He's never going to get it

I'd describe Tony Blair's testimony to the Chilcot Inquiry on Friday as disgraceful but predictable. Lord Goldsmith admits that he agonised over the legal case for war, Jack Straw says supporting the decision to go to war was the hardest thing he's ever done....and Blair? He'd do it again, and what's more (a new twist, this) he thinks that the current situation regarding terrorism in general and Iran in particular shows how right he was.

The amazing thing is that there is now much more than circumstantial evidence that he is lying about all this now, just as he was in the run-up to war. Yesterday he tried to suggest that the 9/11 attacks changed his whole approach to Iraq, by bringing the risks posed by "terrorists with WMDs" into clearer focus. Yet a newly-released memo shows that he signed the UK up to join the US in pushing for regime change in Iraq in March 2001, a full six months before the atrocities in New York and DC. Even at that stage the UK and US had cooked up a strategy to force the issue by making a series of demands of the Saddam Hussein regime in the near certain knowledge that he would be unwilling to accede to them, thus providing a casus belli.

In his Times column today, Matthew Parris says that he finally realises that Blair sees the world in Manichaean terms: a stark division between good and evil. This would certainly explain why Blair was so willing to go along with US attempts to conflate Saddam's regime with al-Qaeda, and why he feels comfortable lumping them together in his testimony as "these people". (How long, I wonder, before that dismissive phrase is translated on Islamist websites as "Moslems"?)

Perhaps most disgracefully of all, Blair took it upon himself to call for a similar course of action to be taken against Iran. That country, he suggested, poses a bigger threat to the UK now than Iraq did in 2003. As we've all -- all except for Tony Blair that is -- long ago realised that Iraq posed effectively no threat to the UK back in 2003, it's to be hoped that Gordon Brown or whoever is in charge in a few months time sets a rather higher hurdle if and when decision time on Iran rolls around.

Flawed Diamond

This from today's Guardian:

Barclays' president, Bob Diamond, warned today that Barack Obama's plans to limit the size of banks would hit jobs, growth and global trade.

Whereas, of course, as we've all learned over the past three years or so, letting them grow like kudzu is always and everywhere beneficial.

Does not compute!

Today's news that the UK emerged from recession in Q4/2009 is welcome, but the feeble 0.1% growth rate is a surprise. Consensus expectations were for growth around 0.4%, so predictably the "analysis" in the media has been focused more on the failings of forecasters than on the growth number itself. For example, the Guardian ran a particularly witless piece of gloating called "How economists got it wrong". There was a picture of the one economist who got it right (though she changed her forecast just before the number came out, half-breaking one of the main rules of forecasting: forecast early and forecast often); and there was a roll call of shame for those who got it wrong. Nothing at all, of course, about HOW they got it wrong, even though that was the title of the piece.

If I'd been forecasting, I'd have been wrong too, and I'm almost convinced that when the revisions to this early estimate appear in a few weeks time, the growth rate will be revised higher. There are not many cast-iron rules for forceasting, but one that comes close is that employment is a lagging indicator of economic activity. Employment numbers have been looking stronger for a few months now, and the most recent data showed the first fall in joblessness since the recession began. It's almost impossible that this could have happened with the economy barely expanding, so I think the Q4 GDP estimate is too low -- and wouldn't be at all surprised if revisions eventually show that the recession ended in Q3.

But of course, I could be wrong.

For "Glass-Steagall" read "Obama-Volcker"

See the cheery chappy standing just behind President Obama as he announced his plans for banking reform? That's Paul Volcker, Alan Greenspan's predecessor as Fed chairman. Greenspan was always regarded as too close to Wall Street -- relaxed about dubious lending practices, always in favour of more deregulation and so on. Volcker, less publicity-hungry and arguably (no, actually unarguably) due most of the credit for breaking the inflationary psychology in the US, was never on such good terms with the Street, and it's a pretty good guess that he's off quite a few Christmas card lists as a result of this week's announcements.

A few weeks ago, Volcker bluntly told a business audience that he'd never seen so much as a wisp of proof that financial "innovation" on Wall Street had ever created any real wealth. Obama's proposed reforms are basically intended to ensure that anyone wishing to continue profiting from such innovation (or "self-deluded risk taking" as it might otherwise be called) does so without the safety net of implicit or explicit taxpayer support. Institutions taking deposits from the public, backed by deposit insurance, will in the future have to be kept separate from higher-risk activities such as hedge fund management or proprietary trading. As Mohamed El-Erian of Pimco explained it on CNBC today, banking in the traditional sense of taking deposits and making loans is going to be regulated much more like a utility if Obama and his new pal Paul Volcker get their way.

Bank shares around the world have fallen in response, reflecting fears that other governments may be emboldened to follow suit. In the UK, both the Tories and LibDems are enthusiastic about doing just that, while Gordon Brown is said to be "relaxed" about it all. (Gordon Brown? Relaxed??). The stock markets' reaction is well analysed by Chris Dillow here. In essence (and in case the link doesn't work), Dillow argues that the fall in bank shares proves that traders are nothing without the capital of a large institution to back them up -- which is in itself a sound reason why banks' trading activities should not have even a whiff of government support.

It's arguable (and it's already being argued) that had the Obama-Volcker plan been in place at the time of the recent credit crunch, it wouldn't have made any difference. After all, the proximate cause of the problem was banks like Freddie Mac and Fannie Mae, or Northern Rock in the UK, going overboard with traditional lending activities. But this misses the point. Freddie and Fannie and the Rock were only able to do what they did because of "innovative" transactions put together by the investment banks, led by the now defunct Lehman and Bear. By the time the crisis peaked, mortgages were being thrown around like confetti solely to allow the investment banks to keep generating their massive structuring fees. It wasn't by any means all Lehman's or Goldman's fault, but if the cycle has to be broken somewhere, it certainly makes more sense to curb the investment banks, or at least make them take risks with their own money, than to overregulate the commercial banking sector.

The best piece I've seen on the Obama-Volcker plan so far is this one by Daniel Gross -- worth checking out if only because it must be the first time in human history that Lloyd Blankfein and Malcolm X have been name-checked in the same article. And I'm guessing that there won't be too much sympathy for the banks, judging by this comment shamelessly lifted from The Guardian's website: I've sold my banking stock and moved into tobacco, landmines and animal testing. I see it as an ethical move.

Bow luxe

There seems to be no limit to the commitment of the London business elite to the irremediable rat's nest that is Heathrow Airport. Today, the Tory-connected Bow Group, fronted by Lord "Tarzan" Heseltine himself, has issued a report rejecting plans for a high-speed rail network connecting the Midlands, North and Scotland to central London. Instead, it wants the hub of the network to be....Heathrow Airport!

Why is it that, after at least 50 years of falling behind in developing a modern railway network, some people in the UK still think we can show the others how it should have been done? A couple of years ago there were objections to a previous high-speed rail plan from a group that wanted instead to build a maglev system. This is currently in use for a relatively short stretch of track between Shanghai and its airport, but China is using conventional rail as the basis for its planned high speed network. Maglev was rejected by Germany for a new Hamburg-Berlin link a few years ago on the basis of excessive cost. Yet Britain should commit to it as the basis for a massive expansion of the railway network??

Returning to the current proposal, I've spent the better part of 30 seconds trying to think of any country that has already developed a high-speed network and chosen to centre it on a decrepit airport rather than its capital city. France? No. Spain? No. Germany? No. This in itself should give Tarzan and friends reason to think that they may be on the wrong track, if you'll pardon the pun.

But it gets worse. The Government (and the Tory leadership) believe that linking Heathrow to the high-speed network would reduce the need for a third runway at the airport. However, the Bow Group says putting Heathrow at the hub of the network would result in a need for greater runway capacity there. This could only happen if people started coming by train to Heathrow to catch flights, instead of flying from local airports. In other words, the Bow Group plan would not only place the London terminus of the high speed lines in a place where few Londoners could use it; it would also adversely affect the viability of existing airports around the country, most of which have plenty of spare capacity already.

This is absolute madness. Then again, how often do you suppose that the Tory grandees on the Bow Group ever demean themselves by taking the train?

Field of nightmares

The English football season has been produced plenty of entertainment on the field this season. Fans with an interest in business have been twice blessed, because the excesses of the past couple of decades suddenly seem set to produce a big implosion. Yes, I know that's been said every year since the turn of the century, but consider the evidence:

* Portsmouth FC are poised to become the first top-flight club to go into administration. A rapid succession of owners of uncertain means (and even identity) has left the club unable to pay its players on time three times so far this season, in debt to half a dozen other clubs and with huge unpaid liabilities to the taxman.

* At the same end of the league, West Ham have just been taken over by new owners who have immediately revealed the shocking state of the club's finances. Apparently debts total £100 million, which makes you wonder what the former owner, the now-bankrupt Icelandic biscuit king Diggestyfe Hobnobbesson, can possibly have done with the money. An early priority for the new owners, who were both keen to stress their barrow boy credentials, is to secure a deal to move the club into the Olympic Stadium once the 2012 games are over. This rather suggests they have their eye on real estate profits from selling the Boleyn ground. How long will they keep putting money into West Ham if those plans are thwarted?

* Switching to the "big four", Manchester United are about to get loaded up with even more debt as the US owners, the Glazers, try to pay down some of the expensive PIK (payment in kind) debt they took on to buy the club. The prospectus for the new bond deal produced a shock horror reaction from the sporting press as it revealed how much the club depends on continuous on-field success to service its debt burden.

* Just down the East Lancs Road, dysfunctional ownership (again from the US) has driven Liverpool FC to the brink of mediocrity, with no money to spend on reinforcements and plans for a new stadium going nowhere.

As I noted at the outset, there have been similar stories just about every year since the Premier League began, and so far disaster has been avoided. This time, though, it really may be different. Sky News is being told by the regulator Ofcom that it must stop overcharging other distributors for carrying the games it broadcasts. It's a measure of how much Sky is raking in that BT has said it will cut its price for Sky Sports channels to £15 from the current £25 per month if Ofcom wins the case. Revenues from Sky, rather than money taken at the turnstiles or through the sales of garish polyester replica kits, have been the key to the Premier League money machine. If Sky pays less for football broadcast rights in future, it won't just be Portsmouth that has trouble paying the on-field "talent".

Scham'Obama ding-dong

Simon Schama has presented a pair of hour-long documentaries to mark the first birthday of "Obama's America" on the BBC this week. The first show focused on the conflict in Afghanistan, and was mainly notable for a surprising lack of references to the supposed subject (Obama) during the course of the programme, as Schama focused on the root causes of the crisis there.

The second show, on the financial crisis, was of more interest to me, not least because many moons ago, Schama was one of the people who interviewed me when I applied for university. As with the show on Afghanistan, the fact that most of the important events occurred before Obama took office posed a serious problem for Schama. In effect, he spent most of his allotted hour describing the events that created the mess that Obama inherited, and rather less time talking about what Obama has done about it.

There were, however, some interesting insights into the behaviour of Wall Street during the current crisis and in crises past. Schama talked at some length about the copper-related financial panic of 1907. The collapse of a major New York bank was averted when J. Pierpoint Morgan called his competitors to his home, locked them in the library and refused to let them leave until they came up with the wherewithal to stave off the crisis. It worked.

The documentary then shifted back to the current crisis, with footage of Lehman Brothers' New York head office. But Schama, to my great surprise, failed to spell out the key difference from events at that time and what JP achieved 100 years earlier. This time around, Treasury Secretary Hank Paulson got all the bankers together at the New York Fed, and there was the clear outline of a rescue plan that would have seen Bank of America buy Lehman. However, one of the bankers in attendance, the CEO of Merrill Lynch, in effect gazumped the deal, selling his own firm to BoA, leaving Lehman to its grisly fate, bringing the global financial system to the edge of the precipice, and sticking the taxpayer with the bill.

It's Schama's bad luck that this programme aired on the very day that President Obama announced his ten-year levy on the banks to recoup the money the taxpayer spent on the bailout. The UK opted for its one-off bonus tax at least in part because of fears of driving the financial sector out of London, on the assumption that no other jurisdiction, least of all the US, would take a similar stand. So much for that. Obama robustly asserted that "we want our money back, and we're going to get it back". Early estimates suggest that three UK banks (Barclays, HSBC and RBS) will between them have to pay over $1 billion to Uncle Sam each year. How likely is it that the UK and other countries will refrain from grabbing a piece of the action, now that Obama has led the way? There'll probably be a stampede.

Schama's documentary recounted how past financial crises had led to major financial reform in the US -- the establishment of the Federal Reserve System after the 1907 crisis, the Glass-Steagall separation of investment banking from commercial banking after the great crash. Obama's levy may not yet match those measures in terms of its impact. It's interesting, however, that the levy has been designed to fall on investment banking activities, rather than Main Street banking. Bill Clinton signed away the last of Glass-Steagall not much more than a decade ago. The shape of the new levy suggests that Obama may be hankering after bringing it back.

'snow fun

The freezing weather is obviously starting to affect people's thought processes. I just heard an AA spokeslady on Sky joking about how long its members were having to wait for help from the AA, because of the large number of callouts triggered by the exceptional weather. Just a couple of days ago the head of the AA, Edmund King, was castigating local authorities for not having enough grit or road salt on hand when the crisis began. Well, Edmund, you petrolheaded dolt, it's for the same reason that your illustrious organisation doesn't have enough vehicles to save your members from freezing by the roadsides when they break down. It simply doesn't make sense to prepare for once-in-a-generation events, especially when they're not really life-threatening. (Most media reports are suggesting this is the worst winter in the UK since 1962-63. My 90-year-old neighbour says he remembers nothing like it since 1947).

The whole gritting debate is nonsense anyway. In the first place, road salt is only effective down to temperatures of about -10C, so most of what's been scattered on the roads in Scotland and the north of England was never going to work. Second, countries that have serious amounts of snow only use grit at the start of a storm, to slow the rate at which the snow accumulates on the roads. Once the snow is down, they use ploughs to clear it. You only have to plough a road once after a snowfall, whereas if you persist in chucking grit about, you have to do it every day, because the road never really gets clear.

Although there are only 460 snowploughs in the UK, many gritter trucks can be equipped with blades, but I haven't seen much sign of that happening. And as for the US approach of fitting other public service vehicles, such as garbage trucks, with blades so that they can be used as snowploughs, forget it -- not least because in most parts of the UK, refuse and recycling collection has been privatised, so there's no way the local authorities can use the vehicles.

Lastly, a personal anecdote. This morning I took a short walk out to the postbox, along entirely ice-covered pavements. On the way I passed a house where the householder was chipping the ice off his driveway, putting it into his recycling box, shoving the box out onto the pavement and dumping the ice next to the footpath! In Canada and the US you can be prosecuted for failing to keep the public walkway outside your home or business clear of ice, so goodness knows what they'd make of this gent.

Ice, ice baby

Sure, the president of Iceland's decision to override parliament and not repay the country's debts to the UK and the Netherlands is an outrage, and no doubt one for which the country's citizens -- who are clamouring for the debt to be repudiated -- will pay heavily. Truth to tell, though, there's more than enough blame to go around in the whole sorry saga, enough for...

....the cowboy "bankers" who used Reykjavik as a base for marauding around Europe, using deposits gathered under dubious circumstances to purchase a stunning array of ropey assets;

....the Icelandic government and regulators, led by the now-discredited David Oddson (-ofabitch), who failed to realise what was going on;

....the money "experts" in the media who urged depositors to pile their money into these bogus banks, highlighting the availability of deposit insurance while ignoring concerns about the safety of the banks themselves;

....the greedy depositors who took the juicy bait, but then had no qualms going to the authorities in both the UK and Netherlands demanding repayment of monies beyond the deposit insurance limits;

....the UK and Netherlands governments for agreeing to make these depositors whole, though in the fraught circumstances of the time this is perhaps understandable.

In retrospect the Icelandic bank story never made sense, a fact that was brought home to me when it emerged that the "multi-millionaire" owner of West Ham FC was....an Icelandic biscuit "tycoon". With a population of 300,000, how many packages of biscuits per head do you have to sell to have enough spare dough around to buy a Premiership foootball team, even West Ham? I pointed this out to a former colleague and he said "they're partial to a nice digestive up in Reyjavik" -- which is fortunate, as they may have very little else on the menu if they actually default on the debt.

There's a bigger point to be made here, though. For a number of years, the banking sector was Iceland's key source of growth and prosperity. Almost none of its activities took place in Iceland; Reykjavik was just a convenient place to operate from, rather like registering your oil tanker in Monrovia. The sector became way too large in relation to the rest of the economy, yet when it all went bad, it was the locals who took the brunt of the pain, and who the UK and the Netherlands are counting on to pay back their depositors. The parallels with the City of London are too numerous to count, even if the scale is wildly different. It's to be hoped that UK regulators and politicians have taken due notice, because this is why separating "utility banking" from riskier activities is a good idea.

Locking the stable door (2)

So, the world-class travel experience at Heathrow is soon to be further enhanced by the addition of "full body scanners" as part of the security screening process. Gordon Brown has announced this, and BAA is rushing to comply, despite the rather inconvenient fact that this technology would not have detected the explosive Y-fronts of the would-be Christmas Day bomber. Then again, nor would it have detected the explosive Nikes of the cretinous shoe bomber, Richard Reid. Nor would it have had any impact on the 9/11 mob, who carried their fearsome box cutters aboard in their carry-on luggage, if memory serves. Nor will it detect explosives carried in body cavities, which Al-Qaeda has already used in a couple of assassination attempts, though not yet on an aircraft. Nor, of course, will it do anything for travellers on other forms of transport that Al-Qaeda has targeted, like commuter trains. It is, in short, no more than an expensive and annoying pre-election gesture on Brown's part.

The US seems to be starting down a different route, announcing that travellers from 14 countries will be subject to additional security checks. I expect we shall see a lot more of this kind of racial profiling in the months ahead, which will cause cries of pain at The Guardian but will no doubt be warmly welcomed by the legal community. Security specialists seem to think that such profiling is the way to go, but I have my doubts. There are something like two hundred countries in the world, all of them issuing passports. It is unlikely to be beyond the wit of Al-Qaeda to secure non-incriminating travel documents ahead of its next attempted atrocity.

Locking the stable door (1)

Word is that Labour Party grandees are worried that Tony Blair may prove to be a liability for the party when the election campaign finally gets under way. They are concerned that his public testimony to the Chilcot Inquiry on the Iraq war will only serve to stir up "those who will always see Tony as a war criminal". They are, naturally, blaming Gordon Brown for being so crass as to call the inquiry in the first place, even though he did his best to limit its impact by ensuring that it would not report until well after the election.

According to The Times, Blair's advisors are urging him to take "a more nuanced approach" in his testimony. Well, if that means what I assume it means, Blair of all people should have no trouble complying.

Forecasting is difficult....

....especially when it's about the future.

The late John Kenneth Galbraith (who used to describe himself as "the world's tallest free-standing economist", though Dubai has probably bred a taller one by now) said that economists do not make forecasts because they think they know the future. They do it because people ask them to. Keep that in mind as you peruse all the prognostications for the new year and new decade.

It obviously makes sense to pay no attention to serially incorrect forecasters (happy new year, Anatole!). But what about those who have been right about things in the past -- say, those who predicted the credit crunch, or those who foresaw oil hitting $150 a barrel? On the one hand, this sort of track record should command respect. On the other, keeping in mind Galbraith's words of wisdom, you might put past successes down to luck, and work on the assumption that lightning is unlikely to strike twice in the same place.

In 1900 the great US financier J. Pierpoint Morgan was asked by a reporter what the stock market would do in the new century. He replied: "it will fluctuate". Morgan made a lot more money than I (or Kaletsky or Galbraith) could ever dream of, without ever contemplating a quarterly GDP forecast or scrutinising a CAPM analysis. Markets will fluctuate in the coming decade, politicians will make mistakes, one of the favourites will win the World Cup in July, someone as yet unknown will win the X-Factor. Sit back, enjoy the show -- well, apart from the X Factor, obviously.