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.