121,000 page hits.
2,100 actual comments.
16,536 spam comments.
Thanks all, I will continue gloriously blogging for the good of the internet.
April 27, 2011 • 8:03 pm 2
121,000 page hits.
2,100 actual comments.
16,536 spam comments.
Thanks all, I will continue gloriously blogging for the good of the internet.
April 20, 2011 • 4:15 pm 3
A few days ago I had good news about how global income was up and global inequality was down.
Global GDP per capita may have dipped in 2009, but it has now surpassed its previous peak of 2008. $11,200 dollars a head, pretty good going a few years after the biggest global contraction since the 1930s. On top of that the world is now on its way to becoming a more equal place…
If you don’t like no stinking facts and think neoclassical economics is a load of bull, your prerogative of course, then witness the phenomenal growth of beer consumption.
Via Felix Salmon here is a new paper by Liesbeth Colen and Johan Swinnen which shows a quadrupling of beer consumption over the last 50 years.
That’s not just the west getting drunker, if anything we’ve become more refined in our tastes, that is Indians and Chinese lifting a few glasses to success.
April 19, 2011 • 5:02 pm 6
Politics is about power. “Democracy” loosely refers to citizens having a stake in who gets to excercise that power. The electoral system is but one aspect of democracy which is but one aspect of politics in this country. I don’t think first past the post is a good electoral system in a triparty system like the UK currently has. I don’t think AV is much better, but I do think it is a bit better, but not as good as STV.
Under STV, I imagine, there would be more political parties and my favourite fluffy lefties would get together with my adorable tolerant liberals and all would have ponies, a land value tax, a citizens basic income, nominal GDP targeting, and worker managed firms.
However, the more I realise how politics actually works in the long run, the less I think electoral systems are the way to make the above happen. Electoral systems seem to allow us to choose between elites, and no system removes that element from liberal democracy. The zeitgeist that ushers in or follows an election seems far more important, and far easier to affect, than the result of that election.
If I want things I like to happen, I have to convince others that they are good things to happen. The right electoral system might merely bring these good ideas forward a decade or so. So the marginal effects are pretty slim.
Given that I think Duncan is correct and the Tories are driving the economy into the floor and I think Sunny is correct and the Tories are not “listening” but are “pressign ahead” with really really stupid top down reform of the NHS doing everything I can to wreck the coalition should be number one priority.
If there is a chance a “No” vote in this referendum could force the Lib Dems out of coalition I should seriously consider focussing on stopping AV, and possibly forcing an election where something important might change.
April 18, 2011 • 5:45 pm 1
Given the UK economy’s lacklustre performance it is hard to be sanguine about either your own, or others’ prospects. The UK is in good company; our neighbours are screwed too. Ireland borrowed too much money, Iceland borrowed way too much money, the American’s built too many houses, the Greek falsified their financial records, the Portuguese couldn’t keep up with German productivity rates and the Spanish foolishly joined the Euro.
But all is not lost.
We are currently living among the best of times for the world economy. Global GDP per capita may have dipped in 2009, but it has now surpassed its previous peak of 2008. $11,200 dollars a head, pretty good going a few years after the biggest global contraction since the 1930s. On top of that the world is now on its way to becoming a more equal place than it has been since everybody was equally poor. The globe’s Gini coefficient, a measure of inequality, has been rising for over a century but has finally changed course.
April 14, 2011 • 1:16 pm 5
April 14, 2011 • 1:11 pm 0
I’m not an expert on UK taxation, let alone US, but that two eminently sensible people can hold opposite views illustrates the complexity of the subjecy.
Felix Salmon: None of this is likely to come as any surprise to tax wonks, but it’s well worth publicizing as Barack Obama now wades into the turbulent waters of long-term fiscal policy. The simple fact is that corporations and the rich aren’t paying as much tax as they have to if we’re going to make a serious dent in the deficit. And although anybody pointing that out is always going to risk being tarred as a class warrior, the country is not going to make any serious progress, fiscally speaking, unless and until it grows up and addresses that fact face-on.
Will Wilkinson: But you wouldn’t know it listening to Mr Obama. He repeatedly and misleadingly portrayed the tax burden carried by America’s top earners as unfairly light, and the top-rate tax cuts under President Bush as a leading cause of America’s dire fiscal straits… In any case, to the extent our woes flow from a paucity of revenue, the problem is that America’s vast middle-class pays too little, not that its rich do. The widely-admired Scandinavian countries collect a much larger portion of GDP in taxes not because their top earners bear a relatively larger tax burden than do America’s top earners, but because they don’t. The president’s confusion on this matter was evident in his open admission that “I agreed to extend the tax cuts for the wealthiest Americans because it was the only way I could prevent a tax hike on middle-class Americans”. But without a tax hike on middle-class Americans, there’s simply no hope for serious deficit reduction. That is, there’s no hope as long as Mr Obama insists on cutting spending with a “scalpel” and “not a machete”. Were he really serious about deficit-reduction, Mr Obama would have let all the Bush tax cuts expire.
April 12, 2011 • 11:38 am 0
The UK Consumer Prices Index (CPI) annual rate of inflation has fallen to 4%, down from 4.4% in February.
The drop was largely due to a record monthly fall in the price of food and non-alcoholic drinks, which fell 1.4%, compared with a sharp rise last year.
Retail Prices Index (RPI) inflation – which includes mortgage interest payments – fell to 5.3% from 5.5% in February.
The fall eases pressure on the Bank of England to raise interest rates.
The pound fell almost 1.5 cents against the dollar immediately after the figures were announced, to $1.6238, as investors decided the Bank was unlikely to raise rates as soon as they had previously thought.
As I’ve long thought inflation cannot stay high without complementary pay rises; it is inherently self limiting.
Adam Posen is now hopefully doing a little victory dance around Andrew Sentence.
April 7, 2011 • 10:57 am 0
Following on from the below posts on the financial sector I see VoxEU has decided to publish an article supporting the broad thrust of my argument; finance is too big, too powerful and needs to be shrunk.
Our results show that the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility.
A very large financial sector like we have in the UK is not necessarily a good thing even if it appears to be out “comparative advantage” as Timmy is wont to argue.
A large financial sector can increase volatility. One effect of this is that volatility depresses investment. If you have the option to invest but the future is uncertain it makes more sense to wait and see. The preponderance of finance and the UK’s low rate of investment may be linked.
A good financial sector helps to improve the quality of investment, but that does not seem to be operating at the moment, finance appears to be system for the enrichment of a minority and the majority’s expense. Perhaps it is time for the banking commission to pull the plug on large bank’s right to exist.
Matters are complicated because such a large share of the City’s activities are exported and this makes a comparison between the UK’s financial industry and the UK’s GDP more difficult. But, it seems that finance is at the same time too concentrated in a few firms, too indebted to positively contribute to growth, too risk tolerant due to subsidy and too arrogant to see this.
Anybody else sick of these guys?
April 5, 2011 • 1:00 pm 1
The finance industry can make us much better off. Insurance, payment systems, mortgages, lending to businesses, funding entrepreneurs, futures markets, risk management, the list goes on with the many ways in which finance makes our lives better. But, and it is a big but, finance also carries with it large risks and the risks our current system of finance pose are greater than the benefits. Reform is vital. This calculus will be at the heart of the Banking Commission‘s report published in April and has been the driving force behind the posts I have written over the last few days.
Finance has benefits, but also produces damaging byproducts. Pollutants can be taxed, to embed the cost of the pollutant in the price of the product, for example a banking levy. On the other hand, pollutants can be banned, like we have with certain uses of DDT. The losses from the financial crisis dwarf anything which a banking levy could raise and this leads me to argue that finance must be reformed. The graph from my first post illustrates the losses suffered by the UK as a whole. The red line is trend economic growth from the start of the past decade, the blue line is actual economic growth. I think it speaks for itself. Worse still, evidence cited by Andrew Haldane (pdf) suggests anywhere from around £1.8 and £7.4 trillion of wealth may have been permanently forgone as a result of the financial crisis.
Reform of the banking sector should not be an issue which splits the left and the right. Massive government intervention in finance is now a certainty - no large bank will be allowed to fail – all that is left to discuss is whether we want intervention on the banks terms or on our terms. The US have plans to somewhat restrict the trading activities of deposit taking banks to insulate them from systemic crises. These reforms will not go far enough and will be too easily gamed by the financial sector – it is sadly, where many of the best minds end up. Only a more comprehensive reform, in which the big banks are broken up and the activities of commercial and investment banking split up, will be enough to stop the recurrent financial crises which are the pollutant produced by finance.
Despite the massive long run societal wide benefits from a better financial system, reform will not come easily. People like Jamie Dimon of JPMorgan Chase are arguing that any regulation would make the financial industry less efficient, and the Treasury are already offering pre-emptive compromises to placate the financial sector. These sorts of events will continue to build and financial reform will slowly be moved from the back burner to washing-up bowl of abandoned policy initiatives without popular protest. The banking industry will viciously resist attempts to make it better behaved.
Spending cuts will hit, are hitting, some people incredibly hard, but unless the horizon of action for anti-cuts groups shifts to include financial reform their actions could come to ought in the long run. UK Uncut and other organisations need to take up the baton of boring boring boring financial reform or it will fail. Well-meaning technocrats will always lose when up against the unrelenting power and cunning of the financial sector, so they need our back up. My preference for smaller less powerful financial institutions is not necessarily the right solution, but it almost certainly points in the right direction.
This movement shouldn’t be restricted to the left, both those who are aghast at the Tory’s treatment of the welfare state and those angry with their paltry pittance of a pay packet need to unite against a common enemy. A financial system which serves itself more than it serves households, small businesses and entrepreneurs and which poses a massive risk to the whole economy once a generation. Until that beast is tamed, wrenching crises will continue.
April 5, 2011 • 9:00 am 2
One way of recovering the cost from a slightly dysfunctional financial system is a levy to gradually recoup the cost of any occasional crises. This is something like the system which is currently in place, in part to insure against future crises and in part to fill the fiscal hole from the last one. But, given that the upper limit on the total wealth destroyed by the crisis could be up to £7.4 trillion for the UK economy alone, no bank tax can possibly be large enough. Plus there is no way of knowing that the levy will be paid by bank owners rather than in inflated credit card charges and deflated saving account rates.
Therefore, I would argue there is simply no way large banks can be permitted to continue to exist in their current form. I would further argue again that this is not a particularly left-wing point, I want the right onboard with this too. The logic goes like this. Further intervention in the financial system is a certainty and to pretend otherwise is foolish. Investors long ago guessed that no large institution will be allowed to fail and the current crisis and bail-out has confirmed this intuition and cemented this subsidy for the financial system. There is no longer any “non-interventionist” policy on the table, the only question is what form intervention should take.
As discussed in the last post on this topic, when all banks are widely diversified the banking system as a whole becomes vulnerable to systemic shocks. The current arrangement allows for massive private gains in good years and massive public losses in bad. This system remains largely intact and only robust action to reduce the risks of the system will be adequate in the long run.
I would also argue that reducing the size of banks would not necessarily result in a reduction in their efficiency – we may be able to reduce the severity of crises in the bad times and improve the functioning of finance in the good times with the right intervention. Banks are now massive institutions, even the biggest firms have enjoyed fast growth in the last decades. In the UK, 85% of personal accounts are held with one of the five biggest banks, financing small businesses and the mortgage market are even more concentrated.
There is little evidence however, that massive banks operating in a multitude of different markets offer economies of scale or scope (pdf). In fact, there is evidence that larger banks suffer from managerial overstretch and thus diseconomies of scale. A bank which operates in many markets, as you would expect, gains useful knowledge which spills over into its other operations and this is a net plus for the economy at large as capital and production is better allocated. But even in this way, larger banks are not necessarily worthwhile creatures as the extra knowledge gained is at the cost of increased exposure to the risks which we have already discussed. The optimum size of a bank may well be under $100 billion, and may possibly be as low as $5 billion, significantly below the level of concentration in the modern financial sector.
There are a number of options for shrinking banks, and for how banks should be run post-reform. The Dodd-Frank Act in the US contains a provision, the so-called Volcker Rule, reminiscent of the Glass-Steagall Act which separated commercial and investment banking. The Volcker Rule seeks to limit the trading of stocks, bonds and derivatives with the firm’s own money for profit, to limit a deposit taking bank’s exposure to risk. Although along the right lines this is too convoluted a process to form part of a robust system of banking regulations, as banks can more items around on their balance sheets to appear to be engaged in legitimate activity when they, in fact, are not. This isn’t a conspiracy theory it’s a history lesson.
Only with a more comprehensive approach, in which banks are split and cross investment between commercial and investment banned, will finance become more stable. In fact, it may be better to go further and completely insulate the core “utility” services of banking – transaction services and retail deposit-taking – from the riskier activities of banks through a restrictive system of limited purpose banking, something which the lamentably blogless Luis Enrique has often mooted. Reform of the banking system will not be straightforward, the complexity of finance and the interconnectedness of the modern world both makes reform difficult and vital to get right. The next post will sum up and look at what needs to be done to maintain what momentum banking reform has.
April 4, 2011 • 1:20 pm 4
There are a number of problems with finance, first of all there is a problem of perception. Not our view of bankers, we are probably already too lenient. The banking system’s first problem is of self-perception, as illustrated excellently by Alan Greenspan. Greenspan was chairman of the Federal Reserve, America’s central bank, and is both a follower of Ayn Rand and an ardent shill for the financial sector. Recently he had this to say in the FT.
Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.
“Notably rare exceptions” include the potential permanent loss of £7.4 trillion from the UK economy, and the blighting of millions of lives worldwide with unemployment, poverty, and insecurity. The financial sector sees their errors as just that, simple errors which we should write-off without much further analysis. A better approach would be to see these “notably rare exceptions” as pollution, against which we need to take action. The structure of modern banking means we are exceptionally vulnerable to financial crises, it is the structure which therefore needs to be tackled.
The infamous Glass-Steagall Act was passed in the US in the wake of the Great Depression, it separated commercial and investment banking. Banks which took deposits from people like you and I were barred from the casino side of banking, and investment banks were barred from accepting deposits. This kept the size and exposure of most banks limited from the 1930s until the 1980s.
The 1980s conservative counter-revolution embodied in Thatcher and Reagan had some notable successes, the ardent reformers in the UK and US enjoyed better growth than the lacklustre reformers on the Continent, but one aspect of the New Right’s programme seems to have been a major failure. Divisions between banks, and restrictions on their activities were torn down and market discipline was supposed to police the actions of the financial sector. This appears to have been a mistake. I would be more smug were I to be less poor as a result of this “I told you so” moment for the left.
Since the 1980s banking has become more concentrated as firms become larger and fewer in number. It has also become more interconnected and complex as financial derivatives have become more widely traded. Inevitably, the system has become more diverse and interdependent. This diversity should be good for banks, a diverse investment implies a safe investment because you have multiple sources of income, if one fails another can take up the slack. Unfortunately, when all banks are more or less equally diversified all banks effectively end up holding the same investments and when one goes down, they all go down. This is the banking system which the world currently has and it is a very bad system.
Massive systemic risk is generated by a financial system subsidised by the public, even while it employs the wealthiest people in the world. This is not a good system and neither is it a system which should be uniquely criticised by the left. The state support the financial sector enjoys and the vile behaviour of its upper echelons means everyone from free market liberal to One Nation Tory can and should work to produce a better system of finance. The next post will examine what benefits may come from restricting banking and what a restricted banking system could look like.
April 4, 2011 • 9:00 am 2
On April 11th the UK’s Independent Commission on Banking will report its interim findings. Although much attention, ink, and blood, has spilled on student loans, spending cuts, and NHS reforms, much less been attention has been directed towards banking and finance. This is remarkable given that the financial sector bares most of the responsibility for the catastrophic recession through which we have been living. Mervyn King is right; it is surprising people are not even angrier than they are.
The reason, I think, people are not angrier, is because they do not know much about the arcane world of finance or what solutions to the problems of financial crises are viable. People want to make sure “it” doesn’t happen again and they want to punish the people responsible, but aren’t sure how.
The next few blog posts on this site will therefore outline why you should be angry and what needs to be done about. First, why to be angry, this was the easiest one to write; next we will discuss the shape of banking today and why it needs to be changed; after that a post will discuss what we can do about the banks. The final post will sum up and pose the question to those better at campaigning than I “how do we get the government to do what is necessary?”
It is difficult to quantify how much the world or the UK has lost due to the reckless negligence of the financial sector. Neither is it possible to say precisely to what extent regulators failed. The damage caused to the UK Government’s balance sheets is well-known and easily understood, however the damage extends far further than that. The graph below merely illustrates one consequence of bankers for the UK as a whole.
The red line is trend economic growth from the start of the past decade, the blue line is actual economic growth. As you can see the financial crisis caused a massive fall in living standards from which we have yet to fully recover (xls). Worse still, evidence cited by Andrew Haldane (pdf) (something from which I’ll being borrowing extensively for these posts) shows financial crises can cause declines in living standards from which economies never recover – a permanent loss of income.
Depending on how pessimistic you are you can roughly quantify the long-term losses to the pocket books of UK citizens. Anywhere from around £1.8 to £7.4 trillion of wealth may have been permanently forgone as a result of the financial crisis. If that has not already made you angry then consider this. Because large banks have long been considered “too big to fail” they have received an implicit subsidy from us to them, something to the tune of £30 billion pounds a year to the five biggest banks. We have been made permanently poorer by organisation which already enjoy an exorbitant subsidy. It being finance, it of course gets even worse. Those supplicants to the public purse are already lobbying for weaker regulation, and this before the Commission has even reported.
Although it is tempting to use this as a justification for the crushing of financiers beneath the boot heel of indignant rage, sadly we do need bankers. Capital needs to be allocated, risks need to be insured, and prices need to be set and the financial sector does all these productive things, and more. However, financial sector failures generate massive generalised and uninsurable losses for the whole economy and some level of intervention is both just and necessary. That is what is to be discussed, stay tuned.
April 3, 2011 • 11:10 pm 0
Marching from A to B to voice vague objections to government spending plans, marching behind Labour and union leaders who fail entirely to offer a coherent alternative, is no longer a sufficient response to these cuts. It is not sufficient because this government, like the previous government, is not at all worried by the prospect of hundreds of thousands of people marching from A to B. They are worried about the prospect of a truly popular people’s uprising. They are worried about losing the ideological argument over the necessity of destroying the welfare state. They are worried by the prospect of a run on the banks engineered by digital people power, as just occurred in Holland, and they are worried about the prospect of a general strike. It’s safe to say that the government has a lot less to worry about this week than it did last week- and activists, anarchists, unions and the Labour movement all need to be asking ourselves why.
Indeed, not enough. And as I’ll argue in the next few days, Laurie et al. need to brush up on financial sector reform to get anywhere.
April 3, 2011 • 9:27 pm 0
Four posts, over the next 48 hours, will be published here on the UK financial system and banking regulation, starting tomorrow at 9am.
This is an important topic so pay attention. It may be boring but unless we get this right we will all be fucked by a financial crisis in the not too distant future.