Coppola Comment

The geeks to whom my post on probability was addressed responded exactly as I expected. "You don't understand the tech", they said. And they went on about network routing protocols and Dijkstra's algorithm . Someone even sent me a spec for an onion routing protocol for the Lightning network. I read it and sighed. They had completely missed the point. To be sure, I had made an incorrect assumption about Lightning. I assumed that Lightning devs respected property rights. It turns out that they don't even know what property rights are, let alone respect them. They see Lightning's pathfinding problem as entirely a technical matter. If it were, then solving it would simply involve developing algorithms to oversee the network and find the most efficient payment paths. I did mention this possibility in my post, in relation to recursive payment paths (emphasis not in original) : Payment routes could become very long and very complex without anyone knowing. Th...

The Governor of the Bank of England's opening remarks at the release of today's Financial Stability Report were stark: At its March meeting, the FPC judged that “the risks around the referendum [were] the most significant near-term domestic risks to financial stability.” Some of those risks have begun to crystallise. The Governor was admirably calm and balanced in his  press conference . But nevertheless there was a degree of schadenfreude about his remarks. Prior to the referendum, the Bank of England was severely criticised by the Leave campaign for scaremongering. It was accused of overstating the economic risk in order to support the Remain campaign. But it is already clear that the Bank's analysis was accurate, as least as far as the near-term risks are concerned. The principal risks identified by the Bank of England are threefold. Firstly, the financing of the UK's current account deficit is coming under pressure as inward investment flows slow down or...

In a new paper *, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is grea...

There is a widespread view that much bank lending is unproductive, i.e. does not raise GDP – or if it does, it does so in an unsustainable way by inflating asset prices or increasing inflation, rather than by increasing production.  Many proposals for bank reform therefore envisage restricting banks to “productive” lending, by which usually seems to be meant business finance and short-term consumer credit. Financial transactions on secondary markets, and the purchase of second-hand property, are regarded as unproductive. This appears attractive. Banks do indeed lend far more for property purchase than they do for business finance, and most of the properties purchased are second-hand. So, the thinking goes, if we could eliminate unproductive housing finance, banks would lend more to businesses, and that would mean higher GDP in the longer term. But I’m afraid there is a serious fallacy here. Lending for secondary market purchases does contribute to GDP, and not just in ...

This is a version of a speech given at IPPR North on 10th June 2014. How many people reading this post own their own home, or would like to do so? I do. I am one of the 60% or so of people in the UK who own their own home. The percentage is currently falling, as housing becomes more expensive and mortgage standards are tightened. But it is still well over half the population. Opinion surveys consistently show that most people aspire to buy their own home. For many young couples, buying a home together has become a statement of commitment: the traditional sequence of engagement followed by marriage is replaced with moving in together then buying a home together. Property has replaced children as the outward sign of shared lives and shared responsibilities. Nor is it just couples. Single people, too, aspire to buy property. They may not want a relationship but they want to own their own place. But why are we so obsessed with property? It's expensive to buy and ...

The London property market is booming. Property prices have risen by 9.7% in the last year and there is no sign of any decline. Such large price rises are, of course, only happening in London, not the rest of the UK, where property price rises are lower the further you are from London (in Scotland prices are actually falling). But the same is happening in other large cities such as New York. Prime real estate in big cities has never been so expensive - and so desirable. Yet people are leaving London, apparently. Both the FT and the NY Times carry opinion columns by disgruntled journalists who have decided the cost of property in London is way too high and are moving elsewhere. And they report that others are doing so too. Here's Michael Goldfarb in the NYT: "Matt, who had been looking for a house for more than three years, summed up the reason for leaving best: “I don’t want to be a slave to a mortgage for the next 25 years.” Given the astronomic rise in house prices he...

People of libertarian persuasion are often very keen on the idea that Government should "defend property rights". Their view is that the assets they own are theirs by natural right, and it is the Government's job to defend that right. I find this view bizarre. As I've  noted before , there are no "natural" property rights. The law of the jungle, which is the law that holds when all other laws are unenforceable, says that the only property you "own" is what you can defend. If something bigger and stronger than you comes along, points at your property and says "I'm having that", you may put up a fight, but in the end you will lose, and then it is no longer your property. Humans have operated like this for thousands of years, particularly over land. Nearly all wars start when a country that thinks it is bigger and stronger than other countries points to a neighbouring country and says "I'm having that", and the neighbouri...