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My intention is to put a short review of films I watch up here, for my reference as much as anything else… I recently ordered “Where the Truth Lies” (2005) on DVD from Sofa Cinema only to realise in the first scene that I’d seen it already and it wasn’t so good I’d want to see it again. But perhaps my mistake was understandable, as Sofa Cinema’s description is:

“Acclaimed director Atom Egoyan adapts Rupert Holmes’s novel about a celebrity journalist who attempts to reveal some old Hollywood skeletons.” Full stop.

The trouble is, all I remembered was that it was about: “… a long-buried incident that affected the lives and careers of showbiz team Vince Collins and Lanny Morris” (thanks, IMDB), which of course, is what the “celebrity journalist… attempts to reveal”. Mind like a sieve, don’t go in for film quizzes! Though, of course, it’s the relationship between the showbiz duo that makes “Where the Truth Lies” worth watching. Wish I could remember where I saw it – I’m beginning to suspect the London Film Festival and that Atom Egoyan answered questions afterwards.

Anyway, “Be Kind, Rewind” is surprisingly OK, given the Guardian review I read after deciding to go and see it (but now I see the Guardian has likely knocked a star off for some perceived political incorrectness). It’s a bit chaotic and quirky, but actually has a plot, which was a big surprise after “The Science of Sleep“, which I just didn’t get.

The movie credits refer to a website something like bekindrewind-swededmovies, but Google didn’t help me find it – I got a single hit (there’s a word for this) of a blog that Google thought would “harm my computer”. Nasty. Does the site exist? If not, why is it in the movie credits? Will it appear? In the meantime, this Youtube page is worth a look.

Rating: *** (I know, same as the Guardian, but I’m gonna be harsh)

Says the FT. Hmm, maybe I wasn’t spouting b.s. after all.

How do BSs raise more capital, pray tell?

For starters, the Yanks don’t have the term “negative equity”.  I tried to tell them by commenting on this CNN story, but it seems CNN is another site where they get you to write a comment and nothing happens. I won’t bother in future.

But this NYT story is breath-taking.  It seems the US is the land of the free, yes sirree, you’re free to walk away from your mortgage if it turns “upside-down”!  Unbelievable.  I hope they realise that no-one (stupid foreigners) is ever going to lend them (the US) money to buy houses ever again.  And they’ll probably be very careful what else they lend it for.  Talk about moral hazard, eh, Merv?

There was an excellent Cambridge Energy Forum (CEF) meeting on aviation yesterday. As someone said there, it’s astonishing that flying is now a sin. Is this really justified? Do we all have to stop flying? How can we reduce carbon emissions from flying?

It turns out that some work is already taking place to develop (small) aircraft powered by electricity. This could be scaled up, or a development path via hybrids to minimal reliance on liquid fuels.

I drafted the rest of this post in response to an email before the meeting, but nothing was said there that changes my mind – I’m now just somewhat better informed!

I intend to address the thorny issue of aviation in the book I’m (slowly) writing. I don’t agree exactly that the aviation industry should create technologies such as CCS (companies, in my view, should do what they do best), but it should certainly pay for them.

There is a clear economic problem to be overcome if the goal is to reduce carbon emissions from flying. If you just put a price on carbon, or on fossil fuels for that matter, then you introduce disincentives for different activities disproportionately, because, (among other reasons) fuel costs are a different proportion of the total cost of different products and services.

Consumers would still quite happily fly at a carbon cost of $100s per tonne [as was pointed out at a recent CEF talk, if I recollect correctly], but at such levels people would be switching away rapidly from other uses of carbon fuels, e.g. road transport, power generation. Incentives for suppliers to introduce technological changes depend on (inter alia) (a) competition from substitute products – for long-haul flights this will only become significant at a very high price for carbon (for business travellers, the cost would surely have to be $1000s/tonne) and (b) the availability of alternative technologies and the cost to introduce them. It is politically impossible to go straight to a carbon cost of $100s. Therefore, if we simply put a (gradually increasing) price on carbon, the aviation industry will continue to grow for some decades. George Monbiot reaches a similar conclusion, I believe, just by considering possible alternative technologies (an incomplete argument). If the policy agenda is to simply impose a flat cost on carbon emissions, then, by 2050 (say), the global economy will be hugely dependent on an unsustainable mode of transport, making it difficult to achieve further emission reductions.

So we have two distinct reasons for taxing aviation emissions more than other emissions:
(1) the additional Radiative Forcing of aviation emissions (because they take place at altitude);
(2) the need (because of the urgency of the GW problem) to encourage technological innovation in aviation and the development of substitute products (high speed rail, etc.) in parallel with, rather than after, other technological changes (such as the decarbonisation of power-generation and road/rail transport).

It seems to me that it is therefore a no-brainer to impose additional costs on aviation emissions beyond a carbon cost proportional to emissions. It seems logical to use these to pay for CCS, the idea being that once we reach the point where we can afford zero net anthropogenic GHG emissions, the aviation industry will have to pay to capture a multiple (based on the scientific assesssment of the damage of high-altitude aviation emissions) of its GHG emissions (though such an equation would not be climate neutral). Obviously the carbon sequestered shouldn’t come ultimately come from fossil-fuel burning, that would be double-counting, i.e. aviation has to pay for both extracting carbon (and/or other GHGs) from the atmosphere and sequestering or destroying these GHGs.

I wouldn’t completely write off the possibility of decarbonising aviation, though. There are certainly a lot of efficiency savings that could be made (I guess we’ll hear about some of these later today), but, apparently, experimental entirely solar-powered aircraft have been built. My idea (OK, just a thought-experiment to support my argument for the possibility of zero carbon aviation) is to increase the energy available to aircraft by putting up a few (thousand) satellites with computer-controlled solar reflector arrays (any old orbit will do, computers will be able to deal with the problem). Solar-powered aircraft would book slots for satellites to focus light on them (note the word “focus” – nothing below or above the aircraft need get fried). Just an idea, but maybe it could reduce emissions at altitude, which is where you want to get rid of them. (There is also a multiplier effect to be exploited, since, with an external energy source, an aircraft could fly higher for a given onboard fuel to payload weight ratio, reducing air resistance. Also, we should be able to focus a lot of light on solar panels on top of an aircraft, since the surface would be air-cooled). At the airport, an alternative way of using external power would be to accelerate aircraft using electricity (why stop at towing them to a stationary stop at the start of the runway?), e.g. maglev ought to be able to get you to take-off speed. Obtaining power this way during landing could be tricky, though, but maybe after the recent incident at Heathrow, it might be a good idea to develop non-powered landing techniques purely involving drag and braking, anyway! I’m a bit surprised, really, that carbon-fuel free flying isn’t one of the 14 great engineering challenges: http://www.networkworld.com/community/node/25219

Campaigning to prevent runway development is not the way forward, IMHO, since:
(1) It’ll simply displace economic activity that causes flying, i.e by the Displacement Fallacy, the available fuel will simply be used in China, India, Africa… rather than UK.
(2) It may have unintended consequences and reduce opportunities for efficiency savings.
(3) It second-guesses where technological breakthroughs will occur – i.e. what if we manage to decarbonise flying before, say, shipping, and are left without enough airport capacity?
(4) It pisses people off, motivating political opposition (and I’m sure there will always be people who want to do less about GW than others).

My alternative proposal would be to turn airports into more general transport interchanges, adding high-speed rail connections to take advantage of the existing local transport infrastructure that currently only supports air-travellers. This would encourage people to switch transport modes, perhaps initially for part or one leg of a journey. Btw I worked out recently that you could save around 10%, on average, of total journey carbon emissions if you simply got people to take the train rather than drive to Stansted. But I bet you FoE et al would object that improving rail services from, for example, Cambridge to Stansted would “encourage people to fly”. But I’m starting to digress…

It seems to me that a practical first-step would be for (say) the EU and US to get airlines to fund CCS trials, either via a levy/tax or through a voluntary agreement with the industry. We need to know a lot more about the viability and likely costs of CCS, ASAP. There are huge policy implications if the potential of CCS has been overblown (or understated, but that’s never happened before in the whole of human history for a technology at this stage in its development!).

This is positively my last post on Northern Rock.

I’ve recently taken to listening to Radio 4 in the mornings. As a communication medium TV has much greater bandwidth than radio (visual awa aural), so why do they fill it with garbage?

Anyway, yesterday we had the former Treasurer of the Rock, who noted passim that “a £5bn problem” was turned into a £25bn one by the bungling authorities. Would have been nice if he’d broken cover before nationalisation. Still, it’s more than his successor has done – he’s quietly left the bank. Not surprisingly, since basically liquidity is a Treasury issue and I presume it’s the Treasurer’s job to stand up to a Chief Exec who gets carried away.

Today we had Hector Sants of the FSA, who explained how it would all not have happened had they paid a little more attention to NR. What self-serving twaddle! Any system that relies on a single group of experts (a) seeing something that’s going on that no-one else (auditors, the markets) can, and (b) being able to quietly solve the problem behind closed doors, will always fail. No, the Tripartite Authorities need to concentrate on setting objective liquidity (and other) measures for the banks, that can be policed not just be the FSA, but by the market and the banks’ own internal and external auditors. Because liquidity is a collective property, the behaviour of the BoE also needs to be predictable – i.e. to inject liquidity into the markets if particular thresholds are crossed. The 19th century approach Sants and King would like (I wonder why) is no longer appropriate. We need “water” – transparent liquidity – management. Planet Hector must resemble Mars.

After the Guardian rejected my exceedingly witty letter, I thought of writing a piece for their “Reply” column. Trouble is, the issue will now have to be resolved in court, so bashing my head against a Rock trying to change a few minds can no longer have any real world effect, so I left it unfinished. Here’s my draft, anyway:

“Public support for the nationalisation of Northern Rock is based on a misunderstanding. The false impression has been given that nationalisation is the least risky option for the taxpayer. In fact, two private sector proposals were rejected last weekend because the Government judged the potential to be too low for profit to accrue to the public purse.

The shareholders’ preferred option was that of the in‑house management team, led by Paul Thompson. This proposal included a rights issue of £700m. The shareholders would have invested another £700m in the bank. This will not now happen. By nationalising the bank, the taxpayer is therefore taking more risk than necessary. As a Northern Rock shareholder, I am baffled that the Government has spurned my offer to take on this risk, and distressed to be vilified in the Guardian and other media.

Northern Rock would have been managed similarly whether nationalised or not. Bryan Sanderson has said that he will operate “at arm’s length” from the Treasury. Even if it had not nationalised the bank, the Government could have imposed constraints on the payment of dividends and the extent to which Northern Rock could take on new business.

It’s perhaps worth remembering that among the people who will suffer most as a result of this fiasco are financially stretched Northern Rock mortgage-holders. The essence of the situation is that Northern Rock is simply an institution established to intermediate between those prepared to lend money and those who wish to borrow it. Following the run on the bank, Northern Rock now has a lot less money to lend. Something has to give. It seems that the nationalised bank intends to try to drive mortgage business away at the end of existing fixed-rate periods. But some mortgage-holders will be unable to find another lender, because every bank has reduced the maximum loan-to-value ratio it is prepared to offer, and, in any case, house prices are starting to fall. The most vulnerable homeowners will be forced to remain on expensive variable rate mortgages with Northern Rock. As a shareholder right up until nationalisation, it’s difficult to reconcile the moral opprobrium heaped on myself with the fact of the matter that borrowers were let down by depositors. Hadn’t they seen “It’s a Wonderful Life?”.

Under the Thompson proposal shareholders would have put another £700m in Northern Rock. It is completely untrue that the taxpayer would have been “retaining all the risks”, as claimed by, among others, Vince Cable, on this week’s BBC Question Time. Let’s imagine that there is indeed a serious house-price crash in the UK, and, in a couple of years it becomes clear that Northern Rock is insolvent. If the bank had remained private, the shareholders would have lost everything, including the £700m of fresh capital. In the same scenario under nationalisation, the taxpayer will have to cover all the costs. The taxpayer will be at least £700m worse off under nationalisation than with the private sector solution. It’s a shame that so much energy has gone into pouring vitriol onto shareholders, and so little time spent understanding their role. I’m no happier with the state of Northern Rock than any other taxpayer, but, unlike most, I would have been prepared to invest more money in the bank with the risk of losing it all. Now, every taxpayer is having to take on that risk.

Two typical comments have caught my eye this week. Will Hutton referred (in a Comment piece in the FT) to the “Northern Rock shareholders’ extraordinary sense of entitlement”. And someone left a message instead of their name on a petition on the Downing Street website: “ffs shareholders should know the risks – u deserve nothing”. But during the run on the bank, the government guarantee to depositors was dramatically improved, at great risk to the taxpayer. No‑one said: “ffs depositors should know the risks”. Perhaps that’s why shareholders expect to be treated a little more fairly than they have been.

The nationalisation route has been taken for purely political reasons, and is certainly not the least risky option for the taxpayer. From a shareholder point of view it is laughable for the Government to tell shareholders such as myself that we’ll be treated as if the bank is being wound up, when in fact it is being run as a going concern. Naturally, if the Government does find an “independent” arbiter willing to accept the terms of reference it is proposing, I’ll join with other Northern Rock shareholders in taking legal action, as long as I consider it likely that a judge will see the situation my way. Otherwise, I’ll have to shrug and walk away. The Northern Rock shareholder could have had such a beautiful relationship with the taxpayer. Now I guess we both feel as if we’ve just been screwed.”

That’s it, there are other fish to fry. See you in court, Darling.

I’m using BS to stand for Building Society, and b.s. for a more vernacular phrase!

One amusing cameo during the Northern Rock debacle was by the ONS, which ruled that the Bank of England loan and guarantees to the Rock should be counted as part of the national debt. Yet the national debt does not include the guarantee on all bank and BS deposits (up to £35K). This comes to much more, several hundred billion is my guesstimate. Is the taxpayer safe?

A few days ago, I received an annual statement from what I shall term, to protect the innocent, Piggy BS. As far as I know, Piggy is a typical BS. What with all this Northern Rock business, though, I thought I’d have a quick look, rather than filing the leaflet in the wpb immediately. And it makes surprisingly interesting reading.

Piggy helpfully provided some ratios:

• the liquid assets ratio is a whopping 25%, that is, it could meet investor withdrawals of a third of the size of the mortgage book! Impressive.

• its gross capital ratio is 6.2%. That is, shareholders capital is 6.2% of shares (i.e. account balances) and borrowings, and obviously about 8% of mortgages (since the liquid assets ratio is 25%).

8% doesn’t seem a lot to me (though I’m not claiming great expertise, merely trying to make some simple points), since this sort of capital ratio is considered appropriate for diversified banks. And Piggy only invests in one thing. “Huff, puff”, says the big bad wolf!

Anyway, if 16% (by value) of Piggy’s mortgagees hand in the keys, and it can recover only 50% of its loan on each property, it would be pork pie time.

Looking a little closer, it gets a little worse than this, since some of Piggy’s capital (OK, only about about 5%) is a “revaluation reserve” on – yes , you’ve guessed it – property, i.e. its own offices. Since it’s a reasonable guess that the market value of this property will be correlated with the property Piggy has kindly mortgaged, this reserve might go negative (from +5% to -5%) over the same period as its mortgage book deteriorates. So let’s say we only need 14% of our customers to default.

Still, not a very likely scenario even though Piggy has increased its mortgage book over the last year by about £1.5bn – three times reserves and more than twice total shareholders’ capital – implying that a lot of the mortgage book – maybe a third of the £10bn total – is recent lending and therefore vulnerable to a house price crash. But more than 1% defaults in a year would be extreme – in fact, catastrophic, since “impairment losses” are currently running at less than 0.02% of the mortgage book – so even a decade long housing bear market should be sustainable.*

Bricks not straw so far.

But Piggy also provides a couple of other ratios:

• annual profit is 0.37% of total assets (i.e. of about £10bn mortgages + £3bn liquid assets);
• management expenses are 0.56% of total assets. Seems a lot. If mortgages average £100K, management of each costs about £700/year!

Looking at it this way, it’s not quite so rosy. Defaults of 1% (by value) or more of the mortgage book would wipe out profits for a given year. A few years of this, and we would start to lose shareholder value.

It’s worse than this, though, since the fees on modern mortgages are front-loaded, i.e. they’re arrangement fees and so forth. So, profits will deteriorate even if there’s a downturn in activity.

And we’d all start to worry long before Piggy goes bust. I suspect Piggy would have to find a Miss Piggy to merge with if, over a period of time, its reserves halved (say) from current levels. If there is a housing market crash expect some action in a few years time.

It’s not Piggy we should really be worried about, though. No, Darling’s generosity on our behalf suggests it’s systemic problems we should be worried about. I’ve already mentioned how BS balance sheets could deteriorate if 25 year mortgages become faddish (remember endowment mortgages) and interest rates rise significantly. Of course, if all this is accompanied by a recession, falling house-prices and increasing delinquency rates (though long-term mortgages do militate against this, somewhat) the BSs would face a double whammy.

But what really gets me is that the BSs have no apparent means of rebuilding their balance sheets. They can’t ask their shareholders for more money, like the banks can. The Government would ultimately have to pick up the enormous tab. We only need the mother of all housing crashes once and the BSs are all toast, (or bacon). I just don’t see how they could sustain losses year after year indefinitely. And some markets do drop 70% or more. There’s absolutely no reason why this can’t happen to the housing market in the UK. And, as I said before, it has happened in the US.

As I say, though, I’m not claiming to be an expert. This could all be b.s. You decide. Me, I’ll look at Piggy’s next annual statement even more carefully.

* Postscript (1): Maybe a long bear market would not be quite so survivable after all. I now read in the FT that “1.1 per cent of mortgage borrowers were in arrears at the end of 2007″. Crikey! This can’t be right, can it?

Postscript (2): And the default rates in some parts of the US are quite hair-raising (AP via Yahoo):

“During the past year, 30 states saw an increase in the number of homes that had received at least one filing.  Nevada led the nation, with 6,087 properties receiving at least one filing, up 95 percent from a year earlier but down 45 percent from December, the firm said.  That translates to a rate of about one foreclosure for every 167 households.” [My emphasis.]

…for micro-generation of solar power, geddit? Here comes the sun… oh, forget it!

Is the Guardian trying to piss me off deliberately? Not content with trying to convince me that it makes good sense for the taxpayer to pay a premium rate to savers, they’ve started a dawn chorus (which occurs as we start to be warmed by solar power every morning – oh, never mind!) in praise of feed-in tariffs.

I remember that for reasons I can’t quite recollect I became much vexed about this a little while ago. Searching my hard drive, I find I actually went so far as to write to a letter to the Guardian editor on the matter. They didn’t publish it, so I will:

“Your Leader “Windy words” (December 11) supports David Cameron’s suggestion that using “feed-in tariffs” to encourage micro-generation of electricity would be the best way for the UK to boost its production of renewable energy (Tories see 1m households selling electricity back to the suppliers, December 6). In fact, feed-in tariffs for micro-generators would be an extremely expensive way to increase renewable energy production.

The most popular micro-generation technology would probably be roof‑top photovoltaic solar panels, since it now seems that domestic wind-turbines have the slight drawback of generating only miniscule amounts of electricity.

But feed-in tariffs for solar panels would be an inequitable subsidy, since, if they are to succeed in stimulating investment, the rate paid to micro-generators per unit of electricity would have to be several times the retail electricity price, as it is in Germany. The result would be to increase everyone’s electricity bill in order to provide a guaranteed income to those with large roofs and the financial resources to invest in solar panels, a demographic one might term “the Camerons”.

There is certainly a case for obliging suppliers to buy micro-generated electricity at or just below the retail price, as this would force them to overcome the barriers of organisational cultures and legacy infrastructure geared to purchasing from a small number of large-scale power generators. But forcing them to pay far more for micro-generated electricity than they can sell it for, for many years, through guaranteed feed-in tariffs, in order to make expensive micro-generation technologies financially viable for wealthy home-owners, would not only distort the market but also lock us all into paying a higher price than necessary for all our electricity, including that from other renewable sources. Since electricity carries no information about its source, there would also be considerable scope for fraud, especially if electricity prices fall in the future.

Yvette Cooper outlined (Letters, December 7) how the Government intends to use the planning process, rather than feed-in tariffs, to encourage micro-generation of electricity. This has the advantage of merely raising housing costs for everyone, rather than forcing the poor to subsidise the rich. But if the “zero-carbon” homes to be built from 2016 do still require electricity, albeit less than existing houses, why pay more to generate it locally just for the sake of it? Given the huge costs involved, we will ultimately be compelled to generate renewable energy in the most efficient way possible. This is much more likely to be by building offshore wind turbines than by paying David Cameron to put solar panels on his roof. Pretending otherwise makes it even more difficult to reduce our carbon emissions.

In contrast with David Cameron’s and Yvette Cooper’s expensive initiatives to encourage local power generation, the existing Renewables Obligation provides an effective incentive for electricity suppliers to provide us with an increasing proportion of renewable energy in the most cost-effective way.”

Let the poor subsidise the rich!

I should note that ideally the Renewables Obligation (RO) would be technologically blind, so that old ladies trying to stave off hypothermia invest their pennies in the most cost-effective renewable energy at any given point in time. In fact, though, some technologies are more equal than others under the RO.

Pleased to find it’s not just me – once again another Tim agrees.

There are voices of sanity out there. Tim Congdon has written several sensible pieces on the Rock affair in the FT. He points out in the latest that the ECB has bailed out the Spanish banks in a way the BoE refused to do for NR. I’m a little surprised, though, that he doesn’t mention that at least one Spanish bank – Santander, which owns Abbey – directly competes in the mortgage market with UK banks. They – and all other European and US banks who might want to operate in the UK retail market, perhaps by snapping up A&L, B&B or even NR itself – have now been put at a significant competitive advantage. Knowing how the ECB will behave in a liquidity crisis, they now know they need to maintain less liquidity than their UK peers and can therefore use their capital more efficiently.

But, from a BoE view, of course, the NR cock-up has been self-defeating. No major bank operating in the UK market will ever allow itself to be totally reliant on the BoE again. They’ll make sure they can also draw on funds from the ECB, the Fed and/or other central banks. Presumably they need to retain a relationship with the BoE if they want to offer banking services in the UK, but they will rely on this as little as possible. The BoE will become marginalised. Hmm, maybe I’ll see the day when I buy my UK daily paper with euros.

Unless, of course, the BoE lets everyone know that it has learnt lessons from the liquidity crisis, and will take specific actions – working in concert with other central banks as central banks should, or they’re not really central, are they? . Scapegoating Northern Rock makes it more, not less difficult to calmly identify what mistakes were made by who, and what policy adjustments should be made by whom. And, of course, so does reappointing Mervyn King. Perhaps we should start calling the BoE the UK’s peripheral bank.

Postscript (1) : An article in the Telegraph this morning shows exactly how small UK banks (and building societies) are being penalised by having to use a back-door (larger UK banks with a direct relationship with the ECB) to access liquidity in the euro which is unavailable in sterling. Of course, the British consumer will ultimately pay for this. The Telegraph reports that: “Bankers said the fact that UK lenders were having to access the ECB through the back door exposed failures at the Bank of England.” Quite.

Postscript (2): And the Guardian notes that “… mortgage experts are trying to predict the winners from the credit crunch and concluding that Abbey could come out on top because of the funding available to its Spanish parent, Santander, through the European Central Bank.” Surprise, surprise.

Don’t worry, the point of the title will be revealed!

It’s amazing how emotion so often overrules reason. This is how we’ve made the biofuel blunder. Mark Lynas, bless his organic cotton socks, gloats that “the environmentalists” were right about biofuels. That’s really funny, Mark, because I thought the problem was that too many “environmentalists” thought biofuels were a good idea. Their emotions gave them the wrong answer. The greens aren’t really green. My emotions – including a visceral horror at the idea of destroying nature to fuel cars – and presumably yours, are supported by reason.

But when we come to a case like the Northern Rock affair, reason barely has a chance. Because the reds aren’t really red. They don’t believe in fairness. No, much more important to them is the comforting illusion that “the people” are in control (we’ll just blip over the last 80 years of European history, shall we?). So my breakfast is tainted with bile as I read from Volks Comrade Hutton that:

“The free-market fundamentalist proposition that the market is the spontaneous natural condition and any form of public interaction is therefore unnatural – which feeds Northern Rock shareholders’ extraordinary sense of entitlement – is to misdescribe reality.”

And there’s me and Rousseau thinking the state was a necessary evil! Thanks for putting us right, Will! I’m a bit confused though: why isn’t “the market” a “form of public interaction”?

But what I really object to in Hutton’s piece is the throwaway: “Northern Rock shareholders’ extraordinary sense of entitlement”. Here Hutton reveals his true colours. It’s not about fairness at all. He wants to create a public space where he can project his emotions. A dictatorship of the commentariat, perhaps. No, if by “red” we mean greater equality, the reds aren’t red. They just want to return to the ways of organising things that led to rivers of blood in the 20th century. Maybe it’s in that sense that they are “red”.

The problem with the Northern Rock affair is that the State has become involved far too deeply. Brown and Darling (while Mervyn King sits back and breathes a sigh of relief) have been able to use public indignation at the “taxpayer” taking risks over NR to create a smokescreen around the UK’s mishandling of the liquidity crisis – which might otherwise have had the dire consequence of loss of public support for, shock, horror, the independence of sterling itself – and at the same time expropriate for the State assets that are possibly worth several billions. Nationalising Northern Rock is less about the economic needs of the British people (who will be worse off as a result of this sorry little affair because people will be less willing in future to take the risk of lending money to them, with the result that the capital they need to borrow to buy their homes will cost them more), it’s more about their emotional needs. The NR shareholders have become (inappropriate) scapegoats for those bad feelings about excesses in the City. Rather than create a fairer society (by, for example, raising the minimum wage) we’ll all try to feel a little bit better, shall we?

Maybe reason can get us a little further. Let’s try to analyse the situation. Here’s what Larry Elliott wrote in yesterday’s Guardian:

“The bank has a good mortgage book and, given the tendency of house prices in Britain to rise, there is no reason why the taxpayer should lose out. … Once ministers decided against administration, nationalisation was always preferable to a lopsided public-private option that, as illustrated by the £2bn Metronet bail-out, would have meant nationalising the risk and privatising the profits.”

A poor analogy as NR is not being nationalised because it has negative net assets. It’s being nationalised because… um, why exactly is it being nationalised?

It’s always a good idea to ask the right question. In this case , let’s ask who is better off after nationalisation, compared to a private sector solution, and who is worse off? Who is taking what risks in each scenario? The private sector options were that shareholders and/or new investors would put in more cash – at least £700m. The Government would receive a punitive interest rate on the Bank of England loan, an upfront arrangement fee of £200m (maybe more) and a later share in profits of a similar amount (the amount of this the Gov’t wanted was the deal-breaker). Conditions would presumably include no dividends until after the Bank’s loan is paid and Gov’t oversight of the business at least until then to prevent any undue risk-taking. In other words NR would be run in a similar way whether it was nationalised or not.

There are actually 4 cases to consider: nationalisation and continued private ownership on one axis and making money and losing money on the other.

If the nationalised bank loses money the taxpayer will lose the full amount lost, if it makes money the taxpayer will gain the full amount gained. Presumably Gordo is happy to take this risk, which implies he wouldn’t have been taking a huge risk had he allowed the private sector solution. Oh, what tangled webs we weave… But let’s go on.

I must have missed a small detail. Aha! Here it is. After nationalisation the taxpayer may have confiscated all the shareholders’ funds. Let’s say these are worth £2bn (about £4 a share). If it does manage this, the taxpayer will only lose out if the bank loses more than £2bn. If legal action goes against the Gov’t, though, (and I so hope it does!), the shareholders will get their £2bn back and the taxpayer will be carrying all the risk. I hope you’re happy with that, Mr Indignant. Nationalisation only makes sense, it seems, if the Government is able to expropriate shareholders’ funds. Hmm. But let’s just check that conclusion by looking at the counterfactual set of possibilities.

If the bank had remained private, though, and lost money, the shareholders would lose out first. Let’s say the shareholders put in £700m now and another £800m as the mortgage market worsens over the next couple of years. They already have £2bn, we’re assuming. The bank would have to lose £3.5bn before the taxpayer loses out. Hmm, do you suppose the taxpayer is taking more risk, or less, than if the bank is nationalised?

What if the bank makes money as a private entity? Well, the shareholders would make a profit, but only after they’ve paid to the “taxpayer”:

• say 3 years times 1% above market rate on a loan of £25bn, which comes to £750m;*
• an estimated £200m arrangement fee;
• another £200m from profits.

That is, well over £1bn. [*Postscript 23/2/08: Oops. Actually, I’ve seriously overstated the case. The arrangement fee was for converting the debt to bonds to be sold a commercial rate, and putting a Gov’t guarantee on them. At this point, punitive interest would no longer be payable on the debt. But the basic point stands – the taxpayer would have got a few hundred mill under the private sector solution, which it won’t receive now it’s nationalised the bank].

So the “taxpayer” is taking a lot more risk by nationalising the bank than not, but may potentially make more profit, as long as it isn’t tripped up by the “independent” valuer or in subsequent court cases.

These are the two assumptions underlying the Gov’t’s decision to nationalise Northern Rock:

1. They’re with Larry when he says that: “The bank has a good mortgage book and, given the tendency of house prices in Britain to rise, there is no reason why the taxpayer should lose out.” i.e. they think it’s unlikely they’ll be in that loss-making scenario.
2. They believe they’ll get the shares in the bank for nothing, or virtually nothing.

Now, I think these two assumptions are actually incompatible. By the time legal avenues are exhausted, the courts will know whether the bank is going to lose or make money in the longer term, and therefore whether the shareholders’ assets were worth anything.

With a bit of luck the courts may also judge that a large part of NR’s predicament has been caused by Gov’t bungling – they should have put liquidity into the markets before NR failed, etc. (bit of a litany, here). The Government is attempting to confiscate assets, pure and simple. Perhaps this is the sort of world Hutton and Elliott want to see. See you in Hell, boys!

There are 2 other reasons why the Government has gone for nationalisation:

• populism, since they’ve done nothing to dispel the popular notion that the taxpayer is actually spending money “that could be used to pay for hospitals”, etc.
• control: Brown is a control freak and when it comes to the crunch he wants to keep his cards where he can see them. He’s terrified by the thought of being a hostage to fortunes at Northern Rock in the run-up to the next election. This way, he can put any bad news off until he’s gone to the polls.

Before I finish, I ask myself why else should NR’s shareholders’ have “an extraordinary sense of entitlement” as Will puts it? Well, Will, perhaps it’s because everyone else is exhibiting “an extraordinary sense of entitlement”. Let’s forgive “the taxpayer” who is being kept in a state of appalling ignorance. What about the depositors in NR, whose panic is one of the causes of the present imbroglio? They lent people money to buy houses and then suddenly decided en masse to call in the loan. Nice. The depositors who put their personal interest above that of the bank and the community that rely on it, and above the fellow depositors behind them in the queue, were at the time entitled to £2,000 and then 90% up to £35,000 if the bank ran out of money before they got to the front of the queue. “ffs didn’t they know the risks they deserve nothing more”, to quote (adapted) some graffiti on a Downing Street petition. But, of course, the depositors are Darling’s darlings and the rules can be changed overnight, so that these people don’t have to worry about anyone other than themselves. Just take all your money out, says Darling, don’t worry about everyone else! It’s a wonderful life for some, isn’t it! Will, perhaps you can explain, so we’re all clear, whether this the sort of support for self-interested behaviour is the kind of “public interaction” you’d like to see more of?

Here’s a disaster scenario “Dangerous” Darling is leading us into, in his desire to pander to the public. He’s now going to get the “taxpayer” to guarantee all deposits in the UK, up to say £100,000. So, you and I may as well take the highest interest rate we can find anywhere. Don’t worry about whether the bank might go bust! And he’s encouraging banks and building societies to offer 25 year mortgages, so Mr Diddums doesn’t need to worry so much about his £200,000 mortgage. Oh, and I nearly forgot, funding from retail deposits is doubleplusgood, funding from international capital markets is doubleplusungood. Let’s roll on to say 2020, and house prices have been kept up by Darling’s new babies, those jolly reassuring 25 year fixed rate mortgages! (Because that’s what it’s all about, really – the electorate will not easily forgive a Gov’t that they think has caused a drop in the value of their homes. Remember Major!). But back to the story. By 2020 inflation is rearing it’s head again, and, unlike in the “Panic of 2007-8″, it fails to recede. This time the world really is running out of oil and land to grow food on. The base rate climbs to 10% and keeps on going up. Retail interest rates reach 15%. House prices really do crash to something like the cost of building a house (which is where they should be in the long-run), and keep on going down… (supply and demand, you know). And all those building societies have made 25 year loans at 7%, but are having to compete by paying more than twice that for the cash they have lent… Depositors don’t care, they can just keep shopping around for the best rate for their AAA rated £100,000. So, paying out 15%, taking in 7.5%… What do you think is going to happen? Perhaps Mr Indignant, the taxpayer, will not remember his Darling quite so fondly when he has to pick up the tab for all those failing building societies.

Btw my little story is not entirely dissimilar to what happened during the Savings and Loans crisis in the US in the 1980s and 1990s (but with its causes back in the 1970s). It was a financial disaster that makes the Northern Rock fiasco seem like losing a fiver on the Grand National. And when it happens, what we’ll need are something like the romantically named Fannie Mae and Freddie Mac in the US.

But perhaps Will thinks this would all be a good thing. Perhaps in Will-world the public should take the risk for those lucky enough to have £10,000s in the building society and lucky enough to be able to take out a hefty 25 year mortgage. The bigger the mortgage, the more risk we’ll all take on on their behalf, eh, Will?