Friday, December 04, 2009
The Bonus fallacy and tournaments
Most people, I suppose, think of a ‘bonus’ as something extra. A pay ‘bonus’ in this definition means something earned by ‘defined exceptional circumstances’ – not something paid over as routine. So good work, increasing efficiency, improved customer satisfaction – all the might earn a bonus.
The ‘Financial Sector’ likes to claim that their ‘bonuses’ are just like this, a kind of posh term for ‘payment by results’ or ‘piecework rates’. This may be the kind of hot air that suggests the collective noun ‘a Wunch of Bankers’.
The reality may be the ‘Tournament System’ so ably described for lay readers in Tim Harfords book ‘ The logic of Life’. Specifically the chapter on ‘why your boss is overpaid’.
This is how I understand Harford’s argument.
Basically most jobs cannot easily be assessed by performance by results. And jobs that involve handling big flows of money are difficult to constrain in the public interest. So what happens is a pay system analogous to a top tennis tournament. The winner, the champion, the chair of the Board, is guaranteed a huge wad of cash. Second place wins much less but still a worthwhile consolation. The aim though is to inspire the twenty or so people in the immediate lower tiers to work their socks off in order to make the organisation work. They need to be guaranteed enough money not to be seduced into rival tournaments. In turn this premier league gives incentives for a strata of much less well paid potential contenders, the people who may actually create the wealth for the organisation if wealth creation is part of the deal.
It is actually irrelevant whether the people getting the top prizes are competent or even active in the organisation. All they have to do in this system is avoid doing conscious damage, and avoid distorting the company accounts too blatantly to make shareholders pay covertly for top corporate benefits.
But admitting that the pay structure is a kind of danegeld paid out to prevent other forms of legalised looting by corporate insiders would be highly embarrassing. So the term ‘bonuses’ has been conscripted to make the general public believe that some kind of payment by results is in place.
Trouble is that when huge losses are the financial order of the day, payment by results suggest no ‘bonus payments’, in the popular sense, should be made. But if you accept that the system is a tournament, it becomes unworkable without some element of obscene overpayments.
The RBS board (and others) are trying to maintain the ‘tournament system’ without actually admitting that is what they are doing. As I understand Harford, he also believes that an element of Tournament Economics’ is inevitable, so he does not suggest a solution.
Is Harford right? If so should we be bringing in the implications of ‘tournament economics’ into our political discourse?
The ‘Financial Sector’ likes to claim that their ‘bonuses’ are just like this, a kind of posh term for ‘payment by results’ or ‘piecework rates’. This may be the kind of hot air that suggests the collective noun ‘a Wunch of Bankers’.
The reality may be the ‘Tournament System’ so ably described for lay readers in Tim Harfords book ‘ The logic of Life’. Specifically the chapter on ‘why your boss is overpaid’.
This is how I understand Harford’s argument.
Basically most jobs cannot easily be assessed by performance by results. And jobs that involve handling big flows of money are difficult to constrain in the public interest. So what happens is a pay system analogous to a top tennis tournament. The winner, the champion, the chair of the Board, is guaranteed a huge wad of cash. Second place wins much less but still a worthwhile consolation. The aim though is to inspire the twenty or so people in the immediate lower tiers to work their socks off in order to make the organisation work. They need to be guaranteed enough money not to be seduced into rival tournaments. In turn this premier league gives incentives for a strata of much less well paid potential contenders, the people who may actually create the wealth for the organisation if wealth creation is part of the deal.
It is actually irrelevant whether the people getting the top prizes are competent or even active in the organisation. All they have to do in this system is avoid doing conscious damage, and avoid distorting the company accounts too blatantly to make shareholders pay covertly for top corporate benefits.
But admitting that the pay structure is a kind of danegeld paid out to prevent other forms of legalised looting by corporate insiders would be highly embarrassing. So the term ‘bonuses’ has been conscripted to make the general public believe that some kind of payment by results is in place.
Trouble is that when huge losses are the financial order of the day, payment by results suggest no ‘bonus payments’, in the popular sense, should be made. But if you accept that the system is a tournament, it becomes unworkable without some element of obscene overpayments.
The RBS board (and others) are trying to maintain the ‘tournament system’ without actually admitting that is what they are doing. As I understand Harford, he also believes that an element of Tournament Economics’ is inevitable, so he does not suggest a solution.
Is Harford right? If so should we be bringing in the implications of ‘tournament economics’ into our political discourse?
Labels: banks, bonuses, economic crash, economics, Financial markets, financial services, recession, tournements
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My father and mother are both bank employees, this is useful information for us about bonus and pay scales, i am here to find out some information about bank jobs, but this type of information we will get it very rare. Keep posting the new updates thank you.
Reshma M,
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Reshma M,
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Saturday, April 04, 2009
On First Opening Cables Storm
“Then felt I like some watcher of the skies” … well not quite a new planet, as we all knew a bit about Vince Cable’s explorations of the ‘Realms of Gold’ and ‘Many Goodly States and Kingdoms’. Or even a Browned-Out Kingdom.
First impression of ‘The Storm’ is that it is a throwback to an honoured British institution, the Penguin Specials. These were books commissioned on matters of immediate controversy in the 1930’s and 1940’s giving a serious analysis and readable guide to matters of live and desperate public concern. So intelligent citizens could make up their own minds on what was what.
And there is a lot for us to take on board as we make up our minds.
The text is militantly plain and the discussion absorbing.
This is not an academic book so there is no barrage of footnotes. While this does increase its readability for many people it also makes it more difficult to follow up some of the points Vince raises, some in striking throwaway lines. An example; after the credit crunch of the 1720 South Sea Bubble:
Yes protectionist pressures once made it a criminal offence to wear cotton underwear in England. Only wool was permitted. Now that scratchy fact is probably familiar to most economics students, but where, general reader and political, activist (or even FOCUS writer), is one to find out more? (1)
Again there is no conventional list of source books rather asset of bibliographic notes. These make in clear that Vince made good use of John Kenneth Galbraith’s work on financial crashes, something you won’t glean from the (very sparse) index, which does not mention Galbraith. (2). This respect for JKG does please me and actually, quotes from Galbraith might well have summed up much of Vince’s case:
One of Vince’s major concerns is to prepare us all for hard and realistic decisions on living with the growth of India and China. Gazing at the Pacific in Wild Surmise won’t keep us alive over the next half century. So again a lot of work to be done, and much further reading for the concerned citizen.
In Party terms, this book is a bit of a risk for Vince and by extension the Party – as Job said ‘wouldst that mine adversary might write a book’. (3) If the book is right, it is a goldmine to steal from and if wrong a millstone that cannot easily be discarded. But that actually is a measure of how important Vince thinks his case is. It is more important that as many people as possible take his case seriously than that we LibDems get partisan benefits in the next election.
And no I don’t necessarily agree with everything in this book. If we can get up a debate on the details of content I will have things to say.
Now back to serious Cable reading.
(1) An excellent work on the world textile trade is Pietra Rivoli (2005) ‘The Travels of a T-Shirt in the Global Economy’. See pp152-156 for an account of the British Underwear Fiasco. Whatever was being ‘protected’ in this outburst of protectionism it wasn’t the nation’s naughty bits.
(2) Galbraith has been heavily sneered at in recent decades, classified as ‘not a proper economist’ because he didn’t indulge in complex mathematical modelling. For a representative sneer see the chapter on Galbraith in Diana Coyle (2005) ‘The Soulful Science’. Incidentally, Coyle is one of the writers associated with the concept of ‘Weightless Economics’, this being apparently something ‘new’ arising from Information Technology. No direct mention of this concept in Vince’s little book. Wonder if he would approve?
(3) Look this one up yourself, the Bible is online!
Oh yes and the poetic references...
And incidentally Chapman’s translation of Homer was pretty dreadful …
First impression of ‘The Storm’ is that it is a throwback to an honoured British institution, the Penguin Specials. These were books commissioned on matters of immediate controversy in the 1930’s and 1940’s giving a serious analysis and readable guide to matters of live and desperate public concern. So intelligent citizens could make up their own minds on what was what.
And there is a lot for us to take on board as we make up our minds.
The text is militantly plain and the discussion absorbing.
This is not an academic book so there is no barrage of footnotes. While this does increase its readability for many people it also makes it more difficult to follow up some of the points Vince raises, some in striking throwaway lines. An example; after the credit crunch of the 1720 South Sea Bubble:
… the venomous political climate .. led to legislation strengthening protectionist trade restrictions against Indian calico –wearing it became crime – thus transmitting the crisis from Europe to villages in Bihar and Bengal. (Cable 2009 p110)
Yes protectionist pressures once made it a criminal offence to wear cotton underwear in England. Only wool was permitted. Now that scratchy fact is probably familiar to most economics students, but where, general reader and political, activist (or even FOCUS writer), is one to find out more? (1)
Again there is no conventional list of source books rather asset of bibliographic notes. These make in clear that Vince made good use of John Kenneth Galbraith’s work on financial crashes, something you won’t glean from the (very sparse) index, which does not mention Galbraith. (2). This respect for JKG does please me and actually, quotes from Galbraith might well have summed up much of Vince’s case:
“Speculation buys up the intelligence of those involved”
“Financial genius comes before the fall”.
One of Vince’s major concerns is to prepare us all for hard and realistic decisions on living with the growth of India and China. Gazing at the Pacific in Wild Surmise won’t keep us alive over the next half century. So again a lot of work to be done, and much further reading for the concerned citizen.
In Party terms, this book is a bit of a risk for Vince and by extension the Party – as Job said ‘wouldst that mine adversary might write a book’. (3) If the book is right, it is a goldmine to steal from and if wrong a millstone that cannot easily be discarded. But that actually is a measure of how important Vince thinks his case is. It is more important that as many people as possible take his case seriously than that we LibDems get partisan benefits in the next election.
And no I don’t necessarily agree with everything in this book. If we can get up a debate on the details of content I will have things to say.
Now back to serious Cable reading.
(1) An excellent work on the world textile trade is Pietra Rivoli (2005) ‘The Travels of a T-Shirt in the Global Economy’. See pp152-156 for an account of the British Underwear Fiasco. Whatever was being ‘protected’ in this outburst of protectionism it wasn’t the nation’s naughty bits.
(2) Galbraith has been heavily sneered at in recent decades, classified as ‘not a proper economist’ because he didn’t indulge in complex mathematical modelling. For a representative sneer see the chapter on Galbraith in Diana Coyle (2005) ‘The Soulful Science’. Incidentally, Coyle is one of the writers associated with the concept of ‘Weightless Economics’, this being apparently something ‘new’ arising from Information Technology. No direct mention of this concept in Vince’s little book. Wonder if he would approve?
(3) Look this one up yourself, the Bible is online!
Oh yes and the poetic references...
John Keats
On first looking into Chapman’s Homer
Much have I travell'd in the realms of gold,
And many goodly states and kingdoms seen;
Round many western islands have I been
Which bards in fealty to Apollo hold.
Oft on one wide expanse had I been told
That deep-brow'd Homer ruled as his demesne;
Yet did I never breathe its pure serene
Till I heard Chapman speak out loud and bold:
Then felt I like some watcher of the skies
When a new planet swims into his ken;
Or like stout Cortez when with eagle eyes
He star'd at the Pacific - and all his men
Look'd at each other with a wild surmise -
Silent, upon a peak in Darien.
And incidentally Chapman’s translation of Homer was pretty dreadful …
Labels: economics, Vince Cable
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Sunday, June 22, 2008
Not To Be Read Until After Thursday
Seen lying around in a corner of the Henley Campaign Centre on Friday - a much thumbed copy of 'The Origin Of Wealth' by Eric Beinhocker. I am reading that too - though like the unknown owner of that copy currently no time to enjoy during waking hours. After Thursday perhaps survivors of the Big ByElection Push could share some notes - for example on Beinhocker's dismantling of the arguments of Milton Friedman using positions drawn from von Hayek...
Labels: chaos theory, complexity, economics
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Thursday, May 22, 2008
Vince's secret power exposed?
Maybe this is why Vince Cable is such an outstanding practical economist. He dances.
Or so you might conclude from this argument from a key modern outline of economics.
So perhaps the mental training of a good dancer really does help develop a receptive mind for understanding the dynamics of ‘complex adapting systems’ – giving Vince the edge over the more leaden footed.
Mind you I think that the author of this extract (Diane Coyle) may underestimate the tacit skills gap between following recipes and cooking great food.
Extract source Coyle, D (2007) ‘The Soulful Science: what economists really do and why it matters’ pp36-37
Or so you might conclude from this argument from a key modern outline of economics.
Getting an economy to expand is more like dancing than cooking. The frequently used metaphor of finding right “policy recipe” is misleading… it is not possible to set down a simple list of ingredients and a technique anyone could follow.
Getting an economy expanding… depends on a complex sequence of decisions and policies, involving many partners … past choices, current resources and good luck
So perhaps the mental training of a good dancer really does help develop a receptive mind for understanding the dynamics of ‘complex adapting systems’ – giving Vince the edge over the more leaden footed.
Mind you I think that the author of this extract (Diane Coyle) may underestimate the tacit skills gap between following recipes and cooking great food.
Extract source Coyle, D (2007) ‘The Soulful Science: what economists really do and why it matters’ pp36-37
Labels: economics, Vince Cable
Comments:
Love it!
I've always thought that politics in general is like music, and writing a speech like composing a song.
Let's face the music and dance!
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I've always thought that politics in general is like music, and writing a speech like composing a song.
Let's face the music and dance!
Tuesday, March 11, 2008
Fleashing out Liberal musings
Its not easy being Liberal, and we have to struggle on with public debates that ignore or travesty our views. So we should celebrate columnists like the Observers Simon Caulkin who often raise and illuminate arguments that resonate with us. Take this for example:
But there is more. Caulkin is also scathing about a private sector where
The central point of the column is to discuss a theory put out by the late great Jane Jacobs on two approaches to economic and social organisation. Each is upheld by a distinct ‘moral syndrome’.
We need both Caulkin says, agreeing with Jacobs,
….the public sector is in the grip of a central planning regime of a rigidity and incompetence not seen since Gosplan wrote Stalin's Five-Year Plans…name another government since Leonid Brezhnev's that prescribes 198 targets for local government, numbers and postings of junior doctors, reading methods for teachers in primary schools, cleaning techniques used in hospitals
and how GPs should organise their appointment diaries.(198 reasons we are in this terrible mess. Observer, 9 March 2008)
But there is more. Caulkin is also scathing about a private sector where
…market rules are so degraded that it has become the role of companies in the real economy, some built up over decades, to act as chips tossed around by high rollers in the City supercasino.
The central point of the column is to discuss a theory put out by the late great Jane Jacobs on two approaches to economic and social organisation. Each is upheld by a distinct ‘moral syndrome’.
commerce thrives on a syndrome of honesty, competition, respect for contracts, initiative and enterprise, optimism, thrift, willingness to collaborate and agree, and avoidance of force.
The other syndrome, which Jacobs dubs the 'guardian' syndrome because it derives from territorial protection, by contrast emphasises loyalty, honour, tradition, prowess, exclusivity and the distribution of largesse. Trading is anathema to it.
We need both Caulkin says, agreeing with Jacobs,
The whole thing needs to be read. Interesting to do so while digesting the points made in Nick Clegg’s latest Conference speech……the disastrous results of the GP contract can be traced directly to the government's determination to turn an essentially guardian organisation into a commercial one….The point about the syndromes is that one isn't better than, or replaceable by, the other: they're symbiotic. It follows that the ability to navigate between them, maintaining their integrity but knowing when to switch, is vital. If, as Jacobs suggests, such a capability is a mark of civilisation, we can only conclude we are going in the opposite direction to what New Labour intended: backwards.
Labels: Caulkin, economics, Jane Jacobs, public service
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Wednesday, February 06, 2008
Meanwhile back with the Rocky banks..
A timely reminder that there is no such thing as THE Free Market untrammelled by ‘government’. All markets exist in some form of framework, if only to give us confidence to deal with strangers.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
In the Financial Times (Feb 5th 2008) Martin Wolf explains why it is so hard to keep the financial sector caged and why it is important nevertheless to make the effort.
….. the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get
into trouble together. The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example…….In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
Discussion on Wolf’s article elsewhere (on Eurotrib) is of some interest, highlighting the implications of this approach as seen from a continental ‘anti Liberal’ worldview that sees the current uproars as ‘the Anglo Disease’.
Labels: banks, crash, credit, economics, Financial markets, globalisation, government, taxpayers
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Tuesday, January 22, 2008
Giving 'Markets' a bad name in turbulent times
TV news programmes (and other so-called bits of journalism) may be damaging the health of ‘markets’ by discrediting the whole concept by their labelling.
Because when they go to report on ‘The Markets’ they mean the casino of share and currency prices, and the second guessing of ‘trends’, and parroting of predictions. Often about as relevant to real market economics as opinion polls are to real politics.
With the current uproar the whole concept of serious economics risks being ever so slightly discredited. And that would be a rather dangerous thing.
‘Bloomberg Television Economics’ is what John Kay calls the media circus presentation of ‘markets’. A kind of market version of the religious fervour of Marxism. In these dangerous times maybe we should follow his advice and concentrate on serious and interesting problems – flower markets and corner shops, car salesrooms and power generation utility control rooms. Real life, in fact.
As for the current uproar, John Kenneth Galbraith had the simple explenation - it is a few decades since the last lot of naive adventurers thought that they had the infallible formula for effortlessly generating money for themselves and their friends through their special knowledge of the secrets of money. 'Financial genius comes before the fall'. Once more we have to learn the lessons in real time, paid for by ordinary people.
See John Kay ‘The Truth About Markets’, Penguin 2004
Because when they go to report on ‘The Markets’ they mean the casino of share and currency prices, and the second guessing of ‘trends’, and parroting of predictions. Often about as relevant to real market economics as opinion polls are to real politics.
With the current uproar the whole concept of serious economics risks being ever so slightly discredited. And that would be a rather dangerous thing.
‘Bloomberg Television Economics’ is what John Kay calls the media circus presentation of ‘markets’. A kind of market version of the religious fervour of Marxism. In these dangerous times maybe we should follow his advice and concentrate on serious and interesting problems – flower markets and corner shops, car salesrooms and power generation utility control rooms. Real life, in fact.
As for the current uproar, John Kenneth Galbraith had the simple explenation - it is a few decades since the last lot of naive adventurers thought that they had the infallible formula for effortlessly generating money for themselves and their friends through their special knowledge of the secrets of money. 'Financial genius comes before the fall'. Once more we have to learn the lessons in real time, paid for by ordinary people.
See John Kay ‘The Truth About Markets’, Penguin 2004
Labels: economics, Galbraith, John Kay, Markets
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Thursday, December 13, 2007
Is the UK economy facing a long bout of 'anglo disease'?
Has the UK caught ‘Dutch Disease’? No, not ‘Dutch Elm Disease’ but the economic catch-22 identified by the Economist to describe the impact of revenues from natural gas on the industrial economy of the Nederlands in the 1970’s. There is now an argument that the UK has suffered a similar hollowing-out of the economy through the dominance of the financial services sector in our economic life and that this will weigh us down for decades to come.
The general claim is that where one economic sector offers exceptionally high profit opportunities, it can squeeze out investment in other sectors. Also the heightened economic activity tends to strengthen the currency, putting weaker economic sectors at an economic disadvantage. OK if this leads to a permanent establishment of comparative advantage, but should the favoured sector go to decline then the economy in question is left with reduced continuing comparative advantage and a need for pretty painful adjustments.
This it is asserted happened in the Nederlands with the boom and decline in the production of natural gas, and the Nederlands is still allegedly experiencing a structurally weakened economy in the aftermath.
Over in European Tribune there is a series of postings by a French Economist asserting that the Financial Services Industries in the UK have (because of there historic superior profitability) led to a similar hollowing out of the UK economy. In a real credit crunch that cracks financial Services bubbles the UK will be left with a seriously weakened economy overall because so many of our otherwise continuing ‘industries’ are not competitive. This he calls the ‘Anglo Disease’.
That there is a serious problem is widely acknowledged, see the Financial Times for one mainstream comment ( ‘The UK Economy is vulnerable’ ). The Eurotrib analysis takes this even further to suggest much longer term dire consequences..
This is rather controversial. But it is worth looking at the figures shown in the postings and thinking about this possibility.
Mind you as I commented over in ‘Eurotrib’:
Reference: Memoire sur l'Angleterre (1773) in Ministere des Affaires Etrangeres, Memoires et Documents: Angleterre Vol 52 Fol. 180-223. Cited in I. and R. Tombs 'That Sweet Enemy' pp168-9
One thing is sure though – having an economic shaman currently in charge of government policy is not encouraging..
The general claim is that where one economic sector offers exceptionally high profit opportunities, it can squeeze out investment in other sectors. Also the heightened economic activity tends to strengthen the currency, putting weaker economic sectors at an economic disadvantage. OK if this leads to a permanent establishment of comparative advantage, but should the favoured sector go to decline then the economy in question is left with reduced continuing comparative advantage and a need for pretty painful adjustments.
This it is asserted happened in the Nederlands with the boom and decline in the production of natural gas, and the Nederlands is still allegedly experiencing a structurally weakened economy in the aftermath.
Over in European Tribune there is a series of postings by a French Economist asserting that the Financial Services Industries in the UK have (because of there historic superior profitability) led to a similar hollowing out of the UK economy. In a real credit crunch that cracks financial Services bubbles the UK will be left with a seriously weakened economy overall because so many of our otherwise continuing ‘industries’ are not competitive. This he calls the ‘Anglo Disease’.
That there is a serious problem is widely acknowledged, see the Financial Times for one mainstream comment ( ‘The UK Economy is vulnerable’ ). The Eurotrib analysis takes this even further to suggest much longer term dire consequences..
This is rather controversial. But it is worth looking at the figures shown in the postings and thinking about this possibility.
Mind you as I commented over in ‘Eurotrib’:
…. part of me does think back to the history of French comments on the 'English' economy'.. for example....
“The bank of England is destroyed: its fake currency shrinks to its real currency.. its credit lost; its resources annihilated; and general terror...”That is from the "Memoire sur l'Angleterre" the 1773 document laying out the hoped-for results of the French strategy of subversion in Britain's colonies in North America. Enthusiastic hopes of a collapse of the 'un-natural English economy' have surfaced many times over the centuries in France... Let's see how the present situation evolves.
Reference: Memoire sur l'Angleterre (1773) in Ministere des Affaires Etrangeres, Memoires et Documents: Angleterre Vol 52 Fol. 180-223. Cited in I. and R. Tombs 'That Sweet Enemy' pp168-9
One thing is sure though – having an economic shaman currently in charge of government policy is not encouraging..
Labels: comparative advantage, economics
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The credit crunch - private parasitism on the public purse?
The idea of nationalising Northern Rock gets a cool comment in an article by Ann Pettifor (Globalisation: Sleepwalking to Disaster) posted in ‘Open Democracy’.
Pettifor calls attention to the analysis by the International Swaps and Derivatives Association that in the second half of 2007 the value of Credit Default Swaps (really a form of insurance) was $43.5 trillion - that is about £21,000,000,000,000 sterling give or take a few tens of millions between friends. Which is twice the value of the US Stock market and three times the GDP of the USA.
On Northern Rock she says:
The debate on all this will be quite heated I think.
Pettifor calls attention to the analysis by the International Swaps and Derivatives Association that in the second half of 2007 the value of Credit Default Swaps (really a form of insurance) was $43.5 trillion - that is about £21,000,000,000,000 sterling give or take a few tens of millions between friends. Which is twice the value of the US Stock market and three times the GDP of the USA.
On Northern Rock she says:
Private gains and public losses
The tide of “easy money” daily drains away from the stricken mortgage-lender Northern Rock and other financial institutions. This bank was chaired until recently by Matt Ridley, a rightwing libertarian who once wrote that "governments do not run countries, they parasitise them”……
The management and shareholders of Northern Rock have built up £40 billion ($80 billion) in
liabilities, mainly to British taxpayers. Alongside the apparent bids for the company - from Virgin and the private-equity firm Olivant among others - the option of the Bank of England to "nationalise" it, and therefore "socialise" its liabilities - is being actively promoted. In that case, the burden of its rescue would fall on British taxpayers. That has not stopped investors entering the fray and blackmailing both the government and the Bank of England for more money.
The crisis of Northern Rock has exposed many persistent delusions about capitalism, among them one recycled in openDemocracy by Roger Scruton: it is one of capitalism's strengths "that, when investors make mistakes, they pay for them" (see the tenth comment here).
Not so. While gains by banks and corporations are inevitably privatised, their losses are often nationalised (read socialised). The true parasites reside in the private sector.
The debate on all this will be quite heated I think.
Labels: credit, economics, globalisation, taxpayers
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Wednesday, November 07, 2007
Credit Crunch - are we going to be Piper Alphad into a crash?
The financial turmoil after the sub-prime mess in the USA continues. Sombre question – are we going to be 'Piper Alpha' cursed?
Piper Alpha was a North Sea oil rig that exploded in 1988 killing 167 people. After cleanup and compensation for victims the owners put in an insurance claim for £1 billion (one thousand million pounds). Because of re-insurance deals the result was a tide of claims across the insurance industry that finally totalled £16 billion. This wrecked Lloyds of London and caused the complete reorganisation of insurance in the City of London.
Why is this relevant to today’s credit problems? Well the primary insurers in 1988 sold on part of the risks to other insurers in various financial packages, and they in turn repackaged part of their risks in other financial instruments and sold them on. Sometimes the primary insurers purchased these repackaged instruments without realising they were actually taking on again part of the risks they had sold on. Come the day of reckoning and the claims went round and round and round…some people having to pay several times.
The sub-prime mortgages (sold to people who are bad financial risks) at the heart of today’s problems presented a risk for the original lenders. They repackaged some of this risk in further financial instruments and sold them on to other people, many of whom repackaged several of those packages and sold them on again – and so on and so on. Bottom line, nobody actually knows how many rounds of this pass the parcel act went on, nor what the actual level of dud values is incorporated in financial securities underpinning otherwise quite respectable holdings. Nobody knows what will happen in a Piper Alpha like unravelling goes the rounds.
The uproar in the Financial Markets is chronicled for example in the Financial Times, Daily Telegraph, Guardian and Independent.
I rather suspect that the concept of ‘a market’ is about to get one of its periodic mass bad press episodes, of the kind wearily summed up by ‘John Kenneth Galbraith’ in the phrase 'Financial Genius Comes before the Fall'. Of course the financial markets are not ‘The Markets’ that give choice in a free economy – but since defenders of ‘market systems’ have been shy of emphasising this elementary fact we cannot complain if the general public conclude for the next few years that markets in general are evil and political poison. The political and economic results could be grim, as Cicero notes…
Piper Alpha was a North Sea oil rig that exploded in 1988 killing 167 people. After cleanup and compensation for victims the owners put in an insurance claim for £1 billion (one thousand million pounds). Because of re-insurance deals the result was a tide of claims across the insurance industry that finally totalled £16 billion. This wrecked Lloyds of London and caused the complete reorganisation of insurance in the City of London.
Why is this relevant to today’s credit problems? Well the primary insurers in 1988 sold on part of the risks to other insurers in various financial packages, and they in turn repackaged part of their risks in other financial instruments and sold them on. Sometimes the primary insurers purchased these repackaged instruments without realising they were actually taking on again part of the risks they had sold on. Come the day of reckoning and the claims went round and round and round…some people having to pay several times.
The sub-prime mortgages (sold to people who are bad financial risks) at the heart of today’s problems presented a risk for the original lenders. They repackaged some of this risk in further financial instruments and sold them on to other people, many of whom repackaged several of those packages and sold them on again – and so on and so on. Bottom line, nobody actually knows how many rounds of this pass the parcel act went on, nor what the actual level of dud values is incorporated in financial securities underpinning otherwise quite respectable holdings. Nobody knows what will happen in a Piper Alpha like unravelling goes the rounds.
The uproar in the Financial Markets is chronicled for example in the Financial Times, Daily Telegraph, Guardian and Independent.
I rather suspect that the concept of ‘a market’ is about to get one of its periodic mass bad press episodes, of the kind wearily summed up by ‘John Kenneth Galbraith’ in the phrase 'Financial Genius Comes before the Fall'. Of course the financial markets are not ‘The Markets’ that give choice in a free economy – but since defenders of ‘market systems’ have been shy of emphasising this elementary fact we cannot complain if the general public conclude for the next few years that markets in general are evil and political poison. The political and economic results could be grim, as Cicero notes…
Labels: crash, economics, Financial markets, Galbraith, insurance
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Saturday, September 15, 2007
Genius, finances and the Rocks
I don’t want to be too pessimistic, but with the current Northern Rock uproars John Kenneth Galbraith’s little book ‘A Short History of Financial Euphoria’ looks all too relevant.
Basic point. Speculation buys up the intelligence of those involved.
The only safeguard against market shipwrecks is good market ‘seamanship’ which recognises what a wrecking coast and adverse winds and tides look like.
Unfortunately the power of money means that a period of prosperity lessens the sense of danger. So-called new financial instruments re-invent old methods of profiting from risks and those involved bask in reputations for financial genius. ‘The world of finance hails the reinvention of the wheel over and over again, often in a more unstable version’ says Galbraith.
All is well so long as the risks don’t come back to leverage disproportionate havoc, as has come about from the innovative repackaging of high risk loans in the USA. The real problem comes from the hedge funds, and from the fact that financial institutions have been borrowing and lending on packages of assets which have been packaaged and re-packaged so often nobody actually knows where the risks are, and how many times they have been multiplied by being repeatedly spread around.
‘Financial genius comes before the fall’, as Galbraith memorably summed up his argument.
One depressing component of any situation where geniuses are discovered to have the wheels coming off their cunning plans is that the Official Great And Good are required to make public pronouncements about the underlying situation being sound regardless of what the situation really is.
I sincerely hope they are this time right about the Northern Rock uproar and the associated troubles.
Basic point. Speculation buys up the intelligence of those involved.
The only safeguard against market shipwrecks is good market ‘seamanship’ which recognises what a wrecking coast and adverse winds and tides look like.
Unfortunately the power of money means that a period of prosperity lessens the sense of danger. So-called new financial instruments re-invent old methods of profiting from risks and those involved bask in reputations for financial genius. ‘The world of finance hails the reinvention of the wheel over and over again, often in a more unstable version’ says Galbraith.
All is well so long as the risks don’t come back to leverage disproportionate havoc, as has come about from the innovative repackaging of high risk loans in the USA. The real problem comes from the hedge funds, and from the fact that financial institutions have been borrowing and lending on packages of assets which have been packaaged and re-packaged so often nobody actually knows where the risks are, and how many times they have been multiplied by being repeatedly spread around.
‘Financial genius comes before the fall’, as Galbraith memorably summed up his argument.
One depressing component of any situation where geniuses are discovered to have the wheels coming off their cunning plans is that the Official Great And Good are required to make public pronouncements about the underlying situation being sound regardless of what the situation really is.
I sincerely hope they are this time right about the Northern Rock uproar and the associated troubles.
Labels: crackpots, economics, Financial markets, Galbraith, history, Markets
Comments:
You are guaranteed 100% of the first £2,000 and 90% of the next £33,000 by the government. Of course if Northern Rock goes bankrupt (a major possibility) you'll be asking for your money back, along with millions of other savers. You won't see a penny for months (or possibly over a year) and will lose the interest you'd have gained if you'd transferred your money on Monday. The price you'll pay is maybe a few tenths of a percent in interest. What price is peace of mind?
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# posted by 
: 3:10 pm, September 15, 2007
: 3:10 pm, September 15, 2007Thursday, September 06, 2007
Economic crackpottery? An interesting read...
An interesting book out in the USA doing a hatched job on such supply-side concepts as the ‘Laffer Curve’ (which purports to show that cutting taxes can lead to an increase in tax revenue). The argument of the book by Jonathan Chait is that an economic cult has driven out sensible economic discourse and tries to show the nature of that cult.
If it is a cult, what are its traces in the UK? Supporters of the Laffer Curve in particular might like to review the arguments of this book.
Excerpts for Chait’s book ‘The Big Con’ are in ‘The New Republic’ this month.
And the core of the argument under attack?
Chait says of the propounders of such theories that “'some of them (are) ideological zealots, others merely greedy, a few of them possibly insane".
The work of two authors (George Gilder’s “Wealth and Poverty” and Jude Wanniski’s “The Way The world works” come in for particular rubbishing:
Another interesting read, too many books to catch up with …sigh.
Jonathan Chait “The Big Con: the true story of how Washington got hoodwinked by crackpot economics” Houghton Mifflin Sept 2007
If it is a cult, what are its traces in the UK? Supporters of the Laffer Curve in particular might like to review the arguments of this book.
Excerpts for Chait’s book ‘The Big Con’ are in ‘The New Republic’ this month.
Like most crank doctrines, supply- side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences…... And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania.
And the core of the argument under attack?
The core principle is that economic performance hinges almost entirely on how much incentive investors and entrepreneurs have to attain more wealth, and this incentive in turn hinges almost entirely on their tax rate. Therefore, cutting taxes-- especially those of the rich, who carry out the decisive entrepreneurial role in the economy--is always a good idea.
Chait says of the propounders of such theories that “'some of them (are) ideological zealots, others merely greedy, a few of them possibly insane".
The work of two authors (George Gilder’s “Wealth and Poverty” and Jude Wanniski’s “The Way The world works” come in for particular rubbishing:
The literary and intellectual style of "The Way the World Works" is immediately familiar to anybody who has ever sorted submissions at a political magazine. It is the manifesto of the misunderstood autodidact--an essay purporting to have interpreted history in a completely novel and completely correct way, or to have discovered the key to eternal prosperity and world peace, or some equally sweeping claim. The Way the World Works fits precisely into this category, except that, rather than being scrawled longhand on sheaves of notebook paper and mass-mailed to journalists, it was underwritten by the American Enterprise Institute, has been published in four editions, and features introductions attesting to its genius from such luminaries as Bartley and the columnist and ubiquitous pundit Robert Novak.
Another interesting read, too many books to catch up with …sigh.
Jonathan Chait “The Big Con: the true story of how Washington got hoodwinked by crackpot economics” Houghton Mifflin Sept 2007
Labels: crackpots, economics, Laffer Curve, supply-side
Comments:
The Laffer curve does not say that tax cuts are always good though.
It says that there's an optimal level of taxation to maximise government revenue. It is thought most governments are actually above this point.
I think that's perfectly reasonable - if you tax too much you reduce economic activity and therefore takings, as well as making the incentive to avoid taxation higher.
Also the costs of collection go down with simpler tax systems, and simpler ones are often lower.
People who support tax cuts below this point on the curve have other reasons - shrinking the state, its functions and its power mostly (a noble aim in my book).
Tax cuts for the rich - well, if you're taxing them until their pips squeak then you're actually going to get little tax revenue from them since they have the resources to avoid it (inheritance tax is easily avoided by the rich for instance) so lowering taxes makes sense, hence the increase in revenue which can come from a flat tax (although they never say if other taxes do increase or not).
So, the Laffer curve seems sensible to me, but its use by politicians to justify some things is just window dressing to disguise other motives.
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It says that there's an optimal level of taxation to maximise government revenue. It is thought most governments are actually above this point.
I think that's perfectly reasonable - if you tax too much you reduce economic activity and therefore takings, as well as making the incentive to avoid taxation higher.
Also the costs of collection go down with simpler tax systems, and simpler ones are often lower.
People who support tax cuts below this point on the curve have other reasons - shrinking the state, its functions and its power mostly (a noble aim in my book).
Tax cuts for the rich - well, if you're taxing them until their pips squeak then you're actually going to get little tax revenue from them since they have the resources to avoid it (inheritance tax is easily avoided by the rich for instance) so lowering taxes makes sense, hence the increase in revenue which can come from a flat tax (although they never say if other taxes do increase or not).
So, the Laffer curve seems sensible to me, but its use by politicians to justify some things is just window dressing to disguise other motives.
Wednesday, July 04, 2007
Happy 'Lucky Escape' day!
Yes it is the 4th of July again, the anniversary of the second day after the US Declaration of Independence was actually voted on.
US Independence was a huge and lucky escape for Britain and the world.
Britain learned after US independence that trade did not depend on colonial controlls. Cross-atlantic commerce boomed after peace was made. This astonished the French who thought they had engineered the beginning of the collapse of the British Economy by cutting off Britain's colonial lifeline.
It was the first practical sign of the reality of Free Trade and the power of the ideas of Adam Smith.
Britain thus also avoided involvement with the rolling slaughter of the US expansion westwards - one of the real causes of the Revolution was the sincere attempt of the King to protect people who had become his subjects, namely various Native American nations some of which were settling on the western lands and becoming farmers. Land speculators in the colonies (such as George Washington) were the backbone of the revolt, frightened that native americans might suddenly put a block on reaising their investments. It is impossible to see how conflict between British Authority and this powerful class of speculators could have been avoided. At least the war and the revolutionary settlement occured at a time when the revolutionary elite was at a high point of Enlightenment enthusiasm and managed to hijack the revolt from the cruder elements powering the grassroots radicals. So we have the various documents and declarations that made a civilised outcome possible, and can even inspire a Briton today.
Another point. Without US Independence , Britain would have remained snared in the politics of the slave-owning colonies which would have built up massive vested interests in Parliament.
The UK abolition of the Slave Trade, and subsequently of Slavery itself, owed a lot to the political isolation of the West Indies planters, giving campaigning room for the various abolitionist campaigns. If the planters had found allies amongst the still-colonial Americas things could have have been very difficult.
And the lingering anti-American sentiments amongst establishment figures helped to make the abolitionist cause politically respectable as Britons gave themselves a license to sneer at the pretensions of a Republic which preached political liberty but practiced chattel slavery. Yes this is not a very happy reaction, but true I think.
So thank you Benjamin Franklin, even if you did subsequently engineer an unnecessary prolongation of the war by bringing in the French (and thus continue to earn personal commissions on the contracts to supply arms to the rebels - the BAe affair does not hold a candle on that scandal).
History is much more interesting than our standard stories tell us...
US Independence was a huge and lucky escape for Britain and the world.
Britain learned after US independence that trade did not depend on colonial controlls. Cross-atlantic commerce boomed after peace was made. This astonished the French who thought they had engineered the beginning of the collapse of the British Economy by cutting off Britain's colonial lifeline.
It was the first practical sign of the reality of Free Trade and the power of the ideas of Adam Smith.
Britain thus also avoided involvement with the rolling slaughter of the US expansion westwards - one of the real causes of the Revolution was the sincere attempt of the King to protect people who had become his subjects, namely various Native American nations some of which were settling on the western lands and becoming farmers. Land speculators in the colonies (such as George Washington) were the backbone of the revolt, frightened that native americans might suddenly put a block on reaising their investments. It is impossible to see how conflict between British Authority and this powerful class of speculators could have been avoided. At least the war and the revolutionary settlement occured at a time when the revolutionary elite was at a high point of Enlightenment enthusiasm and managed to hijack the revolt from the cruder elements powering the grassroots radicals. So we have the various documents and declarations that made a civilised outcome possible, and can even inspire a Briton today.
Another point. Without US Independence , Britain would have remained snared in the politics of the slave-owning colonies which would have built up massive vested interests in Parliament.
The UK abolition of the Slave Trade, and subsequently of Slavery itself, owed a lot to the political isolation of the West Indies planters, giving campaigning room for the various abolitionist campaigns. If the planters had found allies amongst the still-colonial Americas things could have have been very difficult.
And the lingering anti-American sentiments amongst establishment figures helped to make the abolitionist cause politically respectable as Britons gave themselves a license to sneer at the pretensions of a Republic which preached political liberty but practiced chattel slavery. Yes this is not a very happy reaction, but true I think.
So thank you Benjamin Franklin, even if you did subsequently engineer an unnecessary prolongation of the war by bringing in the French (and thus continue to earn personal commissions on the contracts to supply arms to the rebels - the BAe affair does not hold a candle on that scandal).
History is much more interesting than our standard stories tell us...
Labels: economics, history, slavery, United States
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Wednesday, January 10, 2007
New Life for Old Economies? The end of the Dismal Science tag?
While browsing around for more books to back up my Explorations in Economics, I found this one edited by Diana Coyle: “New Wealth for Old Nations: Scotland’s Economic Prospects” Princeton UP, Published March 2005.
This looks like an useful resource for anyone trying to develop a realistic policy for dynemic economic development in a 'regional' or 'small nation' Political framework within an increasingly integrated Europe. I’d welcome comments from Scots or Welsh people knowledgeable about this book- is it of practical relevance with the Scottish and Welsh National Elections upcoming?
Diana Coyle is the author of “Sex, Drugs and Economics” and her latest book is “The Soulful Science: What Economists Really Do And Why It Matters” Due out in February 2007 and definitely on my reading list.
This looks like an useful resource for anyone trying to develop a realistic policy for dynemic economic development in a 'regional' or 'small nation' Political framework within an increasingly integrated Europe. I’d welcome comments from Scots or Welsh people knowledgeable about this book- is it of practical relevance with the Scottish and Welsh National Elections upcoming?
Diana Coyle is the author of “Sex, Drugs and Economics” and her latest book is “The Soulful Science: What Economists Really Do And Why It Matters” Due out in February 2007 and definitely on my reading list.
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Tuesday, October 18, 2005
economics, power and Liberals
The current political gropings in the Conservative Party leadersip crawl irresistably recalls this:
"The modern conservative is engaged in one of man's oldest exercises in moral
philosophy; that is, the search for a superior moral justification for
selfishness."
An observation by John Kenneth Galbraith, of course, a writer all liberals (even Liberals) should read and re-read for several reasons. First because his writing is superb and witty and even politics should have moments of beauty and pleasure. Second because he casts such clear lights on the political agendas within economics. There is a huge effort by the self-interested to define economics in ways that shut out progressive and humane choices. Reading Galbraith will help us see the wider possibilities are not actually just dreams.
Galbraith is still with us – his 97th birthday was on Saturday 15th October. His lifetime covers a third of that of the USA since 1776 (and his professional observations on ecoonomics cover a quarter of that lifetime) so he has seen a lot… this New York Review of Books article on a major biography gives a good overview of his strengths and also perhaps errors. As the NYRB article concludes…
“ The importance of public goods, the central theme of The Affluent Society, has
received perhaps the most serious attention, especially in the economics of
human development. Few economists still believe that stimulating economic growth
is all that matters. Social programs for health care, education, transportation,
and other infrastructure are now widely considered integral to long-term
development. The Human Development Report of the United Nations Development
Programme publishes indexes of human development, based in particular on the
work of Harvard's Nobel laureate Amartya Sen, which include measures of health,
education, and gender discrimination.
There also has long been a constant flow of pertinent criticism from in-dependent economists emphasizing the importance of institutions and economic structure that Galbraith always believed were central to economic understanding. Galbraith refused to make simplifying assumptions that lent themselves to economic methods and other quantitative techniques…."Most economic philosophers needed only to be
right as regards their own time," Galbraith writes in The Affluent Society.
Galbraith's intellectual courage, sensitivity to the abuse of power, understanding of the limits of economic growth, and grasp of the institutions of everyday life will combine to make his body of work relevant well beyond his time…
We UK Liberal Democrats need to keep these perspectives in our active policy lives.
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