I blame Gordon Brown

Kinda-ish. Him making the Bank of England independent in 1997 is normally viewed as having been an unquestionably good thing. You could argue, well I’m going to anyway, that it actually made a notable, if indirect contribution to the credit crunch in Britain. Here’s why.

Banks regularly run stress tests. These set out stressful scenarios wherein property prices fall, inflation rises, the economy goes into recession and so on, the point being to develop a sense of what all of these things would do to a bank’s profitability, capital and liquidity. This in turn should inform how much capital a bank needs to hold just in case.

The most demanding stress test used to be the 1 in 20, which looked back over the previous 20 years (or what was regarded as being 3 to 4 business cycles), then used the experience of the worst ever period during that time to set the test parameters.

Before 2007 this meant 1987 to 93 when Canary Wharf first boomed/bust and Britain had its Black Wednesday. The primary cause of this feck up was the exchange rate mechanism experiment when the Tories used what eventually became crucifyingly high interest rates to hold the pound at an artificially high level. Then George Soros bet against the pound and won.

Given this experience, the subsequent decision to make the Bank of England independent and take the politics out of monetary policy made and makes perfect sense. Except, doing so fed directly into the NICE (Non-Inflationary Constant Expansion) decade that followed or what retrospectively looks more, in economic policy terms, like the “Great Complacency” as when schumcks started claiming to have conquered boom and bust.

Going back to the stress tests i.e. what bankers used/use to identify the risks that should be keeping them up at night, the biggest stresses they used to be institutionally aware of – destructively high interest rates and an over-valued pound - were both politically determined and as such  no longer options, the Bank of England was independent and increasingly transparent after all i.e. finance could be confident politicians were no longer in a position to do anything daft. However, this change also meant it simply wasn’t clear what the actual risks or triggers were or could be. In this environment confidence became hubris, which in turn begat a bubble that became a crash (to be fair historically low interest rates helped here as did the FSA, which was utterly rank rotten incompetent shite too).

I reckon we’re still suffering from a broader, complacency hangover due to the Bank of England’s independence when it comes to the broad understanding of economic policy. The interest taken in Mark Carney’s appointment, his supposed superstar status and notions of him being here to save the British economy distract from how (a) the Bank of England has already done pretty much all it can and then some, (b) economic policy is about monetary policy AND fiscal policy and (c) by focusing on a pretty technocrat, we ignore the reality, which is political dogma is alive and well and actively – via fiscal austerity – influencing economic policy in ways that are actively undermining Britain’s short, medium and long-term economic prospects.

The question isn’t can Mark Carney save the British economy, his primary purpose after all is nothing more than to keep consumer price inflation as close to 2% p.a. as possible, rather its why are George Osborne and the ConDems doing so much to undermine it?

I'll house you

I really don't get it. Like why exactly, given the billions (and eventual billions and billions more) being set up to get pissed away on that new fast train line, why the government isn't instead borrowing to pay for a massive social housing programme now that would:

1) increase the supply of accommodation so push down on private rents, cutting the cost of housing benefit and private rentals
2) create assets that could be sold off,  if required, at a later date
3) before then generate revenues
4) you know, provide people with decent homes
5) address the horrendous problem with the bedroom tax which is the poor sods getting clobbered with it don't have alternative accommodation to move in to
6) create thousands and thousands of jobs and opportunities for apprenticeships
7) be used to regenerate/rejuvenate areas
8) be accurately costed and start generating at least some of the above benefits way before completion

By contrast HS2 will:

1) Do hee haw to ticket prices other than cause them to be raised to cover the cost of it
2)  cost spectacularly more than current estimates. We know this. We also know that the later phases will be postponed indefinitely - wrote someone who cycles past the Edinburgh trams every day - undermining the rationale for doing it in the first place
3)  become simply one part of a broader, subsidised network
4) because of the way procurement works, it'll generate all sorts of fat contracts for non-UK companies that means the benefits of the government spending involved will leak overseas
5) be based on mickey mouse notions of its economic benefits whereas the reality will see it suck even more economic activity darn sarth
6) waste time and money until phase 1 is complete.
7) let some English people feel less inadequate about the state of British railways vs the French

So yeah, why can't we have a massive social housing building programme now* rather than cutting however many minutes off the time it takes to get from Manchester to Leeds in however many decades time?

In the meantime, help to buy is all very good, ish. No, not really, not at all. Essentially, its a lower and middle middle class subsidy that will crank up personal debt levels as it bumps up housebuilder profits, but does hee haw about supply and is generally mental.


* rhetorical question. Successive governments have clung to a dogmatic prejudice against state social housing provision even when, as is obviously the case right now, building more would very obviously be a very good thing for the entire economy.

Fiscal austerity finale meme

Expansionary austerity was always an implausible contradiction in terms that fitted right-wing political sensibilities better than the facts. Now though a run of events have made its increasingly (oxy)moronic nature indisputably clear.

Here, cutting spending to retain the UK’s AAA rating – and by so doing holding down borrowing costs – largely defined ConDem economic policy with the rating to provide a benchmark for assessing George Osborne’s success as chancellor (remember that?). Well, the UK is AAA no longer AND borrowing costs remain at record lows i.e. Osborne couldn’t do something he shouldn’t have been doing in the first place.

Then there’s been the Reinhart and Rogoff debacle were an apparently empirical justification for cutting government debt turned out to be based on a sloppy methodology, bad arithmetic and wishful thinking.

Except, this only followed on from the debunking of the notion that government spending in response to a downturn had only a limited multiplier effect i.e. why bother spending more and anyway cutting spending wouldn’t be that painful. Paul De Grauwe's work carried this critique a step further by setting out the “strong negative correlation” between “austerity measures introduced in 2011 and the growth of GDP over 2011-12” i.e. funnily enough the countries that've cut spending the most have suffered the sharpest reductions in GDP etc., And no them doing so didn’t put a cap on their borrowing costs, that was the ECB stating it was “ready to do whatever it takes”.

Really, picking thru the above, rather than apologise Professor Ferguson should be applauded for setting out the one remaining argument spending cut supporters appear to have as to why Britain should not adopt an actively counter-cyclical fiscal policy. 

Increase government borrowing by say £25bn to finance a 3 year social housing programme? Ha .......

Paul De Grauwe remix

I reckon Paul De Grauwe's Vox article on austerity is already a classic, by which  I mean 50+ years from now economic historians will approach it the same way they do Keynes's "Can Lloyd George Do it?".

As with Keynes's pamphlet, De Grauwe is also seeking to influence government policy rather than articulate any grand, new theory. He does so by setting out clearly, concisely and in a deliberately populist fashion, how the rationale for fiscal austerity is utter bollocks. By doing so he renders fiscal austerity and all it entails an exercise in bigoted, unthinking, hurtful, dogma.

And if that wasn't enough, heck, he even appeals to the great and the good's self-interest when he says "As it becomes obvious that the austerity programs produce unnecessary sufferings especially for the millions of people who have been thrown into unemployment and poverty, resistance against these programs is likely to increase. A resistance that may lead millions of people to wish to be liberated from what they perceive to be shackles imposed by the euro."

So in honour of Professor Groo at a time when the Cyprus bank deposit mess sees the EU plumbing whole new depths of dumb,  the attached "remix" of some of his data strikes me as an appropriate tribute.

Ta da!

The original being >>>

Pushing string

So there’s fiscal policy and then there’s monetary policy, the other side of the economic policy coin. Ideally the two work together. Now? Less so.

Fiscal austerity is doing its damndest to undermine and generally crap on demand what with the massive reduction seen in government spending on capital goods, investment and what not to preserve the UK’s AAA status. Monetary policy by contrast is at best tinkering and tickling round the edge as follows:

-          Historically low interest rates to minimise the number of indebted bods and companies failing (hmmm, what about zombie companies being a bad thing then?)

-          Low interest rates also encourage a competitive i.e, a devalued pound (take that all you dumb fucks that whined about the credit rating downgrade undermining the phallic worth of the pound, that’s monetary policy bitches)
- Low rates also also (well negative real rates) provide a disincentive to save i.e. they encourage people to spend, spend, spend in ourt consumer driven economy
- Obviously, following on from the above, low interest rates and the associated tolerance of above target inflation cheekily chip away at the real value of debt in our deeply indebted nation (shame pay growth is also negative in real terms)

-         Then there's quantitative easing or QE to encourage well its not that clear really, investment in marginally more risky, but still comfortably investment grade assets? To prop up prime asset values that benefit bods with pensions? No got a scoob really

-          And latterly the invention of all sorts of ways of cutting credit costs to, to, well what exactly?

Am guessing, judging by what Bank of England bods say, this last one is about encouraging demand by making it cheaper to borrow except, well how’d you reconcile that with fiscal austerity and what that’s been doing to the willingness to invest for years now? The answer is you can’t, the reason being because you can't.

To give an example using the key economic example of pies; make a pie cheaper then yeah, sure I might buy one, mebbe even two extra, but that’s cos I like pies. If I didn’t like pies, then whether they cost 50 quid or a horsemeat-tastic 50p, I ain’t buying any more and you’re wasting your time.

Similarly, cutting the cost of credit don’t mean shit if I don’t want to borrow new money or to quote from the latest Bank of England creditconditions survey

there was “a reduction in credit demand from small companies … (and) … demand from large firms was expected to remain broadly unchanged” So there you are then, banks don't want to lend to small businesses, banks don't want to lend to small businesses ....

Really? The Bank of England's own research into the impact of its own policy indicates small businesses aren't that keen on borrowing right now, which makes sense. Like European exports aside if you were a business dependent on government contracts would you fancy investing in new stuff right now? Thought not. Refinance your existing debt makes sense obviously, but borrowing more? Nah, no thanks.

Hence, a key and innovative part of current monetary policy looks about as effective as pushing string.

Masochistic e.rection disguise

You know an economic policy has had its credibility chips when the more politicians try to justify it the more they sound like they’re describing a masochistic e.rection.

Hence, fiscal austerity is painful, but thankfully the ConDems are up to taking the kind of big, strong, firm and tough (and blue-veined) decisions we need if we’re to cum through these hard, oh so hard times together. Indeed.

The disguise part here stems from the reality, which is that for all any politician might claim we’re all in this together, the following are the people really feeling the pain - the working poor, the unemployed, the disabled and the infirm. That they are doing so due to policies that are actively undermining the growth they’re supposed to be promoting exacerbates this bloody awful reality.

Snatching defeat from the jaws of victory

The politics of the UK credit rating are currently ghastly, all this he said, she said, nyah-nyah-nyah-nyah crap when there's barely a fag paper between the actual economic policies of the government and the opposition.

'sides its not as if George Osborne wasn't already as obviously useless as he is a shit. Rather, the downgrade is  a real opportunity for some sanity as long as all parties get the basics right of looking at what the downgrade actually does to British borrowing costs (here's a clue  - f' all), then work out how to spin the U-turn needed away from the following assumptions that have wrongly shaped economic policy:

- Cutting spending would have only limited impact on growth (see some IMF bod on how the impact of spending cuts was profoundly under-estimated in this chat on "multipliers")

- Spending needed cutting to save the credit rating because a downgrade would raise Britain's borrowing costs (more relevant than the US was the French example, now Britain is another of how this turns out not to be the case)

Then, they should start thinking in terms of (fiscal) expansionist policies that actually promote growth, a starter for ten being a government debt funded programme to build say £20 billion worth of social housing.

Moodys economic analysis should also be challenged in front of a parliamentary committee, but with the questions asked by people who know what they're talking about. The rationale for this second step is pretty straightforward - Moodys talk shit and need some hard, humiliating schooling. And it'd be fun.

The alternative is more of the same bollocks policies that are as self-defeating as they are cruel.

Budge-this

My favourite budget bit so far is “We are also taking the opportunity to rebuild Britain’s reserves, which had fallen to historically low levels. I can confirm our gold holdings have risen in value to £11 billion. This does not include the 400 or so tonnes of gold sold a decade ago for £2 billion, and which would now be worth six times that at over £13 billion pounds.” i.e. Gordon-the-gold-seller-Brown, you are one seriously useless fucktard.

The 7% new stamp duty rate on £2m plus houses combined with the new 15% rate if you bought them through a company is also awfy cute the way it tells Bob Geldof and co they can try and dodge the stamp duty us plebs pay if they want by buying via a company, but it’ll cost em’more if they do.

In the background to this though and the next few budgets is the supposed reality the Fitch rating agency spelled out when they issued the following chat to explain their decision to move Britain to “negative outlook”: “The triggers that would likely prompt a rating downgrade are … : -- Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast;” (then 2 other triggers are mentioned, one is “blah blah blah” and the other “ya de ya de ya”).

Now Fitch is very clearly using jargon to mask an assertion of ignorant and very debateable prejudice. Negative outlook? That’d be them saying we think certain factors means that a downgrading of Britain’s credit rating has become a real possibility, which matters because markets respond to changes in outlook as well as actual ratings. And for both a negative move typically sees governments having to hand over more tax payer fivers to cover its debts. Discretionary fiscal easing? Hmm, that’s quite a cute one really; discretionary? That’d be what a budget is. Fiscal policy? That’d be about taxing and spending.

So essentially, Fitch said in the immediate run up to the budget don’t cut taxes or increase/not reduce spending in ways we don’t like or else i.e. it’s an assessment that can be read as a warning that’s open to interpretation as a threat.

Of course a rating agency would never see things like that, they only ever provide independent opinions based on privileged access to company data after all that others are “free” to choose to act upon or not (similarly, shops only sell guns whereas it’s the psychopathic outsiders who actually use them to shoot their classmates). And yet would a more active, discretionary fiscal policy be a bad thing?

Paul Krugman certainly thinks it wouldn’t, similarly John Kay today talked about how increased public spending on construction in its widest sense would “as the National Audit Office recently observed, be likely to reduce public expenditure over the medium term, not to raise it. The weakness of current – necessary – austerity programmes is that they focus on capital projects and expenditure deferrals because these cuts are easy, even though they are precisely the opposite of what is needed to balance the books in the long term. We need to devote much less attention to headline spending totals and much more to the detailed composition of public expenditure.” Heck, even this joker thought this was a good idea in 2009 cos he’s also mindful of how cos counter-cyclical government spending “leaks” in an open economy such as the UK there’s a need to focus on stuff that doesn’t like building shit. Except, these kind of grounded in facts but still – lets be honest – ideological views are effectively being swept aside by chat like Fitch’s, which is a bad thing.

Fitch’s chat illustrates perfectly the kind of dogma and prejudice that continues to define the terrain on which British fiscal policy is now set and its overall direction. This makes it a clear assault on democracy and, in the view of all sorts of bods, one that is actively shitting on the prospects of both the British economy and the livelihoods of hundreds of thousands of people left unemployed as a result.

Am trying to think how to draw this to a close, howzabout: The budget is shit and all the ConDems should be made to dress up like girly shepherdesses. This is cos government passively accepting the undemocratic constraints on its fiscal freedom private companies i.e. rating agencies, are imposing is a very, very bad thing.

Instead the debateable analytical and moral capabilities of the latter and of the "market" more generaly should be recognised. Thereafter, these external bodies should be held up to more and more aggressive public scrutiny and regulated til they squeal like pigs.

We should also have, because we need it, a huge increase in public sector debt funded public spending on construction. Given the Labour response has been to fixate on the tinkering and ignore the overall thrust of fiscal policy, Milliband and Balls should similarly be ordered to dress up as shepherdesses complete with pink gingham bonnets. There.