A bit rich

One area of growth in the current recession is the cottage industry of former spendthrifts -- the Rosie Millards and India Knights of this world -- lining up to tell everyone how wonderful it is not to have to spend money any more. The lovely India has even parlayed her embrace of the new puritanism into a "how-to" book, explaining how to survive when you're down to your last pair of Manolo Blahniks. It's all vaguely nauseating: these folks still have their well-paying jobs, but they're peddling advice on how to avoid spending too much money on Christmas presents for the family.

Now the media are starting to move on from these posers. We're starting to hear from people who really have lost money in the crash. The Bernie Madoff scandal is producing some truly distressing stories of people who entrusted this creep with their entire life savings and now face being wiped out. The worst story I have heard so far involved a newly-widowed lady who handed her nest-egg over to Madoff less than two weeks before his scheme collapsed.

One of Madoff's victims, the artist and writer Alexandra Penney, pitched up in the Sunday Times this past weekend. It has to be said that she may not have done much to generate sympathy for the cause. It didn't help that she was pictured wearing a fancy mink coat. It didn't help that she owns three houses. It didn't help that she may have to camp out for a while with her son in, God save us all, Malibu. It didn't help that she hasn't had the heart to fire her maid. (Earth to Alexandra Penney: if you didn't have enough money to pay the maid, you wouldn't have to fire her. She'd simply stop showing up. She can't afford to work for nothing).

A lot of people responded to the story when it first appeared on the Daily Beast blogsite by abusing Ms Penney, saying that rich people like her deserved to lose all their money. That's an awful thing to say. Ms Penney is entitled to be angry and distressed, and she's surely entitled to sue Bernie Madoff from here to kingdom come. But it's in bad taste for someone in her position to whine that she may never be able to afford to use a taxi again. Half a million workers in the US are losing their jobs each month; 27,000 in the UK will lose their near-minimum-wage jobs at Woolworths during the holiday season. For Ms Penney to compare her plight to theirs -- her blog is called "The Bag-lady papers" -- is a bit, well, you know...

Brown, OPEC and the Archbishop

Gordon Brown has been hosting a meeting of OPEC oil ministers in London. He has urged the producing countries to keep investing in new production facilities, even though the oil price has fallen precipitously from a peak of $147 a barrel to its current level near $40. Otherwise, he warns, the oil price will soar again once the global economy recovers.

OPEC has not reacted favourably to Brown's demands, which is unsurprising. For most of the OPEC oil producers (and for some of the larger non-OPEC ones as well -- Russia and Mexico, for example), the collapse in the oil price is a disaster. High oil prices have allowed these countries to provide extravagant benefits to their citizens (especially in the gulf states), or to pursue their foreign policy goals (particularly in Russia, Venezuela and Iran). The collapse in oil revenues makes all these things unaffordable, leading to growing risks of internal unrest (especially in Mexico, Indonesia, Nigeria and even Iran). The last thing the producers are likely to do is to heed requests from consuming countries for them to invest in higher production. What they want is higher prices.

So the oil price is all but certain to rise again once the global economy gets up off the mat. However, that doesn't mean that fears that the next spike will carry it all the way to $200 or more will necessarily be realised. Nobody can seriously argue that this year's rise to $147 was in any way reflective of supply and demand. It was the hedge funds what did it, and the fact that the price has fallen so fast has shown most of them up for what they are: not masters of the universe, but old fashioned trend-is-your-friend herd followers. There are a lot fewer of them out there now, and there will be even fewer by the time oil starts to go up in price again. As a result, the next price spike should be a lot more reflective of underlying conditions, which is likely to mean that it won't be as severe as the last one.

If Brown has got it wrong with OPEC, he's done rather better in a surprising spat with the Archbishop of Canterbury. Cantuar has joined the chorus of people saying that the recession is a salutary experience, and is criticising the government for borrowing more in an effort to cushion the blow. Brown, himself a son of the manse, has taken the "what would Jesus do?" approach. The government, he says, can't watch people suffering and simply walk by on the other side of the street. I wouldn't have thought the Archbishop should need reminding of the parable of the Good Samaritan, but we live in strange times.

Ben gets his chopper out

Fed Chairman Ben Bernanke is an expert on the Great Depression of the 1930s. A few years ago he commented that the Fed could prevent a rerun of that lost decade simply by printing dollars and dropping them on the United States from a helicopter. This earned him the nickname "Helicopter Ben".

We're about to find out if he was right, because after Tuesday's FOMC meeting, the Sikorski is revving up on the helipad. As well as cutting the funds target to zero (0-0.25% to be exact), the Fed has announced a programme of printing money, though these days it's more polite to call it "quantitative easing". The Fed will boost the size of its balance sheet, and take the pressure off commercial lenders, by purchasing Treasuries in the new year, and it stands ready to offer credit directly to the commercial and personal sectors.

The unexpected move gave Wall Street a boost, but there are already fears that the Fed has shot its bolt: if this doesn't work, what else can it do to revive to US economy? Well, it can't cut rates below zero, but it can keep the quantitative easing going for a long as it takes to be effective. With the incoming President apparently having a fiscal stimulus plan all set to go right after his inauguration, there's no doubt that the US is doing everything it can to prevent a return to the dirty thirties. There'll be a price to pay later, of course -- all that public debt will have to be repaid, and the Fed will have to remove the stimulus very abruptly once the economy starts to turn: failure to do so would trigger an almighty bout of inflation.

I'd have been happy to live out my days without finding out whether this part of the Keynesian textbook is correct, but there you go. One thing that strikes me, though, is that in one sense today's policymakers have it harder than their forerunners in the 1930s did. In an electronic age, people expect everything to work instantly, including economic policy. In more "normal" times, when a central bank cut rates, media commentators would carefully point out that it took time for monetary policy to take effect -- anything from 9 to 18 months. That's all gone out of the window. Nobody's prepared to wait and see whether the record low interest rates already in place are going to work. They haven't worked yet, we need more action, and we need it yesterday!

One of the worst at this is, of course, my old pal Anatole Kaletsky. Having failed completely to spot the onset of the credit crunch, and having downplayed its seriousness for many months, he is now looking not just for Plan B but a whole alphabet of new measures. His latest wheeze is that the UK government should give itself access to a cheap source of borrowing by doubling reserve requirements on the commercial banks. How that makes sense so soon after the Government recapitalised them so that they could resume lending is quite beyond me. But it suits the temper of the times (or should I say, The Times?). Kaletsky has decided that the banks are not doing enough, so we need to do something else RIGHT NOW. There may well be a need to do more, but it would be nice if we at least avoided doing things that undermine what's already been put in place.

"Jews hit hard by Madoff scheme"

Odd headline, isn't it? Yet that's how Slate is covering the $50 billion fraud perpetrated by New York financier Bernard Madoff. Sadly, though, it's appropriate. It seems Madoff deliberately targeted his co-religionists for his massive confidence trick. Worse, a large number of Jewish charities were heavily invested in the scheme too, and have been effectively wiped out. This would weigh heavily on his conscience, if he actually had one, which he probably doesn't, considering that one of his last acts before he was arrested was to reveal the whole scam to his two sons -- and then tell them to keep quiet while he divvied up the rest of the cash. Fortunately they were too honourable to comply, and blew the whistle on him.

Where has all the money gone? One analyst has said that a lot it has gone to "money heaven", but that's unlikely unless you think that heaven is someone else's bank account. A Ponzi scheme is by its nature a zero-sum game. (Will we stop calling such things Ponzi schemes now? Ponzi was a two-bit crook by comparison with Madoff, and the apparent losses we are looking at here dwarf anything ever seen in the past. "Madoff scheme", anyone?) We know who a lot of the losers are, and we'll get back to them in a second, but a lot of the people who "invested" with Madoff early made some nice returns, albeit at the expense of the latecomers, and presumably got out whole. That group must include more than just the Madoff family, especially as his sons had no idea what was going on. There are suggestions that some of those who did well will be called on to return the money, on the basis that it represents the proceeds of crime. Given that they didn't know that at the time, that might seem unlikely, but there's a precedent, albeit on a much smaller scale.

Then there are the losers. The investment "superwoman", Nicola Horlick, had about 9% of the assets in one of her funds invested with Madoff. She is bleating that it's all the fault of the SEC, which should have spotted what was going on. I don't think that washes, for the humourless Nicola or for any other fund manager who got caught in the same way. It looks as if the entity that actually held the money within the Madoff empire was not in fact regulated. Investors pay Nicola and her ilk big commissions to figure such things out -- it's called due diligence.

Then there are the commercial banks, with Santander, HSBC and RBS already owning up to big exposures. When I first heard this, I thought it was outrageous for banks to be raking in deposits with government guarantees, then investing them in schemes like this. But that doesn't seem to be the story: most of the exposure apparently arises through loans made to individuals to help them to buy into Madoff's funds. It's hard to criticise banks for lending to wealthy clients against apparently sound collateral, though like Nicola et al, they all seem to have been oblivious to the fact that the key Madoff entity was unregulated. The borrowers are still on the hook for the loans, so the eventual scale of the banks' losses may be smaller than they have initially estimated, though with so many people claiming to have been wiped out, that may be a faint hope.

The Madoff fiasco has set me to thinking about how financial regulation might be recast when (if?) things settle down. A former President of my old firm in Canada used to say that banks accepting personal deposits supported by government insurance or guarantee should be limited to investing in high-quality assets -- Government bonds, mortgages, companies' working capital, and so on. Financing for riskier purposes -- capital projects and such -- would have to be raised directly from institutional investors and more risk-tolerant private investors, without relying on any Governmental guarantee. The argument was that this would force both borrowers and investors to price risk more accurately -- and it would, of course, reduce the burden on Government deposit guarantee schemes.

I can see all sorts of problems with this. For one thing, it looks awfully cumbersome for corporate borrowers, compared to the "one stop shopping" of the current system. For another, it's hard to know where you draw the line for eligible assets for the banks. As I suggested above, a loan collateralised by assets in an investment fund such as Madoff's might well be acceptable. There's no way that all risk can be eliminated, no matter how conservative you think you are. Still, with governments everywhere guaranteeing almost all deposits, and with banks having rather conspicuously failed to manage the risks they take with those deposits, serious change is inevitable. More regulation, less risk, better disclosure, smaller bonuses: isn't banking going to be fun?

The broken Hallelujah

It doesn't matter which you heard
The holy, or the broken Hallelujah!
(Hallelujah, Leonard Cohen)

Turns out though, it does matter.

Since its release in the 1980s, Cohen's biblico-sexual epic Hallelujah has turned into a kind of secular hymn. Everyone and his dog has had a crack at it. A couple of months ago BBC2 ran a one-hour documentary on the song, featuring umpteen different versions by a host of singers, known and never-to-be known, with each trying to explain what they saw in the song. They all agreed it was the mysterious lyrics that drew them to it, though given that no two versions ever seem to include the same verses (Cohen wrote more than 80, of which about a dozen are still used), I find that a bit unconvincing. I think it's the simple tune and the chord progression, which Cohen helpfully (if bizarrely) spells out: "the fourth, the fifth, the minor fall, the major lift".

It's been suggested that Hallelujah is the greatest song ever written. I suppose it might be, but you could equally argue that it's not even Cohen's best. (For your consideration: Alexandra Leaving, from Ten New Songs; Joan of Arc, from Songs of Love and Hate).

Alas, nothing is so perfect that Simon Cowell can't ruin it. He had all three X-factor finalists record Hallelujah, and the version by the winner, Alexandra Burke, has now been released, with every expectation that it will be the Christmas number 1. It's pretty bad. She only sings three verses; she adds a word in the first verse (it's only "and", but you don't mess with Leonard!); and she bellows out the last verse in an appalling Celine Dion/Whitney Houston stylee. With so many good versions of the song out there, it's sad to think that this racket will be many people's first exposure to it.

In fairness to Ms Burke, though, hers is not the worst version I've ever heard. Cohen's own rendition is not that great. Much worse, though, is one that I have on a Cohen tribute album ("Tower of song") in which Bono mumbles an almost inaudible version. Neither the words nor the tune comes out unscathed. Hallelujah survived that, so I suppose it can survive Ms Burke too.

Steinbrucksblitzkrieg

You never want to see news stories that include the words "German" and "surprise attack" in the first sentence, but this was posted on the Virgin media website on December 11:

In a surprise attack, German finance minister Peer Steinbruck derided the headline 2.5% cut in VAT announced by Chancellor Alistair Darling in the Pre-Budget Report while warning that a generation of taxpayers would be saddled with the debt.

In an interview with Newsweek magazine, he described the Government's switch to a "crass Keynesianiam" to try to spend its way out of the economic crisis after years of preaching fiscal rectitude as "breathtaking".

Needless to say Gordon Brown has dismissed the criticism out of hand, ascribing it to internal German politics and pointing out that Germany is introducing a stimulus plan too. I also think that Steinbruck has got it wrong, but not for the reason Gordon is implying. There's nothing wrong with Keynesianism at this time, something that most Governments have acknowledged as they've unveiled their own stimulus packages. Where Herr Steinbruck has got it wrong is in his suggestion that the UK has moved "crassly" into deficit after years of fiscal rectitude. I must have slept through those years; the cardinal error of Brown's economic policy, which may yet come back to haunt the UK, was his failure to rein in spending during the boom years, when the economy was in no need of stimulus. In fairness to Herr Steinbruck, he does talk about "preaching" rectitude, rather than practicing it; even so, it looks like a misrepresentation of UK economic policy.

Herr Steinbruck also derides the VAT cut as too small to have much stimulative effect, but he also warns that it could create a fiscal burden that will take "a generation" to pay off. I tend to agree on the first point, but not on the second. The UK budget deficit is set to soar from an initially-projected £43 billion this year to a forecast £118 billion in 2010, but the VAT cut only accounts for about £12 billion of that. The rest is down to the impact of the slowing economy on tax revenues and "locked-in" spending, and is largely unavoidable. The purpose of the VAT cuts and the Government's other stimulus measures is to make the slowdown as short as possible.

I've argued here before that doing nothing was not an option for the Government. If the public debt becomes burdensome in the future, it won't be because of the VAT cuts, but because of Gordon Brown's inappropriate fiscal policy between about 2000 and 2007.

OK, so what would you have done?

The British government's fiscal stimulus plan has met a pretty muted reception from all sides. (The record rise in the FTSE was not an endorsement -- it was mostly triggered by the US plan to bail out Citigroup). The right, led by the Tories, argues that the plan won't work because taxpayers will see through it, while the left is divided between arguing that it isn't big enough and fretting about cuts in public spending when the time comes to pay for it all.

There's anough analysis of the detailed plans in the regular media and elsewhere on the blogosphere, so these are just a few random thoughts.

* Doing nothing was not really an option. The fiscal situation was going to be dire even if the government had not decided to act. The expected size of the new giveaways is "only" £20 billion, yet the fiscal deficit is expected to rise from an originally-projected £43 billion this year to £118 billion in 2010-2011. Most of that is down to the slowing economy. The Government's gamble is that targeted stimulus will turn the economy round sooner rather than later, allowing deficits to fall after 2010. If the economy doesn't start to improve, then frankly the extra £20 billion committed this week is the least of our problems.

* Despite all the concern about public debt, the UK's position is not going to be all that bad even after the huge surge in borrowing that has been announced this week. The Government projects debt/GDP rising from the low 40% range now to 57% by 2011 before starting to edge lower. Japan's is near 100%, as are Italy's and Belgium's. At the end of WW2, the UK ratio was 250%. Of course, the UK is more vulnerable because its savings rate is low -- the Japanese and Italians buy their own government debt, rather than wait for foreigners to step up. But, to reiterate the point made above, borrowing and debt were on course to soar anyway, regardless of what the Government announced this week.

* VAT may not have been the right tax to cut. A notional 2.5% price cut doesn't add up to much when companies are cutting prices by 20% or more to attract customers. It may not even do much for big ticket items -- car dealers are reportedly giving discounts of £2000 per vehicle, which makes the VAT saving of about £350 on the average car look paltry. (Strictly Unscientific Survey Department: I was in my local M&S on Monday. It was very busy. I asked a couple of folks at the checkout why they weren't waiting for the VAT cut to be implemented before buying. They responded that it was too small to make a difference). It would have been better to target the lower-paid through income tax cuts, especially as the things that the poor spend a large part of their incomes on (food, rent) are not subject to VAT.

* What would the Tories have done instead? They seem to be saying that monetary policy should be loosened further. However, we're already seeing that lower rates and even recapitalisation are not inducing the banks to increase lending (although, contrary to most of the bleating in the media, business lending has actually risen in the past year, according to the British Bankers Association). It's hard to see the Tories leaning hard on the banks to lend more, and unless that happens, monetary policy has no traction.

There's no guarantee that the Government's plans will work, and to be sure, all of the risks seem to be skewed to the downside. In a world where impossible things keep happening (two weeks ago, who would have foreseen a bailout of Citi?), the best we can hope for is that policymakers at least avoid doing things that history has shown don't work. This week's stimulus package just about meets that test.

Forgive me, you reeking perjurers!

The United States, usually so punctilious about the division of powers, still allows departing Presidents to issue pardons to convicted felons. (Even to unconvicted ones -- President Ford used his powers to ensure that Richard Nixon never saw the inside of Sing Sing). Reportedly there are about 700 people hoping to catch a break when Dubya heads off to Texas.

Among them is dear old Conrad (Lord) Black, the disgraced newspaper baron, currently doing time in Florida. His lawyers are busily preparing a submission to the President in hopes of securing an outright pardon, or at least a reduction in sentence.

How odd, then, that Conrad has seen fit to publish this extraordinary attack on the entire US justice system. It first appeared in something obscure called Spear's Wealth Management Survey magazine. The Sunday Times (R. Murdoch, prop.) helpfully reprinted it on the weekend, just to make sure the US Justice Department didn't miss it.

Conrad is well known for his forcefully expressed opinions, but even by his standards this is an exceptionally pungent piece of writing. For example: "The system is based on the plea bargain: the barefaced exchange of incriminating testimony for immunity or a reduced sentence. It is intimidation and suborned or extorted perjury, an outright rape of any plausible definition of justice." He calls the US a "carceral state" (i.e. the country is one big prison) and rails at "US federal prosecutors, almost all of whom would be disbarred for their antics if they were in Britain or Canada".

How is President Bush likely to feel about pardoning a man who remains entirely unrepentant and thinks he was stitched up by a corrupt justice system? Conrad, old pal, I realise it must be hard not seeing your name in print all the time, but don't you think it might have been a teeny bit smarter to hold off on your rantings for just a little longer?

When in a hole, stop.....talking

In the days when I used to get paid for writing stuff like this, one of my favourite beefs was the plethora of "unofficial" economic statistics in the UK economy. There are loads of them in both retailing (BRC survey, CBI survey, "footfall" surveys and so on) and in housing (Rightmove, Nationwide, Halifax, Land Registry). Most of these are used by the body that sponsors them as a basis for special pleading, usually for lower interest rates. The media duly play along. This is annoying enough at the best of times, but in current circumstances, where the economy is wobbly to put it mildly, it can be downright dangerous.

I was put in mind of this again by today's economic releases. After all the doom-mongering of the past few months, including all the unofficial data, ONS reported that retail sales in October fell by a mind-boggling....0.1%! They were 1.4% HIGHER than in the same month of 2007. In the same month mortgage approvals rose 7%. They're still more than 40% lower than they were a year ago, but still, it could be the first sign of a return to normality in the market. Why, it was even reported that an apartment in Birmingham changed hands for more than a million pounds for the first time. (The reporter noted that it had "commanding views over the West Midlands, as if that was a selling point).

The BBC radio reporter from whom I first heard this news was quick to downplay it, noting that retailers were still planning to launch their Christmas sales well before the holiday season. Indeed, Marks and Spencer has been holding an unprecedented 20% off sale this very day. So at lunchtime a BBC News reporter found himself in a shopping mall in Swindon (which, for all I know, you may be able to see from the £1 million flat in Birmingham). It looked pretty busy, but he was quick to aver that it had been quiet up until now. He then interviewed a group of ladies of a certain age who were on a spree. They agreed that they had been lured out by the M&S sale. So far so good. But when asked if that would be the end of their shopping for the season, they were shocked at the very thought. "Certainly not", said one of them, "there's only five weeks to go now, so we have to keep at it". When asked specifically if they were altering their spending plans in light of the credit crunch, they were unanimous that they were not. It looked to me like another attempt at doom-mongering well and truly foiled.

There are dire warnings that unemployment could reach 7% by the time the economy bottoms out. That's awful, but look at it this way: that would mean that 93% of people were still working. The last thing we need in the short term is to put the wind up that 93% to such a degree that they stop spending. For now, it seems as if the retailers have been so convinced by their own cockamamie surveys that they've panicked into price cuts that they could have avoided. Good news for the consumer at an expensive time of year, but brace yourself for surveys in January reporting that sales would have been so much lower but for these price cuts. If all these folks would just shut the f**k up and wait for the official data, and if the media would stop reporting these special pleadings as hard facts, it just might be a whole lot easier to avoid a severe recession.

Spooky!

I haven't watched Spooks, the BBC's overwrought show about MI5, for ages. However, I noticed that this week's episode would pit the spycatchers against a hedge fund grandee bent on bringing down the UK financial system, so I thought I'd give it a go.

As the man who went to the James Blunt concert said, "that's an hour of my life I won't get back". I wish I could describe how the hedge fund was planning to do the dirty deed. For most of the show, it seemed to involve shorting the stock of a fictional bank. Right at the end, though, after the villain of the piece had been conned by one of the MI5 operatives, he was persuaded to "reverse his position". As far as I could tell this reversal again involved selling the stock, and he was duly wiped out for his trouble when the Government stepped up to support the bank. Maybe I missed something, though I swear I managed to stay awake for the whole thing.

If the financial strategy was incomprehensible, the details were laughable. The term "insider trading" was thrown about like confetti, but never once used properly. The climactic "reversing of position", which if I recall involved £16 billion, took less than five seconds. The Chancellor of the Exchequer (a woman, so don't you dare call her Darling) took all the big policy decisions on the fly, without any visible presence of advisors or Cabinet colleagues. The hedge fund villain turned out to be an unreconstructed Communist, not some testosterone-fuelled ex-costermonger as most hedge fund types are assumed to be. Most unbelievably of all, he was conned into changing his position when he was seduced by one of the regulars on the show, a woman who manages the amazing feat of making Sarah Jessica Parker look like Charlize Theron.

I've always been puzzled by why television has never been able to produce a worthwhile drama series about the financial world. (There was a preposterous and short-lived attempt in Canada in the 1990s, called "Traders"). One explanation, I suppose, is that programme-makers assume the business is not interesting unless there's criminality involved -- a view which may well suit the public mood at the moment. However, it would be nice if producers would at least ensure that they portray the financial world with at least a modicum of accuracy. I can't believe that credit default swaps are any harder to explain than the wildly obscure diseases that House treats every week.

Schizo Keynesian economics

Tessa Jowell is in trouble for her comments, reported in the Guardian and elsewhere, that seem to imply that the Government would not have supported the London Olympic bid if it had known a recession was coming. She's attempted to backtrack by claiming that what she meant is that the Government wouldn't bid under current circumstances (because it would be a "distraction", as if that would be a bad thing!) but it's pretty clear that she meant it wouldn't have bid in 2005 if it had known there would be a recession in 2008.

She's wrong either way. There was no reason for a bid in 2005, when the boom was in full force. But paradoxically, if the 2012 Olympics were on offer right now, it would make a lot of sense to lob in a bid. Obviously Gordon Brown and Alastair Darling's reconversion to Keynesianism hasn't yet reached the rest of the Cabinet.

I yield to none in my contempt for the way the UK Olympic movement conned the Government into underwriting this extravaganza. The initial estimates were outright lies and there are still not many people who think that the final tab will fall within the current estimate of $9.3 billion, which is almost four times what the UK taxpayer was persuaded to support a mere three years ago.

Long before Keynes was even a gleam in his father's eye, monarchs and despots understood that bad economic times were the best times to knock up a couple of new frigates on the cheap. During the great depression, Keynes famously said that it would be wise to emply people to bury money in holes in the ground and then dig it up again. Even as an Olympics hater, I have to admit that the Games will probably prove more valuable than that. The media are advocating tax cuts primarily on the grounds that it will take too long for public works projects to have any impact on the economy; here's a huge public works project that will play out over the next three years, and a senior Cabinet minister is implying it's not a good idea!

In any event we're stuck with the Olympics. So it will be interesting to see what happens to the costs as the project moves forward. The huge jump between the initial estimate and the current one happened mainly because the Olympics grandees lied to the Government and the public to get what they wanted, but there has also been some genuine cost inflation as a result of the strength in the economy. With construction workers starting to receive their P45s and materials costs in freefall, it ought now to be possible to achieve some significant cost savings. Unless, of course, the dolts who are running this show have given out a bunch of fixed price contracts, which, now that I think about it, wouldn't surprise me in the least.

The next crisis starts here

The Bank of England's astounding decision to cut its base lending rate by 1.5% is likely to have a whole raft of unintended consequences, few of them benign. Thanks to the British public's unhealthy obsession with property, the rate cut will distort the housing market and make the economy ever more dependent on credit.

The Government is playing the populist card as hard as it can, urging the banks to pass the full benefit of the rate cut on to their borrowers, or face the wrath of the public, or at least of Lord Mandelson. The scale of the furore that has been whipped up about this is amazing, considering that the vast majority of mortgage borrowers are either on fixed rates (and hence see no benefit from any rate cut) or on tracker deals, and hence see the benefit automatically. HSBC said yesterday that 97% of its borrowers were in one or other of these categories, though admittedly it is not a huge player in the mortgage market, and the numbers at other lenders may be somewhat different.

In any case, it's not as simple as the Government is making out, as of course the Government knows perfectly well. The whole reason certain banks had to be bailed out is that they were excessively dependent on wholesale funding, the cost of which is only indirectly influenced by the Bank of England rate. Wholesale funding costs, as measured by the LIBO rate, have been falling since the bailout scheme was announced. However, until the spread between LIBOR and bank rate returns to more normal levels, banks can't just cut mortgage rates willy nilly.

Banks also have to judge how far they can afford to cut the rates they pay depositors. Savers are already starting to squeal about seeing their returns cut in order to bail out what they see as irresponsible borrowers. If enough depositors start to redeploy their money out of the banks and into alternative investments, banks won't have enough money to extend new mortgages -- unless, of course, they resort to more wholesale funding, and we know where that leads.

Guess what the "alternative investments" are likely to be. There are already commentators saying that falling returns on savings accounts will drive more investors to consider putting money into the property market. Another group who may well be tempted to think the same way are pension savers, since annuity rates are sure to tumble further as official rates head toward record lows.

Where does this leave the housing market? If banks are forced to reduce the price of credit, they will be more selective about who they lend to. So the first time buyer will still find it hard to get credit, while the better-off will be piling back into the buy-to-let market. A year or so ago, the number of people owning their own homes in the UK fell for the first time in living memory. That's an unwelcome new trend that may be slow to reverse, regardless of how far the Bank of England slashes rates or the Government jawbones the banks.

At the root of all this is the UK's property obsession, and the Government's conviction, egged on by large sections of the media, that the way out of the crisis is to feed the already engorged beast. We're setting the stage for the next housing crisis before we've even seen the full extent of the current one.

Bank of Mandelson and Cable

Politicians in the UK don't seem to be able to remember which banks they bailed out and which they didn't. Last week we had Lib Dem finance spokesman Vince Cable railing against Barclays for raising money from the Middle East, admittedly on generous terms, rather than signing on for (Mervyn) King's shilling of government aid. Now "Lord" Mandelson is leading a chorus of MPs warning banks that they must pass on future rate cuts to consumers, after HSBC (another non-bailee) hinted that it might not do that. No doubt the criticism will move on to Lloyds, which is planning to refinance its Government-injected pref capital early in 2009 so that it can start paying dividends again. The effrontery!

It may be hard to imagine why the banks don't want Mandelson, Cable and the rest of the finance whizzes in the House of Commons peering over their shoulders every time they meet a customer, but let's give it a try. Those banks that got into a mess did so by lending unwisely and too much, while raising too little in deposits. Let's start with the lending side. The HSBC exec who has attracted the wrath of Mandy said that credit had been systematically mispriced over the past few years, something which now needed to be corrected. The banks mainly have themselves to blame for the mispricing, though HSBC, which has a surprisingly small share of the UK mortgage market, was not one of the bigger offenders. Margins will have to reflect risk more accurately in the future if the financial system is not to veer straight back into the ditch.

The flood of lending that resulted from low underlying rates and mispricing of credit risk outpaced the ability of most banks to fund themselves through old-fashioned deposit taking, though again, HSBC is an exception in this regard. The majority of the UK's banks were only able to keep lending by funding themselves in the inter-bank or wholesale markets. When these started to dry up in mid-2007, these banks had nowhere else to turn.

Look back over the events of the past fifteen months and you can see how these problems on the asset and liability side of the banks balance sheets played out. The first victim, Northern Rock, was undone by its reliance on wholesale funding, despite having a relatively sound loan book. Bradford and Bingley was mainly done in by a dodgy loan book (too much buy-to-let and self-certification), though its reliance on wholesale funding didn't help. The other institutions that have tottered but appear to have been saved suffered from a combination of the two problems.

The government rescue has bought time for the banks to get their houses in order, i.e. deleverage. As well as more capital, the banks need a combination of much slower loan growth, reduced reliance on wholesale funding and improved deposit-gathering. How succesful they are with rebalancing their liabilities away from wholesale funding will determine how much money they can safely lend, which will in turn determine how severe the recession turns out to be. It's going to be difficult to get it right. But cutting rates too quickly will boost loan demand and curtail deposit growth, which is the exact opposite of what's needed. Mandelson et al must know this, mustn't they?

Barclays, Vince Cable and the price of independence

Barclays plc is planning to boost its capital by raising money from investors in Abu Dhabi and Qatar. It's a complicated package and it looks expensive. Here's how the Telegraph website describes the deal:

"For starters, Barclays is paying a 14pc coupon for 10 years on some preferred-like shares. It's the highest rate yet for bank capital. True, the after-tax rate of 10pc is cheaper than the UK government's 12pc – but Barclays probably will be shelling out for at least six more years than its peers getting bailed out by the authorities.

Next, there are warrants – handed over at an in-the-money price and with anti-dilution protection. The Middle Eastern investors can subscribe to 1.5bn new ordinary shares at the severely depressed price of 198p each any time over the next five years.

Then come £2.8bn of mandatory convertible notes. Taking the 9.75pc coupon into account, the conversion price is 27pc below the pre-deal share price. There is also a generous thank you from Barclays - £300m of commissions, which get paid to Abu Dhabi and Qatar regardless of whether the deal goes ahead."

The commissions are pretty stunning, but they're really a sort of "drop dead fee", probably inserted as an inducement for the bank's existing shareholders to back the deal. (They get to vote on it later in the year). After all, they'll be throwing the £300 mil away if they don't.

The Government and most politicians are likely to welcome this initiative, but there's at least one exception. Here's Lib Dem Treasury spokesman Vince Cable, quoted on the Guardian website:

"The deal allows Barclays to strengthen its balance sheet without getting help from the taxpayer, but its terms, which are seen as generous to its new investors, drew fierce criticism today from Liberal Democrat deputy leader and Treasury spokesman Vince Cable.

"This is a scandal of mammoth proportions," he said. "Here is a bank which relies on the taxpayer to bail it out if the going gets rough but which has offered Middle Eastern investors a much better deal than the banks are offering to the British taxpayer."

Cable has been impressive throughout the financial crisis, but these comments are plain nuts. The comment that Barclays "relies on the taxpayer to bail it out" is particularly bizarre, given that the precise reason the bank is doing this deal is to avoid relying on the taxpayer.

Cable goes on to offer his explanation as to why Barclays is going down this road:

"We have to ask why Barclays it is willing to offer a better deal to foreign investors than the British taxpayer," Cable said. "The answer is simple: they don't want the British government stopping them from paying massive bonuses to their executives.

"More than the other banks, Barclays operate a high-risk casino operation which makes the bank particularly unstable but which gives very rich pickings to the top executives. The British government must not simply let this pass."

Leaving aside the accusations in the second paragraph of that quote -- which might well be actionable if uttered by anyone other than a politician -- Cable's explanation doesn't really hold up. The public likes (or should I say hates) to imagine bankers going home on bonus day with the boots of their Bentleys stuffed with crisp new 50s. In truth, most bankers get a large chunk of their bonuses paid in the form of stock, and have to wait years to convert it into cash. A deal like this one, which will certainly weigh on the stock price until the warrants and the convertibles are exercised, is the last thing they'd want.

So why are Barclays' management recommending this deal to shareholders? The classically-named chairman, Marcus Agius, says "it's all about self determination". With the press reporting today that the Government is putting pressure on the banks that have been bailed out to boost lending levels, it's not difficult to believe him.

A big day for bad ideas

On Monday evening Channel 4 showed a hastily-assembled documentary called "Don't bank on the bailout", presented by city fund manager Hugh Hendry. I didn't catch the whole thing, but the parts I did manage to see were, shall we say, unimpressive. Hendry appeared completely unaware of the difference between the annual budget deficit and the national debt. He intoned meaningless sentences like "four and a half is the new fifteen", referring to the level of Bank Rate. He invented scary numbers for the sake of effect, airily dismissing a carefully-researched study that suggested the budget deficit could reach £90 billion with the words "try £200 billion".

According to Hendry, it may be too late to avoid a recession in the UK, but if we are to do so, we need to return to old fashioned austerity. That's a great idea, Hugh. Let's prevent an accidental recession by causing one deliberately, because that's certainly what would happen if both individuals and governments stopped spending. Oddly, Hugh also wants a massive rate cut, which most of us would not see as the most obvious route to austerity. Looks like Channel 4 should stick to Big Brother. As for Hugh Hendry, he might want to spend more time with his funds, as he underperformed the market by almost 8 percentage points in the third quarter of 2008, according to Citywire.

Not that the UK has a monopoly on madcap ideas. Also on Monday, I came across Maria Bartiromo interviewing a panel of distinguished guests. First up was Arthur Laffer, he of the fatuous Laffer curve, who was bemoaning the financial market bailout because it would have to be paid for through higher taxes eventually. (Yes, it's all right for millions of people to lose their homes, as long as Art and his pals don't have to pay any more taxes). Then it was on to Lawrence Kudrow, who was foaming at the mouth at an old quote from Barack Obama, in which Obama said it was a shame that the black power movement had failed to redistribute income. Larry said the government should not worry about how much of the pie everyone got; it should just try to make sure the pie got bigger. He also asserted that Obama would use the courts to redistribute wealth if he could. Pretty clearly, Larry is one of the surprising number of people in the US who think the credit crisis was caused by the poor.

I had to stop watching at this point in order to avoid putting a boot through the TV. If I'd kept watching, Maria's next guest might well have been Jude Wanniski, reaching back from beyond the grave to call for restoration of the gold standard.

So much for "Dow 36000"

A few weeks and many Dow gyrations ago, I heard Maria Bartiromo on CNBC ask one of her equally excitable on-air colleagues "how long can this go on?" It's clear enough now that "this" -- wild stock market fluctuations around a generally bearish trend -- could go on for some time yet. On Friday, for the first time, one of the CNBC talking heads blurted out the previously unthinkable, saying something on the following lines: "once this liquidation is over, some of the pension types may never put their money back into stocks. We could see the market staying at depressed levels for years".

Indeed we could. The bull market has been in place for so long that a lot of people have forgotten what bear markets look like. This is especially true for a lot of the on-air staff at TV stations like CNBC and Bloomberg, who are too young to have real memories of the last one. (The lovely Maria, who is a bit older than she wants you to think, may be an exception). The fact is, though, that bear markets can last a long time. People might be a bit less keen to make comparisons with the 1929 crash and the ensuing depression if they realised just how long the market remained in the dumper: it was 1954 before Dow got back to its 1929 level. That's an awfully long time for the "pension types" and their clients. (You can see a graph of the Dow since 1900, together with an explanation of the rather odd way in which it's calculated, here.)

Even more recently, the Dow has wallowed for years on end. When I first started paying attention to stock markets as a youth, the average never seemed to be able to break above 1000. In fact, it stayed just below that level throughout the 1960s, and it was only the onset of the great inflation of the 1970s that finally gave it a kick higher. If we are entering an era of slow growth and possibly even deflation, we could very well see a similarly long period of sideways trading now, as my man at CNBC has belatedly acknowledged.

People are trying to look for the bright side of a downturn: return to traditional values, that sort of thing. For the more venal, though, this may also be a period in which the foundations of the next great fortunes are laid. As in the 1930s, those lucky enough still to have cash will be able to pick up some great assets at bargain prices -- though it may be their kids or even their grandchildren that reap most of the benefits.

You call that an apology?

Former Fed Chairman Alan Greenspan has probably come as close as he ever will to accepting some culpability for the unfolding economic meltdown. Under harsh questioning in Congress, he announced that he had uncovered a "flaw" in the economic philosophy that had stood him in such good stead for the past forty years.

In the usual Greenspan way, it's a bit difficult to figure out just what he thinks the "flaw" is. However, it seems to be something to do with overestimating the ability of bank shareholders to act in their own self-interest. That's right -- his only mistake was in misjudging the stupidity of others. He's certainly not admitting that it might just possibly have been a mistake for the Fed to cut interest rates every time the markets even quivered. Nor would it occur to him that the behaviour of bank shareholders that he now deplores might in any way have been influenced by the irresponsible monetary policy pursued by the Fed.

Everyone's jumping on the "bash the maestro" bandwagon now, so much so that those of us who've been on it for years are starting to find it a bit claustrophobic. When Greenspan was awarded his honorary KBE by the Queen a few years ago, I wrote in my Bloomberg message header that it must stand for "King of the Bubble Economy". Hey Al, can we have our gong back, please?

What were they thinking?

It's staggering to behold the parade of UK investors who are still coming forward and admitting they stand to lose money as a result of the collapse of Iceland's banking system. (Or to put it another way, it's staggering to discover the lengths to which those banks went to fund themselves).

First we had the personal depositors in Icesave, Heritable and Kaupthing Edge, all of whom seem likely to get their money back eventually, probably at the expense of the British taxpayer. Then there were the dozens of local councils, hospital trusts, police authorities and what have you, who kept piling money into the Icelandic banks even though some of their smarter brethren had seen the writing on the wall months ago and brought their money home. The Government seems to think that these folk should have known better, and is resisting calls to compensate them.

Last week we started to hear tales of people who had seen fit to strap on another level of risk by investing in an Isle of Man sub of a UK sub of Kaupthing Bank. I've seen tales of woe of people with upwards of a million pounds invested in this way, and because the deals were placed in an insurance "wrapper", they may only ever see £50 of their money back. It's impossible not to feel sorry for these people, but at the same time you have to ask why they would think it wise to invest the bulk of their life savings in something that's so opaque, especially without deposit insurance.

And today we hear that the Barnsley Building Society had £10 million with one of the Icelandic banks, and has decided to sell itself to the Yorkshire Building Society in the best interest of its members. Those members, of course, won't be given any vote on the matter, any more, presumably, than they were consulted about putting the society's surplus funds into Iceland in the first place.

Predictably, the Barnsley's bosses are trying to dodge any blame: "The current exceptional situation in Iceland and the full extent of the repercussions were beyond anticipation," said its acting chief executive, Steve Mitchell. He's wrong about that, of course -- even the preternaturally useless ratings agencies were starting to fret about Iceland months ago.

So what were all of these people thinking? As Hank Paulson said of the whole credit mess, "there's plenty of blame to go round". However, in this particular case I think a special mention goes to those "best buy" lists that you find in the weekend papers. These were still touting Kaupthing and Heritable the day before the whole pack of cards collapsed. Last weekend those names were gone, but things like "ICICI Bank" and "Earl Shilton BS" featured prominently alongside the Nationwides and HSBCs of this world. I looked carefully for any warning about risks, credit ratings, deposit insurance coverage or anything of the sort, but there was none. These tables are based solely on price, making them virtually an inducement to the greedy or naive to gamble. Investing money is a big decision -- shouldn't the "quality" papers think twice about providing such incomplete advice to their readers?

Be nicer to Iceland???

People are starting to write into the media castigating the UK Government's hard line toward Iceland, in the face of the collapse of that country's financial system (and maybe its economy too). Some of the objections centre on the Government's use of anti-Terrorism legislation to seize the UK assets of Landsbanki and Kaupthing -- objections on the lines of "see? Once you give Governments that kind of power for particular purposes, they'll use it when they're not supposed to". I guess there is some merit in this, but most of the opinions I've seen from lawyers suggest that the anti-Terrorism law was used because it was the quickest way to meet the Government's objectives. There were other ways the Government could have achieved the same ends, but they would have taken time, time which in the circumstances the Government maybe felt it didn't have.

Most of the objections, though, just criticise the Government for general heavy handedness. One letter-writer described Iceland as "the least threatening people on earth". This seems a bit rich, considering the past history of bad blood between the two countries, especially during the "cod wars" a generation or two ago. The Icelandic government was both duplicitous and belligerent at that time. It was not exactly scrupulous over the legal niceties when it unilaterally extended its territorial waters no fewer than three times, so it's a bit rich of Prime Minister Geir Haarde to act all offended at the UK's actions now. (How weird is it that the Icelandic PM is a virtual namesake of the founder of the UK Labour Party??)

Let's think about this in a slightly abstract way for a second. Ignore the individual companies involved and think in terms of Iceland plc and UK plc. Iceland plc has borrowed a lot of money from UK plc and has used the money to buy some of UK plc's assets. Now Iceland plc can't pay the money back. Is it so unreasonable for UK plc to seize back its assets? I've been involved in a number of what are euphemistically called "distressed situations" in banking, and the UK Government's actions are pretty much what any banker would do in a comparable situation.

It is, of course, a bit more complicated when you put back more of the detail: three privately-owned Icelandic banks buying private UK assets. However, the Icelandic banking system is very unusual. The banks have not been in the private sector for very long, and in the case of Kaupthing, founded only in 1982, don't have a very long track record. The links between the central bank and the private banks are exceptionally tight, or to put it another way, the regulatory system is inadequate. The banks have grown stupendously fast almost entirely on the basis of taking deposits outside Iceland and lending that money for the purchase of assets outside the country. So Iceland doesn't account for most of their business, doesn't regulate them adequately and admits it can't provide the deposit insurance it promised. In what sense are these Icelandic banks? It seems no more than a flag of convenience, the equivalent of registering oil tankers in Liberia or Panama.

I'm not privy to the UK Government's thinking on this, but it seems to me they must have focused on a nightmare scenario: Icelandic companies sell their UK assets and repatriate the proceeds to Iceland, where they're used to pay back some of the banks' domestic depositors, leaving the UK savers high and dry. You can imagine the media outcry if that had been allowed to happen. None of this changes my view that the UK Government should have thought twice before agreeing to pay back all those who chose to save with the Icelandic banks, but it's surely justified in doing everything it can to minimise the cost to the UK Treasury of those banks' failure.

The musical ride

Once things settle down in the financial sector, attention will start to turn to the question of how the Government will pay for the bailout. Tax hikes? Spending cuts? The correct course would probably be to do nothing, as either raising taxes or cutting spending would slow the economy. The sooner the economy gets back on track, the sooner the Government is likely to be able to punt its newly-acquired bank shares back into the market at a profit to the taxpayer. Rising GDP would also begin to rein in the debt-to-GDP ratio that everyone seems to be worrying about.

There's a good precedent for the "do nothing approach". Canada dug itself into a dire fiscal mess in the 1980s, with the public debt/GDP ratio topping 100%. (By comparison, most estimates suggest that even with the bank bailout in full swing, the UK's ratio is unlikely to go much above 50%). Whenever there were calls for spending cuts in Canada, public servants always made sure that one thing topped the list: the Mounties' Musical Ride, a horse-and-brass-band extravaganza that showed up at fairs and rodeos across the country. The Ride was popular, so there was always an outcry. The Government never could quite bring itself to axe it, and somehow sparing it always seemed to mean that the rest of the spending cuts never happened either. Canada eventually got out of its fiscal hole in the 1990s, thanks to a prolonged period of strong GDP growth triggered by low interest rates and an undervalued dollar. The economy grew out of the problem, so the Musical Ride may have saved quite a few worthwhile worthwhile spending programmes.

This is not to say that there are no spending plans in the UK that should be considered for sacrifice: the Olympic money pit (how are we ever going to build the damned thing if all the Eastern Europeans go home?); the ID card scheme that nobody likes and that probably won't work anyway; the Trident Missile replacement (if we want to confound our enemies in the future, we can just sell them some credit default swaps).

Then there's Prince Andrew, Duke of York and supposed trade ambassador. Conspicuous consumption at other peoples' expense is just so last year. Maybe he can be our equivalent of the musical ride -- though I'm not sure there'd be much public outcry if Gordon Brown cut up his credit card.

Iceland meltdown

People falling over each other to boost returns by taking on risks they don't understand, then looking to governments to bail them out. Investment bankers making dodgy housing loans? No, British savers sticking their life savings into Icelandic banks.

It looks as if their gamble is going to pay off, too. The UK government has announced that it will make sure that all investors in Icesave, owned by Landsbanki, get their money back. Two other institutions operating in the UK, Kaupthing and the weirdly-named Heritable Bank, a sub of Landsbanki, have had their deposits taken over by ING.

I can't say I'm happy about this. The risks of putting money into banks you've never heard of in a country with the same population as a mid-sized UK city, paying improbably high rates and with dodgy deposit insurance, should have been evident to anyone. Sadly, the money sections of the weekend newspapers regularly touted these as the best deals available -- even last weekend the Sunday Times was recommending deposit accounts with both Kaupthing and Heritable.

The Icelandic economy is a huge shell game. I recall being amazed when West Ham FC was bought by an Icelandic billionaire "biscuit manufacturer". Just how many digestives do you have to sell to a country of 300,000 to become a billionaire? The banks used funding from investors around the world, including UK savers, to make monster loans to biscuit boy and his ilk, who then used the money to buy stakes in a wide range of foreign companies, including some of the biggest names in UK retailing. (They even own Woolworths, Lord love 'em).

There's nothing illegal about this, but it beggared belief to think that Iceland's government could properly regulate a banking industry that had slipped its leash so spectacularly, let alone stand behind it when things got rough. Sure enough, Iceland's government has blithely told Alastair Darling that it will do nothing to help Landsbanki's UK customers -- it even seems likely to renege on the relatively limited amount of deposit insurance that it was supposed to provide, leaving the UK treasury on the hook for the whole lot. The UK is planning to sue Iceland, but as the country is effectively bankrupt, I'm not sure what good that will do. Russia is reportedly stepping in to help Iceland with a loan, which doesn't exactly surprise me, given my suspicions of what's been behind the explosive growth in Iceland's banks.

I suppose the Uk Government feels that having bailed out savers with Northern Rock and Bradford and Bingley, it has to do the same for the Icesavers. I'm not sure why it feels it owes loyalty to people who've shown no loyalty to the UK banks, but maybe that's old fashioned of me. At the very least, I hope that when the dust settles the Government ensures that this can't happen again in the future. No longer should spivvy banks be allowed to offer online deals to savers while making no contribution to the deposit insurance scheme. It would also be nice if the newspapers stopped giving these characters free publicity every week, but I guess we shouldn't expect miracles.

Dail bail deal fail??

The Irish parliament, the Dail, has rubber-stamped the Government's plan to insure all deposits in six major Irish banks for the next two years. The deal has caused ructions all over the place. The EU is complaining that it wasn't consulted. It is investigating whether the guarantee constitutes illegal state support, in which case Ireland might face financial penalties. Non-Irish owned banks operating in the country are complaining that they are being discriminated against. Banks in the UK are worried that savers will move money into the Irish banks in order to take advantage of the guarantee, as the UK itself only guarantees £50,000 per depositor, just increased from $35,000. There are signs this is indeed happening. There is even disquiet in Ireland itself, with unions and the political opposition arguing that the Government should not have given the banks a blank cheque.

I have more than the insured limit in a UK bank, but I'm not tempted to move any money to Ireland, because I'm not sure that the Irish Government's guarantee is worth the paper it's printed on. The total value of the guarantee amounts to about three times Ireland's annual GDP. Could the Government ever make good on its guarantee if push came to shove?

It's unlikely that all the banks would fail at once -- though the guarantee proposal reportedly came about because there were fears that two of the six would go under this week, so nothing's impossible. Let's suppose that just one of the six failed and that its deposits accounted for 50% of Ireland's GDP. That's still a huge amount of money to borrow. I don't just mean it's a lot to borrow quickly. It's a lot to borrow, period. By way of comparison, years of diligent overspending by the UK Government have resulted in a national debt just above 40% of GDP. It would take Ireland a long time to raise the 50% of GDP it needed to pay out all the depositors. The consequences for its national credit rating of even trying to do so would be disastrous.

And here's the real fly in the ointment: Ireland can't ask its central bank to give it a quick hand by printing money. As a member of the Eurozone, Ireland has given away that power to the ECB. Given the chilly reception that the EU has given to the guarantee scheme, not much help is likely from that quarter.

The guarantee has given Irish bank shares an instant boost and eased the liquidity crunch in the short term. If I was an Irish bank depsitor, though, I'd be praying that I never had to call on the Government to stump up the dough.

Don't want no short people round here

Apologies for another posting on short selling, but it has become a bit of a preoccupation for the media, regardless of whether they understand it or not. These are just a few things I've picked up on in the last few days.

* The publicly-traded hedge fund manager MAN Group has asked to be added to the FSA's list of financial sector companies whose stock can't be sold short. You can dish it out but you can't take it, eh guys? You'd think they'd know how to cope with hard times anyway -- MAN's predecesssor company, ED & F Man, was founded in the eighteenth century as a commodities trading house. They've seen a few crises come and go in that time.

* Hedgies on both sides of the Atlantic are crying foul over the short selling ban, and they've got an advocate on the editorial pages of the Times. Oliver Kamm, one of the paper's leader writers, is an ex-hedgie himself, and he broke cover this week to explain why short selling is a good thing.

I have to say, some of his arguments were a bit short of compelling. Kamm claims that short selling draws market attention to badly-run companies, and thus allows capital to be moved into more productive uses. This "whistleblowing" argument in favour of short selling makes me pretty queasy. It seems as if the short sellers are claiming to be like the kid at school who constantly gets his classmates into trouble by ratting them out to the teacher. Nobody likes that kid, and nobody much likes the short sellers either. In any case, I can't see much current evidence that short selling is abetting the efficient allocation of capital. Lending has dried up regardless of how productive the use for the funds might be.

Kamm also said that more short selling might have prevented Northern Rock's unstable business model from falling apart to the point where the bank needed a massive public sector bailout. Hang on though: there were no restrictions on short selling when the Rock was getting into trouble, so the only lesson I can draw from this example is that short selling doesn't work in the way that Kamm claims it does.

* Lastly, a nod to good old Anatole Kaletsky, who has written two intemperate rants this week blaming the whole mess on Hank Paulson! What an imbecile! (Kaletsky, not Paulson, though I guess the jury's still out on poor old Hank). Suppose a guy goes out and gets drunk, then crashes his car into a lamp-post on the way home. If he then dies in the ambulance on the way to hospital, I guess Kaletsky will want to charge the paramedics with murder.

By the way, I have sent so many comments on Kaletsky's drivel to the Times website that they seem to have set their mail filter to prevent my comments from ever seeing the light of day. Bit of a badge of honour, that.

The worst sentence ever written?

Sports reporters are rarely good writers. The older ones seem to be the worst, and the more senior ones who can insist that their stuff be published without editing are the worst of all.

James Lawton of the Independent is one of these. His prose is often excruciating. Even by his standards, though, this sentence from today's column on the Ryder Cup is a doozy:

"Also, and you could see it plainly enough when Faldo embraced him after he had won his fourth straight point in the cause that had looked to be lost the moment Garcia could not disguise the fact he had no answer to the power and the authority of young Anthony Kim in the opening singles match, that here was, for the foreseeable future, probably the most dynamic candidate to lead a European drive to regain some of their old competitive edge in South Wales in two years' time."

Words fail me, but not nearly as much as they seem to fail James Lawton.

OK Sarah, tell me about short selling

Sarah Vine has a column in today's Times suggesting that the financial sector would be a lot more stable if there were more women in senior positions in the City. To illustrate her point, she talks about going to a mortgage broker (with her husband, Michael Gove, who is a member of the Tory shadow cabinet) to arrange a mortgage. The broker recommended a deal with HBOS, and according to Sarah, she was the only one who thought to ask what would happen if HBOS got into trouble. Seemingly the broker poured scorn on the very suggestion.

That broker may not seem so smart now, although I don't suppose there are many people out there who can say that they saw the demise of HBOS coming. But more to the point, how exactly does this story show that Sarah Vine is smart? She wasn't planning on putting money into the bank, she was trying to arrange a loan. Does she think that all those people lined up outside Northern Rock branches this time last year were distraught borrowers looking to repay their loans?

If I knew for sure that a bank was getting into trouble, and if I were that sort of person -- which thank the Lord I'm not, sir, and I'm sure Sarah Vine isn't either -- I'd try to hit it up for the biggest loan I could wangle. After all, once the crisis hit, it might take the bank a good long time to come after me for the money. Judging by the soaring delinquency rates at Northern Rock, quite a few people are thinking in those terms.

So Sarah, you may well have a point about women in the City, but I'm not sure your own experience goes very far to prove it. Still, never mind, maybe you can help me to understand something about short selling that still puzzles me, even after all my years in the financial sector.

Short sellers are being widely blamed for the demise of HBOS and Lehman and for the pressure that Morgan Stanley finds itself facing. Short selling has been around for a long time and its defenders claim that it adds to market efficiency and liquidity. I'm not sure about that, but I do know that it's always blamed when financial crises hit, and regulators regularly ban it, only to relent and allow it again once markets stabilise.

You can't just go into the market and sell a stock that you don't own. You have to go out and borrow it first, from a pension fund or some other long-term investor. You pay them a small fee for the shares and hope that by the time the borrowed stock has to be returned, the price has gone down and you can repurchase it ("cover your short") at a lower price, allowing you to pocket a nice profit.

Here's the part that puzzles me. Why would a long-term investor lend stock to a short seller? You'd know the only reason they're borrowing it is to drive down the price of your asset, so why on earth would you help them out? If I came to you and offered you £100 to borrow your car for a day, but told you I was planning to write it off, you wouldn't lend it to me, would you? I'm sure Sarah Vine would agree with me on that one.

In Lehman's terms

Most people have reacted to the collapse of Lehman brothers, demise of Merrill Lynch, nationalisation of AIG and so on in predictable ways. George Bush and John Paulson say the US financial system is sound and flexible; in an editorial today, the Times says it all proves that markets are working; the head of the TUC is calling for the Government to do something to help the "ordinary" victims. And Sir Simon Jenkins has produced the most thoughtful piece I've come across so far, in the Guardian.

Just about everyone is blaming the crisis on the decline in the US housing market. That's true as far as it goes, but it doesn't go nearly far enough. The US housing market has fallen apart because it was wildly overinflated in the first place, and that's largely down to an abject failure of US monetary policy during the Greenspan years. I've written enough (or more than that) about this in the past, but in essence Greenspan presided over a period of exceptionally low interest rates and rapid money supply growth. Thanks to the entirely coincidental expansion in the supply of cheap goods from China and elsewhere, this did not trigger the rise in consumer prices that would normally have been expected. Greenspan appears genuinely to have believed that the credit for the low inflation era belonged to him, so instead of being cautious, he just kept pumpimg up the volume.

All this cheap and abundant money had to go somewhere, and it went into assets. So stock prices and house prices began to rise, not just in the US but all around the world. Greenspan never seemed to see this as a problem. Although he once spooked the markets by talking about "irrational exuberance", he never actually did anything about it. In fact, he repeatedly denied that central banks could predict or forestall market excesses. Worse, each time the market seemed about to correct itself (the Russian debt crisis, the tech stock collapse, 9/11) he simply opened the money spigot even further, creating the "Greenspan put".

So far, so irresponsible. However, at the same time as the flood of cheap money began to distort the markets, there were major changes underway in the financial system itself. Regulation became generally lighter, in the US and around the world, and large parts of the financial system quietly went off the radar screen. The rise of LBOs and private capital reduced the role of the stock markets, while the largely unregulated hedge funds eroded the influence of more traditional investors. Many of these newer players were much less adequately capitalised than the more tightly regulated banks.

And everyone had access to much more powerful trading tools than ever before, thanks to the explosive rise in computing power. Options may have been around for a long time, but computing allowed them to mutate into new forms at a staggering pace. The first swap transactions took place only in the early 1980s, but that market quickly mushroomed into ever more complex forms. And the computer allowed trades to take place faster than ever before, sometimes without any human intervention. (It's worth recalling that Nick Leeson put Barings under by arbing microsecnd differences between the updating of Japanese stock prices on two separate exchanges).

There's nothing wrong with these developments in themselves, but in a world where the monetary authorities and the regulators seemed to agree that inflation and crises were a thing of the past, they were a recipe for trouble. It became all too easy for the math PhDs on the derivatives desks to persuade senior management to get into these new markets. The profits were good (or at least, they looked good when the deals were booked) and since nothing had gone wrong yet, it was easy to believe that nothing ever would go wrong, especially with the Greenspan put lurking helpfully in the background.

The very nature of the banks themselves allowed this almost piratical culture to take hold. It used to be a standing joke in the industry that the Japanese banks moved like a herd, but the truth is, almost all banks are guilty of this. If the chairman of bank A plays golf with the chairman of bank B and brags about how much money his firm is making out of credit default swaps, it's dollars to donuts that bank B will try to hire a CDS boffin within the week. Very few banks are immune to this. In addition, the traders are almost always rewarded on the basis of the expected profits at the time the deal is booked. In fact, if they don't get rewarded that way, they go somewhere else. But when deals have very long "tails" and there is no real precedent for how they are going to perform, this is absolutely the wrong way to compensate people.

So: the housing crisis is the result of insane monetary policy; light regulation; changes in the structure of the financial sector; massively increased computing power; the culture of banks themselves; and a flawed compensation system. These are not problems that can be solved simply by easing monetary policy, as the events of the past year, and especially the past week, have made abundantly clear.

Where do we go from here? There is talk on both sides of the Atlantic about a need for a thorough overhaul of the regulatory system, but that's going to take years. Banks themselves are changing their behaviour -- just try getting a mortgage in the UK -- but is anyone going to dare to take on the hedge funds? This is a genuine "crisis of capitalism", certainly the most serious since the great depression. In some ways it may be worse than that, because the underlying values of bank assets are almost impossible to calculate.

There are two things I like to keep in mind about the Great Depression. Whenever a financial advisor tells me that stocks always outperform in the long run, I ask him/her when US stock prices recovered to the level they had been before the 1929 crash. They never know the answer, which is 1954. That's a bit too long for someone of my age to wait! The second is that US policymakers never did find a way to end the Depression. As the Norwegian economist Axel Leijonhufvud wrote many years ago "sad to say, Schicklgruber did it". Let's hope we're luckier this time.

A healthy correction? Not for everyone, it isn't

The editorial pages of the "quality press" are virtually unanimous in the view that the current credit crunch/economic slowdown is an inevitable consequence of the excesses in borrowing and consumption that defined the past decade. No argument from this quarter, though I don't remember too many warnings of impending doom from the same wise men before the crisis hit, which would have been nice.

Many of the columnists in the same papers are going further, saying that the crunch is actually a salutary and welcome development. Here, for example, is a paean to the slowdown by India Knight.

I have a problem with this born-again asceticism. It's all very well to see things this way this if you're a comfortably middle-class scribbler, and your idea of a tough adjustment is to delay your next purchase from Hermes for a month or two, or to eat at Gordon Ramsay only once a month instead of every two weeks. It's a different matter if you're a young couple wondering if you'll be able to renew the mortgage when it comes due, or a back-office worker in the City about to lose your job, or a public servant getting only a 2% pay rise, or a senior citizen worrying about how to pay for the heating this winter. I haven't seen many people from these groups saying how welcome the economic downturn is, but then again, not many of them get to expound their views in the media.

Do they know it's not Christmas?

Yesterday was September 7. I was in our local Matalan store, which had a big display of Christmas ornaments and decorations! A dispirited young mother was trying to convince her agitated six-year-old that it really wasn't Christmas just yet, but the little boy kept dragging her back to the display, saying "you're lying to me, look at all these Christmas things".

Shame on you Matalan! And if you can't shift all this Christmas tat, where are you going to put the plastic pumpkins for Halloween? Unless, of course, I missed those when they were on sale back in July.

They've gone and done it anyway

When rumours first emerged in early August that the UK Government was considering a stamp duty "holiday" to boost the housing industry, I blogged that it was a dumb idea (see "They've lost the plot", 6 August). Nobody in the mainstream media or the blogosphere seemed to think much of the idea, but today the Government has announced that it's going ahead and doing it anyway. It's still a dumb idea and it isn't going to work.

It's only a partial "holiday". Homes changing hands for less than £125,000 were already free of stamp duty; that exemption is now being raised to £175,000. Above that level, the 1% stamp duty rate remains intact, and the thresholds at which higher levels of the tax kick in remain unchanged. Apparently as many as 50% of all home sales take place below the new limit, and of course a very high proportion of those will be first time buyers, whom the Government is especially anxious to be seen to help.

So why won't it work? Well, first of all, it's pretty trivial in scope: the most any purchaser is going to save is £1,750. But with prices reportedly falling at a 10% rate (according to the Nationwide), any prospective buyer can save that much by waiting for about six weeks! As there is no sign of the price declines easing any time soon, the stamp duty cut may not even provide any short-term stimulus. Any smart buyer will wait until just before the stamp duty holiday ends, in order to benefit both from the tax cut and the seemingly inevitable further falls in house prices. So the market might see a big jump in transactions in about August of next year -- and who can say whether the stimulus will still be needed by that time?

The second reason the holiday won't work is that it's not addressing the real problem. In fact, it's not addressing a problem at all: there's nothing wrong with house prices falling, especially after the astounding increase we've seen in recent years. The problem for first time buyers is that they can no longer get financing on the silly terms that were available until the credit crunch began (or as we should be saying, until sanity returned to the market). Unless lenders believe that the stamp duty cut will stop prices falling further -- and they won't believe that for a second -- they'll be no more willing to lend to marginal borrowers tomorrow than they were yesterday.

You need more reasons? Well, if the stamp duty cut persuades some vendors to hold on to irrationally high asking prices, it will delay the needed correction the the market. And all experience suggests that measures like this don't change the number of transactions over a sustained period. They just alter the timing. So any boost in sales in August 2009 will be offset by a fresh slump later in the year -- at which point, no doubt, calls for another set of stimulus measures will immediately be heard.

As I've said before, stamp duty is badly structured and should be reformed. Reformed, not tinkered with.

UK retail sales at 25-year low....NOT!

Why can't newspapers, even the upmarket ones, employ people who can interpret economic statistics properly? Today's Telegraph has a headline "Retail sales hit 25-year low" -- but of course, they didn't. The headline represents a misinterpretation of one of the far-too-numerous survey-based reports that the media love to play up. There are lots of these in the housing markets too, and they are almost never reported sensibly.

So what does this latest shock horror report, compiled by the CBI, actually say? Here are the key paragraphs from the Telegraph report:

"The trade body's survey of 153 retailers showed that 60pc of respondents said sales in the first half of August were lower than a year ago. Only 13pc sold more goods than a year earlier.

The balance of -46 percentage points is the lowest since the survey began in July 1983 and compares with -36 in July."

All that means is that retailers are gloomier, at least by this measure, than they've been for 25 years. But the actual value of retail spending is many times higher now than it was 25 years ago. What's more, the latest official data actually showed a small increase in retail sales in July, something which seems to have escaped the reporter on this story. So it's simply wrong to say that retail sales are at a 25-year low.

The sad thing is that the CBI will not make any effort to correct this misinterpretation of its survey -- in fact, it positively revels in its ability to generate misleading, doom-filled headlines. It's all ammunition for its increasingly strident calls for an interest rate cut. Too bad the newspapers keep falling for it.

The 2012 Olympics? Priceless

The "handover" parties across the UK on Sunday, as London replaced Beijing as the Olympic city, were sponsored by Visa. Given that the London Olympics were an impulse purchase made at an unknown (unknowable?) price, set to be paid for over a very long span of years, that seems very apt.

Greenspan: he's still getting it wrong

Former Fed Chairman Alan Greenspan (formerly known as the Maestro, but probably not any longer) has been sounding off to the Wall Street Journal about the housing crash and related issues. He says the US Government's bailout plan for Fannie and Freddie is "bad": the shareholders should have been wiped out and the companies reconstituted and refloated. He might be right in principle, though the consequences of such a course of action in the febrile state of capital markets might have been difficult to control.

Greenspan also takes the opportunity to dodge any blame for the credit crunch. According to the WSJ, "Mr. Greenspan has been criticized for contributing to today's woes by keeping interest rates too low too long and by regulating too lightly. He has been aggressively defending his record -- in interviews, in op-ed pieces and in a new chapter in his recent book, included in the paperback version to be published next month. Mr. Greenspan attributes the rise in house prices to a historically unusual period in which world markets pushed interest rates down and even sophisticated investors misjudged the risks they were taking".

Only the investors misjudged the risks, eh, Alan? The Fed's behaviour in cutting interest rates every time the equity markets came under threat -- the dotcom collapse, 9/11 -- might just possibly have encouraged that behaviour. They called it the "Greenspan put", and it's probably not something the Maestro wants to see featuring prominently in his obituaries.

As for the idea that "markets pushed interest rates down", those of us who think that interest rates are the price of money might interpret their historically low levels in the first half of this decade as evidence of an excessive amount of money washing around in world markets. That's something Greenspan and pals could have done something about, but they were so busy taking credit for low US inflation (which really originated in China and India) that they took their eye off the ball. You'll have to do a lot better than this if you want to rehabilitate your reputation, Maestro.

Don't do as I do, do as I say

This quote from US Secretary of State Condoleezza Rice is pretty staggering: “This is not 1968 and the invasion of Czechoslovakia, where Russia can threaten its neighbours, occupy a capital, overthrow a government and get away with it. Things have changed.” George Bush has weighed in on similar lines, saying that Russia's recent behaviour in Georgia is not acceptable "in the 21st century".

I wonder why the Russians didn't realise that the rules had changed. Maybe they saw the US invading Iraq and getting away with it. Or perhaps they saw the US invading Afghanistan and getting away with it. Or perhaps they saw the US bombing Serbia and separating off one of that country's provinces, Kosovo, and getting away with it. Or maybe they have longer memories and recall the US invading Grenada to overthrow an elected government and getting away with it.

None of this is meant to excuse the Russians for their heavy-handed approach in Georgia, but really, taking lessons in international behaviour from the Americans makes about as much sense as taking dancing lessons from Stephen Hawking.

Truth and justice, the American way

This week President George Bush spoke out strongly about China's record on human rights and religious freedoms, just before flying to Beijing to attend the Olympic Games. According to Dubya, the American people are very concerned about China's shortcomings in these areas.

Also this week, Osama bin Laden's former driver, Salim Hamdan, was sentenced to 66 months in jail after a "fair" trial at Gulag Guantanamo. The sentence dismayed the prosecution (i.e. the Bush government), which had been pressing for a 30-year stretch, especially as "time served" means that Hamdan will be eligible for release only six months from now. No need to worry, though: the Pentagon has already made it clear that Hamdan will continue to be detained as an "illegal enemy combatant".

President Hu Jintao is probably too polite to express the Chinese people's concerns over the Bush government's human rights record -- more's the pity.

Wrapit: Farepak for rich people

I'd never heard of Wrapit until the company came unpacked this week. Running wedding gift lists sounds like the kind of business that can only exist in a society where people like to think they're too busy to do anything for themselves. Cooking? Housework?? Looking after the kids??? Malgorzata can do that! Set up my own wedding list???? Next thing you'll be suggesting I rely on the taste and generosity of my friends and family.

Even in the parallel universe where something like Wrapit can exist (I believe that universe is known as "West London"), a business like this has to be run on sound financial principles. Most importantly, the money intended by customers to be used for buying gifts has to be kept separate from the company's own operating funds. This requires the business to be properly capitalised, which Wrapit almost certainly was not, and it requires it to grow only as fast as its available capital will allow. Wrapit seems to have grown rapidly and not very sensibly: why did a web-based wedding list company need six retail outlets? Once this sort of company starts using clients' money to pay its operating expenses, it becomes not much more than a Ponzi scheme, and its eventual fate is sealed.

Wrapit's management is trying to convince the media and its customers that the company's demise is all down to the credit crunch and to HSBC in particular. Given the nature of the business, if Wrapit had been properly run and well-capitalised it would have been all but recession proof. Like Farepak before it (and on a much larger scale, Northern Rock), Wrapit is a casualty of the "get rich or die tryin'" ethos of the past decade. It's unlikely to be the last.

A kriminull ideer

A criminology professor is suggesting that "variant" (i.e. wrong) spellings of common words should be accepted as correct. Professor Ken Smith of Bucks New University (no, neither had I, but it's in High Wycombe) is apparently fed up with correcting elementary spelling errors in his students' essays -- truely, ignor, things like that. He wants to be allowed to ignor, sorry, ignore them.

I've never taught in a university, but I have interviewed hundreds of newly-graduated job seekers. It's frustrating to know that a lot of them may have very limited writing or math skills even after a university education. You have to go to a lot of effort to try to identify the competent ones before you take the giant leap of hiring them. Now Prof Smith is proposing to throw his hands up entirely and leave prospective employers even more in the dark about the basic skills of the people they may be hiring. Not that he's doing anyone any favours -- Bucks New University may be cool with bad spelling, but employers won't be. Guess what, kid: you got five devalued A grades at A-level and now you've got a degree that nobody trusts.

I'm pretty sure that Bucks New U wasn't there in those paleolithic days when I was applying for university. All of these new "universities" have been funded by the government in order to make the benefits of higher education available to a much higher proportion of the UK's youth. If a lot of the teachers think like Ken Smith, it's probably a waste of public money.

They've lost the plot

If reports that the Government is considering some type of waiver or delay in stamp duty on house purchases are true, things at Westminster must be even more desperate than they appear. As usual Chris Dillow has written the definitive piece on this, with the perfect title: "Another terrible idea". Almost all of the national newspapers think it's a crazy notion too.

Since others have covered the ground so well, let's just briefly summarise what's wrong with the idea:

1. Stamp duty isn't the problem -- lack of mortgage finance is. So cutting stamp duty won't fix anything.

2. When Norman Lamont abolished stamp duty for several months in 1992, it didn't help.

3. The Government can't afford it (though that doesn't seem to be deterring it any more).

4. It may encourage first-time buyers into a market that has further to fall before true affordability is reached. That's foolish at best, cruel at worst.

5. Unless it's strictly confined to first-time buyers, it will provide an unnecessary boost to those who don't need help -- cash buyers or buy-to-letters.

We can only hope that all of these rumours are the result of a silly season trial balloon by the Government, and that this dummkopf idea will sink without a trace. That's not to say that stamp duty is perfect, though. The fact that the higher rates apply to the entire purchase price as you pass each tax threshold is ridiculous and distorting -- income tax doesn't work like that, and neither should stamp duty. But changing that would be a sensible and thoughtful thing to do, and right now thinking and sense seem to be in short supply on Downing Street.

Sun-loving criminals

The tragic death of a young Welsh couple in Antigua, apparently at the hands of a would-be robber, is leading some people to reassess their desire to visit the Caribbean. A couple has come forward to the Times with a story of a vicious rape and beating in the neighbouring island of St Lucia, and there are reports of people cancelling planned vacations in the region.

Crime in the Caribbean has always been mainly associated with Jamaica, but the rate of violent crime in other islands, including Antigua, has been rising in recent years. The locals seem to be just as scared of this as the tourists are, and place some of the blame on the policy in richer countries (mainly the US, but also the UK and Canada) of deporting convicted criminals to the land of their birth once they have served their jail time.

It's interesting to consider the morality of this. Lots of young West Indians move to North America or the UK as children. Some of them find it hard to integrate, fall into a life of crime and get sent to prison. When they are ready for release, the authorities check their passports and bundle them on a plane to wherever they were born. So: they've grown up in a place they never quite fitted into, they've been hardened up by jail time, and now they've been sent back to somewhere they barely know. You wouldn't think the chances of rehabilitation were very high, would you? These people fell into crime while they were in the US (or Canada or the UK) -- they wouldn't have been admitted as immigrants if they already had records. So while they may be West Indian citizens, they're American (or Canadian or British) criminals. Sending them back is expedient and popular with the voters, but it's manifestly unfair to the hapless recipient country.

This is not just an issue between the rich countries of the Anglosphere and the West Indies. Earlier this year, Australia "repatriated" to the UK a convicted criminal who had emigrated as a child. How do you rate his chances of becoming a functioning member of British society?

The couple who were attacked in St Lucia are urging people considering visits to the Caribbean to stay at home. That seems like an over-reaction -- but then again, you don't want to go for a restful break on the other side of the world, only to be confronted by the same guy that broke into your house in London five years ago.

KP?? Are they nuts???

I can't say I am too upset over Michael Vaughan's resignation as England cricket captain. His batting has clearly suffered since he took on the job. He may have the 2005 Ashes victory on his CV, but the only team England have taken a Test series from lately is New Zealand. (And can Vaughan really take much of the credit for the Ashes? The Aussies whitewashed England not long afterwards in Australia to regain the crumbling urn. History is likely to see England's win in 2005 as Freddie Flintoff's Ashes -- or, if you're an Australian historian, as a fluke result mainly caused by Glenn McGrath's untimely ankle injury).

So few tears here for Vaughan -- but quite a bit of trepidation about the selection of Kevin Pietersen to replace him. It's not like appointing Joey Barton as captain of England, but it's not so long ago that KP was a bit of a bad boy. The selectors must be hoping he'll grow into the job, and everyone says he's matured into a real team player. Has he? Graeme Smith played a true captain's innings to win the thrd test for South Africa, but Pietersen's innings the day before wasn't exactly that of a guy auditioning for the big job. Trying (and failing) to reach his hundred by lofting the ball over a fielder placed to tempt him to do exactly that may well have cost England the game -- and triggered Vaughan's demise.

The other concern about Pietersen is that he's clearly obsessed with money. He has been gagging for the opportunity to cash in on the riches available in the IPL and has made no secret of his ambition to play there next year. What assurances have the selectors received from him about this? The last thing England need with the Ashes looming again is a captain who keeps looking wistfully at the money on offer in Bangalore and Mumbai.

Giles Coren loses it big time

The Times weekend restaurant reviewer, Giles Coren, has written a blistering e-mail to the paper's sub-editors. He accuses them of messing up one of his masterpieces. The e-mail has leaked out; you can read it here.

My first reaction to the e-mail is that if this is typical of Coren's first drafts, it's no surprise that the Times insists on running his submissions past sub-editors. Leaving aside the multiple obscenities, it's verbose (as even Giles admits at the end) and full of mis-spellings and grammatical errors. It's usually a good idea to count to ten after you write something in anger, but evidently Giles was too self-righteously mad to think of that.

And what is the substance of his complaint? Well, the sub omitted one word from the final sentence of the review. One letter, actually: the indefinite article. This got Giles incandescent with rage for two reasons. First, he claims that it means the piece ends on an unstressed syllable, something he would never do. I've read the sentence several times, and he's wrong about that: the word "nosh" is still stressed. Second, he says that it destroys his meaning: he had structured the whole review so as to get in a final joke playing on a double meaning for the Yiddish word "nosh". Apparently this word refers to eating not only in the conventional sense, but also in the sexual sense: blowjobs, hummers, what you will.

I don't know about you, but I don't read restaurant reviews, by Giles Coren or anyone else, looking for things like that. If the sub had left the indefinite article in place, I daresay the number of people who got this great joke would have been limited to the number of people who Giles personally told to look out for it. This is the Times, after all, not Viz. (Without questioning Giles's knowledge of Yiddish -- he seems very touchy about that -- I might point out that the late Lenny Bruce used "fress" rather than "nosh" for the sexual act. Lenny was at least as Jewish as Giles, and a whole lot funnier).

So where does this leave Giles, assuming he doesn't carry out on his implicit threat to walk away from the job? Well, as a restaurant reviewer who uses the column to expound on any subject that comes to mind, he's not a patch on A A Gill; as an egomaniac, he's not in Michael Winner's league; and as a writer, he's a shadow of his late father.