No More Undue Deference

By now we've witnessed the disasters that resulted from a lack of critical thought amongst auditors, ratings agencies, the Federal Reserve, the IMF, the UK Parliamentary Fees Office, the HBOS audit committee, and Gordon Brown's cabinet. So you would've thought a few lesssons had been learned. Yet I was peeved to hear last week that the protocol for meetings within the Bank of England demands complete deference to its officials - even an expert from another regulator must not speak unless asked to, and their unsolicited questions or observations are pointedly ignored.

Now, I'd like to think that somehow overstates the position - especially in light of Mervyn King's increasingly vociferous assaults on the banks he oversees - and I'm very happy to be put right in a comment. But I also fear someone will laugh and point out that every wing of the civil service works the same way and probably many other large organisations to boot. 

But if this is true, it does not bode well for the levels of co-operation and cohesion that will be required amongst the UK's new financial authorities.

I'm not advocating a culture of disrespect, impoliteness or disobedience - the opposite of deference. I'm against undue deference - the kind that amounts to acquiescence, capitulation, complaisance, condescension, docility and submission. If organisations are going to adapt to facilitate solutions to our problems rather than their own, they should welcome thoughtful contributions from every angle, not allow their management to hide behind phoney rules. 

In short, like Australian troops during the 'Great War', we should only salute officers who earn our respect.

Image from The Philosopher's Magazine.

Greed, Fear And The Child Benefit

The UK's Child Benefit spending programme is too broad. It was conceived amidst the devastation of 1945 - a far cry from where we are today - and it benefits people who don't need it... except to compensate them for paying higher taxes. 

In other words, higher income earners are fussing over the withdrawal of the Child Benefit because they don't trust the government to reduce their taxes if the Child Benefit is removed. Their focus is on being 'no worse off'. Officials know this, because this phenomenon is relied upon to 'sell' new spending programmes.

So, like the plan to raise the personal tax allowance, narrowing the Child Benefit provides a golden opportunity for the government to restore faith with those who pay taxes, rather than to continue the proud tradition of cynically preying on their greed and fear. 

That means the government has to be really clear about how a more efficient benefits system is going to mean lower taxes.

Does Ownership Structure Matter In The Long Term?

Thanks to The Foundation for another entertaining Forum last night - this time on whether ownership structure is the only thing that matters for long term growth.

The discussion opened with some insights on ownership from Michael Green of Philanthrocapitalism fame, Luke Mayhew, former managing director of John Lewis (who also chairs the remuneration committees of some large corporations), and the inimitable Anthony Hilton, Financial Editor of the Evening Standard. 

And there was plenty of vibrant discussion about the merits of competing forms of business ownership, whether by employees, shareholders, customers, partners, joint venturers and even benevolent dictators. 

But it was clear that how a business is owned has little to do with long term growth.

Anthony Hilton said it all in his answer to my question whether solving the problems of customers or potential customers mattered more in the long term than ownership structure. He said that customers don't matter at all, as the City has done very well over the past 50 years dreaming up any old product and shoving it down peoples' throats.

To the extent that you believe that this demonstrates long term success, then I would only observe that City firms characterise every form of ownership. So ownership structures themselves have played no particular role in the City's exploitation of its customers.

But of course you might share my view that it would be wrong to judge the City has having done 'very well' with this strategy, as it is hardly in the best of health.

So ownership is just one of many dynamics that a business has to manage. 

If you are looking for the most important dynamic, then I believe it is whether a business is focused on solving its customers' problems, rather than solving its own problems at its customers' expense.

In other words, the key to long term growth is to be a facilitator, rather than an institution.

Image from The Philosopher's Magazine.

A Dogmatic Approach To Social Housing

For today's post, I'm again drawn to the Red Book and the 'problem' of social housing.

Remember, the game here is not to solve anyone's housing problem. It's to get the Labour Party elected to run the country. So it becomes necessary to explain the social housing problem in that light, rather than in a way that might elucidate its root causes and allow us to figure out a solution.  The facts should not be allowed to get in the way of a good story.

Why social housing? Because, as Dr Eoin Clarke explains, Labour's figures show it was deserted by a disproportionately large number of private renters, compared to property owners, in 2010 compared to 1997.  I can't vouch for any causal connection, but let's roll with it.

The primary challenge for the Labour Party is that this slide in support appears to have beeen a problem of its own making. Dr Clarke explains that in his view, "The Right to Buy scheme launched by Margaret Thatcher in 1981 was initially a good thing." And by the time she left office in 1990, the government was building social housing at about the same rate as it was being sold. That continued during the Major government, although both social housing sales and builds decreased steeply. 

Dr Clarke then asserts that the reason for the decline in sales and new builds of social housing was that Thatcher wouldn't let councils keep the sales proceeds - although that doesn't explain why the programme seemed to go okay for its first 9 years so I suspect something else was going on...

But never mind all that. Here's what happened next, according to Dr Clarke: from 1997 to 2010 there was virtually no social housing built at all, social housing sales boomed and the population grew by 4.41 million. House prices "rocketed". Young families had no option but to rent and "their rent payable was often extortionate... That," confirms Dr Clarke "is the legacy of New Labour's handling of housing."

Enough said, one would have thought. Yet against this background, Dr Clarke then asserts:

"Thus, it is fair to conclude that Margaret Thatcher's Right to Buy scheme was, on balance, a disaster for British housing."

"... we don't trust the Tories to build adequate stocks of social homes, because in their last 18 years of power they only built one for every four they sold."

Huh? Where does that come from?

Ironically, a little later, in her later essay on "Understanding the Psychology of the Working Class Right Wing", Rhiannon Lockley has this to say:

"...the key achievement of propaganda is to make the belief being transmitted internalised to the point where its origin is lost and it is accepted as natural and self-discovered by the individual...  The volume and diversity of negative messages about scapegoated groups in the right-wing media today does much to achieve this, and it is also supported by the factual style of reporting whch presents arguments as definite rather than exploratory."

All of which leaves the following questions: Is there a social housing problem? If so, what is it? How big is it? What are its root causes? What improvements could we make to address those causes? What controls could we put in place to show that it doesn't happen again?

But whatever you do, don't ask a dogmatist.

Don't Just Move Your Money: Spread It, Recycle It.

Great to see the MoveYourMoney campaign up and running - certainly a step up from the calls for futile mass withdrawals in 2010. But there are two significant gaps in the message.

Firstly: why should we move our money?

We don't need to 'save'. That's not really an activitiy in itself. And it's only one side of a much bigger story. Where do our deposits go?

As a society, our financial challenge is to get surplus cash from those who have it to creditworthy people and businesses who need it. Quickly and cheaply. At the rate that's right for both parties.

Our financial institutions don't enable this right now. They pay very little to interest to savers. They keep too much of the interest that borrowers pay. They use this 'margin' to cover losses from their own poor investments. 

So we've had to invent direct finance services that cut the cost of connecting savers and borrowers - meaning higher returns on savings and cheaper borrowing costs. As each borrower repays, you can re-lend your money to others. Think of it as financial recycling. The banks still play a role - the operators of these new services recycle the money through segregated business bank accounts - but they don't get to use your money the same way as if you opened your own personal savings account.

But this brings us to the second gap in the MoveYourMoney campaign. We shouldn't move our money to just one place. We need to put our eggs in lots of baskets -  we need to diversify more. There are many other baskets for your eggs than those listed.

Yet we are incentivised by government not to diversify. Most of us only get basic tax breaks (e.g. ISAs) for putting our small amounts of savings in the bank or building society (or in regulated stocks and shares).  This not only discourages us from using more efficient services, but also protects banks and building societies (and managed investment funds) from competition. Worse, it encourages us to put all our eggs in a few baskets, so our holdings of surplus funds are not diversified. We're told this is 'safe' to do because at least some of our money is protected by the Financial Services Compensation Scheme. But such insurance does not ultimately make these baskets 'safe' for all of us as a society. It makes these baskets expensive - because as consumers we all pay for the compensation scheme in the end. And we pay again as taxpayers when the highly concentrated risks in the financial system bring it grinding to a halt.

MoveYourMoney may not yet explain the need to get your money quickly and cheaply to creditworthy people and businesses who need funding. Nor adequately explain the need to diversify. But the government is now aware that the regulations and incentives are wrong. And organisations like MoveYourMoney should be helping us to keep the pressure on government so that these problems are actually addressed.