Blog Review 930

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How do you make people care for each other when they don't care for each other? Use markets of course!

A message for all those who would limit bankers' pay. It's not as easy to do as you might think.

This week's updates from the fake charities.

One of the problems with group and identity politics (based upon skin colour, sexuality and the like) is that it's archaic. Civilisation is the process of moving away from that very idea.

It turns out that the State isn't even very good at the basic research stuff either.

Backyard economics gets taken out into the backyard....behind the woodshed actually.

And finally, meet Captain Brownadder (and do read the subsequent episodes).

The Underpants Gnomes

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Richard Murphy thinks that this idea from the Sustainable Development Commission is a very good one. So clearly there is less to it than meets the eye:

A further option would be to fund specific elements of a sustainable new deal through ‘green bonds’ – bond issues which are targeted directly at low-carbon investments. This idea has a strong rationale under current conditions for a variety of reasons. In the first place, it is clear that many of these investments offer considerable returns, at a point in time when the returns on conventional savings (particularly household savings) are disappearing. 

This has an air of the Underpants Gnomes from South Park to it:

The Underpants Gnomes are businessmen of sorts, and they know a lot about corporations, and explain them to the boys in their underground lair. Their business plan is as follows:

Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit!

What's missing from the green bonds idea is that stage 2. How do we get the investments in these green bonds to turn a profit?

Assume for a moment, however strange it might be, that the SDC is correct in that these investments offer considerable returns. By their own numbers they do, yes. But not, you'll note, to the investors in them. The returns are societal. Reduced emissions and the damage they will cause (look, I know, but we're playing pretend their figures are correct). There is no mechanism by which those societal returns are to be paid to the investors.

This is the exact mirror image of the original point about the emissions themselves. They are externalities, outside the prices that prevail in the market. With our bonds, the returns to the society at large are outside the returns to the investors. So just as we get too many emissions because they are not priced so we will get too little investment as the returns are not included in prices.

We do know how to get externalities internalised. We can do it through Pigou Taxation for example. And we could indeed, in fact we're already trying to do so, get the costs of the emissions properly reflected in market prices. And having those costs, thus the profits to be made from minimising them, properly reflected would be a solution to our problems.

But if we do get these costs and thus potential profits properly included in market prices, then what is the justification for "green" bonds? None at all is the answer to that question. For investment in these sorts of green projects will be a money making opportunity just like any other.

What we come to in the end is that the structural changes, the incentives, required to make green bonds work obviate the need to have green bonds in the first place.

Yes, we do pay for the Sustainable Development Commission out of our taxes. Aren't we the lucky ones?

Coke and aidpods

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Simon Berry’s simple idea to add ‘aidpods’ inside of crates of Coca Cola distributed to developing countries is gaining some force. After years of trying to get the plan on the map, last year he finally started gaining major support from activist groups and individuals through social networking sites and other online resources. Berry is now working with Coca Cola and an international aid organisation to finalize the best method of preparing the aidpods. He will have to get information from varying regions in order to include the most appropriate medicines & materials in each of the packages. Berry is certainly on to something.

Do we need a radical shake-up of boards?

The whole issue of bank governance will now be reviewed by two independent inquiries: the first headed up by that old regulatory standby, Sir David Walker, a former chairman of the Securities & Investment Board (SIB);  the second by the Financial Reporting Council, which is rethinking best practice guidelines for boards.

It is increasingly apparent that directors of major bulge bracket banks are falling down in their ability to ensure shareholder influence over corporate strategy and control. Part of the problem is that non executive directors appeared not to understand what banks were getting up to, particularly when it came to trading such complex financial instruments as a CDO cubed. Indeed, it would be fascinating to know whether they could provide a definition of any of the many credit derivatives traded by the banks. Economists are fond of referring to this dilemma as an asymmetry of information problem, in other words the full time employees of the bank may know about things, but the non executive part-time directors sure don’t.

Lord Myners, the City minister and former chairman of Marks & Spencer and Gartmore, the fund manager, has urged both independent inquiries into board governance to “go outside the conventional framework" by testing unorthodox models. He suggests that non executive directors might attend classes on corporate governance (Myners himself might fail the test on ensuring proper accountability for retirement packages granted to outgoing CEOs). He also raises the important issue of whether non-executive directors should have their own full time secretariats.

The non-executive directors at both RBS and HBOS appear to have ducked asking awkward but pertinent questions of their CEOs.  This is puzzling since the boards included some highly intelligent and successful people – no one who has ever met Sir Steve Robson, the former Treasury mandarin who served on the RBS board for over eight years would describe him as a shrinking violet. It is also rumoured that some non-executive directors threatened to resign after arguments with Sir Fred ‘the shred’ Godwin. However, the record shows that no one ever did.

It is disturbing to discover that some leading institutional shareholders, notably Legal & General, have criticised the boards of major banks for ignoring their views. When Legal & General sought to dismiss the chairman and chief executive of RBS following the rights issue held in 2008, their expressed opinion was overruled by the board. This led Peter Chambers, Legal & General’s CEO to tell the Treasury select committee that, “One would have to conclude that non executive directors were not effective in controlling the actions of the executive directors ". Legal & General was one of the three largest shareholders in RBS.

The wide ranging issues centering on non executive directors’ proper role in the banking sector is one that will be discussed at our next REG roundtable and the debate will be led by Mark Austen,  who sits on the board of Standard Bank and was previously global head of banking & finance at PWC. We will return to this issue as the debate hots up.

Keith Boyfield is the chairman of REG, the ASI's regulatory evaluation group.

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Testament to the inability of non-executive directors to maintain a rigorous oversight over the activities of banks’ executive team is reflected in the mounting losses reported by those two ugly sisters of Scottish banking, RBS and HBOS. Cross-examined by the Treasury select committee earlier this year, it was clear that the non executive members of the board had failed to rein in their CEO’s meglomania. What is more, it was revealing to learn that neither the chairmen nor the CEOs of the two banks had any banking qualifications. Nor had Adam Applegarth, the CEO of Northern Trust, or Matt Ridley, the chairman, ever sat a banking exam. [Cont'd]

Do we need a radical shake-up of boards?

Testament to the inability of non-executive directors to maintain a rigorous oversight over the activities of banks’ executive team is reflected in the mounting losses reported by those two ugly sisters of Scottish banking, RBS and HBOS. Cross-examined by the Treasury select committee earlier this year, it was clear that the non executive members of the board had failed to rein in their CEO’s megalomania. What is more, it was revealing to learn that neither the chairmen nor the CEOs of the two banks had any banking qualifications. Nor had Adam Applegarth, the CEO of Northern Trust, or Matt Ridley, the chairman, ever sat a banking exam.

The whole issue of bank governance will now be reviewed by two independent inquiries: the first headed up by that old regulatory standby, Sir David Walker, a former chairman of the Securities & Investment Board (SIB);  the second by the Financial Reporting Council, which is rethinking best practice guidelines for boards.

It is increasingly apparent that directors of major bulge bracket banks are falling down in their ability to ensure shareholder influence over corporate strategy and control. Part of the problem is that non executive directors appeared not to understand what banks were getting up to, particularly when it came to trading such complex financial instruments as a CDO cubed. Indeed, it would be fascinating to know whether they could provide a definition of any of the many credit derivatives traded by the banks. Economists are fond of referring to this dilemma as an asymmetry of information problem, in other words the full time employees of the bank may know about things, but the non executive part-time directors sure don’t.

Lord Myners, the City minister and former chairman of Marks & Spencer and Gartmore, the fund manager, has urged both independent inquiries into board governance to “go outside the conventional framework” by testing unorthodox models. He suggests that non executive directors might attend classes on corporate governance (Myners himself might fail the test on ensuring proper accountability for retirement packages granted to outgoing CEOs). He also raises the important issue of whether non-executive directors should have their own full time secretariats.

The non-executive directors at both RBS and HBOS appear to have ducked asking awkward but pertinent questions of their CEOs.  This is puzzling since the boards included some highly intelligent and successful people – no one who has ever met Sir Steve Robson, the former Treasury mandarin who served on the RBS board for over eight years would describe him as a shrinking violet. It is also rumoured that some non-executive directors threatened to resign after arguments with Sir Fred ‘the shred’ Godwin. However, the record shows that no one ever did.

It is disturbing to discover that some leading institutional shareholders, notably Legal & General, have criticised the boards of major banks for ignoring their views. When Legal & General sought to dismiss the chairman and chief executive of RBS following the rights issue held in 2008, their expressed opinion was overruled by the board. This led Peter Chambers, Legal & General’s CEO to tell the Treasury select committee that, “One would have to conclude that non executive directors were not effective in controlling the actions of the executive directors ”. Legal & General was one of the three largest shareholders in RBS.

The wide ranging issues centering on non executive directors’ proper role in the banking sector is one that will be discussed at our next REG roundtable and the debate will be led by Mark Austen,  who sits on the board of Standard Bank and was previously global head of banking & finance at PWC. We will return to this issue as the debate hots up.

Keith Boyfield is the chairman of REG, the ASI’s regulatory evaluation group.

Blog Review 929

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Yes, the big story today, Guido. Didn't the boy do well? There's not a political blog in the country without a post on this subject so Netsmith will forbear from pointing to all of them.

But just what was Labour doing? Appointing a man with this sort of background to lead their online efforts?

He does seem to have, umm, varied interests, to be sure.

This isn't the only email scandal of course: although there is a certain joy at a columnist and leader writer on a major national newspaper complaining that a story isn't being covered by the, umm, major national newspapers.

An elegant and concise description of what is wrong with politics: politicians.

A few years back, income volatility amongst the poor was the polite thing to worry about. Now that income volaility amongst the rich has increased is it still polite to worry about income volatility?

And finally, when the internet comes for you.

Government by technocrats

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I realise it'll not be all that fashionable to say so around here but there is indeed an argument in favour of rule by technocrats. Allow the wise and well informed experts to get on with those difficult things and we can enter the land of milk and honey and the Easter Bunny will frolic in the meadows.

Unfortunately, while it is an argument it's not one that quite works. For what always happens is that the technocrats stop being technocrats. Take this little argument about the way that traffic lights were sequenced.

It was because the Government feared motorists who were travelling smoothly, rather than stopping and starting, would use less fuel and pay less to the Treasury in duty as a result.

Yes, congestion and frustration were deliberately increased so as to make sure that we all paid more tax. So far, so technocratic, for a certain perverted meaning of technocratic of course. But then look at this:

Vanderbilt University economist Kip Viscusi studied the net costs of smoking-related spending and savings and found that for every pack of cigarettes smoked, the country reaps a net cost savings of 32 cents.

"It looks unpleasant or ghoulish to look at the cost savings as well as the cost increases and it's not a good thing that smoking kills people," Viscusi said in an interview. "But if you're going to follow this health-cost train all the way, you have to take into account all the effects, not just the ones you like in terms of getting your bill passed."

So therefore restrictions upon smoking are being opposed by those same technocrats are they? For clearly, if increasing the income and wealth of the State are the way we judge things then more smoking should take place, no?

Ah, but of course, that's not the way it works. Smoking has already been declared to be bad, naughty, (as in how dare you proles do what we technocrats disapprove of) and thus the financial arguments are thrown out of the window.

Now I'm not arguing that the impact upon tax revenues should or should not be used as a measure of the desirability of either smoking or traffic light sequencing. Only that if it is in one case then it should be in the other: both or neither.

And given that this is clearly not the case we can see that the case for technocratic rule fails. For technocrats never remain technocrats, they always fall foul of their own prejudices. And being ruled by the prejudices of others is not what it is all supposed to be about: better, by far, to have the maximal possible amount of liberty and freedom so that we can all run our own lives by the inclinations of our own prejudices rather than those of others.

It's Carry on Printing

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The Bank of England not only kept interest rates on hold at its Thursday meeting, it also reaffirmed its commitment to quantitative easing, creating £75bn of new money to be spent largely on government bonds.  The policy is unsound, as I wrote last Tuesday, in that it will misallocate resources in response to the false signals it sends out. 

The error has been compounded by buying government bonds.  This drives up the price and lowers the return on them.  Pension funds, which move deeper into bonds as their members approach retirement, thus achieve lower returns on their investments, and pay reduced pensions in consequence.  If the £75bn bung were used to buy corporate paper, it would still be wrong, but would at least have raised company shares, their asset base and their credit-worthiness.

The minor piece of good news is that the Bank may hold back on the second wave of its printing until its May or June meeting, giving it time to assess what effect the April 22nd Budget might have.  It also gives it time to see if the dreaded deflation is indeed rearing its head, or if it must instead start looking to counter all the inflation pumped in.

The fishing police

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The government is trying to give us handy ways in which we can save money and firms can increase efficiency. For example, their ‘Business Link’ website tells us that fixing a dripping tap could save 90 litres of water a week, greatly reducing costs. If we were to extend the analogy of a dripping tap on to the governments waste of public money, we would no longer be talking in terms of taps and drips, but pressure-washers and lakes. Perhaps the government should sort out its own spending and efficiency before preaching to individuals and firms.
 
We all know examples of government waste, ranging from the immoral MP expense scandals to the absurd overpayment of civil servant pensions. The latest example of government waste I have seen from the government is a flashy advertising campaign telling people that they could face £50 fines if they are caught freshwater fishing without a licence. When we are so badly in debt, people are dying in hospital beds and children are leaving schools with no qualifications, is this really the best use of taxpayer money?
 
It is not only the cost of these adverts that is scary. They are sinister and oppressive, saying we could be hauled up in front of judge and fathers could be banned from spending time fishing with their sons if they do not comply with the rules. I know this government has tried to sap the fun and enjoyment from life, but now they are even targeting a very British past time.

The 'fishing police' have already begun to claim victims. Last year this school headmaster was caught without a licence, after paying his fine of £50 he found that he found that he now had a criminal record which could have potentially prevented him from working with children, meaning he would lose his job and the students their headmaster.

Of course, the most efficient way to encourage responsible and sustainable fishing would be to extend greater property rights over fishing lakes, allowing owners to charge a market rate for fishing. This would also provide greater incentives for river owners to promote fish stocks and maintain clean, healthy rivers.