George Soros says it's all the regulators' fault

That's the upcoming collapse of the European banking system that is. George Soros says that the main cause of the current and coming problems is the very odd decision that the regulators made about capital weights on sovereign debts.

When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge.

I do take Soros to be a very bright man and a very knowledgeable financier. I don't take him to be quite the great economic guru that some seem to think he is.

But this does explain so much. I think it was Basel II which brought tis rule in: that soverign bonds needed no capital assigned to them and there was no haircut in repoing them with the ECB. And that does indeed explain why so many banks lent so much money at such low interest rates to countries that clearly were not as creditworthy as some others under the same rules.

It also explains why it all fell apart so quickly: as soon as the ECB was applying credit based haircuts to such bonds then the flood into the southern nations became a flood out again.

It also leaves us with a very important question. If it was indeed the regulators that caused this then what is the argument behind giving the regulators greater powers?

In which I agree with Keynes and Krugman

I'm as surprised as you are at my agreeing with them both but there is a great truth in this statement:

“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right....

Let us, just for a moment, adopt the Keynesian mindset, agree that the Great Man's works are indeed how the economy should be managed.....even accept that the economy should be managed at all. With that assumed then yes, of course this is true. Blow out the deficit in the slump so as to increase aggregate demand.

Excellent.

But then look at the other side of it: in the boom we should be running not just primary budget surpluses but actual full budget surpluses. No, not just to pay for past or future borrowing, but absolutely to manage, in fact to reduce, that aggregate demand that is excessive in that boom.

This has been managed how often since the immediate post war years? Under Lawson for a couple of years at the end of the 80s boom and under G. Brown for that brief period of time when he was following previous Tory budgets. But Keynes, and Keynesianism, would have had us running budget surpluses all the way from 2000, 2001, to the crash in 2008/9. Again, not so much to reduce the national debt, or to save up room for borrowing in the slump. But to take the top off, the froth off, that boom.

Didn't happen, did it? Even at the top, even the tail end, of the longest boom in modern economic history we were still running budget deficits.

At which point we can point out one of two things: Keyensianism doesn't work given the political system we've got which just won't allow such surpluses to be run: or Keynesianism just won't work with the politicians we've got because they cannot resist spending the cash to buy votes.

Either way, it doesn't work, not because spending in a slump is a terrible idea but because no one will, for any length of time, perform the other half of the necessary equation. Leaving us with the current situation of actually needing the austerity in a slump simply because we don't have the money to do anything else.

Thanks Gordon.

Studying the Great German Economy

Gosh, this is just lovely. The Labour Party is going off to study the German economy and try to work out what makes it tick. So that it can be replicated here in the UK.

Hmm.

It argues that strong local and regional banks underwritten by local authorities have been crucial in providing loans to small and medium-sized enterprises, in contrast with the UK where the big four large remote banks have been repeatedly criticised for failing to fund industry.

Strange this: I don't see them mentioning that the German state bailout of the German banks was as, if not even more, expensive than the UK bailout of the UK banks. Nor that the part of the Spanish banking system, the cajas, which is falling over right now is in fact that part of it that was "strong local and regional banks underwritten by local authorities". Strange that really.

I also see no mention at all of the two things that have in fact kept the German economy motoring along. The first being a deliberately undervalued exchange rate so as to be able to run a large export surplus. The second being that Germany has just spent a decade deliberately screwing down the wages of the workers in order to further increase that exchange rate undervaluation.

That second not being a policy I'd expect any Labour politician to endorse, of course, but I'll not take their studying Germany seriously until they at least acknowledge that that is what was done.

Why detailed planning simply isn't possible

Sometime ago here I mused on whether the socialist calculation problem would ever be solved. Would it be possible for computing speed and information gathering to ever become fast enough and detailed enough that it would in fact be possible to properly plan an economy? My conclusion was "not yet at least" for which I am grateful for the calculation of when it might be possible has just been done for us.

I said before that increasing the number of variables by a factor of 1000 increases the time needed by a factor of about 30 billion. To cancel this out would need a computer about 30 billion times faster, which would need about 35 doublings of computing speed, taking, if Moore’s rule-of-thumb continues to hold, another half century. But my factor of 1000 for prices was quite arbitrary; if it’s really more like a million, then we’re talking about increasing the computation by a factor of 1021 (a more-than-astronomical, rather a chemical, increase), which is just under 70 doublings, or just over a century of Moore’s Law.

If someone like Iain Banks or Ken MacLeod wants to write a novel where they say that the optimal planned economy will become technically tractable sometime around the early 22nd century, then I will read it eagerly. As a serious piece of prognostication, however, this is the kind of thinking which leads to”where’s my jet-pack?” ranting on the part of geeks of a certain age.

But note, that's the number for the Soviet economy of the early 1960s. When, according to the very mathematicians attempting to solve this problem, there were some 12 million products whose supply needed to be calculated. Gavin Kennedy tells us that the problem has rather grown since then what with technological advance and the further division of labour:

Brad Delong dramatised the stark gap between today’s Yanomamo stone-age, hunter-gatherers along the Orinoco River with modern New Yorkers along the Hudson River, by referring to the availability and access to products. New Yorkers have access to tens of billions of products supplied in complex product chains from across the entire globe, as against only several hundred for the Yanomamo people, limited as they are solely to whatever they can provide for themselves within their tribal territory.

So to be able to plan a modern urban economy we've added another one thousand times the complexity.

I think our answer is now clear. In any sort of timescale that matters to any of us here and now, planning of the economy simply is not going to be possible. I am willing to leave open the possibility that it will be possible at some time: but anyone desiring to make that assertion had better work out how to keep me alive for the centuries it will be before it can possibly be true. Be quite happy to eat my hat in return for that extended lifespan.

 

Keystone cops

If proof were needed that our government institutions have a lot of fat to trim, consider the arrest earlier this week of Andy Coulson by Strathclyde police.

The former communications director for David Cameron was detained by seven Strathclyde police officers at his London home at 6:30 am on Wednesday before being driven all the way to Glasgow where he was formally charged at 10 pm for alleged perjury.

Yes, that’s right – seven cops from Glasgow hurtled down the M1 to London, rounded up Mr Coulson and then hurtled back to Glasgow. Seven! What on earth were they expecting? Mr Coulson barricaded in his home and yelling “Come and get me, you dirty rats!” followed by the rat-tat-tat of machine gun fire?

Such a high profile operation would clearly have involved the most senior staff in Strathclyde police in the decision-making process. Did no one speak up and say: “Wait a minute. Seven cops driving to and from London is gonna cost a lot. There’s a couple of drug gangs about to have a bust-up and we could use the lads there. Why don’t we just drop Coulson an email, demanding his appearance at our station here. EasyJet does a same-day return for about a hundred quid.”

But there’s no such mentality with other people’s money. So seven coppers blew hundreds, if not a couple of thousand, pounds on overtime, accommodation, food and fuel to haul in the dangerous Mr Coulson. In the greater scheme of things, that may not seem like a lot but as any household or business knows, sound long-term budgeting comes from counting the pennies on a thousand decisions a day.

We have our own problems with the coalition government’s economic policy but we also have huge sympathy for George Osborne’s biggest challenge – overturning a mentality in government institutions that has no real regard when it comes to spending taxpayer money.

The case for single-issue activism

Classical liberals, libertarians or indeed anyone arguing for a smaller state (I’m going to use ‘Liberals’ as shorthand) have a serious problem. We don’t seem to be very successful at converting the corpus of intellectual work and powerful arguments against interventionism into concrete political success. Whilst the Archbishop of Canterbury, Polly Toynbee or Michael Sandel, to name a few, seem to think we are living in an era of unbridled free markets, any sensible observer can see that this is not the case; state capitalism or corporatism is the status quo. In reality, the trend of the last twenty years has been a move away from free markets with growing taxation and more regulation. What can be done to reverse this trend or at least to revive the momentum of support for limited government?

While there are some elements of the Conservatives and perhaps Liberal Democrats with (some) Liberal ideals – and one or two Labour politicians have sensible ideas on particular issues – there are no elements of mainstream political life we can call home. Fortunately, one might say the same for out-and-out socialists but I would argue that, given the size and reach of government and the state of public discourse, they are rather more at home in contemporary politics.

Of course, think tanks like the ASI do much to promote Liberal ideas and convert them into workable proposals which even manage to gain political traction and become policy and, just occasionally, get implemented. For all the good work of these organisations, I think most of their members would be forced to admit that they are fighting an uphill battle. If nothing else, public choice theory dictates that the odds are stacked against them. As I suggested, I find the prevailing political discourse extremely dispiriting, featuring as it does constant calls for state intervention and constant opposition to liberalising reforms. There is certainly no popular, broad-based movement for Liberals in the public sphere. There seems precious little Liberalism in the press and only a handful of Liberal academics. We have no Tea Party equivalent here in the UK (I have my reservations about the US Tea Party but at least it’s something) but we do have an Occupy movement.

We need to start growing popular support and become a serious voice to be considered in national political and public life. We need some nodal points around which to coalesce and some banners to follow. Liberals, myself included, tend to shy away from such activities – many of us are quite conservative in the Burkean sense and others are too busy trying to earn a crust, or what’s left to us after the state has taken its share. Others are simply too bookish or lacking in a can-do outlook. I think it’s time to change this and to get a broader range of people introduced to Liberal issues. Broadening the base of support is, necessarily, going to mean taking a more limited, gradualist approach as well as, not instead of, pointing out the flaws of central banking and moral problems of interventionism. The Taxpayer’s Alliance is the right sort of direction; my approach would differ in that it promotes a definitely single-issue approach. This is not really a job for think tanks or academics – their task is to come up with the ideas and provide the supporting arguments. At the moment, the Liberal movement is all brain and no body.

The only period, as I see it, when the supporters of freedom have made really sizeable inroads against the state was in the early nineteenth century where single-issue campaigns against the Corn Laws, slavery, emancipation of Catholics and so on brought substantive achievements. Many of those involved were, as Lord Acton observed, not true supporters of freedom. Similarly, amongst Thatcherism’s greatest achievements must surely be the great utility privatisations or curbing of excessive union powers even though many Thatcherites were hardly typical supporters of Liberal freedoms. It is this limited, achievable and comprehensible type of reform we first need to find and then unite behind. Otherwise we’re simply wasting our efforts on too many fronts and on theoretical niceties which have no relevance and resonance to daily life. Surely it is better to achieve several modest victories for liberty than preserve ideological purity whilst government continues to expand?

I would like to suggest therefore, that we adopt a slightly different approach and learn from our opponents and other groups who have proved successful in achieving some of their goals. I think that Liberals should consider emulating activist and single issue groups in promoting and popularising their agendas. Consider the modern environmental movement for a start. This started as a rather obscure minority sport. However, single issue campaigns such as that against CFCs saw a marked growth in environmental awareness. Like them or not, Greens and green issues are now a serious force in mainstream politics.

I’m not proposing that we man the barricades or start camping in churchyards, although at least that would be something. Nor do I think that these kinds of activities ought to be at the exclusion of intellectual and policy work already extant.  I do think, however, that serious, organised, single issue campaigns with professional and volunteer activists should also constitute an important part of the Liberal ‘movement’. These organisations should have websites, professional PR, use social networking, host seminars and events and all the various other mechanisms that campaigners use to get their causes heard.

I’d like to propose a few areas which I think are ripe for single issue-type campaigns. However, to be successful these would need to be carefully and seriously thought out.

i) Perhaps the most obvious candidate for a campaign would be school vouchers. Whilst these may be a sub-optimal choice in terms of theory, most would agree that they represent a vast improvement over the status quo and would at least be the first means to break the state monopoly over education provision. Combined with the Free School movement, such a campaign would provide a clear, single-issue campaign which could potentially bring in a wide range of supporters and perhaps expose them to wide libertarian issues. At the moment, a search for “school vouchers” brings up Tesco’s sports voucher scheme! Privatisation of universities would be another clear target.

ii) In the social welfare sphere, perhaps the most obvious campaign would be the privatisation of state pensions along Chilean lines. Whilst there is already a basis for a campaign by the ICPR there is surely a case for a localised, British campaign with a clearly defined set of goals. A campaign for the complete privatisation of social housing along these sorts of lines would surely present the kind of limited, single issue where progress could be made.

iii) The monolithic dominance of the NHS and its position as the sacred cow of British politics leaves few avenues for discrete campaigns in the field of healthcare. Efforts like the Dutch to convert the NHS to an insurance-based, or better yet an individual healthcare account system a la Singapore are unlikely to succeed although of course are worthy of effort. It is amazing how little successful opposition there has been to the serious attacks on freedom for smoking, drinking, consumption of fatty foods

iv) In transportation, privatisation of the motorways would seem to present a more popular choice than, say, congestion charging. This would be especially true if paired with some reduction of road tax or fuel duty. It would be easily implemented and has the example of the M6 Toll to support it to some extent.

v) In monetary terms, I would love to see a campaign for a return to the gold standard. Of course, this would be enormously far-reaching and complex but it could build upon the excellent work of the Cobden Centre. That said, more focussed campaigns on behalf of savers against, say, QE and low interest rates might actually prove more valuable initially.

vi) The 2020 Tax Commission’s report was excellent but I feel its aims were rather too broad and aren’t likely to have great follow-through.  However, a campaign devoted to the abolition of a particular tax such as the abolition of IHT, SDLT or NICS would present a perfect opportunity. The taxation and benefits system is so complex and intertwined that it seems to defy comprehension, let alone reform. This would seem to make it hard to sell as a single issue but surely tax simplification in some form is an obvious area

vii) Campaigns against specific aspects of legislation and regulation might be worth exploring. The Human Rights Act is a particular bogeyman, so surely certain pieces of legislation are ripe for attack. Abolition of the national minimum wage is urgently needed, this could perhaps be best sold by regionalisation combined with an attack on national pay bargaining in the public sector. Similarly, the abolition of various QUANGOS and their functions could be represented.

viii) One can think of other discrete areas of public life which are ripe for privatisation. Royal Mail is the most obvious and is perhaps already in the headlights, but a vocal public effort could hardly hurt and would keep media attention focussed. Drug decriminalisation is another area where serious campaigns could be developed and might even get the Guardian onside. The censorship of broadcasting freedom and the BBC must be gradually undermined as well. Overseas aid needs some lobbying voices against the loud noises from the aid lobby. There are many, many more.

Of course, there are some existing groups and individuals out there, but they are few and often lacking in organisation and funding. The big question, of course, is: who is going to start these campaigns going? Unfortunately, I can’t answer that, but perhaps there might be someone or some people reading with the inclination, knowledge, skill and most of all funds to try? If I had any funds to do so, I’d be the first to put my money where my mouth is – but you certainly have a volunteer. So, any takers?

New at AdamSmith.org: The Case for Single-Issue Activism

In recent years, believers in a small state have largely failed to convert good intellectual arguments against interventionism into concrete political achievements. Whig argues for a change of gears by liberals, away from politics and towards a focus on single-issue group campaigning.

Classical liberals, libertarians or indeed anyone arguing for a smaller state (I’m going to use ‘Liberals’ as shorthand) have a serious problem. We don’t seem to be very successful at converting the corpus of intellectual work and powerful arguments against interventionism into concrete political success. Whilst the Archbishop of Canterbury, Polly Toynbee or Michael Sandel, to name a few, seem to think we are living in an era of unbridled free markets, any sensible observer can see that this is not the case; state capitalism or corporatism is the status quo. In reality, the trend of the last twenty years has been a move away from free markets with growing taxation and more regulation. What can be done to reverse this trend or at least to revive the momentum of support for limited government?

While there are some elements of the Conservatives and perhaps Liberal Democrats with (some) Liberal ideals – and one or two Labour politicians have sensible ideas on particular issues – there are no elements of mainstream political life we can call home. Fortunately, one might say the same for out-and-out socialists but I would argue that, given the size and reach of government and the state of public discourse, they are rather more at home in contemporary politics.

Read this article.

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Wealth and democracy

In most societies the rich are outnumbered by the not-so-rich (which for simplicity might be called "the poor").  This matters in a democracy because the poor have more votes.  There is thus always a tension between how much politicians will raid the wealth of the rich to distribute in benefits to the poor.  If they take too much, the rich might move away to generate their wealth elsewhere.  If they take too little, social unrest might result, possibly even revolution, which is not what the rich want, and certainly not what the politicians want.  These limits have set restraints on how far the process could go.

The tension is dynamic, sometimes favouring the one group, only to be redressed later by a tilt toward the interests of the other.  It could be argued that Britain in the 1970s, with a top income tax rate of 98 percent, had tilted too far against those who create wealth, and that this was redressed to some extent in the tax-cutting 1980s.

Unfortunately in recent years the politicians in democracies discovered a third group they could raid with impunity, distributing its wealth and assets to the poor without limiting too much the capacity and co-operation of the rich.  This third group has no votes, and does not therefore limit the electoral prospects of the politicians who plunder it.  The group is called the future.

Politicians found they could deliver benefits to the current poor by borrowing money that would have to be repaid by future generations.  Since those future generations are not here, they have no say in the matter, or any ability to influence current events.  There have thus been no restraints on the degree to which democratic politicians could raid their wealth in order to buy electoral popularity today.

Politicians in many countries learned how to do this, until the overhang of debt became so large that people doubted that it could ever be repaid.  If there is a solution to this problem afflicting democracies, one that is compatible with the democratic process, it has yet to reveal itself.  Perhaps some form of inviolable constitutional limits on borrowing might be a solution of sorts?

Ireland should say No to "extend and pretend" treaty

Nothing summed up the farcical nature of Ireland’s referendum campaign on the European Fiscal Compact Treaty better than the Finance Minister Michael Noonan’s assurance that Ireland’s only contact with Greece was “feta cheese and holidays”.

Members of the Yes campaign have, absurdly, claimed that rejecting the treaty, as the UK and the Czech Republic have already done, would mean expulsion from the EU. The hard-left No campaign has been even worse, framing the vote as a false choice between austerity and growth. (Cutting back the state is the only way to achieve growth.) Both sides have tried to create fear and confusion among the Irish electorate.

Like many other Irish expatriates, I have watched this with frustration. Despite the ugliness of most of Ireland’s No campaign, there is a strong case for Ireland to reject the Treaty.

The Treaty will introduce a constitutional amendment banning ‘structural deficits’, and will give Ireland access to the European Stability Mechanism lending fund. In laying the foundations for automatic fiscal transfers between states, the Treaty is the first step towards true fiscal union between EU states.

Much of the Treaty may seem sensible. The ban on running a structural deficit is a welcome nod towards fiscal sanity – at least, it would be if it meant something. In fact, the Treaty does not define what a structural deficit actually is.

Like the Stability and Growth Pact, which required member states to keep budget deficits under 3%, most governments will ignore the deficit rule. Since the Stability and Growth Pact’s ratification in 1997, twenty-four of the twenty-seven signatories have since broken the terms of this pact.

The goalposts have been moved in the past. As the Irish fiscal analyst Cormac Lucey has noted, the IMF and EU both recorded the Irish government as running a structural surplus in 2007. These organizations’ methodology was later revised so that Ireland was found to be running a €15bn deficit in 2007.

States may find it politically easier to raise taxes than to cut spending, only doing more harm to their economies.

Banning structural deficits would not have avoided the Eurozone’s current problems. The welfare expenditures that have helped to bankrupt Eurozone periphery countries like Greece and Portugal are excluded from structural deficit calculations. Bank bailouts, which have been enormous in Ireland, are also excluded.

Apart from this measure, the key to the treaty is the access to the European Stability Mechanism (ESM), a €700bn fund to lend to Eurozone government at below-market rates.

It is a cheap line of credit that is being extended to ensure Ireland stays addicted to debt and bank bailouts. Its structure is almost the definition of ‘crony capitalism’: Article 32 of the ESM Treaty puts the ESM literally above the law, giving it “immunity from every form of judicial process”.

About half of Ireland’s national debt has come from its massive bank bailouts – €64bn, or 40% of GDP. As many of us argued at the time, Ireland should have let these banks fail.

Rescuing them was an exercise in crony capitalism, done to protect the rest of the European banking sector, not to spare Ireland any long-term economic misery. Ireland’s two million taxpayers now each face a €32,000 bill for these bailouts.

Access to the ESM would continue this cycle. Last Friday, Justice Kevin Feeney of Ireland’s Referendum Commission refused to rule out the possibility that ESM money would be used to bail out banks again in the future. The “low” rate provided by the ESM is like a heroin dealer giving a junkie a discount.

This cycle of bank bailouts paid for by more debt on the backs of taxpayers has to end. One of the few reasonable voices on the Irish No campaign, Declan Ganley, has argued that bailed-out banks should be required to repay the bailouts recently injected to them. Those that cannot do so should be put through insolvency purges with their assets sold to the highest bidder.

If Ireland does not access the ESM, global bond markets would still lend to Ireland, albeit at a more costly rates. That may force Ireland’s government to let bad banks fail instead of letting taxpayers foot the bill.

Ireland’s debt addiction cannot be cured with more cheap debt. The ‘extend and pretend’ strategy of taking on more and more debt to avoid making tough decisions will eventually lead to disaster. However Ireland votes, it will still have to meet tough but necessary fiscal targets set by the IMF and European Union.

Ireland can’t kick the can down the road forever. Rejecting the Fiscal Compact Treaty would, at a minimum, force Ireland’s political establishment to accept reality and pull back from the crony capitalist course on which it has set itself.

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Prof Anthony J Evans

Anthony J. Evans is Associate Professor of Economics at ESCP Europe Business School. His research interests are in corporate entrepreneurship, monetary theory, and transitional markets. He has published in a range of academic and trade journals and is the co-author of The Neoliberal Revolution in Eastern Europe (Edward Elgar, 2009). He has conducted policy research for the Conservative Party and European Investment Fund, as well as managing consultancy projects for several corporate sponsors. He teaches Executive MBA classes across Europe and has written a number of teaching cases. His work has been covered by most broadsheet newspapers and he has appeared on Newsnight and the BBC World Service. In April 2011 he joined the IEA’s Shadow Monetary Policy Committee.

Anthony received his MA and PhD in Economics from George Mason University, USA, and a BA (Hons) from the University of Liverpool, UK

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