Sunday, 7 March 2010


Sunday, 7th March 2010

Bring on the serious economic debate

Why does Britain fall for financial spin so often? The question goes well beyond the great confidence trick of Gordon Brown's ten years in the Treasury. I'm just back from three weeks in Australia. What’s always struck me in the years I’ve gone there is how different the newspapers/news shows/political debates are. They are well informed about macro-economics, and there is much less of the spin/personality culture of the mainstream media in the UK.

Canada is exactly the same. Last week, the Canadian budget was published – a very clear and credible path to getting budget back to balance within three years. One of their officials explained to me that the government felt that there was simply no way the Canadian electorate would vote back in a government that had run up lots of debt.

How did two countries, so socially similar to the UK and with the same monarch, end up with such different political cultures?

The answer lies in late 80s/early 90s – both  Canada and Australia got into big fiscal trouble, and the penny dropped with the electorate at large that government financial problems spell lower living standards for all. The spectacular election in  Canada in 1993 was the most clear example of the electorate imposing order. Since then, politics has become a much more informed electoral debate about how the government makes the numbers add up – allowing the more serious (that is to say, more Redwood, Darling or Cable style politicians) to thrive.

I think the UK is now in the process of making that transition. Why? Because we're all starting to realise the price of Brown and the bankers’ hubris – having been told for ten years by a fawning media that, somehow, ever greater debt was simply genius at work and there was nothing to ever worry about.

The public will mistrust the MSM as well as politicians, and both will have to respond. Those MPs who do get this will be those who are likely to emerge in leadership positions over next few years. Financial literacy has not been at a premium in Britain since Black Wednesday, and you can argue that we have all paid the price for that. The terrible disaster to hit Iceland should serve as a reminder that common sense and simple questions have a crucial role to play in politics and economic management.

A sign of the transition in the political culture that I speak about is in this superb piece by Janice Turner yesterday in The Times. Expect much more of this over the coming years.

Filed under: Alistair Darling (94 more articles) , Australia (10 more articles) , Canada (11 more articles) , Debt (31 more articles) , Economy (123 more articles) , Finance (28 more articles) , John Redwood (5 more articles) , Public finances (200 more articles) , UK politics (1161 more articles) , Vince Cable (23 more articles)


From The Times
March 6, 2010

Don’t be a money muggle. You can’t afford it

In Iceland and in England, the financial wizards are banking on our ignorance. We must break their spell

Janice Turner

In Reykjavik the air was minus 3C; inside the “hot pot”, the water a bum-boiling 42C. Postponing the chilly skitter to the changing rooms, I got talking to the woman beside me, and, as always on this holiday, couldn’t resist asking how she was finding, y’know, the global financial meltdown.

Call me an economic rubbernecker — or just a hack — but while I’d always longed to visit Iceland because it is the planet’s geology pop-up book and unlikely nexus of cool, I’d come ultimately because it was bankrupt. What does a wrecked Western economy look like? I had to see. Would there be dereliction, panic, seething unrest, like the demonstrations outside the country’s parliament building a year back when Icelanders pelted ministers with skyrr (the excellent native yoghurt)?

None of that now. Enormo 4x4s glide through the city; we queue for the nicer restaurants; people are well-clad and seem purposeful, not desperate. Then my husband went into a bank to withdraw € 400 to pay our landlady. “Is it for an Icelander?” asked the cashier, like some Soviet functionary. “Why does she want euros?” He was forced to take krona instead. And you realise, whatever the appearance of getting by, these people are no longer free, but tethered by their withered currency to their black, volcanic moonbase.

At the swimming pool, however, my neighbour was sanguine. “Oh, I’ve stopped reading the papers,” she said when I asked about the Icesave referendum, in which this weekend her nation will vote on whether to repay British savers fleeced by Icelandic bankers. “We were all so upset at the time [August 2008]; people thought they’d lost everything. But we’ve got a bit bored with it now, and, well, life goes on. There will always be . . .” — she gestured at the steaming water and laughed — “. . . hot pots!”

Britons and Icelanders are supposedly locked in mortal conflict. They hate us, we’re told, for misusing anti-terrorism legislation to freeze their assets when Landsbanki crashed, and because we are a big brute nation imposing punitive interest rates on debts owed by a population the size of York/Croydon/Basingstoke (insert comedically provincial place here). Except that I enjoyed nothing but hospitality and kindness, and anyway, rather than being enemies, we are bound by a similar fate.

Both our countries are lingering in an eery stasis, waiting for the bad to happen. When it comes, what it will bring, we are not yet sure. Icelanders won’t know even after this referendum what level of personal privation their national debts will entail. Meanwhile, Britons tread water, being told this deficit reduction business will be grim, but not how grim since our political leaders won’t muster the guts to provide details until safely elected.

In waiting we have lost focus, forgotten the cause of the crisis and, since anger is exhausting to sustain, grown tired of flinging yoghurt. In Iceland, the alternative press quips that the nation could return to solvency by growing high-grade skunk in its geothermal greenhouses. And despite scary levels of negative equity on their mostly spanking new flats, Icelanders shopped ferociously this Christmas. And so while the citizens they ruined are smoking or spending or joking, the Icelandic venture capitalists who deliberately targeted the savings of ordinary British families through Icesave are still not in jail. Here in Britain we have grown more prone to rage when MPs get an extra £1,000 a year than when our busted state bank RBS awards itself bonuses totalling £1 billion.

At root, the problem is our own financial illiteracy. I speak for myself here, and for every other business-page-binning fool who thinks it cool, arty and kinda classy to say you don’t “get” money. Because how can we take to task the bankers when, like muggles oblivious to the workings of the wizard world, we can’t even comprehend what they do?

A friend of mine, a smart, well-educated woman, invested in Icesave. Well, why not, since it gave 5.2 per cent interest and beat all the other deals on those online best-buy lists? Yet she had no inkling of the first principle of finance — interest is higher because risk is greater. And neither did I. But I do now.

I’ve just read a remarkable book, Whoops! by John Lanchester, that in elegant phrases and witty analogies, explains the crisis to the economically dyslexic in a way that actually sticks. So, to my amazement, I finally grasp stuff such as leverage, credit default swaps, derivatives and am angry with my ditsy former self who dismissed these as the domain of the boring City types you get lumbered with at parties.

Now I have a hunger to understand more; to my amazement, I am casting aside Heat magazine and reaching for The Economist. And I am not the only one to whom it has dawned too late that we are living in serious times and that it is our duty to understand. Lanchester’s book is high up in Amazon rankings, and when I saw David Hare’s new play The Power of Yes — principally, a two-hour, no-interval economics lecture — there was an intense, studied silence. The audience was packed with liberal, middle-class people who, like Hare himself, would not dream of failing to grasp the political dimensions of a war or a foreign calamity, yet who let the bankers run amok because they regarded their trade as somehow beyond and beneath them.

Strangely, what I have learnt from my baby steps into financial waters is — aha! — I was right all along. My instincts, my natural suspicion of something for nothing, meant that I’d have spotted this would all go tits-up. Dubai’s new money always looked funny to me, as did Ireland’s. I was long concerned about young people maxing out credit cards; indeed, when invited to Downing Street three years ago, I ranted about personal debt to a startled Gordon Brown.

So we econo-idiots, those of us who have to ask someone every Budget day to “explain interest rates to me again”, should not give up. In Iceland and Britain, nothing has changed yet. This is too serious a time to disengage. We must learn and use knowledge to stoke our anger. The wizards are counting on our ennui: they plan to fly away before we disarm their spells.

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YOUR COMMENTS

5 Comments

(Displaying 1-5)

George Shepherd wrote:
What these guys did is not banking. Banking is the taking of deposits, the lending of money and the transmission of money. The traders (that's what they were) gambled the deposits from (their) banks and hoped the asset bubble would not burst. The senior management were not bankers - those in RBS were traders as well - in a different way - they bought banks - the last being ABN Amro - vastly overpriced - with borrowed funds. They made the most elementary mistake that any true banker could have seen. THEY were NOT bankers! They were something else!
March 6, 2010 10:55 PM GMT
Graham Rehling wrote:
It's simple enough really. We trust the bankers with our money and they fail to resist the temptation to nick some of it.
March 6, 2010 7:55 PM GMT
Dodo Broad wrote:
People are confused because what they call banking in this country is not banking. Bankers dont get paid for losing money. But here, the more you lose, the bigger your paycheck. That is not banking

Posted by Britannia Radio at 20:48