Boom politics

3523

boom-politics

A report today by a committee of MPs – and we know what high standards they have – blames the banks' bonus culture as a major source of the financial crisis. The remuneration system, they say, worked to encourage bankers to go out and make deals, without worrying whether they were good or bad deals. They got the cash either way. But naturally, a lot of the deals they engineered were indeed bad.

That's true. But what brought on this bonus culture in the first place? The cause is actually down to the political system.

For the past twenty years, politicians really have believed that they were saving us from boom and bust. Any time there was a blip in the market, like the 1987 stock market slide, or after Russia defaulted on its debt, or most spectacularly after 9/11 – they 'saved' the system by flooding the world with cheap credit. Interest rates after 9/11, for example, came down from 6.5% to just 1%. With credit six times cheaper, people of course borrowed a lot more, buying houses, shares, securities, any asset they could. So many people were buying, that these assets shot up in value.

The response of the banks' management was rational. In this boom atmosphere, almost everything succeeded. Buy an asset today, it would be worth more tomorrow. Since all deals seemed to work, they naturally rewarded staff who made more deals. Of course, when the bubble burst, they all discovered just how dodgy some of these deals were.

But when you are looking at the causes of this crisis, you have to go behind the bonus culture, and not just stop there. What caused that culture was not 'greed' by the banks. They didn't all suddenly get together and decide to be really, really greedy. It was the politicians who engineered the boom that made this perverse culture seem perfectly rational. Physician, heal thyself.

Blog Review 961

3506

blog-review-961

A very seriously good thing to do about aid. Instead of what works, why not start publicising what we know does not work?

If entrepreneurship is indeed genetically determined then we've all got some thinking to do. Maybe Greg Clark was right?

Star Trek may be just a movie franchise, but which other such gives you proper economics?

Why is it that lefties know so little economics? Because those predisposed to be lefties get turned off by all that talk of self interest perhaps?

For example, what is actually wrong with the Equal Opportunities Bill?

A measure of how silly the ethanol programme is. Better to burn the corn than make the alcohol to burn.

And finally, how to really educate a child.

Hard times at BT

3514

hard-times-at-bt

BT’s full-year results today have been dominated by confirmation that a further 15,000 jobs are to go, after a similar amount were cut during 2008/09.

The City will not be surprised by these cuts given BT’s poor finances and many problems. Indeed, the share price has recently been at its lowest since the initial flotation in 1984.

The adjusted figures for 2008/09 - though uninspiring - could have been worse, given the state of the economy.

On the back of 3% revenue growth, underlying EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) - a key City metric - remains within the £5 billion to £6 billion band that has been the case for years. Underlying earnings per share were down by 19% compared with 2007/08.

However, BT’s adjusted figures continue to be overshadowed by two very unwelcome legacy issues.

First, BT’s Global division has been forced to make enormous provisions for some poor contracts, most notably within the much-criticized NHS IT programme. Moreover, this division is also facing restructuring costs of a total £700 million over three years.

Secondly, like British Airways, BT’s pension deficit remains an eternal problem. It has now agreed to contribute over £500 million a year for the next three years to top up its pension fund.

In addition, confirmation of a 59% dividend cut and net debt of over £10 billion is bound to unsettle investors.

More generally, unlike its EU counterparts – Deutsche Telekom, France Telecom and Telefonica – BT does not benefit from rising returns from a mobile telecoms business; its Cellnet/O2 operation was demerged some years ago.

In summary, challenging times for BT. And, given the high hopes when it became the world’s first mass privatization in 1984, BT’s plight is very disappointing for UK plc.

Tax Freedom Day

3507

tax-freedom-day

Tax Freedom Day 2009, the day in the year when the average Brit has earned enough to pay his tax bill, is today, May 14. That's the earliest date since 1973.

But of course, it's not really lower taxes that have shifted Tax Freedom Day so much earlier in the year (although the temporary VAT cut has helped). Rather, it's that the economy is in serious trouble and less tax is being paid.

Along with the headline Tax Freedom Day figure, we also calculate a secondary figure every year, based on what the government actually spends, rather than merely what it collects in taxes. And when you factor in this deficit spending, Tax Freedom Day 2009 does not come until June 25 - the latest figure since 1984. To put it another way, you'd have to work for the taxman for another 42 days to pay off the bills the government is running up.

That gap of 42 days is wider than it was at its previous peak in 1975. It probably represents the biggest gap between revenue and expenditure since the Second World War. That's really no surprise when you consider that the government is now overspending at a rate of £20m per hour, twenty-four hours a day, seven days a week. And needless to say, it means we're going to be paying higher taxes in the years to come.

We've have an early morning here at the ASI doing media work for Tax Freedom Day. Eamonn Butler talked to John Humphreys on the Today Programme, while I appeared on Radio 5's Wake Up to Money (click here and fast-forward to 22.45 to listen). By coincidence, ASI Fellow Nigel Hawkins was on the same programme in his everyday guise as an investment analyst. Fast-forward to 6.20 to hear him talking about BT.

Clean the trough

3501

clean-the-trough

The MP expense debacle is proving to be another costly blow to a damaged system. The taxpayer has lost the most; a lot of our money has been illegitimately wasted. Not only have our pockets been hit, more seriously trust in the whole parliamentary system has plummeted. Post-‘expensegate’ polls have shown natural revulsion against the actions of the main parties. The existing system designed for MPs, by MPs, for the benefit predominantly of MPs is failing. Reform is needed to ensure efficiency, and instil a sense of trust.

Firstly, the issue of expenses must be dealt with. The most important measure is improving transparency. As of today, I know of no easy mechanism to police and monitor expenses. We must know where our money is going! Expenses should be available online, in detail, in an easy to read, search, filter, rank, and order format. Whilst we are at it, why not do the something similar for government departments, Quangos and audit the Central Bank for good measure. Once all details of any abuses are public, we should change the rules to limit what can be claimed in future.

Secondly, we should focus on restoring faith in Parliament. The most important short term action should be the removal of Speaker Martin, and a change of the rules so the Speaker is elected by secret ballot. Further reforms should work to strengthen the true power of individual MPs, and restore Parliament. Further reforms are well detailed in Carswell and Hannan’s book, ‘The Plan’.

Finally, if we want efficiency, we should place greater emphasis on the market to provide our services. This does not translate into ‘quasi’ privatisations where contracts are not open to competition, and conditions are set artificially by government, but to schemes that return genuine choice to consumers or are fully private, e.g. educational vouchers. Government functions that remain should be localised where possible, increasing accountability and choice.

Government, and opposition, can only regain trust, by displaying the dignity and transparency befitting their role. It is time to clean the trough.

Unintended consequences

3502

unintended-consequences

John Baden of FREE – the Foundation for Research into Economics and the Environment – sends out a weekly column which is always worth reading. This week, he's talking about the counterintuitive nature of economics, and he gives an interesting example – and a very relevant one too, given the retreat into trade protectionism.

In 1981, he says, US carmakers and unions petitioned Congress, claiming that the growing tide of Japanese imports put their industry and jobs at stake. They requested a limit – 1,680,000 cars per year from Toyota, Nissan, Honda, and Mazda.

Bill Niskannen, chief economist of Ford, argued against this protectionism. He explained that if the number of cars was fixed, Japanese companies would simply increase their revenues anyway by selling Americans cars of higher quality, larger size, and bigger price.

Ford's management fired him. The Japanese could only build “rice burners", they said —tiny, tinny econo-boxes. They could never compete with Lincoln, Chrysler, or Cadillac. But Niskannan's counterintuitive argument was right. Faced with the threat of import restrictions, the Japanese did indeed take their products upmarket – to the point where they actually surpassed the quality of their American counterparts. Perhaps US carmakers would be in a better position today if they had actually had to square up to the competition and improve their own products too, instead of being featherbedded by legislators.

Human rights and computer games

3504

human-rights-and-computer-games

Just when you thought the EU could not get any more meddling about computer games the Council of Europe comes up with a real corker. In a report grandly entitled Human Rights Guidelines for Online Game Providers, they mention all their favourite bugbears: "aggressive nationalism, ethnocentrism, xenophobia, racism and intolerance." Gamepolitics has the full story.

They are even meddling in "user" generated content that sustains many computer after their sell-by-date and warning companies to be wary, lest they get in trouble for something an end user does without their knowing.

The EU continues to do its best to drive computer games companies out of its borders to friendlier places like Quebec, Eastern Europe and the US.

Verdict on the crash

3503

verdict-on-the-crash

Click on the image to read this full page article in the Daily Telegraph. These ideas are further outlined in a new book from the IEA: Verdict on the Crash, in which Dr Eamonn Butler has written a chapter entitled 'The financial crisis: blame governments, not bankers.

Blog Review 960

3505

blog-review-960

Might it be that the Speaker is covering up yet more troughing?

No, really, he might be.

And how much should an MP get? Rather less than they think they should perhaps?

And John Locke thought they should get nothing. Just think of what would happen if people pursued power for the sake of the money!

We might hope at least now that politicians understand the idea of producer capture.

It's not as if they've ever managed to create a good regulation now, is it?

And finally, what one who complains about the trough gets from the trough.

Dark thoughts

3475

pessimism

On Monday, Madsen wrote about the Telegraph's various reasons to be optimistic about the economy, and also noted the importance of optimism in driving recovery. Some commentators are less optimistic, and think we are experiencing a rally, not a recovery, and that there may be worse news still to come. They see a fundamental problem remaining in the housing market – essentially, that prices have got a lot further still to fall before they reach anything like historic levels. As MoneyWeek's Dominic Frisbee has written:

The average salary multiple over the last 37 years (1971 to 2007) is 4.54. At the 2007 average wage of £24,000, that gives an average house price of £109,000 – a fall of 40% from the peak. But if you exclude the bubble years (from 2001 to 2007), you get a 4.17 average salary multiple – which would give an average house price of £100,091, a fall of 45% from the peak.

There's also the fear that the market might over-correct, with prices dipping below historic averages. That's what happened during the last recession in the 1990s. Needless to say, that would mean massive problems for our weakened banks and could easily prompt another financial crisis (something the Bank of England is already worrying about). Throw in the fact that the banks haven't really felt the impact of consumer and commercial bankruptcies yet – there are lots of credit card bills and loans out there that are just not going to be repaid – and you can see how things might get sticky. All of which could undermine delicately rising business and consumer confidence.

The government isn't helping either. The rate at which they are borrowing money makes heavy future tax rises a near-certainty, deterring both spending and investment. What of quantitative easing? So far, it appears to have had little impact but some people, including the ASI, are still very uneasy. The drop in the RPI that was used to justify it is almost entirely a result of falling house prices, which are not so much 'deflation' as a necessary market correction. Meanwhile, the CPI continues to rise. Add in a weak pound (making imported goods much more expensive) and it's not hard to imagine that a severe inflationary episode is lurking round the corner.

So the good news is not unmixed, and the message might be this: hope for fine weather, but keep the umbrella handy.