Thankfully, I could never be a Tory, but given the lack of relevant thought on the Left its interesting to read the blues are apparently getting their shit together when it comes to the credit crunch and coming up with some ideas (as opposed to any commitment to concrete policies and/or clear proposals).
The biggie it seems is significantly changing the role of the Bank of England in relation to the financial system. You can read about much of what underpins this suggestion, idea and/or potential policy in a Centre for Policy studies paper written by Sir Martin Jacomb, deputy chairman of Barclays from 1985 to 1993 and a director of the Bank of England from 1986 to 1995.
His paper states “The Tripartite Arrangement needs to be recast. The FSA should become a subsidiary of the Bank of England. Its relationship with the Bank should be similar to that of the MPC.” And “Responsibility for the stability of the financial system as a whole should be entrusted to a third subsidiary, the Systemic Policy and Risk Committee. This would report in much the same way as the MPC.” Besides which “The idea of a greater role for EU regulation of UK financial services must be resisted.”
It’s almost too easy to rip the pish out of Sir Martin. There’s his grasp of history i.e. facts, like when he refers to Northern Rock as “the first run since Overend Gurney in 1866” and a “national disgrace”; mebbe aye, mebbe no except the last was in 1878 when the City of Glasgow Bank failed, a far more significant matter because it prompted the widespread adoption of limited liability and as such fundamentally changed the relationship between investors and companies in Britain. Even better according to Wikipedia Sir Martin also described insider trading a few years back as a "victimless crime", suggesting a somewhat interesting moral compass. Finally, the easiest criticism to make is that he’s simply an auld duffer who isn’t so much presenting an argument as moaning on over a rather good brandy about how it wasn’t like this in his day.
Its also good sport to see a think tank set up by Sir Keith Joseph articulating how to intervene in markets, but I guess that’s a somewhat more esoteric point. But, hey ho, if this is the cutting edge of Tory thought lets give it a think because politically it’s an absolute blinder.
1) It would establish real, clear blue water between the Tories and Labour who are much keener on retaining the existing tri-partite balance between the FSA, Bank of England and Treasury.
2) By replacing the tri-partite structure it denigrates what Labour previously did.
3) In the grand scheme of things i.e. compared to say quantitative easing, its relatively easy to understand.
4) It’s relatively easy to sell via soundbites e.g. a new dawn for financial regulation, a fundamental break from the past, CHANGE, CHANGE, CHANGE! Etc.
5) It doesn’t cost much – a new committee here, a new organisational structure there and bingo. Which in turn means you can go on Newsnight and say its a fully costed policy and aren’t we prudent.
And that’s about it really. What the principles and tools underlying all this CHANGE! might be aren’t really mentioned. Keeping out EU regulation is also as silly as a spotty sock with multi-coloured toes. Sure it’ll play well to home county duffers, UKIP voters and what not, but as the Fortis Bank collapse made unavoidably clear multinational banks require well co-ordinated, multinational regulation.
All that aside, I personally agree that the Bank of England needs more teeth. But, thats because I think the FSA is the banks' ineffectual bitch more than anything else. This made it interesting to see Adam Posen’s appointment to the MPC. For the FT what matters is he’s “an axeman” who in his testimony to the US congress on banks stated “have top management replaced and current shareholders wiped out.” Setting aside the city boy toss, the fact an expert on the Japanese lost decade has been appointed to the MPC should actually be making us all shit in our boots as to the prospects of that happening here. Second, he has clear, technical, detailed views on the reconstruction of the financial system.
That his appointment was swiftly followed (do these feckers actually co-ordinate this stuff I wonder? Nah, no chance) by the Governor of the Bank of England stating in a speech that “We (he?) need instruments to prevent the size, leverage, fragility and risk of the financial system from becoming too great” and that “If some banks are thought to be too big to fail, then, ... they are too big”, is kinda interesting cos it leads back to auld duffer Jacomb’s emphasis on a beefed up Bank of England give or take the Governor also making explicit reference to the important stuff (e.g. policy instruments & leverage), that actually matters and about which the Tories aren’t saying hee haw.
So it looks like a bun fight is developing with the only people supporting the FSA being the current government. This is doubly fun because the standard criticism of senior Bank of England appointments is they’re too academic i.e. what you really want is some posh, clubbable debt salesman (e.g. a banker) regulating the stability of the financial system (see the hassle over Charlie Bean becoming deputy governor fer instance). Moreover, besides the bloody obvious vested interest and maintenance of regulatory capture - which is the technical term for "being the banks' bitch" - this also plays well in Britain due to the widespread suspicion of people who can think.
Given this reality it’s hardly surprising the FSA stands out amongst the various regulators for being dominated by ex-bank workers unlike say the CEO of OFWAT who is a regulator and civil servant thru and thru. So with the Bank of England making some clear moves to try and increase its overly academic authority (1), it makes you wonder what the banking industry’s rear guard action will be. I’m guessing based on personal experience (a) they’re too thick and arrogant for the most part to realise before it starts approaching legislation and (b) the sole argument they will subsequently make against anything they don’t like will be that it undermines Britain’s position as a financial centre (the subtext here being tax revenues, tax revenues), regardless of whether a proposal is actually perfectly sound from the perspective of the economy as a whole.
Bunch of cock really.
(1) Alternatively it’s a cry for help because the Chancellor, the FSA and various city interest groups have already stitched things up.
Friday, 19 June 2009
Tuesday, 16 June 2009
Pubes and crumbs
On the basis that the neo-liberal (or is it Anglo-Saxon?) model of capitalism has crashed and burned the past 20 months, I figured the Left might have something to say about it all. I was wrong. The Fabian society, that venerable centre left lot, have recently published a paper on housing apartheid in Britain, which is very nice give or take the collapse of the housing market. Red Pepper, those fiery mixers of environmentalism and socialism have published some half-decent accounts of why things fecked up, but the main proposal seems to be more legislation supporting credit unions, which is lovely, but still a fringe activity. The New Left Review on the other hand has, as ever, put things in a wonderfully global perspective (1) before tossing one off over the applicability of Marx’s theory of value. I kinda gave up on the Scottish Left Review and who cares what the Socialist Workers are saying. Presumably, it’ll involve some quotes from Imperialism the Highest Stage of Capitalism others from the Grundrisse and Das Kapital combined with a critique of reformism and bobs yer uncle or aunt depending on his or her particular gender orientation.
Shame really. You spend however many years waiting for the inevitable collapse of capitalism and when it arrives you've hee haw to say. Being theoretically inclined or at least someone who likes the odd typology or two, I figure I’ll try and highlight where we are in terms of the politics of it all, the participants and outputs.
Stage 1: This is the “Fucking hell” phase and/or “We must do something!”
This is (was) the initial response to the credit crunch and later on to Lehman Brothers. The key participants at this stage would be Prime Ministers, Chancellors, CEOs and Central Bankers.
In terms of outputs absolutely everything is on the table because the key objective is fire fighting i.e. stopping things collapsing. Hence quantitative easing, part nationalisations and kidding on not cutting benefits equals the rediscovery of Keynesianism.
Stage 2: This is when “We must stop this ever happening again!”
Its also when bank execs, the great and the good e.g. very old, possibly incontinent bank chairman and quango bitches along with the British Bankers Association, senior Treasury civil servants and junior ones who really are on a fast-track, CBI directors, Deputy Central Bankers and terribly senior regulators get involved. All of the bods from stage 1 are still in the frame, but only to receive reports, chair committees and steering groups and intermittently give reassuring speeches/launch papers.
The output here in the first instance is proposal documents, position papers, suggestions and speeches, giving way to more concrete reports setting out strategies and principles after the feedback has rolled in.
Stage 3: This is the intentionally reassuring, almost back to BAU stage because “We are taking care of things”.
Would the Prime Minister be involved? Gordon Brown might be given his apparent temperament (and if he’s still PM), but essentially everything has been handed over to middle and senior managers who, with the aid of wonderfully expensive consultants, have been tasked with putting the outputs of stage 2 into practice. This is when stuff gets set in stone and some poor sod discovers he’s lumbered with implementing various stupid ideas signed off by committees stuffed with terribly, terribly senior bods.
Right now I think we're working thru stage 2. For me January was the tipping point when it came to stage 1. This was when RBS shares fell once again prompting rumours about full-nationalisation, except it eventually became clear it didn’t matter how low RBS shares fell, the government wasn’t for nationalising. Thereafter the sense, felt acutely last year, of waiting for something else to fall over, was lost. No more major institutions it seems will be allowed to fail, not even in the US.
Alongside this and from a British perspective the Bank of England is maintaining a stream of speeches that refer to the new tools needed to combat asset bubbles and the FSA issued a huge document setting out various proposals i.e. they feel able to lift their heads up to outline what they think things will be like after the credit crunch. More importantly, the US just saw Timothy Geithner outline some ideas of what the US re-regulation of financial services will look like, which matters because it sets the benchmark for what everyone else will do (I liked the response of US bank bods to the Geithner proposals reported in the FT “yes, but these are proposals” i.e. piss off.)
All of which brings us back to what the Left has to say that’s of any relevance at this vital stage.……………………….. still waiting ……………………………. anyone any questions or suggestions? No? Shame that as it’s only the re-regulation of a global financial system that’s brought about the worst economic downturn since the great depression. Best just leave it then to the same bankers, regulators, government ministers and civil servants who either caused or facilitated it in the first place.
Actually it’s worse than that. Besides the very real moral, economic and political issues this all raises, it actually impacts on the drivel the left has been churning out in teh meantime. Take the Fabian society’s housing apartheid – if there’s no more cheap credit available for owner occupiers and buy to let investors to actually buy houses and fewer get built, how can this apartheid (what a disgustingly inappropriate use of that term), be addressed? Similarly, new housing regs impose higher environmental standards, so no housing market = less environmentally friendly homes, whaddya think of that then Red Pepper? Or theres PFI/PPP that good old trade union, lefty bugbear that was built on the assumption cheap credit would always be readily available. So should we connect what credit markets will look like in this brave new re-regulated world (heres a clue – more expensive) to debates over whether PFI/PPP will ever pass value for money tests in future (or whether these will simply be flexed to accommodate this?) Ah well.
Hence me stealing a phrase a mate came up with in a completely different context. The pubes are the gits involved in stages 1 and 2 and the left. The crumbs? That’s what the rest of us will be left with at the end of the downturn.
(1) For me Robert Wade’s recent NLR article on things is an honourable exception to this for the most part.
Shame really. You spend however many years waiting for the inevitable collapse of capitalism and when it arrives you've hee haw to say. Being theoretically inclined or at least someone who likes the odd typology or two, I figure I’ll try and highlight where we are in terms of the politics of it all, the participants and outputs.
Stage 1: This is the “Fucking hell” phase and/or “We must do something!”
This is (was) the initial response to the credit crunch and later on to Lehman Brothers. The key participants at this stage would be Prime Ministers, Chancellors, CEOs and Central Bankers.
In terms of outputs absolutely everything is on the table because the key objective is fire fighting i.e. stopping things collapsing. Hence quantitative easing, part nationalisations and kidding on not cutting benefits equals the rediscovery of Keynesianism.
Stage 2: This is when “We must stop this ever happening again!”
Its also when bank execs, the great and the good e.g. very old, possibly incontinent bank chairman and quango bitches along with the British Bankers Association, senior Treasury civil servants and junior ones who really are on a fast-track, CBI directors, Deputy Central Bankers and terribly senior regulators get involved. All of the bods from stage 1 are still in the frame, but only to receive reports, chair committees and steering groups and intermittently give reassuring speeches/launch papers.
The output here in the first instance is proposal documents, position papers, suggestions and speeches, giving way to more concrete reports setting out strategies and principles after the feedback has rolled in.
Stage 3: This is the intentionally reassuring, almost back to BAU stage because “We are taking care of things”.
Would the Prime Minister be involved? Gordon Brown might be given his apparent temperament (and if he’s still PM), but essentially everything has been handed over to middle and senior managers who, with the aid of wonderfully expensive consultants, have been tasked with putting the outputs of stage 2 into practice. This is when stuff gets set in stone and some poor sod discovers he’s lumbered with implementing various stupid ideas signed off by committees stuffed with terribly, terribly senior bods.
Right now I think we're working thru stage 2. For me January was the tipping point when it came to stage 1. This was when RBS shares fell once again prompting rumours about full-nationalisation, except it eventually became clear it didn’t matter how low RBS shares fell, the government wasn’t for nationalising. Thereafter the sense, felt acutely last year, of waiting for something else to fall over, was lost. No more major institutions it seems will be allowed to fail, not even in the US.
Alongside this and from a British perspective the Bank of England is maintaining a stream of speeches that refer to the new tools needed to combat asset bubbles and the FSA issued a huge document setting out various proposals i.e. they feel able to lift their heads up to outline what they think things will be like after the credit crunch. More importantly, the US just saw Timothy Geithner outline some ideas of what the US re-regulation of financial services will look like, which matters because it sets the benchmark for what everyone else will do (I liked the response of US bank bods to the Geithner proposals reported in the FT “yes, but these are proposals” i.e. piss off.)
All of which brings us back to what the Left has to say that’s of any relevance at this vital stage.……………………….. still waiting ……………………………. anyone any questions or suggestions? No? Shame that as it’s only the re-regulation of a global financial system that’s brought about the worst economic downturn since the great depression. Best just leave it then to the same bankers, regulators, government ministers and civil servants who either caused or facilitated it in the first place.
Actually it’s worse than that. Besides the very real moral, economic and political issues this all raises, it actually impacts on the drivel the left has been churning out in teh meantime. Take the Fabian society’s housing apartheid – if there’s no more cheap credit available for owner occupiers and buy to let investors to actually buy houses and fewer get built, how can this apartheid (what a disgustingly inappropriate use of that term), be addressed? Similarly, new housing regs impose higher environmental standards, so no housing market = less environmentally friendly homes, whaddya think of that then Red Pepper? Or theres PFI/PPP that good old trade union, lefty bugbear that was built on the assumption cheap credit would always be readily available. So should we connect what credit markets will look like in this brave new re-regulated world (heres a clue – more expensive) to debates over whether PFI/PPP will ever pass value for money tests in future (or whether these will simply be flexed to accommodate this?) Ah well.
Hence me stealing a phrase a mate came up with in a completely different context. The pubes are the gits involved in stages 1 and 2 and the left. The crumbs? That’s what the rest of us will be left with at the end of the downturn.
(1) For me Robert Wade’s recent NLR article on things is an honourable exception to this for the most part.
Tuesday, 9 June 2009
From Riga to Wall Street
If you can remember the British Exchange Rate Mechanism (ERM) experiment and Black Wednesday you’ll have an insight into a bit of the Latvian economy’s current plight. Latvia, like Britain, pegged the exchange rate of its currency to another, stronger currency. In Latvia’s case it’s the Euro, which has increased in value. The standard response here for maintaining a peg is to raise interest rates, drawing in foreign capital to prop up the exchange rate. Latvian central bank rates are accordingly a good chunk higher than the ECB’s right now.
The downside to this is straightforward; higher interest rates typically dampen down economic activity. In addition, propping up an over-valued currency misses out on the benefits of a cheap one i.e. if its cheaper to buy Latvian then exports are more competitive, domestic goods have an advantage over imports and more drunken Brits will go on stag weekends to Riga.
The particular problem Latvia has is the currency peg led to Latvians borrowing en masse in foreign currency to the extent that over 80 per cent of Latvian households now have debt denominated in Euros (for debt read mortgages). So if the currency is devalued by say 10% allova sudden everyone in the country owes 10% more. Now that’s an awfy good way to muck things up. It also means monetary policy is stuffed big time leaving fiscal measures the order of the day. Except for Latvia this means cutting public spending hard at a time when the economy is forecast to shrink by 20% this year alone.
By contrast the IMF had this to say yesterday about Euro Area fiscal policies “Given the large automatic stabilizers in the euro area, the discretionary measures currently adopted seem broadly appropriate, with further stimulus to be set aside for contingencies.” – the automatic stabilizers being benefit payments and what not which increase along with unemployment at the same time as tax revenues fall.
So the apparent consensus is Euro-area government shouldn’t cut public spending and should allow government borrowing to increase whereas Latvia needs to cut public spending regardless of Latvians no exactly being well off to begin with.
The bigger picture here is if Latvia devalues its currency or the economy collapses, then the question becomes which Baltic state will be next. Plus there’s the Swedish banks that were doing a big chunk of the lending who might find themselves well stuffed by all these Latvian borrowers defaulting.
All this leaves me wondering if the Latvian economy is being sacrificed to avoid a domino effect that could undermine the well-being of the broader Baltic region. Such an event could in turn undermine global confidence in the financial system just as its getting itself back together again.
if this is the case though shouldn’t more be getting done to help them? I mean in April Latvian unemployment reached 17.4% and is going to keep on rising meaning we’re looking at at least one in five people is going to be on the dole in a country where mass emmigration has been making the unemployment statistics look better than they actually are for years!
So there you are then, Latvia is totally stuffed and the degree of economic distress and all that brings is well beyond anything we’re going to experience. At the same time it’s just been announced 10 US banks are now allowed to repay the funds they’d previously received from the US TARP fund. The motive here is relatively straightforward – if they no longer have obligations to government, government is in a much weaker position when it comes to imposing restrictions on executive pay. Shame that the economy would benefit more from these banks using these funds to actually finance more lending, but what the hey, we can’t have the financiers who caused all this in the first place missing out on their bonuses for 2 years on the trot.
To get a sense of how much taxpayer help this involved just one US bank (JP Morgan) received $25bn in support. By contrast the Latvian government is going to cut public spending so as to get the next tranche of just $10.4bn in aid from the IMF.
So sure Latvia is looking to membership of the Euro in 2012 I think it is when presumably/hopefully/fingers-crossededly all this will be less of an issue. But, between now and then the economy is going to be absolutely humped and with it hundreds of thousands of peoples lives. And it gets worse because the reality, judging by the British experience throughout the twentieth century, is that over-valued currencies tend not to stay over-valued for ever and eventually get devalued, which implies much of the current Latvian pain is being endured for no good reason. But, hey ho, an eventual devaluation would at least allow Western investors to run in and buy up everything worth buying in the country.
In the meantime it appears that in much the same way that the Latvian government hacking back on public spending on the basics of life is necessary to maintain confidence in the global financial system, so is paying US bankers mega bonuses. Regardless of the fact I’ve only read about all this, it’s still difficult to avoid the bad taste it all leaves. Plus, if I was a Latvian I would be thinking what the fuck? And what the fuck has all this post-Soviet Union look West, not East actually got me i.e. theres potential political consequences here.
The downside to this is straightforward; higher interest rates typically dampen down economic activity. In addition, propping up an over-valued currency misses out on the benefits of a cheap one i.e. if its cheaper to buy Latvian then exports are more competitive, domestic goods have an advantage over imports and more drunken Brits will go on stag weekends to Riga.
The particular problem Latvia has is the currency peg led to Latvians borrowing en masse in foreign currency to the extent that over 80 per cent of Latvian households now have debt denominated in Euros (for debt read mortgages). So if the currency is devalued by say 10% allova sudden everyone in the country owes 10% more. Now that’s an awfy good way to muck things up. It also means monetary policy is stuffed big time leaving fiscal measures the order of the day. Except for Latvia this means cutting public spending hard at a time when the economy is forecast to shrink by 20% this year alone.
By contrast the IMF had this to say yesterday about Euro Area fiscal policies “Given the large automatic stabilizers in the euro area, the discretionary measures currently adopted seem broadly appropriate, with further stimulus to be set aside for contingencies.” – the automatic stabilizers being benefit payments and what not which increase along with unemployment at the same time as tax revenues fall.
So the apparent consensus is Euro-area government shouldn’t cut public spending and should allow government borrowing to increase whereas Latvia needs to cut public spending regardless of Latvians no exactly being well off to begin with.
The bigger picture here is if Latvia devalues its currency or the economy collapses, then the question becomes which Baltic state will be next. Plus there’s the Swedish banks that were doing a big chunk of the lending who might find themselves well stuffed by all these Latvian borrowers defaulting.
All this leaves me wondering if the Latvian economy is being sacrificed to avoid a domino effect that could undermine the well-being of the broader Baltic region. Such an event could in turn undermine global confidence in the financial system just as its getting itself back together again.
if this is the case though shouldn’t more be getting done to help them? I mean in April Latvian unemployment reached 17.4% and is going to keep on rising meaning we’re looking at at least one in five people is going to be on the dole in a country where mass emmigration has been making the unemployment statistics look better than they actually are for years!
So there you are then, Latvia is totally stuffed and the degree of economic distress and all that brings is well beyond anything we’re going to experience. At the same time it’s just been announced 10 US banks are now allowed to repay the funds they’d previously received from the US TARP fund. The motive here is relatively straightforward – if they no longer have obligations to government, government is in a much weaker position when it comes to imposing restrictions on executive pay. Shame that the economy would benefit more from these banks using these funds to actually finance more lending, but what the hey, we can’t have the financiers who caused all this in the first place missing out on their bonuses for 2 years on the trot.
To get a sense of how much taxpayer help this involved just one US bank (JP Morgan) received $25bn in support. By contrast the Latvian government is going to cut public spending so as to get the next tranche of just $10.4bn in aid from the IMF.
So sure Latvia is looking to membership of the Euro in 2012 I think it is when presumably/hopefully/fingers-crossededly all this will be less of an issue. But, between now and then the economy is going to be absolutely humped and with it hundreds of thousands of peoples lives. And it gets worse because the reality, judging by the British experience throughout the twentieth century, is that over-valued currencies tend not to stay over-valued for ever and eventually get devalued, which implies much of the current Latvian pain is being endured for no good reason. But, hey ho, an eventual devaluation would at least allow Western investors to run in and buy up everything worth buying in the country.
In the meantime it appears that in much the same way that the Latvian government hacking back on public spending on the basics of life is necessary to maintain confidence in the global financial system, so is paying US bankers mega bonuses. Regardless of the fact I’ve only read about all this, it’s still difficult to avoid the bad taste it all leaves. Plus, if I was a Latvian I would be thinking what the fuck? And what the fuck has all this post-Soviet Union look West, not East actually got me i.e. theres potential political consequences here.
Thursday, 4 June 2009
James Purnell is a shite
When the Treasury select committee first looked into private equity, my impression was that the "expert witnesses" spent much of their time, initially at least, explaining what private equity actually was and how it worked.
This is understandable. Labour MPs are for the most part either public sector professionals or professional politicians. They have barely, if any, experience of the financial services sector nor much understanding of it. For the most part their grasp of economics typically sucks major ass as well. Right now we are in the most serious economic crisis since the great depression. This originated in complex financial instruments. Looking at the Labour party I'd guess only a very small minority have a reasonable grasp of all this.
This is a tragedy because financial services in Britain are currently being re-regulated. Doing so badly will be a disaster for the economy given it's economic as well as social, moral and political implications. Changing leaders and cabinet ministers is a good means of ensuring it is done badly.
The Tory party, in my view, have been a waste of space thru-out the credit crunch. Any discussion I've seen involving a Tory bod has been a waste of time because they have barely understood whats going on and have had no meaningful or practical alternatives to offer. Again this is understandable because in my view the Labour government has actually responded very well to the current crisis. Its easy to find examples of failure (e.g. overly complex mortgage benefit arrangements) and then theres the pre-credit crunch policies and their implications re: government borrowing. But, on balance the response has been a good one - wide-ranging, relevant, flexible and innovative.
Set against this is James Purnell's resignation and resignation letter. In my view he's decided Labour will get humped in the next general election, but so what? Government's tend not to survive serious economic downturns regardless of a leader's ability to "connect with the people". Accepting that and getting on with things regardless would be a genuine example of public service.
Instead, Purnell is playing a long game - its not about whether Gordon brown remains prime minister tomorrow or whether Alan Johnson can lead Labour to victory in the next election (his failure in turn clearing the way for David Miliband), its who might be foriegn or home secretary in a Labour government in 10 years time. By taking this stand today he is attempting to establish himself as a political big beast tomorrow. It strikes me as reasonable to assume his personal ambition is a key factor here.
Except, he is helping to destablise an administration that is, in my view, doing the best it can and doing better than most other Western governments. This is a tragedy given just debating whether Gordon Brown should remain prime minister by itself recently knocked down the value of the pound i.e. made things more expensive for everyone in Britain.
Alternatively, Purnell genuinely believes what he is doing is for the best. If so he is a fool. The current political climate is about trying to comprehend the revulsion felt by much of the electorate over MP expenses. The expenses scandal is a bad thing, but, it would be much better to have the economy sorted first. I can only read Purnell's actions as a genuinely selfless act from the perspective of the Labour party with Gordon Brown being positionined as the fall guy for the selfish actions of however many Labour (& Tory & Liberal) MPs. Except given this is undermining the government's ability to function and lets be blunt, it's future calibre at a critical juncture, it leaves Purnell placing party before country.
Purnell is himself involed in the expenses scandal. He is now the former work and pensions secretary who claimed more for food each month than an unemployed person recieves in benefits to cover their food, drink, utility bills, clothing and entertainment. As such he has no moral authority whatsoever. As a professional politician he lives at a significant remove from real life. It strikes me this distance is a key factor in his thinking and decsions.
Purnell has certainly made a name for himself, just not the one he is hoping for.
This is understandable. Labour MPs are for the most part either public sector professionals or professional politicians. They have barely, if any, experience of the financial services sector nor much understanding of it. For the most part their grasp of economics typically sucks major ass as well. Right now we are in the most serious economic crisis since the great depression. This originated in complex financial instruments. Looking at the Labour party I'd guess only a very small minority have a reasonable grasp of all this.
This is a tragedy because financial services in Britain are currently being re-regulated. Doing so badly will be a disaster for the economy given it's economic as well as social, moral and political implications. Changing leaders and cabinet ministers is a good means of ensuring it is done badly.
The Tory party, in my view, have been a waste of space thru-out the credit crunch. Any discussion I've seen involving a Tory bod has been a waste of time because they have barely understood whats going on and have had no meaningful or practical alternatives to offer. Again this is understandable because in my view the Labour government has actually responded very well to the current crisis. Its easy to find examples of failure (e.g. overly complex mortgage benefit arrangements) and then theres the pre-credit crunch policies and their implications re: government borrowing. But, on balance the response has been a good one - wide-ranging, relevant, flexible and innovative.
Set against this is James Purnell's resignation and resignation letter. In my view he's decided Labour will get humped in the next general election, but so what? Government's tend not to survive serious economic downturns regardless of a leader's ability to "connect with the people". Accepting that and getting on with things regardless would be a genuine example of public service.
Instead, Purnell is playing a long game - its not about whether Gordon brown remains prime minister tomorrow or whether Alan Johnson can lead Labour to victory in the next election (his failure in turn clearing the way for David Miliband), its who might be foriegn or home secretary in a Labour government in 10 years time. By taking this stand today he is attempting to establish himself as a political big beast tomorrow. It strikes me as reasonable to assume his personal ambition is a key factor here.
Except, he is helping to destablise an administration that is, in my view, doing the best it can and doing better than most other Western governments. This is a tragedy given just debating whether Gordon Brown should remain prime minister by itself recently knocked down the value of the pound i.e. made things more expensive for everyone in Britain.
Alternatively, Purnell genuinely believes what he is doing is for the best. If so he is a fool. The current political climate is about trying to comprehend the revulsion felt by much of the electorate over MP expenses. The expenses scandal is a bad thing, but, it would be much better to have the economy sorted first. I can only read Purnell's actions as a genuinely selfless act from the perspective of the Labour party with Gordon Brown being positionined as the fall guy for the selfish actions of however many Labour (& Tory & Liberal) MPs. Except given this is undermining the government's ability to function and lets be blunt, it's future calibre at a critical juncture, it leaves Purnell placing party before country.
Purnell is himself involed in the expenses scandal. He is now the former work and pensions secretary who claimed more for food each month than an unemployed person recieves in benefits to cover their food, drink, utility bills, clothing and entertainment. As such he has no moral authority whatsoever. As a professional politician he lives at a significant remove from real life. It strikes me this distance is a key factor in his thinking and decsions.
Purnell has certainly made a name for himself, just not the one he is hoping for.
Wednesday, 3 June 2009
Skin in the game
At first glance the sub-prime debacle looks like a classic example of the “principal agent problem” where the principal seeks to align the agent’s interests with his or her own.
The principals here were the buyers of sub-prime debt. The agents were the brokers who sold the debt, the mortgage companies that provided it, the financial engineers who packaged it into asset backed securities and the investment bankers who sold it on to principles as securitisations.
Whereas the principal was looking for a nice, safe earner, the agents’ immediate interests didn’t include the safety of the individual credits. This was because the credit risk involved had been transferred to the principal leaving the agents to chase the fees and commission each new mortgage sale generated. Unfortunately, despite the principle having a clear interest in the underlying credit risk of what they were buying, they had less information about this than the agents. This was why rating agencies were so important; by rating the credit risk attached to the debt packages they performed the necessary due diligence on the principal’s behalf. So whether the interests of the principal and agent were aligned became apparently immaterial. Besides, anyone trying to sell on dross would be subject to reputational damage and a loss of trust that would undermine their ability to sell on their debt in future.
Neither of these checks turned out to be any good. The rating agencies, conflicts of interest aside re: who was paying their fees, got it wrong. Simple. End of. As for reputational risk well if everyone is selling dross, everyone’s reputation is damaged and the market as a whole is affected rather than individual reputations.
The big, big challenge is bankers, politicians, bank regulators and central bankers want securitisation to come back again. Securitisation gave retail banking customers indirect access to institutional investor cash, which they used to buy houses. This made new home owners happy along with builders and stamp duty collecting governments. But, most of all it made all the agents listed above smile like idiots. Unfortunately, right now no one can do a residential mortgage securitisation and sell it onto anyone other than a central bank. With the securitisation market effectively dead and no signs as yet of it recovering nobody is smiling.
This is a major factor when it comes to explaining why the regulations covering securitisation are going to be changed; there are too many vested interests at work for it just to be left to die. Instead bank regulators and central banks are going to try and make it more secure in the hope this will eventually prompt the return of private investors.
One of the main developments here is being led by Charlie McCreevy, the European Commissioner for Internal Market and Services, who is seeing to the introduction of a “5% retention for securitisation”. This means that the people trying to sell on debt will have to retain at least 5% of it. The logic of this is the principal-agent problem writ large because by retaining a small tranche of it the agents will be left with a vested interest in making sure its safe or to quote Charlie the change will mean in future they will retain some “skin in the game”.
It’s a nice idea. In fact for what its worth I’m all in favour, it’s just it’s also a little bit pants and here’s why; if you sell senior debt like a mortgage, worst case scenario at least you can call up the house, sell it and try and get some of your money back. However, if you provided equity instead you only get any crumbs left after the senior debt provider has tried to get their loan back i.e. chances are you’ll get hee haw.
This fundamental difference in risk is why equity investors (think dragons den) typically charge a lot more than lenders. Now, leaping from housing to the commercial property market, yes it saw plenty of commercial property securitisations, however it also saw more and more lenders providing more and more debt AND equity or in Charlie’s terms more and more banks had more and more skin in the game, yet they still fucked it all up.
The real issue for me is what kind of institutional and cultural arrangements see banks continue to throw money at asset bubbles even after they’ve burst regardless of whether they’re principals, agents or jabberwockies. 5% retention? 50% retention? Who cares, rather its about institutional investor expectations and the ability of corporate leaders to manage them, marketing departments that don’t understand the markets they lend to, executives fixated on next quarter’s sales targets and organisational sycophants who know damn fine well the way to get on is to fall into line rather than to apply commercial judgement and common-sense and question whats actually going on.
To give a practical example of this my understanding is in one bank an economics team were quietly advised well into last year not to use the term credit crunch in their reports in case a particular executive read them; because he didn’t believe there was a credit crunch all external analysis had to skirt around the issue. Now how fucked up an organisational culture is that? What kind of risks does it pose and should that level of institutionalised stupidity not also be a target for regulators?
Similarly, the debate over pay and bonuses also strikes me as pants. The big emphasis right now is on deferring compensation with the principal agent problem appearing to underly much of the thinking. Except for executives much of their compensation is already arguably deferred due to the emphasis on share options. Similarly the existing emphasis on rewarding people in shares also means they have a vested interest in the future performance of their employing organisation (think of the comments made by the bank execs summoned by the Treasury select committee about how much they’d personally lost).
I’d argue instead that deferring rewards simply hasn’t enough bite and that 2 additional measures are needed. The first is clawbacks – you do a deal today that ends up costing money in 5 years time? Clawback!Gie us some of your cash and if you haven't got it we'll bankrupt you! The second concerns severance terms.
Right now any banker of any seniority exists largely outside employment law i.e. the amount they’re likely to receive based on a standard compromise agreement of 6 months salary (with the first 30 grand tax free) relative to the maximum award for say constructive dismissal means they have no interest in taking their employer to an industrial tribunal unless they can claim some gender discrimination was going on in which case the potential pay out is uncapped (ahh, so that’s one reason why sacked gay and female financiers flag up gender issues!). Then theres the reputational aspect that means someone even moderately senior who fucks up big time is typically given the opportunity to resign rather than be sacked, which avoids any of the conflict that could lead to a banks institutionalised incompetence hitting the news.
So there’s arguably a culture in corporate banking of throwing money at human resource problems until they go away and/or sweeping them under the carpet. Changing what an employment tribunal can award to a salary multiple and/or the existing limit, whichever is higher, would address this and expose banks to more scrutiny because it would see more bankers taking banks to employment tribunals, which in turn get reported on by the media. Alongside this I’d also suggest reworking executive severance terms into two phases alongside a basic performance clause whereby people e.g. Fred Goodwin, who feck up get feck all. So this would take the standard executive benchmark of share prices and use it to assess (1) the applicability of existing reward policies and then (2) their application with a clear justification issued at each stage that requires signed approval by say a non-executive committee. You’ll still get people fucking up right enough, but hey ho at least they won’t have as much cash left to console themselves with. And for those that question the fairness of treating executives differently, they already are by specialist executive pay teams and consultancies that operate alongside the bods who work out how much to pay everyone else.
A P.S. 17th June - shoulda realised - a big thing with originators keeping a chunk of the debt is it clogs up their balance sheets. If they could sell it all on then their capital base is irrelevant. if they have to keep a slice, then the amount of debt they can originate is constrained by their capital base. So skin in the game is all very well, but here it seems to mean limiting the growth in mortgage finance.
The principals here were the buyers of sub-prime debt. The agents were the brokers who sold the debt, the mortgage companies that provided it, the financial engineers who packaged it into asset backed securities and the investment bankers who sold it on to principles as securitisations.
Whereas the principal was looking for a nice, safe earner, the agents’ immediate interests didn’t include the safety of the individual credits. This was because the credit risk involved had been transferred to the principal leaving the agents to chase the fees and commission each new mortgage sale generated. Unfortunately, despite the principle having a clear interest in the underlying credit risk of what they were buying, they had less information about this than the agents. This was why rating agencies were so important; by rating the credit risk attached to the debt packages they performed the necessary due diligence on the principal’s behalf. So whether the interests of the principal and agent were aligned became apparently immaterial. Besides, anyone trying to sell on dross would be subject to reputational damage and a loss of trust that would undermine their ability to sell on their debt in future.
Neither of these checks turned out to be any good. The rating agencies, conflicts of interest aside re: who was paying their fees, got it wrong. Simple. End of. As for reputational risk well if everyone is selling dross, everyone’s reputation is damaged and the market as a whole is affected rather than individual reputations.
The big, big challenge is bankers, politicians, bank regulators and central bankers want securitisation to come back again. Securitisation gave retail banking customers indirect access to institutional investor cash, which they used to buy houses. This made new home owners happy along with builders and stamp duty collecting governments. But, most of all it made all the agents listed above smile like idiots. Unfortunately, right now no one can do a residential mortgage securitisation and sell it onto anyone other than a central bank. With the securitisation market effectively dead and no signs as yet of it recovering nobody is smiling.
This is a major factor when it comes to explaining why the regulations covering securitisation are going to be changed; there are too many vested interests at work for it just to be left to die. Instead bank regulators and central banks are going to try and make it more secure in the hope this will eventually prompt the return of private investors.
One of the main developments here is being led by Charlie McCreevy, the European Commissioner for Internal Market and Services, who is seeing to the introduction of a “5% retention for securitisation”. This means that the people trying to sell on debt will have to retain at least 5% of it. The logic of this is the principal-agent problem writ large because by retaining a small tranche of it the agents will be left with a vested interest in making sure its safe or to quote Charlie the change will mean in future they will retain some “skin in the game”.
It’s a nice idea. In fact for what its worth I’m all in favour, it’s just it’s also a little bit pants and here’s why; if you sell senior debt like a mortgage, worst case scenario at least you can call up the house, sell it and try and get some of your money back. However, if you provided equity instead you only get any crumbs left after the senior debt provider has tried to get their loan back i.e. chances are you’ll get hee haw.
This fundamental difference in risk is why equity investors (think dragons den) typically charge a lot more than lenders. Now, leaping from housing to the commercial property market, yes it saw plenty of commercial property securitisations, however it also saw more and more lenders providing more and more debt AND equity or in Charlie’s terms more and more banks had more and more skin in the game, yet they still fucked it all up.
The real issue for me is what kind of institutional and cultural arrangements see banks continue to throw money at asset bubbles even after they’ve burst regardless of whether they’re principals, agents or jabberwockies. 5% retention? 50% retention? Who cares, rather its about institutional investor expectations and the ability of corporate leaders to manage them, marketing departments that don’t understand the markets they lend to, executives fixated on next quarter’s sales targets and organisational sycophants who know damn fine well the way to get on is to fall into line rather than to apply commercial judgement and common-sense and question whats actually going on.
To give a practical example of this my understanding is in one bank an economics team were quietly advised well into last year not to use the term credit crunch in their reports in case a particular executive read them; because he didn’t believe there was a credit crunch all external analysis had to skirt around the issue. Now how fucked up an organisational culture is that? What kind of risks does it pose and should that level of institutionalised stupidity not also be a target for regulators?
Similarly, the debate over pay and bonuses also strikes me as pants. The big emphasis right now is on deferring compensation with the principal agent problem appearing to underly much of the thinking. Except for executives much of their compensation is already arguably deferred due to the emphasis on share options. Similarly the existing emphasis on rewarding people in shares also means they have a vested interest in the future performance of their employing organisation (think of the comments made by the bank execs summoned by the Treasury select committee about how much they’d personally lost).
I’d argue instead that deferring rewards simply hasn’t enough bite and that 2 additional measures are needed. The first is clawbacks – you do a deal today that ends up costing money in 5 years time? Clawback!Gie us some of your cash and if you haven't got it we'll bankrupt you! The second concerns severance terms.
Right now any banker of any seniority exists largely outside employment law i.e. the amount they’re likely to receive based on a standard compromise agreement of 6 months salary (with the first 30 grand tax free) relative to the maximum award for say constructive dismissal means they have no interest in taking their employer to an industrial tribunal unless they can claim some gender discrimination was going on in which case the potential pay out is uncapped (ahh, so that’s one reason why sacked gay and female financiers flag up gender issues!). Then theres the reputational aspect that means someone even moderately senior who fucks up big time is typically given the opportunity to resign rather than be sacked, which avoids any of the conflict that could lead to a banks institutionalised incompetence hitting the news.
So there’s arguably a culture in corporate banking of throwing money at human resource problems until they go away and/or sweeping them under the carpet. Changing what an employment tribunal can award to a salary multiple and/or the existing limit, whichever is higher, would address this and expose banks to more scrutiny because it would see more bankers taking banks to employment tribunals, which in turn get reported on by the media. Alongside this I’d also suggest reworking executive severance terms into two phases alongside a basic performance clause whereby people e.g. Fred Goodwin, who feck up get feck all. So this would take the standard executive benchmark of share prices and use it to assess (1) the applicability of existing reward policies and then (2) their application with a clear justification issued at each stage that requires signed approval by say a non-executive committee. You’ll still get people fucking up right enough, but hey ho at least they won’t have as much cash left to console themselves with. And for those that question the fairness of treating executives differently, they already are by specialist executive pay teams and consultancies that operate alongside the bods who work out how much to pay everyone else.
A P.S. 17th June - shoulda realised - a big thing with originators keeping a chunk of the debt is it clogs up their balance sheets. If they could sell it all on then their capital base is irrelevant. if they have to keep a slice, then the amount of debt they can originate is constrained by their capital base. So skin in the game is all very well, but here it seems to mean limiting the growth in mortgage finance.
Wednesday, 27 May 2009
Making the news
I mind someone telling me about one of the big Scottish broadsheets and how the same journalist wrote articles that appeared under different names to give the impression the business desk team was bigger than it actually was. The practical consequences of this became apparent when I read some articles about stuff I actually knew about.
The one that sticks in the mind involved an executive who had failed to deliver a high profile project the chief executive was taking a personal interest in. The executive was accordingly taken aside and told to piss off. This was reported later on in a newspaper article that instead paid tribute to the executive’s many, many achievements then waxed lyrically about their desire to pursue new career opportunities closer to family and friends. The journalist had simply cut and pasted from a press release.
He or she did so because they were presumably struggling to produce 3 different articles under 3 different names at the time and saw this as an open goal. Besides who would complain? The employer’s reputation was intact as was the executive’s which meant the journalist only had two more articles to write to meet that day’s deadline. Result! Except this example illustrates the mutual dependency that exists between journalists and corporate PR departments and the clear scope this has created for routine misrepresentation.
Thank god for the BBC then, that licence fee funded independent cultural giant! Except when I was looking at its business section today I read the following “top business” story headline – “Uncertainty 'keeps borrowing low'”. Does it? I’d best read on then what with us being in a credit crunch an'all.
The article started in bold with the British Bankers’ Association (BBA) assertion that “Uncertainty over UK householders' financial position is dictating their low levels of borrowing” and that this was evidence of “The "safety-first" policy of householders”. Despite this there was no need to worry because mortgage approvals had already stabilised. Then a spokesman from the mortgage broker Coreco offered some sage words of advice –if you’re about to come off an existing mortgage deal, DON’T just move onto your lenders standard variable rate. This “wait and see” approach could “prove very costly” because “the general consensus is that fixed rates are as cheap as they are likely to get”.
Shite. The BBA is the Banking industry’s mouthpiece and as independent of them on matters like this as my arse is of me after a kebab. Mortgage lending has collapsed because high risk lenders are closed to new business, foreign lenders have left Britain and those that are left have hacked back mortgage loan to values to the point where the average borrower typically now needs savings equal to a year’s worth of their gross salary to buy a house compared to the 5 to 10 grand people put on their credit cards before the credit crunch.
The fact the housing market collapse has been driven by supply-side constraints is why government is asking banks for commitments to lend money. But, what’s the point of that then if people have now adopted a safety first policy the BBA might say. But, that’s shite that is because mortgage lending has already stabilised despite every economic indicator and forecast getting worse i.e. if its safety first mortgage lending would still be falling.
So what we have is a BBC top story that blithely cuts and pastes from a BBA press release written in response to government intervention that also tries to recast supply-side constraints on mortgage availability as a matter of consumer caution. Quoting from mortgage brokers though is just insulting. Besides giving them a licence fee payer paid platform on which to publicise their brand they get the chance to dish out advice that essentially encourages people to get a new mortgage deal NOW. So OK why blame a dog for barking given mortgage brokers make their money selling mortgages. But, is there a general consensus on the future direction of mortgage rates? Mebbe if you’re polling fuckwits there is, but as the future availability of credit will be heavily influenced by what happens to secondary markets and the shape of these is currently being debated by global financial regulators, anyone that can claim there is a consensus when the latest word from the FSA is we’ll only start talking about things in more detail in September, by definition doesn’t know what they’re talking about.
So what we have here isn’t a top business story unless by that you mean
1) Uncritically providing a platform for a pressure group intent on influencing public perception of it's members and government policy
2) Handing over some free publicity to a salesman who clearly doesn’t understand the market he operates in.
But, hey ho in an age where its about being first with the story, first with the volume and first with the headcount reductions because with everyone now expecting free news on tap 24/7 no-one can afford journalists, its perhaps only to be expected.
Alternatively, introducing a policy whereby every comment by a spokesman or pressure group is prefaced with a clear statement of how they are funded and/or make their money would be a quick, easy and obvious response. It’d also be fun. Back in the 1970s the Glasgow University Media Group made its reputation largely by recording the adjectives news organisations routinely associated with trade unionists then pointing out what they took for granted as being common-sensical and objective was actually biased. Hence industrial correspondents (remember them?) talked about militant trade unions rather than just trade unions. Because updating this by say tagging the word git to the phrase mortgage broker might cause offence, we could use an FSA mortgage sales regulation style instead. Fer instance, any quote from say the BBA included in a BBC article or news report is prefaced by a statement that clearly sets out the vested interest involved. And some context might help as well.
So fer instance, the top story discussed here would instead read something like this -
“The BBA is the banking industry’s trade association in Britain. It is wholly (1) funded by the banking industry and has the primary objective of furthering the interests of banking organisations trading in Britain(2). At a time when government has sought to secure commitments from major high street lenders to lend money to customers in exchange for unprecedented levels of support the BBA has just issued a press statement claiming that it is actually uncertainty over UK householders' financial position that is driving the historically low levels of borrowing now being seen”
Comparable statements could similarly be used in relation to statements issued by PR companies, lobbyists, company spokespeople and so on i.e. the vested interests actually get spelled out. I’m sure all concerned would appreciate the transparency.
(1) The latest BBA annual report refers to what it does not it’s funding unfortunately, so perhaps they aren’t wholly funded by banks.
(2) What the BBA says is “The British Bankers’ Association is the voice of banking and financial services. We work with governments, regulators, media and the users of banking services to help build in the UK a world-beating banking industry within a competitive global market”. Except, that’s poncy self-serving wank that is.
The one that sticks in the mind involved an executive who had failed to deliver a high profile project the chief executive was taking a personal interest in. The executive was accordingly taken aside and told to piss off. This was reported later on in a newspaper article that instead paid tribute to the executive’s many, many achievements then waxed lyrically about their desire to pursue new career opportunities closer to family and friends. The journalist had simply cut and pasted from a press release.
He or she did so because they were presumably struggling to produce 3 different articles under 3 different names at the time and saw this as an open goal. Besides who would complain? The employer’s reputation was intact as was the executive’s which meant the journalist only had two more articles to write to meet that day’s deadline. Result! Except this example illustrates the mutual dependency that exists between journalists and corporate PR departments and the clear scope this has created for routine misrepresentation.
Thank god for the BBC then, that licence fee funded independent cultural giant! Except when I was looking at its business section today I read the following “top business” story headline – “Uncertainty 'keeps borrowing low'”. Does it? I’d best read on then what with us being in a credit crunch an'all.
The article started in bold with the British Bankers’ Association (BBA) assertion that “Uncertainty over UK householders' financial position is dictating their low levels of borrowing” and that this was evidence of “The "safety-first" policy of householders”. Despite this there was no need to worry because mortgage approvals had already stabilised. Then a spokesman from the mortgage broker Coreco offered some sage words of advice –if you’re about to come off an existing mortgage deal, DON’T just move onto your lenders standard variable rate. This “wait and see” approach could “prove very costly” because “the general consensus is that fixed rates are as cheap as they are likely to get”.
Shite. The BBA is the Banking industry’s mouthpiece and as independent of them on matters like this as my arse is of me after a kebab. Mortgage lending has collapsed because high risk lenders are closed to new business, foreign lenders have left Britain and those that are left have hacked back mortgage loan to values to the point where the average borrower typically now needs savings equal to a year’s worth of their gross salary to buy a house compared to the 5 to 10 grand people put on their credit cards before the credit crunch.
The fact the housing market collapse has been driven by supply-side constraints is why government is asking banks for commitments to lend money. But, what’s the point of that then if people have now adopted a safety first policy the BBA might say. But, that’s shite that is because mortgage lending has already stabilised despite every economic indicator and forecast getting worse i.e. if its safety first mortgage lending would still be falling.
So what we have is a BBC top story that blithely cuts and pastes from a BBA press release written in response to government intervention that also tries to recast supply-side constraints on mortgage availability as a matter of consumer caution. Quoting from mortgage brokers though is just insulting. Besides giving them a licence fee payer paid platform on which to publicise their brand they get the chance to dish out advice that essentially encourages people to get a new mortgage deal NOW. So OK why blame a dog for barking given mortgage brokers make their money selling mortgages. But, is there a general consensus on the future direction of mortgage rates? Mebbe if you’re polling fuckwits there is, but as the future availability of credit will be heavily influenced by what happens to secondary markets and the shape of these is currently being debated by global financial regulators, anyone that can claim there is a consensus when the latest word from the FSA is we’ll only start talking about things in more detail in September, by definition doesn’t know what they’re talking about.
So what we have here isn’t a top business story unless by that you mean
1) Uncritically providing a platform for a pressure group intent on influencing public perception of it's members and government policy
2) Handing over some free publicity to a salesman who clearly doesn’t understand the market he operates in.
But, hey ho in an age where its about being first with the story, first with the volume and first with the headcount reductions because with everyone now expecting free news on tap 24/7 no-one can afford journalists, its perhaps only to be expected.
Alternatively, introducing a policy whereby every comment by a spokesman or pressure group is prefaced with a clear statement of how they are funded and/or make their money would be a quick, easy and obvious response. It’d also be fun. Back in the 1970s the Glasgow University Media Group made its reputation largely by recording the adjectives news organisations routinely associated with trade unionists then pointing out what they took for granted as being common-sensical and objective was actually biased. Hence industrial correspondents (remember them?) talked about militant trade unions rather than just trade unions. Because updating this by say tagging the word git to the phrase mortgage broker might cause offence, we could use an FSA mortgage sales regulation style instead. Fer instance, any quote from say the BBA included in a BBC article or news report is prefaced by a statement that clearly sets out the vested interest involved. And some context might help as well.
So fer instance, the top story discussed here would instead read something like this -
“The BBA is the banking industry’s trade association in Britain. It is wholly (1) funded by the banking industry and has the primary objective of furthering the interests of banking organisations trading in Britain(2). At a time when government has sought to secure commitments from major high street lenders to lend money to customers in exchange for unprecedented levels of support the BBA has just issued a press statement claiming that it is actually uncertainty over UK householders' financial position that is driving the historically low levels of borrowing now being seen”
Comparable statements could similarly be used in relation to statements issued by PR companies, lobbyists, company spokespeople and so on i.e. the vested interests actually get spelled out. I’m sure all concerned would appreciate the transparency.
(1) The latest BBA annual report refers to what it does not it’s funding unfortunately, so perhaps they aren’t wholly funded by banks.
(2) What the BBA says is “The British Bankers’ Association is the voice of banking and financial services. We work with governments, regulators, media and the users of banking services to help build in the UK a world-beating banking industry within a competitive global market”. Except, that’s poncy self-serving wank that is.
Monday, 25 May 2009
War of Independence
It was all so simple before the credit crunch. The Bank of England was given independence and tasked with keeping inflation (measured using the consumer price inflation or CPI) at 2%. To do this a monthly monetary policy committee (the MPC) meets for 2 days, surveys the data then votes on what the Bank’s base interest rate should be. As most other British interest rates are derived from this base rate, changing the latter would in turn see the others change.
Flexing the cost of credit in this way would in turn influence overall economic rates of activity e.g. if it was more expensive to borrow money to buy ladders, less people would buy ladders, the ladder industry would cut prices to encourage more sales and as ladders are included in the basket of goods used to measure CPI, CPI would fall.
That was then. A defining feature of the credit crunch has been the connection between base rate and other interest rates breaking down, in particular between base rate and LIBOR (London Inter-Bank Offer Rate), which is what banks charge when they lend money to each other. Base rate went down (and down and down), but LIBOR has remained persistently high because banks had suddenly become scared other banks were going to fail and on that basis stopped lending to each other.
Allova sudden it became awfy expensive for banks to get cash to lend to customers if they could get it at all. The result was credit rationing – less new credit is available than before and what is available became suddenly more expensive. Hence, the collapse in the confidence banks once had in each other eventually drove the economy into recession by hacking back the number of debt funded commercial and private transactions.
The thing is there were warning signs in the run up to the credit crunch. Asset prices e.g. of houses, companies and offices, were all growing like gangbusters in the run up to the crunch because the ready availability of cheap credit made them cheap to buy. Raising interest rates would have slowed this down and the MPC was certainly mindful of what was going on in the housing market judging by comments recorded in its minutes. However, that wasn’t the Bank of England’s job and anyway none of these things are included in the CPI basket of goods.
Hence the argument to set interest rates in relation to house prices as well as CPI. Except this is regarded as unacceptable by the Bank because setting interest rates like that might adversely affect every other part of the economy e.g. raising rates to stop house prices growing too fast could damage manufacturing by increasing its credit costs and the exchange rate, which would make exports less competitive.
Instead, when I attended a presentation on the latest Bank of England inflation report given by a lovely Bank of England Agent the other day he described how the Bank is discussing other methods of restricting lending. Except this raises all sorts of yucky issues.
There’s the specific debate already underway as to what method or methods should be put in place to be sure – should it be a cap on loans to value, the rate of growth in a particular type of lending, counter-cyclical capital provisioning, and so on and so on. But, that’s not the point here. Rather, its what this could mean for the Bank’s independence and remit that’s the issue.
We now know that when the Bank does something different like quantitative easing, barely anyone understands it. Because this might be the wrong thing to do, this strikes me as a bad thing. So there is the clear risk of the Bank acquiring new powers and targets no-one understands as opposed to its existing nice, neat and straightforward remit of setting interest rates to meet an inflation target.
Then there is the bun fight already underway as to who does what, like isn’t this something the Financial Services Authority should do? A problem here is regulatory capture with the FSA successfully giving the impression of being so up the banking sector’s arse it’s not true. I mean its something of an open secret as to how shit a lot of internal bank systems are that have been passed by the FSA and as its chairman said himself when deciding whether someone was a fit and proper person the FSA’s main criteria was whether they were a money launderer and that was it really. So you’ve a regulatory body that’s arguably in bed with the banks and not especially competent wanting to make sure no one else establishes tools for influencing bank lending because that’s its job. This is exactly the kind of situation likely to produce a compromise designed more to save face/appease vested interests than it is prevent another asset bubble.
Finally, there’s government. Government likes it when house prices go up because it generates lots of taxes and makes voters happy. So imagine the scene; an election is due and allova sudden the Bank of England wades in using its new anti-house price bubble blaster. What government is going to tolerate that kinda vote losing behaviour? Some might, but most probably wouldn’t, which raises the real risk of the Bank’s independence being compromised by politicians.
As to why this could be an awfy bad thing, perversely one of the big factors contributing to the credit crunch was the success of economic policy. Yup, thats right, its success. In the 1980s the Thatcherite monetarist experiement was a disaster, later on the EMU experiment and associated destructivly high interest rates use to prop up an over-valued pound prompted the last property crash. So by abdicating responsibility for rate setting government and taking itself out the equation, government generated a high degree of (over)confidence - no government rate setting = no early 90s style property crash ever again! Just a pain the banks chose to blow their own feet off instead. In future though we could see government reassess its role and that of economic policy in favour of more intervention.
So there you are then, right now the Bank of England clearly wants to change its remit and is discussing what new tools this will entail. The risk is they end up with a new remit and tools that -
1) Nobody understands (give or take a few professor's of financial economics)
2) Have been compromised to the point of being not very effective
3) Are awfy, awfy difficult to actually apply regrdless of need due to potentially destructive political interference.
I hope they're being awfy careful about what they wish for.
Flexing the cost of credit in this way would in turn influence overall economic rates of activity e.g. if it was more expensive to borrow money to buy ladders, less people would buy ladders, the ladder industry would cut prices to encourage more sales and as ladders are included in the basket of goods used to measure CPI, CPI would fall.
That was then. A defining feature of the credit crunch has been the connection between base rate and other interest rates breaking down, in particular between base rate and LIBOR (London Inter-Bank Offer Rate), which is what banks charge when they lend money to each other. Base rate went down (and down and down), but LIBOR has remained persistently high because banks had suddenly become scared other banks were going to fail and on that basis stopped lending to each other.
Allova sudden it became awfy expensive for banks to get cash to lend to customers if they could get it at all. The result was credit rationing – less new credit is available than before and what is available became suddenly more expensive. Hence, the collapse in the confidence banks once had in each other eventually drove the economy into recession by hacking back the number of debt funded commercial and private transactions.
The thing is there were warning signs in the run up to the credit crunch. Asset prices e.g. of houses, companies and offices, were all growing like gangbusters in the run up to the crunch because the ready availability of cheap credit made them cheap to buy. Raising interest rates would have slowed this down and the MPC was certainly mindful of what was going on in the housing market judging by comments recorded in its minutes. However, that wasn’t the Bank of England’s job and anyway none of these things are included in the CPI basket of goods.
Hence the argument to set interest rates in relation to house prices as well as CPI. Except this is regarded as unacceptable by the Bank because setting interest rates like that might adversely affect every other part of the economy e.g. raising rates to stop house prices growing too fast could damage manufacturing by increasing its credit costs and the exchange rate, which would make exports less competitive.
Instead, when I attended a presentation on the latest Bank of England inflation report given by a lovely Bank of England Agent the other day he described how the Bank is discussing other methods of restricting lending. Except this raises all sorts of yucky issues.
There’s the specific debate already underway as to what method or methods should be put in place to be sure – should it be a cap on loans to value, the rate of growth in a particular type of lending, counter-cyclical capital provisioning, and so on and so on. But, that’s not the point here. Rather, its what this could mean for the Bank’s independence and remit that’s the issue.
We now know that when the Bank does something different like quantitative easing, barely anyone understands it. Because this might be the wrong thing to do, this strikes me as a bad thing. So there is the clear risk of the Bank acquiring new powers and targets no-one understands as opposed to its existing nice, neat and straightforward remit of setting interest rates to meet an inflation target.
Then there is the bun fight already underway as to who does what, like isn’t this something the Financial Services Authority should do? A problem here is regulatory capture with the FSA successfully giving the impression of being so up the banking sector’s arse it’s not true. I mean its something of an open secret as to how shit a lot of internal bank systems are that have been passed by the FSA and as its chairman said himself when deciding whether someone was a fit and proper person the FSA’s main criteria was whether they were a money launderer and that was it really. So you’ve a regulatory body that’s arguably in bed with the banks and not especially competent wanting to make sure no one else establishes tools for influencing bank lending because that’s its job. This is exactly the kind of situation likely to produce a compromise designed more to save face/appease vested interests than it is prevent another asset bubble.
Finally, there’s government. Government likes it when house prices go up because it generates lots of taxes and makes voters happy. So imagine the scene; an election is due and allova sudden the Bank of England wades in using its new anti-house price bubble blaster. What government is going to tolerate that kinda vote losing behaviour? Some might, but most probably wouldn’t, which raises the real risk of the Bank’s independence being compromised by politicians.
As to why this could be an awfy bad thing, perversely one of the big factors contributing to the credit crunch was the success of economic policy. Yup, thats right, its success. In the 1980s the Thatcherite monetarist experiement was a disaster, later on the EMU experiment and associated destructivly high interest rates use to prop up an over-valued pound prompted the last property crash. So by abdicating responsibility for rate setting government and taking itself out the equation, government generated a high degree of (over)confidence - no government rate setting = no early 90s style property crash ever again! Just a pain the banks chose to blow their own feet off instead. In future though we could see government reassess its role and that of economic policy in favour of more intervention.
So there you are then, right now the Bank of England clearly wants to change its remit and is discussing what new tools this will entail. The risk is they end up with a new remit and tools that -
1) Nobody understands (give or take a few professor's of financial economics)
2) Have been compromised to the point of being not very effective
3) Are awfy, awfy difficult to actually apply regrdless of need due to potentially destructive political interference.
I hope they're being awfy careful about what they wish for.
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