JOHN CLARK's Blog

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Angela Merkel referred to 'simple folk'
(einfache leute) during a soporific tv 'duel' with SPD Chancellor
candidate Walter Steinmeier last weekend that was shown across German
TV Channels. Perhaps this is an improvement on the traditional phrase
to describe the voters as 'little people' (der kleine mann), but it
is a telling measure of the arrogance and isolation created by
political office in an era when political parties are decaying faster
than teeth. Presumably these 'simple folk' include doctors and
surgeons, university professors and lecturers, engineers and
technicians of all kinds, indeed the majority of Germany's educated
and well trained adult population who are increasingly disengaging
from party politics and look on the works of Merkel's coalition and
despair.

German politics is defined by
conformism and party loyalties, but any pretense of political principle has been
overwhelmed by characterless careerism, partly because real policy
making has shifted to Brussels within the EU's detailed remit for
pan-European regulation in many spheres of business and public
administration and partly because the list system as the basis for an
electoral process gives succour to hacks and coalition
politics in which the electorate cannot know anything about a
prospective government's policy platform until after the election.
Politicians in Germany, not only sound provincial, but the bickering
that is substituted for debate encourages a provincial perspective
reflected throughout their electoral campaigns and is aided and
abetted by journalists pandering to privilege.

Germany has five politics parties who
can dance the caucus' of coalition building. The CDU/CSU is a
conservative alliance of protestant and catholic Christian Democrats.
The SPD, (German Socialist Party), social democrat, was for decades a
'workers party' based on trades union support and a powerful base in
local government as well as at national level. The FDP is a minority
party often described as a power base for politically ambitious
accountants, bank managers and commercial lawyers, but has broadened
its perspective to include people from marketing and MBA
entrepreneurs. Germany's Green Party absorbed several idealistic
groupings including the so-called 'Alternative List' and 'New Forum',
but has convulsed itself to concentrate on environmental themes at
the expense of broader political ideals. Each of these parties has
formed one or another of the governing coalitions post-unification.
Although they have a place in several regional coalitions, including
the city of Berlin, the 'Left Party' (Linke Partei) has never joined
a governing coalition at national level. The 'Linke Partei' is
conservative and traditionalist in its politics, an 'old labour'
grouping formed around the figure-head of ex-SPD Leader, Oscar
Lafontaine and many ageing former East German communists loyal to
lawyer Gregor Gysi and are campaigning with a programme that begins
by arguing for a 'protective umbrella for people', appealing to the
fears of many Germans that their jobs, their pensions and the future
of young people are insecure and pointing the finger of
responsibility to the easy targets of bankers and 'capitalists'
generally. The 'Left Party' are also claiming they do not want to be
in Government, but prefer a role as an antagonistic opposition, which
may be a good thing. Their platform of populist rhetoric would fail
to be implemented in practice, as circumstances would dictate them
abandoning their state goals due to changing circumstances and they
would be revealed as the administrative rump of the former Communist
SED. The chances are that they will attract a lot of votes, pushing
the SPD into third place behind the CDU/CSU in many regions and may
have a chance of winning an outright majority in several parts of the
country with a programme based on the politics of pessimistic
populism.

The 'party list' system of elections
ensures that all the party's leadership are guaranteed places in the
new parliament and the only effect of them winning their own
constituency is to grant another party hack a place in parliament
from further down the 'list'. The predictability of this electoral
process fuels the politics of coalition, with individuals jockeying
for ministerial status as they manoevre their party into even a
minority place in a governing coalition. Intended to encourage
political stability when the system was introduced half a century
ago, the German electoral process has moved into a condition of
stasis. When Germany goes to the polls on September 27, a strong
performance by the 'Left Party' could have dramatic consequences. If
the smaller parties achieve more than 45% of the vote as seems
possible, the notion of a coalition led by one or other of the
traditional large parties and supported by a junior partner falls to
pieces.

The autumn is likely to bring more
dreadful news from German industry as falling production is
translated into losses, while the banking system still appears to be
ignoring the consequences of its own dreadful gambling. If those
issues are compounded by a regime of dithering uncertainty, it may
have interesting consequences for the Euro and a knock on effect
throughout Eastern Europe, Italy, Spain and Ireland. It would be
ironic if a vote for the German left could prove to be a nail in the
political coffin of Silvio Berlusconi. Perhaps he was among the
'simple folk', Frau Merkel had in mind on German television.

Angela Merkel referred to 'simple folk' (einfache leute) during a soporific tv 'duel' with SPD Chancellor
candidate Walter Steinmeier last weekend that was shown across German
TV Channels. Perhaps this is an improvement on the traditional phrase
to describe the voters as 'little people' (der kleine mann), but it
is a telling measure of the arrogance and isolation created by
political office in an era when political parties are decaying faster
than teeth. Presumably these 'simple folk' include doctors and
surgeons, university professors and lecturers, engineers and
technicians of all kinds, indeed the majority of Germany's educated
and well trained adult population who are increasingly disengaging
from party politics and look on the works of Merkel's coalition and
despair.

German politics is defined by
conformism and party loyalties, but any pretense of political principle has been
overwhelmed by characterless careerism, partly because real policy
making has shifted to Brussels within the EU's detailed remit for
pan-European regulation in many spheres of business and public
administration and partly because the list system as the basis for an
electoral process gives succour to hacks and coalition
politics in which the electorate cannot know anything about a
prospective government's policy platform until after the election.
Politicians in Germany, not only sound provincial, but the bickering
that is substituted for debate encourages a provincial perspective
reflected throughout their electoral campaigns and is aided and
abetted by journalists pandering to privilege.

Germany has five politics parties who
can dance the caucus' of coalition building. The CDU/CSU is a
conservative alliance of protestant and catholic Christian Democrats.
The SPD, (German Socialist Party), social democrat, was for decades a
'workers party' based on trades union support and a powerful base in
local government as well as at national level. The FDP is a minority
party often described as a power base for politically ambitious
accountants, bank managers and commercial lawyers, but has broadened
its perspective to include people from marketing and MBA
entrepreneurs. Germany's Green Party absorbed several idealistic
groupings including the so-called 'Alternative List' and 'New Forum',
but has convulsed itself to concentrate on environmental themes at
the expense of broader political ideals. Each of these parties has
formed one or another of the governing coalitions post-unification.
Although they have a place in several regional coalitions, including
the city of Berlin, the 'Left Party' (Linke Partei) has never joined
a governing coalition at national level. The 'Linke Partei' is
conservative and traditionalist in its politics, an 'old labour'
grouping formed around the figure-head of ex-SPD Leader, Oscar
Lafontaine and many ageing former East German communists loyal to
lawyer Gregor Gysi and are campaigning with a programme that begins
by arguing for a 'protective umbrella for people', appealing to the
fears of many Germans that their jobs, their pensions and the future
of young people are insecure and pointing the finger of
responsibility to the easy targets of bankers and 'capitalists'
generally. The 'Left Party' are also claiming they do not want to be
in Government, but prefer a role as an antagonistic opposition, which
may be a good thing. Their platform of populist rhetoric would fail
to be implemented in practice, as circumstances would dictate them
abandoning their state goals due to changing circumstances and they
would be revealed as the administrative rump of the former Communist
SED. The chances are that they will attract a lot of votes, pushing
the SPD into third place behind the CDU/CSU in many regions and may
have a chance of winning an outright majority in several parts of the
country with a programme based on the politics of pessimistic
populism.

The 'party list' system of elections
ensures that all the party's leadership are guaranteed places in the
new parliament and the only effect of them winning their own
constituency is to grant another party hack a place in parliament
from further down the 'list'. The predictability of this electoral
process fuels the politics of coalition, with individuals jockeying
for ministerial status as they manoevre their party into even a
minority place in a governing coalition. Intended to encourage
political stability when the system was introduced half a century
ago, the German electoral process has moved into a condition of
stasis. When Germany goes to the polls on September 27, a strong
performance by the 'Left Party' could have dramatic consequences. If
the smaller parties achieve more than 45% of the vote as seems
possible, the notion of a coalition led by one or other of the
traditional large parties and supported by a junior partner falls to
pieces.

The autumn is likely to bring more
dreadful news from German industry as falling production is
translated into losses, while the banking system still appears to be
ignoring the consequences of its own dreadful gambling. If those
issues are compounded by a regime of dithering uncertainty, it may
have interesting consequences for the Euro and a knock on effect
throughout Eastern Europe, Italy, Spain and Ireland. It would be
ironic if a vote for the German left could prove to be a nail in the
political coffin of Silvio Berlusconi. Perhaps he was among the
'simple folk', Frau Merkel had in mind on German television.

Has the political opportunity of a lifetime been missed by
governments all over the western world, as intervention to 'save' the
banks from their own miscalculations achieves little, but to amalgamate
existing institutions and their bad habits - a lame policy of
consolidating greed?

Banks, whose leaders were pleading 'on their
knees' for support to ensure their continued existence only six months
ago, have begun to make public the payment of huge bonus' to staff,
while Governments all over the world face an uphill struggle with
public finance, as unemployment rises, GDP falls and business falters.
In the face of this 'nothing has changed' culture on the part of the
major commercial banks, it has to be said that despite the enormous
mobilisation of political will to address the economic crisis, 'nothing
has been changed' and the rotten boroughs of the global financial
system have survived more or less intact. The systemic crisis in the
financial sector has led to a reaffirmation of the casino culture of
speculation, providing what seems like a 'licence to plunder'. as fees
to  redress the business by business demands of recovery suck resources
from economies with negative, or nominal growth, effecting a
'devaluation of the economy', while commercial lending is curtailed to
reduce 'risk'. The price is being exposed first in small countries like
Ireland, (sacking policemen and closing schools), Latvia and Iceland,
but larger European countries cannot disguise their wounds for much
longer. The UK is being given the benefit of the doubt, as though the
financial community don't want to call a large country's bluff for fear
of provoking a cascade of failure.

With the Obama
administration just finding its feet, several other large democracies
have elections in the offing, including the UK and Germany, however the
level of debate about 'the way we live now' seems woefully
unimaginative - "Wind turbines - good; tilting at windmills - off
message; 'heads in the sand' - a German cross-party concensus; snouts
in the trough - ubiquitous."

If its 'business as usual', the
question arises about the nature of the opportunities which have been
missed. One starting point is to examine the basic economic
organisation of western countries such as the EU members and the USA.

The
first point to note is that per capita GDP across the Western World is
remarkably similar and Government spending an equally comparable
proportion of economic activity. The second that, there is astonishing
technological uniformity across the world, with innovations integrated
within new products more or less concurrently. The cost of goods and
services are pretty much the same where-ever you are and if a product
is not immediately available, it will be there within months. Thirdly,
the world's major business entities are internationalised to a degree
none of us might have anticipated 25 years ago - there are no longer
even major ideological trading blocks to divide the world.
Nevertheless, the world is divided into hundreds of legislative and
fiscal territories, ranging from international trading areas to
increasingly moribund nation states and increasingly assertive regional
authorities.

Thirty years ago, critics of multinationalism and
transnational business (including myself) would have been appalled at
the notion of a full internationalisation of taxation and public
spending, partly because communications would have meant such a notion
was effectively ungovernable. As the financial markets have
demonstrated, however, it is not only feasible, but extraordinarily
effective to create and exploit online data exchange as a ubiquitous
tool for transactions and trade. Why not apply similar approaches to
the practice of central, regional and local government and above all
tax and tariffs, ethical standards for public administration and
private enterprise.

How much would be saved if a single tax, say
35% of value added, were applied to all trade, with an additional range
of tariffs for protectionist purposes in exceptional circumstances
(room for horse trading there), matched by distribution of the tax-take
to authorities of different kinds and different tiers of government.
This would be must easier to police than the current cat and mouse game
of tax avoidance. I suspect the nation state would immediately begin to
wither and the power of the regions would grow. Horse trading for
resources would then devolve to another framework, say health care, or
social services, but the individual might have a far greater basis for
comparisons of public spending and the follies of over-armament, or
underspending on infrastructure could be made plain for electorates
everywhere.

Some of the stranger anomalies in global society
could quickly be resolved, such as the USA's inability to provide
health-insurance for 60m people and the ability of governments, like
those in Burma, to shackle their peoples might be much reduced. On the
other hand, the quirks of national government, ranging from British
acquiescence to French dirigisme, or Zimbabwean irrationality may be
difficult to conform with a framework of legitimate international
administration, however, the increase in efficiency to be gained, the
paperwork reduced, the simplification of accounting practices and
elimination of perhaps millions of statutes could bring enormous
benefits. Perhaps a standard basic income for everyone on the planet
based on purchasing power, might be one of the affordable gains?

Despite regular accusations of corruption and malpractice, the quality
of international institutions, like the WHO, IMF, UNESCO, or WTA have
improved consistently since their inception in the aftermath of WW2 and
there is no good argument against their continued improvement. We need
these bodies anyway, so why not look further into their potential? In
so many cases, they replicate the remit of comparable ministries in the
national sphere. It seems most societies require only seven or eight
basic administrative units to cover the great themes of everyday life,
health, education, defence, law, culture, infrastructure, social
services and economic management.

The only way that anything
like this could be achieved, would be for a debate to be initiated in
the political domain of many countries and it would then require a
massive coalition of the convinced to bring about change. But change
happens all the time.

It would in retrospect be disappointing
if the biggest shock to the world economic for decades, which has
ushered in a welcome degree of co-operation between governments, were
to pass with only negative results.

Visitors to Berlin are familiar with the red and cream trains which thread their way though the city centre, the S-bahn (a subsidiary of Deutsche Bahn, whose logo adorns the trains), faster than the underground, but slower than the main-line services.
This week, the services between most of the city's main stations, Berlin Zoo, the Hauptbahnhof, Friedrichstrasse and Alexanderplatz have been suspended, for what seems like the foreseeable future, because the wheels on all the system's trains need replacing. A similar problem has afflicted Deutsche Bahn's inter-city expresses, slowing journey times across Germany over the last year.

  Besides the tens of thousands of frustrated and increasingly angry commuters, tourists will find it increasingly difficult to navigate their way across the city, with replacement services making it hard to get to tourist haunts like Hackeschemarkt, Friedrichshein, or the nearby town of Potsdam.

For people thinking of visiting Berlin, the advice has to be 'don't come'. There is a real risk you'll miss your plane if its leaving from the periferal airport at Schonefeldt, which is poorly served by public transport at the best of times.

The recent rash of new shopping centres built around existing stations might give the impression that in recent years Deutsche Bahn has given more attention to property development, sidetracked from their basic task of running a railway. As usual it comes down to politics. If you want to privatise a state owned business, as Government have signalled for years, managers are encourage to bolster the book value of the business and increase turnover. Maybe commercial rents are more attractive than ticket sales to passengers, if you are trying to lure investors, but when the wheels come off, it has to raise a question mark against the competence of management to run a business. Chasing asset values may end by destroying business credibility.

Anyway, for the moment, give Berlin a miss, unless you really have to.

The revolution in communications has been the central theme of my work for the last decade, since plugging into the internet, turning to digital technology for media production and slowly abandoning 'old media'.

What I hadn't taken much notice of has been the change in my spending over the same period, but this is a rough list of the 'print' media we no longer buy on a regular basis:

Germany newspapers and magazines: Die Zeit, Der Speigel, TagesSpeigel (Berlin), Frankfurter Allgemeiner Zeitung: say Euros700 less per year.

UK newspapers and magazines: Guardian, Economist, Financial Times, Independent, Private Eye, UK Vogue, House and Garden, Screen International, New Statesman: say Euros3000 less per year.

US publications: Variety (international edition), New York Review of Books, say 300Euros less per year

There is also a saving on soap, because of no longer having to wash newsprint smudges off your hands. There is also an enormous reduction in the amount of paper to be bundled up for recycling.

However, as well as the 4,000Euros a year we save directly, the amount of advertising digested (and paid for by advertisers), has contracted enormously.

My guess is that I watch perhaps 80% less broadcast television than 20 years ago and 90% less radio. I also guess I spend half as much on books, partly because the number of titles you need to get are smaller once your bookshelves already have most classics.

I spend a lot of time online, reading the newspapers and magazines I no longer buy and follow various communities, reading postings and swapping opinions, but that too has become less costly. Our early internet connection was costed by the minute online, then by the volume of traffic, now a monthly 'flatrate' covers the lot. The same is true of phone calls. A flat rate for phone and net now costs 75% less than our bills a year ago. Online the mobile services still feel expensive, but I expect within 5 years that they too will be fully costed on a 'flat rate'. There are probably a couple of thousand euros savings in that mixture too.

So the change in my media habits has led to an overall reduction of about Euros6000 a year on goods and services, or the equivalent of a month or two's average wages for a journalist, publisher, or tv technician.

Its quite a big change.

The difference in a company's commercial performance that leads to hefty profits, just getting by, or thumping great losses can be quite slim. Change the exchange rate for an exporting company, the level of demand for a product, or re-price in response to competition and the health of a business can wither with alarming speed. Shareholders and banks that will happily lend or provide capital for new investment are never going to be happy if the same managers ask for a dollop of cash just to keep going. When does aggressive price cutting turn into a closing down sale? A point arises when every-one concerned, including governments, have to ask themselves a simple question: 'Do we want this business, or not?'. If the answer is no, or not really, or not particularly then a shop, a factory, a company, or a whole industry will go to the wall, before anyone has seriously assessed the situation.

Much of the investment in Eastern Europe since the collapse of communism has been based on wishful political thinking, as minor competitive advantages based on low wages were leveraged into huge incentives to make these countries 'attractive investment environments'.  Somewhere in the background mumbling of business rhetoric, lurked the undefined assurance that the EU and Germany in particular would come to the rescue, when trouble arose. The rhetoric hasn't changed. German Ministers emerge from international conferences to offer bland assurances that Eastern European countries will be rescued. The founding myth of the 'Euro' is that the strength of the German and
French economies is sufficient to cover the underlying weakness and endemic corruption of other member
state economies. The question that arises is whether Germany, in particular, is able to
live up to its word, or are EU's leaders engaging in a massive game of bluff?

German Foreign Minister Frank Walter Steinmeier is leader of the German Social Democrats (SPD), which he joined shortly before becoming its leader. Second in command of the Coalition Government under Chancellor Angela Merkel, Steinmeier is her main rival for the Chancellorship in the general election later this year.

This week as business confidence falls to its lowest since Unification, Steinmeier has unveiled the new SPD programme. Strong on new regulations (paperwork is a German specialism), the SPD stance on the economy is sentimental electioneering proferring concepts of awesome banality,"We come from a culture of small, family-owned businesses",with the goal "to end the short term focus on short term returns among businesses and investors".

Alongside other measures, the SPD will extend the period of time investors must hold shares before paying capital gains tax on their profits. At a time when institutional and private investors alike are facing catastrophic falls in the market value of shares, this is pretty irrelevant. Since the hyper-inflation of the 1920's, Germany policy-makers have always railed against speculators and the dangers of inflation. It is the easiest form of ineffective populism, as most Germans lack the wherewithal to speculate in the first place.

Families certainly play a more central role in Germany's biggest companies, many of them 'public companies', than in the USA or Britain. But is this a 'culture of small, family-owned businesses'? Volkswagon is a subsidiary of Porsche. Holzbrinck and Bertlesmann are major international players in the media. The Quandt family have played a major role in BMW's fortunes, while the Continental tyre company has recently been the subject of interest from private industrialists and an acquisition deal of disastrous proportions. The patriarchal owner of a drug manufacturer recently lost a fortune shorting Volkswagon, then killed himself, leaving the 'family' businesses facing chaos. The notion that this is a culture of 'small family-owned businesses' seems oddly nostalgic coming from the Socialist Party. It surprises me that the Steinmeier-socialists should be so relaxed about the enormous concentration of industrial and commercial power in such private hands.

There is an enormous contrast between  Germany's role in the world economy and the structure of its internal 'local' economy. While Germany's major corporations internationalise themselves, the backbone of the 'local economy' is property and the rents paid by tens of millions of tenants for their homes. Personal debt in the UK is so much higher than in Germany, because most people are buying their homes through mortgages. One reason German's save is that they expect to continue paying rent in old age. Since Germans rely mainly on state pensions, funded by a levy on employers and employees alike, Germany's biggest businesses are not burdoned with 'company pension funds'. So, the 'financial institutions' in Germany have a rather different balance to those in other countries. The central place of banks and building societies (S&Ls) in housing finance is proportionally smaller, while the 'pension funds' have only a tangential role in people's lives. 

It is therefore much easier for the German government to propose tightening up the rules on funds, as they are much more clearly associated with 'private wealth' and much easier to wag a finger at than would be the case in Britain, where prospective pensioners are concerned about their funds' performance.As Steinmeier proposes, "The government should set limits on the amount of debt private equity investors should be allowed to use when taking over businesses. Excessive leverage had not helped the economy, but 'destroyed healthy companies' by saddling them with unbearable levels of debt, "We do not want to destroy private equity, but we must establish new limits to the amount of debt these investors can raise to make acquisitions." "

Blame the funds is an easy accusation, when none of your constituents are beneficiaries. As for the promise to end 'short termism', well, everyone will recognise that it is easier for a politican to evoke dreams for the distant future, than address the issues of the day.

So what kind of a place is Germany and could the Steinmeier republic live up to its promises to 'bail out' Eastern Europe on top of its de facto commitment to funding the EU's western european basket cases in support of the Euro?

The short term prospects look pretty grim for 61,000 Volkswagon workers put on short time this week and for anyone associated with the car industry as parts suppliers, manufacturers, or distributors. A bubble of temporary demand has been created by offering trade in bonusses for very old cars against new models. But all the major car-makers have shut down factories for extended Christmas breaks, some of which began in early December and went on into the New Year, so the whole auto industry is facing trouble and Germany has a car based economy.

Officialy there is about 8% unemployment already, but another million or more workers are earning benefits plus €1 per hour under Govnerment 'make-work' schemes, an immense drag on the public purse. Yet more are employed in so-called €400/month jobs, which attract no tax, or levies for pensions and social contributions.

As spending moves from high value items attracting high levels of VAT (turnover tax) towards essentials bringing in 12% less, the tax system is going to see falling levels of revenue, on top of the expectation that only the most incompetent of accountants should leave a company with liabilities for corporation tax in the coming year. 

As young people have moved away, towns across the former East are demolishing homes in their thousands, leaving whole regions as geriatric enclaves of little, or no productive economic purpose. Is Land Brandenburg Germany's answer to the real estate disasters of Florida?

Germany's banks, through their international subsidiaries, appear to have indulged in the madness of complex derivatives and exposure to sub-prime mortagages.  Bank closures and amalgamations have become an almost weekly occurance as the gaping holes in their balances sheets become apparant. Even when the Government wants to mount a rescue, as in the case of Hypo Real Estate, complex legal issues stand in their way and the 'Loan Rangers' may not be able to bring help in time. As 'Hypo' is comparable to Lehmann Brothers in size, the issue of its survival is no small question for the whole of Europe.

In a desperate attempt to keep things on track, the German government has provided the largest financial boost in Europe, amounting to 1.6% of GDP. Within a couple of months, it should become clear whether this massive Keynesian intervention will have any effect at all. Should even one of Germany's major international companies, like manufacturers Siemens, or automaker Daimler, or insurer Allianz, get into trouble, then the effort will almost certainly have been in vain.

  Germany's politicians may be in a state of shock, or even denial about the seriousness of the current crisis, but the long-term horizon that Steinmeier want to focus on has all the dreadful signs of a forthcoming capitulation.

"It's not as bad as it looks," said Andreas Scheuerle, an economist at DeKaBank in Frankfurt, "The main drag is the current conditions component. Expectations on the other hand have improved considerably in the past two months, showing there is hope global policy packages and lower commodity prices will revive the economy in the seond half of the year," report Bloomberg, 24/2/09. Let's hope he's right!

  Is this the economy that is going to rescue Eastern Europe?

(Steinmeier quotes here from the Financial Times, 22/2/2009) 

'Year Zero' entered the vocabulary at the end of World War 2, when Germany was in tatters and a wholesale reconstruction of institutions, government, industry and services was imperative. A line was drawn under the recent past. Year Zero meant a new beginning. Italian neo-realist director Roberto Rosselini also used the phrase as the title of a film.

The intense pressure on Government and the whole of society as they nurse the financial sector losses invites comparison with Year Zero and creates a once in a century opportunity for policy-makers and strategists to reshape the British economy. While crisis management to avoid collapse is essential in the short term, those economic and industrial policies based on restoring market equilibria address symptoms, rather than reshape the structure and culture of economic activity and beyond that, the kinds of lives people lead.

Thankfully Britain has not faced any physical destruction, merely the collapse of credibility among its financial institutions. Like soldiers facing demobbing, many of its most talented young people have chosen jobs which make little long term sense and may soon be free to follow more productive careers. They deserve encouragement, rather than unemployment.

Oddly, I am beginning to feel rather optimistic about the UK's prospects. The current market value of 'toxic' debt is based on the assumption of default. I expect this will prove to have been exaggerated (as an end of year book balancing exercise) and a real return will be won in the medium term. Combined with the massive devaluation of the pound in the last half year, the nationalised banks could look extremely attractive in two or three years, when EU competition rules will begin to create pressure for re-privatisation. Before that happens, ownership and economic power will have moved at least temporarily from private hands to government and could provide a strong base for a planned recovery with targeted investment in industries for the future, given that the service based economy has demonstrably failed. This could be the shock that enables to UK to begin a new path based on new and emerging technologies. A lot depends on the quality of the 'plan' which might emerge.

What kind of Britain is desirable, one based on patching up and re-constituting industries and organisations associated with past success and current failure, or creating a new environment based on forward looking prognosis' of technological and organisational change and a targeted framework of support for investment opportunities based on wealth creation, rather than financial opportunism. 'No more lifeboats for sinking ships', as I wrote in my novel, 'The Swoop', should at some stage be signalled to reluctant late-arrivals for the rescue. Reluctance and resistance to change should be recognised and acknowledged by allowing adherents to discredited strategies to follow their instincts, but they shouldn't expect to be bailed out!

 Britain has some interesting advantages. Firstly, the last decade has already seen big improvements in facilities for education and health care, including a large scale extension of higher education. Secondly, the civil infrastructure of physically connectivity is acceptable by international standards. There is no British 'New Orleans'. Thirdly, despite devolution, the lack of regionalisation means the UK need not address crisis' like the California State default. Fourthly, most of its heavy industry in the UK, car production, steel etc, are foreign owned, so the epicentre of corporate collapse will be elsewhere. Tokyo, Detroit, India? Luckily, British roads match Japanese right hand drive cars. Closing the UK's blastfurnaces has probably achieved the cut in CO² expected under climate change commitments for this year. Fifthly, the collapse of house prices and commercial property values will make recovery cheap. Additionally, with a long coastline, two closely linked long term issues can be addressed simultaneously, CO² free power generation and rising sea levels, as potentially massive infrastructure projects could be initiated with a very local character of global significance.

Having taken control of the banks, the first steps towards regeneration must come from government. Some important lessons might be learned from Germany, most importantly by creating a body similar to the KfW, with both a national and regional structure. This could be created as a partnership between commercial banks, the neo-nationalised banks and government to provide a tiered pathway of business finance from start-up to major corporate status, with products designed for businesses as they progress through each stage of business development, including specific projects at regional, national and international level. As Investor's in Industry, 3i's went some way towards this before being floated off as an independent business. A new institution with a wider remit is now desirable.

While this may be worthwhile in itself, the relationship between Theoretical and Applied Research, Industrial R&D, Investment and Business strategies should also be enhanced. Germany has two tiers of research institutions, the Max Planck Institutes for Pure Research and the Fraunhofer Institutes for Applied Technologies. UK Universities have departments that function well within the European network of research clusters, but this could be encouraged to go further with the creation of a deeper range of autonomous research centres on the German model. Analogous to the British Research Councils, the German Research Association (DFG) is a body open to enable applications for research funding by any qualified individual (doctoral) whether they are linked to an institution, or work independently. That simple extension of the Research Councils' remit would be welcome.

Institutional reform of this kind would make it easier for British initiatives to mesh with resources available via the EU in Brussels.

Which directions British industry should pursue is a wider issue, perhaps one of the tasks for Mandelson's Department of Business, Enterprise and Regulatory Reform, however a shift from commerce to industry seems unavoidable given the turmoil of recent experience and the rediscovery of the old adage that it is much easier to close things down, than to create something new. One thing I would like to see, is the creation of entrepreneurial teams to work in partnership with university research teams and patent holders to exploit and develop opportunities based on new technologies.  However, if regulatory reform wins pre-eminence in that Department, then it is unlikely much will be achieved.

'The Swoop' can be downloaded here: http://www.berlinpicturecompany.com/ebooks/ebooks.html

As a result of the Russian's
bizarre gas 'cut offs', I suspect a lot of oil is now being burned for
power generation throughout Europe, offsetting falls in demand elsewhere. I'd be
interested to know how this is effecting refineries, stocks and
deliveries. A couple of
weeks or more without gas across central and eastern europe must amount
to several million barrels of oil equivalent a day, with even the UK
being more cautious about gas consumption (hopefully) despite being
more or less independent of Russian supplies. Should we anticipate a
greater spread between the European benchmark (Brent) and WTI in the
USA?



Worth noting that the European monitors are confirming that in
'restoring' supplies, rather than simply using the normal pipelines,
the Russians have been using odd routes, which the Ukrainians cannot
handle straightforwardly. This is vicious political game.


At the same time, we are told that tankers full of crude are being used as storage. Keeping crude oil in tankers for any length of time is a form
of hoarding, which I suspect will be used as a way of manipulating
supply/price to the refineries to the benefit of speculators. Since shipping costs have collapsed,
clearly shipowners will be relieved to have cargoes sitting at anchor,
rather than having to pay for fuel to have them sailing around at a
potential loss.



This is a fascinating sub-plot within the framework of the global
economic crisis. It must be hurting the Russian economy at a time when
gas prices are at a historic high and set to fall, with their currency
in an endless pattern of devaluations. Who are the Kremlim trying to
bankrupt, themselves as owners of Gazprom, the oligarchs, international investors and companies with projects in Russia, the
Russian people as a whole, or is it all aimed at the former Soviet satellite countries, the 'near abroad' as Russia so quaintly describe their neighbours? That seems to be the question. Whichever, it is an expensive way of destroying political goodwill.

'The Swoop' is a novel I wrote about a bunch of historians looking back at our own era from about 300 years in the future and begins with a take on the Great British Crash and the financial crisis I anticipated a couple of years ago (2006) and thought might happen in 2010. Events have overtaken my thinking, novels take time to write, but in many ways the crisis is emerging much as I anticipated though on a broader geographic scale. You can download a copy of The Swoop here, http://www.berlinpicturecompany.com/ebooks/ebooks.html, and pay for it (€5) if you want to.

So, how is the real Crisis differing from my fictional version?

The first thing to understand is that my historical view is based on the notion of there having been a remarkable recovery, The Swoop, based on sweeping away many of the underlying assumptions around the British economy and its political landscape. I have long derided the shift from an industrial economy to a service based, post-industrial, model proposed by Thatcher and entrenched by New Labour under Blair and Brown. The concept of The Swoop goes further.

The Service-based Economy tends to overshadow one of the basic rules of capitalism, which is that capital gets used up. Everyone recognises that a used car, or an old machine, is worth less than a new one. Accounting systems acknowledge this through the notion of depreciation, where the capital value of an asset is written down to 0 over a period of time, beginning from the moment it is acquired. A service economy thrives off the notions of intangible assets and the expectation that land and buildings have instrinsic worth. This is a long standing British tradition. When the English Revolution began in the 17th century its politicians had to work out how to replace the King and a society built on notions of aristocracy seeking an answer to the question 'who belongs in society and should have the right to vote?'. The Putney and Whitehall Debates came up with the notion of property being the measure of a man's worth (women weren't really taken into consideration, except as chattels - tangible assets/liabilities).

This notion of having 'an interest' in society is very similar to the New Labour rhetoric of stakeholders, in which people's interests are based not only on their humanity, but also their social and economic status. Some people are worth more than others. So we write down the value of industrial investment, putting tremendous pressure on businesses to requip and modernise as part of their refinancing, which means a service based economy requiring nominal caqpital investment is a much cheaper way of creating new businesses and getting people into work, but it is much more fragile.

What I had failed to anticipate was the extent to which the hedge fund industry had infected the traditional banks with expectations that could not reasonably be fulfilled. Hedging is based on using large amounts of money to take advantage of very small fluctuations in asset values, share prices, bond yields, commodities. The basic principle is very simple. A small, or traditional investor must wait for significant shifts in value before being able to sell at a profit. It costs money to buy and sell, the buying and the selling receive different prices in the market. A fund relies on economies of scale to make small prices fluctuations meaningful. There shouldn't really be that many hedge funds, but they have proliferated like rabbits.

I have been astonished to see that people were impressed that Madoff could regularly create a 1% profit per month. Much is made of the 'funds' abilities to play the markets both ways, but I suspect their real advantage is simply scale. Well half a percent has been easy to achieve for small investors by leaving their cash in a German Post Office Savings banks, so if the extra half per cent per month represents an outstanding performance, the gain is not especially impressive. Venture capitalists would demand a far better performance from a new business. Of course, a fund requires next to no capital investment so these requirements can be overlooked, as scale buys credibility, but their fragility is based on the limits of competence. This is perhaps where the traditional banks fell foul, as more and more semi-competent people of average ability were swallowed by an industry that once prided itself on outstanding candidates being trained to elite MBA's at Harvard. The MBA now seems to represent a modest business studies qualification - another symbol of devaluation.  Merryl Lynch's 'thundering herd' of agents, were mimicked by the 'wandering crowds' of Pooterish British bank clerks and building society salesmen. 

I still suspect the worst of the British Crash is yet to come. While the global economy will teeter into recovery, the British 'fundamentals' look all wrong, making it difficult to see where recovery will begin.

First and foremost is the massive over-valuation of property, which cannot really be rectified until land prices and the size of plots for building land are reassessed. No-one can build cheaply on expensive land. No-one can build well on pocket handkerchiefs.

We have already seen banks nationalised. If there is a severe sterling crisis against all the world's major currencies, then the banks will lose their sheen and my exaggerated scenario of rump institutions based on debt collection and zero credit may become a reality.

What my own scenario envisions is the creation of an economy based on robust new enterprises, involving large scale capital investment and this is where the fun starts. What kind of industries and what kinds of technology should be involved? 300 years into the future, I built in some notional structures, like a global hologram, a tourist industry taking advantage of climate change and some pretty dramatic changes in geography. There is also a downside to be read about. Work out which of these might make sense and you might be able to settle on some businesses to build for the future and some it may be better to avoid.

'The Swoop' is volume three of a trilogy about 'authenticity' that began with 'Lone Hunter', the story of a book thief from Berlin in a world of criminal fakery and will be followed by volume 2 that takes a look at the issue of cultural authenticity and personality. What we might learn comparing the three, is how the frameworks of fiction can be authenticated as fact by the diligence of historians armed with new technology. These satirical novels are also intended to make people smile.