Chris is right in everything he says about nationalising the banks, and I think he’s wrong. It’s a completeness problem.

His core argument is this:

[Nationalisation] wouldn’t prevent banks losing money: these are inevitable sometimes because of complexity, bounded rationality and limited knowledge. However, when banks are nationalized, their losses would create only a very minor problem for the public finances as governments borrow money to recapitalize them*. That needn’t generate the fears of a credit crunch or financial crisis that we’ve seen recently. In this sense, nationalization would act as a circuit-breaker, preventing blow-ups at banks from damaging the rest of the economy. (Given that countries are exposed to financial crises overseas, the full benefit of this requires that banks be nationalized in all countries).

This argues for an exchange of private gain/public loss with terrible knock-on effects, for public gain/public loss, which is more balanced. You could argue that the former alternative has other remedies.

But the main problem I see is the other effects of nationalisation: costs, regulation and enterprise.

Costs are hard to control in public enterprises. Partly because of the effects of regulation, partly because they’re unbounded by the profit motive, costs tend to increase to fill the space available when next year’s budget depends on completely spending this year’s. Problems tend to be solved by more money and more management, rather than by eliminating the problems.

Regulation of public enterprises is, necessarily and rightly, more onerous than it is for the private sector. The latter needs to to focus on the prevention of abuse and dishonesty, the former needs to include both measures to prevent corruption and ostentatious displays of virtue. I don’t mean that in a bad way. Tenders to public bodies have to be ritualised in a way private buying decisions don’t.

But despite all the best efforts of those involved, corruption, or nepotism, tend to take over public allocations of funds. To be anecdotal, I was asked a few years ago to take part in a business that was to be situated in Wales. The business plan was, this bloke knew someone in the Welsh Assembly who gave out grants. That was it.

If public sector priorities took over banking, the case study for any sort of finance would become: “can I cover my ass if this goes wrong?” Worthiness would tend to take priority over business cases: you wouldn’t criticise a loan to disabled veterans, would you, you bastard?

What effect would that have on the economy?

There’s another, broader, way he’s wrong too, I think. He says:

My point here is, however, a broader one. One fact illustrates it. During the golden age of social democracy – from 1947 to 1973 – UK real total equity returns averaged 5.1% per year. If we take the fall of the Berlin wall in 1989 as its starting point, they have returned 4.9% per year in the “neoliberal” era. This alerts us to a possibility – that perhaps some social democratic policies are in the interests not just of workers but of shareholders too. Maybe the beneficiaries of neoliberalism are fewer than one might imagine.

All true, I’m sure.

But in 1973 I wore darned socks and trousers with patches, and my younger brother wore my old trousers. We lived in a three bedroom detached house in a nice cul de sac in Essex, just outside the M25 (it wasn’t yet built). That house financed the rest of my parent’s lives, a couple of decades later.

Today I wear socks that cost £5 for 5 pairs, from Tesco, and when they wear out I buy new ones, and I don’t ever see any kids with patched trousers. Torn knees in jeans became fashionable, much later. Then they meant you weren’t patching your kid’s trousers. Signals of actual poverty are never fashionable.

Meanwhile, the people making the socks and the trousers have become many times richer than they were in 1973. Chinese workers have seen their incomes rise by an average of more than 15 times. We’re richer, in terms of what we can actually consume, and so are they. Their increased wealth is more measurable than ours. I’ve never seen a graph of jean patching or sock darning.

That’s also something neoliberalism has achieved. It meant we came through a calamitous banking crisis with problems, for sure, but without the dustbowl economics and breadlines of the 1930s.

The undoubted problems of banking today could be addressed in different ways. Chris talks about a return to full reserve banking, but we don’t have fractional reserve banking, we have Basel Rules that let banks use dodgy securities as backing for loans. Maybe actual fractional reserve retail banking is worth consideration. Maybe lowering the regulatory burden but making it more effective would allow the banking sector to become more diverse, so banking failures were isolated, like failures of newsagents or engineering companies.

There’s no question we have a problem with banking. But making it run with the beige inertia of British Telecom circa 1978 isn’t the answer.

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Norm asked a question about this:

“our physical laws might be explained “anthropically,” meaning that they are as they are because if they were otherwise, no one would be around to notice them.”

There has to be a way of explaining this that saves it from its prima facie air of total unreasonableness. If such-and-such, no one would be around to notice does not normally establish that such-and-such can’t be the case. For example: if a tree falls in a forest on an unpopulated island then no one would be around to notice. This doesn’t prove the non-existence of unpopulated islands. For another example: if you read your book while hiding in a cupboard, then no one will see you reading. It doesn’t show that you couldn’t read while hiding in a cupboard. Provided, of course, you had a light of some kind. So come on, someone, explain it in terms that don’t appear plainly absurd.

I think he might have the wrong end of the stick. The point of this isn’t to deny the possibility that universes could turn out differently even though no form of life could exist in them. It’s instead to assert that they could and that, therefore, the fact this one has turned out like this, capable of supporting our existence, needs to be explained.

A form of explanation is to say that, from our point of view, it couldn’t be otherwise. It’s therefore unremarkable. Whatever the probability might be that the universe turned out like this one, that’s what happened – and this is absolutely fine, mathematically: one chance in however many squillion is still expected to happen, just not very often.

The anthropic principle is also used as an argument for the existence of God. Given there are an almost infinite – perhaps infinite – number of possible universes and only this one could support life, what made it be this one? Could it really be chance?

This assumes there are lots of possible kinds of universe. It turns out, there might be. There have been theories about the multiverse for a while, but at the end of last year, a group claimed to have found evidence of other universes from looking at the cosmic microwave background. They claimed to be able to detect ‘bruising’ where other universes had ‘bumped’ into ours. They had found areas which possess symmetry that, they feel, probably could not have appeared without some kind of event.

Another assumption is that our type of universe is rare, perhaps unique. This brings us back to the opening quotation. Here’s how I understand it: in this universe, there are now four basic laws in which physical reality can be described: the weak nuclear force, the strong nuclear force, electromagnetism and gravity. These are the things the opening quote was referring to. If you take one and change the way it works slightly, then do the sums, it turns out the universe would be very different to the way it actually is. Maybe no molecules heavier than helium could form. Life couldn’t exist; there would be almost no chemistry.

There’s also something called the cosmological constant. This is a term Einstein had to introduce into his equations in order to be able to have an expanding universe. I’m vague about this, but it represents something like the mass you can attribute to the vacuum. In effect it’s a weighting that can – as you slide the value up or down – make the universe one that will ultimately contract, or expand endlessly, or be static. Nobody’s sure of the value, but you can say that if it were outside a certain range then the universe would just be a big blob, or a vast emptiness as everything rushed apart. But it’s in the sweet zone, like the four laws above.

Incidentally, Stephen Wolfram argues* that, while it’s true that varying one of the physical laws throws thing out of kilter, you can often adjust by tweaking one or more of the others.

Wolfram has a particular interest in this because he has invented a new kind of science. This turns the normal approach on its head. Instead of looking at the world and trying to figure out the laws that govern it, he has started with the sets of possible laws, in steps of increasing complexity, starting with the simplest possible set. He is, among other things, looking for the simplest set of laws that produce the characteristics of this universe.

Snoopy picked this up and made me think. He commented:

I would dearly wish physicists considered themselves a bit less of philosophers and a bit more of trained dogs that bring the philosophers new trinkets to get busy with.

Physics used to be called Natural Philosophy, as did chemistry and all the sciences. I wonder whether, as the hard sciences crystallized, what was left behind was the mush, the syntactically correct, meaningless questions epitomized by “Why are we here?”. And I have a feeling the anthropic principle is more mush than crystalline. If there are an infinite number of possible universes or just one, or anything between, it doesn’t matter. This one exists.

* He said this in a video talk, maybe at TED. It would take forever to hunt down.

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Tim gets very cross when people cite job creation as a benefit of a scheme. Here. for example, in response to a:

study by Friends of the Earth [that] said 51,400 jobs could be created if 70% of waste collected by local councils were recycled.

Tim’s argument is that jobs are a cost, not a benefit., and that’s true. But is it more than half true? All transactions have two sides. If I sell you some widgets, the widgets are a cost for you, but a source of revenue, a benefit, to me. Jobs are a cost to the employer but a benefit to the employee. They’re also a benefit to the businesses the employee can now buy stuff from. It depends which direction you view the transaction from.

Tim goes on:

Turning half a million Europeans into rag and bone men means half a million Europeans who are not tending babies, curing cancer of protesting against unsustainable consumption.

Which is only true if employment is zero-sum, if a job created here means a job lost there, and I don’t think this is the case. I’ve no idea how you would be able to measure this (opportunity cost) effectively even if you wanted to, though I am aware people have tried. To be clear, for all I know you lose two free-market jobs for every one created by a scheme like this. Or maybe you lose one for every two. I don’t think anyone really knows.

It’s a given that reports issued by Friends of the Earth are likely to be cretinous, but I think when they say jobs are a benefit they mean from the employee’s point of view and not that of the employer, and that’s fair enough. What they don’t seem to try to assess is the cost of taking money from economically viable activities and pouring it into unsustainable ones, with all the attendant losses of growth, competitiveness and development that entails.

And that’s an enjoyable irony:  the prophets of sustainability trumpet unsustainable ideas without exception – their ideas can’t be sustained without subsidy.

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According to this leftie movie review site, anyway. In a strange rant about Angelina Jolie we have the following:

The basic conservative impulse is to bow down and show total allegiance to authority. This obviously links up with the old cliche about right-wing women (like Rand) being especially passionate about worshipping strong males, which is incidentally why they’re said to be so great in bed. This could be one possible explanation for those reportedly overheard sounds that suggested “an animal being killed.”

I couldn’t possibly comment.

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Norm has taken issue with my earlier post, in which I wrote:

I’m left wondering, again, why it is that socialism seems to demand advancement by begged question, in a way that no other branch of politics seems to.

The issue being:

… I wasn’t begging the question. To beg the question is to assume, in your premises, the truth of the conclusion you have set out to establish; and in that post I hadn’t set out to establish anything. I was giving in summary form my own reasons for voting Labour. It would have been more than rash of me to think I could make a case for a whole conception of social justice in one or two lines.

I was taking issue with the phrase “social justice” rather than with the context Norm had used it in, and perhaps I could have been more clear about that. It is the phrase itself that begs the question, as do other phrases like “fair taxation”, and I wasn’t saying that this sort of language is exclusive to socialists (it isn’t), but rather that socialists seem to use it “in a way that no other branch of politics seems to”.

Such phrases do beg the question because they assume, implicitly, that a particular set of policies are “fair” or “just” without making that case, indeed they seem to be an attempt to win the labels of justice and fairness through assertion and repetition, rather than reasoned argument. This is not to say there isn’t any reasoned argument to be found on the subjects. There’s loads of it, in fact. But it tends to be of interest mainly to the converted, whereas the presentation of opinions to a wider audience tends to be more by the use of these types of phrase.

I can even suggest a reason why language is used to advocate socialist policies in a different way to other types of policies. The fact that their policies seem to them to be socially just, or that it would be fair for wealthy people to pay proportionally more tax than the poor, is the very foundation of socialist thought. Using the phrase “social justice” seems, I think, a convenient and pertinent shorthand.

It’s perhaps worth pointing out that these views are not restricted to socialists. Though few modern devotees of Adam Smith seem to have noticed this, Smith thought that the rich should pay more tax than the poor. Here he is, in the context of road bridge tolls:

When the toll upon carriages of luxury, upon coaches, post-chaises, &c. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, waggons, &c. the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country.

That seems to me to be a clear endorsement of progressive taxation, but one made directly rather than through the abduction of a word.

Rather like Godwins Law, the first person in an online debate to use the word “Orwellian” might be seen to have lost the argument. In this context, though, there is a difficulty: Orwell did make an issue of some of the language used to advance socialism. He was himself a socialist, and he exaggerated within the context of a novel, yet he still made this use of language an significant element in his work. His exaggeration extended to the degree that, in 1984, it was planned as a  way to make certain forms of thought impossible – there would be no words for some types of thoughts.

There’s a little of this – a little, I emphasise – in the use of phrases like “social justice”. The most extreme example, though, is “positive liberty”, which does seek to attach the word “liberty” to an entirely different and potentially opposite notion, that of ability to do something rather than a lack of coercive restrictions, and thereby inhibit its use in other ways, including that of the actual meaning of the word “liberty”. It isn’t unreasonable to point out that the freedom to, say, drive to an out-of-town superstore means little if you can’t drive, and less if the presence of the superstore has led to the closures of the shops you can get to. Why not make the case directly, though? Why try to advance an idea by kidnapping words?

Positive freedom, social justice, fair taxation are all phrases used by the socialist left. What are the equivalent phrases used, characteristically, by liberals and conservatives?

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I know this isn’t exactly breaking new ground, but I’m going to blog about something I don’t really understand. What would the world be like without fractional reserve banking (FrRB)? I’ve been meaning to write about this for a while, because I am on the libertarianish wing of politics and some of the things I’m most dubious about this branch of thought concern currency and banking. There are frequent criticisms of fiat money (paper money, basically), demands for a return to the gold standard and attacks on FrRB, like this one from Austrian School economist Murray Rothbard. Being a sceptic, I like to question received wisdom, even when it’s my own, or that of a group I generally agree with such as the Austrian economists.

The FrRB system is normally described as one in which banks need by law only keep a fraction of deposits in their possession, and can lend out the rest. In fact, I believe it’s more a matter of how much a bank needs in very liquid assets versus liabilities, wherever the assets might have come from. They don’t have to be deposits, a bank can also use its own capital to back loans.

The effects of these two ways of backing loans seem to me to be rather different. Let’s assume banks in a particular country have to hold 20% of their loans in liquid assets like gold, cash or publicly traded stocks. If a bank takes £1,000 in deposits it can lend £800 and has to retain £200. That doesn’t strike me as particularly inflationary and while you can reasonably say new money has been created, you can also – it seems to me – equally reasonably say it hasn’t. The money was there in the first place, but the bank has taken a risk that the deposit won’t be withdrawn in full abruptly before the loans are repaid. Different measures of money supply reflect this: M0 doesn’t include any multiplier effect from FrRB, whereas M1-M3 do.

But to put £200 of capital into the bank, then to lend £800 does seem clearly inflationary and can reasonably be described as creating money from thin air.

The alternative, full reserve banking (FuRB), would not require banks never to lend, but rather demand that they lend on the same timescales as the deposits they have accepted.

To expand on this a little, under the present system banks accept deposits on mainly short terms, redeemable on demand or after very short periods of notice like a month or two, but then lend out most of this money on far longer terms, often measured in years. This means that if every depositor wanted to withdraw their money in full before the loans were repaid, the ban would have a liquidity problem. It needn’t be a catastrophic one: the loans are assets and could be borrowed against elsewhere. The recent banking crisis had, I believe, a lot to do with a contraction of inter-bank lending, which limited the ability of banks to borrow elsewhere when there was a run on deposits. Part of this contraction was an uncertainty about the value of assets that were composed of complicated packages of loans which were hard to value, but that’s a failing of the complicated packages of loans rather than of the system per se.

FuRB would require that deposits repayable on demand be retained in full, deposits repayable on 30 days notice be lent on terms that average 30 days and so on. Plainly, longer term loans would be much harder to finance, though not impossible.

No doubt, like me, most readers of this blog generally borrow from the bank to finance cocaine and prostitute binges in the Bahamas, and having to repay in 30 days might be a useful discipline. But some people and businesses, I am told, borrow to pay for new cars, houses or plant and equipment. In these cases, longer terms are desirable.

So I can see two consequences of an abandonment of FrRB. One is that if the supply of people wanting to have cocaine-fuelled orgies in the Bahamas dries up, it would be very hard for a bank to pay interest on bank deposits repayable on short terms, that is, most bank deposits. Instead, people would have to pay the bank to store their money safely. So, no point at all in saving money as money, if you want to see an appreciation of savings, you’d have to invest them directly in a business and take the consequent risks, which are much higher than those encountered on average in bank deposits, especially for people less able than professional bankers to judge risk in a given business investment.

The second is that businesses wanting to borrow to expand would find it very hard to do so from banks and would have to turn to private investors.

That does rather cure the first problem, though. Fewer people would be employed, earn enough to save, and so the impact of the inability of banks to pay interest on normal sort-term deposits wouldn’t matter so much.

While FrRB might be inflationary, it also fuels growth. The alternative, so far as I can see, would be both deflationary and cause economic contraction.

I think I’d like to stick with Fractional Reserve Banking. If banking regulators required that assets, however packaged, remained transparent enough to be valued clearly, we’d be able to continue to have jobs, and even sometimes save – and be paid interest by banks when we did so. That recently this seems not to have been the case was perhaps less a matter of weak bank regulation, and more one of crap bank regulation.

NB: I know it’s a lot more complicated than this, that there’s a difference between Northern Rock and an investment bank. But this is a blog, not a book, and I’m keeping it as simple as I can – for my own benefit, apart from anything else.

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