More on bubbles. I've been writing about the collapse of the Nikkei 20 years ago for The Spectator. You can read it below. I can't help feeling the world took the wrong lessons from Japan. We keep being told we have to print more money, and raise government spending, so that we don't have a Japanese-style lost decade. But it hasn't worked for them. Anyway, here's the piece.
Twenty years ago this month, as we’ve been reminded by countless documentaries, the Berlin Wall was coming down. Eastern Europe was convulsed by a series of revolutions from which Communism never recovered. Yet, much further east, something else was happening which arguably has had just as profound an impact on how the global economy had developed since then. The rampant bull market in Japanese equities reached its final, frenzied peak.
For stock market historians, December 29th, 1989, will always be a key date. On that day, the benchmark Japanese index, the Nikkei 225, which includes companies such as Honda, Nissan and Sony, hit its all-time peak of 38,957.44, having quadrupled in value from 1985. When the markets re-opened for the first trading day of the 1990s, the index started falling. And falling, and falling, and falling.
And, give or take a few blips, it has been falling relentlessly ever since. Over the next two and half years, the Nikkei fell by 63%. By that was far from the end of it. In March this year, amid global financial panic, the Nikkei touched a fresh low of just over 7,000, more than 80% down in the peak. Even today, as the anniversary nears, it has managed only to claw its way back to 9,500, a quarter of its level two decades ago.
Nor is it just stocks. In the 1980s, the Japanese property market went even crazier, reaching levels that might even make a salesman from Foxtons blush. That market carried on rising even as stocks started to collapse: in 1991, an alarming calculation found that the value of Japan's land was about $18 trillion, or four times the value of all the land in the United States (even though Japan is only about the size of California). Since then, Japanese property prices have plunged as calamitously as stocks, and today remain about 60% below their 1991 levels.
It was, and remains, the Mount Everest of bear markets. And it is an event that dominates the thinking of both investors and policy-makers the world over.
Like all bubbles, there was of course some substance to the Japanese boom of the 1980s. The country was on a roll. Its car and electronics manufacturers were flattening the old, bloated giants of American and European industry. Take just about any product you can think of, and the Japanese version was more reliable, better designed, and cheaper as well. Management theorists flocked to witness its lean, flawless factories: futurologists predicted that pretty soon we would all be wearing kimonos and eating sushi.
The trouble was, like every bubble, it took the kernel of a truth, and stretched it to absurdity. Land in Japan might be short supply, but there wasn’t that little of it. There was a limit to how many Sony Walkmans we wanted to buy, no matter how good they were. And in a free market, the European and American car manufacturers were always going to smarten up their act to compete with the likes of Toyota. The bubble was always going to pop one day. What no one quite foresaw was how spectacularly it would burst, or with such calamitous consequences.
Twenty years later, what are the implications of that crash? For investors, there are plenty, even if the lessons are nearly all dismal ones.
The Nikkei crash blows just about every investment cliché out of the water. Buy and hold? Well, you wouldn’t want to have bought and held this market. Buy after the crash? Well, not really. If you bought the Nikkei in 1992 or 1993, you’d still be out of pocket. Stocks always perform in the long-term? Wrong again. Maybe the Nikkei will recover one day, but it’s likely to be your grandchildren who see it back at 40,000. Maybe even your great grand-children.
More significant, however, might be the influence of the Nikkei crash on policy-makers. We hear a lot about how central bankers are trying to avoid the mistakes of the 1930s. But so much has changed since before WWII, few lessons from that era are really very relevant to today’s world. What central bankers are really trying to do is avoid the mistakes of the Bank of Japan in the 1990s.
Initially, Japan’s monetary authorities didn’t reckon they had much to worry about. Sure, stocks were down, but they looked pricy anyway. The Japanese carried on raising interest rates until August 1990, long after the Nikkei collapsed. It was only once it became clear that growth, which was averaging around 5% annually in the 1980s, had evaporated, that they started to take action. Interest rates were cut, dropping from 6% in 1991, to 1.75% in 1993. And the government started to pump money into the economy: a budget surplus of 1.3% of GDP in 1990 became a deficit of 5% by 1995.
The trouble was, none of it seemed to work. The Japanese economy spluttered a bit every time it was stimulated, then stalled again. As the slump stretched into this decade, the Bank of Japan tried something new. Because it couldn’t cut interest rates anymore, it started printing money, or what was called ‘quantitative easing’. In effect, Japan’s response to the Nikkei’s collapse has been an economic laboratory for how the rest of the world should cope with the financial shocks of the last year. All we’re doing now is what they did a few years ago. There’s only one snag: none of the prescriptions really seemed to work.
For the world’s leading central bankers, the lesson has been that Japan didn’t act quickly enough or aggressively enough. Monetary and fiscal policy “should have become even more aggressive in an effort to prevent a deflationary slump,” argued a key paper on the Japanese experience published by the US Federal Reserve. And that has been the intellectual rationale for the speed and aggression with which the Fed, and the Bank of England, along with other central banks, have both cut rates and printed money in the past year.
But there is an alternative explanation. Just as plausibly, the Japanese propped up the banking system too long: its half-dead, zombie banks acted as a drag on the economy. They allowed too many bankrupt companies to stagger into a financial twilight zone. And they ran up so much government debt that they crowded out the private sector, and left the country fundamentally insolvent. And whilst they printed money like crazy, that just fuelled bubbles in other countries – as hedge funds and other borrowed cheap yen – while Japan stagnated. All they achieved was to turn a short nasty slump, into a long, catastrophic one.
Rather worryingly, we are doing very similar things. Our banks are propped up with billions, but still refuse to lend. And we’ve become even more indebted: in the three years after the Japanese bust, public debt rose by 140%, but ours is already up by 170% since 2007, including the cost of bank bail-outs. And whilst we’re printing money, all that seems to do is create asset bubbles elsewhere.
Central bankers and policy-makers in both the UK and US think they have learned the lessons of the Nikkei’s collapse, and the two decades of economic stagnation that followed. They are determined to avoid Japan’s mistakes. But it is equally possible they are just repeating them – except on an accelerated timetable. In which case, rather disappointingly, sometime around 2030 we’ll be looking back and wondering how the slump that followed the credit crunch managed to last two whole decades.
Sunday, 29 November 2009
How to Spot A Bubble....
It seem obvious to just about everyone that we are in the middle of another asset bubble. I've been exploring that in my Money Week column this week. Here's a taster.
A year into the greatest downturn since the great depression of the 1930s, there is still no real consensus on what caused the sudden collapse in the financial system. Greedy bankers? Lax regulations? Global imbalances? You can take your pick from an intellectual buffet table laden down with different theories.
But one thing seems to unite just about every shade of opinion.
In the years running up to the credit crunch, the US Federal Reserve, along with other central banks, ran far too loose a monetary policy. They kept interest rates too low for too long, inflating asset bubbles in everything from houses, to credit derivatives, to fine art.
Everyone, that is, except probably the most important figure in the global financial system, the Fed chairman Ben Bernanke.
In a speech earlier this month, Bernanke re-trod the same intellectual ground as his predecessor, Alan Greenspan. You can’t spot bubbles, and even if you could, you can’t do very much about them.
The trouble is, if we can’t learn from the mistakes of the past, then we will just keep repeating then. The reality is, you can spot a bubble, and you can do something about. And only by doing so can you start to put the global financial system in better shape.
Reading Bernanke’s remarks to an audience in New York earlier this month, it was impossible not to be transported straight back to the Greenspan era. “It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.” The best approach he argued was to regulate the financial players in the markets properly “and to make sure the system is resilient in case an asset-price bubble bursts in the future.”
It was very reminiscent of the argument of his predecessor, all through the dot com era, and the property and credit bubble that followed it, that it was not the job of central bankers to go around spotting bubbles. Nor was it their job to prick them. All they should try and do was clear up the mess afterwards. With varying shades of enthusiasm, that argument was followed by central bankers the world over. Our own Mervyn King, the Governor of the Bank of England, fretted publicly about the level of house prices in the run up to the crash. But he never actually raised interest rates to stop prices rising further. Was property a bubble or not? Too hard to tell, decided the Governor.
In fairness, there is an intellectual case to be made for that argument. In a free market, it’s hard to tell the difference between a bubble, and a shift in prices.
So, for example, if the price of oil doubles, that might be a bubble. Then again, it might be a rational response to a shift in supply and demand. If the world really is running out of oil, it makes sense for the price to soar: in response, we’ll find ways of using less of the stuff, and the exploration companies will invest more money finding new sources of supply.
It is not a bubble – it’s just prices changing. In a free market, that happens all the time. Try and stop it, and the market won’t work anymore.
On top, of that, it isn’t obvious that we’re in a bubble right now. Bernanke referred to the 63% rise in US stocks since the depths of the crisis last March. That was just getting back to normal prices, he argued. And he has a point. At a cyclically adjusted PE ratio of 20, US stocks aren’t cheap – but they are well below the PE ratio of 44 they hit at the peak of the dot com boom.
That said, there are clear signals that what the financial markets are experiencing right now is indeed a bubble -- and one caused by record low interest rates, and central banks printing money like crazy.
It might not be evident in stock prices – yet. But there are plenty of signs elsewhere.
Commodity prices are soaring, even as industrial production remains subdued. Take aluminium, for example. Its price is up by 33% so far this year, even though there is enough of the stuff sitting in warehouses to build 69,000 Boeing jumbo jets. How can you explain that, except that there is too much speculative money flowing into the system?
Bankers are paying themselves huge bonuses. There isn’t much sign of a pick-up in basic lending, or the profitability of past loans, but they are minting a fortune from their trading operations. Even hedge fund launches are picking up once more. Again, sure signs of a frothy financial system.
The carry trade – borrowing in a cheap currency and investing in an expensive one – is booming just as it did for much of the noughties. Last time around, firms borrowed in yen, and invested in the US or UK. Now they borrow in pounds or dollars, and investing in emerging markets. The result is the same – asset prices soaring on the back of borrowed money.
Even luxury, trophy assets are fetching record prices – another certain sign there is a lot of hot cash swilling around the system.
The real issue is not whether we are in a bubble right now. There are arguments on either side of that question. The point is whether central bankers – in both the US and Europe -- are prepared to look for bubbles and try and stop them. It isn’t enough to argue that central banks should just wait until a bubble has burst before they deal with it. They tried that last time around – and the results were hardly encouraging. The bubble had grown so enormous that it could not be unwound easily. As it burst it plunged the world into a recession that may take a generation or more to recover from.
True, spotting bubbles is difficult. Deflating them is hard work. But that is no excuse for not trying. And if the world’s central bankers haven’t grasped that yet there isn’t much hope of avoiding another crisis a few years down the line.
A year into the greatest downturn since the great depression of the 1930s, there is still no real consensus on what caused the sudden collapse in the financial system. Greedy bankers? Lax regulations? Global imbalances? You can take your pick from an intellectual buffet table laden down with different theories.
But one thing seems to unite just about every shade of opinion.
In the years running up to the credit crunch, the US Federal Reserve, along with other central banks, ran far too loose a monetary policy. They kept interest rates too low for too long, inflating asset bubbles in everything from houses, to credit derivatives, to fine art.
Everyone, that is, except probably the most important figure in the global financial system, the Fed chairman Ben Bernanke.
In a speech earlier this month, Bernanke re-trod the same intellectual ground as his predecessor, Alan Greenspan. You can’t spot bubbles, and even if you could, you can’t do very much about them.
The trouble is, if we can’t learn from the mistakes of the past, then we will just keep repeating then. The reality is, you can spot a bubble, and you can do something about. And only by doing so can you start to put the global financial system in better shape.
Reading Bernanke’s remarks to an audience in New York earlier this month, it was impossible not to be transported straight back to the Greenspan era. “It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.” The best approach he argued was to regulate the financial players in the markets properly “and to make sure the system is resilient in case an asset-price bubble bursts in the future.”
It was very reminiscent of the argument of his predecessor, all through the dot com era, and the property and credit bubble that followed it, that it was not the job of central bankers to go around spotting bubbles. Nor was it their job to prick them. All they should try and do was clear up the mess afterwards. With varying shades of enthusiasm, that argument was followed by central bankers the world over. Our own Mervyn King, the Governor of the Bank of England, fretted publicly about the level of house prices in the run up to the crash. But he never actually raised interest rates to stop prices rising further. Was property a bubble or not? Too hard to tell, decided the Governor.
In fairness, there is an intellectual case to be made for that argument. In a free market, it’s hard to tell the difference between a bubble, and a shift in prices.
So, for example, if the price of oil doubles, that might be a bubble. Then again, it might be a rational response to a shift in supply and demand. If the world really is running out of oil, it makes sense for the price to soar: in response, we’ll find ways of using less of the stuff, and the exploration companies will invest more money finding new sources of supply.
It is not a bubble – it’s just prices changing. In a free market, that happens all the time. Try and stop it, and the market won’t work anymore.
On top, of that, it isn’t obvious that we’re in a bubble right now. Bernanke referred to the 63% rise in US stocks since the depths of the crisis last March. That was just getting back to normal prices, he argued. And he has a point. At a cyclically adjusted PE ratio of 20, US stocks aren’t cheap – but they are well below the PE ratio of 44 they hit at the peak of the dot com boom.
That said, there are clear signals that what the financial markets are experiencing right now is indeed a bubble -- and one caused by record low interest rates, and central banks printing money like crazy.
It might not be evident in stock prices – yet. But there are plenty of signs elsewhere.
Commodity prices are soaring, even as industrial production remains subdued. Take aluminium, for example. Its price is up by 33% so far this year, even though there is enough of the stuff sitting in warehouses to build 69,000 Boeing jumbo jets. How can you explain that, except that there is too much speculative money flowing into the system?
Bankers are paying themselves huge bonuses. There isn’t much sign of a pick-up in basic lending, or the profitability of past loans, but they are minting a fortune from their trading operations. Even hedge fund launches are picking up once more. Again, sure signs of a frothy financial system.
The carry trade – borrowing in a cheap currency and investing in an expensive one – is booming just as it did for much of the noughties. Last time around, firms borrowed in yen, and invested in the US or UK. Now they borrow in pounds or dollars, and investing in emerging markets. The result is the same – asset prices soaring on the back of borrowed money.
Even luxury, trophy assets are fetching record prices – another certain sign there is a lot of hot cash swilling around the system.
The real issue is not whether we are in a bubble right now. There are arguments on either side of that question. The point is whether central bankers – in both the US and Europe -- are prepared to look for bubbles and try and stop them. It isn’t enough to argue that central banks should just wait until a bubble has burst before they deal with it. They tried that last time around – and the results were hardly encouraging. The bubble had grown so enormous that it could not be unwound easily. As it burst it plunged the world into a recession that may take a generation or more to recover from.
True, spotting bubbles is difficult. Deflating them is hard work. But that is no excuse for not trying. And if the world’s central bankers haven’t grasped that yet there isn’t much hope of avoiding another crisis a few years down the line.
Monday, 23 November 2009
Electioneering Over The Economy
There is yet more electioneering over the economy today. But as I point out in my coilumn for Money Week this week, that is the last thing the UK economy needs...
It is now almost two years since the credit crunch stuck, more than a year since Lehman Brothers collapsed, and almost twelve months since the British economy plunged off a cliff, sinking into the deepest recession since records began. And yet to listen to the political debate you’d think nothing much had changed.
During conference season, the Prime Minister Gordon Brown reeled off a whole new list of spending commitments. In the weeks since, not a single tough decision has been announced on spending. Indeed, as Money Week went to press, the Queen’s Speech looked set to unveil yet more public spending.
Unfortunately, that is a foretaste of what is in store for the next six months – populist, pointless electioneering that just postpones the task of rebuilding the British economy.
And yet, the economy is still stuck in recession whilst the rest of the world recovers. Its budget deficit is spinning out of control, and a single word from the ratings agencies could still be the cue for the bail-out from the IMF. Rather than tackling the problems, the political class is still just scoring cheap points of one anther. The longer the UK delays tackling the real problems with its economy, the worse and worse it will get – and the more painful the eventual treatment.
In the past year, there has been no sign of the government facing up to the challenging economic circumstances the country now faces. Instead, we get some populist banker-bashing, such as the latest promise to tear up contracts the government doesn’t like.
None of it comes close to the debate the country needs. Britain needs to re-think its dependence on financial services. And it needs to come up with ways of regulating banks that stops them from holding the country to ransom. But futile measures to micro-manage contracts – which will be impossible to implement anyway - are just a way of avoiding the real debate.
As for yet more spending, there has so far been no recognition that the government is already spending wildly more than it can afford. For the last decade, British politics has been largely about bribing the voters with their own money. Now, it is about bribing the voters with printed money. One in every four pounds spent by the government is borrowed, and since the main purchaser of government debt is the Bank of England using money magically created in its computers, that really is the economics of the Weimar Republic.
Regrettably, the opposition isn’t much better. The Conservative Party might have a better idea of the tough economic medicine that is going to be needed. But it is still too nervous of the electoral consequences to spell out the pain ahead. It has gone along with the increase in the top rate of tax to 50%, even as it becomes painfully clear that it is fast driving entrepreneurs and companies out of the country.
We can expect much more of this in the six months or so until the election is finally called. Gordon Brown’s government will carry on spending money as if the stuff was going out of fashion (which, as quick glance at the gold price will tell you, it already is). Pre-election bribes will be frittered around the place. There will be lots of talk about making tough choices on the budget. Yet don’t expect any of them actually to be made. The opposition parties will be just as bad. They are too nervous to talk about real cuts, for fear of alienating the voters. Instead, they will offer a few headline-grabbing reductions in spending – scrapping the Trident missiles system, or reducing the number of MPs.
And yet Britain remains firmly stuck at the bottom of the global growth league, despite a thirty percent devaluation in the pound, massive government spending, and a central bank that has printed more money than any other in the world.
The stimulus might just about prevent the economy collapsing into a full-blown depression – although only at the cost of storing massive debts for future generations, and weakening the currency. But it is now clear that it is not going to restore the UK to a decent level of growth. The best the UK can hope for under current policies is to repeat the experience of France over the last decade – a state-dominated economy, incapable of growing by much more than 1% a year, and so unable to create enough jobs to maintain its prosperity.
In reality, the UK needs massive structural reform.
It needs to bring its tax rates down to competitive levels. The UK doesn’t have great infrastructure, or skill levels, nor, apart from finance, is it dominant in many industries. It can’t compete when it has the highest personal tax levels in Europe. The only way it can start re-building its economy is by cutting taxes to levels that will draw in a new wave of foreign investors, and encourage a new generation of entrepreneurs.
The budget deficit needs to be slashed. Even if you blieve the markets will fund a budget deficit of 12% or more of GDP (and there remains a big question mark over that), don’t forget that counties with big debts don’t grow. Look at Japan and Italy – the two most indebted countries in the world, and the slowest growing as well. Big budget deficits crowd out investment from the private sector: and yet it is only private sector investment that will restore growth.
Finally, it needs to stop printing money, and make sterling competitive again. There is no evidence to suggest that devaluation is stimulating exports. The UK does best when sterling is strong, not the reverse. What Britain needs to do is get the savings ratio back up, and get investment flowing into business – and you can’t do that when you are trashing the currency.
It is a tough programme. But, in the medium term, it is the only one that will work. And the longer it is put off, the harsher the medicine will have to be when it is eventually delivered.
It is now almost two years since the credit crunch stuck, more than a year since Lehman Brothers collapsed, and almost twelve months since the British economy plunged off a cliff, sinking into the deepest recession since records began. And yet to listen to the political debate you’d think nothing much had changed.
During conference season, the Prime Minister Gordon Brown reeled off a whole new list of spending commitments. In the weeks since, not a single tough decision has been announced on spending. Indeed, as Money Week went to press, the Queen’s Speech looked set to unveil yet more public spending.
Unfortunately, that is a foretaste of what is in store for the next six months – populist, pointless electioneering that just postpones the task of rebuilding the British economy.
And yet, the economy is still stuck in recession whilst the rest of the world recovers. Its budget deficit is spinning out of control, and a single word from the ratings agencies could still be the cue for the bail-out from the IMF. Rather than tackling the problems, the political class is still just scoring cheap points of one anther. The longer the UK delays tackling the real problems with its economy, the worse and worse it will get – and the more painful the eventual treatment.
In the past year, there has been no sign of the government facing up to the challenging economic circumstances the country now faces. Instead, we get some populist banker-bashing, such as the latest promise to tear up contracts the government doesn’t like.
None of it comes close to the debate the country needs. Britain needs to re-think its dependence on financial services. And it needs to come up with ways of regulating banks that stops them from holding the country to ransom. But futile measures to micro-manage contracts – which will be impossible to implement anyway - are just a way of avoiding the real debate.
As for yet more spending, there has so far been no recognition that the government is already spending wildly more than it can afford. For the last decade, British politics has been largely about bribing the voters with their own money. Now, it is about bribing the voters with printed money. One in every four pounds spent by the government is borrowed, and since the main purchaser of government debt is the Bank of England using money magically created in its computers, that really is the economics of the Weimar Republic.
Regrettably, the opposition isn’t much better. The Conservative Party might have a better idea of the tough economic medicine that is going to be needed. But it is still too nervous of the electoral consequences to spell out the pain ahead. It has gone along with the increase in the top rate of tax to 50%, even as it becomes painfully clear that it is fast driving entrepreneurs and companies out of the country.
We can expect much more of this in the six months or so until the election is finally called. Gordon Brown’s government will carry on spending money as if the stuff was going out of fashion (which, as quick glance at the gold price will tell you, it already is). Pre-election bribes will be frittered around the place. There will be lots of talk about making tough choices on the budget. Yet don’t expect any of them actually to be made. The opposition parties will be just as bad. They are too nervous to talk about real cuts, for fear of alienating the voters. Instead, they will offer a few headline-grabbing reductions in spending – scrapping the Trident missiles system, or reducing the number of MPs.
And yet Britain remains firmly stuck at the bottom of the global growth league, despite a thirty percent devaluation in the pound, massive government spending, and a central bank that has printed more money than any other in the world.
The stimulus might just about prevent the economy collapsing into a full-blown depression – although only at the cost of storing massive debts for future generations, and weakening the currency. But it is now clear that it is not going to restore the UK to a decent level of growth. The best the UK can hope for under current policies is to repeat the experience of France over the last decade – a state-dominated economy, incapable of growing by much more than 1% a year, and so unable to create enough jobs to maintain its prosperity.
In reality, the UK needs massive structural reform.
It needs to bring its tax rates down to competitive levels. The UK doesn’t have great infrastructure, or skill levels, nor, apart from finance, is it dominant in many industries. It can’t compete when it has the highest personal tax levels in Europe. The only way it can start re-building its economy is by cutting taxes to levels that will draw in a new wave of foreign investors, and encourage a new generation of entrepreneurs.
The budget deficit needs to be slashed. Even if you blieve the markets will fund a budget deficit of 12% or more of GDP (and there remains a big question mark over that), don’t forget that counties with big debts don’t grow. Look at Japan and Italy – the two most indebted countries in the world, and the slowest growing as well. Big budget deficits crowd out investment from the private sector: and yet it is only private sector investment that will restore growth.
Finally, it needs to stop printing money, and make sterling competitive again. There is no evidence to suggest that devaluation is stimulating exports. The UK does best when sterling is strong, not the reverse. What Britain needs to do is get the savings ratio back up, and get investment flowing into business – and you can’t do that when you are trashing the currency.
It is a tough programme. But, in the medium term, it is the only one that will work. And the longer it is put off, the harsher the medicine will have to be when it is eventually delivered.
Monday, 16 November 2009
When Will RBS Be Put Out of It's Misery.....
I wonder how long it will be before people start wondering how long it is worth propping up RBS with state-spending. In my Money Week column this week, I've been addressing that.
In 1977, the Labour Government of James Callaghan created a new state-owned company, which, even by the unfortunate standards of Britain’s nationalised companies was to prove grimly useless. British Shipbuilder grouped together the old Scottish shipyards of the Govan, some of the mightiest in the world in their heyday, put them together with the equally historic yards of the North-East, and embarked on a doomed attempt to salvage an industry in terminal decline through state control and massive subsidy.
Fast-forward thirty years and another once great Scottish industry has just been taken into state-ownership. Royal Bank of Scotland launches bond issues rather than ocean liners. But its ultimate fate is unlikely to be any happier.
In truth, the extra £25 billion the British taxpayer has just pumped into RBS is no more likely to revive the company than the millions poured into those Govan shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank into administration today.
Better that than turning RBS into the Govan shipyards of the 2010s, a fate that looks inevitable if it stays on its current path.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto, paying little attention to basic banking good-sense – such as whether its funding was secure, or whether it’s customers were ever likely to pay back the money they had borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen, and ATMs stopped working. That would have created pandemonium. The risk wasn’t worth taking.
Yet last week, the government rescued RBS all over again, giving the bank another £25 billion, and taking its stake up to 84%. There is a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the immediate crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures this week. But RBS is still bleeding red ink. It lost £3.3 billion in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5 billion for the quarter.
Another £282 billion in risky assets are currently insured by the government. How much more bad news is there still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2 trillion, or around one and half times the U.K.’s entire GDP. The potential losses are still horrifying.
But it is not the immediate results that are worrying so much as the five to ten year outlook. It is impossible to feel confident about the future of RBS.
It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and are going to suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than two billion euros have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s massive balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people the rival banks don’t want, a certain recipe for decline.
Even worse, RBS now looks set to fall under political control. It will be guided not by commercial decisions about what suits its skills and its shareholder. Only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up companies in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Rolls-Royce, the aero-engine manufacturer, was rescued by the government, and prospered in the long-term. But that is just about the only example. It is possible – although not likely – that Lloyds will repeat the trick. RBS certainly won’t.
It would be far better to place the bank into administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that ending happily.
In 1977, the Labour Government of James Callaghan created a new state-owned company, which, even by the unfortunate standards of Britain’s nationalised companies was to prove grimly useless. British Shipbuilder grouped together the old Scottish shipyards of the Govan, some of the mightiest in the world in their heyday, put them together with the equally historic yards of the North-East, and embarked on a doomed attempt to salvage an industry in terminal decline through state control and massive subsidy.
Fast-forward thirty years and another once great Scottish industry has just been taken into state-ownership. Royal Bank of Scotland launches bond issues rather than ocean liners. But its ultimate fate is unlikely to be any happier.
In truth, the extra £25 billion the British taxpayer has just pumped into RBS is no more likely to revive the company than the millions poured into those Govan shipyards a generation ago. It would be better for everyone – and cheaper as well – to place the bank into administration today.
Better that than turning RBS into the Govan shipyards of the 2010s, a fate that looks inevitable if it stays on its current path.
Under the management of its little-lamented chief executive, Sir Fred Goodwin, RBS expanded furiously, becoming the fifth largest bank in the world. It was an impressive achievement for what, less than a generation ago, was little more than a regional British bank. But the credit crunch exposed the expansion as largely illusory. Puffed up by cheap money, RBS rode the credit boom with gusto, paying little attention to basic banking good-sense – such as whether its funding was secure, or whether it’s customers were ever likely to pay back the money they had borrowed. The credit crunch found the bank cruelly exposed: of the world’s top ten banks, it was, without question, the one that was always most likely to fail.
A year ago, in the midst of the financial panic created by the collapse of Lehman Brothers, it made sense to rescue RBS. If the government hadn’t stepped in, the bank might have closed within hours. Accounts would have been frozen, and ATMs stopped working. That would have created pandemonium. The risk wasn’t worth taking.
Yet last week, the government rescued RBS all over again, giving the bank another £25 billion, and taking its stake up to 84%. There is a big difference between rescuing a bank in the middle of a panic, and investing vast sums of money once the immediate crisis has passed. RBS has now received more bail-out cash than any other bank in the world. It is now a business beyond salvation.
Just take a look at its latest set of figures. Other banks have seen a sharp recovery in their profitability: both HSBC and Barclays reported decent figures this week. But RBS is still bleeding red ink. It lost £3.3 billion in the third quarter after making huge provisions for bad loans and credit-market write-downs. That might not be so bad if the bank was making an operating profit – after all, all banks suffer from bad loans in a recession. But RBS reported an operating loss of £1.5 billion for the quarter.
Another £282 billion in risky assets are currently insured by the government. How much more bad news is there still to come? No one really knows. But at its peak, RBS had a balance sheet of £2.2 trillion, or around one and half times the U.K.’s entire GDP. The potential losses are still horrifying.
But it is not the immediate results that are worrying so much as the five to ten year outlook. It is impossible to feel confident about the future of RBS.
It is a financial conglomerate that was assembled with little rhyme or reason. RBS went around buying up banks that, right now, you’d rather not own. It is strong, of course, in Scotland, and Northern Ireland, via its Ulster Bank subsidiary. But both economies are dependent on government spending and are going to suffer terribly once the taps get turned off. Indeed, Ulster Bank has already consumed vast amounts of extra capital: more than two billion euros have been pumped into the unit this year alone. Its Citizens Bank unit in the US has been making heavy losses. The ABN Amro business acquired with Fortis and Santander looks to have been a turkey. In short, RBS has paid a lot of money for subsidiaries that are now going to cost even more to keep afloat.
Nor do the prospects for its investment bank look good. It made money in the boom leveraging up RBS’s massive balance sheet. It can’t do that anymore. With the government insisting on tight controls on bonuses, it is hard to see how it can hang onto the traders and deal-makers needed to make that business work. It will be left with the people the rival banks don’t want, a certain recipe for decline.
Even worse, RBS now looks set to fall under political control. It will be guided not by commercial decisions about what suits its skills and its shareholder. Only tomorrow’s sound-bites will matter. Don’t be surprised in the next few years to find RBS propping up companies in marginal constituencies – regardless of whether the loans will ever be paid back.
The lesson of the Govan shipyards, along with a whole raft of failing companies that were nationalised in the 1970s, is that once a business is taken over by the government, it usually goes downhill fast. Rolls-Royce, the aero-engine manufacturer, was rescued by the government, and prospered in the long-term. But that is just about the only example. It is possible – although not likely – that Lloyds will repeat the trick. RBS certainly won’t.
It would be far better to place the bank into administration this week. Let the administrators sell off each part for the best possible price, then slowly wind down the rest. There need be no panic, and no crisis. The parts of the business that have a future could be found a better home. The rest could be quietly put to rest. Instead, the British taxpayer has just stepped blindly into an open-ended commitment to a failing financial conglomerate. It is hard to see that ending happily.
Tuesday, 10 November 2009
Annoying Things People Say To Writers...
Over on the Curzon Group blog, I've kicked off a series about the annoying things people say to writers. But here it is....
Tom's splendid post yesterday about film rights has prompted me to think some more about the slim volume I'm planning to write one day called 'Annoying Things People Say To Writers'. One of the hazards of this job is that people have no idea how it really works, but of course they think they do.
The result? If you mention that you are a writer at a dinner party, they make really irritating remarks. Such as....
1. 'All you need to do now is sell the film rights'.
What am I meant to say to that? Oh, yeah, thanks, I'd never thought of that. But I'll get it sorted on Monday morning. Thanks for the idea.
2. 'I've been meaning to write a book when I get the time'.
Listen, if I meet a dentist, I don't say, 'Oh, I've been meaning to do some root canal work, I just never get a minute.' Or if I meet an airline pilot, I wouldn't say, 'Oh, I'll take an A330 for a spin when I've got a day off.' I recognise that those jobs require years of dedicatd training and practise. And yet everyone seems to think they could knock off a novel, easy-peasy, if only they could find a spare minute. It is more than a little rude to suggest that what we do is so simple anyone could do it in a few dull weekends.
3. 'Can I have the name of your agent'.
Why do people imagine we want to give out the contact details of our agents to everyone we meet? They can look it up for themselves. I've just given up on this one, and I now hand out my agent's details automatically to everyone I meet. At my wife's parents house in Cardiff a little while ago, I met this 90-year old lady who used to live next door to my wife when she was small. Turns out she's been working on a historical romantic epic of several hundred pages. I humbly gave her my agent's details. I bet he was pleased to get that one.
4. 'I looked in Smith's and they didn't have your book. I just thought you'd like to speak to your publisher about that.'
Listen, an author is psychologically incapable of walking past a bookshop without going inside to check if they have his book, and, if so, how many copies. Even Dan Brown does it - I've seen him, moving the display bin a bit further to the front of Waterstone's. Trust me, if they haven't got my book in stock, I already know -- all you are doing is rubbing it in.
This one will be continued next time someone says something really irritating to me -- which won't be long I'm sure
Tom's splendid post yesterday about film rights has prompted me to think some more about the slim volume I'm planning to write one day called 'Annoying Things People Say To Writers'. One of the hazards of this job is that people have no idea how it really works, but of course they think they do.
The result? If you mention that you are a writer at a dinner party, they make really irritating remarks. Such as....
1. 'All you need to do now is sell the film rights'.
What am I meant to say to that? Oh, yeah, thanks, I'd never thought of that. But I'll get it sorted on Monday morning. Thanks for the idea.
2. 'I've been meaning to write a book when I get the time'.
Listen, if I meet a dentist, I don't say, 'Oh, I've been meaning to do some root canal work, I just never get a minute.' Or if I meet an airline pilot, I wouldn't say, 'Oh, I'll take an A330 for a spin when I've got a day off.' I recognise that those jobs require years of dedicatd training and practise. And yet everyone seems to think they could knock off a novel, easy-peasy, if only they could find a spare minute. It is more than a little rude to suggest that what we do is so simple anyone could do it in a few dull weekends.
3. 'Can I have the name of your agent'.
Why do people imagine we want to give out the contact details of our agents to everyone we meet? They can look it up for themselves. I've just given up on this one, and I now hand out my agent's details automatically to everyone I meet. At my wife's parents house in Cardiff a little while ago, I met this 90-year old lady who used to live next door to my wife when she was small. Turns out she's been working on a historical romantic epic of several hundred pages. I humbly gave her my agent's details. I bet he was pleased to get that one.
4. 'I looked in Smith's and they didn't have your book. I just thought you'd like to speak to your publisher about that.'
Listen, an author is psychologically incapable of walking past a bookshop without going inside to check if they have his book, and, if so, how many copies. Even Dan Brown does it - I've seen him, moving the display bin a bit further to the front of Waterstone's. Trust me, if they haven't got my book in stock, I already know -- all you are doing is rubbing it in.
This one will be continued next time someone says something really irritating to me -- which won't be long I'm sure
Monday, 9 November 2009
Lay Off The Tax Havens
Everyone keeps attacking the tax havens. But there is very little evidence to suggest they played any role in the credit crunch, as I explain in my Money Week column this week. Here's a taster....
Which countries were most responsible for the financial crisis that engulfed the world last year? If you’ve been following the political debate over the last few months, you’d be forgiven for thinking it was a handful of secretive tax havens such as the Cayman Islands, Jersey, Switzerland or Monaco.
Everyone from President Obama to Nicolas Sarkozy of France to our own Prime Minister Gordon Brown has been queuing up to denounce the thriving offshore industry. Every G20 summit comes with a ritual denunciation of banking secrecy, and a fresh pledge to force open accounts. The suggestion is made that the huge fiscal deficits now being run up around the world could be plugged by clamping down on tax lost via offshore financial centres. Bullying tactics have been adopted against small countries to force them to change their laws in ways that suits their bigger and more powerful neighbours.
And yet two reports published in the last week showed that just about all the accusations hurled so furiously against the tax havens are just plain wrong. The British Treasury asked the accountants Deloitte to look into how much tax is lost through offshore loopholes. The answer? Not very much. Meanwhile, the left-wing Tax Justice Network, which campaigns ferociously against tax havens, has just published a report on the most secretive, un-cooperative financial centres in the world. The winner? Delaware, in the United States, closely followed by the City of London.
In truth, the attacks on tax havens are led by politicians guilty of presiding over precisely the system of secrecy they criticise elsewhere. What they are really frightened off is the way the havens provide an alternative to their own high-tax, big-spending policies.
It is certainly hard to escape the verbal hand grenades lobbed at the tax havens by the world’s leaders. In the US, Obama has launched a fierce crack-down on American companies using offshore subsidiaries for tax planning, pledging to raise tens of billions in extra revenue to plug his budget deficit. The Swiss banks have been forced to hand over the details of thousands of account holders. The French President promised to ‘put the morality back into capitalism’ by clamping down on the industry. The Germans have been bullying Lichtenstein into handing over details of account holders, whilst our own Gordon Brown promised “action against regulatory and tax havens in parts of the world which have escaped the regulatory attention they need.”
But how much tax is actually lost through the havens? And how secretive are they really? As it turns out, not nearly as much as people think.
The UK has always been in odd position on tax havens, because many of them – Jersey, the Isle of Man, Bermuda – are British crown dependencies. The Treasury has just published a report from Deloitte on their impact on the world financial system. The results were not quite what you might expect.
Written by Sir Michael Foot, a former director of the Bank of England, the report estimated that the amount of tax lost to the British government as a result of companies routing transactions through tax havens was less than £2 billon, far less than previous estimates suggested. In a country where the budget deficit looks set to breach the £200 billion barrier, that is little more than a rounding error – less than one percent of the shortfall in government revenues.
In exchange, the British banking system benefits from its relationship with the dependencies. They are used by the British banks to gather funds from around the world, which are then used to bolster the banks headquartered in London. So, for example, in a single quarter this year the dependencies provided almost £200 billion in net funds to the British banks. If the world was really to clamp down on tax havens the way Brown promises, the UK would be a net loser. It would collect only a tiny bit more tax. Against that, it would lose even more as the British banking system became less profitable – and so paid less corporation tax.
Nor does the secrecy charge have the weight you might imagine.
The Tax Justice Network’s ranking of the most secretive financial centres makes for surprising reading. Right at the very top of the list is Delaware, the US state routinely used by American corporations as their place of incorporation because of its pro-business legislation. Britain came in at fifth place, whilst Belgium and Ireland also featured in the top ten. Jersey didn’t make the top ten, nor Liechtenstein. Monaco was right down at the bottom of the list, ranking as one of the most open financial centres.
When you examine the evidence, it turns out the tax havens aren’t costing much in the way of lost tax. Nor are they particularly secretive.
There should be nothing in that, of course, to surprise anyone who actually knows how the financial system works.
In reality, the offshore centres are doing two things, both of them perfectly legitimate.
Fiscal systems around the world have become progressively more and more complex as governments attempt to squeeze impossible high amounts of tax out of the system. It is hardly a surprise that in an increasingly globalised world, companies choose to route their business through centres where taxes are simple, low and straightforward.
And they provide an alternative for people who object to paying the high rates of tax that governments in most of the developed world impose. People may or may not approve of that: but in a free world, it is surely an individual’s right to base themselves somewhere where half their income won’t be confiscated from them every year if that is what they want to do.
If they were really serious about cracking down on tax havens, Obama would be dealing with Delaware, and Brown would be hammering the City. And they would be a lot more honest about how their own policies have helped fuel their growth.
But then it is easier to launch attacks against scapegoats. And if they didn’t pretend they could raise more tax by plugging loop holes, they might have to start telling people how they planned to fix their deficits.
Which countries were most responsible for the financial crisis that engulfed the world last year? If you’ve been following the political debate over the last few months, you’d be forgiven for thinking it was a handful of secretive tax havens such as the Cayman Islands, Jersey, Switzerland or Monaco.
Everyone from President Obama to Nicolas Sarkozy of France to our own Prime Minister Gordon Brown has been queuing up to denounce the thriving offshore industry. Every G20 summit comes with a ritual denunciation of banking secrecy, and a fresh pledge to force open accounts. The suggestion is made that the huge fiscal deficits now being run up around the world could be plugged by clamping down on tax lost via offshore financial centres. Bullying tactics have been adopted against small countries to force them to change their laws in ways that suits their bigger and more powerful neighbours.
And yet two reports published in the last week showed that just about all the accusations hurled so furiously against the tax havens are just plain wrong. The British Treasury asked the accountants Deloitte to look into how much tax is lost through offshore loopholes. The answer? Not very much. Meanwhile, the left-wing Tax Justice Network, which campaigns ferociously against tax havens, has just published a report on the most secretive, un-cooperative financial centres in the world. The winner? Delaware, in the United States, closely followed by the City of London.
In truth, the attacks on tax havens are led by politicians guilty of presiding over precisely the system of secrecy they criticise elsewhere. What they are really frightened off is the way the havens provide an alternative to their own high-tax, big-spending policies.
It is certainly hard to escape the verbal hand grenades lobbed at the tax havens by the world’s leaders. In the US, Obama has launched a fierce crack-down on American companies using offshore subsidiaries for tax planning, pledging to raise tens of billions in extra revenue to plug his budget deficit. The Swiss banks have been forced to hand over the details of thousands of account holders. The French President promised to ‘put the morality back into capitalism’ by clamping down on the industry. The Germans have been bullying Lichtenstein into handing over details of account holders, whilst our own Gordon Brown promised “action against regulatory and tax havens in parts of the world which have escaped the regulatory attention they need.”
But how much tax is actually lost through the havens? And how secretive are they really? As it turns out, not nearly as much as people think.
The UK has always been in odd position on tax havens, because many of them – Jersey, the Isle of Man, Bermuda – are British crown dependencies. The Treasury has just published a report from Deloitte on their impact on the world financial system. The results were not quite what you might expect.
Written by Sir Michael Foot, a former director of the Bank of England, the report estimated that the amount of tax lost to the British government as a result of companies routing transactions through tax havens was less than £2 billon, far less than previous estimates suggested. In a country where the budget deficit looks set to breach the £200 billion barrier, that is little more than a rounding error – less than one percent of the shortfall in government revenues.
In exchange, the British banking system benefits from its relationship with the dependencies. They are used by the British banks to gather funds from around the world, which are then used to bolster the banks headquartered in London. So, for example, in a single quarter this year the dependencies provided almost £200 billion in net funds to the British banks. If the world was really to clamp down on tax havens the way Brown promises, the UK would be a net loser. It would collect only a tiny bit more tax. Against that, it would lose even more as the British banking system became less profitable – and so paid less corporation tax.
Nor does the secrecy charge have the weight you might imagine.
The Tax Justice Network’s ranking of the most secretive financial centres makes for surprising reading. Right at the very top of the list is Delaware, the US state routinely used by American corporations as their place of incorporation because of its pro-business legislation. Britain came in at fifth place, whilst Belgium and Ireland also featured in the top ten. Jersey didn’t make the top ten, nor Liechtenstein. Monaco was right down at the bottom of the list, ranking as one of the most open financial centres.
When you examine the evidence, it turns out the tax havens aren’t costing much in the way of lost tax. Nor are they particularly secretive.
There should be nothing in that, of course, to surprise anyone who actually knows how the financial system works.
In reality, the offshore centres are doing two things, both of them perfectly legitimate.
Fiscal systems around the world have become progressively more and more complex as governments attempt to squeeze impossible high amounts of tax out of the system. It is hardly a surprise that in an increasingly globalised world, companies choose to route their business through centres where taxes are simple, low and straightforward.
And they provide an alternative for people who object to paying the high rates of tax that governments in most of the developed world impose. People may or may not approve of that: but in a free world, it is surely an individual’s right to base themselves somewhere where half their income won’t be confiscated from them every year if that is what they want to do.
If they were really serious about cracking down on tax havens, Obama would be dealing with Delaware, and Brown would be hammering the City. And they would be a lot more honest about how their own policies have helped fuel their growth.
But then it is easier to launch attacks against scapegoats. And if they didn’t pretend they could raise more tax by plugging loop holes, they might have to start telling people how they planned to fix their deficits.
Tuesday, 3 November 2009
Ghosting for Slebs,,,,
Lynda La Plante created a stir at the recent Specsavers Crime & Thriller Awards with an attack on 'celebrity' fiction by the likes of Katie Price, Martine McCutcheon, and soon, heaven help us, Cheryl Cole.
She chewed up the assembled publishers for spending their money on 'drivel' rather than supporting real authors. "The publishing industry is going to implode. They can't pay the millions to these celebrities," she complained.
In the Telegraph, Nigel Farndale wrote a perceptive piece about her attack, arguing that ghost-writed rubbish for Slebs was as likely to put off young people from reading as encouraging them. And Martin Amis is planning to make Price a character in his next novel (I'm looking forward to that).
One point that people miss however is that ghost-writing is far more common than people realise. And the readers are, essentially, getting ripped off.
In fairness, someone like Katie Price makes no pretence of writing her books. The ghost gets credit, and is well-known.
But, as someone who did a fair bit of ghost-writing before writing 'Death Force', I am well aware that is far more widespread than most people realise. Quite a few of the thrillers on the best-sellers list are ghosted by 'authors' who actually claim to the writers of the books.
That strikes me, looking back on the experience, as far more deceitful.
There is no question that the books are a lot worse than the writer could do if they were working under their own name. The first couple of books I ghosted I took quite a lot of care over. But after doing it for a about five years, I was just churning them out fairly cynically for the money. The 'author' couldn't be bothered with the book, nor could the editor, and, after a while, nor could I. The plots were full of holes, the characters weird, and the typos horrendous: in one of them, even the dedication was mis-spelt, although I was probably the only person who noticed.
So people are gettting a sub-standard, slap-dash book, that no one really cares about.
And it is very hard to see how anyone really benefits from that.
With another hat on, I spend a fair bit of time as a business journalist.
And one thing you notice that really distinguishes good businesses from bad ones is that the they care about making a decent product.
The publishers putting out sleb fiction seem to have forgotten that. I suspect at some point they will pay a fairly heavy price.
She chewed up the assembled publishers for spending their money on 'drivel' rather than supporting real authors. "The publishing industry is going to implode. They can't pay the millions to these celebrities," she complained.
In the Telegraph, Nigel Farndale wrote a perceptive piece about her attack, arguing that ghost-writed rubbish for Slebs was as likely to put off young people from reading as encouraging them. And Martin Amis is planning to make Price a character in his next novel (I'm looking forward to that).
One point that people miss however is that ghost-writing is far more common than people realise. And the readers are, essentially, getting ripped off.
In fairness, someone like Katie Price makes no pretence of writing her books. The ghost gets credit, and is well-known.
But, as someone who did a fair bit of ghost-writing before writing 'Death Force', I am well aware that is far more widespread than most people realise. Quite a few of the thrillers on the best-sellers list are ghosted by 'authors' who actually claim to the writers of the books.
That strikes me, looking back on the experience, as far more deceitful.
There is no question that the books are a lot worse than the writer could do if they were working under their own name. The first couple of books I ghosted I took quite a lot of care over. But after doing it for a about five years, I was just churning them out fairly cynically for the money. The 'author' couldn't be bothered with the book, nor could the editor, and, after a while, nor could I. The plots were full of holes, the characters weird, and the typos horrendous: in one of them, even the dedication was mis-spelt, although I was probably the only person who noticed.
So people are gettting a sub-standard, slap-dash book, that no one really cares about.
And it is very hard to see how anyone really benefits from that.
With another hat on, I spend a fair bit of time as a business journalist.
And one thing you notice that really distinguishes good businesses from bad ones is that the they care about making a decent product.
The publishers putting out sleb fiction seem to have forgotten that. I suspect at some point they will pay a fairly heavy price.
Sunday, 1 November 2009
How To Break Up The British Banks...
In my Money Week column this week, I've been looking at how to break-up the British banks. Here's a taster....
Perhaps in preparation for the way they will have to work together after the general election, the Governor of the Bank of England Mervyn King and the Shadow Chancellor George Osborne have already formed quite a double act.
Like a pair of street fighters delivering blows to their chosen prey in quick succession, in the last week they have delivered blistering attacks on the way the British banks have been bailed out by the taxpayer – without, it seems, any kind of reform of the way they work in exchange. Both in different ways are looking towards some kind of separation of retail from investment banking.
That is a big improvement on the current Government. Despite the Prime Ministers Gordon Brown’s boats of leading the world on financial reform, he hasn’t proposed a single significant change in the way the system works. After the biggest run of banking collapses in a century or more, that is, to say the least, eccentric. After all, if the implosion of Royal Bank of Scotland, Lloyds-HBOS, Northern Rock, and the rest of them, didn’t suggest to you the system might need a bit of a tweak, it is hard to imagine what might.
A year after the credit crunch, and with the country still piling up massive debts on behalf of its bailed-out banking system, it is clear that the way we regulated our financial sector has to be reformed. The U.K. can’t go back to hosting international banks of the scale of RBS. The interesting questions are how, how fast – and whether either King or Osborne will feel comfortable with the logical conclusions of the positions they are staking out.
Because what they are really suggesting in a system in which the City just plays host to the global capital markets, whilst the British banks get broken up –meaning the two giants of the sector, HSBC and Barclays, either split themselves up, or else leave the country.
Of the two men, King has pushed the argument hardest. In a speech last week, he described the way the banking system had returned to profitability on the back of government bail-outs as “creating possibly the biggest moral hazard in history.” It was fanciful, he argued, to imagine that the regulators could possibly control the sector: the bankers were too clever and too fast. The only long-term solution was to break up the banks into regulated deposit-takers that took few risks, and risk-taking investment banks, which could be allowed to go to the wall when they got things wrong.
Osborne doesn’t go as far as that – yet. In a speech on Monday, the Shadow Chancellor called for controls on bonuses at the retail banks. He argued that they should be forced to pay more of their bonuses in shares. What was really interesting, however, was his distinction between the retail and the investment banks, and the suggestion there should be different regulatory regimes for them. In truth, both men are sketching out a future in which the UK decides it isn’t really sensible to host big global banks.
As the Swiss have also realised, hosting global banks is just too risky for small or medium-sized countries. Both Britain and Switzerland avoided the fate of Iceland – a country bankrupted by the recklessness of its bankers. But it was a close run thing (and Britain is not out of the woods yet). Neither country wants to repeat the experience. The liabilities of a huge global bank such as RBS or Credit Suisse can dwarf those of the host country – and yet it is that country that ends up having to foot the bill if things go wrong.
So what should the UK do? The answer, in fact, is pretty clear.
The City should be nurtured as one of the world’s leading financial centres. There is no need to worry about the risks taken by the likes of Goldman Sachs, Nomura, UBS or Deutsche Bank. If they make money trading in London, the British government will collect a slice of the winnings in corporation tax. If they go pop, it is their governments back home that will have to pick up the bill. The bigger and brasher the City gets, the better: it means more tax revenue for the UK: and more business for the estate agents, shops, and restaurants that feed off the City’s money.
The British banks, however, are a different matter. They need to be broken up.
There can be little excuse for creating another monster on the scale of RBS. The smaller banks such as Northern Rock could easily be re-mutualised by handing shares over to mortgage and account holders, perhaps with a proviso that they couldn’t reverse the process for fifty years. The UK needs more diverse types of banks – and some big new mutuals would be a good start.
Lloyds-HBOS looks intent on returning to the private sector by raising cash from its shareholders to replace the Government’s stake. But it was a mistake to allow a single bank to control more than 30% of the market. It should be split into its separate parts, preventing a single dominant bank emerging. RBS looks in no state to be privatised soon. It should be forced to sell the profitable units of its investment bank, whilst the retail bank should be split into NatWest and Royal Bank, then privatised.
The tougher choice is for HSBC and Barclays, the two giants of the UK financial industry. Both are hugely successful global banks, with both retail and investment divisions. Neither needed state aid. To expect them to sell their investment banking units, or to sacrifice the profits from wholesale banking, would be unfair. At the same time, the UK can’t risk being liable for their failure – think of the cost of bailing out HSBC. Instead, reluctantly, they should be encouraged to move elsewhere – the US or perhaps China.
What the UK needs is a smaller, more competitive financial sector – every part of which can fail if necessary without provoking a wider collapse. Anything else is just setting up a bigger, and potentially much worse, crisis for the future. Whether either King or Osborne really have the guts to push that through remains to be seen – but it is the inescapable logic of their arguments.
Perhaps in preparation for the way they will have to work together after the general election, the Governor of the Bank of England Mervyn King and the Shadow Chancellor George Osborne have already formed quite a double act.
Like a pair of street fighters delivering blows to their chosen prey in quick succession, in the last week they have delivered blistering attacks on the way the British banks have been bailed out by the taxpayer – without, it seems, any kind of reform of the way they work in exchange. Both in different ways are looking towards some kind of separation of retail from investment banking.
That is a big improvement on the current Government. Despite the Prime Ministers Gordon Brown’s boats of leading the world on financial reform, he hasn’t proposed a single significant change in the way the system works. After the biggest run of banking collapses in a century or more, that is, to say the least, eccentric. After all, if the implosion of Royal Bank of Scotland, Lloyds-HBOS, Northern Rock, and the rest of them, didn’t suggest to you the system might need a bit of a tweak, it is hard to imagine what might.
A year after the credit crunch, and with the country still piling up massive debts on behalf of its bailed-out banking system, it is clear that the way we regulated our financial sector has to be reformed. The U.K. can’t go back to hosting international banks of the scale of RBS. The interesting questions are how, how fast – and whether either King or Osborne will feel comfortable with the logical conclusions of the positions they are staking out.
Because what they are really suggesting in a system in which the City just plays host to the global capital markets, whilst the British banks get broken up –meaning the two giants of the sector, HSBC and Barclays, either split themselves up, or else leave the country.
Of the two men, King has pushed the argument hardest. In a speech last week, he described the way the banking system had returned to profitability on the back of government bail-outs as “creating possibly the biggest moral hazard in history.” It was fanciful, he argued, to imagine that the regulators could possibly control the sector: the bankers were too clever and too fast. The only long-term solution was to break up the banks into regulated deposit-takers that took few risks, and risk-taking investment banks, which could be allowed to go to the wall when they got things wrong.
Osborne doesn’t go as far as that – yet. In a speech on Monday, the Shadow Chancellor called for controls on bonuses at the retail banks. He argued that they should be forced to pay more of their bonuses in shares. What was really interesting, however, was his distinction between the retail and the investment banks, and the suggestion there should be different regulatory regimes for them. In truth, both men are sketching out a future in which the UK decides it isn’t really sensible to host big global banks.
As the Swiss have also realised, hosting global banks is just too risky for small or medium-sized countries. Both Britain and Switzerland avoided the fate of Iceland – a country bankrupted by the recklessness of its bankers. But it was a close run thing (and Britain is not out of the woods yet). Neither country wants to repeat the experience. The liabilities of a huge global bank such as RBS or Credit Suisse can dwarf those of the host country – and yet it is that country that ends up having to foot the bill if things go wrong.
So what should the UK do? The answer, in fact, is pretty clear.
The City should be nurtured as one of the world’s leading financial centres. There is no need to worry about the risks taken by the likes of Goldman Sachs, Nomura, UBS or Deutsche Bank. If they make money trading in London, the British government will collect a slice of the winnings in corporation tax. If they go pop, it is their governments back home that will have to pick up the bill. The bigger and brasher the City gets, the better: it means more tax revenue for the UK: and more business for the estate agents, shops, and restaurants that feed off the City’s money.
The British banks, however, are a different matter. They need to be broken up.
There can be little excuse for creating another monster on the scale of RBS. The smaller banks such as Northern Rock could easily be re-mutualised by handing shares over to mortgage and account holders, perhaps with a proviso that they couldn’t reverse the process for fifty years. The UK needs more diverse types of banks – and some big new mutuals would be a good start.
Lloyds-HBOS looks intent on returning to the private sector by raising cash from its shareholders to replace the Government’s stake. But it was a mistake to allow a single bank to control more than 30% of the market. It should be split into its separate parts, preventing a single dominant bank emerging. RBS looks in no state to be privatised soon. It should be forced to sell the profitable units of its investment bank, whilst the retail bank should be split into NatWest and Royal Bank, then privatised.
The tougher choice is for HSBC and Barclays, the two giants of the UK financial industry. Both are hugely successful global banks, with both retail and investment divisions. Neither needed state aid. To expect them to sell their investment banking units, or to sacrifice the profits from wholesale banking, would be unfair. At the same time, the UK can’t risk being liable for their failure – think of the cost of bailing out HSBC. Instead, reluctantly, they should be encouraged to move elsewhere – the US or perhaps China.
What the UK needs is a smaller, more competitive financial sector – every part of which can fail if necessary without provoking a wider collapse. Anything else is just setting up a bigger, and potentially much worse, crisis for the future. Whether either King or Osborne really have the guts to push that through remains to be seen – but it is the inescapable logic of their arguments.
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