Bring a problem parties – speed therapy

Sometimes, when you are talking to someone, you come on an idea that makes so much sense you are surprised that it has not been thought of before. Often these ideas are not anyone's in particular: they emerge somehow in the conversation. Bring a problem parties are an idea like that.

To begin with, three observations. First, a pint is about the right length to talk over many problems. A pint shared lasts half an hour. With a good interlocutor, there is not much that you can't get some helpful insight on in half an hour. Second, independent advice on problems - be they emotional, practical or technical - is often useful. OK, I wouldn't ask the check out person in my local supermarket for advice on solving a high dimensional PDE, but often a random stranger can be helpful. Third, speed dating proves that if an experience is potentially interesting and short enough that a bad encounter is soon forgotten, then (some) people will sign up.

So, bring a problem parties. A selection of people, each with a problem. They are randomly matched into pairs, with one person selected as the solver, the other as the questioner. The questioner buys the drinks and presents his or her problem. The solver tries to help. After half an hour, a bell rings, and another round begins, with solvers as questioners and vice versa. Four rounds would be two hours, and you would be guaranteed two perspectives on your problem. It would also make for a more interesting evening than most. If you franchise it, cut me in please.

A manifesto

I suspect that some, perhaps a preponderance, of my readers are not of my political persuasion. So you might well disagree with the following. But with an election less than a year away, I wanted to write down the core of the manifesto I would propose if I had a big say in a political party. I don't, thankfully, and this is nothing like the platform any of the parties will contest the election on. But I still think the exercise is interesting.

The rules I set were to write down no more than two sentences in ten different areas. In no particular order:
  • Education. Abolish the charitable status of private schools, and fold academies back into the ordinary state school system. Abolish student grants and increase university funding, including research funding, very substantially.
  • Transport. Abolish road tax, increase petrol duties significantly, and eliminate the special treatment of airlines, including VAT on airline fuel. Invest substantially in carbon efficient transportation infrastructure including trains, buses and cycle networks.
  • Taxation. Simplify the personal and corporate tax system, impose draconian penalties on any form of avoidance, and remove the non-dom status completely. Eliminate UK-linked tax havens such as Cayman, Jersey and Bermuda by forcing them either to join the UK tax code or removing their protection.
  • Energy. It is too late for fission, so invest heavily in renewables and in energy saving. Push hard for fusion because if we can crack that one, energy becomes a non-issue.
  • Defence. Cancel the expensive toys like the Trident replacement. Provide the ordinary soldier with the resources they need, like body armour and IED-proof vehicles.
  • Foreign Affairs. Engage more positively with the EU. Revive Robin Cook's ethical foreign policy.
  • Constitutional Reform. Introduce proportional representation and a fully elected House of Lords. Disestablish the Church of England and secularise the state, recognising the rights of believers and non-believers equally.
  • Finance. Break up the majority state owned megabanks, Lloyds and RBS. Make capital requirement proportional to size to encourage a diverse system of banks that are not too big to fail.
  • Liberty. Cancel the id cards project and other big database projects. Enact legislation to protect our historic liberties and roll back both state and private surveillance and data gathering.
  • Industrial Policy. Develop a comprehensive policy across education, development aid and innovation support to encourage manufacturing and export-based industries, especially outside the South East. Reduce financial and other services as a percentage of the total economy.

Keynesian traps and flooding the building

A frequent correspondent sent me a link to Phillip's Economic Computer, a wonderful analogue device designed to illustrate the flow of money within the economy. And that got me thinking...

A very rough and brutal sketch of Keynes' classical account of the savings trap is that if people save too much, rather than consume, then the velocity of money drops, inventory builds up, growth falls (and even goes negative) as businesses cut back on production. A standard account of the liquidity trap by Krugman is here.

How does the Phillip's device help? Well, it points out a truth that is often hard to see, namely that money can only be created or destroyed by the central bank. Credit cannot be 'created' without funding; money cannot disappear. These days, rather little money is stored in mattresses or bank vaults: most of it is in the form of bank deposits, securities, or other investments. And of course those assets are someone else's liabilities, i.e. funding for them. Thus these days your choice is not between putting your cash under the bed and spending it: it is between putting it in a bank - which will lend it to someone else - and spending it. In this sense saving is not quite as bad as in the classical Keynesian account, as it provides funding for corporations and individuals who do want to engage in economic activity. Even buying government bonds is not useless as the government spends the money on something.

Now of course the increase in economic activity provided by a dollar of spending on goods may be rather more than that provided by a dollar of bank deposits. But it is worth noting that the dollar of bank deposits are not useless: the bank has to do something with your money, and that something probably has positive economic value. Anything else would cause funds to build up rather too fast at the bank - something the Phillip's computer would model as water flooding out...

Keynesian traps and flooding the building

A frequent correspondent sent me a link to Phillip's Economic Computer, a wonderful analogue device designed to illustrate the flow of money within the economy. And that got me thinking...

A very rough and brutal sketch of Keynes' classical account of the savings trap is that if people save too much, rather than consume, then the velocity of money drops, inventory builds up, growth falls (and even goes negative) as businesses cut back on production. A standard account of the liquidity trap by Krugman is here.

How does the Phillip's device help? Well, it points out a truth that is often hard to see, namely that money can only be created or destroyed by the central bank. Credit cannot be 'created' without funding; money cannot disappear. These days, rather little money is stored in mattresses or bank vaults: most of it is in the form of bank deposits, securities, or other investments. And of course those assets are someone else's liabilities, i.e. funding for them. Thus these days your choice is not between putting your cash under the bed and spending it: it is between putting it in a bank - which will lend it to someone else - and spending it. In this sense saving is not quite as bad as in the classical Keynesian account, as it provides funding for corporations and individuals who do want to engage in economic activity. Even buying government bonds is not useless as the government spends the money on something.

Now of course the increase in economic activity provided by a dollar of spending on goods may be rather more than that provided by a dollar of bank deposits. But it is worth noting that the dollar of bank deposits are not useless: the bank has to do something with your money, and that something probably has positive economic value. Anything else would cause funds to build up rather too fast at the bank - something the Phillip's computer would model as water flooding out...

One of the many reasons I am depressed

Barry Ritholtz writes:
I believe the brain trust behind the Obama White House has made a huge tactical error.

As Rahm Emmanuel likes to say, one should “never waste a crisis” — and the White House has done just that...

There was widespread popular support for a full reform of finance. What the White House should have pursued was: 1) Reinstatement of Glass Steagall; 2) Repeal the Commodity Futures Modernization Act; 3) Overturning SEC Bear Stearn exemption allowing 5 biggest firms to leverage up far beyond 12 to one; 4) Regulating the non bank sub-prime lenders; 5) Continuing high risk trades to be compensated regardless of profitibility; 6) Mandating (and enforcing) lending standards, etc...

Instead, we have a White House that appears adrift, and the most importantly, may very well have missed the best chance to clean up Wall Street in five generations.
I agree with the conclusion: and it is deeply depressing for those of us who have devoted a lot of energy to arguing for reform.

Ritholtz's prescription isn't quite mine: I am less convinced about the benefits of a Glass-Steagall style split, not least because many European banks managed to be universal without being dangerous; rather I would prefer to see action to split up too big to fail institutions, combined with increased regulatory capital requirements that really constrain leverage for all systemically important risk takers. But the details don't really matter: doing something does.