Saturday, 15 May 2010

The Clameron Coalition: A Fairer System?

After days of uncertainness about the future of Britain’s politics, the coalition that was formed in the end is the one which is most likely to succeed. It may seem that as the Conservatives have far greater seats and votes, 47% and 40% of the total respectively, they would be in command in terms of the policies that are implemented in Britain over the coming years. However, the coalition was formed after extensive compromising and policy adjustments by both parties and one of the major breakthroughs that the Lib-Dems were able to make was on the issue of Proportional Representation. David Cameron has promised that there will be a referendum on whether the electoral system should be changed to the AV system.

PR, as an idea, aims to secure a close match between the percentage of votes that groups of candidates obtain in elections, and the percentage of seats they receive. The Lib-Dems would especially feel that this idea has been missing from the UK general elections so far, which is the reason why even after getting a significant number of votes, they have not been able to attain as many seats in Parliament. The first-past-the-post system has resulted in disproportionate results especially for the Lib-Dems, whom, in the latest election got 9% of the seats after getting 23% of the general public’s votes.

Thus, it’s obvious why they are pushing for a different, more representative voting system such as the Alternative Voting (AV) system. Under this, voters have to list candidates in order of preference, and after the first preference count, if any candidate is unable to gain 50% of the votes, the bottom candidate is eliminated, and the second preferences from his/her votes are added to the totals for the other candidates in line with those preferences. The process is repeated until one candidate gets an absolute majority. This process would particularly be useful for the Lib-Dems because many voters who vote for the two main parties have Lib-Dems as their second preferences. As there are many constituencies where no candidate receives an outright majority, this would ensure that in any future elections, the Lib-Dems gain a lot more fairer and proportionate amount of seats.

This sytem can potentially have a great impact on the whole system as currently, too many votes are effectively wasted in safe seats where either Labour or Conservatives have large, in-built majorities, and this depresses turnout. As well as this, many MPs are elected on a minority of the overall vote in their constituency. Under the AV system, MPs could not be elected without the backing of at least 50% of voters in a constituency. This would increase the legitimacy of MPs, as well as giving more opportunities to smaller parties. Even though the Electoral Reform society has argued that if the AV system is applied to the recent election, Lib-Dems would only see an increase of 22 seats, this is based on statistics taken from a few of the electorate. In order to see the full effect of the new system, we will have to wait until the next election, given that it is actually adopted.

Saturday, 8 May 2010

Hung Economy?

In the aftermath of the election which has produced no clear winner and left quite a lot of power on the table to be negotiated with, it was certainly not good news for the UK’s economy. The road to recovery after the recession has been a slow and bumpy one with the Greek crisis already creating uncertainty in people’s minds, putting the Euro in danger. Investors all around the world had been hoping for a decisive winner in the election; however, after the Tories were unable to secure an outright majority in the House of Commons, the lack of a decisive winner will almost certainly hit investor confidence, at least in the short term. We have already seen the beginnings of it, as political uncertainty saw the pound fall against the euro to 1.15 and to a year-low 1.447 against the dollar.

What are the reasons for this? Why does a hung parliament spell out danger for an economy, especially as fragile as the UK? Almost all economists agree that for a strong economy, a strong and stable government is needed. However, with a hung parliament, there are fears that there would be insufficient agreements to make the tough political choices necessary to cut the public spending, when UK’s budget deficit has hit a record £152 billion, which is 11% of the GDP. Therefore, investors will be worried that a weak government will be unable to force through measures to reduce the UK's high borrowing levels. The longer the current uncertainty continues regarding whether we see a Conservative-Lib Dem coalition or a Labour-Lib Dem coalition, the longer the delay will be in the recovery process which can greatly jeopardise the future of the UK economy.

Furthermore, the weakness of the pound has sparked inflation fears, as well as factory gate prices rising at their fastest pace for 18 months. The situation is not helped by the fact that all three parties have differing views over how to tackle the biggest problems of it all: the Budget Deficit. Whilst the Conservatives plan on cutting borrowing this year, the Liberal Democrats say that cutting borrowing now would slow down the economic recovery, and want extra resources for the treasury by putting tax rises in place.

Nevertheless, it is likely that there will be some sort of decision by Monday as to which side the Liberal Democrats will be joining, which will come as welcome news for the investors and the markets. But for now, the markets remain anxious, eagerly awaiting the definitive attitude needed to put our recovery back on track.

Thursday, 1 April 2010

Resolving a very important issue

In the upcoming debate of the three major party leaders, for the first time in history, the general public is allowed to question them about any issues or problems that they need resolving with regards to the running of the country. Therefore, I took this opportunity to post a question to them regarding a problem that concerns all: Getting a job in these harsh economic conditions. This is what I posted:

“My question is regarding the prevailing job environment, where there is cut-throat competition for jobs, as so many people are unemployed. Yet, the situation is not being made easier by the employers demanding such high level skills for something as petty as a part time retail assistant.

Let me give you an example. I have a friend who applied for the position of a sales assistant at TKMaxx, doing 20 hours a week. In her interview she was asked questions that I would expect to be asked to someone applying for a manager's role. The questions that were asked were testing her about her leadership quality, her integrity, her strategic knowledge as well as how visionary she was. Now my question is if, for the position of a simple part-time shop assistant, we are being asked such difficult questions of the managerial level, then how does the government propose to get more unemployed people into the working sector? Can we really blame those who see committing crimes as their only choice?”

I am hoping that this issue will be taken on by the leaders and their parties, and we will see a solution to this problem. The conditions for getting a job need to be relaxed in this country as there are so many people with limited skills which need to be developed, and if they are not going to be given that opportunity, then how do we expect to increase our growth and productivity levels?

Sunday, 21 March 2010

Why was there a recession in 2008?

UK began 2010 on a happy note, having painstakingly come out of a recession which affected almost everyone in the country in one way or another. For some, it meant a lower wage than a couple of years ago, while for some, reaching up to 3 million in 2009, it meant not having a job at all. The past two years have seen so many high grossing as well as low profile businesses shut down, "bail out" of banks by national governments and downturns in stock markets around the world. So the most common question arises: why did we end up being in the position that we were in, in the first place?

As with many things in today’s world, we have to start by looking at the USA, the centrepiece around which the whole idea of global markets is based and also where the root of the problem lay. Many have blamed the US bankers, for committing horrendous mistakes when it came to lending and investment ideas. It is true to some extent that there were some reckless and unsustainable lending practices that went on within a few banks, as rising house prices were an indication of a bubble forming in the US. Despite this, banks continued to provide easy credit in terms of mortgages, credit cards, and auto credit, which combined with a low interest rate, meant that people were ready to invest in assets that would have been beyond their reach under normal circumstances. However, with an increase in the interest rate in mid 2006, and a burst in the bubble caused people to default, as housing prices failed to go up as anticipated.

As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime mortgage backed securities reported significant losses. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The meltdown of Lehman Brothers, the major investment bank, was the spark that set off the burning down of the financial system, as panic broke out on the inter-bank loan market and more and more firms started going into administration.

However, the banks should not have to take up all the blame for the slowing down of the economy, as government intervention contributed greatly to this. The financial market had been made extremely fragile due to the work of the US government including creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, as well as the creation of cheap credit through expansionary monetary policy. These policies, dating back to Clinton’s era, were bound to lead to a boom, followed by a bust worse than ever.

What the banks did was only an accelerator of the bust that was bound to happen. The government had created such an atmosphere in the market that people panicked at the slightest lack of assurity and slowed down economic activity greatly. Together with defaults, irresponsible behaviour both by the bankers and government, resulted in a crisis which started in the powerhouse of the world economy and spread like a wild forest fire to the rest of the economies, causing similar damage. The problem is that it’s not the first time that a crisis has been caused due to these factors. These cycles keep occurring every few decades, and yet no one is ready to learn from the mistakes and instead commit them again. After all, what is the point of learning and studying historical evidence, if you’re not going to learn from it?

Thursday, 18 February 2010

Bank Bonuses: A Necessary Evil?

RBS: paid out £1 billion bonuses; Barclays: £1.5 billion cash bonuses, £2.7 billion investment bonuses; Goldman Sachs: paid its chief executive $67.4 million in bonuses; J.P. Morgan: paid out $9.7 billion bonuses around the world.

Despite Gordon brown’s pledge to impose a 50% tax on banks that paid out bonuses last year, the bonus culture is still in place. People are in support of the idea of a tax as banks should be liable to pay insurance to the government if they want to be bailed out. Yet, despite this tax, banks have ignored this policy and have continued to hand out huge lump sums to their elite. Even, RBS, who had to be rescued by the government due to its gambles in the market leading to its nationalisation, has paid more than a £1 billion as bonuses to its staff, in a year where the banks and the economy are supposed to have suffered a financial meltdown.

Banks call them performance related pay, paid out when the firm has had a profitable year. To the ordinary public, the year when the UK went into recession in 2008 till the time when it was still engrossed in it in 2009, would not be called a ‘profitable’ year, especially not for the bankers, whom everyone has blamed for the worst credit crunch sine the 1930s. Moreover, these banks and firms have needed the tax-payers’ money to survive in the first place, and it seems as if they are just handing them out to their staff, almost as if to pat them on their back for their devastating work, encouraging them to take even more risks.

Yet head of banks insist that political and business successes are two separate things and where business is concerned, 2009 has indeed been profitable for the bankers (producing an average annual return of 3%), and the reason for this has been the role of the essential top performers, who were being paid for "effective risk management". The financial sector is indeed a competitive industry, and it is difficult to retain key performers, unless you entice them with a big fat bonus, which seems mind blowing to the ordinary person. Some executives, even for the RBS, use the threat of resignation, if they are not paid an ongoing market rate, making these bonuses essential for a bank’s success as well as for keeping their staff motivated.

As we can see, bonuses are indeed a necessary evil in the financial world; however, this does not mean that nothing can be done about using them in a positive manner. The imposition of the bonus tax has had little effect on the pay banks give, which shows that there is need for another way to re-introduce moral hazard into banking, to ensure that the gambling culture will start to fade within the banks.

The credit crunch showed the big banks that there is no way the government would not bail them out, no matter the circumstances, which is why the chief executives of banks can do anything spectacularly stupid knowing that they are safe. The threat of being sacked is not enough thanks to the amount of the bonuses, meaning they would never need to work again. Therefore, a solution to their attitude could be to give the executives a sufficient wage, and pay them their bonuses after they retire as a pension fund, only after ensuring that they haven’t put their firms at unnecessary risk or caused a major meltdown. This will remove the comfort zone that they currently have and will ensure that they keep their tail between their legs. Only then can we ensure that banking does not remain a casino run for the benefit of bank executives.