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.

Since when did learning to read become a narrow pursuit?

Oh dear. The Pinko Professor’s at it again. Apparently, concentrating in Primary School in the UK on getting kids to be able to read and write restricts them too much, and doesn’t ‘develop’ them enough as individuals.

The Path to Peace in Gaza?

Here are some excerpts of what I wrote during the last few days of the 13 day attack by Israel on Gaza. It’s a basic summary of news reports, official figures, analysis, and my own opinions. I support both the State of Israel and Palestinian Statehood, but this recent conflict shows up one side to have lost rather more humanity than the other.

Britain’s Parliamentary Democracy is slowly crumbling away

British MPs have enjoyed what is known as “Parliamentary Privilege” for hundreds of years, since Henry VIII in fact. This has prevented them from being arrested in Parliament, and allowed them free speech immune from prosecution.

It is the job of the Speaker of the House of Commons, and the Serjeant at Arms, to protect and uphold the rules of the Houses of Parliament, and to protect parliamentary privilege. In fact, the English Civil War was started when the King attempted to have five MPs arrested within the House.

On 27th November 2008, it happened again. The police marched in and arrested Tory MP Damian Green, searched his office and took away his computers and disks. Without a warrant. 

Unfortunately, it seems we have a rather weak Speaker of the House at the moment, and his Serjeant at Arms seems to have just caved in to whatever the police asked of her. Not only did she not refuse them access, which is her duty as well as her job, she also didn’t ask the Clerk of the House (pdf) for advice on what she or the Police could or could not do, and then she even signed a Consent Form allowing the police entry to the MPs office without any involvement from anyone else.

In such a case as this it would be easy to paint her as the scapegoat in this story, but to my mind it shows more a portrait of the Speaker as a weak man with little control over his underlings, and from his own mouth little knowledge of events that are his responsibility. He clearly has an iron grip on things.

Meanwhile, Jacqui Smith, Home Office Minister in charge of the Police claimed “ignorance” about the matter, although she did admit in Parliament that the Cabinet Office was involved – and she is of course a member of the Cabinet. The Serjeant at Arms, always previously an ex-Army officer who enforced the rules rigorously but now no more than an office manager who clearly didn’t know the rules and who didn’t request to see a warrant just let them walk past her rather than doing her job of protecting Parliamentary privilege. Scottish Labour MP and Prime Minister Gordon Brown says he has a “great deal of confidence” in fellow Scottish Labour MP and Speaker of the House, Michael Martin.

The Speaker of course has a lot of power over MPs, so you won’t hear many of them slagging the Speaker off. But over his own underlings, clearly he exercises little control at all. For instance, today the Speaker, rather limply, if not exceedingly limply, only managed to squeak out some ineffectual nonsense about he “did not know the Police did not have a warrant…” Clearly he should be more in control of his underlings so they do inform him then.

One of the foundation stones of any healthy democracy is adherence to and respect for the rule of law, but it seems even at the the highest levels of British political life, liberties are being taken that affect all our freedoms.

It certainly seems we need more than at anytime a Government which believes in Civil Liberties, rather than one composed of either of today’s two most partisan parties, the Labs or the Cons. Unfortunately, I don’t think the LibDems yet have the ear of the people although they probably do have many of the right ideas.

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.

How patronising is David Davis?

Did you see the piece on The Tories by Martha Kearney on BBC’s This Week program? In it she did a mini piece with David Davis. What a patronising fop! He irritated the heck out of me, and that was before he even said anything. Well they do say actions speak louder than words…

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.

Heikki tiptoes timidly around while Lewis Wellies it!

They say your biggest rival in Formula One is your team mate. And when your team mate has just got pole at your home GP, you do have to dig deep and pull out something special  if you are not to be eclipsed.

Luckily for Lewis, his Finnish teammate is showing all the signs of being another Fisichella – fast over one lap, but scared of all the other cars and drivers when out on the track. Scared to overtake. Too tentative to try. I mean, look at how Alonso in a far less competitive car managed to keep Kovalainnen behind him for so long that Kimi Raikkonnen was able to score enough points to maintain equal first in the WC standings.

But what of Lewis himself? Just having a weak teammate doesn’t really mean you lap everybody up to 3rd place, and finish 66 seconds ahead of the second pace finisher, a remarkably well disciplined Nick Heidfeld who was once described as “being as fast as Schumacher over a single lap” based on their days in the Mercedes Benz junior DTM team.

Another ten laps and Hamilton could have lapped the field. Everyone. Including second place! Let’s hope he relaxes a bit now, Lewis has been a little over-eager at times this year, and it has cost him.

Perhaps he should take up golf – that’s a sport in which the harder you try to hit the ball, the less well you actually do so. But hit the ball when relaxed, and it seems to go miles with little effort. Don’t give up your day job, though, Lewis – we want you to continue racing for Britain for some years – and to be the first Briton since Sir Jackie Stewart to win more than one World Championship.

Ron Dennis has gone on record as saying that Heikki was in “poor physical shape” when they inherited him from Renault. So it is possible that it isn’t balls but brawn that Heikki is missing.

It certainly seems like it is Brawn that Ferrari are missing though. Stefano Domenicali seems to be overly challenged on the strategy front, and has made many mistakes this year. The Ferrari does actually seem to be the fastest car out there, and in Raikkonnen they have one of the fastest drivers around. But if even Honda can get on the podium when Ross is around, perhaps Ferrari will live to regret their witch-hunt of British employees.

As for Alonso, he was a long way behind, wasn’t he? If you can’t stand the heat, get out of the kitchen they say. Time for Alonso to hang up his gloves then and just support the Spanish football team and that Wimbledon winning tennis player who will now take up the mantle of most revered Spaniard. Already Alonso is sowing dissension within the team with his threats of leaving, his veiled attacks on Renault, his lack of team spirit. He does like to be the Prima Donna, though, doesn’t he?

Meanwhile, the two wiser dinosaurs of Formula One, Coulthard and Barrichello both had rather different races. Coulthard, in the same car that his team mate qualified in second place in spun out on the first lap, but he really hates racing in the wet even more than he dislikes his back end sliding around. On the other hand, Rubens Barrichello in a car that frequently qualifies in last place, or not far from it, managed to finish on the podium! A brilliant tactical switch to full wets for the short period of rain saw him lapping some 12 seconds a lap faster than rest of the field at one point, and with Brawn’s brains and Rubens’ racecraft who knows how well Honda could soon start doing.

But the day itself belonged to Lewis. He deserved to win, and his composure towards the end of the race was what he needs to remember the rest of the season. He’s a great driver, but over-confidence and over-driving are things he needs to continuously guard against. He can make a small difference to the performance of his car, but even he has to realise that sometimes scoring those extra points for fourth or eighth is more important than going for a win and perhaps in risking everything, achieving nothing as he has done already three times this year.

The second half of the season could be interesting!