Friday, May 28, 2010

More Cuts Than a Deli Counter


Anybody working in the public sector or providing products/services to government bodies will be sat in an uncomfortable place right now.  Thirteen years of a Labour government, with interventionism and centralisation built into its DNA, combined with a debt-fuelled economic bubble, has left the UK with unsustainable levels of both public expenditure and government debt.


As might be expected n the light of the recent election, opinions have tended to follow party lines, and I believe that this has resulted in an unfortunately narrow debate.  Two of the key issues raised during the election were whether £6bn of public expenditure cuts should be made this year or next and whether National Insurance should rise by 1% next year or not.  I would liken this to choosing the colour of a new car; it changes the way the car looks, but it does not alter whether or not the car will still be running in ten years.

It is too simplistic to just slice up the situation on ideological lines such as whether the state should supply certain services or whether taxation policies should be redistributive.  The example of what is happening in the USA right now shows how unhelpful such an approach can be, with political point scoring taking precedence over answering difficult questions.  I would like to make two observations that go beyond these ideological brickbats, ones that have been ignored by both sides.

My first observation is that there has to be a move away from a culture of entitlement.  This is often thought to be an issue just for the lower socio-economic echelons, but I would extend this much wider to include examples including:

  1. The entitlement to cash benefits by virtue of circumstance with no reference to contributions, either in cash or by way of service to society.
  2. The entitlement to use nature's resources without a second thought, merely because:
    1. It is convenient;
    2. It is a “better” school / “nicer” supermarket / “ideal” holiday destination;
    3. It doesn't effect me.
  3. The entitlement to take as big a “slice of the pie” as possible without any (or a token) consideration of the needs of others.

The world has changed beyond all recognition over the last 50 years, but the political and social structures we have were formed in this earlier age.  None of the political parties appears to have the "balls" to face up to this, as they know the majority of the population do not want to hear uncomfortable truths.

The UK has a population of 60m, all of whom expect to have living standards amongst the highest in the world, but no one ever asks whether such expectations are justified?  What do we provide?  We have some pockets of excellence in both manufacturing and services, but far too few of them.  As a country we have too many people engaged in low value added services, but who still expect the full fruits of a high value economy.

To put it simply, you can only go on for so long paying each other rich-world pay rates to make coffee while borrowing money to buy goods made overseas and expecting the value of your house to rise at double-digit levels forever.

This is not a call for a return to the "good old days" of large scale traditional manufacturing; there are many basic industries in which Britain would be unable to regain competitiveness, but we have failed to replace the old "smokestack" industries with something that truly adds value.  This is not a political point, as this neglect spans governments of both sides, which brings me to my second observation.

The pervasive culture in the UK does not celebrate or even encourage learning, innovation or excellence.  Adoration is poured on footballers, TV talent show winners, soap opera "stars" and models, while engineers and scientists are branded as "nerds" and geeks", science and maths subjects are viewed as "boring" and "too difficult", and efforts to encourage and pursue excellence are regarded as "elitist" and "divisive".

The last 30 years has seen a massive expansion in the number of people attending university, but has the economy really benefited from a dramatic influx of media studies, psychology, business studies and leisure management graduates?  People come into the workforce with more qualifications than ever, but are they truly better educated than a generation ago?  The use of information and communication technologies has exploded, but where is the British Google/Microsoft/Apple?

There is an advert for Lastminute.com with the strap-line, "do more of the goodstuff"; the problem with our culture is that we want to do more of the "goodstuff" but we do not want to put in the hard work to pay for it.  We also seem to have an increasingly narrow view of what the "goodstuff" is.   Hedonism is "good"; self is "good"; helping those less fortunate is "the responsibility of the government"; community activities are "boring"; buying things is "good"; going places is "good"; appreciating the simple things in life is "unfulfilling"; learning new things is "too time consuming".  Can this situation be improved; yes.  Will it be improved; I wish I could be hopeful.

Nick

Tuesday, May 25, 2010

Financial Regulation - No, don't fall asleep

There has been a lot of discussion about financial regulation recently, a topic that in past times would generally have elicited a gigantic yawn. The financial crisis that has afflicted the world over the last three years has changed this, just as it has changed many other things. This last week alone has seen Germany ban “Naked Short Selling” (not as interesting as it sounds, but some reason “fleshy” terms are widely used in financial circles) of many securities, the US Senate take a major step forward in passing new banking legislation and the new UK coalition government make reform of the financial sector a significant component of its proposals. The questions in my mind are:
  1. How much of the of this impetus is driven by short term political point scoring?
  2. Have we reached a point where financial innovation is being driven solely for the benefit of a narrow group of market participants?
  3. Is anybody still reading?
Question 1 is the easiest to answer; a lot of the changes are likely to be a political knee-jerk reaction, but that is politics for you. It also doesn’t mean that the reforms are necessarily bad, but it probably means they will be implemented badly and will be distorted by the influence of politically powerful lobby groups.
Question 2 is harder to answer and will illicit the widest range of opinions. I regret to say that I think we have reached such a point. Finance is supposed to be a “SERVICE” industry, but I believe that is no longer the case within many institutions. The traditional role of the financial sector was to bring the benefits of intermediation and expertise, i.e. pooling the savings of many individuals in such a way that this capital could be lent out for productive purposes, invested in growing business and for risk to spread. The pillars of the financial sector: banks, stock exchanges, insurance companies, mutual funds, all had such purposes at their core. This was not out of some long-lost sense of altruism, this was capitalism at its most basic, just like free-trade, with the whole system benefiting. The financial sector was the oil that lubricated the whole capitalist system, and without it, the system did not work. Now however we find ourselves in a place where many of the most powerful institutions play a zero-sum game; no longer does the whole system benefit, but someone wins and someone else looses. The Goldman Sachs/SEC case has had much publicity, but it is just the tip of the iceberg. For many institutions their key mission is no longer to grow by providing the best service and products to their clients, but merely to ensure that they are on the winning side on as many deals as possible. “Naked short selling”, “flash trading”, “naked credit default swaps” etc. do not serve any economic purpose; they are just ways of winning and losing, and examples of where the overused term “casino banking” is actually true.
This is not some diatribe against bankers bonuses; they are not the cause of the problems but a symptom. It is interesting to note that as remuneration in these areas has risen exponentially, returns to Joe Public on their pensions and savings has fallen. In much the same way as a few oligarchs have come to dominate the Russian economy by taking control of formerly state-owned assets, the western capitalist system has seen a huge transfer of wealth from the many to the few. This is not the same as Bill Gates and Steve Jobs getting rich on the back of creating products that are bought on mass because they deliver something people want; this is they win, the rest lose just because they were on the right side of a bet, and that bet is on a race where the odds have frequently been stacked in their favour. I am not sanding up shouting “this is not fair” (I don’t think it is, but that is not the point); I am saying that it is not healthy for society. These are not people who are building businesses, developing new technology and creating a legacy; they are not even the Robber-Barons of 19th Century America, who at least built industrial empires, albeit ruthlessly; no they are more akin to another type of Baron, those of medieval England, handed huge tracts of land and the lives of the people living on that land merely for “services to the king”. Just as such “Barons” built bigger and bigger castles, so today we see ever more luxurious homes in the finer parts of London, New York and Geneva. But just as castles produced benefits to the medieval economy, sucking resources from productive activities such as agriculture and trade, such is the case with the Knightsbridge penthouses of today.
OK, to bring today’s thoughts to a close, I believe that firms in the financial sector should refocus on the core principal of all businesses - providing offerings that benefit their customers, that their customers want, that are superior to their competitors offerings, and earning a fair return along the way.
Question 3? I doubt it.
Nick