"However, critics say it risks forgetting the lessons of the financial crisis..."

From the BBC:

The government has announced what it describes as one of the biggest overhauls of financial regulation for more than three decades.

It says the package of more than 30 reforms will "cut red tape" and "turbocharge growth". Rules that forced banks to legally separate retail banking from riskier investment operations will be reviewed. Those were introduced after the 2008 financial crisis when some banks faced collapse.

The package of changes, the "Edinburgh Reforms" is being presented as an example of post-Brexit freedom to tailor regulation specifically to the needs and strengths of the UK economy.

However, critics say it risks forgetting the lessons of the financial crisis.

Famous last words. The government is clearly insane. It's like scrapping regular checks on bridges on the basis they haven't collapsed for years. This is all just setting us up for the next financial crisis starting in 2025.

If you start at the ideal kind of economy, with free and competing markets, you can either veer to the left: over-regulation, nationalisation, socialism, communism... and end up with a small handful of people living in luxury at the expense of the impoverished masses.

Or you can veer to the right: de-regulation, privatisation of national wealth, corporatism, crony-capitalism, allowing rent-seekers to run the show... and end up with a small handful of people living in luxury at the expense of the impoverished masses.

There's no real difference, is there? Russia pivoted from the Communist extreme to the crony-capitalist extreme in the 1990s, with the same people doing the controlling and exploiting.

Barclays' new "Confirmation of Payee" service.

Email received from Barclays today:

Hi Customer,

What's new?

I'm sure they'll tell me...

A new service called Confirmation of Payee has been designed to help protect your payments from scams, fraudsters and payments going to the wrong account.

From March, when you pay a new person or business using Faster Payments (including standing orders) or CHAPS, we'll match their account name as well as the sort code and account number to make sure you're paying the right person. If someone makes a new payment to you, their bank may do the same.
[and so on]

Your Barclays Business Team

They appear to have learned the lesson from this debacle.

You do wonder, why on earth didn't banks always check the name of the recipient? What was the point of asking for their name if they're not going to check it?

"Banks are not intermediaries of loanable funds - facts, theory and evidence"

Some subversive employees at The Bank of England have put out another fine report.

To sum up, "banks create money out of thin air". They do not sit their patiently collecting deposits and lending them out. They lend first, the borrower spends the money and whoever receives it deposits it back in the banking system (what else can they possibly do? If they spend it, then somebody else deposits it etc).

This will no doubt cheer up DBC Reed no end!

Bureaucrat Worried About His Job

Here

By observation and logic regulationism was at the heart of the events leading up to the 2008 credit crisis.  It was the predictable, abject and unremitting failure of governments and their bureaucratic Satraps engaging in credit expansion and niaive and incompetent (based on their ignorance and their own self regarding arrogance) bank regulation especially as regards the quantity and quality of their capital requirements that encouraged Banks in their own (and ultimately unsustainable) monetary expansion.  The result being an absolutely text book Austrian Business Cycle theory failure.

In fact the sheer quantity of regulationism has made Banking a de facto nationalised industry: a state sanctioned specially privileged cartelised supplier of a monopoly product engaged in couterfeiting.

So then we get self serving bureaucrats like Randall clamouring for more regulation post Brexit. One might have thought he was worried about his job.

Economic Myths: "Government loses £2.1bn on RBS stake sale"

From the BBC:

The government has incurred a loss of £2.1bn after selling another tranche of shares in Royal Bank of Scotland. The shares were sold at 271p each, almost half* the 502p a share paid in the government's bailout of RBS a decade ago when it rescued the bank at the height of the financial crisis.

Clearly, the government did lose money, but that money was lost/wasted ten years ago when the government bailed out RBS. The government did not lose a penny on the sale itself, it merely converted shares worth £2.71 into cash of £2.71.

* The phrase "almost half" is totally misleading as the government sold the shares for more than half of what it paid for them. It would, however, be correct to say "The shares fell in value by almost half".

This leads me on to something else which annoys me. Let's say Object A weighs/has mass 1 kg and Object B weighs/has mass 2 kg. It is fine to say that B is twice as heavy as A, or that A is half as heavy as B. It is also OK to say that A is lighter than B. But for some reason, a lot of people say that A is "twice as light as B", which is nonsense. You can't use a comparative with an adjective meaning light, small, short, near etc, only with adjectives meaning heavy, large, long, far away etc.

Epic neo-liberal propaganda fail.

From the BBC:

Could giving property rights to the world's poor unlock trillions?

They are not talking about 'property' in the legal sense, they are using it as shorthand for 'land'.

And no, all that would happen - as the article makes clear - is that banks will tap in to the rental value of land via loans. That's one of the reasons why the Homeys hate council housing - the banks can't earn anything from it.

In 1970s China, for example, where the Maoists weren't the rebels but the government, the very idea that anyone could own anything was seditious, bourgeois thinking. Farmers on collective farms were told by Communist Party officials that they didn't own a thing. Everything belonged to the collective...

This approach worked terribly: if you don't own anything, why bother to look after it... collective ownership of land left farmers in desperate, gnawing poverty.

So, in Xiaogang in 1978, a group of farmers secretly met and agreed a daring plan. Instead of farming as a collective, they would informally divide up the land, and each keep whatever surplus they produced after meeting collective quotas. It was a treasonous agreement in Communist eyes: discovery risked execution.

In fact, they were found out thanks to their conspicuous success: their farms produced more in one year than in the previous five years combined...

The experience in China shows that even informal property rights can be incredibly powerful. If you know your neighbours respect your boundaries, you can feel confident investing time in weeding your vegetable plot, or building a house.

Bullshit. This has bugger all to do with land ownership, it has to do with ownership of the food produced (the results of their initiative and work done, thus truly 'private property').

It is basic human nature. It's like piecework. If you pay an individual $x for each unit he or she produces, most will try and produce more units. In that case, neither the raw materials nor the finished product is ever the property of the workers, but they are paid for the labour element they add (their 'private property').Take a large group of people and tell them they get paid the same, regardless of how many or few the group produces, the ultimate outcome is that little or nothing is produced.

Clearly, with farming, you need some security of tenure (be that long leasehold or freehold) because it is a long term thing, which is why arable farm tenancies tend to be very long. Conversely, sheep farmers are happy to rent pastures very short term, because it's just naturally growing grass. Actually being able to sell the land (i.e. use it as collateral) is irrelevant; or else there would be no tenant farmers.

But in one critical way, it doesn't help me that my neighbours agree that I own my house. If I want a loan - to improve my house, or build a business - lenders need collateral.

Ah right, so the first thing you do if you want to start a business is buy some land, to be able to borrow against it? This is madness. What about the majority of people who don't own land? In real life, you build up a business or find some other way of earning enough money to buy land, just like any other consumption good.

Tenants are quite happy to pay for improvements if they know they have a secure/long term tenancy, I've seen it plenty of times (in Germany or people in social housing). In the UK however, no residential tenant in his right mind will pay for improvement because a
a) he could be kicked out within six months and
b) the improvements automatically belong to the building i.e. the landlord, so
c) the landlord can increase your rent to make you pay for the improvements you made yourself.

And land or buildings make particularly good collateral because they tend to increase in value, and it's hard to hide them from creditors. But the lender needs to be confident it could take the house away from me if I don't repay the loan. So, I need to prove that the house really is mine. That requires an invisible web of information that the legal system and the banking system can use.

For Hernando de Soto, this invisible web is the difference between my house being an asset - something useful that I own - and being capital - an asset recognised by the financial system... 

But how do assets become capital? How does the invisible web get woven? It needs a government. Enforcing property rights is one of the few things pretty much everyone on the political spectrum agrees a government should do, except perhaps the Maoists.

Here we get to the neo-liberal nub of the matter, dressing up land as 'capital'.

De Soto couldn't actually give a shit about third world farmers, he's a shill for the banks (which is why the Cato Institute give him such a glowing write-up). Loans and interest can only be repaid out of the future income/profit from that land anyway.

Farmers can afford to buy most of the stuff they need every year out of their savings from the previous year (by definition) and if they need something bigger, like a tractor, there is such a thing as hire purchase.

Borrowing any more than that, purely backed by the value of land is a recipe for disaster for any kind of economy, agricultural or developed capitalist.

He also inadvertently makes the Georgist point that 'land ownership' and 'government' are more or less synonymous. It is only governments who can really say who owns land (until and unless they are overthrown or the country is invaded).

Utter, utter twats.

Steve Keen on top form.

Spotted by Lola at Open Democracy:

For a while, this bargain felt win-win for both sides: as the Bank of England recently acknowledged, bank lending creates money at the same time as it creates debt (McLeay, Radia et al. 2014). This money is then spent, either to buy assets, or goods and services. It therefore adds to total demand, and to incomes and capital gains. So, as banks created “money from nothing”, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound… [statement 1]

But you can’t have very high levels of credit-based demand without the corollary of an ever-increasing level of debt relative to income. More and more of income is required to service this debt, cutting into spending on goods and services. The turnover of existing money slows down, reducing aggregate demand from actual work [statement 2], while increasing the dependence on credit.

Don't statements 1 and 2 contradict each other? Either credit/debt increases GDP or it reduces it.

As a matter of fact, in the real world it does neither to any great degree.

1. Most of the (increase in) debt is mortgages, which is just an alternative to paying rent. The inevitable transfer of spending power from tenant/borrower to landlord/depositor is pretty much unchanged. This is A Bad Thing either way.

2. A small part of (the increase in) overall household debts (maybe one-eighth?) is credit cards and personal loans used for buying other stuff. This merely brings forward spending a few months or years. Somebody who wants a new car can save up for a few years or he can buy one on HP, take out finance lease, personal contract payment etc (these are all pretty much the same in economic terms). But that person will probably never own more then one car at any one time. Most of that net-extra spending is in the past - the bloke who bought a car on HP two or three years ago is spending less of his current income on other stuff because he is still paying off the HP instalments.

3. It all averages out anyway, yes, increasing levels of debt seem to go hand in hand with extra GDP, until the credit bubble pops, and then we lose GDP. Chances are, the overall long term trend would be much the same if mortgages and house prices were capped somehow (although that would be a good thing in and of itself).

Clearly, Keen's overall point that the whole economy has been hijacked by the banks is correct, he's just very vague on the details.

"It's different this time"

From City AM:

British banking is an “accident waiting to happen”, according to a new report from think tank the Adam Smith Institute marking the 10-year anniversary of the Northern Rock crash.

Today’s paper, authored by Durham University finance and economics professor Kevin Dowd, also claims the Bank of England’s stress tests are “seriously flawed” and that banks are still too highly leveraged...

“It is disturbing that 10 years on from Northern Rock, the best measures of leverage – those based on market values – indicate that UK banks are even more leveraged than they were then. The biggest risk facing the UK banking system now is the Bank of England’s own complacency...”

The findings of the report have drawn criticism from a number of figures, including Jayne-Anne Gadhia, chief executive of Virgin Money, which now owns the “good” assets of Northern Rock.

“My experience, and the objective data, say to me that the interventions that have been made since Northern Rock crashed mean that a crash of that type, in my view, could not happen again,” she told City A.M.

LOLZ.

There's a credit crunch/land price bust every eighteen years, no amount of banking regulation will prevent that, you've got to change the tax system (or adopt other measures to depress land prices).

Even if that were fixed, banks are run by criminals. There's another scandal every couple of years. There's a good list here. Libor fixing, PPI mis-selling, totally unnecessary interest rate swaps, money laundering/assisting with tax evasion, and rigging exchange rates. Not to mention the usual background insider trading, market rigging, overcharging etc. And that's just UK banks. I once found a longer list going back decades and all of it seemed rather familiar.

"This is like trying to predict earthquakes or hurricanes, they don't happen very often"

From the BBC:

… Neel Kashkari, president of the Federal Reserve Bank of Minneapolis is proposing an alternative that may be more in line with Donald Trump's way of thinking. He believes that banks should be forced to massively increase their capital reserves (1) - the amount of cash they are obliged to keep in hand for the day when everything goes wrong at once.

Currently, US banks need to keep 6% of what are known as their risk-weighted assets, a formula that values their their loan book, in cash. Under the so-called "Minneapolis Plan", Mr Kashkari wants banks to significantly increase this ratio to up to 38%.

Neel Kashkari says [existing] measures to prevent another bank meltdown don't go far enough:

"My highest focus is making sure we don't have another financial crisis where the banks get into trouble and they have to turn to the taxpayers," he told BBC World Service. We've looked at the history of financial crises - this is like trying to predict earthquakes or hurricanes, they don't happen very often.(2)

"And if you look at financial crises all around the world, that's the level of capital that we need to reduce the chance of a future crisis to as low as 10% over the next century."

1) The word "reserves" is largely meaningless in this context as it can mean quite different things. "Cash" is as crystal clear as you can get.

2) He can't have been looking hard enough, there has a been a banking crisis in the USA every 18 years or so since the early 19th century, interrupted only by the second world war (and the mid-cycle dip in the 1973-1989 cycle). The cycles in most other countries in the world have now synchronised with the US cycle (i.e. the last full one was 1989-2007). And these cycles always go hand in hand with land price bubbles; you can't have a land price bubble without a credit bubble - a credit bubble will always go into higher land prices.

So as ever, the question is, is he deliberately lying or is he stupid?

A Dispatch from the Front Line

I have had a reasonable year and decided we should pay off the final balance of our flexible business loan early.  Not a problem you'd think?  Just transfer some funds between accounts.  BTW, this is HSBC.  Note also that HSBC have sacked all their local managers and we are 'looked after' by someone about 70 miles away.

 

Can we do this by on line banking?  Nope.  No facility.

 

OK.  Let's call telephone banking.  Nope.  Can't do that either as one of my access credentials has expired and it'll take 'a few days' (i.e. probably a couple of weeks) so sort that out.  The ooman bean who told me this said she'd email my 'issue' to our 'RM'.  A 'relationship manager' I suppose.

 

RM calls me back. Can I do this in the local branch?  Nope.  So I go off on one about their sacking of all their local RM's and then she make the big mistake of saying that HSBC are struggling with their profits!!!  Oops.  Bad move.  I issue a few choice words about ex nihilo money and QE and so on and it all goes a bit quiet.

 

'You'll have to write to me then and I'll get it done. You can do that by email'.

 

'Oh can I?  Really?  Is that wise as we have no secure email connection with you?'

 

Sigh.

 

Reader's Letter Of The Day

From The Metro:

Good riddance to the greedy bankers who are threatening to leave the UK for Europe over Brexit (Metro, Mon).

Let some other mugs bail them out in future. But before they go, let's make sure every penny they owe is paid back to the British taxpayer.

Fred, Hampshire.

Financial Contagion (2)

I offered an explanation as to why falling house prices end up harming the real economy (despite logic saying they ought to help it) recently, nobody came up with anything better so it'll have to do for now.

To cut a long story short, when house prices fall, people want to withdraw money from banks which are overweight in mortgage lending (which is most of them) because the banks' collateral value is falling. Most banks have about 80% of their lending on mortgages and 20% to the real economy (business loans, overdrafts, credit cards, HP deals/personal loans etc).

It is impossible to make mortgage borrowers repay any faster than under the terms of their mortgage, so the quickest source of cash is to call in business loans, cancel overdrafts, cut credit card limits and stop offering HP deals/personal loans. So the real economy is starved of credit/finance, things which oil the wheels, and it grinds to a halt.

TBH emailed me an article about new revelations on the most extreme real life example of this i.e. the RBS Global Recovery Group which operated on a slash and burn basis. It upped fees and charges, deliberately bankrupted businesses and then a different RBS department acquired their land and buildings at undervalue 'off the market' (can't have forced sales depressing open market prices!). This is a very short term thing and must harm RBS profitability in the long run, but that's not how bankers think; it's only this year's bonus that matters.

I thought that everybody knew this, but apparently not - the BBC re-ran the story (giving due credit to Buzzfeed who uncovered it).

There's no point me summarising, it makes for very interesting reading if you have time.

The point being that without the house price falls, depositors wouldn't have demanded cash, RBS wouldn't have done the slash and burn, and had other banks been expanding their business loans or offered easy remortgages, RBS borrowers would have simply taken their business elsewhere. As things stood, RBS had them by the throat.

"Financial contagion"

There have been lots of explanations offered for why a fall in land prices affects the wider economy, which is like the tail wagging the dog. It is ultimately the health of the economy which dictates land rents, which adjusted for interest rates dictate land prices.

Some people talk vaguely about "the wealth effect" or "animal spirits" or "financial contagion" in the vaguest sense, in which there is some truth but those are very simplistic and superficial concepts.

The way I understand it, it is a simple mechanical thing that follows automatically from the way banks work. It illustrates the old adage that "If you owe the bank £10,000 it's your problem, if you owe the bank £1 million, it's the bank's problem."

As we know, an average UK bank's assets are 80% loans on land and 20% short term loans, overdraft facilities, HP agreements, credit cards etc. The bulk of their liabilities are customer deposits.

When the land price/credit bubble finally pops, as it does every 18 years or so, people will want to withdraw money from the riskiest bank, i.e. the one whose assets are 99% loans on land and which has been handing out the highest loan-to-value mortgages e.g. Northern Rock. People withdraw money from NR and short of stashing notes under the bed, all they do is swap a deposit with NR for a deposit with a safer bank or with the government e.g. NS&I.

Duly panicked, depositors with the second wobbliest bank will want to withdraw their money on the assumption that it will pop next. That bank of course can't call in much of the 90% of its loans that are on land any faster than the underlying loans and interest are going to be repaid; the borrowers simply can't pay any faster. The banks don't want to do mass foreclosures on land which is falling in value because that would be a vicious spiral, so where do they get the money from to repay the depositors who want to withdraw?

The only ways they can get money back quickly are (a) cancelling people's overdrafts or (b) stopping their credit cards and demanding repayment in full (or not making any more personal loans).

a) I look at dozens of balance sheets every week when I'm doing tax returns, and it is quite normal for a business to finance its entire stock of goods with an overdraft. That stock of goods has a turnover period of a few weeks or months, so the bank can get its money back as quickly as the goods can be sold. By doing this, the bank has bitten the hand that feeds. When those goods have been sold and the overdraft repaid, the business will find it difficult to stay in business because it can't finance more purchases. Some will survive by scaling down, others will go under.

b) If people stop spending on credit cards/personal loans, clearly there will be less spending on goods and services for several months until all the debts are cleared and people have saved up for what they otherwise would have bought with a personal loan.

Put (a) and (b) together, we see that the productive economy is being sacrificed on the altar of the land price/credit bubble. These two effects reinforce each other of course; once a business has had its overdraft cancelled and demand for its output is falling, it will find it hard to refinance with another bank; there are knock-on effects on its suppliers. So people lose their jobs, there is less spending and less demand etc etc.

TBH reminded me by email about the most extreme example of this, being Royal Bank of Scotland's infamous Global Restructuring Group.
-------------------------------
Is there a simple fix?

Obviously, the best answer is always shift taxes from production to land values, as a second best, the answer must surely be to segregate banks into two types:

a) hmm, let's call them "Building societies" who lend only on land and whose depositors face strict withdrawal limits i.e. they can't withdraw any faster than borrowers are paying in, so a "deposit" with such a bank is more like an annuity. Mortgages and deposits are denominated in "land pounds" which of course do not exist so can only be repaid with "real pounds" or "government pounds ". So even if their depositors all panic, the building society is allowed to pu a temporary stop on withdrawals, and

b) ordinary commercial banks who are only allowed to lend short term to businesses to finance working capital and fixed assets; to grant overdrafts, issue credit cards and make personal loans etc. These are "real pounds" and deposits are only accepted in "real pounds" or "government pounds". Depositors, collectively, know that they can withdraw all their deposits within a few months without there being a bank run; and they know that the bank is insulated from land price speculation, so they probably wouldn't all want to withdraw anyway.

[Neither type of bank would get any sort of taxpayer-underwritten deposit guarantee. If people want maximum security, there will of course be a third type of quasi-bank which is the government itself, which creates/prints "government pounds" by spending (or paying out deposits) and destroys/unprints money by collecting taxes (or taking deposits). Whether it collect taxes in government pounds, land pounds or real pounds does not seem to matter for these purposes.

People will only be able to deposit "real pounds" or "government pounds" (but not "land pounds") with National Savings and Investments, which would be made a lot more modern and like a normal bank.]

Lending between banks and building societies would be strictly verboten, of course.  So we break the link between useful banking (oiling the wheels of the economy, putting deposits to profitable use) and dangerous banking (land price speculation). This surely makes far more sense than some arbitrary and meaningless split into "retail banks" and "investment banks".

Rather perversely, there is an inverse relationship between the savings rate (i.e. deposits) and house price increases, so actually, during such a period, the banks should have more money from depositors to lend to the productive economy, but somehow it doesn't work like that. I suppose because once the land/credit bust has infected the real economy, banks are just too cautious and stick all the money into government bonds or something.
------------------------------
I cheerfully admit that this might all be old hat and a widely accepted explanation in some circles (not that I've ever read it anywhere). Possibly I have missed the point and there is a better explanation, so I'm open to suggestions, but AFAIC, it is as simple as that.

Central bank interest rates cuts vs commercial bank profits

From today's Daily Mail:

Australia's wealthy banks are set to hang on to $917 million by not passing on the Reserve Bank's record interest rate cut. The big four banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - made only modest reductions to their standard variable mortgage rates and gave customers about half of the Reserve Bank's reduction of 0.25 per cent...

It comes after Prime Minister Malcolm Turnbull was left unimpressed and demanded an explanation from the bosses of the big banks for not passing the official rate cut on in full.

"They operate with a very substantial social licence," he said, "They owe it to the Australian people and their customers to explain fully and comprehensively why they have not passed on the full rate cut."

I like his emphasis on "social licence" i.e. government granted privileges.

Also from today's Daily Mail/This Is Money:

Britain's big banks are facing a £1.3billion hit to their profits if, as expected, the Bank of England cuts interest rates on Thursday.

There are fears that the banks could attempt to contain the damage by not passing on the benefit of lower rates to borrowers – risking fury from customers and regulators. Very low interest rates squeeze bank profit margins, so there will be further losses if the 0.25 percentage point cut is passed on to customers.

It's either one or t'other, surely? Unless UK banks are net depositors with the central bank and Australian banks are net borrowers from the central bank?

Fun with numbers - The European Investment Bank

Via MBK from The Times:

Billions of pounds of European funding for UK clean energy projects including offshore wind farms as well as universities and other big infrastructure schemes have been jeopardised by Britain’s vote to quit the EU.

Britain is a 16 per cent shareholder in the European Investment Bank (EIB), which in the past decade has lent more than £42 billion at super-cheap rates to wind farms, hospitals, railways, social housing and a string of other projects...

Ho hum.

So the UK made (however indirectly) 16% of £42 billion in loans via the EIB last year = £6.7 billion; and the EIB 'lent' the UK £5.6 billion..?

Nothing to see here, is there?

Nobody move or the bankers' bonuses get it!

From the BBC:

Mr Dimon said: "After a Brexit we cannot do it all here and we will have to start planning for that. I don't know if it means a thousand jobs, two thousand jobs, it could be many as 4000, and they will be jobs all around the UK."

He added: "Brexit will result in years of uncertainty and I believe that this uncertainty will hurt the economies of both Britain and the European Union. If the UK leaves the EU, we may have no choice but to re-organise our business model here."

And here's the obvious response:

Steve Baker MP, a Leave campaigner, said: "The British people will not be bullied into voting to hand more money and more power to Brussels by someone whose bonus would make even some eurocrat's eyes water and whose bank helped crash the economy. It's time for the 'In' campaign to engage in an honest debate, not make unsubstantiated and illogical threats which are the real danger to our economy."

I don't get this whole "uncertainty" thing, that is just a threat, that is not something that would just happen of its own accord, that would be something that people would deliberately and maliciously do. And there's only one way to find out if it was all just idle threats or whether other countries' leaders really are psychopaths... either way... it's better to find out.

Private banks and credit creation: if you make it seem complicated, you just create loopholes.

By Prof. Steve Keen at Forbes:

The great tragedy of the global economic malaise is that it is caused by a shortage of something that is essentially costless to produce: money.

Both banks and governments can produce money at physically trivial costs. Banks create money by creating a loan, and the establishment costs of a loan are miniscule compared to the value of the money created by it—of the order of $3 for every $100 created.

Governments create money by running a deficit—by spending more on the public than they get back from the public in taxes. As inefficient as government might be, that process too costs a tiny amount, compared to the amount of money generated by the deficit itself.

But despite how easy the money creation process is, in the aftermath to the 2008 crisis, both banks and governments are doing a lousy job of producing the money the public needs, for two very different reasons.

Nope. Let's split this up into two separate cycles.

1. His description of how governments create money is broadly correct, but government spending should be judged on its own merits, not on how much 'money' it 'creates'. Government debt is a necessary evil, but it can be put to good use as a) a handy unit of currency and b) somewhere for people to put their savings/surplus => full reserve banking.

2. And there are private banks. Strictly speaking, they hardly create any new money. Most of so-called bank lending is nothing of the sort, they are just glorified debt collectors - they collect debts from buyers of land on behalf of sellers of land.

Simple scenario: Mr B agrees to buy land and buildings from Mr S for £100, which Mr A does not have in ready cash.

If Mr B takes out a mortgage of £100, Mr S gets credited with a deposit of £100. These pop up on opposite sides of the banks' balance sheet. Mr B has to pay that off in instalments over twenty years and Mr S can withdraw up to £100. But all depositors taken together cannot withdraw all their money at once and spend it. Collectively, they cannot withdraw their money any faster than all the mortgage borrowers are paying it in.

But there is no need for a bank. They could agree that Mr B will simply Mr S in instalments over the next twenty years. If Mr B defaults, then Mr S would take him to court, repossess the land and buildings, or employ a debt collection agency/firm of solicitors to enforce payment, by fair means or foul. Pretty much the same as what a mortgage bank would do.

So ultimately, what is the difference between banks and debt collection agencies? Not much. The added extra which banks provide is a risk-pooling exercise/insurance, so if Mr B's loan goes bad, Mr S only has to bear a tiny percentage of it; similarly, Mr S has to bear the same tiny percentage loss if other buyers' loans go bad. No doubt a debt collection agency could offer the same service.

A sensible plan for fixing the banking system.

From City AM Forum:

Deposit insurance has been the most sacrosanct component of the regulatory regime for banks since it was widely introduced during the 1970s following the collapse of the Bretton Woods regime. However, while it seeks to protect consumers against the undercapitalisation of banks and their tendency to collapse in times of stress, it has also encouraged such undercapitalisation.

Since the early 1970s, the number of countries with government insurance of customer deposits has increased tenfold while the number of banking crises worldwide has risen by a factor of almost 500 compared with the preceding 25 years. Deposit insurance subsidises an already cheap form of debt whose supply is almost unlimited for banks. Banks have therefore been able to operate at very high levels of leverage with very limited constraints on growth.

All very true. So what's the solution:

First, the abolition of deposit insurance after two years together with an amendment of the Financial Services Act 2013 to make all deposits preferential liabilities in an insolvency.

Second, legislation banning compensation paid to depositors as a result of losses they may suffer in the event of a bank insolvency.

Third, an announcement that National Savings and Investments (NS&I), the state-owned bank, would henceforth offer savings and current accounts to everyone; and

Fourth, a requirement that all deposit-taking banks publish prominently their capital/leverage ratios.

To really nail this down, we would of course have to add...

Fifth, public collection of all or a large part of the rental value of land to prevent credit- and land-price bubbles with purchase mortgages for land only available from the NS&I (private loans would not be recognised by HM Land Registry);

Finally, a strict ban on central bank lending to private banks and abolition of the 'lender of last resort' concept

Even if that were not full-on LVT, it would be the government collecting the interest on land purchases, i.e. quasi-LVT in a politically sellable form.

Killer Arguments Against LVT, Not (378)

I went to a Labour Land Campaign meeting last weekend to discuss "implementation".

If you want to skip the boring background to all this, click here.

Another member and I had, independently, drawn up a list of existing property/wealth taxes which could and should be replaced; added up total revenues R (about £80 bn); calculated the total amount of rental value of UK developed land and buildings which relates purely to the location premium L (about £240 bn); divided R by L and arrived at a figure of around 25% for residential and 50% for commercial.

The annual tax on the bottom two-thirds of homes would be the same as or less than their current Council Tax plus TV licence, assuming they don't claim Council Tax Benefit or its replacement. The LVT on commercial land in London would be higher and in most other places would be lower than their current Business Rates bill. That's them dealt with.

So far so good, then 'politics' got dragged into it, i.e. identifying the 'losers' i.e. those who would pay more on an annual basis, even though over a lifetime, getting rid of SDLT and IHT would largely even it out. Remember that SDLT is a very crude LVT paid in advance and IHT is a very crude LVT paid in arrears. Surely it is far better to get rid of those two taxes and ask people to pay-as-they-go?

One member present actually is a low-income pensioner whose home in London would now sell for around £1 million; we both had calculated that the LVT on such a house would be about £9,000 a year against a current Council Tax £1,500. We pointed out to him that all sensible LVT proposals include a deferment/roll-up option for such pensioners, the chances are that the deferred LVT payable when they die and the house is sold would be much the same as the comparable IHT and SDLT bills. Much less for those who die sooner, much more for those who live longer, it all averages out.

The next political objection was the diagonal opposite of the low-income pensioner in a high value home, namely, the aspiring young couple who had taken out a large mortgage to buy an expensive home and who were absolutely maxed out. My view is, they should have budgeted for an increase in interest rates of at least 1% or 2% and having to pay 0.9% LVT on the current selling price would only eat into that reserve, but was shouted down.

OK, Plan B, I said, for those borrowers whose LVT is significantly higher than their budgeted-for Council Tax, how about we just tell the banks to write off a corresponding part of the mortgage debt? Not good enough, came the reply. That would benefit people with large mortgages but not those with a small mortgage. At which stage I gave up on that line of reasoning.

So in the meantime, I have cooked up Plan C. That is simply to cap the interest rate on mortgages which were taken out prior to the introduction of LVT being announced.

Let's imagine our aspiring young couple has taken out a £900,000 mortgage to buy a £1 million home. (To justify that sort of mortgage, they must be earning around £180,000 a year between them, so they are not exactly starving, but hey…). A quick Google tells us that at the moment, they are probably paying 2.5% interest on their mortgage.

So for a 25 year mortgage, their annual repayments are currently £48,848 (=PMT(0.025,25,900000) and their Council Tax is £1,500, total £50,348.

If their LVT bill is £9,000, that leaves £41,348 to be spent on mortgage repayments, which would mean reducing the interest rate on their mortgage to 1.1%.

As far as I am concerned, we could cap the interest rate on all pre-existing mortgages at 1.1%. So nobody at the top end loses out, and people further down get a double win - their LVT is lower than what their Council Tax/TV licence was and they save a few quid in mortgage repayments.

The total annual 'loss' to the banks, i.e. land rent which they can no longer collect because the government is now collecting it would thus be be a surprisingly small £8 billion a year*. This is about the same as the pay and bonuses paid out to senior staff, or 0.1% of what they claim are their total assets; or 2% of their net assets, so nothing they can't afford.

No doubt somebody will think up an objection to Plan C, in which case, I will do a Plan D, and so on.

The only counter-objection I can think of is that banks will somehow game the system and charge more than 1.1% interest. In that case, the government just sets up a 'government mortgage bank' and offers people with pre-existing mortgages a remortgage at 1.1% interest. So the 'government mortgage bank' pays the banks the face value/amount outstanding of existing mortgages by creating more bank deposits with the Bank of England in exchange.

Let's imagine everybody did this. It would be like more QE. Instead of the BoE paying banks 0.5% interest on £300 bn, the BoE would be paying banks 0.5% interest on £1,300 bn. But seeing as the government bank is charging the ultimate borrowers 1.1% interest, that looks like a nice little earner for the government, and faced with this sort of threat, I think that banks will toe the line and cap interest rates at 1.1%.

* Total outstanding owner-occupier purchase mortgages excl. 'equity withdrawal' slightly less than £1,000 billion, average interest rate 2.5% and duration remaining approx. 15 years.
=PMT(0.025,15,1000)=£81 billion a year cash coming in.
=PMT(0.011,15, 1000)=£73 billion a year cash coming in.

Fun Online Polls: Central heating, bank lending and debts

The results to last week's Fun Online Poll were fairly evenly balanced:

Have you turned on your central heating yet?
Yes - 24%
No, but I probably will do soon - 8%
No, and I'm going to put it off as long as possible - 40%
No. What sort of wimp needs central heating? Put on a pullover! - 28%

Thanks to all 112 of you who took part. As a fully paid up wimps, we turned ours on last week.
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This week's question was submitted by Ralph Musgrave.

How many politicians call for more bank lending while simultaneously decrying the increase in debts?

Vote here or use the widget in the sidebar.