Friday, March 28, 2008

So much to do

It has been rather busy again- so blogging has been exceptionally poor. I have been sorting out a house move and a probable job move at the same time, and since this involves two countries and I also have plenty of other work to complete, it has proven very tricky to blog in any organised way. I hope normal service can be resumed shortly.

Wednesday, March 19, 2008

The Philadelphia Speech

The Philadelphia Speech. That is what they will call it.

"Where were you, when you heard about the Philadelphia speech?"

"Were you in Philadelphia, when Barack Obama made the speech?"

Honest, dignified and hopeful, it puts the finger on the most painful and complicated issue in the American political reality.

More to the point it demonstrates a connection and an intelligence that moves me profoundly.

As the shattered failure of the Bush Presidency twitches to its ignominious conclusion, the hope that Senator Obama offers reminds me increasingly of President Franklin Delano Roosevelt.

Roosevelt is derided in the post Reagan era and yet at the time he was enormously popular- and despite the failures of Yalta, he remains one of the most important figures in the twentieth century.

FDRs oratory- "the only thing we have to fear is fear itself", "the great arsenal of democracy", "Men are not prisoners of fate, but only prisoners of their own minds.", "If you treat people right they will treat you right... ninety percent of the time."- gave hope at a difficult time.

Can Barack Obama match this example?

The Philadelphia speech is a sign of hope.

Tuesday, March 18, 2008

Breaking the Mould

The tectonic plates- as John Prescott once had it- are shifting.

The instability on the global credit markets is undermining people's sense of confidence and as the avilability and terms of mortgages- if not the actual interest rates- grow more onerous, the era of cheap money, at least as far as the UK housing market is concerned, seems to have finally ended.

So what now?

Well, no one really knows, though i notice that the political climate is changing in the UK.

The opinion polls are showing a more entrenched lead for the Conservatives. Interestingly, for the first time for several years, The Liberal Democrats have come above 21%. In the historic scheme of things, the Liberal Democrats have tended to sit around the high teens, and then gain a little further during a general election campaign.

This changed in the last parliament, where the support for the Liberal Democrats firmed up strongly, as the result of a recognition that the party had taken a principled stand against the war in Iraq, but faded a little closer to the election in 2005.

The difference this time, seems to be that Labour are without the communication skills of Tony Blair. I don't know if things can get worse for Gordon Brown, but I am beginning to feel that things could certainly get better for the Liberal Democrats. Perhaps it is even possible that the party, far from losing seats at the next election, might even make an overall gain.

That, from this Liberal perspective, really would be a tectonic shift.

Monday, March 17, 2008

Lib Dem v. Tory (Round 2)

The Liberal Democrats stand for a distinct political ideology. It is an ideology built around both socially and economically liberal precepts. In as far as our ruling Labour government can be said to have an ideology at all, it coincides with Liberalism only incidentally.

Labour stands for pragmatism, and where it does not there is still a core of values that are collectivist and not individual. Sometimes people are prepared to claim the moral high ground for policies of social solidarity and redistribution of wealth. Liberals may argue in favour of equality of opportunity, we can not argue in favour- as Socialists do- of "and equal society". The reason is simple: Socialism does not work.

If one places equality above freedom, then eventually we get tyranny. This is why, while we may argue in favour of a more equal society as being a stronger society, the tools that we may use to gain -in our view- socially desirable outcomes must rest upon freedom above all else. As PJ O'Rourke says: "My wealth does not cause your poverty". Individual attainment of wealth per se is not immoral any more than higher skill in the arts or sciences or sport is immoral. It is this view that makes the chasm between Liberalism and Socialism.

In that sense, Conservatives and Liberals do have more in common in their basic ideology then either do with Socialism. Only Labour pragmatism permits even the idea that Liberal Democrats or Conservatives could co-operate at either local or indeed national level. Yet, paradoxically, this is probably why the venom between Lib Dems and Labour is a bit less than between Lib Dems and Labour.

Liberal Democrats already believe that we have won the intellectual argument against labour, and the level of pragmatism amongst many Labourites is such that the either don't recognise that the debate is what it is, or if they do, then they discount its significance.

Yet the Conservatives, despite assuming much of the language of Liberalism, are a more potent threat both practically- in the sense that Liberal Democrats fight with Conservatives over more constituencies- and also intellectually. Although in Scotland, the relationship between Tory and Liberal Democrats is generally cordial, in most other places it is actually quite bitter.

Paradoxically many Conservatives assume that Liberal Democrats are careerist opportunists. In fact, the fact that the Liberal Democrats have been generally out of power demonstrates the exact opposite. Given the difficulty of even getting elected as a Liberal Democrat- I speak with some experience- thee fact is that the party is not only ideological, but quite purist about its ideology.

Thus Conservatives, still thinking of the Liberal Democrats as leftists, may regard the likely Liberal Democrat commitment to reducing taxation as unprincipled opportunism. It is not. It is a direct result of the failure of Conservative pragmatism to recognise the logical result of Liberal principles. The collectivist imperative of Labour has created a highly inefficient public sector with an ethos that values equality of poverty and not freedom of opportunity. The taxes that support this are already too high.

Tory pragmatism- exemplified by George Osbourne- believes that electoral advantage lies in maintaining government expenditure. Liberal Democrats believe that it is now unacceptable to permit the continuing waste of money that much government expenditure is incurring.

The Liberal Democrat position, on principle, has not altered. Yet at the next election it now seems likely that the Conservatives will be closer to Labour. The Liberal Democrats will be alone in advocating a general reduction in direct taxation. It will infuriate many Conservatives to be outflanked from the right.


End of the beginning of the Credit Crunch

The emergency rescue of Bear Stearns brings down one of the most original investment banks on Wall Street. The Bear Stearns culture was not the same ethos as the white shoe investment banks- of which its new owner, JP Morgan, is the classic example. Instead of connections and education, Bear preferred to focus not so much on CFAs and MBAs, but rather "PSDs"- poor, smart, but with a desperate desire to become rich. Over twenty years, the legendary chairman, Ace Greenberg wrote folksy and thoughtful "Letters from the Chairman" pointing out the virtues of thrift and discipline in the financial markets. Great Bear alumni included Henry Kravis, Jerome Kohlberg and George Roberts, the founders of the most spectacularly successful fund; KKR.

In the end, it was other funds that brought down the house founded to trade equities in 1923. Bear, as the quintessential trading house, had followed the money from equities and into credit, and in particular the esoteric world of asset backed securities. Eventually the impact of the sub prime eroded the capital of two Bear Stearns structured credit funds to the point of collapse. It was the bail out of two of its structured credit funds in June 2007 that expanded the sub prime melt down into the general domain.

Now the gutsy traders have been bought for around 10 cents on the Dollar by a bank whose roots lie in the most aristocratic end of Wall Street, where connections, even now generate business. At the same time, the Fed continues to inject further liquidity through credit lines and interest rate cuts.

In my judgement, the Fed in its determination to reduce the impact of the downturn has made a significant mistake. The cost of the attempted rescue of the credit markets has been a Dollar crash on a scale not seen in living memory. Essentially the credit meltdown- with the associated write-offs- has not only undermined confidence, it has actually reduced the real economic value of the US currency.

Yet still, there is an expectation that the impact of de-leveraging can be mitigated, and perhaps it can, at the margin, but the reality is that the Fed has undermined the value of the US currency to the point where a permanent structural adjustment in the US Dollar price has taken place already. The US consumer- overextended on property leverage and maxed out credit cards- is now retrenching. Yet a dramatic increase in exports that one might have expected from the drastic fall in the Dollar is slow in coming, as confidence falls across the planet.

The Dollar crisis will persist until the US financial system can be seen to have adjusted to the new conditions- a process that could still take several years. In the meantime, the knock on effect in terms of property prices and general leverage is triggering more problems in Spain, Ireland and the UK, who have a similar addiction to property credit as the US market.

Asset prices in Europe are falling, but are still not looking as bad as the US- though it seems to me that the contagion in the Mortgage backed securities market has not reached anything like the adjustment of 30%-40% that seems to be the endgame in the US. The markets are still in a state of denial as to how bad the situation actually is.

The fall of Bear Stearns may not be the endgame in the US, either. We will see further bad figures from Lehman Brothers this week, and continuing write offs across the system. Gold will remain strong, at least until the end of the Indian bridal season. Confidence in the Dollar might have been maintained by a tighter monetary policy, but in simple panic Ben Bernanke and co. may have eased the scale of the downturn, yet at the same time they have ensured that it will go on for far longer. I can see no buying opportunity until the markets accept that.

Predicting the future is largely impossible- as Nasim Nicholas Taleb work explains so well- understanding the present is easier. Nevertheless the lack of clarity in the level of asset back security losses continues to undermine confidence. It may take a further round of losses before a new sense of reality sinks in and only then can I see a floor being put on the overall value of the market. This floor may still be months away. The fall of the House of Bear, Stearns & Co. is a milestone on the journey. It is unlikely to be the final destination of the global breakdown.

Wednesday, March 12, 2008

Cutting the budget on the BBC

Well, another year another budget.

On the other hand the BBC hit a new low. I could not believe the banality of their truly appalling coverage. Jade Goody- disgraced Reality TV star nobody- was seriously wheeled out as a commentator.

This is beyond parody.

I think I want the entire BBC team responsible for this turgid fiasco to quit producing -NOW.

John Reith, the founding Director General of the BBC put forward three principles for the corporation to live by: to educate, inform and entertain.


A Budget commentary team of Trisha Goddard, Jade Goody, Colin Jackson and the rest is simply absurd. What maddens me even more is that this was done at my expense, as a license and (even more heavily laden) tax payer.

This is even beyond dumbing down- it is a spit in the eye of anyone with an even remotely informed view of politics and economics.

Resignations should- indeed must follow

Thursday, March 06, 2008

What's in a name?

Yet again the Greeks are raising the issue of the name of Macedonia. Now they refuse to allow Macedonia to join NATO because there is an area of Greece that is also called Macedonia.

The Greek state has been pressurising the fragile Macedonian Republic ever since it was created. They have changed their flag to answer Greek protests, they have changed the design on their money to avoid some supposed similarity with a tower in Greece. When it comes to the name, however, the Macedonians have no other.

The idea that Greece seems to have is that Macedonia (the Republic of) might want to claim Macedonia (the Greek Province of), just because they have the same name, and despite the fact that the government in Skopje explicitly rules out any such agenda.

Given that the south east province of Belgium has the same name as one of its neighbours, which it also borders and with which it shares a common history, one might- under the Greek rules- expect trouble, but somehow the two Luxemburgs manage to get along.

So should the two Macedonias

Greece is being astonishingly immature- and in the dangerous environment of the Balkan peninsula, it is asking for trouble.

Sterling blues

As Sterling hits further new lows against the Euro, the economic outlook for the UK seems more unstable than for some time.

Currency traders seem to be latching on to the structural problems of the British economy as a reason for selling. In short these problems come under four general headings.

Firstly, the UK has seen the largest increase in residential property prices over the course of the past 15 years. Average prices have more than doubled, but wages have not kept pace. The ratio of average house price to average earnings has gone from three times to more than six times. This is historically well out of line, and as inflation in food and energy prices nibbles away at spending power, the pressure on British consumers is intensifying.

Meanwhile, one major strength of the UK, which has been its ability to attract labour from such countries as Poland, is now also weakening. The weakness of Sterling has meant a stronger Zloty, and as wage rates have increased in Poland, the relative wage gap has fallen to the point where many Poles are now returning home- this a significant source of cheaper labour has now reduced. This may also have a marginal effect on house prices, as those who have bought to let find that rental demand has fallen.

At the top end, the cack-handed attempt by the government to tax non-doms is causing many to reappraise their commitment to the UK. Several investment firms are now considering relocation away from London. Although the income tax take may be small, the VAT and other taxes ARE paid by non-doms, whenever they spend money here, so should they move away, then economic activity will be slower and the tax take will be lower.

The fiscal burden in the UK is now quite high. The closing of various tax loopholes, especially on CGT, and a steady increase in the overall level of general taxation- although not the nominal rate of income tax- has increased the overall fiscal burden substantially. Although Gordon Brown was able, with some twisting of the figures, to stay within his pre set limits, it is practically impossible for his successor in the Finance ministry to do so. Government expenditure is high, and set to increase further. Yet the public sector continues to deliver poor quality services, even despite the substantial expenditure that has been laid out. Admittedly there has been a substantial waste in many projects. The NHS IT system has turned into a GBP 13 billion white elephant. The repeated crises in Agriculture have resulted in further lost billions, the PFI projects are also set to be far more expensive than was first mooted. The latest fiasco, that of Northern Rock is also set to cost the Treasury about GBP 7 billion, based on the fact that Northern Rock paper is being bid at 93 Pence on the Pound. All of this extra expenditure has brought little tangible benefit.

The NR affair has also brought home two further points of weakness- our dependency on financial services, including our regulators and our currency. The City has, in recent years, been challenging to be the leading Financial Services centre on the World. The relatively light regulatory burden was touted as a competitive advantage. However the failure of Northern Rock was massively amplified by the failure of the regulators to get to grips with the business until it was too late. The relatively smaller liquidity of the Sterling market has limited the options available, so that while there have been problems with both German and Spanish banks especially, these have been handled more effectively. The implosion of the global credit market will have a disproportionate impact on the UK, as jobs are lost from the City. It is now inevitable that Sterling will weaken still further, and one hedge fund manager said to me smilingly that he could see the real chance of Pound:Euro parity. "At that point", he said "Prime Minister David Cameron would be pleading with the ECB to let the UK into the Eurozone".

The situation in the British economy is complicated, with many pieces in play. However, the position is difficult, but not hopeless. It is essential that the state reduces dramatically it direct involvement in the economy. The burden of taxation must be reduced, and it is essential that the extraordinarily over-complex tax code is simplified drastically. I also believe that since the Poles are leaving, that we will need to find an alternative, and i suspect Ukraine or even Russia could be a good source of the kind of workers who have helped to maintain our economic momentum- at the moment this is down tacitly, but I believe that visa free travel from Russia and Ukraine might help the British gain a stronger economic foothold in these important countries, as it dis with the Baltic countries before.

Free trade, less regulation and a more open economy are all strongly liberal positions, and in the face of a protectionist clangour that is emerging in the US, we should not be afraid to speak out for these effective and important principles. I also believe that, although we should retain and develop our relationship with the US and with Canada, we need to engage further with the European Union. However, as with Britain, so with Brussels: we should explicitly state what the limits of European level decision making actually are. We should not be signing a blank cheque for ever closer Union. In that sense both the failed Constitution and the reform treaty that replaced it were significant improvements on the current position. In fact, since even David Cameron insists that he would not leave the EU, there is some general acceptance that the EU serves a positive purpose. It would not do our position in the EU any harm if this was publicly acknowledged by our political leadership.

The UK is headed for a period of economic weakness, which could be quite prolonged. The political fall out will be significant- to the point that the next election could well be the one to lose, rather than to win such is the scale of the poisoned chalice that the winners will inherit. However the crisis could become a catastrophe unless a disciplined economic policy, based on economic liberalism is adopted soon. This is the challenge for all political parties to rise to- I wish I had the confidence to believe that they will.

Tuesday, March 04, 2008

Russia's New (Old) Era

The farcial Russian elections have now been completed and the anti-democratic Putin retains his place at the heart of the Kremlin. On the same day, Gazprom stepped up the row with Ukraine over gas supplies- giving the lie to the empty words that the incoming President Medvedev had breathed claiming that Russia could be trusted as a reliable energy partner. As Medvedev is the outgoing chairman of Gazprom, it is clear that once again energy is being used as a political lever against those who oppose the Putinistas.

The sinister and authoritarian regime seems to grow ever more menacing.

Yet, despite the growing litany of threats- the military exercises in the Bay of Biscay, the bellicose posturing from the Putin jugend- the violent thugs of Nashi- and a constant blare of black propaganda, there is a growing sense that Russia has not recovered, and indeed that her weakness is now frightening many.

As always the heart of the matter is in the economy. Although Russia has seen a dramatic increase in the size of her economy, as the result of the huge increase in revenues from oil and gas, the fact is that the stronger Rouble has left much of the rest of the economy unable to compete. As a result, the country is sucking in a large number of imports, especially from the Euro-zone. However, although Dollar revenues are at an all time high, the depreciation of the Greenback has meant that in Euro terms, the economy is only just holding its own. The Russian terms of trade, having strengthened dramatically are now falling.

Meanwhile the country still faces major infrastructural problems, with inadequate transport links and a steady deterioration in the electricity generating capacity and grid. Although investment has gone into these areas, as it has to develop new oil and gas deposits, the replacement rate of investment is higher, and the new deposits have been exceptionally slow to come on stream.

Inflation, hitherto largely kept under control, is now growing very sharply, while debt too has begun to increase- raising the spectre of serious problems as the credit crunch makes itself felt across the world. Socially, the gap between rich and poor has exploded- with the Russian Gini coefficient, which measures income inequality now one of the largest in the world. Many of this new generation of Russian billionaires have been direct beneficiaries of the Putin era- raking in huge profits on the back of murky deals and corrupt business practice.

The rule of law, to which Medvedev has paid some lip service prior to his election, is an essentially meaningless concept in the lawless violence of the Russian state. The result has been extremely low levels of international investment in Russia, especially when compared to their neighbours who have now joined the European Union.

Poor, truculent and bullying, Russia is an uncomfortable neighbour, Meanwhile, if we are to judge the country by its international friendships, we see the comedy dictatorship of the odious hugo Chavez, the gerontocracies of Cuba and North Korea and the authoritarian Communist regime in Beijing. China aside, non of these are exactly successful states. Russia too, can not come to terms with the Stalinist legacy of brutality. the demographics are truly shocking- with the average life expectancy for a Russian male of only 54 years and alcohol and drug abuse causing a mass epidemic of Multi Drug Resistant TB and HIV. Though the birth rate has recovered a little, the population is still set to continue the largest fall in peacetime ever seen, outside of a plague.

So as the global economy enters turbulence, it is clear that Russia has few friends, a legal system that can not deliver international investment, a political system that is a sick parody of democracy, a series of critical social crises- and an economy that is getting weaker.

As we enter the new era, it is clear that Mr. Medvedev has a gigantic task ahead- we will know whether he will be successful when we hear genuinely liberal policies being put in place, other than that, Russia's future in the next decade could be grim indeed.

Monday, March 03, 2008

Whinging Poms

There is no getting around it, the British really love to moan. In fact they are famous for it, as the old Australian joke goes:

-How can you tell when the plane from London has just landed in Sydney?
-Because when they switch the engines off, the whining still continues.

Just recently, though the political negativity has reached almost unbearable proportions. The sense of gloom, pessimism and defeat about almost any subject is practically tangible.

Yet, come on! Those who live on this island enjoy one of the highest standards of living in the world, we are amongst the most competitive economies in the world. We need to protect our freedoms, but we are (mostly) a free country. We are respected, even admired, by our European allies and across the world.

However, to listen to our political leaders, we live in a "broken" society, where things are little better than anarchy- where the majority of children are growing up illiterate and feral, and usually drug crazed or drunk.

However, as P.J. O'Rourke notes, it is in the interests of politicians to create a sense of crisis:

"A politician is anyone who asks individuals to surrender part of their liberty - their power and privilege - to State, Masses, Mankind, Planet Earth, or whatever. This state, those masses, that mankind, and the planet will then be run by ... politicians."

Meanwhile, in our nervous and negative mood, we fail to notice that our political leaders are amongst the least accountable in the democratic world.

The sense of defeat that too many people feel in the UK is directly attributable to the sense of powerlessness that they feel when confronted with daily life. The dependency that our system has created is undermining our sense of self-worth and our morale.

Nevertheless, the unrelenting negativity in the press and in politics is beginning to make me quite angry- it is time for a sense of proportion, and this sense of victimhood is paralysing thought and undermining much that is genuinely positive.

Apart from anything else- it is a very boring country that is so self-obsessed.