In a banking crisis, many – or most – banks flirt with insolvency. They stay in business through cheating, lying, and blackmailing the state. As I said in a speech in Tokyo in January 2009:

The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.

Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.

Back in April last year… bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.

Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.

This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery.

The Eurozone is now riddled with zombie banks, all using their too-big-to-fail status to distort the response to depression in the European periphery, while the deceptions of British banks are steadily being exposed, with Barclays currently in the firing line. In the United States, too, a pattern of rampant criminality is steadily emerging. Liars. Cheats. Blackmailers. Guilty as charged.

But as the Leveson Inquiry has shown, the British media has many of the same bad habits. Not just a willingness  to break the law and bully both the powerful and the helpless, but a casual mendacity, where the story is pre-determined and facts are twisted to give it as much viral zing as possible.

In the lede to his latest on the financial crisis, Aditya Chakrabortty (the Guardian’s ‘economics leader writer’) exemplifies the latter tendency.

We don’t know each other, but I want to offer you a deal: You each give me £20,000. And that’s it. What do you get in return? Well, it’s a fair question but I can’t even promise to pay it all back. But let me assure you of this: your hard-earned cash will keep me in the style to which I’m accustomed. And that’s got to be good for all of us. So I’m sure you’ll agree that 20 grand is an absolute bargain. Indeed, I would call it a once-in-a-lifetime offer; only I can’t promise not to come back again.

You’ve probably guessed that the transfer I’m talking about has already happened. Each man, woman and child in Britain has already handed over £19,271. And our money has gone to the banks.

That’s a carefully crafted hook, reinforced in the last paragraph (“next time, the British might need to cough more than 20 grand each”) to hammer the lesson home. It’s designed to be picked up on Twitter and Reddit, and grumbled over down the pub, all driving eyeballs to the Guardian’s website.

But as a meme, it’s deceptive at best. If 63 million UK citizens had each coughed up £19,271, the total bill would be around £1.2 trillion – but that’s more than the UK’s entire national debt which exceeded £1tn only at the end of last year. It’s simply impossible for the government to have dished out so much money to our banks.

So what’s going on here?

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Nick Clegg spoke at the British embassy in Berlin today. The audience was impressed by his fluent German. But why on earth did the Foreign Office decorate the embassy with what  appear (to be very generous) to be two gigantic deformed parsnips?

Here’s a piece I’ve done for Yale Global magazine on democracy under strain in Europe.

Politicians in power since the 2008 financial collapse, regardless of their political stripes, find themselves in peril. Analysis of the recent French and Greek elections followed three lines of thought: voters soundly rejecting strict austerity measures, blaming incumbents, and abandoning mainstream political parties for more extremist leadership, both right and left. The three interpretations are linked.  Read more

We’ve known for a while that David Cameron will be one of the co-chairs of the UN Secretary-General’s panel on what comes after the MDGs, when they expire in 2015.  Today the SG announced the other two co-chairs: President Johnson-Sirleaf of Liberia, and President Yudhoyono of Indonesia.  So that’s one each from a high, middle and low-income country, one woman – you can see the work that went into putting that together, and it’s a good job.  The UN secretariat will now start hitting the phones to assemble the rest of the panel, and they will be announced after the Rio+20 conference in June.

And in case you were wondering, the three are ‘delighted’ to have been asked, and are hoping for an ‘ambitious’ agenda….the full text of their statement is here.

As David Cameron prepares to chair the High Level Panel charged with designing a successor to the Millennium Development Goals, he should be in no doubt that he faces a tough job.

The original goals have been remarkably successful. Even in a single organisation, most targets are agreed and then quickly forgotten. The MDGs, which took a decade to stitch together, have prospered since their final agreement in 2002. Most developing country governments, and nearly all donors, have at least partially aligned policies to them.

Poverty rates have also dropped remarkably quickly (and not just in China) and progress towards social development targets seems now to be accelerating. How much of the good news can be directly attributed to the MDGs is hard to prove. But if you accept that goals can only ever be a part of the answer to a complex problem, then the British PM should start by asking why the MDGs did so well, not by assuming that his Panel is easily going to come up with something better.

His first question should be to ask what makes for an effective set of goals. I’d identify five criteria. They should:

• Be resonant – powerful, simple and clear enough to communicate with politicians, media, public.
• Form the main elements of a common strategic language, enabling different types of organisation to understand and work with each other.
• Be amenable to implementation, not just on a technical level, but given likely political and resource constraints.
• Have sufficient authority and clarity that it matters whether or not they are delivered fifteen years down the road.

Conversely, effective goals avoid:

• Too much complexity – every interest group in the world will want ‘its’ target included and for technocrats more is usually more. Resisting a ‘Christmas Tree’ framework will require a willingness to pick tough political battles.
• Straying into areas where consensus doesn’t exist – goals make countries more likely to do difficult things they believe are in their best interests; they can’t be used radically to change their identification of those interests.
• Distorting incentives in a way that is significantly counterproductive. Goals will inevitably have at least some adverse consequences, but the detail and balance of the framework will determine how serious a problem this is, as will the quality of the data on results (to avoid cheating).
• Making promises that aren’t really meant – some countries will be happy to sign up to goals they have no intention of doing anything to meet and it is possible to imagine leaders embracing a set of empty promises in 2015 just so they can have a big announcement to make.

So my advice to David Cameron would be to take three types of failure very seriously:

• A failure to agree – lots of talk that leads, ultimately, to another multilateral car crash.
• A framework to forget – we get agreement in 2015, but it’s largely ignored thereafter.
• A strategic realignment to no great purpose – we get goals, try to implement them, but it doesn’t work out due to a lack of will or because the goals are the wrong ones.

None of this is to say that I think that, as Chair of the Panel, the PM has been handed (or worse, lobbied for) a poisoned chalice. Sequels are usually worse than the original, precisely because of the complacent assumption that the original’s success will easily be replicated. Cameron – and his team – need to make it clear from the beginning that they are intent on avoiding this error.

(This post is based on a talk I gave to a seminar recently at Brookings. Alex and I will publish a Brookings paper on the post-2015 challenge in the next few days.)

News in the Guardian today:

David Cameron has been asked by the UN secretary general, Ban Ki-moon, to chair a new UN committee tasked with establishing a new set of UN millennium development goals to follow the present goals, which expire in 2015.

Some initial reactions:

- It’s a major political coup for the UK, and especially of course for DFID, who’ve been working behind the scenes to secure this outcome for months.  (The UK may not have been supposed to announce the appointment just yet – there’s nothing on the appointment in the last briefing of the Secretary-General’s spokesman – but you can see why they couldn’t wait…)

- The immediate question now is who will be the other co-chair – or co-chairs. Two co-chairs is the norm for this kind of UN exercise, one from a developed and one from a developing country, but three co-chairs is not unheard of (e.g. the 2006 High-level Panel on System Coherence). If there were three, expect one to be from an emerging economy and one from a low income country.

- It’ll be safe to assume that the other co-chair[s] will be serving heads of government too. If I had to make a guess right now on people, I’d go for Dilma Rousseff from Brazil as the emerging economy candidate (especially as the Rio+20 summit in June is the launchpad for the Panel), and maybe Ellen Johnson Sirleaf from Liberia. Meles Zenawi would be another obvious choice, but he chaired a recent UN panel on climate finance so may be out of the running, plus the UN will want to have gender balance among the co-chairs.

- Another big question is who will head up the secretariat that supports the Panel. The recent trend has been for the secretariat head to come from within the UN: this was the case on both the Global Sustainability Panel last year (which I worked on), and the 2006 system coherence panel). But there’s also precedent from them to come from outside (Steve Stedman’s role on the 2004 panel on Threats, Challenges and Change being the obvious example).

- In terms of substance, the direction of the post-2015 agenda is currently heading towards the idea of Sustainable Development Goals. The Rio+20 summit will probably call for SDGs as a key summit outcome, but duck the issue of what those Goals should cover – passing the political heavy lifting straight to the Panel that David Cameron will be co-chairing.

- Expect the politics of this agenda to become very challenging and complex over the next 12-18 months. We did a backgrounder on SDGs a couple of months ago, which gives a quick overview; we’ll also be publishing a more up-to-date analysis paper through the Brookings Institution very shortly.

- On the domestic political aspects, Patrick Wintour’s analysis in the Guardian is undoubtedly right that this will firmly lock in the government’s commitment to spending 0.7% of national income on aid. At the same time, David Cameron’s chairmanship of the Panel will also allow him to argue to domestic audiences that he’s pushing internationally for a more hard-headed approach to aid – an argument that Conservative Home is already running with approvingly.

Update: if you’re wondering about how David Cameron sees the development agenda, take a look at this speech from last year.

A particularly special moment in NGO campaigns strategy yesterday, for connoisseurs of the genre: Jubilee Debt Campaign arguing that Britain should forgive £45 million in loans to Argentina’s former military junta, despite the fact that the loans were used to buy weapons (including two type 42 destroyers and two Lynx helicopters) that were subsequently used to, er, invade the Falklands.

Yes, yes, Jubilee is attempting to make a serious point here (i.e. that debt lent to dictators should be regarded as illegitimate and odious, especially when tied to British arms sales), the point is not limited to Argentina (e.g. they mount a similar argument about loans to Hosni Mubarak’s fallen regime in Egypt), and Britain emerges looking pretty stupid on the question of whom to sell arms to (so what else is new).

But even so: to be out there arguing for debt forgiveness for Argentina, for weapons used to invade the Falklands, on the 30th anniversary of said invasion, when Argentina’s current government is rattling sabres about the Falklands all over again – that, my friends, is what is called “brave” in episodes of Yes, Minister.

The results of this courageous stand:

- Business Secretary Vince Cable, realising that Christmas has come early, has enthusiastically embraced the opportunity to say that no, he will not be forgiving Argentina’s debt;

- The story has gone massively viral (it’s currently 3rd most read on the Telegraph website) as the nation digests how satisfying it is to be able to jerk Argentina’s chain back for a change, after months of trouble-stirring by Cristina Fernandez de Kirchner;

- And Jubilee, meanwhile, have ended up looking like utterly bonkers lefties, with debt relief (and, by extension, aid and 0.7) now associated in the public mind not with Africa, but with Argentina - not merely a middle rather than low income country, but the one middle income country actually to have invaded us within living memory.

It’s not immediately clear how Jubilee could possibly top a public relations coup of this magnitude, short of arguing for debt forgiveness for, like, Greece or something. Oh, wait…

Our friends at National Review’s The Corner – America’s foremost Conservative group blog – were devastated on Britain’s behalf at the disrespect Barack Obama showed “America’s closest ally” in his early days in office.

In particular, the decision to return the Churchill bust had them flogging each other into paroxysms of indignation. “The President has never even mentioned the Anglo-American alliance in a major policy speech, and has little affinity for Britain,” complained Nile Gardiner.

“How can you explain a policy toward Britain that makes no strategic or moral sense?” asked Charles Krauthammer. “And even if you can, how do you explain the gratuitous slaps to the Czechs, Poles, Indians, and others? Perhaps when an Obama Doctrine is finally worked out, we shall learn whether it was pique, principle, or mere carelessness.”

The ‘Churchill’s bust’ meme has recurred regularly ever since, as a symbol of a relationship that is irretrievably broken. Here’s race-baiter Mark Steyn sewing it into a 2009 piece on Muslim-take-over, in which he suggests that, due to Churchill’s views on Islam, “ the bust will almost certainly be arrested at Heathrow and deported as a threat to public order.” Hah-bloody-hah.

So how did today’s love-in between President Obama and Prime Minister Cameron go down with the Cornerites? Huge relief that the special relationship is at last on the mend? Or, instead, concern that our centre-right PM clearly has much more in common with America’s centre-left extreme-socialist leader than any of the candidates for the Republican nomination?

Neither. Just stony silence (so far, at least) in the right-wing echo chamber.

Listening to the debates on the UK’s Welfare Bill this morning, I was struck by the similarities between this debate and the endless arguments about whether the UK should give foreign aid.

Ever since the Elizabethans institutionalised the idea of the ‘deserving’ and the ‘undeserving’ poor into the system of poor relief, governments have had two main public reasons for giving people money (here or abroad): because they need it (see, for example, humanitarian aid or child benefit), or because it will do some wider good (like help them find a job, or promote economic growth), and two reasons for taking it away: becasue they don’t really need it (the ‘undeserving poor’ that right-wing pundits are so keen to uncover), or because taking it away is in their own best interests (so they can, in the jargon, ‘stand on their own two feet’).  Welfare reforms, aid budgets, all are subject to this remorseless political logic.

There are two things which are particularly frustrating about this rather sterile argument.  Firstly, it’s conducted entirely on the spending side, while in fact the fairness of a system depends both on how money is raised and how it is spent.  Debates on spending are often conducted as if choices were all about distribution within a group of very poor people.

Iain Duncan Smith, speaking for the government on the BBC’s Today programme this morning, argued that the welfare bill will seem fairer to people in work who are earning low incomes and who don’t want to see their taxes used to provide the unemployed with higher incomes than they themselves enjoy.  But if public spending really has come down to dividing up tax revenues from and benefit payments to people who are at or below the average wage, then the answer is not welfare reform to change the distribution of the spend, but tax reform to change the distribution of the revenue.

Of course poor working families should not be paying for poor non-working families, just as poor working families should not be paying for poor families in other countries.  The whole point of a redistributive tax system is that it’s the wealthy who pay for the poor.  If this is really the issue, then change the tax system rather than tinkering with spending.

My second bugbear is the myth of the perfect system.  People arguing on both sides of the debate about the welfare bill and discussions about aid often appear to assume that there is some possiblity of a perfect system out there, which will solve the short-term problems of poverty without any risk of long-term distortions to people’s behaviour.

Well there isn’t.  Rather than looking for perfection, it might be better to think about both debates in terms of different types of mistakes various systems might make.  Is it better to err on the side of generosity, and perhaps risk giving aid or welfare to a few people who don’t really need it, or is it better to err on the side of meanness, and risk cutting off aid or welfare to people who really do need it? Which kind of mistake can we live with?

Governments in this corner of the world have been struggling with this idea, at home and abroad, for over 400 years, since the first Poor Law was passed in England in 1601. There are real practical questions about how to manage both aid and welfare, how to make the most of scarce resources, and how to build handouts into a system of longer term improvements in people’s lives.  But going down false, politically expedient avenues won’t help anybody.

William Hague’s (alleged) advice to David Cameron ahead of the euro summit:

If it’s a choice between keeping the euro together or keeping the Conservative Party together. It’s in the national interest to keep the Conservative Party together.

What a day. Five observations:

1. My initial reaction this morning: On a sinking Titanic, the UK is lobbying to avoid further damage to the iceberg.  If David Cameron was motivated mostly by his wish to suck up to the City (and to his backbenchers), then he deserves all that fate can throw at him. He has transformed eventual British exit from the EU from Eurosceptic fantasy to the new conventional wisdom in just 12 hours. Quite a feat.
2. But maybe… his government has decided that the euro is now doomed and has made a rational decision to swim as far from the vortex as possible. Many believe that a disorderly break up of the single currency has become more likely than not. That would probably cost the UK 10% of GDP and make British default a near certainty. But if that’s what’s going to happen, then we better knuckle down to being as resilient to the shock as possible.
3. The British veto makes euro failure more, not less, likely. In theory, agreement between a core group is easier than having all 27 countries in the room, but the legal complications of conjuring a new set of institutions from thin air are daunting. Also, expect the core to shrink as the summit’s aspirations are chewed up by domestic politics. Each defection will provide a potential trigger for wider breakdown – probably when a group of the strong decide all hope is lost, and make a collective rush to the lifeboats. By being the first to desert the ship, Cameron has made it much easier for other European leaders to follow.
4. Contingency planning must now go much deeper. Behind the scenes, governments are playing out failure scenarios, and most big businesses have some kind of post-euro plan in place. Much of the thinking is still pretty rudimentary, however. The eurozone countries can’t risk letting markets see them flinch and have to put a brave face on their prospects, but the UK no longer needs to have such scruples. What exactly would we do if the euro goes down? What would be thrown overboard? What, and who, would be saved? How can the government organise effective collective action as the catastrophe hits?
5. Nick Clegg is dead, politically. That was already true, but I can’t imagine even Miriam González Durántez now plans to support her husband at the next election. Paradoxically, accepting his terminal status could give Clegg new freedom of action. Instead of continuing to play the role of coalition gimp, he should offer leadership to those keen to explore what comes after the storm. Politicians with proper jobs – Cameron, Osborne, even Cable – are going to be overwhelmed by events throughout this parliament, even in the best case where Europe struggles back onto its feet. Clegg, though, has an opportunity to focus energy on the longer term. He’ll still lead the Lib Dems to electoral Armageddon, but catalysing a vision for renewal might make posterity a little kinder to the poor man.

Some wag was on Twitter earlier this week, observing that if, during the 1980s, the media used to refer to Sinn Fein as “the political wing of the IRA”, then these days we should be referring to Britain’s coalition government as the political wing of the financial services industry.

Sounds like a cheap shot? Then have a look at yesterday’s FT, which has a full page analysis article (£ – or free blog post here) documenting an interesting fact about where the Conservative party gets its funding from:

“In the past decade, a dramatic shift has occurred. Super-rich hedge fund managers have become the biggest single interest group to bankroll the UK’s current main party.”

Wondering what effect this has on policy? Here’s Tim Montgomerie, editor of ConservativeHome.com and the Tory world’s blogger-in-chief:

“The City’s influence is that top Tories spend a lot of time in the company of people to whom the City matters. If the party was reliant on northern industrialists, it would be a different party.”

Or try this observation from “one of the 10 biggest hedge fund donors”:

“There probably aren’t many votes in cutting the 50p top rate of tax – but among those that give significant amounts to the party, it’s a big issue, and that’s probably why it’s a big issue for the party too.”

What do you look for in good political commentary?

I’m in favor of a mix of moral clarity and realistic judgment, topped off with an  incisive turn of phrase that sticks in the memory.  So I find it hard to top this observation on the recent attack on the UK embassy in Iran, culled from today’s Financial Times:

“I do not like Britain and I know it is evil, but a savage attack on their embassy not only makes us look uncivilised but means we have to pay for its consequences, which will be more sanctions and maybe a war,” says Saeed, a 42-year-old government employee.

100% crystal clear analysis.  Love it.

Remember how Gordon Brown used the Treasury to keep the rest of the Cabinet on a short leash? Seems like Ed Balls is up to the same trick:

It’s almost cliched to paint Balls as the the crudest of tax and spenders, throwing money at a failed system in a desperate attempt to turn the ship around. To read much of the media coverage around the shadow chancellor (and for that matter, the Labour leader), you’d presume they long for nothing more than another spending binge.

Yet tell that to the shadow cabinet, many of whom feel stymied in their attempts to even float potential new policies (nevermind make concrete spending commitments) by the strict control Balls’ office has maintained over even potential spending commitments. Nothing that could even notionally impinge on economic policy is put forward without the explicit say so of the shadow chancellor – a cause for silent frustration for many seeking to make their mark around the shadow cabinet table.

I am sure Ed Miliband is enjoying this as much as Tony Blair did.

In his autumn statement, George Osborne warned that, without his programme of fiscal consolidation, “Britain would have borrowed an additional hundred billion pounds in total [by 2014/15]. If we had pursued that path, we would now be in the centre of the sovereign debt storm.”

But how confident can we be that that storm has been averted? In the city, sovereign risk and an economic downturn are seen as the most important threats to the UK financial system. An economic downturn now seems more than likely, and will be savage if efforts fail to shore up the euro.

What about a sovereign debt crisis in the UK? When asked to name the most important current threat, risk managers for around 70 UK financial institutions now put debt at the top of their list.

I think they’re right to be worried. Even after this week’s downward revisions, the Office of Budget Responsibility expects tax revenues to grow rapidly over the next two financial years – but there’s little prospect of that happening if there’s a sharp downturn.

Imagine, instead, if the government’s income declined in the same way it did after 2008 – that would mean more than £150bn less revenue than expected over two years (a ‘taxation double dip’). Following the Chancellor’s logic, that would be enough to steer the UK straight into a debt storm.

Now you could argue that revenue will prove more robust than it did after 2008 and that’s probably true if the UK sees ‘normal’ economic underperformance. But euro breakup – accompanied by an inevitable banking crisis, massive disruption of exports, lower oil revenues etc. – would take us far beyond normal.

Bottom line: if the euro goes, it probably takes the British government with it. Happy days. (more…)