Bring on the Iron Cage

Technical competency is all very well, but what any best in class organisation really needs is leadership. Sort of, actually no it doesn’t, not really.

Leadership is both a catch-all phrase and a cult. Typically, it's that amorphous mess of charisma, vision and ability to inspire others you occasionally stumble upon, but more often watch strutting about on a podium or sitting the other side of a desk. And by definition it’s both a vague and rare quality; we can’t all be chiefs after all, leaving it something you simply know when you encounter.

This vagueness makes it's supposed importance a belief more than anything else, yet one powerful enough to underpin an entire industry of head hunters, business schools, publishers and training companies, all engaged in selling the stuff YOU need to recruit or even better become a new and improved leader. Unfortunately, reality gets in the way because the belief in leadership is one that can actually destroy shareholder value, the only real measure of a thing's worth in business.

One reality is that “leadership” informs a self-serving political rhetoric that helps legitimise structured inequality. Like when you ask why has that bloke got loads of cash and I don’t, it’s because he’s a leader.

Another reality is that people have vested interests that influence their judgement, decisions and behaviour. To give an obvious example, people buy themselves food because they have a vested interest in not being hungry. To give a more complex business related example, people support projects led by people more senior than they are because it might make their getting a promotion more likely regardless of whether the project is silly. And that’s it really, vested interests routinely drive decisions that may or may not destroy shareholder value, but are perfectly rational for whoever makes them due to the material rewards they generate for the individuals involved.

You could of course challenge this by claiming various organisational structures are in place to put a check on stupidity. Except, the point about the cult of leadership is it emphasises the individual over the committee and, as already mentioned, legitimises as well as encourages the unequal distribution of resources, including organisational authority and power. So you can have as many project approval committees as you like; if one leader is in a position to influence the size of every committee members’ bonus, then what he wants is typically what happens and if he’s an utter nutter, you’re stuffed (and thats not even taking socialization into account or the pressure to conform with organisational values, etc., etc., yadda yadda).

The typical response here is to try and make sure you don't appoint a silly leader by conducting oodles and oodles of interviews. Except, these are typically just more of the same thing, which transforms the process of recruiting a new leader into a pointless endurance race.

A practical alternative that’s both more cost effective and efficient is to move away from the cult of leadership and focus instead on a candidate’s technical competency. To put this in sociological terms it’s to ditch the rediscovery of what Max Weber called “charismatic authority” and instead re-emphasise the importance of “rational-legal authority”.

I’ll explain why; first off, technical competency is easier to assess and measure. So rather than asking some bloke to tell you about a time when he inspired people to exceed expectations and what the outcome was, you simply ask him to change the plug on a kettle then plug it in. If he gets his wires mixed up, bingo, that’s one less travel expenses claim.

More seriously, leadership is such a half arsed, subjective thing to assess shifting the emphasis towards more technical criteria reduces the scope for inconsistent and basically bad outcomes. Most importantly of all, as someone kindly pointed out to me earlier today, it minimises costs/losses and avoids destroying shareholder value.

This is easy to illustrate using a wee model that sees 4 candidates being interviewed for the role of leader.

- Candidate A is a good leader with good ideas
- Candidate B is a good leader with bad ideas
- Candidate C is a bad leader with good ideas
- Candidate D is a bad leader with bad ideas

Candidate “A” is who you’re looking to find, not only has he got good ideas, he’s also got the leadership skills needed to implement them. Appoint him and bingo, you’ll going to improve your company’s bottom line.

Except, if you could spot an “A” straight away you wouldn’t be working thru a protracted interview process in the first place. Alongside this if your organisational focus is on leadership, the difference between a candidate A and a candidate B i.e. someone who can talk a good game, but doesn’t have a fucking clue, runs the real risk of being obscured.

Even worse, the vested interests noted above mean the fact a newly appointed leader might not know what he’s talking about will be swept under the carpet by everyone involved in appointing him because they don't want their lack of judgement shown up. Similarly, all those hoping that by keeping the new leader sweet they’ll get a bigger bonus aren't going to say diddly either.

So installing a B type candidate will see money wasted on external consultants, strategy weekends, bad acquisitions and so on, because they have the personal ability to convince people to buy-in to all that kinda shite. At the same time no one will challenge them because of their vested interest in preserving the status quo

Candidate C on the other hand has loads of good ideas and is highly technical, its just he’s a boring fecker everyone tends to ignore. But, that’s OK. If he was candidate B, he’d be pissing money against a wall inspiring people to build a shareholder value destroying machine. C on the other hand has this wonderful idea for making oodles of cash, it’s just everyone always ignored him whenever he mentioned it, so it never got implemented. At least not initially except now "C" is a leader, he will be listened to.

Similarly, no one cares what “D” thinks, because he also doesn’t have the personal chutzpah needed to introduce any changes of any significance whatsoever regardless of whether they’re good or bad. But, "D" doesn't matter anyway because the use of technical criteria meant he didn't make it past the first interview.

Pulling this together, focusing on good ideas (i.e. technical competency) has two possible outcomes. (1) increased profits or (2) no additional costs. By contrast focusing on leadership will either (1) increase profits or (2) generate losses/increase costs.

So focussing on leadership is only just as likely to deliver the same gains as ignoring it altogether, but poses higher risks. And thats that really.

Words from the genius

(being the first, not very good album by the GZA/The Genius)

When John Kay recently wrote an article arguably excusing, if not quite defending, bank CEOs, it got me thinking about those other, not quite as senior executives. I mean who is out there right now defending or even helping them? No-one, thats who despite them needing it judging by the story I once heard about a recently appointed exec who did something in clear breach of company policy.

For the HR Business Partner involved this was due to his naivety and inexperience and most definitely not an obviously nepotistic act that successfully alienated hundreds of staff. Except we don’t even need to take the HR bod at their word to know why the modern executive needs help. The cult of leadership that defines so much of corporate life to the extent I keep getting spam at work from training companies asking me if I want to unlock its secrets, by definition means there’s no need for leaders (i.e. executives) to have the foggiest notion of what it is the businesses they lead actually do or how they do it.

Except unfortunately they do. Now mebbe Oliver Williamson might intervene at this point, getting all transaction costy to say that’s not an issue because recruiting that type of executive has so far generated the highest returns. Except that’s post-hoc rationalisation that is and doesn’t take the opportunity cost of the alternative into account.

Besides that still leaves us with all these poor execs trying to make their way in a corporate world whose politics they understand, but whose markets they don’t. The obvious solution at this point is to get a consultancy in to outline a big project that will make everything best in class. Result! Theres the exec with consultants fanning his ego 4 times a day outlining a project that will give him enough resource to start doing some of the patronage type shit that got him his company beamer in the first place!

Except now he discovers the project approval committee he sits on has received a report from elsewhere in the business that comprehensively destroys the rationale for his pet project. No it’s not as nice as the consultants' report (they’ve a team of 20 MBAs in India who for 2 rupees will produce the whizziest power points imaginable), but it is clear, factual and well-founded. So what is he going to do? Even worse, what if that was you!

First of all DON’T PANIC! Instead take comfort from the fact anyone naïve enough to challenge the status quo regardless of how credible or coherent the analysis, is clearly not executive material.

Second, remember the golden rule; in business all success is due to great leadership and all failure the result of circumstances over which no individual could possibly have exercised any control let alone forseen.

Third, use one or all of the following tried and tested strategies (complete with shit acronyms) to make sure any opposing view can be safely ignored. In fact, if you’re so inclined use them aggressively enough to completely discredit whoever contradicted you in the first place. Bingo!

1) The Captain Pedant (CP): The CP is easy and can be applied to any report. The mechanics are straightforward – find a fault, any fault, then blow it completely out of proportion to discredit the entire document.

Because no report is perfect it should be relatively easy to spot something. Except, that involves having to read the whole thing and being able to understand the subject matter, which can be difficult to square with the all the other important meetings you need to attend and your basic competency level.

But, that’s OK because you can start with the basics, like is there a vaguely complicated diagram you can spend 10 minutes asking about? Can you plausibly get away with saying the exec summary is too long? Even better is a department that changed its name after the report was written referred to by its old title? Better still get someone else to read it and on their suggestion point out “labour” should be “labor” and that it’s not a “gutter-dynamic-shifting flange”, but actually a “dynamic-gutter-shifting flange”. Sure all this might strike the man in the street as superficial mince, but for a high-flyer like you it’s actually a rich source of reasons as to why an entire report can be safely ignored. I mean if they can’t get the small stuff right, what else have they got wrong?

Even better there’s a good chance no-one else round the table has read the thing, which means you’ll create the impression you actually know what you’re talking about and are a stickler for detail, a definite positive if your career to date has been in sales.

2) The academic (the Bad A): Oh, oh, despite you playing the CP someone who actually read the report is claiming to be impressed by its overall thrust. Again, don’t worry – an executive with time to read every paper he's sent is clearly an executive on the way out, in fact he’s probably already in discussions with HR about his early retirement package. Besides, now you can do the “Bad A”.

In business to call something academic is to discredit it, because in business “academic” is commercial’s idiot brother and that’s that really. Hence, the only decisions worth a damn are “commercial decisions” and the only kind of experience required is “commercial experience”.

Call something academic and you tap into a deep-seated prejudice that means allova sudden the best aspects of academic research – that it strives to be objective, informative, independent and substantiated (yes the reality is different, but hey ho it’s something worth aspiring to) – become weaknesses. So are there lots of facts supporting the argument? Thats academic that is. Are there any numbers, graphs and possibly even formulae? Definitely academic. Even better if its formatted in such a way that even vaguely reminds you of a university essay, then by definition it’s academic and as such can be completely ignored because its irrelevant to the kind of hard, commercial decisions you and everyone else round the table takes every day.

And again you come out smelling of roses because you’ve made clear that for you if it ain’t commercial it ain’t jackshit. Ooo, whose all hard nosed allova sudden.

3) The Mom and apple pie (MAAP): Shit. The report actually stated in clear English in the first few lines of the exec summary that you’re project could drive the company into the ground, listing both the reasons why and practical alternatives. But, that’s OK because there’s always the MAAP.

Somewhere, sometime, someone wrote out a meaningless list of mince packaged up as the "core-values" of “how we do things round here”. These will be so vaccuous no-one could possibly disagree with them and in there somewhere will be something along the lines of “we value our customers through the good times and the bad”.

Because this report is essentially saying for gawd sake don’t do the bad, it'll fuck the lot of us, you can ignore that and instead respond with a MAAP quote. Brilliant! Everyone round the table has to agree because they were at the same strategy weekend held at a rather good hotel where the CEO came up with that bollocks in the first place. I mean to not agree with you that the report is a bad thing is to be disloyal so of course they will.

Still smelling of roses? Definitely, you’ve just quoted the CEO fer gawd’s sake.

4) The offline long-grass (OLG): Except mebbe the CEO or committee chairman just realised the facts are so fecking obvious the points made can’t be ignored. Damn, you might be thinking, but don’t. Theres a meeting agenda after all and because by now you’ve used the CP, the Bad A and the MAAP and there’s still lots of important decisions to be taken, you can now play the OLG – just say rather than take up any more time you’ll take this off-line and pick up with the report’s authors (by which you mean sponsors) so that everyone can move onto the next item. My, my aren’t you the time conscious fecker and masterful with it too. Go tiger, Grrrr!

So despite your project being completely discredited, you’ve now created enough time in which to get this temporary hiccup sorted out. And in dealing with the report off-line you can now reapply the CP, the Bad A and the MAAP all over again in a one to one setting with a wee bit of BM on the side!

5) The Big Mate (BM): Off-line is when the BM comes into its own. First off any report worth its salt should be circulated in draft form round all interested/affected parties before being submitted. Don’t like it? Then hit it with the CP, the Bad A and the MAAP either individually or all at the same time. Has that not worked? Nae bother, just find out who is sponsoring this report and whether you're more senior than them. Then do the BM during a wee quiet chat about how at the present time this might not be in the business’s interest, or anyone else's for that matter i.e. I am senior to you so shut it.

But, what if the sponsor is just as senior as you are you're thinking? That’s OK, the kind of maverick willing to put his name to critical reports won't have as many patrons as you do amongst the upper reaches of the organisation, so all you need to do is have a quick chat with one of them, then drop their name in an email to the sponsor and hey presto, the report is gone because your BM is bigger than his BM.

Now thats before a report has been submitted, but don’t worry you can take the same approach now its OLG. Even better if you kick the report into limbo by inconsistently applying the CP, the Bad A and the MAAP, the poor sod that wrote it won’t have a clue what to do because they're probably the kind of schmuck that thinks black is indeed black when its black rather than the lovely shade of orange the CEO has been partial to ever since that 2 week strategy course he went on at Insead . Even better the more irrational and unreasonable you are the greater the paralysis you'll induce, which means the author will rapidly acquire a reputation as someone who can't deliver.

There you are, problem solved. Apply all of these strategies often enough and rest assured you’ll soon be so senior you can simply disagree with things for no reason whatsoever. As for the project, its costs and eventual losses, just remember the golden rule; in business all failure is the result of unforeseen circumstances over which no individual could possibly have exercised any control.

Nae prospect

For me Prospect stands out a mile as the best regular journal. So OK they’ve got a lurve thang going on with Chris Patten, the acceptable Tory despite his way out of date references, but by the same token they avoid the nepotistic, upper middle class mediocrity that characterises the Spectator. Similarly, they’ll get Labour bods in to write stuff, but avoid the plodding, partisan dullness of the New Statesman. And thankfully, they just don’t do the one-sided free marketeering wank that too often lets down the Economist.

But, here that’s no saying its good, rather it’s saying it’s not bad, whereas it is in fact good. So sure the recent article by some plumb saying Sarkozy’s appeal to France was based on French people wanting to be ridden hard by a sex dwarf was bloody awful (I shit you not. Shame the references were to Nietzche and not Marc Almond), but for the most part the commentary is wide-ranging and the views expressed informative and thought provoking. I mean fuck me a magazine that actually provokes thought as opposed to reinforcing existing prejudice, how cool is that? The problem it has right now though is relatively straightforward – it’s the economy stupid!

I don’t mean by this an exercise in political positioning or sloganeering. Nor is it a question of which party is best equipped to run the Treasury. Rather the reality is that (a) the economy is totally fecked and will be for a good while, (b) following on from that we are going to see a mighty hack back in public spending over the next 3 years at least and (c) we’re currently seeing the rules governing the relationship between the financial sector and the economy being debated before they are rewritten and as such are still up for grabs.

These are key issues and they’re simply not being addressed by Prospect (or anyone else for that matter). Sure they’re getting in bods to explain what quantitative easing is, but so the fuck what? The point surely isn’t to simply explain, rather it’s to analyse, contextualise and relate the implications of this to government policy, the economy and social issues.

Here a quick and easy example –

An obvious response to the recession is for government to embark on a major social house building programme, which would address housing issues and provide jobs.

However, it would also increase government borrowing. The existing level of government debt has already prompted at least one rating agency to make noises about downgrading Britain’s credit rating, which would increase the government’s cost of borrowing.

However, the same rating agencies also said sub-prime was the bees knees despite the conflict of interest whereby the people paying for the ratings where the same ones who would benefit from it getting a high rating.

So should we look at the role of rating agencies, their structure, strategy and technical competency both in terms of rating sub-prime debt and government debt? Like should we rewrite market rules so they can go and fuck themselves?

Even more straightforward, should the issue of social inequality figure in the regulation of pay in banking and the assocaited rhetoric used to justify mega bonuses.

See? Some quick, practical examples that relate social policy to economic policy to financial re-regulation.

And there’s more – the cuts in public sector spending to appease rating agencies arguably render Prospect’s a wee bitty wanky obsession with think tank politics irrelevant. So one think tank says we need to do this to help the disabled, that to help ethnic minorities and the other to address issues of national identity? Piss off, we can’t afford any of them and that’s that really oh and we’re cutting your 2010/11 funding by 30%.

For me unless these realities are addressed and debated it looks like what we’re going to see when it comes to the financial system and the economy is one big vested-interest cluster fuck focused on retaining as much as possible of the old regime, regardless of its flaws .

I should perhaps confess at this point I still think Marx had it more or less right when he wrote -

“these relations of production correspond to a definite stage of development of their material forces of production. The sum total of these relations of production constitutes the economic structure of society - the real foundation, on which rises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life determines the social, political and intellectual life process in general. It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.”

i.e. that’s what I mean when I say “it’s the economy stupid”. The challenge we have right now is that outwith the Treasury, the FSA, the Bank of England and the financial system theres too much focus on the superstructure and way, way too much ignorance about the base.

the moon is made of green cheese

Aaaaaaaaaarrrrrrrrrrrrrggggggggghhhhhhhhh! We all know what income is, it’s that thing that gets paid into a bank account every month then used to pay the bills – and long may it continue (he types with fingers crossed thinking of how shaky a peg he’s currently on). Wealth on the other hand is different. To be wealthy is to have a big house, a flash car, oodles of investments and solid gold pants i.e. to have lots of assets that may or may not generate an income, but have some monetary value and are of varying degrees of liquidity i.e. can be eventually sold for cash (crikey has ebay made the world’s wealth more liquid I wonder?). Except most of us aren’t wealthy and what wealth we have primarily consists of the equity in our houses. So when terribly, terribly serious people witter about consumption and the wealth effect, for the most part they’re referring to the influence house prices have on how much we collectively spend. The only problem is it’s a stupid notion at a macro-economic level, hence the initial “Aaaaaaaaaarrrrrrrrrrrrrggggggggghhhhhhhhh!”

It’s stupid for all sorts of reasons like this one; so say house prices go up - remember when that used to happen? - then chances are I need to spend more to buy a house i.e. rising house prices transfer cash from buyers to sellers, who are more likely to be old with a good pension and suspect attitudes towards gender and racial issues. So if you can net off much of the supposed increase in wealth why do people continuously witter on about the “wealth effect” and consumer spending? I’m guessing this is because of two different theories, a “strong” one and a “weak” one.

Starting with the weak one, this is all about confidence and works along the lines of “Daphne! The Daily Mail says our house is now worth 50 grand more than we paid for it, I’ve just clicked on www.sneak-a-peak-at-how-much-your-neighbours-paid-for-their-house-without-asking-them.com and by jove they’re right, I’m feeling so mighty confident, lets buy some extra tins of beans and caviar to celebrate when we do the weekly shop!”

The strong argument is much less wanky. Instead, rising house prices provide more collateral for banks to lend against. Homeowners in turn take out equity release loans/increase their mortgage when their 2 year deal is up to get some serious spondollas to spend on stuff like diamond yachts and shit.

The significance to attach to both arguments is, of course, set in relation to the netting off effect. The strong argument can also be measured using bank lending statistics and in Britain equity release loans just aren’t that important a factor. The other thing of course is that house prices and consumer spending both tend to rise at the same time because they’re influenced by the same factors, which until the credit crunch largely meant the availability of cheap credit. Hence going daft in a shopping centre with 13 0% balance transfer credit cards with mad limits and taking out a 120% mortgages to buy a new build ensuite city centre flat were simply different sides of the same coin.

So given this is all bloody obvious why a wee while back when I phoned into an invite only tele-conference given by a leading investment bank did I hear one of their professional economists witter on about the “wealth-effect”? The long answer is sociological and takes into account individual ignorance, educational failings, vested interests in the production of economic commentary, prejudice and conformity. The short-answer is because they're an ignorant cock.

More depressing though was the new article on the otherwise fab Voxeu.org, wherein taxpayer funded academics disproved the wealth effect at great length. Presumably they’ll be following up this groundbreaking study with a detailed, econometric analysis of the moon’s cheese content. Cock 2x.

To the right

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.

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.

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.