Tuesday 27 October 2009

George Osborne has Stockholm syndrome

I am back from my week holidaying in the UK (sadly much more economical due to Labour's destruction of the pound) and lo and behold, George Osborne is back to his old tricks.

George is a political strategist and a very, very good one. So good he has helped to destroy New Labour. However, if to defeat thine enemy one must know them, then I wonder where George is going with his pronouncement on bankers' pay.

For to pay them in shares will only make them richer, whilst the money saved will not come 50% as income tax but instead go to bolstering the banks' capital - fattening them up for sale at a later date when shareholders, including taxpayers, will get a better price.

This is a very unsatisfactory solution and I find it sad the politicians' are still going on about bankers' pay when there are much more pressing concerns.

Like how to fix the banking system. I have long advocated a Glass-Steagall approach of splitting off Investment banks. Now I was surprised to see in my near wi-fi free trip that even Mervyn King has come round to seeing this to be the only sensible long-term solution. No matter how much banks howl in protest, it is right that to prevent crises retail and investment banking should be separated.

George Osborne is not very keen on this though, as it is very unpopular with the banks and needs international agreement; so instead we get a New Labour policy of pretending to 'attack' greedy capitalism when in fact doing more or less the opposite.
As I said, he has Stockholm syndrome. Recently he has shown signs of getting out of this, but the affliction appears deep rooted.


Bill Quango MP said...

Good point about the tax. Bankers that are paid in shares borrow against those shares at favourable rates from the very same banks.
So they get the cash anyway but as a loan and not as income.
Note George is saying to do this today for one year. He isn't chancellor and can't implement it until he is. By then it won't be necessary.
Its looks very much like a talk tough gimmick, really aimed to panic a rushed, poorly thought out copycat response from Gordon, that George can ridicule later on.

Simon Fawthrop said...

George may be a good strategist but he is first a foremost a politician pitching for votes.

He knows that if he mentions bankers' bonuses everyone is an expert and he generates applause, column inches and broadcast seconds. Mention narrow banking, Glass-Steagall or other technical issues and eyes glaze over and he might get a mention in the 2am politics/business section of some obscure tv channel.

As for shares being the answer, they also have distorting incentives. CEOs and other senior executives with share options make investment decision based on what they perceive is best for short term share price, at the expense of long term investment in, say expensive capital goods that underpin the long term health he the business. (The Economists' Buttonwood did something on this a couple of years ago).

I agree that something like Glass-Steagll is the answer, that way we can tell "casino bankers" that they are on their own and if they screw-up its their cuff-links and the tax payer won't be bailing them out, whilst heavily regulating domestic banking.

Letters From A Tory said...

The problem is that George is indeed a strategist, but that's all he is. It wasn't that long ago that he was just another SpAd in the Conservative Party - he just happened to get to know the right people, rather than having any intellectual or economic pedigree.

Budgie said...

Re-constructing our own Glass-Steagall is the best way of reducing risk to the taxpayer. But we don't need to wait. As Liam Halligan (Sunday Telegraph) said, if we implement it unilaterally it will give the City an advantage that others will eventually have to copy.

As for shares as a bonus, aren't people taxed on the basis that a shares bonus is a 'benefit in kind'? Even if not, won't the proceeds of a sale of the bonus shares be subject to Capital Gains? Anyone who knows please enlighten.

CityUnslicker said...

GS - overall that is not such a terrible risk. As long as you trust the management...

LFAT - Blair chose a second with flaws,then brown did and so has Cameron; there is a reason for this!

Budgie - The tax will get paid when the shares are issued/sold - but that won't be for up to 3 years.

Anonymous said...

I agree that in the longer term, Glass-Steagall must be re-introduced.

I also agree that it can only be done internationally.

Debt issued (eventual) "money", with more debt issuance required to repay the interest on the original loan, ultimately implies exponential debt increases, which overwhelm GDP/Net disposable income increases, creating ultimate devaluations/defaults. This can be tolerated for a longer time in a world where energy, and all primary commodities are increasing, as their increase offsets to some degree the inflationary effects of the above.

From henceforth, we do not live in such a world.

In the longer term therefore, an alternative to a debt based monetary system must be found. Given the enormity of that challenge, there is precious little time left, and "the longer term" becomes immediacy.

Debate rages about the way to insulate the tax payer from casino banking. A "non-debt" issued currency, of whatever nature may answer this requirement, although whatever the nature of the issuing authority, it must be restrained, to prevent the hidden tax of inflation.

In the meantime the immediate problem is the recovery of the financial system. Nothing can be achieved until stability can be returned.

The US, and the UK, and others, have chosen a particular way to achieve stability, a way not without its critics.

However, we are where we are, and it behoves commenters, politicians, MSM, regulators, financial writers, etc, to understand the particular way that has been chosen, before they choose to flap their lips and make noises.

This is the best concise write-up
that I have found to explain the current situation. Understanding this, and its implications, and how it will evolve, would go a long way to improving the quality of the MSM debate!

Anonymous said...

I note that on the week where there is the largest ever issue of US debt, and options expire, that the $ is up, gold is marginally down, equities marginally down, and the Euro is marginally down.

Clearly the primary dealers/brokers need liquidity for the purchase of Treasury debt.

Next week the fed will purchase Treasury debt from them, they will be liquid again.......

The consumer confidence, case-schiller, new home sales, durable goods, gdp, household purchases statistics issued this week will affect the markets next week.


CityUnslicker said...

Anon 12.40 - very astute points. The markets are close to tipping - I hope they don't but a trend will form in the next few days that will see out 2009.

Old BE said...

I lost all respect for Cameron and Osborne when they started to abandon any attempt at intellectual integrity in favour of being on the popular side of any debate. When I saw Osborne's proposals I actually caught myself thinking "perhaps the Tories will actually be worse than Labour". Worrying.

James Higham said...

By then it won't be necessary.

You mean it's to improve?

CityUnslicker said...

BE surprised to hear that from you, but I do concur re their economic policies.

Anonymous said...

Fed is scheduled to cease QE at end of this month.

They do own the entirety of the home mortgage agency debt market. Purchases of this debt are scheduled to cease 31st March, 2010.

T bill market will be in the hands of the futures sellers.

Keep an eye on the 10 and 30 year rates.

Some dollar carry trades are being taken off the table, hence $ current strength, and probable weakness in US equities.

Equity movements will depend to some degree on how much $ carry trade has been placed in US equities, and how much the primary brokers/dealers, and their friends the wall street banks are dependent on high asset valuations for the strength of their balance sheets.

Ultimately higher rates at this point will kill the US economy. Credit markets MAY freeze....maybe no eurodollar squeeze like last autumn.

This is plainly to ease relations with the Chinese prior to upcoming G20, a play for time, and more Chinese T Bill buying, but at what rate?

The next UK MPC meeting is 4/5th Nov 2009, where QE will probably recommence. If QE does restart, £ will likely fall against $ at this point, and a divergence in equity indices may also follow.

Flawed economic models breed insanity it seems. At all levels.

With high and increasing unemployment, and increasing interest rates accompanying an already almost frozen lending market, and elections upcoming, US politicians and the public will swiftly crucify the Administration of Obarmy.

The next G20 meetings are:-
G20 finance ministers and central bankers, St. Andrews, Scotland, November 7-8, 2009
Look for fireworks, and then perhaps, a restart of QE with debt in US after a few weeks.

Interesting times. You couldn't make this up!

All, IMO.--- E&OE, yada, yada. :-)

Anonymous said...

But then again, the $ could fall as the perception that higher rates will destroy the economy could take hold.

Who knows?


BigBadBank said...

Cityunslicker (hello)

You are exactly wrong: Smoothychops junior is a political tactician (not a strategist) and a very bad one at that.