American musician Ray Stevens has produced this superb analysis of the Obama Budget Plan:
I’m sure Ray has much to teach politicians and the public in the UK and Europe too, particularly about ethics and decency in the public finances.
For more on that subject, see Jörg Guido Hülsmann’s brilliant book The Ethics of Money Production (PDF) and these sovereign debt projections from the Bank for International Settlements.
My colleague Jesse Norman MP has done some fantastic work towards obtaining rebates on exorbitant private finance initiative (PFI) contracts. See for example his article It is time to derail the PFI gravy train. To that end, yesterday we held a lengthy debate in Westminster Hall which you can find here.
PFI really matters to Wycombe and Buckinghamshire, where long, expensive hospital contracts have become fixed points in the local health system. A sensible, negotiated rebate would help NHS staff deliver more.
My colleagues did a fine job in explaining the minutiae of PFI and its faults so I tried to widen the debate to encompass PFI’s place in our present social system:
I would like to develop one point: how PFI fits into the nature of our society. I am reminded of something that Churchill said, which I think speaks to the third way. He said:
“Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk.”
I will come back to how he finished the quote at the end. It strikes me that the third way seems to have turned private enterprise into a vampire squid to be suckered on to the faces of people on normal and low incomes.
…
It is strange that so much money is being funnelled to firms whose commercial risks are being underwritten by the power to tax. Far from protecting the poor, the state now seems to be an institution for protecting the rich from the risks they take with their own investments. I am a capitalist, and I believe that capitalism requires entrepreneurs and investors to bear their own risks. Somehow, through all this mire and mess we find ourselves in, we need to recover the principles of a free society and a vision of a capitalism that works, and works for everybody.
The worst part of the present system of vampire squid state capitalism is of course the banking system, but PFI as recently executed is in there too. The Treasury has made a start but there is far to go before PFI satisfies the public’s incisive sense of fair play.
It was briefly fashionable to admit that interest rates were too low for too long, leading to a boom built on expansionist monetary policy. Unfortunately (related link my own):
Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.
If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.
This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.
Thus there is no doubt that we shall one day have to face again an economic recession, although it is impossible to determine the date of its outbreak and the degree of its severity. It will be bad indeed. But worse than the crisis itself could prove the psychological and ideological consequences of an erroneous interpretation of its causes.
For those consequences, please read the rest of the article: Inflation Must End in a Slump – Mises Institute.
Many remain reluctant to believe in the laws of social cooperation, which are as immutable as the laws of physics, if less susceptible to mathematical analysis. Like gravity, those laws believe in us and they will win eventually.
A good place to start reading into those laws is here.
I have written today on financial regulation for The Cobden Centre:
In the aftermath of the financial crisis, we are now going down a road towards ‘judgement-based’ regulation of financial firms in an attempt to salvage capitalism.
It is proposed that firms will be supervised by what amount to shadow management teams of disinterested, public-spirited individuals more able to reach sound views than firms’ own management teams: they shall possess “the optimal experience and technical ability”.
Quite where these mythical philosopher kings are to be found, I do not know. Presumably, financial firms and regulators already hire the best people available. And the notion that the best people will work for the regulator despite inevitably higher rewards in the firms themselves is silly.
Read the rest of the article: Financial regulation and the deception of government intervention » The Cobden Centre.
As you can see on today’s order paper, Mark Reckless MP has courageously brought forward the following motion, which I have signed (emphasis mine):
EUROZONE FINANCIAL ASSISTANCE
That this House notes with concern that UK taxpayers are potentially being made liable for bail-outs of Eurozone countries when the UK opted to remain outside the Euro and, despite agreement in May 2010 that the EU-wide European Financial Stability Mechanism (EFSM) of €60 billion would represent only 12 per cent. of the non-IMF contribution with the remaining €440 billion being borne by the Eurozone through the European Financial Stability Facility (EFSF), that the EFSM for which the UK may be held liable is in fact being drawn upon to the same or a greater extent than the EFSF; further notes that the European Scrutiny Committee has stated its view that the EFSM is legally unsound; and requires the Government to place the EFSM on the agenda of the next meeting of the Council of Ministers or the European Council and to vote against continued use of the EFSM unless a Eurozone-only arrangement which relieves the UK of liability under the EFSM has by then been agreed.
In my view, this is quite right. Parliament exists to restrain the tendency of the Crown to expropriate the wealth of the British people. The people long since asserted their sovereignty in this country: it is by consent that we have a monarch and a Parliament. We are here to require the Crown to act in certain ways.
Nevertheless, the following amendment has been brought forward to give the Government masses of wriggle room:
Line 9, leave out from ‘unsound’ to end and add ‘urges the Government to raise the issue of the EFSM at the next meeting of the Council of Ministers or the European Council; and supports any measures which would lead to an agreement for a Eurozone-only arrangement.’.
A larger number of colleagues have signed the amendment than the original motion which it spoils. So much for Parliament asserting itself.
My Financial Services (Regulation of Derivatives) Bill has now been printed, ready for second reading on 10 June. You can obtain the PDF here and track the Bill’s progress here. The press release, including links to background evidence and press coverage, is here.
When I introduced my Bill on 15 March, I explained how the accounting rules for banks incentivize trading in derivatives by enabling unrealized profits to be booked up-front, leading to large but unjustified bonuses and dividends.
On 30th March, the House of Lords Economic Affairs Committee published a report recommending that the Government reassert prudence as a guiding principle. That is what my Bill does and I hope the Government will adopt it.
While complying with the rules, banks are producing accounts that grossly inflate their profits and capital in three ways. First, using IFRS mark-to-market and mark-to-model accounting, banks record unrealized gains in investments as profits. Second, IFRS prevents banks from making prudent provision for expected loan losses by allowing recognition only of incurred losses. Third, IFRS encourages banks not to deduct staff compensation from profits. Taken together, these flaws mean that banks’ accounts under IFRS are at once rule-compliant and dangerously misleading.
By way of example, we have deduced from the accounts of the UK Asset Protection Scheme that RBS may be overstating capital by as much as £25bn.
Boards take decisions based on their accounts. If the accounts are misleading, is it any wonder that boards and regulators are failing shareholders and taxpayers? The public are furious about the injustices manufactured by the banking system, and they are right to be, but how much greater is the injustice if grotesque bonuses are based on false profits?
Banks are living in a fools’ paradise in which their boards cannot get a firm grip on vital measures like capital and profit. That is plain wrong.
Thanks to the European Union, the UK cannot simply mandate prudent accounting in compliance with UK Companies Law but we can require parallel accounting to British standards while international negotiations proceed. That is why I am calling on the Government to adopt my Bill.
I chose tonight to support Douglas Carswell’s modest and conservative amendment to the draft EU Budget Bill:
Line 2, leave out from ‘2011’ to end and add ‘is concerned at the above-inflation increase being made to Britain’s EU budget contribution; believes that, at a time when the Government is poised to make reductions in public spending elsewhere, it is wrong to increase that contribution; and calls on the Government to reduce Britain’s EU budget contribution’.
This amendment was not successful.
I wish Justine Greening every success as she sets out to defend British interests in the EU budget negotiations tomorrow.
Over at The Cobden Centre, I have introduced and listed ten substantial plans for financial reform:
Since The Cobden Centre was established by original founder Toby Baxendale, Dr Tim Evans, Dr Anthony J Evans and the author, we have assembled ten plans for financial reform which promise to deliver honest money and social progress. These are set out below.
There is today little doubt that the economic, fiscal and monetary crisis through which we are living was caused by the financial system. It turned out boom and bust had not been ended: we found we had been living on credit in a long unsustainable boom. Some of the flaws in the financial system have been pointed out on this site: in short, government intervention and flawed modern financial theory came together in a catastrophic mix.
Contemporary mainstream debate appears to neglect 200 years and more of monetary history, with an assumption that staying within the status quo is the only option. However, the Currency School vs Banking School debate and the Bullionist v Anti Bullionist Controversy were not, it seems, finally settled.
You can find the proposals here.
At 13:00 today, I attended a busy Westminster Hall debate on Equitable Life secured by Nicola Blackwood MP, to which the minister, Mark Hoban MP, responded.
Nicola covered the situation incisively. Many of us made an exception to sign the Equitable Life pledge during the campaign and we do expect it to be fulfilled. Many older people are living in poverty as a result of Equitable Life’s failure. Many concerns have been expressed to MPs since the election. We have inherited a scandalous legacy from Labour and EMAG members have lost faith in government as a result.
I must dash to my next meeting, so I will post a link to this debate as soon as it is available on Hansard.
Update: the full debate, which I recommend, may be found here. In particular, from the Minister’s response:
I remind hon. Members that no final decisions have yet been made on many of the important issues associated with the scheme. I want the decisions to be in the best interests of policyholders and taxpayers, and I encourage EMAG and others to be involved so that we can move the process on and find a resolution, for which policyholders have waited for many years.
I will give more details on our approach and the next steps in the process when Sir John Chadwick’s final report is published, but I can confidently say that we are moving towards our objective of resolving the issue. We are now reaching a crucial stage in the story of the Equitable Life payment scheme. What happens in the coming months will be decisive in laying out how the scheme operates and the quantum of payments that will be made to policyholders. I encourage all MPs to engage in the debate. This is certainly an issue that we must get right.
Via HMT – Spending Challenge, an attempt to “crowd source” government spending:
The Spending Challenge is your chance to help shape the way government works. We need to reduce the deficit by cutting public spending in a way that is fair and responsible – and you can help.
It could be something small that is quick and easy to put into action, or a more radical change to where and how government works. Either way, please be as specific as you can.
If you see ideas here already that you like the look of, then rate them and get them moved up the list. And if there’s more you’d like to say, then talk to others in the comments section.
A team has been put together right at the heart of government and their job is to make sure that your ideas and comments are taken seriously – and that the best ideas are taken forward as part of the Spending Review.
The Spending Review will set out four year spending plans for all government departments, as well as considering other areas of spending including welfare. The conclusions of the Spending Review will be published on 20 October 2010.
At a glance, there are some great ideas – scrapping HS2 and not wasting money at the end of the financial year, for example – and some awful or ridiculous ones.
You can play your part, for better or worse, here.
