Lords reform: the real loser is David Cameron’s project

Today Nick Clegg, Deputy Prime Minister and leader of the Liberal Democrats, announced that Britain’s Coalition government would end its attempt to make the country’s upper house, The House of Lords, mostly elected.  It is a bitter blow for Lib Dems, but not unexpected.  What does this say about the state of British politics?

The problem was that the plans did not command sufficient support on the Conservative benches.  There were 90 or so rebels at an earlier vote, and this is enough to kill the bill if Labour oppose it.  Labour had supported the reforms in principle, but said that, as a constitutional measure, it needed more time for debate in the Commons, so opposed the critical timetable motion.  This argument is entirely specious.  Debate on the floor of the Commons is an exercise in farce; it has to be time-limited or else it degenerates into filibuster.  The cynicism of Labour’s position is made plain by the fact that they would not be drawn on the amount of time they thought the bill actually needed.  But there was in any case a more substantive argument from the Labour side: in their manifesto they had said that reform should be made subject to a referendum, which the government side did not want to do.  We can argue about the logic of Labour’s position on the referendum, but a manifesto is a manifesto.

So Mr Clegg was quite right to abandon his attempt at reform.  There was very little credit in the wider world to be had for a fight to the death on this issue.  While the public is broadly sympathetic to the idea, they don’t care very much about it.  Mos readily agree to the trump card argument of British constitutional conservatives: that there are more important things to be doing.

Just about the only way of getting the reform through would have been to accept a referendum.  Although the current polls are favourable, it would be  a difficult referendum to win – a bit like Australia becoming a republic.  Australians favour a republic in principle, but the never the particular structure of republic that is on offer.  It was easy to pick holes in the specifics of the proposals – but that would be true of any proposal born of attempts to create consensus.  The risk/reward ratio just didn’t stack.

Lib Dems are very bitter, since they see this as a breach of faith, as Andrew Rawnsley has explained in the Observer.  They have knuckled down to vote for a number of proposals that they really hated, such as tuition fees for universities (though to be fair some high-up Lib Dems secretly liked the idea), and elected police commissioners, as well as immigration limits.  Of course Tories have voted for Lib Dem policies too, but these are mostly quite popular in the country at large, such as raising tax thresholds.  Although the Tories let them have a referendum on AV, their campaign to oppose this modest and sensible reform was so vitriolic and irrational as to come over as a breach of faith, especially when they attacked Mr Clegg personally on the basis that you couldn’t trust him because he entered into coalition with them!

But the public indifference left Mr Clegg with a problem.  Why bring the government down over this, and not tuition fees, or many other things which are currently unpopular with the public at large?  So the breach is not enough to end the Coalition.  Instead Mr Clegg has decided to withdraw the party’s support to boundary changes to Westminster constituencies.  This reform would equalise their size, to the benefit, so the conventional wisdom goes, of the Tories.

Here it is Mr Clegg’s turn to be politically calculating.  I have heard his supporters make the argument that since there will be no elected upper chamber, we need to retain a bigger Commons – an argument that I struggle to understand.  To be fair Mr Clegg does not use this argument in his email to members – where it comes over as a more straightforward tit-for-tat.  The Tory sophists argue that the Coalition agreement did not actually say that they would vote for the Lords reforms – just to bring forward proposals.  But the same can be said of the boundary changes.

And as things have turned out, the boundary changes are a real problem for the Lib Dems.  In ordinary times they would have been much more relaxed, as they have shown an ability to move out of their strongholds in held seats to win over adjacent areas.  The London MP Sarah Teather won her seat in 2010 in spite of major changes to the boundaries.  But the Lib Dem activist base has suffered with the coalition, and the campaigning environment is much tougher.  They have shown an ability to hold on where the party and its candidates are locally well know, but not elsewhere.  There are no reserves with which to flood new areas.  The boundary changes are a major headache.  Neither are the changes partilcualry popular amongst the general public, whatever the intellectual case.  To get equally sized seats they have run roughshod over traditional local sensibilities.  In Wales the impact  is particularly severe.  Even may Tory MPs will be relieved if the reforms died a death.

But it will create an awkward moment in 2013 when the vote is due to take place, unless the proposal is abandoned.  To defeat the changes Lib Dem government ministers would have to vote against or abstain – this would be new territory for the government and could easily bring it down.

So who gains from this sorry saga?  The first winners are Labour, where their cynical manoeuvring have bought rich rewards.  First they have made the Coalition look weak and incompetent.  But best of all they should now be able to defeat the boundary changes, which they hate.  Ed Milliband’s leadership can chalk up another success after his inauspicious start.

The second winners are the grumpy Tory backbenchers.  They genuinely hated the Lords reform, and will be glad to kill it.  They are also pretty relaxed about idea of the coalition failing.  And as individuals the defeat of the boundary changes makes their lives easier.

For the Lib Dems the outcome is mixed.  It’s a policy failure but it is very clear who is to blame: the Tory backbenchers and the scheming Labour politicians – unlike the AV referendum.  This fiasco is out of the way a long time before the next election is due – and defeating the boundary changes will give their campaigners the best possible chance of hanging on to the 40-50 seats needed for the party to survive as a political force.

The big loser is the Tory leader and Prime Minister David Cameron, and his project of turning his party into a credible one of government.  For all the soft soap he puts into the Party’s manifesto, it is clear that he can’t carry his party with him.  He took on his backbenchers and came out second.  His party can unite around a right-wing Eurosceptic platform, but winning a General Election, especially on the old boundaries, looks impossible.  A centrist Tory manifesto will not be credible.  His plan to use the coalition with the Lib Dems to de-toxifiy the Tory brand has come completely unstuck.

And the country remains stuck with an antiquated system of government that increasingly loses the respect of both the public and the world at large.  The public is paying a big price for its indifference.


My day at the Olympics

Yesterday I joined London’s Olympic party, when we went to see the gymnastics at the North Greenwich Arena, better known as the O2 (but the company isn’t an Olympic sponsor…) or in its prior guise as the Millennium Dome.  It was the women’s artistic individual overall final.  All too brief – but I’m glad we made it, for once in a lifetime!

The event was due to start at 4.30pm, but we decided to make a day of it.  We set off at 11.30 in the morning, and took the river bus to Greenwich.  We opted to lunch there, about 2km from the arena, since we’d heard so many scare stories about the dominance of the Olympics sponsors (McDonalds for restaurants, Heineken for beer, etc).  Greenwich town is near another Olympic venue – Greenwich Park for equestrian events – so had plenty of Olympic atmosphere.  After a long but rather mediocre lunch at a Tex-Mex restaurant, we set off by bus for the arena, as directed by one of the many Olympic volunteer helpers.  London Transport nearly undid the glow of goodwill by taking out of service the bus that was due to take us, with a long wait for the next one shown on the indicator.  But another bus turned up, untracked by the indicator, a few minutes later, with space enough for everyone.

At the venue we were cheerfully herded through the security checks.  All very quick, but it was quite early (about 3pm).  It didn’t help to try and figure out what was going on in the complex system of queues and barriers, just follow the crowds and go where people were pointing.  In the Dome we found a profusion of restaurants (but no McDonalds, or Burger King, come to that), with no conspicuous restrictions.  The scare stories were overdone.  But a sign at one of the bars in the arena itself said “proud only to accept Visa cards for payment” or some such.  I think most people, me included, find that the Visa monopoly on payment cards quite offensive, so they should have put “ashamed” instead of “proud”.  We paid cash, which was fortunately allowed for a bottle of water (though not for tickets or merchandise…).

So we took our seats perched up high in the arena with over an hour to go.  But they kept us entertained and warmed us up, with videos and explanations and previews, and finally a dance by the English Ballet from Swan Lake (from their current show which coincidentally we are due to see next week).

And then it all started.  There were 24 gymnasts (limited to two from each country – a bit hard on the Americans and Russians) divided into four groups, each taking on one piece of “apparatus” – the beam, the vault, the uneven bars and the floor (which is not an “apparatus” in my pedantic book) – the last set to music.  It was quite a lot to take in.  The top contenders were all in one group, so the pros could concentrate on just them.  But the two British contenders (Hannah Whelan and the 15 year old Rebecca Tunney) were in another group – and the predominantly British crowd were keen to give them full support.  And again, the floor exercise tended to draw attention, with its sheer size and, of course, the music.  There was a screen and a scoreboard, and a bit of commentary – but it is easier to follow on the television at home.  There were one or two performances that I wanted to see but missed – like the American Gabrielle “flying squirrel” Douglas on the uneven bars.

The organisers could have helped us a bit more.  They were selling a daily magazine for £5 on the day’s events, but this gave just two pages to the gymnastics, gassing on about the two British girls, with two thirds of a page on the the girl they considered the favourite (the US Aly Raisman), who did not end up with a medal, plus a brief profile for the main Russian contender (Victoria Komova) and an even shorter mention of her team-mate (Aliya Mustafina) – these ended up with Silver and Bronze respectively.  So they almost failed to mention the winner, Ms Douglas, at all!  Still, better than the forecast at the beginning of the magazine which predicted an American who failed to qualify for the final at all (Jordin Wieber).  This whole things misses the point about people who turn up for the events – who are unlikely to be attending more than one event in a day – so don’t want masses of superficial waffle on everything – but some substance on the event they are watching.  A list of the 24 finalists, and their scores in  earlier rounds, and perhaps a little profile would have added to the event.  All the magazine could do was while away 15 minutes on the train home.

No matter! It was lovely to be there, and to make your own choices as to what to follow, rather then the choice of some television producer.  The performances were astonishing.  I am no gymnast, and don’t know much about the sport.  But I am irrestiably drawn to it each Olympics, and have been watching the drama of the team finals and the men’s event on the television.  There was a thrilling finish on the floor exercises as the Americans and Russians slugged it out.  But Ms Douglas was already in a significant lead, the others having wobbled a little in earlier rounds and she clinched the deal with confidence – quite wonderful to watch.  Interestingly the leading women contestants did not seem to be so pally with each other as were the men – they seemed a bit more absorbed in their own worlds.  Tears from the Russians in the end as they failed in their bid for Gold, in spite of the American favourite having come a cropper in qualification.

Alas for Ms Whelan.  She was already struggling after a poor beam and indifferent floor, when she came a cropper on the vault and score zero points (the only gymnast to do so on any apparatus) – she ended up 24th by some distance, though she would not have done much better in the placings if she had got a middling score there.  Ms Tunney did better, ending up 13th after an uncertain start on the beam -she should still have her best years ahead of her.  After her vault (she led and so was the first score to be posted in the third rotation), she even topped the leader board for a minute or so – as my picture shows.

What a wonderful experience!  My head had was never really convinced by the economic case for London hosting the Olympics, and still isn’t.  But the gain is deeper than economics.  It makes us Brits feel world class again.  The organisation is generally excellent, the spirit wonderful.  The tone set by the opening ceremony was shear genius – celebrating Britain inclusively for what it is, and not trying to wallow in past glory.  We can be cynical about lots of it (the scare stories about transport chaos, the sponsors’ monopolies), critical about details (the daily magazine) – but it feels good.


The UK GDP figures change nothing

Today the Office for National Statistics delivered its first estimate for the UK’s GDP in the second quarter.  With a fall of 0.7% they were a bit shocking – we have had a number of quarters with it being cose to no change, and this looks like a proper lurch downwards.  This has provoked some predictable “told-you-sos” by the government’s critics, who say that it shows that the Coalition government’s policies are failing, and call for less austerity.  But what do the figures actually mean?

Making sense of it all is not easy.  The first point is that GDP is not of huge importance in its own right – only as a proxy for the population’s overall wellbeing.  But in a dveleoped economy this latter is more closely tied to employment – and here that statistics  seem to be slowly moving in the opposite direction.  This has created a headache for economists, since this behaviour isn’t in the script.  Some even say that the GDP figures may be in error.  But they have been saying this for some time now, and revised estimates have not made the figures any better.  We need more evidence from the real world to see if anything very harmful is going on.  If, for example, the decline in GDP is a result of a shrinkage of investment banking, where they is lots of money and few jobs, we needn’t lose any sleep.  Or if it results form people taking time off, e.g. for the Jubilee holiday, then again it is no real cause for concern – provided people enjoy their time off.  The truth is that we don’t have a clear understanding of what is happening, and whether it is in fact particulalry bad.

Well, not quite.  We rely on money income, measured by GDP, to generate taxes to fund the services and benefits supplied by the state.  And to pay off the debts left by past governments.  Given that taxes still fall well short of what they are supposed to pay for, this is a worry.  For now things are OK.  The financial markets aren’t taking fright (even as they are in Spain, whose finances are not in such bad shape).  If they do then we can expect all sorts of nasty consequences as interest rates rise, and possibly inflation too.

But what of the argument that austerity is slowly strangling the economy, and we need to ease off?  This is a topic that I have blogged about many times before.  The austerity sceptics are those who basicly think that a sustainable economy is within our grasp, and it just needs a bit of confidence and an upward demand cycle to reach it.  I remain sceptical.  Slowing austerity may simply be postponing a necessary adjustment – and runs greater risks with those financial markets.  These figures do not provide additional evidence either way on this debate.

The problem for the government is that GDP – and tax income – is falling behind their projections, which makes it look like a failure.  But this is more a criticism of the art of economic forecasting than it is of government policy.  But economic forecasting has long been known to be inaccurate, and it always will be.  Many people, on both sides of the austerity argument, are not surprised that the recovery is so slow.  And the forecasts weren’t even politically motivated – since the government transferred responsibility to an independent body – the Office for Budget Responsiiblity.

Still, the case for using the government’s weight to progress worthwhile investments in house building, transport infrastructure and education remains strong, and no doubt their advocates will use this data to pressure the Treasury to loosen up.  But these investments must be for items that will be of genuine benefit – the right sort of homes in the right places, for example – and not just expenditure for its own sake.  And that makes the process slow.

So, in short, these GDP figures are nothing to get excited about.


The G4S fiasco poisons attitudes to the private sector

The British contractor G4S has specacularly failed to find anything like enough staff to support its contract to provide security staff for the London Olympics…which start in less than two weeks.  The details aren’t clear yet, but this one has all the makings of a fiasco that will be examined in deph in MBA courses for a long time.  A bigger question is the effect it will have on public attitudes to the private sector here in Britain.

For now the politicians and journalists are having some fun.  “Is this a humiliating shambles for G4S?  Yes or No?” (or similar words) one MP asked Nick Buckles, the hapless G4S Managing Director, this morning, showing the sort of skills of forensic questioning that make people wonder how useful parliamentary select committees really are. Mr Buckles had to agree.  It wasn’t just the size of the recrutiment gap, it is that nobody at the top seemed to have any idea that there was trouble until a couple of weeks ago.

Another revealing encounter was on Radio 4’s Today programme this morning.  John Humphreys was interviewing the senior police officer coordinating Olympics security.  The latter referred to G4S as a “partner”.  They’re not a partner, retoted Mr Humphreys, they just a private company only interested in profit.  And that seems to summarise a widespread attitude here.  Private companies are greedy and heedless of ethical standards.  Meanwhile the good old public services, like the police, the armed services or the NHS are selfless public servants working for the good of us all.

What a difference 30 years makes!  Back in the 1980s public services were supposed to be crassly managed, unable to control their unions and unable to deliver anything on time or efficiently.  The private sector on the other hand, the odd (state supported) car manufacturer apart, was all enterprise, innovation and efficiency.  It says a lot for the process of public sector reform that has happened since that public services command such respect now.  The private sector, on the other hand, has not come out of the banking crisis well, as the parallel case of Barclays seems to demonstrate.

This matters because further public sector reform, especially in the NHS, implies greater use of private businesses.  This was already a hard sell politically.  It’s not getting any easier.  Should it?

Well, management screwups are by no means the unique preserve of the private sector.  Last week a coroner reported on a case of a patient dying at our local hospital, St George’s.  This looks like a case too many people being involved, not aware of the complete picture, and nobody taking the initiative to sort problems out.  The hospital said that it had changed its procedures to prevent future incidents like it.  You can almost guarantee that this means an extra check or process spatulaed on top the ones already there – theoretically dealing with the problem, but actually making the process more complex and difficult to manage.  Reengineering of operations to deal with risks like this seems to infinitely more difficult in public sector organisations than in private sector ones, perhaps because it means trampling over well established demarkation lines.  Cases of bad management abound.  The quality of police management was shown in very bad light by last year’s riots, especially in London, where they were caught flat footed by youngsters with Blackberrys.  And as for the armed forces, whose public stock is currently very high, the amount of money they have wasted in equipment procurement programmes is absolutely eyewatering.

And as for the G4S scandal, the wider story is not necessarily against the private sector.  The company is clearly accountable, and is picking up the extra costs instead of the taxpayer.  And surely the procurement process is a much to blame as the contractor?  G4S may have been suffering from “winner’s curse” – required to cut costs to win the contract, and then finding that it had been unrealistic, or taking too many risks.  Realistic or cautious bidders simply get eliminated.  But this is a well known procurement problem – and surely the commissioners should have seen fit to take precautions?  Some rather obvious questions are being asked about how such a large and important contract was being supervised.

And it’s interesting to reflect a little further on the currently popular subject of “culture” in organisations, that, for example, was supposed to be so bad in Barclays.  Well senior managers not knowing about problems building up within their organisation is often a sign of bad culture.  Mr Buckles said he was a “no excuses” manager; so were staff afraid to pass up bad news?  The twist on this is that this sort, tough, no excuses style of management is beloved of politicians and the public (provided they aren’t actually working in the organisations concerned).  I’m not sure that most politicians would recognise healthy corporate culture if they saw it.  And that is bad news for the public sector.

So it would be a pity if this episode slowed down the process of involving private companies in public service reform.  But it would be as well to learn the lessons for public sector procurement and contract management.


Betty Boothroyd makes the case for Lords reform

This morning’s Radio 4  coverage of the oncoming debate on Lords reform made little attempt at balance.  They gave prominent coverage to opponent Betty Boothroyd.  A supporter may have been given airtime while I wasn’t listening – but if so they did not get a mention on the website.  But at least Baroness Boothroyd’s bluster gives supporters of reform plenty of ammunition.

Baroness Boothroyd, a former Labour MP and the House of Commons’s first (and only) female Speaker is treated as a bit of a national treasure – understandable given her remarkable life story, and the determination with which she climbed the greasy pole to celebrity.  She is deeply conservative, and loves all that fake tradition and flummery that the British Parliament wallows in.  But beyond this emotional attachment, she seems unable to give good reasons in their defence.

Her main point was that electing members of the upper house (whatever it would be called) would give it more power, and elevate its status to beyond that of a mere revising chamber that is not meant to get in the way of the Government and its whipped majority in the House of Commons.  She suggested that the reform would lead to the upper house challenging financial legislation, something which it is currently unable to do.  She also accused the reform’s proponents of not having thought things through, and insisted that it should be debated at length in parliament.

But this is mostly complete nonsense.  The reform bill does not propose to change the current powers of the upper house – which means that it would not have the ability to challenge financial legislation.  The primacy of the Commons is categorically included in the draft bill.  Debate on the floor of parliament is not grand dialectical process by which laws get improved through earnest challenge and debate – it’s a theatre for the pompous to spout off pre-conceived opinions without listening to anybody else’s.  The challenge and debate comes in the consultation process that surrounds the debate.  This has been extensive, both in this parliament and in various predecessors.  The arguments have been rehearsed many times, and solutions to the many problems devised.  Having hammered out a workable compromise it is now time to decide, subject to a bit more wheeling and dealing, perhaps.

But what Baroness Boothroyd showed was that she herself could not be bothered to find out about what the proposals actually were.  So what value does she contribute to the revising chamber that she defends, beyond a few deeply held prejudices?  The trouble with the House of Lords is that it is full of people like her – and not the valuable experts that its supporters claim.  What on earth is the point of it?  Why not just abolish it all together?

The is much to criticise in the Government’s reform proposals.  But they do deal with the two main weaknesses of the current house.  First it shrinks it to a sensible size, including the use of limited terms of office (rather staying until you drop dead, as now) .  Second it replaces patronage systems of appointment with an electoral process.  These two steps will help to professionalise it, and then make it rather more effective in its job of challenging and improving lower house legislation.  It may not succeed.  15 year non-renewable terms may mean that those elected just soak up the status and grandstand rather than doing any real work.  And Baroness Boothroyd’s fear that it may just get in the way of government without adding value is not itself complete nonsense, unlike the bluster with which supported it.  Being elected might give its members licence to be simply obstructive.

But it’s worth a try.  If it doesn’t work we can change it.  Or abolish it altogether.


Behind the theatrics on Barclays, what needs to be done?

Predictably enough the Barclays Libor scandal is generating rampant theatrics amongst both journalists and politicians.  It is not easy to keep grip on what actually matters.  And yet this is vital when it comes to deciding what the next steps should be.

One piece of theatre is a sort of whodunnit, amongst Barclays senior managers, and government and regulatory officials.  How much did they know?  What did they authorise? One line of attack concentrates on Bob Diamond, the former Barclays Chief Executive, whose evasions at a parliamentary select committee yesterday created predictable anger.  The real point behind this is the question of how far up the chain of command should responsibility for unethical behaviour go?  Should bank chief executives be like Royal Navy captains, as John Kay suggested yesterday in the FT, and take full responsibility for everything that happens on their ship?

A further twist comes from the thought that there may have been an element of government connivance in the second phase of manipulation, as the financial crisis was in full swing.  The hope amongst government politicians is that something can be pinned on Labour figures such as Shadow Chancellor Ed Balls.  That looks a long shot.  Experienced political operators like Mr Balls don’t leave fingerprints, and there were legitimate reasons at the time for an interest in the behaviour of Libor.  But the Labour’s case wasn’t helped by a radio interview with Baroness Vadera, Gordon Brown’s economic adviser, yesterday lunchtime.  She was evasive, confusing the two very different phases of the scandal (i.e. the first phase of manipulation for to make trading profits, and the second of official manipulation for wider politcal purposes).  It gave the impression there was something to hide.  Other key Labour figures, such as Mr Balls and Lord Myners, the former City minister, are giving much more confident performances, though.

Centre stage for the theatrics today is the argument as to whether any enquiry should be a full judicial one, like the Leveson Inquiry into the press, which Labour are asking for, or the government’s preferred option of a quicker parliamentary one.  Both options have merit.  A judicial enquiry gives the whole thing an air of importance, and legal interrogators are much more effective than grandstanding politicians; it would keep the City types on the ropes for longer.  But lawyers are unlikely to contribute much of value to designing a solution.  A parliamentary enquiry would be a quicker way to actually change the law, as well as creating less complications for any parallel criminal investigations.  What is actually needed is an expert commission – but we’ve already had one of those, the Vickers Commission – which indeed pointed towards some of the solutions.

But what actually needs to be done?  In principle this isn’t difficult.  Investment banking activities do play a useful role in the modern economic system, and aggressive trading culture can help the process of what economists call “price discovery” – spotting and correcting where the prices of financial instruments don’t reflect the world’s realities.  Short-selling the shares of badly performing companies looks ugly, for example, but it does improve accountability.  But the usefulness of investment banking is distorted by two problems:

  1. Using other people’s money.  Where traders use borrowed money to trade with, which is the bulk of what they do, then they are not taking full responsibility for the rsiks they are taking, and the whole balance of incentives gets skewed.  Trading soon escalates to levels beyond the socially useful. The volume of borrowed money used has risen massively over the last couple of decades, and many traders probably don’t even understand the idea of using their own capital to bet with.
  2. Trading culture struggles to recognise ethical boundaries.  A disagreement over price is one thing, but manipulating systems designed help people is another.  Fiddling Libor (especially in the first phase of this scandal) was one such transgression, as are various scams to exploit the way mutual funds are priced.  The UK regulatory authorities can be too soft on this.

So in essence what needs to happen is this:

  • Isolate banks’ trading and derivative activities from ordinary economic deposit-taking and commercial lending, and attach separate regulatory regimes to each.
  • Clamp down hard on unethical behaviour – with chief executives and directors taking full responsibility for what happens in their organisations.  Ignorance should not be a defence – and if that means some organisations become impossible to manage, then they should be broken up.  Sanctions should hurt, and include the criminal law (though remember that its higher burden of proof can get in the way).
  • The money supply to investment banking operations needs to be choked off, so that only those that fully understand the risks are supplying it.  Isolation will help here, but may not be enough.

The principles are easy, but the details are all important.  The problems are global but it will be very hard for us in Britain.  The City is so important for our overall economy that we are easily scared away from being too tough.  But if the attraction of the City is that it is easier to do unethical business, then this is not a recipe for long-term success.  We can still have a thriving financial services industry with niche operations based on genuine knowledge and expertise of the real world, and the provision of solid, well designed infrastructure and systems.

Next steps?  I think an enquiry is a bit of a distraction, so the government’s option is probably better.  the government perhaps using this enquiry as cover, must go back to the Vickers proposals and implement them in full.  Going beyond Vickers to enforce the full separation of investment and commercial banking should be considered.  And as for culture change, that needs to happen at the regulators, including the Bank of England, as much as the banks themselves.  A change of senior personnel would help here.


Barclays scandal: culture isn’t the problem, it’s the money

City traders live in a world of their own.  After the news of Barclays Bank’s fine for falsifying LIBOR returns, its share price rose slightly.  The scandal had been rumbling on for months, and they were relieved that it had been resolved.  They had no idea about the approaching firestorm – which took a big toll on its price later that day.  Later an investor was reported by the BBC (who may have been quoting a newspaper) that all this mob rule had to end.  But as the hue and cry continues (this morning the Barclays chairman resigned), politicians and media commentators seem to be equally out of touch with what lies behind the scandal.  Unfortunately that may mean that nothing useful comes out of it.

The LIBOR issue itself is being blown out of all proportion.  That is understandable.  So much of the unethical practice in the industry go unpunished that when somebody gets caught a disproportionate response is quite rational.  That is the point that City insiders probably missed in their sanguine early reaction.  But most of the comment has focused on the idea that the industry culture is thoroughly cynical and corrupt, and it is this culture that is the main problem needs to change.  Criminal penalties are spoken of for unethical behaviour, and the familiar idea that the payment of big bonuses should be limited.  The Business Secretary Vince Cable has called for banks’ investors to rein the managements in.

That’s all very well as far as it goes.  The culture is awful.  We shouldn’t be too romantic about how things used to be, though.  In the old City it may have been the case that “my word is my bond”, but ripping off clients and living off fat commissions was rife.  One point frequently made is that traditional upright commercial banking culture, such as displayed by Barclays’s Quaker founders, has been corrupted as investment bankers have taken over.  This is also true, but that fusty, conservative, self-absorbed commercial banking culture had to change.  I well remember having lunch once at Barclays HQ in the 1980s: what a gloomy experience, for all the uprightness of those involved – there was no hope of us doing business with them because they would never be ready!  We must look deeper.

The problem is that it is far too easy for big banks to make lots of money without too much effort.  That is absolutely corrupting.  Bankers naturally think that this money is added value for the highly skilled work they do to ensure that money flows to and from the right parts of the real economy.  The rest of us are entitled to be sceptical.  The profits which happen most years are wiped out in the bad years, when shareholders and taxpayers pick up the tab.  The investment bankers have found a number of ways to make bets with other people’s money, take the benefits for themselves, and make sure somebody else picks up the tab if things go wrong.

But that’s not the only problem, here in the UK at least.  There is also lack of meaningful competition.  It is impossibly difficult to set up a new bank to compete with the existing oligopoly.  The remaining banks have been allowed to consolidate into a small number of behemoths.  The regulatory authorities, including the Treasury and the Bank of England, as well as the FSA, have been complicit in this.  They prefer a cosy club of large organisations with big compliance departments than the rough and tumble of competition that, for example, the Americans or Germans experience.

The aim of public policy should be to make banking less profitable, so that the banks can’t pay massive salaries and bonuses, and more competitive, so that customers benefit from real innovation.  This needs the British authorities to do three things in particular:

  1. Make it much more difficult and expensive for investment banking and financial trading operations to secure finance.  Separating investment banking from commercial banking, as recommended by the Vickers Commission, is a good first step, though may not go far enough.  Increased capital requirements, as now being imposed globally, is another.  Regulators need to be particularly hard on bigger institutions, and not let the idea that larger operations are more efficient take hold.
  2. It must be much easier to set up new banks, both in commercial banking and investment banking.  The issue isn’t the amount of regulatory capital required, but a host of other obstacles placed in the path of new banks.
  3. While regulation needs to lighten up on the creation of new banks, it needs to be tightened on the regulation of lending operations.  We should not allow runaway growth of credit, especially that linked to the purchase of purely financial investments, and, it has to be said, to real estate.

All easily said.  But the trouble is that it is quite painful.  Attacking bank profits will look like an attack on one of a limited number of industries where British based operations are internationally competitive.  Easing up on creating new banks means tolerating more banking failures and creating a more challenging environment for regulators.  Restricting credit means curtailing the British love affair with property ownership.

It is easier to bang on about culture and lock a few people up.  The one good thing about the crisis is that it helps keep the pressure up on the Vickers reforms.  But when the dust settles the usual City types will be having a quiet word with their counterparts in the Treasury, Bank of England and the Prime Minister’s office about not throwing the baby out with the bathwater.  The reforms will be quietly defanged.  Bankers will continue to lord up.  Taxpayers will continue to be exposed.  And the British public will continue to be let down by bankers and politicians alike.

Let’s hope that this does not come to pass.  Critics of the banking industry will need to keep the pressure up.



Why Paul Krugman is wrong

In today’s FT the economists Paul Krugman and Richard Layard (of the LSE, famous for his work on the economics of happiness) publish an article A manifesto for economic sense calling for looser fiscal policy around the world.  Being in the FT it’s behind a paywall (though I have shared the article on Facebook).  But the simplicity and clarity of their argument make it a particularly good pace to discuss the difficult issues of economic policy as the economic crisis rumbles on.

Back in 2005 I was contemplating taking an Economics degree, with little formal background in the subject.  I asked a tutor at the university (UCL) on their advice for background reading and he said “Anything by Paul Krugman”.  The Professor at Princeton, who subsequently won the Nobel Prize, was famous for the clarity of his writing on economics.  I also discovered, as I devoured anything by him I could find, that he was not a shrinking violet on the subject of US politics – passionately attacking the Republican regime of George Bush.  Now he is a crusader against “austerity” – the focus of governments on healthy finances even as recession stalks the world.  He recently visited London, and appeared on Newsnight.  I didn’t see him, but I am told he made mincemeat of his opponents – and I’m not surprised.

As I took my degree at UCL I read more of Professor Krugman’s work, now in academic papers and discussions, rather than the more accessible stuff I read read before.  The clarity remained – but he came over as a bit wild.  I remember in particular one discussion where he became obsessed with the idea that Japan needed to stoke up inflation to get its economy out of the doldrums.  His wild suggestions for doing so seemed to leave his fellow economists quite exasperated.  Ever since I have viewed his opinions as entertaining, but liable to be impractical, and in the end very unhelpful.  So it is this time.

The article (not very long) starts its main line of argument by talking about the causes of the crisis:

The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions – such as Greece – this is false. Instead, the conditions for the crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The bursting of this bubble led to large falls in output and thus in tax revenue. Today’s government deficits are a consequence of the crisis, not a cause.

I think it is highly significant that the authors throw this in so early.  It implies, without actually saying so, that pre-crisis government expenditure in most developed economies was perfectly sustainable, if that pesky crisis hadn’t caused a dip in tax revenues.  It is perfectly true that government debt was not a major problem before the crisis, which was caused by excessive private sector debt.  The trouble is that the boom years gave us false expectations as to what the sustainable levels of tax revenues were.  A large part of the dip is permanent, not temporary.  So substantial cuts will have to be made at some point to bring government debt under control.  It isn’t just a question of waiting for the economy to bounce back (in the UK, US and southern Europe, anyway).

The authors then point out that the crisis is caused by a collapse in private demand – and that it makes sense to make up the shortfall in demand by extra government expenditure until private sector confidence returns.  A failure to act means that unemployment becomes endemic and difficult to put right later.  They point out that monetary policy cannot take up the strain.  They say that there must be a medium term plan to bring government deficits under control – but that it must not be front-loaded.  I have no disagreement with any of this.  Quite a few people think that looser monetary policy would help – but I agree with the authors on this (which I will say more on in a future post).

Where I differ is that I think what they suggest is exactly what governments are now doing, in the UK and US anyway.  In nominal terms government expenditure has not been cut.  The private sector is slowly taking up the slack.  Governments may be talking austerity, to prepare the ground for the real cuts that are absolutely necessary in the medium term, but they are not practising what they preach.

The article concludes by trying to debunk two typical counterarguments to further stimulus.  First is that financial markets would lose confidence and refuse to keep funding government debt.  They point out that there is no sign of this in the UK or the US, where government bonds are at record low yields.  They also say that there is no actual evidence that budget cuts can generate growth.  On the contrary, they suggest (though don’t quite spell out) that looser fiscal policy will help restore confidence and get the private sector moving again, which would allow the deficits to be brought under control.  The trouble, of course, with using past evidence to prove a point is that the current situation is unprecedented.  And the global financial markets are quite unstable; who is to say that UK and US bond markets aren’t in their very own bubble that could burst very suddenly.  The absolute levels of deficit, and, increasingly, overall debt are becoming so alarming that anything is possible.  And what if the private sector remained sceptical in face of government stimulus?

Finally they tackle the argument that stimulus cannot work because there are structural constraints.  In other words, the pre crisis economy was so unbalanced that there is in fact little spare capacity – so that a stimulus would run into trouble very quickly, leading to inflation or a currency crisis.  If this were so, they say, we would see more parts of the economy at full strength.  Here there may be a difference between the UK and the US.  In the UK there are indeed a few signs of trouble.  Inflation has been much more persistent than predicted, though admittedly not through wage rises.  Export businesses complain of a lack of suitably skilled staff.

Straws in the wind perhaps.  But the pre-crisis economy clearly was unbalanced, especially in the UK.  Public service employment was clearly too high, and cannot be afforded at its current strength on any realistic level of taxation.  Also too much of the economy is spent taking care of ultra-rich bankers and foreign exiles – whose numbers and wealth we cannot or should not expect to grow.  And we still need to adapt to a lower energy economy.  I can’t prove that the authors are wrong – but there is enough reason for caution.

The authors make much of not repeating the mistakes of the 1930s.  But that was a very different world for two important, and related, reasons.  First there was a ready solution at hand: the expansion of manufacturing industry with an abundance of good low skilled jobs.  It took the war to unlock this, with the manufacture of armaments and transport, but war production could be converted to civilian use with surprising ease – as there was massive untapped demand for cars, fridges and other manufactured goods.  Second we were much poorer then.  Starvation was a real problem for the unemployed and poor, and the destruction of wellbeing flowing from depression was horrific.  Now we define poverty as lack of access to television and mobile phones.  The hardship is much less – and there is less untapped demand.  Technology has put paid to the number and quality of unskilled jobs.

That bespeaks caution – something that the manifesto economic sense disregards.  There is a case for some sensible investment projects – including the right sort of housing in the UK. But temporary tax cuts would be reckless, and stopping public sector cuts irresponsible.


Class warfare: changing the primary school curriculum

Yesterday the Government announced proposals to change the national curriculum for primary schools in England.  No doubt there was the same sharp intake of breath in liberal circles that accompanies anything that comes forth from the Secretary of State, Michael Gove, with his appeal to traditional, conservative values.  But liberals have often failed to convince on education.

Mr Gove is a remarkable political phenomenon.  He is instinctively disliked by those of a liberal disposition, and the vast majority of people who work in the education sector, or councillors who are responsible for it.  And yet, unlike his health colleague Andrew Lansley, or Theresa May at the Home Office, the vitriolic criticism of the professionals, and lampooning by comedians, seems to make little impression on the public at large.  The government is being hurt by a lot of things at the moment, but education reform is not among them.  For once the public seem to trust the politicians more than the professionals.

So what to make of these proposals?  They amount to a much more prescriptive programme for English, Maths and Science – with proposals on modern languages on the way.  They go further than the current curriculum, and have a traditional, prep-school feel about them – English has a heavy emphasis on spelling, punctuation and reciting poetry, for example.  This is easy to dress up in old fashioned, conservative language – which Mr Gove duly does.

The first criticism to make is that the Government had promised teachers that they would get out of their way, and give them more discretion.  All the pressure in recent years has been to take things out of the National Curriculum, and not add more things in.  The more flexibility schools have, the more room for creativity there is, and the more diversity and choice there will be – something the government had seemed keen on promoting.  But evidently there are some things that Mr Gove feels are too important to be left to parental choice and diversity.  And the changes are focused on the very core subjects – not the peripheral things that politicians had proviously like to pitch in.

Behind all this lurks a topic that vexes many: class.  Now class is something that widely is misunderstood in Britain.  Class here used to be about what you were born into, and the idea that everybody should stay in their place, with all the privileges and duties that this implied.  Mobility was frowned on, but allowed to creep in gradually.  A lot of this mobility took the form of pretending that your family was better bred than it was.  I am doing a project on my family’s history at the moment.  One of the more amusing aspects is how much effort my middle class Victorian (and some later) forbears put into trying to prove the family had noble connections.

But two world wars and a relentless industrial transformation have swept away that understanding of class.  And yet to the disappointment of many, elitism and social stratification remains very much with us – and indeed many of the institutions that supported the old system are in very good health supporting the new – “public” schools, elite universities, and so on.  And although the idea of birthright might have gone, it is very much expected that you support your peer group – and do the best you can to give your children every advantage.  Social mobility, after leaping forward in the middle of the last century seems to be slowing down.  What happens here now is not the lingering of the old system, but something similar to what happens in other modern developed societies which did not have our feudal legacy – like the USA and Australia, who also have “class” problems.

Schools lie at the heart of concerns about class – and here liberals are on the defensive.  Liberals have dominated the state educational system for generations, seeing through major reforms to both structure (for example pushing selective elite grammar schools into comprehensive schools) and the way schools are run – towards what might be called “softer” values.  It hasn’t worked very well – though why remains hotly debated.

Enter Mr Gove.  His solution is to make state schools look and feel much more like their elite,private sector counterparts – and these curriculum proposals are an example.  His critics simply think this is to give middle class parents a private, elitist education at taxpayers expense, without having much impact on the rest of society.  But that is to misunderstand the thinking.  Mr Gove, and many conservative thinkers, think that social mobility is about turning working class people into middle class ones.  And that isn’t just about imparting knowledge and skills, it’s about talking and writing like middle class people too – or at least becoming “bilingual” in class ways.  The old grammar schools did this very successfully – and their abolition has not helped social mobility.

This is all very interesting.  It is easy to see difficulties.  State schools, apart from the surviving grammars, are still quite unlike their private school counterparts in that they cannot select their intake.  Will this approach exacerbate class tensions by teaching pupils to sneer at the less fortunate (as no doubt the old grammars did)?  But liberal policies of inclusiveness have not proved enough by themselves.

I’m giving Mr Gove the benefit of the doubt this time.  Too often we liberals forget the working class ideal of “bettering yourself”; celebrating diversity is good; celebrating mediocrity isn’t.


The Queen understands the nature of privilege

The weather may not be cooperating, but the Jubilee weekend ploughs on.  So far I have attended a Jubilee parade at the local primary school where I am Chair of Governors, and a barbecue hosted by a north London friend.  We are on our way to a damp riverside party in Docklands, where we may see some ships passing by on their way to and from the Thames pageant.  The are street parties in neighbouring streets, and the Tube lines are full.  There is a party mood about.

I have stood up to the National Anthem and toasted the Queen.  But amongst my fellow party-goers almost everybody is sceptical about the monarchy as a system, though respectful of the Queen herself.  We are definitely not a representative group, though to call us part of the “elite”, as many do of anybody who shares our liberal outlook, is a stretch.  None of us runs anything bigger than a primary school.

Meanwhile, much nonsense id being pumped out in the newspapers and on the radio (I’m avoiding the television, as usual).  The Queen has not let us down, claimed an article in the Evening Standard, unlike all those prime ministers – something that says everything about our expectations of the respective roles, and nothing about the competence and intent of those holding them.  The Queen is a human presence amongst all the stiffness and pomp that surrounds her says Matthew Parris.  Like Napoleon wearing a plain hat and coat amongst the splendour of his aides.  One of the worst features of the monarchy is pompousness and obsequiousness that it attracts.

The truth is that the Queen is something of a blank canvass, upon which we project our prejudices.  Right now these prejudices are all positive, but it has not always been so (remember Diana?).  We know very little about her – which is something of an achievement on her part, it has to be said.

What do I project onto this blank canvass?  To me the Queen represents the meaning of privilege, in all its good and some of its bad senses.  In modern usage, privilege has come to mean exclusive rights acquired purely through your status, and, implicitly, undeserved.  This one-sided meaning has taken hold in post-class society (and people who say that class is as rampant in current British society as ever have no idea what class is).  It may have originated from classless America, where Harry Truman railed against the “Republican gluttons of privilege” – which would have been back in the 1940s.

My late mother (who was the same age as the Queen to within a month) always hated this usage of the word.  She was by no means aristocratic, voted Labour at the first opportunity in 1945 and hated Toryism.  But her upbringing, as the daughter of a senior churchman and professor, and being brought up on a cathedral close, was certainly privileged.  To her privilege was a two-sided thing.  It implied responsibilities.  You would hesitate to accept it.  We have caught a sugar-coated version of this on the popular TV series Downton Abbey.  And I don’t think I am stretching my imagination too far to suggest that the Queen embodies this understanding of privilege.  She puts duty first.  She maintains a busy schedule of state commitments (somewhat in contrast to her one diamond predecessor, Victoria), and is never undiplomatic.  People I know who have glimpsed the royals in the flesh are struck with the, well, professionalism, with which they carry out their role.  And if the Queen despises some of the lesser of her subjects (which I doubt), she never, ever lets it show.  That would not be within the meaning of privilege.

The Monarchy, at least in England, will survive a long, long time provided that its incumbents remember that this is what privilege means.