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April 14, 2013

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Bob

"* Intelligent economists of all colours have often called for land value taxes, more housebuilding and monetary policy to pay more attention to asset price bubbles. There's a reason why such policies have little public support. That reason is rooted in Thatcherism".

That reason is obviously "home-ownerism" which Mrs T certainly played on, but she didn't create it. Nor, it must be said, were New Labour any more overtly "anti home ownerist" - they were quite content with the asset bubble too, as I recall. Or did they bring in LVT Mansion Tax or even an extension to Council Tax by adding more bands at the top, and no one notice?

paulc

Cuts in top rates of income tax 'encourage rent seeking and excessive risk taking'...but how exactly?

Tim Almond

And governments following her had how long to look at her policies and change them?

I bought my house at the trough of the housing market in the mid-90s, when people thought that "housing as investment" was a bad idea. Two years later, Blair came to power and he had every opportunity to liberalise the housing market towards more of a pro-building policy. I'm not going to suggest that that was deliberate, but he didn't reverse it.

The crisis was more about the demutualisation of the building societies and the FSA. Crock would not have followed its high risk expansionist policies if it had been a building society, and if the FSA had been a decent regulator, it would have prevented them.

Metatone

Following Tim Almond, some of the Thatcherite roots of the banking crisis were the evisceration of regulation in the financial arena. All this was done in the name of "free markets" - but it should come as no surprise that Tim Worstall disavows policy he supported in the past whenever he wants to make a rhetorical point.

Tim Almond

Metatone,

Actually, no. The main problem was that the FSA bungled bank regulation.

I'm a free marketeer, but if the state is going to underwrite something, it should also have a say in what risks that thing takes. It has an obligation to protect the interest of the public. The FSA failed to do this.

The behaviour of Crock, expanding by borrowing from money markets and picking up lots of short lending to feed long term mortgages was always a risky strategy. If the cost of borrowing went up on the money markets, you'd end up with mortgages that were losing you money.

Luis Enrique

Can anybody tell me whether the "big bang" City deregulation had anything to do with the failings that led to the crisis? (Excessive leverage, short term financing etc.)?

gastro george

Isn't it more to do with the repeal of Glass-Steagall and our equivalent of it? Previously we easily survived the crashes of investment banks, but when combined with the effective guarantee given to domestic account holders, then we can't.

gastro george

"The main problem was that the FSA bungled bank regulation."

It's a right-wing meme that everything is hunky-dory in the world of finance, but Labour's fault for "over-spending" and messing up regulation. When, in fact, Blairism was just a nuanced continuation of Thatcherite neo-liberalism.

Blissex

«high house prices naturally lead to high mortgage debt»

Quite the opposite: extremely lax and cheap lending, that is large mortgages, is mostly what drove up house prices.

Countries that went on a credit bubble had enormous house (and other asset) bubbles too.

«the banking crisis being a crisis not of free markets, but of managerialism. The banking crisis shows us not (just) that free markets don't work, but that hierarchical organizations with bullying managers don't work.»

I understand, having bought and read The Book, the perils of managerialism, but as to the crisis it was merely the excuse, the vehicle for the real culprit, which was simply speculatory greed, itself the deliberate product of a strategy of making it look like that the class interests of the middle class or even the middle income class were aligned with those of the upper classes.

And in banks the managers were not so "bullying", they were more appropriately "bribing" their underlyings, sharing with them some pretty winnings as long as Upton Sinclair said they worked hard to avoid understanding as their bonuses and jobs depending on not understanding.

Managers use bullying on the low paid "bulk headcount", but use bribing on their peers, the "creative geniuses" who "create wealth".

If you believe that managerialism was the motive power behind the bubble, rather than the figleaf, you also should believe that it was all a honest mathematical mistake caused by the misapplication of the gaussian copula to skewed probability distributions as some pro-management book and articles in the business press have argued.


Sure managerialism and bullying can destroy even robust organisations on their own, but they were not the motive power of the crisis.

Look at other countries where the Big Bosses created gigantic credit bubbles to create massive streams of capital gains: in most of them there was no pretence to managerialism, it was just pure greed and politics.

paulc

Still wondering why low tax rates encourage rent seeking and excessive risk taking. I'm guessing that risk taking is discouraged by high taxes since if you win you lose most of your gains to the tax man and if you lose you... lose, so to speak, but why do low rates of tax encourage rent seeking? I don't see why rent seeking would be discouraged by high rates of tax.

Andrew

Nice post Chris, and again some good comments.

I'm with Blissex in finding mangagerialism a fairly unlikely candidate for a root cause of a massive global credit bubble.

I suspect that political regulatory and indeed management philosophy capture is all driven by the vast mountain of money just ripe for harvesting. Why it happened just recently is likely down to opportunity - time since last bubble, globalised finance, Asian savings.

I also find it fanciful to regard Thatcherism as any kind of *important* factor given the global nature of the phenomenon. It may have had a bearing on the local mechanisms but simply cannot have been a necessary or sufficient cause.

Tammly

The banking crisis shows us not (just) that free markets don't work, but that hierarchical organizations with bullying managers don't work.

I think due to the imperfection of human beings, nothing works very well for very long.

Matthew

"Intelligent economists of all colours have often called for land value taxes, more housebuilding and monetary policy to pay more attention to asset price bubbles. There's a reason why such policies have little public support. That reason is rooted in Thatcherism."

I'm not so sure Thatcherism is the reason. The US did not experience Thatcher, but the public here is nonetheless opposed to property taxes. In fact, in public opinion polls they rank dead last, by far the most hated form of taxation.

As for monetary policy, I think there is a lot of disagreement on exactly what a central bank can do to lean against a speculative bubble. Would raising interest rates have popped the bubble, or just punish the rest of the economy?

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