Privatisation was one of the great achievements of the Thatcher era. But it is becoming increasingly evident that the transfer of monopolies into the hands of regulated companies that own, run and develop the assets is flawed. This is excessively costly to consumers. It is also an obstacle to investment in risky long-term assets such as airports, nuclear power , electricity and gas networks.

This is not to argue that privatisation is devoid of benefits. Where competition could be introduced into the newly privatised industry, as in the case of telecommunications, the gains were huge. Elsewhere, privatisation was the way to allow essential activities to escape from the dead hand of Treasury curbs on public investment. Private finance was more expensive, but investments were at least made.

Yet, as recent work by Oxford University’s Dieter Helm makes clear, it is time to review the model. The bundling together of different functions in one regulated entity, and the rules on costs, particularly of capital, need rethinking.

A regulated utility consists of a set of assets, an operating function and a co-ordinating function. The second, in turn, consists of two activities: running the business day to day and planning and implementing investment projects. Professor Helm argues, persuasively, that lumping all these together has led to inefficiency and a rip-off of consumers*.

The remainder of this column can be read here. Click through to read the debate from our expert panel.

Silliness is abroad in the UK. Some are arguing in favour of a looser monetary regime. I responded to this two weeks ago (“Britain must not cut loose its anchor”, May 15). Others are even muttering in favour of joining the eurozone, now celebrating its 10th birthday. Even my colleagues on the Lex column argued last week that the UK was close to meeting the economic tests for joining. The only obstacle to entry Lex could find was political.

Lex is wrong. Whether the UK meets arbitrary tests at a particular moment is irrelevant. What is right today may be wrong tomorrow. If a country is to join the eurozone, its people must be willing to cope with the consequences forever, however unpleasant they may sometimes be.

True, at present exchange rates, entry looks more plausible than for the past 12 years. The implied rate of the old D-Mark against the pound was 2.46 on May 23, well below the rate at which sterling was put in the old exchange rate mechanism in 1990. The real effective exchange rate measured by JPMorgan is 7 per cent below its average since the beginning of the 1980s. At present rates, adoption of the euro looks reasonable.

The remainder of this column can be read here. Comment from our expert panel appears below.

Read the debate - contributors so far include Willem Buiter and Andrew Smithers.

By Martin Wolf

Will sterling follow the US dollar? As Willem Buiter pointed out last week (The silver lining in sterling’s decline, January 4), this is highly likely. Movements in exchange rates are, to put it mildly, unpredictable. But this one ought to happen. It should also be welcomed. This possibility was, indeed, why the UK had to keep out of the eurozone.

Like the US, the UK has had buoyant credit growth, huge rises in house prices, low private and national savings and a sizeable current account deficit. Like the US, it also absorbed the surplus savings of much of the rest of the world in the 2000s. It is, in short, one of the canonical “Anglo-Saxon” economies.

Yet, in many respects, the UK position is worse than that of the US. The run-up in UK house prices, for example, was much bigger than in the US. On almost any measure, housing valuations and household indebtedness are still more extreme. To take one example, at the end of 2006, household mortgage debt was 126 per cent of disposable income, against a mere 104 per cent in the US.

Moreover, the UK’s current account deficit, at 5.7 per cent of GDP in the third quarter of 2007, was bigger than that of the US. Indeed, it was bigger even than it seems. As Andrew Smithers of London-based research company Smithers & Co argues, the deficit is significantly understated by current statistical conventions. Retained earnings of direct investment are included in data on investment income, but this is not the case for portfolio investment. Since a high proportion of UK-based multinationals are owned by foreign portfolio investors, this exaggerates the UK’s net investment income. The UK’s true current account deficit may have been close to 7 per cent of GDP.

The remainder of this column can be read here. Debate from our panel of economists appears below.

by Willem Buiter

The announcement that the UK Treasury had authorised the creation of a Liquidity Support Facility for Northern Rock at the Bank of England came on September 13, 2007.  The Treasury’s announcement of a guarantee for all of Northern Rock’s deposits (not just the retail deposits) and most of its other unsecured credit followed on September 18.  Two months have passed now, and Northern Rock is still on life support, having drawn over £20 bn from the LSF - just under 20 percent of its assets.   

What went wrong and what lessons can be learnt?

(1) The Tripartite arrangement between the Treasury, the Financial Services Authority and the Bank of England, for dealing with financial instability is flawed. Responsibility for this design flaw must be laid at the door of the man who created the arrangement - the former Chancellor and current Prime Minister, Gordon Brown.  The Treasury, as the dominant partner in the arrangement, also bears primary responsibility for its operational performance. 

The main problem with the arrangement is that it puts the information about individual banks in a different agency (the FSA) from the agency with the liquid financial resources to provide short-term assistance to a troubled bank (the Bank of England).  This happened when the Bank lost banking sector supervision and regulatory responsibility on being made operationally independent for monetary policy by Gordon Brown in 1997.  It’s clear this separation of information and resources does not work. 

Continue reading "The lessons from Northern Rock"