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By Steven Baker MP, on 25 October 09
Lloyds will announce within days a controversial £23 billion fundraising that will bolster its balance sheet and finally repair the damage caused by its disastrous takeover of rival HBOS.
The fundraising, being finalised this weekend, will be one of the biggest seen in London.
The bank will ask shareholders to inject about £12 billion through a rights issue. Taxpayers, who own 43% of Lloyds, will have to cough up about £5 billion.
via Lloyds seeks £23bn to exit state scheme – Times Online . (Emphasis mine.)
By Steven Baker MP, on 25 October 09
Writing in The Financial Times, Martin Wolf explains “Why curbing finance is hard to do”, discussing the separation of “utility” and “casino” banking and indicating that 100% reserves on deposits would make finance safe:
First, the border between utility and casino banking is impossible to draw. For Mr Kay, the utility is the payment system and protection of deposits. This would leave all lending – including to households and businesses – inside the casino. For those in the US who hark back to the Glass-Steagall Act, the distinction is between commercial and riskier investment banking.
Mr Kay’s distinction is clear, but problematic. If we followed him, all risk management would become unregulated. It is inconceivable that governments would, or could, leave them so. If we moved back to a Glass-Steagall distinction (itself never accepted in continental Europe), we would need to draw a line. But where? Why would lending to households and business be good, but securitising those loans bad? Why would hedging be good, but speculating bad and how might one draw the line between them? Mr King counters that prudential regulation already draws such distinctions. I would respond that regulation has made a mess in doing so. Furthermore, these are not distinctions between businesses.
This is not to argue that there is no way of making finance safe. There is. But it would be far more radical: deposits would be 100 per cent reserve backed; and the liabilities of other investment vehicles would be adjusted for the market value of their assets at all times. Banking would disappear.
We disagree of course with that last remark. Banking would not disappear: it would just operate without legal privilege.
By Steven Baker MP, on 23 October 09
Via The Times Online, we learn that many economists ”revolt over surprise recession data”:
Economists today cast doubt on official data showing that British gross domestic product (GDP) contracted by 0.4 per cent between July and September, claiming the surprise fall is far worse than economic reality.
The shock figures from the Office for National Statistics (ONS) revealed that the country remained mired in recession during the third quarter — the sixth consecutive quarter of contraction, signalling the country’s longest downturn since records began in 1955.
Economists had widely expected that the country had emerged from recession between July and September.
Well, yes, many economists had expected that but as I have explained before, most economists allow themselves to be misled by a superficial reading of numbers distorted by central bank action.
We can and must do better.
By Steven Baker MP, on 23 October 09
Toby Baxendale and Steve Baker enjoyed a second fascinating day at the joint Ludwig von Mises Institute and Instituto Juan de Mariana conference in Salamanca, “The Birthplace of Economic Theory”:
- Cobden Centre Chairman Toby Baxendale began the day with “An Entrepreneur’s Tale: The Meltdown of 2008″, a well-received lecture setting out our measure of the Sterling money supply and his astounding experience of banks’ behaviour during the height of the crisis.
- Walter Block set about “Defending the Undefendable: Gold and 100% Banking”: his book is here(PDF).
- Thomas J. DiLorenzo gave “The Real Reason for Central Banking: Government for the Privileged Few”.
- Joseph T. Salerno explained “The Effects of Inflation on Morality and Society” with reference to previous hyperinflations and the developing plans of the Obama administration.
- Jesús Huerta de Soto, author of the seminal work “Money, Bank Credit and Economic Cycles“, described “400 Years of Dynamic Efficiency” through unhampered human cooperation, presenting entrepreneurship as the creative search to help other people.
Two additional major figures in the movement for honest money have agreed to join our team as Senior Fellows: we will be making an announcement shortly.
By Steven Baker MP, on 22 October 09
Cobden Centre Chairman, Toby Baxendale, and Corporate Affairs Director, Steve Baker, are this week in Salamanca, Spain for the joint Ludwig von Mises Institute and Instituto Juan de Mariana Supporters Summit 2009:
One of the great discoveries of the 20th century concerns the origins of economic science in the late middle ages in Spain and Italy. Long before Adam Smith wrote, many scholastics from the 14th through the 17th centuries were writing systematic economic theory.
We heard this morning how the Salamancan friars were liberals, believers in freedom, who advocated:
- Free markets and free enterprise
- Low taxes and a small state
- Free movement of people and products
- The rule of law and the equality of all before the law
- Individual liberty
- Separation of the powers of the state
- Democracy within limits set to protect minorities and individual rights
- Justice: the defence of life, liberty and property
The Salamancans promoted subjective value and argued that an abundance of money makes it worthless. As early as 1544, they argued from legal principle for 100% reserves on demand deposits with depositors paying for safekeeping services.
In other lectures, we learned:
- How recent Nobel Laureate Oliver E. Williamson has opened the way to a capital theory in neoclassical economics which could converge on Austrian-School theory through his “asset specificity”.
- How timely is Adam Smith’s Wealth of Nations, a systematic treatise which, despite its limitations, could still refute today’s flawed policies.
- Some lessons from a career in modern banking: how bank failures occur and what history has to teach us.
- What Federal Reserve Chairman Ben Bernanke could learn from Juan de Mariana’s 17th century treatise De Monetae Mutatione: stop inflating the money supply.
Toby speaks tomorrow, presenting “An Entrepreneur’s Tale: The Meltdown of 2008”.
By Steven Baker MP, on 16 October 09
Via Make Britain safer – pull our troops out of Afghanistan – Telegraph, Jeff Randall argues that we should pull out of Afghanistan:
Decent people are sick of the carnage, not because they have no stomach for the fight, but because they cannot fathom what the fight is for. In desperation to justify a textbook example of mission creep, the Ministry of Defence has resorted to emotional blackmail. The remarkably unimpressive Bob Ainsworth suggests that in failing to show enough support for the war, some parts of the public are wallowing in “defeatism”.
This is offensive rubbish. Support for the Armed Forces remains widespread and undiminished. What has cracked, however, is enthusiasm for their task, largely because too few of us have the faintest notion of what victory looks like. The idea that, after a bloody military campaign, we can leave behind a “normalised”, democratic Afghanistan, free from the Taliban, with sufficient resources and appetite to police itself, tests credulity to destruction.
For those who seek to dismiss this view as the bellyaching of limp-wristed liberals, I point you to two MPs from either side of the Commons, both of whom served in the Army: Eric Joyce (Labour, Falkirk) and Adam Holloway (Conservative, Gravesham). Mr Joyce resigned recently as a parliamentary aide over government strategy, while Mr Holloway refers to Afghanistan as “a giant film set for al-Qaeda propaganda”.
By Ewen Stewart, on 16 October 09
 UK Household Savings Ratio (click to enlarge) Equity Strategist Ewen Stewart makes the case that the national debt will within 5 years be over £150,000 per family of 4 with debt repayments of twice the present defence budget, up from £31 billion in 2008/9 to £70 billion in 2013/14. He explains the root causes of our difficulties and indicates a route to recovery.
It’s all over. What a fuss about nothing. The economy will soon be growing again and, look, the FTSE100 is up almost 50% since the March low. Even house prices, according to the Halifax, have risen 6 months in a row. The doom mongers were wrong. Central Banks and Keynesian public spending programmes, together with QE, have worked. Brown indeed has saved the world!
Well that would be one interpretation and a very short sighted one too, for this recovery shows all the hallmarks of a drug addict who claims to be going straight injecting a further mighty dose of the substance that has caused such decay in the first place to prolong the party.
The problem is that the underlying fault lines in the UK economy remain and, thanks to the Government’s response, are even more pronounced.
The underlying problem is, in my view, an addiction to debt, a banking system which is over-leveraged, and now government finances that are out of control. This country that has been living considerably beyond its means for a very long time. Artificial efforts to prop this up, through printing money or inappropriately low interest rates, at best are a short term delaying tactic and at worst risk stoking a loss of confidence and ultimately inflation.
It is my central conjecture that much of the economic growth over the last decade was less the result of genuine private wealth creation but more the result of a number of unique factors which were both unsustainable in their nature and damaging to long term growth. If this view is correct the scale of the over-leverage and the action required to alleviate the problem become even more pronounced.
Continue reading “Happy days are here again? Another view from the City”
By Steven Baker MP, on 15 October 09
Via The perils of cheap money – Telegraph Blogs, Ambrose Evans-Pritchard explains another danger of low interest rates:
Here’s a little nugget from Germany. The regulator BaFin has woken up to the danger that near-zero interest rates are a major danger for the Germany’s €700bn life insurance industry. They may not be able to meet their premiums. If deflation takes hold, they risk going the way of all those life insurers that went bust in Japan during the 1990s.
BaFin thought it had covered every possible shock – a share price crash, a debt crisis, etc – but nobody ever paid much attention to the long-term actuarial shock of low rates.
By Chris Neal, on 14 October 09
Chris Neal explains how the reports of the Centre for Social Justice and Conservative Party policy are converging in a direction which tends towards Cobdenism: people having more to do with one another and the government less.
The Centre for Social Justice’s 2007 “Breakthrough Britain” report identifies five pathways to poverty: family breakdown, economic dependency and worklessness, educational failure, addiction and serious personal debt. This seminal work has led to the development of over 190 policies to reverse social breakdown.
The CSJ’s influence at the 2009 Conservative Party Conference was evident with their policy recommendations influencing much of the modern Conservative approach unveiled in Manchester. Decentralisation, Social Action, Accountability, Housing, Welfare Reform, Family, Law and Order, Schools, Skills, Re-training, Apprenticeships were among the topics on the main agenda for this Conference and it was clear that Breakthrough Britain had permeated Conservative Policy on each. Iain Duncan Smith has shown great courage in tackling issues of social justice head on with his team at the CSJ and was rightly acknowledged by David Cameron who said about IDS in his Conference speech “I am proud to announce today that if we win the election he will be responsible in government for bringing together all our work to help mend the broken society.”
David Cameron vowed to devolve power to communities in his landmark speech to the Open University on 26th May 2009 and this again was underlined in Manchester. Empowering local people and communities to take control or as Iain Duncan Smith puts it “Our approach is based on the belief that people must take responsibility for their own choices but that government has a responsibility to help people make the right choices.”
This all makes great reading and when combined with Tory promises to sweep aside great swathes of bureaucracy and quangocracy would have been music to the ears of ‘Manchester Liberals’ such as Richard Cobden. But are we ready for this as a Nation? Has society become too reliant on economic dependency and worklessness after 12 years of top down government? Are some of the poorest Britons now so emasculated and devoid of aspiration that they won’t be able to adapt to a less intrusive state, one that encourages enterprise and personal choice?
The modern Conservative message makes a lot of sense and could doubtless see the revival of our Nation’s fortunes. Prosperity based on production rather than spiraling debt and replacing a culture of instant gratification with one of hard work and thrift. A Government committed to rewarding social responsibility, families, savings and enterprise. Government can create the framework but unless corporately we embrace the opportunities on offer all the elegant oratory heard at the Conservative Conference and the profoundly accurate conclusions made by the Centre for Social Justice will amount to nothing.
David Cameron in his Conference speech on Thursday 8th October spoke about opportunity “I know how lucky I’ve been to have the chances I had. And I know there are children growing up in Britain today who will never know the love of a father. Who are born in homes that hold them back. Who go to schools that keep them back. Children who will never start a business, never raise a family, never see the world. Children who will live the life they’re given, not the life they want. That is what I want to change. I want every child to have the chances I had.”
Opportunity has been missing for the poorest in society and they need more than a lottery ticket to escape poverty. I am not talking just about the children growing up now but the preceding generation, the so-called NEETS and NINJA’s. They are entrenched in economic dependency with no motivation to work as frequently they are better off financially by staying on benefits. Many aren’t interested in working even when offered the opportunity, as the old saying goes “you can lead a horse to water but you can’t make it drink”. Well they certainly know how to drink but they have never been led to water! What would happen if real opportunity came crashing in on their lives? Opportunity in the form of skills training, mentoring and micro venture funding. The opportunity to begin apprenticeships without formal qualifications. Opportunities that can build respect, self esteem and encourage ambition. Some would respond and through hard work begin to benefit from the change in their circumstances, in turn maybe their success would rub off on others.
Top down state solutions do not work as public servants have to tick boxes for ministers and are not free to react to individual needs. Those of us in the business community however are unencumbered by bureaucracy therefore allowed to think laterally and react appropriately to individual needs. Stop for a moment to consider your own situation and how you might be able to contribute. I was inspired by the Get Britain Working Campaign to set up local Job Clubs and can testify first hand the good that comes from people getting alongside one another when facing the difficulties bequeathed by unemployment. I have introduced a second strand to the Clubs where those prepared to start their own ventures have the opportunity to be mentored and even funded by members of our local business community. Mentoring in itself is socially cohesive creating friendships between people whose paths would not otherwise have crossed. This is more a case of leading someone to water and having a drink with him! Could you start a Job Club in your community or support budding entrepreneurs?
We assume Great Nation stature in times of adversity and maybe this deep recession will manifest the legendary but dormant British qualities of cooperation, courage, determination and hard work to overcome looming economic and social bankruptcy. David Cameron’s vision of a modern Conservative Britain deserves to succeed and we must take responsibility to make it happen.
I would enjoy hearing from anyone who might consider forming a Job Club: please use our contact form.
Further Reading
By Gordon Kerr, on 13 October 09
Gordon Kerr explains the futility of the Government’s planned asset fire sale.
The Government plans “a fire sale of assets worth £16 billion” to raise funds for our national coffers. All of the assets mooted -– the Tote, the Dartford Crossing, the Channel Tunnel rail link –- generate cash. In normal market conditions, they would be highly valued by the private sector. But these are not normal market conditions and, even if they were, the sale would be absurd.
Since these assets all generate cash, there is no net gain to the public purse from selling them. When their cash yield is greater than the interest cost of Government debt, the public purse is better off holding them than selling them to pay off debt.
More importantly, the sales are likely to be only partial. Recent experience has shown that the Government cannot bring itself to allow major infrastructure companies to fail. If Dartford Crossing plc teetered on the brink of collapse, the government would almost certainly support it but that which the private sector produces better than the public sector should be in wholly private hands, free of all taxpayer-backed guarantees.
Lenders to these “privatised” businesses would benefit from at least an implicit government guarantee. The government will be selling the upside of investing in the assets to the private sector whilst underwriting the bulk of the risk.
This amounts to selling assets to oneself, while giving away free money.
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