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.