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.

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?

Greenspan

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.

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.

Heart of Darkness

I have been longing to read this book ever since it took centre stage in the myth module. For me since then it became a myth. Marlow and Kurtz took on flesh both staring intently at the Golden Bough. Now I have read it. I was back in the Scramble for Africa, in the Brussels Museum, in the yet to be written story of my father who went to East Africa in his late teens before WW1. Marlow on the ship in the Thames was surreal. The archetypal story teller talking to Everyman. He then journeys into Africa and into himself. Had I the time I could read endless commentaries, as it is for now I will make do with my own take. Pilgrims, forests, staves are words not associated with Africa. Cannibals are and how interesting to read unemotional justification. I was looking forward to long conversations with Kurtz but they never come. Everything comes to Marlow as myth and in his own imagination.
I will read it again one day.

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?

City regulation and bankers bonuses

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.

Writing fourteen years later, there is no new regulation only a promised loosening. To make this worse, bankers pay is sky high. All this is a recipe for it all to happen again. Financial services are a fiction; we need a real economy. 

Some good did come of the banking crisis. Turner’s book Between Debt and the Devil. Also some fiction, The Crunch. 

Ten years on, I offered this reflection 

Was the culprit economic growth? Or greed? Or both?

Philip Marsden The Main Gages

This book is set in Cornwall in the 1930s. It has a protagonist, Jack, who comes to the sea as an adult and grows in his knowledge of it as the book progresses. The antagonist is the sea and this is painted richly from first hand knowledge by the author but supplemented by extensive research. There is an artistic sub plot with echoes for me from DH Lawrence who was in Cornwall at about the same time. The development of tourism brings out an interest of mine in seeing who did well in the interwar years. The inciting incident is the rushed repair of a ship for trips for hotel guests; the antagonist become the demon money personified by Bryant the industrialist from Birmingham. The crisis is when the fuel cap is left off allowing water into the engine. The wreck which follows is told in what I would term reportage. The surprise comes that the disaster is not of this ship which is saved but rather the life boat which does the saving. The wreck scenes are pages turners, so much so that there was a temptation to skip some of the sub plot passages which intervened.