Political indecision is making the banking crisis worse

29 05 2009

The news  that British banks are lending less, non-financial companies paid back a net total of £2.3bn to big banks last month, points to what well may happen next in the recession, ie good businesses finding it harder to get loans or overdraft facilities. Anecdotal evidence suggests this is already happening. I was at a round table discussion with a dozen other IT CEOs and Vince Cable, the Lib Dem’s treasury spokesman,  last week in which all agreed that it was getting harder to get money from the banks. Cable himself  said that banks were holding on to their worst customers, to try to stop them defaulting on their loans, but were reducing their good customers in order to rebuild their asset balances. Other figures released yesterday from the British Bankers Association showed that mortgage lending fell to its lowest level for 8 years in April, confirming that potential house buyers are being deprived of credit as well.

It is clear that the banks are doing their utmost to hold on to as much cash as possible. This is because many are basically bankrupt and only being held up by government support and guarantees. They are desperately trying to rebuild their balance sheets as fast as possible, essentially by hoarding cash.

What does this mean? Firstly for businesses that find their overdrafts being curtailed it will lead to cash flow problems and possible business failure. This will lead to further unemployment and deepen the recession.

Secondly it means that the indecisiveness shown by the UK government and others in the face of the credit crunch has come back to haunt us. Two things could have avoided the problem we now find ourselves in. The banks inflicted with toxic debt could have been fully nationalised and made therefore instruments of government policy, in which case they could have been forced to lend. Alternately they could have been fully exposed to the market and forced to write off their losses. This would have led to bank failuire on a huge scale, but good banks would have emerged which could now be lending properly. Instead we have the worst of both worlds, bankrupt banks which are desperate to rebuild their balance sheets to offset the huge toxic debt that most still have.

The collapse of large banks would have been a shock to the system, but the alternative is now years of credit starvation and consequent misery as they try to struggle out of the hole they are in. Indecisiveness at a political level has once again made a bad situation worse.

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Economists behaving badly: why individual behaviour is not to blame for the recession

27 05 2009

Bromley illustrationsLast week I attended a meeting with Robert Shiller, a behavioural economist and author of Animal Spirits.  As I have discussed previously, behavioural economics is becoming increasingly influential, particularly as an explanation for the recession and how to get out of it.  Essentially Shiller and others are offering psychological reasons for why people make apparently irrational decisions in the economic sphere.

Shiller’s argument last week boiled down to saying that the recession was caused by lack of confidence, an extension of FD Roosevelt’s proclamation during the 1930s depression that ‘all we have to fear is fear itself”. If you listen to the podcast you will see that in response to  questioning from  Richard Sedley and myself, Shiller is quick to concede that psychology cannot explain everything.

Two reasons why behavioural economics is on the rise

In the current climate of economic and political meltdown however, behavioural economics does not have to be a coherent theory of everything in order to be important. It is becoming increasingly influential because it plays a dual role in the current period of turbulence:

1)  it allows us to feel that it was the mistakes of the greedy bankers, driven by over confidence and corrupted by easy money that caused the recession. In that sense it takes away the necessity to think through what really caused the recession and the underlying political and economic problems that need to be resolved.

2)  if we are irrational beings as Shiller and others suggest, then the State is justified in stepping in to protect us from ourselves. Behavioural economics becomes another reason why the State needs to intervene more, not less, in all aspects of life.

This is why behavioural economics has been taken up by the Obama administration, the British Conservatives and people in New Labour. They are all looking for an explanation, any explanation, so that they can avoid tackling the really hard issues.

Barriers to innovation and change

22 05 2009

My closing speech at the Battle for the Economy conference

Taking risksWe have to frame this discussion within a cultural and a political context. Our society has become tremendously risk averse at every level. Common sense tells us it is unlikely that we can create a more dynamic and innovative economy when we are afraid to send our children to the park on their own, and how likely are these over protected children  to become confident risk takers as they grow up?

This may seem too much of a generalisation, but if you look at the specifics of what is happening in our economy you can see the links.

Take first of some of the better commodity producing  parts of our economy, the bits which actually make new things. Foremost in these are aerospace, pharmaceuticals, bioscience and energy. Each of these industries has been subjected to intense criticism for their supposed threats to us as consumers or to the environment. The aerospace industry is held responsible for global warming , as is the energy industry. The pharmaceutical industry is held in deep suspicion of selling us drugs which cause more harm than good. The biosciences have been held back by fears of Frankenstein food amongst other things. Many of these negative sentiments have been allowed to go unchallenged by our political leaders, sunk as they are in the mire of market research led policies.

How likely is it that these industries can attract the best and brightest young people to work in them or the support they need in universities or from investors when they are held in such low esteem?

Almost every time a crisis has arisen in public confidence the instinct of our political leaders has been to cut and run: Tony Blair over the MMR scare and nearly the whole political class over nuclear power and GM food. This has helped to create a lack of trust in science  and an irrational approach to what are the most exciting areas of development in medicine and other things.

The lack of leadership has encouraged this mood of anti-science and anti-progress, so much so that when swine flu broke out in a school down the road from me local opinion was divided between those who didn’t believe some scientists’ claims that  it  was a real threat, and those who took heed of this warning, but did not believe that Tamiflu was safe and not a dangerous kin to thalidomide, for example.

Secondly, also stemming from our over inflated sense of risk is the belief that economic growth in itself, whatever the source,  is problematic. There are even people who say that recessions are good for us and for the planet. These anti-growth sentiments fly in the face of reality, as all human progress is built on material prosperity. Yet they are very influential.

Thirdly, many of these anti-growth feelings are wrapped up in the idea of the Green New Deal, which seeks that progress and development be restricted to areas that can be proven to do no harm to the planet. This narrow criterion threatens to divert investment down narrow channels and hold up progress elsewhere.

Any threat to the environment or indeed any other challenge we face, is best dealt with by encouraging scientific and economic development on a broad front. Often scientists and technologists come up with solutions to problems they were not themselves originally looking for. To narrow down the areas of scientific endeavour too much risks those serendepitous discoveries.

Even on the terms of alternative energy itself, encouraging economic growth offers the best way forward. China creates 16% of its electricity through renewable sources, compared with 4% in the UK. This is  because China ‘s demand for energy to fuel its rapidly growing economy is such that it is prepared and able to experiment and innovate on a grander scale then we are here.

Finally, in the UK we have lower than OECD levels of both VC investment and R&D, but this is not because there is an absolute shortage of investment money available. Rather, risk aversion is what dominates large investors. The roots of the financial crisis lay in the fact that vast sums of money were recycled through financial instruments with a view to spreading and avoiding risk, incredible as it now seems.

There may be a case, as people like Lord Drayson are arguing, for diverting more of our State resources into encouraging innovation, but science and innovation need to be unwrapped from the risk aversion which surrounds and infuses them at the moment. Perhaps some of the money which is going into authoritarian measures such as ID cards, or the extension of CRB checks could be diverted into encouraging productive investment instead. In other words, this is a politicial and cultural problem about priorities, not an economic one, and so it needs to be tackled at that level.

It is clearer than ever before that there is a close connection between the failures of political leadership and the problems of our economic set up. You cannot tackle one without the other. The good news is that unlike, for example, a cure for cancer, the cure for our political problems lies in our own hands in the here and now.

Michael Martin and greedy bankers, the search for scapegoats continues

20 05 2009

Latest casualty of UK recession politics: Michael MartinApparently, the decline of our political parties is down to the Speaker of the House of Commons, Michael Martin; and we already know that the recession was caused by Fred Goodwin’s exorbitant bonus payout.  Now that we have rounded up, or at least identified the culprits of the dual crises of the economy and politics we can breathe easily.  Or so the story goes…

Of course this is nonsense. Nothing has been less edifying over the past six months, during which the recession has gained momentum, than the search for scapegoats. The recession was not caused by greedy bankers, but by a fundamental imbalance in the world economy which came to a head in the financial sphere. The crisis over MPs’ expenses is a largely self-inflicted predicament; as soon as politicians laid the blame for the recession on ‘greed’ they set themselves up for a fall.

The search for scapegoats continues to be a hindrance in facing up to the real problems of the economy, and of politics. Public anger over the recession is understandable and it is true that our leaders , both in the political and the economic realms, should be called to account. However, scapegoating individuals seems to me an attempt to evade true accountability and in the process we are making little headway.

What I think about when I think about the economy

18 05 2009

This was the focus of my opening speech at the Battle for the Economy conference on May16. 

Battle for the Economy

During the course of this recession we have all become familiar with the concept of zombie banks, that is banks which are technically bankrupt but which are kept afloat by government support. It has now become clear that we also have zombie governments and zombie political parties, brain dead organisations which have only remained upright through support from the various financial bubbles over the past ten years. Recently, these bubbles have burst and the living dead are falling around our feet.

Austerity or innovation?

What kind of society do we want to live in? In Britain we have reached a crossroads. One path is the one that most politicians seemingly want to take us down, the road to austerity, public spending cuts, wage restraint, the sharing out of misery. At the moment these are the loudest voices. The other, less mentioned path, is the path of economic growth, innovation, technical and scientific progress, and rising living standards.

We have been preparing for the path to austerity for some time. Even during the boom years loud and influential voices proclaimed the pointlessness, misery and environmental damage created by materialism. In the process reality has been turned on its head. The truth is that all human progress, in health, education, science, technology and democracy is built on rising living standards. The poorest countries in the world are not paradises , they are inflicted with disease, despotism, ignorance and the desperate routine tragedy of the needless death of their children.

The new politics of austerity are the politics of low expectations. Such politics do not expect us to lift ourselves out of a recession through hard work and application. It does not inspire us to have a positive sense of where we are going as a society, nor does it challenge us to put the pursuit of science and innovation at the core of what we do.

The alternative

What is the alternative?  Politics and politicians have shrunk to insignificance and to levels of humiliation unknown in the modern era.  At this point it is vital that those of us who believe in the potential of humans to fix things and to change our circumstances for the better, should raise our voices louder than ever and act wherever possible to influence an agenda of change.

I would say there are three big issues facing us which are both economic and political and how we act on them will determine the future:

1) any western economies, with the UK at the forefront, have become relatively less and less productive and more dependent on financial services, credit and state spending. What can we do to encourage innovation and an increase in productive activity, and what are the barriers to this? Societies which are economically sluggish are rarely vibrant or dynamic in other ways and our culture of risk aversion is holding back the future.

2) China and other developing countries are demanding (and rightly so) to reshape the world order. This will create enormous tensions at a global level.

3) the lack of any contestation to managerial capitalism has shrunk the worlds’ options and led to the diminishing of politics and human aspirations in general. Anti economic growth sentiments have become rife in response to the perceived failures of the market.

So, I think it is important to remember that when we talk about the economy, we are not just discussing numbers and statistics, but the substance of our lives and the future of our people.

Have a productive day!

Economic recovery-cheerfulness is not enough

15 05 2009

Here is a link to an article I wrote on whether we are seeing the light at the end of the recessionary tunnel. Tomorrow I will be speaking at this conference, hope to see you there.

What is Britain for?

13 05 2009

This is a comment piece I wrote for The Times on the direction Britain ought to take and why I think the ‘age of austerity’ is nonsense.