Archive for January, 2009

Are we running out of money or is this crisis “totally different” to the 1976 IMF bail out

Friday, January 23rd, 2009
IMF Headquarters, Washington, DC.

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In a speech to the Demos think-tank in London yesterday David Cameron suggested that the UK will have to go begging to the IMF because of Gordon Brown‘s borrowing. “If we continue on Labour’s path of fiscal irresponsibility, at some point – and it could be very soon – the money will simply run out.”

Gordon Brown countered on BBC Radio 4′s Today programme this morning that the current crisis was “totally different” to anything seen before, because it was not driven by high inflation and wages.

So, who to believe?

As I said in my previous post at the beginning of the week, the danger is in the ballooning government debt and the eventual risk that the UK can not raise adequate additional funds in the bond market as international markets loose faith in sterling.

The UK may have a much lower national debt as a % of GDP than many other countries, however, the figures exclude the liabilities relating to the government bank guarantees and the fact that the government has effectively stated that it will not let any of the banks go bust. Their liabilities are therefore effectively the government’s liabilities. Much of UK bank debt is international. The falling pound therefore exacerbate the situation.

Gordon Brown says that the situation is very different to 1976 – we are not facing a scenario where high inflation and rising wages cripple the economy. Does that mean everything is OK then?

There is more than one way to run out of money. Having a banking crisis at a time when government finances are already stretched, committing to bail out the banks and losing the confidence of the international financial community is surely another way of ending up at the door of the IMF.

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Septic banks – lessons to be learnt from Lloyd’s of London

Friday, January 16th, 2009
Lloyd’s Building as seen from street level.

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Since the start of the credit crunch I have continually noticed the similarity, albeit on a much smaller scale, of the crisis that faced Lloyd’s of London in the early 90s.

Lloyd’s syndicates believed that they had found a risk free way of doing business by passing on the risks they took on to other insurers. Reinsurance policies became increasingly complex, and premiums dropped as the market expanded and everyone piled in to this new risk free environment where it was easy to underwrite anything and then pass on the risk to the next player. Eventually, a big loss came along in the guise of Hurricane Hugo – it soon became evident that there was no new model, as the reinsurance spiral unwound like a deck of cards.

There is a remarkable similarity in the way banks have taken up securitization over the past decade. The collapse of the US property market was their Hurricane Hugo.

Lloyd’s had additional problems to the insurance spiral – many syndicates were facing huge and ongoing losses from asbestos claims stretching back over 50 years. The combination of the two problems pushed Lloyd’s to the edge of extinction. Nobody would inject new capital into the system as there was no way of valuing the existing businesses as they could not reliably forecast future losses coming from their past liabilities.

The solution they came up with was to setup Equitas – Lloyd’s version of a bad or septic bank. Equitas took on all liabilities from before 1989 in return for a fixed reserve of cash from each syndicate in Lloyd’s. All these losses were ring fenced from Lloyd’s syndicates existing operations giving investors confidence to come back ino the market. If Equitas failed, and the aggregate reserves they took on to cover the liabiliies eventually proved to be too little, this would have come back to haunt Lloyd’s. However, this never happened – Berkshire Hathaway eventually acquired Equitas in 2007 and paid £50m back to the Lloyd’s market.

Surely there are some lessons here for setting up a toxic bank to take on the UK and US banks’ liabilities.

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Will Heathrow expansion plans have an effect on London property prices?

Thursday, January 15th, 2009
Two peacocks in Holland Park.Kensington, Londo...

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This morning it looks like the extension to Heathrow will go ahead. The economic argument has won over the potential environmental impact. Hardly surprising in the current economic climate.

However, have Londoners fully appreciated the potential effect this will have on the capital? The biggest direct impact on London will be noise pollution. If you have been down to Kew gardens recently you will have noticed that the times that the flight path is in a Easterly direction it is not a very relaxing place to hang out. Planes fly over at what seems like one/minute.

So, with an additional runway situated to the North of the current runways, what will be the effect of new flight paths on noise over London? According to HACAN Clear Skies, this will mean an additional 500 flights over London per day. They have written a consultation paper outlining the potential impact on London – you can read it here. Here is an excerpt from the report:

4. New flight paths
The Government has not provided exact details of the new flight paths in the consultation. But, because planes need to line up with the runway several miles from touchdown, it is clear the new landing flight path will be over:

• Holland Park and High St Kensington;

• the northern parts of Earls Court, Hammersmith and Chiswick;

• Heston.

• To the west, the flight path is likely to be over Maidenhead and Slough.

• There will be new take-off routes over Harrow, Northolt and Paddington

5.  Loss of West London’s half day’s peace and quiet
The ending of runway alternation – where planes landing over West London switch runways at 3pm – will take away the valued half day’s peace and quiet enjoyed by residents in these areas.  This will include removing the half day’s peace and quiet at the National Trust’s property in Osterley.

So, by 2015, there could be large parts of West London directly under the new flight path. Holland Park may not be quite the peaceful place it is today.

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Invest in property for free, hang out with celebrities and boost your green credentials

Tuesday, January 13th, 2009
Emma Thompson at the Nanny McPhee London premiere

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Have you ever thought about investing in property but have not had the cash to invest? Well you can now become the “beneficial owner” of part of a plot of land and not pay a penny. To boot, you will be sharing ownership with the likes of Emma Thompson and Alistair McGowan.

Sounds too good to be true? Well, you’re right – but it is partially true. If you read the front page of The Guardian this morning, you will have seen that Greenpeace UK have bought a plot of land on the edge of the village of Sipson to try and stop BAA building a third runway at Heathrow. The land, which you can see here, is now legally owned by Emma Thompson, Alistair McGowan, Zac Goldsmith and Greenpeace UK. The second stage of their campaign is to get as many people as possible to sign up to have a “beneficial interest” in the land. All you have to do is click here and enter your name and email address.

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Will Boxee become the universal EPG?

Friday, January 9th, 2009
BBC iPlayer

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I have been reading about Boxee on Fred Wilson‘s blog but thought it would be focusing solely on the US market. Yesterday I read that it worked with the iPlayer, so I took it for a spin last night.

Boxee is essentially a digital media entertainment hub. It allows you to aggregate all of your digital media from your computer and channels you like on the web in one place. You can then play back through your telly or watch on your computer.

I am a big fan of the iPlayer – I don’t love TV enough to record stuff, but it is great to be able to find something you want to watch when that telly moment comes. Boxee takes this one step further, offering a service which will eventually allow you to watch anything on demand from one place. This feels like the first time that the bridge between the internet and the TV has been built effectively. It will be interesting to see if Boxee ends up being the EPG for the digitally converged living room.

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Can Pro sport save US local news? Any lessons for the UK?

Thursday, January 8th, 2009
Image representing Mark Cuban as depicted in C...

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Mark Cuban, billionaire entrepreneur and owner of the Dallas Mavericks, makes the case for Pro sports franchises to support their local newspapers on his blog. He argues that ultimately it would cost them more in marketing than the effect that well written local news has on allowing “fans to connect and stay connected to our teams”. You can read the article on his blog here.

US sport is a very different beast to the UK market, however, I wonder if there is anything for our local newspapers, football, rugby, cricket and other sports clubs to learn from this.

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Multiple predictions of the end of newsprint

Wednesday, January 7th, 2009
Image representing New York Times as depicted ...

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This morning three of the top ten posts on techme are predicting more pain for the newspaper industry. The Guardian interviews Clay Shirky here, Slate has a piece on “How newspapers tried to invent the web” and the Atlantic predicts that offline papers, notably the New York Times, will disappear sooner rather than later here.

The industry certainly faces an enormous challenge. In the US and the UK much of this pain has come directly from the sudden drop in advertising revenue from the property sector. In 2009 estate agents will focus their budgets on the web. The issue will be that by the time the economy and the housing market recovers they will have adopted new ways of doing things and I doubt that they will start to redirect more money off line. Newspapers have to radically change. I doubt they will physically disappear, as people enjoy reading a physical paper, but they will have to drastically change the way they operate.

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Is the world full?

Tuesday, January 6th, 2009
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Tim O’Reilly / Flickr

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Tim O’Reilly has just written a piece on his blog discussing the current state of the world economy, calling it “the biggest Ponzi Scheme of them all”. He argues that much of world growth has been pure inflated paper wealth, and that economic growth, much like the earth’s resources, is limited. He quotes from Former World Bank economist Herman Daly as follows:

“Growth in US real wealth is restrained by increasing scarcity of natural resources, both at the source end (oil depletion), and the sink end (absorptive capacity of the atmosphere for CO2). Further, spatial displacement of old stuff to make room for new stuff is increasingly costly as the world becomes more full, and increasing inequality of distribution of income prevents most people from buying much of the new stuff—except on credit (more debt). Marginal costs of growth now likely exceed marginal benefits, so that real physical growth makes us poorer, not richer (the cost of feeding and caring for the extra pigs is greater than the extra benefit). To keep up the illusion that growth is making us richer we deferred costs by issuing financial assets almost without limit, conveniently forgetting that these so‐called assets are, for society as a whole, debts to be paid back out of future real growth. That future real growth is very doubtful and consequently claims on it are devalued, regardless of liquidity.”

I can not disagree with the view that much of the growth over the past 10 years has been inflated by a paper wealth bubble, however, I do not think I could cope with accepting that there are few productivity gains to be had. If “the world was full” what would be the point in trying to improve the way we do things?

UPDATE – Tim O’Reilly replied to my comment on his blog:

Tim O’Reilly [01.06.09 09:30 AM]

Henry Yates: I think you misread “the world is full” argument. Daly explicitly calls out the kind of growth that consists of “qualitative improvement.” And I do agree that he perhaps misses the point that certain types of qualitative improvement can be quantitative improvement as well.

Take agriculture for instance. There’s no question that domesticated grains are both a qualitative and a quantitative improvement over the food carrying capacity of the natural environment. Sustainable agriculture of all kinds is an improvement over hunter-gathering. But at some point, you start borrowing from the future. As Wendell Berry pointed out in the article that Chris Ryland links to in his comment above, current farming practices destroy topsoil, while other practices preserve it. At what point do we realize that the version that borrows from the future by stripping the soil and adding petrochemical fertilizer is NOT actually more productive than sustainable agriculture?

Or, more importantly for the argument I hinted at in my conclusion, I believe that there’s a wonderful economy of innovation to be found in qualitative improvement. Is the web not a wonderful demonstration of that fact? We’ve all got the same personal computers we had 20 years ago but we’re getting more out of them not because they are faster but because they are connected (and in fact the rise of netbooks shows that the idea held by the computer industry for so long that faster chips was the only way to grow the industry is wrong.) We hit the wall on certain aspects of quantitative improvement, and qualitative improvement took over.

Or take my own industry: publishing. It’s not been growing much for years. But Amazon has certainly made a great business by creating a qualitative improvement in the way people can find and buy books. So I think you miss the point when you say that there’s no room for entrepreneurship in a steady state economy. If anything, there’s more room, because you really have to innovate if you can’t rely on the free ride given by unconstrained growth.

As I said above, I do think that it’s not a binary choice of qualitative vs. quantitative. But it’s a useful tool for thinking about how “growth” and innovation can continue even in a steady state economy.

I would agree that growth or productivity gain is usually overstated. Qualitative vs. quantitative is an interesting way of looking at things. You could argue that GDP growth is a crude way of measuring progress anyway and that more of a “balanced score card” quality of life metric would be more useful.

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April 1st comes early

Tuesday, January 6th, 2009
No Apple @ MacWorld?

Image by macwagen via Flickr

Over at the The Onion they have a great piece from the annual Macworld conference. They report on Apple‘s new keyboardless laptop. It might take 45 minutes to type an email, but it will append ‘Sent from my Apple Wheel’ to your signature so that everyone will know you have one…

You can see the video here.