Tuesday, 18 September 2012

On Freedom...

... Which could be a musing on the excellent essays by Isiah Berlin, but isn't. It's much more prosaic than that.

Twitter is asking me to sign a petition: @nomorepage3 by someone called Lucy Holmes (the world's greatest Kylie tribute artist, apparently. No... Me neither).

I am not going to sign this petition, mainly because Liberal free-market democracy requires a mindset that if you don't like something, broadly you don't have to do it. Furthermore, those that DO like to do something, watch Films by racists or bowing down before a God or looking at bare breasts in a newspaper, should be free to get on with whatever it is they want to do, unmolested by agents of the state, religion or busybodies. If we are to remain a Liberal, free market democracy, we must be as hard on the busybodies as we are supporters of minority pursuits. I disapprove of the desire to ban things far, far more than I do bare breasts in a paper.

Obviously the state proscribes some harmless activities for our own good: Enjoying a pint with a cigarette in a pub, for example. Or smoking Marijuana at any time. Though broadly speaking, in most grown-up liberal democracies, these things are possible if you're prepared to break a poorly enforced law. The police take things like murder really very seriously indeed. If you kill someone it's rather hard to get away with it. On the other hand, millions buy illegal drugs every weekend, unmolested by the police. Even when Homosexuality was illegal, laws against it were rarely enforced. This shows, broadly, that even where the law is an ass, society has it's head screwed on right.

Ultimately, I am a Libertarian, which means I believe your body is your own to do with what you will. If that means flashing secondary sexual characteristics for a photographer, and be handsomely paid to do so; or sticking cocaine up one orifice, and a cock up another; or for that matter, do something really stupid and dangerous like read the Bible or Marx, you should be free to do so being stopped only from hurting others through recklessness or aggression.

It's amazing how the arguments of people who would deny the us freedom always look the same. Let's look at the preamble to Lucy Holmes' petition to Dominic Mohan, the editor of Britain's best-selling daily Newspaper, the Sun.

We are asking Dominic Mohan to drop the bare boobs from The Sun newspaper.

We are asking very nicely.

Please, Dominic.

No More Page 3.

George Alagiah doesn’t say, ‘And now let’s look at Courtney, 21, from Warrington’s bare breasts,’ in the middle of the 6 O’ Clock News, does he, Dominic?

Philip and Holly don’t flash up pictures of Danni, 19, from Plymouth, in just her pants and a necklace, on This Morning, do they, Dominic?

No, they don’t.

There would be an outcry.

And you shouldn’t show the naked breasts of young women in your widely read ‘family’ newspaper either.

Consider this a long overdue outcry.

Dominic, stop showing topless pictures of young women in Britain’s most widely read newspaper, stop conditioning your readers to view women as sex objects.

Enough is enough.

Thank you.

Why do you care, Lucy? What does it matter to you if some people like to look at other people in their pants? Why are you so offended by the notion that men, in particular enjoy looking at pretty girls in the buff? If you don't like it, don't buy the Sun. Of course there are no naked boobs on the 6-O'clock news, BECAUSE THE LAW SAYS THERE CAN'T BE. Maybe if there were bare boobs on the telly at 6 pm, more working-class people would watch the news?

If you're really offended, encourage others who share your views to not buy the Sun. The Sun, however is the UK's best-selling paper, with is rather a standing retort to your world view, and I suspect this is the real reason you want Page 3 banned. I am reasonably sure that anyone signing this petition has already voted, by not buying 'the Sun', so the signers of this petition are simply looking to impose their preferences on other people.

The idea that a semi-naked woman on Page 3 "encourages men to view women as sex-objects" is ridiculous, as I don't see ms Holmes objecting to the similarly attired David Beckham advertising versace smellies and smalls. This pathetic diatribe contains the logical inference, supplied without argument or evidence, that children seeing bared breasts (organs designed to feed children) will somehow damage them.

The arguments are so weak they essentially boil down to "we, the enlightened object to something you, the proles, do; so we're banning it". This has happened to smoking, which died out in the middle-classes but persists amongst the kind of people who build houses and clean streets. Once this happened, pubs, clubs, businesses were denied the right to allow their patrons to smoke. "For the children" was invoked, but pubs, the kind where working class people gather, not the nice gastro-pub, closed as a direct result. How is anyone happier or better off, drinking at home rather than in a pub?

Cocaine was freely available, and widely used by middle-class dentists and psychatrists. Opiate addiction used to be known as the soldiers disease, for which Cocaine was prescribed! The British Royal family were high as kites at Balmoral at the turn of the century. Currently illegal drugs were only banned when the working classes started taking them. Not because the drugs are particularly harmful, but because middle class people don't like the poor and seek to tidy them up. They failed.

The people who are most keen on clearing "slums", temperance, drug prohibition, anti-smoking, anti-obesity, sure-start, parenting classes and means-tested welfare are the political left, who are also most keen on taxing the poor's few remaining pleasures. The left claim to act in the poor's interest, but they don't seem to much like the poor, and so wish to alter them "for their own good". This isn't about the working class's self-improvement, it's about power and class and brute, miserable prejudice of purse-lipped puritanism and middle-class hypocrisy. C.S Lewis:
Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.

Perhaps the libertarian solution is better: Make sure the poor have enough to survive, but otherwise apply benign neglect. Leave 'em alone for a bit, see what they come up with. Then leave that alone too. Some of "them" might "succeed" and join the middle-class at table; the routes to self-"betterment" must always be open. Otherwise, who are we to judge what they do? Many poor people are happy. The left, with its endless interference and fussbucktry seems intent on keeping the poor in their place (and so the fuss-buckets in jobs). I am not sure the interference helps the people it's meant to.

Were we are all free to make our own choices to both social AND economic spheres, the world would be a better place. It does not matter to me whether your drug of choice is a glass of Sherry after lunch,  or speed-balling smack and cocaine whilst wearing a crotchless gimp suit. It makes no difference to me whether you spend or save, watch TV or go for a run. So much of people's desire to "help" the poor is simple distaste for what other people CHOOSE to do.

The only thing that's certain: everyone's more miserable when mere prejudice is turned into law.

WHY do you care what people you don't know do with their free time and spare cash? Why don't you focus on your own life a bit? Because many of these people you're trying to help don't WANT and HAVEN'T ASKED FOR your help. Listen Guardian readers: SUN READERS DON'T CARE ABOUT YOUR OPINION, so leave them be. They will probably be happier. And you, without an object of your pity and disapproval, might have to confront your own demons, whatever they are. The nanny-state fuss-buckets might be more miserable. Y'see 'freedom' means that some people do things of which you or I disapprove. I get that. Lucy Holmes doesn't. I'm happy to let Page 3 exist, she isn't. Not my problem either.




Saturday, 8 September 2012

Compliance and the Myth of Goldilocks

So far, in the last few years, there have been a number of co-incident enormous financial scandals, which reached from the macro, to the micro, top to bottom. You have various mis-selling scandals. Zero-Dividend preference shares, Endowment mortgages and PFI insurance to name a few. You have LIBOR rigging. You have sub-prime mortgages in the USA, and "liar's mortgages" in the UK. You have a BASEL II capital adequacy regime. You have mega-mergers and the growth of international financial institutions with liabilities so large, they bankrupt the states which stand behind them.

All of this happend despite the rise of the most intrusive compliance regime the financial industry has ever had to endure. There were rules from everything to the type and amount of assets to be held on the balance sheet, measured in billions, to how quickly any given institution answered the phone. To argue therefore the catastrophe which has engulfed global finance since the 2007 is the fault of de-regulation, is absurd. 

I argue the opposite. I argue the strict compliance regime is the ultimate CAUSE of the crisis. Because banks went bust occasionally in the past: BCCI, and Barings, as the result of fraud or rogue traders, but they did not pose the systemic risks of RBS or Lloyds.Why not? 

To understand, we need to go back to  The US savings and loan crisis of the 90's, which triggered the recession of 1990-1991. The end of the recession in 1992-1993 following the state bailouts of large numbers of institutions may have made the recession less severe, but it sowed in the mind of the people lending money, that the Government would ride to the rescue. Having ridden to the rescue, Government for it's part decided to interefere in the lending decisions of banks.

Bureaucrats have tidy minds. To them, the chaos of the market is riskier than the ordered marching of Giants. Since 1990, the number of financial institutions lending money, halved. Regulators encouraged mergers. Savings and loans and regional banks were gobbled up into behemoths. A process which was repeated with equal enthusiasm on our side of the pond. Slowly, the institutions grew. The housing market picked up steam, and ushered in the Clinton "goldilocks" economy of the 90s. 

Almost every financial asset class became more expensive. Bonds had been enjoying a bull market since the late 70's carried on running, and the yields kept falling with low interest rates. On those, more later. Equities ran up towards the bubble, which eventually popped in 2000. Property rose steadily from the early 90's. Money flooded into Government coffers. People felt wealthy on their rising property and took on more debt.

Regulators and politicians congratulated themselves on this state of affairs. They responded to the Stock-market crash of 2000 with lower interest rates, to keep the economy going as investment from the private sector dried up. Instead of allowing the mal-investment in the lastminute.coms and other businesses valued on insane multiples of EBIDAWM (Earnings before Interest, Depreciation, Amortization, Wages and Marketing, AKA "sales") to be purged, that mal-investment was replaced by Government spending, most of which disappeared into lower productivity and higher pay. Low interest rates stoked a property boom all over the world. Banks kept getting bigger, with more liabilites. And with scale came Government interference.

In the USA, banks were instructed to lend to poor credit risks, through the community re-investment act. Bush senior and Clinton allowed banks to securitise these mortgages, and other non CRA "sub-prime" (which then had a more positive meaning - just below prime, ie good). Slowly institutions relied on the prop of the rules. The packaging and re-bundling of debt was a creature of the abnormally low interest-rates driving a frenzied demand for credit, right through the income spectrum. UK banks relied on wholesale markets rather than their depositors. Anything which was allowed was OK, without any real understanding of the risks. Everyone assumed, just like those selling endowment mortgages in the 90's that the assets would just keep going up.

Volatility was taken as a proxy for risk. The CAPM and VAR measures took volatility for previous years and fed it into a model, which spat out acceptable numbers. Of course, as Naseem Taleb explains so elequently, Returns are not normally distributed, the key assumption behind CAPM. Tail risk, the risk of massive unforseen losses are orders of magnitude more likely than predicted by Gaussian mathematics. "6 Sigma Events" like black Wednesday, the LTCM crash and the .com bust which should happen once every 100 million years or so, happen every decade. Just because the distribution of natural phenonomena from penis length to life-span obey Normal Distributions it does not follow that financial markets do so.

However with the regulator happy with ever increasing risk, and everyone from individuals to Governments frenziedly gearing up with debt, the regulatory bureaucrats were applying box-ticking metrics without really having any deep understanding of the businesses they were regulating. Banks got on with making money, but like all institutions became too big to manage effectivly. And they were making money in an environment where the political pressure was entirely RISK ON! While CRA mortgages in the USA were not the worst from a default point of view, the environment in which the legislation was created was one where the politicians encouraged banks to lend in order to get voters onto the property ladder. The because the politicans had achieved growth without inflation, they thought they could "eliminate boom and bust" and encoruaged the banks and regulators to behave as if they had.

Certainly that's what Gordon Brown thought as he, most egregiously, spent the tax-recipts from a booming economy, and borrowed even more, and spent in the assumption that his genius would keep the wheels turning, turning the most solid balance-sheet in the developed world into a social democratic Euro state with fat welfare and soggy competitiveness, like Germany (who in the mean-time was keeping interest rates up, and wages down, marching in the opposite direction).

Of course the .com bust in 2000 heralded the end, though it took 7 years for the ever lowering interest rates, which was the inevitable response to every piece of poor investment or GDP data, to lead to a crash, it is this that is responsible for the property boom, the government overspend and the catastophic finanacial crash. And this was made all the worse for because a system with a few large, systemically important institutions may appear easier to regulate, but is in fact more vulnerable to the storms.

The .com crash caused a recession that never happened as private sector investment dried up, to be replaced by government spending on war and diversity outreach co-ordinators. The boom continuing on Government spending and consumer debt. Debt that ultimately sat on banks' balance-sheets either as "capital" - Government bonds, or as books of loans.

And because of the tight regulation, they were all carrying the same assets, in the same proportions according to the same risk metrics as each other, funded largely from wholesale markets. And when HSBC announced that a surprising number of its US mortgages were going bad in 2006 (about when "sub-prime" took on its current meaning), the writing was on the wall. Those books of loans propping up the system were not worth what people thought they were worth.

Financial markets are prone to panic. It is a chaotic system, and as such does not lend itself to regulation, especially if that regulation is based on volatility. Beta, in a crisis, tends towards 1. This means all financial assets, however diversified in normal times, crash toghether as everyone tries to unload them at the same time. It takes two views to make a market. Regulators, however insist on one view in a catastrophe, and often make things worse. Instead of attempting to remove risk by making entrepreneurs and risk-takers behave like civil servants (they won't), better to let them face the consequences of their actions. Regulation should instead focus on making the system resilient to the inevitable storms. And that means smaller institutions, and more acceptance of differing approaches, the absolute opposite of 15 years of financial regulatory practice. Instead, every bank in the world tried to do the same thing at the same time and the finance system dried up.

No-one is suggesting NO regulation, but ultimately the best regulator is the market. Perhaps a bit more diversity in the system, and more but smaller institutions would be more resilient? The only thing I am sure of is what ever the answer may be, regulators do not have it. Unfortunately they think they do, and seek to impose the same solutions on everybody.

At present, my little corner of the industry is undergoing a bout of regulatory hyperactivity. The retail distribution review is busy setting out what can be sold to whom. Customers are being categorised by risk appetite. Those with low risk appetites are expected to invest almost entirely in Government bonds.

I am being made to sell Government bonds yielding 0% at the 2-year point guaranteeing a 3% annual loss to inflation because Government debt is RISK FREE. Of course we only believe that because we're at the end (inevitably...) of a 30-year bull market. Just as the misselling scandals and credit crunches are a creature of the regulatory environment, I can see the howl of pain when interest rates start to go up again, from Governments paying the interest, and those investors whose "advisers" have  been forced to sell them shitty Government stock. I can see the misselling scandal on the horizon.

Retail financial regulation should be someone slapping customers with a fish, while shouting "CAVEAT EMPTOR" through a loudhailer. Macro-regulation should ask one question: "how fucked are we, if this bank goes bust?" If the answer is "very", then break the bastard up, and say "NO!" When it tries to buy NatWest. Regulators should not try to run banks or investment portfolios. They should protect the investor from fraud, and the tax-payer from "too big to fail" and that's it.

Instead, why are people still getting paid out on RBS bonds? Why does RBS even still exist to pay Hester his bonus? The only people who should have been bailed out, are the depositors, not the management caste. QE? Only benefits the banks, whose top executives are still being remunerated in bureaucratic style, according to headcount. The only guy to crash through the system and save his bank from the tax-payer in spite of the idiot regulator, was Bob Diamond, a hero and worth every penny of $20m. Yet he's painted the villain!

Why not try a helicopter drop? defend depositors, smash investors in banks. Instead of supporting institutions which failed, why not support people? In every instance, the regulators favoured the tidy, mega-institution, rule-based status quo, when they should have let the market do its savage work. Markets encourage diversity and strength. Regulators create a monoculture, vulnerable to the first illness. 

Markets kill bad banks. Regulators prop them up. Here endeth the lesson.



Friday, 7 September 2012

Save The Children & Child Poverty in the UK.

Thanks to the Unique way the BBC is funded, Save the Children got a free advert courtesy of BBC R4's thought for the day this morning. Akhandadhi Das contrasted Save the Children's first ever campaign about poverty in the UK with the charitable status of independent schools, explicitly suggesting the "need of independent schools to fill their places" was less worthy than Save the Children stepping way outside its remit and embarking on a party-political crusade. Let's leave aside the left-wing obsession with private schools, and deal directly with Thought for the day acting as a party-political broadcast for the Labour party.


Child poverty in the UK is NOT caused by a lack of resources. Every child has access to the NHS, free education and the parent receives £20.30 per week for the first child and £13.40 for each subsequent one in child benefit, no questions asked. If there is no job in the household, the family will be housed at public expense, and they will be eligible for income support, a benefit rarely mentioned by welfare campaigners because it's calculated as "the difference between the claimant's net weekly income and the amount required to meet his or her needs". Worklessness in the UK does NOT result in kids starving, or being unclothed, or not being able to get to school, or even being homeless, unless there is contributory negligence by the child's parents. Yes, it's true those kids are unlikely to have access to the latest fashions, and may not be able to afford every school trip, but the poverty is only relative to others whose parents work.

Work, of course is the route out of poverty. The state cannot and should not simply give the poor money, as this creates a moral hazard. Unfortunately, in taking up low-paid work many poor people face the loss of benefits and face a marginal effective tax rate over 100%, mainly thanks to Gordon Brown's working & child tax-credit system. Furthermore, the Benefits system with it's 72 separate bureaucracies makes reclaiming benefits should a job be lost an absurdly onerous process resulting in a massive disincentive to take on the low-paid, insecure "starter" job. And the low-skilled are, of course, banned from ever selling their labour at their real marginal rate of production, thanks to the Minimum wage, and will therefore never get any job and hope of improving their skills .When you factor in the cost of travel and things like work-clothes and sustenance, it simply doesn't pay to try to get off benefits.

This is the poverty trap, Iain Duncan Smith's Centre For Social Justice has identified and is seeking to remedy, in part through a universal credit, simplifying the benefits system.

This has not prevented the left from blaming child poverty on "the cuts", and describing Iain Duncan Smith as a monster, intent on putting a boot on the face of the poor. Every change to the benefits system has been opposed tooth and nail by the unions, who will lose valuable jobs in the bureaucracy, and by the Labour stay-behind OPs in the Quangocracy for whom "poverty" is a meal-ticket. Poverty is being openly blamed on a recession caused by Government policy, and on "the cuts". This simply isn't true. Most child poverty in the UK is in the 20% or so of households where no-one works. Many of these are Multi-Generational welfare families, who are absolutely immune from the business cycle. This is also the reason it's very hard to see correlation in crime numbers with the business cycle.

Save the Children is not an impartial organisation. It is run by a former Blair and Brown number 10 staffer, Justin Forsyth, and Brendan Cox, Director of Policy and Advocacy was a SpAd to Gordon Brown. Amongst the Trustees are a number of Labour quangocrats, including a director of "Labour's greatest success", SureStart, Naomi Eisenstadt. The Coalition are not convinced SureStart is worth the money. This campaign, the first by Save the Children concerning poverty in the UK - they werre silent during the winter of discontent, or during the massive rise in youth unemployment under Blair and Brown, is aimed squarely at the coalition government by a nakedly partisan, left-wing organisation.

It is Save the Children who should have its charitable status revoked, not Eton.



Thursday, 6 September 2012

Ed Balls' "Wealth Tax"

In an Independent "exclusive", Ed Balls has said he's going to impose a "proper wealth tax". Wealth taxes are window-lickingly stupid and anyone advocating them is an economically illiterate moron. here's why:

  1. Moral hazard. It penalises those who save for retirement, pay off a mortgage and seek to not be a burden on the state, against those who spent their surplus income on Beer and Cocaine.
  2. As Tim Worstall points out, a well-off retiree might face a wealth-tax greater than their annual income.
  3. Real wealth is very mobile. No-one is going to stick around or let their money stick around to be taxed by the government. The left hand side of the laffer-curve on wealth taxes is very short. For this reason, the super-mobile top 1%, who pay 25% of income taxes will leave for Switzerland, Monaco or the Carribean. You end up therefore not taxing the 1%, but the less-mobile upper-middle income retirees instead. Even here, a wealth-tax increases the attractiveness of the Costa-del-sol, where retirement property is currently cheep, like a budgie. The wealth tax may, and probably will, therefore end up costing the exchequer.
  4. For the reasons laid out above and many more, wealth taxes are very hard to collect. Dennis Healy, former Labour chancellor of the exchequer during the 'winter of discontent', no rich-pandering neo-something he, said in his memoirs "in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and the political hassle"
  5. Though to be fair, that the hapless Healy thought something impossible does mean it actually is.
Wealth taxes are so utterly stupid that even Gordon Brown's lickspittle, Ed Balls is not actually proposing one. He appears to be entering negotiations with the Liberal Democrats by suggesting a mansion tax instead. He's just appeasing his own moron supporters by calling it a wealth-tax. I've no problem with a mansion tax, but it would be best imposed putting a few more council tax bands on at the top, rather than designing another silly, gimmicky tax with its own bureaucracy of Labour-voting trades unionists. However increasing council tax, even on the rich is political suicide because of the Daily Mail.

So. Everyone's wrong. Democracy: doncha love it?



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