Privatizing banking -- good idea or bad?

Dennis Poore was a friend of Margaret Thatcher as well as my business acquaintance who became a friend over time.  Denis used to dine with the Thatchers on a regular basis, providing a sounding board for the Prime Minister on the entrepreneurial mindset.  Poore owned many companies in England, including the motorcycle companies (Norton, BSA, Triumph, etc) and the London taxi car maker.  He was a dynamic entrepreneur in a socialist state who provided Thatcher with insights on how capitalism works.  While privatization and deregulation were keys to unleashing the entrepreneurial free enterprise spirit in England,  deregulating the banking industry proved to be a mixed blessing.  As things stand, moral hazard came to play a major role in the banking industries both here and in the UK as bankers took on more and more risk and leverage knowing full well the government would be there to bail them out should things go wrong, as indeed they eventually did.  The Austrian economics school has a lot to say on this subject, namely ditch the central banks and government connection and return banking to the discipline of the marketplace.  Make bad bets, go broke!  But the government and bankers like their present circumstances which involves the exercise of power and control by bureaucrats and their accomplices in the private sector so it's unlikely we'll see a divorce between banks and the government any time soon.  City Journal weighs in on this subject a little here:

NICOLE GELINAS

Thatcher’s Lesson for Today

What was good for mining then would be good for bankers now.

12 April 2013

Directly following the London-based Independent’s special section Wednesday on Margaret Thatcher’s death came this headline: “Strip me of my knighthood and please accept my apology,” the plea of a former financial-industry honcho whose bank collapsed in 2008. The two events, believe it or not, are related. Prime Minister Thatcher’s 1980s economic reforms did not directly cause the 2008 financial and economic meltdown, of course. But Britain’s current conservative leaders can learn from Thatcher’s example. They should apply to Britain’s bloated, state-coddled financial sector the same free-market prescriptions that Mrs. Thatcher—as the Brits still call her, despite her later titles—applied to Britain’s bloated, state-coddled industrial sectors three decades ago.

Thatcher is famous for many things, including waging the 1982 Falklands War and breaking the coal miners’ strike of 1984 and 1985. Britain’s political Left and some of what remains of its postwar working class detest her for her reaction to the strike, and it’s clear why the miners fought so hard: parts of Britain’s north have never recovered their industrial-era might. By the late 1970s, though, Britain’s “mixed-economy” system, the legacy of World War II, was no longer working. The government’s ownership of major industries, from gas to telecom, was suffocating the private economy. One real-estate entrepreneur, David Young, “had to go out of his way to avoid letting people know he was an entrepreneur,” Daniel Yergin writes in The Commanding Heights: The Battle for the World Economy. As Young told Yergin, “It was not socially acceptable to work for oneself. People worked for big”—that is, state-owned—companies. By the late 1970s, Yergin continues, “the loss-making nationalized industries were demonstrating a voracious appetite for taxpayer funds. . . . Labor relations had turned into constant warfare,” with strikes “chronically disrupting society and the economy.” Just after her 1979 election, Thatcher wisely demurred on her first opportunity to take on the powerful National Union of Mineworkers, because their ability to cut off coal supplies to power plants could shut down the entire economy.

A half-decade later, Thatcher’s privatization program was selling off to private buyers everything from British Airways to British Gas to British Telecom. This wasn’t some evil idea she had thought up in a vacuum. Successful Western nations were already making such moves. America, though it had not owned its own domestic industries, had previously regulated them so closely that it might as well have; now, America had either deregulated or was deregulating everything from oil to airlines to AT&T. (You won’t find many on the British Left who want to go back to the days when it could take months to get a telephone line.) As Thatcher’s economic guru, Sir Keith Joseph, often put it: Britain could continue to live in fear of thirties-era unemployment levels, with a stagnant economy increasingly resembling that of an Eastern European nation, or it could make changes. But privatization wouldn’t succeed unless the government prevented powerful trade unions from strangling the economy.

The place to take such a stand was the coal mines. “The coal industry, nationalized in 1947, was losing money at a horrendous rate; the government subsidy had risen to $1.3 billion a year,” Yergin writes. But the way the miners saw it, “mine pits could not be closed . . . no matter how large the losses.” What could be more symbolic than weakening a union whose leaders thought they were entitled to shut off the entire country’s power supply by withholding its raw material? Anyone who has ever lived through an urban subway strike understands why Thatcher had to prevail, even if brutally.

Thatcher transformed another industry in 1986, when her government deregulated finance. Prior to the “Big Bang,” investment brokers worked on fixed commissions, and investment firms that bought and sold securities for their own profit-making couldn’t compete with firms that bought and sold securities for their customers. Nobody had to compete much for business. Thatcher changed that by abolishing fixed prices and letting investment firms pursue their competitors’ businesses. Here, too, she didn’t act in a vacuum: America had begun to take similar steps a decade earlier, and big American investment firms were gaining ground in global markets. After the Big Bang, London’s financial sector soared, not just domestically, but internationally. Ever more complex finance drove London’s growth until 2008.

Many British observers, and not just those on the left, have blamed Thatcher for the 2008 crisis. They suggest that her policies killed manufacturing and made Britain dependent on a crisis-prone financial industry. But British manufacturing still exists, though it is more productive and requires fewer workers. The nation’s smaller clump of operating coal mines employs a fraction of the people that the same level of production would have demanded back then. As for finance, if London had a choice, would it give up the extraordinary growth it saw from the eighties onward to avert the 2008 disaster? Without financial deregulation, London would have lost out to New York and other global competitors.

So was deregulating finance a good idea? In truth, it’s too early to tell, because the answer depends on future actions. Since 2008, the British government—first under Labor prime minister Gordon Brown and now under Conservative David Cameron and his chancellor of the exchequer, George Osborne—has taken a statist, pre-1980s approach to finance. Five years ago, Brown nationalized Britain’s two biggest banks, Royal Bank of Scotland and Lloyds, to prevent their bankruptcy and failure. The government has no immediate plans to reprivatize them. Sir James Crosby, the aforementioned banker who made headlines for trying to become the first Briton voluntarily to relinquish knighthood, worked at HBOS, a smaller financial institution that Lloyds, under government pressure, purchased in 2008. That acquisition eventually forced Lloyds to seek a government bailout.

Since taking over in 2010, Cameron and Osborne have treated the powerful financial industry the way pre-Thatcher governments treated the powerful trade unions. The government says nasty things about bankers like Crosby, but it doesn’t want to change anything to harm such a big source of employment. Nor does the government want to upset an economy still based on the banks’ unsustainable borrowing and lending. Osborne’s latest economic idea, “Help to Buy,” would use the British government’s credit to guarantee billions of pounds’ worth of mortgage lending to keep home prices from falling further and eroding middle-class wealth.

People who see Thatcher as championing banks over miners miss the point: Thatcher wanted free markets to determine which industries would do well and which wouldn’t. What worked in her time may not work now; only markets can give us the answer. For five years now, markets have been trying to say that finance remains too big, and that finance-created debt is keeping home prices and other asset values too high. Statist distortions retard economic recovery rather than speeding it up.

Just as throwing more money at miners 30 years ago would have made some powerful interests happy in the short term while hurting the nation in the long term, throwing more money at finance and household-debt creation buys some peace today at the cost of growth tomorrow. If Thatcher was brave enough to force coal miners to lose their good jobs, can’t Cameron and Osborne be brave enough to tell middle-class Britons that their home values are artificially inflated? Britain’s current generation of purportedly free-market politicians should ask themselves: would Margaret Thatcher have used state power to prop up a financial industry that needs its own dose of Iron Lady discipline?

Nicole Gelinas is a City Journal contributing editor, the Searle Freedom Trust Fellow at the Manhattan Institute, and the author of After the Fall: Saving Capitalism from Wall Street—and Washington.

OMB head lies through his teeth

It is not possible to deal with government officials who are willing to dissemble and confuse and obstruct the truth.  Partisan democrats will defend this untruthful official but no one else should. He and all the Obama officials should be shunned by all the people's representatives when they appear before committees and lie to the American people.  It's a shame more people don't understand what this means.

Ronald Reagan roast by Jonathan Winters

Jonathan Winters passed away.  He was a big favorite of mine and many others,  Here he roasts Ronnie  Reagan.

Freidman and Thatcher

These two items from 1979 and 1983 speak volumes about where we are in this country today with the Obama administration.  For some reason liberals (leftists, progressives or whatever they are now calling themselves) cannot understand how human nature affects economics.  They continually try to put square pegs into round holes no matter how many times this action proves futile.  Obviously some people are simply hard wired to believe that socialism is the only way to organize society.

“Hooray for Margaret Thatcher” (Newsweek, 9 July 1979)

We have become so accustomed to politicians making extravagant campaign promises and then forgetting about them once elected that the first major act of Margaret Thatcher’s government— the budget unveiled on June 12—was a surprise. It did precisely what she had promised to do.

Margaret Thatcher campaigned on a platform of reversing the trend toward an ever more intrusive government—a trend that had carried government spending in Great Britain to somewhere between 50 per cent and 60 per cent of the nation’s income. Ever since the end of World War II, both Labor and Tory governments have added to government-provided social services as well as to government-owned and -operated industry. Foreign-exchange transactions have been rigidly controlled. Taxes have been punitive, yet have not yielded enough to meet costs. Excessive money created to finance deficits sparked an inflation that hit a rate of over 30 per cent a year in mid-1975. Only recently was inflation brought down to the neighborhood of 10 per cent, and it is once again on the rise.

  
  Photo credit: Robert Huffstutter

Most important of all, the persistent move to a centralized and collectivist economy produced economic stagnation. Before World War II, the British citizen enjoyed a real income that averaged close to twice that of the Frenchman or German. Today, the ratio is nearly reversed. The Frenchman or German enjoys a real income close to twice that of the ordinary Briton.

Margaret Thatcher declared in no uncertain terms that the long British experiment was a failure. She urged greater reliance on private enterprise and on market incentives. She promised to reduce the fraction of the people’s income that government spends on their behalf, and to cut sharply government control over the lives of British citizens. Her government’s budget is a major first step. It reduces the top marginal tax rate on so-called “earned” income from 83 per cent to 60 per cent, on “unearned” income from a confiscatory 98 per cent to 75 per cent. At the same time, it raises the level of income exempt from income tax and cuts the bottom rate from 33 per cent to 30 per cent. It proposes to cut government spending significantly, to sell some of the government’s industrial holdings and to promote the sale of government-owned housing units to their occupants. It loosens foreign-exchange controls substantially as a first step toward their elimination.

One retrograde step, in my opinion, is an increase in indirect taxes—the British general sales taxes, or VAT. This increase, which partly offsets the decrease in direct taxes, combined with lower spending will reduce government borrowing, facilitating a restrained monetary policy and releasing funds for private investment. The purpose is admirable. However, once taxes are imposed, it is hard to cut them. From the long-run point of view, it seems to me preferable to resort to a temporarily higher level of borrowing rather than to a possibly permanently higher level of indirect taxes.

I would also have preferred to see exchange controls eliminated completely rather than by degrees. The controls serve no constructive purpose. Eliminating them gradually only prolongs the harm and preserves a mischievous bureaucracy.

But these are quibbles. I salute Margaret Thatcher and her government for their courage and wisdom in moving firmly and promptly to cut Britain’s bureaucratic straitjacket. Britain has enormous latent strength—in human capacities, industrial traditions, financial institutions, social stability. If these can be released from bondage, if incentive can be restored, Britain could once again become a vibrant, dynamic, increasingly productive economy.

In the United States, when the President proposes a budget, that is only the beginning. Congress disposes, and it may take many months before the final result is determined. In Britain, the situation is different. What the Prime Minister and Cabinet propose in effect becomes law as of that day—subject only to a vote of no-confidence in the government and a new national election. However, when the party in power has a majority in the House of Commons as large as the Tories now have, that is a purely hypothetical possibility.

What happens in Britain is of great importance to us. Ever since the founding of the colonies in the New World, Britain has been a major source of our economic and political thought. In the past few decades, we have been moving in the same direction as Britain and many other countries, though at a slower pace. If Britain’s change of direction succeeds, it will surely reinforce the pressures in the United States to cut our own government down to size.

"Mitterrand Elects Thatcher" (Newsweek, 4 July 1983)

In 1981, as Britain slid into a deepening recession and unemployment mounted above the 2 million mark, the conventional political wisdom was that Margaret Thatcher’s days as prime minister were numbered unless she could manage to foster a prompt recovery in the economy that sharply reduced unemployment. Talk about a U-turn was the order of the day.

Margaret Thatcher stuck to her guns—proclaiming that U-turn was not in her vocabulary. The recession continued and unemployment kept going up. Yet three weeks ago, with more than 3 million unemployed, she was re-elected in a landslide, achieving the largest majority in Parliament since the postwar Labor landslide in 1945.

One source of her victory was a sharp decline in inflation, from 22 percent in early 1980 to 4 percent currently—fully realizing a major campaign promise. Yet, by itself, that could hardly have produced a landslide. The postmortems have stressed two other factors: the Falklands war and the disintegration of the Labor Party. The Falklands war enabled Mrs. Thatcher to demonstrate in a dramatic way a quality of leadership and a firmness of purpose that had been conspicuously lacking in her predecessors. The “Iron Lady” became an accolade, not an epithet.

The sharp left turn by the official Labor Party, the resulting formation of the Social Democratic Party and the alliance between the new party and the Liberals certainly played a major part in fragmenting the opposition to Mrs. Thatcher. As matters developed, there was simply no responsible alternative to Mrs. Thatcher, no credible alternative government.

However, this explanation lacks one essential ingredient: it omits the role of President Mitterrand.

France was suffering from the same ills when Mitterrand was elected president as Britain when Mrs. Thatcher became prime minister and the United States when Ronald Reagan became president—high and rising inflation, high unemployment and slow economic growth. Mitterrand’s attack on those ills was precisely the reverse of Mrs. Thatcher’s. On coming into office, Thatcher reduced taxes; Mitterrand increased them. Thatcher reduced controls over prices and wages; Mitterrand expanded them. Thatcher eliminated foreign-exchange controls; Mitterrand made them tighter. Thatcher moved to denationalize enterprises and reduce regulation, Mitterrand nationalized private banks and other enterprises and increased government intervention into the remaining private enterprise. Thatcher tried to hold down government spending, albeit with little success; Mitterrand went on a spending binge.

Had the Mitterrand policies succeeded, even if for only a year or so, Thatcher’s opposition in Britain would have been enormously strengthened. The Labor Party would have had a real alternative to offer—one that was consistent with its ideological propensities and that had worked on the other side of the Channel. The cry that Thatcher’s “monetarism” was a tragic failure could not have been dismissed as mere campaign rhetoric.

Instead, the Mitterrand policy was a clear failure. Inflation remained high. Unemployment went up. The government’s budget deficit soared. So did the deficit in the balance of payments. The franc had to be devalued three times in the past two years, despite massive government borrowing in a vain attempt to prop the franc up. Worst of all for Thatcher’s opposition, Mitterrand was forced to reverse course. The U-turn occurred across the Channel as the French government was driven to adopt the much-derided Thatcher policies.

Thatcher’s opposition was left intellectually bankrupt. It had no credible alternative policy to offer. The claim that she was an irresponsible demagogue imposing unnecessary costs on the British people rang hollow. Her persistence in the main lines of her policy was perceived by the voters as a realistic recognition that there was no easy cure for ills that had accumulated during decades.

The British experience is being repeated in the United States. The Democratic leaders attack Reaganomics as a failure, yet they, too, are intellectually bankrupt. They, too, have no credible alternative to offer, and many of them continue to attack the label while adopting the substance. Mitterrand has made no sharper U-turn than longtime New Dealers who have always praised deficits as a way to prime the pump and stimulate the economy but are now preaching the virtues of balancing the budget.

---