Human resources or human assets

Paul Krugman argues that US jobs policy is deficient in that there really isn’t one.  As he puts it,

Here in America, the philosophy behind jobs policy can be summarized as “if you grow it, they will come.” That is, we don’t really have a jobs policy: we have a G.D.P. policy. The theory is that by stimulating overall spending we can make G.D.P. grow faster, and this will induce companies to stop firing and resume hiring.

He compares this with the German approach which is to provide a short-term work scheme which provides subsidies to employers who reduce workers’ hours rather than laying them off – an approach that didn’t prevent recession but which meant that ”Germany got through it with remarkably few job losses“.

One might quibble with the implication that the recession is over but Peter Dorman points out that Krugman misses the really important point about Kurzarbeit.  While giving Krugman credit for seeing the deficiency of the slash-and-burn approach to labour; Kurzarbeit is fundamentally about human capital.

But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.

Krugman adopts the conventional ‘Anglo-Saxon’ view that European-style employment policies are bad for long-run growth and that in “normal times” there is something to be said for labour markets in which employers are free to hire or fire at will but Dorman gives this view short shrift.

In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.

So , do we in Britain have a GDP policy, a skills policy or simply a make-it-look-good policy? 

 

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.

Shredding Sir Fred – and friends

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.

The credit crunch, libertarians and smoking guns

 A few days ago Charlotte Gore wrote, “If Libertarians and free markets are to blame, please point to the regulation that was blocked by Libertarians that would have prevented the Credit Crunch.  The answer is simple: such regulation was never proposed.” 

Oh! Yes it was, and repeatedly – but for various reasons no-one wanted to know.  

I agree with her about Gordon Brown’s reason for not wanting to know (“Brown was thrilled with the ‘boom’ and enjoyed his reputation as the miracle chancellor, the one who had ended boom and bust.  He had no desire to highlight flaws in the system”).   But the wider context was the all-conquering neo-liberal world-view variously expressed as, for instance, ’government is not the answer – it’s the problem’ (Reagan), and that ‘the market is always right’ (Thatcher). 

After 1979 and the Winter of Discontent, socialism as a philosophy with anything useful to say about economics was washed-up so New Labour adopted the neo-liberal world-view to a large extent and it filtered down to the ‘great and the good’ and thence to much of the administrative hierarchy.  

Some people did know that there was a problem but by this point swimming against the tide became difficult for even the most determined individual and neo-liberalism become the ruling cognitive policy.  A better opposition might have evolved a coherent alternative but tragically, none did.  From there on, and in the absence of any rival world-view, the die was cast.  Of course, there were many brave and insightful individuals who did what they could but, as individuals, that is not much in the final analysis. 

Some of the ensuing missteps are documented in this recent piece from the New York Times on the Greenspan legacy.  As former Chaiman of the Federal Reserve, Alan Greenspan championed the ruling view that  any sort of regulation is bad, an unnecessary and unwarranted cost for business, that businesses including banks would naturally self-regulate in their own interest and that Wall Street had tamed risk.  A professed libertarian, Greenspan counted among his formative influences the novelist Ayn Rand who portrayed collective power as an evil force set against the enlightened self-interest of individuals.  

Just to summarize a few threads from the NYT article:

• In 1997 Brooksley Born, then head of the Commodity Futures and Trading Commission, a federal agency that regulates options and futures began exploring derivatives regulation – contracts like the now notorious credit default swops.  She was concerned that unfettered opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it”.  Prescient indeed!  However, she ran into fierce and concerted opposition from Greenspan and others who asserted that she didn’t know what she was doing and that too many rules would damage Wall Street, prompting traders to take their business elsewhere.  Despite the fact that the very next year the collapse of the massive hedge fund LTCM vindicated her view and almost caused a systemic crisis, she was sidelined and eventually forced out.
• Greenspan and allies persuaded Congress to repeal the Glass-Steagall Act - a depression era law that had kept commercial and investment banking separate – in effect creating a firebreak – to reduce the systemic risk of a failure in one part of the banking system spreading to the rest.
• As the size and importance of the derivatives market grew, Greenspan repeatedly rebuffed attempts to bring in even minimalist regulation.  For instance, congressman Ed Markey asked the General Accounting Office to study derivative risks as far back as 1992.  The GAO’s subsequent report identified “significant gaps and weaknesses” in derivative regulation.  They saw that the sudden failure of any large US dealers could pose risks to the financial system as a whole.   Despite this Markey’s subsequent bill was never passed.

Although not strictly part of the current financial collapse, the Enron debacle shares root causes and many of the same cast of characters as this posting by Public Citizen shows.  It documents how the Gramms – Senator Phil and wife Wendy – played a central role. 

In 2000 Gramm engineered a provision in a bill that exempted Enron’s energy trading from regulation and disclosure which enabled Enron to manipulate the electricity market, especially in California in such as way as to reap a vast profit immediately after the deregulation took effect – up 400% from the previous year in 2001 Q1.  The cost to Californians was in billions until regulators belatedly moved to restore some order in June 2001.  Subsequent investigations concluded that “power generators and power marketers intentionally withheld electricity, creating artificial shortages in order to increase the cost of power“.

Is it possible that market manipulations are in some way behind the soaring cost in energy in Britain compared with the Continent?  I think it likely.

More recently, in 2004 the SEC agreed to a plea by the big banks (including Goldman Sachs then led by Hank Paulson) to unshackle them from the traditional rules that limited the amount of debt they could take on in relation to their equity.  With little discussion the change was agreed.  This is hubris of the highest order; it flies in the face of all previous experience and was undoubtedly the proximate cause of the credit crunch – the smoking gun.  Its immediate result was to kick start the huge boom in debt that is now collapsing.

Traditionally, banks have been required to keep their capital ratios at around 10:1 yet by the time Bear Stearns collapsed its ratio had risen to 33:1.  The SEC had become aware of “numerous red flags” regarding Bear Stearns activities yet so great was the presumption against regulatory intervention that no action was taken (just as with Northern Rock).  (The significance of this ratio is that the higher it is, the more profitable the bank – provided markets are rising.  However, the risk increases in parallel so that even the slightest market fall can cause the whole house of cards to tumble). 

Moreover, with the development and growth of the hedge funds, governmental and regulatory negligence have allowed the emergence of a shadow banking system completely outside of the formal banking system and its associated regulatory control.  This again defies all historical experience and is now tottering under the weight of its greed and is about to collapse causing immense ‘collateral damage’.

I could go on, but no doubt there will soon be a tidal wave of books documenting the many and various ways in which warnings were dismissed, regulatory interventions stymied and existing regulations sidelined and not enforced.

However, despite all this sad history, I believe it would be wrong to frame this simply as a issue of libertarian vs non-libertarian or some such; to do so would be to throw the baby out with the bathwater.   There are problems with the extreme libertarian position which is why I do not describe myself as such.  Conversely, there are also great merits in a more nuanced semi-libertarian position which is where I place myself on the political spectrum.

I suggest that there are two common errors with the more extreme versions.

Firstly, the tendency to forget that anything involving human beings has to have a pretty huge behavioural element.  It is all very well for Greenspan and others to argue for instance that market participants would act responsibly (an absolutely fundamental part of his belief-system).  Unfortunately, this assumes that everyone involved is some sort of secular saint which is dead wrong.  There are a fair few spiv-bankers out there and the way that capitalism works is that those who make higher profits eat up those making lower profits.  No morals are involved so – absent imposed boundaries – the result is a race to the bottom and indeed that is precisely the term applied to recent events in several recent press reports.

The behavioural dimension is important in another way – the cock-eyed bonus culture in finance.  If people are paid huge amounts on the basis of short-term measures why would they care if the long-term consequence of their deal making is to bankrupt the firm?  They will be long gone when it unravels.  It’s just a twist on the classic Ponzi Scheme.  This problem completely short-circuits the libertarian logic of enlightened self-interest enforcing discipline.  It has been known about for just about ever – but no-one did anything.  (In contrast, note that the libertarian self-regulation meme can work well for self-employed people embedded in their local community, alert to the reputational dimension and thinking long-term for themselves and their families).

Secondly, some libertarian ideas can, with the slightest nudge, morph from being a benign and positive proposal into a cancerous travesty that is nevertheless so close to the original as to escape detection by the media or Parliament.  Dissenters can easily be dismissed as ’special pleading’, ’ill-informed’ etc.  This is just wonderful for powerful corporations who have the lobbying power to do all the nudging they want, especially when their ‘friends’ are in power.

Thus, deregulation – which can certainly be a good thing in many circumstances - can, in other instances, become cover for a power grab as in the Enron case.  I submit that one of the underlying trends that so disfigures contemporary society is the rise of the Corporate State seen in everything from clone towns to soaring energy prices to disenfranchised citizens. (There has to be a better term than ‘Corporate State’ - any suggestions?)  Carnivorous companies can and do see themselves as being above the law, not subject to it.

So I conclude that for liberals everywhere, it’s time to do some pretty serious thinking about the political economy of regulation, competition and consumer protection.  Somewhere in there is a new, exciting and immensely powerful narrative struggling to be free from the wreckage of the neo-liberal view.

Postscript: Since I roughed out most of the above Greenspan has recanted – sort of.  He has admitted that he made a “partially” wrong decision in thinking that relying on banks to use their self-interest would be enough to protect shareholders and their equity.  Hmm – not much ‘”partial” about it!

Regulation: a New Labour pathology

New Labour’s love of regulation and targets as the solution to all known problems has become pathological.

At the start of this month the Early Years Foundation Stage (EYFS) came into force setting out a totally bonkers 69 “learning goals” for under-fives.  The justification from ministers is that it will help to prevent disadvantaged children falling behind educationally though quite how it’s supposed to do this is a mystery since childminders will need to spend more time with their paperwork and less with the kids.  Motivated teachers will be driven away while timeservers and box-tickers will thrive.  In a few years we will be appalled to discover that toddlers are ‘failing’ but, hey, by a stroke of good luck ministers will have the World’s best statistics to document their shortcomings.

Now childminders are usually friends or neighbours – certainly members of the local community – which is surely the perfect context for parents to exercise the educational choice that Labour loves to promote.  The heavy-handed and counter-productive intervention of Whitehall adds nothings but costs a lot.

The explosion of paperwork and regulation is not confined to toddlers.  A police sargeant recently told me that 22 years ago when he joined the force the paperwork arising from an arrest could be done in as little as 20 minutes – or even less if he was about to go off shift.  Now it takes him up to 5 hours.

Similarly with building.  Yesterday I had a local builder round to quote for some minor alterations.  Ill-conceived and poorly-implemented regulation has become a big problem for responsible tradesmen as he told me – some have even been driven out of business.  Yet the cowboys are left to free to prey on the unwary unimpeded by the regulations which of course they ignore.  Another tradesman told me that in his business regulation has become so onerous – and so dead-brain – that in attempting to comply (as he does) his costs are raised to uncompetitive levels driving increased trade to the cowboys.  Insofar as the regulation relates to health and safety this increases overall risk.  Mad!

Meanwhile, over in the City where regulation most certainly is needed ‘light-touch’ regulation (a.k.a. no regulation) has already caused mayhem and is about to cause even worse.   For what the banks discovered a few years ago was that by creative accounting they could wriggle out of the regulatory framework that protects them (and therefore us) from their own foolishness.  The inevitable result: a large part of the City’s activity is now completely unregulated.  And the response of regulators under the political direction of Gordon Brown?  To ignore the problem of course – that is until it blew up.

In short, Labour’s strategy owes much to Parkinson’s Law of Triviality and two conclusions stand out.

Firstly, if Nick Clegg is serious about saving £20bn as reported then he should aim for some pretty heavy-duty pruning in Whitehall and make a bonfire of the regulatory clippings.  Those in the Lib Dems worried that spending cuts might mean service cuts should not worry.  They are more likely to lead to increases in funds for services (or for handing back to taxpayers or whatever) and will certainly lead to improved efficiency in the real world outside of Whitehall.

Secondly, this is an agenda that plays straight to traditional liberal values – power to the people, small government, hands off where ever possible and so on.  So why aren’t we making more of it as a theme?

Needed: better regulation

For as far back as my political memory goes ‘regulation’ has been a dirty word.  Of course, this hasn’t stopped politicians reaching for new regulations and regulators at every opportunity (would it be too cynical to say in response to every tabloid headline?)   

Unfortunately the QUALITY of regulation is not matched by the QUANTITY and as a direct result the government has problems at every turn.

First to blow was Equitable Life on which the Parliamentary Ombudsman has just reported.  As Paul Braithwaite of the Equitable Members Action Group (EMAG) put it:

The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors.

Quite reasonably they want some of their money back.

This is hardly small beer, but only a curtain-raiser for the credit crunch that broke open last summer.   This is the direct result of the fact that for many years major banks were operating what amounts to a Ponzi Scheme - a fraud involving paying abnormally high ‘profits’ to investors out of the money paid in by later investors rather than from any underlying real business profit.  Needless to say the regulators are supposed to stop this sort of thing but appear to have been too busy checking the petty cash to notice what was going on leaving the banks free to devise cunning ways to wriggle free of any regulation so that much – in some cases most – of their business escaped the regulators.   Inevitably this has ended in tears; we are all poorer as a result and will be living with the consequences for years to come.

Then just yesterday the BBC carried this story reporting that the lack of certainty over the value of university degrees is “descending into farce”.   This involves far less money but is perhaps the most serious of all for it strikes directly at the life chances of a generation.  All of us, students, taxpayers and employers alike, should be able to rely on the fact that a British degree means what it says on the tin.  Anything else is tantamount to fraud.

So what conclusions do I draw?  Simply this; we need good regulation for the safe and efficient functioning of the the complex world we live in.  But not too much or quantity will drown out quality.

Brown’s Tax Illusion

I’ve just heard Shadow Chancellor, George Osbourne, claiming on Radio 4’s The World at One” that Britain now has the longest tax code in the developed world – a claim that I’ve no reason to doubt.

In a sense this merely serves to confirm what we already knew – that Brown is a ‘fiddler’ whose vision (although this is hardly the right word) is to sneak in a little stealth tax here or tweak some tax incentive there, all as part of his plan to work towards his socialist nirvana where everything is ‘controlled’ and everything is ‘fair’.

There’s just one small problem.  It isn’t working because it’s not capable of working.

For one thing it’s not fair: a vastly complicated tax code makes that quite impossible.  The only people who benefit are the super-rich who can afford high-powered tax advice and the tax experts who provide it.  Ordinary mortals are left out in the cold unable to utilize the loopholes that the rich can. 

For another thing it’s expensive:  it is equivalent to out-of-control overheads in the context of a commercial company.  And what’s the first thing a company in trouble has to do?  Cut overheads of course.

And finally it generates the illusion of economic progress and a growing GDP as all those expensive tax advisors work away but it doesn’t actually generate wealth.  Quite the opposite in fact as resources – both human and financial – are diverted from productive uses into an arms race with HMRC. 

Bring on flat tax (or at least a reasonable approximation to it).  It is fairer, costs less, and doesn’t divert resources from proper uses.

 

 

 

 

Not such Good Value

We all know that British supermarkets are highly competitive and give outstanding value for money.  And how do we know?  We know because they told us so.

 

If you smell a rat you are right.

 

What we actually have are 4 near-identikit firms who maintain an illusion of competition but actually have no real interest in duffing each other up and every interest in maintaining a system that suits them just fine.  What they actually do is to use their size and power to roll over and squelch any upstart competition that emerges so ensuring that real competition is minimised and that they are left with free reign to beat up their suppliers and achieve ever greater margins.

 

As Cheshire dairy farmer Ray Brown told the BBC:

 

“If you [the farmer] are lucky you get 26-27 pence per litre, it’s the same price as we were getting 11 years ago.

 

“Supermarkets have a big score to settle there. The consumer then was paying 40 pence per litre, currently they are paying 57-58 pence.”

 

He’s absolutely right.  This means that consumers are being overcharged by a minimum 45% by the supposedly ‘competitive’ supermarkets (and that’s only using the reference point of 11 years ago).  Could there be any clearer evidence of market failure?  Could there be any clearer justification for a strong anti-monopoly response from Govt?

 

I think hard-pressed families (and farmers!) deserve some answers and some action.

 

In this context the publication yesterday of the latest investigation by the Competition Commission is yet another depressing example of the utter uselessness of the established system of regulation (see also Northern Rock etc).   Predictably, and in line with established form, the results will not worry the supermarkets.  Not that they actually wrote it as such but they do seem (as David Boyle suggested recently in this excellent piece on monopoly) to have successfully framed the issues in ways that play right into their hands.  It’s appears that in the rose-tinted World of the Competition Commission the supermarkets are basically virtuous and hence deserving of all possible support—which they are naturally pleased to give with just the lightest possible rap on the knuckles.

 

For instance a principle plank of the CC’s proposals is that planning applications for new stores or store extensions should be made subject to a ‘competition test’.  At first this seems reasonable until you stop to think that using Planning to address a Competition issue is basically barmy.  Moreover, it does nothing to address established local abuses—for instance Tescopoly reports that Tesco is the dominant retailer in 67% of postcode areas and has a greater than 50% market share in 5 areas.  (In contrast note that the CC had earlier concluded that over market shares of over 8% lead to abuse).

 

Another main plank of the CC’s proposals is that a supermarket ombudsman be appointed to oversee and where necessary enforce a stronger code of practice for dealing with suppliers.  Predictably the supermarkets are engaging in heavy breathing and talking ominously of costs of “hundreds of millions … which could be passed on to the consumer”.  To say this is a bit rich in view of their soaring margins on for instance milk is an understatement.

 

Actually, I too am opposed to the idea of a revised code of practice but for a very different reason.  It’s an administrative solution for a problem that requires a market solution and as such it simply won’t work for its intended purpose—although it might well provide lots of new civil service jobs!

 

David Boyle is absolutely right—Lib Dems should make this issue their own.

No Moral Compass

One of the curious features of the sub-prime crisis is why no-one in authority seems to have spotted what was going on and stopped it before it got out of hand.   After all, it doesn’t take a financial genius to realize that something is wrong when loans are made with complete disregard for ability to pay – hence the description of some borrowers as “NINJAs” (No Income, No Job, No Assets) – coupled with widespread evidence of predatory lending practices ranging from gross misrepresentation to illegal kickbacks.

Whether the primary motivation is consumer protection or regulating the financial system the answer has to be the same: this is dangerous, possibly even criminal.

Now it turns out in an article written by Eliot Spitzer shortly before the events that cost him his job as Governor of New York State that the growing sub-prime scandal was spotted in good time.  In fact the authorities in all 50 states took action to curb predatory lending ranging from litigation to legislation but unbelievably were prevented from doing anything by the Bush Administration.

Indeed the Bush Administration went so far as to promulgate new rules based on old legislation enacted for an entirely different purpose to prevent states enforcing their own existing consumer protection against national banks despite determined opposition from state authorities.

In the final analysis government must be a deeply moral activity; amongst other things, it must protect the weak and not allow itself to become a tool of the rich and powerful.  Without a moral compass it will loose whatever mandate it might have started with AND will also screw things up for everyone – including the rich and powerful.

Underwriting Greed

Some industries (air travel or motor manufacturing to name but two) are intensely competitive – it’s in their DNA so to speak.  Others, like most of the formerly state-owned monopolies that have been privatized over the years, operate in markets where there is little or no competition and monopoly is the rule.  So, from Thatcher onwards, successive governments have invented a whole raft of regulators to represent the public interest and substitute for the discipline of competition when these firms were privatized.

Sadly, it is abundantly clear that this strategy has failed, that regulators have suffered regulatory capture and that the new private operators are up to their collective necks neck in rent seeking from a long-suffering public.

BAA was privatized in 1987 and since then there has been growing dismay among airlines about its poor service and lack of customer focus which continued after it was acquired by Spanish group Ferrovial in 2006 for £10 billion of which a whopping £9 bn was debt – apparently with the intention of refinancing the deal once the new Terminal Five was completed.  Unfortunately for Ferrovial life is full of uncertainties – in this case extra security measures have raised costs and the credit crunch has put paid to hopes of a refinancing on advantageous terms.

 Also infrastructure costs are proving problematic. As the BAA website rather plaintively puts it:

“BAA believes, however, the Review does not recognise sufficiently: the scale of the task we are embarked on; the pressures of handling such large infrastructure projects; the full cost of the increased security requirements; as well as the impact of the credit market turmoil.”   

Are we really to believe that when Ferrovial acquired BAA they didn’t notice the half-completed Terminal Five or the dilapidated and under-invested state of some of the other assets?  It must have been quite a shock to the poor dears to find out! 

Fortunately for Ferrovial shareholders all is not lost.  The Civil Aviation Authority (CAA) has, like the proverbial US Cavalry, come galloping to the rescue with a bail-out at public expense and BAA is to be allowed to raise charges by 23.5% at Heathrow and 21% at Gatwick.  Ferrovial will make a killing at our expense as much of this increase will inevitably filter down into ticket prices.

This is scandalous in every way.  Firstly, there is the little matter of moral hazard - that individuals and businesses  should take the rap for their own miscalculations.  Secondly, there is the cost to the public; multiply this around the economy and it soon adds up.  Thirdly, there’s what it tells us about running a business in Britain today; don’t bother with research and development or making widgets or whatever – the really juicy returns are to successful lobbying and getting the rules rewritten to order.

Labour may talk the language of commerce but they really don’t understand it.