The Great Debate UK

Why I have to sleep with the enemy

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own. -

A week or two ago, I posted a blog bemoaning the size of Britain’s public sector and expressing the fervent hope that the ill wind of the financial crisis would blow much of it away, leaving room for private industry to expand in its place.

In response, I received a number of mildly wounding (but fair) comments pointing to the fact that, as I myself work in the public sector, I was perhaps in a false position.

Now I could offer a defence along the lines that, when I started work, the City was a club which was closed to youngsters without money or contacts, that I have spent a few years in the private sector, albeit some years back, and that even now my main occupation involves teaching students, mostly from East or South Asia, who are almost without exception paying their own fees, which makes me a one-man export industry. I also keep the wolf from the door with the help of a little freelance consultancy and some book royalties.

However, instead of an apologia pro mea vita, I want to offer myself as an example of how corrupting government spending can be – or could be if I followed the advice to refrain from biting the hand that feeds me. After all, this view amounts to me being told to show my gratitude to my benefactor, HMG.

The lesson for politicians is clear. If the government of the day can buy my support (and presumably my vote) by the simple expedient of giving me a job, the way to retain power is obvious:  buy a majority.  Tax people so as to pay their wages. Every job “created” in this fashion is another household partly or totally indebted to you for its standard of living, and – more importantly – ready to vote against any party that dares to threaten it. No wonder the percentage of the labour force employed in the public sector keeps rising inexorably!

It’s time to call the bankers’ bluff

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -

I have just reread the blog I wrote for this column last September. A year has gone by, and neither the title – “It’s All Over: the Banks Have Won” – nor the rest of it seem out of date. In fact, last weekend’s Basel III deal looks very much like the final surrender by the authorities.

It is not simply a matter of the feebleness of the reserve requirements and the ease with which they will be emasculated by arbitrage, nor the fact that the regulators have given the banks a few years to satisfy them – “Please Lord, make us prudent…..but not yet”.

Rather, it is the way the banks have so easily fought off any attempt at more radical reform, and in particular their success in silencing the calls to enforce a separation of retail from investment banking and to break up the biggest groups into units which are no longer Too Big To Fail.

Quite the opposite in fact: there seems to be no sense of urgency about undoing the forced mergers we saw in the darkest days of 2008, so that banking in the United States and Britain is actually more concentrated today than it was before the crisis.

There is no secret about how this situation has arisen. As I said earlier, the authorities have given in because the banks are holding a gun to the head of the economy, with the threat: “one false move and the borrowers get it”.

Waiting for the other shoe to drop

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice. -

The unemployed and the terminal insomniacs who have nothing better to do than read my blogs will know that I have long been gloomy about most of the Western economies. How can you fail to be pessimistic when the world economy is still dominated by the U.S. – a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?

Now house prices are plunging again and, with the dollar still strong, the prospects for an export-led recovery look bleak. In fact, a return to recession is far more likely, and the markets are starting to show signs of that sickening here-we-go-again feeling.

How will it all end?

Anyone who claims to know how this will all play out is on no account to be trusted, but there’s nothing wrong with trying to guess – in fact, that’s exactly what we have to do before we can decide what assets to invest in, or whether to invest at all rather than simply blowing it all on a long bankruptcy binge.

So here goes. I start from the observation that the bond and currency markets, in their infinite lack of wisdom, seem to have divided the whole membership of the United Nations into two classes, high-risk countries and low- (or no-) risk countries.

Not much stress, not much test

-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Back in the 1950’s, when most women stayed at home while their menfolk went out to work, a favourite trick of life insurance salesmen was to walk into the prospect’s home at dinner time and ask the wife:

“Mrs Smith, have you ever thought what would happen if your husband keeled over and had a heart attack right now?”

Imagine the effect of this question on the poor guy sitting there eating his meat and two veg. It must often have been enough to make him choke on his roast potato there and then – maybe even die on the spot.

Not being in the business of selling life insurance, the European bank regulators were unwilling to take any chances with the client’s cardio-vascular system, so they have restricted themselves to asking the question:

“What would happen if the client had the flu and needed a couple of weeks off work?”

EU stress tests: for banks or governments?

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.

Second, there are worries about the small-to-medium banking sector in Germany, where some of the first signs of the oncoming crisis appeared early in 2007. It is hard to tell how seriously we should treat these concerns, because the Landesbanken are closely linked to their regional (“Land”) governments, so the question is unusually sensitive. Third, there are worries about the European giants, especially the big French and German banks.

Not only is it still unclear (to me, at least) how badly hit they were by Lehman and its aftermath, it is still a matter of conjecture how much sovereign debt they are holding.

Fourth, there is the enigma of Spain, worth a blog on its own. The bald facts about Spain are frightening – 20 percent unemployment (and nearly as much even before the credit crunch), the economy most dependent on construction of any in Europe, a large budget deficit, tourism suffering from the strong Euro.

Confronting the immigration conundrum

-Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

After being the third rail of British politics for a generation or more, immigration is suddenly a topic which can be spoken about in polite society.

Unfortunately, as far as policy is concerned, it is also a classic case of the politician’s syllogism familiar from Yes, Minister: something must be done; this is something; therefore this must be done. Most of the proposals on offer seem likely to make the situation worse, which is not surprising since many are based on a thoughtless acceptance of conventional wisdom.

Take for example a proposition which had the three party leaders nodding in agreement during the pre-election TV debate on this subject: that only the most highly-qualified immigrants should be allowed entry into the UK.

Really? This raises at least two issues.

First, what is the point of the foreign aid budget?

Osborne unveils a momentous project

-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.

We were promised a Budget that would be a game-changer, and that’s exactly what we got today – ambitious, dramatic, and presented with conviction and confidence (as it needed to be). The Chancellor had four objectives in view:

1. To cut both the deficit (the additional borrowing) and the level of the debt over the life of the parliament, starting now

2. To make a virtue of necessity, by cutting benefits and taxes that create the insidious poverty trap, making it worthwhile for more people to join (or rejoin) the labour force

3. To restore competitiveness by reducing taxes on business, in the hope that it will induce enough additional investment to offset the deflationary effect of the spending cuts

Banks, borrowing, bonds and Britain’s budget

-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes  an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.

There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.

First, if anyone thought the electoral cycle was dead, the run-up to the last election should have disabused them.

The old wisdom is still valid: get the pain in early, keep the goodies for later, when the next election is in sight. In the present case, it is reinforced by the more Macchiavellian consideration that the more blood is spilt on Tuesday, the less attractive will be the prospect of an early election and hence the stronger the bonds holding the coalition government together.

The more important reason for cutting the deficit drastically at the outset is the message it sends to the markets that we are not going to exploit our position outside the Eurozone to inflate away the debt.

In football, the biggest losers win

“Football is just a business nowadays, isn’t it?”

Well, actually no, it’s not, and it never has been – at least not if a business means an enterprise intended to maximise shareholder value.

In the “good old days” – so called because they were bloody awful – football clubs were financed by a Big Sugar Daddy, often the millionaire who owned the local mill or maybe a small chain of shops in the town.

As Chairman of the Board, he would treat the club as his little indulgence, a rich man’s hobby, an alternative to collecting old masters or old mistresses.

In return, he would behave as if he owned the club (which he did), his name would probably be on the main stand and his real business – the one that generated the money – would advertise in the match programme and on boards around the touchline.

With players’ wages subject to a Football League limit so low as to have become a joke (or a national disgrace) by the 1950s, the BSD had little to lose, even though there was no income from TV, only peanuts from sponsorship deals and match tickets cost less than you’d pay nowadays for a half-time coffee.

What’s changed? Everything, except the role of the BSD. Millionaires or the simply rich need not apply nowadays, at least not if a club entertains serious ambitions in the English Premiership (or the Spanish Primera Liga or Italian Seria A).

A history lesson for lenders

-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Anyone looking for a broader perspective on the events of the last three years could hardly do better than choose for bedtime reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.

It is nothing less than a history of financial crises through the ages, starting in late medieval England and continuing via 15th and 16th century Spain and its New World colonies on to the teething problems of Britain’s banks in the industrial revolution and the upheavals of the 20th century, ending in 2008 with the bankruptcy of Lehman Brothers.

The emphasis throughout is on sovereign default. For many politicians, bankers and economists, it ought to read not just as a lesson, but as a severe rebuke, because its basic message is that there is nothing new under the sun and that financial history reads like a long catalogue of facts we have chosen to forget.

So, as the authors show, no country’s history is free of bank collapses, sovereign defaults and currency debasement in one form or another.

Many countries have been serial defaulters, and – surprise, surprise! – the recidivists include some of today’s shakiest sovereigns, notably Greece (which went bust several times in the first decade or two after it gained its independence in 1821, and has never in its history merited a good credit rating) and Spain, which after many defaults in the pre-industrial era seemed until relatively recently to have reformed.