Quotulatiousness

July 4, 2012

British banks are “a cossetted, subsidised industry with captive consumers”

Filed under: Britain, Economics, Government — Tags: , , , — Nicholas @ 08:46

If any industry has more than its fair share of “too big to fail” wards of the state, it’s the banking sector. Allister Heath in the Telegraph:

There is a horrendous problem, certainly, and urgent reform is required. But the ailment has been fundamentally misdiagnosed: banking has become a ward of the state, a cossetted, subsidised industry with captive consumers, and it is that which has crippled it. We have been there before, in other sectors, and the medicine is always the same. This may come as a shock, but we need more capitalism in banking, not less.

Banks need to be allowed to go bust, like every other private company. It was a disgrace that taxpayers were called upon to bail out some of the City’s grandest names. This must never happen again. The reason capitalism works so well, whenever it is tried properly, is that the principle at its heart — profit and loss — is the toughest of disciplines and the best of motivators. It is more ruthless than anything regulators, however clever, could ever dream up. It allows two conflicting emotions, greed and fear, to balance one another out. Shareholders, creditors and bosses want to make money — but they know that a step too far might entail ruin.

That, at least, is how it works for much of UK Plc — but no longer in banking, where profits have been privatised and losses nationalised. It is an obscene perversion of capitalism. Forget the nonsense about “light touch” regulation: the problem is that the fear of failure ceased to exist. Market discipline was replaced by extreme laxity.

There was no longer much need for prudence, proper capital buffers or strict internal controls: the taxpayer was ready to pick up the bill if anything went wrong, while incompetent regulators signed everything off. The Labour government which introduced this mad system wasn’t deliberately seeking to subsidise risk: it merely made a terrible mistake, though with the politically useful side effect of reducing the cost of credit and increasing its availability. The real blunder was that the Financial Services Authority had no plan to cope with a bank going bust. It simply assumed failure would never happen. After all, how could it? Gordon Brown had abolished booms and busts.

July 3, 2012

“The longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture”

Filed under: Economics, Europe — Tags: , , , , , — Nicholas @ 08:47

The Economist on the long-drawn-out European financial mess:

THE longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture. Like the medieval rack, every turn of the crisis tears Europe further apart. This week Cyprus announced it would seek a bail-out. Spain formally asked for money to recapitalise its banks. The Greek limb is close to being ripped off. How long can the Italian one hold?

Monetary union was meant to be a blessing. The euro’s founders dreamed that it would end chronic and divisive currency crises, promote growth and multiply Europe’s economic power. After the creation of the single market, the euro was the next step toward political union.

[. . .]

Now, after first blaming speculators, then profligate states, then, more broadly Europe’s lack of competitiveness, the cardinals of monetary union have belatedly come to understand that the main problem is the euro itself. A new report by a group of prominent economists — sponsored by Jacques Delors, the former president of the European Commission, and Helmut Schmidt, the former German chancellor — describes in telling detail how the euro is destroying itself.

Start with the European Central Bank’s “one size fits all” interest rate, which the report’s leading author, Henrik Enderlein of the Hertie School of Governance in Berlin, relabels a “one size fits none” rate. Differences in inflation are magnified: in countries with higher-than-average inflation (eg, Italy), the real interest is too low, fuelling more inflation; the opposite is true in countries where inflation is low (eg, Germany). Another problem is that the single market is far from complete, so that competition does not even out price differences across the EU. The market in services, which represents the biggest share of economic output, is still fragmented. Moreover, European workers are less likely to move in search of jobs than, say, American ones. A further curse is that countries of the euro zone do not independently control their own money. Because each lacks its own central bank to act as a lender of last resort, troubled countries can more easily be pushed into default as markets panic. Lastly, cross-border financial integration has spread far enough to channel contagion from one country to another, but not so far as to break the cycle of weak banks and weak sovereigns bringing each other down.

June 24, 2012

Conrad Black: Don’t blame Canada

Filed under: Cancon, Economics, Europe, Government — Tags: , , , , , , — Nicholas @ 08:45

In his weekly column at the National Post, Conrad Black refutes Jose Manuel Barroso (who appeared to refer to Prime Minister Harper as a “nobody” recently) that the European crisis was made in North America:

Stephen Harper is absolutely correct to refuse to contribute to World Bank assistance to Europe. The reward for the consistently intelligent fiscal management of Canada by both governing parties for more than 20 years should not be to assist rich countries that ignored our example and the warnings of their own wiser statesmen until the wheels came off the Euro-fable in all four directions.

The president of the European Commission, Jose Manuel Barroso, made the point at the G20 meeting in Mexico last week — in, as he thought, a reply to Harper’s comments on Europe’s self-generated economic and fiscal problems — that the current economic crisis originated in North America. That is not entirely true. It originated in the ill-starred fiscal and social policies of most European countries, and the tinder was set alight by bad financial, social, fiscal and regulatory policy in the United States.

Margaret Thatcher, Angela Merkel, and even Gerhard Schroeder, as well as a number of Austrian, Dutch, and Scandinavian leaders all warned that Europe could not continue to guarantee employment to all job-holders as a steadily shrinking percentage of Europeans worked and the public sector share of GDP rose, infused with the steroids of over-bountiful social democracy. Most countries of Europe today are like the little pigs who didn’t build their homes from weather-proof materials.

Furthermore, it is no rejoinder to Mr. Harper to complain about the Americans. It would be no less logical to blame the floundering of Dalton McGuinty’s Ontario on booming Texas, since both jurisdictions are in North America. In the same line of reasoning, I would like Newfoundland’s involvement in the drug wars in Mexico fully examined.

June 19, 2012

EU’s Barroso spurns advice from Canadian “nobody”

Filed under: Cancon, Economics, Europe — Tags: , , , , , , , — Nicholas @ 08:22

The EU is not taking Prime Minister Stephen Harper’s advice gracefully. In fact, they’re not taking it at all:

Maybe it was the 35 C heat here on Mexico’s Baja Peninsula. Maybe it was the pressure of the crisis he faces back home.

Whatever it was, when I asked European Commission president Jose Manuel Barroso here Monday why Canada should risk its financial good name to bail out European banks, Barroso blew a diplomatic gasket.

“We are extremely open and we are engaging our partners but we are certainly not coming here to receive lessons from nobody,” he harrumphed.

That “nobody” is apparently our PM. How dare a mere Canadian politician offer criticism of the European Union, the greatest political achievement of mankind?

In Barroso’s eyes, the fiscal crisis in Europe is not even Europe’s fault. It is the victim in all of this. For that reason, the rest of the world ought bail it out, even though, as Prime Minister Stephen Harper has noted, the so-called euro area of 27 countries is the single largest and wealthiest economic unit in the entire world.

Harper has told Barroso just that, saying that if Canada — or anyone else — is going to kick in to a US$430 billion pool administered by the International Monetary Fund, then Europe is going to have to release the chokehold it has had on the IMF.

And of course, no negotiation with the EU is complete without some hard-to-misunderstand threats from the Eurocrats:

But Barroso wasn’t finished. In the middle of his tirade, he trotted out a thinly veiled threat that a Canada-EU free-trade deal was at risk unless Harper comes to his senses and sends Canadian cash to the continent.

“We are trying to conclude an important agreement on trade with Canada. Why? Because all the other parts of the world look at Europe as a source of possible growth for them. And, in fact, they also have an interest. The sooner the situation is stabilized in Europe, the better for them,” he said.

Big business loves regulation: it keeps competition at bay

Filed under: Business, Economics, Government — Tags: , , , , — Nicholas @ 08:04

Jan Boucek at the Adam Smith Institute blog, with a couple of examples of big business welcoming additional government intervention in their markets:

First out of the trap was Barclays CEO Bob Diamond. In an interview Wednesday with Bloomberg, he reprised his long-standing mantra that “strong banks, like Barclays, want strong regulation.”

This sounds good in our current age of finger-pointing and bank-bashing but serves Barclays well if high barriers to entry keep out more competition from Diamond’s industry.

Then in an interview Friday with The Financial Times, the outgoing head of retail at Royal Bank of Scotland Brian Hartzer suggested regulators should forcibly end free current accounts. He smoothly phrased it in terms that chime with today’s sentiment: “Regulatory intervention might be helpful in forcing banks to the table” and “A large proportion of customers are being cross subsidised — we think that’s unfair.”

Of course, what Hartzer proposes means banks no longer having to compete on price for their most basic product.

Both these sweetly melodious proposals for more regulation need to be treated with Adam Smith’s “most scrupulous” and “most suspicious attention” because they’re music to the ears of our discordant political maestros.

The closer big business and government become, the stricter the regulations against individuals and firms trying to compete with the big businesses. Small firms are almost always disproportionally impacted by industry-wide regulations (and that’s by design), which makes them less able to compete with the established firms. Regulators are more help to big companies than clever advertising, innovative product development, or good customer relations.

June 13, 2012

“… there simply aren’t enough lifeboats!”

Filed under: Economics, Europe, Greece, Italy — Tags: , , , , — Nicholas @ 13:18

Nigel Farage speaking in the European Parliament:

Another one bites the dust. Country number four, Spain, gets bailed out and we all of course know that it won’t be the last. Though I wondered over the weekend whether perhaps I was missing something, because when the Spanish prime minister Mr Rajoy got up, he said that this bailout shows what a success the eurozone has been.

And I thought, well, having listened to him over the previous couple of weeks telling us that there would not be a bailout, I got the feeling after all his twists and turns he’s just about the most incompetent leader in the whole of Europe, and that’s saying something, because there is pretty stiff competition.

Indeed, every single prediction of yours, Mr Barroso, has been wrong, and dear old Herman Van Rompuy, well he’s done a runner hasn’t he. Because the last time he was here, he told us we had turned the corner, that the euro crisis was over and he hasn’t bothered to come back and see us.

I remember being here ten years ago, hearing the launch of the Lisbon Agenda. We were told that with the euro, by 2010 we would have full employment and indeed that Europe would be the competitive and dynamic powerhouse of the world. By any objective criteria the Euro has failed, and in fact there is a looming, impending disaster.

You know, this deal makes things worse not better. A hundred billion [euro] is put up for the Spanish banking system, and 20 per cent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It’s genius isn’t it. It really is brilliant.

So what we are doing with this package is we are actually driving countries like Italy towards needing to be bailed out themselves.

In addition to that, we put a further 10 per cent on Spanish national debt and I tell you, any banking analyst will tell you, 100 billion does not solve the Spanish banking problem, it would need to be more like 400 billion.

And with Greece teetering on the edge of Euro withdrawal, the real elephant in the room is that once Greece leaves, the ECB, the European Central Bank is bust. It’s gone.

It has 444 billion euros worth of exposure to the bailed-out countries and to rectify that you’ll need to have a cash call from Ireland, Spain, Portugal, Greece and Italy. You couldn’t make it up could you! It is total and utter failure. This ship, the euro Titanic has now hit the iceberg and sadly there simply aren’t enough life boats.

June 11, 2012

We can’t “save” capitalism, because we don’t “have” capitalism

Filed under: Economics, Media, Politics — Tags: , , , , , , , — Nicholas @ 09:38

James Delingpole in the Telegraph (the italicized opening paragraph is a quite from Tim Morgan):

    Reforming capitalism so that it serves the majority, and strengthening the individual against the collectivist and the corporate, are inspiring visions. This is where government should be taking Britain.

Easier said than done, of course — as I was reminded yesterday when I Tweeted it under the headline “How to rescue capitalism….” only to have some Twentysomething smartarse Tweet back “Rescue it? Bury it!”

This is the kind of fifth-form, sub-Banksy political analysis which passes for conventional wisdom these days. It’s the dominant strain of thinking at the Guardian, at the BBC, among the studio audience at Channel 4’s apocalyptically lame 10 O’Clock Live, on Twitter, in the right-on brains of groovester opinion-formers all the way from Ben Goldacre to Graham Linehan to Polly Toynbee — and, of course, across the world in the entire Occupy movement. Capitalism, they all maintain, has failed.

No, capitalism has not recently been tried: that’s the real problem. And what I particularly like about Morgan’s report — well worth reading in full — is that it addresses this extremely important point. What we’re experiencing around the world at the moment is not laissez-faire, self-correcting, authentic, free-market capitalism but an excedingly corrupt and bastardised form thereof.

What we’re seeing is a grotesque stitch up between the banking class, the corporate class and the political class — at the expense of the rest of us.

One day, I like to hope, those of us on the libertarian right will find common cause with (at least some of) the Occupy crowd and unite against our real enemy.

May 24, 2012

A Greek exit is an existential threat to the Euro

Filed under: Economics, Europe, Greece — Tags: , , — Nicholas @ 09:55

John Kay explains why it’s not just a simple cut-and-run for Greece or the rest of the Euro:

When countries joined the single currency, a relatively simple piece of domestic legislation converted contracts in drachmas, pesetas, markkas and Deutschmarks into contracts in euros at a prescribed exchange rate. But you cannot simply reverse that process when countries leave the single currency. You have to prescribe which contracts are now to be fulfilled in drachmas and which remain in euros or converted into Deutschmarks. That determination is politically fraught, technically complex and subject to long legal challenges.

About two years ago some large businesses and wealthy individuals began seriously to ask, “if the euros were to unwind, in which currency would my asset or contract be denominated?” The issue is not whether the euro coins in your pocket carry an Athenian owl or German imperial eagle. The issue is the status of bank deposits and loans, residential mortgages and commercial contracts, as well as wages and prices. The drain of funds from Greek banks is an indication that ordinary people are now thinking in these terms.

Europe’s hapless politicians, having asserted that exit from the single currency was impossible, must now claim that exit would be relatively easy. Only then can they plausibly threaten the Greek electorate with expulsion if they vote the wrong way. But exit was never impossible, never easy and even when it was publicly unthinkable central banks would have been negligent not to have put in place contingency plans.

That is why even though Greece is a small part of the eurozone, a Greek exit is an existential threat to it. Once a path to exit has been defined, business and individuals will have a template for understanding the consequences of further unwinding.

May 8, 2012

Hayek and Keynes

Filed under: Books, Economics, History, Media — Tags: , , , — Nicholas @ 08:32

Brian Lee Crowley recounts some of the interactions between F.A. Hayek and John Maynard Keynes in the National Post:

This year marks the 20th anniversary of the death of Friedrich August Hayek, the Viennese-born Nobel Prize-winning economist and philosopher, who led the intellectual equivalent of the D-Day charge against central planning in the postwar era. His lessons are worth remembering in 2012, especially now that left-wing politicians in France, Greece and elsewhere seem intent on forgetting them.

Hayek’s great adversary was John Maynard Keynes, whose faith in the ability of government economic planners to “correct” the operation of markets inspired generations of disciples in government and academe. In the long run, Hayek got the better of the argument with Keynes. Indeed, his ideas contributed to the fall of the Berlin Wall, and continue to influence economic thought to this day.

Hayek and Keynes were punctilious professional colleagues and scholarly rivals. Yet for all the correctness that characterized their relations — Hayek was, for example, Keynes’s guest when the London School of Economics fled the Nazi bombings to the relative safety of Cambridge — the Austrian could not shake a profound distrust of Keynes.A brilliant economist, captivating teacher, witty conversationalist and bon vivant, Keynes seemed to almost everyone who knew him a Renaissance man and one of his country’s most powerful minds. Hayek found Keynes glib and superficial, but it was Keynes’ intellectual dilettantism that most appalled him. When Keynes wrote A Treatise on Money in 1930, Hayek spent a year carefully analyzing it, and then wrote a devastating review. At their next meeting, Hayek was outraged when Keynes airily said that he now agreed with Hayek, having long since changed his mind. Hayek always regretted that this incident led him to neglect replying to Keynes’ next book. By the time Hayek was alive to the danger, it was too late.

Celebrating the birthday of F. A. Hayek

Filed under: Economics, History, Humour, Media — Tags: , , , , — Nicholas @ 08:16

And the sequel, which some think is even better than the original, Fight of the Century:

May 2, 2012

Jim Flaherty on why the IMF should not go too far to rescue the Eurozone

Filed under: Cancon, Economics, Europe, Government — Tags: , , , — Nicholas @ 08:44

As I’ve mentioned before, Jim Flaherty is the federal finance minister and also my local MP. I don’t always agree with him (especially around budget time when he channels his inner spendthrift), but he makes some excellent points in this article at The Telegraph:

At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.

We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.

[. . .]

Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.

[. . .]

We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400 billion, already has adequate resources to deal with imminent needs.

H/T to Elizabeth for sending me the link.

April 29, 2012

QotD: Bankers, Marx’s dream workers

Filed under: Economics, Humour, Quotations — Tags: , , — Nicholas @ 09:54

In a way bankers are Marx’s dream, it’s the workers getting the fruits of their labours. It’s funny that the left is usually angry at shareholders, for taking money out of companies and thereby bringing down workers’ salaries. Yet with the banks they want shareholders to press the banks to do exactly that, and curb pay.

Joris Luyendijk, “External auditor: ‘Nobody at a bank can have a complete overview any more'”, The Guardian, 2012-04-28

March 22, 2012

Reason.tv: Jim the Realtor

Filed under: Economics, Humour, USA — Tags: , , — Nicholas @ 08:01

“When I come into a house with buyers, I start picking it apart,” says San Diego’s Jim Klinge, known on the internet as ‘Jim the Realtor,’ a wise-cracking real estate agent who posts his honest, painful, and sometimes hilarious assessment of bank-owned properties on his Youtube channel: youtube.com/jimtherealtor.

While both the Bush and Obama administration have advocated programs aimed at keeping people in their homes, Klinge argues that this is the exact wrong approach and is only prolonging the agony in the housing market.

March 14, 2012

The culture of Goldman Sachs

Filed under: Economics, History, Humour, USA — Tags: , — Nicholas @ 11:31

Joshua M. Brown responds to the “why I’m leaving x” meme, specifically about Goldman Sachs variants:

The “culture” of Goldman Sachs was, is and always will be about making money, often at the expense of a client. Do you even know where the term “wirehouse” originally came from? Let me help you out with that. In the 1920’s, there was no CNBC or internet — there was only news delivered by wire and cable, stock market news and prices included. The “wirehouse” firms like Goldman would transmit stock and bond prices to their far-flung offices around the country from Wall Street where the action was taking place. It is a peculiar and yet telling fact of history that during the Crash of 1929, not a single major Wall Street brokerage firm went under. Wanna know why? Because when the sell-off began, they dumped all their holdings prior to wiring the news out to the rest of the investing public and their clientele across the country. Sound familiar, motherfucker? THAT is your firm’s culture, going back a hundred and fifty years.

Deal with it or leave and open an Etsy store.

February 28, 2012

Did Greece get bailed out or did it default? A little from column A and a bit from column B

Filed under: Economics, Europe, Government, Greece, Politics — Tags: , , , — Nicholas @ 09:56

Detlev Schlichter explains what happened in the “big fat Greek bailout”:

Greece was bailed out for the second time in four months. Or did it default? Well, a bit of both, I guess.

All bondholders are equal. But some are more equal than others. If you are the ECB, your Greek bonds were exchanged, par for par, for new Greek bonds, and you can go on pretending that they are worth their principal amount. You won’t have to report a loss for now. But if you are a ‘private’ entity — and that is a rather loosely used term these days as it includes the banking industry which is either now partially owned by the state or to a considerable degree dependent on ongoing support from the lender-of-last resort — more than half your Greek investment was wiped out. So Greece defaulted. But as you ‘agreed’ to the ‘haircut’ it was in fact a ‘voluntary restructuring’, although you really had no choice.

[. . .]

I guess we shouldn’t lose sight of the fact that Greece’s economic model is fundamentally unsustainable, whichever way you cut it. Greece has been living beyond its means for a long time, and has managed to do so by flying under air-cover of the EMU project and with the tailwind of cheap credit and easy money. Spending by the Greek state accounts for more than half of registered economic activity, and a third of the workforce is employed by the public sector. ‘Activities’ are being subsumed under the heading of ‘Greek GDP’ that nobody would voluntarily pay for, that are to a large degree wasteful, and that are simply unaffordable under anything but the most bizarrely generous credit conditions, i.e. precisely those that Greece enjoyed from 2001 to 2008. Easy money has been used to paper over grave economic imbalances. Some of what is generously labelled ‘GDP’ should be discontinued — and fast.

To even suggest that such an economic model would be manageable if Greece, a country with about three quarters of the population of metropolitan Los Angeles but with less than half of L.A.’s GDP, only had its own paper currency and could inflate and devalue to its heart’s content, is economically illiterate. No country ever prospered by running budget deficits funded by the printing press or by creating domestic inflation. Devaluing your currency may give your exporters a shot in the arm — for about five minutes. But it scares your domestic savers away for years to come and severely diminishes your ability to keep or attract capital, the backbone of any sustainable economic model. To even try and attempt to ‘inflate away’ a debt load worth 160 percent of a generously calculated GDP would cause economic damage of gigantic proportion. One must have swallowed the Keynesian mythology of deficit-spending whole to believe that the country could borrow and print itself out of this mess. A proper default on its existing debt and rebuilding from a lower base — but with a hard currency — are the better options.

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