Should Council's be doing this?

I understand the financial imperative for local authorities to seek investments that will provide (possibly) assured future income. But there is a point at which you have to ask whether using the Public Works Loan Board (PWLB) to invest in commercial property is either fair or the proper use of such borrowing:

Through this innovative partnership, local authorities borrow money from central Government via the Public Works Loan board at a fixed low interest rate and regenerate surplus land that they own by building a Travelodge hotel as either a stand-alone project or as part of a mixed-use development. Not only does this create jobs and boost the local economy but it also provides a substantial return of profit for the council.

It looks great, doesn't it? After all the commercial interest (Travelodge in this case but it could be other businesses) gets access to cheaper finance than would be the case had they borrowed from normal commercial sources. And the Council gets that much vaunted 'regeneration' and an income from owning the freehold. It all seems like a brilliant idea but it does raise questions especially where the deal is less of a partnership that the one described here.

The first question is how local authorities with preferential borrowing rates and a benign tax environment are affecting the property market, especially for the sorts of investment - shopping malls, car parks, supermarket sites and so forth - that are favoured because of their (hopefully) reliable income. It may well be the case that the value of these assets is inflated by the capacity of local councils to invest larger sums given low interest rates on their borrowing.

The second question is whether the PWLB exists for the purpose of commercial property investment - especially the sort of investment Bradford Council has undertaken by simply buying an existing car park for several million quid. Surely the operation of the PWLB shouldn't be merely 'prudential' (does the ground rent exceed the cost of borrowing) but should contain some recognisable social value.

Finally, do local councils have the expertise to engage in this sort of property investment - what looks like low risk may turn out to be more problematic. Imagine buying up a freehold only to find that the income from ground rent dries up or becomes difficult to collect? Local councils are looking for long term income here without necessarily appreciating how market and social change will affect that long run - what happens to car parks in a world of self-drive cars? Do AirBnB type models undermine the budget hotel? And how will the medium term play out in the world of retail letting?

Councils will, of course, turn round and say, 'but we've no choice as we've no money'. This merely returns to the original driver of such investments - falling council revenue budgets - while the risks associated with such strategies are unclear and the impact on property markets elsewhere store up further problems. And this is all before we consider how many billions councils will add to public borrowing.

Should councils be doing this?

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Interesting stuff I found down the back of the sofa (plus a comment on grammar schools)

Trade is good.

Clearing out my pockets - here's a few things (other than lint and misformed paperclips) I found:

Big cities are bad for health (this sort of reminds us what public health really is about):

Dr. Seth Berkley, CEO of the vaccine alliance Gavi, points to the recent increase in the scale of densely populated urban areas, many without adequate sanitation, as turning containable illnesses like Zika and Ebola into pandemics. Dense urbanization may not have created Zika, which causes newborns to have unusually small heads, he notes, but it has accelerated its spread from a mere handful to a current tally of 1.5 million cases this year.

Tokyo doesn't have a housing crisis - because it has sensible (aka laissez faire) planning rules:

Here is a startling fact: in 2014 there were 142,417 housing starts in the city of Tokyo (population 13.3m, no empty land), more than the 83,657 housing permits issued in the state of California (population 38.7m), or the 137,010 houses started in the entire country of England (population 54.3m).

Ideology presented as fact - the curse of economics (here's a good example of the genre):

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

And globalisation (meaning free trade and immigration since you asked) is good for the working class:

There isn't an economy in the world — now or ever — that could have endured such massive blows without a major hit to its people. But the worst that has happened in America is stagnant wages. Remarkably, our quality of life has continued to improve.

They never tell you how fast Africa is growing (or that it's down to capitalism - also socialism was what made Africa poor):

Some of Africa’s growth was driven by high commodity prices, but much of it, a McKinsey study found in 2010, was driven by economic reforms. To appreciate the latter, it is important to recall that for much of their post-colonial history, African governments have imposed central control over their economies. Inflationary monetary policies, price, wage and exchange rate controls, marketing boards that kept the prices of agricultural products artificially low and impoverished African farmers, and state-owned enterprises and monopolies were commonplace.

The rise of the far-right is down to the EU (prize for spotting the huge factual error in the article):

All “civilised” politicians in the founding EEC nations agreed nationalism must be overcome. Christian Democrats, Social Democrats, Socialists, Euro communists, all the mainstream Continental political groups agreed that old-style patriotism was at best embarrassing, at worst dangerous and wicked. This meant that ordinary Frenchmen, Germans, Dutchmen, Belgians who wanted to stay French, German, etc had no-one else to vote for but extreme nationalists. Anyone wishing to oppose ever-closer union had no other home than among the xenophobic fringe parties.

It's not just technology but finance that's changing car ownership:

With the rise of companies like Uber and Lyft, it’s clear that we will need to see advances in new ownership models to support tomorrow’s transportation landscape. In fact, Uber recently received a $1 billion credit facility led by Goldman Sachs to fund new car leases. Uber (and Wall Street) are also recognizing the need for more flexibility with this deal — especially at a time when Americans are making larger monthly payments than ever on their cars and taking out record-size auto loans.

The impact of Brexit on projections for housing requirements (sexy stuff I know):

In summary, the current basis for UK estimates of housing need are already predicated on a 45% drop to total net-in-migration by 2021, so for Brexit to have any downward pressure on planned housing targets in Local Plans, it would need to be assumed that Brexit resulted in European net-migration to the UK falling to virtually zero over the medium to long term. This seems unlikely.

A brilliant article - essentially a film review - on small town poverty and decline in the US mid-west (and a glimpse of why Trump):

In Medora we see not only poverty, but nearly complete social breakdown. I don’t recall a single player on the team raised in an intact family. Many of them lived in trailer parks. One kid had never even met his father. Others had mothers who themselves were alcoholics or barely functional individuals. They sometimes bounced around from home to home (grandmother, etc.) or dropped out of school to take care of a problematic mother.

Finally I can't resist a comment on grammar schools. They really aren't the answer to educational challenges but at least the Conservatives are looking at system reform rather than saying the solution is putting more money into institutions - big urban comprehensives - that are failing children.

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Academic qualifications are no substitute for political experience - the case of Dr Varoufakis

This post is not really about Yanis Varoufakis. OK so it is a bit - mostly because, as tyro politicians go, he is the owner of the most incredible sense of destiny (some might describe this as an ego larger than Greece). However, Dr Varoufakis is the owner of a splendid set of qualifications - degrees in economics and statistics culminating in an economics doctorate from the University of Essex. - and an established and successful academic career. Various folk have drawn a flattering comparison between Dr Varoufakis and what we might term his 'opponents' (and Dr V did spend a year or two as a consultant to a gaming company).

The question we need to ask here is whether Dr Varoufakis' undoubted academic success is in any way an indicator that he would make a successful politician or government minister? And, indeed, to ask the much wider question as to what sort of qualification, background or experience makes for a good political leader. All this is in the context of Dr Varoufakis showing himself to be a very poor political leader indeed.

My qualification in all this is that I've spent most of a lifetime - best part of 40 years - in and around the business of politics. And I am convinced that the core skills of a successful political leader cannot be captured through looking at either previous (or parallel) careers or in higher academic qualifications. Nor is owning a brain comparable to Marvin's a sufficient qualification especially since higher academic qualifications reflect a very narrow interest - a doctorate in economics reflects research in a specific and tightly-drawn field not a generalist expertise in economics itself.

Academic excellence - at the level we are talking about with Dr Varoufakis - isn't an indicator that, placed in the world of political decision-making, an individual will succeed. This is because, in the grubby world of practical politics, there isn't a right answer, nor even an answer that can be successfully modelled. The problem with academics (especially in social science subjects like economics) is that they really do believe the answer can be worked out. The truth is (as us old hands know) that the decision will be made in the end on the basis of a mix between expert briefing, electoral or political calculation and gut feel.

Dr Varoufakis went from being an academic who briefly advised a government to being a minister. This would have been OK if Greece had been in a normal situation - plenty of time to learn the ropes, to discover how the political game works - but sadly for that country, it wasn't. Indeed Greece faced a huge challenge and crisis, partly of its own making and partly a consequence of decisions made elsewhere in Europe. From the outside it seems that Dr Varoufakis strode into the meetings wrapped in his own confidence and the electoral mandate from Greece. The problem was that, as Dr V discovered quickly, his 'opponents' were not impressed with his academic achievements - to them he was a baby politician to be toyed with, confronted and taught a lesson. And the mandate of Greek voters matters to Greek politicians not their counterparts in Germany, Holland or Belgium - such politicians care about the German, Dutch and Flemish voters not voters in Athens.

It could be that the analysis from Dr Varoufakis and his colleagues was spot on. But the tactics adopted were almost guaranteed to ensure Dr V and co lost the argument. Fancy media coverage, confrontational speeches and ultimata all have their place in politics but when faced with a stony-faced and negative response to such grandstanding the proper response isn't to indulge in more of it but to start on the boring task of seeking compromise and consensus. To succeed at this you need those political skills that Dr Varoufakis so clearly lacks. The Greek government - newly elected and excited - placed huge responsibility for the national future in the hands of a man with less political experience than the average parish councillor. And his opponents ate him alive - costing Greece the chance of a decent deal and a chance to get out from under its crisis.

Just as many of my colleagues on the right of politics seem obsessed with getting business leaders into politics (despite the appalling track record for such people), many on the left are captivated by academics like Dr Varoufakis. Yet the evidence for academics succeeding as politicians is just as lacking as that for businessmen. Politics is a business filled with particular skills and behaviours that aren't learnt in grad school - this isn't to say that politicians aren't brainy but that their success can't be predicted on the basis of how many higher degrees they've got or what class they achieved in their first degree. Compare the qualifications of Matteo Renzi with those of Dr Varoufakis and you begin to understand that political achievement rests on something other than those exam results.

Because you don't need anything other than a sufficiency of votes to become a politician, we seldom consider that politics is a business requiring a distinct set of skills and attributes. I spend a lot of time reminding colleagues that we are politicians and should act politically - not just because of the currency of votes but because political decision-making is very different from decision-making in business. And the same applies to negotiation, leadership and marketing - some of the skills transfer but the core business of politics is conducted in front of audiences that react differently to business audiences and which are contrary rather than co-operative.

Debate between academics can be very vigorous but, in the end, it is about the content of academic research. The same goes for business negotiation. But for politicians there is no audience that wants debate for the sake of debate and many audiences who want to pull the politician down rather than support them (we see these in both political opponents and in the media - even supposedly friendly media). The academic robustness of your case and the quality of your presentation mean nothing to the 'opponent' who wants you to fail. To succeed such opposition has to be neutralised.

The Syriza government in Greece might have been better served appointing a horny-handed old trade unionist as finance minister - a person who could get drunk with the Germans, eat with the French and hug the Belgians: an operator. And then used Dr Varoufakis' undoubted talents as a thinker about the economy to provide the bullets for that operator to fire. Instead Dr V managed to irritate bureaucrats and upset politicians making it all the more difficult for Greece to make its case for further support on Syriza's terms rather than on Angela Merkel's. I've no doubt that the main reason wasn't Dr Varoufakis' ego, lack of tie or motor bike but his almost complete lack of political experience.

Many may not like politicians and politics but when the crunch comes, we really need experienced politicians (you can call them statesmen if you want to watch them preen) to deal with the dirty business of politics. And just being clever - in book larnin' terms - is not a sufficient qualification to do that business. Dr Varoufakis is a case study of the consequences that stem from this mistake.

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Sorry Lord Turner but it's planning not technology that's driving up urban land values

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It does make me rather cross when the great and good - doubtless living is a splendid multi-million pound home that benefits from rising urban land values - completely fail to understand that it is planning restrictions that causes the problem. Just that, nothing else.

Here's Adair Turner doing just this:

In many countries, the majority of that wealth – and the lion’s share of the increase – is accounted for by housing and commercial real estate, and most of that wealth resides not in the value of the buildings, but in the value of the urban land on which it sits.

That might seem odd. Though we live in the hi-tech virtual world of the Internet, the value of the most physical thing – land – is rising relentlessly. But there is no contradiction: The price of land is rising because of rapid technological progress. In an age of information and communication technology (ICT), it is inevitable that we value what an ICT-intensive economy cannot create.

This is arrant nonsense. Land is expensive in London because it is scarce and it is especially scarce because we've put all sorts of restrictions on using that land including identifying large tracts of land around the city where you can't build. Another bunch of folk want to make it even worse by stopping tall buildings, banning basements and preventing changing use from commercial to residential.

Planning reforms won't make London's land cheap but it would stop that mad rise in values Lord Turner speaks of. For sure you could 'fix' the problem his way - put up interest rates, make it harder to buy and beyond the means of all but folk like Adair. Except that wouldn't solve the problem because the problem is planning. It really is that simple.

If you want to read a better written, better informed and thoughtful piece on this problem turn aside from Turner's ignorant wibble and read this piece by Kim-Mai Cutler about San Francisco's housing problems. I don't entirely agree with Kin-Mai's assessment but at, unlike Lord Turner, she appears to know what she's talking about.

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In many countries, the majority of that wealth – and the lion’s share of the increase – is accounted for by housing and commercial real estate, and most of that wealth resides not in the value of the buildings, but in the value of the urban land on which it sits.

CommentsView/Create comment on this paragraphThat might seem odd. Though we live in the hi-tech virtual world of the Internet, the value of the most physical thing – land – is rising relentlessly. But there is no contradiction: The price of land is rising because of rapid technological progress. In an age of information and communication technology (ICT), it is inevitable that we value what an ICT-intensive economy cannot create.

Read more at http://www.project-syndicate.org/commentary/adair-turner-explains-how-a-fresh-wave-of-automation-is-transforming-employment-and-much-else#krA8CFrE7IHDSafr.99

Transforming Finance Charter - the worst sort of 'curate's egg'

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It all starts so well the Transforming Finance Charter:

The banking sector needs to be transformed in the following ways:

• There should be no bank in the system which is too big to fail, so the taxpayer is not underwriting their costs with an implicit subsidy.
• Retail and investment banking should be regarded as entirely different businesses and separated accordingly.
• There should be increased competition and diversity within retail banking allowing for frequent new entrants, and exits, multiple ownership models including mutuals, credit unions, local banks and sector banks

Not quite sure how you actually separate retail and investment banking but I can see the point. And the idea of more competition, easier market entry and greater diversity is a great one.

But then our friends go and spoil it:

• Banks should ensure they invest a far higher proportion of their balance sheets to the real (non-financial) economy and for productive uses. Policy should be actively used to reduce speculation and the creation of asset bubbles.
• There should be a permanent and legitimate role for the state in banking, at a local or national level, either to reduce the cost of risk capital for socially desirable activities and innovation, or to influence the overall allocation of credit to the economy.

With one hand we open up the market and extend choice and competition. While with the other we dictate to the banks how they should invest - as if it's not bad enough having agents of government fix the interest rate these people then want to subsidise it for "socially desirable activities". It was this sort of stupidity, not speculation, that created the financial crisis in the first place.

But then the proposal is from:

The Finance Innovation Lab, along with founding signatories, New Economics Foundation, Share Action, Positive Money, Move Your Money and Friends of the Earth...

Link this bunch of nonsense-peddlars with the egregious "Tax Justice Network" and it's no surprise at all that any good ideas are swamped by stupid proposals for state-directed finance.

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More on the future of banking...sort of...

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Perhaps more a reminder that banking should be as much about saving as it is about lending. It seems that it takes Ram Singh, an Indian street child to remind us:

Just one among millions of street children who rely on menial jobs for survival, Singh is determined to make his work pay some sort of future dividend.

"I'm smart, but that alone isn't enough to start a business.

"I save money everyday, hoping to start something of my own. Someday soon," he said as he served glasses of India's ubiquitous, spicy milk tea in sweltering heat at a stall near the teeming train station.

We've rather forgotten this as a culture preferring instead to worship the mystic money tree in a basement on Threadneedle Street.

Learning the merits of saving would be a good - and right - thing.

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Can we reduce the "poverty premium" without repeating those sub-prime mistakes?

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Niall Cooper from Church Action on Poverty has written a piece of what he calls “fair pricing”:

And secondly, fair prices.  Much of the ‘logic’ of the way markets have developed in recent years is to move towards ‘risk (or cost) pricing’ and away from shared risk.  Some of the assumptions behind this are extremely dodgy:  The majority of high cost lenders claim that their premium prices are based on the ‘risk’ of lending to low income customers… any yet, when customers pay week after week, year after year, the cost doesn’t go down.  But fundamentally, is it socially (or morally) acceptable to operate ‘cost’ pricing models which force the poorest to pay most?  How can companies square all their talk in recent years of corporate social responsibility, with charging their poorest customers the most?

It has become a mantra of anti-poverty campaigners that poor people pay something they call the “poverty premium”:

Lack of access to the best online prices, bank accounts and managing their budget via cash all adds together to give the poorest families the worst deals around. The result is a poverty premium that costs the poorest families more for the same energy, cookers and household items, credit and insurance than their wealthier peers.

The two prime culprits for this premium are energy and financial services especially lending. In the case of energy this is mostly about methods of payment – the understandable reluctance of people on low incomes to use direct debit as a means of payment. So, in reality, the whole problem is – as Niall Cooper implies – down to financial services. Especially since the ‘food desert’ argument turns out to be a bit of a myth.

“The U.S. Department of Agriculture defines a food desert as a low-income census tract where a large number of residents are more than a mile from a grocery store…. [L]ess than 4.5 percent of the U.S. population [falls into that category].

The question then is how to make is easier for poor people to access affordable financial services given that those poor people are less likely to repay loans, more likely to over draw and live in places where car crime and burglary heighten insurance risks. For this Niall Cooper suggests intervening in the market:

And if individual businesses are unwilling to offer products to low income consumers at fair prices (not least by claiming they can’t do so if their competitors don’t), then is there not a role for market intervention?

The problem is that – certainly where lending is concerned – we have been down this route before. After all mandating lending to high risk borrowers was a central driver in creating sub-prime problems especially in the USA. And if you introduce price caps (as Stella Creasy wants) without mandating lending to poor people then you kill the market entirely. The consequence of this is to create an even bigger problem for which the only solution is unregulated and illegal lending.

Rather than looking at forcing price cuts on suppliers, we should instead consider whether block buying is an option. Social landlords could, for example, purchase energy more cheaply than tenants and have the systems to collect payments in place already. And, certainly for contents insurance, the same should apply. It would be interesting too to look at whether local councils or social landlords could broker other insurances such as third party car insurance helping to spread risks and reduce costs.

If we look to new generation mutuals such as credit unions there are perhaps similar opportunities to reduce costs and spread risks. What we can’t do is wholly eliminate those risks (something the world is finding out very painfully right this minute) meaning that poor people will continue to have problems with access and pricing in financial services. In using co-operative solutions we can ameliorate these considerably and, in market terms, safely. Mandating prices simply takes us back into the financial disaster of sub-prime lending.

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The City of London is Britain's great success story - let's not screw it up!

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The Economist reports (and who am I to argue with their figures) that the City of London generates exports sales equivalent to 3% of UK GDP. That is an awful lot of money - something in the order of £40 billion.

And it means that the City really is by far our most important industry. We don't hear the Americans complaining about Hollywood or Silicon Valley, so why have we arrived at such a down on the City of London? We should be celebrating the City's success, not bashing those who work in it and generate that £40 billion in export sales.

Instead we're moaning about how much city financiers get paid and calling for intervention or regulation, some people are agitating for special taxes on the financial sector that don't apply to other transactions, and there's an eternally repeated mantra of "we should make things" rather than handle the money.

Right now between a daft attachment to a 50% top rate of tax and rhetoric about executive pay, we seem to be doing our level best to screw up the prospects for our most successful industry. This is like the Germans slapping extra regulation and taxes on machinery manufacture or the Italian introducing a product design levy.

So the financial sector (or the parts of its concerned with lending money to people buying houses) played a big part in creating the current crisis. But that's no reason for Britain to hobble its biggest export earner or to introduce policies seemingly designed to drive the future leaders of that industry to Switzerland, Hong Kong or Singapore. So the French and Germans want to clobber the City - mostly because their financial industries are pygmies beside London's - and are proceeding to do so through their de facto control of the EU.

We don't have to agree to this do we? We can use the veto and - I hope this sinks in - when it's clear that Europe proposes to use majority voting to create regulations that damage the City, we should walk away. Right now the biggest threat to recovery is the puerile attacks by politicians on our most successful industry but in the years to come the real threat is the EU and its desire for a closed, constrained, undynamic (and "low risk") financial sector.

We should put the EU - especially the leaders of France and Germany - on notice that we won't accept attacks on the City's viability as the world's biggest and richest financial centre. And if that means leaving the EU, then so be it.

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