Steve Hemingway

As I understand it, Schumpeter coined the term 'Creative Destruction' in relation to the need for new players to provided new products and services and thereby raise the productivity of the economy. The idea was that it was necessary for pioneers like Henry Ford to see the potential of the motor car, and to create firms that provided it, because firms that made horse-drawn buggies would just never adapt to the new technology, no matter how clearly individual managers saw the advantages of the new technology.

I checked on Wikipedia and discovered that Amazon, still by a large measure the largest of the online retailers, started selling books online in 1995. Clearly there were a lot of websites running before this, but Amazon had to solve problems of authentication, secure payments, identification of customers etc. which were not needed by the likes of Yahoo!. Twelve years on, banks, whether in the UK or Hong Kong, behave as if the revolution presaged by Amazon never happened. I find that to do some simple transactions from my Hang Seng account in HK I have to send pages of paperwork. Admittedly the forms may be downloaded and printed by me, but I still have to sign them with a pen, provide a copy of my ID and post them to a branch.

This clinging on to old ways of doing business would doom banks like Hang Seng (a wholly-owned subsidiary of HSBC, not exactly a minnow), if Amazon ever entered the banking area. However the heavy regulation of banks ensures that the barriers to entry are just too high. So customers are stuck with a 70's banking environment in the 21st century. Call centre operatives the world over seem to be programmed to explain that these outdated ways of operated are for the customers benefit ('for your security') although clearly they are no such thing.

It seems to me that the time is over-ripe for a proper, free, narrow, commercial, global, internet bank to emerge. The current situation is akin the the Mediaeval guild system where the incumbents reap large economic rents from their state-awarded oligopoly position. The amazing thing is that we just don't seem to care.

This blog gives an update to the e-gold saga.

I have been a member of e-gold for a long time, but I haven't used it for anything serious, mainly because of a lack of counterparties. I was reminded of it when I listened to Russ Roberts latest podcast. It seems very odd to me that national central banks remain a nationalised monopoly provider of money. It seems obvious that there are plenty of candidates for money, and that the 'modern' reserve banking, with arcane rules for money creation all centrally controlled by a central banker, or cartel of them, can't be the right way to ensure good banking. The latest crisis certainly strengthens this conviction.

Anyway, I would recommend listening to Russell interviewing George Selgin about free banking (i.e. unregulated banking, not the absence of explicit charges for running current accounts). It's fairly clear that Russ doesn't 100% understand what George is talking about, which is what I think makes the Econtalk podcast so good. I should probably listen a second time, because I certainly got lost at various points. My previous experience of doing this, with other podcasts, though is that I am bored for most of the time and fail to understand exactly those points I mis-understood the first time through. Maybe I should get the book.

Traditional banking is occupying my hours a lot a the moment, certainly too many for me to spend long writing this. So I'll have to stop.

The title of this entry is not likely to entice the casual visitor to read on. I don't suppose that 0.05% of the population of the EU have ever thought about carbon steel fastenings, let alone how many are imported from China, let alone what the EU Trade Commission decide about the pricing of these things.

I didn't until I discovered that no Chinese factory will quote for fastenings to be supplied to the EU. Even plasterboard kits, with the board itself, channelling and fastenings, are impossible to obtain quotes for. It is remotely plausible that the Chinese really are seeking to destroy EU factories making nails, but it's hard to imagine that this is a more plausible explanation than that Chinese factories have such a huge advantage in terms of currency exchange rate and the costs of all factors of production that they can indeed sell for less than the marginal cost of production in EU factories, especially in high-cost economies such as Germany, France, Italy and the UK.

The result is that competition is destroyed and we have all ended up paying more for everything that is produced using these fastenings. Maybe this was a price worth paying for the jobs that have been 'saved'. But undoubtedly the finished goods manufacturers who had to bear these higher costs of fastenings will have laboured under the disadvantage of a higher input cost and a reduced competitiveness. Who can really say whether the consequent reduced production in these industries will have been less, in terms of employment, than the higher employment in the fastenings business?

Maybe I'm missing something. I am certainly no economist. Maybe the inscrutable Chinese really have a cunning plan to flood the EU with cheap screws and nails, then, when all the West Midland nail factories have gone under, suddenly increase the price of nails and bring our economy to its knees. From what I can tell, borrowing from our banks would have been a much more effective way of doing that.

Of course, the Commission, in its infinite wisdom, have seen fit to keep the proposal out of the public view. It is possible that an email to trade-ad-fasteners@ec.europa.eu requesting a copy will produce one. Why this might be possible when the document has not been posted on a website will remain a mystery to me until the day I die, I'm sure.

The Wikipedia article on the crisis grows by the day. The FT is constantly filled with news about the latest manifestation of the collapse in demand.

What worries me is that at times of crisis we look to strong men to lead us out of the mess. Arnold Kling in his recent podcast on Econtalk made the point that actually there is no economic theory to guide the likes of Hank Paulson, Ben Bernanke, Mervyn King, Gordon Brown et al. and that they really are making it up as they go along. Although it seems reasonable to preserve the financial system to allow the essential function of allocating capital and facilitating funds transfer and avoid the heavy costs of unwinding complex derivatives contracts entered into by failed investment banks, it is not clear that a transfer of huge sums from future taxpayers to the owners (and increasingly) to the managers of the banks is such a smart move in the long run.

The accepted wisdom in the 60's when we were faced with inflation was strong action. Similarly the problems of de-industrialisation in the UK at least, in the 70's, were addressed by industrial policy. The Great Depression lead to the setting up of a lot of institutions, including agricultural subsidies, Fannie Mae and Fanny Mac, and a mass of government intervention into private and public life that has never been reversed.

Looking at the home front, I am incandescent with rage that the utterly useless UK banks, which have treated their customers with undisguised contempt, and pursued a policy of ruthlessly reducing the pay (and therefore the quality) of their staff for years. I am indebted to Prof Robert Shaw for explaining how this works in his letter to the FT today.

It seems to me that what we need is not more regulation of banks, or indeed more subsidies, but more competition. The key to that is reducing the huge barriers to entry that still exist in running a bank in the UK.

The papers are full of enthusiasm for Barak Obama. The young voted for him overwhelmingly, seeing in him a route to a better life for themselves and their fellow countrymen.

I am rather less enthusiastic. I have almost lost hope in governments making our lives any better, certainly in comparison to the cost of them in terms of taxes paid. To my mind, governments always always stand in the way of progress. I have recently found things I wanted to do blocked by governments. I am very cross about the need for me to have an audit for one of my companies at a cost of about twenty times the cost of the bookkeeping that is to be audited. I feel frustrated that I am not allowed to see my pension fund's bank account balance except through a very occasional paper statement. I am frustrated that the law requires me to make a mark with a pen on a hard copy version of my accounts when all the accounting that went into producing them exists in digital form. My heart sinks when my accountant gives me the soft copy of my accounts as a scan of the signed printout.

My bank still requires me to communicate to them 'in writing', which means that I have to print out and entrust to a very unreliable postal service the most important instructions I will ever send them. Because I no longer own a fax machine my bank told me that the only way I can arrange CHAPS or SWIFT payments is to send them a letter. In order to re-establish my company's ownership of a domain name I am required to fax a request to Nominet on 'the companies letterhead', even though the company has never never had any requirement to communicate by headed letter throughout the twenty-two years of its existence.

I am advised by a Barclays call centre operative that for my protection my 12-digit customer number for use in telephone banking has to be different to my similarly-12-digit customer number for internet banking. When I state that I can see no situation where my security could be improved by having different customer numbers for the two means of accessing a common account (identified by a six-digit sort code plus an eight-digit account number, both unrelated to my two 12-digit identification numbers) my comment is met with incredulity.

Security is one of those goods that is priceless, a human right that must be provided regardless of cost. This way leads to the war in Iraq, the 'war on terror', the absurd expense of the department of homeland security, the incredible difficulty these days of doing ordinary transactions, and, spectacularly the use of the Anti-terrorism, Crime and Security Act 2001 to seize the assets of Landsbanki in the UK, which seems to have passed without serious comment from the press or the public.

This article, based on the Analysis programme to be broadcast tonight on R4 shows how in modern political debate no problem must be acknowledged to be difficult or impossible to solve. In fact politicians require every possible political problem to be solvable by a policy capable of being expressed in a soundbite of a handful of easy-to-parrot syllables. And Hazel Blears wonders why bloggers' responses are cynical.

I contributed a couple of mini-reviews to Amazon about books that made an impact on me. You should be able to read them here and here. These links may not work - Amazon doesn't make it particularly easy to link to a particular review. I think you can probably find them via my page as a customer on Amazon.

These are both books about China. I have quite a collection, but these are among the best. I plan to write another one about 'The China Dream' by Joe Studwell, which I'm currently reading. I have learned quite a lot from travelling to China, probably more by talking to Chinese people here in the UK and in Singapore, but probably most by reading books and newspapers/the internet. I am a firm subscriber to the theory that travel narrows the mind, and that travelling once to a country more or less guarantees that the traveller will never have a deep insight into that country. I am reminded of a relative of mine who travelled to the Philippines when Ferdinand Marcos was in power. She came back from the visit with an unshakable belief in the benevolence of Ferdinand and his then wife Imelda, dismissing my comments that he was a complete kleptocrat.

This article explains how it came to pass that we know what Rupert and Elizabeth Murdoch, Oleg Deripaska, George Osborne, Peter Mandelson, David Cameron and Nat Rothschild were doing on and in the sea around Corfu during the summer.

It's interesting that the press gave the impression of David Cameron enjoying a rain-drenched and wind-blown holiday in Cornwall for his summer break, but more importantly it shows whose company our leading politicians choose to keep. It could hardly be otherwise. The population now takes very little interest in politics. They accept what they are told in The Sun and The Times, and what the various press offices of the main parties choose to communicate to the press. This all requires them to be on good terms with the media and with people who can give them money. No longer is it sufficient to get your wife to drive you around the village halls of England to get your message across. You must now, at the very least, set up WebCameron.

It's quite clear why politicians behave like this. People imagined that Tony Blair was some kind of aberration for being so obsessed with raising money for his party and himself, but really he, like the rest, is a creature of his environment. The unhappy thing is that it will inevitably lead to what we see in the USA: that is the systematic skewing of policies in favour of the selectorate - the people who actually choose the leaders. This selectorate is not exclusively wealthy businessmen. Certainly the unions remain powerful in the USA and in the UK. We will never see any kind of voucher system or realistic choice of schools because the teaching unions are opposed to it and they give a lot of money to the Democrats and to the Labour Party in their respective countries.

I am not a socialist, but do look for a level playing field in society. There will always be a conflict of interest between the haves and have nots (or maybe it is now the 'haves and have yachts'). Generally, a liberal economic agenda will result in a better outcome for everyone in society, but if the wealthy are seen to hijack decision making and tilt the playing field to their short-term advantage we will forever be bound into an economically inefficient organised society. It doesn't seem to me that there is a natural 'thermodynamic equilibrium' to which societies tend. If we allow the likes of Deripaska to exert the political influence they seek we will end in the UK like most of the pseudo-democracies of South East Asia or Latin America or, indeed, Deripaska's own Russia. I am not entirely sure that America, where democracy is more worshipped than practised is safe from going down this route.

This Advert is on the Cardiff Craigslist. Something similar is on the Cardiff Gumtree (I don't know whether it is just me, but I get the impression that Gumtree is pulling ahead of Craig's List, even though I much prefer the design of the latter.

Anyway, if you follow the link you will get the idea of what is required. If you personally know me you will realise that I will be very fair with anyone who is taken on.

At about the time I was born, two US professors looked at how gearing affects the value of a firm. They discovered that like a lot of "businessman's economics" the idea that shareholder value could be improved by the firm taking on any particular amount of debt was flawed. This is a blindingly simple insight as the discussion in Wikipedia makes clear. The two professors' names were Miller and Modigliani. Imagine two firms, identical except in respect of their capital structure. One geared, the other one not. The returns to an investor will be the same given that an investor can choose to gear his own investment in the ungeared firm by forming a portfolio composed of the equity combined with the appropriate number of bonds.

Of course governments continue to incentivise firms to gear by giving special tax advantages to debt finance relative to equity finance for reasons which are quite incomprehensible to me and clearly didn't help in creating the current fine mess we've gotten ourselves into. In principle an investing company (e.g. an investment trust) could itself benefit from the interest payments it makes on debt finance so presumably the theory actually may be valid in the presence of taxes.

The idea that risk is a knob that can be twiddled by the investor is one of the key insights which go into Modern Portfolio Theory which concludes that the market portfolio gives the best tradeoff of risk and return, and that any desired level of risk can be obtained by simply gearing it up.

The funny thing is that both these theorems, which seem pretty watertight to me, are dismissed by most real world practitioners of investment, because if market professionals behaved as if both of them were true there would be a lot less in the way of fees paid to the financial sector, both for those who arrange debt finance for companies and those who manage investments for clients.

To my mind this shows that the insights of Public Choice Theory are applicable to the financial sector. The sector behaves the way it does because of the strong incentives felt by the relatively small number of practitioners in it, even those incentives result in a net cost to the large number of savers and borrowers that the financial sector intermediates between. It seems clear that these perverse incentives have resulted in major misallocations of capital in the economy, e.g. from savers to unbankable US and UK housebuyers.

Politicians talk about new regulations so that this crisis will never happen again. I think it is pretty clear that they will miss the true cause of the crisis, because the lobbying group that benefits from the current structure of the industry is much better financed and organised than any group that ordinary providers and consumers of capital could possibly be. Committees will be set up which employ the very professionals who caused this crisis, do not understand why it arose, and who will propose the kind of detailed procedural regulation that creates large barriers to entry (and therefore ensures large economic rents to the financial sector) just like the mass or financial sector regulation that has been enacted in the past.

John Kay understands all these things and has recently written about Miller and Modigliani in the FT: Surplus Capital Not for Wimps After All. So does his former co-author Mervyn King, I'm sure. Kay also understands that regulation will simply not work, so he's definitely not going to get a call from Alistair Darling.

I've gone from MT 3.35 to MT 4.2. It is a dramatic improvement. Pair handled the upgrade expertly. Once again I am forced to acknowledge their professionalism.

Quick update on what I've been doing recently:

• I've changed around the routers in my house and generally spent ages tracking down bad network behaviour. I think the root of the problem is setting up a phone as a DMZ. I really don't know the exact cause of the problem, but it seems to be solved now.
• I have had my mother to stay. She was very ill in the first half of the year and is still very frail, but much better now. She is very lucky to be alive.
• it's half term, and Tom and Alice are here. Both are getting on with their work rather better than I am getting on with mine.
• I saw my brother and Neil Moffatt in Cardiff over the weekend. I have just read Neil's short story 'Balancing Acts'. Maybe it's just because I feel an empathy with the author, but I found the work really quite good.

The markets continue to tank, and it looks more and more certain that we're falling into a deep recession. This is very worrying.