Anyone remember Harry Nilsson's novelty hit "Coconut" from about 1973? Simple, calypso-y song with only one chord. The lyrics were a bit odd -- a man and his sister buy a lime and a coconut, the sister puts the lime in the coconut, "drink them both together", feels ill and calls the doctor in the middle of the night. His advice "put de lime in de coconut, drink them both together, put the lime in the coconut, then you feel better". So the cause of the belly-ache and the cure seem to be one and the same.
That's fine for a novelty song, but can it really be the case for the US economy? Nobody can seriously deny that the root of the severe malaise gripping the US economy is the excessively easy monetary policy -- low rates, rapid money supply and lending growth -- encouraged by the Greenspan Fed. Yet today, by cutting the funds target by 75 bp, Fed Chairman Bernanke seems to be signalling his belief that the economy can be cured by administering more of what made it sick in the first place.
Hey Ben, to quote Nilsson again, "if you call me in de morning I'll tell you what to do".
Tuesday, 22 January 2008
Brown (and Kaletsky) founder on Rock
Lent starts in a couple of weeks, and I'm thinking of giving up slagging off Anatole Kaletsky. In the meantime, however, his unique combination of pompousness, arrogance and shamelessness is just too ripe a target to resist.
In today's Times Kaletsky takes aim at the Government's rescue package for Northern Rock. Now, I don't disagree at all with his view (and just about everyone else's) that this is a lousy deal. The private sector buyer gets all the upside, and the best that the Government can hope for is that any downside for the taxpayer is put off far into the future.
Unfortunately (but typically), Kaletsky fails to offer any truly appealing alternative approach. I would favour bringing in someone like Branson to run NR on a franchise basis, giving him first option to buy it at a later stage, when the Government might have some hope of sharing in the upside. (Branson is quite happy to operate his train franchise on more or less this basis). Kaletsky's only suggestion is to put the company into administration and then gradually run down its asset portfolio. This is obviously unpalatable to the Government because of the inevitable job losses. The Rock employs 6000 in Newcastle alone, but Anatole airily dismisses the "opprobrium" that would follow any decision to fire them as "temporary".
Maybe he's right about that, but would the impact of removing NR from the new mortgage business be as short-lived? In the first half of 2007 the company accounted for something like one in five of all new mortgages in the UK. Given the extreme distress in the financial markets, who is going to replace NR as a mortgage lender as its portfolio runs down? How many home repossessions are going to result, through no fault of the borrowers, if alternative lenders can't be found? Does Anatole think this is a worthwhile price to pay for teaching the financial sector a lesson? How much will the UK's household wealth, heavily concentrated in property, decline, and what impact will that have on the overall economy?
Kaletsky says that all of this could have been avoided if the Government had offered a small amount of support last August to facilitate a bid by Lloyds TSB totake over the Rock. My very clear recollection is that Lloyds wanted rather more than a small amount of support: its advances were rejected in part because it appeared to want the kind of Government guarantees that have got Kaletsky all hot and bothered now. But in any case, if the Government was complacent about the problem back then, maybe the reason is that it was paying attention to pundits who thought the credit crisis was a storm in a teacup -- pundits like Gavyn Davies and, lest we forget, Anatole Kaletsky.
Kaletsky ends today's rant thusly: "The Northern Rock bailout will demolish or, at best, discredit the entire economic policy framework created in 1997. Since the creation of this framework was his one unquestionable achievement, it seems fair to say that Mr Brown's career as a serious politician ended yesterday." Given that Kaletsky failed to spot the approach of the biggest economic event of his career (the credit crunch, not Northern Rock), maybe we can say the same about his career as a serious commentator.
In today's Times Kaletsky takes aim at the Government's rescue package for Northern Rock. Now, I don't disagree at all with his view (and just about everyone else's) that this is a lousy deal. The private sector buyer gets all the upside, and the best that the Government can hope for is that any downside for the taxpayer is put off far into the future.
Unfortunately (but typically), Kaletsky fails to offer any truly appealing alternative approach. I would favour bringing in someone like Branson to run NR on a franchise basis, giving him first option to buy it at a later stage, when the Government might have some hope of sharing in the upside. (Branson is quite happy to operate his train franchise on more or less this basis). Kaletsky's only suggestion is to put the company into administration and then gradually run down its asset portfolio. This is obviously unpalatable to the Government because of the inevitable job losses. The Rock employs 6000 in Newcastle alone, but Anatole airily dismisses the "opprobrium" that would follow any decision to fire them as "temporary".
Maybe he's right about that, but would the impact of removing NR from the new mortgage business be as short-lived? In the first half of 2007 the company accounted for something like one in five of all new mortgages in the UK. Given the extreme distress in the financial markets, who is going to replace NR as a mortgage lender as its portfolio runs down? How many home repossessions are going to result, through no fault of the borrowers, if alternative lenders can't be found? Does Anatole think this is a worthwhile price to pay for teaching the financial sector a lesson? How much will the UK's household wealth, heavily concentrated in property, decline, and what impact will that have on the overall economy?
Kaletsky says that all of this could have been avoided if the Government had offered a small amount of support last August to facilitate a bid by Lloyds TSB totake over the Rock. My very clear recollection is that Lloyds wanted rather more than a small amount of support: its advances were rejected in part because it appeared to want the kind of Government guarantees that have got Kaletsky all hot and bothered now. But in any case, if the Government was complacent about the problem back then, maybe the reason is that it was paying attention to pundits who thought the credit crisis was a storm in a teacup -- pundits like Gavyn Davies and, lest we forget, Anatole Kaletsky.
Kaletsky ends today's rant thusly: "The Northern Rock bailout will demolish or, at best, discredit the entire economic policy framework created in 1997. Since the creation of this framework was his one unquestionable achievement, it seems fair to say that Mr Brown's career as a serious politician ended yesterday." Given that Kaletsky failed to spot the approach of the biggest economic event of his career (the credit crunch, not Northern Rock), maybe we can say the same about his career as a serious commentator.
Wednesday, 16 January 2008
Fear and loathing at CNBC
As equity prices fall, media pundits are lining up to offer irresponsible and dangerous advice to central bankers. I've written enough about Anatole Kaletsky in the UK (and he's not getting any better), but right now the focus of idiocy seems to have shifted to the US. I just watched a studio full of people on CNBC's pre-market show competing to see who could advocate the biggest and quickest Fed easing. The fact that December CPI data had just been released, showing prices up 4.1% year-on-year, didn't seem to deter anyone.
One gent talked about "losing the war for want of a horse", whatever that means; another said that the economy was being put at risk by Fed dithering; and a third, possibly the most dangerous of all, said that we could worry about inflation later, once the economy had been restored. There was only one voice of sanity: the loud guy who reports from the NYSE trading floor opined that the Fed could cut rates "by 425 basis points tomorrow" (i.e. to zero) without it making any difference: the correction in the economy, after years of excesses, is going to happen anyway.
These are all equity guys rather than economists, and it's clear that they identify a healthy economy with rising stock prices. It ain't necessarily so: stock prices touched record highs in 2007, after a decade in which the US economy has gone through what the Japanese refer to as "hollowing out", consuming far beyond its means and going wildly into debt to just about everyone in the world. Irresponsible monetary policy fostered these developments, with a surge in inflation only prevented by the fortuitous boom in industrial production in China and India, which provided a seemingly endless supply of cheap imports.
Now the party's over. As was always inevitable, the rise in living standards in China and India, coupled with overconsumption in the US and elsewhere, is putting pressure on the prices of key commodities, not least oil. The resultant rise in short-term inflation is curbing US consumer spending power. The (correct) cyclical response of the Fed in raising interest rates has exposed the irresponsible financial practices that began during the excessively lax Greenspan years, resulting in the so-called "credit crunch".
This is a classic business cycle adjustment: cutting rates can only delay it -- and may not even do that -- but will allow inflation to get further entrenched. Anyone who was involved in the financial world through the 1970s and 1980s will know how painful it is to tackle inflation once it has taken hold, which is why the advice to "save the economy now, fix inflation later" is so irresponsible. Even if the Fed and the BoE and others resist these siren calls, it's definitely time to inflation-proof the old portfolio.
One of the most amazing aspects of the current crisis is the fire-sale of major US financial firms to foreign interests. For years, the US Treasury market has relied on offshore buyers; now, it's desperate banks, looking to restore capital after massive write-offs, who are selling themselves to the highest bidders. Up until now, most of the buyers have been found among the "sovereign funds" of the Middle East and Asia, a trend that has already attracted disapproving glances from Congress (well, it is an election year). Now it appears that the large Japanese banks, which went through similar traumas of their own a decade and more ago, are looking to join the feeding frenzy. At some point, Uncle Sam won't have anything else left to sell. This is how empires end.
One gent talked about "losing the war for want of a horse", whatever that means; another said that the economy was being put at risk by Fed dithering; and a third, possibly the most dangerous of all, said that we could worry about inflation later, once the economy had been restored. There was only one voice of sanity: the loud guy who reports from the NYSE trading floor opined that the Fed could cut rates "by 425 basis points tomorrow" (i.e. to zero) without it making any difference: the correction in the economy, after years of excesses, is going to happen anyway.
These are all equity guys rather than economists, and it's clear that they identify a healthy economy with rising stock prices. It ain't necessarily so: stock prices touched record highs in 2007, after a decade in which the US economy has gone through what the Japanese refer to as "hollowing out", consuming far beyond its means and going wildly into debt to just about everyone in the world. Irresponsible monetary policy fostered these developments, with a surge in inflation only prevented by the fortuitous boom in industrial production in China and India, which provided a seemingly endless supply of cheap imports.
Now the party's over. As was always inevitable, the rise in living standards in China and India, coupled with overconsumption in the US and elsewhere, is putting pressure on the prices of key commodities, not least oil. The resultant rise in short-term inflation is curbing US consumer spending power. The (correct) cyclical response of the Fed in raising interest rates has exposed the irresponsible financial practices that began during the excessively lax Greenspan years, resulting in the so-called "credit crunch".
This is a classic business cycle adjustment: cutting rates can only delay it -- and may not even do that -- but will allow inflation to get further entrenched. Anyone who was involved in the financial world through the 1970s and 1980s will know how painful it is to tackle inflation once it has taken hold, which is why the advice to "save the economy now, fix inflation later" is so irresponsible. Even if the Fed and the BoE and others resist these siren calls, it's definitely time to inflation-proof the old portfolio.
One of the most amazing aspects of the current crisis is the fire-sale of major US financial firms to foreign interests. For years, the US Treasury market has relied on offshore buyers; now, it's desperate banks, looking to restore capital after massive write-offs, who are selling themselves to the highest bidders. Up until now, most of the buyers have been found among the "sovereign funds" of the Middle East and Asia, a trend that has already attracted disapproving glances from Congress (well, it is an election year). Now it appears that the large Japanese banks, which went through similar traumas of their own a decade and more ago, are looking to join the feeding frenzy. At some point, Uncle Sam won't have anything else left to sell. This is how empires end.
Tuesday, 15 January 2008
Way to go, Robbie!
Robbie Williams (remember him??) has announced that he may register his displeasure at what's going on at EMI by refusing to release his next album.
This seems like the kind of protest where everyone's a winner, especially the music-buying public. We can only urge other "artists" to follow Robbie's highly principled lead. James Blunt, for instance, or The Feeling.
This seems like the kind of protest where everyone's a winner, especially the music-buying public. We can only urge other "artists" to follow Robbie's highly principled lead. James Blunt, for instance, or The Feeling.
Friday, 11 January 2008
How very Blair you?
I, for one, am not surprised that Tony Blair has taken on a part-time role at JP Morgan. He's always been a complete, total and unmitigated investment banker, and now he can get (very well) paid for it.
That said, I'm not at all sure what JPM gets out of the deal. Having a high-profile ambassador is not a new idea, and it's not necessarily a bad one, but it usually helps if said ambassador has at least some understanding of the business he's trying to represent. Blair never showed the least interest in business and financial matters when he was PM, so he has an awful lot of homework to do.
Of course, JPM thinks it is buying access to Blair's contacts. No doubt these are extensive, but I am not sure how many people will feel obligated to return Tony's calls now that he is no longer in a position of power. Angela Merkel and Vladimir Putin may not be in a rush to renew acquaintances when they know that Blair is only calling to request some kind of favour. And it's not as if JPM really needs this kind of high powered smile-and-dial stuff to get business: any big deal that's going, they're pretty much guaranteed a chance to bid anyway.
It's JPM's money, of course, and they're entitled to do what they want with it. But I am more than a little nauseated by the idea of Blair making a seven-figure sum for swanning around the world, wheedling and schmoozing. And apparently he's looking for a few more, similar deals in other industries. It will be interesting to see if anyone in the UK is prepared to hire him --I'd be very surprised.
That said, I'm not at all sure what JPM gets out of the deal. Having a high-profile ambassador is not a new idea, and it's not necessarily a bad one, but it usually helps if said ambassador has at least some understanding of the business he's trying to represent. Blair never showed the least interest in business and financial matters when he was PM, so he has an awful lot of homework to do.
Of course, JPM thinks it is buying access to Blair's contacts. No doubt these are extensive, but I am not sure how many people will feel obligated to return Tony's calls now that he is no longer in a position of power. Angela Merkel and Vladimir Putin may not be in a rush to renew acquaintances when they know that Blair is only calling to request some kind of favour. And it's not as if JPM really needs this kind of high powered smile-and-dial stuff to get business: any big deal that's going, they're pretty much guaranteed a chance to bid anyway.
It's JPM's money, of course, and they're entitled to do what they want with it. But I am more than a little nauseated by the idea of Blair making a seven-figure sum for swanning around the world, wheedling and schmoozing. And apparently he's looking for a few more, similar deals in other industries. It will be interesting to see if anyone in the UK is prepared to hire him --I'd be very surprised.
Wednesday, 9 January 2008
Confused? You soon will be
I have to pay my income tax in the next few days so I dug out the form that the taxman sent me. It was mailed from an office in Cumbernauld, even though my tax office is in Bedford. If I choose to mail in my payment, the return envelope is addressed to Bradford, but the payment will actually be credited via a branch of Alliance and Leicester in Bootle, for the account of the Bank of England.... in London!
The Government has always tried to ensure that areas away from London get a fair share of public sector jobs, which is fair enough, but you have to wonder if things may have got a bit out of hand. And it's not just the public sector: I regularly get stuff from the banks that I deal with where the point of mailing is completely dfferent from the office I am supposed to contact if I have any questions, and neither of them is anywhere near my own branch. This is all done in the name of efficiency, but can anyone really prove that they are saving money this way?
The Government has always tried to ensure that areas away from London get a fair share of public sector jobs, which is fair enough, but you have to wonder if things may have got a bit out of hand. And it's not just the public sector: I regularly get stuff from the banks that I deal with where the point of mailing is completely dfferent from the office I am supposed to contact if I have any questions, and neither of them is anywhere near my own branch. This is all done in the name of efficiency, but can anyone really prove that they are saving money this way?
Give over, Darling
Alastair Darling, rumoured to be the Chancellor of the Exchequer, has responded to the latest electricity and gas price hikes by urging the utility companies to keep prices down. This is the same man who boosted the excise tax on motor fuel in October, despite the fact that world oil prices were close to record levels. And he has another increase scheduled for April. Maybe it's time to lead by example.
Friday, 4 January 2008
Getting back on track
The fiasco on the UK's railways over the past two weeks -- the shutdown of the entire system for Christmas Day and Boxing Day, the much longer closure of key parts of the system as a result of emgineering overruns -- has cast a spotlight on the flawed structure of the industry. Will lessons be learned for the future? It's hard to be optimistic. After a barrage of criticism of the Christmas closure at the end of 2006, an industry spokesman said "we'll have to re-examine this for next year"; there's no evidence that this happened. More crucially, as long as everyone in sight can blame Network Rail for the problems, and as long as Network Rail by virtue of its very nature has limited incentives to put things right, it's hard to see where the momentum for change will come from.
The biggest problem over the past two weeks was a major overrun in works at Rugby Station, which were aimed at realigning the tracks so that certain express trains can bypass the station itself. Network Rail has taken a lot of routine maintenance back "in house" after repeated problems with outside contractors in the past, but still uses contractors for big tasks like this. And boy, does it use contractors: no fewer than nine of them had their snouts in the trough at Rugby, with the ubiquitous Bechtel acting as lead. It appears that Bechtel et al promised more than they could deliver, hiring far too few engineers to get the job done on time.
Things went so badly that by New Year's Eve, when the project was due to be completed and the tracks returned to the train operators, Network Rail relieved Bechtel of its lead role and managed the rest of the project itself. Think about this: the argument that the private sector can do these things better than the public sector been disproved yet again, but more than that, it has emerged that in fact Network Rail still has enough engineering expertise in house to manage these things itself anyway. It makes you wonder why it was necessary to hire Bechtel in the first place, and newspaper reports suggest that Network Rail is sufficiently angry about the whole experience that it may take these large projects back in house along with the regular maintenance programme.
We have also learnt this week that the contractors have formed their own trade association. Its spokesman has been quick to argue that the farce at Rugby does not suggest there is anything wrong with the system. Well, that's what they pay him to say, I suppose. It's hard to see how anyone could agree with him, but no doubt he will be actively lobbying at Westminster against any change in the way things are done. Anyway, what with duplicate sets of engineers and a completely unnecessary trade association, it's not hard to see why the cost of running the railways has gone through the roof since privatisation.
There has been a lot of excited talk in the media about Network Rail facing "massive fines" as a result of the events at Rugby and another major overrun at London Liverpool Street. It would be interesting to know whether the contracts with Bechtel and the rest of the Gang of Nine include any financial penalties for them in the event of an egregious cockup such as this. But in any case, there's no point in fining Network Rail: it's a non-profit corporation, a nationalised entity in all but name. Any fine levied on it will simply reduce the profits that the company can pay over to the Government. It's a corporate structure of almost Machiavellian brilliance: the Government can treat Network Rail's debt as off-balance-sheet, but it can tell the company what to do and it can point the finger at it when things go wrong. Maybe the events of the last two weeks will allow a lot more people to see through these fictions.
The biggest problem over the past two weeks was a major overrun in works at Rugby Station, which were aimed at realigning the tracks so that certain express trains can bypass the station itself. Network Rail has taken a lot of routine maintenance back "in house" after repeated problems with outside contractors in the past, but still uses contractors for big tasks like this. And boy, does it use contractors: no fewer than nine of them had their snouts in the trough at Rugby, with the ubiquitous Bechtel acting as lead. It appears that Bechtel et al promised more than they could deliver, hiring far too few engineers to get the job done on time.
Things went so badly that by New Year's Eve, when the project was due to be completed and the tracks returned to the train operators, Network Rail relieved Bechtel of its lead role and managed the rest of the project itself. Think about this: the argument that the private sector can do these things better than the public sector been disproved yet again, but more than that, it has emerged that in fact Network Rail still has enough engineering expertise in house to manage these things itself anyway. It makes you wonder why it was necessary to hire Bechtel in the first place, and newspaper reports suggest that Network Rail is sufficiently angry about the whole experience that it may take these large projects back in house along with the regular maintenance programme.
We have also learnt this week that the contractors have formed their own trade association. Its spokesman has been quick to argue that the farce at Rugby does not suggest there is anything wrong with the system. Well, that's what they pay him to say, I suppose. It's hard to see how anyone could agree with him, but no doubt he will be actively lobbying at Westminster against any change in the way things are done. Anyway, what with duplicate sets of engineers and a completely unnecessary trade association, it's not hard to see why the cost of running the railways has gone through the roof since privatisation.
There has been a lot of excited talk in the media about Network Rail facing "massive fines" as a result of the events at Rugby and another major overrun at London Liverpool Street. It would be interesting to know whether the contracts with Bechtel and the rest of the Gang of Nine include any financial penalties for them in the event of an egregious cockup such as this. But in any case, there's no point in fining Network Rail: it's a non-profit corporation, a nationalised entity in all but name. Any fine levied on it will simply reduce the profits that the company can pay over to the Government. It's a corporate structure of almost Machiavellian brilliance: the Government can treat Network Rail's debt as off-balance-sheet, but it can tell the company what to do and it can point the finger at it when things go wrong. Maybe the events of the last two weeks will allow a lot more people to see through these fictions.
Wednesday, 2 January 2008
All in the family
Now that the initial feelings of shock and revulsion over the death of Benazir Bhutto are fading, commentators are lining up in entirely predictable ways to assess her legacy and figure out what may happen next. On the right (typified by Janet Daley in the Times), Bhutto's assassination is seen as a crime against democracy, and used as a rallying cry for the "West" to take urgent steps to defend its freedoms. Over on the left, in the Independent, Slate and elsewhere, there is more focus on Bhutto's flaws and her less-than-universal popularity among her fellow countrymen.
It's pretty clear that if you wanted a poster-girl for third world democracy, Benazir Bhutto wouldn't have been your first choice. She was the scion of an old-established political dynasty in Pakistan, one with a decidedly mixed history as far as integrity goes. Using your last will and testament to pass on control of your political party to your husband, currently facing corruption and fraud charges, and to your 19-year old son, doesn't fall within any reasonable definition of democracy.
Mind you, it's a bit rich for the "West" to lecture Pakistan about this. After all, we still tolerate a hereditary monarchy in the UK, and the US seems to be trying to create one. If Hillary wins the Democratic Party nomination, there's every prospect that the US Presidency will be held by members of just two families from the late 1980's to the middle of the next decade. The Bhuttos should be so lucky.
The really interesting aspect of this story is the suggestion that Bhutto was about to reveal evidence that the US government was covertly attempting to rig the elections in Pakistan in favour of President Musharraf. Think about it: the US might have been planning to present the presence of Bhutto in the country as evidence that the elections were democratic, while still engineering the result that it wanted. Then Bhutto ruined the plan by finding out it. It's an intriguing theory, but surely it doesn't hold water: it's much too subtle a plan for the US intelligence community.
It's pretty clear that if you wanted a poster-girl for third world democracy, Benazir Bhutto wouldn't have been your first choice. She was the scion of an old-established political dynasty in Pakistan, one with a decidedly mixed history as far as integrity goes. Using your last will and testament to pass on control of your political party to your husband, currently facing corruption and fraud charges, and to your 19-year old son, doesn't fall within any reasonable definition of democracy.
Mind you, it's a bit rich for the "West" to lecture Pakistan about this. After all, we still tolerate a hereditary monarchy in the UK, and the US seems to be trying to create one. If Hillary wins the Democratic Party nomination, there's every prospect that the US Presidency will be held by members of just two families from the late 1980's to the middle of the next decade. The Bhuttos should be so lucky.
The really interesting aspect of this story is the suggestion that Bhutto was about to reveal evidence that the US government was covertly attempting to rig the elections in Pakistan in favour of President Musharraf. Think about it: the US might have been planning to present the presence of Bhutto in the country as evidence that the elections were democratic, while still engineering the result that it wanted. Then Bhutto ruined the plan by finding out it. It's an intriguing theory, but surely it doesn't hold water: it's much too subtle a plan for the US intelligence community.
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