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I am not an economist and despite multiple attempts to grasp the UK economic model, I still can’t get much beyond the balance sheet of my business.

But as an active member of the blogosphere, that doesn’t stop me having an opinion, and trying to deconstruct the messages being given by our leaders.

Watching Alastair Darling and Mervyn King slug each other with handbags at the Mansion House dinner, it’s obvious that the words they use, what they say and what they mean are three different things.

At the most obvious level, there’s a power play going on between the two institutions. The previous Chancellor (wee Gordon) made the BoE independent, and now Merv wants some more rope, please. Ally (or Blackbrow to his friends) wants to rein things in a little. Indeed, he seems to be developing a penchant for prudence, and is already irritating the hell out of the Brown-Balls-Burnham triangle by refusing to talk up spending, just at the time when they want to promise more of the earth as a sweetener for Election 2010. (Brown balls? Burnham! – there’s a joke in there somewhere.)

My, how wee Gordon must be irritated at not being able to cull Blackbrow in the reshuffle.

The latter’s caution also seems at odds with the Governor’s view on the regulation of banks. Merv wants to break them up (at least to separate retail from investment, and so limit their size). Blackbrow thinks this is all too simple, and wants to take a softer approach to regulation.

(Interesting that Merv wants everyone else under stronger regulation, but wants more scope for the BoE. A case of financial NIMBYism, perhaps?)

Watching him from my armchair, Blackbrow looks caught between a rock and a hard place. Deregulation and light-touch governance led us to a world of incomprehensible instruments and systemic implosion. But it also gave the UK 8% of its GDP and a world-leading position in financial services, just behind the US.

While tighter regulation may not ‘force’ all megarich dealers or hedgies to flee the country, it will certainly impact the financial sector’s ability to compete. Especially if no-one else signs up.

So Merv sends a message that we should get tougher, and Blackbrow is publicly cautious about caution.

Looked at in this light, I wonder if the handbags were little more than show, and in fact this is a well-rehearsed double act, sending messages out to the global market (especially the US) to test the water.

‘We know that we’ve got to get the banks under more control. You know that you’ve got to get the banks under more control. We know that you know, and you know that we know. Now we’ve let the banks know that we both know. So we want you to know that if you play the game, we will play the game. But play fair, or we won’t play at all.’

The one thing that everyone knows is that for all of wee Gordon’s global leadership at the G20, it would be economic suicide to be the first mover in the Regulation Game. It’s like being in a roomful of foxes that have all voted to become geese.

No-one wants to be the first goose.

Of course, all of the above is based upon an idealistic axiom: that not all Members of Parliament or Bank officials are purely in it for themselves, and that at least some of them are genuinely motivated to improve things for the greater good. After events of the past couple of months, I need to believe that now: I need to restore a little personal faith in the system.

But that doesn’t stop a little voice whispering in my ear that Blackbrow knows he’ll be looking for another job in the next 12 months, so it would be unwise to make too many banking enemies in the near future.

CODA

Update on this one from The Guardian, 8 July 2009

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A letter to a bank from a concerned customer:

Dear Sirs,
In view of what seems to be happening internationally with banks at the moment, I was wondering if you would advise me?

One of my cheques has been returned marked ‘insufficient funds.’ Could you please tell me whether that refers to me or to you?

Yours faithfully

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The lead story in today’s Financial Times reports that the British Bankers Association (BBA) has said that “commercial realities” made it “inevitable that some businesses will not survive the recession.”

Thanks for the economics lesson.

Angela Knight, the BBA’s Chief Executive is quoted as saying that “there are limits to the help banks could offer.”

That would be the limits of the recent £37bn recapitalisation which – unless my eyes and ears deceive me – was needed to support the failing businesses that Ms Knight and her ‘wash our hands’ comments represent.

Interesting to note that on the BBA website, the battle for the definition of reality has begun, with proclamation that the banks HAVE pledged their support for small businesses. Hmm.

But I suppose that we small business folk should be grateful that we are being invited to the table at all for a few remaining crumbs of token participation with Lord Mandelson. How generous of the bank leaders to agree to meet our representatives.

Now that they have less to do (because it’s inevitable that some of their customers won’t survive recession), I’d like to ask them if they will follow JCB’s lead and take a pay cut? After all, as the FT’s recession survey pointed out, ‘we’re all in this together’.

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Clearing out some papers at the weekend, I found this piece of doggerel that I scribbled while stuck in an airport at the beginning of the year. At the time, the business pages were full of a ‘rogue trader’ who had cost Societe Generale $7bn. Still resonates, I think:

Dear Account Holder,
We’re writing to say
Your overdraft limit
Is higher today
Than you had arranged
By some 70p.
So please pay at once
Our £30 fee.

We don’t like the fact
That you’ve overspent
On petrol and heating
On food, clothes and rent.
So today make amends
To your current account.
Deposit post haste
The appropriate amount.

You see…

While you were spending
Your way into debt
One of our traders
Made a currency bet.
And lost. Several billion.
It’s not really our fault;
Some idiot lent him
The key to the vault.

Now we’re low on reserves
And find that the onus is
Closing the gap
To protect our bonuses.
So make sure you pay now -
We’re not being funny.
We may be a bank
But we do need the money.

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Here’s a very interesting paragraph from the Sport supplement of today’s Daily Telegraph:

“A day after (Lord) Triesman criticised the (Premiership) clubs for carrying as much as £3 billion in debt, The Daily Telegraph understands that several clubs were contacted by banks apparently disturbed by his suggestion that levels of debt are unsustainable.”

Why did it take the comments of the FA chairman to wake bankers up to a fact that has been as blatant as a Klinsman dive for years? Weren’t they ‘apparently disturbed’ before?

This happened on the same day as UEFA announced that it would bar teams with excessive debt from European competition (while pointing out that the Premier League’s ‘fit and proper person’ test for potential owners was largely “a waste of time”).

So the FA is aware that there’s a problem, UEFA is aware that there’s a problem, and fans have always been aware that there’s a problem. But only now are the banks ‘apparently disturbed’.

In a rising market, backing massively leveraged deals like the Manchester United take-over probably looked like a good idea – except to anyone not sophisticated enough to understand the complex financial instruments being used. Which now seems to be everyone.

Of course, all this is evidence of a truth that’s as old as banking itself: “When you owe the bank £100, you have a problem. When you owe the bank £100 million, the bank has a problem”*.

And in the case of Premiership football, the banks have had a problem for a very long time.

*2008 update: When the bank owes £100 billion, we all have a problem.

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Like Mum, we went to Iceland – although for us it was an 8-day journey along the south coast of unspeakably wonderful geography, rather than a quick dash through 12 aisles of frozen food.

Our guide, Helga, was enthusiastic and well-informed, our fellow travellers friendly and fun, the weather unusually warm and clear.

And yet all the time we were there, a question kept nagging away in the back of my head: How does this place work?

It has a population of 300K, two-thirds of whom live in Reykjavik. There are four institutions of further education. Like their Northern European colleagues, their quality of life seemed, well, high quality.

It couldn’t all be based on fish?

At the time, the best I could come up with was a two-part answer:

1) everyone has at least two jobs. They’re an industrious lot, the Icelanders. As an example, Helga was also a schoolteacher and she knitted hats and gloves, sold through craft shops.

2) cheap energy. Iceland straddles two tectonic plates, the American and the Eurasian. As they shift, so the country splits in the middle by a couple of centimeters each year, with the gap being filled with magma, Earth’s Polyfilla. Being so close to such an energy source also generates masses of hot water that’s easy to tap.

Water is to Iceland what oil is to the Gulf. Case in point: metal giant Alcan ships raw aluminium from Australia to Iceland for processing. That’s cheaper than doing it locally.

So with these two strands, I wove a not-entirely satisfactory answer to my question, put it away in the mental filing cabinet under “Life’s Imponderables” and moved on.

And today – like an amateur sleuth in a cheap murder mystery – I got the final clue that unlocked the puzzle.

Debt.

No one knows how much (if they do, they’re not telling), but enough to send the value of the krona down by 25% in a day and for shares in its banks to be suspended. Enough for Prime Minister Haarde to address the nation last night, warning that the country could be drawn into bankruptcy unless drastic measures are taken.

There’ll be plenty written about this by people better informed than me. But even I can see lessons in this:

* However good something looks, reserve judgement until you’ve checked under the covers;

* Follow your instincts – if it doesn’t feel right, it probably isn’t right;

* “Let not vaulting ambition o’erleap itself.” OK – that was Shakespeare, not me. But he usually makes the point better than most of us.

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