Lincoln Drill Hall

Lincoln Drill Hall
Lincoln Drill Hall

Tuesday, 23 December 2008

The nationalisation of capital

Earlier this month interest rates went to an new low, the rate current in the year of my birth. This places what is happening in a different context: it is no longer about a theoretical world of money; it is about the lives of the baby boomers. We began in the post war reconstruction, although we didn't know it, we had never had it so good. We moved into the white heat of technology and the fear or expectation of socialism. Perhaps neither happened. Then into Europe and winters of discontent, millions unemployed. From here the unions were crushed and deregulation first appeared, but in the name of financial proberty, the day of the monetarist. I suppose we then went into never never land as the western economy grew on a fiction, or perhaps two fictions, that financial services create wealth and that asset values will always rise giving everyone infinite scope for personal borrowing. The merry-go-round then came to a shuddering halt and many fell off.
We have witnessed central government taking on what is, in effect, that irrational borrowing of individuals: a negative income tax of some sort. Commentators are talking about a new capitalism. I wonder what this might mean. Will we, some years hence, read a party manifesto arguing for the privatisation of money? At current interest rates, capital has meagre reward. Would anyone want it?

Wednesday, 3 December 2008

Pension Scheme funding

No, don't go to sleep; this one matters. You will recall the interplay between three or four numbers which drive the result of an actuarial valuation: inflation, wage increases, pension increase and equity premium. On these four hang all the law and the profits [sic]. A key question is the equity premium post credit crunch. The FTSE is where is was ten years ago, having been 50% higher both last year and twelve years ago. The equity premium is the amount by which returns from equities will exceed those from gilt edged stock (government bonds). The argument has to be that the premium will now be considerably higher; the starting point being considerably lower. This assumes that in the fullness of time the market will once again rise to 6000. I recall that when it did first time round, I thought it has assumed the growth for he next ten years. (One day I must follow my instincts.)
The question is whether it will rise again, or whether we truly are in a new world.

Monday, 17 November 2008

Keynes, Bretton Woods 2, Citigroup and Alice

These really are heady days and feel rather like Wonderland. Is Mr Brown the Rabbit?
Last weekend was billed the great Bretton Woods 2 and those closet Keynsians amongst us perhaps felt our eyes water a little as the great man was dusted off. The difference is that last time he had spent months of preparation and even then only just manged to get his point across. It strikes me that the extent and level of thinking is a shadow of what went before.

Thursday, 13 November 2008

BT and efficiency

It is the old story, our work force has reduced from 250,000 to 160,000 and may well fall further as we seek to be more efficient for our customers. The announcement of BT's figures this morning showed a business that was growing but whose profits had fallen slightly. The market actually responded positively, having previously fallen on a profits warning.
Is a business more efficient if it employs fewer people? It is more profitable if it has lower costs. It is more effective if it gives its customers the service they seek. This perhaps naive, but there is scope for a debate. Last time businesses shed people and those people cost huge sums in unemployment benefits. The question is, who really benefits?

Tuesday, 4 November 2008

So the real culprit was economic growth

The new chief executive of RBS, Stephen Hester, interviewed by Robert Peston on this morning's Today Programme (4 November 2008) blamed the years of good economic performance for the excesses that led to the tidal waive of bad debts. This links in an interesting way to Saturday's Guardian Review and the book by Niall Ferguson The Ascent of Money. It would seem that there is a point at which the financial markets detach from anything resembling real economy. The knee jerk reaction to this is evident in politicians of the left who now queue up to preach the gospel of manufacturing, failing to notice that cost profiles make this a pipe dream for western economies. Yet the answer is not the focus on financial services from which we are now all reeling. It boils down to finding new ways to add value.

Wednesday, 29 October 2008

JM Keynes

Is it possible that we have been Keynsian all along?

If we look back over the years of uninterupted economic growth, we see beyond question that it was funded by borrowing. Much of that borrowing has resulted in bad debts to the lenders, many of whom have been bailed out; by whom? Isn't this public borrowing by another name?

The Guardian (28 October 2008) headline 3 trillion lost, makes the inocent look round for a very large hole. Where has it gone? Indeed where did it come from in the first place? Pension schemes are a major source of investment and a great many of these are now money purchase. That is a frightening part of the answer. Looking back though at the way in which the ftse has moved, the story is, if anything, more chilling. There is a shifting sea of value, but it would seem a sea with a plug hole with plug removed.

Monday, 27 October 2008

Vince Cable

Monday's Guardian (27 October 2008) offers an appropriate reminder that the LibDems' treasury spokesman did make warning noises about house prices and the level of personal debt. The point remains though that it was in no one's interests to do so. A parallel is drawn of the other voice in the wilderness before WW2. Again, what incentive did Churchill have and were we really so surprised that government sought to shake him off. It is the problem of the status quo - it works in the short term, so why rock it?

Sunday, 26 October 2008


It was an article in a magazine, the subject of which has bubbled to the surface of my mind periodically over the fifteen or so intervening years, from time to time really quite fiercely: an interview with the then Federal Reserve Chairman Alan Greenspan. The magazine was Newsweek, I think, and its text the safe, massive hand on the world’s economic tiller. The article was a eulogy. There had been times through the Bush and Carter administrations when Greenspan had appeared fallible; poor economic performance is hardly the badge of the successful Fed chairman. Yet once times began to look good he became the alchemist, the wizard of Oz; consumer lead demand was the answer and we will trust the banks not to lend too much.
In Friday’s Guardian (24 October 2008) the front page announces: ‘Greenspan – I was wrong about the economy. Sort of.’ It goes on to report Greenspan’s appearance before the congressional committee, how the long term cheer leader of deregulation, had found a flaw, got it partially wrong. Nils Pratley in Viewpoint is adamant that Greenspan must share the blame. Pratley’s style brims with irony: ‘it turns out that banking executives couldn’t be relied on to act in shareholder’s interests. They enriched themselves, didn’t understand the risks they were taking, and then brought down the roof on everybody. Golly, who could have predicted that?’
The answer, Mr Pratley, is that if any one did, they kept mighty quiet about it. Monetarism in the sense of controlled public borrowing; financial market deregulation and the imperative of debt funded consumer demand all conspired to ignite an economy that sped along for nearly two decades only to collapse in a heap. The point was that it was in no-one’s interests to question whether it worked; it worked only so long as people believed it did. As soon as belief wavered there was only ever one direction in which it could go.

Thursday, 23 October 2008

Pension Schemes and the dreaded crunch

This is when it comes real.
The first example is of money purchase invested as advised in equities. This is frightening stuff. Will a FTSE of 6000 ever return? It should; we have been there twice before. But it might be that the cash needed to drive it has gone elsewhere. The image as always is of a tray awash with cash. It tilts this way and that: sometimes into equities, others to commercial property, others to gold. Will the weakness of the pound have an impact? Just note these points in the context of who has money purchase plans.
The next is of the young final salary scheme. There must only be one and I am a trustee of it. there is a paradox. The actuary has to take market value and so there is huge deficit. But we can buy cheap. This may well translate into lower future contributions. We shall see.
The mature scheme is the money purchase writ large. The trustees have two choices. Ask for yet more contribution or reduce benefits.
None of this is pretty stuff. Keep working.

Monday, 20 October 2008

Is the equity a thing of the past?

Jill Treanor's report in The Guardian of 20 October 2008 highlighted the concerns of small shareholders with the prospect of the part nationalised bank ceasing to pay dividends until the state investment is repaid. The point made is that such shareholders invest for a steady income and not for a fast buck. This surely is the crux of the matter: there is a mismatch, investors are looking for steady income, companies are in need of risk capital.
The notion of risk capital was so vividly highlighted in the events of the week leading up to the rescue package. Share capital in a balance sheet is eroded in accounting terms when losses are recorded. Far more vividly the collapse of s hare price has now accounting significance but massive implications should the business in question need to go to the market to replenish its capital base. This genre of investment is hardly appropriate for widows and orphans and by that same token pension schemes. Are we moving to a position where there is a resurgance of the preference share?

Friday, 17 October 2008

City regulation

The interview with Lord Turner in the Guardian of 17 October 2008 sets an agenda for the new era of banking. There are though all sorts of echoes coming through the mists of the years of what was really free for all banking. Behind it all stalks the ghosts of Reaganomics and its insistence in controlling public expenditure and allowing the market to do the rest. What seems to have happened is that the private borrowing fuelled by the loosely regulated banks and encouraged by the market which needed it to pump money through the retail and building sectors has ended up on the public balance sheet as bank bail out. This though perhaps is cynical.
One aspect not touched on in Lord Turner's interview is the question of accounting disclosure. Just how could an investor in RBS, for example, know the quality of its assets. There seems to be a mutlidimensional aspect to both assets and liabilities which needs to be understood if a rational investment decision is to be made.
It will be intersting to see how the new regulatory environment unfolds.