Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

Solution? Business secretary Vince Cable has said he wants to nationalise the 18pc of RBS that isn’t already owned by the taxpayer

Vince Cable wants to nationalise RBS. You can see his logic. The taxpayer owns 82% of the firm already. Nationalisation is hardly such a radical idea; it’s more the logical completion of a process.

It’s true that full nationalisation was never the advertised outcome. We were promised that these part-nationalised banks would be rapidly strengthened and restored to full private ownership.There were even muttered suggestions that the government could end up making a profit on its stake.

But it would be daft to make policy on the basis on what bankers and governments choose to tell us. In 2007, the US Treasury Secretary, Hank Paulson, told the world that he didn’t see the subprime mortgage market as ‘imposing a serious problem. I think it’s going to it’s going to be largely contained.’ Sure, Hank. We know how that prediction worked out.

That same year, the head of financial insurance giant AIG’s financial products division said ‘it is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.’ He was almost right – he was off target by just $183 billion, the amount the US government ended up spending on AIG’s bailout.

It’s the same in Europe. Greece has missed 210 of 300 economic targets given it during the course of its extended bailout misery. More recently, the Spanish government of Mariano Rajoy promised financial markets that it would meet its deficit targets and that a bailout was out of the question… until of course it missed those targets and the only bailout question remaining is how many hundreds of billions of euros are required. It was much the same thing in Ireland and Portugal. It will be much the same in Italy too.

So let’s set intentions and promises to one side and look at the facts. First of all, it’s clear that RBS is not about to return to the private sector. The company has just made a six-monthly loss of £1.5 billion. Its computer systems are clearly dysfunctional. It seems certain to get hit with major fines for its role in the LIBOR fixing scandal. The bank’s core business of lending to British companies is gummed up and directionless. The bank’s size makes proper management difficult and restricts competition both on the high street and in business lending.

Struggling: RBS has been dogged by technical problems and poor management, running up a £1.5bn first half loss

And if private ownership remains a pipe-dream, the current arrangement seems like the worst of all worlds. The principal shareholders (you and me) can’t take effective operating decisions because of the private minority. Meanwhile the entire country suffers from a failing banking system. So nationalisation is the first part of the answer – and Vince Cable is brave and right to suggest it.

But nationalisation is only the first step of a long and difficult journey. The next step – the tough one – involves utter honesty about the balance sheet. European sovereign bonds need to be valued at their actual market value. That’ll imply huge losses. Loans backed by British real estate also need to be fiercely written down. Outside a developing property bubble in London and surrounding areas, UK property prices are nosing down. That’s not surprising. In a world where real wages are decreasing, and after a decade long property bubble, prices have nowhere to go but down. That means RBS’s property book is softer than a baby’s bottom.

So government auditors need to bring reality to these accounts. No soft-soaping for the stockmarket. No desperate excuses about ‘trading out of trouble’. (You can’t trade out of trouble if you make losses of £1.5 billion in half a year. That’s trading into trouble, right?)

My own suspicion is that if RBS’s assets were properly valued, it would not be solvent. (I don’t think RBS is alone there, by the way. I think most European banks are insolvent: a belief that others, including the head of Deutsche Bank, share with me.) The traditional government response to financial distress is to pour your money into the stricken institution. It’s what Gordon Brown did like crazy in 2008-09. It’s what countless other governments did too.

And it’s the wrong way. Funnily enough, capitalism already has a solution to insolvency, and it’s called bankruptcy. Bankruptcy is a wonderful thing. In most cases, bankruptcy doesn’t mean the death of a company. If a company is a going concern – that is, if its core business is fundamentally OK, just encumbered by too much debt and too much bad management – bankruptcy is the place to clean it up. Shareholders lose their money (but it’s already lost anyway). Creditors lose a slice of theirs (and it’s already gone too, just slowly and painfully.)

But that’s good. Those losses are good. They’re good for two reasons. One, if creditors make bad loans, they need a reminder to do their due diligence. That’s the only way to avoid the same mistakes in the future. Secondly, as creditors take their losses, RBS can emerge from the ashes with a strong balance sheet, and a sense of confidence. It can start to invest again: in computer systems, in business lending, in all that bread and butter stuff that the firm has neglected so long.

Bankruptcy would help for a third reason too. RBS is too big, too bloated. It needs to be broken up into smaller, nimbler firms that can reintroduce competition to our dysfunctional industry. That can’t be done with a firm that’s already struggling for financial solvency. It needs to be done on the back of a new, strong balance sheet. And it needs to be done without taxpayers contributing a single penny more to the process. We’ve done enough already. It’s time for a new start. It’s over to you, Vince.

Mitch Feierstein is CEO of Glacier Environmental Fund and author of Planet Ponzi: How Politicians and Bankers Stole Your Future

The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

Those same finance ministers are also set to approve a year’s delay in the deadline given to Spain for reaching a budget deficit of 3% of GDP. That won’t, of course, be the last bailout for Spain and, please note, a budget deficit of 3% is still pushing debt ever upwards in acountry whose economy is getting smaller not bigger.

Unsurprisingly, government bond markets have once again been wildly unimpressed. Spanish bond yields briefly touched 7% today, before falling back. Given that Spanish debt (according to the misleading official figures) is around 7% of GDP and rising fast, interest rates at this level mean that about 5 cents in every euro are going to pay the interest on that debt.

The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth

Put another way, Spaniards have to work about three weeks a year, simply to pay off the interest they owe on the national debt. No wonder their economy is failing under the weight of that burden. No wonder unemployment is so extravagantly high.

It’s time to end this massive Ponzi Scheme. If the problem is too much debt, you don’t solve the problem by extending more debt. If the problem is banks with irresponsibly reckless lending practices, the solution is not to “gift” them more money. If the problem is a wildly uncontrolled money supply, you don’t solve that problem by printing money until the presses are smoking hot.

A Ponzi Scheme is any merry-go-round fraud where you have to keep pulling new idiots into your scheme to keep things going. It’s the economics of the chain-letter. People can sometimes make money, but only if the supply of idiots is big enough. These things always collapse – and collapse disastrously – in the end.

We’re near that point now. Spain can’t receive a Greek-style bailout: all the EU rescue funds combined don’t have the resources to do it. Even if Germany decided to do all it could, the scale of these debts would simply overwhelm Germany’s (already very indebted) economy. In any case, if the fairies came and Spain were rescued, the pressure on Italy would soon become almost overwhelming. And though France hasn’t been hitting the headlines recently, it has higher debt than Spain, a history of deficits and a huge banking sector with vast exposure to Spain, Italy and Greece.

So why not let’s just call it a day? For Spain. For Italy. For the Euro. For this whole misconceived and duplicitous Ponzi Scheme. The costs of euro collapse will be huge, but those costs are coming anyway. And they only get bigger the longer you defer the moment of truth.

David Cameron wants to hold a referendum on Europe sometime after the next election. But he’d better get on with it. Europe, in its current form, doesn’t have that long to live.

I published this in the Daily Mail.

‘Frankly, we are not here to receive lessons in terms of democracy or in terms of how to handle the economy,’ he said. ‘This crisis was not originated in Europe; seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.’

Hmmm. So evil Americans are responsible for European woes, huh? That’s an interesting claim, but does it really stand up? And who, really, is to blame for this extraordinary mess?

Who’s to blame? World leaders assemble for the G20 summit in Los Cabos, Mexico

In the spirit of Euro 2012, I thought I’d follow a system of ‘player ratings’. I’ve listed the major players in the Eurozone crisis below. A score of 10 implies, ‘Totally to blame. Why are these guys not in jail already?’ A score of 0 implies … well, it doesn’t really matter: there are no zeroes. Who’s to blame for the Euro crisis? Here are the major players with their scores.

1. American Banks 4/10

OK, I’m no fan of the US banking system. US regulators completely failed to enforce their own rules. The banks screwed up horribly and did a vast amount of damage to the the US economy. But there’s the point: they blew up the American finance system, not the European one. Get a map, Manuel. That big blue thing? It’s the Atlantic Ocean.

2. European banks 9/10

European banks, on the other hand, are vastly to blame for the mess in Europe. For one thing, a lot of the mess in the US was created by the US subsidiaries of European banks: outfits like HSBC, Deutsche, RBS. But then Societe Generale, Paribas, Lloyds, Northern Rock, Bankia, Unicredit, Dexia – these are all home-grown awful, and it’s their problems which have added so much to the European debt load.

Star performer: Greece must take full responsibility

3. Greece (Star Player) 10/10

Every team needs a star man, a Steven Gerrard, Captain Reliable character. The Euro-Blame Team has to name Greece as that €500 billion star. It cooked its books. It never even attempted to reform its economy. It doesn’t get its citizens to pay taxes. It offers crazy pensions. Its rail system notches up losses that exceed its sales. It has a mountain of Ponzi debt that, even after vast write-offs, will be unpayable. You can’t beat that performance. Greece: it’s ten out of ten, all the way.

4. Spanish Real Estate 9/10

It wasn’t so long ago that the Spanish state looked prudent. It had debt levels way lower than those of Germany. (Indeed, it still does.) Its economy thrived. It had a team that played beautiful football. What could possibly be wrong with this picture? Answer: a real estate bubble even worse than the one in America and Ireland. A bubble that Spanish regulators never even attempted to address. A bubble that is currently threatening to wreck not just the Spanish government, but the entire Euro project.

Spain is higher up the radar of international investors at the moment, but Italy is a whale of even larger dimensions. In the decade to 2010, do you want to know how many economies had worse growth than Italy’s? Answer: just two. Zimbabwe and Haiti. If you add to that terrible economic performance a mountainous debt and a corrupt and dysfunctional state – well, 8/10 seems way too generous. I must be Mr Nice Guy as it’s sunny in London today. Portugal, by the way, has somewhat similar problems, but the country’s size means I can’t award it more than a 6/10. Think of it as an impact sub.

6. France 6/10

France lies even further from international radars than its two big southern neighbours, but when you think about a highly indebted country with an exceptionally leveraged banking system, gigantic unfunded pension liabilities, an addiction to state spending, and huge assets parked in the not-so-safe countries of the Mediterranean … well, you probably don’t feel like putting your funds on deposit anywhere that smells of garlic. Stay away.

7. The European Central Bank 9/10

The ECB. What can you say? How Ponzi-ish, irresponsible, non-transparent and undemocratic can a central bank be? The answer, it seems, is ‘very’, four times over. The ECB enabled asset bubbles to form in Spain and elsewhere. It permitted a vastly overleveraged financial sector. And its response to crisis: to extend trillions of euros in soft loans to insolvent banks to gamble on dubious bonds issued by failing governments. That’s not monetary policy. It’s monetary insanity.

Damaging to Britain: But can Sir Mervyn King and Gordon Brown really be blamed for the eurozone crisis?

8. Gordon Brown & Swervyn Mervyn King 6/10

If we were talking about how far this pair of superheroes had injured the UK economy, we’d be pulling out perfect tens. But the question here is about the damage to the European economy and although Britain has been saddled with eye-watering debt, hideous inflation, rotten banks and a stagnant economy, those things have only a marginal impact on the Eurozone. That little strip of blue, Manuel? It’s the English Channel. (And don’t call it La Manche.)

9. Angela Merkel 7/10

OK, this is a tough one. Germany has a strong economy. It has weak and overleveraged banks, a scarily under-recognised pension problem, and too much government debt. But still. Angela and team didn’t create this problem, they’ve only compounded it. They’ve compounded it by always choosing to kick the can down the road, instead of addressing and fixing the giant issues in the European system. Germany’s not mostly to blame, but still. It should have done so much better.

10. Jacques Delors 9/10

Jacques Delors, the principal architect of the Euro, has admitted that the project was structurally flawed from the outset. He’s even admitted that British objections to the idea had real substance. (Thanks, Jacques, and it only took you 15 years to figure that out.) Basically, this project could never have worked and now here it is not working. Quelle surprise.

L’homme culpable: European Commission President Jose Manuel Barroso should take a look in the mirror

11. Jose Manuel Barroso 9/10

Manuel Barroso: if you have a mirror anywhere in your €1.4 billion offices, take a look. The person looking out at you is responsible for maintaining and boosting an impossible system. If EU officials had ever had any respect for democracy, this crisis would never have occurred. If the EU had ever recognised the real gravity of the crisis, if it had allocated blame and responsibility in the right quarters and in a timely way, this would never have happened. Manuel Barroso, l’homme culpable – c’est vous.

Meantime, and in light of the football theme of this article, I have a simple, neat suggestion to make everything right. Spain wants to be bailed out by the German taxpayer. German taxpayers, understandably, aren’t all that keen with the idea. But there’s a footie tournament on, right? Spain and Germany: the two favourites. So what about a simple little wager, double or quits according to which team fares better. And that’s a game I’d pay to see. 

I published this in todays Daily Mail

Shhhhhhhh!

But wait up. A hundred billion Euros? Lent secretly? On unknown terms and conditions? And the entire operation conducted by a bunch of unelected officials and scarcely reported in the media.

Please don’t think that these things happen in Europe but could never happen in the United States. They happen here all the time and on a colossal scale. Remember that Bloomberg fought the Federal Reserve all the way to the Supreme Court in order to establish that the Fed lent over $1.2 trillion to the US banking system and that those loans went ahead unbeknownst to and unauthorised by Congress. Oh, and although I say ‘the US banking system’ what I really mean is ‘any bank that puts its hand out for some cash.’ So the Federal Reserve considered it appropriate to hand over some of your dollars to such not-very-American institutions as the Royal Bank of Scotland, the Belgian bank Dexia, Credit Suisse, Deutsche Bank, the Italian Unicredit, and too many others to name.

Yet nothing happens. When Bloomberg broke its story about the Fed’s secret lending programme, a few other news outlets picked it up, but nothing changed. The same people are in charge of the Federal Reserve. They don’t think they did anything wrong. No central banker thinks that the ECB did anything wrong by handing a hundred billion euros to the collapsing banks of a failing country. It’s just the way these guys do business.

Just to be clear, though, there are alternative ways to do business. You might, for example, think that we should follow the following elementary rules: the central bank should avoid printing money and generating inflationary pressures which affect us all; bankers should lend money prudently and with proper due diligence; if those loans go bad, the banks should lose their money; and, over time, those banks are either left to go out of business (if they’re dumb) or encouraged to shape up and improve (if they’re not.) That system even has a name. It’s called capitalism. We had it in America once.

But not any more. We live in a world where moral hazard reigns supreme, where acts of gross stupidity seem to lack consequence. Where central bankers print money and no one cares. Where banks make dumb loans and get bailed out. Where politicians just want to get re-elected and know that the media is going to analyse the spin down to the very last molecule and leave the substance well alone.

Take some other recent news items. Facebook’s IPO saw its shares trade up to $45 before falling back to as little as $31, a fall of some 31%. It is alleged that Morgan Stanley, one of the banks running the stock offering, revealed data to its institutional clients that it did not share with its retail clients – data that, in effect, called into question whether Facebook’s high valuation could be justified. Morgan Stanley insists it followed every dot and comma of the relevant regulations, and perhaps it did. But retail investors have still lost a shedload of money. And Morgan Stanley and its peers have still made a huge amount in fees. If Morgan Stanley truly did follow procedures, those procedures are plainly inadequate.

Or take JP Morgan’s recent $2 billion trading loss. That arose in a bank which prides itself on its careful risk management. Which has lobbied vociferously against regulations which would prohibit the kind of activities which led to that loss. A bank which is surely ‘too big too fail’ – and in my eyes, therefore, also too big to exist.

Yet nothing changes. Just ask yourself these questions. Will the Fed never again extend secret loans to dodgy banks? Will Wall Street firms never again run an IPO that destroys billions of dollars in value for retail investors? Will Wall Street so clean up its act that it never again reports billion dollar losses because of dumb-but-greedy trades?

You know the answers. Nothing changes. In Europe at the moment, a calamity is unfolding. The Spanish bank, Bankia, has had its shares suspended as it seeks to apply for yet more state aid. The Spanish government, terrified by the way the ground is moving under its feet, is beseeching the Germans to help them borrow more money, so they can pass that money on to the same unreconstructed banks that lost it all in the first place. And meantime government deficits go on adding to the ever-less-supportable mountain of debt.

The United States is not yet in that position, but the preconditions are all here. An uncontrolled deficit. An out-of-control banking system. And politicians who would rather defer any problem than tell the truth about the mess we’re in.

This article was published in todays Huffington Post

In normal times, that wouldn’t really be news. Sometimes interest rates rise, sometimes they fall. Sometimes savers lose, sometimes borrowers do. Swings and roundabouts.

Only – have you noticed? – these aren’t normal times. The Bank of England’s main lending rate has been glued to 0.5% for more than three years now. Because that’s not seen as a loose enough monetary policy, the Bank has also been printing money via Quantitative Easing. In fact, in relation to the size of our economy, the Bank has printed more money than any other central bank in the world.

Easy money: The Bank of England has kept interest rates low while also printing money

So at the most fundamental level, money is plentiful. It’s being pumped into the banking system so hard, it’s surprising that something hasn’t yet burst at the seams. Yet somehow banks think that, despite this astonishing level of state intervention on their behalf, they’re entitled to more. That they’re entitled to drive up your mortgage rate. That they’re entitled to charge you money in order to safeguard their bonuses.

Now, bankers will tell you these accusations are absurd. They’ll say that you can’t just look at the official rates. Crisis in the eurozone is making banks wary of lending to each other. The most widely used measure of interbank lending is the so-called LIBOR rate and those rates have been drifting slowly up from their previously unprecedented lows.

There are a few rejoinders to that, however. First up, it’s become ever more obvious in recent months that LIBOR rates have long been manipulated by the banks (something I’ve addressed in this column before). So for the banks to point to a rate which they themselves manipulate as a measure of financial pain is ridiculous. If they produce credible figures, I’ll listen. Until then, I’ve got no reason to.

Second, you need to remember just how vast was the extent of taxpayer support for the banks during the first phase of the financial crisis. Was and is. Government debt as a percentage of GDP currently stands at around 66%, if you exclude the impact of those financial interventions. But why would you exclude them? We did intervene. We are on the hook. Those interventions happened. So the true figure for British indebtedness is more like 141% of GDP – that’s not my figure, it’s the government’s.

The difference between the two figures translates to around £1 trillion. That’s how much of your and my money is currently at stake with RBS and the others.

Third, and despite their silver-tongued promises to over-credulous government ministers, banks are still failing to lend. They’re not lending to small businesses. They’re not lending to consumers.

If you go online and borrow money from Wonga.com you’ll find APR interest rates of 4214%. Those extreme and (in my view) extortionate rates couldn’t exist in a properly competitive marketplace. But in the gummed-up and uncompetitive market that we are stuck with, Wonga seems to thrive and prosper. And all this in an industry where, as the PPI scandal has proven, banks have absolutely no ethics, no concern for the customer.

QE Bubble: London property is overvalued to the tune of at least 22%

Finally – and worst of all – banks are still a huge source of danger for the economy at large. The London property market shows every sign of being another bubble. Property prices in general are much more likely to fall than to rise. Yet who, seriously, believes that banks would be safe in the event of a 20% fall in property prices? Given that the Economist global house price monitor suggests that British property prices are overvalued by around 22%, it might be safer to budget for a 35 or even 40% fall. Yet if that were to happen, can you even imagine the carnage that would be caused? I can’t.

Mervyn King once commented that he couldn’t understand why the level of anger against banks wasn’t higher. Sure, we grumble, but where are the boycotts? The mass protests? The insistence that we won’t pay another halfpenny in extra mortgage payments, until we get proof that no banker at these bailed out institutions has been paid a bonus in excess of the national median wage, that bankers themselves have put in the hard yards to cut costs, reduce risks and stabilise the ship.

That’ll never happen, of course. We’ll just go on grumbling. In the end, the bankers are right. We’re mad. And they’re laughing.

This was published in todays Daily Mail.

Facing a challenge: George Osborne

Flaky banks, a hideous deficit, soaring debts, public services that had become hooked on ladlefuls of new cash, and an economy that had become disturbingly over-reliant on a financial services industry of dubious value and uncertain profitability. Those are huge problems and no one could expect them to vanish overnight.

But we do have a right to expect visible improvements. On debt and the deficit, Osborne is making progress. It’s slow – slower than I’d like – but these things take time. Reforming the public services is going achingly slowly, but at least you can see a government keen to do the right things.

Elsewhere, however, what’s going on? Public sector austerity is a reasonable financial strategy, especially given wipeout in the eurozone, but it’s not a growth strategy. It’s the opposite of one. It’s an anti-growth strategy, which hasn’t yet kicked into full operating force but which has already thrust the country into the second dip of a double-dip recession I’ve been forecasting for six months and more now. (My book, Planet Ponzi, is still the best available map to the on-going crisis.)

Though the country may be starting to stumble out of recession now, you shouldn’t get excited. As austerity starts to bite at home, as the United States starts to tackle its own (awful) public finances and as our European friends continue to make a mess of their beautiful continent, Britain will be back on Recession Row within a year. You heard it here first.

And meantime, what is the government doing to energise growth? Or, rather, let me rephrase that: what in hell’s name is the government doing?

Well, there’s Project Merlin for one thing. That was a plan to get the banks lending again, to fire up those private sector afterburners and watch high-tech small companies blast us off to a different economic orbit.

Alas, the banks forgot to lend, smaller private firms are starved of cash… and even though we own the damn banks we don’t seem able to control their behaviour. Meantime, the government ‘investments’ in terminally-ill Zombie Banks still look horrible. And the bank’s bosses are still paying themselves insane amounts of money.

And then, for another Growth Strategy From Hell, try quantitative easing. The strategy is so dumb, a schoolchild could see through it. Don’t get too bogged down in the technicalities of how QE works. Essentially the strategy boils down to this: ‘Let’s print vast sums of money, slosh it around the financial system and see what happens.’ 

Well, I can tell you what happens. If you print money, it will eventually create inflation and do nothing at all to help small businesses grow.

If we had a banking system that was good at funnelling spare resources to promising business ventures, my verdict might be a little less scathing.  But we do not have that banking system and everyone knows it. So the most recent bout of quantitative easing (nicknamed QE2) delivers more or less the same quality of ride offered by the Titanic. A short colourful ride, followed by a journey to the bottom of the ocean. Just make you’re your cabin is close to the lifeboats.

Finally, there’s also the misreporting and the misrepresentation that has become a standardized exercise in ‘creative accounting practices’ across the Western world. Government debt currently stands at just north of a trillion pounds. But when the Government puts out its data releases, it states the figures after ‘excluding the temporary effects of financial interventions’. Huh? Just what exactly is that supposed to mean?

The answer: when we nationalised the banks we nationalised their debts. It’s true, of course, that we nationalised their assets too … but their assets were crummy, overstated and unsaleable: that’s why nationalisation was necessary.

What’s more, to talk about these nationalisations as ‘temporary’ is deeply questionable. Something is temporary if you take something into government ownership, clean it up, and quickly flip it. But RBS has been in taxpayer hands for years now and there is no prospect of any imminent sale. So that’s not temporary. In fact, RBS shares are nearly worthless.

Worthless: The state is unlikely to make money from its bailout of RBS

And do you want to know the extent of British government debts if we account for those bank debts the way any private sector corporation would be forced by law to account for them? And are you sitting down? The answer – according to the government’s own statistics – is an eye-watering £2,181 billion. That’s more than double the number the government (and most media commentators) routinely use. Unfortunately, it’s the only number that makes sense.

In summary, then, Osborne could have done worse. But he needs to do a whole lot better. He needs to understand the fundamental failure of the financial system to perform its function: the essentially modest one of funnelling capital to the people who can use it best. He needs to forget about QE as a strategy and he needs to set a new level of transparency and honesty in government reporting.

Osborne also needs to get government out of the way of entrepreneurs. There must be a bonfire of regulations and tax complexities that flames high enough to entice businessmen into risking their time and money again on new ventures. Britain used to be good at that stuff, you know. Somewhere in our DNA, we still have that memory of success. At the moment, sad to say, the memory’s fading.

This article was published in todays Daily Mail.

He said, ‘The [Greek] problem is solved. How happy I am a solution to the Greek crisis … has been found.’ Which is good. Everyone, even presidents, deserves a little sunshine. 

Looking on the bright side: France’s President Nicolas Sarkozy should not think the eurozone debt crisis is solved

Alas, the weather in April is notoriously undependable. Sarkozy’s sunshiny mood probably didn’t survive too well when he heard the Greek Prime Minister admit that his battered little country might yet need a third round of bailout money. It probably darkened further when the markets choked on Spain’s most recent bond auction.

Nor will Sarkozy’s mood improve when he considers that the interest rate on Spanish government debt has risen relentlessly since the start of March towards unsustainable levels. The same thing has happened (albeit less abruptly) in Italy. Although France’s bond yields are still more or less OK, they too have started to nudge upwards from their recent permissive levels.

Setbacks of some sort are, sad to say, part and parcel of any President’s life: the price of office. But these things aren’t just part of the ordinary turmoil of politics. These are waves – still small, still gentle – lapping at the walls of France itself. Waves, which, if they rise to Spanish or Italian levels, could yet threaten the integrity of the nation itself.

And the mathematics looks dire. The official debt to GDP ratio of the French government is around 86%, which is higher than in Spain and Britain, if not yet at Italian or Greek levels.

Only that word ‘official’ hardly gives you that warm, fuzzy glow of truth, does it? Because France also has liabilities of hundreds of billions of euros via the EU, not counted by the official stats. Add those in, and you get to a debt/GDP level of more like 145%. Add in the present cost of future pension liabilities, and you’ll be way over the 200% mark. Add in the cost of bailing out France’s own creaking banks, in the event of meltdown elsewhere in Europe, and you’ll be getting to figures that the country cannot possibly pay.

Parallel reality: Socialist candidate Francois Hollande has promised to increase public spending

These facts aren’t hidden. It takes a bit of detective work to dig out the exact data, but there are plenty of detectives out there. That’s why Standard & Poors removed their AAA credit rating from France. That’s why French borrowing costs are almost double German ones (and one-and-a-half times British ones). All this as France is facing a general election. The first round is next week.

You’d expect the election to unfold in sombre fashion. When Britain held its last election, also deep in the shadow of financial crisis, all three candidates for Chancellor said in a TV debate that they would impose spending cuts deeper than anything forced through by Margaret Thatcher. You might expect that kind of honesty from French politicians now – as those bond market waves go on lapping.

But no. France’s politicians live in some parallel reality of lowering pension ages, hiring gazillions of new public sector workers… and all paid for by a 75% tax on the rich which (when various other levies are added) will be nearer 90%.

Didn’t we try these things already, back in the 1970s? And didn’t we try them in an era when bond markets were less powerful? When trade was less open? Before globalising technological changes, most notably the internet? Before China had opened? When rich people were less likely to hop on a plane and work elsewhere? And you remember the results: strikes, deficits, inflation, the three-day week and the death of growth.

Sarkozy once said to David Cameron, ‘You have lost a good opportunity to shut up.’ Alas, Sarkozy is currently losing a good opportunity to speak the truth. To his electorate. At a time when the stakes are higher than ever.

And here’s another thing. Wherever you have a political culture with a blatant lack of transparency and honesty, you also have one with a total lack of accountability. Among the senior French political figures who have been enmired in scandal are Sarkozy himself; his predecessor, Jacques Chirac; former Prime Minster Dominique de Villepin; IMF chief (and former Finance Minister) Christine Lagarde; Charles Pasqua (former Interior Minister); Jean-Christophe Mitterrand (son of a former President and his political advisor); Dominique Strauss-Kahn (head of the IMF and once expected to be a leading candidate for the presidency) – and too many more to name. Some of these have been found guilty. In some other cases, investigations are still ongoing (and all those charged deny the allegations).

But in general, where there’s fume you’ll often enough find a feu. You can’t have this many corruption scandals and not believe that the fundaments of the politics are broken. Those bond market waves may be destructive, but there can be creation in destruction too. The French political system is broken. Maybe these waves will eventually wash it all away.

Blue whale? Giant redwood? Some kind of deep sea critter? No, no and no. The right answer is the honey mushroom. You’ll see the thing growing out of trees in Oregon and Washington. It doesn’t look particularly creepy, or at least no creepier than these things normally do.

Except it turns out the individual mushrooms you see aren’t separate organisms. They’re connected through long underground filaments to such a frightening degree that the vast bulk of the organism lies beneath the soil. The thing you see on the tree beside you is the same living thing that’s poking out of a tree way over yonder. The largest known honey mushroom lives in Oregon and it covers a stunning 2,200 acres. It’s around 2,400 years old and it’s killing the forest above it.

If you want a model for our debt-ridden, Ponzi-ish world, you have it right there. A huge beast that lies largely out of sight and kills what it touches. More than that, it tricks you into thinking that the various problems are discrete — this mushroom here, that mushroom there — when really it’s all part of the same ugly whole.

Take, for example, the current murmuring about student debts. Average student debts have now reached $25,000. Since 80% of those debts are government-guaranteed (or indeed, issued direct from Uncle Sam’s Magic Wallet ), those debts are also our debts. We’re on the hook.

And because we have lived through two decades in which debt was never regarded as a problem — certainly never as a problem to be faced now — the results are all too familiar: a mountain of liabilities. Just $80 billion in 1999, student debt reached some $870 billion last year. That’s $870 billion heading rapidly for the $1 trillion level.

In the case of the subprime market, spiraling liabilities were not matched by a corresponding increase in quality assets. That’s why we had the bust. The same thing is true of student debt. (Honey fungus, remember: it’s the same thing everywhere.) That increase in liabilities hasn’t come about because of a tenfold increase in student numbers or a tenfold increase in tuition quality. On the contrary, as Mark Zandi, the Chief Economist at Moody’s Analytics, comments, universities ramp up the cost of what they were providing anyway:

Universities and colleges just raise their tuition. It doesn’t improve affordability and it doesn’t make it easier to go to college … Of course, it’s very hard on the kids who have gone through this, because they’re on the hook. And they’re not going to be able to get off the hook.

Data from the Bureau of Labor Statistics show that over the past three decades, student tuition prices have risen at four times the rate of consumer prices generally: 439% instead of 108%.

And with subprime mortgages, who lost out? You may remember that the banks responsible for those crazy loans made out just fine. They got bailouts whenever they needed them. Their bonuses were protected in line with the unwritten 28th Amendment: The federal government of the United States shall not permit any bank or banker to suffer economic loss. The people who suffered were the homeowners. Not just the subprime borrowers, who should never have taken out a loan, but everyone else too. Everyone caught up in a housing bust not of their own making, or trapped in a recession Made in Wall Street, Felt on Main Street.

And it’s the same thing here. It’s always been the case that taxpayer loans to students were protected through bankruptcy: that is, a student or ex-student could not use bankruptcy to wash away their debts. That provision made sense for two reasons. One, taxpayers deserve protection as well as students. Two, federal loans always had generous hardship provisions which suspended repayments for borrowers encountering financial hardship. The bankruptcy rules were simply the flip-side of those hardship provisions. Tough, but equitable.

Naturally, however, Wall Street lobbyists saw those protections and thought they’d like a slice of that pie. Wall Street wouldn’t relax its demands for repayment in case of hardship, but it would like its loans to ride unscathed through any bankruptcy. And in 2005, Wall Street got its way. A rule designed to protect taxpayers and to maintain a fair relationship with the students morphed into something designed to produce a win-win outcome for Wall Street.

But if Wall Street is enjoying a win-win outcome, you can bet your bottom dollar that someone is suffering a lose-lose. And that person is you (if you’re a taxpayer) and doubly you if you’re a taxpayer who is also a student or recent graduate.

The taxpayer loses because we’re guaranteeing far too many of these loans. When students default — and they are defaulting at terrifying levels right now — the taxpayer will have to bear the cost.

The student loses because the cost of your tuition has been ramped up by universities keen to feed at an ever-expanding trough. Students lose again, because a failing economy is not providing jobs for our young people.

But let’s not make the mistake of thinking that the student debt problem is, well, a problem of student debt. It is and it isn’t. It’s the honey fungus error again: you think the things are separate, but there’s a huge beast lying underground and killing your forest. The problem here is an economy that’s become vastly over-reliant on debt and vastly over-protective of bankers.

I’d like to scratch the unwritten 28th Amendment and replace it with a written one of my own devising. The federal government of the United States shall never protect any bank or banker from economic loss. A no bailout rule with no exceptions. A fungicide that could cover an entire country. A fungicide that might, even at this late date, save the forest.