Economics, and life, is about trade-offs. You have to choose the best possible option from a selection of alternatives.

Analysing just one of those alternatives and declaring it good or bad does not in any way make it the right or wrong option. You have to analyse by comparing.

Pick up the Financial Times and you’ll read about how awful Brexit could be or how awful the EU is, but never are the two compared. Whose awfulness outranks the other’s is the correct question to ask.

Of course we can’t answer that conclusively because we don’t know what Brexit will look like. But the EU’s nincompoopery doesn’t set a high bar. More on that in a moment.

When it comes to the analysis of Brexit, the level of dishonesty coming from Remainers has collapsed slowly since the vote. When their predicted crashes and crises didn’t emerge, they began using words like “could” and “might” and “if” in their predictions of doom.

Typifying this is the governor of the Bank of England, Mark Carney. The Guardian newspaper described his latest Brexit warning like this: “Mr Carney said that business investment was slower than it would have been expected to be because of Brexit.” Yes, there’s a definite possibility of a firm maybe.

But my favourite example comes from the National Farmers Union (NFU), which warns Britain could face a food shortage under Brexit. At least that’s the way it’s framed… also by The Guardian. The NFU is actually saying that Brexit is an opportunity to regain food self-sufficiency. We’ve gone from importing 20% of our food to 40% in 30 years, it reports.

Among the top industry- quotes ever to grace a newspaper page is this one from the NFU: “The two main responsibilities of any government are to defend its people and feed its people.” That’s probably true in North Korea and Venezuela, but everywhere else the government has long since learned this policy leads to mass starvation.

But back to economics and trade-offs. The figures are starting to firm up, here and there. The Brexit bill, rightly or wrongly, will cost around £36 billion, for example.

But there are still so many figures we don’t know. What’s the cost of EU regulation? And what will be the cost of the British regulation that replaces it? The difference between the two is the key to whether Brexit benefits or harms the economy. Only doing half the analysis is a manipulative mistake.

 

Europe’s bank regulation challenged

Meanwhile the EU goes about sabotaging itself as expected.

Last week I explained how the EU’s proposed new rules on bank runs would cause bank runs:

The EU is considering new rules to prevent a bank run in the wake of runs on Spanish and Italian banks. Sounds good until you realise just how it plans to do it – by banning withdrawals. Initially, customers would be unable to withdraw their money for five days, but up to 20 days in extreme circumstances.

Of course this will only make bank runs more likely by incentivising them earlier at a lower threshold of risk.

If you doubted my analysis, consider the effect of the last round of EU regulation on banks.

When the EU’s Single Resolution Board (SRB) decided Spanish bank Banco Popular was “failing or likely to fail”, it triggered an intervention which saw the bank sold for a symbolic one euro under the EU’s new rules to prevent crises.

How likely?

Unfortunately, the bank’s owners disagree the bank was about to fail. They argue it was precisely the EU’s looming rescue which caused the failure. And they’re taking their arguments to the European Court of Justice. Their lawyer explained:

“The SRB not only failed to meet the legal requirements for ordering the resolution of Banco Popular, but precipitated the very liquidity crisis that led to its decision.”

“The illegal and unprecedented actions taken here jeopardise the credibility and integrity of the entire European banking system and post-crisis regulatory framework.”

By creating a system where the government intervenes before the potential failure of the bank, a failure is more likely to happen and happens earlier. Depositors, bondholders and shareholders abandon the bank earlier in anticipation of government intervention. If the bank is going to be sold for a euro when it’s “likely to fail”, you run for the exits earlier, which triggers the problem itself.

The importance here isn’t the failure of individual banks. If bank failures are made more likely by government policy at a lower level of risk, that raises the threshold of a systemic crisis. A mid-size problem is more likely to trigger an EU-wide financial crisis thanks to the EU’s policies.

We’ll see how the court case develops. But fears over the EU’s proposed rules to prevent bank runs are certainly justified given the experience of the EU’s bank wind-up rules.

Unleashing Britain

The NFU did get one thing right. Brexit is an opportunity to unleash the British economy. With the right policies…

The wrong policies beget this. Given the propensity of our politicians to do all the wrong things before the free market forces them into compliance with common sense, it’s an eventuality you need to prepare yourself for. The risks and opportunities are all laid out for you here.

But let’s be optimistic today.

Britain could lead the world on all sorts of levels. And not just in finance.

The little corner of Britain which saw the invention of nothing less than the steam engine could be developing something even more monumental.

You’ve probably read about what oil discoveries did to the bank balances of landowners in Texas. Well you need to have your eye on this development if you want in on the environmentally friendlier British version.

Given that even nuclear reactors use steam, this reinvention of the wheel could provide enough steam to spin the UK’s economy, and the value of your shareholdings, to new heights.

Until next time,

Nick Hubble
Capital & Conflict