The UK downgrade by Moodies has been on the cards for some time and some would say was inevitable given the UK’s current situation

Nevertheless it has always struck one as being slightly incongruous that the ratings agencies (Moodies, S&P, Fitch et al) are given as much credence as they are in the light of their woefully inadequate performance assessing the 2007/08 situation; in fact I am slightly confused why they have not been sued into extinction over that episode

The collapse in 2008 had been on the cards for a considerable length of time with a number of warning signs and yet not only did the rating agencies totally fail to identify the impending problems, they totally underestimated the dimensions of the crisis when it materialised.

To all accounts they were working with economic models that ignored real world drivers and what was even worse was, that they had absolutely no idea that they were operating with flawed models in the first place. Even to the layman, it was obvious that these models failed to accommodate the evolution of real-world events or economy

In other words, a systemic failure of economic interpretation by that profession; placing theory above potentially known outcomes and giving greater weight to the wrong areas. A ‘black swan’ event may have occurred, but it is worth noting that there is no such concept as ‘systemic failure’ in the world of economic models. Surely this in itself is a fundamental flaw in approach, because it does not even recognise the possibility of a total breakdown?

Therefore, because of these flaws the rating agencies (regulator SEC) were, by dint of their influence, themselves a contributory factor in the whole crisis such as:

  • Offering the highest ratings to financial instruments that were far riskier than advertised. Mislabelling some bonds as triple-A, thereby encouraging investors to place their money in incorrectly identified low risk investments i.e. CDO (collateralised debt obligations), RMBS (residential mortgage backed securities) etc.

Don’t forget that some institutions are prohibited from holding low rated securities and the very fact that the ratings agencies incorrectly classified CDO’s etc. placed these investors at greater risk than they were allowed to take on. Furthermore, once these instruments were reclassified correctly, the institutions had to dump them because they were in breach of the rules

Now we come to a conflict of interest by the ratings agencies. After all they are paid by the very firms whose assets there were recommending/rating and giving a low rating was potentially bad for business. So we culminate in a situation of ignoring high-risk packaged loans (fraudulent mortgages) and assigning them with a quality rating status

With all this in mind, it is quite extraordinary how these ratings organisations have managed to survive and maintain their credibility in rating corporate/public debt

The following springs to mind

There are known knowns.
These are things we know that we know.
There are known unknowns.
That is to say, there are things that we know we don't know.
But there are also unknown unknowns.
There are things we don't know we don't know.

(Donald Rumsfeld)

Tags: | Categories: Economics

The energy regulator is warning about an impending ‘energy gap’ (doom) with old power stations being phased out and not enough replacements being built to make up for the shortfall.

The consequences of this are that the UK's lights could go out and we are going to have go shopping around the world to plug this gap

This is all well and good, but what precise alternative measures has any recent UK Government taken to ameliorate the problem – very little it would seem other than paying out huge grants for wind turbines, which must be some of the most inefficient ways of producing energy imaginable, quite apart from being a complete blot on the landscape

Well how about this for an idea –

From now on, all new build houses must have a mandatory array of solar PV panels tied into the national grid which must be part of the planning application. Also no planning permission will be granted unless this provision is included

The benefits of this scheme would be enormous, especially including these ideas at the build stage, rather than having a retro-fit approach which is inevitably more expensive.

Furthermore, the sooner the UK starts down this route the better. Just work out the proposed number of houses to be built over the next 1-10 years and then calculate the contribution they will cumulatively make to the nations energy requirements. Also bear in mind that this is an on-going process that will have increased contributions for every future year

This seems a no-brainer, which is obviously a sure-fire reason for no one in Government to take it on board. Nevertheless, having a great many small power generators (individual houses increasing every year) located throughout the country would go some way towards addressing the UK’s current energy problem.

AND … if the previous Government had taken this approach 10 years ago instead of total inertia, where would be today?

Surely the message has to be - the sooner we get started on this idea the better

Tags: | Categories: Energy

Never really understood why Germany continues to persevere with the EU. Especially as it was an ideological/political rather than realistic economic dream and one only has to look at those still doing well out of the EU – on the one hand those in Brussels & MEP’s etc. and on the other countries who see it as a grants ‘cash cow’ in one form or another. After all one only has to look at any graph of net contributors .v. receivers to form a conclusion

Germany have already successfully been through the painful process of reunification in the 1990's, so why would they want the pain all over again with the EU; with no realistic end in sight?

Of course the real problem is that at least with reunification there was the potential of a successful result in the future. Unfortunately the same cannot be said for the EU, where all that Germany is doing is bankrolling the southern block of EU members and taking a massive ‘hit’ for its support

This whole EU disaster area is no longer just Greece, but is now also being acknowledged as France, Italy, Spain … and so on … just look at the historic track record of some of the countries who have been in default over the last 50 years longer than they have been solvent. Why does anyone think they can, or are willing to change their ways under the current situation?

Clearly Germany is getting edgy about their gold reserves and nervous regarding trusting France to hold their gold in safe keeping. What happens if France goes down and they subsequently hijack Germanys gold reserves to help them out?

All that Germany is doing by maintaining the current situation is giving credibility to a basket of other countries that would otherwise revert back to their own currencies and suffer devaluation, rocketing inflation (destroying savings) and resulting political unrest – not what politicians want

And now we have France (Hollande) as the voice for all the other countries that want a weaker euro which would potentially be against Germanys interests – so why do they stay?

Nevertheless if Germany did leave they would no longer be weighed down by supporting the rest of Europe and would probably see its currency soar

Alternatively a two tier Europe might be the answer, with all the solvent countries banding together and letting all the others jostle over support payments for each other; which would definitely flush out nationalistic feelings

Tags: | Categories: European Union

Justice and Security Bill

We are back to the age old political ploy of slipping contentious legislation through whilst everyone is looking the other way.

The most recent demonstration of this is ensuring everyone's attention is focussed on same-sex marriage, whilst furtively re-introducing The Justice and Security Bill quietly in the background and cancelling previous amendments

Political sleight of hand that we all believed had gone away when Tony Blair and Alastair Campbell departed, although unfortunately it does not seem to be the case with the present Government

Nevertheless, there is something ironic about the 'liberal party' supporting something of this nature, although one can see that self-interest over-rides natural justice with all political animals. Furthermore, this mind-set has already been demonstrated by Nick Clegg in other areas, where his 'horse trading' took precedence over doing the right thing for the benefit of the community

The disappointing thing about the recent successful changes to this 'Secret' Justice Bill is that they are geared to protect Ministers and would further strengthen their ability to make use of secret courts to defend themselves; so matters such as the Expenses Scandal would probably never have seen the light of day

Do we really want a system of secret justice hugely weighted in favour of Governments and those in power to the detriment of the 'ordinary' man in the street - what price a free democratic society?

The main lobbyists would seem to be the MI5/6 security chiefs and quite frankly they do not have a great track record themselves

Remember the Dr David Kelly incident, which has never been fully explained to this day. There is still a weight of opinion that Dr Kelly was killed by MI5/6, and unfortunately a cloud still hangs over this episode because of the non-disclosure and secrecy surrounding the whole matter. Whilst Lord Hutton's public inquiry ruled that Dr Kelly killed himself, there are a great many who simply feel that Lord Hutton was the Governments tame poodle, to deliver the desired result and gloss over a number of unexplained incidents surrounding the situation. It is worth noting that

Dr David Kelly is the only person in modern English legal history

to be denied a proper inquest

With this in mind are MI5/6 the best organisations to be interfering or lobbying for items to be included or removed from the justice system?

Once again it is about abuse of trust and even though legislation is introduced today to cater for one specific set of circumstances, politicians & civil servants have a track record of bending and abusing things to accommodate or protect their own agenda in the future

References

HM Government - Justice and Security Bill

Daily Mail - Law chief to probe KGB agent's claim that David Kelly was 'exterminated'

Tags: | Categories: UK Government