Me, Vince Cable, and the Child Trust Fund
Filed under: Credit crunch, Politics, Public policy, The RSA
For some unknown reason I find myself this afternoon on a panel at the National Housing Federation’s Leaders Forum. It’s not hard to see why they chose the other panellists: Lord Falconer, former housing minister and now Chair of a major housing association, Professor Christine Whitehead, housing expert from the London School of Economics and none other than Vince ‘Oracle’ Cable. But why me?
Fortunately it’s a Question Time format. I’ll just have to hope I don’t have to answer first until the joke question at the end: ‘assuming the recession reduces us all to penury what is the one possession you would want to take with you to the poorhouse?’. The answer, of course, would be my socialist-realist painting of ‘Comrade Sister’ Harriet Harman triumphantly leading the post election Labour Party into the wilderness.
I might try to persuade Vince that the LibDems are wrong to want to abolish the Child Trust Fund (only partly because it’s the one genuinely important and useful thing I have ever contributed to). So far, four million accounts have been opened up, many of them by families who would never have previously thought they had the ability or the reason to save. I would have thought if any party stood for the principles of the Trust Fund – inclusion, equity and family thrift – it would have been the LibDems. Latest statistics show that families are increasing their top up into the Trust Fund despite the recession, which reinforces the argument that the CTF encourages the saving habit.
Families with Trust Fund accounts can choose a safer or two more risky options for investment and, with the stock market tanking, the ones who chose the former will be thanking their lucky stars. This will include the lazy and disorganised, as those who fail to open an account themselves have one opened for them by the Treasury. Having said which, the first Trust Funds don’t mature until 2020 by which time even this downturn should be history.
As the equivalent on this afternoon’s panel of the ‘celebrity’ guest on Question Time who is allowed to be idiosyncratic (or simply idiotic), I feel liberated to speculate wildly. It seems to me that one of the effects of the recession is to destroy all the gains made on asset values (on stocks, shares and property) over the last decade. Yesterday the US stock market returned to its 1997 level wiping out the full effects of the last cycle.
The lesson I take from all this is that we should make it a policy objective that average economy wide increases in asset values stay broadly in line with GDP growth. Because GDP rises faster than inflation this still means there are reasons to invest and save, quite apart from the need for us to put money aside for rainy days and our retirement. As the RSA Tomorrow’s Investor project has shown simple indexation of saving could reduce pension fund fees significantly and make saving safer. And as behavioural economists have shown, speculators – whether private individuals or city whizz kids – rarely perform consistently better then the market as a whole.
If policy explicitly aimed at indexing assets to the overall growth of the economy, and if policies like the CTF and the new pension system increased the proportion of us holding assets, we would all benefit from the country’s prosperity and suffer together when we failed. This sounds good for the economy and good for social solidarity.
From St James’ Palace to the launch of the RSA Tomorrow’s Investor Report
Just back from St James’s Palace and the opening session of a conference of the Prince of Wales’ Accounting for Sustainability Forum. The day started with a powerful speech from HRH in which he argued that the factors that had led to the credit crunch – debt fuelled over consumption, complacency about risk and regulation and rampant short-termism – were precisely those which had to be overcome if a new model of capitalism is to confront the ‘climate crunch’. Sadly, the Prince’s challenge was not fully met by the rather bland and complacent offering from some of the big business bigwigs who followed HRH to the podium. It’s not that they said anything one could disagree with, more that they failed to confront the question of how the hard wiring of modern capitalism has to be reengineered.
Perhaps, I should send Prince Charles the RSA Tomorrow’s Investor report: published today, and reported in the Times. As the report makes clear, the incentives placed on fund managers to make quick wins drives short-termism and increases volatility in the market. In other words, it places relative performance ahead of absolute performance. Companies go up and down, increasing the risk of a crash, but no real value is added to the economy.
The way the fund management industry operates reduces returns for investors in another way. Every time fund mangers buy and sell on our behalf, or the funds in which they invest buy and sell on their behalf, fees are generated. These fees eat into our funds and are one of the reasons someone who saves for a pension throughout their working life ends up paying about 40% of their savings in fees. The fees are good news for the financial sector. They are the basis for the bonuses and lavish lifestyles the sector had come to see as its birth right. But there is no evidence over the long run that any of this leads to better returns, as Warren Buffett has pointed out repeatedly. The cost of trading wipes out the benefit of the exchange, as Paul Lee points out in his Tomorrow’s Investor paper.
Investing over the long term not only reduces fees but also provides incentives for fund managers to be more active in scrutinising company performance: exercising what Albert Hirschman calls “voice”. It can thus be a more effective driver of sustainable efficiency and real accountability.
We need many solutions to avoid a recurrence of the credit crunch. The kind of pension funds advocated in the Tomorrows’ Investor report is one of them.
Duped consumers – who is to blame?
It is fitting in this Christmas period – after all an homage to shopping – that there are lots of interesting consumer stories about. The Times reports that US tobacco companies are to be sued for making false claims about the health benefits of low tar cigarettes. The appellants claim that the companies knew those who switched to low tar simply smoked more fags and inhaled more deeply.
This raises an interesting question. On the one hand, if the companies knew from their extensive research on smokers’ behaviour that moving to low tar would have no health benefits, then they displayed a deeply cynical and irresponsible attitude to their loyal customers. On the other, those who smoked low tar (and I was one) were presumably capable of moderating their intake and the intensity of their smoking.
When I go north for Christmas, I enjoy drinking ‘mild’, a dark beer which is usually low in alcohol. I like it precisely because I can drink several pints without getting sloshed, but I can hardly blame the volume of my drinking on the brewery.
Marketing is inherently manipulative – it is based on discovering our habits, insecurities, and irrationalities and exploiting them. As I said yesterday, some brands have successfully duped us into systematically underestimating how expensive they are. If marketeers exploit us, where does the responsibility lie? And if we are to start holding companies responsible for the way their products are used, what reason will Rizzla give for manufacturing those large cigarette papers?
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And while we are on the subject of duped consumers, the papers and news channels are full of the Madoff scam. Again, much of the debate is about whether those who trusted him and his promises are responsible for the losses they are now incurring. But one lesson is surely clear – given that some of Madoff’s biggest investors were pension funds, this is yet more evidence of the terrible value for money that savers get from the exorbitant fees they pay ‘expert’ fund managers. This is an issue we will be highlighting in our Tomorrow’s Investor report, published tomorrow.
Navigating the financial crisis, and the moral maze
An even-briefer –than–usual update today as I am rather distracted (not to say terrified) about being a Moral Maze panellist tonight. The programme is live, the other panellists have done it loads of times before and the subject is really difficult – whether NHS patients who top up their cancer treatments with drugs not available on the NHS should be denied NHS care. If you want to listen in it’s on at 8.00, or you could ‘listen again’ on the podcast tomorrow.
Really good seminar yesterday on Tomorrow’s Investor. Rowland Manthorpe and David Pitt Watson made a good case to a very knowledgeable group that there is a gap in the market for a simple, low fee, high accountability, ethically robust pension fund. The next stage is to look more thoroughly at the viability for such a fund and explore what possible regulatory barriers there might be. The first stage was funded by INVESCO and PWC – whose representatives also made invaluable contributions to yesterday’s seminar – so thanks to them.
I have a piece about behaviour change policies in today’s Guardian. It’s the lead article for a magazine called Ethos which I guest edited on the subject of behaviour change for the company Serco. The magazine includes an interesting article by neuroscientist Susan Greenfield and an interview (by me) with Oliver Letwin.
Lessons from Lehman Brothers
Apart from hard line anti-capitalists (who must be having a great laugh) all anyone wants now is for the bad news about finance and markets to stop. That the RSA will probably have to write off a few thousands pounds in unpaid room booking fees owed to us by Lehman Brothers is a small symbol of how this bad news will travel a great deal further than the city bankers having to return their Porches to the showroom.
There is no question now that the future will see a radical overhaul of regulation in the banking and financial services sector. The best name of any new legislation might be the Stable Door Act. The problem with regulation is that to a large degree its effectiveness relies on things that are much harder to create than new rules; culture, norms and ethics.
What drove the excesses of sub prime, 125% mortgages, and impossibly complex derivatives was not just lax rules but also a lack of realism, restraint and responsibility. Without these virtues new rules will simply be an invitation to find ever more complex, perverse and risky forms of circumvention.
I am far from an expert but it seems to me that certain key principles stand out if we really want to learn the lessons of the last fifteen years. We need to restore the link between accessing and making money and generating value.
Whether at the national level where countries like the US and UK were spending much more than they were producing, at the corporate level where company finances could be the outcome not of goods and services produced but of abstruse forms of gambling, or at the individual level where almost everyone seemed to be able to borrow at will, the link between producing value and getting hold of money became more and more attenuated.
It may be true – as Government ministers say – that the real economy is much healthier than the collapsing world of finance. But, the hunger for spending and borrowing among nations, companies, the super rich and millions of ordinary people long since became detached from the real economy.
We also need much greater transparency, which is a function both of openness and comprehensibility. Whether it is executive pay and bonus systems, the distribution of risks, the real performance of companies and investments, not only do we need to know the facts, we as citizens need to see the importance of holding people and systems to account.
This afternoon we are holding a seminar to discuss our Tomorrow’s Investor project. At the heart of this is the thesis that there is market failure in the pensions sector. Our work with small and indirect investors suggests they want a product that is low fee, high accountability and ethically robust. Very few of us are willing to be active in making our current investments fit this pattern but if the right product was available to us we would grab it.
A good (albeit hypothetical) measure of such a fund would be that if there were future possibilities to invest in products like sold on sub prime mortgages the fund managers would have to explain clearly to investors the risks involved.
As for investors we too have to take responsibility. I wouldn’t put a bet on a horserace if I didn’t understand the odds or the possible losses I might incur. In the future we need to be similarly circumspect about how we foundations of our future livelihood.
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