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!.”