A solution to the asset rich, cash poor problem

This is something I wrote last year, but didn’t publish. I just saw a tweet to which it seems relevant, so with some minor changes I’m publishing it here now. On rereading, I feel it deserves a more thorough rewrite, but I think the central idea, a revenue neutral, non market distorting change to the operation of the Land Registry to allow more efficient property taxation is a good one.  Happy to discuss further.

It’s easy to argue for property to be more heavily taxed; it will lead to existing property being used more efficiently, and since richer people proportionately spend more on property, such taxes are progressive.  But various tax breaks and other encouragements to invest in property are justified as a way to ‘get Britain building’, and with new supply still needed, and without a relaxation of other supply constraints, the positive effect on net supply of better use of existing property may be outweighed by a discouragement to new build.

There is also the problem of the perceived unfairness of those who are ‘asset rich, cash poor’ being forced by increased property taxes to sell up, and move away to a less attractive area, severing all their local ties and friendships.  Pro market economists can say that’s how markets work, and that interfering with them eventually leads to bigger problems, but they should also ask why market forces cannot also create an efficient way for the value of a property being taxed to be used as collateral for a loan, whereby a property owner’s decision to move, if they have to, is deferred to a time more of their choosing, at which point the loan could be paid off.

The idea being put forward here would be to have a simple check box on any form for paying property taxes – in the UK this means currently Council Tax paid to local authorities – for the tax payer to pay on account, with the amount of the liability to be secured against a Land Registry charge on the property.  When the property was sold, any such amounts, with interest added at rate appropriate to the low risk of the loan, would be recovered by the government. Meanwhile, the government could borrow and the same rate against the claims in its favour, and pass this to the local authority which would normally have received the tax directly.  It would be possible here to go into further details, such as how the appropriate interest rates would be established, but the mechanics would not be difficult by modern standards, and with government central to the process, there need be no anxiety that the financial engineering would run out of control.

It would be much more satisfactory than “equity release”, which is what market forces have been able to deliver to date.   Why have market forces not been at efficient, what could be done about it, and what would the impact be on the housing crisis?

There are two sources of inefficiency in current arrangements.  First the procedures for registering charges on properties have evolved over time, with no reason why they should be as flexible as required by this proposal, and also, before modern information systems, not actually feasible.  Second, financial service providers have come to expect high margins from new products, rather than develop simple, easy to use services such as suggested here.  It is possible to blame governments for creating the environment in which such business models work, but for the situation to change, it’s reasonable to expect government to take the lead.  

This proposal defines a series of government transactions which could be almost entirely automated as part of the Treasury function of the UK Treasury.  The costs would be minimal, and if the rate at which outstanding claims were increased was set above the government borrowing costs, the net cost could be zero.

Behavioural Impact – How would tax payers, government and the financial sector respond?

In the first instance, it is worth asking how the asset rich, cash poor owners of valuable properties would respond.  For them, an increasing government claim against them would still be an economic signal that they should at some point move somewhere smaller – or “downsize in situ”, renting out some of the space in their house, so also achieving a more efficient allocation of housing.  But it would do so far less brutally than requiring an immediate sale of assets, taking out an equity release, or selling up the property.  It would soften the immediate impact of property taxes in achieving more efficient use of the housing stock, but the concern it addresses is real, and the proposal would be a reasonable part of a package of moves towards higher annual property prices.

Non ‘cash poor’ tax payers might also wish to take advantage of such an option.  In the existing example of a similar system operating in Denmark – see footnote –  the option is restricted to tax payers over 65, and limited to a single property, but I am not sure that this is necessary.  The restriction to a single property implies that this option is a sort of special concession, which needs to be limited, rather than a contract, and a market price, between the tax payer and the government.  Many property owners would take up this option, since it would be a cheaper way of borrowing than available from the private sector.  There would probably be some concerns expressed about easing credit in the property sector, but since the amount such debt could increase would be limited to the amount of Council tax, this should not be a major concern.

For government there would be the immediate attraction of making the raising of Council Tax more palatable. Against that there would be the costs, financial and organisational, of introducing a new system.  Of these organisational costs, the greatest might well be the changes it would require of the Land Registry, to allow frequent small changes to the charges on properties which it tracks, and for this information to be made easily accessible to other parties with an interest in properties.  On the other hand, there is a danger that the government would see this as a money making opportunity, by increasing outstanding claims are a margin over its cost of borrowing such that the operations more than covered costs.  The Land Registry itself an example of a profitable arm of government, but its proposed privatisation is controversial; many would argue that such well-defined government agencies should be run primarily to serve the public.

Some in the private financial sector, we suspect, would protest that this was government encroaching on the equity release market. However, as argued above, this scope of this encroachment is limited, and if it led to the radical streamlining of Land Registry operations, it should also help the private financial sector deliver better products.


  1. PROPERTY TAXES AND VALUATION IN DENMARK, Anders Muller, OECD Seminar about Property Tax Reforms and Valuation, 2000. http://www.andywightman.com/docs/muller.pdf

The Long Short for Generation Rent

How are Generation Renters supposed to get on with their lives when housing is so unaffordable that they have no realistic hope of buying their own property – and quite possibly would be ill advised to do so anyway?

It’s an agonising personal question for millions of young people, but I’m not aware of any policy responses to it – handwringing doesn’t count.  I did hear something constructive last night when I went to the inaugural lecture of the LSE’s new Professor of Economic Geography, Christian Hilber

who explained very clearly how to make housing more affordable – build more – but that is a different question, which is going to take a long time in any case, since the politics aren’t going to be easy.

Most of those young people, to whose plight the political classes pay lip service, but give no answers, probably still hope vaguely for some political answer, although many will have given up hope.  Here I want to suggest a social response, although it emerges from thinking about the economics of the problem, and from the social response there could be political consequences.

Why ‘The Long Short’?

Although I have followed the writings of Christian Hilber and others in the LSE SERC department, I hadn’t realised that he had been working in Fannie Mae at the same time as the unlikely collection of odd balls described by Michael Lewis in The Big Short were looking at the same numbers, and coming to the same conclusion, that the status quo was unsustainable.  As Prof. Hilber explained, he isn’t that sort of market animal, and now, in the UK, it is even harder to imagine an arbitrageur finding a way to put on the big short.  However, our young people, wanting to own somewhere but realising they cannot, already, in effect, have a short position,  but one which will only pay off in the long run.  In the meantime, it needs to be financed, and that can be painful.

Financing the Long Short

The easy part of this is saying what’s involved – the hard part is accepting it.  In essence, the financing is just keep on paying the rent, but there’s a bit more to it than that.  As a renter, you will want a relationship with your landlord which is as healthy and professional as possible, so that they, as a matter of business, prefer to have you as a tenant than go to the trouble of finding a new tenant.  Agents’ fees for new lets, paid by landlords or tenants, are a bad sign, suggesting that agents are making money out of undue tenant churn.  

If rents for similar properties as yours come down, you’d want to have an agreement with your landlord that your rent should come down in line, without you having to move to such a similar but lower rent property.  In areas like London, it’s sometimes hard to believe that rents can come down, but supply and demand really does operate in the rental market.  Here’s one recent story from the BBC

Rents fall for first time in six years

Conversely, your landlord will want the agreement to allow your rent to rise in line with rents on similar properties if they go up.  That is only fair – and the alternative, which is what we have now, is a system of short term lets where landlords can increase the rent as much as they can anyway.

In either case, it will be helpful if authoritative numbers are being published for what rents on similar properties are doing.  This raises a policy question – can local authorities provide such a service?  It would need financing, but it has been done in Germany for years, and where stable renting is entirely normal, and being in ‘Generation Rent’ is not an issue.

Financing any position in housing involves paying for the maintenance of the property.  Someone has to do it, and most of the costs will be borne by the renter, so the renter will want to find a landlord whose property managers can deliver good long term value for money.  Easier said than done, but as a rule of thumb, large landlords, especially if they have a reputation to maintain, will be better, although small landlords may also be able to subcontract these responsibilities to a proven property maintenance company.  Having a landlord take responsibility for the maintenance is also likely to be better than doing it yourself.  Some people will have the skills to maintain properties more economically than professionals, but in blocks of flats, this will often be out of the owner’s hands.  There should be a way to find out how well landlords do maintenance.  Either I do not know of it, or else there is an opportunity for someone to provide such a service – call it Which Landlord?

Living the Long Short

This is where the sociology comes in.  In the UK, property ownership carries an extraordinary social weight.  ‘Buying your first property’ feels like an essential marker of having become a full member of society, and renters are often seen as not having put roots down where they live, so not quite accepted into community decision making, even if they felt inclined to participate anyway.  To suggest to anyone that they should accept the idea of renting while they get on with their lives will, to most people, be offensive.  To that significant but well connected group within Generation Rent with access to the Bank of Mum and Dad, or just well enough paid jobs that they can see their way to getting a deposit, it may also seem unnecessary.  Psychologically it will be easier to conform to their elders’ social norms, and proudly – nervously? – step on to the housing ladder.  Once in position, with the danger of negative equity if housing does become more affordable, they will become some of the strongest defenders of the status quo.  It will not be easy for their peers – school friends and work colleagues – to follow their alternative life choice with pride, living the long short.

However, the economics of housing mean there are millions who face this choice, between complacency, embarrassment or a sense of victimhood, and getting on with their lives undamaged.  And those who can could transform our politics.  In many ways, they would be like an earlier generation of a reformist Left:

  • driven by economic interests to achieve a fairer society, but
  • dealing with professionally with others, e.g. landlords,
  • using municipal power to publish information about rents to help markets work more effectively, and
  • pushing for good quality independent information about landlords

They would also campaign for an adequate supply of new housing, in well planned developments, but with no ideological demands for it to be owner occupied, social or private rented sector.  Even so, those who have bought into the norms of the previous generation will attack them as dangerous subversives.

So, for the time being, no political party shows much interest in doing anything for this Generation Rent, even though social attitudes should encourage them to do so – this taken from Professor Hilber’s lecture.

ChangingAttitudes

Nimbyism explained – 2

A while back – August 2013 – I posted this on my local Forum:

I had a eureka moment about this a few days ago – the rise of the NIMBY is a consequence of greater fragmentation of freeholding. It’s obvious really – if more occupiers have the legal rights of freeholders, they will use them to oppose development, and if there are fewer opportunities for large scale freeholders to redevelop areas, coherently and benefiting from economies of scale, fewer houses will be built, and in retail commercial property, High streets will be left to decline. So it’s unhelpful to blame the individual nimby, or even their organised representatives, as also it is unhelpful to blame developers for being greedier and more short-sighted than those of previous generations.

Nimbyism explained?

I still think all that is true, but in looking back just to the post war era, I realise now I was missing a much longer history.  So it was that I felt blown away seeing this recently, written in 1685, referring to an Act of parliament from 1588:

Now the reason of this was the People of England were a little before that time under the same mistake, as they are generally now, and cried out against the Builders, that the City would grow too big; and therefore in the 38 of Queen Elizabeth they made a Law to prohibit Buildings in the City of London; which though it was but a probationary Act, to continue only to the next Sessions of Parliament (which was but a short time) yet its effects were long; For it frighted the Builders, and obstructed the growth of the City; and none built for thirty years after, all King James his Reign, without his Majesties License; But for want of Houses the increase of the People went into other parts of the world; For within this space of time were those great Plantations of New England, Virginia, Mariland, and Burmudas began; and that this want of Houses was the occasion is plain; For they could not build in the Country, because of the Law against Cottages.

AN APOLOGY FOR THE BUILDER: OR A DISCOURSE SHEWING THE Cause and Effects OF THE INCREASE OF Building.

The author, Nicholas Barbon, is hardly a reliable witness, but the legislation is clear enough.  The extent to which it was obeyed is another matter, currently leading me down lines of thought in economic history, but given the opposition Nicholas Barbon faced when he chose to ignore the law in the redevelopment of Red Lion Square, it must have had some impact.

What was going on here? There will be an explanation in the public promotion of the virtues of rural life, sturdy independent peasantry, and seeing decay and corruption in the cities.  It’s well a established tradition going back to the ancient world.  Let’s not discount that, but maybe agglomeration economies have been there since people started settling in cities, and would soon have been followed by arguments to justify, and legal devices to enforce, the capture of those economies by powerful interests now within those cities.  Why would they not, when there will always be very good reasons for regulating the growth of cities, which nimbyism can piggy back off?

Restricting housing supply

Channel 4’s Dispatches last night (7th November, 2016)

Britain’s Homebuilding Scandal

lays the blame for restricting housing supply firmly on developers – and much of the content is also here in the Telegraph, in a piece written by the Channel 4 presenter, Liam Halligan

It’s time to get building: Sajid Javid pledges to break the housebuilding logjam

Towards the end of the Channel 4 programme Liam Halligan says he is an economist, and a believer in free markets, but nowhere does he explore how artificially restricting supply can be a sustainable strategy for house builders.  When selling properties from a large development, a developer will have some kind of temporary local monopoly, and they will indeed sell them gradually, rather than dump them all on the market at whatever price they can get.  But buyers can still shop around, and look at properties coming on the market in different areas, from different developers.  Developers will have an interest in getting their stock sold.

If there was some kind of collusion between developers, this would be something for government to investigate, and impose suitable sanctions – but there was nothing about this possibility in these reports.  Instead, it was observed that the house building market had become much more concentrated in recent years.  This is true, but it is still far less concentrated than, for example, supermarkets, and yet these are very competitive, at least in what they offer consumers.  There was some film of some small developers itching to get their hands on a large, undeveloped site, but no suggestion that development might be financially risky.  This is hardly surprising, since the assertion is that developers are, in the jargon, systematic and successful rent seekers.  Actually, development can be quite risky

taylorwimpey

and whatever those risks have been should help explain why there has been a concentration in the sector, from which a more satisfactory explanation might emerge of why developers do not build as fast as hoped.  It might work as journalism, but it is not good economics.

Elsewhere, Andrew Whitaker of the House Builders Federation was asked what the impact would be of measures to penalise his members for not building where planning permission had been given.  (I assume this would be outline, but that was not said). His answer was exactly what an economist would have anticipated should the amount of landbanking by developers be part of a normal competitive business model – it would mean a reduction of supply.  Instead, Liam Halligan asked him, menacingly, if this conclusion was actually a threat.  So much for  a belief in free market economics.

The most obvious factor restricting housing supply, it hardly needs saying, is the planning system, but we are were we are with this, and big developers respond by getting hold of, or putting down markers, on site which they may want to build on in due course.  However, another factor, mentioned briefly, is the large amount of land held by public bodies.  What is stopping them getting on with developing this land. teaming up with developers who are ready to break open the current restrictive practices?  Either getting development done is not quite as easy as imagined, or there is some kind of cartel stopping any developer breaking ranks in this way, or the real culprits for holding back development are in the public sector.

Interesting questions, investigation of which would have made a better report.

For more on landbanking, see this report from Savills

In summary, our analysis suggests that land with capacity for around 80,000-100,000 homes could be considered ‘unimplemented’. This is far below those figures suggested by other analysis, but may still be too high for a Government looking to increase housing delivery. As the Office of Fair Trading 2008 report showed, housebuilders’ approach to the land market is a consequence of the current system and they simply build homes at the rate they can sell them.

If Government is serious about increasing housing supply over the long term then it will need to look beyond the planning system and encourage greater activity from the full spectrum of potential housebuilders including SMEs, housing associations, local authorities, the wider construction industry, and Government.

Stuck In The Planning Pipeline

That seems pretty fair to me.

To more satisfactory discussions about housing

I had one of those unsatisfactory conversations about housing recently.  It wasn’t a big deal, and it was politely conducted, which is always a plus.  I’ll not go into some details, because it was a private conversation, and in any case those I omit are inessential.  The essence was that it would help the UK housing crisis if rental contracts were made more favourable to tenants, in a way apparently normal in Germany. Continue reading To more satisfactory discussions about housing

Adam Smith on neo-liberals

I’m currently reading Simon Schama’s “Citizens: A Chronicle of the French Revolution”. It would be superfluous to add to general praise it has won since publication nearly 30 years ago, but for what it’s worth, here’s the NYT review of it.

This blog is merely triggered by his account of Turgot’s 1776 economic policy disaster.  Constraints on trade and prices were suddenly removed, people rioted, Turgot was dismissed, and Simon Schama’s writing conveys a knowing roll of the eyes.  To my modern mind, familiar with cases of countries not responding as hoped to the shock imposition of neo-liberal policy prescriptions, the story seems rather familiar. Continue reading Adam Smith on neo-liberals

The Pru 100

RLCX1016-20x30

Unlike Team Sky on the Champs Elysées, we’d not practised this for crossing the finishing line, which is why we both look a bit worried.  A week on, Annie is off travelling, and I’m catching up with my life post retirement, with a blog about the whole experience, and thanking everyone who sponsored me, on my list of things to do.  So here goes.

It was wonderful being able to do something like this with Annie – and met by Maggie at the end, who’d just come tenth in a 5k run in Hyde Park.  So, for all of us it was a great family day.

As a cycle ride, it was a bit disappointing, because a serious accident meant we were held in a bottleneck along with thousands of other cyclists, for over an hour, and the most challenging climb, Leith Hill, was cut from our route. My official time was even slower, because I had an earlier start time than Annie, and I waited for her to catch up, so my official time was 7′ 21”.  But for the sections where we were going normally, although this included parts where there was still severe congestion, our average speed was just over 16 mph.  Not too bad, I think, and as we’d both trained fairly well, neither of us had ’emptied the tank’, in the cyclists’ jargon starting to creep into my  language.

I’d also done most of the course, including Leith Hill, at a similar speed, but without closed roads, a couple of weeks before, which took rather more out of me.  On the day it was fun to be cycling without cars and lorries – hoping here that no motorist friends were too inconvenienced – and the spectators in the last few miles were lovely and encouraging.  Of the various good causes on show on the day, I think Shelter must be one of the best recognised brands.

Personally, the training was probably the most interesting part of it all.  Nearing 60, I decided to approach this more seriously than I ever took preparation for long cycle rides I did in the past.  I also joined a couple of local cycling clubs, (Anerley and Penge) and found myself getting out into the Kent, Sussex and Surrey countryside again. There’s a potential digression starting here from how often these routes took us through London’s hallowed Green Belt – but that can wait.

I hadn’t appreciated how club cycling works socially, blending relaxed sections with more competitive climbs, and places where it’s possible to go fast.  I’d no idea that my relative strength would be as a climber, but given my size, that should not be a surprise.  I also took to cycling part of the way to see my Dad most weeks, which involved riding to Marylebone, and then through various Oxfordshire villages.

The new technology is fascinating too, with GPS and a heart rate monitor allowing read outs of how much progress is being made.  It seems my completely un sporty parents had managed to endow me with some good genes as well, based on my resting heart rate. Previously I’ve always been a bit squeamish about blood and other aspects of human physiology, but I seem to have got over that. Another thing on my list of things to do is to work out how those estimates of power and energy used are made from the data inputs.  I’m also interested in how this fitness related technology percolates from elite athletes to the wider population – can it make a difference to public health?

The fund raising was a bit more difficult than I expected, although I realised it would never be as easy as when I worked on an investment bank trading floor. I’m not sure that I’ll do a sponsored ride again, having now learned there are many such ‘sportifs’, but I’m very pleased that both Annie & I hit our funding targets, and as well as supporting the work Shelter does directly, helped raise awareness of the housing crisis.  There’s an even longer digression possible here, starting from one of my favourite observations about housing, which is that Shelter’s foundation in the mid 1960s, and all the attention that housing got then, was also when the level of UK house building started to fall.  For whatever reasons, public concern about housing does not necessarily translate into the essential requirement of getting more homes built.  I’ve written elsewhere about why I think this didn’t happen, and will do so more, along with all the other things on my lists of things to do.

So also is meeting up with old contacts, especially those who were kind enough to sponsor me, and I’d love to talk more about this with those who are interested in housing, economics & politics.

John Kay on Mervyn King’s “The End of Alchemy”

Having already expressed my doubts about Mervyn King’s ideas on credit in his recent book, “The End of Alchemy”, I’m moved to comment on John Kay’s very positive review of it yesterday for the FT,

The enduring certainty of radical uncertainty

where for him the most important message was the stress on radical uncertainty. He describes his and Mervyn King’s parallel intellectual careers where they were together at the start, receiving and passing on what now seems an absurd idea of Milton Friedman’s – that there is no “sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities.”

Up to a point, I don’t think Friedman is being absurd, although that point is reached only a few lines further on in the text John Kay refers to (Price Theory, p. 282), of which more later. Of course there is a distinction to be drawn between these types of risk, but I don’t think it’s that sharp, because almost all financial risks have a degree of uncertainty in the sense of the distribution not being known. But now, conjuring up the idea of radical uncertainty, it suggests a qualitative boundary beyond which quantification is pointless, and that given the pervasiveness of uncertainty, this applies to most financial risk.  Perhaps mundanely, I’d suggest

  • there is no such boundary,
  • that pretty well all financial risks have a degree of uncertainty in this sense, but
  • that in general this can be reduced with some risk analysis (preferable not just collecting data about past performance), and
  • a subjective estimate of the remaining uncertainty is useful for a financial risk taker.

Where I’d say Friedman crosses the border to absurdity is when he writes

Sometimes people will agree – we then may designate the probabilities as “objective”; sometimes they will not – we may then designate the probabilities as “subjective”.

In this, I think Friedman is claiming that by observing how such risk takers act on their subjective estimates, and generate a market price for the risk if there are enough of them, then it will be possible to calculate the probability implied by that price, and that this probability is “objective”.  The scare quotes are still there, but so are they round “subjective”, for no reason I can see.  Combine with this dogma that markets are the best possible calculating device – rather than just a signal worth having on the radar – and the intellectual path is open to the justly derided excesses of financial quantdom.

The example of Gillian Tett’s insights into CDO traders from her studies as a social anthropologist is now well known, and in retrospect we can see that this would have kept our estimates of the uncertainty – and expected value – of such products more objective – no scare quotes needed here.  But so would insights from other disciplines – understanding of IT systems security, for example, and  maybe even some of what still seems like financial quantdom will have a role in understanding uncertainty and reducing it.

Mervyn King on credit

John Plender gives a warm review to Mervyn King’s recent book, The End of Alchemy: Money, Banking and the Future of the Global Economy

Uncertainty principles: ‘The End of Alchemy’, by Mervyn King

concluding

It is rare to encounter a book on economics quite as intellectually exhilarating as The End of Alchemy

I’m not convinced, at least by the review.

The aim of the book is said to be to “put an end to the alchemy that has made financial crises a permanent feature of the landscape and allowed money — a public good — to become the by product of credit creation by private-sector banks”.

This is odd, because there are numerous public goods which are created to a significant extent as by products of private-sector activities.  A typical pattern is that private sector agents engage in transactions where both parties benefit – which, if you insist, can be expressed as both seeing an increase in their utility – and that by such transactions becoming routine, helped by the emergence of institutions to support them, a public good is created.  Very often a public sector agency is needed to support such goods – so judges to support a system for enforcing and interpreting contracts, paid as indirectly as possible – by general taxation – by the parties to the transactions.

It’s how money and banking systems developed, and while in a sense they are inherently unstable, being based on a degree of trust which may suddenly evaporate, on balance I would expect a Central banker to see private-sector credit creation as a strength of a banking system, to be helped impartially in supporting the public good it creates, but not something to be eliminated.

The starting point for the argument is that we live in what economists now call “radical uncertainty”, where it is not always possible to compute the expected utility of any action, and the probabilities of all future events cannot be identified, so no set of economist’s equations that describe people’s attempts to cope with that uncertainty.

I wonder if it was ever possible to calculate the probabilities of all future events, so raising some doubts about any such set of equations.  So what have bankers and monetary economists being doing all along?  Doing the best they can, and if we accept that banking systems have on balance been beneficial, then the policy focus should be on helping them do better in serving the public. This would suggest greater transparency, more public provision of data which will help bankers and their customers identify individual risk, and the prevention of structure which divorce individual risk from public risk (the problem of too big to fail.)

Instead, the concept of radical, or Knightian uncertainty, asserts that some risks can never be calculated, so is qualitatively different from the sorts of risk which it might be possible to understand better.  I can accept that a theoretical distinction can be made between some risks which is it possible to quantify – the result of tossing a coin, for example – and others, which are not, such as whether a potential client is actually an extraordinarily accomplished conman, or whether a technology which depends on cutting edge science – quantum computing, anyone? – is actually going to deliver. Put like that, I’d suggest bankers have always dealt with radical uncertainty, an impression supported when I google to look for examples of such uncertainty.

Explained: Knightian uncertainty

Mervyn King’s response to accepting the world as it is, with such uncomfortable uncertainty to be found not only in businesses as modelled by central banks, but the financial sector itself, is to give Central banks the authority to perform various calculations

he offers an elegant refinement of the concept of “narrow banking”, which seeks to ensure that all deposits are covered by safe, liquid assets. In his system, banks would decide how much of their asset base to lodge in advance at the central bank to be available for use as collateral. For each asset, the central bank would calculate a haircut to decide how much to lend against it.

What is more, it would not just apply to the current financial system, but to any other business which emerged performing an equivalent role

The system would apply to all financial intermediaries, including those now outside full banking regulation, to avoid the “boundary” problem whereby depositors evacuate in search of higher yielding outlets.

I struggle to see how this is elegant – unless the word carries with it the suggestion of intensely learned or technical discussion, with subtleties beyond the appreciation of those not trained as economists.  It doesn’t look that different, to me, to the system of risk weighting for bank capital.

What is rather clearer, however, is that somehow, in a world just admitted to be characterised by radical uncertainly, the central banks will someone be in a class apart from everyone else in the economy, and able to get their calculations right.

It is fairly clear this is nonsense.

Gene Gini

Alternatively, how much inequality would there be if all human lives were played out on an economically levelled playing field?

I know it’s never going to happen, not least because economic winners, whether thanks to luck or talent, like to tilt the odds for the next generation by giving their children the benefit of their experience while alive, and their money when they die.  In earlier ages they have also constructed ideological systems requiring access to certain roles – being High Priest of the Temple, Caliph, or allowed to vote in elections – to those with some arbitrary genetic inheritance, or born or living within some administrative region.

But there is a more modern ideology out there in favour of equal opportunities, which has had some success in getting measures implemented in public policy.

Chart of the Week: How two decades of globalization have changed the world

This chart derives from the work of Branko Milanovic – no fan of inequality, or neo-liberal cheer leader – but the implication is that globally inequality has declined thanks to globalisation, and inequality only appears to increase if seen through a nationalist prism.  The big picture, I’d say, is that on balance globalisation has levelled the economic playing field, and the developed world middle classes are now obliged to compete with equally talented people from emerging economies such as India and China.  Meanwhile members of elites, individually benefiting most from globalisation, very often buy assets in safer developed economies, and go to live there for at least some of the time, so boosting inequality as perceived in these countries.

That chart was just for the period up to 2008, so what happens now, post-crash, will be interesting. From a simple Marxist point of view, one would expect the development among the middle classes of the developed world of ideologies opposing globalisation.