Small Business Server

So, you own a small business with between 5 and 15 employees and need to buy a server. Which one should you get – Windows based or Mac OS X based? Let’s look at the costs involved, because lets face it, businesses need to make money, right?

The next crash will be…

Sometimes we tell people with unrealistic expectations that they live in a bubble, disconnected from the real world and only able to see it through a distorted film. Over the last ten to fifteen years or so most of us have lived in successive bubbles. Will we ever learn? Somehow I doubt it because the next bubble is already upon us.

Which mortgages were ‘foolish’?

The BBC website reports:

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Er, no, I don’t think that’s the cause of the current problem, although it certainly doesn’t help after things have gone wrong. But it surely didn’t start them on that track. No, that was clearly something else.

Saving the American Auto Industry

US car makers are in the news right now as just the latest in a line of beggars knocking on Washington’s door. They’re asking for $37 billion in support from cheap finance because, as GM’s Rick Waggoner puts it, “We made mistakes, and because circumstances beyond our control pushed us to the brink,” referring to the global economic downturn.”

Except for one thing. As I wrote in 2007, Ford has been making losses for years and the others haven’t done so well either. While they didn’t change their strategies, newcomers have set up shop in the US and grown and grown and grown – profitably.

The actions of the US car giants so reminds me of the 1960s in Britain, when the British motorcycle industry sank from world leader to bankrupt nothingness in a decade, and the British car industry was Nationalised to the point of rewarding failure with survival while punishing companies who were successful by not allowing weak competition to disappear.

The current US proposals for bail out are very uniquely US focussed. ”It’s got to be US projects – it would by and large favour, on balance, US companies.“ General Motor’s Fritz Henderson was reported as saying. Conveniently, there is a clause excluding support for US plants that have been built during the last 20 years. That means very little money for newcomers such as Honda, Toyota and VW who all make cars in the US in volume.

US workers working in those factories will not be protected, it seems. Except, for the most part, they don’t need to be.

There are problems for the US over this policy though. First off, there are the issues of illegal state support that will no doubt at some point be raised at the WTO. The US was the first to complain on behalf of Boeing that Airbus was receiving illegal money.

There is an even more serious issue hiding in the shadows here though. If the deal goes through and is seen by outsiders as discriminating against foreign investors, the attractiveness of the US as a place for inward capital flows will diminish – and with a double deficit in both government spending and trade the US Dollar relies on inward capital flows to support the greenback.

While the Dollar has been lifted of late by Barack Obama’s recent election victory and world woes, it is still based on weak fundamentals. I do think Obama will do a good job for the US here though, so perhaps the US will once again build the kind of budget surplus that accumulated under Bill Clinton’s Democrat Administrations.

As for the car industry, I can’t help thinking they still really don’t get it. I think it was GM who was talking of using the money from Uncle Sam to launch some 22 new models of greener vehicles.  Twenty two new models?! No wonder they can’t make a profit, they have too many models, too many brands.

They really need a clean out. But will they get one? Not if their political influence has anything to do with it. What they want is the bail out, not the clean out.

Why are we in such a mess, Chancellor Darling?

Today UK Chancellor of the Exchequer Alistair Darling announced a £20 Billion fiscal stimulus package and an increase in borrowing to a whopping 57% of GDP or more. Tax cuts on consumption (much of which comes from imports) are to be paid for by future tax receipts (much of which comes from earnings paid to bring those same imports in).

Well, this is what happens when you base an economy on consumer spending funded by debt underpinned by house price inflation (at the expense of manufacturing and productive industry). 

For years, some people have imagined themselves to be better off because their house “doubled in value” in a short space of time, and then spent some of the “profit” on consumer goods to re-equip or redecorate or restock their new house after a move, or their current house just because they were bored with the old look. 

Personal debt, underpinned by this artificial feel good factor soared, and when the debt bubble collapsed it showed that the housing bubble was not newly created wealth, but a thin veneer with little substance. 

Maggie Thatcher created this monster with dual attempts to kill off the power of the unions and turn Labour voters into Tories. She attacked the Unions by killing off manufacturing, she turned large numbers of non-rate paying council house owners into poll tax paying property owners who could begin the process of accumulating debt as their artificially cheap houses rapidly increased in value, giving many people the false impression that this would always be the case. 

Few people have wanted to criticise this gravy train which ran for two decades until hitting the buffers last year. 

What this government debt package is effectively doing is attempting to transfer some of the personal debt into government debt. They picked VAT rather than income tax because they thought the UK might follow the US where 80% of any tax credit is saved, not spent, meaning it has far less impact as a fiscal stimulus. Because you only save tax with VAT if you buy something, 100% of the money would be used to enhance consumption, they hope. 

This does rather seem to miss the point that if the large part of people’s previous disposable income came from increases in unsustainable and ephemeral house price increases, with no such increases today, 100% of the money that was available to spend is now missing from the economy. Therefore, no 2.5% VAT tax cut will fix it, although over the course of a year it will mean people can buy more things. 

Doing nothing as the Tories suggest isn’t an option either though. I am, of course, ignoring their stated aim of reversing the hike in income taxes from 40% to 45% for those earning over £150,000 a year. Other than lining their own pockets though, they really have no idea what to do, or perhaps the correct word should be “no inclination” to do anything other than play party politics and utter disingenuous sound bites.

Having said that, judging from George Osborne’s delivery in the House earlier today one can only assume he wishes to drink through the crisis. He slurred his words, both his boss and his colleague who were sitting next to him in the Commons looked concerned he might fall over or totally lose it, and he gave the distinct impression of someone who had clearly had too much to drink. Well, he is an ex-member of the hard-drinking Bullingdon Club. Just like his boss, Cameron then. Which is why he got the job – his degree isn’t too hot if you look him up on Wikipedia…

Getting back to finance, and Tory claims that borrowing on borrowing is not the answer, they singularly fail to provide any idea of what they would do: they have no clue really, do they? Anyway, businesses use overdrafts when things get tight, and people borrow money on mortgages when they want to build a new house. But that’s what happens when you have a Tory Party stuffed with too many lawyers and accountants and self-promoting ideologues who have never taken a risk in their lives – well, not with their own money anyway. You can’t equate government spending with household budgets, even though Maggie Thatcher made good politicial use of this over-simplification of the issue. 

If you do nothing, less money goes into the economy, the recession is far deeper, and like during the 1980s recession huge parts of the UK lose out, not for a year or so, but for decades if not forever. Last time it was heavy industry, now it’s probably going to be anything related to housing, banking, and perhaps a little on the Chinese (imports). 

The problem has now reached such proportions though that there may no longer be any quick fix. Whoever gets into power next will have to fix these huge structural problems and this will take five to ten years to sort out. 

If only people had paid more attention to what the LibDems have been saying for years, the problem may have been caught and prevented much earlier. If only they could be elected to power the problem may last less time before being fixed, too.

Maggie Thatcher’s Tory ideas sowed the seeds for this calamity, and the Labs just went along for the ride because it was so called “established wisdom” and they didn’t want to rock the boat. 

The LibDem’s Vince Cable has been warning against this and suggesting we consider rising house prices as part of the inflation index, which would certainly have alerted people to the problem before it grew too big to handle, as it now almost is. 

But for some strange reason, people will only flip between one extreme to the other, from the party who laid the foundations of the current problem to the party that didn’t do enough to stop it.

Bad Timing at the Bank of England

Today the Bank of England reduced interest rates by 1.5%. I have no problem with that – I said to friends a month ago that October’s 0.5% cut should have been 2%, and I know I wasn’t the only finance professional saying that.

Just when the US needs everyone to pull together, Republican Partisanship prefers mud slinging

To anyone who’s been off-planet for the last year, the world is experiencing some turmoil at the moment. financial markets are in chaos, politicians are in panic. Houses, jobs, and savings are being lost. Just when people need to pull together, the failed and failing Republicans enter attack mode, slinging mud, spreading untruths, misinformation, and fear. They offer nothing positive.

McCain looks more and more desperate as he diverts from his previously credible persona into just another weak charactered Republican Attack Dog, looking like he is fearful of losing and greedy for nothing but power and perhaps willing to try fight dirty to ensure he gets it. In the process he is not only nailing his colours to the Bush mast, he is allowing his reputation to be tarnished by the same methods and people responsible for ruining that of President Bush.

I noticed this change just after he had trounced all the more right wing Republican nominees in the race to become the GOP candidate. He won not because he was like them, but because he was different to them. But as soon as the Republican conference was over, his strategy took on a turn for the worse: divisive, negative, aggressive, patronising, weak. Clearly, their money and influence got to him. Fear-mongering took over, as fear can do with weaker personalities.

Then there’s the McCain money scandal in the savings and loan business from the 1980s where his lack of sound judgement as one of the “Keating 5” was made official. Sarah Palin’s many gaffes and her character attacks on anyone who has been taught by or met a certain Illinois Professor over the last 21 years again point to his erratic judgement. He picked her, or at least agreed to have her as his running mate. I can’t help feeling he was manouevred into that one though. Still, he does have a weakness for a pretty face, doesn’t he?

Yet again McCain’s judgement came into question.

Then there’s this sudden morphing from decent guy into greedy millionaire so obsessed with making up for his past mistakes or disclosures in his time in the military that he is willing to sacrifice everything else for it, even at risk to the health of his country.

You no doubt remember his assertion in the First Presidential debate that in order to pay for the recently passed $700bn financial relief package he would cut spending on everything else. But not the military. That would be sacrosanct.

Well, sometimes leadership is not about keeping the things you love, it’s about giving some of them up.

Increasingly, it is clear that McCain and Palin are two one-track ponies: McCain = Military, Palin = Alaska. Isn’t the US a little bit more complex than that?

I’ll close with something less serious though……seen first on The Eclectic One.

Maybe Congressmen are so rich they don’t need a rescue package

A friend of mine who is into these things spent some time researching the wealth of America’s national politicians. The poorest was a multi-millionaire.

We all know that John McCain is so rich that he owns so many houses he actually didn’t know how many he had when asked. And these aren’t small houses either – after all he’s reputed to be worth $100 million. But maybe my friend’s findings might shock you.

Are they so rich they actually don’t mind if there is no credit in the system? They clearly don’t need to borrow any money. They may even have forgotten the kinds of things borrowed money can be used for. You know, buying a car when your old one finally breaks, tiding your small business through a bad patch or investing in better equipment for growth, allowing your kids to go to College, spreading out the ups and downs of uneven spending throughout the year, and so on.

I guess a Congressman pays cash for everything. Thing is, hardly anybody else in America or Britain does. America is so in love with debt that the whole country borrows more and more each year from predominantly Communist China and fundamentalist Saudi Arabia, home of all of the 911 bombers plus a few other places. The Republican Administration is just as bad, running a record budget deficit of mammoth proportions.

Why? Well, one suspects the NeoCon Bush government was more intent on looking after the financial interests of their millionaire friends than they were in keeping debt levels down. In fact, they welcomed rising consumer debt because this allowed consumers to continue living in a dreamworld where they were surrounded by goodies, gadgets and glitz at a time when their economy was in fact becoming weaker and weaker. This illusion of wealth is what is deflating right now. Assets we thought were worth a lot, are falling rapidly in value – because of the credit crunch, the inability to obtain credit to oil the wheels of the world economy.

Of course we want to punish these guys who earned millions as they enabled illusion to grow upon illusion. Of course it is wrong that people are paid $50 million a year for working no harder than a struggling single parent or large family breadwinner does.

But this rescue package is not designed to give those people more money, it’s designed to allow us to not lose anymore.

Those congressmen and women who voted against the package should be kicked out of office right now, because they are clearly too rich to empathise or care for ordinary people. They seem too stupid to work out the problem, too selfish to think of others before themselves, too greedy to think of giving up politics, and too gutless to do what’s right, rather than just what will get them elected.

Keep the ones that see sense, and throw out those who were against the bill. November’s election isn’t that far away…

The Conservatives Fiddle while the world burns

George Osborn, Shadow Chancellor of the Exchequer, spoke today at the Tory Party Conference. Falsely.

He said a lot of things that on closer study are weasel words that do not mean what they lead you to believe you think they mean, and which you want them to mean. In other words, it was a carefully crafted PR speech fitting the role of the leader of a large PR company. Oh, that’s what David Cameron really is, was and always will be, isn’t it?

He specifically warned people that if they paid large dividends instead of rebuilding their capital base, those people would suffer. This was followed by a comment about not allowing taxes paid by lower end taxpayers to be used for the benefit of those earning millionaire bonuses. But that means they will do practically nothing at all! Let me explain.

The people who the average man in the street feel most badly about are the city traders getting multi-million pound bonuses each year. The problem is, these traders are employees, or partners (most stockbroking firms have been partnerships not Limited Companies. And if they are companies, each bonus earner is a small part in the whole so gets salary plus bonus. Salaries and bonuses are taken out of a company’s accounts before the dividends, so by making the bonuses big enough you can minimise the dividends to avoid any Tory inspired wrist slapping. Result? Tories can claim to be hitting the people most voters now want to be hit, but without actually having anything more than a feather duster to do it with.

Then there’s the matter of party funding. David Cameron has been attacking Labour for some time about being funded by the Unions and cozying up to big business, while at the same time they themselves have raised £50 million in 30 months. Well, nothing wrong with that you think. But just look how they’ve been doing it. Two examples.

First off, the Leader’s Group. This is an exclusive club that costs £50,000 a year to join but which gives you the right to evenings with David Cameron – special privileges for the privileged. If you can’t afford the fee, well, you can’t influence his thinking. 

Secondly, expatriate Lord Ashcroft and the £4 million donation that became £3 million for the Tories. According to a recent Channel 4 documentary, “Cameron’s Money Men” Ashcroft is not on the voters roll, is therefore not eligible to vote, and by law cannot contribute to a UK political party. So how did the Tories receive his money? A chain of companies starting with one in Belize where he is allegedly tax resident and has considerable interests with the last link in the chain being a company in Southampton. Not only is this not allowed, it may even be criminal, according to one of the experts on the Channel 4 program.

The Tories then used £2 million of his donation to fund publicity campaigns in key marginals across the country. Although there is a limit to how much money political parties can spend on an election campaign once one has been called, there is no limit to how much can be spent in the crucially influential two years preceding an election.

Channel 4 programs do not have the reputation for accuracy that perhaps the BBC might offer (remember The Great Global Warming Swindle?) but they did have some pretty well placed people making comments.

Reforming Bonus Pay for long termism

Currently the financial system is under pressure as it hasn’t felt for decades, and a lot of the blame is being laid on the culture of massive annual bonuses based on short term performance. It clearly cannot be right that a bank such as Lehman Brothers is now in Bankruptcy Protection mode just 9 months after paying multi-million dollar bonuses to staff who created the conditions which led to its failure. And those bonuses, once paid, can never be claimed back! Now how short sighted is that?

The system clearly needs changing. Short termism was a problem that I heard first mentioned by then Chancellor of the Exchequer, Nigel Lawson who was fighting against it in the 1980s. You can even argue that the practice has undermined the growth of real value in companies that you and I deal with on a daily basis by encouraging CEOs to always opt for the cheapest solution rather than the best solution over the long term.

How can it be right for a CEO to retire with a multi-million pound severance package, even if he has been sacked, after just three years in the job? Managing companies today seem more to do with pushing problems into the future, or passing them on to someone else, than with making the business stronger.

This process is driven by the need for ever increasing rates of share price increases to fund the mega-million bonuses of twenty-something city-kid traders who seldom have any real life experience.

All of the above we know and recognise, as it has been commonplace to read about it in the Financial pages for many years. But what can be done about it?

I propose that the system of bonuses be completely changed. The means by which they are taxed is one way governments can exert control over the system without introducing excessive regulation, but on its own is a blunt instrument that needs refining. Here is my idea:

1. Tax all bonuses that are greater than 25% of base salary at the rate of 90%
2. Add this money into a fund to be used to stabilise financial markets in times of turmoil
3. Unitise this fund, so that everyone who has paid into it is allocated a share of the total that is proportional to the size of their bonus, just like savers in a Unit Trust
4. Each year, deduct the costs of any “reclaims” when deals that earned bonuses cause severe financial problems
5. After a long enough period that represents the sought-after long-termism, say five to ten years, start paying back the remaining fund units to the bonus earners on a monthly basis, spread over a further five to ten years
6. Tax the eventual bonuses paid at a flat rate of tax so that over the fund term the scheme is fiscally neutral for each participant – they end up paying exactly the same amount of tax they would have paid had the bonus been given to them in one go
7. The bonus fund would have to be ring-fenced from normal government spending as it is supposed to act as a “reserve capital” for use in times of crisis.

This scheme has many advantages. It moves the qualification for the earning of large city bonuses away from frothy, short-termism towards long term value but still allows normal bonuses for ordinary corporate employees who seldom have bonus schemes that award them more than 25% of basic pay; it allows for bonuses to be reclaimed back; it reduces the effect of selling a rubbish investment to another party because your bonus would be affected in the same way no matter whether the trader passes the risk on to someone else or not and therefore keeps the trader “honest”; city mistakes would no longer be paid for by the taxpayer, but by those traders who created the problems in the first place; the scheme would reduce appetite for risk, and increase self monitoring within the city – words such as those uttered by the oft-quoted Goldman Sachs trader as he closed a deal “I ripped his face off!” would be less common; the public would like it.

A similar scheme could run for the banks themselves.