How Labour caused the economic crisis

Four weeks ago I demonstrated how the current financial crisis was a disaster of government's own making. However, most of that was focussed on the American government. In so doing I failed to point out how Gordon Brown (as both Chancellor of the Exchequer and Prime Minister) created the problem.

It is true that the US governmetn deserves much of the blame for forcing banks to lend to un-creditworthy (sub-prime) borrowers and (through the para-statal company Freddie Mac) inventing the practice of securitizing the debt.

But the main source of the problem has been the massive expansion in credit - and indeed money - over the past decade. And while the American government has been as guilty as any of inflationary policies over the past decade, it is Labour that has led UK investors up the garden path with dangerously loose monetary policy.

Having spent ten years allowing Gordon Brown to fan the flames of in an inflationary boom, we are now reaping the whirlwind.

But, I hear you cry, has inflation not been running at around 2%? Isn't that very low>

Well, yes, but only if you look at consumer/retail prices. Sadly for us, economic inflation isn't caused by inflation in the price of consumer goods, which have in fact been falling in real terms since China got its act in gear in the 1990s. Inflation is caused by loose money, which floods through banks, via loans, to be invested in (particularly) capital-industry and land. So the important measure of the inflation isn't CPI or RPI but the money supply.

And how much has the money-supply been inflating over the past decade? The Market Oracle provides this handy chart, which suggests that over the last 5 years the quantity of money swirling around in our economy has doubled.

And where has all that spare cash, utterly un-backed by a corresponding doubling of growth (see GDP figures for 2002 and 2007), gone?

It has been used to bid up the prices of property, shares and capital goods.

However, as demand for them is not actually changed by the new banknotes (electronically) manufactured by the Government, the inevitable "readjustment" is at last taking place as the cost of these goods begins to fall, reflecting their real, non-inflated, value and the cost of consumer goods begins to rise to accomodate the new money in the economy.

As I mentioned a three days ago, further inflation, interest rate cuts and borrowing cannot stop the recession. They can perhaps delay it, and certainly extend it, but in the long run recession is inevitable. We have Labour to thank.

Gordon Brown and the financial crisis: a 1 minute comparison

Three ways to worsen a credit crunch:

1. Lower interest rates: this discourages saving because one gets little reward for delaying one’s gratification (in economic parlance, time-preferences are undervalued), while at the same time encouraging borrowing, thus further reducing the supply of credit relative to demand;
2. Allow inflation to escalate: this also discourages saving because the nominal reward for saving (the amount one’s money goes up) is eroded by the fall in the value of money (what your savings are actually worth), and for the same reason encourages borrowing: at present, the Bank of England base rate is lower than inflation which means that savings are worth less with time (in economic parlance, interest rates are negative);
3. Increase public borrowing: This takes money out of the credit markets: money that is being saved and would be invested in profitable businesses is now diverted into Government bonds and then invested in businesses that are not creditworthy (if they were, they would not need a Government bail-out).

Government policy:

1. Lower interest rates
2. Allow inflation to escalate
3. Increase public borrowing

Remember than the next time somebody tells you that Brown is having a good crisis.

A jolly morning's voting

An unexpected treat landed on my door courtesy of Electoral Reform Services.

Yes, it's Party election time!!

No sign of the one we've all been waiting for, but in the meantime an excellent opporutnity to support old friends, laugh at people's artwork and make instant and probably utterly-unfair judgements about people.

My favourite was the chap who was standing for the peers list who wrote "60 years a liberal" at the top. How can one resist?!

Two names did jump out and me that deserve a vote:

1. Jock Coats for Federal Policy Committee: Jock is known to many of you through his blog. He has an excellent graps of policy and has an answer for almost any problem (the same one, admittedly ;o) and would be a real asset to FPC, fighting for sound liberal economic and social policy and fending off the errors of interventionism;
2. Tony Vickers for the peer's list: Tony is Chair of ALTER and a long serving Liberal Democrat councillor.

I should hasten to add at this point that I am not a member of ATER and my internal jury is still out (if an internal anything can be out) over LVT. But it has been a party committment for a century and yet the policy establishment have brushed it under the carpet in the Cowley Street boardroom every time it has come up.

There are also dozens of other people I know on the lists, but I can't sit here listing everybody and their attributes. That is what your artwork was for!

Anyway. Enough of all that. I've seen a photograph of a women in a barbour so I'm going to send her to Europe!

Dee Doocey is right for all the wrong reasons

The body fascists are out in force again.

Dee Doocey has been pressuring the Mayoral administration to remove London Development Agency funding from London Fashion Week. That’s fine in itself: I can see no reason why London’s taxpayers should be subsidising the fashion industry, let alone why Bromley residents should be paying for fashion shows in the West End.

Sadly, Doocey seems to have no concern for taxpayers subsidising special interests. Rather, she is jumping on a social-conservative bandwagon that aims to dictate how models, fashion houses and the organisers of sartorial trade fairs should market their goods.

This is, in fine social-conservative tradition, all about protecting patronised groups from themselves by dictating to third parties whom the supposedly-weak willed might emulate. In this case, thin girls are seen as at risk of emulating thin women. Doocey notes that “1 in 40 women suffer from an eating disorder, [that] the numbers are on the increase [and that] the girls are getting younger”, all of which is undoubtedly a tragedy. That the solution is censorship does not automatically follow, however.
On a very fundamental level, censorship is always the wrong solution to a problem. Neither the models nor their employers are doing any direct harm to girls who choose to emulate them, any more than Richard E. Grant and Paul McGann can be blamed for causing harm to my liver just because I occasionally like to order “Two large gins and two pints of cider (ice in the cider)”.

As I noted the last time this issue came up, “Perhaps (radical suggestion, I know!) people are making their own decisions based on a multiplicity of information and imagery. Should we control all information, vetting it to ensure it promotes only a benign or (in our opinion) positive image?“

Of course not. If we tried to order our society in a manner that prevented anybody from unwittingly influencing others in a negative manner, we would face an insurmountable censorship burden. Should we allow dangerous sports on the television? What about fat people?

In passing, one cannot help wondering whether the fact that we are concerned simultaneously by obesity and anorexia suggests that our society’s problems with eating are to do with something other than the effects of London Fashion Week.

It is also worth noting (again!) that “Size 0 models” are actually Size 4 models, but it sounds so much more dramatic to disingenuously use the American numbering. Firstly, it implies that there are twelve full sizes between a “normal” girl and one of what Doocey calls these “skeletal models”; in fact, there is only four sizes between them (unless you know where one can buy odd-numbered sized clothes). Secondly, there is a subliminal sense that Size 0 must equate to nothing. This is not ever stated, and nobody would suggest this consciously, but subconsciously Size 0 has a particularly ghoulish resonance.

Opposition to the employment of thin models will do little to help girls with eating disorders. They are surrounded by examples of norms of beauty (and behaviour) that only a draconian censor could prohibit. Their problems are psychological and so require treatment rather than censorship. And it is not clear that any government intervention is going to prevent the problem.
But it is an example of the conservative tendency to use government as a vehicle to protect people from themselves and to use the coercive power of the state to shape society (an in this case, women) in their own (unflattering) image.

If Dee Doocey wanted to strike a blow for freedom, she would object to the LDA’s funding of London Fashion Week because it was a misuse of taxpayers’ money. By allowing this subsidy to pass as long as it promotes her view of how women should look, she is striking a blow against it.

A real economic roller-coaster

Ever wondered what it would be like if the housing marked really was a roller-coaster ride?

Well, some clever wag has created a roller-coaster using Roller Coaster Tycoon 3 and using a graph of US house prices since 1890 as the shape of the track.

An amusing graphic to demonstrate the madness not only of the bubble that has just burst but the overall picture over the past 118 years.

Enjoy!

Real Estate Roller Coaster

Sub-prime, securitisation and how government caused the financial crisis

The bogeymen-of-the-moment are clearly bankers. Photographs of bankers with their heads – or boxes of their possessions – in their hands are commonplace. The sympathy for the former Lehmans employee does not appear to match that felt for the unemployed docker or miner. Schadenfreude is de rigueur at the moment. And if the banker is the bogeyman, the free markets is the wicked system that is now being exposed for what it is (if only!).

But are our current problems really the fault of capitalists and bankers? There is an altogether different narrative that points the finger in an entirely different direction: the sub-prime and securitisation crises were created by government.

The sub-prime problem begins with the US government's 1977 Community Reinvestment Act (CRA), which allowed the Federal Reserve and other US financial regulators to pressure banks into making loans to less-than-creditworthy borrowers. Far from greed driving bankers to offer 100% loans to unreliable borrowers, this position was forced upon them by government.

Thomas DiLorenzo explains the problem:

When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous ‘community groups’ that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded ‘community groups’ like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other ‘community groups’ by giving them millions of dollars as well as promising to make even more dubious loans.

Not only is the sub-prime market the result of Federal legislation that forced banks to lend to un-creditworthy borrowers, but the practice of dicing up debts and selling them on in chunks that mixed prime with sub-prime loans was also the creation of a Government body.

In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company (‘Freddie Mac’) pioneered the ‘securitization’ of bundles of these high-risk loans so that they could be sold on secondary markets. Such ‘securitization’ exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled The Community Reinvestment Act: Its Evolution and New Challenges,

Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals.”

The deregulation of banking in 1994 led to banks to elevate their CRA activities so as to avoid objections by these ‘community groups’ to their business activities. Meanwhile, in 1995 the US Treasury Department created the multibillion-dollar Community Development Financial Institutions to pour taxpayers’ dollars into subsidising sub-prime loans.

Indeed, from 1995 banks were pressurised to make loans “without the benefit of many traditional credit-worthiness criteria, such as the size of the mortgage payment relative to income, savings history, and even income verification! Instead, the Fed told banks that participation in a credit-counseling (sic.) program, many of which are federally funded, could be used as ‘proof’ of a low-income applicant's ability to make his mortgage payments. In other words, federal bank regulators required banks to make bad loans based on nonexistent credit standards.” One cannot help but think that participation in a credit counselling programme suggests that the borrower has had credit trouble in the past and may not be an ideal customer.

Though largely a US based problem analysis has three significant messages for our current situation.

Firstly, the eagerness with which journalists and politicians have blamed bankers is misguided. While there is no doubt that bankers can be and have been greedy, the sub-prime mortgage problem was forced on banks by the US government, while habit of ‘securitising’ debt began with a US government housing agency. This is a problem created by government, not greed.

Secondly, for the above reason, the eagerness with which we look to government to solve the problem is equally misguided. Our faith in more regulation to resolve the current mess is misplaced. To my knowledge HM Government did not force bankers to lend to less reliable borrowers, but the excess of credit in the marketplace as a result of Government’s toleration of inflation in the pursuit of low interest rates meant that banks had to look further down the pecking-order of borrowers to find people to whom to lend. Had money been tighter, there would have been a duel break on the problem as borrowers were more cautious due to facing higher repayments and banks were less eager to accept any borrower due to credit being limited. There might have been fewer 100% mortgages to those with poor credit histories or people who were “self-certificating” (a practice known colloquially as the “Liar’s mortgage”).

Finally, the troubles resulting form the US government’s intervention in housing markets and the deliberate policy of encouraging those on low incomes with poor credit histories to borrow against property casts a cold light upon the Labour government’s proposals to give first time buyers cheap loans, ease the payment of mortgage interest using income support and allow council’s to offer cheap mortgages. This last is particularly pernicious as it opens up the possibility that, in the future, councils will be in the invidious position of having to foreclose on defaulters and repossess their houses (which the defaulter would probably then stay in, now as a tenant of the council!).

Much of the current economic mess has been caused by governments, with the US government to blame for the specific trigger and our own to blame for the underlying mess. Our headlong rush to solve this government-made problem with more regulation risks turning a brief if sharp recession into a long depression. But right now we seem stuck with the mindset that “Something must be done”.

An insight into bloggers and their bitter little battles

My sister is reading Immortality by Milan Kundera and Peter Kussi and came across this passage:

Don’t tell me that two men who deeply disagree with each other can still like each other; that’s a fairy tale. Perhaps they would like each other if they kept their opinions to themselves or if they only discussed them in a joking way and thus played down their significance…But once a quarrel breaks out, it’s too late. Not because they believe so firmly in the opinions they defend, but because they can’t stand not to be right. Look at those two. After all, their dispute won’t change anything, it will lead to no decision, it will not influence the course of events in the slightest, it is quite sterile and unnecessary, confined to the cafeteria and its stale air, soon gone when the cleaning lady opens the windows. And yet, observe the rapt attention of the small audience round the table! Everyone is quiet, listening intently, they even forget to sip their coffee. The two rivals now care only about one thing: which of them will be recognized by the opinion of this small audience as the possessor of the truth, for to be proved wrong means for each of them the same thing as losing his honour. Or losing a piece of his own self. The opinion they advocate is itself not all that important to them. But because once they have made this opinion an attribute of their self, attacking it is like stabbing a part of their body.

It strikes me that it casts a piercing light onto the bitterness with which many bloggers and those who leave comments on websites fight their corners. Very quickly so-called debates descend into slanging matches as one or both parties become more interested in “winning” or slapping the other down harder then they (think they) have been slapped.

In the process the valuable exchange of ideas and the thought that we all might benefit from a healthy debate is lost.