King speaks

Mervyn King’s stint on the Today programme yesterday was curious. It was much anticipated in some quarters. The reality then proved to be less revelatory than some might have hoped. I’m not sure what people were expecting – after years of buttoned-up discretion it was unlikely he was suddenly going to let all hang out. But some of the interpretation of King’s comments has been intriguingly partisan.

We are now only too familiar with the Coalition’s inclination to pin the blame for the financial crisis of 2007-08 on the last Labour government.  But asked directly yesterday whether he thought Labour were to blame he stated:

I am not going to talk about individual parties’ culpability because I think the real problem was a shared intellectual view right across the entire political spectrum and shared across the financial markets that things were going pretty well.

There were imbalances – we knew things were unsustainable – but it was not entirely obvious where it would come unstuck – and I think that is something everyone shared, and the right thing is to make it better for the future.

This has been interpreted in some quarters – notable by the Guardian – as King shifting his position and exonerating Labour. [Read more…]

Speaking money

HowtospeakmoneyYesterday evening the Festival of Economics 2014 kicked off with the author John Lanchester in conversation with Izabella Kaminska of the FT. Lanchester, who is promoting his book How to speak money, had some very interesting and important things to say about the language of finance.

His key point was that the fact most people don’t understand or engage with the language and practices of finance has consequences. It means that bankers and economists are able to get away with obfuscation and mystification in order to hide their own ignorance or render opaque activities of very questionable social value. Because most people don’t really understand what is going on in finance they do not appreciate the risks that are being run or the ethics of some dubious practices. This lack of knowledge reduces public demands for greater regulation of the financial system, to the great benefit of the financiers.

But it is not simply the bankers and the public who are in the dark. Lanchester noted that last month the US bond market witnessed a seven sigma event – in terms of the volatility of short term interest rate movements. This is something which, if the models commonly used to analyze financial markets are right, is near impossible. The most obvious conclusion to draw, therefore, is that the models are wrong. So the analysts are in the dark as well. [Read more…]

A bit of substance on housing to end the season?

House being builtWe’re most of the way through the Party Conference season, with only the Liberal Democrats left to play. So far it’s been a bit underwhelming on the housing policy front.

Labour offered a number of proposals. Some of them had been announced previously. Many of them were rather vague and aspirational.  Some of them looked kind of familiar – the Mansion Tax proposal most specifically. However, the proposal that many were hoping for – the big prize – relaxing the fiscal rules so that local authorities were allowed greater freedom to borrow for new development – was squashed by Ed Balls. Labour housing colleagues are now looking towards the Lyons Review – which is alleged to be emerging soon – to add a bit of ballast to the policy position.

The Conservative conference was rather short on specific housing policy announcements. Most of the announcements relevant to housing were focused on curtailing benefits to various groups deemed undeserving. I imagine one or two social landlord CEOs will be having sleepless nights worrying about their cashflows should the Conservatives be elected to govern alone come May 2015.

The eye catching announcement at the Conservative conference was the proposal to deliver 100,000 homes to first time buyers under the age of 40 at a 20% discount, with the homes to be cheaper because they’re built on brownfield industrial land. [Read more…]

Tax off for good behaviour

Over the weekend the CIH and the Resolution Foundation released a useful briefing called More than a roof. The focus is largely on the way in which financial incentives could be used to improve standards in the private rented sector.

The briefing provides a brief overview of the rapid growth of the private rented sector over the last few years. It then provides a decent summary of the key problems facing the sector, particularly the bottom end of the market where unscrupulous landlords lurk.

When the briefing moves on to policy it reviews what is currently being doing about standards under four headings – statutory obligations, licensing schemes, accreditation schemes, encouraging competition – before going on to look at what more could be done. Here there is an argument that modest and targeted increases in regulation are justified – in particular there is seen to be a strong case for creating greater transparency and uniformity in the standards that form the basis for licensing/accreditation schemes, more effective enforcement targeted at the worst landlords, and the greater regulation of letting agents.

However, despite noting the growth of direct regulatory intervention – notably in the devolved administrations and some London boroughs – the general tone of the report is rather sceptical. Greater regulatory intervention is not seen as the key to solving the problem. [Read more…]

Inclusive capitalism

Mark Carney’s speech yesterday to an Inclusive Capitalism conference has attracted plenty of press coverage. And rightly so.

It is a fascinating speech. But it is not necessarily fascinating for the arguments it sets out. The arguments are familiar. It is fascinating because it is Carney who is making the arguments. Markets erode social capital; inequality undermines the legitimacy of capitalism; more robust regulatory structures are insufficient on their own to deliver a safe and socially useful financial system; banking should be viewed as a support to broader, more important social objectives rather than an end in itself; we need to rediscover a focus on the long-term and the systemic.

These arguments have had currency among the critics of the established financial order for many years. And they have achieved much greater profile and urgency among those outside the citadel since the global financial crisis.  The need for the financial system to undergo an ethical overhaul becomes ever more compelling as each new area of fraudulent market-rigging becomes exposed.

Now the arguments are more clearly registering with insiders. [Read more…]

Forward guidance and managing the housing market

6775556163_ea02f6c4c0_nMark Carney’s importation of the forward guidance approach has been all over the mainstream and social media. But how significant is the announcement that the Bank of England is planning on keeping nominal interest rates as they are until after the next General Election? The comment it has attracted has covered the spectrum: positive, negative, and a bit meh. Commentators have picked up on a number of more specific issues, such as Frances Coppola’s post yesterday on the prospects for savers and Jules Birch rightly pointing out that the commitment to keeping interest rates low, combined with the Government’s Funding for Lending scheme, is going to give the revival of Buy to Let further momentum.

It is the housing dimension that, you might be surprised to discover, I wanted to comment on further.

Carney’s intervention comes shortly after several other housing–related snippets of news. [Read more…]

Zero-hours contracts – normalisation and back

storage roomZero hours contracts are not new. But that doesn’t mean they’re not news.

Today the BBC reports on a study by CIPD that suggests there are four times as many workers on zero-hours contracts than previously thought – a million rather than 250,000. Perhaps as important as the absolute number is the speed at which the use of such contracts appears to be growing. They have been around for a long time and are prevalent in particular industries – such as domiciliary care – where demand for services has always fluctuated substantially and unpredictably. But it appears that they are becoming normalised.

Many of those on the employer side of the labour market see the development of zero-hours as positive. It’s a positive indicator of the flexibility of the UK labour market. So it’s good for UK plc.

But it may be that flexibility needs to go further. At least one Tory MP was on Twitter yesterday arguing – rather incredibly – that zero-hours contracts are a product of the unnecessarily restrictive regulation of the UK labour market. If only more of the regulatory burden were lifted from employers then they would be willing to offer more regular, more secure employment. That is, of course, despite the country already having one of the least regulated labour markets in the world. [Read more…]

Regulatory possibilities for private renting

Water damaged and moldy basement wallLast Thursday I went up to That London to take part in a seminar on Alternatives to regulation.

I made a brief, somewhat speculative, presentation around the regulation of private renting, in the light of current debates about behaviour change and behavioural economics. Some of the ideas need plenty more thought and working through in more detail.

You can find the text to accompany my presentation below the fold. [Read more…]

On the horsemeat scandal

5202328378_026317008a_nThe horsemeat scandal has now been with us for over a month. It has morphed from a localised concern about adulteration of one processed meat product at one supermarket chain into a Europe-wide exposé of industrialised food production and lengthy supply chains that are ripe for abuse.

Many people are outraged. But what sort of a scandal is it? That’s harder to pin down. There is rightly much concern about the mislabelling of food products. You’d expect that when you buy food it is accurately described. That is the foundation of a food production system which relies, in theory at least, on informed consumer choice. And behind that concern for mislabelling someone is being swindled when cheaper horsemeat is being passed off as more expensive beef.

But it is hard to think that people not realising exactly what they are eating can, in itself, account for the degree of popular concern we’re experiencing. [Read more…]

Is financial innovation a good idea?

fin innovat bookIs financial innovation a good thing or a bad thing? Is it possible to tell in advance? Some might recall Warren Buffett’s comments in 2003, when he characterised derivatives as financial weapons of mass destruction, and suggest that perhaps it is.

We know that novel, complex and non-transparent financial products were at the heart of the Global Financial Crisis. So should we draw the conclusion that financial innovation is inherently problematic?

Or should we conclude that the problem was, on the contrary, that the crash of 2007-2008 and its aftermath are in part a result of a failure to innovate sufficiently. From this perspective, more, and possibly more complex, financial innovations could have averted the recent and ongoing economic catastrophe.

This is the territory which a new book entitled Financial innovation: Too much or too little?, edited by Michael Haliassos, seeks to explore. The book originates in a symposium held in Frankfurt in 2009 in honour of Robert Shiller.

The editor is upfront about the perspective on offer (p.i):

Contrary to often voiced opinions, the book promotes the view that it was too little and too unbalanced rather than too much financial innovation that lay behind the global financial crisis that began in 2007. Correspondingly, preventing future financial crises neither requires nor is assisted by regulation that stifles financial innovation but is aided by policies and a regulatory and legal framework that helps broaden the informed use of financial innovation and distils its positive impact on the economy.

The contributions that follow don’t all, it would be fair to say, take quite such an uncritical stance towards financial innovation. Indeed, the editor himself qualifies the position somewhat as he develops his discussion. There are, nonetheless, some comments that struck the wrong note for me. For example, a little later the editor notes (p.viii):

The policy and regulatory environment is crucial to the process of financial innovation. Regulation can prevent useful innovation from happening but, interestingly, it can also encourage beneficial innovation aimed at circumventing the rules.

It isn’t exactly a secret that financial institutions will spend time and money trying to come up with new ways of evading regulatory requirements. We note Andrew Tyrie’s recent calls for electrifying the Vickers ring fence. But this is the first time that I’ve encountered these activities portrayed in quite such positive terms. [Read more…]