The Great Debate UK
Robert Jenkins is a member of the Financial Policy Committee of the Bank of England. He writes in a private capacity and the opinions expressed are his own.
Give an artillery commander the wrong target and the result is likely to be collateral damage. Give regiments of global bankers the wrong target and we should not be surprised by a similar outcome. This is what investors and board directors have done. Many bankers lapped it up. The result: considerable western wreckage. Let me explain.
Banks target Return on Equity (RoE). Sell side analysts track it. Many investors have encouraged it. Has the quest for high RoE produced it? No. Have such targets produced attractive shareholder returns? No. Why? Because those concerned did not adjust for risk. Why did some bankers not adjust for risk? Three possibilities: 1) they did not understand the risks they were taking; 2) they understood the risks but prudence was not in their personal interests; or 3) Investors egged them on. Why did investors not adjust for risk? Actually, many did, witness the fact that in the two years preceding the crisis the bank share index sharply underperformed the broader market. Still, the investment community writ large happily held on to such shares. Why did these investors underestimate the risks? Three possibilities: 1) they did not understand the risks banks were taking; 2) they listened to sell side analysts who did not adjust for risk; or 3) they thought they would enjoy the ride while the music was still playing and be smart enough to exit before it stopped. There are other unworthy explanations. Top of the list is that markets assumed that bank debt, bank deposits and in effect banks themselves were guaranteed by the government.
What a difference a few years make. The banking share sector has produced much volatility and little return. Measured from the mid-90’s the bank sector has underperformed utilities. For the longer term investor, many bank share investments have proved the equivalent of capital contributions to not-for-profit companies employing exceedingly well paid staff. Why? Because now investors are adjusting for risk. For what risks are they adjusting? 1) the risk that bank management do not understand their risks; 2) the risk that governments will not or cannot guarantee banks; 3) the risk that bankers and regulators now understand these risks sufficiently well as to require equity capital in quantities sufficient to support risk-taking.
The world population has officially reached seven billion, according to the UN. This historic landmark reminds us of the massive challenges, including here in Europe, created by an ever-increasing number of humans on the planet.
Growing populations are also driving another mega trend — urbanisation through migration. In 1800, less than 3 percent of the population lived in cities (mainly in Europe), yet by the end of 2008, this had risen to more than 50 percent (much higher still in Europe), and there were 26 megacities (cities of 10 million or more inhabitants), including Moscow, Paris and London.
from Africa News blog:
The biggest story in Africa south of the Sahara over the past few years hasn’t been plague, famine or war but the emergence of the world’s poorest continent as one of its fastest growing – thanks to factors that include fresh investment, economic reform, the spread of new technology, higher prices for commodity exports and generally greater political stability.
from The Great Debate:
By Gordon Brown
The views expressed are his own.
Next week's 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.
Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal -- and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos -- and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports -- a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”
An E.U. protest vote by members of his own party has knocked the UK prime minister. For the moment, the Conservative party rebellion is largely symbolic.
Michael Gove trying to laugh off Monday’s rebellion by 81 backbenchers sounds like a United supporter arguing that 6-1 was more or less a draw. For all the excuses, he can’t hide the fact that the government’s position is full of contradictions.
On the one hand, the PM has added his voice to the chorus calling for the euro zone to turn itself into a monetary-and-fiscal union, a proposal which certainly goes with the grain of the crisis. The idea has the support of the Americans and would probably be warmly welcomed in Asia too. In fact, it has great appeal everywhere except in the euro zone itself, where the main protagonists themselves have got a severe attack of cold feet.
By Kathleen Brooks. The opinions expressed are her own. Nicolas Sarkozy, the French President, has put UK membership of the EU centre stage. His spat last weekend with Prime Minister David Cameron at the EU summit was captured by the global media. In no uncertain terms, he said that the UK hated the euro and should mind its own business. Cue a rebellion from Conservative backbenchers who scheduled and then lost a parliamentary vote this week on whether or not to hold a referendum on our membership in Europe. This faction may not be getting what it wants right now, but its voice is getting louder. More than 80 Conservative MP’s defied the wishes of their leader (some at the risk of losing their jobs) and voted for the referendum after Tory backbencher David Nuttall proposed the motion because of an e-petition backed by more than 100,000 people. As the euro zone tries to fight for survival and re-write the rule book is now the time for the UK to contemplate its EU membership? Obviously for those Tory back benchers it is. But while David Cameron may call himself an “EU pragmatist”, the evidence suggests that the majority of people in the UK are “European Agnostics” – they don’t care if we are in Europe or not. In a recent poll by Angus Reid 49 percent of people in the UK said they want us to leave the EU. This compares with 60 percent of Conservative Party members, according to a recent poll by Conservative Home. So the rebellious Tories don’t really represent the majority view, and, with a very large margin of error, roughly half the population want us to stay in the euro zone, or couldn’t care either way. I suspect the latter is true. Most people have enough politics in their lives with the 24-hour news cycle and a general election every five years. The EU, with its myriad rules and regulations and multiple branches of power, is enough to drive most people dizzy. I don’t know anyone – not even European politics majors – who can say that they fully understand how the euro zone works. Thus, the way the EU impacts our lives may come as a surprise to some. Did you know that EU law takes precedence over UK law and that some UK laws are actually illegal according to the EU statute books? The EU is a huge influence in our lives, but why are people not that interested in whether we stay or we go? One answer is that we never voted to be in the EU in the first place. We joined the EU in 1973, before most people under 40 were even born. Thus, a huge cohort of the UK has never known life without EU membership. Added to this, a lot of the things we come into most contact with in our daily lives are actually controlled by the UK, for example public expenditure including social security, health and pensions. But the EU determines a huge amount that can influence the prosperity of this nation including our trade laws, rules on financial sector regulation and even some macroeconomic policy. And then there are the costs of our membership, which tends to grab the headlines once every couple of years. The UK’s contribution to the EU Budget topped £6.4 billion in 2009/10, this expanded to £7.9 billion in 2010/11, when the UK was recovering from the worst recession since the 1930’s. Added to this, the UK now receives a trimmed down rebate from Europe. This rebate was negotiated by Margaret Thatcher in 1984, but was altered under Tony Blair’s leadership, which saw the rebate cut in return for a review of EU subsidies and the hopes of a smaller Budget. Those were sweet dreams: the EU’s budget continues to rise on cue each year. So what are the benefits of EU membership? Some may say not much, when you look at it from a cost-return basis, however that view is missing the point. EU membership allows the free movement of labour both to and from our shores as well as easy access to trade in the region; this is important since our European neighbours are our largest trading partners. The free movement of labour can be a controversial topic, however it has not only boosted the demographics of this country, but it has also had many cultural benefits. Perhaps the most important reason for our membership is prestige. The euro zone is the largest economy in the world, the UK is sixth largest but we are being chased for that spot by some fast-growing emerging market economies. Thus, our relationship with Europe helps to keep us at the forefront of the world stage. It also allows us to have a say over how to solve major global problems like the European sovereign debt crisis. The Tories may not have won their referendum this time, but our membership of the EU is likely to come under greater scrutiny as Europe’s short-comings continue to grip the headlines. But the fact is that our relationship with Europe is of the love-hate variety and it is likely to drag on for some time yet. Image — Colin Hingston from Southampton stands with other anti-European Union demonstrators as they wait to go into The Houses of Parliament in London October 24, 2011. REUTERS/Suzanne Plunkett
from The Great Debate:
By Michael Ignatieff
The views expressed are his own.
We like to think we made it happen. First in Kosovo, now in Libya, we believe our air power made it happen. Western politicians are taking the credit, but the truth is, we didn’t make it happen, any more than we made the Arab Spring happen and the air operation itself would never have been approved at the UN without the green light from the Arab League. The people of Libya, the peoples of the Middle East made it happen. We all need to understand how little of this is about us. Otherwise we risk succumbing to the illusion that we can shape the future in the Middle East.
The power we exercised in the sky gives us little control over what happens next. This is not just because we don’t have boots on the ground. Even when we did in the Balkans, we never controlled the way events rolled out after the air campaign was over. The people of the Balkans wrote their own history after the intervention and the people of the Middle East will do the same.
The threshold for publishing gruesome images like those of Muammar Gaddafi's death is falling as the internet and social media make many of the editorial decisions that used to be left to a small group of professional journalists. The shaky video footage of Gaddafi's last moments was such a dramatic end to Libya's months-long struggle against its former dictator that many television stations around the world rushed to broadcast much of what they received.
from The Great Debate:
By Gordon Brown
The views expressed are his own.
It was said of European monarchs of a century ago that they learned nothing and forgot nothing. For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the 2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive -- around 2 trillion euro -- finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.
For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent. And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.