Thursday 30 September 2010


There seems to be a strong consensus that the economic problems are due to bankers. A recent poll showed this, Vince Cable showed his economic competence by conflating bankers spivs and gamblers crippling the British economy, Finance Ministers across the world are trying to restrict bonuses to financiers (actually, apart from in the UK they aren’t, but they are talking about it).
This worries me; not because the bankers will be upset – they will cope particularly as they will continue to earn lots of money, but because misunderstanding the cause of the problems makes it more likely we will do the wrong things to so solve them.

The real problem was that we all borrowed too much – individuals, banks and especially governments. We spent money we didn’t have causing house prices in particular – but all assets as well – to artificially rise. This was enabled because governments encouraged banks to gear up, to lend more, to need less capital to support their business. Governments did this because the resulting short term boom made them look good. I say Governments: not all did this; many Asian ones didn’t, not all Europeans did. Iceland was the poster boy for carelessness, but the US, the UK and Eire were not far behind.

I know the banks did some very stupid things – not all of them; for example JP Morgan and HSBC had a “good crisis”- but many lent foolishly, created products their managers didn’t understand and effectively went bankrupt; their shareholders have generally suffered as a result. But the rest of us did stupid things as well, and so did our Governments who not only encouraged the excess but also increased their own borrowings. They also did not get a decent reward for the guarantees they provided the banking system. And who voted for those Governments? Supported their public spending? We did.

If we want to know the cause of the problem: look around.

The UK's public sector deficit is because public spending got out of control. The banks were bailed out but mostly by guarantees which have lapsed; some taxpayer money was invested directly, but a small amount compared with the deficit and it is likley to be recovered at a profit. The bankers therefore played a small part in the problem and in fact there are three ways the banks and bankers are helping us get out of our economic problems:
- As they become profitable, the money we put into them becomes worth more. The state will profit from their investment;
- Banks employ a lot of people and finance and associated services remain one of our few world leading businesses which generate a lot of earnings from overseas;
- Banks and bankers pay a lot of tax.
We would miss them if they went. It’s easy to say we wouldn’t: but who would then pay the bills?

The problem we have to solve is one of excessive consumption – by ourselves but mainly by our Government. That is the problem that needs fixing. Punishing bankers for our mistakes may make us feel better but will stop them from supporting the economy.

Wednesday 29 September 2010

Ed or Dead?

It's too soon to say whether Ed Miliband's election as Labour leader is good for Labour or not.

In the short term it is good for the Tories because Labour have elected someone who was the second choice of most MPs and activists and someone who is clearly in the pockets of the trade unions. He is also inexperienced and lacks charisma. And lastly, he gives the impression of not liking people like me - middle class, slightly successful, workers (I'm not a swing voter but many people like me are). As a member of the establishment intelligensia he looks down on us: we are only fit for whatever cash he can extract from us. I talked about him with a Labour supporting friend, who thought he was sincere: but was that because she agreed with what he was saying? He strikes me as deeply insincere.

BUT... deeply insincere is another way of saying ruthless. He is clearly ruthless. And that ruthlessness may cause him to dump the unions, he may learn to look as though he likes me (and people like me), he will get experience and he may absorb character. And therefore become a successful leader. His brother has done him a big favour by moving to the back benches - it is possible he could become a really useful informal consigliere unless there is now a major family rift. So

The key to his success, however, has nothing to do with him: it is whether the economy recovers during 2013 and 2014. If it does, then the coalition will get a lot of credit and Labour's opposition to getting public finances under control will be seen as silly. If it doesn't, then Labour will have a chance to rebound by saying that the coalition damaged the recovery by cutting public expenditure growth too strongly before the private sector had started to recover.

But at least his appointment will give the coalition some breathing space as things get difficult.