21 November 2008

November 21, 2008

Incumbent politicians are scared.  They should be. 

Why did Prime Ministers and Presidents gather in the States last weekend?   To discuss the plight of the world economy, or to provide photo-opportunities for the media?   Al­most cer­tain­ly, the latter.  Recent elections had indicated an anti-incumbency bias.  There was thought to be an urgent need to refocus images.  Leaders had to be presented as competent and masterful; their delibera­tions in­sight­ful, their recommendations therapeutic!   


They have much for which to answer.

In part, the ploy worked.  Though the news relating to the economy continued to worsen and though the securities mar­kets steepened their decline, the poll ratings of incumbent governments rose a little.  How curious!   What a tri­umph of hope over experience!  


They were asleep on their watch.

Was it so easily forgotten that the politicians seen milling around on White House lawns were those who, when the warn­ing bells were ringing, housing finance im­plod­ing, business sentiment collaps­ing, had ex­pressed con­fi­dence in their delinquent central bank­ers!   Was there no memory of these politicians approving interest rate rises as activity stalled; of their ratifying decisions to set the eli­mination of inflation ahead of the pre­ven­tion of de­pression?  


The alternates, though, are not well liked.

Love may be blind but political allegiance isn’t.  Voters aren’t fooled.  They’re as cynical as ever.  They know that their leaders didn’t spot the dangers in the past and can’t reasonably be expected to cope with them in the future.  But the alternates are not obviously better.  Indeed, their shenani­gans in the recent past fill nobody with confidence.


Early days:  the crisis has hardly yet impacted the real economy.

More importantly, the crisis hitherto has been largely financial.  It seems not yet to have affected the general community.  The slide in stock prices is perceived to have hurt only City Slickers (no bad thing, therefore); the slippage in house prices, though more concerning, to have impacted the Buy-to-Rent brigade (excellent) rather than respectable people.  The key issue is un­em­ploy­­ment and, there, the jury is out:  lots of anxiety, but not yet much agony.


The crunch comes next year.

Will that change shortly?   Yes.  All the indications are that job losses will be climbing by 75 thou­sands a month early in the new year, 125 thousands a month towards the end.  Housing, mean­while, will be a bloodbath:  turn­over slumping, new starts collapsing, and negative equity soaring.  The result will be a level of personal bankruptcy not seen since the thirties.


For politicians and bankers alike.

Next year, therefore, incumbent politicians will become profoundly unpopular again.  They’ll seek to divert the blame, of course; they’ll look for scapegoats.  Who’ll be picked?   Bankers are the obvious choice.  Though treated with kid gloves up till now, they’re likely to be thrown to the wolves next year. 


The City’s dislike of the second . . .

And who will play the part of the wolves?   Investors, of course.  The City is furious.  Bankers are held in contempt for their manifest business incompetence, but what is much worse is their perceived betrayal of shareholders’ rights!  


. . . is even greater than that of the first.

What does Lloyds’ board think it’s doing in going ahead with the takeover of a (probably worthless) Scottish bank?   Cui bono?   Not Lloyds’ shareholders!   So why do it?   To appease the Scots in No. 10 and No. 11.  Does the board regard itself as answerable to them?   Does it suppose it’s operating a French bank?   Shareholders being the mere suppliers of variable coupon capital?


Boards will be disciplined.

And what of Barclays?   How can its attempt to raise extortionately expensive capital from the Mid­dle East be justified?   Did it seek the approval of its owners?   Does it understand the distinction be­tween agent and principal?   Does it suppose that, in the master-servant relationship, it is the master?


Principles re-established.

There has to be a reckoning.  With or without the support of government, it’s going to be necessary to cleanse the stables.  The river needs to be diverted to wash away accumulated financial debris on the one hand, in­tel­lectual debility on the other. 


Pre-emption re-affirmed.

Ironically, the painful process will begin to resolve the financial crisis.  Stock markets are already very good value and will rise as soon as it looks as if the abuse is at an end.  Initially, government bonds will surge; subsequently, corporate bonds will take over the baton; finally, equities will do so. 


Pity, though, the poor DC retiree!

The problem is that those pensioners retiring on a DC scheme in the near future will have been ir­reparably im­poverished.  They’ll seek retribution.  Justifiably so.  It’s unlikely the miscreants, wher­ever they hide, will sleep easily for quite a while.



14 November 2008

November 14, 2008

With economies crashing, political incumbency is unpopular.

New Zealand held a general election last week.  As a result, Helen Clark’s Labour party was oust­ed and John Key’s National party installed.  Should “Antipodeans” be seen, therefore, as march­ing to a different political tune from “Ameri­cans”?   Did the former’s swing to the right set them apart from the latter’s drift to the left?   Of course not!   It wasn’t a question of ideology but of incumbency.


Time for a change is the rallying call.

Economies everywhere are in dire straits.  And voters everywhere, feeling insecure and scared, are angry.  Naturally, sitting governments are blamed—ac­cused of neg­li­gence in the early stages of the crisis, of incompetence in the later ones.  There is a desire to cen­sure them.  Whenever an op­por­tu­ni­ty arises, the alternate is installed.  Twed­dle­dum re­places Twed­dle­dee:  a change being deem­­ed as good as a rest; a varia­tion in therapy as good as a remission in disability.


But it’s as dangerous to be too early as too late.

There is nothing new in this.  Politicians take credit for felicitous outturns, and, as a quid pro quo, have to accept responsibility for ill-fated ones.  It’s all part of the deal.  Players understand the rules.  They know that suc­cess­ful statesman are characterised, not by intelligence or competence, but by luck—and the most important element of luck is timing.


FDR’s timing was immaculate.

The trick is to come to office after the “deterioration” has occurred, but before the “ameliora­tion” begins.  Roosevelt demonstrated the technique brilliantly.  Elected in 1932—very close to the low point of the economics downturn—he remained unassailably popular thereafter.  Though his ad­minis­tra­tion didn’t resolve any of society’s material problems, it was overwhelmingly pre­ferred to the al­ter­nates.  Will those of Barack Obama in the States and John Key in New Zealand be as for­tu­nate?   Proba­bly not:  they’ve arrived on the scene a little too early.


Cameron’s likewise?


Cameron, though, might be spot on!   Ironically, he may come to be the new Roosevelt!   If, as seems likely, Brown defers the election until the last possible mo­ment, it’ll not be held until the economy has reached bottom.  That’ll cause the blame for disaster to be attached unshakably to the out-goers; the glory for re­covery to the in-comers.  It’ll maximise the criticism of Labour; mi­ni­mise that of the Tories.  However bad­ly the econo­­my goes after the election, it’ll seem less bad than that which went before.


Brown is going to be buried with the bankers.


One of the factors condemning Brown will be his lack of judgment in promoting the plan to bail out the banks.  Rightly so.  It’ll be said of him that he was com­pre­hensively conned by the dim­wits run­ning HBOS and RBS.  If he couldn’t see through their threats and bluffs, what match would he be for genuine­ly dangerous characters—fundamentalist assassins on the one hand, federal­ist commissioners on the other?


The man’s judgment is fatally flawed.


Was it sensible of the authorities to make available to the banking addict unlimited quantities of the drug that had unbalanced his mind in the first place?   Was the public financing of the delin­quent’s anti-social habit the best way of dealing with the trouble he had caused?   Wouldn’t it have been better to wean him from dependence rather than encouraging him to re-offend?   Shouldn’t the priority have been the protection of the innocent rather than the rehabilitation of the guilty?


Legged over by amateurs!


It would be interesting to know what the electorate thought of the Treasury’s high-handed re­al­lo­ca­tion of resources.  Are voters happy that a bunch of largely unelected officials, with no refer­ence to Parliament, none to the people, took huge quantities of funds from non-banks and gave them to banks?   What justified this generosity?   Would similar aid be extended to engin­eers and lawyers, plumbers and res­taura­teurs if their behaviour proved similarly incompetent, com­parably iniquitous?  


He should have let the Scottish banks fail.


Last week, significantly, things began to unravel.  The BoE cut interest rates sharply, but the com­mercial bankers, believing themselves still to be Masters of the Universe, proved reluctant to pass on the benefit to borrowers.  They thought the cheaper finance should be used wholly to restore their profits and strength­en their balance sheets.  They saw no need to help the rest of society:  un­employment and penury elsewhere in the economy were prices worth paying to preserve their privileged life style!


Instead, he’ll accompanied them to their doom.


Marie Antoinette had come again!   Would the bankers who replicated her insensitivity end the same way as her?   Would they be dragged uncomprehendingly to the gallows?   Would they be accompanied on the final journey by Gordon Brown?




7 November 2008

November 7, 2008

It’s the economy, stupid.

The cynical misanthropy of political columnists is only skin-deep:  beneath the surface lurks naïve philanthropy.   The phenomenon was demonstrated last week.  After Barack Oba­ma’s vic­tory in the US Presidential elections, superlatives dripped from the pens of Editorial writers.  Tec­tonic shifts were discerned in the geology of society:  America was presented as a model of democ­ratic prin­ci­ple on the one hand, of racial harmony on the other.


Bush was a foreign policy degenerate . . . 

The reality may have been slightly more prosaic; more to do with economics than ethics.  Pse­pho­lo­gy’s iron rule states that an electorate which perceives itself to be suffering a deterioration in liv­ing standards will blame political incumbents and seek change as soon as possible.  That being the case, Oba­ma’s success may have been less the consequence of high-flown principle than low-flown materialism.


. . . but it was his economics bad luck that did for him!

It was irrelevant that the fault was not Bush’s, let alone McCain’s.  Electorates want their lead­ers to be lucky rather than competent.  Republicans were no longer to be tolerated because they seemed ac­cident prone.  It was time to install the alternates.  The surprise was, not that the Democrats won, but that their victory, given the extent of the economics debility, was so modest.


It’ll do for other incumbents similarly.

Administrations elsewhere in the world ought to be quaking in their shoes.  Almost all of them will be dis­miss­ed as soon as voters’ opinions are sought.  Foreign policy won’t save them, nor social ex­perimentation.  The way to an electorate’s heart is though its pocket book.  It always has been thus; it al­ways will be.


Glenrothes notwithstanding.

Did the Glenrothes result in Scotland conform to the rule?   Probably so.  It depends on who were seen as in­cum­bents and who as alternates:  Salmond’s boys in Edinburgh, or Brown’s in West­min­ster?   A couple of months ago, when the voter perceived his economics security to be as­sured, ro­mantic­ism was al­lowed a free rein.  Today, when poverty lours, the Scottish financial sec­tor having col­lapsed in a heap, hard-nosed calcu­la­tion has gained the upper hand.  Fife’s voters de­mand that Eng­lish taxpayers bail them out.  Salmond couldn’t enforce the subsidy; Brown could.  QED.


Official interest rates are headed for zero.


The good news on the economics front was that the Bank of England had finally woken up to the se­verity of the economics threat.  Last week, interest rates were cut by 150 basis points.  Would it be enough to prevent recession turning into depression?   Nobody knew.  But what was certain was that lower was better than higher; sooner better than later. 


That might prevent depression.

What was essential was that nominal borrowing costs be reduced to moderate levels before senti­ment became too pessimistic, and inflation too negative.  The problem was that these phenomena tend­ed to be self-reinforcing.  As activity softened and unemployment rose, the willingness of the consumer to buy was eroded, that of the company to produce curtailed.  Private sector pay set­tle­ments moderated and that, in the context of collapsing commodity prices, caused inflation to fall. 


But not if bankers, Lords of Mordor, can prevent it!


Sadly, the banks looked set to add to the economy’s problems.  They demonstrated extreme re­luc­tance to pass on to customers the benefit of lower borrowing costs.  Accordingly, while the cus­to­mer’s ca­pacity to pay would fall sharply, the bills proposed by the banks would rise sig­ni­ficantly.  It was the surge in the real cost of credit at the beginning of the thirties that was in­stru­men­tal in initiating depression then.  It may be a similar phenomenon that does so again now.


Paulson et al have a lot for which to answer.


And who’s to gain­say the Masters of the Universe?   They’ve pulled the wool so comprehensively over the eyes of the authorities (and media) that they are ef­fec­tively a law into them­selves.  In pri­vate ownership, these bankers were ob­jec­tion­able and obtuse, but some­what susceptible to the will of their shareholders; in public ownership, they are no less objectionable, no less obtuse, but wholly be­­yond the reach of persuasion.  Like Scot­tish voters, they think the rest of society should be im­pov­erished for their benefit.


Don’t let the pensioners get at them!


Attention has not yet turned to the plight of DC pensions.  But, when it does, there’ll be much wail­ing and tearing of hair.   Those coming up to retirement in the near future will find their prospective living stan­dards devastated.  And who’ll be blamed?   Nearly everybody.  But those who’ll be most deserving of opprobrium are central bankers, commercial bankers and government minis­ters.  The feature of society attracting the greatest contempt?   Easy:  the mollycoddled public sector worker luxuriating in the unconscionable generosity of DB pension provision!    



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