Maybe, had Sir Fred Goodman retired two years ago when the price of Royal Bank of Scotland share was 705p and RBS was worth £65 billion, then a £650,00 year pension might have be understandable. At that point in time he had led the bank to a successful takeover of National Westminster Bank and pleased investors by increasing the share price by over 50% in his 8 years in charge. But that is not the case now.

Sir Fred Goodwin is responsible for the bad times at RBS as well as the good times

The share price stands at 24p and the bank is less than worthless. Sir Fred played a major role in the takeover of ABN Amro which resulted in a mountain of toxic debt and he should bear some financial responsibility for that failure. A trite apology will not suffice.

Instead his contract rewards him handsomely for his failure. It is an unreal universe where abject failure reaps such returns.

A Different Retirement Plan

I can imagine at alternative universe where instead of generous rewards a harsh punishment awaits…

Cast your mind back to the Mr Wolfgang, the 82 year old heckler who was detained under the Terrorism Act. If the Government can arrest one pensioner for shouting at a conference then surely then it can be applied to this new super-rich pensioner who brought a bank to its knees!

Quoting from the Terrorism Act

(1)In this Act “terrorism” means the use or threat of action where—
(a)the action falls within subsection (2),
(b)the use or threat is designed to influence the government or to intimidate the public or a section of the public, and
(c)the use or threat is made for the purpose of advancing a political, religious or ideological cause.

(2)Action falls within this subsection if it—
(a)involves serious violence against a person,
(b)involves serious damage to property,
(c)endangers a person’s life, other than that of the person committing the action,
(d)creates a serious risk to the health or safety of the public or a section of the public, or
(e)is designed seriously to interfere with or seriously to disrupt an electronic system.

In this harsher, punitive, alternative universe, then Sir Fred actions clearly fall into section 2b) of the Terrorism Act, where he has caused serious damage to the financial property of thousands of shareholders, employees and customers.

And as a terrorist under the Proceeds of Crime Act 2002, he can have his assets summarily seized without trial by the Assets Recovery Agency, now part of SOCA. That should bring in ten million or so, to help fund the toxic debt. He can also be stripped on his knighthood but what else? Is that enough punishment?

If only Dubya was still in power we could hand him over to the Americans for a spot of water-boarding. But that won’t wash with Obama. I have a British alternative that does not break the Geneva convention.

Instead of waterboarding in Iraq, we have surf-boarding in Scotland. Both are wet, cold and unpleasant. We can detain him at Coldingham Bay on the North Sea for 5 years without trial, with a daily regime of surf-boarding without a wetsuit. Fred and his missus can stay in a drafty B&B on a diet of fish suppers and deep fried Mars bars until the recession is over.

How will he pay for board and lodging? Well, I guess the taxpayers have to fork out for that. Unless of course, he gets a pension of £21,000 a year which is all that he would have recived if RBS had not been bailed out by the government.

GDP falls steeply by 1.5%

With today’s figures indicating that the Gross Domestic Product fell by 1.5% over the last three months coupled with the previous quarter’s drop of 0.6% meant that the UK is finally officially in recession after two quarters of negative growth.

Here is the breakdown

• Construction output – down by 1.1 per cent
• Total production output – down by 3.9 per cent
  • Manufacturing output – down 4.6 per cent compared with a 1.6 per cent decrease in the previous quarter. 
  • Mining and quarrying – down1.6 per cent 
  • Electricity, gas and water output – down 0.2 per cent
• Services output – down 1.0 per cent 
• Distribution, hotels and restaurants : down 2.4 per cent,
• Transport, storage and communication : down 2.0 per cent
• Business services and finance : down 0.5 per cent
• Government and other services output : down 0.5 per cent,
• Agriculture, forestry and fishing output : up 0.1 per cent 

It is difficult to see anything trending back up in the near term except perhaps government output as public spending is increased. Inevitably the private sector is going to suffer most contraction in trying to survive the credit crunch.

Economists do not expect recovery to start until 2010

Most economists expect the recession to last a further year at least, as it will take some time for the government’s measures to take effect.

Graeme Leach, chief economist at the Institute of Directors

We are well into the financial crisis but the economic crisis is only just beginning.

John Cridland, CBI Deputy Director-General

Looking ahead, we hope the impact of interest rate cuts, falling inflation, the fiscal stimulus and the Government’s recent measures to kick-start lending will have a stabilising effect later this year.

David Kern, chief economist at the British Chambers of Commerce

While the short-term outlook is dire, it is important not to drift into excessive despondency. The Government and MPC still have important weapons at their disposal, which they will undoubtedly deploy. The huge stimulus package that the new Obama administration plans to introduce could have beneficial global consequences.

 
So there is a view that the government is doing the right things to mitigate the length and depth of the recession.

Gordon Brown needs to apologise

The best that Gordon Brown can hope for, is to persuade us in 2010, that his good financial management meant we only had a recession whereas under a Conservative Government it would have been a depression. It is a hard sell and unlikely to work. Unless of course, he fesses up to having made some mistakes with public spending and apologises for that ridiculous ‘We will not return to the old boom and bust’ statement on 21st March 2007.

The other thing he could do is reach out to the Conservatives (Cameron and Clarke) and the Liberal Democrats (Clegg and Cable) to get cross party support for decisions that will impact the country for next three or four parliaments. Obama is doing likewise with the Republicans in the USA. Brown should follow his lead.

A day after the excellent quarterly results from Apple it was Microsoft turn. Although revenues were up 2% to $16.63 billion, net income was down 11% to $4.17 billion, which demonstrates a significant fall in profitability. This drives the need to reduce costs and has led to confirmation that 5000 jobs will be cut at Microsoft in the next 18 months

Why is Microsoft struggling in a market where Apple is thriving?

Product Lifecycles

I think a lot of this down to timing and their respective product lifecycles. Apple have the iPod, which is a mature product and cash cow, but also have the iPhone still at the growth stage.
Microsoft, on the other hand, have Windows 7 still at the introduction stage. The beta version is available for download right now but there is uncertainty as whether we will see a full release this year as Microsoft’s statement is that:

The specific release date will be determined once the company meets its quality bar for release

Don’t expect Steve Ballmer to be sipping champagne at the “quality bar” this year. Based on the product life cycle what you can expect is Apple to have a great 2009, with strong revenues from the iPhone, while Microsoft users like myself stick with Windows XP, eschew the poor performance of Vista and wait for Windows 7 with its promises of improved performance and an easier user interface with touch technology, speech recognition and the new “superbar”. {Maybe Microsoft execs are too focused on bars right now}

A truly historic day as America’s most talented politician, Barack Obama, assumed the presidency of the United States of America. High on his rhetoric, his idealism, his realism and his hope, I am only more optimistic about the future.

The democratic election of a non white president, son of Kenyan father and a Kansasian mother, is the realisation of the second glorious sentence in the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.”

As for his view of the credit crunch, he did not pull his punches, and does not underestimate the scale of the challenges ahead. He could be talking about any Western nation…

Obama’s Analysis of the Problem

“Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered.”

Obama’s Solution

“The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

Balance of Power shifts towards a Benevolent State?

The relationship between the state and the individual will change, the ‘invisible hand’ of the market won’t be cuffed, but will be gloved (i.e. greater transparency), and the USA will aim to live up to the high principles of liberty and equality to which it has mostly only paid lip service. Very interesting times ahead!

However, we are not all going to buy into big government, high taxation, more regulation, more intervention and less personal power (unless things get better). Yet it might be the right solution right now. We will find out soon enough.

Today the UK government launched their last attempt to unfreeze the credit markets with a three pronged bank loan scheme:

• Working Capital Scheme – cost £10bn – provides a 50% guarantee on £20 billion of short term loans to businesses with a turnover of less than £500m with banks having to register a portfolio of such loans through the BERR (Department for Business, Enterprise & Regulatory Reform). The BERR will charge a premium for the guarantee which will likely be passed on by the bank to the borrower
• Enterprise Finance Guarantee Scheme – cost £1.3 billion – provides a 75% funding on a scheme for new 10 year loans of between £1,000 and £1,000,000 to small to medium size companies with turnover less than £25 million. High street banks provide the other 25% of funding
• Capital for Enterprise Fund – cost £50 million – provides a 66.6% funding on a scheme where companies with up to £50 million turnover sell their debt for an equity stake of between £0.25 million and £2 million with the four main high street banks providing the 33.3% funding.

I guess the goal is to allow the banks to take another look at the loan requests that fell just outside their current strict lending criteria. With the guarantees in place the banks’ capital requirements are reduced and hence it can make more loans.

However, I can live with the first of these schemes but not the other two as I believe it is inadvisable for the government to put in more than a 50% guarantee or contribution. Any more than 50% really begins to prejudice the lending decision.

As typical with bureaucrats, we have three schemes with different entry criteria and qualifications and this will no doubt suffer from unintended consequences. [Please give me one rule that I can understand rather than three rules where I need a lawyer and an accountant to interpret them.]

Alternative Bank Loan Guarantee Scheme

I would propose a much simpler approach: one scheme rather than three.

• Its goal would be to address those viable businesses needing affordable loans that have only now fallen just outside of the banks’ tighter lending policies.
• a single scheme 
• open to companies up to £100 million revenues 
• loans up to £1 million 
• 30% government guarantee 
• total volume is £38 billion of loans. 
• total scheme cost is the same being around £11.4 billion. 

With my approach less bad loans would be made as the banks would look harder at the lending decision and therefore we can expect less defaults, and less cost to the taxpayer.

Rationalisation for Nationalisation

If the bank loan scheme fails, then what is the next step? Nationalisation?

(Futher) nationalisation of the banks is an interesting prospect. The analysis goes

In summary, the problem was ‘too much easy credit’, and the solution is ‘more easy credit’.

In this scenario, we would definitely need a very light touch on the supply of credit as soon as we look like coming out of recession. Otherwise we will be looking at very serious inflation. It is bit like driving up a steep hill in an old car where you floor the gas pedal but need get the power off quickly just before you hit the summit. Nationalised industries are not known for being ‘quick on their feet’ and ‘having a light touch’ faced with a rapidly changing marketplace. We would half down the hill, in the red, with no control over the steering by the time a nationalised bank realised an adjustment was needed. In other words, a recipe for disaster.

Nationalisation of the Banking System

If you are going to nationalise banking this would be my recipe:

And if I was feeling a bit like ‘Big Brother’:

Maybe it is just as well I am not in power.

Intel’s fourth quarter profits took a hammering as their quarterly net income fell 90% from $2.014 billion to $0.234 billion. The credit crunch had driven revenue down from $10.217 billion to $8.2 billion.

Intel decided to get all the bad news over at once this quarter with a $0.95 billion write off on their WiMax Clearwire investment

The reduction in revenues was due to lower demand and the fact that PC manufacturers were running down their existing inventories of chips.

The exception to this was the new Atom chip, which is used in the new ultra light weight laptops, known as netbooks. These chips are simply too new for the PC manufacturers to have significant inventories.

Evidence of the recession hitting hard in the US was seen through the latest unemployment figures which show the biggest loss in jobs since the end of the Second World War, some 2.6 million jobs in 2008

Obama’s response is a Keynesian one: operating contrary to the downward market; the new US government will borrow and invest in the infrastructure to limit unemployment, welfare payments and try and create real growth in the economy. The other side of this approach is the need to reduce public spending, repay government debt through a higher tax income through the good years.

In the in the 1990s in the UK Gordon Brown as Chancellor started off on this route by reducing debt as a percentage of national income from 45% down to 40% with the intention of reducing the level to 36.5% based on Gordon’s sustainable investment rule. As the table below shows below he allowed debt to grow in now what looks like the good years of 2003 through 2006 when he should have been retaining the level of UK debt well under 40%

1997 : 413,2 £ billion, i. e. 49,8 % of GDP (ONS)
1998 : 410,2 £ billion, i. e. 46,7 % of GDP (ONS)
1999 : 405,7 £ billion, i. e. 43,7 % of GDP (ONS)
2000 : 400,6 £ billion, i. e. 41,0 % of GDP (ONS)
2001 : 385,5 £ billion, i. e. 37,7 % of GDP (ONS)
2002 : 402,9 £ billion, i. e. 37,5 % of GDP (ONS)
2003 : 441,1 £ billion, i. e. 38,7 % of GDP (ONS)
2004 : 487,9 £ billion, i. e. 40,4 % of GDP (ONS)
2005 : 529,4 £ billion, i. e. 42,1 % of GDP (ONS)
2006 : 573,3 £ billion, i. e. 43,1 % of GDP (ONS)
2007 : 618,8 £ billion, i. e. 43,8 % of GDP (ONS)

Source: http://cluaran.free.fr/debt.html

Now in the depth of recession the UK has depleted coffers when we need to spend our way out of the recession. The additional borrowing or printing of sterling that may ensue will result in GBP staying at a lower level, below or around the level of the Euro. Transition to the Euro in the UK would be so much easier at parity however the UK does not look anywhere near meeting the 5 economic tests

The Bank of England dropped interest rates by 0.5% to 1.5%, the lowest level ever.

This is unlikely to have much effect on the level of bank lending as banks will take the opportunity to wider the spread between the rate thay borrow at and the rate they lend at.

The 363 rule of banking, just got better: borrow at 3% , lend at 6%, golf course at 3 o’clock.

The pumping of government money into the banks has helped over the last 3 months as the spread between LIBOR and Bank of England rates has narrowed to 0.85% prior to yesterday moved.

I would expect LIBOR to creep down to about 2.5% and hence allow the bankers to be on the golf course by 14:30, which is very amiable given the dark winter evenings.

This evening, I found myself at Broadgate Circle, drinking champagne at the bridge of the boat-like, Corney and Barrow, overlooking the ice skating rink, safe from the icy winds in the warmth of the bar. It was a New Year’s drinks party with some colleagues and recent ex collegaues.

I was reminded of the scene of the band playing on the deck of the Titanic as the lifeboats were manned. The talk was not of jobs or markets (or icebergs) but of iPods, HDTVs, digitals cameras, holidays in warmer climes and new online businesses. The only recognition of the state of the current economic hardships was that we were drinking the cheapest champagne on offer, a Laurent Perrier Non Vintage at £46.96 a bottle (only £23.95 at anybooze.com. Well, at least we were doing our bit for the economy, spreading the wealth around

As I left, after a couple of hours of amiable chat, I drew my scarf more tightly around my neck. It is going to be a long cold winter.

In the UK, David Cameron set of an alternative to the consensus view of increased public investment and spending, in response to deepening downturn in the economy.

Is he a) enlightened? b) economically inept? c) partisan?

Let’s look at his proposals:
• Remove tax on savings up to the basic rate of 20%.
• Increase tax free allowances on savings for the retired.

Cameron the Enlightened

The problem that Cameron is trying to solve is that of the low returns to savers. It is generally recognized that giving people their own money back is a more effective way of growing the economy than large scale public investment so his proposal is encouraging in this respect.

Also Cameron’s proposal is cheap at this time because interests rate are so low. If you are getting a 2% return on your money, then the tax saving under Cameron’s plan is 0.4%. With the average saver having £10,000, that amounts to £40 a year or about £0.80 per week for the saver.

Cameron the Inept

This compares to the 2% reduction in Valued Added Tax ( a natonal sales tax). If the average person spends £75 a week on vatable items that this reduction will result in a £1.50 per week saving. So Brown’s proposal is on average about twice as effective as Cameron’s.

However, look at who is affected by the changes: the VAT savings proportionally help lower income families more while savings tax changes would benefit middle income more.

Cameron heavily criticised the VAT reductions but his proposals are even more ineffective.

Cameron the Partisan

The increase in tax allowances is really a give away to his supporters. It is targeted at the retired, middle income who are indeed suffering a fall in income as the returns.

The tax system already allows £7000 in tax free ISAs and through Post Office accounts, so the most substantial beneficiaries of his the proposed tax allowance increase would have savings of over £10,000.

However, now consider the scenario where interest rates resume normal levels of 6% as they must do in the next couple of years. The cost of the tax giveaway will be six fold what it is now and with the benefits going into the pockets of his supporters.

Conclusion

Savers will reap the just rewards of their savings but only once when we come out of recession.

Cameron does need to come up with alternative policies to the Labour Government but he needs to demonstrate he has some understanding of the economy and what is good for the country as a whole.

For example, he should agree with the current level of public investment but come up with a different set of priorities on that spending and propose putting in place a set of measures and controls to ensure the public is getting the best possible value for money for these initiatives. This would be a credible approach.