The crumbling social contract

The crumbling social contract

15 Mar 2017

THE LAND OF THE FREE-FROM-RESPONSIBILTY The Occupy protesters (what was it they were protesting about again?) used to chant “We are the 99%”. The 1% were portrayed as the selfish and/or crooked people who had appropriated most of the wealth. It is demonstrably easy to be part of the 99% – in fact, it’s darned hard not to be. Rarely had so many ever been against so few. The trouble with being part of a 99% majority is that it is difficult to be focused. Even the French revolutionaries of 1789, who had pretty much the same numbers on their side, could not agree on their objectives and ten years later succumbed to dictatorship (by a chap named Napoleon). But the recent UK budget, delivered by the harassed Chancellor, Philip Hammond, highlighted one point on which close to 99% of politicians, lobbyists and commentators are agreed. They all have limitless opinions about how public money should be spent but next to no constructive suggestions about how that spending should be funded. There is no responsibility for funding that is commensurate with the responsibility for spending. This seems unfair because the latter offers all the joys of patronage and moral superiority and the former, as Mr Hammond might agree, is like having toothache in a land of no dentists (whose absence is widely attributed to your own austerity policy).      I believe that most citizens are supportive of the idea that they should pay their fair share of taxes. But what weakens their support is any suggestion that the government is misusing their money, either by waste and incompetence or by channelling it to family and friends or by funding causes with which they do not agree. (The 2016 EU referendum ticked all those boxes for many people). There was a great experiment in California in the 1970s that showed what happens when people revolt against their social obligation to pay taxes. PROPOSITION 13 Essentially, Proposition 13, passed overwhelming in a referendum in 1978, imposed severe restrictions on the ability of local Californian politicians to raise taxes. Its genesis was the Howard Jarvis Taxpayers Association. The US has a history of taxing real estate that...

QE : a wrecking ball to crack a nut

QE : a wrecking ball to crack a nut

3 Sep 2016

On 4 August 2016, the Bank of England expanded the QE (quantitative easing) programme that it had begun in 2009. This expansion, which now includes corporate bonds as well as gilts, is ostensibly in response to the Brexit referendum result on 24 June. The Treasury and the Bank had warned that Brexit could lead to a bad recession. You might need reminding that the official purpose of QE, since 2011, has been to stimulate the UK economy. You might think that, if this policy has been a success, it is rather a slow burner. But Andy Haldane (Bank of England Chief Economist) is in no doubt that it is the right thing to do and that this is no time to be faint hearted. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”   Mr Haldane may be an economist but he knows how employ a ridiculous metaphor to make a point. And although he – incredibly – affects populist ignorance of financial matters (giving interviews in which he says that pensions are too complicated to understand), he does not lack respect for his own ability. He explained that the decision to cut interest rates by 0.25% was in order to save hundreds of thousands of jobs, though whether this included his own was not clear. QE actually commenced in 2009 as an emergency measure to prop up asset prices in a (so far) successful attempt to save the banking system. The banks held vast amounts of tradable assets that could become vulnerable to crises of confidence – so the central bank stepped in as a very public buyer and calm was largely restored. Phew. The official line that this was a form of monetary policy that could stimulate economic growth snuck in later and is much more challenging to justify. It seems to me to be a rather strained argument. Here is the latest official serving. BoE report 4 August 2016 The expansion of the Bank of England’s asset purchase programme for UK government bonds will impart monetary stimulus by lowering the yields on securities that...

The ECB, QE and the waiting game

The ECB, QE and the waiting game

12 Feb 2015

Quantitative easing is a process by which a central bank buys relatively safe assets (mostly government bonds) and thereby puts cash into the hands of the newly-ex owners of those assets. In the early years of the financial crisis, this was effectively a life-support system for financial institutions which, post-Lehman Brothers, looked like they might fall domino-style. As the central bank bids up asset prices it creates a rising tide that floats many boats. One side effect of this is that the wealthy become wealthier. QE is quite tricky to justify from this point of view. If it is necessary to prevent the collapse of the banking system it is a jagged pill that needs to be swallowed. As I have written before, this is broadly how the Bank of England justified QE in 2009. “Purchases of assets by the Bank of England could help to improve liquidity in credit markets that are currently not functioning normally.” But gradually, while the music remained the same the lyrics changed. Expressing an idea that was essentially imported from the US, the justification from the Bank in 2011 was quite different. “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” You see what they did there? Once again, it was party time in financial markets. Bonds and equities were rising nicely. Bonds were rising because the Bank was buying them and other people were buying them because the Bank was buying them and equities were rising because they looked cheap compared to bonds. And property in the areas where financial people live began to go up again, despite the fact that prices appeared to require mortgages that quite high incomes could not plausibly service and that damaged banks could not reasonably be expected to offer. My friends and I have done splendidly from this once we had “got it”. And although I don’t know any influential people, some of my friends do. Call me a conspiracy theorist if you want but these influential people soon popped up all over the place saying how brave and wise central bankers were to extend QE. THE HIGH MORAL...