House prices in the UK and Sweden.

To judge from this article, there is no one obvious explanation for house price increases in the UK over the last twenty years. The chart was copied from that article.

While in Sweden, house price increases look roughly similar. The chart below was copied from this article.

What do the UK and Sweden have in common that explains the price increase? Darned if I know.

William Black says banks will game capital requirements.

William Black is a associate Professor of Law and Economics at the University of Missouri-Kansas City. He deserves a Nobel Prize for his anti-fraud investigations and crusades. However, I don’t agree with his claim that imposing decent capital requirements won’t work because banks will “game” the system. Reasons are as follows.

If banks were required to have about 20% of their liabilities made up of equity as distinct from deposits or bonds (as advocated by Martin Wolf, chief economics correspondent of the Financial Times) that would make it near impossible for a bank to fail.

Bill Black’s answer will be: “but banks will game that”.

My answer to Bill is: “OK just make the ratio 100% rather than 20%: would-be fraudsters will have a hell of job gaming THAT.”

You might think the 100% ratio is ridiculous. But as Messers Miller and Modigliani pointed out, banks’ funding costs are not increased when capital requirements are increased.

Second, there are numerous advocates of the 100% idea. For example there is John Cochrane.

Plus there’s Laurence Kotlikoff and Matthew Kline.

In short, Black's "game" point is another argument for the 100% figure.

Vince Cable’s brain is controlled by banksters.

Politicians are suckers. Most of them are so dumb you don’t even need to bribe them in order to get them to do what you want, though a few million pounds fed into Tory and Labour Party coffers, possibly in exchange for peerages, certainly makes politicians see “sense” (sense as viewed by banksters).

Anyway, Vince Cable, the UK’s “business secretary” is keen to let banks get away with dangerous capital ratios so as to make it easy for banks to lend (i.e. increase the amount of debt). As Anad Admati, professor of economics at Stanford University put it:

“…Vince Cable, the United Kingdom’s business secretary, recently accused Bank of England regulators – whom he called “capital Taliban” – of holding back the country’s economic recovery by imposing excessive burdens on banks. Cable appears to believe the banks’ lobbyists when they claim that lending and growth would suffer if banks were forced to “hold more capital.”

The point that Vince Cable clearly doesn’t get is that while it is certainly possible to implement stimulus by having private banks go on a lending spree (house price bubble anyone?), there is a much better way of effecting stimulus, and that’s simply to feed money into the pockets of ordinary households and/or increase public spending.

Moreover, increased spending by households and/or the public sector increases demand for the output of most firms, and where appropriate, those firms will AUTOMATICALLY invest more (either funded by borrowing or retained earnings or by issuing more equity). Those firms do not need ignorant Westminster politicians inducing them to invest or telling them when to invest. Nor do they need the latter ignoramuses telling them whether to fund investment from retained earnings, debt or new equity.

Simon Jenkins has for years been poking fun at the pro-bankster and anti-household policies pursed by Vince Cable and other Westminister politicians. E.g. see here. See also his paragraph starting “Britain’s only counter-recessionary policy…” here. Or see paragraph starting “Britain has less excuse…” here.

Bank losses cause chaos, while far larger losses by other entities cause no problems!!!!

The total losses made by ten US banks that made the biggest losses which sparked off the credit crunch lost a total of £127bn. That caused chaos.

In contrast, the total lost when the tech bubble burst was $6.8trillion:

FIFTY TIMES AS MUCH.

Yet the tech bubble burst didn’t cause anywhere near the same disruption as the above bank losses. In short, trillions wiped off equity values does not cause much of an upset. (Incidentally I got those figures from Stumbling and Mumbling, and the figures seem to be about right to judge from other sources.)

That supports the claim made by numerous people and groups, namely that wherever a depositor or other bank creditor wants their bank to lend on or invest their money, the depositor should carry the risk involved in that investment. That way, those depositors in effect become shareholders or equity holders.

The people and groups advocating the latter policy are several. E.g. Laurence Kotlikoff, John Cochrane, Positive Money, New Economics Foundation, Prof. Richard Werner, etc. For the last three, see here.

Or in the words of Mervyn King, "...we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis. Equity markets provide a natural safety valve."

That just leaves the question as to whether we impose capital buffers which make bank insolvency almost impossible, (perhaps around 20% of total bank liabilities) or whether we force ALL BANK CREDITORS to be loss absorbers. The arguments for the latter policy are as follows (for the benefit of the 0.1% of the population who appreciate logic).

No matter how large capital buffers are, if they are not 100%, there is a finite chance of the bank failing.

The taxpayer can cover that risk, but that amounts to a subsidy of banks, and subsidies misallocate resources.

Alternatively, non-risk bearing depositors can be insured, with depositors paying the premium, but the insurance premium will equal the additional interest that such depositors get from placing their money in a commercial bank as compared to something 100% safe, like monetary base or short term government debt. I set out the reasons for the latter point here.

Original ideas, selling your soul and intellectual prostitution.

This is the abstract from a paper entitled “Publishing as prostitution? – Choosing between one’s own ideas and academic success” by Bruno Frey.

"Survival in academia depends on publications in refereed journals. Authors only get their papers accepted if they intellectually prostitute themselves by slavishly following the demands made by anonymous referees who have no property rights to the journals they advise. Intellectual prostitution is neither beneficial to suppliers nor consumers. But it is avoidable. The editor (with property rights to the journal) should make the basic decision of whether a paper is worth publishing or not. The referees should only offer suggestions for improvement. The author may disregard this advice. This reduces intellectual prostitution and produces more original publications." 

And the first sentence reads:

“When writing this paper, I never expected that it would be published in a (refereed) economics journal because it would not be able to pass the refereeing process…..”

I’m not surprised you didn’t expect it to be published, mate. But good on yer, anyway.

And now a quote from another paper: “How to Build an Economic Model in Your Spare Time.” By Hal R. Varian.

"Most graduate students are convinced that the way you get ideas is to read journal articles. But in my experience journals really aren't a very good source of original ideas……   My suggestion is rather different: I think that you should look for your ideas outside  the academic journals in newspapers, in magazines, in conversations, and in TV and  radio programs. When you read the newspaper, look for the articles about economics, and then look at the ones that aren't about economics, because lots of the time they end up being about economics too.”     

Funding political parties.

This article published by Channel 4 has some revealing details on the murky sources of funding for Britain’s main political parties. The stench of corruption is of course overpowering.

The article is understandably cynical, but not cynical enough.

For example there is no mention of the £18m of taxpayers’ money given by the last Labour government to sundry trade unions ostensibly for “training”, with those same unions subsequently “donating” £10m to the Labour Party.

So what the article calls “trade union donations” to the Labour Party should perhaps be re-named “money stolen from taxpayers”.

Nor is there any mention of taxpayers’ money being given to organisations that can be relied on to back one’s own party or oppose political parties one is opposed to. One small example of this is the taxpayer funded organisation “Hope not Hate” which campaigns against far right parties.

The article does mention the sale of peerages – sorry, I meant “the award of peerages to those who, coincidentally, have given large sums to one of the main political parties”.

But there was also no mention of the £2.4m that the Lib Dems got from a convicted fraudster, Michael Brown.

So next time you see a Lib Dem politician expressing views on crime, you may be tempted to reach for the puke bucket. Sorry to spoil what might otherwise have been a pleasant evening’s television viewing for you.