Friday, 24 June 2016
The above words of alleged wisdom from a Financial Times reader have gone viral on Twitter. “Wisdom” is an unduly flattering description of those words I think, but let’s examine them. (I’ve interspersed the passage – in green italics - with my comments)
“They have merely swapped one distant and unreachable elite for another.”
Wrong. Under rule from London, the supreme political authority, i.e. democratically elected politicians, can be voted out at the next election. That’s not true of the EU. MEPs can of course be voted out, but they don’t have much real political power. I.e. a large amount of political power rests with unelected bureaucrats.
As regards “distant”, a look at a map will confirm that London is about three times nearer the home of the average Brit than Brussels.
“Secondly, the younger generation has lost the right to live and work in 27 other countries.”
Wrong. People have simply lost the AUTOMATIC right to live and work in other countries.
“We will never know the full extent of the lost opportunities, friendships, marriages and experiences we will be denied.”
So you live in a country with about 50 million people (the UK), where you can travel from one end of the country to the other very easily. Plus you can communicate at the speed of light with any of those people. And you don’t have an adequate choice of friendships and marriage partners? Complete BS. What must it have been like in the average village in the middle ages where people had a choice of about two marriage partners? Was everyone miserable because of that? If so, I don’t remember reading anything about that when I did history at school.
Moreover, after the Brexit process is complete, Brits will not stop visiting mainland Europe, nor will mainland Europeans stop coming to Britain for whatever reason.
Conclusion: lost friendships and marriages my arse, if you’ll forgive my French.
“Freedom of movement was taken away by our parents, uncles, and grandparents in a parting blow to a generation that was already drowning in the debts of our predecessors”.
Wrong. I travelled round Europe before the EU existed. Passport checks at frontiers too about fifteen seconds.
"Thirdly and perhaps most significantly, we now live in a post-factual democracy. When the facts met the myths they were as useless as bullets bouncing off the bodies of aliens in a HG Wells novel. When Michael Gove said, ‘The British people are sick of experts,’ he was right. But can anybody tell me the last time a prevailing culture of anti-intellectualism has led to anything other than bigotry?”
Well can you blame the plebs for taking a jaundiced view of those “professional economists”, “experts” and “intellectuals”?
First there were the plonkers who failed to regulate banks properly prior to 2007/8, which resulted in the bank crisis.
Second, the so called experts then spent far longer getting us out of the subsequent recession than we spent fighting WWII.
Third, at the height of the crisis two groups of so called experts the IMF and OECD were advocating consolidation / austerity: the exact opposite of what was needed.
Fourth, several economics professors at Harvard (e.g. Kenneth Rogoff and Carmen Reinhart) vigorously backed the above IMF/OECD call for austerity.
Fifth, there’s the small matter of catastrophic youth unemployment in Greece and Spain.
Of course the average pleb would not be able to reel off all the above examples of stupidity by “intellectuals”. But plebs probably WILL HAVE read about each of the latter five groups of plonkers at some point, and firmly fixed in the subconscious of the average pleb will be the impression that many self-styled intellectuals are nothing of the sort: many of them are actually pseudo intellectuals, charlatans and poseurs.
The plebs thus decided to rely largely on their own common sense, flawed as they would doubtless admit that to be.
Wednesday, 22 June 2016
They make the bizarre claim in their first paragraph that given a post Brexit recession, government would not be able to deal with it. Reason apparently is that: “With interest rates near zero and debt still high, the Bank of England and Government would have limited ability to prevent such a recession.”
Well the existing near zero rate may well preclude an interest rate cut. But that doesn’t rule out FISCAL stimulus. Ah, you might argue (as indeed the above 70 seem to suggest): but fiscal stimulus drives up the debt, and that’s already too high. But fiscal stimulus doesn’t have to be funded by debt: as Keynes pointed out in the 1930s, it can be funded by new money. Indeed, that’s exactly what we’ve done over the last three years or so: that is, we’ve implemented traditional fiscal stimulus (government borrows money, spends it and gives bonds to those it has borrowed from), and followed that by QE (central bank prints money and buys back the bonds). That all nets out to “the state prints money and spends it”, as suggested by Keynes.
So…have the above 70 economists actually studied economics? Have they heard of Keynes? Have they heard of QE?
Tuesday, 21 June 2016
The share of Britain’s exports going to the EU is declining, while the share going to the rest of the world is rising. If that trend continues, then in ten or twenty years’ time, Brits will be asking themselves with even more urgency: exactly what are we doing in the EU?
But the above chart UNDERESTIMATES the declining importance of the EU for Britain. Reason is that at the moment, British trade is clearly skewed TOWARDS the EU because of the tariff free agreements that Britain has with the EU. I.e. if Britain had the same agreements with the rest of the world, then the share of Britain’s exports going to those non-EU countries would be even higher.
The chart is from here.
Saturday, 18 June 2016
Depositors want to engage in commercial activity, i.e. have their money loaned out so they can earn interest. But at the same time they want their money to be totally safe! Bit of a joke that, isn't it?
I mean any normal investor or lender knows perfectly well that they run a risk: at worst, they might lose everything. So what’s the excuse for a taxpayer backed safety net for depositors?
Well I’ll deal with that a few paragraphs hence. But first it’s important to qualify the latter claim that depositor insurance is taxpayer backed. That is, it could be argued that deposit insurance (at least in the US) is not taxpayer funded in that the FDIC is self-funding.
That’s a good point. On the other hand, the FDIC only covers small banks, not large ones. And in the recent crisis the larger banks were rescued thanks to a trillion dollar loan by the Fed at derisory rates of interest. (To be more accurate, the largest amount loaned by the Fed at any one time, according to this source, was about one trillion, whereas the AVERAGE amount loaned (over approximately an 18 month period) was about $600bn.)
As to exactly who was rescued by the Fed, it was not of course just retail depositors: it was a mixed bunch – bank shareholders, bond-holders, very large depositors and so on. In short, it’s not just small retail depositors who are featherbedded by deposit insurance, in the widest sense of the term “deposit insurance”: it’s a range of other bank creditors as well. I’ll use the phrase deposit insurance and the word depositor in that wide sense from now on.
A second weakness in the claim that the FDIC is self-funding is that it’s plain impossible for any private sector insurer to give a 100% guarantee that those insured will be rescued when a loss occurs (e.g. when your house burns down or your car is stolen). Reason is that private sector insurers sometimes go bust. In contrast, everyone knows the FDIC, and similar deposit insurance systems in other countries, are backed by an almost limitless source of money: the taxpayer. And that ability of government to rob taxpayers in the event of the FDIC not being able to meet claims is not a free market transaction: it’s a subsidy of the FDIC.
To summarize, while deposit insurance is TO SOME EXTENT self-funding, it is not entirely self-funding: i.e. it relies partially in taxpayers.
The justification for deposit insurance.
Let’s now return to the question posed at the outset above, namely: “What’s the excuse for a taxpayer backed safety net for depositors?”
A common excuse is that the arrangement encourages lending and investment. Indeed that excuse was given by the UK’s “Independent Commission on Banking” (sections 3.20-3.24). Well there are a couple of problems there.
First, if taxpayer protected deposits at banks and hence bank lending is encouraged, that clearly increases lending, but it also increases debts. And in fact the world is awash with people (e.g. the UK’s former business secretary Vince Cable) who advocate more bank lending in one breath, and then deplore the recent growth in debt in the next breath.
Second, if a taxpayer funded safety net for depositors does in fact encourage investment, then exactly the same applies to ALL FORMS of lending, for example bonds issued by corporations and cities. Come to that, why not take it even further and have a taxpayer funded safety net for SHAREHOLDERS?
In short, there’s a big anomaly at the heart of deposit insurance which is this. If you buy bonds in corporation X there’s no taxpayer protection for you. But if you deposit money at a bank which in turn lends your money to corporation X, then you’re protected. I.e. deposit insurance is simply an artificial form of assistance for a collection of middle-men known as “banks”.
Is lending stimulatory?
Another apparent excuse for artificial encouragement for lending is that a rising level of lending / debt is stimulatory: it increases aggregate demand. Indeed Steve Keen produced a good video explaining that point. (I suggest starting at 12.45).
Well a rising amount of lending / debt is indeed stimulatory, as Keen explains. But first, debt is dangerous, especially when there is too much of it. As Keen explains, when a debt bubble deflates, the entire economy deflates, all else equal.
Second, if we have $Y less demand stemming from a rising level of debt, it’s the easiest thing in the world for any government with its head screwed on to implement $Y of stimulus so as to counteract the reduced demand stemming from debt.
To summarize, the idea that lending and debt are beneficial in that they can boost demand is not a brilliant argument.
So what’s the solution?
So how do we ensure that people have a totally safe way of storing surplus cash without the taxpayer being on the hook? Well the authorities in the US have recently solved that problem, at least in the case of the money market mutual funds (MMMFs).
MMMFs will shortly come in two varieties. First, where an MMMF promises depositors they’ll get 100 cents back for every dollar deposited, that money can only be lodged in a totally safe fashion: at the Fed or the money can be put into short term government debt.
Second, where MMMF depositors want their money put into something more risky (something which will doubtless earn more interest, like corporate bonds), then the relevant MMMF cannot make the latter “guaranteed to get your money back” promise. That is, depositors who want the latter more risky option will see the value of their stake in the MMMF float, as is the case with mutual funds which invest in a wide selection of corporate shares (unlike MMMFs which concentrate on relatively safe corporate bonds).
So MMMFs can’t fail!
MMMFs are banks of a sort. But soon they will be banks which cannot fail.
Certainly the above safe MMMFs can’t fail. And as to the riskier MMMFs / “banks”, if they make silly loans, all that happens is that the value of depositors’ stakes in relevant MMMFs falls: the MMMF cannot go insolvent. What more do you want?
That principle should be applied to ALL BANKS. That would make banks fail safe. Plus it would put an end to taxpayer subsidies for banks and depositors.
Wednesday, 15 June 2016
In 2008, Barclays came up with a great idea for improving its capital ratio: create a few billion pounds out of thin air and lend it to an Arab sheikh (Sheikh Mansour) on condition he used the money to buy newly issued shares in the bank.
According to a Science Direct paper by Prof Richard Werner entitled “How do banks create money…”, that trick was illegal, “But regulators were willing to overlook this”, as Werner put it. And apparently the justification for that illegality was (to quote Werner again) that “This certainly was cheaper for the UK tax payer than using tax money.” OK, let’s run thru this.
In the recent recession, stimulus was needed, plus it was clear that banks needed to be made safer, e.g. by increasing their capital ratios. But there is a possible conflict there.
If increasing bank capital ratios (as per the Modigliani Miller theory) has no effect on the cost of funding banks, then there isn't too much of a problem. That is, banks can simply be ordered to raise their capital ratios, plus stimulus can be implemented.
That stimulus does not cost taxpayers anything. Reason is, to over simplify a bit, that in the case of helicopter drops (one form of stimulus), the state simply prints money and spends it (and/or cuts taxes). There is no need to rob taxpayers of a single penny. Or as Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.”
Of course stimulus can take various forms other than helicopter money (HM), but actually fiscal and monetary stimulus combined come to much the same thing as HM, as others have pointed out. That is, under traditional fiscal stimulus, government borrows £X and spends it and/or cuts taxes, and it gives £X of bonds to those it has borrowed from. The central bank then prints money and buys back at least some of those bonds so as to make sure interest rates don’t rise. Or maybe the central bank prints money and buys back ALL OF those bonds, which is pretty much what has happened under QE in recent years. The latter scenario nets out to the same thing as HM.
So let’s assume that stimulus takes the form of HM (a policy which is actually advocated by some, e.g. this lot)
What if Modigliani Miller is not valid?
An alternative possibility is that MM is NOT VALID, i.e. that increased bank capital ratios do in fact raise bank funding costs. In that case, raising those ratios will indeed cut lending which will be deflationary, but that deflationary effect is easily countered with more HM. So again, there is no cost to the taxpayer, and thus no excuse for dodgy loans to sheiks.
Yet another possibility is that MM is not valid, but government is determined not to let lending by banks decline. That of course is a totally illogical stance: after all if the cost of funding banks (or growing apples) rises, then it’s reasonable to expect a fall in bank lending (or apple sales). Indeed, it was blindingly obvious in 2008 that banks had over-extended themselves, i.e. loaned out too much, thus a CONTRACTION in total bank lending would have made very good sense.
As to what REASON government might have for insisting that bank lending should not fall, the possibilities aren’t too hard to fathom. One is that politicians are beholden to bankster / criminals for funding political parties. Another is that because bankers wear smart suits, drive smart cars and have nice houses in the country, politicians conclude that bankers must know what they’re talking about. Thus when bankers say banks cannot be allowed to shrink, else civilisation as we know it will come to an end, politicians jump to attention and do what bankers want.
Taxpayers subsidize banks.
Yet another possibility is that MM is not valid, government is determined not to let the size of the bank industry shrink, and decides to deal with that by some sort of taxpayer funded subsidy for the process of increasing bank capital. That’s the ONLY circumstance in which the “Sheikh Mansour” trick would save taxpayers’ money. But for reasons given above, refusing to let the size of the bank industry shrink makes no sense whatever.
This is nonsense from start to finish, unless I’ve missed something.
Monday, 13 June 2016
I nearly always agree with Lars, but not with this criticism he makes of NAIRU. Basically he just plays the old straw man trick: he attributes a characteristic to NAIRU which just isn’t there in dictionary or text book definitions of the concept.
To be more exact he claims NAIRU is a “timeless long-run equilibrium”. Well NO IT’S NOT!! That is, advocates of the NAIRU concept make it perfectly clear that the level of unemployment at which inflation rises too much or “accelerates” can vary with a whole host of factors: changing skill levels of the workforce, changing patterns of supply and demand which will make some skills obsolete, and so on.
And in case you’re wondering why I haven’t left the above two paragraphs on his blog in the form of a comment, reason is that his blog is powered by Wordpress which I’ve found over the last few years to be a constant pain in whatsit. Leaving comments on his blog seems to be impossible.