Monday, March 31, 2008
So does the newly published Crock Restructuring Plan finally bring some comfort for taxpayers?
The basic idea is that NR will go on a crash diet, slimming from total assets of £107bn at end-2007, to £49bn by end-2011. That will be achieved by encouraging existing mortgagees to switch away (targeting 60% redemptions), cutting market shares to "well below historic levels", and withdrawing from various business lines altogether. Costs, including staff, will also be slashed.
Meanwhile, reliance on that troublesome wholesale funding will be drastically reduced, and much greater emphasis placed on deposits from retail savers. Retail funding is planned to increase from a mere 10% at end-2007 to 50% by 2012.
In other words, the Crock will go back to being much more what it used to be - a small to medium size mortgage and savings bank.
Well, all of the current £24bn of loans from the Bank of England will be repaid by 2010. So that's good.
And the Treasury guarantee will be released by 2011. That's also good.
And then the "smaller, more focused and financially viable mortgage and savings bank... will be returned in due course to the private sector". Which is excellent.
So it's all good news then?
First, the Crock expects to lose a shedload of money between now and 2011:
"In 2008 the business is expected to be significantly loss-making, as a consequence of both the anticipated one-off restructuring costs, which are likely to be substantial, and higher funding costs."
And it doesn't expect to make annual break-even again until 2011.
Second, those redeeming mortgagees will inevitably be the better quality ones- the people who can find alternative providers. Crock will be left with all the junk.
Which will seriously compound the mounting problems with its deteriorating loan book. Because despite all those high level assurances about high quality, it now turns out it took a £240m charge in 2007 for loan-loss impairment, three times the previous year's figure.
Third, what if it can't live without the Treasury guarantee? Or what if the EU competition authorities don't allow it to continue?
The plan envisages NR achieving an A- credit rating on a standalone basis sometime around 2011. But even if it succeeds - itself highly unlikely given previous comments - A- is a pretty low rating by High Street bank standards (eg HSBC and Barclays are both AA, four notches higher). And given the history, the Tyler fortune would certainly come out, as would many other retail deposits.
It's a problem the plan tries to skate lightly around:
"Given the limited practical experience of the consequences of releasing state guarantees of Bank deposits and wholesale liabilities, the viability of the Plan’s proposals for release of the guarantee arrangements will be kept under review in the light of customer feedback, market circumstances and the requirements of the FSA, as regulator, for adequate capitalisation, liquidity and free assets."
Translation: NR cannot survive without the guarantee, but we have no idea what to do about it: maybe something will turn up. And while it is supposedly now paying a fee for it to HMT, as a nationalised company such payments are a complete charade.
A crash diet is undoubtedly the least bad course available for taxpayers. But this plan does nothing to change our view that we are on the hook for a very large bill in due course (ie the other side of the Election).
PS On payments for failure, Applegarth left with a £760,000 golden parachute, on top of the £2.2m he trousered for his last two years. Nice.
Away from the internet over the weekend, Tyler has returned to a raging diatribe from his old mate the Doc, who's been lashing out at the TPA and its supporters, including Tyler.
Doc picks up our post on the latest TPA Town Hall Rich List, and spews forth:
"The Taxpayers’ Alliance blinkered hypcrisy is an ever increasing source of annoyance... Daily Mail style TPA tabloid fodder. As always with the TPA it takes cheap shots... appeals to the gut rather than the intellect... fraudulent bogey figure... journalistic fraud... TPA’s disreputable spin...
... the TPA, sailing close to the law of defamation... classic bit of economic prestidigitation... an inflammatory out-of-context quote- that is how the TPA works... an exercise in blinkered, nauseating hypocrisy."
But as the great Oscar was wont to observe, there's only one thing worse than being accused of Blinkered Nauseating Hypocrisy, and that is not being accused of BNH.
To start with, let's note that Doc is not alone in his anger. Over on the TPA blog, there are similar splenetic comments from other public employees: how dare the TPA pick on hard working public servants, put them in the tabloid dock over pay, and then not have the integrity to publish their own pay?
And you know what? If I'd stayed working as a civil servant I'd be squawking too. I'd feel I earned every penny. I'd feel that Labour's pay rises were no more than I was due after years of underpayment, and years of watching acquaintances in the private sector creaming it in jobs frankly much less demanding and certainly much less worthwhile than my own. You bet I'd be up for some TPA bashing.
Which is precisely why such tricky issues are never taken up by our mainstream political parties. As we blogged here, one in four employees now works for the public sector (including GPs), and in one way or another, more than half of the electorate are now state beneficiaries. That's a whole shedload of voters you could lose by laying into state pay-outs.
But that's a roadmap to disaster. Someone has to highlight the issues and get the facts out on the table. And nobody's interested in abstract arguments about high level principles, or heavy wonk papers about labour market comparabilities. The reason the TPA Rich List has had such extensive media coverage is that it's specific: it names names.
And let's be clear- these really are the things they didn't want you to know. As the Rich List explains, the level of remuneration disclosure required of local authorities is far below that required of public companies, or even for crissake, quangos. Left to themselves, the authorities tell their taxpayers absolutely zip. The TPA had to send out Freedom of Information requests to 450 plus councils, and quite a few refused to answer (see report for examples of the cock-and-bull excuses they gave).
The Rich List brings transparency, and also helps Council Tax payers identify situations where senior officials have been rewarded for failure. Because as the Guardian's economics editor - probably not a natural TPA supporter - says, Britain's newly enriched public sector bosses "have big salaries, drive expensive cars and – so far at least – appear to have achieved the square root of naff all.”
No wonder there's a certain tension in the air.
And it reflects a much bigger picture. For the first time in 15 years the tide is starting to turn against Big Government. On BOM we say praise God, and pass the ammunition. But the left is already in a muck sweat about massacres to come - so much so, that even some rightish commentators are urging them to pull themselves together and brace up (see Matthew Parris in the Times over the weekend).
As always, public employees are out there in no-mans land, crouched in their shell-holes and desperately hoping the bombardment isn't as bad as last time.
So what of the Doc's specific arguments?
First, that £100k pa definition of rich- is it a "fraudulent bogey figure" as he alleges? True, nice round six figure numbers are shaped for headlines, but according to HMRC, only 1% of adults had incomes over £100k in 2006-07. We reckon that's rich to most of us.
Second, what about integrity? Doc argues that the TPA should not be publishing individual details of the 818 Town Hall officials who get paid over £100,000 pa, unless they publish their own salaries too. He says he "cannot take anyone seriously who sits at the “your salary is too big” table without declaring what they earn themselves." He demands Tyler publish his own emoluments, and he produces a pay and rations expose of leading TPA personnel and supporters (even if it is somewhat light on facts and somewhat heavy on Dave Spart style speculation).
To which we say, settle down Beavis. We reckon there's a rather big difference between the TPA and the Town Halls: the TPA raises all its money from voluntary donations, the Town Halls raise the vast bulk of theirs from taxation. And we reckon that if government is going to take away our money under compulsion of law, we have a right to know exactly what they spend it on. Especially how much they pay those in charge.
Third, is Doc right that the public sector is no worse than the private in terms of employing blithering idiots, failure, and rewarding failure?
We can all agree the private sector has its share of all three - eg the T5 fiasco and payoffs for failing fat cats - but we reckon there are some crucial differences.
For one thing, the private sector mainly operates in the market. Private sector operations therefore only get any money if they can sell stuff to customers. True, the customers may sometimes later regret buying, but they can at least then withdraw their custom. And their cash.
Customers have no such power in the public sector. Their money is taken as taxes, and to all intents and purposes that's it: they have to accept whatever they're given by way of service, however shoddy.
It's a crucial difference. What it means is that in the private sector, successful operations are rewarded, and failing operations are punished: indeed, failing operations can be snuffed out altogether. That is a highly effective mechanism for ensuring that, on average, the businesses that serve us are the ones that work.
In the public sector, there is no such mechanism. Failing schools and hospitals get paid whatever, and can just go on failing. Customers may try to go elsewhere, but the chances are they can't. Parents are forced by lottery to send their kids to the most appalling sink schools. Patients can be consigned to filthy third world hospitals. Crime victims must spend their lives cowering indoors hoping for the best. It is frankly disgusting.
What's that? Oh yes, the Commissars can order deep cleans and compulsory numeracy hours in primary schools.
Except of course, they don't work. As soon as they issue one set of orders, unforeseen problems elsewhere mean they have to countermand them. In 21st Century Britain, state control is a recipe for lumbering blundering failure.
The thing is, the Doc knows all this - you only have to read his blog. It's just that like other public servants, he's out there in no-mans land, feeling increasingly battered and unloved. And over the weekend he clearly snapped. Still, we're a broad-shouldered forgiving type, so we'll allow him the odd dyspeptic rant or two, even when it's directed at us (the TPA itself is somewhat less accommodating).
But he has underlined an important point. Tackling our bloated underperforming public services is certainly going to involve a noisy and uncomfortable struggle with those who work in them. Better gird up our extremities.
PS Doc also says: "The TPA has but one bland belief. Taxes are too high, and should be reduced. In their prominently displayed mission statement the TPA says: Taxpayers' Alliance Mission Statement: We will oppose all tax rises. That is it. No exemptions. No explanation. No penumbra. No analysis other than that in which the conclusions have been pre-defined. Tax is a bad thing." Hmm. The TPA's actual mission statement is set out here, and reads "The TPA's mission is: to reverse the perception that big government is necessary and irreversible; to explain the benefits of a low tax economy; to give taxpayers a voice in the corridors of power." But rather than accuse Doc of using what he refers to as an "inflammatory out-of-context quote", I'll put the misunderstanding down to his failing eyesight. Which presumably also prevented him reading such beefy TPA research reports as Moving Britain Backwards, Dynamic Model of the UK Economy, Better Government report, Flat Tax: Towards a British Model, The Case Against Further Green Taxes, HM Prison Service is failing: a new approach is urgently needed, etc etc - see here for more links.
Saturday, March 29, 2008
The Bloke on last year's Rich List
The Taxpayers' Alliance has just published its annual Town Hall Rich List. Since last year's (blogged here) the number of officials being paid over £100 grand a year has increased by more than 25% to 800+. Top of the pile is Northamptonshire County Council Chief Executive Peter Gould, who got £215,000.
As we said last year, there's no objection to people earning a lot of money, and it's true that if you pay peanuts you will get monkeys.
But the problem with public officials is there's no comprehensive market test. And unlike the situation with state school headteachers, there's no shortage of qualified applicants for these well paid jobs. So the pay could well be too high.
Comparisons with senior executives in the market sector are misleading. There, the big money is a reward for successful risk taking. True, it's not foolproof (as the investment banks highlight), but failure is obvious in the bottom line, and has consequences for those involved: at the limit, companies go bust (unless of course, they're bailed out by wibbling governments and central banks).
Democratic control? As we said last year, with local authorities little more than an arm of central government, there is no democratic control. We're still waiting for that fiscal decentralisation, even if Mr Pickles is making the right noises.
PS Can anyone think of a single town hall chief who's ever moved to a comparable job in the market sector? Jobs heading quangos or charities clearly don't count.
Friday, March 28, 2008
The boffins' very latest flying machine
Yesterday we blogged the latest slew of defence equipment cock-ups. Among them was news that, because of MOD's flip-flopping indecision over buying the American Joint Strike Fighter, our brand new £3.9bn aircraft carriers will be equipped with 80 year old Fairy Swordfish biplanes.
Well, OK, not quite Swordfish, but 50 year old flying bedsteads. I've just found the vid of the bedstead's maiden flight: a brilliant example of British Heath Robinson spunk squaring off against girly Yank technology.
The BBC should be very pleased - flight killer T5 is saving the planet
Following news of the Heathrow Terminal 5 debacle, we refreshed our memory of this blog last year. In it, we relayed the breathless PR hype fed to, and faithfully reported by our journos:
"The project has successfully moved 9 million cubic metres of earth; erected the roof of UK's biggest free-standing building; transported the 900-tonne top cab of a new 87m high control tower 2km across the airfield; bored over 13km of tunnels for rail and baggage; diverted two rivers; and installed over 30,000 sq metres of glass facades."
Somehow our newshounds failed to spot the potential problems that have now produced BA/Heathrow's biggest PR disaster since... ooh... last summer's 28 mile check-in queue.
So what does it mean for that even more grandiose project to build the Olympic Park? With a mere four years to go now, does it mean that Valuable Lessons have been learned, and we will avoid a similar meltdown at the 2012 opening ceremony?
What do you think?
Financial expert at work [Parental discretion advised]
Last evening Tyler imbibed a few noggins with some ex-colleagues from the City. And despite all those reports of explosions and gunfire we hear every day, they were in remarkably good heart. So what, if a few hedge funds have blown up and bank shares have tumbled? These things happen, and there has been obvious excess. Save retail depositors, but let the bankers burn.
Yes, I know, if you can keep your head while all around are losing theirs, you clearly don't understand the gravity of the situation. But listening to these boys and girls, you'd almost think those squawking bankers are deliberately bigging up the danger in order to safeguard their own narrow self-interest!
One statement particularly caught Tyler's attention: that the US Federal Reserve's decision to accept unlimited amounts of dodgy debt from the investment banks as loan collateral, and to allow that debt to be valued by the banks themselves, consititutes the biggest fraud in US financial history. So let's hope Mervyn King does not buckle under the pressure and allow the same thing here.
How will it all play out? Obviously nobody really knows. But one thing's for sure: there will be a whole raft of new financial regulations as panicky regulators and legislators run round bolting stable doors. And a whole raft of costly unintended consequences to follow.
Which got us talking about the fitness of our rulers to decide such things.
The Economic Secretary to the Treasury has lead responsibility for financial regulation. Since last June that's been the bright Kitty Ussher (St Pauls Girls and Balliol), but she has zero prior experience of finance. Her boss is A Darling; 'nuff said.
And when it comes to Parliament, nobody thinks people like John McFall and his Treasury Select Committee colleagues (such as the abominable grandstanding George Mudie) have a prayer of wrapping their heads around this.
But then again, how are we going to decide financial regulation? The "experts" at the FSA?
A referendum! Why not have a referendum on liquidity adjustment factors for Value At Risk?
But surely we could have a referendum on stem cell research. A damned tricky area for sure, but essentially an issue of morality. Why should our MPs' ill-informed views and prejudices have primacy over ours? Why should we let Mr Punch ram his Catholicism down our throats? Surely we should decide such morality issues by referendum.
And come to that, isn't it time we finally got that death penalty referendum we've been owed since 1965?
At which point, one experienced City operative opined that ordinary people (and he included himself in that) don't understand the issues as well as our rulers. We are not worthy. We need to have our rulers deciding the difficult stuff because we haven't had time to find out about it all.
Tyler's jaw flapped open. How could anyone say that, standing at a City bar in the aftermath of the biggest failure of UK financial regulation in 150 years? Surely he could have done a better job himself?
Well, yes, he said, maybe with financial regulation, he could have. But he knows nothing of, say, stem cell research. Or organising a healthcare system. Or education. Or policing. Or anything really, other than finance. And rugby.
The City crisis is obviously much worse than these guys had let on. This poor chap was clearly suffering from terminal shell shock. Either that, or he's never focused on the woeful shortcomings of our rulers.
The problem he assumed away is that none of us know how to organise and run everything. And that goes for our professional politico and commissar class more than anyone. As the Major is forever telling us, all they really know about is getting elected and appearing on Newsnight. Never will they know as much about finance and its regulation as my friend at the bar.
Which of course is precisely why we need to dismantle Big Government. Centralised decisions are almost always bad decisions. We desperately need decentralisation , with power passed to those who actually understand the issues on the ground, be they head teachers, hospital managers, or City financiers.
Yes, we need a framework of law, and yes, the state needs to ensure the little guy is protected against the barons. But when it comes to the barons themselves, they should be left - nay, encouraged - to make their own decisions. And if they suffer losses from making the wrong calls, tough. That's all part of how we make progress.
PS The consensus at the City bar is that to prevent further Crock style pavement queues we urgently need the higher deposit insurance cover for retail punters - £100K is the favoured figure - paid for by the commercial banks themselves (as in the US FDIC system- see this blog). We also need the special measures insolvency process. Apart from that, it's buyer beware: wholesale investors should make their own decisions on where they put their money; they should learn not to rely blindly on those conflicted credit rating agencies; if they lose money, or even their entire business, that's just the way it goes.
Thursday, March 27, 2008
There are three iron laws of military kit. The first is that it always costs miles more than the number they first announce. The second is that it will always be delivered years late. And the third is that it won't do what it said on the original tin.
The Commons Defence Committee has just updated us on how the laws are panning out with MOD's current major procurement projects (and remember these are things that are not yet in service- the eventual over-runs and delays will certainly be greater than the current running tallies):
- Astute class submarine- 50% (£1.2bn) over budget, and three and-a-half years late; we're supposed to be getting 7, but they're trying to contain costs so we may get fewer; alternatively design economies may be made, potentially worrying given these are nuclear powered and the first one is already having to be repaired having blown up at sea (which is presumably what "power loss leading to damage to the Turbo Generator bearings" means).
- Type 45 Destroyer- 20% (£1bn) over budget and three years late; we were meant to get 8, but only 6 have been ordered;
- Nimrod MRA4- 25% (£0.7bn) over budget and seven and a half years late; and as we've blogged before (see all blogs gathered here), the number has been cut from 21 to 12 so the unit cost has gone up by well over 100%;
- A400M- two years late.
Other programmes don't have such clearcut figures because under the MOD's arcane accounting rules, they haven't actually started yet.
Thus, the £3.9bn programme for two new aircraft carriers effectively started last summer when it was announced by ministers, but it doesn't count because more than six months later no contracts have been signed. Given that the first is due to be in service by 2014, there isn't a ships cat's chance it will come in on time. Or on budget. Unless that is, "economies" are made. The Committee says:
"While it is important to acquire the two carriers within the Approved Cost, the MoD must also take account of the through-life costs of the carriers which will be many times greater than the acquisition costs. The MoD needs to make the necessary investment when acquiring the carriers so that substantial savings through-life will be delivered." (para 166)
Watch out for plywood flight decks (and note that the Committee also questions the need for these carriers at all).
The Joint Strike Fighter project for 150 Short Take Off and Vertical Landing planes developed jointly with the Americans is all over the place. Despite having already spent £1bn, MOD is no longer able to say how many we will get, when, or at what cost. Those brand new carriers will instead be equipped "initially" with some old Harriers- aircraft that first flew in the sixties, quite possibly before their pilots' parents were born. A total shambles.
On the catastrophic Nimrod programme, the Committee sums up:
"This is a programme that has been beset by one problem after another and neither the MoD nor the contractor appears to be able to get a grip on it. We hope that the new Minister for Defence Equipment and Support will look closely at this programme and consider whether it is ever likely to deliver the capability our Armed Forces require in the timescale needed. If it is not the MoD should withdraw from the programme."
In other words, the programme should be canned. We agree.
Overall, a very depressing report.
Wednesday, March 26, 2008
Talks a lot of sense that Pa Broon
This afternoon the Public Accounts Committee grilled NHS Chief Exec David Nicholson about the GPs' pay deal (watch again here).
Whether it was President Sarko's imminent arrival to speak in Parliament, or whether it was general incompetence fatigue, PAC members were strangely muted. It was left to Glaswegian Labour MP Ian Davidson (reportedly the Pa Broon of Labour politics) to lift the mood by asking Nicholson if the GPs huge pay rise was not "a manifestation of sheer unadulterated naked greed"? When Nicholson said no, Pa quipped that it must be only "slightly adulterated naked greed". Ho-ho.
The facts are well known to BOM readers (eg see this blog, and this), so here's the picturebook recap from the National Audit Office report discussed this afternoon:
1. The GPs pay deal has ramped costs, with total expenditure virtually doubling between 2001-02 and 2005-06:
2. The pay deal cost £1.76 bn more than planned...
(Actually, this afternoon Nicholson claimed it was only £400m more, but that was because they'd since discovered they were were already spending £1.4bn pa more than they'd actually realised... er... )
3. The average pay of GP partners increased by 58% in the three years to 2005-06 to well over £100,000 pa. But the increases they passed onto their staff- like salaried GPs and nurses- were much less (which is what caused Pa's outburst)
4. GPs' productivity has slumped. We all know about the loss of Saturday morning surgeries and the traditional Out-of-Hours service, but looking more broadly, the ONS estimates productivity is down by 4% (ex their highly dubious "quality adjustment"):
We disagree. As we've said before, this whole mess is down to bungling by the Department of Health: they gave away the store to people who were quite reasonably pursuing their own interests. Plus, of course - as the chart shows - the GPs have actually performed pretty well compared to the rest of the NHS, where overall productivity is down a massive 8%, even after taking account of an extraordinarily flaky "quality adjustment".
This afternoon, Nicholson and his wingmen tried to explain it all away by arguing that this "ground-breaking" contract, along with its Quality and Outcomes Framework, has opened doors firmly shut since 1948: the NHS now has a once in a lifetime "opportunity to take it forward".
We're not holding our breath.
I've just read the FSA's audit report on its own failings over the Crock. Actually, it's not even the whole report, just a summary: the full version won't be published until it's had "redactions to protect commercial and individual confidentiality". But the summary's more than enough to make us scream:
- Total failure to recognise risk: unbelievably, the Crock was deemed so low risk it was subject to much less monitoring than other High Street banks. Indeed, the FSA was so relaxed it hardly bothered to monitor it at all: through the whole of 2005 and 2006 they only had one meeting with Crock management, compared to an average of 100 - yes 100 - with the top five banks.
- Total lack of financial analysis: under the FSA's internal procedures "there was no requirement on supervisory teams to include any developed financial analysis in the material provided to [decison makers], and for the Northern Rock Panel none was provided either for the firm itself or in relation to its peers" (para 15). Can you imagine that- the FINANCIAL Services Authority did not think it necessary to do any FINANCIAL analysis of a bank that was growing faster than any of its peers.
- Rubbish record keeping- "contrary to... standard practice, formal records of key meetings were not prepared" (para 13) "None of the issues was recorded in... the FSA’s database from which internal management information is generated and which triggers escalation of concerns... No change in the firm’s risk scores was recorded" (para 22).
- Massive management failure- "Our findings also show a level of engagement and oversight by supervisory line management below the standard we would expect." (para 24)
- Wholesale staff inadequacy- "the FSA is short of expertise in some fundamental areas, notably prudential banking experience and financial data analysis": translation- anyone who's got the skills required leaves.
This is a shocking report. And frankly, we can have no confidence in the ability of the FSA to put it right.
We'd move banking supervision back to the Bank of England soonest.
Taxpayers on both sides of the Atlantic should be depressed by yesterday's decision by the US authorities to revise their Bear Stearns bail-out terms. Instead of lending JP Morgan $30bn against the collateral of Bear assets, US taxpayers are now effectively taking ownership of those (v dodgy) assets, with Morgan simply chipping in the first $1bn of any losses... and trust me, there will be losses.
When the Fed announced the original deal, we applauded. Comparing it to the botched handling of the Crock, we liked the speedy resolution, the fact that US taxpayers' exposure was limited, and the fact that Bear shareholders had paid by losing virtually everything.
But under the revised deal, US taxpayers have taken $29bn of the most toxic debt, and Bear shareholders have been handed back 5 times more than the original offer. Bear's management and board remain in place, and the taxpayer won't even get a share of Morgan's likely upside.
The message from the Fed to risk-chasing banks is all too clear - do what you like; no need to worry about the Armageddon scenario because we'll always bail you out. No wonder bank shares have bounced.
Commenting on this, the fact that the Fed will be holding its toxic debt portfolio via one of those now notorious special purpose vehicles, and the fact that the collateral for its future loans to investment banks will be valued by the banks themselves, the Prof asks "time for a tax payer class action suit?"
Where do we sign?
But for those of us who believe in free markets, the gloom is even deeper. As Martin Wolf points out, the inevitable consequence of this banking crisis is more regulation. Legislators will demand it and the cap in hand banks will hardly be in a position to resist. Indeed, they are actively inviting it: Joseph Ackermann, chief executive of Deutsche Bank, says that “I no longer believe in the market’s self-healing power”.
But you know, I don't believe in the ability of regulators to do much better. The history of financial regulation is the history of unintended consequences (most recently the US Sarbanes-Oxley legislation driving many US financial firms across to London).
What's more, the actual people who work for regulators are rarely up to the job envisaged by legislators. As we have seen only too clearly with the FSA and the Crock, they are simply not confident enough to challenge aggressive bank management (and the ex-building society coves who ran NR were hardly the raw meat eating brain-boxes who run investment banks).
We'd much prefer the approach advocated by the excellent John Kay:
"The state cannot ensure the stability of the financial system and a serious attempt to do so would involve intervention on an unacceptable scale. But to acknowledge responsibility for financial stability is to assume a costly liability for failure to achieve it. That is what has happened.
"Since financial stability is unattainable, the more important objective is to insulate the real economy from the consequences of financial instability. Government should protect small depositors and ensure that the payment system for households and businesses continues to function...
We cannot prevent booms and busts in credit markets, but today’s regulation of risk and capital – which is more reflective of what has occurred than of what may occur – does more to aggravate these cycles than to prevent them. Regulation in a market economy is targeted at specific market failures and should not be a charter for the general scrutiny of business strategies of private business. Banking should be no exception."
PS We'll post on the FSA drains-up report when we've read it.
Tuesday, March 25, 2008
The improbably named Ed Humpherson of the NAO has just given us an update on Brown's ludicrous red tape drive - the one to cut red tape, that is.
As we blogged here, the £20bn figure the government quotes as being the annual red tape burden, was pulled out of a dark orifice by consultants PWC and KPMG for a fee of £17m. It's completely meaningless.
Assistant Auditor General Mr Humperson has now confirmed BOM's conclusion. He says:
"You have to be much more wary, much more cautious, and give a haircut to the numbers.
He warned that the exercise was “not something where the numbers themselves are the be-all and end-all and can be relied on”. Asked if the £20bn total was in effect random, he said: “It’s a little bit more [accurate] than simply plucked out of the air.”
Mr Humpherson highlighted the need to be “questioning” of the claim, originally produced by a government taskforce, that red tape cuts could increase productivity by up to £16bn. “The £16bn figure . . . is probably a bit overcooked,” he said. “It’s an extremely difficult assertion to make.”
“The risk is all of this good work is done by departments . . . and business does not really notice the difference.”
Business does not really notice the difference.
£17m in consultants' fees, and God knows what other costs inside Whitehall, yet business does not notice the difference.
A couple of interesting news items this morning highlighting some of the groups who've lost particularly heavily under Labour (given that all taxpayers have lost to a greater or lesser extent).
1. The South
A new analysis of Council Tax increases since 1997 underlines the way the South has been slammed to pay for Labour's councils up North.
True the correlation isn't perfect, but it is striking that when you draw a line from the Wash to the Severn, all bar one of lowest rise councils are North of it, and all of the highest rise councils are South.
Of course, this is just part of the regional discrimination picture only too familiar to BOM readers, with the Greater South East (GSE) losing getting on for 10% of its income subsidising the North, Scotland, Wales, and N Ireland (eg see this blog).
The South, and the Greater South East in particular, has been a big loser under Labour.
Against Gordon Brown's insistence that prices have only risen by 18% since 1997 (on his preferred CPI measure to Feb 2008), in the real world most of us inhabit, prices have been shooting up. The Telegraph highlights the 56% increase in the cost of running a family car, remembering of course, that tax accounts for around two-thirds of fuel costs. Here's the DT summary:
(We blogged some other price increases here. As a marker, in 1997 the average price of a standard white sliced loaf was 53p: today it's around £1, a virtual doubling).
3. Hard-working couples
Labour has shovelled large amounts of cash towards unemployed people with children. It's been funded by taking money away from employed people, especially those with no children. Here's the definitive analysis produced by the Institute for Fiscal Studies:
It's been funded by taking an extra 5% from earning couples with no children, and an extra 3% from earning couples who juggle both jobs and kids. The very groups who drive the economy and pay their own way.
Come April 2010 we should all take a moment to tot up how much our own families have lost.
Monday, March 24, 2008
Taxpayers are teetering on the brink of picking up some humongous bills to bail out the banks. Somehow we have to make sure it doesn't happen.
Following Thursday's emergency meeting between Mervyn King and the City's top bankers, we'd steeled ourselves for a multi-billion bail-out announced over the long Easter weekend. So far, despite mounting hysteria, that hasn't happened. Phew.
But it ain't over yet.
The bankers reportedly demanded the Bank start buying mortgage backed securities: the toxic ones nobody else - including the bankers themselves - now wants. The Bank has given a categorical no, but that's likely to cause even more screaming. One FTSE chief executive squawked over the weekend:
"Does the Bank of England think the Fed is stupid or that the actions of the ECB are stupid? They need to wake up to the fact that this is serious and they need to help - that's what we have a f**king central bank for."
Not for doling out taxpayers' money, we f***king don't.
As we blogged here, there's a huge difference between the Bank lending against heavily discounted collateral - which it's certainly going to do more of - and outright purchases of dodgy loans (let alone toxic loans). The banks got themselves into this mess, and they should get themselves out of it.
Here are are couple of interesting charts from Bank of England's Financial Stability Report. The first shows the return on equity capital for major UK banks over the last decade:
The second chart shows how the pattern of banks' earning has been changing (specifically, the chart plots the earnings of Large and Complex Financial Institutions, but it highlights the point)The key point here is that the real growth areas have not been in traditional bank business of taking deposits and lending (generating net interest income), but in fee earning and trading. The latter clearly involves dimensions of risk way beyond anything traditional banks did*, but even fee earning has brought whole new kinds of risk, many of the fees having been earned on the very financial innovations now causing so much concern.
It's the banks and their shareholders who have profited from getting into these new businesses. And taxpayers should not be made to bail them out when the going gets rough.
We reckon King is up for toughing it out. But Brown?
*Footnote- Do you know how these bank trading operations have made so much money? I expect you imagine it's because they employ genius rocket scientists and/or barrow boys who can just "do it". But that isn't the truth of it at all. Most of those profits have come from banks borrowing money cheap, and then placing highly risky bets that pay off most of the time. A simple example is the so called "yen carry trade": there, you borrow yen, which carries a very low interest rate, you invest in some currency (typically dollars) that has a much higher interest rate, and you sit there quietly earning the difference. If you're lucky, the yen also goes down against the dollar because it has such low interest rates, so you make an extra profit on top. Brilliant. Well, brilliant until the yen goes up against the dollar that is. Then, everybody dives for the exit at the same time, and you make a thumping great foreign currency loss. Most of the time, it's a regular money machine, but every now and again, in some entirely unpredictable way, it incinerates your face: don't try it at home. (Actually, it's a bit more complex than that, but the essence- investing in risky assets that are OK most of the time- is correct; and we're now in one of the periods when it's gone horribly horribly wrong: see also this outstanding blog by Martin Wolf and its link to this).
As we've probably said before, Tyler's first proper job was working at the old Department of Education and Science. There, he was in a very small minority of people who'd actually had experience of doing The Thing itself. Admittedly, that experience comprised nothing more than completing a one-year Postgraduate Certificate in Education and then realising teaching was not for him, but it did mean he'd stood in front of stroppy 14 year olds and attempted to teach.
The only other people in the DES who'd had any experience of this were the HMIs- Her Majesty's Inspectors of Education. But they were kept sequestered away somewhere deep in the bowels and in three years Tyler only ever met one. Anyway, the mandarins viewed them as a bunch of obstructive Luddites - as everyone kept saying, those that can do, those that can't teach, those that can't teach, teach teachers, and those that can't teach teachers, become HMIs.
I was again reminded of this reading today's story about the 500 "development milestones" laid down by the mandarins for Britain's under-fives:
"It sets out 69 early-learning goals that every child should reach after a year at primary school.
Under the Early Years Foundation Stage, children will be checked against more than 500 development milestones before they are five, including whether they babble and gurgle as babies."
Did anyone with actual hands-on experience of teaching young children have any meaningful input to this? Highly unlikely. It all smacks of the old DES mandarins, now given free rein by the loathsome Commissar Balls, and itching to extend their power back to the cradle, and probably beyond.
This is another giant dollop of the box-ticking Stalinist nonsense that has caused such damage to our primary and secondary schools.
And let's be clear: the evidence is that for most children, poor educational attainment is not down to what happens in their early years; the main problem today is what happens to them after they enter the state schooling system.
For example, the recent OECD study into reading standards (PIRLS- see this blog) found that while pupils at English primary schools have slumped in the international league table of reading skills, children entering those schools are three-times more skilled than the international average. It's our state schools that then drag them back.
It's in the nature of commissars to extend their rule to everything. But trust me, the ones round at the DCSF haven't a clue what they're doing.
Saturday, March 22, 2008
Some bloke talking about how central bankers caused the Great Depression
Did everyone hear former HBOS deputy Chairman Sir Peter Burt on BBC R4 Today yesterday (listen again here, or Times summary here)? As a taxpayer I found it very concerning.
He was on with our friend Prof Buiter, who had just explained how the Bank of England should provide further assistance to our cash strapped banks.
As the Prof has argued right from the start of this crisis, the BoE should always stand ready to act as lender of the last resort. Moreover, it should be prepared to lend against a much wider range of collateral, and for longer, than it has done historically. That way, banks know they can always access liquid funds even when they are too scared to lend to each other.
But - and this is a BIG BUT - the BoE's loans should be at a price. Not only should the interest rate charged reflect the risks involved, but the collateral should, in the Prof's words, be "priced aggressively"- ie the amount of collateral demanded as security should be scaled up to incorporate a healthy safety margin for credit risk (he suggested banks might need to pledge say £1bn of mortgage collateral to secure a £500m loan).
If this isn't done, he said, we will be sending a message to banks that "if they screw it up they will get bailed out at generous prices". We will encourage reckless behaviour and precipitate an even worse financial crisis next time (aka moral hazard).
All of which we wholeheartedly agree with.
But Burt - the voice of the banks, and presumably reading from the self-same script delivered at their emergency meeting with the Governor on Thursday - took a very different line:
"There seems to be some confusion. Dr Buiter talks about banks lending imprudently and mentioned should people be bailed out?
[But] banks don't lend money: it's the management of the banks who lend money, and they're not bailed out. A lot of the senior executives in the States have lost their jobs.
So I'm less concerned about moral hazard because the penalty for the individuals who make the mistakes is that they lose their job."
Hasn't Sir Peter been paying attention? The point about today's bank remuneration structures is that the management get huge upside when things go well, and others get all the downside when they blow up. Even if they do get sacked, the managers walk away with gzillions (eg Merrill's ousted chief walked away with a reported $159m). That kind of asymmetry means the incentive to be reckless is enormous.
And as for that tenuous distinction between banks and their managements, the last time I checked, the banks themselves were nothing more than buildings with a few faux marble columns: sure, they don't lend money, but they don't do anything else come to that, other than just stand there.
Burt went on:
"What is very important is that the system is protected against systemic risk. If you force them to take massive write-offs at this stage, then their capital is reduced and their ability to lend to businesses in the real world is reduced.
Let's make sure we register what he's saying here. He's saying if the banks are forced to write-off too many of their duff loans "at this stage", it will erode their capital (aka shareholders' funds), limiting their ability to fulfil their public service obligations.
Bank's public service obligations? Never heard of them before? Hadn't you realised those pampered limo'd wedged up bankers are only doing it to serve the public? There's more:
"Dr Buiter remarked that the problem of being too loose is that you stoke up the problems for the next crisis. But as Keynes said, in the long-run we're all dead. If you don't get through this crisis without the economy imploding, then there won't be another crisis: we'll be looking at something like a depression."
Keynes, depression... I think we get the message: unless we write a blank cheque to the banks, we're heading straight back to the thirties. Which is no doubt the message Burt's ex-banking colleagues delivered to Mervyn King on Thursday.
Talk about special pleading. Nobody's saying the Bank of England shouldn't help banks with secured loan facilities, as Buiter outlines. Because we all know how badly the Fed handled the Great Depression, and how starving the system of liquidity caused a huge contraction in the money supply (see Milton Friedman's vid above).
But providing liquidity is not the same as bailing out bank shareholders. Shareholders shared the spoils during the good times, and shareholders condoned the reckless behaviour by their managers that's now landed them all in the soup. Their reckoning is now at hand.
Does that mean the end of banks? After drugs, sex, and arms, financial intermediation is one of the world's most profitable businesses, and always has been. Even if current shareholders take a mauling, there will be plenty more capital to come in, much of it via acquisition of existing banks at knock-down prices. There's no way taxpayers should be forced to bail anyone out.
As we said at the start of the Crock fiasco, taxpayers should never have to part with a bean until a bank's shareholders have lost the lot.
PS We dare say Prof Buiter might possibly have heard Burt's Keynes quote once or twice before. Long-dead Keynes was a brilliant quotesmith, and one of his other lines springs to mind: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” And then there's this one: "A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him." In current circs, our guess is that the great man would line up with Prof Buiter.
Friday, March 21, 2008
Headlines about breadlines may be making a comeback
As the temples of Mammon crash around us, even the BBC is getting up to speed with the lingo of financial distress. The other morning I even heard them gleefully discussing deleveraging, and how it's driving the cataclysm.
Anyone who's read the property supplements knows how leverage works: borrow as much as you possibly can to buy a portfolio of off-plan executive flats in Liverpool Waterside, 10% upfront and the rest on completion; by the time they're built, the price has gone up by 20-30% of the contracted price, you sell immediately and pocket 200-300% profit on your 10% stake; and that's on cash that you'd mostly borrowed in the first place. Return on your equity stake, maybe 500-1000%. The outstanding power of leverage.
Actually of course, you don't even need to do that. You just buy any old property with a bog-standard mortgage, and hey presto, you're leveraged . Your liability is fixed (save for the trifling matter of interest), and your leveraged upside from the assured rise in house prices is infinite. It sure beats working for a living, as you can tell from all those telly progs showing how anyone can be a property developer.
You get a good idea how powerful this effect has been by looking at the growth of household wealth in Britain. The ONS publishes stacks of data on this, but the best overview is produced by... well, waddyaknow, no-we're-not-going-bust HBOS.
They show how in the last decade, the gross value of our houses and flats grew by 216%, reaching just under £4 trillion. That's getting on for three times our annual national income. And a staggering £2.5trn of it has showered down on us in just the last 10 years.
On a family level, that means the average British household has copped about £100 grand over the last decade from the increase in property prices, or around £10 grand pa. We're now sitting on an average £160 grand apiece in property assets. No wonder we've been feeling so flush for so long.
Of course, we have borrowed more- we now have that widely trailed £1.3 trillion of personal debt, of which £1.1 trillion is mortgage debt.
But even taking account of that, our total net assets - including financial assets such as pensions - have increased by £3.5 trillion over the last decade. And with net assets now standing at £250,000 per household, we really never have had it so good:
If only it wasn't for that nasty deleveraging business...
Because now deleveraging is the order of the day, lenders don't want to lend on those Liverpool executive flats any more. In fact, they don't want to lend on anything any more. Buy-to-let landlords can't sell on completion because nobody can borrow the money to buy. Worse, the landlords can't borrow the money for their unpaid 90% either. Defaults... repossessions... firesales... suddenly the whole marvellous wealth creation process starts unravelling.
And how do the numbers look?
Bad. Let's say we get a 10% houseprice fall (quite modest- see here for housepricecrash's survey of predictions). That's £400bn wiped off household wealth, or just under £20 grand per household.
Well, you say, a £20 grand "notional loss" isn't too bad. Ah, but remember households have been used to making £10 grand pa: they've been used to being able to borrow more against their rising property value if they want a little mad money: suddenly they can't.
And remember too that their existing debt doesn't go down: that leveraging thing now works just the same but in reverse. Belts need tightening drastically.
It's all known as the wealth effect- the impact of changes in wealth on spending. Estimates of its strength vary but a plausible level is around 5% (eg see here)- ie for every £1 of extra wealth, households will spend on average another 5p pa.
Which implies our £400 bn fall in housing wealth translates into a £20bn pa fall in consumer spending. That's around 1.3% of GDP.
Or one Big Hole in Darling's growth forecasts. And one sickening lurch for the rest of us.
PS The splendid Prof Buiter is on cracking form explaining why we taxpayers must not be made to bail out the bankers. But I also love this post, "I hate Mom", from guest blogger Prof Uwe E. Reinhardt.
Thursday, March 20, 2008
Sorry- OT. But if all those "bank robbers" made such a killing on shorting HBOS and then talking it down, who lost?
See, someone must have sold at the panicky bottom so those bandits could close their shorts. And we know there were real transactions because at 160m shares traded, market volume was the highest for at least 5 years.
So who was it?
Pension funds? Unlikely, because they'd never be able to make decisions like that in a couple of hours. Insurance funds? Ditto. Private investors? Unlikely to have enough volume, and anyway, personal experience tells me that the service to private sellers breaks down at times like this.
No, the likeliest losers are other City spivs of one kind or another. So frankly, who cares?
There is one thing...
Let's hope this whole experience hasn't rattled the Bank of England so much they spend the long weekend writing blank cheques to the banks. As a taxpayer, I find that emergency meeting this pm concerning.
End of OT.
PS Today I phoned my broker. Well, more specifically, I phoned my supplier of low cost index tracking funds to sort out an admin issue. It took ages to get through and when I did, it sounded more like I was talking to someone at Custer's Last Stand. Above a background soundtrack of shouted instructions and gunfire, he vouched safe it had been a "total nightmare" since Monday, with thousands of freaked retail investors dumping everything. When he finally managed to get my account up on his screen, he informed me it was "shot to pieces". What!!?? I enquired calmly. Then he said he couldn't read his screen because the system had "locked him out". Again. Could I phone back on Tuesday? Client comfort, nul points.
As you may know, the government is spending a huge pile of our cash on its Building Schools for the Future programme. At an estimated cost of £45bn it aims to rebuild or refurbish all of England’s secondaries by 2021, with a separate £7 billion fund for tackling half the nations’ primaries.
So that's an official estimate of £52bn, which on BOM's usual overspend factor translates into a final bill of about £70bn (see this blog for overview of public sector project overspends).
Naturally, one of the things the government claims we'll get out of this massive spend is more eco-friendly schools: "a key goal is to improve the carbon footprint of new schools by reducing carbon dioxide emissions by 60 per cent".
But according to the TES, that's so much... er, hot air.
Roderic Bunn, a consultant specialising in building performance, has compared one of the new eco-schools with a classic from the Victorian era. And yes, you guessed, the Victorian schoolhouse performs just as well as the brand new one: their carbon footprints are virtually identical.
But in terms of long-term maintenance, the Victorian school wins hands down, with its robust traditional technology that everyone understands. In contrast:
"[The new school's] bio-fuel boilers, solar water heating and rainwater recovery systems are proving more demanding. The application of such sustainable technology is no guarantee of permanent good performance. It can put school administrators on a management and maintenance treadmill that they are neither trained for nor expecting."
Describing the commissars' schools energy benchmarks as "dangerously out of date and flaky", Mr Bunn adds:
"Not that Government, the Department for Children, Schools and Families (DCSF) or the Carbon Trust would know this. No one in the education sector is carrying out a programme of post-occupancy assessments to determine whether £45 billion of taxpayer’s money is actually improving the carbon performance of the schools estate."
Now who would ever have guessed that the government would shovel vast amounts of cash into a grandiose project, without even bothering to check it delivered what they claimed?
Here's a prediction: by 2021, the first of these new eco-schools will be in as bad a state of repair as the appalling 1960s buildings they're replacing.
Latest news and links from correspondents:
Rewards for failure
By its own admission, the FSA made a complete horlicks of regulating the Crock, and quite rightly there has been blood.
But not much blood. No politico has gone. And the only high profile departure announced so far is FSA retail chief Clive Briault, who was directly in charge of overseeing NR.
And guess what- he's leaving with a £380,000 payoff. Plus a glowing reference from FSA boss Hector Sants: “Clive has been an outstanding colleague who has contributed much to the organisation.”
And his contribution to taxpayers?
(HTP Dave B)
According to the Cambridge News:
"A bus which takes 18 children as young as four from Rampton to Cottenham Primary School is to be axed in September. A minibus which ferries 40 traveller children from the Smithy Fen site to the school was also to be scrapped.
However, the council's Cambridgeshire Race Equality and Diversity Service (CREDS) has now stepped in, forking out £38,000 a year to save the service. Angry parents are accusing the council of discriminating against the settled community by not saving the Rampton bus."
The council says the cash from CREDS' budget can only be spent on improving the attainment of children from minority communities.
What an outrage: the top-down Stalinism of ring-fenced local authority funding being used to enforce ideological dogma dictated by the "progressive" elite. The wishes of local parents simply don't count.
Another Olympics Black Hole
The NAO has just published its report on funding for DCMS's daft Olympic Superathletes programme (see many previous blogs eg here). It turns out that none of the £100m supposedly coming from private sector sponsors has so far been raised.
Wonder who's going to fill the gap?
Talking of sponsors, the Times reports that NHS hospitals are to enter sponsorship deals with private sector companies. One idea is that Nike could sponsor brain surgery. No, really.
The mind boggles.
And then it asks why?
What possible advantage is there to taxpaying patients in allowing Nike or Durex to use the NHS logo on their products?
Don't make me larf. Remember the City Academies fiasco. We've blogged before about the pitiful amounts raised from private sponsors for them. According to the latest figures, there have so far been 68 Academy projects approved, but only £64m raised from sponsors. So that's less than £1m each, or £600 grand net of tax. Even though the average cost of an Academy is £26m.
NHS sponsorship is yet another example of our idiotic, commercially naive commissars playing at running "a business".
The United States has a population of 301,139,947. They send 100 senators to Washington.
The United Kingdom has a population of 60,776,238. Yet Jack Straw reckons we will need 350-400 elected senators to replace the medieval cronyist retirement home that is the House of Lords.
Because Straw's plan is nothing whatsoever to do with what we want or need. It's about secret discussions to stitch up a cross-party deal whereby patronage can be preserved. Each Senate constituency will be multi-member, with places dished out from party lists: he who controls the list, controls most else besides.
The House of Lords costs us £100m pa (see this blog for details).
Wednesday, March 19, 2008
[WARNING: this is another post that's turned out much longer than planned]
9 Moorside Road seems in pretty good nick, and it's got a larger than average garden. Worth a viewing? You bet! Round our way you couldn't buy a dog kennel for £82 grand.
Just one small thing I possibly ought to mention before you phone the agent: this is Moorside Road, Dewsbury. Yes, the same Moorside Road Dewsbury where your immediate neighbours would include Shannon Matthews' family. Still keen?
Of course, everyone's delighted that Shannon has been found. It's one of the few cases where a headline child disappearance hasn't ended in tragedy. Thank God.
But round our way, that isn't what people are talking about. Round our way, everyone's clucking about her family circumstances, five siblings by different fathers and all. And those neighbours we met at the street celebrations afterwards.
But look, I spent my childhood on a council estate. And it just wasn't like that. For a start I can't remember any families that weren't man, wife, and pretty well behaved kids (all right, I can remember a couple where the boys got into the odd spot of trouble).
So what exactly goes on in an area like Moorside Road? I took a look at the statistics, to see if I could find out.
According to the local paper this is "one of most deprived areas in the country". That conclusion is based on a giant number crunching exercise carried out by the Department for Communities and Local Government and known as the Index of Deprivation 2007.
In ID2007speak, Moorside Road is part of Level 1 Super Output Area E01011025 (not a joke- that is what the Commissars have reduced it to). And on DCLG's calculations, its deprivation percentile ranking is 11.2%- ie only 11.2% of all Britain's 32,000 Super Output Areas are more deprived. So Moorside Road is right down at the bottom (even if it is a cut above its near Dewsbury neighbour E01011141, whose percentile ranking is 0.6%- ie 99.4% of the country is better placed than its residents are).
So what makes it deprived?
Is it money? You might think so, because otherwise why would the government spend so much trying to make poverty history?
We haven't got an exact number for incomes in Super Output Area E01011025, but in the broader ward area, Kirklees Council puts average household income at £27,300 pa, 19% below the GB average of £33,700.
Is a 19% income shortfall deprivation? I guess you might argue so, but in truth, £27,300 pa is hardly the breadline.
So what about the other indicators (see ONS collection here)?
Crime is one where the area scores badly: burglary, criminal damage, and crimes of violence are all much higher than the national averages, and overall crime is more than one-third above the average.
Education is another pretty shocking area, with only about half of school pupils obtaining 5 GCSEs (including Maths) at any grade, compared to around 90% nationally. And 44% of the adult population have no qualifications, compared to 28% nationally.
Another big difference is in working for a living. Unemployment and "incapacity" together account for around 13% of the adult population not working, compared to 8% nationally. Add in another 4% for lone parents (see below) not working, and we've got around 17% of the working age population being supported by the state rather than earning their own way. That's about 70% higher than the national average.
Against that background it's not surprising that welfare payments make up a good proportion of the community's income. 23% of the working age population claim a "key benefit" (cf 14% nationally), including 4% on Jobseekers Allowance, and 10% on Incapacity Benefit. Income support claimants, at 10% of the population, are three times the national average, and Housing and Council Tax Benefit claimants (14%) are more than 50% above average.
Overall, 27% of the local population live in households in receipt of one or more of the following benefits: Income based Jobseeker's Allowance, Income Support, Working Families' Tax Credit, Disabled Person's Tax Credit, and Asylum Support Service.
These are big slices of the population dependent on welfare. But in fairness to Super Output Area E01011025, we should note it's not one of the real hotspots, where up to three-quarters of the working age population live on benefits:
Moorside has one other big difference from the national averages: family structure. Lone parent families make up 14% of households, compared to 6% nationally. A further 5% of households are cohabiting - but unmarried - couples with children (ie like Shannon's family); nationally, that's 3%.
So what should we make of it all? Apart that is, from pulling our hair out.
This is clearly an area with big problems- crime, educational underachievement, unemployment, and family dysfunction. But what can we do?
Money has been tried. As noted above, including al those welfare benefits, average incomes are only 19% below the national average. Yet living costs must be much lower- a house for £82 grand compares to a national average price well over twice that (see this blog for more on regional cost differences).
What's more, public money has also been pushed into the usual slew of regeneration schemes. There's currently a £3.5m "Pathfinder" project which has set up a range of stuff, including youth services, community groups and adult learning. But it's flopped. Roger O'Doherty, its manager says: "We have been very successful in our work with the local community but it is a long, slow job" (translation: we've ticked all the boxes the commissars ordered, but it hasn't made a blind bit of difference).
He goes on: "Unless there is work in the future the most deprived areas will remain the most deprived areas."
And there he's hit the nail on the head. As the world and his wife now agree, work is the only real way forward. But it's easy to say, hard to do.
So here are some suggestions:
- Freeze welfare benefits, especially the reward for having children: welfare should not be an attractive career choice
- Freeze the minimum wage: Brown likes to brag how the minimum wage has not destroyed jobs, but in areas like the poor end of Dewsbury a national minimum wage almost certainly means unskilled low-end labour cannot find work
There could be jobs, but not at the pay rates set by welfare scales and the minimum wage. Without that competition, local employers Jay-Be Beds could cut their costs and surely expand their workforce beyond its current 235. UPS Haulfast could expand beyond 300. And William S. Graham would surely sell more far more carpet yarn if it could cut its prices.
Next time we contemplate voting for a bigger welfare state, I suggest we think very carefully about the residents of Moorside Road.
We've blogged the fantasy Gershon "efficiency" programme many times (see all previous blogs gathered here). As you will recall, this was Brown's 2004 Budget headline to save £20bn pa by improving public sector efficiency by 2007-08.
Most of the subsequent "savings" have of course been pure fiction. The NAO concluded only one-quarter of the announced savings are "reliable", with the rest comprising deckchair rearrangement or service cuts (many of which- such as kicking patients out of hospital early- have expenditure increasing knock-ons). Worse, the programme has spawned its own Whitehall "Gershon" industry, inflating costs even more.
This morning BBC R4 Today interviewed Sir Peter Gershon himself about the whole nonsense.
Asked about that damning NAO report, Gershon pleaded the old "leading edge/frontiers of knowledge" defence - measures of success have had to be developed from scratch, so of course there are a few rough edges.
He also threw in the "long-term" defence - the first three years are just a downpayment on a thousand years of efficiency (OK , ten years).
And could he name one tangible real world saving?
Yes, he could- NHS procurement of pharmaceuticals, where £1.3bn had been saved over three years.
An interesting answer, reflecting the latest scorecard presented by the Treasury alongside the Budget (see chart above).
As BOM readers will know, the Simple Shopper spends getting on for £200bn pa on procurement, and routinely pays way over the odds for everything from spy planes to post-it notes. So there's definitely scope for improvement.
Do we believe the Treasury numbers? Even if we do, buying more cheaply from external suppliers is not really what we'd call an efficiency gain. It's simply exercising the Big Buyer Power that Tesco and Sainsbury have been wielding for years.
The real business of efficiency is reorganising working practices to produce the same (or better)stuff more cheaply. There is no evidence Gershon has cracked that.
Tuesday, March 18, 2008
Given the dire circs, Ron Sandler's plan to dismantle Northern Rock is the best taxpayers can expect.
He plans to shrink the operation drastically, halving the asset base in three years, repaying the Bank of England loans, and cutting staff by one-third. It's certainly the right direction, but before popping any champagne corks taxpayers should remember the following.
First, selling mortgage books in current market conditions will not be easy. Sandler should make sure he holds out for full value.
Second, the easiest assets to sell will be the best. Which also applies to the NR mortgagees who will be persuaded to remortgage elsewhere. In three years time, taxpayers could find themselves left with the problematic rump.
Third, it's not at all clear how he proposes to unravel the offshore Granite funding vehicle (see previous blogs eg here).
Fourth, the NR statement talks of rebuilding its retail deposit base so it can reduce its reliance on fickle wholesale funding. Right now, with the Rock's market leading rates, that's probably going quite well. But that's because the HMG guarantee remains in place, which, as we've blogged many times, that's the deal of the year (if you haven't yet switched all your funds to NR, get on with it*).
What happens when the government guarantee goes? Yup, most of the deposits go too. Or to put it another way, taxpayers will have to go on guaranteeing NR's deposits into the forseeable future.
We are a very long way from being home and dry.
PS I've reminded myself of some details from the US S&L crisis. There are some spooky similarities, including how, during the Go-Go Gekko 80s, the S&Ls diversified their funding sources from boring old retail savings accounts to wholesale funding via an array of intermediating sharks. Small town S&L managements were way out of their depth. Oh, and the subsequent bail out cost $160.1 billion, of which $124.6 billion was directly paid for the U.S. taxpayer.
*Disclosure statement: in recommending Northern Rock deposits, Tyler Investments (Cayman) hereby asserts and affirms it is not in the slightest bit qualified to offer any such advice.