A Letter to Mervyn King....

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.”

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.

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.

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.

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.

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.

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.