Everything's Amazing, Nobody's Happy

While it's of course vital that we identify and solve our real problems, it's worth keeping a little perspective...

Fool's Gold, Fool's Paradise

I've literally just finished Gillian Tett's Fool's Gold, an insightful, frank and highly readable account of the credit crunch, explained from the standpoint of the JP Morgan staff who somewhat unwittingly unleashed the Bistro-style CDS derivative into an environment of such stunning irrational exhuberance, greed, negligence, recklessness and downright fraud that it's left even the insiders angered and aghast.

And it ain't over yet. While subprime default estimates continue to be revised upwards, bankers brazenly continue to repackage downgraded debt into yet more CDO's backed by leveraged loans.

Importantly, Gillian Tett's narrative tellingly confirms a string of cultural problems that we're told again and again abound in the capital markets trading "pit": regulators whose remit and resources prevent them seeing the financial world holistically, a commission/bonus-driven sales mentality that often ignores the limits of the hallowed Gaussian 'models', banking groups that merely comprise dysfunctional silos, the cosy social contract banks enjoy with government. It's little wonder that everyone lost sight of the big picture - and that our faith in these institutions is utterly shattered.

Yet none of these factors is about to change. Amidst all the talk and shuffling of deckchairs little is actually being done to avoid or minimise exposure to Black Swan events. Hedge funds scramble to avoid the sunlight, like the swaps world did previously, and the quest for transparency has degenerated into protectionist farce. With an election still a long way off, competing government and opposition plans for the financial sector realistically mean regulatory paralysis throughout the time when structural and cultural reform would have been most achievable.

We're living in a fool's paradise. Enjoy.

Bank Lending To Remain Partially Self-regulated!

From 1 November 2009, banks will relinquish their self-regulatory control over deposit, savings and payments products. That's when the FSA (doomed, say the Tories) takes over from the self-regulatory club known as the Banking Code Standards Board, and we are led to believe we'll get some retail banking regulatory protection with teeth. Banks will be obliged - on pain of fines - to "treat customers fairly", amongst other things, which ought to raise some eyebrows.

However! The good ol' BCSB will not crawl away to die.

Instead, it is to be renamed the "Lending Standards Board" in honour of its role "to provide continued monitoring and enforcement of lending and credit card standards, including those governing the treatment of customers in financial difficulties."

So the same club of banks are to retain self-regulation of lending and credit standards who virtually drank themselves to death on a cocktail of subprime debt and eye-wateringly complex credit derivatives they didn't understand, and who are ferociously challenging the OFT's right to assess even their overdraft charges for fairness.

The FSA has long huffily sworn-off regulating consumer credit. On the surface, a lot of it is provided by non-banks, so they think it has nothing to do with banking. That siloed, blinkered attitude must end, since we have become painfully aware that the whole financial system is inexorably connected and all product providers are either bank group subsidiaries or otherwise obviously rely on bank lines or financial markets funding at some point in the chain. Besides, the Consumer Credit Act and regulations are a nightmarish quagmire of bitter complexity and foolishness, which the Office of Fair Trading has been unable to use to do more than a poor job of protecting the consumer. As noted, the OFT has fared little better in its attempt to use unfair contracts regulation on the banks.

Regulatory plans appear feeble on the consumer banking front. The proposed Financial Services and Business Bill merely heralds the government's long-overdue plans to ban unsolicited credit card cheques. The Consumer White Paper goes somewhat further, calling for a quicker solution to the saga of the bank charges litigation, promising the said ban on unsolicited credit card cheques, and threatening both restrictions on credit card issuers repricing cards after issuing them and the removal of the "negative payment hierarchy" (i.e. ensuring that credit cardholders' repayments are credited towards the most expensive aspect of their card bills first).

But let's not forget that small businesses in the UK are owner-operated by about 4.3m individual people. As regulation - or the threat of it - bites on bank credit products, SMEs are being required to take commercial credit cards that aren't regulated and on which interchange and other fees are much higher than personal cards. Unless these cards are brought within scope, these people will find themselves right back where they started as humble personal cardholders without any regulatory protection... a miserable experience.

Conspicuous Thrift - Your 5 New Consumer Tactics

Hat-tip to none other than EU Commissioner Meglena Kuneva, whose recent post alerted me to the report of the McKinsey Global Institute on our highly effective responses to the credit crunch, at least as consumers.

McKinsey reports that a third of the decline in Eurozone GDP in Q4 2008 was the result of reduced consumer spending. That's particularly signicant because consumer spending was the single largest factor fueling GDP growth during 2002-07.

They say our spending is driven by confidence, incomes, wealth, the availability of credit and cost of living. All these currently point downward, though the cost of living is obviously less of a problem as prices fall in line with declining demand.

The McKinsey report suggests our savings are a function the type of items we target for savings, the type of consumers we are (discussed below) and the tactic we choose (replace items only when needed, control spending, do-it-yourself, seek value and shop smarter).

McKinsey also say that a "cheap is chic refrain" has inspired the 'do it yourself' tactic. This is more confirmation that the Age of Conspicuous Thrift has dawned. This may also be shorthand for moral or ethical choices - 'green' sentiment and the 'counter-Veblen' effect ("preferences for goods increasing as their price falls, over and above the traditional supply and demand effect, due to conspicuous thrift amongst some consumers"). Do The Green Thing, for example, lists seven tactics for leading a greener life:

"1. You get from A to B without any C when you Walk The Walk
2. It’s delicious but it causes more CO2 than cars so go Easy On The Meat
3. Resist the urge to buy the latest and Stick With What You Got
4. Turn down the central heating and turn up the Human Heat
5. The art of wasting nothing and using up everything: All-Consuming
6. Instead of jetting your way around the world, Stay Grounded
7. Don’t leave it on or even put it on, Plug Out"

What type of items are we targeting for the most savings?

McKinsey say that of all spending categories, eating out has taken the biggest hit. Interestingly, however, electronic gadgets rank 13th on average - we'd rather an iPhone than a fancy meal. But if incomes drop by 20% gadgets rise to the 6th most likely to be cut. The least likely area to target for savings is insurance - perhaps reflecting higher anxiety about what the future holds.

What type of consumer are you? What are you tactics?

The report finds there are 4 consumer types: "party's over", "domestic downsizers", "food scrooges" and "basic bargainers". Of all categories, most people are "party's over" types and these have the largest impact on all spending (especially eating out, clothes, booze and fags). The other consumer types cut back more selectively using specific tactics. For example, "domestic downsizers" target equipment (cars, electronics and home furnishings) by 'replacing only when needed' and make 45% of their total savings on holidays, by simply controlling their spending. Electronic goods tend to fall prey to people engaged in 'controlled spending' and 'shopping smarter'.

What's the message to businesses?

Retailers will have to think carefully about how their offerings may fall victim to these tactics. McKinsey suggests assisting people to budget, pricing competitively and transparently, highlighting usage costs, incentivising the purchase of replacements, less wasteful packaging and promoting home-use/assembly of products. Those selling consumer equipment and holidays in the UK would do well to diversify into insurance, utilities, education or groceries.

I was in a chain store today, and the cashier left her station to take me to the shelves where I could get a 2-for-one item and add something else to cut my overall bill. I was stunned. But in a good way. I'll go back there.

Money - Like Music - Is Better Shared

Here are my notes/thoughts from a really interesting discussion that Bruce Davis of Oikonomics led last night, entitled "Finance is like the music industry in the '90s". Apologies, if I have misrepresented anything. Corrections welcome. Thanks to Bruce, and Thomas Barker for organising.

As individuals we actually share money, rather than 'consume' it. So we prefer to withhold it from those we perceive to be 'taking' our money and not sharing in return. Government and banks would fall into that category. Savings are perceived to be at risk, and not 'solid', even with FSCS guarantee.

We agree the terms on which money is shared or used in context, and that in turn may give it a very different meaning to the users. On that basis, "money" is not a static concept, but a dynamic (though it is basically useful as a means of showing individual contribution, or as a store of value).

Some people view a loan as a cash float or a credit, rather than a debit or debt - e.g. a student loan. This is obviously frustrating to those with a traditional or accounting based view of money, but has to be grasped to communicate effectively. Focusing on our use of money, rather than its value becomes instructive. Trials have shown that if you remove the interest rates from the outside of a bank branch, footfall at that branch increases. Maybe the FSA and the OFT should focus more on the responsible/irresponsible uses of money, not advertised rates and other indicators of 'value'. Responsible lending/borrowing initiatives are the tip of the iceberg, since there are many other uses. On this basis it seems right that there is no usury cap in the UK, since the contextual use of the money, not the rate alone, is key.

It is perhaps worth considering that money in very old economies, like the UK is customary, not created, as it is in newer economies, including the US. In the UK there's a tendency to feel it's somehow wrong to borrow, so we hide or ignore debt. This makes for worse overindebtedness, whereas making debt visible leads people to try to pay it off.

Peronally, we don't like being 'targeted' as 'consumers'. We prefer to be in control and demand products for our own reasons (which may change). On that basis providers should allow consumer to shape products.

It's important to demystify the various uses of money as a means of opening up its uses to people who may feel excluded by complexity and therefore not use or share money to theirs and others' advantage.

Bankers' view of money has shifted in line with Greenspan's admission that his assumptions about the efficiency of markets was wrong. As a result banks no longer trust in the concept of sharing money and and are hording it rather than lending it.

Benefits recipients might feel more encouraged if the benefit or pension is styled as money or an investment in them personally, or an attempt to provide capital, rather than merely 'care' which gets taken away if they find work or another source of income. There is a disincentive to return to work in that it takes so long to get back on benefits if you fail. Yet trial and failure need to be encouraged for low income earners, like any other form of entrepreneurship. Styling unemployement as a social issue closes off the economic, or entrepreneurial path out of it.

Some risk is good, whereas our nanny state is committed to removing the risk from everything we do.

Reboot Earth - Open Government Data

There are great efforts to encourage open government using the latest technology - particularly in the US and the UK, judging by this Google search. And recently we had the excellent, rather stirring example of Reboot Britain, one aim of which is to draw entrepreneurs and the public sector together.

Of course, it is vital that individual public bodies permit open access to the publicly funded data that they control. However, this doesn't mean "Open Gov" initiatives should be geographically constrained. Otherwise, we'll miss not only the big, global picture, but also the similarities between countries and regions and the people and demographics within countries and regions, worldwide. It is trite to say, but a worthwhile point to make here, that only by understanding the true state of the world now, and the trends that are shaping it, can we know where and how to achieve meaningful change. A need that is perceived to be weak and unworthy of attention in one region, may resonate with the same need that is attracting resources elsewhere. Similarly, mistaken assumptions about wealth trends in certain regions may mean great opportunities go begging. Yet public, cross border collaboration is lacking even in the EU, where forging a single market is the top priority.

That a worldwide approach is necessary was brought home to me by Hans Rosling's presentation at TED 2006, which I've embedded here. It was added in a comment by Steve Har on a recent post on O'Reilly Radar speculating on the future of the US open gov initiative. Hans does a wonderful job bringing public statistics to life, in a way that challenges lack of understanding and preconceived notions about the state of the world, its regions and people.

PS, 1 October 2009: Hat tip to FreeLegalWeb - the UK government has called for developers to contribute to the usability of data.gov.uk , and the Australian equivalent just went live (US data.gov led the way in May)

Will White Paper Deliver Green Shoots for Consumers?

To clear their desks ahead of the summer (and clutter ours to no useful purpose), UK officials responsible for Business, Innovation and Skills have recently released a white paper outlining the government's approach to consumer policy, presumptively entitled "A Better Deal for Consumers".

It appears the paper has been prompted by the "downturn" and "the way consumer markets are changing because of the effects of globalisation, and the increasing use of technology by consumers and business to buy goods and services." Which should read: "a dog's breakfast of either previously announced or 'new' but belated attempts to help the vulnerable, tinker with consumer credit, and update enforcement powers and some consumer law."

Don't get me wrong. There's some good stuff in here. But it's beyond me, for example, why it's taken until 2009 to call for a quicker solution to the saga of the bank charges litigation (we've owned some of the key defendants for some time), or to begin the no doubt lengthy process of banning unsolicited credit card cheques, restricting the basis on which credit card issuers can reprice cards after issuing them or ensuring that credit cardholders' repayments are credited towards the most expensive aspect of their card bills first. And, while anything to help those who are overly indebted is to be applauded, we've already heard about the £290m of government funded loans in the budget. And, in the vast scheme of things it's hardly worth mentioning that the government "will invest a further £300,000 in free face to face debt advice [which] will give an immediate boost to debt advice capacity for six months and enable the equivalent of 12 full-time debt advisers to help an extra 1,200 people struggling with crisis debt."

The 'meat', if there is any in this paper, is simply a reference to the unfortunate process of gold-plating the Consumer Credit Directive, and "bringing forward, in due course, a new Consumer Rights Bill which will [no doubt gold-plate] the proposed EU Consumer Rights Directive". The latter exercise has of course been rather undermined by the lack of any real evidence of detriment (see the EC's Consumer Markets Scoreboard).

Guess it's a case of hurry up and wait for that better deal.

Here's an extract of the menu in more detail:

Helping the vulnerable:

• Help to support homeowners and social housing tenants in arrears, and better legal protection for mortgage holders and tenants
  

• ”Breathing space” relief for consumers overburdened with arrears on their utility bills and other unsecured debts
  

• A new debtors’ guide to help those with debt problems understand their options
  

• A new self-help debt advice toolkit to support debtors who want to negotiate repayment proposals with their creditors themselves
  

• A Money Guidance service in the North West and North East of England to help people make better financial decisions and avoid problem debt
  

• A new dedicated NHS helpline to offer healthcare support to those experiencing recession-related stress and anxiety
  

• Improved guidelines for health and social care workers to support people with mental health problems and overburdened with debt
  

• Reviews into how effectively energy and water suppliers protect vulnerable customers from disconnection and help customers with problem debt
  

• Swift enforcement action against debt write-off scams and against firms who exploit the vulnerable in debt
  

• Measures to ensure more responsible debt recovery practices by debt collectors and bailiffs
  

• Programmes to reduce household energy bills.

Tinkering with consumer credit:

• A review of the regulation of credit cards and store cards, including a ban on the sending of unsolicited credit card cheques
  

• Ensuring consumers can access impartial support on choosing and managing credit cards and other consumer credit products
  

• [Gold-plating] the Consumer Credit Directive, including new requirements on all lenders:
• to explain their products to consumers adequately before they enter into a contract, including the consequences of any failure to repay
• to check the credit worthiness of consumers before they lend to them to follow guidance from the OFT to tackle irresponsible lending practices
  

• A review by the OFT of high cost credit markets
  

• A continuing programme of reforms to make the credit market work effectively for consumers and lenders.
  

Updating enforcement powers:

• A series of pilot projects to test the use of new powers to deliver compensation for consumers
  

• A new national strategy and specialist team for internet enforcement on consumer issues
  

• A central “Fighting Fund” to tackle rogues operating on a big scale
  

• A new Consumer Advocate who will co-ordinate work to educate consumers and be a champion for groups of consumers who have suffered a loss at the hands of a business
  

• A mechanism for consumers to get money back that has been recovered from overseas scams
  

• Support for product safety testing of imported goods at major ports
  

• Stronger penalties for rogue traders through new banning orders
  

• Simplifying the confusing array of sources of information and advice to ensure consumers can more easily find the support they need
  

• A new Consumer Rights Campaign.
  

Updating some consumer law:

• Developing rules on new “digital” products to ensure the core principles of consumer protection apply
  

• Looking at how the law on misrepresentation and duress can be made simpler, more transparent and accessible to business and consumers
  

• Reforming consumer law and simplifying weights and measures legislation without diluting consumer protection
  

• Modernising Trading Standards powers to help them deal more effectively with modern trading conditions
  

• Bringing forward, in due course, a new Consumer Rights Bill which will [no doubt gold-plate] the proposed EU Consumer Rights Directive, the lack of any evidentiary basis for which is illustrated in the EC's Consumer Markets Scoreboard.
  

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