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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Holy Credit!

Written by Jan Boucek | Friday 26 July 2013

So Archbishop of Canterbury Justin Welby wants to make the Church of England’s property available for Credit Unions so they can wipe out those dastardly payday loan sharks. This is a brilliant idea with wide-ranging opportunities for both entrepreneurial clerics and banks.

Just consider the convenience for consumers of banking and praying at the same time. After the queue for communion, you simply shuffle over to the bank teller next to the altar to pick up your loan or maybe deposit whatever spare change you have after passing the collection box.

Meanwhile, over in the confessional, the priest can follow up an absolution prayer with a financial product pitch – “Have you considered insurance for seven years of drought?”

Recruitment of young folk into the priesthood has become a real problem for the Church but Credit Unions on site offer an added attraction in the area of branch security. Wearing body armour under cassocks, learning a martial art or designing bank vaults disguised as crypts will broaden the profession’s appeal.

Of course, established banks won’t be sitting still against this new competition on the High Street. Many branches surely have space available for any number of religious sects to set up shop.

What depositor with a bag full of cash could resist first lighting a candle in the hopes his deposits won’t attract the attentions of the taxman? Impatient couples could stop off at the on-site wedding chapel before opening a joint bank account.

Imam calling for midday prayers while you’re stuck in the queue behind the old lady counting out thousands of pennies? No problem – step aside to our prayer rug area and we’ll hold your place in the line.

And what customer wouldn’t appreciate an evangelical choir lifting the spirits before meeting  the bank manager about those persistent overdrafts?

Keep those ideas coming, Mr Welby!

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Ending employer pension plans

Written by Jan Boucek | Monday 10 December 2012

Last week’s autumn statement was further proof that Britain’s pension arrangements are out of date, grossly inefficient and far too complicated. The system benefits politicians, bureaucrats and the pensions industry to the detriment of savers, pensioners and employers. It’s time to sever the link between employment and pension provision.

To refresh your memory, the Autumn statement called for further reductions in annual contribution limits and in the total lifetime limit. Like Lucy in the Peanuts comic strip who pulls away the football just as Charlie Brown is about to kick it, so the government moves the goalposts. No wonder the vast majority of people can’t be bothered to save for their retirement – they know their hard-earned nest egg won’t be all it’s cracked up to be.

Yet again, the politicians couldn’t help mucking about with rules and regulations - it’s in their DNA to endlessly tinker and tweak. Bureaucrats have justified their existence by dreaming up new wrinkles that now need to be ironed out. And the pensions industry? Well, more complexity, more changes and more confusion can only mean more fees.

Way back when pensions were first created, the world of work was pretty straight-forward – you signed up with Metal Bashers Ltd., slogged away for them for the next few decades and then collected a pension for a couple of years before you dropped dead. It made some crude sense for the employer to be the officially designated pension provider.

That world is long gone – companies come and go while employees switch jobs far more often and work for far longer. Increased life expectancy will only heighten those trends as the modern world rewards flexibility, mobility and nimbleness.

Much of this well known but here’s one aspect that isn’t – the insidious effect of employer-provided pensions on companies themselves. At a recent seminar of pension trustees, the chairman of trustees for one of the UK’s biggest retailers detailed the impact of the current system on that company and its scheme. Here’s just a sampling of the issues:

  • The scheme still has a now-closed defined benefits section with some 1,300 active members, 4,000 deferred members (not retired but working somewhere else and with pension assets left behind) and 3,900 pensioners. Its new defined contribution section has nearly 2,000 actives and 2,100 deferreds. That’s a lot of people (about 13,300) to keep track of – the majority of which are long gone. And it’s just going to get bigger as auto-enrolment kicks in.
  • Among many other things, the company and trustees are now planning for the new auto-enrolment rules, mulling closing the DB scheme to future accrual or even buying out all the DB liabilities, restructuring the DC scheme and, of course, struggling to deal with the under-funded DB scheme. No shortage of consultant fees there.
  • The chairman of the scheme last year attended five normal full-day trustee meetings, one ½ day meeting, three conference calls, nine special meetings on the DC scheme, two meetings with advisers, two with fund managers and another 20 conferences, seminars, etc to keep abreast of developments. Who’s minding the shop?
  • Then there’s the endless stream of either ill-informed or simply confused current and former employees seeking advice, guidance and information as they transfer in, transfer out, quit, retire, take leave, work abroad, marry, divorce, move from full-time to part-time and back again. The company is like a harried parent working fulltime but also charged with the well-being of its children except that it has over 13,000 of them and thousands more due imminently.

The old joke used to describe General Motors as a large pension scheme with a subsidiary that made cars. Some companies may be able to cope but many others certainly can’t. If a company is very good at making state-of-the-art widgets, there’s nothing to suggest its expertise extends to administering the government’s welfare system. (General Motors proved itself a failure at both.)

So here’s the big idea: cut employers right out of the pensions business altogether in favour of a simplified universal savings scheme – a giant ISA, if you will. It would need some mandatory minimum contribution levels from both employers and employees with some restrictions on applying those savings to ensure adequate pension provision when the time comes.

The result would greatly increase transparency for savers because they will know exactly how much they’ve got. That same transparency will limit the scope for skullduggery by politicians, bureaucrats and pension professionals because any changes will immediately pop up in savers’ retirement accounts as a bigger or smaller number.

And, for companies, this is probably the biggest opportunity to reduce the regulatory burden that everyone claims they’re in favour of.

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Saint Mark

Written by Jan Boucek | Friday 30 November 2012

Canada’s motto of “peace, order and good government” may not stir the blood as America’s “life, liberty and the pursuit of happiness” or France’s “liberté, égalité, fraternité” but, all things considered, the country’s not in a bad place compared with other advanced economies. The banking system is solid, government debt and borrowing manageable and growth and inflation about as good as could be expected from a major trading nation.

The UK government now hopes that Mark Carney, the current governor of the Bank of Canada, can sprinkle a bit of that Canadian angel dust over here as the next governor of the Bank of England. Mr Carney certainly fits the bill of everyone’s image of the ideal Canadian – modest, polite, no-nonsense – someone you can have a perfectly pleasant dinner with.

To get a sense of the man, check out two major interviews earlier this year on YouTube – BBC’s HARDtalk in August and Reuters TV in January.

Saviours seldom meet  mass expectations for salvation, especially when the sins have been so egregious and widespread. Mr Carney is no messiah, thankfully, but does know what the problems are, what it will take to fix them and what any central bank can actually do. That realism is what’s most needed now.

When asked his general view of the global economic situation, Mr Carney said:  “We’re going through a period of de-leveraging across the advanced economies. There has been a three-decade increase in the amount of debt of governments and households and in some cases corporations across the advanced economies, notably the US, the UK and some parts of Europe…There’s going to be a multi-year process, really measured in decades, of reducing that leverage.”

So, no quick fixes, Cameron & Osborne, Miliband & Balls, and don’t pretend otherwise.

What’s a central bank to do then? “Central banks cannot solve this crisis. Central banks have to focus on, first, delivering price stability. It’s absolutely in no one’s interest to have deflation or runaway inflation…Secondly, we have to do our bit, and it’s not  in its entirety, but our bit to keep the financial system functioning…Central banks can do all of that but just that…will not be sufficient to produce the growth and employment that people want. Other steps have to be taken by national governments.”

So, don’t go to your local central bank to cover the failings of your governments.

And what about Paul Krugman’s belief that central banks are too obsessed with controlling inflation and that a bit of inflation would be a good thing? “I think we’re appropriately obsessed with price stability. The risk in the UK has been deflation. And what the BOE did … (was provide)… additional stimulus through bond purchases - quantitative easing - in order to ensure that… there is not deflation in the UK. That price stability goes both ways…In order for (Krugman’s extra inflation) to make a difference …you have to get ahead of the bond market. You have to have a very large surprise, very quickly in order for it to make a difference on the fiscal side and it won’t work. “

How very Canadian – a sympathetic understanding of quantitative easing but no illusions about fooling financial markets on the dangers of inflation. Clearly a man who understands markets.

As a fellow countryman, I wish Mr Carney all the best and look forward to seeing this cool, calm and collected Canadian cope with Britain’s jumped-up politicians, hyper-active journalists and depressive citizenry.

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Behold the Dartford Olympics

Written by Jan Boucek | Monday 30 July 2012

Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.

That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.

Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to  make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.

However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.

Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.

Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.

Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.

Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.

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Cash piles

Written by Jan Boucek | Monday 16 July 2012

A series of news items on cash in recent days underscore the perversity of the world’s  economic situation. What they all have in common is the growing piles of cash around the world that no one knows what to do with. Consider these items:

  • Some fund managers like JPMorgan Chase, BlackRock and Goldman Sachs have closed some money market funds, notably those denominated in euros, to new customers. More money at current low rates would just hurt current holders.
  • A survey by the Association of Finance Professionals which represents US corporate treasurers found that 41% of them have more cash than ever before and expect that to grow. More interestingly, they’ve more of that pile - over 50% - sitting in simple bank accounts than six years ago when it was just 23%. These treasurers are eschewing capital markets because returns are too low to justify the risk. In short, they’re more comfortable holding a depreciating asset (cash) than risky longer-dated securities.
  • The European Central Bank reported that funds kept at its overnight deposit facility fell in the week after its rate cuts to €325 billion from €809 billion but it all merely moved to the ECB’s current account facilities. Jens Larsen, chief European economist at RBC Capital Markets said. “The real concern for the ECB is not whether banks keep money in one account or the other, but whether the cut in rates has any effect on credit creation and real economic activity.” Clearly no.

Switzerland’s central bank is estimated to have spent some 62 billion Swiss francs (about $63.7 billion) buying up euros in June, up from CHF52 billion in May to prevent appreciation of the franc. One analyst said clients are wondering whether other policies will be needed “to slow capital inflows either through capital controls or negative rates." Those diligent, hard-working and prudent Swiss are wasting their resources buying piles of foreign cash they don’t need.

These are vast sums sloshing around wastefully but in a completely rational response to utter fear of the future. Like medieval peasants hiding copper pennies from rampaging barbarians, some of the smartest people on earth are happier sleeping on a lumpy mattress than investing in the future.

Monetary policy has run its course. Zero interest rates and quantitative easing may have saved the world’s banks from collapsing but now there’s not much point in pushing those strings anymore. As for fiscal policy, that’s also been exhausted – not even the mighty Keynes could have imagined the budget deficits and national debts from Japan to Europe to America.

Confidence in the productive sector remains low. How about some real-world policies that investors can believe in? Like completing Europe’s single market in services and unifying the disparate patent systems? Or simplifying tax codes that do away with special breaks, tax shelters and market distortions in favour of uniform but much lower tax rates – Reagan’s wistful tax return on a postcard ? Or making it easier to fire redundant or poor workers to encourage hiring anyone the first place?

Any of these would do more for confidence and growth than yet more container loads of cash. 

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Market hypocrisy

Written by Jan Boucek | Monday 09 July 2012

It was nice to see so many of our politicians attacking Barclays’ Bob Diamond for distorting markets by manipulating Libor rates. Efficient markets are the bedrock for solid economic growth, and nobody defends free and open markets better than the Adam Smith Institute, so can we take credit for the politicians’ exuberant market fervour?

Alas, no. Many members of the Treasury Select Committee were simply grand-standing hypocrites because nobody manipulates markets more and urges others to do the same than that crowd hunkered down in Westminster and its various partners in crime.

Start with the mother of all market manipulations - quantitative easing by the Bank of England. Running the printing presses to buy up UK government gilts has slashed interest rates across the board, royally screwing honest savers, prudent investors and pensioners. Those absurdly low interest rates allow the government to escape more aggressive cost controls and steer precious capital towards mis-priced investments. Have any Committee members sent emails to anyone about this market manipulation?

Still in the bond markets, the scramble to shore up wobbly banks led to higher capital requirements. And what’s the definition for that higher capital? Yes, holdings of yet more government bonds – how convenient and how market distorting! Even Greek government bonds just a couple of years ago were judged worthy but now leave so many banks in deep doo doo. Are there plans by the Committee to interrogate those responsible for the rule then?

Then there’s the Jaws of market distortions – the unseen predator lurking below the surface, otherwise known as pension deficits. The biggest sharks in the water are the public-sector pensions, virtually entirely unfunded. After all, what is a pension but the return from  long-term investments in the form of dividends, interest payments or perhaps rising tax revenues. The complete disconnect between productive investment and pension payments is an obscene market manipulation whose real costs are only beginning to be understood. Which heads will the Committee seek to roll?

All too mind-numbingly big to comprehend? Here’s an easier one. In our leafy suburb, there’s a four-bedroom detached house occupied by a reasonably comfortable retired couple who recently shipped a vintage sports car to America and back so they could tootle down Route 66 for a few weeks. The roof of their house is now graced with solar panels subsidised every which way from initial installation to higher electricity rates for the rest of us. As this year’s incessant rain pours down day after day, surely one Committee member could demand an appearance by the energy-market manipulators responsible for this travesty.

John Mann, a Labour MP on the Committee, huffed and puffed at Mr Diamond that “Either you were complicit or you were grossly negligent or you were grossly incompetent. That’s the only conclusion.” Indeed. The Committee members might try that line while looking in the mirror.

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Inquiry festivals

Written by Jan Boucek | Wednesday 04 July 2012

Prime Minister David Cameron has just got to think bigger. His announcement of a parliamentary inquiry into the banking industry as a result of the Libor scandal missed a huge opportunity. Maybe Labour leader Ed Miliband has the right idea with his call for a full-blown independent Leveson-style inquiry into British banking.

This could be the start of a series of inquiries around the country on any number of issues. After all, the music festival business is in decline and the Olympics will soon be over so Ed’s Big Idea could keep the circuses coming.

For one thing, it would help reduce unemployment. Think of all those people at Leveson officiating, supporting, analysing, covering, guarding, pontificating, chauffering or otherwise just hanging around. A smart entrepreneur could even make a profit by charging admission, offering corporate boxes and selling programs, refreshments and cream pies for throwing at the baddies. There might even be a market in DVD box sets. Cameron’s parliamentary inquiry merely recycles the tired bunch in Westminster.

A whole raft of inquiries would also leave politicians with little to do as they await the findings of each inquiry. The longer the inquiry, the better as it would keep the politicians out of mischief. Indeed, once these inquiries really get rolling, who needs Parliament at all? We just await the pronouncements of the wise – like the European Commission.

Here’s just three topics ripe for extended inquiries and loaded with drama, villains, victims, money and passion.

The Brown Deficits: How did the Terminator of boom’n’bust run up huge budget deficits during many years of economic growth? Let’s see the emails from Treasury officials, minutes from meetings with the Bank of England and lists of lobbyists trooping through No. 11. Did Tony Blair ever ask what was going on? Did anyone offer to resign? Lord Sugar would be the clear favourite to chair this one. (“What on earth were you thinking???)

The Housing Bubble: Oh, what a rogues’ gallery of witnesses this would be. NIMBYs restricting supply, estate agents flogging the impossible dream and weak-kneed politicians defending the ultimate tax shelter. Polish plumbers, Russian oligarchs, make-over TV show producers – the possibilities are endless. This inquiry would strike at the heart of the British psyche so two co-chairs would be needed. Ken Livingstone and Boris Johnson?

The Education Mystery: So much money spent to produce so many students with declining skills in literacy, numeracy and foreign languages but increasing ignorance of history, geography and literature. Let’s grill the unions on why no teacher ever gets fired for incompetence. Let’s make the trendy education theorists explain their thinking. And let’s see all the email trails flowing through education ministries, if only to assess whether they were comprehensible. Jeremy Paxman to chair. (“Come on, come on!”)

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Subverting the Teutonic way

Written by Jan Boucek | Monday 25 June 2012

Are the days numbered for Europe’s last big bastion of sound money and public finances? The omens from its real estate market aren’t good.

Germany’s Chancellor Angela Merkel faces unrelenting pressure from virtually all other world leaders to set the printing presses free and to hand over her citizens’ dosh to feckless foreigners. Oh, it’s all dressed up in grand macro-economic excuses about matching surpluses and deficits, harmonizing fiscal regimes and stabilizing markets but the assault strikes at the foundation of Germany’s recent success – hard work, prudent saving and thoughtful investment. Like Britain’s own St Margaret in her final days, Frau Merkel is increasingly cornered by the baying hounds.

It looks like the rot, though, has already crept into the home front – literally. This week’s Sunday Times Home section has an article on the booming property market in Germany. Could it be that even those industrious Germans are succumbing to the siren call of easy money to be made in real estate – the same temptation that skewered the economies of Ireland, Spain and, yes, the UK?

German house prices had been relatively steady for two decades but have started to move up significantly in the past couple of years.


Nationally, house prices were up 5.5% last year while flats in the biggest cities rose by 10%. The Sunday Times article is replete with the kind of anecdotes so familiar to British home and property supplements over the years: Berlin properties now fetching three times their price four years ago, opportunities in buy-to-let, exploitation of tax breaks. One developer is quoted as saying: “We’re seeing Greek millionaires pile in out of fear and because they think it’s trendy…”

All these are worrisome signs of a bubble in the making. Even The Sunday Times article itself poses the question “So where are the best places to invest?” – surely a leading indicator of trouble ahead. If German airwaves become saturated with reality make-over TV shows and dinner parties with arguments about the best source for marble counter tops, then we’ll know that even Germany is lost.

We’ve argued before that speculative investment in real estate is a poor substitute for truly productive investment, something that Germany has clearly avoided in the past, much to its benefit. The more Frau Merkel is forced to give away to foreigners, the more the folks back home will ask “Oy! Wo ist meine?” That would be a far cry from the Germany we’ve come to respect and, secretly, admire.

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Rhapsody in regulation

Written by Jan Boucek | Tuesday 19 June 2012

“The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.” — Adam Smith in The Wealth Of Nations

Folks of a free-market persuasion are often misrepresented by those with a socialist inclination of being on the side of business. Not so, as Adam Smith wisely notes above. We  usually prefer economic activity to be in the hands of business rather than under the thumb of government but we’re always wary when business cosies up to government.

Two reminders from the banking industry last week to be on guard.

First out of the trap was Barclays CEO Bob Diamond. In an interview Wednesday with Bloomberg, he reprised his long-standing mantra that “strong banks, like Barclays, want strong regulation.”

This sounds good in our current age of finger-pointing and bank-bashing but serves Barclays well if high barriers to entry keep out more competition from Diamond’s industry.

Then in an interview Friday with The Financial Times, the outgoing head of retail at Royal Bank of Scotland Brian Hartzer suggested regulators should forcibly end free current accounts. He smoothly phrased it in terms that chime with today’s sentiment: “Regulatory intervention might be helpful in forcing banks to the table” and “A large proportion of customers are being cross subsidised – we think that’s unfair.”

Of course, what Hartzer proposes means banks no longer having to compete on price for their most basic product.

Both these sweetly melodious proposals for more regulation need to be treated with Adam Smith’s “most scrupulous” and “most suspicious attention” because they’re music to the ears of our discordant political maestros.

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Granny mugging

Written by Jan Boucek | Monday 11 June 2012

Nick Petford, vice-chancellor at the University of Northampton, wants to take money from law-abiding pensioners and savers in order to give it to convicted criminals. In the spirit of the times, let’s call it granny mugging.

To be precise, Prof  Petford is urging British universities to use at least £1 billion of their annual £7 billion procurement budgets by purchasing from “social enterprises” as part of a campaign called £1 Billion University Challenge whose objective is a “fairer society.” Prof Petford described social enterprises as companies where profits are reinvested in the business rather than paid out as dividends. As an example, he cited buying furniture from Goodwill Solutions which employs ex-offenders.

Clearly, to Prof Petford and many like him in the ivory tower, dividends are a bad thing, conjuring up visions of fat cats sucking on cigars while gathered round a big table covered with stacks of cash. Perhaps a better understanding of dividends is in order.

Companies are in business to make a profit. If they’re successful, they then pay tax on those profits, commit some of the balance to further investment and pay out the rest in dividends. Those dividends are earned by folks who risked their capital in the company in the first place and those folks have to declare those dividends as taxable income. What they do with what’s left can vary – re-invested in the same company, invested elsewhere where returns might be better or spent on a good night out.

Many of these folks in receipt of dividends are pensioners or savers with an eye to their retirement. They either hold a company’s shares directly, perhaps through an ISA or SIPP, or more likely through a mutual fund or through their participation in a pension scheme. Indeed, Prof Petford’s own cushy pension scheme is greatly dependent upon a lot of dividends being paid to ensure his comfortable retirement.

Now, we have no problem with social enterprises if they can provide a good product at a competitive price – that’s what a free market is all about. But Prof Petford then wants to play fast and loose with other people’s money (ie taxpayers’ and tuition fee payers’) by admitting that restricting some procurement to social enterprises would cost “a bit more” but is counting on reaping big social rewards in a couple of years.

What about the “social” rewards from profitable companies hiring lots of workers and paying lots of dividends to the nation’s grannies while producing ever better and cheaper products?

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