Coffee House

Rachel Reeves’s ‘staggering’ and ‘astonishing’ future of welfare speech

7 August 2014

7 August 2014

Rachel Reeves, the Shadow Work and Pensions Secretary, gave a speech earlier this week on the future of the welfare system. The choice that she presented was one between ‘…failing programmes and waste driving up social security spending under the Tories’, and Labour’s reforms to ‘…make work pay and get social security spending under control’. To claim that the current government has failed to control benefit spending is a bold tactic from a Labour Party economic spokesperson, and the numbers used to support the argument were so striking that they deserve some scrutiny.

Claim One: The Conservatives have spent £13bn more on social security in this parliament than they had originally intended to.

If this figure is correct, it equates to an average annual overspend over five years of around £2.6bn, which is just over 1 per cent of total welfare expenditure in 2014/15. The recently announced Welfare Cap, which sets an annual limit on the spending of a collection of benefits, and which has cross-party support, has an allowable margin of forecast error of 2 per cent. With this in mind, the £13bn figure looks like less a gross mismanagement of public funds, and more of an understandable error inherent in producing forecasts in a period of economic uncertainty.

Claim Two: The number of working people claiming housing benefit will double between 2010 and 2018, and will cost a ‘staggering’ £12.9bn.

Subscribe from £1 per week


According to the government’s forecast, the number of housing benefit claimants who are jobseekers will fall from 643,000 in 2010/11 to 494,000 in 2018/19, and claimants who also receive working age income-related benefits will fall from 143,000 in 2010/11 to 32,000 in 2018/19. In other words, it is reasonable to expect that, as the labour market improves, some claimants who had previously not been working (or who are on income-related benefits) will become claimants who are working, or who have higher incomes. In total, the government forecasts that the total number of people claiming housing benefit will rise by just under 8 per cent between 2010/2011 and 2018/19, far less than the doubling of working claimants that Labour believes will occur. The increased cost argument also looks flimsy; the housing benefit bill rose by an average annual rate of 6.1 per cent between 2005 and 2010, but only by 2.2 per cent a year between 2010 and 2015.

Claim Three: Tax Credit expenditure will rise by an ‘astonishing’ £2.5bn over the next parliament.

This figure looks to be in the right ballpark, but given that expenditure on Child and Working Tax Credit fell in real terms over the course of this parliament, yet increased by 43 per cent between 2005 and 2010, which amounts to an £9bn increase in 2014/15 prices, it is difficult to see why the conclusion has been reached that this spending increase is actually that ‘astonishing’. What’s more, the implication of this statement is that Labour thinks tax credit spending is too high. If that is the case, it is unclear how they intend to bring it down.

Hopefully, as the electoral race unfolds over the next nine months, there will be a sensible debate about the future options for the public finances, and clarity on the strategy each party has for managing them.

Steve Hughes is the Deputy Head of Economic and Social Policy at Policy Exchange

 


More Spectator for less. Subscribe and receive 12 issues delivered for just £12, with full web and app access. Join us.

Show comments
  • Mike

    Can’t stand that women, she has a mouth like a fish wife with her incessant rants ! Someone shut her up, please, I’m sure she could find a better use for her big mouth !

  • Lady Magdalene

    No Government will be able to get the welfare bill under control all the time we are in the EU, with an open border to 500 million citizens, half of which life in the poor Eastern European bloc or in the Euro-devastated PIGS.
    They are “entitled” to the same welfare benefits as British citizens – including out and in-work welfare plus social welfare such as Child Benefit and housing benefit.
    With roughly 100,000 EU citizens entering the UK every year, our welfare bill is only ever going to go one way ….. up. And our Government can’t even predict and plan for how many may come here.
    You can have open borders OR you can have a generous welfare system: you can’t have both.

  • andagain

    So Labour are going to try and complain that the evil Tories are cutting welfare spending too AND that they are spending too much on welfare. It’s not altogether easy to make both arguments simultaneously.

    • GraveDave

      Yes it is. The Tories tend to have dumber policies and even dumber managers to implement them.

      • andagain

        I see. The people who got us into this mess are going to say that everyone should vote for them because they are just so smart.

        That kind of assertion only works if people already trust your competance. Since hardly anyone trusts any politicians competance anymore, its not a convincing claim to make.

  • saffrin

    Four years out of Government and Labour still fail to understand all of the UK’s problems are of their making.

    • Des Demona

      tee hee

      • saffrin

        Including the Scot’s In/Out vote.

  • Mynydd

    “What’s more, the implication of this statement is that Labour thinks tax credit spending is too high. If that is the case, it is unclear how they intend to bring it down”
    Unfortunately I did not hear the speech, so I have to take Mr Hughes word for it, that Ms Reeves on this occasion she did not make it clear how Labour intend to bring it down. However Labour has previously made it clear that the way to bring down working tax credits is to move to a higher wage economy and an increase in working hours for those now on part time work, rather than the present race to the bottom.

    • HJ777

      “However Labour has previously made it clear that the way to bring down working tax credits is to move to a higher wage economy and an increase in working hours for those now on part time work”

      Yes, how? That’s the bit that is missing.

      • Dogzzz

        Create hyper-inflation.

        • Mynydd

          How does 1p on the price of a big Mac create hyper-inflation?

      • Mynydd

        For a start by growing the economy as Mr Balls have continually said. At the time of the 2010 general election GDP growth was Q2/2010 = 1%, now it is Q2/2014 = 0.8% with 4 quarters of negative GDP growth along the way. If Mr Cameron/Osborne had not cut off, even this small growth in their first budget, we would be along way down the road by now.

        • HJ777

          I suggest that you look at the rapid rise in borrowing and spending that was required to create that ‘growth’.

          It was more than the total value of the ‘growth’.

          It is easy to inflate GDP growth for a quarter or two by simply spending more borrowed money. You can try the same trick with your credit card. The problem is that you can’t keep doing it and when you have to stop, you’re in a much worse position than if you had never done it.

          • Inverted Meniscus

            That point has been made to that particular troll on innumerable occasions but he just keeps popping up with the same lies.

          • Mynydd

            But Mr Cameron/Osborne have borrowed more in 4 years than Mr Brown/Darling borrowed in 13 years, So if the 1% growth under Labour was achieved by spending borrowed money, then logically, with the increase in borrowing under the Conservatives there should have been a massive rise in GDP growth. There as not been so what happened to all that borrowed money?.

        • Inverted Meniscus

          The same old lies. They inflated the economy with borrowing which shows as growth in GDP but was wholly unsustainable.

      • saffrin

        By kicking out Europe’s immigrants and their working time directive along with it.

  • Smithersjones2013

    Sounds like the mediocre trying to turn the mundane into something interesting and failing abysmally.

    Should we expect anything different from Miliband’s misfits?

  • davidshort10

    These new Labour people just look so naff and also untrustworthy. Ed Balls needs to get a suit coat that he can button up.

  • realfish

    ‘…make work pay..’ ? Did she really say, ‘Make work pay’ ?

    Clearly another Tory line that Labour, devoid of any of their own policies, have needed to plagiarise. They’ll be calling themselves ‘One Nation Labour’ next.

  • lakelander

    Political views apart, Reeves has a cool head and knows how to connect with people. She come across as a decent sort too and will be a force to be reckoned with.

    • Dogzzz

      You must be one of those very strange people who has learned to speak that strange language that labour MPs speak. It uses English words, but often places them in such an obscure order that the actual sentences lose all rational meaning. In fact, to most ordinary normal people, it makes no sense whatsoever and makes labour MPs appear to be completely out-of-touch. Rachel Reeves is very fluent in labour MP speak. This automatically makes her completely disconnect with most ordinary normal people. This is one of the many reasons why UKIP is doing so well in so many formerly safe labour constituencies.

      • lakelander

        Thanks. I needed a good belly laugh today. Poor syntax. Moi?

        And, it is possible to appreciate people as likeable, empathetic human beings without them holding one’s own political views. I appreciate Ms Reeves but I wouldn’t vote for her.

    • Mynydd

      Please stop this you know it upsets the right wingers.

    • Lady Magdalene

      She sounds like an East London Spiv.

      • lakelander

        All the spivs who lived in East London have become part of the White Flight.

  • swatnan

    All goodstuff from Rachael which exposes the myth that the Tories are the Party of cutting spending and low taxes. As Rachel has clearly demonstrated the Tories have spent more and taxed us more; more than Labour ever did. So Rachael is for reining in and less spending. which is excellent news for the British Economy. Sooner she is Chancellor the better.

    • HJ777

      Who increased spending fastest: Labour or the Tories?

      • Dogzzz

        Labour, but the tories after inheriting that mess, have got the exploding interest payments on that massive and increasing debt to pay as well. That is a figure which is much larger than the entire MOD budget, ironically, going to bankers every year. Labour really are the bankers best friends. Labour’s addiction to borrow and waste economics is making the banks hundreds of billions in interest payments alone.

        • Mynydd

          What about the interest on the debt left behind by Mrs Thatcher/Major don’t that count

          • HJ777

            It was much lower.

            • Mynydd

              Yes it was lower than that will be left by Mr Cameron.

    • HookesLaw

      Spending 2010 = £673 billion
      Spending 2015 = £731 billion.
      Take out inflation and thats a real terms cut.
      In terms of the govt managed expenditure the difference is even more stark.

      • Mynydd

        Did the increase in VAT to 20% increase or decrease inflation?
        What if the government mismanaged expenditure, like changing the type aircraft for the carriers then changing back to the original type. I understand this cost £100m in one go.

        • saffrin

          For a labourite to criticize today’s government is laughable.
          You people really must live in a bubble not to recognise today’s problems are a direct result of Labour’s 13yrs of madness.

    • kyalami

      Yeah, because spending was kept well under control by ‘Prudence’ Brown, eh?

  • Phil Hove

    Ha, Ha ha Rachel Reeves and Ed Balls going to sort out the economy and get benefits under control – ha ha ha – unlike ‘…..failing programmes and waste driving up social security spending under the Tories’, ha ha ha, falling off my seat now. Ha,ha ha where do I put my ‘X ‘ on the ballot sheet, ha ha ha

  • Baron

    Welfare, in its morphed form as a sinecure for a growing number of subscribers, ranks as the top festering boil on our society, as will become obvious when it buries us all. And, for the burial service, we don’t have long to wait.

  • Diggery Whiggery

    “Rachel Reeves, the Shadow Work and Pensions Secretary, gave a speech earlier this week on the future of”…………………………zzzzzzzzzzzzzzzz

    I’m amazed you could stay awake until the end, or did you just read the transcript?

  • Diggery Whiggery

    GB brought in tax credits to buy off the middle classes. Everyone’s after their little subsidy now. Who’s going to vote for small government when we’ve all got our grubby little hands in the trough?

    • Ooh!MePurse!

      I wonder how many of us simply contribute and do not qualify for any special interest subsidies? It would be interesting to know. I might be entitled to one without knowing it! I’m white, male, university educated, employed and with no children or disabilities. So probably not then!

      • Diggery Whiggery

        So set up your own lobby group and get cracking, everyone else is. When everyone is living off everyone else’s money we’ll have reached utopia.

      • rugby god

        I am like you, apart from being disabled.

        but not disabled enough to get anything other than a bluebadge. no money for me, even though I’m an amputee!

        • Ooh!MePurse!

          It sounds as if you have gallons of self respect though. I was joking about my own situation, I take a pride in contributing and I suspect that you do likewise!

    • Mynydd

      The subsidy was not to the middle classes but to employers.

      • Diggery Whiggery

        And what class to employers generally belong to?

  • Colonel Mustard

    Oh look, it’s Gomez and Morticia.

    They’re creepy and they’re kooky,
    Mysterious and spooky,
    They’re all together ooky,
    The Labour Chancellory.

    • you_kid

      The British deficit is staggering. Ten months prior to the next elections and Gidiot is spending like there was no tomoorow. You won’t notice until it’s too late, again.

      If only Jyrki Katainen could sort out our mess …

      • Colonel Mustard

        Yeah, whatever. Like the Addams Family would offer any improvement.

        • you_kid

          We note some have given up whilst others have a vision.

          • saffrin

            That’ll be UKIP then.

    • The Masked Marvel

      An insult to the Addams Family. They had integrity and a sense of playfulness.

      • Colonel Mustard

        They were also as mad as a box of frogs with some very dodgy relatives…

  • DavidL

    Spin and lies before the Election. Tax and spend afterwards. We have been warned.

    • Mynydd

      Many have already warned about another Cameron government.

      • HJ777

        Yes, but as the alternative is a Miliband government, then Cameron is looking good.

  • HJ777

    Could Rachel Reeves answer a couple of questions please?

    1. How are her latest claims consistent with Labour claims of savage cuts in welfare spending under this government?

    2. Could she tell us what the rise in welfare spending (what Gordon Brown described as the “cost of Tory failure”) was under the last Labour government?

    • Ooh!MePurse!

      No, she can’t.

      • Inverted Meniscus

        Well she could but she would undoubtedly lie in doing so.

        • Ooh!MePurse!

          True, I momentarily forgot her/their one great skill.

    • Mynydd

      It is the job of HM Loyal Opposition to hold the HM Government to account, and that is what Rachel Reeves is doing. This is the same duty that Mr Cameron had when he was leader of the opposition, now if he failed to hold Mr Brown to account that is his failure.

      • Alexsau91

        No, that’s what she’s trying to do. Keep up. She’s failing spectacularly, and it’s unsurprising why. It’s a bit hard for HM Loyal Opposition to hold HM Government to account for something that is HM Loyal Opposition’s fault.

        Even for things that aren’t Labour’s fault, they are inept at holding anyone to account. That Mr Milliband, you see, can’t avoid jumping on any passing bandwagen.

      • Inverted Meniscus

        By misrepresenting forecasts and statistics. Troll.

      • Colonel Mustard

        Who holds the Welsh Labour government to account? They seem to get away with murder.

    • The Masked Marvel

      Yes, whatever happened to ‘austerity’, then? Was it all – *gasp* – a lie?

      • HJ777

        The extent was greatly exaggerated, especially initially.

        Osborne didn’t cut spending for the first two years in government – deficit reduction was all down to tax increases.

        He wanted to give the markets the ‘austerity’ message and Labour wanted to claim he was cutting “too far, too fast” to make him look heartless.

        • The Masked Marvel

          I meant that Labour and the Progressive media were lying, not necessarily Osborne. Granted, he wasn’t exactly showing his copy book, either.

  • Fraser Bailey

    Well it was Labour’s monumental moron Brown who introduced tax credits.

    So I don’t see how they can complain about the rising cost of tax credits.

    It’s just the usual cynical, lying crap that we have come to expect from all of them.

    • lojolondon

      Worse than a moron, Brown was deeply dishonest. Creating ‘tax credits’ allowed Labour to simultaneously increase welfare and taxation, but created the impression of a net decrease. Unfortunately the dishonest David Cameron has chosen not to blow the whistle on the practice and reverse it, instead continuing with the farce.

      • HookesLaw

        Really?
        http://www.theguardian.com/politics/2012/dec/12/cameron-defend-welfare-cuts-work-tax-credit
        ‘PM clashes in Commons with Ed Miliband as he admits cuts announced by chancellor will hit workers in receipt of tax credits’
        ‘Cameron said welfare needed to be controlled as he confirmed during
        prime minister’s questions that everyone in receipt of tax credits would
        be affected by the changes. “We have to get on top of the welfare
        bill,” he said. “That is why we are restricting the increase on
        out-of-work benefits and it is also the reason why we are restricting
        in-work benefits.”‘

        What’s farcical is people misrepresenting the facts – whether from left or right.

        • lojolondon

          Yes, really.
          If people need welfare, give them welfare. If people pay tax, increase tax. Do not give people tax credits to pretend that tax is down and welfare is down.
          If you say you don’t understand this then you – like Brown and Cameron – are either very stupid or very dishonest.

          • HookesLaw

            The govt have cut credits – you claim Cameron is not

            • lojolondon

              OK, apologies, I get it.

              I still think he should have blown the whistle, called the system dishonest and shut it down. Then given people welfare if they need welfare. The Tax Credits system was only created to allow Labour to ‘tax and spend’, while pretending they don’t ‘tax and spend’.

              • Dogzzz

                The tax credits system was also a system to increase the surviellence of more and more of the population. I remember when you banking details were entirely private and solely between you and your bank manager.

                Now the state has their grubby hands all over it. It is a way for the state to take more tax off people, then have them fill in massively intrusive forms, detailing their entire private financial data, to claim their own hard earned income back!

                it was also increased up the income scale to try to force the vast majority of us into the welfare system making a clear majority of us into being financially dependent upon a labour government. It is electoral bribery of the worst kind, which played into labour’s inherrant “control freak” nature.

                It is an obscene and wasteful system. Scrap it and do not make those low income earners pay any tax instead.

          • Alexsandr

            stop calling welfare tax credits. Its a stupid name. call it welfare payments. Its nothing to do with tax.

            • Mukkinese

              What about a national insurance dividend?

        • Mynydd

          What is called for, is action, not just meaningless words from Mr Cameron.

          • Inverted Meniscus

            Troll.

    • telemachus

      Ah Gordon
      It only needed him in the picture above to complete the picture
      Charismatic Ed Balls always brings a smile and a warm feeling
      Non believers try to add him to the narrative but fail
      How we ache to see him replace the wooden for-us-and-ours Osborne

    • aanpakkuh

      Gordon Brown was not a moron as he introduced tax credits. Tax credits were part of long-term strategy to provide Labour with a stuctural electoral advantage though the pruchase of votes financed by tax paying voters in the South East of England. Other legs of this stratgy constitued relentless gorwth of public sector pay roll and pushing doves onto the montary policy committee of he Bank of England. Add in constituency boundaries that yield Labour an advantage and postal voting, and you have a potent cocktail for winning or at least not losing the elections.
      Failing to refiorm the Upper House in this perspective has been a monumental blunder of the conservatives, while I remain intrigued by the lack of energy abd courage to reform postal voting.

    • Mukkinese

      Tax credits are paid to people in work.

      the reason the cost of them is rising is, as we are constantly told, more people are working.

      Unfortunately they are not being paid enough to live on, hence the rise in tax credits. The taxpayer propping up “free market” profiteers who cannot be bothered to pay a fair days pay for a fair days work…

    • Lady Magdalene

      Brown’s Tax Credits was a massive expansion of the old Family Credit, which was introduced by the Tories in the late 80s. Brown split it into two …. Child Tax Credits and Tax Credits …. and then massively increased the sums awarded.
      Family Credit was a follow-on from the Family Income Supplement which was introduced in the early 70s.
      I’m not sure that Brown ever had an original idea. He was just a traditional tax, spend, borrow and redistribute Socialist.

  • BigAl

    Are Labour incapable of having any policies of their own or do they just like raking around in other groups? We know what happens historically with Labour as you just need to look what happened from 2000-2010. Tax, spend and debt and it doesn’t look like much will change when they win the next election.

    • Redrose82

      Remember also that Labour has never left office with lower unemployment figures from that pertaining when they took over. Yet still the unemployed vote for them. Now I wonder why that is.

    • Mynydd

      VAT up to 20%, welfare spending up, national debt doubled, one would think the present government was Labour and not Mr Cameron’s conservative party.

      • DWWolds

        The national debt has increased because of the accruals of the deficit legacy left behind by Labour. It’s a fairly simple accountancy concept.

        • Mynydd

          Each month the government over spends it income, that is runs a deficit, that amount is added to the National Debit. This year that will be of the order of £90bn, That is nothing to do with the accruals of the deficit legacy left behind by Labour or indeed that accruals of the deficit legacy left behind by Mrs Thatcher/Major. It’s a fairly simple accountancy concept.

          • Inverted Meniscus

            How would Labour have reduced the national debt Troll?

          • HJ777

            So the record peacetime deficit left by Labour has nothing to do with the debt increase?

            That’s not what Labour’s own ‘plan’ at the last election said. They planned to more than double the debt thanks to their deficit.

          • DWWolds

            Of course accruals of the deficit legacy impact on the debt.
            When Labour left office the annual deficit was £180bn. Thus £180bn accrued to the debt at the end of that financial year.

            And the fact the deficit is still running at £90bn and thus an amount of that order will accrue to the debt at the end of the financial year has a great deal to do with Labour’s legacy.
            It was Gordon Brown’s crazy policy of increasing welfare spending paid for by the taxes received from the financial sector. When the banks collapsed along with the taxes they paid the commitment to paying the welfare benefits was still there. That is a key reason why we are still running a large deficit and why the overspend inherent in that that meant the deficit. It is also one of the key reason why vast sums have been accruing to the debt each year.

      • Inverted Meniscus

        Are you suggesting that Labour would have reduced the national debt? How?

      • Colonel Mustard

        You said it.

      • Conway

        Cameron’s party is not Conservative – that’s why he’s lost so many of his core voters.

  • Ooh!MePurse!

    So just more Labour lies then. It’s reassuring to know that they are good at something.

  • Jacques Protic

    Inequality is growing in the UK and the gap between rich and poor is widening. Tories are not delivering Social Justice and by the look of things Labour will not do it either. Perhaps politicians need a wake up call before we have nation wide discontent, riots and perhaps revolution. Market economy is not sustainable and we need a plan B!?

    • BigAl

      Labour and inequality campaigners can achieve their objectives if everyone gets poorer. Hooray!

      Not so unlikely in a country with large debts and an ‘entitlement’ culture that is hammering our productivity and ambition.

      • Jacques Protic

        Thanks for your comment BigAl and in a way your sentiments aptly reflect most of UK’s ‘middle class’ selfish and self centred stance who only see disadvantaged as leeches and parasites but lack vision and understanding that poverty is a cancer in any society that must be dealt with through welfare measures to give those who have nothing dignity and a decent life.

        • Adam Carter

          First of all I do not accept that Social Justice means equality.
          I see Justice as people getting rewarded for talent and industry.
          Secondly I believe that the way out of poverty is NOT welfare payments. The way out is to let the market operate.
          Welfare traps people in poverty, and for some it causes poverty of ambition too.
          Low public sector spending is conducive to economic growth, high public spending stifles it.
          If you doubt the efficacy of capitalism you don’t have to look back far to the late 20th century in divided Europe.

          • Des Demona

            Let the market operate? That really worked well with the banks and the energy companies. Back to Victorian values? No thanks.

            • HJ777

              The point is that the market wasn’t allowed to operate in the the case of banks. The regulator ensured, by bad regulation, that they all behaved in the same way and that there were rarely new entrants to the market to keep existing players on their toes. Had there been less government regulation and no implied government guarantees, then investors would have been more wary of where they put their money. As it is, they trusted regulators and the government to do the job for them…

              As for energy companies – the market worked pretty well in the early days of privatisation (prices dropped sharply) and then the government got involved regulating them to do all sorts of things such as the renewables obligation. The number of players then dropped dramatically and the market became less competitive. Despite that, independent bodies such as VaasaETT say that we have more a more competitive market than most in Europe and consistently some of the lowest prices.

              • HookesLaw

                Better more accurate regulation, not less.
                Des Demona has of course set up a straw man argument. The world does not actually exist as he pretends it does. It makes a change to see a loopy left winger doing this as opposed to the usual loopy right wingers.

                • HJ777

                  I am in favour of less statutory regulation.

                  As Philip Booth has asked, where are we going to get all these super-wise regulators from? When regulators get things wrong, they impose their mistakes on the whole industry, which can prompt systemic industry failures. With less regulation, players in a market behave differently and judge risks differently and investors have an incentive to keep a close eye on what they are doing rather than accepting risky behaviour because the regulator allows/encourages it and the government provides a guarantee if it all goes wrong.

              • Des Demona

                So with less regulation the banks would have behaved better? They wouldn’t have mis-sold ppi, or interest rate swaps, or bet on hokey derivatives for a quick buck, or money laundered, or sanction busted or manipulated the Libor rate,. Really? Why would less regulation have prevented this?
                Banks did not commit these acts because of bad regulations – the regulations were in place for many of those ”misdemeanours”, they chose to ignore them but were caught out and faced massive fines for breaches of the regulation. So explain again how less regulation would have prevented this?

                As for the Energy companies I simply don’t buy your reasoning that players dropped out of the market because of over regulation, they were bought out or forced out by the big boys protecting their cartel.

                • HJ777

                  You are confused.

                  The banks got into trouble despite – I would say because of – complying with regulation. Not because of breaching regulations or breaking any laws.

                  Miss-selling is another matter entirely. These things were illegal. We don’t have regulators regulating selling of most goods and services – we have laws to protect consumers. Regulators failed where consumer protection laws have largely succeeded.

                • Des Demona

                  Huh? The banks money laundered, sanction busted, and fixed lending rates ”because” of regulation?
                  And I’M confused?

                • HJ777

                  I didn’t say that. You are confused because you clearly are unable to read or understand what I wrote.

                  My point was a simple one – the banks got into financial trouble (and were bailed out) but this was nothing to do with illegal behaviour or breaking regulations. They got into trouble while complying with regulations.

                  They also indulged in illegal behaviour – a separate issue. Regulation didn’t prevent this. Illegal behaviour is a matter of law, not regulation.

                • Des Demona

                  Actually you said

                  ”The banks got into trouble despite – I would say because of – complying with regulation.

                • HJ777

                  I was referring to the type of trouble that required the bailout.

                  It was behaviour entirely compliant with the regulations that got them into trouble, nothing to do with breaking any regulations or laws. In fact, the regulations on, for example, capital reserves, encouraged and incentivised inadequate capital reserves.

                  If they break the law then the legal system is there to make retribution, just as it is for any illegal behaviour by any company or individual.

                • Des Demona

                  As far as I’m aware there were few regulations or laws in place relating to the leverage and positions banks could take when dealing with highly volatile derivatives. Perhaps you know better?
                  So they were not complying with regulations. The area was not sufficiently regulated.
                  Your argument seems to be that they got into trouble by complying with the regulations – which is nonsense. The regulations did not say ”bet the ranch on some extremely dubious mortgage derivatives” That was their decision.

                • HJ777

                  So you weren’t aware of the regulations on banks’ capital reserves?

                  That explains your confusion.

                  Because investors assumed that the banks were safe (and if they weren’t would be bailed out) if they complied with regulation (especially those on capital reserves) they didn’t bother to exercise their own judgement on the behaviour of banks and the banks were under little pressure to convince them that their behaviour was safe. Banks which didn’t leverage as much as they could were therefore seen as underperformers and were vulnerable to share price falls and/or takeovers. Meanwhile, government-controlled central banks were flooding the market with cheap credit by keeping interest rates artificially low and ignoring rapid rises in the money supply and asset (especially house) price inflation. They created the credit boom.

                  Don’t take my word on it – read Philip Booth’s analysis.

                • Des Demona

                  Yes I was aware of that. Were you not aware that minimum bank capital requirements, for the most part, target standard bank lending and proprietary bank trading instruments such as equity and bonds.
                  Even if minimum bank capital requirements served a role of containing excessive lending and investment in risky assets, banks can still shift risk using derivative contracts such as Credit Default Swap (CDS) contracts so the true risk never crystallises on their balance sheets until it is too late.
                  That’s how they got round the regulations.
                  You seriously believe it was at the forefront of the bankers minds that ”never mind if this all blows up, we’ll be bailed out”?
                  Investors expect banks to comply with regulations, of course. They don’t expect them to be reckless and greedy.
                  Your point that with less regulation investors would be more wary and the banks would never have become involved in risky derivatives is quite fanciful. Where on earth is there any empirical evidence that less regulation produces better governance?

                • HJ777

                  Yes – set stupid regulations and you will divert attention to making profits by circumventing those regulations rather than running a sound business.

                  Before heavy state regulation banks used to fail without any systemic crash. Were you not aware of that?

                  Again, I refer you to Philip Booth if you are interested in gaining understanding.

                • Des Demona

                  I know you won’t get this, but to me your argument is completely backwards. No one is forcing banks to circumvent perfectly reasonable regulations. They choose to do it. And they do it in such a way that it does not come to the attention of the regulators unless it goes badly wrong. That is not the fault of the regulations it is the faulty of greedy reckless and arrogant bankers who see a chance for a quick buck.
                  Oh dear, Bank failure was one of the reasons for the last great depression. Because of the incredible complexity and international connectivity of modern day banking more stringent regulation is required. Were you not aware of that?

                • HJ777

                  No – you are thinking backwards and that is why you’re missing the point.

                  There would be no need or incentive to circumvent regulations if they weren’t there. Once you incentivise people to do this and offer them a guarantee if it all goes wrong, then they will do it if they can make money from it. It encourages non-transparent and risky behaviour. This is human nature – bankers are not inherently different from anyone else except they were given the opportunity and incentive to behave as they did.

                  In any case, the regulations were not good ones – they were deeply flawed as they replaced vigilance and flexible behaviour that adapts to circumstances, with rigid rules that do not.

                  You need to read up on the causes of the great depression. Needless to say that bank failures (just like any other business failures) were not uncommon and didn’t cause systemic crashes before the state got heavily involved.

                • Des Demona

                  ”There would be no need or incentive to circumvent regulations if they weren’t there.”
                  So you think if there were no regulations on say, money laundering for drug cartels then the banks wouldn’t do it – because they are not now incentivised to do it?
                  Vigilance and flexible behaviour? By whom? Did the banks show any vigilance? We’ve seen what horrendous damage they do when they think they can get away with it – now you want to take away proper independent oversight and let them do what they like, and if it causes an international financial crash then that is ”just the market operating”
                  I’m actually well versed in the causes of the Great Depression, which led to massive reforms on the banking sector. Quite similar to today actually. This was necessitated by the collapse of thousands of banks, mainly through investment banking speculation leading to a systemic failure which required massive state investment and regulation.
                  Were you not aware of that?

                • HJ777

                  Can you not get it into your head that there was no connection between the banking system failure and money laundering? Do not confuse regulation and illegality.

                  Vigilance by bank investors using their own judgement. Neither they nor banks were incentivised to be cautious with their money. Why do you think so many local authorities put their money into Icelandic banks without checking out how Icelandic banks could offer such high interest rates?

                  We had an international banking crash of highly regulated banks. It wasn’t the market operating.

                  You are not well versed in how banks operate or have ever operated, – that is clear from your comments. Asserting that you are is not evidence that you are.

                • Des Demona

                  I’m not suggesting there is a connection between money laundering and the banking system failure. I’m positing a question to your theory that if there were no regulations there would be no need or incentive to circumvent it.
                  You seriously believe that the bulk of investors have the financial sophistication to scrutinise and understand what the banks are up to? To some extent the banks themselves didn’t even understand the risk they were engaged in.
                  And where else would local authorities or investors put their money, regulation or no regulation, under the bed?
                  If you seriously believe that banks should operate with no regulations and at the investors or savers entire risk then I’m afraid you are living in cloud cuckoo land. Industry and commerce would grind to a halt in very short order.

                • HJ777

                  Ever heard of self-regulation and voluntarily signing up to codes of practice? That’s what used to happen.

                  Ever heard of organisations that rate other companies for corporate governance?

                  I suggest that you look at Hedge Funds. Not much regulation, several have failed and were wound up, no systemic failure. I bet you hardly noticed.

                • Des Demona

                  Self regulation for banks? Don’t make me laugh! You are beginning to sound ridiculous. No hedge funds have been wound up on the scale of the disaster that would have occurred should the multi trillion dollar global banks have been allowed to collapse.
                  .

                • HJ777

                  So why was there no systemic failure of Hedge Funds? It can’t have been because they were heavily regulated because they weren’t.

                  There would not have been a systemic failure of banks without bad regulation – which was applied across the banking sector – and central banks (i.e. government) fuelling a credit boom.

                  Once again, I suggest that you read Philip Booth on the risks created by imposing state regulation instead of self-regulation. When you have, come back and tell me why he is wrong.

                • Des Demona

                  There was no systemic failure of hedge funds because
                  a) they mostly don’t operate on the same scale as global banks
                  b) They don’t tend to trade with themselves to anywhere near the same extent.
                  c) They can be involved in entirely different markets.
                  d) They don’t tend to have any contact with the ”man in the street’ and are therefore not subject to highly publicised runs.
                  I could go on.
                  I’m afraid just stating that ”There would not have been a systemic failure of banks without bad regulation” doesn’t make it so. Just as saying there would not have been a collapse if there was no regulation. The financial collapse was not caused by a credit boom. It was caused by the illiquidity in the market when the banks realised they were each sitting on trillions of dollars of junk derivatives and refused to lend to each other.
                  I have no desire whatsoever to read this Booth chap if he is who inspired the nonsense you’ve been spouting.
                  The trouble with the narrow libertarian dog eat dog dogma is that it assumes none of them will be the dog being eaten. It is both arrogant and abhorrent.

                • HJ777

                  “The financial collapse was not caused by a credit boom. It was caused by the illiquidity in the market when the banks realised they were each sitting on trillions of dollars of junk derivatives and refused to lend to each other.”

                  And how would they have got to that point had there not been an credit boom? You are guilty of looking only at the proximate cause – the trigger, if you like – and not at the underlying cause.

                  “I have no desire whatsoever to read this Booth chap…”

                  Obviously not. After all, he is only Professor of Insurance and Risk Management at the Cass Business School, so what would he know?

                • Des Demona

                  The two are not necessarily mutually inclusive. If you have any empirical evidence that there was a credit boom which caused the banks decision to invest in volatile derivatives rather than anything else I’d be happy to look at it.

                  Indeed ”he is only Professor of Insurance and Risk Management at the Cass Business School,” so what makes you think he knows better than most internationally renowned economists? Or is jt just that his opinion fits in with your particular libertarian world view?

                • HJ777

                  He is an expert on financial system risk mechanisms. Most economists are not.

                  And you are assuming that most economists disagree with him. Most do not.

                  Read him and learn. He is a very reasonable man who puts forward very balanced views based on fact and what actually happened. He is inclined neither to bash nor defend bankers.

                • Des Demona

                  perhaps not that much of an expert bearing his book is so long after the event rather than recognising the risk at the time|?Then again not many did.
                  Thanks for the recommend but not my cup of tea. Anyone naïve enough to believe banks will self regulate and by doing so have better corporate governance is not for me.

                • HJ777

                  Anyone naive enough to believe that the failure of regulation means we need more regulation by the same people is not for me.

                  Philip Booth is generally of the Austrian School persuasion – and Austrian School economists were exactly the people who foresaw where government credit expansion would lead and had been warning about it. Indeed, Booth was one of the people who wrote to the Treasury before the crash happened warning that monetary policy was far too loose.

                  http://www.iea.org.uk/multimedia/audio/philip-booth-verdict-on-the-crash

                • Mynydd

                  So the regulations said to bundle sub prime mortgages together and give them a AAA rating.

                • Dogzzz

                  I am sick of hearing people claiming that there should have been more regulation as if that would have made a difference.

                  It has nothing to do with the quantity of regulation. This is a red herring. The regulation of the financial sector should be appropriate to the function of that sector. There could have been much less inappropriate regulation and a bit more appropriate regulation.

                  The answer is not creating more rules or fewer rules. It is making sure that the correct rules are applied and effective sanctions enforced if rules are broken.

                  There was a lot of innapropriate and inneffective regulation, and the sanction against insane risks was non-existant with guarantees inherant in the “too big to fail” mentality.

            • Adam Carter

              The banks were bailed out. That was because the meme ‘too big to fail’ had taken hold.
              That was not the operation of the market.
              If the idea that they would not be bailed out had dominated then the decisions made by the banks would have been more prudent.
              The crisis was a failure of government, not of the banks.

            • Andy

              Neither banks nor energy companies operate in a free market. They are so closely regulated and the last Fascist Government rather than encouraging competition actually consolidated both sectors so there was less providers in 2010 than in 1997.

              • Jacques Protic

                As you, I detest close shop practices and have never been convinced that ‘denationalisation’ of key services is for the benefit of the nation – Efficiency and productivity could have been handled within the public sector, but Tories thought different!? For most part UK’s ‘Regulators’ are useless and do not adequately police ‘Corporate Greed’!?

                • Andy

                  Socialist bullshit. The Fascists consolidated both sectors so they could control more of the economy. We need to privatise more areas of economic life and return power back to the people. Reason you and the likes of oppose this is because when people have choice it destroys your power to dictate.

                • Alexsandr

                  problem with nationalised industries is their capital spending has to come from the treasury. And they never have enough money. So the nationalised industries went into a sad decline.
                  Do you want the days of the under invested british rail back, or a telephone service when you had to wait 6 months for a phone?

                • Mynydd

                  Do you not understand that since nationalisation rail investment as been by the treasury. For example, private capital did not pay for HS1 and it will be the treasury that pays for HS2.

                • Alexsandr

                  well most rail infrastructure investment is done by network rail borrowing on the private market. The treasury then guarantees the borrowing (leading to NR borrowing now being considered to be public borrowing). But is isnt treasury funds, its private.
                  Trains are bought by leasing companies (ROSCO’s) with private money and then leased to TOC’s. Some are guaranteed by the DfT but most are not. ROSCO’s also finance the improvement of trains, and get the money back through lease costs. Not a bad investment as the DfT carefully micromanages which trains each TOC gets to run.

                  All this is to keep rail investment off the PSBR, which then affects interest rates.

              • Mynydd

                If this was a problem why has Mr Cameron, in his four years of power, not done something about it.

            • Dogzzz

              IF the market had been allowed to operate in the case of the banks, then the corrupt, failed banks (ran by unqualified bankers who Gordon Brown had knighted), would have been allowed to fail, and had the good bits bought and rescued and the bad bits would have bankrupted a lot of millionaires who SHOULD have been left bankrupt, for their mistakes.

              It was corporatism, and the wholly inappropriate regulations, not free market capitalism, that caused the crash.

              Energy companies? More corporatism, creating state dictated cartels to rip off tax-payers and customers alike.

              • Des Demona

                And the collapse of the financial system creating untold misery for the ordinary working person who can’t get paid or pay their bills, the civil and international unrest it would cause are just collateral damage to your short sighted libertarian dogma?

                • Dogzzz

                  I would rather see the vile and corrupt financial system collapse and be replaced by a new financial system which is honest, than have the state turned over to the even more corrupt, poverty inducing corporatist system it has become.

                  It is entirely parasitical on the tax-payer giving no value at all in return.

                • Mynydd

                  If the corrupt financial system was allowed to fail who would be in a position to set up a new financial system and how long would it have taken, and at what cost

          • HookesLaw

            And the govt spending plans show continuing cuts in spending – including welfare.

        • Dogzzz

          Welfare traps people IN poverty, removes any incentive, and in many cases actively prevents, the poorest from being able to improve their income.

          As someone who was stuck on benefits, on and off for over 10 years, with occasional very low-paid temporary jobs, I know what I am talking about. Eventually, through my own efforts and an internet connection, I taught myself marketable skills, and got a foothold into a career in IT and Web Development. NO thanks at all to welfare or to the State, whose “back to work” schemes were utterly worthless and kept people trapped in poverty for evermore.

          Welfare KILLS aspiration and opportunity. It is only ignorant, bleeding heart middle-class idiots who believe otherwise.

          Welfare does NOT create dignity or a decent life. It encourages and rewards slovenliness and idleness.

    • Dougie

      Plan B? I presume by that you mean a Plan Boris!

      • Jacques Protic

        Boris is is definitely not a mate of mine Dougie, but Plan B as I see it needs to incorporate Social Justice with elements of Market economy Anything short of that will be a disaster!?

        • HookesLaw

          We have social justice coming out of our ears.
          What we need is what was sadly lacking in the Labour years … education and ambition.

      • Roderick

        Sounds like you’ve just coined Boris’s election slogan.

    • HJ777

      In fact, the statistical evidence is that income inequality, at least, has fallen in recent years.

      • Des Demona

        That is true, the statistical evidence does say that. However it also says that inequality has reduced because most of us have become poorer!

        • HJ777

          Not really, as this ONS paper demonstrates, the poorest have got richer as the rich have become poorer (in income terms, at least).

          http://www.ons.gov.uk/ons/dcp171778_317365.pdf

          However, I agree with your implied underlying point which is that what is most important is rising incomes for the poorest, rather than how rich (or otherwise) the richest become.

          • Des Demona

            The poor have not in fact ”got richer” thanks to below inflation income rises, they have just fared less worse than the rest of us.

            • HJ777

              Read the ONS paper.

              “Disposable incomes have fallen since the start of the economic downturn, with average equivalised income falling by £1,200 since 2007/08 in real terms. The fall in income has been largest for the richest fifth of households (6.8%). In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period (6.9%).”

              • Des Demona

                Here is the more up to date one

                http://www.ons.gov.uk/ons/dcp171778_367431.pdf
                And while it talks of 3% rise in income for the poorest fifth ( 3% of not very much) it also acknowledges that there were rises in indirect taxation, accounting for 30% of disposable income in the poorest fifth, as opposed to 17% of the richest fifth, together with benefit cuts yet to come. In effect the poorest fifth have been standing still at best.

                • HJ777

                  The claim was that inequality has risen. It has not.

                  “The average disposable income in 2012/13 was unchanged from 2011/12, but it remains lower than at the start of the economic downturn, with equivalised disposable income falling by £1,200 since 2007/08 in real terms. The fall in income has been largest for the richest fifth of households (5.2%). In contrast, after accounting for inflation and household composition, the average income for the poorest fifth has grown over this period (3.5%).”

    • HJ777

      If the market economy is not the answer, perhaps you could explain by how much you want government spending to rise in order to address inequality?

      It is nearly 50% of GDP now and that doesn’t seem to have done the trick.

      Had it occurred to you that high government spending and a benefits trap is keeping much of the population poor and denying them opportunity?

    • berosos_bubos

      You either want the poorer to become better off in absolute terms or you want the gap between rich and poor to reduce. You can’t have both as it is the increasing wealth of the wealthy that pays for the poor to become better off. Reducing inequality makes the poor poorer.

    • Dogzzz

      The gap between rich and poor is widening, but at its slowest rate for many years. The gap increased the most under labour as the poorest were held back by benefits which penalised success and ever higher taxes on the poorest workers, which labour constantly increased.

      The only sustainable economy is a free market capitalist one. What we have now is anything but a free market capitalist economy. It is a corrupt corporatist economy. That means a merger between an over-large state, and massive corporations, limiting consumer choice, creating cartels, eliminating real competition and the state forcing the people to use state-sanctioned private provision. It is like they have taken the worst parts of socialism and the worst parts of capitalism and merged them into one new system, which creates a very large interfering state, large profits for corporations who pay almost no tax, and the tax-payer getting screwed left right and centre.

      By the way. It was Gordon Brown who was the architect of our corporatist system. he did more to part-privatise the state itself, and part-nationalise corporations, than anyone. He created ALL the corporate tax-loopholes that the corporations are using to avoid tax. He bailed out the private failed banks with tax-payers money. He even knighted the unqualified bankers, who were working within the financial regulations he created when they caused the banking crash.

      Plan B must be getting out of the EU and allowing us to manufacture and export our economy to prosperity.

Close
Can't find your Web ID? Click here