I write this post hours after James Murdoch on the instructions of his father announced the closure of the News of the World.
No one should be under any doubt of the purpose of this manoeuvre. It is to draw attention away from the fact that nothing has really changed. The News of the World will doubtless be replaced by a Sun on Sunday whilst the management of News International (including Rebeka Brooks), which bears ultimate responsibility for what has happened, remains in place. John Prescott was totally correct when he said that the closure of the News of the World punishes the innocent (the workers and reporters whose lives are bound up with the paper) whilst letting the guilty walk free.
Meanwhile the government has pressed ahead with its plan to conduct two separate inquiries into the scandal. The inquiry into the misconduct of the police will be conducted by the Independent Police Complaints Commission, an organisation that I know well and which in my experience can be relied upon to protect the police. There is no word so far about the form or purpose of any other inquiry or who will head it. Nor is there any indication that the government is prepared to stop News International's takeover of BSkyB. As I discussed in my earlier post the beneficiaries of these moves are Rupert Murdoch and News International.
Friday, 8 July 2011
Thursday, 7 July 2011
THE ABSURDITY OF INTERNATIONAL CREDIT AGENCIES PART II
A few hours following my post though obviously not in response to it the Daily Telegraph published an article by Ambrose Evans-Pritchard defending the credit rating agencies. Allegedly "suppressing" the credit rating agencies amounts to "suppressing" free speech. Evans-Pritchard even goes so far as to adapt in their defence Pastor Martin Niemoller's famous poem "First they came...", which given that this poem concerns the Nazi genocide some of us might feel is both tasteless and grotesque.
What is bizarre about Evans-Pritchard's article is that he actually concedes the main part of the case against the credit rating agencies, which is that they absurdly over assessed the credit worthiness of the Mediterranean economies before the crash. What I find still more bizarre is that though he admits the credit worthiness of the Mediterranean economies was grotesquely over assessed he nonetheless says that the bond holders who made loans to these economies in "good faith" should be protected and even "cherished". Instead he puts all the blame for the catastrophe in the Eurozone squarely on the euro.
Let me say at once that I accept some of the case that is being made against the euro. As I shall argue in a later post the way the euro was created was almost guaranteed to exarcebate the differences between the more industrially advanced economies of the north and the poorer and more backward economies of the south. That does not justify using the euro as a scapegoat to shield the international financial community from its mistakes. Why should mere membership of the Eurozone encourage lenders to throw caution to the winds and lend money to fragile economies without heed to their underlying lack of competitiveness and their deteriorating balance sheets? Why should membership of the Eurozone encourage credit rating agencies to over assess the credit worthiness of those economies? Why should bond holders engaging in commercial decisions be protected from their losses? Why should credit rating agencies that blundered so catastrophically be allowed to walk away with their reputations and authority intact? Lastly, why should bond holders who relied on these credit rating agencies be protected?
Ambrose Evans-Pritchard's article is in fact a classic example of the refusal of advocates of untrammelled free markets to practise what they preach. The reality behind the over assessment of the Mediterranean economies by the credit rating agencies and the willingness of private lenders to lend to these economies in disregard of their economic fundamentals is that an assumption existed that if any of these economies ran into serious trouble Germany would pay to bail them out. Nothing in the European treaties or that the German or any other government ever said ever so much as hinted at such a thing. On the contrary the relevant treaties and repeated statements by the German government made it absolutely clear that the Eurozone is not a transfer union and that Germany does not stand as guarantor for the debt of any other country merely because that country happens to use the euro. Anyone who loaned money to such a country on that assumption was therefore quite simply making a mistake for which they have no one to blame but themselves. To talk of such lenders acting in "good faith" and of the need to "cherish" such lenders is therefore preposterous. That however is what Evans-Pritchard is saying, which is another way of saying that he thinks that despite the clear language of the treaties and of the numerous statements of the German government bond holders who foolishly made loans to these countries should be allowed to keep their profits whilst the overburdened German tax payer should shield them from loss.
What is bizarre about Evans-Pritchard's article is that he actually concedes the main part of the case against the credit rating agencies, which is that they absurdly over assessed the credit worthiness of the Mediterranean economies before the crash. What I find still more bizarre is that though he admits the credit worthiness of the Mediterranean economies was grotesquely over assessed he nonetheless says that the bond holders who made loans to these economies in "good faith" should be protected and even "cherished". Instead he puts all the blame for the catastrophe in the Eurozone squarely on the euro.
Let me say at once that I accept some of the case that is being made against the euro. As I shall argue in a later post the way the euro was created was almost guaranteed to exarcebate the differences between the more industrially advanced economies of the north and the poorer and more backward economies of the south. That does not justify using the euro as a scapegoat to shield the international financial community from its mistakes. Why should mere membership of the Eurozone encourage lenders to throw caution to the winds and lend money to fragile economies without heed to their underlying lack of competitiveness and their deteriorating balance sheets? Why should membership of the Eurozone encourage credit rating agencies to over assess the credit worthiness of those economies? Why should bond holders engaging in commercial decisions be protected from their losses? Why should credit rating agencies that blundered so catastrophically be allowed to walk away with their reputations and authority intact? Lastly, why should bond holders who relied on these credit rating agencies be protected?
Ambrose Evans-Pritchard's article is in fact a classic example of the refusal of advocates of untrammelled free markets to practise what they preach. The reality behind the over assessment of the Mediterranean economies by the credit rating agencies and the willingness of private lenders to lend to these economies in disregard of their economic fundamentals is that an assumption existed that if any of these economies ran into serious trouble Germany would pay to bail them out. Nothing in the European treaties or that the German or any other government ever said ever so much as hinted at such a thing. On the contrary the relevant treaties and repeated statements by the German government made it absolutely clear that the Eurozone is not a transfer union and that Germany does not stand as guarantor for the debt of any other country merely because that country happens to use the euro. Anyone who loaned money to such a country on that assumption was therefore quite simply making a mistake for which they have no one to blame but themselves. To talk of such lenders acting in "good faith" and of the need to "cherish" such lenders is therefore preposterous. That however is what Evans-Pritchard is saying, which is another way of saying that he thinks that despite the clear language of the treaties and of the numerous statements of the German government bond holders who foolishly made loans to these countries should be allowed to keep their profits whilst the overburdened German tax payer should shield them from loss.
NEWS INTERNATIONAL AND THE GOVERNMENT
The latest news on the News International story is that the government is refusing to postpone consideration of the BSkyB takeover whilst at the same time appearing to resist calls for an inquiry to be headed by a judge. No cogent reason has been given as to why the inquiry should not be headed by a judge. Given the nature of the allegations that the inquiry will have to consider the logic of appointing a judge to head it seems irresistible. Failing to appoint a judge to head the inquiry will weaken the inquiry and diminish its impact.
The government seems also to be trying to set up two separate inquiries even though the logic of the situation clearly requires one inquiry. It is totally unclear why there should be two inquiries instead of one when any inquiry if it is to do its work properly has to look at all the facts. Having two separate inquiries not only runs the risk of the two inquiries working at cross purposes but also means that their respective reports will have diminished impact since they will each deal with only part of the matter. Frankly the attempt to set up two inquiries looks like an attempt to narrow their terms of reference and to limit the matters they are able to consider in a way that can only help News International.
After hearing this news I am sure I will not be the only person who will be wondering why the government is bending over backwards to help News International despite all the evidence of illegal and criminal activity that now exists. Nor will I be the only person to start to wonder about the reasons for the Prime Minister's behaviour as he puts his reputation on the line not just on behalf of News International but also on behalf of Rupert and James Murdoch, Andy Coulson and Rebeka Brooks, all of whom it turns out he counts as his friends.
The government seems also to be trying to set up two separate inquiries even though the logic of the situation clearly requires one inquiry. It is totally unclear why there should be two inquiries instead of one when any inquiry if it is to do its work properly has to look at all the facts. Having two separate inquiries not only runs the risk of the two inquiries working at cross purposes but also means that their respective reports will have diminished impact since they will each deal with only part of the matter. Frankly the attempt to set up two inquiries looks like an attempt to narrow their terms of reference and to limit the matters they are able to consider in a way that can only help News International.
After hearing this news I am sure I will not be the only person who will be wondering why the government is bending over backwards to help News International despite all the evidence of illegal and criminal activity that now exists. Nor will I be the only person to start to wonder about the reasons for the Prime Minister's behaviour as he puts his reputation on the line not just on behalf of News International but also on behalf of Rupert and James Murdoch, Andy Coulson and Rebeka Brooks, all of whom it turns out he counts as his friends.
THE ABSURDITY OF INTERNATIONAL CREDIT RATING AGENCIES
News that Portugal's credit rating has been downgraded from "AA" to "AA minus" has provoked a storm of criticism in Europe. The downgrade will make it more difficult for Portugal to borrow on the international money markets because international banks use a country's credit rating when assessing whether to lend to that country. A country's credit rating also determines the rate of interest it pays on any loans. The decision to downgrade Portugal's credit immediately after it has received a bailout is akin to pulling the rug from under Portugal's feet. It also negates the steps the European Union is taking to try to help Portugal.
Personally as someone who has had bitter experiences with credit rating agencies I think the whole practice needs to be outlawed. Firstly there is no rhyme or reason to how credit rating agencies assess individual countries. Portugal's current rating of "AA minus" remains substantially higher than Russia's junk bond "BBB" rating notwithstanding that Russia has paid off most of its debt, has the lowest debt to GDP ratio of any G20 economy, runs a substantial trade surplus, has a balanced budget and at around $500 billion possesses the world's third biggest foreign currency reserves. Portugal's rating is only marginally lower than China's, which is "AA3", notwithstanding that China also runs a large trade surplus and at around $3 trillion possesses the world's biggest foreign currency reserves. As of 1st January 2011 Portugal's credit rating at "AA" was actually higher than China's, which was then "A1". That the credit rating agencies have assessed all three countries wrongly is shown by the fact that since the financial crisis hit in August 2007 it has been Portugal that has needed bailout support whilst Russia and China have not. In the meantime the two countries whose economies stand at the epicentre of the world financial crisis, the US and Britain, and which continue to run massive trade and budget deficits and where government and private debt has exploded to many times the level of GDP, retain an "AAA" rating.
Secondly use of credit rating agencies means that banks instead of carrying out a proper investigation of a country's fundamentals and exercising their own judgement in effect contract this function out to the credit rating agencies. The whole financial disaster the world has experienced is to a large extent a direct consequence of the way in which banks have relied on credit rating agencies to make their decisions for them.
This is bad practice at many levels. Firstly instead of making individual assessments credit rating agencies rely on mathematical formulae when deciding what ratings to set. This reflects the fallacy, especially prevalent in the US, that results drawn from mathematics are somehow "objective" and "scientific" and therefore true. In reality this results in absurd outcomes as I know from my own personal experience. When I needed urgently to borrow some money some years ago I found that banks would not lend to me because my previous avoidance of debt meant that my credit rating as assessed by the credit rating agencies was poor. The rationale was that as I had never taken on debt I had no previous credit history on which the credit agencies could assess me. The result was that I was unable to borrow from the banks even though I had never defaulted on a loan and even though I possessed assets with a far higher value than the money I needed to borrow.
Secondly, though the fact is never admitted, there is obvious political bias in the way the credit rating agencies do their work. All three of the big credit rating agencies are American and are funded by US banks. Not surprisingly they continued to give the big Anglo American banks the highest "AAA" ratings right up to the moment when they all crashed. Similarly they continue to give the US and Britain "AAA" ratings even though the US's and Britain's exploding debt levels and systemic budget and trade deficits scarcely justify this.
In fact the true purpose of credit rating agencies is exposed by my last paragraph. It is to ensure that international capital continues to flow into the US and Britain and specifically to the US and British governments and to US and British banks. Given that this fact is so obvious it is difficult to understand why anyone else takes them seriously.
Personally as someone who has had bitter experiences with credit rating agencies I think the whole practice needs to be outlawed. Firstly there is no rhyme or reason to how credit rating agencies assess individual countries. Portugal's current rating of "AA minus" remains substantially higher than Russia's junk bond "BBB" rating notwithstanding that Russia has paid off most of its debt, has the lowest debt to GDP ratio of any G20 economy, runs a substantial trade surplus, has a balanced budget and at around $500 billion possesses the world's third biggest foreign currency reserves. Portugal's rating is only marginally lower than China's, which is "AA3", notwithstanding that China also runs a large trade surplus and at around $3 trillion possesses the world's biggest foreign currency reserves. As of 1st January 2011 Portugal's credit rating at "AA" was actually higher than China's, which was then "A1". That the credit rating agencies have assessed all three countries wrongly is shown by the fact that since the financial crisis hit in August 2007 it has been Portugal that has needed bailout support whilst Russia and China have not. In the meantime the two countries whose economies stand at the epicentre of the world financial crisis, the US and Britain, and which continue to run massive trade and budget deficits and where government and private debt has exploded to many times the level of GDP, retain an "AAA" rating.
Secondly use of credit rating agencies means that banks instead of carrying out a proper investigation of a country's fundamentals and exercising their own judgement in effect contract this function out to the credit rating agencies. The whole financial disaster the world has experienced is to a large extent a direct consequence of the way in which banks have relied on credit rating agencies to make their decisions for them.
This is bad practice at many levels. Firstly instead of making individual assessments credit rating agencies rely on mathematical formulae when deciding what ratings to set. This reflects the fallacy, especially prevalent in the US, that results drawn from mathematics are somehow "objective" and "scientific" and therefore true. In reality this results in absurd outcomes as I know from my own personal experience. When I needed urgently to borrow some money some years ago I found that banks would not lend to me because my previous avoidance of debt meant that my credit rating as assessed by the credit rating agencies was poor. The rationale was that as I had never taken on debt I had no previous credit history on which the credit agencies could assess me. The result was that I was unable to borrow from the banks even though I had never defaulted on a loan and even though I possessed assets with a far higher value than the money I needed to borrow.
Secondly, though the fact is never admitted, there is obvious political bias in the way the credit rating agencies do their work. All three of the big credit rating agencies are American and are funded by US banks. Not surprisingly they continued to give the big Anglo American banks the highest "AAA" ratings right up to the moment when they all crashed. Similarly they continue to give the US and Britain "AAA" ratings even though the US's and Britain's exploding debt levels and systemic budget and trade deficits scarcely justify this.
In fact the true purpose of credit rating agencies is exposed by my last paragraph. It is to ensure that international capital continues to flow into the US and Britain and specifically to the US and British governments and to US and British banks. Given that this fact is so obvious it is difficult to understand why anyone else takes them seriously.
BSKYB TAKEOVER
One comment that repeatedly gets said with which I must take issue is the suggestion that Ministers cannot simply block the BSkyB takeover because the process is somehow "quasi judicial".
Obviously I am not party to the legal advice but I question whether this is so. The mere fact that the decision rests with Ministers surely means that they do have discretion. If the decision was indeed "quasi judicial" then it would not be made by Ministers but by some sort of impartial "quasi judicial" body like a tribunal. Judicial Review is a mechanism whereby the High Court can review the way Ministers make a decision to ensure that the decision itself is legal and that it is made in a lawful way. I do not see why a decision to refuse News International's takeover of BSkyB would be illegal. Contrary to what is often said about judicial meddling the High Court is actually very reluctant to interfere with a Minister's exercise of discretion so provided it is all done in a lawful way I cannot see why the High Court would want to overturn it. To my mind this whole business of Ministers being supposedly "forced" to make a decision in News International's favour smacks of an excuse concocted to allow the government to do something it has decided to do, which is hand over BSkyB to News International, which it knows is controversial and unpopular.
Obviously I am not party to the legal advice but I question whether this is so. The mere fact that the decision rests with Ministers surely means that they do have discretion. If the decision was indeed "quasi judicial" then it would not be made by Ministers but by some sort of impartial "quasi judicial" body like a tribunal. Judicial Review is a mechanism whereby the High Court can review the way Ministers make a decision to ensure that the decision itself is legal and that it is made in a lawful way. I do not see why a decision to refuse News International's takeover of BSkyB would be illegal. Contrary to what is often said about judicial meddling the High Court is actually very reluctant to interfere with a Minister's exercise of discretion so provided it is all done in a lawful way I cannot see why the High Court would want to overturn it. To my mind this whole business of Ministers being supposedly "forced" to make a decision in News International's favour smacks of an excuse concocted to allow the government to do something it has decided to do, which is hand over BSkyB to News International, which it knows is controversial and unpopular.
Wednesday, 6 July 2011
PHONE HACKING SCANDAL
The media today is dominated by stories of the phone hacking scandal with news that private detectives employed by News International hacked the telephones of various famous murder victims. It seems that the police have been provided with copies of emails by News International's Andy Coulson authorising payments of tens of thousands of pounds to individual police officers. This is incendiary. It means corruption on the part of the police and a system of organised bribery by News International. If News International has been in the habit of bribing police officers whether for information or for some other purpose this may explain why the police have proved so reluctant up to now to investigate its affairs. Buying information and protection from corrupt police officers is the sort of activity one associates with the likes of Al Capone, not with a reputable news organisation and is enough by itself to justify a public enquiry.
Saturday, 2 July 2011
LABOUR WINS INVERCLYDE BYE ELECTION
To the general surprise of most political commentators and to the disappointment of quite a few the Scottish Nationalist Party not only failed to obtain an upset victory at the Inverclyde bye election but came a distant second to Labour. Though the SNP vote increased considerably this was at the expense of the Liberal Democrats whose vote collapsed. The Labour vote held firm.
Followers of this blog will find nothing surprising about this result. It exactly repeats the results of the Scottish Assembly elections in May. Those elections have been misreported and misunderstood as a disaster for Labour whereas in reality the Labour vote held firm. What the Scottish Assembly elections and the Inverclyde bye election both show is a collapse in the Liberal Democrat vote in Scotland as Scottish voters who formerly voted Liberal Democrat react extremely negatively to the Liberal Democrat Party's coalition with the Conservatives in Westminster. What the Scottish Assembly elections and the Inverclyde elections also show is that these former Liberal Democrat voters for the moment overwhelmingly prefer the SNP to Labour so that the increase in the SNP vote is almost exactly proportional to the collapse of the Liberal Democrat vote.
Since what these voters at the moment are doing is registering a protest vote this is not surprising. The reason many of these voters voted Liberal Democrat in the first place was because they are anti Labour. The SNP provides them with the perfect vehicle to register their protest vote without voting Labour. This does not mean that these voters necessarily support independence. Nor does it mean that the SNP will win a general election in Scotland given that as I said in a previous post in such a general election when Scottish voters will be voting for a government in Westminster and not registering a protest vote or voting for an Assembly in Scotland the dynamics of the contest will be completely different.
Followers of this blog will find nothing surprising about this result. It exactly repeats the results of the Scottish Assembly elections in May. Those elections have been misreported and misunderstood as a disaster for Labour whereas in reality the Labour vote held firm. What the Scottish Assembly elections and the Inverclyde bye election both show is a collapse in the Liberal Democrat vote in Scotland as Scottish voters who formerly voted Liberal Democrat react extremely negatively to the Liberal Democrat Party's coalition with the Conservatives in Westminster. What the Scottish Assembly elections and the Inverclyde elections also show is that these former Liberal Democrat voters for the moment overwhelmingly prefer the SNP to Labour so that the increase in the SNP vote is almost exactly proportional to the collapse of the Liberal Democrat vote.
Since what these voters at the moment are doing is registering a protest vote this is not surprising. The reason many of these voters voted Liberal Democrat in the first place was because they are anti Labour. The SNP provides them with the perfect vehicle to register their protest vote without voting Labour. This does not mean that these voters necessarily support independence. Nor does it mean that the SNP will win a general election in Scotland given that as I said in a previous post in such a general election when Scottish voters will be voting for a government in Westminster and not registering a protest vote or voting for an Assembly in Scotland the dynamics of the contest will be completely different.
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