Friday, 19 September 2008

Market Turbulence: Clarification

Lets just remind ourselves why we have the market turmoil, crashing Insurance behemoths, bankrupt Investment Banks, shotgun marriages, nationalised banks, the market flooded with SIVs chock full of junk mortgages with risk weightings beyond the comprehension of Man (and so unmanageable).

The reason we are where we are is NOT due to 

"fat cat bonuses"

It is all down to one reason and one reason only - the US State apparatus enacted a law FORCING lenders to lend to people who could not pay the loan back and whom they would never have wanted to lend in the first place. This is the source of the junk debt and too much debt in the US in general. This is the reason why vast amounts of SIVs containing unknown toxins were created and thus the market for such junk became liquid enough to enable the contagion to spread to the UK. This was just a natural reaction by the markets to mitigate and cope with the bad debt. This is the reason why institutions sought to insure against the risk and why then AIG was pulled into the miasma. The poison leaked out and contaminated the system.

Because of the law the lending was bad.
Because of the lending the debt was bad
Because of the debt the SIVs were bad
Because of the SIVs the assets were bad
Because of the assets the liquidity was bad
Because of the liquidity the banks were bad
And all, because of the bad State law.

So, before everyone thinks this is a time to "clean up the market", let them remember where the poison came from and who brought it about - The State. Who created the environment that enabled banks in the UK to offload bad debt? The State. Who was happy to see it happen and thus hide their ever increasing borrowing behind "prudent" GDP figures*? The State.

We do need to clean up the financial system - clean out corporatism and State meddling for a start.


Mark Wadsworth said...

*Ahem* Land Value Tax would have prevented a bubble arising (while diverting cheap credit into productive investment) and also would have been a good non-distortionary source of taxation (being more akin to a user charge) to replace a shedload of other taxes - and however much you cut public spending, a State will always need some tax revenues. */ahem*

Roger Thornhill said...

LVT has yet to have a workable long term pricing mechanism put forward if it is to replace most/all taxes. Retrofitting that on to the existing land is also more than a little troublesome.

It might have some potential as a way of capturing planning gain, but as a core taxation? Huge unintended (or intended? you never know) consequences.

Old Holborn said...

Wonderful stuff

Mark Wadsworth said...

The purists say there should only be one tax, LVT.

Of course LVT can only possibly raise a third or so of current gummint revenues, but that's an argument for, not an argument against.

As a pragmatarian, I see it as a replacement for existing property and wealth related taxes, see my fuller expose at ConHome.

As to un/intended consequences, the LVT-ers look at the consequences first and work backwards to the ineluctable conclusion that LVT is the least bad tax. The LVTers have, over the centuries, thought about all the consequences in infinite detail and depth and have decided that none of them are in any way detrimental.