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Cleaning up after the exuberance

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Stephanie Flanders | 08:11 UK time, Wednesday, 18 March 2009

merv226b_pa.jpgSpeeches by central bankers tend to be long on theory, short on concrete predictions. It goes with the territory.

Mervyn King's speech to bankers last night at the Mansion House doesn't exactly break with that tradition. But it has some forthright advice for the G20 - and for Lord Turner, whose big picture recommendations for the financial system are out today.

His first message is take it slow. "Whatever exuberance - rational or irrational - that existed has been destroyed by the crisis. So we have time to reflect before we decide on the shape of a new regulatory system."

Translation: relax, no-one ever made a bad loan in a recession.

That could be taken as a gentle dig at those enthusiastic officials - Brits among them - who have wanted the G20 to produce a more detailed framework for international banking regulation than the broad outline agreed last weekend in Horsham.

The governor is backing the American view that this is something too important to rush.

In outlining the broad challenges for reform, the governor covers some well-trodden ground in a typically thoughtful way. But I was struck by the barely-concealed irritation at the idea that a few technical changes would have prevented the crisis. In fact, he thinks it would have taken a herculean and highly implausible act of political will.

Consider the problem of "procylicality", a fancy term for the idea that investors tend to be overoptimistic during the boom and excessively gloomy during the bust.

It's widely agreed that global monetary and regulatory policy was too procyclical in the lead-up to the crash. Interest rates were kept low, and most financial regulators did little to 'lean against the wind' as leverage - i.e. debt taken on to invest - was built up.

How could we have done things differently? Well, fiscal policy could have been a lot tighter in both the US and UK, but that's a story for another day.

Monetary policy could have been tighter. There was discussion of using interest rates to take the air out of the house price bubble on both sides of the Atlantic. But, as everyone now knows, the Bank of England ended up following the Greenspan view that it was easier to clean up after an asset boom than to prevent it from happening at all.

Sir John Gieve, the outgoing deputy governor, said baldly last month that this had now been proved wrong. It certainly sounds pretty stupid from the standpoint of 2009. But Gieve's erstwhile boss has had no such conversion. He still thinks the costs to the real economy would have been too high.

Jacking up policy rates might not even have had much impact on long-term lending rates, in a world of exuberance run amok. Would we really have sat by as unemployment rose, in the name of "restraining growth in financial sector balance sheets"? He thinks not.

Instead of distorting your monetary policy, he thinks you need another tool. And so do a lot of other people these days. Lord Turner will say the same later today.

But even countercyclical capital regulation is a lot easier said than done. Spanish bank regulators have been praised for their "dynamic-provisioning" approach, which made banks provision against profits in the good years, to build up reserves for the not so good ones. But that only seems to have given their larger banks an extra buffer going into the crisis of about 1.5% of assets. Most banks have lost a lot more than that.

There are other ways to be counter-cyclical; Turner will list a few. But King's larger point is that even with the best toolkit in the world we shouldn't fool ourselves that it would have been popular - or even politically feasible. Indeed, the more effective it was at damping the boom, the more the entire financial and political establishment would have been complaining about it and calling for repeal.

After all, it wasn't long ago that prominent Conservatives were calling for city regulation to have an even lighter touch and, as King himself notes, New York was beating itself up for being more heavy-handed than London. This was a time when "virtually the entire weight of opinion, not only in this country but also abroad, was in favour of the expansion of financial services".

The bottom line is that if we want to avoid the next bust we have to be prepared to pass up the boom. Is there any chance that we will be? The governor thinks that "simple and robust policy tools" will help. And a system of "constrained discretion".

But down the road, when memories of 2008 have faded, it is hard to believe they will be enough.

Comments

  • Comment number 1.

    Well, it looks as if the rot is about to set in. We all know what 'take it easy' and 'don't rush regulation' means: codes of conduct and slaps on the wrists.

  • Comment number 2.

    hi stephanie, good post

    i think the key question is will banking ever truely act responsibly if the risk of failure is born by the lender of last resort?

    monetary policy and fiscal policy is really an irelevance in terms of banking practice a means of allowing a bank to fail needs to be established and savers need to be educated that a high interest rate means there are high odds of loosing their money.

    out of interest why is there no talk of increases in house prices on the bbc that i read in the times today?

  • Comment number 3.

    Regulation is difficult is it?
    For gawd's sake, it's within our power to keep it simple. It is not difficult.....
    The trouble is, the unwitting people who led us into this economic crisis, by not understanding basic business economics, are now attempting to lead us out of the crisis.

    I would like to see:

    (i) Keep investment banks and commercial banks separate
    No borrowing on wholesale money markets by the commercial banks

    (ii) Mortgage lending to be restricted
    To a maximum of 3 x income, with proof of earnings
    Houses are a necessity, and not a store of wealth
    Ban second homes
    Build new flats to house the expanded numbers of students and undergraduates. Terraced houses should be for first time buyers, and not used by the buy-to-let market to make money from the enlarged student population

    (iii) Restrict dividends payable by companies
    Encourage a culture of cash creation
    Cash is king, cash is king, cash is king, cash is king...

    (iv) Companies to build bad debt provisions of 50% of sales ledger
    Encourage companies to build large provisions during the good times; so they have reserves to fall back on in the bad times

    (v) Restrict credit cards to manageable limits
    "Credit takes the waiting out of wanting" is a puerile and feckless strategy.
    No need to ban credit cards, but they must be restricted to the recipient's ability to pay.


    It really is not difficult. Once the recession has forced house prices down by 40% we can introduce the lending restrictions. Once the recession has cast out all the inefficient negative cash flow businesses, we can bring in the cash creation and cash protection legislation.

  • Comment number 4.

    In a nutshell then; the boom was too good to miss.

    This would be a valid argument if all who are now suffering the effect of the bust had gained a benefit from the boom. Many didn't. For myself I tend to take cover during booms for fear of the inevitable bust.

    I do agree with the idea that to call a top to the boom would have been a brave act on the part of anyone. This could only have come from the political leadership and they were, and remain, firm adherents to the principles of the Duke of Plaza-Toro. It certainly was not the job of the Governor or the FSA.

    I do agree that we have plenty of time before the next boom, some ten years at least, before we have to draw up a new set of rules. Too many rules now may delay any recovery when we finally get to it.

  • Comment number 5.

    "This was a time when "virtually the entire weight of opinion, not only in this country but also abroad, was in favour of the expansion of financial services".

    Another very exuberant piece Stephanie, but in the more sober (dull but real) world, how exactly was this opinion 'weighed' given that it was a self-interested, deregulated, Financial Service sector and all who did well by it?

    Watching Lord Myners before the Treasury Select Committee yesterday, and especially his effortful condemnation of Sir Fred Goodwin's pension, was just sickening.

    Far too much store is put by words at the expense of action today.

  • Comment number 6.

    Stephanie,

    I don't entirely agree with Mervyn King that it would take a Herculean effort to stop these bubbles forming. Monetary policy has been far too loose for many years due mainly to very low (unsustainably low) oil prices in the 90s and the (temporary) effect of China in the 00s on global inflation leading to excessively low interest rates for nearly two decades. This should never have happened and along the way there have been an ongoing series of bubbles that should have warned us of this. Even Greenspan himself warned of "irrational exuberance" back in 1996. Yet neither he nor any other central banker did anything to stop it, instead they continued stoking the fire.

  • Comment number 7.

    Mr Tweedy,

    You write: "(iii) Restrict dividends payable by companies
    Encourage a culture of cash creation."

    A couple of points. First, the cash does not belong to the business, it belongs to the owners of the business. Giving management even more power than they already have to abuse shareholders is an astonishingly bad idea.

    Second, what are companies supposed to do with all this excess cash? Have it sitting on their balance sheet doing nothing? They should invest what they need to in profitable projects and return surplus cash to their shareholders to invest elsewhere. That is the efficient use of capital within an economy and benefits everyone.

  • Comment number 8.

    Let me guess...

    Window dressing.
    Rearranging deck chairs.

    Bolting windows on to deck chairs so that one might dress them attractively.

  • Comment number 9.

    A few thoughts on bank regulation :

    1. Banks must not be allowed to insure against bad debt. If they haven't the funds to underwrite a loan, a loan cannot be made.

    2. If a bank goes bust, or gets into serious difficulty, appropriate senior bank officials should face criminal charges for incompetency.

    3. Senior staff could be sacked for poor performance or
    judgement. Personal contracts should state that there will be no golden "good-byes" in such circumstances.

    4. Staff bonuses should be just that - namely reward
    for doing a good job, not just an "OK" performance.

    Now that the Government are major stakeholders in so many banks, surely such measures could be written into individual bank's procedures with immediate effect.

    If legislation were passed, all existing employees would have to have their contracts of employment modified. Those that were not happy with the changes in their contracts could leave. This is exactly what happens in other types of business.

  • Comment number 10.

    The bankerrs will have to revert to QE'er viAAAgra and COEtAAA's interuptAAA's to avoid the worst effects of the bare squeeze on their bottom lines.

  • Comment number 11.

    Lord Turner seems to have some very sensible ideas. Just have to hope they will be properly considered and implemented.

  • Comment number 12.

    No. 7. ThereYouGoAgain wrote:
    "Second, what are companies supposed to do with all this excess cash? Have it sitting on their balance sheet doing nothing? They should invest what they need to in profitable projects and return surplus cash to their shareholders to invest elsewhere."

    I agree. A business should return surplus cash to shareholders, but only after:

    (i) The business must retain enough cash to pay its suppliers 30 days end of month
    (ii) The business must retain enough cash to cope with fluctuations in its foreign currency exposure
    (iii) The business must retain enough cash to cope with bad debts suffered, if and when its customers fail to pay their invoices
    (iv) The business must retain enough cash to self-fund future investment projects, rather then relying on debt finance
    (v) The business must retain enough cash to cope with any shortfalls in asset values, such as a fall in the value of market investments
    (vi) The business must retain sufficient cash buffers to cope with general random shocks, economic slowdowns and unforeseen circumstances
    (vii) The business must retain enough cash to be able to easily pay its VAT, corporation tax and PAYE liabilities on the due dates


    All I am saying is, a company should not distribute all its profits as dividends. It must keep back a cash buffer for safety.

    The shareholders own the company but do not directly control the company's assets. The net assets belong to the company, and the directors have a duty to safeguard the assets of the company. The Companies Act contains provisions for the amount of a company’s profits available for distribution, e.g as dividend. The company must have sufficient distributable reserves. It should, however, be borne in mind that a company is not bound to distribute its profits among its members unless the Article of Association so provide. Under the Articles of Association of most companies it is the directors who normally recommend the amount of the dividend, which is subject to the approval of the company in general meeting. The Articles usually provide that the dividend shall not exceed the amount recommended by the directors so that, while the shareholders cannot increase it, they can reduce the amount of the dividend.




  • Comment number 13.

    DevonNative (#11) "Lord Turner seems to have some very sensible ideas. Just have to hope they will be properly considered and implemented."

    A lot of talk on the news today about 'calls for'. Doesn't there have to be legislation? Doesn't that take time, debate and horse-trading in both Houses? Finally, wouldnn't the FSA require resources (staff) competent to do the job as non poachable/corruptable i.e. omniscient etc Compliance Officers in thousands of businesses?

    I M P O S S I B L E.

    I N C O N C E I V A B L E

    In Soviet times, had these things happened those responsible would have been demmed enemies of the people and sent to the GULAG (prison system). After 1990 or so they got renamed 'entrepreneurs' and 'biznuzmen'.

    Funny old life.

  • Comment number 14.

    I really wanted to ask about a different matter. The latest IMF predictions for the UK economy have been happily highlighted by the media, especially those that dislike the present Government. I notice that such forecasts are regularly quoted (less so when they are favourable, of course), but I really have no idea how accurate they turn out to have been. It seems to me that a vital element in the story is missing - especially if previous forecasts have proved fairly wide of the mark. One of the reasons why I worry about the media "dumbing down" is precisely because raw figures (in this case forecasts) are publicised without any context (e.g. their average level of accuracy). perhaps from time to time the BBC might disclose how accurate these various forecasters - IMF, OECD, Item Club, National Institute, etc - actually turj out to be. Then the ordinary punter could have a better idea of what weight to give their prognostications.

  • Comment number 15.

    JadedJean (#13)

    By properly considered, I meant debated of course (should have been more specific, sorry). Trouble is, I'm not convinced that the majority of the members of the Houses of Parliament are competent to have such a debate, given that they're there as a result of a popularity contest or for being friends with the right people. Don't know about the scale of the resources the FSA would need, but couldn't any revised regulations become part of the bank's annual audit? Not sure that any of this is the ideal solution, but without dismantling the whole banking sector (and maybe the whole style of the economy) and starting over, what else can we do?

    As for the Soviets, don't the Russians still like to send an odd oligarch or two to prison from time to time?

  • Comment number 16.

    I subscribe broadly to MK's view that:

    i)the boom was politically very difficult to manage downwards - don't forget that even with the boom we were fighting against mind boggling pension deficits caused by the demographics of living longer and working shorter. Add to that the combination of shocks to the system 9/11, Enron, dot com bust etc. These all served to stay the political and regulatory hand that kept interest rates too low and credit too available regulation too light for the desirable objective of mitigating the impact of shocks to the world financial system in the last 10 years. Those with any national political power could not exercise that power over global markets so we were caught, as you say, in a competitive deregulatory bias.

    ii)Any regulation to be introduced will have to be very carefully framed to meet the needs of the global capital markets and banks operating within. Dr Michael Mainelli at LSE advocated just such "smart focused regulation" at an LSE seminar last summer before the crisis really got going. Smart co-operative regulation is needed to avoid the lowest common denominator attracting all the capital and excessive regulation hindering the efficiency of the banking system.
    Transparency rather than overwhelming bureaucracy – the more regulation there is then there will develop an industry to get around it, through it.

    As for No. 3 Mr Tweedy's suggestions they amount to no more than exuberant prudence after the event.

  • Comment number 17.

    Someone somewhere is going to give us an idea of just how much money will floating about in the system when these restrictions hit.... and we might have an idea how much will be available for house buying, cars, high street purchases, etc.... I’m guessing we are back to late 1980’s economy, maybe mid 1990’s

    To lend mortgages, banks are going to have to hold more in savings (presumably they aren't going to be able to sneak this cash out of the back door and bugger off to Vegas with it), so will have to encourage saving by paying a reasonable amount of interest or maintaining the deposit condition for first time buyers.

    There will possibly be more demand on borrowing than funds to lend... so maybe my sister-in-law will go back to having a finite amount to lend and being judged on lending to those who will repay... rather than a minimum target to lend and the sack if she didn’t....

    Banks may also start to realise they have lived off their reputation for being a safe place to keep money – they might, either feel obliged to live up to that..... or tell us if they want to change the rules

    Lastly Banks might realise that when you pay someone a million pounds plus, you aren’t buying integrity, truth, loyalty or honesty..... you are paying someone to cast those aside in pursuit of your objective.... there are a number of fables that tell us clearly to be careful of what we wish for, the devil is in the detail, as they say!!

  • Comment number 18.

    Microsoft has a habit of holding on to large reserves of cash. The major oil companies do too. The reasons for both are slightly different:
    Microsoft does not wish to take on loans
    Oil companies (e.g. BP) effectively self-insure, so must hold large reserves in case of accidents

    In both instances, BP and Microsoft are not reliant upon the financial services sector to supply their funds. If other companies could also be freed from credit dependence upon other firms, then it would mean no potential for a 'credit crunch'.

  • Comment number 19.

    Mervyn King is a major part of the problem along with the MPC and they must go.

    Mervyn King expects us to believe that he didn't see the crash coming - open your eyes Mr King and read the letters you have been receiving over the last decade warning of the problems that you now say you did not see.

    We can have no recovery until The Governor, the MPC, the FSA and the Permanent Secretary of the Treasury and his staff go. These men presided over causing the bubble and are too associated with creating and managing the conditions that gave rise to it to remain.

    Talk all you like at the Mansion House Mr. King but everybody is laughing at you. You have to be blind not to notice that and even for that reason you must do the decent and honourable thing and resign.

  • Comment number 20.

    #3. MrTweedy wrote: a set of conservative proposals to be (presumably) enshrined in Law to run a well managed company.

    Can you consider the role of Basel2's asset valuation recommendations in creating the present problems and after doing so wonder if bolting the door after the horse is long gone is a good idea, for now?

    Basel2's idea was to move to mark-to-market from a cash returns method of valuation of assets. That is value assets at what the market will pay for them rather than some notional idea related to the income flow that may be generated by an asset. The income flow (or affordability) model of valuation leads to CDO and CDS instruments which as we have seen can become worthless in an instant and that is why I am of the opinion that Basel2 was a substantial cause of the credit crunch. (Although the credit crunch was a necessary correction.)

    This is also I think a very reasonable argument against all those who want to return to an affordability measure of mortgage loan to income multiples.

    Any thoughts?

  • Comment number 21.

    Mr King for the right set of policy actions see:
    https://www.bbc.co.uk/blogs/newsnight/paulmason/2009/03/riga_slump_city.html

    At least the Latvians are dealing with the problem rather than digging a bigger hole!

  • Comment number 22.

    "Counter cyclical" aka "damping".

    As I've mentioned before, there's an Australian economist, Professor Keen, who successfully predicted this crisis several years ago using simulations of credit flows and debt based on engineering principles.

    His blog is at www.debtdeflation.com/blogs

    According to him, a credit money economy can be a stable system if debt is used only for production. If debt is used to invest in assets this causes in effect a Ponzi scheme, which behaves as such an amplifier (pro cyclical) that it can account for the debt bubble we have seen recently.

    Anyway that may be a misrepresentation. The main point is that he is working on a new type of economics that relies solely on engineering principles to model the economy as a dynamic system using engineering software. The research papers on that site are well worth reading.

    If Keen were there instead of Mervyn I'd have half a hope.



  • Comment number 23.

    In the HoC Economics Debate this PM - it was asserted that the Buy-To-Let business was, at its peak, 4x the size of the UK car industry. So, (as I have asked before elsewhere), when it comes to economic contraction and 'home reposessions' and the cut-back in bank loans, just how much of that is accounted for by the Buy-To-Let business?

  • Comment number 24.

    (iv) The business must retain enough cash to self-fund future investment projects, rather then relying on debt finance

    Tell me at least to what extent the business is dependent on technology. Does this hypothetical business have inhouse programmers? If not, what kind of system is being used (SAP?), what is the nature of this business?

    The reason why I ask : If this hypothetical business uses technology that inhouse technologists are customising (eg a software app that is maintained by programmers, or a configurable machine that is maintained by mechanical engineers), in all probability at least some of these people would be happy to absorb spare time into pet projects/ideas of their own. In my experience a motivated technologist is 10 to 50 times more productive than someone who is doing run of the mill stuff. Normal rules cease to apply.

  • Comment number 25.

    "The bottom line is that if we want to avoid the next bust we have to be prepared to pass up the boom."

    Not going to happen, our money is based on debt, so it grow or collapse as the debt eats the credit. There are only booms and busts. If credit doesn't expand, then deflation will be the default mode of the economy.

    Debt based money simply doesn't do steady state.

    Oh and the politicians have already decided to inflate, the next bubble is already on the way.

  • Comment number 26.

    #19
    Absolutely. Anyone who says this crisis was unpredictable was simply being ignorant and should pay the price.

  • Comment number 27.

    What's so daft is that the press keeps reporting all these PR speeches as if they amount to anything substantial. They don't. They're just PR. It's the same with the Treasury Select Committee evidence sessions. All that matters is whether the FSA regulates effectively and that's depdendent on a change to legislation which is currently 'light touch' by design.

    Today, in the HoC Economics debate, the two main parties were still arguing about who had been the most deregulative when the Financial Services and Markets Act (2000) (which created the FSA) was being debated at Bill stage.

    All that substantially matters is whether anything that's done some way far off in the future when NEW legislation is passed, actually makes any manifest difference to the way Financial Services behave! The rest is just theatrics for a naive public in the meantime as I see it as the FSA doesn't have powers or resources at present. This is HOW our liberal (anarchistic) democracy does not work by design.

  • Comment number 28.

    Here's what's happening in my view. Legislation is taking too long and corporate lawyers are finding ways around it as soon as it's produced. The time it takes for the abuse to be spotted and acted upon renders the current liberal-democratic parliamentary system unworkable. What I suspect we'll see next is what was done in Germany (and the USA under FDR) in the 1930s, i.e. government by Statutory Instrument/Executive Order/Emergency Power. In other words - dictatorship - as the only way to curb abuse.

  • Comment number 29.

    FrankSz (#26) "Anyone who says this crisis was unpredictable was simply being ignorant and should pay the price."

    Unlikely. In all the professions which matter, they've got to be just spinning. What's galling is the level of mendacity/chutzpah - but I've said how and why these PDs are selected (see Hare). Significantly, the solution which Germany adopted is now illegal by EU Lisbon/international law.

  • Comment number 30.

    Good old Mervyn King - the only person who seems to be speaking honestly about both the current workings of the markets and the type of human behaviour that gets us to where we are.


  • Comment number 31.

    Perhaps a bit more of "My-word-is-my-bond" that is enforceable against the personal assets of that person, might create less of a risk-taking culture that hijacked the City from 1985 onwards !!

    Perhaps less delusions of grandeur will also help. Saying that one would save the world is all very fine but it *MUST* be backed up by effective and positive actions; not mere thrashings about in the dark !!

    The exuberance you speak is mere spin by those who have no viable solutions !! Those with possible viable solutions are probably quietly beavering away to make them work and are too busy to pour bovine manure on the public at large !!

    Finally, I think Mervyn King is suggesting that we should dig in for a long, long siege and that the recession will not miraculously end next year simply because OUR GLORIOUS LEADER said so !!

  • Comment number 32.

    #22 "According to him, a credit money economy can be a stable system if debt is used only for production. If debt is used to invest in assets this causes in effect a Ponzi scheme, which behaves as such an amplifier (pro cyclical) that it can account for the debt bubble we have seen recently."

    This is typical of the theories based on assumptions to the exclusion of anything else. He focused on debt to the exclusion of repayment(s) of that debt !!

    If debt used to buy assets were ranked *AFTER* dividends, they are entirely Ponzi schemes (ask Bernie Madoff, he knows about such things). If debts for the purchase of assets are ranked *BEFORE* employees' bonuses AND dividends, then they are *NOT* Ponzi schemes since they are repaid as rapidly as possible so that bonuses and dividends can be paid out once the debts are repaid !!

    This is the main failing of the current economic thinking where debts are treated as a permanent fixture. Even our government resort to off-balance sheet items that are hardly ever repaid, preferring to keep rolling them over forever !!

    At best, this is treating debt as a cheap source of capital. Such capital can never be stable since the debt need not be allowed to roll over indefinitely (as has happened recently) and that capital has then to be replaced by some other source or there will be a massive capital restructuring (shrinkage) of the business. If, in the meantime, the cash (liquidity) of the business is reduced by the paying out of bonuses and dividends (rightly or wrongly), there will be no flexibility to buffer this shrinkage and there will be a sudden loss of working capital. No working capital means no further business and it *DIES* (ask Woollies) !!

    Of course this is rather simplistic and there are many more factors involved. This is just an illustration of the problems we face in the coming years !!

    Like the fable of the ant and the grasshopper, the ants of this world will survive this recession while the grasshoppers of this world will find it tough going !!

  • Comment number 33.

    #20 "This is also I think a very reasonable argument against all those who want to return to an affordability measure of mortgage loan to income multiples.

    Any thoughts?"

    3x one + 1x the other with a 20% deposit worked well for years !! Why fix what ain't broke ??

  • Comment number 34.

    #19 "Talk all you like at the Mansion House Mr. King but everybody is laughing at you. You have to be blind not to notice that and even for that reason you must do the decent and honourable thing and resign."

    Add Crash Gordon and Comical Ali to the list !!

  • Comment number 35.

    #18 "Microsoft has a habit of holding on to large reserves of cash."

    In the 90's, Microsoft fought a database war with Oracle and got crushed. Oracle's Larry Ellison had been sitting on a cash mountain since unfortunate experience in the 80's. Therefore, Microsoft decided that if you can't beat 'em, join 'em and started amassing their own cash mountain too !! Despite recent buying sprees by both companies, they still sit on cash mountains !!

    Rather unlike various companies and our government who sit on *debt* mountains !!

  • Comment number 36.

    #15 "As for the Soviets, don't the Russians still like to send an odd oligarch or two to prison from time to time?"

    Nothing odd about their oligarchs; just normal greedy sods !! :-)

  • Comment number 37.

    #13 "In Soviet times, had these things happened those responsible would have been demmed enemies of the people and sent to the GULAG (prison system). After 1990 or so they got renamed 'entrepreneurs' and 'biznuzmen'."

    In China they take a simpler view. They just shoot them and get on with other problems !!

  • Comment number 38.

    #20, #33

    The problem is that quite a few people have borrowed at a greater salary multiple than this, and even the most prudent lenders will lend up to 4.25 X income (e.g. Nationwide). If the maximum lending multiple was to be introduced, it would have to be done very gradually and progressively lowered over a decade or two so as not to make the negative equity problem any worse than it will be anyway after a very large market correction. It would be nonsense to say that everyone who borrowed a larger than three times income multiple was reckless, given that everyone has to have somewhere to live; in many parts of the country buying was always much less expensive than renting, and we must not forget people who have had their salary cut thorough no fault of their own, or families where one parent has given up work or gone part time to look after their children since the mortgage was taken out. However, with a gradual introduction it would be counter-cyclical, as Lord Turner suggests for such a measure.

  • Comment number 39.

    No. 16. tonyparksrun
    "Smart co-operative regulation is needed to avoid the lowest common denominator attracting all the capital and excessive regulation hindering the efficiency of the banking system. As for No. 3 Mr Tweedy's suggestions they amount to no more than exuberant prudence after the event."

    The banking system needs to be stable; that is the number one goal. If it is allowed to be unstable, it is not efficient but destructive. In 2001, for the first time, British commercial banks were permitted to borrow on the wholesale money markets. This deregulation allowed cheap money to be borrowed from Japan etc and then pumped into the mortgage market. The Americans had deregulated and been doing this since 1999. I believe investment banks should be the risk takers, with commercial banks being risk averse. That way we have balance.

    I have been saying this for years, and I have organised my affairs to ensure I have minimised my exposure to the current economic crisis. In effect, I kept my personal stable firmly bolted and my prize horses are still intact. During the summers and autumns I stockpiled dried grass and my horses have plenty to eat now the long winter is here.....
    (However, I am not smug, as no-one can escape this crisis completely, given the gravity of the problem. I am viable; so the government will take my wealth to bail-out the unviable. I will be punished, by being forced to pay for the excessive risk taking and bad debts of others).

    Wealth generation is about understanding your net assets. Too many businesses and households now find they have negative net assets, as their borrowings are high but the value of their assets has fallen. The only real asset is cash. Without cash reserves, and hay in the barn, you have no wealth at all. Too many businesses and households bought into the illusion of wealth through debt. That is all it was - an illusion. They thought they had hay but they only have straw.....

    I have tried to set out some ideas. You say I am wrong and we need "smart co-operative regulation" instead, but I notice you don't attempt to define what this term actually means. Therefore, you have not persuaded me there is a better way.

  • Comment number 40.

    No. 20. John_from_Hendon

    I agree with you - in that I do not like derivatives being created from mortgaged loans. The lender needs to be close to the borrower. How can we value the cash flow from a loan that stretches out over 25 years? There is too much uncertainty. No-one can dispute these mortgage-backed securities were way over-valued and were generally a bad idea.

    House prices need to be kept affordable. Limiting mortgage lending will keep house prices at realistic levels.

    Assets are only worth what someone is prepared to pay, should you wish to sell them. Therefore, they should be valued at market value and not at some untrue price. However, if we fail to prevent asset prices from growing higher than the fundamentals underpinning them, we end up with asset bubbles. To prevent the market value of houses getting too high, we should aim to prevent average house prices from getting above 3 times average income.

    I wouldn't want to prevent a mortgage being transferred from one lender to another, but I don't like them being openly traded as derivatives on a daily basis. Keep mortgage lending to the commercial banks, and not allow commercial banks to package the loans up and sell them to investments banks. Building societies are not allowed to borrow on the wholesale money markets, and they are in better shape than our commercial banks. Building societies do not package their loans up and sell them off. Commercial banks should be more like building societies.

    Investment banks should take risks, but commercial banks should not. We need stable and dependable commercial banks - what you like to call the "Mainwaring banks". Let's keep commercial banking boring, it's safer that way.

  • Comment number 41.

    No. 24. FrankSz

    Thanks for pointing out that employees care about their company and are usually more than willing to work unpaid overtime to support the business.

    If a business has strong reserves to fall back on, it will be able to protect its employees better in a downturn. We don't want to lose skilled labour. A cash rich company has a better chance of protecting its workers, market share and shareholders during a recession. In fact, the cash rich company can benefit from the recession by growing market share through buying up competitors who are in financial difficulty....

  • Comment number 42.

    I too believe that Basel II was one factor.

    Likewise, I consider that significant differences in interest rates between the US and the UK/Euro zone and indeed Japan over seven years was a factor.

    I also believe that the fact that commodities are priced in dollars is an factor not properly discussed.

    There is no doubt that the surge in oil prices last year significantly changed behaviour in the US as petrol and heating oil absorbed so much disposal (or borrowed) income.

    Finally, I am convinced that government spending, based on debt removed credit from the wider market - surely this is the cause of QE.

  • Comment number 43.

    THE POVERTY OF NATURAL LANGUAGE?

    In the HoC Economics Debate yesterday afternoon - one Labour MP asserted that the Buy-To-Let business was, at its peak, 4x the size of the UK car industry (what exactly is the UK car industry these days?). When it comes to economic contraction,'home' reposessions and banks limiting loans, just how much is accounted for by the Buy-To-Let business? How does one know that it's people's home the live in which are being reposesssed rather than those they bought to profit by?

    Like so much else that one hears, it's lmost impossible to tell from the media what is being said. The classes need to be broken down more explictly.

  • Comment number 44.

    AND

    no one ever refers to the impact of two earners per family. 25 years ago it was still rare (certainly in the UK) for women to work when their children were small. This is not now the case. Western women have different expectations of life.

    This change in society has no doubt changed western economies in a way that can't be managed easily through traditional means

  • Comment number 45.

    KIDS WITH VERBAL DEXTERITY

    mrsbloggs13c2 (#44) "no one ever refers to the impact of two earners per family. 25 years ago it was still rare (certainly in the UK) for women to work when their children were small. This is not now the case. Western women have different expectations of life."

    It does get mentioned, quite a lot too (often in the context of the low birth-rate and its implications for an ageing economy, pensions, dumbing down, etc etc). But greed and selfishness is pernicious. Women want their hard won independence and economic freedom (not just the subterfuge of 'supemarket cash-back'. So, it's easily ignored. In the end of course, people will say 'why did nobody say or do anything to stop it?'.......

    Kids eh?

  • Comment number 46.

    Exuberance?! Mervyn King might do better if he didn't speak in euphemisms when addressing this issue. I agree with Mr Tweedy, it shouldn't be difficult to put in place an adequate regulation system. However, there will always be 'boom and bust' - the economic system is predicated on it and concomitantly, so is the stock market. Property, shares, products, labour... cannot have an absolute value - nothing has an absolute value - so whatever price applies at a given moment in time can rise or fall accordingly. What you can do is protect against over-extension, over-inflation, inadequate risk management and poor supervision, so that when the music does stops - as it inevitably will - the whole bloody edifice doesn't crumble into dust.
    Giving people realistic remuneration is part of this process. Inflated salaries have a knock-on effect throughout the economy (see. inflated house prices, land values, retail sales...)and place a high degree of volatility into the system by spreading the risk too thinly. A better distribution of wealth would actually be good for the economy.
    Wealth creation is about producing things that people want to buy and buying things that people produce, it's not really about playing chemin de fer down at the bank with the stocks, securities, assets etc of publicly listed companies. If banks want to play with money in future, they should be a bit more mindful of the role of industry in creating wealth. We didn't have an industrial revolution merely because people could borrow money, it came about because we had people who produced things that others wanted to buy. The role of the banks is skewed, they see themselves and their place in the market as 'the house' when in reality they are merely one of the players. Let's hope that they realise this, otherwise we'll be experiencing the same phenomenon within a generation.

    One of lasting impressions of this farce, contrasts the banks' enthusiasm for lending to over-extended householders with their studied meanness when dealing with the people who actually create wealth.

  • Comment number 47.

    #45 JadedJean

    If women in every culture had independence and economic freedom, and the government stopped offering incentives for the intellectually disadvantaged and unemployable to have children, then a low birth rate would be a good thing, wouldn't it? At least until the world population is stabilised at a significantly lower level than today.

  • Comment number 48.

    DevonNative (#47) "If women in every culture had independence and economic freedom, and the government stopped offering incentives for the intellectually disadvantaged and unemployable to have children, then a low birth rate would be a good thing, wouldn't it? At least until the world population is stabilised at a significantly lower level than today."

    Intensional conditionals/counterfactuals can be very beguiling can't they? If London was in Germany, the FSA would have been a good regulator.

    The reality is that in most of the world that is still not the case and throughout history it never has been. Why? Why, on average, are females shorter than males and less muscular? Answer: natural selection - it's estrogen/testosterone driven. Females have smaller brains than males and are less intelligent, especially in te upper part of the distribution (it's a range and frequencies issue). If one socially engineers equality, it looks like the birth rate falls below replacement level. Worse still, if one encourages equality in HE and work as liberal-democracies do, one ends up with differntial/dysgenic fertility and its dire socio-economic consequences.

    Abilities are not uniformally distributed throughout the world either - gene barriers account for that.

    Conclusion: either we're slowly destroying ourselves in Liberal-Democracies (East and West) or some rival group is doing so. It's less messy than nuclear or conventinal war. End result, dumbed down, more easily managed population (by an enclave, or foreign power).

  • Comment number 49.

    48. JadedJean wrote:
    "Worse still, if one encourages equality in HE and work as liberal-democracies do, one ends up with differntial/dysgenic fertility and its dire socio-economic consequences."

    Interesting point. In the good old days, many people met their spouse whilst at university. When universities only took the best and most able students (and the government paid grants to those students who could not afford it) this meant the best bred amongst themselves.

    Now hoi polloi go to university, the breeding is diminishing in quality.

    The mass market always destroys the things it most desires....

  • Comment number 50.

    #48 JadedJean

    Very beguiling indeed, and reality is such a nuisance sometimes! Best not acknowledge it, for the most part. Most people seem to find life easier that way. Don't suppose it will help in the end though.

  • Comment number 51.

    MrTweedy (#49) It depends how far one goes. The rise in female education begain in the 60s, but as you say, back then, it was only 30,000 students a year in total (then only the top 5% of the entire cohort/disribution). Even so the TFR and differential fertility problem was brewing then as TFRs can only be calculated at the end of the fertility cycle (roughly 15-56) and the latest figures indicated that 1/3 female graduates remained childless. The problem is that once women have their economic freedom, they understadably don't want to give it up. As you say, now that we send 300,000 (50%) of the cohort, the mix is greater but the effect on TFR is likely to be ven more marked as it will delay moterhood for more of the brighter ones. In time the problem just gets insidiously worse as far as I can estimate. It's a paradox as most would think more education is good for society, but if I am right, it's a lagging/generational effect which is liteally demographic and socio-economic suicide. If it was not for the high (0.8?) heritabiliy of intellignce it wouldn't matter.

    Depressing when you look into it all. All the QE and talk of regulation etc isn't going to shift this I fear, as before too long we won't have he people to do it anymore than Zimbabwe etc does (same end result, just different route) :-(.

  • Comment number 52.

    JadedJean

    The mass market does tend to lead to mediocrity, as it tends to pull down excellence. The mass market focuses on low cost and high volume. This drives craftsmanship out of the market, as craftsmanship becomes relatively too expensive.

    Look at how bland out architecture, clothes, and contemporary art is.

    There is an argument that culture cannot exist without money and effort.

    From the Wikiped:
    "Culture (from the Latin "cultura" stemming from colere, meaning "to cultivate") is difficult to define. However, the word "culture" is most commonly used in the following basic senses:
    (i) excellence of taste in the fine arts and humanities
    (ii) an integrated pattern of human knowledge, belief, and behavior that depends upon the capacity for symbolic thought and social learning "


  • Comment number 53.

    MrTweedy (#52) I really think we are sunk. Most of us today have been so thoroughly conditioned by the post-war 'Collective-Guilt' de-nazification program (see wikipedia) run by allied Psychological Warfare that we dare not even acknowledge that eugenics started through Darwin's concerns for man and civilization. The people who created the Eugenic Society (now The London Galton Institute) were people like Galton, Fisher, Spearman, Pearson - i.e. the founders of modern biometrics/statistical testing. They created the Eurgenics movement specifically to try to arrest dysgenesis, hence Differential Psychology, which was at one time coextensive with professional psychology.

    Through outlawing eugenics (Lisbon Treaty Article II of the FCHR) we have stitched outselves up in a way in which China has not.

    Ironically, the very economist who might have stopped this recent economic mess frm happening was also a senior member of the Eugenics Society, and he encouraged Germany in 1936 to embrace his General Theory (of economics).

    I fear we have been had, and I think we need to wake up to this.

  • Comment number 54.

    JadedJean

    The Exuberance of Feckless Behaviour

    It's worth noting the word "exuberance" comes from the French which comes from the latin for "fertile".... Ironically this ties in nicely with your theories on low birth rates.

    Western society has become complacent, and forgotten it has to work hard to maintain its freedoms. We should have protected our advantages. Instead, we have become feckless by embracing the illusion of wealth by debt and the illusion of culture by minimal effort. We will struggle to compete against China, India, Korea and Malaysia. The USA is now dependent on Chinese money......

    It's worth noting that Japan is no better off, as its pension and welfare liabilities are enormous.


  • Comment number 55.

    MrTweedy (#54)

    DOUBLE-STANDARD OR JUST EXUBERANCE?

    Is there a double-standard here? Is it not rational (scientific) to look for deviations from what is expected by chance (ceteris paribus) statistically? Is it not incompetence to neglect searching for rational explanations for observed frequencies which depart from expected?

    Take three groups, where group A has a mean IQ 15 points lower than group B, and Group B has a mean 7.5 points below group C (A=85, B=100, C=107.5). Furthermore, assume that all three groups are of different size, with group A comprising 14% of the population and group C about 5% of the population (we'll leave how homogeneous group B is for now).

    What many people may not fully appreciate is that even if group C is a minority group (numercially), because IQ is Gaussian in distribution by design, groups C's hegemonic advantage over group A's especially is potentially enormous, especially if the culture preaches individualism and equality whilst allowing group interest to flourish for numerically minority groups (because of alleged past persecutions).

    This advantage prevails even relative to group B, even given group C's small size, especially if it is geographically concentrated in urban areas of major political, economic and cultural influence in the nation.

    This must confer hegemonic/political advantage, even if members of the group don't acknowledge this. That advantage is increased through increasing low skilled immigration and the birth-rate in group A.

    The point to be grasped here is that some minority groups may not be disadvantaged at all. The history of colonisation should have taught us that.

    Question: are we possibly seeing something along these lines emerge today without having fully appreciated how it works and how it foments conflict and predatory behaviour?

  • Comment number 56.

    Jadedjean and Mr Tweedy. How did you get onto the subject of eugenics and more importantly why? Under this crazy theory the US government (under the tutelage of Skinner) restricted immigration to the Nordic/Ayrian and Anglo-Saxon peoples and discriminated against the Italians, Greeks, Jews and Irish. Now you don't have to be the brightest spanner in the toolbox to notice that all five nationalities have had made a disproportionately large contribution to civilisation relative to their number and regardless of where they started on the social ladder.
    Eugenics is bull and pernicious bull at that.

  • Comment number 57.

    armchairstrategist (#56) Your post does not appear to be based on the historical or empirical facts.

    Firstly, European TFRs are all below replacement level. Secondly, where were the Jews to come from apart form the USSR?. Thirdly, growth in the USA population and differential/dysgenic fertility, is, according to the official USA Census data, largely in the Hispanic population and then in the Black population. Fourthly, what did Skinner have to do with any of it?

    Historically, those campaigning for immigration were, to the best of my knowledge, the Jewish community. I suggest you take a look at the NYC demographics (link provided elsewhere) and the US Census projections which indicate that the USA white population will fall to under 50% by 2050.

    I also suggest you also look at the effect of the promotion of female education has had on dysgenic fertilty, how this differentially affected ethnic groups, and ultimately, predatory lending to the sub-prime market.

    See previous links to ETS and other peoples' unheeded warnings over the years.

  • Comment number 58.

    Jadedjean (#57). It is. I was referring to the US government's practice in the early 20th century, which depended in large part on the ideas of Skinner, Jensen and others. Also, your premise is that the people of non-European origin will in some considerable way contribute to the "Perfect Storm" to which you and the video link elude. It's a false analogy and a non-empirical judgement as this situation has never happened before. You don't know what going to happen next - no one does. However, unless the US adopts policies that encompasses the whole and not just some of the parts, it's going to get into real trouble. Part of the US's problem is the woefully disporportionate distribution of wealth and opportunity (withstanding the large scale failure of the education system). It's model is more akin to Brazil than developed countries like Switzerland, Denmark and Sweden - where the ratios of the wealthiest to the average are more like 10:1 rather than in excess of 100:1 or more in the USA. More equal societies produce fewer criminals, fewer teen pregnancies, less mental illness, less deviant behaviour, more social cohesion... What you propose is quackery dressed up in its finery. You've created the perfect teacup for your perfect storm and you've used faux empiricism to justify it. Not only that, you've put ugly and unjustified racial and sexist elements in the mix. The future belongs to those societies that are inclusive.
    Think again.

  • Comment number 59.

    armchairstrategist (#58) "It is. I was referring to the US government's practice in the early 20th century, which depended in large part on the ideas of Skinner, Jensen and others. Also, your premise is that the people of non-European origin will in some considerable way contribute to the "Perfect Storm" to which you and the video link elude. It's a false analogy and a non-empirical judgement as this situation has never happened before."

    You (and other readers of what you write) need to grasp that what you are writing is creative fiction. It is not informed by the facts. ETS is the largest educational testing organisation in the world and is akin to our QCA and NAA. They are simply reporting the official statistics.

    You may not like what you hear (deeming it 'ugly'), but that does not make any of it untrue alas.

    You, like many others these days alas, are clearly judging what you believe to be true as a function of what you would like to be true rather than what is the case.

    I urge others to follow the links that I have provided, by all means be critical of the sources, but I think most people will, having done so, find that they are sound.

  • Comment number 60.

    You ought to let the readers draw their own conclusions rather than try to do the job for them. I'm sure they're perfectly capable of appreciating this matter from either angle. Alas, I believe you are wrong. I'm sure the ETS is a highly reputable organisation but its conclusions are facile, arguable and certainly not immutable.

    However, my problem is less to do with the ETS and its findings than with your interpretation of them. Your agenda is of dubious worth and 'ugly' because it is parading all the usual stereotypes of the sort that I referred to. We've been here before as I said. US Immigration - absurd as it may seem - did discriminate against the Italians, Greeks, Jews and Irish on the grounds that they were "less intelligent" (based on sound testing and rigorous research, of course). By the way, the Latinos who settle in the US come from a variety of countries and from a gene pool that was capable of coming up with the Long Count and a more accurate calendar than ours - all before they started regular school.

    I'm dubious about any intellectual fascism which raises the importance of intelligence above all other considerations. The reason for this is simple: it heretical - not in the religous sense (although that would be true, also) but in an intellectual and moral sense. It demeans humanity. What if it were true? It is and can only be part of the story. You are pinning too much worth to it (and besmirching it with nasty racial overtones) when you should know better. Many of our most successful entrepreneurs are dumbclucks at doing anything other than making money. So what?

    America is not about to fold because its intellectual star is dimming, it's doing so because capital has taken the fast boat to China just as Karl Marx predicted; it's run up a huge deficit; it maxed out on cheap credit and shortsightedness... Also, the premise that fools and other assorted dimwits bought houses they couldn't afford works the other way. They bought them from bankers - the intelligent ones by all accounts - who thought it was good idea to expose their companies to debt that was greater than the sum of their liquidity and capitalisation combined. Very clever. A mistake that required one question to rectify: What is our exposure? None had the sense to ask it. The interesting thing here is the symmetry between arrogance and ignorance and intelligence and stupidity.

    Before drawing your ludicrous conclusions listen to pianists like Teddy Wilson and Art Tatum and don't worry your perty little head 'bout nuttin'; genuflect to that old peasant John XXIII; do what ever it is you have to do to stop yourself getting all worked up in your bed linen.

    Alternatively, advise the ETS to encourage immigration from Hungary to the US. I understand those magical Magyars are a nomadic pastoralist's horse's head above the rest at mathematics and they don't even start school until they are seven.

    It might be an idea if the educational establishment in the US - like here in Britain - stopped boring the next generation to death and taught they something interesting, in an interesting way.

  • Comment number 61.

    armchairstrategist (#58) You need to base what you say on fact not fiction if you want to be taken seriously.

    For example, Skinner died in 1990 and was still a student in the early years of the C20th when there was this initial fuss about USA immigration.

    More recent trends should now be a major concern to all but subversives.

    The media is now littered with people expressing falsehoods simply because they know no better. Try to base what you have to say on well replicated, undisputed, scientifically credible, data.

    Pleaae don't share any more of your false beliefs with others.

  • Comment number 62.

    armchairstrategist (#60) "..all the usual stereotypes of the sort that I referred to."

    Sadly, the stereotypes became so because they capture basic statistical truths about people and groups, i.e. they are statistical summaries. What many people ignorant of probability theory fail to grasp is that most of our class terms are statistical. You repeatedely show that you do not understand this by picking on anecdotal exceptions. These are not representative. You need to learn something about statistics and distributions. The mean Hispanic IQ is between that of the White Amercians and Black Americans (separated by 15 points).


    The reason why capital will flow to the PRC is because China now has a higher mean IQ than the USA (which the latter continues to reduce through its self-destructive libertarian policies as I have explained elsewhere). China also has a much larger population meaning that their higher mean IQ dwarfs the USA's intelligentsia. It also has effective population management/eugenic policices.

    One can kt encouyrage migration form the EU. Easter Europe has an even lower TFR than central andWestern Europe. It is way below replacement level. WIth a TFR of 1.3 a populaton halves in two generations (60 years), with 1.1 in 30 years.

    Is the seriousness of this sinking in yet?

    Have the implications of the 'enrichment' dogma of education being a myth sunk in? That is what most people hold as a tacit assumption, and it is false. This will come as a major shock when it sinks in for more readers. There is no evidence we can raise IQ via education. It is essentially genetic. We have desperately tried to do so in a number of professions and we have failed. The idea that we ever could was 'alchemical'.

  • Comment number 63.

    61# Subversives? Strange choice of word. Who are they? People who don't agree with you. I'm always very disturbed by the 'there is no alternative' hypothesis. The media is littered with people who don't agree with you. Oh dear! It's called a dialgoue. You want a monologue in which you do all the talking and everyone else has to listen (obediently). Very dubious.
    I am wary of all expert opinion on this subject or any other subject for that matter. Many ideas have gained credence quite erroneously on the back of - what is supposed to be - unimpeachable scientific research which has later turned out to be flawed.

    By the way, beliefs are articles of faith. These aren't beliefs they are opinions - quite a different matter - and open to debate.

    As for being taken seriously, frankly, I couldn't care less.

  • Comment number 64.

    62# Total drivel wrapped up in statistics. The Chinese IQ does FA to move capital. Capital dances to the tune of profit and return on investment. It couldn't care less whether it was selling to statisticians or schmucks.

  • Comment number 65.

    If within fifteen or twenty years we haven't seen a similar pattern of behaviour I'd be amazed. Regardless of current pain, most people tend to have short memories.

    Henry
    UK Insurance Direct

 

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