Home > General Politics, Terrible Tories > Will the British electorate decide who runs the country in 2010?

Will the British electorate decide who runs the country in 2010?

I smiled a rueful smile when I heard David Cameron call for a ‘good clean fight’ in the forthcoming general election.

Let’s set aside for the moment the fact by pouring millions of Lord Ashcroft mega-wealth into marginal constituencies, the Conservatives are effectively buying up seats, while having the gall to suggest that it is the Labour party that prey to the agenda of its key financial backers.

Let’s set aside the fact that the Conservatives are so heavily reliant on the favours of the Murdoch empire for its media strategy.

We should forget these aspects not least because getting the mega-rich to win an election for you is copyright Blair c.1997. 

It may be wrong, but it’s not new this time around.

What is new this time around is that the result of the election may be decided, not by the apocryphal ‘man on the Clapham omnibus’ with a copy of the Sun in his hand, but by the apparently all-too-real ‘diffident Welshman who does not stand out on the bus from his home in North London’ (hat tip: Freethinking Economist).

This is the same diffident Welshman who, according to Chris Huhne in the linked Times article, single-handedly ‘downgraded the Greek Government’s credit rating.The result was to push up its cost of borrowing by 0.4 per cent in a week.’

On the basis of a single, methodologically obscure decision by a single credit ratings analyst - not necessarily that very Welshman, I know – may depend the tenor and outcome of the whole of the 2010 campaign.

Let’s let Stephanie Flanders take up the story, in her ‘intriguing question for 2010’:

 Everyone thinks that the markets will politely wait until Britain has gone to the polls to draw its verdict on the UK. Well, maybe.

But if sovereign debt is indeed the new sub-prime – at least where the markets are concerned – it’s difficult to believe that Britain will get through the months before the election without at least one major market wobble.

Perhaps one ratings agency will put the UK on negative watch. Or investors will get seized with the idea of a hung Parliament. Or Britain will simply get caught in the crosshairs of a market panic over sovereign debt in Central and Eastern Europe.

Who knows what the trigger will be. But my hunch is there will be something, this side of polling day. The question will be how the major political parties react.

In fact, the Conservative party is already reacting to the possibility of a ratings downgrade as part of its pre-election hype.  Here’s George Osborne in the Telegraph just before Christmas:

It is clear that 2010 will be the year when the world’s focus shifts from the debts in our banks to the enormous debts being run up by governments. The last month has seen a crucial change, beginning with Dubai and followed by Greece, Ireland and Spain, in the way that international investors perceive the riskiness of sovereign debt and the sustainability of public finances. On this count, the credit-rating agencies have singled out Britain as the most vulnerable of any top-rated country, with the biggest budget deficit in the G20.’

While this may not in fact be true (the US is placed in the same ‘resilient’ rather than resistant’ category by Moody’s), such technicalities are unimportant in the general narrative. 

When even Tory apparatchik Iain Dale, who wouldn’t recognise the workings of a bond market if they fell on him from a great height, starts predicting the loss of Aaa status in 2010, you know what the Conservative line is.

While they can’t go as far as express support for downgrading, you can bet your bottom dollar that behind closed doors they’re hoping that it will come early in the New Year, in the context of the ‘panic’ factors that Stephanie Flanders alludes to. 

And let’s face it.  While there is no evidence as yet to suggest that the rating agencies will actively collude with the Conservatives over producing a downgrade at an electorally convenient moment, it is also clear from their decisions on Greece that they favour stupidly radical budgetary cuts even in the face of the real prospect of major social unrest.   This is in spite of at least some evidence to suggest that the markets themselves actually favour a less draconian approach to fiscal balance.

The Conservative strategy, then, is clear enough.  They’ll continue to bang the drum about the possible loss of Aaa status, and they may even be trying to manipulate the actions of the rating agencies behind the scenes.  As and when it arrives, they’ll be shouting ‘bankrupt nation’ from the rooftops, in spite of inconvenient facts like the ten-year old Aa status of Japan.

For Labour, the response is trickier, and it’s even possible to sympathise with them in their predicament.  If they make too many signals to the markets and the rating agencies about plans for cutting the deficit (in the budget, assuming a May election), they risk abandoning their new class-focused narrative which looks like it may serve them well.  If they don’t do that, they risk a downgrade just weeks before polling day.

What Labour needs to do is take the bull by the horns, and attack the Tories and Cameron around their ‘good, clean fight claims’, as part of their evolving ‘them vs. us’ election narrative, but to imbue that narrative with the message that not only are the Tories just out for themselves and their own class, they’re also prepared to sacrifice the very spirit of democracy to get the power they want.rrin

With Ashcroft’s millions, this is already happening at a general level, though the amount of cash poured into each and every constituency needs to be made clearer (here’s a pretty good example from Tom Williams at Labourhome, though the focus is on an individual Zac Goldsmith of the North-type figure and how much personal wealth has been put in).

But the bigger story Labour can create, if it has the political will, is the one around the way a small set of anonymous financial analysts, from mega-earning firms that just twelve months ago were pinpointed as having caused the greatest financial crisis since 1929, are now in a position to undermine British democracy.  As Peter Apps of Reuters says

A year ago, they were being blamed for the financial crisis. Now, the three credit rating agencies are emerging as new powerhouses in European politics, driving policy as governments face record deficits………..

Britain’s AAA credit rating is also in the spotlight. S&P put it on negative outlook in May and while Moody’s and Fitch retained stable outlooks, they have made a string of comments demanding greater austerity…..

The opposition Conservative party has frequently cited the S&P move in speeches and policy statements to underscore its pledge to make stringent spending cuts.

Any downgrade before an expected May 2010 general election would be a heavy blow to Prime Minister Gordon Brown’s embattled Labour government.

Even more saliently, from the same article, Steve Shifferes (Professor of Financial Journalism at City University) says:

It is not that they necessarily know more than any other analysts. But because the credit rating is such an easy thing to focus on, they have much more power. It’s not very democratic.

Absolutely.  It’s not very democratic.  It’s not Cameron’s ‘good, clean fight’. 

Labour would do well to remind people that Cameron is a liar to suggest that he wants any such thing, when many his party’s efforts are directed at subverting the democratic process.

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  1. Barney Stannard
    December 30, 2009 at 7:35 pm

    I think you kind of assume that so long as the Credit ratings agencies keep Britain at AAA nothing bad could ever happen – that it is purely they who drive the binds markets. But this isn’t really true. Whilst they have a degree of autonomy they only do so so long as it is a close call between ratings. If Moody’s downgraded the UK to C then no one would take them remotely seriously – it wouldn’t change anything. By analogy they are only likely to downgrade the UK if it is either “correct” to do so or close to correct.

    As an undergirding to that argument, I’ve been wondering what the benefit is for the Ratings agencies in downgrading sovereign debt. It it does precipitate further turmoil in the markets I can’t see how it would be in their interests – credit would become scarcer again, and the resultant depression in growth will lower bond issues by companies, which is how the CRAs make their money. So the CRAs may well lose out by downgrading the UK.

    None of us know why Greece got downgraded – I can’t rule out it was a capitalist conspiracy. But do we seriously think that a country that fabricated its accounts to be allowed into the Euro, has around 1/3 of GDP not assessed for tax, admits to endemic corruption and has a burgeoning deficit deserves not to be downgraded. They are relying on promises that they will get their budget deficit under control – why should anyone believe them?

    Re the continued stimulus (Labour) v cuts-now (Conservative) debate. There is no theoretical argument that can tell us the answer to this: we need data, and even then its far from certain who is right. To pretend that straightforward arguments of the type “increased government spending causes increased growth which will raise taxes which will offset the spending” is just too simplistic. I think it is probably true up to a point, but if it were true indefinitely haven’t you just solved economics? Its a recipe for limitless growth.

    • freethinkingeconomist
      January 4, 2010 at 11:49 am

      I would like to agree with Barney. Yes, ratings agencies matter. But they did not exist in the 1970s in this way, and yet it was still a sudden-stop. Investors can lose confidence for all sorts of other reasons. A ratings downgrade may play into the pre-election PR, but so too might an expenses-revelation.

      Unlike the great CDO-squared RMBS and other acronym’s, the UK’s position is relatively visible. You have 60m people to tax, and a portion of them to support with transfers and services. In that task, you need to generate, in 2020, a primary surplus. Can it be done? Yes. Will it take political pain? Yes.

  2. paulinlancs
    December 30, 2009 at 10:47 pm

    Barney @1

    Thanks as ever for the full and thoughtful comment.

    I’m not assuming that what the credit agencies say is more important than what the bond markets actually do. The reason for my focus on the credit ratings decisions is the political impact upon voters if a decision is made. That’s why I quote Shifferes at the end of the piece about ratings being such ‘an easy thing to focus on’; voters who know nothing of the bond markets can easily enough grasp the idea of a downgrade because it is set out in an exam-like measure they are used to,and linked to the idea of credit-worthiness that they’re also used to as householders.

    Clearly they’re not going to downgrade the UK to C, but they have already set up the position, in previous statements, to downgrade us below Aaa (or put us on -ve outlook as a lesser but still big step)whenever they feel it advantageous to do so.

    I agree, and I set out in previous posts, that a downgrading would be disadvantageous to their business model in respect of potentially reduced bond isues, but what Stephanie Flanders says (and she’s closer to the action than I am, along with Jennifer Hughes in the FT whose article I left out in interests of brevity) do concern me that they may be considering the other side of their business logic – that after the pigs’ ear they made of the CDO ratings, they need to restore credibility even at the cost of lower bond issues by being tough and being seen to be tough on sovereign debt. That is one explanation of the Greek downgrade, certainly, alongside the factrs you mention (not that these are suddenly new factors coming to light).

    I’m not seeking to argue that the stimulus now-rebalance later is certainly the best way to balance budgets/avert double dip etc., though that does seem to be the favoured opinion (and as we’ve argued about elsewhere, arguably even the favoured option by the markets). I’m not enough of an economist, and all I can really go on is the intuition around how the country might/will react to sudden retrechments at micro-economic scales. My position against speedy rebalancing as proposed by the Tories is political and class-focused; the people who didn’t cause the mess shouldn’t be picking up the pieces, and if that means states continuing with larger deficits than the markets suggest they will tolerate, then so be it. as i’ve said before, a lot of this endgame stuff is about political will, and as with tax regimes, about the enforcement by the financial capitalist system (of which CRA are at the heart) of self-fulfilling prophecies.

    Labour needs to be strong enough now to stand its ground, call foul to democratic processes on behalf of the people it’s supposed to represent, and call the bluff of both the CRAs and, as far as possible, the markets. The markets, as you suggest, can’t operate without strong central economies and the US would, I suspect, quietly but vigorously back a UK govt standing up for itself and the need to maintain its deficit, because it knows it might be next in line and doesn’t want to have to do the bluff-calling itself. (There is the problem of continued Chinese/Western surplus/deficit imbalance here of course but I’ll leave that for now.)

    It won’t be strong enough, sadly (just as clinton’s administration wasn’t in 1994), should it come to it, but it can still talk the talk before the election.

  3. Barney Stannard
    December 30, 2009 at 11:50 pm

    And as ever a full and interesting reply. Merci.

    A few quick thoughts:

    1) I didn’t express my point very well (like, not explicitly at all). What I was arguing was that the CRAs aren’t wielding a particularly arbitrary power (though obviously their position of authority is relatively arbitrary – we should probably be listening to what Goldman think if we’re gunning for accuracy); whilst they do possess a degree of autonomy which could effect the election, the driving force is the underlying mechanics which is guiding their ratings. So the erosion of democracy (insofar as such events so constitute: another debate) is relatively limited.

    2) The Flanders point is a very good one – I apologise for not reading previous posts closely enough. However, I would argue that her logic is essentially the same as mine in terms of the driving forces.

    3) On the politics: to me, with the greatest respect (and I’m not using that rhetorically) “if that means states continuing with larger deficits than the markets suggest they will tolerate, then so be it.” just sounds mad. The cost of borrowing will soar; Conc: we will all lose out. I’m sure you can see the first stage of that so I’d be interested to hear why you think we can avoid the conclusion.

    4) Looking at some other stuff I came across this ONS research: http://www.statistics.gov.uk/cci/nugget.asp?id=1005. I haven’t had the will to look at it closely but the title page was interesting. It shows rising inequality which I agree to be a problem, but it rather debunks the notion that I have heard bandied around (not necessarily by yourself) that capitalism has made the poor poorer.

  4. Barney Stannard
    December 31, 2009 at 12:31 pm

    Thanks James. To be honest I don’t think that is a particularly impressive article. Aside from the lack of particulalry cohesive argument for his position (understandable given he is seeking to rebut others and is confined to a comment piece), five problems jump out at me:

    1) His model of financial markets has them holding mutually inconsistent beliefs. Whilst this is a possibility it doesn’t strike me as a particularly plausible assumption. Nor does he offer any evidence to support it.

    2)The lack of evidence runs through his whole argument: saying ‘this is how markets think’ then coming up with weak arguments, is not a particularly convincing argument to my mind.

    3) His argument against the permanent loss of output (the cautious output gap denier) is that growth will rebound to compensate for the lost output. This may or may not turn out to be true for the UK, but there is substantial empirical evidence against it happening as a matter of course. There are frequent recessions where it does not happen, and there are good theoretical reasons that it need not happen. Indeed Krugman and Mankiw had this debate some months ago with Krugman staying in his chair after the third.

    4) He fails to rebuff effectively the argument that it is QE which is keeping yeilds low.

    5) His argument against market sentiment is essentially that it was wrong last time so why should it be correct this time. I wouldn’t bother to engage with this argument except that it is so prevalent. A brief rebuttal: just because someone is wrong once doesn’t mean they will be wrong again.

    The market is a collection of pretty clever people betting on the future. Will it always be right? – of course not. Have most individuals got reason to think that they are more likely to be right than the market? – no. A few (Mr Soros, Mr Buffet, Mr Chanos etc step-forth)seem to be able to beat it, but generally most people can’t beat the market. It is the collective best guess of what will happen. Whilst the pricings of the market shouldn’t be treated as Holy Writ, they can’t just be discounted.

  5. December 31, 2009 at 7:02 pm

    Barney, his key point is that the market was telling us that everything was fine until the unknown costs became known. His point is not merely that they could be wrong again but that the financial markets currently aren’t counting the social costs of huge spending cuts – because that’s is a cost which is borne either by the government or by individuals.

    Given that the UK economy is particularly dependent upon consumer spending, large cuts in public spending along with the already happening wage cuts in the private sector. Though the bond markets might demand cuts, manufacturing capital, as represented by the EEF seems to be inching towards the need for greater government spending in certain areas.

  6. Barney Stannard
    January 1, 2010 at 1:17 pm

    Bond markets aren’t meant to count those costs. When you buy a bond you don’t look at whether that debt is supporting useful government spending and assess its value on that. A basic model is as follows: you assess it on the interest rate it offers, the risk of default and its liquidity. You compare that to other assets that you could buy, and if it beats all the others you buy it. Nowhere does the social cost enter in, save indirectly via that costs effect on the ability of the government to repay.

    The reason we have to listen to the bond market is because they buy our debt. Without them we can’t do all the public spending. If they think that we are selling too much debt they will demand higher yields on future debt.

    This isn’t a morality play. This is a mechanical system. The sooner this is realised the better.

  7. January 1, 2010 at 10:44 pm

    I realise that bond markets aren’t supposed to count these costs – but try telling that to people who face pay cuts or losing their job. I think they’d see it as an issue of morality – particularly since we have effectively had a taxpayer bailout of the financial markets…

  8. Barney Stannard
    January 2, 2010 at 9:10 am

    Yes but the argument is that more people will lose their jobs and face pay cuts if bond yields rise substantially and stay there. The secondary argument is that private investment will come in to replace the declining government spend. The first can stand without the latter.

    When I said it wasn’t a morality play I didn’t mean to rid politics of morality, I simply meant that one can’t ignore the bond market because it owes us.

  9. January 2, 2010 at 12:15 pm

    Barney Stannard :
    Yes but the argument is that more people will lose their jobs and face pay cuts if bond yields rise substantially and stay there. The secondary argument is that private investment will come in to replace the declining government spend. The first can stand without the latter.

    So, are you arguing that the priority is debt reduction through spending cuts? It would seem that if we are to have a rebalanced economy with a focus on export-led growth, that there will have to be significant public investment to create the conditions for greater private investment effectively by socialising some costs (infrastructure, financing arrangements, etc). To have a quantitative reduction in government spending whilst the recovery is weak seems unwise – but the problem with our economy is that mechanisms for coordination does not exist, and as a result we are held to ransom by the threat of a strike on the bond markets. And that’s one strike that won’t be met with condemnation from the Tory press…

  10. Barney Stannard
    January 2, 2010 at 12:39 pm

    No, that final point I made was in answer to your point about morality – I was merely pointing out that people who call for debt reduction aren’t the only ones concerned with job losses. My apologies for calling it “the” argument, I should have called it “an” argument.

    My argument was not that the priority is debt reduction through spending cuts. My argument was that Skidelsky’s argument is weak. More specifically that it latches on to a moral antipathy to financial markets which seems to vitiate the will to actually analyse what will happen.

    On the separate issue of addressing your point about rebalancing etc.

    1) Not every country can export out of recession.

    2) I see no evidence that greater public investment would be needed for private investment.

    3) “To have a quantitative reduction in government spending whilst the recovery is weak seems unwise”. Possibly. I wouldn’t pretend to know when the right moment to cut is.

    4) Mechanisms for co-ordination don’t exit. The price mechanism. Private individuals organising themselves. Entirely separate and interesting debate.

    5) Bond traders going on strike: no they will be hard at work, buying and selling debt. Just not UK debt. Unless you think that they have a moral obligation to buy mispriced goods.

  11. January 2, 2010 at 4:08 pm

    “2) I see no evidence that greater public investment would be needed for private investment.”

    That doesn’t seem to be a view shared by the EEF. And the recapitalisation of the banks required heavy public investment, no?

    My point is that to get out of recession there has to be a growth in economic activity, right? Government spending in this situation prevents a spiral into depression – as Keynes pointed out it is possible for capitalist economies to continue in a sub-optimal performance for prolonged periods of time, precisely because of a focus on deficit reduction or a taboo against more radical measures (recall the dithering before temporary public ownership of Northern Rock). The strength of Skidelsky’s argument probably relies on an awareness of and agreement with the analysis of Keynes.

    Under the approximately three decade long period of deregulation and privatisation in which the role of public enterprise and state intervention was drastically limited, we did not see a significant growth in private investment in the UK economy. A similar pattern seems to appear in other industrialised countries that have implemented neoliberal policies.

    “5) Bond traders going on strike: no they will be hard at work, buying and selling debt. Just not UK debt. Unless you think that they have a moral obligation to buy mispriced goods.”

    Traders will continue their work, yes. But the point I was trying to convey, with this and my remark about coordination is that the price mechanism and the particular agents involved in bond markets make it difficult for sustainable outcomes. We don’t want to default on debts but then again we don’t want to cut spending in such a way as harms wellbeing.

    I think my general feeling is that the study of economic theory and of the implementation and outcomes of economic policies cannot be separated from the socio-economic divisions that exist in a given society. Both of the main social groups are in distinct ways not capable of setting the path to a sustainable economy – those whose income is mainly from wages are not yet sufficiently organised because of the conditions that prevail, those whose income is mainly from profits generated from the work of others are bitterly divided by the nature of the competition between capitalists.

  12. Barney Stannard
    January 2, 2010 at 5:14 pm

    You mean the EEF want a handout? Quel suprise.

    On the Keynes point. Yes, I agree, Keynes’ thinking on depressions is correct (I’m sure he’s grateful for my support). I was all for Government intervention (though I disagree with exactly how it was done). But that is not the point in contention. The argument is whether we are still at the point where such government intervention is needed. There are a great many models and arguments to be considered and I would not be surprised if I were wrong in thinking that now is the time for retrenchment. But Skidelsky’s article was poor. Merely referencing Keynes doesn’t make it any good. Sure, there are good arguments in support of continued government spending, but Skidelsky doesn’t make them. That was all my point was.

    Re coordination. True, we don’t want default or to cut spending. But as the philosopher Jagger said, you can’t always get what you want. I often have the feeling when debating with socialists that their arguments are based on starting with the way the world should be and heading to that point. That is fine, so long as it is remembered that that point may not be attainable, at least not in the short term.

    On your final paragraph. I appreciate I’m not going to change your mind about the capitalists, but what is your response to the point that an investor doesn’t actually make profit from the work of others. They make it from the risk they run investing their property in a given project. You don’t subscribe to the labour theory of value do you?

  13. January 2, 2010 at 10:40 pm

    The EEF are looking for handouts, but the point is that if there is public investment to create the conditions for private investment it will take place, surely?

    On spending, there are certain things that can be done to boost tax revenue – if as much effort was focused on tax evasion as goes on benefit fraud…

    I do subscribe to the labour theory of value, in spirit at least. There’s problems: namely it misses out the value of biodiversity, etc. And yes, investors take a risk – if a worker saves some of her wages and decides to invest in setting up an enterprise of her own, she will take a risk. Profit-maximisation for private gain on a small scale might have limited negative externalities, but on a large scale it would appear to be unsustainable. Capitalism is prone to periodic systemic crises which are endogenous in nature, because of the way that investment decision-making on investment takes place, the manner in which incentives operate, and because of the negative externalities that are generated because of the primary goal of mere profit-maximisation.

  14. Barney Stannard
    January 2, 2010 at 11:02 pm

    I agree that more should be spent on tax evasion, though sadly I feel that it wouldn simply result in everyone spending more money evading tax and very little more tax being paid.

    The labour theory of value. Could you tell me why if x produces L=2y for each unit of labour and z produces M=y for each unit the value of L=M? Or is that too simplistic? I must confess to knowing nothing about the labour theory.

  15. January 2, 2010 at 11:43 pm

    “I agree that more should be spent on tax evasion, though sadly I feel that it wouldn simply result in everyone spending more money evading tax and very little more tax being paid.”

    Yes, my proposed solution would be changes in ownership and incentive structures: perhaps we need more mutuals, cooperatives, and social enterprises.

    Labout theory of value. It’s at root a moral argument that labour is instrumental in production and therefore should be justly rewarded, I think of it as a principle rather than a tool for working out exact rewards: to profit from the labour of others then, rather than receiving a wage for the work involved in the process of deciding to invest, is to me problematic – for the reasons I’ve given.

  16. Barney Stannard
    January 2, 2010 at 11:55 pm

    The argument’s conclusion is essentially tautologous – it is in essence analytic that people should be justly rewarded. It is therfore meaningless. If the argument doesn’t go to distribution then where does it get you?

    As a note before engaging more fully did you look at the data I posted above. At a brief glance the ONS data has the lowest income decile seeing their wages increase by about 70-80% since 1971. Whilst there has been rising inequality, I would hardly call that a damning indictment of the free enterprise model.

  17. January 3, 2010 at 12:04 am

    Barney, the argument is not that there should be a more just balance between the rewards to investor-owners and wage workers, but that that this inequality should be narrowed.

    The damning indictment of the free enterprise model in this country is that though productivity has risen over three decades, we have not seen a sharing of the proceeds of growth – so a new economic model is needed. I would suggest a greater role for mutual and cooperative enterprise in the economy, which would go some way to extending democratic participation in economic affairs.

  18. Barney Stannard
    January 3, 2010 at 12:23 am

    Narrowed to what? You don’t need the labour theory of value to tell you that a narrowing is needed. Moreover from what you have laid out so far of the theory it doesn’t even get you there. All it says is that workers should be paid a just wage. Which absent a concept of justice is meaningless and with a concept of justice is redundant.

    As to the damning indictment of the free enterprise model; you are of course correct, assuming that a different model would have produced the same growth of productivity. For which there is no evidence. As for failure to share proceeds of growth, why not try and adjust the current system? Rather than risk a lot on a system of arrangments whose empirical record is, to be honest, poor.

  19. January 3, 2010 at 12:29 am

    Democracy has a poor record? I think the extension of democratic rights and active participation by citizens has a pretty good record.

  20. Barney Stannard
    January 3, 2010 at 10:40 am

    Sorry I was talking about economics. I’m interested – you think that introducing co-operatives, mutuals etc would stop capitalism’s periodic endogonous crises? Whilst preserving similar rates of growth. How far do you want it to extend? Do you want people to vote on stock prices?

  21. January 3, 2010 at 11:47 pm

    You can’t split the two.

    Why would people need to vote on stock prices? In an economy based predominantly on cooperative and mutual forms of organisation, ownership would presumably not be something traded but something long-term, more like membership. Did the building societies need bailing out? No, it was the private banks, some of them former building societies.

  22. paulinlancs
    January 4, 2010 at 12:35 pm

    Absolutely fascinating discussion, gents, which I’ve been content simply to sit back and admire for it’s energy and constant sourcing of detail. You don’t find this stuff at Guidos’.

    Barmey, i’ll come back to your ‘this is madness’ (much earlier in the thread) point in a separate post called ‘The bond market endgame’ or some such, as I think the ensiong discussion about the relationhip between the ‘reality’ of the nond markets on the one hand and the ‘morality’ of the whole context in which they operate demands that. It also reminds me of Giles’(free think econ) comments a month or few back on the need to pay bakc debt as a moral issue, which I never got round to properly challenging/debating.

    However, I think my main focus will be on how the endgame might play itself out if a currently hopohetical leftwing govt came to power with the political will to challenge the bond markets, and how this would relate to those same bond markets’ dependency on states to maintain what is, ultimately, a system of (Marxian) fictitious capital. In so doing I’d hope to address some of what you both cover here, and then draw it back into where this OP started – the need for a new leftwing polito-economic narrative in the here and now. Well something like that….

    In the meantime, please do continue your debate. I’m listening.

  23. Barney Stannard
    January 4, 2010 at 7:45 pm

    Thanks Paul, glad you’re enjoying the bar fight. I look forward to your articles.

    James; the question on stocks was meant to elicit a bit more of a theory on how you see the economy working. Not detract from my main point about endogenous shocks and my belief that there is no evidence that a model of the kind you’re advocating would have any effect on them. I’ll take continued silence as confirmation of that.

    On your rejection of stock market ownership, how do you plan for small companies to gain capital? Presumably through selling equity? Or are you only averse to selling ownership on public markets where there is transparency?

    On the “you can’t split the two”. I get that economics is one: what’s the other. If its politics in the moral sense, then I think you’ll find you can. One normative, one scientific (quasi).

  24. January 4, 2010 at 11:50 pm

    Barney, I’ve already said that I believe that ownership structures matter when it comes to endogenous shocks and cited the example of the mutually-owned versus shareholder-owned financial institutions.

    How do small companies currently access capital? From banks in the form of loans. I was under the impression, forgive me if I’m wrong, that this is what currently happens for small businesses which are investor-owned but also for those enterprises which are mutual or cooperative in structure.

  25. Barney Stannard
    January 5, 2010 at 8:10 pm

    1) Your evidence for a system wide theory that your model is more stable than capitalism is the performance of one industry in one two year period? The two sets of institutions don’t even do the same types of things.

    But that is beside the point – even if they were homogenous entities other than ownership, their respective performances over 100 years would be scant evidence (at best) that your sytem would work on a macro scale.

    2) You are forgiven – because you are not wrong, but missing half the picture. A lot of companies, great and small, raise capital through sale of equity (ever watched Dragons Den?). If you ban that then firms would have to leverage even higher to get the same rate of growth. I’m guessing you don’t want that.

    There is of course an argument that debt and equity are the same. In theory this maybe holds. In practice, however… I’m no great corporate finance buff, but in practice it always seems easier to me for troubled firms to cut dividends then re-negotiate debt payments. But I must admit to being no expert on this.

    As an aside – why do you think there is an equities market? Other than the greed of the capitalist that is.

    • January 5, 2010 at 10:22 pm

      1) You might be interested in William Davies book “Reinventing the Firm” and Cliff Mills “Funding the future”, which explain far better than I ever could why ownership matters to sustainability and productivity.

      2) I don’t recall advocating a ban on selling ownership, I’ve just suggested that for the sake of economic stability, long-term ownership is important just as for the sake of justice, ownership by working people is important.

  26. Barney Stannard
    January 5, 2010 at 8:12 pm

    For Paul if you are watching, PIMSCO – the world’s largest bond trader – is to cut holdings of UK and US treasuries. The first crack? or a minor adjustment? Hopefully the latter…

  27. January 5, 2010 at 8:16 pm

    My understanding of all this is fairly limited, but if organisations are divesting themselves of the US government debt then, on the basis that there’s a danger of defaulting, isn’t the entire global economy buggered anyway? Do we even have a frame of reference for such a thing?

  28. Barney Stannard
    January 6, 2010 at 12:01 am

    James: thanks for the references. To be honest we’re getting nowhere. We haven’t been for a while. I suggest we give up.

    Dave: yes and no. Yes we may be kind of buggered, but no not as you think. The (possible) decrease in demand for T-bills isn’t reflective of the risk of the US defaulting. Quite why its happening I don’t know: something to do with the end of quantitative easing making treasuries a sure fire winner, the recovery of other markets and the risk of inflation. This last is the key. The US will never default, but it may inflate its way out of problems. Just 5% inflation p.a. can take a whack off your investment.

  29. January 6, 2010 at 4:09 pm

    Barney, I agree we should give up, though I must say, it’s been an interesting nowhere! Anyway, all the best.

  1. January 8, 2010 at 10:47 am
  2. March 14, 2010 at 9:00 am

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