Adam Smith Institute

Here's an excellent piece by Thomas J DiLorenzo on who really got us into the credit mess – American politicians and regulators.

The Community Reinvestment Act 1977 didn't just force lenders to make bad loans to 'sub-prime' borrowers. It stopped banks making any business decisions that would prejudice this shaky market. The Act also funded 'community' – that is, advocacy – groups to make sure that the banks knuckled under. The lenders knew it was all daft, so to spread the risk, lenders like Freddie Mac 'securitized' their loans in a big way – spreading the infection around the planet.

In 1995 the authorities 'streamlined' the working of the Act by pressuring the banks to carry on making bad loans – telling them not to pay too much attention to tradition creditworthiness tests, and ruling that a borrower's participation on a credit-counselling was proof enough that they could repay a mortgage, which the banks then had to give.

Rising house prices and economic prosperity, fuelled by low interest rates (Federal Reserve again), disguised this craziness for years. But now all those sub-prime borrowers are defaulting big time. And politicians are blaming the bankers!

What have we learned from the financial crisis? The mainstream media are talking about the greed of Wall Street and wild capitalism as the root cause of the financial mess we are in. Very few of them acknowledge the role of politicians and collectivist government intervention. "Beware of trying to do good with other people's moeny." says Russell Robert economic professor at George Mason University in this Wall Street Journal article.

This time the politicians have been eve smarter. They didn't spend the money themselves but since 1992 Congress pressed the biggest national morgage lender Fannie Mae and Freddie Mac to increase the percentage of mortgages going to low–income borrowers:

In 1996 the Department of Houseing and Urban Development (HUD) gave Fannie and Freddie an explicit target — 42 percent of their mortgage financing had to go to borrowers with income below the median in the their area; the target increased to 50 percent in 2000 and 52 percent in 2005.

Also in 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60 percent of their area's median income.

Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable–rate loans, and made to borrowers who bought houses with less than 10 percent down.

That is why the same people that brought us this mess, the US Congress, have had to bail us out. We need to ensure that there is no "next time" by insuring that they can never again play around with other people's money!

Yesterday I noted that Gordon Brown has created three new departments as Prime Minister, and abolished none. That means there are now 27 separate ministerial departments in Whitehall, which strikes me as a truly ludicrous number.

On Friday I came up with a non-ideological list of the functions government could realistically be restricted to, now that people are starting to realize savings need to be made.

I'm still in a list-writing mood, so here's a run-down of the small number of departments we would actually need if we scaled back government:

• Office of the Prime Minister & Cabinet (merging Number 10 and the Cabinet Office)
• HM Treasury
• Foreign & Commonwealth Office
• Home Office
• Ministry of Defence
• Ministry of Justice (encompassing all the law offices)
• Department of Health & Social Services
• Department of Social Security (handling welfare and pensions)
• Department of Education
• Department of Infrastructure (overseeing energy and transport)

I suppose the Leader of the House of Commons would continue to need an office to support their work, but it would not be on anything like the scale of the other departments.

Streamlining Whitehall like this would have another major benefit, quite apart from saving money. It would also allow the restoration of proper cabinet government and collective decision-making. It is no wonder that British government has become so presidential – with decisions being taken informally on sofas in Downing Street – when 31 people attend cabinet. It's a wonder they can even fit them around the table.
 

We used to have state institutions and rules that restrained our leaders. Our basic liberties had been fought for, and built up, over hundreds of years – since at least Magna Carta in 1215. Yet within just two decades, and at an accelerating pace, almost all these restraints have been sidelined or swept away. All in the name of efficiency, or defeating terrorism, or what 'the people' want. But now these restraints have gone, there is nothing left to protect us against our political leaders. And those leaders have shown every willingness to harass, bully, spy on, arrest and imprison us without trial if it squares with their view of what’s best for us.

Parliament, for instance, has been neutered. There's a ‘payroll vote’ or around 120 ministers, whips and others, so you can’t expect many complaints from them.The Cabinet, once a forum for heated debates on policy – remember Michael Heseltine striding out over the Westland helicopter affair? – is now  more of a brief weekly chat about general issues. And the civil service is now completely politicized, stuffed full of political appointees. Armies of spin-doctors quieten another potential source of opposition, the media. They reward favourable coverage with interviews, tip-offs leaks and exclusives ­– using public information as if it were private property – and punish criticism with silence.

For years, even the Opposition didn't present much opposition. They were so divided that they focused mainly on opposing themselves. The government did not need to win any arguments. It is no wonder that its power grew so rapidly, and that so much bad legislation was simply nodded through.

And that, perhaps, is a challenging point for the Conservatives. Will they, in power, be prepared to raise the quality of their legislation by encouraging strong debate on it? Will they protect the long-term interest of the public by accepting restraints upon themselves? Will they save themselves from hubris by welcoming public scrutiny of their actions?

It is symptomatic of the EU that Irish MEP Avril Doyle is calling for a complete ban on smoking within Europe by 2025. Is it not now time for the people of Europe to unite, not in a formalized political or military alliance, but in their opposition to this cryptofascist organisation?

In truth getting a tobacco ban across the whole of Europe will never happen, but that such ideas are on the agenda is indicative of the nannying intellect that is common among those positioned within the Brussels system. A phenomenon that goes under the word: Brusselization.

So what is the future of Europe? Unless the institutions find a way of changing fundamentally, they are heading for more showdowns of the kind that led to the Irish no vote. Without change, the EU will continue to be dominated by who can understand why the creation of the ECSC (European Coal and Steel Community) was wise, but cannot now see how this logic has mushroomed into the current excess of centralized power. Things need to change; subsidies ("market related expenditure and direct aid" in Eurospeak) are not going down. As a consequence, France is still the greatest beneficiary of European taxpayer's money.

Thus, on the one side of the argument we have those who benefit from the centralized power (politicians and effective lobbyists), or those that agree with the policies that are being imposed. On the other side of the argument we have those that are intellectually and/or instinctively opposed to the powers that are being increasingly usurped over their lives by the European edifice.

The solution is to go back to go forward. Back to the idea that trade leads to peace between nations. The rest we can do without.

One rather grumpy German resident of these shores is soon to be an ex-resident. Oliver Hartwich from the Policy Exchange is off to Australia for a better quality of life than can be found in London. Fair enough, although I hope he'll remember to take the yoghurt with him, so as to be able to avail himself of some culture*. In his analysis of what's wrong with our fair land he quite bops the nail on the noddle:

High taxes and complex regulations have both contributed to the phenomenon of rip-off Britain. In particular, a lack of land supply due to planning constraints has pushed up land prices. But somebody has to pay for this, and in the end it is consumers that are footing the bill for our failed planning policies.

We've no shortage of land in the UK for housing or any other form of building, What we have is a shortage of land that we are allowed to build on. The recent rise and fall of house prices for example, has not been about the change in the value of houses at all. They have stayed roughly where they ought to be, around the cost of building a replacement. The variation has been in the price of a piece of land that you are allowed to build a house on.

Such things as the Green Belts (especially the one around London) act as nothing more than a subsidy to those who already own land inside them: pushing up both the cost of housing and everything else that is manufactured, sold or distributed through an actual building. That's the cause for higher prices in the UK.

I would recommend that someone write a report about all this, so as to have a cluebat to beat some sense into those who insist that we should never increase the footprint of civilisation. Fortunately, that report has already been written. Now all we need to do is get people to read it, or even a nice summary of it.

* Yes, Oz bashing is indeed a cultural necessity.

Oh dear, I think I'm having an attack of the vapours. I find myself actually agreeing with Madeleine Bunting. This really isn't something that should happen to any self-respecting policy wonk. She's talking about why the Scandanavian system works (as it does to an extent) for Scandanavians but doesn't for others.

Brown's thought-provoking book on Sweden, Fishing in Utopia, explores how this powerful social fabric has been eroding over the past 25 years. He argues that a set of social relations born from Calvinist protestantism and the intense interdependence of small rural communities is unlikely to outlast the decline of both. Consumerism is a direct challenge to the ingrained self-restraint of countries whose grinding peasant poverty is only at a couple of generations' remove.

Given that we and other industrialised nations haven't been in grinding peasant poverty for many more than a couple of generations, it's not all that surprising that we don't still feel that intense interdependence. As noted there as well, it's highly likely that the Scandanavians won't feel it for much longer either.

I've long been of the opinion that this sort of high tax, all encompassing social democracy wouldn't work in in the UK anyway: normally on the grounds of scale. What might work in an homogenous nation of 5 million (as Denmark) won't scale up to a heteregeneous one of 60 million like the UK. The feeling of all of us in this together just simply isn't strong enough to extend to that large a group of people, certainly not to the point that the tax levels required would gain public acceptance.

One Swede in Brown's book talks about the need for 100% "social control" in which "everyone works together": you could call it consensual authoritarianism, and it is profoundly foreign to most Britons. Despite the persistent illusions of the liberal left, it's part of why the Scandinavian welfare state has been one of the region's least successful exports.

That authoritarianism isn't just foreign to most Britons, it seems to be common to those who are more than a couple of generations away from grinding peasant poverty. We might thus say that far from social democracy being the goal, is simply a stage to be passed through on the route to a wealthy capitalist and liberal society.

Anyone with even half a brain has been able to note that communism, as actually practised, hasn't worked all that well. North v. South Korea, East v West Germany, Mainland China v. Taiwan, living standards and their rise or fall certainly do not make the case that we'll be better off by pursuing some sort of state socialism that might lead to a future nirvana (if it ever arrives).

But there's always those who argue with such comparisons: Taiwan is much smaller, West Germany and South Korea were heavily supported by the US while their comparators were not and so on. We can't make such a clear and simple case. And anyway, life was better in some spiritual matters, being free of the curse of materialism might be worth it and so on. Given the prevalence of such tendentious arguments I was interested to see this comparison made between Estonia and Finland as another way of making the same points.

In 1939 the countries were as similar as it is really possible to be: almost the same language and very similar economies. By 1994 life spans in Finland for men were 7 years longer, per capita GDP was more than three times higher, infant mortality just over a quarter of that in Estonia. More to enjoy in life then, a greater liklihood of having a life to enjoy and longer to do so.

But Finland was far from being a rip-roaringly capitalist economy over those years: it wasn't particularly intellectually free either, and the economy was quite closely aligned with that of the Soviet Union as well. The important point was this:

Despite close relations with the Soviet Union, Finland remained a market economy...

By leaving voluntary exchange unchecked, by having a price system that could inform on the allocation of resources, after only 50 ish years the place was creating three times as much wealth per head for the people to share than the place which did not retain those options.

I've said before here that capitalism and markets are two very different things: the former is a description of a method of ownership, the latter a description of a method of exchange. I've also said that if we were only able to retain one of the two I would unhesitatingly pick keeping the markets and capitalism can go hang. Finland during the post war years wasn't all that capitalist a place but it was indeed a market economy and the comparson here wth Estonia simply reinforces that belief of mine.

The UK's land-use system drives up housing prices. Though academics have been telling the government that for decades, apparently a few more MPs have just noticed this.  The question is whether they'll actually do something about it. At the moment, they seem to get about half of the problem, and half of the solution... hey, that's better than normal! Zoning restrictions and complicated bureaucracies drive up land prices. When supply is artificially restricted but demand increases, amazingly, prices go up! 

The problem is not simply the "stratified communities" or a lack of warm fuzzy feelings that these MPs seem to be concerned about. Land restrictions benefit exactly one group: wealthy homeowners.  Everyone else suffers the consequences, from the obvious (higher housing prices) to the subtle (higher food prices). There is a vast body of research that suggests that zoning laws redistribute wealth from the poor to the upper and upper-middle classes.

At least politicians now realize where the solution lies: to reducing the barriers to production. But they aren't willing to go far enough. The government wants to continue to play social engineer in the attempt to artificially impose a sense of community onto towns by requiring that new homes be low-cost and sold only to local labourers. So they'll lift one layer of restriction, but create a whole new set of restrictions and bureaucratic processes for developers to deal with.

The economic impact of the lack of a real market in land in the UK is widespread. At the moment, I'm working on a paper that seeks a middle ground – a market-based solution that will give residents control over their own neighbourhoods but prevent them from imposing the costs of their preferences on the rest of society. In the meantime, any action that actually lifts the barriers to building affordable housing would be a welcome step.

In the policy world you keep your ear to the ground and still things gallop up unannounced. One such is David Cameron’s ‘Chapter 11’ proposal. It certainly didn’t arrive through long rounds of brainstorming. More likely it came off a long list of squibs that CCHQ keep in order to keep DC in the news every week.

Still, it’s not a wholly bad idea, and the timing is excellent, since the UK economy is shot to pieces and lots more people will be going bust pretty soon.

The idea of Chapter 11 is that individuals and firms who are facing bankruptcy are allowed to keep control of their assets provided they have a recovery plan. Does it work? Well, most of the high-profile cases have been airlines. Sure, it has staved off the instant shock of an airline collapsing, but it’s not obvious that it has really changed what would have happened anyway. Some Chapter 11 filers (Northwest and Delta) have merged, some (ATA) still failed, some (United) limp along, hobbled with debt. In the UK, by contrast, we have competition red in tooth and claw, and the threat of failure is all too real. And yes, weak airlines go bust. But it makes the competition so strong that cost-conscious airlines like Ryanair and Easyjet are becoming dominant. America’s airlines still look fat and bloated.

The UK bankruptcy problem, though, is local councils and HM Revenue & Customs. The former try to bankrupt people for unpaid Council Tax of just £1200. The latter are far too willing to force a firm into bankruptcy – no doubt pocketing a fat bonus for the tax they collect – rather than help them through the hard times that years of reckless economic policy have caused. It's all a matter of incentives, Dave.

Who says you need a powerful, centralised state to run a country properly?

British politicians such as David Cameron are slowly catching on to the idea that centralized government is the enemy of innovation, efficiency and quality. But our cousins in Switzerland have been showing the way for decades.

Switzerland has emerged as a world centre for value-added industries such as pharmaceuticals and banking, and is in the global top 12 service exporters. Its GDP per capita, (estimated at $39,800 in 2008) is amongst the highest in the world. Its healthcare system is one of the top rated in Europe, and its transport system is legendary. Meanwhile, it is one of the few countries in Europe never to have had major social upheavals or revolution.

Much of this quiet success is due to the fact that, unlike Britain, the central government in Bern has very little power. Instead, Switzerland operates a system of direct democracy that gives individual citizens an unparalleled degree of political empowerment.

Decisions ranging from taxation through policing to taxi regulation are made at the local level. Through their local Canton, individuals can propose legislation, or oppose initiatives made at the federal level via referendums. Cantons also set corporate and personal tax rates, leading to a degree of tax competition that ensures pressure on taxation is down rather than up.

Imagine if Britain had such checks on central power. No longer would ambitious politicians be able to inflict their ‘visions’ on the country. Health bureaucrats, police chiefs and educationalists would be forced to look to the people they serve rather than to Whitehall. It’s also hard to imagine counterproductive ideological policies like tax credits being tolerated under such a system.

With England out of the Euro football champions this summer, there’s no question which team we should be supporting. Hopp Schwiz!

The other day I took a tour of the area where Jack the Ripper killed five women. The tour guide began by saying, “The City of London was the seat of the largest empire the world had ever seen and the richest square mile in the world. The East End was the polar opposite, with those exploited by unchecked capitalism crammed into the worst conditions imaginable.”

Say what? Unchecked capitalism to blame? There were plenty of problems with the government at that time, but why are so many quick to blame capitalism for poverty?

French President Nicolas Sarkozy is driven to “moralise capitalism.” Seems France has been at it for decades by instituting 35 hour work weeks, creating useless projects, high taxes, and building the Concorde. The result? Low GDP growth, a low GDP per capita, and unemployment at almost 8%.

In a new development, the French government is now threatening to pass legislation to curb the pay of company executives and use its EU presidency to clamp down across the EU. Business executives are paid well because of what is at stake. Companies have to compete and the companies that invest the most will get the best. Executives that fail will be fired or demoted.

If Sarkozy really wants to moralise capitalism, he should leave it be. 
 

Jean-Claude Juncker, the long serving Europhile Prime Minister of Luxembourg and chair of the regular euro-area meetings, has claimed that EU finance ministers are considering hiking taxes to limit what he has dubbed the scandal and social scourge of corporate bonuses.

With rising inflation, times are relatively hard for many people in the EU. However, it would be an unforgivable mistake to cap corporate bonuses. It would be sure to push even more business out of the continent.

If the EU want help the relatively poor in Europe by cutting inflation they should bin the complex and expensive Common Agricultural Policy (CAP) which keeps European food prices at artificially high levels, while forcing people into abject poverty in the developing world.

Although unlikely, it would be a revelation to see bold leadership from EU bureaucrats, biting the political hand that feeds them, scrapping the CAP and leaving alone the talented individuals whose business it is to make Europe wealthy.

Of course if they really want to cut excess waste, or link remuneration with productivity as Joaquín Almunia (EU Monetary Affairs Commissioner) has suggested, they could offer their resignations, shut down the behemoth and in so doing save the poor citizens of Europe billions of pounds each year.
 

We’ve long known that the Swiss are big-fans but now it seems the Germans too are getting the hang of direct democracy. The Economist reports on the enthusiasm of campaigners for Tempelhof airport, who urged Berliners to vote yes in a referendum to keep open the airport; (which is seen as a symbol of the Berlin airlift of 1948-49). On the same day the citizens of Schwerin voted to oust their mayor for mishandling an investigation into the starvation of a five-year-old girl, while the Bavarian branch of the trade union confederation started collecting signatures on May 1 for a referendum on a minimum wage.

Supporters argue that direct democracy is stepping in where traditional democracy has failed. Membership of political parties has collapsed, as has trust in politicians – trends that should be recognisable to any student of British politics. A 2006 survey showed that nearly half of Germans think elections give them no say over government policies and that some 80% wanted referendums at national level.Yet in spite of such figures opposition still remains; most states do not allow votes on such issues as spending and taxation, and legislatures can sometimes overturn referendum results or have them modified in the courts.

The Swiss model certainly indicates that direct democracy improves decision-making. Lars Feld of the University of Heidelberg claims that Switzerland's taxes and spending are lower than otherwise, and its labour productivity higher, precisely because the Swiss can vote on fiscal issues. Now that Germany is adopting similar solutions in reponse to voter apathy, the qustion surely is, when will the UK catch up?

London's Mayoral election is getting plenty of coverage but the local elections taking place in 155 council areas across England and Wales the same day have generated far less interest. As yesterday's Daily Telegraph noted:

Council elections never attract much interest. Average turnout in local polls since 1996 has been 35.4 per cent. And those who do vote tend to treat the election as a miniature referendum on the national parties, a megaphone through which to shout at Westminster.

The reason is straightforward. People don't think that the composition of their local council is going to make very much difference. Indeed, it's hard to think of any developed country in which local government is weaker than here in Britain. As the Telegraph continued:

Schools and hospitals are largely run from Whitehall. The decree on fortnightly recycling came, in effect, from the EU's Landfill Directive. Three-quarters of council budgets come from central government, the highest proportion in Europe.

This is a shame. Local government could be a useful bulwark against excessive central government. When power is diffused it is limited. Localism creates an 'exit-option' similar to the one that exists in the market – if people don't like the policies of their local authority, they can move to another one and take their taxes with them. That creates competitive pressures to keep charges down and improve standards.

Localism also allows for greater experimentation. Councils can learn from each other and move towards better delivering better services. When power is centralized none of this can happen. There is no 'exit-option' short of leaving the country and only one reform can be tried at a time.

Counties should exercise the same powers as the Scottish Parliament.* People often say that local councils are not competent to exercise such powers, and that if they did it would result in a 'postcode lottery'. But I'd say that these powers are precisely the ones that should be left to local government. They couldn't do worse than Whitehall. And besides, centralization has itself given us a 'postcode lottery'. If local authorities were free to tailor polices to local needs, there would probably be less divergence in outcomes than under the one-size-fits-all approach.

* Healthcare and social services, education, housing and planning, transport and local environmental issues, among several others.