Accountable: A letter in the Sunday Times called for Osborne to begin spending cuts a year earlier than planned

In February 2010, twenty economists published a letter in the Sunday Times calling on George Osborne to begin spending cuts a year earlier than planned. The key sentence of that letter stated that, ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament.’

The logic was clear. If you say you’re going to do something hard but essential, you need to do it at a credible pace. Saying you’re aiming to do something in five years time and after a general election is rather like admitting that you’ve no intention of doing it at all.

You probably agree with that logic. If you are in charge of your household budget and you notice that your expenditures are running ahead of your income, you’ll almost certainly want to address that gap right now this minute. It’s not pleasant doing it, but you do it anyway. Businesses think the same way.

What’s strange then is why those same economists have now reversed themselves. Just three of the original twenty economists are thought to stand by their original view. The Daily Telegraph will this week print opinion pieces from a range of other economists all calling upon the Chancellor to reverse course, slow down the fiscal tightening. Spend more, tax less.

Some of the specific ideas have real merit. Britain has an acute shortage of good affordable housing. Plenty of people would seek to buy a house if suitable properties were available at a vaguely sane price. Yet, as things stand, planning restrictions artificially restrict supply while the construction industry is staggering under its post-Olympic hangover. In principle, therefore, you could release demand and reignite an industry by changing planning laws so as to enable the provision of new homes.

Another good idea is widespread tax reform. The British tax system is too complicated and tax rates are too high. Simpler, broader taxes would allow tax rates to be lowered without any overall loss of revenue. The economy would surely benefit from such a reform. There would also be a huge boost to fairness, as the super-wealthy would find themselves having to pay tax instead of dodging it.

Bad plan: Certain other plans for spending cuts are just bananas, such as cutting stamp duty. Britain has long suffered from a huge property bubble, which is at its worst in London
So some of the ideas floating around at the moment are entirely valid. Some of the reforms mooted are obvious and overdue. But certain other ideas are just bananas. Cut stamp duty? Really? Britain has long suffered from a huge property bubble, which is at its worst in London.

A valid alternative? Alistair Darling wants new investment in power stations, airports and railways

Stamp duty is a tax that’s hard to evade and which keeps some kind of lid on prices. Abolishing the tax will just encourage prices upwards: a disastrous step backwards to the bubble economy of 1997-2008.

And higher prices will of course make it even harder for ordinary people to own their own homes, which should be a perfectly reasonable aspiration for working families in a twenty-first century democracy.

Other ideas are more marginal. Alistair Darling wants new investment in power stations, airports and railways.

He’s right, of course, that Britain’s infrastructure does look ragged compared with that of our European competitors. New investment makes good sense, in principle. But why should we expect the government to fund that investment? If there’s a market demand for new airport capacity, the private sector should be able to fund it. If planning restrictions get in the way, Osborne needs to look at the planning laws – he shouldn’t just pull his chequebook out. Same with the railways. Same with power. Those services need to exist, but they need to be funded by the people who use them. Any other approach is a reversion to the jam-today, pay-tomorrow culture of the previous decade.

This debate is going to rumble away for some time to come. Osborne will face a thousand calls from a thousand directions to reverse course, to back off, to ease the pain. But before you join that chorus, please just remember the position we’re in. According to the IMF’s data, the British government will this year borrow 8% of GDP. That’s £124 billion. Of every £1 that the government spends, about 18p is borrowed money. That’s plainly unsustainable.  If you look at all debt in the economy – household, government, corporate, banking – then our debt to GDP ratio is a terrifying 500%.

Those numbers were produced in April. Since then, the economy has deteriorated, the outlook darkened. That doesn’t make is less needful to get the finances in order, but more needful. This entire crisis – from the collapse of Northern Rock to the travails of the Eurozone – arose because of too much debt. Too much stupid debt. Urging George Osborne to borrow more for longer is like telling an alcoholic to use cider as a way to get through his whisky withdrawal pangs.

For the same reason, it’s sheer madness for the Bank of England to cast around for new ways to loosen policy. The IMF’s commodity price index has almost doubled from its early-2009 lows. London house prices are crazy. The financial markets are also at unsupportable levels. These things are certain harbingers of inflation – and sure enough, last month, the RPI inflation index rose again, to 3.2% and it won’t stop there.

You would think these things would act like a cold shower on policy-makers. That they would remind them of basic truths: that debt is bad, that fiscal responsibility matters, that money-printing is destructive. Instead, though, it sometimes seems that those in charge of policy will do anything but face the facts. There’s talk about changing the way inflation is calculated – the classic government dodge: if the facts don’t change, fiddle the numbers. Meanwhile, the IMF wants the Bank of England to cut the base rate from 0.5% to 0.0%, as though current rates aren’t already absurd. The lunatics are trying to take over the asylum.

But personally, I think George Osborne understands all this. He’s not a dummy. He gets that you can’t cut expenditure without causing pain. He understands that too many people are still hooked on the Ponzi-ish belief that we can enjoy things today and pay for them tomorrow. Over the next few years, George Osborne might not be Mr Popular. He may yet prove to be Mr Right.

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

You know, there would have been a time when a financial contributor for the Daily Mail was restricted to the little stuff. Share tips, muttering about monetary policy, that sort of thing.

Not any more. Over the last few years, there’s been no breaking news like finance news. No war, no election, no natural disaster has long been able to displace finance from the front pages. This new emphasis makes perfect sense. When your job is threatened, your pension demolished, your child’s prospects seriously impaired, you need to know why these things are happening. The answers all revolve around matters financial.

So: another week, another row. Hot on the heels of last week’s news – another banking scandal, another repentance-free resignation – we have this week’s headline. Ed Miliband wants to force the big banks to sell up to 1000 branches each. He wants a specialist financial unit inside the Serious Fraud Office. Vince Cable has lambasted the banking sector’s ‘anti-business’ culture and accuses it of ‘throttling’ an incipient British recovery.

And they’re right. Bang-on-the-money, hole-in-one, jackpot-hittingly right.

Take each of those points in turn. Should the big banks be forced to sell branches? Of course they should! How is there even any argument? The mergers, acquisitions and bank failures which took place during the 2007-09 period have left British high streets with a dangerously oligopolistic industry. That means less competition. It means aworse deal for borrowers, a worse deal for savers – and a much-reduced capacity for corporate lending. It’s a market gone badly rotten. Competition from sizeable, properly funded institutions is essential for us all.

As for a specialist finance unit inside the SFO – I’m frankly astonished there isn’t one already. What’s more, such a unit needs to be lavishly funded. It needs to be able to employ professionals who understand the nuances of the financial markets. If that means paying top dollar, so be it. The money would easily be recaptured from the fines that would result.

And after all, how much more evidence do we really need that these banks have utterly lost touch with their ethics? They are happy to mis-sell a wide array of products to consumers. They are happy to fiddle interest rates. They are happy to sell totally inappropriate derivatives to corporate users. They will help an entire country, Greece, fiddle its books so it can enter the Euro.

I was about to write that there is nothing these people won’t do, and then I wondered. Mass murder? Genocide? Are there perhaps some limits still prevailing? Some matters a board of bankers would still not countenance? I don’t know. Maybe. But until those bankers find their ethics again, we need a fraud unit with as much finding and as much investigative authority as it plausibly needs. The hard truth is that until we see a fair few bankers serving long jail terms, these people will continue to feel immune. And no wonder. They have been immune. Bob Diamond may have resigned last week, but he hasn’t apologised, he hasn’t handed back any of his £100 million pay, he hasn’t indicated that he intends to waive his £20 million odd serverance package – and he isn’t facing jail. (Incidentally, Barclays stock price has declined 52% since February 2011 and 75% in the past five years. So how exactly does he think he earned that money?)

Blame: Vince Cable has slammed the banking sector’s ‘anti-business’ culture and accused it of stifling the chances of a speedy British economic recovery

As for Vince Cable’s comments about the anti-business culture of these firms – well, duh! Of course they have an anti-business culture. Banks have made money over recent years by (i) acquiring lousy assets (Greek bonds, American subprime debt, over-leveraged domestic mortgages), (ii) mispricing them on their books (so they don’t recognise the true impairment in value), (iii) waiting for the Bank of England to print more money as a way to support creaking asset markets and, when in dire straits, (iv) waiting for a handout from the taxpayer. None of these items have anything at all to do with real, ordinary banking business. None of them supports the broader economy. You’ll also note that the last two items involve massive support from the state, yet that support is somehow not inconsistent with the payment of massive bonuses. Explain that one if you can.

The trouble is that many banks are a zillion miles from becoming responsible citizens again. Their balance sheets are rotten. They may not admit that rottenness in public – there would be a bank run if they did – but they know perfectly well that their balance sheets are in a desperately weakened state. Because of that, they flinch from offering corporate loans – which involve real business risks in a difficult climate – and prefer to trade government paper. That way, their capital ratios look alittle better, no matter than no real banking work is being done.

You don’t have to take my word for these things. A strong bank will have a stock market ‘price to book’ ratio of more than one. That is: the stock market regards a given bank as being worth more than the collection of financial assets (less debt) on the bank’s balance sheet. A ratio of one exactly would mean that the bank was worth its financial assets but that its actual franchise – its ability to generate additional profits from those assets – was worth zero.

Action: Labour leader Ed Miliband wants to force the big banks to sell up to 1000 branches each

Most of our banks are today rated at far less than one. Barclays Bank, for example, has a price to book ratio ofjust 0.36. That is: the market regards the bank’s valuation of its own assets as laughably optimistic. While that continues to be the case, the bank willhave neither the strength nor the outlook needed to finance recovery.

So Miliband is right. Cable is right. The Tories are, on the whole, lamentably silent on this issue. (The worst offender is the bankers’ own apologist, Boris Johnson.) That’s not to say the Labour record has been glorious – very far from it. Ed Balls’s recent Oscar winning performance in front of the LIEBORgate enquiry was a frightening reminder of how useless and responsibility-evading his party was when in power. Until we have politicians ready to accept accountability and transparency while in power, we will continue to have a government that is wholly ineffective in the face of the banking lobby.

Nevertheless, and that said, Miliband and Cable are currently seeing these things more accurately than George Osborne and his colleagues. So here’s what has to be done. Break up the banks. Stop printing money. Deflate the housing bubble created by QE. Punish fraud. Force banks to publish honest balance sheets. The solutions are obvious. But will they happen? Of course they will: a Brit just needs to win at Wimbledon first…

Mitch Feierstein is CEO of Glacier Fund and author of Planet Ponzi: How politicians and bankers stole your future

I published this in the Daily Mail.

Barclays will not be alone in its wrong-doing, and other banks may even have exceeded Barclays’ brazen contempt for truth and right-dealing.

So what happens? So far, we’ve seen all the standard responses.

Exit: Bob Diamond has quit Barclays after days of pressure but what will happen next?

Barclays’ Chairman, Marcus Agius, tried to fall on his sword, but the political commotion was such that the bank’s CEO, Bob Diamond, was forced to fall on his instead. It is said that there will be significant pressure on the board to avoid paying a monster ‘golden farewell’ to its departing boss, but don’t place too much faith in that pressure.

For one thing, if a deal has not already been penned (a big IF), Diamond will have lawyers pushing for maximum compensation and the Barclays board will want to avoid a protracted legal fight and even more negative publicity. But in anycase, Diamond has already earned £100 million in pay and and perks from hisstint at the firm. The guy’s hardly going to be destitute.

Neither destitute nor (what a surprise!) repentant. Diamond’s arrogant and self-serving spin said, ‘I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth. I know that each and every one of the people at Barclays works hard every day to serve our customers and clients.’

What? ‘The impression created’? Every one of the people at Barlclays ‘works hard’ to serve customers? Bob, you haven’t got it at all. Your bank was involved in fraud on a massive, multi-trilliondollar scale.

I don’t necessarily mean fraud in the way that the law defines it – I’m not a lawyer – but I do mean fraud in its ethical, moral and human sense: the manipulation of interest rates to fit the bank’s position. Emails prove Barclays bank employees are guilty of conspiring to manuplate interest rates on a massive scale. Bob, your bank was rotten as hell and your bankers were part of that rot.

Probe: The Conservative party have ordered an inquiry into the scandal

Meantime, the Tories have ordered an enquiry into the scandal. Andrew Tyrie, the putative head of that enquiry, describes his remit as dealing with these questions: ‘What does the Libor scandal, what does this scandal in the market, where people have made money by rigging the market, say about the standards and the corporate culture of banks?’

Those are dumb questions. The LIBOR “Fixing” scandal provides one small illustration of what my book, Planet Ponzi, details in 394 pages: banks no longer have any functional ethical standards and that the corporate culture of the City of London has been degraded beyond all recognition. We know that already. (And remember I’ve been talking about this LIBOR “Fixing” scandal long before it hit the main stream news.)

But it’s not just LIBOR. It’s the PPI scandal. It’s the bonuses paid out by taxpayers to the employees of failed, nationalised banks based on lax if not fraudulent accounting practices. It’s the gross misselling of mortgages which led to those bank failures. It’s any number of derivatives scandals. I’ve accused regulators oftentimes in the past of being useless and toothless. And so they mostly are. But a near £300 million fine is a good start. We need to encourage those regulators to stay in action mode, to find their teeth.

Meantime, Labour is reluctant to endorse Tyrie’s enquiry because it wants any probe to be run by a judge under quasi-courtroom conditions.

Reluctant: Labour is reluctant to endorse Tyrie’s enquiry because it wants any probe to be run by a judge under quasi-courtroom condition

And Labour is half-right. If you’re going to do this job, do it properly. Get a judge. Give that judge a budget, as much time as he needs, and the power to sub-poena documents and compel witnesses. The Tory enquiry will only have eleven weeks to complete its mission. That’s pathetically insufficient. You might as well try to fix the England football team in that time, or restore Nick Clegg’s image.

But Labour’s no more than half-right. We don’t need an enquiry, we need prosecutions.

The Feierstein rule of criminal justice says that for every million pounds of financial misselling or manipulation, one banker should spend one year in jail. That’s a reasonable, modest, and proportionate rule. If you started to nick stuff from your local Tesco’s, you’d find a much fiercer rule applied to you.

And where are the prosecutions? Where are the bankers in handcuffs, in custody, applying for bail, their passports confiscated and (ideally) a block on any movement or transfers ofassets? A fine of a few hundred million quid means something to a bank – though not much – but it means little or nothing to the guilty individuals.

Please note that I’m not calling for the writing of new laws to bolt the stable doors behind this most recently escaped horse. I’m calling for the vigorous application of existing laws that have never been enforced.

It cannot be the case that kids who pilfer from ashop in Hackney are sent to jail, while the bankers who manipulate hundreds of millions on an industrial scale and over a period of years, are allowed to walk free.

Oh, and because the bankers will have the best lawyers that money can buy, the state should respond in kind. There should be no financial limits placed on prosecutors. If they need more money to secure convictions, they should get it. If they need to hire in top-dollar financial consultants, they should get them. Without limit. (Oh, and again, this isn’t a new theme of mine. It’s right there in my book Planet Ponzi: enforce the laws, send corrupt bankers to jail. It’s so simple, but what has happened? What ever happens?)

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Uncapped: There should be no financial limits placed on prosecutors

So, enforcement of existing laws would be my very first recommendation, but it doesn’t stop there.

The Tory Party needs to stop taking money from the finance industry. That industry is too vastly compromised and has done far too much harm to this country – yet some half of all Tory funding comes from that source.

Just as the Leveson enquiry will force a much greater distance between politicians and the media, so too should this Barclays scandal force a proper separation of finance and politics. There should be a crocodile filled moat between the two. And searchlights, machine guns and electric fencing.

These things matter for two reasons.

One, it’s a simple question of justice. We don’t have a fair or equitable society if the rich aren’t held to account the same way as the poor.

But two, it’s a question of saving our society from civil unrest. Last summer saw the London riots. There were multifarious causes of those riots of course, but the essential heart of them was the sense – the perfectly correct sense – among the rioters that ours has become an unjust society. Where the rich too often don’t deserve their riches, where their crimes go unpunished.

If we want to save this country from more civil unrest, more riots, we need justice. We need bankers in jail. Lots of them and for long, long sentences.

This was published in the UK 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

The United Kingdom has too much debt. Reports normally focus on government debt: currently around 80% of national income, unless you take into account (as you should) the debts of the bailed-out banks and their toxic portfolios, which would pretty much double that figure.

But what about consumer debt? Mortgage debt? Business debt? The huge slabs of debt incurred by our banking system? The truth is, if you want to know how much the United Kingdom owes, you need to add up everything.

And the answer is terrifying. We owe about 500% of GDP. So for every pound you earn in a year, someone, somewhere owes £5.  Add it all up and you get to a total just shy of £8 trillion.

Burden: Including bank bailouts, the UK’s national debt is already around 160% of GDP

You don’t have to be a rocket-scientist to figure out that this is a problem. Indeed, you’d have to be living under a stone not to have noticed that our economy has plunged into a depression because of this weight of debt. The banks started it, but we’re all in it together. And it’s not just Britain, it’s Europe too. And the US economy is way more fragile than is sometimes reported.

The dictionary definition of a depression is ‘a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle.’ That’s us. That’s where we are. The Great Depression of the 1930s did not destroy output to the same degree and recovery was faster. This is the worst depression in British economic history.

And what is the solution to this crisis, as cooked up between George Osborne and Mervyn King, the Bank of England chief? 

I love Wimbledon, it's Smashing!

George Osborne and Mervyn King have announced their intention to make around £100bn of cheap loans available to banks, allowing them to lend to businesses

Answer: more debt! Clearly, these wise souls believe that the whole problem with the British economy is that we don’t have enough debt. So let’s have more. In fact – and how’s this for a plan? – let’s make soft loans at cheap rates to the same klutzy British banks that created this mess in the first place and hope that somehow that sparks off a spiral of investment and innovation. You might as well plan for world peace by selling arms to the Middle East. (Or, come to think of it, making Tony Blair a peace envoy.) It’s the same crazed logic.

Fortunately, though, businesses aren’t stupid. The main barrier to investment isn’t the availability of credit; it’s the dire economy. Businesses are, quite rightly, looking at the devastation and lack of governance around them and thinking this might not be the best possible time to launch new ventures or expand old ones.

And the solution?  Well, there isn’t one short of de-leveraging. The only way to a problem of excessive debt is to have less debt. You can’t achieve that by waving a magic wand, you achieve it by working hard, paying down your loans, and remembering that, next time, you better keep your credit card in your pocket when you pass those nice, inviting stores.

But meantime, the plan does reveal something important about the decision-makers in charge of the economy. George Osborne I have some time for: at least he realises he needs to get the government to borrow less; at least he knows that the banks have to be tamed. But Mervyn King: what is he for? We are currently paying him to print money and shovel cheap loans at dodgy banks fueling a property bubble of epic proportion. 

Athens burns: Does this look like the creation of aggregate demand, Mr King?

Creating asset bubbles and money printing are terrible policies that King has become addicted to. He’s past his sell by date and has to go.
 

I published this in the Daily Mail

It’s a strange world we’re living in. This newspaper reported yesterday that, ‘Britain and the US joined forces to urge Germany to create a central Brussels body that could assume sovereignty over individual countries’ budgets and fiscal policies.’

David Cameron and George Osborne are said to believe that ‘a single currency can only work if the Eurozone creates an effective fiscal union.’ Barack Obama is in on the act too. Everyone, it seems, wants a Euro superstate … except for Angela Merkel, the woman who’d be in charge of running it.

Now this seems like a simple story, only the more you look at it, the more it’s like one of those pictures where you have to count up the number of impossible things: fish flying through the air, roofs with no walls, water flowing uphill. And right now, we’ve got a lot of flying fish.

Point number one, a simple one. Germany can’t bail out Spanish banks. It’s illegal and unconstitutional. I know that democracy has taken a pasting recently – just witness an unelected Italian government or the almost total absence of democratic consultation over the fiscal stability treaty. (Take a bow, Ireland, for remembering that voters matter.) But even in these undemocratic times, the rule of law still matters. Germany is coming under acute pressure to break or bend laws passed in good faith. It is right to resist.

Secondly, another simple point. As a hedge fund manager, I’m charged with looking after money on behalf of my investors. It’s my job to make money when the markets are good, to avoid losing it when they’re not. And one of my rules is the oldest one in the market: you never double up on a losing trade. You don’t throw good money after bad.

That plain good sense has been altogether lost in recent times. Europe has too much debt, right? So what’s the solution everyone’s been talking about? Answer: more debt. Yes, sure, we’ve been hurling money – whether borrowed or printed – at these problems for the past four years. That solution has clearly failed … yet the answer, apparently, is to do the same again, only on a larger scale. That’s craziness, the very definition of insanity.

What makes it worse is that we see the same recycled advisers coming up with the same failed solutions. I estimate that, if you include guarantees, the co-ordinated money printing since 2008 has currently added at least $14trillion to the global money supply. That’s almost one quarter of world GDP. Does anyone really think that if $14 trillion hasn’t solved the problem, more money is going to do the trick? The problems and challenges have been getting worse, not better.

And third, don’t we live in a capitalist world? Where smart ideas are meant to make money, where dumb ideas lose it. Capitalism without bankruptcy is comparable to Catholicism without hell – yet G7 leaders seem ready to gang up on Germany for holding fast to this basic truth. If a Spanish or Greek bank has got itself into trouble by making bad bets with its shareholders’ capital, it deserves to lose everything. If the Spanish government wants to fix its financial system, it should do so with money belonging to its own taxpayers.

And finally, the Elefant in the Zimmer. Germany doesn’t have the money to bail out Europe. In the first place, its debt to GDP ratio is actually worse than Spain’s. It’s about the same as Britain’s, and we’re hardly in fine financial fettle at the moment. Furthermore, those ratios are based on the official debt numbers … which exclude, for example, any notion of pension liabilities, an area where Germany has massively under-provided over the years. The German economy itself is robust, but that country’s pensioners are going to need every ounce of that muscle for themselves.

Merkel is unwilling to bail out Spanish banks – which would be unconstitutional – despite the encouragement of the G7

Personally, I think Angela Merkel is resisting the G7 pressure for some honourable reasons. I think she doesn’t want to break the law. I think she believes completely in the law of capitalist consequences: that the people who make the mistakes need to be the ones to pay for them.

But she’s also a numerate, intelligent woman. She knows that Germany’s financial strength is far from impregnable. The country’s financial capacity is strong, precisely because she and her predecessors have taken care not to overload it – not to do to Germany what Blair and Brown did to Britain. I don’t want a superstate any more than you do. I certainly don’t want a British Prime Minister to be advocating the development of such a state. But fortunately, I think Merkel doesn’t want one either. Can’t finance it, doesn’t want it. Let’s hope she holds firm

I published this in todays Daily Mail

Paul Krugman, a Nobel Prize-winning economist and writer for the New York Times, is in London at the moment telling us that we’ve got things wrong.

On Tuesday, he gave a lecture at the London School of Economics entitled, ‘Austerity Thy Name is Vanity’. Today, he was on Radio 4’s Today programme telling us that the coalition’s economic policy was ‘failing dismally’, arguing that ‘it is deeply destructive to pursue austerity in a depression.’

I half agree with him. The bit I agree with is that I think it’s fair to call what we now have ‘a depression’. We’re just coming out (we hope) of the second dip of a two-dip recession and I personally wouldn’t bet either that there won’t be a third one or that this dip we were in over winter is necessarily at an end now. Krugman is right: times are grim.

But that doesn’t mean he’s right about the remedies. He wants us to spend more money. Specifically, he wants the government to increase spending by 2% of GDP. Which is pretty modest, right? 2% doesn’t sound like a whole lot.

But let’s remember a couple of things. First, Britain produces quite a lot of goods and services. Even in these recessionary times, we produce £1,500 billion worth of stuff in a single year. If you take just 2% of that very large pile, you are talking about £30 billion. That’s a lot of money. You couldn’t quite pay for the entire British armed forces with that kind of cash, but you’d get a lot more than half.

Secondly, has Paul Krugman not noticed, this coalition government pursuing its ‘austerity’ budget is still spending far, far more than it raises in taxation. In fact, we’re spending about £120 billion that we don’t have. In effect, we’ve chosen to fund the entire health budget from borrowed money. Or, if that thought scares you, then forget the health budget. That borrowed £120 billion would buy the whole defense budget, plus the whole transport budget, and still leave enough left over to put around a thousand quid into the pocket of every man, woman and child in the UK. And at the moment, we borrow that much each year.

For Krugman, this recklessness is not yet reckless enough. He wants us to borrow more, expand the debt faster, add to the burden that will need to be paid off. I don’t have a Nobel Prize on my mantelpiece, but I can see craziness when I see it.

There’s something else he hasn’t noticed. Krugman is an American and I don’t know how often he comes to Europe. But on this continent of ours, there’s a country called Spain. That country has lower debt than the United Kingdom. It has a smaller government deficit. And – Krugman may not have noticed this, but I bet you have – that country is walking a financial tightrope. International investors are shunning that country’s bonds. Put bluntly, Spain is at acute risk of going bust.

Going bust: Spain has a lower deficit and smaller national debt, but is struggling to borrow on the international money markets

Britain is not in that position for two reasons. Number one, we have our own currency, our own central bank and an ability to determine our destiny that not even Germany possesses. That’s probably the biggest part of the story. But we also have a coalition government that has explained clearly and credibly how it is going to restore Britain to the path of fiscal rectitude.

If Osborne listened to Krugman (and don’t worry, he won’t), the cost of borrowing for the British government would accelerate instantly. We’d have to slash budgets and raise taxes simply in order to pay our new, higher borrowing costs. It would be a move of the utmost lunacy.

Three short points to finish with.

One, in the midst of financial crisis, it’s easy to lose a sense of proportion. When an economist on the radio talks about two percent of GDP, we need to remember that that translates into huge sums of money. We need to be responsible about those sums, not get dizzy with the magnitudes.

Second, Krugman is an economist. He lives in an ivory tower (never mind that he is probably angling for a high post in the next Obama administration). And ivory towers remove you from the things that matter. The British government needs to borrow a huge amount of money, simply to sustain itself. No one is forced to lend us money. We have to make ourselves creditworthy. Financial realists know that and adapt accordingly. Osborne and Clegg are both, thank heavens, realists.

And last, sometimes bad stuff happens and you can’t wish it away. If we could vote for sunshine, we’d vote for it. That, plus free food, plus good looks – and hey, why don’t we reduce the force of gravity to give us a little extra oomph in the mornings? ‘Voting for growth’ or for any version of Krugman’s policies are no more reasonable than these things. We created a huge pile of debt and now we have to work it off. That isn’t fun, but it is – alas – reality.

I published this in the Daily Mail