EU ministers turn to jellyfish, as they put back fishing recovery
Do you remember Erich von Däniken? He was that guy who tried to persuade us the statues on Easter Island were made by men from outer space. The truth was altogether more alarming.
The indigenous population of that island followed a religion that required the erection of statues. To transport the stone the statues were made from, wood was required. Quite fortuitous, really, because the island was awash with trees, a veritable forest in the South Pacific.
The snag was, each tribe on the island tried to outdo the other, building ever-bigger statues. Presumably, the island had its own answer to Greenpeace, and some "heretics," warned that the building craze could not last, and yet, even when there was just one tree left, it was knocked down. The end result was, of course, disaster, and the island population imploded.
It's a lesson we should learn, but have we?
No doubt you know the oceans of this “blue planet" are running low on fish. If the global economy was represented by a balance sheet, rather than just by the P&L the IMF and OECD calculate, then it would show sharp falls in capital stock.
Okay, whether you believe we are running out of oil is open to debate, but there can be no doubt that the fish stock is diminishing fast, and no doubt, every year, if it produced balance sheets, the IMF would be announcing more massive write-downs.
But yesterday, the European Union fisheries ministers agreed to allow EU fisherman to catch more fish next year.
Now, a politician who worries about the long-term might be like a fish out of water – but this really does seem to be a horrendous case of short-termism.
But fret not; apparently, fishermen are going to follow "responsible" fishing practice, and follow a voluntary code, which, by the way, carries a financial incentive, of avoiding areas where cod is spawning, and to use fishing gear that is more appropriate.
Part of the problem lies with disgruntled fishermen in Poland, who had been ignoring bans and fishing in the Baltic anyway.
The real tragedy, though, is there had been promising signs, with indicators that the population of young cod has been rising – below the long-term average, of course, but up.
By taking this step, EU ministers have taken a quite appalling short-term measure that will go down in history as a moment of shame.
The economy is howling, but where is the silver bullet?
There is one good thing about the plan hatched by central banks last week to save the financial system from a downward spiralling crisis. The banks who will benefit from the plan, banks such as…well that's just it. We don’t know who the banks are. Shhhh, it’s a secret.
When the Bank of England tried to pump money into the system during the autumn, the UK’s banks took one look at the money they were being offered, and said, “Thank you very much Mr Banker, but no deal.”
It wasn’t that they didn’t want the money. It wasn’t even that they weren’t prepared to pay the extra interest payments the central bank was charging. No, the problem was this: they didn’t want to admit they wanted the money in the full glare of the media’s spotlight. Why was that? Well, perhaps they were worried the Bank of England, when dishing out the readies, would say something like, "don’t panic, the bank we are lending to is solvent."
Yesterday, the Fed unleashed the hounds of promise, or dollars as they are also called. $20 billion of them found their way onto the markets. And in the UK, the LIBOR rate, that’s the interest rate determined by markets, and which we hear so much about these days, fell. At around 6.4 per cent, down from 6.6 per cent, it's still way above the official bank rate of 5.5 per cent, but at least it's moving in the right direction. It doesn’t really matter if it takes a week or even two weeks for the money markets to find a level more conducive to the flow of money, as long as they get there eventually.
Today, the Bank of England, ECB and Swiss National Bank will be doing their bit, with the UK’s central bank dishing out £10 billion.
Will the central banks' plan do the trick? Or will interbank rates start moving back up again after a few days?
It depends on whether you think this whole crisis is just about confidence, about a simple misunderstanding between banks who are not sure who they can safely lend money to when, in fact, all is fine, or whether the problems really are deeper than that.
The bottom line is that the financial crisis has been caused by excess lending. That clever little wheeze called Collateralized Debt Obligations, seemed like such a good idea. You make a risky loan, but reduce your own exposure by slicing the loan into chunks and selling it on.
That’s fine if it’s a one-off. If there is, say, a one-in-ten chance the loan will go bad, and you sell it on to, say, nine more companies, each with a similar stake in the loan as you, then if the loan goes bad you are only going to take a hit equating to 1 per cent of the total.
But supposing those nice little odds persuade you to make more loans; supposing you also buy chunks of loans off others too. Supposing that for every £1 you lend and split up into say 10p chunks, you buy nine 10p chunks from other banks. Then, if failure occurs across the board, your total hit is just as bad as it would have been if you had sold the loans on.
The danger is that the option to provide CDOs, lulled you into a false sense of security, encouraging you to make loans you wouldn’t have otherwise considered.
If the current crisis is simply down to lack of confidence based on ignorance, then the move from the central banks will help.
But if the problem is deeper than that, then the only silver bullet that can possibly come to aid, is the natural business cycle.
The recent levels of surging lending can really only be justified if you take into account rising productivity levels. In the UK, our productivity improvements still lag behind our main competitors, and that is the problem that really needs fixing.
Analysts, commentators and economists, can call out for central banks to slash interest rates, they can plea with the government to do more to help, they can even howl at the moon if they want, but unless the underlying problem is fixed, any other action taken will be little more effective than firing a spitwad at a major battle tank.
The shoe's on the other foot now, banks look towards the government for help
Not so long ago the government’s critics lined up to slam a new tax before it had even been announced. When Gordon was chancellor it was suggested he planned a windfall tax on our banks – British banks, the custodians of our wealth – banks which stand central to the UK’s success story; banks, the wealth creators of Britain.
Of course, not everyone likes banks. Do you remember that ad back in the 1980s for Barclays. The ad was filmed with a Bladerunner type backdrop, with the central character saying “I just to want to talk to someone.” It’s all quite ironic, because twenty years on banks really do remind one of that very situation. If you ring your bank these days you are quite lucky if you manage to get past a computer.
So the idea then of taxing banks has a lot of grassroots support – it's just that this government likes to be portrayed as the government of business. To tax banks any more is tantamount so saying "we don’t care about business," or so they say. It was also argued that a wind fall tax on banks would be a short-termist thing – it would bring money into the exchequer but the loss of jobs overseas that would inevitably follow would mean the government was in effect shooting itself in the foot.
But then, isn't that short-termist argument a little rich. Isn't the banks' preoccupation with the short-term the very thing that created the current credit crisis?
Be under no illusion, the current financial crisis is very serious. If the credit crunch continues much longer, if next year it really is much harder for buy-to-let investors to to obtain mortgages, if the 1.4 million people coming off fixed mortgages in 2008 really do struggle to find affordable replacement mortgages, and above all, if people who are struggling to pay off debt find they are no longer able to top up their mortgage, then it seems unlikely the UK housing market can avoid a crash, and it seems unlikely the UK will be able to avoid recession.
In the US, the land of the free and arch-exponents of capitalism, it has fallen to the government to try and bail out the economy with its plan to extend the life of teaser rates on some subprime mortgages.
As for the UK, this weekend, the FT reported that Michael Coogan, director general of the Council of Mortgage Lenders wants the government to provide money to help those who could be in danger of falling off the housing ladder next year.
You may recall from the early 1990s, repossession levels soared, creating a new supply of cut-price properties, exacerbating the housing crisis of that era.
On a micro scale it may make sense for a bank to repossess a property if a lender is behind with payments, but if applied across the land at a time of rising debt default, such an approach can make the situation much worse, with bank profits falling as a result.
And so it seems, that both here in the UK and in the US, it’s down to the government to try and stop recession by providing support to troubled borrowers.
At the same time, tax payers see their exposure to Northern Rock approach £30 billion.
Right now it seems that actually the government should have taxed banks more heavily in recent years, when times were good, providing the funding for the rescue plan the UK now needs.
Time and time again banks have proven to be unreliable custodians of our wealth – maybe it’s time the government chose to protect the banks from themselves, and tax them in the good times so that there is a lifeboat for them and us when their exuberance proves to have been irrational.