Tuesday 25 November 2008

A Foggy Day (in London Town)

Fog helps me play golf better. When I can’t see the threats of gorse, bunkers, rough etc I worry less. I swing more smoothly. The ball is more inclined to go where I want it to.

The same thing cannot be said for driving a car. You need to see where you are going. Otherwise you have to go slowly and everything jams up.

And I think there is a connection here with what’s wrong with the banking system. Banks hold lots of assets – mainly loans and investments they have made.

In the “good times” it didn’t really matter if the values were a bit foggy and unclear because everything went well and business grew. The ball, in their terms, went where they wanted it to.

Now, however, it does matter. The lack of knowledge about the value of assets banks hold worries other banks and investors because they don’t know just how big losses will be, whether the banks can repay their debts and more relevantly how likely a default will be. The assets (loans and investments) of most banks are much bigger than their customer deposits (which are mostly Government guaranteed), so they need money from other banks and investors. And the price of money (the interest rate) depends in part on how likely it is you will get it back. And if you can’t price it, people won’t lend. This is the main reason the banking system is jammed up.

So far Governments and regulators have done almost nothing to sort this fundamental problem of a lack of clarity. I may be missing something, but it’s obvious to me that until they do the financial system won’t be able to support the economy properly.

Yes, they have pumped liquidity in. Yes, they have said they will put our money into recapitalising the banks. Others have commented - this link is to Robert Peston - on why this so far hasn’t stopped banks from being nasty to small businesses and householders.

But almost no effort has been put into trying to create asset values for all the dodgy loans and investments so everyone can see just how bad the problem really is. Until there is a cross industry initiative – it could be a “I’ll show you mine if you show me yours exercise; it could be an auction; it could be Governments buying them (as the US originally intended to do last month) – the problem won’t get fixed. I’m not opposed to the other stuff – at worst it’s harmless, at best, helpful. But this is core. I’m surprised more comment isn’t made about it.

Until the fog lifts we’ll be stuck.

PS Since writing the above, the US has announced a further $800bn package which seems primarily aimed at this problem. Good, if it is implemented in this way.

Did someone just say something?

I wasn't going to bother to comment on the Pre Budget report because it seems to me to be irrelevant to the real world. But East Anglian Troy asked, so I shall provide (rather like the Government?).

What actually happened?

The Chancellor was more honest about Government finances, or rather the scale of the debt we all face. He did not include all the hidden stuff, like public sector pensions or the Public Finance Initiative funding which will come back to haunt all those new hospitals and schools over the next few decades, but he did talk about the rest.

But most people had already suspected just how bad things were.

He announced some helpful matters for small businesses, although I suspect the most significant (the £1bn facility) will require many bureaucratic hoops to be gone through before it is accessible. And he announced a 13 month small cut in VAT. Most businesses will probably not pass that on, so it will help maintain their margins and therefore employment levels.

But why not do something useful? Like cut NICs to keep people in jobs? Or increase tax allowances to take people out of the tax net completely?

And then he also announced tax increases from 2011 (after the next election, so hoping people won't notice). The increase in higher rate tax will probably lead to no change in tax revenues, the higher NICs will make people worried. And he increased tax on alcohol, cigarettes and fuel to offset the VAT cut. The last is particularly disappointing for those living in rural areas.

So this was as much fiscal penalty as stimulus.

So in summary: as many people have suggested, new labour has gone, we face a big recession and the public finances are in a mess. But that was true on Sunday as well as today: yesterday's statement was not really necessary. He hasn't wanted to annoy his client state (see Simon Heffer on that one); he doesn't have the money to make much of a difference and what he has done is mostly a wasted effort.

As I had noted earlier, markets did not seem to think the UK was well positioned. Nor, now, does the OECD: they predict Britain will have the deepest recession of any major eceonomy next year.

Perhaps the most interesting aspect was that George Osborne, the shadow chancellor, apparently spoke well in reply. And this after Cameron gave a good speech (I thought) at the CBI conference. My sense has been that the Tories have, ever since Northern Rock, not provided a consistent and coherent response on the economy. Could this be the start of effective economic opposition? I hope so...

PS - since writing the above I see on Channel 4 news that tucked away in the small print of the pre budget report there is a small section on public sector pensions, although it does not deal with the capital cost.

Wednesday 5 November 2008

The price of everything, the value of nothing

One of the people on my Venice trip mentioned an EU defence minister’s summit he had assisted in the 1980s – it had been in Venice and co-incidentally HMS Britannia had been there as well, with the Queen Mother in residence. She had invited the various ministers for a drink with consequential positive effects on the UK’s negotiating position. Putting aside how much more tasteful Brittania was compared to Russian mega yachts, it reminded me just how stupid we had been to decommission her. The cost – was it £10m a year? And what an ambassador for the country. There won’t be a world leader who wouldn’t appreciate a State Dinner on board.

Our Government does not seem able to look at social costs and benefits, to look at the wider value of what it does. Given that it uses other people’s money it should. Another much more important example is the inability to value the wider social benefit of post offices to their community – urban as well as rural – when considering how much of the network to keep. In one way or another, that lost benefit will have to be provided in other ways, probably by a combination of Local Councils and the NHS, at an extra cost. A Minister recently commented that the decision on the future of the Post Office Card Account, used for receiving benefits and pensions, would solely be determined by commercial factors. Yet if it is taken away from post Offices up to another 3,000 may have to close.

And yet another example which has prompted this post: Citizen’s Advice Bureaux across the country perform a valuable service for people needing help. (I write as a trustee of a local CAB). Part of their funding comes from legal aid as they help people particularly with debt and welfare issues. The cost of criminal legal aid has gone up so much recently that other legal aid has had to be cut back. This has partly been achieved by a complex formula which saves up to 9 months cash flow and therefore hurts the providers of legal advice by that much.

In addition the Government plans to have contracts with groups covering large geographical areas which can cover at least three areas of law, and appear to accept lowest cost bids. Two examples show the problems with this: in Gateshead, the contract was awarded to a group that has got into financial problems; in Hull, the contract was awarded to a for profit organisation and the loss of revenue for the local CAB means it may have to close, seriously disadvantaging local users.

It is probably too late for policy to be changed, although the effect of withdrawing funds and increasing administration for the CAB does not comply with the Government’s announced policy on helping not hindering the Third Sector. But the bidding process needs to take account of any previous record of successful service provision and the importance of stability of service as well as absolute cost. The key is “value” rather than “lowest cost”.

Obama hype

You may have heard that there has been a US presidential election and a Senator Obama has won. I think:

a) the UK media, especially the BBC, over-reacted. I wonder just how much their coverage cost? I wonder if they work in "Ross" units; I would guess the coverage cost many Rosses. And it needn't have done. They were also too pro Obama in their coverage and analysis. A lovely excerpt where Dimbelby could not cope with this being pointed out is in this link

b) this was the right result. McCain showed his class in his concession speech. But his choice of Sarah Palin was a disaster. And Obama has shown inspirational qualities, and can reposition America.

c) I am worried about the hype. Could he be another vacuous flake like Tony Blair? I don't think so, but expectations are probably too great and therefore disappointment could follow. A lot will depend on his choice of advisors and key aides. And we must remember he is not a character in a TV series who thanks to the writers can always show good judgement, but a (relatively) normal human being.

d) Voter turnout at 64% was larger than usual, 140m+ was a record, people queued for hours. Yet Obama only got 52% of the popular vote. This doesn't seem to me to suggest a revolution in America's thinking. Don't get me wrong: I think Obama is very good news. But clearly he also enthused a lot of people to vote against him.