Monday, 29 April 2013

Banking on a Bad Bank

The case for a fully functioning Bad Bank is now becoming very clear.  The recent news that Jim O’Neil is to leave UK Financial Investments, the organisation tasked to sell our publicly owned banks at a profit, without getting in striking distance of selling a single share in Lloyds or RBS is depressing beyond belief.  The last three years have been wasted as these two behemoths of the banking business are still miles away from full private ownership.  

Sunday, 28 April 2013

Avoiding the triple dip

The flags were re-hoisted following Maggie Thatcher’s funeral on the news that Britain has avoided a triple dip recession (for the time being).  The chancellor George Osborne must have had a broad grin on his face although he was careful to be cautious about the future.  Before we all get carried away we should point out that the economy is  2.7pc smaller than its pre-recession peak in 2008.

The importance of Thursday’s news on GDP cannot be underestimated, not for its economic and social impact but for the political breathing space it provides David Cameron - more of this later.  The announcement on Thursday, contained as much bad news as good - Manufacturing shrank by 0.3pc but that was down to a terrible January, February and March  have been stronger. 

Tuesday, 23 April 2013

To QE or not to QE that is the question

I have just moved jobs and this has prompted me to think about the challenges that Mark Carney the in-coming Governor of the Bank of England (BoE), will face.  He arrives with stellar credentials and a reputation as one of the world most expert central bankers.  He became the central banker for his own country Canada in 2008 and has taken credit for Canada’s OK performance since the financial meltdown following Lehman’s failure in the summer of 2008. He has used a mixture of monetary measures to help the Canadian economy recover, quantitative easing, and monetary tightening have both been deployed more readily than in other economies. 
Mark Carney - Magician or Muppet?
His arrival in Threadneedle Street  is vitally important for the British chancellor, George Osborne, who has run out of ideas for getting our economy growing again
Mr carney must be wishing that he had been appointed a little earlier as the BoE as the current governor has already blown £375bn on quantitative easing – but the firepower may be drying up.  The main issues he faces are:

    1.      Springing the liquidity trap in private consumption and getting the banks lending again
    2.      Managing inflation that has be stubbornly high unlike in japan and other advanced    economies where deflation is a major concern
    3.      Re-structuring the banks and dealing with the debt over hand in the private equity business
    4.      Implementing a new regulatory regime for the banks without killing off this vital sector
     Getting the economy to grow after 5 years of flat lining, with other major economies using QE and monetary policy to improve competitiveness (currency devaluation) we need action that supports the real economy.  
For some time the markets have been convinced that more monetary activism is on the way and this has had the pound plunging, along with yields on UK government bonds. Abenomics  being unleashed by Haruhiko Kuroda, the new Bank of Japan governor, have only stirred expectations of exceptionally aggressive easing with Mr Carney in charge.

Last week Mr Carney acknowledged on that the UK was one of the economies which the International Monetary Fund has said is in “crisis”. Like any in-coming manager he will want to paint the current situation as black as possible; so having talked the UK economy down what room for manoeuvre will Mark Carney have?

He created excitement in December when he mooted the idea that central banks could set targets for the overall size of the economy, or nominal gross domestic product, rather than inflation. But in the budgets Mr Osborne opted for relatively minor changes to the Bank of England’s remit as he kept the 2 per cent inflation target but clarified that policy makers could prioritise growth, provided inflation remained under control.  Economists called the new remit a “damp squib” after all the hype.

So what might change?

     One area of policy that will clearly change under Mr Carney is what is known in central bank speak as “forward guidance”. The idea is that private consumers make spending decision their view on forward interest rates,  if they believe interest rates will remain at ultra-low levels for an extended period they may be less inclined to save. Under Mr Carney’s stewardship, the Bank of Canada became the first central bank in the Group of Seven leading industrialised nations to promise to keep interest rates low a long way into the future. The US Federal Reserve has since gone further, committing to keep interest rates low until unemployment falls below 6.5 per cent. With the UK’s poor record on inflation such a commitment might be more difficult

     He may well consider more quantitative easing, but after our £375bn binge he maybe less include or able to continue the asset purchase scheme.  He could however be a little more radical than the current regime at the BoE and contemplate more structural measures.  He could look at more proactive restructuring of RBS and Lloyds Banking group and some of the private equity funds.  The UK economy is suffering from a large number of zombie companies weighed down by debt but hanging on due to ultra low interest rates.  Rather than raise interest rates, which would damage the housing market and consumers Mr Carney could insist the banks take more proactive steps to restructure debts that will never be paid off.  This might cause some short term unemployment pain but a clear out of Zombie companies would clear the way for more vibrant private sector growth.  Any return to large scale QE and continued negative real interest rates would be a firm signal that both the government and the Bank of England think that bank creditors (savers) should continue pick up the tab for the wild over spending between 2000-2009.    

     Mr Carney could also build on the Funding for Lending Scheme (FFLS), unveiled by the Treasury and the Bank of England last summer, has had some success in easing borrowing constraints on would-be homeowners. But, while conditions in the mortgage market have improved, lending to small and medium sized businesses remains constrained.  Revamping Funding for Lending is an easy win for Mr Carney, who indicated this year that he was willing to use the scheme to boost credit creation.  The problem with FFLS is that it is essentially a mechanism for civil servants to pick winners - a role they are very badly suited to.

If I was in his shoes I would consider a contrary approach, which would mean raising interest rates.  The medicine of ultra-low interest rates in the advanced world has proved a failure in Japan over 10 -15 years and has not worked in the US, UK or Europe in the last 5 years.  Where aging populations comprise a substantial part of the total private consumption and where companies turn cash into share buy backs low interest rates are a killer blow.  We need to move to a world where there are real positive interest rates on 2-3% rather than the current negative real interest rates.  This would also have the benefit of dealing with Zombie companies and force the banks to restructure quickly.  There would definitely be more pain in the short term but we surely benefit in the medium term with a more dynamic and health real economy.

Friday, 19 April 2013

Maggie's Magazine

The news over the last two weeks has been dominated with remembrance for the  life of Margaret Thatcher, who was Prime Minister of the UK from 1979 to 1990.  Along with many others I have found myself obsessing about her life and impact.  Extraordinarily my daughter, who is completely uninterested in politics, spent the month of March writing an essay for her History Degree on the relative importance of the 1979 election compared to the 1945 election.  The '45 election ushered in 30 years of political consensus on the need for government intervention in all aspects of society and the economy, and the '79 turned the tide and has also created a similar consensus.  We spent 2-3 weeks discussing the impact of that election win so I was already in the 'zone' when news of her death broke.

I was 19 when Thatcher became Prime Minister and unlike most of my generation I was captivated by her determination to deliver a simple but consensus changing plan.  By the time we had retaken the Falklands Islands I had joined the Army and at the time of her belated resignation I was working in the newspaper industry.  Sometimes infuriating, always compelling and controversial she dominated the formative  years of my life.  By her will alone the UK was rescued from becoming a third world banana republic so it's vital that we keep the memory, without glossing over the mistakes that she made.

So I thought it would be helpful to put a magazine together of my blogs, pulling together my personal remembrance of Mrs T.

When the news broke of her stoke and death I wrote an off the cuff post on the amazing self belief that she had and her self reliance and suspicion of advisers

On reflection I wrote a better and more balanced piece on the impact she had on the UK, remembering how bad it was when she took over but also considering the things she didn't fix and some that she broke

On the day of the funeral I dug out her five point plan from 1979 - she actually delivered the whole package and very few politicians even commit to a plan let alone execute on it

And finally I looked at the impact of economic theory and dogma on political leaders, contrasting the problems George Osborne has created for himself with Margaret Thatchers romance with Milton Friedman and Sir Alan Walters.  The moral is that politics and economic theory rarely mix well - ask Karl Marx!


As an interesting postscript to this sad week Simon Johnson at the Telegraph rages against Ed Miliband's desire to rip up the legacy of the 1980s market economy.  From a high point in February this error of judgement could see the end of Miliband's opportunistic bid for power.  We will see if Margaret Thatcher remains a force from beyond the grave!

My final thoughts were devoted to my next door neighbor's daughter who went to the funeral to protest against Margaret Thatchers 'values'.  As a privately educated and some would say over privileged young lady her sense of timing made me really angry.  Has she ever demonstrated against Thatcherism before?  No!  will she ever do so again?  No!  Is it good timing to take up the chant 'Maggie, Maggie, Maggie - Out! Out! Out! at the old ladies funeral?  I think not!

Thursday, 18 April 2013

Trusting your political career to economic theory is a dangerous game

In 2010, two Harvard economists, Carmen Reinhart and Kenneth Rogoff,  published an academic paper entitled  “Growth in a Time of Debt”  which used research on around 20 of economies over the last 250 years to show that annual GDP growth ranges between about 3 per cent and 4 per cent when the ratio of public debt to GDP is below 90 per cent. But average growth collapses to -0.1 per cent when the ratio rises above a 90 per cent threshold.  Much political capital has been expended by Osborne and other on the dangers of exceeding the 90% debt / GDP ratio.  Why 90% should be such a perfect tipping point should seem strange to anyone with an ounce of common sense, but more important men than me have pinned their careers to this ‘fact’.

Wednesday, 17 April 2013

Margaret Thatcher's Five Point Plan

When Mrs Thatcher fought the 1979 election Britain was broken, the elected government of the day had no control over the economy, 28 million days a year were being lost to strike action and our nationalise industries were losing money hand over fist.I was 19 years old and I remember the all pervading sense of gloom that surrounded our country's future.   She had to break a few eggs to make the omelette, but what a cook she proved to be.

Thursday, 11 April 2013

Go Abe Go - Proving Paul Krugman Correct

We watch with bated breath for the results Abenomics (the economics strategy of Shinzo Abe the Japanese premier), which is a lethal cocktail of Keynesian supply-side expenditure reckoned to be worth $75bn in this quarter alone and a massive dose of quantitative easing.  Some like Paul Krugman (the liberal conscience of economics) believe it’s the perfect cocktail of goodies to resolve the liquidity trap that the Japanese economy has been in for 15 years or more.  A liquidity trap is where private demand is too weak, so that even at a zero short-term interest rate private consumption (spending by people and private companies) falls well short of what’s required for full employment and positive growth. In these circumstances, monetary stimulus, quantitative easing (QE) is unlikely to have any effect.
Which on is Abe, Angela?
Japan is a very important economy to study and understand as they have been in this liquidity trap for 15 years and these are now the conditions that apply in the US and much of Europe, so if Abenomics works we all need to know how and why.  Krugman argues that people will continue saving even at low interest rates if they believe that central banker are genetically modified to maintain low inflation and interest rates. Krugman is pining his hopes to the idea that Bank of Japan can this time “credibly promise to be irresponsible”.
Read his blog at

I think things are a little bit more mom and apple pie than Krugman.  Private consumption is flat and saving are increasing for two reason, firstly we have an aging population in the west and Japan that are under-funded in their pensions and they are having to stash whatever they can away to cover their endless retirement (same is true with company schemes).  This squeeze on 35-40% of the population is intensified by the terrible savings rates due to all that QE, you need double the pension pot if interest rates are half of what you expected.  Secondly working households are carrying the entire burden of austerity and have no room for manoeuvre, although mortgage rates are down real wage deflation and unemployment have hit them hard. 
So what to do, in the short term I would ignore the saving issue as monetary policy doesn’t seem to have much effect and the medium term expectation is for continued low rates of interest.  I would focus is providing relief to  the working middle class (cutting sales taxe is the most direct route) this would give them money in their pockets, which is likely to flow back into the economy quickly.  This should help prices to rise and eventually force interest rates up.  However unpopular a demand side stimulus is, it's probable to only way to escape the liquidity trap!

Learning from Thatcher's mistakes

In the mid-seventies a visiting official from the Soviet Union asked an important question to a British Civil servant “do tell me who decides how much bread is to be baked in London for tomorrow?”  This sounds quite surreal in 2013 but the frightening thing is, that if Margaret Thatcher had lost the 1979 election is very probable that we would have had a commissar for bread manufacture, deciding how much bread to bake for the proletariat. 

Tuesday, 9 April 2013

The Yin and Yang of Economic Policy

On the same day that The Bank of England opted not to pump more money into Britain's stagnant economy The Bank of Japan unleashed the third ‘arrow’ in its recovery package.  This arrow aims to aggressively target higher inflation by pumping money into the economy through asset purchasing.  It is aiming to do this by doubling its government bond holding over the next two years to help achieve inflation of 2%.  This supplements a massive supply-side push and some economic ‘restructuring’

Monday, 8 April 2013

Margaret Thatcher kept her feet dry

When King Canute of England was carried down to the beach at Southampton by his loyal courtiers to prove that the King’s will could prevail over the incoming tide; I am sure the King was expecting to get his feet wet.  1,000 years later the daughter of a grocer from Grantham turned the tide of social and economic history without the support of powerful courtiers.  Her name was Margaret Thatcher and she never expected to get her feet wet.

The quiet man of politics roars again

At a convivial 50th birthday drinks party two years ago I managed to corner a backbench Tory MP who won the nomination for a very safe seat just before the 2010 election.  A year after the election he was bemoaning the all-consuming power of George Osborne and the dangers that this might create, foreseeing the Icarus career trajectory of our chancellor.  Two years on Peter Oborne in the Daily Telegraph highlights the problem, in a great article that shows how toxic the Osborne brand has become.

The quiet man of politics

The evidence against George Osborne is starting to look water tight!  He has pursued Gordon Brown style fiscal policies tinkering with the tax and spend regime without making any tangible difference to the economy.  Corporation tax down a bit, allowances up a bit, National Insurance up a bit, VAT (sales tax) down and all kinds of changes to the duties we pay on booze, fags and fuel.  Having wasted a once in a life time opportunity to restructure our tax regime to improve the incentives for work rather than benefits he is now trying to steal the limelight from Ian Duncan-Smith who has been steering through the important revolution in our overblown welfare and benefits culture.

Sunday, 7 April 2013

Troika make Portugal suffer - We should remember our oldest ally

As the Scots ruminate on whether they should throw the towel in on over 300 years of partnership with the English it’s important to put our alliance with the “Jocks” in perspective.  The English have much older and more solid alliances and in particular we have been bound to Portugal by treaty since May 1386.  In fact our diplomatic friendship goes even further back to the 1147 Siege of Lisbon, when English Crusaders en route to the Holy Land stopped and helped Portuguese King Afonso Henriques to conquer the city occupied by the Moors.

Friday, 5 April 2013

Guarding against a repeat of 1066

In 1415 we had the longbow, in 1588 we had fire barges, in 1805 we had Nelson, in 1815 we had the thin red line and in 1990 we had Brian Moore, having been out gunned by the French in 1066 we have never allowed ourselves to be in such an embarrassing situation again.  All the talk of Britain throwing in the towel on nuclear deterrents while the French have the bomb is laughable.

The Prime Minister David Cameron has been busy defending the Trident programme, which is our multi-billion £ submarine based nuclear capability, he said  "The Soviet Union no longer exists (well spotted). But the nuclear threat has not gone away. In terms of uncertainty and potential risk it has, if anything, increased".  He added "Last year North Korea unveiled a long-range ballistic missile which it claims can reach the whole of the United States. If this became a reality it would also affect the whole of Europe, including the UK".  Clutching at straws here I think!

Wednesday, 3 April 2013

What class are you?

In the old days it was petty straight forward to work out how you fitted into British society, you were either working class, middle class or upper class.  

Well in principle it was simple,  the reality was somewhat more complicated as no-one wanted to be middle class and the aristocracy didn't want to be lumped in with the upper class and the working class seldom did any work.

Tuesday, 2 April 2013

David Cameron's Achilles Heel - The poor quality of his backbenchers

The latest opinion poll has the UK political parties standing at CON 29%, LAB 42%, LD 11%, UKIP 13%  (YouGov 28th March) .  These numbers make the Parliamentary Conservative Party very nervous about the party’s electoral prospects.  With two years to go before the election in 2015 the back benches are panicking, demanding in no particular order: “changes at the top”, “a lurch to the right” or “a deal with UKIP”. 

The poor polls for David Cameron are also the driving force behind the (ill conceived) plots against him.  Sadly for the Tory cannon fodder our prime minister is not moved by this unrest, David Cameron sees himself in an altruistic light and will keep doing the “right thing”, certain his place in history is secure - The first coalition prime minister since 1940 and he’s adding to his legacy with new legislation to legalize gay marriage and the reform of the welfare state, education and the NHS.   David Cameron may want to win in 2015 but it’s not the end all and be all for him.  
Declining standards in the Tory Pary
Interestingly Peter Oborne writing a day later in the Daily Telegraph has a similar view on the danger his own party present - 

Given the economic legacy and continuing global recession it is unsurprising that the Tory’s performance in the polls is so poor.   Even without these economic problems we would expect a sitting government’s opinion poll rating to slip in a mid-term period, as has happened with every government since democracy was invented.  Adding more woe to these polls is the rise of the UKIP protest vote, but both of these factors should not be unexpected or overly worrying to smart professional politicians.  

And here is the rub, the real problem David Cameron has is the quality of backbenchers in his party, and this is a problem of his own making.  After his election to the Tory leadership in 2005 Cameron, spotting the obvious weakness of his posh background and education.  He therefore decided to broaden the base of parliamentary party.  He instituted the A list and he is now reaping his reward.  Since God was a boy the Tory party has attracted the cream of our public schools and best universities, who understood the importance of calmness and solidarity.  The new intake of 2010 and to some degree 2005 are a pale imitation of their forbearers;  careerist and second rate intellectually they have no idea how to tough things out.  

A smarter bunch of MPs would realise that it’s still very possible that David Cameron can win in 2015 -  if he has some luck with the economy  and he can resolve the impending immigration landslide from Romania and Bulgaria.  Added to this the British electorate will have a further two years to smoke out the opportunistic (but untalented)  Ed Miliband and his very poor shadow cabinet.  So,  probably the biggest risk to re-election is the irrational behaviour of his own party and that’s his own fault!

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