Philippe Legrain

Are banks a vested interest?

Oliver Kamm at The Times, a man I respect a lot, argues in his blog that banks are not a "vested interest".

But unless I have misunderstood him, I think he is being too charitable to the banks.

He argues that "the banks are not some unaccountable lobby seeking to superimpose itself on the public interest: they are an economic sector seeking to maximise profitability within the regulatory framework".

It's worse than that. Banks are unaccountable, since they are not allowed to fail - and capitalism without risk of failure corrupts absolutely.

They do seek to superimpose themselves on the public interest: even now, the notion that what's good for the City is good for Britain is pervasive among many senior officials.

Nor is the regulatory framework a given: it is shaped by banks' lobbying and the revolving doors of finance and politics: boardroom positions for politicians and government advisory roles for bankers - including the astonishing appointment of "Win" (or should that be "Lose"?) Bischoff, the former chairman of failed Citigroup, to co-chair the writing of a report on the future of UK international financial services.

Like Oliver, I am a supporter of open, competitive markets. That's why I find it so worrying that we have allowed a complex oligopoly that earns vast monopoly profits in the good times and passes on the losses in bad to amass such huge economic - and political - power, as I argue in my new book, Aftershock: Reshaping the World Economy After the Crisis, which is out on 6 May.

Banks are a vested interest - and a dangerous one at that. 

Ouch!

 
 from FT.com

A good election to lose?

For anyone of a progressive bent, the prospect of the Tories returning to power is profoundly depressing. However sick of Gordon Brown people might be, David Cameron is hardly an appealing alternative. So at one level it is cheering to see the Conservatives' poll lead melt away with the winter snow. While a narrow Tory victory remains likely, according to political betting markets, it is not in the bag. But while keeping the Tories out would be heartening in the short term, Gordon Brown's re-election would most likely be disastrous for Labour in the longer term.

Some election victories are a poisoned chalice. With hindsight, it was fortunate for Labour and catastrophic for the Conservatives that John Major won in 1992. Sterling's ejection from the ERM shredded the Tories' reputation for economic competence, and five years of in-fighting, blunders and scandal consigned the Conservatives to the political wilderness after 1997. It seemed for a while as if the party might never win office again. The Tories would surely have bounced back more quickly if they had lost in 1992. Conversely, a Labour victory in 1992 could have been fatal. Had the pound plunged within months of Labour taking office, the party's chances of re-election would have been remote. The Labour government would have marked a brief progressive interregnum between long periods of Conservative dominance.

While we do not have the benefit of hindsight, 2010 feels a lot like 1992. Most people are fed up with the government but unconvinced by the opposition. The ruling party has become too comfortable with power and often seems bereft of purpose. The prime minister is at best uninspiring, more often dismal. Most importantly, the economic outlook is unpromising – and there is a growing chance that a run on the pound will wreak havoc with the recovery and the government's plans. Even if catastrophe is avoided, running Britain in an age of austerity will be a thankless task, especially for politicians who believe in active government.

Tax hikes, spending cuts, curbing public-sector pay, cutting public-sector jobs – does Labour really have the stomach for it? Do Labour politicians want to spend the next five years undoing a lot of what they have achieved over the past 13? Do they honestly think voters will look kindly on them next time around if their sales pitch is that their cuts were "kinder" and more reluctant than the hypothetical cuts voters might have suffered under a Tory government? Even if the economy stages a phoenix-like recovery, will voters thank Labour for it? If Labour scrapes through in 2010, there is a good chance it would face a 1997-style electoral oblivion in 2015.

All the more so since five more years of Gordon Brown would test the patience of even the most diehard Labour supporters. Whatever his qualities might be, he is singularly ill-suited to being prime minister. His style rankles. His decision-making (or indecision) is erratic. He is tainted by all the mistakes of the past 13 years – not least cheering on the financial bubble that has now gone spectacularly bust. And since Labour has not had the guts to get rid of him over the past three miserable years, it seems highly unlikely that the party would find the courage to do so after he had won an electoral mandate. Besides, whoever the leader might be, voters would doubtless be gasping for change after four terms – 18 years – of Labour government.

To put it another way, if the choice for Labour is between either an unrewarding extra term in office followed by several terms on the margins or a narrow defeat, a period of renewal and a good chance of returning to government within five years, surely the latter is preferable? Surely only those whose political lifespan is nearing its end, those who depend on Gordon Brown for their advancement, and those who cling to the trappings of office would prefer the former?

The possibility of a hung parliament does not fundamentally alter this calculation. Since the Liberal Democrats have all but ruled out a coalition, a minority government (and most likely a second election) would prolong the uncertainty – increasing the risk of a sterling crisis – but would not change the underlying choice between Tory now or Tory later.

Of course, there are ifs, buts and maybes. One objection is that a Tory victory might result in such severe harm to Britain – for instance, a sequence of events that resulted in Britain leaving the EU – that it must be avoided at all costs. A more immediate danger is that if George Osborne slashed spending, the economy would tank again. That is a big worry. But even a re-elected Labour government might be forced to bring forward budget cuts if markets panic. And in political terms, the likelihood of Tory economic mismanagement strengthens the argument that losing the election would benefit Labour longer term.

Another risk is that Labour might tear itself apart in opposition, rendering itself unelectable, allowing the Tories to win again by default in 2015 unless the Liberal Democrats could capitalise on the situation – a rerun of 1983. That said, Labour might also tear itself apart if it was re-elected, as John Major's Tories did.

Others will argue that Labour could succeed where Margaret Thatcher failed and go on and on and on. A Labour victory might cause the Conservative party to implode (extremely unlikely) or result in electoral reform that entrenched a progressive majority. That possibility is certainly appealing, not least to Lib Dems and Greens. But with or without a change in the voting system, it seems highly unlikely that Labour would stagger on into an unprecedented fifth term after five more years of austerity under Gordon Brown, still less that the Lib Dems would want to prop them up in office.

The prospect of a Europhobic, economically confused, anti-immigrant, privilege-defending Tory government led by a lightweight PR man is soul-destroying. But as disheartening as it now seems, this is an election that Labour might be better off losing.

'War on terror' was a mistake

UK foreign secretary David Miliband has written an excellent piece in today's Guardian about why the notion of a 'war on terror' is inaccurate and harmful. He argues that:

The more we lump terrorist groups together and draw the battle lines as a simple binary struggle between moderates and extremists, or good and evil, the more we play into the hands of those seeking to unify groups with little in common. Terrorist groups need to be tackled at root, interdicting flows of weapons and finance, exposing the shallowness of their claims, channelling their followers into democratic politics.

The "war on terror" also implied that the correct response was primarily military. But as General Petraeus said to me and others in Iraq, the coalition there could not kill its way out of the problems of insurgency and civil strife.

He concludes:

We must respond to terrorism by championing the rule of law, not subordinating it, for it is the cornerstone of the democratic society. We must uphold our commitments to human rights and civil liberties at home and abroad. That is surely the lesson of Guantánamo and it is why we welcome President-elect Obama's commitment to close it.

Are you listening, Peter Mandelson?

Hat tip: Andrew Sullivan

No left turn

Tony Blair once said that ‘we're at our best when at our boldest'. Gordon Brown is - finally - heeding that advice. His plan to shore up Britain's banking system is our best hope of pacifying the financial panic, getting credit flowing through the economy again and avoiding a 1930s-style depression. No wonder it is being copied across the world.

The need for massive state intervention in the banking system is regrettable. But exceptional times call for exceptional measures. Britain - and the world - is suffering a full-on financial heart attack. Unless the financial arteries of the economy are unclogged soon, huge job losses, bankruptcies, repossessions and a sharp fall in living standards beckon.

The government must do whatever it takes - including, if necessary, fully nationalising Britain's banks for a while - to rescue the economy from financial oblivion. Once the immediate crisis has passed, better and tougher financial regulation should be a priority. But while the glaring failings of global finance clearly need fixing, should the rest of the economic rulebook be torn up too?

Many on the left think so. Ken Livingstone, the Guardian's Seumas Milne and others argue that the government should turn its back on market economics. Since capitalism seems to be collapsing under the weight of its internal contradictions, they believe, the government should finish it off and regulate left, right and centre. More measured voices, such as the TUC's Brendan Barber, favour a ragbag of measures such as curbs on boardroom salaries and a new industrial policy.

But the priority now is tackling the crisis and averting a depression; everything else is a dangerous diversion. If struggling businesses that have just had their overdraft cut fear that they are about to be clobbered with higher taxes and more red tape, investment and jobs will suffer. The last thing a heart attack victim needs is to have a healthy leg amputated.

The government's bank rescue plan needs to be accompanied by measures to support the economy, not shackle it. The Bank of England should continue to cut interest rates, soon. Even though inflation is well above the target rate of two per cent, it is set to fall sharply as oil prices tank. Collapsing demand means that the real threat now is deflation, not inflation.

Some argue that the Bank of England's independence should be compromised. But that would be a mistake. Even the perception of political meddling in setting interest rates would add to financial uncertainty, undermine the credibility of monetary policy and raise the cost of government borrowing. As we learnt to our cost in the 1970s and the late 1980s, letting inflation rip does not lead to a sustained improvement in unemployment and economic growth; quite the reverse.

But once the crisis has passed, the government should reform the setting of monetary policy. The Bank of England's target measure of inflation should be amended to include housing costs. Its mandate should also be broadened so that it takes more account of asset prices. This would allow the Bank to raise interest rates to prevent bubbles getting out of hand - and thus avert future busts.

Faced with the threat of a depression, the government must not be hamstrung by its fiscal rules. Rightly, the government plans to borrow huge sums to finance the rescue of the banking system. It is well placed to do so since government debt as a share of GDP is low. This need not increase the national debt in the long term: Sweden's government turned a profit on its investment when it rescued its banks in the early 1990s. The government must also be ready to boost demand with tax cuts and spending increases if the recession turns really nasty. Fiscal tightening will certainly be needed - but only once the economy is recovering.

The bigger question, though, is whether, once the immediate crisis has passed, economic policy in areas other than finance needs to be revised. Leftwing populists have been quick to bury what they describe as the era of ‘unfettered markets', but an economy where the government takes around 40 per cent of national income in tax, pays for and provides essential services such as healthcare and education, and regulates everything from employment rights to credit-card contracts, can scarcely be described as one where the state has shrivelled and markets have free rein. So the issue is not whether the financial crisis sounds the death-knell for the free market, but whether it tips the balance towards greater state intervention.

That question is in fact two: first, does the crisis in financial markets suggest that competitive markets more generally do not work as well as we previously thought?; and second, will the crisis shift public opinion towards supporting a bigger role for the state? My answer to the first question is no; and while the answer to the second question is still unclear, people do not appear to be hankering to turn the clock back to the 1970s - notwithstanding the success of the TV series Life on Mars.

As I wrote in 2002 in my first book, Open World: The Truth about Globalisation: ‘Financial markets are unlike other markets. They are inherently unstable. They are prone to Manias, Panics, and Crashes ... Why? Because they involve bets on an unknown and unknowable future.' Product markets are very different: the market for cars or baked beans is not prone to destabilising speculation - and even if people did start gambling on the price of baked beans, its impact on jobs and the economy would be limited. The temporary part-nationalisation of Britain's banks does not call for increased intervention elsewhere. Royal Bank of Scotland may have come unstuck, but Tesco continues to deliver the goods.

Faced with a nasty recession partly caused by reckless lending in the US, the temptation to blame outsiders for our woes will grow. But we shouldn't throw the baby out with the bathwater. Britain benefits hugely from its openness to foreign products, ideas and people. The low prices in ASDA and Primark are only possible thanks to free trade, and commerce with China will provide many of the jobs of the future. Recent migrants from eastern Europe have filled vital jobs and revitalised the economy through their dynamism. Beggar-thy-neighbour protectionism made the Great Depression much worse; we would be crazy to repeat the same mistake.

Britain's flexible labour markets will be a key strength in the tough times ahead. They allow the economy to adapt rapidly to change, helping to redeploy workers from shrinking industries to growing ones and keeping unemployment down. Combined with measures to make work pay, help people find jobs, and equip them with the skills they need, New Labour's labour-market policies stand us in good stead. We should not be trying to protect yesterday's jobs at the expense of tomorrow's.

While tax rises will probably be needed in the medium term to pay for the costs of the crisis and an unexpectedly deep recession, support for higher taxes is hardly likely to be an election winner. Taxes must also remain low enough to support opportunity and enterprise. If working hard and starting a business is not rewarding enough, economic growth will suffer - and with it the ability to invest in public services. And unless public services continue to be reformed, with choice driving up standards and giving people what they want, voters are likely to feel their money is being wasted.

With Labour so far behind in the polls, the only chance of recovery depends on rescuing the economy from the worst crisis since the 1930s. Brown has come into his own in the past month, while the Conservatives, who are unconvincing critics of City practices, are flailing. But lurching to the left in the mistaken belief that markets no longer work and that voters are crying out for bigger government would be a huge mistake.

Does Gordon Brown really have a purpose?

Andrew Rawnsley on Britain's embattled prime minister:

More and more critics contend that Gordon Brown's fundamental weakness is not knowing what he wants to do with power. I disagree. His core purpose is easily stated and could provide a solid theme for his premiership. He believes that it is morally right and economically imperative to help everyone to maximise their opportunities and make the fullest use of their talents. What he's struggled to do is articulate that theme in a way which resonates with the country or even makes sense to his troops.

Struggled to articulate? You can say that again.

If Brown's core purpose really is what Rawnsley claims it is, then I share it wholeheartedly. But I'm not sure Rawnsley is right.

I think Brown's problem goes beyond a palpable inability to communicate. It is that he has been so obsessed for so long with wresting the crown from Tony Blair that he has lost sight of the bigger picture - and even if he did suddenly find, or rediscover, a purpose beyond narrow ambition (and now survival), he does not have the leadership qualities needed to deliver it.

Wilkinson: libertarians belong more on the left

Will Wilkinson on why libertarians feel an increasing affinity for the liberal left rather than the socially conservative right:

with the obsolescence of the anti-communist alliance with conservatives, many libertarians have sloughed off much of their previously tactically useful sympathy for socially conservative initiatives. Freed to be full-on social liberals, many libertarians are left sensing a much deeper cultural affinity for the left than the right. And this leads naturally toRead seeing more clearly their ideological affinities with welfare liberals. And then you read thinkers like Hayek, Friedman, and Buchanan, and you think: Oh, yes. This is extremely sensible. And now that the welfare-liberal elite has become rather more economically literate and is no longer sighing over five year plans, there is no reason to think they cannot find this sensible, too.

So that’s where I’m at. An old-fashioned market liberal who thinks Hayek, Friedman, and Buchanan get it right, and who thinks Rawlsian welfare liberals should be able to recognize themselves in these thinkers.

Read the full post here. His blog, the Fly Bottle, is stimulating and challenging.

Obamamania?

As a politics junkie, I find the US presidential race exciting - certainly better than Gordon Brown's ignominious coronation - but not particularly inspiring. I'm not wild about any of the candidates.

I find Hillary Clinton uninspiring: a robotic, machine candidate, with a nasty streak and an offputting sense of entitlement. That's a pity. Her policies are a mixed bag; I preferred Bill's.

I think Obama is a great speaker, but I'm not hugely enthusiastic about him either.

Being for "the future" "change" and "hope" is all very well, but tell me which candidate is in favour of "the past" "more of the same" and "despair".

There is something worryingly content-free about his message. Apart from his symbolic opposition to the Iraq war (which is more a consistency issue than a policy difference, since Clinton's current position on the war is not very different to his), there is not much to separate him from Hillary on policy. Instead, he is basically selling himself as him: "Vote for me because I represent change, I represent unity", rather than "Vote for me because this is how I want America to change, this is how I will somehow unite a deeply polarised country."

"Yes, we can" is a great slogan, but how exactly does Obama plan to heal the deep divide over immigration, for instance?

Of course, having a non-white president whose father was a Kenyan immigrant would be hugely symbolic, a credit to American society, and a powerful example of the benefits of immigration. But the most powerful person on earth is more than a symbol - and I would like to have a better idea of Obama's world view before he is granted such power. Symbolic figures are not necessarily good decision-makers.

I also find Obamamania disconcerting precisely because it is a mania: half-way between a Britney Spears concert and the Nuremberg rally. (In case anyone tries to draw silly conclusions, of course I am not comparing Obama to Hitler.)

On a separate point, the media cycle is becoming somewhat predictable: first Hillary is miles ahead, then Obama is catching up quickly, then Obama is going to beat Clinton convincingly. When the results come in, the reality that Obama's score-draw is a huge achievement given Clinton's entrenched advantages is reinterpreted as disappointment compared to the hype immediately before Super Tuesday itself.

If you discount the fact that expectations overshoot because of herd behaviour, Obama did remarkably well in neutralising what was designed to be Clinton's sweeping victory.

A Pyrrhic 'victory' for France's Socialists

It is a measure of how low expectations have sunk that France's Socialist Party (PS) is celebrating after winning scarcely more than a third of the seats in the country's newly elected National Assembly. Pollsters had been forecasting electoral oblivion; instead, the PS merely received a drubbing at the hands of President Sarkozy's victorious UMP.

Voters want a say

The British people want a say when the Labour Party changes its leader, and thus appoints the next prime minister. According to the Observer,

A new opinion poll reveals 56 per cent of the public want the chance to have their say on the new leader of the Labour party, whoever it is, within the first six months. Voters are not content to leave the question of the next Prime Minister to the party and want him or her to earn the right to govern. The GFK/NOP poll found huge support for a genuine leadership battle rather than a coronation, with 81 per cent supporting a contest.

The prince's putsch

Forgive me if I'm wrong, but isn't Britain meant to be a democracy? And doesn't that mean that it ought to be up to voters who runs the country, and that nobody has an inherent right to rule? Not according to Gordon Brown. The Chancellor, we are told, has been waiting to be prime minister all his life; he was promised the top job by Tony Blair back in 1994; and it is high time the prince received his inheritance.

The voters, not the Labour Party, should choose Blair's heir

Apart from the political commentariat, I think most people are sick and tired of the latest twists in the Blair vs Brown saga. The incessant feuding mainly serves to reinforce disillusion with politicians: however much they say that what really matters to them is improving our schools and hospitals or safeguarding our pensions, they appear to care most about their own prospects. So reform of the House of Lords or changes to the way political parties are funded are scarcely going to change the perception that politicians are only in it for themselves