In my Money Week column this week, I've drafted the letter that George Osborne should send to Mervyn King next time the Bank misses its inflation target. Here's a taster....
British economic life has acquired a new ritual. Every three months the Governor of the Bank of England writes a letter to the Chancellor of the Exchequer explaining why he has had missed the inflation target. And, on the same day, the Chancellor responds with an anodyne, sympathetic reply, accepting the Governor’s excuses without so much as a word of criticism.
We saw it played out this month. No doubt we’ll see it a couple more times before the year is out. The Bank has given up on hitting its 2% inflation target. With prices rises at 4% a year on the official figures, and significantly more on the kinds of things that people actually notice they are spending money on, there is little chance of getting back within range soon.
But, in any normal business, if you gave up on hitting the target your employer set for you, you’d expect a monstering. Next time around, George Osborne should rip up the rule-book. He should write Mervyn King a proper letter. Here’s what it should say.
“Dear Mervyn,
Thank you for your letter.
I am disappointed that inflation has yet again significantly exceeded the target set for the Bank of England by the government. I should remind you that meeting this target is a legal requirement. I accept that a target won’t be met every month. That is why some flexibility is allowed. But I am worried that you are not really trying.
I am frankly puzzled by some of the arguments put forward in your letter
I believe there must be something wrong with the forecasting model the Bank of England is using. In the letters sent both to me, and to my predecessor Mr. Darling, you have been consistently predicting that inflation will fall. For example, in your letter of May 17th last year, you argued that the rise in VAT and the drop in the value of sterling were the main reasons why you’d missed the target. “The effects on inflation can be expected to wane over time,” you stated. “As this happens, the MPC expects that inflation will fall back.”
It didn’t happen, did it? In fact, inflation has accelerated since then. If a model keeps producing the wrong forecasts, then it is time to get a new model. I would like you to ask the Bank’s economists to start working on that – and stop sending me wrong predictions.
As for your ‘explanations’, they sound more like excuses. Stop going on about the ‘output gap’. This is intellectual nonsense, and it is time you realised it. The idea that the Bank knows precisely what the ‘right’ level of output for the British economy is, and how much we are currently below it, is the kind of thing that even the Gosplan economists in Moscow in 1970 might have considered a little arrogant. In reality, we have no precise idea what the UK can produce, or how far below that we might be right now – and certainly not to within a couple of percentage points. This so-called ‘output gap’ doesn’t exist. It clearly isn’t bearing down on inflation in any meaningful way. So stop talking about it.
Next, stop blaming imported inflation. True, commodity prices are going up around that world – mainly because your friend Ben Bernanke over in Washington is running the Fed in the same incompetent way you are running the Bank. Of course global inflation impacts us here in Britain. But it is mediated through the exchange rate. If sterling was stronger, then the rising price of oil wouldn’t make any difference to the amount ordinary people have to pay at the pumps. Nor would the price of food or clothing be going up the way it is.
The Bank can certainly influence the exchange rate. Higher interest rates would strengthen sterling, and so change the inflation outlook. If you pledged that there would be no more QE, that too would help the pound. Both together would make sure we weren’t importing inflation anymore.
Finally, I would like you to read more widely. You used to be an academic economist (indeed you were one of the 364 economists who famously attacked another new Conservative Chancellor in 1981). You must be aware that there is plenty of economic theory to suggest that running negative real interests of 3.5% and printing money by the barrow load is a sure way to create inflation. Please re-acquaint yourself with the literature. In your next letter I’d like you to explain why the Bank’s policies of ultra-low interest rates and quantitative easing are not responsible for the inflation we are seeing now.
Most of all, I am worried by the air of defeatism that seems to have overcome you. Never believe that inflation is outside your control, or that it is an acceptable way of working our way out of our debts. In the inflationary 1970s, and early 1980s, when prices around the world were soaring ahead, and the price of oil more than quadrupled, one country never experienced any significant inflation. Germany. Even through the worst of the 1970s, the Bundesbank managed to keep the average German inflation rate at just 4.9% a year. In the 1980s, the average rate was just 2.1%. Please explain why the Bundesbank was able to achieve that in far more difficult global circumstance and the Bank of England can’t.
I am prepared to give you one more chance. But the Governor of the Bank of England can’t expect to be the only person in the country who is not judged by their results. Inflation makes life hard for ordinary people. Real wages are already falling. Families are struggling to make ends meet. The Bank is close to the point of losing credibility. Once that happens, there is a real risk of interest rates having to rise very sharply to bring prices under control again.
Your next letter should be your last. If you can’t find a way of getting the inflation rate back within the target, then I’m sure you will accept that it is time we found someone who can.
With best wishes,
George.”
Monday, 28 February 2011
Friday, 25 February 2011
We Don't Need More Women on Boards....
I've done a piece for The Spectator about why we don't need more women on boards. You can read it here.
Tuesday, 22 February 2011
We Still Love Thrillers
The Curzon Group was, of course, set up to revive the great tradition of British thriller writing. Judging by the latest public lending rights figures, which measure the most borrowed books from libraries, we’re doing a great job. Of the 100 most borrowed books, about two-thirds are crime and thrillers.
Okay, I’m getting ahead of myself. We can’t claim any of the credit for that. James Patterson and Dan Brown would have topped the list anyway. But it is gratifying to know that we are all working in the nation’s most popular genre.
The PLR figures give you an interesting take on what the country actually reads. Of course, the demographics aren’t really representative. Older and younger people use the libraries a lot more than most of the population. But it does give you an idea of what people enjoy away from the hype of the publishers and the deals done with the big supermarkets chains. So, for example, Stieg Larsson, despite all the publicity only managed to get one book in the library chart, and that was at number 76.
The message, surely, is that people like gritty, fast-paced crime and adventure stories more than anything else. Which is lucky, because that is precisely the kind of stuff we write.
Okay, I’m getting ahead of myself. We can’t claim any of the credit for that. James Patterson and Dan Brown would have topped the list anyway. But it is gratifying to know that we are all working in the nation’s most popular genre.
The PLR figures give you an interesting take on what the country actually reads. Of course, the demographics aren’t really representative. Older and younger people use the libraries a lot more than most of the population. But it does give you an idea of what people enjoy away from the hype of the publishers and the deals done with the big supermarkets chains. So, for example, Stieg Larsson, despite all the publicity only managed to get one book in the library chart, and that was at number 76.
The message, surely, is that people like gritty, fast-paced crime and adventure stories more than anything else. Which is lucky, because that is precisely the kind of stuff we write.
Sunday, 20 February 2011
The End Of Swis Banking
In my Money Week column this week I've been looking at the possible demise of Switzerland's formidable banking industry. Here's a taster.
There are a few things we think we know for sure about Switzerland. It makes nice chocolate and reliable watches. It’s sort of pricy, and a little on the dull side. And it has the most formidable banking industry in the world.
For a hundred years or more, Switzerland and banking have been just about synonymous. Countless thrillers feature a scene where a shady deal gets done at some discreet Zurich or Geneva office where the secrecy of the transaction can be considered absolute. If London has a serious rival within Europe as a banking and finance centre, it is Switzerland rather than Frankfurt or Paris.
But now the country’s finance sector is looking challenged in a way that it hasn’t been for a generation or more. The country’s two giant banks, Credit Suisse and UBS, are struggling to recover from the credit crunch. Smaller banks such as Julius Baer are fighting to maintain client confidentiality as data gets passed onto WikiLeaks. Those may just be blips. Every industry goes through ups and down. But they may also be signals of long-term decline.
In reality, the success of the Swiss finance sector was based on secrecy and access to lots of cheap capital. Both appear to be gone forever. And that may well mean that Switzerland’s competitive advantage is at an end.
Whilst most of the global banking industry is roaring back from the credit crunch in fine fettle, and paying itself bigger bonuses than ever, the big Swiss banks seem to be stuck in the doldrums.
Credit Suisse came through the credit crunch better than most investment banks. It didn’t need a rescue. But it doesn’t appear to have recovered much of its old panache as the global economy grows stronger. It results earlier this month disappointed the market. It cut its 2010 dividend 35% last week and lowered its target for return on equity in the next three to five years to around 15% from more than 18%. It seems to have accepted that it will be permanently less profitable.
UBS doesn’t look any happier. The bank only just scraped its way through the credit crunch. Its fourth-quarter pre-tax profit from investment banking slumped
75% t to 75 million Swiss francs. The bonus pool was cut by 10% to reflect disappointing figures. Its chief executive officer Oswald Gruebel admitted that the results were “clearly not yet satisfactory.”
Meanwhile Julius Baer, one of the oldest names in Swiss banking, has been hit by an embarrassing scandal. A disaffected former staffer has threatened to publish the names of thousands of its clients on WikiLeaks. The whistle-blower has been arrested for breaking Switzerland’s bank secrecy laws, and it remains to be seen whether the data is ever released. Even so, it is not the kind of thing that will make the well-heeled clients of Swiss banks feel very confident.
Of course, every industry goes through bad spell. The problem for the Swiss banking sector is that it faces two huge challenges that may make it less competitive on a permanent basis.
The first is that secrecy is dead.
The European Union has been chipping away at Switzerland’s tradition of confidential, numbered bank accounts for years. Neighbouring countries suspected they were losing billions in taxes on money salted away in Swiss accounts, and they were probably right. German businessmen used to drive over the border at weekends with the boot of their BMW full of deutschemarks to deposit in the country. The Swiss have been forced to end all of that.
Now the internet is finishing the job. In an era of hyper-transparency it is impossible for the Swiss banks to maintain the old traditions of client confidentiality. They may succeed in locking up the latest whistle-blower. But it is simply too easily for a disgruntled employee to post thousands of account details on a website like WikiLeaks. If the US government can’t stop sensitive military data being published on the web, a few Swiss banks can’t hope to.
The trouble is, secrecy is often what people were buying. The banks might blather on about how they offered excellent service, and in-depth, personalised investment advice. But usually what the customers wanted was to keep their money hidden from the taxman, their wives, or their business partners. Secrecy was the main reason people went to Switzerland, and if its banks can’t keep their accounts under wraps you might as well go somewhere else.
Secondly, the giant Swiss banks, like the British ones, have grown too big for their home country. The Swiss central bank knows that both UBS and Credit Suisse have assets worth many times the country’s GDP. If both banks ran into trouble the way that Royal Bank of Scotland did in this country, it would quite literally bankrupt the country. In response, they have introduced the toughest capital rules in the world. The Swiss banks will have to maintain capital ratios at double the levels agreed under the Basel rules. In effect, that means the money the banks use as their raw material will be twice as expensive as it will be for British, American or German banks. In a competitive market, that is a huge handicap.
Swiss banking was a great model. Lots of people deposited tons of money in the country. They didn’t much care about how much interest was paid on it, or what the investment advice was like because what they really minded about was discretion. The banks could use all that cash as essentially free capital, which would bulk up their balance sheets, and allow them to go out and finance deals around the world. It was a fantastic way to make a lot of money.
Now it seems the model is broken. The accounts aren’t secret, and the capital isn’t cheap. Unlikely though it seems, in twenty or thirty years we might not associate Switzerland with the banking industry anymore. Still, there’s always the chocolate and the watch industry.
There are a few things we think we know for sure about Switzerland. It makes nice chocolate and reliable watches. It’s sort of pricy, and a little on the dull side. And it has the most formidable banking industry in the world.
For a hundred years or more, Switzerland and banking have been just about synonymous. Countless thrillers feature a scene where a shady deal gets done at some discreet Zurich or Geneva office where the secrecy of the transaction can be considered absolute. If London has a serious rival within Europe as a banking and finance centre, it is Switzerland rather than Frankfurt or Paris.
But now the country’s finance sector is looking challenged in a way that it hasn’t been for a generation or more. The country’s two giant banks, Credit Suisse and UBS, are struggling to recover from the credit crunch. Smaller banks such as Julius Baer are fighting to maintain client confidentiality as data gets passed onto WikiLeaks. Those may just be blips. Every industry goes through ups and down. But they may also be signals of long-term decline.
In reality, the success of the Swiss finance sector was based on secrecy and access to lots of cheap capital. Both appear to be gone forever. And that may well mean that Switzerland’s competitive advantage is at an end.
Whilst most of the global banking industry is roaring back from the credit crunch in fine fettle, and paying itself bigger bonuses than ever, the big Swiss banks seem to be stuck in the doldrums.
Credit Suisse came through the credit crunch better than most investment banks. It didn’t need a rescue. But it doesn’t appear to have recovered much of its old panache as the global economy grows stronger. It results earlier this month disappointed the market. It cut its 2010 dividend 35% last week and lowered its target for return on equity in the next three to five years to around 15% from more than 18%. It seems to have accepted that it will be permanently less profitable.
UBS doesn’t look any happier. The bank only just scraped its way through the credit crunch. Its fourth-quarter pre-tax profit from investment banking slumped
75% t to 75 million Swiss francs. The bonus pool was cut by 10% to reflect disappointing figures. Its chief executive officer Oswald Gruebel admitted that the results were “clearly not yet satisfactory.”
Meanwhile Julius Baer, one of the oldest names in Swiss banking, has been hit by an embarrassing scandal. A disaffected former staffer has threatened to publish the names of thousands of its clients on WikiLeaks. The whistle-blower has been arrested for breaking Switzerland’s bank secrecy laws, and it remains to be seen whether the data is ever released. Even so, it is not the kind of thing that will make the well-heeled clients of Swiss banks feel very confident.
Of course, every industry goes through bad spell. The problem for the Swiss banking sector is that it faces two huge challenges that may make it less competitive on a permanent basis.
The first is that secrecy is dead.
The European Union has been chipping away at Switzerland’s tradition of confidential, numbered bank accounts for years. Neighbouring countries suspected they were losing billions in taxes on money salted away in Swiss accounts, and they were probably right. German businessmen used to drive over the border at weekends with the boot of their BMW full of deutschemarks to deposit in the country. The Swiss have been forced to end all of that.
Now the internet is finishing the job. In an era of hyper-transparency it is impossible for the Swiss banks to maintain the old traditions of client confidentiality. They may succeed in locking up the latest whistle-blower. But it is simply too easily for a disgruntled employee to post thousands of account details on a website like WikiLeaks. If the US government can’t stop sensitive military data being published on the web, a few Swiss banks can’t hope to.
The trouble is, secrecy is often what people were buying. The banks might blather on about how they offered excellent service, and in-depth, personalised investment advice. But usually what the customers wanted was to keep their money hidden from the taxman, their wives, or their business partners. Secrecy was the main reason people went to Switzerland, and if its banks can’t keep their accounts under wraps you might as well go somewhere else.
Secondly, the giant Swiss banks, like the British ones, have grown too big for their home country. The Swiss central bank knows that both UBS and Credit Suisse have assets worth many times the country’s GDP. If both banks ran into trouble the way that Royal Bank of Scotland did in this country, it would quite literally bankrupt the country. In response, they have introduced the toughest capital rules in the world. The Swiss banks will have to maintain capital ratios at double the levels agreed under the Basel rules. In effect, that means the money the banks use as their raw material will be twice as expensive as it will be for British, American or German banks. In a competitive market, that is a huge handicap.
Swiss banking was a great model. Lots of people deposited tons of money in the country. They didn’t much care about how much interest was paid on it, or what the investment advice was like because what they really minded about was discretion. The banks could use all that cash as essentially free capital, which would bulk up their balance sheets, and allow them to go out and finance deals around the world. It was a fantastic way to make a lot of money.
Now it seems the model is broken. The accounts aren’t secret, and the capital isn’t cheap. Unlikely though it seems, in twenty or thirty years we might not associate Switzerland with the banking industry anymore. Still, there’s always the chocolate and the watch industry.
Tuesday, 15 February 2011
What Makes a Great Bookshop
Congratulations to The Book Hive in Norwich, which has just been voted the best independent bookseller in Britain by The Daily Telegraph.
More then 18,000 people voted in the competition, which suggest that a lot of people are still very enthusiastic about their local bookshops, and are happy to support them. With the chains in worse and worse shape, the independents are likely to have an even more important role in selling books.
But what makes a great bookshop, I wonder.
I think selection and organisation are the key to it.
The big difference between a bookshop and buying books online or just grabbing something from the limited selection in the supermarket is that you come across things by accident. You are looking at one kind of book, and then see another that grabs your interest.
Not many shops are good at it. For example, my books are often classed with crime and thrillers, and although they are sort of thrillers, they really have nothing to do with the crime genre, and are not going to appeal to the people browsing in that section of the shop. It would actually make more sense to place them alongside the real-life military stories. Or possibly next to the history section.
Not many bookshops make those kind of creative decisions.
But the few that do will certainly survive and flourish.
More then 18,000 people voted in the competition, which suggest that a lot of people are still very enthusiastic about their local bookshops, and are happy to support them. With the chains in worse and worse shape, the independents are likely to have an even more important role in selling books.
But what makes a great bookshop, I wonder.
I think selection and organisation are the key to it.
The big difference between a bookshop and buying books online or just grabbing something from the limited selection in the supermarket is that you come across things by accident. You are looking at one kind of book, and then see another that grabs your interest.
Not many shops are good at it. For example, my books are often classed with crime and thrillers, and although they are sort of thrillers, they really have nothing to do with the crime genre, and are not going to appeal to the people browsing in that section of the shop. It would actually make more sense to place them alongside the real-life military stories. Or possibly next to the history section.
Not many bookshops make those kind of creative decisions.
But the few that do will certainly survive and flourish.
Saturday, 12 February 2011
The Business of Piracy....
Shadow Force is set amodst the battle against Somali pirates. I've done a piece for the FT amout the business of piracy. You can read it online here.
Tuesday, 8 February 2011
Getting Voices Right...
As I might have mentioned last week, I am making revisions to ‘Ice Force’ right now. For me, that mainly means working on the language, and in particular the dialogue.
One of the hardest things writers have to do is give all the people in the their book a distinctive voice, and that is something I find I have to continually check. It is especially hard for me, because there are ten characters in the military unit in my stories, and although some of them are more important than others, they are all pretty crucial to the series.
So I need to make sure they all speak in a way that is convincing throughout the book, and which also separates one man from another.
I don’t do it through accents. That is partly, if I am being honest, because I am rubbish at writing them. I have no ear for putting a Welsh accent into easily written form. But its mainly because I think it is distracting. You don’t want the book to turn into an exercise in showing off how good I am at accents.
Instead you have to do it by the kinds of things the men say. It is there in the way they react to situations, how they respond to jokes, and in the kind of ideas and thoughts they have.
But you need to have thought through your character completely to know what they would say all the time.
And you need to make sure they never say anything out of character. That would shatter the illusion for the reader in an instant.
When you get it right, it is very satisfying. The right dialogue really makes a book come alive.
But you have to keep checking you haven’t got any of it wrong.
One of the hardest things writers have to do is give all the people in the their book a distinctive voice, and that is something I find I have to continually check. It is especially hard for me, because there are ten characters in the military unit in my stories, and although some of them are more important than others, they are all pretty crucial to the series.
So I need to make sure they all speak in a way that is convincing throughout the book, and which also separates one man from another.
I don’t do it through accents. That is partly, if I am being honest, because I am rubbish at writing them. I have no ear for putting a Welsh accent into easily written form. But its mainly because I think it is distracting. You don’t want the book to turn into an exercise in showing off how good I am at accents.
Instead you have to do it by the kinds of things the men say. It is there in the way they react to situations, how they respond to jokes, and in the kind of ideas and thoughts they have.
But you need to have thought through your character completely to know what they would say all the time.
And you need to make sure they never say anything out of character. That would shatter the illusion for the reader in an instant.
When you get it right, it is very satisfying. The right dialogue really makes a book come alive.
But you have to keep checking you haven’t got any of it wrong.
The Demise of the Euro....
In Management Today this month I've done a piece on the demise of the euro. You can read it here.
How to Make Money from Bank Bonuses.....
In my Money Week column this week, I've been looking at how you can make money from other people's bank bonuses. Here's a taster.
Warren Buffett once famously remarked that the airline industry, whilst making it far easier for people to get around the world, had burned just about all the capital investors had ever put into it. “As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero,” he wrote in one of his letters to his shareholders in the 1990s.
Buffett probably doesn’t feel quite the same way about investment banking – he did, after all, help out Goldman Sachs when it was short of cash during the credit crunch and made a lot of money on the deal. But his observation about airlines is just as true of the traders and dealmakers of London, New York and Zurich. The industry has made a fortune for the people working in it. The executives and traders have walked away with fortunes. But, as a general rule, the outside shareholders have been stuffed.
Now, however, that might be about to change. Under political pressure, banks such as Barclays Capital and Credit Suisse are abandoning big cash bonuses in favour of paying their staff in deferred shares, or in bonds linked to the share prices. Whether that makes the banks any safer remains to be seen. But it should be a great opportunity for investors. The one thing we know bankers are really good at is manipulating the price of financial assets. All you need to do is invest in the same piece of paper that bankers bonuses are being paid in, and you can be sure it will soar in price.
Barclays has been making the most noise about changing its bonus scheme. Chief executive Bob Diamond is said to be about to unveil a scheme that would pay his most senior staff in convertible bonds, known as cocos, rather than just giving them wheelbarrows full of cash. The bonds would be freely traded, but would automatically convert into equity if the bank’s capital ratios fell below a required level. The idea is a simple one. If the bank gets into trouble, and runs out of equity the way many banks did during the credit crunch, all those bonuses would be converted into shares.
Credit Suisse has also been forcing its bankers to have more of a stake in the bank. The bank has started paying a far higher proportion of its bonuses in shares, and staff will have to keep them locked up for four years before they can sell them. Other banks are reported to be considering similar schemes, paying bonuses either in shares or else in convertible bonds.
It’s not hard to see the sense in the idea. Whether big bonuses played the part in the financial crisis of 2008 that is popularly supposed is open to question. It’s possible that lax monetary policy and global trade imbalances played just as big a role. What is certainly true is that bonuses have made investment banking a rotten industry for outside investors. The banks may at times make obscene amounts of money for doing very little – but, rather like football clubs, it was the players who walked away with all the cash rather than the shareholders.
The long-term performance of most of the big banks has been terrible. UBS shares are no higher now than they were back in 1993. Morgan Stanley shares are no higher than they were in 1998. The star of the industry Goldman Sachs has been a money machine for its staff, but not nearly so lucrative for its owners. The shares are still down on the 2006 price, and the yield is less than 1%. As a general rule, the people who actually own the businesses have missed out on all the money the industry makes.
No great surprise about that. There was no real need to share the spoils with the shareholders. For much of the last decade, investment banks didn’t need to raise much fresh capital.
The new bonus schemes will change all that. One useful rule in economics is that if you provide people with a big incentive to hit a target, they will do so regardless of whether it makes much sense. A classic example was in Soviet Russia. The Kremlin leadership decided too many people were dying in Moscow’s hospitals. The doctors were told to cut deaths by 50%. So they chucked all the old people out into the streets. Naturally, they quickly died of cold, but deaths in hospitals fell by the required amount. The target was met.
Banks aren’t going to chuck out old people – apart from anything else, they don’t employ any. But they will, just like those Moscow doctors, do whatever they need to do to meet their target. The one thing that we know for sure bankers are very good at is manipulating the price of financial assets. If actually getting their hands on their bonus requires that the share price or its convertible bonds hit at a certain price in two, three, or four years times, then you can be certain that the entire energies of the bank will be dedicated to making sure it happens.
Whether that will actually make the bank stronger or more stable in the medium-term is open to question. The long-term performance of Barclays doesn’t really depend on its capital ratios. The Credit Suisse share prices may or may not be a good indicator of its underlying performance. But none of that will matter. If it is what needs to be done, it will be done.
It is a great opportunity for investors. Just wait until the bonus scheme is unveiled. When it is, look at what piece of paper needs to soar in price for the bankers to collect their bonus. Then fill your boots. The bank may well go bust a few years later – but you can be sure that your investment will pay off handsomely before that happens.
Warren Buffett once famously remarked that the airline industry, whilst making it far easier for people to get around the world, had burned just about all the capital investors had ever put into it. “As of 1992, in fact—though the picture would have improved since then—the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero,” he wrote in one of his letters to his shareholders in the 1990s.
Buffett probably doesn’t feel quite the same way about investment banking – he did, after all, help out Goldman Sachs when it was short of cash during the credit crunch and made a lot of money on the deal. But his observation about airlines is just as true of the traders and dealmakers of London, New York and Zurich. The industry has made a fortune for the people working in it. The executives and traders have walked away with fortunes. But, as a general rule, the outside shareholders have been stuffed.
Now, however, that might be about to change. Under political pressure, banks such as Barclays Capital and Credit Suisse are abandoning big cash bonuses in favour of paying their staff in deferred shares, or in bonds linked to the share prices. Whether that makes the banks any safer remains to be seen. But it should be a great opportunity for investors. The one thing we know bankers are really good at is manipulating the price of financial assets. All you need to do is invest in the same piece of paper that bankers bonuses are being paid in, and you can be sure it will soar in price.
Barclays has been making the most noise about changing its bonus scheme. Chief executive Bob Diamond is said to be about to unveil a scheme that would pay his most senior staff in convertible bonds, known as cocos, rather than just giving them wheelbarrows full of cash. The bonds would be freely traded, but would automatically convert into equity if the bank’s capital ratios fell below a required level. The idea is a simple one. If the bank gets into trouble, and runs out of equity the way many banks did during the credit crunch, all those bonuses would be converted into shares.
Credit Suisse has also been forcing its bankers to have more of a stake in the bank. The bank has started paying a far higher proportion of its bonuses in shares, and staff will have to keep them locked up for four years before they can sell them. Other banks are reported to be considering similar schemes, paying bonuses either in shares or else in convertible bonds.
It’s not hard to see the sense in the idea. Whether big bonuses played the part in the financial crisis of 2008 that is popularly supposed is open to question. It’s possible that lax monetary policy and global trade imbalances played just as big a role. What is certainly true is that bonuses have made investment banking a rotten industry for outside investors. The banks may at times make obscene amounts of money for doing very little – but, rather like football clubs, it was the players who walked away with all the cash rather than the shareholders.
The long-term performance of most of the big banks has been terrible. UBS shares are no higher now than they were back in 1993. Morgan Stanley shares are no higher than they were in 1998. The star of the industry Goldman Sachs has been a money machine for its staff, but not nearly so lucrative for its owners. The shares are still down on the 2006 price, and the yield is less than 1%. As a general rule, the people who actually own the businesses have missed out on all the money the industry makes.
No great surprise about that. There was no real need to share the spoils with the shareholders. For much of the last decade, investment banks didn’t need to raise much fresh capital.
The new bonus schemes will change all that. One useful rule in economics is that if you provide people with a big incentive to hit a target, they will do so regardless of whether it makes much sense. A classic example was in Soviet Russia. The Kremlin leadership decided too many people were dying in Moscow’s hospitals. The doctors were told to cut deaths by 50%. So they chucked all the old people out into the streets. Naturally, they quickly died of cold, but deaths in hospitals fell by the required amount. The target was met.
Banks aren’t going to chuck out old people – apart from anything else, they don’t employ any. But they will, just like those Moscow doctors, do whatever they need to do to meet their target. The one thing that we know for sure bankers are very good at is manipulating the price of financial assets. If actually getting their hands on their bonus requires that the share price or its convertible bonds hit at a certain price in two, three, or four years times, then you can be certain that the entire energies of the bank will be dedicated to making sure it happens.
Whether that will actually make the bank stronger or more stable in the medium-term is open to question. The long-term performance of Barclays doesn’t really depend on its capital ratios. The Credit Suisse share prices may or may not be a good indicator of its underlying performance. But none of that will matter. If it is what needs to be done, it will be done.
It is a great opportunity for investors. Just wait until the bonus scheme is unveiled. When it is, look at what piece of paper needs to soar in price for the bankers to collect their bonus. Then fill your boots. The bank may well go bust a few years later – but you can be sure that your investment will pay off handsomely before that happens.
Tuesday, 1 February 2011
Revisions, Revisions....
I finished the first draft of ‘Ice Force’ last week, so now all I have to do is revise the manuscript before I hand it in to Headline. I enjoy revisions. As I’ve pointed out before on this blog, I plan my plots in a lot of detail before I start writing the book, so the difference between the first and second draft is not going to include any very radical re-working of the storyline.
Instead, it is all about the prose. I write a book straight through. I don’t go back and re-read anything until the whole book is done. So when I am revising, there is a fair amount of tinkering around to be done. But it is mainly about tuning up sentences, and punching up dialogue. That is all fun. It’s probably the bit of the job I enjoy the most.
But I was struck by a post on Roy Greenslade’s blog this week about how Rudyard Kipling revised his work.
"Take well-ground Indian ink as much as suffices and a camel hairbrush proportionate to the intersperse of your lines,” Kipling advised.
In an auspicious hour, read your final draft and consider faithfully every paragraph, sentence and word, blacking out where requisite.
Let it lie by to drain as long as possible. At the end of that time, re-read and you should find that it will bear a second shortening. Finally, read it aloud alone and at leisure.
May be a shade more brushwork will then indicate or impose itself. If not, praise Allah, and let it go and when thou hast done, repent not."
Kipling, as Greenslade points out, was talking about his newspaper pieces in India. But much the same advice applies to a book as well. Obviously we can skip the bit about the Indian ink. Apart from that, it is good stuff. Always read it carefully, put it aside for a while, then read it again. And once it is done, stop worrying about it.
The one thing I don’t do is read it aloud. But I think it might be a good idea. Words and sentences have a different flow when read out loud, and they might well be improved. I might try that this time around.
Instead, it is all about the prose. I write a book straight through. I don’t go back and re-read anything until the whole book is done. So when I am revising, there is a fair amount of tinkering around to be done. But it is mainly about tuning up sentences, and punching up dialogue. That is all fun. It’s probably the bit of the job I enjoy the most.
But I was struck by a post on Roy Greenslade’s blog this week about how Rudyard Kipling revised his work.
"Take well-ground Indian ink as much as suffices and a camel hairbrush proportionate to the intersperse of your lines,” Kipling advised.
In an auspicious hour, read your final draft and consider faithfully every paragraph, sentence and word, blacking out where requisite.
Let it lie by to drain as long as possible. At the end of that time, re-read and you should find that it will bear a second shortening. Finally, read it aloud alone and at leisure.
May be a shade more brushwork will then indicate or impose itself. If not, praise Allah, and let it go and when thou hast done, repent not."
Kipling, as Greenslade points out, was talking about his newspaper pieces in India. But much the same advice applies to a book as well. Obviously we can skip the bit about the Indian ink. Apart from that, it is good stuff. Always read it carefully, put it aside for a while, then read it again. And once it is done, stop worrying about it.
The one thing I don’t do is read it aloud. But I think it might be a good idea. Words and sentences have a different flow when read out loud, and they might well be improved. I might try that this time around.
Ed Balls Will Be A Disaster
In my Money Week column thios week, I've been writing about why Ed Balls will be a disaster as Shadow Chancellor. Here's a taster....
Almost alone among an anodyne generation of British politicians, Ed Balls has the ability to divide opinion. When the Labour Leader Ed Milliband appointed him as Shadow Chancellor last week plenty of people saw him as too addicted to back-stabbing and briefing to ever make an effective team player. But most praised his economic expertise, and concluded his combative approach would make life a lot harder for the Conservative-Liberal Democrat coalition.
In fact, that consensus is upside-down. Balls’s aggression, and his ability to make the life hard for his rivals, are his strengths. His weakness is his shaky grasp of economics. He’s got just about every major call on the economy wrong. And he has made himself the leading exponent of a crass version of Keynesianism that is going to end making him look absurd.
By constantly making the wrong predictions, and attacking the government for quite sensibly policies, Balls will ruin his party’s credibility. He will make the re-election of the coalition in 2015 far easier.
As it happens, Balls’s record provides plenty of ammunition for his opponents. He was the key economic adviser to Gordon Brown during his ten years as Chancellor. He boastfully claims authorship for many of his former boss’s policies, even though most of them later turned out to be catastrophic. It isn’t going to be hard to pin his past on him.
The new system of financial regulation put in place after 1997 led to the worst string of bank collapses for more than a century. The decision to run-up a vast budget deficit even while the economy was booming looks to have been a costly mistake. The housing market was allowed to run riot, mortgage lending spiralled out of control, and the trade deficit reach new heights. It wasn’t much of an economic record.
Balls points to the independence of the Bank of England and keeping Britain out of the euro as achievements. But, at the very least, these are questionable. The Bank has not done a great job of managing the UK economy. First it gave us the housing boom, now it is giving us rampant inflation. What’s so great about that? As for the euro, the Labour government could never have signed up to it without a referendum, which would have been decisively lost, so that was hardly a personal victory for Balls. It’s like claiming credit for stopping an invasion by Martians. Since it was never going to happen, it’s not much of a deal.
But electorates aren’t much interested in history.
Right now, and for the next five years, Balls is relentlessly pushing the line that the cuts are too fast, and will push the economy back into recession. Much of the media has fallen for this line as well. If you listen to the news, you’ll constantly hear that reducing the deficit may derail the recovery.
It is, however, complete nonsense.
The latest economic research suggests that, contrary to what we kept being told, deficit reduction leads to faster economic growth. And the governments that cut spending tended to be rewarded with re-election.
Take a look at the work of Harvard’s Alberto Alesina, for example. “The conventional wisdom about the political economy of fiscal adjustments goes more or less as follows,” he wrote in a paper for Ecofin last year. “Deficit reduction policies cause recessions which create political problems for incumbent governments. The latter therefore see fiscal adjustments as the kiss of death.” That’s very much how Balls sees it. The cuts will cause a recession, and a backlash against the coalition. “Fortunately the accumulated evidence paints a different picture,” continues Alesina. “First of all, not all fiscal adjustments cause recessions. Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run….Second and this is most likely a consequence of the first point, it is far from automatic that governments which have reduced deficits have been routinely not reappointed.”
Indeed so. In fact, cutting the deficit doesn’t lead to a recession. It more often leads to a period of rapid growth. That was true in this country in the early to mid-1990s, when big cuts in spending led to sustained recovery. It was true of Sweden and Canada in the 1990s as well. Alesina’s study looks at 107 examples of fiscal consolidation, defined as cutting the deficit by 1.5% of GDP or more, within OECD countries since 1980 and found that in nearly all cases it was followed by higher growth rather than lower.
There’s no great mystery about why that is. Of course, cutting spending takes demand out of one part of the economy. But it puts it back in somewhere else, either because the government taxes less or borrows less. There’s no reason why the overall level of demand in the economy should change.
Cutting the deficit, however, helps the economy in other ways. It improves confidence, as consumers and businesses worry less about future tax rises. Real interest rates may fall as the markets grow more confident about government finances, and that stimulates investment. The stock market usually rises, increasing demand as people’s wealth rises. And, of course, since a smaller state and lower taxes are usually good for the economy, anything that makes government smaller rather than larger will help promote growth. Indeed, another key finding of the research is that not only does deficit reduction help growth. The more spending cuts are used to cut debt rather than tax rises, the higher the rate of growth that follows it will be.
The evidence is clear. Cutting the deficit makes an economy grow faster not slower. That is true of just about every other country in the last thirty years. There is no reason why it shouldn’t be true of the UK over the next four years as well.
But Balls doesn’t get it. He insists the opposite is true. A Shadow Chancellor who spends five years issuing blood-curdling warnings about the economy, none of which come true, is not going to impress the electorate very much. He’s just going make himself and his party look stupid.
Almost alone among an anodyne generation of British politicians, Ed Balls has the ability to divide opinion. When the Labour Leader Ed Milliband appointed him as Shadow Chancellor last week plenty of people saw him as too addicted to back-stabbing and briefing to ever make an effective team player. But most praised his economic expertise, and concluded his combative approach would make life a lot harder for the Conservative-Liberal Democrat coalition.
In fact, that consensus is upside-down. Balls’s aggression, and his ability to make the life hard for his rivals, are his strengths. His weakness is his shaky grasp of economics. He’s got just about every major call on the economy wrong. And he has made himself the leading exponent of a crass version of Keynesianism that is going to end making him look absurd.
By constantly making the wrong predictions, and attacking the government for quite sensibly policies, Balls will ruin his party’s credibility. He will make the re-election of the coalition in 2015 far easier.
As it happens, Balls’s record provides plenty of ammunition for his opponents. He was the key economic adviser to Gordon Brown during his ten years as Chancellor. He boastfully claims authorship for many of his former boss’s policies, even though most of them later turned out to be catastrophic. It isn’t going to be hard to pin his past on him.
The new system of financial regulation put in place after 1997 led to the worst string of bank collapses for more than a century. The decision to run-up a vast budget deficit even while the economy was booming looks to have been a costly mistake. The housing market was allowed to run riot, mortgage lending spiralled out of control, and the trade deficit reach new heights. It wasn’t much of an economic record.
Balls points to the independence of the Bank of England and keeping Britain out of the euro as achievements. But, at the very least, these are questionable. The Bank has not done a great job of managing the UK economy. First it gave us the housing boom, now it is giving us rampant inflation. What’s so great about that? As for the euro, the Labour government could never have signed up to it without a referendum, which would have been decisively lost, so that was hardly a personal victory for Balls. It’s like claiming credit for stopping an invasion by Martians. Since it was never going to happen, it’s not much of a deal.
But electorates aren’t much interested in history.
Right now, and for the next five years, Balls is relentlessly pushing the line that the cuts are too fast, and will push the economy back into recession. Much of the media has fallen for this line as well. If you listen to the news, you’ll constantly hear that reducing the deficit may derail the recovery.
It is, however, complete nonsense.
The latest economic research suggests that, contrary to what we kept being told, deficit reduction leads to faster economic growth. And the governments that cut spending tended to be rewarded with re-election.
Take a look at the work of Harvard’s Alberto Alesina, for example. “The conventional wisdom about the political economy of fiscal adjustments goes more or less as follows,” he wrote in a paper for Ecofin last year. “Deficit reduction policies cause recessions which create political problems for incumbent governments. The latter therefore see fiscal adjustments as the kiss of death.” That’s very much how Balls sees it. The cuts will cause a recession, and a backlash against the coalition. “Fortunately the accumulated evidence paints a different picture,” continues Alesina. “First of all, not all fiscal adjustments cause recessions. Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run….Second and this is most likely a consequence of the first point, it is far from automatic that governments which have reduced deficits have been routinely not reappointed.”
Indeed so. In fact, cutting the deficit doesn’t lead to a recession. It more often leads to a period of rapid growth. That was true in this country in the early to mid-1990s, when big cuts in spending led to sustained recovery. It was true of Sweden and Canada in the 1990s as well. Alesina’s study looks at 107 examples of fiscal consolidation, defined as cutting the deficit by 1.5% of GDP or more, within OECD countries since 1980 and found that in nearly all cases it was followed by higher growth rather than lower.
There’s no great mystery about why that is. Of course, cutting spending takes demand out of one part of the economy. But it puts it back in somewhere else, either because the government taxes less or borrows less. There’s no reason why the overall level of demand in the economy should change.
Cutting the deficit, however, helps the economy in other ways. It improves confidence, as consumers and businesses worry less about future tax rises. Real interest rates may fall as the markets grow more confident about government finances, and that stimulates investment. The stock market usually rises, increasing demand as people’s wealth rises. And, of course, since a smaller state and lower taxes are usually good for the economy, anything that makes government smaller rather than larger will help promote growth. Indeed, another key finding of the research is that not only does deficit reduction help growth. The more spending cuts are used to cut debt rather than tax rises, the higher the rate of growth that follows it will be.
The evidence is clear. Cutting the deficit makes an economy grow faster not slower. That is true of just about every other country in the last thirty years. There is no reason why it shouldn’t be true of the UK over the next four years as well.
But Balls doesn’t get it. He insists the opposite is true. A Shadow Chancellor who spends five years issuing blood-curdling warnings about the economy, none of which come true, is not going to impress the electorate very much. He’s just going make himself and his party look stupid.
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