Archive for June, 2011

Is Greece Akin To Lehman Bros?

Thursday, June 30th, 2011

The answer is yes and no. The Yes is merely comparative. The No is fundamental.

Several commentators have remarked that a failure to save Lehman was the cause of the credit crunch. It was not. The cause of the credit crunch was excessive lending on inflated assets to people who had no prospect of repaying, reducing the value of securing assets to near worthless junk, which were then traded on more borrowed money, gearing over and over an insolvency of concept. The crash would have come. Lehman made it happen when it did. Saving Lehman would have put it off, but the crash would still have come, because it was systemic and had infected the entire economic structure of the West. Delay would have made it bigger.

Likewise Greece, but in reverse. Lending that country yet more money which it cannot possibly repay,  is merely putting off the first of what may be several sovereign debt defaults, which, because of a failure to tackle the financial issues now, will get worse not better. They will get worse because added to the sovereign debt will come a collapse of political consensus and widespread personal insolvency. This will hit the banks on two fronts at once. Losses on sovereign funds and losses on personal loans. Assets will nowhere match liabilities. But this time round the consensus necessary to invoke taxpayer bailouts will in some cases be missing, maybe  everywhere.

Sovereign debts exist because governments have spent way above revenue and borrowed more than their countries either can or are willing to repay. Euro Land finance ministers are relieved that the Greek parliament has passed, by fewer than a score of votes, the latest austerity package, but no economist can be found who thinks that default is any more than delayed and no political commentator believes the Greek government any longer has the authority or the power to put the measures into effect. There is a ghastly aura of re-arranging deckchairs on the decks of the Titanic, in preparation for a dawn the ship would never see.

But far down below water is flooding in. This metaphor aptly illustrates a crisis in the UK economy, just beginning to be noticed by those who keep watch below decks. There have been fewer insolvencies and re-possessions than feared because the banks have exercised forbearance and not foreclosed upon those in difficulty, in the hope they may recover financially. The facts are that many businesses and households are way over-borrowed and like Greece, have no realistic means of ever paying their debts. Moreover when interest rates rise, as rise they sooner or later must, those in trouble will not be able to meet the higher interest payments. The value of the assets securing these loans, mostly property, will be nowhere near enough to cover the borrowing.

The UK collectively owes more money than any other country in the world, apart from the US. But whereas the eye popping US total is around 90% of its GDP, that of the UK is 400% of it own GDP. Therefore the twin burden of sovereign and private debt in this country looks potentially impossible to repay. Devaluation can help sovereign debt, but the rest of it is mostly owed overseas and quoted in dollars, so devaluation makes it worse.

Striking unions need to get real. Their members may in the end count themselves lucky to get pensions at a fraction of those now on offer. Because this is not about what to do in the future. It is about how to escape from the past. The coalition’s strategy to escape from the yoke of the greatest financial folly in recorded history is correct, but it is an open question  whether the country has the human will and industrial resource to develop the financial velocity to escape its backward pull.

Bankers, politicians, union leaders and financiers must now stop looking for signs and signals. Their problems are real and have happened. It is no longer about the future. It is about the past and whether what has already been done in such folly will allow an orderly future to happen, or whether like a world war, there is no way to stop a vast financial collapse and conflagration, only out of the ashes of which, can a meaningful economic order be re-built.

Republican Victory 2012? But Who?

Wednesday, June 29th, 2011

The Republicans do not just dream of victory in 2012. The believe, after success mid-term, that they have a chance. The curious thing is that there have, up till now, been no candidates who  inspire and know what they are talking about at the same time. Michelle Bachmann looks promising as well as glamorous and for her age very glamorous. She has that star quality of, dare one say it, Ronald Reagan. True there have been gaffes already, but these are likely due to nerves. Her story is very American dream and her credentials are close to the total package for both the Tea Party as well as the Republican main stream. If America is ready to elect a woman, as it was to elect an African American in Barak Obama, then like him, she has the story and looks the part.

The problem for the Republicans is that their message is somewhat like a listing ship. It is lop sided and if it ever put to sea, it would surely sink. They are right to want to cut government, they are right to want to take as much responsibility as possible back to the individual States, they are right to be fiscally conservative and right to want to reign in spending.

Where they are wrong is taxes. It was Reagan who began the programme of constantly increasing spending, while at the same time cutting taxes. The latter was supposed to boost the economy to pay for the former. This connection was never made. Thus spending always outstripped revenue through Reagan and two Bushes. Growth was an illusion built on credit. The deficit now accumulated and added to in the crash, is eye popping in size.  Unless the United States of America wants to go bust, it has to be paid off, or at least reduced to a hill, rather than a mountain touching the stratosphere. To do that America must live within its means.

Because of the errors of the past, that can only be done if America not only cuts its expenditure by slashing programmes, but also commits a larger slice of personal income and corporate profits to the national endeavour. That means taxes must go up. Such an idea is anathema to Republicans of every stripe, but because of the national situation  which they had a big hand in creating, there is no other way. If they can embrace that verity, not only may the Republicans win, but the Presidency following the victory will be a success. If they do not, they will not deserve to win, though may do so more easily, but the Presidency will be a disaster. The test of Michelle Bachmann is whether she has the bottle to tell Americans what they do not want to hear.

Warrant for Gaddafi

Tuesday, June 28th, 2011

This makes little sense. The purpose of the entire UN/NATO operation is to protect civilians. Several, indeed most, participating countries want Gaddafi gone, but that is not the official aim of the undertaking. The quickest way to end the bloodshed is to hold peace talks so that the Libyan people, who have grown tired of killing each other, can work something out.

The Gaddafi side refuse to talk (officially) until the NATO bombing stops. This is not insurmountable, as sooner or later it has to stop anyway. The rebels refuse to talk unless Gaddafi goes. He and is family may soon see little future for themselves in Libya and a deal might be struck. Or might have been until the issue of this inane arrest warrant by an organisation with no power to carry it out. This is because the power lies with the host country and Libya is not signed up to the ICC. On the other hand if Gaddafi and co step over the Libyan border it will now be into handcuffs and jail.

It is not clear to this blog why they should want to do that. There are many countries who are not signed up to the ICC and many who have signed but not ratified. Among them is the United States of America. Nevertheless a welcome there for the Gaddafi clan seems very unlikely because of Lockerbie. Somewhere a haven has to be found, if the suffering of the Libyan people is to be brought to an end before a long and costly fight to the finish.

Greece on the Brink

Tuesday, June 28th, 2011

Beneath the high drama of politics and protest, there are, beneath the surface, currents flowing through the Euro crisis, presently centred on Greece, which give an altered perspective to those who delve.

First, the bail out of Greece is actually a bail out of, mostly European, banks. Many would be in very serious trouble if Greece went into an uncontrolled bust. Therefore when Euro zone finance ministers hold their regular crisis meetings, they are more focused on the survival of their banks than they are the trials of the Greek people. In giving Greece more money, they are buying time for their banks, hoping to put off the inevitable  default until a point down the line when the banks can cope.

Meanwhile the Greek people sense this and have had enough austerity which goes nowhere but to even bigger problems. Even if the Greek parliament passes the package, there is no certainty that the government can put the statute into effect. This is the next layer. Greece is fast becoming ungoveranble by democratic means, but even at its best, it is only partially governable anyway. People do not pay their taxes, especially the better off and there is a mixture of corruption and ministerial rivalry at the heart of government which hobbles the Greek economy, no matter what. Although the symptom of these problems is massive debt, the cause is political.

For the euro zone, although the crisis is indeed financial, the cause is, again, political; the lack of political will to install economic governance across the euro zone to give the euro the foundation needed by any currency the world over, a reliable government. In some ways it may be that a chaotic exit of Greece from the Euro, with vast knock on effects across Europe especially, but also the world, would bring about that necessity more quickly than  a slow write down of the majority of Greek debt, in a dance of the veils called re-structuring. It may also summon the finest qualities of the Greek people to establish a style of government they all respect, whose laws, all of them, they are willing to honour.

The Price of Debt

Monday, June 27th, 2011

It is sobering to look at the figures for the interest the U.K. government now has to pay out of taxes to cover the national debt. This debt pile grows by the second and will continue to do so until the budget is brought into balance. We are now paying over £40 billion per year and this is set to rise soon to £50 billion. This is more than the whole defence  budget and nearly half the NHS. This first demand on the income of the nation, which grows day by day, is the reason why it is imperative to cut the deficit as quickly as possible, rather than at a pace which is less painful.

We can see what happens if nothing is done. The bill becomes so big that it becomes too much to pay and the resultant retraction of the economy ensures that it can never be paid. This is why Greece is where it is. The fact that, when setting up the Euro, its founders baulked at the controversy of how to govern a common economic policy to support the common currency, is why the Euro zone is in its current crisis.

This is why we did not join the Euro. The flaw was there from the start, clear for all those who looked, to see. It is also why, after the post war experience and the IMF humiliation of the nineteen seventies, a more cautious approach to government borrowing prevailed in the UK. Labour needs to remind itself of that, as do the unions. Emotion is easy to inflame, but in the end it all comes down to the money. At the moment that money just is not there.It is on its way to pay for past follies. Demanding another folly will not help.

China To the Rescue

Monday, June 27th, 2011

The Chinese Premier, on his tour of Europe, has said that China supports the Euro and will continue to invest in Euro bonds. This has offered some respite in the deepening crisis gripping the single currency zone, which is part political, part economic and part financial. However these kind words should not be over-interpreted.  They do not mean that the issues do not need resolving. They mean the crisis has not become a catastrophe. Had Mr Wen Jiabao declared that China had lost confidence in the Euro and would stop buying the bonds, things in Euro land (and  across the world) would have taken a grim turn. It is often easier to measure value by taking it away.

What this declaration does is calm jittery markets a bit and give the pipe dreamers another little high. Its effect is therefore useful. Its meaning, on the other hand, is epoch making and profound. China may be in number two slot in the ranking of the globe’s economies, but it is already the world’s top economic power. This is because China has money. It has more money than anybody else. In the global economy it is not guns, but money, that defines power.

In an interview with Robert Peston he defined his position on Europe with the quotation  ‘a friend in need is a friend indeed’. These were Churchill’s words to FDR in appreciation of the US coming to the rescue of Europe in WWII. Wen Jiabao is not only a lover of Shakespeare. He  has a sense of history. He reminds us that times have changed. Indeed they have.

President Obama and the Afghan Pull Out

Sunday, June 26th, 2011

President Obama is savvy. He knows that the military the world over and down through the pages of history, always want a little more for a little longer. Nevertheless there comes a time when however much and however long will make no difference, except with total war, when every life and shell counts.

Afghanistan is not a total war. It is a war, now without popular approval, without a clear objective, in support of a flawed analysis of U.S interests, to prop up a corrupt and incompetent government, waged against the natives of the country of which the U.S. and its  allies are seen as friends by some, but by many as yet another foreign invader.

The idea that an elected (with a good deal of fraud)  government needs a huge security force, continuously engaged in the field against its fellow countrymen is a contradiction which does not offer a prospect remotely democratic. Moreover whether the U.S and its allies withdraw some troops now and more later, or more now and fewer later will make absolutely no difference to the eventual outcome. The President has shown great perception in confronting the military. He now needs to show a good deal more to bring to a dignified conclusion a costly and mistaken adventure.

The Karzai government is rotten. It is financially fraudulent. It is incompetent. Sooner or later it will fall. There may be civil war. There may be a Taliban government. There may be fragmentation. Afghanistan is more of a tribal region than a single country. Whatever is resolved, it is and must be, up to the Afghans themselves.

Negotiations among the parties would ease bloodshed and may offer hope of some sort of peaceful transition. Talks are said to be secretly under way. They will get nowhere, nor will solutions last, without the participation of Afghanistan’s neighbour and mentor, Pakistan. Some fence mending here by the State Department, of tattered relations following the taking out of Bin Laden, might do a lot to ease those talks forward towards a constructive solution.

European Mission and the FPC

Friday, June 24th, 2011

We should not allow the very real problems of Greece and the Euro to dampen enthusiasm for the ideal of a united Europe. For centuries the various nation states, which make up the European family, have been at war with each other from time to time and much of the time, at huge human and cultural cost, culminating in WWI and WWII.

Now, every five years, over 500 million people go to the polls to elect members of the European Parliament. Such a concept would have seemed unreal in 1943, yet generations now live with the prospect of secure peace, rather than the certainty of coming war. This is the greatest tribute to the sacrifices of the fallen, buried in their millions across the continent. The European Union enshrines the suffering of those terrible conflagrations and gives them meaning.

The EU is one of the greatest accords of human history; it is a success and its success will continue. As with any great undertaking there are some issues unresolved, for which resolution calls. The first is the simple issue of monetary union, which now exists in the euro zone, when economic union does not. The present crisis illustrates, to those who did not know, that you cannot have the one without the other. The second is the same issue that traumatised the original model of the United States and to some extent still does; whether independent states should be bound together by a federal union or a looser confederation.

The second of these questions will resolve itself by evolution over time. The first must be resolved quickly. Given that there is a determination to protect the euro and sustain monetary union among the euro zone members, there must now be constructed an economic governance to which all members  submit. Those who do not wish to, or cannot, will have either to leave the euro or allow their local euro to float. There are lots of dollars across the world floating against the value of other currencies and the US dollar. There is no reason why there cannot be a central euro for Germany, France and other financially disciplined countries willing to cede economic union, with floating euros for the others. Whatever happens, something must. It would be better to organise it pro-actively now, than salvage it from wreckage later.

Meanwhile the UK must prepare for a Greek default. The new FPC’s call for an audit of the exposure of UK banks to Greek debt and its entrails, is timely. The exhortation for them to use profits to shore up their balance sheets, still full of dodgy assets, instead of paying themselves and their shareholders, though overdue, is a game changer for the banking industry. This is a very good start for the Financial Policy Committee.

Afghan Pull Out

Thursday, June 23rd, 2011

President Obama has overruled the advice of his generals and rightly so. This pointless but costly war has bumbled on for ten years, daily snatching the lives of brave servicemen and women who give their all as the highest calling of patriotic duty. It also costs the lives of countless Afghans, some fighters, but many innocent. The vision of a democratic state, unified and at peace, was always unrealistic and is now no more than a pipe dream of the most hallucinatory kind.

Afghanistan is a tribal society of centuries standing, averse to central government, with its own tradition of war lords and tribal elders, which has never and will never, re-mould to some democratic system of Western origin. It presently has a government elected by fraudulent means which is widely acknowledged to be the most corrupt in the world. It is financially dysfunctional and cannot even pay its soldiers regularly, because so much of the largess dispensed by the West, lines the pockets of its dishonest ministers and officials.

The Taliban, repeatedly described by generals high on a cocktail of wishful thinking and self delusion, as on the back foot, constantly reappears to commit murder and mayhem. They know they only have to wait, until the foreign troops go, when the Karzai government will implode as its leaders flee, their pockets a jangle with pilfered aid, while their security forces defect to the Taliban, who will then return in triumph to power. To reinforce the humiliation of those who promoted this ill starred campaign, even when it was clear it could not succeed, The Taliban will actually provide, in  spite of its archaic format,  a government which will be a good deal better than the one it has put to flight.

Clegg’s Free Shares: A Half Baked Idea

Thursday, June 23rd, 2011

The Deputy Prime Minister wants to give everybody free shares in Lloyds Bank and RBS, so as to reward taxpayers for bailing out the banks. This is just silly.

First we are in the midst of a sovereign debt crisis, destabilised by a euro crisis. At best this will lead to significant sovereign debt re-structuring, starting with Greece. This will mean substantial losses to European banks, with UK banks exposed either directly or by credit default swaps and the like. We all know how much they are worth when reality kicks in. Except it is worse, because some will require a payout to French and German banks to cover their losses, which UK banks have covered. It is not impossible that further rescue by taxpayers will be needed, not least because the coalition government, of which Nick Clegg is Deputy PM, has shuffled about and delayed urgent bank re-structuring, which leaves these profligate institutions too big to fail. In fact they may now be too big to save.

On top of all that, the issue of whether HBOS should be separated from Lloyd’s is not fully resolved, nor whether Halifax should be reconstituted as a building society and separated from Bank of Scotland. There is too the question of whether Nat West should have its independence restored and whether Coutts, as the country’s poshest bank, might not do better out of Sir Fred’s former and now tottering empire.

To come up with this childish plan in order to appeal to simplistic echoes of Thatcher’s Sid, tells us a good deal about the drifting nature of Clegg’s brief as Cameron’s minder. It does not enhance their joint creditability and coming on top of one of the richest harvests of policy u turns in the history of government, makes it look as if the weakest links in the coalition are at the top. Compare with the single minded Osborne and Alexander, with Hague and Cable in the wings.