Economics News: 24 Sept

September 24, 2010

A little learning is a dangerous thing, but a lot of ignorance is just as bad.

Economics is characterised by the latter.

Error is difficult to control.

After a catastrophe, politicians usually express regret for the past and good intentions for the future. Invariably, they promise to do what’s necessary to prevent a repetition of recent failings. It’s very rare, though, that they live up to their undertakings.

Lop off one head and it grows another.

Chancellor Osborne said some time ago that commercial banks must “never again” be allowed to wreck the economy. An excellent sentiment. But was he to be taken seriously? Probably not.

Bankers are particularly prone to error.

Banking is an activity that alternates between feast and famine. It’s almost impossible to eliminate the volatility. Indeed, it tends to be intensified, not dampened, by the operations of the authorities—especially those of limited competence.

Be prepared for them, therefore.

Though financial crises can’t be eliminated, they can be treated in a way which does re- latively little harm to the rest of the community. The trick is to isolate the virus. Saving the banks mustn’t require sacrificing the more valuable parts of the economy.

Governor King wasn’t.

That was what was so wrong about the recent debacle. The banks, as usual, got themselves into a mess, then came whingeing to the authorities. And the Governor of the Bank of England, instead of thinking about things rationally, took it upon himself to write blank cheques. He saved the banks by devastating the people!

He should have thought about the opportunity cost of what he did.

How should the Chancellor change things in the future? Most importantly, he should ensure that the cost of prospective bailouts, even systemic ones, be affordable. That would mean guaranteeing only the money-transmission parts of the banks. Their other activities—corporate finance, propriety trading, fund management, etc—would need to be sold off.

A banking break-up is the answer.

Some banks might decline to do so. It’d be their choice. But, in that event, they’d not be eligible for taxpayer assistance. In a future crisis, they (and their depositors and customers) would not be bailed out.

If some say they’ll go, call their bluff.

Some have anticipated the proposition. They’d change domicile in such circumstances, they’ve said. They must be free to move to whichever jurisdiction they find most amen- able. Their threat to leave the UK is toothless unless it entails their taking the non- banking parts of their operations with them. Would they? Probably not.

They’re not part of the City.

The “City” is pre-eminent in the world of finance, not because of the commercial banks, but despite them. It’s the fund managers and brokers, accountants and lawyers, actuaries and financiers, that are the attraction. They’ve survived the demise of domestic manufacturing and the implementation of European regulation! They’d welcome the loss of delinquent bankers.

They’re just a creaking utility.

Will it happen? No. The ICB, headed by Sir John Vickers, will recommend a compro- mise that buys off the bankers, but doesn’t prevent future crises. The cycle will be repeated therefore. Twenty or thirty years from now, politicians and regulators will once again be investigating banking failures. And the taxpayer will once again be picking up the bill!

Economies, meanwhile, are softening.

The bill is particularly onerous because the economy is not reviving as quickly as had been hoped, and the borrowing requirement is consequently proving stubbornly resistant to treatment. Things will get worse before they get better. Most economics indicators, in most parts of the world, (about 60%) are consistent with loss of momentum.

And there’s worse to come.

There are some commentators who suppose that the slowing is temporary, that 2011 will bring a new quickening. It’s more likely, though, that deceleration will give way to de- cline. It’s then, in 2012 in particular, that the full costs of the banking bailout will be ap- preciated. It’s then that the politics will turn nasty.

Politics too will be difficult

In Britain, the coalition will become increasingly fraught. The LibDems will take most of the heat. But, with popular support in single digit percentages, they’ll not dare pull the plug. They’ll support the Tories because the alternative will be oblivion.

Politics too will be difficult. Here, and in Europe.

In Europe, similarly, the euro may drift on, despite mounting economics hardship: the core faltering, and the periphery disintegrating. Problems will be very difficult to resolve. Civil disobedience will serve no purpose. Political (and financial) power will have passed to unresponsive (and unelected) bureaucrats.

And in the US.

Nor is the outlook in the States at all good. Obama will lose control of Congress in the forthcoming elections, and may be a lame duck for the rest of his term. The economy will outpace Europe’s, its flexibility being its principal advantage. But politics will be harsh, a return to isolationist distinctly possible.

Will the emergers save us? Of course not.

Will the emerging world come shining through? No. Its internal demand is insufficient to sustain it. In a global slowdown, it’ll suffer disproportionately. In a protectionist environment, it’ll be shot to pieces.

Economics News: 17 Sept

September 17, 2010

During Carnival, men put cardboard faces over their masks.

Xavier Forneret, and on many other occasions as well.

Some truth is spoken in or-der that more might be concealed.

Hoping to maximise public support, politicians often say different things to different audiences. It’s a dangerous ploy, though. Speeches are widely reported and often tele- vised. There’s potential leakage therefore from one audience to the other. As a result, the speaker risks being exposed as a cynical dissembler. In that event, he’s likely to become distrusted by both groups to which he’s trying to appeal.

Politicians are expert dissemblers these days; other officials aren’t.

Was this the trap into which Governor King fell at the TUC Conference earlier this week? There, he told assembled unionists that workers had a right to be angry. It wasn’t their fault that the economy had plunged into recession. The blame for the col- lapse was to be laid at the door of the authorities on the one hand, the bankers on the other.

The Governor of the B-of-E is still learning the tricks.

Quite right. But is that what he says when he addresses the other audience? Does he charge his own staff with gross incompetence? Does he claim that Treasury Officials are unfit for purpose? That the FSA is an expensive indulgence of consummate inep- titude? If so, those speeches seem to have gone unreported!

There are lots of skeletons in his cupboards.

And what about the Governor’s relationship with the odious bankers? It’s all fine and dandy for him to tell the TUC that they were the proximate cause of the problem, but he needs, in that case, to explain why he bailed them out. What made him dip his hand in- to taxpayers’ pockets, take out a hundred billion pounds, and give it those he now as- serts were the malefactors?

He may have cost taxpay- ers countless billions.

It wasn’t the country’s elected representatives that performed the deed. Parliament wasn’t told of the sequestration until long after it occurred. It was he, unelected and unaccountable, who did it. It was he, therefore, who had to bear responsibility for it.

The jury is still out.

His deputy, speaking at monetary conferences in the last year, has tried to justify the Bank’s action by claiming that things would otherwise have been even worse. And how did he know that? Because, he said, no trace of irony in his voice, his forecasters told him so!!!But the judge is preparing his black cap!

But the judge is preparing his black cap!

How droll! His assertion is that the Bank’s projections, horrifically wrong prior to the collapse, became insightfully right afterwards. It’s doubtful that even so practised a Holy Friar as Tony Blair would have had the nerve to try that one!

Were TUC delegates impressed? No!

It remains to be seen is how TUC delegates react to the Governor’s pitch. Will they be more willing to accept public spending cuts because he thinks them desirable? Proba- bly not. The message is influenced by the messenger’s track record. The little boy who repeatedly and inappropriately cried wolf lost credibility. Likewise MI6. Likewise, in all probability, the Bank.

Trust has been lost. It’ll not be easily regained.

If she’s to regain the people’s trust, the Old Lady must do better in future. In particular, she must discipline the commercial banks. They mustn’t be allowed any longer to ride roughshod over the rest of the economy. The Governor has to take a stand—aspiring to be Robin of Loxley, not Sheriff of Nottingham; a righter of wrongs, not a committer of them.

The fly in the ointment is the commercial bank.

What he should propose is that the banks be broken up and sold off. They shouldn’t, in the future, be allowed to undertake high-risk operations. Only then might the taxpayer be persuaded to bail them out when next they mess up (typically it’s once every other generation). But the taxpayer support must not extend to complicated operations: in- vestment banking, proprietary trading, fund management and so on. Such activities, the valuable part of the City of London, should be the preserve of non-banks, preferably those that are owner-managed.

Radical surgery is needed.

The politicians’ ideas on the subject are hopeless; the Business Secretary’s as impracti- cable as those he devised for financing University tuition. And the FSA’s, reflecting its reputation as a repository for those who’ve failed elsewhere, no better. Faffing around with bonuses is not the way forward. The banks’ll run rings round the regulators!

But recession is creeping nearer.

The world economy, meanwhile, is gradually subsiding. Demand in America, Europe and Japan is slowing on schedule. A recession is not immediately in prospect, but it’s possible that one will start in 2011 and intensify in 2012. Thus far, the Emerging world has held up very well. Sadly, it’s unlikely to continue to do so.

And financial valuations creeping higher.

Securities markets, on the other hand, will be all right. Liquidity will stay plentiful and investors, some against their better judgment, will buy assets. Bonds for the wary, equi- ties for the adventurous.

Economics News: 10 Sept

September 10, 2010

Knowing that there’s worse pain to come doesn’t make that at present hurt any less.

It wouldn’t be so bad if the pain were reckoned part of the remedy, but devastating if it were thought it’d make things even worse.

More often than not, Government aid is a poisoned chalice!

The whole country is going to be affected by public spending cuts in the next few years. Some regions, though, will be hurt more than others. Can the (relative) winners and los- ers be identified? The BBC decided to spend licence-payers’ money to try to find out. It commissioned an investigation. And last week, the results were published.

It destroys individuals, companies and regions.

It emerged, unsurprisingly, that that the south-east of England was likely to be injured least. Why was that so? Because it was where the proportion of public sector jobs was lowest.

Underperformance mustn’t be treated indulgently.

The BBC, of course, left its analysis there. It didn’t ask why other parts of the country had become so dependent on public spending. If it had, it might have been forced to conclude that it was because they were uncompetitive. Private sector employers were reluctant to locate in them because rates of return generated there were too low. Only public sector employers, immune to financial considerations, could afford to do so.

Cost reduction and productivity improvement are the keys.

If ruthlessly honest, the BBC might have gone on to argue that the Government’s region- al policies had been counterproductive: they’d tried to narrow the differences between north and south, but succeeded only in widening them. Uncompetitive locations needed to lower their costs, not to raise them; they needed better infrastructure and higher edu- cational standards, not State hand-outs and indulgence of failure.

Has anything changed? Is Cameron just another Blair?

So what are the prospects? Not very good. The Coalition looks set to do what politi- cians usually do in these circumstances: cut spending on capital projects, but preserve it on revenue account. As a result, it looks as if the north-south divide, which deterio- rated under Blair and Brown, will continue to do so under Cameron and Clegg.

The auguries aren’t good.

In that event, it’ll mirror the rift between state and independent schools. New Labour had promised to close the gap. Needless to say, it didn’t. New Conservatism is talking in similar terms. Will it fail as comprehensively?

It’s much the same story in education.

In the last decade, funds were poured into state education: the promise was to lift the standards of the state sector to those of the independent one. Empty words! Standards continued to slip. Bureaucrats secured huge prizes for themselves; teachers grabbed rather more modest ones; but the poor children got nothing at all. Pass marks were low- ered to pretend otherwise, but nobody was fooled. Least of all, the top universities.The gulf is widening.

The gulf is widening

They’d been demanding higher standards, and the best schools responded. The A-level was spurned in favour of the more demanding IB and the pre-U. And it was predomi- nantly the independents that took up the challenge.

Blair was an educational Verwoerd. Will Cameron be a Botha?

In another ten years, current trends continuing, the country’ll have established an educa- tional apartheid! There’ll be an elite and an underclass. The one will be prepared for, and will consequently go to, good universities; the other, unprepared, will be condemn- ed to bad ones. The segregation will begin at pre-school nursery and continue through- out the educational process. Transfer from the lower to the higher streams will be all but impossible!

The economy, meanwhile, drifts slowly on.

There’s not much that’s new on the economics front. World activity is progressing mo- destly: its second differential negative, but its first still positive. Accordingly, there’s no immediate danger of recession. Not unless central bankers increase interest rates, or politicians implement protectionism, would the near-term threat be significant.

The bad period is still a year ahead.

The medium-term is more problematical. Consumers are not going to be in a position to lift demand; nor, a fortiori, will public sector spending departments. Might investment and exports surge in compensation? Of course not. Both rise only in response, often lagged response, to buoyancy elsewhere. The most likely scenario is, therefore, a re- cession starting in the second half of 2011 and intensifying during 2012 and early 2013— mild if Governments and Central Banks are sensible, harsh if they’re not.

Asset markets are fine, though.

Significantly, equity markets have bounced impressively. Indices fell when investors imagined that recession was imminent, but recovered when they thought it delayed. Corporate profits are the fixed star. They continue to rise. They imply on-going value, whatever the vagaries of economics or politics.

Equities and bonds both.

Bonds similarly. Inflation will be contained in most countries for a protracted period. And borrowings (private as well as public) will undershoot for years to come. It’s a favourable outlook; one that’s not yet fully reflected in prices!

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