I am *so* sorry (not)

In his final press conference of 2011, Mervyn King, part time Governor of the Bank of England and full time Dame Edna Everage look-a-like, wished journalists and consumers alike a merry Christmas, and a “systematically stable 2012”. It was a wish, not a promise because, despite his lofty position in monetary circles (or coins as they tend to be called), he is not the master of the house, nor the keeper of the zoo. King, Blankfein, Obama, Hu – they are all at the mercy of the global invisible hand. A hand which Alan Greenspan, a man that my sixth-form economics teacher absolutely adored (sadly, the course finished in mid-2007), said of recently:

“With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.”

This is indeed a fun game, with limitless possibilities. With notably rare exceptions, (the British Medical Association, the majority of GPs, and House of Lords, for example), the Health and Social Care Reform Bill is widely supported by the medical profession. Similarly, with notably rare exceptions (2003-2010, for example), Roger Federer has had an underwhelming career.

The Bank of England was granted independence* by Gordon Brown or Tony Blair, depending on whether you voted for Ed or David Miliband in the Labour Leadership Election, at the beginning of Labour’s first term in office. It was a shock and awe move, designed to wow the sceptical markets into trusting Labour with the economy. The Monetary Policy Committee was set up, and given a mandate to target inflation of 2%. There was a margin for error of 1% either side, but if inflation slipped below 1% or above 3%, the Governor of the Bank of England would, like an apologetic public school boy after breaking the chapel windows with an errant free kick, have to write a letter to the Chancellor of the Exchequer, explaining why he had screwed up.

With notably rare exceptions (April 2007-present), Mervyn King has not had to write such a letter. Since April 2007 however, King has had to write a plethora of letters to the Chancellor, explaining why inflation had (usually) overshot the mark. The naïveté and arrogance of this charade is almost adorable. Not Andrex puppy adorable, more like young child with chocolate all over its face adorable, because the clean up process has been protracted.

The British Government tried targeting full employment. It failed. It tried GDP growth. It failed. And, like a game of economic indices spin the bottle, it tried inflation targeting. And it worked. The UK enjoyed 43 consecutive quarters of economic growth under inflation targeting. This really was the Holy Grail – strong economic growth without the accompanying high inflation. Presumably, this wasn’t because the Governor was so terrified of writing to Gordon Brown, nor because he was an economic wizard, nor even because the Chancellor had abolished boom and bust. It was, rather drearily, a result of a combination of hundreds of factors, from cheap manufactured goods from China, to global banking deregulation, and so on. Of course these global imbalances that had kept inflation and interest rates down, and therefore growth up, eventually led to the greatest economic and financial crash since the one in black and white. It wasn’t so much a case of the emperor is wearing no clothes but rather the emperor got pissed as arseholes and sold all his clothes for a plastic singing fish in a pique of drunken materialism.

The letters that King has sent to the Chancellor are a gentle reminder of the arrogance of the 1990s, when we thought we had perfectly manicured the invisible hand; we thought we were in control. It’s comforting to think that one is in control, or at least that someone is. That’s where the power of conspiracy theories emanates. It’s much easier to think that Princess Diana was murdered by Prince Philip, because Prince Philip doesn't give a damn about you. A car crash? That's unsettlingly possible. Or the terrorist attacks of 9/11. If it’s an inside job (Bush, the Israelis, Alex Ferguson), then it was by design and therefore avoidable. If it’s just two dozen horny Saudis, a couple of steak knives and those flying lessons you get from your rich uncle on your birthday, that’s chaotic and terrifying.

And that’s what the last few years have been. The future depends on a US-led recovery, a soft landing in China, a stable Eurozone, and maybe even some new technologies. It also depends on Mervyn King, but not very much. Sorry.

* Not quite independence, closer to devo-max, but what's monetary independence between friends?

Arsène Wenger and the Ikea Effect

The ‘Ikea Effect’ is a theory put forward by Michael Norton, Daneil Mochon and Dan Ariely, in a Journal of Consumer Psychology paper entitled ‘The IKEA effect: When labor leads to love’. The authors postulate that people value things they build or assemble themselves more highly than premade goods. In other words, that bookshelf you put up three months ago that you think is awesome but in reality is a threat to small children and books everywhere, is a result of the Ikea effect. In their experiments, people saw their ‘amateurish creations as similar in value to experts creations, and expected others to share their opinions.' They write:

When instant cake mixes were introduced in the 1950s as part of a broader trend to simply the life of the American housewife by minimizing manual labor, housewives were initially resistant: the mixers made cooking too easy, making their labor and skill seem undervalued. As a result, manufacturers changed the recipe to require adding an egg; while there are likely several reasons why this change led to greater subsequent adoption, infusing the task with labor appear to be a crucial ingredient.

It seems possible, therefore, that Arsenal FC, run with near total control by Arsène Wenger, is suffering at the hands of the manager’s labour of love, which has led to the managed decline of a once great team. Wenger’s project of developing young, technically gifted and no-taller-than-five-foot-eight footballers through the youth academy has been terrifically successful, as long as you judge success by pre-tax profits. However, Arsenal have not won a trophy for seven years, a period, incidentally, in which the Chinese economy nearly doubled in size. Despite a wealth of evidence to the contrary, and barring a desperate, last-minute shopping spree following Arsenal's worst defeat in a century, Wenger has not changed his philosophy. Arsenal has been made to suffer for the affection of Arsène Wenger.

Eight years ago, Arsenal went an entire league season undefeated. In 2012, they might go eight minutes without an amusing defensive calamity. The Ikea effect can drive a man to believe that Miguel is superb defender, that Denilson is better than Xabi Alonso and that Walcott dropped a little bit physically in the second half but showed great mental strength. Right now, Arsenal could do with a left back, a central midfield and a striker. Failing that, ten eggs to support Robin van Persie.

Monnet's Masterpiece and the Democratic Deficit

The Eurozone is a contradiction wrapped in an oxymoron, inside a beautiful ideal. An elite project to safeguard peace and democracy in Europe that has led to rioting in the streets and the condemnation of a national referendum. There are two deficits in Europe; one fiscal, the other democratic.

There is no such thing as Euroscepticism. For the European project is about ever-closer union. The Americans seek to form a more perfect union. The Europeans, we’ll settle for just being closer. Therefore, to be Euroscpetic is about as useful as grumbling about the weather. Everyone complains, but no one ever does anything about it.

Like many, I was flabbergasted by Georgos Papendreou’s decision to hold a referendum on the latest bailout package to Greece. How could he be so irresponsible? How could he be so ungrateful? In what position is he to dictate terms? But this immediate reaction, whilst understandable, is as stupid as it is arrogant. In October 2009 the Greek people voted in elections. They gave Papandreou’s Pasok Party a working majority in parliament. Then, a bunch of really bad things happened one after another, and France and Germany imposed a further austerity package on Greece in exchange for a 50% haircut on Greek sovereign debt. What this means is that in exchange for a partial default, the Greeks will cede control of their fiscal policy to Merkel and Sarkozy, or whoever will beat the two bumbling leaders in 2012 and 2013 respectively. When the Greek people voted in 2009, they assumed they were voting for a parliament that would control its own fiscal future. This being no longer the case, how can any man, woman or Eurozone leader deny the Greeks' right to a referendum?

The Euro hasn't worked because the Eurozone remained a group of disparate nations which seemed surprised to find themselves with one currency and one interest rate. And the catastrophic rescue attempts have reflected this. Sarkozy cares only about the state of his toxic-Greek-debt-exposed banks, Merkel with inflation, and Berlusconi with staying in power. The connection between a democratic deficit and the failure of the Euro is that the Euro required far greater integration of member states, integration that would have required either referenda that would have been tricky for governments to get ascension to, or simply ignoring the electorate and giving away not just monetary, but fiscal powers to Brussels. The lack of democratic legitimacy in the Eurozone it's hamartia.

The solution to this crisis is the same now as it was two years ago – print money. Eurozone countries have vast debts, like the United Kingdom, like the United States, like Japan. But unlike these countries, the European Central bank (ECB) has acted about as economically adept as its acronym-sake, the English Cricket Board, could be expected to. It hasn’t just done nothing. The until very recently Chair of the ECB, Jean-Claude Trichet, actually raised interest rates to 1.5%. Raised them at the same time that Portugal found itself exactly level with the Atlantic. Germany, the main beneficiary of the Euro, is still terrified of the printing presses, because the last time they used them there was hyperinflation and fascism. Despite the fact that most of the money being used in Europe is German, the Germans have benefited more than anyone from the single currency. Without it, the Deutschmark would be painfully expensive, and Germany’s exports would be inaccessible to the world. 

It’s a great shame that the Euro is failing, because the EU, Monnet’s masterpiece, has fostered peace in Europe (at least between its members) since 1945. We take this for granted now, and the idea of Germany invading Belgium tomorrow seems absurd. But it remains one of the great achievements of modern human history. Throw in the fact that free trade is a jolly good thing and you have yourself a success story.

The people get the government they deserve, and this time is no different. We weren’t paying attention. We weren’t voting; we were consuming, and we didn’t care by what means.  I find it frankly embarrassing that, as a European, we cannot sort this mess out. We knock the Americans endlessly for their missteps, their failures in global leadership and for electing sub-standard presidents. Shame on us. It was hubris and we had it coming. And if the Greeks have taught us anything, it’s that hubris is nothing to worry about.

Capitalism 4S (and pie)

Peter Mandelson once famously (okay, not famously, notably) declared that New Labour was ‘intensely relaxed about people becoming filthy rich’. And in many ways, it’s a sensible sentiment, even for a nominally socialist party. For wealth is a reward for wealth created. You need not go into politics or run a charity in order to good works on this earth. If you run a business that employs people and pays them a fair wage, that is wealth creation. If there’s no money being created, then there’s no money to be redistributed by the government. The pie is grown, and then those responsible for that growth get to keep a bigger chunk. The rest of us get to share in the proceeds of growth, like schools, hospitals and the Millennium Dome.

That model held, or seemed to hold, until the entire edifice of the pie (I’m in too deep with this metaphor now to simply saunter out) collapsed, having been grown, not with lovely filling (sustainable growth, new technologies), but with air (derivatives, credit default swaps and lies).

Ed Miliband’s speech at the Labour Conference was poorly received. This should come as no surprise. The Labour Leader was attempting to do what only two post-war Prime Ministers, Clement Attlee and Margaret Thatcher, have done - reinvent British politics. Tony Blair was not a Tory; he simply operated in the post-Thatcher orthodoxy. Attlee transformed his nation through nationalisation, his most famous of course being in health, whilst Thatcher achieved her place with privatisation (though of course emphatically not of the National Health Service) and the entrenchment of the neo-liberal settlement in the UK. Forget predatory companies, the subtitle of Miliband’s speech might have been ‘pro business, anti-business as usual’.

Financial markets, Wall Street in the USA and the City of London in the UK, took an enormous slice of the economic pie in the 2000s yet did little to grow it. The 1920s and 1930s had the explosion of, amongst other things, the auto industry. The 2000s had finance. Alright, it also had broadband internet, Twitter and the iPad. But how many employees does Twitter, the ubiquitous social network site employ worldwide? 300. Now the auto industry. It currently employs around 350,000 in the US alone, and that's just the people who actually make the cars. Then there are over two million who sell, repair, or fill them with petrol. Of course I’m not including the workers who drive them with massive payloads, insure them with massive policies, nor those who built and then patrolled the roads. I could go on. That is wealth creation. Who cares if Henry Ford got filthy rich? Meanwhile, finance is the mere movement around of other people’s money through huge risk taking. What the 2008-present financial crisis taught us is that this is not wealth creation. It is a zero-sum game that creates inequality and enormous instability.

The evidence is that, according to the Institute for Fiscal Studies, by 2013 there will be a further 600,000 British children living in poverty whilst those born in the early 1990s will retire 25% poorer than their parents. This is the sense of injustice that the 99% of us are feeling. That somehow the game is rigged. That those who work hard, put money away and grumble only a little bit, will always in the end get screwed by a hedge fund short selling AIG stock. And so if the game is rigged, change the game. And as obscure as it may seem, that is what Miliband is attempting to do. He wants to foster a capitalism that rewards job creators, innovators, and curtails the runaway dealings of those who see nothing beyond the quick private buck which quickly turns to public debt . This is not a straightforward distinction to make, but it is a worthy one.

The financial crisis might just have brought us into a new era of British politics. If the country is won over by Miliband’s rhetoric, his beliefs and, yes, his personality, then he might add his name to that short list of transformational figures. If not, he will, like Michael Foot, be regarded by posterity as a loser and a fool. Talk about risk taking.

It's Getting Better All The Time

“Hasn’t been born yet” – Michael Johnson on who can beat Usain Bolt.

The global economic model hinges on the concept of infinite growth. When you put money into a pension as a young person, you expect to get more out of it than you put in. Not because you got lucky and invested in Apple stock twenty years ago (though if you had spent that $5,700 in 1997 on Apple stock instead of the PowerBook laptop, you would have made in the region of $330,000) but because, generally speaking, growth just happens. Our entire way of life is based around this very fact. Economic growth means people will have more money and so stocks and shares will be worth more. Hello Costa del Sol. It’s why companies invest – they believe they will make more money in the future. It’s a big part of the reason why Japan hasn’t seen consistent economic growth in two decades. Their population is shrinking, so companies see no incentive to invest, and in doing so they have essentially abolished the business cycle.

I was wondering whether the same thing might ever occur in sport. Take tennis, and the recent useful example of the US Open final. The upward trajectory of men’s tennis has been undeniable in the last twenty years. No sooner did Pete Sampras achieve an unbreakable 14 major record, then Roger Federer came a long and smashed it in six years. Then this guy called Rafael Nadal comes along and beats Federer in pretty much every match they play. And now Novak Djokovic, playing better than both these guys, is currently racking up a faintly bizarre 64-2 record for the season. Permanent growth. How long does Djokovic have until some kid comes out of nowhere to be greater still?

Maybe longer than we think, if athletics is anything to go by. World records are a rare event these days, even with the spectacular Usain Bolt. Humans have physical limitations; the 100m will never be run in four seconds, even if the mile could (quite easily these days) be completed in under four minutes. Usain Bolt runs with 1000 pounds of force, so could there be a time when the human body simply collapses under its own force? One hundred metres is a short distance, with just a few technical stages. Room for improvement is minimal. "A pen is harder to refine than a tractor”, as Ato Bolden, four-time Olympic medallist, neatly puts it. Where can further progress come from? We’ve improved diets, training regimes and sports psychology. That sounds a lot like Tyler Cowen’s low-hanging fruit.

Over the last forty years, the 100m world record was broken in tiny increments of 0.1 and 0.2 seconds. Then, out of nowhere, a man seemingly too tall for the distance smashed it once, and then smashed it again (Richard Keys would be so proud). And herein lies our answer. Usain Bolt is the human embodiment of that new technology that comes along, and revolutionises the global economy. Humans were around for quite sometime before the invention of modern agriculture. Horses were the number one mode of transportation until the steam engine was conceived and these things call trains came along. Progression is never linear. Right now, the world is suffering from too few engines of growth. We are stuck, like those 100m athletes before Bolt, at incremental growth. This is not to say that governments and entrepreneurs should be lax, and simply assume that a technology or advancement will come along and save the world. But Bolt does offer a grain (cf Norman Borlaug and the Dwarf Wheat, the technology that saved the lives of millions of Indians) of hope. That if we keep trying to run as fast as possible, we'll get there in the end. 

Except that it's infinite, so we won't. But the point remains.

‘abhorrent to society at large’

This month a man and a woman were jailed in Birmingham for having sex with each other. This was justified by the fact that the man and woman were also known as father and daughter, and incest is against the law in the UK. This has been the case since 1908 when, due to increasing concerns over child protection, Parliament passed the Incest Act, which for the first time stipulated incest as an offense. Incest is defined as sex, either heterosexual or homosexual, between an individual and their parent, grandparent, child, grandchild, sibling, half-sibling, uncle, aunt, nephew or niece. There is a maximum sentence of fourteen years imprisonment for the crime.

Forget your own instinctive views on incest – it is against the law to prevent birth defects. In the same way that wolves mate with packs thousands of miles away to avoid producing genetically weaker offspring, we cannot take our sisters or cousins to the prom for the same reason. But in Arizona and four other US states, cousin marriage is legal if you can provide proof of infertility or if you are too old to procreate. So why shouldn’t this be extended to siblings, aunts, uncles and so on?

In his statement to the court, judge James Burbidge denounced their relationship as “illicit”, calling it “a relationship that is regarded as abhorrent to society at large”. It’s sweet that the judge should take my feelings into account when handing down his sentences, but I do have several concerns. Perhaps you do find incest abhorrent. And not just the idea of yourself engaging in a sexual relationship with a family member, but anyone doing so. What is your specific complaint? Are you concerned about sick children being conceived? Well, what if the protagonists were, like in Arizona, infertile or too old to procreate? What of a homosexual couple? There is very little chance of conception in that case. Or do you just find the idea a bit icky?

Tolerance is a word that is often employed by those who wish to demonstrate open-mindedness. Except that tolerance isn’t what a lot of people think it is, or at least it is often misused. Tolerance isn’t accepting homosexual marriage because you agree that everyone should have the right to marry whom they love, regardless of sexual orientation. Tolerance is deeply disliking the idea of homosexuality, including the idea that gays might marry, yet supporting it anyway. Toleration is to, in the words of Robin Hanson, “tolerate things that actually bother you”. Gay marriage will become law in liberal democracies not because people are becoming more tolerant, but because they are less bothered by homosexuality. So who are we to be intolerant toward consenting sibling-sibling or father-daughter relationships? The government need not encourage it, but then again it need not encourage gay marriage. Simply not ban it.

Categories of behaviour, whether fashion, interracial marriage, homosexuality or incest are historically and culturally specific. Our ideas on these topics are grounded in early twenty-first century social positioning. The most common anthropological example of homosexuality in ancient Greece is a misnomer, due to the dangers of crude cultural relativism – practices, whether homosexual or otherwise are usually conceptualised in relation to a particular gender order. Homosexual acts were certainly not free of hierarchical constructs including class and gender: boys, women or slaves were acceptable partners for adult men in ancient Greece The point remains however that homosexual practices did not carry the same social and moral vilification that has characterised Euro-American cultures, in particular from the late nineteenth century. Acknowledgement of temporal and social contexts of social attitudes is vital. For example, in the 1950s and 1960s, declaration of homosexuality was diagnosed as a sign of mental illness. Today, secrecy is viewed as a sign of psychological trouble.

In our episteme, the term Foucault adopted to describe an epoch in which knowledge is grounded, incest, like paedophilia, remains abhorrent in all circumstances according to the law. But so was homosexuality, interracial marriage, divorce and many other elements of modern liberal life that we take for granted. This is by no means to equate the consensual sex between two related people in Birmingham with homosexual relations, nor to the devastating crime of paedophilia, but it reminds us that what is acceptable today may not be tomorrow, and what is regarded as abhorrent right now may not be so in the future. Though Arsene Wenger's transfer policy is clearly crazy in any episteme.

Absolute Impunity & Fitch

Imagine being told you have to lose weight. Of course you can’t, you are thin and beautiful, but suspend your disbelief for this short thought experiment. You are warned that without drastic action, your very life is in danger. So you do what you are told. Yet every time you forgo a biscuit, every time you disembark deliriously after an hour on the treadmill, you are injected with lard by those very people who told you to get healthy. That would be a little annoying. And that’s essentially how José Manuel Barroso, President of the European Commission, feels.

Portugal’s credit rating was downgraded four notches in July for reasons that will not astonish anyone: high debt and low growth. Portugal received a €78bn bailout from the European Central Bank in May, due to the already high cost of borrowing it was facing. Essentially, no one would lend them money at a reasonable rate, so they had to go to the ECB. Subsequently Moody’s, the credit rating agency, promptly downgraded Portugal anyway. The downgrade is a result of Moody’s belief that Portuguese debt is more risky because a default is more likely. Yet in downgrading their credit rating, thereby making Portugal’s cost of borrowing even higher, they make a default much more probable. It is a painfully depressing self-fulfilling prophecy.

There are three main credit rating agencies, each with names more ominous than the last. Fitch, Moody’s and Standard & Poor’s. Rating agencies are the people who calculate the risk involved in financial transactions, and help set the price of German debt much lower than say that of Argentina. So who is the European Union to judge and complain? After all, the rating agencies are experts, and the Eurozone is simply broke and bitter about it. The problem begins, as so many seem to do these days, with the financial crisis that began in 2007, and which people optimistically thought had ended in 2009.

The crisis itself began when hundreds of billions of dollars of US mortgage debt was rated as triple-A, the safest possible, but turned out to be worthless. Who rated these junk securities as triple-A? You guessed it, Fitch, Moody’s and Standard and Poor’s. A combination of conflicts of interest, and some cases where the rating agencies didn’t understand the securities they were rating, led to financial ruin. The US Financial Crisis Inquiry Commission called the rating agencies “essential cogs in the wheels of financial destruction”. Many parties were responsible for the financial crisis – banks, rating agencies, governments and consumers. The impunity enjoyed by banks and bankers is notorious. Less well known is that of the rating agencies.

Standard & Poor’s demanded $4trn in cuts by the US government to keep their triple A status, and they haven’t got it. But say what you want about members of Congress (and I would be perfectly content with the US political system being downgraded to junk status), they do enjoy democratic legitimacy. If Standard & Poor's decides to downgrade US debt, it will be a fine example of the supremacy of financial leaders over the political. But who regulates the regulators? EU leaders want to set up their own, more dovish rating agency, but that will not solve the problem.

I leave you with this thought: the World Bank has hired as its new Treasurer Madelyn Antoncic, who is described on the organisation’s website as an "experienced senior executive from the financial industry who has been active in the regulatory and policy debate". Experience she gained as Chief Risk Officer from 2002-2007 at Lehman Brothers. You cannot conceive of the sheer tonnage of canned tuna in my immediate possession.