1. Basic accounting
The FT peddles the same old myth, that somebody can make a profit by trading with himself:
Changes to the state pension announced at the weekend will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.
The extra NIC deducted from public sector employees' pay packets (if they end "contracting out") is indeed a reduction in government spending, and HMRC can book an increase in receipts from public sector employees as extra income if they so wish but the extra receipts from public sector employers is matched by an equal increase in government spending to pay the extra employerer'sNICs in the first place.
It's an uphill struggle all this. A working assumption must be that most people really are as thick as pig shit (is pig shit actually "thick" or is it more runny? No idea.).
Pointing out that this is a self-cancelling transaction is about as futile as trying to explain that interest paid to HM Treasury on its holding of UK gilts is HM Treasury's income but it's also HM Treasury's expense because they are paying the interest in the first place. Or the fact that Housing Benefit claimed by social tenants is not government spending because the money is being paid by one branch of the government (DWP) to another branch (local councils) who then pass it back to HM Treasury anyway, who in turn fund the DWP and so on ad infinitum.
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2. Basic accounts
Lola alerted me to Douglas Carswell's bright idea on banking reform, which is pretty much the same as Positive Money's bright idea, and they say so themselves:
My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes.
Apart from the fact that the government do not want to reform banking in the slightest, as the UK government (like so many other governments, including but not limited to the USA and the EU) is run by, for and on behalf of bankers, this will not achieve anything:
1. Let's gloss over Carswell's fundamental error that credit creation starts with somebody depositing money in the bank. No it does not. It starts with the bank making a loan.
2. And let's gloss over the fact that banks would manage to circumvent the rules on a practical level, for example by lending out money taken for "storage purposes", booking the corresponding receipt as being for "investment purposes" and then slipping the money back into "storage" again before anybody notices, i.e. by the end of the each day's trading.
3. The point is, we do not need to mull over what would happen if customers were offered two different types of accounts, because we already know.
Twenty years ago, we still had the Post Office Bank and the Trustee Savings Bank, which were government run/sponsored, implicitly 100% government guaranteed and safe. And we had commercial banks, which also had some sort of government guarantee for deposits, but it wasn't very high (it was up to 90% of the first £30,000-odd until a few years ago, I've no idea what it was twenty years ago).
And twenty years ago, we had a lot of building societies, which were inherently safer than banks (because of what they did, how they did it and all the restrictions imposed on them).
4. So instead of making commercial banks offer two different types of accounts (which can be easily circumvented, see 2.) we could simply set up a new government bank (similar to PO or TSB) and offer people "basic accounts" which pay little or no interest, offer no overdrafts, which do direct debits and offer a debit card and not much else, and which are 100% government protected.
In this case, there would be no need to make commercial banks offer "storage purpose" accounts or to give a government guarantee for deposits with commercial banks because if people want that, they can put their money with the new PO-TSB. And if they want something a bit racier without a guarantee, they are free to open an account with a bank on whatever terms and conditions they please.
5. Will commercial banks continue to merrily blow credit bubbles and land price bubbles, like they always have done, with or without government guarantees for deposits, with or without there being safer types of investment, with or without all but the fiercest bank regulations? Yes of course they will. They'll keep splitting the zero and creating new loans and new "investment purpose" accounts.
6. Will people be happy with this? No of course not. During the next boom, people's urge to make a quick buck and get something for nothing (or the politicians desire to be seen to be giving the voters something for nothing) will take over, the PO-TSB will be privatised, demutualised, become a quoted company, over-trade and then go bankrupt again, the government will bail them out etc, and then the cycle starts again.
7. And during the next bust, the government will simply extend the deposit guarantee to all accounts again, or increase the eligible amount, just like they did this time.
As ever, the real problem here is the bankers (and landowners) tapping into people's desire to make a quick buck and get something for nothing, and the politicians just going with the flow.
People have to remember that they are the ones who end up paying for the quick bucks - for sure, all Halifax members got £1,800's of "free shares" in the 1990s (I've still got my contract note selling them on the first day) but we've ended up paying a lot more than £1,800 each to bail out Lloyds-HBOS. Its the usual vested interests who are getting richer from all this, not the likes of us common or garden voters.
Tuesday 19 March 2013
Basic accounting & Basic accounts
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12 comments:
Twenty years ago, we still had the Post Office Bank and the Trustee Savings Bank, which were government run/sponsored, implicitly 100% government guaranteed and safe.
Technically, you still do, with NS&I. It doesn't have any retail services it seems though, like paying bills, debit cards, which is a shame. I agree, for simple, run of the mill banking, there is no reason even the state can't run a bare-bones service. It can lend itself the cash for normal liquidity needs. That implies some trust in government finances though...
There is still 110 "savings banks" over here, that's one per 45.000 head, which are locally based, self-owned institutions. They are more or less like commercial banks, but they largely avoid being part of any outrageous scandals on a regular basis.
"but that is matched by an equal increase in government spending to pay the extra NICs in the first place."
Not necessarily. The additional employers' contributions will be funded by additonal goverment spending to match the additional income, but the additional employees' contributions come out of the pockets of the employees and form a genuine increase in income or reduction in expenditure, although I suspect that more senior public employees will get a compensating pay rise.
(is pig shit actually "thick" or is it more runny? No idea.).
As the son of a one time pig farmer, I can tell you that yes, pig shit is thick. It's not like cow shit.
"but we've ended up paying a lot more than £1,800 each to bail out Lloyds-HBOS"
Well, no, in the sense that we wouldn't have had to pay less tax if the gov't hadn't bailed out Lloyds-HBOS. Surely it's like rent: the government charges the maximum people are prepared to pay, regardless of its expenditure.
Kj: "That implies some trust in government finances though..."
Surely you can trust a government run bank like NS&I or TSB a lot more than a private bank which has to rely on government bail outs to keep it going. Because the government doesn't actually have to bail out its own bank, the government IS the bank.
B, I have amended that paragraph to make it clearer.
Pig shit is actually thick. That's good to know.
"the government charges the maximum people are prepared to pay, regardless of its expenditure."
That is possibly true, but...
a) If they hadn't wasted it on bail outs, they might have spent it on some a bit more worthwhile (I struggle to think of something less worthwhile).
b) they are indeed collecting as much tax as they can get away with AND ON TOP OF THAT they are running a massive deficit AND a large part of that deficit is down to bank bail outs. So maybe taxes would not be lower in the absence of bail outs, but sure as heck the deficit would be lower.
(I struggle to think of something less worthwhile).
How about bailing themselves out after the latest cockup, e.g West Coast Main Line tendering.
"but sure as heck the deficit would be lower."
Hmm, I think that now that they have discovered that they can run a deficit and nothing disastrous happens in the short term, they run as large a deficit as they think they can get away with, bailouts or no bailouts.
B, the WCML turned out all right in the end, Branson retained his franchise, what's £50 million between friends if the right guy won? (I've no idea whether he is the right guy, but I and the family went on one of his Pendelinos once and it was great and not overly expensive).
As to deficits, that is true, but again there is "good" deficit spending and "bad" deficit spending and bank bail outs is clearly "bad" deficit spending.
MW: Since we are in "might-as-well"-mode, govt. might as well take deposits, use them to build houses, shops, industral parks etc., *all of them*, rent them out us, and we'd be rid of a whole lot of problems. It's ofcourse very unlibertarian, but imagine the change in political discource and how little we could care about bank behaviour. For "entrepreneurialism", have management companies that bid on the rentals and do all the dity work.
From memory when the TSB was privatised it kept its (inept) civil service mindset managers who then went on a spree spent a billion or two and bust the outfit in about 5 years. And to rescue it it was forced into a merger with Lloyds.
@KJ/MW
Nationalise the banks and be done with it.You are never going to stop banks creating money through "loans".It happened in the crudest times when promissory notes were issued instead of gold and then traded.
A lot of banks are now zombified , not worth anything ,so should be put out of their misery.
Then we get two Single Taxes : One on money (interest rates/basically a tax ) and one on land.
Kj, yes of course. And that's not unlibertarian at all; we get freedom from banks, landlords and taxes on income. Yippee!
"For "entrepreneurialism", have management companies that bid on the rentals and do all the dity work."
Correct. When I was a landlord, the letting agent did the everyday work for about 10% of the gross rent. So the state can easily get competing firms to run it for them for a percentage of gross income.
L, I didn't take an interest at the time, but a reasonably well run state bank was turned into a useless private bank.
DBC, sort of agreed. We can chop the banks down to size with LVT (so no more lending on land values)and/or with more state owned housing, see Kj's comment.
We then bayonet the survivors with a bank asset tax of about 2% to soak up the interest margin they can earn in their sleep, so after that, the bankers will really have to work for their money.
But yes, interest and land rents are much the same thing, you have to try and nail down both.
This is kind of what we are talking about.
Kj, yes, that is the same as Douglas Carswell is the same as Positive Money.
Superficially, it is a good idea. In practice it will achieve little or nothing. And as the government is run by bankers and landowners, it will never happen.
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