Saturday 10 January 2009

They really hate Vaclav Klaus, don't they? (4)

Here's part two of that letter
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Equally dubious and illogical is [Vaclav Klaus'] conclusion that the current economic crisis was an “unavoidable consequence” of immodest and over-confident politicians “playing” the market. The roots of the current economic crisis lie in the collapse of the US sub-prime housing market and the subsequent fall-out of structured investment products created from these underlying housing loans. If anything, it was the lack of regulation and investor understanding of these complex structures that is the key to the crisis. His failure even to grasp the roots of the crisis is downright Palinesque; and his cure, which is to “repeal various labour, environmental, social, health, and other standards” is completely batty.

President Klaus displays the defining attitude that got us into this mess in the first place. His seemingly unquestionable faith in the markets to take care of themselves, with sweeping claims such as “we always need more of markets and less of government intervention”, just does not make sense, when it was the market’s failure to curb excessive leverage and speculation that led to the current financial crisis. We need more than just sound bites, Mr Klaus.

Calvin Quek, Singapore.

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VK has nailed this one as well; in the Anglosphere and Spain, politicians knew that rising house prices give an illusion of ever rising wealth so did their best to make sure they happened, so VK is quite right to say that "Their attempts to blame the market, instead of blaming themselves, are unacceptable and should be resolutely rejected."

It is relatively easy to stoke a house-price bubble - all you need is gradually falling interest rates, very restricted supply* and a complete lack of sensible banking supervision** - job done. The letter writer appears to have fallen for the Nulab line that we should blame the Yanks and the banks.*

What a twat, franky.

* The restricted supply is the opposite of free markets, isn't it? But UK parties always promise to restrict supply (all of their manifestos include some waffle about 'protecting the Greenbelt', AFAIAA) to gain the votes of the NIMBYs, which is the vast majority of voters.

** I accept that there was "lack of investor understanding of these complex products", but the overall picture was pretty clear. Total consumer debt doubled in ten years and house prices trebled, did that not set alarm bells ringing?

9 comments:

AntiCitizenOne said...

Nope, you only really need falling Bank Reserve ratios to increase credit supply and that's really the sole cause.

AntiCitizenOne said...

I wonder who sets Bank reserve ratios?

Mark Wadsworth said...

AC1, yes, credit bubbles and property price bubbles are two sides of the same coin.

Bank reserve ratios are set by governments and the industry itself, in theory regulated by shareholder pressures (yeah, right). Whatever the ratios were, they were far too low.

This is one of the few areas where government supervision can actually make capitalism work better; it's difficult to regulate in rules and ratios, but the overall picture is easy. As a fallback, the government could just say that HM Land Registry only records mortgages of up to 75% (or whatever) of property values, and that the rest ranks as unsecured.

Anonymous said...

Splendid stuff which I trust you have encompassed in an equally blunt reply letter to the FT.

Lola said...

I am not sure about compulsory capital reserve ratios. Under monopolosed money they are probably sensible, but if money making (in the literal sense) was de-monopolised and banks began issuing their own currency the trend would be to financially stonger - well, more strongly capitalised banks.

Just a thought.

Mark Wadsworth said...

L, that is an interesting thought experiment but I'd stop right there. Whether you are using your own currency or somebody else's, you still need a certain capital ratio.

AntiCitizenOne said...

Lola,

Because there is more advantage* to having one currency in one area.


* At present.

Lola said...

AC1 and MW. Well yes, sort of. But imagine a system where any bank could issue its own currency, which after all is only a promisary note. Let's say it started here. And let's suppose following Gresham's law the stronger bank's currency prospered because it was the one that people trusted and accepted, why would it not expand beyond our borders? The only way to stop that is or other countries to make this currency illegal. Now also suppose that these new currencies were available on the interweb across borders....

Mark Wadsworth said...

L, in principle yes, but all bank accounts and notes and coins and bonds are just promissory notes, really. The bank's money or promissory note would have to say "I promise to pay the bearer on demand £x or $y" or something. How is that different to a bank account or bank bond?

Which is exactly what a bank account or bank bond does - of course, bonds in badly run banks fall more in value that bonds in better run banks (because of counter-party risk) so that's the more or less exactly the same as what you suggest, only it already exists in practice.

As Banking Minister, you ought to be fixing the existing system before you invent a new one :)