Uncharted Territory

June 12, 2017

The Brexit Logic Trap

Filed under: Brexit, Complex decisions, Economics, Markets, Politics, Reflections, Regulation — Tim Joslin @ 11:52 am

170612 Pic for Brexit post doh

“I think people will interpret membership of the single market as not respecting that referendum.” – John McDonnell

You can’t build a rocket to reach the Moon without understanding the laws of physics.  In politics, as in many other fields of human endeavour, we are most likely to succeed not through raw emotion, but when our goals are aligned with logic and a clear understanding of the real world.  Thus, political projects have for centuries been informed by the carefully crafted logical, evidence-based arguments of thinkers from Adam Smith to Karl Marx.

Somewhat more parochially, the UK will only resolve its Brexit conundrum by finding a solution that works in practice, not just in the fevered imagination of one or other political leader.

Why do I say we’re in a “Brexit conundrum”?  Surely we’ve voted for Brexit and should “just get on with it!”.  Well, no – putting the hard-line “Remoaners” to one side for the moment – it’s not quite as simple as that: the argument now is apparently over whether we have a “soft Brexit” or a “hard Brexit”.  Oh well, I hear from the gallery, we were going to have a “hard Brexit”, but Theresa has put her expensively shod foot in some seriously pungent doo-doo and now we’ll have to have a “soft Brexit”.

Yes, it seems to have turned out that a “hard Brexit” is not a politically viable option, though David Davis and Liam Fox are still in denial.  Nor is a “hard Brexit” economically viable, I might add.  Never mind, “just get on with it!!”, say the great British public: we’re more concerned about the NHS and inequality anyway.

Unfortunately, it’s still not quite as simple as that.

Why?  Because a “soft Brexit” is not a logically viable option.  If it was, Theresa May would probably have proposed it already, since, contrary to popular belief, she and her advisers are not entirely stupid.  No, it turns out that, no sooner have you pulled on one loose thread of the UK’s relationship with the EU, than you’re standing in front of the nation completely starkers, as Theresa May hinted during the election campaign.

For example, if we go “hard” and leave the European customs union, then, for starters, there’s a border problem in Ireland, not to mention with Gibraltar.  Huge bureaucratic costs arise for business, plus we revert to WTO tariffs on all our trade until we can negotiate something different.   Enough!   Let’s stay in the customs union, then, you say.  Oh, but then we wouldn’t be able to negotiate our own trade deals.  We need to do that to offset leaving the single market.  And trade is kind of important because we need to import stuff.  Like food.

OK, then, let’s stay in the single market.  Ah.  But then we’d retain free movement (I know I am on record as thinking that’s a good thing, but I’m trying to be detached and objective here).  And, incidentally, be subject to the European Free Trade Area (EFTA) court, which apparently doesn’t violate our precious sovereignty as much as the European Court of Justice (ECJ), though I’m not sure the great British public would be fully appreciative of the fine distinction.

Hmm, surely we can remain members of uncontroversial European agencies, Euratom, perhaps?  Nope, sorry, not unless we submit to the authority of the ECJ (which Labour don’t happen to feel is worth mentioning in their manifesto, I note), assuming we haven’t already done so by trying to stay in the customs union.

So the dilemma facing the nation’s glorious leadership cadre is to propose either a “hard Brexit” – which might not have got through the Commons even before the General Election and would lead to years of economic chaos and decades of underperformance – or opt for a “soft Brexit”, which would involve remaining in the single market and customs union, but also mean retaining the ECJ and free movement, and (presumably) land us with the same £50-100bn bill as hard Brexit would, as well as no influence over the single market and customs union rules nor the ability to negotiate our own trade deals.

In other words, dare I say it, if we don’t have a “hard Brexit” we may as well stay in the EU.

This is the logic trap in which we find ourselves.

This is why the Labour Manifesto, as David Davis correctly points out, pretty much paraphrases the Tory government’s Brexit White Paper.  Labour write:

“We will scrap the Conservatives’ Brexit White Paper and replace it with fresh negotiating priorities that have a strong emphasis on retaining the benefits of the Single Market and the Customs Union.”

whereas the Guardian’s commentary notes that:

“The [government’s] white paper [die!, evil capital letters, die!] reiterates that the government aims to secure ‘the freest and most frictionless trade possible in goods and services’ with the EU outside the single market and via ‘an ambitious and comprehensive free trade agreement’.

[The Tory government] also wants to be outside the customs union, so it can negotiate its own trade deals, but would like ‘a new customs agreement’, which should be theoretically possible thanks to new technology. … [No kidding, this really is their argument]

… [T]he UK will not seek to adopt an existing model used by other countries, but try to ‘take in elements’ of the single market in certain areas – in other words, bespoke deals for important business sectors. From the EU perspective, all this is ambitious: it sounds suspiciously like cherry-picking.”

Of course, Labour’s presentation during the election campaign was very different to that of the Tories, emphasising that they’d prioritise the economy over immigration, for example, but in essence both are just nuanced versions of Boris claiming he can simultaneously have his cake and shove it into his stupid gob, spraying crumbs and spittle in all directions.

Reality awaits.

September 9, 2016

After the Brexit Referendum (3) – the Mobile Classes vs the Rooted Classes

Filed under: Brexit, Migration, Politics, Reflections, UK — Tim Joslin @ 9:53 pm

I’ve worked out why I’m overcome with rage whenever I hear Frank Field championing the needs of the “ordinary white working class”, in the Guardian’s words (it’s not clear whether Field actually said “white”), besides, that is, his uncanny resemblance to Ian Richardson’s Francis Urquhart in the original UK early 1990s House of Cards series.  I suspect that Field and I see the world quite differently.  Hence my irritation.

The contrast between Field and, for example, Gordon Brown could not be more stark.  It seems to me that Brown, and Blair for that matter, both share my view that, when in power, whilst they represented the British people – and they are patriotic – their concerns were not limited to the welfare of the British.  Others, Poles and Romanians, say, deserve no more or less than us Brits.  You could say that Brown, Blair and the many others who supported the Remain side, including myself, are internationalists, but there may be a more fundamental distinction – between open and closed thinking.  An example of closed system thinking is to carefully conduct a laboratory experiment, varying only one factor at a time; but the real world is an open system, with numerous uncontrollable variables.  Closed thinkers only want to worry about their own area of concern; open system thinkers grapple with complexity.  I’m sure Frank Field believes Poles deserve a good life just as much as Brits do.  I presume he just doesn’t think it’s his problem.

But that means Field has to ignore many of the people who make up today’s British society.  And it seems to me that the specific closed way in which he is thinking is to consider only what I will term the “rooted” classes, the people Labour has historically represented.  Perhaps this form of closed thinking explains in part why there’s not only a divide down the middle of the Conservative Party, but also a damaging – because the issue is so fundamental – schism in the Labour Party, the majority enthusiastic for Remain on one side and Field, Gisela Stuart, Kate Hoey, John Mann and Dennis Skinner, to name the most high-profile Brexiteers – assuming we take Corbyn’s Remain stance at face value – on the other.

Just because the Tories are divided over Europe doesn’t mean Labour has to be.  The vocal minority of Labour Brexiteers (4% of their MPs said Field) have done untold damage to the Party, as well as skewed the referendum debate by portraying Labour as more evenly split on the issue than it in fact is.  I expect many enthusiastic Remainers will transfer their allegiance to the Lib Dems, especially if Corbyn stays on as Labour leader.

So, to the point I wanted to make in this post.  It seems to me that we have to begin with the observation that within each social class, in the UK specifically, but also elsewhere – however many classes you want to define – we have a significant subdivision that I would describe as “mobile”.  For simplicity’s sake, I contrast these people with those we might term “rooted”.  So we have skilled and unskilled or “blue collar” and “white collar” working class who will seek employment only near where they live, which is most likely where their parents live.  “Community” – a term which I find to be another source of irritation, since it is far too often glibly used to refer to all those living in an area, whether they ever talk to their neighbours or not – is all important to them.  But we also have skilled and unskilled, “blue collar” and “white collar” working class, however you want to divide them, who are prepared to travel across continents for employment.

Many of the uber-rich are extremely mobile, seemingly basing themselves in multiple global centres or even, to rub in the point, on £200m yachts, though some are undoubtedly more rooted than others.  Though having said that, it occurs to me that it’s not unknown for even royal families to spend a generation or two in exile.

For large numbers of professionals – the middle classes, if you like – the employment market is national, if not international or even global.  In fact, given the custom in the UK of leaving home to attend university, many of us relocate, at least temporarily, while still in education.

Some industries are so concentrated in small numbers of geographical clusters – consider Hollywood, the City of London, the English Premier League – that, if you want work, you’re pretty much obliged to relocate.  Great cities, such as London and New York, are magnets for the aspirational. Companies increasingly require employees to relocate, often across borders – I’ve been told myself that “international experience” may be necessary for career progression.

Of course, not everyone, not even a majority, move to another country, but mobility has been a feature of the last few decades of globalisation.

Although many have emigrated for centuries, in particular to the New World, to some extent renewed mobility has recently trickled down to what Frank Field would call the working classes.  Or let’s put it another way.  Many families have become rooted over the last century or so, particularly in those former industrial heartlands we hear about that voted Brexit so strongly.  Their ancestors, several generations ago, left the countryside during the era of urbanisation ushered in by the Industrial Revolution.

Other families, such as my own, have moved intermittently for generations, around the country and around the world.  For many, moving for work, or for personal reasons, is just something you do.  You make a life where you find yourself.  I have never had any expectation of remaining in the same locality for my whole life.

Here’s my proposition.  At the present time there is a conflict of interests, at least in the UK, between the rooted classes and the mobile classes.  This was a critical divide between Remainers and Leavers in the Brexit referendum.  The rooted classes see the mobile classes as a threat.  This is particularly the case amongst Field’s “ordinary white working class”.  And, indeed, in some ways they are a threat, since as a society we have allowed rights and privileges to accrue to the rooted classes, in particular entitlement to housing.  But, as in the Industrial Revolution, as in the urbanisation of modern China, economic growth and development has always thrived on mobility.  And the economy never stands still.  You can’t make a decision to freeze the economy as it is – you’ll be destroyed by competition.  The mobile classes are essential to the process of economic renewal, to support technological change.  That’s why it’s a mistake for policy to be determined solely by the needs of the rooted classes.

A large part of the reason for the schism in the Labour Party, then, is that the Brexiteers, particularly the likes of Frank Field, see themselves as representing the rooted “ordinary white working class”.  And, to be honest, they have a point, if they take the narrow view that they represent those who vote for them.  Because we – the UK and the EU – have shamefully allowed the mobile classes to become disenfranchised.  Not only were citizens of other EU countries living, working and paying taxes in the UK denied a vote in the Brexit referendum, so, ludicrously, were UK citizens living overseas, even in Europe, if they’d left this country more than the arbitrary number of 15 years ago.

In part this disenfranchisement has occurred because the rooted classes are seen as privileged.  And see themselves that way too, no doubt – I’m sure there is a certain kind of Brit who would be apoplectic at the idea of giving the vote to “EU migrant workers”.  It’s this idea of the “nation” as a people, rather than a place, of course – an idea which perhaps another time I will argue is unsustainable, though I doubt I have anything new to say on such a longstanding and tediously emotive question – together with the idea of citizenship, which rather ignores the fact that a large part of the point of free movement of labour in the EU was to avoid the bureaucracy and emotional hurdle of the citizenship process.  The aim of course was to create a mobile workforce, with individuals perhaps working in the UK today and Germany tomorrow – something Brexit will no doubt make a more common experience!

But citizenship is only a piece of paper (or a bit in a Home Office computer these days, I suppose).  Granting citizenship to immigrants doesn’t necessarily reflect either commitment on the part of the new arrival, though of course it may often do so, nor assimilation into British society.  People become citizens in large part because they need to or perceive that they need to, especially given the significant cost involved to apply in the UK nowadays.  And EU citizens living in the UK under free movement provisions in EU treaties haven’t needed to become citizens, even though they may be just as committed to the UK and integrated into our society than arrivals from elsewhere who have taken citizenship.  In fact, EU citizens have not up to now had to apply for “indefinite leave to remain” in the UK, a status which gives citizens of Commonwealth countries the right to vote in General Elections and referenda.

Thus recent immigrants to the UK from non-EU countries who became UK citizens soon after arrival in this country were able to vote in the Brexit referendum, whereas citizens of EU countries who’d lived here for decades were not.  Compounding the problem, citizens of Commonwealth countries with UK residency status were also allowed to vote, even from those Commonwealth countries which were never British colonies, as in the case of francophone Rwanda and Mozambique, who seemingly joined the Commonwealth out of dissatisfaction with their own former colonial power.  And the status of citizens of Zimbabwe, suspended from the Commonwealth, was so unclear, I had considerable trouble finding out whether or not they were allowed a vote (for the record, I’m pretty sure they were)!  Most of these enfranchised non-UK citizens were also non-EU citizens, but there is in fact overlap between the Commonwealth and the EU, so citizens of Malta and Cyprus could vote.  As could many hundreds of thousands of Irish citizens living the in the UK, for separate historical reasons.  You could hardly make it up.

The electoral bias against the mobile classes arises not just from the electoral franchise, though.  Even when they have the vote, people may not know who to vote for.  They are likely to be unfamiliar with the UK’s political parties.  And our political structures are geographically based, favouring the rooted classes.  Those who have lived in an area for many years are much more likely to join political parties.  Not only will they have an understanding of local issues, they are also much more likely to see their involvement as a worthwhile investment of time.  The political agenda is consequently driven by the rooted classes.

The idea of the Brexit referendum, indeed, any electoral process, was to weigh the views of all those affected by the decision – in this case all those with a direct stake in the UK’s membership of the EU.  Excluding large numbers of the mobile classes simply biased the vote.  For the mobile classes the opportunities provided by the EU may outweigh any downsides, whereas for the rooted classes aspects of the EU may seem a threat, perhaps one not sufficiently counterbalanced by the benefits to the UK economy.  To reach the right decision all these individual experiences need to be taken into account.  And since the outcome was 52% plays 48% – a difference of a bit over a million votes – somewhat less than the number of EU citizens living in the UK but denied a vote, let alone the total if we also took into account the UK citizens who’ve been living abroad for more than 15 years, it’s very likely that we’ve actually reached the wrong answer as to what is best for the UK.

March 26, 2013

Forecasting and Philosophy

I noted yesterday that:

“Weather forecasting (and climate prediction) is not just about computer power. Deep philosophical ideas also come into play.”

I fear I may have under-delivered on the philosophy.

I intended to suggest that all forecasts, such as of weather, are necessarily and systematically inaccurate.

To recap, my main point yesterday was that running an inaccurate forecasting model numerous times doesn’t solve all the inherent problems:

“All ensemble forecasters know is that a certain proportion of computer model runs produce a given outcome. This might help identify possible weather events, but doesn’t tell you real-world probabilities. If there is some factor that the computer model doesn’t take account of then running the computer model 50 times is in effect to make the same mistake 50 times.”

Let me elaborate.

We can dismiss the normal explanation for forecasting difficulties.  Forecasters normally plead “chaos”.  Perfect forecasts are impossible, they say, because the flap of a butterfly’s wings can cause a hurricane.  Small changes in initial conditions can have dramatic consequences.

I don’t accept this excuse for minute.

It may well be the case that computer models suffer badly from the chaos problem.  In fact, the ensemble modelling approach relies on it.  I suspect the real world is much less susceptible.  Besides, given enough computer power I could model the butterfly down to the last molecule and predict its wing-flapping in precise detail.

No, the real-world is determined. That is, there is only one possible outcome.  Given enough information and processing power you could, in principle, predict the future with complete accuracy.

Of course, there are insurmountable practical problems that prevent perfect forecasting:

  • The most fundamental difficulty is that no computer can exceed the computing capabilities of the universe itself.  Although the future is written, it is in principle impossible to read it.
  • You might try to get round the computing capacity problem by taking part of the universe as a closed system and building a huge computer to model what is going on in that relatively small part.  The difficulty then is that the entire universe is interconnected.  Every part of it is open, not closed.  If the small part you were modelling were the Earth, say, then you’d have to also model all celestial events, not just those which might have a physical effect, but all those which might be detectable by humans and therefore able to affect thought-processes and decision-making.  And, since our telescopes can see galaxies billions of light-years away, there’s a lot to include in your model.  That’s not all, though.  You’d also need to model every cosmic ray that might disrupt a molecule, most dramatically of germ-line DNA – though a change to any molecule is of consequence – and even every photon that might warm a specific electron, contribute to photosynthesis or allow a creature to see just that bit better when hunting…
  • Then there are problems of what George Soros terms reflexivity.  That is, people’s behaviour is modified by knowing the predicted future.  They might act to deliberately avoid the modelled outcome, for example by deflecting an asteroid away from its path towards the Earth, which we might term strong reflexivity.  Or they might change their behaviour in a way that unintentionally affects the future, for example by cancelling travel plans in light of a weather forecast – weak reflexivity.  With enough computer power, some such problems could conceivably be overcome.  One might predict the response to an inbound asteroid, for example.  But it’s not immediately apparent how a model would handle the infinitely recursive nature of the general problem.

In practice, of course, these would be nice problems to have, because computer simulations of the weather system are grossly simplified.   They must therefore be systematically biased in their forecasting of any phenomena that rely on the complexity absent from the models.  As I noted yesterday, all runs in an ensemble forecast will suffer from any underlying bias in the model.

Two categories of simplification are problematic:

  • Models divide the real-world into chunks, for example layers of the atmosphere (or of the ocean).
  • And models necessarily represent closed systems – since the only truly closed system is the universe as a whole.  Anything not included in the model can affect the forecast.  For example, volcanic eruptions will invalidate any sufficiently long-term (and on occasion short-term) weather forecast.  Worse, weather models may be atmosphere only or include only a crude simplification of the oceans.  That is, they may represent the oceans in insufficient detail, and furthermore fail to include the effect of the forecast on the oceans, which in turn affects the forecast later on.

The good news, of course, is that it is possible to improve our weather forecasting almost indefinitely.

Perhaps those presenting weather forecasts should reflect on the fact that, as computer models improve, ensemble forecast ranges will narrow.  The 5-day forecast today is as good as the 3-day forecast was a decade or two ago. The probability of specific real-world conditions will not have changed.  That has always been and always will be precisely one: certainty.

It makes no sense to say “the probability of snow over Easter is x%”, when x depends merely on how big a computer you are using.

No, forecasters need to say instead that “x% of our forecasts predict snow over Easter”, which is not the same thing at all.

March 25, 2013

The UK’s Cold March 2013 and the Perils of Ensemble Forecasting

Weather forecasting (and climate prediction) is not just about computer power. Deep philosophical ideas also come into play. In particular, problems emanate from the use and communication of the concepts of probability and uncertainty. Often, the probability of a specific outcome is quoted, when what is meant is the level of its certainty in the opinion of the forecaster. Or more to the point in the opinion of the forecaster’s computer.

I’ll discuss communication problems more generally in a later post, but here I want to suggest the possibility that the outputs of forecasts – specifically ensemble forecasts – are being misinterpreted, and not just poorly communicated.

Anyone wanting an accessible introduction to the issues of forecasting, communicating forecasts and ensemble forecasting in particular, could do a lot worse than view the recent Royal Society debate, Storms, floods and droughts: predicting and reporting adverse weather. It’s entertaining too – there’s a great rant (with which I can’t help agreeing) from an audience member on the way the BBC reports London’s weather.

Ensemble forecasting is when a computer weather (or climate) model is run repeatedly – say 50 times – for the same forecast, but with very slightly different initial conditions (e.g. atmospheric pressure and temperature at particular locations). The idea is to produce a range of forecasts, representing the likelihood of possible outcomes. Tim Palmer suggests during the Royal Society debate that the most famous UK forecast ever – the dismissal in 1987 by Michael Fish of the possibility of a hurricane in Southern England the evening before one occurred – would instead have been presented probabilistically. Had he had an ensemble of forecasts, Fish might have said that there was a 30% probability of a hurricane.

I don’t agree with this.

If Fish had said there was a 30% probability of a hurricane he would have been guilty of confusing his computer model with reality.

All ensemble forecasters know is that a certain proportion of computer model runs produce a given outcome. This might help identify possible weather events, but doesn’t tell you real-world probabilities. If there is some factor that the computer model doesn’t take account of then running the computer model 50 times is in effect to make the same mistake 50 times.

March 2013 in the UK is the cold snap that just keeps on giving. The weather has defied forecasts. Specifically, it seemed just a few days ago that westerly air was going to break through before the end of March. Of course, this has a bearing on where March 2013 will rank among the all-time coldest, which I discussed in my previous post, but I’ll have to find time to revisit that subject in the next day or two.

The Weathercast site has made ensemble forecasts from the European Centre for Medium-range Weather Forecasts (ECMWF) available to the public. Here are some from over the last few days:

130323 Heathrow actual weather slide 4

I’ve lined them up, so that the day the forecast is for appears in a column for forecasts as of 00:00 hours on 22nd, 24th and 25th March.

An ensemble that’s behaving itself should provide less of a spread of forecasts as we get closer to the forecast date. For example, the spread of the maximum temperature on Easter Day, 31st March narrows in the forecast from 25th March compared to that on 24th.

But now look at the coldest possible temperatures on 31st March. On 22nd hardly any predicted temperatures below 0C, and none below about -2C. By 25th most of the forecasts were for a frost on the morning of 31st, and many for a severe frost (-3C or so). This shouldn’t happen.

It seems that on 22nd nearly all the model runs predicted Atlantic air to break through by 31st; by 25th virtually none of them did.

Instead of fanning out more the longer in the future the forecast is for, the ensemble model outcome seems to change systematically. Perhaps ensemble forecasts don’t solve all our problems. I suspect there are aspects of the climate system our computer models do not yet capture. There are things we do not yet know.

As we saw for the unexpected rainfall in 2012, ensemble forecasts can predict zero probability of extreme events, in this case the (most likely) second coldest March since the 19th century. And the whole point of ensemble forecasts is to predict extremes.

The forecast for 31st March is of more than passing interest, of course. It is no doubt of great importance to those who may be planning to take school kids on Duke of Edinburgh expeditions on Dartmoor or (since we’re talking about a London forecast) preparing for a traditional Boat Race on the Thames!

July 16, 2012

Saint Mervyn: King by Name, King by Nature

I’ve been following the Libor scandal with considerable interest. The former Chief Operating Officer of Barclays Jerry del Messier should be settling into his chair before the UK House of Commons Treasury Select Committee as I write these words – don’t worry, I’ve set the recorder for the BBC News Channel.

Perhaps we’ll find out the answer to why Jerry del Messier was cleared of rigging Libor on the grounds that, according to Barclays’ briefing note (pdf) issued ahead of Bob Diamond’s appearance before the Select Committee he:

“…concluded that an instruction had been passed down from the Bank of England not to keep LIBORs so high. He passed down an instruction to that effect to the submitters.”

on the basis of Diamond’s infamous note to file which suggested that Paul Tucker, Deputy Governer of the Bank of England had advised that:

“…while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

The mysteriousness of it all arises because Barclays was already lowering its Libor submissions. They admit that during the period Sept 2007 – April 2008:

“Less senior managers gave instructions to Barclays submitters to lower their LIBOR submissions. The origin of these instructions is not clear.”

You’d think that when Jerry del Messier told his rate-setters to “lowball”, someone might have mentioned that they were already doing it!

I really like the point in Barclays memo that:

“[del Messier’s] instruction became redundant after a few days as liquidity flowed back into the market.”

“Became” redundant? His instruction was already redundant!

It’s not del Messier’s behaviour that really bothers me about the whole affair. It seems all the banks were at it, and Barclays may not have been the worst culprit. Barclays is just the first to settle. And the only logical explanation I can think of for George Osborne’s strange claim that Libor lowballing was sanctioned by Balls, Brown and Vadera is that it was an open secret in the City.

After all, no-one would borrow at a rate inflated by concerns that the banks might fail, as opposed to one simply reflecting risk, the base rate and the balance between supply and demand for money. Libor simply doesn’t work in those circumstances. The authorities would be obliged to address the problem any way they could in order to save the economy.

I hate to see public bullying. It seems our politicians – and many in the media and, notably, Mervyn King – just don’t like Bob Diamond. What will they do when they run out of obvious scapegoats? The excuse for laying into Diamond seems to be some problem with the “culture” at Barclays. Is it any different to that at any other investment bank? Doesn’t the “culture” in any occupation go with the turf? Presumably they don’t want traders to behave like, say, Premier League footballers, or Hollywood actors. Something less flash perhaps: doctors, say or IT guys. But would they still be able to do the job? These occupations surely require quite different qualities and aptitudes. Maybe something a little more sales oriented, perhaps, then: used car dealers or estate agents. Or politicians! But are these professions more or less honest than investment banking? I’m stuck. Perhaps our politicians could spell out exactly how they want investment bankers to behave.

Or perhaps Mervyn King could tell us. After all, he’s the one who fired Bob Diamond – never mind that the regulatory investigation is far from complete. Is he going to fire the heads of a dozen other banks?

Never mind that the real reason seems to be some problem with Barclays “culture”, it’s not actually Mervyn King’s job to sack the Chief Executives of banks. Or anyone else employed by a bank for that reason. And even if it was King’s job, he would be obliged to follow due process.

Diamond could be forced to step down if the Financial Services Authority found he was not a “fit and proper” person. Which didn’t happen.

Or if he lost the confidence of Barclays’ shareholders. He might have done, I suppose, but that’s not why he went.

No, Marcus Agius (Barclays Chairman and ex-Chairman) explained what happened:

“Agius told MPs that the chief executive had quit ‘because it became clear that he lost the support of his regulators’ just 48 hours before the American-born Diamond was scheduled to appear before the committee.

Agius described how he had been summoned, along with Sir Michael Rake, the most senior non-executive director on the Barclays board, to see King shortly after Agius’s resignation had been announced a week ago on Monday.

‘We had a conversation in which he said that Bob Diamond no longer enjoyed the support of his regulators,’ said Agius, who then had to hold an emergency board meeting by telephone of non-executive directors to decide how to proceed. He admitted to being shocked as concerns had not been raised when the £290m fine for attempting to manipulate Libor rigging emerged five days earlier.

Agius said he and Rake went to Diamond’s home on the Monday evening. Diamond – who had insisted to MPs last week that he did not know about any regulatory pressures – ‘was not in a good place’, said Agius. He said that the conversation was ‘not long’ and that Diamond had asked for time to talk to his family.

‘I left his [Diamond’s] house confident he would resign, if he hadn’t done so already,’ Agius said.”

Staggering.

I’m surprised there’s not been more outcry at such authoritarian behaviour by the Governor of the Bank of England, who is, after all, just a public official.

One exception is Philip Inman who provides some background in a Guardian piece titled “How Mervyn King Finally Got Bob Diamond.”

“…from the moment the credit crunch began to wreck Northern Rock’s finances in the summer of 2007, the grammar-school boy from Wolverhampton, whose father was a railway worker and then a geography teacher, was ready with his analysis. King said most of the huge debts accumulated by banks could be tied to the huge bonuses executives received as reward for their lending.

In meetings with regulators and then chancellor Alistair Darling, Diamond, then head of Barclays Capital, and his investment banking peers were seen as a bunch of amoral, greedy traders. Darling relates in his diaries how King would counsel against providing rescue funds that perpetuated a risk-taking culture.

But it was Diamond, one of nine children and also the son of a teacher, who made it public and personal. At a time when most bankers were busy trying to prevent their institutions going bust, he broke cover to give an interview in a Sunday newspaper. In an analysis of central banks’ actions in combating the credit squeeze, Diamond notably excluded the Bank of England from praise.

He said providing short-term cash was the job of a central bank. ‘For the recovery to continue we need to find more ways to get liquidity into the short end of the curve,’ he said. ‘That’s down to confidence, and that’s down to the central banks. We’ve seen thoughtful moves by the [US Federal Reserve] and the [European Central Bank].’

The Bank of England saw the interview as a direct attack on its handling of the crisis. King’s response was to embark on a series of speeches and interviews in which he openly decried the emergence of a ‘small elite’ that agreed to pay itself bonuses in good times and bad.”

So petty. Maybe Mervyn is touchy – I think Diamond was right. Perhaps, if King had behaved more like other central bankers, we’d have a healthier banking industry today, and Ed Miliband wouldn’t be threatening to break up the survivors to create more competition. Don’t forget that Alliance & Leicester, Bradford & Bingley and Northern Rock have all disappeared from our high streets.

What’s more, blaming the financial crisis on bank bonuses is simplistic to say the least.

And perhaps central bankers should have seen the housing bubble warning signs a bit earlier.

Another commentator who hasn’t let the matter pass is Hugo Dixon who suggests at Reuter’s that the “BoE governor’s arm-twisting raises tricky issues”:

“…on whose behalf exactly was King speaking? The BoE, after all, is not responsible for supervising banks – and won’t be until next year. That’s still the job of the Financial Services Authority. If King wasn’t speaking for the FSA too, he was arguably stepping beyond his authority.

On the other hand, if the BoE governor was speaking on the FSA’s behalf, why didn’t the regulator itself deliver the message that Diamond should go? And why too did the FSA apparently change its position? After all, the regulator had only just agreed a settlement with Barclays over the Libor rate-fixing scandal. If it had wanted Diamond to go, that would have been the moment to say so.

A further question is how exactly the regulators managed to twist Barclays’ arm. If the FSA doesn’t support a bank director in his role, the current mechanism for removing the executive is to deem him no longer ‘fit and proper’. But it seems hard to argue that Diamond didn’t meet that test. After all, the lengthy investigation into the Libor scandal did not criticise him personally.

Some people will no doubt say it is good that Diamond has gone and it doesn’t really matter how that was engineered. But methods used in difficult situations can easily become precedents.

The BoE is about to become even more powerful next year when it takes over banking supervision. It is important that it operates in a transparent and accountable fashion.”

Quite.

July 12, 2012

The Pensioners’ Crusade

Filed under: Complex decisions, Economics, Inequality, Politics, Public spending, Reflections, UK — Tim Joslin @ 12:06 pm

I noted on Tuesday Nick Boles’ suggestion in a keynote speech at the Resolution Foundation (pdf) to limit certain pensioner benefits to the less well-off:

“Spending on universal benefits for the elderly (the Winter Fuel Allowance, free prescriptions, free bus travel and free TV licenses for the over 75s) reached roughly £4 billion in 2010/11.

I know that this help is vitally important for many older people – and a step away from universal provision of these benefits after the next election would need to be handled very carefully as many members of this generation are admirably reluctant to make a fuss, even when they really need help.

But, does anyone here think it would be responsible for a country in our financial position to go on giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney after 2015?”

A point well made.  But, I strongly suspect, to no avail.

I diligently provided links to reaction at the BBC, Guardian, Independent and Mail which all headlined Boles’ hardly original elderly means-testing proposal, even though it would only save £1.5bn of the £8.5bn he says we need to save:

“If we are to achieve stability in our public finances AND make crucial investments in improving productivity and competitiveness, we must find a way to save at least £8.5 billion from the £145 billion we currently spend on benefits other than pensions.”

Popping into Tesco yesterday, though, I noticed that I’d jumped the gun in my headline search.  The Express is going to war on the issue.  Holy war.  Here’s their front page:

I love that capital C in Crusade.  “Upper-case there”, the editor must have ordered.  “We’re not being figurative here.  This is official.  It’ll be there in the history books alongside Richard the Lionheart vs Saladin and, of course, the Children.”

The headline’s a classic as well.  Whereas the Mail and the Independent implicitly accepted the government’s right to cut benefits, but signalled with the A-word (“axe”) that targeting elderly benefits might be a cut too far, the Express went several steps further.  “Secret Plot to Rob Pensioners”.  Hmm.  Not really “secret” is it?  Which means it doesn’t really qualify as a “plot”.  And I think most would agree that discontinuing the provision of a benefit hardly counts as “robbery” (which, strictly speaking, involves violence or the threat of violence, as opposed to theft, which doesn’t).  One might even quibble that it is “pensioners” being “robbed”.  The word “pensioners” has connotations of those struggling to get by on a meagre stipend, and the qualification for the benefits in question is on the basis of age, not – as Boles’ examples of Winner, Sugar and McCartney might suggest – dependency on an annuity.

Boles’ whole point was that benefits would only be withheld from the wealthier elderly, a subtlety somewhat glossed over in the scene-setting opening sentences of the story on the front page of yesterday’s Express:

“A THREAT to strip Britain’s pensioners of benefits such as free bus passes and prescriptions triggered outrage last night.

A key ally of David Cameron yesterday called for strict means testing of claims that also include winter fuel payments and TV licences.

But the move was immediately condemned by charities and OAP groups – and today the Daily Express adds its voice by launching a Fair Deal For Our Pensioners Crusade.

This newspaper urges readers and campaigners alike to support its demand that the Government honours its pledges to pensioners in full, and does nothing to chip away at their universal welfare entitlements. Tory MP Nick Boles caused ­fury after saying the Government could save £4billion a year by stopping better-off pensioners from getting the benefits.”

£4bn/yr is in fact the total cost of the benefits.  Boles hopes to save £1.5bn/yr.

But Cameron’s calculation will be whether £1.5bn is worth the potential electoral damage in 2015 (if the Coalition lasts that long).  He’ll be looking for media outrage at “giving a free TV license to Michael Winner, free prescriptions to Lord Sugar and a winter fuel allowance to Sir Paul McCartney”.  And not finding it.

On one side is most favourable headline to the proposal at the BBC, which reports that the “Rich elderly should lose benefits, says David Cameron ally”.

And on the other is a lot of axeing and the Express’s army of pensioners ready to march against the heathens in Downing Street.

You have to admire the Express.  They understand their constituency.  As, I’m sure, does Cameron.  This kite’s not going to fly.

July 10, 2012

Nick Boles’ Resolutions

Filed under: Complex decisions, Inequality, Media, Politics, Public spending, Reflections, UK — Tim Joslin @ 5:04 pm

Note (12:15 11/7/12): Corrected in 2nd paragraph following a communication from the Resolution Foundation – they are focussed on issues rather than party politics (like the E3 Foundation – I approve) and do not “describe themselves” as “centre-left in outlook”, as I said in the initial version of this post that they “might” do.

I wrote last time that I would try to report on events I attend. For once, I’m keeping my word.

This morning, the Resolution Foundation (RF) hosted the latest in a series of meetings making up its “Commission on Living Standards”, which constitutes a large part of the analysis and policy debate around what Ed Miliband loves to call the “squeezed middle”, that is, as RF put it, “the economic decline of low to middle income Britain”. Heck, the Commission even has its own website, full of bells and whistles. Whilst the RF seems centre-left in outlook, they are politically independent and engaged with all three mainstream political parties. Today was the turn of the Tory and Cameron loyalist Nick Boles, with Lord Adonis chipping in as responder.

Many Resolution Foundation events are heavily trailed and reported in the media, and Nick Boles’ pitch on Raising Living Standards this morning was no exception. Trouble is, the mainstream media inevitably focus on whatever aspect they believe will catch the attention of their readers, so we have “Tories plan to axe pensioners’ benefits” in the Independent, “Limit winter fuel allowance and Sure Start, says Cameron ally” in the Guardian, the more accurate headline “Rich elderly should lose benefits, says David Cameron ally” at the BBC, not to mention the A-word again at the Mail: “Axe free prescriptions and bus passes for the better-off elderly, says Cameron ally”.

Clearly the media would rather scare the horses (check out the comments – and the voting on them – on that BBC story) than present some reasoned argument. No wonder we end up with swathes of incoherent policies.

The Independent’s report gives the best summary of the politics of the situation. Cameron doesn’t want to “axe” benefits for the well-off elderly, because he promised not to in 2010. Will he be able to avoid repeating such a promise in 2015? The question was asked this morning. Although Boles made a good point about how none of the parties faced up to the impending fiscal crisis in 2010, I’m not convinced. I reckon Paul McCartney’s bus-pass is safe for some time yet.

But Boles’ talk was not titled “Pensioner’s perks”. It was much more wide-ranging than that. Indeed, there was much more discussion in the Q&A this morning of tax credits, youth unemployment and even the comparative advantages of the German education system (better for technical students) and that in the UK (better for the academically inclined).

If there was a takeaway policy message from Boles, it was not that the government might try to claw back around £1.5bn/yr from well-off pensioners, it was that they want to find £8.5bn of savings (at 2012 prices) from the welfare budget as a whole by 2016 (by which time that £8.5bn will have inflated to £10.5bn). And my impression was that if it was up to Boles most of the saving would come from child-related benefits, especially those paid to parents (i.e. Child Tax Credits and Child Benefit), as opposed to schools, and Sure Start, which Boles seems to have it in for.

Since the hard-working families demographic is up there in electoral importance with the pensioners-who’ve-earned-the-right, it’s hard to see where any of the £8.5bn is coming from.

The strength – and weakness – of Boles’ approach is that he aims to be ruthlessly analytical. So he laid down 4 principles:
(1) Only those areas of spending that measurably increase the competitiveness of the economy should be allowed to increase faster than GDP.
(2) As implied by (1), spending on other areas (police, defence, environment etc) must fall relative to GDP.
(3) Areas of recent public-spending growth must decline relative to GDP.
(4) There should be no new areas of spending.

This leads to some overly-rigid thinking, in my opinion. For example, principle (4) seems to preclude a resolution of the elderly care issue, which has revived this week (apparently all-party talks broke down some time ago – like Adonis, I despair at the Westminster political process). And principle (1) relies on measurements, which are not simple in practice – this seems to be why Boles doesn’t like Sure Start.

During the Q&A though, it became clear that Boles has another principle:
(5) Public spending must decline as a proportion of GDP.
Boles said he didn’t go as far as David Laws, who has apparently called for a reduction in public spending as a proportion of GDP to 35%, from 45% after the financial crisis, but implied 40% was a ceiling (Osborne is trying to get it back down to around 39%, similar to the level under New Labour).

Of course, as Adonis pointed out, growth is key, and could reduce the tax-take percentage simply by increasing the denominator (GDP).

But the real weakness in Boles’ thinking is that it ascribes a cost to money that is simply paid to the Exchequer and then paid back out again. This is illogical. A perk is still a perk whether it is a free bus pass (counts towards the public spending percentage) or preferable tax treatment (doesn’t count). You could save money by taking away free bus passes for well-off over 65s or by requiring over 65s to pay National Insurance (NI). Now you or I would weigh up the pros and cons of both these measures. But Nick Boles doesn’t look at it that way. He’s wrong – the public only care about the rate of tax they pay (and to be honest even that’s irrational – they should only care when it changes, as pay rates adjust to the tax regime over time). People certainly don’t give a monkey’s whether UK public-spending is 29% or 45% of GDP – or 25% or 50% for that matter.

So Boles would be wise to reflect on the last question asked this morning, by Gavin Kelly, the RF CEO and Chair of the meeting. Gavin reckoned that the £8.5bn could be saved by requiring over 65s to pay NI (which all agree should be consolidated with income tax – it would be a bit illogical to pay insurance for when you can’t work when you’re over retirement age!) and (probably the biggie) reduce tax relief on pension contributions to basic rate tax only.

I suspect there are other tax allowances that really apply only to the better off that could be looked at – some of those for buy-to-let landlords look rather generous to me, and do we really need to allow new savings to be added to ISA tax shelters every year? Are we really serious about reducing the deficit?

It would seem to be less painful to reduce tax allowances than cut public spending. Consideration should at least be given to tax measures that don’t commit the political cardinal sin of raising headline rates of tax. Come on guys, even Brown was bold enough to raise the NI rate!

Let’s hope ideology doesn’t trump pragmatism in the Coalition’s forthcoming Spending Review. Perhaps they should start by renaming it a Budget (or even Deficit Reduction) Review. Or simply reclassify tax allowances as “spending”!

June 20, 2012

Rio+20 Mañana

One of my New Year 2012 resolutions was to report here about events I attend. Trouble is I always seem to put it off – “mañana”, I think – and after a few days there’s another event to report on. In fact I’m already one event behind (thorium – mañana) but am nevertheless starting by reporting on the Alternative Rio+20 Summit organised in London by the Campaign against Climate Change (CCC).

My expectations were moderate to low – I was hoping for a briefing on what Rio+20 is all about and maybe some interesting talks and discussions. I can’t say these aims were met. The CCC is about climate change and that’s not the main topic at Rio, so the conference wasn’t focused as well as it might have been. And whereas a few years ago CCC conferences were excellent and informative, they now seem to be a gathering mainly of “activists” all keen to promote their cause. The Q&A sessions were therefore largely hijacked, most annoyingly by a social networking bedwetter carrying around a 3ft dragon soft toy as a way to attract attention, and a woman wearing Mickey Mouse ears with text proclaiming something about “McNulty”. She was campaigning against proposed cuts in rail services. The effectiveness of her interjections may be judged by the fact that I had to google “McNulty rail” to find out who the guy was. Both campaigners, using the term loosely in the case of Mr Twitter-will-save-the-world, not only spoke off-topic in the plenary, but in subsequent breakout groups too. Most people in the breakout meetings will have attended the plenary.

The likelihood is extremely low that any intelligent debate can be organised around topics so vaguely defined as “sustainability” and “development”. Compounding the problem, “sustainable development” is – if these words mean anything at all – an oxymoron. So what I found most interesting about the whole Alternative Rio+20 event were the reflections on the history of international negotiations made by a couple of academics from the host institution, the School of African and Oriental Studies (SOAS). Harald Heubaum spoke about how Copenhagen failed for procedural reasons and suggested that the G77 group of countries was less unified than at the original Rio (the “Earth Summit”) and the West less inclined to make concessions. My initial thoughts were that perhaps the Earth Summit was too successful and, as well as taking all the low-hanging fruit (so how could any subsequent conference possibly match its ambition?), locked in unhelpful features, such as the distinction between “developed” and “developing” countries, with no mechanism for movement between these groupings. Of course, dividing the world in this way is madness, but the very idea of countries negotiating in the way they do is flawed. The interests of states is not the same as the interests of their people, so we end up with bizarre assertions, such as that the “right to develop” is a human right. It’s not, “development” is collective, human rights refer to individuals.

As far as climate change is concerned, these international talks are becoming increasingly fruitless, at least in terms of action (as opposed to exchange of ideas). The whole exercise has become entirely dominated by demands from developing countries that the developed countries are unable to meet. “Development” is in any case not something that can simply be given, or prevented. What’s clearly needed is to establish technocratic institutions that are able to say these are the rules for burning coal, preserving forests & oceans, wherever they are in the world. That’s right – we need the same rules for everyone.

Reading about the Rio talks – such as the draft text – is profoundly depressing. There’s little clarity, but the question our leaders are apparently asking is something like: “How can the aim of preserving the environment be prevented from conflicting with ‘development’?” The “needs” of the economy rather than the need to preserve the environment are taken as a given. Common sense, such as the observation that there are indigenous peoples who just want things left as they are and who aren’t really bothered about “development”, would suggest turning the whole thing round. “How can we protect the planet from the Malthusian juggernaut of industrialisation?” Clearly there’s a process – economic growth or “development” – that may be a good thing or may be a bad thing, but has certainly been accelerating for a couple of centuries, a process that will, if left unchecked, consume the planet. This process simply needs to be constrained. Such an observation would suggest that we need to simply protect remaining biodiversity wherever it is, leave fossil fuels in the ground wherever they are and so on. The tools currently being employed by the global community are not achieving this, and are never likely to.

We don’t need Rio+20. We don’t need any more COPs (Conferences of the Parties), such as Copenhagen. What we need is an entirely different process that starts from the environmental problems we’re actually trying to solve. The interests of nation states (or those of any other institution) should not be represented, since these will obviously conflict with the goal. Sovereignty must be delegated, else solutions are impossible. The technocrats would simply need to decide what the best mechanism is for preserving each resource – outright bans on exploitation perhaps in some cases, but most likely some form of pricing – and how best to implement it.

I do have more to say, but the morning is over. I’ll try to find some time to finish. Mañana.

June 2, 2012

Grexit? Spout? No, better half-in, half-out!

I’m not a huge admirer of Margaret Thatcher, and still less of her Chancellor, Nigel Lawson. But, back in the day, they suggested the eminently sensible idea of “currency competition” as an alternative to European Monetary Union (or, rather aptly, EMU). The idea was that the euro would be introduced alongside the pound, franc, mark and so on, with markets deciding the extent to which the international currency displaced the national currencies. But did the eurocrats listen? No, like improbably large flightless birds, they simply buried their heads in the sand.

The time for currency competition has now arrived. The case is compelling. So compelling in fact that when I scour the web to check my (in fact accurate) recall of the origin of the idea of currency competition in the eurozone, I find that it’s already been suggested as a solution to the current crisis – an alternative to Greek exit from the euro (Grexit) and Spain out (Spout) – by Philip Booth at Conservative Home. The existence of Professor Booth’s contribution allows me to make this post a little shorter than it would otherwise be. He also points out something I hadn’t previously realised – that it would be necessary to enact “a simple constitutional change to remove the clause in the EU constitution that requires the euro to be the sole legal tender currency in eurozone countries.” Actually that seems to put a small spanner in the works – is there no limit to the stupidity and lack of foresight of the eurocracy?

What would happen is this. In the (extremely likely) event that the Greeks do not vote on June 17th for parties willing to stick to the country’s agreements with its creditors, the EU (and IMF) would say to Greece that no more euros are to be made available from, say, 1/1/13 (to allow for necessary preparations). Greece nevertheless wants to stay in the euro. The conditions would be these:

  • All euros in circulation in Greece remain as euros. New bank accounts in drachma are created alongside for those who need them. Euro debts remain euro debts. And the Greek governments euro debts remain payable (it’s too late, unfortunately, for those that have already been forgiven).
  • Drachma are issued by the Greek central bank, subsequently backed by drachma bonds made available to the domestic market (I say domestic as international lenders are likely to be somewhat sceptical). The drachma floats freely against the euro.
  • Greece starts paying public sector workers, domestic contractors and state beneficiaries (the unemployed, pensioners etc) in drachma. The private sector has a choice. But companies (say in tourism) with euro debts and euro income would have no need to change their main operating currency. Such Greek exporters are not part of the problem – they can and should remain part of the European single market. It’s the Greek government that is bankrupt. The problem is the Greek public sector, not the private sector.
  • All Greek shops (and domestic businesses) would be obliged to accept both euro and drachma at an official market rate, say the previous day’s closing mid-market price.
  • Greece continues to service its international euro debt and recapitalises its banks (in euros, though if drachma are provided, these would have to be immediately converted by the banks). The need for euros for this purpose would be a key factor in determining the value of the drachma and hence public sector wage and other costs. In return (and only if satisfied that the Greek banks are solvent) the ECB would continue to allow Greek banks to borrow from it.
  • In theory it doesn’t really matter what currency Greece collects taxes in (as they are convertible), but because of time-lags the tax currency should match the currency of the taxable event (i.e. if you’re paid in euro you pay taxes in euro). Note that the drachma is likely to inflate, so the public and companies are likely to want to convert to euro for savings purposes.
  • Greek import costs are similarly convertible, but since there may be few external holders of drachma, euro would effectively be required. Greece would be forced to balance its trade (and in fact achieve a surplus, given its debts) – and the drachma would fall until it did.

The goals of such a policy are of course to:

  • Stop the haemorrhaging of deposits from Greek, Spanish and Italian banks. This is taking place because of fear that such deposits will be forcibly converted to a weaker currency, such as the drachma.
  • Remove the need for further Greek and other bailouts.
  • Force Greece (and others) to take reponsibility for their own budget and trade deficits.
  • Allow wages and hence public-spending to adjust in Greece and any other countries that follow the same course.

My flavour of the idea is slightly different from Booth’s in that he doesn’t make such a clear distinction between the public and private sectors of Greece’s economy. What we have in common is the realisation that, as Booth puts it:

“There would be no doubt about the legal status of private debts and credits denominated in euro and little doubt about the legal status of Greek government debt (any doubts would revolve around whether it was denominated in euros or the ‘sovereign currency of the Greek government’ – most likely the former). There would be no capital flight – all euro deposits in Greek banks would remain euro deposits.”

I would say the policy exploits what George Soros terms “reflexivity”. That is, it creates the positive feedback that as soon as it becomes seriously discussed it becomes less worthwhile for Greeks (and Spaniards and Italians) to move their euro bank deposits to Germany, making the policy itself easier to implement.

Note that this desirable reflexivity is in marked contrast to the historically stupid decision to haircut private lenders to Greece, which had the fairly predictable consequence of raising the costs of borrowing by other euro countries perceived by the market to be weak.

I call this the “half-in, half-out” or “Hiho” plan for restoring some kind of normality to the economies of the eurozone’s ailing members and to get the overall European economy moving again. As the ditty goes: “Hiho, hiho, it’s off to work we go!”

May 13, 2012

Gifts to Greece

My first thought this morning was to write about the so-called UK drought again. Maybe I’ll post something on that later.

Then I had a strong urge to comment on the absurdly excessive punishment of Lewis Hamilton (a 5 place penalty or inadmission of his final run – moreorless equivalent punishments – would have been appropriate) after an error by his team in qualifying for today’s Spanish GP. I’d hardly call myself an expert on the sport, but a previous foray into F1 commentary attracted a good deal of attention.

Instead I’m going to channel my annoyance at the spoiling of what might have vaguely resembled a sporting event in Barcelona towards the Greeks.

All I want to convey is one simple point, that the Greek people have benefited hugely from the international loans on which they have already partially defaulted and look increasingly like failing to repay in their entirety.

We haven’t invented this thing we call money just for fun. Money allows resources to be allocated. If you borrow it, spend it and fail to repay the loan, you have acquired or consumed resources that could have been used by someone else. Take the Athens metro railway and all the other billions worth of infrastructure to support the 2004 Olympic Games. How was that funded? I’ll hazard a guess. Borrowed money, at least in part. And what will happen to all that capital investment when Greece defaults? It’ll still be there. These assets will remain in existence indefinitely for the benefit of the Greek people. To the extent they haven’t been paid for, they’ve effectively been stolen from the rest of the world.

Some loans may be riskier than others, because that’s how the world is, but, unlike equity investments, loans are designed to be repaid. Financial disruption – on a global scale over the last 5 years – arises when debts are not repaid. So, because of the knock-on effects, Greece’s default is worse than theft! The entire EU has been plunged into recession in large part because of the need for the financial system to prepare for possible Greek default. Instead of using capital to support new lending, banks have been writing down Greek (and other) debt and taking actual losses.

Obviously we’re just reaping what was sown when Greece and other European sovereigns borrowed unsustainably. The question is how to prevent repeats of this cycle of behaviour?

Let’s mull over that question for a minute. What is the popular conception of what’s going on?

I think it was Arthur Smith I heard on the radio yesterday saying the Greeks should be let off their debts because “it’s not the fault” of those protesting. In what sense is that, Arthur? Are you perhaps saying the average Greek took no executive decisions regarding the nation’s finances? Clearly true. But isn’t a large part of the problem that they haven’t paid and continue not to pay their taxes? What do you think is fairer, that every Greek homeowner should pay a special tax (they’re refusing) or that you and I should find the money?

And isn’t a large part of the problem the Greek public-sector? What do you think is fairer, that Greek workers should take whatever pay cuts it takes to balance the books (as has happened elsewhere in Europe, such as in Estonia – now growing again – Latvia and Lithuania) or that you and I should find the money?

Many non-wealthy Greeks must also be culpable of wilfully participating in a cash economy, benefiting from lower prices for services whilst complicit in tax avoidance. What do you think is fairer, that the Greeks start paying taxes commensurate with their public spending like people in most other countries, or that you and I should find the money?

But the really interesting point is that Greece is a democracy. They’ve chosen their own government since the ousting of the colonels in the 1970s. Collectively, then, they’ve repeatedly elected politicians, at least some of which have overspent, undertaxed and cooked the books, or appointed officials to do so on their behalf. Clearly, collectively, the Greeks have benefited from this behaviour. I’m intrigued, Arthur, whether you’re suggesting that, collectively, the Greek people are also not responsible for the situation they find themselves in.

That’s probably enough. After all, Arthur is a national treasure, practically the new Queen Mother, and perhaps a little fragile. Maybe he just didn’t think. Maybe, like the QM, he inhabits a world where decisions are made by waving a magic wand. Maybe, like the QM, he lives in a world where one need take no responsibility for one’s finances.

I also caught a snippet this morning of someone on the Andrew Marr Show invoking the precedent of Argentina. That great and honourable country, that upstanding, exemplary member of the international community most recently defaulted on their debts about a decade ago. And it’s been great for their economy! Who’d have thought it? It’d be great for my personal finances if I went out and bought a house, a car, new furnishings and white goods, new shoes, clothes and so on and then didn’t bother paying for them. I’m sure I’d feel pretty well off for a few years too.

Let’s pick on someone else. Arianna Huffington writes in the NYT:

“Yes, the Greeks acted irresponsibly before the economic collapse — the same way my father had acted irresponsibly in his private and professional life. But that is not reason to punish the children, to destroy their future as part of a remedy for a past for which they bear no responsibility.”

What Arianna is saying – for some reason “bleeding heart liberal” is the outmoded phrase that comes to mind – is a little more sophisticated than Arthur Smith’s indignant genialism. We have to draw a line, she says, to protect the innocent. Though, I can’t help pointing out yet again, these “innocent” are nevertheless beneficiaries of the misappropriated funds spent in Greece over the last decade or so. Perhaps they’ll remember that every time they hop on Athens’ shiny new metro trains.

The fear gripping financial markets – and contributing to the unnecessary economic hardship and suffering of innocent little children currently taking place in, say, the UK – is that other countries will follow Arianna’s line of reasoning too. Why shouldn’t Ireland, Spain, Portugal and even Italy say “don’t punish the children”? Having elected profligate, irresponsible governments that have given them what they wanted – low taxes, high spending – why won’t they now elect governments to satisfy their new desire for debt writeoff with some kind of moral justification (right wing nationalist or left wing anti-capitalist – take your pick, or, hey, what the hell, you can even pick both!).

If we want financial stability – quite possibly a good thing, I suggest, in light of the 1930s, just as a for example – then debts have to be repaid. And sovereign debts would be a good start.

So how can the international community protect itself against freeloaders? Against those countries who run up debts, fail to collect enough tax and then, in the words of the song about the girl next door and the bathroom floor, plead “It Wasn’t Me”?

Here’s my suggestion. Many of the countries that default are serial offenders. There’s something deeply ingrained, in their DNA if you like, that leads them to spend too much and collect too little tax. So cut them off from international finance for long enough for them to lose thir habits. This would be simple to implement. The financial services industry is highly regulated (all that effort’s been really effective, hasn’t it?). Regulators in responsible countries (say the UK, the US, the EU apart from Greece) could simply demand that no financial institution or its subsidiaries (maybe even no company) lends at all to a government that has defaulted on sovereign debt over the last 50 years – or maybe even more. Or, crucially, to any institution in that country dependent on its government, such as a bank or a company.

Since holding the currency of the defaulted country would constitute lending, all investment in defaulted countries would have to be funded locally in their own currency. Imports would require foreign currency that would have to be acquired beforehand by local institutions or individuals, i.e. by selling goods and services as exports (or small amounts of currency to tourists and other visitors). No publicly funded export credit guarantees would be available to UK companies, for example. In effect, such countries would be forbidden from running a trade deficit.

Such a measure would do two things. It would financially quarantine serial defaulters for a time longer than short-term market memory currently manages (defaulters tend to return to the international markets within a decade). And it would give non-defaulters pause for thought.

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