Brexit at any price?

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article 50, austerity, bailout, Bank of England, banks, Brexit, Brussels, crisis, David Cameron, debt, ECB, economy, Enda Kenny, EU, euro, Europe, European Union, eurozone, Gary Lineker, Germany, inflation, investors, Ireland, Italy, Labour, Lisbon, Mark Carney, migration, NAFTA, Northern Ireland, Poland, politics, recession, referendum, reparations, Scotland, Singapore, Strabourg, Theresa May, UK, UKIP, vote, wealth, Zac Goldsmith

Sunny weather doesn’t favour the Tories. But what about a rebel standing as an Independent?

In the five months since the initial Brexit fallout, the mud-slinging has continued from both the UK and European Union camps. None of it helpful, yet the UK government is unwilling to discuss in detail what it plans to do.

I have consistently argued that Brexit for the sake of a Brexit is not an option. We should never leave a club that has brought us benefits – as well as pains – just because we now can.

The referendum certainly gave the government the moral mandate it needed to proceed. But that doesn’t make a hard and fast Brexit right.

Rewind: People voted for Brexit in order to see an improvement in their standards of living. They didn’t do it because they wanted all foreigners out (as that might include one’s wife!) or because they know the horrors of largesse in Brussels.

These were contributory factors yes. But they were not the point. People believed that a protest vote was needed to shake up the EU. They also wanted to see more checks on whom we allow to settle in the UK. But principally the extra 1 million people who voted for Brexit rather than Remain were poorer income groups who felt ignored by Westminster let alone some foreign place called Brussels or Strasbourg.

They cried out for change and saw this as the only chance. Even if they had little clue exactly what change it would bring. Despite their uncertainty – because even the UK government had no real policy of a post-Brexit Britain – voters did not vote for chaos, a 20% decline in sterling that makes the 1967 devaluation looks positively lightweight, nor increased racial hatred that has accompanied all this. Nor did they vote for what might end up shredding another Union, the United Kingdom, as regions as well as Scotland and Northern Ireland see their vote ignored by London.

While data so far has been buoyant and some economists have sought to repent for making mistakes forecasting an economic disaster following Brexit, it could also be argued that they were simply a little too hasty to predict – but also to apologise.

All the good data so far has been historic. It takes time for an economic disaster to gather momentum. A robust developed economy like Britain won’t suffer overnight Armageddon but rather as some forecast before the June referendum, a slow motion train crash.

So it is foolhardy to rubbish Governor Mark Carney or the Bank of England for their dire predictions. Certainly, the Bank still believes inflation will go up next year and prices might even rise at their fastest pace for any period since 1945 unless sterling’s decline is corrected soon.

For that correction to take place, the government will have to be more open and less hasty to Brexit. When Prime Minister Theresa May told her party faithful at conference in October what she planned to do and announced she would trigger Article 50 by the end of March 2017 it shocked and confused a lot of people. Why by March? What is the hurry?

Enda Kenny, the Irish premier, said in the past few days that he doubts Brexit talks will conclude in two years but rather five years. Another realist who can see the folly of another EU regulation agreed to in Lisbon in 2009.

But the only conceivable reason for May’s hurry is that talks are expected to conclude within a 24-month period of the trigger. That takes us through to March or April 2019. May might be feeling that with a slender government majority, the risk of further MP defections or by-elections the government could be forced into an earlier election. And don’t forget that my own MP Zac Goldsmith is standing for re-election today as a Heathrow expansion protest as an Independent but who sadly will be at risk of losing his seat over his Brexit views not shared as widely by Londoners who will vote in Richmond Park. But at least from one ballot paper we saw this morning, someone forgot to put it into the box and as an impromptu exit poll it marked Zac on the ballot paper!

That is why some have even called for May to call a snap election now while she still commands some respect from the electorate.

Certainly, it would make far more sense to trigger Article 50 on a day in the future when sterling has stabilised and preferably regained some of its lost strength.

The government and its advisers are held bent on telling us constantly that “it would be unhelpful for the British government to provide a running commentary on Brexit negotiations”.

We hear that all the time and as though someone is trying to drum it into our heads. Like in all forms of torture and indoctrination – say it enough times and people start to believe you.

Stand back from the hub-bub and ask yourself Why?

The government is using “running commentary” as a shield to protect itself, for its own convenience of not having to be accountable. It appeases the right wing in the ruling Conservative Party as well as its provocateurs, UKIP.

Having won the people’s vote for a Brexit, the government now thinks it can do everything itself. Well, on December 5 the government plans to appeal a Court order that said Parliament should have a say in Brexit and vote on it not merely discuss it and allow the government free will.

With the vote to leave close 52% to 48% on a high turnout, it is understandable the courts feel uneasy about allowing the government to have easy passage on this.

It is a decision that will affect millions of people for generations to come. Although not irreversible in 50 years the damage could be very much done if we make a Brexit on any terms.

People aren’t that dogmatic and I would imagine that they have had some regrets about voting for Brexit IF they had any idea it would play out this way.

A nation famed for its tolerance and conservatism with a small “C”, “Britain is fast becoming a dystopia” as TV pundit Gary Lineker aptly put it after the court ruling and his tweet of support when the public turned against him.

While it is true that the EU has some difficult issues it needs to soul-search over – such as its insistence over labour mobility – Britain too needs to think hard about what it hopes to achieve.

As I have argued often since June, premier May could simply note the referendum decision and then proceed to choose a time in the future when to trigger Article 50 once we have a solid policy in place and sterling has been repaired.

But having rashly gone for a deadline of end of March 2017 to trigger Article 50 we should be discussing the negotiations process and what we hope to achieve from it. Even if Europe doesn’t want to discuss anything before we trigger – a means to weaken us – we as a nation should debate.

We cannot trust one Cabinet inside a government to make all these huge decisions and sacrifices on our behalf. We must not assume that they are somehow the Ten Wise Men. They are politicians, as susceptible to being gullible and short-sighted and stubborn as any other human being.

Moreover, how practical is it to even imagine blocking debate?

The government might want to get into the history books as the ones who helped us Brexit but that is a hollow victory if Britain suffers.

The French want us to start talks as soon as possible so that we are in a weak position with a low sterling exchange rate. The French can be short-sighted. It was the French too who wanted to punish Germany for World War One by demanding high reparations at Versailles in 1919. It resulted in years of chaos and resentment in Germany which led to the Third Reich within 20 years. Not smart.

Any effort to damage Britain now will actually come to make all of Europe suffer later. We have been down that road. It will limit German car exports to one of the nation’s most important markets, the UK. It will lead to European workers having reduced rights in Britain as well as Britons in Europe. Tit for tat. That’s ever so Cold War!

Of course, it is also true that apart from a healthy engagement and debate with the people of Britain by the UK government, the EU needs to have a debate within its own ranks and its own peoples.

Both the British government and top EU brass seem impervious to that.

While the Italian constitutional reform referendum isn’t a vote to leave the EU on December 4 but to speed up how Parliament functions with a slimmed down Senate, so too Europe needs to address a more fundamental question: migration.

The EU says it cannot function without migration. Why? It is true that many low-skilled workers have un-burdened Europe by coming to the UK to seek work. And it has been good for keeping down wages in agriculture in the UK too.

But look more widely and you will see that migration is a principle peculiar to the EU and outmoded by the risks of new threats such as terrorism.

Already the EU has a problem on its eastern border. Having criticised Turkey’s Erdogan for the way he has been heavy-handed with the aftermath of this year’s failed coup and reacted by suspending talks on Turkey joining the club, Erdogan has threatened to release millions of immigrants into the EU unless Brussels changes its mind.

It does rather show what a magnet for migration the EU has become.

Yet if you look at the North American Free Trade Area (NAFTA), now under review from a new populist President-elect Donald Trump, or south east Asia’s trade area, it is apparent that you can have free trade and prosperity without migration.

In Asia, Singapore will allow daily guest workers to flood in from Malaysia but won’t grant settlement rights. The whole region prospers and there is no friction between communities about migration.

Trump may well kill off NAFTA but a pity if he does. There is some debate over whether NAFTA has brought America benefits or just grief and joblessness. That in itself doesn’t mean trade areas are a bad thing or that the EU should be disbanded. Only that it needs to be drafted smartly and respected by all who participate in it.

So the bottom line? We need a fair and effective trade agreement without migration as the pre-condition. We should accept other nationals based on the skills they bring. We also need to enter into negotiations over Britain’s future by being more transparent and open. Anyone who says we can’t have a running commentary is trying to hide something.

The future of Europe is simply too big to be debated in a Cabinet without checks and balances. We owe it to the children of all Europe to get this right.

Between the devil and the deep red debt?

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Adair Turner, banks, bubble, Bunds, Challenger banks, China, debt, debt crisis, debt forgiveness, economics, European Central Bank, Eurostat, Federal Reserve, Japan, lending, risks, Society of Business Economists

He may have been the chief regulator in the United Kingdom, but Adair Turner chose a function in London hosted by the Society of Business Economists to tell a packed room of economists that more regulation is not the answer to averting another debt crisis.

Speaking about his new book “Between Debt and the Devil” Lord Turner, the former chairman of the Financial Services Authority, documented how no one saw the financial crisis (which later became the sovereign debt crisis) coming in 2007. But how we might have learned from the antics of Japanese credit lending as far back as 1990.

Turner also painted a less than savoury picture of what banks do rather than what GCE ‘A’ Level students are told they do in the standard practices of education. But he stopped short of following the example of some US economists in the 1930s who had proposed to President Franklin D. Roosevelt the abolition of banks.

He gave the example of India to illustrate that too much debt could be a bad thing. Sure, he said, if the subcontinent had more credit available in 1970 today its economic growth rate would have been higher too. But can you have too much credit? And if you do, what happens with it? Where does it go?

Turner’s central theme was one that has found a home on this blog in contributions three years ago, such as UK readies for new “first timers” property crash where I argued that debt is managed, not reduced, and where radical write-offs may be necessary. See also The merry-go-round of the world’s debt burden. It is passed around like a parcel between households, banks and governments, Turner said, as I hinted upon in Not even half way through the crisis – HSBC and other dispatches. Why was it ok that 60 years ago peripherals wrote off half Germany’s debt but it is not ok to consider such options now? See also  Austerity makes debt bloat, but there is a better way.

Perhaps where I disagree with Turner’s view it is that Japan was not the first and only sign we knew things were going wrong. As a debt correspondent at Reuters, I had questioned before the financial crisis why it was that Bund futures volumes briefly rocketed from historical levels of 650,000 daily lots to 2.6m before coming back down to 650,000 lots. Surely a bubble? And why did the world’s money supply which took 300 years to reach USD35tn then double again in six years by 2006? So, along with Eurostat’s firebrand assessment soon after 2004 that Greece had “cooked the books” as one Reuters headline splashed, I would say that Japan’s 1990 crisis was an early warning signal but far from the last painful scream before we landed in a protracted crisis.

Certainly what was not in doubt was the wide scale complacency, even among debt strategists of how bad things were going to get. I remember once such poor soul receiving a phone call from me in late November or early December 2009 – after the newly-elected Pasok government had taken office in Athens and discovered a black hole in its finances – and offering up a prediction about Greek bond yields. At that point they were running at something like 50 bps over German Bunds. He said he would be “surprised” if they more than doubled by year-end before pulling back. Well then, he must have been blown away by May 2010 when Greece appealed for an international bailout and faced yields some 2,000 bps over Bunds.

But Turner and me are agreed that the recovery is far from here and the debt crisis is far from over – it has just become someone else’s problem.

Early in his presentation, Turner explained that classic textbooks would tell you that banks’ function is to lend cash in such a way as to allocate resources to capital investment. But in Anglo-Saxon economies and beyond, they have rather carried out two other activities: 1. propped up consumption and, as he called it, 2. encouraged competition between ourselves for assets which we already own, such as property.

Turner tried to slay two “fictions” as he called it. Firstly he said banks don’t use pre-existing savings to allocate to capital investments and secondly, banks don’t even fund more than 15 percent of the capital investment needs.

So rather than wealth generation, the banks have helped us find an outlet to spend and merely helped drive up asset values. He said that Japan’s stated goal was different. It had greater ideals such as encouraging lending to exporters and manufacturers – to wealth generators in other words. Japan, at least on paper, was keen to encourage capital investment.

But back to how things went wrong in Japan. Debt, Turner said, doesn’t just go away. It moves around. That is why it is not inflationary. “Our canary which we should have seen was Japan in the 1990s,” he said.

Interestingly, one of the questions I wanted Turner to expand on after his presentation was how did it go wrong for Japan when he had told us that capital investment lending had been encouraged? I didn’t have long to wait, someone at the front of the audience was in with the first question asking precisely that.

Turner’s response was that in reality Japan’s lenders broke “all the rules” of neo-classical economic thinking, and often backed croneys or white elephant projects. Hence why it only looked good on paper! Japan sank into the quagmire of high leverage that has dogged Anglo-Saxon economies too.

But if Japan’s prescriptive policy was wholesome yet not adhered to, he was scathing of China’s position in recent years. Fearing the fall-out from the financial crisis China embarked on a different policy push to Japan and rather than backing manufacturers it sank money into real estate and urban developments across its vast regions.

“In the four years since 2009 China poured more concrete than the United States did in the whole of the 20th century,” yet to make matters worse many of the constructions were poor and will never be occupied.

For someone appealing to us to think about fundamental reforms rather than blunt monetarist interest rate policies to counter the risks of future crises, Turner was remarkably unsympathetic to the idea of any alternative monetary armoury available. He asked how will yet more European Central Bank QE help German exporters when debt yields are already very low? He also doused excitement around the secondary effects this may have on the wealth effect, on the feel-good factor, and more consumption that might follow. He said that was all “questionable”. As for the benefits on forex of a weaker euro, he remarked you can boost EUR exports for Europe, but not when there is a global debt crisis.

He said of German policymakers “You were right, for the wrong reasons, and looking the wrong way.”

He also detailed that as income disparity in society grows it throws up new challenges. The wealthy tend to save a bonus. The banks will then transfer it to the impoverished who will spend it. But none of this spurs higher Gross Domestic Product, which would help all in society.

Turner encapsulated the fundamentals of the debt crisis that need to be challenged as: 1. An Inequality driver, 2. A Real Estate driver, and 3. a Global Imbalances driver.

“It is those fundamentals which must be challenged rather than just bank regulation,” he said.

Turner offered some forecasts too. Convinced that we are far from ending the current deflation era, he said he was sure the Federal Reserve would act to raise interest rates in December, but his 2018 forecast was that near-zero rates would be at 2 percent, UK rates at 1.5 percent, Japan’s still at zero or even back in negative territory, and China’s rates would fall to 2 percent. In other words, growth would not be strong enough to see sharp tightening, with the most aggressive of nearly 200 bps being the USA, the world’s biggest economy.

He went on to warn that all ways of stimulating demand are “inherently dangerous”. So we are back to supply-side reform involving the three drivers named above.

At the end of the presentation, I missed out on my question, but I was pleased to see a lady economist sitting nearby had a question pretty much the same as I wanted answered. It was about the emergence in the UK of alternative funding vehicles to the banks. These are so-called Challenger banks, crowd lenders and other initiatives which may not be as stringently-regulated as other lenders and would they present the next regulatory crisis?

Well, here Turner offered a few equations to warm up to an answer. His response was that “shadow banking” as he called it was present before the crisis and had actually significantly shrunken as a share since the crisis.

That may well be true, as dominant traditional banking comes back to the fore at least, but shadow banking is only a part of this since some institutions are not shadow but are not traditional banks. Did we expect someone who oversaw the creation of the regulation and approvals of some of the challenger banks et al really want to dishonour his past?