It's Management, Stupid!

I have always believed that banking has been stocked with poor managers - I don't mean retail banking but the stuff where they make the profits and blow them. Regularly.

This is not a new phenomenon. Indeed, Gordon Brown has always labelled the Conservatives as 'Boom and Bust' merchants and that description was largely attributed to their cycles driven by investment banks making big profits and then blowing them in relatively short order. Nicholas Taleb contests that banks only ever really make money out of loans, mortgages and other products to businesses and people - all the other profits they make they surrender.

While the above statements are not entirely accurate, banking is one of the few industries where an incredible focus goes on making money with money to lavish huge rewards and then as busts come, they simply surrender the profits, make a ton of backroom people redundant and then carry on as if nothing has happened. Why would you run a business to do that?

This particular cycle, although a massive crisis around the world that has taken more then just surrendering profits to resolve, is not different. At the core of it is not just the bonus culture, it is not even the derivative type products that can be so destructive, it is not even that the financial system has its own in-built self-destruct or that many of the products are for banks alone to play with - all of which are highly toxic when mixed together. Nope, you can survive all these things so long as you have decent management - and that has always been what was missing.

If we drove our car recklessly and crashed it as a result, we would tend to learn our lesson and so not do it again. But there are those in life who actually thrive on the risk of crashes and love the sensation of speed. Normally, such people would try their hand at racing cars and exercise their urge at purpose made circuits where their activities are well managed and the dangers are minimised. But there are those who insist on continuing their hobby on our roads - they are a huge danger not just to themselves but to us all. Their activities can damage our cars or even hurt us. In extreme, they can kill.

In all cases, these people can, at some point, do it again. Unless, that is, we make them drive slower. We can put cameras and signs up, put bumps in the road or more traffic lights but ultimately if they want to speed, they will. The only real way to slow them down is to make their cars slower.

This analogy is like management. Managers will be reckless if left in an environment where there are few controls, all of which can be ignored if not enforced rigorously. Even the threat of transgression fuels the urge. Not until the business is modified so it cannot do the dangerous things, will managers stop doing them. In banking, this is precisely the issue. They are driving fast cars on our roads and they can kill. Unless we make them modify their cars, they will kill just as they have done in the last year.

The heart of the issue is not the free availability of fuel (money), it is not the way they transact business (the roads), it is not they way they drive (their bonus culture) - it is the cars they use. Give them lesser cars and they can only drive slower.

This will take a different type of manager.

The management of banks, having suffered their reprimands having caused untold damage have clambered straight back in and they are driving just as, or even faster than, before.

Henry Mintzberg, Professor of Management at McGill University, has an interview in this month's Director Magazine. It augments exactly the point I make.

Redundancies - They Aren't Big And They Aren't Clever

So the recession has caught you out. For whatever reason, you did not see this coming, denied it could effect you, the global market conditions changed in an instant or all of those things and the result is that you have to drastically cut costs. So that's it - people have to go.

We can can go on and on about the appalling lack of planning by companies in the lead up to the obvious effects of the recession but let's park that there for a while. Sales have dropped, costs are too high - you need to drastically re-align. Redundancy is one of the major options - for many small firms payroll is easily the largest overhead and so it has the biggest effect if cut.

Firstly, I would make this point. Lack of planning is a mortal sin - the results of which are things like redundancy. So my point is that as a management technique it should be the place of last resort because it is neither a good reflection on your company or on you as individual managers. The stigma of redundancy is all too quickly transferred to the individuals who get their notice and join the dole queue. In my book, the stigma should lie with the managers who caused it due to their incompetence.

Secondly, redundancy is all too often applied as some sort of way to weed out poor performers or people not liked or trusted by management. Many managers use it as a tactic to clear the decks and settle minor scores with individuals they do not like. Once again, redundancy as a management tool is neither a big or a clever thing to do. Unless it is done for the right reasons and in the right way, it will almost certainly cost more than the numbers say.

Thirdly, often redundancies are triggered by the abdication of bullish managers of their responsibilities. Sales orientated directors are classic examples of good managers when the graphs point up, the moment they point down they let the cost cutting people from finance take over. From here, decisions are based on numbers - it will take the loss of 10 of those sorts of people to save £X,000 in the short term - go do it. Naturally, unless they have a department participating in the process, they will not be the managers who have to sit across the table and watch people deflate in front of them as the news is given.

I have had to endure watching a grown man cry and his manager plead with me not to make the person redundant - and while I have had to do it again since, the memory of that first time still haunts me to this day. And so it should with any manager who resort to redundancy to manage their business. Making people redundant is an admission of failure.

Redundancy - The Reality

The first obvious mistake small to medium size companies (SME) make is that they view redundancy as a management tool - it is a chance to get rid of specific individuals. The process of redundancy is in fact all about making the SPECIFIC ROLE redundant to the organisation, as a direct result of a management review in the face of a crisis in the business. That role is no longer required and the associated cost can be saved. So 5 people have to go in the sales department and the sales manager immediately writes down the 5 individuals who should go. Wrong.

The first thing that should happen is a review of the roles and what is required. Then the specific roles which are no longer required should be identified. Lastly, you should then see how many of those roles actually exist and then start using objective criteria to apply to ALL people in those roles.

When you start manufacturing the criteria to fit an individual you are not making the role redundant, you are making a specific individual redundant who happens to occupy that role.

Here comes the first reason why redundancy is not clever - because it is a form of dismissal. Too often managers use redundancy as a cloak for dismissing individuals who they either don't like or they think aren't performing well. The moment you go down the performance route you are entering rugged and treacherous territory. How do you apply performance criteria fairly? Over what period? Against what benchmark? How does everyone else stack up? The only way you can do this rigorously and fairly is to have had rock solid performance criteria already in place against which you do thorough and regular reviews with actions arising agreed by all parties.

In other words, it presupposes you have good HR governance already in place.

If you suddenly spring performance as a reason and you haven't been managing against it previously, then you are wide open for attack. Remember, redundancy is not a clever way to manage a business - this will be a creeping theme which I will return to and not allow managers to get a away with. Making people redundant is a direct consequence of managers failing to manage properly - so the process of making people redundant as a result of it will almost certainly be itself flawed. It is very rare that the individual actions or lack of will have caused the overall bad performance of the company - redundancies are usually made because the business has not reacted to market changes.

Already, an individual might claim that there was little they could have done personally to have prevented overall bad figures.

Recently, an SME company I know made a significant proportion of its staff redundant. The MD told me that he had no regrets as those who were given their leaving orders were poor performers, and were front line salespeople in the main which stood to reason. A few days later he received official notifications of grievances by some of the people made redundant, two of them cited grounds for sexual harassment and sexual discrimination.

The recent reforms of Employment Law since October 2006 have created a minefield for HR governance and there is no doubt that it is significantly harder to dismiss employees without due process and for anything other than the right reasons. To many managers, they see this as unnecessary protection of poor performing employees while others would argue that if the managers do not manage properly then they deserve to be brought to book. In the case of the company I have used as an example, clearly there had been a lack of due management process in managing performance generally and then as applied to the redundancy process - the redundancies were used as a cheap way to performance manage in the extreme. In the process, poor HR governance and lack of proper procedure on performance reviews has left the company wide open to the suggestion that criteria other than performance was used in the process of selecting who would be made redundant.

It is a legal gold mine and there are plenty of lawyers out there willing to take up the challenge in such situations.

The grievance process is also very strict and time consuming and by no means conclusive. While the company may rule that there was no suggestion of wrongful criteria used or that there was dubious conduct by management, lawyers can see things very differently. And while compensation for cases upheld are generally capped, when there is a whiff of sex or race discrimination involved, compensation is open ended and unlimited. Lawyers just love it.

Compromise Agreements

It has become fashionable lately, thanks to the bullish behaviour of US companies who have 'Fire at Will' clauses in all their contracts of employment in the States and so their executives struggle with onerous European laws, to use a Compromise Agreement as a form of dismissal and sometimes to replace redundancy. The essence of the Compromise Agreement is that the company acknowledges it has either not gone through the full due process but wants to get rid of the employee just the same or that it knows that there is a chance that the decision could be questioned and so in signing it, the removed employee effectively waives any right to protection from the law. In return, the settlement for leaving is generally a compromise between what could be claimed legally as compensation and what the company want to pay. It must allow for the employee to have the Agreement reviewed by a lawyer and usually there is a specific allocation of money as part of the Agreement to cover such a review. Once signed, the employee accepts the money on the terms of the Agreement solely and usually they will have restrictive covenants on working at direct competitors and strict confidentiality on revealing the details of the compensation to any other parties.

The Compromise Agreement generally involves an element of tax free money which is handy for both parties and so it typically can approach where a Tribunal might fix the compensation unless, of course, either race or sex allegations are involved.

Redundancy, by contrast, is a relatively low cost method of removing people from the organisation and this makes sense as if a company is truly in trouble and needs to resort to redundancy then it would be pointless to make it high cost. This is why managers get so tempted to abuse the process. In their minds, if they go above the statutory redundancy terms then they should make the leaving package sufficiently generous as to avoid scrutiny by either the employee or any lawyer. The fact is, the moment a manager steps outside the normal redundancy costs then an alarm bell should go off. What are they up to?

Many large firms give quite generous redundancy terms and this is usually as they can account for them differently and take them as one off charges to the business and not interfere with their operating margins in the accounts. BT is rumoured to be taking charges as write offs and 'restructuring' of around £1.5 bn but it will try to demonstrate that underneath is a still healthy business by separating this cost out. However, the astute amongst us will just think that their profitability has been overstated for a period.

For SMEs, of course, redundancy cost itself is nothing other than a direct cost. There may not be vast reserves of profit and cash swilling around and so each redundancy is a direct incremental cost initially while the saving comes a while later. This means, that every SME resorting to redundancies would be absolutely suicidal to not use good HR governance and proper due process.

Redundancy Processes and Options

A) Avoiding Redundancies

1) Non Compulsory Redundancies

There are many sources of good information on how and why to make people redundant and what the process should be. Of course, the first thing you should realise is that redundancy does NOT have to be brought about just because the business is doing badly - in fact this is not generally a good reason for this. The more viable reasons are that the business ceases to operate, relocates to beyond a certain distance or due to the introduction of new working practices or technology as a direct result of which specific job roles are rendered redundant. So when making people redundant purely to SAVE costs you are already entering a shady area which can be made far worse if proper due and fair process is not accurately followed.

Once again, prior business planning should avoid redundancy and one aspect of that should be communication to employees. Nothing hurts a company more than a sudden bolt from the blue, 'Sales have dropped, we are making redundancies'.

It would be far better if the first step could be to announce something like, 'The business is not performing well, management have anticipated a downturn which will affect sales and profit which will result in a specific shortfall in the region of £xxxx and are considering actions to take in order to save the equivalent sum in cost. So management invites cost cutting suggestions by staff, some of which that you might like to ponder are:

a) Reduced working hours for a period
b) Lay offs for a period
c) Reduced pay or a foregoing of any pay rises or bonuses for an unspecified period
d) Voluntary redundancies.'

You may be very surprised that by joining staff into the problem they actually may come up with the solutions - some of which you may have thought of and desired, others which are fresh thinking. Either way, you have prepared the ground ahead.

The outcome of such an involvement of staff may still not get you to where you need to go, but what you can quickly gauge is the APPETITE of the employees to accept drastic action or not. For example, if employees are not happy about the thought of redundancies then they may say that they would accept a selection of other things. Immediately, it is not only pointing to a potential course of action and solution, but it may help alleviate any repercussions of dissenters as you can legitimately claim that you had consulted people and your actions were using the suggestions made.

If you have planned so badly that such a communication exercise is not viable due to time constraints, you can still come up with a range of selections and communicate them but always put the figure you are looking to attain. Giving staff no view of the target savings does not allow them the chance to come up with alternative suggestions which will add up - also make sure they are fully aware of what would happen if the cost savings are not met and the timescales involved.

One of the most powerful ways to avoid nasty action and repercussions is to ask for non-compulsory or voluntary redundancies. You will need to craft a package which poses enough of an incentive for some staff to take it. As an advantage, usually the types who accept voluntary redundancy are the sort of people who would leave if they got the chance and it is a fair assumption to make that they will not be the most industrious types - they may be cynics who have been sniping at management for years or resistant to change. However, drawbacks could be that as such an option is not necessarily role related, you may find one of two of your best people leave plus it is generally a more costly option as long servers can take up more of the available pot. You can have a clause in there to veto certain people's request to leaving if it causes imbalances.

Here's the rub on this - if your best people do take voluntary redundancy then you truly know that as a management team you have not managed the company well. However, it can save a massive amount of back end costs for getting the process wrong and inviting lawyers in.

2) Get Rid of Contractors or Part Time Employees First

Why am I saying this? It's my lifeblood! However, the reality is that much contract, temporary or part time work may itself be redundant. You have to review hard what is required. The beauty of contract workers is that they are flexible and can be quickly brought back on board if things start to change again - it's a powerful way to avoid redundancy. BT has almost a third of its staff as contractors and that is both daft and useful. It means that they can make just 10,000 redundant and a stack of contractors. The really stupid thing would be to not make savings by ridding yourself of contractors first as a) it shows a lack of loyalty to your staff, b) you save less ongoing cost and c) you are showing to HMRC that the contractors are employees in all but name - so if someone is not paying taxes appropriately the alarm bells go off.

3) Stop Recruiting

Believe me, I have been in companies where this kind of crassness goes on. As a ton of employees exit from various parts of the business, other parts either are replacing ones lost through attrition or because there is a new business venture going on, are actually hiring. Of course, the first thing should be to stop all hiring as this also saves recruitment costs, the second thing should be to assess whether any of the outgoing employees are either suitably skilled or can be trained to do some of the vacant jobs.

Certainly, back filling empty headcounts is just daft without considering such options - it is also required by the law. And any employee identified for redundancy should have the option of reading the job description and having the choice to apply, then be properly assessed against the job criteria as any candidate would be.

If you are making an offer of an alternative job to an employee selected for redundancy it has to be unconditional and in writing - do not start changing the rules either just before or after they have accepted. Also, make sure the offer is made before their current contract end - it seems obvious but when their current contract ends they are actually redundant so they can claim the redundancy package and be re-employed.

4) Ban Overtime

This is self-evident. There is no point in people working overtime if it can save money.

5) Restrict Or Stop paying Bonuses

A moratorium on bonuses should be imposed. One of the really crazy things I have not got my head around in the management at banks is how they seem to think that certain people should get bonuses even if the company is losing money hand over fist. The perverse logic is that those individuals will walk. Yet as they were instrumental in clocking up the vast losses, it seems logical that they should be the first to go.

Management cannot see beyond their own stomachs sometimes. Bonuses should be at the discretion of the company. You can always defer them or pay them in a different, less costly format.

6) Adjust The Commission Plans of The Salesforce

Make sure the commission scheme is aligned to new goals and is appropriately geared for succeess and pays little for failure. As an example, reset the barrier or the point at which commission commences to be paid but compensate by having higher accelerators for over target performance.

7) Early Retirement

This may not be applicable to many SMEs but it is an option and one preferred by larger companies. It can be more costly than one-off costs as usually it means some larger contribution to the affected person's pension pot but again it avoids the stigma.

8) Exhaust All Options Before Choosing Redundancy

This goes back to the employee communication and suggestions - make sure you explore all options to save the cost first. Redundancy is a sad business and those affected by it often do not get over it while those managers who have to 'do the deed' can be very emotionally destabilised. The company PR engine goes into reverse, the competition and the markets get a bad message, you can have knock effects in the local area - it is just not a good thing so if you can avoid it - do so.

B) Compulsory Redundancies

So you have exhausted all of the above and you have nowhere else to trun. You are going to have to make people redundant. For SMEs, this may be relatively small numbers but it is best to try to follow the main procedures as, if nothing else, it affords protection. It is also standard procedure to use more than one criteria as by using one only, you are almost certainly going to discriminate even if you don't mean to.

1) Establish A Pool Of Identified Employees Earmarked For Redundancy

The pool can be as wide as you like or just one person.

2) Make Selection Criteria

These criteria must be objective, non-discriminatory and applied consistently. Here are some pointers:

a) Skills, Qualifications and Aptitude - this can be justified on keeping a good balance in the organisation.

b) Standard of Work Performance - Yes, this is allowable. However, this must be provable as an extension of a continuous performance assessment process, you cannot just invent it to suit the situation. You have to know, objectively, what is historic good performance and bad in order to prove your point. If the employees can legitmately say that such rigours have not been applied before or to them individually, i.e. no one has ever mentioned they have under-performed before, then you are leaving yourself wide open. This all needs to be backed up with documentary evidence, seen by the employee and stored on their HR records.

c) Adaptibility - Employees need to be assessed as to whether they can be adapted to do other roles in the company.

d) Attendence/Disciplinary Record - Stands to reason but again, just producing this at the point of redundancy is not good practice - the employee needs to have been aware of any problems beforehand and records show it - the reasons for the absence should have been explored as well. Obviously, don't be silly and include things like maternity, paternity or adoption leave.

Avoid automatically unfair reasons like being a union member and associated activity, being involved in industrial action, actions taken on grounds of health or safety, anything to do with pregnancy, maternity, paternity, adoption or parental leave and reasons relating to regulations on part-time work.

Think hard on all these - any one of them can be due cause for unfair grounds.

3) Redundancy Consultation

If you fail to consult employees (and their representatives if applicable) on redundancy beforehand, then you will almost certainly make the whole process unfair from the start. SMEs may not be affected by this but there is a process for making groups of 20 people or more redundant in one place of work in a 90 day period. You will need to inform the Department for Business Enterprise for Regulatory Reform (BERR) in writing or via the attached form and then consult with representatives of the employees in the pool of those identified to be made redundant. There is a formal process which is available at the Business Link website.

At the start of the consultation, you must provide written details of:
- The reasons for redundancies
- The numbers and categories of employees involved
- The numbers of employees in these categories employed at the establishment
- How you plan to select employees for redundancy
- How you will carry out redundancies
- How you will work out redundancy payments

Consultation does not have to end in agreement, but it must be properly carried out with a view to reaching agreement, including ways of avoiding the redundancies or minimising their effect.

While that is applied to groups, remember, for Individual Redundancy Consultation, you should consult employees individually regardless of the number you plan to make redundant.

If you fail to do so, any subsequent dismissals may be unfair.

4) Respecting The Rights of Redundant people

Redundant employees have a number of rights, the main one being the right to receive a statutory redundancy payment (SRP).

a) The right to receive an SRP

To receive an SRP, an individual must:
- Be an employee, i.e. partners, casual workers, agency workers, the self-employed and directors not working under a contract of employment do not qualify - here's a guide on employment status
- Have at least two years' continuous service
- Have been dismissed, laid off or put on short-term working, ie those who opted for early retirement do not qualify - check on this here: redundancy selection - non-compulsory
- A redundant employee also has the right to receive a written statement setting out the amount of any redundancy payment and how you worked it out.

You must make the payment when or soon after you dismiss the employee.

b ) How is an SRP calculated?

An SRP is based on:
- The employee's age
- The employee's amount of continuous service - up to a maximum of 20 years
- The employee's weekly pay - up to a limit of £350 where the employee's employment ends on or after 1 February 2009)
Currently, the maximum SRP payable is £10,500. here's an interactive tool to calculate the statutory redundancy pay due to your employee.

c) Taxation of SRPs

As long as it's not more than £30,000, a statutory redundancy payment (SRP) is not taxable. Any redundancy payment you make in addition to SRP is subject to tax and National Insurance (NI). You must be careful however, when you are making other termination payments to the employee at the same time, eg a payment in lieu of notice and holiday, as you may have to deduct tax and NI for these.

d) Failure to make an SRP

An employee has six months from the date their employment ended to make a claim for payment to an employment tribunal where either:
- The employee disagrees with the amount of the payment, or
- You fail to make any SRP, eg because you think that the employee is not entitled to it. If they fail to make the claim in time, a tribunal still has the power for a further six months to decide whether or not the employee should receive an SRP.

If you cannot pay, eg because you're declared insolvent, the employee can apply to the Department for Business, Enterprise and Regulatory Reform (BERR) for a direct payment from the NI Fund. However, they must have applied in writing to you for a payment within six months of their employment ending, or applied successfully to an employment tribunal within the six months after that.

e) Other redundancy rights

Redundant employees also have the right to:
- Be offered alternative employment wherever possible.
- Have a trial period in the alternative employment without losing their right to an SRP.
- Reasonable time off on full pay for job-hunting or to arrange training.
- Not be unfairly selected for redundancy. Employees normally need at least one year's service to claim unfair dismissal. However, if an employee is selected for redundancy on certain grounds, their dismissal will be automatically unfair and they do not need a minimum amount of service.

5) Alleviating The Pain

Redundancy is a bad thing - it is not a good experience for most people. It is very good practice, therefore, to try to help people after they have been made redundant. It is not compulsory so long as you have adhered to the above, but it certainly can help make the best of a bad situation.

Where possible, you should try to find ways of helping employees come to terms with their situation. The practical and financial help you offer will of course depend on the size of your business and the seniority of any employee being made redundant.

a) It is good practice to do your best to help employees find a new job.

To do this, you could:
- Contact the local Jobcentre Plus to find out about suitable vacancies or training.
- Set up interviews onsite for redundant employees. You could consider using a specialist outplacement agency - outplacement counselling and retraining is tax deductible in respect of all redundant employees, including part-time workers.
- Contact other local employers who may have vacancies.
- Offer advice on searching for suitable vacancies in the press and on the internet.
- Offer guidance on CVs, job application forms and interview techniques.
- Highlight the importance of being prepared to consider a wide range of jobs.
- Consider re-employment if business picks up, where this is appropriate.

b) You can also help with financial issues by:

- Providing clear information on the financial effects of redundancy - amount of redundancy pay, effect on pension payments and state benefits
- Pointing out the need for the employee to discuss the financial implications of redundancy with their family as early as possible.

If you have the budget, you could consider offering individual counselling. Alternatively you could train HR managers, if you have them, to carry out this task.

The Pitfalls

Finally, there is a heavy price to pay if you go about this wrongly - even if it is entirely unintentional.

a) Following redundancies, an employee can claim unfair dismissal if you:

- Have unfairly selected them for redundancy. This covers both where you used selection criteria that were - on the face of it - fair but you incorrectly applied them and where the criteria themselves make the dismissal automatically unfair.
- Failed to offer alternative work where it was available.

Employees may also be able to claim a protective award if you fail to properly consult with employees' representatives.

b) Unfair Redundancy Selection

An employee will have been automatically unfairly dismissed if you select them for redundancy for certain reasons and here's a comprehensive list.

Key to all this, and particularly for the company I highlighted earlier, is that if you are to go down the route of redundnacy or dismissal on the basis of performance, it may seem clear to you but the employee needs to have a fair assessment and comparisons with benchmarks and with others in similar roles. It has to stand up to hard testing and scrutiny.

The last thing is that if you have any 'skeletons in the cupboard' such as potential allegations of sexual harrasment or sex or race discrimination at your workplace then you need to tread incredibly carefully as almost from the start you are setting yourself up for a major downfall with terrible costs associated with it.

When you combine Unfair Dismissal with any of those such allegations you are seriously jeopardising yourself as the compensation is open ended.

The Costs of Getting It Wrong

There is no real rule of thumb here as cases vary. I was called as a witness in an Industrial Tribunal that considered the allegation of Unfair Dismissal and Sexual Discrimination by a former lady employee at a company I worked for previously. The preparation of the case alone absorbed an enormous amount of time and money but if you seriously want to defend such cases and win, you are going to need a Barrister and that escalates the cost. In this instance, the total claim against the company was over £480,000 plus costs for various reasons but the cost of fighting the case, and eventually winning it, cost over half that amount. It was a fair saving but it came straight off the bottom line and did not really account for the management time lost which included the time, travel and accommodation costs amounting to some 40 man days of senior executives.

The message is - redundancy is like any form of dismissal. Do it wrongly and it will cost you. Make it your last resort in the fight against the recession.

Please Note: I am not a qualified practioner on redundancy nor an expert on the law. The above is merely an opinion derived from experience and various sources. Please make sure you seek good advice and counsel on the subject and do not take the above as anything more than illustrating the complexities.

Sources: Business Link

The Dark Lord Returns

As if things were not bad enough in the front lines of business right now, it's really heart-warming to know that decisions affecting businesses are being taken in High Government with the view that British business people are 'Incapable of success'.

Furious MPs

In the article in today's Daily Mail, it appears Lord Mandelson (doesn't it make you wretch when you say it, must be the syllables) thinks British Bosses are incapable of running successful businesses. The remark was wildly taken as an insult when it was made at a private meeting of Labour MPs at Westminster last week as Mandelson outlined his really poor plans for the partial privatisation of Royal Mail. The context of the remark was that as part of Royal Mail was being virtually given away to Dutch company, TNT, and Dutch managers from this TNT would likely flood the Royal Mail as British Managers were not capable of turning a public sector business into a success.

Two Labour MPS were so incensed by the remarks that they went public on this, one being Colin Burgon, MP for Elmet, Leeds.

Is He Right?

On the face of it, if he was referring to the fat-salaried Adam Crozier and the company hopping Allan Leighton, he may have a point. But of course, this was specialised, heavyweight business acumen bought in by previous Labour Ministers under the policy you have to pay blindingly high salaries to Non-Executives like Leighton to get the right calibre just like the heads of the watchdogs. If that is Mandelson's point, I couldn't agree more.

However, I suspect The Dark Lord has been hobnobbing too much in the corridors of power in Europe where there is an altogether more liberal and creative approach to business where Russian Aluminium Tycoons can entertain you on £80m yachts and you can deny having met them before crucial EU votes on tariffs on the said element, this accidentally lining the Oligarch's pocket more. That's the kind of success he likes - that and nice brothers contributing towards worthless edifices in return for the odd passport.

He Has No Right

The fact is Lord Mandelson is an unelected bureaucrat. He has zero experience of running a company and twice in his career he couldn't keep his job as a Minister because he operates too close to the wire. If that would be his mode of operation in real business, it's likely his career would have been short lived and he ended up the wrong side of the law.

The point was raised in the IOD Discussion Forum in LinkedIn today and rightly it has received a barrage of criticism from angry UK bosses. If he had run successful businesses he would have the right to say such things but he has never done so. Now, he sachets along the corridors of power, wielding the magic wand of power that could dictate the future business health of this nation, I am certainly pretty disgusted he can get away with such comments and am pretty under confident he knows what is best for British business. Brown must have been a very desperate man to have brought him back - I hope he is regretting it.

If Mandelson doesn't like Britain, why not hop off back to the EC and earn the fat salary he's getting paid from them anyway (yes he is on a 3 year full salary compensation deal while drawing an Minister's salary too. Like that really happens in business).

Would YOU Buy A Car, Mr. Brown?

As Superman Brown urges banks to lend and us to spend and contemplates saving the car industry, I guess the acid test is whether HE would buy a car or not in these current times.

Monday’s Telegraph reported that thousands of motorists are suffering from the concept of ‘negative equity’ much like home buyers. This phenomenon comes about when someone buys a car on lease with a deposit and monthly payments, with the idea of having the option to buy the car at the end of the lease with a single ‘balloon’ payment based on the estimated secondhand value of the car at the time when the lease was taken out. Such leases are known as Personal Contract Purchase which handily spread the cost of a car purchase over a couple of years.

In the old days, such schemes were reasonable value, and those on company car leases if offered a chance to buy their car at the end of the lease, often would be incentivised to look after their car. The reason was that the lease company estimates on the secondhand value of a company car at the end of a lease would be significantly lower than the average care car of the same age as the stigma of company reps driving cars into the ground usually made them only good for auction.

But, now that the bottom has literally fallen out of the secondhand car market after the failure of the new car sales market, cars coming to the end of their leases are actually worth a great deal less than the original estimates when the lease contract was taken out – leaving a considerable negative equity. The Finance and Leasing Association has confirmed that many people who took out such contracts are now handing their vehicles back. Both the person with the lease contract faces excessive balloon payments and the lease company also lose out as the cars are auctioned at considerably lower than the prices originally estimated

Bigger Wasn’t Better

Those who used such contracts to afford more expensive cars (perhaps this is why we have seen the glut of swanky high-end motors and 4x4’s on British roads in the last 5 or 6 years?) will suffer most as more expensive cars have been hit the most.

So, when Mr Brown dwells upon saving the car industry, there is an infinitely more complex situation at work. Car sales in the UK dropped 21% last quarter which is a far cry from the massive declines seen in the US, but there is always next quarter and a registration change to think about. Further, any bail out to the car industry will not be to help stimulate sales but to mothball production lines and prevent mass unemployment as there are an estimated 800,000 jobs associated with the UK car industry. This report shows that there is little point in people going out and buying cars if the lease contracts mean they will pay way over the odds or indeed to buy a fast-depreciating asset.

Utopian Britain

Once again, in the dreamworld that is Government these days there seems to be a vain hope that by borrowing more they can rekindle the excesses of the last decade. The nightmare that is reality in the country says no one has the appetite and confidence, let alone the money to make that dream a reality. Then again, I don’t suppose Brown, Mandelson and Darling have had to worry about paying for their own vehicle or transport since becoming Ministers which shows just how out of touch with reality they can be.

Old Habits Die Hard

As a footnote and on a different subject, I was little shocked to read in Private Eye that Goldman Sachs made a loss of $2.1bn last quarter and still paid out $2.6bn worth of bonuses (even though they said they would not). Good to see all that bail out money being put to good use then. Happy days for all the old gang too as the FSA has lifted its ban on shorting, which did not stop several culprits losing $30bn in a single day’s trading on a single share (VW) after the ban was imposed. It’s nice and official now and shows the system is getting back to its normal, shady self.

Roll on 2009 bonuses now the banks have been saved.

What Exactly Was That £800bn Bail Out Designed To Do?

When Gordon Brown 'Saved The World', as he modestly put it, he used taxpayers' money in an unprecedented way and volume to shore up a business sector that had used a flawed business model to go bust.

Make no bones about it - without Government putting up over £600bn in loans, guarantees and capital to banks, several would have failed fatally. Such decisive largess has been welcomed by the British Public who now view Gordon Brown as a saviour in hard times. But the question remains, what precisely was that vast sum of money meant to do? Was it ever going to be enough? And, having saved one vital industry from going belly up, which others will have to be saved? Have we just preserved the jobs and salaries of a few failed executives?

The Domino Effect

I have talked a lot about companies Hitting The Wall when in a comparatively short trading period, the recession bites so hard they quite literally fail. Starting with Northern Rock, we now have a whole spate of High St calamities from MFI to Woolies to Adams to Whittard to Savvis to Wedgewood. These are not just any old companies - these are household names. As the Car Industry struggles en masse against dropping sales and most companies see order books starting to dwindle, there is no doubt we are in for more bad news.

The problem is that as order books start to fail and revenues are impacted, companies need cash to survive. Meanwhile, banks are recovering from all that stupidity over the last 10 years and the last thing they want to do, Government urging or not, is to lend money just to pay salaries - that has never been their business model. And now that Government is meddling with their mortgage books and loans to give individuals more time to pay debts while the job situation worsens and house prices plummet, plus greater protection will be afforded to those who get into financial difficulty, it is highly likely that their lending policies will get even tighter to make sure their exposure to more debt failing is minimised.

Which all sort of flies in the face of what the Government's use of taxpayer money was meant to do.

Forces At Work

You see, banks have to get their books in order. They blew a lot of stupid money in the past and partied happily paying themselves and shareholders handsomely for their cleverness. Now it has all gone badly sour and so the priority is to get their balance sheets back in order, strengthen their policies and ensure their own credit ratings get back to normal so that they can start attracting new capital. And of course, we as taxpayers have a vested interest in that as a) we are now shareholders of several banks and b) we underwrite their balance sheets - totally. We WANT them to behave sensibly so that we can a) get our money back, b) hope we can actually have some benefit out of our 'investment' and c) the credit ratings of the banks will be a direct reflection on the UK plc's creditworthiness which reflects outsider confidence in our ability to repay our bills and so ensures the Government bonds used to raise all this cash are actually worth something.

The reality is that we, as 'shareholders' in the banks, do not want them to go out and starting blowing money the same was as before as effectively, as Robert Preston alludes to, WE are the banks for the foreseeable future.

So About that £800bn Bail Out

There are two diametrically opposed things at work, the way I see it. On the one hand we have protected the banks from collapsing and as we all are aware now, in many cases there were just matters of hours before banks could have gone bust. On the other, the Government want banks to behave in much the same way as before, albeit with a few constraints, and get lending levels back to August 2007 levels.

The two things are incongruous - you either save the banking system and get some sense into the business model so there is stability or you pump more and more cash into a system that is flawed with a potential of an even more spectacular failure in the future.

What if Hadn't bailed The Banks Out?

The resultant financial mayhem had the Government not stepped in would have been beyond imagination, I am sure. However, I also not sure that many really understood what might have happened if a number of banks had been allowed, as the USA did to Lehmans, to fail. It could be strongly argued that Northern Rock was a floating disaster with a ruptured business model and if it had to stand up to a Lord Mandelson Test of worthiness it would have failed dismally in terms of strategy. The mortgage book could have been saved as it was worth something and the deposits were largely guaranteed by the FSA schemes - all Government really had to do was to ensure all savings deposits were guaranteed.

Further, RBS has traded with a massive £161bn gap in funding as it had gone on a greedy spending spree that saw the CEO, Fred Goodwin, culminating in winning a bidding war for ABN AMRO that was probably more exposed to bad debt than most for massive £50bn+. If any other company had done the same, it would have been allowed to have sunk. But RBS is a flagship UK Bank now, gone are the days of sleepy backwater provincial bank. But isn't that the price you pay for monumental business cock ups? To save RBS firstly exposed us all to £1.3 trillion of liabilities (yes that's bigger than our GDP), and secondly exposed us all to the stupidity of a business that had failed.

Was the objective in all this just to stop collapse and sort out the mess or to preserve a status quo that either saved useless senior businessmen their jobs and continue their ludicrous lending activities?

The question is pertinent as the Government's Utopian view is that now they have saved the banks, they want them to lend more. The simple logic says that this cannot happen. There is a recession on for starters and secondly this is what got them into the mess in the first place.

You simply have to sort out the mess first before we can properly see how the system can progress again. And I think Mervyn King is right - ultimately, the £800bn bail out was a knee-jerk reaction without knowing if it was going to be enough, followed by a succession of costly nervous twitches to fiddle with taxes to try and stimulate a very alarmed population into behaving like before. There is no money out there for that to happen and with us all borrowed to our eyeballs already and fearful of our jobs, we want to hang on to our money for once - that makes sense.

The Cost of The Future

I ask this question because I am exercising my own 'Rational Expectations' as I face up to a business and personal future. I think the Government had little understanding of what it was doing in putting together the bail out package. By and large it has saved the skins of a number of executives who showed poor business acumen and were motivated by greed. I do not think the Government knew how much the whole thing would cost as applying old theory to modern times glosses over that the economy today is radically different from before and the financial system itself is far more complicated than ever. Globalisation has wrought a very complex structure into the world of business and finance and it is almost impossible to guess the real cost of saving the system as is.

I would argue, that by allowing some natural failures to have occurred, the Government and the rest of us could have got a better idea of how bad the situation was and I think that could have been done without hurting a single investor or borrower in the instance of Northern Rock. I think the merge of Lloyds TSB and HBOS was both stupid and downright uncompetitive as the Government intervened at the highest level to make it happen and then shored up Lloyds TSB's balance sheet to make it work - in other words they were in no financial position to have made an offer in the first place.

I also think that as a group of taxpayers we have had our future payments used as collaterals to fund vast loans for all this guesswork and we will all pay a very heavy price in the future. I think the path of huge Government borrowing is not right - you have to get some balance here. The British economy has changed drastically and only 15% of our GDP is from manufacturing and only a fraction of that from exports - so our weak currency does not help us despite the reverse bargain hunters from the continent buying our imports at a lower price.

I think the Government plan to kick start the economy is incongruous - you cannot save the banks and increase lending. The banks have to be far more prudent and no-one is going to lend against a falling economy and asset values. Spending on new industries and internal projects is all very well, but in a world where cheaper, imported labour has grown in the UK, will it actually provide jobs for British people or just cause another new influx from the EC countries of unskilled, lower cost workers?

Look At The Bottom Line

It would be sensible before we all get slap happy from patting Gordon Brown's back that we just stop and think. If a plan doesn't sound right it's probably because it isn't right - and half a plan implemented today rather than a full one tomorrow means we will always be stuck with the half plan. And rather than us sitting back and not really caring, we ought to ask these questions in earnest.

Why? Because we are the NEW BANKS that are providing the funding for it. The bill is right at our feet and we should ask about every penny spent and yet to be spent.

2009 - A Year of Debt Consolidation

I am sure I am not alone but I actually drastically reduced the amount of money I owed last year. By liquidating a few ISAs and realising a property investment, I reduced my credit card debt to zero and reduced my mortgage debt by over a third.

OK, so my wife is an IFA (Independent Financial Adviser) and thanks to her wise counsel we sold the ISAs when the FTSE was at 5400 but our property dream was soured by a small loss. However, overall, it means that between us, and thanks to her choice of a 0.49% above base tracker mortgage, our outgoings on debt servicing has collapsed to a small fraction of our income. Again, thanks to the clever mortgage my wife chose, we have a savings pot which we have bolstered from our debt-reduction to access in case of emergencies. Further, our plans this year are to forego expensive holidays and spend wisely on home needs. We had our most frugal Christmas for at least 5 years by my estimate although we had at least the same amount of fun and entertained friends far more.

My point here is that we have made conscious and, dare I say it, strategic efforts to weather a storm.

A Business View

I work with firms to help them grow and so I have a precarious existence at the best of times. In good times, I compete with companies investing in expanding their employee base and in tough times I compete against contracting costs. It means my Value Proposition as a Business has to stand both tests of scrutiny. In the last few months, I have been able to win new business and consolidate existing clients, and helped one whose business model is favoured in tougher times. So far, I have been able to not just maintain revenues but actually increase them.

That has come about from a very conscious and strategic change in my plans coupled with a sharp increase in work rate. It also focuses the mind. Some contracts and potential clients who I had hoped would do business with me, I have simply not worked on - there is always a whiff of reality over wishful thinking to be had in tougher times, something I have preached loudly to anyone who might listen.

Combining a Personal & Business Strategy

What my wife and I had done over the last few months, almost without discussing it in the same context, was to modify our personal and business outlooks to coincide. There was no point in me believing my business was recession-proof even if I can position the services as recession-busting or easing, the fact remains that businesses will have to cut cost and that often means rational thought about service value goes by the wayside. Reality says that I should not expect my business to continue to perform the same way in a recession and I would certainly have to modify my personal thinking about money and how I spend to match this. It came about without a sit down pow-wow, we just both thought the same way.

We may not feel more confident about the future at the moment but we are actually more prepared.

2009 - Poor Outlooks

There is no doubt we planned with the worst in mind and much of it made sense anyway - we have not missed out on anything as a result. However, the recent KPMG Report on 2009 outlooks with reference to personal debt has brought our decisions into sharp focus. The accounting firm predict there will be a big increase in Insolvencies this year with some 150,000 people going bankrupt or entering into arrangements - up from 104,000 in 2008.

For most of us, debt has become a way of life. If you are a student, you now start your working life with a long term debt and banks are instructed to treat this differently so that such students can still have access to more credit like loans, credit cards and even mortgages. As a nation we have an enormous amount of debt which is not secured on any asset at all beyond our mortgages, with over £1 trillion of it racked up on credit cards alone. We have been, for some time, a nation with a ticking bomb of debt.

Up until August of 2007, everything was fine. Most of that unsecured debt was more than covered by the equity in our homes. That has changed dramatically and we now know our homes are worth the same as they were in August 2004 and are still dropping in value. For a large proportion of all mortgage holders, the equity in their homes has collapsed to nothing and in many cases gone negative. The threat of personal insolvency is very much a reality as we move into 2009.

What the KPMG report illustrates is that most people are 'ill-equipped' to deal with the situation and for those heavily in debt, the costs of their day to day outgoings and debt servicing have not been sufficiently modified or possibly cannot easily be in order to meet their obligations going forward.

Debts Write-offs

In 2008 it was estimated that creditors had to write off some £1.1bn 2009 in debts to customers. For those entering what is known as Individual Voluntary Arrangements (IVAs), they had an average of £47,800 of debt which was agreed to be paid back at around 38% of its value. Over 2,500 people entered IVAs with over £100,000 of debt - and the predominant creditor is always credit card companies.

KPMG say that by the time people deal with the situation, the roll up of debt, interest payments, penalties and additional borrowing to meet minimum payments are so high as to make the only way out some kind of IVA or similar as they had no realistic hope of meeting payments. What KPMG say is that those with seriously high levels of debt are ill-equipped to deal with the hardships of recession and downturn - with the further risk and threat of job losses now a reality, many of these people will have little choice but to go bankrupt - meaning the loss of all assets including their house.

A Joint Plan

I don't assert that my wife and I were really clever but we have always had a sharp focus on our responsibility and accountability when it comes to money. It came as second nature to us to do something about our situation while we could so that if anything bad should happen, we could weather the storm without seeking Government handouts or help. Most people think the same way, I would imagine.

There are those though who had not understood what the boom of the last 10 years meant. When the Government keep standing up there telling us our Economy is stable and that Recession cannot affect us because of how clever the Ministers were, many believed it for what it appeared. I can really understand that even if I saw through the guff Gordon Brown and Tony Blair tried to make us believe. There is no doubt in my mind, they have led ordinary families into some kind of Utopian view of the world and how well off they were and it was simply not true. The cost could be very heavy for all thoe individuals.

My only advice - and most of it comes from my IFA-qualified wife - is that anyone who is either experiencing hardship from debt or who has heavy debts to start talking with creditors early - and to keep talking. The worst thing to do is to avoid the obligations as the Law favours the creditors especially if debtors make no effort to either pay or talk.

I also advise to get professional help as early as possible. Many IFAs, Lawyers and Accountants are fee-earners only and so advice can be expensive. There are many bodies such as the Citizens Advice Bureau that can offer some advice for free. However, if you do have a financial adviser, now is the time they should earn their fees.

I can offer my wife's firm, Haymarket Associates (www.haymarketifa.co.uk) as a source of help.

Formal Protection

One area the Government has helped on after helping create this 'Utopian Britain' is that there will be new legislation coming into being which will avoid the need for bankruptcy for relatively small debts - and that's a good thing as bankruptcy carries an awful and practical stigma.

There are several official levels of protection from debt as last resort:

• Debt Relief Orders (DRO) - Planned for April 2009 this will be a mechanism for those with debts of less than £15,000 to be protected from creditors if they have minimal assets or surplus income to service the debt. It can mean the debt will be written off.
• IVA - This is a deal between you and your creditors overseen by an Insolvency Practitioner. It has less associated stigma and can possibly mean you keep your home but does mean you pay some or all of your debts in one go or over an agreed period and plan.
• Bankruptcy - It's the traditional way of escaping overwhelming debt and in the US is actually not so bad. In the UK it has a terrible stigma and can blight your credit rating and more for a long, long time. It will also mean that you will certainly lose your house and other assets to pay as much as you can to creditors whether you like it or not.

Plan Now

My only practical advice is to sit down and plan now. Debt has a way of spiralling very quickly and getting out of control and don't be fooled by low interest rates. When debt gets hard to pay, creditors start charging penalties and they can be wholly out of kilter with base interest rates.

I would advise that you be sensible about prospects going forward. While all may seem pretty good now, job prospects OK, things can rapidly change. I have blogged about this incessantly and argued with people on the subject as people honestly say to me that the recession is not real. I am not proud or happy to say some of those people have been badly affected since.

Debt on a personal level and business-wise needs to be balanced. For many individuals and businesses, it has become a large source if not the only source of funding for day to day expenditure. If that is the case, do your planning now.

20-20 Hindsight - The Wisdom of Politics

If you had asked 50 random people in any High Street of any sizable town in Britain what the effect of a reduction of 2.5% off the rate of VAT would actually do to their spending habits, I think the answer would have been little or nothing.

Why then, several weeks after the rate cut was introduced, are Opposition Politicians like David Cameron and Nick Clegg only now questioning what effect it would have? Suddenly, with the benefit of Retail Spending data, which revealed exactly what any person in the street would have predicted that the rate drop had no effect, why now have these Politicians suddenly become wise and are haranguing the daft Ministers that introduced it?

Probability Theory

I watched an absorbing part of the Christmas Royal Institution Lectures yesterday where an able Professor showed that if you drop a small ball into a box which had a triangular set of wooden pegs to interrupt its path, the ball would randomly drop into one of eight slots. Do it again to an individual ball and again the next ball randomly chooses a slot. If, however, you suddenly drop a whole jar full of identical balls into the box, the balls would fall into the slots so that the height of each stack of balls in each slot exactly followed the pattern of the mean distribution of probability. In other words, individually the balls are random and hard to predict but when taken over a whole sample, they behave according to plan.

So applying the same theory to a minor 2.5% cut in VAT rate to an individual's spending pattern it seems you can't predict it but when an overall saving of £12.5bn is at stake, surely the great mass of people would spend according to plan - i.e. a lot more?

When Theory Does Not Mirror Reality

Probability Theory isn't actually applicable in this instance. Common sense would tell you that 2.5% off VAT would not do a jot to spending patterns, because the individual gain in savings is pathetic. After rising tax bills, fuel and energy prices, food bills, plus a fall in the available credit supply, people are looking to far greater savings to stimulate spending. Although John Lewis reported a good start o the Sales Season, anecdotal evidence on the number of people in town centres and the High Street generally show that people are simply not spending as much.

And that's because it is not about minor savings, it's about the lack of money generally and the uncertainty surrounding the future as the recession bites and hits jobs.

Reality has a habit of proving theories to be just what they are - theories.

The Progress of The Bail Out

Mervyn King has been pretty succinct. It is his belief that the £800bn so far pumped into banks is not enough to stop more toppling. In fact, he has alluded to potential wholesale public ownership of banks - a far cry from the theories of free market forces. The money pumped in has merely kept fat cat executives in a job and worrying about how they get the gravy train going again and to generate the vast bonuses of before. Meanwhile, those loiterers at the cash tills and backrooms get made redundant on mass as they are nothing more than hangers on.

What the bail out did was shore up a status quo, a way of life. These besuited people, while feeling some remorse allegedly for the mess we are in, still do not slash their own salary bills and get back to the core business of capital raising and lending, instead they want to continue along the lines of before. We spent £800bn to keep a slim population of elite executives in their jobs while a further 600,000 to 1 million people will pay with their job for their lack of talent.

I may be being a bit harsh and slightly left of the truth, but I don't see the economic benefit filtering through from this huge bail out - in fact I have seen pretty much the opposite. So when Darling and Brown gave out all the money we will have to fund, where were the tight stipulations on how it would be used and spent? The answer is they just followed what the Theory said in their old books. Spend and it will all come right.........probably?

Accountability vs Responsibility

For those who follow my Blog, I have consistently picked on themes of management in business and one theme is Accountability vs Responsibility. In the worst economic crisis since The Great Depression, I would like to see more than just theory used but some hard nosed common sense and the bearing of accountability for the mistakes - the ones so far and future ones. I cannot help thinking, after 10 years of flowering up our economic position thanks to a false boom based on unrealistic asset growth, that we are allowing a Government that so horribly got it wrong to try and rekindle the same bonanza.

Common sense says it cannot work again - so why are we letting them get away with it a second time?

John Maynard Keynes and Utopia

If you are like me, whenever I go past Milton Keynes on the M1, I unconsciously press the accelerator and go a little faster. The town sharing the famous monetarist's name is hardly Utopia.

New Crisis, New Theories

Since the twin crises of Credit Crunch and Recession loomed quickly on the Government so much so that they had to work hard on their usually well scripted tune on the economy to take us from prudent and stable economy to downright disaster but somehow blame it on a smalltown America, the economic theory behind the last 10 years has been rapidly ditched and the theory of John Maynard Keynes has been resurrected as the darling of Darling to 'Save the world' as daddy Gordon would put it.

Keynes, while writing in the depths of The Great Depression in the 1930's, said that the 'Paradox of Thrift' would cost us dearly. The idea that we should individually and collectively save during a recession was not common sense and that Government in particular should in fact not be prudent but effectively 'Party, Party, Party' like there was no tomorrow and spend far more lavishly than it ever planned. This would indeed fool us all to actually spend more and so stave off further recession.

There is a perverse logic to all this. If we we get gloomy and save then indeed demand further falls and so less investment goes into business, getting us into a vicious spiral of longer recession. Keynes said the way round this is to introduce vast new Government spending to stimulate the economy and we would all think more positively and not squirrel away our money.

Ah, But

There is, of course, a minor flaw in the plan and the economic theory of 'Rational Expectation' does kick in. This suggests we are not individually and collectively entirely stupid and that when a recession arrives, we tend to think slightly further ahead than the next mealtime. So factors like reality and our fear about our jobs, ability to pay bills like mortgages, future tax bills and feed the family tend to come to the fore.

There is also another important factor. This week, on top of the forecast for 600,000 job losses in 2009, we hear that house prices dropped to August 2004 levels. It doesn't take a genius to work out that most people who took out mortgages of 80% of value or more since 2004, are now likely to be in negative equity. With the job loss forecast, the possibility of defaults on mortgage payments are growing and it's forecast that 75,000 homes will be repossessed in 2009 despite the nice Government holidays on interest payments. Just as rapidly depreciating assets like cars are less attractive in hard times, buying a new asset like a house in a recession is not the wisest idea if it will be worth less than you paid for it within 12 months.

Keynes, as with most monetary theorists, was an idealist. The reality is that it makes much more sense to rein in personal spending in hard times than to spend more. Common sense, rather than fancy theories tell us this is sensible.

Borrowing Growth

Already Britons borrow some £1 trillion on credit cards and have leveraged their equity in their houses which has now collapsed, so it makes good sense for us individuals to think about saving rather than spending, if only as a buffer against potential job loss. While this is a self-perpetuating model in Keynes' eyes, it's hard-nosed reality to the person in the street.

Meanwhile, the Government, without accounting for the bank bail outs, will increase borrowing from above the 38% of GDP target today to around 57% of GDP by 2010. The bonds issued to fund this must be less attractive as our ability to pay has bigger doubts associated as tax revenues are due to sharply decline over the same period, not helped by the cut in VAT but the simple issue of higher unemployment benefits and less tax contributors will kick in. As the rich like Stelios and Sir Philip Green smile in their Monaco apartments as they can afford to avoid tax, the Government is suddenly getting hard on Welfare Claimers which means it will be tougher on the new wave of legitimate claimants as unemployment rises. The new claimants will pay the price of laissez-faire Government attitudes to long term claimants over the last 10 years.

The reality is that suddenly we have a Government about-turn on many fronts because it got sucked in by its own bull over the last 10 years and never ran the country properly. While we somehow think Gordon Brown et al are heroes for 'saving the world' and bailing out the economy using our money, we seem to have conveniently forgotten that it was the same crew who got us here.

It does not inspire confidence that if they did not get it right when the graphs pointed up over the last 10 years, that they have an earthly idea what they are doing when they point down.

The Difference and Why Keynes May Not Be the Way Out

The major differences between The Great Depression and Today that Keynes does not account for is that over the period since and particularly recently, home ownership in the affluent world has risen spectacularly and the value of those homes in the last 10 years has risen extraordinarily thanks to cheap and plentiful credit which relied on the values ever-increasing - it's own upward spiral. It meant that the affluent world had another source of capital gain outside of household income - the rise in equity of their homes. And boy did we use it.

Mortgage Equity Withdrawal has been the biggest stimulator to the economy in the last 10 years. And it was make-believe. What Keynes does not know is that the collapse in house values mean that the equity leveraged is worthless and all that is left is the debt. For many negative equity is now a reality and this was not a factor in The Great Depression.

Largely, Keynes wrote about an economy which relied on the confidence of a settled household disposable income. This new economy relied on Mortgage Equity Withdrawal and this has dried up. In the 10 year period to now, household disposable income has actually shrunk.

It's why economists are now talking of the economy shrinking by 2.9% in 2009, the biggest drop since 1940.

Reliance on an old theory about Recessionary forces is foolhardy and shows a complete lack of understanding of the actual situation. The last 10 years has seen unprecedented use of a new income source from home-equity. To get that back is going to take far more than tax cuts and bank bail outs. Just like the stupidity of paying vast bonuses to bank executives on profits that would subsequently be lost, the Government has gone down the path of trying to give a boom today when we are more interested in survival - but we will pay the price of this in the next generation of tax.

Personally, I believe the bank bail out has just shored up a status quo and we will not see modified behaviour from executives and shareholders, and we certainly have not seen banks acting in the interest of customers. We have just preserved a way of life and executive salaries. Meanwhile, around 1m more will join the dole queue as the likes of Peter Mandelson play God to save industries who scratch his back the most.

We must be idiots. Common sense says this is the wrong course of action. While we should not sit tight, we should allow the natural course of events on banks to play out. It's at the heart of the problems of the last 10 years and there is a price to pay. Avoiding it now will only make it worse in the future.

Which Comes First? Spending or Lending?

There was a time when the amount you spent was very proportional to the amount you earned. Under the Labour term of office we lost that connection.

Much of the spending of the last 10 years and economic growth that ensued was from the amount of equity we withdrew from our mortgages which was fuelled by a big rise in house values and the corresponding availability in credit. It became a circle of plenty. And the more credit we got the less it had to do with our ability to service the debt but more to do with the value of our property.

Now things have changed.

'Bank Lending Will Not Recover Soon'

So says John Varley, the Head of Barclays Bank. He believes consumers will find it hard to access credit for possibly the next two years which sort of dampens the hopes of Gordon Brown who wants us to mobilise and spend as we did just over a year ago in order to kick start the rapidly receding economy and that depends on how much banks will lend us.

Varley further points out that while credit is available it's shrinking and he did not foresee banks increasing lending again until 2010 at the earliest. This, he believes, will spark a 'public relations crisis'. In his job he must work so hard that he is denied access to world information as I might suggest there is just a little public mouth-frothing going on already about how banks have behaved over the last few years, but perhaps he means it's going to get a whole lot worse.

What Varley is certainly right about is his assessment that there should be a reduction in the overall quantity of debt in the economy. For that to happen, lending will have to decrease - it's a mathematical thing.

Bloated Asset Values Squealing Like a Deflating Balloon

In his interview with the BBC, Varley said, "The amount of credit available was shrinking, it absolutely is, and that is a painful process, it's a process through which the world absolutely has to go. As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months."

We all like to play with the farting noises of a deflating balloon on Christmas Day, or at least I do. This year it can be a handy scientific demonstration of how asset values are deflating in your Christmas Lecture on spending in 2009 to the family, perhaps just ahead of the Queen's Speech.

Clearly Varley has linked our ability to spend and his ability to lend with the decreasing value of our property assets - the two things are now inextricably linked. The old days of you spent what you earned are out of the window - in the last 10 years we spent what our properties increased by and now we have that spending as debt around our necks along with some £1 trillion of unsecured credit card loans.

We Are So Sorry

Varley continued by offering that banks should take some share of the responsibility for all this and that banks had a lot to do to regain confidence. It's really nice as lots of families face a nervous Christmas this year wondering whether in 2009 the bread winners will have jobs and so will have to go on that nice Mr. Brown's schemes to defer their interest payments on their mortgages that at least someone has held his hand up and say, 'Yup, all this financial mayhem around you was partly caused by me.'

Now, before we start throwing rotten tomatoes at Varley and his fellow bankers, they would all like to point out that it takes two to tango and that we share a portion of the blame too. They believe the fact we were offered so much cheap lending against assets that had to go pop some time was partly our fault for accepting it - the more we accepted it, the more they offered it. And yes, we should accept our guilt.

Just A Second

Business naturally relies on suckers for its products. From classy products to pyramid scams - we love a good purchase. And if we are given access to tons of freely available cash because business tells us we have a new source of wealth, i.e. our homes, then we should not heed the warnings of the gremlins on our shoulders and not take the nice sweeties on offer from the nice gentlemen in bowler hats. We should be austere, firm and refrain.

Sadly the last 10 years didn't a work like that. Consumers were offered credit and we spent it. Everyone thought it was a business model that could not fail.

The Boys in Suits

When thinking about who else we can neatly blame all this on we should not turn to Superman Brown. After all he has been absolutely correct in every prediction that we had a stable economy for the past 10 years due to prudent fiscal policy and because of that this 'Global Economic Downturn' that happened to suck Britain in was at first, 'Not going to affect us chickens' (sad use of the Mad Cow joke) and 'Won't affect so bad as we have such a good economy'. Anyway it all, started in the US and even they agree with that.

Consequently, Honest Gordon's stock has ridden so well that mortgage companies are basing new trackers on his growth index instead of the FTSE.

Hello - is there anyone at home? Why do we believe the tripe he says and why are we giving him so much credence after he has allowed this whole fiasco to develop? The third lot to blame in all this once we have stopped pelting bankers and beating ourselves up is to blame a Government that rode a bandwagon of growth that they knew could not be sustained. And during that time they allowed Britain to float along, allow education to drift, the NHS to sponge up more money for less return, allow kids to start killing each other and stoked up the hornet's nest of international terror as we fight at least one war that never should have started and two we can't win.

Suddenly we are getting hard on people on benefits when there are over 2 million on long term disability allowance and have been for ages. Now we face 3 million unemployed, the rules will get tougher. So as we get kicked in the nether regions and lose our jobs, the Government plans to apply heavy handed new rules which will apply to everyone the same whether you have started claiming or done so for 10 years - akin to peeing on us as we are doubled up in pain.

The Reality

Superman Brown may have a rude awakening soon. As Mervyn King worries about whether the banking bail out was ever going to be enough and more cash is required, as old businesses like Woolies go belly up, the car industry collapses like Bambi on ice, Brown would like us to spend more. Well average household earnings decreased over the last 10 years and now asset values and the equity we withdrew have also collapsed. So 2.5% off VAT and a few scraps of incentives just won't cut it.

We boomed, we bust. Deal with it.