I was honoured to be invited to the annual party at the FT, where Martin Wolf regaled us with an interesting and wide ranging speech, and floating amongst the canapes and red wine were just about every impressive economist and journalist I had half heard of in the last 12 months.  Plus a certain Chancellor of a particular Exchequer, giving nothing away. It was very interesting, and I will treat it as Chatham house, for my convenience, because 6 glasses of wine later, I am not entirely sure what was said.  Except:

  • I can find no-one who is against QE.  Everyone imagines the no-QE counterfactual would have been worse
  • I myself am beginning to row back a bit from my Slash and Grow? views, and said as much to Rupert who advises G Osborne.  Fact is, it may be unlikely, but it is still the right aspiration.  Politicans express aspirations, rather than Plan A to Z in descending order of likelihood.  Don’t get me wrong: I still think they are nuts to try cutting immediately.  But you can’t prove it just by saying “this has never happened before”.  People know that- we’ve been on a 30 year binge after all.   What I am still uncertain of is: if the economy weakens, will they go all ‘Lady’s not for turning’ on us?
  • I did not find many people willing to agree with me that Ed Balls is a good bet at 30-1 to be the next Labour leader.  But I know good odds. He s joining the mad war on fiscal arithmetic (see his Seeking £2.6bn on Spending).  Iain Dale (who is apparently some sort of blogger), wonders what he is up to, tracing his weaving and bobbing on this issue.  What I think he is up to is aligning himself with that part of Labour that may decide the future leadership: the part that thinks fiscal arithmetic for all future years is optional.   Alistair Darling is having a go at him, according to the FT
  • I feel strangely confident in the country’s future, because I saw a lot of bright people from across the spectrum chatting amicably.

Other FT stories.  Obviously the fiscal responsibility act is a pointless noisy political gesture. Read “Fiscal Rules OK“.  There is no way that fiscal policy can be bound by (a) rules written a while ago or (b) unelected bureaucrats (if you want the Tory alternative)  I like the quote from the FT leader:

The fiscal bill is the most egregious example of the government’s use of aspirational legislation, seen also in the child poverty bill and the draft bill on international development spending. These efforts to impose policy goals on a future government by statute bring the law into disrepute.

Not everything about recession is bad news.  There is a flood of elder teachers into the profession.

I love Brad DeLong’s graphical explanations for why fiscal policy may still be better than monetary policy.  But Economist Blog Free Exchange is probably right that the monetary levers still have more political capital.  AS BDL himself pointed out (see my blog before): getting more out of Congress, even if it makes perfect economic sense, may not be easy.

As for the UK … if Dillow is right, the government has already bucked at the fence of promised higher spending .  But the trouble is that monetary policy IF it can work is not committing to the right measures: permanent money increase.  There are real divisions in the  MPC as to the right next steps.  Is that good?

The OECD’s growth projections are going up, but are still nowhere near the Bank’s.  I have a pet theory: is this the Bank’s belated attempt to prove that it will do anything – including lie about what it thinks of the future – in order to boost demand?

Having enjoyed Paul’s attack on Left economic illiteracy, I was glad to read a sceptical take on Cruddas’s communitarianism. I once tried to count the ISMs in a Cruddas article, and gave up after 20.  What would you do? rather than which isms are you in favour of? should be yelled from the floor at all these characters.

UPDATE:  The Isms of Cruddas: worth a second post.

Bill, I can’t read law.  Explain why this document changes the political reality of regulators taking on booming financial firms.


3 thoughts on “Hungover from a party at the FT, I turn to the FT

  1. Giles,

    As the Congressman himself puts it:

    •Objective Standards. Size is by no means the only factor to determine if a financial company is “too big to fail.” The recent financial crisis has shown that many other factors can also cause a company to become a systemic risk. Rather, the amendment considers a variety of objective standards to determine if financial firms pose a threat to our financial stability, including the scope, scale, exposure, leverage, interconnectedness of financial activities, as well as size of the financial company. The Kanjorski amendment does not cap the size of financial institutions.

    •Mitigatory Actions. If a financial company is deemed systemically risky, the Kanjorski amendment provides responsible preventative actions to protect our financial system and curtail those risks. These include modifying existing prudential standards, imposing conditions on or terminating activities, limiting mergers and acquisitions, and in the most extreme cases, breaking up the company.

    •Protects American Competitiveness. We have learned from this financial crisis that we are all connected. The Kanjorski amendment addresses the concern that our regulatory system works in conjunction with those around the globe. Currently, the European Union is considering similar action, and harmonized regulations would benefit both economies.

    I am interested to see if it has any traction in the House, given the general scepticism of the willingness of future regulators to act this time.

    Not having been to a cocktail party, I remain very bearish in deed – maybe even more bearish. I put a link to a Bill Gross analysis up on Duncan’s blog. How about a global or at least western Lost Decade with FTSE grubbing along at 3500, house prices 50% of Jan 2008 prices, politicians refusing to repeat the strategy of the last 12 months, trade barriers being erected here there and everywhere, zenophobia and intercommunity strife.

    QE seems to me to be a very central bankers’ and market-based attempt at a solution (a cocktail party solution) that is just stoking up the conditions for the next bank implosion … watch the Bank of Ireland or something like it. With the Second Coming there will be no stomach for a repeat among the politicos and no resistence to deflation. Cameron will have his year with the knife.

    My route to salvation remains the PSBR – very unfashionable but it is the magic place where monetary and fiscal policy is one and the same thing. Increase PSBR and you increase the money supply. Couldn’t be more direct, but very un-central bankerly. Spend it on investment and capacity building, prime the pump but get something useful – as you have said elsewhere, over the last year G Ex has just gone on, not with a plan, an intent, a rallying call, a redirection, but just as if nothing had happened other than someone turned the tax tap off. A National Programme for Reconstruction and Renewal.

    Sorry if this has gone on too long.


  2. BIll, that deserves an answer.

    On your first point, I suspect that the inherent complexity of financial markets and economics (see Pinnacle Global for a decent intro to how economics needs to change for this: http://www.pinnacleglobal.co.uk/The%20Economists%27%20Paradox.pdf) means that you can’t write down in a law all the different things that may cause an institution to become a risk.

    I also think that anything that looks at just firms rather than the system as a whole will fail: it is quite possible for an economy with thousands of small banks to produce systemic problems. Take the stock market crash of 1987: it was not caused by any one big firm. Whatever was structurally wrong with the market, it would have been difficult to discover through any check-box written in a law.

    But I would also return to the point made in Waldeman: there are undoubtedly decisions of judgement, and decisions of political consequence, that regulators will need to take in order to reduce risks. They will be political because (a) they will hurt particular well connected interests and (b) because those large companies have stake holders, shareholders, customers, and so on, the consequence of regulation will ripple through the country.

    An example: Northern Rock. You might come up with measures that determine how it is a risk. At some point a regulator has to act on those measures. Itt’s 2006, and the bank is: extending finance to thousands of grateful locals, employing loads of locals, paying big dividends to shareholders, on good terms with local Labour MP’s – and as of 2006 was seemingly doing *nothing* wrong. That regulator, without the glorious advantage of hindsight, has to damage bunches of people, because on a hunch he is worried about the possible consequences of their behaviour on the wider system. If that regulator actually makes the right call, no-one will ever know.

    I can’t see how another amendment can fix that fundamental problem. Particularly if you consider crises without the rear-view mirror; the next crisis will not come with a big sign on it saying “Southern Boulder” and all the boxes ready to tick. It will look utterly different: not unrecognisable, but sufficiently different that it will require judgement and some regulator to put his or her neck on the line.

    I don’t share your bearishness, or Duncan’s (I may visit there next, if time permits). QE has a big effect on asset prices. I am not convinced that the policy is being made the most of – this is the government’s big weapon, after all – and share your views about doing fiscal things with it, since so many of its effects are quasi fiscal (boosting the profits of finance, making the wealthy wealthier)

    Thanks for all the stimulating comments, Giles

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