Government Contractors

For an illustration of how government contracts cost more and deliver less, have a look at Alastair Campbell's blog.

If you use IE 8.0, the 'post a comment' section doesn't display properly. Also the times people leave messages are out by an hour. It's also difficult to read with comments on the left and the original blog post on the right. There's no easy way to link to the current post. Overall his webpage is very arty but at the expense of ease of reading. Not great if you describe yourself as a communicator.

Look at the bottom and you'll find his page has been designed by government contractor Silverfish. This is what happens when you employ consultants. They dazzle you with wacky and complex ideas. But when it comes down to it, they deliver something less functional than something available for a fraction of the price. Tom Harris and John Redwood probably spent less on designing their blogs but they are much better for it.

Meanwhile, on the economy...

As political journalists are exposed this weekend for the complicity in spinning Brown, their colleagues on the finance pages are still at it.

Stories abound, with Spring inspired optimism, about how property prices have turned the corner. And the Chancellor, apparently, is going to predict that the recession will be over by October. Note, however, this is from the same political team in the Telegraph, now notorious for failing to help the government bury the biggest sleaze scandal of recent years.

On house prices, think if you own one, could you afford your own house if you were starting out today? Could somebody like you bought it afford to buy it today? If the answer isn't yes to both, then house prices are clearly unsustainable. There might indeed be a Spring bounce. The only question though is when they'll fall another 25%, not whether.

Yesterday, BT announced another 10,000 job cuts. And that's just a single item in a single day's news. What will happen to house prices as unemployment soars towards three million plus, as most expect it to?

Over the worst? My arse.

When asked by a journalist what would make the G20 a success, Brown replied, "that you report it as a success". To many bloggers, that was interpreted cynically. That is, that Brown merely thought that the appearance of success was all that mattered. I don't take this view. I think it shows how little he understands about the economy: he thinks it is merely a matter of confidence in the markets and all will be right again; he thinks that fundamentals (borrowing, trade balance, money supply) don't really matter or, if they do, they are a function of confidence, rather than the other way round. In a way, this is precisely what he thinks about everything in politics: it's all about the people. If you can bully them into parroting your line then everything will be ok.

The trouble is that this is only true in the short term. In the long term reality rears its ugly head, as it is increasingly doing.

Italy has gone into a recession from which it will NEVER    recover. Ditto Japan. (Both countries have catastrophic declines in population that have already gone beyond the point of no return and, fundamentally, the size of the economy is a multiple of the number of people you have.) France, has more Muslims of fighting age than ethnic Caucasians. They will be a minority in their own country within a generation. Alas, the Muslims have a economic benefit one tenth of a Frenchman's. What will that do to France's GDP as the baby boomers retire? Is Germany, itself running out of people, going to tie itself into this death pact and bail out Eastern Europe (themselves denuded of their most productive people who've emigrated to the UK and elsewhere) and the PIGS (Portugal, Italy, Greece and Spain)? If it gives them loans, how on earth does it think they'll be repaid as the productive element in these populations collapses? All across Europe, politicians are focussing on the appearance of success, rather than the reality. No wonder they all agreed at the G20.

My prediction: there will be yet another huge war in Europe within 10 years, as con trick by our politicians become increasingly difficult to perpetuate. Brown's sleaze shows how desperate it has already got. Europe has been rotting from within for decades. When the final collapse comes it will be sudden and violent.

Brown’s in trouble

My summary of the momentous events of this weekend is as follows. Downing Street as peddled the following untruths:

Lie 1: Only McBride and Draper knew about the smear plan. From the evidence out so far, it seems to have involved in addition:

• Liam Byrne (Minister for the Cabinet Office, HM Government) – said McBride had done the 'honourable thing'.
  
• Tom Watson (Minister for Digital Engagement and the Civil Service, working for Byrne) – mentioned in emails and has previous, smearing Cameron with Sion Simon in a cringe making video
  
• Kevin Maguire (Daily Mirror) – still defending McBride and seeking to use the smears.
  
• Charlie Whelan (Unite) – copied on emails
  
• Andrew Porter (Daily Telegraph) – part of co-ordinated strategy for damage limitation once story was out.
  

 

Lie 2: They thought about putting these stories into the public domain but changed their minds. This is already unravelling as Nadine Dorris is saying today.

Lie 3: Brown thinks 'there is no place in politics' for this type of behaviour. Clearly he does. Otherwise why would he employ such people? It is almost incredible that he didn't know what was going on, especially now with his 'war room' having him sitting in the middle of all his spin doctors.

From the breadth of people involved in the smear plan (this is no small tight-knit group), it is almost certain we will learn more. Brown is up to his neck in this. He's lost his spinner-in-chief who would normally have defended him. I'm fascinated to see what happens next.

Why MSM Political Commentators Are Toast

Peter Oborne writes in today's     Mail that Michael Trend was exposed 'because a whistleblower was so disgusted by the MP's criminal conduct'.

However, that would imply that his behaviour was exceptional. As we now know, it was all too commonplace. Trend was exposed because he tried to sack one of his staff and she was so angry at this abuse of her 'job for life' scam that she exposed Trend for his scam. She was then taken on by Norman Tebbit to shut her up.

Peter Oborne clearly doesn't know what he's talking about. He's making assertions without any supporting evidence. Yet he's supposed to be a professional at the top of his trade. We're better off with free comment on the blogs – it's more accurate and better informed.

Politics Corrupting Science

Are economists partly to blame for the current crisis? Has their overconfidence led us astray, as claimed by the Coffeehouse this morning?

IMHO this is just another feature of having a too big and overbearing government. It is not that scientists have corrupted us and made us spend too much money; it is that government has paid them to come up with the research that supports government's own prejudices and has increasingly squeezed out genuinely independent research.

This is most visible in the 'science' of climate change but it also applies to virtually every area of research, including economics.

The solution is not to product more rules on government grants, as socialists would prefer, but to abolish the funding altogether. Would the country really notice if all government research into economics was suddenly stopped? Sure, the academics and their grant maintained supporters would wail – loudly – but would we really be any poorer? I doubt it.

The same principle could be applied across universities and other government funded bodies, such as the opera. Don't assume I'm a heathen for saying this. In the short term we would lose many familiar establishments. Before too long, however, private individuals would step into the breach and they would create much more vibrant institutions which would not only cost the taxpayer nothing, they would be of much more benefit to humanity.

Craven Reporting

The front pages today are full of gushing praise for the G20 and their 'historic' agreement. Trouble is, read the details and most commentators agree that there's nothing new. The trillions have all been previously announced. The special drawing rights for the IMF don't require their agreement anyway. The clampdown on tax havens contained no specific action. Even the agreement to meet again couldn't agree when. And so on.

How does Brown pull it off? What has he paid the journalists to get such coverage even as most of them know (read their own blogs) that it's all bullshit?

Is it possible that the answer may be in the fact that the government's PR budget is a shade over £1 billion per annum? Is it possible that those political editors think they won't get future 'exclusives' from the government if they don't play the game? The trouble is their readers are deserting them. Every few months, even before the recession started, another newspaper would lay off staff. When will the supposedly professional hacks realise that people don't buy newspapers to read reheated government press releases, that their jobs are dependent on people buying their newspapers, not government handouts?

Banks’ toxic debts aren’t their main problem

Toxic debts are a problem, a huge one; it's just that there's a systemic problem with the banking world that's much bigger.

Fractional reserve banking means that banks have to keep a proportion of the funds invested with them as a reserve but the rest they can lend out. As the companies they lend to recycle this money to the banks, this means it can be leant out multiple times. If the reserve requirement is 10%, for example, this means that £1 deposited in the banks can allow them to lend £10 to industry. It sounds like voodoo but, in fact, it works well and has been the secret of our prosperity since the industrial revolution. The banks are essential catalysts in helping businessmen literally create wealth, to the benefit of all.

In the old days, people would deposit with a bank and that same bank would lend to people. If the borrow defaulted, the bank usually ensured the borrower had enough collateral to cover the debt and the bank was protected. As the money supply chain was short, it was also efficient.

Nowadays, multiple intermediaries are used. For example £1 invested in a bank A, which is then lent through banks B, C and D with each of them reserving 10%, means that the end customer only borrows 66p from bank D. The upside is that the banks are now much more profitable as the interest rate available to customer goes up. As they take turns in being in different parts of the chains and also trade with their own subsidiaries they can also charge interest multiple times. Not only is profit increased but also the risk is apparently reduced, as instead of investing in a risky customer, banks A, B and C have instead invested in B, C and D respectively, none of which has never defaulted, have good official capital ratios and therefore excellent credit ratings.

The problem comes when the end customer defaults. Because he was only lent 66p in the first place, he cannot really be asked to repay more. Worse, this 66p needs to be spread between the four lending banks in the chain. So bank A, instead of getting, say 81p back for 90p invested is now only looking at a quarter of the 66p. That is about 16p or just 18% of the sum at risk. Now, in isolated defaults, the remainder should come from the other banks in the chain, from their reserves. But in the case of multiple defaults, this is unlikely to happen as the banks on average will have shared this risk between themselves.

If this model were to apply to RBS, for example, which has £2 trillion of assets balanced by £2 trillion of liabilities, then the real value of these assets under default conditions is only actually about £360 billion. Actually, it's worse than this because most banks have invested disproportionately in property as the end customer. Many of these assets will be worth only half of their face value even in the long term. This is the reason the banks say they cannot value their assets. The truth is too scary.

In effect, therefore, the banks have taken higher profits for much higher risk. They are not technically insolvent, as the new CEO of RBS claimed the other day; they don't have a cat's chance in hell of making ends meet in the case of a generalised default by even a small group of customers. They have geared themselves up, meaning that instead of generally getting 90p in the pound from a defaulting customer, they are lucky to get a fifth of that.

Worse still, the banking supply chain has sucked not just people out of more productive industry but also working capital. This is the reason that Britain's growth rate has been so poor compared with China, despite the apparent prosperity and stability, which would normally be ideal conditions for growth. Also the money supply is shared around a much smaller number of end customers, meaning that each one is more important, creating greater instability when one customer does default.

The banks have made a mockery of regulation by changing the structure of the industry, meaning that capital ratios and other key metrics have lost their meaning.

The solution is to do the opposite of what the government is doing. Instead of lending to the banks to reflush their supply chains so they can continue to lend to each other, government lending should be restricted to end customers at no more than one remove. Instead of creating a new government owned 'bad bank' with all the toxic debt, all the existing banks should be treated as bad banks. This will force them to collapse their extended supply chains and focus once again on end customers. High Street banks should be forceably demerged from investment banks to protect the public as most investment banks will go bust. They should be replaced with new local bank managers, seeded with public money if necessary. These people should replace the government owned Business Links and be run for profit. The overall effect of this, whilst painful for bankers and their employees, would be to release huge amounts of capital back into the economy, capital that is currently stuck in a banking supply chain held up by frozen wholesale markets.

50% off

It's time to stop arguing over trifles. Brown cuts VAT by 2.5%. Cameron drops his 'sharing the proceeds of growth mantra' but says this means he'll just not increase spending by so much, a change of maybe 0.5% of GDP.

In the last 10 years the state has grown by over 30%. This is on top of growth under both John Major and Mrs Thatcher and it was too big then.

Meanwhile, the economy is dropping of a cliff. The U.S. reported it's fastest every increase in unemployment last year and Dell, which on its own accounts for 5% of Ireland's GDP, announced it was closing its factory there. There are serious doubts about the U.K.'s ability to service its debt let alone pay it off and the value of the pound has fallen by over a quarter against our major trading partners. Yet all our politicians do is talk about trifles. A few more hundreds of billions of debt here (on top of the trillions we already have). A miniscule tax cut there.

It is time for something more forthright.

The state has got too big. It should be cut in half. From 40% of GDP to 20%.

This is not to say that these services will disappear; just that responsibility for paying for them should be given back to the people. This isn't about cuts; it is simply about letting the people decide how to spend their own money. Only this way, do we stand a chance of being able to weather the coming economic Tsunami.