Friday, 1 September 2017

"La Nacionalitat Catalana"

Para entender cómo piensan muchos separatistas catalanes, es imprescindible leer “La Nacionalitat Catalana” de su ideólogo de cabecera, Enric Prat de la Riba. Es un fascinante panfleto de principios del Siglo XX en el que el autor repasa lo que entiende por una “nacionalidad” y explica por qué Cataluña lo es. Explica también que la represión tras la Guerra de Sucesión oprimió al pueblo catalán hasta que su cultura resurgió en un espontáneo “renacimiento” (básicamente coincidiendo con el Romanticismo de finales del IX). El libro entero es un compendio de victimismo (“Castilla” nos ha oprimido), revisionismo histórico (la Edad Media era maravillosa), imperialismo (las naciones civilizadas tienen que dominar a las bárbaras), admiración por el nacionalismo alemán (el “Volkgeist” o espíritu nacional) y supremacía (los catalanes somos diferentes y mejores); todo en la mejor tradición del fascismo español.

"In, Inde, Independència!"

I originally wrote this at the end of September 2012 but declined to post it because Spain at the time was in the throes of a serious financial crisis and in my professional position, a personal opinion of this nature may have been counter-productive. Five years-on, however, I feel the debate is out in the open and this may be a minor contribution to it.

Greetings, o’ loyal reader. It has been a long time indeed since I last wrote in my blog. Partly this is due to new demands on my time from a new family member but, more importantly, I have been constrained due to my current professional activity. I have a fiduciary duty to my employer and, as such, I need to keep most opinions to myself.
However, I have been raised from my quiescence by the recent sight of almost one million people clamouring for independence in Barcelona. Reflecting upon this event, I remembered a good friend and former MBA classmate who, as an advertising executive, revealed to me the art of his profession. “Blood, sex and money”, he said. These are the primal instincts that move people. Appeal to these and you can move mountains. Blood. Sex. Money. Think of all the cases where rational argumentation is futile because it directly attacks one’s feeling of belonging (religion and family?). Think of all the cases where rational thought is put away in order to pursue a sexual fantasy (Bill Clinton and Dominique Strauss-Kahn). Think of all the cases where civilised behaviour is eschewed in the pursuit of power and status (too many to mention?).
I pondered upon this when I tried to get another friend to explain to me why he defended the idea of an independent Catalonia. After failing rather miserably to present a rational argument he ruefully admitted: “It’s a question of feeling”. He was not able to rationalise an independent Catalonia, he worshipped an independent Catalonia. At this point, I realised that no rational argument was ever going to waive his conviction, his feeling of belonging, his kinship with the tribe.
Against irrational and emotional arguments that have set in people’s minds it is almost impossible to win. Think of religion- how many mad ideas are floating about which are plainly ludicrous, but whose mere criticism can place you at risk of death? This, unfortunately, is the situation that we have to deal with in Catalonia. There are limited ways of dealing with this problem and one, force, is clearly not an option in today’s environment. Yet other options exist and only require the political will to be implemented. Aligning incentives- both positive and negative- is clearly an option. The threat of a Spanish veto to a Catalonian entry to the EU is an example of negative incentives but these are not sufficient. Are positive incentives not available? Don't we have examples of how Catalonia has prospered within Spain? Many are available but few publicly abound.
Finally, the propaganda apparatus of the nationalists should also be deactivated, probably by cutting the access of public funds for these means. But also by using pro-Spain advertising and marketing. The population in Catalonia currently only have access to one side of the story.

In theory, the debate is centred around the fiscal"theft" that the rest of Spain inflicts upon Catalan taxpayers. Leave aside the obvious point that many of those claiming redress are net tax recipients rather than contributors. What is clear is that tax rules are the same in Spain as in Andalucia and as a consequence residents in Catalonia pay more because they earn more. Again leave aside the argument that part of the reason that Catalonian residents pay more is because of many large corporates selling to the rest of Spain are based here (Madrid, by the way, contributes far more for exactly the same reason).

So the gripe is about expenditure and "justice". Since 1978, Catalan nationalists have been asking for transfers of decision making, which has been achieved to an extent unknown in any jurisdiction I know. I can't, for example, think of a single instance of a region that does not permit public schooling in the national language, despite parental demand for optionality. Once most decision making power has been transferred, the issue is whether these powers are administered efficiently. It is pretty obvious that successive governments have done at least as badly as the national governments in managing expenditure.

One obvious source of expenditure reduction would be to recentralise some decision-making power but that is not an option, which shows that the debate is not really economic but more a smoke screen to hide the ultimate ambitions of the puppet-masters of the demonstration: secession. Time will tell.

Thursday, 2 September 2010

Bread today can bring hunger tomorrow

The above phrase is a literal translation of a Spanish saying: “pan para hoy y hambre para mañana”. The closest sensible translation I can think of is “laugh now, cry later”… a typical Southern European attitude to problems which makes this part of the world a great place to live in. Sometimes, however, we can get carried away with “laughing” by adding a few boosters (such as consumer or housing debt) so that the “crying” can almost develop into “dying”. While I write this facetiously, I think we have experienced too many excesses in Spain over the last decade.

How have we Spaniards managed to focus on today at the expense of tomorrow? Here go three of my favourites:

1. Dependence on the construction and housing sectors

This is a sector that cannot be competed away via trading and has thus avoided the impact of globalisation. It also happens to be low value-added labour intensive so that job-creation was an added bonus. Politicians of all sorts became chummy with construction “entrepreneurs” in a fatal embrace which was to show itself to be unsustainable. There were few incentives to improve education and competitiveness to face increasingly assertive emerging markets.

“Pan para hoy y hambre para mañana”

2. The use of deferred payment mechanisms to finance the above

The main constraint to the above policy is the availability of finance. Fortunately, central bank policy across the Euro area meant that money could be thrown at the above sectors in the form of both development grants from the European Union as well as financial debt provided by foreign financial institutions and other long term investors. To ensure that the volumes of debt being thrown in did not scare these foreign investors away, the funding was conveniently disguised into debt issued by local financial institutions, infrastructure “public-private project financing” and corporate debt of construction companies. I will not provide figures in this post but take my word for it. The volumes involved are huge. One flaw in this policy- debt has to be repaid and we cannot devalue our currency.

“Pan para hoy y hambre para mañana”

3. The restricted list method for choosing political representatives

The intellectuals who designed the post-dictatorship constitution decided that they wanted to strengthen political parties in the light of the inherited power of the Armed Forces, the Catholic Church and other reactionary elements. This might have made sense at the time, but it has since developed into a mockery of democracy where candidates owe their loyalty to the party that includes them in the list and not to the electorate. As a consequence, political parties have become so strong that they have weakened the very fabric of society. There are few, if any, genuinely independent institutions in Spain, including the judiciary and the press.

“Pan para hoy y hambre para mañana”

Change is necessary but I don’t think that change will come naturally. Those that benefit from the status quo will not voluntarily become the agents of change. Change will only come about if forced by circumstances or outsiders. This was and still is my great hope for the crisis. A renewed commitment to envision, propose and create a genuinely liberal society where basic rights are enforced, responsibility is assumed, and creativity and freedom from coercion genuinely flourish. After all; who wants to build a house on sand?

Wednesday, 15 July 2009

The Big Lie

Yesterday's Goldman Sachs results have been illuminating. The investment bank that everyone loves to hate produced record returns for its shareholders (and management) with a quarterly profit of USD 3.4bn . Its prowess in financial markets trading is unparalleled in the finance world and they certainly deserve it...or do they?

An institution that was on the verge of bankruptcy just nine months ago and required public financial assistance is now producing record profits and paying oversized salaries to its top management. It seems that many financial institutions will follow suit in the coming quarters. Where are the returns on the public investment?

The “Big Lie” that we have been fed by a compliant press is that the stimulus packages which have been implemented in major economies were designed to support the real economy. In fact, these packages have been used primarily to prop up the banking system, a worthy aim in itself had not the main beneficiaries been shareholders, bondholders, and management. In plain English, taxpayers have had their pockets picked to support investors and top management in financial institutions.

I think that no reasonable economist can disagree with the need for the government to step in to save the money centre function of banks by safeguarding retail deposits and clearing relationships, but I can see no worthy use of taxpayer funds in supporting the financial rewards of institutional investors and management. The latter, after all, are trading risk for return. In 2008, after many years of return, risk reared its head and proceeded to destroy the value of financial instruments in a violent and unprecedented move. In my opinion, it is only fair that financial rewards for shareholders and management should have been wiped out. It is a basic premise that owners and management are responsible for the actions of the financial institutions they control.

Not content with direct assistance to the industry, monetary authorities have also stepped in to ensure that banks quickly start making money. How is this achieved, you may ask? It is as simple as enabling the carry trade...central banks have flooded markets with liquidity so that short term interest rates have collapsed. Banks can then borrow cheap short term money and lend longer term without taking on much risk. Call it a licence to print money.

Ostensibly, the policy of cheap money was designed to save the real economy but I don’t believe that a real investment project is sensitive to rates at levels below 5%. The only institutions that measure returns in basis points are financial institutions, given their high leverage and portfolio of financial assets. The fact is that rates have been reduced with massive liquidity injections because they assist in the repair of banks’ balance sheets by providing access to carry trade income. Again, governments have used public policy tools to protect well connected shareholders and top bank management.

Further evidence of mis-use of public funds is implicit in the conflict of interest of regulators. Ask these questions: How many of the financial sector regulators own or have friends/relatives that own substantial stakes in bank shares? Are they chummy with top management or do they get access to perks? I suspect that regulators are responding to hidden incentives in many your friends and they will help you; with a job in the future, or maybe access to holiday homes, yachting holidays and “business” opportunities.

In Spain, the lack of freedom of press has led to few and far between debates about the convenience of using tax-payer funds to save bank shareholders and stakeholders in Cajas. When referring to stakeholders, I include management and the political establishment which has benefited from the largesse provided by directing savings from depositors. Much in the same way that industrial companies used to own banks in order to provide cheap funding for their industrial activities, politicians have continued that ancient tradition to channel funds to pet projects. The lack of debate regarding the recent restructuring fund set up by the government has been egregious.

We live in a world in which society at large has been skimmed to pay for the returns of stakeholders in banks: so called sophisticated investors and management. Once more, prudent economic agents have had to bail out the aggressive imprudent agents, reinforcing the moral hazard which will inevitably encourage the next financial bubble under this “let’s socialise the losses and privatise the profits” policy.

Friday, 16 January 2009

Spanish party politics...and I'm not referring to "fiesta"

Let’s take a look at why Spain is going the way of Citigroup. I think it is important so that once the crisis is over, politicians and institution builders are able to recall history and avoid past mistakes.

First, the Spanish political system is reminiscent of nouveau riche antics. It was developed and executed in the latter part of the 1970s, when the combination of ideological enthusiasm and democratic inexperience led to the creation of a political system that has outlasted its usefulness. The ideologues of the system wanted strong parties, regional representation and democratic principles as the basis of the system. Over the years, strong parties and regional representation have cast out principles-based management to create a system that is on the verge of moral bankruptcy. Check out this link:

Today, over 30 years after the death of Franco, the key indicators of health of a democracy such as voter turnout and strong independent institutions are weaker that at any time in recent history. A primary reason for this democratic deficiency is the Spanish electoral system. Numbers always help; let’s look at the results of the March 2008 elections (click on image):

Several conclusions can be drawn from this table. The first column in red provides the percentage number of total seats assigned to each party. Note that PSOE and PP each were assigned 48.3% and 44% of the seats, despite obtaining only 43.9% and 39.9% in number of votes, respectively. Note also that Izquierda Unida was assigned only 0.6% of the seats despite obtaining 3.8% of the popular vote. Therefore, large parties and strong regional parties are over-represented, which inevitably leads to under-representation of dispersed national parties such as Izquierda Unida and UPyD. Another disturbing fact is that 4.1% of the people who voted had no representation whatsoever. When you add this voter base to the 24% of registered voters who abstained from voting, an astounding 27% of registered voters are not represented in the Spanish parliament. Surprised?

Spain has 52 electoral districts (or circunscripciones) with 2 representatives allocated to each and 248 distributed on the basis of population, for a total of 350. The d’Hondt method of seat allocation ensures that the strong candidates within these electoral districts get elected. As a result, strong national parties and regional parties are over-represented in contrast to parties which have a voting base spread across all the electoral districts. The d’Hont method works like this:

-Within each electoral district the first seat goes to the most voted party
For calculation of the second seat allocation, the party that obtained the first seat divides its number of votes by the number of seats obtained plus one (i.e. two).
-The second seat is then allocated to the most voted party (note that, under 2 above, the party that got the first seat has halved its votes for calculation purposes)
-For calculation of the third seat, the party that obtained the second seat divides its number of votes by the number of seats previously obtained plus one (i.e. if it is the same party that got the first seat this would be three, otherwise it would be two)
-The process is repeated until all the available seats are assigned.
-For mathematical minds the test for allocating each seat is based on: V/S+1; where V= number of votes and S=seats previously obtained

Therefore, we have an electoral system that is not representative, at least for many people. Strong parties and regional parties have run the country for 30 years and made it what is now, a nation which is close to becoming a banana monarchy.

To add insult to injury, a closed list system has also been implemented. In closed list systems the party has pre-decided on who will receive the votes in the elections, that is, the candidates positioned highest on this list tend to always get a seat in the parliament while the candidates positioned very low on the closed list will not. There are no prizes for guessing to whom candidates owe their loyalty. It’s not to the voter.

The outcome of this electoral system is plain for all to see, yet the players involved have no desire to change a system that works to their benefit. Why would the PP or PSOE want to change a system that allocates them disproportionate influence? Regionalists, in turn, have wielded their power in national politics to force the central government to transfer power to the regions, regardless of whether this was efficient or effective. Why would the regionalists want to change this system?

Therefore, it is highly unlikely that the system will change, unless a political crisis forces change and the current economic and financial crisis seems to be brewing future strife. Our current rulers have managed to dispense enough mortgage debt and football entertainment (“panem et circenses”) over recent years to keep the populace quiet, but as defaults soar incentives will change....and they call this a democracy.

Wednesday, 14 January 2009

From the fire into the frying pan

As I reflect on the course of action that governments around the world have taken in addressing the current financial crisis, I realise that there is something profoundly disturbing in these actions. If the underlying problem is an investment bubble financed by savings which have been invested into projects that are based on wildly unrealistic expectations, then shifting these inflated assets from the balance sheets of the private sector to the balance sheet of the public sector is not going to solve anything. It will buy time for a short period until investors realise that the underlying premises which supported the valuation of these assets are still as wildly unrealistic as they were before, only now a government guarantee has been slapped on. Governments, however, will still have to pay for the bill... and how will they do that? As little, if any cash will be forthcoming from these investments, my hypothesis is that they will either: (i) eventually raise taxes or (ii) print money which will lead to inflation (another form of tax). As a consequence, the losses will have been transferred from those who held the risk of these inflated assets to society at large.

Losses, like the previous 15 years of profit, should accrue to those that took the risk in investing in these assets. Share and debtholders in financial intermediaries should be wiped out where appropriate, shareholders in general should also suffer from the new revised valuations, and real estate should similarly adjust (these are, after all, risky assets). The necessary wealth destruction and consequent deleveraging should take place, fast. I suspect, further, that bearing these losses will not lead to serious social unrest as most of these investors have alternative sources of wealth. The only part of the financial system that, in my opinion, merits government intervention is the payments system and commercial bank accounts. Another possible alternative, if the level of uncertainty is such that a liquidity freeze sets in, could be for the government to set a floor at, say 25-30%, of peak prices in certain markets. It is highly unlikely that this level would ever be reached but it would provide support and comfort to an unstable market.

On the economic side, I concur with the idea that governments use their borrowing capacity to undertake investment projects which can have an effect on productivity; primarily infrastructure investments . These projects can act as a cushion on reductions in aggregate demand, temporarily alleviate unemployment and promote future competitiveness. Eventually, however, reality must kick in and economic players (capital and labour) will have to adjust to lower returns, or, better still, a new productivity model will have to be found. If the right incentives are provided, I have no doubt as to mankind’s ability to develop another groundbreaking development. Just think how much the world has changed (positively) in the last 100 years.

Thursday, 20 November 2008

Bailing out the bozos

So the great unwinding is finally happening...the time has come for the prudent and responsible to emerge from obscurity; or maybe not? As put by one reader of the FT Alphaville section ( “So I’ve cautiously decided to keep my cash on deposit in the bank - taxed at 40%, not only do I have to put up with falling interest rates and a depreciating currency but as a tax payer I will be bailing out all the people who told me: ‘You are an idiot, because what you don’t understand is that house prices only ever go up’”

Precisely. Why should the cautious now help to subsidise the fast cars and expensive holidays that certain individuals purchased with debt secured on inflated assets? Many borrowed money and overspent without regard to prudence; thus implicitly forgoing future consumption. It’s now time for these individuals to save and repay their debts. If they can’t repay with current income, then they should lower their living standards and/or liquidate their assets. However, government action across the world seems bent on bailing out these poor souls by paying their debt with other people’s money. In other words, a policy of “the gain is individual while the pain is socialised” has now been institutionalised.

Another mistake. If individuals are spared from the consequences of self-inflicted actions, the necessary learning process will not take place. Lessons must be learnt for mistakes to be avoided in the future. True, there might be grievous instances of injustice which can and should be covered by a safety net, but these represent a small minority.

Similarly, companies and their senior management have to pay for past mistakes. I remember advising corporate CFOs to lock-in long term committed facilities to finance long term assets, yet many refused because this implied a higher cost in commitment fees. Those that took such advice are sitting pretty while the ones who didn’t are now clamouring for government rescue packages. I don’t think the latter will be returning their 2003-2007 bonuses anytime soon. Why should taxpayers then shoulder the consequences of their bad management? I take the point that systemic risk should be avoided, but companies that access public funding should, as a condition precedent, remove all the top management which led them into the situation in the first place. Only then will the lessons be learnt.