"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.

Rent controls vs financial crises

In a slightly different context, BenJamin' emailed me this 1995 article about rent controls.

As we see, Georgism Lite was prevalent in most Western countries in the decades after WW2:

Rent controls were imposed in the United States shortly after the country's entry into World War II. Putting the country on a war footing required massive relocation of labor, with consequent pressure on many local housing markets. Controls were imposed to ensure affordable housing and to prevent profiteering. The appropriateness of imposing controls in wartime seems to be virtually undisputed.2 The form of controls was a freeze on nominal rents.

The rent freeze continued after the end of the war in the belief that the return of soldiers would otherwise cause a rapid and disruptive rise in rents, at least in certain markets. However, there was a housing boom in the late 1940s and early 1950s, which lowered market-clearing rents and permitted almost painless decontrol. The only jurisdiction to retain wartime controls was New York City, and these were applied only to pre-1947 housing.

European countries imposed wartime rent freezes, too. In fact, controls in several countries had lingered on from the First World War. The postwar experience of the European countries was less fortunate. Housing reconstruction took much longer because of their war-ravaged economies and extensive destruction of their housing stocks. As a result, many European jurisdictions retained a rent freeze on at least prewar housing long after World War II. While the nominal rent freezes were typically not absolute—intermittent adjustments were made—controlled rents fell significantly in real terms, to only a fraction of the rents in the uncontrolled housing that was constructed after the war.

It is the experience of these jurisdictions, together with that of New York City, which forms the basis for the common opposition to rent control among economists. The type of controls imposed in this period has come to be termed "hard" or "first-generation" rent control. Since the early 1950s, the pattern of rent regulation has been significantly different in Europe than in North America.

In much of Europe, the legacy of first-generation controls is still keenly felt. In some jurisdictions, controls gave rise to housing problems that prompted increasingly intrusive government intervention. In others, the uncontrolled rental housing sector grew healthily, while the older, controlled housing in the downtown areas deteriorated, but remained keenly sought after due to the wide disparity in (quality-adjusted) rents between the controlled and uncontrolled sectors. Over the last 15 years, largely as a result of the perceived failure of socialism and renewed faith in the market, European governments have been eliminating or relaxing controls.

Rent controls were just part of the overall package of course, they went hand in hand with mortgage caps; more social housing; higher taxes on rental income; and higher taxes on residential 'property'. Different countries had different packages, Singapore still has its own peculiar model of Georgism Lite with the inevitable resounding success.

Whatever the narrow impact of Georgism Lite was on the housing market per se, there were much wider ramifications which economists usually ignore:

1. The 18-year land price/credit boom bust cycle was kept largely in abeyance between 1925 and 1973.

2. The post war years up to the 1970s are seen as the golden age of Western capitalism, there was almost continuous economic growth and almost full employment. This was because of the absence of major financial crises and people putting their earnings into the real economy not land price speculation.

3. There was also inevitably more equality and the benefits of economic growth were felt more evenly.

4. This has all gone nicely into reverse since the 1970s, with Home-Owner-Ism at its most rampant e in the UK and Australia, although there has been a slight backlash in some German states which are now re-imposing rent controls.

Georgism Lite was just diluted Georgism without a full-on LVT. Both are ways of ensuring more stable economic growth as well as a more equitable sharing of the benefits of economic growth*. Full-on Georgism with much higher LVT is just a much better way of doing it**, because you get all the well established benefits of Georgism Lite plus the benefits of having much lower taxes on output and employment.

* Economic growth goes into higher rents; rent controls are a way of sharing that growth between landlord and tenant.

** The growth is shared by the whole economy with the landlord getting what's left over after LVT.

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.
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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.
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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.

Fun Online Polls: The global financial crisis & Muslim migrants

The results to last week's Fun Online Poll were as follows:

What caused the global financial crisis which has seen the UK mired in recession for the last seven years?

The global land price and credit bubble, mortgage backed securities etc. - 81%
UK government deficits of a few percent of GDP in the years before the crisis - 5%
People under 25 claiming benefits rather than looking for a job - 4%
Other, please specify - 10%8

Correct. So treat the cause, not the symptoms.

Which is the opposite of what UK governments (of whatever party) have been doing for the last seven years.
* Taking away benefits from the under-25s is something the Tories are doing quite ruthlessly (aka 'bayonetting the survivors). Despite the fact that most of them were still at school back in 2007-08 and thus can be absolved of any blame.
* If government deficits were a minor or secondary cause, then why have they run a cumulative total deficit of over fifty per cent of GDP over the last seven years? (considerably higher than what Labour was doing until 2008).
* Seeing as the land price/credit bubble was the actual cause, why have UK governments done their level best to prop up house prices and prop up speculation and banks by depressing interest rates?

Strikes me, they are making things worse and just delaying the inevitable. Perhaps until 2025-26?
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Muslim migrants have been in the news a lot recently. History shows that they are not very good at fitting in Western/non-Muslim countries and tend to stay "within their own communities", so we can assume that Muslims prefer to live among other Muslims.

So fair enough, people are fleeing the war zones (I know that I would), but that's only part of Syria/Iraq. Surely your easiest option is to move to a more peaceful area in Syria/Iraq; your next option is move to a neighbouring Muslim country; your next option is the easy overland route to a Muslim country further afield (from the Atlantic to Pakistan, if you gloss over Malaysia/Indonesia).

From Wiki:


So why are so many of them taking the most difficult journey across continents and oceans to north-west Europe, where they will never fit in anyway? And yes, that is more or less a rhetorical question.

So that's this week's Fun Online Poll.

Vote here or use the widget in the sidebar.

Fun Online Polls: Jeremy Corbyn & The Global Financial Crisis

The results to last week's Fun Online Poll were as follows:

You will/would you vote for as leader of the Labour Party?

Jeremy Corbyn - he'll make Labour unelectable = 41 votes
Jeremy Corbyn - I might not agree with him, but at least he has principles = 28 votes
Jeremy Corbyn - I agree with the majority of his policies = 3 votes
One of the three faceless soft-centre Tory-lite candidates = 2 votes
None of the above = 16 votes
Other, please specify = 1 vote

I think he's got this one sewn up.

Thanks to everybody who took part.
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Something which has been bugging me for years is the Tory notion, subscribed to by the three out of four Labour leadership contenders who aren't Jeremy Corbyn, that the UK has been mired in recession for the last seven years because Labour was running up deficits in the preceding years.

That is the Economic Myth from Hell, if you ask me. Of course Blair-Brown are guilty as charged when it comes to their part in stoking the UK land price bubble and then transferring bank liabilities to the taxpayer, but the Tories have merrily continued this strategy and in any event, the Tories are running far larger deficits than Labour did.

Just as sickening is the Tory notion (again, subscribed to by the other three Labout leadership contenders) that this should be blamed on people now under 25 over-claiming benefits instead of working. Apparently, we can fix the deficit by taking away their benefits; this will magically get them all into jobs; and this in turn will magically put the economy on the road to recovery. That's like blaming a war on dead soldiers and civilians.

But what do you think?

Vote here or use the widget in the sidebar.