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By Philip Booth, on 23 November 10
Europe is trapped in a cycle where debt is being passed round and round in circles – the banks are bust so the Irish government bails them out; the Irish government’s debt is owned by other banks and if the government defaults, they go bust; the EU as a whole then tries to rescue both in opaque arrangements which are only sustainable because Ireland is so small; now Britain is getting involved.
Responding to debt crises in this way is entirely unsustainable, we potentially have crises in Italy and Spain around the corner and nobody can shoulder their indebtedness.
The EU has been sitting around doing very little for the last two years (except for dreaming up new regulations for the banks, hedge funds and private equity). What it and the nation states involved should have been doing is ensuring that banks can be wound up in an orderly fashion so that all providers of capital and credit potentially lose money except for depositors who were insured at the beginning of the crisis. The EU governments are simply underwriting mistakes made by private businesses and then blaming it all on “casino capitalists”.
The Irish government’s debt position would not, in fact, be that bad if it were not for the bank guarantees. Ireland is not another Greece (or Italy) – its underlying position is sound. The key issue has not changed since the beginning of the crisis – it is the need to recognise failed financial institutions for what they are and not load the cost of their bad loans onto taxpayers in general. At the beginning of the crisis, the bail-outs were understandable; we have now had two years to sort out proper legal mechanisms for winding up banks.
By Andy Duncan, on 18 October 10
Professor Kevin Dowd has penned an excellent article for the Institute of Economic Affairs.
Here’s a sample quote:
Then there is the third and least desirable but most modern form of capitalism: crony capitalism. Management is now largely out of control and its remuneration skyrockets. This is especially so in the so-called financial “services” sector. This sector encapsulates the excesses of “capitalism” at its worst: stratospheric remuneration for practitioners, a disregard for both shareholders and customers, and an obsession on short run “grab and run” profits with no concern about the longer run. It is also characterised by massive risk-taking with practitioners safe in the knowledge that the taxpayer will bail them out if they get into difficulties: profits are privatised, but losses are socialised, i.e, the social contract is “heads I win, tails you lose”.
Personally though, I’d just read the whole thing.
By Dr Tim Evans, on 12 October 10
On Tuesday the 2nd of November, at 18:30 the IEA will be presenting a lecture by Dr Mark Sousen:
Dr Mark Skousen, author of “Vienna and Chicago, Friends or Foes?”, will address the major differences between the Austrian and Chicago schools in confronting the ongoing global financial crisis, both in cause and policy prescriptions. The Chicago monetarists have never worried much about asset bubbles, while the Austrians accurately predicted the macro effects of the real estate crash and the destabilizing nature of central bank inflation. The two schools also differ considerably on policy: Chicago favours interventionist actions by the central banks; Austrians adopt a laissez faire policy. In this timely lecture, Dr Skousen will analyze each position and which school has the advantage. After his lecture, he will have an autograph session for his book “Vienna and Chicago”.
Dr Mark Skousen is a professional economist, investment expert, university professor, and author of over 25 books. Currently he holds the Benjamin Franklin Chair of Management at Grantham University. In 2004-05, he taught economics and finance at Columbia Business School and Columbia University. Since 1980, Dr Skousen has been editor in chief of Forecasts & Strategies, a popular award-winning investment newsletter. He is also the producer of FreedomFest, the world’s largest gathering of free minds (www.freedomfest.com). He is a former analyst for the CIA, a columnist to Forbes Magazine, chairman of Investment U, and past president of the Foundation for Economic Education (FEE) in New York. He has written for the Wall Street Journal, Forbes Magazine, and the Christian Science Monitor, and has appeared on CNBC, CNN, ABC News, Fox News, and C-SPAN Book TV. His bestsellers include The Making of Modern Economics and The Big Three in Economics. In honour of his work in economics, finance and management, Grantham University renamed its business school, “The Mark Skousen School of Business.”
Website: www.mskousen.com.
Contact iea@iea.org.uk for details.
By Mark Goodhand, on 24 September 10
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.
By Toby Baxendale, on 2 September 10
Today’s Telegraph reports
The International Monetary Fund has warned that long-term fiscal reforms will be required among advanced economies as it projected the UK’s gross debt to gross domestic product would rise to 90.6pc in 2015.
According to Mark Littlewood at the IEA,
These statistics underscore the need to drastically cut government spending. Only through cutting spending and subsequently lowering the tax burden will growth be stimulated in the UK economy.
The IMF is right to point to the UK’s spending on health and pensions as areas of concern. However, when pensions liabilities are taken into account, UK national debt already stands at a staggering 333% of GDP; far worse than the 90.6% the IMF predicts for 2015. It is time for politicians to be frank and honest about our real debt levels.
The coalition government has made a start, but it must be bolder and more radical if it truly is to deal with this gargantuan task.
The 333% figure comes from an IEA report published in June, A Bankruptcy Foretold 2010: Post-Financial-Crisis Update, which uses standard accounting practices to estimate the true level of UK government debt.
Regular readers will remember the Cobden Centre article by Prof. Kevin Dowd, which suggests the figure may actually be as high as 530% of GDP — “Two different methodologies by reputable researchers, both painting a very bleak picture”.
By Mark Goodhand, on 23 July 10
In his latest article for CentreRight, Steve Baker highlighted recent articles here at the Cobden Centre by James Tyler and Kevin Dowd, which questioned the mainstream economic views of Ambrose Evans-Pritchard.
Steve noted that because monetarists focus on aggregates, and ignore the structure of production, they give policy advice that sows the seeds of future problems. He illustrated this with a quote from Hayek’s Nobel lecture:
The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganisation of all economic activity.
In the comments section a lively discussion ensued, which Professor Dowd concluded with a call to set aside doctrinal issues, and focus on insights relevant to the problem at hand:
I would suggest there are three key questions:
1. Is the financial/banking system broken or is it fundamentally sound? [My answer: the system is clearly broken, and this is a structural problem that cannot be resolved by macroeconomic measures. The way I would tackle this problem is posted at http://www.libertarian.co.uk/lapubs/econn/econn111.pdf]
2. Do we need fiscal ‘stimulus’? [My answer: absolutely not. Fiscal 'stimulus' has brought the country to the brink of insolvency, and we desperately need a credible program of cuts in government spending and future commitments to take us back to solvency.]
3. Do we need more monetary expansion, low interest rates, QE, etc? [My answer: most definitely not. Current monetary policies are highly irresponsible, and not only create an inflation time bomb but also, by keeping interest rates at (I would have to say, obscenely) low levels, are artificially propping up the banks and creating the seeds of yet more asset price bubbles, wasted 'investments' and so on.]
Focussing on these questions I think would help us to see where agree and this is far more important than focussing on the points where we might disagree.
Above all, we need to dislodge the conventional wisdom [sic] in favour of bailouts and conventional Keynesian/expansionist policy responses. We can surely agree that these are discredited. Our problem is to get this message across effectively to policy and opinion makers and so pave the way for the radical reforms that are necessary to get us out of this mess.
In this spirit, the Cobden Centre collaborated with Prof Philip Booth at the IEA, and Dr Eamonn Butler of the Adam Smith Institute on a seminar, Why today’s political class needs Ludwig von Mises, held yesterday at the IEA. Steve reports that the event was “a great success throughout with a good atmosphere despite running over time on questions”.
By Toby Baxendale, on 13 July 10
Following the success of our lunchtime event, we’re pleased to announce an evening of Austrian economics at the IEA next Thursday, focusing on the works of Ludwig von Mises:
The credit expansion is built on the sands of banknotes
and deposits. It must collapse. – Ludwig von Mises, 1949
An IEA special event – 4pm, Thursday July 22nd, 2010
2 Lord North Street, Westminster, SW1P 3LB
Many free marketers are familiar with the works of Hayek and Friedman.
But how many have read the original works of Ludwig von Mises? Or know of his relevance today?
Mises laid the foundations on which Hayek built – and he made crucial and timeless contributions to economic thinking.
His theories foretold how mismanaged monetary policy by nationalised central banks would lead to booms, busts and crashes.
This special IEA event – featuring three stimulating sessions and a distinguished gathering of authors and thinkers – will demonstrate how Mises’ work should be at the very heart of today’s practical policy thinking.
And all attendees will receive a free copy of the IEA’s acclaimed Ludwig von Mises – a primer, by Dr. Eamonn Butler.
Programme
Session One 4:00pm-4:45pm
The life, work, importance and influence of Ludwig von Mises
- Chairman: Prof Philip Booth, Institute of Economic Affairs
- Speaker: Dr Eamonn Butler, Adam Smith Institute
Session Two 4:45pm-5:40pm
NHS reform: how the new government can learn from Ludwig von Mises
- Chairman: Toby Baxendale, The Cobden Centre
- Speaker: Dr John Meadowcroft, King’s College London
- Commentator: Steve Baker, Conservative MP for Wycombe
Tea/coffee 5:40pm-6:00pm
Session Three 6:00pm-7:00pm
Booms, busts and crashes: what Austrian economics tells us about the crash of 2008
- Chairman: James Tyler, Tyler Capital
- Speaker: Dr Anthony Evans, ESCP Europe Business School
- Commentator: Allister Heath, Editor, City A.M.
Each session will have ample time for discussion.
Places are sure to be in demand, so If you’d like to attend please RSVP by email now to IEA Reception or call: 020 7799 8900.
By Andy Duncan, on 12 July 10
Brian Micklethwait attended the Cobden Centre luncheon at the IEA on Friday, on The crisis and the Austrian theory of the business cycle, and was duly enthused by the speakers:
The invasion by Austrian Economics of the Institute of Economic Affairs continues apace, and at lunchtime today I attended this IEA event on that very timely subject staged by the Cobden Centre. The weather today has been so hot that since this meeting I could hardly stay alive and then when I had staggered home, awake, so don’t expect a long and detailed report of what was said. All I really want to say here, now, is that I was greatly impressed by the two speakers [Jörg Guido Hülsmann and Sean Corrigan], both of whom I photographed in action.
To see Brian’s photographs and to read the rest of his report, you can hop on over to my old alma mater, at Samizdata.net.
By Toby Baxendale, on 7 July 10
This Friday (9 July) at 1pm, I will be chairing a lunchtime event at the IEA:
The crisis and the Austrian theory of the business cycle: Conventional policy solutions and some Austrian ones
The current economic crisis is a classic example of the Austrian theory of the business cycle.
This lunchtime discussion will critique current policy solutions and put forward radical measures for dealing with the crisis – including a total restructuring of the banking system into 100% reserve but otherwise free banking , dealing with the national debt and putting an end to credit induced booms and busts.
Dr Jörg Guido Hülsmann and Sean Corrigan will be speaking.
Details are on the IEA website.
By Toby Baxendale, on 30 April 10
I have written a short article over at the IEA blog:
The elephant in the room: debasement of our purchasing power
Enjoy.
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