Pushing string

So there’s fiscal policy and then there’s monetary policy, the other side of the economic policy coin. Ideally the two work together. Now? Less so.

Fiscal austerity is doing its damndest to undermine and generally crap on demand what with the massive reduction seen in government spending on capital goods, investment and what not to preserve the UK’s AAA status. Monetary policy by contrast is at best tinkering and tickling round the edge as follows:

-          Historically low interest rates to minimise the number of indebted bods and companies failing (hmmm, what about zombie companies being a bad thing then?)

-          Low interest rates also encourage a competitive i.e, a devalued pound (take that all you dumb fucks that whined about the credit rating downgrade undermining the phallic worth of the pound, that’s monetary policy bitches)
- Low rates also also (well negative real rates) provide a disincentive to save i.e. they encourage people to spend, spend, spend in ourt consumer driven economy
- Obviously, following on from the above, low interest rates and the associated tolerance of above target inflation cheekily chip away at the real value of debt in our deeply indebted nation (shame pay growth is also negative in real terms)

-         Then there's quantitative easing or QE to encourage well its not that clear really, investment in marginally more risky, but still comfortably investment grade assets? To prop up prime asset values that benefit bods with pensions? No got a scoob really

-          And latterly the invention of all sorts of ways of cutting credit costs to, to, well what exactly?

Am guessing, judging by what Bank of England bods say, this last one is about encouraging demand by making it cheaper to borrow except, well how’d you reconcile that with fiscal austerity and what that’s been doing to the willingness to invest for years now? The answer is you can’t, the reason being because you can't.

To give an example using the key economic example of pies; make a pie cheaper then yeah, sure I might buy one, mebbe even two extra, but that’s cos I like pies. If I didn’t like pies, then whether they cost 50 quid or a horsemeat-tastic 50p, I ain’t buying any more and you’re wasting your time.

Similarly, cutting the cost of credit don’t mean shit if I don’t want to borrow new money or to quote from the latest Bank of England creditconditions survey

there was “a reduction in credit demand from small companies … (and) … demand from large firms was expected to remain broadly unchanged” So there you are then, banks don't want to lend to small businesses, banks don't want to lend to small businesses ....

Really? The Bank of England's own research into the impact of its own policy indicates small businesses aren't that keen on borrowing right now, which makes sense. Like European exports aside if you were a business dependent on government contracts would you fancy investing in new stuff right now? Thought not. Refinance your existing debt makes sense obviously, but borrowing more? Nah, no thanks.

Hence, a key and innovative part of current monetary policy looks about as effective as pushing string.

Masochistic e.rection disguise

You know an economic policy has had its credibility chips when the more politicians try to justify it the more they sound like they’re describing a masochistic e.rection.

Hence, fiscal austerity is painful, but thankfully the ConDems are up to taking the kind of big, strong, firm and tough (and blue-veined) decisions we need if we’re to cum through these hard, oh so hard times together. Indeed.

The disguise part here stems from the reality, which is that for all any politician might claim we’re all in this together, the following are the people really feeling the pain - the working poor, the unemployed, the disabled and the infirm. That they are doing so due to policies that are actively undermining the growth they’re supposed to be promoting exacerbates this bloody awful reality.

Snatching defeat from the jaws of victory

The politics of the UK credit rating are currently ghastly, all this he said, she said, nyah-nyah-nyah-nyah crap when there's barely a fag paper between the actual economic policies of the government and the opposition.

'sides its not as if George Osborne wasn't already as obviously useless as he is a shit. Rather, the downgrade is  a real opportunity for some sanity as long as all parties get the basics right of looking at what the downgrade actually does to British borrowing costs (here's a clue  - f' all), then work out how to spin the U-turn needed away from the following assumptions that have wrongly shaped economic policy:

- Cutting spending would have only limited impact on growth (see some IMF bod on how the impact of spending cuts was profoundly under-estimated in this chat on "multipliers")

- Spending needed cutting to save the credit rating because a downgrade would raise Britain's borrowing costs (more relevant than the US was the French example, now Britain is another of how this turns out not to be the case)

Then, they should start thinking in terms of (fiscal) expansionist policies that actually promote growth, a starter for ten being a government debt funded programme to build say £20 billion worth of social housing.

Moodys economic analysis should also be challenged in front of a parliamentary committee, but with the questions asked by people who know what they're talking about. The rationale for this second step is pretty straightforward - Moodys talk shit and need some hard, humiliating schooling. And it'd be fun.

The alternative is more of the same bollocks policies that are as self-defeating as they are cruel.

Lies, damned lies and libor

The libor thing is pretty cool. There's the whole making money betting on an outcome you can influence shebang, but, mainly its cool because its so monumental - libor being used to price the cost of squillions of debt - and so obvious; the system worked on the basis people would make honest submissions despite them having a huge personal vested interest in gaming the system. It's also cool because of all the things it throws up about how finance actually works.

Once, is the difference between regulation here and in the US with he massive fines being meted out very much American-size. If it had been left to our FSA things would have been very different. There might have been an investigation, eventually, a few people would have got their jotters and mebbe, just mebbe, some banks would have been fined a total of say £2.5 million. Only mebbe mind, because Britain needs the City of London to stay competitive, we can’t antagonise/scare off potential inward investment, wealth creators need to be rewarded if they’re to create more wealth, punitive fines could threaten the financial stability of the system and/or key institutions, ya de ya de yada, all the self-justifying dogma bollocks we've heard for years now.

Another thing is the libor scandal challenges the rationale for massive trader pay and bonuses. Like this article here details how one of the traders involved received a $5m job offer in 2009 to lure him from UBS to Citigroup i.e. one of the biggest earners in banking made his money cheating the system better than his peers and was in demand as a result.

Yet another is that with cases now being lined up to go to trial, the secrecy/gagging clauses and career concerns that underpin the silence surrounding how banks actually work should be lifted, if only for a little bit. Over and above the juvenile trader emails we’ve already read, we’re due detailed, blow by blow accounts of how banks systematically encouraged staff to break rules.

Confronted by all these fundamental challenges, we’ve predictably had the usual it was a “handful” of bad apples bollocks with said apples presumably having been sacked and lessons learned etc.,. And I guess you could run with this approach if you compared/contrasted the dozens of bent traders that've been dismissed (and given the opportunity to resign) with the hundreds of thousands of people banking employed, except, (a) that there are dozens being investigated/fired at each of the banks (or over 100 at Barclays) getting fined constitutes more than a handful unless you’ve very big hands and (b) the numbers being talked about/being dismissed appear to constitute a chunky percentage of all those engaged in this activity i.e. an entire line of bank business was bent.

Time presents further problems for the few bad apples bollocks. A quick skeck at some of the Libor scandal timelines dates this back to 2005 since when lots and lots of those involved will have been promoted and/or moved on to more senior positions elsewhere. What this means is straightforward; lots of current senior people do know what went on in graphic, close up detail and have done so for years

Finally, as say PPI, bank collapses etc., make clear this isn’t an isolated example of bad behaviour, rather it points to more systemic issues affecting banking, the economy and society more broadly. This last point stems from the criminal nature of what went on; while the Serious Fraud Office and the FSA initially huffed and puffed about what to do, trying to sound tough by making clear anyone doing this in FUTURE was for the high jump, oh yes, comments on a legal blog neatly summed up what had actually occurred - If Tom asks Bob what rate Bob can borrow at, and Bob dishonestly tells Tom information that Bob knows to be false with the intention of causing gain to Bob, then Bob has committed fraud (s1 by s2 Fraud Act 2006). There. That's nice and straightforward.  And heck we've finally got the chance to dish out some real justice for the credit crunch in a people who suggested rioting on Facebook got 4 years type style. Except there's no way in hell that will happen.

Redundancy notice period cut to 45 days. And?

So, err, there you are then as at 10.38 am the redundancy notice period (for large scale redundancies) has just been cut from 90 to 45 days.

I only found this out by chance via a noticeably bland BBC article. Reading through it I wondered why this wasn't regarded as big news given its a reasonably chunky change to the employment rights of millions of people with obvious, practical financial and employment implications for those being made redundant e.g. 45 days less pay plus 45 days less to find another job. You know, cheeky stuff like that.

At least the TUC has responded, but then you'd hope they would. Labour? Not yet although there is a "fascinating" piece on the latest inflation stats. The Guardian? Nope.  Not yet.

I don't know. What I do know is it makes clear, in economic policy terms, that the ConDem's have a fixation with "supply-side reform" (as in a euphemism for stripping away employment rights)  whereas (1) the UK economy is contending with a crisis of demand and (2) in terms of labour market flexibility the UK (a) already has a competitive advantage compared to much of the EU and (b) simply can't compete with Asia i.e. this is the product of nasty dogma, not reality, and is in keeping with the kind of policies Tory party donors want. Funnily enough it could also be counter-productive given it will encourage more people to save "just in case". Like if your house was on fire, this policy is the equivalent of someone trying to put it out by crapping through your letter box all the while expecting a please and a thank-you.


A 12.49pm update: So the Beeb is padding out its chat about this using articles dating back to May about how yer asset stripping, tax "efficient", debt-addicted, Tory funding, private equity boy Beecroftwas wanting things like this done. What's notable is the gap between then and now i.e. this appears to have sneaked out or been forgotten about, but hey its only employment rights, what do they matter.

 

What does S&P stand for?

Oh no, Standard and Poor’s (S&P) has revised its outlook on long-term UK government debt from “stable” to “negative”, meaning Britain is more likely to lose its “AAA” rating. Oh no!

Why (oh why) I wonder? Well, it’s because they think it more likely that “within the next two years … fiscal performance weakens beyond our current expectations. We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation.” Ahh, so “fiscal performance” means onsolidating government finances i.e. cutting the deficit. Ahhhh.

But, hang on a mo, isn’t there a tension between fiscal ”consolidation” i.e. cutting government spending/raising taxes and economic growth especially right now as per the following statement; “We continue to believe the government's efforts over the next few years to engineer the planned correction in the U.K.'s fiscal accounts will likely drag on economic growth”.

Ahhhh. So there is a tension, a proufound contradiction even especially when private sector demand is so weak, between fiscal consolidation and economic growth. I wonder who came out with that mad view? Err, that’d be S&P in the same note setting out why they’ve moved the UK to a negative outlook.

Except, further on S&P then say “We could lower the ratings if we conclude that the pace and extent of fiscal consolidation has slowed beyond what we currently expect. This could stem from a reappraisal of our view of the government's willingness and ability to implement its ambitious fiscal strategy.”. So at the same time as S&P is saying fiscal consolidation is a drag on economic growth they’re also saying they’d probably downgrade the UK if consolidation slowed down?

Oh. I guess you could go off on one here about double-think. Personally, it reads to me more like S&P are setting out their “analytical” prejudices (cut spending, cut spending) and reality, then failing to acknowledge let alone reconcile the two. This would be nice if it was a purely academic exercise, except its not. Or is it? 

Before some dicksplash shouts Greece, Greece like a Pink Lady gone wild, we’ve actually now got a meaningful example of what impact a UK downgrade would have; a month after France lost its “AAA”, French long-term borrowing costs “hit a record low at an auction”. So there you then, a one notch downgrade doesn’t matter diddly right now, which makes sense given there aren’t too many practical alternatives to British government debt i.e. there’s only so much “AAA” Finnish debt to go around.

This reality should be a marvellous and liberating thing for government policy. Now, not only can we get a real, counter-cyclical, debt funded government spending programme (social housing, social housing!) we could do so safe in the knowledge that S&P’s incoherent shite (plus whatever leaks out of Fitch’s and Moodys pants) can be safely ignored. 

We should, but as things currently stand we won’t cos S&P aren't the only people to have those same prejudices plus there's the major and therefore probably politically unpalatable u-turn doing so here would involve, Shame & a Pity really. Sad & Pathetic even. Shysters & Poobahs or is it Sock-Wranglers & Pie-chart-interferers? Nah, its Shite & its avoidable Pish.

I was a zombie garden centre

One of the first things I did in banking was assess a credit application for a garden centre. Discussing the business with a more experienced colleague, he pointed out the owners would be better off selling it, paying off their debts and sticking what was left in a savings account judging by how much they actually took out the business to live on. Later, I looked at a credit for a farm. Reading the file I discovered the farmer had been struggling to make it pay for years so every so often had sold off assets to manage his debt; a field here, a tractor there until eventually he moved into a static caravan andm sold his house.

Picking out the general features of these examples provides a reasonable definition of a zombie company, it being one that generates a poor absolute and/or relative return on capital, has negligible prospects as it stands and is barely, if even, able to meet its existing financial obligations without gradually cannibalising itself; zombie companies exist rather than prosper. Moreover, when/if we ever move out of the current low-low interest rate regime many of them will finally expire.

I’m putting this definition forward in response to the growing interest in zombie companies. A recent radio 4 File on 4 on the subject made for interesting listening and included chats with some highly relevant people (and some others as well), but ultimately proved analytically far less than the sum of its parts largely because of its half-arsed "Austrian" capital mis-allocation aspects (much of this being provided by Jon - can the BBC please start calling him the private equity boy that he is and not an entrepreneur - Moulton for some reason). Despite this, the Treasury Select Committee subsequently saw fit to raise the subject, choosing once again to highlight its largely facile nature.  

Here’s why; the concern with zombie companies stems mostly from the Japanese lost decade. Rather than ‘fess up to problem loans, Japanese banks opted to extend them on the basis that a rolling loan gathers no loss. The only problem with this is a bank can only lend so much and if a big chunk of its lending is tied up in companies that aren’t going to grow or are problem loans involving undeclared losses, then more viable businesses get starved of credit, economic growth is impacted, ya de ya de yada.

Fast forward to the here and now and you’ve the Bank of England (BoE) getting all concerned about forbearance, meaning they’re concerned British banks have turned Japanese and opted to roll loans rather than ‘fess up to all the dreck on their books so as to avoid even bigger losses. This concern has taken an aggressive turn with the publication of the BoE’s latest FinancialStability Report, which explicitly goes on (and on) about Forbearance and how “the longer it continues, the more likely it is to be concentrated on weaker companies with less ability to invest and innovate. This might divert credit from potentially more productive companies, for example new business start-ups.”

Unfortunately, dull facts prevent any direct comparison between Britain and Japan being especially meaningful. Drat. One is the Japanese experience was predicted on fundamental differences in the structure of their economy, in particular the prevalence of keiretsus, groupings of companies spanning various industries typically centred on a bank and defined by cross-shareholdings and close familial relationships. Or as a Japanese bloke I knew explained when his family’s firm was invited to join a keiretsu, him marrying a senior banker’s daughter would seal the deal. So when a Japanese bank rolled the loan of a zombie company, there’s a good chance it was a father helping out his son-in-law at a company he part owned. By contrast the structure of the British economy just isn’t like that meaning it lacks the obvious incentives seen in Japan to prop up zombies. Another thing to bear in mind, given preserving Britain's AAA status is a lynchpin of current economic policy, is that when the Japanese banks finally started ‘fessingup to what they were doing, calling up securities and so on, taking the pain and finally declaring the losses that had been sat on their books for years, Japan was downgraded by the rating agencies.

Yet another thing is what the British banks have actually been doing. Here the BoE stability report helps by stating “the non-core disposal plans of LBG and RBS are ahead of schedule and targets for 2012 have been raised. Since 2008, these banks have shed £383 billion of assets”. Now just chew on that for a minute, £383bn. They have already disposed of assets i.e. loans valued at £383 billion and are due to get rid of even more. Fuck me.

To put that in perspective you could compare £383bn to the all new £3bn Green Investment Bank, except that would be to show up the latter's mediocrity. So here’s a better comparison; the total assets of the entire British building society sector as at June 2012 i.e. how much it’s lent, were £325bn. So between them LBG and RBS have already got rid of far more “non-core” assets than the current British building society sector has acquired in over 100 years. And the “non core” bit is important because it includes exactly the dreck the Bank of England is concerned about/Japanese banks once kept on their books.

Except perspective seems to be missing judging by the stability report’s chat about he European Banking Association’s findings on forbearance given this includes the "interesting" Spanish bank experience, which can be summed up as pantalones en el fuego liar liar, when it comes to their annual accounts and the losses they’ve been willing to declare.

Aside from these dull facts there’s the slight issue of monetary policy and the chat about how when interest rates start edging back to more normal levels, all the zombie companies currently being propped up will start keeling over, stifling any recovery. Except, one, the BoE is maintaining interest rates at record lows and two, via the funding for lending scheme, is inventing entirely new ways of cutting credit costs i.e. the institution doing more than any other to actively prop up zombie companies is the same one going on about them being a bad thing.

So  “What is to be done?” Well, this is the bit that needs spelling out very clearly - British banks are now being encouraged to start pulling the plug on thousands of businesses more aggresively than they already are.

This is a fucking stupid notion for all sorts of reasons.Practically, how the fuck does a bank know which business is a Facebook and which a Myspace let alone a FriendsReunited (besides which Facebook has already jumped the shark)? Anyone with that kind of Nostrdamus like insight would already have invested in the winner and retired somewhere lovely.

Politically, just think about it for a mo; zombie companies are servicing their debts, meeting their covenants and getting by doing their thang, then allova sudden a big evil bank pulls the plug cos its decided the customer doesn’t have a business model with exponential growth potential. Uh huh? And how much of a backlash would that generate? Like to get a sense of how cretinous the reporting on bank lending already is ignore the routine bollocks criticising banks that only sell debt for not providing start-ups with equity and read the following monumentally shite article; “Lending from RBS and Lloyds slumps by £117bn in less than three years” i.e. banks are already being criticised for doing what the BoE wants them to do.

Then there’s the economic impact; the main problem facing the British economy right now is a crisis of demand influenced by factors including falling real incomes and a lack of confidence. Now, would banks pulling the plug on thousands of businesses sort that out? Of course it wouldn’t, instead it would aggravate it, a lot, and that's without taking into account the potential impact of an asset fire sale. Like even accepting all these start-ups i.e. tiddlers, are being starved of debt, that’s so existing businesses can keep employing people and buying goods and services. Like see that hand, the one with a bird in it? Cool, that’s what we’ve got right now and its worth a damn sight more than the two that may or may not be in a bush in 5 years time. Oh and then there’s the potential for companies to suddenly shit themselves/rein in spending even more than they already are when they realise banks are more likely to pull the plug.

Finally, there are the examples I started with and what they actually mean. The reason the farmer struggled on was so his eldest son could inherit some land and maintain a family tradition. Similarly, as for the garden centre, who the fuck is the BoE, the current fiscal policy in favour of bunch of cock that it is, to strong-arm anyone, tax payer owned bank or otherwise, into destroying a business a husband and wife had built from scratch and were continuing to make a living from?