Lincoln Drill Hall

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.