Duncan’s Economic Blog

One for the critics (dropping the mask)

Posted in Uncategorized by duncanseconomicblog on March 17, 2009

So I rarely become annoyed. But I am annoyed . Annoyed by the following comment on Hopi’s blog:

‘You should read what Duncan has to say , in amongst the slavering New Labour lackey-isms he cannot help noticing some inconvenient facts like the fact our debt mountain has nothing to do with a stimulus bit is simply the result of the vast welfare state and its dependents moving out of a boom. Or the fact we cannot abolish the trade cycle . Pity Duncan was not saying such things when it was useful but then I daresay he was parroting the New Labour line that you could then.’

So, having watched the Watchmen movie (which is superb), it is time to drop the mask. My name is Duncan Weldon. I work here. I used to work here. And before that at the Bank of England.

Whilst in my old job, I wrote the following.

The future then, for banks, looks rosy. As long as they can fund increasing lending via capital
markets activity, profits will continue to soar. Funding via customer deposits seems so last century.
Moreover, it would be rather difficult anyway given Britain’s absurdly low savings rate of 5.2%.
The simple problem with this system, elegant though it appears (especially for the bankers), is that
it is built on foundations of sand. It is a model that relies upon risk premiums staying low: a change
in risk appetite or, more likely, a sudden realisation that investors are swallowing a lot more risk
than their appetite requires, could lead to the whole system falling down. If buyers of asset backed
securities start to demand a higher risk premium for owning these securities, then banks will witness
the cost of their funding soar; their ability to generate new loans will be severely restricted – it
could result in a run on the banks without a single deposit being drawn down.

And

another real worry is that so much of the banking sector’s funding is now short term (see next chart). It
is not too much of a stretch to envisage a situation whereby some unconnected event, perhaps in
land far, far away, causes investors quickly to reassess the risks they are bearing, driving up yields
across various types of debt instrument. When a bank tries to roll over its funding, as many must do
nearly every day, it suddenly finds that it needs to pay out a lot more cash than previously. We then
find ourselves in crisis mode, as a major bank desperately tries to find the cash to keep itself liquid
– with huge knock on effects through both debt and equity markets.

So please Newmania, less personal attacks.

7 Responses

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  1. VinoS said, on March 18, 2009 at 7:16 am

    It does strike me that the personal attacks flow from the fact that they can’t think of a rational rebuttal to your arguments. It does seem that many elements of the blogosphere [and I would say this is more marked among self-proclaimed right-wing ‘libertarians’ than others] to seem to lack a degree of civility. It can be seen by the vitriolic way some comments are phrased and by the abuse that some bloggers heap on people they don’t like. All this adds heat rather than light to debates.

    I have to say, what I like about your blog is that it is trying to add light to economic debates. Pointing out facts about deficits, about the 1870s depression etc, that may help us to understand what is going on at the moment.

  2. Thomas said, on March 18, 2009 at 10:54 am

    Newmania is incapable of good-natured and polite discourse.

  3. newmania said, on March 18, 2009 at 12:40 pm

    Pity Duncan was not saying such things when it was useful but then I daresay he was parroting the New Labour line that you could then.’

    Calm down dear ,so I was wrong , it was not a terribly serious comment .Bearing in mind your reasonable concerns ( shared at various levels by almost everyone who was not a New Labour economist)It will be clear to you that after New Labour dropped Conservative spending limits the shift to the Public sector , over regulation of SME` tax burden , creation of the sicky 2,000,000 and mountainous state obligations in a down turn were a mistake .
    It will also be clear that the no more bust line was a disaster and appears to have been a genuine delusion.
    Now you are convinced that we should all get out a vast and irresponsible loan and that we will all run around spending it ( as if we were gnats with no foresight ) to assist a Labour administration being returned in 70s style , with a far left agenda a big hole to fill. , inflation mounting and the Public Sector Unions paying their bills ….well that’s sounds inviting .
    Any tax payer should be running for the hills screaming. It would frankly be well worth a worse economy not to be at the Mercy of Brown .( As it was worth sacrifices to beat the Miners and maintain the rule of law against the mob)

    You are a brainy chap Duncan but what’s the good of that of you use your super powers for evil ?

    • duncanseconomicblog said, on March 18, 2009 at 12:47 pm

      More just wanted to plug the Watchmen.

      I would like private sector debt to shrink as public sector debt expands. The debt will still have to paid off but the interest rate will be lower.

      I want to reflate the economy through public sector spending rather than the public sector helping people get yet more loans.

      But this is a post for a another day!

  4. VinoS said, on March 18, 2009 at 9:11 pm

    What I want to know is what policies Newmania would support. All he seems to do is slag off Labour & those of us who are sympathetic to the left. I have a lot of time for criticism of Labour from the left – however it seems that Newmania opposes it from the right. I don’t see that the Right would have been willing to stop the banks acting recklessly. They would have seen regulations as a ‘burden’ on business – and thus been as willing as Gordon Brown to allow the banks to borrow recklessly on the wholesale market and deal in MBS (mortgage backed securities), CDOs (collateralised debt obligations) etc.

  5. newmania said, on March 18, 2009 at 10:57 pm

    I `m not an economist or banker Vino. My suspicion is that regulating will not work and what is required is to reintroduce risk at the time of risk taking , there has to be a market solution , the FSA are beyond useless . I very much doubt a Conservative Government would have avoided this but then a Labour Government would have jumped into the ERM mess without putting their welly boots on which did not help Major .
    A Conservative Government would however have had a lower and simpler tax regime and smaller state and a raft of less esoteric policies which would have left us well prepared and not the invalid country we are .The Labour Parties so called policy is not really that at all its just a way of disguising the fact that the 40 % golden rule given the welfare commitments we have was only sustainable in a fake boom.
    We have not decided to borrow we have no choice

    Duncan by loan I meant the loan we each individually take out when the Government spends money we have not yet been obliged to hand over . If sopemone walked through the door and asked you if you though that was a good idea , with your own money , what would you say
    ‘Off ‘ would feature prominently in my reply

  6. VinoS said, on March 19, 2009 at 7:13 am

    So, Newmania, to clarify, you have no alternative policy. Just a vague hope that, somewhow, a lower and simpler tax regime would have led to banks being less stupid. I think that goes to show how little the right have to offer in terms of solutions to a market-originated crisis.

    In terms of borrowing, my view has been that the state needs to borrow to maintain aggregate demand if the private sector is in a recession. To repeat, if the private sector isn’t spending – and so employment is falling – the state will automatically be borrowing more as there is less tax revnue coming in and because more benefits need to be paid out. Additionally, the government needs to spend on public works (and/or other forms of economic stimuilus) in order to keep aggregate demand high. The alternative is to let output and employment fall. How much unemployment are you willing to accept just because you don’t like public borrowing?


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