Compass doesn\’t do logic you know

Their report about what we should all be doing.

What went wrong:

Although the government suggests that the state
is the problem, most economists would support the
view that the real cause of the recession is the drying
up of liquidity in financial markets.

So, what should we do about this?

Seventh, introduce a financial transactions tax
(FTT) at a rate of 0.1%, applicable to all sterling
transactions. Minimally, this would raise a
further £4.2 billion – maximally, it would raise
£34 billion, or about 2.5% of UK GDP.70

Yes, in CompassWorld the solution to economic woes caused by a reduction in liquidity is to tax liquidity so that we get less of it.

So, who thinks that the peeps at Compass would recognise logic if it were to sidle up to them in a pub and offer them a pint? Or leapt up and bit them on the bum?

And that\’s without their ideas about raising income tax rates to 75% by uncapping national insurance.


6 thoughts on “Compass doesn\’t do logic you know”

  1. Neal Lawson is quite scary/bonkers.
    He wants to (re-)educate us all away from “consumerism”, by which of course he means any consumption of which he doesn’t personally approve.

  2. Assuming they wish to preserve the tapering of the personal allowance at £100k, then by uncapping NI and reducing the super tax threshold, the marginal wihholding rate between £100k and £115k is 87%.

    Anyone with a student loan in that income range (not beyond the realms of possiblity) would have a marginal withholding rate of 96% in that income range…

    Why not just revoke all propert rights and loot without pretence?

  3. “caused by a reduction in liquidity” To call this woolly thinking would be charitable. So it wasn’t caused by all the fraud, the subprime mess, excess borrowing, the free-riding of banks on the backs of taxpayers, then getting everyone else to bai them out, and all that. No. Everything was ticking along just fine, and then suddenly, bang, a “reduction in liquidity” screwed everything up. Whatever you think about a financial transactions tax, your rubbishing of it here misses the mark spectacuarly

    Tim adds: Erm, that description of what happened is a quote from the Compass report. So you agree thaen that they are, at the least, guilty of woolly thinking?

  4. Tim

    If you think that the problem was that banks relied on short-term financing then were screwed when liquidity dried up, it makes PERFECT SENSE to argue for a transaction tax that make short-term financing uneconomic and therefore stop banks relying on it.

  5. Northern Rock borrowed short in wholesale money markets and lent long, as did most other UK banks. Schoolboy error, which was ignored by the so called regulators. When the BoE , which had been transformed by Mervyn King into a replica of the University of Birmingham department of Econometrics, lost control of the money markets, that particular model came unstuck. Funding 30 yr motgages at 3 mth money rates was (and still is) bad for the economy, but generally more profitable for banks. A transaction tax would make no difference, sensible securitisation structures (yes those eevil things) would stop the poor UK householder getting a tax increase every time the BoE want to change the marginal price of money. The recession in the UK and peripheral europe was started in 2008 when the central bankers raised rates in reaction to the oil price spike, pushing up the cost of funding a mortgaeg in some cases by 40%. The financial crisis reached the real economy when the collapse of lehman led to a short term run on money market funds in the US such that in October 2008 there was no-one to buy the trillions of dollars of commercial paper that was due to roll over. The Fed subsequently stepped in, but in the meantime, the world had its working capital lines pulled. Inventories were run down , orders were cancelled. Now it is all back on line and (officially) the recession is over. Unless of course your business relied on boat loads of cheap finance from the likes of HBOS. The bankers blew themselves up, not the economy. Allowing Lehman to go bust for moral hazzard sensibilities toppled a house of cards few realised existed. We still have a bad mortgage system and the risk to the UK and peripheral europe remains the duration mismatch, not of banks anymore, but of households. Politicians are busy blaming everything on the pantomime villain of bankers and the class warriors are joining in. Be careful, the solutions will likely be worse than the problem…

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