Knowing and Making

Martin Wolf has an intriguing proposal to " end the land cycle " - by which he means: make sure that any future rise in the value of land goes to society rather than the individual landowner. This argument has three parts. First, he makes a moral case that increases in land value are largely a function of external effects - increasing population density and infrastructure investments - and therefore why should the current occupier of the land capture all the benefits? Second, a practical case that the current system has stymied productive new development - because it's easier and cheaper for landowners to get a return by reducing the competitive supply of new housing (through the planning system) than by investing in new infrastructure which benefits everyone. Third, the current system of land ownership through debt is one big casino: buyers borrow money in order to put a bet on the Ponzi game continuing. When it does not, the losses are shoved onto two groups of peop...

Martin Wolf has described  the eurozone rescue package for Greece, correctly, as "a fudge". However, he thinks this is a bad  thing. Here's why it might not be. One of the key goals in designing a rescue package is to avoid creating moral hazard  - the risk that other countries look at the bailout, assume that they will be rescued too and therefore continue to borrow. If the rules for the bailout are clearly stated, that creates an anchor  which encourages people to trade up to it. The most obvious example is the Maastricht treaty rule which stated that countries in the EU must keep their fiscal deficit below 3% of GDP. Guess what size of deficit most countries ended up with? Around 2.9% was a pretty common figure. So if the rules for the rescue were made explicit, it would give governments very clear guidance on exactly what risks they could take. Inevitably, some would be tempted to push it to the limit - and fall over that limit, in the knowledge that the ...

Martin Wolf outlines what has to happen to get the UK's fiscal deficit under control while keeping the economy growing [note the similarity to Chris Dillow's argument a few days ago]: Policymakers must bear four points in mind: first, they must promote the essential strengthening of investment and net exports; second, they must realise that this big economic adjustment is a necessary condition for a durable fiscal improvement; third, they must also prevent the fiscal deficit from crowding out the needed rebalancing; and, finally, they cannot assume that today’s huge fiscal deficits can be comfortably financed indefinitely, should the rebalancing of the economy itself fail to occur. This is going to be a very tricky policy performance. I agree with the diagnosis. But it raises a different question which is not answered: why does not the market solve this problem? Some would argue that public sector borrowing itself causes the problem - if the government did not run a defici...

Robert Peston has been working hard reporting on results from RBS and Lloyds the last couple of days. A couple of points. He claims that taxpayer's money has gone down the drain at RBS, because: we as taxpayers put in £25.5bn of new equity into this bank last autumn...but...the equity of this bank has increased by less than £16bn to £80bn. So almost £10bn of the £25.5bn we've only just put into RBS has already been wiped out by losses. Well, that's half true. £10 billion has indeed been wiped out by losses. But it's not £10 billion of our  money, it's £10 billion of the former shareholders'  money. Our £45.5 billion has bought 84% of that £80 billion in equity, a £67.2 billion asset. The reason we're not in profit yet is because the market is still applying a discount due to uncertainty over future losses. We don't know if those losses will happen yet - it depends mainly on economic recovery - but on the book value of the bank, we got a good a...

In a difficult moral situation, we like to have someone to tell us what to do. The hard work of weighing up factors and working through the consequences of our choices is confronting - not least when the conclusions risk conflicting with some existing assumptions about the world or ourselves. This is where I find myself with respect to the Icelandic banking crisis. I generally think the UK government - especially the civil service - is pretty sensible, well-intentioned and respectful of markets and the rule of law. Thus, the idea that they might have attempted to extort money out of an innocent little third-world country like Iceland raises my cognitive dissonance hackles. The Icelandic government has done what most governments would have done in their situation - put a hold on everything while they try to sort it out and decide how much of their banks' liabilities they will stand behind. The UK's reaction - invoking anti-terrorism legislation to freeze several billion po...

Martin Wolf's article on Lord Turner's review is a good one (by which I mean, of course, that he agrees with me). He identifies irrationality as "the main analytical conclusion" of the report, but he doesn't take the next step of suggesting that it can be directly regulated. There are a range of interpretations of Turner's report. Some think his diagnosis was that banks are too thinly capitalised. Some that he condemns financial innovation. I think Martin Wolf has found the most important part: his conclusions about irrationality, both collective and individual. But while Turner has diagnosed the right disease, he doesn't propose a workable cure. To combat irrationality, he suggests a set of tools that work through rational means. Counter-cyclical capital requirements, leverage ratios, remuneration and centralised CDS clearance are perfectly sensible measures, but - like interest rates, the main tool of existing counter-cyclical policy - they work by mark...

Robert Peston interviewed Martin Wolf in Davos (along with Roger Carr and Richard Lambert, but they needn't concern us at the moment; Lambert did display a useful clarity, requesting nothing but opening of the credit markets). Martin, as always, had some exciting things to say and said them in his unique way. My paraphrasing: The UK is the most vulnerable economy in the G7 because the financial sector is so important, because the housing boom was so large and because household debt is sensationally high, and we are also highly dependent on the rest of the world which is suffering a recession too. And our underlying fiscal position related to these vulnerabilities is much worse than anyone thought 2 years ago. It's interesting that the fact of a recession is the problem - that is, a reduction in GDP, rather than the actual level of output or consumption. If the UK has benefited (as it undoubtedly has) from huge growth in the financial sector and housing-related investment over ...

In 2000, the IMF added up the reported trade balances for every country in the world and discovered that total world imports were $172 billion greater than total exports. Discounting the prospect that aliens are using their unfair price advantage (presumably they are not subject to payroll taxes) to steal our jobs, the idea that the world as a whole could run a trade deficit is of course absurd. However, the idea is resurfacing in much recent comment about the world financial crisis. Even the excellent Martin Wolf is talking about "a growing crisis of insolvency" and this is becoming a common theme: we thought we had an illiquidity problem, but now we find it's an insolvency problem. Well, it's not. Insolvency is the inability to pay debts as they fall due. The total amount of debt in the world is zero - every debt is owed by one party to another party, in equal amounts. Just like the total trade balance of the world is zero, the world does not have any debt and there...