Either Gillian Tett's On Fire...

Ominous bursts of smoke have been rising from Gillian Tett recently. 

On September 12, the lady who gave us Fool's Gold pointed out that six key aspects of the financial system in 2008 are far worse now. 

The banks are bigger. Shadow banking is bigger. Investor faith hinges on central banking 'wisdom' and liquidity, while the top 5% of bankers are soaking up 40% of that support in bonuses. No one has been jailed for their role in the sub-prime fiasco. And the US government agencies now account for 90% of the mortgage market...

Today's smoke is rising over the Federal Reserve's decision to keep buying smack bonds at the rate of $85bn a month. It appears to have concluded that the West simply can't handle the withdrawal symptoms. Meanwhile, the UK regulatory elite has finally started to ring the bell over the fact that only 10-15% of the money our banks create actually goes to productive firms, while the rest is stoking financial asset bubbles... And, oh look, the real estate agency, Foxtons, has soared on its return to the stock market.

Either Gillian Tett's on fire, or something else sure as Hell is.

Image from JetSetRnv8r.

Involve The National Audit Office in Project Planning

So, two weeks have passed since the revelations of the latest (known) public sector IT disaster, and related wasted expenditure. But I'm willing to bet that nothing has changed in the way projects are planned, and we'll see many more juicy stories in future.  

Perhaps some kind of pre-emptive strategy would be in order...? 

Surely the National Audit Office is by now rammed with people who can spot the seeds of doom in just about any public sector IT project it cares to look at. So why not involve them at the start?

Forget all this talk of economic recovery, only the civil servants can save us now.

Cryptocurrencies Crest Capitol Hill

On Tuesday, I had the pleasure of joining a panel on mobile payments at Liquidity, the summit on new finance. I also caught the earlier sessions, but sadly missed the afternoon. It was definitely worthwhile, and I'll include links to the videos when they're published. Well done to Stan and Edie for pulling the summit together.

One development in particular that caught my attention was James Smith's explanation of the wider uses of Bitcoins, and other cryptographic currencies. I actually struggle with the idea that these are really 'currencies' as opposed to commodities that can be bought and sold. That would also explain the volatility in the 'exchange rate'. But the technology definitely opens up some interesting possibilities.

One of the wider uses of cryptocurrencies involves agreeing that a unique string of numbers with a nominal 'value' (say, a sixteenth of a Bitcoin), represents the record of title to a specific asset. This use-case is reflected in colored Bitcoins, for example, where different coloured 'coins' respresent different types of asset. While we already have asset registers for many types of property, such as land, ships, cars and securities, there are many other types of asset for which a similar approach would be too expensive. Some of the challenges confronted by such a project from a technological standpoint are described here.

The proliferation of cryptocurrencies and their possible uses has generated  significant interest from the venture capital community, as well as amongst central banks, monetary authorities and agencies fighting financial crime.

Far from retreating before the threat of a regulatory onslaught, however, cryptocurrency service providers have been lobbying for some time to gain acceptance, (e.g. via the Bitcoin Foundation). Recently, the leading providers and supporters also formed the Digital Assets Transfer Authority, or DATA to concentrate and focus resources more efficiently and provide a forum for resolving appropriate controls for the shared operational and regulatory risks.

The fact that the future of cryptocurrencies have reached this level of official engagement definitely makes it an area worth keeping an eye on.

BS2 and The Planning Fallacy

In his excellent book Thinking, Fast and Slow, Daniel Kahneman explains that governments tend to reward bidders who over-estimate the utility of large-scale projects, while under-estimating the cost. This is known in the trade as "The Planning Fallacy". While Kahneman cited research that demonstrates the fallacy in relation to many railway procurement exercises over many years, we also saw if firsthand recently in the West Coast railway fiasco. Now the government is trying its hand again, with BS2 HS2.

The Planning Fallacy suits all those involved, except commuters and taxpayers. At the time of the West Coast debacle, costs were about 40% higher on Britain’s railways than comparable European networks. And taxpayer subsidies, adjusted for inflation, had reached approximately £7 billion per annum. Approximately 10% of trains didn’t arrive on time. Only 42% of rail customers were satisfied with value for money for the price of their ticket. Only 69% said there was sufficient room for all passengers. And only 80% of rail customers were satisfied with punctuality.

This spring, the figures don't look any better. In fact, only 29% of UK commuters thought they got good value for their rail fares. Adding a fancy new rail project doesn't seem likely to fix their day-to-day experience.

There are numerous hard-headed dismissals of the alleged viability of HS2, including John Kay's piece yesterday. And it wasn't reassuring to learn from a Channel 4 news interview with the Transport Secretary that he has set aside a £14bn 'contingency' in an apparent budget of £40bn. It smells like 'waste' to me.

There must be ways to spend that kind of money to improve the lot of today's commuters, rather than saddling the next generation with a whole load of BS.

Banks Can't Even Be Bothered For The Rich

Oh those poor, poor bankers. Now, we're told by Spear's, that the new 'retail distribution' rules have made their lives so complicated they even have to stop fleecing servicing wealthy customers. Bernie Madoff must be relieved to have got out before the well ran dry.

Ironically, for a magazine that bills itself as "the essential resource for high net worths", Spear's argues the bankers' case. The article seeks to persuade wealthy readers to stop being so demanding if they wish to avoid being 'managed out' by private bankers who find them too costly to serve. In particular, customers must stop expecting services aligned to their needs and behave in a way that suits the banks: 

• agree what the banker will do for you up front, then wait for the quarterly reports and limit any discussion to those times instead of pestering for more frequent advice;

• don't change your instructions (the banks already chew through 3% of your return by making 'adjustments' to your portfolio, so don't make it worse); and

• behave as if you're part of a team - cut your banker some slack when he is slow to realise gains or avert losses and, most importantly, recommend him to your friends (bankers just love the bandwagon effect).

Puzzling, until you realise where Spear's probably gets most of its advertising revenue.

Definitely a sign that yet another area of the financial services market is ripe for innovation by facilitators.