Current economic trends - call for evidence

[Brendan]

House prices being too high were the reason for the stupid lending in the first place.

So you?re just going around in circles.

[Jeremy]

Yeah it is kind of a chicken/egg situation. But it's not just the amounts being lent out, it's also the ability of sub-prime borrowers to pay the loans back. Mortgages were being mis-sold by unscrupulous lenders, with discounted periods to entice borrowers who might not be able to pay the full rate in the future. And banks had no problem buying these mortgages up and re-packaging them. And this, of course, in turn pushed the house prices up further. And here in the UK, even reputable lenders were offering mortgages of over 100%... madness.

So yes, we were overly dependent on property prices - but it's just as unhealthy to have a property market in freefall as it is to have one rocketing upwards.

[mockney piers]

"If you don't think that stopping the rot in the equities market is important... please enlighten us as to what is?"

boring bleeding heart liberal stuff like actually doing something about global warming, actually doing something about securing our clean energy needs. Actually doing something about global poverty and injustice....

You know the things western leaders pledge to do then conveniently forget to give a few million towards. Meanwhile cutting benefits for old people to heat their homes in winter because we all have to make sacrifices to ensure the banks are ok. At least they've put in lots of regulation to ensure risks aren't taken and people aren't rewarded for short term profits.

Oh wait....

No sorry, equities markets of course. I remeber a tome when equity was a mechanism to raise capital for Sensible investment, but there I am being naive again. We can just print money these days cant we.

[Jeremy]

When I said "important"... I meant an important indicator of the state of the economy.

You know full well that I believe clean energy is important... in fact I'm appalled at the lack of investment and incentives from the government over the last few years. But the money has to come from somewhere, the government can't let the economy go to pot.

[mockney piers]

Ah sorry I misunderstood. Apologies for rant, this whole situaion gets my goat.

I'll admit they are signs that confidence is returning it's just to what end. We haven't changed anything....at all.

Meanwhile we have very real issues that noones doing a damned thing about.

Addressing these issues, indeed becoming world leaders in achieving advances can help this economy become more than a massive navel gazing service nation based upon house prices and a healthy city. It's papering over the cracks of an ill nation and it's sad, pathetic and a lost opportunity.

Out of strife should come wisdom and advancement. I see no sign of this.

[Jeremy]

That's the problem... there's no diversity in the economy. We've become far too centred around finance and services, and there's no forward thinking.

If the previous governments of the 80s/90s had more vision, we could have been a world leader in renewable energy technology. Our iconic brands all seem to be foreign owned, because we don't have the guts and/or ingenuity to take them forward. Chunks of our essential infrastructure are becoming commodities to be bought up by investment consortiums.

[mockney piers]

I'm totally with you there. We had two governments who laid claim to ushering in times where we've never had it so good and tried to bask in the glory of it.

In fact all that happened was a huge sell of of the family jewels for short term gain.

Oops, that's all been spent and those issues that were there 10 and 15 years ago are no closer to bring resolved, in fact they are further away because we've allowed science to practically fall of the syllabus. Not so much a brain drain more no future brains.

I'm pretty sure real leadership is facng up to hard decisions and making the difficult calls. The last two were travesties, mote obsessed with their public image and the hand of history than with actually achieving anything. Gggaaaaahhhh hate'em hate'em hate'em!!!!!!!!!!

Rant spit bile rant

[alphacalifragelistic]

@ SeanMacGabhann

"and with respect to anyone going into detail about the various factors, debt values, GDP blah blah blah - I am officially not listening to ANYONE who is making any kind of prediction. If we have learned anything from recent times it's that no-one knows jack. A very very small number of people are able to point to predictions they made 3 years ago, which turned out to be largely true but that doesn't mean it was expertise on their part - it could just as easily have been a maverick reaction to prevailing consensus

It could all fall off a cliff tomorrow or it might start to get better, or it might through another sudden cycle - but we'll manage."

- Whoa, cool your jets pal. Firstly, I don't think anyone's claiming omniscience here. Secondly, the title of the thread might indicate what we're all trying to do here. Given that all three major political parties are now actively and explicitly planning significant 10%+ public sector expenditure cuts, that does have some predictive utility.

If I were working in the public sector, I'd hold off on increasing my debt exposure (given the prospect of wage freezes and lay offs) and I wouldn't bank on that retirement date staying fixed on a future calendar. Medium term public policy is being formulated that will have direct effects on parts of the economy.

Add to that the prospect of a >10% reduction in a sector that is 43% of the UK economy and I think it is fair to say that will have a significant ceteris paribus effect on the economy, roughly equivalent in size to the current reduction we have already suffered due to the crash. My point is that this is separate and additional to the impact of the financial credit crunch. Fingers crossed, that fiscal tightening will be made while the private sector starts growing again, over 2011-2015, so it could be balanced out, but that is a big ask.

As for the canard that 'no one knows anything'. Well, up to a point Lord Copper. I remain sceptical about effective market timing techniques, but there are people out there who made substantiated cases that we were in a bubble. - Roubini's work on MEW driven consumption in the US, or the analysis by Smithers (which reached the public via Martin Wolf on the FT) on cyclical P/E ratios, to name just two. That is a bit more than just saying "this all looks a bit toppy to me squire".

My take is that the equity rebound was driven by the wave of relief that systemic collapse appears to have been averted, helped along by supply chain re-stocking resumption that resulted in earnings reversion. In addition, equity prices have often decoupled for extended periods from their underlying economies.

As for VAT, of course retailers will complain when it increases. It is the de facto 'don't fire me, our results are all down to that nasty government' card for every CEO who underperforms. Given the thin operating margins, fixed costs and 2.5% implicit increase in net revenues that the 15% VAT rate handed retailers, I suspect that the reduced rate did have an effect upon that sector, which was masked and matched by plummeting discretionary consumption. Hence the collective shrug of indifference we witnessed in the press.

Mockney, I suspect that most of the posters above would happily sign up for a manifesto that included things like an increased emphasis on viable clean energy and a Doha WTO round that reduced trade barriers for third world country exports. ("Piers for PM"?) However, selling that to a sullen electorate facing high energy bills and the prospect of unemployment is a difficult task. Not impossible, it just needs leadership and a bit of guts. In addition, if the economy stays mullered, we have less cash to spend on green energy R&D, a smart grid, whizzy lower carbon high speed train lines, etc.

Secondly, implementing a global Glass-Steagall v02 would require co-ordinated and collective action. Add to that the possibility that any refuseniks might benefit (albeit perhaps on a temporary basis) from a potential flight of business, a la post-war Euro-Bond market's transfer to London from the States. I could see Dubai / Qatar making a sustained attempt to entice investment banking operations with a more relaxed capital adequacy regime than stricter European and American equivalents. You may well say good bye and good riddance, but check out the likely loss in UK GDP & the implications for our taxation revenue.

Harder than it looks, innit.

[SeanMacGabhann]

alphacalifragelistic - sorry - I wasn't trying to sound quite so aggressive. And nor was I claiming anyone pretended to know it all. I just wanted to make the point that I have stopped listening to anyone who claims to know anything about the situation

You are correct that " there are people out there who made substantiated cases that we were in a bubble. " - I said as much in my last post. But again the point is "so what" - noone listened to them. More people made the opposite case and as has been said by many on here, no lessons have been learnt and nothing has changed.

[mockney piers]

On the contrary my gut instinct tells me that it's easier than we fear.

Very easy to cry 'it's hard' or 'they won't do it so why should i' or 'it'll be expensive and someone else might benefit more than me'

In the end they all look rather weak and whining, at least that's what I'll feel as I look my grandchild in the eye and apologise that my generation fucked it all up for them and did nothing about it in the full knowledge of the consequences of our (in)actions.

I for one will be building, at considerable personal expense, an eco home of the future within the next five years. It won't be near the sea!!

[Brendan]

There is the argument (I have no actual reference for these figures but I read ?em in a Guardian article recently) that it will take the entire financial services sector about 90 years to pay back through taxation what has just been pumped into it from the public purse. So letting them pull out may actually be cutting our losses.

[Jeremy]

Brendan - the government didn't just "give" RBS and Lloyds the cash, they took equity in return for it. Nobody is expecting them to recoup the money through taxation!

[HAL9000]

The problem was that US banks had over $700 billion of toxic assets on their books.

Congress voted $700 billion of TARP money to buy those toxic assets from the banks.

Instead, the TARP money was just given to the banks.

So the banks still have over $700 billion of toxic assets on their books.

The original problem is still 'out there'!

Those same US banks are now playing silly-buggers by marking up the value of those toxic assets to their pre-Crisis levels and claiming huge profits while an ever-gullible public climbs aboard the next bull-market roller-coaster.

This madness can only end in disaster.

[alphacalifragelistic]

@ Jeremy

The difficulty is that 'strategic planning' was used as a covert excuse to chuck loads of money at dying nationalised industries in the past, such as British Leyland. More modern large public projects that leap to the public's mind include the Dome and the ever increasing budget largesse of the 2012 Olympics. Hence the appetite for massive investment in public infrastructure in things like a smart grid, high speed rail, etc, is curtailed.

Re. the energy sector, we had a golden opportunity to use North Sea offshore platform technology to give us a commanding lead in offshore wind (also making use of our idle shipyards), but that was lost. We are doing well with installations, but the firms involved all seem to be American, Danish, German and Chinese.

As for nuclear, Brown sold Westinghouse to Mitsubishi in 2006. Another brilliant move, which echoed his decision to sell half of the country's gold reserves, at an average price of $275 an ounce, at the start of the decade. - Best. Chancellor. EVER!

@ Mockney

Re. education... To give just one example, not one state school in Islington Borough now offers single subject science A Levels, thereby ruling out uni applications in those subjects. The problems we face, in terms of energy, feeding the world, creating new industries, etc, all need scientists and technologists. We just won't be getting any from state schools from boroughs like Islington. - It is not just the economy that this lot have messed up.

Which brings me back to an earlier point. Does anyone have a convincing explanation of how we are all going to get out of this mess? Given that our world beating financial services industry appears beaten and that financial innovation is unlikely to command the interest and premiums it did in the past, just what is it that will generate the sorts of value and mass employment (whether direct or ancillary) that we will need to recover? North Sea oil is in decline, our tech start ups decamp to Silicon Valley at the first chance they get, manufacturing is being outsourced to lower wage economies...

[Brendan]

Well you can import brains. Problem is then what do you do with the millions of people left stranded because there is no place for their marketing and finance degrees?

[Brendan]

You obviously import the person, not just their brains.

[mockney piers]

I'm pretty certain this is all achievable but we really have to get off

our arses. After 30 years of the politics of I'm all right jack, we have to ge our heads around the fact that the challenge ahead of us is every bit as much an existential threat as Nazi Germany.

The economy needs to mobilise effectively to a war footing. We need everybody to get involved to some extent. We need our scientists and inventors to be every bit as admired as Barnes Wallace or Turing.

For this we need strong leadership and a politcal frame of debate far removed from wheee we are now. Sadly judging by the loathing met here at the horror of low energy lightbulbs poking up from lampshades I fear our failure is inevitable.

[mockney piers]

Brilliant Brendan, don't forget the media studies!

I'm reminded of the golgafrinchans suddenly, though everybody needs their haircut and their telephones sanitised.

[Brendan]

A ship full of people land on a deserted planet, disorientated, in need of shelter and sustenance they go about devising a logo, setting up a string of focus groups to assess its effectiveness and establishing a committee responsible for setting rates of interest at which resources will be borrowed.

[HAL9000]

alphacalifragelistic Wrote:

-------------------------------------------------------

> Does anyone have a convincing explanation of how we are

> all going to get out of this mess?

In my (admittedly controversial) opinion, any man-made dynamical system in metastable equilibrium is more likely to encounter a Catastrophe theory-type cusp than to re-stabilise itself through mutually agreed self-sacrifice for the greater good.

[mockney piers]

I can't see an awful lot that's contreversial about, and I believe I'm paraphrasing you, 'we're a bunch of selfish cunts and our own worst enemy'

[Jeremy]

alphacalifragelistic - I couldn't agree with you more, regarding lack of science education, and lost opportunities in the alternative energy sector. In the 80s we were at the forefront of renewable energy research, but it was all thrown away - e.g. the funding for the wave power programme was revoked by the Thatcher government in a secret meeting.

HAL9000 - there is no "self-sacrifice for the greater good"... hence governments, rules, regulations...

[mockney piers]

Though a British inventor has invented that incredibly funky wave snaky thing which looks like it has real potential at harvesting the quite considerable wave power potential we have on our hugely long coast on some very rough seas.

And I take back what I said above. Even if you take it that there is nomsuch thing as altruism, that we ultimately only act in self interest, then I think we've seen in the past that that selfinterest has many time looked uncannily like self sacrifice and idealism.

We amy have done baby steps in getting rid of CFC's or lead from petrol, but these things have been done and we can achieve the changes necessary to avoid the catastrophes ahead.

[alphacalifragelistic]

@ Mockney

"On the contrary my gut instinct tells me that it's easier than we fear."

Really? R.E.A.L.L.Y?

As soon as fuel prices began to bite via the fuel tax escalator, the truckers jammed up the motorways.

When the government mooted a mandatory energy performance certification component of the HIPS assessment process, journalists queued up in the press to chuck bricks at the heads of any minister involved.

Look at the protests that plans for on-shore wind installations generate.

The carbon trading schemes in the US & Europe are both in a mess, so public policy solutions in this area appear to be highly problematic. (Just look at the cost burden that would be imposed on the NHS by a rigorous carbon tax. - "Minister of Health Mockney Piers today explained that the Great Ormond Street Hospital for Children would be closed due to increased costs resulting from the imposition of the new EU carbon tax, explaining that 'sacrifices must be made to secure the future of our children, the one's that survive the closure of this hospital that is'.")

The government has just spent ?300 million via the car scrappage scheme, on encouraging us to buy more cars, to plaudits in the press. (BTW, just ?6 million is believed to have been spent on cars made in the UK. Another. Brilliant. Move.)

It is all very well blaming the current set of politicos - and they damn well deserve it. However, public engagement goes both ways and this is the lot we picked. The 'Them' is 'Us'. In the same way that the financial market players we decry for their selfish investment decisions include our own pension funds, whom we would be highly critical of should they move to fuzzier mandates that resulted in us ending up with delayed or reduced pensions.

If you do not think that an electorate can suffer from cognitive dissonance, just take a look at the mess the State of California is now in, helped along by a series of implicitly contradictory referendums thanks to direct democracy initiatives.

Many of the things we would both like to see require asking people to make certain losses for (relatively) uncertain benefits. That is a big ask. Fundamental reform of financial services suffers from the same problem. Good luck to anyone that campaigns to reduce access to mortgages (with stricter deposit & credit assessment requirements), split investment from retail banking (thereby hammering the likes of Barclays) and lessen the attractiveness of London as a home for global capital.

Lastly, I think this might cheer you up, as (I think) Lord Skidelsky has been arguing that one long term solution to the problems of the finance sector would be if economists were taught less maths and more history. Props to history grads, even if I hear you'd make a terrible Minster of Health.

[alphacalifragelistic]

@ Mockney, down a dirty telephone,

"We need our scientists and inventors to be every bit as admired as Barnes Wallace or Turing."

Er, dude, an unfortunate couple of examples, as I think you'll find that Turing suffered horrendously at the hands of the British state towards the end of his life. Or is that 'thereby ending his life'? (Hope you signed the petition BTW.) Barnes Wallis had great difficulties getting his bouncing bomb and swing wing technology adopted by the British government. Still, it's a good general point.

On lightbulbs, can you find me a 100w equivalent long life low energy bulb for under a tenner that can cope with my lounge's dimmer switches? - I am literally gloomy about the chances of that. Another example of policy that has genuinely not been thought through.

@ Brendan

You forgot the stakeholder consultation exercise and environmental impact study required before they could build a shelter. Sadly, a fire would be banned as the island council passed a resolution early on to be carbon neutral. "We all have to make sacrifices. No, literally. - We've got nothing to eat."

Hmmm, I think we're all getting a bit 'Lounge-y' (myself included), still, it's been a long week and it's a grim topic.