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Friday, 11 November 2011

Nudges, Bribes and Good Sense

The UK government has announced the imminent reduction of subsidies to installers of solar panels on houses. The subsidies have created thousands of jobs in a new 'market' that has been totally phoney. The government gives a guaranteed price, over several years, for electricity delivered from their homes to the National Grid, to households that install the panels. Such a large number of people opted to take the money, that it became unaffordable. Now 'industry leaders' are moaning that halving of the subsidies will 'cost' many of the jobs that would never have been created in the sort of 'market economy' that features in Economics textbooks.

Since 2007 the banking business in Europe and the USA has been in a similar position to the UK solar panel business. It has been subsidised by governments and Central Banks. Governments have bought shares in banks to save them from bankruptcy. Central Banks - led by the US Federal Reserve and the Bank of England; and now followed by the European [Eurozone] Central Bank - have created 'money' to buy bonds from banks, enabling them to meet their obligations: on the assumption that if this did not happen the banks would be bankrupted.

The difference between the two situations is that the solar panel business has been doled out tens of millions, while the banks have had tens of billions. So the British government feels able to pull the plug on the solar panel business, but not on the banks.The relatively modest bribes to encourage people to install 'green' energy cost too much on the scale that is applied to that sector: by contrast it would appear that the bribes required by the banks are apparently infinite.Since subsidies do not put any constraint on the  banks, governments have tried 'nudges': hints, guidance, threats of organisational changes and the threat of a 'Tobin tax' [previously examined in this blog]. None of that has worked. So the time has come - is long overdue - for sensible direct oversight of banks' activities.

Governments are not subject to the banks: the banks depend on the state. The contracts that banks make, and the debts that people and firms owe to them, are only enforceable under the law that is provided by the state. The money in which banks trade, in which they record their assets and liabilities, is the property and the creature of the state. Governments try to tinker with the 'markets' in which the banks gamble with the 'money' that states and Central Banks have given them. They are wasting their time.

Markets have no ultimate power: their existence depends on governments. Yet the traders in the markets are arrogantly telling countries 'to get their act together'. This is a totally wrong perspective. Governments need to recognise their powers and the markets' weakness; and begin to  protect the savings and the jobs of the people they purport to represent.

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