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]
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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.
– Alvin Toffler
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.
Apologies to Samzidata readers if you have already seen this, but I had not, and boy, this is just gooooooood.
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.
As I have seen before, a lot of political news coverage in the UK (and in the US, for that matter) rather resembles sports coverage, if without the tone of hysteria covering the media’s reporting on England’s World Cup horror show. For instance, over at the Spectator’s Coffee House blog on the issue of public spending cuts, it goes into a lot of the arguments about who said X or Y about cutting A or B. In fairness, the Coffee House crew are pretty good at teasing out the statistics – Spectator editor Fraser Nelson has been excellent in hammering the former government over its debt – but there is something a bit missing from its analysis. And that is this: the scale of the shift that we might see from public sector jobs to private sector. If is true that hundreds of thousands of public sector jobs are to go, and the private sector is going to be encouraged to pick up the slack by new job creation, that is surely good news.
We are not admirers of Cameron’s style of Conservatism here at Samizdata (that’s putting it mildly, Ed), but I’ll give him and his finance minister credit if, at the end of the current parliament, there has been a significant shift away from the state and towards the private sector. We libertarian ideologues are hard to please, but such a shift will be pretty tough to pull off. If it means we have to put up with a certain amount of political BS along the route, I don’t especially mind. It is the general direction that counts.
Update: Guido Fawkes points out that certain leftist publications, reliant on public sector job ads, such as with the Guardian, have an obvious reason to fear the axe. It’s not a bug, it’s a feature!
Basic logic is something that Mr Richard Murphy, wonderfully flayed by the indefatigable Tim Worstall, is blissfully unaware of. As Tim points out, Murphy reckons we can use inflation to somehow “wash” out massive debt (by shafting savers and others on a fixed income) while he also vents about the terrible plight of pensioners and the need to protect them.
It might be easier to deal with Richard Murphy in the same way that you might an old, very ill dog. Don’t worry, Richard, there would be no pain.
This posting is going to have to be of a more than usually interrogative sort, since I am more than usually ignorant of that whereof I blog, and which I will now copy and paste:
Certainly, on my travels, I’m going to be wary of accepting euro notes with serial numbers that are prefixed with the letters Y (coming from Greece) or M (from Portugal).
I shall also strongly steer clear of notes with the serial numbers starting G (Cyprus), S (Italy), V (Spain), T (Ireland) and F (Malta).
This might sound as if I’m being ridiculously alarmist, but you cannot be too careful.
However, other euro notes should be reasonably safe.
These include those marked Z (Belgium), U (France), l (Finland) and H (Slovenia). As for those with serial numbers beginning with X (Germany), P (the Netherlands) and N (Austria), they can all be used with total confidence.
Is this common knowledge? Am I the last person in Europe to hear about this? I shouldn’t be surprised. You can tell which country printed which Euro. Well, well. Who knew? Who, even now, knows?
The above quoted text is from a Daily Mail piece by Peter Oborne (linked to by Instapundit) about the various economic disasters the world faces. One of which is the melt-down of the Euro.
My big question, aside from wondering who else does or does not know this, is: supposing lots of people do know this, or get to know it, does it not provide a mechanism by means of which mere people might hasten the collapse of the more dubious EUrozone economies, by demanding, when being paid in actual money, to be paid only in Euros printed by the undubious countries?
Perhaps the answer might go: but making such judgments would be, in EUrope, illegal. Maybe so, but that won’t stop a black market making minute comparisons between differently lettered Euros, nor will it stop tourists in other parts of the world, planning their EUropean trips, demanding, once they hear such stories, to receive only the kinds of Euros that they would like. They could, for instance, refuse to accept the wrong kind of Euros, or, if given a mixture of good Euros and bad Euros, sort out the good from the bad and swap the bad ones back for pounds, or dollars, or whatever.
The wrong kinds of Euro notes, from the dubious countries, could soon be treated exactly as if they were forgeries, could they not? The big difference being that these forgeries will be easier to spot.
So, the much prophesied melt-down of the Euro can now be accelerated in a much more discriminating way than merely by people judging that the Euro as a whole will soon be disappearing down the toilet. We will all be able to decide – many may soon be forced to decide – which Euros will descend toilet-wards first. Won’t we? Can’t we? Now? I realise that there is more to money than mere bank notes. But if stories like those sketched above were to start circulating …
Has Oborne got his facts right about this? And if he has, do my supplementary questions also make any sense? As I say, this is all completely new to me, so I could soon, after the first few responses, be wishing that I’d never even asked.
In the United States one of the biggest exercises in false consciousness the world has ever seen – people gathering in their millions to lobby unwittingly for a smaller share of the nation’s wealth
The Guardian’s George Monbiot is talking about the US Tea Party Movement.
Which is it, do you think? Has nobody ever told him about the fixed quantity of wealth fallacy, or does he just enjoy winding people like me up?
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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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