As a Liberal a belief in the importance of freedom has always been pretty central to my political philosophy.  There are many reasons why I dislike the authoritarian instincts of Conservatives or the meddlesome top-down approach of Labour but many of these come back to the central importance of freedom in the final analysis.

I’m not fundamentalist about it - freedom is not the only value in my universe - but without a large measure of both political and economic freedom we are all poorer – both literally and metaphorically.

So I naturally agree with a cry for freedom that reminds us that, 

The founding texts of the English Constitution – charter, petition, bill of rights – have one thing in common: they create nothing.  They assert old freedoms; they restore lost harmony.  In this they guided America’s Revolution, itself a codification of earlier colonial liberties.”

But herein lies a difficulty.  For the author is Ambrose Evans-Pritchard writing in the Telegraph of all places and the subject of his attack is the Lisbon Treaty which came into force earlier this week.   As he puts it,

Europe’s Constitution – the Lisbon Treaty, as we know it – began as a sort of Magna Carta.  EU leaders agreed at Laeken in 2001 that the Project needed restraining…   People do not want Europe inveigling its way into “every nook and cranny of life”, they said.  Needless to say, insiders hijacked the process …  The text says much about the heightened powers of EU bodies, but scarcely a word to restrain EU bailiffs and constables.

The Charter of Fundamental Rights … asserts that the EU has the authority to circumscribe all rights and freedoms…  In other words, our Magna Carta has been superceeded.

He concludes that in doing so the EU has crossed a subtle line and is no longer legitimate.  I agree.

And for my money that precipitates the EU into a crisis – but it is a crisis of ideas as well as of legitimacy as the Economist’s Charlemagne blog pointed out this week in a post headed “Europe: where are the big ideas?”   He quotes with approval Jacques Delors, the former European Commission boss,

“But we are not making any proposals … and to propose something, there has to be much more co-operation between us.  But no, everyone is in their own corner. Germany is run from Berlin, France has turned into “Greater France” and Britain is more and more anti-European…  If Europe does not take care, within ten years we will have a world run by two powers: the United States and China.”

He goes on to quote Poul Nyrup Rasmussen, president of the Socialist Group,

“The old democratic contract is broken. Globalization has taken sovereignty away from the nation state, leaving people vulnerable to forces outside their control. Europe is the only means to regain this lost sovereignty and to empower people once more. But if we do not act now, the danger we face is the withdrawal of democratic consent from the European project. It will happen slowly but surely if we do not change the way we do politics.”

 Perhaps the best summary comes from one of the comments (rewt66),

It seems to me that there are two Europes.

There is the Europe of the liberal democratic tradition, of the rule of law, of stable institutions, and of transparent and accountable government.

And then there is the EU, which essentially decided to force a constitution down the throats of those that didn’t like it. (“Ireland voted against? That’s unacceptable. They’ll just have to vote again. Nothing will be permitted to block this constitution – certainly nothing so trivial as a democratic vote!”) The EU creates a maze of bureaucracy (so much for transparency) and removes the decisions further from the people (making accountability harder).

It seems to me that the EU is, if not diametrically opposed to the best traditions of Europe, then at least not fully in keeping with them.

So what is going on?   In which direction does salvation lie?

The answer, I suggest is that we must rediscover our ancient freedoms and insist that the EU is remodelled to comply with them.  It means a Europe where power is clearly understood to be delegated upwards, not downwards and where bureaucrats are servants, not masters – in short a Europe where democracy (and hence legitimacy) is restored.

All of which is a little difficult for the Liberal Democrats.  In theory the party is fully subscribed to the idea that freedom should be a guiding principle, in practice the it is so clueless it has blundered into supporting the exact opposite.   Tragically, Nick Clegg and his coterie have not understood that there are different ideas about how Europe should work; instead of working up alternative proposals based around freedom and democracy they have naively swallowed the establishment party-line that ‘there is no alternative’ (shades of Margaret Thatcher) and, in limply surrendering to the establishment framing, they have lost the battle.

It has also left the Liberal Democrats in a terrible mess as a party that thinks it believes in freedom but actually promotes the opposite.  

We have by far the best and most trusted economic brain in Parliament at a time when that really matters, we regularly win local elections all round the country and the two big parties both looking utterly unconvincing;  yet despite all this we are nevertheless managing to flatline in the opinion polls?  Is there a connection between this lack of support at national level and our muddled message on freedom.  You Bet!   Not that it’s the only factor, but it’s certainly an important one and if we want to move forward and actually be a liberal party it’s one we have to resolve.

For one thing is certain; the ancien regime is dead – the political leadership is preoccupied with chasing poll ratings, the bureaucrats are consumed by office politics and the theologians have gone for the intellectual drivel that is neoclassical economics.   Do we, as a party, want to join the dead establishment or lead the revolution?   If the latter, we must lift our game but I see little evidence of this so far.

How many senior managers does it take to run the BBC?

Apparently it’s quite a lot less, 18% less to be precise, than previously thought according to the BBC Trust which has agreed to proposals from the Executive to cut the senior management pay bill by around 25% over the next three and a half years.

Other savings will come from freezing pay and bonuses for senior management until 2010 as part of a larger plan to cut a whopping £1.7 billion from costs between now and 2013.

Wow.  18% less senior staff!  Savings of £1.7 billion.  What a veritable feeding trough this must have been in recent years; a perfect illustration of how the interests of senior staff can diverge from that of the organization and its shareholders (the public in this case). 

Actually the salary and bonus savings are likely to be just the tip of the iceberg.   The primary cause of inefficiency is not too many staff and an inflated wage bill, bad as that is, but the organizational constipation they cause as they get in each other’s way.  All those staff have to do something, and when there are too many of them they invent work, creating endless and pointless meetings and paperwork, hoarding information, diffusing responsibility and playing (company) politics.   Trust me, I’ve been there, I’ve got the tee shirt.

But if the BBC is top-heavy and over-managed, what of central government?   I suspect the BBC is positively slimline by comparison.  Think about it; most long-established major industries have in turn experienced an existential crisis which has forced root and branch reform – think shipbuilding, coal, steel, motor manufacturing, telecoms and so on.   Some have failed to make the change, others have gone on to thrive (though often under foreign ownership).  The one obvious holdout, protected until now by the endless generosity of the taxpayer, is government.

Well, this party is about to end.  A country needs a government just as a large and diversified company needs a head office but it must add value and it can only do this if it is small and efficient.  If it gets too large it becomes inefficient and self-serving and subtracts value.  That sadly, is what HMG too often does.

Which is why I have always disagreed with the plan to save $20 billion from government spending.   It’s simply too small; it implies leaving the system basically unchanged and making it just a bit more cost-efficient round the edges.  For heavens sake!  If the BBC can find £1.7 billion after a few months what is the potential across government?  £200 billion is probably nearer the mark because that implies a root and branch change in the way government works.

It’s long overdue.

HMRC’s rule is that “an employee or office holder may deduct expenses incurred wholly, exclusively and necessarily in performing the its duties” (sic).

Easy enough you might think (apart, that is, from the proofing error), but that is before this simple rule collides with a Parliamentary culture that is long past its sell-by date.   Some, like Norman Baker, have been fighting  to change it but too many MPs, ignobly led by Speaker Martin have used every trick in the book to preserve their cosy sinecure.  It’s long past time to drag Parliament into the 20th century; the rest of us have already moved on to the 21st!

What would Speaker Martin care to say to the three policemen arrested yesterday in connection with a number of offences including misconduct in a public office a.k.a. fiddling their expenses?   We all depend on Parliament to do a good job yet we now have an unconscionable situation where there is one law for them and another for the rest of us.  It is hard to imagine anything so offensive as this.

Yet beyond all the brouhaha about MPs expenses there is an even more serious issue lurking in the shadows; namely that it exposes a quite startling degree of complacency in ALL the party leaderships.

That this was going on they all certainly knew;that it would eventually detonate catastrophically became highly likely once the FoI Bill was passed and a racing certainty many months ago.  Any one of the Party leaders could have put his lot in the clear (at least as far as the more recent years are concerned) by unilaterally instituting a clear party policy on it.  Yet despite some gestures none managed to institute an effective policy leaving them all in an unseemly scramble to react to developments after the event.

I don’t want, and Britain can’t afford, leadership whose highest ambition is to hold office, that thinks it’s adequate to react after the event and whose habitual response it to spin and wriggle its way out of the mess that inevitably results.  We need leadership that is knows where it wants to go, is proactive in this and can analyse and plan accordingly.

There are many good and honest MPs in all parties but they can do little if the culture is against them.  So, before the Lib Dem leadership starts consoling itself with the thought that they got off relatively lightly, they might like to reflect not just on how it is that they failed to dodge this particular bullet but rather on how it is that they still languish in third place in the polls even after Labour has contrived to wreck the economy.

A funny thing has happened almost by stealth sometime in the last two weeks or so.  Progressives, who might be excused for thinking that Obama’s election would indeed lead to “change we can believe in”, have had to admit that he’s getting it wrong, badly wrong as far as the financial crisis is concerned.

Now an excellent interview with William Black on Bill Moyers Journal provides much of the context and moreover shed an uncomfortable light on developments on this side of the pond.  (The video is about 30 minute long but well worth it.  A transcript is provided if you prefer).

William K Black is now professor of Economics and Law at the University of Missouri, Kansas City and was formerly a regulator during the savings and loan crisis of the late 80s. 

Black’s thesis is simple; the financial crisis is driven by fraud on an epic scale.   He explains to Moyers how it works:

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you’re a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there’s going to be a disaster down the road.

BILL MOYERS: So you’re suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

He goes on to explain that the big banks knoew perfectly well that the liar loans and the like were fraudulent, but that complex financial instruments were deliberately created so that swindlers could exploit them.  The fraud became widespread.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that’s a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, “Trust, but verify.” They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

And now there’s a cover up.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

But the whole thing tracks back to a small number of individuals.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker’s income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.

Which brings us back to the beginning.  How is a highly intelligent man like Obama getting it so badly wrong?   Ditto Gordon Brown?

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.

Rewarding senior executives for failure has become all too  common in recent years.  The £16 million pension awarded to Sir Fred Goodwin, former boss of RBS, may make him ‘media hate person of the day’ but his is only the latest in a long line of payments for destroying perfectly good companies.

Gordon Brown may view it as ”unacceptable” and be taking legal advice about how to claw it back but surely we need to draw the general lesson here and not just beat up on one case – however offensive that case might be. 

And that general lesson should surely encompass the thought that all rewards – including salaries, bonuses and pensions – should be commensurate with results.   In other words the perfectly justified public anger over this case (and banking bonuses generally) could and should be harnessed to put through some long-overdue changes to corporate governance.  

In too many large firms the rights of shareholders (and that means most of us through pension funds etc.) have been expropriated by a breed of self-serving managers who serve no higher goal than short term greed.  It is too easy for a dominant Chairman to pack his board with yes-men who can be relied on to lock arms and push back against even the most determined efforts to question pay awards or strategy.  No wonder we are in a mess.

Corporate governance needs to move on from being the domain of buccaneers and kleptocrats to one of managers who actually serve the longer term interests of shareholders (and in practice therefore also of employees and the wider society). 

So what can be done?

I suggest that legislation to restore shareholder control is the democratic and effective way to go.  Legislate that directors of public companies may only draw a salary package up to a maximum of a specified multiple of average wages in their firm – say a generous 20x.  That should be more than enough for anyone to live on!   Any remuneration above this level (whether as bonus or pension etc.) would be subject to two votes by shareholders -   the first to agree and set up a bonus scheme and a second vote five years later to confirm (or deny) any sums awarded under such a scheme.

In practice the shareholders would be pension funds etc so they would use such powers responsibly and sparingly but the threat of being able to do so would be a powerful deterrant to bad behaviour in the first place.

If it turned out that the Directors had been utterly foolish and/or negligent then the shareholders would have the right to decline to pay the accrued bonuses.   However ,shareholders would be constrained to behave fairly and not unreasonably or they would find it impossible to attract and retain quality management.

Funds accrued could earn interest while in trust so there is no ultimate loss to the directors involved – only a delay so that any short-termism is exposed.

And just imagine; if such legislation were introduced in the next few months and backdated to late last year,  it might even catch Sir Fred.

That would seem perfectly fair.

Recent events seem to have an almost Biblical quality about them.  Let me explain. 

As a youngster I was quite well brought up in matters Biblical.  This included an appreciation of the historical books of the Old Testament as being, in part at least, an account of how the Jewish people were gradually taught the right way to live.  People being people, they periodically fell away from this right path in one way or another with inevitable and disastrous consequences – being carried off to captivity in Babylon, economic collapse, military defeat and so on.

Whether you are a believer or not is, at one level, irrelevant.  You can see this either as divine intervention or simple cause and effect – jump off a cliff without a parachute and, splat!  When societies are operating justly and harmoniously they work, when they operate unjustly and with sectional interests to the fore, they fail.  It’s as simple as that.

Three passages come to mind:

1. Exodus 32: The Israelites make and worship a false God – a golden bull-calf (and this millenia before bull markets).  It ends badly.
2. 1 Kings 12: Rehoboam succeeds his father Solomon as King.  The elders advise him to lighten the tax burden on the people but his contemporaries suggest increasing it.  He goes with the young bloods and as a result looses most of his kingdom splitting the Kingdom of Solomon into two weak kingdoms with dire consequences down the track.
3. Amos 2:vv6-8: Somewhat cryptic but the complaint is that the law is being widely flouted with one law for the rich and another for the poor.  Indeed the law has been perverted into an instrument of oppression.  Archaelogical evidence from the time suggests that in the generation or so before this social inequality had increased sharply.

All of this sounds alarmingly modern.  Clearly human nature has not changed in the last 3,000 years or so, but it does leave me with a problem.

How come that in some of the most overtly Christian countries of the world, these ancient lessons seem to have been so thoroughly forgotten?  How come the New Testament injunctions to love your neighbour and be a peace-maker has been replaced for many with a call to fight, fight, fight?  How has a Gospel of love been changed to a Gospel of fear?

The Bible is clear.  There must be justice or there will be disaster.