Wednesday, December 24, 2008

Merry Christmas!

Just wanted to say Merry Christmas to everyone! Hope you all get decent presents and Scrooge relatives don't use the Krunch as an excuse to give you a pair of socks.

Will be back blogging after the festivities.

Thursday, December 11, 2008

More on the VAT cut

Lots of people, including Cameron, and Germany, have been ruishing to claim that the Vat cut "won't work", just 11 days in. Their reasoning seems to be that the VAT cut involves a loss of tax revenue, which will have to be borrowed, which in turn will make people wary of spending as they worry about future tax rises to pay for the borrowing.

This argument ignores one fundamental point: in downturns, sales fall, and thus VAT revenue received will drop anyway. Therefore anything the government can do to support consumption, supports tax revenue and mitigates the need to borrow.

John Lewis says that the VAT cut has worked. They say that sales for the first week of December are down 6.7% on the equivalent week last year, but that sales in the pre-VAT cut period were down 13%-14% on equivalent weeks last year.

Lets say for ease of calculation, that John Lewis made sales of £1 million per week last year. A 13% drop in sales equates to £130,000 in lost sales and £19362 in lost VAT revenue at 17.5%. A 6.7% drop in sales equates to £67000 in lost sales and £8739 in lost VAT revenue at 15%.

Therefore the VAT cut, in getting people out to the shops, has reduced the rate at which VAT revenue was dropping. Paradoxically, more revenue would have been lost if nothing was done. Cameron's belief that a VAT cut results in a straightforward loss of revenue assumes that sales will be the same or more than last year. But it is self-evident that in a downturn sales drop. The question then becomes, how do we slow down this trend or reverse it.

People can deride the VAT cut as "too small" and a "gimmick", but anything the government can do to support economic activity, helps. Do-Nothing Cameron would have seen his tax revenue drop faster and his borrowing increase quicker than Do Something Darling.

As to why the VAT cuts work - people are programmed to just like tax-cuts, it seems to stimulate a different pleasure centre in their brains than mere discounts. And half the time they arn't being rational or logical about it. John Lewis was surprised - "Nat Wakely, director of selling operations at John Lewis, said there had been clear evidence that consumers were holding back on more expensive items until the cut in VAT spending was passed on 10 days ago - although he admitted it was "slightly curious" because the 2.5 point cut announced in the pre-budget report had appeared to be too little to make a difference". But then it is the Conservative party that has trained the general public to act like pavlovian dogs to tax cuts these last thirty years. Curious that they now no longer believe in what they themselves have wrought!

Wednesday, December 10, 2008

Saving the World...

Much merriment in the Commons, as Gordon Brown meaning to say "the government has led the world in saving the banks" said by mistake "we saved the world..."

It's funny, but also sweet and oldfashioned. Not many politicians go into politics these days aspiring to save the world. Certainly the derision from Conservative benches, together with their resistance to temporary tax cuts, resistance to recapitalising the banks, resistance to all government efforts, combined with their belief that "recessions can be good for us" shows that the Conservatives arn't even interested in saving Britain. What are they interested in? Raising the inheritance tax threshold to £2 million, so that the shadow cabinet can leave their money without the Treasury touching it - that's why they've gone into politics.

There is absolutely nothing wrong with aspiring to save the world. In trying much good is done. Those who refuse to try, achieve nothing of worth at all.

It must be chilling for voters to see how palpably Conservatives wish things would get worse, how gleeful they are when people lose their homes and jobs, and how cynically they deride those on the Labour side trying to ameliorate the downturn. The voter is probably thinking, what have I done that the Conservatives wish me ill and take such pleasure in misery in this way?

Friday, December 05, 2008

Savers complain

As predictably as night follows day, we have had a savers rant in the Times, complaining about falling interest rates.

What people don't seem to understand is that interest rates are the price of money and savers are really lenders, who loan money to borrowers, with the banks acting as middlemen and taking their cut as middlemen do. All year we've had savers complaining about the feckless youth of the country who are borrowing too much when they should be saving. And these same people have been complaining about prices. Now they've got their dearest wish - this it what it looks like when you have rapid disinflation and everyone is saving. The profits (interest rates) of the savers/lenders are falling, because no one will borrow from them. Message to savers - your interest comes from borrowers, not out of thin air, and when people cease to borrow, you cease to get a return for your money.

Of course some savers believe they should be paid high interest rates even if no one is borrowing, in the same way that some people think they should be paid an income even if they do no useful work. But that's not how it works in a capitalist system. If savers want interest rates to go back up, they need to get out there and do their Christmas shopping and stimulate the economy.

If the above makes you feel grumpy, then console yourself with the thought that we are not a pure capitalist economy. Instead we are a mixed economy with a big Labour government. There is still one borrower left in town willing to pay you for lending your money. You can lend to Her Majesty's Government either by buying gilts (you can do this directly - see your Post Office for the form) or through National Savings. National Savings are offering tax-free Index-Linked Savings Certificates at 1% + RPI, which is pretty damn good. It should be enough to cheer up the grumpiest saver.

Thursday, December 04, 2008

Action in Queen's speech on Repossessions

The Labour government has secured agreement from eight banks who control 70% of the mortgage market (HSBC, Abbey, Nationwide, Lloyds TSB, Barclays, Northern Rock, Royal Bank of Scotland and HBOS) to allow homeowners who are struggling to either take a two year mortgage holiday, with the interest added to the loan, or more likely to make reduced payments, with the balance added to the loan.

Why is this a good thing? First of all, it's cheaper for the householder to take a payment holiday (even if they will end up paying interest on the deferred interest) than to go through the whole nasty palavar of repossession through the courts. Plus they get to stay in their own homes. From the government's point of view, this means that they don't have to suddenly house people who are homeless (and fork out housing benefit for them). From a macro-economic point of view, it slows house price falls. House prices fall mainly due to forced selling (otherwise householders simply stay put rather than sell). This also gets rid of some of the fear factor (the main reason people arn't spending is that they are worried sick about losing their jobs and homes). And from the lenders' point of view, this makes long-term sense - their biggest profits come from people who pay their mortgage over the entire term. Having to repossess, sell-off and write down bad loans is a hit on profits that they only undertake to please the short-termists in the markets - but now the govt is a major shareholder, the long-term can be considered. If this actually gets the economy moving again, the banks will be the first to benefit.

Today also saw the French unveil a €26bn stimulus plan. Unlike the UK which went for tax cuts, they have gone for public spending via the state owned companies like EDF, and building social/affordable housing.

So we are now seeing several different stimulus models. The Americans went for a straight income tax rebate in the summer (this is generally believed to have failed as a stimulus), and Obama intends to undertake a mammoth $700bn public spending spree when he takes office on Jan 20th, spending the money on infrastructure (which the USA desperately needs as they've let things atrophy in the last 30 years). The public spending should work (but we will have to wait till the New Year to see if it does). The French are also going down the public spending route (though you could argue that their infrastructure is in good shape already). The British have gone for support for business - the 2.5% VAT cut plus another £7bn help for small business (eg spreading tax payment for struggling firms) - plus help for householders (spreading mortgage payments for struggling homeowners). The Chinese are going to spend $586bn on infrastructure (though they have spent plenty on infrastructure already, arguably too much - they might have been better off providing a social safety net, as the lack of domestic spending in China is due to a lack of welfare support). The Germans have decided to Do Nothing, though bizarrely they are hoping everyone else is acting - Michael Glos, the economics minister, said last week: “We can only hope that the measures taken by other countries ... will help our export economy.” Free-riders!

Everyone has also cut interest rates sharply. So now the fiscal and monetary authorities have done their stuff, and we wait to see whose remedies work best. Of course I'm biased, but I think our remedy is the best. Business activity is key - they pay tax and they employ people. If they survive everyone else does too.

Monday, November 24, 2008

Some initial thoughts about the budget

My main impression was that this was a budget to shore up business. Let's deal immediately with the temporary cut in VAT from 17.5% to 15%, which will cost circa £12bn. Tories are saying "this won't make any difference". They sincerely believe that releasing £12bn into the economy will have no effect and this reflects their lack of understanding of how business works (possibly because their leadership comes from the aristocracy rather than the commercial community).

Here's why it will make a difference. In the current tough retail climate, retailers are slashing prices - for example the M&S 20% discount sale. When retailers slash prices, they are in effect slashing their margins. But there is a limit as to how low they can slash. If the price the consumer is demanding is below the break-even price for the retailer, the retailer has only a few options. They can try to cut costs such as heads of staff - which will increase unemployment, and which has the effect of scaring other consumers, fearful for their own jobs, into spending less. They can try to cut the price below break-even to grab market share and force their weaker competitors to try to match them and take losses in the hopes of forcing them out of business (job losses again), which then opens up room to raise prices again. Or they can try to hold prices at break-even and hope that their competitors who are discounting cannot sustain the discounts for long, and either go bust (job losses) or raise prices to above break-even again.

Therefore doing nothing leads to job losses. VAT represents a cost to business. So the 2.5% cut means that they should be able to maintain small margins even while discounting, and hence forstall the need to cut costs through letting employees go. That's why the retail industry has welcomed todays move. The main point about this is to help businesses maintain trading and thus safeguard employment.

The Tory opposition to the £12bn cut is also incoherant - if we had raised VAT by £12bn they would have made no end of fuss. But if it makes no difference one way it should make no difference the other way!

The govt has also deferred the small business corporation tax increase, and let struggling businesses spread the amount they owe the Inland Revenue, which should make a huge difference to cashflow. As any small business knows, the Inland Revenue is the scariest of creditors and it is usually not being able to pay the Revenue that precipitates firms going into bankruptcy. The additional help to small business will be worth £7bn.

What about boosts to the consumer, I hear you ask. This will come from monetary policy. The 1.5% cut in the base rate has been passed on by most lenders (apart from HSBC), and will hit people on the standard variable rate or trackers in Dec. It's worth about £100 a month. The BoE will undoubtedly cut rates again in Dec, and going forward.

So you see a two-pronged attack - putting money into pockets via monetary policy and shoring business up (and hence employment) via fiscal policy.

With regard to the tax rise for those earning over £150k - the cover for doing this comes from the election of President Obama. I wrote the following on 5th November:

Obama has stated that he thinks a person on an income of $250k is rich (this is about £158k). He intends to raise the top federal tax rates to to 36% and 39.6% (from the current 33% and 35%). Remember that Americans pay state income tax in addition to federal income tax. The American state that mirrors Britain's economy most is New York State. There, the state income tax if your income range is between $100,001 and $500,000, is 7.375%. If your income range is $500,001 and over, your tax rate is 7.7%. People living in New York City pay city income tax too of between 2.9% and 3.6%.

That means that the top marginal rate of tax for high earners in New York City (London's great rival) will go up from the current 46.3% to 50.9% under Obama. Compare that to the 41% levied in the UK.

The tax rise comes into effect in 2011, when Obama will have implemented his tax rise. This means that those in the City inclined to complain won't find it viable to up roots and go to New York. They are still better off in London. The 0.5% increase in N.I. will mainly affect those who earn over £20k (due to moving of the thresholds).

The other point to make is that the tax rises will come after the general election, so the country has a chance to vote on it.

Regarding borrowing - the point needs to be made that doing nothing and letting a deep sustained recession take place will kill tax revenue, and force government borrowing up even further. Only the economically illiterate do not understand this. As for public spending, the next round will have an increase of just 1.2%, which is very tight. In order for the Tories to do better than that they will need to actually close schools and hospitals.

So now the battle for the next election is set. People in 2010 will be voting to either increase tax on those over £150k to 45%, or to vote Tory and keep the top rate as it is, to increase the inheritance tax threshold to £2 million from the current circa £600k, and to pay for it by physically closing hospitals.

Monday, November 17, 2008

The Australian Dollar

As you can see from the chart, the Australian Dollar has also lost a third of it's value against the US dollar since August (and dropped precipitously against the yen too). This despite the Aussies running budget surpluses. The Australians were due to have a budget surplus of 1.8% of GDP in this tax year, it will be less than that as they are increasing spending to offset the downturn - but they will be in a fiscally sounder position than both the Americans and Japanese.

So why are they having a downturn and why is their currency falling? Hint: it's nothing at all to do with Gordon Brown! There is a global recession going on that is effecting every country on earth. As for currency movements, hot money tends to overwhelm movements due to trade or government borrowing. (If you doubt this, ponder on the fact that the pound's value against the dollar is exactly what it was in 2002, when the Labour government was running the biggest budget surpluses since the 1940's).

Since 2002, hedge funds and other traders have borrowed in dollars and yen (which had very low interest rates) and invested in Europe, Australia, New Zealand, and the emerging economies (Brazil, South Africa etc). These loans are being called in, money is also being withdrawn from hedge funds by investors, so they are selling assets abroad (causing falls in the world markets), and then repatriating the money to pay off their loans - which is why the dollar and yen are rising.

Now, every world finance minister and their opposition counterparts know this, apart from George Osborne, who is under the impression that the forex markets can actually be controlled by governments!

No one can control the forex market, it's too big, there is too much money in it and too many players. Those who direct fiscal and monetary policy with an aim to target a certain exchange rate are doomed to failure, as Nigel Lawson and John Major proved so expensively.

If exchange rate movements make you queasy, you can always take refuge within a fixed rate system like the euro. But if you want a floating currency, you need to accept that it will move all over the place, you need to accept that you will have no control over it and you need to have enough nerve to not intervene or panic about it.

The trouble is Tories hate Europe, so don't want the euro. But they are also the biggest panic merchants out there! We saw that with Lawson and John Major, and now with Osborne. But panic and intervention combined with a floating currency system is the worst of all worlds. Intervening in currency markets doesn't work. Crafting fiscal and monetary policy with the aim to target the exchange rate instead of domestic consumption, destabalises economies.

The Tories have clearly learnt nothing from the disasters of Lawson shadowing the D-mark and John Major's ERM experiment. But we should be grateful to Osborne for letting us see now, before the general election, how clueless he is.

Saturday, November 15, 2008

Osborne upset that floating exchange rate, er, floats!

George Osborne has today accused the government of causing a "sterling collapse, a run on the pound". No doubt he is trying to evoke memories of 1970's "sterling crises" (Osborne is rather obsessed with the 1970's - when Labour nationalised Northern Rock in February, Osborne's response was to say "We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s.")

However, you can only have a sterling crisis if you are within a fixed exchange rate system such as Bretton Woods, or the ERM, or if you have borrowed in a currency not your own, which means that movements in the exchange rate affect the government's ability to service existing debt (eg Hungary has a lot of euro-denominated debt, and the collapse of the forint has meant that existing coupons are suddenly more expensive as they have to pay these in euros). None of this applies to Britain at the moment - we are not in a fixed exchange rate mechanism, and our government only borrows in sterling.

The whole point about floating exchange rates is that they float, shock horror! This means, Georgie-boy, that they go up, down, and occasionally sideways, and it doesn't always mean much due to hot money overwhelming fundamentals. See the chart at the top (click to enlarge it). Sterling collapsed in 1985, but this did not mean that the economy was in trouble - indeed the economy was far stronger in 1985 than it was in 1981. Similarly, the economy was stronger in 1993 than it was in 1990, the economy was stronger in the lead up to 2001 bust than after it. The exchange rate reflects more speculation and hot flows of money than anything else (though relative performance between economies plays some part too). At the moment, there is massive deleveraging going on in the markets. Money borrowed in dollars and invested elsewhere is returning back to the USA so that loans can be repaid (and this is also happening to the yen, hence that currency's sudden strengthening to the dismay of the Japanese - BTW Japan's sovereign debt is over 150% of GDP, so much for Osborne's theory that high sovereign debt weakens currencies!)

Does a weaker currency help or hurt the UK? It should help. The reason we have had a negative trade balance in recent years (i.e. imports are greater than exports) is because sterling has been so strong for so long. The currency level dictates the trade balance, rather than the trade balance being independent of currency as some ignorant Tories are suggesting. It's is cheaper to buy foreign goods and services than to buy local when you have a strong currency, and very difficult to export in these conditions. This should start to reverse.

We are already seeing people taking their holidays in the UK rather than going abroad - in the stats, this counts as a reduction in imports of tourism services. It's no longer worth people making a Christmas shopping trip to New York as they did last year - it's now cheaper to shop at home, to the relief of the retailers. I imagine supermarket buyers are already seeking to stop sourcing goods in the dollar and euro zones and looking to buy locally. We'll see fewer blueberries and cranberries and more blackberies and raspberries on the shelves.

Businesses like Airbus price their planes in dollars, but their costs are in euros and sterling (the cost of staff is always the biggest expenditure in modern manufacturing businesses). They were suffering under the strong pound and euro, but will now experience a competitive advantage over Boeing. Businesses that export IT services such as Sage will also benefit - they price their products to Europeans in euros and to Americans in dollars. Most international contracts are priced in dollars (especially to the Far East). The dollar is still the currency that the world does business in, and the Americans in recent years have been trying to borrow growth from the rest of the world with a weak currency. We have respite from this at the moment. How long it will last is anyone's guess - it will take a little longer to deleverage and longer than that to see how economies perform relative to each other. But British exporters of goods and services should make hay while they can.

Oh - there was some suggestion in the Times that Osborne was "talking down the pound", which made me chuckle. He has such a poor understanding of economies and such a poor standing in the world, I doubt very much that he has the ability to move anything. Vince Cable pointed out how odd it was that the Tories were complaining about the floating currency being flexible. Tories do have a tendency to worry about exchange rate flexibility - the last time they were in power they tried to shadow the D-mark, then when they got into economic difficulties, their solution was to remove flexibility completely and join the ERM! And now here we have Osborne thinking that the job of the govt is to maintain a certain exchange rate. Labour however knows that you should simply leave the exchange rate to do it's thing, and not interfere or worry about it (it's impossible to control the forex markets anyway and there are more important priorities for the government to concentrate on).

Saturday, November 08, 2008

The Interest Rate Cut

Apparently the banks were pretty miffed to be hauled up to see Alistair Darling and asked why they were not passing on the BoE's interest rate cut. The banks wanted to widen their margins some more (most didn't pass on the full 0.75% cut that took place earlier this year, and some didn't pass on the full 0.5% cut in October and they still wanted to widen their margins further by not fully passing on November's 1.5% cut). They've been whining about their profits - but bank net interest margins are more than holding up according to this article from the Times.

Of course it's not the British government's job to ensure the banks make profits. Merely to ensure that they don't collapse. After all, no one forced RBS to blow £49bn buying ABN Amro, no one forced Barclays to load up with worthless US sub-prime paper, no-one forced HSBC to buy the US sub-prime lender Household. The banks seem to think they are the most important part of the British economy and that it's the job of other well-run businesses like Tesco, Sainsburys and others to take a hit in profits because the banks have run their own businesses badly.

Actually banks only employ 15% of the British workforce. The other 85% is employed elsewhere. The reason it was imperative for the recent rate cut to be passed on was that the benefit should hit households in December in time to pay for Christmas. We know that the banks don't wish to lend, and that households don't wish to borrow. The only answer in those circumstances is to make people's existing mortgage payments come down, so they have more disposable income available to spend for Christmas. Which in turn will keep retailers and others going and hopefully help them weather the crisis.

There are 1.7 million borrowers who are on trackers or the standard variable rate, and they will benefit from the rate cut being passed on. Another 1.5 million mortgagees were on fixed rates that expire this year. Most won't be able to remortgage - but going from a fixed of 3.75% to a variable rate of 5% isn't as bad as going to a variable of 6.5%. If people can keep up their payments, there will be less defaults. If those on variable rates have more to spend, there will be less pain for the non-banking sector, which also has debts to service. Which should help the banks, except they are too bloody short-sighted to see it.

I note that Barclays and HSBC are still holding out on passing on the rate cut. They are making a fetish of their "independence" from the government. They should be careful though. Customers are not stupid. They will walk to those banks that have the lower SVR, which should make those elusive "profits" much harder to come by for Barclays and HSBC.

Further musings on Glenrothes

The reaction from some Tories to the Labour win at Glenrothes on the message boards of the Guardian and elsewhere has been interesting. Many have rubbished the result saying in effect "How can holding onto a seat - previously considered rock-solid Labour - be considered a triumph?" You would never guess that Labour had been in power for eleven and a half years and was in it's third term, and that by-election wins in such circumstances were unprecedented.

They are acting as though Labour has only been in power for about 17 months, and that this is a major blow as the majority was a bit down from the general election! I could dismiss this as mere spin from them, but I can also sort of see where they are coming from. Because it doesn't feel like Labour has been in power for eleven and a half years, the Labour government feels newer than that.

I think a great part of it is down to the Brown government having a very different feel to the Blair government. Only four members of the old Blair government have survived - Brown, Darling, Straw and Mandelson, and of these, Darling previously didn't have a national presence at all, but now he's on our screens almost daily, which makes him a genuinely fresh personality that is dominating the government, and Brown too is a bigger presence than he used to be (under Blair, Brown only seemed to emerge twice a year at budget time). Indeed the travails of the government in the last year fits with the scenario of a new government taking over and struggling to cope with the transition, in the way that Clinton struggled in his first year (teething troubles that Bush suffered too and which Obama hopes to avoid). And the new bounce happened when they all got to grips with their jobs in time to handle the crisis. If they were newbies in 2007, they are not anymore. They got tested in the crucible and came through with flying colours. They are now experienced in crisis management.

An illustration of the change in flavour came today when Darling summoned the banks to scold them into passing on the interest rate cut to their customers. Such government activism was unthinkable in Blair's day. The Brown-Darling government feels more activist, more protective of the little person, more to the left of the Blair government. It's becoming clearer and clearer that the Brown-Darling administration is quite different to what went before.

What does this mean for British politics? Part of the reason John Major got elected in 1992 was because the public had their change of government in the form of him replacing Thatcher, and didn't want another one so soon. If the Brown-Darling government continues to offer a change in direction and continues to stay on top of events, the public might again conclude there is no need for another change in 2009/10, especially if the Tories resist going left with the zeitgeist and try instead to cling to the Reagan-Thatcher settlement. Just a thought.

Friday, November 07, 2008

Happy Days!

First Obama on Tuesday, then Brown on Thursday! And there I was trying not to get my hopes up for a Labour victory in Glenrothes of a mere 500!

I personally think it was Sarah Brown wot won it. Some SNP people dismissed her as "too English" to have an effect - and she is very middle England. But Gordon+Sarah represent Middle Scotland married to Middle England. Which is the antithesis of the SNP message. I think too that the people of Glenrothes liked the fact that the government was taking them so seriously that the Prime Minister and his wife came in person to woo them. (For those naysayers who said that Sarah shouldn't campaign - she's a paid-up member of the Labour party and is entitled to campaign as much as any other member.)

I can't help feeling that the zeitgeist favours the centre-left. Now is our moment in history, 1997 was merely a holding point. The tide is with us, can we take it at the flood?

Thursday, November 06, 2008

More on the implications of the Obama victory

A rant first. Am a bit frustrated by the British coverage of the Obama win - they are going on about "defining moments" in American history, and then showing pictures of Kennedy, who was a very minor president indeed (he merely responded to events during his presidency, he didn't "make the weather" in the way FDR, Johnson or Reagan did). It's almost as though they think, Obama handsome, Kennedy handsome, they must be similar presidents!

They are also going full-on about the historic "black" win, with footage from civil rights etc (which of course they prepared earlier). But of course the reason Obama was elected had nothing at all to do with colour. Instead the contest, which had been close, tilted decisively to him when the meltdown happened in the financial markets. The really historic thing is that though Obama is half-black, the election was about policy, and people would honour the spirit of the moment better if they explored those policies.

American journalists however are focusing on policy. Joe Klien had this to say in Newsweek:

"Unlike Bill Clinton, whose purpose was to humanize Reaganism but not really challenge it, Obama offered a full-throated rebuttal to Clinton's notion that "the era of Big Government is over." He was a liberal, as charged. But the public was ready, after a 30-year conservative pendulum swing, for activist government."

Now, New Labour's strategy was modelled on Clinton's. The idea was that we couldn't dismantle the Thatcher settlement, but we could modify it. So higher rate taxes were not touched (apart from Brown raising N.I. above the upper earnings limit by 1% for the first time). And redistribution was done by stealth. It was only during this third parliament that Labour people actually started openly acknowledging the amount of redistribution taking place (through raising the minimum wage much faster than the growth in average earnings and through tax credits). Everyone kept quiet about it in the first eight years.

Obama however means to turn away from the Reagan-Thatcher settlement. He's a potential FDR if he wants to be. The financial meltdown has made Americans give him a fair hearing, and there is a fair amount of goodwill behind him. Ordinary people are irritated at the rich being bailed out while they struggle with basics and are scared to get sick. I've been saying for some time that the current crisis is very different from the early 90's one. Then government was blamed and the markets were heroes. This time the market is the villain and people are looking to government to protect them.

Obama's solution is to increase public spending, cut taxes for the poorest, and pay for it by raising taxes for the richest. It's something Labour would love to do, but the difficulty is the "raising taxes for the richest" bit. One big difference between the UK and the USA is that the Americans don't have any such thing as a person non-domiciled for tax. If you are a citizen, you pay tax, regardless of where you are living. There is no escape. They have double taxation agreements with most countries, but if you are paying less locally than you would in the USA, you pay the difference to the US treasury. So an American in Monaco will pay full federal tax to Uncle Sam. A Brit in Monaco pays nothing to the Inland Revenue (Monaco has zero income tax and Britain allows the concept of non-domiciles). So it's easier for Obama to collect his revenue than for Gordon Brown - unless we change the law to say that citizenship comes with the responsibility to pay tax.

The other interesting thing is that much of Obama's public spending may go on infrastructure. Many Americans look back to the era of Eisenhower with nostalgia for the full employment and job security. What is now forgotten is that Eisenhower had a top rate of tax of 90%, and he used the money to build the American Interstate system. In 1999, the building of the US Interstate system was voted the most important event of the 20th century that shaped US business, as it enabled goods to get to market, and thus powered the growth in the US economy. However, not much spending has taken place on US infrastructure since Reagan (with dire consequences in New Orleans). That might change. It's also something we should consider here, especially if the downturn means that government has to step in with projects to make up the shortfall in activity.

We are living through a once-in-a-generation shift to the left. I just hope on this side of the pond we have the nerve to seize our moment.

Wednesday, November 05, 2008

Wow it was a huge win!

Thrilled to have been proved wrong about the US election being close. And also hugely relieved.

It really hit home that Obama had won when he started giving his speech, and I had the odd sensation of hearing phrases that we are familiar with in the Labour party these last twelve years - "rich and poor, gay, straight, disabled and not disabled" and "we cannot have a thriving Wall Street while Main Street suffers" (the kind of thing Cruddas says, only substitute City and High Street for Wall Street and Main Street) - coming out of an American President's mouth. One of us is in the White House!. How exciting is that?

Pleased too that he mentioned that the task of dismantling the Reagan-Thatcher settlement will take more than one term. The audience looked so desperately hopeful, at one point it was almost like a session in church with them answering him at set points. The expectations on him are almost too much for a mere mortal to bear. I really hope he pulls it off.

What does this mean for Britain? Well if Obama succeeds in tilting the USA leftwards, it makes it easier for the Labour govt. For instance if he raises taxes on the wealthiest, it will be easier to swat away those who claim that the British tax system is resulting in people fleeing the country. If he restores inheritance tax, it makes it easier for us to explain that the Tories are being just plain greedy to want the inheritance tax threshold raised to £2 million. If he goes ahead and puts in place policies to tackle global warming, it will be easier for us to bat away those in industry and in the Tory party who are complaining about the climate change levy. If he succeeds in producing a socialised healthcare system, we can finally say to the right-wing critics, see, even the USA has capitulated. Just as FDR's election in 1932 preceded a leftward tilt in Britain in the 1940's, Obama's win signals the end of the Reagan-Thatcher settlement and a move leftwards in the developed world.

This is a moment for the centre-left to feel very cheerful indeed.

P.S. Just checked the tax situation. Obama has stated that he thinks a person on an income of $250k is rich (this is about £158k). He intends to raise the top federal tax rates to to 36% and 39.6% (from the current 33% and 35%). Remember that Americans pay state income tax in addition to federal income tax. The American state that mirrors Britain's economy most is New York State. There, the state income tax if your income range is between $100,001 and $500,000, is 7.375%. If your income range is $500,001 and over, your tax rate is 7.7%. People living in New York City pay city income tax too of between 2.9% and 3.6%.

That means that the top marginal rate of tax for high earners in New York City (London's great rival) will go up from the current 46.3% to 50.9% under Obama. Compare that to the 41% levied in the UK. It gives cover for the Labour govt to raise N.I. by a mere 1% over the upper earnings limit (to take the marginal rate to 42%), should they wish. Especially as the Irish have introduced an income levy of 1% (and 2% for earnings over €100000) to take top rate to 43%. Alistair Darling has ruled out tax increases for now. But what has happened in the USA gives us room for manoeuvre if we need it.

Sunday, November 02, 2008

Good luck Obama

All of us on the centre-left are holding our breath hoping that nothing gets in the way of Obama winning the US Presidential election on Tuesday.

Perhaps it's because I'm Labour, but I believe the only moment of certainty in politics is the night the ballots get counted. The uncertainty starts again the very next morning. I am always astonished when people think something is "in the bag" - that's usually when things start to slip away from them (for the most recent example of this see this poll done by Conservative Home just before their party conference, where an astonishing 91% thought they were either heading for a large victory or a small victory - that was when the Tories were running a good 25 points ahead of Labour and before the meltdown of the markets).

American polls are more inaccurate than British ones - we saw this in the primaries. At least the regular primary ballots provided a reality check. We haven't had one for a while, and it's likely that media hype is disguising an unstated resistance to having Obama in the White House.

I hope I'm wrong, but if I was Obama I would get my people to fight fiercely to the very end to get out the vote. I think the result will be close and that every last vote will count. Obama has very good organisation on the ground, and if he wins it will be down to that rather than any radical shift in the zeitgeist (the shift will come after he wins and starts to govern, and has the power to "change the weather" in fundamental ways).

Wednesday, October 22, 2008

A look at Northern Rock one year in

Northern Rock was essentially the start of the credit crisis in the UK (though before they imploded the Germans had to rescue some banks, as did the Americans).

In August 2007 the credit markets froze, and Northern Rock, which funded itself through the money markets, found itself in trouble. They approached the BoE for a loan, and the bank disclosed this, causing a run on the bank as excitable TV coverage convinced savers their money was under threat. The government responded by guaranteeing the savers of Northern Rock, extending £26.9bn in loans to be repaid by 2010 at an interest rate of 6.75%, and then nationalising the bank in Feb 2008, injecting 3.5bn in capital into the organisation.

At the time, an enormous fuss was kicked up by the opposition to these sensible measures. The Telegraph scaremongered in Nov 2007 that the taxpayer would never get their money back after Alistair Darling refused to "guarantee" that the loans would be repaid (what reasonable person could give such a guarantee?) When the bank was nationalised in Feb 2008, George Osborne called Alistair Darling a "dead man walking" and said that "We will not back nationalisation. We will not help Gordon Brown take this country back to the 1970s."

Alistair Darling appointed Ron Sandler to sort the bank out. At the time the Rock had 1 million savers, 800,000 mortgages and 6000 staff. At the time of nationalisation the Rock received just 25% of it's funding through deposits. Nationalisation tasked it to get this up to 50%. Sandler made 1500 people redundant, but the Rock still employs 4500 staff and has 70 branches.

Sandler's strategy was to halve the mortgage book, and in order to incentify mortgagees to remortgage elsewhere, they have the highest standard variable mortgage on the market at 7.34%. Why so drastic? Because it was a race against time. If the property market tanked many people wouldn't be able to get remortgages elsewhere. They had to be incentivised to move quickly. They also had to cap the number of savers they could take on to 1.5% of the savings market to comply with EU rules on nationalised industries. But they are well on their way to achieving their target of 50% of funding through deposits.

So far the strategy has paid off. They've repaid £15.5bn of their loan so far, leaving them with £11.4 bn still outstanding. The scaremongering from earlier in the year that the taxpayer would lose the lot was unfounded.

Some charity groups have been accusing the Rock of harshness in their repossession strategy. They repossessed 4200 homes, compared to about 2200 the year before. But in the context of the total number of mortgages they held when this saga started, this is low.

Some Northern Rock mortgagees took out the now infamous "Together" mortgage which constituted a 95% mortgage, plus an unsecured loan, that took total lending to 125% of the purchase price. Most of the Rock's unsecured loan portfolio comes from these "Together" loans. Unsurprisingly, the mortgagees appear to have blown all the money advanced to them, and other lenders are reluctant to take them on. They represent the biggest threat to Northern Rock achieving normality. Once NR have repaid their loan to the govt, expect new mortgage rates to drop for very secure customers with low loans-to-value, as a way to attract good customers and dilute the number of risky mortgages on their books.

Still, Northern Rock is well on it's way to being mended. Once they have repaid the loan to the government, and sorted out their funding, they should be in a prime position to be floated on the market. I expect the government will wait a few years though. It's never sensible to float in a depressed stock market.

Two people come out well from this. Alistair Darling's actions in nationalising the bank and appointing Sandler to run it turn out to have been the right thing to do. Darling is going from strength to strength - no way can he be termed a "dead man walking". Ron Sandler appears to be an excellent trouble shooter. If we need troubleshooters again, his name will surely be on the top of the list.


Screeds have been written on the convoluted goings on in Corfu, so I'll limit my post to the role played by Nathanial Rothschild.

I nearly fell off my chair when I read the letter he sent to the Times. It is curt and incendiary. It's almost unheard of for someone like him make a direct attack on a politician in such a public way. Without the letter, this would have been a minor story based on rumours and reports from "friends". But the letter is like an Exocet.

I was even more astonished to find that Rothschild was a Tory supporter, and his mother had donated £190,000 to the running of Osborne's office. Note the donation was not to general Conservative funds, but to Osborne. Apparently they are all supposed to be friends.

So what on earth has happened to make Rothschild fall out with Osborne to this extent? I can't believe he was being protective of Mandelson, who is Labour. People like Mandelson and indeed all Labour folk, are expendable to people like the Rothschilds. The other explanation that has been put forward is that this was an old boy put-down for gossip. But the Osbornes are more titled than the Rothschilds (though less monied) and why didn't he put down Murdoch as well for stirring the pot?

If this is really about mere irritation at blabbing, all I can say is that they do friendship differently in ToryWorld than everywhere else. A Labour person irritated with another Labour person would have expressed their anger in private and smiled through gritted teeth in public. But then Labour is tribal.

Going public like this, with a mission to destroy, is on a whole other level than irritation. Either aristos have a truly weird idea of friendship or there is something else going on here.

Sunday, October 19, 2008

Kirsty Allsop is still the Tory "Housing Tsar"

Kirsty Allsop, the Channel Four property cheerleader was appointed Tory Housing Tsar in October 2007. As I wrote at the time, not only was she relentlessly pushing houses on national TV and telling everyone that "rent is dead money", but she had developed a feud in 2004 with, whom she accused of "talking down the market".

In fact even as recently as April 2008 she tells the Telegraph that

The people she finds most irresponsible are those who are trying to whip up fear. "There is a website called and I am their deadliest enemy. They all rent and have a vested interest and enjoyment in watching others suffer. That's sick. Schadenfreude is absolutely disgusting and a terrible trait. There has been overpricing in some areas but this is not America. We are not going into freefall unless we panic ourselves into it."

It turns out that the denizens of are worried about her connections to the Conservatives. One of them wrote to Cameron and posted the following reply he received onto the board on August 8th 2008:

"I am replying on behalf of David Cameron to thank you for taking the time to write to us with your concerns about Kirstie Allsopp's involvement with the Conservative Party.
Kirstie Allsopp has, and continues to be, a valued contributor to the home buying review which the Conservative Party is currently undertaking. She has been extremely helpful in adding a public face to what has been, in the past, a largely closed process.
Kirstie is very experienced in the home-buying and selling process, having been a property search agent for over 10 years. Every week she travels over the UK dealing with the fears, worries and frustrations of buyers and sellers and she sees the full extent of the resulting stress that they all too often suffer in the process. Reducing this stress through increased certainty and speeding up the process is a key objective of the Conservative Home-Buying Review and as such, Kirstie’s involvement in the review has been useful and worthwhile.
You should not feel that because Kirstie is the most visible face of the home buying review that she is by any means the only contributor. We are endeavouring to ensure that all relevant parties are involved to the greatest level possible with the process.
If you are interested please take the time to look at our website: which also gives you the opportunity to contribute to the review and put forward any concerns you have.
Thank you, once again, for writing.
Yours sincerely,
Lara Moreno Perez
Office of the Leader of the Opposition
House of Commons
SW1A 0AA "

So it looks like the Conservatives are keeping her on, which is interesting. Kirsty Allsop has cheerled for the housing bubble in a way that no-one in the Labour party ever did.

Indeed she opposed every attempt by the Labour government to slow down the market. And Labour has been trying to slow the property market. Brown abolished MIRAS in April 2000, when it became clear that some people thought that the tax relief was incentive to load up on mortgage debt and never repay/overpay it.

He then introduced stamp duty of 3% on homes over 250k and 5% on homes over 500k in 2003, when it became clear that big bonuses in London were creating a top-down bubble in housing - the classic theory is that if you increase transaction costs, people stop trading houses constantly as though they were shares and instead increase the length of time they stay put (and pay down the mortgage debt during the period they stay put). In particular people with existing houses just below £250k were incentivised not to move - people think twice before moving if they are presented with a stamp duty bill they must pay in cash (whereas the mortgage is borrowed money and doesn't seem quite as "real", even if it is a way bigger amount). That slowed the market for a good six months.

When the market resumed it's upwards trend Mervyn King made a famous statement in June 2004 where he stated that house prices would fall. His words managed to slow the market for all of six months.

The govt then introduced HIPs, which also slowed the market down for a few months. Each slowdown paused the market and allowed people's earnings to catch up a bit, and some more debt to be repaid. They added up to several years of pause, which is why the market didn't surge up so sharply in the last three years before the top in the way the American one did.

But Tories opposed all this, and Allsop in particular resented any attempts to slow the market. Presumably David Cameron appointed her, and keeps her on because he approves of the way she pushed and keeps pushing the housing bubble. Indeed Allsop is campaigning for all stamp duty to be removed so that houses can indeed be traded like shares.

When Tories criticise Labour over the housing situation, we need to shout "Kirsty Allsop" back at them - or "Krusty" as like to call her.

Saturday, October 18, 2008

The Bank Rescue

The Times has a fascinating behind-the-scenes account of how the bank rescue was put together. It's marred only by the title they give the piece - "How Gordon Brown took the credit for his sidekick’s rescue plan".

Certain sectors of the press and all Tories have been criticising the Bank rescue, not on the details of the plan (it's a very good plan, so hard to pick at it), but on the basis that Gordon Brown shouldn't get any credit, because he didn't come up with the plan personally. It speaks to an bizarre view of how government works.

In this blog I've always referred to the plan as the Darling plan, as it is clear to me (and to anyone who has given thought to it), that something that comprehensive could only have come from the Treasury. Number 10 doesn't have the resources to do it.

The job of the Prime Minister/leader is not to think of everything himself, but to task others to come up with solutions - and then to decide and choose correctly which solution to pick from the vast array presented to him. There is always a range of solutions presented. Even in the lead up to the Iraq war, the MoD will have presented several plans, one of which would have included the benefits of not deploying at all.

Leaders vary in how much of a steer they give their cabinets. Eisenhower used to insist that his cabinet presented him with a summary no more than a page long. He then read the submissions, decided, and went off to play golf in the afternoon. Roosevelt took a slightly different tack - he always set up two separate streams of ideas flowing to him, one official and one unofficial, and let both know in advance that the other existed. In his opinion, that was the only way to catch out people out when they tried to withhold information, or use their proximity to power to steer him by suppressing ideas they personally didn't like but which were beneficial to the nation. He felt that his decision-making benefited from as broad a range of information and ideas being presented to him as possible. Thatcher by contrast, didn't trust anyone's ideas but her own. She had mirror departments in No 10, which made the actual decisions, sidelining the people in the real departments (to the frustration of people like Nigel Lawson).

The Treasury under Labour has really blossomed. It's gone from being a department that under the Tories was convinced it could get nothing right, into a big powerful department that attracts the best civil servants and is confident of it's abilities. It should surprise no one that they came up with such a good plan. It should surprise no one that the current incumbent of No 10 trusts the Treasury.

At the end of the day the Prime Minister looked at the options on the table and decided. With such big sums at stake, he was the one who had to sign things off. It's his plan because the responsibility for it lies with him. If it works, it's because he chose it. If it doesn't work, it's down to him for choosing it. That's what being prime minister is about.

But clearly the Tories and parts of the press don't share this view of what the job of prime minister is about at all. I believe their strange ideas stem directly from the top of the Conservative party, where Cameron and Osborne operate a tight cabal and believe that if they haven't thought of an idea themselves, it's not allowed the light of day. Which is a juvenile or novice idea of how large organisations are run. And it would create no end of problems if they were ever to get into power. Another reason to keep them out.

Thursday, October 16, 2008

Trends in Personal Lending

The graph left comes from page 30 of the FSA's Financial Risk Outlook report, which was published in January 2008 (though it is 70 pages long, it's well worth a read, as it is quite prescient).

For me the most interesting thing has been a collapse in credit card lending since 2005 (mainly due to lenders withdrawing 0% deals). Unsecured lending also drops. If the extreme lending in 2003-2004 was unsustainable, so too is the lack of lending in 2008. By contrast, a return to 2007 lending means a return to very prudent lending indeed, compared to the last fifteen years.

Tuesday, October 14, 2008

A look at New Zealand

The USA isn't the only country going to the polls in November. On Nov 8th, New Zealand votes for a new government too. Labour has been in power in New Zealand since 5th December 1999 - coming up to nine years.

And in the past year, New Zealand Labour have been trailing the right-wing National party by over twenty points. At one point in June 2008, the Colmar Brunton poll put the National party on 55% with Labour on 29%.

But the polls have been narrowing dramatically. Two weeks ago the gap between the two parties had closed to 11 points apart. By Friday 10th Oct, the Morgan poll put the National party on 40.5% with Labour on 37.5% - a mere three point difference.

All indications are that the credit crisis is helping the left. 42.7% said new Zealand Labour would handle the economy best in a crisis, compared to 41.2% for the National party.

I think this is down to the nature of this crisis, which is very different to the storms that hit the global economy in the early 1990's. In the early 90's, the market was seen as good, and the government seen as a source of ill. Reagan's quip that the nine scariest words were "I'm from the government and I'm here to help" was taken to heart.

But that's reversed now. The markets are seen as self-destructive, mad and bad, and government is all that stands between the ordinary voter and Armageddon. Because right-wing parties around the world have spent the last thirty years bashing government, they now find it very hard to say convincingly the sweetest words you could hear in a crisis - "I'm from the government and I'm here to help."

Monday, October 13, 2008

Save the Bankers, Save the World

The New York Times had a column by Nobel Laureate Paul Krugman simply entitled Gordon Does Good, which begins "Has Gordon Brown, the British prime minister, saved the world financial system?" He then goes on to praise the clarity, decisiveness and speed with which Gordon Brown and Alistair Darling have reacted to the crisis.

The comments to the Krugman article were instructive too. Anna, New York writes "Did we make a mistake in 1776? Is it too late to correct?".

Lisainvan, vancouver, bc writes "Can someone please just state the obvious? Brown was able to do this because he is the leader of the Labour Party. Labour, unlike the leaders of other leading nations at this time, does not have an ideological opposition to 'nationalizing' infrastructure".

And twofold, detroit, assesses the American presidential candidates and concludes that "Unfortunately, our choices for president are limited this year. Only a few weeks ago McCain was saying the fundamentals of the economy were sound. He also claimed little knowledge of economic issues at the start of the campaign season. Frighteningly Sarah Palin has shown less grasp of the subject. I would not trust Mr. and Mrs. Maverick with my financial matters. This leaves us with Obama, who at least shows a grasp of the facts. I feel his over all philosophy is more in tune with Gordon Brown’s."

Bless. You know something has changed when Americans are looking for the a leader "in tune with Gordon Brown".

It's always lovely when Britain leads the world and is praised for it. And our Gord is now de facto Leader of the Free World at least until the new American president is inaugurated in January 2009 and finally gets control of that rudderless state.

Friday, October 10, 2008


The Daily Mail reports that Barclays is thinking of trying one last attempt to raise private capital before tapping government offers to recapitalise them:

"Barclays is hatching a plan to bolster its capital base by £3billion by offering existing investors first refusal on preference shares before seeking cash from the government's £50billion rescue fund.

It is thought the bank is talking with backers, including Middle Eastern and Asian funds like Qatar Investment Authority, China Development Bank, and Singapore's Temasek, about buying the stock.

However, if they rebuff the plan, Barclays ... would go to the taxpayer-backed capital pool."

Why does Barclays think it is better off with state-owned money from the Middle East or China rather than UK state money? Because they think the UK taxpayer is a bit hard - wanting to curb bonuses and whatnot - whereas they think that Middle East and Qartari sovereign funds will let them continue as before.

They are in denial at the sea-change that has taken place over the last week. Things are not going to be able to continue as before. The sell-off in the western markets shows that ordinary shareholders (and foreign sovereign funds) are as leery about risks and excessive behaviour as the British taxpayer.

The Darling plan depends on British banks facing up to reality post haste and tapping the funds he has made available. It's regrettable that the boards of companies like Barclays are still in denial, and by delaying, putting their ordinary shareholders, bondholders and customers in jeopardy. Boards that delay too long in facing reality should walk the plank - and bow in public and express deep regret for their foolishness.

Thursday, October 09, 2008

Kudos to Alistair Darling

Unlike Hank Paulson's rescue package, which was universally derided (and will probably not work), Alistair Darling's rescue package was universally acclaimed as well-designed. Indeed, Italy, Spain, Sweden, and Denmark have said they will be copying it. And Paulson in the USA now says he might change his plan and adopt ours after all. Markets are rallying on the hope that now a credible plan is on the table, every government affected will copy it.

It's actually very hard to produce a sane and comprehensive resuce package under pressure (as we have seen from responses in the USA, Ireland and Germany), so Alistair Darling turns out to be the man of the moment. It also turns out that Alistair Darling was speaking straight when he told the Guardian some months ago that we might be seeing the worst global storm for 60 years. Many, including myself, thought he was being hasty. Actually, he was merely a man completely on top of his brief and making preparations for the worst - and his plan is well-designed because he understood before others what was at stake and took the time to start preparations in the summer.

I'm glad he is chancellor.

Saturday, October 04, 2008

Welcome back Peter Mandelson!

I felt hugely cheered when I heard Peter Mandelson had come back to the government. I became a fan of his when as EU Trade Commissioner, he took on the French in defending free-trade (a core Labour policy since we ran on a free-trade ticket in 1923) and asking the French to to support the abolition of CAP, which prompted that fool Sarkozy to attack him.

I think he's been one of the best UK commissioners we've ever had, and now that the Doha negotiations are dead (killed off by the Americans trying to get the Indians and Chinese to open their markets to US agriculture, and India and China balking), he is best deployed at home, where his vast experience of how international trade works can help the UK weather this crisis. Any changes to financial regulation in the EU will be negotiated by the Council of Ministers, the decision-making body of the EU, and having Mandelson as a partisan within the UK government, as opposed to a neutral Commissioner observing the proceedings, will help enormously. I was disappointed that most of the television networks yesterday only focussed on his UK government experience, and said practically nothing of his European experience.

Of course the return of Mandelson is also political. Mandelson, Blair and Brown were the founders of New Labour, and were later joined by Alastair Campbell. As John Kampfner pointed out, the New Labour tribe is re-grouping again. The only one missing is Blair, and I keep expecting him to start doing election rallies in Bill Clinton style.

People like Matthew Parris in the Times write hopefully that the re-grouping will result in disaster and predict feuds to break out. They misunderstand the nature of founders of New Labour. They were a band of brothers. They may have squabbled among themselves from time to time, but always closed ranks against the common enemy. If you read Alastair Campbell's diaries, you understand how hard they all worked to put Labour into power. They are not about to let it all go now.

Mandelson also helps in that he is a big beast. In 2007, Gordon Brown gave the next generation their chance to strut their stuff by promoting them to the cabinet, but for the most part they've been disappointingly timid. Mandelson with his intellect and confidence lends enormous ballast to the team. Labour won in 1997 by a massive team effort. In recent months people have forgotten this and tried to claim that the job of winning was solely down to the leader while everyone else sat on their hands. That will change as teamwork starts kicking in again.

I must say a word about Margaret Beckett. She's the great survivor of the Labour party, with experience dating back to the 70's. She has seen and experienced it all. She was first elected in 1974, and served in both Harold Wilson's government and Callaghan's. She was then defeated in 1979, in the electoral tsunami that brought in Thatcher (something few current MPs have experience of). But she dusted herself off and got re-elected again in 1983, and supported Kinnock in his battle against Benn. She was elected Deputy Leader of the Labour party in 1992, she served briefly as leader when Smith died and stood against Blair for the leadership in 1994. When Labour came to power in 1997, she served in the Labour government being moved sideways, down, up, you name it and became the first woman Foreign Secretary. And now she's back as Minister for Housing.

The thing about Margaret Beckett is that she has no ego - her aim is simply to serve the Labour government and Labour party, she's not worried about status. Other prima donnas who flounce out of government because they arn't promoted or given the job they want, should take lessons from her. She's achieved a state of grace by being so calm in the face of over three decades of political turbulence.

Thursday, October 02, 2008

Senate approves the Bailout bill, but...

In order to pass the "Bailout Bill", now belatedly renamed the "Economic Recovery Plan", the Senate added $150 billion in tax breaks, none of which are revenue neutral. Which made the bill $850bn.

From reading the American forums, reaction has been bad. On the Washington Post forums there seems to be universal denouncement of the package, with people saying things like "How do tax cuts help this disaster? That’s like saying you’re going to offset your increased credit card debt by reducing your payments", "451 pages of Bushit","Why did the Senate have to add the pork to this Bill?", "the no golden parachute clause (read pages 32 - 33) covers NEW agreements, not existing agreements. How convenient - the tax payers will fund all those existing agreeements", and "how can we afford universal healthcare now?".

This whole thing has turned toxic. Paulson botched initially by simply introducing a plan that handed over money in return for nothing and with no oversight as to how it was spent. It's just gone from bad to worse since. The House may pass the bill due to the additional pork, but pressure on them from voters will only grow.

Voters are also frustrated that both Obama and McCain voted for this bill, and there is a lot of talk about "3rd candidates". If Ross Perot was in this race he'd be swept into the White House. There are other candidates in this White House race - Ralph Nader, Bob Barr for the Libertarian party, Chuck Baldwin for the Constitutional party, Cynthia McKinney for the Green party, Alan Keys for America's Independent Party, Gloria La Riva for Party for Socialism and Liberation, and Charles Jay for the Boston Tea Party.

If the poison doesn't get out of the situation soon, some protest votes will undoubtedly be given to these "3rd candidates" in a way that is already happening in Europe, and which will make the outcome of this election very unpredictable. We live in very interesting times.

Saturday, September 27, 2008

Government spending over time

There is a great site called, that tells you exactly what the government spends it's money on. You can go back in time, looking at historic data, and also look at the data in billions or as percentages of GDP.

% of GDP is the best way to look at things as you get an accurate look at how spending changes relative to income. All figures quoted are the total of central government and local government spending. Here's a look at what has happened since 1997:

1997 2001 2005 2008

Pensions 6.060% 6.807% 6.998% 7.308%
Health Care 4.976% 5.408% 6.721% 7.515%
Education 4.553% 4.522% 5.126% 5.615%
Defence 3.091% 2.878% 2.721% 2.819%
Welfare 7.895% 6.173% 6.366% 6.610%
Law&Order 1.891% 1.880% 2.294% 2.372%
Transport 1.225% 0.908% 1.294% 1.448%
Gen govt 0.796% 0.952% 1.587% 1.869%
other spending 4.611% 3.999% 5.065% 5.492%
Interest 3.444% 2.624% 1.971% 2.248%
Balance 0.476% 0.426% -0.268% -0.388%
Total 39.019% 36.578% 39.874% 42.908%

Other spending consists of agriculture, forestry and fishing, waste management, government sponsored R&D, broadcasting, pollution abatement etc.

You can see certain trends over time. Health spending is jacked up (though our spend remains lower than that of any G7 country with the exception of Japan). Spending on state pensions goes up due to increased number of older people, plus Labour increasing the state pension through minimum income guarantee, plus other payments and free services for the elderly (free eye tests, free local bus pases etc). Spending on education and law and order is also up.

Spending on welfare goes down due to unemployment dropping. In future, as the reforms to incapacity benefit kick in, it should continue to drop. Spending on debt interest drops too - Labour spent the first six years paying off debt, and renegotiated a bunch of it at lower interest rates and most debt issued by this govt has been at low coupons (the lowest being 4% in 2005).

Many Tories believe that a potential conservative government would cut tax - but Cameron has boxed them in somewhat by his statements. He has said that the NHS is sacred and they wouldn't make any cuts there (and given our low spend relative to other countries, pretty hard to shave spending in this area without trying to destroy the service and returning it to the shambles of the Major years). They would probably not touch state pensions as most of their supporters come from the over 60's. The over 60's are the stroppiest part of the electorate - despite Labour spending a lot more on their state pensions, they still believe that they arn't getting enough. Tories have signed up to Labour's education policy. They want to increase defence spending, and it's doubtful they could do better on welfare spending than Labour (Labour's record on reducing welfare spending is much better than the Conservative one).

Which leaves them with cutting back on such vital things as waste management and pollution abatement etc. The Thatcher and Major governments paid for their tax cuts by simply privatising assets. Essentially previous Labour governments used to go to the pain of raising tax in order to buy out shareholders and nationalise assets. Then Tories would take this store of money helpfully put away by Labour, and sell the assets and spend the loot. New Labour hasn't played the nationalisation game though. We've nationalised just two entities - Railtrack (which no one wants to buy) and Northern Rock, which people might want to buy once it's back on it's feet. Northern Rock's market capitalisation was about £4bn prior to it crashing - raising that in a privatisation is peanuts in the context of government expenditure.

So I'm very interested to hear what the Conservatives have to say at their party conference. The only way they can supply tax cuts is for Cameron to abandon his commitments to the NHS, state pensions and education. But of course those are the very commitments that his populatity is based on.

Wednesday, September 24, 2008

Hugely relieved about Gordon's speech

Against the odds, Gordon Brown gave one of the best speeches of his career, while at the same time his potential rivals crashed and burned.

I'm not the only Labour party member massively relieved at this. It means the Old Man of Fife gets to fight on and lead us into the next election. After that he will step down, win or lose (if he wins the election, he will go within a few years). Either way it will be an exit with honour (there is no shame in being rejected by the electorate, that's democracy for you, the shame lies only in being stabbed by your own side).

It's no exaggeration to say that the rank and file had dread in their hearts at the plotting going on before the conference. At one point it seemed as though the damage being done to him was irretrievable, and our Gord would be forced to go in the most awful circumstances.

And that was not what we wanted. Labour is the party of love and compassion and second chances. It's not our style to knife leaders at the first sign of trouble. I watched Polly Toynbee on the Politics Show on Sunday, extolling how the Tories knifed Thatcher and then kept knifing each new leader, over and over. She seemed to admire this (why, I've no idea). I felt like screaming at the TV, we're not Tories, don't you get it?

Because if we did emulate the Tories, we'd lose our USP. It would be like Coke abandoning it's tried and tested formula for a new version simply because sales were temporarily dipping and people were telling testers they prefered Pepsi. It turned out that people didn't want a version of Pepsi from Coke, they wanted Coke from Coke, after all.

Thus Labour. This is who we are - a party that choses a leader and then gives them a fair go. Make no bones about it, Gordon Brown was chosen in 2007 because there was no other choice for leader, and there still isn't. It still seems to me that he is the right choice for these dark times, in the same way Blair was right for the sunnier clime of 1997.

We've just witnessed a financial earthquake where it appears the City can't cope without the help of big government after all. So much for deregulation. This is one of those turning points much like the one in the early 1930's when Hoover and the free-markets went out of fashion, and Roosevelt and his regulation was in. We don't know how things might ultimately play out, but some elements of Thatcher's deregulation of banking in 1987, which allowed retail banks to enter investment banking, insurance and other financial lines, might need to be modified and in some instances reversed and the firewalls reinstated. The deregulation that took place here in 1987 was similar in effect to the repeal of the Glass-Steagall Act in the USA in 1999, the repeal of which allowed banks there to securitise credit-risk and sell it on and while our deregulation allowed banks here to buy those risks. The current climate is a serious moment for serious people - a moment for Gordon perhaps. It's not over till it is over.

Monday, September 22, 2008

Will the People's Republic of the United States lose it's AAA rating?

I'm from the centre-left, but I'm gobsmacked at the latest events in the United Staes. It was OK to nationalise Fannie Mae and Freddie Mac (initial cost $100bn) and rescue AIG for $85bn, and rescue Bear Stearns for $30bn. Despite the $5.4 trillion of liabilities Fannie and Freddie have, and the $185bn liabilities in AIG, most of those will come good, only a small part are bad. In the long-run the taxpayer will make a profit (and this is the case for Northern Rock too), and the present cost to rescue them is reasonable in the circumstances.

But this $700bn rescue fund being proposed by the Bush administration to buy toxic assets is something else. These "toxic assets" are worthless, that's why there is a problem in the first place. Unlike Fannie and Freddie where the nationalisation meant that the taxpayer gets the good with the bad, this new plan means that the taxpayer is essentially giving away a load of money for junk with no value and the only ones to benefit are the companies receiving the gift. Talk about getting rewarded for screwing up the system.

The markets are nervous too - stocks, bonds and the dollar all collapsed today and NYMEX oil for October delivery jumped $25 in a day, as people sought a safe haven. Because the end result of this can only be a sharp downgrading of the superpower's own credit rating, which implies that being loaded with junk like this might cause Uncle Sam to default in the future.

I can't believe they are even considering doing something with those sorts of implications. Frankly they'd be better off nationalising the whole banking system, even if it made them more Commie than the People's Republic of China (which has been privatising stuff in recent years). Nationalisation at least means the state gets the good bits with the bad, plus control over the banks - it means the state has a chance to break even or make a profit (with the potential for future privatisations) and thus the state/taxpayer gets to survive all this relatively intact. But gifting money to robbers in return for worthless paper, just puts too much strain on the state.

Even worse was Hank Paulson's exhortation for the rest of the world to follow his example. Eeeu! If our government wants to make emergency nationalisations, fine. Gifting taxpayers money to the city, no.

Saturday, September 20, 2008

A few thoughts about Frank Luntz on yesterday's Newsnight

I'm guessing that most people interested in politics will have viewed the focus group run by Frank Luntz on Newsnight on Thursday and Friday and will be scratching their heads to make sense of it.

To recap - the group of Labour leaners thought Gordon Brown's presentation was awful, didn't like Cameron, didn't know who Clegg was but liked his presentation (though one woman pointed out that it was because as an unknown, they were taking him at face value). Then they dismissed all the contenders to replace Brown (with David Miliband scoring no better than Ed Balls), looked at the greybeards (Straw and Johnson), and then decided that they wanted to keep Gord after all. Oh, and they expressed nostaligia for Blair.

What to make of it? My feeling is that Blair and Brown have been such a solid part of political landscape for so long, that in turbulent times people still wish that partnership was in place. And that if they can't have Blair, they will at least hold onto Brown.

What interested me most was when they were discussing who was to blame for individuals taking on so much debt. One man said that it was Brown's fault, only for a Labour leaner to say, I paraphrase, "how is it Brown's fault if someone chooses to run up large credit card bills?"

This is really important, as I think it divides those who will vote Labour and those who won't. I can illustrate this best with anecdotes.

My mother is a classic floating voter - she voted Tory, but switched to Alliance in 1983 as she thought Maggie was cruel and racist, and Labour only interested in attacking people like her. She voted Labour for the first time in 1997, but LibDem in 2005 because of Iraq. In September 2007, she was virulently angry at Labour over inheritance tax, but was pleased and pacified by the transferable allowance introduced by Darling. She doesn't think the IHT threshold needs to be increased to £1 million, let alone £2 million. "We're middle class people, not millionaires" and "there arn't that many millionaires in this country, there are more important priorities than them".

At the moment, she's in Gordon's camp, and doesn't want him replaced. As far as she's concerned, he's done OK for the country, listened when people like her were upset, and has "a good heart". In her opinion no one else in the political system can match him for experience and she thinks Britain needs an experienced person at the helm. The other thing to note is that she is completely unaffected by the credit crunch or global turmoil. She has never had any debt, bar her mortgage, which she determindly paid off early. She doesn't understand people who have debt and has no sympathy for them trying to blame the government for what she sees as their own failings. Most of her savings are in building societies, and most of her income comes from these savings. She's pleased that interest rates on savings have risen. She's not extravagant but hasn't noticed food prices, because she doesn't eke out the pennies while shopping and she likes the free local bus travel Labour has inroduced for the over 60's (she doesn't drive). She will vote Labour if Gordon is at the helm.

My sister and her husband, in their mid-thirties, are both firmly Labour (no floating for them). They are professionals who are just above the higher rate tax threshold, but don't resent paying the tax. They are not extravagant - they paid off their mortgage a couple of years ago, emulating my parents in ploughing every spare pound into getting rid of debt, security was a priority and living high was not. They feel that the Labour government provided the opportunity of a good job market, and it was up to the individual to seize the opportunity to make good. They are completely unaffected by the current economic crisis. No mortgage outgoings mean lots of savings accruing in building societies. They are green, they don't drive much and my sister grows most of her vegetables. They think of Labour as a positive force that enabled them to get jobs in the first place, which made everything else possible for them. My brother-in-law is from a working class background and is convinced that people like him would never have prospered at all under the Tories. They will vote Labour regardless of who leads Labour.

My other half works in IT as a Java developer. He too is a floating voter, voting Tory till 2005 when he switched to LibDem, and he is now in Gordon's camp because he thinks Cameron is a tosser. As you can imagine we have had interesting political discussions in our household over the last decade - while I was enthralled with Blair in 97, he was suspicious. It wasn't till Blair was leaving that he came round (he liked the Blair skit with Catherine Tate for Comic relief). He supported the Iraq war, while I was furiously against. Switching to LibDem in 2005 was a halfway stage to moving left (people find it hard to move either way in one go), it was nothing to do with Iraq, but about weaning himself off the Tories (he didn't like Michael Howard).

The main thing colouring his "Gordon is good" feeling is that he thinks Britain needs a solid person at the helm, and the economic turmoil hasn't affected him either. He struggled to get work under the Tories after graduating, but refused at the time to believe that Labour would be any better. But his career has taken off in recent years. His firm is struggling to recruit people, and this year he got a 14% payrise because his boss is trying to retain Java developers. He used to have debts before he met me, but doesn't any longer bar the mortgage (any household where my mother's daughters live is debt-averse). He doesn't drive (I ferry us about), so is oblivious to fuel prices, and doesn't notice food bills because they are too small a part of the budget. As far as he is concerned life is great, and he doesn't see the need to change government or PM. He thinks I spend an unhealthy amount of time reading the press and that my fears about the Labour leadership are all down to that.

A pattern emerges here. Those who have benefitted from the long economic boom, where jobs were readily available, and who've seized the opportunities available to make their lives better, will vote Labour.

Those who haven't seized the opportunities available, and frittered their money away instead, will blame anyone but themselves and will try to punish the government for perceived sins, including the sin of not controlling the world oil price and not sending a personal letter to their household saying please don't overload with debt.

The question is, how big is each camp. I fear the former is smaller than the latter.

Wednesday, September 17, 2008

Stock Market Falls

I've been taken aback at how many people are worried about stock market falls. It's legitimate to be worried about the banking system and whether the American crisis will ruin the world banking system, but to worry about the stock market?

Stocks go up and down. During the crash the FTSE went from 6900 in Jan 2000 to 3287 in March 2003. By contrast the current bear market (peak 6706 in Oct 2007 and 4912 today) is mild, and clearly has much further to go. 2003 wasn't that long ago, have people such short memories?

Markets have also been known to be flattish for extensive periods of time. The Dow Jones for instance was flat from 1937 to 1950, and then flat again from 1966 to 1982, and the 1950 to 1966 rise was very shallow indeed (you'd have been better off sticking your money in a deposit account). Yet America was booming from 1938 onwards as they supplied all the armaments for WW2 and didn't suffer any domestic destruction, plus came out of WW2 as a stonking superpower (in the 50's and 60's the USA ran massive budget and trade surpluses and had nearly 50% of the world's GDP). By contrast the Dow rose very sharply in the 1920's, but the underlying American economy then was nowhere near as strong as in the 40's, 50's and 60's.

Go-go markets have more to do with fear and greed than anything else. Essentially the stock market is a giant casino. Witness the go-go market in oil for instance. Did fundamentals really justify the $147 per barrel in July, or is the $90 now more reflective of the world economy? And that drop in oil price will have also taken out those speculators who thought the price would go to $200 per barrel - but the oil bear market is actually beneficial to the real economy.

I think the trouble is that too many people think that stock markets can go only one way and lots of people who invest in them simply don't understand the nature of the gamble they are taking. If you really want financial security, you'd be better off overpaying your mortgage - people pay way more in interest over the term of their mortgage than they did on purchasing the property in the first place. But it's funny how no financial advisor ever recommends that simple solution.

Tuesday, September 16, 2008

If I was Obama I'd promise to reinstate the Glass-Steagall Act

The two laws collectively known as the "Glass-Steagall" Act were banking regulations that were passed in June 1933 - practically the first things that Franklin Roosevelt signed into law after he was inaugurated as President in March 1933 (it formed part of his "100 days" of furious and frenetic action).

The legislation introduced for the first time separation of bank types (i.e. retail banks could not be investment banks and brokers) and forbade retail banks to sell insurance or securities (bonds) or to underwrite them. What prompted it was the failure of 5000 banks during the depression. FDR and the Democrats of that era believed that it was conflicts of interest and contagion rather than the Wall Street Crash of 1929 that brought down the banking system.

And the act stood for 66 years, safeguarding the USA as it turned into a superpower. Then it was repealed in November 1999 by the Gramm-Leach-Bliley Act, which Clinton, under the cosh from impeachment hearings, signed into law instead of vetoing it. And here we are a mere nine years later, with three of the top five American investment banks gone, Fannie Mac and Freddie Mac with $5.4 trillion in liabilities, nationalised by the US govt, and the huge American insurer AIG teetering on the brink of disaster, plus loads of small American banks going under, and the contagion threatening to spread across the world. It all makes Northern Rock look like a triviality.

Glass-Steagall was repealed in response to ferocious lobbying of the Republican Congress by Wall Street, who felt they were over-regulated - the same people who now want the American taxpayer to bail them out.

If Glass-Steagall had been in place the sub-prime lending crisis would not have happened as lenders would not have been able to sell on the credit-risk through securitising it, and hence would have been more careful about the loans they were making.

And Senator Gramm, one of the architects of the repeal, was John McCain's economic advisor (McCain has previously admitted that he himself knows nothing of economics).

McCain hasn't really been able to respond to the crisis other than calling for a commission to look into it and report in three years time (by which time it's too late). Americans can't really afford to let the current situation continue, where bankers assume that Uncle Sam will pick up all the bills, as it will create an even more extreme moral hazard if it's always "heads you win, tails the taxpayers lose". In any case, Uncle Sam is starting to get scared at the liabilities being taken on, hence the decision to let Lehman brothers go to the wall.

This is an opportunity for Obama. For the first time, not having a Clinton on the ticket may be a plus. He can claim to be running against the orthodoxy of de-regulation of the last 30 years, and re-instate the depression era legislation. Americans after all have a lot of time for FDR and all he did - recall hostile way the public reacted when a newly re-elected Dubya pledged to abolish FDR's Social Security (state pensions); the hostility killed Dubya's plans. In the end, if Obama plays this right, his role in history is not to be the new Martin Luther King nor the new JFK, but instead the new FDR.