Monday, 23 November 2009

Dumb and dumberer Pt 1

Starting with the dumb, professional commentators, authors, telly experts, think tank bods and what not frequently attach far too much importance to ideas. And so it was this morning on Radio 4, which broadcast some bloke who’d written a book and Will Hutton wittering on about the credit crunch.

Obviously I’d not fully woken up, but from what I can remember both appeared pretty certain the credit crunch will prove an intellectual watershed comparable to the perceived death of Keynesianism in the 70s and its subsequent replacement by the Anglo-Saxon model of capitalism.

For me this is the Hollywood version of events, except rather than some grave injustice being righted in a courtroom by some handsome and/or beautiful lawyer in the final ten minutes, over the next few years academics, regulators, governments, bankers and so on are presumably going to see the error of their ways and adopt a more touchy, feely, fluffy notion of capitalism.

The reality of course is that the righting of wrongs is so unusual it’s worth making a film about it when it happens. Similarly, comparing now with the 70s illustrates why the credit crunch is unlikely to have a Hollywood ending. For one thing (and ignoring Scandinavian as well as French and German notions of social democracy), thanks to Milton Friedman and Keith Joseph, the UK in the 1970s had a readymade alternative intellectual foundation for economic policy waiting to take over.

By contrast, right now, we simply don’t have an alternative of any substance. Indeed, the efforts of say a James Purnell to encourage the adoption of god knows what kind of political philosophy illustrates how Labour for one isn’t even in the right ball park.

For another the exorcism of Keynesianism was as much an institutional process as it was an intellectual one. So while this morning’s discussants cited 1970s style industrial relations, they forgot to acknowledge the very real changes made to their substance and conduct that were so integral to Thatcherism. Put simply trade unions were booted out of the polity and left sitting on increasingly restricted sidelines throughout much of the 80s and 90s.

By contrast the bankers and financiers who caused the credit crunch are still in place and still able to influence policy, give or take a few meaningless public gestures and the odd early retirement. I reckon this institutional stasis alone will prove enough to limit the significance of any changes. So sure undergraduate degree options that focus on financial crises will prove popular for the next few years or so, but apart from that so feckin what?

The dumberer bit refers to the masturbatory navel gazing some academic economists appear to be engaging in. Must finish that bit off tomorrow.

Sunday, 22 November 2009

The Gnome (of Zurich) is dead long live the Gnome

Even if ratings agencies are a necessary evil, do they have to be so shite? By this I don't mean the jaw-droppingly obvious (and very lucrative) conflict of interest that saw them being paid by sub-prime debt salesmen to rate the self same sub-prime debt. And its not the fact the AAA ratings they actually awarded (which increased the debt's value and enabled it to be sold) turned out to be completely wrong either (ahh, but that was the credit rating, not its liquidity rating or some such bollocks said the rating agency PR department in the earlier stages of the crunch). Nah, I'm more thinking more about their general stupidity as opposed to collosal incompetence.

So there was me listening in on a conference call hosted by one of the big 3 global rating agencies on the future of UK high street banking. To quickly summarise the view presented by the agency (1) UK high street banking has seen a long term trend towards concentration and (2) the sell-off of primarily retail bank assets being forced on the two banks that have received the most state aid, by allowing new entrants into the market, could well see the fundamental restructuring of the market into one with more big players and more competition. This mattered because in the rating agency's (woefully simplistic) view more competition = less profit.

What an utter pile of ignorant pish. Even ignoring the untested assumptions about competition being presented, besides the sell-offs and the potential for say Tesco and Virgin to use them as a means of setting up shop (as banks) on the high street, you've also already seen foreign banks leave the UK market (think anything vaguely Icelandic), the Nationwide Building Society merge with or acquire the Portman, Derbyshire, Cheshire and Dunfermline building societies and Santander add the Bradford & Bingley and Alliance & Leicster to its existing Abbey business during the crunch.

A fundamental restructuring that will produce a more competitive market? Swings and roundabouts more like and thats being generous. So while RBS and Lloyds have to sell off over 900 branches over the next however many years, Santander alone has already added 451 branches and 140 agencies (god bless you wikipedia) to its network.

So there you are then - in 2009, 2010 and 2011 (and possibly beyond), the UK high street banking market will be more concetrated than it was up until 2007. Its not an especially complicated conclusion, more a bloody obvious one thats hard to disagree with. It's also one that anyone with access to wikipedia and could have worked out. But, not this rating agency. I wonder why?

Obviously, what they were saying (1) was a big notion and as such more likely to grab people's attention and (2)was cautious, which presumably is an impression they want to convey given their sub-prime experience. I'm also guessing (3) its a product of the kind of analysis they produce, which seems to fixate on sticking today's wanked up business headlines to the side of overly complex financial modelling at a remove from actual events.

Except, given the influence rating agencies actually have over corporate and public policy (e.g. Britain needs to cut public spending to preserve its rating agency awarded credit rating) such basic ignorance strikes me as simply unacceptable.