Economics News : 18 Dec

December 18, 2009

The City of London has survived worse things than . . .
The “Who’s Who” of international financial centres changes exceedingly slowly. In the last forty years, the constituent cities of the Premier League—London and Geneva in Europe, Hong Kong and Singapore in Asia, New York and Chicago in the Americas—have not altered. There’ve been no promotions from junior divisions, nor demotions to them.

. . . the malice of Brown and the envy of Sarkozy.
Why this should be so is not known. There’ve been rapid changes on the general economics front, but none seems to have affected the location of centres of financial excellence. In the seventies and eighties, for instance, Japan’s industrial supremacy did little to boost Tokyo’s position; nor Germany’s engineering virtuosity in the same period anything to help Frankfurt. It was much the same story within the US. Over the years, population and GDP may have drifted westwards, but not finance. New York City today remains as unchallenged by Los Angeles as it was a century ago.

The reality is that financial centres enjoy massive inertia.
Political considerations are probably also irrelevant. The City of London was not seriously hurt by the lunacy of Harold Wilson, nor helped much by the good sense of Margaret Thatcher. Similarly, Geneva’s sometimes radical politics have not impinged on its attractiveness; nor authoritarianism on that of Hong Kong and Singapore.

Economics, politics and tax are largely irrelevant.
Law, on the other hand, is important. Its principles have to be widely understood, and its practice has to be generally consistent. Language also is a significant consideration—in the back office as much as the front one. English is currently dominant, and will probably continue to be so for a few more decades.

Law matters; and so does regulation.
Regulation is arguably the most relevant factor of all. Where it is run by mindless bureaucrats, concerned more with protecting their own reputations than the portfolios of investors, financial centres never take root; where run by only moderately incompetent amateurs, they thrive. Things operate best when the regulator knows (but not too well) those he regulates. Nowhere is it done well, but some locations contrive to be much worse than others.

The story that the City of London will shift elsewhere is a spoof.
Taxation is a minor consideration. The proposition that the City of London’s pre-eminence was borne of a low-tax regime is obvious nonsense. The idea that throngs of City folk will set up shop elsewhere in the world to avoid a 10% impost on their marginal incomes is risible.

In the short term, the constraints (institutional and psychological) are too large.
Where would they go? To New York? Possibly; but they’d not be able to do London’s business from there, not unless they were prepared to get their offices by 3.00 in the morning! To Geneva? Not in the short term; it doesn’t have the capacity to accept anything beyond a trickle of arrivals, and few Englishmen (educated in Blair’s era) would have the language skills to cope with such an environment. To the Isle of Man? In the long term, perhaps. English law and language, set in the context of sympathetic regulation, suggest that, ten years hence, it might be a viable centre; twenty years after that, an important one.

In the medium term, the Isle of Man may pose a challenge.
In the meantime, of course, London will affected by a variety of external factors. Near term, for instance, there’s to be an election. Cameron will doubtless win, but what he’ll do in office is not clear. Will he take a long-overdue axe to the public sector? Will he reject the stream of financial regulation emanating poisonously from Brussels? Will he ever say No and mean it?

What, in the interim, can we expect of Cameron?
The early indications are not good. He seems to think he can rebalance the economy by merely tinkering with it. He seems to imagine he can halt the encroachment of the monstrous Commission by appeasing it.

Is he mouse or man? Does he believe in anything?
Not so. He needs to provoke an early confrontation with both to set the tone of his administration. Sacking a million public sector workers, sending BA into bankruptcy, and refusing to pay Brussels its monies might do the trick. Such actions would grab the attention of those he needs to impress; they’d indicate that, unlike his predecessor, the new PM wasn’t a patsy. Will he deliver? Don’t hold your breath!

Markets will probably advance. But sentiment is poor.
In the meantime, markets are drifting sideways. The world economy is anaemic, but the outlook for profits is excellent. Stock price indices would probably be headed sharply higher but for anxieties about the credit environment. Investors fret that dozy central bankers might accidentally tighten money, sending economies over the precipice, and valuations likewise. The chances are we’ll be safe; but it’ll be white knuckle ride.

Economics Views : 16 Dec

December 17, 2009

Men have no need to take to crime,
when there are so many legal ways to be dishonest.

Prime Ministers, Cabinet Officials and Chairmen of Public Inquiries demonstrate the proposition.


The wheels of justice certainly grind slowly; let’s hope finely as well.
The Chilcot inquiry is beginning to get results. The questions posed to witnesses have been less than searching, the equivalent of slow half-volleys outside the off-stump, but the answers they’ve evoked have been revealing nevertheless. There’s been confirmation that the decision to go to war against Iraq was taken a couple of years before hostilities began. There’s been confirmation also that the issue of weapons of mass destruction was no more than a fig-leaf: useful, if discovered; irrelevant, if not.

The crime was committed many years ago . . .
It’s been established as well that American “planners” hadn’t considered how to conduct the occupation that would follow the invasion. Credulous and naïve, they seemed to believe that Iraqis would welcome their invaders, and rush to adopt western values. Some British advisers said they’d tried to disabuse Bush’s chums of their misapprehensions, but soon recognised their views were unwelcome and would in any case be disregarded.

. . . and the criminals haven’t yet been challenged.
Blair, though he’s not yet given evidence to the inquiry, is being painted as a monster. Quite right. In a separate television interview, he’s admitted that he was party to the decision to go to war for reasons of “regime change,” arguably because he wanted the allies to control Iraq’s oil. Amazingly, shame seems to be one of the few emotions he can’t counterfeit.

Chilcot seems to be open-minded.
What a contrast to previous inquiries! There’ve been four; but none hitherto has owned to uncovering anything untoward! Why not? Were their terms of reference set too restrictively? Or were their members selected too unfairly? It was the findings of the Hutton commission that rankled particularly. At the time, the Noble Lord’s white-wash seemed unconvincing; these days, even more so!

His predecessors may not have been.
What, ask members of the general public, is the point of organising official inquiries if they are designed more to conceal than reveal? If Prime Ministers and other malefactors can bias the terms and membership of investigations, and thereby escape censure, there’s no limit to executive wrongdoing. Cynicism about the State of the State, already substantial, seems to be justified!

Quis custodiet ipsos custodes? No hope for society if judges are biased.
Is it any wonder that more than 50% of the population doubt the need to take action to deal with climate change? Those who now stress the urgency of the situation, Blair and Brown for instance, are the very ones who were so wrong, by accident or design, in an earlier period about Iraq. They were wrong also about the economy in 2007 and about the banks in 2008. In fact, they’re a counter indicator! In future, we might do well to listen carefully to what they recommend, and do the opposite!

Economic numbers don’t make sense. They’ll be revised.
The economy, meanwhile, is a mystery. Growth is reported to be modest, but unemployment stable. Does that make sense? Is productivity plunging, or are the data wrong? Probably the latter. But which? Is output understated or employment overstated?

But markets will rise—for a while at least.
The good news is that securities indices are rising. Liquidity is easy, inflation low and profits satisfactory. Investors may be disgusted with politics and bemused by economics, but they’re content with markets. They’ve risen strongly in 2009, and are expected to continue to do so in 2010.

What’s a euro worth? Depends whether it’s Greek or German!

December 16, 2009

In order to make correct decisions in the future,
it is essential to acknowledge grievous errors in the past.

Fund managers hold this truth to be self evident; politicians, especially those in Europe, don’t.

Investors are not like politicians.
Investors tend to be a little credulous. They’ll believe what those in authority tell them until there’s good reason not to. But the other side of the coin is that their trust, once lost, is not easily restored. After disenchantment has gone beyond a critical point, they’ll be reluctant to accept anything at all.
The former learn from their mistakes; the latter don’t.
The European Currency Union illustrates the syndrome. In years gone by, investors were largely sympathetic to the claims of the Commission: monetary integration was an historical inevitability; economics and political convergence were unstoppable. Such hubris! Only Europe’s politicians and bureaucrats, untainted by experience of the real world, could have made the assertions.
Monetary Union is a case in point.
Investors were gullible perhaps, but also open-minded. They noted that the process of convergence seemed to come to a halt before it was complete. They noted, more worryingly, that divergence thereafter became the norm. Official denials of a problem merely made matters worse; encouraging the thought that the euro mightn’t survive in its current form.
The EZ’s euro is subject to the same strains now . . .
There are parallels with the attempt in the nineties to link the currency of Argentina to that of the United States. Initially, things went well; but subsequently badly. As the economies of the two countries stopped converging and started diverging, investors lost faith. Petulant claims, made by the authorities in Buenos Aires, that the peso and dollar would be locked in unity forever were ignored. Interest rate differentials widened sharply. Argentine businesses and local authorities were starved of reasonably priced credit; and their erstwhile workers rendered redundant. Life became intolerable. Finally, in the midst of political and economics crisis, the currency linkage was unceremoniously abandoned.
. . . as Argenina’s peso in an earlier decade.
Will the same pattern be followed within the EuroZone? Possibly so. Economics convergence is long over. The inflation differential between Germany and Greece, for instance, is significant and widening. Likewise GDP growth. Likewise also the balance of payments and fiscal deficits.
There’s a political dimension to the dilemma.
The authorities in Athens find themselves in a dilemma: Brussels Commissioners, acting as the ECB’s mouthpiece, demand that deflationary policies be implemented; Greece’s voters insist that they not. Who’ll triumph? People or Officials? Democracy or Authoritarianism?
For the Greek authorities, there’s no acceptable solution.
For a while, of course, politicians being politicians, there’ll be a fudge. The Government in Athens will say one thing to the people and another to the ECB. That will just make markets and investors even more suspicious; the interest rate gap will widen horribly.
To stay in the euro means economics privation.
Investors will shun Greek assets and start to inspect their legal position. Is a euro, it’ll be asked, with Greece included, the same as one with it excluded? Of course not, the man on the Clapham omnibus will say: apples in the one case; pears in the other.
To leave, humiliation.
In that case, it might be concluded, contracts denominated in euros would have been “changed” by Greece’s departure! Would they still be valid? Who’s to say? But what is certain is that lawyers would have a field day, and business confidence, especially in Europe, would be knocked.
Greece is not alone. Speculators are queueing up to attack other units.
And, once one country had succumbed, others would be deemed more vulnerable. A shadow would be cast over the whole of Eastern Europe, and perhaps over Ireland, Portugal and Spain as well. Their economics prospects would certainly be prejudiced: interest rates rising and credit availability drying up when savage spending cuts were being implemented.
A bas les aristocrats!
And the response of the people? Would they bow the knee to the foreign autocrat or man the barricades? In the past, Europe has been prone to revolution because its Governments do not pay attention to the people. Plus ça change. It may be time therefore for a new rising. And the first of the tyrants to bite the dust? The unspeakable Commissioners, of course!

Economics News : 11 Dec

December 11, 2009

Pain inflicted by Government is Inevitable;
Suffering experienced by People, Optional.

Bad never becomes good until worse happens. Yeah, yeah; enough of the Stoicism already!

The decline was ferocious; the advance has been anaemic.
The economics recovery is not going well. Although activity has risen in the last eight months, it’s done so exceedingly slowly. Momentum in the States in the third quarter was pedestrian; in Japan in the same period, it was almost non-existent.
And now it’s faltering.
What’s gone wrong? Why haven’t easy money policies implemented by central bankers during the last eighteen months worked their customary stimulative magic? Arguably, because the world’s current economics imbalances are not cyclical, but secular; the resulting debility not recessionary, but depressionary.
The parallels with the thirties are uncomfortable.
Although there’s lots of extra liquidity around, banks are unwilling to lend, and non-bankers to borrow. Everybody wishes to strengthen his balance sheet. To this end, spending is being cut by consumers and businesses alike. It’ll take a change in psychology to cause growth to revert to potential. And that may be years hence, even decades!
Governments now, as then, pretend they know what they’re doing.
Predictably, Governments have wished not to appear bemused by the crisis. They’ve wanted voters to see them as competent and prescient! To this end, not being able to think of anything sensible to do, they’ve sanctioned huge increases in public expenditure. They’ve claimed such measures would help lift overall activity. And much of the rest of society has gone along with the proposition.
They obviously don’t.
The reality, of course, is that fiscal policy is a zero-sum game: it redistributes resources, but does not (cannot) augment them. Initially, therefore, the heightened public spending (and the concomitantly enhanced public borrowing) were thought to be largely irrelevant to the progress of the economy—a political indulgence, but neither reflationary nor deflationary.
They may be making things worse, not better.
That view has changed in the last couple of weeks. And it’s been sentiment that’s caused the rethink. Investors have taken fright at the size of borrowings and have been reluctant to acquire the bonds of some Governments. The rating agencies (pandering, as usual, to the prejudices of their customers) have cut the ratings of some big spenders, and have threatened to review those of others.
What the gold standard did in one period, the EMU does in another.
The result has been a perceptible increase in the costs of borrowing of the delinquents. Greece has taken a pounding, and Ireland likewise. They’re locked into an exchange rate nightmare from which there’s no easy escape. And, compounding their woes, they’re shortly to be hit by penal interest rates on the one hand and savage expenditure cuts on the other.
Public spending needs to be cut severely.
The message is clear: in a crisis, don’t raise public spending; it makes things worse not better. Even Darling, one of the least perceptive of today’s politicians, sees the dangers. The man who previously championed the fiscal stimulus no longer does so. He fears that Britain’s ratings will go the way of those of other high rollers, and is trying to get the country (and himself) to be seen as prudent again!
Darling is clueless.
His autumn budget, though, was a mess. It talked about public sector restraint, but delivered nothing. Most conspicuously, it was pusillanimous on the issue of labour costs. It opted for slower rates of increase of pay rather than cuts, and slower rates of recruitment rather than sackings. Most disappointingly, it made no mention of ending the iniquity of public servants’ retiring at 60, and of their receiving thereafter inflation-adjusted, taxpayer-financed, DB pensions.
Last week’s package . . .
Fatally, Darling’s budget went for higher National Insurance Contributions. Did he think the way to preserve employment was to tax it? Did he think that foreign inward investment might be encouraged by making it less attractive to the sponsor?
. . . was embarrassing.
His banker bonus proposals were childish. They’d be hopelessly unenforceable. But the cost of pretending to implement them would be sizeable. It was a lose-lose situation. Was he stupid, or did he think we were?
Asset prices are worried by the thought of sovereign default.
Securities markets have been dominated for a week or so by negative psychology. Although the fundamentals—in the form of negative inflation, negligible interest rates and satisfactory profits—are quite bullish, investor anxiety has been more than compensatingly bearish. Which will win in the future? Probably the former, but there might be a worrying hiatus in the near term.
Anxieties are overdone, but powerful nonetheless.
In Britain, with an election in the offing, and with an Opposition driven more by expediency than principle, there are a number of risks. It would be unsurprising if investors were to take a wait-and-see approach. They’re nervous about the incumbents and also about the alternates. Regrettably, therefore, a good deal of money might go overseas in the short term, and not return until the colours of the new administration become clearer.

Economics Views : 9 Dec

December 10, 2009

To preserve the Mental Health of a Society,
it’s best not to put Lunatics in charge of the Asylum.

Nor, if the economy is to be kept intact, public sector workers anywhere near the source of the money!

Greed cannot be legislated away; it has to be channelled.
It’s not only bankers who exploit market imperfections for personal reward. Politicians and lawyers, industrialists and trades unionists do so as well. It’s a problem that’s in the nature of the beast. It can’t be wholly remedied, but can perhaps be partially contained. The trick is to reduce market rigidities, not increase them.
The Chancellor, out of his depth, is drowning.
Alistair Darling seems not to understand. He’s seeking to limit bankers’ bonuses by legislation and regulation. He’ll almost certainly make things worse. The extra taxation he’s proposing will be easy to avoid, but the extra cost of the civil servants employed to administer his scheme won’t be. The bottom line will be richer bankers and poorer taxpayers; a more indebted country and a less efficient economy!
He saved the Scottish banks; and they are now sinking the rest of us.
None of this would have happened if the temptation to save the Scottish banks had been resisted. If RBS and HBOS had been sent into administration (depositors protected on a sliding scale), there’d be no question now of bankers paying themselves bonuses. Instead, they’d be fighting to keep their jobs. Pay would be falling significantly; not rising embarrassingly.
They’re no better than the feckless rail bosses.
The Rail industry is much like the Banking sector. In recent years, it’s delivered an appallingly bad service to its customers, but incompetent executives have convinced themselves (and their dolally Ministers) that they deserve huge bonuses. Is it any wonder that the RMT union behaves similarly? Drivers are hugely over-compensated for doing the equivalent of operating an automatic lift, but they’re unashamed of using restrictive practices to organise a labour shortage and thereby push for even higher rewards!
Or the unspeakable immigration officials.
Likewise executives in the Border Agency: they too have jumped on the gravy train. We deserve our bonuses, they say; we’re doing an excellent job. In comparison with their predecessors, in the not-fit-for-purpose Home Office, they may be. But, in absolute terms, they’re certainly not.
Or the incestuous BBC broadcasters.
Likewise also the BBC. It sets very low standards for itself and when, inevitably, they’re exceeded, rewards its executives generously. It is judge, jury and executioner in its own causes. And it’s the poor taxpayer who has to pick up the pieces!
We need competition not bailouts.
The central issue is one of competition: when it exists, where a sector is entirely unsubsidised by public funds, excellent profits probably justify high rewards; when it doesn’t, where it is suppressed for whatever reason, profits are meaningless and high rewards unjustified. RBS and HBOS must be broken up, their non-money-transmission activities sold off, and competition re-established. If there is any talent in the banks (and there’s probably not), let it go and prove itself in the real world; let it earn its living not whinge for taxpayer-financed handouts.
But will Tweddledum be any better than Tweddledee?
The same prescription should be applied to Transport, Border Control and BBC. Sell them off where possible. And, to the residuals, apply strict cash limits. It is public sector involvement in the economy that lies at the root of most problems. Don’t let politicians, or civil servants or quangos have the opportunity to work their black magic. Put them back in their boxes. Feed them only when they learn to behave.

Economics News : 4 Dec

December 4, 2009

In nature, repulsive caterpillars
turn usually into lovely butterflies.

Anton Chekhov—but, with humans, it’s sometimes the other way around: lovely babies turning into repulsive bankers.

Lies and errors are like cucumbers: they repeat.
It’s not usually possible to tell just one lie, nor to make just one policy mistake. An initial transgression almost always demands a subsequent corroboration. In the process, the first offender is transformed into the seasoned recidivist. Politicians, caring more about the now than the then, are particularly susceptible to the syndrome.
Iraq provides a classic example of the phenomenon.
Blair demonstrates it. His early exaggerations in the run-up to the invasion of Iraq later became blatant falsehoods. And the tangled web he wove proved to be, not a vindication of his actions, but a condemnation of them.
British banking may provide another.
It may be much the same for Brown. His decision to bailout hapless Scottish bankers was a mistake from which he’ll probably not be able to extract himself. Each subsequent twist in the financial crisis, each requiring a further misallocation of resources, has only underlined his original misjudgement.
Are the RBS boys brave or stupid or both?
Last week, there was a new deterioration: the directors of RBS said they’d resign if they weren’t allowed to pay themselves colossal bonuses. It was an obvious tactic: they knew that, doing so, they’d undermine the resale value of the bank. Taxpayers would have to bear the loss. And they’d blame, quite rightly, the politicians who’d caused the problem in the first place.
A spell on the dole would be good for their souls.
The solution, as with all blackmail, is openness. What Brown must do is call the miscreants’ bluff: he shouldn’t let them resign; he should sack them. Will he be brave? Of course not. That would require him to admit that his initial decision was mistaken; something he’ll never do.
Brown has not thought things through.
Instead, he’ll compromise. The bonuses will be paid, but they’ll be slightly less generous than originally proposed: he’ll settle for the outrageous in place of the unconscionable. Will that play well with the electorate? Will the unemployed factory worker or the redundant retailer feel justice has been done? Will the DC pensioner, plunged into hopeless penury, appreciatively applaud the judgment of the Prime Minister? Probably not.
Nor has Cameron.
Would the Tories have been any better? Sadly, no. From the first, they thought it right to sacrifice the rest of the economy on the altar of the bankers. One Grandee, a former Chancellor, opined at the close of 2007 that, “saving the banks would save the economy”! The view hasn’t changed much since then.
The RBS board has as much talent . . .
Last week, the talk was all about banking expertise. Bonuses had to be paid, it was said, to prevent talent migrating elsewhere. Really? What talent? That which caused excessive lending to property developers? Or that which misconstrued financial derivatives? Or perhaps it was that which led to failed fund management?
. . . as the Scottish football team.
The truth is that there is a lot of talent in the City, but that very little of it is to be found in banks. Indeed, the world would be safer, Britain’s economy stronger, if the Scottish banks (and their loathsome directors) had been put out of their misery. Schumpeter’s principles should have been applied: the “bad” had to be allowed to fail if the “good” were to be able to succeed. Woolworths and British Leyland were demonstrably not up to scratch; RBS and HBOS similarly. Is it too late to reverse policy? No, even now, something might be saved if politicians and regulators undertook an honest analysis of the situation. But don’t hold your breath.
What happening to economics data?
Meanwhile, on the broader economics front, many data items have been puzzling. German unemployment, for instance, was reported to have fallen last month! Why? Was activity surging or productivity plunging? Nobody seems to know.
The numbers don’t add up.
And can activity in China and India be as strong as the numbers indicate when imports are so anaemic? The latter seem to be corroborated by other countries exports; the former by commodity prices. But there’s a statistical black hole somewhere.
The States and Japan are probably drifting sideways, though.
What is not to be doubted is that the world’s two biggest economies are dull. Activity in both the US and Japan is lacklustre. Wages are being squeezed and spending is being cut back. There is no immediate disaster, but no imminent redemption either.
But stock valuations are climbing, albeit slowly.
Happily, company results are continuing to surprise on the upside and inflation on the downside. It’s a favourable background to securities valuations. The indices will advance for a while longer.

Next Year’s PSBR, Brown’s wee-bit housie, too, in ruin

December 3, 2009

The best laid schemes o’ mice an’ men gang aft agley.

Robert Burns’ Allegory turned Irony—two hundred years ago, the English were thought to be oppressing the Scots; now, it’s the other way round.

Britain’s public finances are in an appalling mess.  Ten years ago, they were arguably the best in the developed world; today, they are unambiguously the worst.  The deterioration has been the result partly of bad luck and partly of bad judgment.  It’ll take years to rebalance the accounts and, in the process, there’ll be a good deal of pain.  What’s yet to be decided is how the pain should be distributed between the innocent and the guilty.

The arithmetic is fairly straightforward:  if both GDP and public spending were to be growing at their trend rates, PSBR would stay fairly constant.  If, however, the former should soften, but the latter not, there’d be trouble.  A 1% shortfall in GDP would, ceteris paribus, cause net taxation to decline by about 1½%.  That, given an overall tax rate of 50%, would cause the PSBR to rise by ¾% of GDP.

In 2009, Britain’s GDP fell by more than 4½% (i.e. by 6½% relative to trend).  That alone would account for a deterioration in the deficit of about 5% of GDP.  But political decisions made things much worse.  Most importantly, the Government or the Bank (it’s not clear who was responsible for the misjudgement) decided to bail out the failed Scottish banks.  Precisely how much money was committed isn’t clear, but it was at least £60 bns (4% of GDP).   Additionally, the Treasury was persuaded to spend a good deal of other money (perhaps 2% of GDP)—the PM’s thinking was that such indulgence would make the economics decline less severe!  In total, therefore, the PSBP may deteriorate by about 11% of GDP in the current year:  from 4% to 15%.

What then is the outlook for 2010?   Not good.  The Treasury had been hoping that activity would recover strongly and that banking assets might be sold profitably.  Neither forecast looks likely to be fulfilled.  GDP is set to be anaemic and disposals of banking assets, prejudiced by developments in Dubai, modest or unprofitable or both.  On unchanged spending policies, PSBR in 2010 might be 16%, perhaps more than 17%.

There’s only way to bring it into acceptable territory:  sizeable and sustained spending cuts.  Tax increases would be largely counterproductive—driving business out of the country and thereby reducing tax collections.  It’s unpalatable (and neither Cameron or Brown seems to be prepared to acknowledge the seriousness of the condition), but the reality is that public spending has to be cut, in nominal terms, by 2% a year for at least 5 years, and possibly for 10.

What specifically needs to be done?   Salaries of public sector workers have to be reduced by 5% immediately and then frozen.  The retirement age has to be lifted to 70 and then adjusted in line with life expectancy.  RBS and HBOS have to be broken up (the latter lifted out of Lloyds) and the non-money transmission parts sold.  The Middle Eastern wars (certainly illegitimate, probably illegal) have to be ended.  Negotiations to reduce the cost of association with the EU (probably a referendum relating to membership) have to be begun.

Will any of this happen?   Very unlikely.  Instead, the authorities will faff around with higher taxes and a continuingly bloated public sector.  They’ll bring the PSBR down to 14% and claim they’ve done a good job!

Economics Views : 2 Dec

December 2, 2009

A Constitution needs both Sail and Anchor.


  Lord Macaulay—enough of the one to adapt to changing times; enough of the other to do so only slowly. 


Not since the reign of Charles I have unelected officials . . .

In the ten days or so since the Governor of the Bank of England let slip his sanctioning of secret loans to Scottish banks, the response from Press and Parliament has been muted.  There’s been a low level debate about the economics consequences of bailing out failures, but no dis­cus­sion of the constitutional implications of allowing unelected ap­pa­ratchiks to do so.  That’s surprising; not to say disappointing.

. . . encroached so blatantly on Parliament’s fiscal pre­rogatives.

For centuries, it’s been a principle of English Law that decisions re­lat­ing to fiscal policy be decided by Members of the House of Commons, and exclusively by them.  But today, it appears no longer to be an issue about which people feel strongly.  The B-of-E surreptitiously lends £60 bn to RBS and HBOS, foisting the obligation on non-banks, and is not even censured for its (probably ultra vires) actions.  The Govern­or, Mervyn King, reporting to the House of Lords, does not feel ob­lig­ed to apologise for them; the happy-clappy Deputy Governor, Paul Tucker, is prepared to boast about them.

But the B-of-E’s outrage seems not to have upset anybody; least of all MPs.

Their claim is that, without such a transfer, the economy would have performed less well.  Really?   Are they suggesting that bankers use re­sources more efficiently than non-bankers?   What is their evidence?   Do they think it’s been industrialists and retailers, fund managers and dentists who’ve been profligate, who’ve invested unwisely and brought the country to its knees?   What nonsense!

Tucker said it was done with good intentions.  Hmph!

There’s only one group of people whose behaviour has been worse than that of bankers—and that’s bureaucrats.  It’s the legislators and regulators, and their mollycoddled civil servants, who’ve been the weak­est link in the economics chain.  If resources had to be given to feckless bankers (the case is non-proven), they should have been taken from even more feckless bureaucrats. 

Economies, the UK’s ex­cepted, are strengthening.

Global economics news, meanwhile, has been moderately good.  The cyclical recovery, now almost nine months old, is quickening.  But it’s still very mild in comparison with the preceding setback.  There’s no economics justification, therefore, for employment rolls to have stayed so high.  Perhaps, in the months ahead, there’ll be a correction. 

But only moderately; depression still lours.

If so, if huge numbers of workers should be laid off, the consequences for sentiment, and probably also for spending, would be serious.  And it might be little different even if workers were to retain their jobs.  So long as they feared prospective unemployment, attitudes would stay cautious, and spending subdued.  The odds against a “normal” re­cov­ery, one developing self-feeding momentum, look to be high.

Afghanistan is going the way of Vietnam; Barack Obama of Lyndon Johnson.

And the news relating to Afghanistan is almost as bad as it could be.  Obama has decided (Brown trailing obediently behind) neither un­am­biguously to withdraw nor wholeheartedly to commit.  Extra troops will be deployed, but only for a limited period.  The Taliban will be al­lowed to take back control, but not yet.  It’s a message that will dis­heart­en friends and foes alike.  It’s Vietnam all over again. 

Markets nevertheless to appreciate.

Securities markets have wobbled in recent weeks, but the outlook re­mains fairly favourable.  Low interest rates, negative inflation and sa­tis­factory profits will be a winning combination.  Heightened levels of M&A will provide the cherry on top of the icing.




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