Uncharted Territory

March 17, 2009

The Age of Stupid Planning Processes

Filed under: Economics, Energy policy, Film, Global warming, Housing market, Politics — Tim Joslin @ 7:49 pm

Back in 1998, McKinsey published a famous report: Driving Productivity and Growth in the UK economy (pdf, free registration required), which noted the detrimental effect of inflexible and onerous (my words) land use regulations on UK productivity. They note, for example, that:

“land and property regulations … constrain the hotel and software industries… [T]heir effects can be seen in industries as diverse as airlines, banking and general merchandise retailing. By contrast, the combined effect of deregulation in capital markets and a liberal approach to the use of land in London’s Docklands during the 1980s fostered dramatic growth in investment banking and securities, a field in which the London market now leads the world.”

Whilst the McKinsey consultants were writing their report, a team of film-makers on a shoestring were working on McLibel, eventually released in 2005. A decade on, the same team have released The Age of Stupid, which I found most notable for demonstrating that onshore wind-power generation should be added to the list of industries throttled by the UK planning process.


The film is based around a future Pete Postlethwaite looking back on the current era from 50 years hence, when global warming has left London flooded and the world in anarchy. Postlethwaite views video footage which includes the stories of 3 particular characters. One was a New Orleans resident oil industry worker and hero of Hurricane Katrina. The point of continuing the reportage into the character’s retirement was lost on me. I was expecting him to denounce the oil business, but that never happened.

The other two stories were much more effective. At times the film achieved what I call “cringe humour”, as perfected by Alan Partidge, David Brent and Borat. The founder of an Indian budget airline created his own episode of The Office when he berated and threatened to fire his staff.

But the film is worth seeing most for the battle of David Cameron, sorry, Piers from Cornwall, a caricature of the upper-middle-class eco-nut – and I mean that in the nicest possible way – with a family to match. Piers’ partnership with a farmer was straight out of The Fast Show. The team wanted to build a wind-farm. But Piers was reduced nearly to tears (on the phone to his mum) by the nimby country-folk – some even more upper-class than Piers himself – who block his plans.

As The Age of Stupid demonstrates so eloquently, the UK planning process is completely dysfunctional. It effectively gives people – local residents with a vested interest and time on their hands – the power to make decisions on matters of which they know next to nothing. There is only one possible decision they can make, which is to reject plans, so the process is obviously skewed towards this outcome. The critical concept in this charade is power. As The Age of Stupid shows, the reasons for rejecting plans are often irrational, bordering on the ludicrous. Since the majority of us who would benefit from a development, such as of a wind-farm, have no say in the process, there is no other way those involved can demonstrate their power than by turning planning applications down. It is utter, utter madness.

I pointed out the same problem with housing a while ago. It is entirely illogical for local residents to be given the right of veto over housing developments that benefit (among others) prospective purchasers of the houses, who have no say whatsoever in the decision as to whether or not they are built. Where did this right come from? Some of the objections to the wind-farm in Stupid were on (largely unfounded) grounds of noise nuisance. But someone could quite legally create a similar noise, say by driving up and down a country road. Quite apart from the failure of the planning process to weigh general benefit to society against cost to individuals, it gives more weight to those nuisances (or imagined anticipated nuisances, or psychologically constructed imaginary possible nuisances) that arise from construction activity than arise in other ways.

Here are 3 possible responses to this situation:
1. Confront the problem head-on: tell people they do not have the right they think they have. Take planning decisions at a higher level, weighing the general interest of the population against that of those near a development and achieving objectivity by excluding (either explicitly or by modifying the electoral process, i.e. introducing PR) directly elected representatives for the locale affected. Tightly constrain the grounds for objection, explicitly challenging, for example, the “right” to a particular view, the value of which before and after a development is purely subjective and subject to irrational fears. To put it simply, people get used to, and even appreciate, new features in their environment.

2. Spineless, self-serving politicians are unlikely to take sufficiently drastic action in removing the rights local residents have somehow acquired, so another tactic is to buy off the opposition. Simply pay people compensation, according to a formula, for the inconvenience of – say – being within a certain distance of a new wind-turbine.

3. Developers need to get wise. A lot of objections are entirely irrational. They arise, in part, because people want to feel they have power and are not helplessly subject to developers’ whims. It is essential to engage in the right way with the Residents’ Associations, local councillors and unaffiliated busy-bodies who are likely to block developments. They have to be involved in the process, so that they feel they have power over the shape of the development. I expect there are consultants specialising in this sort of exercise. We probably need more.

A full solution will involve aspects of all three of my proposed responses. Some changes to the UK’s planning regulations have taken place for large projects since McKinsey’s report. But much more needs to be done if we are not to become a nation of ever-poorer people, living in increasingly expensive houses, heated by energy that is both unnecessarily polluting and in shorter supply than necessary. Perhaps The Age of Stupid will provide a little more impetus for change. Go see this movie.

March 4, 2009

Logan’s Run, Peston & Goodwin, James Baker’s loony ramblings and Compact Fluorescent Lightbulbs

Filed under: BBC, Credit crisis, Economics, Film, Global warming, Media, Reflections — Tim Joslin @ 8:34 pm

I was treated last week to a screening of the 1976 dystopian saga, Logan’s Run. The event was organised by CRASSH, so we discussed the themes of the movie afterwards (and the 1970s haircuts!). There’s the idea of what the world would be like if we disappeared – a longstanding human preoccupation recently discussed, for example, in Alan Weisman’s The World Without Us. The film treats us to an the sight of an overgrown Washington. Perhaps the familiar trope – remember Survivors, Twelve Monkeys? – arises from a collective experience of living among the ruins of past great civilisations – Egypt, Rome, Greece, Inca, those of the builders of Stonehenge and the giant Easter Island statues, the fascination with mysterious, powerful Ancients reinforced in a thousand Hollywood movies and supplanted to imagined worlds in numerous SF works (check out Iain M Banks’ Against a Dark Background, Feersum Endjinn and Matter) and a dozen Star Trek episodes – coupled with the perceived Cold War threat of the rapid destruction of our own civilisation (as most memorably explored in the classic novel, A Canticle for Liebowitz). The scientific question of “what would happen without us” is an interesting one, though, so perhaps more on that another time.

Logan’s Run also presents a future of overwhelming state power. This was a common theme in portrayals of future (or historically contingent “parallel world” alternative) societies in the media of the middle part of the 20th century – think of 1984, It Happened Here, and, less high-brow, Blake’s Seven and Star Wars. The examples are endless, but less common today, when the narrative is more likely to revolve around external (or internal) threats to society – think 24 or even Battlestar Galactica.

We forget how the state became so dominant in people’s lives during the mid 20th century, and the battles to throw off the yoke – remember 1968 and 1989. It wasn’t just the Nazi and Soviet phenomena. The World Wars were among the factors leading to powerful states everywhere determining the course of their citizen’s lives. But even after 1945, conscription sent the youth of many countries to fight in pointless wars, food was rationed in the UK until the 1950s, and it was only after the Thatcher Revolution that the state’s role in housing provision started to decline. Globally, the post-war Affluent Society rippled out from the US, where it asserted itself in the 1960s, reaching the Soviet Empire in the 1980s, and China – where Tiananmen has postponed political change – only in the 1990s.

Perhaps it is my interpretation of recent history as a battle for individual freedom that causes me to react so viscerally against the scape-goating of Fred Goodwin, led by the dangerously influential, over-excitable Robert Peston. I consider it nothing short of scandalous that the BBC – the only UK website in the world’s top 10, they seemed to be saying on the radio today (though I don’t recollect what metric this was based on and Mr Google can’t verify this factoid) – presents a single dominant opinion on financial issues to the world, in the form of Peston’s blog. It is, in fact, the only blog in the hundreds of links on my customised version of the BBC homepage, appearing prominently at the top of the Business & Money section. I checked all the boxes and, looking at the selection menu again, “Robert Peston” appears on the same level as category headings, such as “Economy”, “Companies” and “Top stories”! It reminds me of how, in 2007, many UK newspapers contained News, Sport and Madeleine McCann sections.

It’s not just me who sees the hounding of Robert Peston as the thin end of the totalitarian wedge. There’s Daniel Finkelstein in The Times, for example, and – flaming hockey-sticks! – I even find myself agreeing with Boris in the Torygraph. Unfortunately, it’s not just Peston. Vince Cable is another who is profiting immensely by talking down the financial system. Here’s what he has to say on the Lib Dem website:

“In the case of Sir Fred Goodwin, it seems to me the Government would be on strong ground to tell him he is entitled to pension payments available to employees of bankrupt companies under the Pension Protection Fund, which have a maximum of £27,000 a year. If he feels that’s inadequate he can sue.”

Unbelievable. Let’s make it up as we go along, shall we?

But it’s not just executives such as Goodwin who must be punished, apparently. Look at this paragraph from a prescription by James Baker writing in the FT:

“To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.”

Everyone must be protected from their actions, it seems, except shareholders! Forget the law. Forget fairness. Forget even the economists’ cherished but flawed principle of moral hazard. Apparently there are consequences if depositors lose confidence in the system, consequences if bondholders lose confidence. But… hang about. What about those crashing stockmarkets? Aren’t they one of the feedbacks in the system, ratcheting down business confidence and people’s willingness and ability to spend? Don’t massively devalued share prices make it more difficult for companies to raise money? If there’s a danger of bank-runs by depositors and bond-holder panic, then maybe, just maybe, there’s a danger of stock-market crashes if shareholders are wiped out, or if confiscation of their assets is threatened.

Value judgements and confiscations by government don’t help us solve this crisis – they make it harder – but they sure reinforce the power of the political classes and their media rabble-rousers.

I was minded of this on Sunday evening when I was trying to make a complex point in a discussion. Someone had earlier pointed out to general amusement that the UK’s Middle England tabloid, the Daily Mail, had, in the same week, railed against the ban on traditional incandescent lightbulbs and pointed out the money that could be saved by installing them! I rhetorically suggested that maybe the ban on incandescent bulbs had been counter-productive. Meaning, a better way to phase out the old type of bulbs would be to convince everyone that the new ones are a better product. Anyone stocking up on incandescents now in advance of the ban could use them for decades, whereas someone switching to compact fluorescents (CFLs) to save on their electricity bill would do so immediately. And are we going to abandon CFLs in favour of advanced LEDs in a few years’ time? Probably not, but those conscious of the electricity cost may well make another switch voluntarily. But apparently my comment about banning bulbs was beyond the pale and I was interrupted mid-flow.

Do we really want to solve our problems by state diktat? Or should we respect fairness, reason and individual freedoms? The latter is the only possible path that can succeed. If we imagine that we can only achieve our goals by capture of the state apparatus the result will be endless conflict. And we might not like the end result.

The Great Depression of the 1930s was a factor in greatly increasing the power of the state over the individual. Let’s not repeat the experiment.

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.

March 19, 2008

How to play dominoes

Filed under: Economics, Film, Media, Northern Rock, Rights issues — Tim Joslin @ 5:21 pm

I keep getting an error (good old Beeb) when I try to post on Robert Peston’s blog. What I wanted to say was:

“Rob, Why does the link to this blog entry [Postscript: broken, i.e. story changed – unprofessional by the Beeb, as usual, where’s the audit trail?] refer to a ‘secret bank meeting’? Be careful. Btw, I don’t agree with Robin Bruce that the NR accusations against you are ‘unfair’.”

Here, in my space, rather than Rob’s, I’ll go further. I fail to understand why Peston is receiving awards for the scoop of the year (the NR “emergency” loan). I suggest that we make appropriate laws so that the next reporter that provokes a bank run instead finds themselves “helping with police enquiries”. Laws that will also ensure that the next media organisation that allows this to happen is instead the organisation that has to lay off 1/3 of its staff and whose shareholders are “punished” and executives disgraced.

And now it’s happening all over again with Bear. People who’ve invested their entire working lives into the organisation have been wiped out overnight: “‘My life has been flushed down the drain,’ one senior figure [said]”. Imagine how this must feel, all you so quick to apportion blame. Imagine, Mr King, as you still apparently smugly believe: “…there should be some ‘moral hazard’ in the system and… banks should not expect the central bank to step in to ease their funding crisis.”

I went to a discussion yesterday evening about “money” – the topic being “where does it come from?”, I think. It was quite clear that the average (educated) person has little clue how the financial system works, so perhaps it might be best if I don’t bandy about terms like “liquidity” and “risk” on the assumption that people will be clear what I am trying to say. Let me first try to explain a few points, and maybe convince a few people that “moral hazard” is a bankrupt concept, morally and intellectually.

First point – I know nobody understands money – but let’s nevertheless talk about risk. Who takes the risk when a loan is made, say to buy a house? Well, the answer is it all depends. In some US States, the bank takes all the risk, as I noted before. Yeap, can’t pay the mortgage, just walk away, yippedee doodaa! And this, of course, is the root of the entire global credit crisis.

That may seem a bit odd to those out there who, like me, lay awake night after night in the early ’90s worrying about the negative equity over their heads. No, indeed, ‘cos over here in the UK, we’re tough. Walk away and the banks will hunt you down. In fact, there’s still the occasional story in the papers of court cases from the ’90s crash, only now finally being resolved.

Let’s put it in starker terms. You’ve all been to the movies. I watched “Mean Streets” on DVD the other day. Borrow off the local hoodlum, and it’s you that’s taking the risk, not him.

See what I mean, there are risks to all parties involved in a lending transaction – and, as Scorsese demonstrates in “Mean Streets”, to third parties as well.

For the record, IMHO, the UK system is superior. It is in the general public interest for losses to the banking system, in which we all have a stake, to be minimised. It won’t stop people making mistakes, but it is in the general interest for people who take on debts to pay them back (and IMHO, bankrupts and IVA beneficiaries should have to pay back their debts forever, if necessary, as long as they are earning enough money, in a similar way to student loans, or by having a higher rate of tax).

So, second point, what is a systemic problem? Answer: it’s a problem that affects an entire system. While house prices are rising, all those involved in the mortgage-lending transaction are hunky dory. When prices start to fall, then problems arise for those carrying the risk, which, as I’ve demonstrated, is arbitrary – it depends to a large degree on local circumstances.

One way to contain the problem is for individual home loans to be as isolated from each other as possible. That is, they have to be paid back (i.e. via mortgage indemnity insurance and/or being hunted down by Jack Bauer). The impact on the bank – and the banking system which we all rely on – can only be minimised in that way. This is why I believe the UK system as it operated in the ’90s to be superior. Somehow the Building Societies survived, perhaps against the odds. Who knows what this daft Government will try to do this time, though.

A systemic problem, then, is one affecting a whole system, in the case in point the US housing market and banking system – at first parts of them, and now pretty much the whole caboodle, not to mention much of the rest of the global economy. Whoops.

What we have is a uncontained systemic risk problem. One that we have so far failed to solve.

Third point, let’s introduce another concept: scapegoating. Scapegoating – making one or more people the scapegoat – is a great way to deal with systemic problems. Instead of fixing the system, those involved agree that only some people are wholly to blame for the problems – whether they are in fact solely guilty or not. These people can be stoned, sacrificed or shot depending on societal preferences, or, in the case of financial systems in our civilised modern world, bankrupted and/or disgraced.

Fourth point, scapegoating works best when people can be convinced that it is not in fact scapegoating, but true apportionment of blame. In the modern world, some kind of intellectual justification tends to work best. And this is where the concept of moral hazard comes from. It is at best a bit of fashionable pseudo-science. The idea is that if you bail people out when they run into problems “of their own making” – especially due to risks they’ve taken – then they will repeat the same behaviour.

And that’s why, when Northern Rock ran into difficulty, the people who had bought mortgages from it were forced to sell their houses to pay the bank’s depositors who wanted to withdraw their money. And with everybody selling at once, most people had to sell their homes for less than they bought them for and were hunted down by Jack Bauer… Oh, sorry, that’s not what happened.

No, moral hazard is why Northern Rock’s depositors lost their savings… Oh, sorry…

No, in this case Merv and Gordo decided (while Darling fetched their coffee) to blame Northern Rock’s management and shareholders. That’s right, the intermediary between the lenders (the depositors) and the borrowers (the mortgagees) was deemed solely to blame for the “excesses”. Get rid of them and we don’t have to fix the system. We are not all to blame – we, the depositors, the homebuyers, and most of all those (Merv and Gordo) supposedly overseeing the whole system and responsible for its health, no, we‘re not to blame – so we can blame Adam Applegarth and the Northern Rock shareholders. And we’ll try to regulate the banks even more… and history will repeat itself (with a few twists) in another 10 or 20 years.

Let’s sum up:

  • scapegoating doesn’t solve the problem because it doesn’t fix the system (and in fact makes it more difficult to fix the system, because it implies the cause is understood – it was those wicked people, um, doing their job);
  • moral hazard is a pseudo-intellectual justification for scapegoating.

What might improve matters?

Fifth point, let’s introduce another concept – expectations. It is scientifically proven that people make decisions according to their expectations of the future. Momentum investing (buying assets that are already rising – or falling – in value) is illogical (since the market should already have determined the value of particular assets), but works [I’ll supply a link if I find it].

The moral hazard concept is insidious, because it is partly true – it is based on not setting false expectations. The trouble is, it does nothing to address movements in the value of assets such as houses. It is in fact entirely rational to buy when house prices are rising. And to loan money to people buying such houses. Everyone expects prices to continue to rise, because they know that’s what everyone else expects. No-one has any way of knowing when house prices are about to peak. And, as I say, it has been scientifically proven that whatever the absolute value of an asset, such as houses, if it is rising, it is more likely to continue to rise than not.

Hmm, so how do the authorities stop bubbles and subsequent busts? Well, they can either adopt policies aimed at keeping price growth at a certain level or they can try to slow the crash. And they’ve done neither.

House prices are not included in the otherwise successful targeting of inflation.

And back to our game of dominoes, the authorities have made the problems worse by failing to assist the intermediaries – banks and building societies – enough. Or rather, they’ve failed to make it easier for them to help themselves.

Let’s introduce some more concepts.

Point six is the idea of the balance sheet. Banks have assets – in particular, loans, such as mortgages, which provide an income, and which they could sell – and liabilities – in particular, deposits, which could be withdrawn at any moment. Assets minus liabilities gives some idea of the value of the bank.

Now, what’s happened is that some of the assets for some banks have suddenly become worthless. Now, assets, such as mortgages for x pounds, are risky – they may be worth £x + interest or somewhat less than £x. Nobody knows yet. Banks have to avoid the value of their assets falling below their liabilities at all costs. When some assets turn out to be worthless, they can do two things:

  • stop lending to ensure that the x pounds they have remains worth x, instead of an indeterminate amount;
  • raise more capital (or retain more profits).

That is, they can sell more shares in the bank, so that the difference between their assets (those mortgages) and their liabilities (those accounts) is higher. This gives them more headroom for taking on those risks, that is, for writing mortgages. Allowing people to buy houses again and stop prices falling

So, point seven, and this is what I’m leading up to, what you really want to do, is to get more private capital into the bank – and, if you’re Merv, or Ben/Hank – and I should say, Hank has stated this explicitly (link when I find it) – into the banking system in general.

So what’s happened? NR: shareholders willing to put up £700m. Amount of extra capital put into the UK banking system by nationalisation instead? £0.

Bear: Citic (China) offering to invest $1000m. Amount of extra capital put into the US banking system via Bear Stearns? $0 (JPM took out Bear with shares rather than cash, Citic cancelled investment).

Now, point 8, we have certain beneficiaries of these exercises to wipe out those shareholders as the evil Professor Roubini puts it. Let’s try to work out who these are:

  • the UK taxpayer – but only in the long-term if they succeed in privatising NR and don’t lose court cases to the expropriated shareholders (and I think they’ll lose hands down);
  • JPM;
  • competitors of NR and Bear (who may have had a hand in cutting off their lines of credit);
  • short-sellers in NR and Bear, rumour-mongers among them.

Remember, you need shareholders to provide the capital to take risks. Writing mortgages is inherently risky, and until banks restore their capital, they can’t write mortgages, house sales will be sluggish, and house prices will keep falling, and there will be more defaults, wiping out bank capital… perpetuating a vicious spiral.

Now, NR’s assets are very likely greater than its liabilities. Why should the UK state benefit? And why should short-sellers of NR and Bear stock benefit?

Ditto, Bear, though there is some doubt as to the value of its assets. But why should JPM Chase benefit?

Now, maybe the NR and Bear shareholders are less deserving than the UK state and JPM, but let’s just take a step back from all the judgementalism and emotion. Let’s try to be practical. There are two important questions to answer from a general public interest pov:

Q1. Will the nationalisation of NR and Bear takeover lead to more capital being put into these banks than would otherwise have been the case?

Q2. Will the nationalisation of NR and Bear takeover lead to more capital being put into the banking system as a whole than would otherwise have been the case?

A1. This is very easy to answer. No. It would be illegal for the UK Gov’t to put more capital into NR. That’s sorted! And if JPM wanted to raise more capital it could have done so anyway.

A2. OK, so far, we’re £700m of risk capital down on NR and $1000m on Bear. That’s ultimately a bit of a bummer for the old Ango-Saxon housing market, but not that much dosh in the great scheme of things. But, and here’s the $64billion question, is it now more or less likely that people will go to their 100% taxpayer guaranteed UK or US savings account, take the money out and buy shares in their bank instead? Well, my friends, I need hardly spell out the answer. Yours truly will not be buying any more bank shares in a hurry. And certainly not while short-sellers are trying to wipe out HBoS and LloydsTSB.

The domino effect is that the failures of NR and Bear have made further bank failures more, not less likely. Boils may have been lanced, but MRSA has infected the wounds.

Now, here’s the big idea.

Instead of saying the shareholders should be “wiped out”, a less face-spiting idea (not everyone’s nose is insured) might be to say: “the shareholders better put up some more capital or risk being wiped out”.

What I suggest is that in the event of the next NR or Bear the bank in question (could be anybody now) is taken into a sort of Chapter 11 for banks. Protected by the overseer (Fed, BoE, ECB) and ordered to raise more capital on pain of bankruptcy/firesale etc. I believe it is rational for at least some existing shareholders to invest more. The value of the bank is uncertain. If they don’t invest more they definitely have £0. If they do, they have the £x they put in, plus £y that the bank is actually worth. Unless they believe £y to be negative they should put up more dosh.

Like quite a few other people, I thought exactly this sort of capital raising exercise was what was happening in the case of NR, which is why my opinion of Messrs Brown and King is now unprintable.

I fundamentally do not believe that banks should be allowed to fail because they run out of liquidity alone, if shareholders are prepared to put up more capital. This is a recipe for dominoes to fall. The financial system should in any case be a machine to find out which risks were ultimately worth taking and which weren’t. For this to happen the game must finish. If only the biggest banks can survive each crisis, then even bigger losses are ultimately possible. Because, the way the game is being played now, at least some banks are going to fail in every crisis. And we have no way of knowing whether this was because the business they did was bad or not.

But the main point is that when we stop this childish game of punishing shareholders, we start to see that there are ways of getting more capital into the banking system.

If the Fed and the BoE end up holding vast mortgage portfolios, whilst no-one is writing mortgages, because they’re losing money year after year, and can’t raise capital, because investors see their stock as a gamble and not as an investment, then the taxpayer will really suffer.

I see no reason why house prices anywhere – US, UK, Europe – wouldn’t drop by 50, 60, 70% in such a scenario, before enough people could afford to buy property outright to arrest the fall.

So, Rob, if HBoS ever were in trouble, then I’d hope Merv and Gordo were having secret meetings. Put the kettle on, would you, Darling?

March 5, 2008

“My Blueberry Nights” – with added raspberries

Filed under: Film — Tim Joslin @ 5:32 pm

A tad disappointing this one.

It’s clear from the off that there’s something very wrong with Jude Law. His heart just didn’t seem to be in it. Maybe he found out that Wong Kar-wai hadn’t been able to land Clive Owen for the part, or maybe he just didn’t fancy (or even like) his leading lady. There was no chemistry between Jude Law (Jeremy) and Norah Jones (Elizabeth), which was a shame, as a spark between the two was an essential premise of the movie. Instead, Jude seemed to be dreading the inevitable clinch. Or perhaps his awkwardness resulted from his interaction with the director – “My Blueberry Nights” is the first film Wong Kar-wai has made in English.

Norah Jones appeared to deal successfully with the part of Elizabeth, as the role was apparently written as that of an ingenue drifting around America like a member of the public who’d wandered onto a film set. Elizabeth looks on helplessly while the characters she meets live (and die) like they are actually in a film. But it is the two subplots – Arnie (David Strathairn) and Sue Lynn’s (Rachel Weisz) marital problems and Leslie’s (Natalie Portman) gambling non-problem (though the least said about her family problem the better) – that make the film worthwhile. How the minimal interaction with the larger than life characters she meets is supposed to have transformed Elizabeth is anyone’s guess, so my recommendation is to treat the film as a couple of tasty sides, and ignore the main dish.

Stylistically, the dark Memphis scenes (with appropriately stormy sound effects) contrast effectively with the bright daylight of the road-trip and the saturated digital colours in the New York cafe. The director must be trying to show us Elizabeth’s changing mood, but unfortunately this loses all its impact if you’re not convinced by the main story. There’s also some CCTV surveillance business in the cafe that seems to be from another movie. Probably the movie left on the cutting-room floor.

Rating: **

March 4, 2008

I’ll be kind to “Be Kind, Rewind”

Filed under: Film — Tim Joslin @ 6:46 pm

My intention is to put a short review of films I watch up here, for my reference as much as anything else… I recently ordered “Where the Truth Lies” (2005) on DVD from Sofa Cinema only to realise in the first scene that I’d seen it already and it wasn’t so good I’d want to see it again. But perhaps my mistake was understandable, as Sofa Cinema’s description is:

“Acclaimed director Atom Egoyan adapts Rupert Holmes’s novel about a celebrity journalist who attempts to reveal some old Hollywood skeletons.” Full stop.

The trouble is, all I remembered was that it was about: “… a long-buried incident that affected the lives and careers of showbiz team Vince Collins and Lanny Morris” (thanks, IMDB), which of course, is what the “celebrity journalist… attempts to reveal”. Mind like a sieve, don’t go in for film quizzes! Though, of course, it’s the relationship between the showbiz duo that makes “Where the Truth Lies” worth watching. Wish I could remember where I saw it – I’m beginning to suspect the London Film Festival and that Atom Egoyan answered questions afterwards.

Anyway, “Be Kind, Rewind” is surprisingly OK, given the Guardian review I read after deciding to go and see it (but now I see the Guardian has likely knocked a star off for some perceived political incorrectness). It’s a bit chaotic and quirky, but actually has a plot, which was a big surprise after “The Science of Sleep“, which I just didn’t get.

The movie credits refer to a website something like bekindrewind-swededmovies, but Google didn’t help me find it – I got a single hit (there’s a word for this) of a blog that Google thought would “harm my computer”. Nasty. Does the site exist? If not, why is it in the movie credits? Will it appear? In the meantime, this Youtube page is worth a look.

Rating: *** (I know, same as the Guardian, but I’m gonna be harsh)

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