Facebook Friends and Trust

I know I keep banging on about trust at the moment, but Facebook has shown us recently why people are losing faith in the idea of a free market.

When Facebook shares were floated, they were bought by small investors and fans of Facebook at $38 a share.  It wasn't only small investors, George Soros bought some too.  However last week saw the end of the 'local-in' period for the early investors, such as Goldman Sachs.  As they rushed to cash in their gains, Facebook's share price fell to less than half of what we were originally told it was worth.  Told by people like Goldman Sachs.

It doesn't matter if this was rigged or not.  It's a high profile float where those who were on the inside make lots of money, and those who take their advice and listen to the hype, don't.  At least in the short term.  I personally have an issue with free marketeers who say that capitalism is the only answer.  It may be, I don't know, but the market isn't free and we shouldn't pretend otherwise.

Transparency and the Electricity Market

A belated comment about electricity markets, which I suddenly realised when I was reading the FT magazine recently.  Tim Harford wrote a piece in the Undercover Economist called 'Don't Judge a Book By Its Cover Price'.  The article was about amazon and computer pricing models, but he mentioned the problems of price transparency.

As JLF Bertrand pointed out in the nineteenth century, is two companies are offering an identical product and have transparent pricing, then rational customers will just go to the one that is the cheapest. This will lead to a race to the bottom in terms of pricing, until the price is at, or just above the cost of production.  This surely highlights a reason why electricity pricing is far from transparent.  The more complicated each company makes its products, the harder it is for customers to compare, and then move to the competition.

Bertrand's argument was too simple, however.  While a cartel would be illegal, imagine if the competing companies understand this model and find a way to raise prices between themselves, or just never start the price competition in the first place.  In fact, it would be entirely irrational to start undercutting your competitor, as you know where it ends - zero profit for everyone.

Which makes me wonder which way electricity prices are heading.

The Price of Sport

Last night I watched a Women's Semi-final football match in Wembley. As someone who's really caught Olympic fever,even from the Midlands, I was excited just to be there.

The Columbian-American sitting next to me commented on the missed opportunity of the empty seats, and there were great swathes of them. He said how he and fellow American tourists had said how much they would love to buy these leftover tickets on the day and just how much they would be willing to pay for them. Afterall, as he said, we're here now, what's a few extra hundred pounds?

Despite these small set backs, I've been incredibly impressed so far. London isn't quite as busy as I expected. However the volunteers are amazingly helpful and friendly- the best sort of ambassadors you could hope for. And on top of all that, we are winning medals. So what about the legacy? (hard to say without coming over all twenty twelve).

In 2002, 25% of young people were doing at least 2 hours of sport a week. By 2010, that figure was 90%. Since then the School Sport Survey has been scrapped, Sports Partnerships have been scrapped and Michael Gove has approved the sell-off of 21 out of 22 schools playing fields (since 1998 schools have to get government permission). So the legacy picture looks not so bright. The changes that have happened over the last couple of years are exactly the reasons the Australian press is currently giving for its poor performance since its home games and 4th position in the medal table.

I've blogged about trust a great deal this year. Currently our elite athletes get only a few percent of their funding from commercial sponsorship. Most comes from the National Lottery and the rest from government. As the coalition continues its austerity drive, maybe the commercial players need to be stepping in and filling the gap, so we don't lose the momentum. Now is the time to capitalise on our successes. I can't see the government stepping up. Let's hope someone else does.

Time Called on London Finance

I've read an interesting article in Time Magazine this week, that essentially blames the London culture for the issues that are appearing in the financial sector at the moment.


I thought this was interesting, because it raises some points I discussed in a previous blog, about trust.  We hear much about the importance of the financial sector to this country's economy, which justifies the state's active role over the last couple of years.  Time points out that in the boom years up to 2007, British based financial institutions accounted for more than half of the generation of global funds.  In other words, these institutions provided the largest part of the world's liquidity.


At the same time, London is the major hub for foreign exchange, with over a third of the world's turnover in this market.  So it is no surprise that the rest of the world watches London closely, and that issues of integrity and trust start alarm bells ringing elsewhere.


The focus in this country started around the salaries of the top bankers when the companies they ran were clearly not performing well.  Bob Diamond has earned more than $150million since 2005 from Barclays.  While that raised questions about individual integrity, we now are starting to see evidence of more widespread manipulation of the markets.


Today we saw that Barclays first half performance was better than expected, but that profits are being pulled down by the fines; £290m for manipulating Libor, £450m put aside for mis-selling interest rate hedge products to SMEs and a new investigation by the FSA into 4 senior staff members.


Time Magazine quotes Democratic Audit as saying that British Institutions are "especially fragile" when compared to other EU and OECD countries.  In fact, its Audit of the United Kingdom (Wilks-Heeg, S., Blick, A., and Crone, S. (2012) How Democratic is the UK? The 2012 Audit, Liverpool: Democratic Audit.) concludes that:


"these findings strongly reaffirm what is perhaps the most important of our five overarching theme: that representative democracy as we know it is in long-term decline. Key representative institutions, most notably parliament, are fatally undermined if they are perceived to be riddled with corruption and if policy decisions are seen to be taken 'behind closed doors’ between ministers and lobby groups. "


So while the Time Magazine article may be laying the blame squarely at the door of London and its culture in the city, the important issue it raises is again one of trust.  

Responsible Capitalism-who do we trust?

Copyright Philippa Roberts 2012

It's been a grim week already on the economic news front, as we bounce from the Libor rate fixing scandal to resignations and fines in the face of wrong-doing.  Just a quick look at this week's headlines in the FT shows Bob Diamond leaving Barclays, GSK fined $3billion by the US authorities and an ex-Glencore staff member being sued for fixing the price of cotton.


I've just been listening to George Osbourne on the Today programme and was interested to hear him say that the regulators failed and 'this causes the current crisis' (that's not an exact quote btw).  I find this comment quite astonishing as it implies that we all need someone watching over us otherwise we'll be dishonest.  Obviously that's nonsense, but the role of the regulators is important.


We are in a period of significant change at the moment.  Our institutions, and our trust in them, is part of the glue that holds society together.  David Brooks talks in The Social Animal about how institutions pass on knowledge, and norms of behaviour, and are subject to incremental change over decades and generations.  However, at the moment, trust in key institutions is low.  We have been rocked by the Parliamentary expenses scandal, the media's phone hacking, the police taking cash for information and now the banks fixing rates that ultimately impact my, and your, mortgage.


I think we will look back on this period as being significant because these institutions are important, not only for what they do, but also for providing the checks and balances on each other.  At the moment, with scandal after scandal, it is difficult to see who should be trusted to play that role.  There has to be change, because the economy will never recover unless we have trust and confidence in the country's ability to make sure the game isn't rigged.  Why would I, as a small business owner, go to a bank right now if I needed capital?  Especially when I hear from my peers that it isn't lending.  Why would I be going through tender processes for new work if I think there is an old boy network in place and the winners will be the same companies as usual?


Confidence is key.  I'm a positive person, so think that the change will happen and that it will set us on a slightly different and better course.  I also think that at some point the sun will come out this summer, so don't put money on anything I say!  The important thing is that with so much uncertainty it is difficult to have positive growth plans; better to sit tight and wait and see what happens next.  We need our institutions to be strong and trustworthy. If we don't think that we all have an equal chance of making it (in however we define 'it') then why bother trying?

Pay - What are you worth?

There's fair pay round here somewhere. Copyright Philippa Roberts 2012

I just started flicking through Merryn Somerset Webb's book on personal finance for women (dreadful cover - looks like a chick lit novel and how I hate that genre!).  The first chapter looks like it deals with getting paid what you are worth and it quotes an interesting piece of research from Linda Babcock, a professor at Carnegie Mellon University in the USA.  She noticed that students were graduating with similar qualifications and going into similar jobs, but the women were starting on salaries that were 7% lower than the starting salaries of her male students.  It turned out that the women accepted the salary they were offered when offered a job.  The male students negotiated any offered starting salary upwards. 


The startling thing is the difference over a lifetime.  A man who starts on a salary 5% higher than a woman and then has exactly the same percentage pay rise for the rest of their working lives will earn £285,000 more over 30 years.


Now, this has obviously made me wonder if I am earning what I am worth.  I know for many years that I wasn't, as when peers told me their day rates (often in a pub late at night) they were charging considerably more than me.  I know that I didn't, in my first 'proper' job after university and working in a call centre.  The man who had done the job before me was paid more for it than I was, but that was in the 90s and I didn't realise there was anything I could do about it.


I know that in my last salaried position (about 6 years ago) I had the same sort of qualifications (two degrees), a similar amount of experience (we had both had practical jobs in a waste company) and was the same age as a male peer in the senior management team.  I had more staff responsibilities, but he earned more.  When I questioned this, I was told he had been there longer than me and would kick off if I got paid the same as him.  Both of these were true, but I am not sure if that was a valid reason for the disparity.


Now I didn't intend this to be a blog about sexism, but thought I'd give an example of unequal pay and now realise that it happened in two out of the three companies I worked for.  So I will now be checking at the board meeting next week whether I am earning the same as my fellow (male) non-exec.  I intended to write about inequality in pay and how some people get away with what they do.


The FT this week has written about the growing shareholder rebellion at Xstrata, where the company is claiming that it needs to pay it's senior management £173million to keep them as the company merges with Glencore.  I thought the Telegraph described the situation well when it said that the job of executives is the same as the jobs of the rest of the workforce - 'to produce a good return for the owners."  "It is as if the butler of a great house took the lion's share of the revenues from the estate while issuing the poor earl, who owns it, a little pocket money."


Whether this is an analogy that rings true with many Telegraph readers, I don't know, but I liked the way they put it.  In a year when a quarter of the FTSE 100 CEOs had a 41% pay increase and the rest of the population received just 1%, it does beg the question.  Are any of us being paid what we are worth?

Policy Paralysis?

World economy - stuck fast, going nowhere.Copyright, Philippa Roberts 2012.

I saw a fascinating article online at the FT this morning - fascinating in part because of the comments section - about the lack of confidence in policy makers going into the G20 Forum today in Mexico.


If you think the news is grim when you here about the ongoing recession here in the UK, or the European debt and currency crises, it all starts looking even worse when you look at the figures coming out of the rest of the world, especially the BRICs.


Merryn Somerset Webb recently wrote about why China is a bad place to invest in right now, listing 17 reasons.  The FT article points also to the slowdown in other large developing economies and the fact that US growth could be slowing.


The FT/Brookings Institution Tiger Index of world economic conditions is showing that the recovery is stalling, because of a lack of confidence in the policy makers ability to get their economies growing again.


But if we look at the range of options; we have seen technocratic governments in Greece and Italy.  Since the start of the crisis in 2008, the left has lost General Elections in the UK, Portugal and Spain, the right in the US, France and Denmark.  There will be another election in the Netherlands in September as the austerity measures could not be agreed by the ruling 'coalition' parties and in Belgium, records were broken in 2011 when it took 541 days to form a government.


All of this could point to a lack of anyone having a solution.  Or it could point to the fact that the public do not believe their politicians and the solutions they have been given thus far.  In 2008, many spoke of the fact that this could be the start of a no growth decade, rather like the one experience by Japan in the 90s.  So far, 4 years in, it looks like this is going to be the case.  But many of the policies that are being suggested and the structural reforms that are needed will take longer than an electoral cycle.  Some of these decisions will be the sort that Sir Humphrey would tell his Minister are 'brave'.  Some, and these is where I thought some of the comments were interesting, will question how on earth we stimulate demand when real incomes have fallen so much, and if that's the case, should we be stimulating consumer demand at all?


The policy reaction over the last 4 years has been fire-fighting, because the fires have been springing up all over the place and the priority must be to put them out.  I think though that there is still a lack of a coherent vision about what a different economic future will look like.  Until we have that, and know where we are headed, then the lack of confidence in policy makers will continue.