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...]


Putting the brakes on housing booms

Home buying processProperty markets are frequently implicated in economic booms. It isn’t always residential property. But often it is. The last boom, which eventually triggered the Global Financial Crisis, had a strong housing market component.

A while ago the Bank of England created the new Financial Policy Committee (FPC) with responsibility for macro-prudential regulation. Within its regulatory remit is action to stop the development of housing booms and bubbles. The FPC favours using so-called “sectoral capital requirements” (SCR) to take the froth off the market, rather than setting out rigid rules for loan-to-value (LTV) or loan-to-income (LTI) ratios to restrain borrowing. This approach was restated earlier this week.

The FPC’s proposed approach has been reported differently by different newspapers. While some are billing it as the arrival of strong new powers, others are rather more critical. The critics argue that while there is evidence from other countries that regulating LTV or LTI directly can be effective in restraining house price inflation, the performance of regulating capital requirements in the aggregate is rather more uncertain.

This is quite an interesting regulatory question. We can all agree that avoiding run away housing booms would be good, not just for the housing market but for the broader macroeconomy. But how to achieve that? All regulatory interventions have strengths and weaknesses, they all carry downside risks. Might the blunter instrument of direct LTV or LTI regulation be better? There several possible issues. [Read more...]


On banking reform

funny concept of happy face and dollar eyesThe debate over the future organisation and operation of the banking industry seems to have spluttered back into life.

Just before Christmas the first report of the Parliamentary Commission on Banking Standards made its appearance. The report focused on structures. Its most eye-catching and newsworthy recommendation was that the ring-fence between retail and investment banking, proposed by the Vickers Review, should be “electrified”. The aim is “that banks be given a disincentive to test the limits of the ring-fence”. That relatively simple statement is perhaps more revealing of the ethics and operation of the banking industry, and hence the regulatory challenge, than it first appears.

The continuing focus on the Vickers proposals is troubling. Even more troubling is the working assumption that if the Government holds its nerve – or there is sufficient pressure from outside to make sure it doesn’t backslide – so that the Vickers proposals are implemented in full then that would be an ambitious policy triumph that would tame the banks and deal with the problem. It is nothing of the sort.

There are straightforward arguments against this focus. Banks operating very different business models got into serious, and in some cases terminal, difficulty during the financial crisis. Some of the worst casualties – for example, Northern Rock, Bradford and Bingley – had no investment banking component. Their failure had everything to do with bad decision-making, poor risk management and weak regulatory oversight. As Frances Coppola has recently pointed out, this is not untypical. Looking back at previous banking crises problems of risk management and management oversight are much more frequently the source of banks getting into difficulty. But we seem incapable of learning this lesson.

The Parliamentary Commission proposes further reports later in the year covering a broader range of issues including organisation culture in banking. It will be intriguing to find out the shape that those reports will take.

The latest – and perhaps slightly belated – contribution to this debate is the publication of the IPPR’s Don’t bank on it: the financialisation of the UK economy. [Read more...]


Revisiting Capitalism Unleashed

Capitalism unleashedOver Christmas I went back to Capitalism Unleashed: Finance, Globalization and Welfare by Andrew Glyn. It is simultaneously a sparse and a sprawling book. The text has fewer than 190 pages, and yet it covers an immense amount of territory. I returned to the book to look for clues.

Glyn’s broad argument is that the post-Second World War period is a game of two halves.

During the 1950s and 1960s western industrialised economies experienced an unprecedented period of stability and growth during which the division of economic output was renegotiated – in the face of full employment and better worker organisation – away from profits and towards wages.

The crisis of the 1970s was followed by an extended period during which these gains for labour were eroded in the face of austerity politics, economic restructuring, globalisation, deregulation and privatisation. Glyn notes that capital account deregulation and financial innovation, in particular, reduced national autonomy, increased disruptive economic volatility and created dysfunctional incentives for senior management. He uses the now-famous example of the failure of Long-Term Capital Management and the contagion experienced during the Asian financial crisis to illustrate some of the key points. Environmental degradation sits ominously in the background as possibly placing an upper bound on future economic growth.

Glyn notes that the post-1980 marketising and liberalising policy agenda was not notably successful in improving the performance of the relevant economies. It was, however, successful in reordering the beneficiaries of the fruits of economic activity. There was a rebalancing away from wages and towards a greater share to profits. More income was also derived from property. These changes led to increasing inequality.

Glyn’s key observation is, however, about the resilience of social institutions, although he doesn’t quite frame it in those terms. Over an extended period there has been a cross-national policy agenda – sponsored by International Organisations – directed at welfare retrenchment. However, the institutions of the welfare state have proved remarkably robust, particularly in continental European countries. Glyn sees this as a positive sign. He argues that the welfare state is worth fighting for. It is the most effective means of mitigating the “market inequality” exacerbated by liberalisation and of providing adequate social insurance.

The book finishes with a brief discussion of the possibilities for introducing a Basic Income for all citizens. This is a means of moving away from the pernicious effects of means-testing benefits. It is also a means of coping with the fact that achieving adequate living standards will not require everyone to work full time, and that there is more to life than paid employment. Achieving this goal is not an economic impossibility. The barriers are primarily political.

You may be asking why, specifically, I was revisited Glyn’s book. What sort of clues was I looking for? [Read more...]


Leveson, liberals and legislation

Was David Cameron’s reaction the Leveson report any great surprise? One of the starting points of the inquiry was the concern that politicians – including Cameron himself – had got “too close” to the press. Forecasting that he would side with the press interest rather than the public interest took no great insight. And it looks like we’re heading that way. One might argue that this is simply one further illustration of the problem in question.

The response from parts of the press was similarly predictable, on at least two levels. First, it was predictable that the papers, particularly those who came closer to Lord Justice Leveson’s attention, would come out strongly, and pre-emptively, against statutory regulation. It’s the thin end of the wedge. It opens the door to totalitarianism. Type of thing. Second, it was predictable that the way in which they would portray Leveson’s proposals would in no sense represent fair reporting. One might, yet again, argue that this is a further illustration of the problem in question.
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All “thin end of the wedge” arguments should, as far as I’m concerned, be dismissed out of hand. Whether or not the Leveson recommendations are implemented will make no difference to any future clampdown on the free press, if we were foolish enough to elect a totalitarian government.

And it would, in any case, be a peculiar state of affairs if we were to afford the views of perpetrators pride of place in determining our future strategy for dealing with their crimes and misdemeanours.

The liberals online and on my timeline seem seriously divided in their response to Leveson. [Read more...]