James Mackintosh

I am sad to say I will be leaving this blog, as I will shortly be starting a new role as Investment Editor, writing a daily column on financial markets. Thank you to all readers and commentators.

There will be a pause of a few weeks on the blog until my successor takes over as Comment Editor, running the blog and the comment page. Please bear with us.

James Mackintosh

Nick Clegg’s newfound twin status as political wonder boy and hate figure of the Tory press seems to have made the British Liberal Democrat leader even more popular with the Twittering classes. The second-most popular topic on Twitter right now is “#NickCleggsFault“, mocking the Daily Mail, Daily Telegraph and Spectator for their rabid attacks on the previously-ignored politician.

My current favourite, from a long list, is the last of these three:

@BarneyRonay: In tomorrow’s daily mail: clegg thrashes oap with stick. Drunken clegg vomits on diana memorial. And clegg: my squirrel porn shame

The question is whether voters will like Clegg more because he’s under attack, or like him less because they buy the Mail’s (nonsensical) likening of him to a Nazi, the Telegraph’s assault on his expenses and political donations or the Conservative attempt to take on his policies and character.

Early indications are that the Twitter parody is already having an effect: the Telegraph has been put on the defensive, with Benedict Brogan denying orchestrated efforts by the press to “smear” Clegg. (EDIT: Just come across the Daily Mail-o-matic headline generator, further parodying the paper’s attacks on Clegg by producing random but intelligible Mail-esque Clegg headlines.)

At the very least, the ad hominem attacks must raise his stature. Ken Clarke, Tory former chancellor of the exchequer and now shadow business secretary, wrote in the FT today that Clegg “is a perfectly nice chap but he is not a prime ministerial candidate”. The fact that the Tories have to unleash one of their few remaining Big Beasts to deny that Clegg could be prime minister is extraordinary: even after beating the Tories in some polls, Clegg presumably doesn’t have such delusions of grandeur.

Much of the sudden bounce in the polls must be down to the public finding that actually they rather like Clegg once they see him – for the first time, the televised debate let him make his point directly to a big TV audience, and he did it well. But equally, a 10-point jump cannot be sustainable; he’s bound to slip back, and some of the mud thrown by the Tories will stick.

Any slippage in the polls will be seized on by the media as the bursting of the Clegg bubble (a classic newspaper strategy: build him up, knock him down). But all the Lib Dems need is to take 25% of the vote, well below the 30% they are polling, and they will be back to their 1983 highs (they scored 22% at the last election). That would be a phenomenal outcome for the Lib Dems. Still, some in the party must have fingers and toes crossed in the hope that the bubble lasts to May 6 and the party tops the popular vote; even then, though, the Lib Dems will probably come out third in number of MPs, and Clegg certainly won’t get to be the first Liberal prime minister since David Lloyd George.

James Mackintosh

Nouriel Roubini built his reputation, and that of his Roubini Global Economics consultancy (RGE), on his gloomy, but accurate, predictions of financial doom. He isn’t always right though; and the decision by RGE to publish a call for a military overthrow of the democratic Brazilian government is clearly a mistake.

Ricardo Amaral, a Brazilian economist, pulls no punches in an article on the RGE web site (EDIT: RGE has taken the post down. Here’s the Google cache of the article):

I am suggesting that the military should seize power again in Brazil through a coup d ‘état, because we all know that this massive crime problem that is devastating the Brazilian population can’t be solved under a democratic system of government, and because of the actions that have to be taken to bring peace to all neighborhoods in Brazil. It is time for a benevolent military dictator to take power in Brazil and get the job done.

Mr Amaral even recommends General Augusto Heleno Ribeiro Pereira, commander of the UN Stabilisation Mission in Haiti, as a possible candidate.

This comes after hagiographies of the last three “benevolent dictators” of Brazil, who he credits with laying the groundwork for Brazil’s economic success.

Under the dictatorship of a civilian politician, and later under the dictatorship of the military important economic changes were adopted and implemented in Brazil that planted the seeds for long-term Brazilian economic prosperity.

So who is Mr Amaral? It turns out he’s a direct descendant of José Bonifácio de Andrada e Silva, Brazil’s “patriarch of independence” – and Mr Amaral’s first example of a benevolent dictator, although technically he was minister under the then Prince Regent. Mr Amaral wrote a book about him: “Jose Bonifacio de Andrada e Silva – The Greatest Man in Brazilian History”.

Would Mr Amaral take a post in a new military government? No idea. But here’s what he says in his biography:

Mr. Amaral is a member of the two most politically influential families in Brazilian history the “Andrada Family” and the “Souza Queiroz” – The “Andrada Dynasty” in Brazil is still alive and well, and in the last 200 years we had more than 50 members of our family who were Prime Ministers, Finance Ministers, Secretary of various branches of government, state Governors, Mayors, Attorney General, various Ambassadors, and so on.

It is worth highlighting that RGE explicitly distances himself from anything written for its Economonitor web site, which aims to reflect different views; a sort of online op-ed page. From personal experience I can say it is often hard to convince readers that opinions expressed on the FT op-ed page are not necessarily the opinions of the newspaper; it will be harder still for an economic consultancy to pull that off. One has to wonder how welcome Mr Roubini will be in Brasilia from now on.

James Mackintosh

Thought the short sellers were up to no good? You’re not alone, at least when it comes to short-selling collateralised debt obligations (CDOs), one of the acronyms behind the financial crisis. And now you can sing along to the tune. US hedge fund Magnetar, according to an investigation by ProPublica, took a leading role in pumping up subprime debt by helping create the CDOs it then went on to short. Even better than the article, which should be a must-read for everyone involved with Wall Street, is the music, put together to go with it by This American Life (h/t Daily Intel).

However, we already knew that John Paulson’s Paulson & Co, together with Goldman Sachs, Deutsche Bank and other banks, had done something similar. But the scale of the Magnetar CDO creation seems to set it apart: it sourced the bulk of the CDO market in late 2006, shorting some of the CDO debt it had helped create while buying the super-toxic CDO equity, which CDO creators usually found tough to shift. Its losses on the equity were in at least one case more than covered by the eventual profits from the debt when the CDO tanked, ProPublica reports. Worth noting is Magnetar’s explanation: it insists it was net long all its own CDOs, which means it would lose money when they defaulted, and that it ran a market-neutral strategy, meaning it aimed to make money whether the mortgage/CDO market went up or down.

James Mackintosh

Having run short of ways to distract British voters from the need for drastic cuts, both Labour and the Conservatives have seized on mutuals as part of their strategy. Mutuals, the thinking goes, are nice cuddly non-profit organisations that pose no threat to the future of the planet or the future of finance – unlike nasty profit-hungry multinationals and banks.

On Monday, Labour’s manifesto (complete with a 1930s-themed cover featuring socialist realist art designed to make one think Gordon Brown statues could soon spring up around the country) pledged more mutual involvement in everything from banks to public houses. Here’s the full list of Labour’s mutual pledges:

  • Finance: “will consult on measures to help strengthen” mutual financial services firms. Will “encourage” a mutual solution for Northern Rock (although it is clear there won’t be one, since it also promises to ensure value for the taxpayer)
  • Transport: will “welcome” bids from mutuals, among others, for rail franchises
  • Childcare: will “pioneer mutual federations running groups of local Children’s Centres in the community interest”
  • Health: “across the NHS we will extend the right for staff, particularly nurses, to request to run their own services in the not-for-profit sector”
  • Football: “Registered Supporters Trusts enabled to buy stakes in their club”
  • Pubs: “We will support pubs that have a viable future with a new fund for community ownership”
  • Old buildings: will “review the structures that oversee English Heritage, putting mutual principles at the heart of its governance so that people can have a direct say over the protection and maintenance of Britain’s built historical legacy”
  • Canals and rivers: “British Waterways will be turned into a mutually owned co-operative”

So far, so populist. After all, how could the John Lewis-shopping classes be against mutuals? (For anyone who hasn’t realised, the department store and supermarket group is owned by its employees, who shared a bonus pool of £151m last year as a result.)

I like John Lewis. But Labour – and the Tories, who are also pushing mutual ideas – have misunderstood the lesson from the success of John Lewis. Its mutual model may contribute to its culture, and give staff an incentive to help customers; but equally, it may not. After all, many shareholder-owned retailers also offer strong customer service and value for money. What is clear is that fierce competition in retailing gives the company, and hence its management and staff, a strong incentive to provide keen pricing and good customer service.

What of the rest of the mutual sector? Currently, the biggest mutual businesses are building societies and insurers, plus the Co-operative retail-to-banking group. Supporters of mutuals make a clear distinction: the building societies that converted to banks had to be rescued (Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester); the building societies that stayed mutual did not. Mutuals, supporters argue, are inherently less likely to blow up because they are “less prone than banks to pursue risky speculative activity”.

Unfortunately, this just isn’t true. It is not just that Dunfermline building society blew up spectacularly after pretty much the same misguided property investments as HBOS. It is not just that Presbyterian Mutual Society in Northern Ireland collapsed after a bank run, just like Northern Rock, and had made lots of buy-to-let loans, betting on the frothiest part of the mortgage market bubble. It is not just that 10 troubled building societies, most recently Stroud & Swindon, were rescued by mutual friends in the sector.

What really shows the lack of safety of the mutual movement is that the last major banking crisis in the US, the savings & loans disaster, was in fact a systemic failure caused by the US equivalent of building societies, most of which were mutual. Before that, America’s mutual savings banks fell as a series of dominos in the early 1980s.

Of course, this is not to say that banks are perfect, to put it mildly. But my point is: neither are mutuals.

As with everything, it is a question of incentives. Mutuals run by their staff – such as GP practices, owned by doctors, or Lambeth’s local authority leisure centres, outsourced to a mutual – are naturally run to suit their owners. This can lead to terrible service, as at Lambeth’s swimming pools, or short working hours at inconvenient times for patients, as in doctors’ surgeries. Competition can stop mutuals becoming self-serving, as with John Lewis, but it is hard to apply competition to GPs or large leisure centres.

This is why the Tory plans are also likely to fail, if implemented. David Cameron wants “to let nurses manage their own clinics, job advisers take over employment offices and teachers run their own schools”. Are they likely to favour staff or customers/patients/students? My guess is that if staff have no one but the government looking over their shoulder, the organisations will have even more trouble motivating staff to work hard and provide great customer service than other ownership models.

Here are my three top problems with mutuals:

The first is corporate governance. The people who run large mutuals have almost no accountability to their owners. True, shareholders in big businesses relatively rarely act to throw out management; but the management of underperforming companies are frequently ejected through hostile takeovers. The lack of accountability of management at mutuals is a serious problem if they operate in a less than fully competitive environment. The wave of demutualisations in the 1990s made management at the remaining mutuals far more accountable than it had been; but public pressure has died down since the prospect of payouts went away, and renewed member apathy has left management with few checks on what it can do.

Second, linked to this, is the question of efficient use of resources. In competitive markets mutuals have the same pressures as non-mutuals. But in less competitive markets, such as banking or medical care, mutuals are under little pressure from their owners to use resources efficiently; if they are staff-owned, rather than customer-owned, they are likely to face pressure from their owners for the inefficient use of resources, in the form of above-market pay levels.

Third, mutuals distort the allocation of resources in the economy, by tying up capital far more tightly than any public company. If they are run inefficiently, they cannot be taken out in a hostile takeover, and may – particularly under a Labour administration – find it easier to access state funds to keep them in business.

James Mackintosh

“Tory win best for economy say top bankers” screamed the Telegraph’s Friday splash headline (online, the story was downplayed and detailed, wierdly). The “top bankers” in question were Deutsche Bank’s London strategy team – great strategists, but perhaps surprised to find themselves labelled thus. Quibbles aside, a detailed strategy report from DB suggests a Tory government with plans for faster cuts to the deficit would be likely to be better for sterling, might help prevent a downgrade of the country by ratings agencies and could result in lower interest rates. Here’s what Jim Reid says in the report:

The best result for UK equities is likely to be an outright victory for the Conservative party. Although an outright Labour victory would help create certainty, the lack of urgency in their deficit reduction plans may be negative for Gilt yields and may alert the rating agencies. If Gilt yields aren’t negatively impacted by a Labour victory then their ‘spending for longer’ policy may actually be better for markets than a Conservative administration committed to fiscal cutbacks.

But the actual deficit policies from the Tories, the report accepts, don’t look much different to Labour over the term of the next parliament – the Tories have just said they would bring the cuts in sooner.

James Mackintosh

Corporate board members don’t quite have a fiduciary duty to oppose tax rises on their companies, but chief executives are hardly likely to be in favour. So, surprise surprise, herds of UK executives are bleating about the dangers of Labour’s planned rise in National Insurance, brilliantly rebranded the “jobs tax” by the Tories. And it has become a major problem for Labour.

Should we listen to business complaints? No, and yes.

No: after all, they would say that, wouldn’t they? As an employer myself, I’m strongly against a rise in NI, which I will have to pay. But I’m also, on the same purely selfish grounds, against a rise in income tax, in VAT, parking charges or the price of milk, against inflation, deflation and mice. Quite rightly, I just get my one vote, and no one is interested in my selfish opposition to any of these things. Ask companies whether they would prefer the tax rise in the form of higher corporation tax instead, and you can guarantee a stony silence from boardrooms.

But yes, there is a reason we should listen: The NI rise is a bad way to pay for the debt crisis. Leaving aside the question of how much of the deficit reduction should come from tax rises and how much from spending cuts, both the employer and employee parts of NI are a poor way to raise additional tax.

Employer NI is, as the Tories insist, a tax on jobs: the more people a company employs, and the more it pays its staff, the more it pays in tax. This at a time when the government claims to be doing all it can to reduce unemployment. My colleague Chris Giles disagrees completely. But while all taxes may, as he points out, be a tax on jobs, there is an adjustment period to new employee taxes during which employees have a lower standard of living, before they can demand higher wages to compensate – particularly at a time when employers are finding it easy to resist wage hikes. Raise employer NI, and there is an immediate incentive for companies to reduce staffing, which is hard (particularly in industries with collective bargaining) to pass on in lower wages. With low inflation, it takes longer to pass this on in future through lower wage rises, too.

Employee NI is also a bad tax. It is a tax on earned income, not paid by those with unearned income. Notting Hill trustafarians, as well as pensioners, thus miss out. Weird when you think about it, but Labour is increasing taxes on labour. If you want to encourage hard work, and discourage lazing about extracting rents, then tax the extraction of rent, not hard work. Duh. It would be far better to raise income tax, which treats income equally – except that Alistair Darling gambled that people wouldn’t notice an NI rise. The chancellor seems to have been right – but companies did notice.

Unfortunately Gordon Brown mishandled the debate spectacularly (EDIT: Dan Roberts sets this out nicely), accusing business of having been “deceived” by the Tories’ plan to pay for the scrapping of the majority of the NI rise through magical mystery savings, supposedly from additional “efficiency” savings (Gerry Grimstone, one of those closely involved in the government’s efficiency plan, insists such savings cannot be conjured up suddenly).

This, of course, is not relevant to corporate concerns: they don’t care whether the next government pays to get rid of NI through efficiency savings, genuine spending cuts or tax rises elsewhere – just as long as it isn’t a tax on them.

Related reading:

UK election 2010: National insurance nonsense FT Money Supply blog

James Mackintosh

The Conservatives have a secret plan to save Britain’s economy. Hidden in their financial documents (that’s journalist-speak for “in the briefing notes”) is an explanation of how the opposition’s tax cut plan can be squared with gilt investors baying for deep cuts: The Tories would push through immediate spending cuts of 0.5% of GDP, or £6bn.

Sounds great. You can buy a lot with £6bn nowadays: two aircraft carriers and change, or the whole of the British bank bail-out.

But there are two caveats. And they show the Tories have got zero clue about the level of spending cuts needed to satisfy the markets and maintain the country’s AAA rating.

First, this is a one-off cut. After saving an extra £6bn in 2010-11, the Tories would splurge all future savings on the cost of reversing (“most of”) Labour’s planned National Insurance rise and a freeze on council tax. Popular with the Tory base, tax cuts.

Second, the £6bn is a one-off cut equal to 0.7% of the country’s net debt. Not the deficit, but the outstanding balance. Consider this: if you had a £250,000 mortgage and were struggling with the monthly payments, this is equivalent to making a one-off payment of £1,749, then thinking you had fixed your debt problem so you could go out and buy new iPads for the whole family every year.

Here’s what the Tories say:

This is just under 0.5% of GDP and less than 1% of total Government spending. It is the result of a twin assessment of what is necessary in order to retain Britain’s credit rating and restore confidence in our economy, and what is achievable in-year without affecting the quality of front line services…

Our judgement is that this is the right amount of additional in-year savings needed to establish credibility and restore confidence in our economy.

Are they right? Is this going to solve the the market’s perception that Britain is a worse risk than, for example, Italy? Is it going to end the risk of credit rating downgrades? Simply put, no.

Here’s the reality: the voters would not accept David Cameron and George Osborne’s efforts to sell an “age of austerity”. So the Tories have switched from fiscal responsiblity to fiscal denial, spending money the country doesn’t have in the hope that markets will forgive them. Dan Roberts summed up the optics of the Tory shift nicely in the Guardian:

Either Osborne was right that Britain’s colossal deficit threatens to wreck the economy, in which case this is a reckless piece of political grandstanding. Or perhaps he is right now that there is enough wiggle-room to give voters some money, in which case what was all that stuff about economic armageddon?

A one-off £6bn saving is neither here nor there. Luckily for the markets, Osborne almost certainly knows this and will push through a true austerity budget after the election. Unluckily for democracy, the voters won’t be told what is coming, at least by the Tories.

James Mackintosh

Given the difficulty telling the British political parties apart on serious issues, the creation of VoteForPolicies.org.uk is an eye-opener.

The site takes you through a blind tasting menu of policies, then tells you at the end which party you prefer, based on their policies rather than on where their leaders went to school or whether they are balding.

Surprisingly, the Green party is currently ahead with almost a third of voters. Even I – brought up in Green-infested Gloucestershire, and therefore deeply sceptical of the economic and political nonsense the party plasters everywhere – managed to pick one of their policies. Second are the Liberal Democrats, followed by Labour and the Conservatives.

The test is well worth taking. Unfortunately, it does not improve the level of debate that much: were voters actually to pay attention to it, party policies would become even more tactical and short-termist (although after the Tory tax and spend promises over the weekend, one has to wonder if political promises can get any more cynical).

James Mackintosh

Here’s the problem: the public does not realise that truly enormous cuts to public service and/or massive tax rises are required. The politicians are too scared to tell them, for fear of losing the election. So after the election, whoever wins won’t have a mandate to push through the big cuts needed. Cue strikes, disappointment, attempts by new government to delay action, a sterling crisis, and possibly even an IMF rescue.

Politicians are being advised by some to keep schtum. But the solution should be for politicians of all the parties to set out NOW how bad things really are. The deficit is 11.8% of GDP, and has to be cut. Even on Labour’s planned cuts, if it sticks to its promise of protecting frontline services and overseas aid, other services need cuts of 18%-24% over four years. This is a profound change to the way the country operates; the public needs to be prepared, and needs to debate the issues before the election.

But no party is willing to set out the precise cuts, because the other side will attack them – as we’ve seen from the “Labour investment vs Tory cuts” lie, and from David Cameron’s backing away from the Conservative promise of an “age of austerity”. As a result, half of voters don’t believe action is needed, with almost half arguing that public spending should rise. They are going to get a shock when the cuts start to bite, and they are not going to be happy.

It is time to call on the Queen. Heads need to be banged together. Gordon Brown, Cameron and Nick Clegg should be forced to set out their policies in detail: all agree, after all, that big cuts are needed, they just don’t publicise it (much). There is very little difference between Cameron and Brown on the speed of the cuts, for all that both sides are trying to make that the issue. The political decision voters should face is whether they want Labour cuts or Tory cuts: and the only way to get that is if the politicians are honest.

The primary role of the head of state is surely to guarantee that democracy functions. At the moment the democratic debate is not working properly, which could have profound effects on the future of the country. A summons to the palace for the three leaders would probably do it, but if not, a simple public comment: the Queen continues to have the most powerful platform in the country. But if she’s too bound by constitutional convention to intervene, it just goes to show that it is time to move to a new constitutional set up, with a proper head of state able to defend democracy.

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Politics, economics, high finance and morality – this blog addresses the issues being considered by the FT’s comment team, and their thoughts.

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Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.


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