance the government is reducing their incentives to study whilst at school. This benefits nobody.

Blog Review 728

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If you actually wanted to create a financial crisis, how would you go about doing it? My, isn't there a remarkable similarity between what was done and what you would want to do?

An alternative, more Austrian, but not fundamentally different, view.

Proof that the method of regulation (as opposed to regulation or no regulation) does indeed matter.

A further alternative explanation, one that blames regulations themselves for the problems.

So just why did the oil price spike yesterday?

A precis of Darling's speech and a precis of Polly's latest column.

And finally, quote of the conference (so far).

Use the market force, Luke

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I nearly threw up over the Daily Telegraph on Monday, as I read Roger Bootle arguing that "banking is too important to be left to the bankers". I like Roger, he's very brainy and we've had him at our Power Lunches here from time to time. But unfortunately the truth is that banking is too important to be left to central bankers.

Make no mistake, they're the ones who got us into this mess. As cheap imports flooded in from China, prices should have been falling; but the Fed and the Bank of England were content to preside over (modestly) rising prices. There was, simply, too much money around for far too long. True, with events like 9/11 lots of people were calling for yet more money to be injected. But now we know that simply lowering interest rates and keeping them low is no long-term formula for economic success. We binged on credit, and now we're hung over.

John Stepek of Money Morning has a better idea.

"I’d say just ditch central banks and let the market set interest rates. Central banks, regardless of how ostensibly independent they are, are instruments of the government. The government wants happy voters, and free money makes people happy. So there’s always the temptation to keep the money flowing freely. "

"The market on the other hand, couldn’t care less what voters think. One feature of the credit boom is that most people in the City and on Wall Street knew it couldn’t last forever, and they had a hunch it would blow up in a very unpleasant way. But they couldn’t stop playing along, because they had to compete with their peers. However, if markets set interest rates rather than governments, then arguably this mood of rising concern among the participants, would be reflected in the price of money long before things got out of hand. Anyone who had overplayed their hands would run into trouble long before they became “too big to fail".

That seems like a much better idea than spending hundreds of billions of dollars and tens of billions of pounds to create a welfare state for distress banker-folk. Use the market force, Luke!

All change, please

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all-change-please

You would expect the week that Britain's embattled ruling party held its conference to be a good one for blogging. Surely there should be loads of new policies to discuss, lots of political skulduggery to mull over? Well, not so far.
 
Indeed, just a few days after a major economic crisis, Alistair Darling, the Chancellor of the Exchequer, managed to give a keynote speech in which he said almost nothing interesting at all.
 
And as for Gordon Brown – who is meant to be fighting for his political survival – the best he has come up with is a pledge that every two-year-old will get a free nursery school place by 2018. Needless to say, that will cost money he doesn't have, and he won't be around to see it through anyway. It's an empty promise.
 
It's also a bad idea. The last thing the UK needs to do is extend the dubious (and costly) benefits of state education to two-year-olds. Children in most countries already start school much later than in the UK, and seem to be better off for it.
 
In truth, you can't escape the feeling that Labour has reached the end of the line. After 11 years in power, they are divided, introspective, and devoid of fresh ideas. The big question is, how long will it take them to recover?

Andy Hutson joins the ASI

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Hi! I’m Andy and I have just started my gap year job with the ASI. Previously I attended Westcliff High School in Essex, completing A levels in politics, economics, maths and geography. After working here I plan to go to university to study PPE. I have always held libertarian views and so am greatly looking forward to working within the leading free-market think tank.

My hobbies include running, squash and tall ships sailing (I am a Watch Leader with the London Sailing Project, based in Southampton).

I am hoping that this opportunity will allow me to expand my views on politics, whilst contributing to many current debates.
 

Prime Minister for a day

In this think piece – originally written for Whitehall & Westminster WorldASI policy director Tom Clougherty explains what he would do if he were prime minister for a day. In a nutshell: reduce spending and scale back government, reform public services, and cut taxes. Would it really be that hard?

6.30am

I’ve never been a morning person, but if by some stroke of luck I became prime minister for a day, I would want to make an early start. Most PMs struggle to achieve much in five or even ten years, but I’d have big plans for my day in Number 10, and I’d need all the time I could get.

7.15am

Over breakfast – something substantial, to keep my hunger locked up till lunch – I’d kick things off with some simple reforms to make everyone’s journey to work a little bit easier. For starters, I’d let people turn left on red lights, which would reduce congestion and make traffic flow more smoothly. Then I’d let motorcycles and cars with passengers drive in under-utilized bus lanes, making far more efficient use of our scarce road space.

9.30am

Getting into my workday now, my thoughts would turn to all those people toiling away in Britain’s public services. I’d think of all the doctors, teachers and policemen whose working lives are made a misery by stifling government bureaucracy and I’d want to do something to help. So I’d get rid of all the Whitehall targets and memorandums, those orders from on high, and let the professionals get on with their jobs.

Instead of having to march to the beat of the government’s drum, I would make them accountable to the people who really matter, the people they treat, teach and protect. Brits would elect their police chiefs, pick their doctors and hospitals, and choose their children’s schools. And all these services would have the independence they needed to innovate, specialize and tailor their services to individual and community needs. Before long people would be asking, why didn’t we always do it like this?

1pm

I’d watch myself on the news, reflecting on how much better the BBC had become since I privatized it over my elevenses. Then I’d have beer and sandwiches – Number 10 have been good at that ever since Harold Wilson’s cosy chats with the unions. They’re pretty good at peas too, thanks to John Major. I’d head into the garden for a bit of fresh air, and feed any scraps to Humphrey, the Downing Street cat.

1.45pm

Back to work. Did you know the government will spend more than £600bn of the taxpayers’ money this year? That’s more than £10,000 per head for every man, woman and child in the UK, and twice as much as in 1997. It doesn’t represent anything even approaching value for money.

As PM, I’d have to ask myself, do we really need 1165 QUANGOs, spending more than £63bn a year? Do we need a business department that does nothing for business and spends £5bn a year? Or a culture department that spends £3bn? Does the communities and local government department do anything useful? And why do we still have a Scotland Office and a Wales Office, now that Edinburgh has a parliament and Cardiff has an assembly?

Every government promises to cut waste. Most of them fail. They spend years re-arranging the furniture of government and trying to make things more efficient, but it never amounts to anything. Government just grows and grows. The only way to stop it is by abolishing whole departments, agencies and functions. And if I were PM for a day, that’s exactly what I’d do. I doubt anyone would miss them.

3.30pm

Thinking of all the money I’d just saved, I’d get down to cutting everyone’s taxes. I’d start by raising the personal allowance to at least £12,000, taking low-earners out of the income tax system altogether. Then I’d create a single, flat-rate tax on all income over that threshold – regardless of its source. Capital gains would have to be indexed to inflation, but apart from that there would be no added complications. While our current ‘progressive’ tax system hammers low-earners with disproportionate tax bills, my ‘flat tax’ would put everyone from cleaner to fat cat on a level playing field. All those New Labour zillionaires would be pretty peeved at losing their loopholes, so I’d take the phone off the hook and dodge their angry complaints.

6.30pm

By now my day as PM would be drawing to a close. Running the UK government has got to be a pretty stressful job, so I’d want to head to The Red Lion across the road in Whitehall to unwind. Before knocking-off, however, I’d make one more reform: repealing the licensing laws so that pubs could stay open as long as they wanted. My work done, I’d promote myself to the House of Lords. It would be such a welcome relief from serious politics.

Blog Review 727

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blog-review-727

On panics of a different kind. Is it really necessary to get the entire fire department out for a broken thermometer?

How can you, as an employer, both win awards for improving worker safety and also have one of the highest rates of employees retiring with work related disabilities?

The law is important and yes, we all should be equal before it. And in public please, too.

So just what are the top unsolved problems in economics?

Could it be yet one more thing that those Nordics got right?

On the perils of connecting to the wider economy.

And finally, there's no slomo replay in real life.

In defence of spivs

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The current excitements in the financial markets are allowing everyone to have a go at their favourite targets. The regulators ban short selling when there's absolutely no reason or purpose to it other than varied politicians shouting about spivs (pots and kettles come to mind). Others want capital controls, yet other demand that polticians should control interest rates (entirely unaware that at anything except the base rate itself interest rates are set by markets and always will be). One more spotted in the Independent on Sunday:

It allows spivs to borrow money to buy a profitable company and then saddle that company with the debts incurred in buying it out. It contradicts our sense of natural justice and our instinct that the finance industry should be about financing real activities rather than speculative profiteering.

That the rise in the cost of money has already rather put a stop to the leveraged takeover is one thing, but to claim that such takeovers are not "real activities" is absurd. There are a number of productive assets floating around the economy. From skilled workforces to industrial plant, land and buildings to intellectual property. Some of these are not very well used, not employed to their maximum capability. Some of them are valued by one group of people higher than they are valued by another. Sometimes those who value them more highly are those who don't currently own them so, again sometimes, they purchase them. They pay more for them that the current owners think they are worth.

Quite how they raise this finance to do so is an irrelevance. We have moved those assets from those who value them at one level to another group who value them more highly. And that is the very definition of weatlh creation: moving assets from one use to a higher value one.

There is indeed speculation here, for no one is ever quite sure that the new use is indeed a higher value one. You have to actually try it out to find out if it is. Making a profit is the sign that it is indeed a higher value use, so we at least hope for profiteering from such moves. But there's nothing that's not "real" about such activities, nothing at all.

 

Fish n' rights

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Throughout recent decades a stream of evidence has been produced that points to a continuing ‘tragedy of the commons’ across world's oceans. Such tragedy is especially evident in the Northern Atlantic, and the seas around the European Union. A recent study for Science Magazine has discovered that giving fisherman rights over the seas they fish, extends stock life and improves conservation.

In a piece entitled: “Privatization Prevents Collapse of Fish Stocks, Global Analysis Shows" [Sorry, subscription required], the results showed that when a fisherman has more rights concerning the quotas allocated to him, fishing stocks tended to remain healthy. Obviously for developed parts of the world, with established rules of law, the protection of fisherman's rights could easily be achieved. This, though, is only an extension of what those on the ‘right’ side of the argument have been continually arguing: that to protect fish stocks it is imperative to grant rights to those that fish and for those rights to be defended

A few days prior to this, the EU announced that it was to overhaul its fisheries policy. The investigation reviewed in Science is a weighty piece of research that the EU will most likely ignore and/or botch implementing. Ideally we would withdraw from the Common Fisharies Policy in its entirety and establish our own protected fishing grounds. This would save jobs, fish and decrease environmental damage. It's time for the waters to be privatized.