Do Government Bailouts of Banks Worsen Economic Conditions?

 Ruchir Sharma in The FT 

As bank runs spread, it has become clear that anyone who questions a government rescue for those caught underfoot will be tarred as a latter-day liquidationist, like those who advised Herbert Hoover to let businesses fail after the crash of 1929. 

Liquidationist is now challenging fascist as the most inaccurately thrown insult in politics. True, it’s no longer politically possible for governments not to stage rescues, but this is a snowballing problem of their own making. The past few decades of easy money created markets so large — nearing five times larger than the world economy — and so intertwined, that the failure of even a midsize bank risks global contagion. 

More than low interest rates, the easy money era was shaped by an increasingly automatic state reflex to rescue — to rescue the economy from disappointing growth even during recoveries, to rescue not only banks and other companies but also households, industries, financial markets and foreign governments in times of crisis. 

The latest bank runs show that the easy money era is not over. Inflation is back so central banks are tightening, but the rescue reflex is still gaining strength. The stronger it grows, the less dynamic capitalism becomes. In stark contrast to the minimalist state of the pre-1929 era, America now leads a rescue culture that keeps growing to new maximalist extremes. 

Today’s troubles have been compared to bank runs of the 19th century, but rescues were rare in those days. America’s founding hostility to concentrated power had left it with limited central government and no central bank. In the absence of a financial system, trust was kept at a personal, not an institutional level. Before the civil war, private banks issued their own currencies and when trust failed, depositors fled. 

Had the US Federal Reserve existed at the time, it would not have helped much. The ethos of contemporary European central banks was to help solvent banks with solid collateral — in practice they were tougher, protecting their own reserves and “turning away their correspondents in need”, as a Fed history puts it. 

A restrained government was a key feature of the industrial revolution, marked by painful downturns and robust recoveries, resulting in strong productivity and higher per capita income growth. Right into the 1960s and 1970s, resistance to state rescues still ran deep, whether the supplicant was a major bank, a major corporation or New York City. 

Though the early 1980s is seen as a pivotal moment of broader government retreat, in fact this era was marked by the rise of rescue culture when Continental Illinois became the first US bank deemed too big to fail. In a move that was radical then, reflexive now, the Federal Deposit Insurance Corporation extended unlimited protection to Continental depositors — just as it has done for SVB depositors. 

Recent bank runs have been compared to the savings and loan crisis of the 1980s. Triggered in part by regulation that made it impossible for S&Ls to compete in an environment of rising rates, the crisis was resolved by regulators who wound down more than 700 of these “thrifts” at a cost to taxpayers of about $130bn. The first preventive rescue came in the late 1990s, when the Fed organised support for a hedge fund deeply tied to foreign markets, in order to avoid the threat of a systemic financial crisis. 

Those rescues pale next to 2008 and 2020, when the Fed and Treasury smashed records for trillions of dollars created or extended in loans and bailouts to thousands of companies across finance and other industries at home and abroad. In each crisis, rescues held down the corporate default rate to levels that were unexpectedly low, compared with past patterns. They are doing the same now even as rates rise and bank runs begin. 

The hazards are not just moral or speculative, as many insist — they are practical and present. The rescues have led to a massive misallocation of capital and a surge in the number of zombie firms, which contribute mightily to weakening business dynamism and productivity. In the US, total factor productivity growth fell to just 0.5 per cent after 2008, down from about 2 per cent between 1870 and the early 1970s. 

Instead of re-energising the economy, the maximalist rescue culture is bloating and thereby destabilising the global financial system. As fragility grows, each new rescue hardens the case for the next one. 

No one who thinks about it for more than a minute can wax nostalgic for the painful if productive chaos of the pre-1929 era. But too few policymakers recognise that we are at an opposite extreme; constant rescues undermine capitalism. Government intervention eases the pain of crises but over time lowers productivity, economic growth and living standards.

Whither free market? Carillion the Government's preferred private contractor maybe bailed out.

Aditya Chakrabortty in The Guardian



You may never have heard of Carillion. There’s no reason you should have. Its lack of glamour is neatly summed up by the name it sported in the 90s: Tarmac. But since then it has grown and grown to become the UK’s second-largest building firm – and one of the biggest contractors to the British government. Name an infrastructure pie in the UK and the chances are Carillion has its fingers in it: the HS2 rail link, broadband rollout, the Royal Liverpool University Hospital, the Library of Birmingham. It maintains army barracks, builds PFI schools, lays down roads in Aberdeen. The lot.

There’s just one snag. For over a year now, Carillion has been in meltdown. Its shares have dropped 90%, it’s issued profit warnings, and it’s on to its third chief executive within six months. And this week, the government moved into emergency mode. A group of ministers held a crisis meeting on Thursday to discuss the firm. Around the table, reports the FT, were business secretary Greg Clark, as well as ministers from the Cabinet Office, health, transport, justice, education and local government. Even the Foreign Office sent a representative.


Why did Chris Grayling give the HS2 contract to a company that was already in existential difficulties?

That roll call says all you need to know about the public significance of what happens next at Carillion. This is a firm that employs just under 20,000 workers in Britain – and the same again abroad. It has a huge chain of suppliers – and its habit of going in for joint ventures with other construction businesses means that a collapse at Carillion would send shockwaves through the industry and through the government’s public works programme.

To see what this means, take the HS2 rail link, where Carillion this summer was part of a consortium that won a £1.4bn contract to knock tunnels through the Chilterns. If Carillion goes under, what happens to the largest infrastructure project in Europe? What happens to its partners on the deal, British firm Kier, and France’s Eiffage? The project will need to be put back and the taxpayer will almost certainly have to step in.

Imagine that same catastrophe befalling dozens of other projects across the UK and you get a sense of what’s at stake. Jobs will be cut, schools will go unbuilt (just a couple of months ago, Oxfordshire county council pulled the plug on a 10-year schools project) – and the government’s entire private finance initiative (PFI) model for building this country’s essential services will be shaken to the core. The dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.

After all, this isn’t the only case where the public sector’s reliance on one giant private-sector player endangers the provision of basic services. As my colleague Rob Davies reports in today’s paper, crisis-hit Four Seasons Health Care has run into yet another roadblock in its rescue talks. If those negotiations fail, then the big question will be who will look after the 17,000 elderly and vulnerable people in its care.

Carillion crisis: fears major government contractor is on the verge of collapse



Or look at rail, where as I wrote this week, transport secretary Chris Grayling has come to a disastrous deal (sorry, “pragmatic solution”) to allow Virgin Trains to get out of their contract to run the East Coast mainline three years early. The public will have to step into the breach with some makeshift arrangements and will forego hundreds of millions in lost franchise payments. The train operators will be able to go about their business and even take on new franchises.

Should Carillion go down, there will be another truckload of questions for Grayling. He awarded the firm its £1.4bn HS2 contract last July – by which time the writing was already on the wall. That job from the Department of Transport may have helped tide Carillion over for a bit – but why did the transport secretary give the work to a company that was already in existential difficulties? A firm known to have grown too quickly by borrowing hundreds of millions. A firm that just a few months later came under investigation of the Financial Conduct Authority. I have long thought that Grayling is less serious minister and more an unexploded landmine. I just wonder what the trigger will be.

But what happens to that minister is just one debacle of many as far as Carillion is concerned. Today you may never have heard of Carillion. Soon you may wish it had remained that way.

Modi government's big bank bailout

British banks can’t be trusted – let’s nationalise them

Owen Jones in The Guardian


Sometimes the case for a policy is as overwhelming as the level of ridicule it will get from the punditocracy. The nationalisation of Britain’s failed banking industry – the sector responsible for most of our country’s current ills – is one such example. According to a recent poll, half the electorate support nationalising the banks, despite almost no one arguing for such a policy in public life.

It may well be because the banks plunged Britain into one of its worst economic crises in modern history, spawning, according to the Institute for Fiscal Studies, perhaps our worst squeeze in living standards since the 1750s. The fact that they have been bailed out by the taxpayer but allowed to carry on as though little happened – including more top British bankers in 2013 being gifted bonuses worth over €1m than all EU countries combined – while public services are gratuitously slashed, has rightly riled some British voters. 

Nationalisation of the banks is not about vengeance, though. Sure, the rip-off inefficiency of rail privatisation, or the failure of the great energy sell-off, or the fact that even the Financial Times has argued that privately run water is an indefensible debacle – all are testament to the intellectual poverty of the “private good, public bad” argument. None quite compete, however, with the matter of the banks leaving the entire western world consumed with the gravest series of crises since the second world war.

Would Brexit, Donald Trump, or the gathering demands for Catalonia to secede from crisis-ridden Spain have happened without the financial collapse? Almost certainly not. It is now somewhat darkly comic to note that most commentators and politicians claimed Labour lost the 2015 election because it was too leftwing. It is notable, then, that over four in 10 voters back then believed Labour was too soft on banks and big business, compared to just over one in five who differed.

Economist Laurie Macfarlane says the banks make a mockery of the nostrums of free-market capitalism. Because the banks were given state bailouts after their catastrophic failures, there is the assumption that, when another crisis hits, the same will happen again.

No other industry enjoys the same protection. They are “too big to fail”, which means they benefit from an implicit subsidy – worth £6bn in 2015. The Bank of England is their lender of last resort. State-backed deposit insurance of up to £85,000 per consumer is another de facto mass public subsidy.

As the New Economics Foundation says, it is commercial banks who are now responsible for creating the vast majority of money in economies like the UK, a source of vast profit. This is called “seigniorage” and – as the foundation puts it – it represents a “hidden annual subsidy” of £23bn a year, or nearly three-quarters of the banks’ after-tax profits. And banks are an essential public utility: it is almost impossible to be a citizen without a bank account, and there is no public option when it comes to making electronic payments.

Even now, as Macfarlane notes, the British state technically owns a fifth of the retail banking industry because of its stake in Royal Bank of Scotland. Repeated RBS scandals, and the aftermath of the EU referendum result, have dented the worth of the company’s shares, meaning that the state selling its stake would result in eye-watering losses. Meanwhile, small businesses have struggled to get the credit they need, and escalating household debt threatens the foundations of the stagnating British economy. But the state’s arms-length approach means RBS has failed both its customers and the broader economy. A profit-driven banking sector closed 1,150 branches in 2014 and 2015; about a third of those were owned by RBS. The bank once promised never to close the last branch in town; the pledge was broken, and 1,500 communities have been left with no bank branch. Vulnerable customers and small businesses inevitably suffer the most.

By contrast, foreign publicly owned banks are self-evident successes. Take Germany: KFW, the government-owned development bank, is crucial in developing national infrastructure as well as the renewable energy revolution. On a regional level, state-owned Landesbanken are responsible for industrial strategy. Then at the most local level, there are Sparkassen: they focus on developing relationships with local businesses and consumers. They’re not beholden to shareholders – instead, they have a stakeholder model, focused on helping local economies – indeed, their capital has to remain in local communities.

It is impossible to understand Britain’s current plight without examining the country’s rapid deindustrialisation in favour of a financial sector concentrated in London and the south-east. And according to New Economics Foundation, while foreign stakeholder banks lend two thirds of their assets to individuals and businesses in the real economy, that’s true with only a tiny proportion of British shareholder banks. Overwhelmingly, it goes to mortgage lending and lending to other financial institutions.

Our current banking system is rigged in favour of a crisis-ridden City. The New Economics Foundation suggests transforming RBS – in which the state still has a three-quarter share – into a network of local banks. Labour’s 2017 manifesto backed a review into these plans. A management board would run the network day to day, but a board of trustees would ensure the bank was accountable to the broader economy and customers, not shareholders.

A third would be elected by workers, a third by local authorities and a third by local stakeholders. The mandate of each local bank would be to promote local economies – not least their small businesses – rather than the City of London. Here is a model of democratic ownership that can, in time, be extended to the rest of the economy.

Can it really be argued that private ownership of the banks is a case study of the glorious success of free market capitalism? The principle architect of Labour’s recent manifesto, Andrew Fisher, called for the nationalisation of Britain’s banking sector in his 2014 book The Failed Experiment: And How to Build an Economy That Works. He was surely right then and he is right now. As Macfarlane notes, there are different possible routes to the banks’ nationalisation: whether it be swapping corporate shares for government bonds, using quantitative easing to buy up shares, or simple nationalisation without compensation. Labour is right to call for a German-style public investment bank, backed up by similar publicly run local banks.

But such proposals are not in themselves sufficient. Britain’s privately run banks have proved a disaster for everyone except their shareholders. The only good alternative is public stakeholder banks, run by workers, consumers and local authorities, with an obligation to defend the best interests of our communities. Privately owned banks have proved a catastrophic failure – for our economy, our social cohesion and our politics. There is surely no alternative to public ownership.

‘From bad to worse’: Greece hurtles towards a final reckoning

Helena Smith in The Guardian


Dimitris Costopoulos stood, worry beads in hand, under brilliant blue skies in front of the Greek parliament. Wearing freshly pressed trousers, polished shoes and a smart winter jacket – “my Sunday best” – he had risen at 5am to get on the bus that would take him to Athens 200 miles away and to the great sandstone edifice on Syntagma Square. By his own admission, protests were not his thing.

At 71, the farmer rarely ventures from Proastio, his village on the fertile plains of Thessaly. “But everything is going wrong,” he lamented on Tuesday, his voice hoarse after hours of chanting anti-government slogans.

---For Background Knowledge read:

Yanis Varoufakis and the Greek Tragedy

----

“Before there was an order to things, you could build a house, educate your children, spoil your grandchildren. Now the cost of everything has gone up and with taxes you can barely afford to survive. Once I’ve paid for fuel, fertilisers and grains, there is really nothing left.”

Costopoulos is Greece’s Everyman; the human voice in a debt crisis that refuses to go away. Eight years after it first erupted, the drama shows every sign of reigniting, only this time in a new dark age of Trumpian politics, post-Brexit Europe, terror attacks and rise of the populist far right.

“I grow wheat,” said Costopoulos, holding out his wizened hands. “I am not in the building behind me. I don’t make decisions. Honestly, I can’t understand why things are going from bad to worse, why this just can’t be solved.”

As Greece hurtles towards another full-blown confrontation with the creditors keeping it afloat, and as tensions over stalled bailout negotiations mount, it is a question many are asking.

The country’s epic struggle to avert bankruptcy should have been settled when Athens received €110bn in aid – the biggest financial rescue programme in global history – from the EU and International Monetary Fund in May 2010. Instead, three bailouts later, it is still wrangling over the terms of the latest €86bn emergency loan package, with lenders also at loggerheads and diplomats no longer talking of a can, but rather a bomb, being kicked down the road. Default looms if a €7.4bn debt repayment – money owed mostly to the European Central Bank – is not honoured in July.



Farmer Dimitris Costopoulos in front of the Greek parliament in Athens. Photograph: Helena Smith for the Observer

Amid the uncertainty, volatility has returned to the markets. So, too, has fear, with an estimated €2.2bn being withdrawn from banks by panic-stricken depositors since the beginning of the year. With talk of Greece’s exit from the euro being heard again, farmers, trade unions and other sectors enraged by the eviscerating effects of austerity have once more come out in protest.

From his seventh-floor office on Mitropoleos, Makis Balaouras, an MP with the governing Syriza party, has a good view of the goings-on in Syntagma. Demonstrations – what the former trade unionist calls “the movement” – are a fine thing. “I wish people were out there mobilising more,” he sighed. “Protests are in our ideological and political DNA. They are important, they send a message.”

This is the irony of Syriza, the leftwing party catapulted to power on a ticket to “tear up” the hated bailout accords widely blamed for extraordinary levels of Greek unemployment, poverty and emigration. Two years into office it has instead overseen the most punishing austerity measures to date, slashing public-sector salaries and pensions, cutting services, agreeing to the biggest privatisation programme in European history and raising taxes on everything from cars to beer – all of which has been the price of the loans that have kept default at bay and Greece in the euro.

In the maelstrom the economy has improved, with Athens achieving a noticeable primary surplus last year, but the social crisis has intensified.

For men like Balaouras, who suffered appalling torture for his leftwing beliefs at the hands of the 1967-74 colonels’ regime, the policies have been galling. With the IMF and EU arguing over the country’s ability to reach tough fiscal targets when the current bailout expires in August next year, the demand for €3.6bn of more measures has left many in Syriza reeling. Without upfront legislation on the reforms, creditors say, they cannot conclude a compliance review on which the next tranche of bailout aid hangs.

“We had an agreement,” insisted Balaouras, looking despondently down at his desert boots. “We kept to our side of the deal, but the lenders haven’t kept to their side because now they are asking for more. We want the review to end. We want to go forward. This situation is in the interests of no one. But to get there we have to have an honourable compromise. Without that there will be a clash.”

It had been hoped that an agreement would be struck on Monday at what had been billed as a high-stakes meeting of euro area finance ministers. On Friday, EU officials announced that the deadline had been all but missed because there had been little convergence between the two sides.

With the Netherlands holding general elections next month, and France and Germany also heading to the polls in May and September, fears of the dispute becoming increasingly politicised have added to its complexity. Highlighting those concerns, the German chancellor, Angela Merkel, attempted to end the rift that has emerged between eurozone lenders and the IMF over the fund’s insistence that Greece can only begin to recover if its €320bn debt pile is reduced substantially.

In talks with Christine Lagarde, the Washington-based IMF’s managing director, Merkel agreed to discuss the issue during a further meeting between the two women to be held on Wednesday. The IMF has steadfastly refused to sign up to the latest bailout, arguing that Greek debt is not only unmanageable but on a trajectory to become explosive by 2030. Berlin, the biggest contributor of the €250bn Greece has so far received, says it will be unable to disburse further funds without the IMF on board.

The assumption is that the prime minister, Alexis Tsipras, will cave in, just as he did when the country came closest yet to leaving the euro at the height of the crisis in the summer of 2015. But the 41-year-old leader, like Syriza, has been pummelled in the polls. Persuading disaffected backbenchers to support more measures, and then selling them to a populace exhausted by repeated rounds of austerity, will be extremely difficult. Disappointment has increasingly given way to the death of hope – a sentiment reinforced by the realisation that Cyprus and other bailed-out countries, by contrast, are no longer under international supervision.

In his city centre office, the former finance minister Evangelos Venizelos pondered where Greece’s predicament was now. “[We are] at the same point we were several years ago,” he joked. “The only difference is that anti-European sentiment is growing. What was once a very friendly country towards Europe is becoming increasingly less so, and with that comes a lot of danger, a lot of risk.”

When historians look back they, too, may conclude that Greece has expended a great deal of energy not moving forward at all.

The arc of crisis that has swept the country – coursing like a cancer through its body politic, devastating its public health system, shattering lives – has been an exercise in the absurd. The feat of pulling off the greatest fiscal adjustment in modern times has spawned a slump longer and deeper than the Great Depression, with the Greek economy shrinking more than 25% since the crisis began.

Even if the latest impasse is broken and a deal is reached with creditors soon, few believe that in a country of weak governance and institutions it will be easy to enforce. Political turbulence will almost certainly beckon; the prospect of “Grexit” will grow.

“Grexit is the last thing we want, but we may arrive at a point of serious dilemmas,” said Venizelos. “Whatever deal is reached will be very difficult to implement, but that notwithstanding, it is not the memoranda [the bailout accords] that caused the crisis. The crisis was born in Greece long before.”

Like every crisis government before it, Tsipras’s administration is acutely aware that salvation will come only when Greece can return to the markets and raise funds. What happens in the weeks ahead could determine if that is likely to happen at all.

Back in Syntagma, Costopoulos the good-natured farmer ponders what lies ahead. Like every Greek, he stands to be deeply affected. “All I know is that we are all being pushed,” he said, searching for the right words. “Pushed in the direction of somewhere very explosive, somewhere we do not want to be.”

"You Don't Deserve a Bailout - You are NEITHER a Banker NOR Chinese"

If librarians and steelworkers wanted state bail-outs, they should have done something 

useful - like bankers

In any case the bankers deserved to be bailed out, as they couldn’t possibly anticipate that if they kept taking money it might eventually run out, whereas steelworkers have caused their own downfall by not being Chinese.

Mark Steel in The Independent


The main thing to realise with the current steel industry crisis is that the government has been clear and decisive. They’ve stated firmly, “We’re not ruling out anything at all, though we are ruling out nationalising anything as that doesn’t count as anything, but we will do anything we possibly can that won’t make a difference such as drawing a pretty picture of a caterpillar, and we’re doing all we can because as we keep saying there’s nothing we can do, but we do feel desperately sorry for anyone who loses their job which is why any steelworkers who become redundant will immediately be called in to the job centre for an interview and told they won’t get any benefits if their answer to ‘Why have you let yourself be put of work?’ is ‘There was nothing I could do’.”

---Also read

Steel v banks: Why they're different when it comes to a government bail-out

Tata's failure - Another nail for Indian corporate power?

------

Some people have pointed out that other industries were bailed out by governments in the past - but this has only been if they’ve produced essential goods, such as hedge funds and executive bonuses, not frivolities like the stuff that makes ships and teaspoons.

In any case the bankers deserved to be bailed out, as they couldn’t possibly anticipate that if they kept taking money it might eventually run out, whereas steelworkers have caused their own downfall by not being Chinese.

Luckily this sound economics is understood across the country, including by the sensible wing of the Labour Party such as those in charge of Lambeth Council, who are closing half the borough’s libraries and turning them into gyms.

This is the sort of can-do attitude people want from Labour. Hopefully it will spark off other schemes, such as turning social services departments into sushi bars, or converting disabled people’s wheelchairs into drones so they can be rented out to the RAF.

There’s no point in complaining about this; it’s the way the free market works. And if the Chinese are flooding South London with cheap Agatha Christies, we just have to accept it, and ask the elderly people who rely on going to libraries as their only point of contact with the community to spend all morning performing 200 reps of 40 kilograms per calf on a multi-gym body-solid squat machine instead.

One of these libraries, the Tate, has been assessed as receiving an average of 600 visits per day. This may seem successful, but where the library has let itself down is forgetting to charge any of them money for borrowing books and bringing kids into reading classes.

Maybe the library service should learn from gyms, and only let them in if they pay £40 a month on a minimum two-year contract. They could even offer them special courses in which an instructor screams, “Right, everyone, let’s all read this week’s Economist - you CAN do it - let’s drive ourselves to the limit - GO – ‘the Yen faces unexpected slow down’ - come on Eileen pick it up, PUSH everyone!”

The council insists they will preserve the essence of the libraries, because each of the gyms will include a “lounge with a limited supply of books”. Obviously they won’t have all those unnecessary books you see in old-fashioned libraries, but surely no one’s so fussy they insist on any specific book, as most books are pretty much the same.

The council also agreed that “under-18s may not be allowed in these lounges”, which will surely improve the service as rooms with books aren’t a suitable environment for the young.

Surprisingly, the local population appears shamefully ignorant about economics - so there have been daily protests against the closures, in which thousands have taken part. It seems these people don’t understand that it may have been all right to build and maintain free libraries back in the 1930s, but you can’t expect us to keep funding the luxuries we could afford back then.

So the council demanded a banner was taken down at one library, which was changed each day to tell people how many days were left until it was closed. Maybe the council hoped that if people weren’t reminded of the closure, they just wouldn’t notice. Then eventually they’d all tell stories of success and improvement to each other, such as: “I asked for a reference book on growing cucumbers and was sent into the corner. After three weeks I didn’t feel I was making any progress with my gardening, but then someone told me I’d spent the whole time benching 140 kilograms and now I’m the all-Hertfordshire Over-60s Bodybuilding champion.”

Nevertheless, the protests continue. But the libraries have probably been lending the wrong assets if they want state intervention. Instead of irresponsibly lending books to people who live round the corner so they can read and study and educate and entertain themselves and their kids, they should have lent billions of dollars to anyone who asked for it, without even suggesting a 40p fine if they kept it a week too long.

Then, once they’d succeeded in ruining the world economy, they’d have had a very reasonable case for being bailed out - unlike these people who want to fund steelworks and libraries because they don’t understand the world economy.

@@@@@@

------- The China Tariff matter

Steel tariff row explained

Here’s a Q&A on the steel tariffs row, from Kate Ferguson of the Press Association.

Q: What is a tariff?

A tariff is a form of tax imposed on goods or services imported from abroad. It can restrict trade by making products more expensive, and can be used as a form of protectionism - to protect and encourage domestic industry.

Many in the UK steel industry have demanded higher tariffs be imposed on imported steel amid concerns Chinese steel dumping has sent prices plummeting.

Q: What is steel dumping and why are the Chinese accused of it?

Steel production in China has soared over the past decade and it now produces around half of the world’s annual output of 1.6 billion tonnes. But its domestic market has been slowing, leading steel producers to seek to export more.

China has been accused of “dumping” its steel on European markets - which means selling it not just cheaply, but at a loss. In 2014, Chinese steel imports to the UK cost €583 a tonne compared to €897 a tonne for steel produced elsewhere in the EU, according to reports quoting the EU’s statistics agency, Eurostat.

Q: Why has the British Government been criticised for not doing enough to protect the UK steel industry? 

Sharply falling prices and a flood of cheap, foreign steel has sparked major concern for the future of the British steel industry, and the many jobs that depend on it.

British ministers blocked proposals in the EU to get rid of the “lesser duty rule” which caps tariffs at 9% - in the US some products face a tariff of up to 236%. The British Government has said the 9% tariff is too low, but warned against lurching towards protectionism.

The debate comes as Britain has been courting China hard in a bid to foster closer trade links. Chancellor George Osborne said the two nations should “stick together and create a golden decade” while on a visit to China last September.

The following month, Chinese President Xi Jinping visited Britain and was treated to a State banquet at Buckingham Palace, where he sat between the Queen and the Duchess of Cambridge.

Set in this context, the Government has been accused of betraying British steelworkers to curry favour with the Chinese.

---China imposes a tariff on EU steel imports

The Guardian on 1/04/2014

China has risked raising tensions over its role in the UK steel crisis by imposing a 46% import duty on a type of high-tech steel made by Tata in Wales.

The Chinese government said it had slapped the tariff on “grain-oriented electrical steel” imported from the European Union, South Korea and Japan. It justified the move by saying imports from abroad were causing substantial damage to its domestic steel industry.

Tata Steel, whose subsidiary Cogent Power makes the hi-tech steel targeted by the levy in Newport, south Wales, was unable to say on Friday whether any Cogent products are exported to China.

News of the tariff emerged as David Cameron confronted the Chinese president, Xi Jinping, on the sidelines of a summit dinner in Washington on Thursday night, urging him to use Beijing’s presidency of the G20 group of leading countries to tackle the problem.

Asked if Cameron raised concerns about British job losses from Chinese steel dumping, a senior government source said: “He highlighted his concerns, yes.” The source added: “He made clear the concerns that we have on the impact this is having on the UK and other countries.”

British politicians have been accused of pandering to China by blocking new tariffs on Chinese imports to the EU, a measure designed to prop up Europe’s struggling steel industry.

The tariff move by the People’s Republic is likely to anger steelworkers and unions, who blame China for much of the industry’s recent troubles. Steel firms say one of the key reasons for the UK industry’s woes is that state-subsidised firms in China are “dumping” their product on the European market, due to flagging demand at home.

The UK business secretary, Sajid Javid, who visited Tata Steel’s struggling Port Talbot plant on Friday, has been accused of blocking measures to crack down on Chinese imports. Javid voted against EU plans to lift the “lesser duty” rule, which would have allowed for higher duties to be levied on Chinese steel imports. The UK has also lobbied for China to be granted “market economy status”, which would make it even harder to crack down on steel dumping.

“The fact is that the UK has been blocking this,” European Steel Association (Eurofer) spokesperson Charles de Lusignan told BBC Radio 4’s Today programme. “They are not the only member state but they are certainly the ring leader in blocking the lifting of the lesser duty rule. The ability to lift this was part of a proposal that the European commission launched in 2013, and the fact that the UK continues to block it means that when the government says it’s doing everything it can to save the steel industry in the UK and also in Europe, it’s not. It’s not true.”

IMF admits: we failed to realise the damage austerity would do to Greece

Athens officials react to report with glee, saying it confirms that the price extracted for country's bailout package was too high

• Larry Elliott, Phillip Inman and Helena Smith in Athens
• The Guardian, Wednesday 5 June 2013 23.05 BST

IMF chief Christine Lagarde. Greek media recently quoted her describing 2011 as a 'lost year', partly because of IMF mistakes. Photograph: Stephane Mahe/Reuters

The International Monetary Fund admitted it had failed to realise the damage austerity would do to Greece as the Washington-based organisation catalogued mistakes made during the bailout of the stricken eurozone country.

In an assessment of the rescue conducted jointly with the European Central Bank (ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.

Also read: 1.  The IMF should be on trial

2.  Watch out, George Osborne: Adam Smith, Karl Marx and even the IMF are after you
3. Beware the nostrums of economists
4. Austerity has never worked

Fund officials had severe doubts about whether Greece's debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.

While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.

"Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment."

In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy."

Under the weight of such measures – applied across the board and hitting the poorest hardest – the economy, they said, was always bound to dive into an economic death spiral.

"For too long they [troika officials] refused to accept that the programme was simply off-target by hiding behind our failure to implement structural reforms," said one insider. "Now that reforms are being applied they've had to accept the bitter truth."

The IMF said: "The Fund approved an exceptionally large loan to Greece under an stand-by agreement in May 2010 despite having considerable misgivings about Greece's debt sustainability. The decision required the Fund to depart from its established rules on exceptional access. However, Greece came late to the Fund and the time available to negotiate the programme was short."

But having agreed that there were exceptional circumstances that warranted the biggest bailout in the Fund's history, officials were taken aback by the much bigger than expected slump in the Greek economy. The country is now in its fifth year of recession and the economy has contracted by 17%. The IMF thought it would contract by just 5.5%.

In the evaluation of the package provided in 2010, the IMF said: "Given the danger of contagion, the report judges the programme to have been a necessity, even though the Fund had misgivings about debt sustainability.

"There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access).

"In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. The baseline still showed debt to be sustainable, as is required for all Fund programmes."

In the event, the report added, the Fund was open to criticism for making economic projections that were too optimistic."

While the report says a deep recession was unavoidable, it is critical of senior officials in Brussels and European capitals who said Greece would fare better outside the euro. Concerns that Greece could be ejected from the euro and return to the drachma intensified an already febrile situation.

"Confidence was also badly affected by domestic social and political turmoil and talk of a Greek exit from the euro by European policymakers," it said.

Brussels also struggled to co-ordinate its policies with the ECB in Frankfurt, according to the report.

"The Fund made decisions in a structured fashion, while decision-making in the eurozone spanned heads of state and multiple agencies and was more fragmented."

The Greek media recently quoted IMF managing director Christine Lagarde describing 2011 as a "lost year" partly because of miscalculations by the EU and IMF.

The authoritative Kathimerini newspaper said the report identified a number of "mistakes" including the failure of creditors to agree to a restructuring of Greece's debt burden earlier – a failure that had had a disastrous effect on its macroeconomic assumptions.

"From what we understand the IMF singles out the EU for criticism in its handling of the problem more than anything else," said one well-placed official at the Greek finance ministry.

He added: "But acknowledgement of these mistakes will help us. It has already helped cut some slack and it will help us get what we really need which is a haircut on our debt next year."

My Weltanschhaung - 11/2/2012

I am glad that atleast now a few Greek politicos have called the bail out terms extortionate. I think Greeks should default on their loans. Else, where is the risk for the lender who seems to get his money back in all circumstances and even by hurting innocent victims in a society.

A more disturbing news is that Chinese imports (of raw materials, I presume) fell in January. This will worry all export led growth oriented countries, unless they are beating China at their own game. Unlikely though since Chinese firms enjoy state subsidised capitalism.

Harry Redknapp seems to be inching towards the England managership. I suppose every man rises to a level of failure, but it won't be Harry's fault as there appears to be a shortage of talent in England.

Argentina accuses the UK of storing nuclear weapons near the Falklands. At the same time the UK tries to prevent Iran and others from getting nuclear weapons.

The global outlook for oil appears gloomy, so will the energy suppliers lower retail prices?

Policy can trump unpopularity - A way to solve the EU crises

By Martin Hutchinson

As is well known to readers of this column, it is my considered opinion that economic policy and management reached a global all-time apogee (so far - one can always hope) under the British prime ministership of Robert Banks Jenkinson, Lord Liverpool (prime minister, 1812-27). However Liverpool is generally thought to have had one enormous advantage over modern policymakers in not having to deal with a modern democracy. Unlike modern democratic leaders, he was thus only moderately constrained by his policies' temporary unpopularity.

The Greek crisis has however graphically illustrated that popular resentment at unpalatable economic change is very much as it was in 1812-20, and that policymakers responding to that resentment are at least as insulated from popular feeling as were Liverpool and his government. Unfortunately, unlike Liverpool, they are not using that insulation to good effect.

If the European Union's policy elite had possessed Liverpool's depth of economic understanding, the crisis would have been easily solved, and indeed would not have arisen in the first place. Liverpool would have put Europe onto a gold standard; if he had been thwarted in that he might well have supported the euro but would certainly not have admitted Greece into its membership.

He would immediately have spotted the disgraceful discrimination against the private sector involved in the Basel Committee's zero rating of government debt, a principal cause of the crisis because it has favored bank funding of excessive government deficits over productive lending to the private sector. He would have opposed root and branch governments increasing their deficits through "stimulus" spending, pointing out the superior recession-fighting record produced by his own 1816-19 austerity.

Once the crisis had arisen, Liverpool's solution would have been simple and complete. He would have perceived by a simple analysis of relative productivity that Greece had no hope of solving its problems while it remained a member of the euro. He would thus have forced it to readopt the drachma when the crisis first arose, in spring 2010. Following such re-adoption the drachma would have immediately devalued by about two thirds, taking Greek per capita income down to about $11,000 from the $32,000 at which it stood in 2008.

Naturally a further result would have been a Greek debt default, from which Liverpool would have stood back entirely. If the Greek government wished to bail out its banking system with drachma paper (thereby weakening the drachma further) that would be its choice, but not one cent of German and Swedish taxpayer money would be provided to facilitate this process.

Similarly, Liverpool would have allowed the Irish government to default, as a result of its foolish 2008 attempt to bail out its banking system, and would have given Spain, Italy and Portugal the alternative of leaving the euro or adopting austerity programs rigorous enough to keep them members (those austerity programs would have needed to be less rigorous than Latvia's, but in any case their adoption would have been a matter for the national governments themselves, with neither coercion nor extra resources provided by the EU.)

Should Liverpool's rigorous policies have caused problems in Europe's overleveraged and badly managed banks, Liverpool would not have stopped the European Central Bank from providing resources to eurozone banks, but only on the terms eventually prescribed by Walter Bagehot - short-term loans against first-class security at punitively high interest rates. There would have been no bailouts, as Liverpool, with his knowledge of the 1720 Mississippi and South Sea crashes, would have regarded "too big to fail" as being equivalent to "too big to be allowed to live".

Liverpool's policies would thus have been dictated neither by sentimentality about the inevitable short-term pain his policies would cause, nor by political considerations of their probable unpopularity, but simply by their likelihood of solving the problem in a market-friendly way and thereby allowing economic growth to resume in the Eurozone as a whole. They would have been basically free-market oriented, but not dictated by free trade or other dogma, as were the policies of the free traders a generation later.

By their apparent harshness, they would have made him highly unpopular, yet they would have stopped economic decay in its tracks and would have allowed Europe to rise above the problems of its periphery, while that periphery led productive existences at the lower living standards justified by their modest output potential.

The Liverpool government's attitude to popularity was best expressed not by Liverpool himself but by his colleague Robert Stewart, Lord Castlereagh, who as leader of the House of Commons bore much of the opprobrium for Liverpool's policies. In 1821, after the 1816-19 "double-dip" recession had lifted, he remarked "I am as popular now as I was unpopular formerly, and of the two, unpopularity is the more convenient and gentlemanlike."

Some years ago I wrote a piece quoting Castlereagh and extolling the virtues of unpopular economic policies. The piece was picked up by the Almaty Herald - it was doubtless to the taste of Kazakhstan president (since 1991) Nursultan Nazarbayev, who felt it proved that his economic policies, being unpopular, must therefore be beneficial. I would like to correct any misapprehension: my extolment of unpopularity was not intended to justify every action of Central Asian dictators by suggesting their economic policies must be superior. The unhappy fact that good economic policies are often unpopular does not imply that unpopular economic policies are ipso facto good.

Liverpool would have understood the EU bureaucracy's desire to insulate itself from populism, and would have been intrigued by the ingenuity of some of the mechanisms by which it achieves this insulation. The idea of a permanent appointed secretariat that was only distantly accountable to the electorate would have seemed to him a plausible alternative to the pre-1832 franchise of rotten boroughs, open vote purchase and limited voting rights.

However, he would have scoffed at claims by the EU leaders that their supposed democratic antecedents gave them a moral superiority and would have correctly pointed out that his pre-1832 franchise was far more accountable than the EU bureaucracy, in that it gave considerable weight to public opinion when broadly held over a prolonged period.

In any case, Liverpool would have had no time at all for the policies the insulated EU bureaucracy pursues. He would have regarded its economics as riddled with error, and the mantra that "economists never agree" as a mere excuse to justify that error - he would have pointed out that the members of the average high school algebra class don't agree on the solution to the week's problems, either, but that's because half of them have bungled their calculations.

He would have regarded EU attempts to impose their lifestyle and ideology choices on the people of Europe as appalling tyranny, which would have reminded him most of the fanatical and cruel Jacobins of Maximilien Robespierre, a movement with which he was very familiar. As I remarked above and Liverpool was well aware, insulation from democratic accountability does not necessarily produce good policies, and in the case of the EU apparatchiks it has bred arrogance and corruption.

Whereas the policies and desires of the EU bureaucracy would have appeared strange and repellent to Liverpool, those of the Greek rioters would have been completely recognizable. His ascent to power, after all, coincided with the Luddite anti-machinery riots. The fury of a populace finding unpalatable change imposed on it by economic forces outside its control would have been entirely explicable, as would the even greater fury of a people losing economically unjustified comforts to which they had become accustomed.

Greek prime minister George Papandreou's claim on Thursday that "We are bearing a cross and we are being stoned", with its extreme biblical overtones, would have appeared very similar indeed to the rantings of "Orator" Hunt and his peers.

Perceiving the Greek problem and anticipating the Greek reaction to policies imposed by the EU bureaucracy, Liverpool would have rightly informed German Chancellor Angela Merkel and French President Nicolas Sarkozy that the correct response to such rhetoric and disturbances is firmness, not handouts.

In the Greek case, firmness, ie forcibly restoring the drachma, is perfectly feasible, since the EU authorities are not in reality subject to significant democratic control. Moreover, the economically superior outcome of a firm policy, as with Liverpool's own firmness in 1816-19, would restore tranquility even to the aggrieved Greek populace within a very few years and would preserve economic stability and growth elsewhere.

In this crisis, there is thus no excuse for Europe's leaders not pursuing policies that actually work.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions. 

Irrational Optimism

A state-hating free marketeer ignores his own failed experiment to offer discredited theories riddled with blame-shifting and excruciating errors

George Monbiot

Brass neck doesn't begin to describe it. Matt Ridley used to make his living partly by writing state-bashing columns in the Daily Telegraph. The government, he complained, is "a self-seeking flea on the backs of the more productive people of this world … governments do not run countries, they parasitise them."(1) Taxes, bail-outs, regulations, subsidies, intervention of any kind, he argued, are an unwarranted restraint on market freedom.

Then he became chairman of Northern Rock, where he was able to put his free market principles into practice. Under his chairmanship, the bank pursued what the Treasury select committee later described as a "high-risk, reckless business strategy"(2). It was able to do so because the government agency which oversees the banks "systematically failed in its regulatory duty"(3).

On 16th August 2007, Dr Ridley rang an agent of the detested state to explore the possibility of a bail-out. The self-seeking fleas agreed to his request, and in September the government opened a support facility for the floundering bank. The taxpayer eventually bailed out Northern Rock to the tune of £27bn.

When news of the crisis leaked, it caused the first run on a bank in this country since 1878. The parasitic state had to intervene a second time: the run was halted only when the government guaranteed the depositors' money. Eventually the government was obliged to nationalise the bank. Investors, knowing that their money would now be safe as it was protected by the state, began to return.

While the crisis was made possible by a "substantial failure of regulation", MPs identified the directors of Northern Rock as "the principal authors of the difficulties that the company has faced". They singled Ridley out for having failed "to provide against the risks that [Northern Rock] was taking and to act as an effective restraining force on the strategy of the executive members."(4)

This, you might think, must have been a salutary experience. You would be wrong. Last week Dr Ridley published a new book called The Rational Optimist (5). He uses it as a platform to attack governments which, among other crimes, "bail out big corporations"(6). He lambasts intervention and state regulation, insisting that markets deliver the greatest possible benefits to society when left to their own devices. Has there ever been a clearer case of the triumph of faith over experience?

Free market fundamentalists, apparently unaware of Ridley's own experiment in market liberation, are currently filling cyberspace and the mainstream media with gasps of enthusiasm about his thesis. Ridley provides what he claims is a scientific justification for unregulated business. He maintains that rising consumption will keep enriching us for "centuries and millennia" to come(7), but only if governments don't impede innovation. He dismisses or denies the environmental consequences, laments our risk-aversion, and claims that the market system makes self-interest "thoroughly virtuous"(8). All will be well in the best of all possible worlds, as long as the "parasitic bureaucracy" keeps its nose out of our lives(9).

His book is elegantly written and cast in the language of evolution, but it's the same old cornutopian nonsense we've heard one hundred times before (cornutopians are people who envisage a utopia of limitless abundance(10)). In this case, however, it has already been spectacularly disproved by the author's experience.

The Rational Optimist is riddled with excruciating errors and distortions. Ridley claims, for example, that "every country that tried protectionism" after the Second World War suffered as a result. He cites South Korea and Taiwan as "countries that went the other way", and experienced miraculous growth(11). In reality, the governments of both nations subsidised key industries, actively promoted exports and used tariffs and laws to shut out competing imports. In both countries the state owned all the major commercial banks, allowing it to make decisions about investment(12,13,14).

He maintains that "Enron funded climate alarmism"(15). The reference he gives demonstrates nothing of the sort, nor can I find evidence for this claim elsewhere(16). He says that "no significant error has come to light" in Bjorn Lomborg's book The Sceptical Environmentalist (17). In fact it contains so many significant errors that an entire book - The Lomborg Deception by Howard Friel - was required to document them(18).

Ridley asserts that average temperature changes over "the last three decades" have been "relatively slow"(19). In reality the rise over this period has been the most rapid since instrumental records began(20). He maintains that "eleven of thirteen populations" of polar bears are "growing or steady"(21). There are in fact 19 populations of polar bears. Of those whose fluctuations have been measured, one is increasing, three are stable and eight are declining(22).

He uses blatant cherry-picking to create the impression that ecosystems are recovering: water snake numbers in Lake Erie, fish populations in the Thames, bird's eggs in Sweden(23). But as the Millennium Ecosystem Assessment shows, of 65 global indicators of human impacts on biodiversity, only one – the extent of temperate forests – is improving. Eighteen are stable, in all the other cases the impacts are increasing(24).

Northern Rock grew rapidly by externalising its costs, pursuing money-making schemes that would eventually be paid for by other people. Ridley encourages us to treat the planet the same way. He either ignores or glosses over the costs of ever-expanding trade and perpetual growth. His timing, as BP fails to contain the oil spill in the Gulf of Mexico, is unfortunate. Like the collapse of Northern Rock, the Deepwater Horizon disaster was made possible by weak regulation. Ridley would weaken it even further, leaving public protection to the invisible hand of the market.

He might not have been chastened by experience, but it would be wrong to claim that he has learnt nothing. On the contrary, he has developed a fine line in blame-shifting and post-rational justification. He mentions Northern Rock only once in his book, where he blames the crisis on "government housing and monetary policy."(25) It was the state wot made him do it. He asserts that while he wants to reduce the regulation of markets in goods and services, he has "always supported" the careful regulation of financial markets(26). He provides no evidence for this and I cannot find it in anything he wrote before the crisis.

Other than that, he claims, he can say nothing, due to the terms of his former employment at the bank. I suspect this constraint is overstated: it's unlikely that it forbids him from accepting his share of the blame.

It is only from the safety of the regulated economy, in which governments pick up the pieces when business screws up, that people like Dr Ridley can pursue their magical thinking. Had the state he despises not bailed out his bank and rescued its depositors' money, his head would probably be on a pike by now. Instead we see it on our television screens, instructing us to apply his irrational optimism more widely. And no one has yet been rude enough to use the word discredited.