A Tale of two Balls: UK vs PIMCO

Lessons from WWII as Russia conquers Crimea

Even assuming Ed B. makes it into power, his brother wins hands down. The UK government spends around £720 billion a year and most of it is already earmarked. Chancellors – pace all the kerfuffle around budget announcements – can only affect policy at the margin. Andrew B., on the other hand, is head of European bond markets with the capacity to strike fear in the hearts of Italian treasury ministers, among others.

Markets matter, which is why the ambitious and admirable management overhaul at the Bank of England, announced last week, is sorely lacking on that front. Creating a new Deputy Governor for markets and banking is right in acknowledging the importance of markets, plus it is a coup for the Bank of England to have appointed Nemat Shafik, an effective policy maker and global player, as Deputy Governor for banking. But appointing her Deputy Governor of markets as well is a mistake. What was needed for that part of the role was an investment banker with knowledge of markets and a wide network of acquaintances and colleagues.

Or at least for a former banker to be appointed to the role of Executive Director of Markets, reporting to Shafik. Instead, Chris Salmon, whose whole career has been at the Bank of England, will take over that role.

This column has long banged on about former Governor Mervyn King’s weakness in deifying academic economists and not valuing markets. The bank would have better understood and reacted faster to the seriousness of Lehman Brothers going under – let alone known about its fragility earlier.

Governor Mark Carney, a former Goldman Sachs banker, is fully aware that markets move mountains. But when he leaves the Bank of England at the end of his five year term, he looks to have failed to incorporate that knowledge into the executive.

For an indication of Russian thinking as the Crimean/Ukranian crisis escalates, one could do worse than turn to Max Hasting’s superb volume on WWII, All Hell Let Loose.

Our inbuilt bias assumes our opponents will react in the same way as we in the West do. In other words, hit Vladimir Putin where it hurts – his wallet – as the Russian stock exchange plummets and international sanctions loom. Yet this is Russia.

In 1944 as Stalin’s army crossed the Danube in their Hungarian invasion, indifferently losing soldiers to the enemy, a Hungarian hussar gazed on the corpses on the river bank and said to his officer in shocked wonder, ”Lieutenant, sir, if this is how they treat their own men, what would they do to their enemies?”

The Russians bore the brunt of the fighting against Hitler during the war, with it being fought mainly on Russian soil. Stalin was not bothered by the barbaric behaviour of his soldiers towards German civilians a few years later. As Hastings points out, the Soviets saw no shame, such as burdens Western societies, about the concept of revenge: “The price of having started and lost a war against a tyranny as ruthless as Stalin’s was that vengeance was exacted on terms almost as merciless as those Hitler’s minions had imposed on Europe since 1939.”

President Putin is not Stalin. But a paranoid historical memory lies at the heart of both men. Winston Churchill famously spoke about a “riddle wrapped in a mystery inside an enigma.” It is worth quoting the rest of his speech in 1939, “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that the West* should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe, That would be contrary to the historic life-interests of Russia.”

*In the original speech, it was Germany.

Motherhood, apple pie and transparency. All good things? English Poet Philip Larkin didn’t believe the first word qualified, with his most famous line being, “They **** you up, your mum and dad.”

As for apple pie, we are now aware of the rotten repercussions of all the sugar we have been eating.

The debunking of the God of Transparency, however, has yet to happen. This is despite the incalculable harm done to the US and the UK’s intelligence gathering by Edward Snowden. We are less safe than we were prior to his revelations, while the probability of recruiting spies will have plummeted, as they consider the extra danger involved in this ever-more translucent world.

Moreover, consider the harm done to the Bank of England’s market intelligence operation by the release of minutes from a meeting in 2006 where senior foreign exchange dealers from some of the world’s largest banks told a senior member of the central bank of “attempts to move the market.” Paul Fisher, who was head of its foreign exchange division at the time, insisted in Parliament that this was “traders’ whingeing about how difficult their life is.”

Understandably, the focus is now on whether the Bank of England failed to take action on market manipulation within the trillion dollar foreign exchange market, where $5.3 trillion changes hands every day and a number of investigations are taking place.

But the transparency from releasing those minutes comes at a cost. What trader will now raise an issue with the regulator if this can’t be done informally? Which regulator will want to be closely involved in markets, given that it is a career dead end – either you are not well informed on what is going on, or you are and are therefore suspect.

Fisher has lost his seat on the powerful Monetary Policy Committee. Meanwhile Paul Tucker, a former deputy governor who was a strong candidate to succeed Mervyn King, was booted out of the running when information was released showing his closeness to Bob Diamond, the former head of Barclays Capital.

Temperance in the application is the key to transparency. As it is for motherhood. And perhaps apple pie.