Northern Rock's lesson in regulation


The Northern Rock, which publishes its results today, used to be a building society. They were rather conservative institutions, whose role was to take money from cautious savers and lend it to people buying homes.

But in the Thatcher years, they found themselves suddenly able to become banks, and swap the dull world of bricks and mortar for the exciting world of international derivatives. A few didn't take up the offer, recognizing that their customers actually preferred savings accounts that were dull but safe. Some, like Northern Rock, grabbed the chance. And this being a competitive market, the Rock rushed after market share. Unfortunately it rushed after market share at the expense of good business, and came a cropper.

Some folk think that this Thatcherite deregulation is the sole cause of our present problems. That's wrong. Firstly, it was quarter of a century ago, and lots of other things have happened since. Secondly, to me it shows more the folly of regulation, rather than deregulation. If you minutely regulate your business institutions, then suddenly set them free, you might well expect them to do a lot of silly things. Like all those East Europeans, after the Berlin Wall came down, rushing into the West to spend their life savings on the Mercedes Benz they'd always dreamed of. The lesson isn't 'don't deregulate' - the lesson should be 'don't over-regulate in the first place'. And if you're going to cut back on regulation, maybe it's best to do it gradually so that euphoria doesn't overwhelm everyone all at once. The deregulation of the alcohol licensing laws might provide us with another example.

Should we then go back to tighter regulation? To force banks to separate their day-to-day small-saver business from their high flying money market activities? Bring back Glass-Steagall? No, we shouldn't. After this little lot, customers will be demanding that for themselves. And bankers will be well aware of what sort of a mess they got themselves into by mixing and matching different kinds of business. Regulation, as we now all realize, is a very powerful tool. It's such a shame that it's wielded by people who plainly don't have the competence to handle it.

The Rotten State of Britain by Eamonn Butler (Gibson Square Books) is available to buy here.

Government in a panic


‘Bad cases make bad law’ (Law 101). I have read many contracts and I have never ceased to be amazed at the casual approach to important contractual issues displayed by relatively high-paid executives in both private and public life. The reaction to Sir Fred Goodwin’s pension fiasco among members of the Government is born of the panic to remove him as quickly as possible as the fall-guy for the whole sorry mess.

The more the bank bosses were and are portrayed as culpable, the less the public would blame the Government, or so the politics of pass-the-parcel blame game feels like since last October. This Government is obsessed by being seen to be ‘doing something’, allegedly better than ‘doing nothing’ (though ‘doing right’ is the better strategy).

The ‘mere’ details of the severance arrangements slipped from view. Competent negotiators often say: ‘If you’ve got it in writing you’ve got a prayer; if it ain’t in writing you’ve got thin air.’  Sir Fred got it in writing. Lord Mandelson, the Chancellor, and the Prime Minister didn’t, and neither did their talented advisors. Double worse, it has come to light, and now they are squirming in deep manure.

Their reaction? As ever, they panic!  Harriet Harman threatens to over-ride the law because the Prime minister says so. How? By passing a new law, or introducing a new tax on high incomes, or perhaps something in the anti-terror laws, or how about the wartime laws on the seizure of German assets? Or don’t pay him and await his writ in the courts?

In short, more panic, more short-termism, and more of what got us into this mess.

Professor Gavin Kennedy is a fellow of the Adam Smith Institute and writes regularly here

Nationalism in developing nations


Developing countries should not grow weary of the global economy. Globalization has been the force pulling developing countries upward for the past two decades, and eventually it will accomplish the feat in full as long as their governments leave well alone.

Jeffrey E. Garten published an essay in the Wall Street Journal this week called The Dangers of Turning Inward, in which he argues that although most countries claim that their current protectionist policies are temporary, many of these policies will be difficult to reverse after the recession.

It is not only the actual tariffs in India, Argentina, and Brazil that are hurting their development into economic powerhouses, but the illusionary mindset which can turn a temporary policy into a long-term failure to re-cooperate with the world market. “It is a frame of mind that casts doubt on the very assumption that we live in a single international market, and that relatively open borders are a virtue."

Millions of people in developing countries will be moving from the countryside to cities such as Sao Paulo, Johannesburg, and Shanghai in search of careers, housing, and education. Globalization was the major force behind this movement, and only through increased trade and cooperation can these people find their means to live. “It will be globalization that opens the world to them, allowing international agencies to pump in capital, multinational companies to help supply technology and management, and Western universities to transfer knowledge."

Hopefully governments will not lose faith in the world market economy, for every country’s cooperation will eventually save us from the current mess. From the EU to the US to Argentina, every country should value the free-market, and not expect to rely on nationalism for long term growth.

Blog Review 887


We all agree that monopolies are a bad thing which is why tax competition is such a good thing.

One part of Obama's proposals seems to be to entirely gut the American approach to charitable giving. And replace it with government money.

Yet another proposal that government should simply steal private property.

That's still better than this proposal to abolish the rule of law though.

Is the book industry about to go the way of the music industry?

"There is no threat of deflation in Europe". Netsmith thought that central bankers had actually learned something from the 1930s?

And finally, ever had a day like this?

Optimists and pessimists


I have long thought that mainstream environmentalism is essentially a belief system for pessimists. In their eyes, we are on a downward path from some idealised golden age, and things can only get worse. This seems to be an inbuilt human trait, as each generation seems to find reasons why things were better when they were young and why the next generation (perhaps with their own children as exceptions) are taking society to hell in a handbasket. The green movement gives a pseudo-scientific gloss to this.

Of course, it is arguable that the discontent we all feel at times is what drives the human race to innovate and change things. Nothing is ever perfect and, as we make an improvement in one area, we often create other problems or have the leisure to find something else which needs fixing. The fact that greater prosperity doesn't necessarily make us any happier is sometimes used as an argument against continued economic growth; putting environmental goals before economic ones.

Now the Social Issues Research Council has published a report which suggests that, as a nation, Brits are more optimistic than we might believe. But, being Brits, we are very self-effacing about this and don't really want to admit it. Nevertheless, in my (optimistic) view, this seems to confirm my feeling that the majority of people worry less about the big environmental issues than does a vocal and influential cadre of pessimists.

Guest author Martin Livermore is the Director of The Scientific Alliance

The first minister moan


Last week Gordon Brown met with the first ministers of Scotland, Wales and Northern Ireland. According to the BBC: “Alex Salmond was accused of turning the meeting into a squabble", as he and the PM disagreed over a government efficiency drive, which is set to cut the Scottish Government’s budget by £500m.

Apparently Alex Salmond doesn’t believe that his government can achieve a measly 1.5 percent efficiency saving, despite the fact that the Scottish Government’s budget has more than doubled since devolution. If that were true, it would be a pretty shocking indictment of their competence. In reality of course, such a saving should be easy.

Actually, that’s the real problem: the government’s efficiency target just isn’t stretching enough. Bearing in mind that fact that public spending has sky-rocketed since 1997 (from £300bn to £600bn), I’d say they could cut 15-20 percent (around £100bn per year) of public spending without reducing capacity. After all, if private sector businesses (which are far more efficient in the first place) can achieve such savings, doing it in the bloated public sector should be child’s play.

When it comes to Scotland, there’s another issue: as long as the Scottish Government is not responsible for raising the money it spends itself, Alex Salmond (or whoever) is going to keep coming to Westminster and moaning that he should have a bigger slice of the pie. If you separate the responsibility for raising revenue from the responsibility for spending it, you encourage profligacy. End of story.

The obvious answer is fiscal autonomy for Scotland: have the Scottish Government set and collect their own taxes. People say it would weaken the Union, but I don’t buy it. On the contrary, fiscal autonomy would probably blunt the most powerful instrument Salmond has in his quest for independence – the financial resentment that’s bubbling up on both sides the border.*

* Not that I'd actually mourn the end of the Union...

Blog Review 886


It may well not be socialism we're heading for but is corporatism any better?

One more reason why it's really not going to be like the Great Depression: we're all so far above the (real) poverty line.

Yes, it's true, Adolf Hitler really was a Keynesian.

Worth pondering: why has so much time been spent passing new laws when we already have such that address the very same problems?

Also worth pondering. Would the financial markets have been very different if the banks had only lived up to their legal responsibilities rather than their perceived moral ones?

On demonising the rich yet delighting in what they have offered us to generate such riches.

And finally, welcome to the future.

Commissar Harman speaks


I just heard Harriet Harman on the BBC saying Sir Fred Goodwin, a.k.a. Fred the Shred, the former Royal Bank of Scotland chief, should “not count on" keeping his pension.

Harman – Labour’s deputy leader – said: “The prime minister has said it is not acceptable and therefore it will not be accepted. And it might be enforceable in a court of law, this contract, but it’s not enforceable in the court of public opinion and that’s where the government steps in."

Translation: screw your legal rights and screw the rule of law. We’re the government and we can do whatever the hell we like.

This is getting scary.

Does that mean I think Sir Fred ‘deserves’ £650K a year for leading RBS to the edge of collapse? Of course not. Given the mess Goodwin presided over, I don’t think he ‘deserves’ anything.

But I also realize that a world where I decided what everyone did and didn’t deserve, regardless of their legal rights or my legal obligations, would be a terrible one to live in.

Harriet Harman, I suspect, would find it particularly unpleasant.