Make up your own caption

Supply and demand

From The Metro:

Just a third of students expect to find a ‘graduate level’ job after graduation, researchers said. ‘With a record number of students due to complete degrees in the coming weeks – and tens of thousands of last year’s graduates still looking for work, there is widespread concern on campus that competition for graduate jobs has never been fiercer,’ said Martin Birchall of High Fliers Research, which commissioned the study... This year’s graduates will also have average debts of about £17,900, up from an average of £11,600 in 2008.

From The FT:

Mr Darling claimed that Mr Laws's package would undermine a "fragile" recovery... The former chancellor also claimed that the scrapping of the child trust fund and a cut of 10,000 additional university places went far beyond his promise to curb "waste and inefficiency".

So we have a massive surfeit of students, who can't get the kind of job they'd hoped for, but who still end up with 'average debts of £17,900', and The Badger is complaining that the Lib-Cons didn't increase (let alone cut) the number of such people by ten thousand?

He actually said it!

There's an article in the FT about Labour's last minute scorched-earth spending splurge, all good stuff, although the Lib-Cons have barely scratched the surface*.

The highlight is this from The Badger: Former ministers have dismissed the exercise as a political show-trial to soften up public opinion for spending cuts. Alistair Darling, former chancellor, said blaming an outgoing administration was the "oldest trick in the book".

Sheesh.

They wrote the book. A quick Google search of years+of+Tory"under investment" gives me 33,500 hits, the latest were in the last few days.

* A few quick wins, lads - shut down DTI, DFID, DECC and DCMS, and replace the entire welfare system with a Citizen's Income, that'd save about £50 billion a year. Sure, DTI budget includes some spending on higher education, which is important for the economy in general and employers in particular - but they end up paying twice. They pay for cost of higher education through taxation and the value of the education through higher salaries.

On a personal note, I paid for my own degree courses (OK, they were subsidised, but it's the principle that matters) without getting a penny of grant and for my own professional qualifications (with private providers). Stupendously good value they were too. I can imagine most lorry drivers or taxi drivers would say the same thing, or indeed anybody who accepted below-market wages while they were doing an apprenticeship or similar.

"Deeper and tougher than Margaret Thatcher"

A nice bit of Indian bicycle marketing

To recap, Indian bicycle marketing is my way of describing the way that the two main parties pretend that their more-or-less identical policies are somehow ideologically different. At the moment, they are bickering over whether to slow the growth in State spending by "a bit" or by "not very much". Commenting on the Tories' spending plans, the Chancellor had this to say:

"Some [The Tories] seem in a hurry to cut services. We are focussing on cutting costs."

Notwithstanding Labour's atrocious record of increasing costs without any improvement in the quality of services and their intention to increase State spending by at least ten per cent, this turn of phrase actually suggests that the Tories will continue Labour's policies of providing worse and worse value for money, or, alternatively that the Tories are motivated purely by malice and aren't planning to do this at least in part on behalf of the longsuffering taxpayer, which seems unlikely.

Paucity of ambition

The government has been increasing public sector debt by three or four per cent of GDP since about 2000 (which is not as bad as it sounds, seeing as GDP was growing by three per cent or so - a form of mortgage equity withdrawal, if you will), which is as much as they thought they could get away with, seeing as they were constantly trumpeting how well the economy was doing (it wasn't doing well at all, obviously, it was mainly fuelled by cheap credit).

They are now making the best of the recession and using it as an excuse for a massive increase in spending and borrowing, which is expected to be nearly ten per cent of GDP each year for the next couple of years.

Anybody who believes that this increase is directly caused by the recession itself is a mug, of course. If GDP shrinks by four per cent, and the average tax rate is fifty per cent, that would only create a two per cent of GDP shortfall, and we have hitherto spent about two per cent of GDP on unemployment benefit etc, so if unemployment went up by a million, that would be another one per cent shortfall. Conversely, in a recession, a lot of things get cheaper, so the government ought to be able to get better value for money, so if they kept real spending constant, you wouldn't expect the deficit to increase very much.

No, my gullible friends, they are ramping up government spending (and hence taxes) like mad because they know it's politically possible to do it during a 'recession' (they've gone just as mental in the USA as well, interestingly enough).

Anyway, I digress. Any sensible policy ought to be about getting the public finances into balance ASAP; they don't even have that ambition; The Badger has now proudly said that they would try and halve the deficit within four years. That's a bit like a burglar asking for leniency and promising to cut down the number of homes he'll burgle in four years' time to half as many as he intends to burgle this year.

Just sayin', is all.

Reader's Letter Of The Day

From The Daily Telegraph:

SIR – Alistair Darling says: "I am confident that the UK will return to growth round the turn of the year." But economic forecasting is not really possible. The existing economic models are relied on only to explain the past.

Mr Darling did not "foresee" the recession till it was well under way, so how can he "foresee" what will happen six months ahead? Did anyone foresee that there were no weapons of mass destruction in Iraq? Did anyone foresee that we would release the Lockerbie bomber? Did anyone foresee that tobacco advertising would be given an extra year for Formula 1? We can't even see the Government's liabilities, let alone foresee them.

Until we have open government we will be lucky to see five minutes ahead.

Brian Gilbert, Hampton, Middlesex.

Another day, another desperate throw of the dice (18)

Up to now, the UK and the US have been taking the long way round:, first encourage/allow the banks to make reckless loans, which the banks then slice and dice and sell on to investment firms, and then when it all goes wrong, bail out or nationalise the banks with billions of taxpayers' finest.

But why bother waiting for the banks to fail first? Why not short-circuit the whole thing and just have the government make the reckless loans in the first place? That's the approach now being taken in the UK:

"The Chancellor's plan involves effectively underwriting the majority of new mortgages in the UK to encourage big investors to give badly needed money to lending banks.

The proposed scheme means the UK Government would guarantee mortgage bonds, where banks parcel up individual home loans and sell them to investment firms. When the system works properly, banks have a source of money to loan to customers and investors get a return.

The total value of new mortgages involved has been estimated as up to £100bn... "

Via LP

Bank bail-outs for beginners

The Goblin King, The Badger and The Prince of Darkness have all been on record in the past couple of days, wringing their hands about the fact that UK banks aren't doing what the government wants them to do (which is to prop up house prices via more reckless mortgage lending and, to a lesser extent, not pull the rug from under businesses), despite the massive taxpayer-funded bail out.

So, for the benefit of these senior government figures, here's my Noddy's Guide on How Banking Works.

1. In normal circumstances, money comes in from depositors, bondholders and shareholders ('investors'), the bank records this as liabilities and lends it out to mortgage borrowers and businesses ('borrowers') and records these advances as assets (banks are just middlemen, of course, they don't actually create new money - see footnote*). The bank receives repayments of interest and capital from the borrowers ('income'), and after deducting running expenses, the income is passed on to the investors as interest, dividends, bond redemptions and share buy backs ('expenses'). As long as there's confidence that house prices will continue rising, in the economy and in the bank, this all hums along quite smoothly:


2. Until one day, confidence in ever rising property prices and debt-financed businesses starts to erode; banks are less willing to lend, the value of the bank's assets (i.e. loans to borrowers) starts to look shaky, and these borrowers start running up arrears. In this case, the arrow from the investors flips round - they want their money back; or at least, they want to shift it from higher risk to lower risk investments in banks (from bonds to deposit accounts, for example) or from higher risk to lower risk banks. This now becomes the bank's most pressing concern - how to keep their creditors (the investors) off their backs before they start a run on the bank:


3. "Oh dear," thinks the government, "The whole property price bubble, on which the illusion of ever rising wealth was based is bursting, and less-well capitalised businesses are going to the wall. Let's fire hose £37 billion of taxpayers' finest at the banks!"

The Big Fat Arrow in the last picture represents the £37 billion (with promises of plenty more to come):


4. Now, in the name of All That Is Unholy, who in their right mind expects banks to do anything other than hoard that cash to cover withdrawals from deposit accounts, to keep up interest payments and redemptions on bonds, maybe even to continue to paying dividends, to send a false signal that the bank is still profitable?

FFS, is the government really surprised that the semi-nationalised banks aren't all too keen to continue granting mortgages secured on plummeting property values?

As an unfortunate result of all this, debt-financed businesses (who may be otherwise well run and profitable) are going to the wall, which of course exacerbates the down turn, but do not imagine for one second that the government gives a hoot. Businesses are merely there to bid for government contracts (i.e. make donations to whichever party is in government), to pay as much tax as can be milked out of them and to create jobs for regulators.

* This statement is hotly disputed, for example see Arthur in the comments. I agree that banks can create loans apparently out of thin air, but you must always remember that for every £1 they lend to borrowers they need to receive another £1 from investors. So the result of a credit bubble is that a lot of borrowers end up owing a lot of investors a load of money, but the banks are just middlemen - the bank's net asset position does not change by one penny as a result.

Outbreak of commonsense ...

... at HM Treasury!

I have been pointing out for ages that VAT is The Worst Tax Of All, to little avail. Happily, the CEBR got a lot of coverage recently with their suggestion that the standard rate of VAT be reduced from 17.5% to 12.5%. Former Chancellor Ken Clarke suggested in an interview in today's Times that the best thing that The Badger could propose in his much vaunted Pre-Budget Report next Monday would be to reduce VAT to 15% (as a good EU-phile, Fatty Clarke knows that the EU demand that each country has a standard rate of no less than 15%), and hey presto ...

From The Times (breaking news): "Gordon Brown to cut VAT as winter recession bites" (note: not "Alistair Darling to cut VAT ..."). A similar story has appeared on The Telegraph's website.

Equally heartening, another of the bullet points in that article suggests that there'll be: "A tax exemption for foreign dividends, designed to persuade UK-based multinationals not to relocate abroad."

I have also been saying for ages (e.g. item 2 here) that the UK ought to exempt foreign dividends from tax, just like all other civilised European countries (i.e. all of them except the UK and Ireland).

The static 'cost' per annum of these two eminently sensible tax reduction simplification measure would be around £12 billion for VAT and £1 billion for the foreign dividends, the dynamic 'cost' will be less than half of that, i.e. about one per cent of current government spending, one-fifth of which is pure waste and corruption anyway.

"Darling fine-tunes recovery plan"

The government has gone completely and utterly mad:

The Chancellor, Alistair Darling, is spending the weekend putting the final touches to a package of tax cuts and big increases in public spending. The measures, designed to revive the flagging economy, are to be announced in Monday's pre-Budget report. It is understood Mr Darling will say tax cuts will only be short-lived and taxes will have to rise in the future.

*sigh*

1. The gummint has already extended current spending far, far beyond the core functions of the state (being those things which only the state can do and which 'add value'; law and order; refuse collection; street lighting; immigration control; defence etc), in other words it is wasting huge sums of money - at least £100 billion per annum. (I'm not counting pure redistribution i.e. welfare and pensions as gummint spending for these purposes). So there's no point wasting even more.

2. The State can also spend money on longer term 'capital' items, like transport infrastructure, which can add enormous value, far in excess of the cost, provided they stick to the budget (which they never do). But these projects take years to plan and implement, so initially there is an additional burden on the economy, which is exactly what we don't want right now. In fact, the State spends most of its time preventing private companies from investing their own money in infrastructure (see Heathrow, Kingsnorth, Donald Trump's golf course etc).

3. Then there's the marginal interest rate. Let's assume our National Debt is 40% of GDP, on which we have to pay an average interest rate of 5.4%. The higher the debt-to-GDP ratio, the higher the interest rate, of course. If they cheerfully borrow another 10% of GDP, the overall average interest rate might not go up much, let's say to 5.7%, but that's a marginal interest rate of 6.9%*

4. Then there's the hotly disputed idea of Ricardian Equivalence,"...an economic theory which suggests that it does not matter whether a government finances its spending with debt or a tax increase, the total level of demand in an economy will be the same. It was proposed, and then rejected, by the 19th century economist David Ricardo." He appears to have rejected it because ".. if people had rational expectations they would be indifferent between the two systems, but since they do not have them, they are subjected to a fiscal illusion which distorts their decisions."

IMHO, it is far simpler than that, and it is irrelevant whether people are entirely 'rational' (whatever that means) or not. It is a cash flow thing: it makes absolutely no difference whether we all pay an extra £1,000 tax this year; or whether the governments borrows £1,000 from each of us. Either way it's money out of our pockets. And whether we realise it or not, that money can only be repaid in future by taking more money out of taxpayers' pockets to transfer to the pockets of those people who lent the government the money in the first place.

The theory goes that the trick only works if people are dumb enough to overlook the fact that in cash terms, they'll never get the money back that they are lending the gummint now. But if household spending is to be maintained, this in turn has to be funded out of borrowing, because people have less cash of their own (having lent some to the gummint). Which is what got us into this mess in the first place.

OK, things get more complicated if the gummint borrows the extra money from abroad, but ultimately it must cancel itself out.

And what's worse, despite coming up with a plan that will worsen and prolong the recession, Labour are catching up in the polls.

*/sigh*

* You work out the marginal interest rate thusly:
40% of GDP @ 5.4% costs 2.16% of GDP;
50% of GDP @ 5.7% costs 2.85% of GDP
Therefore, that extra borrowing of 10% of GDP has cost us an extra 0.69% of GDP
Therefore the additional 10% of GDP that we borrow is at an interest rate of 6.9%.

Another day, another desperate throw of the dice (7)

Continuing my occasional series, The Badger has noticed that trying to force commercial banks to increase mortgage lending to their crazy 2007 levels in the face of plummeting house prices is trickier than he expected.

Not a problem! The gummint is now going to completely reverse its eminently sensible policy of running down Northern Rock's mortgage book as fast as possible (by simply making sure that NR's mortgage deals were the least attractive on the market). The new plan is to give NR long term taxpayer funded loans and guarantees in order to try and reflate the housing bubble.

H/t Stillthinking at HPC, who adds "... this must count as an extension of government borrowing and so push the pound down further, and ... push up real long-term interest rates."

Dave illustrates Nigel Farage's point

On yesterday's QT, UKIP leader Nigel Farage managed to get a word in edgeways, and pointed out that the three large parties were more or less indistinguishable*.

Dave The Chameleon gives us a good example. Per The Metro:

On GMTV this morning, Tory leader David Cameron said: "The interest rate should** be passed on. If they do not, further action may be necessary."

How is this any different in any way shape or form different from the crap that The Goblin King or The Badger have been spewing recently? "Further action", what's that, exactly? Aren't the Tories supposed to be just a leedle bit more small-government free-market liberal than Nulab? Ah well ... just a thought.

* Let's not forget that even in an authoritarian regime, the dominant political party can come in several disguises. In East Germany, the dominant party was the SED (formed by merging KPD and SPD) but this was in permanent coalition with the National Democratic Party, the Liberal Democratic Party, and the Democratic Peasant's Party and the Christian Democratic Union.

** Should.

What a difference a year makes ...

13 September 2007:

Chancellor Alistair Darling has urged Britain's banks to take a more cautious approach to lending*... Mr Darling said both lenders and borrowers needed to "think long and hard" about the risks involved. He also suggested a return to "good, old-fashioned banking" ..."In crude terms [lenders] need to know who they're lending to [sic], how much they're lending and what the risk is. Now, that's elementary banking, one might think, but there are times when going back to good old-fashioned banking may not be a bad idea." But Mr Darling made no suggestion government would intervene with tighter regulation of lending.

* This was about two days before Northern Rock went *pop*, of course.

13 October 2008:

As part of today's £37 billion bailout package Gordon Brown said that banks would be expected to help struggling homebuyers and small businesses by restoring the availability of loans to last year's more generous levels. But today the Council of Mortgage Lenders quickly warned that this might not be 'prudent or desirable'.

Northern Rock and Stamp Duty Land Tax

Damn. I spend a day out enjoying the North Devon drizzle, and it all kicks off behind my back.

As I have said often enough, The Goblin King's "sixty three consecutive quarters of economic growth" (the first eighteen were under the previous Tory gummint, of course) were based on an illusion of wealth caused by spiralling house prices* and artifically low interest rates**.

All bubbles burst eventually, and once they do, there is nothing you can (or should) do to stop it. I listed Nulab's first four desperate, and futile, attempts here. Throws five and six were ... on the same day ... £3 billion more for Northern Rock and they're seriously considering nicking the Tories' f***ing stupid plan to axe Stamp Duty Land Tax for first time buyers (which they in turn took from that economics genius Krusty Allsopp, 'nuff said), which will cost future taxpayers another few £ billion (the 'tax cut' won't be mirrorred by a much welcomed spending cut, it'll just be added to gummint borrowings, in other words, today's tax cut is a future tax hike)***.

To recap: house prices are falling at 1% to 2% a month (total housing stock falling in value at about £10 billion per week), but turnover is still shrinking rapidly, so who in his (or her) right mind seriously believes that a further 1% reduction in price will bring buyers flooding back to the market?****

At least Normant Lamont had the decency to throw in the towel after losing £2 billion in one day.

The delicious irony is, these bastard MPs are all second-home owners, so they are panicking on a purely personal level, as well as on a political level.

* The Goblin King: "I think the important thing is that over the last 10 years people in the South have seen their living standard rise substantially. They've seen their net wealth rise even faster than their incomes."

** Former Bank of England Governor Eddie George: "We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term."

*** I'm not disputing that Stamp Duty Land Tax is, taken in isolation, a totally evil wealth/property tax, but my view is that it should be rolled into Land Value Tax rather than being scrapped, that's a political thing.

**** There's a fine article in The Times pointing out that the Tories tried the same wheeze in 1991 and it achieved nothing, via enuii at HPC.

The Badger

"Ivory Coast halves government pay"

Here's a good idea. How about it, Badger?

What a muddle - a modern tall story (2)

AFAIAA, LadyThinker was the first to spot the deeper connection between these two unsavoury characters. Seven months later, the MSM has finally cottoned on ... surely this juxtaposition in The London Lite is not a coincidence?

"HSBC charges up to £9,999 for 'rescue' mortgage deals"

The first comment under the article in The Times sums it up nicely:

HSBC are just relying on Joe Public to be gullible enough to fall for the low rate. But they are not alone, all lenders are now doing this in their mad scramble for profit ... Graham, Bradford, England

I wonder what King Canute will say about this?

"Reduce rip-off mortgage fees, Darling tells banks"

Following The Goblin King's voluntary humiliation at OPEC, it appears to be The Badger's turn today.

King Canute must be turning in his grave...