Friday, January 29, 2010

A failure of Ambition?

As always when coming to France, I am struck by the deliberate way the state has invested in infrastructure. It is not just that their Railways work so well, which is -frankly- a standing rebuke to Britain, the country that invented them, it is also the way in which grands projets reflect a vision of France. It may seem sometimes an overblown, perhaps even bombastic, vision to a more cynical Anglo-Saxon eye, but it does unquestionably reflect an ambition for France.

In a country half as densely populated as the UK- especially its South-East corner- it is obviously easier to build straight high speed rail lines or such huge statements as the Millau viaduct in France. However there is also a far greater will to do so. In Britain we spend billions on invalidity benefit and call it "investing in people"; in France they genuinely do "invest" in infrastructure. It is an investment that allows the French to travel across the country in 2-3 hours. To live in Mid France and still work in Paris: the equivalent of living in Sheffield and working in London, with only a one hour travelling time between the two. By contrast, it takes hours to simply cross London. There are no high speed RER trains in London, which make travelling in Paris so much faster. Cross Rail, which would be RER 40 years later, remains a distant dream, while in Paris there are already 7 or 8 RER lines.

The British economy is choking under the weight of the need to concentrate so much in London and South East England because it takes to long or is too expensive to travel if one is based outside that region. Paris and the Ile-de-France have far fewer problems because of the vision and the ambition that they showed in fixing up their infrastructure. Sure, not all of it works: the Mitterand Library is a poorly built, ugly shambles. Yet still one can not fault the idea. The Nimby-ism and catastrophically expensive real estate market in the UK are impoverishing the whole country.

And there is no-one to even start the national debate about what we must do.

Wednesday, January 27, 2010

Darling's Double Dip Disaster

The UK has released the latest GDP numbers: on 40% of the data, the statistics show that the British economy finally returned to growth... of 0.1%. The consensus forecast was for 0.4%, so there is no doubt that these growth numbers are disappointing, and there is still the scope for them to be revised downwards. Meanwhile next months numbers are likely to be worse, given the slowdown in retail spending that the increase in VAT is likely to bring about.

So it may be that the British economy has not even come out of recession, and even if it has, it may go back into negative territory at the next data point.

This comes despite the fact that the British government is continuing to run a double digit deficit; A deficit that is not sustainable and which must be reduced sharply. The fact is that those who are seeking to put a positive gloss on the situation of the British economy are missing the point: the country has still not escaped from its fool's paradise where property is always a one way bet and that it is legitimate to borrow as much as possible at today's "low rates" in order to get on the property escalator for the future.

However, the rapid increase in inflation is not just a function of base effects: the whole structure of the British economy is now paying the price for the devaluation of Sterling over the past two years. The Bank of England is signalling that it will not increase rates even if the inflation numbers over the next two quarters are worse than expected. The Bank is trying to avoid the blame for tipping the economy back into recession by raising rates too soon.

Yet all that is happening is that the low rate environment is keeping the UK housing market at an unsustainable peak. The imbalances of the British economy can not be corrected while House Prices are 20% above any sustainable level. As CQS observes in their latest briefing: the outlook is for considerable turbulence in the UK economy.

The risk that the Bank of England runs be keeping rates low is that the erosion of Sterling that high inflation causes becomes a collapse in confidence in the currency.

As I have noted before, the choice is stark: either keep rates low and risk a Sterling collapse or increase them and trigger a house price fall, with a risk of further problems in the banking sector. For the time being, the market believes that the Bank of England will have to raise rates quite soon. If they are disappointed then there is a real risk that the Pound becomes permanently dislocated from its previous trading range and drops to parity with the Euro, or even below.

There is a certain amount of patience still in the market, because the expectation is that a new government will take effective action against the deficit, but the UK is running out of road. If, despite the massive deficit spending, the double dip actually happens, then the policy choices are all very unpleasant indeed. The government after the next election may find that it has to make pro-cyclical cuts in government expenditure even though the economy has returned to recession. Under those circumstances the longest recession since 1945 which we have supposedly just emerged from will look like a phony recession: the impact of Great Recession II will involve the painful restructuring that the Brown government tried to avoid and it will be all the worse for having been delayed. The imbalances in Housing may finally be addressed, but the consequences for millions of mortgage payers will not be pretty.

So, it is not a wonder that there are growing mutterings about the outlook for the British economy over the next few years: and those mutterings could become a roar quite soon. The day of reckoning will come very soon unless there is real leadership at the Treasury and the Bank of England.

Friday, January 22, 2010

A chill wind

Tonight in Tallinn is set to be one of the coldest nights so far: minus 24 Celsius.

In fact it has not been above -14 for a while now. Personally I prefer it like this than when it is around freezing point, because there is no damp in the air, so it feels drier. Not to mention the fact that every day has begun with a beautiful clear sunrise and with the sun on the frost, the days are bright and cheerful.

We have some snow forecast in the middle of next week, but I will be back for a few days in London and Paris, so hopefully will miss this and the -6 associated with snow.

It is certainly true that you adjust your frame of reference quite quickly: once upon a time I would have considered -6 to be quite cold!

However, despite the cold, there have been three separate reports today that confirm that Estonia is on track to enter the Eurozone on January 1st 2011. It looks like we have finally struggled through our economic winter. Christmas tourism is up sharply on this time last year. The economy is out of recession. Finally, the place is looking up.

Meanwhile I shall go cross country skiing tomorrow in the bright sunshine. The chill wind is blowing this country some good.

Glass-Steagall Redux

President Barack Obama is in a mean mood. Furious that his Democrats were unable to hold one of the safest seats in the Senate, he allocates at least some of the blame for this on the large bonuses that the Wall St. bankers paid themselves in the middle of the election campaign. In the battle between America's Main Street and Wall Street- the votes are largely on Main Street.

Yesterday the President made his move: He has announced that he intended to restrict the ability of banks to use their own capital to take positions in the market, so-called proprietary trading. This is not exactly reimposing the highly restrictive Glass-Steagall Act, but it is being seen as a serious attempt to bring the bankers under control.

So serious, in fact, that the markets have fallen sharply in response. However, despite the approving noises made by George Osborne this morning, it will be quite difficult to enact these restrictions. The German model of Allfinanz or French Bancassurance is explicitly based on the ability of deposit takers to trade on markets. However, the way in which these institutions trade is rather different from the Anglo-Saxon model. Even still, the intervention by President Obama will be exceptionally difficult to enact internationally- even with the support of "Squeeky" Osborne.

I think Mr. Obama's challenge to the banks will be resisted tooth and nail. The resistance will come not only from the bankers themselves, but also from Europeans and Asians who have operated under different financial models.

President Obama, facing defeat on his health care proposals in Congress as the result of the Massachusetts special election, may find that he is picking up an even more difficult battle.

Wednesday, January 20, 2010

Cup Hands: there goes Cadbury

The long saga of Kraft's bid for Cadbury is now over. The board of the British chocolate company has now agreed that the bid from the American food giant should now go ahead. Personally I think it is the wrong decision at several levels. Firstly Kraft has a poor record in confectionery: their takeover of the Swiss Jacob Suchard thirty years ago was not a demonstrable success. and the once premium Suchard brands like Milka are now mostly also-rans in their markets. It is not clear to me that the Illinois-based company will be a particularly good steward of these businesses which have acquired a massive brand equity since the foundation of the Cadbury firm in 1824. After all the repeated takeover deals that Kraft has been involved with, from Phillip Morris to Nabisco are classic examples of value destroying M&A activity. There are also clearly going to be substantial job losses- with Cadbury's UK headquarters likely to be closed, and jobs transferred to Kraft's European headquarters in Zurich.

More than that though, I feel very uncomfortable with the way in which this deal has been concluded. The large pay-off to the Cadbury board: a reported £12 million to the managing director alone makes may question whether or not the British company's board simply put their own interests ahead of those not just of their workforce but also their shareholders.

The workforce at Cadbury have every right to feel somewhat betrayed- and the history of Cadbury makes the role of the workforce important. Cadbury was founded by a Quaker family upon Quaker principles. The huge pay-off that the board is now said to be in line for is an amount of money that would have shocked the founders as an example of naked greed. That it comes at the expense of the workforce whose interests Cadbury's founders always sought to protect and promote is -at best- a very unhappy situation, at worst it is a scandal.

If Cadbury was a French company, the job losses alone would make the French government at the least investigate the takeover. Unfortunately the real interests of the UK: maintain Britain as the headquarters of world class businesses are being drowned in the short term interests of the board of Cadbury.

This is a deal that Peter Mandelson should call in and at least investigate.

Yet he probably won't, and another part of Britain's business heritage is going to leave the UK. As we have seen with Nestle's takeover of Rowntree Mackintosh, being a branch of a global business diminishes British economic power and loses British jobs. Cadbury represents another step down for the UK and indeed for British companies on the London stock exchange.

A sad day indeed.

Tuesday, January 19, 2010

The Rollercoaster Ride of the Pound

I must admit I am feeling a bit smug: I anticipated that the UK inflation numbers would be worse than expected and as a result delayed transferring my cash off shore. The numbers are so bad though, that my long position in Sterling may be only needed for a few months.

Some may ask themselves why such bad news would cause the Pound to go up. The answer is all about interest rates. The market is increasingly anticipating that the Bank of England will have to raise interest rates substantially in order to deal with an inflation rate that is already headed to the top of its supposed permissible range. Is this good news? Very obviously not: the costs of borrowing for British companies and households is going to rise substantially, and probably very rapidly. On the other hand if the Bank fails to act quickly enough, then inflation could really take a hold: with equally dire consequences for the UK cost of living. Yet the UK economy remains in a highly fragile state, large rises in interest rates could kill off the tentative recovery before it even starts. The Bank of England is damned if it acts too rapidly, but equally damned if it acts too slowly.

Goldman Sachs put out a very optimistic report on the UK economy only this morning, saying that the 25% fall in Sterling over the past 18 months would boost the economy dramatically. The problem is that the UK economy is now largely public sector services- precisely the area where there is the least currency effect. Manufacturing output is only 9% of GDP: it is too small to have a real impact on the growth of the economy. In fact the fall in the currency is highly inflationary given the massive trade gap between the giant import and puny export numbers- and invisible earnings have been badly hurt by the disproportionate British investment in the USA whose currency has also depreciated versus the Eurozone where it has appreciated.

Goldman Sachs of course will be seeking to place a record amount of Gilts onto the market later in the year, though naturally it would be cynical to suggest that their consistently bullish view of the UK is linked to the huge fees that they gain from doing business with its government and monetary authorities.

For what its worth, my view of the British economy in 2010 is that this months inflation figures will be followed by even worse (indeed record monthly) figures next month. There may even need to be an emergency rate rise as early as March. That rise will need to be at least 100 basis points, possibly 150, and will be followed by several other rises in quick succession. This will be particularly true if the polls continue to point to a hung Parliament after the general election. Unemployment, meanwhile, will rise sharply too: the classic stagflation mixture. If demand for the big Gilt auctions later in the year is low and the cuts proposed by any new government are unconvincing then both the UK triple-A and Sterling will come under renewed pressure. Rates will have to rise substantially, particularly bearing in mind that the average base rate since the Bank of England was founded is 5%. Eventually the highly overvalued UK housing and corporate real estate markets will have to capitulate. This in turn may place renewed pressure on the banking system. I would not bet against rates above 6% before the year end.

As for Sterling: in a word: volatility. As the interest rate cycle tightens rapidly, I think it could peak at somewhere around €1.30. However the election, gilt auctions and need for recession inducing government cuts, not to mention looming pressure on the credit rating makes me think that it will test parity again before the year is out.

We will see if I am so smug in June, which is when I hope to have cut my long Sterling position to a short one.

Monday, January 18, 2010

Class War

As the British election draws ever closer, the debate begins to focus on a small number of key themes. This time, the media have taken up Class as a subject of debate, well I say the media, but actually I mean the left wing media which thinks that pointing out that David Cameron is a posh boy will stop him getting elected. Class, we are told, is still with us, and it still matters.

Well no shit, Sherlock.

However it is not really about David Cameron, or even the large number of rather chinless public schoolboys who make up most of his shadow cabinet. It is about something much more fundamental. You see the dark secret of British Society is that Labour too is dominated by the public school system, Harriet Harman is at least as posh as George Osborne. Tony Blair- famously- is an Old Fettesian and Alistair Darling was at the- even posher- Loretto. Amongst the Liberal Democrats, public school educations are equally popular; Nick Clegg went to school at Westminster.

Nor is the extraordinarily strong preponderance of ex-public school types in powerful places limited to politics. In the law, over 70% of judges are ex-public school. In the media, the preponderance is even higher- over 80%. At every level in the levers of state, the 7% of the population that were sent to public schools have massive advantages over the 93% who were not. Just because you go to University does not mean that this exclusive club will let you in, because Class is not about talent. It is about entrenched, often inherited privilege. It is about socialisation as much as education. It is about us, it is not about them.

It is also a total disaster for our country. This narrow elite has closed itself off, not just from the rest of British society but quite often from the rest of the world. The Public Schools have created a Mafia that protects its privileges and largely denies them to those beyond their own circle. Merit is subordinated to clique and the impact has undermined economic and social cohesiveness.

In my early years in the City there was still the vestige of the old school tie- but the vast expansion of finance after 1986 drowned the Piers's and Gervase's in meritocratic foreigners, and the braying of the toffs was diluted. They moved on into other areas: Estate Agency, property, the media. This was why David Cameron could get a job in PR, but not one in the City (though of course many of his friends did go into the City). Not co-incidentally, the power of the City of London in global terms grew dramatically.

Despite dilution in the City, the power of this Class across the rest of society is overwhelming, especially considering its small size. Whole professions are shut to the majority- and these are generally the best rewarded and most powerful ones. As the economic crisis of the coming decade takes a firmer grip, the naked social divisiveness of the system is going to become a far more obvious part of the British political discourse. Although Labour has sucked at the same teat of privilege as the Conservatives, the more obvious self satisfaction of the Tories, and their denial of the institutional power that Class still possesses will make them more vulnerable to attack.

Of course the cynical news minders of Labour know this, and will not hesitate to play the Class card for all it is worth. However as they do that, both Labour and the Conservatives should remember that there is something genuinely wrong about the way that the UK allows powerful elites to remain closed and unchallenged- and it is one reason why so many of the brightest and the best have chosen to leave. Being a foreigner in Britain is far better than to be the wrong class and being derided by braying ignoramuses.

Sunday, January 17, 2010

The Implosion of British Power

I have been participating in a small conclave of very senior foreign policy experts: by experts I mean Foreign Minister (several were present) and Senior Ambassadorial level. It was one of those informal meetings that drives much of the opinion forming on key issues in international relations. I was one of those few present in an unaffiliated analytical capacity, since I have direct experience of several of the topics covered. The conference was conducted under the Chatham House rule, which limits what I can say to reporting the tone of the meeting and does not reveal attendees or ascribe views let alone direct quotes to specific individuals.

In any event the point I wish to make is not about the specifics of this meeting.

What this meeting- and several others that I have attended recently- has revealed, is the utter breakdown of relations between Britain and its allies. I would say that the United Kingdom is not only isolated, it is actually pitied.

Neither is this a European phenomenon: Americans were expressing the same attitude. One who was present when Gordon Brown visited Barack Obama, was contemptuous that the only thing that the British wanted to gain out of a meeting with the President of United States was essentially a photo opportunity. There are a variety of critical issues- not least in Afghanistan- that could have been usefully discussed, but the British avoided anything of substance at all.

Nor is this simply a function of the outgoing government.

Meetings with Conservative front benchers had been similarly inconclusive. The Europeans found that Conservative debates were simply about whether or not they should discuss anything at all- since the British relationship with the US was the critical one. Unfortunately, the Americans already have at least as close discussions with other EU and NATO states as with the UK and don't need British intervention, let alone intermediation. Indeed the idea that such intervention was needed was regarded as a joke. The Conservatives ignorance of foreign policy was regarded as just as damaging as the vacuousness of Labour practice of it. The special relationship- in any practical form- is finished.

Britain is not respected. It is not liked. It is becoming regarded as an embarassment- a mad relative who one has to see at Christmas, but would choose to avoid at all other times. A Miss Havisham cloaked for a wedding with an American groom who will never come.

Although Catherine Ashton- the new British EU foreign affairs supremo- is personally regarded quite well, her selection was an irrelevance, since these new Lisbon mandated roles rely on personal political influence: as she is an unknown unelected, and British figure, her power base was exceptionally weak. The petty calculations that Brown made in selecting her were contemptible and pathetic in the full meaning of both those words.

The British Conservatives phobia towards the EU has already inflicted great damage. The interests that they claim to represent are regarded as totally irrelevant in the wider world. British influence has imploded. The economic crisis will remove the last fetish of British power: its larger than average military clout. Those that have had meetings with the Conservative front bench expressed general astonishment as to failure of these people to understand the full implications of the positions that they were laying out. With few exceptions, the quality of the Tory front bench was considered to be exceptionally light weight.

Isolated, irrelevant to the United States, ignored by the rest of the European Union. Even a new government seems set to lose further ground in the international system.

It will be a very long haul to recover any ground. I must confess to being shocked and very sad indeed just how far the British star has fallen.

Wednesday, January 13, 2010

Chinese Puzzle

Google has announced that they have uncovered a systematic attack on their systems in China, targeting pro-democracy activists. They have therefore renounced their policy of self censorship, the so-called "Chinese firewall", that prevents a Google search showing results that the Chinese Communist Party does not approve of. From the point of view of most users of the web, this will be welcome news, and Google has sustained some withering criticism for its willingness to accommodate the authoritarian regime in Beijing. As for Google itself, they have seen falling market share in China, and although there is a growth opportunity forgone, the costs of withdrawal from the Chinese market are not particularly severe at this point.
However, this is the latest in a series of news items from China that suggests that the country could be on the brink of significant upheaval. The Chinese economy is expanding rapidly, to the point where the Chinese monetary authorities are moving to tighten their reserve requirements, and may be forced into an early rise in interest rates. Despite the policy of keeping the Chinese currency at a low rate, when a free market would have appreciated the exchange rate, it may be that inflationary pressures in China are more serious than has been understood. Certainly, the incredibly inefficient Chinese banking system does not seem to function in a normal commercial way. Even three years ago there was substantial speculation that the Chinese banking system held losses about as large as their then holding of US Dollars. The Chinese economy is massively weighted in favour of manufacturing, and it is making the country exceptionally rich. Yet more and more we hear of problems emerging amongst Chinese producers, and several American manufacturers have decided to return some manufacturing to the US.

Part of the problem remains the fact that the Chinese do not respect intellectual property laws when it does not suit them. Widespread copying and counterfeiting amounts to wholesale theft, and many of these thieves operate under the protection of the Chinese authorities, including the Chinese army. Google too may be facing the theft of its codes, which might not be an issue of competition, but certainly is a question of security and privacy. In short there are major difficulties in dealing with the Chinese authorities that set limits to what can be achieved in the Chinese market.
Internationally too, we see policies, such as the hoarding of rare earths which suggest that China's embrace of free markets is an attempt to seize global economic domination by any means, and threats to the United States over their arms sales and other support for Democratic Taiwan. These policies have raised fears that China is a potential threat to the international system and potentially to global peace. Certainly as an emerging power it is inevitable that China will exert growing power on the world stage, however whether that is a force for good or bad will depend on whether China is prepared to respect international law and the agreements that she herself makes.
The root of the problem is the Chinese political system. It is increasingly obvious that prolonged one party rule is creating a corrupt cadre of leaders that are increasingly afraid of the material and political aspirations of the people. If this economic crisis stalls the astonishing economic growth of China, then a substantial part of the legitimacy of Communist rule will be undermined.
Even as it is, there is a growing number of Chinese who are seeking to create a more open and pluralist political system: and the emergence of a Chinese democracy out of the KMT dictatorship in Taiwan is becoming an ever louder rebuke to the Communist Party in Beijing. The Tienanmen square pro-democracy demonstrations of June 1989 still makes Communist blood run cold: they fear the challenge of political reform.

Yet that reform voice is growing, which is why harassment of democracy activists is growing more obvious too. Buried beneath a blanket of pro-regime propaganda, the mass of the Chinese people have given the regime legitimacy, but this legitimacy is conditional upon the continued delivery of economic success. Inevitably, though, there will come a time when the economy enters a cyclical downswing- and at that point the political challenge will be redoubled.
One Chinese commentator suggested that Democratic rule must be only a matter of time, that ultimately a free press and indeed multi party elections will come- and that this will give China far greater stability. He believed that the current "rule of men" must give way to a "rule of law". He wrote:

"It is the Western parliamentary democratic system that has demonstrated the most vitality. This system is currently the best one available. It is able to manifest the spirit of democracy and meet the demands of a modern society, and it is a relatively mature system.
Of course, this system is not perfect; it has many problems. yet relatively speaking, this system is best suited to a modern civilization, more adaptable to shifts in public opinions and more capable of realizing democracy. Moreover, it is more stable. The vitality of this system has grown increasingly clear. Almost all developed nations have adopted a parliamentary democracy.
In the past few decades, the newly emerging nations with their fast paced development have illustrated more clearly the trend to converge on a parliamentary democratic system. I am certain this is not by chance. Why is there not one developed nation practicing any other system? This shows if a country wants to modernize, to realize a modern market economy, it must practice parliamentary democracy as its political system.
Of course, it is possible that in the future a more advanced political system than parliamentary democracy will emerge. But that is a matter for the future. At present there is no other.
Based on this, we can say that if a country wishes to modernize, not only should its adopt a market economy, it must also adopt a parliamentary democracy as its political system. Otherwise, this nation will not be able to have a market economy that is healthy and modern, nor can it become a modern society with a rule of law. Instead it will run into the situations that have occurred in so many developing countries, including China: commercialization of power, rampant corruption, a society polarized between rich and poor"
As Democrats there is nothing we can disagree with here. So it may be surprising to learn that they are the words of Zhao Ziyang, the former Communist Prime Minister of China, who was placed under house arrest after the crushing of the Tienanmen Square demonstrations until his death in 2005.

Tuesday, January 12, 2010

Lies, Damn Lies and Greek Statistics

After the the crisis hit Greece, it became clear that the country's political leaders had forced the Greek statistics agency to produce false accounting. Instead of the actual numbers, the country reported a slew of figures that seemed to show that the country had eschewed its old spendthrift and incompetent ways and embraced the rectitude of the Maastricht economic criteria. In fact instead of a single figure deficit, the country has been running much bigger deficits and then lying about it. The effect of discovery was to send the country towards a serious crisis and to see a dramatic expansion of its debt yields... oops!

In fact the FT now reports that the positions is even worse than was feared. In fact, virtually all the Greek statistics are lies or meaningless. Not too surprisingly, the European institutions, from the Commission, to the ECB to Eurostat are livid.

The next steps now remain a bit of an open question. Obviously the new government in Athens is trying to show the appropriate level of contrition and is hurriedly revamping its entire statistical service as an independent organization that conforms to Eurostat rules. The Greek government is also going to have to inflict much more serious economic restructuring to reduce its now suddenly inflated deficit. Meanwhile the ECB is beginning to work out a plan that can sort out the mess without having to resort to the ultimate sanction of massive fines that might force the Greeks to exit the single currency.

The Greeks will be hurt by this, after all who now would believe a word they say? However it may also be that the Euro ends up being strengthened, provided that the word of at least the ECB can be relied upon.

Leading Universities out of Dependency

Sometimes headlines seem like an endless succession of repeats- a kind of Groundhog Day from a 24 hour media with little short-term, let alone long-term, memory. This morning we have had the annual complaint from Universities- not co-incidentally just ahead of the annual budget discussions they must have with the Education ministry- that they are in a "crisis" that will lead to unimaginable cuts.

Now, I am not one who imagines that all is rosy with the universities in the United Kingdom. Far from being the ivy-clad, ivory tower of cliche, many of Britain's higher education establishments are actually quite squalid places. While many uncomfortable, inappropriate buildings are being replaced, the fact is that the new buildings are expensive and as a result, the temptation of University administrators to overcrowd facilities has become overwhelming.

The basic problem is not so much that budgets may be cut and policies changed, but that they are changed erratically and with little notice. The government sees two valuable aspects of University life: the value that they have in improving the quality of the workforce in the longer term (and also reducing youth unemployment in the shorter term) and the distinctly lesser value of primary research. Yet, while many Universities regard research as their primary goal, the government regards teaching as the Universities primary role. Nor is this a feature of the Labour government. Conservative governments too have upgraded formerly teaching-led institutions such as the Polytechnics and central institutions into fully fledged, chartered Universities. The idea behind this was to eliminate a snobbishness about Polytechnics that meant that even a brilliant Poly had less status than a poor University.

The result has been that research funding now has to feed a much larger number of mouths, and expensive research- like physical sciences- inevitably struggles to gain critical funding for expensive laboratories. This is one reason why science teaching has gradually lost out to the cheaper teaching of humanities, because the scientific research side is not able to offer the right facilities. This in turn has reduced the number of graduates who can teach scientific subjects in schools and so reduces still further the pool of students opting to study sciences at Universities. This process has been going on for several decades, and has been a significant distortion of the British labour market: we have too few engineers and too many sociologists. The failure of governments to understand the links between primary research and undergraduate teaching has had significant consequences.

However, as the public sector funding crisis gathers momentum over the next few years, Universities are going to have to face new choices- and so are undergraduates. The levels of funding are going, inevitably to fall under two pressures: the pressures on government expenditure and the falling domestic undergraduate intake as result of demographic pressures. Many Universities have already responded to these by increasing their intake of international students. These overseas students pay full fees, and as a result they help subsidise the domestic students who do not. Yet domestic students, beyond their fees being paid, have increasingly less access to overall funding- the days of fully funded student grants are at least two decades gone. The result has been that students have opted to study closer to home, taking advantage of proximity to parents in order to reduce their bills.They have also increasingly taken part time work in a way that would have been surprising to the generation of 1960s and 1970s whose left-wing nostrums would have regarded such industriousness as class betrayal. Nevertheless, students have adapted to the sharp reduction in government funding.

Universities too must now try to take their lives back from government control. Some Universities are wealthy enough to escape government control by charging full fees but funding poorer students with bursaries which they can fund from their large endowments. Those Universities that are not wealthy are seeking to increase their independent endowments and also to focus their attention on a narrower, more specialised subject range. Others have created community out reaches to attract local students, including mature students form their immediate area. Yet others, by contrast, have sought to expand their overseas activities, including developing campuses overseas. All are perfectly rational, indeed commercial responses to the inadequacies of government funding. Yet- so far- only one University, the University of Buckingham, has opted entirely out of the government system, and this has been as much a matter of right wing ideology as of genuine need. Nevertheless, it is only going to be a matter of time before a major University decides to go it alone.

Yet all of this is happening without significant debate. Most politicians do not like to offend articulate students or their families directly, and as a result the debate has been extremely low key- no discussion of "hard choices" is made when those choices create significant resistance within the heart of the political establishment. Nevertheless, the time is drawing closer when a banal slogan like "Education, education, education" will need something real behind it. University reform is inevitable, they question is what form this reform should take in order to maximise the benefits to society as a whole and increase the quality of research in particular.

The annual media groundhog day of University funding discussions may be changing into a substantive debate about what we as a country want out of our University system and how best the Universities themselves can adapt to provide this- including a dramatic increase in self-funding.

Thursday, January 07, 2010

Direction of Travel

Yet another "plot" to unseat Gordon Brown before the Labour Party's date with destiny at the next general election appears to have fizzled out before even getting started. It is not hard to see why. Despite his obvious failings, both personal and political, Gordon Brown does not actually have an obvious rival. After 10 years as heir apparent to Tony Blair, Brown was elected as leader by the Labour Party unopposed.

One can argue whether the coronation of Mr. Brown ought not to have been contested, but in the end not one individual was even prepared to act as a stalking horse candidate against him. There was not even a facsimile contest. Mr. Brown's reputation for unforgiving, volcanic anger and a Stalinist devotion to destroying his enemies seems to have persuaded his colleagues that discretion was the better part of valour. The fact is that no figure has emerged who is prepared to challenge directly the failing and faltering leadership of Mr. Brown. Only Charles Clarke ploughs his solitary furrow of opposition, but he is a powerless and marginalised figure.

The failure of Hoon and Hewitt is not that they have no support- even inside the cabinet there is considerable sympathy for the idea of removing Mr. Brown- it is that they have not identified a single credible alternative who is prepared to challenge Mr. Brown directly. The various candidates said to be in the frame, from Jack Straw to David Milliband appear to be calculating that they can simply inherit the leadership of the party after an election defeat.

It is a collective failure of nerve that could be very dangerous for the Labour Party. It is clear that Mr. Brown is not temperamentally suited to being Prime Minister, yet there is no one, no one at all in the cabinet who is prepared to say so publicly and then to do something about it.

The consequences could be a spectacular, rather than a merely heavy, defeat. Labour flirted with annihilation in 1983, because they would not axe Michael Foot. Can it be that Labour are going to make the same mistake twice. With the lowest polls for Labour at only 23%- behind the Liberal Democrats- might it be that this failure of nerve in the cabinet brings truly epochal changes to British Politics- including the eclipse of Labour as a governing party?

"Whom the Gods would destroy, they first make mad"

Wednesday, January 06, 2010

The Politics of Jelly and Ice Cream

As a child you may have wanted to eat jelly and ice cream for every meal, to eat it until you were sick. Yet, for most kids, there were adults to prevent such greed from causing their offspring such harm. In the end we put away childish things and if we eat jelly and ice cream today it is with an adult sense of moderation. Learning such moderation is a large part of growing up.

Yet our society today seems to reward the infantile and the irresponsible. The adult equivalent of jelly and ice cream is probably sex- and here we seem to revert to our inner child. The tawdry succession of sex partners that Katie Price, aka "glamour" model Jordan, has left in her wake has enabled the manipulative owners of the "Big Brother" franchise to populate their nasty programme with quite a few of Jordan's former bed mates. Ms. Price's candour- on the front page of gossip magazines, newspapers, and in a series of ghost written books- about her complicated, even tortured, love life is supposed to show her as some kind of empowered new woman. Of course it does not: her infantile screeching towards one of her ex-husbands, and the father of some of her children makes her out as a child inside a cartoon of a woman's body.

Yet, Katie Price is held up as some kind of role model in certain circles, which is pretty worrying if we want to bring up well adjusted, thoughtful, mature and kindly children. Jordan is a symptom of a widening coarseness in Britain: a country that is seemingly unprepared to impose adult disciplines of moderation upon itself.

Instead of saving-up for furniture or electronic goods, or any other "must-have" in our consumer society, people now buy them on the never-never and sometimes even throw their goods away before they have even finished paying for them. Nothing: not lack of money for consumer goods, not damaging your physical health with drink or emotional health with promiscuity must get in the way of the hit of immediate gratification.

Our politicians can recognise the zeitgeist. In order to get elected, it will not do to give the voters too many home truths. As a society we insist that we can have it all: material progress, environmental protection, deficit reduction, full employment, economic growth, universities and apprenticeships, housing and the green belt; but we can't, we must make choices. Leadership is being able to articulate these choices and convey the benefits, and the costs to the rest of society.

We have few leaders in the UK today. A very small number of political leaders since Margaret Thatcher, have been prepared to defend their positions when they face unpopularity. Whether it is the short attention span of the media, or the growing complications of modern society, the fact is that the masculine, goal-oriented traits of decisiveness and tenaciousness in the face of unpopularity have been drowned by more feminine, process-driven traits of consensus building and compromise. This is not altogether healthy. We see the emergence of moral relativism: one can not condemn Jordan as the sad slapper she is, because "slapper" is sexist and demeaning to all women, not just slappers, and anyway who are we to condemn any one?

It is how we have become a society that is puking on too much jelly and ice cream- in the case of 60 stone men this is literally true- too much debt, too many broken homes, too many sick and dying alcoholics. Yet, if we may offer no condemnation to people who are sick, are we to make no judgement at all? Surely to recognise- to judge- aberrant behaviour is the first and necessary step to finding solutions to the problems that are created? Yet the compulsory social consensus - cheaply called "political correctness"- will not allow society to make such judgements and to impose discipline upon itself.

If, as a society, we have become addicted to the jelly and ice cream- of things that are bad for us without moderation- so our politics reflects this. Political leaders will not take a stand, they will not offer difficult choices, only the bromides that are so banal as to be a lie direct.

It is a tragedy that "tough choices" has become a meaningless cliche that exists to give the impression of decisiveness in a political class that reflects the social crisis but lacks the detachment or discipline to understand it, still less to address it. In the meantime our social, economic and political infrastructure are devalued by our inability to control ourselves and make responsible -adult- choices in the face of temptation.

Tuesday, January 05, 2010

Me, me, me...

Oh dear... the launch of the "unofficial" UK election campaign in a blaze of posters seems to have begun.

Discussion about the profound, existential crisis facing the country is reduced to some unilluminating truisms- preferably banal ones. The absurdly airbrushed David Cameron announces that he will cut the deficit and not the NHS. Hmm... The NHS is in another crisis. Not, it is true, the funding crisis that it endured under the Conservatives, but a far more serious one. The system as it currently stands soaks up more money and delivers generally worse outcomes than most European comparables. The lack of accountability and responsibility is leading to gold plating at every level: the tripling of GPs compensation over the past decade has not delivered triple the care- indeed GPs now work a fraction of the time that they worked 15 years ago. Hospitals struggle to cope with basic cleanliness- and unrestricted visiting is sending MRSA and other superbug infections out into the community. The NHS is highly dysfunctional, but Mr. Cameron dares not be seen as a threat to this holy cow.

Meanwhile the use of the personal pronoun "I will..." underlines the central role of Mr. Cameron in the campaign, but the reality of our Parliamentary system and indeed the scale of the crisis requires huge collaboration and much high level teamwork. Apart from the potential hostage to fortune that taking the challenge personally represents, the fact is, it is not true: Mr. Cameron can do nothing on his own, and it is a mistake to pretend that he can.

As the first salvos are loaded the fight a long election campaign, my heart sinks at the prospect of shrill trite, dishonest and just plain stupid political debate, when all the time the hour of economic reckoning comes closer.

This is not a very adult way to start the debate.

Monday, January 04, 2010

Sufficient unto the day is the evil thereof

Well, a long holiday- and a long break from blogging. I have travelled several thousand miles across several European countries, but am now back in Tallinn, under a record covering of snow. Like all of Northern Europe, the winter here is breaking records, being both much colder and much snowier than usual. The ice is beginning to cover the sea, and we are told that the ice road to the islands will be open within a couple of weeks.

Meanwhile, the last part of 2009 was a time of a large number of goodbyes- including the flat I lived in for 12 years in London. 2010 seems a more than usually uncertain year- and not just for me. In the press and amongst my friends I see a sense of foreboding. There is very real anxiety- continued terrorism, continued war in Afghanistan, continued economic crisis. In a way it takes me back to my childhood in the 1970s, where Britain in particular faced serious economic decline, combined with a particularly vicious and insidious form of terrorism from the IRA. Of course in addition to all of that we had the challenge of the cold war, with nuclear mega-death in theory only a four minute warning away.

Despite the depth of our economic problems, the fact is that the "Noughties" were not anything like as bad as the 1970s. Now, as the new century begins its adolescence, the question is how to calm our own insecurities in order to be able to avoid new problems while we address the problems that we have. The response of George Bush to the threat from Al-Qaida now seems very ill judged, and by taking the line of revenge, the Bush administration made the horrors of 9/11 into the most successful terror attack ever. Iraq- not involved in the attacks- was made a scapegoat and while settling the Bush family score with Saddam Hussein, President Bush (junior) fatally compromised the real effort in Afghanistan. Now the Taliban, Al-Qaida and its suicide death cultists have made new bases, in Somalia and in Yemen. In Somalia our failure to recognise the only piece of the imploded state that still works: Somaliland, is a dreadful mistake, that may lead to the expansion of terror there too.

Nevertheless, although heavily criticised for indecision, President Obama's caution now looks increasingly wise. Although -disgracefully- his Republican opponents are openly hoping for his failure- in order, partly, to make the Bush fiasco look better in retrospect- Mr. Obama's legendary coolness may be about to pay off. Although there are tough battles ahead, his political success on the domestic front- opening up the way for American health care reform- may now be matched by a substantial economic success, as the United States unwinds its quantitative easing and returns to more stable economic times. Despite the challenges from a disruptive and overly assertive China, America remains the dominant economic and political force in the world, and in 2010 its economic recovery may remind us of this fact.

In the European Union too, there are signs of recovery- and the economic power of Germany is reaching new heights, even while those countries in the EU which have not reformed now struggle to play catch-up with the bloc's undisputed leader. The tough decisions being made in Spain and Ireland, while very painful in the short term, seem set to place those countries on a more sustainable economic footing.

Only in Britain, mired in election mudslinging for the next six months, is the outlook continuing to dim. The failure of the exhausted Labour government to address the looming fiscal crisis is more critical every day. Unlike America, the banks remain in a dreadful state, and the emerging collapse of the commercial property market may require a second rescue as large as the first. As public sector workers receive new wage increases- including increases in their unfunded pensions, as bank bonuses are being paid despite the absence of any recovery, as consumers splurge over Christmas, there is already a palpable sense that this level of irresponsibility will have terrible consequences.

Although the general world outlook continues to brighten a little. The outlook for the UK in 2010 is now as grim as it has been for nearly 40 years. Many argue that the fall in sterling will rescue the economy. Unfortunately British manufacturing now comprises only 11% of the economy and the bulk of economic activity is now in the public sector- all a falling Pound is doing is importing inflation. So in addition to emergency government spending cuts sometime in the mid year, we will see much higher inflation- and a rise in interest rates that will finally undermine the UK housing market. Although self-interested groups have been pointing out that housing has become more "affordable" the fact is that this affordability is based on ultra low interest rates. They fail to note that the historic average Bank of England base rate is 5%. Meanwhile the ratio of price:rent in the UK is still 20% above its long term average. The combination of inevitably rising interest rates and large job losses in the public sector can only mean a significant real fall in house prices. Either the currency will collapse or housing prices will.

I expect it will be both.

Happy New Year