Month: January 2010

The US and UK both allowed or encouraged excess credit up to 2007. Both slammed on the brakes too abruptly in 2007-8 and failed to see the impact of their actions on the general economy and the solvency of the banks.

Thereafter, they diverged. The US offered short term financial help, and has now succeeded in gaining full repayment with interest. The UK government chose to own two large banks. They sit at the taxpayers expense, with their share prices well below the price the government paid. As reported here, the US actions were the more sensible.

Owning the banks means it would be even dafter for the UK to impose the kind of levy the President is now inventing – it would be taxing ourselves, and lowering the value of the government’s shares further. UK taxpayers will have to pay Obama’s levy in part – because we own US banks through our ownership of RBS and LLoyds. What a pity they did not got on with selling those overseas banks off earlier, as recommended on this site.

The President has failed his economics test. His decision to tax banks will make things worse. His tax is a levy on banks’ liabilities other than deposits from the public. It is designed to encourage banks to have smaller balance sheets. That makes it a way of limiting growth or acting as an incentive to reducing banks assets, as assets equal liabilities. Banks’ assets are Joe Public’s mortgages, company loans for investment and working capital, and other borrowings by Main Street. This is the opposite of what is needed.

I hasten to add that I am not today riding to the help of overpaid bankers, or acting as an apologist for the bad banking that occurred in the heady days of the Credit explosion. I just think this is the wrong punishment at the wrong time. It is also a bit rich coming from authorities which played such a big role in bringing on the banking crisis.

The President has designed a tax which will act as a disincentive to banks to lend more money to people. It is a tax on banks borrowing to lend more. When getting out of recession is the priority, you need to do the opposite. You need to encourage banks to find more money to lend on.

This tax might have been a good idea in 2006 to try to limit the excess credit banks were pushing out. Then, of course, banks were more popular with politicians because politicians were some of the worst offenders at encouraging too much lending and borrowing in the private sector. Now politicians like Obama are against more lending and borrowing in the private sector, wanting all the extra borrowing to be by the state.

So why has the President done something so foolish? He has done it because bankers are unpopular. He wants to show some backbone against bankers who are about to receive large bonuses again. He wants to deflect any criticism from the Adminstration for the Credit Crunch and its aftermath. The bankers are an ideal scapegoat.

In its own terms it is a misdirected policy. It will not harm the bankers very much, or limit their bonuses this year. It hits bank shareholders more. Bank shareholders include a large number of Mr Obama’s own voters, as they are the ultimate beneficiaries of pension, Trade Union and insurance funds who own the banks. It is a levy that will cut bank profits more than bonuses. If he wants to hit highly paid bankers, he needs to increase income tax. Unfortunately for him that would also hit high incomes that are not earned in banks. It would be closer to what he says he wants to do than this banks tax.

Mr Obama’s strong rhetoric says this 10 year levy is being imposed so the banks pay back the American people. As many commentators have pointed out, the banks have already paid back the American people with interest for the loans they needed or were forced to take out by the authorities during the crisis. Now apologists are having to say that this extra repayment is to take into account the benefits the banks received from the AIG and motor company bailouts. Surely those bail outs were designed to help Main Street as well as Wall Street? The bankers would argue so were the bank bail outs, but that is another more difficult argument.

The irony of the policy is this. The authorities did much to undermine banking profitability in 2007-8. In the last year they have deliberately created an easy money low interest rate regime that will allow banks to make big profits. They did this because they decided that only if banks recovered could they get out recession and avoid depression. Now this is happening in the USA the authorities blame the banks for making the extra profit!

This policy will encourage banks to put more things off balance sheet, and to make more profits out of trading instruments and arranging fancy deals. It favours the investment bank at the expense of the Hig Street bank. Is that what he really wants to do? Look forward to a new set of banking distortions, as they flex to limit the levy.

Labour today are going back to talk about equality.It’s well within their comfrot zone. If they looked at the numbers and saw the growing inequalities they have presided over they might be more cautious in choosing this topic.

I am with them when they condemn racial or class based discrimination. It is common political ground in modern Britain that we want to live in a society open to all the talents and blind to background, race and colour.

The political arguments need to be centred instead on where there are disagreements. Is equality of opportunity more important than equality of outcome? Should you make a society more equal by taking away money and achievement from the people and institutions that have done well, or should you instead concentrate on changing those things that can be changed so more people and institutions can thrive?

My view is equality of opportunity is what matters most. Policy should be aimed at levelling up, not levelling down. We should not want to abolish Eton, but give to state schools more of the love of learning and pursuit of excellence which makes Eton what it is. I speak as a former scholarship boy whose parents could not afford to send me to a smart fee paying school. I was fortunate to be educated in an era when you could go to a good school on a state financed free place.

I am all in favour of improving the schools that teach people in lower income areas. If only Labour would take the steps needed to achieve that. Their much vaunted belief in comprehensives for all has not produced the equality they expected. Many comprehensives in better off areas outperform by a big margin the majority of comprehensive in less well off areas. The elite schools for the children of the richest outperform all by an astonishing margin. This surely must be as dispiriting for Labour’s class warriors as for the rest of us.

I am all in favour of welfare reform so we have a system which encourages people to succeed more. I would like to see people treated better financially if when unemployed they start to work for themselves.

There are a couple of hard truths about inequality which many Labour Ministers and MPs do not wish to confront. Most of the really successful people I know work harder and longer hours than people who do not reach the pinnacles. Most of the really wealthy who have made their money themselves have made it by taking risks the rest of us would not dare take.

There are limits to what an interventionist governemnt can do to reduce inequality. As this government has discovered, you can spend huge sums of money on trying to balance incomes up, yet the end result of their labour is more inequality than when they began. You can seek to attack the best institutions and the most successful people in your country, but this is not a guaranteed route to greater riches for the many. On the contrary, it is the route to less tax coming in, and fewer role models and job creators remaining here, if you push it too far.

So how can a well intentioned government encourage more people to put in the effort and take the risks that it takes to be well off? There are two main changes required. You need to tax the profits and incomes of success less, so it is more worthwhile for the less motivated to want to try. You need to be less penal on business failure, so more people will think giving it a go a worthwhile bet. Bankers and financiers took too much risk. They did so because they were playing with other people’s money. Elsewhere in our economy we collectively take too little risk. The result is we achieve lower living standards and have fewer home produced goods and choice of home delivered services.

It is not Oxford and Cambridge’s fault that so many state school pupils fail to get three grade A A levels or better, and fail to demonstrate that extra love of learning and additional knowledge that comes from intensive study if they go to interview for a place. The problems lie not in the elite universities, but in the state schools. This government seems to think the universities should solve the social problems the government has so singularly failed to tackle in a way which delivers.

Dear Shareholder,

Don’t worry. We had some silly nonsense last week from a couple of former employees. One I think was the Head of our company sanitorium for a bit, and the other apparently worked in security. They had some crack pot notion that we needed an immediate vote on whether I should stay as CEO. I told them in no uncertain terms that my policy of never knowingly underspent, and never knowingly underborrowed, was going down a storm with our core customers and stakeholders, so there was no need for any vote.

It was gratifying that after a few hours all the Board members agreed and came out in praise of my leadership and our collective strategy. It is true I had to have words with our Finance Director, our Deputy CEO and our Company Secretary, but they soon got the point. None of them want to see Conco take over. They all mainly seemed to want to be more associated with our successful strategy, and were gently arguing over who could be on TV more to explain it all to people. A little friendly rivalry amongst Board members is a sign of life and energy in your company, and is to be expected.

I do want to warn you about a few of the annoucements coming up. Our Finance Director is going to have to say that one day we will borrow less than today. He tells me that the markets who have been so good to us for so long, lending us so much money, are getting a bit jumpy. Apparently if we pretend that we will cut the deficit sometime over the next four years they will calm down. Meanwhile we can carry on with our preferred and correct approach of achieving record borrowing.

Some Directors also do not think it is right that we highlight the class background of our competitors, Conco. It turns out that one or two of our Directors are also from posh schools and rich families, so they are feeling the heat. With the Board elections coming up I have decided to humour them a bit. We have decided to brief out regularly that we are not going to make class an issue in the future decision on who should run UK PLC for the next five years. That will suit everyone, keeping the issue in the limelight whilst allowing us to reassure anyone worried by saying we are not going to make it an issue. I think you will agree that’s a pretty clever way of dealing with this important question.

Whatever we may say, I want to remind you of our core strategy which will stay the same. It is to spend more, to borrow more and to print more than any other management of UK PLC has ever done. We are not just setting records – we are establishing totals that are off the charts. The graphs need bigger paper and log scales to fit in all our borrowings and liabiliites.

We are soon posting the large bonuses to the hard working employees in our banking subsidiary. I am sure they will be relaxed if at the same time we have to make statements about how bankers should not get large bonuses. If we don’t, others might get jealous. We are still working on better bonus packages for administrators, who also deserve it. Owing to the difficulties staff have had getting in in the snow there will be delays in implementing quite a few of our plans, but we should be able to keep the essential supply of new press releases going.

We intend to use all this money to recuit more staff, to increase staff pay rapidly, and to offer more money to our loyal customers through our system of bonus payments or benefits. This is the way to defeat Conco, whatever whatshisname might think. I will not be deflected from my aim.

Yours, secure in my office

CEO

Just when I was getting used to my wayward car the snow and ice came. It made divorce inevitable. Today I am swapping it for a 4×4 in the hope that that might work in these Arctic conditions. With any luck such a move might also bring the micro Ice Age to an end. It is reassuring to remember that it is just cold weather, after all, and not climate.

It was one cold night when there was slush on the main road that I decided I had had enough. I had been driving the car as well as it would let me in difficult conditions. I held back before any incline so we could get a bit of a run at it. I kept trying to get it to change up, but of course the car knew best and wanted to stay in a low gear because the speed was low. I tried to find any bit of wet tarmac that might give it some grip. We came to a long gentle hill. Momentum needed renewing to keep the car going. Instead the accelerator refused to give power to the wheels thanks to the traction control, and the gear box refused to take the higher gear. The car shuddered to a halt half way up a slushy main road. It would not budge forwards. All I could do was roll it a little backwards and sideways into the snow drifts on the side of the road and leave it for the night.

It took two attempts the next day to dig it out and to get it to work. The following days have either seen me operating the car from as near to home as I can get it, or not using it at all. It doesn’t take much slush, let alone ice on the road for it to slip or slow to a halt.

I feel a great sense of relief after months of fighting the gear box and the map displays, with the car always having a different view to me on which gear it needs and what picture to show. The replacement will not be as good looking. So let’s hope it works. It was made in the UK. It should be much more economical on fuel because it is a diesel.

Yesterday, a couple of weeks late, Parliament was treated to a Statement on the inclement weather. The Transport Secretary’s side kick in the Commons was asked to speak for his own department, for Local Government, for Health and Education on the state of play.

The statement did not tell us much, and did not tell us anything new. We had heard it all before on TV and radio over the week-end from Mr Khan’s boss. That’s par for the course in the modern Commons. We were reminded that salt is being rationed. Salt ordered by prudent authorities may be diverted to others in greater need. We were told they had learned the lessons from last February, implementing all the necessary changes. Strange then, that rail services have been so disrupted and the road system has been so affected. The Speaker displayed his wry sense of humour by calling Mr Martin Salter first after the front bench exchanges.

When it came to questions, Mr Khan chose two different ways of answering that did not go well together. For much of the time he did what a Minister should so in such a situation. He should grasp that most MPs are there to ask urgent questions about the impact on their local area, and need help, advice or sensible answers to tell their Councils and electors. Unfortunately Mr Khan was usually only able to say he would investigate and write to the member concerned. You would have thought that he would be better briefed and could answer what were entirely predictable questions given the state of the roads,the stations and the pavements.

However, Mr Khan also mixed this with forays into party politics, attempting to blame Conservative Councils or Opposition spokespeople for the ills of the day. It was not a day nor a statement for such treatment, and it jarred with the rest of the proceedings.

The position on the matters that concerned us most was:

1. Can people clear their paths, sideroads, car parks without being sued? The Ministers thinks it good if they can help clear up, but thinks they might be sued. There was no attempt to say he would clarify or change the law.
2. Will the Highways Agency ensure certain named parts of the trunk network are safer and clearer? Maybe.
3. Will he take action to get more trains running ? He will look into it, and expressed surprise at the charge that trains from Hertfordshire had been cleaned overnight, only for the water used to freeze them into inaction the next morning.
4. Will he try to get station platforms cleared of ice? He will write about that.

I asked if schools that have to close for snow will be asked to provide alternative days when they will open so the children do not lose any education. The Minister seemed sympathetic but would not say Yes or No.

Only eight backbench Labour MPs turned up. Most of the questions were asked by Opposition MPs.

Yesterday Mr Cameron confirmed that a new government would need to accelerate the work to cut the deficit. It will need to start sooner and cut further than the current vague government plans. The Conservatives now understand that if you want a sustainable recovery you need to control the deficit before it controls you. There is not much time. With quantitative easing about to end, interest rates will soon to exposed to the full force of the markets. If the markets continue to disbelieve the pace and sincerity of this government’s deficit cutting, we will have higher interest rates and another knock to private sector recovery.

The IOD has recently pointed to the government studies which show a disappointing performance on public sector productivity. If the public sector under Labour had improved its effficiency at the same rate as the private sector, the budget deficit would be around one third less than it is today. A range of government studies have mainly concluded that productivity has fallen over the Labour years. The falls in achievement were greatest when the increases in public spending were at their largest. They shovelled money into services which were not able to spend it wisely. Under the year ending rules they felt obliged to spend it. Ministers believing in the lump of money fallacy forced them to spend it, almost regardless of what it was being spent on. I remember in the 1990s seeking to spend more money on the Welsh NHS to get specified improvements in services.It was extremely difficult getting agreement to ways of spending the extra money that would deliver the improvements in service. There was plenty of pressure to spend extra on the overhead. That problem got far worse under the Labour years, as Ministers seemed happy as long as the money was spent.

Our daily experience tells us that productivity is poor. So many tasks are now carried out by directly employed officials and by private sector consultants and contractors. We end up paying twice. We have often discussed on this site the surge of non jobs and strange jobs in the middle and senior managment tiers. These jobs often get in the way of efficient operation of basic services. Part of the answer to the deficit is to seek rapid catch up by the public sector of the private sector’s efficiency levels..

The surge in public sector pay has also gone well beyond a necesssary catch up for some lowly paid workers. The pay rates in some of the higher paid areas are now way over the top. A one year pay freeze is a necessary first step. The public sector has to understand the tough discipline and rough justice experienced in many parts of the private sector as companies have struggled to survive and employees have made their contribution by keeping their jobs for lower reward.

We also need to identify the less desirable things we can do without or do not want. I have done a lot of that over the last year on this site. I look forward to the next few weeks, when the main parties have to firm up their proposals. If we are to have a Darling budget he needs to make his postponed deficit reductions much more credible.

I met a successful entrepreneur the other day who told me he was on strike. He built up a good company, ran ir for many years, and sold out. He is young enough, energetic and wise enough to be able to run another good business. He has no current intention of doing so. He finds the tax and regulatory background now too hostile. He asks, why should people like him bother when the government is so keen to pile ever more burdens on them? They accuse him of being rich. They don’t encourage him to work hard. They just see his past success as something to raid to pay for their mistakes.

Some people have enough money to be able to live by just investing their cash in portfolio investments. Some even have enough money to be able to stay in the UK and pay all the taxes. Others are now leaving. One of the most important sources of new funds and management talent to create and build new businesses and to turn round old businesses is the talent pool of people who have done it before and made a go of it. They think income tax is too high. CGT has been changed against them, regulations have multiplied and employing people has been made dearer by National Insurance hikes.

We need an entrepreneur’s package, so more stay here and more invest and work again here. We need tax rates and regulatory burdens that still make it worthwhile to accept all the aggravation of running a business. As my contact on strike said, he remembers what hard work it was running the business. He felt very responsible for all the people working in it, for the quality of the product and for the customers. He did not wake up every morning dreaming of great riches. He woke up every morning thinking of the next problem he had to surmount to keep the jobs and keep the clients happy. If you are fighting the government at the same time, it can be enough to put people off doing it again. We are going to need all the entrepreneurs we’ve got – and more besides – if we are going to earn our way out of this debt crisis.

When President Obama made his first statement on the Intelligence failure over the underpants bomber it came over as a man attacking his own staff in public. That is not a good way to run something. If you are unhappy with how your staff has handled something you tell them in private, whilst supporting them in public. If the error is grave and unlikely to be remedied in the future you also make changes to key personnel to signal the need for change. If the exisiting staff can do better in the future you give them better leadership on how to carry out the task, and addtional training if appropriate.

In his subsequent statement he amended his stance, accepting that he was ultimately responsible. He had fallen back on the old ally of a Minister or boss in trouble – system failure. No single person apparently is to blame, and no-one will lose their job. The bosses of the relevant agencies and the Cabinet member concerned can sleep more easily as a result. Let us hope that this greater presentational wisdom does not get in the way of him changing the Intelliegnce services to make them more effective.

The President is now a warrior President. He may not have wanted to be a warrior President in the way George Bush became following 9/11, but he has been sucked in to a similar response to his predecessor. Mr Obama chose to make the Afghan war his own and to escalate it. His wish now to fight Al Qaeda – even if he refuses to call it a war on terror – may drag him into wars elsewhere, as Al Qaeda take their activities outside Obama’s war fields to Yemen and elsewhere. It is the old Bush wars by another name. Indeed, the Afghan war is being intensified in a way Bush declined to do.

He would be better advised to think again about how you can best counter terrorism. Fighting wars in every place where terrorists may train and have their bases is not a realistic approach. Why can’t he say so? It does matter that he improves Intelligence, as that is the best way of keeping us relatively safe. It also matters that he changes US relations with a range of difficult or unpleasant regimes around the world. He needs to be tough enough so they believe he would act under provocation, and tough enough not to have to invade them. He runs the risk of being too weak to be taken seriously, but still dragged into wars he cannot easily win.