Basic accounting & Basic accounts

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.

Killer Arguments Against LVT, Not (245)

It's not just Poor Widows In Mansions who'd take a hit; replacing as many taxes as possible with Land Value Tax would also wipe out all the extra taxpayer-funded rents which all those MPs are collecting.

Give me all your money and don't ask any awkward questions

I thought that was the whole point? Why are they now squealing?

From The Daily Mail:

Three quarters of home buyers are concerned about mortgage rates, fearing it would take only a small hike to send them over the edge, a new report shows.

The research by consumer watchdog Which? shows one in seven cash-strapped buyers are already struggling to make their repayments. But despite their problems only a third of people affected are approaching their lenders for help.

Options available to those with difficulties include moving from a repayment to interest-only mortgage, taking a payment holiday or allowing them to switch to a different deal...

Now, perhaps I've missed something, but isn't the whole point of Home-Owner-Ism to encourage people to borrow as much as humanly possible and beyond to keep the bankers rich and the illusion of wealth (rising house prices) going?

And if some valuer is prepared to sign off on the fact that the potential selling price of your house has gone up, isn't the correct procedure to remortgage with a bigger loan to "unlock some of the cash tied up in bricks and mortar"?

So I really don't see what the fuss is about. The whole point of Home-Owner-Ism is for every generation to enslave the next generation with even bigger debts, or failing that, for people who ought to know better to enslave themselves, so that wealth cascades UP the generations, from young to old, from productive economy to monopolists etc.

If you ask me, the system has worked a treat. Keeping people close to the verge of bankruptcy used to be something to be celebrated - that way they have to keep their noses to the grindstone - so I appear to have missed that memo as well.

See also The 830,000 homeowners stuck in a negative equity trap

Special Pleading Of The Week

From The Press Association:

"The majority of MPs think more should be done to help struggling first-time buyers in London and across the country get on to the property ladder, a survey has indicated. Around 83% of MPs said they thought their constituents should be given more support when buying their first home, rising to 100% among those with constituencies in London, according to insurer Genworth Financial...

Angel Mas, president of mortgage insurance for Genworth Financial in Europe, said: "The deposit remains the biggest barrier to home ownership in the UK, along with the prudent approach taken by lenders, who are allocating their scarce capital to other segments of the mortgage market.

The return of high loan-to-value lending is vital if we are to unlock the market for those with a sound credit profile, but who are unable to save for a deposit in the near term. Lenders can participate safely in the high LTV segment by transferring default risk to a specialist insurer."

H/t Gawain Towler.

Vested Interest Fun

Nice to see a whole shed load of Vested Interest groups sticking their oars in at the BBC:

The UK government should put a moratorium on shale gas operations until the environmental implications are fully understood, a report says.

Inevitably, the article kicks off with a 'should'.

"We are aware that there have been reports from US of issues linked to some shale gas projects," a spokesman for the Department of Energy and Climate Change (Decc) told BBC News, "However, we understand that these are only in a few cases and that Cuadrilla (the firm testing for shale gas in Lancashire) has made it clear that there is no likelihood of environmental damage and that it is applying technical expertise and exercising the utmost care as it takes drilling and testing forward."

Regulator takes regulated's word for it. Nice.

The Tyndall report also expresses concern that the exploitation of shale gas is bringing new greenhouse gas sources into play. It says: "This will further reduce any slim possibility of maintaining global temperature changes at or below 2C (3.6F) and thereby increase the risk of entering a period of 'dangerous climate change'."

All things being equal, the amount of 'greenhouse gases' and other pollutants created per unit of energy consumed in a building is probably lower with domestic shale gas than e.g. importing gas from Russia or the Middle East.

... there have been reports of problems with the technology in the US, such as cattle dying after drinking water from the fracturing process that found its way to the surface.

Possibly true, that all depends on whether cattle drink water which has recently fallen as rain or which trickles out of rocks. But the overall safety record of European oil and gas producers is vastly better than in the USA, so I'm not sure that's relevant.

In Pennsylvania, some residents can now set fire to their drinking water after methane leaked into wells. They are blaming shale gas extraction.

Possibly true. Safety tip: if you turn on your water tap and smell gas*, then open a couple of windows and leave the tap running until the gas dissipates, and most importantly, don't hold a lighted match under a running tap.

The Tyndall report says that gas drilling in Lancashire will give rise to a range of local concerns including noise pollution, high levels of truck movements and land use demands.

Ah... the NIMBYs making a late guest appearance. As a rule of thumb, where there's a Greenie there's a NIMBY not far behind.

The Decc spokesman said: "We support industry's endeavours in pursuing energy sources (like shale gas), provided that tapping of such resources proves to be economically, commercially and environmentally viable...

If it weren't 'economically viable', then no private company would want to do it, short of there being massive subsidies. The reason why we can't rule out the government subsidising this is hinted at earlier in the article: "Experts say the technological breakthrough increases energy security worldwide and reduces the diplomatic power of gas-rich nations, such as Russia."

The article concludes:

"All onshore oil and gas projects, including shale gas exploration and development, are subject to a series of checks, including local planning permission before they are able to move ahead with drilling activities."

Not going to happen then, is it, short of energy companies merrily greasing a few palms. So it's in the interests of local politicians to stoke up Greenie and NIMBY opposition because that enhances the amount of bribes they can demand.

*The problem being that apparently you can't smell natural gas, but hey. More to the point, UK water companies are very much geared up to separating out methane from water pumped into the system, that's what sewage works are for.

It can't be rocket science to separate a heavy liquid (like water) from a light gas (like methane). From here: "Methane can also migrate from coal seams into sandstone aquifers. If methane is present in an aquifer, it will likely exist as a dissolved gas in the water. When the well is pumped, the water level is drawn down. The draw down will lower the pressure in the well and allow more gas to be released from the water. Methane will readily move from the water phase to the gas phase when water pressure is reduced to atmospheric pressure at the ground surface."

Bonfire Of Hypocrisy

I wasted a quarter of an hour answering the first fifteen questions of the Oxford PPE entrance exam, as unearthed by Simon Clarke, which asks you inter alia to spot the underlying assumption in an argument and say whether it is logically flawed or not*.

Once you have sharpened your wits on that, I invite you to turn your attention to a practical, real life issue that affects millions of perfectly honest, hard working young (and not so young) people in this country - the 'priced out' generation.

The FT's article of today is a bonfire of hypocrisy. Go and revel in it in full if you have time! If not, let me highlight two findings ...

"A YouGov survey, conducted on behalf of the New Homes Marketing Board last week, indicated that 89 per cent of respondents thought that the cost of housing was a problem for first-time buyers...[but]...According to the Saint UK Index, an annual measure of attitude towards development, 83 per cent of people in the UK oppose any kind of local development".

To sum up: "We feel a bit sorry for you. But we're all right. So go f*** yourselves"

* and scored 13 out of 15.