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[toryreformgroup]

'Help to Buy' may look and feel sub-prime, but is it?

Daniel Cowdrill

Much of the recent criticism of the Government’s ‘Help to Buy’ scheme is informed by the collapse of the sub-prime market in the United States. The comparison has been made between this and the National Homeowner Strategy launched by the Clinton administration.

Whilst ‘Help to Buy’ looks and feels like sub-prime, is it? The new scheme still requires buyers to put down a deposit, and as a Financial Times piece points out, whilst there is a positive correlation between the Loan to Deposit Value (LDV) and defaults, the significant increase in default rates occurs at or above 100% LDV. 

In addition to a 5% deposit, people will not be able to access the scheme if their credit history does not meet the Financial Conduct Authority's ‘impaired credit’ standards. A Treasury spokesman added, “borrowers must also be able to afford the mortgages, with income verification and stress testing as set out in the FCA's mortgage market review.” 

Furthermore, whilst house prices are expensive relative to incomes, they are undervalued relative to rent, a trend confirmed in the first quarter of 2013. Simon Ward, Chief Economist at Henderson Global, points out that rental yield reached a low in 2007 indicating that house prices were overvalued. Yields have since rose strongly reflecting falling house prices since 2008. This leaves room for an upward adjustment in prices.

Concerns that prices will soar due to a lack of supply may also be over-stated. We saw many developers buy land during the recession which they are now building on. House construction reached its highest level since 2010 in June. The latest Markit/CIPS UK Construction Purchasing Managers' Index (PMI) signalled "a solid increase in construction employment levels and the strongest degree of positive sentiment about future output since May 2010." The index jumped to 57 from 51.0 in June, where a figure above 50 indicates expansion.

All things considered, ‘Help to Buy’ need not lead to an unsustainable bubble. Lenders are also operating in a risk averse market making them less likely to repeat the same mistakes; no one is talking about 100% plus mortgages anymore. Lightening, as the saying goes, rarely strikes twice.

In the wake of the sub-prime collapse in the U.S, there is understandable caution about government sponsored attempts to help people on to the property ladder. But perhaps it is a risk we can take if it helps those for whom high rents make it almost impossible to save a 10% deposit.

[toryreformgroup]

Executive pay argument is a distraction and not based on reality

Daniel Cowdrill 11.15am

Both David Cameron and Edward Miliband competed over the weekend to sound tough on executive pay. They both criticised what they see as ‘excessive’ pay at the UK’s biggest companies.

We were told that executives are on a ‘merry-go-round’, where remuneration committee members sitting on each other's boards, ‘pat each other's backs, and hand each other pay rises’.

A range of policies are now being proposed to combat this percieved corruption, such as making pay rewards legally subject to shareholder votes.

However, the definition of the problem bears no resemblance to reality. Research by Manifest shows that only 5 per cent of FTSE 100 directors sit on another FTSE 100 board, and of these only twenty directors sit on another company’s renumeration committee.

As Robert Peston has said, there is ‘no practical mechanism for executives of different companies to pay lavish amounts to each other by sitting on each other's boards, in the way that Mr Cameron seems to believe is rife.’

Furthermore the idea of executive pay being accountable to shareholders, nice as it sounds, isn’t that simple. With globalised capital investors are more transient. Their interest may only last a few days or even a single morning. Longer term investors tend to be ‘sleeping’ investors, more interested in the value of the company rather than the parochial matter of individual pay agreements.

A small investor may hold shares in twenty companies listed in London; a big investor in many more companies across the world. They are hardly likely to have the time or the inclination to pour over the pay deals of every single executive.

In the unlikely event that executive pay becomes so unwieldy that it affects company productivity, I wouldn't mess about leading a campaign against the board of directors. Quite simply, I'd sell my shares.

However, this misguided perception of cronyism and the equally misguided response of our political leaders is not my main concern. My concern is that the sheer political effort being expended on the issue is a distraction from declining social mobility and entrenched educational underperformance.

In his second principle of justice, John Rawls argued that social and economic inequalities are fine as long as they satisfy two conditions: first, that positions and offices are open to all under conditions of fair equality of opportunity; and second, that inequalities are to the greatest benefit of the least advantaged members of society.'

I broadly agree with this principle, yet it is evident that the tax collected from blue-chip companies and their executives, which must amount to tens of billions of pounds, is not being spent effectively on education and training. It is vital that young people are equipped with the tools to compete in the global market place.

Only seven other OECD countries spend more than the UK per pupil (approximately £54,000), yet the UK is falling down the respected PISA survey. In 2010, the UK was ranked 25th for reading, 28th for maths and 16th for science. In 2006, when 57 countries were included in the study, it was placed 17th, 24th and 14th.

Significantly, the UK has a greater variation in reading standards attributed to class differences than almost every other country in the OECD. The proportion of students from poor homes who achieve higher than expected scores is lower in the UK than across the OECD on average. Just 24% as against an OECD average of 31%.

Furthermore, the UK is one of only a few countries where richer pupils have more teachers than poorer ones. Only in Israel, Slovenia, Turkey and the US is this also the case.

We would be better advised to spend the same political effort on driving education and training for millions of young people rather than on a misguided war against the pay of a small minority of executives.

[toryreformgroup]

Choose your battles wisely, Edward

Daniel Cowdrill 10.47am

The Tories' election defeat in 1830 ended some forty years of dominance. What was left of the Tory party in Parliament came to be led by the former Home Secretary, Robert Peel.

Peel's preferred strategy was, as far as possible, to support Whig measures. He resisted the temptation to enter into opportunistic alliances to inflict embarrassing defeats on the government. Instead, where appropriate, he would support it and allow its nominal supporters to attack instead.

Peel's aim was to break-down gradually from within the government's majority. It worked. After significant gains in 1835 and 1837, in 1841 the Conservatives won a majority of 70.

Opposition exercised judiciously is the best choice out of a bare arsenal for opposition leaders. It takes judgement, discipline, and quite often a long spell out of government.

The advantages are numerous. It shows that the Opposition party is a disciplined force and likely to conduct government business in an apropriate manner. It also prevents the Opposition from becoming background noise. By predictably opposing everything you become a fixture in the game rather than a player.

Edward Miliband has made his choice: headlines, rather than credibility. Officially, the Labour party remains implacably opposed to the coalition government's spending reductions, 80 per cent of which would have taken place were Labour still in office. Mr Miliband continues to attack each 'cut' without proposing any of his own.

Another example is David Cameron’s veto at last month's EU summit. Agree or disagree, the Prime Minister made a decision. Edward Miliband, contrastingly, argued that it was a bad deal for Britain, that the Prime Minister had put party before country. Yet Edward refused to answer whether he would have signed up to the treaty himself.

It is a self perpetuating spiral. The less credible Edward becomes the more he and his colleagues resort to cheap shots and gimmicks. It is not the stuff great opposition parties are made of.

Edward Miliband is also unfortunate. David Cameron looks, sounds and acts like a statesman. And his “big, open and comprehensive offer” to the Liberal Democrats appeared to position him above party politics.

Examine the two leaders' personal ratings. Mr Cameron has remained consistently the most popular. By the end of 2011 his personal approval was approximately 25 points ahead of Mr Miliband’s, with the gap widening. Even voting intention as we head towards the peak of the public spending cuts is edging in favour of the Conservatives.

After Sir Robert Peel’s death, William Gladstone observed from Peel’s handling of opposition that he had matured into a ‘profound statesman’. People are likely to say the same about David Cameron in years to come, but not the younger Miliband.

[toryreformgroup]

Why atheists can agree with Mr Cameron too

Daniel Cowdrill 6.01am

David Cameron’s speech at Christ Church to commemorate 400 years since the publication of the King James Bible was a commendable attempt by the Prime Minister to engage with faith in a way that predecessors have tried to avoid.

Mr Cameron makes an interesting point that in politics, as in political history, faith is important.

A study into Margaret Thatcher, for example, would be incomplete without reference to the fact that she listened dutifully to her father, a Methodist lay preacher, every week of her childhood (and a fascinating new book on 'God and Mrs Thatcher' is due in 2012). Indeed, future studies of Cameron will also be incomplete without reference to his upbringing next to a parish church where both his parents volunteered.

David Cameron’s thesis is that the realisation that God created man in his own image was a 'game-changer' for human civilisation. When each individual has a common power above them, and when every individual is of equal and infinite importance, created in the very image of God, it created an irrepressible foundation for human dignity and the basis for Christian values such as responsibility, charity, compassion, tolerance, humility, self-sacrifice, love, and the common good.

As an atheist I think these are all virtues, but I approach them from a different angle. The German philospher Ludwig Feuerbach disagreed with the idea that God created man in his own image, but that man created God in his own image. God is the outward projection of the wise, moral, and sympathetic being that man can only aspire to be.

It is the reverse of the 'Creation of Adam', the centre of Michelangelo's ceiling at the Sistine Chapel. God and Adam hold their hands out towards each another, one passively the other forcefully, poised on the brink of creation. Feuerbach would see it differently. He might point to the obvious fact that although God and Adam reach towards eachother they don't actually touch. Adam gazes longingly into the sky at a vision of godliness, a projection of his own good qualities.

Where I diverge with Feuerbach, however, is in Part Two of Feuerbach’s ‘Essence of Christianity’, published in 1842. He suggests that the Chrisitian belief in salvation makes us more tolerant of vice than we would otherwise be. In other words, we don’t have to stand-up to bad people because they’ll get their comupance when they arrive at the pearly gates.

However, this seems to jar with the good intentions of so many faith based groups. David Cameron is correct to point to the tremendous work that faith charities and churches do here in the UK and abroad to uphold human dignity and rights, and to their role in the social fabric.

While as an atheist I cannot accept the creation of man by God, as a human being I can agree with the virtues that spring from Christianity. They are, in the end, human qualities.

[toryreformgroup]

While the Euro remains on life support, it's business as usual for the City

Daniel Cowdrill 10.04am

Listening to David Cameron’s opponents during the weekend, you would think his veto signals the end of civilisation - or at least the UK’s participation in it.

One of their scare stories is that the City of London is worse-off than before the EU summit. In reality, however, it is in much the same position. The sticking point was the financial transaction tax (FTT). This is a tax on every sale or purchase of stocks and bonds or other financial products by banks. On these pages, Craig has dismissed a FTT as an unhelpful 'soundbite tax', while Alex described it as 'misguided'. Elsewhere, Sir John Major has labelled it a 'heat-seeking missile aimed at the City of London'.

As 75 per cent of the EU’s financial services industry is located within the City of London the burden of this tax would fall disproportionately on the UK economy and the two million people who are employed in financial services in this country.

Unfortunately, France was not willing to listen to British demands. President Sarkozy’s refusal to concede led to a fiscal ‘pact’ rather than the fiscal union the markets had desired. What is set to be agreed over the coming months without the UK is unlikely to be enough to stop the deterioration of the European debt crisis, and President Sarkozy won’t be so ‘heartened’ if (or when?) France's credit rating is downgraded. However, beyond all this the fundamentals remain the same for the City. The UK remains part of a single market that allows the (reasonably) free movement of people, capital and services across a trading block of 500 million people. The City will continue to benefit from the single market - Mr Cameron's veto does nothing to alter this. To be sure, it could be argued that the new 17+ euro block will foist regulations on the City when Qualified Majority Voting (QMV) is introduced in 2014. But these are future deals that are yet to be negotiated and agreed. When the time comes there is no reason why Britain can’t win support and obstruct the worst that might come our way. In any case, there are some people who believe that had the UK not vetoed the new treaty the French would be less determined to impose other regulations on the City. This thinking is deluded. French dirigiste tendencies have been strengthened by a financial crisis that many in France perceive as the fault of speculators in the City of London. This isn’t going to change no matter how much sovereignty we sign away. Furthermore, access to the single market is not the only thing that attracts business to the City. In the 1980s the ‘Big Bang’ attracted financial services to London from all over the globe, not just Europe.

The UK’s competitive regulatory and tax framework continues to attract financial services to these shores. We are also near the main European continent and, of course, we speak English. Even the EU tends to deliberate great matters in English - now the global lingua franca (such irony might be lost on the French).

The City will live to fight another day. The euro, on the other hand, may not.

[toryreformgroup]

Failing schools should face the same fate as Lehman Brothers

Daniel Cowdrill 6.00am

‘Meme’ is short for the ancient Greek ‘mimene’, or in English, ‘something inherited’. It was coined by Professor Richard Dawkins in his book The Selfish Gene (1976). A ‘meme’ is an idea that behaves like a gene. It describes a process whereby ideas and practices are transmitted from one mind to another via variation, competition and inheritance. The result is that self-evidently we improve over time.

Improvement springs from social interaction and exposure to how other people do things. A simple example is driving on the left-hand side of the road. It was enshrined in law only recently but through interaction people learned to ride their carriages on the left and later their cars.

Without ‘Meme’, bad practices can develop. We witness this regularly in the market economy. Who would have thought, for instance, that by the end of 2008 some investment banks would have disappeared? From the 1990s onwards their leaders acquired an elevated position as ‘masters of the universe’. Inertia limited the functioning of the Meme. Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley since either collapsed or abandoned their lofty positions.

But let us focus on education. The highly respected Programme for International Student Assessment (Pisa) shows that Britain has slumped to 28th place in maths (from 24th four years ago), 25th in reading (from 17th) and 15th in science (from 14th). Searching questions must be asked as to why this relative decline has taken place.

The tripartite system of education introduced after the Second World War - grammar schools, technical schools and secondary moderns - was inadequate for a number of reasons. However, the move to comprehensive schooling caused its own problems. It made a a virtue of reducing variation and competition, hence it has rightly been criticised for encouraging mediocrity at the expense of excellence.

It is vital in education to encourage variation and competition so that the transmission of good practice occurs most widely. One can argue that greater competition has driven educational standards higher in Europe. It can also be argued that Catholicism’s historic resistance to public schooling in France has resulted in a much greater proportion of independent schools than in the UK, thus creating a market that boosts educational standards.

Research published in the Economic Journal by academics at the Harvard School of Education and the University of Munich suggests that there is a causal link between higher numbers of privately educated students and higher educational attainment in general. This is not due to more people attending private schools but because the wider existence of private schools push up overall standards. State schools have to work harder to attract the best pupils against the competition of nearby affordable private schools, hence driving up standards for everyone. Good state schools in turn put pressure on private schools to justify the additional costs to parents.

Choice in education does not just mean more private schools, rather it means more independent schools with their own customs and practices that can be appropriated and improved on by others. While education policy certainly must address equality of opportunity, the Meme will do the rest.

Follow Daniel on Twitter @DanielCowdrill

[toryreformgroup]

It is time to cut adrift Greece and its creditors

Daniel Cowdrill 6.00am

To all intents and purposes, Greece is insolvent. Greek public debt is €340 billion, or approximately 150 per cent of GDP. One of the highest public debt ratios in the world is accompanied with the lowest sovereign debt rating since Standard & Poor reduced it to CCC.

The IMF's standard prescription is spending cuts and devaluation. The first element will be a struggle for Greece - for starters, the €50 billion privatisation pacakge is hopeless, as the Adam Smith Institute's Eamonn Butler has pointed out. Secondly, devaluation is not an available option due to Greece's membership of the single European currency. Like many profilgate western economies, Greece has a large trade deficit that is hampered by an overvalued currency. Greece can neither cut nor trade its way out of debt.

This would be less of a problem if it were not for the fact that several other European economies are also heavily indebted. The argument goes that if Greece defaults, general borrowing costs will soar and other economies like Spain's will be pushed over the edge. Therefore the EU and the IMF have felt compelled to throw good money after bad.

It is now dawning on politicians that further loans to insolvent Greece are not just ineffectual but also counter-productive. The new package will ask banks to 'roll-over' their Greek bonds for thirty years, so deferring €30 billion of bond payouts. Basically the banks will receive high interest on extended maturities, which will be guaranteed by a surplus economy like Germany's. The fact that this idea was floated by the French banking sector is not coincidental: French banks hold €40 billion worth of Greek bonds and are desperate to shift this liability on to taxpayers.

However, 'rolling over' is problematic. First, the market might see it as a default in all but name. One Standard & Poor source said, 'While an exchange offer for longer-dated bonds may appear to be "voluntary", we may conclude that investors have been pressured into accepting because they fear more adverse consequences were they to decline the exchange offer.' Even if it works, the scheme reduces the incentive for Greece to curb its expenditure and to reform its economy - i.e. moral hazard. It is possible that Greece will end up in the same position a few years down the line.

The strategy is not only risky, it is morally wrong. This has also been mentioned today by the Daily Telegraph's Peter Oborne. Allowing lenders to cash in on bad investments through high interest extended maturities (guaranteed by European taxpayers) is a disgraceful act. Lenders are responsible for their lending and they should take the hit for their mistakes. In their role as lenders of last resort, European governments must be judicious in their use of public funds to underwrite debts, thereby keeping banks alert. In this instance, a proper evaluation of European banks shows that their exposure to Greek debt is substantial but not excessive. They can survive a hair cut.

Furthermore, Europe must recognise that Greece is crying out for a devaluation. The EU must draw up a legislative framework that allows a temporary Greek withdrawal from the euro so that its economy can rebalance itself. It is then up to the Greek government to negotiate with its creditors and to implement structural reforms. Only then can the Greek economy prosper.

This is all very unlikely. The European political class is living in a world of shangri-la economics, believing that defaults can be avoided and that the euro can be saved via imaginative accounting. The longer this is believed, the higher the cost will be for ordinary Greeks and for the rest of us Europeans.

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Salmond rolls up his sleeves, but where are the Unionists?

Daniel Cowdrill 6.53am

The Scottish Nationalist’s success in the Holyrood elections makes a referendum on Scottish secession from the United Kingdom inevitable. While the polls indicate that the Scottish people are pro the UK, Unionists cannot afford to be complacent. Westminster appears to have ruled out a preemptive referendum, and the Scottish Nationalists have bought themselves time to change Scottish opinion before they call the referendum, the timing of which is in their hands.

Recent polling evidence suggests a slight increase in support for secession, and within the results there is another very worrying trend. The only demographic that is clearly opposed to independence is the 65 and above age bracket.  Contrast this to younger groups. 51% of voters under 24 favour independence with 36% against; 40% of those between 25-34 are in favour with 36% against, and 38% of those between 35-44 are in favour with 36% against. If Salmond can galvanise these groups, this could be the most serious threat to the Union in its three hundred year history.

Barely a few weeks into the new Parliament the First Minister picked an extraordinary fight with the Supreme Court. It erupted last month when the court overturned a judgement by Scotland’s highest court convicting Nat Fraser of murdering his estranged wife, Arlene, following her disappearance in 1998. The role of the UK Supreme Court in Scottish criminal cases that engage human rights law has been a running controversy in Scotland for a while, and Salmond lost no time hitting back at the Supreme Court which he argues has ‘no role to play here’.

Salmond has positioned himself carefully. His gripe isn’t with Strasbourg or the European Convention of Human Rights, it’s with the Supreme Court in London. It would have been nice, he told an interviewer, to hear what Strasbourg thought of the Scottish judgement before it was overturned in the name of the European Convention by the Supreme Court in another UK jurisdiction. Salmond wants more cases to go straight to Strasbourg instead, which he argues is more sympathetic to Scottish justice.

Despite heavy criticism from Lord Hope and the Scottish press, the Nat Fraser case has a firm grip of the Scottish psyche, and may play to Salmond’s advantage. His brazen attack on Lord Hope after the latter’s rebuttal of Salmond’s comments in The Times, runs against the deference usually observed towards members of the judiciary, but is indicative of Salmond’s single-minded determination to drive a wedge between Scotland and the rest of the UK, whatever it takes.

A bet against Salmond on the question of secession may be a good one, but is not without risk.  As First Minister, Salmond can utilise his power to influence public opinion. He also has a good rapport with the Scottish people and has appointed the tried and tested Angus Robertson to oversee the campaign. Unionists, on the other hand, are disparate and isolated from events in Scotland. A pro-Union campaign spearheaded by a Conservative led Government in Westminster is likely to fall on deaf ears north of the border, and there is no obvious figurehead that can take the fight to Salmond in Edinburgh. Labour were decimated in the Holyrood elections and elder figures like Gordon Brown, Alistair Darling, and John Reid, are too associated with the party that were so comprehensively rejected by the Scottish people. Against this ill-prepared opposition, it is not difficult to see how a First Minister as deft as Alex Salmond may conquer all.

As the polls narrow slightly and Salmond rolls up his sleeves, there is an urgent need for those of us who support the United Kingdom to mobilise.

Daniel Cowdrill is assistant to Stronger United - a new think-tank setting out the positive case in favour of the United Kingdom - www.strongerunited.co.uk

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