Obama-nomics

It is impossible not to like Obama as a person. But I'm nore sure about his economic policies, and it is on those that he will ultimately be judged. In Money Week this week I explain why. Here's a taster.

He speaks like an angel. His wife, everyone agrees, is poise, intelligence and grace personified. Even the first puppy, a Portuguese water dog called Bo, appears to have been blessed with the ability to charm cats, never mind the world’s media.
And yet, 100 days into his Presidency, the outlines of Barack Obama’s economic strategy are becoming clear. We have the key point of Obama-nomics. And there is just one snag. Rather than slowing down the global recession, or even turning it around, the steps the American President is taking appear more likely to prolong it.
Obama is in thrall to a very 1960s-style form of industrial policy. He is promoting mergers, rescues and ‘grand projets’ that would make a French enarque purr with pleasure.
But he is ignoring the real issues that caused the virtual meltdown of the global economy last autumn. And he is promoting a style of hyper-interventionism that is completely unsuited for the networked, decentralised economy of the 21st-century.
No one can doubt the energy and commitment of the President.
In his first three months in office, he has sunk hundreds of billions into vast spending packages, bailed out the collapsing American auto industry, and launched a swinging clampdown on offshore tax havens.
"We can't go back to an economy that's built on a pile of sand, on inflated home prices and maxed-out credit cards, on overleveraged banks and outdated regulations that allow recklessness of a few to threaten the prosperity of all," he said in a speech on the economy last week.
Ambitious stuff. The trouble is, the reality is lot murkier than some of the high-flown rhetoric.
Start with the auto industry. Last week, Obama pushed through a rescue for the auto giant Chrysler that, via bankruptcy, will create a new entity, jointly owned by the employee association, the American and Canadian governments, and Italy’s Fiat. Bond-holders and hedge fund manager who may have had stakes in the outcome were quickly hustled aside.
The Chrysler rescue package looks set to serve as a template for the much larger bail-out of General Motors, a company in just as poor shape as Chrysler but with even more jobs at stake. Fiat may well step up to the plate again – the Italian company looks set to take control of its European brands Vauxhall and Opel as part of that rescue.
Let’s put this as kindly as we can. If the answer to what’s wrong with the economy is Fiat, you must have been asking the wrong the question.
In reality, Chrysler has been a dog of a company for more than a generation. Ever since poorly engineered, gas-guzzling cars with built-in obsolescence went not-very-surprisingly out of fashion in the early 1970s it has struggled to come up with a new role for itself. Daimler Benz chewed its way through tens of billion of euros trying to re-invent it, and completely failed – and Daimler, let us remember, is, along with Toyota, the finest auto company in the world.
The idea that a combination of Fiat, the White House and the auto workers union can turn things around is absurd. That, however, is what is about to be attempted – first with Chrysler, and then, on a far larger scale, with GM.
The reality is that the Americans are not very good at making cars, and would be better off closing down their whole industry much as the British did in the 1980s. Autos are turning into a Japanese-German industry, just as, say, aerospace is an American-French industry, or banking an American-British industry. There is no point in sinking billions into denying that simple reality.
The big danger the world faces right now is a revival of protectionism. If Chrysler and GM are part-owned by the American government, and are still struggling to compete, how long will it be before there are demands for curbs on their competitors? How long before there are restrictions on those irritating European, Japanese and Korean cars people keep buying. Not long.
Worse, he is propping up an industry where everyone acknowledges there is too much capacity – and so postponing the inevitably moment when the industry is slimmed down to a handful of companies that can actually make money. As for an exit strategy, no one has mentioned it – but getting out of Iraq is likely to be child’s play compared with getting out of Chrysler and GM.
The same mistakes are likely to be played out elsewhere.
Obama had launched a crack-down on what he terms ‘tax avoidance’. In fact, it is just American companies shifting profits around the world. It doesn’t make any sense to treat the likes of Boeing or Microsoft of McDonald’s as US companies. They are multi-nationals that happen to do some business in America.
Whatever the problems of the global economy, they aren’t going to be fixed by either a retreat in protectionism or an attack on globalisation. But when you look past the rhetoric, that is precisely what is happening. Both are only going to postpone the eventual recovery from this recession – and leave the US economy that emerges a lot weaker.
Meanwhile, money is being squandered on French-style ‘grand projets’ such as attempting to introduce high-speed trains to the US. But trains struggle to make money even in small, densely populated countries: they have little chance of prospering in a huge, thinly populated one such as the US.
In truth, the root causes if the credit crunch are well-established. Monetary policy was too lax for too long. And the trade imbalances – mainly between the US and China – created a system in which too much capital was being re-cycled through the global capital markets than could be safely handled.
Nothing much, however, is being done to address either issue.
The rhetoric of Obama-nomics is sweetly judged. The reality is that many of the policies he is pushing are only going to deepen the problems of the global economy – and they certainly aren’t going to start fixing them.

Death Force In Large Print

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Charging for Websites

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Those Green Shoots....

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How To Re-Invent The City

In Money Week this week, I've been writing about how the City will need to re-invent itself. Here's a taster....


It has been a terrible year for the City of London. Half the British banking system has been nationalised, and the other half doesn’t look safe yet. The non-domicile tax rules that made it the magnet for the brightest young financiers from around Europe have been curbed. There are tough new rules on the way bankers are paid being proposed by the Financial Services Authority.
And now – presumably on the principle that you might as well finish a job once you have started it – the Government has just lifted the top rate of tax to 50%. It would have been hard to think of a more deadly final nail to hammer into an already wounded financial centre.
In response the City is going to have to re-invent itself all over again. For the last twenty years, it has flourished as a lightly-regulated, lightly-taxed global financial centre – Monaco without the yachts. That has now been shot to pieces. The City has re-invented itself several times in the past, and can no doubt do so again. It can find niches in stockbroking and financial re-structuring, as well as building on the UK’s historic ties with rising economic powers such as India. But the challenges are going to be immense – and there can be no certainty that the City will be able to rise to them.
There is no point in underestimating the gravity of the threat the City now faces. Its standing in the world has taken a terrible series of blows.
Whatever the Government may pretend, there UK has suffered more damage from the credit crunch than any other major economy. No other nation has seen runs on banks such as were witnessed at Northern Rock, nor has there been any calamity on the scale of the Royal Bank of Scotland.
The FSA Chairman Adair Turner has promised a tough new regime of regulation, stating bluntly “there’ll be fewer people earning less money”. No doubt that is true, but it suggests a regime that will be heavy-handed and intrusive.
Meanwhile, the non-doms who made London a magnet for ambitious young financiers will now have to pay a £30,000 annual charge, and, more worryingly, answer a lot of detailed questions. And now, a 50% top rate of tax, which will apply to any earnings from working at London-based bank or hedge fund regardless of whether you are British or not.
That will be the fourth highest top rate of tax in the developed world (Sweden, Denmark and the Netherlands are higher, in case you are wondering where you really don’t want to move to). It is simply inconceivable that ten of thousands of clever, ambitious young bankers, motivated principally by money, are going to up sticks and move to one of the highest-tax regimes in the world.
For the UK, that matters. In the 2007-09 financial year, the City provided 11% of total income tax payments, and 15% of corporation tax payments, making a total of £42 billion. Already that is reckoned to have at least halved, responsible by itself for much of the red ink splattered across the Government’s books. The British economy needs a thriving financial centre. It is one of the few things we are really good at.
But the City is going to have to re-invent itself. True, it is good at that: the Square Mile has scripted more triumphs over adversity than a Hollywood screenwriter. In the 1960s and 1970s, it created the offshore Eurodollar market, recycling dollars from the oil rich states to the rest of the world. In the wake of Big Bang, in 1986, it re-created itself as a global hub for largely foreign-owned banks. A combination of the non-dom rule, what in retrospect was excessively light regulation, and the traditional entrepreneurial spirits of its workforce, allowed it to see off challenges from Paris and Frankfurt to become the key European finance centre. Indeed, in the last three years, it was starting to pull ahead of New York as the global centre for the money markets.
All that is in the past. The foreigners will head back home. The American and European banks will be slimming down their operations. And the British banks will be shadows of their former selves.
There are opportunities out there.
Stockbroking, which was once one of the City’s core professions, is about to make a comeback. The credit crunch has left thousands of companies with shattered balance sheets. They will need to swap a lot of debt for equity, and that is going to mean patiently talking to shareholders and persuading them the business is worth backing. That is precisely the job stockbrokers used to do – and there will be a demand for them again.
Next, the government debt markets will be swilling with paper. The British government will soon be selling £200 billion of debt a year, and other governments will be placing similar amounts. The competition for capital will be intense. Any expertise in placing that – and the City has plenty – is going to be in demand.
Thirdly, the City is already the world’s major currency trading centre. The euro has survived the credit crunch so far, but whether countries such as Spain, Italy and Ireland can stand the pain of the recession without devaluing their currency remains to be seen. Splitting up the single currency could be a bonanza.
Lastly, the BRIC economies of Brazil, Russia, India and China are going to keep growing in importance. The City has always been the most international financial centre. It has already established itself as a bridge between Russia and the rest of the world. And it can do the same for India as well.
Even so, the City will be a far more English financial centre for a decade or more to come. It will be smaller, and less profitable. And it will be a long time before it claws back the prominence of the middle half of this decade.

A Great Review Of Death Force

There is a great review of Death Force on the Motorbar website. You can read it here...