Wednesday, September 30, 2009

Is my pessimism justified?

I'm increasingly pessimistic about prospects for meaningful reform in the wake of the financial crisis, and feel that a repeat, quite possibly on an even larger scale, is not unlikely. Martin Wolf in the FT seems to agree. His tone is of course more sober and measured: here are some excerpts, but do read the whole thing:

What entered the crisis was, we now know, an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead. ... Today, the core financial institutions are, beyond doubt, a part of the state. ... The most important point is that where we are now is intolerable. Today’s concentrations of state-insured private wealth and power must surely go.

And this from Michael Pomerleano in Wolf's FT Forum (HT Mark Thoma):
In 2008, salaries of the top 10 banks reached $75 billion (up from $31 billion in 1999), while cash dividends to shareholders were only $17.5 billion. Management took 4.3 times more than shareholders at a time when shareholders were injecting capital and government was guaranteeing deposits. He pointed to the critical principal-agent fiduciary problem. Essentially, financial sector losses will be paid for by future taxation (large fiscal debt) or inflation.

The bottom line here is that we are already collectively paying (through the nose) to support the financial sector and will continue to do so. This is a scale of state subsidy that is surely unparalleled in the West. And the ultimate irony of course is that the beneficiaries of our largesse continue to kid themselves that they are "innovating" and "creating wealth", embodying the free market spirit!

Thursday, September 24, 2009

What next for Britain?

Right-wingers are now arguing that because of the crisis, we have to reduce public spending and reduce income taxes. For these people, whatever the data, the remedy is the same - during the boom/bubble they said essentially the same thing, i.e. cut income taxes, free up "innovation".

I share the Right's disdain for Labour, although perhaps for different reasons. They are a disgrace, and certainly not a social democratic party: in all their years in charge they have done little to move Britain towards the kind of high-human-capital society I would like to see, and instead were cheer leaders, if not prime movers, in the banking fiasco.

Equally, while I have sympathy, even a natural liking for, the notion that technology and good management can raise productivity in public services, my feeling is that the gains that can be realized are hugely exaggerated. Britain still lacks a lot of basic, fairly physical stuff: accessible training, facilities for quality education (especially at the lower end), public sporting facilities, public spaces; on-the-ground comparison with our neighbours in Northern Europe really bears this out. Does anyone really think it is possible to see more of such things with a reduction in spending? Equally, in Britain's (many) deprived areas, by all accounts in most cases a small number of social workers/doctors/nurses are overwhelmed by the troubles of a poorly educated, often dysfunctional populace. Where are these huge numbers of public servants who can be let go without impact? I'm sure there are a few, maybe even quite a few, but enough to make a serious difference?

Britain needs a fundamental re-think of it's spending priorities. First, we need massive investment in public physical infrastructure and facilities, especially in deprived areas, and especially when this impacts human development (i.e. learning skills and abilities, early childhood experiences and so on) and in particular those many young people who are neither in training or employment. Second, a real move towards quality vocational training: we have a dire lack of people who can really do things well, from bakers to cooks to builders. This is where there is a real opportunity to both improve productivity and reduce expenses that arise in managing the fallout from having a vast number of untrained, often unemployable people. Third, a reduction in the size and importance of the financial services sector. It is not clear that the sector is at all profitable at the margin, absent implicit and explicit government support. However, it is clear that the distortions induced by this support enjoyed by the sector damage the wider British economy: what might all the smart young scientists and engineers have done if they hadn't gone into the City? Been brilliant teachers? Genuine entrepreneurs? Worked in R&D? Fourth, we need an infusion of technical expertise into management. In Britain most senior management, even at engineering firms, appear to know very little about the business they run. Thus, a CEO is almost always a lawyer/PPE/MBA or the like, rather than a PhD engineer or scientist. This is emphatically not the case in Germany, for instance, certainly not as often, and I think this is a major reason why Britain's scientific excellence does not translate in successful businesses.

But doing these things requires taking on the City and it's increasingly deadly grip on the national psyche. And that is where none of our political parties will go.

Tuesday, September 22, 2009

When, not if.

I wanted to apologize to readers for my silence and offer some explanation of why I have not been continuing with my post-crisis blogging. First of all I've been even busier than usual at my day job, doing science.

But second, I now feel that there is little real point in continuing (I will continue to blog, but less often on the crisis itself). This really is preaching to the converted. Most people in the econ blogosphere now agree - at least broadly - about the kinds of things that need to be done. Yet it has to be said that the vast eruption of post-crisis blogging, while intellectually stimulating, has politically been a failure. Most of our politicians seem unable to discern either the scale or nature of our problems, and many are, I think, simply intellectually corrupt. People are already suffering, but treat the crisis and its aftermath as a random event, akin to a weather calamity, rather than the consequence of repairable systemic flaws coupled with criminal behaviour on the part of an avaricious minority.

What is the end game here? My prediction is that we will (continue to) suffer considerable short-term economic fallout and (truly huge) longer-term social costs and missed opportunities. The systemic flaws will not be substantively addressed, and the actors involved not held responsible in any serious way. Moral hazard will grow, as it's now abundantly clear that not only is it permitted (if not encouraged) to be too big and/or interconnected too fail, but that even when you do fail there are essentially no consequences. There will be a second crisis, probably larger, whose timing will depend on precisely how little action is taken in the present.

But what is clear is that it's now a question of when, not if.