Early on in this Parliament I viewed the utterings of Vince cable with some alarm. He was then proposing that the Lib Dems support a "flat tax", which appeared to be very regressive, and he proposed ridding the party of it's very popular policy of taxing the rich at 50%.
The party very quickly dropped the flat tax idea (as did the Tories) when the German Christian Democrats nearly snatched defeat from the jaws of victory in their general election, having proposed such a policy. However Vince succeeded in changing the 50% policy. At the time he argued that the new replacement policy was even more progressive - more revenue would be generated from Green taxes and these really would be progressive. On the other hand, Ming Campbell suggested another reason; he wanted the policy to "reward ambition" - the same logic you would expect from a Thatcherite.
So Vince Cable was identified with the right of the party, but listening to his speeches I was not so sure. He was coming up with many progessive ideas on taxation, and in my mind I repositioned him as "hard to categorise".
This of course was confirmed when he supported the nationalisation of Northern Rock as an emergency measure. I wonder if other LD MPs like David Laws and Jeremy Browne would have proposed such a policy? Yet the party was united on this, apart from a few fringe bloggers.
Recently Vince has somehow found time to write a book, and this of course gives an excellent opportunity to find out what he thinks, albeit in less than 160 pages.
I have read the book and would heartedly recommend it. I agree with most of it. Because it is short there are obvious gaps - the chapter on Malthus is rather short and inconclusive which is a shame as I for one think it ought to be the most important part.
However there is no doubt what he thinks about extreme Libertarians;
"(quote from Herbert Spencer) 'The ultimate result of shielding man from the efects of his folly is to people the world with fools' . This approach was influencial in the years of the Great Crash, and it helped inform the advice given to president Hoover by his treasury secretary, Andrew Mellon: to do nothing. '[Panic] will purge the rottenness out of the system ... People will work harder and live a more moral life ... enterprising people will pick up the wrecks from less competent people.' Since Hoover and Mellon emerged as the fools who precipitated the Great Depression, their abstemiousness become seriously unfashionable", page 46, The Storm.
The economic crises we face today has resulted from the policy mistakes of those who believed in the philosophy of "setting business free". The business lobby is a formidably powerful lobby and has persuaded even nominally socialist politicians to buy into this philosophy. We are where we are today because of the failure of "light touch" regulation. However even if you persuade the politicians the policy still has to work, and instead it has failed, big time. The backlash is now well under way, and libertarians will be one of the foremost causalities.
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Big business rarely lobbies for consistent libertarian positions - often they support regulation, largely because it acts as a barrier to entry, hence shielding them from competition.
There are lots of types of regulation.
It always makes me cringe when I see it written that the era of 'light touch regulation is over'.
Sure, perhaps the banks should have been regulated so that they separated their lending/borrowing facilities and their investment/trading facilities, but you can't possibly advocate greater regulation of fruit so that they're all a consistent shape and size (as the EU tried), or even for that matter forcing the banks to maintain higher capital ratios than are necessary especially when they ought to be lending (as is happening now when it really ought to be counter-cyclical).
There is sometimes a need for a "light touch", and sometimes there isn't.
I am more than happy to have a pragmatic argument about whether or not in certain situations more regulation is needed, and other situations less is needed.
However if your argument is one that many libertarians employ, that the state is by defintion incompetant, then that will lead you to object to regulation for ideological reasons.
And this was precisely what the business lobby was campaigning for until recently. No doubt there was some hypocracy involved, some special exceptions. But generally their technique was to find one (prima facie) absurd example and seek to imply that all regulation was like that.
Interesting to note that so far no one has come to the defence of Herbert Spencer.
People who look for ideology in the Northern Rock decision are mistaken. Bank deposits are guaranteed, and nationalisation is simply the most cost-effective way of meeting that guarantee.
Libertarians would have no such guarantees, which would mean nobody would have reason to trust banks, and the banking industry as it is wouldn't be able to exist. This would wreck the economy.
The point of banking regulation is there to protect the depositor and protect the public interest of minimising the cost of the deposit guarantee. Clearly it hasn't been done competently. But cutting regulation without cutting guarantees is not the libertarian position, merely the position of representing the banks' interests (unenlightened as it turned out) above the public interest.
Left Lib, even some of the staunchest of libertarians (that doesn't mean extremist) take the view that you have to prevent monopolies and 'market failure'- that could entail regulation.... in fact I probably should have just said "what Julian H said".
Just because the state is incompetent doesn't mean it can't have rules - libertarians all argue for the maintenance of property rights, presumably by the state.
Actually Joe, I'd look at Debt-for-Equity Swaps. Mine's probably not the best explanation of this amazing free-market solution (which I should also point out works, and has worked, even with some banks in the US who refused stimulus funding!), but it's worth a read.
Here's a link: http://soc-liberal-party.blogspot.com/2009/01/mystery-that-is-debt-for-equity-swaps.html
and here's how it compares to the other solutions: http://soc-liberal-party.blogspot.com/2009/02/solving-banking-crisis.html
I actually think the NR decision was also giving into the demands of bondholders who didn't want to see a temporary decrease in bond repayments. However a Debt-for-Equity swap could have entailed both a guarantee of deposits and less regulation.
Anton, surely a debt-for-equity swap is virtually identical to nationalisation. The difference is only whether a token amount of equity is left with the original owners. And I guess that other creditors (other banks) might get equity in another bank rather than cash, which may have some merit, but also some problems.
Joe, not at all. Nationalisation involves government taking on all of the assets and liabilities of the bank.
Debt-for-Equity Swaps do not. Instead, the Swaps involve bond-holders exchanging bonds for equity so that the liabilities of the bank are reduced to a level that can be covered by non-toxic assets. There's no need for government intervention whatsoever, although it can facilitate it. The bondholders would receive the same amount as if they had delayed repayments, but the shareholders would also have been practically wiped out by being heavily diluted. The key difference is that government does no get involved and thus the taxpayer does not take on the liabilities of the bank.
But Anton, the deposit guarantee makes the government become the bank's biggest creditor. So debt for equity means government equity means, more or less, nationalisation.
But I would agree that there may be some merit in other creditors sharing the pain. But why would they agree to? Debt for equity is an agreement, and bank creditors are not obliged to join in.
The leverage we would have would be the threat of winding up the bank, and that might have been the correct hard-nosed decision, but my guess is that it wasn't, not least because passing more pain to other banks at this time would further deepem the crisis.
Joe, sorry, I've got my terms mixed up. In a Swap, there's no need for the government to take on the liabilities, but only to ring-fence the depositors from having to take part in the swap - thereby guaranteeing their deposits, but not in the usual sense of the term.
My mistake - the reason they'd do it is because they would have no other choice - if government says it won't bail out the banks, then the next best thing for the bondholders is to perform a Swap, meaning that they'll receive the maximum amount they could hope to achieve from non-toxic assets. After that, the next best thing is to allow a delay in repayments followed by a balloon sum a few years down the line, but this restricts bank lending. After that, the next best thing is bankruptcy, but that involves a lot of legal hassle, etc.
The link I posted earlier comparing it to other methods is a fuller explanation.
I've now just read your last para and realised you knew all that anyway... but I don't want to delete it all! I believe it would have been the right choice, and would have cleared out the banks rapidly all in one go - like ripping off a plaster quickly instead of the slow agony we've had instead. It would also have prevented government going into such massive debt - which in the long term will probably cause even more pain even after the recession.
Geoffrey, regarding Spencer's quote; do you know where it is from and have you read it in context? Or are you having a knee spasm because it is Spencer alone?
I ask, because the essay from which it comes, "State-tamperings with money and banks" which can be found in Vol 3 of his "Essays: Scientific, Political and Speculative" on the web courtesy of the Online Library of Liberty" is, allowing for the slightly convoluted Victorian English prose style, a fabulous analysis of why, as Hayek concluded a hundred and tenwty years later, or as both Mises and Rothbard have concluded in their ciriticism of the Federal Reserve system, the state is incompetent in the running of currency.
What the government is doing by quantitative easing is abolishing the rule of law and its part in enforcing contracts. What they are saying by creating additional money into the system is that you no longer need to pay all the debts on contracts you have issued, because ere's some extra money to cover them. And that if banks were allowed to run under free banking these crises would never been as deep or as p[ervasive as they are through manipulation of the currency by the state.
It is a brilliant exposition of the origins and effects of what we know of as "moral hazard". And that the effects of us being shielded from that moral hazard by state offered, ultimately worthless, guarantees, is to populate the banking system with the sort of fools we have witnessed, from Fred the Shred to Adam Applegarth.
Anton is absolutely right. This crisis could have been averted by telling the banks they were on their own, that only a certain level of deposite (because, alas, it is state guaranteed money) would be guaranteed, and not their toxic assets. And that "debt for equity" swap system is exactly what I am using in my scheme for an asset partnership "financial institution" intended to enable us to rescue the mortgages of all those poor people who have been hit by this bubble.
By the way, Geoffrey, regarding this in your earlier comment:
I am more than happy to have a pragmatic argument about whether or not in certain situations more regulation is needed, and other situations less is needed.
However if your argument is one that many libertarians employ, that the state is by defintion incompetant, then that will lead you to object to regulation for ideological reasons.
The problem is that you are trying to frame as a startting point for your "pragmatic argument" a status quo in terms of the level and necessity of state (ie coercive collective) action.
Ten years ago when I was on Oxford City Council the buzz-phrase that was all the rage was about "zero based budgeting" where instead of simply annually accepting there were some core functions of a department that were automatically funded and some others that you could do a little more of or a little less of according to political priorities you had to look at the entire core service and work out whether it was achieving its aims or was the best way of achieving those aims and whether there were some skeletons in their budgets, long forgotten that were consuming current resources with little or no justifcation and, perhaps even worse, were counter-productive to delivering the services needed today.
Such an exercise needs to be done for the entire state apparatus. For me an absolute touchstone of liberalism is that individual and genuinely voluntary co-operative action should always be better for liberty than a system that, however you dress it up, is coercive and at its most basic says "we know better than you".
Now, you can say that "voluntary co-operation" cannot possibly deliver certain things, and often trotted out are notions such as "natural monopolies", or that a "state" has to exist to enforce a default or something similar - all are arguments frequently put forward for the necessity of majoritarian collective action.
But while, as it is now, that majoritarian collective actor, the state, consumes in the process half our national wealth, it behoves those who believe in it to justify that level of interference against what one might call "natural liberty".
Why should we believe that 646 elected people and their largely unaccountable hangers on in the civil service is the correct level at which to intervene? Because it has the benefit of authority from history? Not good enough. Why could such beneficial outcomes as it may be necessary to have some coercive collective action based on some form of majority decision making not be at an Oxfordshire level for me, say, or an Oxford level, or even at a Marston parish level or a John Garne Way street level or whatever? Or could the solutions be very different between different communities served by different "first tier" levels of coercion?
These too are fundamental questions we are asked as Liberal Democrats by our preamble.
I find the position you are trying to build your "pragmatic argument" aound - that we accept that the "state" has to do what it does now less a little bit or plus a little bit fundamentally untenable as a starting point. The state is now so large and dominant (I am sure J S Mill would be appalled at the now tyranny of the minority) that even liberals allow it as the unquestioned starting point. Yet what the state does in some areas may be not only counter-productive to what it tries to do elsewhere, but actually create a necessity for further intervention.
We need to base our discussions on the notion of a "zero based state".
Well, the state is certainly not incompetent. Its very very good at a few things.
One is killing people. States do this fantastically well.
Another is keeping in power. The political class is very good at keeping power within itself.
The last is promoting the interests of the few over those of the many, often whilst claiming to benefit the many (look at the neo-liberal mythology, and the mythology of the welfare state).
I oppose the state because it puts limits on the potential for human progress. Because it destroys lives and the environment.
I cannot offer a utopia as statists would, but freedom, true freedom can offer us all opportunities.
I agree, left next time, but further left that you are willing to go, left to the radical left of Tucker, Proudhon, Bastiat, Molinari and even Spencer and Herbert.
On Herbert Hoover - I'm not sure what advice he was given, but his policy was one of intervention.
FDR even made Hoover's profligate government spending a main point of his campaign.
Hoover was not a 'laissez-faire' president as the mythology of the statist left would have us believe, he was an interventionist.
@Joe:
Too right we don't want any of the regulation.
Banking as we know it grew up on state intervention to benefit the rich and powerful.
Libertarians want banks to have to earn out trust and we want them to have to compete.
The system of banking is as anti-free-market as you can get, and as such it is a chief driver of poverty and conformity.
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