The fact is that confidence in the currency has held up since the Bank announced the start of QE in early March

TO BE NOTED: From Stumbling and Mumbling:

"Confusion about QE

Fraser Nelson is hopelessly confused here. He says:

The massive Quantitative Easing programme is making it harder for companies to raise money, because the government is flooding the market with its own IOU notes. The Bank of England today confirmed that less than 1% of the £44.5bn it has printed has gone to buy company loans – it had indicated that as much as a third of the £150bn pool would go to companies. Instead, it is a mechanism to help the government issue the £240bn of gilts it’s issuing this year.

He is correct that QE has overwhelmingly been used to buy gilts. But you can’t complain both about this and about the government crowding out the corporate sector. If the Bank of England were to buy all the gilts issued this year, the government wouldn’t have to tap the private sector for cash at all, leaving it free to fund companies. Bank of England gilt purchases are the solution to the crowding out problem.

If the markets think QE is actually a way of one department of the government printing money for the other departments to spend (a la Weimar Germany), then confidence in the currency collapses.

And if my aunt had bollocks she’d be my uncle. The fact is that confidence in the currency has held up since the Bank announced the start of QE in early March. Sterling’s trade-weighted index barely budged. Sure, this could change. But, so far, it’s irrelevant to the relationship between QE and corporate financing.
Fraser then points to the collapse in lending to non-financial companies, and says:

One explanation is that British companies are simply paying down debt. Another is that the government’s debt issuance is so extreme that it is crowding out other forms [of borrowing].

There is, though, a third explanation - that the credit crunch has made banks unable or unwilling to lend to companies. If we look at the monthly path of bank lending to non-financial firms, we see that this fell in the autumn, after the collapse of Lehmans, but has recovered a little since. If it was gilt issuance that was denying firms’ financing, you’d expect the opposite pattern.
Now, I say all this not to defend QE; I have big doubts about its effectiveness. However, to blame it for companies’ lack of finance is just silly.

May 08, 2009"

Nevertheless, this report is a milestone.

In case you want to read The Turner Review, here it is:

http://www.fsa.gov.uk/pubs/other/turner_review.pdf

Here's a few good posts about it:

"Towards a rational exuberance

Lord Turner's report "A regulatory response to the banking crisis" was released yesterday.

One of the key findings is that markets, and market participants, can be irrational. This can lead to problematic outcomes such as bubbles in asset prices and massive mispricing of derivatives such as CDOs and CDSs.

However, Turner's recommendations barely address this problem. There are several valid recommendations about procyclical reserves and a hint at a power to intervene in momentum trading (such as short-selling which feeds on itself). But this only dances around the edges of the problem.

He also recommends technical training or qualifications for bank executives. But that's not where the irrationality is. Indeed, many bankers have been all too rational throughout this crisis - extracting rents for themselves at the expense of shareholders and creditors. Turner does recognise this principal-agent problem and some of his recommendations deal with it. However it is not a problem of irrationality; the irrationality that matters is that of borrowers and investors, not of banks.

The corollary of this is a more radical proposal.

Regulators - central banks or financial regulators such as the FSA - need to monitor aggregate irrationality. There are two ways to do this:

• measures based on the behaviour of individuals, aggregated across a whole market
• measures based on the aggregate risk taken and valuation implied by market asset prices

The second of these can be measured using (fairly) standard financial measures - projections of economic growth, share of output accruing to capital or to profits, discounted and compared with asset prices. The answers won't be exact, but measures that are wildly outside of economic rationality will be apparent.

There will certainly be challenges in measuring across different asset classes - typically a single regulator does not cover equity and debt markets, for example, and if there is an aggregate overvaluation, it will be very hard to gauge whether equity holders and debt holders are both expecting a too-high share of overall returns, and who is wrong. But with unified or at least coordinated regulation, it should be possible to determine that overall prices are too high.

The former requires insights from behavioural economics and particularly from behavioural finance. In many situations it is possible to measure objectively what the rational outcome or decision is. And it is possible to see where an individual investor diverges from this. Sometimes this does not matter for the system as a whole; and sometimes it does. But as Turner points out, markets are not always self-correcting and certainly not in the short term. Thus, it is likely that a dedicated regulator could identify substantial deviations from rationality in large populations.

On the border between these is the collective action problem: where individual rationality leads to an outcome which is not a rational one for the group. Turner does mention this but offers no solution. Again it is clearly measurable: at present, for example, we have an excess of desired savings leading to a reduction in overall output - clearly not a desirable outcome for the population as a whole, but perhaps rational for each individual saver. Somehow the interest rate mechanism is not resolving this problem (the zero bound is one reason; sticky prices, wages and investments are another).

So our hypothetical regulator has identified irrationality of some kind - irrational exuberance or irrational depression. What should it do?

Here we turn again to behavioural economics. There are clear ways in which irrational behaviour can be guided or corrected by specific stimuli. Specific examples:

1. Framing of choices. The right kind of framing can influence people to take more or fewer risks, to consider the future more or less, and to put a higher or lower value on assets. Framing methods include choice of language, the range of pricing and risk choices available to buyers, subconscious signalling such as branding, and sensory cues such as colour and music. The mechanisms for regulators to communicate their decisions downward to the framing of commercial decisions do not yet exist, but could certainly be put in place. After all, they currently influence interest rates, so the argument for commercial freedom is not an absolute barrier to this.
2. Visibility of irrationality. People tend to become more rational either if they have more time to reflect, or if their irrationality is made visible to them. A regulator could certainly have a role in making this happen. Simplistically, one could ask why not make people more rational all the time. But there are transaction costs and diminishing returns involved. It's not realistic for a regulator to step into all transactions everywhere; but if they are able to measure who is irrational, when and where, they can focus their efforts where they'll have an effect.
3. Lengthened time horizons. Buyers generally make less rational decisions when they consider the consequences over a shorter time period. The longer a period that is considered, the better the decision will be. Interest rates are one way of influencing the time periods that investors consider; others include the credibility of inflation targets or the availability of externally anchored future events. For instance, subjects who are asked questions about their age and retirement dates will subsequently make a different kind of investment decision than those who are not.
4. Increased scope of social contract. Buyers who act purely as individuals will make different choices to those who also consider the effects on their family, their social groups or their society. It is possible to measure the divergences between individual and group interest, and to influence the degree to which people consider the consequences for a group when making decisions.

This proposal undoubtedly needs further research: we don't yet know the most accurate measures of irrationality or the most effective influences on it. And there are obvious limits on rationality in all circumstances - predictions of the future are not perfect, information is not always available, and people cannot always know their own preferences with regard to time discounting.

But I am confident that direct methods to help people and groups to be more rational will have a more powerful, and more timely, effect than relying on banks' capital cushions to make the corrections for them. This isn't all about correcting for overconfidence; it will also work on the risk aversion and underconfidence we're seeing now. Exuberance can be rational, and growth will be more steady and reliable when it is.

at 16:50 "

And:

"Wolf on Turner

Martin Wolf's article on Lord Turner's review is a good one (by which I mean, of course, that he agrees with me). He identifies irrationality as "the main analytical conclusion" of the report, but he doesn't take the next step of suggesting that it can be directly regulated.

There are a range of interpretations of Turner's report. Some think his diagnosis was that banks are too thinly capitalised. Some that he condemns financial innovation. I think Martin Wolf has found the most important part: his conclusions about irrationality, both collective and individual.

But while Turner has diagnosed the right disease, he doesn't propose a workable cure. To combat irrationality, he suggests a set of tools that work through rational means. Counter-cyclical capital requirements, leverage ratios, remuneration and centralised CDS clearance are perfectly sensible measures, but - like interest rates, the main tool of existing counter-cyclical policy - they work by market participants responding rationally to incentives, with consistent discounts on time and risk.

As Turner points out, this criterion is unfulfilled often enough to matter. Investors and borrowers do not always act rationally, and if regulators want to combat that, they need to tackle it directly.

Fortunately, they are starting to gain the ability to do so. Behavioural economics research provides tools both to measure irrationality - on an individual or aggregate basis - and to influence it. If equity market participants take too much risk (as they, sometimes, objectively do), there are specific framing mechanisms which can increase risk aversion and have the effect of making investors more rational. If monetary and fiscal policy fail because of hyperbolic discounting, there are 'mental accounting' techniques which can correct for this.

Naturally such policies will require research and testing before being implemented; in particular, the methods for transmitting central policy decisions into the marketplace need work. Just as the mechanisms for transmitting central bank interest rate decisions into the money markets and the consumer debt markets have gradually developed over decades and are still not fully understood - quantitative easing, anyone? - rationality transmission will need time and experimentation to take root.

But if effective controls can be developed, we will be able to avoid restrictive controls on financial innovation by using a more targeted and direct toolkit to mitigate irrational exuberance or irrational fear. The economy - with help from the financial markets - will have room to grow, with a much lower chance of building up large internal imbalances.

at 10:28 "

And:

"Why the Turner report is a watershed for finance

By Martin Wolf

Published: March 19 2009 19:28 | Last updated: March 19 2009 19:28

Lord Turner is the UK’s man for all seasons. A few years ago, he fixed pensions. Today, it is finance. The report by the new chairman of the UK’s Financial Services Authority is a turning point.* The authorities of a country that used to boast of its light financial regulation have changed their minds: the UK has lost confidence in its financial sector.

“Over the last 18 months, and with increasing intensity over the last six, the world’s financial system has gone through its greatest crisis for at least half a century, indeed arguably the greatest crisis in the history of finance capitalism.” This is the report’s starting point. It advances two explanations for this disaster: exceptional macroeconomic conditions – particularly the emergence of excess savings in large parts of the world – and reliance on “the theory of efficient and rational markets”. As the report notes, “the predominant assumption behind financial market regulation – in the US, the UK and increasingly across the world – has been that financial markets are capable of being both efficient and rational”. So regulators were expected to stay out of the way. In the report’s new view, they should be in the way, instead. The financial sector no longer enjoys the benefit of the doubt: it may burn up the world.

The most important analytical points are that individual rationality does not ensure collective rationality, that individual behaviour is frequently less than rational and that, in consequence, markets can overshoot, in both directions. Above all, such failings create systemic risks: if everybody believes in the same (faulty) risk models, the system will become far more dangerous than any individual player appreciates; and if everybody relies on their ability to get out of the door before anybody else, many will die in the inferno.

To these points must be added the vulnerability inherent in borrowing “short and safe”, in order to lend “long and risky”. If we were not so familiar with banking, we would surely treat it as fraudulent. Moreover, far from reducing the frailty, securitisation enhanced it by spreading “toxic assets” everywhere.

The recommendations include: increased quality and quantity of capital, particularly against trading activities; a strongly countercyclical capital adequacy regime; a maximum gross leverage ratio; enhanced regulation and supervision of liquidity; coverage of all significant institutions; enhanced supervision of rating agencies; codes covering remuneration in systemically significant institutions; and centralised clearance of the majority of trades in credit defaults swaps.

Also recommended are enhanced “macro-prudential” analysis by the FSA, the Bank of England and global bodies; a big shift in regulation by the FSA towards high impact businesses, by focusing on business models, strategies, risks and outcomes in the supervised companies; greater international co-ordination of supervision; an independent European regulator; and an end to the “untenable present arrangements” for cross-border activities of European banks – the “Iceland problem”.

In short, the stable doors are to be locked tight, though only after a herd of horses has already bolted. Nevertheless, even Lord Turner’s radicalism is limited: the report rejects division of the financial system into utilities and a casino. The arguments against are that the casino would still need to be regulated, that such a distinction could not be introduced by one country on its own, particularly in the European Union, and that global companies need “large complex banking institutions providing financial risk management products”. So securities underwriting by banks is still needed, though “large-scale proprietary trading through in-house hedge funds is not”.

In all, this report offers radical tightening of regulation and supervision of a financial system that would remain broadly the same as today’s. The most regulated businesses would be less profitable and so would shrink. That would be no loss, suggests the report: the profits they reported were illusory, but the dangers they created all too real. This judgment is surely right.

Yet even this report leaves important questions unaddressed.

First, it does not explain why we can hope to contain the behaviour of companies too important to fail.

Second, it does not demonstrate that regulators can contain regulatory arbitrage by profit-seeking financiers.

Third, it does not deal with risks posed by institutions that may be too big to rescue by some host countries.

Fourth, it does not explore the room for charging heavily for guarantees.

Finally, it does not consider the incentives towards excessive leverage inherent in the tax system.

Nevertheless, this report is a milestone. It should help catalyse the needed global discussion of regulatory reform. Other countries – and, above all, the US – should commission comparable analyses of their own regulatory failures. I would also wish to see equally searching analysis of mistakes in monetary policy, both in the UK and elsewhere.

Humans learn far more from failure than success. The failures this time are big enough to make learning the lessons essential. The Turner report is a start. More learning must follow.

*Turner Review, www.fsa.gov.uk

martin.wolf@ft.com"

And:

The Turner review: some questions

The Turner review (pdf) of financial regulation (pdf) is intended to be the first words on the subject, not the last. It leaves open several questions. For me, the main ones are:
1) How do we get from here to there? Turner wants banks to have higher capital-asset ratios - even higher than Basel II ones. But banks are now under-capitalized; in my day job, I’ve estimated, from Bank of England data (table B1.2) that banks need over £80bn of capital just to return to 2006’s capital-assets ratio. How can banks raise their ratios so much? Turner says we need a “lengthy transition” period to ensure that his proposals don’t cause a halt to lending. But this period might be very long indeed. Not does he say how banks are to raise such capital, without further government help.
2) Turner wants banks to have counter-cyclical capital requirements, building up reserves in good times. But are these really enforceable?
Imagine the next boom, in which banks restrain lending. Young people will complain of being unable to get on the housing ladder. Firms will complain of being starved of finance to invest in profitable new equipment. Banks will resent the foregone profits. And everyone will downplay the probability of a recession - that’s what happens in booms. Can regulators or governments really resist these pressures to abandon counter-cyclical requirements?
3) Won’t regulatory arbitrage circumvent these problems, for example as offshore lenders step in to fill the gaps left by banks? Turner says that purely national regulation is “by far second best”, and calls for “internationally agreed” regulation. But isn’t this rather idealistic?
4) Far from accepting calls for a Glass-Steagall style separation of “utility” and investment banks, Turner seems to want a merger of the two. His call for very high capital requirements against banks’ trading books mean that stand-alone investment banks would face huge capital costs. This would encourage banks to take them over. Is this desireable?
5) If Turner gets his way, we’ll have slower, more stable economic growth. But what are the benefits of this over higher, more volatile growth? It’s easy to forget that booms can have lasting benefits - for example by bequeathing us a higher stock of physical capital or houses, or giving some of us nice capital gains as a result of irrational exuberance; I speak as one who sold a London flat for silly money a year ago.
6) Is Turner really wise to downplay the role of inadequate management structures in this crisis? He points out that managers’ big equity stakes did not stop Lehmans‘ collapsing. But he doesn’t point out that unrestrained hubristic chief executives (Dick Fuld, Fred Goodwin etc) played a role. And, aside from calling for banks to use some counter-conventional wisdom academic research, Turner doesn’t ask how to break up the deference to individual leaders or groupthink that led banks to so willingly take on high risks.
And herein lies the paradox of the report. The dominant theme of it is that banks are incapable of managing themselves. But to Turner, the solution is not a change of ownership (the N-word isn’t mentioned as far as I can see), nor or management structure, and certainly not the introduction of more market forces. Instead, it’s management at arm’s length, by regulators.

March 19, 2009 | Permalink"

Happy reading!

this recession will lead people to acknowledge that this can be answered in the affirmative. (Hint: citizens’ basic income).

From Stumbling And Mumbling:

"Unemployment: what to do?

In light of today’s terrible unemployment numbers (pdf)- a 138,400 rise in the claimant count in February alone - this new paper (pdf) by David Bell and David Blanchflower is especially important.
They remind us that unemployment is very costly. It reduces well-being even among those who keep their jobs, increases crime and stress and reduces life expectancy. And among young workers it has a scarring effect; being unemployed when young increases one’s chances of being unemployed when older. This is an especial problem because unemployment is disproportionately concentrated among the young; today’s figures show that 18-24 year-olds account for 30.6 per cent of all the unemployed.
So, what can be done? Bell and Blanchflower are sceptical about active labour market programmes - policies aimed at “helping” the jobless into work. These are of limited use in good times, and are likely to be less useful in bad ones.
Instead, they have a number of ideas. One is a massive fiscal stimulus; £87bn, if we follow the US’s lead, they estimate.
Other ideas they have are: to encourage 18-24 year-olds into training schemes; tax breaks to encourage firms to hire youngsters; encouraging work-sharing, via the tax credit system; and raising the education leaving age to 18.
However, they recognize that these policies are mere palliatives. They won’t stop unemployment rising, probably to over 3 million by year-end.
And there’s the point. As Michal Kalecki pointed out, unemployment is “an integral part of the normal capitalist system.” It’s just fantasy to believe you can have capitalism (or perhaps any form of market economy) without unemployment.
For me, the question is: to what extent is it possible to increase ways of pooling risk - reducing the pain of unemployment - without dampening incentives?
My hope - which is not strongly held - is that this recession will lead people to acknowledge that this can be answered in the affirmative. (Hint: citizens’ basic income).

March 18, 2009 | Permalink"

Me:
I'm assuming that this is a form of Guaranteed Income, as in the plans of Milton Friedman and Charles Murray. If so, then I agree completely.

Posted by: Don the libertarian Democrat | March 18, 2009 at 03:23 PM

What I mean is that a post-nationalized system could consist of two types of bank.

From Stumbling And Mumbling:

"Nationalization and free markets

Could nationalization of the banks pave the way for a free market banking system? A suggestion in this post by Arnold Kling makes me wonder.
What I mean is that a post-nationalized system could consist of two types of bank.
One would be the nationalized banks. These would be plain utilities, a bit like old building societies. They’d take in guaranteed deposits and make vanilla loans to firms and households. They’d use money markets to smooth liquidity conditions, but not to fund their businesses.
The second type would be unregulated banks which could operate as they please, but with no government protection for depositors or investors.
Mightn’t this system give us the best of both worlds - there are guaranteed deposits for those who want them, but there’s also a source of innovation and dynamism?
What would be the drawbacks?
One is the sheer practical difficulty of getting from here to there. How do we slough off RBS’s risky operations to leave us with its utility-style business? In current conditions, with investors acutely risk averse, how would non-regulated banks raise funds to start?
Another problem is whether the free market system would be a danger to the wider economy. What if a large bank fails? Free market optimists might say that the contingency is a remote one, as the market would regulate them, by starving risky banks of funds in the first place. Or they could argue that the only losers would be depositors and counterparties who knew the risks they were taking and staked only money they could afford to lose. The wider economy might suffer from a dip in demand as there’s a modest adverse wealth effect, but nothing catastrophic.
Pessimists, however, could argue that there’s systemic risk here, as those who lost from this bank failure are unable to meet their obligations to third counterparties.
A third problem is the classic adverse selection problem. Good borrowers would prefer to borrow from the nationalized utility banks as their guaranteed deposits mean they can offer cheaper loans. Private sector banks are then left with only the riskier prospects.
You might think that this point raises a fourth difficulty - that the nationalized banks have such advantages that free market ones would be unable to compete. I’m not sure. If the free market is as dynamic and innovative as its supporters claim, then it’ll find a way. And if it isn’t, then nationalized banks aren’t as bad as they claim.
Feel free to add other difficulties.
But the question isn’t: would this system be ideal? Perfection is unobtainable. It is: would this system be better than a heavily but imperfectly regulated industry? Could it be that state ownership, far from being the enemy of private enterprise, might in this case be a precondition for it?

February 11, 2009 | Permalink"

Me:

I like the idea, but I think that narrow/limited purpose private banks could also be a possibility:

See here from the FT:

http://blogs.ft.com/economistsforum/2009/01/putting-an-end-to-financial-crises/#more-315

"What will change this behaviour is to not let it happen. Banks should be allowed to initiate only conforming, i.e., government-approved, AAA-rated mortgages and business loans. These would be long-term, fixed-rate loans with 20 per cent-down and payments below 25 per cent of income.

The government, via the Federal Financial Authority, would use tax records to verify loan payment-to-income ratios. It would also spot check collateral. Once approved, the banks would bundle and sell “their” loans within mutual funds.

Again, traditional bank runs wouldn’t arise. And today’s bank runs, which entail lenders and equity investors avoiding risky banks, wouldn’t either. Why? Because banks would bear zero risk. Mutual fund owners would bear risk, but not the banks. And these lenders would know they were buying government-approved AAA-rated loans, not Bear Stearns‘ CDOs.

This limited purpose banking is a modern version of narrow banking proposed by Frank Knight, Henry Simons, and Irving Fisher. Banks would hold deposits, cash checks, wire money, originate loans, and market mutual funds, including money market funds with no guarantee of par value redemption.

With limited purpose banking, financial crises would largely disappear. Banks would never fail, never stop originating loans, never expose the public to massive liabilities, and never see their stock values evaporate. Banks would be stable, boring economic cogs - like gas stations.

The Fed would also gain full control of the money supply. To expand the money supply, the Fed would continue buying treasuries from the public and supplying cash. But banks wouldn’t be multiplying and contracting M1 (cash plus demand deposits) based on their ever changing decisions about lending deposited funds.

Milton Friedman, who also advocated narrow banking, blamed the Depression on the Fed’s failure to offset the M1 money multiplier’s collapse. In the past year the M1 multiplier has contracted by over 40 per cent, forcing the Fed to double base money. If the multiplier shoots back up, we could see the money supply and prices explode."

Check it out.

Posted by: Don the libertarian Democrat | February 11, 2009 at 10:56 PM

"Instead, it is to provide certainty. People hate dissonance, doubt and uncertainty. Experts help dispel these. "

Stumbling And Mumbling has an interesting post about experts:

"It’s a bad day for experts. The Times complains that economic forecasters are as blind as ancient soothsayers, whilst proof that Colin Stagg was innocent discredits Paul Britton’s expertise as a forensic pyschologist.
To point out that experts are wrong, however, is to misunderstand the purpose of them. Their function is not to provide knowledge, and still less clear thinking. Instead, it is to provide certainty. People hate dissonance, doubt and uncertainty. Experts help dispel these. So, Paul Britton’s function was to tell the police that they had the right man, whilst economic forecasters’ job is to provide an impression that the future is knowable; no-one wants to hear about standard errors, parameter uncertainty or the Lucas critique.
What’s so pernicious here, though, is that people have ways of achieving an illusory certainty anyway. As Sir Harry Ognall - the judge who acquitted Stagg - says: “The police closed their minds to any other possibility than that of his guilt.”
There are several ways they got these closed minds. All have analogues in corporate planning and financial trading.
1. The confirmation bias. Having acquired the belief that Stagg was guilty - he fitted the profile, was on the scene and a bit of a weirdo - subsequent evidence was interpreted as corroborating this. So, the fact that he looked shifty in interview was seen as evidence of guilt, not as the sign of an innocent man nervous of being fitted up.
A similar thing happens in economic forecasting. If you thought last week that we’re heading for a very deep recession, you put great weight on Wednesdays’s jobless numbers and find ways of dismissing yesterday’s retail sales figures. If you thought the recession would be mild, you do the opposite.
2. The halo effect. In their book, Mistakes were Made, Carol Tavris and Elliot Aronson describe how policemen believe “I couldn’t have been wrong because I’m a good guy.” Even if we grant the premise, the error here lies in believing that good qualities - moral rectitude and cognitive skills - must be correlated. They are not. Of course, coppers are not unique in thinking this.
3. Groupthink. If our colleagues agree with us, our confidence in our judgment rises, especially if we like them.
This error arises in part because we fail to see that correlated data points add little to certainty. If our colleagues have the same training and evidence as us, and are also prone to groupthink, their beliefs will be correlated with ours, and so will not be new evidence - no more than a second copy of the Daily Mail corroborates the stories made in the first. But we interpret them as if they are.
4. Ego-involvement. Admitting that we are wrong means more than just fessing up to narrow technical error. We interpret it as a blow to our ego - a sign that we are not the infallible, uber-competent professionals we think. We’ll do anything to squirm out of facing this. Hence the failure of the police, until yesterday, to apologize to Colin Stagg, and the failure of many bank bosses, Tom McKillop excepted, to apologize for their errors.
And herein lies the purpose of experts. It’s to reinforce these mechanisms, to help people avoid the uncomfortable facts that the world is uncertain, that mistakes are inevitable, and that we are not as in control of things as we think.
Blaming experts for being wrong is like complaining that the economy is not yellow. It’s a category error so howling as to be nonsensical."

I don't take experts very seriously. I do take arguments very seriously. Given that, I consider every case or argument on its own merits. The list does provide some common errors of reasoning, of which there are many.

But surely there are experts. My doctor is an expert, and thank God for that. He is not always right, but he is right enough of the time that I prefer him to my neighbor for help with my ailments. One could argue that he has a skill, while some experts don't. These might the experts talked about. Their skill is dubious, so seeking their views is merely for comfort.

We don't have to look to experts for certainty, but for advice. Advice should be viewed from a pragmatic perspective. We should take it from people who gives us reason to trust it, and ignore from people who don't.

It might well be that people hate dissonance, doubt, and uncertainty. I wouldn't know. They're all I have.

"Seamus Milne says it’s time to fully nationalize the banks. Leaving ideology aside, it’s not obvious that this is a stinkingly bad idea."

This is a great day for finding posts I agree with. From Stumbling And Mumbling:

"Seamus Milne says it’s time to fully nationalize the banks. Leaving ideology aside, it’s not obvious that this is a stinkingly bad idea. "

Why, it's, it's, mine as well. I find ideology to equate to my political theory and economics.

"For one thing, Seamus is right that the measures taken so far have not worked. As the Bank of England says today:
Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult. The Committee noted that it was unlikely that a normal volume of lending would be restored without further measures."

Why it's...You get it. I agree.

"The simple case for nationalizing banks is that they would be able to raise cash much more cheaply and easily than they can now; before today’s Bank Rate cut, 3 month Libor was 3.8% whilst the 3 month T-bill rate was just 1.7%. This would almost automatically allow them to increase cheap lending."

Why it's...it's...My argument again. From about two months ago, at least.

"And a lot of conventional arguments against nationalization are just plain wrong.
“Government has no expertise in managing banks.”
Nor do existing bank bosses. That’s why we are in the mess we are."

Why it's...I've argued this many times before.

“Nationalization reduces competition.”
The private sector solution to our crisis also entails a loss of competition; the Lloyds TSB-HBOS merger would never have been tolerated in normal times. And even in the best of times, competition between the banks wasn’t great."

In fact, over here, the original TARP had Tax Subsidies to encourage consolidation. These are the very same provisions that many people just stumbled upon a couple of weeks ago.

“Nationalization reduces innovation.”
It’s innovation - all those CDOs - that got us into this mess. By contrast, the innovation that would be useful - Shiller-type insurance against macroeconomic disasters - has not occurred in part because private sector financial firms cannot appropriate the large social benefits that they would bring. Maybe public ownership would help solve this public goods problem."

This point is a little shakier, but it has to do with implicit and explicit government guarantees in the US. In Britain, I'm not sure.

“Nationalization leads to bad deals for customers.”
Few customers, however, are happy with banks today. And my personal experience - from looking for somewhere to deposit the money raised from selling my flat a few months ago - suggests that National Savings are at least as efficient as any private sector bank."

This is less a bad deal than a bad joke.

“Nationalization would cause lending to become politicized.”
It would be nice to have any lending, politically motivated or not. But any reasonable arms-length structure would address this problem. After all, the BBC is in effect nationalized but operationally independent."

Much less so than a Hybrid Plan, and it would end sooner.

"So, full-scale nationalization is not a stupid idea. Better still, it might not be an expensive one. As stock markets and the economy recover, it might be possible to privatize the banks at a profit sometime in the next few years. How else is government borrowing to come down?"

Exactly. That was my original argument for a Swedish Type Plan.

"In light of the most recent data another fiscal boost is needed, and it had better be big."

Clive Crook also supports a stimulus:

"How big a boost? One leading policy economist -- also a noted scholar of the Depression and a level-headed man not given to exaggeration -- is Barry Eichengreen of the University of California (Berkeley). He has called for a further stimulus of 5 percent of national income: in other words, another $700 billion. "This means that the [budget] deficit may be closer to $2 trillion than $1 trillion next year," he points out. A $700 billion stimulus is at the high end of the numbers currently being suggested. Among economists, packages of $300 billion to $500 billion are more the norm, and proposals circulating on Capitol Hill are at the lower end of that range. A year ago, even these smaller sums would have been regarded as staggering.

I agree with Eichengreen. The economy is no longer on the edge of the precipice but tipping over into free fall. A second stimulus package of $500 billion or more -- to include spending on infrastructure and unemployment assistance as well as tax cuts -- is necessary. If you are going to do this, there is no point in half-measures. The government has to fill the space that terrified consumers are now vacating, and it is a very big space."

I agree. Here's my comment:

"If European governments and other countries introduce big fiscal plans of their own (as they should, in their own interests), the chances of a flight from the dollar would come down. Second, the package should ideally include commitments -- including postdated tax increases and reform of the budget process -- that would reassure investors that Washington will bring the deficit back under control once the crisis is over."

But this:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2008/10/the-benefit-of-inequality.html?cid=137119795#comments

"Stumbling and Mumbling on a stimulus plan:

"This raises an obvious question. If government borrowing today merely means lower state spending or higher taxes tomorrow, why should it boost aggregate economic activity at all? Won’t it just cause tax-payers to save in anticipation of higher future taxes, or public sector workers to save in anticipation of redundancy?
This is, of course, the challenge of the Ricardian equivalence hypothesis. This says that fiscal policy is impotent, because people should save in anticipation of higher future taxes, which is what borrowing is."

Will people save in preparation of tax increases? Or losing a job?

"the UK is one of the few countries in which Ricardian equivalence is wrong. So perhaps fiscal policy might work.
How can this be?
It‘s not necessarily because people are short-sighted. It‘s because they are liquidity-constrained - they can’t save or borrow enough.
Put yourself in the shoes of a poorly-paid person. You might anticipate higher taxes in five years’ time. But what can you do about it? You’re struggling to pay rent and leccy bills today. You just can’t save as a precaution against future problems - you’ve enough on your plate making ends meet now."

Well, if people are poor enough, No. They can't. They need to live.

"But what if we had a more progressive tax system, with taxes only levied upon those of us who can afford to save? We might well trim spending on fripperies to save more. We would then be in the world of Ricardian equivalence, in which public borrowing was offset by private saving."

So, people who can save will.

Conclusion:

"My point is simple. What allows Darling’s fiscal policy to work is the fact that taxes fall upon people who can‘t save. If the poor were better off - and so able to save - or if taxes were more progressive, fiscal policy would be less powerful.
Personally, I’d prefer a world of greater equality and less powerful fiscal policy. But not everyone shares my preference."

I agree, but I'm not sure I accept the reasoning. For one thing, oddly, if the rich will save in anticipation of future taxes, why not tax them now, and obviate that problem. Another possibility would be to raise taxes until they don't want to save. One could also tax their savings. I'm not advocating any of these things, but there do seem possibilities to counter this effect where it exists."

And this:

"You might be interested in this about the Japanese stimulus plan from the FT:

http://www.ft.com/cms/s/0/00df00ae-a63c-11dd-9d26-000077b07658.html

"Although the handouts would increase household disposable income, given that there could be a consumption tax rise in three years, the plan was structured in a way that would encourage people to save, Mr Morita said."

Now, are we more like Britain or Japan? Easy, where saving is concerned. But you've already mentioned the tax cuts earlier this year, and the fact that a lot of it was saved. Now this, from the WSJ:

http://blogs.wsj.com/economics/2008/10/31/good-news-for-stability-bad-news-for-growth/

"Part of the reason that consumer cut back on spending in September is that Americans were putting more of their money into savings. That may not be good news for GDP growth in the short-term, but it’s a positive sign for the long-term stability of the economy.

In September, personal saving — disposable personal income less spending — was $140.3 billion, compared with $82.5 billion in August. That raised the savings rate to 1.3% from 0.8% in the previous month. The savings rate spiked from May to July on the back of the government’s stimulus payments, but averaged below 1% for a number of years. It was just 0.2% in April before the stimulus payments went out, and has been nearly flat for years, not rising more than 1.5% in any month since 2004. The rate was in double digits in the 1970s and early 80s, but began a steady decline to the historic lows reached in recent years."

So, I'm with you on the stimulus, and we should eventually work on the deficit and debt, but, for God's sake, don't announce that now.

As the WSJ reports:

http://blogs.wsj.com/economics/2008/10/31/ecb-to-governments-spend-more/

"In a currency bloc governed by strict rules about how much debt national governments are supposed to hold, it doesn’t happen often that a central banker encourages governments to up spending. But radical times call for radical measures."

Let's be radical now, and conservative later.

Posted by Don the libertarian Democrat | October 31, 2008 3:48 PM