October 30, 2007

Lets hide the debt problem!

Filed under: Economics, Musings, Observations, Worries — Tags: , , , , , , , , , — conceptualizer @ 5:16 pm

The Master Liquidity Enhancement Conduit (MLEC) fund has been created by several big US banks with between $75bn and $100bn (depending upon who you believe) to buy up debt from Structured Investment Vehicles (SIV) which in simple terms are mortgage providers. The debt is largely in the form of Residential Mortgage-Backed Securities (RMBS) and Collateralised Debt Obligations (CDOs) – i.e. mortgages. SIVs, which own about $400bn of assets, are investment pools used by banks, but most enthusiastically by Citigroup who originated them in the 1980’s. It is now clear SIVs have been too keen to offer debt to financially dubious property buyers. The MLEC is an attempt by the private sector to mitigate some of the risks associated with bad debt incurred during the US property price bubble. That bubble was inflated by the poor lending strategies of the SIVs and ultimately those that initiated them. The MLEC fund will be accepting only the best risks, leaving the worst in the SIVs, so they will flounder rather than the banks. It is interesting to speculate as to why this cause was not taken up by the IMF, whose role it is to promote international financial stability. Perhaps they do not see it as a big enough problem.

So can this fund help? Well as an attempt to reintroduce confidence to the market and hence stability, to some extent that is going to happen, especially as it has the tacit approval of the US treasury. However, ultimately the problem is rooted in lending money on the basis of economic growth that was not there. Now that position has to unwind and the costs of the overestimate will have to be dissipated. This fund can only act as a buffer, trying to spread and slow the normalisation cost, it still has to happen. So in that sense it is more like an attempt to convert a painful punch into a protracted uncomfortable pressure. The problem has to be handled and it seems that somewhere someone has made the decision that the drawn out normalisation approach is the better option. So as we get used to the inevitable slowdown, the remaining market confidence will be subdued rather than demolished. In that sense it is a better strategy as stability and confidence are perhaps the most essential assets of a reliable economy. Ultimately the costs of this failing will be carried by everyone, the banks will ensure that, rather than just their shareholders.

October 10, 2007

Taxation Simplification

Filed under: Concepts, Economics, Ideas, Observations — Tags: , , , , — conceptualizer @ 12:02 pm

Although only a small improvement, it’s nonetheless good to see some simplification of taxation. Complexity increases the costs inherent in collection and administration, adding no value to the economy while adding opportunities for avoidance and evasion. The honest tax payer is pursued relentlessly, while the difficult target reduces their tax burden. Simplification can be a blunt tool, but by reducing avoidance and evasion it can also be more even-handed. Taxation should be funding the public sector of the economy, but in part has become a tool of the moralist. Differential taxation is used to punish success, hard work and spending on what a few have decided is not good for us. Taxation should be refocused on its purpose and needs to become simpler, less bespoke.
There is a strong case for drastic simplification in taxation. I suggest a gradual migration to zero personal taxation with all tax revenue raised from business. The simplification would produce huge benefits for the economy, but the total tax burden on the economy would remain the same, less the saving in administration costs. It would also encourage a dynamic economy as spending patterns would not be stymied and it would encourage people with money to move to our economy. Business would benefit from simplification of taxation and as a whole be no worse off, because the extra tax they pay will be offset by reductions in wage bills. There will be those businesses that come off better and worse. Those at the extreme ends of the ratio of taxable revenue to employee pay, but it would also tend to encourage reinvestment in research and development as companies seek to minimise their tax bill.

October 9, 2007

Confidence Needed

A vital element of any market based system, especially those trading nonessential items, is confidence. Firstly, confidence in the reliable operation of the market place and secondly that the items traded have some stability in value. Lower confidence and fewer people will be prepared to use the market. It seems the significance of this axiom has been lost on the various interested and influential parties in the Northern Rock debacle. They need to refocus on this fundamental. Further, I suggest that reviews and action should be proactive rather than reactive.

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