Uncharted Territory

February 27, 2009

The Peston Goodwin Pension Questions

Filed under: Credit crisis, Economics — Tim Joslin @ 1:46 am

I’m a big picture kind of guy, and don’t normally like to get involved in the detail of malfeasance that the blogosphere is so effective at illuminating.

But I referred earlier on to Fred Goodwin’s pension and shared my opinion with the world that the higher principle of honouring contracts outweighed the public’s desire for its pound of flesh.  (Besides, of course, history will, I’m sure, blame the likes of Sir Fred a lot less for the Great Crunch and misguided – nay, negligent in my view – monetary policies a lot more).

A late night peek at Rob Peston’s blog shows he’s still on the case of Fred’s pension.  For reasons best known to themselves, since as a licence-fee payer there are more important issues I’d rather be informed about, Fred’s pension is also still the top story on the BBC’s news output here in the UK.

Peston claims on his blog that RBS wasn’t obliged to pay Fred Goodwin’s large pension.  If true, that would somewhat undermine the point I was trying to make in my blog entry, so I read Peston’s piece carefully.

And something seemed just a little bit fishy.

Peston wrote:

“Having looked at the relevant part of Royal Bank’s accounts, it does not seem to me that the bank was obliged to pay Sir Fred Goodwin a £650,000 pension with immediate effect.

The rules of its pension fund are that it was ‘allowed’ to pay an early enhanced pension to a member who ‘retires early at the request of the company’.

But it was not obliged to do so.”

Really?  Seems a bit odd to me.  But then I have challenged an employment contract in the past and been told “everyone else just signed it” despite the existence of some very nasty clauses in favour of my employer.

Peston, rather unhelpfully, doesn’t provide a link to “the relevant part of Royal Bank’s accounts”, so I’ve had to use my friend Mr Google.

What I’ve found are very similar “Service contracts” sections in the “Directors’ remuneration report” sections of RBS’ Annual Report and Accounts for 2006 and 2007 (my understanding from Fred’s letter is that the 2008 edition is due out next week).  In both years, the relevant sentence appears to be:

“The RBS Fund rules allow all members who retire early at the request of their employer to receive a pension based on accrued service with no discount applied for early retirement.”

This does not, by any stretch of the imagination, mean, as Pesto claims, that the company has discretion as to whether or not “to pay an early enhanced pension to a member”.  It’s the member who has the discretion, if any were applied, although the sentence above is fairly clear that discretion isn’t really the point.  The rule is clear that – as one would assume – if the company asks you to retire early you simply receive the annual pension that you would have done had you worked until retirement age.  Because, to be honest, it would be daft for something so important to be at the whim of the company (especially at the exact moment they no longer want anything from you!), and no-one would knowingly agree to such a condition.  Indeed, it’s my understanding that it’s common practice for people retiring early at the behest of a company to have their pension years made up exactly as Goodwin’s were.

In other words, Peston’s basic premise that the company could have chosen to reduce Fred’s pension doesn’t stand up to scrutiny.

It all smells a bit Gilliganesque to me.  Let’s not let the facts detract from the story, eh?


February 26, 2009

We need rules, not regulation

Filed under: Credit crisis, Economics — Tim Joslin @ 6:21 pm

There must be a full moon, because the lunatics seem to be running the asylum.

First, we have the fuss over Fred “The Shred” Goodwin’s pension.  I suspect the reason Alistair Darling has waded into the debate – and perhaps for the timing of Fred’s tasty annuity becoming public knowledge in the first place – is to distract the media from the far more important issue of the UK’s dodgy asset insurance scheme (or whatever it’s called).  I have no idea whether the taxpayer or the banks’ shareholders are being ripped off (though I am cynical enough to suspect the latter, since this would be consistent with the UK’s policy to date), but I do know one thing: the basically correct strategy of muddling through is most definitely not enhanced by debate in the media! Now, I agree that Fred’s pension is far too generous.  But the problem of excessive inequality is a general one – broader even than the whole area of executive remuneration, of which Fred’s compensation is by no means the most extreme example.  Inequality should therefore be addressed as by general measures – for example, raising the minimum wage aggressively.  When it comes to raiding Fred’s pension pot, I think we should be more concerned about fundamental principles such as the fact that our society is based on honouring contracts.  The question we should be asking is: “Where does this lead?”

Second, I know the UK political and chattering classes, shamefully and counterproductively, simply blame “greedy, reckless” bankers for the Great Crunch.  Indeed, the UK leads the world in focusing blame – I’ve heard from no less blessed lips than those of Barack Obama himself, words along the lines of “we have [i.e. “the American public has”] to get used to the fact that 30 or 40% annual increases in the value of our homes are a thing of the past”.  Nevertheless, there is a quiet, sober voice even in the UK’s debate that points out that we are all to blame, for taking on too much debt.  I therefore find myself feeling like Jack in Cuckoo’s Nest.  Why am I the only one who questions the wisdom of supporting those who demand the right to spend money they don’t have?  I refer of course to those noble campaigners who are demanding the return of charges levied on them for unauthorised overdrafts.

It seems that, rather than address the causes of the Crunch, the thrust of government action is aimed at regulating the banks even more than before. I’ve seen several pieces commenting on this, all in favour.  For example, before getting distracted by Fred’s unfeasibly large pension pot, Rob “Breathless” Peston was gasping for air after hearing the FSA’s thoughts about regulation.

What Rob simply doesn’t appreciate is that the banks did not want to get into this situation.  He writes:

“The only role for the FSA at the time – according to Turner – was to make sure that the structures, systems and processes of the banks were ticketyboo. So it verified stuff like whether there were a sufficient number of bodies in the risk-management department; or whether the right kind of management and risk information was being gathered and disseminated to the right people; and so on.

But it wasn’t apparently proper for the FSA to challenge banks on whether they should be growing so fast in the mortgage market, or loading themselves up with collateralised debt obligations manufactured from toxic subprime loans, or funding themselves to an ever-increasing extent from the sale of mortgage-backed securities.

I’m so shocked that I’ve come over all cockney. All I can think of to say is ‘can you Adam-and-Eve it?’

And my own answer is ‘no’, if I’m honest.”

Peston is seriously misleading the public – quite a lot of them judging by the number of comments on his blog.

It is not the purpose of regulation to second-guess banks’ strategy.  The principle the FSA was trying to employ was correct.  They should be focused on ensuring:

1. That banks’ internal controls are in place – the internal risk departments have a voice, and so on.  Perhaps the FSA failed to achieve this at HBoS, for example.

2. The banks provide information for external controls to function.  External auditors provide a similar function, and part of the FSA’s role is to make sure they are able to and are doing their job properly.  The true external control on banks like RBS are the capital markets (i.e. investors), assisted by analysts and the media.

If the FSA simply tries to look over the shoulders of bank executives, as Peston suggests, they will be entirely ineffective.  Not enough media commentators and investors believed that: banks were “growing [too] fast in the mortgage market”, or that there was a problem “loading themselves up with collateralised debt obligations manufactured from [with hindsight] toxic subprime loans, or funding themselves to an ever-increasing extent from the sale of mortgage-backed securities”.  And neither did the rest of us.  The idea that the FSA will (ignoring entirely the evidence of the past) in future be staffed entirely with bold contrarian visionaries is, frankly, absurd.

It would be far more effective for the FSA to concentrate on establishing rules that will allow the existing mechanisms to control the banks to operate more effectively.  For this reason the UK government is wise to resist calls for nationalisation, thereby ensuring that Lloyds’ and RBS’ shares remain listed, and that bond purchasers in the banks also understand they are taking on a risk greater than lending to the state.

Let’s look at a few of the things that have gone wrong:

1.  Reliance on capital markets.  The liquidity crisis took down Northern Rock in 2007, for example.  But it wouldn’t have taken much to avert this one.  No-one knew the Bank of England would fail to act as lender as last resort.  If reliance on the money markets (as opposed to deposits) was so stupid, why didn’t the FSA issue guidelines limiting banks’ reliance on them?  Investors would have run a mile from banks breaking such rules.  As I’ve said before, I think it was a mistake for the Bank not to act as lender of last resort right at the start of the crisis in 2007.  Furthermore, I simply don’t understand how all banks can rely on deposits. The money markets are always going to be an important source of bank funding, since large pots of sterling are held all over the world (larger than necessary, in fact, thanks to our trade deficit).  No amount of second-guessing of banks’ strategy is going to make up for a lack of clarity as to the circumstances when the Bank will provide liquidity.

2. Excessive property lending.  In which HBoS, in particular, appears to have indulged.  If there’s an asset bubble, then some will have bought or lent excessively – by definition!  What’s needed are policies to prevent asset bubbles.  Since the UK (through its definition of the sort of inflation which is targeted) and the US (e.g. Greenspan, explicitly) have decided to ignore asset price bubbles until they burst, maybe, just maybe, we should examine this policy, before spending £100s of millions on more regulators.  I doubt, myself, whether there’s much to be done to prevent stock-market or commodity bubbles.  The former are very difficult to identify and it’s even more difficult to employ appropriate  levers to control them; the latter (commodity prices) are – even more than stock-market bubbles – a global phenomenon.  But surely we can devise policies to prevent excessive rates of increase in the price of property –  particularly residential property?

3. Takeovers at the top of the market.  Such as RBS of ABN.  This is a) an old problem and b) not specific to the financial services sector.  Why the FSA thinks it can solve this one (assuming it does), or that it’s the appropriate body to do so is beyond me.  95% of RBS shareholders voted for the ABN  takeover, so perhaps, if Fred has to spend his old age in a bothie on a remote Scottish island, he should, when he fancies reminiscing over a dram of whisky, be able to hike to his neighbours, those who were in charge of our pension funds, who also apparently thought the ABN takeover was a good idea.  A large proportion of British adults had a significant stake in RBS through their pensions.  Perhaps public debate in such corporate actions as mega-takeovers (and corporate pay!) would be encouraged by giving more beneficiary holders of shares a vote at AGMs.  A good place to start would be private shareholders who generally use nominee accounts.  Modern IT systems could surely be employed to enfranchise such shareholders at relatively little cost.

So, leave Fred alone, work out what went wrong and change the rules.  It’s madness for government to try to second-guess bank, or any other, executives.  An entire industry of financial analysts, advisers, journalists and so on already exists to do that.

I’m rather disappointed to see Willem Buiter in the FT jumping on the bandwagon.  He writes:

“The notion that markets, including financial markets[,] could be self-regulating, by properly incentivising CEOs and Boards of Directors, and through market-discipline is prima facie suspect.” (Buiter’s point 4)

but then – to my mind – contradicts this by saying:

“Regulation can only take place on the basis of independently verifiable (public) information.” (Point 5)

Whilst he makes a number of sensible points, Buiter has a touching faith in public discourse. He notes, for example, that:

“There is a need to regulate financial innovation…. To get a new instrument or new institution approved, there will have to be testing, scrutiny by regulators, supervisors, academic specialists and other interested parties, and pilot projects.”  (Point 12)

Peston mentioned the evils of mortgage-backed securities.  But the banks believed they were diversifying risk.  Do we seriously believe that outsiders would have reached a different conclusion?  Of course not.  Besides, if you try to do someone else’s job, you inevitably end up thinking like them.

Sure, there are a lot of things that should be done.  We should, for example, recognise that sufficiently large hedge funds can pose a systemic risk.  But that’s something that should have been done after (or even better, before) LTCM failed in 1998!

But, apart from the huge cost of all these regulators, I strongly suspect they will merely define the parameters for the next financial crisis.  I’m particularly concerned by the idea that:

“Counter-cyclical capital and liquidity requirements or leverage ratios should be implemented…” (Buiter’s point 15).

As I’ve previously pointed out, this will simply allow asset bubbles to inflate even further.  And, as I noted some time ago, the measure will not be as easily applied as most people seem to think: we never know where we are on the cycle (though it’s likely to peak just after we stop increasing the counter-cyclical buffers, believing that “it’s different this time”!) and, most problematically, we never know how bad it’s going to be.  The pressure is still on banks to increase their capital in case things get even worse.  No-one’s saying: “Lucky our capital reserve was 6% and not 4%!”.  Banks will only be able to reduce their capital when things start to improve – that is, when they no longer need to!

No, these demands for more regulation are a distraction from identifying the causes of the Great Crunch, and instituting policies that really will make the financial system more stable.

February 25, 2009

Counterfactual Conundrums

Filed under: Credit crisis, Economics — Tim Joslin @ 7:48 pm

I know I said I’d identify many causes of the Great Crunch, but I’m still pondering the Chinese Mistake.

After mulling over the issue, I have arrived at the position that:

“Money, or what I prefer to call ‘leverage’, is created as a debt/credit relationship mediated by a bank. Once created, electronic money in particular must be lent and cannot be destroyed (other than by the originating central bank) or stored in large amounts, except by cancelling out a debt against a credit.”

The central problem is that the money supply depends on a process that is inherently unstable.  Positive feedbacks can generate increased or decreased leverage (or lending) faster than any changes in underlying economic activity.

In response directly to increased lending (or leverage), or simply to increases in the money supply, asset prices, too, tend to increase and decrease faster than any changes in, say, the productivity of the economy one might naively suppose ultimately supports their price.

Now, in the description of the leveraging process, above, I’ve stressed that money is only normally destroyed when debts are cancelled against credits.

The foreign reserves of other countries are therefore a semi-permanent reservoir of a given currency that is extremely difficult to remove from the system.

It seems that China is determined to maintain its currency peg against the dollar, in order to maintain export-led growth, and as a buffer against capital flight in some future economic crisis. This suggests to me that we should ask ourselves two questions, which are really two perspectives on one question:

1. What would have happened had a credit crisis not begun in 2007, triggering the current recession?

2. What will happen if we simply make it more difficult for the banking system to fail, for example by requiring banks to build greater buffers in the good times against customer or counterparty defaults and/or a sudden withdrawal of liquidity from the money markets?

Let’s imagine that the policies to reinflate the bubble by encouraging banks to resume lending are successful – I don’t really see why they shouldn’t be, though inflation may start to appear relatively quickly. The following are likely to happen:

1. China (and other exporters) will resume their growth and continue to add to their vast foreign-currency reserves.

2. Property and other asset prices will recover from what will be seen as a “correction”.

3. Commodity prices will also resume their upward path.  Oh, of course, it was just another “correction”.

There are a number of possible scenarios.  First, a couple of possibilities if we don’t recognise the problem:

1. The bubble bursts in a similar way to the present situation – that is, with another banking crisis.  But the problem is, we’ve made the banks stronger.  Asset prices will therefore rise even higher and even more $trillions of capital will be lost before markets bottom out!  I would anticipate that sovereign debt could be more of a problem next time round, for several reasons:

– countries such as the UK and the US may not have had time to clear the vast overhang of debt they’re taking on this time round.

– the huge investments by China and others in Treasuries will have kept their yields low, so governments will have been lured into becoming overextended.  When the wind changes they will find themselves unable to roll over the debt.

– the banks will lose more money next time round.

2. The surplus moves either to resource exporters or new low-cost manufacturing countries.  Manufacturing exporters such as China may start to find their surplus eroded (like India’s) by the cost of raw materials.  Or, new entrants – perhaps in Africa – may emulate China’s strategy of export-led growth based on policies such as exchange controls to keep their currency low.   Either way, the outcome is likely to be broadly the same: increasing trade imbalances and asset-price bubbles.  Nothing much will have changed except for the distribution of surpluses and the height of towers in Dubai – 2 kilometres rather than 1, perhaps.

On the other hand, China (which, remember, I’m using as shorthand for a number of countries) may take some steps to alleviate the problem:

1. Most obviously they may diversify their reserves into other currencies, perhaps into the euro.  This will simply move the problem – or, rather, spread it out.  Asset bubbles will be more widely distributed, particularly in Europe.  The crisis will again be worse, because it will take longer for the weak point to reveal itself.  And when it does more asset prices will have further to fall.

2.  Or perhaps they diversify their reserves into gold.  This is very likely to happen, but since it will simply transfer a portion of reserves to prior holders of gold and resource countries (and likely create a gold price bubble), the outcome is likely to be similar.

3.  Inflation corrects the situation.  Now, what would actually be needed is inflation in China or deflation in US to equalise purchasing power (at the currency peg) in the two countries.  Unfortunately, this is very unlikely to happen:

– in the short-term, the US is trying to inflate by, among other things, printing more money.

– the effect of the Crunch on output in China and other exporters is likely to be more than in the deficit countries.  There’s a nasty aspect of the situation here: countries which need to revalue (Japan, China) to solve the long-term problem are more likely to be able to devalue during the downturn!  With the currency peg, though (China having allegedly flirted with the idea of actually devaluing the currency!), costs in China (wages, raw materials, property) could conceivably fall more than in US.  This is the complete opposite of what’s needed to prevent the trade imbalances causing new bubbles and a 2nd Great Crunch.

– because of the manufacturing dynamic, productivity in China is bound to grow faster than in more mature economies.  This will have the effect of reducing costs in China relative to their trading partners – making the situation worse, not better.  One relatively hopeful possibility is that technological innovation – green energy, perhaps – reduces production costs in developed countries at a faster rate than economies of learning and scale can in China.  But most likely such technologies will be deployed in China as well.   And for the sake of the planet, let’s hope they are!

– China develops a consumer economy.  This would, perhaps, let us off the hook.  But is China about to institute the mechanisms – such as trade unions or a much higher minimum wage – that would allow its people to raise their living standards?  I doubt it – they still have 100 millions living in rural areas who will demand to be lifted out of poverty, so can’t simply lift the wages of the existing urban workforce.

4. The only real solution is for China to reduce its surplus by allowing the renminbi to rise as soon as the current financial crisis is over (ideally before, but that’s wholly unlikely).  The trouble is, this will export jobs.  Can China come to terms with this?  Could the benefits in terms of faster global economic growth outweigh the disadvantage of slower relative growth in China?

As I said, I’m referring to China as shorthand for a number of countries, but its effect on the global economy is huge and likely to become even greater, so, scarily, the future course of the global economy could depend on a single set of decisions by a small group of people.

It therefore seems that if China is not able to come to terms with allowing the market to set the value of the renminbi, we are fated to see at least a repeat of the Great Crunch, and possibly an era of instability.

Worse, the global community may lose its resolve if we go round the same loop again in a decade or two, and the 2nd Great Crunch could result in a lurch into protectionism – and maybe wars.

February 24, 2009

Turning the UK housing market

Filed under: Economics, Housing market, Markets — Tim Joslin @ 5:03 pm

The housing market has been a British obsession for far longer than it has in the US.  A few years of “flipping” and they all suddenly go “underwater”.  Amateurs!  And the proper expression for “being underwater” is to be “in negative equity”.  “Underwater” is baby talk.

But the Brits know less about the behaviour of markets than the average American kindergarten kid.  Thus, as one contribution to a flurry of debate on the issue, an Independent editorial this morning suggested policies to slow the house-price fall are the right medicine.

The Government does indeed (as noted towards the end of yesterday’s post) seem to be following the Indy’s prescription by allowing Northern Rock to write new mortgages.

The divergence between the mainstream media and informed opinion on this issue is rather striking.  The Radio 4 breakfast-time programme, Today referenced the Indy’s daft editorial, but the vast majority of comments from the public say house-prices need to fall further.  They see the Government’s attempts to stimulate the market as what they are: panic ahead of the next General Election.

To be fair, the Indy’s own columnist, Jeremy Warner, on whose blog I was once again unable to post my thoughts, did question his own newspaper’s official stance:

“One way or another, the debt overhang of the boom has to be removed before a proper recovery can begin. The short, sharp shock approach may have something to commend it over the long, slow agony all this political meddling promises to deliver.”

Too right.

But what got my attention this morning was Today‘s reference to Polly Toynbee’s column in the Guardian.  She suggests that:

“Now is the time to tell people that house prices will not be allowed to go mad again. Announce a tax to be imposed on future gains (not retrospectively). There are plenty of ways to do it. Some administrations impose an annual tax, including many US states. Some urge a land value tax system. It would be easy to impose capital gains tax on all future rises: that 18% on any inflation in value, only to be paid on selling it, could stop another bubble. The money raised could be earmarked for building social and private rented homes, or helping others to buy.”

Polly’s on the right track, but not quite there.

Here’s my recommendation.  I identify a number of steps in the line of reasoning:

1. The construction industry is a significant part of the economy. Restarting it would therefore be a large step towards ending the recession.

2. The Government could and should make life easier for the builders, as I’ve discussed in a previous post, but a full revival will only take place when house prices stop falling.

3. Falling markets in general recover only once “clearing prices” are reached, as the Yanks understand.  Things have to stop getting worse before they can improve.

4. Anyone struggling to repay a mortgage can do so for only a limited period of time.

5. Our problem is not that house prices are now falling, it’s that they rose too far in the first place (relative to earnings), at least at the low end of the market.

6. There are new “rules of the game” – purchasers are going to need a deposit of at least 10% and will find it difficult to obtain a mortgage for more than 3x salary.  This is as it should be, of course.

7. Points 5 and 6 imply prices have a long way to fall.  Points 1 thru 4 imply that the faster we get there the better.  So what could the Government do to encourage prices to fall faster?

8. The best changes are those that the market needs permanently.  I suggest two are appropriate:

9. First, abolish stamp duty, immediately (April 5th this year).  This is a tax on transactions and discourages people from moving, not just to take up opportunities for work, but also to somewhere more appropriate to their needs when their circumstances change – for example, to a smaller property when the kids leave the nest.

10. Second, announce that capital gains tax (CGT) will apply to all house sales completing after April 5th 2010.  This will encourage people – for example, those with bigger houses than they need, perhaps as an “investment” – to sell before the end of tax year 2009-10, getting the market moving immediately.  It would also give sellers an incentive to mark prices down, since they will lose some of the profit if they don’t sell in time.

11. My prediction is that, following steps 9 and 10, house prices would fall steeply, bottoming out around the time CGT is introduced.

February 23, 2009

Money, Debt and Damaging Half-Truths

Filed under: Concepts, Credit crisis, Economics, Film — Tim Joslin @ 9:52 pm

I’m going to make a movie.  Because it’s amazing what you can get away with.  Last night, a member of Transition Cambridge was good enough to entertain me and a few other interested truth-seekers, screening and leading a discussion of “Money as Debt“.

I thought I’d explained in my previous posts on the subject of where money (or “leverage”) comes from that for every debt there must be an equal credit.  Think of this principle as a financial version of Newton’s Third Law.

But in a surreal passage(? – scene? clip? – there must be a word for a segment of a non-fiction film – maybe it’s “segment”!) – anyway, I say “surreal”, because it combined illuminating insight with astonishing misleading ignorance – “Money as Debt” explains in a series of steps how what I prefer to call “leverage” can be created.  Their bank had $1111.12 of shareholders’ capital, if I recollect accurately, and by making loans backed by this capital, which was then redeposited, the bank (or what was correctly described as the closed system of banks) was able to generate a total of around $100,000 in loans.   This is a version of the Harvard Business School (HBS) money game described on p.49-50 of Niall Ferguson’s “The Ascent of Money: A Financial History of the World“.

The HBS money game is itself obviously a gross oversimplification, since, in making a perfectly valid point, it is concerned only with bank reserve ratios, that is liquidity, and not the capital adequacy ratios necessary to manage risk.  Banks need not just (in this example) a 10% buffer in case 10% of depositors withdraw their funds at once, but also (say) a 5% buffer in case 5% of debtors default.  With this second condition the HBS money game and the example in “Money as Debt” only work if the banking system has more capital than with only the first rule.  In the “Money as Debt” example, the banking system would have needed a total of at least $5,000 to support the $100,000 lending described.  This point is crucial, because it explains why it is so important to recapitalise the banks to get lending going again – and, yes, create more money.

But the real howler in “Money as Debt” is that their Step 1 (after setting up a bank with $1111.12 capital) did not start with a deposit of $10,000 (allowing them to lend $10,000).  It started with them making a loan, which they simply would not have been able to do.

Let me take a stab at explaining why people are confused by this point.

They observe that if you go into a bank you can obtain a loan by signing a form (as in the film).  This loan represents an asset to the bank.  The bank has a call on you to repay the principal + interest.  The value of this loan to the bank depends on how likely you are to repay it, which depends on (among other things) your inclination to repay and the rules governing debts in the relevant jurisdiction.

In return for the loan the bank may deposit the value of the loan in your account (a liability to the bank, balancing the asset of the loan).  It seems as if the bank has simply created money.  But the bank could equally well give you a cheque made out to a third-party (or create an electronic payment) – to a car salesman or someone whose house you are buying, for example.  Even if the money is initially credited to your account, the bank is hardly likely to expect you to leave it there.  It may – to use the figures from an example by a fellow truth-seeker – lend you $1000 for a year at 10%, but only pay 5% interest on deposits over the same time period.  Simply leaving the money in your account would be equivalent to donating the bank $50.

The bank can only “create” money by giving you a loan and a simultaneous deposit, because it knows that there are many depositors.  It relies on the $1000 loan it has deposited in your account being replaced as soon as you withdraw it.

In reality, modern banks have literally millions of depositors, and make millions of loans.  They manage the situation, for example, by adjusting interest rates to influence demand, so that (barring catastrophes, such as a run on the bank as at Northern Rock) they limit their lending, and attract sufficient deposits, in order to stay within the liquidity and capital reserve ratios I’ve described.

I tend to think people only believe stupid things because it suits them.  In this case, painting a picture of banks creating money supports the demonisation of bankers.  It is true that money (or what I prefer to term “leverage”) is created in the lending process, and that the system is unstable, requiring careful management.  But a more accurate representation of the role of banks is as intermediaries between the depositors (lenders) and borrowers, in a highly-regulated process following rules laid down by governments and other authorities.

It is a gross oversimplification to blame the banks for the current recession.  I don’t like to see bullying, but the ongoing assault against the banks by the political classes and the media could lead to worse than we’ve seen so far.  In a different era, vilification of money-lenders was a step on the road that led to the horrors of Auschwitz.  We’re now told to expect violence on the streets of the UK.  If a long hot summer in the City does arrive, it will be in no small measure the fault of the politicians and in particular our elected – sorry, not actually elected – leader, Gordon Brown, who paints a picture to the public that “explains” it all as the fault of reckless bankers and ignores the mistakes and intellectual failure of politicians and the regulatory authorities.  Even now, the Government is using all means at its disposal to try to reverse the fall in house prices – even though the house-price bubble is a large part of our problem and needs to be permanently deflated.

I’m sorry, “Money as Debt” is in the same league as 9/11 conspiracy theories, a division below the grassy knoll, but battling against relegation with Elvis sightings.

£13.20 revisited: Cambridge Evening News asks the public

Filed under: Rail, Transport — Tim Joslin @ 7:37 pm

I love the polls that, every day or so, appear on the Cambridge Evening News (CEN) website.  Some seem designed to elicit a particular answer – one can hardly be surprised, for example, that 96.5% of 1552 respondents answer the question: “Can Cambridge sustain a population the size of Manchester?” in the negative. Perhaps the findings would have been a little different if they’d asked: “Do you think Cambridge could grow to be larger than Manchester by late in the 21st century?”

Other questions do seem to tap the wisdom of crowds. The 28.9% of 724 who selected the option “Bin bag” to the question “What is the Fen tiger?” may well have a point.

And “Would you use an Oxford to Cambridge rail link?” (63.9% of 781 say “Yes”), may well belong in a category of legitimate market research.

After my rant about the cost of a Day Return train ticket to London, I was pleased to see the CEN asking the public: “How much do you think an off-peak return train ticket from Cambridge to London should cost?” It’s not a brilliant question since, not only does it fail to make clear whether it is asking about a Day Return or (the more expensive) normal return, most passengers also pay less than the full price – my £13.20 was the full off-peak fare discounted by 34% with a Network card (£20). Infrequent and/or non-student, adult but not Senior passengers without a discount card would pay exactly £20. Obviously, if you have a discount card, its cost has to be spread over all the journeys you make in a year. It’s a shame CEN didn’t sacrifice simplicity for a little more clarity and add “for regular travellers with a Senior, Student or Network discount card” to their question.

Nevertheless, the CEN poll results imply that, based on a sample of 930 people, the Cambridge public believes it is being seriously overcharged: a large minority (42.4%) believe the cost of an off-peak day-trip to London should be £10, and only around a third (35.1%) think it should be more than a tenner. Of those 35.1%, 24.7% believe the price should be only £15. Since £15 is around the minimum you can pay, taking the cost of a discount card into account, it’s likely all but 8.4% of respondents to CEN’s poll believe they are being charged.

I wonder how many of those who answered CEN’s question believe, like I do, that the route is highly profitable, and that these profits are largely being used to subsidise the rail network in other parts of the country?

February 20, 2009

£13.20? You’re having a laugh!

Filed under: Rail, Transport — Tim Joslin @ 9:05 pm

In case my Martian readers are online today, I should describe the background state of affairs: the UK has not only screwed up its trains, the dental service has also been seriously dysfunctional since at least the 1990s.  The main problem tooth-wise is expense, since the NHS service we all pay our taxes for is chronically under-resourced – dentists aren’t paid enough for NHS patients, so have taken their drills to the private market. Nowadays, when a new dentist announces they’re taking on NHS patients, it’s like when fresh fruit arrived in the north of the Soviet Union.  People drop everything and queue.

Obviously, we’d all be better off without the NHS provision (not that I actually advocate this solution, I’m just making a point), now, since not only would our taxes be lower, the (lower end of the market) private prices are elevated by the fact that some people have managed to keep themselves on an NHS dentist’s list (though a significant number of people resort to the use of pliers for self-extraction).  Come to think of it, it’s a similar type of screw-up to the housing market, really.  I was removed by my previous dentist from his list in around 1998, for not going often enough!  I had a couple of extremely painful experiences at the next dentist I tried (on the second occasion she still hadn’t found the nerve after 5 local anaesthetic injections).  Once I found a good dentist, then, naturally, I stuck with him, even after I’d moved away from the area.  And, no, I’m not telling all and sundry who he is!

So this morning I rose bright and early (actually I could have had a lie in, because, as will become clear, it’s better to wait until the commuters have left the city), brushed, flossed, rinsed and made my way to Cambridge Station in good time to catch the 10:20 to London, the first train for which you can buy the cheapest tickets.  I stress that I arrived at the station in good time, since the queue for tickets at either machine or desk, was (as I’d expected) a good 5 minutes.  I mention this – it’s usual at Cambridge Station at many times of the week, with a minimum of a 5 minute waste of time to be expected on Saturday mornings and Friday afternoons, as well as, it seems, for the first cheap train of the day – because I’ve just had a look at the latest Passenger Focus report on value for money(!) on the UK’s trains.

Section 9, p.20 of the report suggests passengers should not have to queue for more than 3 minutes off-peak, 5 peak.  I can’t help noting that the peak/off-peak times make no sense for ticket sales, since most peak-time travellers are commuters with season tickets, so don’t need to buy a ticket.  Perhaps this explains what is evident at a glance from the Passenger Focus report, that the 3 minute off-peak target is achieved much less often than the 5 minute peak-time target.  The data looks a bit – how do I put it? – stupid.  I suggest they just have one target, 3 minutes.  And bring in some fines to make sure 3 minutes is actually achieved.  But what is also needed, it seems to me, is an edict that machines should be added to stations until there are no queues at them (as is the case in some European stations I know, den Haag Centraal, for instance).  Today, I used the multi-queue for the ticket desks at Cambridge Station (6 desks now, I acknowledge, in a rare, but insufficient improvement).  The point is, if you have to queue for a machine, you may wait for a long time behind someone having difficulty with the options (it’s not surprising that this happens, maybe some design of the screens is called for – just perhaps?), or the bloody thing may refuse your card.  And whatever you do, buy any complicated tickets from a real person at the counter!  The cost of the machines must be small compared to the value of the time passengers spend queuing.  And the marginal cost of each extra machine is even smaller – the cost to produce them is surely (like for other manufactures) mostly attributable to design, software, and tooling up for manufacture.  Queuing for machines!  They wouldn’t have believed you 50 years ago – it’s like a science fiction dystopia!  If there’s no queue, people will at least try to use a machine rather than what is the most expensive resource – the human ticket-seller.

Actually, I don’t think it’s cost that explains why there are uniformly too few machines in railway stations in the UK.  I’m beginning to wonder if it isn’t too difficult (or at least too much hassle) to deal with the inevitable consequence – a reduction in the number of ticket-counter staff – because of the militant RMT and other unions.

What I really wanted to write about (as I said before, you could write an essay about every train journey in the UK), though, is the exorbitant cost of the journey.  I used to buy One-day Travelcards – which include use of the tube and buses – when travelling to London, for the flexibility.  But, partly because of the new restriction that you cannot use the return portion of Off-peak (i.e. reasonably priced) tickets between 16:30 and 19:00 (though, unbelievably, if you buy a cheap ticket from London to Cambridge, you can use it at these times!), I now usually just buy returns to London, rush back rather than spend an hour or two in a museum or whatever, and use an Oyster card whilst there.

The last Off-peak Travelcard I bought from Cambridge to London (via King’s Cross) cost me £11.90.  But that was in 2008.  Today the price was £13.20, a 10.9% increase!  Frankly, this is getting ridiculous, as I’ll explain.

But first, let’s compare like with like.  Some years ago I wrote to Douglas Alexander, then Transport Secretary (there’ve been a few since then – does that tell you anything?), noting the rise in price of One-Day Off-peak Travelcards (with Network Card discount) from Cambridge to London.  I can now extend the series:

2003     £11.55

2004     £12.60     9.1% increase on previous year

2005     £13.85     9.9%

2006     £14.85     7.2%

2007     £15.20     2.4% (presumably lower because of the new afternoon restrictions)

2008     £15.85     4.3% (lulling us into a false sense of security)

2009     £17.50     10.4% (out of the blue – it’s a record!!)

Overall, in 6 years the ticket-price has risen by 51.5%!

In comparison, the ONS provides the latest RPI figure – 210.1 for January 2009.  It was 181.3 in January 2003 (I downloaded the table a while back).  That is, prices in general have only increased by 15.9%. The difference – 51.5% versus 15.9% – is, frankly, ridiculous.

That’s right.  Prices in general (RPI) have risen by 15.9%.  The train ticket I’ve relied on since I moved to Cambridge has gone up by 51.5%.  And the service has been seriously degraded by the introduction of the draconian restriction on when you can use the ticket to travel back to Cambridge – you have to return either too early to do anything in London in the afternoon, or too late to do anything in Cambridge in the evening (like eat at home at a normal time).

What really pisses me off, though, is that I think I know the reason for this injustice (besides RMT members’ belief that they have a God-given right to earn more than their work would merit in a different environment).  The point is that the franchise system in the UK works by awarding monopoly pricing power to the highest bidder.  The price to the franchisee in some regions is negative (i.e. some routes are subsidised), but for the franchise that includes Cambridge it is in the tens of millions of pounds per year (there’s no way to determine the value of the Cambridge route, and therein lies part of the problem).  The cost of the ticket therefore bears no relation to the cost of providing the service. This is a crime.  There is no mechanism – tragically, as there is even competition from Cambridge, you can travel a little more cheaply to Liverpool Street, though that happens to be usually way out of my way – for supply and demand to determine the correct price for the route.

The Passenger Focus report notes that the cost of tickets into London is higher than to other cities in the UK, yet there are more frequent services.  I found no real discussion of why this should be the case.  Have these people never heard of economies of scale?  If the market were functioning correctly (so that comparative prices reflect comparative costs), prices for travel into London would in all likelihood be considerably lower than to other cities.  Passengers in the busiest parts of the network are massively subsidising those in other areas.

The reason train travel into London is so expensive is, I suggest, because the market will stand it.  The train price reflects the cost (in money and time) of the alternatives.  Only the nobility can really afford to drive into London: you have to be stupidly brave, wealthy and have a lot of time on your hands.

The tragedy is, the rail network should be allowed to expand in the areas where a profit can be made.  There should be even more (e.g. fast, late night, early morning, every 15 minutes, not 30) services between Cambridge and London.  If parts of the network were allowed to grow, then, over time, the network as a whole would become more profitable.  The franchise system and consequent monopoly-pricing of rail tickets is one factor preventing the growth and modernisation of the UK railways.

As I said, it’s a crime.

I’ve skimmed through most of the latest Passenger Focus report.  There’s not a mention of the effect of the deeply flawed franchise system on ticket-pricing and hence value for money.  In fact, it reads like internal company market-research.  But of course, that’s what you’d expect from an organisation that appears to have no true independence from government.

Rather than sponsoring this flannel, the DfT should be getting its teeth into the task of making the rail franchise system work for passengers.

February 19, 2009

Dodgy Ogi?

Filed under: Credit crisis, Economics, Northern Rock, Reflections — Tim Joslin @ 10:18 am

I knew it was too good to be true.  I bookmarked an FT story late yesterday that at the time was titled “Panicked Antiguans rush to withdraw funds”, but is now headed “Storm waves crash on tiny Caribbean island”. The article noted that:

“…a Swiss newspaper reported that former Swiss President Adolf Ogi will be immediately stepping down from the advisory board of the advisory board of the Stanford Financial Group. ‘I don’t want to have anything to do with something that could be dodgy,’ Mr Ogi told the Cash newspaper on Wednesday.”

I know I’m not imagining things because (among others) the FT’s own search engine throws up the original article title and text.  The quote appears all over the internet too.

What amused me was that yesterday I followed a link to the original story which was in German.  This one probably.  What Adolf Ogi appears to have actually said was:

Ich will nicht mit etwas zu tun haben, das unsauber sein könnte.”

Now, despite the efforts of Mr Smith, my German teacher, my knowledge of the language (let alone Swiss German) is fairly rudimentary.  Nevertheless, I suspect that the operative word in the above sentence is “unsauber”.  The English equivalent may well be “unsavoury” and the internet gives a number of other translations for the word, none of which is “dodgy”.

What’s clearly happened, probably at a news agency (Reuters seems to be the source) is the guys have discussed the story.  “‘Ogi’, how do you pronounce that?  As in ‘Oggy, oggy, oggy! Oi, oi, oi!‘?”  “No, mate, rhymes with ‘dodgy’ “.  And the rest is history!

It’s frequently rewarding to read right to the end of articles.  Today, for example, the FT notes that “Gordon Brown took part in transatlantic economic ‘war games’…” and quotes the PM:

“What nobody bargained for was a shock that went right throughout the system internationally and froze the banking system. The regulatory system had designed itself to look at what would happen if an institution failed.”

Interesting.  Because I could swear that I frequently see the odious Alistair Darling on BBC News 24 explaining how Northern Rock, and now HBoS, had deeply flawed business models, because they were too reliant on the money markets rather than trusty old retail deposits.

As I’ve already explained, it should be up to the authorities to keep the money markets open, not individual institutions to plan for them to shut without warning.  Given that large amounts of the money that needs to be lent by Western banks (OK, around $2trn) is owned by the Chinese government, the only way it can get to where it is needed is via the “money markets”.  Does Darling expect the Chinese to send plane-loads of brief-case carrying state functionaries to the UK to deposit the cash in a Nationwide account?

The whole explanation they give for Northern Rock’s failure is pure self-serving deceit by the Government and the regulatory authorities.  Even worse, it may be self-deceit.  If they all believe their own propaganda, then clearly they have become incapable of thinking in straight lines.  Heaven help us!

The Government should just pay the Northern Rock shareholders what the market thought the bank was worth before the start of the Great Crunch in 2007.  And stop screwing the remaining private shareholders in the banks.

February 18, 2009

Great Crunch Causes: 1. The Chinese Mistake

Filed under: Books/resources, Credit crisis, Economics, Financial crisis — Tim Joslin @ 6:38 pm

A couple of weeks ago, I promised to identify the causes of the current financial crisis, which I’m now terming The Great Crunch.  And for once I’m keeping a promise.

I thought I’d make sure I knew what I was talking about before putting finger to keyboard.  To that end, I spent last week’s pocket-money on “Fixing Global Finance”, by Martin Wolf.  Best £18.99 I’ve spent this year (I couldn’t wait for a cheaper copy by post, so paid the full RRP for the only copy from Heffers – I was expecting the local bookshops to have stacks at them! And I was right, copies of this book should be selling like hot cross buns).

Everyone should read Wolf’s book, because this guy knows what he’s talking about.  I agree, though, with (say) the Independent’s review, that: “The final chapter on possible solutions is the least persuasive.”  At least Wolf has left some scraps for the rest of us!

The argument is very simple, though Wolf provides a great deal of background and discussion.  And graphs.  Dozens of them!  After the financial crises of 1998, the East Asian emerging economies, and China – which is particularly significant because of its size – adopted a policy of export-led growth, maintaining trade surpluses and large foreign currency, particularly dollar, reserves.  I’ve only used 3 Post-it notes for the whole book: Figures 4.8 and 4.9 (p. 70-1) show the savings build-up from 1998.  The counterpart (as Wolf would put it) of the Chinese and other surpluses was, of course, massive borrowing in the US (see Wolf’s Fig. 4.30 on p.101).

A very important point to be aware of is the role of China’s monetary authorities.  They have maintained their trade surplus by holding their currency down against the dollar (this is the currency peg they’ve chosen to target). Think about what’s happening.  A Chinese company supplies toys in return for $ (or £, € etc.). It exchanges these for Chinese renminbi to pay staff, suppliers and so on. The dollar ends up owned by a bank or other foreign-currency dealer. But the Chinese central bank buys the dollar for renminbi. Where did it get these renminbi? Answer, it issues bonds, which Chinese are obliged banks to buy. Thus the revenue (more accurately the profit since there may be import costs in dollars) from export sales is converted into renminbi, but these are “sterilised” by bond issuance and do not add to the Chinese money supply, where they could stoke inflation.

We have a different situation to “normal” balanced trade. If money were just a medium of exchange the renminbi would be used to buy dollars, which would be exchanged for, say, a Britney Spears MP3 download. The net effect would be that a toy had travelled from China to the US and Britney from US to China. But because Britney doesn’t always make the trip, we end up with a different situation. The toy goes to US, but the $s stay in China (and a Chinese bank ends up with a local currency bond).

Or do the $s stay there? Wolf makes the point several times that, compared to the first era of globalisation (1870-1914) when the gold standard was in force, “fiat” currencies are now dominant. This makes all the difference, because China cannot store its dollars. Instead, it invests them, mainly in US Treasuries. This means there is a surplus of capital in the US. Treasury yields fall, so investors look for better returns elsewhere, say in corporate debt or mortgage-backed securities…

Cutting to the chase, an asset bubble in US (and other countries with a similar trade deficit) is almost inevitable as a result of the export-led growth policies of China and other countries.

There are not a lot of things that can happen as a result of the trade imbalances over the last decade or so:

1. General inflation in US (and elsewhere)

This has not occured, because globalisation has turned inflation into a global phenomenon.  Or, rather, the inflation that is universally targeted by governments (essentially commodity and labour costs) is a global phenomenon.  As I will argue in future posts, the major intellectual failure has been a failure to target, let alone control, asset prices.

2. Fiscal deficits in the US (and elsewhere)

One possible and logical policy response would have been for the US and other countries to run budget deficits corresponding to their trade position in order to soak up the excess dollars.  True, after Clinton valiantly balanced the books, the US did indeed run up a massive budget deficit, but it was nowhere near big enough to soak up all the excess dollars.  It’s not quite a case of unintended consequences of fiscal rectitude (a post title I may yet make use of) because the US government would in any case have had to spend the money, so it would still have led to asset bubbles, just by a different route.

The only way I can think of to avoid this would be if the US Treasury purchased renminbi (ignoring, for the moment, the existence of Chinese exchange controls), in effect engaging in a battle of wills with China as to the dollar-renminbi exchange rate!  Or perhaps China would agree to such cross-holdings (whether the US taxpayer would is another matter) – at least this way China would be able to maintain large foreign currency reserves without damaging the global economy.  This would, in effect, implement a US policy of “sterilisation”, corresponding to the Chinese one.

3. Equilibrium because of gradual renminbi revaluation

It’s obviously possible for China’s foreign currency reserves to decrease in $ value at around the rate at which it is adding to them, as the renminbi gradually rises in value.  Indeed this is moreorless what’s been happening.  This may (arguably) be OK for China – the poor return on investment may be worth it in order to maintain a foreign currency pool for emergencies – but is certainly not OK for the US, because even if its net external debt ceases to increase, it still has the problem of a surplus of cheap money.

4. Asset price bubbles in US

As I said, asset price bubbles in US became moreorless inevitable.


I’m a little disappointed that it’s a case of Good Wolf, Bad Wolf (sorry, another so far unused blog post title).  If disaster was moreorless inevitable, then it’s no good blaming the banks.  In fact it’s a wasteful (and increasingly distasteful) distraction and lets the politicians and regulators off the hook – and they’re the ones who oversee and need to change the system.  And unfortunately Wolf has jumped on the bonus and nationalisation bandwagons.   The first is an irrelevance and the second would be a disaster – governments’ primary concern really ought to be their own balance-sheets.  If asset price bubbles are an inevitable result of global imbalances, as I believe they are, then why muddy the waters by complaining about the banks, as Wolf has done repeatedly?  You may as well blame the weather (as Tony Blair used to say about the newspapers).  I simply do not understand the logic – maybe Wolf had a bad experience with an overdraft (or a job application) in his youth!

In order to prevent a Second Great Crunch (which seems inevitable to me, at the moment), and to escape this one, we need to understand the causes.  We won’t do that by engaging in an orgy of scapegoating of the bankers.

It’s difficult enough as it is to accept that the deepest cause of the Great Crunch has been those nice cheap fluffy toys from China.  Wolf points out in his book that sufficiently determined countries can keep their currencies down (it’s more difficult to keep them up, because, as Russia is now finding, like Lamont and Major in the UK on Black Wednesday in 1992, you eventually run out of foreign currency reserves) and that there’s not that much other countries can do about it.  As he puts it in his concluding remarks (Post-it note 3):

“Thus the United States is at least as much the victim of decisions made by others as the author of its own misfortunes.  That is an unpopular view – in the United States, because it is easier for Americans to accept that they are impotent, and in the rest of the world, because it is far easier for others to accept that the United States is guilty than that they themselves are responsible.”  (Fixing Global Finance, p.194)

The Chinese Mistake is to imagine that massive trade imbalances are sustainable.  Governments should by all means maintain foreign currency reserves, but these must be reciprocal.  Over time, global trade must be kept in balance.  It’s easy to say that, but achieving such a nirvana may be a little difficult.

February 16, 2009

High-speed Professor goes off the rails

Filed under: Books/resources, Climate change, Coach, Global warming, Rail, Transport — Tim Joslin @ 5:32 pm

When someone says, literally, or in effect: “Listen to me, I’m a Professor”, be suspicious, very suspicious.  Because the truth is, Professors are just as likely as the rest of us to spout misleading garbage.  But their gibberish is more likely to be published, simply because the average editor thinks: “Letter from a Professor – must be worth a column inch or two!”  If you’re told it was written by a Professor, the chances are therefore higher than otherwise that what you are reading is poorly thought-through drivel.  Furthermore, having their output published more often provides the said Professors with the positive reinforcement that encourages them to submit for publication more material in the same vein as the rubbish that shouldn’t have been published in the first place.

I was therefore immediately sceptical when I read the last of an interesting clutch of letters in this morning’s Guardian on the topic of the UK’s procurement of new trains.  A Professor Lewis Lesley of Liverpool wrote:

“At £5.4m per carriage, these are the most expensive trains ever. For the same money, 30,000 high-speed luxury motorway coaches could be acquired, increasing the total size of the UK bus and coach fleet by 50%.”

I think he means that you could get 30,000 coaches for the £7.5bn cost of the whole order, not for £5.4m.  The order is for 1,400 train carriages, plus locomotives, so, including the cost of the locomotives (expensive, because they’re dual diesel/electric) one train carriage costs as much as around 21.5 coaches.  Hmm, maybe that’s not too unreasonable.

But, still, 5.4 million pounds – wow, that’s a lot of money!

Or is it?

Let’s assume, for ease of arithmetic, that the carriages seat 54 people each on an average trip (it’s probably more, since they’re filled like aeroplanes these days).  So that’s £100,000 per seat.  Wow, still a lot.

Wait a sec.  These carriages will be in service for decades.  Let’s just give them 20 years (they’re actually expected to last nearly twice as long as this, but, as you may have guessed by now, I like to make conservative estimates *).  Now we’re down to £5,000/seat/year.

See what I’m driving at?

Divide just once more and we see the cost is less than £15/seat/day over the 20 years.

And, of course, these trains can make, let’s say, two return trips (another conservative estimate) on one of the UK’s main lines every day.

So, for a single journey – London to Manchester, say – the portion of your ticket price needed to cover the investment in the rolling stock is at most a princely £3.75.

Think about that next time you shell out as much as £360 for a walk-on ticket, as the Guardian’s consumer champion reported on Saturday.

There was a reason why I scrutinised Professor Lewis Lesley’s “argument”.  I would much prefer a future where I am able to travel around the UK on high-speed trains than “high-speed luxury motorway coaches”.  This is a contradiction in terms: “luxury” and “coaches” do not belong together in the same sentence.  And virtually every vehicle on the UK’s roads is capable of exceeding the 70mph speed limit.  Only an idiot (or perhaps a Professor) would contemplate purchasing a fleet of coaches incapable of sustaining 70mph.  What the adjective “high-speed” is doing in the Professor’s sentence is therefore anyone’s guess.

Look, travelling by coach is an unpleasant experience.  That’s why, by and large, you find, proportionally-speaking, considerably more impoverished students on coaches and highly-paid Professors on trains.

It was when he started on the merits of promoting coach travel (in some unspecified way – presumably state diktat) that George Monbiot lost me in his (nevertheless worthwhile) book Heat.

Look, guys, if you’re going to get everyone out of their fossil-fuel powered cars and aeroplanes, then please, please provide an alternative vision that people can believe will improve their lives.  Heck, why not try to capture their imagination once in a while?  Because you’ll never get enough people to wear a hair-shirt.

Oh, and I agree with the Guardian’s correspondents who say we should be completing the electrification of the rail network, not buying diesel locomotives.  Getting rid of the need for dual-powered trains would also reduce the cost per carriage-seat even further, of course.

In fact, of course, the main costs of your rail (or coach) journey are fuel, staffing and maintenance of the infrastructure (not necessarily in that order), the last two of which are subject to economies of scale, so that the cost of rail travel should start to reduce if you can get the network into a dynamic of continued expansion of passenger numbers.  If the railways are run on renewable electricity, then in the long-run, the fuel cost will come down, because the cost of generating the energy will ultimately be subject to the scale economies of manufacturing.

Of course, the most significant cost to society of train or coach journeys is most likely the passengers’ time.  Perhaps this should be borne in mind by Professors making the recommendations on which Government transport policy is no doubt based.


* Another way of looking at this is that the cost of the capital (think of it as a mortgage) to pay for the carriages would be something of the order of 5% pa – another reason for choosing the figure of 20 years for the lifetime of the carriages.

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