This is Part 2 of a two-part post reviewing Finance for the Future's paper proposing so-called "Green Quantitative Easing (QE)".
PART 1 of the post, "A Doomed Assessment", reviews Finance for the Future's assessment of the Bank of England's Quantitative Easing programme in 2009-10.
PART 2 reviews Finance for the Future's proposal for government investment in the economy specifically to further green objectives as outlined in the New Economics Foundation (NEF)'s Green New Deal. I would like to make it clear that, as I am neither an economist nor an environmentalist, I am not concerned with the merits of the Green objectives themselves. I am merely commenting on the financing proposal. For a discussion of the Green objectives and their potential economic impact, I'd suggest you read Simon Cooke's blog.
BACKGROUND AND SUMMARY OF PART 1
Part 1 of this post can be found by following the link above. I admit it is pretty wonkish and therefore hard going, so if you want to skip the gory details, my conclusion is as follows:
"The authors' assessment of QE was doomed from the start because of their abject failure to understand what QE is and how it works. In particular, their confusion of central bank and government, and their evident lack of knowledge of the mechanics of fractional reserve banking, mean that this is a very seriously flawed analysis."
PART 2 - "Green" Quantitative Easing
The stated aims of "Green" QE, according to the authors, are as follows:
1. To provide the boost to the rest of the economy that the banks and financial services sector received from the first round of quantitative easing;
2. To finance a Green New Deal;
3. To promote new investment in productive capacity in the UK economy;
4. To refinance existing government related loans at low cost, so freeing public sector organisations and agencies to undertake new economic activity.
It is immediately apparent that these are much more diverse and wide-ranging aims than the stated aims of QE, and at least two are fiscal, not monetary, objectives. QE is a monetary policy tool used to substitute for interest rate policy when interest rates are close to zero. It is arguably not a suitable vehicle for delivering fiscal policy. These objectives are also, I would suggest, impossible to achieve through central bank money creation without compromising the independence of the BoE. Independence of the central bank carries a significant advantage in that monetary policy is not subject to political interference. Do we wish to return to a state-controlled central bank? Do we want the central bank involved in fiscal matters?
However, reading on it is quickly apparent that the authors are not talking about QE at all:
"In each and every case we are suggesting that the government spends the funds made available to the next likely round of quantitative easing to feed directly into the economy, and does not do so through the existing commercial, High Street and investment banks..." (my emphasis)
Now, in Part 1 I pointed out that government does not provide funds to the BoE for QE - the BoE creates the money out of thin air. If the government provides funds - presumably in the form of new government debt - then it is not QE. It's good old-fashioned direct investment by government. Calling it QE is just giving a new name to a very old game.
I looked through Part 2 of this paper to see if I could find any indication that the authors had any intention of funding their objectives with newly-created money by the central bank. If they had, then they could perhaps argue that QE is an appropriate descriptor. But I could find no reference anywhere to creating money to fund these activities. In fact throughout Part 2 there is repeated reference to public expenditure and borrowing, neither of which have anything to do with central bank money creation. On page 12, for example:
"Undertaking these activities would give the economy an immediate shot in the arm as well as providing infrastructure of lasting use which would more than repay any debt incurred in the course of its creation..."
"...We stress, what we propose is borrowing for investment, not borrowing for current spending. We are not alone in arguing this..."
"This is what we believe the programme we recommend would do and this is precisely why it is approapate to do it now when the cost of government borrowing is so low, a point Wolf and Skidelsky also make. This borrowing now to spend into the economy is the basis for the first stage of Green QE2 - and of the Green New Deal"
And on page 13:
"We recommend Green QE2 be used to deliver the funds that are needed for local authorities to draw on to take that risk. It should also provide the local capital that is needed to ensure the private sector joins them in delivering local green solutions. This will help create the employment we so badly need and in the process generate long term savings for the UK that will more than pay the cost of this debt...."
"That same low cost of borrowing does, however, bring us to the final issue we believe Green QE should address...."
Now, I'm not arguing that direct government investment in the economy is a bad thing. As I said at the start, in this post I am only commenting on the financing approach, not on the merits of the Green proposals. If a future government wishes to issue lots more debt to finance the aims of the Green New Deal, it can propose that to the electorate and obtain a democratic mandate to do so. But it should be called by its name - debt-financed government investment. It is emphatically not Quantitative Easing - of any colour.
And one final comment. I admit that I am really rather relieved that the authors have comprehensively misunderstood what QE is. If they had really been proposing creation of new money by the central bank to finance public works, I would be planning to emigrate. I don't want to live in Britain's version of the Weimar Republic. I know that various economists have suggested that government, not banks, should have control of the money supply. But I am by no means sanguine about that. Expansion of the money supply to fund spending into the economy is known to be inflationary. Sometimes that's a good thing, and yes, it's true that investment shouldn't be inflationary. But would politicians exercise sufficient caution in the use of such a powerful tool? I doubt it.
Friday, 30 September 2011
A doomed assessment
This is part 1 of a two-part post reviewing Finance for the Future's paper proposing so-called "Green Quantitative Easing". The paper was produced in December 2010 (although I have only just seen it) but the ideas it contains are widely promoted, so I thought a critique would still be in order. I make no apology for the technical language I use in this review, as the concepts in the paper assume a fair understanding of finance and economics.
PART 1 of the report is an assessment of the Bank of England's Quantitative Easing programme in 2009-10. PART 2 is a proposal for government investment in the economy specifically to further green objectives as outlined in the New Economics Foundation (NEF)'s Green New Deal. I shall follow the same structure in this review.
I would like to state before I start that this review is in no way intended to be a criticism of the authors, Richard Murphy and Colin Jones. I would also like to issue a personal disclaimer. I am neither an economist nor an environmentalist, so will not comment here on the economic usefulness or otherwise of either Quantitative Easing or the Green New Deal. My comments will be concerned entirely with the financial process.
PART 1: Assessment of Quantitative Easing
What is Quantitative Easing?
The BoE has a handy layman's guide to QE as a PDF download from their website. As this is so easy to obtain, I am surprised that the paper does not refer to it, or even to the brief definition on the BoE's website. Instead, the appendix to the paper obtains a definition of QE from an article in the Financial Times (FT). The FT's definition is consistent with the BoE's but is not as comprehensive an explanation. Perhaps because the explanation is limited, the authors of the report have completely misunderstood it.
According to the authors of the report,
"Quantitative easing is......the Bank of England granting the Treasury an overdraft".
No it isn't. It's the central bank injecting newly-created money directly into the economy, bypassing government. Here's what the Bank of England (BoE) itself says about this (from its website):
"The MPC boosts the supply of money by purchasing assets like Government and corporate bonds – a policy often known as 'Quantitative Easing'. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from."
The central bank is able to create new money itself and does not require permission from government to do this. Because this money is created "out of thin air", it is NOT borrowing and does not increase the government debt, unlike an overdraft. What it does do is increase the size of the BoE's balance sheet. It can of course be reversed by selling a sufficient quantity of securities to eliminate the amount of new money created - this may or may not be the same quantity or type of securities as the original purchases, of course, depending on movements in market prices since purchase. The BoE's money creation process for asset purchases has absolutely nothing to do with the issuance of new government debt in the form of gilt-edged securities, or "gilts".
What assets were purchased?
From the BoE's pamphlet:
"...in March 2009, it decided to buy two types of asset – UK government bonds (known as gilts) and high-quality debt issued by private companies. Making the majority of purchases in gilts allows the Bank to increase the quantity of money in the economy rapidly. Targeted purchases of private sector assets should make it easier and cheaper for companies to raise finance by improving conditions in corporate credit markets."
The reason why gilts were purchased was because the gilt market is highly liquid, so funds could be injected into the economy quickly and easily. For some reason the authors seem to think that the QE programme was "buying back" government debt. It wasn't. The BoE bought gilts, but they were not redeemed. Those gilts, along with corporate bonds purchased as part of the same asset-purchase programme, now form part of the BoE's balance sheet.
Where did the assets purchased come from?
According to the authors of the report, the assets came from banks. Here's how they think it works:
"...the Bank of England has been issuing bonds to High Street and investment banks, which they buy.....But because the Bank of England does not want to take money away from the banks....the Bank of England then buys back gilts from those same High Street and investment banks that have bought the gilts issued by the Treasury"
Well, yes, high street and investment banks do indeed buy gilts, although they are by no means the only purchasers of that debt - major holders of gilts are pension and other savings funds. But the BoE generally did not buy gilts back from banks. On page 9 of the BoE's pamphlet we find these statements:
"Direct injections of money into the economy, primarily by buying gilts, can have a number of effects. The sellers of the assets have more money, so may go out and spend it. That will help to boost growth. Or they may buy other assets instead, such as shares or company bonds. That will push up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more. And higher asset prices mean lower yields, which brings down the cost of borrowing for businesses and households. That should provide a further boost to spending.
"In addition, banks will find themselves holding more reserves. That might lead them to boost their lending to consumers and businesses. So, once again, borrowing increases and so does spending. That said, if banks are concerned about their financial health, they may prefer to hold the extra reserves without expanding lending. For that reason the Bank of England is buying most of the assets from the wider economy rather than the banks." (my emphasis)
In other words, because the BoE was concerned that High Street and investment banks might just sit on the money realised from asset sales instead of lending it out, it AVOIDED buying gilts or other securities from them.
What was the effect of this asset-buying programme?
As the authors correctly state (quoting Alistair Darling), we don't know whether QE did what was intended. The BoE, on page 13 of its pamphlet, provides a useful checklist to determine whether or not it was working. But the authors of the report produced their own checklist, so I shall use that.
Outcome 1: Recapitalising the banks
Recapitalising the banks was certainly not an aim of QE. The authors claim that "...public money has been used to reflate the banks with the benefit going to the existing shareholders and those receiving bonuses rather than reflating the broader economy to the benefit of the majority"
There are two errors here. Firstly, the money created by the BoE to purchase assets was not public money. The BoE, like all fractional reserve banks, has the capability to create new money without borrowing. The money it created had nothing to do with the government. Secondly, the money it created was not "used to reflate banks". Most of that money initially went to institutional investors. Yes, it then found its way into banks, because risk-averse investors chose to place the cash in deposit accounts rather than invest in riskier assets themselves or spend it, as the BoE hoped. And that cash did indeed inflate bank reserves. And banks may indeed have used that money placed on deposit with them to speculate on the international financial markets, from which they will have made profits which - if retained - improved their capital, or which may have been distributed in the form of bonuses and dividends.
So yes, the end result of this process may well have been that banks profited from QE. But that's not the same as using the money "to reflate the banks", is it? And if investors preferred to hoard the cash rather than spending it, well, they were only doing what in the report the authors identify as normal behaviour in a recession - saving. And if the banks speculated with that money, they were only doing what banks normally do with wholesale deposits. It was all perfectly normal behaviour. The only abnormal bit, really, was the lack of bank lending. I shall return to that.
Outcome 2: making funds available to business
From the authors:
"The stated aim of quantitative easing was to make funds from banks available to business so that they could meet the pressure on them arising as a consequence of the recession".
No it wasn't. There was no such stated aim. In fact the BoE avoided purchasing assets from banks because it was concerned that banks might not lend the funds out.
The stated aim of QE, according to the BoE's pamphlet, was to make it easier and cheaper for businesses to raise finance on the capital markets:
"Bank of England purchases of private sector debt can help to unblock corporate credit markets, by reassuring market participants that there is a ready buyer should they wish to sell. That should help bring down the cost of borrowing, making it easier and cheaper for companies to raise
finance which they can then invest in their business.
More generally, the Bank of England’s purchases of both government and corporate bonds also increase the total demand for those types of assets, pushing up their prices. This is another way in which the Bank’s actions will make it cheaper for companies to raise finance."
Outcome 3: a shortage of gilts for investment purposes
By reducing the availability of gilts, and therefore increasing the price, the BoE hoped to encourage investors - including pension funds - to move their portfolios more towards riskier assets such as corporate bonds and equities. What they actually did was place the funds on deposit at banks, which wasn't what the BoE wanted. But QE creating a shortage of gilts - yes, that was the point. It was supposed to.
So I'm a bit bemused by the authors bewailing the fact that there was a shortage of gilts for pension investment, as if QE wasn't supposed to have this effect. However, the key to this lies in the authors' observation that "...during a recession people save more". Indeed they do. But the point of QE was to encourage spending instead of saving. So obviously QE was going to make life difficult for savers, wasn't it? The shortage of gilts raised gilt prices and lowered yields, reducing returns to savers and therefore discouraging saving. In a recession, this is quite a sensible thing to do, surely?
Outcome 4: asset price inflation
"We suggest that is because excessive funds, being saved for the reasons noted above by both households and corporations have been moved by investment managers acting on their behalf into the UK stock exchange and other markets (such as those for commodities, including metals and foodstuffs) because those funds have not had sufficient access to the gilts market, because the government has not met the demand for gilts to be used for savings, and has instead been repurchasing gilts, so denying them to the savings market."
The authors, in that sentence, have summed up the entire purpose of QE. What a pity that they are using it to criticise QE's effect. If that has indeed happened then QE has done exactly what it was designed to do - forced investors to move funds to other types of asset.
Oh, and the confusion between central bank and government rears its ugly head again. No, the government has NOT been repurchasing gilts. The BoE has been purchasing them.
The authors then go on:
There are important consequences of this. First, a mini asset boom has been created, maybe inadvertently....(my emphasis)
No, not inadvertent at all. Absolutely what was intended.
Given the whole problem that gave rise to the financial crisis was asset price inflation, or booms, this replicates the whole financial failing of the pre-2008 era.
The authors are comparing apples and oranges again. Commercial banks leveraging assets to the skies with derivatives is hardly the same as partial replacement of certain classes of security with cash.
"Second, because many of the assets whose prices have been inflated, such as coffee which is at a thirteen year high, or palm oil, which is up 45% in price in a year, feed (almost literally) into consumer price inflation, this policy does result in inflation, but not as a consequence of the direct printing of money, which is what economists predicted."
Well, ok, commodity price inflation on international markets probably was an unintended effect. But QE is supposed to raise inflation. Yes, in the short term it depresses yields. But the aim of the spending boost is to raise inflation to the level where normal interest rate management can take over. The BoE's stated aim for QE was to get inflation back up to the target level of 2%.
Outcome 5: deflation has been avoided
Yup, by raising inflation. Which was the point.
Outcome 6: low interest rates
"Another policy objective of the Bank of England, the government, and the quantitative easing programme was the maintenance of low rates of interest within the UK economy with the objective of stimulating economic activity. The programme has clearly helped achieve this with regard to interest rates on government debt, and on rates of interest paid by banks on savings, but the impact on the cost of borrowing to business, in particular, has been marginal. As has been widely reported, businesses have continued to pay significant premiums over bank base rates. This is because banks say that the risk inherent in such loans has increased. As a result it is not clear that the programme has delivered the new economic activity via increased bank lending to business that was intended."
I do have to agree with the authors here, except for their assertion that increased bank lending to business was an intended outcome of QE. The costs of borrowing for both businesses and households has risen massively. Yes, cost of financing on capital markets has fallen. But most businesses don't have access to capital markets, and for them, bank lending has become expensive and difficult to get. This is not because of QE, but because of risk aversion on the part of both lenders and borrowers.
Summary of PART 1
The authors' assessment of QE was doomed from the start because of their abject failure to understand what QE is and how it works. In particular, their confusion of government and central bank, and their evident lack of knowledge of the mechanics of fractional reserve banking, mean that this is a very seriously flawed analysis. Let's see if Part 2 is any better.
You can find my review of Part 2 by following this link: "A new name for an old game".
PART 1 of the report is an assessment of the Bank of England's Quantitative Easing programme in 2009-10. PART 2 is a proposal for government investment in the economy specifically to further green objectives as outlined in the New Economics Foundation (NEF)'s Green New Deal. I shall follow the same structure in this review.
I would like to state before I start that this review is in no way intended to be a criticism of the authors, Richard Murphy and Colin Jones. I would also like to issue a personal disclaimer. I am neither an economist nor an environmentalist, so will not comment here on the economic usefulness or otherwise of either Quantitative Easing or the Green New Deal. My comments will be concerned entirely with the financial process.
PART 1: Assessment of Quantitative Easing
What is Quantitative Easing?
The BoE has a handy layman's guide to QE as a PDF download from their website. As this is so easy to obtain, I am surprised that the paper does not refer to it, or even to the brief definition on the BoE's website. Instead, the appendix to the paper obtains a definition of QE from an article in the Financial Times (FT). The FT's definition is consistent with the BoE's but is not as comprehensive an explanation. Perhaps because the explanation is limited, the authors of the report have completely misunderstood it.
According to the authors of the report,
"Quantitative easing is......the Bank of England granting the Treasury an overdraft".
No it isn't. It's the central bank injecting newly-created money directly into the economy, bypassing government. Here's what the Bank of England (BoE) itself says about this (from its website):
"The MPC boosts the supply of money by purchasing assets like Government and corporate bonds – a policy often known as 'Quantitative Easing'. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from."
The central bank is able to create new money itself and does not require permission from government to do this. Because this money is created "out of thin air", it is NOT borrowing and does not increase the government debt, unlike an overdraft. What it does do is increase the size of the BoE's balance sheet. It can of course be reversed by selling a sufficient quantity of securities to eliminate the amount of new money created - this may or may not be the same quantity or type of securities as the original purchases, of course, depending on movements in market prices since purchase. The BoE's money creation process for asset purchases has absolutely nothing to do with the issuance of new government debt in the form of gilt-edged securities, or "gilts".
What assets were purchased?
From the BoE's pamphlet:
"...in March 2009, it decided to buy two types of asset – UK government bonds (known as gilts) and high-quality debt issued by private companies. Making the majority of purchases in gilts allows the Bank to increase the quantity of money in the economy rapidly. Targeted purchases of private sector assets should make it easier and cheaper for companies to raise finance by improving conditions in corporate credit markets."
The reason why gilts were purchased was because the gilt market is highly liquid, so funds could be injected into the economy quickly and easily. For some reason the authors seem to think that the QE programme was "buying back" government debt. It wasn't. The BoE bought gilts, but they were not redeemed. Those gilts, along with corporate bonds purchased as part of the same asset-purchase programme, now form part of the BoE's balance sheet.
Where did the assets purchased come from?
According to the authors of the report, the assets came from banks. Here's how they think it works:
"...the Bank of England has been issuing bonds to High Street and investment banks, which they buy.....But because the Bank of England does not want to take money away from the banks....the Bank of England then buys back gilts from those same High Street and investment banks that have bought the gilts issued by the Treasury"
Well, yes, high street and investment banks do indeed buy gilts, although they are by no means the only purchasers of that debt - major holders of gilts are pension and other savings funds. But the BoE generally did not buy gilts back from banks. On page 9 of the BoE's pamphlet we find these statements:
"Direct injections of money into the economy, primarily by buying gilts, can have a number of effects. The sellers of the assets have more money, so may go out and spend it. That will help to boost growth. Or they may buy other assets instead, such as shares or company bonds. That will push up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more. And higher asset prices mean lower yields, which brings down the cost of borrowing for businesses and households. That should provide a further boost to spending.
"In addition, banks will find themselves holding more reserves. That might lead them to boost their lending to consumers and businesses. So, once again, borrowing increases and so does spending. That said, if banks are concerned about their financial health, they may prefer to hold the extra reserves without expanding lending. For that reason the Bank of England is buying most of the assets from the wider economy rather than the banks." (my emphasis)
In other words, because the BoE was concerned that High Street and investment banks might just sit on the money realised from asset sales instead of lending it out, it AVOIDED buying gilts or other securities from them.
What was the effect of this asset-buying programme?
As the authors correctly state (quoting Alistair Darling), we don't know whether QE did what was intended. The BoE, on page 13 of its pamphlet, provides a useful checklist to determine whether or not it was working. But the authors of the report produced their own checklist, so I shall use that.
Outcome 1: Recapitalising the banks
Recapitalising the banks was certainly not an aim of QE. The authors claim that "...public money has been used to reflate the banks with the benefit going to the existing shareholders and those receiving bonuses rather than reflating the broader economy to the benefit of the majority"
There are two errors here. Firstly, the money created by the BoE to purchase assets was not public money. The BoE, like all fractional reserve banks, has the capability to create new money without borrowing. The money it created had nothing to do with the government. Secondly, the money it created was not "used to reflate banks". Most of that money initially went to institutional investors. Yes, it then found its way into banks, because risk-averse investors chose to place the cash in deposit accounts rather than invest in riskier assets themselves or spend it, as the BoE hoped. And that cash did indeed inflate bank reserves. And banks may indeed have used that money placed on deposit with them to speculate on the international financial markets, from which they will have made profits which - if retained - improved their capital, or which may have been distributed in the form of bonuses and dividends.
So yes, the end result of this process may well have been that banks profited from QE. But that's not the same as using the money "to reflate the banks", is it? And if investors preferred to hoard the cash rather than spending it, well, they were only doing what in the report the authors identify as normal behaviour in a recession - saving. And if the banks speculated with that money, they were only doing what banks normally do with wholesale deposits. It was all perfectly normal behaviour. The only abnormal bit, really, was the lack of bank lending. I shall return to that.
Outcome 2: making funds available to business
From the authors:
"The stated aim of quantitative easing was to make funds from banks available to business so that they could meet the pressure on them arising as a consequence of the recession".
No it wasn't. There was no such stated aim. In fact the BoE avoided purchasing assets from banks because it was concerned that banks might not lend the funds out.
The stated aim of QE, according to the BoE's pamphlet, was to make it easier and cheaper for businesses to raise finance on the capital markets:
"Bank of England purchases of private sector debt can help to unblock corporate credit markets, by reassuring market participants that there is a ready buyer should they wish to sell. That should help bring down the cost of borrowing, making it easier and cheaper for companies to raise
finance which they can then invest in their business.
More generally, the Bank of England’s purchases of both government and corporate bonds also increase the total demand for those types of assets, pushing up their prices. This is another way in which the Bank’s actions will make it cheaper for companies to raise finance."
Outcome 3: a shortage of gilts for investment purposes
By reducing the availability of gilts, and therefore increasing the price, the BoE hoped to encourage investors - including pension funds - to move their portfolios more towards riskier assets such as corporate bonds and equities. What they actually did was place the funds on deposit at banks, which wasn't what the BoE wanted. But QE creating a shortage of gilts - yes, that was the point. It was supposed to.
So I'm a bit bemused by the authors bewailing the fact that there was a shortage of gilts for pension investment, as if QE wasn't supposed to have this effect. However, the key to this lies in the authors' observation that "...during a recession people save more". Indeed they do. But the point of QE was to encourage spending instead of saving. So obviously QE was going to make life difficult for savers, wasn't it? The shortage of gilts raised gilt prices and lowered yields, reducing returns to savers and therefore discouraging saving. In a recession, this is quite a sensible thing to do, surely?
Outcome 4: asset price inflation
"We suggest that is because excessive funds, being saved for the reasons noted above by both households and corporations have been moved by investment managers acting on their behalf into the UK stock exchange and other markets (such as those for commodities, including metals and foodstuffs) because those funds have not had sufficient access to the gilts market, because the government has not met the demand for gilts to be used for savings, and has instead been repurchasing gilts, so denying them to the savings market."
The authors, in that sentence, have summed up the entire purpose of QE. What a pity that they are using it to criticise QE's effect. If that has indeed happened then QE has done exactly what it was designed to do - forced investors to move funds to other types of asset.
Oh, and the confusion between central bank and government rears its ugly head again. No, the government has NOT been repurchasing gilts. The BoE has been purchasing them.
The authors then go on:
There are important consequences of this. First, a mini asset boom has been created, maybe inadvertently....(my emphasis)
No, not inadvertent at all. Absolutely what was intended.
Given the whole problem that gave rise to the financial crisis was asset price inflation, or booms, this replicates the whole financial failing of the pre-2008 era.
The authors are comparing apples and oranges again. Commercial banks leveraging assets to the skies with derivatives is hardly the same as partial replacement of certain classes of security with cash.
"Second, because many of the assets whose prices have been inflated, such as coffee which is at a thirteen year high, or palm oil, which is up 45% in price in a year, feed (almost literally) into consumer price inflation, this policy does result in inflation, but not as a consequence of the direct printing of money, which is what economists predicted."
Well, ok, commodity price inflation on international markets probably was an unintended effect. But QE is supposed to raise inflation. Yes, in the short term it depresses yields. But the aim of the spending boost is to raise inflation to the level where normal interest rate management can take over. The BoE's stated aim for QE was to get inflation back up to the target level of 2%.
Outcome 5: deflation has been avoided
Yup, by raising inflation. Which was the point.
Outcome 6: low interest rates
"Another policy objective of the Bank of England, the government, and the quantitative easing programme was the maintenance of low rates of interest within the UK economy with the objective of stimulating economic activity. The programme has clearly helped achieve this with regard to interest rates on government debt, and on rates of interest paid by banks on savings, but the impact on the cost of borrowing to business, in particular, has been marginal. As has been widely reported, businesses have continued to pay significant premiums over bank base rates. This is because banks say that the risk inherent in such loans has increased. As a result it is not clear that the programme has delivered the new economic activity via increased bank lending to business that was intended."
I do have to agree with the authors here, except for their assertion that increased bank lending to business was an intended outcome of QE. The costs of borrowing for both businesses and households has risen massively. Yes, cost of financing on capital markets has fallen. But most businesses don't have access to capital markets, and for them, bank lending has become expensive and difficult to get. This is not because of QE, but because of risk aversion on the part of both lenders and borrowers.
Summary of PART 1
The authors' assessment of QE was doomed from the start because of their abject failure to understand what QE is and how it works. In particular, their confusion of government and central bank, and their evident lack of knowledge of the mechanics of fractional reserve banking, mean that this is a very seriously flawed analysis. Let's see if Part 2 is any better.
You can find my review of Part 2 by following this link: "A new name for an old game".
Wednesday, 28 September 2011
The growth illusion
Let's face it, we are in a mess. According to the BIS, the UK is the most heavily-indebted nation in the developed world, with total public and private debt amounting to something like 350% of GEP. Our economy is on the floor, unemployment is rising (particularly among young people) and would be even higher if it weren't for the fact that people are taking part-time jobs instead of the full-time ones they really want. Housing is still overvalued, first time buyers and young families can't afford to buy properties, and even if they could banks don't want to lend to them. Fuel costs are astronomical, food costs are rising, wages are flat. Businesses are going bust and individuals are going bankrupt.
Even worse is what's happening across the Channel. I, for one, am exceedingly glad that the UK did not join the Euro, which appears to be intent on blowing itself apart with an explosive mixture of market panic, economic mismanagement (by everyone, not just Greeks) and political inertia.
And then there's the US, with chronically high unemployment, welfare and healthcare systems that are very expensive and frankly unfit for purpose, a defunct housing market and debt that if stacked up could reach the moon - and a total lack of political will to deal effectively with any of this.
And then there's Japan....how long has that been bumping along the bottom now? Still paying the price for a housing bubble collapse and banking crisis two decades ago, not to mention recent natural disasters and an ongoing nuclear standoff.
And then there's China, which seems well-placed to become the overlord of the world - if it doesn't fall apart in a subprime crisis of its own first......
And then there's Switzerland, whose economy is being systematically crippled by scared investors moving their money to what they regard as a "safe haven". The SNB's attempt to deal with this by pegging the currency has effectively made tiny Switzerland the world's banker. Well, I suppose I can think of worse things for a country to be, but if and when they remove that peg, heaven help their economy....
I could go on, and on, and on....there are many, many more. The whole world is in an economic crisis.
On the face of it, the problems faced by all these countries look very different, don't they? But actually they all boil down to the same things. Political deadlocks, market panic, and above all - the dominance of economic theories that put the interests of international money ahead of the needs of ordinary people and ignore the real issues facing the world today.
Any economic theory that does not have the interests of PEOPLE at its heart is morally bankrupt. And by PEOPLE I don't mean the moneyed elite that play the international casinos. I mean ordinary people living ordinary lives, doing ordinary jobs for ordinary wages - bank clerks (yes, really), shop assistants, garage mechanics. I mean owners of very small businesses like mine, sole traders and little companies - corner shops, plumbers, peripatetic music teachers. I mean elderly people trying to live on a pension that diminishes day by day as inflation outstrips interest on savings. I mean single mothers trying to be both loving carer and adequate provider to their children as their benefits are cut and they are charged for trying to obtain maintenance from their runaway spouses. I mean young people leaving college in debt with little prospect of any decent job in the forseeable future.
I'm sure most readers of my blog would agree with me that we need an economic theory that really addresses the needs of these, and many other, people. The trouble is we don't agree on what that theory should contain. On one side we have those who believe that the way to prosperity is ramping up public debt (since interest rates are very low) to invest in public works, expanding the public sector hugely in order to develop essential infrastructure. On the other side we have those who believe that the way to prosperity is to cut the public sector brutally to allow the private sector into the gap that is left, because the private sector is a better source of innovation. I wish that both sides could see that they want the same thing, but they don't agree on how to get there - and they waste a lot of time and energy insulting each other rather than trying to achieve a compromise that honours the respective roles of both private and public sector.
For me, though - and I know I've said this before - if there are endless debates that degenerate into slanging matches and solve nothing, both sides are missing something important. Here's what I think the missing issue is: both sides anticipate a return to growth some time soon. But I think they are wrong.
We have lived for a century or more in the belief that prosperity comes through economic growth. And indeed, economic growth in the developed world has been astronomical in the last hundred years. We see the benefits in our comfortable lifestyles - and now, understandably, countries whose development has lagged behind want a piece of the action too. To support the lifestyle that we come to enjoy and enable other countries to have that too, the world economy has to grow - and maintain growth - at an unprecedented rate.
But the growth rates of the last century have been achieved through use of a finite resource. I mean oil, of course. And there is no doubt that we have nearly exhausted the known reserves of oil, but our global demand for oil is higher than ever before.
Now don't get me wrong. I am not playing the environmentalists' "economic catastrophe" card. I don't think the world running low on oil will mean all the lights will go out and we will return to living in caves. I am constantly amazed by the ingenuity of humans, and I have no doubt that solutions will be found to substitute for the crucial role that oil has hitherto played in the global economy. But it won't be quick, and it won't be cheap. And above all, it won't enable ANYONE for the foreseeable future to have the sort of economic growth that we have come to rely on.
So any economic plan that aims to restore the sort of economic growth we have had in the past is fundamentally flawed. And any political manifesto that claims that growth will sort out our financial and economic problems and restore the "good times" is dishonest. So I oppose "Keynsian" stimulus packages, whoever proposes them and whatever name they go under, if they involve more public borrowing. We cannot expect to have the sort of growth that will reduce that debt in the future, and although interest rates are very low at the present, there is no reason to suppose they will still be at that level in five years time. Yes, sovereign countries could print money instead of borrowing. But the relationship of money printing to inflation is well known, and although I suppose it is theoretically possible to manage the production of money so tightly that the inflation risk is minimal, I have no confidence in the ability of politicians to resist the temptation to interfere with this discipline in the interests of buying votes.
On the other hand, there is no doubt that people are suffering from our economic decline, and I don't see any prospect of this improving in the short term. I believe it is the job of government to support those who are the undeserving casualties of economic difficulties. Yet almost all the countries I have mentioned above are currently implementing spending cuts which hurt the most vulnerable in society. To me this is uncivilised. I don't want to live in a society that can't or won't help those who are unable to provide for themselves. And therefore, I don't support cuts in the public spending programmes that support the weakest. We are not so poor that we can't afford to care. Now, it is possible that providing people with the support they need to survive the next few years might require an increase in public spending in some areas, and that might involve additional borrowing. But I personally would regard that as money well spent.
What I DON'T want to see government doing is spending money - whether obtained through taxation, borrowing or printing - to prop up failed companies, build white elephants, host expensive flagship events, develop vast IT systems that are cancelled before they are implemented, or provide finance to high-risk small businesses that no commercial bank would lend money to (as Samuel Brittan suggested in the FT the other day). Or to set up a very expensive, monolithic and clunky state banking system, when all that is needed to provide essential banking services in the event of major clearing bank failure is a basic electronic payments facility and emergency lines of credit. And personally I don't even want government involvement in the development of green technology and replacements for oil - although I accept there is a role for government in financing R&D and very large infrastructure projects - because I think the private sector does that kind of innovative work much better. I'd rather government focused on providing essential services to support people. Because for me, that's what the public sector does best.
If I am right about the future facing us, then there are implications for our lifestyles. Will commuting become a thing of the past, replaced with homeworking, networking and electronic conferencing? Will schools and universities become centres of virtual learning, with students based at home (with homeworking parents?) and participating in on-line lessons delivered in real time? Will we see a return to shops within walking distance of people's homes and vibrant local high streets, replacing large out-of-town shopping centres only accessible by car?
Perhaps, when we can no longer rely on oil as we have done, it will force us to think more locally, to engage with our local communities and build prosperity through real economic activity from the grass roots up. And surely that is the best way of achieving a positive, prosperous future.
Even worse is what's happening across the Channel. I, for one, am exceedingly glad that the UK did not join the Euro, which appears to be intent on blowing itself apart with an explosive mixture of market panic, economic mismanagement (by everyone, not just Greeks) and political inertia.
And then there's the US, with chronically high unemployment, welfare and healthcare systems that are very expensive and frankly unfit for purpose, a defunct housing market and debt that if stacked up could reach the moon - and a total lack of political will to deal effectively with any of this.
And then there's Japan....how long has that been bumping along the bottom now? Still paying the price for a housing bubble collapse and banking crisis two decades ago, not to mention recent natural disasters and an ongoing nuclear standoff.
And then there's China, which seems well-placed to become the overlord of the world - if it doesn't fall apart in a subprime crisis of its own first......
And then there's Switzerland, whose economy is being systematically crippled by scared investors moving their money to what they regard as a "safe haven". The SNB's attempt to deal with this by pegging the currency has effectively made tiny Switzerland the world's banker. Well, I suppose I can think of worse things for a country to be, but if and when they remove that peg, heaven help their economy....
I could go on, and on, and on....there are many, many more. The whole world is in an economic crisis.
On the face of it, the problems faced by all these countries look very different, don't they? But actually they all boil down to the same things. Political deadlocks, market panic, and above all - the dominance of economic theories that put the interests of international money ahead of the needs of ordinary people and ignore the real issues facing the world today.
Any economic theory that does not have the interests of PEOPLE at its heart is morally bankrupt. And by PEOPLE I don't mean the moneyed elite that play the international casinos. I mean ordinary people living ordinary lives, doing ordinary jobs for ordinary wages - bank clerks (yes, really), shop assistants, garage mechanics. I mean owners of very small businesses like mine, sole traders and little companies - corner shops, plumbers, peripatetic music teachers. I mean elderly people trying to live on a pension that diminishes day by day as inflation outstrips interest on savings. I mean single mothers trying to be both loving carer and adequate provider to their children as their benefits are cut and they are charged for trying to obtain maintenance from their runaway spouses. I mean young people leaving college in debt with little prospect of any decent job in the forseeable future.
I'm sure most readers of my blog would agree with me that we need an economic theory that really addresses the needs of these, and many other, people. The trouble is we don't agree on what that theory should contain. On one side we have those who believe that the way to prosperity is ramping up public debt (since interest rates are very low) to invest in public works, expanding the public sector hugely in order to develop essential infrastructure. On the other side we have those who believe that the way to prosperity is to cut the public sector brutally to allow the private sector into the gap that is left, because the private sector is a better source of innovation. I wish that both sides could see that they want the same thing, but they don't agree on how to get there - and they waste a lot of time and energy insulting each other rather than trying to achieve a compromise that honours the respective roles of both private and public sector.
For me, though - and I know I've said this before - if there are endless debates that degenerate into slanging matches and solve nothing, both sides are missing something important. Here's what I think the missing issue is: both sides anticipate a return to growth some time soon. But I think they are wrong.
We have lived for a century or more in the belief that prosperity comes through economic growth. And indeed, economic growth in the developed world has been astronomical in the last hundred years. We see the benefits in our comfortable lifestyles - and now, understandably, countries whose development has lagged behind want a piece of the action too. To support the lifestyle that we come to enjoy and enable other countries to have that too, the world economy has to grow - and maintain growth - at an unprecedented rate.
But the growth rates of the last century have been achieved through use of a finite resource. I mean oil, of course. And there is no doubt that we have nearly exhausted the known reserves of oil, but our global demand for oil is higher than ever before.
Now don't get me wrong. I am not playing the environmentalists' "economic catastrophe" card. I don't think the world running low on oil will mean all the lights will go out and we will return to living in caves. I am constantly amazed by the ingenuity of humans, and I have no doubt that solutions will be found to substitute for the crucial role that oil has hitherto played in the global economy. But it won't be quick, and it won't be cheap. And above all, it won't enable ANYONE for the foreseeable future to have the sort of economic growth that we have come to rely on.
So any economic plan that aims to restore the sort of economic growth we have had in the past is fundamentally flawed. And any political manifesto that claims that growth will sort out our financial and economic problems and restore the "good times" is dishonest. So I oppose "Keynsian" stimulus packages, whoever proposes them and whatever name they go under, if they involve more public borrowing. We cannot expect to have the sort of growth that will reduce that debt in the future, and although interest rates are very low at the present, there is no reason to suppose they will still be at that level in five years time. Yes, sovereign countries could print money instead of borrowing. But the relationship of money printing to inflation is well known, and although I suppose it is theoretically possible to manage the production of money so tightly that the inflation risk is minimal, I have no confidence in the ability of politicians to resist the temptation to interfere with this discipline in the interests of buying votes.
On the other hand, there is no doubt that people are suffering from our economic decline, and I don't see any prospect of this improving in the short term. I believe it is the job of government to support those who are the undeserving casualties of economic difficulties. Yet almost all the countries I have mentioned above are currently implementing spending cuts which hurt the most vulnerable in society. To me this is uncivilised. I don't want to live in a society that can't or won't help those who are unable to provide for themselves. And therefore, I don't support cuts in the public spending programmes that support the weakest. We are not so poor that we can't afford to care. Now, it is possible that providing people with the support they need to survive the next few years might require an increase in public spending in some areas, and that might involve additional borrowing. But I personally would regard that as money well spent.
What I DON'T want to see government doing is spending money - whether obtained through taxation, borrowing or printing - to prop up failed companies, build white elephants, host expensive flagship events, develop vast IT systems that are cancelled before they are implemented, or provide finance to high-risk small businesses that no commercial bank would lend money to (as Samuel Brittan suggested in the FT the other day). Or to set up a very expensive, monolithic and clunky state banking system, when all that is needed to provide essential banking services in the event of major clearing bank failure is a basic electronic payments facility and emergency lines of credit. And personally I don't even want government involvement in the development of green technology and replacements for oil - although I accept there is a role for government in financing R&D and very large infrastructure projects - because I think the private sector does that kind of innovative work much better. I'd rather government focused on providing essential services to support people. Because for me, that's what the public sector does best.
If I am right about the future facing us, then there are implications for our lifestyles. Will commuting become a thing of the past, replaced with homeworking, networking and electronic conferencing? Will schools and universities become centres of virtual learning, with students based at home (with homeworking parents?) and participating in on-line lessons delivered in real time? Will we see a return to shops within walking distance of people's homes and vibrant local high streets, replacing large out-of-town shopping centres only accessible by car?
Perhaps, when we can no longer rely on oil as we have done, it will force us to think more locally, to engage with our local communities and build prosperity through real economic activity from the grass roots up. And surely that is the best way of achieving a positive, prosperous future.
Saturday, 24 September 2011
Trolling, cyberbullying and constructive debate
There has been much discussion recently regarding the phenomenon known as internet "trolling", following the conviction of Sean Duffy for posting offensive messages on Facebook about young people who had died. The BBC's article on trolling to my mind confused it with cyberbullying, but I agree there is a considerable overlap: both cyberbullying and trolling involve deliberate, malicious attacks on an individual, and it is not clear at what point trolling metamorphoses into its far nastier and possibly illegal cousin.
Wikipedia defines "troll" thus:
"...someone who posts inflammatory, extraneous or off-topic messages in an online community, such as an online discussion forum, chat room or blog, with the primary intent of provoking readers into an emotional response or of otherwise disrupting normal on-topic discussion"
Urban Dictionary is subtly different:
"one who posts a deliberately provocative message to a newsgroup or message board with the intention of causing maximum disruption and argument"
And a pretty comprehensive definition of "trolling" comes from Know Your Meme:
"....refers to any behavior that is meant to intentionally anger or frustrate someone else. It is often associated with online discussions where users are subjected to offensive or superfluous posts and messages in order to provoke a response."
All these sources agree on one thing. It is not so much what is said but the INTENTION that defines whether someone is trolling. Online debates can become quite heated, tempers flare and language can become unprintable, but that doesn't necessarily mean that anyone is trolling. It is the deliberate DISRUPTION of debate that constitutes trolling.
This is in my view a very important distinction. In the comments on my recent post in Liberal Conspiracy, I was called a moron, an idiot and various other names by people who felt very strongly about what I had said and chose to show this by means of personal abuse rather than addressing the points they disagreed with. For me, anyone who resorts to personal abuse has already lost the argument. But that didn't mean these people were trolling. They simply felt strongly about something and expressed it in personal terms. As someone said to me recently, this could be seen as a good thing - at least they recognised me as a person!
But if someone maliciously attacks what another person has written with the intention of discrediting them, is that trolling, if the points they make are valid? This to my mind is a bit of a grey area, and I'd value comments from others on this. The definitions above are unclear: the Wiki definition suggests that this is not trolling, since the attacks are on-topic, but the other definitions do suggest that offensive posting IS trolling even if on-topic, because it is intended to anger and provoke rather than engage and debate. Deliberate attacks which seek to prevent reasoned discussion of the writing and aim to undermine the writer are hurtful and disruptive. But on the other hand it must be possible to disembowel a silly argument without being accused of trolling. The problem is, though, that what one person regards as reasonable fisking, another may regard as an unjustified and vitriolic attack.
To me the best strategy is to remain factual, address the points in a logical manner and refrain from emotive language or personal abuse - even if someone is using abusive language themselves. And don't attack just for the sake of it, for a laugh, or because you don't like the person: only take a post apart if you genuinely disagree with it. Stick to the topic, provide reliable evidence to support your points, and be polite to the writer while you are demolishing their arguments. They may still call you a troll, but the evidence will be against them.
Sometimes a particular individual is systematically targeted for abuse by others on social media. This is often called trolling, especially when it is associated with completely opposed political views. But in my view a sustained campaign of abuse of an individual on social media is not trolling, it is cyberbullying - even if the person concerned has been blocked so they cannot see what is being said about them. No block can completely prevent information reaching the target. I have been the target of such a campaign recently, and found it exceedingly distressing to discover that someone was deliberately spreading lies and misinformation about me in order to discredit me. However much you may disagree with someone, or believe they are a fraud and a sham, if you deliberately spread lies about them, misrepresent what they have said, or abuse them personally, you are a bully. You should engage them in constructive debate, not stab them in the back.
Sometimes the target of abuse - trolling or cyberbullying - exposes the abuse by writing about it, broadcasting it on social media, or confronting the abuser. I've done this myself and am in two minds as to whether or not this is a good idea. The advice from Twitter is to ignore abuse unless it involves threats of personal violence, in which case you should inform the police, of course. In many cases studiously ignoring abuse is sensible: "don't feed trolls" is generally good advice. It certainly stopped the abuse I was receiving. But cyberbullies may not be as easily put off as a troll who is getting off on your distress, and sustained hate campaigns involving personal abuse may therefore be better exposed. No-one should have to put up with this stuff, and exposure can be a powerful weapon. But if you do decide to expose abuse, be careful - make sure you release EXACTLY what the abuser has said and done, and keep copies of their postings as evidence. If you alter what they have said or done you may be guilty of trolling or cyberbullying yourself.
And finally, a warning about nasty jokes. Not all trolling is malicious attacks on serious posts or deliberate campaigns to discredit. Urban Dictionary gives a good example of "lighthearted" trolling:
The "other guy" may well have meant this as a joke. But it was unpleasant, unnecessary and unrelated to the topic of the first remark, and therefore it was trolling. There is far too much of this stuff around on the internet and it would be a much nicer place if people would refrain from issuing gratuitous insults, even as "jokes". They aren't funny.
So in summary, play nice - even if the other person really is a prat!
Wikipedia defines "troll" thus:
"...someone who posts inflammatory, extraneous or off-topic messages in an online community, such as an online discussion forum, chat room or blog, with the primary intent of provoking readers into an emotional response or of otherwise disrupting normal on-topic discussion"
Urban Dictionary is subtly different:
"one who posts a deliberately provocative message to a newsgroup or message board with the intention of causing maximum disruption and argument"
And a pretty comprehensive definition of "trolling" comes from Know Your Meme:
"....refers to any behavior that is meant to intentionally anger or frustrate someone else. It is often associated with online discussions where users are subjected to offensive or superfluous posts and messages in order to provoke a response."
All these sources agree on one thing. It is not so much what is said but the INTENTION that defines whether someone is trolling. Online debates can become quite heated, tempers flare and language can become unprintable, but that doesn't necessarily mean that anyone is trolling. It is the deliberate DISRUPTION of debate that constitutes trolling.
This is in my view a very important distinction. In the comments on my recent post in Liberal Conspiracy, I was called a moron, an idiot and various other names by people who felt very strongly about what I had said and chose to show this by means of personal abuse rather than addressing the points they disagreed with. For me, anyone who resorts to personal abuse has already lost the argument. But that didn't mean these people were trolling. They simply felt strongly about something and expressed it in personal terms. As someone said to me recently, this could be seen as a good thing - at least they recognised me as a person!
But if someone maliciously attacks what another person has written with the intention of discrediting them, is that trolling, if the points they make are valid? This to my mind is a bit of a grey area, and I'd value comments from others on this. The definitions above are unclear: the Wiki definition suggests that this is not trolling, since the attacks are on-topic, but the other definitions do suggest that offensive posting IS trolling even if on-topic, because it is intended to anger and provoke rather than engage and debate. Deliberate attacks which seek to prevent reasoned discussion of the writing and aim to undermine the writer are hurtful and disruptive. But on the other hand it must be possible to disembowel a silly argument without being accused of trolling. The problem is, though, that what one person regards as reasonable fisking, another may regard as an unjustified and vitriolic attack.
To me the best strategy is to remain factual, address the points in a logical manner and refrain from emotive language or personal abuse - even if someone is using abusive language themselves. And don't attack just for the sake of it, for a laugh, or because you don't like the person: only take a post apart if you genuinely disagree with it. Stick to the topic, provide reliable evidence to support your points, and be polite to the writer while you are demolishing their arguments. They may still call you a troll, but the evidence will be against them.
Sometimes a particular individual is systematically targeted for abuse by others on social media. This is often called trolling, especially when it is associated with completely opposed political views. But in my view a sustained campaign of abuse of an individual on social media is not trolling, it is cyberbullying - even if the person concerned has been blocked so they cannot see what is being said about them. No block can completely prevent information reaching the target. I have been the target of such a campaign recently, and found it exceedingly distressing to discover that someone was deliberately spreading lies and misinformation about me in order to discredit me. However much you may disagree with someone, or believe they are a fraud and a sham, if you deliberately spread lies about them, misrepresent what they have said, or abuse them personally, you are a bully. You should engage them in constructive debate, not stab them in the back.
Sometimes the target of abuse - trolling or cyberbullying - exposes the abuse by writing about it, broadcasting it on social media, or confronting the abuser. I've done this myself and am in two minds as to whether or not this is a good idea. The advice from Twitter is to ignore abuse unless it involves threats of personal violence, in which case you should inform the police, of course. In many cases studiously ignoring abuse is sensible: "don't feed trolls" is generally good advice. It certainly stopped the abuse I was receiving. But cyberbullies may not be as easily put off as a troll who is getting off on your distress, and sustained hate campaigns involving personal abuse may therefore be better exposed. No-one should have to put up with this stuff, and exposure can be a powerful weapon. But if you do decide to expose abuse, be careful - make sure you release EXACTLY what the abuser has said and done, and keep copies of their postings as evidence. If you alter what they have said or done you may be guilty of trolling or cyberbullying yourself.
And finally, a warning about nasty jokes. Not all trolling is malicious attacks on serious posts or deliberate campaigns to discredit. Urban Dictionary gives a good example of "lighthearted" trolling:
Guy: "I just found the coolest ninja pencil in existence."
Other Guy: "I just found the most retarded thread in existence."
Other Guy: "I just found the most retarded thread in existence."
The "other guy" may well have meant this as a joke. But it was unpleasant, unnecessary and unrelated to the topic of the first remark, and therefore it was trolling. There is far too much of this stuff around on the internet and it would be a much nicer place if people would refrain from issuing gratuitous insults, even as "jokes". They aren't funny.
So in summary, play nice - even if the other person really is a prat!
Wednesday, 21 September 2011
On risk and safety
At the Keynes vs Hayek debate at the LSE on 26th July, Shiv Malik (from the audience) asked a question which stopped the panel in their tracks. He commented that Hayek could be regarded as representing the desire of people in the 1930s for freedom, and Keynes as representing their need for security. And he asked whether people of today are looking for both freedom and security.
Needless to say, the panel did not answer his question - though many economic writers of today are indeed attempting to bridge this divide. But it reminded me of a song that some of my students sing, and the conversation I always have with them about the meaning of the song.
The song is "Dona, dona" by Sholom Secunda and was originally written in Yiddish. Only the verses are relevant and I reproduce them here in the translation recorded by Donovan in 1968.
On a wagon, bound for market, there's a calf with a mournful eye.
High above him there's a swallow, winging swiftly through the sky.
"Stop complaining", said the farmer, "who told you a calf to be?
Why don't you have wings to fly with, like the swallow, proud and free?"
Calves are easily bound and slaughtered, never knowing the reason why.
But whoever treasures freedom, like the swallow has learned to fly.
I learned this song when I was eight, and at the time thought it was about a calf called Donna - and was very puzzled by the calf's gender. I know better now.
This song exemplifies the very tension between desire for freedom and need for security that Shiv Malik identified, that different schools of economics portray and opposing political parties espouse. And I believe his point was really that human beings need both freedom and security, so our economic and political structures need to accommodate both of these - degrees of freedom so that calves can grow wings and fly if they wish, and degrees of support and protection for those who, for whatever reason, are not able to fend for themselves as swallows must. We are both calves and swallows. And the degree to which we are "calf" or "swallow" varies at different times in our lives and in different circumstances. In my own life I have been, generally, much more swallow than calf: the choices I have made have forced me in that direction, even when I would much rather have been a calf for a while. Equally I am sure that there are many people who have ended up as calves when they had hoped to be swallows.
In our society we generally aspire to "freedom", but we don't like the risks that attend it. In other societies, people like the protection that comes from conforming, except when that becomes oppressive - then they start clamouring for "freedom". And when times are good we resent government interference in our lives, but when times are difficult we call on government to rescue us. Being a swallow means accepting responsibility for our own lives, including the difficult bits. Being a calf means giving up some of our freedom in order to be cared for by our society.
So it is with business, with government, and with finance. When times are hard, and especially after high-profile fraud cases and financial crashes, we call for increased state control and intervention - "there should be a law against it". But when times are good we want the state to back off and let free enterprise rule. At the moment there are proposals for vastly increased regulation of banks, coupled with varying degrees of structural reform. There are even calls for a complete state takeover of banking. Yet only ten years ago the fashion was for deregulation, a hands-off approach by the state and freedom for financial enterprises to do whatever they wish.
We pay a heavy price for this pendulum swing from too much control to too little, and back again. How do we find, and stay with, the centre point, where free enterprise can operate freely within reasonable constraints set and enforced by the state? What constraints will we accept on our freedom to do whatever we want in the interests of financial stability?
I don't have a simple answer to this conundrum. But it seems to me that part of the issue is people's unwillingness to accept risk. We want to be swallows when we invest our money - after all, we like high returns, and those only come by taking risks, so we want to be able to choose where to put our money in order to achieve the best return. No-one wants to be forced to put their money into a state savings scheme when private schemes offer better returns, do they? But when the risks we have taken turn out to be bad ones and we face the prospect of losing our money, we suddenly become calves, scurrying to the safety of the government cowshed and crying "it's not fair!".
Is it time for us to understand the real risks we take with our money and take rational decisions as to whether safety or risk are more important to us at different times in our lives? Is it time we started to care about whether the companies we invest in are financially sound, economically useful and ethically acceptable? Some people already do. Maybe the rest of us should as well. And perhaps, if enough of us care about these things, the financial sector will start to provide the range of investment options from very risky to very safe that we really need, instead of pretending that investments are safe when they are not and conning us into accepting rubbish returns as a price for the illusion of safety.
Much of the problem in the last financial crisis arose from the fact that investments that had been regarded as "safe" turned out to be anything but. There is in my view an important role for government to ensure that real safety is available for those who need it, and real risk is available for those who want it, and both are clearly identifiable. Tinkering with organisational structures, pretending that some forms of banking are safer than others, fragmenting financial functions - none of these deliver the clarity and openness that we require in order to manage our money. What is needed is clear and accurate reporting and management of risk from end-to-end of the entire financial services industry. Only if there is complete transparency of reporting and accurate understanding of risk in financial services do people stand any real chance of being able to manage their need to be, at different times, both calves and swallows.
Needless to say, the panel did not answer his question - though many economic writers of today are indeed attempting to bridge this divide. But it reminded me of a song that some of my students sing, and the conversation I always have with them about the meaning of the song.
The song is "Dona, dona" by Sholom Secunda and was originally written in Yiddish. Only the verses are relevant and I reproduce them here in the translation recorded by Donovan in 1968.
On a wagon, bound for market, there's a calf with a mournful eye.
High above him there's a swallow, winging swiftly through the sky.
"Stop complaining", said the farmer, "who told you a calf to be?
Why don't you have wings to fly with, like the swallow, proud and free?"
Calves are easily bound and slaughtered, never knowing the reason why.
But whoever treasures freedom, like the swallow has learned to fly.
I learned this song when I was eight, and at the time thought it was about a calf called Donna - and was very puzzled by the calf's gender. I know better now.
This song exemplifies the very tension between desire for freedom and need for security that Shiv Malik identified, that different schools of economics portray and opposing political parties espouse. And I believe his point was really that human beings need both freedom and security, so our economic and political structures need to accommodate both of these - degrees of freedom so that calves can grow wings and fly if they wish, and degrees of support and protection for those who, for whatever reason, are not able to fend for themselves as swallows must. We are both calves and swallows. And the degree to which we are "calf" or "swallow" varies at different times in our lives and in different circumstances. In my own life I have been, generally, much more swallow than calf: the choices I have made have forced me in that direction, even when I would much rather have been a calf for a while. Equally I am sure that there are many people who have ended up as calves when they had hoped to be swallows.
In our society we generally aspire to "freedom", but we don't like the risks that attend it. In other societies, people like the protection that comes from conforming, except when that becomes oppressive - then they start clamouring for "freedom". And when times are good we resent government interference in our lives, but when times are difficult we call on government to rescue us. Being a swallow means accepting responsibility for our own lives, including the difficult bits. Being a calf means giving up some of our freedom in order to be cared for by our society.
So it is with business, with government, and with finance. When times are hard, and especially after high-profile fraud cases and financial crashes, we call for increased state control and intervention - "there should be a law against it". But when times are good we want the state to back off and let free enterprise rule. At the moment there are proposals for vastly increased regulation of banks, coupled with varying degrees of structural reform. There are even calls for a complete state takeover of banking. Yet only ten years ago the fashion was for deregulation, a hands-off approach by the state and freedom for financial enterprises to do whatever they wish.
We pay a heavy price for this pendulum swing from too much control to too little, and back again. How do we find, and stay with, the centre point, where free enterprise can operate freely within reasonable constraints set and enforced by the state? What constraints will we accept on our freedom to do whatever we want in the interests of financial stability?
I don't have a simple answer to this conundrum. But it seems to me that part of the issue is people's unwillingness to accept risk. We want to be swallows when we invest our money - after all, we like high returns, and those only come by taking risks, so we want to be able to choose where to put our money in order to achieve the best return. No-one wants to be forced to put their money into a state savings scheme when private schemes offer better returns, do they? But when the risks we have taken turn out to be bad ones and we face the prospect of losing our money, we suddenly become calves, scurrying to the safety of the government cowshed and crying "it's not fair!".
Is it time for us to understand the real risks we take with our money and take rational decisions as to whether safety or risk are more important to us at different times in our lives? Is it time we started to care about whether the companies we invest in are financially sound, economically useful and ethically acceptable? Some people already do. Maybe the rest of us should as well. And perhaps, if enough of us care about these things, the financial sector will start to provide the range of investment options from very risky to very safe that we really need, instead of pretending that investments are safe when they are not and conning us into accepting rubbish returns as a price for the illusion of safety.
Much of the problem in the last financial crisis arose from the fact that investments that had been regarded as "safe" turned out to be anything but. There is in my view an important role for government to ensure that real safety is available for those who need it, and real risk is available for those who want it, and both are clearly identifiable. Tinkering with organisational structures, pretending that some forms of banking are safer than others, fragmenting financial functions - none of these deliver the clarity and openness that we require in order to manage our money. What is needed is clear and accurate reporting and management of risk from end-to-end of the entire financial services industry. Only if there is complete transparency of reporting and accurate understanding of risk in financial services do people stand any real chance of being able to manage their need to be, at different times, both calves and swallows.
Thursday, 15 September 2011
Trading losses and takeovers
It appears UBS has lost some money - about $2bn - due to unauthorised and highly risky trading on financial markets. Not for the first time, either.
As a result of this, there are now even more strident calls for UK retail banking to be ring fenced to prevent these sort of losses from impacting on retail customers. This tweet from the BBC's Robert Peston is typical:
As a result of this, there are now even more strident calls for UK retail banking to be ring fenced to prevent these sort of losses from impacting on retail customers. This tweet from the BBC's Robert Peston is typical:
Friday, 9 September 2011
Monetary Policy RIP
So the markets were disappointed that Bernanke didn't announce Quantitative Easing (QE) round 3 for the US.
And the markets were disappointed that the Bank of England's Monetary Policy Committee (MPC) didn't announce a second round of QE for the UK.
Both Bernanke and the MPC have in effect said "monetary policy is dead in the water". Base lending rates are on the floor and neither has come up with any measures to reduce real interest rates further. Yes, Bernanke did suggest that there were some other measures the Federal Reserve could take to depress interest rates along the yield curve and so encourage investment. And neither the MPC nor the Fed have ruled out further QE at some point. But their reluctance to act suggests that they are now - belatedly - doubting the wisdom of throwing more money at the markets in the hope of stimulating demand in the real economy on either side of the Atlantic.
And about time. Business investment is low and consumer spending is on the floor. Those businesses that have cash aren't investing it - they are hoarding it instead because of worries about lack of sales. Those businesses that don't have cash are either paying down debt or avoiding borrowing for investment, again because of worries about lack of sales (different link!). Yes, there are of course some businesses that do want to borrow. But guess what - banks don't want to lend to them. Not because they don't have any money to lend. They do. But they would rather hang on to that money and park it safely at the central bank (which pays interest, of course) or invest it in nice safe assets such as government bonds. That's what they did with the money from the last round of QE. Which is why it didn't work.
As I've pointed out in a previous blogpost, QE only works as a domestic demand stimulus if banks are lending to businesses and individuals. But they aren't. It is therefore completely pointless.
Unfortunately those who work in financial markets can't tell the difference between the bubble they live in and the real economy. If there's more money around and bond yields are down, QE must be working, yes? No. QE does affect investor behaviour: it floods the market with cash and reduces the supply of safe long-dated securities, which is supposed to push investors towards investing in riskier assets such as equities. Trouble is, what they are actually doing is hoarding cash in insured deposit accounts and safe haven currencies. So arguably QE didn't work even for the markets. All it did was create loads of cash that is now sloshing around the world desperately seeking a refuge. Heaven alone knows why they want more. They can't find enough hiding places for the cash they've already got.
Monetary policy has nothing more to contribute. The only solution to the economic decline on both sides of the Atlantic lies in the fiscal realm. It is time that the politicians stepped up and accepted their responsibility for getting us out of this mess.
And the markets were disappointed that the Bank of England's Monetary Policy Committee (MPC) didn't announce a second round of QE for the UK.
Both Bernanke and the MPC have in effect said "monetary policy is dead in the water". Base lending rates are on the floor and neither has come up with any measures to reduce real interest rates further. Yes, Bernanke did suggest that there were some other measures the Federal Reserve could take to depress interest rates along the yield curve and so encourage investment. And neither the MPC nor the Fed have ruled out further QE at some point. But their reluctance to act suggests that they are now - belatedly - doubting the wisdom of throwing more money at the markets in the hope of stimulating demand in the real economy on either side of the Atlantic.
And about time. Business investment is low and consumer spending is on the floor. Those businesses that have cash aren't investing it - they are hoarding it instead because of worries about lack of sales. Those businesses that don't have cash are either paying down debt or avoiding borrowing for investment, again because of worries about lack of sales (different link!). Yes, there are of course some businesses that do want to borrow. But guess what - banks don't want to lend to them. Not because they don't have any money to lend. They do. But they would rather hang on to that money and park it safely at the central bank (which pays interest, of course) or invest it in nice safe assets such as government bonds. That's what they did with the money from the last round of QE. Which is why it didn't work.
As I've pointed out in a previous blogpost, QE only works as a domestic demand stimulus if banks are lending to businesses and individuals. But they aren't. It is therefore completely pointless.
Unfortunately those who work in financial markets can't tell the difference between the bubble they live in and the real economy. If there's more money around and bond yields are down, QE must be working, yes? No. QE does affect investor behaviour: it floods the market with cash and reduces the supply of safe long-dated securities, which is supposed to push investors towards investing in riskier assets such as equities. Trouble is, what they are actually doing is hoarding cash in insured deposit accounts and safe haven currencies. So arguably QE didn't work even for the markets. All it did was create loads of cash that is now sloshing around the world desperately seeking a refuge. Heaven alone knows why they want more. They can't find enough hiding places for the cash they've already got.
Monetary policy has nothing more to contribute. The only solution to the economic decline on both sides of the Atlantic lies in the fiscal realm. It is time that the politicians stepped up and accepted their responsibility for getting us out of this mess.
Where were you on 9/11?
As we approach the 10th anniversary of the destruction of the Twin Towers, many people will be asking that question - where were you when the planes hit?
I'll tell you where I was. Just about to get into a taxi, heading for the airport. To get on a plane.
No, I wasn't in New York. I was in Edinburgh. At the time I was working on a project for RBS, designing and implementing a computer system to enable them to produce consolidated financial and regulatory reporting on something rather more robust and auditable than an Excel spreadsheet. I was dividing my time between London and Edinburgh, and on Tuesday September 11th 2001, I had been in Edinburgh for two days and was about to fly home. Just as I was leaving the office, someone said to me "have you heard the news?" I looked round, and on the computer screens were the images of the smoking twin towers.
I still got on that plane. It was the weirdest flight I have ever been on in my life. Everyone knew, of course - but no-one was saying anything. The only indication of anything being abnormal was cabin crew handing out double gin & tonics. That, and the atmosphere. You could cut it with a knife. I don't think I have ever been so scared, and I am certain I was not the only one who felt like that.
Our landing at Gatwick was uneventful, and there was no extra security as we went through to Arrivals. But in my taxi on the M25, we heard the news that Gatwick had been closed. Apparently mine was the last domestic flight to land before everything was grounded.
Why did I get on that plane? Well, I did toy with the idea of diverting to Waverley station and trying to get a train. But that would have caused a big problem. You see, I had to pick up the kids from the childminder at 6 pm.....
The events of 9/11 forced me to look hard at the life I was living. For the first time I realised how very tenuous my childcare arrangements were - that while my children were in school and nursery, I was four hundred miles away. And that happened nearly every week. They couldn't be ill, or unhappy, or short of some essential, because Mummy couldn't drop everything and run to the school or nursery at a moment's notice. And on 9/11, Mummy nearly didn't get home at all.
I felt that my children deserved a mother who had time for them, who could be there for them. Yes, I earned a good income. But the hours I worked, the travel, and the mental aggravation of senior-level banking meant that I was either physically not present or personally unavailable. That wasn't the sort of mum I wanted to be.
So when I completed the RBS project I looked for work that was more compatible with family life and the needs of my children - and my own need to be a decent mum. I set up my own business as a freelance singer and teacher, funded it from savings, and was afloat within three years from scratch. It is hardly the most lucrative profession in the world, and I am much poorer financially than I was before. But I have gained so much from having time with my children - and even more from discovering that I have a real talent for teaching and can help so many young and not-so-young people learn to enjoy singing, many for the first time.
I have no regrets at all that I left banking, and I do not plan to return. But that won't stop me talking about it, writing about it and trying to influence policy makers as they struggle to reform banking for the 21st Century. I worked in banking for a long time and I know it well. I have much to say.
I'll tell you where I was. Just about to get into a taxi, heading for the airport. To get on a plane.
No, I wasn't in New York. I was in Edinburgh. At the time I was working on a project for RBS, designing and implementing a computer system to enable them to produce consolidated financial and regulatory reporting on something rather more robust and auditable than an Excel spreadsheet. I was dividing my time between London and Edinburgh, and on Tuesday September 11th 2001, I had been in Edinburgh for two days and was about to fly home. Just as I was leaving the office, someone said to me "have you heard the news?" I looked round, and on the computer screens were the images of the smoking twin towers.
I still got on that plane. It was the weirdest flight I have ever been on in my life. Everyone knew, of course - but no-one was saying anything. The only indication of anything being abnormal was cabin crew handing out double gin & tonics. That, and the atmosphere. You could cut it with a knife. I don't think I have ever been so scared, and I am certain I was not the only one who felt like that.
Our landing at Gatwick was uneventful, and there was no extra security as we went through to Arrivals. But in my taxi on the M25, we heard the news that Gatwick had been closed. Apparently mine was the last domestic flight to land before everything was grounded.
Why did I get on that plane? Well, I did toy with the idea of diverting to Waverley station and trying to get a train. But that would have caused a big problem. You see, I had to pick up the kids from the childminder at 6 pm.....
The events of 9/11 forced me to look hard at the life I was living. For the first time I realised how very tenuous my childcare arrangements were - that while my children were in school and nursery, I was four hundred miles away. And that happened nearly every week. They couldn't be ill, or unhappy, or short of some essential, because Mummy couldn't drop everything and run to the school or nursery at a moment's notice. And on 9/11, Mummy nearly didn't get home at all.
I felt that my children deserved a mother who had time for them, who could be there for them. Yes, I earned a good income. But the hours I worked, the travel, and the mental aggravation of senior-level banking meant that I was either physically not present or personally unavailable. That wasn't the sort of mum I wanted to be.
So when I completed the RBS project I looked for work that was more compatible with family life and the needs of my children - and my own need to be a decent mum. I set up my own business as a freelance singer and teacher, funded it from savings, and was afloat within three years from scratch. It is hardly the most lucrative profession in the world, and I am much poorer financially than I was before. But I have gained so much from having time with my children - and even more from discovering that I have a real talent for teaching and can help so many young and not-so-young people learn to enjoy singing, many for the first time.
I have no regrets at all that I left banking, and I do not plan to return. But that won't stop me talking about it, writing about it and trying to influence policy makers as they struggle to reform banking for the 21st Century. I worked in banking for a long time and I know it well. I have much to say.
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