Socialism or capitalism - Big government is a consequence, Small government an objective

Look at what they do NOT what they say!

Socialism or Capitalism - it is one of the central discussion points these days. Socialist too form a broad spectrum - from Bernie Sanders to AOC to Elizabeth Warren. The capitalist are not yet vocal but many are simply dismissive of the left-leaning neo-politics. But are there really left-right differences? Not too much. And I say that as I look at what they do NOT what they say.

Governments get bigger

The basic aim of government at the formation of Amercian revolution was twofold - Army formed protection force protecting citizens from outsiders AND legislation, police, courts system formed Law and Order for resolving disputes among citizens.

Gradually government came to provide diverse services - education, healthcare, insurance, subsidies, legislation and regulation of various industries. Each of these activities has grown in scale over the past 100 years. 

When you want government to take up more responsibility then you will end up with a big government. 

Big government = MORE TAXES

First objective of taxes is to pay for the government. In some countries the salary expenditures of government account for more than 50% of the total expenditure of the government. This is not counting the maintenance cost and other regular expenses government has to incur just to exist. = MORE TAXES.

Then all these people employed by the government have to do something. Even if they do nothing and just make presentations they consume a lot of money. That requires even more budgets = MORE TAXES.

To make it worse usually they add to procedure and impose cost on society. They prevent innovation. They make it their responsibility to say NO. That stops entrepreneurs before they can create value. It means MORE HIDDEN TAXES.

It all eventually leads to more taxes.

 

Big Government attracts big responsibility

People have started viewing government as a provider. Governments have encouraged that view. In effect whatever we want to get done, we want government to do it. We would like universal health care, you ask government. You want insurance for all - you ask government.

When governments become bigger, governance becomes difficult. Hence laws turn into fine prints, every step of industry is managed by dozens of legal clauses. Compliance becomes a cost.

Big government is a consequence - Small government is an objective

We need to prune governments regularly. On one level that means improving productivity of government servants. But on other level we need to reinvent our systems to be designed for less government.  But remember, no matter what they say, they will increase the size of government AND they will increase taxes AND they will default towards socialism.

To prevent it we must actively reinvent the system to stay on the money. We shall discuss how in subsequent posts.

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Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

About Australian banks and Australian property

John Hempton highlights something interesting today about resignation of top Australian Bankers.

Back in 2016 John Hempton and Jonathan Tepper of Variant Perception conducted research by personally meeting with the real estate brokers and seeking apartments to buy. In a sort of reply of scenes from the Big Short, they found banks wanting on the paperwork, mortgages being sold to those with questionable ability to repay. You can read some media reports about this here, here or here.

Today John Hempton wrote about recent firing in light of the final report of the Royal commission into banking and detailed allegation therein. John Hempton says:

Anyway come the Royal Commission Dr Henry talked to the Commission in a frank and open way about the problems. It was Dr Henry being Dr Henry: honest, competent, and realistic.

It came off badly. I remember the grilling he got from the Royal Commission and understood what was happening. It was clear that what was required from the Royal Commission was kowtow, rather than honest frank discussion. Dr Henry looked bad even though he was probably the single most reliable and honest witness the banks put up.

The Royal Commissioner made specific findings against Dr Henry and Andrew Thornburn. This surprised me because on my research National Australia Bank was the best of a bad lot, both in absolute level of moral decay and in direction.

The report quotes Dr. Henry and Thorburn in many places. The transcripts do not show Dr. Henry in good light. The transcript indicates that possibly Dr. Henry took this too lightly. He did not do any homework. A deposition once you are sworn in is a serious business. I do not sympathize with Dr. Henry.

The transcript of some others reveal that they kept repeating from jargon books and PR manuals. To that extent whatever their deep rooted ills did not come out. 

Implication for property market

There are two fundamental issues with the housing and mortgage markets. 

First the search for yields and the quantum of capital available makes real estate the best asset class to absorb the QE effects. It is doing precisely that. So some of the price appreciation is attributable to this. The macro policies have created this asset builders boom - create an asset and sell it to REIT type holders at ludicrous cap rates without any regard to final consumer.

Second, the problems in mortgages are of banks creation. As banks search for return in a tight market they have crossed the limits. The crisis in Australian banks is part of continuum that includes Wells Fargo opening accounts for customers to US sub-prime crisis. It may not be as acute but it is part of the same class.

Learnings for Commissions in India

The commission for banking has its website and documentation spot on. I urge Indian commissions to maintain such kind of records open for public scrutiny.

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 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".

Interesting Readings May 14 2018 - Development Finance Institutions.

Financing reindustrialization: bring back development banks

Deepak Nayyer talks about capabilities created in Development Financial institutions (DFIs) for longterm lending. 

These DFIs are very important in creating a capability for lending to special investments. India, till 2000, had developed the capabilities to lend to infrastructure, sector-wise capacity creation etc. We need the concentration of skills in one place. This way, special knowledge reduced the risk for lending.

The commercial banks decided to reduce the lending risks by consortium lending. That is a statistical approach to risk mitigation.

Now Deepak Nayyar wants to create a National Development Bank. That I think is a bad idea. Though there may be some merit in creating a network of professionals who can lend to industry and towards infrastructure. These professionals can be monitored using DIN-like number (Director identification number) and their investments performance tracked. These people may be employed with commercial banks but without sign-off from these persons, such loans will not be approved.

Note:

What we are creating is attribution chain. I have discussed the importance of attribution in both of my books - Subverting Capitalism and Democracy and Understanding Firms. Please use the links below to check out the books. 

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 Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".