Cash and Burn

Michael Lewis breaks news from 2008

2011-08-19T08:10:00.005+01:00

Michael Lewis, of Liar's Poker fame, has emerged as a leading writer of the credit crisis and its aftermath. I wish there were 10 of him. And if only one of them were European. His latest piece, on Germany, is kinda funny and kinda accurate.

He writes that the Germans got way over-exposed to dodgy debt in the credit boom, as long as it was foreign and had a AAA rating. He ties this financial stuff with genuinely funny observations about the Germans he meets, as well as claiming they have a scatological obsession. Lewis is American so it reads a bit National Lampoon's European Vacation for my taste but the financial stuff is solid.

However ... Germans' obsession with AAA-rated credit (and Norwegians' for that matter) is well known in the markets and has been a topic extensively explored since the explosion of CDOs in late 2008/early 2009. That this is still news 2-3 years after the event suggests financial journalists in Europe are simply not doing their job, are unable to explain complex finance or have failed to find ways to explain it in interesting enough ways.

The sweet ironies of the Murdoch empire brought to heel

2011-07-17T20:26:00.011+01:00

The fall from grace of the Murdoch empire contains many rich ironies. Above all, the element that gives me most satisfaction is that the News of the World's disgusting obsession with sensationalist reporting of child murders directly led to the scandal that brought its closure. The tabloid campaigns against alleged paedophiles were absurd, unnecessary, unhelpful and cancerous to good public policy and safety. It should be noted that Rebekah Brooks remained proud to the end that she led one of the worst of these campaigns.

On the wider issue of Murdoch's influence over politicians, there is a bigger irony. It is easy to forget, 50 years on, that when Murdoch first came onto the British media scene in the 1960s that he was the outsider determined to break up the complacent and deferential establishment culture. His belief was that people were being denied news and entertainment that they wanted, instead being patronised by self-serving views of the elite.

Roll forward to the start of the new century and the establishment was no more. The key institutions of the ancien regime – aristocracy, the Church of England, the Conservative Party – were close to collapse, following attacks from both right and left. In their place stood a thin, celebrity-obsessed culture, one that denigrated the institutions and mechanisms by which people achieve long-lasting and meaningful success. A culture that applauds people winning a country's worth of wealth through a state-backed lottery.

Always close to the helm of this empty, random, "late" culture was Murdoch (followed by his less pleasant mini-me, Richard Desmond). The journey from outsider to dominant patriarch was complete. Time had shown that Murdoch's problem with the establishment was that he wasn't running it.

But like in a movie, one journalist knew there was something terribly wrong at the heart of his biggest, brashest newspaper, The News of the World. At each turn in his investigation he found the paper's misdeeds involved more and more members of the new establishment. Meanwhile, peers ignored, sneered or played up the flaws in Nick Davies' work. They had forgotten – if they ever knew – that the best journalists are usually obsessive. In a climate full of lazy journalists spoon-fed by PR firms and the internet, few remembered that proper journalism is awkward and jarring, driven forward by unusual and intense people.

Is it ironic that News International's worst excesses were exposed and brought down by proper journalism? Probably, though more accurately it may be described as sweet justice. Is it a shot in the arm of investigative journalism everywhere? Definitely. Though as long as we remember the right bits of the story.

Is the Murdoch empire finished? Probably not, but it has been put back in its box (there is some kind of lesson there for those that assume big companies always get their own way). Where we go from here is for us to decide.

Cracking a nut with a hammer (the return to a regular theme)

2011-07-12T18:32:00.001+01:00

One of Ben Goldacre’s best jokes is to suggest that the Daily Mail has embarked on a grand oncological ontology experiment in which it seeks to divide the world’s inanimate objects between those that cause cancer and those that cure it. Other newspapers have different obsessions. The News of the World, for instance, had its own project to peep and pry on behalf of the nation’s prurient busybodies while attempting to redefine ‘the public interest’ as to mean ‘whatever some of the public could be interested in’.

But given my background in debt it is The Guardian’s ongoing campaign to mislead its readers about debt that regularly attracts my attention. As part of this project, most days the newspaper will publish at least one debt-related story but omits a key piece of information or analysis allowing the author of the article to declare the financial markets are singularly corrupt or evil in some way.

Guardian readers, many of whom have been brought up on the watery soup of quasi-Marxism espoused by polemicists such as Michael Moore or Naomi Klein, lap up these safe anti-establishment stories, just as Mail readers relax in the knee-jerk right-wing idiocies of Richard Littlejohn.

But by lazily assuming all finance is somehow wrong, the newspaper prevents itself from producing meaningful analysis of how finance works. Among those that understand finance, the unreliability of The Guardian’s business pages is simply a bad joke.

For instance, when Jill Treanor got on her high horse about Barclays not paying taxes, she did so seemingly without knowledge of basic accountancy rules, rules that her own company had used for similar advantage. And some. Moreover, The Guardian’s great campaign against Tesco’s tax structures quickly ran into the ground when the retailer was able to easily show that many of the newspaper’s allegations were false.

Embarrassing and expensive incidents like these appear not to have dissuaded the newspaper from its overarching project to mislead.

On Sunday, the economics editor of The Observer (owned and operated by The Guardian), Heather Stewart, declared: “Defaulting rescued Argentina. It could work for Athens too.” Then followed an analysis so oddly skewed it might well have been written sideways.

The thesis was outwardly plausible – Argentina had defaulted on its debt a decade ago and recovered, maybe Greece could do the same? But the article didn’t explain that Argentina’s recovery since the default was largely due to the commodity boom (Powerpoint file), not because it had failed to repay its debts (though the devaluation also helped). It was a bit like reading about a lottery winner's work ethic but not mentioning that person's wealth derived from having bought a winning ticket.

The following day the Guardian website published another article on the theme of debt, this time by the blogger David Malone. I have come across Mr. Malone’s theories about finance before on the Liberal Conspiracy website (a peculiar name, because there is rarely anything liberal published on the site which slavishly believes in growing the state, and is allied with parts of the Labour Party). Mr. Malone is an enthusiastic amateur – in that he has no professional experience of journalism or finance – but recently published a book called “The Debt Generation”. Mr. Malone’s style is both tedious and accusatory; he demonstrates that a small amount of knowledge can be a dangerous thing.

As such, he is perfect for today’s Guardian, which published his article that declared that “our wealth is disappearing” due to the needs of a group he specifies as “bondholders”. The article states: “Gradually the story (of the financial crisis) became less about the banks owing us money and more about owing the bond holders.” The piece is like a party of straw men all competing for the honour of who can be most misleading.

But to a non-specialist, Mr. Malone's article may seem plausible and the detail he introduces through the second half of the story would make many readers believe this is a man in charge of his brief. (Several comments underneath the article demand more from Mr. Malone.) However, to someone with knowledge of political economy and finance the article is a shambles, full of mixed-up ideas and ill-judged accusations, as well as basic errors. Mr. Malone’s central charge, that bondholders are being protected while the public have to pay for debt write-offs, is simply untrue in most senses of the words.

In the most advanced case of a eurozone bailout, the Irish government has successfully forced losses of up to 90% on lower-ranking bondholders. Meanwhile, it has been able to protect the state’s holding in the “equity” (or shares / ownership) of the banks, which theoretically should have taken losses before the bonds.

Meanwhile, the situation with regard to Greece is that there is a long argument going on between many different actors, with many different incentives, to work out who will take losses, and how much these should be. The idea that bondholders won’t take losses on Greek debt hasn’t been the case for weeks, if not months.

On the other side of the equation – that the public are being unfairly singled out – this also doesn’t stand up to scrutiny. Mr. Malone’s accusation is: “Public debt … at the insistence of the same banks and bond holders we have bailed out, is being paid down at breakneck speed, no matter what the cost in unemployment and the destruction of social services.”

Like others Mr. Malone here confuses debt and deficit. The UK government’s actual focus is on reducing the deficit – the amount more it spends than its income – rather than its absolute level of debt. Indeed, debt levels in the UK will rise in the next few years, as will state spending. The arguments over the last year have all been about the rate at which this debt level will rise, not about cutting it.

Given this level of ignorance, it almost feels unfair to focus on Mr. Malone’s writing. Clearly he doesn’t know a great deal about the subject that he writes, so why bother so clearly demonstrating it? Surely this is a hammer to crack a nut.

Unfortunately, and as seen with the plagiarist Johann Hari, people that don’t know anything and can’t reliably report facts regularly make it to the top of the British commentariat. Ignorance is no barrier to success, even in apparently technical fields. All it takes is to have views in line with the newspaper’s own prejudices and a talent for self-promotion.

Hari and me

2011-06-28T22:56:00.004+01:00

A long time ago - around 11 years now - Johann Hari wrote his first article for a big London paper, a front page splash in the New Statesman. It was rubbish and I wrote a response to it but it was rejected, I was told, because the Statesman doesn't publish articles critical of its own work.

Hari's article was a dull prediction that drugs would be legalised in 10 years' time. It was a typical post-student 'radical' article that could have been written at any point in the previous 40 years using the same arguments and ideas. Indeed, given today's Twitter storm about Hari plagarising others' interviews, maybe he did lift those articles.

I have avoided much of Hari's output since because he represented the type of journalist I dislike: a preference for controversial views over facts and a willingness to exaggerate reality to fit an argument. Moreover, he appears to have no background of reporting, only trying to win arguments.

The #interviewsbyhari trend on Twitter today was a belated lesson for this junior-level hack. It was also very funny. And he's now famous in the US! (For all the wrong reasons.)

Today, Independent editor Simon Kelner defended his columnist stating that no-one had ever made a complaint about Hari's writing. That's hardly the point and he knows it - no journalist can state they did something when they actually didn't. Hari's own initial defence reads very weak.

Interestingly, the last time I read an article by Hari I was compelled to respond. That response is here with details of what he got wrong. I was saddened but not surprised that Hari continued to abuse facts in his articles to suit his own arguments. I was particularly saddened that no-one in the London media was willing to point out that Hari was simply a bad journalist.

Hari is set to defend himself in The Independent tomorrow. Let's hope he sticks to the facts. For once.

Updated to add: Hari attempts to defend himself here. It's so bad it's steaming. Lesson one in journalism school is that a story that's a bit wrong is completely wrong. That Hari doesn't know this suggests he needs to start again from scratch, or leave the business. That his editor has again stood by him and claimed the criticisms are 'political' only reflects badly on The Independent; it was a big and wrong call.

When will UK Uncut flash mob The Guardian?

2011-05-30T20:20:00.042+01:00

The tone of my last two blog entries provoked some comment, both on- and off-line, along the lines that my arguments might be more effective if they were more evidence-based and less emotionally charged. Maybe so.

However, I'm a sensitive soul and sometimes find it difficult to be relaxed when I read non-factual material dressed up as news. Unlike some others, it’s the output of the broadsheet newspapers that I find most difficult to accept, as I assume – maybe incorrectly – that the impact of tabloid nonsense is well understood (though not appropriately insulated from the policymaking process).

What gets me is not just the broadsheet newspapers’ air of superiority, though this is certainly the case, nor that such a large proportion of their material is untrue, which is also the case, but that the organisations printing this stuff don't believe what they write.

Indeed, there seems to be an inverted rule at play, where the more scandalised a newspaper is over a particular moral outrage, the more likely it is the same newspaper actually commits the same offence.

And again we expect this kind of stuff from the red-tops and other tabloids. For instance, Jonathan Rothermere, chairman of Daily Mail publisher Associated Newspapers is a 'non dom', helping him limit how much tax he pays in the UK, though this does not stop the newspaper from running politically convenient sneers at others benefiting from the same break. Or The Sun mounting a campaign against politicians for being soft on crime while for decades employing a convicted killer as one of its leading reporters.

But the broadsheets apply exactly the same double standards. And so we must be thankful for Private Eye, that curiously relevant and irreverent fortnightly magazine. For without it, and specifically its Street of Shame pages, newspapers would be able to carry on printing their nonsense without anyone knowing just how large the gap is between their words and deeds.

This week's Street of Shame has a particular focus on The Guardian, and for good reason. The Guardian is undoubtedly the winner in the hypocrisy takes. Private Eye's trio of Guardian stories this week leads with a tale of debt and private equity, revealing that despite The Guardian's apparent outrage at the behaviour of private equity firms and the immorality of investment bankers and excessive debt, Guardian owner GMG has been up to all the same tricks. And some.

The story starts in 2008 when GMG decided to sell just under half its shares in Trader Media (publisher of Auto Trader) to private equity firm Apax Partners. As part of the deal, Trader Media was loaded up with £835 million of debt in what's known as a 'leveraged buyout'. As The Guardian financial editor Nils Pratley pointed out just a couple of weeks ago, in the "wonderful world of the leveraged buyout", companies loaded up with debt can cut the amount of corporation tax they need to pay.

You should be able to guess what's coming next. As part of the 2008 deal to sell the Trader Media stake to Apax, the Guardian did some extensive financial engineering. Ownership of Guardian assets was transferred out of the charitable Scott Trust and instead shifted into a new private company, Scott Trust Ltd. This helped the newspaper's owners to avoid paying tax on the profits of the sale of the stake, allowing it to report profits of £306 million but for that year pay absolutely no corporation tax. (Indeed, that year they received a tax payout from the government.)

It gets worse.

In recent months GMG and Apax had looked at selling Trader Media completely, but it appears they could not get the price (two billion pounds) they wanted. So instead they decided to borrow a further £200 million against Trader Media expressly to pay themselves a special dividend.

Mr. Pratley wrote last year: "If the coalition really wanted to reverse the trend towards short-term thinking it would change the rules on the tax-deductibility of interest since the current rules encourage companies to load up with debt to reduce their tax bills … and seek instant gratification and popularity in the form of special dividends."

Guardian Economics Editor Larry Elliott, who has written a whole book about the failures of corporate debt and bankers, chipped in recently with: "The cult of private equity suggested that any business could produce bumper returns if loaded with a ton of upfront debt while management sweated its assets." This is the same Larry Elliott, director of the Scott Trust, which oversaw the Trader Media leveraged buyout deal.

So, on the one hand Guardian owner GMG has loaded up a firm with debt to pay itself a dividend and limit its corporate tax, and on the other Guardian writers queue up to condemn private equity firms for, er, loading up firms with debt to pay themselves a dividend and limit their corporate tax.

In Sunday's Observer-Guardian 'investigation' into the failures of private equity and debt, a TUC spokesperson was quoted as saying: "It sounds a depressing, familiar scenario, where a company is bought by private equity firms and essentially loaded with debt. What too often follows is year after year of value extraction."

Given the recent waves of redundancies at the Guardian, massive executive pay and plans to increase the “partnership” between the newspaper’s corporate and editorial arms, one wonders who these increasingly hysteric stories about private equity, debt and tax avoidance should really be directed at.

Newspaper, heal thyself!

Drowning in stupid

2011-05-18T13:53:00.006+01:00

One definition of stupid is having very strong views about a subject that you do not understand. Like a mob attacking the house of a paediatrician, or Microsoft launching a social networking site.

In my life, the primary exponent of stupid is the British newspaper. Like that other factory for idiocy, Big Brother, these brightly-coloured comics of made-up-stuff are funny to watch for a bit but after a while become really quite annoying. With politicians you can tell when they are lying by when they move their mouths, with newspapers you can tell they are bullshitting when they print an edition.

Some of the newspapers make it pretty clear that they are talking shit. Like a tree frog in the Amazon, they carry warning colours to alert you of the danger. If you see red at the top, you know not to take seriously anything written inside. But not all are so clear; the real danger comes from those newspapers that give the appearance of not being stupid, while still churning out crap like a sewerage farm on overdrive.

The easiest way to test this is to look at what the newspapers have to say about an area you know about. My area of professional expertise is debt and restructuring; I have plenty of material to wade through.

Take this article from the Telegraph, “Alliance Boots will have to refinance debt in a very different world”. Given that it’s written by City Editor Richard Fletcher we should be able to trust what it says. However, as it turns out I’ve listened to more convincing dogs than the claims in Mr. Fletcher’s article.

The main thrust of the piece is that Boots will struggle to refinance its debts as they come due for repayment in a few years’ time. Mr. Fletcher warns that “unless debt markets improve dramatically” the company is likely to be left 1 billion euros short when it seeks to refinance its debt. However, this is imaginary; no-one in the debt markets would agree with this. Yes, they would recognise that Boots has a lot of debt, but they would start by pointing to the large number of other companies who have been able to refinance debts, particularly in recent months, that have been in a much worse state. Even Gala Coral, which was forced to restructure (ie not repay) much of its debt just last year, just borrowed a load more cash from banks and bondholders.

Over in the Guardian, economics editor Larry Elliott declares that Greece is certain to be the next Lehman Brothers, and this will have the same impact on the wider world, if not more. But it says much about Mr. Elliott that he can’t (won't?) tell the difference between a massive investment bank collapsing overnight at the height of the credit panic and the slow-paced, well-signalled (but bloody difficult) reordering of a country’s debt. Mr. Elliott claims the comparison is valid because of “the structure of modern financial markets, with their chains of derivative trades and their pyramids of debt”. But that’s not good enough. On these terms, pretty much everything in the financial world for all time could be “the next Lehman Brothers”. It’s the equivalent of saying “stuff”.

And given that the headline, sub-headline and opening two paras are so catastrophically loose, it’s hard to take the rest of Mr. Elliott’s article particularly seriously. And maybe it is not a coincidence that the only journalist at the Guardian who understood debt and restructuring left the newspaper a few months ago and has not been replaced.

Sometimes I wonder if this is some kind of project to see how much stupid can be injected into the body politic. Certainly it is insidious, this creeping nonsense. And influential. Who do you think attention-seeking politicians listen to? Newspapers with readerships of millions, or experts with less sensationalist views? (This may explain why when they arrive in government, politicians change their tune so much.)

So, what to do? How do you avoid stupid? How do you find where the jewels are in amongst the crap? Or do we have to accept that the British newspapers are generally rubbish and turn to other sources for information? I don't know the answers to these questions but as someone who works in information I can share some of the solutions that I have come up with. First up: assume newspapers are written by idiots who are repeating verbatim the last thing they heard.

The Shit Sandwich

2011-05-05T23:27:00.010+01:00

The most successful Prime Ministers of recent times, Margaret Thatcher and Tony Blair, were often able to convince voters of the necessity of making difficult choices. For Mrs. Thatcher, TINA – there is no alternative – was her ally, while Tony Blair preferred instead an open recognition of how it was sometimes important to take unpopular decisions.

Since taking power a year ago, Britain’s coalition government has tried to take a similar position. The country’s structural deficit, rising debt and recent financial crisis meant the Conservative-led government came to power full of doom-mongering about the UK’s solvency. Building up the drama, the government staged an ‘emergency budget’ shortly after taking office, and allowed talk of an ‘austerity budget’ to enter the media debate. The junior partners in the coalition, the Liberal Democrats, publicly allowed themselves to be convinced of the need for drastic cuts, rowing back on positions they had campaigned on just weeks before.

In the fourth series of The Wire, Baltimore’s Mayor Carcetti, faces a similar situation. An unexpected shortfall in his education budget forces him to reverse his reformist spending pledges. Reflecting the language of Baltimore, the mayor finds he has a shit sandwich to deal with.

There are two distinctive features of the shit sandwich. The first is that it must be eaten. Like a hospital pass in rugby, the shit sandwich is a terrible thing to receive, but impossible to pass on. Someone’s going to have to take a bite. The second feature is that no matter how much bread there is, it’s still a shit sandwich.

Faced with such an unappetising menu on coming to power, and hardly over-endowed with intelligence (this is a team that regarded a former News of the World editor as an intellectual powerhouse), it is hardly surprising the new government allowed itself to overstate the unpleasantness of its situation. Moreover, not put off by their own exceedingly comfortable backgrounds and circumstances, they thinly claimed that they were “doing this for us”. Thanks guys! Unsurprising was the lack of gratitude from the populace, though many of them were more used to being stuffed by the big fat state lying back on a sea of easy money.

Given how gullible many people are financially (have you ever spoken with a retail bank’s personal advisor? It’s like being patronised by Jedward.), it is hardly surprising that a significant proportion of the public rejected out of hand the concept it was necessary to cut state spending when there was less money.

Predictably, those with most to lose and the best organisation, the trade unions who are concentrated in the public sector, led the campaign. They were followed by their political allies in the Labour Party, seeking a popular cause after being thrown out of office and relegated to third place in the May poll.

Disappointingly, these groups decided that the best course of action was simply to deny the existence of the shit sandwich. Or, if they led the Labour Party, claim they know it exists but declare that those who believe it doesn’t exist are heroes. No, it made no sense to anyone else.

Moreover, if you write for the Guardian, or are the shadow chancellor, you now must believe that if such a dish were to exist it can be magicked away via the means of Keynes, where increased state spending will clear away any unpleasantness through faster economic growth and higher government revenue. That such increased state spending would be entirely dependent on borrowing yet more from bondholders, who have – via their proxies in the rating agencies – made it clear there is a puke point after which they will not lend, is so inconvenient as to be portrayed as irrelevant.

But while one side of the debate is in denial, the other side is in crisis. Unlike 1997, when Labour came into power with a rigid professionalism, this new government crash-landed into power and have looked ill at ease ever since. Though accused of ruthlessly executing an extremist ideology by their leftist critics, it has always seemed more likely that incompetence and incoherence would be more likely to trip them up. A sign of their uselessness came at the start of the year, when they failed to sell off a few commercial pine forests after having no answer to a press release circulated by a weeks-old leftwing campaign group. The AV referendum, meanwhile, has been a thorough disaster for the current crop of Liberal Democrats, who risk being remembered by history as simply a stupid bunch of fuckwits, outmanoeuvred by a babyfaced PR man with a small brain and a large wallet.

But what of the shit sandwich? Though the government may be less trustworthy than Paul Gascoigne conducting brain surgery with a can of Stella just beyond reach, and as likely to do the right thing as Lee from Blue judging a fraud trial for a bit of a laugh, it does not follow that there is no looming solvency issue for the British state. As the latins would say, that’s something of a non sequitur. Looking ahead, it remains to be seen if the incompetents in government will stick to their task, and keep munching, or fall apart as their rank incompetence defeats them all. If so, would an election then propel the deniers-in-chief back to power? Whatever – I seem to have lost my appetite.

Sailing on the pool of liquidity

2011-04-13T17:23:00.015+01:00

During the credit boom, financiers regularly talked of ‘special purpose vehicles’ for their operations and so I started to wonder what kind of vehicles these would be. In my imagination, they quickly became ships sailing on the seas of liquidity, transporting wares over time and space.

So attractive was this idea that it quickly grew details. Suddenly, the ships had a crew – the company directors – and there became ports where these ships would sail to and from. Obviously the biggest port was the City of London, which, just as in times of Imperial Britain, was the hub of international trade. Every day vast numbers of ships from all across Europe, the Middle East and further afield would dock and unload their financial goods, ready to then be repackaged and put on ships sailing elsewhere.

And there were treacherous seas. Ever-changing, the seas of liquidity would in places be broad and deep while at others deceptive and shallow. Ship-ripping rocks were an ever-present menace, appearing to cluster around certain places and times. If a heavily-loaded ship were to sail through a patch of limited liquidity, then its end could be sudden and disastrous. Only a few sailors had the knowledge and experience to know where and when was best to sail, but not all shipowners were wise, or wanted to hear the message of experience.

In port, the loading and unloading of the ships was watched by the regulators. Few of the regulators had ever been to sea, and the sailors did not think much of their ability. However, often the regulators and the ship owners would end up drinking in the same pubs in the ports, and while there, telling tales, the regulators could often be persuaded to see the others' point of view.

GETTING LOADED

So what would these ships carry? Over the years, trends came and went, different ports handled different goods. Over the years, the Chinese ports sent out increasing amounts of goods, especially manufactures. In London and New York, the amount and complexity of financial goods grew and grew. Each load was ever more valuable. Incentives increased to load up each ship with more and more.

A rising tide lifts all boats, they say, and in credit world the same rule applies. So when the central banks began pouring in liquidity to the seas after 9/11 all the boats began to rise. Liquidity came from lower interest rates, pushing down the cost of debt and so lowering the price of risk. This was bolstered by banks and investment funds, seemingly free from restrictions to generate new debt-based products, with each iteration leading to greater liquidity.

By 2005, this was sufficient for the shipowners to declare they were almost drowning in liquidity. For the ships, this meant the risks of overloading grew smaller and smaller. Default (sinking) rates fell and the risks taken by ship owners increased. As each overloaded ship returned safely to port, this encouraged the next ship to be loaded up yet further. And the regulators? They had been persuaded that what was good for the shipowners was good for the port. The shipowners had invested in a range of complex measures to assess their risks, and paid rating agencies for their opinion of them. The regulators believed that the shipowners’ actions had helped stop ships from sinking. However, they rarely looked out to sea, but if they had they would have seen levels higher than ever before.

CRUNCH

All good things must come to an end. But before it ends, there must be a final orgy of activity. This took place in the second quarter of 2007. Liquidity became so deep that shipowners started to believe they could do anything. The most elaborate structures set sail on the sea with no consequences. But then the consequences began. This started innocuously, a couple of small boats overturned loaded with goods few people knew about. However, by August the rumours grew. Throughout the month, the shipowners' newspaper had trumpeted “crisis” on the front page every day.

People grew worried. They looked out to sea and noticed the levels, though high, were dropping. And each time they looked, the lower the sea became. Suddenly, all those ships at sea were at risk. The atmosphere in the ports grew ever more fearful. By the turn of the year, the situation looked grave. Liquidity continued to slide away. Everyone had become sucked in to the chase of landing just one more load; one shipowner noted that 'if the music is playing, you've got to keep dancing'. But the music was ending, liquidity was ebbing away. Ships overloaded with complexity and risk were left to battle their way back to port. By the middle of 2008, like a pool of rainwater left long in the African desert, there was no liquidity at all.

Cranks

2011-04-11T09:54:00.014+01:00

Last week I wrote a short piece about the two different styles of political economy writers. I noted that they can take a cautious approach, or be more bombastic and forthright. On reading this, a friend noted this was a quite a difficult distinction to draw, and it was “a bit subtle”.

As this person has an interest in science, I got to thinking that a better word for someone taking the latter approach is often “crank”. In the world of science and medicine, cranks routinely emerge but are usually (sometimes after a period of time) pushed out of normal discourse. If cranks do get taken seriously, and cause harm, then there are a number of institutional mechanisms to eradicate their influence and there is an effort to correct mistakes.

The recent case of Andrew Wakefield and the MMR scare is a good example of this. Mr. Wakefield’s views were, for media-related reasons, taken seriously for a while until eventually he was exposed as a crank. In 2010 he was struck off by the General Medical Council.

Another was the example of Simon Winchester, a science writer. Mr. Winchester wrote an article for Newsweek on 13 March claiming that “The Scariest Earthquake is Yet to Come”. It didn’t take long for geologists to reject Mr. Winchester’s claims, and though his “bogus claim” was picked up by many news sources in the US, punch in “Simon Winchester” and “bogus” to Google and you can see the world of science fighting back.

Politics and finance does not have the same process. Indeed, often the most sensationalist ideas get picked up while the accurate ones are ignored. The list of cranks writing about political economy, particularly after the financial crash, is long, and many get a lot of attention. However, there is no mechanism or culture of correcting mistakes. People with silly views of the world usually remain uncorrected.

One of the most forthright of these is Johann Hari, the Independent columnist. Here’s an example of what he does. He wrote a story for the Huffington Post in December declaring: “The Banks Have Not Been Reregulated by Our Corrupt Politicians. So Get Ready for the Next Crash”. There was little in the story that was accurate, neither in his general assertions or the details provided.

As an example, to justify the claim that “the banks have not been reregulated”, he said that: “Most economists believe the banks need to hold capital reserves of 30 percent to protect against another crash. The new rules say they have to hold 3 percent, by 2019, if you wouldn't mind awfully.”

Neither of these claims are any way near true. “Most economists” wouldn’t claim a 30% capital ratio to be desirable, and even the article he links as a source doesn’t say this (“equity requirements need to be very much higher, perhaps as high as 20 or 30 per cent”) and he’s the only writer I’ve seen suggesting such a high number. His second point about the “new rules” refers to Basel III, which states that banks have to hold 7% by 2019 not 3%. (As an FYI, today’s ICB report on UK banking says the figure for retail banks should be 10%.)

I wrote to Mr. Hari asking him if he could point me towards his sources for these claims. I didn’t get a response. The article was widely republished and remains on his website, uncorrected (September 2011 update: the article has been removed from his website between July and September 2011). General readers will never realise that the article was misleading and its key facts were wrong.

The Puke Point

2011-04-08T14:17:00.006+01:00

What, my wife asked, knowing that sometimes I need an outlet to talk debt, is going on in Portugal? What is this mess they’ve got into?

Earlier that day Portugal’s caretaker Prime Minister had given into the inevitable and started talks with the European Union on a bail-out financing. Reports suggest the country needs financial support of 70 – 90 billion euros.

It’s a tough situation for a country that’s seen several years of hard times. There’s been years of deficits, recession, a failed austerity budget and then, pushing it over the edge, the parliament refused to pass a second austerity budget, triggering Prime Minister Socrates to stand down and call new elections, due 5 June.

The Prime Minister continued to resist help, but the final straw was the threat by Portugal’s biggest banks to stop buying government bonds. They had reached the puke point, where bond buyers lose their appetite to buy debt. On Monday, Portugal held its (semi-regular) auction to sell government bonds and had to pay 5.1% on six-month debt and 5.9% on 12-month debt – far higher than the country can afford over the long-term, and would have to rise further if the Portuguese banks made good on their threat.

And governments cannot choose to ignore the debt markets. Auctions of debt are routine for all large economies, and the results are made public. And in between these auctions there are a variety of ways (primarily secondary trading and CDS) that indicate market appetite pretty much in real time.

For Greece, bond auctions in the first months of 2010 indicated that lenders had grown queasy of buying Greek government debt; the puke point was not far away. By March, Greece had agreed a rescue package from the international authorities.

Last September, the Irish government decided to cancel all planned bond auctions, seeking to shy away from bondholders’ unpleasant message. However, CDS levels rose through October and ended up indicating Ireland would have to pay in excess of 7% to borrow. By November, Ireland had begun bailout talks.

There are differences between Ireland, Portugal and Greece. In Ireland, the government made a rash decision in 2008 to offer a blanket guarantee to the country’s banks. (In hindsight, this was one of the most expensive decisions ever taken by a small country.) By contrast, banks in Greece and Portugal are not in need of a bailout, and in many circumstances are held back by the weakness of the sovereign state’s credit rating.

In Greece and Portugal, but not in Ireland, the banks have traditionally bought a high proportion of the government’s debt. By doing so, governments were given an easy source of funding, but these banks tended to be owned by the state and acting in the interests of the state, so have been stuffed with low-priced – uneconomic – bonds. They had no puke point; the taxpayer would ultimately pay for their largesse through regular banking collapses and financial crises.

Since joining the euro, these countries have been able to reduce their dependence on their domestic banks, finding instead foreign bond investors more than willing to lend. These investors believed that Europe’s periphery offered a ‘convergence play’ – ie that the poorer countries of Europe were on a journey that would see them end up with similar credit profiles to that of the richest, but in the meantime they would pay higher interest rates than countries such as Germany and the UK. Investors’ largesse combined with poor governance, and Greece saw its sovereign debt balloon to more than 290 billion euros, most of it held by foreigners.

So that’s Portugal, Greece and Ireland dealt with, is there anything here that’s relevant to the UK? Only today The Guardian splashed its front page with attacks on Chancellor George Osborne ("desperate ... scaremongering" according to Shadow Chancellor Ed Balls). Critics of austerity at the leftist blog Liberal Conspiracy took Osborne to task. Here is one of the better-informed critics today:

“Tough austerity is a self-defeating strategy.

Several commentators have been quick to point out that Portugal, Ireland and Greece had ‘no choice’ but to adopt these policies. Now whilst there is always a choice, I fully accept that in each of those cases membership of the Euro, the maturity profile of outstanding debt that needed to be refinanced and loss of confidence from the bond markets forced the government’s hand.

But this doesn’t change the fact that austerity isn’t work and is unlikely to work.”

According to this commentator, who at least seems to know the difference between debt and deficits,

“The key difference between Britain and the Euro-Periphery is that Britain certainly does have a clear choice – we have the longest debt maturity in the developed world, the markets are prepared to lend to us at near record lows (and have been for over two years – not just since the emergency budget), our debt/GDP ratio is comparatively low. Whatever the scare-mongers say, Britain was nowhere near the brink of bankruptcy.”

This is a curious and elusive use of phrasing, concepts and numbers. It is true that Britain was not near bankruptcy, as David Cameron once (in 2009) unwisely claimed. It was untrue then and it’s untrue now. And, yes, the UK has stretched its debt maturity (as have other developed world countries) for the last couple of years, taking advantage of continued investor appetite for UK debt.

So, nothing to worry about then?

Well, not really. What’s noticeable about Mr. Weldon’s peon to the UK’s creditworthiness is that he doesn’t mention the main group of people concerned about the UK’s debt: the credit rating agencies. And these have issued frequent warnings about the UK’s debt position. As noted below, one of these, Moody’s, said last month that the UK’s Aaa rating remained at risk, and explicitly praised Osborne’s plans to cut the deficit.

Until now, the UK has seen its debt climb at a dizzying pace but has maintained investor confidence. The puke point appears some way away. However, and as the Moody’s report makes clear, this confidence is substantially connected to the government’s determination to reduce the deficit. Investors have seen the UK as a safe haven, but there is no law that says this will always remain the case.

If there is one thing we should have learnt from the financial crisis is that high debt levels mean investor confidence can be lost almost overnight. The puke point is never far away. The complacency of the anti-austerity critics, and this includes the Labour opposition, seems breathtaking in this regard. The difference between Portugal and the UK is that investors in Portugal reached their puke point; given the UK’s high level of debt there is no reason to suggest the same could not happen to the UK.

Addendum: the only way that the UK could be sure of continuing to borrow without a care for investor confidence would be turn the clock back and stuff state-linked banks (such as RBS) with government debt. Though such cronyism has long since been banned by Europe, it is one logical extension of the arguments made by the anti-austerity brigade.

Number Crunching

2011-04-06T07:57:00.002+01:00

£10 million: Amount of tax UK Uncut accuses Associated British Foods, which partly shares ownership with Fortnum & Mason, of avoiding and used as justification for the store's occupation on 26 March.

£60 million: Amount of tax The Guardian's owner, Guardian Media Group, has been accused of avoiding as part of its 2008 deal to sell a stake in Trader Media.

GMG paid no corporation tax in the 2008/2009 financial year, for which it reported profits in excess of £300 million. “The Board (of GMG) ... believes that it has a commercial responsibility to manage the Group’s affairs in a tax efficient manner within those rules as well as to manage the Group’s exposure to tax.” The Guardian has described its tax affairs, which included the establishment of a Cayman Islands subsidiary, as “not abnormal”.

Since 2007, the Guardian has run an investigation to expose how “large corporations are creating elaborate structures to move profits through subsidiaries to offshore centres such as the Cayman Islands, Bermuda and the British Virgin Islands, to avoid handing money over to tax collectors in the countries where their goods are produced”.

Seek and ye shall find

2011-04-03T20:20:00.004+01:00

There are two ways to write political economy. One is to be the intrepid explorer, seeking out the truth and constantly revising opinions along the way. Each new mountain of understanding reveals a fresh vista from which to understand the world. Such a writer must know much about what he does not know; changing conclusions becomes a habit, modesty and an aversion to certainty become key characteristics.

The other approach is the seeker of a distinct truth that lies buried at a known point in the jungle. The style of such a writer is to march in a straight line from here to there, scorching the earth, proving all the way why that journey is correct, and leading inexorably to the predetermined destination. Habits of such writers include certainty from the opening page, declarations of others' weaknesses and failings, as well as claims that their work reveals some secret but vital truth about the world.

In our opinion-soaked age, telling the difference between the two is of vital importance.

Where's the fool?

2011-04-01T20:02:00.005+01:00

To mark April Fool’s day, the UK media have a charming habit of publishing plausible yet false stories to entertain their readers. The Guardian, splendidly, once published a guide to the island of Sans Serriffe. However, to my critical eye it’s not just April 1st when it seems difficult to distinguish between fact and fiction. And it’s not just the silly stuff.

Take The Guardian’s recent story on whether the UK can pay its debts - “UK risks losing top AAA credit rating if growth is lower than predicted”. The maintenance of the country’s AAA credit rating is a key economic objective of the present government, and so the story is of significance.

The newspaper’s headline is reflected in the opening of the story, and there is a quote high up the story from Moody’s in support of the opening section of the story (the ‘lede’).

However, the headline of the report was actually: “UK Budget: Continued Commitment to Fiscal Consolidation Critical to Aaa Rating”. ‘Fiscal consolidation’ broadly means cutting deficits - where the government spends more than it receives in tax.

Here’s some meat from the Moody’s report: “The two key drivers of the future evolution of the United Kingdom's credit risk profile are likely to be economic growth and fiscal consolidation. Although the government faces challenges in both areas, the budget announcement on 23 March 2011 indicates that the UK has the willingness to meet these challenges. This conclusion is based on the government's plans to achieve a cyclically adjusted current balance by the 2015-2016 fiscal year, or even earlier, despite the recent deterioration in the near-term economic growth outlook.” (Emphasis added.)

However, this doesn’t fit the centre-left / Guardian narrative about the economy, which is that government’s cutting plans are excessive and will mean the UK economy will stop growing. So, the story effectively hides the fact that Moody’s explicitly praised Osborne’s budget, and specifically his plan to cut the deficit in full by 2015-16, by burying it in paragraph eight (of 10). To get to the truth, readers must first wade through references to Osborne’s over-optimistic growth forecasts, the threat this causes to the Aaa rating and the (spurious) assertion that the Moody’s report directly led to a (tiny) drop in the value of the pound.

Ultimately, the story is misleading, because even the most determined and well-informed reader would have struggled to realise that Moody’s believes it “critical” that the government focuses on cutting the deficit, while the issue of growth is important but of secondary significance.

Two risks, two gambles

2011-03-30T20:07:00.000+01:00

Looking ahead, there are no easy options for the UK economy. The present government is accused by the TUC and the opposition Labour Party of taking a gamble with the economy by making excessively deep cuts. They have a point. Substantial amounts of money are being withdrawn from the economy at a time when there is little growth and fragile confidence.

However, the plan espoused by these critics is a gamble also. Their gamble is that the government will be able to borrow more from bondholders and that this extra debt will be effective in kick-starting the economy, or at least protect it from recession. The government’s plans will still see debt rising, just not by as much as under the “Plan B” espoused by the opposition.

The government says borrowing more risks the UK’s credit rating, and at worst its solvency. They have a point: ahead of last year’s election all the bond credit rating agencies flagged up the risk of the amount of debt carried by the UK. It was clear that the UK’s prized AAA rating was under threat. And in a rather under-reported story, following the budget rating agency Moody’s said the UK’s AAA rating remained at risk.

So there are two gambles on the table for the UK, one based on the state taking on more debt, the other based on not taking on more debt. In the wake of the biggest debt crisis of anyone’s lifetime, and continuing solvency issues in many European governments, it is not so surprising the government has opted not to tap its credit card any further.

Financial journalists should take responsibility too

2010-07-19T18:53:00.001+01:00

In our information-soaked age, it is shocking to see how little our newspapers know of money. Though newspapers are hardly advertisements for financial acumen, as they lose both money and readers at a quite astonishing rate, but one would have thought that finance was one area of our newspapers immune from the distractions of celebrity culture and sensationalist reporting. Surely, money would be too important to trivialise and people wouldn’t make mistakes over simple numbers.

A general reader glancing through The Financial Times - the high point of London’s financial journalism - would be forgiven for thinking that readers of the finance pages are treated with a certain respect. It might be not be very entertaining, but it looks pretty solid, what with lots of numbers and graphs, and clever-looking men staring out from columns full of weighty-sounding economics talk.

But it was out of these pages that emerged the single biggest crisis the world has seen, certainly in the last decade, maybe even the last half-century. Somewhere in those boring pages lay the causes of the biggest economic crisis since the Second World War, a crisis that came close to tipping the western world into depression and collapse, that loaded taxpayers with hundreds of billions of pounds of debt, and longer-term ramifications that are only just starting to be felt.

As a financial journalist reporting on the world of credit throughout the build-up to the crisis, I had a remarkable vantage point to understand the credit boom, and also to get a sense of what would happen if the house of cards came tumbling down. During this time I started - but never finished - a book about debt.

It is damning criticism of my business, financial journalism, that we failed to look hard at the credit boom and call it for what it was, and what it would mean. Instead, what happened, was we stood up the day after it happened and pointed to all the reasons why we knew it would have happened, and highlighted the small number of examples were we mentioned it in passing. Then a few months passed, and we forgot everything we might have learnt from the biggest disaster our industry has known in recent times, and reverted to populism.

Blame the banker was an easier game to play than the intellectually difficult, and quite worrying, truth: that ignorance was central to the crisis, that a profound and systematic intellectual failure undermined almost every one of the world’s financial and government institutions. And while it was not journalism’s fault that credit boomed, and assets bubbled, and banks tweaked structures, and governments’ took advantage, it was journalism’s responsibility to tell the world what was going on.

What they are not telling you

2010-07-03T18:57:00.000+01:00

There is so much going on in the world, and the well-trained journalist knows that within each event lies a thousand stories, and within those a million different articles. No-one is able to tell all those tales. As such, journalism is a flawed occupation; destined always to fail. But the mistakes are interesting, and only by understanding them can understand their impact.

Financial journalism is certainly one flawed part of this error-strewn business. Indeed, because of the importance of finance and money in our world, the failures of financial journalists have a particularly large impact, not just on their readers - misled about how to manage their finances and hence much of their lives - but also upon opinion-formers and policymakers, who introduce bad laws based on poor information.

Moreover, even professionals in the world of finance, who really should know better, can find themselves herded into decisions by journalists and newspapers who in the search for the big story often generate a climate of crisis out of nothing, or sometimes just blunder on through mistakes and misunderstandings.

This is why I instinctively reject conspiracies. Nothing in the world that I have seen has ever been as perfect, as neat, as the stories told by conspiracy theorists. The things they are not telling you are usually secret not because there is some massive conspiracy generated by an all-powerful elite. No, what they are not telling you are the things they don’t know, or don’t think you need to know, or they can’t be bothered to tell you about.

CDS fail

2010-03-11T18:01:00.002Z

People don't understand CDS. I guess that fact should be obvious - it's a relatively complex tool used by financiers to make money, sometimes in situations where others are losing out. Like short-selling, it appears to have given politicians in Europe something (anything!) to rail against and as with the short-selling ban it is unclear what the evidence there is to support the vituperative attacks. (Indeed, as time as gone by there appears to be less and less evidence that short-sellers were to blame for problems with banks.)

Here is a brief explanation of what was going on with Greece: it seems as though hedge funds sold CDS to banks to protect the banks against a possible default by Greece. More here and here and a lengthy and wide-ranging one here. The CDS became more desirable - and the price rose - as Greece found an enormous black hole in its finances, a media and political storm became whipped up, and some banks panicked. None of this stopped Greece eventually selling its bonds (to those evil foreign investors that it relies on), but neither did it stop European politicians capitalising on all this froth to try to ban an element of finance capitalism they seemed not to understand.

It is an interesting question to ask whether it matters if policy has to come from evidence. Many people seem to believe that politicians should act just because a group in society is angry, often at wide variance to the facts. This is a form of populism, and it has a long history. Unfortunately most of this long history is of making people, particularly those in identifiable minorities, sad, poorer and/or dead.

Securitisation and the Mediterranean

2010-02-25T18:26:00.000Z

Now, what does this remind me of?

Fooled by Randomness: David Cameron

2009-08-21T18:03:00.002+01:00

Tory leader David Cameron does not have a big reputation for intellectual gravitas. Indeed, intellectually he's probably on a par with Blair, and that's not a great thing.

So curious it was to see Cameron share a platform with Nassem Nicolas Taleb, provocative intellectual and author of Fooled by Randomness and The Black Swan.

I hear many anecdotal stories indicating there is some truth in critics' claims that Cameron lacks solidity in his policymaking, and is prone to cherrypick inconsistently.

So it was hardly surprising that Labour -- moving back to a anti-intellectual position -- seized the opportunity of Cameron's Taleb meeting to smear one with the other.

A Guardian front page story highlighted Taleb's thought crimes ("Cameron's guru"), including his apparent denial of man-made climate change and his strong position on the need for banks to face the reality of insolvency. Larry Elliott then weighed in with his own clearly unbiased view ("economics editor" indeed!).

Here's a reasonable overview of the issue.

Columnists: creating an imaginary world

2009-08-21T17:54:00.001+01:00

A fine piece this, about the dynamic between news and comment in tabloid newspapers.

"What the tabloid columnist usually does is act as Greek Chorus for the paper they appear in. The tabloids set the scene with their constantly repeated stories, with exagerrated figures, distorted coverage of reports that aim to invert their meaning and opinion dressed as fact - that happen to fit the targeted narratives they've created.

But these will often be flawed by the balance that must be inserted (and mostly is) with a quote toward the end, or the inclusion of actual figures that readers might spot aren't quite as scary as the paper wants them to believe they are. So here the columnist pipes up and shows the reader what their ideal reaction should be.

Want to imply that most crime is carried out by foreigners, but are hampered by the fact that they're not? A columnist doesn't worry about facts, so with a throwaway line, Richard Littlejohn can help by saying, in a complete fabrication, "Most of the robberies in this country have been carried out by Eastern European gangs."

Want to exaggerate how much immigrants get in benefits but find it difficult to get away with it in news stories because they don't get very much? Someone like Carol Malone can make the fatuous claim that they get free cars. Yes, free cars. Columnists take the false claims made in news stories that extra step to help create a version of Britain for their readers that rely even more on imagination."

Left Vacant

2009-08-19T14:26:00.007+01:00

Revisiting 'leading' Leftist thought -- through my encounters with Klein's shaky polemic -- proved a reminder of an old belief of mine that the Left could do so much better.

Naive belief in grand unworldly politics ("a world parliament"), peaceful revolution ("throw out capitalism") and little or no engagement with the reality of politics (producer interests, identity politics, etc etc), there remain true believers willing to roll out the same old lines.

A rather thin article in the Guardian earlier this week about the vacant Left prompted letters from such die-hard fanatics.

Amidst the usual self-congratulatory nonsense came this:

"It is a mistake to think the left can flourish independently of the rest of the working class. It is out of the living resistance of workers themselves that the left will renew itself."

Living resistance huh? It's all a battle I guess to some. All or nothing. Total dedication or else. For me, a bit of engagement by lots of people would be welcome enough. For the ideologues, nothing but 110% belief is enough. Actual politics with actual people? Less of a priority.

Also ... the letters selectively miss Paul Ormerod's point:

""The left just gave up on economics," says the economist Paul Ormerod, who retains sympathy for the cause. "Marx and Keynes cast such long shadows. There was too much of the left saying, 'It's all there in the old masters.'" Marx died in 1883 and Keynes in 1946; by the 80s – some would say much earlier – the world economy had changed sufficiently to invalidate some of their ideas. Yet the left was more interested by then, Ormerod argues, in other issues such as race and gender and sexuality. Lawson agrees: "We've had a hollowed-out generation of economic thinkers.""

Edited to add: a grand piece of Marxist nonsense from the SWP! If you ever wanted to see the religion of modern-day Marxism, here's a good example.

I find it hard to take such people seriously. they are marxism's quants - enablers of complex nonsense.

Other takes on Shock Doctrine

2009-08-14T16:40:00.003+01:00

I clearly have been reading the Guardian too long, and listening to the BBC excessively, because in the end I found some critics of Klein able to put aside bias and examine her arguments.

Here are some of my favourites, in order of pokiness:

NYT (a short triumphant slam)

"In the end, I suspect that Ms. Klein’s goal in writing “The Shock Doctrine” is not so much to persuade others to join her anti-globalization, anti-corporatist cause as it is to reinforce the dreams of those already convinced of its righteousness.

“We did not lose the battles of ideas,” she said in a recent speech to the American Sociological Association. “We were not outsmarted and we were not out-argued. We lost because we were crushed. Sometimes we were crushed by army tanks, and sometimes we were crushed by think tanks. And by think tanks I mean the people who are paid to think by the makers of tanks.”

That must be a comforting thought. If only it were that simple."

The New Republic, Jonathan Chait (probably definitive take-down, most close to my own ideas)

"Klein repeatedly implies that there is something immoral about using crises to advance the right-wing agenda without explaining why this is so. After all, Friedman wanted to overhaul the New Orleans public education system because he believed, rightly or wrongly, that vouchers would work better. If you thought your house was horribly designed, and a tornado flattened it, would you rebuild it exactly as before?The notion that crises create fertile terrain for political change, far from being a ghoulish doctrine unique to free-market radicals, is a banal and ideologically universal fact."

...

"With the pseudo-clarity of a conspiracy theorist, Klein dismisses out of hand the possibility of incompetence. There were memos warning the Army of looting, she ominously notes--scanting the possibility that bureaucratic lethargy, rather than conscious intent, prevented the memos' warnings from being acted upon at ground level. That widespread bungling and mismanagement also followed Hurricane Katrina strikes Klein as proof of intentionality. "The fact that exactly the same errors as those made in Iraq were instantly repeated in New Orleans," she remarks, "should put to rest the claim that Iraq's occupation was merely a string of mishaps and mistakes marked by incompetence and lack of oversight."

...

"The other piece of data that Klein cites to support her charge that Bush administration officials profit from the disasters that they cause is Vice President Cheney's holdings in Halliburton. "When he leaves office in 2009 and is able to cash in his Halliburton holdings," she charges, "Cheney will have the opportunity to profit extravagantly from the stunning improvement in Halliburton's fortunes." This is a spectacular accusation--that the driving force behind the Iraq war stands to gain millions of dollars from it. You might wonder why John Kerry did not make this an issue in 2004, or why liberal pundits have not crusaded against Cheney's blatant self-dealing. The answer, of course, is that it is completely untrue. Cheney has signed a legally binding agreement to donate to charity any increase in his Halliburton stock. (Honest-- you can look this up on factcheck.org.) Lord knows Rumsfeld and Cheney have committed enough actual misdeeds not to need indicting with imaginary ones."

...

Klein's strength as a writer is her interest in the ground level of things. Free-trade advocates rely heavily on abstract theory, lecturing us on comparative advantage and the relative virtues of Portuguese wine versus English wool; but Klein, no armchair radical, jets off to wretched places in the Third World and paints a picture of the reality of free trade in chilling detail. That picture ought to give pause to the most committed free-trader, even if she is hardly the only one to have noted these consequences. Yet when it comes to the right-wingers who constitute her book's main subject, Klein's reportorial spirit is nowhere to be found.

...

"What makes Klein's thesis so odd, and so awful, is that in fact there is an unlimited supply of raw material, an abundant basis in reality, for the sorts of arguments that she wants to make. The last two decades certainly have seen the global spread of absolutist free-market ideology. Many of the newest adherents of this creed are dictators who have learned that they can harness the riches of capitalism without permitting the freedoms once thought to flow automatically from it. In the United States, the power of labor unions has withered, and prosperity has increasingly come to be defined as gross domestic product or the rise of the stock market, with the actual living standards of the great mass of the population an afterthought. Corporations, which can relocate nearly anywhere around the world, have used their flexibility as a cudgel against workers, who do not enjoy the privileges of mobility. Domestic policy has aggressively sharpened income inequalities, and corporations have enjoyed unfettered influence to a degree not seen in a hundred years. And the president did start a war without paying the slightest bit of attention to the country that he would be left occupying or how its people would react.

All these things are true. And all these things are enormous outrages and significant problems. It's just that they are not the same outrage or the same problem. And Naomi Klein's relentless lumping together of all her ideological adversaries in the service of a monocausal theory of the world ultimately renders her analysis perfect nonsense."

TLS, Paul Seabright (great political economist, tries to engage but ends up slamming her)

"Cherry-picking the evidence is particularly important for Klein's favoured strategy of guilt by association, when she implies, for instance, that since many torturers have been keen on free markets, free-market ideology leads intrinsically to the use of torture. It is not clear what, on this theory, explains the use of torture by Communist or otherwise anti-capitalist governments. Since she never mentions it, she may not be aware that it has ever happened."

LRB (long, academic, sympathetic but damning)

"She claims that economic ‘reform’ in 1990s Russia was ‘one of the greatest crimes committed against a democracy in modern history’, thwarting an ‘authentic democratic revolution’. Here she is making the same mistake of which she rightly accuses Friedman. She is confusing the absence of obstacles with the presence of preconditions. Authentic democracy will not spontaneously emerge simply because tyranny has been knocked down and all the ‘distortions’ have been removed.

Klein might defend herself by saying that the ‘democracy’ she apotheosises is exclusively a democracy of protest, never a democracy of governance, and therefore invulnerable to criticism for unfairness, stupidity or abuse of power. But this response would not sit well with her understandable but unrealistic hope that ordinary citizens around the world will soon ‘become the authors of their national destinies, at last’.

Uncertainty principle: Shock Doctrine 150 pages in

2009-08-12T14:21:00.004+01:00

The shock of The Shock Doctrine comes largely from its walloping, great big bias. My worry is that few of the readers of this book will notice the very many sins of omission, the suggestive sleights of hand and the unsupported assertions. Moreover, I fear many readers of this book will not care.

My concerns began on the second page, where quotes of American politicians are run alongside the accusations from “ordinary” people. The Americans sound evil and manipulative, and we are left with the belief – though no evidence is offered – they are likely murderers.

The other shock is that of deja vu: there's little on the first 150 pages you won’t find elsewhere.

In particular, I remember reading many of the same accusations and quotes about 1970s Chile when first a student 15 year ago. Indeed, Klein’s core thesis derives from arguments made by Chilean politician Orlando Letelier, murdered in Washington by the Pinochet regime in 1976.

Letelier said the right-wing, monetarist policies applied by the Pinochet government were a part of the administration's murderous repression; the two should not be separated.

This is one theme of Klein’s book: right-wing monetarist policies can only work if they are backed by state violence. Providing some shock treatment of her own, Klein indulges in pages and pages of gruesome depictions of torture (so long as the torturers can be associated with the US government; torture chambers of other dictators are relentlessly ignored.).

While Klein may force the reader to wade through pages of torture, she spares detailing any evidence if it does not back her thesis. As a historian, she makes George W. Bush seem sophisticated.

Readers are treated to a history of Pinochet’s rise, and Allende’s overthrow, that eliminates all complexity and can be summarised in the following statements: US corporations dictate American foreign policy; US corporations objected to Allende’s election; the American government engineered Allende’s overthrow; the American government, and corporations, used Chile as test bed for experimental right-wing economic experiments.

Given such simplicities, I ended up reading Klein’s work on Chile in close proximity to the internet, as I felt I was being told only half the story. For instance, I find it curious to read about US foreign policy in the 1960s and 1970s and not find a single mention of either the Cold War, other than a couple of lines dismissing the conflict in Latin America as an American scam.

Now, I am no expert at Chilean history but I do like to be treated like an adult. I can cope with complexity and I think other people can as well. Klein must think otherwise, for she declines to tell readers that Allende received payments from the KGB, and omits any mention of the difficulties Allende faced when ruling the country. Instead, she blames all of Allende’s problems at the feet of American governments, and those nasty U.S. corporations.

There is a peculiar form of colonialism that emerges from such an analysis. The Chilean people are mere pawns in a great game presided over by grand schemers in Washington. Even when Chilean people act, they are merely puppets on strings pulled by Kissinger, Nixon and others in Washington (Read this as a healthy corrective). Ideologically, the Chilean people have no control over their own affairs: instead the evil genius of Milton Friedman, himself a puppet of US corporations, engineered the failure of the mighty Chilean economy and the accompanying death of torture of thousands of people.

As history, it’s bunkum. As economics, it's appalling. Klein treats any leftist economic programme as a success, and any right-wing economic view as awful, if not evil. Her economic analysis is restricted to stylised sneers and a footnote on page 83.

But like Chomsky, who loves attacking journalists who don’t toe his line, Klein’s focus is on the messenger. This is an ideologue fighting an ideological battle, rather than an educator trying to explain what happened. Through a succession of paraphrases, selective quotes, sleights of text and inappropriate comparisons, Klein pours most of her scorn on an academic. Friedman is like a torturer, she says at one point. Like the Nazis, at another.

This is left-wing populism at its worst, for at least Chomsky’s polemics have some originality. After 150 pages of this intellectual abuse, I wonder why I should read on. I fear that most readers of the book thrill to that the "secret" history of the twentieth century has been "revealed", whereas all that's happened is another schlock hack has made another buck.

Uncertainty principle: Klein review intro

2009-08-11T09:18:00.000+01:00

Like many of the finest mothers, mine worries. One of her worries is about what I do in my job. She knows I write about companies going bankrupt and worries that I may say or do something that gets me into trouble. To help her sleep, I try not to tell her about how many billionaires I’m writing about who are losing their fortunes.

I tell her not to worry because after a dozen years in the business, I know how not to make mistakes. And as long as I stick to the lessons I have learned, then my stories are impervious to even the most assertive of lawyers.

Another defence mechanism is my employer’s rule that any mistake, however small, must be publicly corrected. This humiliating process helps keeps a lid on the number of mistakes made – no-one wants their mistakes, slips and errors listed for all to see.

Moreover, every claim we make in an article must be “sourced”. I cannot simply say, for instance, that the world is going to hell in a handcart. Instead, I must say the world is going to hell in a handcart, said Milton Friedman (for example). And that’s “said” rather than “according to” because “according to” suggests the journalist might be questioning the opinion of the source.

Given all of this, reading Naomi Klein’s “The Shock Doctrine” was itself a shocking experience.

Uncertainty principle: fisking Klein (1)

2009-08-10T10:32:00.004+01:00

Klein's Shock Doctrine book is the new poster child of the Left but it is a weakly-argued polemic taking readers down a dangerous blind alley. It would likely take many days to pick apart her mistakes so I'll detail them in error-themes. The first is context.

+ Klein provides no context for her theory, preferring instead to cherry-pick to fit the thesis. She appears to have decided her thesis -- likely after thinking about George Bush and Iraq -- then carefully chosen events over the last few decades to back it up.

A fair-minded historian would point to many more events in recent decades that do not fit the Klein's theory. My belief is Klein's ideas are almost laughably crude and rely on evasive writing and selective history to make any kind of sense.

1) Her claims about a nightmarish "corporatist state" rising make no sense if one remembers that we have actually had a corporatist state solutions, and this was 40 years ago. The influence of the monolithic corporate is actually less today than it was then.

2) Her claims about the terrible roll-back of the state, designed by Friedman's evil genius, needs to be put into historical context. Through the course of the 20th Century, the state hugely increased in size in all Western countries, and this continued in the second half of the century, ie during the 50 year (or 30 year, NK claims both) campaign waged by Friedman.

In the UK, chosen by Klein as one of the countries where the SD has been applied, public spending did not drop throughout the 1980s and increased by the end of the 1990s into the 2000s. How does that fit the theory?

3) Financial capitalism has exploded in size and significance over the last 30 years, leading up to the credit boom and crunch of the first decade of the millennium. Does Klein's thesis engage with this process?

4) The recent experience of Venezuela, as well as the earlier Cuban revolution and elsewhere, show that violent revolutionary politics was commonplace in South America in the latter half of the 20th Century. It is curious that Klein does not seek to make contextualise Chile in the 1970s.

5) Klein also fails to contextualise Thatcher's decision to smash socialism in the 1980s. Thatcher was a right wing leader of a party previously ejected from power after coal miners went on strike (Heath, 1973). This fact provides some useful context on why Thatcher went after coal miners in the 1980s. It is again a failure of Klein's perspective she chooses not to mention this, instead focusing on the Falklands War that does fit the thesis.

C&B: extending the range

2009-08-09T21:49:00.004+01:00

+ First proposition: we know a lot less about the world then we think. Uncertainty is the only realistic position to take. In the midst of this chaos and confusion there are people.

1. It is certainty that moves societies forward. Groups gather with a purpose and reshape the world around them. There are some very certain people out there. They get things done. They take ideas, make them flesh through families, groups and institutions. They find money and get power. Their certainty leads them to cross the paths of other people, pursuing different paths with equal certainty.

This is the world of politics, of economics, where groups with ideas, money, backing, friends, families collide or coalesce. Just as waves on the sea gather and build only then to break apart and reform, so it is with people.

+ Second proposition: people operating in this uncertain environment sometimes are very certain indeed, and this is often works very well for them.

2. Certainty operates in a world where the only truth is uncertainty. I make a bet but I do not know if I will win. What is to stop the horse I backed from tripping over at the last fence? My certainty that it is the best horse is no guarantee of a successful passage. Certainty might often be the best strategy to adopt but it is not a crystal ball.

Much of human civilisation has developed to overcome uncertainty. Religion is a most wonderful human institution to help manage uncertainty. All those structures, all those magnificent buildings! What statements we made about our certainty in the unknowable, the ineffable. What confidence we placed in those that wanted – needed – to take away our doubts. How else were we to cope?

When we instead focused on what we could only know, we created new belief systems, new myths. Dreams of the future in a war-ravaged world. Interplanetary fantasies. Concorde. 2001. While we might not be jetting off to far-flung planets living off protein pills, our society moves on, endlessly changing, transforming.

According to Malcolm X: “the future belongs to those who plan for it today”.

+ Third proposition: the certainty of people can come from the Right -- where it overlaps with power -- or the Left. Neither seem comfortable with uncertainty, and instead prefer profitable consensus, unverifiable assertions or self-righteous accusations.

3. Plans come from all quarters. Most societies are open to ideas, but most are biased one way or the other. They lie open to some ideas more than others. Some believe in aliens but not evolution. Others prefer pixies over politics. But all are susceptible to the influence of individuals. A single person able to draw together a society’s likes and dislikes under one umbrella is a powerful force.

Telling people the bald truth is rarely popular. “I don’t know” might be honest but rarely helps lead to a conclusion. Trying to embrace all of life’s uncertainties in a single answer is often not possible. The challenge of modern life is to simplify accurately without losing sight of the complex.

There are traps and blind alleys along the way. Many people blame others for endemic human problems. A single individual, or a group of people, are not solely to blame for world poverty, for instance [as implied in Klein, The Shock Doctrine, and much of the “Radical Left]. Poverty has always been a part of human existence, as has war. These are not unique products of uniquely evil groups and individuals.

While the Left may find themselves led up the cul-de-sac named “blame”, the Right too often find themselves lured into being the intellectual cannon fodder for the wealthy. Freedom is a wonderful thing, one (literally) worth fighting for, but sometimes freedom for one is something that deprives others of their liberties.

+ Fourth proposition: in this environment the media frequently does not help people understand the world around them.

+ Fifth proposition: we have to be careful of confirmation bias - only believing the things we want to believe. Most of the western Left has now fallen into this trap.

+ Sixth proposition: it is often easier to believe in simple explanations rather than complex. We seem predisposed to believing events can usually be explained by the actions of one or two individuals ("great man theories"), rather than as part of wider processes.

+ Seventh proposition: the less we know about something, the more likely it is we will accept a over-simplistic explanation for it. (Look at how the ancients explained the occurrences in the heavens.)

+ Eighth propostion: to write a strong polemic often requires a selective reading of history.

C&B: one general thesis

2009-08-08T23:08:00.004+01:00

+ First proposition: we know a lot less about the world then we think.

+ Second proposition: people operating in this uncertain environment sometimes are very certain indeed.

+ Third proposition: the certainty of people (second proposition) can come from the Right -- where it overlaps with power -- or the Left. Neither seem comfortable with uncertainty, and instead prefer profitable consensus, unverifiable assertions or self-righteous accusations.

+ Fourth proposition: in this environment the media frequently does not help people understand the world around them.

+ Fifth propostion: we have to be careful of confirmation bias - only believing the things we want to believe. Most of the western Left has now fallen into this trap.

C&B: what's it worth?

2009-08-06T13:37:00.003+01:00

I have spent much of the week in court listening to highly-paid lawyers argue about company valuations. In the trial, both the plaintiff and defendant hired expensive advisers to tell them how much the company is worth. For one side, it is better that the company is worth more, on the other side, it is better the company is worth less.

By some strange coincidence, the report for the side that wishes the company to be worth more says the company is worth a large amount more than the report for the other side, wishing the company to be worth less.

Both of these long, detailed, reports were put together by well-known financial analysts using apparently objective approaches - the usual graphs, numbers, complex breakdowns of weighted average cost of capital, discounted cashflow analysis, etc - yet still the clients' needs appear to have dictated the outcome of the valuations.

On my desk is a large book titled "Analysing Companies & Valuing Shares". It is not a high level book aimed at market professionals, instead it is aimed at people like you and me, the curious generalist. But I suspect it will remain on my desk unread for many months to come, as piles of more immediately useful paper gets stacked upon it.

One reason why this no doubt fascinating book will remain undisturbed is that I am not convinced a book can tell me how to value a share. I have a suspicion the best the book can offer me is an insight into what people who buy a lot shares think about when they decide to buy shares. This is nearly - but not quite - the same thing as the value of a share.

Judging value is both simple and complex. The simple answer to the question of what something is worth is to reply simply: "Whatever someone will pay for it." In the jargon of finance, this can sometimes be done through a "market test" by putting the asset up for sale and seeing what someone is willing to offer.

The complex mechanisms involve trying to determine an asset's intrinsic value, and - if you are quite modern - trying to understand the psychology of buyers and sellers. The latter is sometimes known to academic economists as "behavioural finance". Value then becomes a mix of a formal calculation about the asset's value - often linked to the income it will provide - with the likelihood of people buying it.

Given the uncertainties around both these subjects, it is hardly surprising even sophisticated people often revert to the simpler valuer methodology, suggesting that value is only a product of someone's willingness to pay.

Next: beating the market, managing the economy

C&B: the FTSE 100

2009-08-02T20:32:00.005+01:00

The world is full of explanations. Millions of words in newspapers, books and – of course – the internet means we are the best informed people the world has ever known. But this massive growth in availability of information is a mixed blessing. Just because we have the information does not automatically mean we understand the world any better, and in some cases makes it worse.

This is one reason I have for writing this book (and for this book to be read). Because while some stories can be understood at a glance – a football score, for instance – others, like finance, take more explaining.

The dangers of confusing finance for a simple story can be easily demonstrated. There is a convention that part of the evening's television news broadcast in Britain is to read out the closing figure of the FTSE 100, a leading index of London shares.

Few people know a great deal what this number means, what the index consists of, or why they should care. What they do know is that it has something to do with shares, and it kind of matters in some way to the British economy whether it is up or down.

The truth of the matter is that the day’s FTSE 100 result rarely matters to the millions of people watching the news. Viewers’ money might be invested in many of these shares, but the day-to-day result of one index of these shares will rarely tell us much, apart from on very occasional days.

It is a little like reporting football by reading out the total number of people that attended a match that day. Interesting, but not usually what you want to know.

Unfortunately, it is possible that the convention of reading out a near-meaningless number of a share index does more harm than good. For this daily incantation of a figure tells many people three things about finance: it is incomprehensible, it is full of numbers and it is something about shares.

By the end of this book, I hope that you will see that finance is none of these things. It is pretty easy to understand, it is largely about people and the things they do, and it is not really about shares at all.

And yes, there is a functional reason to read this book, other than for pure education: by the end of the book you will be much better equipped to read the financial press and know who to trust with your money.

Next: values, managing the economy and beating the market.

Cash & Burn: a skeptics' guide to finance

2009-07-30T18:07:00.005+01:00

The millennium's first decade saw the largest boom in credit ever known. Throughout these years I was a baffled and frequently bemused specialist journalist, learning my trade and finding out about the looking glass world of debt finance.

I started in Eurobonds, moved into bank loans, then ratings and structured finance. After that, I set up an information service covering lending to Central and Eastern Europe. I now work for one of the world's largest media organisations, still writing about debt.

Sometime during my career I realised how fortunate I was to be writing about this world. Others might wonder why. Sticking to a largely desk-bound job in the town where I was born hardly sounds glamorous, or exciting.

Many financial journalists spend much of their time plotting to escape this world and land up in the heady territory of political reporting, or highly paid public relations work. I've never been tempted. Well, never seriously.

The reason why I stay is because of the stories. There are always great stories. I sit down at my desk in the morning and my trouble is always one of having too many things to write; my list of story ideas is never short.

So what are these stories? And why haven't you heard about them before?

That's what I aim to explain here. And if these words go on, and people like them, I'll try to turn it into something else. A book maybe. Or a website. We'll see (let's not get ahead of ourselves).

In the meantime, if there's anything you want to know about this weird world, please ask and see if I can find out about it for you.

Debtors prisons

2009-07-27T13:42:00.000+01:00

Junaid Malik thought that it happened only to those who had lost their jobs and could no longer afford to pay off debt.

But earlier this month, after missing his monthly credit card payment, he received the call – a collections agent from his bank threatening him with jail if he did not immediately pay what he owed.

...

While customers condemn such tactics, the banks say they are necessary because the Emirates has no institutional framework, such as a credit bureau or a bankruptcy court, for dealing with bad debts

http://www.thenational.ae/apps/pbcs.dll/article?AID=/20090726/NATIONAL/707259844

Debt

2009-07-27T09:49:00.001+01:00

Debt is to borrow money that one doesn't have with the intention of paying it back later.

In the financial world, it is a rule that you borrow now because having money now rather than later gives a particular advantage, especially if it is costly to borrow the money. If the price of borrowing money goes down, the more incentives the borrower has to borrow.

Justify yourself

2009-07-27T09:33:00.002+01:00

The need to prove a story by market movements leads to farcicial statements such as this:

"But as deadlines keep passing by -- the bond was meant to be repaid in May -- investors are getting increasingly uneasy.

Shares in Independent, which is sagging under the weight of a 1.4 billion debt pile and a collapse in advertising, were down nearly 1 percent in late trade."

Nearly 1%? Does that really show anything?

Proof

2009-07-21T13:45:00.003+01:00

Not wishing to sound like a cracked record, but this is very strong evidence of what I've been arguing for some time: the Guardian is more "talk" than "walk".

Here's a (long) list of Oxbridge attendees at the ever-so-equal Guardian. It's not comprehensive, unfortunately.

Martin Kettle – Balliol College, Oxford
George Monbiot – Brasenose College, Oxford
Jonathan Freedland – Wadham College, Oxford
Catherine Bennett – Hertford College, Oxford
Zoe Williams – Lincoln College, Oxford
Tanya Gold – Merton College, Oxford
Marina Hyde – Christ Church, Oxford
Bidisha Bandyopadhyay – St Edmund Hall, Oxford
Melanie Phillips – St Anne's College, Oxford
Emily Bell – A. N. Other College, Oxford
Allegra Stratton – Emmanuel College, Cambridge
Peter Bradshaw – A. N. Other College, Cambridge
David Mitchell – Peterhouse, Cambridge
Riazat Butt – A. N. Other College, Oxford
David Shariatmadari – King's College, Cambridge
Timothy Garton Ash – St. Antony's College, Oxford
Simon Tisdall – Downing College, Cambridge
Andrew Osborn – Oriel College, Oxford
Jane Martinson – A. N. Other College, Cambridge
John Hooper – St Catharines College, Cambridge
Ian Black – A.N. Other College, Cambridge
Sam Leith – Magdalen College, Oxford
Peter Preston – St John's College, Oxford
Andrew Rawnsley – Sidney Sussex College, Cambridge
Simon Jenkins – St John's College, Oxford
Alexander Chancellor – Trinity Hall, Cambridge
Alan Rusbridger – Magdalene College, Cambridge
Paul Sagar – Balliol College, Oxford
Richard Norton-Taylor – Hertford College, Oxford
Clare Armitstead – St Hilda's College, Oxford
Janine Gibson – St John's College, Oxford
Martin Wainwright – Merton College, Oxford
Victoria Coren – St Johns College, Oxford
Simon Hoggart – King's College, Cambridge
Nick Cohen – Hertford College, Oxford
Ben Goldacre – Magdalen College, Oxford
Seumas Milne – Balliol College, Oxford
Rowenna Davis – Balliol College, Oxford
Hadley Freeman – St Anne's College, Oxford
Paul Lewis – King's College, Cambridge
John Harris – Queen's College, Oxford
Madeleine Bunting – Corpus Christi College, Cambridge
Jackie Ashley – St Anne's College, Oxford
Polly Toynbee – St Anne's College, Oxford
(Also Larry Elliott, Fitzwilliam College, Cambridge)

From here: http://www.guardian.co.uk/commentisfree/2009/jul/20/social-mobility-inequality-milburn?commentid=dae7c0a3-e125-46a4-8706-fcbb42a912ee

Ignorance isn't bliss

2009-07-16T08:58:00.004+01:00

In its modern form, the Guardian (sorry for repeating) prefers to employ shallow stylists to write for their paper rather than solid, 'hard news' reporters. These writers are encouraged to write beyond their specialisation. Sometimes this is amusing, often it is deeply annoying. If I want to hear the views of someone with no expertise but lots of opinions, I'd go down the pub.

So here is Hadley Freeman talking about the need for more finance education. Nothing wrong with that you might think. However, when the thrust of the story is incorrect (Madoff's rip-off was not about financial illiteracy) it is ironic to call for greater education. Physician, heal thyself!

Saint George and the dragon

2009-07-13T20:26:00.009+01:00

There is a lot to admire about Guardian columnist George Monbiot. He is an active man with a vibrant intelligence and a willingness to act. In general, the world is a better place with people like him in it.

Unfortunately many of his articles are rather woeful. Trained as a zoologist, Monbiot has a willful naivity that he must regard as a strength. He is a single issue campaigner who believes he is not. A unsophisticated man who believes he has the key to understanding the entire world. (There is much in this critical review that I agree with.)

Most of the time this does not bother me. The Guardian knows its readership, and knows that it needs on its staff a saintly, curly-haired columnist who writes well-meaning books about the evils of corporations and the virtues of revolution. He is the acceptable face of the naive Left which by its own intellectual weakness is destined never to get a whiff of power.

Sometimes, however, he makes claims that need to be forcefully rejected.

Last week, he complained about "astroturfers" who come on to the Guardian's website and disagree with him about climate change.

Many of the posters [who disagree with him] appear to have fallen for the nonsense produced by professional climate change deniers, and to have adopted their rhetoric and methods. But it is implausible to suppose that this is all that's going on. As I documented extensively in my book Heat, and as sites like DeSmogBlog and Exxonsecrets show, there is a large and well-funded campaign by oil, coal and electricity companies to insert their views into the media.

Monbiot is not alone in having such theories. I used to know someone on Urban75 that spent a considerable amount of time trying to work out how those that argued against climate change theories were paid. And I have often been in discussions with left-wing campaigners simply unable to believe that those with right-wing views can honestly believe the things they do.

So Monbiot takes his argument to its logical conclusion: if those that disagree with him are either stupid, irresponsible or dishonest, then there should be much tighter controls on who can comment.

"I ... believe that everyone who comments here should be accountable: in other words that the rest of us should be able to see who they are."

On the surface this sounds reasonable but both the specific point and the general are deeply problematic.

SHUTTING DOWN DEBATE

Banning anonymous responses would severely limit those commenting, and it would restrict the nature of the comments too. People would -- and probably should -- worry about the possible long-term consequences of their posts. A quick google search by a future employer might reveal everything ever posted.

Many current employers would have issues with such open comments. I, for one, am banned from posting on message boards under my own name, as are my colleagues.

There might be positive sides to the idea but it is unarguable the idea would restrain commenting and dampen debate. The Guardian's messageboards would end up a tedious and worthy place, full of people happy to post up bland comments under Monbiot's articles.

The wider point that Monbiot's suggestion raises needs also to be challenged.

People do not need to be misled to disagree with George, nor do they need to be stupid. Everyone has different views, and it is a matter of intellectual maturity to understand this, and to understand what this means.

And people do not need to be paid to disagree with Monbiot's sometimes odd ideas -- they usually contain enough hot debating points to irritate a large number of internet debaters.

Conspiratorial thinking such as this damages our society in other ways. For one thing, it corrupts debate by diverting attention away from critical thinking and wider engagement and towards an inward, defensive approach to intellectual debate.

Look at how Monbiot's attack on poster "scunnered52" in the comments on this thread prompts other debaters to smear other commenters as fakers.

Or look how Naomi Klein's latest book accuses an intellectual, Milton Friedman, to be guilty of genocide, to the broad welcome of the media.

This is not new. Much of Noam Chomsky's oeuvre comprises finding "structural" reasons why journalists and academics do not agree with his unusual point of view and distinctive reading of western history, ignoring their views.

MAN VS MACHINE

A vivid illustration of Monbiot's politics can be seen in this video of him interviewing the then Labour cabinet minister Hazel Blears.

Blears might be unpopular but she has grit. Unlike Monbiot -- brought up in a large country house in a Tory family, before going to Oxford -- Blears has old fashioned working class roots. Born and brought up in Salford, Blears always says she uses the local people's views and interests to keep her straight.

As such, the pair's encounter is fascinating. Blears keeps to the party line, and tries to demonstrate that the Labour government has helped the poor. Monbiot has no comprehension of this form of politics -- of party, of tribe, of class, of Tory vs Labour -- and instead wishes only to ask Blears why she doesn't agree with the issues he believes to be most important.

There is no middle ground. There cannot be. Monbiot cannot accept the reality of Blear's political world, of cabinet collective responsibility, and the compromises inevitable when making choices in a complex environment (Blair's oft-repeated 'difficult decisions').

If that is politics, Monbiot appears to say, then we must all, everyone in the world, immediately start again, according to the rules he has made up.

But Monbiot's politics is just as tribal as Blears' world. Monbiot is in the "green-left" tribe which decided some decades ago to fight the "military industrial" tribe. All of his political views operates through this narrow prism.

To those that believe that Monbiot is an optimist, I would argue the opposite. It is Monbiot that sees the internet to be full of enemies, out to drag him down (ego?). It is Monbiot that ignores the positive developments in the world (declining infant mortality, for instance) to focus solely on the issues that we currently find difficult to solve, before moving to draw mean-spirited conclusions about those that try to fix them.

Monbiot may think he is so right as to accuse and insult those that disagree with him but to my mind his reaction shows he has already lost the debate. A good debate is open, pluralistic and accepting of the honesty of others' views, however wrong they may appear to be.

As the hour grows late, and I continue to argue, I am reminded of one of my favourite cartoons.

Securitisation rools again!

2009-07-10T17:33:00.000+01:00

A sane view of securitisation?

Thirst for justice 1; Truth 0

2009-07-06T18:38:00.005+01:00

It started this morning listening to John Humphreys interview TUC chief Brendan Barber. Why, Barber was asked, should public sector workers be able to avoid the pay cuts and job losses seen elsewhere in the economy.

Barber's reply was that this was because many public sector workers are low paid (true) and that they were not responsible for the mess the economy is in (highly debatable). Humphreys demurred, saying that only a small number of people were responsible.

This reminds me of a piece by Zoe Williams in the Guardian last week. It is not the most coherent of articles but where it does focus, it says that people want to slake their thirst for justice more than they want to understand the issue. I couldn't agree more.

It it possible that we jump up and down at our MPs because we enjoy doing so, not because the crimes they committed are uniquely heinous. Much of the reason they claimed expenses because of an institutional cowardice to ask for higher pay. The fees office was frequently complicit in the claims made, a part of the Telegraph story that never really fitted with their sensationalist reporting.

The danger of this approach is that nothing significant changes but our world becomes less meaningful and more fearful of media attacks.

A senior civil servant I spoke with a couple of weeks ago says that a majority of her time is now occupied with trivial media requests, as is much of government, and this feeds substantially into policymaking.

Is this how it should be? Does the media use its increased power responsibly? Very few people seem to be asking this most urgent question.

Russia's deal

2009-05-21T08:27:00.002+01:00

Good piece about how Russia operates at the top.

'Yurgens outlined Putin's thinking and what he described as his "gentleman's agreement" with Medvedev thus:

'OK Dmitry. If you can make it, make it. I will be firmly behind you with all the siloviki whom I control...and in four years, if everything goes all right we will find a solution for me and you carry on. Go, go.'

...

'If Chinese growth is 8 percent, oil is at $60 a barrel, the global financial system starts working and credit lines are unblocked, then I think we are probably all right,' he said.

'If not, then there will be very special measures.'

Cheque-book journalism

2009-05-15T08:53:00.002+01:00

"Observing all this, few in bars and at breakfast tables are asking how The Daily Telegraph got hold of the revelations. But one day, a fascinating story will be written about how the entire, uncensored, expenses claims ended up in the hands of a newspaper. The data may well have been stolen, although that does not seem to matter right now.

It is not confirmed whether the newspaper paid for its information, but it is widely believed that it did, with guesses in a range of £60,000 to £150,000. Given that sales on Friday last week, the first day, were up 95,000, and ahead in days thereafter, the investment was probably sound. The Telegraph keeps about 60p to 65p of the 90p cover price, so every 100,000 extra copies is worth about £60,000, less the cost of printing."

From here

And while ITV cancels the South Bank Show, for budget reasons, they pay Cheryl Cole two million quid.

I don't think this is a parody

2009-05-06T10:30:00.001+01:00

"In a new Special Comment, entitled "On the Hook -- Update on Moody's
Global Macroeconomic Risk Scenarios 2009-2010", Moody's explains that the
"hook"-shaped scenario has the steep downturn signalled by the U-shaped
scenario, but neither the steep but delayed rebound of the U scenario,
nor the flat stagnation of the L-shaped scenario. Instead, it has an
upward tilt that lies somewhere in between, illustrating the painful
recovery that the headwinds of a severe and synchronised balance sheet
restructuring will cause. The "hook-shaped" scenario is a variant of,
rather than a departure from, the U-shaped recovery -- the previous
central forecast."

Source: Moody's

Blogs and news

2009-05-01T15:23:00.002+01:00

Been a bit quiet recently, focusing on the day job. Allowed me to some time to reflect on how blogs and news works. At the moment, I am leaning towards the day job - hard news reporting - and question claims made by those that argue that blogs will ultimately do a better job.

The continuing challenge of good news reporting is well documented, and I'm struggling to see good internet journalism.

I thought this when I read Andrew Gilligan's article for Greenwich.co.uk which simply seems a repeat of the demented man's prejudices against the local council. But that said, he repeats much of the same unsourced partisan hackery for the Evening Standard newspaper too, so honours even I guess.

Then there are the hard-working souls at FT Alphaville. Much of what they report can be found elsewhere but in there are new angles, and indepth work. But without the discipline of a (word limited) newspaper, sometimes the journalists write curious articles like this, or rambling pieces like this.

I will shortly be doing some professionally blogging myself if I'm not careful, so I'll be looking not to fall into the same traps. Can't avoid either blogging or the mistakes I guess!

Seen it all before

2009-04-20T18:04:00.004+01:00

A long-in-the-tooth asset manager I was speaking to last night affected an air of general boredom about the credit crunch.

"Seen it all before am afraid. Debt builds up then gets blown away. Everything comes and goes in cycles."

And this was no crusty old bore, indeed he is in the process of setting up a company to fund green energy projects.

But on the other side of the coin, breathless journalists reel with shock at discovering finance.

"The world is in an era of epic economics. So huge are the challenges, they will define domestic politics for years," pants youthful Faisal Islam at Channel 4 News in his blog, which launched today.

Economics is the new, new thing it seems.

I wonder how long this will last. The attention-disordered media spotlight rarely cares about anything long enough to improve it, so I fear that this late conversion to economics will be as good for finance as Paris Hilton's Damascene moment was for (robed) men in cloth.

But, ever fearful of being over-cynical, feel free to take up Islam's final plea:

"An epic economic era requires an equally epic response, so please get involved."

Flat is the new growth

2009-04-17T13:45:00.004+01:00

A month ago or so I took the plunge and started investing in shares after a long time playing safe. My reasoning was that apocolypse was then, not now, and people's gloom was overblown.

Sentiment around the first couple of months this year was like the dot-com boom inverted.

Back then, we knew there was huge change coming and lots of money would be made, somewhere. Like a modern-day gold-rush, investors poured in, putting money everywhere, anywhere, in the hope of another big strike.

The credit crunch has been the reverse. We knew there were black swans out there, ready to strike down investments, and lots of money would be lost, somewhere. And money was indeed lost, in structured finance and real estate in particular.

Now, the flow of black swans is easing. There hasn't been a massive shock for a few weeks now. Even retailers are doing alright. Flat is the new growth.

So a glance at share prices shows that confidence is trickling in, with bleeding-edge investors doubling their money on high-risk equities such as Taylor Wimpey. Even Lloyds TSB's share price has doubled in the last month.

Impossible (literally) to predict where this will end up, but at the moment it looks like an excess of negative sentiment is working its way out of the system. Real growth, however, still looks some way off.

Illiquid markets

2009-04-15T14:51:00.002+01:00

I have read variations of this statement a number of times recently:

"Prices in the credit markets, meanwhile, have suggested that Britain is about five times more likely to default on its debts than the fast-food chain McDonald’s."

(From here.)

This stat is often used to support arguments that the UK has too much debt and prices in 'the market' show this.

However, a moment's reflection should make us wonder about the stat. The UK's debts are backed by taxes paid by you and I. McDonald's, on the other hand, is a medium-sized company with mere revenues and assets; it has no armies to force people to pay it money.

The truth behind the sensationalist stat is rather more prosaic (though quite interesting to debt nerds): the credit default swap market is barely operating because of the credit crunch and few trades are being done. This means that all prices are rather anomolous and so should not be compared with each other, certainly not when they are as different as a company and a country.

However, that would not make such a good story!

Seriously critical

2009-04-14T17:41:00.007+01:00

Here's a confusing article: "How the credit crunch and recession helped Britons discover the joy of being serious."

It reminds me of an article I've been thinking of writing recently. I wanted to point out that the credit crunch shows us the need to think critically instead of simply going with the herd.

This is not the same point made in the article above, which seems to confuse being serious with being critical. The need to think is not the same as 'reading stuff' and not smiling. I mean, lots of crackpots push out books, and some of them are quite serious indeed.

Meanwhile, there are some truly critical thinkers out there, and they are usually quite easy to spot.

They are often highly critical of the media, sometimes obsessively, like Nassim Nicolas Taleb or Ben Goldacre. Or they might know how to profit from understanding uncertainty, like John Kay. Others are simply odd, like Hugh Hendry, or fiercesomely learned, like Fred Halliday.

I'd like to go on. I need more to add to this list. Anyone?

(Edited to add: this discussion between Hendry and a conventional analyst.)

Counterculture goes mainstream

2009-04-12T21:29:00.005+01:00

Has the counter-culture actually taken over? If you watched the police batons hit the heads of protesters on April 1 then you'd struggle to agree, but there is something weird going on with politics today.

People today seem increasingly opposed not just to the government - which is understandable given the point in the electoral cycle - but anti-politics itself.

Richard Curtis' new film 'The Boat that Rocked' is pretty ordinary (though has some good tunes) but its portrayal of 'the people' as salt of the earth while politicians are sterile, nasty kiljoys is even more normal. Film-maker Adam Curtis has a curious theory about why this may be so.

He thinks that during the 1970s and 1980s a countercultural movement developed, which sidelined normal politics. It's icon was Bob Geldof and it's signature event Live Aid. When the Cold War ended, TV journalists lacked a grand narrative. No good, no evil. So they picked up the counterculture theory of pure individuals and evil politicians. This worked to explain the revolutions of 1989, but then Rwanda happened. This showed that even normal people were bad. So in recent years bad things have not been explained, simply shrugged away.

"When there were no good or innocent people to support any longer, the kind of news reporting invented in the 1990s made no sense because the news had given up reporting them as political struggles.

It meant there was now no way to understand why these terrible events happen, instead political conflicts around the world, from Darfur to Gaza, are now portrayed to us as simple illustrations so a mindless cruelty of the human race about which nothing can be done, the only response is 'oh dear'. It is like living in the mind of a depressed hippy."

Niche! Nitch!

2009-04-08T18:08:00.001+01:00

Reuters goes trade

Taleb lines up against the market

2009-04-08T18:03:00.001+01:00

Interesting to compare the conclusions of Taleb with those of the Left

Return of the lizards!

2009-04-07T17:04:00.002+01:00

A nasty outbreak of lizardism has broken out on the Left.

Its effects are pernicious: everytime you look at someone in power, all you see is a lizard, an all-powerful slithery alien creature, whose sole aim is self-gratification at the expense of the human race.

The police are the agents of lizards, as are all politicians. Those politicians that start out not being lizards must join them to succeed. All bankers are lizards, as are all those that defend bankers.

Beware the lizards! Wear turquoise.

Good morning capitalism - SE4 graffiti

2009-04-03T17:25:00.003+01:00

HT: http://transpont.blogspot.com/2009/03/brockley-graffiti.html

Beaten by the Japanese, Italians, French etc ...

2009-04-03T10:07:00.006+01:00

There is a curious myth that the UK government has the most debt in the world, ever. Daniel Hannan's oft-watched European speech rests heavily upon the claim. He cites the IMF as a source.

But this is what the IMF said in this recent report (the numbers are percentage of debt to GDP - a measure of debt to the size of a country's economy):

A tale of louts and hippies

2009-04-02T14:12:00.004+01:00

Like a carnival of the stupid, violence erupted yesterday in the City. Fallen bankers watched on as masked children daubed slogans on walls and played at fighting the police.

Blood flowed, and there was even a moment of tragedy; the only winners were London’s journalists, able to demonstrate to bosses their Twitter skills.

The revolution, predicted by one third-rate professor, did not turn up.

But the protest’s failure to reach beyond the usual suspects of louts, hippies, hangers-on and mobile-phone-wielding curiosity-seekers, says something about the political naivity (to be kind) and reactionary instincts of those involved.

This could be the movement’s big moment – a government on the run, widespread disaffection with the present-day economic settlement, rising fears of joblessness and despair (though, like crime, economic pain remains more written about than experienced – at least for now) and even tabloid support – but this is a movement infamous for its trick of missing open goals, even when standing on the goal-line, with the ball at its feet, and the opposing team nowhere in sight.

Instead of critical thinking, education and pragmatic steps to demonstrate the much talked of alternative world, we get generalities, the avoidance of hard choices, and an unholy mix of soft soap and thuggish threats.

How do you square democracy and equality in a world of six billion and rising? What happens now that the environmental movement’s campaign of fear has run out of steam? How do you address the mass of the public and engage with their ‘conservative’ interests of family, jobs and stability?

On these questions, neither the protesters nor the “alternative G20” summit seemed to offer answers, other than - at the latter - the usual script from the usual suspects – an ageing ex-lord, that witty comedian with a fine sense of theatre, and a woman whose scary leftist organisation took over, some say ruined, the anti-war movement.

In the end, the big news from yesterday was not the protest, despite the phalanx of London journalists on the streets looking for a story, but a helicopter crash off the North Sea, the apparent restarting of arms talks between the US and Russia, and a rise in investor appetite for risk, which has sent stock markets soaring.

To the protesters, it seems they fail on their own terms. The idea of the spectacle is to suggest how an alternative world might exist. To show rather than tell. But by showing that they have failed to move beyond incoherence, hopeless idealism and violence, it is hardly surprising the public does not engage.

150,000 words!

2009-03-30T17:54:00.002+01:00

Lucky commuters received a spoof copy of the Financial Times on Friday. It was quite a piece of work.

"Journalists frame public debate, and the City frames public policy,” said Raoul Djukanovic [made up name], who edited today’s fake FT. “If they reframed their thinking, they could help build a different world instead of conning us with lifestyle porn and bubbles."

The journalists behind it are - it is thought - disaffected financial hacks. Alphaville says it was written by Michael Fowkes, who wrote this, which provides some evidence for his authorship.

As a financial journalist, I can't say I felt particularly challenged by it. In fact, after a page I grew bored. No jokes. No facts. Just a series of long-winded assertions by someone with a political axe to grind.

Hardly something the internet is lacking.

A quick check

2009-03-30T14:55:00.005+01:00

Private Eye sells many papers based on exposing journalists' hypocrisy, and it is rather easy to do.

Take Dan Atkinson, for instance, loudly declaring in this column, and in this book, that evil power-hungry bankers and politicians knowingly ignored the dangers of excess credit.

Well, how about Dan Atkinson's own output, in his role as senior journalist at the Mail. Surely, during those crazy boom years of 2005 and 2006 he was shouting from the rooftops that we were headed for a crash. Surely?

Er, no.

"No one now doubts that the UK consumer has over-borrowed in recent years. As long as employment prospects are good and interest rates remain low, it will not be a problem," said Atkinson in a jointly bylined piece at the beginning of 2006.

In all, of the 63 financial articles he wrote in 2005 and 2006 for the Mail, only 3 concerned debt, and one of these was about the Bank of England warning about excessive debt. Another one argued that regulations were unfairly hampering people from borrowing.

So at the time of the boom, Atkinson's opinion were pretty much in line with leading politicians and bankers. Yep, those same ones that he wrote his angry book denouncing.

And, no, it doesn't really matter. Journalists get it wrong all the time. However, this time around these accusations are being taken up people baying for bankers' blood. At such a time, the truth is precious.

The worm that turned

2009-03-29T23:39:00.005+01:00

I have never been a fan of the equity market.

A share is not a particularly strong investment to take - you get paid out last if there's a big problem at a company, and you don't really have any control of any company - and during the credit boom, share prices just looked wrong.

I sold out of my last share holdings in November 2007 when I grasped the full scale of the credit crunch. It took a while for the equity markets to catch up and collapse, but eventually they did.

Now, however, I am interested in shares again. For many of the reasons listed here, which suggests that there opportunities in the gloom, and there are likely to be some big movements in share prices, even during the economic slowdown.

However, I do not agree that investing in an index tracker - one that follows the entire market - is a good idea. Because there are still many reasons why some companies' share prices will fall, a lot, over the next year. The stock market, as a whole, is very unlikely to rise - it is as likely to fall.

But some shares will do well. I am looking for companies with strong balance sheets, strong cash positions, in good sectors and management, with limited amounts of debt. And the final thing, is that the rest of the market has not found them yet, and the share prices are low.

A counter example: Sainsbury's. I like Sainsbury's. It is a good company that I know well, but not only do I know this, but so does the rest of the market. When it released strong figures a week or so ago, it's shares went down. It is not a good high growth stock ... but it is one to have and to hold for a while.

So the shares I am looking for are good companies in unfashionable sectors, like hedge funds, retailers and banks.

We are like you

2009-03-27T09:00:00.001Z

Now that so much money has vapourised, does this mean that City money is not real? It is a claim I hear frequently, and seems to underpin some of the arguments for manufacturing. Much better to make real things rather than rely on fantasy money, the argument seems to run.

It reminds me of a seminar during my masters degree close to a decade ago. My soft-left professor was arguing that the City skewed UK industrial policy, and that it operated largely in its own bubble without reference to anyone else.

The issue of the day was Gordon Brown arguing with Europe about withholding tax and Eurobonds.

So to illustrate his point, my professor asked who cares about Eurobonds, who actually knew anyone who worked in that market?

Amused, I raised my hand. I worked in the Eurobond market, and it was clear to me (at the time) that the European move to impose a withholding tax was an attack on London as a financial centre (I’m not sure I still agree, I probably do).

The point being, you don’t know anyone whose livelihood depends on the City until you ask. And if you do ask, you might be surprised at the answer.

Same mistakes all over again

2009-03-25T10:03:00.004Z

Mid-way through the financial crisis, it's a relief there's no-one out there banging the drum for banks to lend irresponsibly again.

Oh, my mistake.

Will you succeed? You will indeed. (98 3/4% guaranteed.)

2009-03-25T09:18:00.006Z

Through the looking glass, the world looks the same but different.

To get there, read Nassim Nicholas Taleb’s book Fooled by Randomness, and it becomes quite impossible to see the financial industry in the same way again.

So it is always interesting to meet someone that gets it, that has drunk the kool aid, taken the red pill and gone to other side of the looking glass, particularly if they control half a billion pounds of money.

Such a person is Hugh Hendry, head of Eclectica Asset Management. He came to speak at Reuters yesterday, and it was clear from the outset that there was something different about him compared with other industry figures.

The reading matter laid out before him was enough to suggest something unusual was likely: Dr Seuss’ Oh The Places You Will Go, and Will Self’s The Quantity Theory of Insanity.

And Hendry did not disappoint. Parts of the hedge fund industry were evil, he claimed, while his investments in agriculture were just to show people that he wasn't completely pessimistic. Meanwhile, difficult questions about the future were palmed off by references to his astrologer.

The intellectual substance to his perspective is not just Taleb, but the economist Irving Fisher.

(The Economist ran a useful briefing on Fisher last month if you haven’t heard of him.

"As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions.")

Hendry is often on the TV nowadays, possibly because there is little else for him to do at the moment – almost all of his investments are in safe-as-can-be government bonds, and he claims he will not start buying for another 18 months or so. Here’s one TV performance to keep you going, while here’s another.

Personally, I think his comparisons between Japan in the 1990s and the US in the 1930s are interesting but possibly overplayed. History rhymes rather than repeats.

American consumers are more optimistic and less rational than those in Japan, while the financial markets today form a profound and powerful industry reaching throughout society, in a way they did not in the 1930s. A few broken windows aside, the interests of finance are more likely to again be embraced by Anglo-Saxon politicians and publics rather than entirely rejected, as Hendry’s analysis implies.

But I am very likely to be wrong, and he right, or maybe both of us are wrong. As such, almost all of my assets are in risk free investments, while I have a small investment in bank shares.

Be that as it may, it was a refreshing change to hear someone speak who is not constrained by industry expectations, who thinks for himself and who gets that the financial industry demands (needs!) more rationality than could ever be known by any set of human institutions.

Day trading

2009-03-23T11:43:00.006Z

After my earlier success with Lloyds, first thing this morning I bought some HSBC shares. My basic strategy at the minute is to take advantage of volatility in banking stocks. I think the overall direction is positive, as investors creep back in, but there will be days of big drops. The skill will be to buy on the drops and sell on the leaps.

HSBC dropped a lot on Friday, largely because of investors taking up rights issue sales. This pushed the price down and now they are moving back up, ahead of the US Fed announcement this afternoon. Again my target is 10%: I bought at 370p, so looking for a sale at 410p.

Edited to add: again, a rising tide floats all boats ... shares hit 415p in the mid-afternoon, so I sold on. Interesting this day trading lark.

Lloyds sold

2009-03-20T16:18:00.004Z

That was quick! I sold the Lloyds shares I bought earlier in the week. My aim was for a 10% return annualised. Instead, I got my 10% return in a week. So why wait any longer?

Criminalising mistakes

2009-03-20T09:24:00.004Z

Had a good chat with a mate yesterday about big mistakes and morals.

On one side of the conversation, I was putting forward the line that people are generally quite wrong, so mistakes - even very, very large ones - are hardly surprising, while on the other side of the debate, the point was made that these mistakes were sometimes knowingly made, and made for short-term gain at the price of others.

So I was thinking about this last night. At what point do mistakes become crimes? If short-termism was a crime, then we should all go to jail. And if stupidity is condemned then the police will certainly have a big job on their hands.

But then, but then, we do legislate to protect society, and the behaviour of banks has led to unprecedented taxpayer bailouts. We have had to pay for them, and that won't do.

Obama, last night:

Shouldn't someone go to jail, Leno asked, for what had happened to the economy? "Here's the dirty little secret," Obama replied. "Most of the stuff that got us into trouble was perfectly legal. And that is a sign of how much we've got to change our laws." More "common-sense" regulation of financial products was urgently needed. Still, he went on, people "should have complete confidence in the banks … They shouldn't be putting [money] in their mattresses."

Bonus surtaxes

2009-03-19T17:07:00.004Z

Here is one way that the British government could solve a number of problems all at once.

Why not introduce a supertax on extremely high earners? And craft it so that it specifically affects the amount 'earned' by Sir Fred Goodwin?

Taxing Goodwin's millions to the hilt would be a neat way of punishing his mistakes, keeping within the law, as well as clawing back tax, giving high earning bankers a nasty dilemma, and throwing the electorate a meaty bone to satisfy their anti-banker lust. What's not to like?

I thought of this a while back and am reminded of it by Felix Salmon, who recommends it as a way to resolve the AIG bonus situation.

Fools or frauds?

2009-03-19T09:15:00.003Z

Much of recent comment implicitly (at least) suggests that all bankers of recent times are fraudsters. But here's one stat that suggests they were merely fools:

"The net value of purchases for all bank directors in the six month’s since Lehman’s collapse was £95,700, a 91pc slump from the £1.1 million that they bought in the previous six months."

That 1.1 million is probably now worth a fraction of that amount. People are angry, and want to throw around accusations, but it would be great if we could get angry at the right things: stupidity, ignorance and arrogance.

Many of the critics of bankers unfortunately demonstrate many of the same traits.

Discredited banks

2009-03-17T13:55:00.006Z

The British have a love/hate relationship with the City. It is a complex issue, complicated by a history of class antagonism, the North/South divide and lingering confusion about what the City actually does (ie, is money made in the City 'real'?).

(I set up a information service for the European finance industry a while back, so can certainly attest to the reality of City money and its role in exports.)

I woke up this morning to hear Robert Peston arguing that the public's anger at bankers puts at risk one of the few industries in which our country has comparative advantage. In this he repeats arguments I have been making recently about the dangers of throwing the baby out with the bath water, and buying into myths about manufacturing.

There is a very large 'but'. That is, there is more than a whiff of truth in the criticisms of banks and bankers, and the government (to its credit) is pushing hard for deals where banks clean up their act in return for taxpayer support. Note the comments underneath Peston's article (on the Peston link above).

This makes today's stories about Barclays particularly pertinent. The often persuasive Alphaville crew believe the bank is seriously challenged by today's revelations. Certainly, such large-scale 'strategic tax planning' is not the 'humble' and socially-aware form of banking that the government (and public) wish to support.

Instead, the activities of Barclays' SCM look like the kind of discredited complex and aggressive behaviour that characterised the banking world during the credit boom.

I don't like charts, but ...

2009-03-16T17:39:00.003Z

... I did like this one. HT Alphaville.

Edited to add: the Alphaville comparison does not work, because the mechanism of the bubble - the meme flowing from the 'smart money' through to the public - is not applicable.

First buy

2009-03-16T15:22:00.004Z

In a fit of spring madness today, I bought some shares. In Lloyds.

I originally planned to do this in summer 2008, when they cost around £2.50. Today they cost me just under 50p. Unlike then, there will be no dividend for, I guess, 18 months. However, the bank dumped most of the bad stuff from its books, and I reckon the equity market is 'anti-bank', depressing equity prices excessively.

I don't think market antagonism will change for six months or so, but suspect as the banking sector has been the first to restructure it will be the first to recover.

My guess is the investment will begin to pay off in 18-24 months time. Hoping for 10% per annum return, so selling for around 70-75 pence in late 2010.

Not likely here

2009-03-16T09:47:00.006Z

Other parts of the UK press have picked up on the Stewart/Cramer debate discussed below. The Guardian wonder whether it should happen to financial journalists in the UK.

Of course it should, but the UK journalists that should be scrutinised are those that pumped up the housing markets for year after year, without caring or thinking about the consequences.

However, there still remains too much of a cosy and self-interested consensus - with journalists' employers receiving significant sums of advertising money from the housing industry, and too many householders still believing (hoping?) that their house prices are real.

This allows evidence-free articles like this to still be published, written by journalists still desperately trying to pump up the market.

Edited to add (after Matt's comment): I am not accusing anyone of dishonesty, just ignorance and bias (same as Jim Cramer).

Emotional closure

2009-03-13T17:56:00.004Z

The Jon Stewart vs Jim Cramer argument has gone to an interesting place, in my humble opinion.

After days of increasing - and articulate - anger from Jon Stewart, one of CNBC's leading commentators, Jim Cramer, went onto his show.

And - amazingly - the debate is really interesting. Stewart tones down his hyperbole, while Cramer also seems sober.

Couple of things - Stewart thinks that people were so engaged with the debate because of the gaps between CNBC's claims about itself and the reality. I don't agree, I think the engagement is because the public needs to talk, think, shout, engage and get some, er, closure on what is happening out there.

That's the first section. The second section is a little less interesting but we see Cramer accept things must change.

The third section sees Stewart act as the public, plaintively crying "why didn't you tell us this stuff?". It is eloquent, angry and intelligent. Must watch stuff.

Here's some blog opinion on the debate.

Square eyes

2009-03-12T18:20:00.004Z

On a day that Reuters got a lot of news coverage for its interview with Hector "be afraid" Sants, it is interesting to take a quick look at financial TV.

CNBC - favourite of the day traders - has come in for a lot of attention recently, and not for reasons it would like. Watch Jon Stewart's attack, or - more realistically for those of you at work - read Salon's fun article on the subject.

Who watches financial television seriously? I do not know but Reuters has just launched its new streaming video service, and with serious intent.

There is talk that the future of TV is 'narrowcasting' ... so I guess this fits with that.

Second-wave feminism

2009-03-11T17:13:00.003Z

Gratifying to see it is not just me that finds cliched assumptions about gender offensive. It seems some rather high-powered women do too.

"...we are deeply troubled by claims that women are inherently more risk-averse or cautious or prudent than men, and that this essential nature somehow makes women more suited to leading in a downturn. Such assertions have little or no empirical support in a business context. These speculations also come with dangerous implications. Are men therefore better suited to managing growth or leading businesses through healthier economic times?"

Ever the contrarian

2009-03-10T13:43:00.004Z

I have been a running a low-level campaign for unfashionable industries, such as finance and the media.

Once seen as the mainstays of the new economy, in the light of the crunch these weightless sectors have come in for criticism from all quarters.

So I enjoyed reading Dave Hill’s plea for London to not be shy about selling its strengths.

"Is there something shallow and insubstantial about all this, even something just a little un-British? On the first point, I can't help fretting that the answer might be yes. On the second, I am certain it is no. Even more than in the 1980s we have little choice but to rise from the ashes on a zephyr of conspicuous consumption and self-promotional frippery. Churchill's reticent, stand-alone land will be saved by greasepaint, insurgent aliens and the party buckets of Colonel Sanders. We need to buy and have world buy into us. We need to sell ourselves, history and all."

And if you have any doubts about the level of unpopularity of finance, read the comments following Tetsuya Ishikawa’s call to help firms used and abused by private equity companies.

Edited to add: it's well worth a read of this article suggesting the decline of manufacturing in the UK is a myth.

And, while we're at it, it's worth reading Simon Jenkins on Thatcher. Gets across the complexities and paradoxes of politics.

Kay (again)

2009-03-09T13:25:00.003Z

FT columnist John Kay has a new book out, "The Long and Short of It", which is notable for having one of the worst covers ever known on a book and being a wise but rather difficult read.

This is surprising given that that book is intended for the general reader. Indeed, it is more impenetrable than his previous book, which explained (quite brilliantly) how all of the world's economies work.

So for the even more general, general reader, it is worth a read of this article by Kay n the Sunday Times, which summarises most of his main points.

- most professional fund managers are not able to outperform the market
- all they do is follow conventional wisdom (this is their learning and advice)
- so there is no need to pay them fees
- it is not *that* difficult to learn the basics yourself
- and it will probably be the best paid work you ever do

Simple lessons from history

2009-03-06T18:01:00.004Z

I always like finance explained simply and quickly, and here’s a good one, possibly the best I have ever seen.

Two problems – first, the focus on sub-prime is a little out of date, the problems for the last year have been much broader – corporates, sovereigns, LEHMAN! AIG etc.

Second, it’s great being wise, but is it so great to be wise after the event? We might learn some lessons from history, but I do suspect the lesson here – that CDOs and subprime do not really work together – have already been learned.

(And can we stop blaming investors solely for subprime - there was politics in here too.)

The credit angle

2009-03-05T17:52:00.004Z

The big news of recent times is that the share markets appear finally to have succumbed to the crunch.

It took some time but it was inevitable – credit and equity are not divorced (though they are in many newsrooms).

As such, orthodox articles like this, which explain the equity drop in terms of results and expectations, miss a couple of key points.

First, that the bid premium has gone. Private equity buyers have vanished, as have trade buyers. Neither can raise any debt, and paying in shares aint often gonna win friends. Cash is king, and there's not much around.

Second, the rise of distress fundamentally alters the value of shares. If dividends stop, the value of shares droop, as there’s no income. And if creditors look likely to take over, then the value of shares fall off a cliff.

So, maybe it's time to buy a new bed.

The future of finance (for the next 10-15 years)

2009-03-04T17:29:00.002Z

- Mathematical models should not be relied on without a proper understanding of the economic conditions and behaviour that fed them.
- It is foolish to put blind faith in credit rating agencies. Do not invest in what you cannot understand.
- Shun arbitrage strategies that assume permanent access to liquidity.
- Avoid investment vehicles that inflict swingeing charges in exchange for what in most cases will amount to market performance or worse.
- Treat leverage with due care. Recognise that the conventional wisdom of the consulting fraternity is not conducive to contrarian behaviour, one of the keys to successful investing.
- Above all, beware what Charles Mackay, the 19th-century historian, called the madness of crowds.

From here. HT Alea.

Never the same again

2009-03-04T08:39:00.006Z

I found myself interviewing a very senior corporate lawyer yesterday and he had exactly the same views as those I heard on Monday at a Guardian debate.

"This is not a small shock which will rock the economy for a short while and then life will go on as normal," he said. "Things will not be the same after this."

How things will look after the shock is a matter for debate. The Guardian debate's subtitle was "Can Capitalism Be Fixed?" though the panel were not clear as to what capitalism really is, was or will be.

Gray was clear that things will never be the same again, and they will be worse. But his position is the standard ludicrous political mix shared by much of the whinging left:

- expecting a gold-standard welfare state provision, far better than anyone, anywhere has ever known
- ignoring the nationalism and social solidarity that built up the welfare state
- closing down the country's most productive economic sectors
- building up our manufacturing base to compete with low-cost Asian countries
- calling for massive transfers of wealth overseas

We are in desperate need of something better. We await a new generation of thinkers, writers and politicians to lead. Until then, the corrosive nature of modern discourse drags us down ever further.

Ultra-capitalism at the Guardian

2009-03-03T18:47:00.009Z

I had my first peek at The Guardian's new building last night, when I went along to one of the paper's "Capitalism in Crisis" debates.

It was difficult not to gasp at the riches of the building - providing a level of grandeur beyond any investment bank - and not wonder at the ironies on offer ... but I tried my best to get over myself.

On the panel, John Gray offered up his best grumpy old man impression. Why had we not listened to the mavericks he wondered, an idiotic statement if I had ever heard one. Admittedly, I am no fan of Gray. He wrote a book a few years back that I truly loathe and I have never read a word of his since. Here's why.

Then came Jayati Ghosh, a professor of economics in India. She trotted out the line that exploitation of the developing world has not ended, and that it would difficult for the capitalism to recover.

She claimed that jobs had not gone to India and China, in defiance of our own experiences, and the evidence. When challenged, she uttered the phrase: "There are many countries in India and China," meaning - I presume - that the jobs have gone to the wrong bits of these countries, and which sounded to me like she was cherry-picking evidence to suit her thesis.

Elsewhere, the two generally pro-capitalist speakers, financier Terry Smith and David Goodhart, editor of Prospect, were more interesting.

Smith makes for a fine after-dinner speaker, having a good sense of wit and an impressive collection of stories. He was also the most succinct. When defining what had gone wrong, he said that people simply borrowed too much because debt was too cheap. It is an argument hard to disagree with.

Goodhart was sometimes contrarian and often interesting, but by the end he tired as the audience's (rather predictable) anti-capitalist leanings seemed to get to him. And it is desperately hard to talk positively about private enterprise at a time when the government has had to bail out some of the country's largest companies.

This is almost as hard as swallowing an anti-capitalist line from a newspaper that during the boom years did all the things that its comment pages frequently castigate. Like Michel's Iron Law of Oligarchy repeated, even those most resistant to capitalism bought into its excesses. (And yes, the editor of the Guardian earns more than double that of the Prime Minister.)

So now that the bankers are apologising, and the politicians are U-turning, wouldn't it be delightfully ironic if the Guardian becomes the last institution to continue boom era hyper capitalist behaviour?

Financial advice

2009-03-02T17:37:00.002Z

Every week or so someone asks me for financial advice. It is both a good question to ask, and one that worries me.

Max Hastings' article in the Guardian today shows why. Love him or hate him, he's a smart guy, yet his investment return over 25 years is probably below zero.

He uses this information to wonder whether the approach we take to personal investment in this country works.

He asks: "When it comes to money, many of us are unfit to be let out without a nanny. But who can be trusted to push the pram?"

It is another good question. Put simply, people both wilfully ignore good financial advice and are regularly fleeced by people they should be able to trust.

The Mail, as ever, provides some real people.

Whatever the answer is, I suspect it will not satisfy these frustrated Alphaville readers. It feels like the end of days, and even a change in government appears unlikely to shift the gloom. Charlie Brooker expects a riot. I think the odds are shortening.

Restructuring Cartoon!

2009-03-02T16:45:00.003Z

It is likely you know David Simonds' work, but you might not know that.

He does many of the cartoons for The Economist, as well as for the New Statesman, as well as occasional pieces elsewhere.

He is my favourite cartoonist (as well as being a really nice person), able to both convey detail and humour, which is some skill.

Here's a couple more.

Thatcher, the film

2009-02-27T08:50:00.004Z

In a belated attempt at balance, last night's BBC2 drama doc on Margaret Thatcher was extremely kind to the woman, often preferring to show Thatcher as a put-upon wife and mother.

Only once, and more than half way into the show, did we see a flavour of the iron lady, the vicious ideologue, the poisonous and ego-driven destroyer of comfortable consensus, flicker.

There might be a continuing admiration for Thatcher's conviction, but less of a recognition that much of this came from a narrow determination to destroy her political opponents, which inevitably meant harming the interests of the millions of people that supported them.

Hindsight is a terrible thing

2009-02-26T16:45:00.005Z

Yesterday I gave myself a gentle (but frustrated!) pat on the back for seeing the credit crunch coming, today I met a bunch of very narked analysts from a credit rating agency who are even more annoyed.

Not only were they ignored all through the boom times, but when the crunch came, everyone turned round and damned the credit rating agencies.

Their problem (and ours) is structured finance. The structured finance divisions of the rating agencies were young, inexperienced and had few incentives to question the dominant market belief: that the originate and distribute model minimised and diversified risk.

Unfortunately for them (and us), it didn't; instead it magnified risks by helping to boost borrowing even further, and much of this ever-greater volume of debt had rosy-looking AAA ratings from the agencies, led by Moody's, S&P and Fitch.

It will take a long while before the mess in structure finance fades away. Until that time, rating agencies, however accurate, will struggle against credibility issues.

Critical thinking

2009-02-25T17:52:00.003Z

Analysts – love or hate em, they write a lot of stuff. Sometimes it is interesting.

Not often though.

Alphaville posted up a long quote from one good analyst report yesterday (it has taken me that long to read it!). Labelled Bob the Bear from RBS.

Bob is a bit miffed that no-one listened to him when he saw the sub-prime crisis in 2006/7. But no-one likes a Cassandra. I mean I noted issues with securitisation in 2003 and house prices in 2004, as well as the problems with excess liquidity in 2005, and I’m not bitter. Oh no!

But I do have sympathy with Bob’s statement that:

"Forgive me, but I cannot see how talking advice from folks who couldn’t see this crisis coming even when the tsunami was starring them in the face can be of any real benefit."

Most of these people currently wail about apocalypse now, complain about bankers and say there is now a return of some kind (never very well detailed) of alternative capitalism.

Bob notes (correctly) that this year will see many more defaults, and this will challenge banks as much as some of the minor obstacles they have already encountered.

He also says that Europe will not be immune.

"Europe is in at least a big a mess as the UK/US - there is simply a lag. This applies to the banking losses/problems, the real economy, to ECB rate cuts, to the EURO (soon) taking up the UGLIEST CURRENCY baton from GBP, which in turn took the baton from the USD."

Meanwhile,

"All of which to me means that this is all gonna get worse before we get the next quantum leap forward in both full disclosure AND policymaker intervention, and before it gets better. And the REAL HEALER will be TIME and falling ASSET PRICES, combined with rather than because of any policy magic. In other words, rising defaults and powerful deflation will trump all/any (nominal) +ve’s for much/most/all of this year."

Of course, we could all give up on thinking and stuff and just hope ourselves into a better world.

First wave feminism

2009-02-24T13:18:00.003Z

At the Observer, Ruth Sutherland's feminist campaign continues.

As business editor, Sutherland believes that we should hear more about the different approach women bring to business.

Given the bias in the thesis, it is hardly surprising that ridiculous conclusions, hackneyed clichés and prejudice quickly follow. Women are more "maternal" and "emotionally intelligent" she posits in her latest missive, glorying in the "female-friendly" spas of Iceland.

The Atlantic island’s failure, she repeatedly claims, can be blamed entirely on men, even though she believes Iceland has a level of gender equality that we can only aspire. Maybe there is a world where this argument makes sense; I’m glad I’m not on it.

Elsewhere she pushes prejudiced arguments about women’s superior emotional intelligence in business. This is a tired line of argument, one drawn from a time when women were first trying to break into business, a decade or three ago.

Nowadays, the position is meaningless. Imagine suggesting to a female colleague: “Sorry to bore you with this man talk about numbers, can you bring on board the women’s view about how we all should feel?”

Nonsense. In the modern world, men have emotions, and understanding, and women can do numbers, and rationality. Anyone suggesting otherwise is simply prejudiced.

There are issues with women, the workplace, and boardroom representation, but Sutherland’s sexist views do little to improve the lot of anyone, male or female.

Ultimately, I wonder what the men working for Sutherland think about their boss’s weird assumptions?

Bonds in fashion again

2009-02-19T09:06:00.002Z

Here's a little bit more about bonds.

Something that needs to be underlined is when normal people buy bonds, it usually means buying into funds, which in turn buy bonds. The value of these funds also rise and fall, as well as the underlying, not necessarily in step.

Just how safe are bonds?

2009-02-17T08:49:00.004Z

This is what the experts are doing with their bond exposures - increasing their provisions against losses.

Meanwhile, here's a strange headline: "Some junk bonds are safer than stocks".

Well, duh! In an insolvency situation, ALL junk bonds are safer than stocks. Whoever wrote the headline doesn't know much about stuff.

The article itself is an basic starter guide to where bonds sit in the capital structure. However, it doesn't mention a key point: that equity investing should be about buying into a growth story (because you get wiped out if anything goes wrong), whereas buying bonds is largely defensive.

Plenty for everyone

2009-02-15T18:41:00.005Z

The rising tide of anger against bankers seems to be entering a new, exciting phase.

In the first phase, there was confusion. Commentators and experts emitted surprise and concern at the state of the world’s finances.

In the second, people became annoyed. Years of plenty, easy living and excess coming to an end. How terribly unfair!

In the third, we demanded explanations.

In the fourth, being none the wiser, we demanded apologies from people no more in control of events than a three-year-old’s parents in a supermarket. But at least we tried for emotional closure.

In the fifth, and new phase, we are confused, angry, frustrated but demand change! In this perilous political place, any and all explanations are offered for something we have no understanding of, backed by advocates of anything and everything.

So, if you have an axe to grind, a political project that has yet to get off the ground and does not really make sense, NOW is the time to act! Yes, for the next six months any idea, no matter how poorly thought through, lacking in evidence or worthwhile outcome, might well become law so as to satisfy the media’s anger.

And all this populist nonsense even before the Conservative Party comes to power!

Me? Well, I blame MEN! (I couldn't read this with a straight face, can you?)

No, sorry I mean ADVERTISERS!

ALAN GREENSPAN!

Sorry, I meant the GOVERNMENT!

BANKERS!

GORDON BROWN!

There's so much to go round, why not everyone? And can we sue?

I wonder who will win this battle for Britain’s baffled, angry masses?

Whoever it is, I suspect it won’t be us.

Finance is a fashion business

2009-02-15T14:07:00.002Z

Everyone seems to be talking about corporate bonds. Really.

The logic is as follows: we do not trust stocks, we don't like savings and property is a busted flush, so ... er ... bonds!

Obviously it is crazy investing in something you do not understand, and even crazier to advise others when you know little more, but since when did that stop financial journalists pushing product?

Did I (not) hear someone say "rising default rates"?

Together in electric dreams

2009-02-13T10:33:00.003Z

Interesting to see the blogosphere and mainstream media tag-team Stanford International Bank.

Primed by the Bernie Madoff scandal, mainstream financial media are now on the look-out for any similar scams.

So when Alex Dalmady, a banking analyst and - now - occasional journalist, wrote that all was not what it seemed at Stanford International Bank, he had a receptive audience.

The financial press are now cranking up the stories. None have said anything quite so contentious as Dalmady. They say 'questions being asked' or some similar conservative formulation.

This should be enough - the financial authorities should now be finding the truth, whether it be benign or not. And investors also know they should do some checking before putting their money with SIB.

That's as it should be. But sometimes the appeal of the story lets a journalist run too far. Last night the BBC ran an awful story of a suicide linked to the Madoff scandal. A man had lost his money and then shot himself. Terrible.

But it didn't end there. The BBC journalist let the man's son rant about how his father was killed by the banking crisis, and that it was terrible that the banks were being bailed out while the victims of Madoff had not.

There are times when a journalist should not quote people however interesting the things they say. This was one of those moments. The banks have been bailed out and nationalised because it is in society's interest to keep the country's economy afloat. The same can not be said for Madoff's victims. And fraud is fraud, it has nothing to do with the banking crisis.

Market whispers

2009-02-12T18:05:00.004Z

I have the seen the enemy and now I know its name.

It is called training for financial journalism and it tells young, impressionable journalists that there is a simple reason for all market movements and the journalist must, under severe time pressure, say what this is at the top of the story.

Hence bollocks.

The generalist journalist has no idea why the market moved 0.5% so grabs in the drawer of that week's ideas and trends and sticks it onto the story.

"FTSE 100 drops as economic fears rise," they write, relieved to have found something.

The reader, relieved at the outbreak of certainty, knows little of the spurious reasoning - maybe an analyst friend has said something, or it is the journalist's pet belief - behind the 'cause'.

In this way, false beliefs build in the market as these 'reasons' are repeated back and forth by people - journalists, analysts, CEOs - who have no reason to question them, and each with vested interests in repeating them.

So it goes.

Another glorious day in financial journalism

2009-02-10T13:41:00.002Z

So the bankers have apologised. Well that changes everything doesn't it?

The economy is now fine, the government wise and we now know all the reasons why the crunch happened.

Hmmm.

This morning's mea culpa was a press-driven forced apology which may in the short term mean that bankers get an easier run of things.

And that's it. Nothing has really changed. But at least the press got another scalp.

Straight thinking

2009-02-04T17:47:00.003Z

For the first time in my career, I am wearing a suit every day. However, as a journalist I hope that the suit does not dilute my indepedence, and I remain free of (excessive) institutional bias.

However, it is all too clear that the role of the journalist in the modern age is often to find out and then report conventional wisdom.

Being the finder of such wisdom leaves the journalist slightly ahead of the curve, often knowing things a few minutes, hours, days or weeks ahead of the public. But often, the only knowledge they are passing on is 'how people will be thinking' rather than the objective truth.

Look at the journalists claiming to have discovered the credit crunch. All they did was do their job - tell the world what the credit market was telling them: the bubble had burst. In July 2007, this was hardly a surprise.

(Not all credit market journalists have the temerity to proclaim that they discovered the credit crunch; but not all credit market journalists have a book they need to flog.)

And as a journalist, your job is find out what people are thinking. This thinking is then reflected in the price of goods and services (directly or indirectly). Hardly surprising that journalists might believe they can tell the future. (Anthropology degrees and discovering that credit is complex hardly amount to substantial insights.)

However, and as with the credit boom, journalists (even Ms Tett) were no better able than anyone else to see the truth, as all they were capable of doing was reporting what everyone else was saying.

If you do not believe me, try being a journalist and telling a story that contradicts the conventional wisdom. Imagine calling the credit crunch in mid-2006 (when all the same factors were at play), or a house price crash in 2004 (ditto).

As John Kay says in his latest book, it is possible to make a lot of money by being aware of the conventional thinking. Either by knowing what the thinking is before anyone else (which is what George Soros does) or by ignoring the flow and arbitraging it (Warren Buffett). However, neither approach makes you a journalist that most companies will employ.

But whatever option taken, never confuse conventional thinking for truth, or imagine that knowing what everyone else knows makes you special. This can get you into a lotta trouble.

Rights and wrongs

2009-01-29T13:40:00.005Z

In November 2007 I switched my investments from a mix of equities and bonds to cash. The FTSE 100 was around 6000 at the time while the credit markets were tanking; the future did not look pretty.

Turned out the timing was OK - equity markets have since gone down and investors are now pouring into cash. My holdings have gone up around 15%. Lucky me.

So now I'm looking for what next. Corporate bonds are the obvious, but the market has already moved. Might have to wait for the next dip. Equities also look interesting, but have to be oh-so-careful, given the market conditions.

Moreover, equities are getting increasingly risky given the recent spate of equity raisings, which is expected to continue.

Market volatility means share prices are all over the place anyway. Throw in equity raisings, which usually lead to massive falls in share places, and it is even more problematic.

For now, I am being slow about placing my bets and am happy leaving the cash in the bank. Every day of such caution I grow both more impatient and very slightly wealthier.

Aaargh-MBS

2009-01-28T09:33:00.002Z

A truly startling article has appeared in IFR. (Am afraid it is subscription only.)

Apparently the liquidity facilities on two securitisations vanished because of slip-ups. These are AAA notes, and are already under pressure.

It then says:

"Some investors just want to open the legal proceedings, however spurious the reason is, to get access to the full documentation. The assumption is that they will always be able to find something that is wrong in the drafting," the lawyer said."

If they can,

"This is especially the case because some hedge funds are investing in structured deals with the specific intention of finding discrepancies in documentation that they can use to launch legal action [and then force an accelerated repayment]."

Model behaviour

2009-01-28T08:40:00.003Z

John Kay is on fire again with another fantastic column.

His latest is a paean to individual judgement and financial models, as well as some snappy analysis.

"In the new economy bubble of the 1990s, equities roared ahead while property languished. But during 2003-2008, the availability of underpriced credit, followed by its abrupt withdrawal, affected property and shares in similar ways. Anyone in the financial world knew these things: but computers, churning through reams of data, did not."

Choices, choices

2009-01-20T11:35:00.002Z

How to get out of debt? Bankruptcy or inflation.

There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalisation, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

Gotta love private equity

2009-01-15T11:09:00.003Z

Here's an interesting thing. The trade body representing private equity say that half of the profits made by the industry came from debt.

Or, the bulk of the gains made by PE were by taking advantage of excess liquidity stiffing the banks, and now defaults are set to rise (to 18% if Moody's are to be believed).

(Un)happy New Year

2009-01-01T18:30:00.006Z

My new job is to write about large companies going bust, or are close to going bust, and so this year will be full of bad news from me.

However, I am wary of the doom and gloom that seems to have infected certain sections of the media. This is not to say things are going to be great, but comparisons with the Depression of the 1930s, for example, are close to nonsensical.

Of the rubbish I've read recently, this piece by David Gow in the Guardian merits special mention for being so sensationalist as to make the Daily Mail appear the voice of calm and reason. Everything bad in the world ever has either just happened or is just about to take place. It is a 'bloodbath', a 'bottomless financial crisis', 'dark, depressed and downtrodden', 'apocolyptic', people celebrating Christmas were 'deluded' and further riots are around the corner.

It is easy to understand why journalists write in such a way. David Gow's story is largely about how forecasts are for Europe's economy to contract by around 2% this year, and there is political division about how to proceed. Well, economists' forecasts are both dull and usually wrong, and European politicians usually argue, so that is hardly news either. So, to liven up the story, the journalist has injected a string of sensationalist claims and fearful scenarios.

Here is Peter Preston writing about the boom in gloom. Such cultural pessimism appears popular and difficult to criticise, if you take a read through the comments below Preston's article. And while elements if it are true, many that repeat such facts are doing so because of a particular agenda - political or social.

Gaz-gone?

2008-12-30T15:04:00.002Z

I spent a number of years tracking the build-up of debt in Russia. Now, the party's over and the high cost of producing oil and gas in Russia is becoming a significant factor in its economic downturn.

The NYT here produces a rough overview of the issues. Great final quote:

“Everybody was thinking Russia had succeeded, and they were wondering, how do you keep water in a sieve?” Ms. Latynina said. “When the input of water is greater than the output, the sieve is full. Everybody was thinking it was a miracle. The sieve is full! But when there is a drop in the water supply, the sieve is again empty very quickly.”

No more news?

2008-12-17T23:18:00.009Z

Here’s a curiosity. The Financial Times’ blog Alphaville went down for a day, annoying a number of people. The outtage provoked Yves Smith at Naked Capitalism to have a whinge about the Financial Times. She complains about the "sensationalistic" headlines, minor errors of detail and "way-too-frequent tech issues".

Well, if these make for a failing newspaper, then most journalists should worry. And the discussion beneath Yves’ post is full of bloggers and blog-readers complaining about the poor quality of mainstream financial journalists.

As one myself, it is interesting to read others’ views on the industry. However, I’m not sure if Yves or those making the comments add much to the debate.

Financial journalists are always swimming against the tide of facts, events and trends. Basically, there is far more out there than we journalists can ever track, log and explain. Much of our business is educated guesswork and a reliance on simple narratives.

So should we embrace trends and hope that blogs and other free internet sources will do a better job than newspapers? It seems a little unlikely. The only blogs that regularly break news stories are Alphaville, which is published by a newspaper and is run by two senior newspaper-trained hacks, and Robert Peston's blog at the BBC, and he is also an ex-newspaper man.

Most of the other blogs add analysis and views but do little in the way of systematic news coverage. In fact, many of the facts they use as the basis of their analysis come from newspapers and agencies.

One danger is that the newspapers will accept the ultra-modern thesis suggested by hyped up bloggers and so duck their ('boring') responsibility of reporting news and instead drift further to being newsy lifestyle guides. The Guardian has already marched a fair way down this murky track, as has the Telegraph. Any further along and newspapers will amount to little than this nonsensical fluff. If so, then the newspaper industry is really in trouble.