Wednesday, December 31, 2008

The British State: the biggest Ponzi scheme in history

Perhaps the oldest fraud in the financial system is the Pyramid scheme, a fraudulent operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. In America, the Pyramid is known a the Ponzi scheme, after the name of one high profile fraudster of the 1920s.

The principle is simple: the scheme usually offers abnormally high returns in order to entice new investors. The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going. Yet the system is destined to collapse because the earnings, are less than the payments. Normally the authorities intervene, although in the case of the latest pyramid scandal- that of the "funds" run by Bernard Madoff - the scale of the losses is truly vast: an estimated $ 36 billion.

Yet, despite the scale of Mr. Madoff's alleged crimes, there is an even bigger Ponzi scheme, much closer to home, and one that is actually run by the British State. There are over 6 million people employed by the British State and the vast majority are entitled to receive pensions that they have not contributed to. Neither the state as employer, nor the employees have paid for the lucrative pension rights that are on offer, and the vast majority of these pensions are thus paid from the general pool of current taxation. MPs. judges, civil servants, all are entitled to receive large pension rights upon retirement.

Meanwhile, those in the private sector who have contributed to the National Insurance fund for there own pension have found that the fund was never created- that too went into the general pool of taxation. Those who, under the terms of the legislation of the 1980s and 1990s, opted to create private pension funds have found that after Gordon Brown began to tax such funds, over £4 billion a year is paid into the general taxation pool. All in all, more than a third of the general taxation pool is now being used to pay unfunded public sector pension liabilities.

2008 was a year of brutal financial turmoil. The fall of major investment houses lead to the gridlock of the whole financial system. Despite the dramatic cuts in nominal interest rates, the availability of credit in the market has shrunk dramatically, and where such credit is even available, the effective cost has risen substantially. It is clear that 2009 will see a punishing recession, but no one knows how deep or how long the economic plunge will last. The effect on private sector pensions, based on investing in different securities has been appalling. The pension fund deficit of the British Airways employees is so large that it is stopping the firm itself from proceeding with any of its hoped for merger plans with other Airlines.

The British government, however, has taken on some massive liabilities. The nationalisation of much of the banking system is increasing the liabilities owed from general taxation, and the markets are already concluding that British government debt levels are too high.

In Estonia health care is paid for from a genuine insurance fund, as is social welfare payments. Deficits are not permitted, and the overall level of state debt is exceptionally low- in good years the state even records a surplus. Despite he rapid growth of private debt in Estonia over the past five years, the levels of debt are still less than 40% of those of the UK. There is a higher level of net saving, which is the result of a fully funded pension system.

Unless the political class in Britain (which is the greatest beneficiary of the public sector pension scheme) can reduce the burden it imposes on the general pool of taxation, Britain faces a bleak financial future of high tax and rotting public infrastructure leading to declining competitiveness, social discord and increasing international irrelevance.

2009 will be a year of recession.

We do not know how long this will be nor how deep it will be. However, a root and branch reform of public sector finance is critical. Irrespective of party, the need for leadership is clear. Any figure brave enough to articulate the need for revolutionary change will demonstrate their fitness to lead. Yet are there any in what Peter Oborne calls the narrow self serving political elite who have the vision, the will or the courage to end the British Ponzi scheme and return the UK to financial honesty?

At the turn of the year a hope so, but I am not encouraged by what I see.

Tuesday, December 30, 2008

Gaps in time

Well a periodic return to the UK for Christmas has left me nursing a dose of the flu- hence blogging silence.

When on the mend I shall renew normal service.

Thursday, December 11, 2008

Learning the wrong lessons from the Crash

The scale of the financial and economic crisis that we now face, across the globe, is exceptional. It not just the absolute numbers- which, in a growing economy increase anyway- but the relative numbers which now look eye-popping. The scale of capital destruction is now even beyond the levels of the 1930s. There is no measure that we can grasp that means anything.

Many assets- like your house- are unsaleable at any reasonable price, possibly at any price at all. Meanwhile, Britain is choosing to take on the unlimited liabilities of the banking sector, and thus nearly doubling long term government debt and massively increasing state control over the economy. The idea of bank nationalisation- rejected by socialists in the past as too radical- is now embraced across much of the political spectrum. Government investment and even control is regarded as vital.

Er... hang on a minute.

It is not freedom or the free market that got us into this mess.

It was the fervent belief by bankers that they could predict the future and thus accurately price any given risk that got us into this mess. It was the epistemological arrogance of those who wrote endless reports predicting quarterly earnings or economics and continued to do so despite the fact that they were always inaccurate- I mean their inaccuracy was so total that they never got it right even by accident. It was those who chose closed models to represent open ended reality who have made the mistake.

Now we have had the longest boom in history, so sure enough it seems reasonable that we could have the longest bust in history simply to bring the imbalances back to normal.

Of course one of the reasons for this unexpectedly long boom was the repeated bubbles inflated by the policy makers. Therefore it does not make me comfortable that we are now handing over our entire finance system to precisely these same policy makers.

In the end letting banks fail -while protecting deposit holders- may well prove to have been a better option than keeping alive zombie banks. However the "decisive action" of Brown and Darling in "saving the world" now means we are committed to an open ended funding of all of the liabilities of the banks- not just their deposit holders. The state is over riding the creative destruction of the free market. The state is second guessing what market outcomes could, or rather should be.

Bad idea.

I believe that the current policies of the Brown government will, in time, be regarded as a major mistake. The bankers will continue to function as if their sacred cow- the "bell curve" was not an intellectual fallacy, and will delay the implementation of open ended risk control systems.

By which time the British economy will be worth precious little and our financial services sector, which historically employed millions and was the engine room of innovation and wealth in our country, will be dead.

Wednesday, December 10, 2008

More Migrationwatch twaddle

I have never had much time for Andrew Green - the absurd extrapolations of questionable statistics that his "Migration Watch" group publish periodically serve only to get a few scare story headlines rather than actually contributing to the debate on migration.

Since Mayor Boris Johnson- a figure who increasingly impresses me- mused publicly about the idea of an amnesty for illegal immigrants, it was only a matter of time before Green would publish some swivel-eyed nonsense.

The scare story headline was that "legalising" illegals would cost £4 billion. However even before we start, we find that half of this is somehow attributable to the partners and families of illegals- many of whom are actually already legal British tax payers. So even on Mw's numbers, then the cost falls by half to the still eye-popping £2 billion.

Then you look at the assumptions.

Essentially Migration Watch assume that those who are working would not only not pay tax, but would instead become claimants on the state.

As a former civil servant, Sir Andrew knows more than most about being a cost to the British tax payer. However the vast majority of immigrants to the United Kingdom- illegal and legal alike- would regard it as either pointless or a matter of some shame to claim on the State.

As usual, Migration Watch's numbers are simply meaningless scare tactics to promote a xenophobic and unpleasant agenda.

At a time when the population of the UK is actually falling sharply- with Poles returning home, and the foreign high-rollers in the City of London following them out of the door, we will increasingly struggle to compete as further skill shortages emerge.

In such circumstances, the anti-migration lobby may get what they wish for... and then really wish they hadn't.

Monday, December 08, 2008

De Mortuis....

A principle said to have been first recorded by Chilon of Sparta, but more usually given in Latin is "de mortuis nil nisi bonum decendum est"- "Of the dead speak nothing unless good", or rather, do not speak ill of the dead.

Yet there are those where it is very hard to adhere completely to this rule. I don't mean such obvious villains like Stalin, but more nuanced figures. Such a figure is the late Russian Orthodox Patriarch, Alexius II. His death at 79, announced on December 5th, came after a long illness. In its wake came a raft of obituaries and even the conventional obsequies hinted that there was perhaps rather more to this man than a conventional prelate.

Alexey Ridiger was not born in Russia, but in independent Estonia in 1929. he was the child of a German Baltic baron and a Russian mother. Although his family had fled to Tallinn to escape persecution, he was not a figure likely to be friendly to his birthplace. Nevertheless even after the occupation of Estonia by the USSR, despite the religious persecution visited by the Communists on all faiths, he continued to be active in the Orthodox church. As a young man he seems to have had sufficient personal integrity to resist the oppression of Marxism-Leninism. Nevertheless, he was in time able to serve two masters.

In 1950, he was ordained and that same year he chose to marry. Yet within one year he was divorced, and in the subsequent years he is said to have become a collaborator with the feared and hated KGB. It seems almost certain that by 1957, he was a fully fledged member of the KGB- a senior officer in the 5th directorate for religious affairs, though he may also have reported to the 7th directorate- the surveillance of Soviet citizens. It was with such connections that in 1961 he was appointed Bishop of Tallinn and all Estonia.

It was a difficult time in Estonia- the guerrilla war of resistance to Soviet rule that had been largely ended in the mid fifties had only reinforced the deep suspicion of the Estonians by the Soviet authorities. All senior figures in society, and especially the Communist Party were either Russian or Estonians that were so Russian that they could barely speak their native language- for which reason they were known as "Yestonians". In such an environment it is crystal clear that the young Bishop could have only risen to his position with the full support of the KGB. Nevertheless, Alexey conducted a religious life, becoming very close to the Convent of Puhtitsa in Eastern Estonia- a connection that was to continue for the rest of his life. It is also said that he prevented the destruction of the Alexander Nevsky Cathedral in Tallinn- yet the cathedral, only constructed in 1912, has always been seen as a visible example of Russian colonialism in Estonia, which may have been the basis of his appeal to the authorities.

In the 1960s the future Patriarch saw a rapid rise in the hierarchy of the church and, it now seems clear, within the KGB as well. After rising to Archbishop in 1968, he was made Metropolitan. By this time, it is understood that he was very close to the top of the KGB 5th directorate. Any resistance to the Communist party was rooted out, and such members of the church that did resist were not merely imprisoned, they were very often disavowed by the very church to which they gave their loyalty. Many Priests and many more ordinary members of the church were sent to the camps, and many were martyred for their faith. While the Metropolitan struggled in public to save buildings for the forms of religious use, the faithful themselves faced torment.

In 1986, Metropolitan Alexey became Metropolitan of Leningrad and Novgorod. It was at this time that he may have first encountered a young KGB officer, newly returned from East Germany, Vladimir Putin. After the death of Patriarch Pimen in 1989, Alexey, despite his unusual non-Russian background, became the Patriarch of All Russia. Yet, as the Soviet Union went down the drain, his parallel career seems to have withered. Certainly in the early 1990s, Patriarch Alexey stood up for the rights of the church- becoming increasingly militant in so doing. Yet, in his implacable opposition to the Polish Pope John Paul II, perhaps he revealed a little of his KGB biases. Certainly, John Paul was never able to visit Russia, although it was for many years his dearest wish.

Latterly, Alexy appointed many bishops in his own stamp: deeply conservative and fiercely protective of the Russian Church to the exclusion of all else. The emergence of the KGB faction in power under Vladimir Putin brought substantial new rights to the Patriarch who, with the restitution of much church property, was now leading one of the wealthiest organisations in the Russian Federation. The reconstruction of the -rather vulgar- Cathedral of Christ the Saviour in Moscow was a public symbol of the full restitution of the rights of the Russian Orthodox Church- under complete state protection. In exchange for such protection, Alexey gave unshakable backing to the regime- even supporting such actions as the Chechen war. Unashamedly patriotic, the Russian church retains to the full its traditional role as the supporter of the government- whichever government, seemingly, is in power.

Although Estonian born and a long time Bishop here in Tallinn, there are no flags at half mast here in Estonia- perhaps more surprisingly, even the Russian Embassy has not dipped its flag to mourn this controversial figure. His legacy of cravenness to the powers that be may survive him, but it seems more likely that the last Soviet Patriarch may bequeath a more pluralist church than he intended. As he meets his maker, it will be a mixed record that he must show to God. It is certainly a record that will require more forgiveness than is usual in the life of a cleric.

Sunday, December 07, 2008

The Speaker: on and on and...?

Mr. Speaker Martin is holed below the waterline.

His attempt to brazen out his crisis by placing sufficient blame on the Sarjeant at Arms to distract attention from his own personal culpability in allowing Police to search the Parliamentary office of Damian Green MP at best strained credulity and at worst was simply contemptible cowardice.

The support he is receiving from such figures as Peter Mandelson demonstrates the scale of the Speaker's failure: his performance has become a matter of party politics.

Now, we understand, the Speaker intends not only to remain in office until the next election, which might have been tolerated even by a House of Commons that has been severely shaken by his incompetence and cowardice, but even to stay in office after the next election.

This is simply not acceptable.

The next election could lead to a hung Parliament, with Labour losing the popular vote and yet still gain the larger number of seats. In such circumstances the country must have confidence in the key arbiters of the constitution. Speaker Martin has no such confidence.

In my view it should be made clear that the Speaker will stand down at the next election. Already over fifty Members of Parliament have expressed reservations about the Speaker, and the Leader of the House- despite the Mandelsonian manipulation in the background- has not been able to express confidence in the Speaker- despite the Prime Minister doing so. Indeed unless the Speaker makes it clear he will go, he should face censure by the House, up to an including impeachment from office. It should also be made clear that all parties will stand to contest Michael Martin's Glasgow seat.

Wednesday, December 03, 2008

The Self Server self serves.

All opponants of this Labour government will now need to be adamantine in their discipline this afternoon.

The disgraceful intervention by the poisonous figure of Lord Mandelson is a deliberate attempt to pour petrol on the flames of justified indignation over the detention and arrest of Damian Green MP.

To accuse those who are already extremely angry at the contempt of Parliament that the executive has shown of being "self-serving" is outrageous. It is also a deliberate attempt to wind up the opposition and ensure that the effectiveness of their attack on the partisan and incompetent Mr Speaker Martin is blunted.

It is a classic of the Mandelsonian oeuvre of political wickedness.

I think the agenda of the Conservatives and Liberal Democrats and those Labour MPs who are also deeply concerned about what has happened needs to be to protect Parliament above all else.

After that, if the Speaker is culpable, then he must face severe censure and consider his position.

As for the contemptible Mandelson- revenge is a dish best served ice cold.

Defining Liberalism

Stephen Tall, in a terrific post at Lib Dem voice, has made a challenge: to sum up the idea of the Liberal Democrats in a single phrase or sentence.

He points out that Conservatives can sum themselves up as supporters of "wealth creation", and Socialists as supporters of "equality".

It is of course very difficult and may be pointless to try to sum up the richness and power of liberal ideology in a single phrase, after all the Wikipedia article on the subject of Liberalism is one of the largest.

Nevertheless, in response to challenge from the former Deputy Lord Mayor of Oxford, I will give it a go:

"Liberals believe in the perfect right of the individual to control their own destiny"

Monday, December 01, 2008

Nick Clegg: Time to listen as well as talk

The latest gossipy nonsense published by the Sunday Mirror reporting comments that Nick Clegg made in a conversation with Danny Alexander on the flight to Inverness that were overheard by a journalist are no more than the trivia of political backstabbing. They can - of themselves- be safely ignored, however embarrassing they may be. However, as with the unfortunate interview where Nick gave a -no doubt truthful- account of his sexual experience, and his rather weird comments recently about what his family are doing to face the credit crunch (not much), the fact is that he has again been rather too loose-lipped in public.

Although I do not know Nick Clegg personally, I have known several past leaders of the Liberal Democrats quite closely: Charles Kennedy is a long time family friend for example, and as a former Scottish activist, I have also been on friendly terms with Ming (and Elspeth) Campbell. Paddy Ashdown remains a personal hero of mine. I am very well aware of the problems, both personal and political, that the leader of the Liberal Democrats has to endure- and am very sympathetic to the enormous difficulties that are imposed on our leadership.

At the beginning of the leadership election I took the view that Nick Clegg was an intelligent and rounded political figure- and I still think that he is. The only real concern that I had was that his life has been lived too much in politics. In short, he seemed to be part of the professional political class that has arisen in Britain over the past twenty years. Once there was a large number of MPs who had direct experience of business, either as executives or as trade unionists. These days, the number of MPs with such experience is dramatically lower: few of the leading members of the Cabinet or the Conservative front bench has spent very much time away from politics, and where they have they have tended to come either from legal backgrounds or from the public sector. As the leadership election went on I, and many other members of my party, grew increasingly impressed with Chris Huhne: a man who had built a multi million Pound business as well a having been an award winning economic journalist.

In the end, as we know, despite having entered the race as comfortable front runner, Nick Clegg barely scraped home as the leader of the Liberal Democrats. As leader he has the mandate to shape the party in the way that he seems fit. I have been very happy to support Nick in his difficult role. However, the fact is that in the face of an arrogant Labour government and and inept Conservative opposition, it is pretty disappointing to see the long run of opinion polls that show the Liberal Democrats falling back from the level of support that we gained in 2005. While the distortions of our electoral system and our own tenacious campaigning mean that it is by no means certain that we would suffer an overwhelming setback at the next election, the fact is that we should be talking about advancing, not fearing retreat.

It is now not about policies. Over the past few years, the Liberal Democrats have crafted a raft of thoughtful, costed and effective measures into an integrated political programme. I am delighted to see many measures that I personally support being adopted by the genuinely Liberal leadership in our party. The tax debate that I would like to see has not yet happened, but I am probably more at one with the policy positions of the party than I have ever been.

It is not about talent. Such figures as Vince Cable, David Laws, Ed Davey, Chris Huhne, Steve Webb, Susan Kramer would be senior ministerial material in any party. The experience of Charles Kennedy, Ming Campbell, Malcolm Bruce, Alan Beith and many members of the Lords gives a real pool of wisdom from which the leadership and the party can draw.

Over many years, one problem that the Liberal Democrat leadership tends to have is that they- and I mean all of the leaders- tend to take advice from a very narrow circle. Furthermore, this circle tends to exclude all but a very few Parliamentary colleagues. The Leader's office- like the Party headquarters in Cowley St., is staffed mostly by activists. It is very easy for the office to retreat and become a "bunker". Certainly, the increasing isolation of Charles in the later part of his leadership was not only a desire by those around him to protect him- it also suited the narrow circle around him to limit access to the leader.

Sure enough, it seems that our new leader is not reaching out to Parliamentary colleagues either. If he had, then he would know that, however laudable it may be for a man to spend time with his family, the Liberal Democrat leader must, like his MPs - many from the most distant constituencies of the kingdom- sometimes sacrifice his family time. Refusing to give up a working day a week with his family under any circumstance annoys such MPs several of whom also have young families, which they can not see in the week no matter what. Likewise talking about his rather privileged family circumstances as though this was normal for most people in the country gives a bad impression.

Restricting his advisers to those of like age and background will also limit his appeal to the country as a whole.

Nick Clegg is being painted by the media as a Cameron lite. To beat this, He must now reach out to his colleagues and to the party. He needs to engage with both and not -as some previous leaders have done- regard them as more of a liability than an asset.

His private office needs a significant shake up- it gives the impression of an arrogant and out of touch leader, rather than a listening and engaged figure.

We have a rich and talented party, both in Parliament and across the country, which should be used better. With Ros Scott, the newly elected Party president, Nick has an opportunity to exploit these reserves of experience across the party.

All he has to do is ask.

The Speaker for The Constitution

The arrest and detention of Damian Green MP marks a point where executive power has been deployed against the very legislature to which it is supposed to be accountable.

Rightly, figures amongst all parties have expressed profound concern. The badly drafted and anti-liberal terrorism legislation that MPs agreed, despite widespread public misgivings and the deep opposition of Liberal Democrats, has actually been deployed against one of their own members.

In fact it appears that the Parliamentary authorities actually agreed to permit the Police to search Mr. Green's Office.

There are two responses.

Firstly it is now quite clear that supposedly "anti-terrorist" legislation is being used as a catch-all. The seizure of the assets of Iceland: a friendly power and fellow NATO member, and the arrest of Mr. Green demonstrates that much of this legislation has far too broad an application. The measures should at the very least be redrafted to permit only a specific scope, or -better still- abolished altogether.

Secondly the role of the Speaker in the granting of permission for the search must be questioned. I hold no brief for Mr. Speaker Martin: his election broke party conventions that the office should alternate between parties, and he has proven partisan and incompetent in office. In my view he is much the weakest holder of the office that I have seen in my lifetime.

However if it is the case that the Speaker, together with the Serjeant at Arms, did indeed permit police entry into Mr. Green's office, then his position is simply untenable. The arresting officers, by harassing a member of Parliament in the course of his duties seem, prima facie, to be guilty of contempt of Parliament: a dramatically more serious crime than contempt of court.

If Mr. Speaker turns out to have sanctioned the Police raid, then as a bare minimum he owes the House of Commons a deep apology. Personally, in my view, the House would be within its rights to launch impeachment proceedings against the Speaker. The Liberties of the House are by implication the basis of the constitutional liberty of the whole Kingdom, and his failure to protect those liberties is not a minor offence: indeed, if proven then he can not remain in office.

As for the executive in whose name this investigation has been prosecuted- with or without the personal knowledge of the Home Secretary and the Prime Minister- they have rightly earned the withering contempt of the House. The partisan anti-liberalism on constitutional matters of this woeful government should be punished with extinction. This Rump government deserves no less than the Rump Parliament at the hands of Cromwell.:

"You have been sat to long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!.”

Thursday, November 20, 2008

Brr... its global warming

The snow has come to Tallinn, and after a rather warm and not very snowy winter last year, the Estonians are hoping that this year will revert to the traditional cold, snowy and crisp season that allows people to ski most of the time.

This year we have even seen early snow in London. So, despite the undoubted issue of Carbon Dioxide emissions, we could still be in for a colder than average winter across Europe. Indeed, the global slowdown will certainly reduce the emission both of CO2 and heat into the atmosphere- and thus, as in the recession year of 1981, the reduction in the overall economic activity of mankind may notably chill the planet.

The inevitable reaction from many will be to ask: "What global warming?" and perhaps to dismiss the large body of evidence that suggests that CO2 emissions is a significant pollutant and is effecting major and possibly critical changes to the global climate. Of course, a cold winter will change the overall averages, but the data will still suggest that we still have a significant problem to contend with.

So, rather than turn up the heating, I will still be putting on extra clothes to face the cold.

Tuesday, November 18, 2008

The Liberal Principle

The return of Mandelson to British politics has certainly increased the shrillness factor. Despite pledges of bi-partisanship in "facing this grave crisis", within a few weeks we are back to business as usual. Despite the blatant culpability of Gordon Brown- "no return to boom and bust" now sounds like a slightly off-colour Carry-On joke- the Conservatives have struggled to inflict further damage on the Labour government.

There has been much discussion- not least amongst Conservatives- about why this could be. Some have pointed the finger at George Osborne. Certainly he has been guilty of some serious personal misjudgements- not least over the Corfu affair. It is also true that the timbre of his voice and his rather effete demeanour bring out the worst in even the least sensitive class warrior. Despite the fact that those who know him suggest he has an astute political brain, the fact is that he irritates a lot of people, including on his own side. Yet it it is what he is trying to do politically that is making him vulnerable- not just his "cocky little runt" manner. Osborne is trying to force the political game onto a strategic ground beyond the news media's attention span. By talking about longer term policies he is essentially giving up the tactical battle for immediate action to the Labour spin-meisters.

Perhaps part of the problem is that while it is true to say that tax cuts today have some negative consequences for the future, the fact is that they have immediate positive consequences, and by the time that the negative consequences come round, much may have changed. Being a Jeremiah also negates the positive atmosphere that David Cameron wishes to envelope the Tory brand- and these mixed messages are confusing the Conservative faithful. More to the point, as so often in the past, the Conservatives are not behaving like an opposition- they presume that they will simply inherit power- and the electorate grows weary with such presumption. Unless the Conservatives can do more than talk about the pragmatic course they would follow in the current circumstances they risk losing the fourth election in a row.

What then of the Liberal Democrats? Jeering Tories would point out: "so what, your party has lost twenty three elections in a row". It can not be denied, although it also true that over the past three elections the number of Liberal Democrats in the House of Commons has grown from 20 to 63. Although apparently squeezed a little in the opinion polls at present, there is still the prospect of further progress for the future too.

However such progress is not going to come from following the Conservative or indeed Labour road of pragmatism before principle. The pressure that comes on George Osborne from his own part is the result of his failure to articulate how his positions- both tactical and strategic- advance the Conservative agenda, and the fear of many Conservatives is that the answer is that they don't.

The election of Ros Scott as the President of the Liberal Democrats is a timely reminder of the value of sticking to principles over the longer term. Ros has been a particular supporter of the Liberal vision of international relations: that the power of states should be limited by international law. This principle is why the Liberal Democrats could not support a war that had not been endorsed by the United Nations- an organisation whose rules our country had pledged, by treaty to uphold. At the time, both Labour and Conservatives chose to ignore this principle in favour of a pragmatic support for George Bush. Over time, the power of these principles has been validated and the short term abandonment of them has been punished.

Liberalism is a coherent political agenda, promoting political and economic empowerment of the Citizen. By definition, Liberals are opposed to the Nanny state, and I think we should say so more often. We also support greater economic diversity- and in particular mutually owned businesses as part of a wider free market economy appeal to our ideas of empowerment. We also understand that much of the current regulatory regime is onerous and quite often it fails to recognise and apply true economic costs to specific activities- forcing the general taxation pool to bare the burden. This is why we have advocated polluter pays and cap and trade programmes to deal with the economic cost of environmental degradation. I could continue down a long list, showing the ideological coherence of much of the Liberal Democrat policy platform. However, the problem that Liberal democrats have is not that they have too few policies, but that we do not talk about the core principles that underpin our policies.

In my opinion, what ever subject is under discussion the message should simply be to explain how the key principles of freedom and the empowerment of the citizen are promoted by our position. It is the antidote to the shrill short termism of the Mandelsonian media manipulation and it also avoids the trap that George Osborne is falling into: failing to explain what a policy or even a party is FOR.

Monday, November 17, 2008

The disastrous miscalculation of Vladimir Putin

As I have warned over the past few months, Russia is being particularly badly hit by the global financial crisis. Partly this is a function of the severity of the collapse of commodity prices, especially oil and gas, which has had an exceptionally serious impact on a country where 85% of GDP relies on the extraction of raw materials. However the scale of the crisis in Russia has been hugely increased by a number of massive miscalculations by the Silovik state. Now the speed and scale of the Russian meltdown could conceivably become a threat to the stability of the Silovik regime itself.

As energy prices rose from their lows of a decade ago, the regime which took power after the resignation of Boris Yeltsin on New Years Eve 1999 made oil and gas the central plank of their economic policies. In a sense this was a natural thing to do, but from the Kremlin's point of view, it had several political advantages. Firstly, control over oil and gas was a lot simpler than controlling the complicated logistics chains of modern industry; and secondly the oil reserves could not be shifted overseas, beyond Kremlin control. However, by making oil and gas such a priority, the Russian economy suffered two unwelcome effects: firstly the strong Rouble rendered much of Russian industry uncompetitive so that it subsequently collapsed and secondly it made Russia much more vulnerable to big swings in commodity prices. In effect Russia lost more complex elements of its economy and in a sense therefore actually became less developed.

Nevertheless, the surge in energy prices, based around a global economic boom and concerns about "peak oil" dramatically improved Russia's financial position from the point where they defaulted on their debt on August 15th 1998. Russia became awash with liquidity- much of it provided by the global banking system, which was chasing yield wherever it could find it. Yet, even in these good times, there were significant problems. The increasing use of state power against certain oligarchs was greeted with concern, particularly the arrest of Mikhail Khordokovsky, the chairman of Yukos, an oil company which had gone the furthest in adapting to a Western business model and was, from the Kremlin point of view showing worrying signs of independence. However for most people, the murderous history of these so-called Oligarchs actually made the idea of the Kremlin cracking the whip against them quite popular.

The government of Vladimir Putin, it was suggested. was built upon Order. However, it was not built upon Law. The continuing high levels of corruption were only part of the problem. There was simply no recourse anywhere in the Russian constitutional or legal system. The government was not a government dependent on laws, but on the personal decisions of its occasionally capricious leaders. Without any legal order, disputes have often turned violent. The murderous habits of the Oligarchs were adopted in full by the Siloviki- the tight-knit and shadowy members of the former Soviet security services such as the KGB like Vladimir Putin himself-who often turned out to be the same people as the Oligarchs.

This lack of legal certainty meant that completely arbitrary decisions were being taken. Massive contracts involving major global companies were cancelled without warning or redress and technical skills that these companies had brought to Russia were stolen. It became quite clear that intellectual property, like every other property in Russia, could not be protected from arbitrary theft by the state. The cancellation of the Shell Sakhalin-2 consortium was a major example of this.

Then came the dispute between BP and their partners in TNK. here it was not just the technical expertise that was under threat, but the very concept of ownership at all. BP executives were forced to flee for their very lives as it became clear that even BP could not protect its own legal interests against those of the Silovik-Oligarch ruling elite. At this point, confidence in Russia was being seriously shaken, and several major investments planned by global investors in the country were abandoned.

At the same time, the power elite in the Kremlin, seemingly awash in petrodollars, had been putting forward an increasingly assertive foreign policy. Popular at home, these policies often seemed to be nothing more than doing the opposite of what Western powers wished Russia to do. Hostile rhetoric became the order of the day and the myth grew that Russia had somehow been humiliated by the West and was now simply restoring their rightful place in the world order. However the invasion of Georgia, after a series of provocations designed to lure the erratic Georgian leader, Mikheil Saakashvili into an ill advised military response, was a spectacular own goal. Although the Western political response was weak, the invasion led to a dramatic loss of investor confidence in Russia.

Since the invasion of Georgia in August, Russia has seen a spectacular market rout, which dwarfs anything seen in the West. The market value of Russian companies has fallen by over $1 trillion. The credit freeze in the West has been even more severe in Russia and the market collapse firstly triggered margin calls and then essentially bankrupted the Russian banking system. Despite the amassing of $450 billion of Russian reserves, more than a fifth of this carefully husbanded war chest was lost in a single month.

In a single quarter Russia has gone from hubris- riding high in confidence and expectations- to nemesis- a spectacular meltdown across their entire economy.

Yet the political response to this crisis from the Siloviki has been pitifully inadequate. They have continued their aggressive foreign policy: responding to the anti-Iran missile shield by moving short range Iskander missiles into the Kaliningradskaya oblast was a highly unwelcome distraction to President-elect Obama. However since Russia only has six functioning missiles, the threat is ultimately empty. It does, however, underline the fact that Russia would like to be a strategic challenger to Western interests and thus reduces western goodwill to Russia still further.

The determination of Vladimir Putin to return to the Presidency has also been underlined by the increase in the Presidential term proposed by his successor. Yet by doing so he has given reinforcements to those in Russia who speak out against the regime. Until now supporters of Putin have argued that his respect for the constitution was absolute, yet this move makes it clear that it is not, and that threats of dictatorship are not so wide of the mark after all. A Putin return to the Presidency before the expiration of President Medvedev's four year term expires will only add to the perception that Putin is indeed a tyrant. Should he do so, his popularity is likely to be well below the high levels he enjoyed during his first period in office.

In fact the change in the Presidential term only underlines the contempt for Law that has been the hallmark of the Putin regime. It is this contempt that is destroying the economic and social fabric of the Russian State. The root of the popularity of Putin's first term was not so much in any particular policy that he adopted, but in the fact that the overall levels of Russian wealth were being increased by the commodity boom. The end of the boom has thrown the Russian economy sharply into reverse. The regime, whether under Medvedev or under Putin, now faces a return to bad economic times. It will be impossible to eliminate a gathering background noise of criticism, although it is said that there are advanced plans for a further political crackdown should the country hit a period of unrest.

In the end, Putin will discover that Order without Law is highly unstable. Unless the regime faces the demons of corruption and violence and creates a constitutional and legal order it risks a revolutionary explosion. The fact that the regime patronises militant paramilitary "youth" groups such as "Nashi" shows how far away they truly are from understanding the realities of a state of laws. It is not impossible that they could retreat into their authoritarian comfort zone and attempt to create a quasi-fascist government. Yet that might even lead to the break up of the country- a significant and growing proportion of the population of Russia is not ethnically Russian, and the support for the tiny number of Ossetians and Abhaz in Georgia has also woken up the several million Tartars, Bashkirs and of course Chechens.

Hard on the wings of the economic crisis, Russia now faces a constitutional and political crisis.

Sunday, November 16, 2008

The indiscreet charms of George Osborne

Much has been made in the British press of the comments by George Osborne on a future British currency crisis, what he called "having a proper sterling collapse, a run on the pound". Leaving aside- for the moment- the convention which Osborne has broken that opposition politicians do not talk down the British economy, let us examine what George Osborne is saying.

On Friday, Sterling hit a a six and a half year low against the US Dollar and a record low against the Euro. The immediate cause was a series of extremely gloomy predictions for the UK economy and the expectations, that despite the 150 basis point rate cut, there could still be further reductions in British interest rates. None of this, you note has much to do with UK government borrowing. However the risk of a run on the Pound that George identifies is based on the idea that the Labour government intends to make a significant fiscal stimulus, in effect following the Lib Dem line that significant tax cuts are now required. However, whereas the Lib Dems would make such cuts broadly revenue neutral, Labour intend to increase government debt. It is this increase in government debt that Mr. Osborne suggests is dangerous.

However, the fact is that while the short run revenues of the British government are not looking particularly healthy, the overall level of government debt is- in international terms and even including Northern Rock- by no means dramatically out of line with most industrial nations. So, while I do not advocate Labour policy, Mr. Osborne is actually just plain wrong when he suggests that an increase in overall government debt is an imediate threat to the British currency.

However by suggesting that the Conservatives would not follow a loser fiscal regime, and he can not offer tax cuts, he must now do worse and now indicate what spending cuts he would implement as Chancellor. By essentially saying that there is no room for any tax stimulus he is arguing that not only would he maintain taxes at current- pretty punitive- levels, but would also most likely cut expenditure budgets, just as the UK economy is entering an extremely deep recession. The impact of such a policy would certainly deepen the impact of the recession.

In short it is not Labour who are being irresponsible here, it is Mr. Osborne for ruling out tax cuts and tacitly saying that he would significantly reduce government expenditure who is being willfully reckless.

We have already seen the price that George Osborne has paid for his indiscretions on Corfu, but this policy blunder is not- as Andrew Rawnsley argues in today's Observer - a strategic positioning, it is a mistake that undermines still further Mr. Osborne's credibility in the eyes of the City and the global economy.

The fact that Mr. Osborne broke the political convention of avoiding negative comment on the economy simply undermines the risk that he has taken. While I do not doubt that the Conservatives will rally round their wounded Shadow Chancellor (as Iain Dale has loyally done today) the fact is that Mr. Osborne has put his foot in his mouth. He- yet again- shows poor economic and indeed political judgement.

There may yet come a time when it is not Mr. Osborne's judgement that is under most scrutiny, but the judgement of David Cameron for keeping the indiscreet Mr. Osborne at his post.

Saturday, November 15, 2008

And thats not all...

I see that some sections of the British media are tearing themselves apart because some survey has identified that some parameters of health care are better in Estonia than in the UK.

Well like... duh.

My experience of the Estonian health care system is very positive, while for chronic illness like cancer, they probably can not score better than Britain, since the number of patients is so small, there is little doubt that the flexibility of Estonian health care is better than in the UK. At my doctor's surgery in London I may call on Monday in order to get an appointment on Wednesday. I may not call earlier, because government targeting will not allow me to wait more than 48 hours for a doctors appointment. In Estonia I can call whenever I wish and an appointment is usually available within the same day or at the very least at a time at my convenience.

Of course the Daily Mail -which is particularly cross about this Estonia comparison- probably thinks that Estonia is a third world state, rather than the rather Scandinavian place that it is, so the presence of Doctors probably comes as a slight surprise, but of course other Scandinavian countries also score better than Britain in a range of health care issues. However what should shock anybody in the UK is that this better service exists pretty much across the board in public services, despite the fact that the Estonian tax burden is quite a bit lower than in the UK.

Both Tory and Labour governments have imposed external performance measurement without understanding that such measures distort what they are trying to measure. In Estonia, as in the rest of Balto-Scandia, there is a more hands-on sense of responsibility amongst professionals.

Because Doctors, Matrons or Nurses have to take responsibility for their own actions, they don't need professional administrators. the result is a far lower cost and a far more efficient delivery of service.

British politicians will insist on trying to second guess things, whether that is the market mechanism or the delivery of health care.

Since most British politicians have no executive experience at all, it is easy to see why they are only able to deliver expensive, inefficient and low quality services.

Now they have taken over the banks, it is no wonder that the global markets are not exactly alive with confidence in UK PLC, and frankly- despite his self confident comments- if George Osborne were in charge I suspect that market confidence would be even lower.

If Vince Cable were in charge, on the other hand, I think things would be rather different...

Thursday, November 13, 2008

Yo-ho-ho and a bottle of Rum

The news that HMS Cumberland attacked and captured a Somali pirate vessel in the Gulf of Yemen was one of those slightly quaint pieces of news that is somehow rather cheering.

On the one hand while we know how desperate the situation is in Somalia and the autonomous Puntland, Pirates, by definition, are the bad guys. The seizure of the Ukrainian ship "Faima" and its cargo of weapons was clearly the last straw for the international community. The fact is that we can not allow global logistics chains to be disrupted like this. On the other hand, there is not the global political will to actually sort out the truly awful situation on the ground in the wreckage of Somalia.

Personally, I think it is about time to admit that Somalia as a state is not fixable. To my mind that means recognising the independence of Somaliland- the former British Somaliland- and allowing that country to develop more normal relations with the rest of the world. It is, after all a more or less orderly state, unlike its neighbours, Puntland and South Somalia, but the lack of international recognition has severely hampered its development.

Meanwhile the incident was the lead news in Russia last night. The story reported was that the Russian ship Neustrashimy ("Intrepid") had led the attack. The comments from the Royal Naval boarding crew show that they were unaware that the Russian ship was even in the area. The problem is that the Kremlin is now living in such a fantasy land that they seem to be beginning to believe their own -highly embellished- version of events, no matter what evidence there might be to the contrary.

In the meantime, I am wondering what the idea of Somali pirates might do to "International talk like a pirate day". It really would not do to change "Avast me mateys!" to whatever the Somali equivalent of "Oh B*****!" might be.

Wednesday, November 12, 2008

When Bloggers attack

I had been holding off blogging- partly because being located in two countries at once seriously limits your free time, but also because I had come to question the value of blogging.

This blog is not a particularly widely read one- although when it is running regularly it attracts about 5000 people a month. The big blogs, such as or Iain Dale or Guido Fawkes attract hundreds of times more readers. The problem is that many of these readers seem to leave their brains at home. Guido makes a point of stirring, so we can hardly be surprised at the visceral response that his posts attract. Even Iain Dale likes to gently goad his political opponents. The biggest disappointment for me though has come from The current joke is simply to wait for a new thread and then post "first"- which I simply find irritating. The level of debate has become a lot more variable, and the level of vituperation and rank rudeness has grown stronger over time. The civilised discussion club where different party views could be simply debated quite often becomes an aggressive and unpleasant bear-garden. The Private Eye parody of blogs is often not a parody at all.

I suppose it is inevitable that a backlash was going to come- although I hold no brief for Hazel Blears- but the fact is that many bloggers, if not nihilistic, can be boring dullards- and I am sure than several of my own posts do not measure up to my own standards.

However, I have decided to start blogging again simply because I still hope that I have something to say, based on my own rather unique life experiences, but that I also see some serious questions that I do not see either the mainstream media or indeed other bloggers particularly addressing. My career has been in finance, which is now the centre of the global economic storm- a storm that I think I understand. However I have also been privileged to get to know a key region- Central & Eastern Europe, a place where critical political challenges are still being resolved, not least in the aggressive challenge against global peace that has emerged from the increasingly tyrannical Moscow Kremlin over the past few years.

I also stand by my domestic political agenda. I believe in political, social and economic freedom. I oppose the distorted version of those principles that is emerging from the opportunist and overly pragmatic Conservative party and the totally unscrupulous Scottish National Party, and I naturally deprecate the "vision of the anointed" put forward by the meddling and incompetent Labour Party.

So, in so far as time may allow, I will try to keep this blog up for a while longer so that I can put forward my point of view, and of course engage with those people that are interested providing that they too do not fall into the blogger's trap of ill informed invective...

Understanding risk: why we are storing up even more trouble in the banking system

The last few years have seen a extraordinary consolidation in the global banking sector.

The rise of the global mega-banks has devolved global decisions onto a very small number of credit committees and a steadily smaller number of different lending policies. Many have argued that this has simply reflected the increasingly globalised economy, where corporations require a limited number of the banking relationships but still want to have access to large pools of credit and capital.

The ecology of the global banking system has become increasingly a monoculture.

The problem remains that the general view of what risk is is becoming broadly similar around the world, yet as we have seen in the repeated need for recapitalisation of different banks, this general view is wrong.

Now, we are seeing emergency rescue plans for the banks that involve yet further injections of equity capital, but this time, at the expense of the state and not the market. Meanwhile the proviso is that in exchange for this cash injections, the state demands yet further consolidation in the number of banks.

It is hard not to view this as a potentially lethal mistake. The entire risk model of most of the global banking system has been proven wrong, and instead of encouraging a de-concentration of risk and a more diverse set of risk control policies, the the nationalisation of much of the western banking system seems set to deliver massive mega banks which rely on a risk model that has already failed.

Thus, even if the current policy delivers a short term relief, in the longer term it is increasing the likelihood that there will be a failure of risk control, and will make that impact of the risk failure even larger.

It is now critical to diversify the ecology of the credit system. Increased competition is critical and once the system has been stabilised, governments should seek to break up the huge concentrated pools of capital and allow a much greater diversity in the market for risk taking.

Instead of a single provider of credit, a more syndicated approach can still allow the global corporations to obtain the capital that they need, but without forcing the kinds of concentration of risks that was the driver for the global bank consolidation in the first place.

We have seen repeated bank crises over the past twenty years, and the consolidation has increased the scale of rescues that have been required- we are now putting the entire financial solvency of our political systems at risk. The merger of Lloyds-TSB and HBOS should be reversed as quickly as possible and the larger financial behemoths need to be broken up and far greater competition allowed. Unless this happens the scale of the next crisis could be beyond any financial rescue programme from any government.

Tuesday, November 11, 2008

The difference between may, might and will

Cicero does not believe in predicting the future- understanding the present seems complicated enough.

Journalists, on the other hand have no such scruples- they are quite happy to extrapolate to absurd conclusions and then print such conclusions as though they were definite fact. For example, for some time the conventional wisdom is that the UK and the Western world will suffer an obesity "epidemic". Now, leaving aside the idea that obesity could somehow be infectious, the numbers quoted for the overweight were generally forecasts, and were based on then-current trends. Usually the journalist would say something like "on current trends by X year 95% of us will be morbidly obese and as a result suffer from high levels of X", usually heart disease, diabetes etc, which are illnesses associated with obesity. Now, this story has become rather old and we now have stories that "obesity may have peaked". This is not a new story- it is simply the other side of the data that had already been published. The difference is simply the story.

The same now applies to journalistic commentary on the current economic position.

I am currently dividing my time between Tallinn and London. As a result I pay some attention to the international commentary on the Baltic economic position. Almost always there are serious mistakes in fact. For example, most journalists note that the three Baltic countries are now in a recession. They also note that they suffer from a current account deficit. However the deficit number usually quoted is 6-12 months old, while the GDP numbers tend to be the latest months. The result is that the journalists seem to believe that the economic situation here is like Iceland, and that like Iceland, the Baltic states will effectively go broke. The forecasts are usually made in the light of some discouraging economic news, such as a -rather overdue, in the light of global problems- credit rating downgrade. Almost never do journalists note that the current account deficit has halved in less than nine months. Partly this is simply because so few journalists understand why this is important, but also, this would get in the way of a good story.

How can Estonia's banking system collapse in isolation, when 90% of the banking system is Swedish owned?

If I listened to the commentators, I would guess that Estonia had been on an international spending spree, like Iceland, when in fact the reverse is true- Estonians have been selling their assets to international investors.

Meanwhile, the inky scribes presume to comment on the latest economic news in the UK as though they even understood it!

Reading the OP-Ed columns, I would now be investing solely in canned food and shotguns. But, in the same way that things were not as good as they were vaunted in the boom, it is increasingly difficult to take the Jeremiads seriously. Now, don't get me wrong- I understand that Britain faces serious economic problems, however I also know that- like the good times- the bad times will not last forever. While, "on current trends" the UK is facing economic annihilation, in actual fact we are most likely to face difficult but probably not impossible times. we will adjust, we will get by.

After all, these same journalists were predicting an easy win for the SNP in the Glenrothes by-election. Well, despite the really low opinion polls for Labour, they were able to win because, as I have often said, the Scots are by no means as interested in independence as the SNP- and the London media- want them to be. After Glasgow East- on then current trends according to the media- Independence was a certainty.

Well maybe, and maybe not.

As so often before, Czeslaw Milosz has it right when he quoted "an old Jew of Galicia" at the beginning of The Captive Mind:

When someone is honestly 55% right, that’s very good and there’s no use wrangling.
And if someone is 60% right, it’s wonderful, it’s great luck, and let him thank God.
But what’s to be said about 75% right?
Wise people say this is suspicious.
Well, and what about 100% right?
Whoever say he’s 100% right is a fanatic, a thug, and the worst kind of rascal.

Wednesday, October 29, 2008

Cultural Austerity: Political Seriousness

In some previous posts, I suggested that the likely effect of the economic downturn might include some significant cultural changes. After the age of excess, I suggested, there might come an age of restraint, and that not of of this would be negative.

To a certain extent the suspension of Jonathon Ross and Russell Brand for making obscene telephone calls on a radio programme is the kind of thing that I meant. I do not particularly like Ross or Brand whose style of humour is pretty coarse at the best of times, but the spectacle of two middle aged men behaving like teenagers seems to have been pretty unedifying to a whole lot of people. Although some sources close to the BBC have suggested that the root of the complaint was "salary envy" at Ross's £18 million package, in many ways the whole idea of such a vast amount of money being paid to anyone seems, well so "last year". Ross's vulgar humour in any event is based on a certain level of cruelty which now seems rather dated and unnecessary.

The tolerance level for the bad behaviour of celebrities seems to be falling fast. Likewise, perhaps the tolerance for boorishness in general. The failure of Little Britain USA to attract Americans seems partly that the ideas behind the series now seem exceptionally tired, but also, perhaps, that Americans are not so eager for the kind of potty humour that La Walliams and Mr. Lucas have made their own. Being offensive is not, in and of itself, actually funny.

As the financial catastrophe brings down the curtain on the age of excess, perhaps the age of restraint may score a few more victories in the kulturkampf . It may even have already changed the political weather in the United States. The blatant insult to the intelligence that is usually the core of Sarah Palin's speeches seems to be going down exceptionally badly with the American voters. Meanwhile the fact that difficult problems- like the credit crisis- require complicated and often only partial answers seems to be accepted by the American people. It seems to be almost certain that the cerebral, even distant, figure of Barack Obama will triumph over a Republican Party that has been lead for eight years by an irresponsible frat boy.

In the UK, the shallow and vacuous figure of George Osborne has inflicted substantial damage on the Conservative brand. In Scotland the glib certainties of Alex Salmond have been revealed a simple nonsense. The age of restraint will favour the serious and the measured over the brash and the easy answer. Whoever can catch this new spirit will find a new connection with the voters, in the same way that it appears that Barack Obama already has.

Monday, October 27, 2008

Osborne: Goodnight and thank you

George Osborne "has done nothing wrong"- or so the leadership of the Conservatives is trying to tell us. How then, to explain the news that Mr. Osborne will no longer be taking an active role in fund raising for the Conservative party.

If he is not a fit an proper person to be concerned in the finances of his own party, how then, can he continue to pretend that he would be a credible Chancellor of the Exchequer?

I mean, it is not as if Mr. Osborne's entire brief is to look at finance and regulate financial probity or anything.

The man is holed well below the waterline- David Cameron might have left him with a bottle of whisky and a pistol, but he seems to be too caddish to take the hint.

It would now just be a kindness to put him out of our misery and remove him- Osborne is simply a laughing stock.

Friday, October 24, 2008

Russia: The Financial Storm becomes a Hurricane

For a long time this blog has warned of the dangers of the aggressive regime in place in the Moscow Kremlin. In common with commentators like my friend Edward Lucas, I have pointed out the consequences of the lack of property rights and the extraordinary level of corruption in modern Russia.

This prickly and aggressive approach has had an impact on any country that is the focus of Russian policy. As Vygaudas Uzackas- the Ambassador of Lithuania in London- observed in a conference last week, Russia still has trouble escaping the mindset that it must deal with other states either as enemies or as vassals. This zero-sum world view of the Kremlin looks not only old fashioned, but self defeating.

The Russian Federation , during the past five years, has built up an extraordinary war chest of liquid reserves. Indeed, although there is some uncertainty about the actual level of reserves, it seems clear that they are now around the third largest in the world. This gave confidence that the Russian economy had indeed stabilised after the dramatic collapse of 1998. However, as I have noted in the past, the Russian balance sheet may have been liquid, but it had failed to address the lack of investment of decades. Much of the Russian infrastructure is in a critical condition, and the investment level is below what is needed even for care and maintenance. Even the much vaunted naval exercises in the Bay of Biscay, far from demonstrating strength, showed the huge decline in Russian capabilities- in fact the flotilla comprised almost the entire serviceable fleet available to the Russian Federation- including unarmed spy-trawlers. The Jane's Weekly report on the Russian attack on Georgia, despite the quick victory, pointed out that the Russian army is no match for the more flexible and better armed forces of NATO.

Thus, as I have previously argued, despite the corruption and bellicosity of Putin's Kremlin, the problem the global community faces in Russia stems not from burgeoning Russian strength, but an almost catastrophic weakness.

I fear that this weakness will now be revealed in a spectacular financial collapse which could have incalculable consequences and even lead to an overtly fascist regime in Russia. The precipitate decline in global oil prices has left Russia facing a large and unforeseen deficit. The emerging Russian banking collapse is set to be more complete than any except Iceland, and rather than mergers to protect depositors, several banks will fail altogether, leaving thousands to be financially ruined. The Russian government has already been forced to spend around 20% of their reserves in such areas as currency support, and now they face the real prospect of being forced to make massive capital injections in order to secure the banking system and the teetering and sometimes debt laden empires of the Oligarchs.

It is exceptionally difficult to foresee how the Russian government can continue their longer term policies without having the oil and gas bonanza to finance them, and when those carefully built reserves will now have to be largely allocated to financial rescue.

Yet for the West, this is a major opportunity. After the overconfidence- indeed arrogance- of the Kremlin in the last five years, there is now the chance to create a genuine partnership. As such, the interests of the NATO states can be secured - as can the security position of Ukraine, and even Georgia. As the crisis is addressed in the West, there will be a window of opportunity to offer support to the Russian Financial system- partly repayable in Russian good behaviour.

It should certainly be an early priority for the in-tray of President Obama.

Wednesday, October 22, 2008

None dare call it treason

"Treason doth never prosper, what's the reason?
Why, if it prosper, none dare call it treason"

Sir John Harrington (1561-1612)

There is more to the Osborne affair than meets the eye.

The alleged facts are simple, in the words of Nat Rothschild's letter to The Times,

"George Osborne, who also accepted my hospitality, found the opportunity of meeting with Mr. Deripaska so good that he invited the Conservatives' fund raiser Andrew Feldman, who was staying nearby, to accompany him on to Mr. Deripaska's boat to solicit a donation. Since Mr. Deripaska is not a British citizen, it was subsequently suggested by Mr. Feldman during a conversation at which Mr. Deripaska was not present, that the donation was “channeled” through one of Mr. Deripaska's British companies. In a subsequent phone call in mid-September about one month later, Mr. Feldman again raised the issue of the donation with me. Mr. Deripaska decided that he did not wish to make any donation."

In other words, George Osborne was seeking an illegal donation from a Russian citizen and was prepared to find ways to bend the rules to ensure that the donation could be made.

Those are specific allegations.

However, despite the appalling error of judgement that this solicitation implies, the scandal is not just about Osborne. It is also about the huge network of business, personal and financial contacts between senior members of the Conservative Party and Russian business.

At least 20 Conservative Peers and MPs, including several former cabinet ministers, have take board positions with companies that do business entirely or largely with the Russian Federation. Many of these businesses have close links with the Kremlin or with Oligarchs known to be close to the Kremlin, including Oleg Deripaska himself.

These links have been highlighted by the fact that the Conservative Party was formally allied to Putin's United Russia in the Parliamentary Assembly of the Council of Europe. Indeed The Conservatives were prepared to support the election of a Russian as the representative of this human rights body- despite the disgusting human rights record of the Russian Federation, which long predates their foray into Georgia and includes the butchery of the Chechens by the corrupt and ill-disciplined Russian army. Russia is ranked as Not Free by Freedom House, but the Conservatives were prepared to treat with the Russian tyrannical regime instead of working with Christian Democratic Parties from our NATO allies.

Lord Rothschild, Nat Rothschild's father, knows Russia very well. He was a close business partner of Mikhail Khordokvsky, the founder of Yukos, who defied Vladimir Putin and ended up in jail- where he remains. Stephen Curtis, the head of Bank Menatep which was associated with Yukos died in a mysterious air crash at Bournemouth. The Rothschild family has seen at close hand the nature of the Silovik state- and is widely believed to regard the close links between the Kremlin and the Conservatives with concern.

The policy of the Kremlin has been to cultivate close relationships with senior European political figures. The most obvious is the former German leader, Gerhard Schroder whose controversial chairmanship of the Nordstrean Gas pipeline is widely regarded, especially here in Estonia, as corrupt. It seems quite logical that a wider policy of suborning Western politicians with financial inducements would include British politicians too.

The rebuttal that George Osborne has made points out that no donation was made. So what? That was not the allegation. Since George Osborne is not prepared to see Nat Rothschild in court, he should now resign.

However, far more important is that David Cameron must now clean the stables. He must start to purge all possible corrupt Russian influence from his party. Unless he does, then l'affaire Osborne may well be just the beginning of the scandal.

Russian money is involved in British politics for sinister ends. Those who choose to accept it are guilty of a lot more than a simple error of judgement.

Wednesday, October 15, 2008

Those who are not with us...

The US election has as they say over there "gotten" nasty.

While it may have been a joke to say that they only difference between a pitbill and a Hockey mom was the lipstick, I really don't understand why American pitbulls wear lipstick. The bare faced lies that Sarah Palin has been prepared to sell to the American public: that Barack Obama "pals around with terrorists" etc. either mark her out as a truly exceptionally stupid woman or they demonstrate a contempt for the American people that is, quite literally, an insult to their intelligence.

It is now hardly a surprise that the McCain campaign is going down with all hands.

In fact, and more accurately, it is the Republican party that is holed below the waterline.

Sen. McCain has a record of distinguished service. However even he -and still less the witless Gov. Palin- can not overcome the legacy of the Bush administration and its record of reckless arrogance. The strutting mock-Texan George "W" Bush tried to to force the world into his own limited understanding and he failed. He failed to understand that even when facing the depravity of Osama Bin Laden or Saddam Hussein, it is still necessary to explain and to form a coalition.

Leadership involves persuading and cajoling people into doing things they may not wish to do and following ones own line. America had such leadership- earned through the hard lessons of the Cold war. Under Bush, it has come close to losing it.

Barack Obama is a natural coalition builder- in his world, whoever is not actually against him, is for him. Bush, by contrast, has alienated even those who are the natural supporters of the United States.

As Palin shows- oh so clearly- that she has learned nothing form the failures of the worst President in American history, Barack Obama now looks not only like the victor by some margin, but also that his Presidency could contain the elements of the transformational leadership that the country needs in order to overcome the disaster of the last eight years.

As a long time friend of the United States, I certainly hope so, and that the freak show of Sarah Palin and her demented followers is relegated to the footnote in a tome of a very obscure political history of the Great Republic.

Tuesday, October 14, 2008

The night is darkest..

It is just over seven months since Bear Sterns was forcibly incorporated into JP Morgan. It is just over six weeks since the United States government took over Fannie Mae and Freddie Mac. It is a month since Merill Lynch sought an emergency sale to Bank of America and Lehman Brothers went under. AIG was rescued four weeks ago. Goldman Sachs and Morgan Stanley were transformed into bank holding companies on September 22nd.

Over the past four weeks all of the listed former building societies in the UK have disappeared. HBOS has been forced to merge with Lloyds TSB. Of the former big four clearing banks two have essentially been nationalised.

In the Euro-zone, Dexia and Fortis have been rescued, the latter forced to merge with BNP-Paribas.

The run on the Icelandic kronur has brought the country to the brink of penury.

Any single one of these events would have been considered spectacular on its own, taken together they represent the greatest single economic failure in at least two generations.

The meltdown of Black Friday dwarfs any previous crash., but perhaps when we examine the crisis that has been unfolding over the last year, perhaps we should not be so shocked.

Now, the markets appear to believe that the effective nationalisation of the banking system around the world can stabilise the situation at least for the immediate future. Eventually the work-out of the debt will reduce the overall level of the bill to the tax-payers. However, while the total bill is likely to be only between 10% and 20% of the total, that is still a dramatic increase in the level of state debt- a debt that we will pass on to unborn generations.

I will leave it to economic historians to analyse and attribute the blame for the meltdown. However, the consequences of banks' risk modelling- the fundamental systemic flaws that Nassim Nicholas Taleb identified some years ago- must surely be the first in line.

There are also immediate consequences of the meltdown. Much that we took for granted before last week's Black Friday no longer holds.

The first consequence must surely be the severe punishment of the American Republican Party at the polls on November 4th. The corruption and incompetence of the catastrophic Bush administration has been truly wretched to behold. The splits in the party, revealed to appalling effect by the failure of Republicans to back the Paulson plan in the Congress on September 29th. Despite Sen. McCain's undoubted courage and strength of character, his unhappy choice of Paleo-Conservative Governor Sarah Palin as his running mate is set to deliver the Presidency to Sen. Obama by a landslide. Even John McCain's many positive qualities can not stop the rout, and the Republican party will take at least a decade from the disaster of the Bush-Cheney administration. The futility of this most arrogant administration seems set in retrospect to make the malaise of Jimmy Carter look like a golden age. The Democrats may indeed win states that they have not won since the 1960s. McCain was ahead in September, he is well behind now.

In the United Kingdom, it is clear that Gordon Brown has had a good crisis. Britain, as a leading financial centre, was duty bound to play an important role, but Mr. Brown with his Treasury experience behind him, has been able to push for measures that seem set to be the model, not only for other states in Europe, but in the United States too. It remains to be seen whether this success transfers into a lead in the opinion polls, but it certainly puts Labour back in the game.

Andrew Neal, interviewing Nick Clegg the other day asked "who is listening to the Liberal Democrats anymore", but probably Neal's vanity lives in a world where Vince Cable does not. In fact the Liberal Democrats have found a figure that is respected and listened to across the party spectrum. Indeed Dr. Cable has had an even better crisis than Mr. Brown and has been ahead of the crisis at every stage. By contrast Messrs Osbourne and Cameron have struggled not to appear shrill and lightweight. The impact of the crisis on British politics remains to be seen, but it is clearly going to be a far more open game than it was for much of 2008.

Another unexpected gainer has been the European Union. Despite the constant sniping from anti-Europeans like Ambrose Evans-Pritchard, the EU has not seen a meltdown. Indeed the Euro has been much more resilient than any forecast. Despite the lack of a central point of authority for bank supervision, the co-ordination of the contact between the various separate central banks, while far from ideal, has so far proven robust.

Russia has been another big loser. Although it continues to maintain a highly aggressive stance- continuing with the missile tests this week which simulated a nuclear launch against a British target city. It can not be sustained with oil back down below $80/bbl. The damage to Russia's international credibility from the repeated closure of the Moscow markets during the crisis has been substantial. Those members of the Silovik state who advocate greater economic freedom may have scored a small victory- but even the giant Russian reserves have not prevented an even greater meltdown in Russia than elsewhere. Russia has been damaged badly by the crisis.

As the markets begin to take stock and new patterns of global finance begin to reform, it seems as though firms like GLG, Och-Ziff, Perry Capital and Citadel will fill the vacuum created by the collapse of the old Investment bank model. To an extent the world is reforming in the pattern of the 1930s- commercial banks tightly regulated and conservative and investment banks free wheeling and creative- but only risking their own money and those of their partners.

It has been a hell of a ride to get us back to where we were before- and the political and other consequences may take many years to play out.

Monday, October 06, 2008

Sending the fool into the church

Oh dear, some cretin of a vicar talks nonsense about gays, little thinking that the majority of his colleagues like wearing dresses and smelling of perfume.

I am reminded of Kind Hearts and Coronets: that aristocratic familes "sent the fool into the church".

For fresh bank confidence

Another week begins with a panicky market marking down value across the board. Even though the UK banking system has now largely reverted to the Pre-liberalisation big four: Barclays, Lloyds, Natwest (RBS) and Midland (HSBC) plus the government and the large Spanish bank, Banco Santander, there is still pressure on the British government to follow Germany, Denmark and Ireland and issue an unlimited guarantee to British bank depositors.

Now, this is getting silly.

Firstly the scale of the guarantee is much bigger for the UK banking sector than it is for the others- largely because the UK depositor base is much bigger, so it is more difficult for Britain. Yet paradoxically the larger base is a sign of the relative strength of UK banks- they are able to fund relatively more from deposits than from the money market and in the current circumstances that is a good thing.

Despite the fall out of the Lehman collapse, the British bank sector has now consolidated dramatically and although RBS faces problems with their acquisition of ABN Amro and the impact of the crisis spreading to Asia will also hurt HSBC, the fact is that all UK banks are now solvent enough to cope with the crisis, at least for the next few months. Meanwhile, Banco Santander has substantial resources and the banking of the Bank of Spain and the ECB. Despite the twitterings of Ambrose Evans Pritchard that the European financial system would fail, in fact the united European political will to deal with the crisis is growing- as indeed it must.

It is quite clear that the actions of a lone government to deal with the crisis, even when that government is the United States, are now insufficient. The British government, despite being outside the Euro zone, recognises that it must co-ordinate its actions with the rest of the European Union. As Iceland, faced with economic catastrophe, now pleads to join the European Union, the Anti-European vision of a "buccaneering Britain" outside the EU now looks like the absurd bravado that its always was.

The fact is that in the face of the emerging economic meltdown, the governments of the EU have no alternative but to increase the scope of their co-operation. The difficulties hit by first the US and then the UK are no less serious in Europe, and potentially even Asia will face the same crisis, although perhaps to a lesser degree.

In the end, this remains a matter of confidence. The UK banking system is clearly pretty sound, yet it could still be undermined by a failure of confidence. The incompetence of the Bush administration has a global impact, but one that can be off set by the Congress behaving more responsibly but also by a concerted approach in the EU and in Asia. The Brown government has made several missteps, however the time has come when a clear vision from Downing street could have a positive effect, not just in London, but in European Union and in the wider world.

When "the only thing we have to fear is fear itself", the presence of clear headed leadership is critical. It will not be found in Washington. Can it be found in London?

The next six weeks will decide whether we are looking at a 1981 Recession or a 1931 Depression.

The omens are not looking good.

Friday, October 03, 2008

Return of the Undead

Peter Mandelson is an... unusual... political figure.

He began his career as an exponent of the blackest of the black political arts. The quintessential back room boy, he was one of the most ruthless of the political spin doctors who jointly founded the New Labour project. Fiercely loyal to Tony Blair, he repressed anti-Labour stories and promoted the New Labour project with a will that one of my friends, who as a Newsnight producer was a regular recipient of Mr. Mandelson's brand of charmless bullying, did not hesitate to describe as "evil".

Yet, as a Minister, he was surprisingly clumsy. He was forced from office, not just once, but twice under circumstances that would have destroyed any other political career. His forgetfulness over loans advanced to him to purchase his large house in Notting Hill could have left him open to fraud charges. His handling of the Hinduja passport applications was said to be "naive", yet the very word naive seemed the antithesis of this sophisticated and cerebral figure. Even Mr. Mandelson's closely guarded personal life- he has a long-term Brazilian male partner- came into the public realm in the almost farcial disclosure by the journalist, Matthew Paris. Peter Mandelson left British politics under something of a cloud, yet he was still able to gain the significant power of the European Trade Commissioner.

The news that Mandelson is set to return to the Cabinet can only be a shock. It is public knowledge that Gordon Brown and Peter Mandelson have long been bitter political enemies. The repressed emotionalism of both men has certainly contributed to a bitter feud. Why then does Gordon Brown want Peter Mandelson in his Cabinet?

The answer can not be that he values his ministerial skills. There are still many high quality figures, such as Denis Macshane, who have not been brought back into government, and Macshane was a far more popular Minister than Mandelson was. Clearly it is for the black arts of political threats and blackmail that Gordon Brown has chosen to resurrect the undead political career of his old enemy.

Mandelson inside the tent may prove to be a more potent political force than he was in more distant Brussels. Yet that threat may prove to be more to the Prime Minister himself than to his opponents across the floor. Mandelson is widely disliked across the country, and having been out of the loop for so long, he is a far less formidable figure than he once was.

It seems somehow appropriate that the dying years of the New Labour project should see the resurrection of the ruthless, dishonest and baleful influence of this most disliked and distrusted politicians. The undead political career of Peter Mandelson joining the Zombie government of Gordon Brown.

I shall be clutching at garlic and crucifixes and loading my pistol with silver bullets. I do not expect to see the Cabinet in daylight at all.

Wednesday, October 01, 2008

Taleb tries not to say "I told you so"

In the dead slot of the BBC Radio 4's Today programme, after 8.45 when everyone is arriving at work, there are often interesting debates about the issues of the day.

Today Nassim Nicholas Taleb was one of the guests and, as he has done before, he spoke out about the systemic risks that bankers did not realise that they were undertaking.

He also made the point that in the 1982 Emerging markets crash the Bankers lost all the money that they ever made, and then they did it again in the 1991 Savings and Loans crash. In other words, most of the banking system has not, in the long term, been a profitable business. He added that with each successive crash, risk has become concentrated in a smaller and smaller number of banks. As a result the problems have grown larger.

The answer is clear- if not simple- the ecology of the global banking system needs to change and become more diversified. Single risk should not be concentrated in the system. Diversity is critical in order to reduce the concentration of risk.

The problem is that the regulators are now simply trying to cope with the crisis that is happening now- they are not focusing on creating a more diversified ecology of banks- indeed, far from it. The primary result of the crisis in the UK has been the concentration of ownership of bank assets into only six super-banks. This, of course presupposes that size alone is the biggest guarantee against failure, whereas the loss of Lehman, Merill, etc. shows that this is certainly not the case.

The fact is, that in trying to address the problems of today, the state is now creating a regulatory environment which is likely to concentrate systemic risk still further. In the way the state is dealing with the crisis of 20o8, they are creating the conditions for a still bigger crisis in 2018 or so. This can not be said to be even a Talebian "Black Swan"- it is actually quite easy to forecast.

Listen again to Taleb's words of wisdom (and Evan Davis' continuing mispronunciation of his name) on the Today website at 08.45 on the running order.