First nurses and degrees, now bankers' contracts are being controlled by the state. In a piece of short-termist populism, Labour have potentially sounded death knells for the City.
London needs the City. Britain needs the City. Without the City, who are we? It all goes back to the comparative advantage we have in finance, a theory that Adam Smith talked about a couple of hundred years back. I complain that the minimum wage is an undue interference on the freedom of contract between employer and employee, so this potential maximum wage is horrendous. What right does the state have to stop a bank using its profits to pay its bankers? Perhaps instead the state should stop supporting irresponsible practices, by bailing out and guaranteeing everything, and by making credit far too easy for far too long. If the shareholders don't like the bonuses, shares will drop. That is deterrence in itself.
Gordon Brown keeps saying he wants to "change the banking sector" and suchlike. The market will reallocate and change the banking sector, not the government, who don't have a clue what's needed. In the meantime, sort out the regulation as to minimise the size of credit bubbles.
Showing posts with label banking. Show all posts
Showing posts with label banking. Show all posts
Sunday, 15 November 2009
Friday, 23 October 2009
Six quarters of negative growth
Labour's recovery policies are really working, aren't they?
This is the longest and worst recession since records began in the 1950s - and the reasons we aren't coming out of it are quite simple.
1. No business confidence. The growing budget deficit is seen as deferred taxation. They also don't like the look of the 50% rate, or the possible EU hedge funds directive. Therefore, businesses don't want to expand supply again.
2. Banks cannot lend. The interest rates are low yes, and the money supply has been expanded through QE, but that extra money is just being stored up in banks' reserves. The problem here is that the regulator is trying to look like it's doing something, and has implemented a measure that should have come at the top of the boom, not in the recession - higher capital ratios. Banks don't actually have enough money to lend (and no one wants to save because of the ultra-low interest rates), so regulation is one reason that we aren't getting out of the slump. Then we have crazy suggestions like the windfall tax on banks' profits, which would surely stop the financial sector's recovery for a bit longer.
Keynesianism has been tried again. Just like in the 1930s, it's failed again. Regulation has been tried again. Just as its hopelessness helped the crash occur, its hopelessness will prevent recovery.
This is the longest and worst recession since records began in the 1950s - and the reasons we aren't coming out of it are quite simple.
1. No business confidence. The growing budget deficit is seen as deferred taxation. They also don't like the look of the 50% rate, or the possible EU hedge funds directive. Therefore, businesses don't want to expand supply again.
2. Banks cannot lend. The interest rates are low yes, and the money supply has been expanded through QE, but that extra money is just being stored up in banks' reserves. The problem here is that the regulator is trying to look like it's doing something, and has implemented a measure that should have come at the top of the boom, not in the recession - higher capital ratios. Banks don't actually have enough money to lend (and no one wants to save because of the ultra-low interest rates), so regulation is one reason that we aren't getting out of the slump. Then we have crazy suggestions like the windfall tax on banks' profits, which would surely stop the financial sector's recovery for a bit longer.
Keynesianism has been tried again. Just like in the 1930s, it's failed again. Regulation has been tried again. Just as its hopelessness helped the crash occur, its hopelessness will prevent recovery.
Sunday, 18 October 2009
Depressionomics
Ministers are planning a windfall tax raid on banks. What?!
Let's put this in context. Banks are expected to have much higher capital ratios (knee-jerk reaction from the regulator) so are trying to build them up, with low interest rates (so no-one wants to save money to build them up) yet are still expected to lend out money.
So acting in a government-like way, you could say, they also plan a huge tax on profits. This will only have the effect of delaying any recovery. The financial services sector is the bedrock of our economy; if we hold it down, we won't recover. Additionally this tax will hit the banks that made profit and generally weren't bailed out - Lloyds et al made losses and won't suffer. Rewarding failure anyone?
It doesn't inspire anyone with any confidence, in two ways - will banks be able to hold up their capital ratios in the future to be able to lend? How? And as well as this, another policy clash shows no sign of direction from the government. It's just a populist, knee-jerk measure. They are trying to win an election (or minimise their losses), not create growth in the economy.
Not only is this a stupid proposal, but it also extends the idea that bankers are totally to blame for this - ignoring the real problems - too low interest rates and too loose credit suddenly tightened to very high interest rates and tight credit, coupled with the hopeless FSA who didn't enforce capital ratios during the boom and pushed them up far too high in the bust. Government was the primary cause of this crash, not the bankers - they were just doing their job in the conditions available.
And wouldn't a windfall tax on profits make bankers pay themselves higher bonuses, in order to reduce the overall profit level? I'm sure this government could come up with another stealth tax though.
John Redwood called it putting one foot on the accelerator and one foot on the brake; now the government is planning to pull up the handbrake too.
Let's put this in context. Banks are expected to have much higher capital ratios (knee-jerk reaction from the regulator) so are trying to build them up, with low interest rates (so no-one wants to save money to build them up) yet are still expected to lend out money.
So acting in a government-like way, you could say, they also plan a huge tax on profits. This will only have the effect of delaying any recovery. The financial services sector is the bedrock of our economy; if we hold it down, we won't recover. Additionally this tax will hit the banks that made profit and generally weren't bailed out - Lloyds et al made losses and won't suffer. Rewarding failure anyone?
It doesn't inspire anyone with any confidence, in two ways - will banks be able to hold up their capital ratios in the future to be able to lend? How? And as well as this, another policy clash shows no sign of direction from the government. It's just a populist, knee-jerk measure. They are trying to win an election (or minimise their losses), not create growth in the economy.
Not only is this a stupid proposal, but it also extends the idea that bankers are totally to blame for this - ignoring the real problems - too low interest rates and too loose credit suddenly tightened to very high interest rates and tight credit, coupled with the hopeless FSA who didn't enforce capital ratios during the boom and pushed them up far too high in the bust. Government was the primary cause of this crash, not the bankers - they were just doing their job in the conditions available.
And wouldn't a windfall tax on profits make bankers pay themselves higher bonuses, in order to reduce the overall profit level? I'm sure this government could come up with another stealth tax though.
John Redwood called it putting one foot on the accelerator and one foot on the brake; now the government is planning to pull up the handbrake too.
Monday, 20 July 2009
Banking regulation
First of all, I apologise for not posting in a while - although exams are over, life has been hectic.
David Cameron hits the right notes with the briefing for his speech on regulatory reform. Having already been told by Osborne that the FSA would be scrapped, we have an idea of how banks would be regulated.
It makes sense for the central bank to regulate - it knows how much banks are borrowing, knows what the economy is doing, and so on - after all it has to set interest rates every month. Not only this, but we are told that the Bank of England warned the FSA about the risks taken, but the FSA took no action - incompetence.
Breaking up RBS/HBOS is a welcome step too - no bank should become too big to fail, and no bank should be bailed out by the government - the economy is better off without bad banks.
However the MPC especially has to look at the prime cause of the financial crash - keeping interest rates too low for too long and encouraging over-borrowing. The only viable solution would be to allow the market to set interest rates, since it is more efficient than nine central bankers. That way, as demand for borrowing increases, interest rates are raised by banks to get a greater return and to encourage saving to build up a capital base; in the same way interest rates will fall if banks want to encourage borrowing. I know it isn't a perfect theory, but should be more efficient than the current macroeconomic consensus we have today.
David Cameron hits the right notes with the briefing for his speech on regulatory reform. Having already been told by Osborne that the FSA would be scrapped, we have an idea of how banks would be regulated.
It makes sense for the central bank to regulate - it knows how much banks are borrowing, knows what the economy is doing, and so on - after all it has to set interest rates every month. Not only this, but we are told that the Bank of England warned the FSA about the risks taken, but the FSA took no action - incompetence.
Breaking up RBS/HBOS is a welcome step too - no bank should become too big to fail, and no bank should be bailed out by the government - the economy is better off without bad banks.
However the MPC especially has to look at the prime cause of the financial crash - keeping interest rates too low for too long and encouraging over-borrowing. The only viable solution would be to allow the market to set interest rates, since it is more efficient than nine central bankers. That way, as demand for borrowing increases, interest rates are raised by banks to get a greater return and to encourage saving to build up a capital base; in the same way interest rates will fall if banks want to encourage borrowing. I know it isn't a perfect theory, but should be more efficient than the current macroeconomic consensus we have today.
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