Haldane: bond bubble is the biggest threat to financial stability

Via City A.M., Bank official: Bond bubble is the biggest threat to financial stability | City A.M..

OUTSPOKEN Bank of England official Andrew Haldane warned yesterday that the bursting of a bond bubble is the biggest threat to the world’s financial stability.

Haldane, the Bank’s executive director of financial stability, told the Treasury Select Committee that central banks’ massive asset-buying programmes have created significant risks.

“If I were to single out what for me would be the biggest risk to global financial stability right now, it would be a disorderly reversion in government bond yields globally,” Haldane told the MPs.

“We’ve intentionally blown the biggest government bond bubble in history. We need to be vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted.”

It’s at once terrifying and wonderful to see the conversation about the economic crisis move in this direction. Terrifying because it looks increasingly like those of us who have been talking about the massive economic disruption caused by central banks are correct. Wonderful because at last the Bank’s most courageous official has made this explicit.

The FT recently reported on its front page, “Some of the smartest money in America is getting out of US government debt.” Unfortunately, big players in markets like central banks cause herding. It therefore remains to be seen whether it is possible for the bond bubble to deflate slowly.

In any event, interest rates will rise unless central banks take yet further action. The medium term consequences for our system of money, the welfare state and society are likely to be profound.

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The woman who changed the world has passed away

I learned this afternoon with considerable sadness of the passing of Baroness Thatcher.

I cannot say I knew her — I was 19 when she ceased to be Prime Minister — but I grew up with the transformation she delivered in our country and across the world. It was only after a year in Parliament that I began to realise against what odds and opposition she had suceeded. I was grateful to meet her once after my election.

The Economist has published an obituary, The lady who changed the world:

ONLY a handful of peace-time politicians can claim to have changed the world. Margaret Thatcher, who died this morning, was one. She transformed not just her own Conservative Party, but the whole of British politics. Her enthusiasm for privatisation launched a global revolution and her willingness to stand up to tyranny helped to bring an end to the Soviet Union. Winston Churchill won a war, but he never created an “ism”.

I recommend the entire article, which concludes, “What the world needs now is more Thatcherism, not less.”  No doubt that is correct although today our problems are more subtle. When the state owned so much of the means of the production, the way forward could at least be clearly understood, even as it was contested.

And it is that contest for which Margaret Thatcher should be remembered. She demonstrated a superhuman degree of resilience, tenacity and courage, not least because she was our first female Prime Minister in an earlier and less condusive age.

I do not doubt we have lost our greatest peacetime leader.

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Monetary activism must end in a slump

On Friday, I spoke against monetary activism once again, complaining about the use of expectation management and new monetary instruments in an attempt to defibrillate the economy. It’s a mistake, not least because a failure to contain inflationary expectations could be catastrophic, as I set out last yearMark Carney understands the argument that monetary activism will cause a damaging “intertemporal misallocation of capital” but he chooses to believe wise intervention elsewhere can compensate. I am sure this is wrong.

This morning, I rediscovered Mises’ short 1951 essay Inflation Must End in a Slump. The essential characteristics of the real world have not changed since but currency debasement subsequently became much worse. Here’s the article:

This country [the USA], and with it most of the Western world, is presently going through a period of inflation and credit expansion. As the quantity of money in circulation and deposits subject to check increases, there prevails a general tendency for the prices of commodities and services to rise. Business is booming.

Yet such a boom, artificially engineered by monetary and credit expansion, cannot last forever. It must come to an end sooner or later. For paper money and bank deposits are not a proper substitute for non-existing capital goods.

Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.

If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.

This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The Unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.

Thus there is no doubt that we shall one day have to face again an economic recession, although it is impossible to determine the date of its outbreak and the degree of its severity. It will be bad indeed. But worse than the crisis itself could prove the psychological and ideological consequences of an erroneous interpretation of its causes.

For the spokesmen of the artificial expansionist policy are busy denying that economic crises are the inevitable effect of the preceding expansionist policy. They are anxious to exonerate the governments. As they see it, inherent shortcomings of the capitalist mode of production cause the periodical recurrence of bad business. There is no other means, they conclude, to avoid a crisis than to put the economic system under the full tutelage of a central planning board.

This is essentially the doctrine of Karl Marx. Those supporting it, those passionately attacking the insight that it is the policy of inflation and credit expansion which produces economic depressions are – sometimes unwittingly – serving the cause of the Communists. When the slump comes, people indoctrinated by their teachings will argue precisely as Stalin expects them to. They will think: The efforts to preserve capitalism have proved vain; capitalism necessarily results in the recurrence of economic catastrophes; if we want stability, we must turn toward Communism.

In the antagonism between the doctrine of the economists who ascribe the emergence of economic crises to the policy of credit expansion and the official doctrine that ascribes them to alleged inherent defects of capitalism there is much more at stake than a merely doctrinal quarrel. The way in which people will react to the – unfortunately hardly avoidable – letdown of business that will follow the end of the present armament boom may decide the fate of our civilization.

People must learn in time what the inevitable consequences are of the monetary and credit policies adopted by the present administration. They must realize that what the collapse of the artificial boom will establish will not be any insufficiency of capitalism, private enterprise, and the market economy, but the failure of the methods of financing public expenditure as practiced by the New Deal and the Fair Deal.

A comprehension of the nature of the boom will also make people more cautious in their business dealings. They will not fall victim to the deception that the boom will go on forever.

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The madness of contemporary economists

The Bank of England is considering negative interest rates to “stimulate” the economy, together with more QE. It’s one thing to pay a bank for safe-keeping and other services, another for the central bank to manipulate the credit markets as a whole. It is explicitly a policy of expropriating savers, of which there is much to be said on another occasion. Allister Heath provides sensible comment here.

What the Bank of England is trying to do is restart the money creation process which dropped us into this mess while keeping expectations of inflation low. It’s an extremely dangerous game, one which Hayek explored in his Nobel lecture: it is a policy which cannot create sustainable prosperity but which may create massive inflation, with all its destructive effects.

Having mostly failed to see this crisis coming before failing to predict even the general pattern of events, senior economists now want more of the medicine which already nearly killed the patient. This may look like madness or stupidity to those of us without a high level of formal education in economics. It is neither. Contemporary economists are trapped in an intellectual prison founded on now-old errors of method and epistemology: the knowledge and simplifications necessary to make their mathematical models work are unavailable and invalid respectively.

As a result, economists and central bankers in particular think it is their task to intervene when the choices and actions of tens of millions of people produce aggregate statistics they, and politicians, don’t like. Massive economic disruption and misallocation of resources — ultimately, human suffering — is the result. Unfortunately, it looks like those few who hold the terrible power of monetary policy are determined to test their ideas to destruction.

Following the UK credit rating downgrade, I gave Newsnight an interview. They chose a couple of sentences in which I pointed out the reality that welfare, health, education and debt interest are about 3/4 of spending on 2012 figures and that they will have to be cut eventually if we are serious about the state living within its means. You can find it at 17:00. If I had been given longer, I would have said those things you can find in this interview with RT:

We have been on a merry-go-round of deficit spending, excruciating taxes, heavy borrowing and easy money for most of 40 years. That merry-go-round is now running down and will stop. Attempts to spin it up through monetary policy are extremely dangerous: they will store up worse trouble for later.

If the Government does not act to end expansionist policy in time by a return to balanced budgets, by ending government borrowing from the commercial banks, by stopping quantitative easing and by letting the market determine the height of interest rates, then it will have chosen the German way of 1923.

This article originally appeared on


If the Treasury Committee rejects the new Governor, the House must have a binding say

I’m not excited about the appointment of a new Governor of the Bank of England. The money power is one too pervasive and too dreadful to be trusted to an individual or a committee: the prospects of tens of millions of people ought not to depend on the talents and character of an individual or a small group. With Richard Cobden, I believe managing the currency and interest rates is an impossible task. That’s a minority view these days but more or less anyone ought to agree that the Governor of the Bank of England has now a vast power over the collective and individual life of the country and that this power will increase under the new regulatory system. That’s why the Treasury Select Committee’s pre-appointment hearing is so important.

Given the undoubted power of the Governor, it is vital that this appointment is subject to democratic scrutiny. If the Treasury Committee does not support the appointment of Mark Carney, then the House must have the opportunity to debate and endorse or reject their decision – and the Chancellor’s.

These select committee debates are usually held in back-bench time, which is precious and which the Government seems to ignore. The role of Governor is too important for that: any debate should be in Government time and any motion should be binding on the Government. A free vote is probably too much to ask, but nevertheless the vote should be free.

The power to set interest rates and to control the exchange value of money is either a power too dreadful to tolerate in a free society or, if it must be tolerated, it is one which can only properly be wielded by someone ultimately under democratic control. Parliamentary scrutiny matters, first through the Treasury Committee, then through the whole House if necessary.

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The cruel fiction of state power

A speech on the morality of taxation 

Dr Eamonn Butler, a doctor of moral philosophy, provides 17 moral arguments against taxation in the report of the 2020 Tax Commission. They range from tax as coercion via the undermining of personal responsibility to the corrosive effects of tax on human prosperity.

I do not intend to rehearse all 17 arguments. My goal is to leave you certain that it is morally right to demand lower taxes and lower spending in the general interest.

My father is a builder, or he was before he retired. Not a housing magnate, a simple site carpenter, in his words.

He once told me something I treasure: “The worst kind of government for the working man is a Labour government.”

He was right. Labour and the statist left do not understand that their system of high taxes and high spending is inhumanely ineffective, absurdly inefficient and now in checkmate: the present system will end.

The doctrines of collective state power do not help working people, they harm them and we should have the courage to say so.

Now, in this world of sin and woe, we are trapped between immoralities.

On the one hand, the immorality of taking by force property which has been justly acquired by original appropriation or voluntary exchange: that is, by hard work creating value for other people.

On the other, the outrage of absolute poverty in a world of plenty and the lamentable fact that some reach adulthood without the skills necessary to escape material, spiritual and aspirational poverty or the self-esteem to try.

Those are inhuman who care nothing for the lot of the hungry, the sick and disabled, the downtrodden and neglected.

Those who fail to strive because they think their lot hopeless. Those who do not have the self respect to escape dependency on others and achieve the dignity of determining their own future.

The question is not whether to alleviate human suffering and want but how best to do so.

Providing for those who cannot provide for themselves should be our duty and our joy but the level of taxes is so high as to fill our hearts with resentment and rob us even of that.

The state is ineffective

For a hundred years, state spending has grown to be the default answer to suffering and injustice. Since the 1911 National Insurance Act which was intended to extend the benefits of friendly societies but instead crushed them, state spending has grown from about 15% to about 50% of national income.

And yet week after week, all of us who hold constituency surgeries wade in the seas of human misery and struggle which surround us. The worklessness; the educational failure; addictions; debt; family breakdown. Endless problems with a welfare state incapable of compassion. The mother in her 60s, struggling to find respite from caring for her two learning-disabled sons in their forties. The responsible father unable to see his children. The desperate mother separated from a rich father cleverly evading maintenance payments.

You only need to open the CSJ’s Breakdown Britain to complete the story of state failure and human misery. This is despite all the money and all the dedication of large numbers of public servants.

If increasing taxation and state spending was ever going to solve society’s problems, it would have done so by now. Let no one tell you that the state is the fountain of effective care and compassion.

The state is inefficient

The 2012 Budget allocated £207 bn to social protection. There are about 13 million people in poverty. So the state spends about £16,000 each year for every person in poverty.

According to the IFS, 53% of the population have a lower income.

This is utterly absurd. At these levels, there should be no poverty.

The Government will also spend £130 billion on healthcare but in Wycombe, public dissatisfaction with healthcare is intense, so intense that the public often appear to think that the NHS is a conspiracy against them.

Thank goodness the Government’s £91 billion on education gets results. But then, we have grammar schools.

The fact is, the state is not just ineffective, it is institutionally inefficient to a scandalous degree, despite the dedication of so many public servants.

The state is now in checkmate

Rulers have always funded themselves three ways: taxation, borrowing and currency debasement.

For forty years, the British government has mostly lived beyond its means and it has borrowed to cover the gap.

If we only looked at the western world’s debt projections, we would know that, in our lifetimes, the merry-go-round will stop.

But rulers have always had a third way of funding themselves: currency debasement.

For forty years, Sterling has been chronically debased, to a degree unprecedented in our history.

When I was born in 1971 and the end of Bretton Woods severed the final link to gold, the UK money supply was about £34 bn. By 1997, it had reached £700 bn.

Under New Labour, the broad money supply tripled to £2.2 trillion by 2010.

The pattern is repeated around the world.

The awful truth is that the welfare state has for forty years been funded indirectly by easy money. That has had all the destructive effects predicted by classical economists, even by Keynes.

It has laid waste to the banking system. It has distorted the economy towards finance, housing and the South East. It has critically undermined public confidence in the justice of the existing distribution of wealth.

The state is ineffective. The state is inefficient. Millions of people have been made dependent upon a system whose funding mechanism has inevitably destroyed itself. This is a grave immorality which we must have the courage and the tenacity to confront without hesitation or remorse.

Now, I would like you to imagine a world in which the provision of compulsory social insurance is met with the following response from the working classes:

Working men are awakening to the fact that this is a subtle attempt to take from the class to which they belong the administration of the great voluntary organisations which they have built up for themselves, and to hand over the future control to the paid servants of the governing class … This is not liberty; this is not development of self-government, but a new form of autocracy and tyranny not less but the more dangerous because it is benevolent in its intentions.

Imagine living in such a country.

But this is Great Britain in 1911 and the comment is taken from the magazine of the Oddfellows friendly society on the eve of the National Insurance Act.

That is the spirit which must be re-awoken in the hearts and minds of the British people.

The firm conviction that human dignity lies in personal and mutual provision in all things and that state provision, the attempt by everyone to live at everyone else’s expense, is a cruel fiction.

That doctrine was once liberalism, the liberalism of Bastiat, Cobden, Bright and perhaps Gladstone. It is the doctrine which recognises that the public treasury is not an inexhaustible horn of plenty which may be drawn upon without consequence.

And yet today liberalism is so degraded as to have no higher aspiration than greater taxes on the rich. After his tuition fees apology, you would think Nick Clegg would have learned not to peddle nonsense.

I am reminded of something Reagan said: “the trouble with our liberal friends is not that they’re ignorant; it’s just that they know so much that isn’t so.”

So we Conservatives must discover the moral courage and the confidence to declare that everyone who can support themselves should, in sickness and in health.

If we can find in ourselves the conviction that the basis of a moral life is voluntary exchange of value for value, mutual aid and personal responsibility, then we can find those policies and institutions which will build up life in society and we shall escape the destruction which lies before us on our present path.

Advocate lower taxes, knowing that doing so is morally right. Those who scream for higher taxes are the bad guys. Truth and morality are on our side.

The Cobden Centre does not endorse any political party. We welcome the growth of Richard Cobden’s ideas wherever they take root.


A central banker worth hearing?

I’m not aware of any unconditional support for central banking as such around The Cobden Centre but, nevertheless, occasionally a central banker says something worth hearing. Today, that central banker is often Andy Haldane, Executive Director, Financial Stability at the Bank of England.

The Wall Street Journal and the FT (£) report his speech at Jackson Hole, which may be found here. For example,

So what is the secret of the watchdogs’ failure? The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.

Mr Haldane is a way from Greenspan’s famous defence of gold and free banking but the contemporary debate is also far from that point. Haldane’s speech is an intellectual tour de force which concerns some of the epistemological problems which will be so familiar to Austrians.

In my time-limited speech on the Bill which hands vast discretionary power to the Bank of England, I criticised it, saying, “I sincerely hope that it represents the absolute zenith of contemporary thinking on interventionist bank reform”. Perhaps it may yet: Haldane concludes,

Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.

Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.

It does not yet seem likely that a central banker will produce a speech with which Austrian-School liberals will agree whole-heartedly but Andy Haldane’s recent contribution was a courageous step in the right direction.


Who needs economic freedom when you can vote?

As the resident Parliamentarian amongst the Cobden Centre staff, I thought Learn Liberty’s Who Needs Economic Freedom When You Can Vote? was the right article this Friday:

Although everyone agrees that freedom is important, political freedoms are often prioritized over economic freedoms. Many believe that the best way to maximize personal freedom is to furnish each individual with an equal voice in the democratic decision-making process. After all, the logic goes, how can you be unhappy with a choice that you had a hand in making?

Professor Jason Brennan explains that an equal vote is not tantamount to personal freedom. In fact, he posits that many democratic outcomes are injurious to individual freedom. Unless it is limited by a constitution that protects certain rights, majority rule can make individual liberty all but illusionary. If we truly care about freedom, Professor Brennan argues, then individuals should be given the largest possible sphere of personal and economic autonomy. Only then will individuals be allowed to take full control by making choices about all facets of their lives – not simply which lever to pull on election day.

As Professor Brennan concludes, economic liberty is about much more than dollars and cents; it’s about allowing individuals to “lead the lives that they regard as authentically theirs.”

Those of us who believe liberty under the law is the best route to peace and prosperity owe a tremendous debt to everyone involved in the Learn Liberty project. If ever we are tempted to despair at the state of contemporary public debate, we need only remember that our generation is blessed with this fabulous communication mechanism, the Internet, and all the wonderful resources provided by fellow travellers who share our view that civilisation is best advanced by the voluntary cooperation of free people.


Could the US Republican Party take gold seriously?

Via the Financial Times and behind their paywall, we learn:

The gold standard has returned to mainstream US politics for the first time in 30 years, with a “gold commission” set to become part of official Republican party policy.

Drafts of the party platform, which it will adopt at a convention in Tampa Bay, Florida, next week, call for an audit of Federal Reserve monetary policy and a commission to look at restoring the link between the dollar and gold.

See also the Huffington Post.

I wonder if Alan Greenspan will restate his commitment to the essay he never repudiated, Gold and Economic Freedom.  As Greenspan pointed out, gold is inseparable from economic liberty and property rights. The question could quickly become whether the people of the United States and the world are ready for a a society with a just and moral base.

More as the story develops.


Two simple steps to transform the culture of banking and to forestall the next outrage

It’s time to privatise commercial risk in banking and insist on prudent accounts. Government should:

  1. Eliminate moral hazard from the financial system by implementing this measure to make bank directors strictly liable without limit and to treat as capital both directors’ personal bonds and, for five years, the bonus pool.
  2. Introduce prudent bank accounting so banks can’t game the rules using derivatives to manufacture illusory profits from unrealised cash flows.

The banking system isn’t capitalist

It’s not capitalism when private individuals stand to gain from their actions but the taxpayer carries the risk. When risks are socialised and potential profits huge, individuals are bound to be reckless: why be responsible?  It’s no good agonising about the culture of banking without considering the astronomical moral hazard endemic in the system today. Of course people who do not have to bear the negative consequences of their actions behave badly.

The truth is as Sir Mervyn King said in his 2010 Bagehot lecture (PDF): ”Of all the many ways of organising banking, the worst is the one we have today.” Here’s why:

  • Profits are privatised and risks socialised, creating incentives to be reckless.
  • The entire interest rate market is deliberately manipulated by the central banks to promote or restrain lending and saving.
  • Government has a monopoly on money and legal tender laws enforce it.
  • Fiat money – paper promises to pay and accounting entries corresponding to new loans – means that there is no effective restraint on the creation of new money by banks.
  • The banks own the money in your current account: they fund themselves from money which they owe you immediately on demand.
  • To deal with the problems created by banks funding themselves out of your current account, there’s taxpayer-funded deposit insurance and a lender of last resort. As the Bank of England admits, that means public subsidies which could be worth over £100 billion to UK banks plus an overblown financial system which draws resources from other sectors.
  • The system has been tightly but badly regulated for years. Anyone who thinks banking has been laissez-faire hasn’t worked in a bank or a regulator, tried to start a new bank or looked at the regulations.

The result is a centrally-planned, taxpayer-backed banking system in which money is loaned into existence by institutions which are systematically encouraged to be reckless by bad regulation. That’s why there was a tripling of the money supply between 1997 and 2010 in a vast credit boom which was bound to burst. That’s why individuals were prepared to manipulate market prices for unjust personal gain.

The next outrage?

As if this were not bad enough, banks create illusory profits and capital by using derivatives to game accounting rules under the International Financial Reporting Standards (IFRS). Gordon Kerr explains how in detail here.

That could be the next outrage. The present LIBOR scandal could look minor when the public discover that banks use derivatives to record as immediate profit monies which have not been received: bonuses will have been paid out of capital or even bailout funds. No wonder UK banks’ derivative exposures surged after IFRS accounting was introduced in 2005:

(Click for interactive BoE database)

And without prudent accounts to provide a true and fair view of banks’ financial positions, how are even basic laws to be applied?

What is to be done?

It’s time to privatise commercial risk in banking and insist on prudent accounts.

Risks cannot and should not be eliminated. Society needs a successful, entrepreneurial financial system to provide productive investment. But officials must stop pretending that the consequences of moral hazard can be regulated away. In a free society, people must take responsibility or there will be licence, lawlessness and chaos – just what we are seeing today.

My Financial Institutions (Reform) Bill and my Financial Services (Regulation of Derivatives) Bill would transform the culture of banking, enable a true and fair view and stop exploitation of shareholders and taxpayers by reckless individuals in the system.

There would be no need to claw back bonuses: they would already be treated as capital and taking losses.

Commercial error would receive financial penalties: there would be no calls for criminal law to deal with the consequences of bad business.

And, told well in advance that they would be taking unlimited personal liability for their banks’ losses, you can be sure that bank directors would soon split up our banking behemoths into the smaller, more manageable and competitive institutions that we need – without legislative intervention.

There may be little point in a further independent inquiry. The Vickers Independent Commission on Banking already reported and the Government is legislating but the proposed measures don’t deal with moral hazard or bad accounting. The rewards for risk-taking will still be huge and the risks will still be socialised: does anyone really believe that will lead to lasting cultural change?


David Cameron has said:

The country needs a new direction and new answers. I am clear about the new direction we must set for Britain. To meet the challenges of the twenty-first century, and to satisfy people’s aspirations today, this country needs a responsibility revolution.

Both King and Cameron were right: we have the worst possible banking system and this country needs a responsibility revolution. The LIBOR scandal shows it is time to take serious action. Government and officials should stop pretending they can regulate away the consequences of giving bankers freedom without responsibility. They can’t. They should adopt my bills.

This article was previously published at