Archive for the ‘Politics’ Category

Petition to tell Gordon Brown to resign

Saturday, April 25th, 2009

As Mrs Thatcher told CUCA in 1976, “He must go — and go now.”

http://petitions.number10.gov.uk/please-go/

Please sign this petition. Could it go viral? Tell all your friends and it might.

Winning? The real battle is only just beginning…

Sunday, April 19th, 2009

By Ben Gadsby

Ben Gadsby

There is a temptation, I think, amongst Conservative supporters and campaigners to think the game is won. We’re consistently over 10 points ahead in the polls (17 this morning), the Labour Government is dogged by scandal – how can the next election not be a Conservative victory?

But we cannot afford to be complacent. Below the headlines, the opinion polls repeatedly show that the position is not as strong as it seems. Just 21% of people trust Cameron to keep his promises. The top team is still prone to accusations of being toffs. The traditional Tories still seek tax cuts and a harsh line on crime. They are placated by the size of the lead. As it shrinks, and policies are announced, there will be murmurs.

We have a unique opportunity. People who used to shut their doors as soon as the word “Conservative” was used no longer recoil, they even engage. Time and time again, the people who propelled Blair to power and condemned us to the political wilderness are saying the same thing – I’ll never vote Labour again.

How do we capitalise on this? Hit the streets. It’s all perfectly well discussing the merits of Thatcherism and sipping on gin, but the election will be won on the streets, not in the Bateman Room. Whether you deliver leaflets, canvass, or tell, you can do something to bring us back to power.

It’s tempting to look at the opinion pools, and the papers, and conclude that the election is won. It’s not. This Wednesday’s budget is the election budget. The European elections are the final dress rehearsal. The general election is not won. The campaign is only just beginning. So get involved now – and help make history.

Easter Day Message to CUCA

Monday, April 13th, 2009

Easter Day Message: De-Bunking Weak Socialist Exegesis

I’m not going to do any work today, for obvious reasons probably minutely detailed in Canon Law somewhere. Instead, I thought I would offer, as briefly as possible, some exegetical clarifications that Christian Conservatives can make when markets and finance are attacked as immoral and enforced redistribution of wealth is advocated as a genuine response to Christ’s exhortation to charity.
What I’m going to do is to take the two most oft-referenced passages used by agoraphobes (in the etymological sense) to try and claim that Jesus opposed markets. Then I will endeavour to point out a few of the complexities of these passages, or otherwise how an anti-market understanding of them simply ignores the historical or literary context. I apologize in advance for not being able to cite the commentaries that taught me these details when I did my exegesis paper last year. Well, here goes.

1) The famous ‘render’ passage (Luke 20:21-28):
(in which Jesus is asked by Pharisees whether or not Jews ought to pay taxes to Caesar, and replies that one must ‘render unto Caesar what is his, and unto God what is His’)

This is doubly important as it is also used to attack an Augustinian opposition to big government: statists claim that obedience to the laws, whatever they are, is simply ‘rendering unto Caesar’ and so the only proper way to oppose unjust laws is to go through the rigmarole of parliamentary democracy to change laws (that is, impose Christian morality on society using government). Usually, however, it is used to argue that Christ has basically given taxation (the violent collection of money from people living within a certain territory) a Divine Command carte blanche. Its repercussions in terms of doctrine and simply theological attitudes towards government stretch and multiply throughout Thomist theory and beyond.

First, we need to ask ourselves why Jews would object paying taxes to Caesar at all. The uninformed answer is that Jews simply resented being subjected to Roman rule and may have felt that, since Caesar had simply invaded Israel, he had no claim to their loyalty or a portion of the profits of their labour. But there’s more to it than that. Crucially, the wording on a Roman denarius, the coin with Caesar’s profile on it which Jesus holds as he gives the ‘render’ statement, calls Caesar a god. It refers explicitly to the imperial cult, in which Caesar is both ‘lord’ and ‘saviour’, among other divine titles – titles that Jews used for God. For Jews in the first centuries, to use Roman money was to traffic in idolatry and by implication ought to be avoided (more on this later) yet at the same time its use was practically demanded of them under Roman rule.

So the Pharisees’ question isn’t a tricky one because it seeks to expose Jesus as being either a rebel against Roman rule or a collaborator. It is difficult to answer because it represents one outward expression of a major moral dilemma for Jews then: how to refrain from idolatry to the extent that the Law demands, while living under the rule of an empire which relies on idolatry (the imperial cult) as its cohesive force. It is true to say that Jews were exempt from the usual requirements to sacrifice to Caesar: yet Roman understanding of the Law was not so adequate that they were allowed, for example, to pay taxes in their own currency, or keep the imperial cult out of their lives in the many minor ways in which it daily infiltrated the lives of subjects of the empire. It was not the paying of taxes to an external ruler per se that Jews objected to (although they surely objected to paying too much), as can be seen by the same dilemma not arising under the other imperial powers, without imperial cults, that dominated them in the Old Testament. It was the idolatrous violations, if minor, of the rule incurred everyday by living under Roman rule. So when Jesus tells Christians to ‘render unto Caesar what is his’, how should they understand that? If Caesar is an idol then nothing can belong to him.

There is a second problem with the statist interpretation of the ‘render’ passage. The formula of ‘give to X what he/it deserves, and to God what He deserves’ is not unique here: Jesus borrows it from the Old Testament, where the meaning is occasionally explicitly ironic or hostile. In 1 Maccabees, for example, the dying Matathias, at the end of a battle, tells his brother to “pay back the Gentiles in full, and obey the commands of the Law”. So perhaps if what is Caesar’s is his use of violence and striving for temporal power, then the ‘render’ passage is really directly rebellious.
This argument, however, is not majority opinion.

Jesus’ answer to the Pharisees cannot be shown to be an injunction to pay taxes as a service to Caesar equivalent to following the Law as a service to God: Caesar’s role as idol rules out such an understanding. What Jesus’ answer did was allow him to express his dissatisfaction with Roman rule without saying something that could get him mistaken for a political rabble-rouser; and he could make the ambiguity of his answer more acceptable to those worried about the idolatrous implications of following Roman laws and customs by including a reminder that, whatever you did with your denarii, Gods Law was notwithstanding.

The radicalism of Jesus’ social message, and His admonition to turn from worldly concerns, however, extend to political life and what role we accord government. Civitas Dei would be the obvious recommended reading on that whole theme.

None of the details I draw out in this article are intended to show that the converse of the statist interpretations is true (e.g. that tax is bad or shouldn’t be paid) but rather that these interpretations don’t stand up to serious scrutiny. The ‘render’ command can’t be used to show that we are divinely enjoined to pay taxes and obey the law. Attempts to do so may entirely miss the point of the passage.

2) The expulsion of the moneychangers from the Temple (I don’t cite the passage because here the redaction between gospels is relevant)

This is not often used as a proper argument that Jesus was antipathetic towards markets: it wouldn’t hold up if used that way because the Temple-context is obviously central to the passage. Instead, it is appealed to as evidence of a general sentiment – shops make Jesus angry – which is easier to support with a string of irrelevant quotes from the sermon on the mount and so on. There’s anecdotal evidence below of the earnest, if not necessarily effective, way in which this passage is appealed to as evidence of Jesus’ broad dislike of people buying and selling things.

Among the G20 protesters there was a chap dressed up as Jesus bearing a placard with ‘throw the moneylenders out’. Firstly, he had misquoted the gospels. Secondly, I don’t understand how he thought the economy was going to recover without them. Money-lenders serve a necessary purpose in our financial system (as in pretty much any – there’s evidence that Thales bought olive fortunes).

Likewise, the money-changers in the Temple of Israel had a very important function in the Jewish sacrificial cult: Jews could offer money to the temple coffers as a sacrifice, and needed to pay for the animals they intended to sacrifice (hence the livestock salesmen: also a necessary service), but they could not do so using pagan money, stamped as it was with images of idols and bearing profane creeds. So money-changers were needed to trade foreign coinage for the domestic currency. This service became particularly important in the early first century as Jews were returning from a plethora of different nations, bearing different currencies, to sacrifice. Technically, then, there was a market-place in the Temple: but it was there because it was needed for the Temple to work in the way it always had done.

The past tense there is the key. Jesus was going to change the way that God’s people sacrificed to Him: rather than animals in one physical building in the world, the people of Israel, after the Crucifixion, were going to re-present Christ’s sacrifice in their own churches, anywhere, and it would be a complete rather than petitionary sacrifice. John’s gospel makes it explicit that Jesus’ expulsion of the money-changers and livestock salesmen from the temple was a symbol of the impending total renewal of the cultic practices of God’s people (John 2:18-21).

To understand the passage as Jesus accusing necessary cultic service-providers of being “robbers”, implying that money-changing and livestock selling did not belong at the edge of a holy place, carried to its logical conclusions, suggest that not the nature of the Temple cult but rather the extent of the providers’ profit-margins was the issue at stake. Nevertheless, the “den of robbers” accusation that finishes this pericope in Mark (11:17), Luke (19:43) and Matthew (21:13) seems pretty strong and needs consideration.

Mark 11:17: “and he was teaching, saying to them, ‘Hath it not been written — My house a house of prayer shall be called for all the nations, and ye did make it a den of robbers?’” (my italics). Note that ‘the nations’ is the equivalent term for gentiles. The prophetic-symbological interpretation, then, can be maintained here: Jesus is making the distinction between the universality of the future temple cult of the Church and the specificity of the Temple in Jerusalem which has led to its misuse (not necessarily at that very moment) in the history of Israel. So an anti-market interpretation in the Marcan pericope is not necessarily appropriate. Matthew copies Mark’s account almost word-for-word.

Luke 19:43: “saying to them, ‘It hath been written, My house is a house of prayer — but ye made it a den of robbers.’” is much less clearly symbological, although it contains compressed references to the Marcan juxtaposition of universal spiritual future and flawed contingent past. It could be argued that Luke’s redaction of Mark here tones down the prophetic content, perhaps in order to bring out Jesus’ vehemence towards markets. This contention becomes rather strained since Luke places that very redaction immediately after a parable in which a servant gains his master’s praise by successfully investing the master’s money, gaining profit.

The above analysis is, of course, somewhat speculative and quite close to the text: I am an amateur and my conclusions worth little. The attempt to use this passage to paint Jesus as an habitual opponent of trading and capital, however, requires two things: it not only requires (a) that Jesus is specifically throwing traders out of the Temple specifically because they are trading there, but also that (b) he does so vehemently enough that we can infer a negative attitude towards trading per se and not just in the Temple – otherwise the most that the G20 placard-bearer could have been complaining about is, perhaps, that he had to pay for his Catechesis in the church book-shop. If (a) is ambiguous – if not a misunderstanding – then we cannot move to (b).

I’m sorry that took so long. Thank God you don’t have to do it for weekly supervisions! Basically, try to paraphrase the arguments in your head so that the next time a statist tries to claim Jesus would have raised capital gains taxes, you have something to say back besides attacking their party’s anti-clericalism (which never goes down well, and often results in one accidentally defending clause 28 or something equally tasteless). Have a good year!
p.s. last time I tried arguments like this on an evangelical I know in the CSLD he claimed I was ‘intellectualizing’ the gospel. There’s a very easy way to undercut such an approach: ask so-called ‘literalists’ to explain how the words of the Bible teaches the existence of the Holy Trinity. Then watch them squirm.

Quote of the Day

Tuesday, April 7th, 2009

Caution and ambition are the two reins of her passion. So far, it must be said, she has led her party and handled herself with great skill and circumspection. Ministers who go around saying that she is “Labour’s secret weapon” underestimate her as party leader and as a vote-snatcher. She has shown restraint especially in refraining from committing herself to policies. Her tactical objective, now that the election can be glimpsed over the horizon, is to remain as uncommitted as possible while deflecting as best she can accusations of Carter-like “fuzziness” on the issues.

The Guardian, Wednesday 25th May 1977

And another thing…

Sunday, April 5th, 2009

cartoon

When will the government stop transferring wealth from the the poor to the rich? The hundreds of billions for bailing out banks or “stimulating” the economy are far more significant than the millions claimed by MPs. Whether the money comes from taxation, borrowing (deferred taxation), or inflation (taxation by stealth), it is theft from the poor. The poor are the only people who face marginal tax rates of 70%, 80%, 90%, 100%, 110%. This must stop.

The main assumption behind which the Enemy Class justifies its looting of the taxpayers is that any cuts in public spending must fall on the welfare budget. Of course, it is a false assumption…”

Creditcrunchy by Fergus McGhee

Friday, April 3rd, 2009

Creditcrunchy

A Cautionary Tale

~

Behold the Crunch of Credit!
That alliterative beast
Which skulks along Threadneedle Street
With violent caprice;
Which darkens every board room door,
And prowls about the trading floor,
Devouring Christmas bonuses;
Disturbing fiscal peace.

Beware the Crunch of Credit!
The debt that bites, the risks that catch!
Defaults of every size and sort
He’ll frumiously despatch!

Observe the Crunch of Credit
And his wicked weaponry.
The stocks have crashed, the LIBOR soars,
¡Negative equity!

Survey the Crunch of Credit:
How he slithers, how he writhes,
How he toppled with one subprime swipe
The fated Rock, the mighty Bear,
Brought low the Brothers Lehman,
Made the Scottish banks despair!

Perceive the Crunch of Credit,
And detect his subtle powers:
How he raised from rank obscurity
That mercurial Peston of ours.
Admire the bard’s concise adage
And prescience so stellar:
“The nature of bad news,” he wrote in truth,
“Infects the teller!”

And banks, in their lividity,
Sent copious liquidity
Careering through pecuniary pipelines.
Recapitalisation was on all the experts’ lips,
While the name of Keynes was whispered in the streets.
And so we took the plunge
And bailed them out, the bungling banks.
Each mortgage-backed security
We bought hold-to-maturity,
And now we must all hold on to our seats.

Eheu!
The Crunch of Credit
Hath another victim slain.
Just as we mourned the passing
Of the noble Woolworths chain
The news arrived of worse to come –
GM and Chrysler are undone!

Across that vast new continent
Exhausted cries of woe accrue;
Their answer is a distant, but distinct,
Bavarian “Juhu!”
And yet they have their problems too:
The market shrank, the Euro flew
As the glorious pound became less sound;
O what were we to do?

St Gordon took his sword in hand:
All boom and bust he’d soon disband.
Long time his manxome foe he sought –
So rested he by his brooding tree
And stood awhile in thought.

And as in dithering thought he stood,
The Credit Crunch, with eyes of flame,
Came whiffing through that tulgey wood,
And burbled as it came!

A spending spree, slashed V.A.T.
The fiscal blade went snicker-snack!
And though the sword was double-edged
It didn’t hold him back.

And at Westminster’s Palace
He arrived in prudent pomp,
And took to the despatch box
With a clunking-fisted thomp.

“Fear not,” said he (for mighty dread
Had seized their troubled minds);
“Glad tidings of great joy I bring
To you and all mankind.”

A silence grasped the chamber,
Every member was in thrall…
“For I have slain the Credit Crunch
And saved the world withal!”

And hast thou slain the Credit Crunch?
Come to my arms, my beamish boy!
O frabjous day! Callooh! Callay!
The Dow Jones shall be up today!

What forces dark could explicate
These grand felicitations?
A Faustian pact, no less,
Bought with our future generations.

It was now clear the Saint had been
Trained in the School of Madoff,
And all men of good sense agree
It’s time that he was laid off.

But Gordon is not all to blame;
Some people bear a greater shame.
The problem, if you care to see,
Was monetary policy.

Who spawned the Crunch of Credit?
That ‘twas bankers still persists.
All true, but don’t forget
The scholarly economists.

The money in supply, M4 –
as it’s known in the trade –
Approximately doubled over that
Debtors’ decade.

The learned persons thus assembled
Knew this and lamented;
And yet, instead of raising rates
Accordingly, relented.
And as night follows day
They had unwittingly consented
To preconditioning
This boom and bust unprecedented.

But how now learned friends?
What weaponry are you possessed of?
Alchemical de-squeezing
Such as “quantitative easing”?
The Crunch of Credit scoffs
And, Calibanically gleaming,
Jeers, “Who are these pretenders
With their gyring, gimbling scheming?”

And lo! so sudden from the sky
A voice was heard to prophesy,
“Hark, ye mimsy banks!
Hark ye, thou uffish Premier!
Hearken all who hear the call
Of downturns and despair!
The reckless beast cannot be maimed
With instruments of recklessness.
No victory can yet be claimed
While mired in such a fecklessness.”

And choirs celestial sang the strain
Which plumbed the very azure main:
The words of our absolving shrift,
The ancient liturgy of thrift:
“Sumptus censum ne superet!”
Repeat it, pray, lest we forget:
“Sumptus censum ne superet!”

The Hellenistic world agreed:
“????? ????” they decreed.
And in the plain vernacular,
Micawber took the lead.

Yet howsoever it may be said,
How loud, how slow, how clearly read,
Let each without exception
Brand its meaning on his head.

And then, just when
We can say Amen!
To being in the black,
We’ll go anew galumphing
To spend what we don’t lack.

~

(with grateful acknowledgements to Mr Lewis Carroll)

Abolish the minimum wage

Thursday, April 2nd, 2009

There are some things which few people will thank you for saying, but still need to be said. There are some statements which will lose a politician more votes than they gain him, but still need to be said.

As Sean Gabb says in “Free Life Commentary”:

“A political leader, as opposed to a demagogue, has a duty to listen, but also to educate. This means on occasion resisting the will of the majority. It means the sort of patient explanation of truth that I last saw in the early 1980s, when several dozen Conservatives, in or out of office, went about the country telling often hostile audiences why the calls for reflation had to be resisted.”

One thing that needs to be explained is the badness of the minimum wage. Just as any price-fixing will cause a shortage or a surplus, the minimum wage causes unemployment (a surplus of labour). There are some people whose labour is simply not worth the minimum wage. With minimum wage laws, they will never get a job. To believe otherwise is to believe that government can legislate against the laws of economics. But governments can no more do that than they can legislate against the laws of physics.

Of course, if a minimum wage is brought in at £5/hour, not everyone previously earning less than £5/hour will suddenly lose their jobs. Like most political decisions, some people benefit from it, and some people lose out. But there are plenty of tasks which are simply not worth paying for at that cost. Various jobs are destroyed, and plenty of people do become unemployed. The government know this, of course, which is why there are different minimum wages in the UK for those aged 22 and above (£5.73), those aged between 18 and 21 (£4.77), and those younger than 18 (£3.53). Most under-18s are not skilled enough for their labour to be worth the adult minimum wage. Rather than see even more unemployment, the government created a tiered minimum wage. But it is not the case that the labour of everyone in any particular age band is worth the same. There are plenty of adults (currently unemployed) aged over 22 whose labour is worth less than £3.53/hour. Rather than differentiating by age, we should differentiate between each individual. But that would mean abolishing the minimum wage. This clearly demonstrates that the minimum wage was created for reasons of political popularity, despite the clear economic argument against it.

A good way to see why minimum wages are bad is to ponder why the minimum wage is currently £5.73.

In this clip from the BBC’s “Politics Show”, a woman says “I’ll vote Labour if they put the minimum wage up to £8″. Why isn’t it £8/hour? Or indeed £20/hour?

Perhaps this woman was on minimum wage. It’s hardly surprising that someone would turn to a politician for a pay rise when they couldn’t get it from their boss. However, raising the legal minimum wage to £8/hour would certainly have the unintended consequence of lowering this person’s actual wage to £0. Rather than increasing their income, they would become unemployed as a result of such a policy.

On Thursday 6th November 2008, in the annual “No Confidence” debate at the Union, Oliver Letwin was asked, “Why did you vote against the minimum wage?” It didn’t seem to have occurred to the questioner that there could be any good reason for opposing a minimum wage. Mr Letwin replied that he had been responsible for changing Conservative policy on the minimum wage “because we were wrong about it. It turned out not to price people out of jobs the way we thought it would. The reason we were sceptical about it is because we thought it would price people out of jobs… I hope, I trust, that it’s not going to rise to a level where it does that in a recession.”

Mr Letwin is wrong that the minimum wage has not priced people out of jobs. Indeed, now that we are in a recession, it is surely responsible for even more unemployment. The reason the minimum wage is not £8/hour is because that would cause more unemployment. So the choice for a politician when setting the level of the minimum wage is: How much unemployment do you want? Unemployment will never be minimised as long as minimum wage legislation remains in force.

Lowering or abolishing the minimum wage is of increased importance at the moment, because lowering wages is essential to ending recessions.

“It is common and indeed conventional knowledge that only World War II ended the Depression… What is less often acknowledged is that the New Deal as such thus failed to end to the Depression. Nor is it generally understood why the Depression did not return in 1946, after the military was demobilized and war production ended. By all rights, nothing should have been any different from 1939. But the Depression did not return. Despite demobilization and the end of war production, unemployment in 1946 was 3.9% and in 1947 3.9%…

So why didn’t the Depression return in 1946? Because wages were frozen even while the money supply was inflated with the war spending. This drove down real wages, the opposite of the consistent policy of Hoover and Roosevelt for a decade to drive up wages. In 1946, wages were low enough to clear the employment market. If employers could then hire workers at a market wage, and produce consumer goods, business could get back to normal. It did.”

However,

Dave Prentis, general secretary of Unison, will cut a special cake in the Commons to celebrate the anniversary, saying that the current £5.73 an hour rate should increase to £7.45 by October 2010.

The union also wants apprentices to be covered by the minimum wage, adding that the “development rate” for younger workers should be scrapped as it “discriminated” against young people.

As Tim Worstall puts it,

Are these people mad? A 30% pay rise in the middle of a recession? When people are shedding labour left, right and centre, you’re going to make labour more expensive?

The minimum wage is a blunt instrument. Prices are information, and setting prices (including wages) distorts the market, preventing it from solving the economic calculation problem and allocating resources efficiently. Just as we don’t set prices, we shouldn’t set wages.

The minimum wage is unfortunately popular amongst many people that it harms. If you want to redistribute wealth, which is what the minimum wage tries to do, a negative income tax would be a far more effective method.

Margaret Thatcher quote of the week 10

Wednesday, March 25th, 2009

Did Thatcherism leave the nation divided?

http://uk.youtube.com/watch?v=cpdbEK3E4U8

The greatest divisions this nation has ever seen were the conflicts of trade unions… under the dictat of trade union bosses… They used their power against their members. They made them come out on strike when they didn’t want to… It was that which Thatcherism, if you call it that, tried to stop. Not by arrogance, but by giving power to the ordinary, decent, honourable trade union member who didn’t want to go on strike. By giving power to him, over the Scargills of this world…

That is one conflict. That is gone. Now another one.

I believe passionately that people have a right by their own efforts to benefit their own families. So we’ve taken down taxation. It doesn’t matter to me who you are or what your background is. If you want to use your own efforts to work harder, yes, I’m with you, all the way!

We’ve had an increase in home ownership, the heart of the family, under this government… Far more share ownership. Far more savings in building society accounts. This is what is building “One Nation”. As every earner becomes a shareholder. As more and more people own their homes. No, we are getting rid of the divisions. We are replacing conflict with cooperation. We are building One Nation through wider property and democracy.

The devalued Prime Minister of a devalued Government

Tuesday, March 24th, 2009

Daniel Hannan is a Conservative Member of the European Parliament. He spoke to CUCA in Michaelmas 2008. With Douglas Carswell MP, he is author of “The Plan: 12 months to renew Britain.

One of the advantages of leaving the European People’s Party is that we will get more influence. Because he is not a member, Mr Hannan was the only Conservative to speak when Gordon Brown visited the European Parliament today. Here is what he said:

“Perhaps you would have more moral authority in this house if your actions matched your words. Perhaps you would have more legitimacy in the councils of the world if the United Kingdom were not going into this recession in the word condition of any G20 country.

The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child.”

Do watch the whole thing. If only we could have seen Gordon Brown’s face.

How to fix the banks

Sunday, March 22nd, 2009

On Tuesday 17th March 2009, Professor Kevin Dowd gave the Libertarian Alliance’s 2nd Annual Chris Tame Memorial Lecture, “A Libertarian View of the Financial Collapse”, which I attended at the National Liberal Club in London.

http://video.google.com/videoplay?docid=2495820480786986515&hl=en

There is a transcription with notes and appendices at http://www.libertarian.co.uk/lapubs/econn/econn111.htm.

Despite its title, Professor Dowd’s lecture did not focus on the causes of the financial crisis. For that, I would recommend “The Financial Crisis: Causes and Possible Cures” by John Allison, CEO of BB&T, on 29th January 2009.

Professor Dowd did identify statist measures which contributed to the banking crisis: limited liability laws which encourage irresponsible risk taking; the deliberate destruction of the convertible pound which allowed inflation; state-mandated deposit insurance; and central banking. All this is the opposite of a free market, far from a laissez-faire system which some people claim it to be.

He criticised the reappearance of Keynesianism, which he described as “discredited and abandoned in 1976″. He criticised the government response so far, pointing out that credit is tight because confidence is lacking, not because interest rates are too high, and that printing money will erode confidence further. Erratic government action, such as further bailouts when previous ones didn’t work, also erodes confidence.

However, most of Professor Dowd’s lecture was on how to fix the banks. Our objective is “a safe, stable and efficient financial system”. “This can be achieved through a system of laissez-faire, or free banking.” Our objective is free banking on a sound commodity based currency.

We could apply laissez-faire immediately, in the middle of the crisis, and let market forces purge the rot out of the system. This sharp but short shock, says Professor Dowd, would be better than what governments actually did. However, it would be politically difficult.

More importantly, we can do better.

The Bank Recovery Programme

Professor Dowd proposes a “bank recovery programme”, involving no state guarantees and no bailouts, which would deal with the fundamental structural problems of the banking system.

The key question is: How do we deal with financially distressed firms?

Professor Dowd says that we should simply apply receivership law to banks just like any other firm. A firm’s liabilities should match its assets. If a firm’s liabilities are greater than its assets, it should go into receivership. The aim should be to restructure a bank’s balance-sheets so the firm is adequately capitalised, and hopefully return it to operation. Assets are written down, and creditors are paid off first. Shareholders get what is left, if anything. If creditors have to take a hit, then shareholders lose everything. If the firm is still potentially viable, it is recapitalised with new shareholders and returned to operation in a financially healthy state.

In the case of banks, there is share capital, and deposits (debt). The debt obligation is fixed in nominal terms. If a bank does not have enough assets to meet its debt obligations, the depositors make a loss, and the shareholders are wiped out.

This programme deals with people who claim banks are too big to fail. It allows us to fix the banks without them failing, yet without a bailout; without taxpayer involvement.

The programme treats banks just like any other firm. Some people claim that “banks are different”. Yes, but not in any relevant way. Existing bankruptcy law should cope just fine with banks. Indeed, before the present crisis, the authorities were saying just that: that we were operating in a “non-zero failure regime”.

There is one way in which we must treat banks differently from other types of firm. “Any receivership solution to a distressed firm needs to take into account the nature of the firm’s business”. If an electricity provider goes into receivership, you don’t want to switch off the the generators while the firm is sorted out. If a hospital goes into receivership, you don’t close it down while you sort the accounts out.

Banks are central to credit system for the rest of the economy. Banks are central to the payment system. So receivership must be implemented carefully.

The government has placed an obstacle to receivership: deposit guarantees. This reassures depositors (with a catastrophic long term cost). But it prevents receivership operating normally. It prevents depositors taking a hit.

So the government must rescind the deposit guarantee at the same time as implementing the receievership package.

They should do it over a weekend. On Friday evening, the government should inform banks that the deposit guarantee is immediately rescinded. Any bank that was confident could choose to weather the possibility of a run on its deposits. Other banks would go straight into receivership. The receivers would move in overnight, and work quickly to minimise disruptions to the wider economy.

Cash withdrawals would be limited for the duration of the operation. It is important to keep the banks’ assets in the banks while we devalue them. Assets would be written down quickly according to prepared write-down formulae for different asset classes. These wouldn’t need to be particularly accurate: indeed, it is best if write-downs are harsh, worst-case valuations to be on the safe side.

Now comes recapitalisation. Shareholders lose everything. The new capital comes from deposits: some deposits are converted into shares.

For example, imagine a bank with £80 of assets and £100 of deposits (debt) on its books. The shareholders are wiped out. The depositors lose £20. The receivers then judge how much share capital is needed, and convert a proportion of deposits into shares. The depositors become the new shareholders.

We could protect smaller depositors to make the plan politically easier.

On Monday the banks reopen.

Hopefully, the market would realise assets were worth more than they were valued at, and share values would rise. That’s the advantage of harsh write-downs. Depositors would make a loss on their deposits, but a capital gain on their new shares. The capital gain would increase as confidence returns.

Shareholders should take the hit. After all, what has the taxpayer got to do with it?

With a good capital base, the banks would be healthy again.

Here is a letter Professor Dowd wrote to the Telegraph on Sunday 25th January 2009:

SIR – The Government’s policy towards the financial crisis is clearly not working. Having “saved” the banking system with the big bail-out last October, it now turns out that the banking system needs another big bail-out three months later, and the plunges in the banks’ share prices last week suggest that this second bail-out is not working either.

The Government’s blundering is leading towards the piece-by-piece nationalisation of the banking system, with no thought-through solution to the underlying problems.

Any solution has to provide a framework within which banks can restructure their balance sheets and restore their financial health. Were these institutions anything but banks, the obvious answer would be for them to go into receivership. Their assets would be written down and creditors’ claims on those assets would be cut; they could then be recapitalised and returned to normal operations.

Yet, radical as it might appear, this same receivership-recovery model can also be applied to banks. It could be implemented via formal receivership, as existing law provides for, but could also form the basis of a government rescue package that would stop further losses being inflicted on taxpayers.

The key elements would involve: write-downs on assets; write-downs on banks’ debts (for example, swaps of deposits for equity, with exemptions for smaller depositors); and measures to minimise disruption to banks’ ongoing ability to provide both credit and payment services (including ensuring that the rescue took place over the weekend).

The combination of asset write-downs and fresh equity would restore confidence and put the banks on a sound footing again.

Prof Kevin Dowd
Centre for Risk and Insurance Studies, Nottingham University Business School

Johnathan Pearce also has a write-up with comments over at Samizdata.