Should the United Kingdom leave the European Union?

[Mise]

Well, the general outline is pretty much the same for all of the developed world. The so-called "major differences" between the systems of economics of the Anglo-Saxon world and the Continental European world are for most part imagined by left-wing extremists from the latter and the hard-right of the former.

China's economic model, with its complicated formation of businesses and lacking the possibility of private land-ownership (in the PRC, all land is state-owned and all land used by people and corporations is on lease) would be an example of an economic model that would be significantly different enough to warrant being considered distinct from the free-enterprise system that is now universally adopted among the developed countries.

Yeah, it's true that in practice all Western governments have followed basically the same neoliberal orthodoxy for a few decades now, and most disagreements are largely inconsequential. But the attitudinal differences are still there and are still significant. When the UK faced higher bond yields and a downgrade threat in late 2008/early 2009, even the Labour government at the time didn't knee-jerk into blaming speculators and saying that this would all blow over. All 3 main parties recognised that debt reduction was going to be the main focus of economic policy for the 5 years at least, and all 3 main parties aimed to reduce the deficit and national debt by the same amount (they only differed in how they were going to do that). British politicians generally accept that if you don't want to be at the mercy of bond markets, you shouldn't borrow from them in the first place. Compare that to what basically every Eurozone government has been saying for the past 2 years...

These attitudinal difference have a big impact on policy, especially in a downturn. It's one thing to grudgingly accept the idea that markets work better the freer they are when free markets are delivering consistent wealth growth and lowering your cost of borrowing. But now things are different, and those attitudes are going to cause big differences between the kinds of governments that understand economics and the kinds of governments that are naturally hostile to business, trade and free markets.


@Cutlass: I didn't mean "constrained" to carry with it negative connotations. I just meant that it has more constraints in its mandate, which it does: it has to manage economic activity, unemployment and inflation, whereas the only constraint on most other central banks is to manage inflation. Kaiserguard already said that its actions were more interventionist, i.e. less constrained.

 

[Cutlass]

Mise, the point is that if a CB "only has to manage inflation", then pretty much by definition it is going to frak up by the numbers at some point. It was designed to frak up by the numbers.

Also, on your earlier point of the EU should liberalize many things, don't forget than when you liberalize finance, financial crises are the most common result. So you have to be careful with those things.

 

[Takhisis]

They argued that the City's interests are in fact going against the interests of most of Britain, and that it stands in the way of making the UK truly competitive in the long term.

The City makes money out of money. 'Nuff said.

 

[dutchfire]

These attitudinal difference have a big impact on policy, especially in a downturn. It's one thing to grudgingly accept the idea that markets work better the freer they are when free markets are delivering consistent wealth growth and lowering your cost of borrowing. But now things are different, and those attitudes are going to cause big differences between the kinds of governments that understand economics and the kinds of governments that are naturally hostile to business, trade and free markets.

The world does not need free markets, it needs competitive markets. It is competition that leads to better results for all stakeholders. Competitive markets often require anti-trust regulation and regulations about the quality of products that are sold. Of course, these regulations are not in the interest of some businesses. You'll often hear them talk about the Free Market when they want to stop this type of regulation from being passed.

In the case of the financial markets, a lot of what they did was selling crappy products (repackaging bad loans). Attempts to regulate these bad practices are too often countered with appeals to the free market. Anglo-Saxon politicians, their elections campaigns financed by these very firms, too often choose the side of big business in such cases, resulting in sub-optimal market results.

 

[Mise]

I agree with all of that, but what frustrates me is that people talk about "regulation" as if it's a linear, sliding scale. It's not - there are good regulations and bad regulations, ones that promote growth and ones that stifle growth, ones that protect workers and ones that alienate workers. Aside from financial services, I can't think of an area of our economy that is actually under-regulated. And the kind of regulation that gets proposed by the Eurozone tends to be the bad kind of regulation.

The British government has already decided to break up "too big to fail" banks, so that they no longer pose a threat to the rest of the economy, or have to be bailed out in the future. The retail arms of big banks will be separated from the trading arms, so that they are effectively two legal entities. Though they can be owned by the same owners/shareholders, the profits from one arm can't be used to subsidise the losses in other arms. This kind of banking reform goes way, way beyond what Eurozone leaders are suggesting. In addition, UK and Swiss banks are already being forced to hold more capital than Eurozone banks.

All this, to me, suggests that Eurozone leaders like to talk tough on banking regulation, but when it comes to implementing it, they continue to allow their large, universal banks to be "too big to fail". Their regulations tend to be "harsher", but no more effective (witness Commerzbank in Germany once again coming close to collapse, despite repeated "stress tests" by Eurozone regulators). I'm not saying that breaking up the big banks into ones that aren't too big to fail is the only way of reforming the global banking system - there were many different suggestions, all of them an improvement over the current regulatory regime - but the Eurozone hasn't done any reform to its banks whatsoever, despite a good deal of them facing imminent collapse if more Eurozone sovereigns default.

Anyway, that's finance. Aside from finance, what "sub-optimal market results" do you have in mind?

 

[dutchfire]

The rating agencies, for example, have not performed very well. That market is also not very competitive, with only 3 major international companies. I think some regulation could help that market perform better.

Your point that regulation is not a one dimensional thing is of course very true. Regulation should promote honest competition. My point is that regulators have to keep in mind that any market party they speak to (both labour unions and businesses!) doesn't have a well-functioning market in mind. Every stakeholder wants a market where he holds the power. The, admittedly hard, task for the law makers is to strike the perfect balance there. The fact that some market parties (big business) have much more access to politicians makes that task a lot harder.

 

[Mise]

That's kind of backwards. The ratings agencies have an artificial monopoly created by the regulators. The regulators pretty much abdicated responsibility for judging the riskiness of a bank, its assets and its liabilities to the rating agencies. The fact that there are only 3 major ones is down to the fact that the regulators and central banks will only accept the ratings of those 3, and not any other random agency that rocks up with an assessment of an asset's credit worthiness. The regulators need to find a better way of judging the safety/riskiness of a bank than relying on a select few privileged rating agencies.

Indeed, in many cases, the markets completely ignore the credit rating agencies, and just do their own thing. In 2009 for example the UK's government bonds were traded at yields that implied a credit rating of AA, whereas the official agency rating was still AAA. Similarly, after the downgrade of US debt in the summer, bond yields didn't really move at all.

In other words, the only reason the agencies are nationally important is because national regulators judge assets by the ratings of the 3 agencies. The reason why the agencies' failure to rate CDOs adequately during the sub-prime crisis was such a big deal was because those ratings were used to justify the bank's overall riskiness in the eyes of regulators. Had the regulators attempted to judge the riskiness of the CDOs themselves, they may have come to a different conclusion, judged CDO assets as not really being assets at all, and subsequently prevented the banks from lending on their value. Then again, they may have come to the exact same conclusion as the rating agencies, for the exact same reason as the rating agencies - they didn't foresee homeowners defaulting on their home loans and giving up their homes in response to going into negative equity.

Indeed, the fact that it's not obvious that regulators are more competent than rating agencies in judging the credit worthiness of assets is a pretty strong justification for banks simply holding more capital to begin with. It's really not obvious that "more regulation" is what's required, just different regulation that doesn't depend on the credit assessment of any individual organisation to protect taxpayers and "innocent bystanders" from being harmed in the event of another banking failure. That's why I think breaking up the banks and forcing them to hold more capital is a better kind of regulatory change than giving more power to regulators.

 

[kronic]

All this, to me, suggests that Eurozone leaders like to talk tough on banking regulation, but when it comes to implementing it, they continue to allow their large, universal banks to be "too big to fail". Their regulations tend to be "harsher", but no more effective (witness Commerzbank in Germany once again coming close to collapse, despite repeated "stress tests" by Eurozone regulators). I'm not saying that breaking up the big banks into ones that aren't too big to fail is the only way of reforming the global banking system - there were many different suggestions, all of them an improvement over the current regulatory regime - but the Eurozone hasn't done any reform to its banks whatsoever, despite a good deal of them facing imminent collapse if more Eurozone sovereigns default.

The problem mainly is that EU regulation on banking has closely mirrored Anglosaxon ideas of banking - much like in many other policy areas. That enabled European banks to become legalised gambling institutions just like their US and UK counterparts. The crisis of the infamous German Landesbanken for example is in parts a direct result of EU (de-)regulations as they took away the special privileges and their special role they were asked to play within the German banking system. For the sake of levelling the casino playing field, their business model was destroyed - and now everybody wonders why it costs billions or dozens of billions to bailout these banks.

As for reforming banking - if the two most important financial centres of the world, including the one that utterly dominates the European market, resist any meaningful regulation, there's little the others can do (but I concede they don't have the right ideas or are not willing to implement them either). Let's not forget that even the big Eurozone banks like Deutsche Bank make most of their money from London where their investment branches are headquartered. It isn't about setting reserve requirements or core capital ratios. Increasing them will not change the system. What we need is breaking up the big banks, reinstituting reasonable rules for lending (no more 110 % mortgages for example), outlawing the use of most derivatives and other financial instruments that sometimes not even the banks understand, and an overhaul the regulation of the entire investment branch of banking. We also need to find a way to make to make ownership of a company (= owning stocks) meaningful. On average, stocks are nowadays held a few seconds, thanks to all the algo trading going on. Good thing, that some guy's fat finger can cause a market collapse that way. Ah, the perfect and rational markets! But you know, that would shrink financial industries around the world massively, and destroy certain governments' budgets...

 

[Mise]

But as the post you quoted said, Britain is enacting exactly those regulations - it's breaking up the big banks so that they are no longer "too big to fail". Not really sure why you say that the UK "utterly resists any meaningful regulation" when it's the only country that has actually started implementing any kind of regulation whatsoever. The rhetoric simply doesn't stack up to the facts.

 

[Terxpahseyton]

They do? Do you happen to have link?
But breaking them up doesn't do much IMO if they then still engage in the same business - just in more variations. I mean the trouble of the financial crisis wasn't so much the size of the banks but their interdependency.

 

[Mise]

http://www.bbc.co.uk/news/business-16235636

Personally I was surprised that they accepted so much of the report, given how financially dependent the Conservative party is on donations from rich bankers and the like. The reforms go much, much further than any other country is doing. Guess you don't hear that on the continent, huh?

I mean the trouble of the financial crisis wasn't so much the size of the banks but their interdependency.

Their "interdependency" wouldn't have mattered if they were small enough to fail without causing catastrophe to retail lending. The reason why the gov't had to bail them out was because, if they failed, it would have meant that the entire credit system would have seized up in the retail markets, not just in the financial markets. And the additional capital requirements means that they are much less likely to fail in the first place, especially since the capital requirements get disproportionately larger as the bank's lending increases.

 

[EnglishEdward]

Vince Cable is occasionally allowed to talk about breaking up the banks.

And there is talk about a UK plan that won't be implemented until 2020.

But most sensible people know that this is merely a smokestream to obstruct
reform while the casino bankers continue to loot the rest of the economy.

The only real opposition is the "occupy" movements.