Uncharted Territory

November 27, 2008

Clarifying Deleveraging, or, Saving the Economy

Filed under: Credit crisis, Economics, Housing market, Risk — Tim Joslin @ 9:47 pm

Earlier today I wrote, a little sloppily, that:

“…the only way to arrest the deleveraging process is to increase the capital able to support lending.”

“Deleveraging” should be defined as a reduction in gearing, i.e. a reduction in the ratio of borrowing to risk capital.  This could be achieved by reducing borrowing or increasing risk capital, or a combination of the two.

What I really meant to say, then, was that the only ways to maintain lending levels are to:

  • increase the risk capital employed; or
  • reduce the riskiness of lending.

The problem we face is that capital is fleeing to safety – yields on Treasuries are breaking records – and lending is perceived to be riskier than before, not less risky.  Only a few contrarian investors are putting their toes into the water and, in the case of Northern Rock, for example, rather than support them, the UK government has seen fit to expropriate their investments.  Not a lot was done to see Woolworth’s through the shock of denial of trade credit insurance, which appears to have demanded so much working capital Woolies didn’t have to have pushed it from turnaround possibility to insolvent virtually overnight.  Government concern seems to be limited to protecting jobs until the New Year by some kind of behind the scenes deal, even though the administrators would have needed to keep the stores open anyway to conduct fire-sales of stock (destroying more capital in the process).  In the absence of new risk capital, preserving the 30,000 Woolies jobs in the longer term will likely prove impossible.

Despite the recapitalisation of the banks, it’s difficult to see how overall lending levels can be maintained until a floor is put under the destruction of risk capital (Sir James Crosby agrees – see below for more discussion of his report).  If the government takes on too much debt [or risk – and note that fully nationalising the major banks, as the loonies are talking about, would be to take on the risk of entire multi £100 billions balance-sheets], Brown will likely become the next Callaghan, cap-in-hand to the IMF. We can’t simply spend our way directly out of trouble. The focus should be on investment, not VAT reductions.

We’re therefore going to have to make some choices on lending.  Broadly, if we have any brain-cells, we will realise that we have to reduce mortgage and consumer lending, and, if possible, increase lending to business.  It seems to me we should simply let the banks do this.  Allowing them to increase real interest rates to consumers (but likely still reduce nominal interest rates) would help rebuild their balance-sheets.  Interference may well be counter-productive, since the government has the ulterior motive of needing to keep the voters happy in the short-term.

Here are three scary indicators (apart from the VAT reduction) that the UK’s establishment is in headless-chicken mode.  In the words of everyone’s favourite football chant, Darling, “you don’t know what you’re doing”:

(1) Having slept on it and having printed off the Introduction (actually a Summary) to his report, I am even more astonished than before that Sir James Crosby (a mortgage-banker, of course!) thinks we can or should actually increase net mortgage lending over the next couple of years.  If we do this, the result, sure as eggs, will be to reduce other forms of lending, i.e. to corporates.  This will lead to more redundancies and defaults on mortgages…  Crosby, bizarrely, seems to consider the mortgage market in isolation to the rest of the economy.  I repeat, house-price falls per se will not lead to defaults in the UK (because we don’t have no recourse loans).  As long as interest rates don’t spiral up, unemployment will be the main cause of defaults.  We therefore need to keep people in work, by preventing unnecessary corporate bankruptcies.  Like Woolies.  Good start, guys.

(2) Today’s Grauniad included a graphic (not included in the online version of the article) showing what countries were spending money on to try to boost their economies.  The UK blob starts with “tax cuts”.  Germany?  “Infrastructure, green technology and tax breaks on new cars” (not sure about the cars!).  France?  “Help for industry”.  Spain?  “Extra spending on roads, transport and tax relief over 2 years”.  Only the UK, it seems, is borrowing for consumer spending on imports.

(3) Then there’s Mervyn King’s confused remarks to an MPs’ Committee.  Nils Pratley, among others, expresses his puzzlement.  He runs some numbers and reaches the conclusion that: “There is a funding drought.”  I say again, do we want to sacrifice good firms to try to maintain what looks more and more to have been a house price bubble?

Interest rates are likely to be decreased even further next week.  And again, the banks’ arms will be twisted to reduce their SVRs, preventing them from rebuilding their capital.  And preventing them from supporting businesses (the failures of which will blow more holes in bank balance-sheets) and reviving the economy, leading, in the longer-term, to less new mortgage lending, more defaults due to unemployment and an even greater drop in house prices than would otherwise be the case.

Do Economists Understand Economics?

Filed under: Credit crisis, Economics, Markets, Risk — Tim Joslin @ 12:59 pm

The Times’ Anatole Kaletsky was on stage at a conference I attended last week.  I can report that his picture tells only one lie: in real life he does indeed bear a passing resemblance to a famous comedian, but to a somewhat older Jasper Carrott than implied by his mugshot in the Times.

So I made a particular point of having a look at Kaletsky’s column this morning.  In an article where he undermines his credibility by committing the cardinal sin of arguing “first” and then “Secondly” (at my school such a mistake would have resulted in a high velocity blackboard duster aimed right between your eyes), Kaletsky supports the government’s recent VAT giveaway, arguing that: “for every saver there has to be a borrower”.  In the 5 words the Times comment facility allows me, I tried to point out that the real issue is leverage.

Savings and borrowings can go round and round.  I might use an overdraft facility at my bank to borrow from Anatole’s savings to go to Woolies to stock up on sweets at firesale prices.  This money would then go into a bank account belonging to Deloitte’s (Woolies’ receivers) and could be used to support lending to someone else.  This process can continue indefinitely.

However – and isn’t there always a “however”? – all this lending has risk associated with it.  I might suffer amnesia after an attack on my way home from Woolies by some sweet-mugging hoodies and never pay off my bank overdraft.  Banks need a buffer – let’s call it “shareholder capital” – to cover the risk of people not paying back their loans.  This limits the amount of borrowing and lending that can be undertaken via that institution.  The total amount of lending and borrowing that can take place in the economy is obviously the sum of the lending by all banks and other risk-taking intermediaries – including the state, a point I’ll try to get to later.

The primary problem is not, as Anatole imagines:

“…that private citizens and businesses are in a panic and have suddenly decided – or been forced – to cut back their borrowings and increase their savings to an equally unprecedented degree.”

The problem is that, due largely to the US sub-prime crisis (and the complete and utter madness of no recourse loans), but also other cock-ups that have exacerbated the original problem, such as permitting banks to conceal the real extent of their leverage by the use of off-balance sheet vehicles, and the insanity of mark-to-market valuation of bank assets, a huge hole has been blown in the capital of banks worldwide, including in the UK.  This has meant they can lend less, and has initiated a process of deleveraging, which, due to various feedbacks (such as knock-on bankruptcies) resulting from less willingness to lend or a higher cost of capital to individuals and firms, tends to feed on itself.

Now, the only way to arrest the deleveraging process is to increase the capital able to support lending.  This would happen, for example, if you could persuade Anatole and a few thousand other Jasper Carrott doppelgangers to withdraw their savings and instead invest the money in rights issues by banks.  The banks would still have the actual cash, but could use it to support – or leverage – the merry-go-round lending I have described, rather than just lend it out once as was the case when it was on deposit.

We should therefore assess government policies on the basis of how effectively they counter the deleveraging process, not on the simplistic basis of how much money they put into the economy.  Let’s have a look, then, at what’s on the table:

(1) Recapitalising banks: obviously very effective (but see below).

(2) A reverse auction for “toxic assets” (e.g. the original idea of the US $700bn TARP programme): this might have been very effective as a price-discovery mechanism, since banks may be perceived by the market (despite any suspension of mark-to-market accounting rules) to have less capital than they really do have, and their lending therefore restricted.  Although it may seem more expensive than (1), this measure may be necessary on a limited scale.

(3) Reducing VAT or other taxes: such measures simply encourage spending, which may go on imports, increasing the overall debt (private + public), and leverage, of the nation.  On the plus side, tax reductions may keep some retailers and suppliers afloat, saving jobs and resultant bankruptcies and loss of bank capital.  But is this really the best way to reduce the risk of future bad debts and arrest the deleveraging process?  I seriously doubt that tax reductions are going to prevent large numbers of personal bankruptcies, since the main driver of these is unemployment.

(4) “Public works” programmes: would directly prevent personal bankruptcies, so would give more bang per buck than tax reductions.  They take longer to implement (not attractive to politicians facing elections), but in my opinion this delay should be accepted.  We may not be fighting a battle that will be “over by Christmas”.  The government could also spend money effectively by investing in housing, for example, indirectly, by lowering costs for housebuilders.  In the UK they could reduce the indirect taxes on “planning gains”, e.g. Section 106 deals, such as to produce “affordable housing” alongside housing for sale.  Surely it would be better to build just private housing than none at all?

(5) Prevention and minimisation of the direct or indirect impact of personal and corporate bankruptcies.  This requires a book in itself, but I can’t help observing that spending a few £bn on the insurance needed by suppliers to at-risk businesses might well have saved jobs at Woolies, MFI and other suppliers (and, just as important, the capital losses to the banking system from such bankruptcies) far more effectively than a VAT reduction.

Kaletsky suggests that “the Government is right to borrow on a scale almost never imagined”. Maybe, but there is a risk to savers with governments (i.e. purchasers of government bonds).  It seems to me that this risk should always be minimised, just in case things get even worse.  It would therefore have been much better, as well as fairer, for example, as I’ve argued several times for months, if the government had acted to encourage or allow private recapitalisation of the banks, not spent public money.  Whilst talking down the pound and using interest rate policy to achieve a limited devaluation (among other things) might be a good idea, the danger is a loss of confidence in the currency.  Public borrowing costs would increase, and we could end up importing inflation or living under IMF strictures.

So my verdict is not as positive as Kaletsky’s.  The government has already gambled once by putting more public money into the banks than necessary.  It’s now throwing our chips into trying to encourage a spending binge.  I suspect this will be a last gasp before coming out of denial and starting to take the longer term measures necessary to arrest the deleveraging process.  In particular, as I wrote yesterday, we have to accept that house-prices are going to fall much more, and that over the next few years we must reallocate some of the borrowing that can be supported by the economy.  To investment, rather than speculation.

The government is being too impatient and making the error of targeting lending and spending directly, rather than the underlying cause, the deleveraging process that is causing lending to be reined in.  Rather than reduce VAT, the government should accept that the next few months are going to be grim, and invest in trying to pull us out of the nosedive in a controlled manner in spring 2009.  Brown and Darling, I suspect, are flapping their wings ineffectually.  Even if they manage to stimulate a Christmas spending binge, that won’t save us.

When you’re in a room full of unexploded bombs, it’s much wiser to take the time to defuse them all carefully than to start throwing the furniture around in the hope that everything will land safely in a more ergonomic arrangement than before.

November 26, 2008

The Purpose of Profits (Part 1)

Filed under: Credit crisis, Economics, Housing market, Markets — Tim Joslin @ 7:56 pm

An editorial in today’s Guardian is so incoherent that I find myself reluctantly putting down the analysis-free report to the Chancellor by the Rights Issue Review Group.  I’ll write about that later.

The editorial starts reasonably well:

“This financial crisis began with housing, and any hope of its ending must lie with housing. That does not just mean house prices finding some kind of bottom, but also would-be homeowners being able to get fairly priced mortgages, and securing a more stable supply of new homes.”  [my emphasis]

At this point the leader-writer obviously went out, got drunk, and returned to the office 5 minutes before the deadline to file the piece.  Apparently, it’s a problem that:

“…last year’s net total of £108bn of new home loans has shrunk to around £40bn this year and could fall below zero next year.”

Huh?  Surely anything else would imply that we were taking on more mortgage debt, when in fact we need to pay some down.  The world has decided that UK plc (among others) has reached its credit limit.  Government thinking also implies an increase in mortgage debt:

“The Crosby report [commissioned by Alistair Darling] suggests that the government should auction its services as a guarantor to banks seeking to tap into financial markets. In return, the government must require that the funds go into new mortgages.”

This makes absolutely no sense.  For starters, the banks are struggling to roll over the money-market borrowing they have already taken out to support mortgage-lending.

It’s also rather dangerous to think that we can put off the evil day when the UK can borrow no more by (in effect) replacing private loans with government loans.  The government can only borrow more cheaply than you or I because they can raise taxes.  If UK consumers can’t pay their individual debts, then it might turn out they can’t afford to pay more taxes either.  Or at least the market might start to think this, and start charging more to lend to the UK government.  There’s a limit to how much the government can (in effect) commit to future tax increases.  Especially as the people who can afford to pay more tax might all decide to emigrate to Australia.

The Guardian’s leader-writer, and perhaps the government, have characterised the problem completely incorrectly.  The problem is not that house-prices are falling rapidly and as a nation we are having to reduce our borrowing.  This is merely a result of the real problem.  Which is that house prices have risen too high and we have taken on too much debt.

Here’s a novel idea: why don’t we simply assume in the first instance that banks will be able to undertake new mortgage lending at a rate equivalent to that at which existing mortgages are being paid off, less losses due to defaults, plus profits due to the differential between the interest rates at which they borrow and lend?

Let’s go back to basics.  The purpose of profits is to act as a signal as to where insufficient investment is being made in the economy.  Let’s say company A reports that it is making a lot of money either lending to homebuyers or building houses, just as a couple of relevant for instances.  Company B may well see company A bragging about this in the boozer and quietly decide to try to obtain some of these profits for itself.  Company B will also start lending to homebuyers or building houses.  Even in the absence of company B or C or D, company A will likely plough more money into these profitable activities, by reinvesting profits rather than paying them out in dividends.

When evaluating government policy, it’s always worth asking oneself whether it would be better for government to do the precise opposite of what is proposed.  There’s my vote of confidence, Mr Darling!

So, if we want the banks to boost or maintain the amount of lending (note I’m not saying “mortgage-lending” – more about this later) in a downturn – which isn’t a bad policy – is it wise to also demand that banks reduce their lending interest rates?

Earlier this month the government insisted banks “pass on” the 1.5% cut in base rates in their SVR for mortgage borrowers.  They may well make the same insistence in December. This will reduce bank profits.  Is this likely to encourage new or existing banks to invest more in the UK mortgage market?  No, because, as we’ve seen, profits have a purpose.  Is it likely to encourage people to lend money to mortgage banks and free up the money markets?  No, because the problem is that lenders are worried that more banks will fail.  They will fail if the profits on their good loans are exceeded by the losses on their bad loans.

“Aha!” I hear you shout, “that’s the point, reducing mortgage rates will reduce defaults on bad loans.”  Really?  Surely interest rates are already so low that the vast majority of mortgage defaults going forward into 2009 and 2010 will be because of unemployment or other losses of income by mortgage-holders.  Remember, we’re in the UK, and you can’t just send back your keys because your house is worth less than the mortgage.  We’re not in the 1990s when interest rates were rising rapidly.

Banks should simply be left to manage their own businesses.  Instead, the Guardian’s leader-writer suggests that:

“… matters have not been helped by the government’s arm’s-length management of the part-nationalised banks, when what is needed is much more hands-on direction of lending.”

Interesting.  Are we to suppose that Alistair Darling has a highly trained army of civil-servants able to replace tens of thousands of the banks’ staff and make sensible lending decisions?  If I’m correct, and of course I’m sure I am, banks will lend more, the more profit they think they will make by doing so.  And people will lend to UK banks in the money-markets if they think UK banks are going to be profitable.  Goodbye recession!  I suspect that, like me, you are starting to wonder what lending criteria will be employed by Darling’s army of civil-servants.

Furthermore, what exactly is our priority?  As a nation we’re maxed out on borrowing.  That’s a key reason why our banks can’t borrow in the money-markets.  Should we really be taking on even more mortgage debt, as the Guardian suggests?  Wouldn’t it be better to make lending to business a priority so that fewer people lose their jobs – the main cause of mortgage default?

It turns out it’s a myth that banks have reduced lending to small businesses.  What I suspect may be happening is that lending facilities are being cut back.  The point is that banks have granted businesses borrowing limits (or at least many businesses leave working capital on deposit).  But the banks have insufficient cash for every business to be up to their limit at the same time.  These limits were set in the boom years, when only a proportion of businesses needed to make full use of their borrowing facilities at any one time.  As we go into recession, most businesses are seeing their sales drop and are borrowing money by drawing on their existing facilities.  But these borrowing facilities add up to more money than is available.  And you can’t get a quart into a pint pot.

Back to the housing market.  New buyers are only going to enter the market when they see the possibility of a profit, or at least (since people need houses to live in) the likelihood of not losing a large amount of money.  The sooner the market bottoms out, therefore, the better.  It is not therefore a given, as the Guardian writes, that:

“The short-term priority must be to allow the property bubble to deflate in as orderly a fashion as possible so as not to send further shocks through an already traumatised economy.”

This appears to be government policy.  But it will only lengthen the slump in activity in the housing market and therefore the recession.  If we want the recession to be V-shaped, then I suggest it’s a mistake to try to slow the fall in house-prices.  The correct policy is to let house-prices drop, paying down mortgage debt and freeing up capital to invest in the economy by lending to businesses.  Keeping as many people as possible in work is a much better way to avoid mortgage defaults.

As is all too often the case, a government policy to please the voters – in this case by trying to maintain house prices at what is still a very high level, relative to incomes – is likely to be counterproductive.  The correct policy is probably the exact opposite of what the government is doing.  As usual.

November 11, 2008

EU Energy Policy: Good in Parts

Filed under: Energy policy, Feed-in tariffs, Global warming — Tim Joslin @ 8:21 pm

They say you should avoid clichés at all costs.  I say “bollocks to that”.  Language evolves through the generalisation of specifics.  The shorthand “machiavellian”, for example, no doubt arose by gradual contraction of phrasing such as: “By Gad, the cunning bounder has stitched me up in the manner of the Prince in the famous work by Niccolò Machiavelli!”.

Why, then, do I imply that the EU energy policy is like – and I hope readers take the trouble to follow this link – Nicholas Parsons‘ egg?

Let’s just take stock of where we are.  The EU countries have agreed greenhouse gas (GHG, sometimes, perhaps even herein, referred to inaccurately as “carbon”) emission targets under the Kyoto Protocol.  What one might have thought the EU would be trying to do would be to provide a framework to support its member countries in achieving the goal of reducing their carbon emissions over the period 2008-12 (and beyond, anticipating further global agreements) relative to the 1990 levels.  And indeed it is, for example, with its Emission Trading Scheme (ETS).  But events have moved swiftly on, the bureaucrats have been hard at work creating employment for themselves, and we’re now all living in Targetland.

2005 saw a rapid – even, I dare say, historic – increase in awareness around the world of the global warming problem.  Since then, it’s been slowly dawning on people that just reducing our GHG emissions over a couple of decades will not be enough.  Rather, we need to move away entirely from fossil-fuel based energy over a time-scale of perhaps half a century.

Al Gore has recently produced a vision of how we can do this.  It’s well worth reading (I’m not putting these links in for fun, you know, it’s bloody tedious), even though Saint Al seems to think creating jobs is an end in itself.  What we actually want to do is produce energy as cheaply as possible, which means the less labour is required the better.  The aim should be to get the price of renewables below that of fossil fuels, in which case there’s no need for FITs, NFFOs, ROCs or any other kind of bureaucratic intervention.  All the civil servants can be sent to the wind turbine and solar panel factories.

Important point: the cost of renewable energy is controlled by the manufacturing dynamic, whereby costs tend to reduce over time; by contrast fossil fuel costs increase over time because of the increasing scarcity of at least easily extracted reserves.  Once renewables cost less than fossil fuels it’s game over for the black stuff.

It seems to me that the simplest way to guarantee the adoption of renewables would be simply to add a substantial cost to fossil fuels to reflect the external costs (GHGs and other pollution).  This is often referred to as a “carbon price”.  The trouble is, frankly, we all want to have our cake and eat it.  We want cheap energy even as we reduce our reliance on fossil fuels.

Rather than put an effective price on carbon, the EU decided to set a separate target for renewables, “20% by 2020” as explained by the House of Lords (pdf).  This makes some sense, I suppose, if government can’t stop itself meddling. After all, it’s equivalent to a very high carbon price (i.e. whatever the penalty is for non-compliance) for 20% of the energy supply.  But the EU’s egg is a little whiffy:

1. Demand vs supply

The EU has conflated the demand for energy with the supply of energy.  This is not just because they’re thick (sorry, I’m thinking more and more that our society will inevitably collapse if we continue to give out so many prizes for stupidity), it’s also because, unlike our friend Al Gore (op cit), they have no vision.  Now, the vision for Europe is not so different to that for US.  We will end up trading energy over a Supergrid.  We will then be able to take advantage of the fact that the wind is always blowing somwhere.  And we’ll be able to deploy solar power facilities where there’s most sun, e.g. in North Africa.

Here’s what their Lordships say (op cit):

“In January 2008, the Commission published the 20 20 by 2020 package. This includes proposals for reducing the EU’s greenhouse gas emissions by 20% and increasing its proportion of final energy consumption from renewable sources to 20%. Both of these targets are to be achieved by 2020. In order to meet the EU renewable energy target each Member State will be given a national target to meet based on their existing renewable generation, their GDP and a flat-rate increase for all. The UK’s proposed target is 15%.”  [My emphasis].

If we’re eventually going to trade energy over a Supergrid, why does it matter where the energy is generated?  Why should countries not all have the same target?  Then we would clearly have a demand-side policy and not a completely muddled mess that doesn’t know whether it’s coming or going, that is, whether it’s a demand-side policy or a supply-side policy.

2. A missed opportunity to create a pan-European renewable energy market

To be fair, the EU Commission has allowed for some trade in energy (UK Lords, op cit, pdf):

“The Commission’s proposals include creating a standardised Guarantee of Origin (GoO) certification scheme for renewable energy. This would allow a market in GoO certificates to be created. Member States could then meet part of their targets by
counting energy generated in another country for which they have bought the GoO certificate. The Commission believes this will create the flexibility needed for Member States to meet their targets.”

Wrong, wrong, wrong.  The Commission is talking about paying someone to generate and use the renewable energy for you – the carbon offsetting logic.  In order to make progress towards the vision, though, we need to trade the energy itself, not offsets.  We need to start building the Supergrid and create a market.  OK, you can’t label individual electrons, but you can, surely, account for flows of electricity from one country to another.

And, worse, this was the UK Lords’ reaction (op cit, pdf):

“We recognise that some flexibility will be necessary, but are concerned that GoO trading has the potential to undermine efforts to increase renewable generation domestically. We recommend that the Government commit to achieving a significant proportion of the UK’s target domestically.” [My emphasis].

OK, this is a fairly logical leap to take when you’re conceiving an offset market rather than an actual market.  Their Lordships seem to be thinking ahead to when we need more than 20% renewables.  When it’s serious, and not just tinkering at the margins.  But they still seem to have a mental block preventing them considering that we could import energy in the future (i.e. after 2020).  Why should I care where energy is generated?  Why pay more for wind power from Scotland than from France (which is nearer, as it happens)?  We’re entirely reliant now for our energy on states that are a hell of a lot less reliable as trading partners than fellow members of the EU.  Why, oh why, do we have to persist with this ridiculous, childish attitude that it is somehow desirable to generate all our energy in the UK?

Not only are we a very densely populated country, we’re not best placed to make a big increase in our renewable generation by 2020 (though we have some serious wind resources that may be very valuable if we can exploit them fully by trading our surplus and buying in power when we’re becalmed).  In the manufacturing dynamic I referred to earlier, production and deployment of a technology typically follows an S curve (measured e.g. by number of units in the field).  When I say “typically”, I mean “always” – I’m a modest, understated sort of fellow.  As a technology is adopted and manufacturing costs come down, growth becomes exponential.  Eventually the market becomes saturated and deployment levels off.  This has happened for radio (particularly rapidly), fridges, film cameras, digital cameras, mobile phones, microwave ovens, hairdryers, the internet… the list is endless.  The point is that it may be a lot easier for Germany (say) to quadruple its electricity production from renewables to 40% (enough for some to be exported) than for the UK to go from 2% to 15%.  Until Germany runs out of wind turbine sites, why shouldn’t they keep expanding their production?  And why should UK consumers buy expensive British wind when they could have a cheaper German variety?

3. A FIT of localism madness

Their Lordships go even further than just UK self-sufficiency.  Apparently now every house – well, at least housing estate – has to be self-sufficient in energy (op cit, pdf, again).  Yes, they’ve decided we need Feed In Tariffs in the UK:

“…we believe that feed-in tariffs have the potential to stimulate generation in some sectors of the renewable market. [No shit, Sherlock! A guaranteed price will increase the supply of a product!  Well, I never!] Although the evidence we received in favour of feed-in tariffs anticipated that micro-generators would benefit most from such a system, we do not believe that the benefit of feed-in tariffs would be limited only to small-scale generation. Single site operators, community developments, affordable housing schemes and farmers will often want generation capacity above the micro-generation level. They are, however, unlikely to want to trade in the ROCs market with large energy companies. Such generators are likely to favour the certainty of a medium term feed-in tariff structure over the uncertainty of the RO. Therefore, we see potential for the RO and a feed-in tariff to work in parallel with generators choosing the most appropriate support scheme for their own needs. [The old duffers are hopelessly confused: FITs are a supply-side subsidy, whereas ROs create a market].  We recommend that a system of feed-in tariffs be created to work alongside the RO.”

Why on Earth should we subsidise these “single site operators, community developments, affordable housing schemes and farmers”????  Let alone microgenerators.  We’d be giving them a guaranteed return on any investment.  If we want to do that why don’t we simply borrow the money from all these people for the same rate of interest (or lower!) and use it to build a larger-scale more efficient renewable energy installation?  I’ll tell you why.  It’s because an irrational ideology – “localism” – has taken hold.  Only The Good Life is really moral, now it seems.  Maybe, just maybe, that’s not true.

4. Nuclear doesn’t count

The really daft thing about the 20% by 2020 target is it doesn’t include nuclear power.  Why shouldn’t countries choose that path if they want to?  This is what happens when summits are used to bounce states into agreements.  Excluding nuclear also makes a mockery of the implication that all countries can or should generate their own energy.  Maybe there’s a country which has little endowment of wind or sunlight from which to produce renewable energy – let’s follow Douglas Adams and call this hypothetical place “Belgium”.  If such a place did exist it would just have to buy in energy to meet its renewables target.

5. But biofuels do

Even though they’re worse than burning fossil fuels.

6. Why does it matter?

Let’s remind ourselves where we want to be by 2020.  By then, I’d hope to see 2 or 3 renewable energy generation technologies price-competitive with fossil-fuels – large-scale wind and concentrated solar power (CSP) are my bets right now, but we shouldn’t try to second-guess the market.  What will make them price-competitive?  Partly fossil-fuel prices reflecting their real cost (i.e. including their polluting effects); partly the scale manufacturing economies of the renewables; and partly the development of ways of transporting and storing renewable energy (probably as electricity, IMHO, but again, I don’t care if I’m proved wrong) so that energy can be generated where it’s cheapest and the inherent problems of intermittency of renewable energy can be overcome.  To achieve this, the EU and member and neighbouring states should simply be (1) putting an appropriate price on carbon and (2) facilitating through creating a Europe-wide energy market, and removing obstacles to the planning of infrastructure such as power-transmission “interconnectors” between states and regions that we’ll eventually think of as a Supergrid.  OK, I’ve conceded that a renewable energy target is a way of putting a price on carbon.  But it’s not a particularly good one.  And there’s too much fiddling for my liking.  Supply-side measures like FITs are good for creating an industry – Germany has no doubt made a good investment, but there’s no need for everyone to make wind-turbines and solar panels – but are inappropriate for a large-scale roll-out.  And there’s way too much ideological localism and not enough sound economics going on.  The benefits of trade and the economies of scale are no longer rocket-science.  If Europe doesn’t exploit them, we’ll be left in the wake of those who do, like US and China.  As usual.

Harry’s Burden

Filed under: Reflections — Tim Joslin @ 4:50 pm

Memory is the strangest thing.  I can’t remember when I was first told that “old soldiers never die, they just fade away”.  It’s something I’ve always known.  Growing up, OK, we were told of a hundred kings and queens, their wars, battles and allegiances, their victories and defeats.  But they may as well have existed in Narnia for all the relevance they had to me.  Real history was the two World Wars.  It was the Great War that most stirred me up.  The sheer pointlessness of it.  The facts I learnt were suffused in helpless, uncomprehending anger at the scale of the suffering and appalling waste of life.  And eventually I reached the conclusion that the First World War led to the Second.  Evil arose out of tragedy.  So why was what I prefer to call the Great War allowed to happen?

I am no longer so confident we have come through the fog of history to reach a place of wise clarity. Even if we understand the mistakes of the past we’ll simply find new ways of making them.  Only future generations will see the parallels.  Maybe, though, if reason fails, the right emotions will alert us before we step over the brink.

So now all I feel on 11th November each year is a deep sadness.  I never dreamed how poignant it would be to see the final dwindling of the ranks of the First World War veterans.  The war without purpose.  A slaughter that, far from being “the war to end all wars”, merely sowed the seeds of the next.  Today there were only three men left, all bearing wreaths as they were pushed in wheelchairs to the Cenotaph.  Harry Patch is the last who remembers the trenches.

The true tragedy is that, as the numbers of combatants has diminished over the years, Harry’s wartime memories have become stronger.  90 years of daily recall have burned a path in his mind to the horror of Passchendaele, whilst thoughts of happier times are tainted with images of the War.  It’s as if Harry has had to take on the burden for those who’ve faded away.

Let’s hope that in the years to come we are strong enough to take on Harry’s burden.  If we allow the monuments to the Great War, and our memories to fade through disuse, then we will surely be fated to repeat the mistakes of the past.

November 3, 2008

I Want Colin’s Sandwich!

Filed under: BBC, Media — Tim Joslin @ 8:24 pm

It’s “have a go at the Beeb” week here in the UK, after Sachsgate (I always feel I should provide a bit of background for my Martian readership).  Why the leader of the Old Etonian party (who are, perhaps, starting to look like an Eton mess, methinks, if I may permit myself a jolly jibe at the expense of Messrs Osborne et al) decided to argue that BBC executive pay levels have anything to do with it is completely beyond me.  Let’s remind the voters that some are more equal than others, shall we?  That’s bound to play well for the Tories, that one.  Novices.

I did, though, find Eton Dave somewhat less vomit-inducing than Paul Gambaccini trying to somehow exonerate the one executive, Lesley Douglas, who did the decent thing and resigned.  “Lesley Douglas was brought low by Russell Brand”, opined the ageing DJ.  I would have thought she was “brought low” (I expect she’ll work again, the media look after their own, don’t they, Andrew Gilligan?), by the mistake of hiring a comedian edgier – to modify a Fred Truemanism that comes to mind – than a broken piss-pot and then not implementing common-sense management controls in case he went too far.  Even if the humour of Brand’s must-read column in the Saturday Guardian is as perfectly judged as that George Best chip, it’s not as if every past attempt at humour by the hirsute, but slightly effeminate and studious, though paradoxically studdish, truly enigmatic comedian has been perfectly appropriate for the politically-correct inhabitants of Beebworld. It’s not about executive pay, Cameron Minor: the problem is the deep-rooted arrogant culture that’s developed at the BBC over many years.  Unfortunately, the Corporation is of course a public-sector organisation which makes it very difficult to fix, because you can’t just appoint a new management team to carry out a change programme – which generally involves “letting go” a lot of those who don’t feel like changing – because you can’t fire anyone without a public inquiry.

Actually, I wasn’t planning to write any of the above when I sat down at the keyboard.  It does bring me to my point, though.  The BBC is a public sector organisation but in recent years it has started trying to behave like a private company, to the detriment of the licence payer.  Prompted by an FT piece, Corporation Rampant, I was going to develop an argument in forensic detail showing how the goals of BBC Worldwide are contradictory to those of providing value to the BBC’s customers in the UK.

The trouble is, I thought I’d do a little research on the 1988 and 1990 sitcom, Colin’s Sandwich, just to confirm that Mel Smith’s little gem is not available on DVD, before using it as an exemplar.  You’ve probably guessed what happened next… yeap, it’s not quite the real thing, but some Sandwich clips are available on YouTube, so I had a look at Best Man Speech.  Then I noticed links to real best man speeches.  After a bit I realised that it’s probably possible to spend your entire life watching best man speeches on YouTube, since they’re likely being put on there faster than you can play them…

Anyway, the FT reports that the BBC currently receives £3.4 billion p.a. in licence-fee revenue (a £139.50 regressive tax on each TV-owning household) and that this is supplemented by a further “£200-250 million” from BBC Worldwide, which gets to exploit the BBC’s content overseas and in the UK, for example, by selling DVDs, licensing programmes abroad and even operating channels such as BBC World (not apparently available in the UK for reasons that are totally beyond me).  Now, £250 million is 250/3400 = less than 1/13th of the licence fee, that is, around a tenner per licence-fee payer.

My point is that restricting access to BBC content costs licence-fee payers more than £10 a year in lost value.

It’s perfectly valid to ask why the licence-fee payer who misses a series on TV should have to pay a premium price for it on DVD.  The BBC recently broadcast a 6 part series about the Amazon.  I downloaded a few episodes via iPlayer, but didn’t get round to watching them before all that bandwidth was wasted and they expired and were deleted after 30 days.  Before the sectors on my hard-drive had even cooled down, I saw the BBC advertising the Amazon series on DVD for the princely sum of £19.95.  Rather than, say, broadcasting them end-to-end in the middle of the night on BBC channel 73 so that the interested viewer – who’s already paid for them – can make a recording.  Or simply not letting them expire on iPlayer, which must be less effort, IT-wise, than deliberately making them unwatchable after a certain period.

It’s also easy to argue that there is a loss of value of at least £10 loss per licence-fee payer if we just consider access, or lack of it, to the “long tail” of BBC content. Colin’s Sandwich would definitely be worth more than £10 to me.  Per series.  Another example – attentive readers will recall – was the Gerry Robinson NHS programme.  This is also not being marketed to the public, as far as I know.  There must be thousands of programmes we are denied access to, but for which there is no business case for the BBC to produce on DVD (all that box design) and distribute.

I would find the BBC’s current-affairs and documentary content (news, Panorama, Horizon, etc.) an invaluable research resource, but it’s simply not available, though the technology is now there to make it so.  In fact – and sorry to harp on about it – programmes that you’ve actually gone to the trouble of downloading are deliberately made unavailable in iPlayer after 30 days.

There must be a better business model.  The funds BBC Worldwide generates for the BBC licence-fee payer are not worth the cost in terms of the lost opportunities to provide more generous access to content for the BBC’s viewers in the UK.  Personally, if I had access to the BBC’s entire archive I could manage without the 1/13th more programming supposedly enabled by the profit from BBC Worldwide.

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