Osborne stands up for capitalism
Fraser Nelson 7:33pm
So, whither Tory economic policy? It was George Osborne's turn to discuss it today, and, overall, it’s very good news. The shadow chancellor's speech appears to be a rejection of Brownite rules-based economics. Inflation targeting was not enough to prevent the crash, and Osborne appears to say he’d empower the Bank of England governor to take a free view to regulating the City. But, as with a lot of Tory speeches at the moment, the desire to devolve power clashes with the desire to tinker. So Osborne proposes greater freedom of regulatory powers, but he’d like the banks to be smaller. Anyway, his full speech is here. My ten-point take below:
1) SMALL BANKS The headline proposal is Osborne saying he wants small banks. I’m sceptical: Canada had large banks. They worked very well because they were properly regulated. Size doesn’t matter, it’s what you do with them that counts. But I think we can safely disregard this: would Osborne impose a maximum balance sheet? Maximum market share? I suspect this is little more than a formula for disposing of the nationalised banks in a normal pre-amalgamation way. And lets not forget EU regulation will enforce this anyway.
2) OSBORNE DEFENDING CAPITALISM
a. “China’s market reforms that began in the early 1980s and India’s opening to trade at the beginning of the 1990s have done more to raise the living standards of more people than any other government policy in the history of the world. Abandoning that progress or turning our backs on open markets would be a tragedy.”
b. “Markets can behave irrationally. The people who make up markets can behave irrationally. This isn’t a failure of capitalism, it is a feature of capitalism.”
This might sound tautological to CoffeeHousers, but it is genuinely bold of Obsorne to be defending the free market in the current climate. He is resisting the desire to pander to the anti-capitalist instinct out there. Bravo.
3) BEEFED UP BANK OF ENGLAND “We propose giving the Bank of England a new responsibility to supervise the overall level of debt and credit growth in the economy as a whole.” Great, but how? The way one controls credit is by fixing its price, and that is done via interest rates. Osborne is resistant to this conclusion - he thinks you can't use one instrument (interest rates) to target both consumer prices and asset prices. So if a Tory government is worried about house prices (unlikely, as house prices makes the electorate feel richer and more likely to vote for the government) it would try to make mortgage lending more difficult for banks. Sounds rather fiddly to me.
4) CHANGE THE INFLATION TARGET “A change of government would provide a sensible opportunity to review, with the Governor of the Bank of England, what changes would be appropriate so that housing costs are properly reflected.” This means a return to RPIX inflation targeting, away from CPI. A wise move, but the bigger concern is that the MPC’s remit is expanded to take account of asset prices as well as the ECB does (to an extent). I’m not sure why Osborne doesn’t address this: after what he says about asset prices and M4, it seems the logical next step. Nonetheless, a serious change from the status quo.
5) LIMITATION OF RULES “Of course new rules – especially on capital and liquidity – will play an important part, but experience teaches us that no rule is flexible enough to deal with every situation.” The credit bubble is partly due to the fact that central bankers fell in love with their metrics. They thought inflation targeting was all, and didn’t notice the imbalances – or argued that they were irrelevant. And as Osborne says, a new set of rules may lead to exactly the same trap.
6) IMPORTANCE OF IMBALANCES “Gordon Brown claims that our economy was fundamentally sound when it was hit by a banking crisis that came out of the blue from America. What went wrong in our banks was a reflection of fundamental imbalances that were allowed to build up throughout our economy over a decade.” Osborne is precisely right here: it’s a new way of seeing macroeconomics. It chimes very well with what William White, ex-BIS chief economist, told the Spectator’s inquiry into the recession (see his evidence here). The big question is: what would Osborne do about it? It implies a new macroeconomic framework, fundamentally different to the inflation targeting fundamentalism of most developed economies (to a greater or lesser extent). Osborne is talking about fine tuning incentives for saving - thinking this will combat the currenyt account deficit. Again, I see it as a matter of base interest rates. If they are low, people wont save. If they are high, they will.
7) GLASS STEAGALL “Whether any form of separation between retail and investment banking, even within the same financial group, is feasible or desirable…” He didnt say much about this, but my understanding is that Osborne is attracted to a proposed separation between investment and commercial banking. This is the best solution. It means that investment banks can stand as a domino far away from the rest of the economy – if it collapses, no one else will be hit.
8) CALIFORNIA DREAMING “We know from California that when people are given this information, and find out that they're using more electricity than their neighbours, they quickly take action to become more energy efficient.” He’s talking about ‘nudge’ and choice framing (or ‘libertarian paternalism’ to give the doctrine its proper name) We recently ran a spread on the Californian influence on Osborne’s thinking - the ‘nudge’ stuff is another example of it.
9) A LITTLE TOO MUCH AMERICA “Our banks borrowed money from China to lend to us, so we could buy the goods the Chinese produced. We could see it in the huge current account deficit that persisted for a decade.” Osborne needs to be careful here. The China argument crops up in a lot of US post-crash books that he’s evidently been reading (he’s even spelling ‘recognizing’ thus). But there isn’t the same read-across with the UK. For a start, the Arab world bought a lot of our debt, and now UK state-owned banks are mysteriously snapping it up.
10) EYEBROWS “It used to be said that one twitch of the Governor’s eyebrows was enough to force unruly bankers into line – well we will give the Governor back his eyebrows in a way that suits modern financial markets.” Hmmm. The Chancellors with the most noteable eyebrows were Healey, Lamont and Darling. Big eyebrows is not always a good omen for macroeconomic stability.
Previous
Sally Chatterjee
April 8th, 2009 8:36pm Report this commentHallelujah! At last a British politician offers a vision of the future for the financial sector, instead of the usual retrospective rubbish and sticking plaster rescue moves. Now if only he could spend a day with a voice coach to sound less like a smartypants schoolboy and more like a relaxed expert.
Verity
April 8th, 2009 8:43pm Report this commentWhat about the EU? What about the "Lisbon Treaty" (aka as "Constitution")? What about "multiculturalism" and immigration? What about the loathsome "thought crimes" invented by Labour?
maas101
April 8th, 2009 8:47pm Report this commentOsborne could go a long way forward by promising to repeal Gordon's raid on pension tax credits. Private sector pensions were decimated by the changes which forced pension fund managers to seek higher risk investments to maintain returns.
One of the 'dodges' to maintain returns was the 'renting' of shares to short sellers which resulted in the runs on bank share prices.
People disenchanted with the returns from pension funds moved into the buy-to-let market thereby increasing the inflation of the housing bubble.
This was one of the most near-sighted and destructive moves from any chancellor and deserves to be abolished as a priority.
George Laird
April 8th, 2009 8:57pm Report this commentDear Fraser
"Osborne stands up for capitalism".
Wrong time, wrong place, wrong mood!
I have said Osbourne is a loser, another example of being inept.
Yours sincerely
George Laird
The Campaign for Human Rights at Glasgow University
DSR
April 8th, 2009 10:37pm Report this commentVerity - the Shadow Chancellor, whatever you think about him, would be derided and scorned for trying to rope any of your hobbyhorses into the ring during what was meant to be a serious speech on the economy.
Sally C - send the voice coach to Robert Peston first, please!
Oli
April 8th, 2009 11:14pm Report this comment"We are a Conservative Party not a libertarian party. As both I and David Cameron have argued, Conservatives have always understood the limitations of free markets on their own. We understand that unless markets are embedded in strong institutions, laws and cultural norms they can become free-for-alls that are prone to instability and end up benefiting the powerful at the expense of the needy."
George Osborne's defence of capitalism is timely and most of his speech was encouraging, but I can't understand the constant misrepresentation of 'libertarians' (as immoral libertines with an 'anything goes' philosophy), at a time when they are surely the Conservatives' natural allies on the issue of free markets and capitalism. David Cameron did the same at the Conference when he described 'libertarianism' as the belief in 'the right to do whatever we want, regardless of the effect on others'. I'm no UKIP supporter but should the Conservatives be surprised when the libertarians within the Party vote for a party which doesn't repeatedly and deliberately try to alienate them?
lawrence greek
April 8th, 2009 11:15pm Report this commentI thought Osborne's speech today was excellent, maybe not fully fleshed out but thoughtful, accessible to the layman, just, and a devastating critique of Brown's economic buffoonery. Why are they so weak at getting these messages across? It isn't difficult, they should be lacerating Brown with his own idiocy.
lawrence greek
April 8th, 2009 11:19pm Report this commentmaas101 - agree, but the issue of pensions needs addressing in its entirety. difficult political area though, what with the massive sense of public sector entitlement.
THX1138
April 8th, 2009 11:52pm Report this commentTory defends capitalism and this is news. What is the world coming to!
Verity
April 9th, 2009 12:28am Report this commentDSR - Thanks so much for your tips on Political Science 101! I really must study it more!!!
Obviously, the economy needs to be addressed, but not in detail to a broad audience, because most people don't understand, or don't have the patience to follow, the detail where the devil resides.
But yes, they want to know that the Conservatives would be competent managers of the economy.
My point is, just now, while they have our attention, the Conservatives should be making a few bold, interesting brush strokes. We don't need the nitpicking details just yet, because the election isn't exactly round the corner. We just want to know that the Conservatives are on our side in the major issues - all of which Cameron avoids.
He will not address, nor allow anyone in the Shadow Cabinet to address, the EU issue, including the "Lisbon Treaty" and its probably ratification before they get into office. They will not discuss immigration of alien people and their encouragement by Labour not to integrate.
They won't discuss the wrecking of the Constitution and our second chamber and promise that they will fix it.
They won't discuss the criminal truncation of our freedom of speech and haven't committed to wiping all the socialists' thought crimes off the books. They don't discuss the sexualisation of children - and the stealing of their childhood from their parents, through "sex education" at age 7. They don't discuss the vast welfare sector. They might as well address it, because for sure none of these leeches is going to vote Tory.
I do not see Cameron as a leader. He has no sense of connection to the people he essays to lead.
I'm sure he cannot even imagine, except with a vague shudder, what it must be like to live on an estate next to a welfare family comprising a single slag and four or five undisciplined children and a train station full of men "passing through". And drunken yobs playing loud stereos through the night and the police not bothering to respond, or putting 999 calls on hold.
A detailed thesis on the economy is of interest to people who understand these things, but he could have painted with a broader brush, and given the details to the financial media. Cameron simply refuses to address the nuts and bolts issues that most people readily understand, like those I have mentioned above. He does not connect with the people.
He's scared to address the NHS - even tangentially - yet it is a monstrous problem.
The one thing they have addressed in detail is the economy, which most people do not understand. All the voters want to know is, it will be in safe hands, and they will judge that by how the Tories address the other issues that touch their lives, that they do understand.
Verity
April 9th, 2009 12:52am Report this commentIn other words, DSR, those of us who don't have Firsts in Economics will decide to trust the Tories on their aptitude for handling the economy based on their judgement of how to handle issues that we do understand.
Jim
April 9th, 2009 5:12am Report this commentI'm surprised you say big banks aren't a problem, look at Canada. It might be better to say, Canada's big banks are ok, at the moment. This crisis has a long way to run.
Smaller banks offer more choice, because of competition, remember that? Also they have less systematic risk. Large banks are a menace, as they have gained the power to control the government, both in America and the UK.
strapworld
April 9th, 2009 7:55am Report this commentVerity is right. I have written a number of times of Cameron's silence on the EU. He has to be taken on directly.
Why cannot THE SPECTATOR give him an interview he finds difficult?
On the NHS I agree with Verity. There is so much the Tories can save and make it a better service.
This Government has created levels of 'quango's' behind which Ministers can hide when things go wrong. I do not think the public (or conservatives) are aware of the vast amount of money, which goes into the National Health Service – for us the patients!- which is wasted on Quango's
The National Institute for Clinical Excellence. The National Research Ethics Service.The Care Quality Commission. The National Patient Safety Agency. The NHS Information Centre.
MONITOR The Independent Regulator of NHS Foundation Trusts, The National Quality Board, The Healthcare Commission, Regional Strategic Health Authorities and the Trusts themselves!
All have offices and staff. They all have a Board with a Chairman, Non Executive Directors and Chief Executives, who do not come cheap in the NHS! And a full compliment of Executive Directors.
When you consider the money that we pay into the National Health Service why on earth do we need so many organisations? Are they necessary?
Russell
April 9th, 2009 8:54am Report this commentVerity. Surely it is up to the Leader of the opposition to explain about the EU,the "Lisbon Treaty" "multiculturalism" and immigration and the loathsome "thought crimes" invented by Labour? Not the shadow chancellor.
Ed B
April 9th, 2009 9:11am Report this commentOh FFS Verity, this is the Shadow Chancellor making a speech, why shouldn't he be speaking about the economy?
Quite honestly, reading your posts reminds me of my brief involvement with the Conservative Students at Uni, which put me off active politics for life. All those ghastly swivel-eyed Monday Club types, petty one track minds, unpleasantly xenophobic, bad skins, bad hair, bad breath... still makes my flesh creep when I think of them.
Publius
April 9th, 2009 9:40am Report this commentJim. I agree with you on the banks. If they're too big to fail, then they're too big.
At the moment the efforts of the whole world seem to be directed at bailing out these private businesses. Private "enterprise" takes the gain; we take the loss. This must never happen again.
A good speech by Osborne.
Fergus Pickering
April 9th, 2009 9:44am Report this commentEd B. Many years ago I shared a flat with Robin Cook and his then wife. They had a party full of pretty women who all turned out to be members of the University Conservative Club. 'Where are the Labour girls, Robn?' I enquired. 'Have you SEEN the Labour girls?' he replied breezily.
Paul Weller
April 9th, 2009 9:48am Report this commentEd B I wrote a song about it.
"I first felt a fist, and then a kick
I could now smell their breath
They smelt of pubs and wormwood scrubs
And too many right wing meetings"
Marcus Cotswell
April 9th, 2009 9:49am Report this commentHe also says, in so many words, that the Conservative Party does not believe in laissez-faire capitalism. I'm surprised you haven't mentioned that in your piece, Fraser - it's quite a bold statement.
David Ossitt
April 9th, 2009 9:51am Report this commentVerity.
"He will not address, nor allow anyone in the Shadow Cabinet to address, the EU issue, including the "Lisbon Treaty" and its probably ratification before they get into office. They will not discuss immigration of alien people and their encouragement by Labour not to integrate.
They won't discuss the wrecking of the Constitution and our second chamber and promise that they will fix it."
The fact that he does not or will not see; that most of us, the traditional consevative voters hold the above two very high on their list of priorities, shows how much he is out of touch.
Kevyn Bodman
April 9th, 2009 10:16am Report this commentVerity is correct.
David Bouvier
April 9th, 2009 11:14am Report this commentWell, John Major being forced into the ERM by the likes of Lawson and Hestletine (lets remember all those folks who wanted in) put us out of power for a generation.
The is a real danger that unless the Conservative Party shows that it has ideas for what they would have done differently and will do differently now, then holding nanny Brown tight, however awful, may be the less scary option for voters.
His reputation as Chancellor amongst those who followed the detail - never great after he came off Tory spending plans - has not yet been fully debunked.
This is the first clear speech I have heard setting out a coherent Conservative plan for the financial sector. It doesn't matter if it goes over most peoples head.
1% will read it and care; 10% will talk about its sound bites and 2nd hand opinions and hopefully 50% will get a general sense that the Conservatives have nailed Brown to the wall and have a better idea - even though they would be hard pressed to say what it was.
Publius
April 9th, 2009 11:16am Report this comment"Capitalism", like "globalisation", is one of those words that is bandied around far too often without being defined properly. The result is a discussion devoid of meaning.
Does one mean by "capitalism" merely free markets, and by "globalisation" free trade? Or something other than that?
I mean, there were free markets before capitalism, weren't there? And there was free trade before globalisation.
Johnathan Pearce
April 9th, 2009 11:18am Report this commentVerity is right that there needs to be discussion of the EU dimension, such as the bank capital adequacy rules derived from the Basel II accords. So much financial regulation is derived from EU directives such as MiFID.
In general, though, Mr Osborne's speech is quite encouraging. I'd be keen to see the Tories argue for cuts in taxes on savings to help boost the savings culture.
David Bouvier
April 9th, 2009 11:41am Report this commentWell, John Major being forced into the ERM by the likes of Lawson and Hestletine (lets remember all those folks who wanted in) put us out of power for a generation. The economy matters.
There is a real danger that unless the Conservative Party shows that it has ideas for what they would have done differently and will do differently now, then holding nanny Brown tight, however awful, may be the less scary option for voters.
His reputation as Chancellor amongst those who followed the detail - never great after he came off Tory spending plans - has not yet been fully debunked.
This is the first clear speech I have heard setting out a coherent Conservative plan for the financial sector. It doesn't matter if it goes over most peoples head.
1% will read it and care; 10% will talk about its sound bites and 2nd hand opinions and hopefully 50% will get a general sense that the Conservatives have nailed Brown to the wall and have a better idea - even though they would be hard pressed to say what it was.
Pandora Witherspoon
April 9th, 2009 2:20pm Report this commentGrasping the nettle is never easy and GO has done that now.
Next a shopping list of projects to cancel that are costing too much and unachievable like ID cards, totally centrallised information control under any guise, and quangos whose role can be made fully accountable without all the duplication of admin etc. Go for it George!
Verity
April 9th, 2009 3:07pm Report this commentRussell - yes, of course, your point is irrefutable. And he apparently made a good job of it. I am saying that the focus is wrong. I am not saying he shouldn't have given the speech; I am saying that the focus is off, unbalanced. Other issues and solutions should have been addressed first, by others, and this show stopper (for the economically literate) should have been embedded in a larger landscape of initiatives and plans over a period of weeks.
This is unbalanced and tells me that Cameron lacks the judgement to relate to ordinary people. I am not saying Osborne's speech wasn't of value.
Verity
April 9th, 2009 6:54pm Report this commentPut another way, Cameron sent out an actor to do a soliloquy, but the stage wasn't set. There were no other actors. It's an empty stage. The speech was given with no context.
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