Meaningful freedom has always
implied responsibility.

Via Hansard:

Q9. [93975] Steve Baker (Wycombe) (Con): On Monday I visited the offices of the Bucks Free Press to hear what my constituents have been saying about proposed changes to health services at Wycombe hospital. I can tell the Prime Minister that Labour’s tragic legacy in my constituency is distrust and despair. Does he agree with me that the right way to deliver local accountability in health care in our constituencies is clinical commissioning and foundation trust status?

The Prime Minister: I think my hon. Friend is entirely right. The whole point of the reforms is to put the power in the hands of local doctors, so that they make decisions on behalf of patients and based on what is good for health care in their local area. We may well find that the community hospitals that were repeatedly undermined by Labour will actually get a great boost, because local people and local doctors want to see them succeed. That is what our reforms are all about.

Under the heading, Osborne looks to limit damage of ‘credit busts’, the FT gives a neat summary of the Chancellor’s plans. In particular:

He said the FPC would also look out for dangerous linkages in the financial system and identify exotic new instruments that might undermine stability. It would be charged with containing credit booms as well as limiting the damage of “credit busts”.

Which this morning caused me to regret that I was not given time in the Commons at the second reading of the Financial Services Bill to quote from the 1932 preface Hayek’s Monetary Theory and the Trade Cycle:

There can, of course, be little doubt that, at the present time, a deflationary process is going on and that an indefinite continuation of that deflation would do inestimable harm. But this does not, by any means, necessarily mean that the deflation is the original cause of our difficulties or that we could overcome these difficulties by compensating for the deflationary tendencies, at present operative in our economic system, by forcing more money into circulation. There is no reason to assume that the crisis was started by a deliberate deflationary action on the part of the monetary authorities, or that the deflation itself is anything but a secondary phenomenon, a process induced by the maladjustments of industry left over from the boom. If, however, the deflation is not a cause but an effect of the unprofitableness of industry, then it is surely vain to hope that by reversing the deflationary process, we can regain lasting prosperity. Far from following a deflationary policy, central banks, particularly in the efforts than have ever been undertaken before to combat the depression by a policy of credit expansion—with the result that the depression has lasted longer and has become more severe than any preceding one.

In debate on Monday, after a number of interventions about the futile search for stability and the breach of the rule of law inherent in the proposals, I indicated three flaws in the Bill, three “elephants in the room” as Peter Lilley had put it,

I very much welcome the Bill, which I hope and believe will prove to be the zenith of contemporary thought on bank reform. With due deference to my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), I wish to talk about three potential elephants in the room. First, I wish to make some remarks about accounting, then I wish to discuss the conduct of individuals and liability, and finally I wish to talk about financial stability.

I know that the Minister has heard my views on the international financial reporting standard, but I draw his attention to a letter in yesterday’s Financial Times by Lord Lawson, under the headline “Forget Fred and focus on the real banking scandal”. He stated:

“The auditing of banks’ accounts, however, is fundamentally flawed in itself. The IFRS accounting system itself has proved to be damagingly pro-cyclical, and the ability to pay genuine (and genuinely large) bonuses out of purely paper profits, which are never subsequently realised, is at the heart of both the bonuses that cause such public and political outrage, and the reason why bank management consistently does so well when bank shareholders do so badly.”

Andy Haldane, the executive director for financial stability at the Bank of England, gave a speech in December. I shall not read out all the remarks that I meant to cover, but he concluded by saying that

“if we are to restore investor faith in banking sector balance sheets, nothing less than a radical rethink may be required.”

He was referring, entirely, to accounting standards. I therefore refer the Government to my private Member’s Bill introduced on 13 May 2011, which seeks to introduce parallel prudent accounting for banks. It is a couple of pages long and I hope that it can be added to this Bill.

I also refer the Government to “The Law of Opposites”, a paper produced by the Adam Smith Institute and written by my colleague Gordon Kerr, who has spent 25 years “gaming accounting rules”, as he would perhaps say, in order to make a profit. The banking system is in a far worse state than is generally believed. I do not see how either the Financial Policy Committee or the prudential regulation authority can operate without a true and fair view of the state of financial institutions, and I do not believe for a moment that the international financial reporting standards give that to us.

On the conduct of individuals, we fail too often to think about the pattern of regulation in which we have engaged. It seems that the first thing that legislation does is to damage the incentives and disciplines of the market. Having thereby created moral hazard, regulators come along to try to mitigate the consequences of that moral hazard. A banking licence today is a licence to lend money into existence, at interest, with the risk socialised. When we look at central banking, deposit insurance and limited liability, we find that moral hazard is absolutely rife in the banking industry, even before we consider investment banking. I suggest to the Government that it is time to increase the liability of banks’ directors. There should be strict liability for them, and bonuses should be held in a pool and treated as capital for at least five years. I will introduce a private Member’s Bill to that effect on 29 February.

We have talked about financial stability and the difficulty of defining it. There has been a sense that there is some kind of equilibrium economy—an evenly rotating one—in which there could be a sustainable and stable quantity of credit. Indeed, on pages 14 to 16 of the Joint Committee’s report there is an interesting discussion about the need to regulate credit.

To leave time for my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg), I will just say that if we were talking about any other commodity and were discussing adding to a failed regime of price control a regime of quantity control, we would certainly reject the idea out of hand. In Lord George’s testimony to the Treasury Committee before the crisis, he made it absolutely clear that the Bank of England had created a credit bubble to avoid falling into recession, yet we are going to give the Bank even more powers, more tools, [resulting in] more risk of ruin and more big-player effects and distortions of economic expectations.

I congratulate the Government on introducing the Bill, and I sincerely hope that it represents the absolute zenith of contemporary thinking on interventionist bank reform.

In the following video, my remarks begin at 21:31:

I should think society will learn, in the next few years, some important lessons about the use of arbitrary power by monetary and financial authorities. Hold tight.

The Prime Minister today made a spirited defence of the Government’s position following the European Council meeting, in the face of ridiculous pantomime behaviour by Labour. I was glad to be called to ask a question, in which I brought to the Prime Minister’s attention the Initiative for a Free and Prospering Europe, launched yesterday:

The Initiative for a Free and Prospering Europe (IFPE) is an informal and non-political group of European think tanks and other non-governmental organizations, personalities from economic and other sectors, and citizens, whose main aims are reflected below:

1.to raise awareness about the real threats and negative consequences of a deepening political and economic centralization in the European Union (EU), at the expense of individual liberty and responsibility, and the prosperity of people;

2.to call on main political leaders of the EU member states, representatives of the European Commission, ECB, and other key players to stop trying to solve all European economic problems through centralization, including of the creation of a European fiscal union and a European economic government;

3.to propose alternative solutions to the European debt crisis that include the elimination of the causes (not just symptoms) of the debt crisis, based on sources of freedom, responsibility and prosperity (e.g. free markets, property rights, competition, hard backed honest money, and small and responsible administrative governments);

4.to initiate a discussion about alternative solutions to the European debt crisis and the political and economic conditions necessary to transform the EU in a community of free citizens living in prosperous countries.

The IFPE works to draw attention to the risks and devastating consequences of the current and scheduled attempts to solve the debt crisis by increasing the political and economic centralization of the Europe’s decision-making processes in Brussels: the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), the purchase of government bonds by the ECB, the attempts to introduce common European bonds or taxes, and other centralizing experiments. Among the consequences of such interventions are a deepening of the debt crisis without it being solved in any way, a decline in the purchasing power of the euro (an inflationary euro), a growing financial burden on the citizens of the European member states, concentration of power, and finally the limitation of liberty and prosperity for the people of Europe.

The Initiative urges responsible actors to put an end to such counterproductive measures and to stop the inexorable march towards the political and economic centralization of Europe. It is in this context that the Initiative proposes alternative solutions for the debt crisis. They are reflected in the proposal for the financing of sovereign debts through massive programmes of privatization and an administered process of state bankruptcy for those countries with the most severe financial problems. As part of a set of alternative debt crisis solutions, public finances should be reformed for the purpose of maintaining balanced budgets or budgets in surplus (without increasing taxes). There should also be monetary and banking reform (in order to have free and sound money), marked by the introduction of a commodity-backed currency.

The representatives of the IFPE believe in starting a constructive debate about such practicable debt crisis solutions. For they are convinced that a more open debate will help to create the conditions in which a positive agenda for European freedom and prosperity will thrive.

I’m a signatory to the Initiative, which originated in Eastern Europe where they remember only too well the dangers of political and economic centralisation. As I said in the Commons today, I hope Europe’s leaders abandon their outdated ideology and follow the path of our PM.

The Government has announced its decision on HS2:

The Government has decided to proceed with the development and delivery of a new national high speed rail network to provide the capacity that Britain needs to compete and grow.

I just left the Chamber after listening to the oral statement and a good number of colleagues’ questions. The mood is overwhelmingly in favour, on both sides of the House. I remain convinced of the point of view I put to the FT:

Steve Baker, MP for Wycombe, said he was unconvinced that the huge cost of the scheme was justified. “The maths doesn’t add up; this is just sinking capital into a lossmaking project. If you’re going to use the power of the state to do that, then you shouldn’t be surprised that this country is getting poorer.”

Since people often ask me and since I have asked so many questions already, I asked the Secretary of State if she had considered tunnelling the width of the Chilterns. She had: it would cost £1.2bn, which was considered unaffordable.

So the project goes ahead. In the meantime, I’m reading a brief which sets out the tale of woe which is the failure of high speed rail projects in Portugal, Spain, France, Poland, The Netherlands, Norway, Taiwan, China, the USA and  Brazil…

In 1953, the economist Ludwig von Mises wrote:

In a capitalist country the railroads and the telegraph and telephone companies pay considerable taxes. In the countries of the mixed economy, the yearly losses of these public enterprises are a heavy drain upon the nation’s purse. They are not taxpayers, but tax-eaters.

Perhaps little changes, but I should prefer value-creating infrastructure, not infrastructure which makes us poorer.

Yesterday in Parliament, I chaired an event with Gordon Kerr, launching his report The Law of Opposites, which is covered in the Guardian today:

Banks use accounting loopholes to inflate their profits and bolster staff bonuses, according to a report published on Wednesday that calls for changes to the international accounting rules.

According to the paper by the Adam Smith Institute, banks are able to use complex financial products such as credit default swaps to report profits that they might not otherwise be able to.

via Banks use accounting loopholes to inflate profits and bolster bonuses | The Guardian. In related news, The Telegraph reports Watchdog’s verdict could put Sir Fred Goodwin in the dock.

As the Adam Smith Institute blogs:

The Adam Smith Institute report is structured around six shortcomings in the rules governing bank profit and capital reporting, which must be addressed:

• Uncertain future cashflows can be recognised as certain by purchasing a credit default swap (CDS) or similar “protection”, even though the supplier of the protection is likely to default if the insured event occurs;
• Profits can be recognised from the increased value of assets, or decreased value of liabilities, on the basis of a market price, even though the totality of revalued assets or liabilities could not be sold at that price;
• Profits can be recognised from the increased value of assets, or decreased value of liabilities, even when the revaluation of assets is estimated, not by market prices, but by a model built by bank employees. This is the so-called mark-to-model approach to valuation;
• The net present value of uncertain future cashflows can be recognised as profits even when they are estimated using implausibly optimistic forecasts. (This is a variation of the mark-to-model problem listed above);
• The EU’s IFRS accounting system, voluntarily adopted by UK and Irish banks at the banking company level, is inconsistent with UK law;
• Banks need not make provision for expected losses when calculating their profit.

The implications of all this are profound, not just for the solvency of banks, but for the justice of taxpayer bailouts and bank bonuses. I’m sure we have not heard the last of the flaws in IFRS and the problems it causes.