Month / May 2010

by Oisín Gilmore

MEET THE NEW BOSS, SAME AS THE OLD BOSS

One of the oddest things about moving to England is the fact that the press is so right wing, and Sir Tony O’Reilly is so opportunistic, that the main O’Reilly newspaper is centre left. Anyway their front page today is pretty good.

Text reads:

 Inside Parliament: “Legislation will be brought forward to restore freedoms and civil liberties”

Outside Parliament: “Peace Protesters targeted in Westminster: veteran campaigner Brian Haw is arrested”

 For those of you who don’t know, Brian Haw is a peace campaigner who has been protesting against the ‘war of terror’ continuously day and night since 2001.

by Oisín Gilmore

WHO VOTES FOR THE BNP?

Another Article by me written for The Commune newspaper. Cut and pasted below —————————-

The standard media portrayal of a BNP voter is of a poor, unskilled to semi-skilled white worker, who used to vote Labour, is worried about rising crime, unemployment and the rise in immigration. But is this really who votes BNP? Two recent studies suggest otherwise.

According to the BNP itself, the primary reason for its growing support is that the political elite is out of touch with working class people’s real concerns about immigration. A report by the Institute for Public Policy Research published last month finds little evidence for this. Indeed the report finds that higher immigration lowers the vote for the BNP. Likewise, the higher the number of non-white people in an area, the less likely people were to vote BNP. (The one and only exception to this was in Barking and Dagenham.) Intuitively, we can understand why this is the case. The more interaction people have with migrant groups the less concerned about immigration they are.

Another finding of the study was that crime and unemployment seemed to have little to no effect on support for the BNP, and what little evidence there was suggested that higher crime rates and higher unemployment led to lower BNP votes.

A slightly older study, “The BNP: The roots of its appeal” (2006), by researchers in the University of Essex looked at BNP support in the 2004 European elections. They interviewed people coming out of poling stations and found that “it is the lower middle classes [sic], C1s and C2s, who vote for the far right”. After this the next largest BNP voter demographic was the unskilled/manual working class. Very little support came from either the professional and managerial demographics. Most interestingly however, was that very little support came from the poorest demographic.

The same study also found that although the BNP was pulling support from all three parties, but the main voter swing was from the Conservatives and not Labour.

So if most of the simple reasons for BNP support have been dispelled, why are people voting BNP? The IPPR says “socioeconomic and political exclusion are the major factors at work.” Not surprisingly, the IPPR find that where less people think “that their area is one where people from different backgrounds get along” they higher the BNP vote. They also find that areas with lower voter turnout show more BNP support. This finding is also supported by the “The BNP: The roots of its appeal” report.

While some anarchists, such as this author, might occasionally like to think that declining voter turnout suggests that people are abandoning representative democracy and are about to stand up for themselves through direct action and self organisation, this need not be the case. Rather, declining voter turnout means little more than that people feel alienated, separated and unrepresented by mainstream party politics. There is no reason why people’s experience of political exclusion should result in a revolutionary rather than a reactionary response.

Another strong finding of both reports is that the lower the average level of qualifications in an area, the higher the BNP vote. The standard reaction to this might be “people vote BNP because they aren’t educated”, and then draw the conclusion that the task of the left should then be to “educate” BNP voters about how bad the BNP is.

The Essex report seems to tend in this direction. However, it is extremely unclear to me how an A level in Maths or a BSc in Engineering could make anyone less racist. The IPPR report gives a much clearer explanation of how and why people’s level of qualifications matter. They point out that “people with higher qualifications have more options in the increasingly open, flexible and knowledge-based economy that we live in. While finding employment per se may not be central (as indicated by the finding that employment levels do not affect votes for the BNP), the quality of work people can access may be critical. Where people have lower levels of qualifications they seem increasingly likely to struggle to find good quality work that pays a living wage, which could make them feel excluded and vulnerable.”

In sum the IPPR finds that “the evidence points to political and socio-economic exclusion as drivers of BNP support. In particular, areas with low average levels of qualifications (which can mean people struggle in today’s flexible, knowledge-based economy), low levels of social cohesion, and low levels of voter turnout (indicating political disenchantment) are the ones that show more BNP support.”

by Oisín Gilmore

FEELING LIKE WINSTON SMITH?

There’s that bit at the end of Nineteen-Eighty-Four where Winston Smith predicts how the news will play out before it does. Sometimes I feel like this. Things play out as you’d expect them to. I’ve been joking for months with the question ‘Which of our friends will have joined the Labour Party over the next 5 years?’ Why because provided the Tories got in, which was always the most probable election result, you’d expect everyone to get behind Labour. And low and behold, in the Guardian today.

Almost 10,000 people have joined the party since the close of the polls. The post-election boost represents a 6% rise in its overall membership, after years of dwindling numbers willing to commit to the party.

by Oisín Gilmore

CONSERVATIVE-LIBERAL AGREEMENT DOCUMENT LEAK

I don’t know if this is real or not. But via Sonny H at Liberal Conspiracy here is what looks very much like the the agreement from the conservative -liberal negotiations.

___________________________________

Conservative Liberal Democrat coalition negotiations

Agreements reached

11 May 2010

This document sets out agreements reached between the Conservatives and Liberal Democrats on a range of issues. These are the issues that needed to be resolved between us in order for us to work together as a strong and stable government. It will be followed in due course by a final Coalition Agreement, covering the full range of policy and including foreign, defence and domestic policy issues not covered in this document.

1. Deficit Reduction

The parties agree that deficit reduction and continuing to ensure economic recovery is the most urgent issue facing Britain. We have therefore agreed that there will need to be:

  • a significantly accelerated reduction in the structural deficit over the course of a Parliament, with the main burden of deficit reduction borne by reduced spending rather than increased taxes;
  • arrangements that will protect those on low incomes from the effect of public sector pay constraint and other spending constraints; and
  • protection of jobs by stopping Labour’s proposed jobs tax.

The parties agree that a plan for deficit reduction should be set out in an emergency budget within 50 days of the signing of any agreement; the parties note that the credibility of a plan on deficit reduction depends on its long-term deliverability, not just the depth of immediate cuts. New forecasts of growth and borrowing should be made by an independent Office for Budget Responsibility for this emergency budget.

The parties agree that modest cuts of £6 billion to non-front line services can be made within the financial year 2010-11, subject to advice from the Treasury and the Bank of England on their feasibility and advisability. Some proportion of these savings can be used to support jobs, for example through the cancelling of some backdated demands for business rates. Other policies upon which we are agreed will further support job creation and green investment, such as work programmes for the unemployed and a green deal for energy efficiency investment.

The parties agree that reductions can be made to the Child Trust Fund and tax credits for higher earners.

2. Spending Review

– NHS, Schools and a Fairer Society

The parties agree that a full Spending Review should be held, reporting this Autumn, following a fully consultative process involving all tiers of government and the private sector.

The parties agree that funding for the NHS should increase in real terms in each year of the Parliament, while recognising the impact this decision would have on other departments. The target of spending 0.7% of GNI on overseas aid will also remain in place.

We will fund a significant premium for disadvantaged pupils from outside the schools budget by reductions in spending elsewhere.

The parties commit to holding a full Strategic Security and Defence Review alongside the Spending Review with strong involvement of the Treasury.

The Government will be committed to the maintenance of Britain’s nuclear deterrent, and have agreed that the renewal of Trident should be scrutinised to ensure value for money. Liberal Democrats will continue to make the case for alternatives.

We will immediately play a strong role in the Nuclear Non-Proliferation Treaty Review Conference, and press for continued progress on multilateral disarmament.

The parties commit to establishing an independent commission to review the long term affordability of public sector pensions, while protecting accrued rights.

We will restore the earnings link for the basic state pension from April 2011 with a “triple guarantee” that pensions are raised by the higher of earnings, prices or 2.5%, as proposed by the Liberal Democrats.

3. Tax Measures

The parties agree that the personal allowance for income tax should be increased in order to help lower and middle income earners. We agree to announce in the first Budget a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes. This will be funded with the money that would have been used to pay for the increase in Employee National Insurance thresholds proposed by the Conservatives, as well as revenues from increases in Capital Gains Tax rates for non-business assets as described below. The increase in Employer National Insurance thresholds proposed by the Conservatives will go ahead in order to stop Labour’s jobs tax. We also agree to a longer term policy objective of further increasing the personal allowance to £10,000, making further real terms steps each year towards this objective.

We agree that this should take priority over other tax cuts, including cuts to Inheritance Tax. We also agree that provision will be made for Liberal Democrat MPs to abstain on budget resolutions to introduce transferable tax allowances for married couples without prejudice to this coalition agreement.

The parties agree that a switch should be made to a per-plane, rather than per-passenger duty; a proportion of any increased revenues over time will be used to help fund increases in the personal allowance.

We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

The parties agree that tackling tax avoidance is essential for the new government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals.

4. Banking Reform

The parties agree that reform to the banking system is essential to avoid a repeat of Labour’s financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.

We agree that a banking levy will be introduced. We will seek a detailed agreement on implementation.

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.

We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.

We agree that ensuring the flow of credit to viable SMEs is essential for supporting growth and should be a core priority for a new government, and we will work together to develop effective proposals to do so. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

The parties wish to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this would take time to get right, the commission will be given an initial time frame of one year to report.

The parties agree that the regulatory system needs reform to avoid a repeat of Labour’s financial crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

The parties also agree to rule out joining the European Single Currency during the duration of this agreement.

5. Immigration

We have agreed that there should be an annual limit on the number of non-EU economic migrants admitted into the UK to live and work. We will consider jointly the mechanism for implementing the limit. We will end the detention of children for immigration purposes.

6. Political Reform

The parties agree to the establishment of five year fixed-term parliaments. A Conservative-Liberal Democrat coalition government will put a binding motion before the House of Commons in the first days following this agreement stating that the next general election will be held on the first Thursday of May 2015. Following this motion, legislation will be brought forward to make provision for fixed term parliaments of five years. This legislation will also provide for dissolution if 55% or more of the House votes in favour.

The parties will bring forward a Referendum Bill on electoral reform, which includes provision for the introduction of the Alternative Vote in the event of a positive result in the referendum, as well as for the creation of fewer and more equal sized constituencies. Both parties will whip their Parliamentary Parties in both Houses to support a simple majority referendum on the Alternative Vote, without prejudice to the positions parties will take during such a referendum.

The parties will bring forward early legislation to introduce a power of recall, allowing voters to force a by-election where an MP was found to have engaged in serious wrongdoing and having had a petition calling for a by-election signed by 10% of his or her constituents.

We agree to establish a committee to bring forward proposals for a wholly or mainly elected upper chamber on the basis of proportional representation. The committee will come forward with a draft motions by December 2010. It is likely that this bill will advocate single long terms of office. It is also likely there will be a grandfathering system for current Peers. In the interim, Lords appointments will be made with the objective of creating a second chamber reflective of the share of the vote secured by the political parties in the last general election.

The parties will bring forward the proposals of the Wright Committee for reform to the House of Commons in full – starting with the proposed committee for management of programmed business and including government business within its scope by the third year of the Parliament.

The parties agree to reduce electoral fraud by speeding up the implementation of individual voter registration.

We have agreed to establish a commission to consider the ‘West Lothian question’.

The parties agree to the implementation of the Calman Commission proposals and the offer of a referendum on further Welsh devolution.

The parties will tackle lobbying through introducing a statutory register of lobbyists. We also agree to pursue a detailed agreement on limiting donations and reforming party funding in order to remove big money from politics.

The parties will promote the radical devolution of power and greater financial autonomy to local government and community groups. This will include a full review of local government finance.

7. Pensions and Welfare

The parties agree to phase out the default retirement age and hold a review to set the date at which the state pension age starts to rise to 66, although it will not be sooner than 2016 for men and 2020 for women. We agree to end the rules requiring compulsory annuitisation at 75.

We agree to implement the Parliamentary and Health Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure.

The parties agree to end all existing welfare to work programmes and to create a single welfare to work programme to help all unemployed people get back into work.

We agree that Jobseeker’s Allowance claimants facing the most significant barriers to work should be referred to the aforementioned newly created welfare to work programme immediately, not after 12 months as is currently the case. We agree that Jobseeker’s Allowance claimants aged under 25 should be referred to the programme after a maximum of six months.

The parties agree to realign contracts with welfare to work service providers to reflect more closely the results they achieve in getting people back into work.

We agree that the funding mechanism used by government to finance welfare to work programmes should be reformed to reflect the fact that initial investment delivers later savings in lower benefit expenditure.

We agree that receipt of benefits for those able to work should be conditional on the willingness to work. 8. Education

Schools

We agree to promote the reform of schools in order to ensure:

  • that new providers can enter the state school system in response to parental demand;
  • that all schools have greater freedom over curriculum; and,
  • that all schools are held properly accountable.

Higher education

We await Lord Browne’s final report into higher education funding, and will judge its proposals against the need to:

  • increase social mobility;
  • take into account the impact on student debt;
  • ensure a properly funded university sector;
  • improve the quality of teaching;
  • advance scholarship; and,
  • attract a higher proportion of students from disadvantaged backgrounds.

If the response of the Government to Lord Browne’s report is one that Liberal Democrats cannot accept, then arrangements will be made to enable Liberal Democrat MPs to abstain in any vote.

9. Relations with the EU

We agree that the British Government will be a positive participant in the European Union, playing a strong and positive role with our partners, with the goal of ensuring that all the nations of Europe are equipped to face the challenges of the 21st century: global competitiveness, global warming and global poverty.

We agree that there should be no further transfer of sovereignty or powers over the course of the next Parliament. We will examine the balance of the EU’s existing competences and will, in particular, work to limit the application of the Working Time Directive in the United Kingdom.

We agree that we will amend the 1972 European Communities Act so that any proposed future Treaty that transferred areas of power, or competences, would be subject to a referendum on that Treaty – a ‘referendum lock’. We will amend the 1972 European Communities Act so that the use of any passerelle would require primary legislation.

We will examine the case for a United Kingdom Sovereignty Bill to make it clear that ultimate authority remains with Parliament.

We agree that Britain will not join or prepare to join the Euro in this Parliament.

We agree that we will strongly defend the UK’s national interests in the forthcoming EU budget negotiations and that the EU budget should only focus on those areas where the EU can add value.

We agree that we will press for the European Parliament only to have one seat, in Brussels.

We agree that we will approach forthcoming legislation in the area of criminal justice on a case by case basis, with a view to maximising our country’s security, protecting Britain’s civil liberties and preserving the integrity of our criminal justice system. Britain will not participate in the establishment of any European Public Prosecutor.

10. Civil liberties

The parties agree to implement a full programme of measures to reverse the substantial erosion of civil liberties under the Labour Government and roll back state intrusion.

This will include:

  • A Freedom or Great Repeal Bill.
  • The scrapping of ID card scheme, the National Identity register, the next generation of biometric passports and the Contact Point Database.
  • Outlawing the finger-printing of children at school without parental permission.
  • The extension of the scope of the Freedom of Information Act to provide greater transparency.
  • Adopting the protections of the Scottish model for the DNA database.
  • The protection of historic freedoms through the defence of trial by jury.
  • The restoration of rights to non-violent protest.
  • The review of libel laws to protect freedom of speech.
  • Safeguards against the misuse of anti-terrorism legislation.
  • Further regulation of CCTV.
  • Ending of storage of internet and email records without good reason.
  • A new mechanism to prevent the proliferation of unnecessary new criminal offences.

11. Environment

The parties agree to implement a full programme of measures to fulfil our joint ambitions for a low carbon and eco-friendly economy, including:

  • The establishment of a smart grid and the roll-out of smart meters.
  • The full establishment of feed-in tariff systems in electricity – as well as the maintenance of banded ROCs.
  • Measures to promote a huge increase in energy from waste through anaerobic digestion.
  • The creation of a green investment bank.
  • The provision of home energy improvement paid for by the savings from lower energy bills.
  • Retention of energy performance certificates while scrapping HIPs.
  • Measures to encourage marine energy.
  • The establishment of an emissions performance standard that will prevent coal-fired power stations being built unless they are equipped with sufficient CCS to meet the emissions performance standard.
  • The establishment of a high-speed rail network.
  • The cancellation of the third runway at Heathrow.
  • The refusal of additional runways at Gatwick and Stansted.
  • The replacement of the Air Passenger Duty with a per flight duty.
  • The provision of a floor price for carbon, as well as efforts to persuade the EU to move towards full auctioning of ETS permits.
  • Measures to make the import or possession of illegal timber a criminal offence.
  • Measures to promote green spaces and wildlife corridors in order to halt the loss of habitats and restore biodiversity.
  • Mandating a national recharging network for electric and plug-in hybrid vehicles.
  • Continuation of the present Government’s proposals for public sector investment in CCS technology for four coal-fired power stations; and a specific commitment to reduce central government carbon emissions by 10 per cent within 12 months.
  • We are agreed that we would seek to increase the target for energy from renewable sources, subject to the advice of the Climate Change Committee.

Liberal Democrats have long opposed any new nuclear construction. Conservatives, by contrast, are committed to allowing the replacement of existing nuclear power stations provided they are subject to the normal planning process for major projects (under a new national planning statement) and provided also that they receive no public subsidy.

We have agreed a process that will allow Liberal Democrats to maintain their opposition to nuclear power while permitting the government to bring forward the national planning statement for ratification by Parliament so that new nuclear construction becomes possible.

This process will involve:

  • the government completing the drafting of a national planning statement and putting it before Parliament;
  • specific agreement that a Liberal Democrat spokesman will speak against the planning statement, but that Liberal Democrat MPs will abstain; and
  • clarity that this will not be regarded as an issue of confidence.
by Oisín Gilmore

SOME NOTE ON DEAN BAKER’S “FALSE PROFITS”

Recently, in response a request for “resources for understanding the economy”, I recommended a few books. The request was as follows:

The actually existing one I mean, the global economy and the US economy, not like general principles such as surplus value and exploitation, but what’s really been going on recently-ish…. I feel really under-equipped in terms of knowledge about the economy and about how to find out more about the economy – from basic stuff like where do most people work, up to things that feel more confusing like what’s a derivative, how does currency trading work, etc. Can folks recommend me like 1-3 good sources for getting a grasp on some of this? The shorter the better. 

And my response was:

1-3 good sources is pretty difficulty because you’ve cast a very wide net. As a rule of thumb…you are much better off reading economics that does not come from the far left. But after thinking about this while i cook lunch I think I am actually going to recommend you some left wing books.

So two books by Dean Baker The United States Since 1980 and False Profits: Recovering from the Bubble Economy (Haven’t actually read this yet though)

One by Andrew Glyn Capitalism Unleashed

And one by Paul Krugman’s The Return of Depression Economics and the Crisis of 2008

i.e. basically books by social democrats. The far left is shit at economics. (Although Glyn was on the far left, but exceptions rules all that.)

A lot of people have asked me for recommended reading on the economy recently and I think my above recommendations are pretty good. Dean Baker’s books are quite US-centric but still well worth a look considering a) the central role the US plays in the world economy and b) very little is being written about the EU/Irish/Western economy.

However, as I said in my response, I hadn’t actually read Baker’s book “False Profits” so I perhaps shouldn’t have recommended it. But I read it this morning and am now pretty happy recommending it. Anyway, the point of this blog post is basically to note down some issues with the book while its still fresh in my head.

As is my wont, I’m going to begin polemically by responding to Brad DeLong’s blog post I Need to Review Dean Baker’s “False Profits”. DeLong writes:

I really need to get started on this…

The first two paragraphs:

Dean Baker is one of the very few economists to have gotten things right in the mid-2000: to have not only recognized the housing bubble, but to have predicted that it would produce big trouble for the economy as a whole. Now he has produced his book on the financial crisis, False Profits. Given the sales of all the books by all the people who did not predict that the housing bubble would have big bad consequences for the economy as a whole, everybody who has bought even one of those other books is under a strong moral obligation to buy Dean Baker’s book and to read it was very close attention. And they will all profit substantially from doing so.

But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other.

I’m pretty much onside with DeLong here. I don’t think that you can reduce the crisis to failings by the Fed to the extent that Baker does. Baker writes in paragraph 1, page 1: “The basic story of this economic collapse is very simple. The Federal Reserve Board, guided by its revered chairman, Alan Greenspan, allowed an $8 trillion housing bubble to grow unchecked.” I don’t think it is that simple. Paul Krugman lists six possible explanations of the crisis in his Minsky Lecture “Six Doctrines in Search of a Policy Regime”

– Size: Our largest financial institutions have just gotten too big – Shadows: The rise of shadow banking, institutions that fulfill banking functions but evade the regulatory regime, has undermined stability – Opacity: We’ve come to rely on complex financial instruments that neither regulators nor the private sector – Predation: Financial firms deliberately misled consumers and investors – Government intervention: Public policy pushed lenders into making bad loans, especially to the poor – Monetary mismanagement: The Fed did it by keeping interest rates too low for too long, and/or policymakers panicked in 2008 and spooked the markets

While, I don’t find Krugman’s dismissal of reason 1, 5 and 6, I also think that Baker basing his entire explanation on reason 6 ‘Monetary mismanagement’ is too much. However, DeLong isn’t being fair to Baker is saying that he reduces it to not increasing the interest rate in time. If that was Baker’s argument both DeLong and Krugman would have a point. Neither the argument that interest rates were too low before the crisis, nor that increasing interest rates more in 2004/2005 would have prevented the crisis are arguments I find persuasive.But Baker doesn’t argue that, rather he argues that “the Fed could have issued clear warnings about the existence and danger of the bubble.” (p.36) He argues the Fed should have pressed “the case everywhere for the existence of a housing bubble”. Along with that he says that “the Fed could also have used its regulatory authority to crack down on the proliferation of bad loans” by for example issuing mortgage guidelines (p.37) that were promised since the 1990s but weren’t finalized until 2008. He argues that if that doesn’t work, the fact that the Fed is pursuing a clear and committed strategy to burst the housing bubble would mean that if it came to increasing the interest rate, any increase would have an amplified effect. (p.38) This is a much stronger argument than simply saying that the Fed should have increased the interest rate; the opinion that DeLong attributes to Baker.

However, Baker’s take on the effect of interest rates on the housing bubble is kind of confused/confusing. He actually explicitly rejects the argument that the housing bubble was fuelled by low interest rates (pp.25-26). He says that “Historically, housing prices have not been that sensitive to interest rates” (p.25). But later he argues that there was a surge in housing demand after the 1981-82 recession caused by the Fed cutting interest rates. He writes: “the Fed held the key to reviving the economy. When it did so, by lowering interest rates, it kicked off a huge surge in car purchases and home buying because substantial demand had built up during the recession.” (p.40) The is a bit of a contradiction here. If lower interest rates increase the demand for houses then, ceteris paribus, the price of houses should increase i.e. housing prices should be sensitive to interest rates. There is a way to square this circle which is to argue that interest rates cause a rise in the supply of housing equivalent to the rise in demand. I can think of some reasons that that might be the case and Baker does have a strong argument that an increase in demand relative to the supply of housing was not the cause for rising house prices. He points out that neither income nor population were growing sufficiently to fuel the growth in demand, nor was supply constrained. The 2002-2006 building rate was at a record rate, rental vacancies were increasing throughout the period and ownership unit vacancies increased towards the end of the period. However, I’m filling in the blanks here. It would have been better if he had explained how and why low interest rates increase housing demand but not house prices.

Moving on from chapters 1 and 2, to chapter 3 “The Terrible Tale of the TARP”. In this he argues strongly that the TARP was a bad policy. The TARP, I thought until reading this, was basically like a better designed NAMA. My thinking here was that NAMA agreed to purchase bad assets above their market value in order to recapitalise the banks, whereas the TARP planned to buy bad assets at market value. However, as Baker points out, there was no point to purchasing assets at market value. Doing this did not recapitalise the banks it merely changed the composition of its assets. He says that what Paulson ended up doing then was simple giving capital to the banks and not purchasing the ‘bad assets’ at all. To be honest I hadn’t come across this argument before. I found it really interesting and its something I’m going to follow up on.

In chapter 4 he argues that the housing bubble is still being propped up. In chapter 5 and 6 he discusses the financial stimulus. In chapter 5 he argues that the stimulus was necessary and too small. This includes a humorous analogy, he writes: “the last senators who were pulled on board behind the stimulus were proud of the fact that they had reduced its size. The whole point of stimulus is to spend lots of money; reducing the size of a stimulus package is a bit like finding a shortcut on your jogging route. It might be possible, but whats the point? Instead of expressing ridicule, many in the media applauded these senators for being fiscally responsible.” (p.109) Chapter 6 describes other possible expenditures that could be included in a further stimulus. This is probably the least interesting chapter. I’m sure we can all think of useful things the government could spend money on.

Chapter 7 is on reforming the financial system. In it he argues for two reforms. Firstly, he argues for restructuring the Federal Reserve system to take it out of the control of private finance and put it more under public control.This issue is what I’m doing my PhD on and it is not as simple as Baker suggests it is. Yes changing the appointment system of the federal reserve so as to make it so as that private banks aren’t electing their regulators is obviously a good idea, but… placing the federal reserve under more public scrutiny and control is difficult. Democratising capitalism destabilizes capitalism. I don’t want to pull the revolution rabbit out of the economics hat here, but there is a fundamental incompatibility of a publicly controlled economy and a free market economy.

His second proposal is to introduce a financial transaction tax, this is similar to the idea of a Tobin tax or more recently and more idiotically named the ‘Robin Hood Tax’. However, his discussion of this raises two very interesting points that I didn’t know. 1.) The UK has a financial transaction tax on London Stock Exchange. 2.) The LSE tax raises £4 billion pounds annually. I thought that any tax on financial transactions would not really raise all that much. I viewed the tax as basically being a disincentive to speculation not as a realistic revenue raiser. It would seem that it is!

Baker also argues for some other financial reforms. He argues for dealing with derivatives by making all derivatives exchange traded, regulated by the exchange and that any customized derivative would have to go through the bother of getting the customized derivative on the exchange before it could be sold.This he argues would result in the standardisation of derivatives and thereby in their decreased opacity. He also argues for ratings agencies being employed by exchanges and not by firms. This would change the incentive structure for ratings agencies and would stop them giving large firms the ratings they want, because they would no longer be directly employed by those firms. Apart from sounding like a pretty good idea, this is interesting because 1. I didn’t know that rating agencies were directly employed by firms 2. Baker doesn’t even bother arguing that ratings agencies were giving firms the ratings they wanted, he just takes it as a given. If ratings agencies were doing this is is serious, I imagine illegal and if so people should go to jail over it.

The book ends with chapter 8 appealing to reader to remember that the people arguing that workers should pay with unemployment for the crisis are the people who created the crisis. (How true that is I’m not really too sure.)

by Oisín Gilmore

BRAD DELONG ON “OBAMA THE CENTRIST”

Interesting article on project syndicate. It pretty much sums up how Obama is what some of us on the left feared he would be:

Despite the frequent cries of American Republicans that Barack Obama is trying to bring European-style socialism to the United States, it is now very clear that the US president wishes to govern from one place and one place only: the center. 

In fighting the recession, Obama decided early on that he would push for a fiscal stimulus program about half the size of what his Democratic economic advisers recommended, and he decided to count that as a total victory rather than press for expanding half a loaf into the full amount.

Obama has been so committed to that cautious policy that even now, with the unemployment rate kissing 10%, he will not grab for the low-hanging fruit and call for an additional $200 billion of federal aid to the states over the next three years in order to prevent further layoffs of teachers. Rather than stemming further erosion of the national commitment to educate the next generation, Obama has shifted his focus to the long-term goal of balancing the budget – even while the macroeconomic storm is still raging.

And, in order to move forward on long-term budget balance, Obama has appointed a fiscal arsonist, Republican ex-Senator Alan Simpson, as one of his fire chiefs – one of the two co-chairs of his deficit reduction commission. Simpson never met an unfunded tax cut proposed by a Republican president that he would vote against, and he never met a balanced deficit-reduction program proposed by a Democratic president that he would support. Partisans whose commitment to deficit reduction vanishes whenever political expedience dictates simply do not belong running bipartisan deficit-reduction commissions.

Likewise, in dealing with the financial sector’s distress, Obama has acquiesced in the Bush-era policy of bailouts for banks without demanding anything of them in return – no nationalizations and no imposition of the second half of Walter Bagehot’s rule that aid be given to banks in a crisis only on the harsh terms of a “penalty rate.” Obama has thus positioned himself to the right not only of Joseph Stiglitz, Simon Johnson, and Paul Krugman, but also of his advisers Paul Volcker and Larry Summers.

On environmental policy, Obama has pressed not for a carbon tax, but for a cap-and-trade system that, for the first generation, pays the polluter. If you were a major emitter in the past, then for the next generation you are given a property right to very valuable emissions permits whose worth will only rise over time.

On anti-discrimination efforts, the repeal of the US military’s “don’t ask, don’t tell” policy toward gay soldiers is on an extremely slow track – if, that is, it is hooked up to an engine at all.

On policy towards the rule of law, the closure of the mistake that is Guantánamo Bay is on a similarly slow track. Moreover, Obama has joined George W. Bush in claiming executive powers that rival those claimed by Charles II of Britain in the seventeenth century.

On healthcare reform, Obama’s proudest moment, his achievement is…drum roll…a scheme that almost precisely mimics the reform that Mitt Romney, a Republican who sought the presidency in 2008, brought to the state of Massachusetts. The reform’s centerpiece is a requirement imposed by the government that people choose responsibly and provide themselves with insurance – albeit with the government willing to subsidize the poor and strengthen the bargaining power of the weak.

In all of these cases, Obama is ruling, or trying to rule, by taking positions that are at the technocratic good-government center, and then taking two steps to the right – sacrificing some important policy goals – in the hope of attracting Republican votes and thereby demonstrating his commitment to bipartisanship. On all of these policies – anti-recession, banking, fiscal, environmental, anti-discrimination, rule of law, healthcare – you could close your eyes and convince yourself that, at least as far as the substance is concerned, Obama is in fact a moderate Republican named George H.W. Bush, Mitt Romney, John McCain, or Colin Powell.

Now, don’t get me wrong. My complaints about Obama are not that he is too bipartisan or too centrist. I am at bottom a weak-tea Dewey-Eisenhower-Rockefeller social democrat – that is, with a small “s” and a small “d.” My complaints are that he is not technocratic enough, that he is pursuing the chimera of “bipartisanship” too far, and that, as a result, many of his policies will not work well, or at all.

I understand that politics is the art of the possible, and that good-government technocracy is limited to the attainable. But it would be good if Obama remembered that we dwell not in the Republic of Plato, but in the Roman sewer of Romulus.

by Oisín Gilmore

POSSIBLE CRIMINALITY BEHIND THE ICELAND DISASTER

There’s an article on VOX.eu at the moment on the report by the Icelandic Parliament‘s Special Investigation Commission on what brought down their banks. The abstract/summary thing is:

What brought down Iceland’s banks? This column examines the revelations from the latest report from the Icelandic parliament, raising the possibility that the collapse of Iceland’s three largest banks is the result of “control fraud” where shareholders stole from their own bank in the same way as those convicted of looting from the American saving and loan banks in the late 1980s.

And there’s some pretty interesting and shocking things in the article. On the excesses in Iceland:

  • Two Icelandic brothers who produced TV dinners for export became bank shareholders, and went on to buy themselves a yacht that used to belong to Giorgio Armani.
  • Another bank owner bought himself a penthouse in Manhattan, but – this is actually in the SIC report – the bank “forgot” to ask for collateral.
  • At a small dinner party for favoured bank clients on the Riviera, where Tina Turner stood for the music, the main course was sprinkled with – you couldn’t possibly have guessed this one – gold flakes.
  • And then there was the dinner party in Reykjavik where singer George Michael had been scheduled to land on the glass roof in a roaring helicopter, but to the great embarrassment of the bank’s director of entertainment the plan fell through.
  • One of the bank owners, the afore-mentioned Mr. Guðmundsson, declared bankruptcy in 2009 to the tune of $750 million, of which $500 million is owed to the bank he owned and directed. Not even Texas has seen a personal bankruptcy of such proportions.

And on the possible consequences:

The SIC has referred a number of cases or issues to the Special Prosecutor’s Office where an independent assessment will be made as to whether charges will be brought against the bankers and the four civil servants. Parliament will decide whether to press charges against the ministers; if it does, it must convene Landsdómur, a special court designed to determine whether ministers have broken the law. If Landsdómur is convened, as appears likely, it will be the first time in the 66-year history of the republic. If some or all suspects are found guilty, the constitution permits the President of Iceland to pardon the bankers and the public officials, but a presidential pardon of ministers found guilty by Landsdómur would have to be affirmed by Parliament. We are not in Kansas anymore.

Honestly, I’m not sure about all of this. I’m sceptical that what was happening in Iceland was all that unusual. Rather I think that what is unusual about Iceland is that the financial collapse was so complete and that the Icelandic public wanted ‘blood’. I’ve a feeling that if you deug down into the financial system in Ireland, Lithuania naybe even the US and UK you’d find much the same thing.

This article also reminded me to read a paper a lot of people have been referencing recently: Akerlof, George A, and Paul M Romer (1993), “Looting: The Economic Underworld of Bankruptcy for Profit“,Brookings Papers on Economic Activity 2:1-73.