Getting up and making more of an effort? Our money is safer in bed
Iwonder what happened to all those plausible people who told us that we should be making our money work harder. Some of them must have been lynched, and some, I dare say, are promoting hedge funds and buy-to-let schemes. This was the sales pitch they used to bring new members into Lloyd's of London. Don't be content, they would say, with the dismal returns that you get on your savings. Leave them where they are, but sign up for Lloyd's, let your money back your membership, and watch the cheques roll in. So they did, until the day came when they began to roll out again. All too late for the losers, the penny dropped. Making our money work harder meant making it work twice — running two sets of risks in the hope of obtaining two sets of rewards. We could have achieved this more simply by doubling up on the horses. It is always a temptation, though, and, suitably repackaged, it will find its moment. Once again, the returns on our savings have been looking dismal. Life assurance? Ouch — and don't mention the Equitable. Shares? Back where they were seven years ago, when New Labour came in. (Odd coincidence, that.) Government stocks and bonds? Here and on Wall Street, yields have fallen to levels scarcely seen for half a century. Isn't it time that our money got out of bed and made more of an effort? Any suggestions? Claret futures, perhaps, or old masters? Our houses seem to have been working hard to make us richer while we were asleep. The hedge funds claim to be able to make money for us in all seasons, and charge accordingly. We can see the returns from these alternative investments. What we may not yet see is the risk.
Test under stress
The Bank of England, which worries for its living, worries for us. What happens, it would like to know, when all these alternatives come to be turned into the oldest alternative, cash? Can it be done? In a hurry? In bulk? On what terms? Will the exits get jammed, with investors and lenders knocked to the ground in the rush? This is what the Bank's Financial Stability Review means when it says that the search for yield poses risks and that the test will come when the weather changes. We have lived through a long sunny spell, when money has been cheap and plentiful, and governments everywhere have slipped back into their old ways of borrowing and spending. There are limits to that, though, as they are beginning to learn, and interest rates are already on their way up. From its eyrie in Basle, the Bank for International Settlements — the central bankers' own Swiss bank — says that policy, fiscal and monetary, in the world's leading economies will have to be made much tighter. Along the way there will be stresses and failures. Cold winds and cold weather bring on financial fatigue. Something snaps.
Houses and hedges
Borrowing money is one way to double up on the houses. We can remortgage our own house, buy another one, mortgage that, and wait for the price to go up and the rent to roll in. It all sounds like Lloyd's in the old days — but, of course, if house prices boil over, or if our tenant vamooses, the money will start to flow out again. For the second or third time in as many weeks, we have been warned of the danger. Even so, if! had to look out for a case of financial fatigue, my eye would be on the hedge funds. Every day now, somebody gets rich by promoting a new one. He may tell his investors to pay him a management fee and hand over a share of their winnings — their losses, if any, they keep. To invest on these terms is like playing roulette on a wheel with five zeros, in the belief that your system is sure to win. The Nobel Prize winners at Long Term Capital Management thought they were betting on certainties, and when they turned out to be wrong, the damage was so severe and so widespread that the Federal Reserve Bank of New York had to march in and restore order. No doubt many hedge funds are sober and sensible, but the first rule of investment reminds us: if you don't understand it, don't buy it. Just think of the losers this rule would have kept out of trouble at Lloyd's.
Going short
More casualties in the back office: the Bradford and Bingley has followed the example set by HSBC and Barclays, and is cutting out 600 jobs, none of them on the front line in the branches. Of course Brad and Bing will have to keep on all the staff now needed for keeping the regulators at bay and for satisfying ministerial curiosities. Last year the High Street banks fielded ten different reviews and inquiries, four more are now under way, and that is before the Eurocrats get going. Looking for discards, Brad and Bing will turn to the experts in its human resources department, and might (as I was recommending last week) set them to economise on themselves. Goldman Sachs, with a fine choice of euphemism, refers to this function as Human Capital Management. Sometimes you have to go short.
Chancellor Bismarck
What an imperial power the Treasury now is, in its gleaming white fortress! The Iron Chancellor sounds just like Bismarck retuning the concert of Europe. There has been an orchestrated attempt, so his spokesman complains, to denigrate the Treasury. He will not tolerate this. Any day now he will add that, in certain eventualities, his forces could not and would not stand idly by, or even that his patience is exhausted. The casus belli this time is provided by Derek Scott, a mildmannered economist back in the City after six years on attachment to Downing Street, trying to interest Tony Blair in his subject. He may have better luck now that his book, Off Whitehall, has got him denounced by Gordon Brown as a tool of the conspiracy. Which conspiracy? The one next door, of course. Out with it. Can this be an ultimatum? In Whitehall, the balance of power is unsettled. Chancellors and prime ministers need to be allies in the endless struggle to keep the spending departments at bay. This Chancellor, though, has tried to suborn the big spenders by throwing money at them, only to find that they and their clients can never be satisfied. I shall look forward to Mr Scott's book, but I know what he thinks that New Labour has done for the British economy. A dripping deposit of complication and regulation has left it furred up.
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