Bogey Banks

People don’t like banks or bankers much at the moment. For good reason:
- They over-extended themselves badly, requiring massive taxpayer support;
- Their failures last year, and the resulting drying up of credit, have been a major factor in the current recession;
- Despite receiving massive taxpayer support, UK banks have not met their side of the bargain in renewing credit to UK businesses; and
- UK and global banks are making a lot of money again, partly because market volatility allows them to and partly because there are fewer banks able to compete. And they are paying out as big a percentage of their profits to employees as they used to. Taxpayers do not like their money effectively being routed to pay substantial sums to bankers.

It’s not all the banks’ fault, though, and developing public policy to deal with these issues can’t simply be based on bashing bankers and taxing bonuses because they are complex. Hence some of the disagreements between the UK Government, the Bank of England Governor and the FSA (although the last two have more in common than the media imply) over what to do. And hence the lack of agreement on real action internationally*.

There are lots of reasons for banks becoming over extended; Bad management is certainly one: George Bush’s comment “Wall St got drunk” is as good an explanation as any. But lax regulation and encouragement from Governments was another very important factor, as was the willingness of most of us to spend future income immediately and as a result borrow too much. I’d split the blame 25:25:50 between the banks, the public and Governments.

Having got in a mess, Governments have had split views on the ideal outcome. Yes, they want banks to lend more but more importantly they want them to rebuild their capital. They also do not want to see them make too much money because of the public impact. But profitable banks have three major benefits for Governments: they can reduce the level of support they are giving; they can eventually sell the stakes they have for a profit; and both the banks and their employees will pay tax and spend money to help kick start the economy. Hence you’ve seen the Governments talk about restricting bank profits and bonuses, while doing nothing. Evidenced by the fact that in the UK some of the bigger pay packets are going to be at RBS, which we as taxpayers own and where the Government could take direct action if it wished.

What should happen?

I wrote some time ago about why banks paid such big bonuses: a lot of that is still valid. Essentially, it’s because their margins are too high for two main reasons:
- the correct price of what they sell (or buy) is only known with hindsight, often after many years. They have better information than their customers and they charge too much. As the end eventual buyer of most financial services is the ordinary person’s savings, this extra profit is a real cost to the rest of us.
- Much of the advisory and financing work banks do for companies and Governments is really important to the individual company and the Government. The impact of a failed transaction is very high – so what matters is the quality of the service and the chance of success. The fee is unimportant: it’s like the price of a drug to an addict.

But overall financial services have been good for the economy, powering increases in wealth, especially in the UK. So any changes must not damage the long term health of the sector.

There are four ways of reducing bank margins:
Capital: insisting banks should have more capital, particularly for certain types of trading activity where customer involvement is limited. This discourages banks from doing this sort of business, the sort of business which caused many of the losses.
Transparency: letting customers understand charges is the easiest way of reducing them. Financial services are traditionally opaque: regulators need to force banks to disclose what they really charge.
Competition authorities: high margins usually mean there is a market structure failure, which should be subject to a competition review. Remedies might include price controls or breaking up banks which are too large.
Government contracts: Banks want and need Government contracts; Governments are one of the main buyers of banking services. They should insist on lower fees.

In addition, I think this and next year are special cases. Governments have not insisted on a proper reward for taxpayers for the support we gave. All banks, even those who did not receive a direct injection of capital, benefited from the support given to the system. There is a case for an override on all banks to prevent excessive bonus payments either by forcing increased capital retentions or special tax payments.

And lastly, the Bank of England Governor’s concern that moral hazard has increased is valid. Banks now know they are important to fail: they have an implicit Government guarantee. This has to be reduced over time and a way found to protect retail deposits while allowing shareholders, bond holders, some creditors and employees to suffer. I think a separation of investment banking from basic banking is too extreme but the head of the FSA's idea of making banks define how they should be wound up and having higher capital for investment banking is a good start. Much more constructive than the Chancellor’s and PM’s refusal to admit the merit of The Governor’s concern.

None of these things are easy. Many are however on the agenda, and not all require co-ordinated international action. They could be done here if there was a strong Government. Which recognised that its flawed regulatory system magnified the problem in the UK.

* Brown did try to take the credit at various international summits for bringing the world together, but as you’d expect there was much talk and no action.

Questioning Question Time

I didn't watch the programme with Nick Griffin; I just saw it as a cheap publicity stunt to improve ratings for Question Time.
I think the BBC should be ashamed, not for inviting the BNP leader to be on in the first place, but:
- For doing so in such a public way simply to generate publicity, and;
- To preserve their reputation as caring liberals who found the BNP abhorrent, staging a lynch mob atmosphere (I understand from those who did watch it) with questions primarily focused on the BNP rather than on normal topics. This ganging up by representatives of a widely disliked establishment will have increased sympathy for the BNP.
I’d rather see the publicity die down as it is just playing into both the BBC’s and BNP’s hands. They BBC should have had a normal programme handled in a low key way to highlight the poverty of policy, and an interrogation by someone like Paxman to highlight character issues. But that would have been quality public service broadcasting and would not have played to their egos.

Cliff!

Another great British tradition: Cliff! Well before the trend for one word identifiers ... Madonna; Kylie etc ... there were two all time greats. Elvis of course. But also the British version - Cliff. And he's still rocking on*. I went to see him last night, on his final (?) reunion tour with the Shadows.

He was as good as ever; the Shadows were a revelation...

Brilliant.

Let there be many more final reunions.

* Comes from a song from A Slice of Saturday Night:

When they're all dead and gone,

There'll be one rock star rocking on,

The man with the quiff,

Cliff .. and his 4 lads,

Cliff Richard and the Shads

Cry 'God for Harry, England and St George!' *

That traditional English - and British - concept of liberty has taken a bit of knock in the last few years, and now another slice has been taken away: a law firm has got an injunction stopping a newspaper (the Guardian) reporting a Parliamentary question. In other words, stopping the public from knowing what is being said in Parliament.

Thanks to the blogosphere, the question, the facts and therefore the matters the law firm (Carter-Ruck) were trying to cover up (Barclays tax-avoidance schemes and Trafigura's Nigerian pollution) have been widely disseminated. I post this - despite the Guardian's unsurprising hypocrisy in going on about tax avoidance while covering up its own tax-haven status - because:

- we should be worried at the loss of liberty;

- despite the issues over MPs' and Peers' expenses, Parliamentary freedom is important and we need the proceedings to be reported;

- as one of the leading blogs noted, the more people who know about this the better. That way the injunction is likely to be removed - and law firms are less likely to try again if the result is greater publicity than there otherwise would have been.
And apparently the application for the injunction has now been withdrawn

* Cry 'God for Harry, England and St George!'

Bad News Day

Is it co-incidence that the following bits of news were all released on the same day:

- a large programme of asset sales by the Government (which however will only be enough to fund August's deficit, never mind the rest of the year. Or next year.).

- Letters being written to MPs about their expenses (note that the details of which MPs owe what money back will not be made public)

- Jacqui Smith's second home claim was wrong despite her agonised defence

- The arrest and forcible search of Damian Green for embarassing the Government was "not proportionate".

Clearing the decks for a fresh start? Maybe even another re-launch?

In the meantime: an interesting recent talk about the perils of printing money. Not a theme our current Government would accept.

Olympic Golf

Regular readers know I like golf. But it’s ridiculous that it will be in the Olympics from 2016. It’s not particularly athletic (note: parental guidance required for the language on that link), it’s very commercial, and the Olympics will be close to irrelevant compared with the four Major championships. It’s only in for the money and as a result it demeans golf. It can’t really demean the Olympics: that is so bloated and extravagant as to be beyond hope. As sadly the preparation for the London Games is proving.

Conference Season

Another party conference season over. On balance, a clear win for the Conservatives – as shown by the opinion polls. But I still worry about complacency and underestimating the size of swing required.

I think there were four good things for the Conservatives:
- They started to show they would be serious about the public sector deficit, and distinguished between cutting administrative costs and front line costs (why does the MoD for example have as many people as there are servicemen?);
- They did not implode over Europe;
- Cameron’s speech highlighted the fact that Labour has failed a generation of people stuck in poverty, and that Conservatives want to make things better; to repeat once more: every Labour Government has left office with unemployment higher than when they came in. They fail their people. Continuously.
- Nothing too much went wrong so the faithful will have left enthused for the seven or so months left before the election. But I did like this fake diary of Samantha Cameron’s week.

There were two bad things:
- They have had to start dripping out policy. This means their ideas will probably be stolen.
- The Conservative message - big Government doesn’t work, people should be encouraged to take more responsibility for their lives - hasn’t quite gelled with all the public. But at the end of the day, if the voters want another five years of Labour then so be it. At least it means Labour will have to get to grips with the economy and to take responsibility for what they have sown.


There was one good thing for Labour:
- It really didn’t go very well; there will be no complacency and rather like Avis in the 60s: they will try harder.

There were two bad things:
- It was demotivating for party members. Nothing good happened, lots of MPs didn’t go. They announced lots of initiatives but as I said before – why have they not implemented them before, why wait 12 years? It just all seemed flat. Even without The Sun’s intervention.
- Brown did not come across as a leader with ideas to cope with the present situation. He is still talking a generation ago. He talks about himself as though he has led an economic recovery: I don’t like him, but I suspect that unlike Blair he is honest and has principles and he believes what he says. And in some ways that is even more scary than if he was lying.

The Lib Dem conference was three weeks ago and to be honest I can barely remember it. It didn’t go well: they couldn't decide if they wanted to be more left than right, they didn’t stamp their presence on the electorate and in some ways – because of clear tensions between Clegg, Cable and the rest – it made them appear more divided than normal. If only this had really happened.

Today

I woke up to Harriet Harman's voice in my ear; she was talking (on the Today programme) about all she thought she had done to increase women's employment. But she couldn't see the point of the other guest: that increasing equal opportunity bureaucracy for employers simply discouraged them from emplying as many women as they otherwise would. Unintended consequences flow from Government action. After 12 years she doesn't seem to know that.

A later guest, talking about the lack of investment in new power, made a similar point: if you keep changing regulations then firms lack confidence to invest. Regulation, he said, should increase certainty and reduce risk not the other way round.

A man of influence?

You’d like to think your MP had influence, could get things done.

People who aren’t political junkies might have missed a recent survey published a few days ago of senior Lib Dems asking who are the 50 most influential Lib Dems. Our MP, Alan Beith, was not one of them. Not even in the top 50. I am disappointed but not surprised: this area has lost out in many ways in the last 30 years by not having an MP from one of the main parties who could have helped get investment into matters such as local hospitals, the A1 and school refurbishments. And this is especially no wonder if we don’t even have an influential Lib Dem.

The next election is time to consider whether it is enough to be served by a nice guy who (as an MP should) helps individuals, or whether we need someone who can get also things done for the area as a whole.

Conference Time

I nearly went to the Conservative party conference this year. That intention was great – it has kept almost a week of my diary free so I will actually have time to do things next week. But somehow it seemed just a bit too long to spend hanging around corridors pretending to be important. Plus it was in Manchester.

I’ll nevertheless be interested to see what happens. My main worry is over-confidence. I don’t understand why Labour is so depressed – or why there seems to be such an assumption that the Conservatives will win the next election. I have as much regard for the Sun’s page 3 “News in Briefs” as anyone, but this is not a slam dunk, for four reasons:
- The voting system and boundaries are massively skewed against the Conservatives. It will take a very big swing, and a much larger share of the vote than Labour, for them to have a majority.
- The election is likely to be 7 months away. A lot can happen in 7 months. Reputations can be made or broken. Leaders can come and go. Economies can recover or crash. Wars can deepen or end – or start.
- The Conservatives are reliant on a very small Cameron based clique for policy and personality; it’s worked well so far but...if there's any crack in that small clique there'd be big problems.
- There a big gaps in policy detail. As, to be fair, there were in 1979. And announcing policy will simply see it copied. But not being Labour may not be enough.

In addition, the Lib Dems are clearly, from their conference, leaning to supporting Labour so if there is a hung Parliament there’s no doubt who they will back.

There’s not a lot the Conservatives can do about this – except don’t take victory for granted, don’t appear to take victory for granted and try to work up some decent policy detail behind the scenes.

The Irish won't need a third referendum..what do the Tories do?

It looks as though the Irish will vote to adopt the new European Constitution (I call it a Constitution rather than a Treaty because that is what it really is).

The main reason seems to be that the credit crunch has made many feel safer in a larger Europe; that's strange because:
- most of Ireland's specific problems came because of the excess boom resulting from being in the Euro;
- as a small country they did better than say Iceland by being part of the Euro, so their currency and borrowing abilities did not suffer: but this is irrelevant to the issues of European governance raised in the treaty;
- being part of Europe (as opposed to the Euro) has not helped them at all in recovering from the problems. Ireland has done much itself in terms of working out how to sort out its banks and reduce public spending - far more than say the UK and indeed most other European countries.

But all that's irrelevant to what should the UK, and specifically the Tories, do now. Commentators have suggested that a yes vote would be a major problem for them, because they will have to be more specific about how they will deal with Europe. And many Labour and Lib Dem supporting commentators will hope that they will be riven with internal arguments as a result. I suspect some anti-Cameron Tories will hope the same.

This need not happen: the Tories must be controlled in their response.

First, although the Irish vote makes it more likely that the constitution will be ratified before a UK election, Poland and the Czech Republic still need to do so. There's no immediate need to change the policy: Labour and the Lib Dems reneged on their commitment to offer referendum on the Constitution, we won't.

Second, they need to avoid too much emotion about the wrong issues:

- It will be very frustrating if Blair becomes European President. But apart from having to watch him on TV more, it shouldn't matter too much; his new Middle East role confirms his ability to talk a lot and deliver little. If he is President of Europe, he is more likely to damage the European Union rather than the countries within it;

- Much of our complaints in the UK about Europe stem from how we negotiate and then implement European legislation, rather than the legislation itself. Many things should sensibly be handled at a European level - but many shouldn't. (Lightbulbs?) We need to build the management of European legislation into our Parliamentary processes - unlike Denmark, say, their is no Parliamentary scrutiny of forthcoming legislation until after it has been negotiated. The time to review it is at the beginning of the process, when constructive input will be welcomed and where exceptions can be negotiated. The Tories should focus on improving how we handle legislation within the UK rather than supporting generic complaints;

- If the constitution is ratified before the election then there is no point in having a referendum just on that issue: it has been ratified and we will be bound by it;

- There's no point in having a bland "should we leave the EU" referendum because the answer is clear - no we shouldn't; there's no chance of a majority for leaving and any other question is not specific enough to be asked simply.

So apart from improving UK handling of legislation - and don't underestimate how important that would be - there must be a medium term (ie in the life of the first Parliament) commitment to re-assess how the EU is working and how Britain should relate to it, followed by a Parliamentary debate on whether there needs to be a referendum on any EU issue, and what the question would be. This has to be a soft commitment because the new processes are untried and it's unclear what the outcome will be. And there's no point in being too specific on international negotiations because you shouldn't tie your hands too much.

My suspicion is that the best result for the UK and for the EU would be a formal move to a two-speed Europe; those countries that wish to integrate more can, those that don't needn't.

Apologies for the length of this - but I think its an important topic and one where there will be a lot of pressure trying to derail the Tories.

Summer Things

Was the name of an atmospheric book about things that went wrong - and right – over a Summer. So having been silent for so long and needing something to kick start my blog I’ll use the title as a theme and describe what I read over Summer. I didn’t create a reading list, nor did I follow the list sent out by Tory High Command to their MPs, although I did buy one book on that list (The Pathans).

That list was largely political and historical but (I thought*) strangely omitted Bernard Donoghue’s Downing St Diary (vol 2) covering his period as James Callaghan’s Policy Unit head from 1976 to 1979. It’s a very entertaining read by an author who comes across as human rather than a political drone, about how the political process works. It is a good reminder of the last years of the last Labour Government: I am sure things are nastier 30 years on, but there are fascinating parallels.

He describes the frustration of power draining away despite the conviction that only they could do the right things; an inability to deal with a rising borrowing requirement and public sector spending; anger at public service unions wanting to protect themselves and contemptuous of both Government and the public; concern about uncontrolled immigration; some vocal Scots wanting devolution. And rising unemployment (did you know that every Labour Government has left office with higher unemployment than when it came in?). Yet feeling they had the right answers if only they had a bit more time... Fortunately for all concerned the Conservatives were elected.

I also read a book called Making Sense of Pakistan, a detailed exposition of how this vibrant and confused country came to be formed and came to have such a split personality regarding the balance between Islam, terrorism, capitalism and relationships with its neighbours and the West. I continue to worry about the influence of this area (and the resource rich countries of Central Asia) on world stability and the economy. I think Iraq (and potentially Iran) is a huge diversion and it scares me how little interest Western politicians (with the initial exception of Obama) generally show this region. For this reason I also read the Qu’ran – a big topic for another post.

Lastly, I do try to have a life: I also read some lighter stuff: I’d particularly recommend the new Le Carre; a charming book about crosswords and love; a couple of classic crime thrillers; the new Zafon; and a book about a Feng Shui detective. Amongst others.


* It wasn’t on the list because it had been on the 2008 Christmas holiday list – in hardback. I hate to buy books in hardback so I only read it after it came out in paperback.

Labour Conference Speeches

All these new initiatives....hospital parking, sorting out teenage Mums, solving street crime, and so on.


Why now? Why not in the previous 12 years?


Or was it all the Tories’ fault for not being a threat for most of that time?