Banditry: The idle musings of John B

As far as I can make out with reference to the Grauniad/Barclays tax evasion dossier:

1) Barclays has done nothing illegal
2) Barclays hasn’t receieved any aid from the UK taxpayer.

…so this isn’t an issue.

Should Barclays request aid from the UK taxpayer at any point, its activities should, obviously, be taken into account when deciding how much of a haircut its shareholders deserve to be given. But at the moment, it’s trying to stop the UK taxpayer from making it take ‘aid’, which is kind-of the opposite…

RBS:

As part of our implementation of FSA guidelines around Anti-Money Laundering activities, we introduced questions on Politically Exposed Persons as part of our account opening procedures.

Genius financial columnist Nelson:

what on earth is a Politically Exposed Person?

The FSA anti-money-laundering guidelines, which have been in force for three years:

customers who, by virtue of their position in public life, are vulnerable to corruption

This isn’t earth-shattering stuff; any professional or financial services firm has to ask those questions of its clients, and RBS would be remiss for not doing so. Taking UK political party membership as an indication of PEP status was technically incorrect, but fair enough I reckon – if you’re a member of a UK political party, you’re either corrupt, stupid or massively over-optimistic…

Nelson then goes off into an insanely paranoid rant about banks asking people whether they occupy any political offices. Oh noes! A majority-government-owned institution is asking me whether I’m a political party member. The gulags surely do beckon…

If you’re worried about this, you’re a moron.

No.

Or:

Britain is not Iceland. Iceland is the size of Coventry. Britain is the fifth-largest economy in the world (although it also has the third-largest current account deficit). The pound is still a reserve currency that people want to buy, despite the efforts of the speculators. We are bankrupt only in the sense that we could not pay if all debts were called in right now – which is true of many countries. A falling pound will be good for exports, assuming there is someone to buy them. The UK’s credit rating was reaffirmed last week. The only thing that could push Britain into bankruptcy would be a full-scale panic.

OK, so we appear to be in the early stages of a major recession, which may well go on for years. A whole load of people may well lose their jobs, pay rises will be a thing of the past for people who keep them, and overall incomes from working will fall substantially.

Meanwhile, inflation has fallen to pretty much nothing. Falling fuel and food prices are among the main drivers of the fall in inflation. Imported consumer goods, of the sort that kept inflation low during the boom, have risen in price due to the pound’s devaluation.

So let’s think about the people who’re left worst-off by this. Are they:
1) people living on fixed incomes (ie pensions or savings), who’re seeing their living standards remain pretty much flat, who have no chance of a catastrophic decline in incomes, and who spend disproportionately on heating;
or:
2) people not living on fixed incomes, who’re seeing their living standards fall, who’re at risk of losing their jobs, and who’re much more likely to spend on imports, but who have relatively large savings to cushion the blow if anything bad happens;
or:
3) people not living on fixed incomes, who’re seeing their living standards fall, who’re at risk of losing their jobs, and who’re much more likely to spend on imports, but who have debts to service that will utterly crucify them if bad things happen?

The answer, fairly obviously, is group 3. People with decent net savings are just fine: if they never had jobs, they’re insulated from anything bad happening anyway; if they have jobs now, then they can afford the time taken to find a new job if they lose the current one.

So the new Conservative party policy of punishing people in group 3 to reward people in group 1 [*] can only be viewed in two ways: either breathtaking, witless stupidity, or the intergenerational equivalent of class warfare, deliberately screwing over economically productive people even more than the recession will do anyway to give money to the elderly, who the recession won’t have any impact on. [***]

[*] in group 2, where I’m lucky enough to sit, we’ll gain slightly on the tax breaks but lose out from the spending cuts [**].

[**] To “they’ll be funded by cutting waste not productive spending”-ists, that’s not the point. If you’ve got a plan to cut waste, great – but you still need to explain why the benefits from that plan should accrue to people who’re doing fine, rather than something sensible like a rise in the income tax allowance to benefit the working poor.

[***] Of course, the working poor are busy either working or drinking themselves into a stupor to forget their miserable lives, whilst pensioners spend their time talking to Edna in the post office about absolutely nothing, and therefore voting rates for the latter group are far higher than the former. This is another reason why democracy is A Bit Pants, Even If It’s Better Than The Alternatives.

So, my decision a year ago to stake my life that house prices wouldn’t fall by more than 20% in 2008 appears to have been vindicated. That’s just as well. And I’m still projecting house prices from Jan 2008 – Dec 2012 to outperform the base rate (OK, the base rate cuts have helped with this one…)

When someone buys a country’s government bond, the government needs to pay it back on a specific date. If the government refuses to do so, there will be a total collapse in international confidence in the debt of the country and of all its banks, companies and residents, a currency crisis, and generally a wide range of Very Bad Consequences.

When someone works for a country’s government and is told they’ll get a nice fat pension, the government can decide to not pay it. This will upset the person who works for the government quite a lot, and might be perceived as somewhat unfair. However, the consequences for the country’s ability to borrow, invest and trade in international markets are non-existent.

Therefore, anyone who counts public sector pensions as a liability faced by the UK government in the context of the current financial crisis (generally as a way of saying ‘ooh, we’re nearly as bad as Iceland’ – Nadeem Walayat, this means you) either doesn’t understand what they’re talking about, or is trying to mislead their audience into thinking things are much worse than they really are.

A commenter at CiF, against all odds, cites some relevant statistics:

Financial services which – some people fondly believe – is “all we do nowadays” made up only about 5% of the economy at their height, (rather less now, methinks), whilst industry accounts – according to that CIA thing everybody else seems to be quoting from – for 23.4% of GDP.

In Germany, by contrast, industry makes up a massively larger 31.1% of GDP. (With France a measly 20.6%, the US an even more measly 19.8%, and mighty Japan, at 26.5% only 2% bigger.)

(Link)

The Bill Emmott piece on which he’s commenting isn’t at all bad, either. Although the total, ruinous collapse of the dollar next year is going to be the major story…

So the fairly essential cuts in interest rates are hitting savers. As a net saver, I can only say this is a good thing.

There are approximately four sorts of people in the UK, financially speaking:
1) people with no assets or liabilities. “The poor”.
2) people with houses and mortgages. “Hard-working families”.
3) people with some savings, no house and no mortgage. “People who noticed there was a bloody great house price bubble”.
4) people with houses, savings, and no mortgages. “Jammy sods”.

Cutting the interest rate benefits people in group 2, at the expense of groups 3 and 4. But the house price crash has massively disbenefited people in group 2, to the benefit (either now or at some point in the next couple of years) of people in group 3. The fact that we’ll lose out on interest in the short run is more or less irrelevant, since by next year our cash will be worth about 1.5x what it was in 2007 in terms of “how much house can you get?”. So it’d be churlish for people in group 3 to worry too much about bailing out the poor buggers in group 2 – we’ll just buy their houses for next-to-nothing…

People in group 4 are unequivocally hit both by the house price crash and by the interest rate cut. But since their net worth is enormous by comparison with everyone else, even after both these adverse events, and since they’re the ones who benefited from 40 years of house price inflation and the enormous wealth transfer from the young to the old that this entailed, their plight is pretty much inconsequential.

And the poor? Well, they’re pretty much still poor, just as they were during the boom.

BBC City Diarist ‘Stephen’:

During the chancellor’s pre-Budget report and the opposition’s response, there were alternate gasps of disbelief and jeers of contempt across our trading floor. It’s utterly bewildering how our political system has managed to put such innumerates, however well-meaning, in charge of our economy.

Hmm. Perhaps, after you – not the politicians at all – were directly responsible for screwing the economy, you might lay off on jeering at them for trying to clean up the mess you created? And given your complete inability to price or understand liquidity risk, perhaps ‘innumeracy’ jibes might be considered especially inappropriate?

As ever, Dan Davies has the sensible economist’s take on things: viz, it’s all to the good but probably won’t be enough. And prophet of doom Willem Buiters is as terrifying, well-argued and appallingly badly written as ever.

If anyone uses the phrase ‘the cupboard is bare’ when referring to the UK’s current economic position, this is an excellent indicator that they are entirely clueless about it. For one, it’s an embarrassingly trite and twee metaphor, unlikely to be used by anyone literate; for two, it paints an entirely false picture of the government’s financial situation (also, note that the government precisely and exactly did pay down the national debt as a proportion of GDP, which is the only figure that matters, during the boom times, which makes criticising them for not doing so particularly weird).

As Chris highlights (while also, correctly, pointing out that the current ‘sterling crash’ isn’t one at all – if it were, the pound would have fallen significantly against the euro, which it hasn’t. Rather, it’s a dollar/yen rally), people are still falling over themselves to lend the government money at very low interest rates. That’s an indicator that outside of cutesy-talking-point land, serious people accept there’s plenty of, err, cupboard-room.

While I’m here, a couple of points on the Centre for Policy Studies report that purports to show the UK has a ginormously terrifying public debt. For a start, it’s written by a Tory MP – aren’t think-tanks producing this kind of report supposed to maintain some vague pretence of not being entirely motivated by partisan hackery?

Content-wise, it’s the same report the CPS churn out every year, with the figures slightly updated. And as always, it’s spun ridiculously: the angle is approximately “when you include the PFI Enron accounting, Network Rail’s nationalised in all but name-ness, bank bits, various other dodges and public sector pensions, the national debt is enormous”. In fact, the only non-trivial sums it identifies are PFI payments – which it exaggerates by a factor of more than three by failing to follow anything even vaguely resembling accounting standards, as I’ve already pointed out here – and public sector pensions, which are an order of magnitude larger than any of the other factor, and are the only way authors of this kind of paper can get from “the national debt is 42% of GDP instead of 39%, nobody cares” to “oh my god, the national debt is 150% of GDP and we’re all ruined due to Evil Labour”.

Quite how the hell public sector pensions should be accounted for is a tough question, and not one which has been satisfactorily resolved anywhere by anybody. However, suggesting that the UK is particularly screwed because of Labour’s incompetence and dodging, when actually the problem has existed forever and in every developed economy, is grossly dishonest. It also doesn’t represent debt in the sense of ‘people who have pieces of paper saying you’ll pay them and who’ll sue you if you don’t’ – it’s just a promise from politicians to be nice to old people, and we all know about the iron-like unbreakability of politicians’ promises…

[*] Yes, Network Rail’s GBP20bn debt should be included in the headline figures, as it’s government-guaranteed and not secured against tradeable assets. So should the real PFI number of c.GBP30bn; together, these add an extra 4-5% of GDP to the official national debt figure. I’m happy to confirm for the benefit of readers who question my political neutrality that these should be classed in the national debt proper and that Labour are slippery sods for not doing so (although on the other hand, they were the first ever UK government to move to GAAP for public sector accounting and are one of the first globally to adopt IFRS).

The banks shouldn’t be: it doesn’t make sense to view debt backed by tradeable financial assets as part of The National Debt, since it doesn’t represent money that’ll have to be paid back out of future taxation. At worst, we’re on the hook for the difference between the value of the banks’ mortgage books now and the long-term value of the relevant houses, cushioned by homeowners’ wiped-out equity. Even if we have a two-year depression and house prices fall 40% from their peak, the loss potential isn’t high.