Lib Dems and the Quality of Life

One of the more entertaining episodes of the last Lib Dem conference was the debate on the party’s new Quality of Life policy paper.  This paper had wended a long but largely uncontroversial path through the policy formation process, including extensive consultation, before reaching the conference – and I was a member of the working group – interest declared.  And generally policy that has followed this path gets more or less nodded through.  Not this time.  The motion and paper got the backs up of many representatives, and there were a number of well-delivered and entertaining speeches against.  For a flavour of this ire see Alex Wilcock’s blog – scroll down past the Dr Who stuff to 20 September.  If you click through to the comments page, you will find Alex describing yours truly as “not so much a thinking liberal as a sneering one”!  The paper was passed, but the margin was quite narrow by the usual standards of these things.

And that’s a bit of a problem.  This is policy that stands behind other policy – important not so much for its direct recommendations as its influence on subsequent policy.  I hesitate to call it philosophical – since it does not attempt to develop the core values of the party, but rather to apply them in a new way.  But if it is considered contentious, it may get ignored.  And for all that it is official policy, this would be quite easy.

What’s the fuss about?  The starting point of the paper is that public policy is too dependent on “hard” economic statistics, such as income and economic growth, to measure success.  But these are only intermediate measures – in other words we like them because they lead to good things, rather than being good of themselves.  That is because of the difficulty of measuring success in itself – the hitherto rather woolly concepts of wellbeing and quality of life.  But social science has been advancing rapidly and it is now possible to measure wellbeing in a rigorous way – mainly through asking people to make subjective judgements on their state of mind.

What the paper recommends is to make wellbeing an explicit policy goal, alongside the traditional economic measures.  To ensure this is done rigorously, it recommended that a National Institute of Wellbeing is established to promote standards. Various other devices (a cabinet champion, for example) were recommended to get it embedded into the business of government.

So far, so good, perhaps – but for liberals some loud alarm bells should be ringing by now.  This could be a charter for highly paternalistic government.  And especially when you come up against the evidence that many people seem to have a poor understanding of what is good for their wellbeing.  So the beating heart of this policy paper is the insight that individual autonomy (“agency” in wonks’ jargon) is central to wellbeing.  The idea is to help people help themselves, and not bullying and cajoling them into making better choices.

Education is central.  And, to make a small digression, this takes you in a very interesting direction.  A lot more is understood about life skills – emotional intelligence, resilience, and such – and the wellbeing insight gives these a much higher priority at all levels of education.

Fortunately there is a wealth of evidence to support the liberal view.  There one further thing – the measurement mechanism of choice for social sciencists, self-reported wellbeing, is a thoroughly liberal idea.  Wellbeing is what the population says it is, and not an arbitrary idea imposed by policymakers.  It’s like voting.

What were people objecting to?  One faction distrusted anything with so little in the way of concrete recommendations – especially when those few recommendations sounded like more bureaucracy and a new quango.  At best they interpreted it as harmless, and so a cost-free policy to rebel against; at worst they thought it was opening the party up to being criticised for being irrelevant in times of widespread economic hardship.  Others, Alex was amongst these though he was not called to speak, understood how dangerous the the quality of life idea could be in the wrong hands, and felt that it was too toxic to touch.  Or, possibly, that the detail of the policy paper did not live up to its liberal intent. At any rate that is my reading of what they were saying.

All this put the promoters of the motion in a bit of a difficulty – it is really quite difficult to push abstract ideas in this kind of debate.  In a short speech you don’t really have much opportunity to say more than “I think this is a good idea” rather than why you think it is good – at least not in a way that will connect to more than a minority of the audience.

Does it matter?  The problem is that the wellbeing agenda is slowly but surely infiltrating itself into the public policy process already.  The word (or “well-being”, the spell-check compliant variant which I don’t like) and quality of life come up with increasing frequency in all kinds of public policy contexts, and especially in health.  The concepts, if not the measurements, lay behind so much of the last government’s meddling in people’s lives.  And David Cameron is an enthusiast too, though with an entirely different agenda -but no doubt paternalist in  a different way.  Liberals need to get into this debate and push back hard against paternalism – but using the language of wellbeing, and not just pronouncing the plague on all its works.

And there is something else, even more important in my view, which the paper doesn’t really touch.  And this is the usefulness of the idea in promoting a more environmentally sustainable economy.  It is important to break through the tyranny of current economic measurements to show that a more sustainable way of life does not equate to poverty – and indeed that it can be better for everybody.  This is why the New Economics Foundation is so interested in wellbeing.  I particularly like their paper on Measuring our Progress.

So we need to keep pushing.  As one of the motion’s supporters said to me afterwards “Who remembers how close Nick Clegg’s margin of victory was for the party leadership?”.  Still, we that understand and support the policy have a selling job on our hands.

 

Understanding the Euro Crisis

My favourite contemporary economist is UCL’s Professor Wendy Carlin.  She was my tutor at UCL, and led my second year macroeconomics course, and a third year course on European institutions.  Her patient, dispassionate analysis is worth so much more than all that shoot-from-the-hip banging on by celebrity economists, Nobel Laureates and all.  It was her analysis, well before the current crisis broke, that demonstrated to me that the last government’s economic “miracle” was unsustainable (the combination of an appreciating real exchange rate and a trade deficit being the giveaways).  She also helped me understand the Eurozone, and pointed out the trouble ahead, again well before it happened, arising from diverging real exchange rates within the currency bloc – in other words Germany was becoming more competitive while Italy, Spain and others were becoming less so.

So I was delighted to read her summary of the Eurozone crisis – 10 questions about the Eurozone crisis and whether it can be solved.  The is a wonderfully clear summary of the whole situation, written in early September.  Her central point is that the zone’s banking system is at the heart of the crisis, and tackling the banks will the heart of any solution.  European politicians have been trying to avoid this, no doubt because it shows that Northern European countries have played an important role in creating the crisis.  However, not least thanks to the new IMF chief Christine Lagarde, this is changing.

Of course Professor Carlin cannot point to an easy escape.  She points to two alternatives paths, other than the breakup of the zone:

Scenario #1 – a more decisive approach based on current policy (bailouts)
Policy-makers need

  • the existing bailout schemes to be successful and to be seen to be working in the next year
  • to keep Italy out of the bailout regime
  • to develop a replacement for the high moral hazard regime for banks and for governments but to do this in a way that does not undermine the bailout regime in the meantime.

Scenario #2 – large-scale restructuring of bank and government debts (defaults)
Policy-makers need

  • to move decisively now to end the high moral hazard regime by accepting that default on bank and government bonds on a much larger scale than envisaged in Scenario #1 is necessary
  • to engage in restructuring sovereign debt and bank debt by, for example, forcing bond-holders to swap existing short-term bonds for long-term
European politicians are attempting the first path, but the problem is contained in Professor Carlin’s third bullet: devising a financial scheme that avoids moral hazard by banks and sovereign states – this reckless behaviour in the belief that it will be underwritten by everybody else.  The favoured answer of many is a “Eurobond” – i.e. government borrowing underwritten collectively, combined with a toothier version of the failed Stability & Growth pact.  But this decisive step towards a more federal Europe runs well beyond any democratic mandate.  The German Chancellor, Angela Merkel, is rightly suspicious.
Which leaves the second scenario, which is favoured by American commentators, based on their experiences of Latin American debt crises.  This is surely much more convincing, and I hope that the IMF will use its influence to push down this path.  Bank regulation clearly needs to change, but beyond that it doesn’t need a more federal Europe.  We can use bond spreads to act as a break on government profligacy – which is how the Eurozone should have been run from the start.
A final point worth making from Professor Carlin’s analysis is that dropping out of the Eurozone wouldn’t really help Greece or any other country that much.  They would still have to run a government surplus, and so still have to go through a very painful reform programme sucking demand out of their economies.  Of course the hope is that a rapid devaluation would kick start exports – but it does not stop the need for painful supply-side reforms if these countries are to recover anything like their former standards of living.

Time the British woke up to the crisis in Europe

It is a commonplace for Britain’s politicos to sadly shake their heads and complain that the Euro crisis demonstrates a woeful lack of political leadership.  Regardless of the fairness of this charge in respect of Angela Merkel, say, it clearly has resonance for Britain’s own leaders.  There seem to be two camps: ravingly impractical Eurosceptics, and sheer paralysis from everybody else.  The mood amongst Europhiles (as I witnessed at fringe meeting at the Lib Dem conference) is akin to deep depression.  It is time for this to change.

To be fair some key players have been showing something less than paralysis – George Osborne and Nick Clegg have both been conspicuous in raising the seriousness of the situation with their international colleagues – but their pronouncements are hardly more helpful than anybody else’s.  They aren’t bringing anything to the party and they aren’t trying bring our own public alongside.

The first point is that the Euro crisis has serious implications for Britain, much though most people seem to think it is happening to somebody else.  This is for two main reasons.  First is that this country would be caught up in any financial disaster.  Our oversized banks are deep in the mess; Euro zone countries are vital trading partners for a country very dependent on trade – especially given that international financial services are so important to us.  Our fragile attempts at recovery risk being completely blown off course.  Forget Plan B if this lot breaks.

The second reason it matters to Britain is that resolution of the crisis could take the European Union in a direction that is against our interests.  Britain leads the single market wing of the union: the chief Euro zone countries are more protectionist in their instincts.  We risk being shut out of the design of critical architecture – much as the Common Agriculture Policy was put together in our absence.

How to proceed?  We need to tackle the dark spectre head on: the best resolution of the crisis involves changes to the European treaties.  To change the treaties will require a referendum here (let’s not weasel out of it this time).  If we face up to that challenge now, it will show real courage, and help get things moving.

But, of course, we would need to see something in return.  Changes to the treaties that would further our interests.  These need to be to promote the single market, to protect London (and Edinburgh) as centres for financial infrastructure, and to reduce unsightly bureaucracy and/or operating costs of the Union (the siting of the European Parliamnet at Strasbourg needs to go on the table, at least).  Given our understanding of finance, we might well have useful things to say on the Eurozone architecture too – even though we clearly can’t be part of it.

To do this our leaders (the Prime Minister and the Deputy Prime Minister in the lead) need to build two sets of alliances.  The first is within the British body politic, so that the referendum can be won.  This needs to cover Tory pragmatists (David Cameron, George Osborne and William Hague), the Labour leadership and, preferably, the SNP.  The Lib Dems have an important role in making this hold together since, by and large, they understand the Union the best.  Mr Clegg’s experience of deal-making in the European parliament counts for a lot.  The next set of alliances is within the Union itself, to create a Single Market bloc.  The obvious candidates are the Nordic countries, Ireland and the Netherlands, together with many of the newer members in central and eastern Europe.

This will be very difficult.  That’s the point, almost.  The reward is a stabler EU, constructed more to our taste, even if we must concede some powers to an inner core of Euro area countries.  Everybody wins.  And by taking on the wilder Eurosceptic fringe, including their newspaper backers, it will cheer all right-thinking people up.  It’s time we stopped being paralysed by fear and came out fighting.

Memo to Miliband: break some eggs

As a political insider it’s very easy to be carried away by partisan emotions, but very dangerous.  Thus I have been watching (not literally) the Labour conference with a great deal of caution.  I want to scoff, but my better self tells me to be more careful.  And that applied especially the Labour leader Ed Miliband’s speech delivered yesterday.  After reading the commentary in the papers I decided that I had to read the text of it too.

Let’s start with the good bits.  It set out a clear narrative for the past present and future. His starting point was Mrs Thatcher and the 1980s.  Some good reforms but she started a culture of heedless self-advancement.  New Labour was a step forward because it invested heavily in public services and in tackling poverty – but it didn’t do enough (anything?) to change a reckless business culture, and this brought the whole system down in the financial crash of 2008-09.  After the crash the current government is doing nothing to address this underlying sickness, and its austerity policies are choking off growth and making things worse.  For the future, Mr Miliband wants to transform society by making government more moral, and finally taming the monster that Mrs Thatcher unleashed.

Mr Miliband’s core constituency, the “squeezed middle”, remained firmly at the centre of his narrative – although he wisely did not use that phrase.  These are people who are neither rich nor poor, and whose living standards are being steadily squeezed, as government largesse is focused on those who are poorer.  Mr Miliband identified this key group at the start of his leadership, and he is maintaining his aim.  He is clearly more successful in this than the Liberal Democrat leader Nick Clegg, who has identified the same group as decisive (using the phrase “Alarm Clock Britain” to describe them, to general derision), but has struggled to hit the right note.

It is easy to pick holes in the narrative, but that would only hint at its main weaknesses. Firstly that to most people it will sound abstract and irrelevant, and second that he failed to tackle the hard choices that would show he meant business.

Irrelevance?  Britain stands in the middle of a global financial crisis, lurching towards another episode on a par with the crisis of 2008.  The Euro zone is at the heart of this crisis, and thus the European Union, this country’s main diplomatic and economic partner, is facing the biggest challenge in its history.  And Mr Miliband’s answer to this global challenge?  To fiddle with VAT rates and implement the government’s cuts a bit slower.  The world situation got hardly a mention.  No doubt the idea is to set a time-bomb for the government, so that as the economy fails to approve he can say “told you so”.  But since Labour’s explanation of the 2008 crisis was the world economic situation, what answer do they have if this government says the same thing?  As George Osborne and David Cameron  scurry round the globe trying to stave off disaster, Labour stays at home and whinges about VAT.  This doesn’t look very convincing.

And he did not have much else to say that would help his squeezed middle voters in the pocket, rather than replicating their complaints about benefit cheats and fatcats.  In fact he did not have much to say on specific policies at all.  He wants to cut university tuition fees (which would in fact help the better off more than anybody) and that’s about it.

The problem is this: change hurts.  People know that instinctively, so that to convince them that you are serious you have to do painful things.  Tony Blair did so by taking on a number of Labour shibboleths: Clause 4 of the party constitution, not raising income taxes and (as few now remember) sticking to the then Tory government’s austerity plans to tackle the deficit.  David Cameron did similar things on socially liberal issues, while eschewing tax cuts.  What will Mr Miliband do to show that he is serious about his mission to transform Britain, and win back trust?

Here are some things he might do:

  • Accept more publicly the logic of the Government’s austerity policies in order to create the funds for tax cuts to the squeezed middle as the economy improves.  We did get statements that they could not reinstate all the government’s cuts, but the delivery of these was so muffled that I don’t think most Labour activists noticed them, still less become angry.
  • Call for reform of the European Union so as to address the unfolding financial crisis, throwing down the gauntlet to Tory Eurosceptics.
  • Pick a serious fight with the trade unions about public sector strikes and participation in Labour politics.
  • Call on the government to get serious about coasting schools and sub-standard health services by in the first case getting tougher on teachers and the second closing sub-critical hospitals and putting serious heat onto GPs.
  • Challenging ordinary voters by pointing out that they also contributed to the crisis by living off credit cards and going for ever bigger mortgages.

Each of these would require a lot of courage – but that’s the point; he must make a lot of people  in his party angry.  Instead we get some rather bland ideas about favouring “good” rather than “bad” businesses.  But these sound rather like things that the coalition is already putting forward on banking reform and reshaping the economy towards manufacturing and green businesses –  Mr Miliband even quoted Lib Dem Business Secretary Vince Cable in his support on the radio this morning.  Other ideas sound like more bureaucracy.

To make an omelette, they say, you have to break some eggs.  Until Mr Miliband starts breaking eggs nobody will take him seriously.

The strange cheerfulness of the Liberal Democrats

I returned from the Liberal Democrat conference in Birmingham yesterday.  After the March conference, when things were already looking bad, I blogged under the title of “The Strange Cohesion of the Liberal Democrats”.  The cohesion is still there, but to that was added widespread cheerfulness.  This was not expected, but widely commented on .

This is strange for a number of reasons.  The party’s situation remains dire.  The Independent’s cartoonist depicts the party’s bird logo as a dodo.  Though I naturally believe the opinion polls showing the party at 17%, this still isn’t that much better than what was achieved at the calamitous local elections last May.  And plenty of polls show a much lower rating, down to 10%.  Some party leaders (notably Paddy Ashdown) made much of some improved results in local by elections; but these are nearly meaningless, a fortunate confluence of favourable local factors.

And there’s plenty of anger about too, especially over NHS and education reforms, which worry many activists a lot.  And not everybody buys the leadership line that there is no alternative to the government’s austerity policy.  As Steve Richards of the Independent points out, the second conference after a general election should be when it is safest to display dissent in public; so why was it so muted?

Party conferences are always bubbles where attendees can cheer each other up without too much intrusion from the outside world.  And there was undoubtedly an element of this.  One reason for both the cohesion and the at times positively aggressive cheerfulness was a response to adversity.  As a party that is just one step away from oblivion, people did not have the confidence to display of too much disagreement; we are much more vulnerable than the Labour or Conservative parties when in similar straits.  This is not a bad sign; it shows a degree of maturity and survival instinct – in contrast to the response of the SDP in particular to the 1987 election, which resulted the party’s poll ratings dropping into the margin of error of nothing.

Party outsiders will not be convinced that the party’s fortunes are on the mend.  But for insiders there are some reasons for cheer.  First, of course, the thrill of being in government remains strong.  For so long the only hope of getting pet policies into action was that other parties might steal them.  Direct access to the levers of power is the ultimate reward for any serious political party.  It still feels good; almost nobody says that going into coalition with the Tories was a bad idea.

Further, the threat from the other parties does seem to have receded somewhat.  The Left’s rampant anger at the cuts and Lib Dem “betrayal” seems to be burning out.  Compared to Sheffield the demos outside the conference were pathetic.  And Labour’s poll rating are stuck in a rut.  And as for the Conservatives, only last May it looked as if their “human shield” strategy was working to a tee.  Our presence in the government was supposed to help de-toxify the Tory brand, while we took the full brunt of the anger at government policies.  Since then the party has managed its PR better, so that the opposite seems to be the case: that the Lib Dems get credit for anything progressive that the government does.  For example quite a lot was made of the government’s commitment to increasing foreign aid; and yet David Cameron gave this policy much more prominence than we did before the election.  In this, ironically, the party has been greatly helped by the Tory right, and their friends in the press.  The more they complain about Lib Dem influence, the easier it is for the Lib Dems to take credit for the nice bits.

All this gives credence to Nick Clegg’s “centre ground” strategy, first unveiled in March (I think) to widespread scepticism.  That means the party defines itself by what others do, the complaint ran.  But neither of the other parties can win a majority without the centre, so denying it to them improves the chances of a hung parliament.  And there may just be enough votes there so that the party can hang onto enough seats to be a real influence in the subsequent bargaining.  And who knows, if the party stays the course they may even get a little grudging respect from the electorate that so despises it now.

And of course, there is the attention.  The party have never had this degree of scrutiny before, leading to the widespread complaint that nobody knew what the party stood for.  They still don’t, by and large, but as the party learns how to present its distinctive profile in government this is changing.  But will the public like what they see?  Or is liberalism just a middle class hobby?  Getting people to understand what liberalism is, and persuading them that it is good for them is the real challenge ahead.

 

It’s time for the Lib Dems to grow up

I had wanted to include the phrase “growing pains” in the title of this post, but growing is not what is happening to the Lib Dems at the moment.  Not in the sense of membership or votes, a small summer bounce in both notwithstanding.  It is about becoming a more mature political party – and becoming more mature is always painful.

I am going up to the party’s conference in Birmingham tomorrow; I don’t know what I’ll find.  Evidence of pain is everywhere.  There was a moment in April 2010, after the first party leaders’ debate when we dared to hope for something spectacular.  And this wasn’t just a  media frenzy – it was palpable on the doorstep and in the streets.  It has been downhill ever since, apart from the brief thrill of seeing the party enter government – though this left the voters unmoved, as opposed to party insiders.

Last May’s local election results were a massive trauma.  Many of the party’s activists were in the process of winning the country over “one ward at a time”.  They thought that by being relentlessly local, and doing a good job for their local voters, they would be insulated from the national tumult – something that has been by and large true in the past.  So it was a really rude shock.  Many blame the party’s MPs as shameless opportunitists who are out of touch with the voters and activists.  And of course, it showed the party that oblivion is just around the corner.

And there’s everything else.  Endless criticism on the papers; being the butt of comedians’ jokes (and worse) on the radio and TV.  Taking responsibility for unpopular reforms in the NHS and education.  I have an email today from a very long standing member who is about to resign because of the NHS bill.

And yet.  These are all vicissitudes that Britain’s two most successful political parties, Labour and the Conservatives, (leaving aside the SNP for now) have long learned to take in their stride.  It is part of being a grown up political party.  It is part of mattering.  At members’ meetings one of Nick Clegg’s favourite stories is what happened when the party went back to talk to the many voters that slipped out of the party’s grasp in last week of the General Election campaign.  It amounted to, “These are tough times, and we need a grown up political party.”  Enduring this type of pain is a necessary step to breaking through to the next stage of the party’s advance.

The trauma could kill the party, of course.  But if you are part of it you need to be positive, and ensure that it doesn’t.  The opportunity is palpable.  Neither Labour nor the Conservatives are flourishing.  If the party can hang on to something like its current number of seats, especially in a smaller parliament, then another hung parliament, and coalition opportunity, is odds on.  Who needs electoral reform?

And the whole nation is in trauma.  The good times just aren’t coming back.  The apparent economic achievements of the last decade are proving hollow.  Property prices will not rise endlessly to make everybody rich.  We haven’t got the money for the public services we used to have – just as the demographic challenge is about to get much worse.  Labour still haven’t come to terms with their failure, and seem to be stuck somewhere between anger and denial.  The Tories are riven by divisions between a rampant but lunatic right, and the leadership’s more paternalistic vision.

If the Liberal Democrats can get their story straight, there is all to play for.  There are signs that the party is slowly addressing this.  The conference motions don’t really do this, with the Facing the Future motion on strategy (with its 17 priorities) a particular disappointment.  The Quality of Life and Community Politics motions offer some light, though.  But behind the scenes there is a furious discussion over the party’s narrative.  Some good ideas are emerging.

Labour’s vision of a benign and overpowering government, aligned with rampant capitalism, has let the country down badly.  The Tories are chasing after a fantasy of a little England run by an unfettered middle class.  The Lib Dems can offer a sustainable future based on real empowerment of the people, in a proper international context.  Go for it!

Taming the banks: two views from the FT

Oh the shame of the FT’s paywall!  Yesterday  the paper presented a wonderful view of the debate on the UK banking reforms proposed by the Vickers Commission with two opinion pieces under the title Taming the banks, long overdue or utter folly?  For the reforms was regular columnist John Kay.  Mr Kay (though I’m sure he’s not really a mere Mr) is one of my favourite FT columnists.   His articles do come out on his website in due course, but not this one yet, I’m afraid.  It is a very lucid article, pointing out the massive size of UK banks balance sheets: at £6 trillion, four times the size of the country’s income.  Of these but a tiny fraction is lending to industry, and a rather larger fraction is domestic lending such as mortgages.  The bulk of it is to the finance industry pumping up the great game of leverage.  The idea of ringfencing, the critical part of the proposed reforms, is to stop the small fraction of balance sheets that matters to individuals and “real” businesses from being poisoned by financial engineering gone wrong; or to put it another way, to stop the British state from having to underwrite the latter to protect the former.  Mr Kay’s only criticism is that the reforms are being implemented too slowly.

The opposing article is from Sir Martin Jacomb.  Sir Martin is no more a banker than Mr Kay, that is to say he’s done non-executive directorships but not much more; he’s a lawyer and chiefly famous for saying that universities should be independent of government, and that Oxford University should cut its ties with the state.  The bankers are in fact rather quiet on the reforms, after some rather clumsy lobbying to get the implementation delayed, which appears to have been quite successful.  The weakness of their case seems reinforced by Sir Martin’s article, which nearly nonsense.  Is this really the best the FT could find?

Sir Martin reiterates a familiar litany:

  • The reforms advocate breaking up “universal banks”, but this model “can be perfectly safe”.
  • It will hurt the City’s international position. “There must be universal bankers in Frankfurt rubbing their hands.”
  • It will cause the loss of jobs and taxes.
  • the new banks will not able to offer helpful products to industry.
  • It does not address the immediate problems besetting European banking,  “which result not from mistakes by bankers so much as blunders by European Union governments in the management of the euro.”

This lot is readily disposed of:

  • Universal banks did not come out the recent crisis well.  It is true that some of the better managed ones did not need direct government rescue (Barclays and HSBC in the UK, BNP Paribas, JP Morgan), though still benefited from implicit and explicit guarantees.  But far too many did, especially in America (notably Citigroup and Bank of America), here (Natwest and HBOS) and Switzerland (both UBS and SBC).
  • This is yet another cry of “Wolf!” from the City.  I remember how us not joining the Euro was supposed to kill the City in favour of Frankfurt.  The City’s standing is based on network effects of people, skills and time zones.  Most of its activity is from foreign owned institutions already.  If the UK owned activity shrinks, it is because the public liabilities that go with it are too large.  It best that we adapt.
  • This sort of answers the jobs and taxes bit.  As Mr Kay points out, lending to job-creating non-financial businesses should not be affected, and might even benefit if they do not have to compete for attention with gearing up of financial products.  It is much healthier if our economy is less dependent on highly paid bankers’ jobs.
  • Sir Martin uses the example of a currency hedging, which might be useful for an exporter with a long term contract.  But surely his ordinary banker can introduce him to an investment banker at little extra cost?
  • This is true; it’s a separate issue.  But is quite astonishing for him to suggest that the Euro area problems are the fault of politicians rather than bankers.  It was the bankers that bankrolled the Italian, Portuguese and Greek governments at absurdly cheap prices.  It was its banking industry that laid the Irish government low.  It was bankers from across the zone that pumped up the Spanish property bubble.   This kind of “it wasn’t us” defence from bankers simply shows how little they have learned from the disaster.

Apart this whingeing, Sir Martin makes a more subtle point.  We should be promoting more competent management amongst banks, and excessive regulation does the opposite.  Well, we must ask what caused the rampant incompetence in the most of the world’s banks before the crisis.  Surely it was the thought that if things went bad governments would come to the rescue, and it would all then be somebody else’s problem?  This is exactly what the reform seeks to address.  By separating the investment banking side out, it means that failure from that side will be easier to tolerate, and should not require the UK tax payer to stump up.  The retail side would be bailed out in the event of a failure, true, but it will be more difficult for these banks to pump themselves up to create a massive hole.  

There is an irony behind all this.  The point about banking reform is to make banking more, not less risky, for bankers anyway.  We need to see more bank failures, not less.  The by-line to Sir Martin’s article is perhaps its most cogent bit:  “Beware the paradox that a system to limit risk invariably increases it”.  But risk to whom?

My 9/11

11th September 2001 was a wonderful, bright and sunny day here in London, just as it was in New York.  You didn’t need a jacket outdoors.  I was on duty for a presentation to a prospective client that morning, at the client’s offices.  I was done by lunch time and walked through the lobby blissfully unaware of what was happening over the Atlantic, though it must have been on television screens in the lobby by then.  As I walked through the sun from Gresham Street to our office on Moorgate I was in a world of my own, relieved that the presentation was done.

It wasn’t until I reached the office with sandwiches in hand that I found out.  “Somebody has flown a plane into he World Trade Centre,” a colleague said.  I had in mind a light aircraft, or perhaps something a bit like the plane that flew into the Empire State Building in the war.  It was only as I tapped into my computer that the scale of it started to become clear.  The internet was overloaded, so the information only came through slowly.  At first there were the burning buildings.  And then the towers collapsed.  We held an emergency management meeting, since the trading and custody activities that we administered would certainly have been affected.  But there wasn’t much we could do.

Our management team had held a global conference in New York only that April.  And we’d had dinner at the restaurant on top of the World Trade Centre tower.  We’d used those lifts.

Nobody could do much work; we gathered in small groups.  Apart from trying to understand the sheer horror, the main concern was what the Americans might do in response.  Revenge attacks would only make things worse, we all thought – but were all too likely.

I went home a bit early, I think.  A lot of City workers had been sent home in the afternoon.  I joined my wife in front of the television – she had been home that day and had been watching the TV as the second plane struck, having turned it on more or less by accident just after the first one had.

I had a meeting scheduled for that evening. The local primary school where I was a governor had an OFSTED inspection going on – and the inspectors wanted to talk to governors that evening.  Would it be cancelled?  No notice to say it was, so I went.

And the meeting did go ahead.  The head of the inspection team, a self-important little man, carried on as if nothing had happened; he didn’t even mention it.  This was his day of power, and no terrorists were going to spoil it.  I managed to sit through it, but said nothing.  Back home to watch the TV.

And that’s what I remember.  How have we been spending the 10th anniversary?  We went to see Marlow’s Dr Faustus at the Globe.  We started in a shower, but the weather was mostly nice.  An interesting and enjoyable play, well produced and played to a packed house.  Going there and back we had to go to Waterloo, since the Bank branch of the Northern line was closed.  We worked our way through the crowds attracted to the Thames Festival – and had a delicious venison sandwich for lunch from one of the stalls.  On the way back we visited the Tate Modern to have tea in the Members’ Room and to see the Miro exhibition in its last couple of hours.  Mostly his work is beyond me; but some of the paintings were breathtaking – especially the huge triptychs.  The resonances with other Spanish artists, Picasso and Dali, were interesting, as was the relationship to political background in Spain (and Catalonia); I can only imagine the man’s total despair in the early 1940s.  As we hurried for the station in the rain we passed a carnival parade gathering for its moment of glory behind the National Theatre.

The South Bank was packed with people seemingly of all nations having a nice day out.  Apart from the rain the only blot was Transport for London’s decision to keep the York Road entrance to Waterloo tube closed – in spite of the crowds.  The folly of this was illustrated when they had to close one of the down escalators because of an accident.  Such are our everyday frustrations ten years on.

And later I will be joining some of my local Lib Dem friends in the Nightingale pub for our regular monthly drinks.  Life is well within its usual frame.  But we don’t forget.

 

Tony Blair is both right and wrong, but mostly yesterday’s man

Well I was going to turn the radio off this morning when John Humphreys was interviewing Tony Blair to mark the 10th anniversary of 9/11.  But I couldn’t go that far, and I caught about half of it.  I’m glad I did because it has helped clarify my views on confronting terrorism.

Mr Blair’s main argument is a lot more subtle than it is often made out to be.  He dismisses his critics as believing that the Islamic extremists (and I think that term is a fair one) are not a lunatic fringe who can be contained using normal security methods.  They are in fact the extreme end of a much larger spectrum of people who agree with their virulent anti-western narrative.  Since they have such a large hinterland of people who will support them and from whom they can recruit, they will simply grow stronger if they are not vigorously confronted.   He completely rejects the idea that the West’s interventions in Iraq and Afghanistan have made things worse, since he says the terrorists would have gathered strength anyway.  What provoked 9/11? he asks.  The Al-Qaeda threat is of much longer standing than than these Western interventions.

And he is partly right.  There is a big hinterland for the terrorist groups, and an even bigger group of people who think that there are two sides to what is going on, rather than it being a simple battle between good and evil.  But from the same facts I draw a different conclusion.  This is not just a battle between just goodies and baddies; there is a huge neutral middle ground whose support is decisive.  These are mainly Muslims, and they live all over the world.  If these people come to the conclusion that the terrorists are a bad thing, who will make their aspirations more difficult to achieve, then Al-Qaeda and its like will be isolated and disappear.  If, on the other hand, they accept the clash of civilizations narrative, their support, even if mostly tacit, will keep the terrorist threat going forever.

There is a security campaign against the terrorists; but there is also a hearts and minds campaign for the Muslim public.  Unfortunately, if we are too uncompromising on the first campaign we will not win the second.  It is important to occupy the moral high ground.  The tragedy is that Tony Blair, and the American neocons, think they are occupying this higher ground.  In fact they have been systematically provoking the Muslim public.

And the important thing to understand about the hearts and minds campaign is that the ground shifts.  What gave Al-Qaeda real strength in its early days was the US intervention in the first Gulf War in the 1990s, which led to the stationing of US troops on Saudi soil; this seemed an insult.  It probably didn’t mean a great deal to the wider Muslim public, but it was enough for a determined group of Middle East activists to get started, mainly from Saudi Arabia and Yemen.  Israel, Iraq and Iran didn’t really come into things.  This was enough to lead to 9/11.

But the American response to 9/11 changed the game.  The outrage initially gave them the precious high ground, but they made cynical use of it.  Two problems stand out: the campaign in Iraq and taking sides with Israel.  These may not have been all that relevant to the Al-Qaeda threat in 2001, but they became so because the the strength of the American intervention.  The Muslim public became angry with America and its allies, and the extremists were able to pump up the clash of civilisations narrative.  They started to draw in many more recruits from right  across the world, including Britain.

But the hearts and minds battle has not been one-sided.  The terrorists’ very success has exposed the weakness of their case.  They now spend more energy killing other Muslims and creating civil disorder in Muslim countries than they do on attacking the west.  They have no real answers to the problems that trouble so many Muslims: dis-empowerment and poverty.  The west is retreating from Iraq and, ever so slowly, Afghanistan.  The British coming together after 7/7 has not played to the extremist narrative.  The western response to the Arab Spring has shown it to be a bit less cynical than people thought – comparing favourably with China and Russia, say.  In Libya Al-Qaeda and the west turned out to be on the same side.  Israel remains a running sore, of course.

Of course we need a robust security response to the terrorist threat.  But it can do more harm that good.  Assassinations and suspending the rule of law should not be part of it.  The terrorists may not be moved by this – but they will increasingly lose the support of their hinterland.

We have to move on.  Mr Bush’s and Mr Blair’s response to 9/11 was a huge mistake, and we can’t expect them to acknowledge this.  But they are yesterday’s men.  We’ve learnt a lot.  A new generation of leaders is showing more subtlety.  Slowly, we are learning how to manage the terrorist threat.

 

Time for Plan B?

Predictably, the heat is mounting on the British government to soften its fiscal policy in light of weak economic growth.  Today the new IMF chief Christine Lagarde seems to be adding to the pressure, even if she wasn’t explicit.  The code for changing this policy is referred to by political types as “Plan B”.  I am now convinced that some sort of Plan B may now be a good idea – but it would not take the form that a lot of Plan B advocates, especially the Labour opposition propose.

First, why?  I have been progressively convinced by the FT’s economics editor Martin Wolf.  I have found him to be easily the most cogent commentator on the current economic situation, better than any number of economics Nobel Laureates or former members of the Bank of England monetary policy committee, who seem to think that their past glories can compensate for the shallowness of their analysis.  Paul Krugman, Ken Rogoff, Joseph Stiglitz, to name a few, have disappointed somebody that has respected their weightier works; David Blanchflower has turned downright silly in order to widen his audience.  Mr Wolf has been consistent, logical, and has gone further than most to try and understand all facets of the arguments.

The problem in the UK economy is not lack of consumer demand, since consumers are right to pay down debt as a priority right now.  The problem is lack of business investment, and a weak world economy, and hence potential export markets.  And excessively tight fiscal policy may send investment into a doom-loop, since so much depends on confidence.  Add to that the fact that current levels of public expenditure are unsustainable, and the massive size of the public deficit, and you will understand that most versions of Plan B are unconvincing.  Reducing the cuts simply creates problems for later, and builds up a false confidence in what this nation can afford.  Cutting VAT temporarily, as advocated by Labour,  addresses the wrong problem.

The answer must be to promote investment.  As Mr Wolf points out (here but behind the FT paywall), there is a golden opportunity for the government to do so because its borrowing costs are so low.  The trick is finding projects that deliver a convincing financial return; borrowing against such projects does not undermine the country’s finances.  Unfortunately this is easier said than done.  A lot of public projects make extravagant claims about their worth, but are in reality wasteful prestige initiatives – think of the Building Schools for the Future programme.  Or else they turn out to be so badly managed that promised returns are never delivered – think of NHS IT, or Edinburgh trams, or anything undertaken by the Ministry of Defence.

There is no doubt some scope for increasing funding to standard public projects.  But actually what needs to be done is to provide more support for medium sized and small businesses, especially growing ones.  The banks are not stepping up to the plate, demanding ludicrous returns for their efforts.  Surely there is scope for the government to beef up regional development funds and increase funding for institutions such as the Green Investment Bank.  This will not open the floodgates to usher in an era of rapid growth.  But surely it would help.