The Tory website, Conservative Home, has hosted an attack on Socialist Economic Bulletin. That the Tories disagree with SEB is scarcely surprising. The way that it is done, however, tells a lot about the weakness of the Tories economic arguments.
One of the most invariable tests of whether an opponent is wrong is whether they are forced to distort the position they are criticising. If an opponent has a powerful and effective argument then the position they are attacking is presented correctly, clearly and coherently – because if you have a serious argument against something that is the most effective way to demolish it. If, however, your opponents is forced to distort your position that reveals that they cannot actually answer your argument – which is why they are forced to distort it.
Conservative Home has therefore decided to criticise SEB for proposing to: ‘Nationalise some of the banks without compensation to shareholders’.
Actually, of course, SEB has proposed no such thing. It has merely pointed out that it is highly likely that the value of certain existing UK banks, when the full extent of their current and future losses is revealed, will turn out to be zero – as it was with Northern Rock and Bradford and Bingley. For example, given that HBOS’s share price has fallen by more than 90 per cent, and the extreme depressive pressure that the proposed merger of HBOS and Lloyds TSB has placed on the latter’s share price, not merely SEB but very many operators in the market strongly suspects that the actual value of HBOS, as shown by the balance between its assets and liabilities, may well eventually turn out to be zero. Royal Bank of Scotland shows similar, if slightly less extreme, weakness. What Ken Livingstone said in SEB is that if the value of shares is zero then the taxpayer should not pay a price for them, but the government should: ‘announce it is ready to take over the functioning of any of the banks that turn out to have no value for shareholders. This means that deposits should be guaranteed but not shareholders.'
Paying no compensation for something which is worthless seems rather appropriate and uncontroversial. Does Conservative Home believe that compensation should be paid to shareholders for shares that are worthless? That would seem to take the general approach of the Conservative Party, that there should be market economics for the unemployed and socialist welfare state protection for shareholders and bankers, to a new extreme!
Is Conservative Home really arguing that taxpayers should pay out money to shareholders for shares that are worthless - it would be interesting to know if it would really defend that.
There are many more fundamental reasons for knowing that Tory economic policies are wrong but the fact that Conservative Home can't even address SEB’s position, but has to distort it because it is incapable of answering it, demonstrates yet again just how weak the Tories economic policies have become.
Friday, 17 October 2008
Larry Elliot on the Green New Deal
The Guardian's economics editor Larry Elliot has an excellent piece in that paper's Comment is Free section today praising the fact that: 'Ed Miliband, the new secretary of state for energy and climate change, [has said] that he will introduce a feed-in tariff so that those who invest in small-scale electricity generation can sell excess power back to the grid. This sends out an important signal that ministers are serious about tackling climate change and are not, like Italy or Poland, using the financial crisis to wriggle out of their commitments.' He draws attention to the New Economics Foundation's pamphlet urging a Green New Deal and argues: 'Gordon Brown is calling for a Bretton Woods II to reshape the global institutions in a post-bubble world; a Green New Deal should be the starting point for discussions.' SEB strongly recommends people to read it. It can be found here.
Negative market effects of bank proposals show themselves
The fundamental flaws in the proposed bank bailout plan have already been discussed in terms of economic theory on this blog. But these effects, only four days after the announcement of the plan, are showing themselves on markets.
The government agreed to purchase shares in Royal Bank of Scotland (RBS) at 65.5p, in Lloyds TSB at 173.3p, and in HBOS at 113.6p. By buying shares in private banks the government necessarily artificially inflates their share price above that which the market would set by itself and simultaneously exposes the taxpayer to the risk of loss – up to £37 billion of losses in terms of the sums the government has agreed to put into such share purchases.
As Socialist Economic Bulletin pointed out: ‘What is the consequence of assuming this risk? The “taxpayer” is not an abstract entity. The “taxpayer”... consists not only of individuals but of profitable, that is viable, companies. Therefore the risk the government has taken has been put onto the shoulders of individuals and viable companies, instead of being concentrated on RBS, HBOS, and Lloyds TSB shareholders. This is... unjustified and damaging to other viable companies and to individuals.’
The risk of loss for taxpayers could be seen clearly by the end of trading yesterday. RBS shares stood at 65.0p – 0.8 per cent below the government price, Lloyds TSB at 150.0p or 13.4 per cent below the government price, and HBOS at 84.1p – 26.0 per cent below. This would represent a loss of several billion for the taxpayer.
Second, however, the indirect and direct negative effect on other companies could be seen.
An indirect one is that any such loss for taxpayers would in part be paid for by taxation from viable companies. A direct one was the effect on their share prices.
Overall on 16 October the market was severely down. The FTSE closed down 5.4 per cent. The fall was widespread. It affected energy companies – BP down 4.0 per cent, Shell down 7.2 per cent – mining companies – BHP Billiton down 13.1 per cent, but it extended beyond these - BT for example was down 3.1 per cent and Marks and Spencer down 5.4 per cent.
The fall struck the financial sector particularly severely. Insurance company Legal and General was down 10.9 per cent, Aviva was down 12.9 per cent. HSBC bank, by far the strongest of the major banks operating in Britain due to its Asian roots, was down 4.0 per cent, Barclays Bank down 11.0 per cent, Standard Chartered bank down by 12.9 per cent.
But there was one small knot of companies that stood out against the trend. HBOS was down only 1.6 per cent, Lloyds TSB only down 0.1 per cent and RBS closed at exactly the same level as the previous day. These were, of course, the three banks that the government had promised to buy shares in. In other words the share prices of these banks were being relatively protected against falls while other, more viable, banks were hit - resources were channelled away from viable companies and towards the least viable.
The government agreed to purchase shares in Royal Bank of Scotland (RBS) at 65.5p, in Lloyds TSB at 173.3p, and in HBOS at 113.6p. By buying shares in private banks the government necessarily artificially inflates their share price above that which the market would set by itself and simultaneously exposes the taxpayer to the risk of loss – up to £37 billion of losses in terms of the sums the government has agreed to put into such share purchases.
As Socialist Economic Bulletin pointed out: ‘What is the consequence of assuming this risk? The “taxpayer” is not an abstract entity. The “taxpayer”... consists not only of individuals but of profitable, that is viable, companies. Therefore the risk the government has taken has been put onto the shoulders of individuals and viable companies, instead of being concentrated on RBS, HBOS, and Lloyds TSB shareholders. This is... unjustified and damaging to other viable companies and to individuals.’
The risk of loss for taxpayers could be seen clearly by the end of trading yesterday. RBS shares stood at 65.0p – 0.8 per cent below the government price, Lloyds TSB at 150.0p or 13.4 per cent below the government price, and HBOS at 84.1p – 26.0 per cent below. This would represent a loss of several billion for the taxpayer.
Second, however, the indirect and direct negative effect on other companies could be seen.
An indirect one is that any such loss for taxpayers would in part be paid for by taxation from viable companies. A direct one was the effect on their share prices.
Overall on 16 October the market was severely down. The FTSE closed down 5.4 per cent. The fall was widespread. It affected energy companies – BP down 4.0 per cent, Shell down 7.2 per cent – mining companies – BHP Billiton down 13.1 per cent, but it extended beyond these - BT for example was down 3.1 per cent and Marks and Spencer down 5.4 per cent.
The fall struck the financial sector particularly severely. Insurance company Legal and General was down 10.9 per cent, Aviva was down 12.9 per cent. HSBC bank, by far the strongest of the major banks operating in Britain due to its Asian roots, was down 4.0 per cent, Barclays Bank down 11.0 per cent, Standard Chartered bank down by 12.9 per cent.
But there was one small knot of companies that stood out against the trend. HBOS was down only 1.6 per cent, Lloyds TSB only down 0.1 per cent and RBS closed at exactly the same level as the previous day. These were, of course, the three banks that the government had promised to buy shares in. In other words the share prices of these banks were being relatively protected against falls while other, more viable, banks were hit - resources were channelled away from viable companies and towards the least viable.
Thursday, 16 October 2008
Seven key points that must be included in any programme for dealing with the economic crisis - by Ken Livingstone
The core of the international financial crisis is the uncompetitive state of the US economy reflected in its huge balance of payments deficit. This reflects major overvaluation of the dollar, which in turn was reflected in the last period in an unsustainable overpricing of US assets compared to their real international values.
The result of this was that US assets would inevitably eventually adjust downwards to nearer their real international levels – which is why this crisis broke out in the most overpriced part of the US asset market, sub-prime mortgages. But many other US assets, including shares on Wall Street, were also overvalued in real international terms and will also inevitably adjust downwards - either due to dollar devaluation, or falls in their price, or both.
As these US assets fall in price this has weakened, or in some cases entirely wrecked, the balance sheet of US financial institutions - which in turn sets up a severe liquidity squeeze as financial institutions are no longer able or willing to lend. Contagion from this has spread through the rest of the world economy.
This driving force of the situation also determines the only shift that can permanently overcome this financial crisis and re-establish balance in the world economy. The devaluation of US assets is inevitable. This shows that markets have demonstrated that the US does not have the economic resources to attempt to maintain its present role in the world - and the attempt to do so is spreading havoc through the world economy.
The US must lessen the strain on its economy - retrench by cutting its military spending and accepting a reduced role in the world economy. The US must either accept this voluntarily, which would be the wise course, or it will eventually be forced through crisis to accept this, but in the meantime severe damage will be inflicted on everyone.
The US role as world’s sole economic superpower has ended. The US has become one very large power in the world among others such as European Union, China and India.
In the medium term all this will require major shifts in the British economy - including the need for much closer relations with Europe, China and India. But in the short term the crucial question is to protect ordinary people to the maximum degree possible from the fall-out from this financial crisis.
To achieve this seven key points must be included in any programme to deal with the economic crisis. This financial crisis is continuing to develop, and therefore so must programmes to deal with it. But there are already elements of the answers required that are clear.
Each corresponds to a particular and crucial part of the present crisis. Further measures to deal with other aspects of the situation will therefore be required, but these seven points are indispensable in any adequate policy response.
First, the government, in order to avoid huge contraction in the economy, must take over the functioning of large part of the banking system. The present scheme for the government to purchase shares in private banks was well intentioned but, due to the huge fall in share prices, which may well continue, creates huge risk and threatened loss to the taxpayer of over £40 billion. This is because it is likely that the real value of both HBOS and Royal Bank of Scotland, once the balance of their devaluing assets and their real liabilities is taken into account, is not only far below the present share prices but may well be zero. The government must not pay money for shares that may be considerable overpriced or even worthless – to do so would be to suffer losses for the taxpayer that would damage public spending, or necessitate higher taxation, for years to come. The government should instead announce it is ready to take over the functioning of any of the banks that turn out to have no value for shareholders. This means that deposits should be guaranteed but not shareholders.
HBOS and Royal Bank of Scotland (RBS) will almost certainly finish up being nationalised, given they are very likely already worthless in terms of real share value once their losses are fully revealed, but by this approach a large loss on share purchases by the taxpayer will be avoided. As shown by Northern Rock, which is now one of the most attractive banks in the country to savers, nationalised banks can be reorganised rapidly and effectively – indeed the productive economy will benefit as such nationalised banks resume lending.
Second, there must be further sharp reductions in interest rates and the government, through banks under its control, must start lending directly – as is already being done in the US. Without this severe damage will be done to individuals and viable companies.
Third, the government should be prepared to run large budget deficits. Keynesian budget measures by themselves are not sufficient to overcome a financial crisis on this scale but they are necessary as a short term measure to counteract recession.
Fourth, as the economy moves into recession, those with the least responsibility for the present situation, those on medium earnings and the least well off are threatened most, while the highest paid will be relatively most protected. This is not only economically and socially unjust but politically disastrous for Labour - whose support is precisely concentrated among those on medium incomes and the less well off. There must therefore be a shift to a more redistributive system of taxation to recycle resources from the best off to those on medium incomes and the least well off. To finance this at a minimum a new 50 per cent rate of income tax for those earning over £150,000 a year must be introduced.
Fifth, the most severe driving force of inflation is high energy prices which are generating extra profits for the energy companies. Such extra profits must, instead, be redirected back to energy consumers by means of a windfall tax on energy companies that is used subsidise those paying extra energy bills.
Sixth, the recession, and probably a decline in exchange rate of pound, will shrink the economy both domestically and in real international terms. In relation to incomes an increase in taxation on the highest paid has already been dealt with. But there will also be a squeeze in public expenditure. The public expenditure that must not be cut is on health, education and welfare and instead resources must be freed up for these through reductions in military spending. This means the replacement for Trident must be cancelled, the new aircraft carriers must be cancelled and British troops taken out of Iraq.
Seventh, polluters must pay. Given that the planet is threatened with climate change, and ordinary people are suffering economic hardship, it is unacceptable that damaging and entirely unnecessary activity such as driving large gas guzzling and polluting cars is taking place. In London the £25 a day CO2 congestion charge on gas guzzling cars must be reintroduced and nationally high levels of taxation on such cars much be strengthened.
There are of course many other economic and social effects of the financial crisis that must also be dealt with in any government programme. As there is a severe squeeze in the private housing market large scale state funded programmes of house building will have to be undertaken. Recession will mean an increase in crime, or the threat of crime, and therefore spending on the police must be maintained – another reason why military spending must be reduced in order to ensure the resources for policing are maintained. The threat from racism will increase, as will the danger of domestic violence against women, and therefore programmes against these must be stepped up.
But the seven points outlined above, while not a full economic programme, are indispensable parts of any policy to deal with the present economic situation.
The result of this was that US assets would inevitably eventually adjust downwards to nearer their real international levels – which is why this crisis broke out in the most overpriced part of the US asset market, sub-prime mortgages. But many other US assets, including shares on Wall Street, were also overvalued in real international terms and will also inevitably adjust downwards - either due to dollar devaluation, or falls in their price, or both.
As these US assets fall in price this has weakened, or in some cases entirely wrecked, the balance sheet of US financial institutions - which in turn sets up a severe liquidity squeeze as financial institutions are no longer able or willing to lend. Contagion from this has spread through the rest of the world economy.
This driving force of the situation also determines the only shift that can permanently overcome this financial crisis and re-establish balance in the world economy. The devaluation of US assets is inevitable. This shows that markets have demonstrated that the US does not have the economic resources to attempt to maintain its present role in the world - and the attempt to do so is spreading havoc through the world economy.
The US must lessen the strain on its economy - retrench by cutting its military spending and accepting a reduced role in the world economy. The US must either accept this voluntarily, which would be the wise course, or it will eventually be forced through crisis to accept this, but in the meantime severe damage will be inflicted on everyone.
The US role as world’s sole economic superpower has ended. The US has become one very large power in the world among others such as European Union, China and India.
In the medium term all this will require major shifts in the British economy - including the need for much closer relations with Europe, China and India. But in the short term the crucial question is to protect ordinary people to the maximum degree possible from the fall-out from this financial crisis.
To achieve this seven key points must be included in any programme to deal with the economic crisis. This financial crisis is continuing to develop, and therefore so must programmes to deal with it. But there are already elements of the answers required that are clear.
Each corresponds to a particular and crucial part of the present crisis. Further measures to deal with other aspects of the situation will therefore be required, but these seven points are indispensable in any adequate policy response.
First, the government, in order to avoid huge contraction in the economy, must take over the functioning of large part of the banking system. The present scheme for the government to purchase shares in private banks was well intentioned but, due to the huge fall in share prices, which may well continue, creates huge risk and threatened loss to the taxpayer of over £40 billion. This is because it is likely that the real value of both HBOS and Royal Bank of Scotland, once the balance of their devaluing assets and their real liabilities is taken into account, is not only far below the present share prices but may well be zero. The government must not pay money for shares that may be considerable overpriced or even worthless – to do so would be to suffer losses for the taxpayer that would damage public spending, or necessitate higher taxation, for years to come. The government should instead announce it is ready to take over the functioning of any of the banks that turn out to have no value for shareholders. This means that deposits should be guaranteed but not shareholders.
HBOS and Royal Bank of Scotland (RBS) will almost certainly finish up being nationalised, given they are very likely already worthless in terms of real share value once their losses are fully revealed, but by this approach a large loss on share purchases by the taxpayer will be avoided. As shown by Northern Rock, which is now one of the most attractive banks in the country to savers, nationalised banks can be reorganised rapidly and effectively – indeed the productive economy will benefit as such nationalised banks resume lending.
Second, there must be further sharp reductions in interest rates and the government, through banks under its control, must start lending directly – as is already being done in the US. Without this severe damage will be done to individuals and viable companies.
Third, the government should be prepared to run large budget deficits. Keynesian budget measures by themselves are not sufficient to overcome a financial crisis on this scale but they are necessary as a short term measure to counteract recession.
Fourth, as the economy moves into recession, those with the least responsibility for the present situation, those on medium earnings and the least well off are threatened most, while the highest paid will be relatively most protected. This is not only economically and socially unjust but politically disastrous for Labour - whose support is precisely concentrated among those on medium incomes and the less well off. There must therefore be a shift to a more redistributive system of taxation to recycle resources from the best off to those on medium incomes and the least well off. To finance this at a minimum a new 50 per cent rate of income tax for those earning over £150,000 a year must be introduced.
Fifth, the most severe driving force of inflation is high energy prices which are generating extra profits for the energy companies. Such extra profits must, instead, be redirected back to energy consumers by means of a windfall tax on energy companies that is used subsidise those paying extra energy bills.
Sixth, the recession, and probably a decline in exchange rate of pound, will shrink the economy both domestically and in real international terms. In relation to incomes an increase in taxation on the highest paid has already been dealt with. But there will also be a squeeze in public expenditure. The public expenditure that must not be cut is on health, education and welfare and instead resources must be freed up for these through reductions in military spending. This means the replacement for Trident must be cancelled, the new aircraft carriers must be cancelled and British troops taken out of Iraq.
Seventh, polluters must pay. Given that the planet is threatened with climate change, and ordinary people are suffering economic hardship, it is unacceptable that damaging and entirely unnecessary activity such as driving large gas guzzling and polluting cars is taking place. In London the £25 a day CO2 congestion charge on gas guzzling cars must be reintroduced and nationally high levels of taxation on such cars much be strengthened.
There are of course many other economic and social effects of the financial crisis that must also be dealt with in any government programme. As there is a severe squeeze in the private housing market large scale state funded programmes of house building will have to be undertaken. Recession will mean an increase in crime, or the threat of crime, and therefore spending on the police must be maintained – another reason why military spending must be reduced in order to ensure the resources for policing are maintained. The threat from racism will increase, as will the danger of domestic violence against women, and therefore programmes against these must be stepped up.
But the seven points outlined above, while not a full economic programme, are indispensable parts of any policy to deal with the present economic situation.
Wednesday, 15 October 2008
Omar Salem on Compass Online - 'Tough times call for tough choices to ensure fairness'
Omar Salem has a post on Compass Online arguing that 'Tough times call for tough choices to ensure fairness'. It looks at child poverty in particular and argues: ''To ensure fairness, there is scope to look at rebalancing the tax system to help those who are on lower and middle incomes and whose living standards are most under threat. This would make a real difference to people's lives and demonstrate that Labour has a distinctive approach to dealing with tough times - and it is one of the areas where policy changes can have a tangible effect very quickly.' Read it here.
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