The Vision Never Achieved

When the dust has settled long after our memories will be able to recall the two years of financial disaster we have experienced, the country will have literally blown all the money spent by New Labour since 1997.

This is the stark reality we face of the Government's proposed spending cuts, the biggest squeeze on the UK's finances since the 1970s. Instead of a bold Utopian vision of the future we have slumped back into Life on Mars. For all the boldness of the Blairite, New Labour vision and all the 'investment' that went into it over the last 12 years, we will reclaim back every penny under the New New Labour proposals on spending cuts and tax increases to get our finances back below £100bn a year's worth of borrowing by 2014.

During the new years, national debt will rise to over 80% of GDP, the IMF reckons it will be closer to 99%. No matter as it will be just quibbles over how much interest we will pay which is where the cuts and taxes will be aimed. At the peak of borrowing, the estimated interest bill will be £60bn or approximately half the annual budget for the NHS.

The election will this time around be all about which party can pee over a fence higher in terms of sending cuts instead of bold new futures. Instead of shiny new 'It can only get better' and 'Cool Britannia' adverts with catchy songs, it will be all Hovis type dour music and austere themes.

Welcome to Britain under New New Labour - it has been a perfect exercise in how to blow a load of money on nothing and then reclaim every penny back so that we stepped exactly 5 paces forward and the same back.

Nice one. That story should win a few votes and if I hear once more 'It was Tory free market economics' or it was 'sub-prime in America' that caused it all, I think I will throw a brick through the TV. I have had my intelligence insulted far too often by these people - don't let the same happen to you.

Cut One's Budget Deficit

Amid a ceremony which might have been required some 300 years ago, the Queen will today effectively be the puppet to Lord Mandelson and read out what he thinks the General Election will be fought on next year.

There will be the grandstanding and total impracticality of a bill designed to curb bank bonuses which you can almost guarantee that it will not make it to law but if it does it will just cause chaos because it is so ill thought through and irrelevant. Then there is the superbly named 'Fiscal Responsibility' bill which will be a Government pledge to cut the budget deficit by half over four years.

The chances of the latter making it to law in the 70 or so business days left for the existing Parliament are virtually nil but should it actually get enshrined in law then it will probably be meaningless. By 2014, it is predicted by authorities like the IMF that Britain's borrowing will be over 90% of its GDP. The only thing that could decrease the budget deficit by half would be an incredible upswing in the UK economy so as to wipe out the requirement for further borrowing over that period - the sort of suicidal growth the country does not need or swathing cuts to public expenditure which the Government tells us it will not do.

Other than that, the whole thing is a complete con trick to make you think that the sad bunch has an iota of knowledge about what it is doing. That has been decisively been proven to be not the case in the last two years, though arguably for the last 12.

There are important things that need to be attended to between now and May of next year. Yet again, we have a missed opportunity to get to the heart of some the real problems in Britain for the sake of leading us down the vote decision making path as early as possible. The opposition are up in arms, maybe be rightly, as they don't get the same opportunity. But the howling shame will be that, despite Harriet Harman's lie the 'most' of it will be come law before the election, hardly any of it will actually get on the agenda to become law.

We now have one of the Milliband's spouting off to tell us that we will hang about in Afghanistan until the Taliban are no longer a threat, condemning our Armed Forces to an interminable new Northern Ireland - a tour of duty no one will want as it is where an unseen enemy can take potshots and hone their killing skills on you without much you can do in return. Such a vague strategy has been at the heart of the issue - what is it we want out of Afghanistan as illegal drug production is at a peak, the violence is getting worse and the democracy there - which we sponsored - is a sham amidst a corrupt regime?

The Queen's Speech is about as irrelevant as the content of it - the only important thing to note is that she and the Commons will be summoned to Mandelson's feet in the process.

Grim Faces

Quite what Gordon Brown was grinning about and patting Alistair Darling on the shoulder for after perhaps one of the most grim budget speeches since 1945 in terms of the country’s finances is beyond most people. At least our finances back in 1945 were grim for good reason – we had just saved the world by fighting a real war.

Yesterday we heard how Britain was going to try and dig itself out another, far more serious financial situation caused by greed and incompetence to a degree not encountered before in the globe’s history.

The surprising thing was that it seemed to amuse Brown greatly. Personally, I would be holding my head in shame.

The budget was undermined by an inability to add up. Less than a few months ago, the PM and his sidekick were telling us confidently that the economy would not shrink by a certain amount and therefore borrowing would not need to be so high. Yesterday we heard that he and Darling had got the numbers wrong – the economy would decline by 3.5% this year before picking up by 1.25% next year and because of lower tax revenues due to higher unemployment, the borrowing would be significantly higher than anticipated before. Even before he had finished saying it, the IMF roundly contradicted him saying the economy would decline by over 4% this year and a further 0.4% next year and so borrowing requirements would be higher than he had predicted in his speech. The IMF, to be fair, has called the UK numbers far more accurately than our own Ministers.

It was ‘Wishful Thinking’ again from Darling who looked increasingly alarmed about the numbers as he mentioned them, as if by actually articulating them it was the first time he had noticed quite how disastrous our position actually is. The problem with wishful thinking, as we know in business, is that inevitably it leads to assumptions upon which wrong decisions are made. For us, it will be the amount of future tax we all pay – it’s that fundamental.

Class Wars

One of the least unexpected features of the speech was that the highest rate of tax has now been set at 50% on earnings above £150,000 which means, with the removal of the personal allowance for earnings above £100,000, that the effective top rate of tax is 60%. Labour has reverted back to the party of taxing higher earners but not the super-rich who can afford to evade this. It was, of course, a tactical move designed to elicit some sympathy from the public.

However, the greater amount of tax would be raised from the additional duties on tobacco, alcohol and fuel. A great proportion of the population consume these products and probably as much as any rich person, which means that lower paid people are getting taxed disproportionately more compared to their earnings. This has been a tactic of this Government since its birth and once again, the soundbite was designed to divert attention from the real menace of the budget – we will all pay more tax.

As unemployment topped 2.1m yesterday and the burden on the welfare state rose again, it is very clear that our situation is getting far worse. In short order, Britain will be borrowing around £1.4 trillion or over 70% of a falling GDP – an additional liability of £23,000 per head of population in Britain, which of course excludes non-domiciles. Whether we believe Darling or the IMF, we are pretty much up the creek without a paddle.

‘Grow Out of a Recession, Not Cut’

Darling’s little snippet may well be his epitaph. How much longer he has to endure the pain of being Chancellor might be mercifully short if he continues to bungle but if he’s unlucky he might have to hang on until the next election and ensure his team loses – a subject on which he is making good progress. Surely, he cannot be enjoying being made to look such an idiot each day.

Meanwhile, the Bank of England Monetary Policy are encouraged that there are signs that the policy of putting new money into the economy is working, the £75bn set aside for buying Gilts is apparently showing signs of effect. The good news is that there will not be any shortage of Gilts to buy as over £225bn of them will be sold in the near future, a very grim reminder of the additional debt the country is taking on. Last month saw the first failure in the Gilt auctions since 1995 and for just a second there it seemed that the whole darn policy had hit a brick wall. External investors had basically shunned us, fearing that Britain did not have the ability to service that debt and there were fears of a down-grading in our credit status globally. That drama has yet to fully unfold and over the course of the next few months, Mervyn King and Gordon Brown will need to attend Tony Blair’s Faith Tour to get the strength to pray enough that the auctions do not fail again.

While the theme was to borrow more to invest and we got a few snippets of how that may be in terms of increases in bad debt insurance, help for the unemployed young and a few other things, in fact, the majority of the budget was how efficiencies were to be achieved and taxes would rise. Wales alone is set to see over £400m chopped off its budget and there were concerns that Health and Education would suffer. Perhaps the Assembly Politicians should have thought of all this before creating so many Politicians on fat salaries, expense accounts and rock solid pensions in their swanky new building beforehand but at least if they scrapped the Assembly now we could salvage some savings for the future. Policies at the start of the Labour Terms are now coming back to haunt them and this is one – layers of Government with no power clogging decision making channels and creating new talking shops in new offices, draining valuable resources - was one of the worst.

There are many, many ways in which this country could save cost and divert the money into better spend and this should have been the theme. Instead, it’s all about draining resources on key things in favour of propping up a failed and flawed bank system. Investment in the right areas should be the priority.

Britain Post 2010

While we are being focused on the here and now by the Government, our future looks very bleak. There is no point in toiling hard and trying to get salary increases only to see most of it absorbed in new taxes while the relief on pension savings is being scrapped at the higher end so we cannot provide enough for our retirement.

Tax bills will rise dramatically and what we heard yesterday was only the start of what will be many calls on us for more money. They say two things are certain in life, death and taxes. Yesterday was the first step of the biggest certainty we will all face – taxes will rise dramatically over the next 20 years regardless of who is in Government. Just as the last Labour regime left the country in a dreadful state that took the policies of Margaret Thatcher to solve, it will be someone else’s problem for the future and it will take some solving.

Of course, one of the lasting Blair legacies was to be the 2012 Olympics. I love the Olympics but I have always had a problem with the obsession by countries of holding them which seems to attract politicians like moths to a light. This Olympics now looks as if it will be more of a millstone than a legacy and already there are rumours of cuts in venues as budgets continue to overrun.

As with Assemblies, legacies are to be earned not paid for and the Olympics is in severe danger of becoming one of another Labour’s major follies.

Job Done - What's Next?

'This is the day the world came together to fight back against the global recession, not with words but with a plan for global recovery and reform,' said Gordon Brown at the end of what many believe was an astonishing G20 summit.

Astonishing in that just 24 hours earlier, the French were threatening to walk out, the Germans were unhappy at the size of bail outs and China did not want anything that ruined their chances of re-stimulating their economy. Rumours abounded that Barack Obama himself acted as a mediator between the French and Chinese to get agreements.

So What Did We Get?

There were a lot of floral words and nice commitments but the really meaty bits which had a plan attached, was the $1 trillion stimulus package and the consensus on regulation going forward which should be a great deal tougher than before. The French and Germans will feel very cosy after all this, as the stimulus package seemed somewhat restrained given a similar amount was pledged as part of the last stimulus package in the US alone. The good news is that the money goes to the IMF who will in turn pledge around $100bn to help bail out the struggling nations.

Beyond that, we were into the world of platitudes - promote global trade and reject protectionism and build an inclusive, green and sustainable recovery seemed like noble aims but in practice will be very hard to achieve and nebulous to measure. While my theme of transparency was not referred to there was a reference to reforming the international financial institutions under greater scrutiny, looking at bonuses more carefully, financial accounts, tax havens, hedge funds - in general, a far higher level of scrutiny.

Are We Really OK Now Then?

I think everyone realises that the summit could not wave a magic wand and put all to right. But this is probably a distant second. There is broad agreement on a way forward on funding, stimulus and regulation and those are pretty crucial. It was certainly a case of 'Look after your own' in that there was little hope given to less well off nations who were sitting, quite literally open-mouthed, waiting for the developed world to remember them and so the word 'protectionism' to them has a different meaning. But that said, at least we have some way forward.

I think there is a general relief that the magnitude of the new stimulus package is far less than we all worried about. There seems to be an air of restraint and that comes as a blessed relief to taxpayers who waited to see just how much of their future earnings and well being were staked on their behalf.

In some respects we got away with less of a sting than we thought.

Of course, I am far to thick to realise quite where the IMF gets all its money from if we don't have it to give to them and given that we may have to go back there, cap in hand, at some stage, it seems a bit pointless handing over what we haven't got. But that's just my naive self talking. I am sure someone can put me right on that - maybe its like EC rebates.

Hope At Last

What the G20 summit did prove is that in a world of terrible divides, there is the power to drive us to come together with common commitment to tackle issues when they threaten us all.

It is a tragedy that it had to be something which in reality is trivial, to do so. Trivial in the sense that it is the future prosperity of the developed world that was at stake caused by the greed of the minority - if only we could have been meeting to give $1 trillion to the poor, starving and diseased of this world or tackling the consumption of our natural resources or the level of CO2 in our atmosphere - all with the same level of collective commitment to the common good.

Instead it was all about self-preservation. As much as I am happy we got a consensus, once again it will be one of the major missed opportunities of the decade as there will be unlikely a time when the same people meet to discuss other agendas.

Life, indeed, does go on.

Is It Time To Get Worried?

Yesterday marked an historic moment for Britain. For the first time since 1995, British Sovereign Debt was questioned when the auction to sell Gilts failed, with some saying the lowest interest in our bonds ever.

As Gordon Brown tours the world mustering support for his spending plans to fuel the economy which will rely so very heavily on the country’s ability to raise money via selling its debt, we may well ask is it time to get worried? Our inability to sell our debt is a very clear question by the outside world as to whether Britain has the long term ability to repay.

Government debt in the form of so-called gilt-edged bonds which bear a fixed rate of interest over their term are usually classified as the safest form of investment. As a sophisticated, rich and well developed democracy and having one of the major financial hubs in the world in the City of London, it is not a surprise that many traders have been shocked by yesterday’s failed auction.

Policy Worries

The markets may well have got spooked by Mervyn King’s comments and actions this week when he cautioned Brown over raising too much debt. He also was surprised that inflation had reared its head when everyone thought it would fall, which brought into question the Bank of England’s plans for Quantitative Easing (QE) which involves the Bank creating money to buy Government debt. The markets may well have felt that King’s apparent volte face would reduce the amount of bonds he planned to buy and they copied his lead.

Who knows what the real reasons may be but what is clear is that a sharp warning has been sent to the people at the top that the world is not in agreement with Britain’s policies on how to tackle the failing economy. Confidence in Britain’s future, so much part of the Brown-Mandelson mantra, is not shared beyond the realms of the Cabinet Room.

The long term effects of such a failed auction is that the cost of borrowing may rise as Britain may have to borrow from other countries or the IMF and suffer higher interest rates. Worse still, Britain’s credit rating may well get reduced, which was a rumour circulating a short while ago. The repercussions for taxpayers would be that all this massive borrowing required by Brown to fight the economic maelstrom we are in – which is now set to rise to over £1 trillion by 2013 - is that our personal burdens will rise once more. As unemployment rises, the burden on the welfare state gets heavier while tax revenues actually fall as we have already seen at the last announcement, which means that those in employment will have to shoulder more of the cost of that borrowing in the future.

Confusion

In the midst of all this is the apparent lack of consensus on the way out of the mess. Brown was preaching in the US that in fact King may be right in not borrowing too heavily which comes as some relief but in the same breath he says that the answer lies in QE. Sadly, Mervyn King had started to back track on that idea as the surprise rise in inflation had caused concerns that this tactic could horribly backfire as one of the disastrous side effects of QE can be inflation and, worse still, hyperinflation – the sort of nightmare suffered in 1930’s Germany and, more recently, Argentina.

The Slippery Slope

It seems we have teetered past that edge of the precipice that we had reached and are just beginning to scramble for footing at the downslope. The next few months, possibly weeks, could determine whether we lose our balance and start to slide without control or regain our composure. The problem is that having got to this horrific situation through uncontrolled greed, we have plotted a strategy that tries to get us back to the point where it all went wrong. For this, an incredible amount of money has been consumed and pledged in order to shore up the failed system. In reality, we cannot get back to the point we are aiming for as the system failed so badly that it needs to be completely remodelled and then restarted at a lower point – we must endure the punishment of decrease in the economy before we can move it forward again, and that will take time.

The first major mistake was to step in to rescue Northern Rock by taking it into public ownership instead of taking the time to look at alternatives and form a cohesive plan to fight the crash. It triggered a succession of similar knee jerk reactions which have cost us dearly and got us nowhere.

The reactions have been followed by management of the poorest quality by the Government and their army of advisers realised by a shameful attention to detail as to how the enormous mountain of money has been spent. Fiasco after fiasco surrounding bonuses, pension payments, consultancy fees show us how failure in execution of the plan stemmed from the lack planning and foresight by the people who devised it.

I am reminded, having stepped through it this morning, of the incredible lack of planning and execution showed by an inept British Airways (BA) and BAA in the Terminal 5 launch. Bad management is endemic in business and Government and it leads to poor execution which wastes money. Fortunately for BA and BAA they recovered to have a well functioning Terminal. After 12 years of incompetence, I do not have the confidence that this Government has the ability to get out of this mess. The clearest indicator that the same view is held by the wider world came at yesterday’s failed bond auction.

The reality may have dawned that the apparent success of the New Labour Project was built as a house of cards. Fine words and clever spin have been the key factors in creating the vision of a ‘Cool Britannia’, the stuff of dreams. Reality has proved that it was only a dream. But it could have been attained if as much attention to creating the plan and vision had been given to executing it.

For that, we will all pay a very high price as we bear the cost of their failure - every single penny of it plus interest.

Seconds Out - Round 4

AIG, the prominent sponsors of arguably the most successful football club of the decade, have not mirrored their protege's success themselves. Having had 3 serious injections of cash to try and shore up their rotting balance sheets, they have gone back begging for a fourth hand out. This time their argument is not so strong - it's plain and simple; help us out or the whole money market could get crippled causing major effects in Europe and amongst other insurance companies - doom is the alternative.

It's the equivalent of a financial gun to the head and it is also an invite to pile in good money after bad. In the UK we have had a similar problem with RBS and Lloyds - to the tune that more money has been ploughed into RBS than its entire worth in terms of shares meaning it will be a long, long time before the taxpayers' shareholding sees any return on the investment - if any.

So what is the mentality behind so much money going into these companies? What is the predicted outcome? And when does it all stop?

Finance For Dummies

The financial crisis has sobered us all up - and at least we know some more about the mechanics than before. Over the past 10 years or so, we have believed in the competency and skills of the slither of elite population occupying the banking world and given them credit for creating a period of prosperity which has seemed greater and more sustainable than at any other time in history. I was among the few people who did not believe in the Brown-Blair mantra on the economy and it was obvious to many that the prosperity was not coming from fantastic Corporate performance and the corresponding general increase in disposable household income from salary and benefits. It was clear that an awful lot of money was 'created' by leveraging assets which flowed to a comparatively small number of people and made them incredibly wealthy.

In the world of zero sum economics, there is a belief that not money is never created or destroyed, it just flows somewhere. That is true to a point. The fact is that those who have leveraged the increase in the value of their homes have effectively just increased their debt - money was created and lost as asset values plummeted.

It is very hard to see how people of fabulous intelligence could get this so horribly wrong. The whole financial system had been grown in size and complexity well beyond the fundamental value that underpinned it and it was easy for outsiders to see - so why was it so hard for insiders to understand this?

And why did Politicians ignore repeated warnings from places like the IMF about Britain's National Debt but, more importantly, the unprecedented growth in personal, unsecured debt? These numbers are not hidden nor are they hard to understand. Whilst many would point to the judgement of bankers being clouded by their own greed, this could hardly be aimed at Politicians who, apart from consuming ever larger amounts in unwarranted expenses, were not on some superb bonus scheme should they keep the economy growing.

What Caused The Errors Of Judgement?

The one thing I never thought about Gordon Brown in the run up to the financial meltdown was that he was unintelligent. His academic credentials are fairly awesome and his textbook language of the economy certainly seemed to demonstrate he knew the terminology if not the mechanics of the economy. I definitely disagreed with his assessment that Britain's fundamental economic position was good - it was clear to me that our economy was underpinned by over valued assets and that had to give at some point. I did believe, though, that he must have an infinitely better grasp of the situation than I so there was probably a great deal more to the situation than I knew about.

It appeared that was not the case. What has certainly been proven in the last year is that Gordon Brown has little more grasp on the mechanics of the economy than the average guy in the street. Even now, as he surrounds himself with very highly paid and some very dodgy bankers, he still seems to have little clue as to how to solve the problems.

The Catalogue Of Errors

I could go on but here are just a few.

Firstly, I think character judgement has been poor. Already we have seen people like Glen Moreno and Sir James Crosby at the heads of watchdogs and members of the inner-circle of advisers be from businesses with dubious backgrounds. In Crosby's case, HBOS were using over zealous selling tactics and later got into suicidal corporate lending, mostly via Crosby's protege Andy Hornby - but HBOS was on a path to go bust, be rescued, clock up massive losses and have over £200bn in toxic debt. How on earth did Crosby get a place at the advisory table is beyond comprehension. Moreno sat at the head of several dodgy tax avoiding companies in Liechtenstein and yet was part of the inner-circle too. Then there was the man that Gordon Brown held up as the pinnacle of banking genius so much so he befriended him personally had him knighted - I am talking about Sir Fred Goodwin of RBS.

Secondly, the long term belief that the economy was working fine despite the severely over-heated house prices was bad enough, but the belief that the financial system was not using a flawed model was unforgivable. Down-toning the methods of the watchdog, the FSA, was symptomatic of foolhardy judgement that the business model would somehow keep fuelling itself when all logic pointed to it imploding if some small spanner got in to the works. The spanner was small - it was just a realisation that any one part of the financial system could have a mismatch between actual worth and estimated brought the whole thing to a shuddering halt. And not just an 'adjustment' as George W Bush famously called it, but a massive implosion as everyone realised they had been trading in debt until they were far beyond knowing who held what and how much it was worth, and that this alone, not deposits, was making the whole banking system work. The funding gaps together with the concern over asset values, blew the whole system apart.

Yet it was visible all the time - a system built on such a house of cards that any one corner could give way and cause the total to collapse.

Thirdly, the reaction to the collapse has been extraordinary. Far from trying to assess how much toxic debt was at the heart of the problem - for some reason it was believed that pumping a significantly large amount into the system would restore the Utopian view of the economy once again. Yet the total amount of outstanding derivative positions was over $500 trillion, over $900 trillion if you included the associated insurance positions. This was the total extent of traded debt in the market - somewhere between zero and that total figure was the answer to the question - how much? Yet the accumulated wisdom of the banking fraternity at the heart of all this and the Politicians who believed them, started to pump what now appears to be huge yet inconsequential sums of money into the system. The recession has only exacerbated the problem - global demand has dropped significantly and even the budget positive Chinese is now plummeting into debt. As Politicians try to apportion blame to some amorphous body of energy called 'globalisation', they also try to make us believe that without this globalisation the world will be far worse off - yet we were not that bad off beforehand and without it.

Fighting Fire With Fire

The end result sees plenty of talk, some big action and then some total inaction with the associated ineptitude. While Ministers tell us that the car industry needs to £2.3bn to survive in January, we are now in March and nothing has been done as Vauxhall teeters on the edge of oblivion. The failed New Labour experiment in commerce has brought us at the brink of the abyss of nationalisation and how sad that we have red-carpeted their path to it by giving them two terms in office and such powerful mandates that makes it impossible for us to get them out within two years. By that time, the detrimental effect on our economy will be something that future generations will have to pay.

In reality, all the upside of the last 10 years will be paid in the form of a 30 year mortgage on the people, which will be paid off, if we can afford it, in future rises in tax.

At some point, commerce has to kick in. In the world of business, there is little room for sentimentality and idealism. If you run your business badly, you pay the price - seeking bail outs to survive is a fantasy world in which people who are most affected by the mess actually foot the bill for the mistakes made by people who became amazingly wealthy on their stupid business ideas.

If you had written it as a novel - no one would have read it for its lack of reality.

Yet this is what is going on. In the US, AIG and Citicorp, have collapsed to mere shrivelled shells of once great companies, but that is the law of business. You play with fire, you get burnt. Giving you more fire to play with only means you get more burnt.

What If We Did Not Bail Out?

It is hard to say or know what would have happened had we let many of the banks fail - certainly the likes of Northern Rock. There would have been mass defaulting on debt, but in the long run it may have been quicker and less expensive in exposing the actual value of the problem, to then deal with it and then move on. Instead, we have attempted to maintain the status quo and it has been a horrible and expensive series of mistakes which may yet prove to be far more costly than could ever have been imagined. To some extent, it could even be argued that we may still yet have a system which completely fails and we may yet have to go back to some starting point and suffer the wide-scale collapse of the banking system. By that time, all the money we have put in so far will have been lost and Britain would stand on the edge of the cliff of bankruptcy with only the IMF left to turn to as our bonds will be junk.

As we try to pick our path out of the mess, there are more than financial systems which need to change - I would argue that the Political system needs an overhaul too. One of the most disempowering aspects of this whole crisis is that no one has been in a position to effectively challenge and stop the Government from making more mistakes or for them to only listen to the advice of the idiots who caused the mes in the first place - that should teach us a grim lesson as this second Labour Government had a 100+ seat majority based on only 34% of the popular vote.

It is at times like these that you understand that our democracy, as we know it and try to impose on other nations, is very flawed indeed as is our knowledge of finance.