Saturday, January 31, 2009

British Dole Queues For British Workers

This year Mrs T and I decided to shun the superficial glitz of Davos, and instead we've spent a few days meeting some real opinion formers up in the Midlands.

Opinions there are being formed around two key questions. First, WTF has happened to all those promised British jobs for British workers? And second, how much longer do we have to tolerate that appalling Brown bloke pushing his ugly duplicitous mug into our living rooms every night?

On the jobs question, the Polish receptionist who checked us into our Oxfordshire hotel explained things had gone "a bit quiet". Not that we were the only guests - oh, no, by no means - there was a Dutch couple, and some other people might come in for dinner. Later, as we smiled supportively at our most attentive Indian waiter and Czech waitress, we wondered how they and the kitchen staff were going to fill the rest of the evening once we'd finished.

Then, on the way home yesterday, we dropped into Bicester Village, seduced by the allure of "Chic Outlet Shopping" (Paris, Rome, and Junction 9 of the M40). There, unlike our hotel and our own local high street, the staff all seemed to be Brits. No obvious Poles, Czechs, or Indians - all apparently local Oxfordshire types. How odd.

And especially odd given that most of the punters seemed to be Chinese. Not your British Chinese, but real Chinese, as in can't speak English Chinese. And according to one of the shop assistants, that's not unusual: the Village gets coachloads of shopping tourists, many of them from overseas.

So we have Chinese shoppers jetting to J9 of the M40 and loading up on discounted Ralph Lauren, Burberry etc, much of which - according to the small print on the labels - was manufactured in... er... China.

A quick check on the Yuan/Sterling exchange rate explains all: with sterling's collapse, the Yuan in those Chinese designer pockets at J9 is now worth a staggering 50% more than it was last year.

But that's good, right? Given time, that ought to be good for British jobs, right? Maybe we could even bring Burberry back from China.

Hmm. Maybe. But not unless British workers are prepared to accept Chinese wage levels and working conditions.

As we all understand by now, Britain's jobs outlook is dire.

Let's remind ourselves how the overall jobs structure has changed under Labour. Brown has constantly boasted of the 3 million jobs "he created", but he's always been much less forthcoming on the mix of those jobs.

The truth is that under him, although the total number of jobs increased by 2.8 million (1997 Q2 to 2008 Q3), more than all of them came in just two areas:
  • Public sector - jobs in education, health, and public administration increased by 1.4 million
  • Finance and business services - up by 1.6m
In sharp contrast, manufacturing jobs, like those at Burberry, were whacked. Overall, despite Brown's much vaunted boom, they declined - yes, declined - by 1.4 million to a mere 3.1 million. Labour's debt-fuelled boom sucked in such huge amounts of foreign capital, it ramped our exchange rate way above the level that could sustain much of British manufacturing.

So now, with finance and business services in freefall, and the public finances unable to support more public sector jobs, we're kind of stuck. Manufacturing might well rebuild itself and its jobs in the long-term, but as we see from our mothballing car industry, we shouldn't hold our breath.

Which brings us back to the question of who should get the jobs that do exist?

As we've blogged many times, Labour's mass immigration policies brought no net economic benefit to Britain in terms of GDP per head (eg see here). But they clearly put downward pressure on wages at the low end. In broad terms, the rich and the employers really did get the benefits, and the poor really did get the costs.

And in terms of those 2.8 million new British jobs, most studies have concluded that at least two-thirds of them went to migrant workers (eg see this blog).

Now boom has turned to bust, that process looks set to intensify. We don't have all the facts about those Italian and Portuguese contractors, but you'd have to guess they're cheaper than the locals. And it also seems that many of the supposed temporary migrants from Eastern Europe have no intention of leaving again anytime soon. Times are going to get even tougher for indigenous workers outskilled and/or underpriced by migrant labour.

So what's going to happen?

It goes without saying that there will be some very long dole queues. But it's starting to look a lot uglier than that.

Labour's open-door immigration policies have left us with a serious problem. And that's on top of the desperate debt hangover they're leaving us.

True, Labour will be destroyed in next year's election. But that hardly seems enough somehow.

Tuesday, January 27, 2009


Apparently this isn't very healthy

BOM reader Hans L highlights the latest study from the Department of the Bleedin' Obvious:

"Officers from 76 councils sampled 494 kebabs to test their nutritional value, during the Local Authority Coordinators of Regulatory Services (Lacors) study."

And guess what they found.

They found that doner kebabs are, like, really really unhealthy. According to their pathbreaking analysis, kebabs are full of fat and salt and unwashed sheeps' arseholes.

Well waddyaknow.

What we'd like to know is how much this rubbish cost us.

To start with, how many "officers" were involved? Kebabs being such dangerous things, we'd imagine each one of those 494 purchases would have required a specialist team of at least three fully trained comestibles outreach facilitators. Each of the 76 councils would have needed kebab campaign planners, project coordinators, media liason officers, saturated fat trauma counsellors, etc etc. And that's even before the cost of the lab work and the necessary overtime payments.

Hans reckons it will have cost in excess of a quarter mill. But that's only £3-4 grand per council. We reckon £1m is closer to the mark, which is some kebabbing.

But not nearly the kebbabing we taxpayers are suffering every day just so our headless chicken "government" can prove it's taking Action on the slump.

Today we got the car industry bail-out, which if the headlines are to be believed will cost us getting on for £2.5bn.

To be frank, I simply can't be bothered to delve into the spun-to-death-once-again-pre-announced-through-Peston details, but some immediate thoughts spring to mind:
  • The cash mainly goes to shoring up Labour constituencies
  • The package has had to be shaped to meet the needs of Brussels not Britain - HMG is having to guarantee £1.3bn of EIB loans, and is having to disguise whole chunks of the package as "retraining" and "green" subsidies in order to satisfy EC requirements
  • WTF are we having to give further support an industry that is already being given a huge boost by the collapse in sterling - a collapse that will cost the rest of us a packet.

Now, to be fair, this may not be a kebabbing. It may be a kippering. But either way, it's yet another addition to the huge burden now being loaded onto taxpayers. A burden we are going to be carrying for years,

Anyway, BOM will now be off-air for a couple of days - Mrs T and I are going on a brief tour of Midlands kebab shops.

Monday, January 26, 2009

We're Not Going Bust, Huh?

Under Gordo our foreign debts doubled

According to the head of the CBI - the relatively sane Richard Lambert - we're not going bust after all. He says:

"...the UK is not about to go bust. Our capital markets are deep enough to support the increase in government borrowing. And our flexible labour market and floating currency will make it much easier to adjust to the recession than will be the case for some of our continental neighbours."

What we must not do, he says, is "listen to the gloomsters".

And Lambert's not alone in dissin' said gloomsters: indeed there seems to be a concerted campaign against them, mounted by the economic establishment.

This morning, Roger Bootle ripped into the hedge fund gloomster who said it was all over for sterling. Yesterday, David Smith assured us that Britain is not Iceland. And Ken Clarke has even contradicted his own gloomster boss, denying that we will need an IMF loan.

So how can we tell if we are going bust? What would it feel like?

The first thing to understand is that a country going bust is not going to feel the same as a company going bust.

When a company goes bust, it means it can no longer pay its creditors, and the creditors are entitled to take possession of the assets. The assets - possibly including salvageable bits of the business itself - are then flogged off to repay the creditors. Pretty clearcut.

But when a modern country goes bust, it's a bit trickier to see what's happening. To start with, who's the debtor? If it's the government, or its agencies, that's one thing. But what if it's the country's banks, like with us now? Creditors can't go after the government for its banks' debts (or at least, they can't unless the government issues a blanket guarantee to all the banks' creditors, and surely no government would be stoopid enough to do that).

And even if it is the government directly on the hook, how can the creditors snaffle its assets? They can't grab the obvious things like the country's houses and factories, because those things generally don't belong to the government. They might try to grab the foreign exchange reserves, but in this scenario, they've likely gone already. And grabbing, say, the country's naval assets might prove a tad challenging - ours are kitted out with nukes.

But governments have a different sort of asset, which in some ways is much better than anything a company might own. Because governments have populations and economies under them. And crucially, they have tax raising powers. Unlike companies, they're not dependent on markets and customers for their money - they simply extract it from their citizens under penalty of law.

Indeed, back in the 70s, it was just such a thought that persuaded the world's big commercial banks that countries could never go bust. So it was perfectly safe to lend them huge amounts of recycled petrodollars. True, that whole deal turned a little sour when a bunch of Latin American dictators decided to default outright, but you can sort of see what the banks were thinking.

So what does that mean in terms of the UK's prospective bust? Given that during Labour's boom our combined overseas debts soared to an extraordinary and wholly unsustainable 300% of our national income (see chart above) - ie £170 grand for every British household.

Now, it doesn't mean that we're going to get closed down and have all our DVDs flogged off cheap like Woolies.

And it doesn't even mean that we'll no longer be able to get any further credit. So in that sense, it's not like a company bust.

But it does mean that any further credit is going to be very expensive - already the market rates HMG's credit worse than any other G7 government bar Italy (today's 5 year Credit Default insurance rate HMG debt is 1.36%pa, more than twice the French and German rates).

And it does mean that from now until you are very old and very grey, you're going to be taxed to buggery and back.

And it does mean that you'd better not try to use any public services, because they are going to be incinerated.

And there's something else. Those pound coins you carry round in your increasingly ragged pockets are going to buy a lot less than you've been used to. Because in the last six months sterling has tanked, losing a staggering one-third of its value against the dollar:

And yes, you can say it's only giving back its overvaluation of the last 5 years, but make no mistake - sterling's crash has made us all a lot poorer.

The bottom line?

When soothing establishment voices tell us that we're not going bust, ignore them. In effect, we are already bust.

We have huge overseas debts we cannot conceivably repay without a prolonged period of high taxes, poor services, and low purchasing power. In my book, that's going bust.

PS It's quite understandable that the economic establishment has decided to throw itself behind the Pick Yourself Up line from St Obama's inaugural address. It would be great simply to talk ourselves back to confidence. But even though it's generally recognised that Obama is Fred Astaire's love grandchild, somehow there really ain't nothing like the real thing. And since Mrs T is a lifelong fan of the late great Fred, let's remind ourselves exactly how he and Ginger picked everyone up during the Great Depression (Swing Time 1936, Pick Yourself Up, music by Jerome Kern and lyrics - not in this genius virtually one-take clip - by Dorothy Fields):

Sunday, January 25, 2009

News From BOM Correspondents - 13

This one's cheaper

Latest news and links:

£500 per trip ghost bus

"Every Tuesday, at 9.45am precisely, a 50-seat executive coach draws up at a bus stop outside Ealing Broadway station in West London. No one ever gets on and, a moment later, it departs - empty - on a 70-minute trip to Wandsworth Road in South London.

Once there, it waits for two hours and 15 minutes before returning, again carrying no passengers. Welcome to Britain's most luxurious bus service, paid for by the taxpayer, immaculately clean, punctual to the second and which the Government is trying desperately to keep secret.

This service, funded by the Department for Transport, is not advertised on any timetables or departures screens, and staff at the stations it serves are not even aware it exists. The “ghost bus” runs simply to allow the Government to escape the embarrassment of admitting that it has closed several sections of railway in West London to passenger trains... The coach costs the DfT about £500 a day"
(Times 7.1.09 HTP Mr Brillo)

So just to be clear, we taxpayers are being stung for £26 grand pa just so our lyin' no good rulers can avoid "embarassment". And these are the same lyin' no good varmints who say we can't afford the carbon footprint even to light our own homes properly. Talking of which...

Reality Bites Council Hippies

"Shirehall watchdogs in Shropshire have called for an investigation into why the county council has gone back to using fossil fuel for its electricity.

The switch, it is claimed, has been met with “astonishment and great concern” as the council is regarded as one of the top local authorities tackling climate change.

Panel chairman Alan Mosley said today the cost of using green electricity had risen, costing the authority £180,000 more. “So an officer somewhere made the decision to switch back,” he said."
(Shropshire Star HTP Mr B)

The ourageous thing about this story is that these hippy councillors are saying the unnamed council officer was wrong to save council taxpayers £180 grand pa. We think he/she should be given a medal, and we're only sorry we can't vote at the next Shropshire council elections.

Quango Self-Service

"PUBLIC bodies are spending about £2m a year on political consultants to help them lobby ministers and MPs for more taxpayers’ money... The close ties between state-funded quangos and the lobbying industry are disclosed in a dossier listing 71 separate contracts worth almost £10m over five years.

The biggest beneficiary is Weber Shandwick, headed by Labour’s former chief press officer, Colin Byrne, which has lucrative relationships with organisations including the Crown Estate, the Meat and Livestock Commission and the British Museum, worth a total of £1.8m over five years. The firm also employs Priti Patel, a Tory parliamentary candidate and former aide to William Hague...

The quangos use a variety of euphemisms to justify the hiring of lobbyists, including “strategic counsel”, “policy tracking”, “political consultancy” or even “stakeholder relationship advice”. Some admit that consultants had been used to coach their managers on what to say when they appeared before Commons committees."
(S Times 30.11.08 - we somehow missed this outrage first time - HTP HJ)

Soviet Britain

The CEBR has updated its picture of Soviet Britain for the S Times:

"PARTS of the United Kingdom have become so heavily dependent on government spending that the private sector is generating less than a third of the regional economy, a new analysis has found.

The study of “Soviet Britain” has found the government’s share of output and expenditure has now surged to more than 60% in some areas... In the northeast of England the state is expected to be responsible for 66.4% of the economy this year, up from 58.7% when a similar study was carried out four years ago. When Labour came to power, the figure was 53.8%.

Across the whole of the UK, 49% of the economy will consist of state spending, while in Wales, the figure will be 71.6% – up from 59% in 2004-5. Nowhere in mainland Britain, however, comes close to Northern Ireland, where the state is responsible for 77.6% of spending, despite the supposed resurgence of the economy after the end of the Troubles." (HTP Steve)

In the past, the high income South East paid for all this sovietisation. But the collapse in banking means there's now a bit of a hole...

Trough News

Just so it doesn't pass uncommented, the Labour peers who are charging £120 grand for twisting our laws highlight two points we've made on BOM many times.

First, WTF in 2009 do we still have entirely unelected legislators? Does any serious democracy do that?

Second, WTF in 2009 do we still allow our legislators to have any little earners on the side? Does any serious outside enterprise allow that for senior full-time employees?

Saturday, January 24, 2009

Shifty Paradigms

We should see the threat of even Bigger Government

No time for a proper blog today, but I must highlight Matthew Parris's latest article. Pointing out that there is no easy escape from our current difficulties, and we just have to accept we've been living way beyond our means, he says:

"There's a piece of fashionable political nonsense you should be vaccinated against before the virus hits us: a whole vocabulary of ministerial happy thoughts to which you'd best learn to block your ears... our prosperity sinks, the politicians' rhetoric will go skyward. “New challenges”, “a new vision”, “post-millennial economy”, “thinking outside the box”...

... it will all be just so much hot air...

The non-City part of our economic landscape has not been held back by political inattention, and will not be significantly advanced by political patronage or speeches. Politicians don't “rebalance” economies. Market forces do.

This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble."

As so often Mr P is right on the money.

Big government types are once again screaming that "unbridled capitalism" has failed, and it's time for governments to bring forth the new paradigm - eg yesterday's Newsnight gave us Will Hutton puffing "stakeholder capitalism", the central idea of his 1995 anti-market book The State We're In.

Back in 1995, managementspeak was all about such "paradigm shifts". Yet what gave us the global boom of the next decade was not some high fallutin' mindsetgame, but the plain old-fashioned profit motive.

Which, as Mr P says, is precisely what will eventually drive our recovery from the present slump.

And you know what?

We're betting that the financial sector - despite all its past excesses, its present difficulties, and much tighter regs in future - will yet return to be a key driver of our future prosperity.

And when we've got some more time, we'll spell out precisely why it's a better bet than all those "green" industries now being promoted so heavily by the BBC and the rest of the left.

PS Talking of the BBC, their refusal to broadcast a Gaza appeal is a jaw-dropping illustration of just how arrogant BBC management is. Given the hideous damage inflicted on the Palestinians, even those of us who understand why Israel attacked, want to reach out a helping hand. And we're the ones paying the BBC's bills.

Friday, January 23, 2009

How Much Are We In For?

This time around we may not avoid the cheap 'un

One of the most worrying aspects of the current crisis is that the government has completely lost track of its liabilities.

Of course, Brown has always relied on Enron-style fiddling to shift his debts off balance sheet (PFI, public sector pensions, etc etc - see many previous blogs), but until now we've always assumed he was simply being dishonest. We reckoned that behind the deceit he actually did know the true extent of the debt.

But now it's clear he really doesn't know. He has promised so many bail-outs and dished out so many financial guarantees - both explicit and implicit - that he has no idea what it all adds up to.

This morning on R4 Today he was asked point blank for the total by Evan Davis. He simply couldn't answer. Sure, he blustered around his usual generalities, and Davis unfortunately let him off. But the message was clear - he has lost track.

The Treasury Select Committee highlights the same concern about unquantified liabilities, and says:

"By nationalising financial institutions, the Government has taken on responsibility for significant liabilities. In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed. These disclosures must be at least as comprehensive as those made by major banks and should go further then meeting the minimum acceptable accounting standards."

Spot on (even if, as Jeff Randall points out this morning, the banks themselves are hardly shining paragons in this area).

So in the absence of government figures, just how much are we in for?

The scary truth is that nobody really knows. But here are a few figures we do know about: £100bn or so for the Crock, £20bn odd for Bradford and Bingley, £500bn for October's bank bailout, £11bn odd for loans to small companies, £50bn for some other loans, various other stuff too vague to understand, and some hundreds of billions on an undefined toxic debt guarantee scheme.

Hmm. So what does that come to? £700bn? £800bn? A trillion? Your guess is as good as Gordo's.

An alternative estimate, much discussed by the Prof, starts from the other end - ie the total liabilities of the banking system, the argument being that either explicitly or implicitly, Brown has now guaranteed the whole lot.

These numbers are really scary. When last sighted (November 2008), the total liabilities of our banks summed to £7 trillion, well over four times our annual GDP. If that lot went belly up, we'd really be in the can.

Of course, those bank liabilities are supposedly backed with assets, so we shouldn't really be in the can for the whole £7 trillion. But right now, how confident can we feel about that? The financial markets are telling us the word "assets" likely conceals all manner of further horrors.

Ah well, you say, if the assets turn out not to be worth enough, HMG will simply have to default in the time honoured manner - ie by running the printing press. It will be brutal on widows and orphans, but we have at least been there before. We mapped that territory back in the 70s and it wasn't actually the end of civilisation as we knew it. Why, most of us even managed to go on eating Birds Eye beef burgers.

Yeesss... unfortunately, this time round there's a slight snag.

Because of that £7 trillion total bank liability, no less than £4 trillion - yes, £4 trillion - is foreign currency debt. And as we've blogged many times, while HMG can always default on its sterling debt by running the printing press, with foreign currency debt there is no such "easy" option. HMG never did manage to acquire that foreign currency printing press.

You know what? I'm depressing myself again.

As far as I can see, every single household in Britain could be in the can for something between £40 grand and £280 grand.

Beef burgers won't be in it - even the cheap 'uns.

It'll be economy baked beans.


During Evan Davis's rather poor Today interview with Gordo this am, G came up with a new one.

According to him, the current bust doesn't count. You see, under the terms of the International Convention on Evil Tory Boomnbusts, busts are only scored against a player if inflation is out of control, and interest rates have had to be racked up. Since that isn't the case here, this does not actually count as a bust. So he shouldn't have any points deducted from the huge score he amassed during the boom years.

Unfortunately, Davis then got into a yes-no pantomime wrangle over whether this is a bust, rather than staying focused in on the insanity of Gordo's massive credit boom. He even let G get away with his other Great Lie of the moment, which is that the FSA has been an excellent financial regulator, blown off course only by the incompetence of foreigners (see many previous blogs eg here).

This morning's GDP stats show the economy has already shrunk by 2.1% in just six months, which is dire.

All the mainstream GDP forecasts are now heading South at a stomach churning rate. The consensus forecast is already at -1.7% for this year, and will be cranking down further.

This is definitely going to be worse than the early 90s recession. Then, GDP fell by just 2.5% (1990 Q2 to 1991 Q3), and this time we've already lost 2.1%.

We reckon it's also going to be worse than the early 80s decline, when GDP fell by 5.9% over roughly two years (1979 Q2 to 1981 Q1). What we're looking at here is much more like the thirties.

And just to repeat what we've blogged many times - we're doing much worse than any other major economy. Which is the direct result of Labour's huge wobbling debt bubble, bigger even than America's. Once again, here's the key chart (and see this blog):

Brown can run from culpability by claiming that under "the rules" his bust is somehow different. But the truth is that his policies that are directly responsible for turning a drama into a crisis.

Thursday, January 22, 2009

Staying Safe With Jacqs

No longer safe anywhere

According to today's quarterly crime update from the Home Office, "since 1997, crime has fallen by 39% and violent crime reports have decreased by 40%."

Jacqs adds:

"I welcome the figures which show that overall recorded violent crime is down 6% – more than 15,000 fewer violent crimes."

Meanwhile back in the real world, another village sub-Post Office has been robbed in broad daylight, and the postmaster badly beaten. The Windsor Express reports:

"A postmaster in Eton Wick has been threatened with a gun, robbed and beaten - in the middle of the day on a busy Saturday afternoon.

Police are appealing for witnesses after a robbery at the sub-post office in Bell Lane, Eton Wick, at 12.20pm on Saturday. Three men burst in and threatened the man in his 50s with an imitation handgun. He was hit in the face and tied up before the men escaped with an undisclosed amount of cash in a waiting car."

As it happens, Tyler knows Eton Wick very well, and knows this Post Office. And he can say for certain that this is the first such outrage the village has ever suffered.

The residents are shocked. They're also angry that a succession of wibbly low-grade hand-wringers like Jacqs have failed to keep them safe.

They're asking "Why can't we bring back proper punishment for scum who do things like this? Why do we let 4 in 10 of them off with a caution? Why don't we have proper prisons? Why do we have to let them out again? Why don't our useless politicians get off their backsides and do something? HTF do we make them listen?"

A good question, and one we've mulled once or twice before.

Yes, of course, there's the issue of cost. But according to the Ministry of Justice the cost of a prison place is "only" £40 grand pa, so we could double the number of places for around £3bn pa - a pittance compared to all the cash the government routinely squanders (plus, the Major's plan for cut-price economy prisons would cut the cost considerably).

The real stumbling block is not cost but wibble. Our political class has somehow convinced itself that its massaged target-distorted goodnews crime stats are right (see this blog and this), and that the villagers of Eton Wick (along with the rest of us) are wrong.

The only bit of good news is that the police apparently reacted to the EW Post Office alarm with lightning speed. Indeed, it's believed they've already caught one of the thugs involved. So on this occasion, well done to the boys and girls in blue.

We will be watching to see what sentences eventually get handed down.

Public Service Broadcasting

Ready to serve

Yesterday we were treated to an endless stream of self-styled "public service" broadcasters telling us why we should pay for even more of them.

Is the BBC anywhere near enough? Is it credible that the BBC's mere hundreds of TV and radio channels can really satisfy the public's boundless need for public service broadcasts? Wouldn't the public be even better served if taxpayers bolstered the £3.5bn pa telly tax with, say, the gift of future spectrum auction proceeds to C4?

In a week when the £6m pa Wossy returns to serve us, the latest "Celebrity" Big Brother is in full swing, and the real world is in melt-down, most of us will have vomited blood at such self-serving whining.

As it happens, last night brought the chance to compare melt-down coverage on the public service BBC with that on Sky.

For Sky we had Jeff Randall Live, a new daily programme that has already become required viewing for anyone seriously interested in business and finance.The programme was packed with informed grown-up discussion, and mercifully light on gimmicks. Randall does not spend his "show" trying to prove how clever he is, and after 30 minutes you've always learned something from his interviewees.

For the BBC we had The City Uncovered with Evan Davis, part 2 of a 3 hour series aiming to explain how we got into our current mess.

Now, we actually quite like Davis, and we have no doubt he could do a good informative programme about the melt-down. But this SHOW is really disappointing. Despite getting interviews with an amazing group of players (from the Nobel laureate fathers of quantitative finance, to the legendary Hank Greenberg, the man who built AIG), its style is shallow and gimmicky, everything pitched at a 20 second attention span, and a soundtrack of intrusive Newsnight-style techno beats*.

Last night Davis spent most of it - and I promise I'm not making this up - clad in tight-fitting leathers astride a big Yamaha, Gay Biker of the Year style. Why? We don't want a personality show about Evan Davis; we want a serious programme and time to understand exactly what the players have to say for themselves.

So there we have it. A lightweight - and by the look of it, expensive - showboat from the tax-funded BBC, vs quality grown-up coverage from the free-market Murdoch.

Take your pick.

And note that Randall's programme is now on Sky News Monday to Thursday at 7.30. Which means that if like us you find half-an-hour of Bishop Snow's evening sermons more than enough, you can now switch over for some serious coverage of the day's events.

(And see here for Randall's views on his time at the BBC. Yes, he's got a big ego too, but I like this bit:

"Randall may have made the leap from print to broadcasting, but it wasn't an easy transition and he admits he had some terrible days at the office, including a live 'two-way' with Huw Edwards on Marks & Spencer. 'Huw asked: "Jeff, what does it mean for shoppers?" I thought: "Well Huw, I'm fucked if I know." I goldfished.'

He clearly hadn't worked out that the BBC business coverage naturally reverts to its consumer news default position).

*Techno note - The Major's not so sure Davis' beats are techno - according to him they may be ambient garage. Like he's a Big Expert. Either way, they are feckin' pants.

PS The BBC's coverage of the Obamafest was everything we'd expected, but it was still hilarious to watch them brushing over the great man's fluffed oath taking and let-down speech. Now just suppose it had been Bush who had blundered like that. Can you imagine how the BBC would have guffawed, and gone on about how it was a terrible start and how the world was now in the hands of an idiot?

Wednesday, January 21, 2009

Knock Knock

Knock knock.

Who's there?

I M F.

I M F who?

I em efraid we've come to repossess your public services, your pensions, and your standard of living for the next twenty years.

Unfortunately, they won't be joking. In exchange for bailing out Britain, the IMF will demand big cuts in public spending, both now and in the future. They will demand much higher taxes, and an end to living off foreign credit. The righteous and the unrighteous will be squeezed dry. It will be dire.

True, we have been here before - in 1976 under the last Labour government. So maybe you're thinking it wasn't all that bad: we still had food on the table, and we still enjoyed first class entertainment from Red Robbo and the Bee Gees.

But last time through we actually escaped quite lightly. When Callaghan called in the IMF, they provided a £2.3bn loan (just under 2% of GDP) in exchange for a public expenditure cut of 4% in real terms. It felt tough at the time, and the associated public sector pay restraint did end in the Winter of Discontent, with all those unburied corpses in the street. But compared to the howling gales we now face, it was a walk in the park.

Oh, if only we could go back there now.

Back then (1976-77), public sector borrowing was only 6.2% of GDP and falling. This coming year it will be 8-10% and rising.

Back then, public sector debt was only 52% of GDP and falling. This coming year it will be 60-70% and rising (and that's on the fiddled official definition).

Back then, our banking system was not collapsing, and taxpayers had not been forced to guarantee its entire balance sheet. This coming year taxpayers will be supporting bank liabilities equivalent to four times our GDP.

Back then, we had a Prime Minister and a Chancellor who had come to understand - however reluctantly - that the governments cannot simply spend us out of recession. This coming year we will have a PM and poodle who seem to believe they can pretty well spend what they like.

So grim though an IMF bailout would be, as a taxpayer, Tyler is now thinking a return visit may be preferable to the alternative. These clowns have clearly lost the confidence of the markets, yet they still have another 16 months to run. God knows what further damage they'll have done by then.

A year ahead of the 1976 IMF bailout, Wislon's favourite economist wrote to him secretly, warning that a collapse of market confidence could lead to "possible wholesale domestic liquidation" and "a deep constitutional crisis".
With sterling plummeting, the public finances wrecked, and the printing presses being warmed up, we may be about to find out what he meant.
*Footnote - a quick scan of this month's public finance stats is enough to have you reaching for the Major's gin bottle. All the dials are pointing in the wrong direction, with spending up, revenue down, and borrowing through the roof.

PS So why hasn't Brown nationalised RBS outright? The only coherent explanation we can think of is that he's worried about RBS's huge overseas liabilities. As long as RBS remains nominally a private sector company, Brown could still walk away from its liabilities. That would be very difficult if it was nationalised. Confidence rating? Minus 17.5.

Tuesday, January 20, 2009


Spiralling to disaster

How the eff did we get here?

Legendary investor Jim Rogers (co-founder with G Soros of the Quantum Fund), reckons we're finished:
"I would urge you to sell any sterling you might have. It's finished. I hate to say it, but I would not put any money in the UK."

There are rumours that a major credit rating agency is about to downgrade British government debt from its vital AAA rating (a status we didn't even lose during Labour's last economic disaster - aka the 1970s).

And despite pumping limitless further billions of our friggin' money into a massive bank bail-out, it's so useless, bank shares have collapsed even more.

Meanwhile all our bankrupt "government" can say is that they're the innocent victims of American incompetence and evil bankers.

Let's take those bankers first. Sure, some are truly evil, in the sense that they've ponzied our widows and orphans, and lied through their teeth about their toxic waste deposits. In fact, you'd almost think they were politicos.

But most are only evil in the sense that their actions are driven by Mammon. And sorry, that's what bankers do. In fact, that's what we need bankers to do.

What's really evil is a government that not only condoned, but actively encouraged those bankers to take risks way beyond the capacity of our financial system to withstand.

To start with, against the specific advice of the Bank of England Governor (and others), Labour imposed an untried and untested tripartite regulatory system. That system totally failed to understand or even monitor the risks (see many previous blogs on the shambolic amateurish box-ticking FSA).

Second, far from raising a proverbial eyebrow, Labour actually celebrated and embraced those who were inflating our huge wobbling debt balloon.

We all know about the knighthood they awarded Fred The Shred Goodwin, the man who gave us the multi-billion disaster that is RBS. But there was also long-time NuLab insider Lord Dennis Stevenson, the man who was so well regarded he was put in charge of selecting Bliar's laughably named "Peoples' Peers" (see this blog). Stevenson chaired the multi-billion disaster that is HBOS. (See here for Oborne's take on Labour's love affair with the city spivs).

Why did Labour do this?

We know why. Even setting aside the direct financial support some of these people provided to the party, they did it because they thought it was somehow free money.

As we blogged here, Brown's boom was built entirely on the explosive growth of financial and business services. Two-thirds of our overall GDP growth from 1997 to 2008 came from just those sectors - it was a one-legged boom:

And no less important was the contribution to Brown's tax revenues. As a classic socialist spendaholic, he was always desperate for revenue to fund at least part of his extravagant spending programmes. At the height of the boom, it's reckoned that City financiers were generating a quarter of his corporate tax revenue, and his instinct was to cheer - not to ask how a sector comprising only some 6% of the economy could possibly make that much money.

So when Brown claims our problems are down to evil bankers, we need to spit. And then we need to ask how come he was so crap that he never asked questions until now?

And what about those incompetent foreigners?

To nail that one, all you have to do is look at the European Commission's latest economic forcasts. They show that Brown has left our economy far worse placed than any other major.

This year, the EC expects the UK economy will shrink by 2.8%, compared to an EU average of 1.8%. The cause-of-all-our-woes US is only expected to go down by 1.6%. What's more, both the US and Europe are expected to recover much more quickly than us in 2010.

So we are much worse, having also been much worse last year (the luridly unsettling chart at the top shows the EC's Economic Tracer for the Euro area - if they'd done one for us the plunging line would probably go down to at least this paragraph).

When we look at those much fiddled figures for debt and borrowing, the EC says that 0ver the next two years our government will need to borrow the equivalent of 18.4% of GDP - twice the EU average. Hardly surprising that by 2010 we will have more government debt (71% of GDP) than the EU average, and that includes such longtime basket cases as Italy and Greece. Remembering also that our figure excludes the vast bulk of this bank bail-out cash, just as it excludes all the PFI/public sector pensions Enron debt we've blogged so often.

So if we can't blame it on the bankers, and we can't blame it on incompetent foreigners, who can we blame it on?

Yes, that's right - ourselves.

We (well, more specifically, you) are squarely to blame for not learning the clear lesson of history. Labour governments always always ALWAYS end in economic disaster.

Look, let me spell it out for you:

  • Ramsay McDonald - economic disaster
  • Clement Attlee - economic disaster
  • Harold Bloody Wislon - economic disaster
  • Jim Callaghan - economic disaster
  • Bliar/Brown - economic disaster

See? See the pattern?

Now, try to remember it.

(See also Iain Martin's excellent Telegraph piece this am).

PS Nick L has updated us on Brown's bank equity hedge fund (see this blog). Net Asset Value continues to spiral, and as of last night, the fund was down £22.5bn, or 80%. Not bad for less than 3 months.

Update: A beady-eyed reader Mark L, has queried our original figures on the size of the financial sector. The facts according to the ONS are that Financial and Business Services accounted for 29.9% of GDP in 2003 (the current base year). And that's the basis of our calculation on its two-thirds contribution to GDP growth (see previous blog referenced above). The figure of 6% also mentioned in the blog refers to a narrower definition comprising just the City -ie the guys who used to wear the braces. And admittedly it is much flakier - ie it is not an official ONS figure. But that doesn't change the Big Picture.

Monday, January 19, 2009

Blankety Blank Cheque

Of course we'll insure your toxic onions -why not?

Watching the Brown/Darling news conference on their latest massive bank bailout, it was interesting to see how Brown reacted to the Blank Cheque charge. He growled menacingly at ITN's Tom Bradby that he should be "very cautious" about suggesting such things.


If it isn't true, surely Brown could have simply swatted Bradby away with some chapter and verse. But he couldn't, because the charge is spot on.

For taxpayers, the most worrying bit of of a worrying package is the insurance we'll be providing on the banks' existing holdings of toxic debt (eg see this blog).

We've been trying to access HMT's detailed release on how it's actually going to work, but as per, nothing has yet been made available to mere taxpayers, apart from this sketchy press notice. So we turned to the excellent FT Alphaville, which reproduces what HMT has put out to the people it considers important.

Key points are:

  • Pretty well any asset may be eligible for insurance, including assets denominated in foreign currency - which as we've blogged previously, loads a huge additional layer of risk onto us because our government does not have a foreign currency printing press
  • There is no stated upper limit on how much we'll be insuring
  • For each asset, HMT will somehow make "an assessment... for inclusion on a case-by-case basis... subject to appropriate investigation by the Treasury and its advisers in order to assess the probability of future loss" - bearing in mind that this will be tens of thousands of loans/investments, many of which are so complex nobody has been able to fathom them, and nobody has a clue what future losses may be
  • "In setting the terms under which protection will be offered, the Treasury and its advisers will take into account their estimation of the performance of the assets of the institution to be included in the Scheme. The fee, “first loss” amount to be borne by the institution and residual exposure will be set accordingly." - Translation: we have no idea how much we'll charge, what the "excess" levels will be, or how risk sharing will work

As Alphaville points out, taxpayers are now entering the very business that made mega US insurer AIG go bust:

"The new scheme will effectively do what AIG - and other insurers, like the monolines - did for the banks back in the heady days. That is, provide regulatory capital relief.

Under Basel, banks hold regulatory capital as a cushion against potential losses from their assets. The amount of capital which must be set aside against each asset varies according to those assets’ “risk weightings”: which are calculated according to a host of different models prescribed by the Basel accord. But risk-weightings can be offset by credit risk mitigants: insurance.

...a bank could thus own a security rated BBB but using sufficient hedging - with, in this case, HMT, (but previously, someone like AIG) - treat the security as if it was rated AAA. The difference in risk weightings implied are huge...

As with AIG’s business, in principle, the scheme could be very lucrative... The problem is that modelling the value of most structured credit products is extremely difficult. The Treasury intends to assess submissions on “a case-by-case basis”, which is plainly mad. The most qualified names in finance have had their fingers burned touching CDOs. There’s a danger that the Treasury’s scheme - just like AIG - could be rather a costly capital sump."

A costly capital sump or a blank cheque? In practice, taxpayers will find there's very little difference.

Sunday, January 18, 2009

Toxic Spin

Our insurance plan goes up to 11

When is a bad bank not a bad bank?

When it's called a "pay as you go" insurance deal, of course.

The precise details of Brown's latest bank bail-out scheme are somewhat sketchy - what's new? But according to the Sunday Telegraph's report:

"The Prime Minister is understood to have favoured the new "pay as you go" insurance deal over a single toxic bank because of the potential shock to taxpayers if they faced an immediate multi-billion pound hit so soon after last October's £37 billion bank rescue package. However, the impact of the two schemes is intended to be broadly similar."

"Broadly similar" is putting it charitably. Identically similar is closer to the mark.

Because contrary to the Treasury spin (faithfully relayed by the BBC yesterday), it doesn't make any difference whether we taxpayers take physical delivery of these toxic assets into a taxpayer-owned Bad Bank, or whether we simply give the banks a guarantee of their value - either way, we're bearing the risk that they turn out to be as worthless as everyone fears.

Whatever the label says, the key question is what is the price at which we're on risk?

Let's just remind ourselves of some facts.

As a result of their own reckless lending, our banks have a load of very dubious loans/investments on their books. Nobody knows what these so-called toxic assets are worth - it may well be zilch. But one thing everyone does know is that banks have been very slow to recognise the losses on them, and their current stated value is almost certainly way too high (hence the panic on bank shares last week).

By forcing taxpayers to take on the risk - even if it is in exchange for a face-saving insurance premium - Brown is doing another big favour to bank shareholders. They not only avoid the need to take another big write-down hit to their capital, but they also retain the possible upside in the (admittedly unlikely) event that these things turn out to be worth something after all.

Indeed, this could actually turn out even worse for taxpayers that a straight Bad Bank. Because with the insurance deal, we still take all the downside risk, but now we don't get any of the possible upside - that all goes to the banks.

So how much are we in for? A figure of £200bn is floating around, but precisely what that refers to is unclear - it may be the original value of the debt, or a partially written-down value.

What we can be sure about is that the Simple Shopper will not negotiate anything like a fair price for us. We will be gifting bank shareholders many more tens of billions.

Remember that when the spin-machine spews forth tomorrow.

Saturday, January 17, 2009

Another Hedge Fund Disaster

This one's going to jail - ours will go to the Lords

With his plush offices in London's swanky SW1, his unpleasant blustering manner, and his apparent command over hundreds of billions, Gordy Brownoff likes to present himself as the king of hedge fund managers.

But this week, investors watched with mounting anger as his flagship fund - the Notimeforanovice Britannia Bank Reconstuction Fund - chalked up further massive losses. Given that the fund was only launched in October, and has already lost gzillions, there are calls for Brownoff's immediate arrest.

Instead of which, he is set to launch an even bigger fund this very weekend.

"This man is either a complete idiot, or an outrageous fraudster, or most likely both," said one apoplectic investor. "My gerbil could do better than this - it's a poncy scheme. Why should we be forced to give our savings to a scam artist? Where has all our money gone?"


BOM correspondent Nick L has been monitoring how Brown's bank hedge fund has been going.

Just to remind you, this is the fund that Brown set up last October to buy equity stakes in our High Street banks. In theory, it was only going to underwrite the issuance of new equity by RBS, HBOS and Lloyds, but of course, it ended up getting stuck with the entire shebang - nobody else wanted them at anything like the offer price.

How do we know it's a hedge fund? Because it follows a highly aggressive investment policy, holding positions in just three stocks, all in the same highly risky sector. Plus, it's hugely geared, having financed itself entirely with debt. The investors (ie we taxpayers) are jointly and severally liable to repay the debt in due course - which is a ticking time bomb even Bernie Madoff didn't inflict on his punters.

Brown's fund has performed abysmally. On a £28bn initial investment, Nick calculates it's already lost us £11.8bn, or 42%. Here are his figures:

So he bought the stocks at £6bn above their market value at the time, and since then, they've slumped by a further £5.8bn.

We can hardly say we weren't warned. As we've blogged before, Brown made such a hash of managing our gold reserves that he sold them at historic market lows (now officially known as the Brown Bottom - see this blog). Whereas the gold price is now around $850, he sold our gold at an average price of $275. He truly is King Midas in reverse.

As an investor, you'd be insane to entrust your savings to a lying twok like Gordy Brownoff.

So just explain again why it's different with our taxes?

Friday, January 16, 2009

Taxpayers Vs Shareholders

We'll be paying good maney for this

On this one, Tyler is stuffed either way. He's a taxpayer, but he's also a bank shareholder*. So however the latest wave of bank bail-outs finally breaks, he's a loser.

Ahhh, shame, you say.

Which is a fair point. Except that if you've got a private sector pension, or a with-profits policy, or unit trusts, you too are a bank shareholder.

And it's now obvious the banks are in an even bigger mess than we'd imagined. What we can gather from the unmissable Bloomberg TV, is that they've now quaffed their final shot of Red-Eye in the Last Chance Saloon, staggered out onto the street, and are facing the final show-down.

In the US, the once mighty Citibank is tottering around trying to amputate its own gangrenous limbs, and whether what remains will be capable of fighting another day looks doubtful.

Bank of America has done even worse. Its rushed takeover of Merrill Lynch during the autumn was done in such a slapdash way that it inadvertantly ingested enough toxic debt to poison the entire combined enterprise.

Elsewhere, Anglo-Irish Bank has now had to be formally nationalised, the leading German banks have revealed huge new losses, and most mainstream continental banks are only being propped up courtesy of their governments (see here for summary). Total admitted loan losses by US and European banks have now reached a staggering three-quarters of a trillion dollars, and nobody believes it will stop there.

Here in the UK, we taxpayers have provided billions in formal guarantees to banks, and we are now effectively guaranteeing their entire £6 trillion balance sheet. What's more, because nobody else would provide fresh capital, we've ended up owning 58% of the equity in RBS, and 43% in Lloyds/HBOS.

Unfortunately, the nightmare hasn't stopped. It turns out the banks' cupboards down in the vaults are stuffed full of loans that have gone putrid. Slimey green gunk is seeping out all over the place, and up above in the gilded dining rooms senior management are gagging at the stink.

Hence the latest plan - the so-called Bad Bank.

The Bad Bank will be a toxic waste dump. Our banks will be encouraged to load up all their putrid loan cupboards onto the back of a big sealed artic, cart them round to the dump, and leave them. Which means our banks are then once again sweet-smelling, and can get on with the wholesome task of lending money to Perfectly Viable British Businesses and Hard-Working Families.

Splendid idea.

Well, there is one other small detail - as the owners of this toxic dump, we taxpayers will be paying the banks handsomely for every putrid cupboard they deposit. In effect, we will be handing the banks a get-out-of-jail-nearly-free card, letting them off the consequences of their bad lending during the go-go years.

Like the sound of that?


Now, we can all agree that we must have functioning banking sytem. That is an essential condition of future prosperity.

And here on BOM we can also agree that state ownership of banks is a terrible idea.

But right now, what is the least worst option?

We taxpayers have already given bank shareholders a stack of support. Do we really want to buy all their toxic debt? Do we really want to let the banks choose all their smelliest most putrid legacy cupboards and sell it to us sight unseen?

Because if you believe the Simple Shopper will be able to negotiate a "fair price" for this stuff, you just haven't been paying attention.

The only possible way we can accept this is in exchange for a further big slug of the banks' equity. And frankly, in the case of RBS, the next stop is full nationalisation.

Bank shareholders did a terrible job at controlling bank management during the boom, and lessons must be learned. Shareholders need to be far tougher. The B of A takeover of Merrills - where B of A management apparently failed to make even basic checks on what they were buying - once again highlights that shareholders still need to be much more active (HTP JW).

We've said it many times before, but taxpayers really should not be forced to bail out bank shareholders.

*Small print - Tyler Investments (Cayman) Ltd holds no direct equity positions in banks. But it holds plenty of indirect positions via collective investment vehicles. Bad call.

Thursday, January 15, 2009

They Should Have Had A Whip Round

Not quite so wide-eyed now

Frankly, BOM has never been a fan of Lord Digby Jones (eg see here). But we have to agree with his latest outburst at the Public Administration Committee.

Drawing on his recent unhappy experience as a junior minister at BERR, he rips into our civil servants:
"Frankly the job could be done with half as many, it could be more productive, more efficient, it could deliver a lot more value for money for the taxpayer.

I was amazed, quite frankly, at how many people deserved the sack and yet that was the one threat that they never ever worked under, because it doesn't exist."

Having worked in both the civil service and the private sector Tyler can only nod his head vigorously. Certainly back in the 70s and early 80s, the civil service was wildly overstaffed. Tyler personally witnessed civil servants who routinely spent much of their afternoons snoozing - one even kept a supply of claret in his filing cabinet to help him on his way. Clearly, things have not changed.

But who's to blame?

You can hardly blame the civil servants themselves. They have to eat, and the vast bulk of them are only doing what they've been told to do. They're very small cogs in The System. It's not their fault if they've been assigned to some sub-departmental empire where there's simply not enough work to go round.

Just as it's not their fault if they're working on something that isn't actually needed. Maybe they're in a section that was set up to manage some once vital ministerial initiative subsequently overtaken by some vital new ministerial initiative - Tyler himself once worked for a time in just such a section, fondly imagining his beaverings were of vital national importance.

So does the blame rest with senior management?

Well, yes, you'd think so. But then again senior civil servants are no more than bigger cogs in The System. There's never been much upside or support for a senior mandarin who wants to axe the people reporting to him. And besides, it's a deeply unpalatable activity.

So how about ministers? Surely they must be responsible.

Well yes, definitely.

Except that according to Digby, being a junior minister was "one of the most dehumanising and depersonalising experiences" he'd ever had. He too was powerless against The System.

So it's all down to the head honchos. They're the only ones who can act. The only ones who can order efficiency programmes that can really get a grip on the fat.

Which was precisely why Commissar Brown ordered the Gershon efficiency programme... the programme that has been so useless it may have actually increased overall costs (see many previous blogs).

The reality is that no country's civil service has ever managed to deliver efficiency. It's simply not what they do. Indeed, if Digs is right and our civil service is only 2x overstaffed, I'd say it's doing quite well.

Forget trying to make government efficient. Put it from your mind.

The only real question is how can we radically downsize the wretched thing?

Of course, if Jones's civil servants had just had a whip round to give him a proper leaving present, all this unpleasantness could have been avoided.

PS Just for reference, there are currently 522,000 civil servants. The largest numbers are at the Department for Work and Pensions (116,000), HMRC (92,000), Justice (86,000), and MOD (78,000 - none of whom are men with guns).

Wednesday, January 14, 2009

So What Will It Cost Really?

Luckily this lot have only got another 15 months

We've considered the mysteries of the headless chicken before, but the question of the hour is whether they can spot green shoots? I mean, think about it - you've got no head, which is clearly less than ideal, but on the other hand you're still running around. Maybe your shortfall in the head department means you can sense the shoots in some way. In fact, maybe you can sense special shoots which are always hidden from the fully headed.

ESP - makes you think.

Meanwhile, back on planet earth, the cacophony of policy announcements coming from the chicken coop is now so intense that Tyler has lost the will to decipher them.

As far as he can tell, taxpayers are now going to guarantee £20bn of short-term bank loans to small businesses. Well, no, although the coop headline says £20bn, it actually seems taxpayers are going to guarantee only half of that, the rest of the risk remaining with the banks. And then there's another £1.3bn of longer-term loans, and £75m of equity investment. Ballpark, it seems taxpayers are being put at risk for some £11bn.

God knows if this will actually moderate the slump. Tyler now routinely asks small businessmen if they've lost their existing bank facilities, and he's yet to find one who answers yes. But we must assume our extra-sensory chickens have sensed a different answer, including somehow concluding the guarantees won't simply be used by the banks to de-risk their existing exposures.

Anyway, what we really need to know is what we're going to lose from all the defaults we're going to suffer?

My Lord Mandy reckons that defaults on the £10bn chunk will cost us no more than £225m. But that's only 2.25%, which looks ludicrously low.

Defaults on Labour's existing Small Firms Loan Guarantee scheme reached a cumulative 13% in just the first two years of its existence. And that was only up to March 2008, well before the economy fell off the cliff. Here's BERR's own chart showing soaring defaults right across the programme:

In terms of money, losses in 2007-08 were £69m on a programme that had only lent about £440m cumulative. So that was getting on for a 20% default loss (recoveries amounted to a notional £1m). And God knows what the loss has reached by now - 40%? 50%? 70%?

So overall, if we're guaranteeing £11bn in the teeth of the worst slump for a century, Tyler's fag packet says the default losses are going to be BIG. £225m ain't in it. We're talking billions.

Tuesday, January 13, 2009

Bubblegum Economics

If it's big and pink and wobbly, it's probably a bubble

If you haven't yet watched Jeff Randall's excellent interview with Chancellor Darling, you really should (here). The great thing about Randall is that he understands how economics and finance works, and has the facts at his fingertips - which is a lot more than our usual TV interviewers. As a result he was able to give us a proper discussion about the underlying issues, rather than the usual look-at-me stuff.

As has been widely reported, Randall put it to Darling that the government owes us all an apology for getting us into this mess in the first place. Needless to say, Darling declined the opportunity and trotted out the old line about how it's a global problem, and with the benefit of hindsight everyone would have acted differently. How were they to know?

But of course, as Randall suggested, that really won't do. The current crisis is the result of a huge credit bubble bursting, and our government was centrally involved in inflating it in the first place. Let's recap:

  • They maxxed out the public sector's own credit cards, leaving nothing for that rainy day
  • Their tax changes encouraged companies to gear up with much more borrowing (eg see this blog)

  • They ignored the huge growth of personal debt, much of it "secured" against a ludicrously overpriced property market, which had itself been driven up by the credit bubble; household savings collapsed (eg see this blog)

  • They ignored the huge growth in our overseas debt (not just the borrowing to fund our ballooning current account deficit, but also massive borrowing to fund our banks/hedge funds)

So why did they let it happen?

The excuse that nobody knew it was a bubble at the time is pretty thin. On virtually all measures, credit was exploding and property prices were unsustainable. The bubble featured regularly in every newspaper from the Gruaniad to the Mail.

A more credible version of why we had official inaction is that, while plenty of people said it was a bubble at the time, there was no way of proving it. And governments and central banks had come to be very circumspect about second-guessing markets. As Fed Chairman Alan Greenspan famously put it in 1998:

"There is a fundamental problem with market intervention to prick a bubble. It presumes that you know more than the market.”

Now Tyler has a lot of sympathy with that point. Governments and their agencies - including central banks - have a long and expensive history of unsuccessful attempts to buck markets, and the Big Picture conclusion is that it's almost always best to leave things to the market itself.

But in this case of course, the market seems to have failed. Or to put it more precisely, it seem to have blown us all to buggery.

Greenspan has at least had the backbone to admit he got it wrong. Back in October he said:

"I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms. And it's been my experience... that the loan officers of those institutions knew far more about the risks involved in the people to whom they lent money than I saw even our best regulators at the Fed capable of doing.

So the problem here is, something which looked to be a very solid edifice, and indeed a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me.

I still do not fully understand why it happened. And obviously, to the extent that I figure out where it happened and why, I will change my views. And if the facts change, I will change."

No such admission from Darling last night, although you can be sure he's happy to go along with the bit that blames the bankers for not "protecting their own shareholders and their equity in the firms" (aka evil bankers robbed everyone, including their own shareholding grannies).

But is Greenspan's confession the real reason that governments and their central banks were so hands off with the giant bubble? Was it really because all agreed that markets always know best?

Or was it perhaps that the growth, employment, and votes generated by a runaway credit boom were simply too good to pass up?


With the benefit of hindsight, it is clear that central banks should have been far more willing to prick bubbles over the last two decades.

And perhaps even more important, they should have been far less willing to reinflate them once they'd burst. The notorious Greenspan put (see this blog) kept the US equity market motoring right up to the collapse, and then he compounded the problem by slashing interest rates just in time to fuel the mad, and nearly terminal, sub-prime mortgage bubble.

Just as Keynesian fine-tuners once thought that if they managed aggregate demand, everything would be fine, so today's central bankers had come to believe thay if they just managed the official inflation rate, everything else would somehow take care of itself. Both turned out to be wrong.

From the South Sea Bubble to the 2004-2007 housing market, we've always had asset bubbles. And we probably always will. But we shouldn't have to accept governments and their agents ignoring/conniving in them. At 40% of the economy, we should expect them to be a stabilising influence.

And that doesn't just mean slashing interest rates and pumping in billions of taxpayers' money when bubbles collapse. It also means spotting possible bubbles well before they get to bursting point, and taking action then.

Yes, we can all see bubble spotting is not an exact science. But you know what - if it's big and pink and wobbly with flecks of spital on it, it's probably a bubble. Just like the one we currently have in the government bond markets.

The fundamental problem is the other one - calling time on a party is never ever going to be popular. But as this lot will discover next April, neither is getting everyone covered in masticated bubblegum.

PS Tyler used to be a master in the great art of bubble-blowing. But being of limited means, he couldn't run to more than one piece of bubblegum a day. Which meant traditional mealtime storage behind the ear. Unfortunately, while taking tea one day with a rather intimidating great aunt, he inadvertantly gummed his head to her high-backed antique chair. She was somewhat less than amused. In fact she dragged him into what she called her scullery (do they still exist?) and proceeded to scrub behind his ear with said scullery brush. These days, she'd have been put inside... except of course, we have no prison places, and are unlikely to afford any ever again.

Monday, January 12, 2009

Reflation As Redistribution

Governments have never been good at turning on these

However we look at it, a prolonged recession now appears unavoidable. And the overwhelming consensus among at least 364 economists is that in order to mitigate its effects, our government should ditch all the normal rules of fiscal and monetary prudence. Governments should ramp up spending, borrow more, and pump money into the economy by all means possible. Saving should be discouraged in order to address Keynes' famous paradox of thrift.

As regular readers will know, we have serious concerns about all this. Not only will it bury us under a mountain of debt and taxes for years to come, but we also reckon it runs a high risk of triggering another inflationary spiral. Indeed, we confidently expect governments here and abroad to actively promote that inflation in order to default on the very debts they're currently amassing.

True, we're not alone in these concerns. John Redwood has been splendidly vocal - especially over the last week - Liam Halligan had a good piece yesterday - and Prof David B Smith, the chairman of the IEA's Shadow Monetary Policy Committee, says:
"What we're doing now, in terms of rate cuts and fiscal stimulus, will not prevent the current recession, but it will have serious consequences at some point in the future... Even at their current rate, lower interest rates will put a hell of a lot of stimulus back into the economy, and we could easily go back to boom and bust again.

The Keynesian bandwagon has allowed the Government to go on huge spree, and the evidence from the 1990s is that you could easily have a situation where public spending holds up GDP but also induces a collapse in private sector activity which could be equivalent to the Great Depression."

In other words, all this government spending could easily crush the private sector, preventing it from generating the growth that we must have to recover (cf the famous Eltis and Bacon analysis of Britain in the 70s - Britain's Economic Problem: Too Few Producers).

Because beneath the macroeconomic headlines, there's something else going on here - a massive redistribution of income and wealth from the productive to the unproductive (or at least, the much less productive).

Let's recap on the losers from reflation:
  • Savers - they have already lost bigtime from the slashing of interest rates, and look set to lose more as the government pressures banks to cut loan rates
  • Taxpayers - they will have to pick up a hefty tab for servicing the government's huge new debts; increases in National Insurance and higher rate income tax are already in train, and there will be much more to come
  • Those on fixed incomes - just like back in the 70s, anyone on a fixed income, like a pension annuity, will lose as inflation takes hold; similarly all those who hold their life savings in bank and building society accounts will lose, as will those who've placed their trust in the government's laughably misnamed Gilt-Edged Securities (unless they've been cute enough to buy the index-linked variety)

All of the above will lose in order to support a burgeoning public sector, plus a soaring bill for welfare and all those job subsidies. The productive and the thrifty - the very people on whom our long-term prosperity depends - will be penalised to support an even higher number of state dependents.

Now those 364 reflating economists are basically saying don't worry about the long-term because in the long-term we're all dead. And anyway, the government will be able to turn policy on a sixpence just before the dire long-term consequences kick in. Here's how the normally sensible Roger Bootle describes it:

"In the short term, we must rely on an increased government contribution to demand through higher borrowing and increased consumer spending... Within a couple of years, though, these two sources of demand can be wound down as two others take over – a huge boost to growth from our net exports and a concomitant rise in corporate investment.

The winding down can take place through cuts in government borrowing, achieved through cuts to spending and higher tax receipts generated by economic growth, as well as higher interest rates, effectively undoing the stimulus packages of the last year."

Hmm. In my lifetime I have never seen a government that was able to execute that kind of policy switch before the ordure hit the whirling blades.

The reality is that the productive and thrifty will be picking up the pieces for many years to come.

Unless they leave, that is.

Sunday, January 11, 2009

The Price Of Engineering

That degree in Disco Studies may yet come in useful

NuLab has hugely increased state spending on education. This year they will spend well over £80bn, comfortably more than double what they inherited in 1997. In inflation adjusted terms, spending has increased by 5% pa, much faster than GDP. And state education's share of GDP has risen by nearly one full percentage point.

In fact, at 5.3% of GDP, we are now spending more on state education than any other G7 country except France (on 5.6%).

So what have we got for all that money?

Have we had the promised leap in education standards, and can we now see that bright new workforce equipped to triumph in the post-industrial hi-tech challenges of the 21st Century?

Er, no. We've had record GCSE results, record A Level results, and record numbers of university graduates, but we haven't had any of that other stuff - the stuff we actually need. We are spending tens of billions extra every year, yet the results are no better.

In fact, so ill-equipped is the bright new workforce now pouring out of our state schools and universities, that the government is having to pay employers to take them on, even temporarily.

Last week, we heard taxpayers' money was being used to bribe employers to take on 35,000 unemployed school leavers as "apprentices" (see this blog). And today we hear another bunch of employers are being bribed to offer an unspecified number of "internships"* to unemployed university grads. Skills Secretary John Denham (most assuredly no relation to The Bloke) explains:

"They [new graduates] will be a very big group: around 400,000. We can’t just leave people to fend for themselves. At the end they will be more employable, and some of them will get jobs."
Wow! Some of them might even get jobs?

And pray explain again why we've got 400,000 graduates - graduates who are so ill-equipped for life that they can't even be left to fend for themselves. Remembering of course, that when Labour came to power, our unis were only producing 200,000 grads per year.

Yes, we know there's a recession/slump on, but the problems with all these new grads go much deeper than that. As we've blogged many times (start here), both the nation and the students themselves have had shocking value from Labour's gung-ho expansion of "higher" education and its entirely arbitrary 50% participation target. A brief recap:
  • Taxpayers now spend £12bn pa on higher education; the students themselves spend a whole lot more
  • There are 2.3m students, or 4% of the entire population (including 27,000 doing the Major's favourite, the degree in media studies)
  • The 50% participation target is "aspirational" - ie entirely arbitrary (admitted to the PAC by the Chief Executive of the Higher Education Funding Council for England - see this blog)
  • The average HE participation rate across the OECD is 35%: ours is already 40% and heading for 50%
  • Thousands of graduates now do non-graduate jobs, and that number is growing rapidly- their M Mouse degrees have simply not equipped them to do anything else (according to HESA, 75% - yes, 75% - of 2002-3 graduates were still in non-graduate jobs four years after graduation; what's more, 26% weren't in full-time jobs of any kind
  • The average financial return to a degree is plummeting - according to PWC, the gross return to an Arts degree is now only about £30 grand, and that takes no account of the costs of study and the earnings foregone - net net an average Arts degree almost certainly reduces lifetime wealth.

The truth is that despite all their "challenges of the globalised economy" wibble, Labour have never seen education in economic terms. From comprehensivisation to Laura Spence, Labour's priority has always been social engineering. For them, it has always been far more important to put everyone on the same level, than to pursue educational excellence.

So let's thank God for private education. Because without it, Britain really would be in the merde. All our top jobs would have to be filled by people who'd been processed through our dumbed-down state social engineering factories.

Yes, Brown's new Equality Commissar - Haze of Dope Milburn - is perfectly free to rant on about the unfair advantages private education brings on the employment front. But we all know the truth: the reason that social mobility has stalled so badly is that Labour politicians sacrificed state education on the altar of social engineering.

And unfortunately, as the slump gathers pace, the dismal results of their approach are going to be even more apparent. People who may have been employable in a credit boom are going to find it very tough in the harsh future now unfolding before us.

As someone whose life chances were transformed by high quality state education, it really does make me want to scream.

*Footnote- So HTF has our deadend government persuaded sensible companies like Microsoft and Barclays to offer these internships? Well, first - as per - it sounds like classic vapourware and probably won't happen. "A spokeswoman for Microsoft said the company in principle “absolutely supports” the idea and had been “really enthusiastic” when the government approached it. Asked what the scheme involved, she said: “We have to sit down and go through the scheme in detail." Hmm. And second, Microsoft... major government supplier... needs to be seen as A Good Citizen in these troubled times... Barclays... big bank with big debts... needs to be seen as A Good Citizen in these troubled times... nope, I don't get it at all.