Adam Posen, a member of the Bank of England’s Monetary Policy Committee has opened a catering sized can of worms, reported in today’s Telegraph

“Adam Posen, a member of the Bank's Monetary Policy Committee, said that the Government should consider slapping extra taxes on British properties, suggesting that in future homeowners should have to pay an extra charge if prices rise too fast. In comments which will cause extreme disquiet in the Treasury, he even indicated that this may mean imposing capital gains taxes on first homes and raising stamp duty”.

Now, fair play to the guy, I guess for even broaching the subject. Such bubbles are not earned rewards, but the result of existing policy preventing the market adjusting to the demand quickly enough and other policies putting more pressure on particular areas. Not only that, but they are effectively a zero-sum game - for those who gain, others have to lose out - on the cost of renting often or on their increasing inability to afford to join in the housing boom.

But the real and permanent mechanism is to base all our tax system on land value taxes instead of incomes and profits and sales. A land value tax will collect more, naturally, when the market overheats and prevent bubbles forming, not punish them when they do, or wait till sales happen to charge an extraordinary tax.

In a quick diversion from my task of preparing a business plan to rescue Oxfordshire's distressed home-owners and businesses from the worst effects of the state-created credit crunch I noticed the other day, in a rare foray into blogging himself, a Lib Dem Federal Policy Committee member, Geoffrey Payne, has been reading Vince Cable's new book about the credit crisis, The Storm. Geoffrey is one of those Lib Dems with a visceral hatred of anything "economically liberal", which he will always equate to something akin to "what Maggie and Ronnie did".  He notes that Vince quotes Herbert Spencer, saying that it shows how little Vince thinks about "extreme libertarians":

I have read the book and would heartedly recommend it. I agree with most of it. Because it is short there are obvious gaps - the chapter on Malthus is rather short and inconclusive which is a shame as I for one think it ought to be the most important part.

However there is no doubt what he thinks about extreme Libertarians;

"(quote from Herbert Spencer) 'The ultimate result of shielding man from the efects of his folly is to people the world with fools' . This approach was influencial in the years of the Great Crash, and it helped inform the advice given to president Hoover by his treasury secretary, Andrew Mellon: to do nothing. '[Panic] will purge the rottenness out of the system ... People will work harder and live a more moral life ... enterprising people will pick up the wrecks from less competent people.' Since Hoover and Mellon emerged as the fools who precipitated the Great Depression, their abstemiousness become seriously unfashionable", page 46, The Storm. [From Left Liberal: Vince Cable lays into Libertarians]

Now, I don't suppose for one minute that Geoffrey has bothered to read the Spencer essay from which this quote comes. I hope Vince has. For in "State-tamperings with money and banks" which can be found in Vol 3 of his "Essays: Scientific, Political and Speculative" available on the web courtesy of the Online Library of Liberty Spencer produces a fantastic critique of state controlled money systems and how they will inevitably exacerbate bubbles and crashes.

Allowing for the slightly convoluted Victorian English prose style, it is a fabulous analysis of why, as Hayek concluded a hundred and tenwty years later, or as both Mises and Rothbard have concluded in their ciriticism of the Federal Reserve system, the state is incompetent in the running of currency.

What the government is doing by quantitative easing is abolishing the rule of law and its part in enforcing contracts. What they are saying by creating additional money into the system is that you no longer need to pay all the debts on contracts you have issued, because here's some extra money-tokens to cover them. And that if banks were allowed to run under free banking these crises would never been as deep or as pervasive as they are through manipulation of the currency by the state and the banking system by regulation.

It is a brilliant exposition of the origins and effects of what we know of as "moral hazard". And that the effects of us being shielded from that moral hazard by state offered, ultimately worthless, guarantees, is to populate the banking system with the sort of fools we have witnessed, from Fred the Shred to Adam Applegarth.

I encourage you to read Spencer's essay (it runs to about 23 pages of one and a half lines width print on A4). If we are to avoid this sort of crisis again, we need to learn from the likes of him, and Hayek, and Mises and Rothbard, about how these crises come about through the state currency system. I am very proud that English liberals understood this a hundred and fifty years ago, and equally ashamed that politicians ever since have believed themselves immune to these facts of economic life.

Most of you know I have little truck with bankers at the best of times, let alone after they have comprehensively trashed our entire way of life(!), but to be fair to them, I've been watching some coverage of the Westminster Banking Trials, and it made me wonder whether our glorious representatives might have actually started from the wrong place.

They have passed the buck to the banking industry and not looked at the state's much more important contribution to creating this crisis. Without learning this, they will be doomed to make similar mistakes in future and cause, one day, an even bigger crisis that they will not be able to stop.

And it's all the more worrying since the evidence of government's responsibility for this crisis was given to their very committee on 20th March, 2007 - so nearly two years ago now, in the Treasury Select Committee's investigation into the first ten years of Bank of England "independence" and the Monetary Policy Committee. And with evidence, it is a relatively simple matter to construct an alternative view of the credit crunch in which the over-extension of the banking system is a direct result of public policy, at least in the UK anyway.

Eddie George, the former Bank of England Governor in oral evidence to the Select Committee, and picked up in the next day's Independent, said that the political incentive in the late nineties/early noughties was to keep the cost of borrowing down far enough to keep people borrowing against property and spending on imports to prevent the UK economy going into a mini-recession following the dotCom bubble.

Rising house prices make the majority who are owner-occupiers feel good. Plenty of credit and spending makes the country collectively "feel good". Staying out of recession, even just a short one, allows Gordon Brown, Chancellor, to keep banging on about his mantra of having abolished boom and bust, and having presided over the longest period of economic growth in recorded history.

Now let's have a think about Bank of England "independence" for a second: the Bank has "independence" insofar as its one defined job is to maintain a government set target inflation rate. The Bank is solely responsible for monetary policy to achieve that. Not, categorically not, macro-economic policy in general. So the enjoinder to keep people "feeling good" about the economy must have come from Downing Street.

So, having given this instruction, the City reacted in the only possible way. Clearly the Bank of England could not be as brazen as to pump high-powered government created money into the system. So the only way this policy objective could be implemented was to sell more debt. Either more debt to the same people who had already debt, or new debt to people who weren't in debt. And the only asset class that could bear this sort of debt creation without itself feeding through into inflation was housing.

So, on the technical signal of low base rates from the Bank of England the banks swung into lending mode - after all, they make money when they are lending. And when one group of people has had their fill of mortgage debt, and you cannot sell them any more, you have to find new customers. You need to start selling mortgages to people you would previously not have considered a good risk. You need to offload that more risky lending so you invent a collateralized debt obligation to sell that risk to many different types of investor. Markets get more and more jittery and start wanting to insure and hedge their positions and create credit default swaps.

On the demand side, with rising property prices, as I have written before, far be it from a classic "bubble" mentality where irrational optimism takes the crowd into ever more irrational market situations, people who were aspiring owners who could not afford to buy and faced with rising rents apparently only heading north for the foreseeable future, had to take ever riskier loans in a desperation to get on a housing ladder being consistently talked up by government and the fourth estate in equal measure.

Now, this doesn't let bankers off the hook of course: they should have said when they knew the policy was untenable without taking extra-ordinary risks. But with a few honourable exceptions few in the political arena were complaining too much at the "feel good factor" at work despite mounting evidence of unsustainable personal debt. But if we are going to learn from this crisis, we must understand that the "original sin" in all of this was political policy. How can we expect politicians to fix it?

If this analysis is correct, we can surely say that Gordon Brown and the government of the late nineties is responsible for the most devastating episode of capital destruction on record.

I don't normally get to see the Daily Politics, but I'm on a week off at the moment and saw today's after PMQs. There was Yvette Cooper being grilled by Brillo who was asking whether Britons' status as the most personally indebted population in the G7 was anything to do with our current travails.

She kept avoiding the point, as usual, insisting that it was an American thing from which we had got infected. For your benefit, Yvette, you lying cow, here's what Eddie George said just eighteen months ago:

"In the environment of global economic weakness at the beginning of this decade... external demand was declining and related to that, business investment was declining," he said. "We only had two alternative ways of sustaining demand and keeping the economy moving forward - one was public spending and the other was consumption.

"We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term. But for the time being, if we had not done that, the UK economy would have gone into recession just as the United States did."

He said he was "very conscious" that stimulating consumer demand could give rise to problems in the future. "My legacy to the MPC, if you like, has been 'sort that out'," he said. Under Lord George's governorship, rates were slashed from 6 per cent in 2001 to 3.5 per cent in 2003, pushing house price inflation above 25 per cent and high street spending growth to its highest since the late-Eighties boom.

I hardly expect tomorrow's papers to cover the news of Mrs Balls's resignation - but she is deliberately misleading the public and that would be the honourable course. I understand that you can only really begin to tackle a problem if you admit to it in the first place. Eddie George did; it's time this government did too. Disgusting, lying bunch of shit-crocks.

Just what did she study at Balliol, Harvard and the LSE?  Does she really believe we will just think she is stupid or mistaken?  What the fuck have the people of Pontefract done to deserve her?

...it's more like 2% of our money that is actually real, tangible stuff.

You're lucky if you happen to have some of the real stuff in your hands in fact. Why shouldn't the good old coin counterfeiter have a go. The Masters of the Universe who are at this very moment plunging us all into financial depression are the ones who are really the counterfeiters. And on an unimaginable scale. So unimaginable that we would rather believe it's not been happening.

The fact is that what we think of as pounds and pence are really only represented in the real world by, at the last calculation, about £45bn worth of notes and coins. Yes, that's the sum total of what the state has ever issued in our name.

But add up what we all have in our bank accounts and the humungous numbers represented by our outstanding mortgage balances and so on, there are more like £1,800bn or one point eight trillion.

Is it any wonder that this house of cards is teetering? And the fraudulent pound coins and notes that sometimes inconvenience us when a shop assistant tells us we can't use the money we thought we had are only the visible manifestation of a fraud so much grander we'd prefer not to think it exists.

There's been much talk, most of it at least tacitly approving, of the restrictions or bans imposed in the past few days on so called "short selling" company shares. Most of you probably don't know that my first career, straight out of school., was as a trader on the stock exchange, followed by stints in several stock-broker firms mostly in private client advice and fund management, before I got into IT - which was as a result of my city experience. That's all a bit apropos of nothing really. After all, you'd be right in thinking that if I had been successful in this first career I might now be funding a think tank or something. But it gives a little background to my knowledge of this issue.

Short sellers, per se, are not the problem here it seems to me. Indeed the stock exchange relies on players prepared to go short - that's what market makers are effectively obliged to be prepared to do when they make a price.

Short selling is also an important way of the market getting the information it needs to make accurate value assessments. Longer term shareholders may have more emotional reasons than pure profit to resist pressure. Even perhaps just inertia. Sometimes even tax considerations. Short selling is also a way in which holders of stock can increase their returns on the stock by renting it to the short sellers. Little risk to them.

In my day, you could short sell, effectively, for fourteen working days. The London Stock Exchange used to work on a fortnightly settlement cycle. So for example a deal you do tomorrow, if tomorrow was a new cycle, would not need to be settled until the Monday in the middle of the next fortnightly cycle. If you went short tomorrow, you could, potentially, buy back for cash settlement (a special, premium service for urgent trades that was settled the next trading day) as late as the Thursday night before settlement day - so giving you fourteen trading days to see the stock fall and buy it back.

Nowadays everything is more or less "cash settlement" with positions settled the next working day - hence the self limiting requirement to borrow stock to deliver on short positions.

No, there's nothing wrong with short selling. Once you realize that the secondary market is stocks and shares is a big gambling den in any case, how can you outlaw one type of gambler and not another.

The real problem, it seems to me, with the run on HBOS shares for example, blamed on "short sellers", is the idea that some market players, hedge funds were cited, were "hunting in packs". Now, it is conceivable that even if there's nothing wrong with the fundamental financial health of a company, such a "pack" could be strong enough to provoke a run on a stock simply by weight of numbers. This, however, would be market manipulation. It would be legal, ethical, and even just plain sensible, to suspend trading in a particular share, or even in the whole market, if there was such illegal manipulation going on, or suspected. If a suspension was unwarranted, there should still be the equivalent of a "stewards inquiry" to determine if there was manipulation, a cartel operating, and if so how to punish them.

If the fundamentals were bad for HBOS, and actually I suspect that they were worse than the financial watchdogs have been saying - otherwise opening their books would have been enough to disprove the rumours - then the short sellers simply administered the coup de grace a bit more humanely perhaps than dragging it out for weeks more uncertainty.

I very much suspect that some hedge funds and private equity fund managers do aggressively hunt in packs occasionally. The fact that the secondary market is a gambling den makes it likely. That needs investigating. Market procedures for suspending trading in a market in which the true value of a company has become impossible to assess immediately need looking at. But having a go at the short sellers, who could, after all, just be the people maintaining liquidity in a particular market, is simply creating a scape-goat. The authorities should be ashamed.

...and we still don't seem to know what to do about bankers!

The Bank of Scotland, whatever is now left of it, is 312 years old. That of England just two years older. Ever since the banking system has been built on state protectionism, corporate welfare, monopoly privilege and, at its heart, a gigantic fraud.

The fraud was that a goldsmith could give both you and I receipts for my gold stored in his vaults and make money on both - from me a fee for keeping my gold, from you interest on the receipt you had borrowed from him. Indeed they found they could duplicate this so frequently, fraud upon fraud if you like, that though gold is perhaps regrettably no longer the basis of our money, the "hardest money", real "hard cash", amounts now to just three per cent of our total money supply in terms of everything we all have collectively borrowed and deposited.

To be fair, most goldsmiths at least issued notes of their own. Customers - both depositors and borrowers - chose which goldsmith to bank with on their reputation. If they became overstretched, issued what was felt to be too many receipts for the same gold, their notes would be less desirable in trade, there may even be a "run" when all the receipt holders tried to get their "real" money, the gold, out of the bank, which of course had much less gold than he had issued such receipts for. Nowadays, however, what they create and destroy in their lending business is denominated in the national currency, a currency issued nominally at least, by the state and guaranteed by the state.

This means it is no longer a private affair between a bank and its customers as to whether their business practices jeopardise their customers' savings; it is a problem for us all. We have ceded control of the supply of money issued in our name to private businesses whose main aim is to make profit for themselves and who, in the course of that otherwise noble pursuit, play fast and loose with the very air the entire economic system requires to function. And states protect them, bail them out as seems about to be the case in the US to the tune of almost countless billions, because they have to guarantee the currency they have so little control over.

Regular readers will know I am very fond of a quotation from Josiah Stamp, Liberal politican, Chairman of the Midland Bank in the 1920s and reputedly second wealthiest man in Britain in his lifetime:

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again.

"However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."

It rather seems to me that with the events of the past few days, we may be "taking the earth away from them" (or, more accurately and nauseatingly, buying it back from them) which they have stolen from us with their inflationary approach to money, but leaving them the power to create those deposits all over again with which, in the next bubble, they will buy it all back again.

Everyone seems to think that money has somehow been pretty constant. The way it works I mean, not whether we call it shillings and guineas or pounds and pence. But the current confidence trick really began in earnest in 1913 with the work of two extremely wealthy, powerful men in the US who persuaded the government of their day to set up the system that enabled them to create "our" money according to their corporate priorities. The results of John D Rockerfeller and John P Morgan Jnrs' work was the Federal Reserve and the rapid ramping up of fractional reserve banking, and the eventual demise of real solid backing for that currency.

If the current crisis really does turn out to be the "big crunch" at the end of the cycle begun by that 1913 disastrous collaboration between politicians and financiers we should be ready with policy to replace that fraudulent, anti-competitive, oligarchical system, designed by the very wealthy to keep them that way for little actual productive work with something different. Entirely different. I do not detect any mainstream politicians with the cojones to say so. Our governments and politicians are but eunuchs to the bankers, and the longer that continues, the more the vast majority of us will suffer.

Since the Vatican last week tried to redefine the "Seven Deadly Sins" and the events of the last few days in the financial markets I thought I would share a nice quote by a chap called Josiah Stamp, a liberal economist, tax policy expert, director of he Bank of England for a while, chairman of the LMS Railway company, and at the time reputed to be the second wealthiest man in Britain:

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Of course bankers, we know, ruleown the world. And they will stop at nothing, ultimately, to keep the rest of us from really understanding what's been going on these last few weeks but with one predicting, according to the Sunday Times, that the run on Northern Rock, which is what it undeniably is, could go as far as savers removing up to £12bn, it's worth a little reminder of what that number amounts to.

Going, going, gone!
There's only £50bn of the stuff in existence.
Originally uploaded by Ste D

I'm sure not everyone is demanding cold hard cash with the monarch's head all over it, but if they did, that £12bn would amount to just shy of a quarter of the entire stock of Sterling notes and coin in circulation and in banks' tills. So, whether you bank with Northern Rock or not, if you want your share of that pretty measly pie, you'd better get it wherever you can, soon!