Are we absolutely sure it was Sarah Palin who said the crisis was caused by too much regulation and not Tina Fey?
http://www.youtube.com/watch?v=BE2gE-VVjBI

How can we be sure? Personally, I don’t think nearly enough credit is given to Sarah Palin for her unquestionable talents as shown here:
http://en.zappinternet.com/video/FoTcFukYog/Candidata-Sarah-Palin-en-Banador

Krugman: “90 solid minutes? That’s half a Castro” Arf.

…but then only pointy-headed liberal elites who win suspiciously foreign-sounding prizes for economics and want big government to eat your children would criticise the future saviour of the Republican Party…

Credit where it’s due. Sarah Palin – if it really was Sarah Palin and not Tina Fey – has at last hit upon an important fundamental truth. Look at it this way: America has a lot of crime, so much crime that the estimated prison population in the US prison system in 2007 amounted to 7.3 million:

“(CNN) — A record number of Americans served time in corrections systems across the country in 2007, according to a report released Monday by the Pew Center on the States. The U.S. correctional population — those in jail, prison, on probation or on parole — totaled 7.3 million, or 1 in every 31 adults.”
http://www.cnn.com/2009/CRIME/03/02/record.prison.population/

That’s an awfully large number of people and it’s very costly to American taxpayers to keep so many folks in the prison system, so expensive that in California they figure one way of cutting $1.2 billion off the state’s fiscal deficit is by reducing the state prison population by 27,000 through an early parole program.

Now this is where Sarah Palin comes in. There’s a simple and straight forward way to cut the crime which puts folks into prison. That way is to repeal the very laws which make criminals out of citizens. With fewer laws there will be less crime and the costly prison system can be downsized. Simple.

Ahh, the old “government was not responsible for this crisis” issue again.

The thing about Palin is that she was right about some things – namely that governments did keep interest rates low and did tell banks to lend to those less able to afford repayments. It’s notable that Krugman chooses not to address this issue directly.

He does identify the solution though. You have to regulate the amount of cash and capital held by banks in relation to their lending. You also have to make sure you don’t get banks that are “too big to fail”. You can have less regulation as long as you regulate the correct things.

Personally I’d ideally like to see no regulation, but I accept that when our economies are reliant on banks not collapsing that the government should take some role in preventing that from happening. Setting correct interest rates and ensuring banks don’t over-lend are the two big ways of preventing that.

The earlier Savings and Loan Association debacle in America was a precursor for the recent financial crisis:

“The US Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. More than 1,000 savings and loan institutions (S&Ls) failed in ‘the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.’ The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government, which contributed to the large budget deficits of the early 1990s.”
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

It’s been argued that what prompted the S&L crisis was the Federal Deposit Insurance (FDI) scheme created by the (regulation loving) Roosevelt administration back in the 1930s to stop domino bank runs and potential systemic collapses of the financial system. With the security of deposits guaranted by the FDI, some managers of S&L Associations felt freer to invest monies in their charge in more speculative ventures which seemingly offered the prospects of greater profits.

Predictably, some argued that the problem stemmed from the intervention of the Roosevelt administration in creating the guarantee for bank deposits through the FDI. Had the FDI been unwound once the sun was shinning after the depression years of the 1930s, the managers of the S&L Associations would have been more prudent. Of course, with the unwinding of the FDI, there would have massive losses for deposit holders in the banks that collapsed in the recent financial crisis but that is another story.

A few months back, some free market gurus were indeed saying that governments should have allowed the bad banks to fail — to encourage the others, so to speak, and teach depositors to be more careful about where they stashed their savings.

Well it seems the G20 don’t agree with Krugman now.

From John Redwood – “In [the G20's] statements on regulation there is an important development. They now admit that ‘Major failures of regulation and supervision…..contributed significantly to the current crisis’”

So can we move on from ‘this was all done by bankers’ now please?

If John Redwood and the Conservatives think ‘Major failures of regulation and supervision…..contributed significantly to the current crisis’ is an amazing new admission then heaven help us all. How dim and slow witted is it possible to be in frontline politics?

For starters, an audit report highlighting failings of the FSA in its supervision of Northern Rock was published back in March 2008:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/028.shtml

Apart from lunatic fringes, no one of much political significance on either side of the Atlantic is saying there weren’t serial failings in regulatory supervision of financial institutions, as well as failings in early recognition of the potential for systemic collapse in financial markets. Alan Greenspan, previous chairman of the governors of the board of the US Federal Reserve Bank, has admitted as much:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

The critical issues are not about whether there were serial regulatory failings but how, why and what to do about regulatory reform now that the prospect of a consequential economic depression on a global scale seems to have been averted through concerted policy responses by national governments.

These policy responses in most/all major economies mostly amounted to (supposedly heterodox) keynesian-type counter-cyclical fiscal boosts to overcome national recessions. In comparison with the policies of governments in many other major economies, the fiscal stimulus of c. £20 billion applied in Britain – as announced in the Pre-Budget Report last November – was relatively modest.

Fortunately, it was soon appreciated – except, evidently, by Nigel Lawson – that orthodox monetary policy alone would not be sufficient for the counter-cyclical challenge.

Unfortunately, despite several timely reminders, the government failed to heed warnings that asset-price bubbles – as with house prices in Britain – are apt to generate unwelcome economic consequences when the bubble finally bursts, as bubbles inevitably do. There were glaring enough indications from the stagnation of Japan’s economy from 1992 onwards of the potential problems in prospect from bursting asset-price bubbles but the signs were ignored, as also were the warnings in 2003 from Warren Buffett about the ascending risks inherent in derivatives trading.

From John Redwood – “In [the G20's] statements on regulation there is an important development. They now admit that ‘Major failures of regulation and supervision…..contributed significantly to the current crisis’”

..but it doesn’t follow that the answer is less regulation – unless you’re John Redwood. Or Sarah Palin. Or, perhaps, Mark M.

“but it doesn’t follow that the answer is less regulation”

Absolutely, redpesto.

By many reports, the leaders of G20 governments are heading not towards less regulation, let alone no regulation, but towards the reforms of national – or international – regulatory and supervisory systems for financial services industries needed to prevent another crisis developing downstream.

The urgency of the need for reforms has accelerated with media reporting that the banks with their bonus payments for high-risk decisions are rapidly reverting to pre-crisis modes.

Sadly, the Conservatives are more focused on playing a puerile blame game for electoral advantage than analysing the root causes of the crisis and, especially, on discussing the policy options needed to prevent major economies from slipping further into recession, bringing the danger of repeating the scale of depression during the 1930s.

For a good briefing article on fiscal reforms – meaning budget cuts – in Britain, try:
http://www.economist.com/displaystory.cfm?story_id=14505343

Well quite. I can’t argue with you there redpesto. I’m in no position to judge whether more or less would be better. But you also have to accept that it similarly doesn’t follow that more regulation is the answer.

At least the powers that be have acknowledged that their regulation systems weren’t up to the task. More or less regulation doesn’t matter, the answer is better regulation.

And this IS an important step, whatever Bob B thinks, because it’s finally an admission that it wasn’t 100% greedy bankers that were responsible for this crisis. Did Gordon Brown say ‘well, bankers have played a significant part in this but we must also realise the FSA should have done more’? No, did he hell. He just blamed bankers, America, anyone who wasn’t him.

More, less regulation? I don’t care, just regulate the right things next time.

Whatever else, there remains the enduring and fundamental puzzle as to how so many bankers, mainly but not exclusively based in America and Britain, managed to do so many deals and trades which ultimately generated losses for the banks by which they were employed amounting to hundreds of billions of Dollars and Pounds.

The great failure of regulation was the failure in preventing those bankers from inflicting such gargantuan losses on the institutions which employed them as to render a swathe of major international banks insolvent and thereby threaten the systemic stability of the global financial system.

The seizing up of the lending capability of insolvent and injured banks precipitated a series of recessions across major economies which could have easily developed into a depression on the scale of the 1930s but for concerted and speedy policy responses by governments to boost national economies by fiscal and monetary interventions.

Frankly, it beggars belief to blame all that on regulators for not preventing bankers from inflicting losses on the banks for which they worked – hence Alan Greenspan’s comment reported above

The best accounts that I’ve come across of the roots and progress of the crisis are by those leading FT journalists: Martin Wolf on: Fixing Global Finance (Yale UP 2009) and Gillian Tett on: Fool’s Gold (Little, Brown 2009)

I’m unsure whether recommendations as to further readings about the crisis would be appreciated here or regarded as bumptious on my part but I’ll have a go.

Paul Krugman: The Return of Depression Economics (Penguin, revised edition 2008) is easy and lively reading and informative although not very deep. Robert Skidelsky: Keynes – the Return of the Master (Allen Lane 2009) is more challenging and goes deeper but the best recent book IMO for explaining why Keynes’s economics is distinctively different from what is dubbed the New Classical Economics is: Paul Davidson: John Maynard Keynes – Great Thinkers in Economics (Palgrave Macmillan, just out in P/B) but some priors in economics would be at least a helpful preliminary.

Recall Krugman’s brusque assessment of modern macroeconomics:

“In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was ‘spectacularly useless at best, and positively harmful at worst.’”
http://www.economist.com/printedition/displayStory.cfm?Story_ID=14031376

New Classical Economics came to be the predominant macroeconomic paradigm taught in many universities in the last 30 years. As an ancient, I came from before that time, which means that I wasn’t brought up to despise Keynes. For a recent sceptical take on the inherited orthodoxy that finance markets are efficient, try, Justin Fox: The Myth of the Rational Market (HarperBusiness 2009).

If anyone ever believed markets were perfect, they deserve to be ridiculed.

However that is a very different thing from saying that increased regulation and/or planning would be better. It might be, but it does not automatically follow.

(The argument seems to go – well, better regulation would be better. Wow, really?! Of course that’s just a tautology.)

Regulators did not *cause* the crisis, but they allowed it. To a great extent indeed they encouraged it.

While Greenspan is in total denial, central bank underpricing of short-term interest rates – which are set by bureaucrats not by the market – provided the rocket fuel on which the overall credit boom fed.
At the same time Fannie Mae and Freddie Mac’s implied government guarantee underpriced US mortgage credit.

Greenspan does have one thing right though. The abolition of “booms and busts” – Brown’s moronic boast – is impossible.

“Regulators did not *cause* the crisis, but they allowed it.”

Well they weren’t *allowed* to do any regulating, were they (see “we’ll just leave for Dubai if you do” threats, passim).

No, they weren’t allowed to raise interest rates when it was clear the credit boom was building up were they?

No, the evil bankers held a gun to their heads.

And who was going to leave for Dubai?

I think you are confusing banks with hedge funds, who had little or nothing to do with the whole thing.

…he said, misunderstanding for comic effect.

If anyone believed that economics was a science they deserve to be ridiculed.
Along with psychology. at least that only attempts to predict individual/group behaviour.
Economics within liberal/capitalist countries is the fairytale for the masses,

“If anyone ever believed markets were perfect, they deserve to be ridiculed”

However, see this Wikipedia entry for the Efficient Market Hypothesis:
http://en.wikipedia.org/wiki/Efficient-market_hypothesis

“The first time the term ‘efficient market’ was in a 1965 paper by E.F. Fama who said that in an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected ‘instantaneously’ in actual prices.”
http://comp.uark.edu/~tjandik/papers/emh.pdf

Compare this:

“Nobel laureate James Tobin reports that one of his Yale students went to work for the Chicago Mercantile Exchange as an assistannt to an active trader who was a former economics professor. After a few weeks, the young man asked about the long-run calculations that governed the trades. He was told ‘Sonny, my long-run is the next ten minutes.’” Robert Solomon: Money on the Move (Princeton UP, 1999) p.14.

But what’s new? See this narrative about the South Sea Bubble of 1720:

“The prize must surely go to the unknown soul who started ‘A Company for carrying on undertaking of great advantage, but nobody knows what it is.’ The prospectus promised unheard of rewards. At nine o’clock in the morning, when the subscription books opened, crowds of people from all walks of life practically beat down the door in an effort to subscribe. Within five hours a thousand investors handed over their money for shares in the company. Not being greedy himself, the promoter promptly closed up shop and set off for the Continent. He was never heard of again.”
Burton Malkiel: A Random Walk Down Wall Street.

The Demon himself made manifest at Princeton on video with a lecture in April on: The Return of Depression Economics (1 hr long)
http://www.youtube.com/watch?v=r5r17NrIMRY

The issue of whether economics is a science is often invoked to sidetrack serious debate, in my experience going back to ancient times. I really don’t care whether economics is dubbed a science or not. What matters is the quality of the debate.

Btw compare whether medicine is a science:

“At least 100 patients are dying or suffering serious harm each year after healthcare workers give them the wrong medication. The number of alerts relating to errors or ‘near-misses’ in the supply or prescription of medicines has more than doubled in two years, the National Patient Safety Agency said.

“More than 86,000 incidents regarding medication were reported in 2007, compared with 64,678 in 2006 and 36,335 in 2005.”
http://www.timesonline.co.uk/tol/life_and_style/health/article6820090.ece

“Accidents, errors and mishaps in hospital affect as many as one in 10 in-patients, claim researchers.”
http://news.bbc.co.uk/1/hi/health/7116711.stm

“We are pleased to announce the 2nd International conference on DIAGNOSTIC ERROR IN MEDICINE, to be held Oct 21-22, 2009 in Los Angeles, CA. This year’s meeting will be held in association with the annual meeting of the Society of Medical Decision Making.”
http://www.smdm.org/diagnostic_errors.shtml

The world is riddled with errors.
It always will be.
That is human nature.

The question is how we minimise those errors.

Via markets or via bureaucratic direction?

I would not have posted on this topic, but as diagnostic and medication error are closely linked to my profession, I would just like to correct a misunderstanding.
Both medication and diagnostic error is caused by human fallibility. Pharmacolgy and medicine are based on sound, scientific methodology, and know universal principles. I think we are confusing subject with application.

“The question is how we minimise those errors. Via markets or via bureaucratic direction?”

It’s not as simple as that because of the potential for market failures and lively debate as to what statist policies should be applied to correct for anticipated failures. There’s a daunting market failures literature going back at least to Pigou: The Economics of Welfare, published about a century ago. For a summary of where we had got to c. 50 years ago, try this:
http://instruct1.cit.cornell.edu/courses/econ335/out/bator_qje.pdf

Then along came Coase in 1960 who argued that externalities could be left to private bargaining providing the costs of bargaining were sufficiently small – which is hardly true regarding climate change:
http://www.sfu.ca/~allen/CoaseJLE1960.pdf

I don’t think anyone can survey the recent wrecking of huge international banks by their employees and conclude financial market institutions function efficiently and should be left to carry on without more irksome supervision and regulation. As I’ve mentioned before, Warren Buffett was remarking back in 2003 on the increasing risks inherent in the growing trade of derivatives.

“Pharmacolgy and medicine are based on sound, scientific methodology, and know universal principles. I think we are confusing subject with application.”

C’mon. I was taken off medication which had been widely precribed on both sides of the Atlantic for several years when it emerged that the medication was associated with a higher incidence of heart attacks for reasons which were not anticipated or understood.

The fact is that there is a lot of hit and miss brute empiricism and fads in medical treatments. Remember when lobtomies, ECT and insulin shock therapy were all highly fashionable?

The brainwashing has begun again, some of them will make any excuse for their mates the bankers.

22
Unfortunately there are unforseen side-effects from medication, which incidently is monitored quite closely, when such side-effects come to light action is taken, no doubt your GP or consultant took immediate action. Research in medication and treatments is an on-going process and information is being collected daily. However, the difference between the emergence of previously unknown side-effects and someone making an error (e.g. prescribing a medication which is already known to give a particular serious side-effect) is quite different. ECT, which is shock therapy, is still widely used to successfully treat severe depression, although it is still not fully understood why this happens, however, from observations and reports from patients, it does, so I think we can safely refer to this as empirical evidence.
As always, with universal principles, the environment does create changes, the path of a falling light object will be different in a force 1 wind than in a force 9.
The efficacy of any particular medication is dependant on all sorts of factors such as any other medication being taken, diet, weight, general health, the time its taken and many others, nonetheless, this is the nature of science.
The application of science is a different matter, and relies upon human input, I would suggest that when a GP gives a diagnosis on a particular patient s/he is using skill, experience and even intuition as much of the information is from patient reporting.
Of course as research continues new theories emerge based on new and updated
knowledge, but, I still think you are confusing subject with application.

“The application of science is a different matter, and relies upon human input, I would suggest that when a GP gives a diagnosis on a particular patient s/he is using skill, experience and even intuition as much of the information is from patient reporting.”

That process has marked similarities with an economist reading the latest economic entrails gathered – often online – from the Office of National Statistics, the Bank of England, HM Treasury and the Institute of Fiscal Studies or commentary from the NIESR to make an assessment of what is happening in the economy. As those who follow Paul Krugman will appreciate, some economists make different assessments from others.

The economy – like the human body – is a complex system so there is often scope for varied interpetations of the available information. Just as medical scientists try to test their hypotheses about the functioning of the human body or how and why a pharmaceutical drug works, so economists also test their hypotheses and policy prescriptions with reference to economic data. In both cases, there are limitations on testing hypotheses under laboratory conditions for fear that the subject under test might not survive.

As for regulation, about 10 years back, I became engaged in a lively online debate with American free marketeers about whether the US Federal Drug Administration (FDA) was unnecessary and a complete waste of public spending, not least because the FDA took time to approve new pharmaceuticals for general prescription. That contrasts with the more usual assessment that the FDA performs a valuable function – it blocked from the beginning the prescription of Thalidomide in America, which is more than can be claimed for the approval authorities in Britain.
http://en.wikipedia.org/wiki/Thalidomide

[23] Robbo

The problem I seem to be having with getting this ‘poor regulation had a part in this crisis’ argument over is that as soon as I say it, people jump up saying “so you’re excusing the bankers… typical tory.. blah blah”.

Let me be clear, I am NOT excusing bankers of their part in causing this crisis. They lent too much to too many people who were unable to repay. Just because the regulators told them to do so doesn’t excuse doing it (if they told me to jump off a cliff then it would still be my fault for doing so).

So, bankers are at fault for lending to people who couldn’t repay, and regulators are at fault for not stopping them doing so.

I hope that’s clear enough.

“So, bankers are at fault for lending to people who couldn’t repay, and regulators are at fault for not stopping them doing so.”

It would seem to follow logically that it’s the Police, and not the criminal law, who are really to blame for crime, from which we might conclude that the Police ought be sacked and relegated to prison.

The problem with the bankers is not just that they made available mortgages to people who couldn’t afford to repay the mortgages.

The bankers then securitised those very mortgages and sold off bundles of subprime mortgages (= Collateralized Debt Obligations) into the finance markets with the blessings of credit rating agencies which had awarded the bundles starred ‘A’ credit ratings. Other bankers and hedge funds went on buying these duff bundled mortgages or used the bundles as collateral for inter-bank borrowing until the banks began to appreciate that the bundles could be worth a great deal less than the price paid or apparent value.
http://en.wikipedia.org/wiki/Collateralized_debt_obligation

As that realisation spread, banks curtailed their usual lending to other banks, for fear of being caught with duff collateral, and also became very wary about regular corporate lending to nonfinancial companies as well, partly because of bank balance sheets seriously weakened by their previous binge purchases of duff assets.

The seizing up of bank lending and mortgages availability collapsed house construction in Britain and caused commercial and industrial businesses to drastically curb intended business investment – all of which drove the economy into recession.

Just so we are clear, regulation good, no regulation bad and got us into this shitty mess.

Yes, but what regulation is absolutely crucial for restoring the stability of financial services in Britain but also to revive the tax revenues previously generated by the financial services industry.

The fact is that London and South East resident taxpayers were bank rolling public spending in the other regions in Britain. Without those tax revenues, public spending will get cut back more in order to end the deficit.

For any readers interested in one set of detailed proposals for regulatory reform of financial services, see here for the Turner Review, published back in March:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/037.shtml

Lord Turner is curently chairman of the Financial Services Authority (FSA). In earlier manifestations, he worked for the Chase Manhattan Bank and was later Director of the CBI 1995-9.

News update 29 September 2009:

“Mr Darling intends to legislate to ensure City bonuses are structured to reward long-term success, although new guidelines are already being put in place by the Financial Services Authority. He will tell bank remuneration committee chiefs next week to apply the new rules immediately – before the legislation comes into force – amid fears that rising bank profits could feed through to a politically embarrassing New Year bonus season.”
http://www.ft.com/cms/s/0/036ac7b2-ac90-11de-a754-00144feabdc0.html?nclick_check=1

Well putting aside “Nobel prize in economics” which there is not one, as its not a science, we can put some of this conjecture to the test.

Lets take 1980 and 2005 as the benchmark years and calculate how many regulatory hurdles you have to pass to set up a basic retail personal and business banking service.

I am not sure about 1980 in the UK, but to in the UK you would have to knock off around 12000 pages of regulation in 2005 (according to my MP who I wrote and asked) so thats hardly laisser faire is it?

I am not a banker, but i work in a highly regulated civil engineering field, in demolition as it happens, and I can tell you people, some very bright and highly educated work exclusively and blindly to the regulations and make big mistakes as they don’t apply common sense leading to error and sometimes death. There is no substitute for experience.

My general view of 20 years experience, is too much regulation turns peoples brains off, and thats what happened in the banking sector, regulation gave them a false sense of security.

For those interested in new reading about the making of the current financial crisis, here are two more good books recently published:

SM Reinhart + Kenneth Rogoff: This Time is Different – Eight Centuries of Financial Folly (Princeton UP, 2009)

Rogoff, now at Harvard, was previously chief economist at the IMF.

Henry Kaufman: The Road to Financial Reformation (Wiley 2009)

Kaufman has long track record as an historian and analyst of financial markets.

Martin Wolf on regulating fiancial services in Wednesday’s FT is worth reading, as always:
http://www.ft.com/cms/s/0/34cbca0c-ad28-11de-9caf-00144feabdc0.html?nclick_check=1

One crucial insight in all this is that even state-owned banks make totally daft investments. The French experience with Crédit Lyonnais, a state-owned bank since 1945, is an object lesson demonstrating that public ownership of a bank guarantees absolutely nothing so long as banks operate under a precept of privatising gains from banking but socialising the losses:

“By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion.”
http://www.erisk.com/Learning/CaseStudies/CreditLyonnais.asp

At one stage, in pursuit of the fantasies of its management, this French, state-owned bank came to own the MGM studios in Hollywood, as well as making multi-million loans to that arch crook, Robert Maxwell.

Btw Dominique Strauss-Kahn is now MD of the IMF. Prior to his political career, he was a professor at École nationale d’administration (ENA) through which most of France’s political elite, such as Delors, Chirac, Dominique de Villepin, Eduard Balladur, Michel Rocard, Alain Juppé, Lionel Jospin etc etc passed as students – except for, amongst a few others, President Sarkozy.

Hot news on Wednesday – must read:

“Britain’s five largest banks are to accept the curbs on bonuses agreed by G20 leaders at the recent Pittsburgh summit, Alistair Darling has announced.

“The five banks that have signed up to the new rules are Barclays, HSBC, Lloyds, RBS and Standard Chartered.

“While the curbs do not limit bonuses, the changes will include the banks having to disclose all such payments.”

And more . .
http://news.bbc.co.uk/1/hi/business/8283735.stm

@Sean,

My general view of 20 years experience, is too much regulation turns peoples brains off, and thats what happened in the banking sector, regulation gave them a false sense of security.

Deary me, that is highly simplistic thinking.

As someone who has also worked in the highly regulated Civil Engineering sector, I can tell you that it is when firms DO NOT follow regulation (eg. on health & safety) that cock ups – and deaths – occur.

I agree that it is precisely when individuals take their eye off the ball – perhaps because inspection regimes have become more lax due to rampant, abstract ideology – that these incidents occur.

That leads to the opposite conclusion from the one you’re trying to reach. Following the rules may help (no such thing as certainty here) to keep people safer.

Laissez faire on the other hand exposes everyone to risk. Much of it huge.

News update from Thursday, 1 October:

“UK banks face stricter bonus rules than US”
http://www.ft.com/cms/s/0/9c43aaf4-ae01-11de-87e7-00144feabdc0.html?nclick_check=1

For a downloadable, free ebook of essays by economists on the financial crisis, try:

The First Global Financial Crisis of the 21st Century, produced in 2008 by the Centre for Economic Policy Research:
http://www.voxeu.org/reports/subprime/report.pdf

34
As risk and investment are inherent within capitalist societies, banks (whether state-owned or not) will engage in that practice. Risk, within this environment is only daft with hindsight, after all a lot of financial experts thought that it would be a good idea to lend money to people on benefits. The problem lies with the system itself not individuals or organizations.

“after all a lot of financial experts thought that it would be a good idea to lend money to people on benefits. The problem lies with the system itself not individuals or organizations”

Which so-called experts? When I started on the house-buying ladder all those decades ago, 100% (and higher) mortgages were regarded as ridiculously “imprudent” by financial institutions and that was when claimant count unemployment rates – the ILO standardised unemployment rate based on sample surveys hadn’t been devised then – were typically under 2%, or more likely under 1% in the region where I lived then.

Even so, with the cheap money of the early 1970s when interest rates were decided by the Chancellor in HM Treasury – not by the Bank of England – we had a house-price bubble. And another in the late 1980s as a consequence of Nigel Lawson’s monetary policy when Treasury-set interest rates were set lowish to keep the exchange rate of the Pound “competitive” – and recall that Lawson obviously regards himself as a policy expert. Note: in one job I had, one of my line managers, a very good economist, was effectively sacked from the Treasury by Lawson.

Apart from all that, there were increasing press reports in 2007 of first-time house buyers being encouraged to lie about their incomes to qualify for mortgages by bonus-motivated agents pushing mortgages. It was therefore hardly surprising when it turned out that the borrowers couldn’t afford to make the payments on the mortgages.

We also discovered that some banks had been borrowing heavily in the wholesale money markets to fund the mortgages which the banks had been pushing on gullible house-buyers. There was added risk for the banks contingent on the continued availability of funds on the wholesale markets at interest rates below their lending rates. But inter-bank borrowing on the wholesale money markets got scarce, with the flood of “Collateralised Debt Obligations” underpinned by subprime mortgages, and lending rates on the wholesale markets rose steeply – see above at #28.

Finance markets are riddled with “asymmetric information” – where knowledge about transactions risk differs between borrowers and lenders – which is widely recognised as another potential source of market failure. Nobel laureate Joe Stiglitz has a famous paper about this:
http://mcb.unlp.googlepages.com/StiglitzWeiss1981.pdf

Some make much of the issue of council housing in Britain but recall that in the 1950s, the German government of that time decided to leave the massive problem of housing reconstruction after WW2 to the private sector. The downstream outcome, when I last checked the figures a few years back, was that the majority of households in Germany were still living in rented housing, unlike Britain where 70+% of households live in owner-occupied housing. There was no house-price bubble in Germany recently.

For good analytical commentary about house prices, see the blog of Stephanie Flanders, the BBC’s economics editor:

“The average price of a house in the UK is now the same as it was a year ago – or so says the Nationwide. But even estate agents are wary of calling the turn of the cycle. And for good reason.

“Of course, prices are still lower than they were – on average, prices in the Nationwide’s index have fallen 13.5% since their peak in October 2007. But if you’d wagered a year ago – when the world was ending in the financial markets – that house prices were going to stabilise about six months later and be back to the same level within a year, you would have found plenty of people happy to be on the other side of your bet. . . ”
http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/

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As I said, risk and investment are inherent in a capitalist system. And I think you will find that most people who purchased houses in the 70s and 80s did so because it was a cultural/social imperitive. It is only recently that we have seen the rise of individuals buying houses for economic incentives (other than commercial property developers and builders) Most people viewed houses as ‘homes’ and the real economic impertive was that there would be no rent to pay when they retired. or it gave them more choice. Those who inheritted ;property tended to purchase larger homes, but it still did not represent a commercial decision.
You are quite right about Germany, several years ago I was asked to find temporary rented accomodation for several German engineers, they were appalled at the cost of housing and the massive increase in property prices from purchase to re-sale. As you point-out, most Germans tend to rent their homes and if they buy. the re-sale price tended to be the same as the original purchase price, even after many years. This pre-occupation with house ownership within the UK, also a fairly recent phenomenon, has not done the UK economy any long-term favours

#42: “As I said, risk and investment are inherent in a capitalist system”

The implict suggestion that risks are somehow avoided in some other unspecified systems – like “socialism” – is laughable, especially given the collapse of the socialist economies in eastern Europe in 1989. The centrally planned command economies, like the Soviet Union – famously with bonus payments paid to socialist enterprises which over-fulfilled planning targets – were notoriously inefficient with recurring product shortages alongside persistent surpluses of other products. Try the late Alec Nove on: The Soviet Economy.

What matters is not the prevalence of risk and uncertainty but how risk and uncertainty are accommodated in financial markets and by enterprises.

On the crucial differences between “risk” and “uncertainty”, see: Frank Knight: Risk, Uncertainty and Profit (1921)
http://oll.libertyfund.org/index.php?option=com_staticxt&staticfile=show.php%3Ftitle=306&Itemid=27

On the question as to why we observe firms, within which markets are subordinated to a hierarchy of managerial decisions, see Ronald Coase on: The Nature of the Firm (1937):
http://www.sonoma.edu/users/e/eyler/426/coase1.pdf

This week’s The Economist has a longish special report on the world economy here:
http://www.economist.com/specialreports/displaystory.cfm?story_id=14530093

It’s also worth knowing about the latest IMF World Economic Outlook in October 2009:
https://www.imf.org/external/pubs/ft/weo/2009/02/index.htm

One incidental but important value of these reports is that they have a potentially crucial public function in exposing lying by politicians.

Philip Hammond, the shadow secretary to the Treasury, has been going around claiming the recession in Britain is all due to Gordon Brown – which neatly fits a repeating media narrative on why Labour needs to dump Brown as leader.

Curious then about the recessions in all those other economies in Europe, North America and Japan, several of which have experienced greater hits on their national GDP than Britain has.

Btw in previous message #40: “Germany” should have read: “West Germany”.

Latest news on Friday:

“Britain was served notice by the International Monetary Fund today that reforms to healthcare and pensions will be needed to repair the long-term damage to public finances caused by the global recession.”
http://www.guardian.co.uk/politics/2009/oct/01/nhs-debt-imf-britain

Doubtless, this will be welcome news for the public spending cutters. How about leaving this to a bit of local initiative and enterprise to introduce local terminator stations to cut back on the numbers of the vulnerable and chronically sick pensioners?

You seem to be talking to yourself…

“You seem to be talking to yourself…”

Perhaps – although some readers may appreciate the links without wishing to contribute.

The substantive diagnostic and policy issues at stake in the financial crisis and the ensuing recession are anything but technically simple and straight forward.

I follow the news closely in any event. The motivation for the special interest is participation in a lively Current Affairs discussion group of the local branch of University of the Third Age (U3A):
http://www.u3a.org.uk/

The discussion group – which has been meeting twice monthly for the last seven years (!) – includes retired professionals from diverse backgrounds, such as a charge nurse, accountants, professional social workers, a business consultant, a graduate from the Sorbonne, the widow of the engineer who used to run that retired powerstation near Chelsea Bridge before it closed and so on.

Anyway, I’ve been reading and following Paul Krugman for years.

Whatever else, for any other ancient readers here, I thoroughly commend joining your local U3A branch.

Why is it that when capitalist systems are criticized the automatic counter-argument is to quote the USSR? Many people (including myself) perceive the Soviet economic system as state capitalism, indeed so did the Soviets. Apparantly there are only three types of economic system – free-market, state capitalism and state interventionism within capitalism (Keynes I suppose)
Free market appears to be based on a late 18th century book (industrialization hadn’t completed at that stage) and mass production was, but a twinkle, in the eye of Ford’s great grandfather.
There are other ways that the economy could be organized, eg. Owen and Morris were proponents of co-operatives, Gorz’s model, which I believe will be eventually adopted’ is never spoken of.
Yes, I should have said West Germany,

“Why is it that when capitalist systems are criticized the automatic counter-argument is to quote the USSR?”

Because the Soviet Union loudly proclaimed itself, in the Soviet constitution, for example, to have a socialist economy that was supposed to be progressing towards communism, all according to the prescription in Lenin: The State and the Revolution. Marx was entirely obscure as to how a socialist or communist society was supposed to function.

I don’t know what “state capitalism” is supposed to be and suspect that it is just a lump of obfuscating jargon intended to camouflage the unpleasant-to-horrific reality of the regimes which have claimed to be applying socialist principles.

I’ve been posting for years – yes, years – that the only really free markets are to be found in the middle of the Sahara Desert or a tropical jungle where the writ of law doesn’t run. The fact is that observed functioning markets depend on de facto infrastructures of laws and regulations and law enforcement agencies to enforce property rights, to deter fraud and corruption and the rest. Risk premiums in transactions tend to soar in economies with deficient, erratic, or corrupt legal systems. The sensible debate is not about whether we should have Free Markets but about which of the many varieties of infrastructures of laws and regulations are most conducive in practice to growth in economic prosperity.

As you hint now, there are, in fact, many varieties of capitalism – in addition to many different varieties of governance. The ideologies of the “social market economies” of countries like Germany are distinctively different from both the Anglo-Saxon model, which is currently disgraced, and the so-called Nordic model, which includes the Netherlands.

Try: Globalisation and the reform of the European social models, prepared by André Sapir for the think-tank Bruegel and presented at the ECOFIN Informal Meeting in Manchester on 9 September 2005, which argued that there is not one European social model, but rather four – the Nordic, Anglo-Saxon, Mediterranean and the Continental:

• The Nordic model (welfare state, high level of social protection, high level of taxation, extensive intervention in the labour market, mostly in the form of job-seeking incentives)
• The Anglo-Saxon system (more limited collective provision of social protection merely to cushion the impact of events that would lead to poverty)
• The continental model (provision of social assistance through public insurance-based systems; limited role of the market in the provision of social assistance)
• The Mediterranean social welfare system (high legal employment protection; lower levels of unemployment benefits; spending concentrated on pensions)

http://www.euractiv.com/Article?tcmuri=tcm:29-146338-16&type=News

On Sapir’s assessment, only the Anglo-Saxon and Nordic models are sustainable over the longer term.

An updated memorandum relating Andre Sapir’s original paper on: Globalisation and the Reform of European Social Models (November 2005), is here:
http://www.bruegel.org/Public/fileDownload.php?target=/Files/media/PDF/Publications/Policy%20Briefs/PB200501_SocialModels.pdf

Note: the Nordic economies function reasonably well despite relatively high tax burdens and generous welfare benefits but that might be because each has a relatively small population so it easier to reach a national consensus on preferred national policy options.

Really worried about Gordon Brown and Britain’s budget deficit?

Try Sam Brittan on: A cool look at the current deficit hysteria
http://www.ft.com/cms/s/0/4679c2be-aed0-11de-96d7-00144feabdc0.html?nclick_check=1

Leon Brittan, a cabinet minister in one of Mrs Thatcher’s governments and subsequently a member of the EU Commission, is Sam Brittan’s younger brother.

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Yes I am aware that free-markets require some kind of state intervention in order for them to function.
Are the examples you quote capitalist but with different forms of state interventions? – I work quite long shifts and do not have time to read your list.
The state capitalism within the USSR was copied from the UK and Germany when those states controlled the economy in war-time, hence Lenin termed the Soviet system,war communism. The plan was that it would eventually become a socialist system when the chaos was sorted out, history tells us that it never managed to evolve to that stage. Most socialists argue that it is because the socialist stage had to emerge from mature capitalism (Marx), and clearly 1917 Russia was not even remotely capitalist. A Marxist, socialist system has never existed.
As I have said before, I totally agree with Tony Benn, – you cannot reduce the inequalities within capitalism by state intervention, and I think even most right-wing thinkers would agree.