Europe - The Big Half-Truth

Many commentators have criticised the refusal by the UK government to agree to European Union treaty changes that would have ceded control of the UK financial markets.  France in particular maintained the position that these changes, allowing the introduction of an EU-wide transaction tax, were necessary to prevent a repetition of the current crisis.  A transaction tax won't solve the current crisis - it will be a case of shutting the stable door after the horse has gone..  

The big half-truth, bordering on a big lie, is the assertion by politicians throughout the EU that the crisis was caused largely by the banks.  Yes, they were part of it, but most European governments have been surviving on budget deficits, with the gap closed by growing levels of borrowing, ever since the introduction of the Euro.  This money was lent by the banks and low rates were underpinned by the assumption that European sovereign lending was all as safe as German debt.

What has really rocked the banks is the discovery (surprise, surprise) that some governments couldn't close their deficits, and at that point, the assumption of safe sovereign lending was blown out of the water.  The governments have caused the banks to lose stability due to their own inability to address their budget deficits.  Politicians keep blaming the banks to shift attention from their own failures.  They don't want to adopt the debt brake (Schuldenbremsen) proposed by Germany, or they're frightened that their electorates won't stomach it. There's a good article from The Economist here.

The big truth that electorates throughout the EU should remember when they next have a chance to vote is that debt must be repaid, sooner or later. If it doesn't look as though debt will be repaid, the lenders will keep raising rates or bond yields to take into account the risk of default. That's reality.

Zopa UK - a little less P2P

I felt a little sad that the peer to peer (P2P) lending site, Zopa UK, has decided to stop offering Zopa Listings.  This facility allowed individual borrowers to pitch to the Zopa lending community for backing for their individual needs, instead of having to convince the people who evaluate loan applications through the standardised Zopa Markets process.  It let the lenders make their own judgments about the rates and amounts at which they would be prepared to lend.

As the loans were filled Dutch auction-style, it was possible to end up with what seemed like a very acceptable rate as a lender, and the borrower could always decline if the overall net rate was too high.   Having said that, the predicted default rates in the Listings looked higher to me, and it's possible that some of these will turn out to be a case of  'a fool and his money... '.  Maybe these loans were high risk investments which weren't being priced correctly by the auction process.

I suppose it's a completely justifiable business decision, but it takes a little bit of the sport out of the game which becomes a little less P2P as a result.  Zopa Markets provide a more controlled way to lend. I  went there because of my frustration with the deposit rate I could get from a high street bank.   It may not be the thing for widows and orphans; only time will tell how good an investment this is, but so far, I seem to be ahead of the high street rates.  If you want to try it, the graphic below has a link (health warning: this includes a little incentive for me if you lend enough after signing up from here)

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Brown broke Britain

It's time for blame to be given where it's due. I'm fed up with hearing the spin that "Gordon's done a great job for Britain." Gordon Brown has messed up almost everything he's touched.

On the credit side, he freed the Bank of England in May 1997 to set interest rates. Sadly, quite soon after, in June 1998, he screwed up banking supervision, and that is the root cause of the current financial crisis. The Bank was, at the time, a world-renowned centre of excellence for banking supervision. Famously, a 'raised eyebrow' was all that was needed when supervisors wanted a change made. This was replaced by a rules-based supervisory regime under the Financial Services Authority which had power to penalise and set rules, but lacked the reputation and clout that had enabled the Bank to keep a tight rein. Whenever there's a published set of rules, clever people will find ways to push the envelope - which is what's happened in spades in the sub-prime loans scandal and Credit Default Swaps debacle.

He's also messed up the UK pension system. Our defined benefits system was the best in the world before he and his mate Ed Balls got their dirty fingers into it. They axed the dividend tax credit in 1997. Very few private sector organisations can now afford to offer defined benefits pensions - thanks largely to Brown's pension grab which in March 2007 was already estimated to have taken more than £100 billion out of private sector pensions (Daily Telegraph article).

Finally, he's saddled us with unaffordable obligations that won't go away. Public sector spending has been a diarrhea of give-aways to anyone whose acquiescence needed to be bought, much of it funded by present or future borrowing. Rather than work out a cost-benefit analysis for new initiatives, money has been sprayed into wild ideas that have been more to do with popularity or grabbing headlines than solving the needs of the country. Many Government IT projects have been a complete shambles. Pay settlements have been much more generous than those available to most private sector workers. MPs and many other public sector have defined-benefit pensions, on massively generous terms, that they will go on collecting for the next forty or fifty years.

We'll be paying for Brown for two generations. Brown did a great job for Brown.

Barclaycard on the ball... and then not

Barclaycard contacted me on Saturday morning (7th) to ask if I'd just done a transaction for £1,000 with a mortgage provider on my business credit card. No! Then did you do £2,000 with an energy utility on Friday? No! What about all the other transactions? One other was fraudulent, a Pay As You Go phone top-up - I don't have a PAYG phone. Top marks for picking up the untypical transactions, two of which weren't what I would consider as suitable items for a business account.

The disclaimer form arrived today - and included a number to which it could be faxed after completion. And guess what - no answer (multiple times), number busy, no answer. Less than top marks for that.

Banking oblivion

So, as expected, the Monetary Policy Committee of the Bank of England has reduced base rates to 1%. I no longer think the Bank is independent - it's been cowed by the criticism of its role in the Northern Rock debacle.

This will further drive retail savers away from the commercial banks; building societies have less political pressure to reduce saver and borrower rates because they're not seen as 'guilty'. It also reduces the cost of government borrowing, at least where it has a captive depositor base, such as some National Savings products, and reserve deposits at the Bank of England.

So it's not inconceivable that this is part of a fiendish game plan by HM Government. Why? So that it can nationalise all of the banks, which will soon have little liquidity except that supplied from government schemes.