Steve Baker’s researcher, Tim Hewish, found an interesting CNN interview with Niall Ferguson on the US approach to the economic crisis:
… the way that the discussion is conducted it seems like there is only a Keynesian option and the alternative is just sort of passively waiting for disaster. I think there is a better strategy that we could adopt. Imagine radical fiscal reform that attacked not only the entitlements problem — that fundamental problem of Medicare and Social Security that is going to bankrupt the country if something isn’t done — and rationalised the tax code: simplified income tax, maybe even created just a simple flat tax rate; simplified, and indeed reduced corporate tax; created a federal sales tax. There is a way of creating a confidence-boosting fiscal reform … I’m depressed at how few people in Washington are prepared to talk about this option.
And later on:
one reason I’m sceptical of [Krugman's proposed] response is that we used to do this. It’s not like we haven’t tried Keynesianism in the past. Indeed it was orthodoxy for most of the 60s and 70s that what you did in the face of unemployment was that you ran deficits and printed money. And guess what we ended up with? The 1970s — stagflation: double digit inflation and low growth. I don’t quite understand why Keynes is suddenly so fashionable … we need to look at some radical alternatives.
In his Ascent of Money, Ferguson takes a view of economic history that many Cobden Centre readers would question. Even after the financial crisis, he wrote,
The historical reality, as should by now be clear, is that states and financial markets have always existed in a symbiotic relationship. Indeed, without the exigencies of public finance, much of the financial innovation that produced central banks, the bond market and the stock market would never have occurred.
Read into that what you will. Personally, I suspect that two parasites can coexist symbiotically on a shared host. More encouraging was Ferguson’s December 2009 endorsement of Laurence Kotlikoff’s Limited Purpose Banking proposals.
Mutual funds are, effectively, small banks, with a 100 per cent capital requirement under all circumstances. Thus, LPB delivers what many advocate – small banks with more capital. Will this work? It has. Unlike so much of the financial system, the mutual fund industry came through this crisis unscathed. True, the Primary Reserve Fund broke the buck by investing in Lehman and had to be bailed out. But under LPB only cash mutual funds (invested solely in cash) would never lose investors’ principal. The first line of all other funds’ prospectuses would state: “This fund is risky and can break the buck.”
In any case, this interview is worth watching. High profile questioning of Keynesianism is always welcome.
There’s a follow-up article on Ferguson’s website:
Zero Hedge has published a vivid account of hyperinflation by Art Cashin:
in 1922, the German Central Bank and the German Treasury took an inevitable step in a process which had begun with their previous effort to “jump start” a stagnant economy. Many months earlier they had decided that what was needed was easier money. Their initial efforts brought little response. So, using the governmental “more is better” theory they simply created more and more money.
But economic stagnation continued and so did the money growth. They kept making money more available. No reaction. Then, suddenly prices began to explode unbelievably (but, perversely, not business activity).
…
In 1913, the total currency of Germany was a grand total of 6 billion marks. In November of 1923 that loaf of bread we just talked about cost 428 billion marks. A kilo of fresh butter cost 6000 billion marks (as you will note that kilo of butter cost 1000 times more than the entire money supply of the nations just 10 years earlier).
Cashin concludes with that old favourite Keynes quote:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…..Those to whom the system brings windfalls….become profiteers.
To convert the business man into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.
Lenin was certainly right. There is no subtler, no surer means of over-turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose….By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract….governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century.
I’m sure the modern über-Keynesians would never allow such a dreadful scenario … as Cashin puts it, we can “rest assured that no one would let it happen again.”
Steve Baker’s latest article for Centre Right is one of his best:
I listened to Comrade Milliband’s tedious historical revisionism with interest: apparently New Old Labour are to become the party of enterprise and small business in order that wealth can be created and redistributed. With Comrade Milliband’s remarks following so closely after Comrade Cable’s denunciation of capitalism, I am reminded of Churchill:
Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.
Steve covers Edwin Riegel’s concept of right wing socialists, and explains how the apparatus of the state is responsible for problems in banking.
It is good that bankers are intelligent, driven and innovative: they are merely operating a flawed system to their own advantage, which is to be expected. As I wrote in the Wall Street Journal, explaining the present crony capitalism, it is the power of the state which has corrupted banking and consequently the entire economy. Persecuting bankers for the crisis is no more sensible than criticising farmers for the CAP.
Vince Cable’s recent attack on capitalism has predictably and deservedly generated a lot of comment. His remarks might have gone unreported in previous years, but his position in the government means that we can no longer afford to ignore his rants.
Cable believes that “economic recovery will not happen automatically, by magic”
Government has a key role. It has to sustain demand. That is basic Keynes.
Basic Keynes it may be, but Keynesian logic is as flawed today as it was in 1932.
Cable’s views are no sounder when it comes to the role of our banking system:
On banks, I make no apology for attacking spivs and gamblers who did more harm to the British economy than Bob Crow could achieve in his wildest Trotskyite fantasies, while paying themselves outrageous bonuses underwritten by the taxpayer. There is much public anger about banks and it is well deserved.
At the Cobden Centre, we share the public’s anger, but we trace the problems to their root cause. Formidable as they are, the bankers did not have the power to compel taxpayers to underwrite them; only the government could do that.
Cable proudly declared that he has “managed to infuriate the bank bosses”, but his threats of meddling and taxation have done nothing to endanger their privileged position. In fact, the interventionist system that Cable favours is responsible for a massive, ongoing transfer of wealth from those he claims to represent, to those he purports to loathe.
The IEA’s Nick Silver explained it well last week,
Every fortnight I play poker with banker friends. Recently I asked them why asset values are increasing so much when there’s so much uncertainty and bad news. Looking at me as if I were stupid, they said something along the lines of “of course they’re going up; the Fed has effectively guaranteed very low interest rates for the foreseeable future and so we’re borrowing money for practically nothing and investing in anything which is obviously increasing in value because of the reduced interest rate expectation; we thought as an actuary you understood how to value assets using discounted cash flows.”
In addition to making profits in a rising market, anecdotal evidence also suggests that, because of the collapse of the securitised market, there is a high demand for credit, so banks are not passing on the low interest rate to their customers. So by setting low interest rates, central bankers are delivering super-profits to banks, the results of which have been widely publicised in the media.
But who is paying for these profits? Let me hypothesise that, without the interference of the central banks, there would be a market interest rate, and let us say for argument’s sake that it is 4%. The effects of the artificially low interest rate on the economy are manifold and complex, but let us just isolate a couple of groups who are directly affected. Savings in the UK are £1.2 trillion, so that’s an annual lost income of £40 billion and people who are purchasing pensions annuities would be losing about a quarter of the value of their pension. So this represents a wealth transfer from savers and pensioners to bankers – I leave the reader to decide on the fairness of this.
Cable’s “range of sticks and carrots” will not bring the banks in line, nor can he know what is best for the “real economy”. His “tough interventions” will at best be futile, and more likely counterproductive.
The Business Secretary insists, ominously, that “the Government’s agenda is not one of laissez-faire”
Markets are often irrational or rigged. So I am shining a harsh light into the murky world of corporate behaviour.
But never in the history of politics has has the government’s agenda been one of laissez-faire, and this is the problem. Markets are rigged, by the agents of government. If Vince Cable wants to understand the murkiness of corporate behaviour, he should shine his harsh light a little closer to home.
Liam Halligan’s latest article for The Telegraph considers the role of political manoeuvres and industrial lobbying in Japanese economic policy:
when the victorious Kan on Wednesday ordered a wholesale yen sell-off, the country’s first currency intervention in six years, the markets were entirely wrong-footed. That allowed the yen to be pushed down by 3.1pc against the dollar and 3.4pc against the euro.
Since then, Japan’s yen manoeuvre has attracted much economic comment – as pointy-headed analysts have recalibrated their complex models and updated their spreadsheets. In the real world, though, currency interventions are strategic, not scientific. This one, too, should be analysed through an unashamedly political lens.
As well as trying to secure his position in the Diet, it appears Kan has also been looking out for certain vested interests:
The yen’s recent rise has deeply unsettled Japan’s powerful export lobby. Kan’s decision drew rare public praise from carmakers such as Toyota and Mazda. Adding to the air of euphoria, the Nikkei index of leading shares soared by 3pc on Wednesday, as the yen fell. With the Ministry of Finance declaring that “the strong currency can no longer be over-looked”, more selling may be in the pipeline. Japan’s currency, after all, remains higher than just three weeks ago.
But while such interventions may help Kan, Toyota, and Mazda, they do nothing to promote the long term health of the Japanese economy:
In the end, only structural reform, not short term fixes, will allow the Japanese economy to recover in a meaningful way – a lesson that holds in the UK as well. When I’ve argued against “quantitative easing” and debt-fuelled Keynesian boosts over the last two years, I’ve often been met with a glib one-word response: “Japan”.
Many UK policymakers have been brain-washed into thinking Britain needed to print money like crazy and prostrate itself with more state debt in order to avoid a Japanese-style “lost decade”. This was always dangerous nonsense.
Japan didn’t stagnate because it refused to do QE and a massive fiscal expansion, or because it waited and did both half-heartedly. Japan suffered a 10-year slump precisely because its too-big-to-fail, politically-connected “zombie” banks were allowed to stagger on, acting as a massive drain on the broader economy. The same is now happening in the UK. That’s the real lesson from Japan – a lesson that Prime Minister Kan, with his myopic currency move, has shown he is yet to grasp.
Earlier this week, John Redwood MP posed some difficult questions for Mervyn King:
Why did the Bank so misread the cycle 2005-9? Why did it encourage or allow dramatic overheating, when the smell of scorching was powerful enough for outsiders to notice it?
…
Why is inflation still at 4.7% (RPI) and 3.1% CPI when the target rate is 2% on the CPI? Why has it been persistently above target for so many months?
…
How can we have confidence that the Bank is now reading the cycle better?
…
Why does the Governor think sovereign debt is a risk free asset class for banks to hold, and why do the authorities now demand that banks hold so much more sovereign debt?
Still, one gets the impression that Redwood thinks the problem is simply that the wrong person was wielding the levers of power; that someone else, in King’s place, would have done a better job:
Why did they ignore the strong advice some of us gave to ease money markets earlier to avoid the worst of the crash?
…
Does the Governor think now is a good time to demand more cash, capital and caution from the banks?
…
Could it be that the economy still needs a more generous approach to money and bank credit to help it out of the deep hole recent policy forced it into?
…
We need to believe the Bank will this time listen to their critics, instead of drawing on a narrow group of economists who all agree they are right and end up with a slump and 5% inflation at the same time.
The problem is more fundamental: nobody is qualified for the job of Central Banker. As Jamie Whyte noted in The Times a year ago, it is absurd to trust a team of ‘wise men’ to manage monetary policy:
Mervyn King, Governor of the Bank of England, complained recently that he lacked the powers required to fulfil his new statutory role of ensuring stability in the banking system. A more powerful Bank of England would do a better job.
He is wrong. The economy would benefit from a weaker Bank of England, stripped of its principal power: namely, the power to set interest rates. This is not intended as a criticism of Mr King or of the other members of his Monetary Policy Committee. No one should be allowed to set interest rates.
Interest rates are simply prices for borrowing. As with all prices, they should be determined by supply and demand in a free market. When they are fixed by a wise man, or by a wise committee, they no longer carry information about the preferences of consumers and the scarcity of resources. On the contrary, no matter how wise the dictator, interest rates set by diktat are sure to be a kind of misinformation, leading those who act on them into error.
To believe that the likes of King and Bernanke can know the “right price” for borrowing, the “right level” of risk for banks, or the “right time” to open and close the money taps, is to place undue faith in the kindness of geniuses:
You should be sceptical of those who claim to be giving away something very valuable, including their extraordinary knowledge or skills. Yet that is precisely what our political leaders are now asking us to believe of financial regulators.
The big new idea in banking regulation is that regulators should force banks to hold more capital when their lending is causing the price of assets (such as houses) to get too high: that is, to reach levels from which they must crash. The Obama administration now has a similar idea concerning commodities, such as oil. They want regulators to intervene in commodity markets to counteract speculation that they believe is making prices too high or too low.
Let us not argue about whether it makes sense to say that a price can be too high when people are willing to pay it, nor whether any human, even computer-assisted, could possibly know that it is. Suppose that some people really do know such things. Why would they work for the government on a salary of less than £50 million?
The fact is that no one person, or team of people, can effectively manage the economy. Despite occasional “irrational exuberance”, prices will be more accurate, and adjustments less painful, when the free market is allowed to work its magic. The intervention of Philosopher Kings will always do more harm than good.
With no objections, the bill was brought in by Mr Carswell and Steve Baker MP. The next reading will be on the 19th of November.
UPDATE: Here is the full text, courtesy of Hansard
15 Sep 2010 : Column 903
Financial Services (Regulation of Deposits and Lending)
Motion for leave to bring in a Bill (Standing Order No. 23 )
1.33 pm
Mr Douglas Carswell (Clacton) (Con): I beg to move,
That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.
Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs-but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member’s behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank-bank B-which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.
Banks enjoy a form of legal privilege extended to no other area of business that I am aware of-it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them. So why are banks allowed to sub-let people’s money many times over without their consent?
My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes. Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.
My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one’s deposit as an investment in a giant credit pyramid, banks are able to conjure up credit. In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.
As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit-interest rates-in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings. Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people’s money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles. To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else’s deferred consumption, so the credit boom creates unsustainable over-consumption.
Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme-and the people who built it-and in doing so devalue our currency to keep the pyramid afloat.
Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.
The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.
Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.
With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks’ own boards seem to understand.
Question put and agreed to.
Ordered,
That Mr Douglas Carswell and Steve Baker present the Bill.
Mr Douglas Carswell accordingly presented the Bill.
Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).
Steve Baker MP has an article in today’s Wall Street Journal entitled “A Bill to Fight Crony Capitalism”:
If you borrow a friend’s painting and promise that you will give it back on demand, and you then lend that same painting to somebody else, you have committed a fraud. The same rules do not apply, however, to bankers. British parliamentarians have an opportunity to change that today, and I hope they do.
Today, banks enjoy the legal privilege of fractional reserve banking, meaning they may lend out what they already owe depositors. By lending and investing on-demand deposits, banks create money by extending credit. When the bank’s investments turn sour—and investments often turn sour at some point—the bank cannot pay back the deposits and goes bust. Unless it manages to convince politicians that it is too large to fail, in which case it will be bailed out by taxpayers.
In his latest article for CentreRight, Steve Baker explains his vision of the Big Society:
The change we need is a change within. From a belief that human relationships should be based on class conflict and mutual plunder mediated by the State, to a reliance on mutual cooperation. From the view that business is somehow bad, to the realisation that all enterprise is social. From condemnation of profit, to an understanding that it is a measure of the value created for others. From fear of bearing risk, to the truth, that the search to create value for other people is the foundation of worthwhile community. From waiting for the State to decide and provide, to energetic, innovative mutual support.
Later that day, we were delighted to hear from Mr Schulman himself, who sent this update:
Back in the mid 70′s when I was writing my first novel Alongside Night — published in 1979 with endorsements on the dust jacket from Anthony Burgess and Milton Friedman — I portrayed a distant future where a European union called EUCOMTO had gone through a Weimar-Germany-type hyperinflation a decade earlier and now had a stable gold-backed currency called the Eurofranc; while the United States was now experiencing its own hyperinflationary economic meltdown with General Motors having gone bankrupt, and the European Chancellor chided the President of the United States for having a “New Dollar” the daily value of which decayed more rapidly than the bananas in a banana republic. In 1979 Alongside Night was reviewed as science fiction. Today I’m lucky if it’s not tomorrow morning’s report on the Fox Business Network. Pulpless.Com released a 30th Anniversary PDF edition of Alongside Night on June 13, 2009; as of this morning 221,830 copies have been downloaded for free from alongsidenight.net. Now international movie/TV star Kevin Sorbo and I are in development to produce Alongside Night as a feature film, from my own screenplay adaptation; I’ll be directing it as my second feature film. Still looking to complete financing — what’s $3.5 million converted from pounds or euros? Script and budget available on request.
