Month: March 2008

It is good news that the Bank of England is thinking about its role in modern markets, and that the US and UK authorities are to review how to handle banking liquidity and regulation in future.

This agenda should include:

1. Have the Basel regulatory arrangements encouraged too much off balance sheet lending?

2. How can a market in securitised good quality loans be restored? Should the authorities buy in or accept as collateral more of these loans, whilst protecting taxpayers against losses?

3. Has the UK Government burdened British markets with too much off balance sheet borrowing of its own? Can this be curbed?

4. Do the leading Central Banks have enough capital of their own to keep markets liquid enough?

5. Shouldn’t Central Banks try to keep market interest rates in line with their announced main interest rate by open market operations?

There is nothing wrong with the idea of banks bundling up loans and selling them to others in the market. That is healthy and helps the growth of the world economy. The danger arises if the banks themselves continue owning large quantities of corporate bonds or securitised papers in conditions where they find they cannot sell or value these assets at a realistic price. Market seizure for bonds or loan packages forces banks to cut their lending and to write down the value of these assets on their balance sheets in moves which can become a vicious circle.

The Central Banks need to find a way of keeping the high quality bond and securitised paper market in line with their chosen interest rate generally. That should be the main issue facing the US/UK Committee.

Meanwhile, the UK Government needs to ensure rapid and orderly repayment of the Northern Rock loans and needs to consider whether that is sufficient to give the Bank of England the financial firepower it needs. It also needs to cut its own appetite for borrowing, which is now in danger of crowding out other borrowers from the market. The Bank needs some of its old powers – and information – back from the FSA so it can understand banks’ positions more quickly and respond in money markets appropriately.

Last night I heard the Wokingham choral Society sing Carl Orff’s Carmina Burana. The highlight was a brilliant rendition of the drinking song of the “Abbot of Cucany”, who boasts that if he drinks with someone all day in the tavern by the evening that person has lost his clothes. The baritone soloist was Grant Doyle. The next song in the cycle explains that in the tavern they gamble to excess as welll as drink too much, and that is where the money goes.
The songs are based on the poems of the wandering scholars or goliads of the Middle Ages, who sung of Fortune’s turns, of love, singing and drinking. The songs and the poems in Orf’s version have a life and a passion which is tremendous. The Choral Society did it full justice with their strong performance.
Listening to that medieval world recorded in verse is like peering under the seats in a cathedral at the misericord carvings to see those scenes of everyday life long ago. The Abbot of Cucany reminded us that just as our present condition drives too many to excessive drink and gambling, with government promoted gaming and high taxes on drink, so too did conditions in medieval Europe.

Press reports of large salaries paid to senior Council officials, and yesterday’s post on this blog about Chief Executives of Councils, has revealed the strong feeling that Council bureaucracies are out of touch and spending far too much on themselves.

We elect Councillors to direct and control these bureaucracies, and are about to see some of them on our doorsteps asking for our vote. It is a good time to remind them that above all we want them to seek value for money in what they do spend, and reduce the Council Tax they impose on us.

To do this, in many cases they could cut the Tax by:

1. Telling their officers that they are halving the budget for external consultancies, as they expect their professional staff at the Council to do more of the work themselves.
2. Impose a staff freeze on all administrative and executive posts, appointing to the ones that really matter from among the exisiting employees of the Council.
3. Design with the top officers a new structure for top officials, with fewer posts, to be implemented as and when senior officers leave. This might entail removing the CEO’s office, or requiring the CEO to undertake one of the functional roles as well.
4. Concentrate the work of the Councils on the main services that matter – schools, social care, planning and transport. Reduce the Council’s involvement in trying to run everyone else’s responsibilities through so called partnerships.
5. Cut the number of commitees and meetings, with Councillors concentrating on a limited number of issues that matter most.
6. Cut out all the expensive surveys – it is the job of Councillors to keep in touch with electors and to know the mood of the taxpayers and service users. Councillors should take an interest in the Complaints department, and seek to abolish it by managing down the number of complaints to remove the need for it.
7. Stopping the urge of some Highways departments to tinker endlessly and expensively with the network.
8. Review the assets of the Council and dispose of assets that are not being used and properly maintained in Council care.
9. Implement a policy to cut the Council’s use of energy by improving insulation, controls and building use.
10. Review the Council’s transport requirements and vehicle use to cut the cost.

Many Councils could save millions by following these simple approaches. Officers try to keep Councillors discussing “unavoidable commitments”, “partnerships”, “service obligations”, grant formulae and budgets based on the expectation of perpetual growth in resources. Councillors need to reply by talking about the cash people have to send to the Council to pay for everything, and the results they are getting for spending it all. They should remember that many people cannot afford an increase in their Council Tax and do not think it represents good value to them.

I am glad to see the Telegraph today giving front page prominence to the rise in mortgage rates this week. See yesterday’s blog on interest rates and the MPC for the background.

Sometimes it is events dear boy that land a Prime Minister in trouble.
This week we have seen the PM trying to cement an alliance between the UK and France. Listening carefully to Mr Sarkozy’s agenda it sounded more like the old Scottish-French alliance, as a strong and integrated EU is more SNP than English Eurosceptic. Gordon Brown followed that diversion with an address to the Labour Scottish Conference, reminding us all of the important Scottish influence over current UK policy.
Maybe this will bring forward the day when Labour, desperate to keep their nothern English seats, propose a change to the Barnett formula to redress the current imbalance in funding?

Since 1974 we have seen the introduction of the Chief Executive Officer in to the world of local government. They arrived with the hated new counties of Avon and the rest cobbled together out of smaller cities and rural areas with differing senses of loyalty. They were introduced in the naïve belief that they would make local government more efficient and better managed, drawing on a false analogy with business. The bogus Counties have now been swept away. It is time to review what the CEOs have achieved and ask if the idea has lived up to expectations?

I know some very good Chief Executives in medium and larger sized British businesses. They all earn six figure salaries, but they deliver great value for their customers and profits for their shareholders. They have the following main responsibilities:

1. To deliver revenue growth, by selling more things to more customers.
2. To control costs – in the case of manufacturing usually to reduce the costs per item produced each year
3. To recruit, motivate, monitor and control a team of senior managers to run the business and through them to keep up morale and achievement throughout the company.
4. To report fully to the Board on performance, and to take a leading role in consultation with the Chairman in developing the strategy for the business.

In order to do this modern private sector CEOs have to work very long hours. Most larger businesses are global or widely spread, with CEOs having to travel away from home regularly to meet customers, visit suppliers and control far flung factories, sales offices and administrative offices. They are often away at week-ends. Their rewards contain a substantial performance oriented element that depends on delivering the profits in the budget, and their jobs are on the line if performance falls too far.

In contrast, the CEO of a Council does not face many of these requirements.

1. The CEO does not have to bother about revenue and customers at all. Most of the revenue comes from national taxpayers in a pre-arranged annual grant, and the rest from a local tax. All the Council does is send out letters to reluctant payers reminding them they will be put in prison or their goods seized if they fail to pay. Councillors deal with the “customers”.
2. Most Council executives present their Councillors at the beginning of the annual budget process with a long list of demands for extra spending, and claim that crucial and valued services will have to be cut if the higher administrative budget is not agreed to along with extra tax to pay for it. I have never met a Council CEO who thinks they can deliver as good or better service for less money (in the way industry has to to stay in business) and volunteers a cut in the Council Tax for the first budget draft. If cost control breaks down during the year in a particular service or area, the CEO simply presents a demand for revised budget amounts to be spent, raiding the contingencies fund and the Council balances to pay for it.
3. The CEO does help recruit the senior management team, and does have the task of guiding and chairing its meetings. However, Councillors are also involved and the responsibility is therefore more blurred than in a business. Council CEOs rarely in my experience monitor and manage absenteeism, one of the most obvious ways of watching morale. A CEO facing a problem of low morale is as likely to tell Councillors it is their problem than to fix it.
4. The CEO does not report to the Council in the way a CEO reports to a company Board. Individual Councillors have executive roles, and they are responsible for reporting to Council. The CEO is not usually allowed to speak at Council meetings, though in a way these meetings ought to be primarily reviewing the CEO’s performance at delivering the Council’s strategy. A well led Council does not need a CEO to craft or develop a strategy, as the strategy is the set of policy proposals and promises the majority group offered to the electorate when they secured their victory.

Some Council CEOs work long hours, because they may need to adjust their diaries to have time to talk to part time Councillors, and tbey may face difficult problems in particular services that need their help. I accept that many CEOs are hard working and well intentioned people. I just think the role they are in is ill defined and their actions largely governed by an ever tinkering central government. They do not have to travel abroad, find time for customers, and rarely work week-ends as Councils have all their meetings during the week. Many enjoy the benefits of public sector flexi hours, which allows the long week-end. Most CEOs now have CEO departments – to their salaries of £125,000 to over £200,000 we should add much more as pay for the staff who help them do their work. A typical CEO’s department is now spending several hundred thousand pounds and in many cases well into seven figures.

If Councillors wish to continue with CEOs to “run” their Councils, they need to get smarter at motivating and incentivising them. To some extent, with this government, the CEO will remain whatever the Council does a well paid clerk filling in forms and trying to meet box ticking requirements put on them in profusion by the central government. At the very least Councillors need to specify what the CEO’s responsibilities are, set some hard targets to hit, and to make some of the large payment to them only if they achieve the results. Surely, for example, the CEO could be set a tough target to cut the total administrative costs and outside consultancy budgets of the Council each year, instead of automatically budgeting for an increase? Most Councils start from a well padded budget in these areas. Those Councils which do offer some performance pay often adopt soft targets which do not stretch the executive concerned. It would be interesting to know how many CEOs have been denied all their performance pay for bad performance.

There are other models that could be used. A Council could dispense with a CEO’s department. The Council’s chief financial or legal officer could be made the chairman of the executive team, taking on the executive leadership role, whilst the Council’s strategy could be very clearly the responsibility of the Leader’s office. Alternatively, CEO departments could be slimmed down, and the different nature of the CEO role in local government from business recognised by suitable targets and monitoring of what the CEO can and should do.

The current system is not working. A rapacious central government keeps burdening local government with more and more things to do whilst often not offering sufficient grant to do them. At the same time local government can become careless about its own costs, resulting in unacceptable Council tax rises. Often a good Council is forced into extra administrative staff and extra external consultants to comply with the nit picking requirements of Whitehall.

Last night I heard a fascinating presentation from the President of Virgin Galactic about their plans to sell people a trip into space on their reusable plane and space ship. They are offering the opportunity to people to become astronauts, seeing the beauty of our planet from space and experiencing weightlessness.

The ambition and the simplicity of the project are both stunning. At a time when NASA and the European Space programme still spend huge sums on earth launched rockets, which require very expensive technology and huge amounts of fuel to propel them the first 50,000 feet against gravity and the atmosphere, Virgin proposes taking a smaller and more lightly fuelled rocket and space ship up on a carbon fibre plane, launching it from beneath the plane at 50,000 feet to make the rest of the climb out of the earth’s remaining atmosphere. The result is a project which offers a low launch cost, a small fraction of the launch cost of a conventional rocket after adjusting for the different payloads the official machines can currently handle.

I find this interesting for several reasons. The first is the private sector is now taking on the challenge of space travel, a province that has ever since the 1930s and Wernher Von Braun’s pioneering steps with rockets been government controlled and financed. The second is the private sector is able to handle a project of this complexity with a very small team of people, to a budget that represents a sensible business bet for a reasonable sized company. The third is the private sector has come up with a very different way of solving the complex problems of launching a heavier than air machine and hurling it into space.

It is always difficult for governments to have the vision and the parallel thinking necessary to make major advances. In Second World War Britain, when innovation was at a premium in matters relating to warfare in order both to keep up with the enemy and to try to get ahead, many of the important breakthroughs came from private sector companies taking a chance on small budgets, and in some cases occurred despite official discouragement. The official machine can often develop just one house approach to a problem. Churchill’s scientific adviser, Professor Lindemann, thought it impossible for the Germans to make the V2. When he was shown the first reconnaissance photo of one on the ground he denied it could be a missile, because it was not large enough to hold all the solid fuel he calculated it needed. He could not bring himself to believe that the Germans had mastered liquid fuel technology for such a rocket and could therefore produce a much smaller effective weapon.

It is easy to criticise in retrospect, as we know the answer. Clever, well educated well intentioned people like official scientific advisers can make mistakes, because government can easily be gripped by a single way of looking at a problem, reinforced by its command hierarchy. We all know how difficult sometimes it is to find something for someone else, as we do not often know what we are looking for, as their description misses out the characteristics that our eyes and brain pick up.

That is why it is exciting that generations brought up in the belief that if you want to go further in space or take more payload you just need to build bigger and bigger ground launched rockets with more stages should now see another more fuel efficient , lighter cheaper option – taking the rockets well up on a plane before the final launch into space. It will be interesting to see how long it is before NASA and the European Space Agency look seriously at Virgin’s breakthrough. The Virgin craft comes back to earth, I was told, with less risk than the re-entry of conventional space vehicles, because it reconfigures its shape to “feather” into the atmosphere before converting back to a glider shape to land. Safety as well as a greener way of getting into and out of space is high up the commercial agenda.

The monthly tea party for academic economists at the Bank of England – the regular meeting which Gordon Brown claimed meant he had “made the Bank of England independent” – looks more and more irrelevant. The other changes Mr Brown made to the Bank, taking crucial powers away, have exposed the Bank to torrid times trying to run the markets.

This week some mortgage rates have gone up, because market interest rates have gone up. The MPC has not met. It has not wanted rates to go up. It has expressed no view on the way money market rates these days may be up to 1% or 100 basis points higher than the rate they recommend.

It should be the Bank of England’s job not merely to host a meeting to settle what rates should be, but to spend the rest of the month making sure that decision is reflected in market rates. If they do not do so, the system breaks down and the MPC looks unimportant.

When market rates first started deviating from MPC rates last year we were in the high noon of the moral hazard period, when the Bank seemed to think it was fine that rates were higher than MPC rates. This week it looks as if the Bank of England does wish to bring rates more into line with MPC recommendations, but is finding it difficult to do so.

A central Bank can control market rates through its open market operations as a main player in money markets. The Bank has not been willing to commit sufficient funds to markets to get market rates down to its proposed rates. One of the reasons may be that the Bank has too much committed to Northern Rock and is short of fire power itself to deal with the shortages in the markets. It reinforces the case for securing earlier repayment of the money advanced to that institution, so the Bank of England has a freer hand to sort out money market rates.The MPC itself could meet and lower its recommended rate to offer a signal that it does not want market rates to rise.

Listening to President Sarkozy yesterday was a salutary experience. The setting was both splendid, and redolent of more difficult times in Anglo-French relations. Maybe the organisers had a sense of humour, asking our guest to address us in a room dedicated to British royalty and dominated by the hanging of magnificent tapestries of the battles of Trafalgar and Waterloo. The President spoke with passion, seeking to woo his new friends. He sidestepped the pitfalls of the place brilliantly, referring to times when we had been rivals rather than allies, and valuing the differences in our approach to monarchy, whilst showing understanding and enthusiasm for our democracy.

The address was divided into two parts. The first was all Duke of Alencon – it was 2008 going on 1579. Mr Sarkozy wooed us, praising England and English virtues. He spoke movingly of the sacrifices many British people made to save liberties in Europe in the two world wars. He told us how much he admired our independent freedom loving spirit, and how much it meant to him to be speaking in the Mother of Parliaments to Lords and Commons assembled. He explained how important the UK had been to Europe’s past, and how much he wanted a new alliance or friendship for Europe’s future.

He had in mind a new romance that was not exclusive. He freely confessed his continuing commitment to the Franco-German axis that has been the centrepiece of the EU for many years, and said he understood we would wish to continue our special relationship with the USA and would not wish to sever links with our Commonwealth. His general vision was of us both reforming world institutions together in the name of democracy. He wooed well.

Then I felt we shifted to 1802, and we heard echoes of a different leader of France. Sarkozy came over as a peaceful Napoleon, pursuing French interests with a strong eye for the diplomatic opportunities.It was the spring of peace of that year, with many British politicians rejoicing at the new friendship they had negotiated with Napoleon, travelling to Paris to see more of the powerful phenomenon that had emerged from French political turmoil. Months later Napoleon was frustrated by his unflattering portrayal in the British press, whilst Britain did not feel France’s leader had kept to his promises.

Sarkozy’s vision was not our vision of greater freedom for individuals, companies and institutions. It was not a call to free trade and less regulation, nor a shared passion for less government and less central intervention. His ideas were more Euro socialist than free enterprise democratic, with the French view of Europe gaining a new ally to project it further on the Euro stage. He wanted Britain to join him in an agenda of reform, but not the reforms many of us would want.

Many MPs and peers loved the speech, and heard the President say he now recognised the need to reform the Common Agricultural Policy. They did not reflect on what he went of to say. To him the main problem with the CAP seemed to be that we let in too much agricultural product from outside the EU, not too little. He wants stronger controls over quality and cleanliness to keep out “unwanted “ product. I did not hear him say the CAP is an affront to the developing world and a scandal for domestic consumers, so it should be swept away.

Some heard him say he was much more of an Atlanticist than previous French leaders, and keen on fighting the Taliban. But he did not say France would definitely send more troops to the hottest part of the conflict, and seemed to want to press on with a European defence alliance between the two greatest military powers in Europe on a basis that might not be a strength to NATO.

His language was more Euro protectionist than free trade and free enterprise in the passages that contained any detail at all. He believes in national champions, sector strategies, and all that panoply of governments picking winners that we had to challenge and change in the UK many years ago. He seems to want more laws on employment in the belief that these offer worker protection rather than destroy jobs. He voices the usual EU agenda of solidarity, intervention and protection.

He had studied the views of our Prime Minister well. He played on his wish to join the PM in a Euro drive against climate change, and constantly stressed the Brown catchphrase that the UK has to be engaged in the EU. He reassured us that the era of institutional change in the EU is over and now we can see what can be done with the “reformed” EU of the Lisbon Treaty. There was no institutional changes left showing above the parapet whatever might be going on behind closed doors in Brussels. He offered those of who want less European government nothing, other than his casual admission that Europe is a “difficult” subject on this side of the Channel, and that he had been on the losing side in the permitted French referendum on the EU constitution, which clearly had not phased him. There was no sense of irony in the way he put the two parts of his speech together. The first longer part, was brilliant praise of the different British temperament and interests, seeking an independent freedom loving democracy. The second part was a request that we commit ourselves to a centralised over governed European project that limits and damages those very freedom loving democratic virtues for which we at our best have stood.

My worry is we will as a country pay too high a price for fine French words without seeking delivery of the true reforms for freedom and free enterprise that the UK should expect of its European partners. We should judge the new French President not by his address – it would be wrong to complain that it was too long or too inflexible, or to praise it too highly for its fine sentiments and moving passages about our more recent past together. We should judge him by whether or not the French are now willing to reform the CAP in a way which cuts its costs to consumers and taxpayers and helps the developing world.