Ideology- More Important than Theory Or Reality

The report by Sir John Vickers into how to reform banking so that we never again have to face a choice between bailing out bankers and risking a domino like collapse of the entire economy has made a number of recommendations- most prominently that retail and investment banking should be ring fenced  from one another.

What a brilliant idea, in order to avoid banking crises we should ensure that all banks either do nice safe low risk retail banking (like Northern Rock for example) or engage purely in risky investment banking so there would not be a knock on effect to the wider economy if they did collapse (like Lehman Brothers).

The Roosevelt administration brought in a similar law during the Great Depression- and bank collapses continued at a rate of 1 a week throughout the 1930s.

In theory spreading risk widely (by engaging in multiple sectors) should make banks sturdier.

And in practice none of the combined banks have actually suffered the kind of collapses that sent the economy into freefall in 2008 but they are the ones we should break up it seems.

So it neither works in theory or reality but in terms of ideology it is a winner.

Quote Of The Day.

Even a couple of years of declines in GDP and relatively high unemployment will not overshadow the remarkable economic achievements during these decades. These include unprecedented growth in GDP in formerly poor to very poor countries, such as Japan, South Korea, China, India, Malaysia, Chile, Spain, Portugal, and others. Growth in mainly market-oriented developing economies swept away dire poverty from hundreds of millions of families in Asia, Europe, and South America. This sustained growth also led hundreds of millions of others into middle class status, where they could afford to buy cars, well-equipped homes, television sets, cell phones, computers, and other goods that not long ago were considered well beyond the means of the typical family in all but a few countries.

~Gary Becker.

The financial crisis does not prove that capitalism has failed any more than a plane crash disproves the laws of gravity.

Voters Reward The Perps.

Every so often there is a story about a firefighter or wannabe fire fighter getting caught committing arson so that he can be the hero putting it out. This is much like giving Gordon Brown credit for trying to resolve the financial crisis that he caused, but that is seemingly what voters are doing.

The effect shouldn't be exageratted, Labour's standing in the polls has merely been upgraded from "catestrophic" to "dire", but even so this crisis does appear to be helping the left, both here and abroad as Daniel Hannan notes:

No one said politics was fair. Strikes always hurt Labour, however much Labour condemns them. City bonuses always hurt the Tories, even when the Tories are in Opposition. In the current climate, what people see are fat-cat bankers being bailed out by hard-pressed taxpayers. And, instead of objecting to the bail-out, they object to the bankers and, by extension, to the free market culture they are thought to embody. The world over, Left-of-Centre parties are benefiting: Obama in the US, Brown here.

The paradox is that what Britain most needs at the moment is to cut spending and cut taxes. In retrospect, we can see that the massive extension of the federal government during the Great Depression served to prolong the slump. (Why the court-packing, four-term Roosevelt is so kindly treated by history remains a mystery to me.) Sadly, we seem about to repeat FDR's errors, engorging the state and mortgaging its citizens in order to socialise the financial system.

Similar effects are occuring in Canada and New Zealand, where right of centre parties that were heading for big wins now look like having to settle for just getting across the line in first place.

The crisis has made Obama the big favourite in the US election and there is a danger that a combination of an left wing President Obama, a Democratic congress, a sycophantic media and a financial crisis could enact legislation that will harm the US and world economies for decades to come as any disasters that they inflict on the world economy will be blamed on the legacy of the current crisis.

Now That's What I Call "Moral Hazard"!

There has been a lot of talk about how the US bailout of the financial sector might remove the "moral hazard" for mismanaging the institutions in question. Did our system ever have any real moral hazard to begin with though? Compare the West to the East, in this case Vietnam:

There cannot be many places in the world where you can get shot for losing money on a foreign exchange deal, but Vietnam is one of them.

That is the situation potentially facing Nguyen Thi Quynh Van.

Until March this year, she was the deputy head of trade financing at a branch of one of Vietnam's biggest state-owned banks in the port city of Hai Phong.

Now she is under arrest, having been charged with "losing state resources through economic mismanagement" - a crime that carries the death penalty in Vietnam.

If "losing state resources through economic mismanagement" is a capital offence we ought to send Gordon Brown over to Vietnam right away.


ps. In case you are wondering, I don't think they did execute her. I wouldn't make light of it they had killed her. Probably.

Robbing The Poor To Give To The Rich.

In the Absurder Will Hutton writes about banking:

The first task of President Franklin D Roosevelt after his election in 1932 was the recapitalisation of the bankrupt American banks by new public agencies - which his Republican critics decried as socialism. But it pulled the US out of slump. Unless the western interbank markets start functioning again soon, the question will arise as to which governments are going to bail the western banks out of their foolishness.

Given that the Depression lasted for 7 or 8 more years after Roosevelt's banking reforms, and bank collapses* continued unabated in that time why should we look to that era as an inspiration. Also why the likes of Hutton who bleat on about widening inequality and income redistribution incessantly, so keen to transfer money from the general tax paying population to shareholders who have chosen to invest in risky banks? Robbing from the poor to give to the "Not quite as rich as they expected to be" is what Hutton's proposals amount to.

* Interesting fact, whilst hundreds of US banks went bust every year throughout the Depression, no Canadian banks did. This was because US banks were over regulated and artificially prevented from diversifying their risks.