UK Economic Meltdown?

Yesterday's Daily Telegraph could not have been more depressing on several fronts. First came the news that Tesco, that bastion of growth and barometer of the UK good times, announced slower sales growth as like for like sales growth was 3.5% and below forecasts. Second was the words of the HSBC Chairman Stephen Green that the banking model that delivered soaring debt was 'bankrupt'. Thirdly, the news that one of Britain's top house builders, Barratt, requires £1bn just to survive. Hot on the heels of this HBOS saw shares dip below their rights issue price potentially scuppering their plans for a vital £4bn injection of capital.

Looking behind these headlines, HBOS shares have dropped a colossal amount from nearly £11 at the beginning of the year to around £2.58 while Barratt has seen its share value decrease by nearly 80% in 2008. And we're only half way through. In fact only one of the UK's top house builders has seen its market capitalisation decrease by less than 50% this year - that's Redrow and their shares have dropped a mere 49%.

Banking, Housebuilding & Groceries

The three industries are very indicative of the UK economy as a whole. As the UK suffers the implosion due to unregulated greed by banks funding the once limitless credit and cheap cash which in turn fuelled a 170% increase in the average house value in the UK in the last 10 years, finally the staple industries like groceries and clothing which represent that which we cannot do without have begun to creak - Tesco being the mightiest. To boot, in the last few weeks there has been a 20% drop in sales of petrol as Britain counts the cost of its greed and wrong decisions. Mervyn King, Governor of the Bank of England, at the meeting of the British Banker's Association, hinted that Britain faces a return to 'stag inflation' which is experienced when high inflation coincides with shrinking economic growth. As if on cue, it is estimated that a further 23,000 people went into negative equity recently as house prices began to fall - those with 100% mortgages became the next wave of victims after the swathe who had 100+% mortgages. Then it was announced average family energy bills could rise to £1,300 per household and just to add to the gloom, it was estimated that 200,000 more pensioners were classed as in poverty in 2006/7 compared to the previous year. We do not have to mention growing trade deficits and rampant government borrowing - the picture tells the story. Britain is in the early stages of a serious economic meltdown.

Unemployment & Unemployability

Amidst all this gloom and doom, the one statistic that has not had a great airing is unemployment. Well, it's probably going to be the next big area to be concerned about. After the government managed to decrease unemployment by around 1m over the last 10 years it has been paradoxical to see an almost identical number added to those who are long term incapacitated and cannot work - we shan't dwell on that strange statistic even though it smacks of false accounting. However, it is almost certain that the next major bad news will be that inflation and economic slowdown will start to affect the unemployment figures in the next few months as companies strain in the face of rising costs and less profit.

The fact that Britain has become a nation of obsessive spenders and negative savers will inevitably come home to roost. For many, as the potential of employment decreases, there will be little left to rely on other than state handouts. In turn, the burden on the state will rise and accordingly there will be cuts in spending and an even greater call on taxes. The failure to deal with the immigration issue will come home to roost which will ring hollow for the likes of William Hague who 'mistakenly' fought an election on it and was poo-poo'd by Blair as being out of touch, as several million new arrivals will be affected as low-level casual jobs at restaurants, coffee bars and labouring will go first when finances get thin. These are predominantly young, unskilled workers who will be starting families here. The burden on the state could be enormous.

Accountability

I will be devoting more of my blog space to the concept of accountability, but let's just consider this for now. The Chairman of one of the world's largest banks (HSBC)has decreed that the world's banking model is bankrupt and that there should be a return to 'good old fashioned principles'. He highlighted to the BBA that 'The huge build up of leverage in the system over the last five years where profit depended on high and ever increasing leverage, that model is gone, and that model is gone because it is bankrupt. You simply cannot build a business that way. Those that will propser will be those that remember the basics - the importance of customers, deposits, capital and balance sheets...good old fashioned stuff.' He went on to say that banks will have to adjust to a future where profits and return on capital will be lower and that the bubble had burst. He also said. 'It's worth noting that some of the returns on capital looking backwards were inflated, and much of the returns were subsequently given back....the banking industry has not covered itself in glory in recent months.'

While this is a stark and honest appraisal of the situation, it also beggars belief. HSBC has not been alone in writing off almost incredible amounts of loss in the last few months to pay for its wrong decisions and mistakes as it took a greedy place at the feeding trough. He, along with many bank executives, traders and analysts, across the industry will take their extortionate bonuses and not pay them back. They will just have to look gloomily ahead and conjure up another way to keep the money pouring into their salary pots. How they can stand there and say such things and keep their jobs is amazing.

My recent article on Nassim Nichloas Taleb springs to mind. He ascerted that banks never make money on loans, mortgages, derivatives and the like - they only ever make money on the interest on current accounts and charges, all other profits being surrendered shortly after they make them. Yet, it will be the front line banking staff and everday customers who will bear the cost of all this. In higher interest and bank charges, the blame will be passed on in the form of job losses of front line bank staff, higher costs to customers and poorer services.

So when, exactly, does this industry and the government that allowed it to feed at the frenzy of unsustainable growth become accountable? Taleb believes Black Swan random events caused the sub-prime collapse and aftermath. But if anyone ever read the book 'Fantasy Island' by Larry Elliott and Dan Atkinson you would have known that the New Labour Project of 'a surfeit of consumption, a surfeit of speculation and a surfeit of deceit' was at the heart of the causes. They also believe that the New Labour movement has brought about a culture a destruction of personal accountability - 'blame anyone but me' - and that flows from the very top, Gordon Brown and Tony Blair, to the bottom, you and I, plus all those greedy banking executives in between. We are all accountable.

Bricks & Mortar Turned to Gold

It has always been the mantra by the government that the previous Conservative government were 'boom and bust' and there is some truth to that. But what we have seen from the 'prudent Chancellor' is nothing short of lunacy despite all that Oxford-bred intelligence. How could he have not possibly seen the looming danger of the over-egged housing market in the UK? With over 40% of all new mortgages being re-mortgages, it was obvious the nation was leveraging the new-found equity and using it to fund a spending bonanza. With it came bundles of extra credit in the form of interest free credit cards, 125% mortgages, 5 times salary mortgage lending, cheap loans and plenty of places to spend the money. Designer fashions boomed, coffee shop culture rose, all day drinking hours and foreign home ownership shot up - Majorca turned to Mauritius for holidays and is it me or are there actually more Aston Martins, Bentleys and Range Rover HSE Sports on the roads than before.

How could we have all possibly ignored the warning signs? How could we all have forgotten that if something looks implausible it's because it probably is?

Hindsight & Foresight

With the benefit of hindsight, would the bankers and consumers have done anything different? Of course not. You do not have to look far back to see the evidence of similar mistakes - the Dotcom boom is there for us to see and the dramatic collapse of the share markets was so profound that they have never recovered the ground to this day. So why do we allow the banking industry and government to employ such people who repeatedly make the same mistakes? Why do we allow people like Stuart Green at HSBC keep his job (sorry to pick on him as he is not alone)? Why do we allow a system to build up incredible profits on the back of assets that cannot possibly sustain it?

And do not think they learn from their mistakes. As the banks suddenly realised that their credit spree was going to leave them with incredible debts backed by worthless assets, they stopped lending to one another for fear of making the problem worse and we saw for one of the first times in modern economic history, the complete disconnect between the Bank of England Base Rate and the cost of mortgages. Gordon Brown had lost his magic wand. So what did he do? First he rescued Northern Rock by putting it into government ownership and gave us all a liability of £125bn and started paying the advisors millions to do the obvious, then he stumped up £50bn to mortgage companies to try to kick start the credit bonanza again and hope the asset-backed security market would become unpetrified. The very thing that got us into the mess in the first place.

Experience & Education

There is a theme on my blog about experience and education and how that is valued or not in the recruiting process. Well consider this - you can have a ton of education from the best universities in the world and all the experience your time on earth will allow but it will not stop people making appalling and greed-driven decisions that are not in the long term interest of the corporations and government they serve. I will later assert that interviewing potential candidates for roles has little to with what's on their CVs and here is the demonstration why. We, as experienced citizens and consumers, should also shoulder blame. We swallowed the hype, took the money, spent it and will carry the can. While taxes grew stealthily and wars were declared in our name we allowed the country to be led down a path that could only end up in one place. In the meantime, we allowed the guff about health care, education, security and transport to be spouted and gotten away with. We sit in a country with outrageous taxes that do not have to be paid by the richest people, we have become a playground for the super-rich to make more money, we have allowed our school children to become dumber, carry knives and murder each other while we concentrate our efforts on 'democratising' suitably well-resourced countries, risking the lives of professional soldiers, while we hand out more parking fines and speeding tickets and let the country become flooded by immigrants who will ultimately make our system strain even more.

Meanwhile, the elite write their jocular memoires, re-write history to enhance their glory, get fat-paid jobs in the companies they helped get rich, and carry on making decisions that will affect the future our next generations.

Taking Responsibility

We are all stakeholders in this country and in the banks who hold the deeds to our houses and the money we make. It is time we stood up to the responsibility that gives us. We should make it very clear by our actions that we do not want the wealth of this country squandered and given to speculators who don't live here and we don't want officials who cannot apply the experience and knowledge they have without their greed getting in the way. We have become too dependent as a nation on the strength of the City of London's financial market - it is high time it came under the jurisdiction of proper governance, the scrutiny of the law and do the bidding of its real customers. And it is high time we wised-up to the government's lack of ability to focus on the real issues we face in society today and get the country back into financial order - that will mean us first voting out the jokers who got us into this mess.

These are the views of humble voter and bank customer. I deliberately stoke up the fire to find out what your views may be. I have put the case from one point of view but it is something that requires debate and I hope you will feel you can contribute. It's hard not to get political about this but I see this more as highlighting failure on a grand scale rather than political comment.