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Friday, August 28, 2009

Sand in the Wheels

By Henry Kippin

“If you want to turn London into a Marxist society, then great…”

At the risk of wading in to an area I know too little about… interesting to read reaction to Adair Turner’s comments this week on the idea of a global tax on financial transactions – known as a Tobin Tax.

This is essentially a tax on currency speculation, and a proposal that some development economists have floated as a means of generating revenue to support economic development in the global south.  In fact, the original purpose seems to have been more focused on dampening market volatility – as Tobin himself put it, throwing “sand in the wheels” of the market.

Obviously the finance industry have opposed this, along with those who argue that such a thing just isn’t feasible (tax avoidance reasons, for one).  But at Avinash Persaud notes in the FT today, times have changed:

“The real question today is not … feasibility; but … desirability. It is hard to argue that anything is not feasible today after governments have engaged in whole-scale bank nationalisation and credit guarantees, pushed budget deficits into double figures, become the buyer of last resort of assets they would not normally touch with a barge pole and threatened to legislate against private sector pay. Where there is a will there is a way.”

So I guess one reason why the idea might fly today is that global regulators are looking much more critically at a ‘swollen’ financial market, and a need to address excessive profit-making in the financial sector.  This is quite a conceptual shift and, as one might imagine, one that is not shared by many bankers (one of whom was responsible for the quote above).

There’s a serious trade off underpinning all of this – between the need to make sure we don’t return to the culture of excess and irresponsibility that brought us through boom, bust and recession; and the need for London to maintain its comparative advantage in an important revenue-generating industry.  Strong vested interests muddy the waters, so Lord Turner will need to navigate a difficult path between morality, social justice, regulatory prescience and macroeconomic stability.  Good luck to him.

Friday, August 14, 2009

Unemployment – just following the tide?

By Henry Kippin

The latest unemployment figures make for awful reading, especially for those under 25 feeling frozen out of the labour market before their careers have even begun. Reports this morning warned that “Britain faces losing a generation to unemployment”, effectively marking a “reversal” of the gains made over the last ten years.

Flashbacks to the 1980s are impossible to ignore, especially the stark juxtaposition of City bankers with enormous mobile phones, against dole queues and depression in many northern cities. Things have certainly changed since then, but pick up any broadsheet yesterday and you would have seen articles on the human effects of the “worst recession in modern history”, side-by-side with the reporting of an effective free-pass from the FSA to help restore the City bonus culture.

Whatever the economic rationale (usually about protecting the City’s comparative advantage), this is pretty hard to take. As Matthew Taylor points out, under 25s “were not to blame for the economic mistakes made by Government, business and consumers. Most have done their best in the education system on the promise that their efforts would be rewarded, a promise that is now being broken.”

It feels like there are a couple of undercurrents running below these headlines. One is a re-emergence of economic liberalism, having ridden out the storm of calls for more and deeper state intervention in financial and other markets. Bill Emmott’s article in yesterday’s Times is a good illustration of this:

“The … biggest, implication of a recession that ends now is that the obituaries written last year for liberalism, for the 30 years of policy domination by the ideas of Reagan and Thatcher, will prove premature. The state has been back only as an emergency rescue service, albeit a vital one, and governments in Europe and America will sell nationalised banks and other assets at the first opportunity, and cut public spending wherever they can. Financial regulation will be tighter at the end of this crisis than at the start, but even Friedrich Hayek, Lady Thatcher’s guru, would not quibble with that.”

From this perspective, the state – having effectively stepped in to prevent total market collapse in the financial sector – is simply a short term backstop, and calls for a more socially responsible model of capitalism reflect a crisis of confidence, but little more. If we accept this line, then rises in unemployment are simply an inevitable byproduct of a necessarily flexible and dynamic labour market, and we should wait for the upturn…

The second undercurrent feels like the beginnings of a reincarnation for orthodox economics, and the efficient markets hypothesis in particular. This is not reflected across the whole community of high-profile economists (Thaler, Skidelsky and Shiller notable examples), but I noticed a piece from William Easterly the other day that attempted a bit of retrospective justification:

“Economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned EMH is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.”

I am not an economist, but this feels a bit like Donald Rumsfeld double-speak mark II. And in any case, I might well be overstating the importance of these opinion-pieces. But it certainly feels like the further we edge out of total economic crisis mode, the more likely it is that these undercurrents will again define the direction of the mainstream. And I’m not sure that is something to be welcomed.

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Posted by Henry Kippin at 10:12 am
Thursday, March 26, 2009

Accountable Capitalism and Market Citizenship

By Henry Kippin

There’s an interesting report available today from the IPPR’s Tomorrow’s Capitalism series, exploring the idea of ‘accountable capitalism’. Its authors take the financial crisis as their starting point, and argue that simply blaming the bankers is a red herring. The crisis, they contend, is evidence of systemic failure – a ‘collision of self-interests’, not the fault of one set of agents.

This starting point leads into a discussion of what should replace our failed system. The focus, they argue, should be on five pillars: responsibility; accountability; relevant information; independent adjudication; and vigilant participants. The first pillar is already a central element of the Cameron message, which has pushed the idea of ‘fiscal responsibility’, ‘civic responsibility’, and even responsibility for obesity. Accountability is high on the Labour agenda, with the PM trailing the Cabinet Office’s ‘Working Together’ document as ‘ushering a new world of accountability’. The need for relevant information and effective adjudication has also been thrown into light by recent turmoil at the FSA.

So far so essential – but also relatively uncontroversial.

The authors’ discussion of vigilance is, however, a new avenue – interesting as much for what it doesn’t say as what it does. The essay explores trustee accountability and grass-roots shareowner movements as ways of shaking people out of a ‘hardy culture of passivity’, and using Web 2.0 networking capability to ‘pressurise investors into continuous engagement’. The overarching argument is that insiders (or market participants in this case) are often more effective regulators of market processes than outsiders – with the potential to drive up structures of transparency and accountability.

This is not self-regulation, but a nod towards the idea that we are all stakeholders in the financial crisis – and thus we all share a degree of responsibility for how it should work in the future.

The question is how far we take this idea. What would a citizen focused view of the market look like? Would it imply more than simple transfer and exchange? Should we be more than consumers? Should we be demanding a company balance sheet with our take-away cappuccinos? The IPPR are pushing at an open door with regard to re-evaluating the role of values in markets; but the debate will also have wider implications – sharing elements with emerging debates over public service reform. It is a creative avenue worth following.

Monday, March 23, 2009

What can we expect from the G20 Summit?

By Ashish Prashar

While the UK and the US call for a coordinated macroeconomic policy reaction to the ongoing recession, France and Germany are calling for microeconomic measures to prevent the next crisis. While the UK and the US are concerned about mounting unemployment and the associated distress of millions of households, France and Germany appear more worried about public debt.

For a while, many political leaders in Europe and elsewhere, including in Asia, were soothed by the decoupling theory, according to which the crisis would not come their way. Even now that the decoupling theory is in tatters, many in high positions seem to believe that it will never be as bad in continental Europe as it is in the UK and US. Besides believing that their banks are in better shape, they like to argue that Europe’s famed welfare systems have larger automatic stabilisers and should reassure consumers. This is not really supported by most empirical estimates, but we know that precision is not the hallmark of this corner of economic knowledge.

It is true that piling up public debt is a guaranteed implication of fiscal policy expansion, while no one really knows how much bang we will get from the bucks. Yes this is a problem; however, what is missing in this line of argument is the simple fact that a recession will worsen budget deficits. Containing the recession, therefore, is one way to limit the deficits. This is a lesson that should have been learnt from the Great Depression.

The G20 will not be able to paper over these differences, which reflect deep divergences in the way economic policies are prepared and understood. So what can we expect from the G20 Summit next week?

Probably not much. The Franco-German idea of focusing on the next crisis by rethinking financial regulation is disastrous. For one, there is no reason to choose between macroeconomic policies and financial regulation. Both are badly needed, although fiscal action is a matter of acute urgency while financial regulation is going to be a long drawn-out process that will take years to deliver its results. In addition, financial regulation is extraordinarily complicated, as it calls for sophisticated general equilibrium reasoning. Summit meetings are ideally unsuited to the task. It is one thing to ban tax havens, which played no role in the crisis; it is another thing to design incentives that will prevent financial firms from taking risks that yield vast private returns and even larger public losses.

The UK, with support from the US, Japan and, surprisingly, China, are highly unlikely to extract more than token fiscal policy commitments from the other European nations. Maybe this is not all that disastrous. These four countries account for about a hefty share of world GDP, so they can do a lot of good to themselves and to the rest of the world. Indeed, it is very likely that a significant portion of their fiscal expansion will feed imports from the other countries, thus spreading relief internationally, especially if their currencies appreciate. But who knows? The problem is that free-riding by some countries may elicit protectionism from those that carry the burden. And that would be disastrous.

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Posted by Ashish Prashar at 10:15 am

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