Although the foreigners may have only wanted government debt instruments, so they may have bid up government debt prices instead? Interest rates would still have fallen in this country, don’t you think?

I will continue to read the Don’s stuff on Citizen’s assemblies with interest. On solving the political expenses crisis, I support the idea strongly. If they could agree not to use MP’s as proxy councillors, I think we may get somewhere.

My point about losses was that we bear the eventual cost of government debt issued to the foreigner. If there had been less of our governemnt debt, the foreigner would have bought more CDOs, etc. He would then bear the losses on them instead of our picking up the losses in the course of propping up our banks. But the counter factuals are only of interest for exploring theory.

Nobody really knows about the uses of Citizen’s Assemblies; but the experience so far has been more promising than I expected.

David. This is the puzzle that Greenspan could not solve – low real rates despite high short rates. But why do you think that we would have borne less of the losses? If we had had more savings, why would they not have gone off to CDOs etc in even greater quantities?

I think all these counterfactuals are fairly academic. Politically, it would have been very hard to save or stand in the way of the housing boom.

With respect to you both, we citizens give pretty bad answers and (more often) non-answers to all sorts of technical questions when they are asked out of the blue (or out of the red). However, we tend to give pretty interesting answers once we are assembled, briefed and have discussed the question. Insofar as this is a question of political economy, a Citizens’ Assembly for the subject might give the normal political process a much better starting point than we now have.

Giles,

You may be over-rating Charles Dumas letter to the FT, and the virtues of Gordon Brown’s mistake in over stating the UK’s potential growth trend which lead him to square his Budgetary Golden Rules with sizeable deficits in the good times. The main savings flow was from the trade surplus countries. I surmise (without doing the arithmetic) that an increase in UK and US government savings would have meant that a greater proportion of the surpluses would have found a home in Western private sector assets. The surplus countries would therefore have bourne more of the costs of the crash, so probably leaving less of the losses on the Western banks’ balance sheets.

The arithmetic that I have not done is feeding the scenario through a stock-flow conditioned model of the world economy.

i quite agree that this is a problem of political economy, not just technocracy. but i severely doubt how cou nting heads or hearing what gets the loudest cheer will have a any reliable relationship with fixing systemic crisis..

democracy works when people need to decide how to share resources. it is highly relevant for the fiscl crisis.. but for new capital rules?

I know that democracy can be very frustrating for bright technocrats, but ‘the centre left should learn that democracy doesn’t fix problems, and the little people have nothing useful to say about the financial crisis’ is, with respect, one of the worst pieces of political analysis that I have read in a very long time.

Happy to debate the details of the policies (is the problem of loan sharks really so much worse in France or any of the other countries where they cap interest rates?), but the underlying principle has to be to engage and involve ordinary people in figuring out what to do next.

A few years ago, some people made exactly the same criticisms about the demand for a Living Wage – today it is supported by radical leftists such as Boris Johnson, Barclays Bank and Pricewaterhouse Coopers. Whatever the merits, the ideas put forward last night were the exact opposite of ‘platitudinous talking-to-ourselves’ – every main political party, the Olympics Legacy Agency, city law firms and banks and the Corporation of London all sent representatives to pledge to work with London Citizens. That’s a lot more influence than, say, a think tank producing a pamphlet.

If you don’t treat economic policies as a political matter, don’t try to involve and engage people and win support for your ideas, then no matter how good your ideas, they will be irrelevant.