Banana republic

Glenn Greenwald hits the bullseye with a superb post on Salon.com comparing the US now to Russia and Argentina during past crises.   His article is a must read by any standards.

He starts by quoting Desmond Lachman, a former IMF official, who describes his experience of Russia and Asia.

I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.

And.

I often heard Asian reformers such as Singapore’s Lee Kuan Yew or Japan’s Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change.

Greenwald observes (following Yves Smith) that this is now also the road the US is on.

 … Citibank and Bank of America are now using TARP funds they received not to extend more loans (the ostensible purpose of the bailout), but rather, to buy up more and more of the very distressed assets that Geithner insists they need to be relieved of, because they now know that, under Geithner’s plan, they will be able to sell them at a substantial profit courtesy of public funds (i.e, the Government will buy those crippled assets at well above their current market price).  

Quite simply, this is looting of the public purse by a powerful elite.  Greenwald goes on to put his finger on the central problem.

The key dynamic underlying all of this — the linchpin that allows it all to happen and, historically, the primary hallmark of a deeply broken nation — is the total elimination of the rule of law for the ruling class, with a simultaneous intensification of the law as a weapon against the citizenry.  Does anyone expect there to be any widespread prosecutions for those most responsible for the looting, systematic fraud and grand-scale theft of the last decade? 

It’s not quite as bad as that here in Britain as yet but we need to be alert; it’s a very slippery slope. 

The choice is between holding unequivocally to the rule of law or becoming just another banana republic.

(H/T naked capitalism)

Multiple organ failure

All of us now know what family and friends of patients at Stafford Hospital have known for along time – that it is a deeply dysfunctional organisation.  Its grotesque failings arethe bitter harvest of a NHS system which is itself experiencing multiple organ failure.

But it is not just the hospital management that has failed; the entire regulatory structure has failed leading to around 400 excess deaths between 2005 and 2008 according to the Healthcare Commission.   That must be the tip of a very large iceberg.

Government targets are to blame for much of the trouble.  As the BBC reports:

Staff told the Healthcare Commission that there was “pressure, pressure, pressure” on them to meet the four-hour A&E waiting time target.   Several doctors recounted occasions where managers had asked them to leave seriously ill patients to treat minor ailments so the target could be met.  One gave an example of being asked to leave a heart attack patient being given life-saving treatment.  Nurses reported leaving meetings in tears after being told their jobs were at risk after breaching the target.

None of this is new; I have been hearing stories like this for years yet the government remains wedded to the concept of targets for everything despite the huge weight of evidence that (a) they don’t work, (b) that cheating on the measures is endemic and (c) they create perverse and distorted outcomes whether its treating minor ailments first as in this case or ‘teaching to the test’ in schools or whatever.  I suppose that for a control-freak PM from a Party with centralising instincts, targets must seem like a wet dream of a solution.

The reality is that most of the things that government runs are complex systems full of messy, awkward, non-standard things like, er, people.   Complex systems cannot be managed by targets and the sooner this is taken on board the better for all concerned.

But even aside from the problems created by the targets what of the regulatory superstructure?

The Healthcare Commission is the independent watchdog for healthcare in England but Monitor also has a finger in the pie as regulator of  NHS Foundation Trusts – which since 1st February includes the Mid Staffordshire NHS Foundation Trust.

The problems in Stafford were first spotted as long ago as summer 2007 by researchers based at Imperial College which rather raises the issue of what value the Healthcare Commission adds and whether it is sensible to have two bodies working in the same general area.

Meanwhile, foundation trusts are (in Monitor’s words) “a result of the Government’s drive to devolve decision making from central to local organisations and communities.”  (Evidently this does not extend to setting their own targets!)  Yet it seems that Monitor did not check with the Healthcare Commission what its view was of Mid Staffs and, to judge from its website, its approach is primarily to do with finance.  I found no mention of patient care.  Incredible!

In this context it is perhaps not surprising that the findings of the Healthcare Commission’s investigation include this shocker (their emphasis):

An analysis of the trust’s board meetings from April 2005 to 2008 found discussions were dominated by finance, targets and achieving foundation trust status. There is little evidence that poor standards of nursing care were identified and discussed.  The investigation found that poor results of surveys of inpatients or staff were not discussed in public. It found that a doubling of the rate of C. difficile infection in the early months of 2006 was not released to the board nor the public.  The investigation also found that in 2006/07 the trust set itself a target of saving £10 million. This equated to about 8% of turnover. To achieve this, over 150 posts were lost, including nurses. This was in a trust that already had comparatively low levels of staff.

So what I think is that we have a picture of a system where the message from the top is all about finance and dead-brain targets that must be met no matter what.  Where managers have sufficient courage to go out on a limb to some extent and defy the system then it might more or less work.   Where if they don’t, it collapses.  The message from Health Secretary Alan Johnson is clearly what this they should have done.  Unfortunately for patients this is not the direction his department is driving in.

But, of course, how the NHS is managed and regulated is all of a piece with how the successive administrations have sought to run the rest of the government estate since Thatcher; Labour (and Conservative) fingerprints are all over this.  It is no coincidence that we are seeing collapse in the NHS at the same time as in the financial markets.  Stand by for more storms.

No pictures in our school

We spent yesterday with friend and their three primary-age children.   Since we last saw them their school has been rebuilt under a PFI scheme so one of the first questions was about how they like it.

“It’s boring – there are no pictures” said the youngest, age six.

His mother explained that teachers are not allowed to stick anything to the walls which are emulsion on plaster for fear that blu-tack will remove little patches of paint.   All artwork, charts, maps and the like are confined to limited noticeboards.

“But it’s very bright with nice big windows” mother said hopefully.   The children all said that they preferred their old Victorian school.

This is everything that’s wrong with PFI even allowing for the less than perfect information that filtered through to us.   I’m guessing that if there were a good case for a new school that this would have filtered through to the older children in some form.  (E.g. The roof leaks and would be too expensive to repair).   In fact I had earlier heard stories that staff and parents were not convinced of the need for a new school but had been overruled.

Cui bono?

But even granted that a new school was needed, the “no pictures” rule is deeply shocking for what it says about priorities – which evidently don’t include children.  Did the financiers not know that primary schools generate lots of artwork?  Did they fail to provide a suitable wall covering – or will they now attempt to blame the council for not so specifying?   And even given that it’s now a done deal what is so serious about a few divots in the emulsion?

Presumably the lawyers would be only too happy (at vast expense!) to sort something out but if we need their help to get a few pictures up we really have lost the plot.

For me this illustrates a point that is too often forgotten; that there comes a point in any scheme where financial analysis (which I assume this school ‘passed’) cannot help.   Even aside from the GIGO issue there is always a non-financial dimension which is not captured by a financial appraisal and which comes down to judgement.  For instance it might be the case that Plan A beats Plan B in financial terms by £10,000 but is less flexible.  So the question then becomes ’Is retaining flexibility worth £10,000?’   If it is, then Plan B is superior despite costing more.

At the end of the day it is hardly surprising if this and other PFI schemes emit a very bad smell for they depend for their existence on three very dubious factors:

1. The government’s desire to fiddle the books by moving expenditure off its balance sheet as a way of hiding its profligacy – and just look what that did for the banks! 
2. A pathological hostility to local government and democracy and preference for centralised control with Whitehall pulling the strings.
3. A  corporatist agenda – a penchant for keeping close to selected big companies and keeping the revolving door going.

None are exactly Lib Dem themes!  Am I alone in being mystified about why we don’t call time on PFI?

Doing the fair thing is doing the right thing

Today’s cut in base rate to just 0.5% is horrible (though not unexpected) news for savers.  Anyone who has been prudent and saved to build a nest egg for their retirement or against a rainy day is getting hammered by the loss of  income; many retirees will be forced to dip into capital to survive.

But, apart from the obvious point that Gordon Brown’s once-vaunted reputation for prudence is now deader than the proverbial parrot, what does this tell us about his government’s priorities.  How is he proposing to spread the pain about, who will loose most and who will loose a little.  Will there even be some winners?

Forget all the economic jaw jaw.  We need a debate explicitly and in terms about what is fair and what is not fair.  If, as most Lib Dems fondly believe, ‘fairness’ is a core principle of their party then NOT having this debate is a gross dereliction of duty.

Moreover, it has become abundantly clear that most mainstream economists don’t have a clue about how the economy works, or they would have seen it coming – which they didn’t (with remarkably few exceptions).   The proposition that we should leave it to those who got us into this mess to save us from it is laughable.

This matters because I have an old-fashioned belief that doing the fair thing is in fact doing the right thing.

So, what is the government doing – and what should they be doing?

Their approach was and is to get lending restarted so we can all go back to where we were – carry on as before – no lasting harm done - trebbles all round.   But many banks have so much bad debt that they are bankrupt - zombies kept alive only by government guarantees of billions.   This will be a burden to taxpayers for decades to come – a massive inter-generational transfer.   Is this fair?

But the banks winnings are not limited to the immense cost of capital injections and guarantees.   Their gross margins (the difference between the interest rates they pay savers and the rates they charge borrowers) have gone through the roof.    So both savers and borrowers are also loosers.  Is this fair?

(An anecdote illustrates this.  A friend who runs a high quality small business with a strong balance sheet was recently looking for a modest loan.   Several banks quoted 10.5 – 11.5% for a secured loan.  Until recently he could get loans at around 9% unsecured or 2% over base rate secured.  Multiply the gross margin they are getting – say 10% – by all their loans and this is a LOT of money).

The government’s clear policy is to thus to fill the black hole in the banks’ finances thorough a combination of government cash injections and rolling up bumper profits (those monster gross margins) over many years.  (At the moment we are not ’seeing’ these profits because they are being cancelled by write offs of bad debt).  Unfortunately we just don’t know how big the banks’ eventual losses will be nor therefore how long this will take.  At least a decade is a reasonable bet but an ongoing capital famine – for that is what would result - would be a disaster for businesses and would-be house buyers alike with opportunity costs that would be incalculable.  Is that fair?  

Also today the Bank of England has announced that it is to begin ‘quantitative easing’ (aka printing money) to boost liquidity in the banking system and therefore – hopefully – demand.   No-one, least of all the Bank, seems to have any confidence that this will work.   Neither do I  for it fails to address the core problem of too much debt.   What it may well do is stoke inflation that would wipe out the capital value of any remaining savings.  Is that fair?

This crisis started when debt was allowed to balloon to unaffordable levels; it will end only when debt is once again affordable.

The tragic truth is that there is no painless or even fully fair way to get debt down.  Realistically, killing the zombie banks that carry most of the bad debt is the only way to go and is less unfair than any alternative.   (Their branch networks and supporting systems would continue as before but under new management – they are the ‘Money National Grid’ and a vital part of the economy).  Killing zombie banks whose greed got the better of them is entirely fair.

(Interestingly, this is the solution that the private sector has come up with for rescuing firms that have been coaught out with unaffordable levels of debt.  Recent weeks have seen a slew of  ‘pre-pack’ administrations (i.e. bankruptcy) where a new company emerges the next day purged of its accumulated mistakes).

In the meantime the government should not pour taxpayers money into propping up bankrupt institution that have collapsed themselves by their own greed.  If it continues to prop them up there is a high probability that it will bankrupt itself – any that would be the ultimate unfairness.  That’s the scenario we shouldn’t have to face.