More theories on the credit crunch

Two New York economists argue that the causes of the credit crunch were

• banks developing off-balance sheet ways around their legally mandated capital requirements
• government guarantees of "too big to fail banks" encouraged excessive risk-taking

In a world without regulation, creditors of financial institutions (depositors, uninsured bondholders, etc.) would put a stop to excesses of risk and leverage by charging higher costs of funding, but lack of proper pricing of deposit insurance and too-big-to-fail guarantees has distorted incentives in the financial system.

Importing food

Alex Renton has deeply muddle-headed piece in the Graun today. His theme is food waste, but he simply doesn't know what he's talking about.

the British food economy is not healthy today and we've only begun to feel the first tremors of world food shortages. We import 52% of our food; the figure seems likely to rise since, as the Department for Environment, Food and Rural Affairs (Defra) figures state, 63% of our 300,000 farms are essentially not economically viable.

If they are not economically viable, it's because there's oversupply of food, so presumably there is no sign of Mr Renton's food shortages yet. If it does happen in the future, guess what will happen? That's right, food prices will go up and all those farms will be economic again. It's like magic isn't it?

We bring lamb and butter from the other side of the world and most of our bacon from Europe, not because it tastes better but because it is marginally cheaper.

And your problem with this is what exactly? We want to use fewer resources, yes?

A mixed salad illustrates the absurdity. We must have fresh salad all year, so we import 60% of it.

The thing about growing seasons is that we get a surplus at some times of year and a shortage at others. But we can overcome this problem by sending food from areas of plenty to areas of shortage. With this ingenious insight we discover that we can feed more people. A good thing, most would agree.

Processors and retailers throw away on average 40% of what they eventually sell, because of the problems in forecasting demand.

If you can come up with a way of predicting the future, we'd like to hear it.

Most of these statistics come from a fascinating exercise in dissecting the nation's rubbish bins, carried out by the Defra-funded Waste & Resources Action Programme (Wrap). It found that, in total, British households throw away 6.7m tonnes of food, at a value of £10bn, 30% of Britain's food wasted.

Yes, but everyone knows that study was a fiddle. What WRAP calls food, you and I would call waste - potato peelings, chicken carcasses and so on.

Wrap has got some commitments from retailers: extra advice on packets, rationalisation of sell-by dates and fewer buy one get one free offers.

What a fool! BOGOFs are specifically intended to deal with overstocks. All this will do is to increase the amount of food thrown away by supermarkets.

Tim Lang, professor of food policy at City University, is an adviser on food security and sustainability to government. He says that attitudes are changing fast from a time, quite recently, when politicians would privately ask if there was any need for farming in the UK at all and food policy was best described as "leave it to Tesco". "But we haven't got a coherent policy. Are we raising production or are we relying on world food markets? Which? Because we've got to get on with it."

Hmm. Central planning of the food supply chain being hinted at there. Now I'm worried. The result is usually starvation.

Of UFOs and carbon trading

Picking Losers has a salutory tale of mystical cults and UFOs.

The credit crunch explained

I've been looking for something like this - an explanation of the credit crunch, by an economist, in words that I can understand.

Replacing historic cost

Last year, when the oil companies were making a killing on the back of a rising oil price and politicians and other assorted lefties were falling over themselves to demand windfall taxes of the oil majors and crucifixion of their executives, I pointed out that the whole thing was a storm in a teacup which was due to an accident of accounting rules.

British companies are required by law to state their profits using the historic cost convention. That means you measure the profits on the basis of what you sold something for, less what you paid for it. This is fine for many businesses, but for a company which is experiencing fluctuating raw material prices, the effects of this rule is to make the profits fluctuate wildly.

With all the criticism they took, the oil companies seem to have taken note. Instead of issuing media advisories for its quarterly results on a historic cost basis, BP has started used replacement cost instead. Of course their accounts will still have to be on a historic cost basis, because that's what the law demands, but the media don't look at those - they only cut and paste from the press releases and then only the bits that are written in big letters at the top. So the oil companies can probably steer journalists to the more meaningful replacement cost figures and we can do away with the whole media hysteria cycle that runs alongside the oil price cycle.

Another fine mess you've got me into

Struggling to make ends meet? Worried about your job? Well I've got some bad news for you. Having just had the pleasure of being forced to bail out most of Britain's banks, it now looks like the European colleagues are going to relieve you of a whole lot more money, this time to subsidise a completely different set of impecunious barrow boys in suits.

Iceland will be put on a fast track to joining the European Union to rescue the small Arctic state from financial collapse amid rising expectations that it will apply for membership within months, senior policy-makers in Brussels and Reykjavik have told the Guardian.

And that means just one thing. You are going to be filling in the hole in the Icelandic accounts. Remember that when your employer goes bust.

Escape to Santiago

The idea that the whole world is going to hell in a handcart is pretty much universal right now. Brown has lost the plot, Obama is going to copy him and hose the economy down with stolen cash, the protectionist barriers are going up around the world.

There's no escape.

Or perhaps there is. According to the Wall Street Journal, things are looking up in South America, where much of the continent is quietly being transformed from banana republic to stable democracy. The media here may drool over the student-revolutionary-friendly antics of Hugo Chavez and Daniel Ortega, but these are the exceptions rather than the rule.

Most of Latin America is [...] undergoing a period of unprecedented political and economic transformation. In Chile, Brazil, Peru, Uruguay, Costa Rica, El Salvador, Panama, the Dominican Republic and, yes, Mexico -- which is most decidedly not a failing state -- there has been a quiet but substantial movement toward the creation of societies that are characterized by increased economic opportunity, social mobility and political democracy.

Chile sounds pretty good to me. And they have wine and beaches too. What's not to like?

Image of a woman being wheeled to hell in a handcart by Sacred Destinations.

Broon the loon

The theory that Gordon Brown is in fact a certifiable madman is still brightening up these dark and sombre days. I remember being roundly berated for suggesting so a couple of years back in a comments thread. There certainly seem to be strong hints of it in the mainstream media.

And when you see him proposing rises in National Insurance at a time like this, you know he's a few cards short of a full deck.

Something's got to give

Instapundit has been reporting regularly on the problems caused by over-generous state pension schemes. With the stock market tanking, these are now showing terrifying deficits, all of which are going to have to be filled by taxing workers in the private sector. The problem is that with no sign of improvement in anybody's economic fortunes anywhere on the horizon, there isn't going to be much that they can actually tax for years to come.

What is worse, this is all happening just as the baby boomers start retiring.

The situation is going to be the same here, and resolving it is going to be messy, if not bloody.

A double whammy for the private sector

Private sector workers are being decimated by layoffs. It's a bloodbath out there and there's no sign of a letting-up in the pace of the slaughter.

Even the lucky ones who survive the cuts are not going to be allowed to escape scott-free though. All those layoffs mean less tax money for the government and Alastair Darling is going to have to fill the gap somehow - there is a public sector machine that needs feeding.

The answer is, inevitably, more taxes. Not satisfied with decimating private sector workers the parasites in the public sector are going to rape the corpses as well.

The government car boot sale

Jim Lindgren, writing at the Volokh Conspiracy, suggests that the American banks hold a yardsale (that's something like a car boot sale, I imagine) to liquidate some of their assets. That makes perfect sense, and I'm sure British banks should follow suit.

But why stop there? Surely the government should not start holding a carboot sale to get rid of its assets and fill the budgetary holes left by its mismanagement of the economy. Yup, it's privatisation again. Now. Where could we start. Schools....hospitals...the BBC...Channel 4. That should help.

Any other suggestions?

I've how much these would raise in the marketplace, but it must be quite a lot, mustn't it. Your estimates are also welcome.

Bandit accounting

In the comments to the last thread, Jonathan Pearce pointed out that the Guardian is a supplicant of the state whose income is largely derived from its position as the state's advertising agency for government jobs.

This reminded me of a suggestion of a few years back which the Tories made, namely that the government should set up a dedicated website for all state positions, saving huge sums of money and doing away with the inbuilt political bias of the current situation.

In response to this, John Band wrote a dismissive artice here, in which he pointed out that the costs were likely to be far more than the Tories anticipated.

For starters, the £5m a year cost is a gross understatement. In the private sector, market leading online job site Monster.com spends $187m on non-marketing non-wage costs to offer 12 million jobs a year. The civil service site would offer about 1.2 million jobs a year (20%ish turnover on 5.5ish million public sector workers); even assuming Monster’s size generates no economies of scale, then this takes the cost up to $19m (£10m).

Now, given that it costs the government £40,000 a year to run a blog, and given that Monster.com’s original setup costs have been written off, do we think that the real cost will be in the £5m bracket, the £50m bracket, or the £500m bracket...?

Now, it's hard to argue with the idea that the cost is likely to be higher than anticipated, but take a look at those Monster figures. $187m to offer 12m jobs a year. So each job is costing $15 or so to process, plus wages!!?! What does he think they are spending all this money on. It's simply not possible.

If you follow the press release, you will find that the actual figure is $187,204. There's no £000 in the column heading. John is out by a factor of 1000. Whoops.

To be fair, JB goes on to make some fairer points about access to the internet for some poor people, and as I've said I agree with his position that the state would cock it up. My solution would be to use Monster.com. It's free, it's widely used already, and there would be no question of political bias either way.

Guardian fantasy land

Iain Dale points out that the US state now employs more people than manufacturing.

Meanwhile, over at the Graun, Jonathan Freedland gushes in the general direction of Barack Obama and welcomes the end of what he calls the 30-year grip of the notion of limited government.

It seems clear then that Freedland is living in la-la land, like so many of his colleagues. Is there actually anyone at the Guardian with even the slightest idea of what happens in the real world?

Coining it

Argentina has a critical shortage of coins - change cannot be had for love nor, erm, money, it seems. The Wall Street Journal notes that this once happened in Britain. Back in the days when the a bit more backbone was displayed by the inhabitants of these islands, the banks simply started minting their own coins, solving the problem in fairly short order (at least until the government stepped in, forcing them to cease, and recreating the problem at a stroke).

A solution for the Argentine, perhaps.

Generous bankers

Back to the grind, and it's been cold wet and miserable since we got home. Mind you, that's not a lot different to the weather in Spain. Amazing stuff, this global warming.

Thought for the day was prompted by a posting at CiF, where Ian Jack comments in passing about greedy bankers. The thing is, the credit crunch was caused by aforementioned greedy bankers handing out money to people who had no chance of ever paying it back. I always thought this sort of behaviour was called "generosity" rather than "greed".

(Yes, I know, they were only dishing out the money because the government made them, but all the same...)