Britain's financial crisis was 100% home grown

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One year on from the part-nationalizations of Lloyds-HBOS and RBS, a new ASI report by John Redwood MP has pinned the blame for the financial crisis squarely on the government and the Bank of England.
 
In Credit Crunch: The Anatomy of a Crisis, published this week, Redwood attacks the notion that the UK economy was well run, and that its problems were imported from the US. He blames bad monetary policy from the Bank of England, bad regulation from the Financial Services Authority, and bad fiscal policy and crisis management by the British government for the severity of the crash. Britain's crisis may have had much in common with America's, Redwood says, but it was very much home grown.

Britain's fake boom
The report traces the roots of the banking crisis to the "false boom" of 2001-2007. A boom fuelled by ultra low interest rates, lax credit controls, and an explosion of lending, rather than real, sustainable growth. These economic conditions encouraged banks, like Northern Rock, to pursue an aggressive growth strategy based on selling securitized mortgages and borrowing short-term from the money markets to finance new lending. As well as driving a house price bubble, this approach sowed the seeds of later disaster.
 
Blame the Bank of England
The Monetary Policy Committee of the Bank of England must take a major share of the blame for the crash. Redwood explains that having first kept interest rates too low for too long, it then raised them too far and too fast in 2007. They starved the money markets of cash and triggered the first phase of the financial crisis, as Bradford & Bingley, Alliance & Leicester and HBOS had to be bailed out, and Northern Rock, ultimately, nationalized. Incredibly, Redwood points out, in the year that followed the run on Northern Rock, the Bank of England acted as though nothing serious had happened, keeping interest rates relatively high when they should have been cutting them.

The government got it wrong
The report argues that the worst policy mistake of the crisis was the government's. In autumn 2008, just as world markets were showing serious signs of strain, they suddenly decided to insist that the banks hold more cash and capital than they had required during the boom years. As Redwood points out:

"That was the worst possible moment to make such a request, and the worst possible thing to do when markets needed reassurance from the authorities that the banks would survive. As soon as the regulators' demands became public, confidence in the major financial institutions was undermined, and RBS and Lloyds-HBOS were forced into semi-nationalization, at huge taxpayer risk."

Reforming Britain's banks
The result of this disastrous intervention, Redwood says, is that Britain has been left with a banking sector with too few competitors and too many weak balance sheets. He argues that the prime task facing the next government will be to remodel the state owned banks, splitting them up into smaller institutions to encourage domestic competition, and return them to the private sector as soon as possible. The report also suggests that banking regulation should be returned to the Bank of England, who would in future focus on the 'big picture' and set counter-cyclical cash and capital reserve requirements for the banks.

Click here to read the report.

David Wiletts and student fees

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Tory David Willetts could raise student fees to £7000. It's not enough.

The Conservative Shadow Minister for universities, David Wiletts, said that he would consider demands to raise the annual fees charged by universities fo £7,000, roughly twice the current levels. That's a step in the right direction. People complain about students leaving university with debts of £20,000 and suchlike – but the fact is that a university education can raise their future earning potential by much more than that, so it's still a really great deal.

If the universities had to balance their own books and pay for themselves instead of taxpayers handing them cash, their fees would have to be a lot higher than that, though. ASI Fellow Terence Kealey, himself the head of Buckingham University, reckons that £15,000-£20,000 would be nearer the mark – comparable to the fees in top US universities.

The public interest argument is that we don't want bright but poor students to be discouraged from going into higher education. Quite right. But the US universities solve that by accepting students only on the basis of merit, then having endowment funds to pay the fees for those who can't afford them. It's a very sensible sort of arrangement, and we should strive to have it in the UK. But I'm skeptical of the argument that the taxpayer should subsidize the universities because the country needs lots of graduates. The main benefit of a university education goes to the students themselves, and not to the general public. So the students should pay most of the cost – the real cost. A loan system is a good way to make that manageable for them. But it is right that people should look at the costs and benefits of higher education and decide on the basis of the realities – not on the basis of subsidized prices. That would be a more rational allocation of taxpayer funds, and better for the students themselves.

Dr Butler's book The Rotten State of Britain is now in paperback.

Police use child abuse tapes for PR

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Police have released interview tapes of child abuser Vanessa George. That should worry us all.

Justice is flouted so routinely these days that you may feel they can't do anything more to shock us. And then this happens. Nursery worker Vanessa George,39, has been found guilty of abusing young children at the nursery where she worked. Given that anyone who comes within 100 yards of a child these days has to go through Criminal Records Bureau checks, you might wonder how that can happen. Well, the system seems to be wrecking scout groups, schools and after-hours clubs, who have seen a bit drop in parents volunteering to help out – innocent parents who simply can't bear the intrusion of a CRB investigation – though it doesn't seem to stop the real abusers.

Maybe, as with the Soham murders, it was just police incompetence. But even that is not the real shocker. Really shocking is that the police interview tapes with Vanessa George have been released to the BBC and are now all over the internet.

Police interview tapes came in for one reason alone. There were so many cases of defendants pleading that they had been bullied into confessions by police questioning that, to protect the public against any possibility of police abuse, it was ruled that all police interviews should be taped. It would also ensure that what appeared as evidence in court was properly extracted and did actually correspond to what a defendant said.

Now interviews are conducted on video, not just audio. A relief to innocent people who are accused of things they didn't do, you might think. Until you find that the police are releasing your tapes to the BBC, as they did in this case – complete, of course, with their own commentary: "She clearly knows what she did was wrong..." and "She was still trying to manipulate the situation..." etc etc. Yes, she's guilty, yes, she's going to jail, and good thing too. But the duty of the police is to prosecute cases, not to put their own spin on them. Something brought in to protect the public is now being used for police PR.

It's truly amazing. How are the police going to get anyone to confess to anything if they imagine that edited snippets of their tapes are going to be splattered all over the BBC and the internet? I've often said that if you are arrested by the police, the best thing to do is to say absolutely nothing. Yes, they will hold you as long as they can out of spite, but at least you won't be set up, and the BBC won't be playing tapes of you saying something unfortunate for the next twenty years. Just because Vanessa George has been found guilty doesn't make it any better. Today it's tapes of guilty people. Soon it will be tapes of anyone they pull in, plus commentary, if they figure that a bit of public outrage might help the case against them. You might think the rules of natural justice mean that could not possibly happen. But seeing how far our liberties have been eroded, it's surely only a matter of time.

Dr Butler's book The Rotten State of Britain is now in paperback.

Charisma or control?

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A very insightful Times piece by Roger Mavity of Conran holdings observes that a successful business needs two types of person. There is the charismatic CEO, and the number-crunching Finance Officer. They have different roles, and are different personality types. The guy (or gal) with the imagination and drive that can fire people up is what drives creativity and innovation, whereas the more sober accounting type is there to cut the cloth and control costs.

"One of the classic mistakes in business," says Mavity, "is to promote the finance director to chief executive — leadership by charisma is exchanged for leadership by control." This is, he thinks, what has happened to the Labour government. The imaginative inspiring CEO (Tony Bair) has been replaced by the control-obsessed Finance Director (Gordon Brown), and the result is stagnation and lack of leadership.

On a wider scale, Mavity identifies a more general problem for Britain. We have become obsessed with numbers. Teachers waste their time filling in forms about targets, instead of inspiring children with a love of learning. Everywhere from hospitals to business offices we are driven by targets and numbers, the stuff of control. All too lacking, he says, are the imagination and flair which can lead to innovation and achievement.

"But all too often," he says, "our ingenuity and our sense of adventure gets slowed down by the box tickers, the people who can’t have an opinion until a focus group has had it for them, the people who won’t ever take a risk they don’t have to." He cites Charles Saatchi, James Dyson, Terence Conran and iPod designer Jonathan Ive as people who broke the mould and dared to take risks and let their imagination run. There are all too few of them, he says, and as the box-tickers take over, our world is the poorer for it.

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Europe is lagging behind

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Europe is on the right track to becoming the largest re-agriculturialized region in the world. Whilst all other regions tend to use more and more resources on research and development (R&D), the European Union continues to subsidize wine production and agricultural export instead of making it profitable to invest in future wealth.

The OECD has recently publicized a report expressing concern about the investments made in the EU in the field of R&D. Likewise, the European Commission has also expressed concern that the EU region will not reach the goal of using 3 % of GDP on R&D in 2010. Both the US, China and Japan are currently investing more money in future development than the European countries, even though the EU countries make up the world’s largest economy.

The combined investments made in the EU region equals 1.8 % of total GDP, in comparison the expenses used on subsidizing wine and butter, adds up to 0.6 % of EU GDP. Right now every European Citizen is using about £90 a year to enable European farmers to sell goods in developing countries at prices that cannot be matched by local farmers, forcing them to rely on aid from European countries... The safe way of ensuring jobs for bureaucrats.

What could then be done to increase the wealth of EU citizens in the long as well as the short run? In the first place, the EU countries could choose to use the agriculture subsidies on corporate tax reliefs encouraging investments in R&D. This would leave the EU region using 2.4 % of total GDP on actual improvement. An increase like this would mean that the EU region would spend $298 billion on R&D compared to the US’s $344 billion. Secondly the EU could stop taxing agricultural import from developing countries, leaving these economies with a fair chance of self-propelled economic development as well as securing cheap agricultural goods to EU citizens. Last but not least we would save the costs of unnecessary bureaucracy, since we wouldn’t need to send nearly as much development aid to developing countries in view of the fact that they would be better off as a result of free markets.

What has Obama done for peace?

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Plenty has already been written on why Barack Obama didn't really deserve to win the Nobel peace prize, and in general I agree with it. But one thing that bothers me – and I'll confess here that my views on foreign policy are strongly non-interventionist – is that people seem to be labouring under the delusion that Obama is some kind of pacifist. He isn't. Sure, he rose to fame and political fortune as an opponent of the Iraq war. And yes, he did initially promise to withdraw American troops from Iraq and close Guantanamo Bay as soon as he became president. But he hasn't done those things.

As Cato's Jason Kuznicki points out, the withdrawal from Iraq has been delayed and partial, and is now described by the White House as "complicated". Meanwhile, the Bush administration's policies on detention and rendition have remained largely intact. Obama might have railed against the executive powers the Bush administration invented for itself when he was a presidential candidate, but now he's in the Oval Office he seems to like them. It is also worth noting that Obama is considering sending 60,000 additional troops to Afghanistan, to fight a war with unclear objectives and little real prospect of success. Again, that hardly strikes me as a peaceful act.

Of course, you can't really blame the Nobel prize committee for not realizing Obama wouldn't stick to his promises, can you? After all, he had only been president for 12 days when nominations closed.

The weakest link

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Britain’s political establishment is indeed its weakest link, with insufficient collective self-control to take decisions that are truly in the public interest. No wonder we are in such a mess. We should never forget that while capitalists and free markets are far from perfect, politicians and regulators tend to be much worse. Our self-interested and all too human political class is as far from the ideal of the Platonic Guardian as it is possible to imagine.

Allister Heath 'Expenses scandal latest blow for sterling' City AM.

Sweden's social welfare popularity

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Among the intellectual feast that was this summer's Stockholm meeting of the Mont Pelerin Society was a challenging and controversial paper on the popularity of Sweden's social welfare system [pdf here]. As Sweden has progressed from its outrider position on social democracy into a fairly mainstream OECD economy, the popularity of their generous and far-reaching welfare system has not diminished. Indeed, opinion poll evidence suggests it has increased.

The explanation was provocative. It is that Sweden is not a community paradise in which everyone accepts the state provision as fair and equal. Rather it is that changes to Swedish welfare have allowed people to tailor it to suit their own individual circumstances. The school reforms allow them to choose with state money the schools they would have chosen if they had had to pay fees direct to the school instead of via taxation. Similarly in areas like sickness and unemployment cover, people now routinely use private cover to top up the level of state provision to the degree of cover they prefer.

The rule is that it is easier for people to top up a modest state coverage than it is for them to sell off any surplus if the state coverage is more than they need. So topping up is now normal, allowing people to augment state cover to the level of welfare coverage they feel they need. The popularity of Sweden's system rests, it is suggested, on the fact that it provides through taxation something fairly close to what people would have chosen had they been spending their money directly.

The key to that is the scope for individual variation. In place of a one-size-fits-all blanket state coverage, there is opportunity throughout for it to be tailored to individual circumstances. It is a remarkable thesis, with lessons for the UK if it is borne out. Maybe we should be looking at ways that allow UK citizens to tweak and tailor our state services and welfare to suit their own individual needs?

Check out Dr Madsen Pirie's new book, "101 Great Philosophers."

Home education vs. the bully-boy state

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The presumption of guilt is eating it`s way into our lives: Home Education is the latest victim.

As a parent you are a suspect in the crusade against child abuse. That is the message to Home Education from this government.Through a staged Review and now onto a Select Committee, the drive has been to find ways to justify an assault on Home Ed., taking away parental rights, enforcing child interviews alone and invading the family in a way that singles out Home Ed. as a "prime suspect".

Yet the very idea that Home Education could be harbouring child abuse is one manipulated from Local Authorities because the Government wanted to hear something that would enable it to invade Home Ed. Certainly, cases like Baby P. have made the system determined to seek out and stamp-out child abuse whatever the cost, but such cases have not been anything to do with Home Ed., so why single out one group for inspection?

The drive to stamp out child abuse should not cause abuse of children, or their parents, yet this is what compulsory interviewing of childen will achieve. Home Ed. is a sanctuary of love and good education, it nurtures children and allows them to learn and develop at their own speed. Many children are bullied in school and parents deregister their kids to protect them from further harm. We can only imagine what harm will be done to these kids when they are forced into interview alone, not to mention the damage if the National Curriculum is imposed along with government educational standards.

Currently, Local Authorities are widely acting ultra vires in regard to Home Ed. They are lying to parents, purporting to have powers under the law that they do not have, trying to bully children into returning to school. This really is a bully-boy State.