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The title of this article written some months ago by noted US economist, Arthur Laffer, has never been more apt after I finished reading through the UK government’s latest outrage, its annual budget statement.
A new, top rate of income tax of 50 per cent comes in from next year, applying to annual incomes of £150,000 and above. The government, which probably knows it is doomed anyway, has made the base calculation that the Tories won’t dare to repeal it. I actually am not too sure about that: while £150,000 a year is a lot of money, for many self-employed folk with lumpy income streams, such a new tax band will hit them very hard in marginal terms, encourage further emigration from the UK, deter anyone with any entrepreneurial brio from entering the UK, and probably reduce, not raise, revenues. It is also a boon to the tax-planning and accountancy profession, since anyone who can restructure their affairs to convert income into a capital gain – CGT is just 18 per cent in the UK – will do so.
Update: I share Guido’s reaction. No wonder, by the way, that the G20 nations – hypocritically – chose to attack “tax havens” and create a global tax cartel. If you are someone like Gordon Brown or The Community Organiser, the last thing you need is for your high earners to escape abroad. But I’d be willing to bet that there will be quite a rush now of people out of this country. Expect to read lots of stories about how “Mr X, who runs a small business in the Midlands, said he was heading off to Australia/Canada/wherever to get away from high-tax, high-crime Britain”. Expect there to be a relentless, drip-drip of such stories in the months ahead. (Mr Jennings snorts about my mention of Australia: yes but at least there are other benefits to moving there).
Update: Madsen Pirie of the Adam Smith Institute and some top wealth management folk give the budget a thorough hammering over at CNBC. The guy from Denton Wilde Sapte is particularly good.
I am not terribly convinced by this:
“…after decades and decades of instability in the 1800s and early 1900s, followed by the massive bank failures of the early 1930s, regulations were imposed to stabilize the banking system. The result was sixty years of calm in the financial sector. That’s hardly a failure of regulation. It wasn’t until the shadow banking system began growing outside of the regulatory umbrella that problems began to re-emerge. A central theme of the posts this week has been that bringing about another decades long period of relative stability will require the regulatory umbrella to be extended to cover all firms within both the traditional and non-traditional (or shadow) banking system, hedge funds included.”
That does rather ignore the fact that, in the early 1970s – in the period of “calm” that this writer talks about, we had stagflation, the collapse of the Bretton Woods banking system, etc. Hardly very calm. And if the system was calm, as claimed, how come it collapsed? (Hint: it was not the fault of evil private bankers or tax havens).
In the absence of a return to sound money and an end to fiat monetary systems, there may be something to be said for rules to at least limit some of the damage that monetary mistakes can cause. This is a second-best solution, I would say. I have heard it argued, even by some pretty ardent free market types, that there is a case for splitting the roles of risk-taking investment banks from those of more utility-like retail banks, as under the old US Glass-Stegall rules in the US. But had Glass-Stegall been in force today – it was abolished in the late 1990s – it would not have been possible for investment firms such as Morgan Stanley and Goldman Sachs to remodel their businesses as full-service banks, as happened in the autumn of last year when those firms were partly bailed out by the taxpayer. The ironies abound.
On this issue of the “shadow banking” system, the author and others need to understand how the business of securitising debt and selling it off to investors started, as well as why hedge funds and other non-bank institutions developed. This market, and the fiendishly complex derivative products that drove it, was given much of its early impetus by a banking regulation system, known as the Basel system, that told banks they had to set aside a certain portion of capital to one side to protect against risk.
It was, if you like, a partial acceptance that fractional reserve banking, if it is allowed without any “safeguards”, is dangerous. But what happened? Banks took out tradable insurance policies, such as credit default swaps, and used this insurance to get a better credit rating, and hence, reduce the amount of capital they set aside. The “shadow” banking system, then, and the derivatives market that gets so much heat, was partly driven by regulations, as well as by the application of sophisticated – if flawed – mathematical and scientific techniques to the business of finance.
The article does at least, in a backhanded sort of way, recognise that not everyone is signed up to the narrative that “unregulated capitalism” has failed. I am glad that has been noted. After all, it is a myth that supporters of capitalism, such as yours truly, oppose regulations per se: what I oppose is state-imposed, one-size-fits-all regulations. For example, if a privately run stock market wants to create its own listing rules to build and develop a reputation for high standards, it will be in its self interest to do so, since a track record for honesty, transparency and efficiency reduces the costs of capital because investors are more willing to hold equities traded in honest places rather than dodgy ones, and so on.
If the state has a role, it is that of going after thieves and fraudsters. And as we have seen in the case of US Ponzi scheme conman Bernard Madoff, the powerful US Securities & Exchange Commission did not act, despite certain suspicions about him, for years. By focusing on the basics, rather than trying to regulate everything under the sun, the state might even do some good.
Via this website is a list of the ten most annoying taxes. I am not sure if I agree with the rankings, but still.
The website does seem to have many attractive features (absolutely! Ed).
One issue that does not appear to have provoked a lot of discussion, at least not yet, is how the government bailouts and encouragement of mega mergers between struggling banks has created a banking industry that is, if not monopolistic in its structure, then pretty damn close to so being. Now – as I once argued four years ago (gulp!) – the fact that a firm such as a computer software house or bank is big is not, by itself, harmful. One should not confuse bigness with control over the consumer. A lot of anti-trust laws – which I believe often create more harm than they supposedly solve – are based on the mistaken idea that a firm’s being big is somehow proof of malign intent and that bigness, is, ipso facto, harmful. Well it all depends how the firm got to be big in the first place, and whether it retains its market size by continuing to offer good products that people want. For a firm to stay big at a time when barriers to entry in certain fields are being slashed by new technologies such as the internet, confusing bigness with lack of competition is a serious mistake.
Now turning to the banks, it is clear that the mergers between the likes of UK’s Lloyds and HBOS, or Bank of America and Merrill, or Wells Fargo and Wachovia, have produced a number of large banking groups with the state acting very much as the encourager of such mergers, rather than, as might have been in the case when anti-trust lawyers were on the prowl, hostile to them or at the very least, skeptical. As free marketeers like to point out, monopolies that are supported by state powers and privileges are harmful, while those that arise out of a dynamic market process tend not to be, since state-backed monopolies are the least likely to fall prey to new, nimbler competitors. Without state support, even supposedly invincible big firms, such as IBM, Ford or for that matter, Microsoft, can find their market share eroded by a newcomer.
One of the reasons why I actually favour free banking and competition in money is that it might create more banks and give the established banking sector a much-needed dose of competitive pressure. I am pleased to see that the likes of Tesco’s, the supermarket chain, is getting into banking. That is good news for the consumer, hopefully, although the haters of Big Retail might complain.
In the UK, for example, Lloyds Group, after its acquisition of HBOS, controls almost 45 per cent of the UK mortgage market. Any new entrants that can put that behemoth under pressure are to be welcomed.
I am not suggesting by any means that the gold standard was perfect, but if we judge it by its record, it achieved much better price stability than the disastrous inconvertible paper money standard that replaced it.
Unfortunately, in the twentieth century the gold standard came to be seen as a pointless constraint against the issue – or, rather, over-issue – of currency. Economists argued that the Bank of England should be free to issue whatever amount of currency it (or its political masters) wanted. The old idea that the gold standard imposed a useful discipline against the over-issue of currency was discarded as out of date. Keynes famously told us that the gold standard was a relic of a barbarous age, and reassured us that modern governments were much too sophisticated to debase the currency. Modern governments were not like impecunious Roman emperors or medieval kings.
The results were catastrophic, but Keynes was right about one thing. Modern governments were not like Roman emperors or medieval kings: they were much worse, and produced much greater inflation rates than their predecessors ever managed to achieve. There is a limit to how much inflation you can create by clipping the edges of your coins and putting them back into circulation, but the sky’s the limit when you can just speed up the printing press or add additional zeroes to your notes.
– a characteristically forthright moment from Kevin Dowd’s Chris Tame Memorial Lecture entitled Lessons from the Financial Crisis: A Libertarian Perspective, delivered on March 17th, already reported on here by Johnathan Pearce, now published by the Libertarian Alliance as Economic Notes No. 111, printable out as a .pdf but (more to the point for bloggers) copiable and pastable as an .html
The political atmosphere in Britain is rather peculiar just now. One of the more interesting things to ask of public opinion at any particular moment is: Who exactly does public opinion think are the people who are most blatantly and most undervedly robbing us. It was a decisive fact about the 1979 general election that public opinon’s answer then was: The Unions. It was a decisive fact about the next big electoral upheaval, in 1997, that public opinion’s answer then was: the Conservative Party. Now, public opinion seems to be arriving at another answer to the who-are-the-biggest-plunderers? question. It seems to be deciding that the answer now is: Members of Paliament of all parties. If this opinion solidifies in time for the next general election, it will be very interesting to see what it does to the Conservative vote in particular. What if all the major parties do worse? Since they have all done so badly, this would make sense, I think.
But surely the plunderings now being contrived and the further plunderings being attempted by the people who are politically well above the average MP in the plunder pecking order make the petty pilferings of our Members of Parliament look very petty indeed. Has any MP put in a claim for even so much as one billion pounds, to pay for a second West Indian island? If so, I missed the news. It’s almost as if the powers that be want the mere MPs to take all the blame for everything. It’s all a dastardly establishment plot, orchestrated by evil pseudo-libertarian Guido Fawkes!
Of course, it could just be that regular people can get a handle on the fraudulent expenses claims of MPs, because these are the kinds of amounts they deal with themselves, and sometimes even pilfer themselves with morally questionable expenses claims of their own. On the other hand, the sums of money being slung at dodgy banks and political-donation-wielding bankers, and now being further unleashed by “monetary easing”, well, these are just way beyond all normal experience. Pile up all those bank notes and they reach far off into the Solar System, or deep into our own galaxy, or the next, or to some such unimaginable never-land. (Thus also does a council planning committee debate a patio extension for an hour and a half, before letting an oil refinery through without further discussion, that being another insight, to add to this one, that we owe to Professor C. Northcote Parkinson.)
Speaking of the really serious plunderings that are now being perpetrated, by those at the Obama/Brown level of operations, the other odd thing I have been reading lately, this time said by commentators like Peter Oborne and Fraser Nelson, is that Mr Brown is bad, because he is not stealing as much money as he is pretending to steal, in order to “stimulate” (the new word for wreck) the world economy. Oh Mr Brown claims to be stealing a thousand gazillion pounds! He would, wouldn’t he? But in fact it’s only a hundred gazillion pounds, because he has counted most of the gazillions in question twice or even three or four times. Most of the gazillions he is now promising to steal anew have either been stolen already or won’t be stolen at all. Bad Mr Brown!
But surely this is a case where words on their own are greatly to be preferred to words followed by or accompanied by actions. Our best hope now is that, when Obama and Brown and the rest of them promise that they are now taking decisive, radical and above all very big and very expensive actions of various kinds to save the world, they are lying. Heaven help us all if they are telling the truth.
Last September, I went walking in the Scottish Highlands with a good friend. My friend and I were booked on different flights leaving Edinburgh airport for London on Sunday evening. My friend then had a connecting flight at Heathrow to Hong Kong and then on to Sydney, so he was particularly eager not to miss his flight. Therefore, I dropped him off at the airport terminal before I went looking for a petrol station to refuel the rental car before returning it to the airport and checking in for my own flight.
The “Where the expletive is the nearest petrol station” dance before returning a rental car to an airport car rental office is one I know well, but this one wasn’t too bad. After driving a few kilometres down the M9 I saw a station on the other side of the road, so I exited the motorway at the next junction, crossed the bridge across the motorway, and found…
Well, I found myself myself in a new and better world, actually. It was an office park, but not just any office park. There was a big sign with an RBS logo, lots of gleaming buildings, water features (both active and passive), corporate sculpture, and the general sense of the intense self-regard held by the people who had had this place built. Clearly, RBS had decided that it needed a new, gleaming head office from which to run its überimportant global operations, and had had this Dr No like compound built near Edinburgh airport, where its highly sophisticated heart could beat, without any interruption or disturbance from reality. RBS’s dedicated motorway junction made it easy for these great bankers to come and go to and from wherever their business now was. I am sure there were also fancy gyms, day care centres, cafes and Lord knows what in the complex.
Having worked in international finance myself, this kind of arrangement is not that unheard of, particularly for banks that are big fish in whichever smaller pond that they originate from. I can think of one or two Spanish banks that have even more Dr No-like headquarters on the outskirts of Madrid. Usually the offices of the same organisations in major financial centres are much more normal – RBS has its London offices in a rather boring but shiny block near Liverpool Street Station.
However, to enter such a complex in Madrid, one faces barbed wire fences, metal detectors, ID checks, men in overly fancy uniforms, and probably finger prints and Iris scans. In Scotland on a Sunday afternoon I was able to drive into the complex by accident, and get lost in the private roads between the fancy new buildings. There were a few security guards around, and I suspect that if I had got out of my car and walked near any of the buildings I may have been challenged, but driving around for a few minutes led to little interest. Eventually I found the entrance ramp to the motorway, which was on the other side of the complex to the exit, so it seemed it was not possible to use the RBS offices to turn around without driving through the private office park. I then refuelled my car and drove back to Edinburgh airport.
However, that of Micklethwait’s laws that says that any company that builds a new and ultra-fancy office is doomed, whereas an important company that is still operating out of grimy offices in Basingstoke is probably okay very manifestly holds, I think.
So how long before not even the mainstream media can pretend this lunacy is not going to spread economic catastrophe far and wide? My guess is they will move from cheerleaders to tut tutting sages of rectitude seamlessly in a few years without the slightest sense of irony. This will probably happen about the same time the mainstream media more or less stops existing in any meaningful sense.
The collective democratically sanctified derangement on display sure does help harden the heart when people start complaining about the economic hardship they find themselves in. A friend of mine said “Ordinary people do not deserve what is happening to them”.
“Sure, except for all the people who voted for any one of the main parties,” was my reply.
They are getting exactly what they voted for, good and hard, and there is a trillion more of it coming down the pipeline that will wash away all our savings.
Let it not be said that the politicians gathering to celebrate an orgy (er, steady on, Ed) of Keynesian delinqency and transnational socialism are letting this current financial crisis go to waste. The G20 countries have agreed to a crackdown on those pestilential things, tax havens. I have defended them before and will do so again. What we are seeing is a determined effort to create a global tax cartel. Cartels, unless backed by brute force, tend to break down eventually. The G20 are making lots of blood-curdling threats about sanctions and so forth. What is Germany or Italy going to do – invade Switzerland? Good luck with that, gentlemen.
At the root of the hatred of tax havens is a hatred of freedom, pure and simple. If you believe a democratically elected government, say, can seize the wealth of a portion of its citizens, then you will believe that that minority can be more or less robbed, held hostage and prevented from going abroad. Socialists such as Richard Murphy believe that if 51 per cent of my fellow citizens want to help themselves to the contents of my bank account, then I am being “undemocratic” and a bad citizen if I choose to park my cash in the Caymans or wherever. Well, why not go the whole distance and require anyone who has an offshore bank account either to close it or be forced to get an exit visa if they wish to do so? We may be already reaching that point. If, on the other hand, you believe people are entitled to their property regardless of what their fellow electors think, then tax havens – “haven” is a place of safety, remember- are an important escape route and bulwark against looters. When politicians want to shut down places of safety in a time of crisis, it is well to be cynical about the motives of those involved. Especially if they happen to be such characters as Gordon Brown or Barack Obama.
The sheer cynicsm of it all is breathtaking. Whatever the cause of the current financial crisis, I think it is pretty fair to say that it did not originate in tax havens. Switzerland, in fact, has been hammered by the crisis; its biggest wealth manager, UBS, has lost an estimated $49 billion in write-downs connected to the US sub-prime disaster. The $50 billion Ponzi scheme fraud of Bernard Madoff happened onshore, right under the noses of the SEC, rather than in some far-flung island in the South Pacific. The huge losses incurred by banks have been nothing whatever to do with so-called “tax leakage”. And in the US, there is already a tax haven, known as the state of Delaware. And the UK has been – well until recently – a tax haven on certain definitions. Ditto places such as Ireland or even Belgium.
Rant over. Thanks for your patience.
“The Federal Reserve…along with other central banks, is a legal counterfeiter.”
Paul Kasriel, economist at Northern Trust, the US bank. He is in favour of all this “quantitative easing”, by the way, but he is far too honest an economist not to identify what that euphemism actually stands for. And he predicts that it certainly will trigger inflation later on.
Two splendid snippets facing each other in today’s print edition of the Times. First Chris Ayres’s Los Angeles notebook:
California’s decision not to ban black cars should by no means reassure anyone that the Golden State is now run by sane people.
And more substantially, Daniel Finkelstein on anti-capitalists:
I think that they have looked back at 5,000 years of human history – at pestilence and famine and disease and degradation, at genocide and civil war, at fear and loathing, at bigotry and ignorance, chauvinism and dictatorship – and concluded that our biggest problem is… shopping.
[…] I have struggled to get to grips with the idea – and maybe I am doing them a disservice – but I really think the notion that they are advancing, once stripped of all their posh words, is this. I go to the shop and buy a new television. The archbishops think that this impoverishes my soul, the G20 protesters think I am destroying the planet and exploiting the workers, and Oliver James thinks that I am making myself mentally ill.
He is really not doing them a disservice. The common motivation is a sort of snobbish distain about vulgar ways of enjoying the material world; and the same thing finds its head in the circles of power, too, as a sort of neo-puritan obsession with work, regulation and oversight of individuals to make sure that no-one is getting away with the sin of unapproved lifestyle.
My post below on the experience of Scottish banking before 1845 – when the rules were changed by the-then UK government of Robert Peel – elicited a lot of great comments. It turns out that the Lawrence White paper that I mentioned had been savaged fairly thoroughly by Murray Rothbard. Rothbard’s paper is immensely detailed and shows what a thorough economic historian Rothbard was. Briefly put, he says that White has misinterpreted the Scottish banking experience by not distinguishing between free banks that operated 100 per cent reserve requirements linked to gold, and those that were simply free banks without such specie requirements. (Rothbard was an advocate of such metal-backed money). This inevitably raises that old friend of ours, fractional reserve banking, which Rothbard described as essentially a fraud. Now in trying to make up my mind on FRB, it seems to me that so long as the holder of bank notes is made aware that the note has been issued by an FRB, rather than a 100-percent reserves one, then what is the problem? It is a bit like the argument about limited liability corporations that vex some libertarians such as Sean Gabb of the Libertarian Alliance. Surely, if I transact with a LL company and knowingly do so, then such consent is what counts. LL companies could, conceivably, exist even without special government legislation, although they might not last as long as LL firms do now. (Here is a rejoinder to Gabb on LL). Same with FRB: if there is commercial deposit insurance and customers know the score, I fail to see why the existence of fractional banking should necessarily lead to disaster. Or is there something I am missing in this debate?
At first blush, some might consider all this to be a bit arcane. It is anything but. Explaining how banks work now, and how they can be made to work much better as a result of competition and basic rules, will go some way, I hope, to destroying misconceptions. Such misunderstandings that exist at the moment only play into the hands of those who want to bring the free market order down. Such as those folk protesting at the G20 summit in London today. I will be in the area on business. I might take some photos and post them up later if they are any good.
Update: I was in the Docklands area. Nothing much going on while I was there.
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Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
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