openDemocracy

Here's a fascinating chart of spam activity on oD's forums for the past 2 months:

So, has Mollom beaten the site spamsters? It certainly looks as if they eventually learn that their spam messages are getting blocked ... Now we just need Mollom to implement this for Drupal 4.7 so we can apply to the main site and I'll be singing the praises of Mollom to all who care to listen.

Tony Curzon Price

The Bank of England has just come out with its quarterly inflation report.

The big headline is that recession for the next 12-18 months is almost certain.

A comparison with August's forecast is interesting:

Although the shape of the downturn is broadly similar, the current forecast has essentially shifted down between 3/4% and 1.5%. Note also that the BoE has been consistently optimistic in its forecasts---if you look at the balck "ONS Data" line, that is how things actually turned out. You might have thought that the statisticians at the BoE might have learned by now to take the pinch of salt into their own forecasts by now. (Actually, the optimism seems even worse than the graphic suggests. The Quarter 3 out-turn growth was a whisker above 0%, which is right on the outside edge of the outside August probability band. However, the BoE has decided to represent this graphically in the November chart as being on the inside edge of the outside band. (Ah! The rhetoric of charts!)

Anyway ... what we now know is that the BoE thinks we have a nastier and sharper depression coming than it thought in August. It is interesting -- particularly so given the election cycle that sees a general election by May 2010 -- to see what kind of shape they predict for the end of the depression.

Their central estimate is that things are getting better very fast by May 2010, with growth around 2% and the rate of change of growth very rapid --- things have been pretty bad just 6 months earlier. Sounds good for Brown. Indeed, one assumes that an independent bank must play the election calendar into its scenario-building, and must be assuming heavy government action in its central case.

In this respect, it is interesting to compare the August and November inflation forecasts. This is the current forecast of inflation:

And this was the August forecast:

In August, the rate of price growth rate was expected to fall for the whole 3 year forecasting period. Now, inflation starts to rise again (although from a lower base) already by mid-2010. This seems clearly compatible with a change in the basic assumptions about increased government borrwing and a lower sterling exchange rate.

Based on these BoE forecasts, Brown's window for an election in 2010 looks very tight---when incomes have started growing again and before inflation has shown the economy to come out of the depression in a pretty unproductive state.

And remember the BoE pinch of salt -- that will make the window even tighter.

Tony Curzon Price

The Group of 20 meeting in Washington this week-end will do little in the way of solving the financial crisis, let alone designing a new World Economic Order (WEO). The Green New Deal (GND) hopefuls would like to see  environmental concerns built into the fabric of the WEO --- if banks can have reserve requirements, then why not carbon per dollar loan limits too? --- or at least make the idea of Keynesian reflation focused on programs for renewable energy. Whatever the fundamental problems with the suggestion (see my response here), the two practical problems for the GNDers are firstly that Obama will not be present at the Washington meeting and secondly that there is a remarkable lack of support for an international-level tie of the financial and green agendas in the economics community. The creative and very timely Vox ebook edited by Barry Eichengreen and Richard Baldwin has many radical suggestions, but not a mention of any GND ideas.

This may be disappointing for all of us concerned with the environment. But it seems right. We can still avoid depression, and we should focus our attention on that. The unforeseen consequences of the crash of 1929 were horrific, as could be the consequences of depression over the next decade (Simon Maxwell and Dirk Messner in oD are very good on this). This is especially true for emerging nations and powers whose social stabiltiy and geopolitical good behaviour requires delivery of improving economic conditions.

Maxwell and Messner get the balance just right, I think -- the November 30th Copenhagen climate change summit must keep the environmental agenda moving with an eye firmly fixed on the middle-distance. The G20 summit must deal with the immediate and dangerously close.

Tom Griffin

Mike Small (Fife, Bella Caledonia): What's a more motivating force, fear or hope? Across the pond Obama has inspired a generation, re-inspired another and put 9 million people on the electoral register. Here a halving of the Labour Partys majority has been represented as a historic victory. Here it was politics as usual, and bitter negative politics at that. Labour have successfuly played on peoples fears of economic collapse. But can Britain be held together by fear? Where is a credible positive agenda emerging from London? It's not going to be the Olympics or the sight of a UK football team emerging at Hampden comprising 11 Englishmen.

There is no doubt that Labour ran a very successful campaign, but that's not why they won. The SNP ran a great campaign but chose a candidate that made them the incumbent (Peter Grant is the Head of the SNP Council), but that's not why they lost.

There are three reasons why Labour won.
 Read the rest of this post...

Ben Folley

Ben Folley (London, Compass): The future of the US Missile Defence system is now up for discussion following the election of Barack Obama as US President and two weekends in a row where the Czech Social Democrats have won enormous electoral victories over the governing conservatives, just as the Czech Chamber of Deputies prepares to discuss and vote on the installation of a US missile defence radar station.

Obama has previously suggested he is not willing to provide endless funds to a system for which there is little proof of operational success.

Within that context, and the success of the Czech Social Democrats campaigning on an explicit anti-missile defence agenda, the broad statement of over 50 Labour MPs released yesterday, welcoming their sister party's opposition and calling on the government here to allow an open debate on British involvement in the system, is particularly welcome. Their calls are boosted by a new opinion poll showing the British public believe US Missile Defence installations increase threats to national security.
 Read the rest of this post...

Tony Curzon Price

The European Investment Bank's deal, announced yesterday, whereby it made €30bn available for lending to the Europe's small and medium sized companies is interesting for the model of emergency banking that it suggests and pilots.

Westminster is delegating two ways: first, the administration of these loans is going to the big clearing banks, who know the businesses in question, have their credit records and bank movements; second the source of the funds is coming from a European institution that is used to spending and accounting for public money.

So when we've had enough investing in propping up bad banks, here is what we do: we massively increase the capital available to the EIB---as taxpayers, we put our money there rather than in idle accounts with the banks through their equity account---and we employ the bankrupt bad banks to be our agents in lending the money.

We'll need to design the incentive contract with the bad banks ... but with financial sector employment falling fast, that negotiation shouldn't be too tough on us. The banks can get some variable amount depending on a host of effectiveness indicators: volume lent, default rates, GDP growth ... with a bonus "kicker" in the contract on average median incomes and carbon emmissions for the whole economy over the next 20 years.

Tony Curzon Price

I have just published Mary Kaldor's latest column, which I think makes a really valuable contribution to our view of the financial crisis. The economics commentary, however much it professes to have learnt its new growth theory from Schumpeter, does not think about the actual characteristics of the technology development phases we are in or relate this to the current crisis.

MK's view (which borrows much from Carlota Perez) is that this crisis should be understood in relation to the new technologies as the 1930s crisis was understood in relation to Fordism and mass consumerism. MK sees deregulation and liberalism not just as the advance or retreatof some ideology, but rather as a phase which is suited to the early development of a technological/economic/institutional epoch --- a phase which finds justifications to shake off institutions from a prior age. But initial investments and returns are not sustained, and the financial sector becomes "creative" in the search for the return it has started to consider to be rightfully its own. This is what happened after the dot com bust and the mass move of finance into the extraordinarily unexciting business of (over)-financing home building.

One of the nice things about this way of looking at the crisis and at economic history is that it contextualises economic ideologies and offers a creative synthesis that might take us beyond state/market arguments. It encompasses each in different phases of the epochs of development.It also allows us to look at the 1930s asking not so much about the lessons in terms of technicalities of money supply management, but more in terms of the political and institutional shifts that took the world economy beyond 1930. Can we hope that creative destruction might be a little less destructive this time around?

I'd still like to see the analysis become more specific. From the vantage point of the early 1930s, could one see that Fordism would require/engender national welfarism, American economic hegemony, etc? And if we can, what does the nature of new information and energy technologies imply is needed for the next epoch? World-wide welfarism? Democracy support? A new finance infrastructure, including learning from micro-finance? Anti-consumerist values ...

Is there a Schumpeterian who would like to stick their neck out with a forecast? 

Tony Curzon Price

George Osborne gave the Today program an opportunity to demonstrate the great emptiness of the media-political conversation this morning.

Paraphrasing, here was the interview:

SM (interviewer): "What is wrong with Darling's plan?"

GO: "You can't spend your way out of a recession with a Keynesian splurge on big projects"

SM: "What would you do diffferently?"

GO: "Freeze council tax, give small businesses help and let the bank of England cut interest rates, putting money in people's pockets."

SM did not then ask why this wasn't itself Keynesian splurging. There are three points here:

1. what should be the level of fiscal largesse?

2. is it better to spend this mainly on public investment or to delegate that spending to households and small businesses?

3. who eventually pays for fiscal largesse?

GO pretended to answer "1" by answering "2", and Today let him get away with it. "3" is a very interesting question which GO proposed one answer to that was never challenged by SM. The point about "who pays?" is closely linked to Ricardo's equivalence, the argument that claims that there is no difference between financing government spending through borrowing or through the raising of taxes. Public borrowing has to be paid back, eventually through higher taxes. Taxpayers, if they understand this, will know their lifetime consumption possibility has fallen by exactly the amount of the public spending, so who cares if it is financed through taxes now or higher taxes later (higher in order to cover interest payments)?

The argument is fine in a classical regime - as long as we do not currently face the risk of a Keynesian recession. The point of a Keynesian recession is that capital markets do not work; hence the equivalence argument based on households comparing present and future consumption is simply not applicable. The only question that Today's interview should have drilled towards was this: does GO think there is no risk here (there is certainly a case to be made -- Tim Congdon has made it recently -- but is GO really taking the political risk of supporting this view)? Or does he deny Keynesian efficacy in such an eventuality? 

One day, Today will ask the hard questions.

 

Tony Curzon Price

The BoE quarterly report has a table (reproduced below) of all the measures that have been taken by central banks world-wide to get banks lending again. The fact that, after all we are doing, they still are keeping all the cash they can get their hands on for themselves, shows that their difficulties are much worse than these solutions envisaged. I have written several times about the Credit Default Swap market, and here is a really insightful article (hat tip Eurointelligence) describing exaclty how the "CDS overhang" (or should that be hang-over?) is causing a sort of financial black hole into which any cash that comes into the orbit of a bank gets whooshed.

What the article makes clear is that taxpayer funds and guarantees -- worldwide amounting about £4.5 trillion -- do not cover the losses that banks are exposed to on their unregulated CDS dealings. A CDS is just an insurance contract: a bank agrees to pay out some stated amount if some specified  loan (bond)  goes bad. Banks, hedge funds and insurance companies found they could sell thisinsurance in large quatities -- far larger than the value of the loans being insured. In the casino on which the sun never set --- our modern financial markets --- there was a market in bets on other people's ability to pay, whether you had a stake in the game or not. There are $50 trillion of outstanding CDS contracts. It is fear of these liabilities that is making banks cash-hoarders.

But liabilities may well be capped below the $50 trillion number. When Lehman's was bankrupted, institutions that had insured Lehman bonds had to find cash to pay out on the insurance. CDS's are non-regulated, non-standardised, 'over the counter' (OTC) products and come with a wide variety of terms. According to the article, some of the CDS's required that the insured party deliver the underlying debt in order to get paid. This limits the size of the CDS payout overhang. Unsurprisingly, insurers have been asking for delivery of Lehman debt before paying out. It will be interesting to see if the price of bankrupted Lehman bonds starts to move up. 

 

 

 

Enclose notes for the Blue Mugge pub discussion next Tue 4 Nov.   Roger Elkin has prepared these notes and will lead/chair the discussion.

A reminder of programme change: on Tue 25th Nov we will be debating and discussing  The Crash, 2008.

Also:      Friday 7th November   10.30 - 3.30pm
The WEA has organised:
Celebrating Tawney in 2008.
The 100th anniversary of Tawney's first University/WEA Tutorial Class in Longton.
The speakers are acknowledge experts on the subject.
Venue:  Potteries Museum and Art Gallery,  Hanley

 

Open Circle or Odd Group

Tuesday   4th November 08 at The Blue Mugge Pub, Leek

Some Poetry Definitions

1     S.T.Coleridge:         Poetry; the best words in the best order.
2    W.B. Yeats:        Poetry is truth seen with passion.
3.    William Wordsworth:     Poetry is the spontaneous overflow of powerful feelings: it takes its origin from emotion recollected in tranquillity.
4.    T.S. Eliot:        It is neither emotion, nor recollection, nor, without distortion of meaning, tranquillity. It is a concentration, and a new thing resulting from the concentration, of a very great number of experiences… a concentration which does not happen consciously… Poetry is not a turning loose from emotion, but an escape from emotion; it is not the expression of personality, but an escape from personality.

4Which of the above do you agree with?
5Is there anything that you would add to help to define what you think poetry is… and should do?
6What makes a “good” poem?           
7What features make the following poem “good”?

 

Mushrooms                         Sylvia Plath

Overnight, very
Whitely, discreetly,
Very quietly

Our toes, our noses
Take hold on the loam,
Acquire the air.

Nobody sees us,
Stops us, betrays us;
The small grains make room.

Soft fists insist on
Heaving the needles,
The leafy bedding,

Even the paving.
Our hammers, our rams,
Earless and eyeless,

Perfectly voiceless,
Widen the crannies,
Shoulder through holes. We

Diet on water,
On crumbs of shadow,
Bland-mannered, asking

Little or nothing.
So many of us!
So many of us!

We are shelves, we are
Tables, we are meek,
We are edible,

Nudgers and shovers
In spite of ourselves.
Our kind multiplies:

We shall by morning
Inherit the earth.
Our foot’s in the door.                                       13th November 1959

 

Tony Curzon Price

Iceland's chill has led Bjork to tune in to her inner philanthrocapitalist. (Hat Tip CalendarGirl ). In this interview, Bjork describes her reaction to Iceland's economic woes and explains what she is actually doing to build a new economy based on green localist principles. Admirable for its pragmatism, is it a model for all of us?

Bjork is looking to encourage MBA students, geeks and rural workers in Iceland to produce business plans that provide good incomes in the knowledge and eco-tourism economies in order to avoid building more  aluminium smelting plants --- that's what Iceland resorts to when it is in a fix, exploiting its huge hydro potential.

The dilemma faced by Iceland today---pay bills by inviting  ALCOA (The Aluminium Company of America, whose CEO was Donald Rumsfeld) to build more dirty business, or feel financially poorer but preserve the environment---is one we will all face soon. Is environmentalism a luxury?

Bjork wants to attack the problem by offering an alternative to ALCOA, a vision of "a new, independent, environmentally friendly Icelandic economy". She is building -- or thinking of building, I am not sure which -- an incubator for these new businesses. Sounds very attractive:

It's one big institution where everybody who has a good idea goes and they all work together and help each other and then companies start to come out of there. But it takes like eight years. For me, it's sort of like a record company. It's like an indie label in a way. It's grassroots, where all these people can come and feed off of each other and get support. Where if one person gets a good idea, the other five will help them..

But there are pieces of the idyl that are much less attractive:

•  [We want to] "build this purely Icelandic thing up with Icelandic money, Icelandic companies."
• "We should make companies here made of Icelanders, both working class and the brainpower, discover new things that stay in the country."
• "Why not have the Icelandic people who are educated in high-tech and work already in those factories in the higher paid jobs, why not let them build little companies who are totally Icelandic with the knowledge they have? Then they get the money and it stays in the country."

There are hints of looking to use the incubator and environmentalism to keep the nasty world out in all these identitarian references. Why can't we have what David Hayes and Andrew Dobson have characterised as a Cosmopolitan Localism -- a localism and environmentalism that does not see the world as a threat, and that has the confidence to live its identities in the open? Iceland has just been slapped for its Viking raider hubris of the past 10 years. So a desire to retreat into autarchy is understandable. But it too should be resisted. It is just as much of a perversion as the raider mentality.

(Thanks to  verapalsdotir for the photo)

 

Tony Curzon Price

The Bank of England's report on the state of finance has about 3 worrying graphs per page.

Here's just one example - the amount that UK banks will need tofind next year to pay back loans that are coming due.

 

Any wonder the banks are hooarding all that taxpayer investment they are getting and not lending on? And if you were asked to invest in a business that you knew had to stump up these sorts of sums next year, would you worry that your investment was just going to stright into the pocket of a creditor whose lending terms are tougher than your ownership terms?

I'm all for the State being the bank of last resort, but I don't have any taste for the taxpayer being the dupe of last resort. Why don't we let these banks go under while putting in place an emergency financial system. I am glad to see that Walter Munchau has started to suggest this option.

Open Circle, ODD Group

A brief reminder that the theme tomorrow evening, Tue 28 Oct, will be 'Consciousness 2'.
I've had a brief chat with Bob on the phone, who will again chair the session, and I enclose a few additional notes which may be used during the evening.

==

-1Consciousness

Additional notes for Tue 28th Oct.

From The Conscious Brain  by Steven Rose - former Professor of Biology, the OU.
(Penguin Books,  Revised Edn,  1976).  

“Consciousness means many things, sometimes simultaneously, often contradictorily.
Thus, it may simply mean a state different from being asleep or in a coma;  the reverse of being ‘unconscious’.  It may be used to relate to the private world of the mind in contrast with a presumed ‘public’ world of observed behaviour.  People speak of ‘altered states of consciousness’ which may be induced by drugs, often implying by this altered awareness or altered perception of the world around.  
Consciousness may have a Freudian meaning in which some human acts, or the motivations for them, occur at a level out of reach of the thinking ‘conscious’ mind with its overt rationalisations,  buried in some relatively inaccessible ‘subconscious’.   Finally, there is the Marxist sense of consciousness.  
The difference between these uses of the term is that whilst most of the earlier ones are essentially static definitions, of consciousness as a ’state’ of being, in the Marxist sense consciousness is a dynamic force which emerges in interaction between the individual and his or her environment….

Consciousness in my sense of the term, is a continuously unrolling, continuously developing activity of minds/brains in interaction with their environment, modified, either temporarily or permanently, by changing circumstances.”

 

Tony Curzon Price

Here is Jeff Jarvis in the Guardian today:

"I want a page, a site, a something that is created, curated, edited and discussed. It will include articles. But it's also a blog that treats a topic as an ongoing and cumulative process of learning, digging, correcting, asking, answering. It's a wiki that keeps a snapshot of the latest knowledge and background. It's an aggregator that provides curated and annotated links to experts, coverage from elsewhere, a mix of opinion and source material. Finally, it's a discussion that doesn't just blather but tries to add value. It's collaborative and distributed and open but organised.

Think of it as being inside a beat reporter's head, while also sitting at a table with all the experts who inform that reporter. Everyone there can hear and answer questions asked from the rest of the room - and in front of them all are links to more and ever-better information.

It's not an article, a story, a section, a bureau, a paper, a show, a search engine. It's something new. What do we call it? The topic table? The beat bliki (ouch)? The news brain? I don't know. We'll know what to call it when we see it."

 

Jeff talks about the unsatisfactory atomisation that blogism has brought, and I have tried to express this in my piece on "The Blind Newsmaker". There is a sort of fallacy of decomposition that says that the web can recombine all the bits of journalism to create a satsifactory whole. Blogism does not produce the right atoms for that, because how you create determines what you create.

My view is that commissioning is the ingredient that has too often been dropped from the auto-publish web. In his article, Jeff is asking for coherence, for meaning, for a discursive arrival at partial understandings. The editorial conversations that lead to commissioning are at the heart of the creation of temorary moments of understanding.

openDemocracy's "open source model for news analysis"  is trying to work towards Jarvis' ideal newsroom.

 

Tony Curzon Price

The Sunday Telegraph publishes a letter from the rump monetarists---many familiar names from the economic crusades of the 1980's.
It is interesting to see how those old arguments play today.

Take this chestnut:
"It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession. Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources."

This is true, of course, in some absolute sense of "know". However, as these very same economists have been quick to point out whenever it comes to governments dealing with clear errors of markets, for example with environment or anti-competition issues, the ideal does not make for a good benchmark. Just a market failure should be remedied if imperfect government can do better, so imperfect governments should be compared to actual markets, not imagined ones.

Look at the argument again: the financial system, which brought us massive over-investment in technology, in housing, in commodities, in conceptual art ... this is the process that should be trusted with avoiding "serious resource misallocations"?
The financial crisis has brought the government back into policy not so much because it has any answers, but because the market has demonstrated so unequivocally that it does not.

Damian O'Loan

The weekend reports of Dominique Strauss-Kahn's dangerous liaison have set tongues wagging worldwide, at a time when the IMF's Managing Director was positioning the organisation to implement a new global, financial regulation system. Neither favourable nor disfavourable behaviour in Mrs Piroska Nagy's regard has been established, and the investigation had been discretely ongoing since August, but in light of the fate of Paul Wolfowitz, his very future is clearly at stake.

It would be interesting, then, to examine who may stand to benefit from Mr Strauss-Kahn's aventure d'un soir. The investigation was launched in response to governing board member A Shakour Salaan's request. The Wall St Journal, who broke the story, claiming this was done with "advice from the representatives of Russia and the U.S." And this does seem probable. The Times speaks of a "dismayed President Sarkozy." This rather less so.

Clearly, if the IMF was to return to a role exceeding even it's former strength, as proposed in the Financial Times, there would be difficulties for those countries whose growth most depended on their financial sector and speculation. There may be effects on oil and gas prices. There would certainly be voices opposing restoring the oversight that has been carefully dismantled in the U.S., given their muzzling of government as crisis approached. Russia nominated its own candidate when Nicolas Sarkozy convinced enough leaders to make DSK Europe's, and may well seek to nominate his eventual successor. Read the rest of this post...

openDemocracy

I went to a fascinating lecture by Daniele Archibugi yesterday at Birckbeck who argues that the prospects for global democratic institutions are actually quite good. The essence of democracy, he argued, are non-violence, public control and political equality. The first is about some sphere of social change being outside the realm of might; the third is the principle that those affected by an action should have a say in the action. The second is the one where Daniele mentioned the financial "events" of the past few days---when the G7, IMF and various finance ministers have met, we have known nothing of their actual deliberations. The degree of public accountability is very tenuous. In all three cases, Daniele thinks that the international system shows signs of beign able to grow in the right direction: the strengthening of the ICC; the accountability mechanisms we do see; the growth of the EU as a systematic experiment in "accountabiltiy beyond borders".

I asked Daniele in the question session afterwards whether the hopes might be misplaced that the financial crisis would be the sort of moment to bring about pro-democratic reform at the global institutional level---after all, the muddling along of ad hoc groupings is coping (...so far...); and if they are misplaced, what sort of crisis is that will actually bring about the democratisation that he is talking about?

At first, I did not understand his response. He said: "Did you say "crisis"?" (I nod). "Which crisis? There has been no crisis." Still puzzled, he went on to clarify:  "... This is somewhere Schumpeter was right and Keynes was wrong: capitalism moves in waves of creative destruction, and the moments of destruction are necessary and part of the system. There is no system crisis here."

This is very persuasive. Schumpeterians have been in the ascendant in economics recently, with theories of growth explicitly relying on the idea that the culling of inefficient, non-innovative firms and the liberation of resources for new ones is what sets the scene for economic growth. Creative destruction and its dynamic are asumed by capitalism, and will not be the conditions that rock capitalism. For Schumpeterians, business cycles are like the evolutionary force of selection---who makes it through? Daniele was contrasting Schumpeter to Keynes who "saw nothing good in the business cycle"and hoped his general theory would help to eradicate the cycle. The Schumpeterian view is given full treatment by Edward Chancellor in the FT yesterday, where he rattles off all the recent historical examples of crisis to point to their systemic nature.

But even if Schumpeter is right about the links between creative destruction at the firm and industry levels, the business cycle,  and the "evolutionary strength" of capitalism, there still seems much to explain. Is the psychology of boom and bust created within the system---the overconfidence, the resilience to criticism, the in-group mentality that create exuberance, as much as the fear and self-loathing that perpetuate depression---or are they caused elsewhere? Despite economists' imperial urges to make everything determined within their system, I suspect the "elsewhere" is important.

Tony Curzon Price

While I am 100% with Yves Gingras that Economics should not have a Nobel, I am very pleased that Paul Krugman has been awarded the The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.

 PK has been a voice of sense on many issues, not least the Financial crisis - I have often linked to his NYT column from this blog. My personal favourite amongst his wide-ranging economics are his books and articles on Economic Geography. His "Self Organising Economy" has a particularly nice account of the forces that lead to the emergence of Edge Cities. Clear, simple and essential.

 

Tony Curzon Price

Will Hutton writes in his Observer column that "big public stakes in banks and offer guarantees to the interbank market [...] is a necessary condition for stabilisation [but] it is not sufficient."

While I agree with Will that we need to sort out the "black hole" of the Credit Default Swap insurance pyramid, I think that the time for recapitlaisation is now passed. Recapitalisation is not a necessary condition for stabilisation. The rapid creation of a new state lending bank is what is needed.

Recapitalisation might once have worked: financial pyramids are a confidence trick, and a state recapitalisation of the order of a few percentage points of GDP might have allowed a gradual, orderly wind-down of the massive liabilities. But the kind of confidence that would allow a gradual, muddle-through solution of the sort that happened in the Latin American debt crisis of the 1980s is simply no longer there. Barclays and RBS alone are the ultimate insurers against default of contracts worth more than the annual income of the UK. These are the sorts of contracts which, in an auction on Friday of Lehman Brother's assets, went for less than one tenth of their face value. The trouble with nationalisation and recapitalisation is that the liabilities do not disappear. When the slate is this heavy, you need bankruptcy to wipe it clean.

The financial sector is scrabbling aorund for whatever cash it can lay its hands on because every institution is likely to find itself in the position of having to pay out on insurance contracts with other parts of the financial sector that they know they cannot currently cover. The taxpayer with our capital injectionshave become the latest source of that cash, and we will see it disappear into the black hole of CDS liabilities.

The time for confidence tricks is passed. The banks are bankrupt.Time to stop  putting in good money after bad -- it simply will not help.

Save the real economy by rapidly creating a State bank that will lend directly to business, and let the finance system diappear into the black hole that it has dug for itself.

 

 

 

 

Tony Curzon Price

 

Plan 'B"

Face up to it: the Brown re-capitalisation plan may not work. The banks have relied to a massive extent on Credit Default Swaps, a sort of insurance on lending. They have given themselves false comfort, and in some cases very real cash-flow, on an insurance pyramid that will not hold-up under even modestly higher default rates. Liabilities under these insurance contracts are vast. One hedge fund was insuring 100 times its cash base before it went under. If the banks that we are now the proud part-owners of end up being heavily exposed to these liabilities--the total CDS market is measured around $50 Trillion, almost 1000 times more than the Brown rescue--we should just cut our losses and let the banks go under.

The problem is the protection of the real economy. The Federal Reserve has shown the way here, with its direct lending to companies, started 2 days ago. We should start a new state bank, recruit bankers and accountants from the City, and get them to work on lending to the real economy. At first, they will not have the time to distinguish good and bad loans. They will have to be lax but short-termist in their lending decisions. Their task will be to rapidly and efficiently become ``relationship bankers''--understanding the underlying businesses they are lending to and setting appropriate and gradually tougher lending terms. Once financial flows to the real economy are safe, the state bank should be broken into 10 identical pieces and with 9 sold to private investors who will operate in a new regulatory regime. The tenth should remain in state hands, as a benchmark bank, a way for the state to stay close to what is happening in the markets.

It is disturbing that the Brown re-cap was hatched by the Treasury, the Bank of England and top bankers. The trouble any regulator has is that the people who best understand the business and the crisis are the people you are trying to regulate. This is the basis of every regulatory capture. You cannot trust what the knowledgeable say to you. If the liabilities of the banks start to mount, let's make sure this plan B is ready to be deployed.

 

---

Tony Curzon Price

I posted Gideon Rachman's FT column  on oD's The World link-watch page on diigo earlier today. Gideon writes:

Investment bankers, the shock- troops of the Reagan-Thatcher revolution, were allowed to bet their banks on this new market, because regulators and politicians believed so firmly in the magical and self- regulating qualities of the market.

The same process of intellectual overshoot happened with other signature ideas of the Reagan- Thatcher era: privatisation, scepticism about environmentalism and democracy promotion.

Well ... I think there is a kind of "democracy promotion" --- the kind openDemocracy stands for --- that is not neo-liberal and is in the wings, waiting for its open moment, as it were.

That apart, Gideon's judgement of ``overshoot'' is very welcome. I wrote asking him about the idea of "progress"  -- did he think that was oversold too? The pessimistic conclusion to his column, in which he saw just a batting back and forth between over-regulation and over-deregulation, suggested that he might be shorting progress too. Can we socially  learn from these crises?

 

 

Tony Curzon Price

 

The essence of the de-leveraging crisis

Paul Krugman has a simple model of the crisis that is a pretty useful tool to think about what is happening and what should be done immediately. It is not a model of why we got here, but a diagnostic tool for short term action.

First, Krugman's conclusions from the model are a) that taxpayers becoming shareholders in banks is a good next move and b) that international coordination of rescue plans is particularly important. Quoting him directly:

 

 

First, it suggests that the core problem is capital, not liquidity - or at least that you can explain much of what's going on without appealing to a breakdown of buying and selling per se. To the extent that this is true, rescue plans centered on making troubled assets liquid, like the Paulson plan passed last week, won't do the trick. Instead, what's needed is an injection of capital, which can't reverse the original shock, but can undo the financial multiplier effect of that shock.

 

Second, the international implications: to the extent that we regard falling asset prices and their consequences as a bad thing, which we obviously do right now, this analysis suggests that there are large cross-border externalities in financial rescues. Macroeconomic policy coordination never got much traction, largely because economists never could make the case that it was terribly important. Financial policy coordination, however, looks on the face of it much more important. Capital injections by U.S. fiscal authorities would help alleviate the European financial crisis, capital injections by European fiscal authorities help alleviate the U.S. financial crisis. Multilateral Man, come home - we need you!

 

On the specifics of how to re-capitalise the banks, I have to agree 100% with the basic framework proposed by Willem Buiter.

The model makes it clear why we might want to re-capitalise the banks rather than allow the de-leveraging to run its course. Ordinary savers are quite right to be wanting to reduce their holdings of risky assets--they have understood that the investments they held were much less good quality than they previously thought. The price of houses, art works and all the bubble assets must still fall a great deal. But this adjustment, which is just a welcome return to reality, is creating massive knock-on effects as the ``Highly Leveraged Institutions'' of the financial sector have to reduce their lending because the price of the assets they were using as security for the lending is (rightly) falling. This forces the financial institutions to sell assets, making the problem worse. As Krugman points out, this is exactly the way that contagion spread from the Russian to the Asia to the Brazilian crisis in 1998.

Worryingly, the model leaves open the possibility of instability. In particular, if we --- we the ordinary savers --- become extremely unwilling to hold assets with any risk at all, then the model predicts that we spiral into a very nasty loop indeed. I do not think we are there yet, but the model underlines the importance of investor psychology at this point.

A financial system based on such highly leveraged institutions is not right. But we need to wean the system from that leverage slowly, giving the real economy time to adjust, while the logic of Krugman's de-leverage model is that this is being forced on banks at lightning speed. Re-capitalising the banks is a way of breaking the cycle of de-leveraging. Krugman's international conclusion comes form the fact that the banks all hold assets from all countries, so that asset price shocks ripple through the leverage multiplier much faster than would be suggested by the extent of movements of goods and services around the world. Krugman illustrates this with a nice graph.

So the way forward is becoming clear. Put capital into the banks following the Special Resolution Regime proposal of Buiter's to stabilise the system. Once the real economy has access to the credit it needs to operate, nationalise or hyper-regulate the banks and let the real economy slowly - over five years - reduce its dependence on bank credit.

The chart shows rest-of-world assets in the United States (red) and US assets abroad (blue) as a percentage of non-US GDP. What this shows is that when US asset prices fall, foreign financial firms feel the de-leveraging squeeze; and when foreign asset prices fall, so will US financial firms.

 

Tony Curzon Price

Sounds like a firm of City lawyers -- Krugman, Blinder & Co. In fact, it is half the panel line-up on this excellent film of the Princeton Economics Department panel on the subprime crisis.(YouTube embedded below - the whole thing is about 1 hr, with the first 1/2 hour most informative, IMO).

Unfortunately, Blinder is mostly cut. Brunnermeier is fascinating on really detailed stuff---economists will never be short of clever fixes to regulation problems; Hong is really  interesting --- I want to post on his point about the psychology and sociology of systems prone to bubbles; Krugman --- well, if you've followed him in the NYT, you won't find any surprises here. 

openDemocracy

My note to Willem Buiter on his praise of the Fortis "nationalisation":

Dear Professor Buiter,
I agree that Fortis shows that the worry - expressed just today by Munchau in the FT - that Eu cannot respond in a crisis is wrong. But the outcome of the capital injection seems favourable compared to what would come out of TARP, no?

51% of old shareholdings preserved --- doesn't this show that a little more transparency to voters in the Benelux might have got them a better deal?

Taxpayers are unwilling risk capitalists here, and that should make our representatives negotiate harder for our upside, not less hard.
Best wishes,
Tony

Tony Curzon Price

My note to the FT's Martin Wolf this morning, on reading his column, which argues (quoting Churchill Winston “The United States
invariably does the right thing, after having exhausted every other
alternative.”) that the time for a bail-out is now.

Dear Martin,

I enjoyed, as ever, your column on avoiding depression. I do wonder how much time we have (our political systems have) to negotiate the deal ... Paulson tried to tell us it needed to be done over 1 week-end; 10 days later it was not passed and the consequences are still mostly confined to the financial sector. What sets the ticking clock here? Presumably, the real economy's borrowing that comes up for renewal is the biggest deadline. And is that not temporarily extendable by central banks? Indeed, the various central bank facilities are presumably doing exactly that.

Given that decisions made in crisis are highly determinant of the shape of the eventual settlement, should we not be thinking about how to extend the window for negotiation rather than implementing a solution to the crisis?

Best wishes,

Tony

openDemocracy

Here is the first draft of the bailout bill. Just 20 pages into it, but it looks as if the right terms have been put into it. Breath-holding over. The American system appears to have delivered.

Tony Curzon Price

There's a huge amount of excellent and important commentary on the financial crisis. I have collected together the RSS feeds I'm using in 4 netvibes tabs that I am skimming through to keep abreast. You'll find feeds from Krugman, Roubini, Setser, DeLong, Thoma and many others who are commenting regularly on the crisis.

If you're not a netvibes user, go to the link here. You will see tabs across the top of the screen with Economics 1 to 4 - click those for the feeds. Click on a feed to have a quick read of what it contains, or do "shift+click" on a title to open the originating article.

The professional economics blogosphere, mainly under the influence of american academics, offers a pretty complete substitute for the analysis pages of the main newspapers. There are just a few exceptions - like the FT's own economics blogs (and especially Buiter's Mavrecon). An excellent European voice comes from VoxEU, a group blog of Euroconomists.

I hope you find these feeds useful, and drop me a line (tony dot curzonprice at opendemocracy dot net) if you've got some RSS feeds or sites that you think should be added to this list for crisis-watching.

Tony Curzon Price

 

The price of mistrust

Gamekeeper Hank Paulson has asked taxpayers to put up $700bn of risk capital to spend on his erstwhile and future colleagues on Wall Street. He has given permission to his previous employer, Goldman Sachs, to become a deposit-taking institution. (I am no financial adviser, but I would caution anyone to think twice before transferring their balances to Goldman Sachs today). Are the Democrats right to be resisting the blank cheque, or are they playing loose with the world economy?

The dilemma is clear: crises require flexibility, rapid action and leadership; but the power of flexibility can be abused. Paulson, who rose to the top in the macho culture of ``take no prisoners'' Wall Street is not the man the taxpayer should trust. Worse, the Bush administration's systematic capture by energy, military and religious interests does not suggest a culture that can be trusted with huge power.

Here, concretely , is the worry. The US taxpayer gives Paulson the risk capital. He spends it on buying up the assets that banks do not value--he buys them at a price that the banks find attractive. Once the bad assets out of the way, the banks no longer have to worry that their colleagues and counter-parties will go suddenly out of business and they can start to lend again. It is back to the good old days, except the taxpayer holds all the junk. Paulson has bailed his buddies; the Bush administration has rewarded its friends; bankers and lawyers learn to subvert the new regulation as they subverted the old. Wall Street--indeed world finance--can return to being a cosy club dedicated to personal enrichment.

This is why the Democrats now resist nodding through Paulson's plan. Paul Krugman summarises the problem on his New York Times Blog. The presidential politics make this particularly hard. It is a crisis and your leader asks for urgent help. As you start to raise objections, you can easily be turned into the cause of problems. Every time Nancy Pelosi says ''no'', markets will fall. There is a basic political Pavlovianism that will make the Democrats seem anti-economy. Obama's response to the plan--''it seems very big, but this is an emergency and I will not get in the way''--clearly recognises the danger. McCain's response--''Fine, but No New Taxes''--is clever: McCain protects the taxpayer, and no one thinks he would fail to support Wall Street.

The solution? The Democracts must put flexibility into the rescue package so that the next administration is not tied down to supporting a bad bail-out. Taxpayers should agree to put new money into banks in exchange not only for the toxic assets, but also for various options. Firstly, the option to turn those toxic assets into shares in the banks at the price before last Friday's announcement of a bail-out. This means that if world finance does recover past profitability, taxpayers will not have been the ultimate suckers, the ones who will always patiently take on the losses while others take on the gains. Second, taxpayers should require the option to monitor and cap all pay deals in the rescued institutions. As the Lehman case shows, profitability can go down while individuals still command astonishing rewards--not the rewards that an effectively nationalised industry should tolerate. Third, taxpayers should insist that the risk be borne by those who profited most from the leverage-bubble. Mark Thoma is very convincing that this should be done through a strong dose of progressive income tax.

The basic rule of finance is ''Who has the gold makes the rules''. When the banks have no capital, and the taxpayers are asked for gold, they need to remember that they make the rules. This is the moment to set the rules, not tomorrow, after a recapitalisation. There is a critical difference of a few months between today's crisis and the 1932 banking crisis that brought in the New Deal. Banks started failing in November '32, after the election. Roosevelt's plan was the important one. Today, unfortunately, three months make all the difference. It will be Paulson's rescue. The Democracts must avoid being cast as the destroyers of the economy, while standing firm as the rule-makers of last resort on behalf of that unlikely risk-capitalist, the taxpayer. Nouriel Roubini, long the Casandra of the this crisis, warns in his FT commentary that the crisis will spread to the real economy and to Europe's as well as the US's.

It is going to be hard, so now is not the moment to waste the hardship on a crony's solution.

 

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tony curzon price 2008-09-22

Tony Curzon Price

I wrote the other day that we -- the collective, global, democratic "we" -- desparately need to take responsibility for financial regulation. I mainly had in mind our own shareholder, pension-holder, saver activism. But our friends at Avvaz.org have a very sensible, complementary approach that tries to put pressure on our governments to take the issue of regulation seriously. Their new campaign around the issue is here: looks to me like a good one to sign up to.

openDemocracy

The de-leveraging crisis--or the sub-prime crisis or the debtonation crisis--came about through the interaction of wicked plutophiles, genuinely useful financial innovations and lax, cowardly and confused regulators. It is important to untangle these in order to destroy what was genuinely bad in our financial arrangements. The spread of cheap computing, the theoretical understanding of how to price flexibility--option pricing--and the globalisation of supply and demand for capital set the stage for the growth of the financial sector from the 1980s for the next 25 years. In a world of benevolent, professional bankers, these changes would have been welcomed. However, the world of finance became the global magnet for hordes of semi-quantitative plutomaniacs against whom the partially sighted, ideology-bound regulators had no chance of success.

Globalisation, financial innovation and computing have brought benefits that now, when blame is spread generously, should be remembered. The heart of every financial transaction is an exchange of financial risks. When you sell a house, you want an amount of cash in exchange with a known, certain value. When a bank offers a mortgage, it swaps a known value for the likelihood of a stream of payments. The seller of the house has become financially more secure; the seller of the mortgage has taken on the corresponding risk. Moving risk around has real social value. A manufacturing company in Senzhen with good commercial contacts to corporate America can borrow to expand; it wants to take on risk. A fifty year-old office worker in California, at the height of her earning powers and saving for retirement, may find that an investment in a Senzhen factory is attractive. Globalisation of capital markets--whatever abuse it also permitted--expanded the opportunities for these sorts of re-allocations of risk. There is real social value in doing this--as long as you do it right.

Financial intermediaries can often provide more attractive risk re-allocations than would be possible with direct contracting between lenders and borrowers because they can enjoy the statistical effects of pooling risks. This is the basis of insurance: because things tend not to all go wrong at the same time--because ``sod's law'' is not a law--two mortgages are less risky than one mortgage. Information technology expanded the scope for the discovery of offsetting risk of this sort, and so found ways to ``cancel-out'' uncertainty. There is real social value in doing this, as long as you really do it. Only inveterate gamblers prefer material uncertainty to stability, and they can always be served at the casino. The more material uncertainty can be destroyed through social aggregation of risk, the easier we ought to be able to sleep at night ...as long as we are really doing this. Computers trawling great databases of prices could identify opportunities for cancelling risk on an unprecedented scale.

The development of portfolio theory and option pricing theory by financial economists has opened the way for a greatly increased scope for pooling risks. Even once you have identified uncertainty that can be ``cancelled out'', you need to turn that aggregate into a product that those affected by the uncertainty can buy; and as long as you can assess the price of risk, these become products that those with a collective appetite for risk can supply. So, a retiree might want to swap her accumulated pension fund in exchange for a promise to have her medical care covered, her subsistence needs covered, and a small amount left over for her children. Financial theory now allows such products to be priced and supplied.

In the midst of all this potential to do good came the plutomaniacs and bad regulators. The three forces of good change in finance of the last 25 years--increased opportunities to trade, increased data-processing and increased understanding--could all in themselves justify some degree of increase in the level of leverage. For every pound, euro or dollar of certain value that a financial firm could count on, it could now transform those into more uncertain pounds, euros or dollars of value than in the past. The banking multiplier could increase. Its increase from a traditional value of about 6 to the current value of about 25 is the story of ``debtonation'' that Ann Pettifor has told so well. Even if the forces of good change could justify--an extreme suggestion--a doubling of the rate of leverage, the five-fold increase we have lived through in 20 years can only be explained by the monumental failure to properly guide an invisible hand made weak by the mendacity of many in the financial industries.

As globalisation allowed banks to run rings around national regulators, the Bank for International Settlements transformed itself in the 1980s into a world-wide regulator. All banking institutions need to show consolidated accounts and prove that taking all their operations together, they have sufficient capital to cover ordinary and even extraordinary risks. Banks are required to limit their lending to 8 times their capital, where the value of the capital base is cleverly adjusted for its riskiness. In a world of benevolent bankers, all of them following the rules, these constraints should have worked. The banking money multiplier would have stayed at 8X, a number apparently entirely justified by the good forces for change in finance.

But we know the reality ...Banking ``innovation'' became more concerned with hiding the lending that banks were extending in order to continue to lend a long way beyond the 8 times capital limit. The ``special investment vehicles'' like Granite--the Jersey-based company that Northern Rock set up--existed only to be the repositories of lending that would not be counted against capital by the Bank for International Settlements regulation. Bankers, bonuses based on the volumes of the transactions they performed, had found a way around the spirit of regulation to unconstrained personal gain. Asset price bubbles followed, as the money created by banks chased limited investments. Emerging markets, technology stocks, housing, stock markets, gold, commodities, contemporary art ...anything in vaguely fixed supply--or at least supply slightly more fixed than the unconstrained creation of money by the financial sector--rose in price to absorb the money being created in the cracks of international regulation by the plutomaniacs. We can tell that the crisis still has a way to run from the stellar results of Hirst's last auction.

The crisis we are now going through comes from the fact that the money-creation went into a largely virtual economy. This was not about factories in Senzhen or retirement packages ...most of the growth in money was going to casino chips on which rich-world middle classes became hooked; their appreciating housing assets gave them a sense of righteous enrichment, a reward for who knows what hidden moral virtue they could conjure. The retrenchment today will require de-leveraging from today's absurd 25X to a normal 8X. Two thirds of the debt in the system needs to be eased out.

The dilemma now is this: how do we de-leverage in such a way that the virtual economy is hit, not the real? and how do we protect the real forces for good while cutting off the most destructive tendencies of the plutomaniacs? Regulatory pragmatism is aimed at the first problem now. AIG is too close--or thought to be too close--to the real economy to be allowed to default, while Lehman is sufficiently virtual to need to go. HBOS has strong links to reality--its mortgage business in the UK is tightly related to household savings, and so to the UK economy as a whole--to get nod-through approval to join the stronger balance sheet of Lloyds-TSB. As banker to the real economy and bankrupter of the virtual economy, this regulatory pragmatism is the right approach to the immediate mess.

But what of the longer term problem of good regulation? Can we have our good financial cake without it being forced down our throats like geese prepared for their liver? A solution to a problem usually comes from choosing the right constraints: what is fixed? what can be assumed to be in our choice? It is important to assume that the plutomaniacs will always be with us: financial regulation must assume that the great magnet of money will always disproportionately attract the iron-like sharks. What was true of politics when David Hume recommended that we design constitutions on the assumption that every man be a knave should now, in a world where the market has become mightier than the sword, be applied to financial regulation. 75 years after Hume's advice, Benjamin Constant, in his essay on the Freedom of the Moderns as Compared to that of the Ancients, reminded us that we ought to continue, all of us, to stay involved in politics in order to prevent the return of tyranny:

we should [...never...] surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying!

Today, this advice holds for control over finance. This is where the holders of authority lie in wait for us. Politics today needs to be in the shareholder assembly, as activist investors, as savers and borrowers. We must take control of regulation from the demoralised public servant and help ourselves. Where is your pension invested? Who manages the money? How culpable am I for the use that my savings have been put to? In our pre-occupation for the freedom of the moderns, for our cherished ability to get along with our private concerns, we have left a gaping opportunity for plutomania to operate and create havoc. Regulation is too important to be left to the conflicted civill servants.

We need all to become our own regular regulators.

 

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tony curzon price 2008-09-19