Rolled-up Trousers

Risk and Reward

German Chancellor, Angela Merkal:

"Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?"

This was said to the German Parliament in response to the situation in Ireland where they are bending over backwards to meet the demands of the state's debtholders. The Irish people are the ones suffering in order to do this. Merkel raises the point that these bondholders should accept they took a risk and can't always expect to get their money back with profit.

This basic principle of risk and reward should also apply to banking. The higher the risks, the greater the reward. Banks have made catastrophic financial losses, resulting in massive bailouts by taxpayers. These taxpayers are the same ones who hold accounts with these banks. The banks resolutely oppose any separation between this everyday banking and their casino-style trading. In the boom years, bankers walked away with billions leveraging on this money, while account holders received nominal rates of interest in return.

Post-bailouts, bonuses are back to what they were while ordinary people pickup the previous bill, never mind get a share of any money being made now. It is arguable that bank account holders haven't really entered a risky arrangement given that their investments come with a state guarantee. However, we know that the speculative activities of banks also come with a state guarantee - to answer Merkel's question, the answer is "no" as international bankers are in the same boat. They are also often holders of government debt, while being backed by governments. It's an almighty mess.

So who is risking anything here, and so who should get the reward?

If bank bonuses had been 20% less over last 10 years, they would have had enough liquidity not to need a bailout

The above was said by WSJ journalist Scott Patterson on Jon Stewart's Daily show on 5th March (not viewable outside the US) this year. It was not something the conversation dwelled upon despite how significant a statement it was. There may be more in his book The Quants.

I recalled it when reading Robert Peston's blog today. He said:

Research by the Bank of England shows that if banks reduced the proportion of their revenues that they pay out in pay and bonuses back to what it was in 2005 (which was a pretty good year for the banks), they would free up £10bn - which could be used to strengthen themselves by retaining it as capital (which is what the Bank of England and FSA would prefer) or to pay higher dividends.

To put it another way, the failure of the owners to insist that this £10bn be deployed to reinforce the foundations of their banks or provide an income to them is one of the great mysteries of our time.

I'd be grateful if anyone can direct me to this Bank of England report as I can't find it. Thank you to anyone that can assist.

Changing the Celtic Tiger’s stripes

There are a number of mistakes cited as to why Ireland has arrived at the point of taking a massive external bailout, from being a member of the Eurozone to the massive debt property bubble built up in the last decade. None of the commentary however cites its departure from the United Kingdom as the source. No one is saying a condition of the money now is that it needs to rejoin either. This is the normality of independence, and when Scotland gets it, no one will look back either.

After announcing the money, Chancellor George Osborne said Ireland "were a friend in need" and did not add that the bailout was necessary due to Ireland’s independence. This was in contrast to former PM Gordon Brown, who was quick after the bailout of RBS and HBOS in 2008 to say that an independent Scotland would not have been able to take the action that he had. Debatable sure, but if we are going to engage in pure speculation, it is also clear today that that had Ireland been part of the UK, the exchequer would not have been able to mount the rescue which has just happened by themselves. We live in an interdependent Europe and interconnected world – Scotland’s future doesn’t depend on London.

The UK banks may need another bailout next year. That is what the £7bn UK contribution is all about given the exposure of UK banks in Ireland. It is also a proportionally modest contribution in terms of the overall £70bn package. 2011 is going to be the high water mark for capital hungry UK banks that need to find £250bn in that period. If they don’t manage it we could be looking at Bailout II. There is no guarantee the UK will be able to raise the money. The Tories spent the general election year talking up a market attack on the UK. And remember in 2009 the worried Labour government were saying IMF bailouts were “like getting wellbeing care or even like going to a spa to recuperate”. Or maybe Norway would help us out.

What Ireland has got now is a loan at a reasonable rate of interest. This money would not have been otherwise available at that price because “the markets” have decided that Ireland should be charged more. The price went up after the country announced harsh austerity measures – at the behest of said markets who then decided that austerity meant low growth and higher risk on the debt.

Ireland’s mistakes were Ireland’s to make, just as Norway’s success has been their own. It’s what is done with political power that matters. We can never know what economic policies Holyrood prime ministers would have pursued over the last few decades had we been independent. What matters now is that if we are to depart a bankrupt Britain, it can’t just be an opportunity to escape the cuts, get the investment in jobs and infrastructure that is needed, and go back to how things were done but with kilts on.

A new kind of economy has to be built on social democratic lines with environment at its core. The current crisis has led us all to seek answers, and there is much discussion still to be had about what the priorities and hallmarks of a new economy should be.

Yellow Water, the Lib Dems, and raising tuition fees

During this year's general election campaign I was very pleased to sign the NUS pledge to oppose any increase in tuition fees should I have been elected.

Every SNP candidate did likewise, as did many Labour ones, and every single Scottish Lib Dem. Lib Dems now appear on the news though and say things like "We didn't make a promise, we made a commitment in our manifesto", as Vince Cable did at the weekend. This pledge though is not a party political issue to hide behind. 

This pledge that individual candidates signed with the NUS was a personal promise by would-be MPs to vote against any increase. It said "I pledge..." not "We pledge...", or even "Our manifesto says if there is the miracle of us forming a majority Lib Dem government...".

MPs who want to impose spiralling tuition fees on today's students, after benefitting themselves from free university, should do the decent thing and voluntarily cough up for their degree. Three years at £9,000 from around 325 MPs will add the best part of £9m for public funds. It'll show them putting their money where their mouths are, and for once have MPs doing as they say others should.

The NUS are looking into using powers of recall to force out reneging MPs. They should use all legal means at their disposal. I don't know if signing this pledge constitutes any form of a contract, but morally at least we now know they had no intention of fighting for the policy when it came to negotiations with the Tories. They would secure a deal for part-time students, and "leave the rest", which would maintain "clear yellow water" between them, Labour and the Tories.

The coalition are keen on using household metaphors when it comes to the economy. That as the country is in debt, just like in ordinary homes in such a situation, belts should be tightened and swingeing savage cuts to expenditure should be made.

Except, the state is not subject to the same rules as homes. But let's accept the simile for a moment and turn it on its head. Coalition cuts are like breadwinners not going out to work because they've slashed their bus fare budget. We're not going to send the kids out to get educated now either. This is the harm that the Tories and Lib Dems are doing to us, their supposed family.

And if any Lib Dems are planning on talking about "yellow water" again any time soon, the public will bring to mind the age old advice to never eat yellow snow.

Mind your own business

35 business leaders intervened on the eve of Chancellor George Osborne’s comprehensive spending review, urging him to press full speed ahead with his cuts by arguing that any public sector job losses would be offset by the private sector.

The letter in the Telegraph on Monday is however at odds with their own personal records, where many of the firms they manage have been responsible for redundancies during the straitened times of the last few years.

They say in the letter:

“The private sector should be more than capable of generating additional jobs to replace those lost in the public sector, and the redeployment of people to more productive activities will improve economic performance, so generating more employment opportunities.”

Among the signatories to this are:

• BT chief executive officer Ian Livingston who has overseen the loss of some 35,000 jobs since 2008, with another 5,000 redundancies still feared
• GlaxoSmithKline chairman Sir Christopher Gent, where 4,000 jobs went in January, even after a year of profits which were made possible ironically enough by state spending on swine flu vaccinations
• Yell chairman Bob Wigley, where 1,300 jobs have been shed since 2008
• B&Q currently have 1,000 jobs at risk, and have not replaced 3,000 staff who have left since 2008. The DIY chain’s owner is Kingfisher whose chief executive Ian Cheshire signed the letter.
• Marks & Spencer saw job losses of 1,000 in January 2009. It didn’t stop chairman Sir Stuart Rose signing the letter.
• Car Phone Warehouse chairman Charles Dunstone, where 450 jobs were lost last year.
• Microsoft cut 150 jobs in the UK last year, and more are expected. MD Gordon Frazer signed the letter.

The list is long. 10% of the workforce has been lost at Aveva and Sage over the last few years, yet Nick Prest (chairman) and Paul Walker (chief executive) respectively saw no contradiction in their political statement. Arup have lost 20% (Philip Dilley, chairman).

Diageo CEO Paul Walsh is on the list, despite the well-publicised loss of 500 jobs in Kilmarnock last year. Whitbread (Anthony Habgood, chairman), who run Premier Inn and Costa coffee, shed 600 jobs last year, while Britvic (Gerald Corbett, chairman) shed 50 in Northern Ireland six months ago. Corbett is also chairman of SSL, who own Durex, and who also expect job cuts soon.

Maybe some of these captains of industry suffer from amnesia. The most breathtaking case must then belong to the executive chairman of Boots, Stefano Passina, who just two weeks ago announced 900 job cuts.

600,000 people are expected to lose their jobs in the coming period (and that's the Tory OBR's estimate), and the gentlemen above look set to contribute to the reemployment of not a single one of them, but still see fit to agitate for the increase in unemployment in addition to their own direct contribution to it.

They claim in the letter that:

“There is no reason to think that the pace of consolidation envisaged in the Budget will undermine the recovery.”

However, ASDA finance director Judith McKenna is on record saying: “The scale of public sector cuts and increased taxation is without doubt a concern to customers. While we hope for better times ahead, we're certainly not planning on that basis”. ASDA chairman Andy Bond, nevertheless signed the Telegraph letter. He can’t claim he’s not well advised.

Next chief executive Sir Simon Wolfson signed it, despite only last month (amnesia again) saying that the boom time was over for retailers for the foreseeable future due to spending cuts. Lord Wolfson is a Tory peer, and should have just signed the letter as such.

I agree with the September Sir Simon rather than the October Lord Wolfson. The private sector has already faced tough times over the last few years, and fewer people with money to spend due to increased joblessness means even less consumer confidence and demand moving forward. What these business leaders have signed up to is the strangest suicide note in history. Given the harm it does the public, it would also be the longest boycott list in history, if it wouldn’t just end up in more job losses.

The country is not a business. The state cannot callously cast aside and eliminate the people it puts out of work. It continues to pick up the bill, not just in economic terms, but social too. Unless they are willing to put their money where their mouth is and guarantee a job to everyone put out of public sector employment, they should keep quiet and start creating the jobs they speak of.

Call me Friar Tuck

Alternatives to the Conservative/Lib Dem coalition's cuts agenda emerge all the time. The IMF of all people have backed the idea of a "Robin Hood Tax" on financial transactions.

This hasn't been widely reported, and instead we get the usual stream of lurid headlines about public spending cuts. I'm not sure if the IMF's plans are strictly along the lines of the RHT campaign given that this calls for the money to be used specifically to tackle poverty and climate change at home and abroad.

Still, using the money to bolster public investment would be infinitely better than the reverse Robin Hood syndrome the UK government is currently implementing. Their plans will hit the poorest hardest.

As well as the £20bn that the RHT would raise, Richard Murphy of Tax Research UK has demonstrated the same amount could be brought in though a bit work to chip at the tax gap that exists. Instead, the Tories and Lib Dems are cutting HMRC operations too.

Chief Secretary to the Treasury Danny Alexander will say that he announced extra money for tax collection this week. However, this is less than the amount that is to be cut from this work.

The coalition government have got no right to be instigating losses of jobs and essential services without having made any serious effort to get the income levels up. This is after all what has increased the deficit in the first place. They have no plan for growth, and any time new money is identified such as the £7bn they say they are going to raise through better tax collection, or through better than expected growth figures for the last few months, the news is not accompanied by good news of less cuts. That's what makes the spending vandalism ideological, and not necessary.

Instead we are treated to constant infantile similitudes with tightening household spending, which Deputy Prime Minister Nick Clegg treated us to again yesterday in his conference speech. Family finances are nothing like those of a state, but if we take Clegg's comparison, he is about to make members of his own family jobless and hungry in a wanton act of domestic violence.

Why next year's election is one to win

There is a theory that no one wants to win next year’s Holyrood election given the public spending cuts that will have to be implemented.

After all, Labour were not all that keen on holding onto power following the general election, with the reported words of Bank of England Governor Mervyn King ringing in their ears that whoever won would be out of power for a generation given what needed to be done.

Moribund discussions of cutting free personal care for the elderly, taking away their bus passes, taxing ill health and charging for education is certainly not why the SNP are around. This though is the dominant discussion in media and political circles. The SNP can’t avoid it either, with a tough budget due before the election. Labour are meanwhile allowed to assiduously avoid saying anything about what they’d do.

It doesn’t have to be this way though. The UK has gone from an economic model where the priority used to be solely on achieving economic growth, to one which is aiming to satisfy bond markets allegedly hungry for public spending cuts. The money the Tories are taking out of the economy, and the unemployment that will be created, is widely expected to lead us into another recession - and possibly depression.

Scotland meanwhile has been in surplus even after the banking crash and even despite not having the normal economic powers to deal the economic crisis. Not only must we maintain investment in our communities, but everyone also recognises the need for new industries. Luckily in Scotland we have a massive green energy jobs potential to invest in. We can do this with financial independence. This is a stone’s throw from political independence which is why the London parties are reluctant to embrace it.

So next year’s election is not about who would most competently administer Cameron’s cuts in Scotland. This is clearly where the opposition want us. We must not just talk managerially about the current budgetary pressures. Every public utterance, media appearance and press release needs to state the alternative. This will get us on the front foot from strategies advised by Labour spin doctors for the ConDems to “passport the responsibility for unpopular decisions” onto the SNP. Iain Gray tries to pin everything on Alex Salmond every week at First Ministers Questions.

To paraphrase Bill Clinton, it’s the economic powers, eejits.

Note to BBC: David Cameron is cutting spending, not the deficit

They are not interchangeably the same thing - BBC news link

See also the important change that is needed in our national discussion on the economy - BBC News - Geithner tells Europe to focus on growth

The cuts won't work, they'll just make it worse

This year’s general election showed up a serious ideological difference between the SNP and the other major parties. We were the only ones who went into it opposing the agenda of swingeing cuts in public spending.

Sure, it was hidden behind the grammatically controversial “More Nats, less cuts” slogan. But there was so much more to it than a policy of Scottish exceptionalism. This was apparent in any of the hustings I took part in, which surprised even me at how much to the left we were of Labour, Lib Dem and Tory orthodoxy.

True, there is a significant budget deficit and this should be brought down. For this, it should be recognised what brought it about. It was not a surge in public spending, it was a reduction in the tax take the recession entailed. Economic growth therefore should be the driver to reducing the deficit.

Labour's plan for dealing with the deficit though was proportionally 50% spending cuts, 25% tax increases, and just 25% resting on growth. The Tories since taking office have said their plan rests 80% on spending cuts and 20% on tax rises (no mention of growth from them at all). Both proportions are plucked out of thin air, and both show great lack of confidence in their ability to grow the economy.

With the private sector having stagnated, the major economies rightly employed fiscal stimulus to replace it. The state has a vital role to play, and balancing its books is not the same as tightening the household finances – a childish analogy senior politicians routinely make.

This crisis is the biggest since the crash of 1929, which turned into the Great Depression precisely because of the instinct to cut at the sight of increasing deficits. As we know, it was policies like FDR’s New Deal in the US which hiked spending on essential national infrastructure projects but which boosted the economy, created jobs, helped businesses, and got the tax take up. Cutting may reduce spending on one hand, but also reduces tax revenues and increases spending through higher unemployment payments.

There is plenty that we need built in this country. There is a green energy revolution to unleash.The creaking public transport infrastructure we have that needs an overhaul, is one other obvious example.

Deficit hawks will say that the markets will not put up with this. That is the same credit rating agencies which gave gold star ratings to the rotten produce that created this crisis in the first place. What they will certainly not like is the double-dip recession that current thinking will produce. If they are looking for a credible plan to reduce the deficit, then politicians should put one forward.They should be setting the tone for the markets, not the other way round. All they ever talk about though in the context of deficit reduction is cuts, and never give anywhere near as intricate plans for maximising growth.

This is Labour’s problem in posing now as opposing Tory cuts. They were set to do exactly the same, save for this particular financial year. Alistair Darling said as chancellor that their cuts would be “deeper and tougher” than Thatcher’s. They accepted the market-driven narrative that supposedly necessitated savage cuts, when they needed to show strength and drive a different path.

They could even after it was all done have kept the Tories out with a progressive coalition, but weren’t interested. We now seem to be headed for years of gloom, depression and unrest. The SNP’s election campaign this year will appear more and more important as time goes on.

Vince Cable on the Labservative Democrats

Radio 5 Live's Victoria Derbyshire questioning the Lid Dem's Vince Cable on the economy:

VC: The position is so serious it would be helpful if all the major parties agree on the basic framework within which we deal with this crisis. In other words, what's the deficit, how fast you deal with it, how do you coordinate this with interest rates, how do you coordinate it with bank lending. Getting the framework right for getting the British economy back to normal and we're happy to work with both of the major parties on that kind of agenda.

VD: But as you know, there wouldn't be agreement because you and Labour believe you shouldn’t start cutting till next year and the Conservatives believe you need to start cutting this year.

VC: As it turns out, over the last week or so that argument has narrowed to the point of being I think largely meaningless. The government are already making cuts and the Tories are talking about “making a start” of purely token things so actually the differences around that are not fundamental.

VD: So you could work with either of those parties?

VC: Both. We're suggesting a national approach to that set of issues ... given that there is a national crisis we think that major parties should work together on that kind of agenda.

30th March 2010, 11.28am

The inactivity of Glasgow’s Labour MPs

Last week I issued a press release condemning the inactivity of Glasgow’s Labour MPs on high speed rail.

This was especially so when compared to how Yorkshire MPs campaigned vigorously and successfuly for the network to include Leeds and Sheffield. This was from a starting position where until even recently it was assumed that Manchester to Glasgow would be favoured ahead of them, and an environmental view that domestic flights would only be cut if the network came to Scotland.

Here in more detail is what each of the Labour Glasgow MPs who have been elected since 2005 have done on the issue for the city in Parliament:

Mohammad Sarwar – Glasgow Central
Nothing

Ann McKechin – Glasgow North
Question “answered” as Scotland Office minister
Another question in her capacity at the Scotland Office showing no concern about Glasgow

John Robertson – Glasgow North West
Nothing

Tom Harris – Glasgow South
Nothing. He has though questioned the environmental benefits of high speed rail. Was also at the ministry of transport.

Ian Davidson – Glasgow South West
Nothing

All is not lost and Glasgow can be put back on the map. This tired lot will clearly have to be replaced for that campaign to have the energy that it needs though.

Treasury says 'It's trains or Trident'

From today's Times about High Speed Rail:

Treasury officials acknowledge that the project would compete for funds with Trident, prisons, an NHS database and other capital projects.

So Trident becomes even more of an election issue than it was already. The UK government is acknowledging the negative impact it has on other investment the country needs.

I am actually flabbergasted by today's announcement that the UKG is planning HSR to Manchester, Leeds and Sheffield, but not Glasgow. The biggest obstacle to HSR coming here was supposed to be cost - in the region of £30bn. What the government have announced today is that package of money - but what they've done is served more locations in England through it. Read more in the press release I've put out.

Stimulation

Here's some figures for your consumption:

 

The UK is the only G7 country not to have a stimulus package this year. Out of the G20, the UK's only company is Argentina.

The UK bosom that Labour and Tory politicans say that Scotland relies on is being shown more and more to have been made of cheap implants that have now been removed.

Meanwhile, over 60 leading economists have come out strongly against cuts in public spending. The media have for some reason portrayed this as backing the Labour position. This is the same Labour government that have imposed an £814m cut on the Scottish Government this coming year.

Public spending is needed now more than ever to replace reduced private spending in the economy. Cuts will only increase unemployment and therefore increase welfare spending i.e. increasing the deficit. Investing in jobs gets unemployment payments down and brings in tax - decreasing the deficit in a proper manner. Labour's cuts will make a double-dip out of their recession - if we're even out of it at the moment.

Have you heard any Scottish Labour MPs talking about this? The way they've danced to the Tory tune on cuts shows they cannot be trusted. This is why they need replaced.

The banks say they are "too big to fail." So let's make them smaller.

Jim Wallis:

When I recently told a few friends that my wife, Joy, and I had decided to close our little account at Bank of America and move our money to a local bank that has behaved more responsibly, I was amazed at the response. Religious leaders and pastors from around the country called to say that they, too, were ready to take their money out of the big banks that have shown such shameful morality and instead invest according to their values, by putting money into more local and community-based institutions.

So we've decided not just to remove our own money, but to invite other Christians, Jews and Muslims to do the same. Already we are hearing reports of whole congregations, groups of churches and faith-based organizations, from California to New York City, deciding to transfer their funds to local banks and credit unions.

The banks say they are "too big to fail." So let's make them smaller.

SNP conference dispatch - the economy

The economy naturally was discussed at SNP conference through a number of motions. One speaker criticised Jim Murphy’s ‘Arc of Insolvency’ line, pointing to an 'Arc of Recovery' where Iceland is now faring better arguably than the UK is on growth and unemployment. Norway has hardly been touched at all.

Gordon Wilson, SNP leader from 1979 to 1990, delivered the Donaldson lecture this year, and suggested the SNP should adopt negative campaigning, pointing out that it has worked for Labour over the years. His concrete suggestion was to highlight ‘Bankrupt Britain’, and in the context of the massive public spending cuts ahead, the idea of London as Scotland’s economic comfort blanket is in serious jeopardy. He has a book out.

One of the conference highlights for me was the Saturday lunchtime fringe launching Gerry Hassan’s new book on the Modern SNP. It was hosted by Joan McAlpine of the Sunday Times and had a thought provoking panel who have contributed to the book. Hassan himself said that the SNP has been a “breath of fresh air” on the Scottish political landscape and reflected on what state we’d be in if it was just Labour, Conservatives and the Liberal Democrats in the Scottish Parliament.

Colin Mackay, political editor for independent radio said he felt there was less of a buzz amongst delegates this year compared to the previous two. This hadn’t yet slipped into complacency, but was certainly what he described as a comfort zone. With the aim being to deliver independence through a referendum in the short term, the current trajectory wasn’t going to deliver that. A number of people took exception to this I should add.

The economists Jim and Margaret Cuthbert meanwhile accused the SNP of having joined the Washington Consuses with their economic policy, and adopted neoliberalism (albeit with a heart) just as the whole system collapsed. They advocated strategies that the party could now adopt in moving forward with a different model, allowing Scotland to chart a new and innovative course.

I reflect that it does seem to be very much business as usual as far as the causes of the current crisis are concerned. Regulation and policy remain unchanged across the board internationally and politically there doesn’t seem to be much determination to change this. Could Scotland lead the way on this, just as we have with climate change? Obviously the powers do not reside in the Scottish Parliament on this matter, but a robust articulation of the country’s views and a concrete set of proposals are possible.