Talking of banks...

... here are some photos I took in the City last Friday.

Note the window cleaner:

When I'm cleaning windows!
Originally uploaded by David Farrer

The way we were

One of my grandfathers was Provost of Annan. He served on the Audit Committee of the Annan Savings Bank, which was founded back in 1835. In 1875 the Annan Bank incorporated the remaining 28 accounts of the neighbouring Ruthwell Parish Bank, which was the world's first savings bank.

I recently dug out my copy of the 1967 Annual Report of the Annan Bank. Let's have a look at an extract from the Auditors' Report:

We have examined the Depositors' Accounts in the Books of the Savings Bank and have checked the same with the List of Depositors' Balances, which amount with interest to £1,678,456. A copy of this List certified by us is open to inspection at the Savings Bank by Depositors for the purpose of comparing the amounts in their Pass Books with their balance shown on the list.

During the year we have visited the Savings Bank in business hours and have compared 2,321 Pass Books with the relative Depositors' Accounts in their Ledger and found them to agree.

In all 6,216 accounts were open, so over one third of customers' Pass Books were actually verified individually by the Auditors. Not quite like today, I think.

And what about the Bank's investments, which totalled £1,828,753?

Certificates or other evidence representing the whole of the Investments held by the Savings Bank as at 31st January, 1967, have been produced to us and found to be in order.

The Bank's investments were extremely conservative. There's no mention of derivatives or the like, although one does wonder whether it was wise to have as much as £1,000 tied up in "Office premises, furniture and equipment."

Isn't it time for prudent and cautious local bankers to make a comeback?

Back Again

Here are my photos from the Libertarian Aliance Conference that was held at the weekend.

The two star speakers:

David Friedman
Originally uploaded by David Farrer

Hans-Hermann Hoppe
Originally uploaded by David Farrer

No Win situation...

I see that Oprah may be the next US ambassador in London. Not a good idea, I think. These days we need someone who is knowledgeable about economics.

Now, I fully understand that President Obama will want to appoint some fellow persons of colour to key positions. Who we need in Grosvenor Square is Thomas Sowell. Not only is Sowell one of America's greatest economists, he is considerably blacker than Obama. And he's a keen photographer.

It's a no-brainer. And Tom can moonlight by teaching economics to Mr Brown and Mr Darling.

Should Sowell be unavailable, Alvin Hall is the obvious second choice.

Small world

Back in 2005 I was at an Edinburgh event attended by David Cameron. The soon-to-be Tory leader entered the room and worked the crowd. He shook my hand and said: "Hello, I'm David Cameron." "Hello, I'm David Farrer," I replied. The chap to my left looked at me. Cameron turned to my neighbour and once again said: "Hello, I'm David Cameron." And my neighbour replied: "Hello, I'm David Purdie." I stared at my neighbour.

As Cameron moved on Messrs Farrer and Purdie said simultaneously "St Quivox Road?" And yes, we had both lived a few doors apart in that street in Prestwick around forty years earlier.

I knew from my mother that David Purdie had become a doctor but not that he was now a prominent public speaker. Anyway, he's now on the blogroll and having heard David speak at the Adam Smith dinner I can confirm that Dr Purdie is indeed a successful practitioner of his new calling.

Too few banks?

Here's an interesting comment from "Ben Franklin" (post number 73) on the Belmont Club:

The only other thing I would add is that I am in the advertising industry and most of the ads for sub-prime loans had dried up before the recent bail-out bill. As soon as that went through the volume for these ads went up 10 times. Whatever the government did to “fix” the problem ain’t working because all they did was just give everyone who didn’t make money the first time around another shot at the craps table.

The small business community that I am a denizen of is absolutely livid at the bailout because they see very clearly what has happened. They have good noses for how to make money and can see how the government system could be exploited by people less wise or scrupulous than they are. It seems funny this should be the case when all of the Harvard MBA’s in Washington and on Wall Street drove right into it.

So the sub-prime lenders haven't learnt and the spending goes on. But why not if the taxpayer will bail you out? I see that the American small business community opposes the US bailout but I get the impression that bank bailouts are more popular here in the UK. So why the difference?

I'd guess that it's because there are far more banks per-capita in the US than in this country. Effectively we have only five banks that cater for almost all business customers. If even one goes down the contagion could destroy any or all of the other four. In the US there's a greater likelihood that your bank is sound. So what is the British government proposing? A merger between Lloyds and HBOS reducing the total to four! Or even fewer if nationalisation continues. This is the opposite of what we should be doing. It would be far healthier if we had more banks that competed vigorously and under such a regime the failure of one bank would be less likely to be systematic.

Oh, the inhumanity

How about this?

GMAC to limit car loans to buyers with good credit

Money and Credit

Here's Brian Micklethwait's latest podcast on the current crisis. This one takes the form of a discussion between Brian and fellow libertarians Antoine Clarke and Michael Jennings. Listen to this and be assured that there are some people who understand what's going on and what needs to be done, and not done.

I saw that Guido (another long-term libertarian) is showing a picture of The Theory of Money and Credit by Ludwig von Mises. Mises was the most prominent of the Austrian School of Economics that was briefly mentioned in Brian's podcast. I looked out my copy last night and was rather shocked to note that I'd bought it in 1973! Such a pity that none of our politicians today would spend time reading Mises. How different things could be.

Day of reckoning?

It's becoming almost impossible to keep with events at the moment. I phoned a colleague at around 9.15 this morning to tell him that RBS shares had been suspended. That turned out to be a false rumour but since then both RBS and HBOS shares have lost 40% of their value. This evening it's being reported that all British banks will be partly nationalised. Bank of America is down 19% at the moment but who knows what'll be the situation in ten minutes' time?

Meanwhile I read that Iceland has arranged for a 4 billion Euro loan from Russia.

But read this:

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik - a former American air base - as leverage to obtain financial support from the West.

So perhaps it's not yet a done deal. I suppose one advantage of a Russian takeover of Keflavik would be a cut in the outrageous price of beer in the terminal. That's a joke by the way. More seriously, I recall reading a thriller in which WW3 starts with a Soviet "container ship" running aground on Iceland and out of it emerges troops and tanks who promptly defeat the Americans and take over the US anti-submarine base. Needless to say the good guys won in that case. Now? I haven't a clue, except to say that von Mises must be laughing in his grave.

Dems and Reps

I was fascinated to read this thread over on the Housepricecrash site. The thread author writes:

Democrats Want The Bill, Republicans Don't, I'm confused.

I would have thought that the Republican Party would be the ones crying out for the Bill to go through, but it seems to be the Democrats.

Can anyone explain why?

A few of the contributors sort of get it but not properly. What "Jimothy" seems to think is that the Democrats are the party of the downtrodden working class while the Republicans are plutocratic, top-hatted bankers who flick cigar ash at the masses from the windows of their Cadillacs as they speed by on the way to Wall Street. Ah, the perils of trying to understand America through the prism of the BBC...

Maybe fifty years ago the Democrats were the party of the industrialised and unionised white working class. But there aren't too many of them left these days: those jobs are now in Shanghai. Nowadays the Democrats represent a coalition of rather disparate groups:

1. The minorities, especially blacks. And this isn't really anything to do with Obama: blacks vote overwhelmingly for the Dems at every election.

2. The intelligentsia. This is where most of the Democratic activist base is to be found. I'm thinking of teachers, professors, lawyers (especially lawyers), journalists, television folk and almost everyone in the entertainment industry - one of America's biggest. Subsets of this group are the gay and feminist lobbies.

3. Other government workers of all types, although not including too many members of the military.

4. Wall Street. Yes, and why not? Top bankers generally live in the same cities and neighbourhoods as the leading members of the liberal intelligentsia - in New York, Boston, Chicago, San Francisco and Los Angeles. They socialise with the entertainment elite. I note that even the Republican Paulson seems to have actively donated to typically leftist causes. People like to fit in.

What all of these groups have in common is the desire to use the state for their own class interests. Minorities want abominations like the Community Reinvestment Act that seems to be directly implicated in the current mess. Most of the intelligentsia hates the West and wants to bring it down by brainwashing future generations. Government workers have everything to gain from government expansion. And the Wall Streeters operate in an industry with extremely close links to the state. They all understood that their dodgy CRA loans would be bailed out by Fannie and Freddie and, if necessary, Ms Mae and Mr Mac would themselves be "saved" by the taxpayer, exactly as we've just witnessed. And I've not even mentioned the whole rotten system of GOVERNMENTAL central banking that empowers the Wall Street crowd who wouldn't know a free market if it hit them on the head.

And what of the Republicans?

The Christian fundamentalist element isn't that important, despite what the BBC might tell you. Essentially the Republicans are the millions and millions of normal middle class Americans who live in the suburbs and small towns and who work predominantly in the private sector. They do include professionals and business owners who are often wealthy but, unlike all too many rich Democrats, they've made their own way in the free market without any "help" from the government. It's hardly surprising that these cautious, taxpaying Republican voters bitterly resent being asked to hand over their lifetime savings to bail out the profligate. And that's the message that's been given to members of Congress today. Good and hard.

How Brown may dish the Nats

Suppose the government decides to nationalise all of the banks. Brown then announces that the new People's Bank will be based in Scotland. In the interests of decentralisation, of course. I suppose he'd base it in Edinburgh, but a huge back office operation could go to Glenrothes, could it not?

Fractional Reserve Banking

A couple of weeks ago Knirirr wrote this comment:

Is money really made out of thin air? This article makes a good case that it is not, and that fractional reserve banking is not against libertarian principles. Click here. I agree with you about the state meddling, though. knirirr | 09.15.08 - 12:55 pm | #

The article's concludes:

In brief, I do not find any of the libertarian arguments against fractional-reserve banking compelling. The charge of fraud can be handled by clear deposit contracts and proper labeling of notes, while the other two charges I address are either empty or irrelevant. It may be that bank customers would reject fractional-reserve banks if fully informed about their operation—although, again, I doubt that is true—but that is only an argument for full disclosure, not for banning the practice.

In general I agree with Callahan's analysis. If I go out to my local shop and hand over a "Farrer Note" that's been crafted and signed by myself there is no fraud so long as I don't claim that the note is something other than what it is. If I sign the note with the word "Rembrandt" it seems clear that I have committed a fraud. The problem is that today's fractional reserve banking system is rather more complicated than a marketplace containing rival Farrer Notes, Bush Notes and Brown Notes all of which people take their chances with when accepting them. We have to consider the role of the central bank.

As always, Rothbard hits the nail on the head:

Indeed, Rothbard does no less than portray the Fed as a cartelizing device that limits entry into and regulates competition within the lucrative fractional-reserve banking industry and stands ready to bail it out, thus guaranteeing its profits and socializing its losses. Rothbard further demonstrates that not only bankers, but also incumbent politicians and their favored constituencies and special interest groups benefit from the Fed's power to create money at will. This power is routinely used in the service of vote-seeking politicians to surreptitiously tax money holders to promote the interests of groups that gain from artificially cheap interest rates and direct government subsidies. These beneficiaries include, among others, Wall Street financial institutions, manufacturing firms that produce capital goods, the military-industrial complex, the construction and auto industries, and labor unions

The Bank of England is unlikely to bail out any unlucky holders of "Farrer Notes" should it become apparent that are only worth the paper they are printed on. As we are seeing right now the Bush and Brown notes are being bailed out. So expect lots and lots of inflation, at least in terms of Bushes and Browns. Banks advance loans on a base of government issued money that gives them an unwarranted degree of credibility. Without a central bank I have little doubt that a fractional reserve bank wouldn't last very long in an unsubsidised marketplace.

Were the short sellers to blame?

It seems very unlikely. Apparently they comprised 3% of the participants during Wednesday's collapse of HBOS shares.

Adopted Domain lays bare the economic ignorance at Holyrood:

Why did HBOS go down? If you listen to the Holyrood debating chamber led by the SNP, the recent blamestorm pointed almost unanimously toward the short-sellers - the spivs and the speculators - who took a one way bet against the public purse. Andy Cochrane and Holyrood Chronicles are surprised to see politicians from all the main parties lining up to have a populist dig at the short sellers, with the exception of the Greens, Patrick Harvie, who seemed to be the only one with any financial literacy whatsoever. This, despite the fact that many of the same short sellers who allegedly brought down HBOS, will have lost a great deal of cash when the market rebounded at the end of last week, largely led by financial stocks.

The act of shorting stock does not bring banks down, a lack of trust in the business model does. It seems much more likely to me that the fact the growing perception in the city that HBOS had become too dependent on the wholesale money markets, just like Northern Rock, and the fact that it had the biggest exposure to the bust balloon UK property market, may well have been much bigger factors in their demise. Yet no criticism from Labour, the SNP, the Tories or the LibDems on the management of HBOS. And Gordon Browns solution to the crisis? Make a yet bigger bank.

I wonder whether MSPs really are as financially uninformed as they appear to be. Perhaps they just hope that spouting off about "spivs" will appeal to the electorate, no matter how nonsensical that theory may be. I have the horrible feeling that they really are ignorant and that doesn't make me too optimistic about what the political class will get up to in the future. Needless-to-say there's no evidence of any greater sophistication at Westminster.

As for HBOS itself, here's a marvellous quote from today's Mail on Sunday. It's about HBOS chairman Lord Stevenson:

Awarded the CBE in 1981 and made a life peer in 1999, he likes to describe himself as "an unreconstructed 1960s Guardian-reading liberal."

If Stevenson had been an unreconstructed 1860s (Manchester) Guardian-reading liberal none of this would have happened.

Courts! How very quaint

Readers may know that some of FDR's New Deal legislation was challenged in the American courts on the grounds of being contrary to the Constitution.

How much more civilised things are today:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

From the LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

Libertarian Alliance

The Libertarian Alliance's Annual Conference is coming up shortly. Note the presence of Hans-Hermann Hoppe and David Friedman.

And here are the thoughts of LA Director Dr Sean Gabb on the current financial crisis.

Will we see the end of ageism?

When I was a simple Finance Director I'd face an audit every year.

You say there's £258,784.18 in the bank; naturally we'll write to Lloyds just to confirm that balance.

We see that you claim to have 30 company cars; let's pick these three at random and actually look at them.

According to the accounts your clients owe the company £2,396,148.69. It's OK if we write to the top five just to get their confirmation, isn't it?

This invoice for a new computer. Which one, exactly, is it? And who authorised its purchase?

And your balance sheet claims that there's £3,253.26 in the petty cash box (this was an ad agency!); you don't mind if we count it right now, do you?

Etc. Etc. Etc.

The problem as I see it is that the people running all too many of today's financial institutions remind me more of the copywriters and art directors with whom I used to work rather than my fellow finance guys. Now those creative types were very nice people and, despite what some may think, earned their money through hard graft. But I'd never dream of trusting them with the company's money.

How on earth can anyone audit the fearsomely complicated financial products that are now falling to bits all around us? Actually, Enron showed that we couldn't.

It's time for a return to simplicity. To the days when one had to save for a few years before (perhaps) being offered a mortgage of 2.5 times evidenced income. And perhaps it's time for the banks to keep on board some of the oldsters who remember previous hard times.

Good Evening Comrades

Following the US financial nationalisations I thought this might be of interest:

John McCain's Top 5 Contributors, 2003-2008

Merrill Lynch $293,010
Citigroup Inc $251,851
Goldman Sachs $223,995
Morgan Stanley $212,821
AT&T Inc $187,673

Barack Obama's Top 5 Contributors, 2003-2008

Goldman Sachs $689,280
University of California $531,070
JPMorgan Chase & Co $449,671
Citigroup Inc $411,504
Harvard University $407,452

Rep. Ron Paul's Top 5 Contributors 2003-2008

US Army $78,255
US Navy $60,226
Google Inc $57,901
US Air Force $56,955
Microsoft Corp $49,323

From Mike Shedlock's blog

United We Stand

Who'd have thought that we'd see Newcastle United sponsored by the Bank of England and Manchester United by the Federal Reserve?

HBoS and RBS

Shares in HBoS and the Royal have been severely hit in the last two days. Along with Standard Life and Scottish Widows, these companies comprise the cream of Scotland's financial sector and are two of the largest employers here in Edinburgh.

I have no idea what the real underlying strengths and weaknesses of these banks may be, but I am certainly worried. I have an ISA with HBoS although I withdrew 40% of it a year ago when the last panic took place. That money was subsequently invested in a Euro deposit account that's done quite well since then.

I don't really expect that either HBos or the Royal would be allowed to go under: such an outcome would lead to a collapse in the British economy from which recovery would be extraordinarily difficult. But what if either company were to be taken over? Perhaps by HSBC who seem to be the soundest bank in the UK at present? Surely the Edinburgh economy would suffer. Loss of top jobs is always a problem and just how much back office work would remain? Some, but perhaps not all. The knock-on effect would be huge.

Then there's the political question. Would the loss of one or both of Scotland's banks benefit Labour or the SNP? Surely Labour would argue that such an event showed that the Union was all the more necessary. A Scotland that was unable to keep its major financial institutions would need to look to London for its security. Or would Scots blame Labour for what had happened and be even more likely to want to go it alone? I don't know but the situation sure is interesting.

Crisis of capitalism - you must be joking

But that's what millions of fools will be told and will believe.

Vox tells it like it is:

This isn't a failure of free market capitalism. It's precisely the opposite, it's the failure of government-controlled faux market capitalism.

Exactly.

Mises explained what's now happening decades ago. Rothbard put it in easy to understand terms:

Rothbard not only argues for the gold standard; he shows how it can be restored in a practical, step-by-step plan. No other system will stop the seemingly endless monetary inflation of the Federal Reserve system. He also makes his strongest case against fractional reserve banking. This essay was written in 1962 and this edition includes Rothbard's sweeping introduction from 1991, in which he argues that the true gold standard is more viable than ever.

It really is quite straightforward. Any banking system that allows the creation of money out of thin air will go bust eventually. And such a regime is always the product of a socialised central bank. Capitalism is based on property rights that relate to real assets and that's exactly what we need right now. We should no longer allow the predator class to use the state to steal from those who produce real wealth.

Financial News

A good site to look at for financial news is Calculted Risk.

This post has an amazing 658 comments...

Breaking News: Sitemeter buys Lehman Brothers

Why not? The world has gone mad.

First they came for the smokers...

And then for the horizontally challenged:

A TEAM of NHS nurses is patrolling Scotland's streets to target pot-bellied members of the public and tell them how to lose weight.

Armed with measuring tapes to check waists and equipment to test blood pressure, the "Street Nurses" are policing busy shopping centres, supermarkets and community centres.

Any man with a paunch, or woman with an "apple-shaped" body whose waist measurement is higher than recommended limits is given diet and lifestyle advice or referred to local slimming classes.

What can one say? Why did my father fight against the Nazis?

But some useful idiots are quite relaxed it seems:

People are generally OK about us talking about their weight

But some of us aren't. Not because we've had a few too many pints but because our size is none of the government's business. I have reluctantly come to the conclusion that we are approaching a total breakdown of civilised life in the not too distant future. Whether a Hayekian spontaneous order will be allowed to evolve I don't know. But it's certainly exciting to sit back and watch the endgame.

Scots Law and the economy

I'm in the middle of reading The Legal Foundations of Free Markets, which is the latest book from the IEA.

One chapter is by Cento Veljanovski and is titled The Common Law and Wealth.

He concludes:

Some laws are more efficient or more conducive to facilitating economic activity and growth than others. It appears that the common law may do this better than civil law systems, at least in some areas and in some jurisdictions.

Under "Europe" the author lists Cyprus, England, Ireland and Wales as common law jurisdictions. Scotland isn't mentioned and has a mixed system with less use of the common law than elsewhere in these islands.

The question is this: Does Scotland's legal system harm economic growth?

I honestly don't know.