Saturday, April 11, 2009

Chalk One To Mr Fawkes

Fair do's. Our taxes are paying this slug's salary. And what do we get for it ?
McBride goes on to suggest that the website should spread rumours that pictures exist of Osborne “posing in a bra, knickers and suspenders” and “with his face ‘blacked up’ ”.

“He wouldn’t be the first student to do some cross-dress-ing at university. But . . . why would a student in the late 1980s black up his face for the amusement of friends in their private college rooms? This in the era when young Tories wore ‘Hang Mandela’ T-shirts.”

In what is perhaps the most vicious section, McBride suggests spreading rumours about the mental health of Frances, Osborne’s wife, following the furore over his discussions with a Russian oligarch during a party on a yacht last summer.

I must say Frances looks rather a sweetie, much as I'm prepared to believe the worst of her husband, who always seems to come across as a public school bully in the Commons. Take a horsewhip to him, George, and I swear I'll join the Tories.

Boom Bang A Bang

It's all the rage ...

A bodyguard was being quizzed by detectives after explosives were found in his house.
An army bomb squad searched Justin Cartwright's family home after police found suspicious items that could be used to make explosive devices.

According to friends, the accused intended to supply incendiary devices to bodyguard firms to use in training scenarios. Once again our rulers stifle the honest endeavour of the British working man. No wonder so many members of the British explosives community find it easier to relocate to Waziristan.

As for the British exploding community ...

A 30-year-old man has appeared before magistrates, charged with making explosives at home. The court heard police found 12 grams of the homemade explosive hexamethylene triperoxide diamine (HMTD) in Donatien Chamchawala's kitchen cupboard in Blackwood, Caerphilly. Mark Topping, prosecuting, told the court at Newport it was enough to cause "substantial damage" had it exploded.

Mr Chamchawala was remanded in custody to appear in court again on 20 April.

Some HMTD crystals were also found at the two-bedroom semi-detached house, as was an attempt to make a form of plastic explosive, the hearing was told. Mr Chamchawala was arrested and the house raided by Gwent Police on 4 April, after neighbours heard loud bangs and saw smoke, Mr Topping said.

Donatien Chamchawala ? Where's that name from ? Donatien was the first name of the Marquis de Sade, while the Chamchawala family feature in Salman Rushdie's Satanic Verses.

While we're blowing things up, I hadn't realised that the 7/7 bombers apparently used the same H2O2/chapatti flour mix as the 21/7 asylum seekers. I'd never heard of the NEFA Foundation, an American band of anti-jihadis, but their report on the 21/7 flop is fascinating stuff. In my chemistry days I used to think 100 vol hydrogen peroxide was pretty pokey stuff, an opinion based on what happens when you drop a grain of pot permang into some. Fume cupboard and eye protection are advised, rather than this foolish chap's kitchen surface.

The 7/7 bombers were apparently buying 60 vol (i.e. 1 ml of peroxide liberates 60 ml of oxygen gas) or 18% solution, and boiling it down to 70% - which if my maths is right equates to around 230 volume. Quite a lot of oxygen. You wouldn't have thought chapatti flour made a terribly good fuel, but apparently it does.

Not a bad site, NEFA. This portrait of Bradford wannabe jihadi Aabid Khan, given 12 years in 2008, is far more detailed than anything Uk-sourced.

Lordy. Eight o'clock Mass tomorrow and then off to see the in-laws. Back Monday.

"The finance industry has effectively captured our government"

Via Liam Halligan, this Atlantic essay by Simon Johnson, former IMF chief economist, crystallises a lot of my thoughts and fears about where we are and where we are going. Although written about the US, pretty much everything in it applies in spades to the UK.

More than a few bloggers have noted that in many societies, power has been in the hands of a priestly class, who write in a priestly language, using a terminology and a set of commonly understood assumptions which laymen cannot follow. Hence the class cannot be challenged or debated with - simply not having the tools with which to argue. To some extent this is a characteristic of all "in-groups" - whether social workers, doctors, teachers or gang members, the acronyms (or street slang) and common references are both a means of binding the group together and of excluding outsiders.

Those rightish bloggers who see Gordon and co as the return of Old Labour, Red in tooth and claw and itching to nationalise everything that moves, altogether underestimate the gravity of the situation. This government - and its predecessor - do not want to nationalise the commanding heights of the economy. They want to tax them. Remember that 1997 was the assumption of full state power by the ideals and idealists of the Sixties (and remember that the Sixties actually went mainstream among students in the Seventies, when our current rulers were at Uni). These people don't want to do anything as grubby as, say, running a steel industry, water supplies or even a bank. These aren't Attlee and Bevin, let alone municipal socialists like Joe Chamberlain. In the final analysis, while their actions are likely to be extremely serious for their country, they themselves are not serious people.

They've been doling out taxpayer cash to their preferred causes since Student Union days. They're convinced that talking to people - via teachers, lecturers, doctors and nurses, social workers, anti-racist 5-a-day smoking cessation co-ordinators, fake charity employees, tax-funded "community activists", the BBC, the government's huge advertising budget - can change their behaviour, if those people are criminals, benefit spongers or the other ne'er-do-wells created by a Welfare state designed for a 1948 generation but delivered to a 2008 generation. *

But these initiatives cost money. The only way to get it, at least until they recently discovered the printing press, was via taxation. You need fat profits and earnings - and the City of London provided the fattest. Didn't something like a quarter of UK tax receipts come from the City until recently ?

They couldn't run a bank to save their lives, although I'm sure there are some more competent civil servants than John Gieve. All they can hope to do is to shovel tax money at the bankers and hope somehow to get the whole doomed show back on the road. The Lloyds/HBOS saga shows how desperately they do NOT want to nationalise. Indeed, they're still selling off stuff that even the Tories might have balked at - like the manufacture of our nuclear warheads.

I digress. Perhaps. The point is that NuLab have no desire to penetrate the mysteries of banking - and the arch-priests have convinced them that they, and only they, can return the golden days of yore.

And this is the theme of Johnson's essay - that control of economic policy has been pretty much handed over to the people who landed us here. He starts with a portrait of a typical supplicant nation at the IMF door :

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

Hmm. That last sentence ring any bells ? OK, what happens when the risky bets don't come off ?

With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.
It all seems terribly familiar to me.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
It does to him, too.

... these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside. The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on ... From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007. The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan.
By strange chance the blossoming of the financial sector on both sides of the Atlantic since the Thatcher and Reagan eras parallels the decline of manufacturing in both countries (admittedly far worse here) and the boom in imports. I'm sure I read somewhere that half of all UK science graduates with firsts go into the City. And how did the priesthood rise ?
Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance. As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.”
I think the late Ralph Miliband would call this 'hegemony'.

... the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world ...(which of course was actually a declining position - LT)

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

Don't forget de facto if not de jure free movement of people, too. Then it all hit the buffers. And what is the Government doing ?

... the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.
Yup. The addicted gambler is treated by filling his pockets with chips and shoving him back through the casino door. The names of the banks are different, but the deals are similar.

...we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

Yay. Good bank ! Willem Buiter, thou should'st be living at this hour !

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.
I have quoted an awful lot, but you really should read the whole thing. Note that a few oligarchs only get chopped when the riots start - otherwise Joe Public gets the financial hit. The Brits - especially those who'll be paying the bankers bills - aren't a riotous bunch. My guess is that the undoubted rage will be expressed through the ballot box.

UPDATE - Willem Buiter says the same thing :

Governments everywhere are doing the best they can to delay or prevent the lifting of the veil of uncertainty and disinformation that most banks have cast over their battered balance sheets. The banking establishment and the financial establishment representing the beneficial owners of the institutions exposed to the banks as unsecured creditors - pension funds, insurance companies, other banks, foreign investors including sovereign wealth funds - have captured the key governments, their central banks, their regulators, supervisors and accounting standard setters to a degree never seen before.

* (although, to be fair, they do believe that the behaviour of racists, foxhunters and parents who smack their children can be changed by imprisonment and sackings)

George Osborne "Good Policy" Shock Horror

If he's serious, this is excellent news :

A Conservative government would look at whether Britain needs smaller banks, shadow chancellor George Osborne has said in a speech. Mr Osborne said the eventual sell-off of part-nationalised banks should not necessarily be to the highest bidder but those benefiting the economy most. Creating larger institutions could encourage more risk because they were "too big to fail", he added. It would be a "bitter irony" if the sector became "even riskier", he said.

He's quite right. Both here and in the US regulators should be breaking up financial institutions into small enough units that the failure of one has a minimal domino effect. But doubtless the reason nothing will be done (and I'd be so pleased to be proved wrong) is that the banks will 'need to be large enough to compete internationally' or similar. In which case we'll be back where we were, only more so, as we now have the Lloyds / HBOS behemoth. As I said :

"if the banks were 'too big to fail', shouldn't we be thinking, both here and in the States, of breaking them up into units which could be allowed to fail - with appropriate protections for depositors ? Instead we're creating even bigger banks."
I would love to be persuaded that the Tories have the root of the matter in them, as Churchill would put it. But I fear that my General Election vote will be a case of the least worst option.

Friday, April 10, 2009

M. Pot - may I introduce you to Mme Kettle ?

Guido on Tom Watson and fellow denizens of the Browning Street Bunker :

They are intent on a dirty, smear filled, personalised, negative, divisive political campaign that will reach a new low in British politics ... They have no coherent positive strategy, they only have political poison to offer ...
Hang on. I yield to no man in my despision of Gordon and all his vile work. But isn't Guido the chap who coined the phrase 'the Prime Mentalist' and illustrated 'Is Brown Bonkers' with the Glorious Leader photoshopped as a clown ?

While there's plenty of good political red meat in his blog, I thought personalised negativism was Guido's USP. As a commenter said on the 'Brown Bonkers' thread :

"It is low politics to hurl abuse at opponents...."

FFS that the whole purpose of this blog. Without the bile and insults we may as well switch over to Ma Dales.
I must say if Watson, Derek Draper and co try and cut up rough (there are already a claque of presumably full-time Labour people carpet-bombing blogs like Guido's with anti-Tory comments) political invective looks like it could be going back to the days of Gillray and his scandalous cartoons.

Been Away ...

More than a quarter of a century ago a young Laban, on his way to a party given by a college friend, stepped off a bus on a filthy November night in a small Northern seaport he'd never visited. That night he met his future wife - and he fell in love with the town, too. The town with this gravestone :

And this magnificent cake shop :

And this pier :

We met up with the girl who gave the party all those years back (now lives in California) and a few of the other nurses they used to work with. Just as much chat, if somewhat less alcohol, my daughter and California daughter got on like a house on fire, and sons walked the mean streets (and they are mean after dark) and arcades.

There are some signs that the place is trying to go upmarket - the old Marine cafe of chips-with-everything teas is now a shiny brasserie-type bar, and several other places have been revamped in a similar Swedish kitchen showroom style. I deplore these tendencies. Fewer fishing boats every visit, too.

These herring, waiting to be smoked, come from Norway.

But it's still a wonderful and beautiful place.

Blogging will recommence when I've unpacked ....