The real causes of the financial crisis

This is my comment article published in The Boar of week 10 Term 1 2009.

In week 8 at the politics society question time I was asked if there was a risk of too much regulation of the financial sector. My answer: yes. The audience laughed. I was the libertarian representative. I was not going to say “the government must regulate things”. That would have been unlibertarian. I have to admit that I was positively surprised by the laughter. It is better than being booed. I then tried to explain what were the causes of the financial crisis in one minute, I doubt many people understood the argument.

The blame for the financial crisis lies with the government. It is not a failure of the “free” market. Let us first look at the causes of the subprime lending crisis and then look at more fundamental aspects of “capitalism” (as it is currently understood, rather than what libertarians argue it should be).

In 1938 and 1970 the US Federal government charted Fannie Mae and Freddie Mac. They were privately owned but the government pledged to help them pay back their debts. The idea behind the creation of these two institutions was to help families who could not easily get a mortgage to get one. By 2000 they had 50% of mortgage they purchased had to go to borrowers below the median of their area. And 20% of the mortgages they purchased had to be “special affordable loans” aka subprime loans). This allowed the government to increase home-ownership amongst poor people (always a politically popular thing to do) without, in the short run, having to pay for it.

Since this was basically a political free lunch (increase home ownership without increasing taxes or making cuts elsewhere) they decided to do something similar with entirely private institutions. The Communities Reinvestment Act (CRA) was passed by Congress, it pushed private institutions to lend to people who would otherwise be not credit worthy enough to get a mortgage. They were not forced to comply however a high level of CRA compliance was required to do things likes establishing new branches and getting approval for mergers and acquisitions.

The result of all these policies: too many subprime loans who will eventually default and cause a crash. However this is not looking at it fundamentally enough. There is another aspect of modern finance (which is practised internationally) which is due to government intervention and which is wrong. It is called fractional-reserve banking. Under that system the bank only holds a fraction of its deposits in reserve (the rest is loaned or invested in shares or equities). Suppose a bank is only required to keep 10% of reserve deposits. If you put £100 in that bank it will be able to lend up to £900. Basically £900 is created out of nowhere. The bank then lends this money to other people and gets interest from it (effectively they are getting paid for doing nothing productive at all). Contrast that situation with full reserve banking where all of the deposits have to be kept as reserve (the bank will still be able to lend money from the money it has in fixed term accounts).

The problem with fractional reserve banking is not if a certain (not necessarily significant) proportion of its clients wants to get their money out the bank has a problem. The solution is to use the printing machine of the central bank (the central bank since it is backed by the State and its law making power does not have much a problem). This is not cost free, it creates more inflation and thus reduces the purchasing power of everyone (a sort of invisible tax on al of us). My point is: if it was not for the backing of the State banks would not engage in fractional-reserve banking.

With fractional-reserve banking the interest rates are lower (since there is more money to lend) than with full-reserve banking. This means that some of it is invested in poor investments (for example subprime mortgages). Eventually they will default and that will cause a chain reaction leading to a credit crunch. If I have not bored you to death have a look at “The case against the FED” by Murray Rothbard (it is available for free online).

There is another creation of the State which is bad and which most people commonly think of as part of “capitalism”. It is called a limited liability company. The first thing to note is that a company is not an association of persons. It is a person in itself. Why? Because Parliament has said so. It has all the rights of a natural person (even human rights) but not necessarily all the responsibilities (you can't lock up a company for murder). But that's not my main concern. My concern is a particular type of company called a limited liability company. If the company goes bankrupt the liability of the shareholders for any debt which has not been paid back from selling the company's assets is limited to the face value of their share (which is an arbitrary amount decided when the company is incorporated). To illustrate the situation better consider the following example: if I am a sole trader and I mess up I am personally liable for all the debts of the business but if incorporate a company and say it has a capital of £1000 and it goes bankrupt I only lose £1000. It is unfair and artificial. For an even more artificial example look up the case Salomon v Salomon. Basically the loss of the shareholders is limited but what they stand to gain is unlimited. This leads to an asymmetry of risk which leads the company to engage in very risky activities. I believe that it is another cause of the financial crisis.

What needs to be done is to remove all forms of government interference in the market, including fractional-reserve banking and limited liability.

: 17 Dec 2009 00:35 |  Tags: Politics |  Comments (1) |  Close comments |  Report a problem

The Illusion of Freedom

Writing about web page http://theboar.org/comment/2009/oct/5/illusion-freedom/

This is my article as published in the Boar of week 1 term 1 2009.

Two weeks ago Rowan Lax­ton, the head of the South Asia desk at the FCO, was found guilty of racial­ly ag­gra­vat­ed ha­rass­ment. He was in a Lon­don gym watch­ing a tele­vi­sion re­port about the death of a farmer killed by Is­raeli bombs dur­ing the Gaza con­flict when he ex­claimed: “Fuck­ing Is­raelis, fuck­ing Jews.” It is also al­leged that he said “If I had my way, the fuck­ing in­ter­na­tion­al com­mu­ni­ty should be sent in and if the Is­raelis got in the way, they’d be blown off the fuck­ing earth.”

What he did was in­ap­pro­pri­ate and this is ag­gra­vat­ed by the fact he is a diplo­mat. One would hope that Her Majesty’s rep­re­sen­ta­tives be able to ex­press them­selves in a more diplo­mat­ic man­ner. He should re­sign.

What Mr Lax­ton said is of ab­so­lute­ly no use to the de­bate about what Is­rael did in Gaza and it was not meant to be. As the judge said “it was an emo­tion­al re­ac­tion”.

He was con­vict­ed under the Crim­i­nal and Dis­or­der Act 1998, one of the many Acts passed by New Labour re­lat­ing to crim­i­nal jus­tice. Here is how the Home Of­fice sum­maris­es the law: “A crime will count as “racial­ly ag­gra­vat­ed” if it can be shown that it was mo­ti­vat­ed ei­ther whol­ly or part­ly by racism. A crime will also count as “racial­ly ag­gra­vat­ed” if it can be shown that – even though the mo­ti­va­tion for the at­tack was not racist – racist hos­til­i­ty was demon­strat­ed dur­ing the course of the of­fence or im­me­di­ate­ly be­fore or after it.” A “racial group” is, for the pur­pos­es of the new of­fences, “a group of per­sons de­fined by ref­er­ence to race, colour, na­tion­al­i­ty (in­clud­ing cit­i­zen­ship) or eth­nic or na­tion­al ori­gins”. The Act does not cover re­li­gion but it “makes it clear that even where there is a re­li­gious el­e­ment to a crime, so long as some part of the mo­ti­va­tion is racial, the of­fence will count as a racial­ly ag­gra­vat­ed of­fence.” So shout­ing “fuck­ing French” at me (I am French) even if your mo­ti­va­tion is not “racist” (say­ing that French is a race would cause an out­cry in France) counts as racial­ly ag­gra­vat­ed.

If your racial­ly ag­gra­vat­ed ac­tion hap­pens to be con­sid­ered ha­rass­ment or “putting peo­ple in fear of vi­o­lence” with­in the mean­ing of the Pro­tec­tion of Ha­rass­ment Act 1997 (a New Labour law which has very often been used against peace­ful protesters) then you would be, like Mr Lax­ton, guilty of “racial­ly ag­gra­vat­ed ha­rass­ment”. In any event should the rea­sons why some­one does some­thing be rel­e­vant in con­vict­ing him?

I men­tioned above that re­li­gious ha­tred was not cov­ered by the Act. This is now the case thanks to Racial and Re­li­gious Ha­tred Act 2006. That act goes even fur­ther than the pre­vi­ous laws by its ref­er­ences to “threat­en­ing” words, be­haviour, writ­ten ma­te­ri­al and pub­lic per­for­mance of a play.

In any event these laws will not de­feat racism: the law can­not con­trol what peo­ple think. They could even be counter pro­duc­tive.

These new laws re­flect a very wor­ry­ing de­vel­op­ment, the cre­ation of a right not to be of­fend­ed. This of course goes against free speech, which after all means not the right to ex­press views you agree with but also views you whole­heart­ed­ly dis­agree with. It is es­sen­tial that in a demo­crat­ic so­ci­ety one should be able to of­fend.

It’s in­ter­est­ing to note the con­trast be­tween what hap­pened with Mr Lax­ton and what hap­pened in Swe­den re­cent­ly. A tabloid news­pa­per pub­lished an ar­ti­cle claim­ing that Is­raeli sol­diers had har­vest­ed the or­gans of some Pales­tini­ans whom they had shot. With­in hours, Is­rael’s deputy for­eign min­is­ter had de­nounced the ar­ti­cle for racism and de­mand­ed that it be con­demned by the Swedish gov­ern­ment. How­ev­er the Swedish for­eign min­ster wrote on his blog that Is­rael want­ed the Swedish gov­ern­ment to dis­tance it­self from the ar­ti­cle or take steps to pre­vent a repli­ca­tion, but that was not how the coun­try worked. “Free­dom of ex­pres­sion and press free­dom are very strong in our con­sti­tu­tion by tra­di­tion. And that strong pro­tec­tion has served our democ­ra­cy and our coun­try well”, he wrote. This ro­bust de­fence of free­dom of ex­pres­sion was en­dorsed by the prime min­is­ter.

It seems Britain is no longer the land of lib­er­ty it used to be.

: 07 Oct 2009 17:48 |  Tags: Boar Politics |  Comments (0) |  Close comments |  Report a problem

People I am voting for (provisional)

If you don't care do not bother reading.

My killer question is what is your stance on No Platform, a candidate supporting it will not be on the list of people I am voting for (I might even R.O.N them if I am in a bad mood).

A candidate who says he wants to leave the NUS will be viewed in a positive way.

Other positive things in a candidate:

• not being politically correct
• being libertarian
• believing in the right to property (at least as far as the fruits of one's labour)

So here is my provisional list (nor particular order). If you are not the list, don't be offended, I still love you (unless I did not love you in the first place).

President: Sam or Andrew or Asen

Education: R.O.N if I I am in a bad mood

Communications: Andrew Horder or Issac Newton (depends of their stance on NP)

GFO: Andy Perkins

Welfare: Fran or Sami

Sports: I honestly don't know and I can't be asked to ask each of the candidates for their stance on NP. So it will be Laura or Nicola (because they are girls, yes I know it is a bad reason for voting for someone)

Societies: OJ or James.  

Now for the part-time people

Student sport: Sonny Kombo

Campaigns: Puneet

Democracy Committee: don't know

Executive Committee chair: Chris

Societies Comm: Giles

Anti racism: Sam

Ethics: Leo

If any of the candidates I listed is pro NP please let me know.

: 18 Feb 2009 15:44 |  Tags: Politics Union |  Comments (0) |  Close comments |  Report a problem

Union elections fb group

I really should be doing some work but I am not.

If we assume that facebook is everything (not an unreasonable assumption) then it can accurately predict the election results.

So here are the number of people in the fb groups of the candidates for President (and the number of people invited) at around 16:15 on Monday week 7 (day 1).

1. Mitchell Fung: 215, 1614
2. Andrew Bradley: 147, 859
   
3. Sam Shirley: 106, 876
4. Asen Geshakov: 70, 206
5. Andy Glyde: 58, 441

By far Mitchell is the big winner.

I can't be asked to do it for the other positions.

UPDATE: previously I did not find Bradley's group. This has now been corrected.

: 16 Feb 2009 16:19 |  Tags: Politics Union |  Comments (1) |  Close comments |  Report a problem

Constitutional reform in the UK

I just had an idea for the British Constitution. We should do the following:

• HM should preside over cabinet meetings
• Each government departement should be presided by a permanent secretary who will sit in the cabinet (there will be no politicians in the cabinet).
• Permanent secretaries should be career civil servants appointed on merit.
• The right of all hereditary peers to sit in the House of Lords should be restored.
• "Working peers" should be abolished.
• All the new peerages should be life peerages appointed based on merit.
• The House of Commons should not change (although something should be done to weaken the power of the whips)
  
• HM may in some circumstances refuse to give assent to some bils (especially if the Parliament Act was used).
• The senior judiciary should have the power to strike down legislations repugnant to fundamental common law principles.

I am not going to give detailed reasons now but there are a few brief explanations.

The idea is that elections create populist politicians who do things to impress the respectable readers of respectable newspapers like the Sun or the Daily Mail. Ideally the House of Commons should be scrapped (so no more elections) but if the masses think that  it is a democracy and they are in control they will be more likely to accept things.

TB was advised by the security services that if he went to Iraq this would cause an increase in the threat to the UK. He did not listen. The security servies, the DPP and several Chief Constables said 42 days was not necessary, GB did not listen. Same for ID cards (I think). In many case civil servants know better and take better decisions than elected politicians (who just want to appear favourably in the eyes of the tabloids).

What does everybody think?

PS: Ideally the State should be abolished or should just be a sort of Night watchman state.

: 11 Feb 2009 16:43 |  Tags: Law Politics |  Comments (1) |  Close comments |  Report a problem

Boar Comment on Prince Harry

This is a slightly different version of my comment published in The Boar of T2 wk3 08/09

George Orwell said the following about fascism:

“The word ‘Fascism’ is almost entirely meaningless. In conversation, of course, it is used even more wildly than in print. I have heard it applied to farmers, shopkeepers, Social Credit, corporal punishment, fox-hunting, bull-fighting, the 1922 Committee, the 1941 Committee, Kipling, Gandhi, Chiang Kai-Shek, homosexuality, Priestley's broadcasts, Youth Hostels, astrology, women, dogs and I do not know what else... almost any English person would accept ‘bully’ as a synonym for ‘Fascist’”.

The same is happening today with racism. The definition of the term is becoming increasingly wide.

In a private video three years ago Prince Harry referred to one of his Sandhurst colleagues as “our little paki friend...Ahmed”. He did not seem offended nor did he file a complaint. The video has now been made public and the use by Prince Harry of the “P-word” has caused a lot of negative reactions. Everyone from politicians to Muslim leaders condemned Prince Harry for what he said. It was racist and offensive they said.

Prince Harry used the term in an affectionate way. Paki is simply an abbreviation for Pakistani. It's true it has been used as a racist term. But this should not mean that every use of the term is racist. Racist individuals should not have the monopoly of using this word. Indeed, according to an article by the BBC, some young Pakistanis use it themselves. What is important is the context and the intention of the person using the word. “Filthy paki” is completely different from “my little paki friend”.

Those who label Prince Harry's action as “racist” contribute to the weakening of this word. This may eventually lead to taking all the power away from this word and making it a synonym of bully.

The use of a word may be offensive to some but this does not mean someone should be socially banned from using it. As Orwell said:

“If liberty means anything at all, it means the right to tell people what they do not want to hear.”

Her Majesty and by extension the Royal family are a unifying figure in Britain (or at least they are supposed to be). They should not do anything which could be (mis)interpreted as being divisive. This is the reason why Prince Harry should have apologised and it is right that he did so. We should however bear in mind that this was a private video.

Mohammed Shafiq, a young Muslim who is the chief executive of the Ramadhan foundation, was one of the people who reacted to Prince Harry's comment. According to the BBC he said the following:

“Anybody who uses derogatory terms such as the 'P' word and other words are obviously from a different age. He is trying to portray this image of being caring like his mother, who was a great woman, or his father who's a person who's widely respected across the world. He's a thug.”

He later apologised for calling Prince Harry a thug. His emotions had got the better of him, according to the Times.

What is interesting to note is that his comments have drawn very little criticism. Is what Prince Harry has done so much worse than calling someone a thug? Or is it just political correctness?

: 22 Jan 2009 00:45 |  Tags: Boar Politics |  Comments (1) |  Close comments |  Report a problem

A few of my predictions

I felt it is a sensible way to procrastinate.

Most of you probably do not care but here is what I think will happen in the world:

1. Barack Obama will be America's Tony Blair
2. New Labour will win the next general election by a very small majority
3. Britian will become even more authoritarian
   
4. Project Cameron will fail
5. The libertarians will dominate the Tories
6. The NUS will die
   
7. The courts will rule that they have the power to strike down primary legislation
8. Someone will prove the Riemann Hypothesis
9. Nothing special will happen in 2012
   

Discuss.

: 26 Nov 2008 15:54 |  Tags: Politics |  Comments (0) |  Close comments |  Report a problem

Happy Brithday Magna Carta!

Writing about web page http://en.wikipedia.org/wiki/Magna_Carta

Today is the anniversary of the day, in 1215, when the King of England appended his royal seal to an agreement with his rebellious barons which has since been held to be the founding document of English liberty.

Here are the clauses still on the statute book today:

• I. FIRST, We have granted to God, and by this our present Charter have confirmed, for Us and our Heirs for ever, that the Church of England shall be free, and shall have all her whole Rights and Liberties inviolable. We have granted also, and given to all the Freemen of our Realm, for Us and our Heirs for ever, these Liberties under-written, to have and to hold to them and their Heirs, of Us and our Heirs for ever.

• IX. THE City of London shall have all the old Liberties and Customs which it hath been used to have. Moreover We will and grant, that all other Cities, Boroughs, Towns, and the Barons of the Five Ports, and all other Ports, shall have all their Liberties and free Customs.

• XXIX. NO Freeman shall be taken or imprisoned, or be disseised of his Freehold, or Liberties, or free Customs, or be outlawed, or exiled, or any other wise destroyed; nor will We not pass upon him, nor condemn him, but by lawful judgment of his Peers, or by the Law of the Land. We will sell to no man, we will not deny or defer to any man either Justice or Right.

: 15 Jun 2008 16:22 |  Tags: Law Politics |  Comments (0) |  Close comments |  Report a problem

I was on Overheard at Warwick

Writing about web page http://www.facebook.com/wall.php?id=8731787599

: 26 May 2008 02:06 |  Comments (2) |  Close comments |  Report a problem

A judgement by Lord Denning to do with the National Front

I just found a really cool judgement  by Lord Denning, M.R. (I got bored of revision). The case is Verrall v Great Yarmouth BC [1980] 1 All E.R. 839.

I will just quote the good bits of the judgement (emphasis added).

LORD DENNING M.R.

The National Front is a political party. This is one of its stated principles:

"The National Front stands for the preservation of the national and ethnic character of the British people and is wholly opposed to any form of racial integration between British and non-European peoples. It therefore is opposed to all non-European immigration into Britain and is committed to a programme for the resettlement overseas of those non-European people already here."

Another principle is: "The National Front is implacably opposed to Communism and all other forms of Marxian Socialism." Those principles are abhorrent to many. Nevertheless, it is a political party. It is entitled to make its views known, so long as it does so peaceably and without inflaming others to violence.

The National Front has been in existence for some years. At the end of 1978 it made arrangements for its annual conference to be held this year, 1979, in Great Yarmouth at the Wellington Pier Pavilion on October 26 and 27, 1979. To that end it entered, by its officers, into negotiations with the officers of the Great Yarmouth Borough Council. The council was at that time controlled by a Conservative majority. They were fully aware of all the difficulties which might ensue - even the tumults and disturbances - if the conference were held there. In the course of the negotiations, there was much discussion in the council. The public in the gallery made their voices heard against any such conference being held. Nevertheless, after two or three meetings, the council deliberately decided to allow the National Front to hold its conference there.

...

On May 3 the Labour Party came into control at Great Yarmouth. One of the first things the new council did was to hold a special meeting on May 15. It passed a resolution that the approval for the use of the conference halls by the National Front be rescinded, the offer of facilities be withdrawn, and any payment sent back. So there it was. The new Labour-controlled council put everything into reverse.

Faced with this difficulty, the National Front tried to find a place elsewhere in which to hold their conference. They tried both in England and Wales. They are trying even now. No other town or city will receive them. So they have brought proceedings in the courts by a writ issued on August 6, 1979. They claim that a contract was made for the use of this conference hall for those two days, that it has been repudiated, and they claim specific performance of that contract.

The matter has come speedily before the courts. It came before Watkins J. After hearing the case argued for a day and a half, Watkins J. (and I would like to pay tribute to his judgment, which was prepared very quickly) came to the conclusion that the National Front should be entitled to go ahead with their conference and hold it in the Wellington Pier Pavilion. He granted a decree of specific performance accordingly, ordering the council to hold to their contract and allow the National Front to come in.

...

Watkins J. ordered the new council to perform the contract. He did so because of the importance of freedom of speech and freedom of assembly. These are among our most precious freedoms. Freedom of speech means freedom not only for the views of which you approve, but also freedom for the views you most heartily disapprove. This is a land, in the words of the poet:

"where a man may speak the things he will. A land of settled government. A land of just and old renown where freedom broadens slowly down from precedent to precedent."

But, mark you, freedom of speech can be abused. It can be used so as to promote violence; to propagate racial hatred and class warfare; and to undermine the structure of society itself. History provides examples. Such as when Hitler led the Germans to believe that they were the master race, and inflamed them so that they expelled and massacred the Jews. Or when the communists have used their freedom to destroy the freedom of others. If there were any evidence that the National Front were abusing this freedom, it might turn the scale. But there is no evidence of it here.

Freedom of assembly is another of our precious freedoms. Everyone is entitled to meet and assemble with his fellows to discuss their affairs and to promote their views: so long as it is not done to propagate violence or do anything unlawful. On this point I would stress - and it is very important that it should be stressed - that this is a private meeting of this political party. I will read what the plaintiff said in his affidavit:

"The conference which is to be held in Great Yarmouth is a private meeting. It is open to members and to invited members of the press only. Each person attending the meeting will be required to produce a current membership card validated by a regional officer of the National Front. A panel of senior members of the National Front will scrutinise the credentials of every person seeking entry to the meeting.

"There have been 12 such conferences in the past. There has never been any trouble inside such a meeting."

That is the meeting which is contemplated. It is essential under the constitution of this party that it should hold the meeting; that it should elect its officers and members for the ensuing year and the like; and that it should do all such things as are done at an annual conference of this kind.

The evidence is that if there is any trouble it will not be at the meeting at all. If it does occur, it will be outside caused by opponents of the National Front. There are societies such as the Anti-Nazi League who object to all the goings on of the National Front. Their members may threaten or assault the members of the National Front: or try to stop their meeting. It would then be those interrupters who would be the destroyers of freedom of speech. They cannot be allowed to disrupt the meeting by mass pickets, or by violent demonstrations, and the like. The police will, I hope, be present in force to prevent such disruptions.

In this case, in April the Great Yarmouth Borough Council made a deliberate decision. They took everything into account. They had all information before them. They must have decided that the dangers were not such as to lead them to withhold the use of their halls for the conference. The dangers are just the same now. The newly constituted council is bound by what the old constituted council did. The newly constituted council must honour the contract. I see no sufficient reason for not holding the council to their contract. In the interests of our fundamental freedoms - freedom of speech, freedom of assembly, and the importance of holding people to their contracts - we ought to grant specific performance in this case, as the judge did.

I would therefore dismiss the appeal.

: 21 May 2008 22:42 |  Tags: Law |  Comments (1) |  Close comments |  Report a problem