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.
Tuesday, 25 November 2008
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.
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”.
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.
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.
Sunday, 26 October 2008
The Pain in Spain
Just back from one of the Costas.
Where in Andalusia alone there are meant to be 1.2m unsold flats, with another 1m+ in construction. That’s a lot of flats. The Coast of Spain is a poster child for excess development. But talking to people, the economic situation and the general level of confidence seems no where near as bad as the UK. So why does Gordon Brown persist in saying the UK is better positioned to handle the economic situation than other countries?
First, I suppose he daren’t admit the truth. Second, and in some ways even more worryingly, he may believe his own hype. But looking at Spain as an example: their banks are not in such a mess because their Central Bank was responsible for stability and imposed sensible balance sheet constraints. Consequently, households are not as indebted (Household debt as % of disposable income:110% vs 174% in the UK). And their Government debt is also less.
As Brown was saying how well the UK is positioned, sterling’s exchange rate against the dollar especially, but also all other major currencies, fell sharply. There is no better indicator of the rest of the world’s view than this.
I overheard someone say yesterday – this all started in the States, why aren’t they doing as badly? This shows the UK Government has done a good job in spinning the line that it’s a global problem. But the exchange rate shows that the UK’s actions over the last few years and very recently have made it worse here:
- Poor structure of banking regulation;
- Excessive debt both household and Government;
- Delayed reaction in terms of cutting interest rates and providing bank liquidity.
You’ve got to be positive; exchange rates are volatile, and there is more than one reason for the dollar’s rise. And a decline in sterling should help the economy, at the cost of more inflation. But Brown’s errors of judgement are slowly being exposed.
Where in Andalusia alone there are meant to be 1.2m unsold flats, with another 1m+ in construction. That’s a lot of flats. The Coast of Spain is a poster child for excess development. But talking to people, the economic situation and the general level of confidence seems no where near as bad as the UK. So why does Gordon Brown persist in saying the UK is better positioned to handle the economic situation than other countries?
First, I suppose he daren’t admit the truth. Second, and in some ways even more worryingly, he may believe his own hype. But looking at Spain as an example: their banks are not in such a mess because their Central Bank was responsible for stability and imposed sensible balance sheet constraints. Consequently, households are not as indebted (Household debt as % of disposable income:110% vs 174% in the UK). And their Government debt is also less.
As Brown was saying how well the UK is positioned, sterling’s exchange rate against the dollar especially, but also all other major currencies, fell sharply. There is no better indicator of the rest of the world’s view than this.
I overheard someone say yesterday – this all started in the States, why aren’t they doing as badly? This shows the UK Government has done a good job in spinning the line that it’s a global problem. But the exchange rate shows that the UK’s actions over the last few years and very recently have made it worse here:
- Poor structure of banking regulation;
- Excessive debt both household and Government;
- Delayed reaction in terms of cutting interest rates and providing bank liquidity.
You’ve got to be positive; exchange rates are volatile, and there is more than one reason for the dollar’s rise. And a decline in sterling should help the economy, at the cost of more inflation. But Brown’s errors of judgement are slowly being exposed.
Friday, 24 October 2008
My friend's enemy is my enemy
George Osborne has got into a mess, and he has damaged his party as well.
In his favour, his father sells good wallpaper. Also:
- The only detailed analysis I have seen comparing his statement with Nat Rothschild’s suggested Osborne was broadly in the right, and that Rothschild had had to amend his earlier insinuations: the discussions were initiated by Rothschild. I suspect Osborne went along with it out of politeness and an understandable curiosity to see a mega yacht.
- Mandelson’s involvement seems a lot murkier and so far is being swept under the carpet.
However: politicians have to be lucky. And:
- Getting out of his depth in this way has allowed the heat to be taken off Mandelson and has provided evidence for the theory that “they are all as bad as each other”.
- He was not having a good “credit crunch” He has not provided any serious ideas or comments since initially not knowing what to do about Northern Rock. Keeping quiet and letting Labour mess it up is a reasonable strategy for a bit – but not if you don’t keep quiet!
So he should probably go, however unfair, although possibly to another role. This would let someone credible like Clark or Davis come back – or Hague? The trouble is it would be a Labour scalp but if done, it’s best done soon as part of a reshuffle. Then the focus can get back to Mandelson's behaviour.
And hopefully it will prompt the Tories to take a serious look at their money raising activities.
In his favour, his father sells good wallpaper. Also:
- The only detailed analysis I have seen comparing his statement with Nat Rothschild’s suggested Osborne was broadly in the right, and that Rothschild had had to amend his earlier insinuations: the discussions were initiated by Rothschild. I suspect Osborne went along with it out of politeness and an understandable curiosity to see a mega yacht.
- Mandelson’s involvement seems a lot murkier and so far is being swept under the carpet.
However: politicians have to be lucky. And:
- Getting out of his depth in this way has allowed the heat to be taken off Mandelson and has provided evidence for the theory that “they are all as bad as each other”.
- He was not having a good “credit crunch” He has not provided any serious ideas or comments since initially not knowing what to do about Northern Rock. Keeping quiet and letting Labour mess it up is a reasonable strategy for a bit – but not if you don’t keep quiet!
So he should probably go, however unfair, although possibly to another role. This would let someone credible like Clark or Davis come back – or Hague? The trouble is it would be a Labour scalp but if done, it’s best done soon as part of a reshuffle. Then the focus can get back to Mandelson's behaviour.
And hopefully it will prompt the Tories to take a serious look at their money raising activities.
Sunday, 12 October 2008
Life in Venice
I've just been in Venice, at a conference of stockbrokers and investment managers. As you do, when financial markets are collapsing. As one speaker said, where else would you go but a sinking city?It was of course all arranged when times were good. And in many ways it was better for them to be away rather than at a desk getting despondent. There were a lot of good speakers: overall, the mood was surprisingly optimistic about the world economy especially taking a long view. My sense is that we are starting to see an end of share market declines (interestingly one of the speakers had predicted in January that there would be a bear market in 2008 with a maximum low at 3.30 on 14 October):
- The current selling is by people having to sell to get cash: equities are the easiest thing to sell. Plus some are starting to panic. This will eventually stop. Those who need cash or who panic will have sold all they can.
- The problems are starting to be understood, Governments are moving from talking and pontificating to actually doing something.
- Lastly, Asian growth could still be strong.
The short term problems aren't share markets - it doesn't really matter if they fall for a bit. It's that the banks are in a mess, by having lent too much. And this stops money moving.
An accounting joke from the conference: Banks' balance sheets have two sides, liabilities on the left and assets on the right. The trouble with banks is that on the left, there's nothing right, and on the right, there's nothing left.
Oh, how we laughed.
An accounting joke is very suitable for Venice. Venice's main claim to fame is that it is the birthplace of double entry bookkeeping. Some people go on about the mercantile empire, the exploration, the Carnival, the romaticism and perhaps most of all the timeless beauty. But to be the foundation of accounting: now there's a real legacy.
A scary thought
Interesting comment in the Sunday Times today by Lord Owen concerning the "mood music" growing about an Isreali strike on Iran.
It's also clear some Republicans are getting very concerned that Obama will win the election. Previously a crisis would tend to support voices of experience, the sitting administration, perhaps even the more experienced candidate. But Obama has done well out of the financial crisis.
It couldn't be could it that voices in the current administration want to create a geopolitical crisis so that McCain's foreign policy experience would come through? (And remember limited wars tend to get economies moving again.) A serious middle east escalation on top of the current financial situation would be really depressing but somehow I wouldn't put it past some just to stop Obama winning.
It's also clear some Republicans are getting very concerned that Obama will win the election. Previously a crisis would tend to support voices of experience, the sitting administration, perhaps even the more experienced candidate. But Obama has done well out of the financial crisis.
It couldn't be could it that voices in the current administration want to create a geopolitical crisis so that McCain's foreign policy experience would come through? (And remember limited wars tend to get economies moving again.) A serious middle east escalation on top of the current financial situation would be really depressing but somehow I wouldn't put it past some just to stop Obama winning.
A 21st Century Viking Raid
When the story of local Councils being big losers from depositing money with Icesave, the failed Icelandic bank, I felt the inevitability of Northumberland County Council being involved. And sure enough it was - not the biggest loser, but in the top 5, with £23m. £23m!
This is a Council with a substantial deficit bequeathed by the old Labour and Council leadership, with the predicted savings from having a unitary council unliklely to materialise. You would have hoped the new leadership would have wanted to review the figures and assets. Its been common knowledge and talk that Icelandic banks were seriously overstretched and the leadership has had 4 months to do something about it.
I'm sure the excuses will come; interest rates were good; the bank was FSA approved; other Councils lost money as well. But in the end I guess its simple incompetence. Its not their money; they just don't care. I bet no-one takes responsibility for this potential loss - that I think will be key to whether or not the Lib Dems are serious about Government.
Vince Cable sounds like a serious financial leader - although a close comparison of his words suggests he's a bit flaky - but will his party here in Northumberland accept responsibility for this error?
This is a Council with a substantial deficit bequeathed by the old Labour and Council leadership, with the predicted savings from having a unitary council unliklely to materialise. You would have hoped the new leadership would have wanted to review the figures and assets. Its been common knowledge and talk that Icelandic banks were seriously overstretched and the leadership has had 4 months to do something about it.
I'm sure the excuses will come; interest rates were good; the bank was FSA approved; other Councils lost money as well. But in the end I guess its simple incompetence. Its not their money; they just don't care. I bet no-one takes responsibility for this potential loss - that I think will be key to whether or not the Lib Dems are serious about Government.
Vince Cable sounds like a serious financial leader - although a close comparison of his words suggests he's a bit flaky - but will his party here in Northumberland accept responsibility for this error?
Monday, 22 September 2008
A Random Walk Off Wall St
I remember on “Black Monday” in October 1987 (when share prices fell by about 25% in a single day - puts the recent falls to shame) I was in Dusseldorf trying to agree a deal. As I walked around I saw screens in bank windows showing the price falls and feeling very out of touch; we had good meetings but the changed world made the deal irrelevant.
I felt just the same on Wednesday, the day after AIG was saved and Lloyds agreed to buy HBOS. I was in Newcastle catching odd glimpses into what was happening and feeling that what I was doing was irrelevant.
The positive spin from 1987 is that of course things recovered, new opportunities arose: in due course they will here as well.
The title comes from the book A Random Walk Down Wall St. It suggests share prices move like a random walk (aka a drunkards walk). In other words (and very simplistically), it is not possible to beat the market except by chance and that if you must invest you should get a representative mix of shares and just hold on. Fortunately for the financial industry, most private investors don’t believe this and waste their money trying to do better.
A quote from another book, The Go-Go Years , about the collapse of confidence in Wall St in the late 1960s shows little has changed and summarises what’s gone wrong in the past few years:
"..in America - with its deeply imprinted business ethic - no inherent stabilizer, moral or practical, is sufficiently strong .. to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short term money than maintain long term order and sanity by profiting less. A former high SEC official, talking to me in 1969.., defended the SEC's relative passivity by describing its rightful function as that of being "an arbiter between powerful industry groups pulling in different directions".
Sounds familiar.
I felt just the same on Wednesday, the day after AIG was saved and Lloyds agreed to buy HBOS. I was in Newcastle catching odd glimpses into what was happening and feeling that what I was doing was irrelevant.
The positive spin from 1987 is that of course things recovered, new opportunities arose: in due course they will here as well.
The title comes from the book A Random Walk Down Wall St. It suggests share prices move like a random walk (aka a drunkards walk). In other words (and very simplistically), it is not possible to beat the market except by chance and that if you must invest you should get a representative mix of shares and just hold on. Fortunately for the financial industry, most private investors don’t believe this and waste their money trying to do better.
A quote from another book, The Go-Go Years , about the collapse of confidence in Wall St in the late 1960s shows little has changed and summarises what’s gone wrong in the past few years:
"..in America - with its deeply imprinted business ethic - no inherent stabilizer, moral or practical, is sufficiently strong .. to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short term money than maintain long term order and sanity by profiting less. A former high SEC official, talking to me in 1969.., defended the SEC's relative passivity by describing its rightful function as that of being "an arbiter between powerful industry groups pulling in different directions".
Sounds familiar.
Saturday, 20 September 2008
Finite Confundus, JK
Its shattering when someone you trust implicitly lets you down, does something so bad that you feel cast adrift.
I have been a Harry Potter fan for over 10 years since East Anglain Troy first recommended them. As well as enjoying the books I have admired the way JK Rowling has handled herself with the contrasting pressures of being a hard pressed single Mum to a very successful financial and personal life.
So the news today that she has given the Labour Party £1m, specifically endorsing Gordon Brown and criticising the Conservative's plans to improve the UK's broken social fabric, is hard to bear.
To be fair, rich sheltered celebrities are usually a very bad indicator of good policies. It's also probably good for the Conservatives that Labour keep Gordon Brown as Prime Minister, so any support for him is helpful. But it's such a shame that the Conservatives' long term plans to rebuild a stable society are traduced by JK as not supporting single parents, who of course do deserve serious support. (And who are not actually being helped by Labour).
Hence the title, drawn from a list of spells: it must be that Brown has put a confundus spell on her: Finite Confundus!
A parody on Today today suggested Brown as Voldemort - that is perhaps taking it too far. Pettigrew, maybe.
I have been a Harry Potter fan for over 10 years since East Anglain Troy first recommended them. As well as enjoying the books I have admired the way JK Rowling has handled herself with the contrasting pressures of being a hard pressed single Mum to a very successful financial and personal life.
So the news today that she has given the Labour Party £1m, specifically endorsing Gordon Brown and criticising the Conservative's plans to improve the UK's broken social fabric, is hard to bear.
To be fair, rich sheltered celebrities are usually a very bad indicator of good policies. It's also probably good for the Conservatives that Labour keep Gordon Brown as Prime Minister, so any support for him is helpful. But it's such a shame that the Conservatives' long term plans to rebuild a stable society are traduced by JK as not supporting single parents, who of course do deserve serious support. (And who are not actually being helped by Labour).
Hence the title, drawn from a list of spells: it must be that Brown has put a confundus spell on her: Finite Confundus!
A parody on Today today suggested Brown as Voldemort - that is perhaps taking it too far. Pettigrew, maybe.
Thursday, 18 September 2008
Caught Short
Apologies for another long blog on financial markets.
Its become fashionable to blame "short sellers" for share price falls. They have become a new evil.
I'm not sure why: if I want to buy a share I need someone to sell it. Short sellers are therefore very useful in making markets work. If there are as many buyers as sellers, then they can't force prices down.
It's as sensible to blame the rest of us for not buying shares as it is to blame those who sell.
(This is a bit simplistic: a short seller makes money from selling shares he doesn't have and buying them back later when the price is lower. Three things are needed for this tactic to make money:
- as above, there aren't enough buyers
- people who already own the shares (in most cases the people who manage our pensions) lend them to the short sellers so they can deliver them to get paid. Yes, the people who own shares facilitate people wanting prices to go down)
- in the long term, the company has to be overvalued: in fact, both the short seller and the people who didn't buy have made the right decision. And surely should not be criticised. There is one exception: when false rumours are spread. I am sure this happens occasionally. I'm also sure the impact is exaggerated because most people know when something is false, and the amounts of short sales just aren't enough to make a big difference. But when it does happen its illegal although almost impossible to prove.
So the conclusion above mostly remains: sharp price falls are the result of people not buying, not short sellers. And most analytical work has shown that if short selling is prevented it makes share prices more not less volatile.)
Post script: Since writing the above, the regulator (the FSA) has just announced a ban on new short selling; I haven't seen the detail but this has me more worried about markets than anything I've seen so far. It suggests an attempt at market manipulation, probably politically driven, which will make the eventual resolution of problems worse and longer than it need have been.
On a related subject, Antoine Kaletsky in the Times today suggests that the current action by the regulators may not be enough and that banks may have to be nationalised. This did of course happen in the Scandanavian countries in the 1990s. It mostly worked well: shareholders and managers lost out, depositiors, borrowers and tax payers didn't, and it allowed the banks to be restructured, the bad stuff to be gradually worked out and the normal business to be sold back into the private sector. If this happens, don't panic. It would be part of the solution.
Its become fashionable to blame "short sellers" for share price falls. They have become a new evil.
I'm not sure why: if I want to buy a share I need someone to sell it. Short sellers are therefore very useful in making markets work. If there are as many buyers as sellers, then they can't force prices down.
It's as sensible to blame the rest of us for not buying shares as it is to blame those who sell.
(This is a bit simplistic: a short seller makes money from selling shares he doesn't have and buying them back later when the price is lower. Three things are needed for this tactic to make money:
- as above, there aren't enough buyers
- people who already own the shares (in most cases the people who manage our pensions) lend them to the short sellers so they can deliver them to get paid. Yes, the people who own shares facilitate people wanting prices to go down)
- in the long term, the company has to be overvalued: in fact, both the short seller and the people who didn't buy have made the right decision. And surely should not be criticised. There is one exception: when false rumours are spread. I am sure this happens occasionally. I'm also sure the impact is exaggerated because most people know when something is false, and the amounts of short sales just aren't enough to make a big difference. But when it does happen its illegal although almost impossible to prove.
So the conclusion above mostly remains: sharp price falls are the result of people not buying, not short sellers. And most analytical work has shown that if short selling is prevented it makes share prices more not less volatile.)
Post script: Since writing the above, the regulator (the FSA) has just announced a ban on new short selling; I haven't seen the detail but this has me more worried about markets than anything I've seen so far. It suggests an attempt at market manipulation, probably politically driven, which will make the eventual resolution of problems worse and longer than it need have been.
On a related subject, Antoine Kaletsky in the Times today suggests that the current action by the regulators may not be enough and that banks may have to be nationalised. This did of course happen in the Scandanavian countries in the 1990s. It mostly worked well: shareholders and managers lost out, depositiors, borrowers and tax payers didn't, and it allowed the banks to be restructured, the bad stuff to be gradually worked out and the normal business to be sold back into the private sector. If this happens, don't panic. It would be part of the solution.
Tuesday, 16 September 2008
City Life
I stopped working in a City dealing room in mid-2002; until this week I hadn't really missed it.
But the gradual yet persistent bursting of over-priced asset bubbles is fascinating to watch, and would probably be even more fascinating from the inside. A doubling and halving of the price of a major company (HBOS) more than once in an hour is a rare event. Of course it was silly, it bore no relation to underlying values, but it reflected extreme uncertainity. The old phrase 
no gain without pain is true in this regard: things can only get better once asset prices are low enough for people to have confidence to regroup. I suspect there is a long way to go but at least the process is underway.
no gain without pain is true in this regard: things can only get better once asset prices are low enough for people to have confidence to regroup. I suspect there is a long way to go but at least the process is underway.I'm pleased one bank, Lehman, has been allowed to go under:
- Lax Government regulation and central bank policy was a major cause of the problems. But poor risk and business management by the major banks was just as important. So it’s good to see shareholders and to a lesser extent management lose;- It shows Governments will not always bail out failing institutions, which will encourage more careful behaviour;
- The financial industry needs to understand credit risk: it needs to really understand what happens as all the interconnected deals unwind. A major trading bank has not failed for decades and no-one knows how it will all be dealt with. This failure let us see how things unwind, it will identify problems and let them be sorted them out. This transparency will be help build confidence.
The US has also decided to save some institutions – but in those cases it has also ensured top management changes and ensured a major loss for shareholders. And in addition, in all cases it has acted quickly; their equivalent of the Chancellor has taken a leading role and its Central Bank has been quick to cut interest rates (reflecting the risk of recession) and to add liquidity to ease day to day trading between banks.
I think this contrasts with the UK. The Bank of England was slow to put in place a scheme to help add liquidity to help banks trade with each other – it was months after the European Central Bank and the Fed in the US. And their scheme expires at the end of September. Yet at the start of this week – when Lehman had failed, when the biggest insurance company in the world was in deep trouble - they had not announced a replacement or a renewal of the scheme. No wonder questions about HBOS’s liquidity were raised. The Bank has now extended the scheme till January – Stable doors being shut?
And then interest rates in the UK have not been cut because of (valid) concerns over inflation. But the Bank of England has been constrained by two things:
- the massive increase in UK Government borrowing over the last 10 years; and
- the way the Bank of England’s monetary policy committee was established, with the responsibility to look at inflation only. In the US the Fed has a dual responsibility, to manage inflation while maintaining a stable economy. The UK approach worked while things were benign and is in danger of failing now.
And another time when the authorities were slow to act: Northern Rock. Certainly, Northern Rock’s disregard for risk management as it expanded wildly was its own fault but once the problems were exposed the Government was slow to act – it was always behind the curve and didn’t finally nationalise it for almost 6 months. A little slower than the US in the same position. One reason was the complex system of tripartite responsibilities for regulation set up by Gordon Brown at the start of his Chancellorship. Again, it worked when it didn’t have to, but fell short when it was needed.
I agree the problems were not initiated by this Government. But the UK’s position has been made worse because the Government coasted on a global asset price boom while borrowing excessively and establishing inadequate structures, with the resulting slow responses once problems emerged. It’s worrying our direction is in the hands of a Government that is so internally focussed and has laid such a poor base for recovery. I am sure the Conservatives are right to let Labour implode – but I also hope they are giving serious thought to what they would do if they do form a Government in terms of:
- Financial regulatory structure;
- Spending control; and perhaps most importantly
- Tax reform
Saturday, 13 September 2008
A botanical weekend
It started with a visit to an exhibition of lovely paintings set in a lovely garden. The only downside was the return of the rain (it's a weekend - what do you expect: as I noted a couple of months ago, weather really is worse at weekends) but that simply drove everyone into the old milking shed (?) where the paintings were all hanging. It was a good mixture of art and drink. You can have too much of either, but the mixture helps.
I say it started with the exhibition - it really started after a croquet training session. People were preparing Bamburgh Pavilion for the annual show, and suggested I enter. I got a list of the prizes to 
see if I could produce anything to enter, and then spent Saturday morning after the party (sorry exhibition) seeing if I had anything in the garden to enter. I had some potatoes - could I get 3 white round ones? or coloured kidney ones? And some tomatoes (4 required) and some peas (4 pods, although they weren't in good shape). And lastly a single rose: fortunately there was a prize for a single rose as I only had one undamaged one left in the garden.
I would have felt prouder had they not been the only entrant in that category. Instead I felt anger that my Tomatoes - which I thought were very cute - hadn't been up to scratch. But as the notice of the show said: THE JUDGES DECISION IS FINAL. I suspect its been questioned over the years.
I say it started with the exhibition - it really started after a croquet training session. People were preparing Bamburgh Pavilion for the annual show, and suggested I enter. I got a list of the prizes to 
see if I could produce anything to enter, and then spent Saturday morning after the party (sorry exhibition) seeing if I had anything in the garden to enter. I had some potatoes - could I get 3 white round ones? or coloured kidney ones? And some tomatoes (4 required) and some peas (4 pods, although they weren't in good shape). And lastly a single rose: fortunately there was a prize for a single rose as I only had one undamaged one left in the garden. Some of the other prizes obviously required a lot more preparation: Lady's spray and Gent's buttonhole; The Best Pet with Waggiest Tale; Dahlias for effect. I left my exhibits; they didn't look too bad; but I don't think I could watch the judges. So I went to play golf. And got a text at the end: my Peas had won!!!
I would have felt prouder had they not been the only entrant in that category. Instead I felt anger that my Tomatoes - which I thought were very cute - hadn't been up to scratch. But as the notice of the show said: THE JUDGES DECISION IS FINAL. I suspect its been questioned over the years.Anyway, I left feeling committed to entering again next year. And reflecting on all the unseen work people do to keep alive this sort of social fabric.
At a tangent, it made me think about Post Office closures. They arise because the Government has failed to properly cost the hidden benefit the network brings to society, to many disadvantaged and older people in both rural and urban areas. As a result, the network is smaller, the social fabric tears a bit and on-going costs of care and support will have to be higher.
Essex County Council (Conservative controlled, by the way) has just announced it is reopening a Post Office; this sort of initiative is valuable in keeping the network alive. Northumberland's Council is silent on the issue (apart from token protests about how the Post Office carried out its closure programme). Bitter, moi?
Tuesday, 9 September 2008
Why don't I like Sarah Palin?
I ought to. She is direct. She is transparent. She is hot.
But I don't. She strikes me as false in the same way Barack Obama doesn't.
I don't think its because I don't like the powerful woman thing. It doesn't usually scare me if women are powerful (I had a poster of Maragret Thatcher with a cane on my door at university, although admittedly I think it was a mock-up).
Some of it is her children's names. But I think most of all it is her certainty - an unimaginative certainty, which makes me think she is qualified to shoot moose and perhaps even to clean up Alaskan corruption. but not to handle the problems that life would throw at her as a VP. Life isn't black and white. Principles take you a long way. But the ability to understand and empathise with all of the issues is needed to get all of the way.
I'd also worry that her certainty is a short step away from an arrogant assumption of rightness, with the end then justifying any means. We may see some of that come out of the inevitable digging reporters will now be doing.
(To be fair, of course, she probably wouldn't like me).
But I don't. She strikes me as false in the same way Barack Obama doesn't.
I don't think its because I don't like the powerful woman thing. It doesn't usually scare me if women are powerful (I had a poster of Maragret Thatcher with a cane on my door at university, although admittedly I think it was a mock-up).
Some of it is her children's names. But I think most of all it is her certainty - an unimaginative certainty, which makes me think she is qualified to shoot moose and perhaps even to clean up Alaskan corruption. but not to handle the problems that life would throw at her as a VP. Life isn't black and white. Principles take you a long way. But the ability to understand and empathise with all of the issues is needed to get all of the way.
I'd also worry that her certainty is a short step away from an arrogant assumption of rightness, with the end then justifying any means. We may see some of that come out of the inevitable digging reporters will now be doing.
(To be fair, of course, she probably wouldn't like me).
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