Bank of England fails its stress test again

On November 30th, the Bank of England released the results of its third publicly disclosed set of stress tests of the financial resilience of the UK banking system.  

The good news is that the news is good: our banking system is in good shape, but the bad news is that the good news is not credible.

In this post, I would like to put the stress test results through my own favourite stress test – a reality check.

By this most basic of tests the Bank scores an ‘F’.

Read on:

The spin is that the banking system passes with flying colours even though one of the seven banks involved failed (RBS) and two others (Barclays and Standard Chartered) were deemed as problematic.

Let’s pass over the slight glaring contradiction at the heart of that narrative and quote Governor Carney:

The resilience of the system during the past year in part reflects the consistent build-up of capital resources by banks since the global financial crisis. … the UK banking system is well placed to provide credit to households and businesses during periods of severe stress.

That conclusion is corroborated by the 2016 stress test [which is] broad, coherent and severe …  (Governor’s opening remarks, p. 3)

Every one of these claims is questionable, but let’s focus on the severity of the Bank’s ‘doomsday’ scenario.  

The scenario consists of a bunch of adverse events, including world and UK recessions (annual global GDP growth troughs at -1.9% and UK GDP falls by 4.3%), major falls (over 30% and over 40%) in the prices of houses and commercial real estate, unemployment rising by 4.5 percentage points and sundry other stuff. However, the key phrase is this: “overall, the UK stress is roughly equivalent to that experienced during the financial crisis, albeit with a shallower fall in domestic output” (Bank of England, 2016 stress test results report, p. 6).

Take-home message: the stress scenario was not quite as stressful as the Global Financial Crisis (GFC).

----

Now consider how this adverse scenario impacts the banks. To quote Carney, the adverse stress scenario led to “system-wide losses of £44 billion over the first two years of the stress – five times those incurred by the same banks over the two years at the height of the financial crisis.” (Governor’s remarks, p. 2)

This statement misled some commentators into thinking that the stress scenario was five times more severe than the GFC, but it isn’t.

Carney’ statement implies that the system-wide losses over the two height years of the crisis were less than £44 billion/5 = £8.8 billion.

This claim is misleading, however. In fact, the banks spread out their reported losses over the period since, because they were afraid of the adverse public reaction if they had disclosed them promptly. Consequently, the appropriate comparison is not with reported losses over these two years only but with cumulative losses post-2007. As James Ferguson of The MacroStrategy Group points out, the cumulative loan losses for the big 4 banks alone were nearly £200 billion and nearly double that if we include balance sheet reserves, securities losses, restructurings/goodwill write-downs and legal redress (Ferguson, 2016, p. 2). [1]

The £44 billion losses generated by the Bank’s stress model are not five times the losses incurred at the height of the crisis but 44¸ 450 or about a tenth of the gross losses banks experienced since 2007.

---

But how can a supposedly severe stress scenario lead to the moderate losses projected by the Bank’s stress model?

The most plausible answer is that the Bank’s model is wrong. The Bank model’s estimated losses merely indicate that the feedback link between the scenario and the simulated losses in the Bank’s model must (greatly) under-estimate the losses involved.

This point in and of itself is enough to discredit the entire exercise.

---

In the Q&A at the press conference, Carney makes a related claim:

the capital hit in this stress would have wiped out all of the capital that these same banks had prior to the crisis. So this is a big, big hit to capital. (Financial Stability Report Q&A, p. 19)

This claim is wrong. For the big four banks alone, their 2006 Annual Reports report that their capital going into 2007 was about £150 billion. The projected £44 billion loss from the Bank’s stress test model is barely 30% of this number, and would be even lower if we included the capital of the other banks in the exercise.

A loss of $44 billion is a fairly small hit anyway. With about £2.1 trillion in assets, a loss of $44 billion is equivalent to a loss rate of about 2 percent. Yet since the GFC, the accumulated loss rate so far has been about 10 percent, i.e., five times bigger rather than five times smaller than that simulated by the Bank.

---

Carney’s responses in the Q&A also alluded to another important issue that deserves more attention: the problem of the incurred loss accounting model by which losses are not recognised until they have occurred – implying that expected losses are not reported – and the inadequacy of the supposed solution to this problem, IFRS 9, which recognises expected losses so long as they are expected within 12 months. As he said in response to a question:

Now there is another issue which is not adjusted for in the stress tests which is coming which is IFRS 9, which not yet finalised and could have some impact. But I think you know the banks, the analyst community, ourselves, we all have equal line of sight to that and its timing. (Press conference Q&A, p. 18)

So Carney acknowledges that the Bank’s stress tests are based on accounting rules that ignore expected losses and some people might regard this omission as a bit of a worry.

But even when it is implemented, IFRS 9 won’t fix the hidden expected losses problem: it will merely encourage banks to adopt practices that make sure that losses are pushed out into the future so they are expected to occur more than 12 months hence. As the UK’s leading financial accountant Tim Bush wrote me: IFRS 9 “is going to be a disaster.”

---

There is one last issue that surfaced in the discussion last week: the setting of the Countercylical Capital Buffer (CCyB). Back in July, the FPC reduced the CCyB on banks’ UK exposures from 0.5% to 0%. To quote Carney again:

The FPC was concerned that banks could respond to these developments by hoarding capital and restricting lending. The reduction of the CCyB rate was intended to reinforce the FPC’s expectation that all elements of capital and liquidity buffers are able to be drawn on to support the real economy.

That position has not changed. In light of the continued uncertainty around the UK economic outlook and the resilience demonstrated in the 2016 stress test, the FPC agreed to maintain the CCyB rate at 0% and that it expects, absent any material change in the outlook, to maintain this rate until at least June 2017. (Governor’s opening remarks, pp. 4-5)

I don’t understand this passage. What does it mean to say that the FPC expects “that all elements of capital and liquidity buffers are able to be drawn on to support the real economy” and how is this relevant to the decisions first to reduce the CCyB to zero and then to keep it there?

And what is the point of relying on “continued uncertainty” to justify any CCyB decision, given that uncertainty, like the poor, will always be with us?

There is a deeper problem: the FPC seems to have it the wrong way round. The purpose of the CCyB is to counter the financial cycle: as aggregate credit builds, markets boom and risks build up; then the boom breaks, markets fall and the risks are realised and subsequently fall. [2] The CCyB should rise in the first phase to help slow the euphoria, and then fall in the second phase to ameliorate the distress. Over the last few years markets have been booming, so we are presumably still in Phase 1. If so, then the FPC should be to increase rates instead of to reduce them. The FPC’s ‘countercyclical’ policy is therefore procyclical: it is aggravating the problems it is meant to ameliorate!

On the other hand, it may be that the FPC’s and Carney’s thinking is that we are actually in Phase 2, the down phase of the cycle, in which case reducing the CCyB would make sense – if one accepts that assessment and buys into countercyclical financial policy in the first place, which I don’t. However, that is not the message that clearly comes across from their statements.

At the very least, the Bank should always base its decisions on CCyB settings on a clear statement about which phase of the cycle they think we are in: Phase 1 implying that the decision to be considered is to raise the buffer or Phase 2 implying the opposite. However, I suspect they don’t do that because they don’t know themselves or because they don’t wish to expose their views on the matter to criticism. Hence the Bank waffle around the issue. If this latter conjecture is correct, they would be better off abandoning CCyB policy altogether.

One gets the distinct impression that all that they see is uncertainty, so they think “uncertainty is bad so we should ease” and cut the buffer. However, if that is what they do, they are not even attempting to follow countercyclical policy: all they have is a policy bias towards ease, which is the same bias that we see with unconventional policy for most of the past decade.

But this might just be me. All I can say is that I don’t understand their CCyB policy and I suspect they don’t either.

There are further problems with the stress test results too, but I will come to those in my next posting.

References

Bank for International Settlements (2016) “Countercyclical capital buffer.” July 20. Available at https://www.bis.org/bcbs/ccyb/.

Bank of England, Financial Stability Report Press Conference Q&A, 30 November 2016. Available at

http://www.bankofengland.co.uk/publications/Documents/fsr/2016/conf301116.pdf.

Bank of England, “Opening remarks by the Governor.” Financial Stability Report Press Conference, 30 November 2016. Available at

http://www.bankofengland.co.uk/publications/Documents/fsr/2016/fsrspnote301116.pdf.

Bank of England (2016) “Stress testing the UK banking system: 2016 results.” Bank of England 30 November 2016. Available at

http://www.bankofengland.co.uk/financialstability/Documents/fpc/results301116.pdf.

Ferguson, J. (2016) “UK bank ‘stress’ test.” The Macrostrategy Partnership, 2 December 2016.

Local Authority Pension Fund Forum (2011) UK and Irish Banks Capital Losses – Post Mortem. London: LAPFF.

Parliamentary Commission on Banking Standards (2013) ‘An accident waiting to happen’: The failure of HBOS. London: Stationery Office.

End Notes

* Kevin Dowd (kevin.dowd@outlook.com) is professor of finance and economics at Durham University. I thank Tim Bush, James Ferguson, Martin Hutchinson and Basil Zafiriou for helpful comments.

[1] Let me also cite some other numbers give an idea of the true scale of losses. (i) Tim Bush in his LAPFF Post-Mortem report (LAPFF, 2011) cited bank losses over the 2007-2010 of over £89.4 billion. (ii) The Parliamentary Commission on Banking Standards (2013) reported that the losses for HBOS alone were £46.5 billion. (iii) The Asset Protection Scheme has estimated the losses to RBS at almost £60 billion.

[2] Consider this quote from a recent BIS statement (BIS, 2016): “The countercyclical capital buffer aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. Its primary objective is to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk. Due to its countercyclical nature, the countercyclical capital buffer regime may also help to lean against the build-up phase of the credit cycle in the first place. In downturns, the regime should help to reduce the risk that the supply of credit will be constrained by regulatory capital requirements that could undermine the performance of the real economy and result in additional credit losses in the banking system.”

How Britain should fix its fisheries

Over at Brexit Central, Madsen has written about his plan to restore Britain's fisheries using property rights and market mechanisms – the Icelandic model, essentially:

Having seen its fish stocks depleted by over-fishing, Iceland instituted a quota system to restore and sustain them.  Each year its scientists estimate the biomass within Iceland’s waters.  They measure the amount and size of a variety of different species and calculate the quantity of each that can be fished sustainably.  Quotas of different types of fish are assigned to every boat, quotas which belong to the owners and which, crucially, can be traded.

Every catch is recorded, and no dumping is allowed.  All catches must be landed, and if a boat exceeds its quota for a type of fish, its owners must buy quotas from others to stay within the law. All catches and quota trades have to be made public, and are put online so that any vessel can inspect the current state of the market, and decide what and where to catch based on public information.

Read his post here, and his recent paper on these proposals here.

The Marijuana Transmogrification

'It was all Mrs. Bumble. She would do it,'

'That is no excuse,' replied Mr. Brownlow. 'You were present on the occasion of the destruction of these trinkets, and indeed are the more guilty of the two, in the eye of the law; for the law supposes that your wife acts under your direction.'

'If the law supposes that,' said Mr. Bumble, squeezing his hat emphatically in both hands, 'the law is an ass—an idiot. If that's the eye of the law, the law is a bachelor; and the worst I wish the law is, that his eye may be opened by experience—by experience.'

Oliver Twist, Charles Dickens

In Dickens’ story, Mr. Bumble, Oliver’s corrupt guardian, tosses the boy’s identifying heirlooms into a river. When questioned about the act, he blames it on his wife, only to be informed that the law views his wife as his agentless servant, rendering him guilty. While Mr. Bumble may be a villain, his ruin results not from the smooth functioning a justice seeking law, but the exploitation of its absurdity by Oliver’s friend. Oliver is glad of the man’s fate, but unlikely to gain much respect for the law from the episode.

Mr. Bumble’s claim holds weight not because he is innocent, but because in convicting him, the law reveals itself to be operating on an incorrect set of assumptions about the world. While Bumble hopes that the law’s eye will be opened by experience, the early 19th century provided the law with many examples of female agency. In the face of this reality, the law blinked, continuing to indulge a fiction, and depriving itself of a basis for respect. The ongoing prohibition of marijuana blinks similarly in the face of reality and experience, placing needless strain on the rule of law.

The law is not merely the specific statue in question, but the rule of law, an institution respected, in principle, as a set of constraints necessary for the enjoyment of ordered liberty. We are not expected to pick which laws we ought to obey, but to follow them all because they are equally law. This works only when the law is applied impartially, and corresponds to a set of broadly accepted moral norms. Each statue gains the binding power of law, but, with great power, comes great responsibility; each regulation’s individual legitimacy reflects back upon the law as a whole. A small number of bad laws can do great damage to the rule of law; only a donkey’s head is necessary to make a man Bottom.

Marijuana use, while not healthy, simply does not have the deleterious effects long promised by prohibitionists. Marijuana users are not generally regarded as particularly deviant, or antisocial. Prohibition affects poorer urban users more than others, both because of racial discrimination, and the relative ease with which densely populated spaces can be searched. As a result, the ongoing to prohibition of marijuana begs us to understand the law as scientifically ignorant, discriminatory, and a least an amoral restraint.

When marijuana use is both normalized and illegal, breaking the law becomes a normal act. Would-be law abiding marijuana users regularly interact with criminals, or delve into the dark web. We shrug when passing marijuana smokers in the park, seeing something illegal, but certainly not worth arresting anyone over. Police are distrusted as enforcers of an erroneous order, or begin selectively enforcing the law. A century of prohibition has made an ass of our law with little to show for it, the sooner we can open its eyes, and begin to reverse this spell, the better.   

On the subject of Google's search results

A complaint that searching Google for "Did the holocaust happen?" leads to, as its first result, something from Stormfront. Deluded idiots that they are they deny that it did. This is, apparently, an outrage. That we live in a society which has freedom of speech to the extent that people are allowed to say things which are wrong.

And, according to Google, it’s the most authoritative source on the internet on the “question” of whether or not the Holocaust actually happened. Sceptical, educated people will of course look for other evidence. These are the searches that Google lists at the bottom of the page as suggestions for what to search next: “Holocaust never happened theory” “proof the Holocaust happened” “Holocaust fake proof” “Holocaust never happened movie” “Holocaust didn’t happen conspiracy” “did the Holocaust happen during ww2.”

On our search, to replicate this outrage, we found that the second entry was the BBC explaining why the holocaust did happen, the third Wikipedia's entry on holocaust denial, the fourth and fifth from the United States Holocaust Memorial Museum (not known to  be a hot bed of deniers) and so on.

We're not overjoyed about Stormfront's placing either but that line from the play about Voltaire comes to mind, we disagree with what they say but we're damn certain that they should be allowed to say it - we are though ambivalent about whether we would put our lives on the line for that particular grouping even though it is traditional that we should claim we would.

A search for Fidel Castro produces the BBC on Cuba's revolutionary leader, The Guardian on how he corrected Gabriel Garcia Marquez's manuscripts, the NYT on some called him a hero, some a despot. A search for Mao Tse Tung gives us the History channel which notes that people died under his rule but is remarkably coy about apportioning any blame.

And no doubt further investigation will find more such "errors" in such search results. All of which is, we would maintain, the price of that liberty and freedom we have. That people are not only allowed to say, subject only to the laws of libel and incitement to violence, what they believe to be true, but even if it is wrong. And to prevent the presentation of this, these views, by the law is indeed censorship.

And that, of course, is where this is going:

This is hate speech. It’s lies. It’s racist propaganda. And Google is disseminating it. It is what the data scientist Cathy O’Neil calls a “co-conspirator”. And so are we. Because what happens next is entirely down to us. This is our internet. And we need to make a decision: do we believe it’s acceptable to spread hate speech, to promulgate lies as the world becomes a darker, murkier place?

Because Google is only beyond the reach of the law if it we allow it to be.

The case is very simple indeed. Do you believe in freedom of speech or not? If you do then Stormfront gets to have a website detailing whatever it is that it misunderstands about the world. As does every other vile and hateful group from left and right. There is no shortage of sites insisting that Stalin had nothing to do with the Holodomor, that it was disease not starvation, that the starvation was just bad weather, that there was no campaign against Ukrainians and anyway, it never happened did it?  

There is amusement here as well though:

Our problem too: because do we let these multinational corporations own us and all aspects of our lives? Is that the plan? The Google Transparency Project has documented how the company has become one of the biggest spenders on government lobbyists in the US.

Traditionally the Silicon Valley firms spent little to nothing on lobbying. They just got on with life and business. Then politicians noted that there was lots of money out there. So, they started to regulate the sector - a Danegeld, pay the political process or we'll regulate some more. Which is why they all now have lobbying operations because people are trying to use the political system to gain what they cannot through the normal market processes, control of those Silicon Valley giants.

And it is amusing that the very people arguing for political control use the evidence of resistance to said political control as the reason why control must be imposed.

Let's face it here, wouldn't you send someone to Washington DC to explain to politicians why Carole Cadwalladr should not gain political control over the free speech of billions? Yet that you have done so is evidence to Ms. Cadwalladr that she must have that power. And if you can't laugh about that then why not cry instead?

As we might have mentioned, idiocy is still idiocy even if it's political

Correct, a lot of you disagree with our solution to climate change - stick on a carbon tax and we're done. But given the head of steam that the idea has, rightly or wrongly, something is going to be done. Thus let's try to make sure that it's the right thing which is done, not the wrong.

For example:

Jeremy Corbyn’s Labour Party is considering radical plans to ban the sale of new petrol cars in the UK, The Independent can reveal.

The bold proposal would mean only zero- or low-carbon vehicles being sold after a set cut-off date, dramatically reducing air pollution and potentially saving thousands of lives.

Or, of course, kill tens of thousands as people cannot afford the transport that enables them to live and work. Then there are the people who get it right:

The Canadian government has agreed a deal with eight of the country’s 10 provinces to introduce its first national carbon price, Justin Trudeau has told reporters.

...

Under his plan, carbon pollution would cost C$10 (£6, US$7.60) a tonne in 2018, rising by C$10 a year until it reaches C$50 in 2022. The provinces can either implement a carbon tax or a cap-and-trade market.

That's a bit steep as a ramp up, something a little more gentle would be a better idea.

But the basic understanding is correct. And again, please, let's not say that it's all a scam. That doesn't matter - these people are going to do something so let's insist they do the right thing. Which is, of course, that some things are just too important to not use markets. If we really do have an externality about emissions then that one crowbar into market prices, that Pigou Tax, is the correct solution. Rather than politicians deciding that they're going to ban the greatest contribution to social freedom yet invented, the internal combustion engine powered car.

But there are those who argue differently:

One party source said: “It’s got nothing to do with whether the technology is there now. It is there, and this is already happening elsewhere in the world. It is only the political will that is lacking in this country.”

The European record of the Triumph of Political Will is just so inspiring, isn't it? But then Fascism always was a movement of the left....

To put Thomas Piketty's worries to rest

You might recall that Thomas Piketty told us all that capitalism was on its last legs, again, and that we needed to have that glorious revolution, again.

The particular worry this time was that capital was growing in relationship to GDP. Instead of said societal capital being 200%, or 300%, of GDP it was rising to ever higher multiples, perhaps 400% and so on. This could only mean that inherited capital was going to become ever more important as a determinant of positions in life, as was true in the 18th and 19th centuries, so tax the capitalists now and tax 'em good.

It's possible that we missed a little of the nuance there but that's a reasonable outline of his worries and his policy solutions. At which point we've this information from the OECD:

The 2016 OECD Pensions Outlook analyses how the pensions landscape is changing in the face of challenges that include ageing populations, the fallout from the financial and economic crisis, and the current environment of low economic growth and low returns.

The report shows that there were 13 OECD countries in which assets in funded pensions represented more than 50% of GDP in 2015, up from 10 in the early 2000s. Over the same period, the number of OECD countries where assets in funded private pension arrangements represent more than 100% of GDP increased from 4 to 7 countries.

We're living longer lives these days, we're working for fewer decades of them and thus people are rationally saving for their expected golden years. Thus capital as a percentage of GDP rises - not to produce inheritances, but to produces incomes in retirement. And rises by potentially at least more than 100% of GDP.

We can't see that this is a problem and we most certainly cannot see that this is an argument for greater taxation of capital. Quite the reverse in fact, people saving for their old age should be encouraged, not specifically taxed.

So much for the most recent French call for revolution then, eh? 

Will our Corporate Tax Cuts get Trumped?

Theresa May's decision to pledge that Britain will have the lowest Corporate Tax Rate in the G20 is undoubtedly good news. If we're to make a success of Brexit (another thing Theresa May has pledged), then preserving and building upon Britain's competitive tax code is essential. But, I suspect Theresa May hasn't quite grasped just how significant Trump's tax cuts will be.

Most of the media has focused on the headline tax cut from the absurdly high 35% to 15% in the tax plan on Trump's campaign website, but this is misleading. First, very few US corporations actually pay that 35% rate. There's a labyrinthine set of exemptions and deductions that mean the average US corporation pays a much lower effective rate of 12.6%. Trump's plan funds his headline tax cut through eliminating almost all (except the R & D tax credit) of these distortionary exemptions from the current system. This means in effect US corps won't be paying substantially lower taxes, even if they'll benefit from less distortionary and more efficient tax code.

Second, and more significantly Trump's tax plan isn't necessarily the tax plan that'll be put forward in the House of Representatives (where Speaker Paul Ryan and Ways and Means Chairman Kevin Brady hold the cards). The Ryan-Brady plan dubbed "A Better Way" differs from Trump's framework in a few key ways (for even more detail read Cameron Arterton and Lisa Zarlenga's excellent overview).

First, they cut the headline rate by much less. Under the Ryan-Brady plan, the headline tax rate only falls to 20%.

Second, they border adjust it. That means that imports are taxed, but exports aren't. To readers of this blog, that might sound worryingly mercantilist - but as AEI's Alan Viard points out it won't have this effect. Such a reform does however resolve some of the transfer pricing problems that plague modern corporate taxes.

Third, and this is the big one, the Ryan-Brady plan proposes unlimited immediate expensing of all wages and new capital investments (tangible and intangible). This turns the Corporate Income Tax into what economists call a business cash-flow tax. This isn't just tinkering with rates, this is fundamentally changing the structure of business taxation in the US. It removes entirely the tax burden on capital and shifts it to consumption. Economists generally believe that taxes on capital are excessively harmful because capital is incredibly mobile and even low capital tax rates translate to incredibly high taxes on future consumption. As my colleague Ben Southwood points out, even though it's meant to raise taxes from wealthy investors, it ends up leading to much lower wages for ordinary workers.

In essence, the Ryan-Brady plan turns one of the most inefficient taxes into one of the most efficient. Typically, Republicans (and libertarians) oppose such moves because they think making taxes more efficient will encourage the Government to spend more and only a painful, inefficient tax code will put the brakes on out of control spending. As Will Wilkinson points out, that's bunk. The Ryan-Brady plan breaks with that dogma.

What does that mean for Britain? Well, cutting corporation tax just ain't good enough. Theresa May and Phillip Hammond need to be more radical if they don't want to be Trumped by the Donald. Let's abolish corporation tax and replace it with a simpler, more efficient business cash-flow tax.

Trial and Error

Karl Popper is rightly esteemed by those of a liberal persuasion for his many contributions to the cause.  In The Open Society and its Enemies – volume 1 he took issue with Plato.  He showed that although Plato claimed to be seeking just and virtuous rulers, his Republic resembled the totalitarian warrior state of Sparta with detailed control over every aspect of its citizens' lives.  The point, said Popper, was not to choose the best rulers, but to prevent bad or incompetent rulers from doing too much damage.

In volume 2 of The Open Society he took issue first with Hegel, then with Marx, showing that their ideas must lead to coercion and that they contain the roots of totalitarianism, a theme he developed in The Poverty of Historicism, where he countered the socialists' claim that history is moving in their direction toward an inevitable goal.  

A strong case could be made that Popper's greatest contribution was the methodology he identified in The Logic of Scientific Discovery.  He showed that science does not proceed by deducing new knowledge, or by induction from the past and present to the future, but by conjecturing theories that are then tested in experiments.  The imagination leaps forward beyond present knowledge to suggest something new, and the consequences that would follow from the new thing are then tested in the real world to see if they accord with it.

Popper devised the notion of falsification.  We do not test theories to see if we can prove them to be true; we test them to see if we can prove them false.  Popper saw an asymmetry, in that no amount of experimentation will prove a theory to be true, because a new test might go against it tomorrow.  On the other hand, Popper thought that we could show a theory to be false by an experiment that does indeed go against it.

Popper thought that by eliminating known falsehoods we could be left with an ever more concentrated core of truths, of theories that have survived attempts to disprove them.  He spoke of "Objective Knowledge," and wrote a book under that title.  He thought that there were truths about the universe that are true whether or not we recognise them as such.  There was a pool of knowledge to be gleaned about the universe, and by using his methodology of conjecture and refutation, we could gain access to more of it.

In my book Trial and Error I adopted Popper's methodology but took issue with his metaphysic.  My problem was that I do not think things can be proved to be false any more than they can be proved to be true.  In the first case if we prove something to be false we are thereby proving its converse to be true.  It is also the case that in an experiment we are assuming that our senses are not deceiving us when we make the observation.  We are also relying on what we already know to test whether it is compatible or incompatible with the new theory.  We are not testing for truth but for consistency.

I don't think science uncovers truths about the universe.  Its aim is to predict what we shall observe, and it discards the theories that do not help us to do that, and retains the ones that do.  It is not that the theories are true of false, but about whether they help us to achieve out purpose – to predict what we shall observe.  The ones that do that are useful to us, the others are not.

We want to predict what we shall observe because we want to control it.  We want to control our circumstance and render ourselves less vulnerable to fate and fortune.  Some animals grow warm coats in winter; we build central heating.  Other animals adapt to their environment; we adapt the environment.  We have evolved over millions of years with an inbuilt drive to control our circumstance and to cope with whatever chance might throw our way.  It is how we survive.

Our theories are inspired guesses that might explain the world we observe, and we test them against each other to see which ones do it better.  We reject those shown to be less effective at prediction, and we retain the ones that are more effective.  We are not proving some of them false, merely discarding them because they serve our purposes less well than the others, the ones that survive the process of experiment.  We keep those because they are useful to us.

Our theories may look like true or false descriptions of what the universe is actually like, but in reality they are more like mental models of it; and we test them to see which ones successfully mirror the world of our observation.  In this terminology Sir Isaac Newton did not discover the theory of gravity; he invented it.  He constructed a mental model that enabled him to predict the behaviour of rolling balls on Earth and the orbits of the planets in space.  It was not a truth waiting to be discovered, but something he created in his mind to help him and others to explain present observations and to predict future ones.  

Instead of proving or disproving theories, we are retaining or rejecting them.  We are not doing so because they represent objective knowledge, but because they serve our purposes.  We call them useful or non-useful to the degree to which they do that.  We call the method inspired trial and error, but we are not proving error, only choosing to discard inferior attempts to achieve our purposes.

This method mirrors to some extent the way evolution works.  The variations less well equipped to survive are counted out by a selective death rate.  The major difference is that the innovations produced by evolution come at random, whereas the new theories we devise have intelligent minds producing them.  This means that our ability to increase our control over circumstance is faster than any advantages produced by evolution.  It took evolution millions of years to produce human beings; it took those human beings only 12,000 years to crawl out of their caves and plant their footprints on the moon.

For the last word on the subject I go to Xenophanes, a philosopher who wrote 2,500 years ago.

“The Ethiops say that their gods are flat-nosed and black,
While the Thracians say that theirs have blue eyes and red hair.
Yet if cattle or horses or lions had hands and could draw,
And could sculpt like men, then the horses would draw their gods
Like horses, and cattle like cattle; and each they would shape
Bodies of gods in the likeness, each kind, of their own.”

“The gods did not reveal, from the beginning,
All things to us, but in the course of time
Through seeking we may learn and know things better.
These things are, we conjecture, like the truth.
But as for certain truth, no man has known it,
Nor will he, neither of the gods
Nor yet of all the things of which I speak.
For even if by chance he were to utter
The final truth, he would himself not know it:
For all is but a woven web of guesses.”

Precisely so.

That employment law comes from the EU doesn't mean that employment law must come from the EU

It is entirely true that much employment law currently comes to us via the tender ministrations of the European Union. This is not, however, the same as the statement that only the European Union can deliver employment law. Which is the logical mistake that is being made here:

One could be forgiven for wondering what the Independent Workers’ Union of Great Britain (IWGB) – a small trade union that represents mainly low-paid migrants and workers in the “gig economy” and relies on crowdfunding to help finance its initiatives – is doing intervening in the UK’s most important court case in recent history.

The starting point for understanding why the IWGB has an interest in the Brexit case is this: the UK leaving the EU represents potentially the biggest assault on workers’ rights and migrants’ rights in a generation. Indeed it is difficult to overstate the degree to which working people depend on employment law that originates in Brussels.

To name just a few examples: your right to paid holiday; your right not to be discriminated against because of your age or sexual orientation; your right not to be sacked or have your wages reduced when a company buys out your employer; your right to be consulted when your employer wants to make you and your co-workers redundant; protection against unfavourable treatment towards you if you work part-time; and equal pay for men and women.

It is entirely so that many, even all, of these things come to us as a result of the beneficence of the Parliament in Brussels. But that's rather because said Parliament and system has been insisting these recent decades that it should be they which have the right to legislate upon said subjects.

That is, said laws come from there because we are members of the EU, not because only the EU can deliver such laws. We are really rather sure that Canada, Australia, New Zealand, Norway, Switzerland, all have very similar laws and all of them are entirely unblessed by being members of the EU.

Indeed, we're old enough to have long memories and not old enough to have no memories at all. The UK has had equal pay for men and women since the Equal Pay Act 1970. Which is not just before Britain joined the system but before the EU itself even came into existence. Holiday pay as a legal requirement for all has existed since the Holiday Pay Act of 1938 - not just before EU membership but even before Rossi and Spinelli started scribbling their manifesto on Ventotente.

It's entirely true that much law in the UK today is derived from the EU. But that's because EU membership has meant that the EU is the body which defines much law in the UK. There's absolutely nothing at all to stop us retaining, altering, amending, adding to or abolishing any of these laws and or rights as we wish post-Brexit.

The EU, that is, is only the mechanism by which these things exist currently, not the only, nor possibly even the best, way that we can make them exist.

We're against the Magnitsky Amendment, a horrible piece of law

What was done to Sergei Magnitsky was appalling - that is not an excuse for a terrible piece of law. But that's what is being proposed as the Magnitsky Amendment. As Margaret Hodge (and it would be she pushing such a nonsense, wouldn't it?) explains:

Our amendment places a duty on ministers to ask the High Court to place a designation order on people who were involved in, or profited from, the worst human rights abuses. Once an individual is subject to a designation order, the enforcement authorities will have a duty to freeze their British assets.

Seems fair enough, freeze the assets of the evil ones. Except:

More than £100 billion is laundered through Britain each year but only £100 million — a fraction of the amount — is frozen. The Magnitsky amendment will close gaps in the law. Individuals and NGOs can also take matters into their own hands and apply for designation orders, sending a clear signal that inaction by the government and enforcement authorities is not acceptable.

The specific point being made is that anyone breaching the Section 1 of the Human Rights Act 1998 rights can be subjected to such an order.

Such as the right to family life, the right to freedom of religion, free elections, even religious education. Thus, for example, those who would abolish religious schools in the UK could have their assets frozen. Officials from countries which regard a Muslim embracing another faith as the crime of apostasy could have their assets frozen. All Cuban government officials could have their assets frozen as a result of the absence of free elections for 55 years which we admit would be fun to see.

And any Tom Dick or Harry can apply for such an order to be made. 

No, this is not good law. If it does pass there would be a terrible temptation for us to start organising cases against those who do breach some of those rights. Cuba first perhaps. Closely followed by HMRC attempting to insist upon payment of disputed tax bills before a court has ruled upon the issue. But however much fun we might have with it it would still be bad law. Thus it really should not be passed into said law.

For this rather comes under the general rubric about power and the law. You never, ever, want to put into the law something that you don't want your enemy or rival using against you and yours. And we really would have fun using this.