Spelling It Out

I have been asked by one of my blog readers, what do I mean when I say 'There is a shortage of houses to be sold at £10m+. Go figure.'

It's a good point. What I mean is that the top earning and most wealthy individuals of this country and those who work here but are classed as non-domiciled for tax reasons have been the least affected by the financial crisis over the last period - in fact, they have mostly benefited from it. There is a good reason for that and why Britain is still in recession despite the fact that super-wealthy people cannot find enough £10m+ homes to use their money on. It's because our bank bailouts ensured that the way these people earn their money was not just preserved but actually the whole system has been 'reset' at taxpayer cost so that they can earn far, far more from the kinds of products that mean nothing to us and society in general.

Our Government, very different to Governments of France, Germany and Japan, poured almost all of their 'stimulus' money into saving the banking system. Germany, for instance, put €10bn into directly subsidising wages so that workers were not laid off and into major education rejuvenation projects and technology plus stimulating directly, and substantially, the car industry. In contrast, we have really provided little stimulus and what we have provided mostly went down the throats of banks in the form of Quantitative Easing who used it for their high risk casino banking.

That is the reason why we have remained in recession and why the only way out to service our long term debt will be to make the low earners disproportionately less well off as tax increases will be aimed at those first.

It's hard to spell it out any clearer - but there is a tiny percentage of very wealthy people who helped cause the crash who are far better off because of our Government's policies on economic rescue. Sarkozy and Merkel told Brown he was wrong in trying to bail banks out too readily, they have been proved right.

This year over 100 banks have failed in the US and not a single saver has lost their money - nearly every one of those banks were small regional players that did not participate in the activities of the greedy banks - yet they took the brunt of the economic catastrophe. Meanwhile the newly revitalised investment banks like Goldman Sachs and JP Morgan Chase are talking in terms of record profits and bonuses.

The solution to our problems are actually making the problems worse.

It's Payback Time

If Silvio Berlusconi 'fingered' you for a particular role, I should think most of us would feel distinctly uncomfortable and start looking over their shoulder.

As David Mills has found out, there can be a high price for helping him out even if the initial rewards are good. So I wonder how Tony Blair must be feeling now, having just been endorsed by the Italian PM as the 'ideal' candidate for the new role enshrined in the Lisbon Treaty of EU Presidency. Currently, Mr. Blair is busy squeezing being a Middle East Envoy in between earning an estimated £12m since leaving office in 2007 in various other roles as writer, public speaker, non-executive director and adviser on globalisation to people willing to pay £2m a year for his wisdom.


Only the ratification of the Czech Republic stands in the way of the appointment which Berlusconi wants confirmed as soon as is 'legally' possible. The word 'legal' must send a shiver down his spine for the man who describes himself as, 'The most persecuted man in the world'. There are no suggestions of favours being called in although those with good memories will remember that the Blairs have enjoyed multiple free holidays at various Berlusconi properties in Tuscany and Sardinia. But as Tony's good friend, Peter Mandelson, knows there are always such things as free lunches and holidays on £80m yachts and the like. Just tell the public that you discussed the weather and they will believe you.


My memories are of Berlusconi smiling and greeting with a bandanna as his hair was busy being transplanted and dyed while dreaming of nubile young girls. It is as good as endorsement as Blair will get as Sarkozy and Merkel are rumoured to have not endorsed him while he is unlikely to get it from Chairman Brown.

Where's George W Bush when you need him?

Different Strokes

China will spend around 2% of GDP on Fiscally Stimulating its economy this year and the same next - USA exactly the same this year, dropping to 1.8% next while Germany will spend 1.5% this year and 2% next. Britain will spend 1.4% this year and zero next.

Germany's biggest issue is that the money it has pledged to stimulate the economy is not being used fast enough, as much of it is for driving renewable energy into public buildings, building more, refitting old buildings and other projects. Such projects are big public spends and their laws mean that tenders have to be written and due process observed. This has bottlenecked public spending and so they have introduced ranges of laws that say spend of less than €100,000 does not have to go to public tender, just a few quotes while some projects up to €1m can avoid the old tender process. In just 14 months, they need to spend €10bn in education alone and the rumour now is they will spend that money on anything that disperses the cash quickly meaning that German schools could become showcases for interactive learning for all Europe. The main thrust is that instead of just a few large construction or IT companies benefiting from the spend, literally thousands of small firms will benefit from the spend.

Along with direct Government subsidies to firms to pay wages in the recession, Germany has deadened the impact and unemployment has not risen appreciably despite spectacular insolvencies like Arkandor. Britain, meanwhile, has seen unemployment rise to over 2.4m and it continues to rise with predicted peaks at over 3m. In the same breath, we have seen tax receipts drop 20% in the last quarter, 3 times the level of drop predicted by the Chancellor, meaning higher borrowing again - rumours abound about Britain's ability to pay for all this debt which could see our credit rating moved down.

For Britain, it was all about saving the banks and stimulus has come only from the VAT decrease which is temporary. Credit was seen as the major issue and so it had to get flowing again. Instead of seeing more Fiscal Stimulus going directly to save jobs, we have seen new money pumped into the banking system via Quantitative Easing to the tune of £175bn and precious little has got down the line. In fact, credit has never been so expensive and hard to get with banks missing their lending targets consistently, loans at multiples of base rate not points above, fixed rate mortgages at a huge premium and loan criteria at their most stringent in years. Yet banks are awash with new cash from taxpayers and money markets again at the cheapest price in years.

What has happened? Why isn't the money getting into the economy at the points where it is needed? The answer is simple - banks are at their high risk games again, with cheap money and an unlimited guarantee against losses underpinned by the taxpayer - they cannot fail to make money, so why give it to us where they would earn comparatively less?

While even Adair Turner is now mooting a windfall tax to prevent excessive bonuses, and bonus schemes are getting a bit tighter but no one is regulating new salaries and inter-bank headhunting of new 'talent' with lavish guarantees and other perks. The fact is that while bonus schemes may look more difficult to attain the old heights on what is certain is that clauses defining that traders MUST get paid even if the banks are making losses are being set in stone. We actually will come out worse, not better thanks to the lack of thought being into the process by non-bankers.

The end result is that technically France, Germany and Japan have all exited the recession while we suffered a further 0.8% shrink in the same quarter. It seems Britain is more focused on fining and locking up music downloaders than tackling unemployment or real crime - it seems we are more keen on bank rolling the real criminals in banks who robbed us of billions to support their high risk gambles and we have allowed them to do it all again with impunity. Meanwhile, the money getting to the parts of the economy where it is needed is minimal, expensive and late.

We have paid the best part of £100m in fees to numb skull bankers and lawyers to plot a way out of trouble that has put money right back into the hands of those who broke us, and they are keeping it to spend on their lavish high risk derivative gambles to earn mega-bucks to lose again later.

It is anticipated that Angela Merkel will breeze the forthcoming election in Germany and she has around 83% of the anticipated votes in polls. Gordon Brown may take real note as she fought him hard on Fiscal Stimulus and bank bail outs at the G20 as did Sarkozy of France. They have been proved to be right, Brown wrong despite his belief he 'saved the world'. They thought about specific programs and directed spend to stimulate the economy and get money into all businesses while we focused billions on banks and the financial system which are failing us yet again as we did not set rules and regulate properly.

Despite the smug, self-congratulations, Brown has been proved to be lacking in real skill in economics and Britain will pay a very high price as a result.

Putting Money In The Right Places Not Where Your Mouth Is

A study by IAB labour market has concluded that Germany will not suffer the same scale of job losses as the UK. The main reason is that Germany pumped money into wage subsidies which supported employment.

It's more than that. I sit here having spent this and the last few weeks in Germany and it is clear there is a profound difference to the way in which Germany has spent money to stimulate its economy and how the UK has. There are obvious things - Germany and France are pulling out of recession and there are signs that it is sustainable. Germany put money into wage subsidies for firms to help stop widescale, automatic redundancies which has been the first port of call in the UK in response to the recession. Germany and France put around €5bn into the car scrappage scheme to stimulate sales rather than dither over helping mothball factories and then go to scrappage in the UK at a paltry £300m. Angela Merkel pledged €6bn into the wage subsidy scheme but she fought, along with France, the wholesale and unlimited bail out of banks much to Gordon Brown's annoyance in the G20 meetings. The results have been impressive with no huge increase in unemployment and an early exit to the recession while Britain reels at 2.4m unemployed (some say the real figure is 6m) and this will peak at over 3m before the year ends - as yet there is no sign of the end of the recession for the UK.

Germany got it right - we didn't.

Don't React, Think

Another of my New Scientist articles caught my eye. Notice how Government's over react to situations rather than think them through - the soundbite is better than the diligence in most cases as it sustains or wins votes. But you only have to look at Britain's reaction to swine flu to understand we have committed huge resource to try to cover something which could have been contained far more easily and with less cost, and we have simply saved no more lives by doing so. That is one example - another would be how, in the face of a rail disaster we pour millions into rail safety. The result is that we have no more rail disasters in 2008 over 2007 saving a few lives. Meanwhile around 279 deaths happened as a result of trespass and suicides on the rail network in 2008, around the same amount as 60 years ago.

In other words, we tackle the headline, not the real problem costing far more.

We could get onto road saftey but that is its own nightmare deserving far more airtime while all the heightened security, a war with Iraq and spend after 9/11 did not stop 7/7 occurring under our noses. There is now clear evidence that George W. Bush actually got briefed on a threat to hijack US planes just a month before 9/11 and his recation was, 'You have covered your asses, now go.' The subsequent spend on two major wars has got us no further in making us safe - if anything, we are far worse off.

So back to the point. While Germany put specific money like €10bn into education which has to be spent by the end of 2010 on refitting schools or new interactive learning techniques to lay a foundation for the future, Britain chose to put huge sums into bank bail outs without any idea how much was required or when it would stop. In fact, we knee-jerked into taking Northern Rock into public ownership before we had even time to think and then plunged incredible sums into banks and a further £175bn into Quantitative Easing without any idea what the real results would be. Germany and France were right on their game - specific sums for specific effects and no wanton bail outs with incalculable effects.

Guess who is in the better position.

But there is far more. Eminent economists like Kenneth Rogoff argue that we have thrown money at the problem of the banking system with little thought, especially when it comes to regulation. You do not have to be a genius to realise that banks worldwide are now using easy and cheap loans from Governments to fund incredibly high risk debt swap and the likes as they did before but now under the umbrella of taxpayer guarantees should they fail again.

What does it do? Obviously, it will bring vast, short term profits which banks will want to pay high bonuses on - and guess what we have got? Rogoff goes into far more detail but basically he highlights the knee jerk reactionism by the US and UK over Northern Rock and Lehmans as examples of reacting without thinking which has caused a cascade of similar, more profoundly expensive mistakes.

Time and again, we see that Governments react with short term thoughts that have major effects in the long term. Germany and France campaigned against some of the stupidity Britain went for and they have been the quiet, unassuming winners because they put their money into the exactly the right places to get the desired effects.

At the time, Merkel was seen as the ditherer while Brown was seen as the superhero flying from country to country to save the world even if he did inexplicably go through Brazil. Merkel has proved to be right, choosing the thoughtful and precise approach. Brown has a dog's dinner on his hands thanks to his knee-jerk responses to crises. The difference being is that Merkel knows pretty much how much it has cost to get out of the recession - Brown has zero clue and we will pay yet more as banks behave in the same way as before the crisis.

Regulation and reformation of the financial system was the key if £billions were to be thrown at it. We have none and we are faced with the sight of banks paying a thin layer of superstars bonuses that make it look as though we are rich again. Instead we are paying off debts that will last until 2032.

This is not an issue between employer and employee as Darling would have us think, this is about what banks are really earning, what they can sustain and what we have paid them to survive. We are the 'Masters of the Universe' but we need politicians to enforce it. It's our money, after all.