The media is often accused of accentuating the negative, of spreading doom and gloom, but this is not actually true. In fact it tends to be over-optimistic about the economy and failed to foresee the 2008 Crash. And if you look at the range of predictions for 2009, you find many forecasters are expecting a dramatic recovery. The business magazine Forbes is not alone in foreseeing a 30% stock market rise in the next 12 months. Analysts from all the big banks like Morgan Stanley,JP Morgan, UBS and Citigroup have been quoted forecasting a substantial recovery in share prices of up to 50% in 2009.
You may wonder what planet they’re living on, when everyone can see with their own eyes that things are dire. The UK economy is expected to shrink by 3% in 2009, according to the British Chambers of Commerce, the steepest decline since 1946. The housing market is falling at its fastest rate in 25 years according to the Halifax. Unemployment is expected to increase by at least 600,000 in 2009 and most analysts believe there will be three million on the dole by the end of the year. Given unprecedented levels of consumer debt, collapsing corporate profits, continued problems for our insolvent banks and the threat of protectionism across the world, why would anyone seriously think things are getting better?
Well, history for one thing. Paradoxically, stock market recoveries often happen during the early stages of a recession, making it look as if capitalists are opening the champagne just as millions are being thrown out of work. Following the 1974 economic crisis the UK stock market roared in 1975, but that didn’t mean that the economy was in great shape - indeed the ‘recovery’ saw the Chancellor, Denis Healey, having to go ignominiously to the IMF for a financial rescue in 1976. Stock markets often bottom before the the economy because financiers have already “priced in” the economic recession and are speculating on the coming upturn. Since the stock-market collapsed by a third in 2008 - it’s worst year since the 1930s - many forecasters believe the bottom must have been reached.
This matters politically because it lends credence to the government’s claim that, by the second half of 2009, the UK economy will be out of the woods and on the way back to sustained economic growth. Except of course that won’t be - the “recovery”, if it happens, will essentially be a financial illusion. But it will at least allow Gordon Brown to announce that the ‘green shoots of economic recovery’ are poking through the permafrost. The media is only sensitive to stock market movements when shares go down. That’s when all the front pages show pictures of men in dealing rooms holding their heads in their hands or covering their eyes in apparent despair. In fact, they’re probably just thinking about where to go for lunch or trying to remember the date of their wife’s birthday, but the image is selected to fit the message. When stock markets go up these dealing room tableaux rarely feature and the economy is thought to be sound by default even if it isn’t.
House prices are the other touchstone index about which governments care intensely when prices fall. There is mild panic in the cabinet at the 19% crash in house prices over the last year and a half and the government will do almost anything to get prices to rise again. This isn’t rational because as many people gain from house price deflation as lose from it. Falling prices can also boost the stock market. With prices scheduled to fall by 50%, peak to trough by 2011, investors are going to be more likely to put their cash in shares than in property. Since the FTSE is seen as a barometer of economic health, this flight from property could help the government persuade voters that the economy is one the mend.
So, Gordon Brown is desperately hoping that the current rise in the FTSE will continue so that he can claim his policies are working. So, will it? Well, the trouble is that the stock market gurus all predicted exactly the same stock market rally this time last year. Yes, on the eve of the biggest crash in eighty years, there was hardly a banker in London who didn’t say that 2008 was going to be a great year for the markets. The vast majority of forecasters said that shares were cheap by historic standards, that the worst of the credit crunch was behind us, and that prompt action by the banks and governments would lead to a strong bounce in the markets throughout 2008. In reality, the FTSE fell by 31%.
How can so many intelligent people get it so wrong? This is one of the great mysteries of economic science: the complete unreliability of forecasts. Surely anyone with eyes could see, twelve months ago, that there was too much debt in the economy, that the housing market was collapsing, that banks had lent far too much money, and that the so-called shadow banking system of hedge funds and derivatives, was in deep, deep trouble. Northern Rock had been nationalised in September 2007, after all, and banks had stopped lending to each other. So why did no one realise that this would bankrupt the banks? Taking their lead from the Bank of England, which insisted through the first half of 2008 that Britain was going to avoid recession, that house prices would stabilise not fall and that the banking system was quite safe, the wise heads of the finance houses all confidently forecast that things were going to be fine. They weren’t.
This fantasy forecasting is a serious problem. The entire forecasting industry and the media in general is massively over-optimistic. It always says shares are going to rise. It is a kind of collective delusion brought about by an ideological blindness to the dynamics of the capitalist system. In the boom years there was huge pressure on individuals not to depart from the consensus that the economy was robust and that house prices were not going to fall. Anyone who said anything different was likely to be accused of “talking the market down”, being a “perma-bear” or simply a crank. Professor Nouriel Roubini for example the New York economists who correctly forecast the collapse as early as 2006, and was labeled “Dr Doom”. Even now, mainstream economists say Roubini was right for the wrong reasons, and that ‘even a stopped clock is right twice a day’. Well, they said it: a broken clock is a better economic forecaster than the cream of City financial experts. Perhaps you should bear that in mind before you put your money on the boom of 2009.
Monday, December 29, 2008
Sunday, December 28, 2008
Here they are: my predictions for 2009
Forecasting is a mug’s game, but here’s mine: there will be a general election in May/June 2009. Gordon Brown will lose his majority in the House of Commons, but will return to power as leader of a Labour-Liberal Democrat coalition government. This will be called a National Government of Reconstruction and David Cameron will be invited to join it, but will refuse.
The Scottish National Party will lose Glasgow East in the May election and Alex Salmond will fail to deliver half of his forecast of 20 MPs. The Scottish government will encounter a succession of crises as its budgetary plans come unstuck in the recession and thousands of Scots lose their jobs. The opposition parties in Holyrood will attempt to topple the minority Nationalist administration in the autumn budgetary crisis, but will fail leaving Alex Salmond crowing at the year end.
The general election will be announced in the week after the Prime Minister hosts the G20 summit of world economic leaders in London in April 2009. The newly-installed President of the United States, Barack Obama, will commend Gordon Brown’s management of the economic crisis and call on the world to unite behind the PM’s second global financial stimulus package. The G20 will call for an international programme of investment to tackle the effects of climate change. America and China will fail to agree on the precise terms of this. The two nations will also accuse each other of introducing protectionist measures as world trade slumps and a global recession takes hold.
Gordon Brown will be accused of “cutting and running” by holding a Spring election when the world economy is heading for disaster and unemployment rising to 3 million. The Conservative leader, David Cameron, will claim that Brown is not telling the nation the truth about just how bad the economic recession is going to be. Brown will reply that the previous two Labour administrations have been four year terms of government - 1997-2001 and 2001-2005 - and that he is merely following precedent established by Tony Blair. He will admit that the economic situation is serious, that things have got worse since the start of 2009, and that he needs a mandate from the people of Britain to launch the next economic recovery package which will take borrowing to 60% of GDP.
Property prices will continue to decline and by the end of the year the average house will be worth 35% less than in August 2007. Nowhere will the fall in house prices be more marked than in Edinburgh where the crisis in the financial services sector will deepen. RBS and HBOS will suffer further write downs and losses requiring another injection of public funds and a further extension of public ownership. On the bright side, the Homecoming celebrations centred on the 250th anniversary of Robert Burns will be an unexpected success as visitors come to Scotland in record numbers to benefit from the huge fall in the value of the pound.
The Scottish National Party will lose Glasgow East in the May election and Alex Salmond will fail to deliver half of his forecast of 20 MPs. The Scottish government will encounter a succession of crises as its budgetary plans come unstuck in the recession and thousands of Scots lose their jobs. The opposition parties in Holyrood will attempt to topple the minority Nationalist administration in the autumn budgetary crisis, but will fail leaving Alex Salmond crowing at the year end.
The general election will be announced in the week after the Prime Minister hosts the G20 summit of world economic leaders in London in April 2009. The newly-installed President of the United States, Barack Obama, will commend Gordon Brown’s management of the economic crisis and call on the world to unite behind the PM’s second global financial stimulus package. The G20 will call for an international programme of investment to tackle the effects of climate change. America and China will fail to agree on the precise terms of this. The two nations will also accuse each other of introducing protectionist measures as world trade slumps and a global recession takes hold.
Gordon Brown will be accused of “cutting and running” by holding a Spring election when the world economy is heading for disaster and unemployment rising to 3 million. The Conservative leader, David Cameron, will claim that Brown is not telling the nation the truth about just how bad the economic recession is going to be. Brown will reply that the previous two Labour administrations have been four year terms of government - 1997-2001 and 2001-2005 - and that he is merely following precedent established by Tony Blair. He will admit that the economic situation is serious, that things have got worse since the start of 2009, and that he needs a mandate from the people of Britain to launch the next economic recovery package which will take borrowing to 60% of GDP.
Property prices will continue to decline and by the end of the year the average house will be worth 35% less than in August 2007. Nowhere will the fall in house prices be more marked than in Edinburgh where the crisis in the financial services sector will deepen. RBS and HBOS will suffer further write downs and losses requiring another injection of public funds and a further extension of public ownership. On the bright side, the Homecoming celebrations centred on the 250th anniversary of Robert Burns will be an unexpected success as visitors come to Scotland in record numbers to benefit from the huge fall in the value of the pound.
Happy New Angioplasty
Coronary heart disease is nature’s way of telling you to slow down - or so the old joke goes. Thing is, heart trouble is the one thing I never thought I would have. I’ve got low blood pressure, no family history, I don’t smoke and I’m fitter than I was twenty years ago. Even as they wheeled me into the operating theatre I was still insisting they must have made some kind of mistake. Unfortunately, they hadn’t.
Actually, it isn’t an operating theatre and looks more like a cold store, with the medical staff wrapped up against the cold and standing behind screens. Something to do with all the x-ray machines. The procedure is called angioplasty and involves threading a tube through your wrist into your heart to detect blockages in the main arteries of the heart. If they find any, and on me they did, the doctor inflates a tiny balloon to open up the blocked blood vessell. Then they feed in a little latticework tube called a stent to hold the walls of the artery open. This may be more information than you need - but if you are a middle aged Scottish male it’s worth knowing what you’re in for.
If you want, you can watch it all happening on on two large TV screens next to the bed - like some coronary sat-nav. It only takes an hour, and then you’re out of there, but it was one of the most extraordinary experiences of my life. You cannot fully appreciate the wonder of modern medicine until you see your own beating heart being fixed from the inside. Amazing. Sobering too: the fact that this kind of procedure is as routine as plumbing tells you all you need to know about the state of Scottish hearts. They may be brave, but they are also broken.
Coronary heart disease is still Scotland’s number one cause of premature death, killing one in four men - one of the highest rates in the world. And it’s not getting better either: among Scottish men aged 35-54, deaths from coronary heart disease rose from 60 per 100,000 in 2003 to 62 per 100,000 in 2006. We are 60% more likely to die from heart disease than men in the south of England. In 2009, CHD will remain the great medical challenge for the Scottish health system. No one really knows why we are so vulnerable to heart disease and unfortunately, as I discovered, looking after yourself is no guarantee of not getting it.
The doctors shrug and say: “Well, it’s just Scotland”. Yes, we tend to smoke, drink and eat badly, but that’s not the whole story: I don’t even eat most dairy products. Researchers have looked at everything from rainfall to the water supply without finding any obvious environmental factors. Perhaps there is some insidious psychological quality of life in Scotland - the dark, the way people treat each other, the anger that seems to afflict a lot of Scots men. But that doesn’t make a lot of sense either since men in England are pretty emotionally inarticulate too, and the stress of life in congested London, where people often have to commute three hours a day, is surely greater than in Glasgow. Anyway, I spent half my working life in London.
Sometimes there just aren’t simple explanations for things that go wrong with our bodies; there is only the dealing with them. Preventive medicine for all its virtues, can never replace the hard-headed business of fixing the plumbing, doing it early and doing it right. This is what the National Health Service is there for, and does superbly well. I could not fault the care I received from the much-maligned Edinburgh Royal Infirmary. Within three weeks of complaining that I had chest pains I’d been diagnosed, scheduled and dealt with. They were calm, highly efficient and kept me properly informed at every stage in the process.
In fact it was a shock to discover how good the NHS actually is, since I haven’t been in hospital for over thirty years. The wards seemed clean and even the food was pretty good - for mass catering. The equipment is state of the art, the medical staff are mostly brilliant, and they really do try to treat you as an individual. Simple things like asking you what name you would like to be called by. Yes there is bureaucracy, and the nurses seem to spend most of their time shuffling paper. But that’s largely a result of the target and compliance culture that has afflicted the NHS in the last decade. As a patient you have to fill in endless forms and legal disclaimers before they can do anything to you. I mean, you’re hardly going to refuse, are you?
Media coverage of hospitals tends to focus relentlessly on what goes wrong in the NHS - MRSA, chemotherapy cock ups, waiting times, C.difficile, dirty wards - so we get a distorted view of what the service actually delivers. I’ve always been a supporter of the NHS, but even I had begun to accept the conventional wisdom that it is bureaucratic, slow, inefficient, uncaring and that it represents a financial black hole in the public finances. Not true. As I lay in bed playing with the remote control that allows you to configure the bed into an infinite number of positions, I wondered why the public image of the NHS is so unlike the reality.
Partly it’s history: a lot of money has gone into the service recently and there has been a lag in public perception. Those 90’s waiting lists did a lot of damage. But I also think marketing has a lot to do with it, or rather the lack of it. The private sector runs all those BUPA ads showing happy patients being given care by attentive nurses in clean hospitals. The message is that none of this is available on the NHS, whose image is conditioned by press stories about dirty wards and people dying before they get their operations. The debate about private medicine is skewed by this misperception.
Imagine if the NHS could employ Saatchi and Saatchi. The campaign would be simple. Here's one of the best health services in the world, according to the World Health Organisation, which is free at the point of need, is run by dedicated staff who really know what they are doing, and requires no expensive medical insurance. It really is the bargain of a lifetime. Especially for middle aged Scots men. So, use it or lose it. I did - and I know who’s going to have a happy New Year.
Actually, it isn’t an operating theatre and looks more like a cold store, with the medical staff wrapped up against the cold and standing behind screens. Something to do with all the x-ray machines. The procedure is called angioplasty and involves threading a tube through your wrist into your heart to detect blockages in the main arteries of the heart. If they find any, and on me they did, the doctor inflates a tiny balloon to open up the blocked blood vessell. Then they feed in a little latticework tube called a stent to hold the walls of the artery open. This may be more information than you need - but if you are a middle aged Scottish male it’s worth knowing what you’re in for.
If you want, you can watch it all happening on on two large TV screens next to the bed - like some coronary sat-nav. It only takes an hour, and then you’re out of there, but it was one of the most extraordinary experiences of my life. You cannot fully appreciate the wonder of modern medicine until you see your own beating heart being fixed from the inside. Amazing. Sobering too: the fact that this kind of procedure is as routine as plumbing tells you all you need to know about the state of Scottish hearts. They may be brave, but they are also broken.
Coronary heart disease is still Scotland’s number one cause of premature death, killing one in four men - one of the highest rates in the world. And it’s not getting better either: among Scottish men aged 35-54, deaths from coronary heart disease rose from 60 per 100,000 in 2003 to 62 per 100,000 in 2006. We are 60% more likely to die from heart disease than men in the south of England. In 2009, CHD will remain the great medical challenge for the Scottish health system. No one really knows why we are so vulnerable to heart disease and unfortunately, as I discovered, looking after yourself is no guarantee of not getting it.
The doctors shrug and say: “Well, it’s just Scotland”. Yes, we tend to smoke, drink and eat badly, but that’s not the whole story: I don’t even eat most dairy products. Researchers have looked at everything from rainfall to the water supply without finding any obvious environmental factors. Perhaps there is some insidious psychological quality of life in Scotland - the dark, the way people treat each other, the anger that seems to afflict a lot of Scots men. But that doesn’t make a lot of sense either since men in England are pretty emotionally inarticulate too, and the stress of life in congested London, where people often have to commute three hours a day, is surely greater than in Glasgow. Anyway, I spent half my working life in London.
Sometimes there just aren’t simple explanations for things that go wrong with our bodies; there is only the dealing with them. Preventive medicine for all its virtues, can never replace the hard-headed business of fixing the plumbing, doing it early and doing it right. This is what the National Health Service is there for, and does superbly well. I could not fault the care I received from the much-maligned Edinburgh Royal Infirmary. Within three weeks of complaining that I had chest pains I’d been diagnosed, scheduled and dealt with. They were calm, highly efficient and kept me properly informed at every stage in the process.
In fact it was a shock to discover how good the NHS actually is, since I haven’t been in hospital for over thirty years. The wards seemed clean and even the food was pretty good - for mass catering. The equipment is state of the art, the medical staff are mostly brilliant, and they really do try to treat you as an individual. Simple things like asking you what name you would like to be called by. Yes there is bureaucracy, and the nurses seem to spend most of their time shuffling paper. But that’s largely a result of the target and compliance culture that has afflicted the NHS in the last decade. As a patient you have to fill in endless forms and legal disclaimers before they can do anything to you. I mean, you’re hardly going to refuse, are you?
Media coverage of hospitals tends to focus relentlessly on what goes wrong in the NHS - MRSA, chemotherapy cock ups, waiting times, C.difficile, dirty wards - so we get a distorted view of what the service actually delivers. I’ve always been a supporter of the NHS, but even I had begun to accept the conventional wisdom that it is bureaucratic, slow, inefficient, uncaring and that it represents a financial black hole in the public finances. Not true. As I lay in bed playing with the remote control that allows you to configure the bed into an infinite number of positions, I wondered why the public image of the NHS is so unlike the reality.
Partly it’s history: a lot of money has gone into the service recently and there has been a lag in public perception. Those 90’s waiting lists did a lot of damage. But I also think marketing has a lot to do with it, or rather the lack of it. The private sector runs all those BUPA ads showing happy patients being given care by attentive nurses in clean hospitals. The message is that none of this is available on the NHS, whose image is conditioned by press stories about dirty wards and people dying before they get their operations. The debate about private medicine is skewed by this misperception.
Imagine if the NHS could employ Saatchi and Saatchi. The campaign would be simple. Here's one of the best health services in the world, according to the World Health Organisation, which is free at the point of need, is run by dedicated staff who really know what they are doing, and requires no expensive medical insurance. It really is the bargain of a lifetime. Especially for middle aged Scots men. So, use it or lose it. I did - and I know who’s going to have a happy New Year.
2008: Year of the Great Crunch
In the first fortnight of October 2008, Britain went slightly mad. Perfectly rational people were pulling their money out of British banks and sending it across the Irish sea to banks in a country in even greater financial difficulty than ours. You could almost feel the panic in the air. Friends who had never shown the slightest interest in financial affairs were suddenly dividing up their savings into bite-sized chunks and depositing them in an array of institutions to comply with the government’s deposit guarantee scheme.
What drove this bizarre behaviour was fear - fear of something so strange, so unusual, that it has never actually happened in Britain, at least not since the modern banking system was invented in the 18th Century: a simultaneous run on the nation’s banks. Were these fears justified? Could the large British banks have folded? Probably not. The government was always going to step in - as it did - to avoid a systemic collapse, because the consequences of not doing so were too awful to contemplate. Loss of any one of the big high street banks would have reduced Britain to sub-Icelandic status . This was why the government had nationalised Northern Rock a year previously.
But the collapse of confidence extended to the government itself. Gordon Brown repeatedly assured anxious depositors that the government stood ready to act again if any other banks threatened to go under, but a lot of people thought it was still safer to hedge their bets and join the banking merry-go -round. According to the BBC’s Robert Peston, who has become the Walter Cronkite of the financial crisis, Royal Bank of Scotland was within hours of closing its doors because of a run on deposits. The heads of the big banks were summed to the Treasury by the Chancellor -Alistair Darling, whose place in history is assured - and given an offer they couldn’t refuse: accept government money, or be nationalised. Sir Fred “the shred” Goodwin the boss of RBS called it a “drive by shooting”, unconsciously comparing himself to a gangster.
It was ironic indeed that Scotland’s oldest banks, one of which had practically invented modern paper money, were at the centre of the crisis. HBOS and Royal Bank of Scotland, institutions which since the eighteenth century had been synonymous with prudence, caution and thrift were exposed as reckless gamblers, willing to take astonishing risks with their depositors money in the pursuit of world domination. RBS was one of the five largest banks in the world until October 2008, when it almost became the greatest casualty in the history of banking. Halifax Bank of Scotland was supposed to be the people’s bank, eager to help the first time buyer onto the “property ladder” and happy to bankroll Scottish entrepreneurs who were frozen out of the City of London club because they didn’t wear the right ties. More than half of corporate lending in Scotland in 2007 is said to have come from HBOS. Its collapse into the arms of Lloyds leaves much of Scotland’s economy without any means of financial support as we enter the worst economic depression since the 1930s.
The collapse of HBOS and RBS was a crushing blow to Scotland’s self confidence and has been compared to the Darien Disaster in the 1690s when Scotland’s great colonial adventure ended in disgrace and the loss of around a quarter of the nation's entire capital. That is perhaps a comparison too far. Nevertheless, financial services was Scotland’s growth industry and we are going to have to look for something else in future to earn a crust - and no one is quite sure what that is. But we aren’t alone: unlike in the 1690s both Scotland and England now face the same fate, as the management of money has turned out to be a fools game. Both partners in the Union had bet the house on financial services and had allowed manufacturing industry to dwindle. The Crash of 2008 has been a devastating collective blow to the UK, but unionists believe it has brought the nations closer together in the face of a common financial adversity .That remains very much to be seen, of course, and depends on whether Scotland is perceived to receive a fair deal in the economic reconstruction that is to come. But it is certainly true that, right now, both Scotland and England are too busy clearing up the wreckage to be thinking about further constitutional change.
And it isn’t over yet. This is a global banking meltdown and the financial reactors are still burning out of control spreading toxic waste across the entire economy. The crisis that began with the collapse of the sub-prime mortgage market in America two years ago, is now expected to cost - in direct banking losses - between $1,000 billion and $2,000 billion before it blows itself out. The economic impact of this has to be multiplied ten fold to get a measure of the contraction of global credit that is entailed by losses on this scale. The days when banks lent multiples of thirty times their core capital - which was standard practice in th City of London as recently as 2007 - are clearly over. All the banks are now focussed on building their balance sheets and trying to pay off government loans and equity stakes, which is one reason why it is naive to expect them to return to the easy lending practices of the past. Another is that many of the businesses they are being asked to lend to are going to go bust in the recession.
But we are all now in the banking business. Half the British banking system is now nationalised, an outcome that would have seemed incredible this time last year. The UK taxpayer has injected some £600 billion in loans, guarantees and capital into the banking system during 2008. That is an astonishing sum, and of course, most of it will hopefully return to the Exchequer as loans are repaid and government shares are sold off when the banking system recovers. But for now we all now carry the losses of banks like RBS Northern Rock and Bradford and Bingley on our national balance sheet - even though the government is not quite prepared to admit that it is there. Many taxpayer billions will surely evaporate, or find their way into private accounts. The banking system, even when it is bankrupt, remains highly efficient at one activity: generating bonuses. Even in the year of the greatest financial crash in modern history, the City of London managed to pay itself around £10 billion in bonuses.
Curiously, public opinion seems pretty relaxed about this - certainly there have been no angry demonstrations in Threadneedle St. There has been no clamour for heads to roll in this crisis, and unlike in America there have been no angry public hearings or arrests. We seem to accept that being fleeced by bankers is just a fact of economic life. Indeed, it is extraordinary looking back about how complacent the authorities were about the economic crisis. As recently as August 2008, the Bank of England was insisting that the worst of the credit crunch was over, that Britain would escape recession and that economic growth would be around 2.5% in 2009. How can we have any confidence in economic forecasters that got it so spectacularly wrong? In his pre-Christmas BBC interview, the deputy governor Sir John Gieve, admitted that the Bank of England simply didn’t understand the crisis. It thought that the effects of the credit crunch on the real economy would be limited and that the housing bubble was a temporary and largely benign phenomenon. Well, now they know.
Yet it should have been clear to anyone with half a brain that house prices - which had nearly tripled in ten years - were an accident waiting to happen. It was the apparently endless rise in real estate values, actively encouraged by governments here and in America, that fuelled the credit bubble. The belief that house prices could not fall is what motivated banks to give sub-rpime mortgages to Ninjas - people in American cities with no income, no jobs and no assets. If these people defaulted on their loans, so the banks thought, their houses could still be sold at a profit in a rising market, and so there would be no losses. This was what underpinned investor confidence in the various mortgage instruments, like the infamous collateralised debt obligations, which packaged up loans of various qualities and sold them on as securities. It was the belief in ever-rising house prices that led Northern Rock to start lending 125% loan to value on houses in the UK and caused HBOS to throw caution to the winds in seizing a third of the UK mortgage market. All booms need fuel and it was this magic money from ever-rising property prices that provided the combustible material. When the inevitable happened and house prices started to fall, first in America and then in Britain last year, the whole system was plunged into crisis.
How could some of the most intelligent people on the planet, hired by the banks on huge salaries, come to believe in something so plainly ludicrous as the idea that house prices could never fall? Well, the short answer is that they were paid to believe it, or rather they were paid not to disbelieve it. As someone who repeatedly wrote about the inevitability of a house price collapse, I know from my own direct experience how difficult it was to challenge the orthodoxy. People got very angry if you said house prices were unsustainable - didn’t I know there was a housing shortage, that land was scarce, that immigration and divorce was creating huge demand for housing and that governments would ensure that house prices would not be allowed to fall? Most of the property experts accepted that a house price fall was theoretically possible, even that it was going to happen eventually - but not for the foreseeable future. And for the foreseeable future, there was money to be made. You see, no one made money from saying that house prices would eventually fall, except a few astute futures traders and people like Jon Hunt, the owner of the Foxton’s estate agent empire, who sold his business for £400m on the eve of the crash.
This confidence in ever rising prices was bolstered by the government and the Bank of England. I recall Labour politicians insisting that, if house prices fell, the Bank of England would just cut interest rates and everything would be fine. Governments gave huge tax advantages to home ownership, like exemption from capital gains tax, to keep prices rising. The state even underpinned the buy-to-let market by allowing landlords to set their mortgage interest against tax. This qualifies as one of the most ruinous tax breaks in fiscal history, since it encouraged a million or so amateur landlords to invest their pensions in badly built city centre flats at the very top of the housing boom. Most of these flats are now worth barely half of what they cost to buy.
The government believed that high property prices were a good thing. They boosted retail sales in furniture and home decorating firms. Rising property values underpinned the growth of the financial services industry which was built on the mountain of debt taken on by British families in order to enter the property market. Labour arguably won two general election victories on the strength of rising property prices. People felt rich because their houses had doubled in price.
But the flip side of property prices, of course, is debt. and Britain is now drowning in it. We now owe £1.5 trillion in mortgages and unsecured loans - more than Britain’s GDP and more than, per capita, any country in the world including America. Every household in Britain owes £60,000 on average, and of course house prices are now collapsing at a faster rate than at any time since the 1930s. Prices have fallen 16% in the last year alone, and are dropping at around 2% a month. There is no expectation that the fall will be halted in the coming year and the banks are pricing in a further 15% drop. This, rather than prudence, is why banks will not lend to first time buyers unless they can put up a sizeable deposit - at least 20% for the better mortgage deals. Continuing falls in house prices will further damage banking balance sheets as they have to accept further write downs in mortgage bonds.
And now we have recession and the spectre of mass unemployment entering the economic equation. It is quite possible that three million people will be unemployed by the end of 2009. Retail chains like Virgin, MFI and Woolworths are collapsing like skittles as the financial crisis deepens. The government is preparing to bail out the motor industry, even though it is mostly foreign owned. Having thrown billions of our money at the banks, the government finds it difficult to argue that other legitimate industries should go to the wall just because of a temporary lending famine.
The government’s financial credibility has been the other great casualty of the year. Gordon’s golden rules have been thrown out as the government has taken to borrowing like there is no tomorrow. £16bn in November alone. The PM is justifying this as a necessary corrective to deflation. Better to borrow than to end up with another Great Depression. But the danger is that the debts raised now will only have to be paid off a couple of years down the road while the economy is still contracting. There is a suspicion that Brown’s horizon is limited to the chance of winning an election in Spring of 2009, before the real mass unemployment begins to mount.
There is anyway something deeply suspect in tackling a debt crisis by yet more borrowing. At the end of 2008 he most indebted people on he planet were being urged to go out and spend their way out of recession. It was another kind of madness to add to the banking panic of October. Truly, 2008 was the year we all took leave of our senses. In 2009 many of us may have rather more leisure time than we expected in which to reflect on the insanity of the financial system we have created and sustained by our collective appetite for debt.
What drove this bizarre behaviour was fear - fear of something so strange, so unusual, that it has never actually happened in Britain, at least not since the modern banking system was invented in the 18th Century: a simultaneous run on the nation’s banks. Were these fears justified? Could the large British banks have folded? Probably not. The government was always going to step in - as it did - to avoid a systemic collapse, because the consequences of not doing so were too awful to contemplate. Loss of any one of the big high street banks would have reduced Britain to sub-Icelandic status . This was why the government had nationalised Northern Rock a year previously.
But the collapse of confidence extended to the government itself. Gordon Brown repeatedly assured anxious depositors that the government stood ready to act again if any other banks threatened to go under, but a lot of people thought it was still safer to hedge their bets and join the banking merry-go -round. According to the BBC’s Robert Peston, who has become the Walter Cronkite of the financial crisis, Royal Bank of Scotland was within hours of closing its doors because of a run on deposits. The heads of the big banks were summed to the Treasury by the Chancellor -Alistair Darling, whose place in history is assured - and given an offer they couldn’t refuse: accept government money, or be nationalised. Sir Fred “the shred” Goodwin the boss of RBS called it a “drive by shooting”, unconsciously comparing himself to a gangster.
It was ironic indeed that Scotland’s oldest banks, one of which had practically invented modern paper money, were at the centre of the crisis. HBOS and Royal Bank of Scotland, institutions which since the eighteenth century had been synonymous with prudence, caution and thrift were exposed as reckless gamblers, willing to take astonishing risks with their depositors money in the pursuit of world domination. RBS was one of the five largest banks in the world until October 2008, when it almost became the greatest casualty in the history of banking. Halifax Bank of Scotland was supposed to be the people’s bank, eager to help the first time buyer onto the “property ladder” and happy to bankroll Scottish entrepreneurs who were frozen out of the City of London club because they didn’t wear the right ties. More than half of corporate lending in Scotland in 2007 is said to have come from HBOS. Its collapse into the arms of Lloyds leaves much of Scotland’s economy without any means of financial support as we enter the worst economic depression since the 1930s.
The collapse of HBOS and RBS was a crushing blow to Scotland’s self confidence and has been compared to the Darien Disaster in the 1690s when Scotland’s great colonial adventure ended in disgrace and the loss of around a quarter of the nation's entire capital. That is perhaps a comparison too far. Nevertheless, financial services was Scotland’s growth industry and we are going to have to look for something else in future to earn a crust - and no one is quite sure what that is. But we aren’t alone: unlike in the 1690s both Scotland and England now face the same fate, as the management of money has turned out to be a fools game. Both partners in the Union had bet the house on financial services and had allowed manufacturing industry to dwindle. The Crash of 2008 has been a devastating collective blow to the UK, but unionists believe it has brought the nations closer together in the face of a common financial adversity .That remains very much to be seen, of course, and depends on whether Scotland is perceived to receive a fair deal in the economic reconstruction that is to come. But it is certainly true that, right now, both Scotland and England are too busy clearing up the wreckage to be thinking about further constitutional change.
And it isn’t over yet. This is a global banking meltdown and the financial reactors are still burning out of control spreading toxic waste across the entire economy. The crisis that began with the collapse of the sub-prime mortgage market in America two years ago, is now expected to cost - in direct banking losses - between $1,000 billion and $2,000 billion before it blows itself out. The economic impact of this has to be multiplied ten fold to get a measure of the contraction of global credit that is entailed by losses on this scale. The days when banks lent multiples of thirty times their core capital - which was standard practice in th City of London as recently as 2007 - are clearly over. All the banks are now focussed on building their balance sheets and trying to pay off government loans and equity stakes, which is one reason why it is naive to expect them to return to the easy lending practices of the past. Another is that many of the businesses they are being asked to lend to are going to go bust in the recession.
But we are all now in the banking business. Half the British banking system is now nationalised, an outcome that would have seemed incredible this time last year. The UK taxpayer has injected some £600 billion in loans, guarantees and capital into the banking system during 2008. That is an astonishing sum, and of course, most of it will hopefully return to the Exchequer as loans are repaid and government shares are sold off when the banking system recovers. But for now we all now carry the losses of banks like RBS Northern Rock and Bradford and Bingley on our national balance sheet - even though the government is not quite prepared to admit that it is there. Many taxpayer billions will surely evaporate, or find their way into private accounts. The banking system, even when it is bankrupt, remains highly efficient at one activity: generating bonuses. Even in the year of the greatest financial crash in modern history, the City of London managed to pay itself around £10 billion in bonuses.
Curiously, public opinion seems pretty relaxed about this - certainly there have been no angry demonstrations in Threadneedle St. There has been no clamour for heads to roll in this crisis, and unlike in America there have been no angry public hearings or arrests. We seem to accept that being fleeced by bankers is just a fact of economic life. Indeed, it is extraordinary looking back about how complacent the authorities were about the economic crisis. As recently as August 2008, the Bank of England was insisting that the worst of the credit crunch was over, that Britain would escape recession and that economic growth would be around 2.5% in 2009. How can we have any confidence in economic forecasters that got it so spectacularly wrong? In his pre-Christmas BBC interview, the deputy governor Sir John Gieve, admitted that the Bank of England simply didn’t understand the crisis. It thought that the effects of the credit crunch on the real economy would be limited and that the housing bubble was a temporary and largely benign phenomenon. Well, now they know.
Yet it should have been clear to anyone with half a brain that house prices - which had nearly tripled in ten years - were an accident waiting to happen. It was the apparently endless rise in real estate values, actively encouraged by governments here and in America, that fuelled the credit bubble. The belief that house prices could not fall is what motivated banks to give sub-rpime mortgages to Ninjas - people in American cities with no income, no jobs and no assets. If these people defaulted on their loans, so the banks thought, their houses could still be sold at a profit in a rising market, and so there would be no losses. This was what underpinned investor confidence in the various mortgage instruments, like the infamous collateralised debt obligations, which packaged up loans of various qualities and sold them on as securities. It was the belief in ever-rising house prices that led Northern Rock to start lending 125% loan to value on houses in the UK and caused HBOS to throw caution to the winds in seizing a third of the UK mortgage market. All booms need fuel and it was this magic money from ever-rising property prices that provided the combustible material. When the inevitable happened and house prices started to fall, first in America and then in Britain last year, the whole system was plunged into crisis.
How could some of the most intelligent people on the planet, hired by the banks on huge salaries, come to believe in something so plainly ludicrous as the idea that house prices could never fall? Well, the short answer is that they were paid to believe it, or rather they were paid not to disbelieve it. As someone who repeatedly wrote about the inevitability of a house price collapse, I know from my own direct experience how difficult it was to challenge the orthodoxy. People got very angry if you said house prices were unsustainable - didn’t I know there was a housing shortage, that land was scarce, that immigration and divorce was creating huge demand for housing and that governments would ensure that house prices would not be allowed to fall? Most of the property experts accepted that a house price fall was theoretically possible, even that it was going to happen eventually - but not for the foreseeable future. And for the foreseeable future, there was money to be made. You see, no one made money from saying that house prices would eventually fall, except a few astute futures traders and people like Jon Hunt, the owner of the Foxton’s estate agent empire, who sold his business for £400m on the eve of the crash.
This confidence in ever rising prices was bolstered by the government and the Bank of England. I recall Labour politicians insisting that, if house prices fell, the Bank of England would just cut interest rates and everything would be fine. Governments gave huge tax advantages to home ownership, like exemption from capital gains tax, to keep prices rising. The state even underpinned the buy-to-let market by allowing landlords to set their mortgage interest against tax. This qualifies as one of the most ruinous tax breaks in fiscal history, since it encouraged a million or so amateur landlords to invest their pensions in badly built city centre flats at the very top of the housing boom. Most of these flats are now worth barely half of what they cost to buy.
The government believed that high property prices were a good thing. They boosted retail sales in furniture and home decorating firms. Rising property values underpinned the growth of the financial services industry which was built on the mountain of debt taken on by British families in order to enter the property market. Labour arguably won two general election victories on the strength of rising property prices. People felt rich because their houses had doubled in price.
But the flip side of property prices, of course, is debt. and Britain is now drowning in it. We now owe £1.5 trillion in mortgages and unsecured loans - more than Britain’s GDP and more than, per capita, any country in the world including America. Every household in Britain owes £60,000 on average, and of course house prices are now collapsing at a faster rate than at any time since the 1930s. Prices have fallen 16% in the last year alone, and are dropping at around 2% a month. There is no expectation that the fall will be halted in the coming year and the banks are pricing in a further 15% drop. This, rather than prudence, is why banks will not lend to first time buyers unless they can put up a sizeable deposit - at least 20% for the better mortgage deals. Continuing falls in house prices will further damage banking balance sheets as they have to accept further write downs in mortgage bonds.
And now we have recession and the spectre of mass unemployment entering the economic equation. It is quite possible that three million people will be unemployed by the end of 2009. Retail chains like Virgin, MFI and Woolworths are collapsing like skittles as the financial crisis deepens. The government is preparing to bail out the motor industry, even though it is mostly foreign owned. Having thrown billions of our money at the banks, the government finds it difficult to argue that other legitimate industries should go to the wall just because of a temporary lending famine.
The government’s financial credibility has been the other great casualty of the year. Gordon’s golden rules have been thrown out as the government has taken to borrowing like there is no tomorrow. £16bn in November alone. The PM is justifying this as a necessary corrective to deflation. Better to borrow than to end up with another Great Depression. But the danger is that the debts raised now will only have to be paid off a couple of years down the road while the economy is still contracting. There is a suspicion that Brown’s horizon is limited to the chance of winning an election in Spring of 2009, before the real mass unemployment begins to mount.
There is anyway something deeply suspect in tackling a debt crisis by yet more borrowing. At the end of 2008 he most indebted people on he planet were being urged to go out and spend their way out of recession. It was another kind of madness to add to the banking panic of October. Truly, 2008 was the year we all took leave of our senses. In 2009 many of us may have rather more leisure time than we expected in which to reflect on the insanity of the financial system we have created and sustained by our collective appetite for debt.
Saturday, December 20, 2008
Gordon's Broonzi scheme beats Bernie Madoff's Ponzi
What does Gordon Brown have in common with the world’s greatest financial fraudster, Bernie Madoff, author of the £50bn hedge fund scam? Well, they are both running versions of a Ponzi scheme - a pyramid fraud named after Charles Ponzi, an Italin American confidence trickster from the 1920’s Only Gordon’s “Broonzi” scam is bigger.
A pyramid scheme involves paying returns not from income generated by the business itself - which is bankrupt - but from gullible future investors who think it isn’t. Everyone thought Bernie Madoff was a financial genius, who could produce high returns year after year, so more and more people entrusted the former Nasdaq chief with their money. But to keep the pyramid from collapsing he had to raise ever greater sums of cash from new mugs to pay off the old mugs. Eventually the sums grew too large and the scam collapsed leaving everyone broke.
Now look at Brown’s Britain. The government has been boosting public spending based on future tax receipts rather than from the government’s current tax earnings. Britain is essentially insolvent, but Brown has been financing his fiscal stimuli, like the VAT cut, by borrowing - a staggering £16bn last month alone. The longer this goes on, the more will have to be paid in by future generations to meet the payouts of the Broonzi scheme. It is a fraud perpetrated on our children, according to the Archbishop of Canterbury, Rowan Williams, who believes spending our way out of recession is essentially immoral - like curing an addict with more drugs.
But just imagine if Madoff had been able to print his own money. He would have been able to keep the scam going almost indefinitely. Well, we hear the government is preparing to do precisely this, following the American practice of “quantitative easing” - which sounds like a constipation cure but means electronically creating more and more credit in the hope that people will spend it in the shops. Finally imagine if Bernie could have borrowed money for nothing thanks to ZIRP, which stands for Zero Interest Rate Policy, and is also being pursued by governments to head off deflation. In theory this means Bernie could have borrowed from Uncle Sam to pay his clients without paying a penny in interest. Indeed, if he'd been able to keep going for a few more months, Bernie might have been eligible for the US government’s Troubled Asset Relief Programme. Well, his assets were certainly troubled since he didn’t have any.
Bernie Madoff is starting to look like an honest swindler in a nest of vipers. Politicians and central bankers will do anything in their power to avoid deflation, even if it means adopting the economic policies of Robert Mugabe. Get ready for the twenty billion pound note, which is what we’ll probably need to buy a loaf in 2015. The reason governments are afraid of deflation is because it can lead to unemployment - which returned to British politics with a bang last week with record numbers of job losses. If people aren’t buying, shops like Woolies close and the factories that provided them with their goods lay off workers. Most of these workers are in China, but nevermind. The government wants us to take on yet more debt to buy stuff in order to give them theri jobs back. And if we don’t the government will do it for us. In the middle of the greatest ever debt crisis we are being told that our patriotic duty is to borrow even more money we don’t have and to spend it on things we don’t need. This may make sense to economists, but to the rest of us it looks like the lunatics have taken over the asylum. The chairman of the Federal Reserve, Ben Bernanke, says that he would happily drop millions of dollars on American cities from helicopters if necessary, to get people spending in the shops. Doesn’t he realise how insane he sounds?
And no, I dont think unemployment is a “price worth paying” for stabilising the economy, as the former Tory Chancellor, Norman Lamont, put it back in 1992. Unemployment is never a price worth paying for anything, but nor is hyper-inflation a risk worth taking. The government is obsessed with falling house prices. You can make the biggest mortgages affordable if you reduce interest rates to zero, but does anyone seriously believe that another housing bubble would be a good thing? People aren’t as stupid as governments think they are, and they know that this will all have to be paid for. In a few years time, as the boss of Barclays, John Varley, let slip yesterday, interest rates will have to rise again, as the government tries to tackle inflation.
Anyone who buys a house or sets up a business on the basis of zero interest rates and free money is being conned as surely as one of Bernie Madoff’s clients. It is a pyramid scam which will collapse eventually into mass collective bankruptcy. The UK housing market was itself been a kind of Ponzi scheme, yet the only solution the government can see to revive the economy is to get it going again.
So, what do we do about unemployment? Well, the answer is surly to get the country back to work, proper work. There is a chronic housing shortage, huge waiting lists for social housing, and a construction industry going on the dole. Surely it doesn’t take a genius to work out what to do here. Then there is renewable energy - wind, wave and tidal power -; one of the great sunrise industries in which the UK, and Scotland in particular, could be a world leader. Better to build our own industry than buy nucler power stations off the peg from France.
We desperately need infrastructure appropriate for the post-carbon age - like fast rail links and the development of electric vechicles for cities. What we don’t need, surely, is a return to imports of consumer junk from China which ends up in landfill sites. We don’t need houses at seven times earnings. We don’t need gas guzzlers, yet the governemnt is using our money to subsidise Jaguar Rover - a firm which is owned by an Indian conglomerate, Tata. Nor do we need a bloated and parasitic financial services “industry” which merely manufactures debt.
The government now owns most of the British banking sector, so there should be no problem about financing the reconstruction of the UK economy using prudent borrowing rules. What is a problem is deliberately causing inflation to reduce debts and impoverish future generations. Bernie Madoff is alive and well and living in Downing Street. It’s time to call in the law.
A pyramid scheme involves paying returns not from income generated by the business itself - which is bankrupt - but from gullible future investors who think it isn’t. Everyone thought Bernie Madoff was a financial genius, who could produce high returns year after year, so more and more people entrusted the former Nasdaq chief with their money. But to keep the pyramid from collapsing he had to raise ever greater sums of cash from new mugs to pay off the old mugs. Eventually the sums grew too large and the scam collapsed leaving everyone broke.
Now look at Brown’s Britain. The government has been boosting public spending based on future tax receipts rather than from the government’s current tax earnings. Britain is essentially insolvent, but Brown has been financing his fiscal stimuli, like the VAT cut, by borrowing - a staggering £16bn last month alone. The longer this goes on, the more will have to be paid in by future generations to meet the payouts of the Broonzi scheme. It is a fraud perpetrated on our children, according to the Archbishop of Canterbury, Rowan Williams, who believes spending our way out of recession is essentially immoral - like curing an addict with more drugs.
But just imagine if Madoff had been able to print his own money. He would have been able to keep the scam going almost indefinitely. Well, we hear the government is preparing to do precisely this, following the American practice of “quantitative easing” - which sounds like a constipation cure but means electronically creating more and more credit in the hope that people will spend it in the shops. Finally imagine if Bernie could have borrowed money for nothing thanks to ZIRP, which stands for Zero Interest Rate Policy, and is also being pursued by governments to head off deflation. In theory this means Bernie could have borrowed from Uncle Sam to pay his clients without paying a penny in interest. Indeed, if he'd been able to keep going for a few more months, Bernie might have been eligible for the US government’s Troubled Asset Relief Programme. Well, his assets were certainly troubled since he didn’t have any.
Bernie Madoff is starting to look like an honest swindler in a nest of vipers. Politicians and central bankers will do anything in their power to avoid deflation, even if it means adopting the economic policies of Robert Mugabe. Get ready for the twenty billion pound note, which is what we’ll probably need to buy a loaf in 2015. The reason governments are afraid of deflation is because it can lead to unemployment - which returned to British politics with a bang last week with record numbers of job losses. If people aren’t buying, shops like Woolies close and the factories that provided them with their goods lay off workers. Most of these workers are in China, but nevermind. The government wants us to take on yet more debt to buy stuff in order to give them theri jobs back. And if we don’t the government will do it for us. In the middle of the greatest ever debt crisis we are being told that our patriotic duty is to borrow even more money we don’t have and to spend it on things we don’t need. This may make sense to economists, but to the rest of us it looks like the lunatics have taken over the asylum. The chairman of the Federal Reserve, Ben Bernanke, says that he would happily drop millions of dollars on American cities from helicopters if necessary, to get people spending in the shops. Doesn’t he realise how insane he sounds?
And no, I dont think unemployment is a “price worth paying” for stabilising the economy, as the former Tory Chancellor, Norman Lamont, put it back in 1992. Unemployment is never a price worth paying for anything, but nor is hyper-inflation a risk worth taking. The government is obsessed with falling house prices. You can make the biggest mortgages affordable if you reduce interest rates to zero, but does anyone seriously believe that another housing bubble would be a good thing? People aren’t as stupid as governments think they are, and they know that this will all have to be paid for. In a few years time, as the boss of Barclays, John Varley, let slip yesterday, interest rates will have to rise again, as the government tries to tackle inflation.
Anyone who buys a house or sets up a business on the basis of zero interest rates and free money is being conned as surely as one of Bernie Madoff’s clients. It is a pyramid scam which will collapse eventually into mass collective bankruptcy. The UK housing market was itself been a kind of Ponzi scheme, yet the only solution the government can see to revive the economy is to get it going again.
So, what do we do about unemployment? Well, the answer is surly to get the country back to work, proper work. There is a chronic housing shortage, huge waiting lists for social housing, and a construction industry going on the dole. Surely it doesn’t take a genius to work out what to do here. Then there is renewable energy - wind, wave and tidal power -; one of the great sunrise industries in which the UK, and Scotland in particular, could be a world leader. Better to build our own industry than buy nucler power stations off the peg from France.
We desperately need infrastructure appropriate for the post-carbon age - like fast rail links and the development of electric vechicles for cities. What we don’t need, surely, is a return to imports of consumer junk from China which ends up in landfill sites. We don’t need houses at seven times earnings. We don’t need gas guzzlers, yet the governemnt is using our money to subsidise Jaguar Rover - a firm which is owned by an Indian conglomerate, Tata. Nor do we need a bloated and parasitic financial services “industry” which merely manufactures debt.
The government now owns most of the British banking sector, so there should be no problem about financing the reconstruction of the UK economy using prudent borrowing rules. What is a problem is deliberately causing inflation to reduce debts and impoverish future generations. Bernie Madoff is alive and well and living in Downing Street. It’s time to call in the law.
Tuesday, December 16, 2008
Santa is credit crunched
Brring, briing. Hello. Is that Mr Cringle? Mr Chris Cringle? Royal Bank of Lapland here. I was wondering if I could talk to your about your business expansion account. Yes. We're downsizing your overdraft facility.... Well, to zero actually....Sorry, but we at RBL Corporate believe this is the best way to help your business at this time....Yes, shut it down..... It will involve some readjustment of course.
You see the problem is that your business model no longer fits with our lending policy. For a start you are giving away all those presents for nothing. No revenue stream, you see, not viable going forward.....Yes, I know we used to fund internet start ups with no tangible revenues either but times have changed.....But when we gave you two mil last year that was when we were throwing money away and we're not allowed to do that anymore because we're nationalised now and the government says we have to lend more money to business..... Yes, but not to you.......
Well, I'm sorry Mr Clause but see it our way. You're basically sub prime and we are no longer in the business if handing large sums of money to Ninjas. No, sorry I know your not into martial arts. I meant No Job, No Income and No Assets....What can you do about it? Well you could mortgage the reindeer I suppose, and turn your workshps iinto a theme park, but that would take cash, and we aren't giving you any.
Perhaps you could start charging for your presents.....Hmm, Don't believe in money, eh?. Well you could put bar code on each stocking and get them to pay on credit. Or perhaps start issuing a Santa Card. What a brilliant idea. We could give you lots of advice on how to set one up. You hook people with zero interest upfront and then allow them to pay a minimum each month while you rack up eye watering charges on the balance so the poor suckers get trapped in debt for the rest of their lives...... Oh really? Not what you had in mind? Season of Goodwill, you say. Can't you monetize the goodwill? Our accountants always add a 10 per cent goodwill premium to our end year capitalisation...
.. Well, really if that is your attitude...I don't see what you are getting so worked up about.. this is standard banking practice in a recession. How would we pay our bonuses if we didn't screw people?...... I'm sorry but we are going to have to cut you loose Mr Cringle. You simply aren't a good business risk. Then in two years when your share price collapses we'll buy you out for pennies. Happy Christmas.
You see the problem is that your business model no longer fits with our lending policy. For a start you are giving away all those presents for nothing. No revenue stream, you see, not viable going forward.....Yes, I know we used to fund internet start ups with no tangible revenues either but times have changed.....But when we gave you two mil last year that was when we were throwing money away and we're not allowed to do that anymore because we're nationalised now and the government says we have to lend more money to business..... Yes, but not to you.......
Well, I'm sorry Mr Clause but see it our way. You're basically sub prime and we are no longer in the business if handing large sums of money to Ninjas. No, sorry I know your not into martial arts. I meant No Job, No Income and No Assets....What can you do about it? Well you could mortgage the reindeer I suppose, and turn your workshps iinto a theme park, but that would take cash, and we aren't giving you any.
Perhaps you could start charging for your presents.....Hmm, Don't believe in money, eh?. Well you could put bar code on each stocking and get them to pay on credit. Or perhaps start issuing a Santa Card. What a brilliant idea. We could give you lots of advice on how to set one up. You hook people with zero interest upfront and then allow them to pay a minimum each month while you rack up eye watering charges on the balance so the poor suckers get trapped in debt for the rest of their lives...... Oh really? Not what you had in mind? Season of Goodwill, you say. Can't you monetize the goodwill? Our accountants always add a 10 per cent goodwill premium to our end year capitalisation...
.. Well, really if that is your attitude...I don't see what you are getting so worked up about.. this is standard banking practice in a recession. How would we pay our bonuses if we didn't screw people?...... I'm sorry but we are going to have to cut you loose Mr Cringle. You simply aren't a good business risk. Then in two years when your share price collapses we'll buy you out for pennies. Happy Christmas.
Monday, December 08, 2008
Holyrood lost it in 2008
It was a rather ragged end to the year in Holyrood. Political staff seemed tetchy, MSPs grumpy, hacks bored. The last sessions of First Minister’s Questions were pretty dire as even Alex Salmond’s wit deserted him. There’s a general feeling that, well, the action is elsewhere. Holyrood has fallen off the map.
Labour insist this is because the SNP government has run out of ideas and is ‘doing nothing’, and there is a grain of truth in that. Ministers are showing signs of exhaustion and while there is no shortage of bills going through the parliament, a lot of the excitement has gone. The rows over the Scottish Futures Trust and local income tax refuse to go away, like blue tack stuck to the sole of Alex Salmond’s boot.
But SFT and LIT are pretty synthetic political issues. I mean, in the midst of the greatest economic crisis in 80 years, who really cares? Lives are not at stake over alternative models of public sector procurement; wars are not fought over local authority funding methods. That these seem the only issues in town only confirms that the town is some distance from the action. Which right now is in London - where the key economic decisions are being taken over bank rescues, fiscal stimuli, corporate bailouts, interest rates and such like. Such is the nature the devolution settlement - however there is a danger of Scottish politics looking petty-mind, as if Scottish politicians were reluctant to address the great issues of the day. Instead of continuing with vapid adversarialism, I wonder if it might be time for the Scottish parties to pool their intellectual resources and start presenting a common front.
The economic crisis poses similar political problems for both the main Holyrood parties. As the government of the day, Alex Salmond risks being blamed for economic problems for which he is not responsible - like the mass unemployment. Similarly, Iain Gray, the new leader of the Labour Party in Holyrood, risks being blamed for decisions taken by the Westminster government. Salmond needs to demonstrate that the Scottish government is more than just a constitutional ornament; Gray that he isn’t just an apologist for London Labour. It may be that they they can do this better right now by working together than by working apart.
They don’t need to form a national government, but they should seriously consider putting together a common plan of action for the Scottish economy. The Scottish voice needs to be heard loud and clear in Westminster and there’s more chance of this happening if the parties start speaking a common language. This recession will be different from previous ones in that its epicentre is in the financial services sector in London. A lot of articulate metropolitans are going to be demanding support from government in the “middle class recession” as it’s being called. There is real danger that the rest of the country gets forgotten about. It bodes ill that, in the emergency budget last month, the Chancellor almost imposed a crippling increase on Scotch whiskey by duty mistake.
I am not saying that oppositons should not oppose, or governments not govern. But right now there is a broad consensus about what is needed in Scotland; more social housing, better transport, manufacturing, support for higher education and training. Get Iain Gray, Alex Salmond and Tavish Scott in a room together and there wouldn’t be a cigarette paper between them on the big economic issues. If there are to be Obama-style public works programmes, then a fast rail link to Scotland should be top of the list. Renewable energy is a great Scottish resource but it needs public investment to turn it into a great industry. Whatever you think of the Barnett Formula, now is not the time to be cutting public spending in Scotland, under the current review. The Homecoming is all very well, but we need to do more than celebrate the short-bread tin.
The Scottish political classes need to stop bickering about side issues like SFT and LIT and start thinking about how to use the Scottish budget constructively to promote employment and growth in Scotland. Elements of the £30bn budget could perhaps be reallocated to promote job creation. If fiscal stimulus is the order of the day, could there be a case for using the existing Scottish tax powers to give the economy a boost?
Could all parties not press for the Scottish govrnment to be allowed to issue debt - bonds - to finance more public works projects to promote economic activity. Why not? Every local authority has the power to issue bonds, why not the Scottish government? It would allow infrastructure projects in Scotland to go ahead without wrangling over the method of funding. And, yes, if public private partnership really is the only game in town, why not use that if it can be made to deliver value for money? There could be other taxation moves, perhaps on corporation tax or fuel duty to mitigate the overcentralisation of the economy in the South East.
For there is a real danger that Holyrood and Scottish politics could be sidelined for a decade or so until the economy stabilsies. After the economic crisis broke in earnest in September, you could almost feel the power draining away from Holyrood. This was most evident in the way that Gordon Brown brushed Alex Salmond aside in his pursuit of a shotgun marriage between HBOS and Lloyds. When bank workers in Edinburgh started to fear for their jobs, it was to Westminster, rather than Holyrood, that they looked for salvation. Businesses left high and dry by the collapse of corporate credit are looking to Westminster for anwers, not Holyrood.
The home rule debate has been sidelined as people have started to focus on their financial security. The Calman commission is becalmed; the national conversation muted. Nationalism has tended to be a fair-weather phenomenon in Scotland - autonomy is something voters seek when they are feeling reasonably confident and prepared to take political risks. That isn’t the case right now, and the experience of bankrupt Iceland - and the rest of the ‘arc of insolvency’ - while not directly relevant to Scotland, has dampened enthusiasm for constitutional innovation. It’s not so much that Scots don’t want self-government any more - polls confirm they do - but that they have other things on their minds.
The Scottish political classes need to open their minds. Action is needed to prevent capital, skills and public investment being drawn inexorably south. This is an opportunity to put Holyrood’s much-vaunted cooperative model into practice. And after all, this is the season of goodwill.
Labour insist this is because the SNP government has run out of ideas and is ‘doing nothing’, and there is a grain of truth in that. Ministers are showing signs of exhaustion and while there is no shortage of bills going through the parliament, a lot of the excitement has gone. The rows over the Scottish Futures Trust and local income tax refuse to go away, like blue tack stuck to the sole of Alex Salmond’s boot.
But SFT and LIT are pretty synthetic political issues. I mean, in the midst of the greatest economic crisis in 80 years, who really cares? Lives are not at stake over alternative models of public sector procurement; wars are not fought over local authority funding methods. That these seem the only issues in town only confirms that the town is some distance from the action. Which right now is in London - where the key economic decisions are being taken over bank rescues, fiscal stimuli, corporate bailouts, interest rates and such like. Such is the nature the devolution settlement - however there is a danger of Scottish politics looking petty-mind, as if Scottish politicians were reluctant to address the great issues of the day. Instead of continuing with vapid adversarialism, I wonder if it might be time for the Scottish parties to pool their intellectual resources and start presenting a common front.
The economic crisis poses similar political problems for both the main Holyrood parties. As the government of the day, Alex Salmond risks being blamed for economic problems for which he is not responsible - like the mass unemployment. Similarly, Iain Gray, the new leader of the Labour Party in Holyrood, risks being blamed for decisions taken by the Westminster government. Salmond needs to demonstrate that the Scottish government is more than just a constitutional ornament; Gray that he isn’t just an apologist for London Labour. It may be that they they can do this better right now by working together than by working apart.
They don’t need to form a national government, but they should seriously consider putting together a common plan of action for the Scottish economy. The Scottish voice needs to be heard loud and clear in Westminster and there’s more chance of this happening if the parties start speaking a common language. This recession will be different from previous ones in that its epicentre is in the financial services sector in London. A lot of articulate metropolitans are going to be demanding support from government in the “middle class recession” as it’s being called. There is real danger that the rest of the country gets forgotten about. It bodes ill that, in the emergency budget last month, the Chancellor almost imposed a crippling increase on Scotch whiskey by duty mistake.
I am not saying that oppositons should not oppose, or governments not govern. But right now there is a broad consensus about what is needed in Scotland; more social housing, better transport, manufacturing, support for higher education and training. Get Iain Gray, Alex Salmond and Tavish Scott in a room together and there wouldn’t be a cigarette paper between them on the big economic issues. If there are to be Obama-style public works programmes, then a fast rail link to Scotland should be top of the list. Renewable energy is a great Scottish resource but it needs public investment to turn it into a great industry. Whatever you think of the Barnett Formula, now is not the time to be cutting public spending in Scotland, under the current review. The Homecoming is all very well, but we need to do more than celebrate the short-bread tin.
The Scottish political classes need to stop bickering about side issues like SFT and LIT and start thinking about how to use the Scottish budget constructively to promote employment and growth in Scotland. Elements of the £30bn budget could perhaps be reallocated to promote job creation. If fiscal stimulus is the order of the day, could there be a case for using the existing Scottish tax powers to give the economy a boost?
Could all parties not press for the Scottish govrnment to be allowed to issue debt - bonds - to finance more public works projects to promote economic activity. Why not? Every local authority has the power to issue bonds, why not the Scottish government? It would allow infrastructure projects in Scotland to go ahead without wrangling over the method of funding. And, yes, if public private partnership really is the only game in town, why not use that if it can be made to deliver value for money? There could be other taxation moves, perhaps on corporation tax or fuel duty to mitigate the overcentralisation of the economy in the South East.
For there is a real danger that Holyrood and Scottish politics could be sidelined for a decade or so until the economy stabilsies. After the economic crisis broke in earnest in September, you could almost feel the power draining away from Holyrood. This was most evident in the way that Gordon Brown brushed Alex Salmond aside in his pursuit of a shotgun marriage between HBOS and Lloyds. When bank workers in Edinburgh started to fear for their jobs, it was to Westminster, rather than Holyrood, that they looked for salvation. Businesses left high and dry by the collapse of corporate credit are looking to Westminster for anwers, not Holyrood.
The home rule debate has been sidelined as people have started to focus on their financial security. The Calman commission is becalmed; the national conversation muted. Nationalism has tended to be a fair-weather phenomenon in Scotland - autonomy is something voters seek when they are feeling reasonably confident and prepared to take political risks. That isn’t the case right now, and the experience of bankrupt Iceland - and the rest of the ‘arc of insolvency’ - while not directly relevant to Scotland, has dampened enthusiasm for constitutional innovation. It’s not so much that Scots don’t want self-government any more - polls confirm they do - but that they have other things on their minds.
The Scottish political classes need to open their minds. Action is needed to prevent capital, skills and public investment being drawn inexorably south. This is an opportunity to put Holyrood’s much-vaunted cooperative model into practice. And after all, this is the season of goodwill.
Holyrood lost it in 2008
It was a rather ragged end to the year in Holyrood. Political staff seemed tetchy, MSPs grumpy, hacks bored. The last sessions of First Minister’s Questions were pretty dire as even Alex Salmond’s wit deserted him. There’s a general feeling that, well, the action is elsewhere. Holyrood has fallen off the map.
Labour insist this is because the SNP government has run out of ideas and is ‘doing nothing’, and there is a grain of truth in that. Ministers are showing signs of exhaustion and while there is no shortage of bills going through the parliament, a lot of the excitement has gone. The rows over the Scottish Futures Trust and local income tax refuse to go away, like blue tack stuck to the sole of Alex Salmond’s boot.
But SFT and LIT are pretty synthetic political issues. I mean, in the midst of the greatest economic crisis in 80 years, who really cares? Lives are not at stake over alternative models of public sector procurement; wars are not fought over local authority funding methods. That these seem the only issues in town only confirms that the town is some distance from the action. Which right now is in London - where the key economic decisions are being taken over bank rescues, fiscal stimuli, corporate bailouts, interest rates and such like. Such is the nature the devolution settlement - however there is a danger of Scottish politics looking petty-mind, as if Scottish politicians were reluctant to address the great issues of the day. Instead of continuing with vapid adversarialism, I wonder if it might be time for the Scottish parties to pool their intellectual resources and start presenting a common front.
The economic crisis poses similar political problems for both the main Holyrood parties. As the government of the day, Alex Salmond risks being blamed for economic problems for which he is not responsible - like the mass unemployment. Similarly, Iain Gray, the new leader of the Labour Party in Holyrood, risks being blamed for decisions taken by the Westminster government. Salmond needs to demonstrate that the Scottish government is more than just a constitutional ornament; Gray that he isn’t just an apologist for London Labour. It may be that they they can do this better right now by working together than by working apart.
They don’t need to form a national government, but they should seriously consider putting together a common plan of action for the Scottish economy. The Scottish voice needs to be heard loud and clear in Westminster and there’s more chance of this happening if the parties start speaking a common language. This recession will be different from previous ones in that its epicentre is in the financial services sector in London. A lot of articulate metropolitans are going to be demanding support from government in the “middle class recession” as it’s being called. There is real danger that the rest of the country gets forgotten about. It bodes ill that, in the emergency budget last month, the Chancellor almost imposed a crippling increase on Scotch whiskey by duty mistake.
I am not saying that oppositons should not oppose, or governments not govern. But right now there is a broad consensus about what is needed in Scotland; more social housing, better transport, manufacturing, support for higher education and training. Get Iain Gray, Alex Salmond and Tavish Scott in a room together and there wouldn’t be a cigarette paper between them on the big economic issues. If there are to be Obama-style public works programmes, then a fast rail link to Scotland should be top of the list. Renewable energy is a great Scottish resource but it needs public investment to turn it into a great industry. Whatever you think of the Barnett Formula, now is not the time to be cutting public spending in Scotland, under the current review. The Homecoming is all very well, but we need to do more than celebrate the short-bread tin.
The Scottish political classes need to stop bickering about side issues like SFT and LIT and start thinking about how to use the Scottish budget constructively to promote employment and growth in Scotland. Elements of the £30bn budget could perhaps be reallocated to promote job creation. If fiscal stimulus is the order of the day, could there be a case for using the existing Scottish tax powers to give the economy a boost?
Could all parties not press for the Scottish govrnment to be allowed to issue debt - bonds - to finance more public works projects to promote economic activity. Why not? Every local authority has the power to issue bonds, why not the Scottish government? It would allow infrastructure projects in Scotland to go ahead without wrangling over the method of funding. And, yes, if public private partnership really is the only game in town, why not use that if it can be made to deliver value for money? There could be other taxation moves, perhaps on corporation tax or fuel duty to mitigate the overcentralisation of the economy in the South East.
For there is a real danger that Holyrood and Scottish politics could be sidelined for a decade or so until the economy stabilsies. After the economic crisis broke in earnest in September, you could almost feel the power draining away from Holyrood. This was most evident in the way that Gordon Brown brushed Alex Salmond aside in his pursuit of a shotgun marriage between HBOS and Lloyds. When bank workers in Edinburgh started to fear for their jobs, it was to Westminster, rather than Holyrood, that they looked for salvation. Businesses left high and dry by the collapse of corporate credit are looking to Westminster for anwers, not Holyrood.
The home rule debate has been sidelined as people have started to focus on their financial security. The Calman commission is becalmed; the national conversation muted. Nationalism has tended to be a fair-weather phenomenon in Scotland - autonomy is something voters seek when they are feeling reasonably confident and prepared to take political risks. That isn’t the case right now, and the experience of bankrupt Iceland - and the rest of the ‘arc of insolvency’ - while not directly relevant to Scotland, has dampened enthusiasm for constitutional innovation. It’s not so much that Scots don’t want self-government any more - polls confirm they do - but that they have other things on their minds.
The Scottish political classes need to open their minds. Action is needed to prevent capital, skills and public investment being drawn inexorably south. This is an opportunity to put Holyrood’s much-vaunted cooperative model into practice. And after all, this is the season of goodwill.
Labour insist this is because the SNP government has run out of ideas and is ‘doing nothing’, and there is a grain of truth in that. Ministers are showing signs of exhaustion and while there is no shortage of bills going through the parliament, a lot of the excitement has gone. The rows over the Scottish Futures Trust and local income tax refuse to go away, like blue tack stuck to the sole of Alex Salmond’s boot.
But SFT and LIT are pretty synthetic political issues. I mean, in the midst of the greatest economic crisis in 80 years, who really cares? Lives are not at stake over alternative models of public sector procurement; wars are not fought over local authority funding methods. That these seem the only issues in town only confirms that the town is some distance from the action. Which right now is in London - where the key economic decisions are being taken over bank rescues, fiscal stimuli, corporate bailouts, interest rates and such like. Such is the nature the devolution settlement - however there is a danger of Scottish politics looking petty-mind, as if Scottish politicians were reluctant to address the great issues of the day. Instead of continuing with vapid adversarialism, I wonder if it might be time for the Scottish parties to pool their intellectual resources and start presenting a common front.
The economic crisis poses similar political problems for both the main Holyrood parties. As the government of the day, Alex Salmond risks being blamed for economic problems for which he is not responsible - like the mass unemployment. Similarly, Iain Gray, the new leader of the Labour Party in Holyrood, risks being blamed for decisions taken by the Westminster government. Salmond needs to demonstrate that the Scottish government is more than just a constitutional ornament; Gray that he isn’t just an apologist for London Labour. It may be that they they can do this better right now by working together than by working apart.
They don’t need to form a national government, but they should seriously consider putting together a common plan of action for the Scottish economy. The Scottish voice needs to be heard loud and clear in Westminster and there’s more chance of this happening if the parties start speaking a common language. This recession will be different from previous ones in that its epicentre is in the financial services sector in London. A lot of articulate metropolitans are going to be demanding support from government in the “middle class recession” as it’s being called. There is real danger that the rest of the country gets forgotten about. It bodes ill that, in the emergency budget last month, the Chancellor almost imposed a crippling increase on Scotch whiskey by duty mistake.
I am not saying that oppositons should not oppose, or governments not govern. But right now there is a broad consensus about what is needed in Scotland; more social housing, better transport, manufacturing, support for higher education and training. Get Iain Gray, Alex Salmond and Tavish Scott in a room together and there wouldn’t be a cigarette paper between them on the big economic issues. If there are to be Obama-style public works programmes, then a fast rail link to Scotland should be top of the list. Renewable energy is a great Scottish resource but it needs public investment to turn it into a great industry. Whatever you think of the Barnett Formula, now is not the time to be cutting public spending in Scotland, under the current review. The Homecoming is all very well, but we need to do more than celebrate the short-bread tin.
The Scottish political classes need to stop bickering about side issues like SFT and LIT and start thinking about how to use the Scottish budget constructively to promote employment and growth in Scotland. Elements of the £30bn budget could perhaps be reallocated to promote job creation. If fiscal stimulus is the order of the day, could there be a case for using the existing Scottish tax powers to give the economy a boost?
Could all parties not press for the Scottish govrnment to be allowed to issue debt - bonds - to finance more public works projects to promote economic activity. Why not? Every local authority has the power to issue bonds, why not the Scottish government? It would allow infrastructure projects in Scotland to go ahead without wrangling over the method of funding. And, yes, if public private partnership really is the only game in town, why not use that if it can be made to deliver value for money? There could be other taxation moves, perhaps on corporation tax or fuel duty to mitigate the overcentralisation of the economy in the South East.
For there is a real danger that Holyrood and Scottish politics could be sidelined for a decade or so until the economy stabilsies. After the economic crisis broke in earnest in September, you could almost feel the power draining away from Holyrood. This was most evident in the way that Gordon Brown brushed Alex Salmond aside in his pursuit of a shotgun marriage between HBOS and Lloyds. When bank workers in Edinburgh started to fear for their jobs, it was to Westminster, rather than Holyrood, that they looked for salvation. Businesses left high and dry by the collapse of corporate credit are looking to Westminster for anwers, not Holyrood.
The home rule debate has been sidelined as people have started to focus on their financial security. The Calman commission is becalmed; the national conversation muted. Nationalism has tended to be a fair-weather phenomenon in Scotland - autonomy is something voters seek when they are feeling reasonably confident and prepared to take political risks. That isn’t the case right now, and the experience of bankrupt Iceland - and the rest of the ‘arc of insolvency’ - while not directly relevant to Scotland, has dampened enthusiasm for constitutional innovation. It’s not so much that Scots don’t want self-government any more - polls confirm they do - but that they have other things on their minds.
The Scottish political classes need to open their minds. Action is needed to prevent capital, skills and public investment being drawn inexorably south. This is an opportunity to put Holyrood’s much-vaunted cooperative model into practice. And after all, this is the season of goodwill.
When is the recovery coming?
Since the economic crisis broke earlier this year this column has never knowingly understated its severity. But I make no apologies for having dwelt on doom and gloom. For most of 2008 government, regulators and monetary authorities were in denial about the severity of the crisis. We were repeatedly told that the end was in sight, that the economic fundamentals were sound, that Britain was well placed to ride out economic turbulence. Well, now we know.
However, there is a point beyond which realism turns into negativity. The danger now is that this pessimism becomes self-reinforcing. Indeed, the difference between a deep recession and an economic depression is, as the term suggests, largely psychological. Beyond a certain point people begin to lose hope of any recovery and a negative feedback loop stifles economic activity. So, as we end the most dramatic year since 1929 we really have t to start thinking now about the economic recovery that will eventually come.
Unfortunately, it isn’t imminent. The Chancellor’s forecast that Britain will emerge from recession late next year is about as likely as Speaker Michael Martin admitting he has made an error of judgement. We face a long and lean time while the economy works through the excesses of a credit boom which lasted over twenty years. However, this doesn’t preclude a stock market rally sometime in the New Year. Indeed, the chances are high that there will be a turnaround in the markets in 2009. Shares are extremely cheap by historic standards and there is a lot of cash sitting on the sidelines of the global stock-markets which is earning next to nothing because interest rates are so low.
This rally will not indicate the end of the financial crisis, or even the beginning of the end. Contrary to myth, the Great Crash of 1929 wasn’t a single event but a series of shocks spread over eight years after a succession of bear market rallies. Slashing rates to zero could even ignite another economic bubble or two - though that is something we should dearly wish to avoid. The global commodities bubble, which has just burst in spectacular fashion , was almost entirely a result of the US Federal Reserve slashing interest rates in America at the end of last year. Oil rose to nearly $150 a barrel; now it is forecast to fall to $25.
The 2008 Crash was in reality the bursting of succession of bubbles: a credit bubble, a property bubble, a commodities bubble and even an emerging nations bubble. Never in history have so many asset classes collapsed at the same time and across the globe. Everything has been marked down, from oil to house prices, from gold to shares. This is why the crisis is so profound. It is the first truly global synchronised economic collapse - a product of the internationalisation of financial markets and the growth of world trade.
However, the good news is that when the recovery begins, it is also likely to be global, and co-ordinated. The nations of the world are now linked together through trading and financial markets as never before in history. Only if there is a return to outright protectionism - to countries protecting their industries by tariff walls - is this global network of economic linkages likely to be broken. Which is why it is so important for bodies like the G20 of leading nations to promote free trade at the same time as seeking to control and regulate international financial markets. New products are being created all the time, in everything from life sciences to robotics, which will provide the markets for the future - provided they can get to market.
However, free trade must also coincide with a commitment to social equality. The huge disparities of wealth which had been allowed to develop both within and between nations during the bubble years are a large part of the problem. American consumers are in a debt crisis largely because middle class salaries have stagnated for the last decade as the top one percent of US citizens has acquired disproportionate wealth. Rich people do not spend most of their money; they invest it in assets like houses and shares, which boosted the bubble economy.
The New Deal in the 1930s coincided with a very great increase in taxation on wealth. It was this redistribution that allowed the consumer society to be created out of the wreckage of the Second World War. The economy boomed in he 50s because ordinary people could afford to buy things. Even poorer countries like China and India today, which have been investing much of their sovereign wealth in US bonds and mortgage assets, need to develop their own consumer markets to recycle their foreign earnings. Otherwise we will just have yet more asset bubbles.
Of course, this doesn’t mean we can afford to go back to the hyper-consumerism of the recent years. The noughties will go down in history as the dumbest boom in history, as we squandered the world’s precious resources shipping across the world huge quantities of toys and trinkets that we didn’t need, and mostly didn’t want. The new consumer industries will have to be environmentally sustainable and focussed on conserving rather than exploiting natural resources. There is no law that says economies have to built on the irresponsible burning of fossil fuels.
Indeed, the markets that will provide the impetus for the economic upswing in the 2010s will largely be in the field of renewable energy and conservation. These will be immense markets because they are environmental imperatives. We really don’t have any choice but to combat climate change, which is now happening faster even than the worst pessimists believed possible ten years ago. The economic effort that will have to be mobilised to restore the climatic balance of the planet will bring even the deepest economic depression to an end.
In truth, it wasn’t the New Deal in America that ended the Great Depression, it was the Second World War. The Keynsian reforms introduced by governments across the world after 1932 helped, but mass unemployment continued until America and Europe began rearmament programmes in the late 1930s. Well, the challenge today is not European war but the threat of planetary extinction. This will again force governments to override market mechanisms in order focus on the greatest challenge humanity has ever faced.
Well, no one said recovery was going to be easy.
However, there is a point beyond which realism turns into negativity. The danger now is that this pessimism becomes self-reinforcing. Indeed, the difference between a deep recession and an economic depression is, as the term suggests, largely psychological. Beyond a certain point people begin to lose hope of any recovery and a negative feedback loop stifles economic activity. So, as we end the most dramatic year since 1929 we really have t to start thinking now about the economic recovery that will eventually come.
Unfortunately, it isn’t imminent. The Chancellor’s forecast that Britain will emerge from recession late next year is about as likely as Speaker Michael Martin admitting he has made an error of judgement. We face a long and lean time while the economy works through the excesses of a credit boom which lasted over twenty years. However, this doesn’t preclude a stock market rally sometime in the New Year. Indeed, the chances are high that there will be a turnaround in the markets in 2009. Shares are extremely cheap by historic standards and there is a lot of cash sitting on the sidelines of the global stock-markets which is earning next to nothing because interest rates are so low.
This rally will not indicate the end of the financial crisis, or even the beginning of the end. Contrary to myth, the Great Crash of 1929 wasn’t a single event but a series of shocks spread over eight years after a succession of bear market rallies. Slashing rates to zero could even ignite another economic bubble or two - though that is something we should dearly wish to avoid. The global commodities bubble, which has just burst in spectacular fashion , was almost entirely a result of the US Federal Reserve slashing interest rates in America at the end of last year. Oil rose to nearly $150 a barrel; now it is forecast to fall to $25.
The 2008 Crash was in reality the bursting of succession of bubbles: a credit bubble, a property bubble, a commodities bubble and even an emerging nations bubble. Never in history have so many asset classes collapsed at the same time and across the globe. Everything has been marked down, from oil to house prices, from gold to shares. This is why the crisis is so profound. It is the first truly global synchronised economic collapse - a product of the internationalisation of financial markets and the growth of world trade.
However, the good news is that when the recovery begins, it is also likely to be global, and co-ordinated. The nations of the world are now linked together through trading and financial markets as never before in history. Only if there is a return to outright protectionism - to countries protecting their industries by tariff walls - is this global network of economic linkages likely to be broken. Which is why it is so important for bodies like the G20 of leading nations to promote free trade at the same time as seeking to control and regulate international financial markets. New products are being created all the time, in everything from life sciences to robotics, which will provide the markets for the future - provided they can get to market.
However, free trade must also coincide with a commitment to social equality. The huge disparities of wealth which had been allowed to develop both within and between nations during the bubble years are a large part of the problem. American consumers are in a debt crisis largely because middle class salaries have stagnated for the last decade as the top one percent of US citizens has acquired disproportionate wealth. Rich people do not spend most of their money; they invest it in assets like houses and shares, which boosted the bubble economy.
The New Deal in the 1930s coincided with a very great increase in taxation on wealth. It was this redistribution that allowed the consumer society to be created out of the wreckage of the Second World War. The economy boomed in he 50s because ordinary people could afford to buy things. Even poorer countries like China and India today, which have been investing much of their sovereign wealth in US bonds and mortgage assets, need to develop their own consumer markets to recycle their foreign earnings. Otherwise we will just have yet more asset bubbles.
Of course, this doesn’t mean we can afford to go back to the hyper-consumerism of the recent years. The noughties will go down in history as the dumbest boom in history, as we squandered the world’s precious resources shipping across the world huge quantities of toys and trinkets that we didn’t need, and mostly didn’t want. The new consumer industries will have to be environmentally sustainable and focussed on conserving rather than exploiting natural resources. There is no law that says economies have to built on the irresponsible burning of fossil fuels.
Indeed, the markets that will provide the impetus for the economic upswing in the 2010s will largely be in the field of renewable energy and conservation. These will be immense markets because they are environmental imperatives. We really don’t have any choice but to combat climate change, which is now happening faster even than the worst pessimists believed possible ten years ago. The economic effort that will have to be mobilised to restore the climatic balance of the planet will bring even the deepest economic depression to an end.
In truth, it wasn’t the New Deal in America that ended the Great Depression, it was the Second World War. The Keynsian reforms introduced by governments across the world after 1932 helped, but mass unemployment continued until America and Europe began rearmament programmes in the late 1930s. Well, the challenge today is not European war but the threat of planetary extinction. This will again force governments to override market mechanisms in order focus on the greatest challenge humanity has ever faced.
Well, no one said recovery was going to be easy.
We are drowing in debt
It’s not bad being a banker, really. All you have to do is borrow money at a low interest rate from the government and then lend it at a higher interest rate to businesses and mortgagees. Doesn’t take a lot of genius to do that. Even I could make money out of it.
So, why does the government waste its breath squealing at the financiers to pass on interest rate reductions? If they’re serious, why don’t they just move in and take operational control of the banks - many of them are state-owned already like Northern Rock and Bradford and Bingley, or with a large state holding like RBS. It’s not as if banking requires any special skills. You could nationalise the lot and no one would notice except luxury car dealers and yacht builders.
But no, ministers would prefer to stand on the sidelines shouting and pointing fingers at the nasty bankers for refusing to lend. Well, the banksters deserve it, you cannot deny that. I was one of the first to denounce the practices that got us into this mess. Their predatory lending, extravagant greed, short-sightedness and plain stupidity have condemned them in the public eye for a generation. Everyone is talking about a return to the Seventies, with economic crisis and mass unemployment, but this time it’s not the trades union barons who are in the dock of history, but bankers.
However, like the trades unoins the banks aren’t always wrong, and in one respect they are introducing an element of sanity into monetary policy as the government tries to turn the clock back to 2007. They are pointing out that this is a debt crisis and that taking on more debt isn’t necessarily going to get us out of it. That we have to save for the future, and that means making it worthwhile for people so to do. The governmente seems to have been persuaded to adopt the opposit policy, of slashing interest rates and debasing the currency by “quantitative easing” or printing money. The idea - though they won’t put it quite this way - is to ignite inflation so that people with savings are forced to spend it, or see its value evaporate.
Someone needs to say this right now as caution, and money, is thrown to the winds. The government and the Bank of England have gone from complacency to panic in a matter of weeks. Only last summer we were still being told that the economic fundamentals were sound and that the end was in sight; now it’s just The End they see. Instead of the measured dont-frighten-the-horses quarter percent steps on interst rates, the Bank of England has taken to massive one and one-and-a-half point leaps which not only frighten the horses, they make the rest of the world bolt for the door. If the government were trying to engineer a sterling crisis, it couldn’t do much better.
Now, it is true that deflation is not very nice. Prices fall and businesses go bust. But there is a logic to it. After all, the present crisis is almost entirely a result of an unsustainable consumer boom financed by debt. The British people owe £1.5 trillion in personal debt - considerably more than the nation’s GDP. The number of people who spend more than they earn has risen to nearly 5.3 trillion, according to Legal in General. Meanwhile the government is on the way to a trillion pound deficit. This means that, by next year, very household in Britain will carry £50,000 of public debt as well as an average of £60,000 in personal debt - that’s a almost Icelandic total of £110,000. The governmenet hope that rising prices will lower the value of these debts. But this is not just an temporary imbalance on peoples’ domestic accounts we are talking about, ;it is a chronic and ingrained debt habit which must be broken if the economy is to be stabilised in future.
The inconvenient truth is that we simply have to save. The banks are doing this trying to keep their deposit interest rates high to encouage people to save with them. This isn’t out of philanthropy - they need the cash to rebuild their balance sheets. But they point out, fairly, that low interest rates penalise many older people who rely on their savings in retirement. We have yet to hear from silver surfers about the raid on their living standards, but the government might do well to reflect on the fact tht there are now more people over 65 in Brtiain than there are under 16, and that older people are much more likely to vote than the under 34s.,
The government hopes that low interest rates will get people buying houses again. But there is no guarantee that slashing rates and printing money will necessarily stabilise the housing market. Frankly, no one is going to buy houses in a collapsing market no matter how low interest rates go. In neither America nor Japan has low interest rates halted the collapse of unsustainable house prices. Indeed, the Japanese housing crash has lasted nearly twenty years. Anyway, the last thing we need is another housing bubble.
There’s no mystery about what the government is trying to do. After the Black October crash, the government and the Bank of England got out their history books and started looking at what happened in the Great Depression. In September 1931, as unemployment reached 3 million, the National Government slashed interest rates and abandoned the gold standard. The value of the pound fell by 25%, just as it has today. Interest rates fell from 6% to 2% - deja vu - and this led to a modest, export-led recovery. Unemployment fell marginally in 1935 as a recovery in the housing market, mainly in the south of England, boosted economic activity. The government is clearly trying to do the same today.
However, this isn’t the 1930s. For one thing, there was a lot of spare capacity then in the economy, which is not the case today. We also had the Empire. Britain erected tariff walls against imports and used the colonies - yes we still had them - to provide cheap food imports. The 1930s depression wasn’t caused by consumer spending and debt, it was a classic crisis of ineffective demand.
Also: it didn’t really work. Unemployment remained stubbornly high throughout the 1930s outside the South East of England, and it was only rearmament, as the Second World War approached, that ended mass joblessness. We are in a very different sitution today. We cannot seek salvation in another unsustainable boom and we certainly cannot afford to go to war. We have to get out of this one ourselves. And I fear that the government is going in the wrong direction.
So, why does the government waste its breath squealing at the financiers to pass on interest rate reductions? If they’re serious, why don’t they just move in and take operational control of the banks - many of them are state-owned already like Northern Rock and Bradford and Bingley, or with a large state holding like RBS. It’s not as if banking requires any special skills. You could nationalise the lot and no one would notice except luxury car dealers and yacht builders.
But no, ministers would prefer to stand on the sidelines shouting and pointing fingers at the nasty bankers for refusing to lend. Well, the banksters deserve it, you cannot deny that. I was one of the first to denounce the practices that got us into this mess. Their predatory lending, extravagant greed, short-sightedness and plain stupidity have condemned them in the public eye for a generation. Everyone is talking about a return to the Seventies, with economic crisis and mass unemployment, but this time it’s not the trades union barons who are in the dock of history, but bankers.
However, like the trades unoins the banks aren’t always wrong, and in one respect they are introducing an element of sanity into monetary policy as the government tries to turn the clock back to 2007. They are pointing out that this is a debt crisis and that taking on more debt isn’t necessarily going to get us out of it. That we have to save for the future, and that means making it worthwhile for people so to do. The governmente seems to have been persuaded to adopt the opposit policy, of slashing interest rates and debasing the currency by “quantitative easing” or printing money. The idea - though they won’t put it quite this way - is to ignite inflation so that people with savings are forced to spend it, or see its value evaporate.
Someone needs to say this right now as caution, and money, is thrown to the winds. The government and the Bank of England have gone from complacency to panic in a matter of weeks. Only last summer we were still being told that the economic fundamentals were sound and that the end was in sight; now it’s just The End they see. Instead of the measured dont-frighten-the-horses quarter percent steps on interst rates, the Bank of England has taken to massive one and one-and-a-half point leaps which not only frighten the horses, they make the rest of the world bolt for the door. If the government were trying to engineer a sterling crisis, it couldn’t do much better.
Now, it is true that deflation is not very nice. Prices fall and businesses go bust. But there is a logic to it. After all, the present crisis is almost entirely a result of an unsustainable consumer boom financed by debt. The British people owe £1.5 trillion in personal debt - considerably more than the nation’s GDP. The number of people who spend more than they earn has risen to nearly 5.3 trillion, according to Legal in General. Meanwhile the government is on the way to a trillion pound deficit. This means that, by next year, very household in Britain will carry £50,000 of public debt as well as an average of £60,000 in personal debt - that’s a almost Icelandic total of £110,000. The governmenet hope that rising prices will lower the value of these debts. But this is not just an temporary imbalance on peoples’ domestic accounts we are talking about, ;it is a chronic and ingrained debt habit which must be broken if the economy is to be stabilised in future.
The inconvenient truth is that we simply have to save. The banks are doing this trying to keep their deposit interest rates high to encouage people to save with them. This isn’t out of philanthropy - they need the cash to rebuild their balance sheets. But they point out, fairly, that low interest rates penalise many older people who rely on their savings in retirement. We have yet to hear from silver surfers about the raid on their living standards, but the government might do well to reflect on the fact tht there are now more people over 65 in Brtiain than there are under 16, and that older people are much more likely to vote than the under 34s.,
The government hopes that low interest rates will get people buying houses again. But there is no guarantee that slashing rates and printing money will necessarily stabilise the housing market. Frankly, no one is going to buy houses in a collapsing market no matter how low interest rates go. In neither America nor Japan has low interest rates halted the collapse of unsustainable house prices. Indeed, the Japanese housing crash has lasted nearly twenty years. Anyway, the last thing we need is another housing bubble.
There’s no mystery about what the government is trying to do. After the Black October crash, the government and the Bank of England got out their history books and started looking at what happened in the Great Depression. In September 1931, as unemployment reached 3 million, the National Government slashed interest rates and abandoned the gold standard. The value of the pound fell by 25%, just as it has today. Interest rates fell from 6% to 2% - deja vu - and this led to a modest, export-led recovery. Unemployment fell marginally in 1935 as a recovery in the housing market, mainly in the south of England, boosted economic activity. The government is clearly trying to do the same today.
However, this isn’t the 1930s. For one thing, there was a lot of spare capacity then in the economy, which is not the case today. We also had the Empire. Britain erected tariff walls against imports and used the colonies - yes we still had them - to provide cheap food imports. The 1930s depression wasn’t caused by consumer spending and debt, it was a classic crisis of ineffective demand.
Also: it didn’t really work. Unemployment remained stubbornly high throughout the 1930s outside the South East of England, and it was only rearmament, as the Second World War approached, that ended mass joblessness. We are in a very different sitution today. We cannot seek salvation in another unsustainable boom and we certainly cannot afford to go to war. We have to get out of this one ourselves. And I fear that the government is going in the wrong direction.
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