We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
Over the weekend, Tim Evans, who has been a friend of mine for about a quarter of a century, and who is now part of the Cobden Centre ruling junta (listen to a recent and relevant interview with Tim Evans about that by going here), has been ringing me and emailing me about this, which is a so-called Ten Minute Bill (I think that’s what they call it) which Douglas Carswell MP and Steve Baker MP will be presenting to the House of Commons this Wednesday, just after Prime Minister’s Question Time.
Ten Minute Bills seldom pass. But they are a chance to fly a kite, put an idea on the map, run something up the flagpole, shoot a shot across the bows (see above) of some wicked and dangerous vessel or other, etc. etc., mix in further metaphors to taste. Were this particular kite actually to be nailed legally onto the map (which it will not be for the immediately foreseeable future) it would somewhat alter the legal relationship between banks and depositors. For more about this scheme, from Steve Baker MP (whom we have had cause to notice here before), see also this.
Basically, this proposed law says that depositors should get to decide whether they still actually own what they already now think of as their own money when they hand it over to a bank, or whether their money degenerates into a mere excuse to create much more degenerate money, out of thin air. Depositors get to decide, in other words, about whether their bank deposits will be the basis of fractional reserve banking, or not. Or something. Don’t depend on me to describe this proposal accurately, or comment learnedly and in detail on its efficacy, were we to live in a parallel universe of a sort that would enable this law to pass right now.
What I do know is that Austrian Economics (or, as I prefer to think of it: good economics), which is the theoretical foundation of the Cobden Centre, ought to have massively more sway in the world than it does now. Recently I have been trying to get my head further around Austrian Economics than my head has hitherto been, and I have also been watching the Cobden Centre as it has gone methodically about its self-imposed task of transforming Britain’s and the world’s financial arrangements, thereby massively improving the economic prospects of all human beings.
I have always been impressed by Austrian Economics, ever since I first dipped into Human Action in the library of Essex University in the early 1970s. I knew rather little about Austrian Economics until lately and I still don’t know that much, beyond the fact of its superiority over bad economics. And I am now also very impressed by the Cobden Centre. What this latest parliamentary foray shows is that now Douglas Carswell MP seems to have joined the Cobden Centre network. Or maybe, what with Carswell having been an MP for some while, the Cobden Centre network has got behind Douglas Carswell MP. Whatever, and whatever his rank or title within Cobden Centre pecking order, Carswell is now a senior member of that network. Good. I hope and believe that there are many others now joining too, of comparable weight and intelligence.
I could say more about all this, much more. And I very much hope that in the weeks, months and years to come, I will. In particular I hope to explain more about just why the Cobden Centre has so far impressed me so much. But the important thing now is to get something about this up here, now, so that the Cobden Centre crowd (Tim Evans in particular) will have one more little puff of opinion to point at, to help them suggest that the intellectual wind may at least be beginning to blow in their (and my) preferred general direction.
A couple of further cricket games between England and Pakistan have now happened. In the first of these, Pakistan surrendered a winning position. Sound familiar? It should. In the second, they never got to a winning position in the first place. England were efficient in both games. I refuse to provide links to mere match reports. Did the Pakistanis lose because they were paid to, or is it merely that they are now utterly demoralised? Probably the latter, but given that one can’t now be sure it is hard to care. That Pakistan’s cricket bosses had to be bullied into suspending the players revealed as having cheated hasn’t helped. Ijaz Butt in particular looks far more like part of the problem that part of any solution.
I’m reading this kind of reaction quite a lot, the one about being shocked, shocked. As in not actually very shocked at all. But the importance of what just happened is not that cricket fans now strongly suspect Pakistan’s cricketers of cheating, but that we now know it. The cheaters are still protesting their innocence, and the wheels of justice will, as is proper, grind slowly on, but the market (i.e. the fans) is already now speaking, loud and clear. Guilty:
Stewart Regan, chief executive of Yorkshire County Cricket Club, said: “The phones haven’t stopped ringing from people wanting to vent their fury and ask whether they can get refunds.
“I’ve fielded several calls and we’ve had numerous enquiries about cancelling tickets. From the club’s point of view we can’t give refunds simply because of a personal opinion about what’s gone on, no matter how much we might agree with them.”
“Might” agree. Hah. Now I’m watching the TV highlights of the game earlier this evening. The crowd is tiny, heavily outnumbered by empty seats. Pakistan cricket will not soon be forgiven by the English county clubs now caught up in this mess. They will want someone’s blood, and since they cannot expect much satisfaction from Pakistan itself any time soon, they will probably look closer to home.
They won’t have far to look. As Michael Jennings said in a comment on this:
Seriously, the judgment of Lord’s and the ECB looks consistently bad. Somehow they missed getting properly involved in the IPL and ended up doing a deal with Sir Allen Stanford because they needed the money, and they then did this deal with Pakistan (who were unable to play games at home because terrorists attempted to kill the last foreign team that went there, and who India wanted nothing to do with) because they had empty stadiums and needed someone to play in them. Meanwhile, they were unable to do such things as cooperate sufficiently with the IPL so that English sides can participate in the Champions League. They seem to have made the wrong choice every time.
Here is a long(ish) article stating that because financial investors think the UK government is serious about slashing the public deficit, this is keeping the prices of UK bonds high – which also means the interest rate that firms pay to borrow long-term is less than in a number of other countries.
Obviously, the proof of the pudding will be in the eating. We are now entering a period when the various government departments of Cameron’s administration need to deliver with real cuts, rather than simply talk about them. But it does seem that there is a real difference of perception in how markets view the UK (trying to cut the deficit) and the US (spend, spend, spend!). Other things being equal, it will cost a dollar-denominated corporate borrower more to get financing than a sterling-based one. The UK economy will benefit. Just one more reason to ignore the siren songs of the Keynesians.
Tim Worstall has a good headscratcher of an article about an aspect of the recent financial crisis: what is called securitisation. To those not familiar with this term, it is the process by which banks and other financial institutions that lend money out – such as mortgages – use the repayments as collateral to take out loans of their own, at a (hopefully) lower rate of interest, and thereby make a profit on the difference between the two. The idea is that by packaging loans and other IOUs into big parcels, and then selling these packages to end-investors such as pension funds or life firms, that the risks inherent in the individual mortgages and loans are spread out among a wide circle of investors.
On the face of it, that sounds smart: spreading risk is, after all, the basis of insurance. However, unlike say, fire insurance, defaults on bonds tend to rise and fall in line with the economic cycle: you do not usually get a massive uptick in fires every three or four years, for example, although in bad periods a combination of natural disasters can hammer insurers.
A lot of this financial engineering, and the associated alphabet soup of acronym terms for the various products involved, has come under fire from all those books that got published in the aftermath of the crisis. A typical example is Gillan Tett’s effort, Fool’s Gold, which tends to play to the “evil bankers” schtick that has become so familiar. I prefer this and this.
As Tim says, the problem, however, is that banks did not – contrary to the conventional wisdom that has condemned securitisation – done nearly enough of this sort of thing. In fact, when the shit hit the fan in 2007/08, many banks and other lenders had not managed to securitise their loans and had to make massive writedowns as defaults mounted. Case in point: HBOS and Royal Bank of Scotland in the UK.
The trouble, though, is that beating up on banks for not doing enough to remove credit risk from their balance sheet ignores, I think, the underlying problem that has been mentioned before here, which is that in a world where central banks set interest rates and cut them at any sign of economic trouble, banks will be under enormous commercial pressure to chase yield where they can, by lending money to high-risk ventures. Until and only when borrowing is financed from real savings rather than central bank Monopoly money, the underlying causes of such recent messes will not go away.
Even so, Tim has raised a smart point that kicks against the usual clichés, which is one reason why his blog is one of my daily reads.
So… the global economy has been tanking in no small measure because certain states provided perverse incentives and pushed lenders to offer vast quantities of money to people who had no realistic probability of ever paying it back… and the solution to get us out of this whole mess is to twist banks arms into making loans they would rather not make.
The Lib Dem members of the Coalition favour a more interventionist approach to banking. Having been bailed out by the taxpayer, they argue, the banks have an obligation to lend. The Tories regard it as contradictory to try to control banks while encouraging them to build up their balance sheets.
No shit, Sherlock. The lunatics have taken over the asylum.
To think that the new economy is over is like somebody in London in 1830 saying the entire industrial revolution is over because some textile manufacturers in Manchester went broke.
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, both of whom I photographed in action:
These two gentleman are, on the left, Jörg Guido Hülsmann, and on the right, Sean Corrigan. Watch out for those names. I’m fairly sure that quite a bit more is going to be heard of and from both.
The good news is that Cobden Centre Chairman Toby Baxendale asked both these two gentlemen if their performances could later be made available in written form to the Cobden Centre with a view to online publication, and both promised that they would cooperate fully with such plans.
I took other photos, including a couple of Tim Evans, the Cobden Centre’s Chief Executive. In one of these snaps, Tim poses next to the IEA’s evil monetarist Tim Congdon, who was present only as a picture on the wall.
Tim said that he also thought the speeches by the two gents above to be “superb”. He says that about any performances he has had any part in organising no matter how average, but this time I think he meant it. And as I say, I enthusiastically concur. Judging by the response at the end from a gratifyingly crowded room, everyone else present did too.
To all intents and purposes, the banking industry inside the EU has ceased to have any serious claim to be a part of the free market. The EU has voted to cap bonuses for bankers, introducing remuneration controls that look pretty draconian.
Of course, defenders of such controls might say that we are where we are: the modern banking industry, with all its privileges, “too big to fail” ability to claim taxpayer support, controls on capital ratios, and the rest, means that banking has not been a proper model of free market behaviour for decades. That is true. But capping bonuses is about the least relevant reform that policymakers could make, though no doubt this panders to the sort of anti-banker sentiment that also recently encouraged Germany’s government to impose, without warning, controls on the investment techniques of hedge funds. The radical overhaul of our banking system advocated here, for example, is not really considered.
We are in the best of hands, as Glenn Reynolds likes to say.
Germane to Michael Jennings’ post below pertaining to Prince’s declaration that the “Internet is completely over”, I had a brief conversation with a decidedly winsome 20-something young lady, elegant yet edgy (she was a cut glass accented thoroughbred Sloane Ranger wearing ‘All Saints’). She was sitting in a sandwich shop in a well-heeled part of town… expensive Apple laptop open as she availed herself of the free WiFi whilst having luncheon…
The following really happened, serious, not joking.
Samizdata Illuminatus “Did you read that Prince thinks the ‘Internet is completely over”? He refuses to release any of his music on it at all”
20-Something-Young-Lady “Really? Umm… I did not even know he was a musician.”
SI “Well, yes…he is. He is one of the great guitarists of our time.”
20-S-Y-L “Hah, that’s funny! I cannot picture that old foggy playing a guitar! I thought he just spent his time playing polo, messing with architects and hugging trees…”
SI “No, no, no, not Prince Charles… ”
20-S-Y-L “Prince William? No, I am sure you must mean Harry! Oooo! Yummy Harry with a guitar!”
SI “No, the American musician called ‘Prince’.”
20-S-Y-L “Oh, I see. And this chap calls himself ‘Prince’? That’s hilarious!”
SI “He used to call himself ‘Squiggle’.”
20-S-Y-L “I’m sure I’ve never heard of him.”
SI “I suddenly feel very… old’.”
20-S-Y-L “I’ll download something of his off Bit Torrent and see if he’s any good.”
I do not believe she immediately grasped the sheer transcendent irony of the moment.
Contrary to what most people had assumed, banking in the United States had been highly stable in the decades before deposit insurance. Of course, depositors were concerned about their safety, but this made them cautious in whom they banked with. They demanded reassurance from their banks, and the banks gave it to them. Pressure from depositors forced the banks to be conservative, to lend carefully, to keep their leverage ratios low, and to disclose their broad positions. The bankers themselves were conservative even in their dress, but this was itself reassuring, and the solid architecture of the banks’ offices reinforced the notion that they were pillars of the community with solid roots in it. The key to banking was maintaining the confidence of depositors and not taking that confidence for granted.
Before deposit insurance, a bank that took too many risks would eventually undo itself. It would do well for a while, increasing market share and generating better shareholder returns than the fuddy-duddy banks, which would feel the pressure. However, come the inevitable downturn, the cowboy bank would experience heavy losses on its questionable lending, liquidity would tighten, and a point would come where the frightened depositors would run for their money: the cowboy would be literally run out of business. These occasional crises were unpleasant, but good for the long-term health and even stability of the system: the runs would expel the cowboys from the system and give a salutary reminder to those who survived. The system itself was rarely seriously at threat, because the depositors would redeposit their funds with the safe banks. There would typically be a flight to quality, a transferring of funds within the system, rather than a run on or threat to the system as a whole. Thus, it was the threat of a run that kept the bankers in line.
Once you introduce deposit insurance the situation changes profoundly. Deposit insurance allows the bankers to take their depositors’ confidence for granted. This takes the pressure off the bankers, who can now safely increase both their lending risks and their leverage ratios, thereby increasing returns to their shareholders (or, in modem Wall Street, to themselves). For their part, the depositors are no longer concerned with the risks their banks are taking, but only with the rates they get on their deposits. Consequently, deposit insurance subsidizes risk-taking, so leading to excess risk-taking with the deposit insurance agency and, ultimately, the taxpayer, picking up the tab.
Nor does the damage end there. With deposit insurance, there is no longer any run to fear and even the most insolvent banks following the most unsound “shoot to the moon” investments can now remain in business indefinitely, attracting more funds and staying in business by merely raising deposit interest rates. The process of competition then becomes utterly subverted: instead of allowing the conservative banks to drive out the cowboys, even if it takes a little time, the process of competition now rewards the cowboys and penalizes the good banks. It therefore pays to become a cowboy and, eventually, all banks do.
– From Alchemists of Loss by Kevin Dowd and Martin Hutchinson (pp. 271-2). Pictures of the two authors here, taken at the launch of the book last Wednesday evening at the Institute of Economic Affairs.
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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