Archive for October, 2010

Sunday, October 31st, 2010

Economic Recovery in the U.K. and the U.S.

There are signs that things may be picking up both here and in the U.S., although there is a long way to go and the path will not be smooth. Something, however, is happening which makes this recovery different and much more difficult for politicians to control, both in the U.S and the U.K.. It is this. The people have turned against borrowing. In doing so they, more than their leaders, are re-structuring the economies of both countries to a different and more sustainable model. The new financial structure is going to be different. It will not be built on debt.

The implications are huge. The easy route of lavish credit  to a quick boom, which beleagured politicians could use to escape from poor fiscal policy decisions and get re-elected, is closed off. This time round economic recovery will be built on wealth creation rather than asset inflation. This will take longer and will inflict pain, but the outcome will be more robust.

The Coalition understands this better than Washington. Its policies are more Monetarist than Keynesian, but with a sweetener of liberal compassion. It refuses to reduce its cuts or make their impact less severe. It is imposing much tougher demands on regulators to end irresponsible lending, as well as cutting housing benefit. Both will reduce house prices and will have the effect, in the long term of increasing the money in the pockets of the lower earners, so they need to borrow less. Companies are looking to new investors to raise capital to expand rather than to the banks.

All of this is good news, except for the government. Sound governance will become more rewarding, but populist measures will become harder to sell. Governments never like having to explain themselves to a savvy people.

Saturday, October 30th, 2010

Terrorist Alert

Tariq Ali, when answering a question on last night’s edition of  Any Questions, made the very simple point that there is no way the terrorist threat will reduce while we continue to pursue our current foreign policy. He is so right. It is also right to maintain the highest practical level of security precautions compatible with liberty. The terrorists will try and try again and we depend upon the excellence and cooperation of the intelligence services across the world for our safety.

Whilst these services work tirelessly to protect us, they do not make policy. Not only does fighting in Afghanistan de-stabilise Pakistan, but it does nothing to lessen the Al Qaeda potential, which is mobile and can set up more or less anywhere. There will be no let up in recruitment of volunteers, so long as this war continues and there will be no peace until Israel can be persuaded to make a serious compromise to achieve an accord with the Palestinians leading to a viable Palestinian state.

These are simple truths. It is remarkable that politicians and the military find them so hard to grasp.

Friday, October 29th, 2010

Boris, Polly and Housing Benefit

Both these two have caused a big stir with dramatic words. Polly Toynbee regrets talking about a final solution for the poor, but Boris was less forthcoming about his jibe of Kosovo style cleansing. Whatever the sensitivities of these words, and they are real and many, Boris and Polly have done a great deal of good. What they have done is show us that in a complex society, simplistic solutions may not work.

What has happened is, as I have posted already, housing values have gone off the rails. All governments are responsible for this equally. The Tories began it in the eighties but New Labour did nothing to halt the the rise, indeed it stoked it. Add to this the lack of council house building and the disintegration of estates once thought of as a bright new dawn following post war slum clearance, and you have a complete structural imbalance. Where do nurses, firemen and every other kind of less well paid worker, upon whose low pay and hard labour the whole of the rest of functioning  society depend, live, if there is no sensibly priced housing available? The answer is on the street or too far from their work to be able to do it and maintain the welfare of a family. 

Thus they need housing support in the form of a subsidy from the taxpayer(most of them pay tax themselves) in order to be able to function and society has an obligation to pay. Allowing this to happen is as feckless as allowing food prices to rise by such dimensions that the taxpayer is forced to subsidise groceries and the contents of the fridge are the most valuable assets in the wealth of the nation. It illustrates what a dreadful, unbalanced financial mess has developed in the post Thatcherite era, which laid the foundations in the belief that there was no such thing as society. Without society there is no civilisation and in the end no survival.

It will take a very long time to put this right and the government is right to make a start. But the plan, as set out, cannot stand. There will have to be a special premium for the most expensive areas, mostly cities and most of that in London. As Boris put it, no social cleansing on his watch. He is right. We want our towns and villages to retain the essential character of our country where all income groups live happily side by side. The outspoken declarations of two national figures, one a Tory, the other Labour, has changed my mind. I am not alone. The majority of all parties and people in the country, on this detail (not the policy in principle to curb housing benefit) back Boris and Polly. This is not about workshy people living the life of Reilly. It is about working families upon whom we all depend, the elderly and the vulnerable being forced to migrate. We no longer do that here.

Thursday, October 28th, 2010

Housing Benefit and House Prices

At first glance the Coalition’s proposals seem reasonable and fair, balancing need of claimant against charge on taxpayer. Delve a little and they fly close to a creating a social disaster. It is a complex issue.

The problem is that, rightly, unlimited benefit, or benefit at inflated rents, is grossly unfair to taxpayers paying the bill, who themselves cannot afford to live in similar accommodation. The emergence of the taxpayer as paymaster, rather than the vaguer government, is one of the most profound changes which has occurred in our democracy. People now  understand that they are paying and, though the agent is the government, it is their money. Thus benefit scroungers or those who seem to be living rather well off the State, are just as, maybe more, unpopular in poor areas as in rich locations. This will change the climate of government and its freedom to spend.

Next in the mix, and at the heart of the matter, is the excessive cost of housing everywhere. I have hammered this argument from before, during and after the crash. An economy built upon inflating the asset value and therefore the cost of an essential commodity, in this case housing, cannot sustain and will crash, as crash it did. The problem is that people cannot actually afford the cost, so the taxpayer has to step in (sometimes one and the same) and take up the slack. The problem started with the sale of council houses which on the one hand created the nostrum that to own was better (which it often is not) and on the other sucked cash out of the housing system nationally, because a greedy treasury took the takings from the sale, leaving councils unable to replace the dwindling stock of social housing.

This led to a rise in homelessness and families living in B&B accommodation, utterly unacceptable in a civilised society. It also created deprived estates in which people who could not afford to buy lived, leading to outbreaks of poverty, deprivation and benefit dependency, especially in areas of high unemployment because of industrial decline.

Homelessness has now been all but eliminated and few are housed in bed and breakfast except very temporarily. But the bill is astronomic, especially in London and the South East. Moreover the pouring of state funds into the coffers of private landlords allowed house prices to be pushed even higher with rents keeping pace. All this has to be brought under control and the measures announced to do it are perfectly reasonable.  Applying them to existing situations, we are talking about people, families and children, is another matter. To do this without causing a social crisis will require some transitional arrangements and, like the proposed Universal Benefit, will cost. The long term improvements will be considerable, but the immediate savings may not be a big as expected. 

Once again this emphasises the need to get house prices and rents back down to manageable levels. This is why the latest fall in house prices is, perversely, very good news.

Wednesday, October 27th, 2010

Breaking Up the Banks

Mervyn King has called, again, for the banks to be broken up, so that what we call retail banking is separated from what has become known as investment banking. This blog fully supports the Governor and has advocated this course continuously.

There is good reason for this. Well capitalised retail banking, following sensible lending criteria, is not only critical to a modern, or indeed any, economy, but it is also systemically safe. There will be failures among businesses reciving finance and some private borrowers will run into trouble. Overall the system is designed to cope with this and historically has. A permanent government guarantee of depositor funds would place very little actual risk at the door of the taxpayer. This is especially the case with the establishment of the new Financial Policy Committee at the Bank of England to run alongside the MPC, as part of the Coalition’s plans to re-organise the arrangements by which the financial industry is supervised.

Investment Banking is different. The nature of the trading in which it engages amounts to gambling. It creates its own electronic money de-facto, by creating, then valuing, then trading in, financial instruments so peculiar that nobody is able to explain exactly what they are. The sums of money are so vast that they exceed many times over the GDP of the whole world. These mind boggling sums flash from screen to screen from one trader to the next in millions, billions and trillions. When things go wrong and the crunch comes, the so called instruments are all but worthless and the trillions of dollars in this electronic racetrack are nowhere to be found. This is because they never actually existed in the first place.

With the cry that they are too big to fail, the taxpayer is called upon to come to the rescue with real hard cash to fill the vacuum in the balance sheets and coffers in some of the world’s top financial companies. Because they are organised in such a way that these preposterous financial fornications are entangled in the banking security of ordinary people, governments round the world had to respond, ours to the biggest tune of all.

What is required is the separation of this proprietary gambling from orthodox banking, of which it should never have been allowed by Big Bang to become a part. Then when trouble brews, the taxpayer can pass by on the other side and let them crash, wiping out their assets, salaries, bonuses and all, as well as the greedy shareholders who backed them. The crash would be spectacular and hard working people who do all those things which are socially useful rather than socially useless, would look on, most enjoying the spectacle and many rubbing their hands with glee.

That prospect and that prospect alone will ensure these gamblers, calling themselves investment bankers, mend their ways. The Governor is right. He deserves  support.

Tuesday, October 26th, 2010

Labour and the Economy

If David Milliband had been elected Labour leader, thus keeping alive the concept of New Labour, the current economic posture of the Opposition would serve. The prospects of a return to power would be negligible.

But it was not David, but Ed, who was elected, signalling the end of New Labour, with all its skeletons, arrogance, inertia and spinning. The prospects for Labour are therefore much brighter, not because it will justify its past and offer more of the same, but because it will break with the past and offer something different. This is not happening with the economy.  Alan Johnson is good on communication and voter empathy. He talks of worried families up and down the land and people nod. But there is no big idea. When he talks, we hear a man who has mugged up, not an innovator who has thought through. That big idea is out there. Alan Johnson needs to grasp it and make it his own.

Tuesday, October 26th, 2010

Growth Figures

These have turned out better than expected for the third quarter at 0.8%. Annualised that would come to 3.2%. Actual growth over the past twelve months is 2.8%. All this is very respectable, but the effect of the cuts is yet to feed into the economy, although those of the past year by Labour and the Coalition combined are as fierce in effect as those yet to impact. Cause for optimism certainly and favouring deficit hawks, but not so decisively as to give them the field. Yet.

It is interesting to compare what is happening here, with the U.S.. There the economy received such a record stimulus and government spending by the Federal authorities has reached such proportions, as to energise the battered Republican Party, give birth to the Tea Party and hazard the prospects for the Obama Administration in the mid- term elections. There is evidence of the economy failing to generate any momentum of its own and growth slowing, not because of cuts, but because the impact of spending measures is wearing off. Moreover the structural imbalances and fault lines remain much as they did at the beginning. Jobless totals are frightening and property prices continue to fall.

This suggests that without fundamental re-modellling, the old economic model is clapped out and no amount of spending will fire it up or keep it going, a view held by this Blog. By contrast the faults in the structure of the similar economic model employed in the U.K., in the lead up to the crash, are now correcting themselves. This is because the private sector and the ordinary working people have known for long what was wrong, but weighed down by the ever growing State, have been held back. The attack on big government and profligate spending by Whitehall, has energised everyone not engaged in it and the British economy, so long skewed from its potential by over-borrowing, quangos and co-ordinators, has started to break free.

It therefore looks as if we are doing better than the high spending America. It is no time, however, to be cocky. Without an American recovery at some point, our own will not sustain.

Monday, October 25th, 2010

U.S. Mid Term Elections and the Tea Party

There is something very interesting going on in America. On this side of the Atlantic all people are aware of is the simple fact of elections,  in which either the Democrats of Republicans will win the most seats in both Houses of Congress. There is also something called a Tea Party.

What is the Tea Party? It is a fundamentalist movement within the Republican Party, dedicated to reducing hugely the size, cost and reach of the Federal government. No one knows how its candidates will fare on the day, nor how they will act if they are elected. Let us remind ourselves what America is and in that we shall find, if not the answer, a significant clue.

America is a country made up of  independent states, all with their own governments, but linked together by a Constiution to provide a common defence and to guarantee freedoms under the law for all its citizens. First came the people, then came the colonies which became the states and after that came the Union of the states. Everything was built from the bottom up, with the individual as the root of all. The famous line we the people says it all. It does not say on behalf of the people we.

The citizens who came from overseas to make this nation came first from Europe, then from the world over, some in wealth, others, the masses, in poverty, driven by a common faith. This was not a faith in one or other God, nor in one or other interpretation of what their chosen God expected. It was faith in themselves as individuals who, fettered by oppression, ground by poverty, or bereft of opportunity, left the land of their birth to seek a new horizon. This was that, in freedom from all oppression and the heavy hand of government, they would seize that opportunity and upon their own backs and through the output of their own toil, they would first make themselves,  then together,  forge their new nation, in which the people and the people alone, were the sovereign power. 

The road was hard and long. It ran with blood. Not all the story is good. Not all the record shines with honour. But taken as a whole project, it must rank as the among the most profound and the most admirable ever undertaken by civilised man. The whole enterprise was established to turn government from shadow to light, to make it do the bidding of the people not bid the people what to do. It is utterly incompatible with big government, because it was this oppressive concept from which its founders had fled and against which they had fought, and which, in the framing of their Constitution, those founding idealists were determined ever after to deny.

Thus was laid down a fault line, the tectonic plates of which produced  a great deal of argument, culminating in Civil War. It has rumbled on, deep down, throughout the politics of the United States of America. It has engaged first one political party then the other. It rumbles again now and the noise is getting louder. It is interesting not just to Americans, but to all the world, not because the outcome can be foreseen, but because it cannot.

The Tea Party is not a political party, nor is it truly a movement, nor even a campaign. It is an instinct, a deep abiding faith in the primacy of the individual, for better or for worse. Either are in prospect. Possibly both. None can be sure what forces will be empowered, nor what energy will be released. Nothing may happen, yet something may. Anything is possible.  This is not about any country. This is about America.

Saturday, October 23rd, 2010

WikiLeaks and the Pentagon

It is hardly surprising that the Pentagon is up in arms at another tranche of its files seeing the light of day. The MOD follows in its shadow. But times have changed. The Pentagon, as everyone else, has something to learn.

We know about revolutions. America was founded on not one but two. There are also revolutions of the practical kind like the Industrial Revolution. We are now in the Information Revolution, which will have perhaps the most profound effect of all. Everyone now has access to everything. Secrets can no longer be kept. Governments must accept that whatever they sanction will become public, whether they like it or not.

The Iraq War is one of the most discredited military campaigns in history and one of the least strategically successful. It is also one of the nastiest. Sooner or later we will all, including the military, have to accept that. Government in a democracy will no longer be able to have secrets. For the first time the people will be truly enfranchised to monitor their rulers. This may be a good thing or a bad thing, but nothing will now stop it.

For the moment it is sufficient to say that any vestige of justification for the Iraq War has now gone. The implications of that will be long lasting and far reaching.

Friday, October 22nd, 2010

Dr David Kelly

The post mortem records have been released. They tell us nothing we did not know already. Neither do they answer questions posed by experts challenging the assumptions made.

The issue is very simple. Hutton is a discredited Report, since few who read its conclusions overall, who had also followed the evidence day by day, concurred with what amounted to letting what is now recognised as an untruthful and spinning government off the hook. But how Doctor Kelly died was only part of the conclusions and, at the time, was taken more or less for granted anyway. It is since then that worries have arisen and these are not just from conspiracy geeks.

It is very unsatisfactory to investigate a death of this nature by a special enquiry charged with reporting to the Government. This is especially the case when any alternative conclusion would have cost Tony Blair his job as Prime Minister. This is why a proper Coroner’s Inquest must now be held. It will be fully independent and will examine not only those involved in the investigation but other experts with different views. It may, or may not, come to the same conclusion. What it will do is settle the matter.

Dr. Kelly is owed this. He was, after all, right. We must not forget that. All the world knows that now. There is nothing left to cover up, except exactly what did happen that grim day in the woods.