On the current craze for blaming "greedy bankers"

It is striking how fashionable it has become in the last week or so, indeed since the financial turmoil really got going in 2007 and 2008, to pile blame on "greedy bankers". The latest well-known people to indulge in this, both politicians, are the current Prime Minister, David Cameron, and the Leader of the Opposition and Labour Party, Ed Milliband. My motto tends to be: Always beware a politician making 'policy' by talking about 'morality' instead, as it is usually a sign that they have no idea what to do about a particular problem, or don't want to state an obvious truth for fear of upsetting the voting public.

A couple of days ago I read an article in the Douglas Carsewell blog (he is a Conservative MP) that reported on a Coffee House article by Spectator editor Fraser Nelson. Being a politician, Douglas Carsewell, really a sort of Essex 'bovver-boy' with presumably a decent education and defintely with decidedly 'radical' views, focussed on one particular aspect of what Fraser Nelson had actually written, that if one was going to blame bankers, then one should not forget to include central bankers as targets. Fair enough, but that is not the whole story, certainly of what Fraser Nelson wrote and even more so of how I think 'blame', if it is a worthwhile exercise at all (which I tend to doubt), needs to be placed, so I wrote a comment in Douglas Carsewell's blog which I reproduce below, because I think it is probably a fairer and more complete analysis. Politicians, in particular, don't like to tell the truth to their electorates, because they depend on public votes to get elected or re-elected - but sometimes 'naughty kids' (in this case 'the public') do require to be told a few home truths; the comment was my small effort at correcting this omission:

Well, it is convenient for politicians (of all political parties, but specially that of the government of the time), to blame 'greedy bankers' and they must obviously share some of the blame, but as you - and Fraser Nelson writes - the macro-ecnonomic policies put in place by central banks, specially in the US and UK, but even more specifically (as you conveniently forgot to mention) the governments of those two countries carry an even more major part of the 'blame' or 'responsibility'. It would be neglectful and dishonest too, although politicians who need votes always seem to gloss over the matter, not to mention the third major component of what went wrong - the borrowing public, which was very happy to run up enormous credit card debt and think that property investment and the high borrowing which almost always funded it was a one-way bet. No-one forced these borrowers to take on more debt than they could handle and in very many cases it wasn't to fulfil real needs, merely to take part in the consumer-led bonanza going on all around them. Not everyone did this and a few people, such as myself (for example) were counselling anyone who would listen amongst my acquaintances and family not to become swept up in it. And I'm not talking about 2007 or 2008, I'm talking about as early as 2002. - the signs were already very clear then of the way things were developing. All political parties in the UK, including the then Opposition (i.e. the Conservatives), were egging on the public to borrow more, but of course without the idiocy and greed of the borrowers the disaster could not have happened. Most politicians are venal, but then most politicians are no worse than most of the people they represent who, given the opportunity for what seems like 'easy money' will not hesitate to indulge themselves. Politicians (and central bankers) don't like to tell voters the truth, but them most voters don't really want to hear the truth!

Until the borrowing public who fund much of their discretionary expenditure by borrowing on credit cards or loans (for example to fund several foreign holidays a year, or regular clothes shopping for reasons of 'fashion' rather than utility, or to have a new car every year or other year, etc) realise they are just as responsible for the financial mess we are all in and, more importantly, accept they must modify their own behaviour in the light of this, then I am afraid to say it is 'they' the public (and far too many politicians) who still do not get it!

Interesting visits to my little blog

Occasionally I notice a particularly interesting visit to my little blog and such an event occurred just about 15-20 minutes ago and I thought I'd say "Hi!" to whomever it was who was kind enough to land here, just in case I have a return visit.

The Google query concerned was "carol barclay kinghorn" and when I checked, my relevant blog article comes at the top of the Google search results, amazingly ahead of two BBC news reports at around the same time; as the link in my blog article was to a similar BBC article I had read and which prompted my article, I think it illustrates just how discerning Google is to 'recommend' me so highly.

However, the really interesting thing about this search so far as I am concerned is that it emanates from a "Halifax & Bank of Scotland" server, seemingly in Halifax - the lady concerned was at the time employed as an Assistant Manager by HBOS at its Gyle Shopping Centre branch in Edinburgh. I wrote my article in March 2009, so I am wondering if she is now at liberty once more or perhaps in discussion with her [now presumably former] employers.

The truth about inflation, interest rates and Mervyn King

Fraser Nelson in this week's Spectator tells it like it is about the policies being pursued by the Bank of England under current governor Mervyn King: inflation is being allowed to gain a hold, probably quite deliberately, as a way of inflating away the value of debt. Read a summary of Fraser's contention (with which I agree wholeheartedly) in a CoffeeHouse article appropriately entitled King's Ransom. The tool of choice to engineer this madness has of course been the now-ubiquitous 'quantitative easing', in other words 'debasing the currency'. A couple of excerpts from Fraser's article:

Inflating away debt is politically attractive. It makes cuts all the more easy. Freezing pay means a 3.3 percent pay cut, thanks to inflation (of 4.8 percent if we were using RPI, as we did from the war until the Brown era). Reducing the actual amount of government debt – or staff salaries – is hard. But to debase the value of the currency in which they are paid has always been the easy option. But once unleashed, inflation is very difficult to control. As we know to our cost. Rates have to be rammed up to emergency levels, and the only victors from such struggles against money tend to be people like George Soros. Fiscal problems do not go away if you ignore them – that was the moral of the last crisis. Credibility, once lost, is very hard to retain for a central bank. And, given how much debt the UK government needs to issue, credibility is a very precious commodity.

- read the full article here

Banks and bonuses

I spent my career in one of the world's largest international banks as it so happens. We had bonuses most years, probably every year (to my recollection) and for most people this was a 13th month of pay, usually paid out in December with the salaries for that month. Now whilst most people implicitly 'expected' to get this bonus, I do not think that anyone was under any illusion that it was anything other than discretionary on the part of the Board of Directors; certainly in every office or branch of the bank where I worked, receipt of that crucial telex from head office was eagerly awaited, giving authority to release the extra funds, after the Board had met. We never assumed it as a 'done deal' until that telex was received.

I find it difficult to understand how institutions which now exist only because they have been 'bailed out' with public funds should be paying ANY bonus at all. We are being told by government ministers that some of the banks which have received public recapitalisation and which are now effectively controlled and owned by the State have contractual obligations to pay certain specific bonuses. If so I would like those contracts to be scrutinised very meticulously, because they usually contain specific 'performance' clauses - so I find it difficult to understand how the level of employee who has such a specific bonus clause in a contract, presumably a pretty high-level grade of employee, can be totally unconnected with the issues which have caused these banks to 'implode'. Sure, some of these employees would be disappointed, angry even, if their bonuses were cancelled, but that is life - my personal investments in a number of banks and other types of company have taken a dramatic hit over the past year; they pay dividends when they make money, not when they don't and some have been effectively nationalised or have simply gone out of business. We are all suffering - banking executives within banks which have fouled up for one reason or another cannot expect to be insulated from these financial realities.

At the same time it is absolutely no business of the government to dictate to banks which have not required its assistance and who remain profitable to dictate to these banks how they should remunerate their employees. One of those banks, Barclays, has successfully resisted the government's frankly socialist agenda to try and grab a hold of most of the banking sector and has today announced its results which, whilst a reduction on previous years still remain reasonable and ahead of the market's expectations; it has also, because of the reduction in its profits last years, announced a substantial reduction in the bonuses it plans to pay out - that seems right and proper to me, but it is of course a choice for them to make, not the government.

The Citi never sleeps - but it is having a stroke

When the world's largest bank by assets this time last year suffers the kind of declines in its share price which Citibank has experienced in the past week, then one must wonder if anyone at all is now safe in the maelstrom which is engulfing the [western] world's financial markets. Citibank has seen its market value shrink from USD192bn a year ago to less than USD19bn now. The announcement of in excess of 50,000 job cuts a few days ago really shook me when I heard about it, on top of the redundancies earlier this year; however this behemoth still employs about 300,000 even after getting rid of about 75,000 this year. Could the whole bank be sold to try and keep the show on the road? That, at any rate, is what was being being speculated in The Daily Telegraph yesterday. Absolutely extraordinary. Citibank is not just an investment bank of course, it is a major retail bank and brokerage.

Today The Sunday Telegraph has a further report of 'crisis talks' this weekend by the bank to try and secure a capital injection from a wealthy investor or the US government or those existing sovereign wealth funds which already hold stakes in the bank (from the Middle East and Asia). Although it seems to be considered unlikely that a break-up of the bank will result, predators are nevertheless circling (well, one in particular) to see if juicy parts of the portfolio can be picked up. That bank happens to be the one where I spent all my career and my recollection is that Citibank was one of the very few banking groups in the world that was regarded as a really serious rival and competitor in most markets; one can imagine that Citibank has been studied in depth for years. My own personal contacts and friendship with Citibank people date back to my earliest days as a banker and continued on and off in various locations. Suffice to say that whilst events in the financial markets over the past year and a bit and more recently those affecting the two major Scottish-based financial institutions (HBOS and RBS) have caused me deep concern, I have to confess the news that Citibank of all banks has suffered such a precipitous decline in its fortunes is just, well, stunning.

Barclays and freedom from government meddling

I have become increasingly infuriated over recent weeks by the naked ambition of the Labour government, and its apologists and hangers-on, to bring about the effective nationalisation of much of the banking sector of the UK. This was made excruciatingly obvious at the end of last week by the strident criticism of Barclays Bank in 'daring' to spurn the capital funding offered by the government and instead to make its own arrangements to procure the required capital funding to boost its capital ratios to the levels now required by the FSA - there were even idiotic and disingenuous comments that it was somehow 'unpatriotic' for Barclays to be seeking funding outside the UK. Stuff and nonsense! The Labour government tells us regularly that it believes in the 'free market', but the past few weeks have revealed what I have always believed - that given half a chance they would revert to their 'socialist' roots and seek to take even more of the productive parts of the economy into public ownership - there to stifle all initiative and creative activity. Just look at what has happened to Northern Rock since it had the misfortune to fall into the State's hands. The bickering over the merger of HBOS with Lyoyds TSB, complicated because of the desire by some to see theoretical 'management' stay in Scotland (as if that has really existed ever since Bank of Scotland merged with Halifax some years ago) has thrown this ulterior motive into sharp relief, and in order to achieve this the 'socialists' (in both the Labour and Scottish National Parties) would rather see Bank of Scotland fall even more blatantly into the hands of the State.

Fraser Nelson has an excellent article in the Coffee House at the Spectator which reproduces a letter from Barclays Chief Executive John Varley to staff about what the Board has decided is best for the company's future.

As a small shareholder in several of the British banks involved in the current government bail-outs, as well as a couple of those which have, thankfully, been able to avoid this fate (including Barclays), I have to state clearly that I applaud Barclays' actions. My own investment portfolio has suffered badly in recent months (to the tune of several tens of thousands of pounds), as has everyone else's as a proportion of their overall holdings I expect, but I am very clear that I would rather that the companies I invest in remain free of even partial government ownership - the criticism of some lenders for not passing on base rate reductions to borrowing customers is clear enough evidence that the government's claims that it would not try to interfere in the management of the banks it has managed to get its claws into is just so much empty rhetoric. As a saver I have also suffered a reduction in the rates I am being paid - all in the cause of the banks trying to maintain and increase their margins. It is true that some banks have behaved very foolishly - but they have been prevented from suffering their just fates (bankruptcy) because of the desire of the government to 'protect' depositors and mortgage borrowers - I put 'protect' in quotes because what the government is really doing is trying to protect its own voter base at the next election, NOT the longer-term interests of either depositors or mortgage borrowers. Pain averted now is merely a greater pain delayed until the future by the distortion of the markets in which the government has indulged.

Labour and the SNP squabble over financial crisis and its implications for Scotland's future.

Gawd give me strength! Have the SNP and its hangers-on and Labour and its hangers-on nothing better or more productive to do with their time and energy right now than to squabble like children over whether the current financial crisis will affect Scotland's prospects as a continuing member nation of the UK or as an independent nation, positively or negatively?

I'm not sure quite who started this squabbling match although I think the first 'skirmish' I saw was yesterday (Monday) in a couple of the SNP-leaning blogs that I read regularly (here and here), followed in pretty rapid succession this morning by a Labour leaning blog I read here. Then I noticed that Labour, in the august personage of Prime Minister ("I don't want to make a political point, but ...") Gordon Brown has appeared portentously saying that Scotland would not have had the resources on its own to have 'rescued' the two nominally-Scottish banks included in those 'rescued' by the British government, followed in quick succession by Scottish First Minister Alex Salmond describing as 'ridiculous' such claims. I reference a BBC report which addresses some of these issues.

I've no doubt that this will be a fertile subject for study by economists and political strategists in months and years to come, but I think that it is highly-inappropriate right now, whatever view you happen to take of the role of Scotland either within a continuing UK or separated from it. We have much more important things to worry about right now!

When the time comes to look at this issue, however, I think it will need to be subjected to a greater degree of analysis than the 'bullet point' summaries the two sides of the arguemt have attempted so far. The SNP, for a start, makes many assumptions about the role Scotland might play post-separation/independence in the EU and about the repartition of oil and gas reserves in the North Sea following on from it; similarly the Labour Party wishes to look at present-day political realities as a guide to how a post-separation/independence Scotland and the rest of what had been the UK might organise themselves. For example, as an analogy, it would be relevant to look at the relationship between the UK and the Republic of Ireland before and after the period when the Irish currency maintained a fixed exchange rate (at parity) with the UK currency; that is the point, in my view, when Ireland's destiny economically-speaking might have been said to have begun to diverge from that of the UK; the decision of Ireland to merge its currency and economic policy within the Eurozone merely continued this process, it did not start it. In the case of Scotland the disproportionate importance of financial institutions incorporated in Scotland within the UK economy is a very important factor; both the RBS and HBOS conduct a majority of their activities outside Scotland and in the case of RBS in particular a very significant proportion of its activities in recent years is outside the UK and the EU entirely. There are a great many imponderables about how a post-separation/independence Scotland might have dealt with current circumstances, always supposing that the current events affecting either/both the RBS and HBOS could have or would have happened were not Scotland within the UK. We really cannot say for certain, whatever view you take of the merits/demerits of independence/separation. Just for starters, would a 'UK' without Scotland have followed the same policies over the past few years without Gordon Brown as Labour Chancellor and would a putative Scottish government have followed significantly different policies than it has within the current UK? Similarly, would financial services regulation have followed the same pattern in Scotland or in the rest of the currently-defined UK if the currently-defined UK had ceased to exist some years ago?

In other words I believe the petty bickering between partisans for the SNP and Labour of the past few days (and continuing this evening) is completely pointless (although the implicit assumption that the EU has collectively provided a support package is not exactly how it happened, from what I can gather, rather it is a case of coordination of independent national responses of countries within the Eurozone, largely to accommodate the [justified] scruples of Germany about supporting a pan-Eurozone support package). No doubt a proper and rational analysis of the economic relationships between Scotland and the present UK and between it and a post-Scotland UK is possible, and desirable, but I believe that in the midst of the current crisis is not the time.

Finally I do not believe that anything about the current crisis relates specifically to the size of the national economies involved, rather it relates to the regulatory regimes in place; yes a 'small' country such as Iceland has been hard hit, but so have been countries with large (the UK) and huge (the US) economies. However, other countries have not been so massively affected, both large and small, because they have in practice had in place more robust internal regulatory regimes even if the globalised economy in which we all operate has left them almost as vulnerable as everyone else. To summarise, knee-jerk reactions attempting to favour one view or the other relating to Scottish separation/independence from the UK are the last thing we all need right now.

Visions of the future ...

London lawyer Czechout, author of the Made in Scotland blog has some grim visions about a possible future that might flow from the current financial crisis. I doubt that these visions will become reality (and I certainly hope not), but it may well be true that some things we have taken for granted for decades will change. Personally I think (and have thought for some time) that a major shift in the balance of power in the world is underway, as a result of the unsustainable living standards we have grown accustomed to in western countries, way beyond the income generating capacity of most of our economies, coupled with the fact that many formerly poor countries now have access to enormous liquid reserves, plus their own lower (but admittedly rising) labour costs give them a tremendous competitive advantage; maybe Russia will be one of the new wealthy nations, but I think both its wealth generating capacity and its political stability rest on rather shaky grounds. China, India and Brasil (to name but three) are probably very different cases indeed though. As a commenter to Czechout's article recommended, I plan to 'Cheer up!' - we will undoubtedly get through the current difficulties eventually.

The UK government and its slowness to act over Icelandic banks

I've castigated our Labour government often in the past (including earlier today) for their fundamental lack of understanding about how markets work, but this article about queries and warnings the government had received in July illustrates even more clearly just how hopelessly complacent they were a few months ago when perhaps they might have begun to take steps to protect British depositors, whether private, charities or councils. Notice at the end of the linked article the weasel-like obfuscations of the junior Treasury minister responding to questions in July from the Parliamentary Treasury Select Committee.

Darling's gamble over council cash deposits

The Spectator links to an article in the Times which illustrates just what ignorant bunglers our current government comprises. Over the past few days, since the collapse of Icelands's banking system, and the decision of Iceland's government not to honour debts of banks it has nationalised to depositors in Britain, Britain has taken 'tit for tat' measures against Iceland by freezing Icelandic assets in the UK (quite how 'legal' all of this is I've no idea). At the same time the British government has said it will indemnify all British private depositors with failed Icelandic banks, regulated under the UK FSA. However this indemnity excludes corporate deposits and deposits by local councils around the UK. Earlier in the week I heard a figure of GBP1bn for such deposits being mentioned, but this was 'pooh poohed' by some spokespeople as being an exaggeration, but it turns out, now that all the figures are trickling in, to be roughly correct.

Naturally enough councils around the UK are somewhat alarmed at this turn of events, so it seems they are now 'threatening' to withdraw ALL their deposits from private institutions and instead place them in Government securities (aka 'Gilts'). These deposits represent, apparently, TENS OF BILLIONS OF POUNDS and if they carried out their 'threats' would probably cause a 'run' on all banks affected. What's our government going to do, do you think?

A few caveats, however. I think councils which had deposits with these Icelandic banks needs to asks themselves a few questions and to answer those questions honestly. Much has been made in the past few days that they were actively encouraged by the government to invest their funds for the best possible return and they say they were recommended to place some of their funds into these Icelandic banks by their professional investment advisers and in any case they were authorised under UK financial regulations to take deposits here and had good 'credit ratings' from the major ratings agencies. So far, so good; their story would seem to be 'watertight'.

Now comes the other side of this seemingly rosy picture. Apparently the rates on offer by these Icelandic banks were rather higher than many others in the market and at least one council, Brighton and Hove (according to the BBC 6 o'clock news this evening who interviewed someone from that council), thought this sufficiently of concern to withdraw its deposits before the crash. This really high-lights a timeless truth; councils (and indeed private depositors) need to be more honest with themselves and accept that if they place deposits with an institution which is somehow able to pay a significant margin of return above that offered by other deposit-takers then there is usually a reason for this and a part of that reason may be increased risk for depositors. The reason, the only reason, that our disgustingly self-interested government has rushed to indemnify private depositors who have lost out in this collapse is because they represent a great number of votes, councils don't - even if they are managing funds on behalf of those other voters the council-tax payers. I really wish to know how our government is going to wriggle out of this one!

Finally, I have just been watching another interview with the Icelandic prime minister - he has changed his tune somewhat since yesterday. Yesterday he seemed to suggest that the British depositors of Icelandic banks were not his problem, but that of the UK government. Of course I am well aware that Iceland is facing an unprecedented national crisis as it is effectively 'bankrupt', but the realisation that the UK authorities have blocked Icelandic assets in the UK said to be worth around GBP8bn has probably made him re-assess his earlier belligerent reaction and adopt a more cooperative posture because he knows that, whatever the rights and wrongs of what the British have done, he will have to deal with the consequences at least in the short term.

These issues are just a microcosm of some of the 'beggar thy neighbour' actions that governments around the world might begin to take if the world financial system continues to spiral out of control. I tend to doubt that this particular US President any longer has either the domestic or international prestige to calm the markets, any more than our own Prime Minister does (*). We enter this weekend in what is really a very alarming position - I am apprehensive about what the coming week may bring.

(*) And this report indicates the very limited extent of Brown's influence outside his own family - not zero undoubtedly, but pretty close to it.

Iceland, finance and the Russians

When I heard early this morning that Russia might provide about 4bn Euros to Iceland to help it withstand the financial storms which are lashing it just now (see also here), my immediate reaction was to ask what is the quid pro quo going to be? This Spectator article speculates, too, and may provide some clues as to what's afoot, given Iceland's strategic location between Russia and North America.

RBS and me

Intriguingly I had a telephone call a short while ago from the Private Banking (PB) department of RBS seeking to set up a telephone appointment for me; apparently my PB contact is taking time off as a result of illness and the replacement person wishes to speak with me and one assumes other clients of the ill colleague. Probably this is just a routine call having no especial significance, but just at this time one cannot help but wonder if it is at least partly designed as a reassurance that things remain well within that bank and that clients such as me should not be unduly alarmed at what we are reading and seeing in the media. I'll know in a few days time and may or may not decide to write further here when that happens, depending upon how I feel afterwards.

Obviously I am as concerned as anyone at what has been happening in recent weeks and days, however there is not a lot I can realistically do that I have not done already and the solution is certainly not to exacerbate whatever problems might exist at various financial institutions by lots of people thinking about withdrawing sizeable funds from one of the UK's and the world's largest banks; I certainly would not wish to keep that kind of money in liquid form (whether paper or gold), as I would obviously have to try and provide some security against theft, so I would be obliged to try and decide which other institution(s) might be as good or better a home for it. Frankly, best to leave such funds as I do have where they are, for better or for worse; if that bank were to fail then there would be few other safer havens, I fear.

NewLabour's brave new 'State Bank' Britain

Once again, with the said-to-be imminent nationalisation of the Bradford & Bingley, the Labour Party and, unfortunately still our Government, revert to type and jump in to nationalise another financial sector company.

There is already deposit protection for the vast bulk of depositors so what is the fuss about? If the market has lost faith in this bank it should be allowed to fail; then the long slow process of allowing the market to heal itself could begin. But no, the government wants, at all costs (and it will be very high for taxpayers for many years to come), to be 'seen to be doing something', even if it is the wrong thing. I can't even begin to remember how many times I have heard ministers from this sad excuse for a government tell us how much they believe in the market, but it doesn't take much for them to revert to type and start to take things back into State ownership - remember this (in my main website's comment section before I began this blog) and the follow-out when the truth was forced out of him (Stephen Byers) here - completely different subject as it concerns the rail network, but the same principles seem to apply. Seems a long time ago now, doesn't it?

However, on the laterst banking nationalisation fiasco which is about to hit us, John Redwood has some pertinent questions, as usual.

PM wants what he calls 'financial responsibility'

... and according to this report he considers a part of that to be support for the USD700bn bail-out of the US financial sector currently wending its way, with some difficulty, through the US Congress.

Personally I'm with some of those ordinary Americans I saw in news reports tonight who said that market forces should be allowed to run their course; those finance houses that have loaned money badly should be allowed to go to the wall and should not be bailed-out. It that were to happen it would be excruciatingly painful of course and undoubtedly a lot of people would suffer in the short term, but until this happens we are only storing up yet more painful disasters in the future. The same goes for the UK of course - Northern Rock should have been allowed to fail and public money (i.e. the money taxpayers have had extorted out of them by governments) should not be used to bail out comemrcial failure.

I believe in capitalism, but for it to work efficiently governments need to get out of the habit of manipulating markets. That's the only way that commercial firms, whether borrowers or lenders, will begin to take responsibility for their own decisions, rather than expect tax-payers to bail them out when things go wrong. Of course ordinary citizens need to be reminded that they too need to act responsibly when contracting to borrow money; if people have borrowed too much when interest rates were at historic lows, with an inadequate margin of equity to back-up their borrowing, then they should have realised the dangers they were running. Perhaps lenders were greedy, but it takes two to make a contract and borrowers (commercial or retail) should not be allowed to feel they do not share a part of the blame for their own predicament.

For years and years 'consumers' in wealthy countries have grown used to having luxuries now, without saving for them, or even without saving enough to contribute even a small part of the equity when acquiring major assets such as a house, or even cars or on non-asset based expenditure such as foreign holidays to exotic locations. Politicians have pandered to the rampant borrowing culture most of us live in because, to put it crudely, there are votes in it.

Now these politicians want to apply yet more sticking-plaster to the wounds our financial system has suffered - because they fear the reactions of electorates when their votes are required. The bail-out which G W Bush is pleading for Congress to approve, and which our Prime Minister is said to support, is largely based on a fear of the electoral back-lash which is likely to occur if the bail-out doesn't go through; it is shocking, but not surprising that both McCain and Obama apparently support the bail-out, too. No one wants to face what needs to be done. Ever since he became President, Bush 43 has proved that he does not, in practice, believe in 'small government', whatever his rhetoric might say, but of course there has never ever been any doubt that Gordon Brown does not believe in small government.

Years of uncontrolled and largely unfunded consumption across the capitalist world is now coming home to roost, but the markets would given half a chance enforce a natural corrective mechanism. If the markets had not been systematically perverted by government fiscal manipulation over the past several decades then the correction that would now ne necessary would have been a lot less severe, because a lot of the excesses that have grown common in recent years would never have happened if the markets had known that governments wouldn't almost always step in to save them from their own folly.

I think I have now ranted on long enough about what is going on in our economies. To summarise, one day the markets will force a correction - if not this weekend then in a few years time when the present crisis seems like a 'blip' and our economic resources have been further depleted to the extent that our governments can no longer apply sticky-plaster to the damage.

The financial 'crisis' - to blog or not to blog

Like some others (many others) I have been, in my case for at least a few years, observing with some apprehension likely developments in the global economy. In the UK these developments have become more obvious to 'the man in the street' for roughly the last year when domestic financial bad news began to hit the headlines. Whilst I have blogged about this from time to time over the past four or five years, I have not felt it wise, or useful, to keep up a running commentary on every new 'disaster' - it has seemed clear to me for some time that a global economic re-adjustment, long predicted, is now finally underway - it is not going to happen overnight and in my view we are only near the beginning of what is going to happen over the next few years, but it is not going to be pretty or commfortable for many of us, specially in western countries which have been relying for many years (decades) on increasing levels of borrowing to sustain our national and individual economies. One day the bill has to be paid and that day is upon us, except it won't be over in one day. There will always be survivors, though. How individuals manage their own resources can make a big difference to how badly they will be affected, but it is probably true to say that for those (the vast majority) who have done little or nothing so far to rein in their indebtedness, by continuing their profligate practices of acquiring more and more goods and services (cars, houses, clothes, expensive vacations, etc.) by increasing their borrowing to fund them, are going to be facing difficult times. The same goes for national economies of course. Our own government has breezed ahead with its redistributional policies, by squandering our national resources and by increasing borrowing levels dramatically. Only the US government has been more reckless.

However, one day the holders of debt paper begin to realise that the real value of their assets may be a good deal less than the face value. The situation is even more toxic when the economies of the main lenders (whether individual, corporate or national) have been able to grow hugely rapidly solely as a result of the consuming nations historic high credit ratings being assumed to be 'good' for the debt. In other words the whole global economy has been based on 'confidence' and it is that confidence which is in process of undergoing a massive re-evaluation. Naturally in this situation the hunt is on for people to 'blame', but the only people to blame are ourselves - rather too many have been willing to give their votes to political parties who have promised nirvana in the short-term and the politicians who have peddled this story are, through a mixture of ambition, incompetence and venality, going to be the obvious targets. The truth is, though, that a large part of our historically-high standards of living in western countries is built up on unsustainable bases. It all comes down to the old saw: total income one pound, coupled with total expenditure 99p, happiness, but let total expenditure creep up to 101p whilst still having income of only one pound and you will have misery. A lot of people are going to have to adjust their expectations - that food must not be squandered, that clothes should be expected to be used until they are worn out and not changed simply to stay in fashion, that vacations will probably have to be briefer and less epxensive, etc. Those are only the cosmetic changes though - what really needs to happen is that the State is reduced to a much smaller role and the safety-net which it provides, with our taxes and our national borrowing, will have to be similarly reduced. And of course people in countries which are already poor and with economies which don't amount to much (large parts of Africa, parts of Asia and Latin America) are going to see their sometimes already pitifully low standards of living fall, with the so-called 'rich' nations no longer in a position to, or willing to, help out in any substantial way.

Now, I think I have rambled on for quite long enough. I read with interest this blog post some days ago, followed up by this one today - I'm afraid that what is speculated on there is not at all far-fetched. However, being of an optimistic nature, I would say that ultimately a lot of the changes which are in process will be good for all of us, but it is undeniable that along the way many are going to suffer. Our individual and national task is to ensure that we are on the right side of history by taking appropriate action - it is too late for many, probably, but who said anything about life being fair? I have been preaching this in a low-key way here and elsewhere for years, as have some others; it is not my problem if some are only now waking up to the mess they've got themselves into. I hope the government, in its [hopefully short] time remaining in power does not try and 'help' by raising taxes to sustain its profligate levels of public spending in the hope of bolstering its chances at the next election; if the British people fall for that one again, then they really deserve all they get!

Northern Rock and New Labour's reversion to Socialist-type

So the 'inevitable' (copyright Vince Cable, the LibDem's guru on such matters, in case you had no idea who he is) has happened - Northern Rock has been nationalised; marvel at the bare-faced effrontery of our 'glorious leader', Gordon Brown; the coward even has Alistair Darling alongside him to try and deflect some of the flak from his august personage - it doesn't wash! Naturally none of this 'guff' has anything to do with the number of Labour seats potentially at risk in the north-east of England, Northern Rock's home-base, or at least so we are led to believe.

Rather than spending a lot of time writing a ranting post about this latest development in the saga that the government has allowed Northern Rock to become, I refer you to an excellent post, justifiably excoriating in tone, from Guido; it tells you all you need to know about what a useless bunch of [.......] (*) this Labour government is. I never ever believed for one minute the hype in 1997, particularly from Gordon Brown himself, that this Labour government would be any better at managing the economy than previous Labour governments; it has taken them just over 10 years, but I think this present shower of incompetents will go down in history as being even more incompetent than the governments run by Harold Wilson and James Callaghan, 'ably assisted' by the likes of Hilary Benn's dad, Tony, that other Brown (George) and not forgetting that amiable old buffer Dennis Healey, who still pops up on TV occasionally.

The only other thing I write aobut this right now is that I thought Alistair Darling, Chancellor of the Exchequer, was even more unimpressive than usual on the Today programme this morning. Of course he is to some extent just the hapless fall-guy for his incompetent and cowardly boss, Gordon Brown, the man who actually created the conditions that allowed Northern Rock to get into the mess it has.

(*) My self-imposed policy in this blog prevents me from using the appropriate word here; it begins with 't' and ends with 's'.

UPDATE: (Monday 18FEB08 17.45 RST) John Redwood MP has a post up about Nortern Rock today, as one would expect. He has a useful recapitualtion of the steps that led to where we are now and how the government has at every stage shown poor judgement in its handling of this crisis; I agree completely. However, I'm with Guido in the comments to that post when he criticises the idea of a 'solution' having been to pump liquidity into Northern Rock; as I've written before this would have been like giving a drug addict ready and continuing access to the cause of its distress; businesses and their shareholders should expect to suffer the consequences of poor management decisions, just as they should receive just rewards for more successful risk-taking - Northern Rock should have been no exception. If the speech Alistair Darling gave on 13th September, and which John Redwood refers to as 'stupid', had not been delivered, it is highly probable that the crisis would not have been so severe or perhaps even have happened at all. The speech was a product, in my view, of the ignorance of most people in this government, who have little commercial or business experience, of understanding of the dynamics of capitalism. They may have tried to emulate the thought-processes of people who operate successfully in a market economy, but fundamentally they do not believe in it; they are instinctive 'socialists'.

Bank robbery in Mazarrón!

Or to be strictly accurate at the Camposol urbanisation just outside Mazarrón and just a few kilometres up the road from where I am.

My Spanish bank account is, it so happens with the bank branch which was robbed and the robbery must have taken place on Monday night as I had been into the bank on Monday to withdraw some cash and had arranged to return on Tuesday to collect some more. However, when I arrived at the bank yesterday morning it was closed and one of the large plate-glass windows had been smashed in; repairs to that were already getting underway. I went back again today and although the branch has re-opened it has no cash other than what is in the automated cash machine and the withdrawal limit on that is less than I require. Apparently the thieves stole all the cash and the branch won't be re-stocked with significant cash until sometime next week when the damages have been repaired (the plate-glass window has already been replaced, but there is other significant damage inside the branch and workmen were hard at work this morning on that). There was also a security guard checking everyone who entered, something which is not usually the case, but understandable after the branch has just been ransacked and robbed.

PS/ I just had broadband internet installed in my new Spanish house this morning so I am no longer out of internet/Skype touch, as I have been since arriving here on Sunday. A lot of the furniture is already delivered and installed, but a few items remain, the most critical of which are a hob and oven for cooking. The hob which came a few days ago did not fit, so another model has been ordered and, in theory, should be delivered this evening. Assuming this happens, then I shall probably move in tomorrow or Friday; I have the rented house for another week and a half so there is no particular hurry, other than my impatience - balanced by a determination not to have to 'camp out' in a partially-furnished house, specially when there is another rented house available to me just a few minutes away.

Soc. Gen. - Jérôme Kerviel's activities become clearer

There is an excellent report today in the Financial Times. He seems to have been carrying on unhedged trading since 2005, and although his activity was being monitored and he was asked about his activities on several occasions, he was always able to 'show' that his deals were hedged and therefore not risky. He is apparently cooperating fully with investigators upto now. His motive appears to haveen to increase his chances of a good bonus for 2007, for which period he closed out all deals with a profit of around €55mio. Apparently his more reckelssy huge deals began only in early 2008 (it's yet to be shown if this is true) and that as late as midday Friday 18th January his operations remained profitable. Quite extraordinary!

Most worryingly he claims that "the practice of making trades for which he did not have permission was widespread". As I mentioned in my last post on this topic, I expect many other banks are frantically checking all their deals and their dealers' activities to find out if this is true! It is quite clear that Soc.Gen.'s own checking procedures to ensure the autheniticity of what Monsieur Kerviel was telling his bosses was factual were sadly deficient. How many other banks are in this precarious position? Of course 'trust' and 'self-certification' is the basis of much business activity, but there really do need to be back-up methods of verifying that what is certified to be true (whether verbally or in writing) is so and it seems to me that this need is particularly importing when off-balance sheet and hedged operations are at issue.

"Red, Black and Rising"

Or should that be "in the Red"! (The title has been used as an advertising slogan by the bank for some years.)

French Bank Société Générale (link is to the main French website) has just announced a double-whammy - an internal fraud by a 'rogue trader' which has lost it EUR4.9bn (USD7.1bn; GBP3.7bn) and write-downs of EUR2.05bn (USD2.97bn; GBP1.55bn) worth of lending relating to the sub-prime market in the US. Although the bank states it will still make a profit of EUR600mn to EUR800mn for 2007, it needs to raise new capital of about EUR5.5bn to offset the losses. It's not clear if the latest write-downs in loans are are in addition to or part of the rescue package announced in December 2007, when it had to rescue an investment vehicle in the US.

Société Générale is one of France's oldest banks (founded 1864), it was nationalised in 1945, then in 1987 the government decided to choose it, of the three major French state-owned banks, for privatisation. It has always, until now, had a pretty good reputation for prudence and for careful credit-control, before, during and after the period when it was under direct state control. I knew a few people in Société Générale both when I lived in Paris and then some years later when I lived in Vietnam, where that's bank's person in Hanoi was a good friend.

It is however mind-bloggling to learn that a person described as 'mid-level' has been able to commit the bank to contracts of the scale required to produce a loss of EUR4.9bn - Robert Peston, the BBC's business editor, has his views on what's been going on. Worth a read. From the details that are emerging so far it seems that the bank's own internal control mechanisms of what its trading desks have been up to have been sadly deficient! No doubt a lot of internal checking (I hope) will be going on today in other banks to see just what may be lurking under the surface.

Government attempts 'smoke and mirrors' solution for Northern Rock

Northern Rock is a mess - everyone knows this and no private buyer has yet been found that is mad enough to take this huge problem off the Government's hands - it has committed about GBP26bn (USD51bn approx) in loans. Let us be quite clear that loans represent money out the door. It is gone. If a borrower is sound, one will probably get it back, but let us not forget that the borrower in this case is Northern Rock; servicing the loans at a relatively punitive rate of interest, which Northern Rock is currently managing to do, is not equivalent to saying it is capable of paying them back - it is obviously not in a position to do this anytime soon, if ever. In addition to the loans, the government has issued guarantees so that the total government commitment (i.e. the taxpayer's ) is about GBP55bn (USD107bn).

Now we are told that the Government (i.e. Prime Minister Gordon Brown) is looking favourably on a proposal by Goldman Sachs effectively to securitise the loans by issuing government bonds and, legally, avoid 'nationalising' Northern Rock, so permitting the rump of the business to be sold to a private buyer. However, the bonds issued would be on the public balance sheet and be an additonal government (i.e. taxpayer) liability - no liability for repayment of these bonds will be assumed by any private buyer of Northern Rock. In effect, if not legally, the government is considering writing-off the loans it has provided to Northern Rock. It is theoretically possible that these loans might be repaid in part or even fully, but if so this will take many, many years; it will be a problem for whichever government takes over from the present shower of incompetents - and the ones after that, too. Not to mention the British taxpayer!

Undoubtedly the guarantees given by the government already to secure Northern Rock's continuing ability to operate will have to remain in place for the time being, too. We have no indication at present about which liabilities, if any, of Northern Rock that a private purchaser of the bank would assume in place of the government - my impression is that they would assume very little of any liabilities other than those which their own 'due diligence' teams state are covered by the existing mortgages (which we are told are generally well performing) altough in the case of a 'fire sale (which, let's be frank, this will be) I think one can be fairly certain that the private buyer's credit controllers will be pretty strict about what part of Northern Rock's existing loan/mortgage book they are willing to accept as collateral for liabilities they are asked to assume. In any case, if the government is to retain the collateral of Northern Rock's loan/mortgage book to allow the fiction to continue that the loans to it might one day be recovered, then the loan/mortgage book obviously won't be available to any private buyer to set against any liabilities it might otherwise assume.

Given the conditions which existed in September 2007 I do not quarrel with the comments of Chancellor Alistair Darling last week that urgent and drastic action had to be taken then to prevent the possibility (the likelihood?) that the troubles which had hit Northern Rock would spread to other financial institutions and to the wider economy. However that begs a very large question. It is very arguable that Northern Rock was only able to get into the position it did (borrowing short in the money markets, lending long in the mortgage market) because of the dilution in responsinility for the conrol of the financial sector which his boss, Prime Minister Gordon Brown, engineered as Chancellor soon after Labour came to power in 1997. The 'spin' now is that issuance of bonds will somehow clear the way for a private sale of Northern Rock and obviate its nationalisation, the 'spin' then was that the Bank of England was being granted automony by the government to regulate the economy by being given power to set interest rates (or at least that governing the rate used for loans given under 'lender of last resort' terms) without government interference, but less stressed (i.e. not stressed at all) was the removal of most of the Bank of England's role as regulator of the financial sector. In retrospect this was a calamitous decision and the responsibility for it rests soley with Gordon Brown.

The latest 'spin' is a desperate measure on the part of the government, and Prime Minister Gordon Brown, to avoid having to nationalise Northern Rock by concocting a mechanism which will persuade a private buyer to take over management of the bank. However, let no one be under any illusion that all the troublesome parts of Northern Rock's balance sheet will not remain as a public liability for years to come.

As the BBC's financial editor Robert Peston observes quite correctly:

In this game of chicken, by signalling how reluctant he is to push the nationalisation button, it was the Prime Minister who blinked this weekend – and the hedge funds may well be feeling pretty chipper.

The hedge funds, to recapitulate, are shareholders to the extent of about 18 per cent in Northern Rock who last week were, in the 'spin' at the time, defeated in their efforts to have resolutions passed at the EGM held then to restrict the powers of the Board of Directors to dispose of assets, to issue new shares or to acquire new assets. The defeat for the hedge funds, and all shareholders, last week needs to be seen in the light of the latest evidence of the government's reluctance to go for the nationalisation 'nuclear option'.

As a minor shareholder in Northern Rock myself I long ago gave up any hope of getting much (or anything) back from my investment and whilst I cannot pretend I am happy aobut this I accept it as a part of the risk I take in holding shares - as the caveat emptor phrase always states: "the value of your shares can go down as well as up".

Although Gordon Brown and his cohorts are presenting their latest 'spin' as some kind of solution to the Northern Rock crisis it is in reality nothing of the kind. It is merely an acceptance forced upon them of the harsh realities of the market. They hold an asset on the nation's behalf (the value of the loans granted to prevent the bank's collapse) which no private buyer wishes to acquire except under the most stringent conditons. The government has, however much it may puff and blow, been forced to accept that its, and our, commitment will have to continue for the forseeable future. That is the real meaning of the latest proposals.