Those are a few of the phrases Alistair Heath used to describe the government's banking policy in an excellent City AM editorial yesterday. He's right not to pull any punches: the Chancellor's demand that the major UK banks increase their lending really doesn't make a lot of sense, other than as a media stunt.
As Heath says, do we really want the banks to lend at the same levels they did in 2006-7, at the height of what is now recognised as a completely unsustainable boom? Surely it's a good thing that banks like Northern Rock are "no longer growing at a crazy rate by imprudently borrowing on the money markets"?
Moreover, it's not just that the supply of credit has fallen, in part because "many foreign banks (such as the Icelandic lenders) have quit Britain". Demand has fallen too – a point made in our recent book, The Recession. As Heath points out, there's still plenty of mortgage credit available, it's just that people have finally developed more realistic attitudes towards investing in property (i.e. prices don't just go up). And that's a good thing.
The trouble is, ultimately, that the government doesn't know what it is doing. They can't decide whether stabilizing the banks is the priority, or whether more debt is needed to 'stimulate' the economy. So they attempt to require the banks both to sort out their balance sheets and hold more capital, and try to get them to lend more at the same time. In their desperation to paint the Tories as a "do nothing party", the government is running around doing anything and everything it can think of, without a rational set of guiding principles.
This kind of incoherent policymaking is not just ineffective, but actually damaging. Businesses and consumers don't know what to expect next, and economic activity slows as a result. What markets need desperately if they are to recover is stability. Sadly, this government seems singularly incapable of providing it.
Property developers will be pleased by Housing Minister John Healey’s announcement that 270 developments have been shortlisted for government assistance totalling £925m. £419m of this takes the form of five-year loans (presumably at lower rates than offered by the commercial banks), while £339m will go towards affordable housing, and £166m be given as direct grants to developers.
Healey’s declared aim is to “help build the homes the country needs." One would think that a shortage of homes would sort itself out – that demand would push up prices, and developers would be able to make a profit on constructing new homes. On these 270 projects at least, that doesn’t seem to be true: since the housing slump, the projects need government help to make them viable. At more than £40,000 per home (22,400 are to be constructed), the scheme is an expensive way of building homes that cost more to build than people want to pay for them.
Perhaps the logic is that we need to provide more affordable housing (although only a third of the proposed homes fall into this category). But if that really is the idea, then surely the best way is not to subsidise loss-making developments, but to give grants to consumers who could not otherwise afford homes. Rather than a Soviet-style central government department determining where and how homes should be built, it should be left to the decisions of consumers and developers operating in a free marketplace – it is they who know best.
Healey boasts that the scheme will “create 20,000 jobs on housebuilding sites", ignoring the fact that government funding for these jobs must found from somewhere. It is perhaps the only merit of the plan that it is to be funded from cuts elsewhere, but nevertheless the money given to house-builders must eventually come from the taxpayer, either now or in the future. The scheme will not create jobs – it will take wealth from the productive areas of the economy, to subsidise the unproductive activities of private builders.
Now, it is true that in the long term we face a shortage in housing supply – the rate of building new homes just isn’t keeping up with the demand generated by a growing population and dividing households. But government handouts (and generous loans) are resolutely not the answer. Rather, if government is serious about tackling the housing shortage, it must address the heart of the problem: the stifling and illogical planning laws and politicisation of the planning process that hold back developers from pursuing really beneficial projects.
News that Sir Win Bischoff, formerly chairman of Citigroup, is taking over as chairman of Lloyds Banking Group does not exactly inspire confidence. After all, Citigroup needed a massive bailout from the US government in November 2008, receiving $45bn under the TARP scheme and receiving government guarantees on another $306bn of assets. Those figures exceed even those of AIG – the posterboy for mismanagement and incompetence on Wall Street. So clearly Sir Win is just the man to run Britain's biggest and (arguably) most troubled bank...
I'd prefer we adopted the approach advocated by Tim Ambler and Keith Boyfield in our recent publication, Regulatory Myopia: "If any financial company is rescued by the government, the directors should be treated as for bankruptcy: i.e. they should be disqualified with pro rata loss of bonuses and pension rights". The City's current failure-free merry-go-round just gives capitalism a bad name.
Gordon Brown promised to put an end to boom and bust. Having put an end to the boom, he now has a novel wheeze to put an end to the bust. Unfortunately, that wheeze is likely to put us right back where we started.
The Guardianreports that the Government is considering providing state insurance (initially outright but later by underwriting private insurance, which amounts to the same thing) to all mortgages secured with a deposit of less than 20 per cent.
According to this month’s banking white paper, “Some countries have adopted alternative models for mortgage insurance... Some UK stakeholders have proposed that the government considers the benefits of international models". For stakeholders, read bankers and insurance brokers.
As the paper freely admits, “"this model helps [sic.] by encouraging risk sharing between insurers and lenders, and helping ensure that lenders do not take excessive risks when the economy is growing and do not withdraw from higher LTV lending during periods of economic disruption." But when the insurers are themselves underwritten by government, what this effectively means is that risk is not shared but transferred completely to taxpayers. Banks would therefore have even less reason to take care when and to whom they lend.
The problem is not merely one of risk, however. Government caused the previous housing boom by massively expanding the money supply, which inevitably found its way into asset prices. While it was inevitable that (artificially) increasing the supply of mortgages would lead to more risky lending – banks are bound to lend to the best customers first, and only lend to less good customers if the resources are available – this was only part of the story. In the US banks were cajoled into lending to individuals from low-income groups in the name of “fairness", loans which were inevitably “sub-prime".
Government policies that encourage further risky lending on the back of even looser monetary policy than that of the last decade risk repeating the errors of the past. Rather than lifting us out of recession, they will create a new housing bubble and more systemic risk in the economy. The next recession starts here.
I've now been told by an impeccable Tory source that co-payments have been ruled out for the NHS and that it will remain free at the point of use.
I'm not surprised and, indeed, have heard the same absolute commitment myself. One of David Cameron's earliest acts as leader was to rule out ever moving in the direction of an insurance-based system, and shadow health secretary Andrew Lansley has been going out of his way not to "frighten the horses" ever since.
This is understandable. Despite its failings, the British public remains bizarrely attached to the idea of a nationalized health service, so it would take a brave politician to break with orthodoxy. At the same time, the Conservatives are promising a fully-fledged internal market in the NHS, which is at least a step in the right direction.
However, I don’t believe that a universal, taxpayer-funded, free-at-the-point of use health service is sustainable – especially not in the context of a fiscal crisis. Given that healthcare accounts for about 17 percent of total public spending, no government that is serious about balancing the books can afford to 'ring-fence' it, as the Tories currently propose.
My money-saving suggestion would be a radical one: the complete privatization of NHS primary care (GP surgeries, clinics, dentists, etc), on which the government spent £18.6bn in 2007/8. Clinicians would offer their services in a free, competitive free market. Patients would be free to shop around and would then pay directly for any services. Of course, an NHS entitlement could still be available for those unable to pay their own way.
Britain's high street opticians – Specsavers, Vision Express and the like – provide a good example of how this could work in practice. They also indicate the way in which private ownership and competition could make a dramatic difference to standards, as well as working to keep down prices.
This would certainly be a controversial policy at first. But just as no-one would today advocate returning opticians to government control, privatized primary care would soon be accepted as a completely normal state of affairs. And given that the vast majority of patient interactions with the health service occur at the primary care level, the impact of this would be enormous.
According to Monday's Telegraph, David Cameron is considering plans to introduce road tolls after the next election. This is in essence a good idea: as Adam Smith identified in 1776, tolls, if properly implemented, have three great benefits.
A toll road "defrays its own expense" – it pays for itself. Any policy that moves the burden of expenditure from taxpayer to user should be applauded, but Cameron's tolls will only do so if balanced by cuts in general taxation, road tax and fuel duty. Motorists already pay more than 5 times the cost of maintaining the roads , and road tolls on top of this would be rightly seen as nothing more than a revenue-generating exercise.
Toll roads "pay for the maintenance of those public works exactly in proportion to the wear and tear which they occasion of them." Pricing the roads, like any other scarce commodity, encourages their efficient use: drivers have a reason to economize. When tolls are set intelligently, costing more in periods of congestion or in polluted areas, drivers pay not only for the maintenance of the roads but for the costs that driving imposes on others. This can only work, however, if the toll system is a comprehensive one; otherwise drivers simply avoid the expensive roads, and move the maintenance, congestion and pollution elsewhere.
Toll roads "can be made only where commerce requires them." Like in any market, those roads that are profitable would survive, and roads that cost more to maintain than they generate in wealth would be abandoned. Faced with abandoning a road, the government is more likely to bail it out, or put up toll prices. Only a road system owned by private enterprise can sustain the competition necessary to keep down prices and jettison loss-making roads.
Unfortunately, it looks unlikely that the Tories will introduce a system of road tolls that seizes these potential benefits. Rather, Cameron emphasizes that he can't "promise tax reductions", advocates "separate road tolls" rather than a comprehensive scheme, and has made no reference to privatization. It seems driving will remain dirty, crowded and expensive for a while to come.
I’m studying Philosophy, Politics, and Economics, at Exeter College, Oxford, where I spend a lot of my time arguing, with anyone who will listen, for the free-market policies Britain needs. Thinking that my tutors and fellow students had probably heard enough, I applied for a summer placement at the ASI, who have offered me a chance to work for them over the next two months.
This is a brilliant time to be working at the ASI. The economic crisis - and the rocketing government spending, surging market intervention, and collapsing trust in capitalism that have followed - has made it more important than ever to argue for limited government, and limited spending; to point out to both policy makers and the public how government interference in the market led us to where we are; and to explain why the government can provide no easy route out. I’m really looking forward to playing a part in that.
As part of my degree I’m taking papers in British and American Politics, Political Theory, Money & Banking and Public Economics, which I hope will all prove helpful here. In time away from work, I‘m generally to be found flying aircraft, sitting in a pub, or playing golf badly.
Yes, we know the argument, if only those wise people who had learned how to steal the most votes were put in charge of running everything then we'd all be gambolling in flowered meadows and life for all would be immeasurably better. This argument works right up until we look at what actually happens when the politicians manage to run something. Like, say, the monopoly off track bookie in New York State.
OTB is operating with a negative cash flow of $600,000 to $800,000 a month on a betting handle of $900 million a year, largely because of a revenue-sharing formula dictated by Albany that forces it to pay out more than it takes in after operating expenses...
Yes, the wise and omniscient beings face incentives, just like everyone else, and as everyone likes something for nothing they've set up a bookies so that it must (note, MUST) pay out more than it gets in plus the costs of doing so.
Of course, a bookies isn't that much of a problem but what happens when similar pressures are brought to bear on a more important segment of the economy?
What great advice! Make more loans, but make better loans. What a great banker he would make! I mean, the guy is just amazing, he knows everything about everything. I’m sure all the bankers in the room slapped their heads in a collective I-coulda-had-a-V8 moment and said as one: “Why didn’t I think of that!?!" And of course Putin knows just what the interest rate should be. 14 percent is Just Right. Pretty amazing to watch a bald guy do a Goldilocks impersonation.
It's not going to work out well, is it?
Aren't you glad that there is at least a modicum of sense in our own government regarding the banks? They're desperate to sell them off, get them out of governmental ownership, before the sillier parts of the Labour Party have a chance to offer such sterling advice.
Our Regulatory Evaluation Group (REG) held another of its successful lunchtime discussions yesterday, with Paul Thornton OBE (pictured left), head of Gazelle Corporate Finance. The theme was company pension funds – a topical subject in view of the worries about the sheer scale of pension funds that are larger than the companies that sponsored them – like the Post Office pension scheme – and those which have a huge deficit to match – like that of British Airways.
A particular concern for financial managers is whether the huge deficits that have opened up – following Gordon Brown's changes to the accounting and liquidity standards, and of course the effects of falling investment returns because of the financial crisis – are actually making mergers and acquisitions impossible. Already we have seen potential bidders walk away from a deal because the pension trustees have argued that a huge wodge of finance is needed to close their deficit.
In fact, there seems to have been a certain amount of gaming going on between pension trustees and company boards. By making changes to their funding assumptions, the trustees may well be able to increase their apparent shortfall and so scupper a takeover or merger that they don't particularly like.
Nevertheless, a lot of the deficits are all too real. And to some extent that is chickens coming home to roost as companies have underfunded their pension schemes during the good times. I would argue that pension funding requirements should be stated clearly on company balance sheets, so the potential liability is clear. Come to think of it, that is exactly the way the government should run the state pension, and all those index-linked civil service pensions, too. But of course they don't. The government's pension schemes would not even pass its own laws and regulations. Indeed, if the cabinet were private-sector pension trustees, they would all have been carted off to Pentonville Jail long ago. Now there's a thought to keep you happy in an impoverished retirement.
There's been for some years now a push that we should all reconsider our ideas about the work life balance. You know the sort of thing, the mantras about "ever longer working hours" and the need for these to be limited by governmental fiat. The logic has always rather fallen down in that we all have ever more leisure and thus must be working shorter hours but then logic has never been either a strong point for politicians in search of a cause nor useful in politics generally.
The latest manifestation of this desire to limit freedom has been the insistence that we should ban anyone from working more than 48 hours in a week: something rather brought in via the back door through the European Union. I've never really quite grasped why adults cannot be trusted to make these decisions for themselves really:
Concerns about the economy and rising unemployment mean workers are taking on extra work to bring in an additional income. As many as 2.7 million people, or 15 per cent of workers, have a second job, according to the findings by price comparison website uSwitch.com. Workers are also spending longer at their main job to earn some extra money, up to 29 per cent compared to 19 per cent a year ago.
You see, it's not just that different people have different opinions of what constitutes a decent work life balance, it is that the same people in different circumstances do (with the grandchildren staying mine has certainly changed). Those two variables simply cannot be happily dealt with in some centrally ordained number of hours that we may work.
Best simply to leave it to the people themselves: as we largely have done for decade upon decade. It does tend to work out that as incomes rise some fraction (eyeballing the numbers, perhaps 10-20%) of that rise in income is taken as greater leisure the rest in more physical consumption of goods and services paid for through work. If that's the way people in general want to take their higher incomes why not simply leave them to get on with it?
"Pathetic." "Ridiculous." "Stage-managed." Utterly fake." "Desperate." "Absurd." "Utterly inconsistent." "Hypocrisy." "Disgraceful muddle."
Gordon Brown promised to put an end to boom and bust. Having put an end to the boom, he now has a novel wheeze to put an end to the bust. Unfortunately, that wheeze is likely to put us right back where we started.
According to Monday's Telegraph, David Cameron is 
I’m studying Philosophy, Politics, and Economics, at Exeter College, Oxford, where I spend a lot of my time arguing, with anyone who will listen, for the free-market policies Britain needs. Thinking that my tutors and fellow students had probably heard enough, I applied for a summer placement at the ASI, who have offered me a chance to work for them over the next two months.
Our Regulatory Evaluation Group (REG) held another of its successful lunchtime discussions yesterday, with Paul Thornton OBE (pictured left), head of Gazelle Corporate Finance. The theme was company pension funds – a topical subject in view of the worries about the sheer scale of pension funds that are larger than the companies that sponsored them – like the Post Office pension scheme – and those which have a huge deficit to match – like that of British Airways.