Much ado about nothing

At this time of the year, every January, there are some high-profile events that are worth scrutinising for signs that the movers and shakers are alert to, or even aware of, the great economic and financial crash that is bearing down on the whole world.  If they are aware of the danger and alert to the need to take avoiding action, it is understandable that they will not admit it for fear of scaring the horses.  The last thing they want is for the horses to bolt causing panic among their populations.  Once the wheels start coming of the wagons nobody has any trust in the drivers and confidence evaporates.  If they are alert to the danger there would be some signs that they are doing something to avoid the crash.  Unfortunately there are no such signs.

It seems that the warning that became a reality in 2008 is being ignored.  The lessons to be learned from the scandalous behaviour of the banks and their investment bankers, including the collapse of Lehman Brothers, have not been learnt.  In the UK there has been no proper investigation in to the actions and behaviour within the financial services sector.  It has been confirmed that the Financial Conduct Authority is not to proceed with the promised inquiry.  In the Republic of Ireland there has been a parliamentary inquiry that has been heavily politicised, with much arguing and dissent about the conclusions.  The conclusions have not been made public, but have been leaked, and with the Irish general election in train it remains to be seen whether they will appear during the election period.  However, the Inquiry was held in public and it is very clear about what happened in Ireland.  The UK should take note and act accordingly.

The first thing to say is, thank God for Gordon Brown and his contrived convergence conditions for entering the Euro Zone.  He kept us out of the Euro despite great pressure from the likes of Blair and Mandelson, and heaps of criticism from Clegg and the LibDems.  They were proved wrong and he was proved right, to the extent that there will be no further suggestion the UK give up the Pound Sterling.  I will go as far to say that had the Labour Chancellor kept to his initial fiscal prudence, instead of opening the public spending floodgates in 2001, he would have gone down in history as one of the great Chancellors of the Exchequer.  His resentment and sense of entitlement to the position of Prime Minister was his undoing.  So that when the ship hit the Rock in 2007 he was left floundering, and with disbelief of the severity of his situation, he assumed the Captains position but lost his vessel.  He was not helped by Brussels and Frankfurt, which considered the financial crisis to be an Anglo-American affair from which they were immune.  The term Euro-gloating would be appropriate.

They would quickly find out that the Euro was also in danger.  Portugal, Italy, Greece and Spain (the PIGS) for various reasons were experiencing problems maintaining their positions within the Euro Zone.  A common factor was their contrived membership as they did not honestly meet the convergence criteria and they were heavily in debt.  In Spain there was also a criminality factor leading to a property bubble.  The majority of illegal drugs entering Europe do so via Spain.  Much of the proceeds (in Pesetas) was undeclared and held in cash.  When the switch to the Euro took place it was not possible for the crooks to exchange their ill-gotten gains at the bank, so a giant money laundering exercise took place.  This consisted of land purchase, bribing public officials to grant planning permission, building on the Costas, and sales to foreigners.

Something a little similar was happening in Ireland.  Also, Brian ‘Biffo’ Cowen, who was Finance Minister, just like Gordon Brown had his sights on becoming Taoiseach (Prime Minister).  This seems to have affected his judgement.  To be fair, Ireland unlike the PIGS did genuinely meet the convergence criteria.  The public finances were well-managed and the national debt was tiny.  The Celtic Tiger economy was an example for all the aspiring Eastern European countries.  Of course this was built on the largesse emanating from Brussels, a grateful Brussels, for the reversal of the two referendum ‘no’ votes to the Nice and Lisbon Treaties.  It created a totally unrealistic and unsustainable public perception of the Irish economy.  The resulting property boom was the result of low interest rates.  The low rate was dictated by Germany, when a higher rate would have been better for Ireland.  With no control over the rate, the country was awash with money and inevitably the banks were irresponsible.  The chancer property developers had no trouble getting loans, all they needed were the planning permissions.  These were provided by the politicians and the fable of the Fianna Fail hospitality tent at the Galway Races became widespread.  This was were the bankers, developers and FF government ministers got together.  At the Inquiry this was vehemently denied by Biffo.  What is indisputable is that there were planning permissions for more houses than the nation required.  The surplus properties were outside Dublin, when the real demand was in Dublin where there is a shortage.  Also, the wrong types of property were being built.  It comes as a surprise to find blocks of flats in even small rural towns.  It is also amazing to know that 80% of the loans being made by Irish Nationwide building society were being made to developers.  Where loans were being made to house purchasers, people were being forced to take mortgages for larger amounts than they required.  This was crazy behaviour resulting in raging house price inflation.

Much the same was happening in the UK.  We need to learn the lessons and as we are not to have an inquiry dealing with the financial crisis, we should consider very carefully the Irish experience.  Two pieces of evidence to the Irish Inquiry are very revealing.  Ms Hunt, Head of Research for CBRE Ireland, told the Inquiry that her company believed that a soft landing was plausible.   Mr Moran, Managing Director of Jones Lang LaSalle, said however that they did not anticipate the level of correction that followed.  Asked whether they had a moral obligation to buyers, he said absolutely not and buyers went in with their eyes wide open.

These two links to RTE reports are self-explanatory;

http://www.rte.ie/news/business/2015/0402/691574-bank-inquiry-property/ and

http://www.rte.ie/news/2016/0122/762192-banking-inquiry-report/

 

The other important points are that the Irish Government mismanaged the crisis, such as the 100% guarantee for bank deposits that they never expected to meet but which have cost the taxpayers nearly 50 million Euro, and they paid more than value for the Irish banks that they bailed out because the banks were dishonest about their liabilities.  The outcome proved to be disastrous.  When the situation became unmanageable they approached Brussels requesting a bridging loan, but instead were forced in to a bailout against their wishes.  To be clear, this bailout was not about saving the Irish, it was about saving the Euro.

Well the Euro is not out of the woods yet and there are warnings of another impending financial bubble.  Check out these reports;

http://www.bbc.co.uk/news/business-34223544 and

http://www.rte.ie/news/business/2015/1211/752787-yves-mersch-ecb/

 

When it comes to Quantitative Easing, the never-ending deflation in Japan proves that this policy is a failure.  They have resorted to minus interest rates while they chase the inflation target of 2%.  They have a shrinking domestic market due to an ageing population.  These links explain it much better than I can;

http://www.rte.ie/news/business/2015/1224/756059-japan-economy/

http://www.rte.ie/news/business/2016/0129/763797-bank-of-japan/

http://www.rte.ie/news/business/2016/0209/766506-japan-yields-and-stocks/

 

The problem is how is it to  be reversed?  There is no doubt that QE leads to increased national debt.  It is clear that governments are transferring national public debt to personal debt through fiscal policies.  In the UK George Osborne has repeatedly failed to meet his deficit reduction targets, never mind coming up with any plan to reduce the national debt.  Mark Carney continues to give forward guidance, but fails to act on it.  He is now indicating that he may remain in post as Governor of the Bank of England for the full eight year term.  I do not think the country can afford a further three years of inaction.  After great expectations he is proving to be a disappointment.  If the country cannot cope with gradual and small increases to the base interest rate, it confirms what a dire state the economy is in.  See http://www.bbc.co.uk/news/business-35493474

George Osborne promised to rebalance the economy by switching the emphasis to manufacturing.  He has failed.  The steel industry, Rolls-Royce engines and British Aerospace are the high-profile examples of cutbacks.  Sheffield Forgemasters, who he withheld a loan from, has also announced cutbacks.  His plan B was to rebalance the economy by geography with the Northern Powerhouse.  It did not get off to a good start with delays to transport projects.  The immediate economic improvement seems to be in the Midlands.  He might be better advised to step back and let the economy take care of itself.

Which leads to the World Economic Forum in Davos, and the relevance of this post headline.  George, the Prime Minister and Business Secretary were all attending this year’s Forum.  The PM seemed more concerned to stir business leaders to speak up for the UKs continued membership of the EU.  They may have been networking, but nothing worthwhile has emerged.  In fact they appear to have been partying at the taxpayers expense, rather like the hospitality tent at Galway Races.  They were not alone.  Among the preponderance of politicians who were attending was the Irish Taoiseach and the US Vice-President, Joe Biden, whose priority was to admonish business leaders for not implementing LGBT rights.  Predictably, ex-PM Tony Blair was hanging-on.  This year also saw the return of the celebrity campaigners, mostly self-appointed.

Reports indicate extravagant entertaining and a return to pre-2008 attitudes.  The associated survey of global chief executives revealed that only 27% thought growth would improve.  China is the main concern along with falling oil prices.  The previous week Royal Bank of Scotland went in to panic mode and advised investors to sell shares and put their money in to bonds.  Perhaps they should have explained that they did not mean their own and other bank shares.  Not only is the WEF irrelevant, it is also an embarrassment and perceived as an example of western decadence.  David Cameron and Enda Kenny no doubt took the opportunity to line up job opportunities for when they are no longer prime ministers.  Barack Obama was not attending and never has.  Perhaps next year the ex-President will be there, along with Bill Clinton and Tony Blair.

The President of the United States has delivered his eighth and last State of the Union address to Congress, that can only be described as delusional and a party political speech in support of the Democratic Party candidate (whoever that might be).  He took the opportunity to hit back at his critics, defend his legacy and strike an optimistic note for America’s future.  So here is a taste of what he said;

“Our unique strengths as a nation – our optimism and work ethic, our spirit of discovery and innovation, our diversity and commitment to the rule of law – these things give us everything we need to ensure prosperity and security for generations to come.”  [comment:- hardly unique, sounds like David Cameron]

“The USA is the most powerful nation on Earth.  We spend more on the military than the next eight nations combined.  No nation dares attack us or our allies because they know it is the path to ruin.”  [comment:- it used to be more than the next eleven countries combined]

“Anyone claiming that America’s economy is in decline is peddling fiction.”  [comment:- the US national debt is close to $19 trillion and growing faster, with annual interest of $545 billion, that is $17,311 per second, and equates to $58,516 per citizen – it is 104.58% of GDP]

Senate Speaker, Paul Ryan, accused the president of not confronting reality.  The official Republican reply was that Obama’s policies make life harder for working Americans and put the country at needless risk.  A NBC news poll indicated that 70% of people believe the country is on wrong track and 73% want next President to change course.  Obama’s approval rating is 48%.

Donald Trump’s response; it was boring and rambling with no substance.  And he should know.

So there you go – much ado about nothing.

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