Knowing and Making

This slightly sordid but predictable story about the collapse of an airline covers the alleged overspending of the chief executive, the financing of yesterday's bills from today's revenue, and the likely explanation: ultimately, this company collapsed as a knock-on effect from some other airlines, which failed while owing it  money. It's unfortunate for the creditors and those who had bought tickets, but these things happen. The first comment on the BBC story? There has to be something inherently wrong and deficient about Gordon Brown's handling of the UK's financial landscape. "Prudence"???? ...I don't suppose the Company bought tables at Labour Party dinners - or did it? "Prudence" or "Darling Pridence" - Would you trust them to look after a bag of sweeties? The guy just can't get a break.

It seems like someone in the Treasury has been reading Shiller and Akerlof's Animal Spirits . This Budget has a strong unstated theme of 'fairness' in the sense that the authors use it - as one of the fundamental psychological phenomena that they believe contribute to economic performance. Two behavioural experiments are useful in understanding the Budget and the reaction to it. The first is the ultimatum game . This has two players, Mary and John. Mary is offered £10 to share with John as she wishes. The catch is that whatever share she offers to John, he has the chance to accept or reject it. If he rejects it, neither player gets anything. In a perfectly rational world, Mary would offer John a penny and keep £9.99 for herself. He would accept the penny - it's better than nothing, after all - and both would get their money. But in practice, John never behaves like this. If Mary offers him less than about a third of the money, he normally rejects it - so both players lo...

Robert Peston is in a bad mood this morning . He claims that the National Audit Office's report on Northern Rock shows that Brown and Darling "didn't make adequate preparations for the possible collapse of banks", "didn't expect a recession" and "had a hopelessly naive view" about the Rock's 100% loans. It makes a nice story. The problem is, it isn't really true. I've read the NAO's summary of the report. Here's a notable phrase from it: This report does not consider: the causes of Northern Rock’s problems Indeed, all that the report does consider is the response of the Treasury to the problems that arose in late 2007, and whether it made the right choices and managed things in the right way. And on those counts, it mostly gives its seal of approval. Some exceptions are: The Treasury's worst case scenario planning was not quite bad enough. Instead of a base case loss of £270 million, Northern Rock lost £585 million last...

According to today's City AM newspaper in London - which holds itself up as the City's second best financial paper: Chancellor Alistair Darling will hold back from a new fiscal stimulus programme in next month's Budget, he signalled yesterday. Addressing foreign journalists, Darling hinted that tax cuts and spending programmes would instead be introduced... It doesn't say where the foreign journalists were from, but I suspect they spotted the surreality in this statement a bit sooner than City AM did. The actual statement is rather less egregious than the above mangling of it.