Siemens to set up its own bank.

Good – they can’t possibly do worse than Lehmans, Northern Rock, Bernie Madoff, Fred the Shred, and the other bizarre assortment of people running Anglo-Saxon financial institutions.

Banks tried to foist debt on Australia which Australian didn't need.

We all know that banks are into skullduggery. But this takes some beating: they tried to foist extra debt on Australia when Australia was running a surplus and happily paying off its national debt!!!!

Unemployment does not make crowding out less likely.

It is a popular claim that crowding out won’t occur (or that it’s less likely) where there are significant unemployed resources.

For example Robert Skidelsky made this claim in an otherwise excellent Independent article.

The “crowding out won’t occur...” argument is usually something like, “given full employment, an increase in government sending can only come about given a reduction in private spending (i.e. crowding out of some sort)”. Well, that statement is true by definition, which makes it a near useless statement. It doesn’t explain anything about cause-effect relationships or “transmission mechanisms”. Which means that the desired cause-effect relationship might not actually work. Put another way, the above desired outcome (private spending declining so as to make room for public spending) might not occur.

Or to put it yet another way, the argument is usually something like, “given significant unemployment, crowding out won’t occur because all those unemployed resources are just waiting for a source of demand, like government borrow and spend, to bring said resources into productive use”. Again, there is nothing about cause or effect.

Crowding out is the following phenomenon. Government borrows more, which pushes up interest rates (or lending criteria become more restrictive) which in turn reduces private sector borrowing, which at worst means there is no net effect on spending.

Now that cause effect chain will work regardless of the number or volume of unemployed resources, seems to me. To illustrate, suppose five million immigrants suddenly arrive in some country, complete with necessary skills, capital equipment, etc., but without any money. The unemployment rate (and the incidence of unemployment for other resources, e.g. capital equipment) would shoot up. But what’s that got to do with the extent to which a bank makes things difficult for a private sector borrower because government has collared the relevant savings? Absolutely nothing !

Put another way, as the advocates of modern monetary theory (aka functional finance) have pointed out time and again, aggregate demand will be inadequate if the private sector thinks its net financial assets (i.e. savings) are inadequate. That inadequacy is not altered one iota by the arrival of the above five million immigrants.

The "crowding out" concept is irrelevant.

First, definitions. The word government is used below to refer to politicians, bureaucrates, the legislature and central bank all combined. The actual extent of central bank independence varies from country to country, and within a given country, from decade to decade. Thus treating government and central bank as one unit is legitimate, at least for some purposes.

Crowding out is where government borrows $X with a view to spending the $X (or thereabouts), and the fact of borrowing drives up interest rates (or makes borrowing for the private sector more difficult for other reasons) which in turn reduces private sector spending.

In some cases, crowding out is desirable. E.g. given more or less full employment, and given a desire to expand the public sector relative to the private sector, a portion of the latter’s share of GDP obviously has to be crowded out, else spending in aggregate is excessive.

In this instance, crowding out is not a problem: it is irrelevant.

In contrast, in a recession, governments borrow and spend with a view to stimulus. Crowding out would occur if government allowed interest rates to rise as a result of the additional borrowing. But governments are hardly likely to do this, are they? Indeed, they’ll most likely cut interest rates. Indeed, if they let rate rise, they’re just cutting their noses to spite their faces. So crowding out doesn’t occur.

So the relevance of the “crowding out” concept is what? Anyone know?

Robert Skidelsky.

I recommended an article by Robert Skidelsky recently (see below). For Skidelsky fans, here is another article (in The Independent).

Recommended article in today’s F.T.

It’s by Robert Skidelsky. I don’t agree with every sentence, but it’s quality stuff.

Idiots in high places.

Nick Clegg, the U.K.’s deputy prime minister, asked “"How will we pursue social justice with billions of pounds of taxpayers' money disappearing down a black hole every year, just to pay the interest on our debt while our schools and hospitals fall apart?" See last para here.

Well the “money” does not “disappear down a black hole”. U.K. national debt is held mainly by U.K. institutions: banks, pension funds, etc. The interest is mostly money going round in circles within the U.K. Of course about a third of U.K. national debt is held by foreigners, but this is more or less cancelled out by the large chunks of foreign national debt held by U.K. institutions. Less money for taxpayers and more for pensions has no effect on the total amount of tax the government can collect from the population.

(Update (24th June): Nice to see some support for my doubts on Nick Clegg's understanding of economics.)

And The Times leading article claimed “Borrowing has expanded so far and fast that it risks economic stability.”

Now look ‘ere Times: the U.K. national debt (like that of the U.S.) is still nowhere near half what it was just after WWII or just after the Napoleonic wars. Neither of the latter lead to “instability”.

Of course there is the point that the world’s debtors are being harassed by the wolf pack lead by those incompetents and fraudsters, the credit rating agencies (to which Warren Buffet pays little attention, according to Janet Tavakoli’s book “Dear Mr Buffett”). But the fact that a collection of vandals are trying to vandalise something is a reason to clobber the vandals, not those being vandalised.

Also the above is an argument for a zero national debt regime, as advocated by Modern Monetary Theory (at least Milton Friedman and Warren Mosler’s version). (See second last para of Warren Mosler’s article.)

But the above U.K. incompetence is not as bad as the claim by Winterspeak that Bernanke doesn’t understand banking! (See 15th June post: “Bernanke cannot do accounting.”