Not the claim I would make

The permanent secretary to the Treasury, Sir Nicholas Macpherson, has argued that the 2008 financial crisis was “a banking crisis pure and simple”, contradicting Conservative claims that it was caused by Labour overspending.

His remarks emerged after Ed Miliband came under pressure on the leader’s Question Time on BBC1 on Thursday, facing accusations that Labour government had overspent, a view strengthened by the now notorious letter left by the former Treasury chief secretary Liam Byrne to his successor in 2010 that there was “no money left”.

In a largely challenging review of Mr Osborne’s Economic Experiment, a book by the Observer economics columnist William Keegan, Macpherson wrote in March before the campaign started: “Some of Keegan’s book resonates. The 2008 crisis was a banking crisis pure and simple. Excessive risk had built up in the system; the regulators failed to appreciate the scale of that risk or to address it.
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“As he puts it, it was ‘a failure of the Group of Seven economic policymaking establishment’, myself included. Inevitably, countries with bigger banking sectors, notably the UK, were worse affected.”

Miliband has always insisted that the banking crisis caused the deficit, not the other way round, but admits that the last Labour government did not do enough to reform the banks.

That the crash was caused by overspending. I would claim that the economy was fucked by overspending but that’s a different matter. It coming in two flavours:

1) Brown wanted to increase the portion of GDP that flowed through the State. This was a bad idea.

2) Someo0ne, somewhere, should have had at least an inkling of Keynesian economics. That when you’re in the longest peacetime boom of modern times that’s about the time to be cutting back on spending growth? Not even to pay down debt, but just to stop feeding yet ever more demand into a frenzied economy?

82 comments on “Not the claim I would make

  1. It was a banking and government policy caused crisis. It’s not either/or. The two work together to overheat the financial sector, falsely allowing more State spending, and boom and bust is the result. And in every boom, they convince themselves that there will be no bust.

    The answer of course is to have a free market banking system instead of the current State managed one.

  2. I’ve heard Lefties claim that Righties claim that overspending by G Brown crashed the economy in 2008.

    I’ve never heard a Righty make that claim. Its a strawman.

    Those followers of Keynes, Brown and his advisers, Miliband & Balls, seems to have read only half of his output. Keynes would have run a surplus during the boom, thus tempering it, and having Government finances in good shape when the inevitable bust happened. Everyone else knew it would, just not when.

    Brown talked about balancing the budget over the economic cycle – he just didn’t do it.

    That a permanent secretary to the Treasury doesn’t know this tells us all we need to know about the sort of people who rise to the top of the Civil Service.

    The fact that we could shortly be governed by these numpties again leads me to doubt my previously strong faith in democracy.

  3. As any fule kno, only a neo-liberal troll would fail to recognise that the banking crisis *actually* began in 2001, thus justifying billions of pounds every year in a growing deficit before anyone even coined the phrase “credit crunch”. You would have to be a right-wing sophist to argue otherwise and, although I welcome spirited debate, I am afraid that I now have to ban myself from your blog

  4. +1 to the foregoing.
    It was more government than banks, though, because successive governments had for electoral advantage created the cheap credit, overspending/waste and social conditions which together made an inevitable downturn worse than it might otherwise have been.

    Senior civil servants can’t say this kind of stuff because the Lords pays £300 per day tax free, with free travel to and from, and subsidised dining in agreeable circumstances once one arrives for one’s daily catch-up with one’s pals.

  5. The flaw in Tim’s claim that the economy was “frenzied” (his last sentence) is that inflation was well under control prior to the crisis. Of course a PARTICULAR PART of the economy had become “frenzied”: the banking / mortgage sector. And that’s precisely Macphearson’s point.

  6. The grotesque flows of money that led to the whole shemozzle started from Greenspan at the Fed. The lousy regulation of the British banks started from Brown’s brain-dead reform of regulatory arrangements in 1997. The cack-handed rescue of the banks at the taxpayers’ expense was another Brown blunder. The fact that the public finances were so vulnerable was also Brown’s doing.

    I think that about sums it up.

  7. It’s no secret that bankers will always live on the edge to make a fast buck so which fools let them out to play unsupervised?

  8. Well frankly, being a global economic cycle thing (exacerbated by Greenspan’s “no recession on my watch” interest rate policy) that one would have happened even if the British government had been running a Keynesian surplus.

    What’s important is that, if they had been running that surplus, there would have been less of the hated “austerity” (aka: living within your means) to follow during the bust.

  9. I would be very interested to know what a “free banking system” as opposed to a “State managed” system would have looked like and how 2008 would, or wouldn’t, have played out.

  10. The short answer there is that 2008 wouldn’t have happened in a free banking system because one couldn’t get into the same condition, mainly due to the absence of central, State managed interest rates and the flow of cheap money from central banks (which wouldn’t exist).

    If you want to read more thoroughly on free versus state banking, the internet is a goldmine of information.

  11. As Ian B has got a bee in his bonnet about the money supply (which he has said in earlier comments on why nobody saw the Credit crunch coming, should stay absolutely static) perhaps he can explain away the BoE bulletin “Money creation in the Modern Economy” which shows the money supply always expanding with the actions of the banks creating money out of thin air and the whole economic history of the post-war era being action by the authorities to stop this expansion becoming inflationary by upping the interest rates. If he believes in Dungeon and Dragons economics, as he says, perhaps he can also explain what is going to happen when monetary lock-down forces firms out of business by requiring drops in their prices below the profit margin.

  12. May I say that I am shocked by the stupidity of Tim Worstall’s remarks ? I cannot really believe that this piece is by him, its so crass.I know he likes to keep the right-wing know nothings on side but this is unconscionable.
    His support of the idea that there was nothing wrong with the banks creating money worldwide (what they call lending) to pump up property prices (“frenzied” indeed ) and that the fault lay instead with Gordon Brown expanding the UK State puts him outside the bounds of reasoned debate into right-wing boot boy territory.

  13. No DBC, D&D Economics is a simple thought experiment to illustrate a principle, like Robinson Crusoe economics etc.

    If you cant figure out why a fixed money supply doesn’t “force firms out of business by requiring drops in their prices below the profit margin” I’m not sure how I can help you, since it’s in the “not even wrong” category. I’ll try though.

    Imagine a cobbler. He makes one pair of shoes per day and sells them for 10GP. His income is 50GP per week (he takes weekends off). Thanks to wise advice from an economist and investment in tools, he manages to up his rate of production to two pairs per day.

    Now his productivity has doubled. He now sells the shoes for 5GP per pair. His income is still 50GP per week, and there are twice as many shoes in the economy, so the economy has expanded (in shoes, it has doubled), his income remains the same and no extra money is needed in the money supply.

    Any help?

  14. I also can’t quite fathom why DBC is furious that the money supply expands, inflating the property market, but then keeps demanding monetary expansion, for the common good.

  15. Surely the point is that its not that spending as a % of GDP was out of control prior to the crash (although as many have said it was typically one eyed Keynesianism to run a deficit throughout the 00s boom) its that the GDP was artificially inflated by the bubble in the financial and property sectors. And that any responsible government would have been banking those boom years tax revenues and not spending it, in the knowledge that it was illusionary – it could not last forever.

    Its like a person having extra overtime income in the run up to Christmas, but agreeing to spend commitments like it would go on forever.

    Incidentally, I predicted the crash, to within 6 months. I sold my portfolio of stocks in April 2007, as it was obvious at this point from the data coming out of the US that it was entering recession, and the UK always catches a cold if the US does. I didn’t realise the extent of the problem that would arise, but it was obvious at that point we were in trouble. The UK housing market was obviously overheated at that point too, and had been for several years. How a government could look at the data that was coming out at the time that in aggregate people were spending more than their total income and financing the balance from equity withdrawal and think this was a sustainable economic policy I do not know.

  16. Its strange that DBC Reed has managed to be on the internet and using IT but has managed to miss the fact that the IT manufacturing industry is still here despite dealing with consistently falling prices for its products. And that people still buy computers and IT equipment, even though they know whatever they buy will be cheaper in 6 months time.

  17. I can’t see the sense of this:
    ” perhaps he can also explain what is going to happen when monetary lock-down forces firms out of business by requiring drops in their prices below the profit margin.”
    It’s treating the company as if it was the only player in the market responding to orders from authority on high.
    The company would be reducing prices to compete in a market where its competitors were reducing prices. If they’re able to reduce prices, it’s because their costs have fallen.
    As Jim says about the IT industry, above, prices of “stuff” have consistently fallen because all the costs of making stuff have been falling. Due to innovation, increased productivity etc.
    Again,asin another thread, DBC seems to be denying the industrial revolution happened. That’s how we all got wealthier, wasn’t it? Everything became cheaper in real terms.

  18. “It’s treating the company as if it was the only player in the market responding to orders from authority on high.”

    Thats because DBC Reed is a little Stalinist who imagines himself upon high doing the ordering around.

  19. @J
    Ignoring the typical boot boy insult about Stalin ,the industrial revolution was financed largely by the profits of the slave trade.Moving so much of the population up north was never sustainable and now we have huge towns like Liverpool in terminal decline with population unable to move where there’s work because they can’t afford the housing.
    The point you make that the UK and US property markets were grotesquely inflated only lends weight to my argument that, given inbuilt expansion in the money supply, a Land Value Tax or the equally effective post-war measures should have been in place to stop the new money being diverted into land-based investment which ,since the supply of land can’t be increased ,is bound to be inflationary .In fact Thicky Thatcher and her pals removed all these counter inflationary safeguards and then deliberately inflated the property market.
    Si monumentum requiris ,circumspice.

  20. Its like a person having extra overtime income in the run up to Christmas, but agreeing to spend commitments like it would go on forever.

    With the Left blaming Christmas for not coming in January/February/March as well.

  21. Moving so much of the population up north was never sustainable and now we have huge towns like Liverpool in terminal decline with population unable to move where there’s work because they can’t afford the housing.

    Huh? The Industrial Revolution happened between 1760 and 1820. The northern towns went into decline in the 1980s. 150-200 years (5-6 generations) is an odd definition of “never sustainable”.

  22. DBC’s grasp of economics is tenuous. He’s never understood the thing that economic growth is more goods and services (production) and money is just some tokens you use to pay for them.

    To be fair this is common. Keynesianism makes the same error of understanding for instance.

  23. DBC: Not even wrong doesn’t begin to express how stupid your socialist crap is.

    If there had been no industry to begin with –where would the profit have been in the slave trade? Cotton was picked etc by slaves. But the cloth industry already existed (albeit in a labour-intensive form). The great industrial pioneers found ways to augment and replace human labour. Their actions were anti-slavery–serving to reduce the burden of human toil.

  24. I think the general problem with economics is people tend to start thinking about the very complex and abstract stuff without looking at the simple stuff first, hence coming to strange conclusions like “the economy can’t expand without creating more money”.

  25. IanB

    Remarkably, you have said something with which I am in total agreement. Free banking would indeed be a preferable state of affairs. However, it does not mean that banks would not have gone bust and small depositors would not have been hurt. So some regulation is socially desirable.

    DBC Reed

    Why don’t you take a trip to Tax Research UK, where The Great Leader has offered his alternative economic history of the 2000s. He seems to be admitting (though I am sure he is about to get into his usual tangle) that “out of thin air ” doesn’t quite mean what you think it means.

  26. One thing about free banking though; the certainly would not be a fixed money supply.

  27. Ironman: “However, it does not mean that banks would not have gone bust and small depositors would not have been hurt. So some regulation is socially desirable.”

    That is how it all started the first time around. Private banks–like any other business can fail–thro’ bad decisions, bad luck or even fraud. People will have to take their chances as with every other area of life. Don’t put all your money into one bank.

  28. I didn’t say there should be a fixed money supply, I just used a simple story about a cobbler under simplified monetary conditions to explain to…

    oh what’s the point

  29. In general though, with free money, the amount of credit (which we use as money these days, paradox fans!) would expand and contract along with market conditions.

  30. Right then.

    A load of stuff needs expanding on in this comment stream:

    A free market banking system:

    1) Stupid bits of legislation like the Community Reinvestment act signed by Clinton wouldn’t have obligated banks to lend to ethnic borrowers without the means to pay it back.

    2) Lack of moral hazard. The banks went along with the CRA knowing that the government would backstop them. They also knew they’d be covered for any other stupid shit they were doing.

    3) Cack handed regulation reform. (and the bit that should have seen Brown prosecuted) The creation of the deaf dumb and mute FSA let the Scottish banks such as RBS and BoS, as well as the north’s Northern Rock build huge liabilities on sand. [Presumably on the traditional anti-London chippiness of Labour politicians.]

    4) GB then fucked Lloyds and their shareholders over by forcing a shotgun wedding for HBoS.

    5) The Slave trade was never a big earner for the UK, and some historians argue that the UK spent more money enforcing a global ban on slavery, than it ever made on exploiting it. [I’ll ignore how we now fail to teach kids to be proud of Wilberforce’s legacy rather preferring to use the issue as a traditional lefty smash the system argument]

    So in summary, fuck off DBC Reed you ignorant git.

  31. “the industrial revolution was financed largely by the profits of the slave trade”
    Sorry, DCB, but how would this work? If you’re a slave trader making profits in the slave trade, why would you finance cotton mills oop north? You’ve already got an excellent opportunity for investment. Buy more slaves.
    Now if you’re saying the C19th cotton weaving industry benefited from cheap, slave produced cotton, that’s a different thing. We’re looking at the marginal advantage of using slaves to produce cotton, in the cotton producing industry. There may be a competitive advantage to doing so but it’s quite possible to not use slaves. Currently cotton producers don’t. It’s a margin. And, bearing in mind the low cost of agricultural labour in the sort of areas likely to grow cotton, not a great one. Suggested by cotton growing not ceasing after slavery was ended.
    The important thing is that there were no slaves working in Lancashire. And factories in the industrial revolution were producing a lot more things than cotton cloth. Few of which required slaves in the supply chain.

  32. Ian B and I share a Northampton background (as does the Stigler) so describing “cobblers” as shoemakers when they actually just repair shoes is a bit odd.Even odder is the notion that a few tools and some financial advice would bring about a 100% increase in output : these tools must be pretty rudimentary for not putting up production costs.In the real world that order of production increase would require either some expensive mechanical innovation (of an unprecedented radical nature as shoe production is still very labour intensive) or taking on more staff.Both of these would preclude halving the sales price thereafter, as you fondly imagine.Your version of a static money supply is totally at odds with reality in several different dimensions.
    @I if you don’t recognise that money is made up from thin air you have not read the BoE’s Money Creation in the Modern Economy and should not really be bandying words with the grown-ups.
    @TN Liverpool’s population started to decline after WW2.It was never sustainable to take a plantation crop like cotton and transport it all the way over the Atlantic when it could be spun in situ.As far as the UK was concerned the Industrial revolution was an offshoot of the Slave Trade: plantation crops like sugar, tobacco,cotton etc produced by slaves sent over here to places like Liverpool for processing by child(therefore slave) labour in factories built out of Slave Trade profits. Sooner or later the processing would get to be done much nearer the point of agricultural production .

  33. Private banks–like any other business can fail–thro’ bad decisions, bad luck or even fraud. People will have to take their chances as with every other area of life. Don’t put all your money into one bank.

    I’d agree with that were it not almost impossible to live in a normal society without a bank account, mainly due to regulations. Does anyone have a choice to be paid in cash these days? Are they allowed to defend a cash pile in their home? Nope and nope. Will companies allow large cash purchases, or shit themselves about money laundering regs? The latter.

  34. It was never sustainable to take a plantation crop like cotton and transport it all the way over the Atlantic when it could be spun in situ.

    Okay, 120 to 170 years, then. Longer than Ford is likely to last in Detroit. And who cares if the population of Liverpool has declined? The place has not emptied leaving a ghost town.

    Besides, the premise of your argument is bollocks: raw materials are routinely shipped around the globe for processing, and it has always been like that.

  35. DBC-

    It’s a story designed to illustrate something, not actually an accurate description of the shoemaking industry. The thing you were supposed to understand from it was that an increase in production allows the unit price of a good to fall rather than necessitating an increase in the money supply. That is how economic growth occurs.

  36. “It was never sustainable to take a plantation crop like cotton and transport it all the way over the Atlantic when it could be spun in situ”
    Oh Christo! Now he’s abolished comparative advantage.
    So what they going to do, DCB? Ship textile workers, machinery, coal to power it, the whole fabric of Lancashire life across the Atlantic, to weave cotton, to send cloth back to the UK? There’s not even much bulk difference between raw cotton & manufactured cloth for a saving on transport costs..
    Makes as much sense as doing all our driving in the Middle-East because that’s where the oil is.

  37. And this sort of lefty bollocks is always…grrr.
    ” produced by slaves sent over here to places like Liverpool for processing by child(therefore slave) labour in factories built out of Slave Trade profits.”
    The concept of “child”, in the way you mean it, is a product of the industrial revolution. There were no “children” before the industrial revolution. Just infants & everyone else. People worked as soon as they were old enough to become productive. It’s the increased productivity of the IR enabled us to start considering it preferable for the younger members to do other than work. Because the option became available.

  38. I always enjoy DBC Reed’s contributions – for a while I assumed him to be the creation of some sort of surrealist artist, because no one could be that stupid.

    Apparently he’s real!

    But I suppose one should no more expect wisdom from a man who consistently is unable correctly to employ a computer keyboard’s space bar, than from my dog.

    Actually, my dog would beat him paws down in a debate.

  39. I don’t agree with anything DBC has written today. Except his boot boy comment. Some people here smashed his argument to pieces; others relied on irrelevance or just simple abuse.

  40. Market outcomes may be efficient. There is, however, something called society. And society doesn’t always find market outcomes desirable for those not directly engaged in the transaction; hence externalities.
    As Tim Newman notes, private individuals with small amounts saved do not have options when it comes to banking. It simply isn’t on to watch small depositors lose their life’s savings and say that’s the market; you takes your chances”.
    For the record, that was Richard Murphy’s first response to the Cypriot banking crisis.

  41. “It simply isn’t on” according to whom? You? “Society”? Who is this “society” and who speaks for it?

    Banks can run less or more reliable policies. When the State insures the deposits, it encourages risk. Just imagine if banks and savings institutions had to compete for customers by demonstrate that they have reliable policies that will not lose the depositors’ money.

  42. Or to look at it from another perspective, people used to be happy to just store money. Until the State/banking system decided to make inflation a deliberate policy, forcing savers to seek interest rates above inflation to hedge against it, exposing their saved money to increasing levels of risk…

    It is government policy to destroy the value of your money by 2% every year. Why? Might it be to force you to lend your money to banks? Hmm?

  43. “As Tim Newman notes, private individuals with small amounts saved do not have options when it comes to banking. It simply isn’t on to watch small depositors lose their life’s savings and say that’s the market; you takes your chances”.

    Indeed

    And why small savers shouldn’t be in the same banking system that’s doing credit creation to supply loans. They shouldn’t be exposed to the risk of FRB. As it is, the entire risk is socialised through deposit guarantees. Which ends up with it back with those small savers.
    If banks wish to make loans, the banks should carry the risk of the loans. With appropriate rewards to those amongst its depositors are willing to accept risk. The idea of a bank utilising the contents or current accounts & savings accounts to leverage lending into the highly speculative property market is insane. None of the smaller depositors would risk their own money that way, given the choice.

  44. “It simply isn’t on to watch small depositors lose their life’s savings and say that’s the market; you takes your chances”.

    It isn’t on to witness someone get run over in traffic or watch them fall off a cliff. What are you going to do? Big Daddy Govt isn’t going to save anyone. That is how the present banking/economic mess started. The odd private bank fails. “Oh Noes” cries Big Daddy. “You poor things–let me help you. Just a few rules and regs”–and off to the races we go. Central banks, money manipulation, debt, counterfeiting–the whole works is back again. Thieves and conmen will always thieve and con. That is who they are. The wheel will come full circle unless it and the axle it spins on are destroyed.

  45. @Ironman – haven’t you got an EDL march to organise, you Thick.Racist.Prick?

    Haters are gonna hate, after all. Those ‘muzzies’ aren’t going to drive themselves out of Liverpool, are they?

    You vile, disgusting racist.

    🙂

  46. Isn’t the link between the two that Brown encouraged the boom, and that he spent up to (and over) the government’s income during the boom, whilst claiming (or, perhaps, even believing) that the boom was the ‘new normal’, how things would continue?

  47. Re: my comment at 4.55pm on the abuse thrown at DBC; thank you Interested for dispaying exactly the sort of crap in question.

    “Haters are gonna hate, after all”. Indeed, it seems they have no alternative.

  48. Mr Ecks said: “None of the smaller depositors would risk their own money that way, given the choice”

    Well, lots of them do put their money into the riskiest banks just to get an extra bit of interest. Look at the Icelandic bank collapses. Suggests that they do prefer to take a bit more risk in return for more return (that looks wrong, but you know what I mean).

  49. ““Haters are gonna hate, after all”. Indeed, it seems they have no alternative”

    Remind me again who it was who started calling people names on here then.

    And as for the little Stalinist, there’s not a name or phrase in the dictionary thats anywhere near bad enough to describe the supporters of a political ideology thats built on a mountain of human skulls. DBC Reed gets called a few names, the people who stood up to those he idolises got a 9mm in the back of the neck, if they were lucky.

  50. As an aside i work in Clerkenwell in London and last Friday was the Mayday union march as Karl Marx had a gaff locally.

    The SWP set up a stall outside my office and when I went our for a coffee they asked me to sign a petition against UKIP “racism”

    Being a proud kipper I calmly asked then my they thought UKIP were racist. Got a bullshit answer so asked another question..

    Took about 5 minutes before the thickest guy on the stand said “I can’t wait to get the gulags back for the likes of you”

    The hard left are cunts. If you want to know how collectivism killed 100 million people in the 20th century its because the hard left types enjoyed doing it.

  51. @Jim
    I believe the Nagant came in the 7.62 rather than the 9. Chinese, come to think of it most of the r̶e̶d̶ p̶e̶r̶i̶l̶
    enlightened by the sage Karl, seem to have opted for it or a knock-off for terminal education matters.

    With reference to what Brown did & didn’t do or did or didn’t cause, there’s something in Jonnydub’s comment above:

    1)Stupid bits of legislation like the Community Reinvestment act signed by Clinton wouldn’t have obligated banks to lend to ethnic borrowers without the means to pay it back.

    2) L̶a̶c̶k̶ o̶f̶ moral hazard. The banks went along with the CRA knowing that the government would backstop them. They also knew they’d be covered for any other stupid shit they were doing.

    Politicians create moral hazard when they pursue policies that have foreseeable adverse consequences. And the causes of the crash are in both Clinton’s & Brown’s reigns of terror.
    It’s not hard to see how any individual bank or banker might have had misgivings about the likely path of future events. But none of them could have acted on them because of all the other banks & bankers. Because any individual bank or banker, by following another path, doesn’t produce the returns of the dangerous path & thus loses relative profitability & upsets the shareholders/ loses his job by under-performing. And once the politicians have got themselves onto this carousel of doom it’s electorally impossible for them to get off of it. Bush inherited his seat & couldn’t dismount if he wanted to. Nor can Cameron. Obama doesn’t seem to care.

  52. “Mr Ecks said: “None of the smaller depositors would risk their own money that way, given the choice””

    I never said that.

  53. No, I said it.
    “Well, lots of them do put their money into the riskiest banks just to get an extra bit of interest. Look at the Icelandic bank collapses.”
    I know a woman who did exactly that. And caught the cold.

    But this is, essentially, part of the same problem. People have been educated not to contemplate risk. Because the set up assures them there isn’t any.
    Even when the friend caught her Icelandic flu, it was impossible to explain to her what had happened.

    “You accepted a higher level of risk in exchange for a higher level of interest”
    “No I didn’t”
    “Yes you did. It’s in the paperwork. it’s a foreign bank. it’s not covered by UK guarantees.”
    “Why isn’t it? They never told me that”
    “I would have thought a head office in Reykjavik might have given you a clue. it’s hardly Surrey, is it? Why do you think they were paying higher rates than Barclays or Lloyds?”
    “Boo hoo. Boo hoo hoo”

    People have been so wrapped in cotton wool, they’re incapable of understanding risk in any meaningful way.

  54. If they had kids at school read Peter Schiff’s desert island economics comic “How an economy grows and why it crashes” then the world would be a much better place.

  55. DBC

    If you’re still tuning in to this then I really would recommend you Ritchie’s “the speech Ed would give if he’d just listen to me”.
    I’m afraid it blows your “out of thin air” rubbish sky high.

  56. Thing is, we need people to have enough time to do stuff. It’s an investment banker’s job to understand the market they’re in, in depth. They should be spending hours every day studying it. So I am all for letting them fail. But someone who just needs a bank account to get through their daily lives, it’s not their job to understand or predict the money markets. They presumably have other things to do, such as running shops, fixing cars, driving trains, and other things which we want done. Demanding that everyone who has a bank account dedicate the necessary time to understand the money markets or else is no different from demanding that everyone who drives a car learns how to strip down and reassemble its engine. I mean, what if the car crashes due to a mechanical fault? It’s your fault for driving it. You must have known the risk of it crashing. After all, you were in it. What, did you let some mechanic maintain it for you? You fuckwit.

    There is a difference between running a service and using a service.

    The reason the government should guarantee the deposits of banks’ customers is simply so that those people can get on with doing the other things that make up our economy. Specialisation, division of labour, and all that. Personally, I’m not convinced the best way to protect service users is also to protect service providers. But I have mixed feelings about the bailout now. At the time, I was against it, on the obvious grounds that it put bad incentives into the system — in theory. But, working inside RBS, I cannot deny that in fact those bad incentives are not here. The bank is run by people who do not want anything like that to happen again, not by people saying “Woohoo! We can do what we like and the taxpayer will rescue us! Party!” I have no idea why that be.

    I am not convinced the UK bailouts and the US bailouts were the same in that respect.

  57. I think the thing is S2, to use your analogy, people who drive cars should know they need to add some oil occasionally, put petrol in the tank and air in the tyres.

    That’s what I got from the comments anyway.

  58. DJ,

    But that’s not the analogy, though, is it? No-one’s talking about somehow maintaining your bank account. How would you do that? We’re talking about moving your money into the right account — and which account is the right one changes depending on market conditions. So a better analogy would be to follow the car manufacturing trade closely and change cars every couple of weeks depending on safety records and the expected lifetime of internal parts.

    Besides, we could make the same analogy regarding catching a bus or a train or a plane, in which case absolutely none of the maintenance is the responsibility of the passengers.

    Also, I was explicitly talking about time. Learning to put oil and water in a car is quick and easy. We can reasonably expect people to know how to do that without it getting in the way of the rest of their lives — and, crucially, the rest of their economic activity. Predicting which banks will crash and which will not, really, no.

  59. Ironman – re “out of thin air” – thanks for the link.

    I see you managed to get 5 whole posts in this time before the inevitable:

    “You’re wasting my time again and you know what happens then” …

    It was mentioning Tim what done it..!!

  60. PF

    My favourite exchange though was

    Ritchie: are you saying you know better than the BoE?
    Me: Actually, I’m only saying what the BoE is saying
    Ritchie: The BoE got confused there.

    Is it too much to ask him to follow his own thread for a couple of minutes?

    Is it too much to ask a man who styles himself an economist to know just a little bit about monetary systems?

  61. DBC Reed knows how to type, pity he doesn’t know how to read with a ‘a’.
    I have several times explained that only note-issuing banks, like the Reichsbank in 1932, can create money “out of thin air” and that fractional reserve banks need capital and deposits.
    As to the Industrial Revolution – how much of that originated in Bristol? NONE. The Industrial Revolution was funded by individual entrepreneurs in the Midlands and North hundreds (or at the minimum scores) of miles away from anyone profiting from the slave trade.
    Cobblers repaired shoes but prior to the industrial revolution outside London (and, maybe, Northampton), most shoemakers combined cobbling and shoemaking because there was not enough demand for new shoes and they spent more time repairing shoes than making new ones.

  62. Squander Two

    I am always afraid of the result when ideology trumps evidence in peoples’ reasoning. I think this is one of those occasions.

  63. Ironman,

    Quite.

    Ian,

    > Just imagine if banks and savings institutions had to compete for customers by demonstrate that they have reliable policies that will not lose the depositors’ money.

    How would a British bank demonstrate that it has reliable policies that will stop political interference by the US Congress to cause the American mortgage market to go to hell?

  64. Squander

    Iy couldn’t. Even if it could, the small depositor simply does not have the time, inclination or the training to follow the salient distinguishimg features. And why should he?

  65. Aren’t you guys ignoring the governments guarantee of £85K for UK depositors in UK retail banks.

    The problem during the crash was that the Icelandic banks were strangely enough not UK based banks and didn’t have UK subsidiaries.

  66. This is always the justification for State interference; that the little people in the marketplace aren’t safe by themselves. One implicit fallacy is that one can adjust one variable without affecting others, and thus that one can make predictions based on how things are now, with only that one thing different.

    If people face more risk, they will adjust to it and be more cautious. Once regulatory regimes come to be relied on, people start trusting them because “it wouldn’t be allowed it it was dodgy”. We all do this all the time. We trust a handrail or a floor because of the building regulations. Etc.

    So you’re comparing how people act in a “regulated to be safe” environment with how they would act in a “might be dodgy” environment. Which would be different. In particular, people would remember the old adage that if it seems too good to be true, it probably is. High interest, low risk? Where’s the catch?

  67. @ Ironman; many thanks for your kind words ( above 11.39).This kind of fair play used to be the norm on this site but TW has pitched so down market with endless seedy complaints about the rape laws , reflex attacks on Richard Murphy and writing sentences which the boot boys are given simple- to-follow instructions to laugh at , say, Polly Toynbee, The Guardian, Human Rights ,the BBC, anybody who is not aggressively heterosexual, Arts graduates, anybody who thinks free markets can go completely wrong and crash.This list is endless.(You would not believe TW is an interesting exponent of classic land tax theory; he keeps that one quiet nowadays.)
    Has Jim ever heard of the libel laws?Fortunately for him I am involved in two legal wrangles at the moment or I might be tempted to test his rash assertion that I am a Stalinist (FFS!) My whole political belief system amounts to the following: Money is created out of thin air by the banks,This money creation is more easily ,and more properly carried out by the State which should spend it into existence through providing public services such as education etc but not allowing the new money to inflate land values which brings financial crashes like the last one (and the next ).This is actually quite moderate.
    I did look up Murphy’s version of the speech he’d give if he was Ed : it actually states banks create money and the state should create some as well! Am I looking at the right entry?If you google around you get a Murphy piece from 16.i.15 entitled “Banks do create money out of thin air-which is a power that must be used for social good” Not perhaps what you had in mind?
    I will duck out of this site (again!).The standard has got too low .You don’t get a good argument any more, just vulgar abuse .There are some exceptions, people whom you can learn new angles from: Yourself, Ian B (that about it) .
    I blame grade inflation.

  68. Johnny,

    > Aren’t you guys ignoring the governments guarantee of £85K for UK depositors in UK retail banks.

    Er, no, we’re discussing it.

  69. DBC, if you want to create money it doesn’t matter who creates it, it has the same effect. Money is neutral. It doesn’t know it was created by a wise socialist for spending on social capital. It will follow the, er, money.

    Be Keynesian; consider giving a newly minted pound to a poor man. His velocity is high. He spends it. It will rip rapidly through the economy until it finds somewhere with a low velocity to rest; that is in the hands of a wealthy man. It may lay fallow for years, as more of its kindred arrive. But oh! It can be loaned out. To people buying houses, for instance.

    The effect happens wherever the pound started from. You can’t demand monetary expansion then complain about the effect of monetary expansion. It just makes no sense. The problem is you’re treating the economy as linear, rather than a circulating system.

  70. Ian,

    > We all do this all the time. We trust a handrail or a floor because of the building regulations.

    Er, yes, quite. Are you suggesting that we shouldn’t trust surveyors and engineers and builders to have made buildings safe and should instead check the blueprints and structurally survey any building we walk into, because the responsibility for it not collapsing is assumed by us the moment we enter it? If not, what’s your point?

    > This is always the justification for State interference; that the little people in the marketplace aren’t safe by themselves.

    Not my justification at all. As I have said repeatedly, the problem is not that people cannot make their money safe; the problem is that accurately predicting market movements takes a lot of time, and ideally we want people to have time available for other things. It is my contention that having the entire population snort market data and move their money into optimum vehicles for four hours a day would cause the economy to collapse.

    There are thousands of things that we have professionals do and do not insist that end-users have to be experts in. What’s so special about investment banking, that anyone with a bank account should have to learn it? Or do you also believe that all computer users should be computer security experts, that no-one should turn an oven on without understanding how all its safety features work, that no-one should use a mobile phone without a full understanding of the relative stability of the various battery technologies, that no-one should turn on a tap without having checked the building’s water supply for legionnaire’s disease, etc?

  71. DBC

    No, I will not engage in the abuse. However, I will point out that Murphy showed yet again that he doesn’t understand the difference between money – base money -creation and money supply expansion through credit. He doesn’t understand, or doesn’t want to, how banks are restricted in how they can expand credit and how they can run out of money.
    IanB gets it, John77 does. I’m not sure you do.

  72. There’s a lot of talk here about absolute risk & very little about relative risk. Or any attempt to value risk. And it’s these things people need to be doing.
    Take my Iceland saver I mentioned above. She needed the income on her investment to pay the bills. She certainly shouldn’t risk the principal. It was a large part of her savings. The interest she was getting where she had been keeping the money was paying the bills. The difference the Iceland investment would give her would be a few hairdressers appointments & meals out during the year. What she seemed to think she was risking was the difference between what she had been getting & the higher rate. If it didn’t work out, she just switches the money back. The idea she was risking the entirety of the money & the income against a few dye jobs & a Thai curry was beyond her comprehension. She didn’t even try & get advice. Just went on an article in the paper. But articles in papers never seem to mention downside risks.
    The Telegraph regularly boosts buy to let. And boosts borrowing money to do so. Sorry, but risking my savings on the UK property bubble on the end of a 400% lever ain’t my idea of an investment for my old age. At any rate of return.

  73. Just read your comment above, there, Mr B. And thought on it some. Very profound.

  74. Or do you also believe that all computer users should be computer security experts, that no-one should turn an oven on without understanding how all its safety features work, that no-one should use a mobile phone without a full understanding of the relative stability of the various battery technologies, that no-one should turn on a tap without having checked the building’s water supply for legionnaire’s disease, etc?

    Why do you think that only State regulation can make these things safe? Personal example: when I trained as an electrician, there were no compulsory electrical regulations. Nonetheless, we all learned a set of regulations produced by the IEE and generally followed them. They were a requirement by insurance companies etc. Britain had one of the safest electrical infrastructures in the world, all without the government.

    Since then, the regs have been nationalised. Further Labour brought in a requirement for compulsory certification from your local council, preventing anyone (including a trained but no longer practising sparks like myself) doing even the most simple of works, creating an “electricians guild”. Look on an internet electricians forum these days and most of it is anal retentive pettiflogging discussions of the regs with constant “that’s against the law!”s pointed at some poor sweat who just wants a new light fitting in his conservatory. Paperwork has increased massively. Whether this has actually increased safety at all is not clear.

    Statists assume that only the State can produce good practise and safety. I beg to differ.

  75. Also Squander, bear in mind that many of the country’s most desirable and admired properties were built before any State building regulations. Look at all those magnificent, over-engineered cathedrals. Even without regulations, remarkably architects and builders don’t want their buildings to fall down, stairways to collapse, etc.

  76. ” Look at all those magnificent, over-engineered cathedrals”

    Yes, but what about all the old buildings that collapsed killing the inhabitants and had to be rebuilt stronger? Its a self selecting prophecy to look at old buildings still standing today and conclude that the oldsters built them better back in the day without any regulation. You don’t see how many rows of jerry built victorian houses collapsed 6 months after they were built.

  77. @Ian B There is an interesting argument to be had about the velocity of money which you correctly identify as of paramount importance particularly to Keynesian demand stimulus, but such an argument is not really possible on here where there are bound to be interruptions from people who have weird unorthodox views on the monetary system. (Since the BoE.published “Money Creation in the Modern Economy the once fugitive belief that banks create money is now the new orthodoxy.)
    A key influence on Keynes was the wonderfully odd Silvio Gesell whom Keynes initially treated as a crank. Gesell’s idea ,which was put into practice in the Tyrol and has been revived recently , was to speed up the velocity of money by making banknotes entirely lose their value unless you stuck stamps on them at specified dates.Naturally people hurried to spend the notes before these dates so money shot round the system to the general benefit of places like Worgl. Gesell also tried to stop the money being immobilised by being stuck on deposit or invested in land. (One half of his magnum opus was on land reform ,which Keynes described as being influenced by Henry George and therefore not very interesting).
    The present Gesellian experiment is Googleable as Chiemgauer as it operates round the Chiemsee .

  78. Sorry for the delay getting back to this. Migraine yesterday.

    Ian,

    > Why do you think that only State regulation can make these things safe?

    I don’t. I thought we were discussing a choice between having the state guarantee deposits and insisting that end users take on all risk of everything themselves. I’m sure there are other solutions, such as insurance, obviously — though I’d argue you’d need some regulation there: if you’re selling a policy insuring against the collapse of the banking system, I think a rule that you may not actually be part of the banking system yourself would be reasonable. But sure, whatever: I’m sure there are lots of ways of dealing with this problem. But I still maintain that insisting every bank’s customer become an expert in the money markets and move their money round accordingly is unreasonable and counterproductive.

    Jim,

    > Its a self selecting prophecy to look at old buildings still standing today and conclude that the oldsters built them better back in the day without any regulation.

    Yes, exactly. It’s backwards: what actually happened is that we looked at the buildings that stayed up and ones that fell over and killed people and based building regulations on the difference between them. No argument from me that a lot of regulation is guild-protecting bollocks and should be destroyed, but there’s no need to throw out the baby with the bathwater; a lot of it is based on avoiding past mistakes.

    The big example is Titanic. The results of the public enquiry into the disaster led to loads of regulation that is in place to this day. Ships are markedly safer as a result. Without that regulation, what did private self-regulating industry do? It created the Titanic disaster.

    BNIS,

    > any attempt to value risk. And it’s these things people need to be doing.

    Agreed, but there we’re talking about one of the major failings of our education system. I think kids should have the basics of real-world economics drummed into them and should understand that lower risk equals higher cost. Let’s work towards that, yes, please. But, until we have that, what you’re proposing is to penalise people for being victims of an education system they had no choice over.

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