Archive for October 20th, 2009

How our senior libel judge stamps on free speech – all over the world

Guardian: Mr Justice Eady’s rulings amplify the democratic world’s most illiberal laws – enabled by 12 years of utterly feeble leadership

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Cats on Parade….


by Richard Rude

Forget most of what you’ve heard about the economic crisis, it’s unbelievably boring anyway. Even experts explaining it on the news get bored. Especially since they don’t seem to understand ten percent of what they’re talking about (it’s the little bit they miss that nails them). And it’s not very inspiring to hear them promise to fix what they broke in the first place.

Subprime, Credit Default Swaps, Madoff, Schmadoff, Toxic Assets…? These are just symptoms. Hardly any of the pundits want to mention the cause, and there is one underlying and principal cause of all that’s gone wrong with people’s money lately. Unless we talk about it plainly no one’s going to be fixing anything in a hurry. Worse, we may be led to think the crunch is over, only to be demolished by Crunch 2.0, El Gordo, just around the corner.

Start by taking a walk through the Square Mile. I did for the first time in a decade and one thought immediately struck me: what the hell are so many swanky new bars, restaurants, and glitzy boutiques doing here? What’s with all the pampering?

I know there’s been a lot of development in London, but doctors don’t have golf shops or virtual driving ranges on Harley Street, and Grey’s Inn isn’t a warren of tanning salons for barristers, so why has a banking district been tarted-up like a Dubai shopping mall for the amusement of its workers? It isn’t seemly and it makes for shoddy work habits. But it’s a good reflection of one fundamental change that began in the late 1990s, the one basic factor that’s fostered the deplorable lack of professionalism that suddenly became the hallmark of Finance. It’s cultivated carelessness and self-delusion, and bred the subprime incubus, the credit crunch, and the clusterbomb of ensuing problems.

Here’s the thing.

Money has been too cheap for too long.

Truly, you have to look no further than this for an explanation of what this crisis is about, both in terms of market mechanics and of mass psychology.

For the past ten years the cost of borrowing – the price of money, the interest rate – has been set much, much lower than in previous decades. Seen in this context everything else in the markets and beyond drops neatly into place: the extravagance, the foolhardiness, the ruinous combination of stupidity and greed. Once we link all this to the backdrop of long term cheap money the knots into which the experts are tying themselves fall apart.

When the cost of borrowing is too low for too long a period it distorts everybody’s model of reality. It turns society into a teenager who wants to blow his inheritance. Cheap money causes us to over-value everything: property, shares, artworks, “aspirational furniture”, ourselves, you name it. The subnormal can pass for average; the mediocre is raised to excellent; everybody’s special. The unequivocal transcendent advertising mantras of our time, “Indulge yourself”, and, “Because you’re worth it!” send powerful messages — if you want to create a society of spoiled, self-deluded brats, that is. What’s especially pernicious about too much easy credit is that over time it has a sneaky way of lulling us into a state where we start to believe we really should be living way beyond our wildest expectations. Nowhere has this been more evident than in the London property market.

At the climax of the buying spree in 2008, one investor paid upwards of a quarter-of-a-million pounds to string a hammock between two parking meters on a residential street. It was only a 12-minute sprint to Hounslow East tube station so the buyer had no trouble renting it out. I am of course pulling your leg, but honestly, I’m not pulling very hard.

Extend the buy-to-let business model from property to everything else on the planet: as long as new money is continuously created cheaply it has interest in buying anything in the world. What’s more borrowers haven’t even had to worry about positive yields on their investments they bought with loans because everything just kept going up in price year after year (N.B. until it didn’t). Can’t let your buy-to-let property? No problem. It’s still good business because anyway the price of your hovel will probably go up faster than the rent you’re not receiving. Everything becomes a commodity; what should be an ‘investment’ and return a steady income gets bought not for its yield, but just for the sake of selling it at a higher price to the next sucker queuing up with a cheap loan in his hand. And so on, and so on, until the music stops.

There’s another even more harmful and tangible effect brought about by ultra-low interest rates: they empty bank accounts. Obviously those with savings or capital will not keep their money in an interest-bearing deposit when there’s little or no interest to be had. Low rates squeeze out cash from savings accounts into more attractive alternatives. Never mind all their bad bets, no wonder banks keep running out of capital, it’s so evident it hardly needs explaining – no cash in the coffers because of low interest rates!

The important thing to remember about the stingy interest rates of the past decade is that like all adjustments they started off as temporary. What should have been occasional kick-starts to help get businesses and consumers over a few hurdles became permanent policies that just kept blowing more and more helium into share and property bubbles. This is about as clever as putting the kettle on the stove before leaving your house to go on holiday.

So why didn’t they raise interest rates – make money more expensive and bank deposits more attractive — to take a little heat out and avoid the bubbles and the crashes? I’ll tell you the real reason, but here’s what central bankers kept telling us,

“Inflation is benign”. Low inflation means there’s no reason to raise interest rates; it’s fine, everything’s cool, Bro.

Excuse me, but how do you measure inflation? (This is the heart of the melon, and now we have to get very serious for a moment).

There are two principle measures of how much prices are rising: the first, Headline Inflation, is the average price of a basket of goods and services; the second, Core Inflation, is the same basket but it strips out the cost of food and energy. Central banks favour whichever of these two is the lowest, the most self-serving, and fits best with their preconceived notions. We’ve been sold a story of low inflation for years. Some genius cat back in 1996 even wrote a book called The Death of Inflation, and a lot of people believed him. Since then central bankers with the foresight of ostriches have chosen to ignore rampant share markets, “irrational exuberance”, rising commodities, and out-of-control property speculation. They only wanted to consider the narrower Core measure of inflation, which consistently showed that prices were tame.

Incidentally, house and share prices, and all the other stuff that got real expensive do not figure in any measure of inflation central banks care to monitor. Now ask yourself a question: What are the average household’s three biggest outgoings? I’d say mortgage payments, food, and energy, in that order — three things that are specifically not in the ‘favoured’ Core inflation measure central banks use to make an interest rate decision. I don’t know about you, but when I want to know how hot the engine in my car is I don’t look at the radio.

What’s more, the Core basket is mainly comprised of cheap Asian consumer goods and outsourced labour. You know the type of thing; tennis balls from child-operated factories in Indonesia; laminated novelty handset covers stamped out by Chinese political prisoners; Bangalore emergency call centers, and the rest. There’s been a huge divergence between cheap imports and high asset prices, between how our cost of living is perceive and what our overall expenditure actually is when we take into account food and petrol, and the price of housing and other assets and services we purchase. It’s a somewhat confusing picture, but not that difficult, and history shows the central bankers got it completely wrong.

When central bankers drive down the price of money too far they drive up the price of the World. Paradoxically, they also cheapen its worth. As long as too much new money keeps being created everything is always affordable to too many people no matter how expensive things get. Taken to an absurd conclusion, when money is so cheap to borrow that everything is immediately acquirable by everyone, at any price, at the same time, we are left with prices approaching infinity and value closing in on zero. Just think how useful one more car in central London would be; now imagine its value after cramming in 10,000,000 additional cars. More is better: up to a point.

Now I have to tell you why the central bankers have been setting such obsessively low interest rates. For the simple reason that just as “greed is good”, up is better than down. Everybody was making so much money borrowing cheaply to buy stocks and property that no one dared interrupt the party. The central bankers ceased being shepherds; they painted their butts white and ran with the herd.

I’m afraid that’s really all there is to it.

Now they’re setting interest rates even lower. Never mind the rhetoric about economic stimulus packages and the like. All the policies have one overriding purpose: to get property and stocks back up to their pre-crash levels, because that’s what the toxic assets are linked to and where capital is tied up. Policy makers, investors, governments, homeowners, heck, just about everyone wants the price of assets to go up again – and keep going up. The hope is to revalue, essentially to ‘de-tox’ the toxic by re-inflating asset prices back to their giddy heights with another stampede of buying, and presto! as if by magic all the banks will suddenly have good paper on their balance sheets, and it’s business as usual, Madame. Crisis? What crisis?

Of course this speedy recovery dream fueled by even more cheap money also means that many of those who made poor decisions and bought at the top of the market will be able to sustain their shaky investments. The problem for said ‘recovery’ is that nothing fundamentally changes, and low interest rates will continue to inhibit the trickle of money into bank deposits  – well, who’s going to put it there unless rates rise? Once again this will lead to more shortfalls in capital and require yet more government handouts. The lessons go unlearned.

Look: when it comes to keeping bank coffers filled the best way is the old-fashioned way: through deposits. This is banking. It’s not about acquisitions, or punting the stock markets, or creative accounting; it’s about taking money in and lending it out – but you have to get it in in the first place. Interest rates need to be low enough to accommodate economic growth, sure, but they also need to be high enough to encourage deposits, or else a bank is just one more canoe up a certain type of creek without a paddle.

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College of Law Inside Track Podcast:
Sir Nigel KNowles, CEO of DLA Piper
Sir Nigel Knowles , CEO of DLA piper explains how his firm went from being two small regional firms in Sheffield and Leeds to become the world’s largest law firm by revenue in a matter of 15-20 years. He talks about what DLA Piper are looking for in terms of recruiting young lawyers, emphasising that they have a very flexible approach and promote diversity and in particular are more than happy to give wild cards a chance. He talks enthusiastically about the College of Law and Sutton Trust Pathway to Law programme which DLA Piper supports and explains why DLA Piper chose the College of Law as their preferred provider.

Listen to the podcast

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