Saturday, 19 June 2010
Memo to Roy Hodgson
If I were you, Roy, I'd stall a bit on returning those phonecalls from Anfield. There could be a bigger job available in a few days time.
Friday, 18 June 2010
Broken Pipe, Barack's Petulance, Braying Politicians...
It's almost impossible to feel sorry for BP as it wrestles with the Gulf of Mexico oil spill and tries to defend itself from the bloodlust of US politicians and media. Even before the current catastrophe, the company had an appalling track record in the US, what with the Texas City oil refinery explosion a few years back and the shambolic deployment in the Gulf of the $1 billion "Thunder Horse" rig , which promptly capsized like some modern day Vasa.
Still, the persecution of the company, led by a plainly panicking Barack Obama, is reaching absurd levels. By any reasonable measure, BP is far from the only party responsible for the disaster. Ever hear of TransOcean? It's a US owned company (although Swiss resident for tax purposes) that both owns and operates the rig where the explosion took place. You'd think it might bear some responsibility, but it's getting a free ride in Congress. Or what about Anadarko Petroleum, an American company which owns 25% of the venture (BP has 65%)? It's just announced a dividend payment, unlike BP, which has suspended its own payouts until at least the end of the year. It's even seen fit to start slagging off BP for its management of the project. Or there's good old Halliburton, which installed the failed safety equipment on the wellhead (though, to be fair to them -- as much as that pains me -- they do appear to have tried to warn BP that the safety measures the latter was prepared to pay for were inadequate).
It's not altogether surprising that British politicians and media are starting to kick back against US attempts to portray BP (or British Petroleum, as nobody had called it for twelve years until the well blew up) as the only villain. The foreign press is starting to notice, too -- see this piece from the Toronto Globe and Mail. The Tories are taking the lead here, typified by this quote from Lord Tebbit, in full Chingford skinhead mode:
“The whole might of American wealth and technology is displayed as utterly unable to deal with the disastrous spill,” he said, “so what more natural than a crude, bigoted, xenophobic display of partisan, political, presidential petulance against a multinational company?”
You go, girl. (Makes you wonder, though, who the old-line Tories like Tebbit actually like at the moment. Europe? Never. America? Nope. Persons of darker complexion from the former Empire? Probably not.)
It's surprising that nobody has thought of reminding the Americans ever so gently of the rather different approach they took when one of their own multinationals, Union Carbide, unleashed all kinds of hell at Bhopal three decades ago. People died there, not just gulls. Probably wouldn't do any good though. BP is going to have to take its lumps, and we're just going to have to watch. And while watching the Congressional hearings yesterday, I couldn't help thinking that the company is not being well served by the appearance of its CEO, Tony Hayward. His default expression -- in fact, almost his only expression -- is a supercilious smirk, which must be irking the Congresspersons no end. Still, in the unlikely event that someone decides to make a blockbuster movie about all this, Michael Sheen basically casts himself in the lead role.
Still, the persecution of the company, led by a plainly panicking Barack Obama, is reaching absurd levels. By any reasonable measure, BP is far from the only party responsible for the disaster. Ever hear of TransOcean? It's a US owned company (although Swiss resident for tax purposes) that both owns and operates the rig where the explosion took place. You'd think it might bear some responsibility, but it's getting a free ride in Congress. Or what about Anadarko Petroleum, an American company which owns 25% of the venture (BP has 65%)? It's just announced a dividend payment, unlike BP, which has suspended its own payouts until at least the end of the year. It's even seen fit to start slagging off BP for its management of the project. Or there's good old Halliburton, which installed the failed safety equipment on the wellhead (though, to be fair to them -- as much as that pains me -- they do appear to have tried to warn BP that the safety measures the latter was prepared to pay for were inadequate).
It's not altogether surprising that British politicians and media are starting to kick back against US attempts to portray BP (or British Petroleum, as nobody had called it for twelve years until the well blew up) as the only villain. The foreign press is starting to notice, too -- see this piece from the Toronto Globe and Mail. The Tories are taking the lead here, typified by this quote from Lord Tebbit, in full Chingford skinhead mode:
“The whole might of American wealth and technology is displayed as utterly unable to deal with the disastrous spill,” he said, “so what more natural than a crude, bigoted, xenophobic display of partisan, political, presidential petulance against a multinational company?”
You go, girl. (Makes you wonder, though, who the old-line Tories like Tebbit actually like at the moment. Europe? Never. America? Nope. Persons of darker complexion from the former Empire? Probably not.)
It's surprising that nobody has thought of reminding the Americans ever so gently of the rather different approach they took when one of their own multinationals, Union Carbide, unleashed all kinds of hell at Bhopal three decades ago. People died there, not just gulls. Probably wouldn't do any good though. BP is going to have to take its lumps, and we're just going to have to watch. And while watching the Congressional hearings yesterday, I couldn't help thinking that the company is not being well served by the appearance of its CEO, Tony Hayward. His default expression -- in fact, almost his only expression -- is a supercilious smirk, which must be irking the Congresspersons no end. Still, in the unlikely event that someone decides to make a blockbuster movie about all this, Michael Sheen basically casts himself in the lead role.
Tuesday, 15 June 2010
Make of it what you will
I was underwhelmed when George Osborne announced he was hiving off the task of fiscal forecasting to a new Office of Budget Responsibility (OBR). There's nothing in the OBR's first report, or in the initial reaction to it, to convince me that I was wrong. Many private sector forecasters seem convinced that the OBR, just like the Treasury before it, is too optimistic about the future, while the media and the politicians are using the report selectively to back up their preconceptions. No change there, then.
The downgrade in the growth forecast for 2011, to 2.6% from the 3-3.5% projection in the final Labour budget, has been widely reported as evidence that the previous Government was cooking the books. Truth to tell, in forecasting terms it's only a minor statistical adjustment. Both forecasts imply, almost certainly correctly, that the recovery from the credit-induced recession will be far from robust; the tenths of a percentage point shaved off the forecast are mere details.
A more alarming implication of the OBR forecast is that the credit crunch has permanently reduced the trend rate of growth of the economy, with an anaemic pace of expansion set to continue through the middle of the decade. I've even seen it reported that the economy will "never" recover the ground lost in the recession. I'm not sure what this can possibly mean. After all, real GDP will surpass its previous peak by about the end of 2012, if the OBR's forecasts are correct. It may be true that the structure of the economy will never be the same as it was back in 2007, but as the economy is always evolving, it's impossible to say a priori whether that's a good or a bad thing.
Alastair Darling has seized on the OBR's fiscal projections to demand an apology from the new Government for its frequent claims that Labour left the national finances in an unholy mess. On one level, he has a point: the actual deficit numbers for the last fiscal year were significantly lower than Darling forecast in his final budget statement. Despite its reduced growth outlook, the OBR projects a slightly less dire trajectory for the deficit (and hence also for the national debt) than the Treasury had forecast. In fact, the OBR report implies that Labour's claim that its measures would reduce the deficit by half over the course of the new Parliament was justified, which is certainly not what Osborne wanted to hear.
Naturally Osborne and his LibDem friends see this rather differently. They are pointing instead to the OBR's calculation that the "structural" portion of the deficit -- the part that won't go away as the economy moves back towards full capacity -- is somewhat higher than previously claimed, at about 8% of GDP rather than 7.3%. Calculating the structural deficit is such a complex matter that the difference between these numbers is relatively trivial, though that won't stop Osborne and pals from using the higher estimate to justify more aggressive fiscal tightening.
So, the stage is set for next week's emergency budget, and an early test of the usefulness of the OBR, all of whose new economic forecasts are based on the fiscal policy projections in the last Labour budget. If Osborne announces higher taxes and lower public spending for the next five years, those forecasts will be out of the window. If fiscal tightening significantly lowers the growth outlook, and thereby undermines the tax base, Osborne could easily preside over an era of pain with little gain -- slower GDP growth than the OBR is now expecting, with only nugatory improvements in the public finances compared to what Labour was set to achieve. So the main thing I'll be looking out for in the budget is the projected impact of the fiscal tightening on the growth outlook. Well, that and the possibility of a higher VAT rate on my still-pending car purchase.
The downgrade in the growth forecast for 2011, to 2.6% from the 3-3.5% projection in the final Labour budget, has been widely reported as evidence that the previous Government was cooking the books. Truth to tell, in forecasting terms it's only a minor statistical adjustment. Both forecasts imply, almost certainly correctly, that the recovery from the credit-induced recession will be far from robust; the tenths of a percentage point shaved off the forecast are mere details.
A more alarming implication of the OBR forecast is that the credit crunch has permanently reduced the trend rate of growth of the economy, with an anaemic pace of expansion set to continue through the middle of the decade. I've even seen it reported that the economy will "never" recover the ground lost in the recession. I'm not sure what this can possibly mean. After all, real GDP will surpass its previous peak by about the end of 2012, if the OBR's forecasts are correct. It may be true that the structure of the economy will never be the same as it was back in 2007, but as the economy is always evolving, it's impossible to say a priori whether that's a good or a bad thing.
Alastair Darling has seized on the OBR's fiscal projections to demand an apology from the new Government for its frequent claims that Labour left the national finances in an unholy mess. On one level, he has a point: the actual deficit numbers for the last fiscal year were significantly lower than Darling forecast in his final budget statement. Despite its reduced growth outlook, the OBR projects a slightly less dire trajectory for the deficit (and hence also for the national debt) than the Treasury had forecast. In fact, the OBR report implies that Labour's claim that its measures would reduce the deficit by half over the course of the new Parliament was justified, which is certainly not what Osborne wanted to hear.
Naturally Osborne and his LibDem friends see this rather differently. They are pointing instead to the OBR's calculation that the "structural" portion of the deficit -- the part that won't go away as the economy moves back towards full capacity -- is somewhat higher than previously claimed, at about 8% of GDP rather than 7.3%. Calculating the structural deficit is such a complex matter that the difference between these numbers is relatively trivial, though that won't stop Osborne and pals from using the higher estimate to justify more aggressive fiscal tightening.
So, the stage is set for next week's emergency budget, and an early test of the usefulness of the OBR, all of whose new economic forecasts are based on the fiscal policy projections in the last Labour budget. If Osborne announces higher taxes and lower public spending for the next five years, those forecasts will be out of the window. If fiscal tightening significantly lowers the growth outlook, and thereby undermines the tax base, Osborne could easily preside over an era of pain with little gain -- slower GDP growth than the OBR is now expecting, with only nugatory improvements in the public finances compared to what Labour was set to achieve. So the main thing I'll be looking out for in the budget is the projected impact of the fiscal tightening on the growth outlook. Well, that and the possibility of a higher VAT rate on my still-pending car purchase.
Saturday, 29 May 2010
Summer reading list
I'll be taking a short break here, so you'll be needing something to read. May I recommend...
Wolf Hall, by Hilary Mantel. Every bit as good as the critics say it is. Think of the Godfather, only with Thomas Cromwell as the consigliere and the Tudors as the Corleones. If you don't like this book, you need to find someone who can help you to unlearn how to read, because literacy is wasted on you.
Hackney, That Rose-red Empire, by Iain Sinclair. Sinclair may well be a bit nuts, in the nicest possible way. This paean to his home of the last forty years may or may not be factual -- "where it needs to be true, it is", Sinclair tells us. True or not, it's a wildly entertaining look at an eccentric part of London, with particular scorn for politicians who wilfully destroy local heritage, and special venom for everything to do with the London Olympics.
I'm only away for two weeks, and those books total well over a thosuand pages, so that should be enough to be going on with.
Wolf Hall, by Hilary Mantel. Every bit as good as the critics say it is. Think of the Godfather, only with Thomas Cromwell as the consigliere and the Tudors as the Corleones. If you don't like this book, you need to find someone who can help you to unlearn how to read, because literacy is wasted on you.
Hackney, That Rose-red Empire, by Iain Sinclair. Sinclair may well be a bit nuts, in the nicest possible way. This paean to his home of the last forty years may or may not be factual -- "where it needs to be true, it is", Sinclair tells us. True or not, it's a wildly entertaining look at an eccentric part of London, with particular scorn for politicians who wilfully destroy local heritage, and special venom for everything to do with the London Olympics.
I'm only away for two weeks, and those books total well over a thosuand pages, so that should be enough to be going on with.
Forecasting the past
Economics is the only profession where you get paid for forecasting what already happened. Within the economics department of any financial institution, there will be one or more people whose job it is to predict what the economic data releases will be. So they "forecast" what the US non-farm payrolls release will be, or to put it another way, they try to predict what happened last month. Or they "forecast" the UK quarterly GDP number, or rather, they predict what the economy was doing three or four months ago.
This wouldn't make much sense, and it certainly wouldn't make sense to pay people serious money to do it, except for one thing: markets react to this stuff. If you can "predict" the non-farm payrolls number better than your opposite numbers at other firms, you can give your company a big trading advantage. Sometimes this advantage lasts no more than a few seconds after the data are released, but that can be enough to make a lot of money at the expense of the less skillful (or the poorer guessers).
This is a long introduction to a brief comment on the reaction to Friday's downgrade of Spain's sovereign debt ratings by Fitch. Everyone knew the extent of Spain's problems, and earlier in the week there was a brief sigh of relief when the Government squeezed through measures to address them. But Wall Street still tanked after the ratings cut. The objective facts about Spain didn't change either for the better or for the worse: like the economists I rattled on about earlier, Fitch was talking about the past. The only piece of new information was the ratings cut itself, but that was enough to trigger a swoon among investors.
For me, ratings agencies have always been a long way down the food chain within the financial sector. They do a job that nobody really needs; in fact, things would almost certainly be better if investors had to make their own credit judgments, rather than relying on the agencies. And they don't even do the job well: telling you what you already know is very much their stock in trade. Their credibility seemed to be pretty much shot after the sub-prime crisis, where they never seemed to get up with the game, let alone ahead of it. Yet as Fitch has just shown, they're still around to cause mayhem. Forgotten but not gone, more's the pity.
This wouldn't make much sense, and it certainly wouldn't make sense to pay people serious money to do it, except for one thing: markets react to this stuff. If you can "predict" the non-farm payrolls number better than your opposite numbers at other firms, you can give your company a big trading advantage. Sometimes this advantage lasts no more than a few seconds after the data are released, but that can be enough to make a lot of money at the expense of the less skillful (or the poorer guessers).
This is a long introduction to a brief comment on the reaction to Friday's downgrade of Spain's sovereign debt ratings by Fitch. Everyone knew the extent of Spain's problems, and earlier in the week there was a brief sigh of relief when the Government squeezed through measures to address them. But Wall Street still tanked after the ratings cut. The objective facts about Spain didn't change either for the better or for the worse: like the economists I rattled on about earlier, Fitch was talking about the past. The only piece of new information was the ratings cut itself, but that was enough to trigger a swoon among investors.
For me, ratings agencies have always been a long way down the food chain within the financial sector. They do a job that nobody really needs; in fact, things would almost certainly be better if investors had to make their own credit judgments, rather than relying on the agencies. And they don't even do the job well: telling you what you already know is very much their stock in trade. Their credibility seemed to be pretty much shot after the sub-prime crisis, where they never seemed to get up with the game, let alone ahead of it. Yet as Fitch has just shown, they're still around to cause mayhem. Forgotten but not gone, more's the pity.
Wednesday, 26 May 2010
EU's half-baked bank levy plans
I'm all in favour of the taxpayer never again having to pick up the costs of a bank bailout, but...Maybe I'm just having a bad day, but I can't make head or tail of the EU's new proposals for a bank levy.
According to the BBC website,
A network of national funds should be introduced so the cost of bank failures are not met by the taxpayer, the EU internal market commissioner has said.
Michel Barnier said such funds would provide part of a broader system aimed at preventing future financial crises.
Banks would be required to pay a levy into the funds which would not be used to bail out failing banks, but manage failures in "an orderly way".
And later:
Mr Barnier said the financial sector should pay the cost of banking crises in future.
"That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion - but which is not a bail-out fund."
I really have no idea what this means. It seems to imply that, for example, Northern Rock would not have been rescued if this plan were in place, but the funds would have been used for....what, exactly? Injecting into other threatened banks to prevent contagion? Paying restructuring costs to allow Northern Rock to be split up and sold?
Then there's the question of how the funds are managed between crises. Here's the BBC story again:
The proceeds of funds would remain within national borders, but there are some national disagreements about whether the money should go into a special ringfenced fund or wider national coffers.
Germany wants to ringfence the funds, but how practical is that? What will they do with the money? Put it in the bank, or maybe invest it in Greek sovereign debt? On the other hand, the UK and France want to put the money into general revenues, so it's just a new source of tax for them to spend. How that is supposed to protect the taxpayer if/when another crisis hits, I really don't know.
For once I find myself agreeing with Angela Knight of the British Bankers' Association:
she proposes that each country should strengthen its regulation and supervision, with a national intervention authority, being the Bank of England in the UK.
"And each country needs to put in place arrangements so that if intervention is required, then this is paid for by the industry and depositors are protected," she added.
It would be nice if the BBA would advance some specific proposals, but the general thinking behind this is correct. As for the EU, it will provide more details on its plans at the G20 summit next month. Right now I'd say they have a lot of work to do.
According to the BBC website,
A network of national funds should be introduced so the cost of bank failures are not met by the taxpayer, the EU internal market commissioner has said.
Michel Barnier said such funds would provide part of a broader system aimed at preventing future financial crises.
Banks would be required to pay a levy into the funds which would not be used to bail out failing banks, but manage failures in "an orderly way".
And later:
Mr Barnier said the financial sector should pay the cost of banking crises in future.
"That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion - but which is not a bail-out fund."
I really have no idea what this means. It seems to imply that, for example, Northern Rock would not have been rescued if this plan were in place, but the funds would have been used for....what, exactly? Injecting into other threatened banks to prevent contagion? Paying restructuring costs to allow Northern Rock to be split up and sold?
Then there's the question of how the funds are managed between crises. Here's the BBC story again:
The proceeds of funds would remain within national borders, but there are some national disagreements about whether the money should go into a special ringfenced fund or wider national coffers.
Germany wants to ringfence the funds, but how practical is that? What will they do with the money? Put it in the bank, or maybe invest it in Greek sovereign debt? On the other hand, the UK and France want to put the money into general revenues, so it's just a new source of tax for them to spend. How that is supposed to protect the taxpayer if/when another crisis hits, I really don't know.
For once I find myself agreeing with Angela Knight of the British Bankers' Association:
she proposes that each country should strengthen its regulation and supervision, with a national intervention authority, being the Bank of England in the UK.
"And each country needs to put in place arrangements so that if intervention is required, then this is paid for by the industry and depositors are protected," she added.
It would be nice if the BBA would advance some specific proposals, but the general thinking behind this is correct. As for the EU, it will provide more details on its plans at the G20 summit next month. Right now I'd say they have a lot of work to do.
Thursday, 20 May 2010
Short shrift
Chancellor Merkel's decision to ban "naked" short-selling in Germany has come under attack from the usual quarters. Traders have ridiculed the measure, pointing out that there is nothing to stop them shorting German debt out of London or Paris or elsewhere. The right-wing press in the UK has also piled in; see, for example, Tracy Corrigan's May 19 blog posting on the Telegraph website. Tracy excoriates Merkel's action on the grounds that: it won't work; the French are upset; EU officials are upset; and anyway there is no evidence that short-selling has anything to do with the problems in Greece.
While much of this is true, there is a case for restricting short-selling, especially of the so-called "naked" variety. In fuddy-duddy, old fashioned short selling, the seller had to borrow the securities that were to be sold short. This never made much sense to me -- why would I lend a stock to a short seller if I knew his plan was to try to pulverise the value of my asset? -- but at least it limited the activity. With naked short-selling, the seller doesn't have to borrow the securities. This makes it riskier (because it may be impossible to get hold of the stock when the time comes to cover the short) but also more lucrative (because borrowing the securities costs money). The US already bans naked short-selling, and those who can remember back as far as the start of the credit crisis will recall that the US, UK and other jurisdictions moved quickly to ban all types of short-selling in an attempt to stem the decline in markets. In fact, this happens in just about every financial crisis, which is an odd thing to happen if short-selling is such a good thing.
According to Ms Corrigan and other defenders of shorting, short-selling is a useful tool in markets because it helps to reduce the likelihood of speculative bubbles. Oh yeah? I struggle to recall any headlines over the past decade or so on the lines of "Short sellers prevent tech stock bubble", or "Shorts head off credit crunch", but there have been countless stories of short sellers ganging up on perceived weaker credits and driving them into the ground. Although it's true that Greece's problems, and those of the banks that have loaned money to Greece, are entirely of their own making, it's hard to see any rationale for allowing short sellers to wade in and make money by impeding efforts to clean up the mess.
Some time ago (September 2008) I wrote that short sellers were like the kid in school who ratted out his fellow students when they did something naughty. Nobody likes that kid, and very few people like short sellers, maybe aside from Tracy Corrigan. The fact that this kind of thing is tolerated illustrates the extent to which the financial sector has managed to place itself on a different moral and even legal footing from other businesses: as master, instead of servant. There's nothing new about this, of course: the Medicis were quite convinced that it was in their remit to appoint Popes. Even though Frau Merkel's actions looked panicky and may prove ineffective, it would be good to see more politicians standing up to today's Medicis.
While much of this is true, there is a case for restricting short-selling, especially of the so-called "naked" variety. In fuddy-duddy, old fashioned short selling, the seller had to borrow the securities that were to be sold short. This never made much sense to me -- why would I lend a stock to a short seller if I knew his plan was to try to pulverise the value of my asset? -- but at least it limited the activity. With naked short-selling, the seller doesn't have to borrow the securities. This makes it riskier (because it may be impossible to get hold of the stock when the time comes to cover the short) but also more lucrative (because borrowing the securities costs money). The US already bans naked short-selling, and those who can remember back as far as the start of the credit crisis will recall that the US, UK and other jurisdictions moved quickly to ban all types of short-selling in an attempt to stem the decline in markets. In fact, this happens in just about every financial crisis, which is an odd thing to happen if short-selling is such a good thing.
According to Ms Corrigan and other defenders of shorting, short-selling is a useful tool in markets because it helps to reduce the likelihood of speculative bubbles. Oh yeah? I struggle to recall any headlines over the past decade or so on the lines of "Short sellers prevent tech stock bubble", or "Shorts head off credit crunch", but there have been countless stories of short sellers ganging up on perceived weaker credits and driving them into the ground. Although it's true that Greece's problems, and those of the banks that have loaned money to Greece, are entirely of their own making, it's hard to see any rationale for allowing short sellers to wade in and make money by impeding efforts to clean up the mess.
Some time ago (September 2008) I wrote that short sellers were like the kid in school who ratted out his fellow students when they did something naughty. Nobody likes that kid, and very few people like short sellers, maybe aside from Tracy Corrigan. The fact that this kind of thing is tolerated illustrates the extent to which the financial sector has managed to place itself on a different moral and even legal footing from other businesses: as master, instead of servant. There's nothing new about this, of course: the Medicis were quite convinced that it was in their remit to appoint Popes. Even though Frau Merkel's actions looked panicky and may prove ineffective, it would be good to see more politicians standing up to today's Medicis.
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