Thursday, 31 October 2013

Target Seats - A Strategy of "Lookalikes"

This post will not be about policy, my usual focus, but on something that has come to my attention as I have roamed around the local area and interacted with the local branches in the zone.

At the South Central conference last weekend, we were introduced to the three candidates for the target seats in the region. The seats were Winchester, Oxford West & Abingdon and Newbury. This got me thinking. Winchester and Oxwab were relative no-brainers but Newbury? Where is Romsey (one of our 2010 losses) on this list?

It seems like a lot of the target seats are being predicated on the potential gains dictated by a swing needed from the 2010 results, BUT with an overlay of extraneous factors. I suspect in the case of Newbury its the fact that we used to hold this rather atypical seat (at least by LibDem standards) after a rollicking by-election victory that ranked with Orpington and Torrington in party annals. As we all know those seats reverted after one or two terms, as did Newbury.

Targeting seats still remains an art with a component of science and a component of art, it would seem.  If we cast back out minds to the darkest days of the 1950s the party was reduced to a rump of six seats that could be very well summed up as West Country, Wales and far north Scotland. Despite the surge in seat numbers since then, there is still such a thing (but on a grander scale) as a LibDem-look seat, though it has broadened and become more nuanced. Those that don't have the "look" (an obvious candidate being Brent Central) become head-scratchers as to how one holds onto them when the incumbency factor is gone.

Once upon a time, the targetting process was guided by areas where we had strength on the ground and some affinity. I prefer to call the affinity a "lookalike" aspect.

Looking about in my neck of the woods the thought strikes me:

if we have won Winchester then why not the lookalikes, Salisbury and Chichester?

if we have won Eastleigh then why not Havant?

if we have won Eastbourne then why not Bognor Regis & Littlehampton?

if we have won Portsmouth South then why not Gosport?

if we have won Romsey & Southampton North then why not Fareham?

Some would retort that the gap is too large to take some of these, but when one roams around the area one sees similar demographics between the seats we hold and ones that we do not hold (by a big margin). 

Clearly we have some empathy with the inhabitants of cathedral and/or university towns... maybe it is because they tend to have neither industrial nor office-based populations (in contrast to places like Basingstoke or Peterborough). Wells (though smaller) is somewhat like Chichester and Salisbury, while Bath (though bigger) is like Winchester.. Farther back we might recall our hold on Isle of Ely.. and why not Shrewsbury & Atcham (its current Tory MP seems more LibDem than anything else anyway)? Or making the extra push at Hereford?

While back in South Central...Romsey has its cutesy villages of thatched houses it has a very humdrum main town in Romsey (and an even more nondescript subset in North Baddesley) that appear to be cut adrift from Eastleigh, but made of the same cloth. It also has a university population in the northern fringe of Southampton. 

Havant is mysteriously safe Tory when it has one of the worst council estates (Leigh Park) south of the Midlands. The "classy" parts of the seat are the attractive Emsworth and the far more prosaic Hayling Island. Why the bulk of the seat (and Hayling) should not be LibDem territory eludes me. As recently as ten years ago the council was minority-controlled by the LibDems. 

Likewise at Gosport where a slightly better demographic stills remains pretty similar to Eastleigh. What Eastleigh is to Southampton, Gosport is to Portsmouth. And Gosport too had a much stronger LibDem council group ten years ago. 

As for Bognor Regis & Littlehampton, a recent trip there on a bleak and grey day made me think of breaking out the rusty razor-blades and ending it all straight away. 

These towns are typified by "do nothing" Tory-dominated councils who preside over fading gentility, with fringes of 1950s and 1960s social housing of an unreconstructed and soul-destroying mediocrity. These are the towns we should be "LIBerating" form the dead-hand of Tory complacency and inaction. 

Just looking at Swingometers in targeting seats as "most likely" to fall (or fall back) our way is a very backward looking strategy. We need something more akin to the hub strategy where we accumulate blocks of seats that are contiguous, with similar characteristics. We have done this in the West Country most notably. Now we need to do the same in the Solent area, the Fenlands and the Borders bulking up into hubs of seats from which our worker ants will go forth to forage in neighbouring territories making them ours. 

Sunday, 27 October 2013

HS2 - Looking the Gift Horse (of the GCML) in the Mouth

The most hotly contested debate at yesterday's South Central Conference of the party was the issue of HS2. Despite the party's official policy of supporting this boondoggle, the voting on a motion on this issue was fairly close. Any closer and a headcount would have been needed.

The motion was a rather nuanced one with the proposer advocating what he called an "amber" light on the issue rather than a green light. And he rightly noted that it would be better to be positioned for a three-point turn on this matter than having a U-turn forced upon us. Verily as the conference was going on David Cameron was hedging on the issue (presumably without consulting the Transport Minister, Baroness Kramer) by saying the if Labour did not support the project then the Tories would not either. This led the motion's proposer to suggest that the LibDems would end up carrying the can of disapproval of this project if both other major parties jumped ship. I could see a scenario in which Milliband when pressed on how he would pay for his housebuilding plan could claim that he was using the money that he save from abandoning HS2. 

In another post, we have expounded on the merits of rebuilding the old Great Central Main Line as a high speed (with few stations) route to the Midlands. The Great Central Main Line (GCML) opened in 1899 and ran from Sheffield, southwards through Nottingham and Leicester to Marylebone Station in London.

The GCML was the last main line railway built in Britain during the Victorian period with tha aim of operating a high-speed, north-south main line to London. Sound familiar? 

The line was not only designed to a specification which would permit trains to run at higher speeds, but also built to a larger loading gauge in anticipation of larger continental European trains. The chief driver of the project presciently believed that it would be possible to run direct rail services between Britain and France and had also presided over an unsuccessful project to dig a tunnel under the English Channel in the 1880s.

The GCML was very much a strategic line in concept. It was not intended to duplicate the Midland line by serving a great many centres of population. Instead it was intended to link the MS&LR's system stretching across northern England directly to London at as high a speed as possible and with a minimum of stops and connections: thus much of its route ran through sparsely populated countryside. Now if you didn't get it the first time, does this start to sink in?

Aside from this ambitious scheme, the GCML operated as a fast trunk route from the North and the East Midlands to London. In the 1960s, the line was viewed by the Beeching Report as an unnecessary duplication of other lines which served the same places, especially the Midland Main Line and to a lesser extent the West Coast Main Line. Most of the route was closed between 1966 and 1969. And the HS2 is supposed to relieve the over-crowded West-Coast Line?

A key point to note is: The line was engineered to very high standards: a ruling gradient of 1 in 176 (5.7 ‰) (exceeded in only a few locations on the London extension) was employed; curves of a minimum radius of 1 mile (except in city areas) were used; and there was only one level crossing between Sheffield Victoria and London Marylebone.

Marylebone is currently undertuilised and would be a better terminal than the heavily trafficked Euston terminus. 

In a criminal act, the surviving part of the line (41 miles) between Sheffield and Manchester (the Woodhead Line), that had seen major investment with electrification in the 1950s, was controversially closed to passenger traffic on 5 January 1970. The track was lifted in the 1980s in an act of governmental vandalism. The mind boggles....

Ergo, the GCML line was an HS2 before its time...

Current Status

There is in fact a part of the former main line that has been preserved as the Great Central (heritage) Railway between Leicester and Loughborough.

Rather bizarrely, the HS2, as currently planned, would re-use about 12 miles of the GCML route. The proposed line would parallel the current Aylesbury line corridor and then continue alongside the GCML line between Quainton Road and Calvert. From there it would roughly follow the disused but still extant GCR trackbed via Finmere as far as Mixbury before diverging on a new alignment towards Birmingham.

One critic of the GCML revival plan that we encountered argued that part of the trackbed was built over so it "couldn't be done". The amount that is built over is so limited that this scarcely counts as a credible argument. When one is talking the difference between a capex below £10 billion and one of over £50 billion the difference of demolishing a few 1960s and 1970s structures versus plowing through the Chilterns is so massive that the critic's argument is almost risible. 

The trackbed of the 40-mile stretch of main line between Calvert and Rugby, closed in 1966, is still intact except for a missing viaduct at Brackley. 

Frequent passenger services run over the joint line between London Marylebone and Aylesbury Vale Parkway, and also between Marylebone and High Wycombe (continuing northwards to Princes Risborough, Bicester North, Banbury and Birmingham Snow Hill). Currently, both these groups of services are operated by Chiltern Railways. Strictly speaking, neither of these routes is specifically of GCML heritage, although the line between Neasden South Junction and Northolt Junction was built, maintained and run by the Great Central Railway and is still in use today for all Chiltern services.

A short extension of Chiltern passenger services to a new Aylesbury Vale Parkway railway station on the Aylesbury-Bicester main road opened on 14 December 2008.

In November 2011 the government allocated funding for reopening of the section between Bicester and Bletchley (via Claydon Junction), and between Aylesbury Vale Parkway and Claydon Junction, as part of the East West Rail Link scheme, which could see passenger services operating between Reading and Milton Keynes (via Oxford) and between London (Marylebone) and Milton Keynes (via Aylesbury). Currently, this stretch of route is used for freight consisting of binliner (containerised domestic waste).

Sections around Rotherham are open for passenger and freight traffic, indeed a new station was built there in the 1980s using the Great Central lines which were closer to the town centre than the former Midland Railway station. Commuter trains run from Hadfield to Manchester via Glossop. These are modern trains using 25 kV overhead wires that were installed to replace the 1500 V system. 

Naysayers claim some of the trackbed is (partly) built over with housing and roads which is a rather a feeble argument when comparing to the potential environmental disaster and disruption of HS2. The cost of removing these excrescences would be a mere fraction of the cost of HS2. 

Two asides - Poignant Contrast

First we have the consultant bill thus far with not a thing having been achieved:

and then we have the scheme of the aforementioned heritage railways (essentially enthusiasts) to join up two of the existing sections:

Tempts one to paraphrase the old joke... how many consultants does it take to connect the Midlands to London? Maybe they should hire some rail enthusiasts instead..

In Summary

The GCML is not only an alternative to HS2, it is better than HS2. Reviving it would cost a fraction of the current plan (in the order of lass than £10 bn) and it even runs through Sheffield. Birmingham is not the be-all and end-all. 

The time has arrived to ditch HS2 and embrace the GCML, let the Tories take the blame all through the Cotswolds for HS2's environmental cost. Meanwhile we take the fiscal high ground by rejecting what is clearly a financial black hole in the making. 

Friday, 25 October 2013

Implausible Deniability - Cutting the NSA out of the (data) Loop

The saga of the Snowden revelations becomes more expansive as the days go by. Camp followers of the NSA, like Angela Merkel are suddenly "finding religion" on privacy issues when it is her phone that is being bugged, not just Johann Schmidt down on the Hochstrasse. As for the France, one of the countries that blocked Evo Morales plane upon instructions from their "oldest ally", they are now too moving into high dudgeon.

Brace yourself for the next revelations which will probably be that leaders of some of the other Four Pillars, Cameron on down to New Zealand will have been spied upon as well.  With friends like these......

Hell hath no fury like a Merkel scorned and while the US Congress may be suckers for Clapper assurances, the sophistry involved in the statement "we are currently not spying on Germany's leader's phone calls and shall not do in the future" is fooling no-one outside of Capitol Hill. This is the newest twist in the words and represents the end-game of Implausible Deniability, to neologise further a neologism. 

The policy recommendations here are relatively simple.... Firstly, Angela should get herself a disposable cellphone. But on a greater level, we should be pushing (using our MEPs in the Liberal bloc in Strasbourg) for an EU move to force the very largest US-based information firms to create EU-based server farms for non-US traffic. Thus Google, Yahoo, Microsoft, Facebook and Twitter, who all have the financial wherewithal to establish such server farms if push came to (legislative) shove would be forced to create systems where traffic is not routed through the US. If they want to do business in the EU then this will be the cost for them to do so. They would also need to have at least one main board director based in Europe who would be a "hostage" effectively to be arrested if the companies breached the legislation on privacy by permitting server access in the EU.   

If they refuse to play ball because their political masters do not allow it then the EU could resort to some Chinese techniques to punish them. Who would have thought it that the Chinese were on the ball when it comes to Google and the NSA well before the Europeans had the blinkers fall from their eyes. 

Wednesday, 23 October 2013

Liberals Rules the Waves - Restoring the Primacy of the Royal Navy

It is interesting to note the Defence policy briefing for the LibDems is a sole one-sheeter and moreover it is only half-full..(or half-empty).

As we all know the party conference in September in Glasgow distilled our policy on the Trident issue:

So even on this score the policy briefing for PPCs on the site has not been updated!

Not having a more fleshed out Defence policy would appear to be a major flaw in our policy mix. While some activists just don't care (or can only get hot and bothered selectively, such as on Trident) the policy area is a large one, budget-wise, and too important to be left by default to the Tories. We might also note that the best they could do in the space was serve up the disgraceful Liam Fox and his amanuensis (or was it really the other way around). Defence is a matter of importance to a large niche of the population (not least of which being current and former service personnel) and these also happen to be voters. 

The party has not always been such a blank slate on Defence and indeed the last First Sea Lord who was a Liberal MP was Winston Churchill, in his Liberal manifestation. As nature abhors a vacuum and seemingly no-one else in the party cares about foreign relations (with Ming Campbell exiting the stage) or defence, I shall boldly step into the breach. As the sphere has so many moving parts and because my particular area of interest is naval policy (and the party holds the Navy seat, par excellence, in Portsmouth South), I shall focus my thoughts on this area alone. Never one to do things in half-measures, the proposals here will be broad brush mixed with the highly specific and possibly annoying to the existing Whitehall defence establishment, but most certainly NOT annoying for RN personnel, past or present. We are not pitching for the support on Whitehall mandarins but for the rank and file (not to forget the Brass either).


The Royal Navy has been continuously undermined since the early 1960s. The premise that Britain's colonial empire was gone (which it wasn't) gave open slather to those who hoped for savings by shrinking the naval establishment. First to go was independence of the service in 1963 and after that it was easy to pick off stragglers and critics. By attrition, the number of vessels and personnel was shrunk and the number of bases and facilities dwindled. It was a "frog in the boiling water" situation where the Royal Naval  "powers that be" found themselves reduced to a mere shadow of what the Premier Service had once been and all in the name of economy. The post-Colonial rationale for a smaller force was only partly justified for it should be remembered that the Royal Navy became the feared force it was well-before the whole colonial push of the 19th century. 

The relevance of having projection on a global stage (and this is easier to do with a navy than an army) was brought home to me by the nonsensical claims, post the Syria vote, that Britain was irrelevant on the global stage and "had no reach". Besides being just not true, it displayed a lack of imagination in the way that the navy could be used to punch above its weight. It also failed to grasp that the Royal Navy could be used as an instrument of liberation from the deep-fried, overwrought and just plain tired Special Relationship. When it comes down to it the US may have a way larger navy these days but Britain has some very strategically located naval bases (and the potential to create more) and it also has its Commonwealth membership that makes British vessels more welcome in more places than the US ever could be. 

So here are some sound-bites to start with that I shall elaborate upon over coming months and that shall hopefully spur some debate:

Re-establish the Admiralty

Re-establish the First Lord of the Admiralty as a civil ministerial title

Separate Naval Intelligence (Room 39) and locate it in Gosport

Boost ship and crew numbers

Establish a naval base at Port Stanley

Build (or acquire) a New Britannia - firstly as a marketing and image tool with the Royal Yacht function being an added bonus

Build a naval training sailing vessel

Support Trident - as a means of liberation from the Special Relationship rather than to fend off some imagined lingering "Soviet threat". 

Sunday, 20 October 2013

British Business Bank - Policy Made Reality

Is it a dismal reflection on the party member's lack of grasp of matters financial that one of the (potentially) most significant initiatives made by one of our ministers should have received so little airplay or comment? The policy in question is Vince Cable's British Business Bank initiative. 

At the Autumn conference in 2012, Vince Cable telegraphed the initiative to LibDem delegates:

He announced that the government had resolved to put £1bn into setting up a bank designed to increase the amount of lending to businesses to help many small and medium-sized companies who have struggled for credit since the financial crisis.

He promised to fight short-termism and "get behind" good firms. He signalled that the bank would operate via existing lenders, and would start within 18 months.

It was envisaged that the government kickstart capital would be matched by private sector investment. Certainly private equity funds are flush with cash at the moment and there is no reason to think that funds would not be forthcoming either from that source or maybe through the stockmarket. He said he was working with the chancellor to develop a state-backed institution that will combine up to a billion pounds of new government capital with a larger private sector contribution.

"This will then apply further leverage through guarantees to support up to £10bn of finance to SMEs [small and medium enterprises] and mid-sized business - a significant portion of all the lending available."

Government support would be in the form of both guarantees and equity, and will go on to the balance sheet of the new institution and not be reclaimed by the Treasury. 

Interestingly, at the time, both the Confederation of British Industry and the TUC threw their support behind the measure. This was definitely a miracle of sorts to find two such rare bedfellows. 


Fast forward, to way less than the 18 months projected back in Vince Cable's first announcement and the bank is already on the road (though little do the public and LibDems know it). We stumbled upon some important developments in a rather minuscule article in the business section of the Daily Telegraph on Friday the 18th of October. 

The gist of it was that Vince Cable had appointed Ron Emerson, a former executive at Standard Chartered, as the first chairman of the British Business Bank. He had also appointed Christina McComb, director of Standard Life European Private Equity, as senior non-executive director of the Bank. 

At the same time Vince Cable rather doggedly (and prematurely) insisted the Bank would not have a high street presence, despite demands from business lobby groups. “You are not going to see branches popping up with the Business Bank logo next to branches of Metro,” he said. “This is a catalyst for lending not a high street competitor.” With the travails of the Co-op Bank at the moment the thought did strike me that they could be "helped out" by being relieved of the Britannia Building Society's branches, providing the new British Business Bank with a ready-made network for deposit gathering. 

Thus far the nascent bank has a staff of 60 and, according to Vince Cable, will become “fully functioning” once it has clearance from European authorities next year. An interesting issue for me (and the party) should be where this entity is headquartered. Much as I love the City, and logical and inevitable as it is for it to have some sort of City presence, the minister should be sending a signal on regionalism by locating the new bank's head office in the provinces. I personally think that it would be a feather in the LD cap to have it placed somewhere like Hull. It would be something we could make mileage, and votes, upon.  

This would make space between us and the wet blanket of Chuka Umunna who has described the Bank as “few desks in the Business Department”. I have to agree that Whitehall is the last place we would want this bank to based.  

The Telegraph went on to report that John Longworth, Director General of the British Chambers of Commerce (BCC), welcomed the new appointments, but warned that without more funding, the bank could become an “irrelevance”. He said: “Under the current plans the Bank will lack the scale necessary to play a full role in providing access to finance to viable businesses. We continue to call for the Bank to be better capitalised and have the ability to lend directly to businesses, so that they can access the same level of financial support that companies in other countries take for granted. Otherwise we run the risk of a Business Bank that is irrelevant before it starts.” 

The new chairman, Mr Emerson, said the Bank was “an idea of its time”. He said: “The UK has long needed a more effective set of financing options for smaller businesses, and the British Business Bank will be a key catalyst in this process.”

I could not agree more. This is our policy and we should "own" it. As we have seen in recent times, the Tories are conspiring to steal our policy clothes yet again. First they resist initiatives, then grudgingly accept them, then claim them as their own. Has this not been ever the way since 1910? 

By choosing the location of the new bank to suit our ideological needs would be a key means of making the policy our own and showing the seriousness of the LibDems in prioritising development north of the M25. 

As an afterthought... why not get Jeremy Browne involved in furthering this initiative...    

Friday, 18 October 2013

Throwing Sand in Somebody Else's Sandbox

As if it isn't difficult enough making headway in financial markets against the uneven playing field that had been created by Tory and Labor financial nomenklatura favouring the US team in UK financial markets, now we effectively have the US team fining the competition (most notably in the selective pursuit of the Libor-rigging scandal) so they are hampered in sending any players onto the field, even if they had the wherewithal to do so. 

The issue here is not two specific cases (Libor-rigging & the London Whale) but a chain of events which has culminated in these two specific events. First we had the Americanisation of the UK and international capital markets then we have the US claiming that it is first in line to prosecute and fine (irrespective of jurisdiction)... and fine it does... but now it is widely suspected that there is a bias in the "pursuit of truth justice and the American way" which falls heavily on City institutions (whether UK- or European-owned) and tips the scales in the favour of US banks and investment banks. 

Jamie and the Whale....

The most recent example of US judicial over-reaching (for that is the only word for what has happened) was the evocatively-named London Whale. It may seem arcane to the outsider and even to the City insiders, but the activities concerned are definitely niche preoccupations for the bulk of the City that deals in equities, bonds/loans and commodities and transaction like M&A. 

In essence the London Whale was a matter entirely internal to employees of J.P. Morgan Chase who had falsified data fed to supervisors (and by implication, beyond to regulators) to cover a series of highly complex trades that had gone bad.. It supposedly had implications for some customers, but who they are and where they are based has never been identified. What is also clear though is that massive market distortion was indulged in with the effect that other market players were impacted.

Back in the old days, the Bank of England used to have a rather amorphous policy of casting to the outer darkness individuals deemed to not be "fit and proper persons". The question is whether Jamie Dimon would have passed muster as such a person back in the good old days when the City codes cast out those that had brought the City into disrepute. While he might be Teflon-coated in the US, why is he regarded in the same light here? Truman had a sign on his desk that read "The buck stops here", seemingly at JP Morgan Chase the only buck that stops at the leader's desk is his pay cheque. 

Frankly the London Whale crisis would have been the end of other mere mortals in the financial space but in this case not. We won't go into who was specifically to blame but the party that was collectively at fault was the US bank itself with lax controls and a dubious culture of mendacity and deceit. 

In April and May 2012, large trading losses occurred at JPMorgan's Chief Investment Office, based on transactions booked through its London branch. The unit was run by the bank's Chief Investment Officer, who has since stepped down. A series of derivative translations involving credit default swaps (CDS) were entered, reportedly as part of the bank's "hedging" strategy. A trader, nicknamed in the marketplace as the London Whale, accumulated outsized CDS positions in the market. An estimated trading loss of US$2 billion was announced, with the actual loss suspected to be substantially larger. The Wall Street Journal in mid-September 2013 posited the loss was closer to US$6.2 billion. As the size of the loss was only gradually revealed and augmented the shock to the financial system was a lot less than if the full extent of the loss had been known at the beginning. These events gave rise to a number of investigations to examine the firm's risk management systems and internal controls.

The bank agreed in September 2012 to pay at least US$920 million in penalties and admit wrongdoing as part of a broad regulatory settlement over its handling of the matter. Regulators (that is US regulators) went for blood in pursuing lower level flunkies despite the fact that the individuals were EU-citizens and had been UK-based at the time of the "crime". It was revealed in October that the bank would pay a further US$100mn in fines to US regulators in relation with the matter.

The Daily Telegraph reported (19th of September) that the US bank was fined £138m by the Financial Conduct Authority (FCA) for what regulators said were “serious failings” in its Chief Investment Office. In addition to the UK fine, the US Federal Reserve, Securities and Exchange Commission, and the Office of the Comptroller of the Currency imposed further penalties of $200m, $200m and $300m respectively, taking the total fine to $920m.

Now the intriguing thing to us is exactly what part of the bank is paying the fines and what are the fiscal implications for the UK. Let us just imagine that the whole amount of these fines are being levied on the UK subsidiary of the US bank. This has some interesting implications. This would generate a tax loss of the order of a billion dollars. With the corporate tax rate at 23%, the UK revenue authorities would be facing a reduction of over $230mn in the amount of revenues it might expect to collect on 2013 (and later years) on net revenues of Chase's business units incorporated in the UK. Meanwhile for a crime that was perpetrated on UK shores, the US government would be collecting around US$800 million dollars (total fines minus the widow's mite the FCA gleaned) from Chase's UK subsidiary. All the UK taxpayer gets from this bonanza is the £138m fine. 

Who knows what other sweetheart tax side-deals Chase was offered by the US authorities to expedite this act of financial prestidigitation....

The sole consolation is that the gross incompetence by the bank resulted in $6.2bn in losses for the bank, implying a similar amount in profits for the "smarter guys in the room". 

If Chase's UK subsidiary had gone belly-up in the UK (as the subsidiaries of Bear Stearns and Lehman Brothers had done before) then UK tax-payers and regulators might have been left to clean up the mess, then surely if the bank survived, and was called to account, then the financial penalties should have been in favour of the UK side not providing a mega-payday for the voracious US regulators (who had so singularly failed to supervise one of their largest banks). 

The lessons here are that some financial institutions act cavalierly in international capital markets and then the US plays sheriff and collects the fines on the miscreants casting a wide net using laws that have no pertinence in the London or non-US markets to shake down the players to its own benefit. In doing so, it cooks deals which are in the best interest of the US (and in the interest of US miscreant institutions) or even worse acts in a fashion that weakens parties (as is strongly suspected in the Libor-rigging scandal) that compete against US institutions in pursuing asymmetrically the perceived malefactors.

It is time that the US was told to mind its own business in the City. The regulators of the City are accountable to the government and the government is currently made up of ourselves and the Conservative party. In a day and age when austerity has been the watchword and services have been brutally cut to pay for a financial crisis in 2008, that had its epicentre and root cause US profligacy, then why are we allowing US regulators to strip fines (i.e. profits) out of UK subsidiaries and ship the funds to Washington with a mere consolation prize of an FCA fine being left on the table in the UK. The total of fines should belong to the UK and the Exchequer. 

A policy should be put in place to not only ensure that financial crimes perpetrated in the UK (and EU) are the exclusive jurisdiction of the UK (or EU) but also that individuals involved in the transactions are only subject to UK (or EU) criminal proceedings. Its time to draw a line in the sandbox and keep the playground bully out.

Tuesday, 15 October 2013

Manufacturing Policy - Futurology

While I mainly dwell on financial, housing and transport matters, a related theme that has exercised my mind in the past has been industrial trends. As we all know the manufacturing flow over recent decades has been one way towards China with a massive shift of production of, firstly, low value-added manufacturing and, recently, higher value-added products to the Far East. As a result large chunks of British industry have seen production losses over the last 20 years with China as the beneficiary.

The trend, plain and simple, was powered by price and scale. The Chinese did big runs (and now small runs) cheaper than any one else. Since the boom in shipping rates in the run-up to the 2008 crash and the increasing frequency of SNAFUs in just-in-time industrial production lines, apocryphal, but credible stories have circulated of some European and US manufacturers moving functions back from China so that the high shipping costs and long lead times related to doing work in China could be avoided. These functions have tended to be higher-value product manufacturing where labour was not such a component in the end product's price. This process was called on-shoring (being theoretically the antonym of off-shoring). Still the Chinese remain the masters of cheap, but for how long?

I include here an article I wrote for the journal, The Banker, back in the dim dark past of 2004, that partly presaged this trend. The reason I feel it pertinent to address the matter anew is we are that much more advanced from the point at which I wrote it. China's bottlenecks (and labour shortages) have become more acute. Salaries and other costs are rising, and shipping is now getting expensive again. All these add up to higher costs on products out of China. Before dismissing out of hand the thought that China may be pricing itself out of markets by claiming they have unlimited labour to deploy, one should recall the days when Japan was "cheap and cheerful" (well, cheap and dreadful), followed by Taiwan (that is now all high-tech) and South Korea (which is no longer low-wage and thus priced out of much of its old textile and clothing niche). If we are nearing the "end of cheap" then there is potential for some, though not all, of the manufacturing lost to the East to trickle back to these parts. 

Do we have an industrial policy in the party? What should it be? How do we capture the flowback? 

Here is my old article....


4 November 2004

Recently I was looking at the mountain of stuffed toys that my two young children have and was comparing this to the lone, high-cost teddy bear I had when I was the same age in the 1960s. The mountain of stuffed, “made in China” toys of today probably, collectively, did not cost as much as that teddy of yore. Who will make the stuffed toys 40 years from now when the Chinese economy evolves into a higher wage economy than it is today?

While the world will not grind to a halt if teddy bears are once again an expensive item and children are reduced to having one or two, what happens at Gap if a pullover is being produced by someone getting paid $2 an hour instead of 50 cents an hour? How soon will this moment come and will there be an end to the great era of “cheap”?

The two great sources of “cheap” these days are China and India. China is starting to move, however, into the space once occupied by Taiwan and Korea in more sophisticated components. Why then shouldn’t China evolve in the same way that they have into relatively high-cost economies that can no longer compete in some of the categories that made them famous?

Bottomless pit

Many economic commentators see China as a bottomless pit of cheap labour. We suspect the factories will have to go to the workers in the near future rather than vice versa. In the longer term, we could see the Chinese economy increasingly following in the footsteps of the other tigers with a scenario in which it could very rapidly convert from being export-oriented into being a mix of exports and domestic consumption, in much the same way as Japan did in the 1960s.

Some would say that the untold peasant masses will provide permanent factory fodder to sew away for the western world. But this flies in the face of the demographic demon China has finally got under control, with the replacement ratio now negative. It also fails to note that no nation has remained so overwhelmingly such a net exporter for all that long. Eventually the established urban masses will gravitate to higher paid jobs (as shown by the current apocryphal tales of urban labour shortages) and then more of the population will be engaged in servicing domestic demand. China could become a more classic service economy with a powerful external sector.

So in the scenario that the Chinese become too busy to worry about making knick-knacks, then is India the next China? It is about the only nation with such an enormous base of population that could be put to work at rock-bottom rates. The Chinese government felt an imperative to develop the economy in such a way as to keep occupied the heaving masses of the hinterland. Does the Indian government show the same type of propensity to have the Keralan fishermen throw away their nets and head to the outer reaches of Mumbai to make clothing? There has been little sign of that.

Finding a replacement

So where is the inexpensive labour to come from to keep the perpetual motion machine of cheaper goods coming the West’s way? Sub-Saharan Africa? Central America? There is not enough labour in these places to fill the Chinese gap and they are not cheap enough compared with China. Maybe the nadir of absolute cheapness in production costs for goods with a high manual labour component has been reached in these most recent times.

If China were to move its currency upwards the move would not be small. The shift could be of the order of 20%-30%. Instantly, “cheap” becomes 25% more expensive. This is a scenario in which “cheap” as we have known it could end within a few months of now. In the longer term, the Chinese economy will evolve into a more expensive place that may forsake making many cheap items.

Goods will still be available for a price, but that price will be higher. There will also probably be more diversity of supply. Those countries now fearful of losing their tenuous grip on maquiladora (assembly line) activities for western consumer markets may find the balance tipped back slightly in their favour. There will be more made in Myanmar, El Salvador and even some made in Mali. Cheap isn’t dead yet, but we should not count on it being around forever.

Christopher Ecclestone, Strategist at Hallgarten & Company LLC, New York

Saturday, 12 October 2013

The City and the LibDems - The Water that We Breathe

In L. P. Hartley's book "The Go-Between" the first line is "The past is a foreign country, they do things differently there". Well may we paraphrase this sentence to read "The City is a foreign country, they do things differently there" to sum up the mystification of the British public and political class with what goes on in the Square Mile and its American-controlled enclave, Canaray Wharf. 

Having worked in the City, on Wall Street and in the Australian and Argentine stockmarkets, I have found myself often over the years at dinners and parties in conversations with people outside the financial sector who regard what goes on within as something somewhat akin to the rituals of a mysterious cult. However for those of us within the sector, finance is no mystery and we are like goldfish swimming around in our pond not imagining being in any other medium or indeed like humans not thinking about the air they move through and breathe until there isn't any of it.

The point I am getting to here is that the City, if it is a different country, is one in which the LibDems cannot afford to be strangers. This very week, Vince Cable was the front man for the successful privatization of the Royal Mail, arguably the greatest success in privatization since the glory days of People's Capitalism under Mrs T. (and I say that with a straight face). If privatization "to and for the people" was not a Liberal slogan at the time, then it should have been, and maybe we can furtively rewrite the history books and claim it as our idea in the first place.

Maybe my memory fails me (and I was working in stockbroking in the City at the time, albeit at the bottom of the heap in settlements) but in those deals, the public were prioritized over institutions in allocations with prospectuses published in the broadsheets for all and sundry to punt upon the sale of the likes of British Gas, Rolls Royce and TSB. In this day and age though, the siren songs (and remember what happened those enchanted by such lieder) of Goldman Sachs have prioritised institutional investors and hedge funds (flippers disguised as real investors) over the public. Fortunately though the deal that Vince Cable cooked at least let the "institutions" cannibalize each other in the feeding frenzy with ₤30bn (supposedly) in over-subscriptions with the public being the end winners from this process (despite what Chukka might think).  

LibDems (or at least some of us) need to get our brains wrapped around the City and what it does. We should make it our own... make common cause with the pillars of capitalism and use them to reshape the country in our vision. The first tranche of the Lloyds Bank sell-off was biased towards the "instos" but Vince should see the writing on the wall here and insist that the public get first bite of the apple in the sale of the government's residual stakes in both Lloyds and RBS. Beyond that, we should be thinking seriously along the lines that used to exist back in the Golden Age of the 1980s when prospectuses were compulsorily published for hoi polloi to be given a chance of participating in the IPO (Initial Public Offering) process. We date the decline of People's Capitalism (and the City as a place of relevance to the UK public) to the removal of this requirement with its corollary being the dominance of the US investment banks in the UK equities business. These people are dedicated to the concept of cultivating their symbiotic relationship with the great and good of the hedge fund world, while the public are viewed as the suckers who end up paying top dollar last in the line. "Let them buy in the after-market" is their mantra. Our mantra should be (like Maggie's)  "let the institutions buy in the after-market". 

Under Major and New Labour there was a love-in with the Canary Wharf crowd. And who was this crowd? Well amongst them there was Bear Stearns, Lehman Brothers and Refco, the poorly supervised progeny of the SEC. From the mid-1980s, the British-owned firms in the space ran up the white flag and names like Warburg, Kleinwort, Morgan Grenfell and scores of lesser lights were sacrificed on the altar of globalisation of markets.

All well and good... Capitalism is Darwinian and financial capitalism is Darwinian in the extreme. But then what happened was that once the UK-owned institutions were rubbed out, the door was slammed shut. The regulators made life hellacious for new start-ups and most UK-owned stockbroking firms and investment banks have remained but stunted shrubs in a compliance-driven nightmare of costs and supervision that US investment banks can easily (though expensively) negotiate while any homegrown contenders remain priced out of the game. The LibDems need to evolve a policy of caveat emptor in the financial space instead of the current nanny-state that advantages the big US institutional players to the disadvantage of UK-owned stockbrokers and merchant banks. The nanny-state school of financial regulation is a cruel trick, already successfully employed in the US to ensure concentration and domination for what is called the Bulge Bracket firms. They are the enemies of People's Capitalism. They are the unwinders of the opening that Big Bang, in 1987, brought to the City and to the British investing public. It has been all downhill (until this week) at the hands of the US investments banks and their sycophants and acolytes in the ranks of the Tory and Labour finance nomenklatura

LibDems exist in the City and the financial sector and they should be marshalled for the cause and used as a brain's trust to formulate policy where clearly the Tories and Labour are clueless (or worse...hand in glove with Wall Street's best and brightest). For this reason in recent months, I started up an initiative of Liberal Drinks in the City and it has gained traction with a number of events already having been held. The City may seem like another country to some LibDems but for the likes of the powers-that-be within the leadership its about time they were seen more in its alleys and by-ways, but with loins well-girded and always wary that the front-men  now for the financial space need to be sorted into those who might advance the national interest and those whose real loyalty lies in Midtown Manhattan.  

Friday, 11 October 2013

Staying on the Right Track - Rail Fare Reform

Hmmmm... while we do not want to appear reactive in this policy forum and vastly prefer to be proactive but we cannot help having a thought that there lies a danger in the move of Norm Baker to the Home Office that the whole issue of fare reform will go by the wayside (the trackside?) as the new Minister is a Londoner. It is very easy for Londoners to dismiss the travails of the more long-distancing commuting crowd in the South-East. Many of these hard-pressed commuters are in seats that LibDems are either in first or second position come election time. 

It was less than a month ago (September 18th) that Norm Baker revealed plans for fare reform. The moves were a start in our view but only a start at reforming a century of obsession with season tickets, an instrument of oppression for commuters all across the South-East. 

One of our biggest gripes, beyond the absolutely outrageous level of fares in general is that part-time workers have to pay for five days' weekday service, yet may work only three, lose out heavily under the current inflexible system, as do those who have to work weekends. At least those who only work weekends can benefit from off-peak rates. 

The scheme mooted by Norm Baker in his dying days in the transport ministry also included discounted tickets for those travelling in the slightly quieter periods at either end of the rush hour, known as the shoulder peak.

Norm Baker explained had explained to the press that the aim of the scheme was to make season fares more equitable and flexible and “give commuters a better deal on the railways”.

He said: “Millions of people no longer work traditional nine to five.

“Flexible ticketing must reflect that.

“It will give passengers a better deal by reducing the money they spend on fares and will spread demand across the network by encouraging them to take less busy services.”

The plan for flexible season tickets is one of a range of options to modernise train fares as part of the Government's Fares and Ticketing Review.

The Department for Transport will run a competition next year to select a train operator to run a pilot on a busy commuter route into London.

Mr Baker said a more flexible approach using “smart technology” (such as Oyster cards) is vital.

“Part-time workers and those who sometimes work from home have long complained they have to pay the full price for season tickets even though they do not get the full benefit,” he said.

“Under this pilot we will look at how we can give them a better deal and also reward those commuters who avoid the busiest rush hour services.”

However, this reform seems more like a band-aid and we wonder how much passion Baroness Kramer will bring to the issue. Is she really even interested in those parties that have to pay ₤60 to travel from somewhere like Havant or Winchester into London on an ad hoc basis? Why is the fare so high in the first place? It's a vast multiple of the minimum wage. It's a big chunk out of even a well-padded traveller's budget if they only make the trip infrequently.

Frankly season tickets themselves are like a relic of the 1950s. The commuter zone has been steadily extended with the fares now at criminal levels at its farthest extremities. Travelling at 9 am from Winchester to London (getting there after 10.15) at best costs you ₤60 with no concessions allowed. The journey is roughly 63 miles so it's a bit under 50p per mile for the round trip. Meanwhile from Wimbledon to Waterloo (a distance of 13.6 miles round trip) is ₤6.90 (so 50.7p per mile). Now the railways might argue that it costs them just as much to run a train over each mile over a long distance as it does over a short distance, but when one looks at the inconvenience that longer distance commuters suffer then one could very well argue for lower fares per mile after a certain point. It would certainly do no harm for the LibDems to take up the cudgels with a case for fares to drop substantially beyond the greenbelt. 

The powers-that-be need to decide that if that don't want everyone stacked into London then longer distance travellers need to have a compensatory reduction in fares for the inconvenience and mediocrity of the service over longer distances. I fortunately can arrange my days (usually) to travel to London after the Network card rates kick in (though that invariably means arriving at Waterloo after 11.30 am). However, one is paying premium rates in peak hours from the station where I alight and yet the trains are particularly dire in their frequency being only once an hour in non-peak times and not all that much better in peak times. The station is never manned, despite being on the mainline and passengers can only enter and alight from the front carriage.  

Thus there is a great difference in the service level that the distance traveller receives versus the outer-urban commuter while the price per mile is not all that different. Frankly there is no admission of comparative advantage (dare we call it economies of scale) by the rail operators for the longer distances.

The vast swathe of constituencies and population across the South-east, East, South and the near-North are daily milked by the railway operators in a rather brutal fashion with excessive fares for distance travel. Oh joy! Can't you just see it in your fellow travellers' faces!

A substantive proposal would be to have fares decline steadily on a per-mile basis beyond a certain distance from London.... the point at which the fares start to decline might well be called the "pain barrier" and every long distance traveller knows that point in the evening where they think "oh no, we are still only half-way home" and yet it feels like an hour (and is probably more like 40 minutes) since the train first departed. 

Indeed that gives us the wicked thought that the fares should start dipping substantially the longer the journey in time. Let the train operators wrap their minds then about how long the train takes.. The shorter the journey in time... The bigger the revenue for them. An Oyster-like card that measured the time from clocking in to clocking out with shorter times being more expensive per minute might be the way to turn new technology to the travellers' benefit.