When ‘New Labour’ came to power in May 1997 the first thing Crash Gordon, the then Chancellor of the Exchequer, did was hand control of interest rates to the Bank of England stating that they had a target to maintain inflation at 2%.  The logic being that successive Conservative governments had used interest rates as a political tool to curry favour with a home owning (mortgage owing) electorate that they had created since 1979.  Prior to the owner occupier explosion created by the Thatcher Government, interest rates would have little direct impact on a great swathe of the electorate because they were in rented housing.

            The logic of the decision was to take the political element out of the interest rate setting process so interest rates would be set at a level appropriate to the level of growth in the economy.   Now, in order to measure the growth in the economy a full set of metrics would have sensibly been required, manufacturing order books, house price growth, unemployment levels, money  supply levels, strength of sterling compared to other currencies and domestic inflation.  If you think of all these metrics being instruments on a car dashboard it would be a good picture to have in your mind.  What the government was to give the Bank of England was a single measurement, that of inflation. Using the dashboard analogy, this was like ripping your dashboard out and leaving just a voltmeter in place of all the other more useful stuff….. like a speedometer for example.

            The Bank of England was told that they had to maintain inflation at 2%, with the stiff penalty of having to write a letter to the chancellor if the level of inflation went above 3% or below 1%.  Now, the level of UK inflation is based on the Consumer Price Index, CPI, this is set by an independent body, who are essentially statisticians.  They monitor the prices of a basket of typical goods, food stuffs, cinema tickets, domestic and vehicle fuel, computer games etc.  The contents of this basket are reviewed periodically to ensure that it fits in with what people are actually buying otherwise the price of items such as Fish Tail Parkas would still have an impact on CPI despite the fact that nobody has worn one for 30 years.  The CPI is meant to be able to give an international comparison of inflation, thus trifling things (like Council Tax and Mortgage Interest) is not included in the CPI and as we are all so painfully aware Council Tax has increased dramatically since the millennium.

            Critically, one measure that is omitted from the inflation figures is house prices. This, as it turns out, had a dramatic effect on the economy.  Just after Labour came to power, the rapidly growing economies of South East Asia hit something of a crisis. This was big news indeed, and stock markets around the world fell dramatically.  The SE Asian economies that were affected addressed their problems by de-valuing their currencies and promoting their manufacturing base.  In turn, this had a fairly dramatic effect in the UK and other Western economies.  Prices of consumer electronics fell dramatically and the price of oil tumbled at one stage to below 10 USD/barrel due to lack of demand from the East.  UK inflation was pushed down and allowed interest rates to remain at a low level.  Business profits increased as fixed costs such as fuel fell.   Interest rates being low enabled people to borrow a larger principal amount for the same monthly payment as they would have had, say 5 years previously thus lighting the blue touch paper under house prices (increasing by 10-15% per annum). But crucially, this was not reflected in the rate of inflation which stayed low because of all the cheap consumer goods that were coming in from the East.

Eventually, the principal amounts being requested and indeed required by borrowers to buy a home outstripped the supply of money that depositors had in bank accounts. That’s when bankers hit on the idea of securitised mortgages which moved customer debts off their balance sheets. These were then traded in a market (the banks had discovered alchemy) where money could never run out.  They didn’t need to offer savers good rates anymore in order to draw in funds to lend to borrowers.   Banks were also buying bundles of theses securitised mortgages and treating them as fixed rate bonds.  These gave the banks a ‘fixed’ income at a fairly high level as some of these mortgage backed securities had sub-prime lenders at the far end of them who were paying a high rate of interest.  Savers reacted to this by stopping saving and starting spending, mainly it would seem on houses, again pushing prices skyward.

Then the music suddenly stopped, those sub-prime borrowers reverted to type and stopped paying their mortgages so the securitised bonds at the other end of the mortgage stopped paying the interest and the banks were (and still are) left high and dry!  The mortgage backed bonds are worthless, banks cannot sell them on and income from the bonds has dried up.

If house price growth had been included in the inflation figures, interest rates would have been increased to choke off inflation which would have dampened mortgage demand thus reducing the banks’ dependence on traded debt.

            Gordon Brown was revelling in the umpteen quarters of interrupted growth that he had presided over as Chancellor.  Clearly this was all down to his prudent handling of the British economy had nothing to do with the events in SE Asia at the end of the 1990s.  One of the statements that he frequently made was regarding low interest rates; typical mortgage rates having fallen to around 5%.  The fact that you needed to borrow twice as much to buy a house meant that your monthly payments were around the same they would have been when mortgage rates were at 10% was ignored, not just by him but by everybody else.

            May 2007 came along and Tony Blair went off smiling into a cushy number with the UN working on Middle East peace, a job that you can’t really fail at as it’s unachievable, leaving Gordon holding the baby. vAs soon as he took over the reins it all went very wrong;  the wettest summer on record followed by the debacle that marked the end of Northern Rock and the start of the Credit Crunch. 

            Gordon had appointed the comedic ally named Alastair Darling to pick up the job of keeping the economy ticking over, ‘shouldn’t be hard really it’s gone OK over the last 10 years, just keep fiddling with the tax rates which just move the burden around a bit and you should be OK’.   The Northern Rock problems blew up in his face; panicked savers were shown ashen faced on the news night after night facing the loss of their life savings queuing outside branches like in the scene from Mary Poppins where there is a run on the bank.  What was required was strong and decisive action; put a floor under the bank, assure customers that retail deposits would not be forfeit.  What we got instead was a week of dithering and statements which were long on words and short on content not unlike his namesake from Blackadder.  Eventually, the bank had to be nationalised.

            As things have steadily gone from bad to worse since September 2007, we were assured that the problems at Northern Rock were unique to the business model that it was pursuing.  All other UK retail banks were well run and well capitalised we were assured.   Hmmmm! Not really panned out that way has it? It would seem that all the banks were following the same flawed business model.

            It must be said that it was the policies of Crash Gordon that have put the UK into a worse pickle than it needs to be.  But, the policies that our Darling Chancellor is now pursuing are full of good intent but are sadly misdirected.  Banks have been offered a lifeline by the government.  By underwriting a forced massive rights issue by the Lloyds Group and RBS the government have wound up as a majority share holder in RBS and owning almost half of the Lloyds Group.  This was all promised in rather too much of a hurry.  Would a private business buy into another business without performing a due diligence exercise?  Not likely, but Darling promised to underwrite the rights issue over a weekend without so much as a cursory glance at the books.  After the event the government were surprised to find out that 80% of the loan book at RBS was abroad, including 3bn pounds owed by one Russian gentleman who is rather loathed to pay it back.

            What the British economy needed was a shot in the arm, so in the Autumn statement the Chancellor announced a raft of measures designed to give the economy a boost.  Businesses were struggling with demand that had, rather than fading, gradually dropped off a cliff.  The best place to inject the cash would have been into business via cuts in corporation taxes, increasing capital allowances to encourage investment etc.   As a Labour administration, the government could not be seen to be pandering to business which is where the wealth of the nation really starts.  They had to be seen to be giving some to business and more to individual families.  Child benefits were increased by a couple of pounds a week, tax allowances were increased, but the major headline was given to a 2.5% cut in VAT.  The train of thought behind this was that if a tax rebate cheque were sent out to households (as is generally favoured by the US administration) householders may use it to pay down debt or just bank it.  In order to benefit from the VAT cut the British public would have to go out and SPEND ! 

The first impact of this hurried legislation was that businesses up and down the land would have to adjust pricing, tills, computer systems, maybe stationery all at 6 days notice, so the impact to business was a cost in the first instance.  There’s nothing to force a business to reduce prices.  They could just as well leave prices at the previous level and pocket the extra by paying the VAT at the reduced level.  Also, darling Darling has announced that the VAT reduction will be a temporary measure for 13 months only, the biggest fillip that this is likely to have is a sales rush in December 2009 which is not what he intended!

The cost to the exchequer of the cut in VAT is reported to be in the region of £12bn.  Now that could have gone as tax rebate to people on the lower rate of tax who are more likely to spend it than bank it.  The problem with the ‘SPEND IT’ plan is that the UK has a very small manufacturing base, so any money spent is likely to have a small impact with the retailer, wholesaler and distributor and a somewhat bigger impact in a land far, far away where the products are made.  The £12bn wasted in the VAT cut would have been far better spent on measures to increase spending by businesses.  A direct cut in Corporation Tax would just be put onto the bottom line, however increasing capital allowances and allowing business to depreciate capital expenditure in the first year would encourage companies to bring planned capital expenditure forward, perhaps increasing their efficiency and productivity.  

The government also put in place a number of measures to encourage banks to lend to small businesses with the government standing as guarantor for 75% of the loan value (known as the enterprise loan guarantee scheme (ELG)).  This was not discussed with the banks prior to it being announced to the public.  Reports in the media seem to suggest that businesses requesting these types of loans with their business bankers are met with blank looks.  

The companies that are most in need of cash are companies that are outside the target audience for these types of loans, think Woolworths and some of the major house-builders who have had, in the case of Woolworths, major cash flow problems, rather than Mrs. Miggins’ pie shop and Bob the builder round the corner.  It’s the failure of these major employers that will bring the economy down.  Many small businesses are run prudently with cash surpluses to see them through lean times.

The ‘Today’ programme on Radio 4 featured the story of a woman who ran a successful chain of cafes in Scotland.  Wanting to expand her chain she found new premises and agreed funding (£50,000) with the Bank of Scotland.  After signing the lease, the bank pulled her funding leaving her high and dry.  She heard about the ELG and trawled around all the other banks asking for a loan under the conditions of the scheme.  The banks had either not heard of the scheme or had not yet implemented a plan to lend under the scheme.  This has got to be poor communication on the part of the Government.  Banks being banks only make money from their loan book.  If somebody is going to stand as guarantor for 75% of a loan to an already well established business then it’s not a decision that takes much time…you’ve 100% of the upside and only 25% of the downside risks. When you are lending money to a purveyor of sausage rolls in Scotland this is not a high risk business model!

So, Crash Gordon got us into this position with his policy of leaving it to the Bank of England and excluding things that have gone up a great deal from the inflation calculation.  Darling is flapping around throwing money, OUR money, at the problem indiscriminately.  The Bank of England is cutting interest rates every month without waiting to see what last month’s cut has done and the treasury is issuing government debt at an alarming rate… both of which are debasing the UK currency.

Here’s a clue for marvellous Mervyn and the MPC….If cutting interest rates to 1% has not worked, cutting them to zero isn’t going to make any difference.  The problem is people and businesses don’t have the confidence, or the appetite, to take any more debt on even if it’s interest free.  Once interest rates are at zero, Merv has announced his intention to print more money!  Now this is a policy that’s been used before in Germany’s  Weimar Republic where this model pushed inflation in 1923 to, and this is not a misprint,  560 billion percent and more recently in Zimbabwe where inflation is currently a more modest 231 million percent. 

Maybe Darling and Merv have cooked this up as a ‘cunning plan’ as inflation at those levels would quickly mean the Government debt levels would shrink in real terms very quickly but I wouldn’t count on the international community buying any more UK debt after that.

You’d think that buying a “quality” newspaper at the weekend would mean that if you hold it by the main fold and shake it, some “quality” items might drop out of it - but you’d be wrong.

Take last Saturday’s Telegraph as an example…..

What fell out of it was a glossy booklet sponsored by the Reader’s Digest proclaiming…”1,000 Ways to Save Money and Time”.  Obviously this sparked up a bit of interest as in the current climate we’re all looking to save a few bundles of cash and saving time is always a neat trick when you don’t have any to start with!

I opened the booklet and flicked through it eagerly.  Here are a few of the “top tips”:

1. Separate toes when applying polish Get the comfort of a salon treatment when giving yourself a home pedicure. Just place marshmallows between your toes to separate them before you apply the nail polish. Make sure your feet are completely dry though or they may get sticky!

Sorry but I don’t get this…..what woman in their right mind is going to think “I must get some marshmallows from the supermarket so that I can paint my toenails”?  It’s just never going to happen, plus who gets to eat them afterwards?

2. Make a facial mask Pat your face with mild yellow mustard for a bracing facial that will soothe and stimulate your skin. Try it on a small test area first to make sure it will not be irritating.

This sounds highly dubious to me and brings a whole new meaning to hot flushes!

3. Wash lettuce in washing machine If you are expecting lots of people for an outdoor lunch and have lots of lettuce to wash, place one pillowcase inside another. Pull apart the lettuce heads and fill the inside case with lettuce leaves. Close both pillowcases with string or a rubber band and throw the whole package in the washing machine with another large item, such as a towel, to balance it. Now run the rinse and spin cycle. Your leaves will come out rinsed and dried more effectively than in a salad spinner. 

Hmmmm…..first of all, no matter how big your party, nobody eats this much lettuce especially after you tell them how you “cleaned’ it.  Secondly, aren’t you meant to carefully pat lettuce dry so it doesn’t bruise?

4. Make an extra grill If you have a big party or barbecue planned and the grill is not big enough to handle all those burgers, sausages, steaks and hot dogs, improvise a second grill by building a fire in an large old pot. Cook on a wire cake rack placed over the pot. After you are finished, put the pot’s cover on to put out the fire and save the charcoal for another outdoor cooking session.

Or in true knokknok style, ask a friend if you can borrow his!

5. Make cut flowers last longer Don’t throw away the last drops of a bottle of soft drink. Pour about 50ml into the water in a vase full of cut flowers. The sugar in the drink will make the blossoms last longer. Note: If you have a clear vase and want the water to remain clear, use a clear drink, such as Sprite or 7-Up.

Yes, I can see it now…..children all over the land topping up their glasses of pop and, instead of emptying the last few dregs, they miraculously hold the last bit back to keep for their mother’s cut flowers…a likely story!

I had expected to read a few gems that would help make the credit crunch a little more palatable but this booklet is a joke and a complete waste of time (even more so than this article)!  I wonder how much it cost to produce?

I shan’t be buying the accompanying book.

The whole world seems to think that their job is the next to go and maybe it will, but people need to keep in mind that a company shedding 25% of its staff would be big news indeed, however 75% are still in a job.

It’s also worth noting that the headlines in the Daily Mail, what I refer to as the ‘Daily Outrage’ that xyz bank is shedding half its staff does hide the fact that a good number of those will work for business unit abc which is being spun off or sold to another bank, so strictly speaking the Daily Outrage is correct the payroll will shrink by 50% but not all those 50% will be walking away clutching a redundancy cheque and a P45.

In the ‘Great Depression’ between 1929 and 1935 things were about as bad as they could get but only 10% of business folded, when the economy recovered the 90% of businesses that survived doubtless divved up the trade from the failed 10% between them. In a similar vein Matalan, Primark and Game are seeing increased trade from the demise of dear old Woolies.

This period of non stop bad economic news will, like all things pass and we’ll move on to better times, perhaps we’ll all be better people for the experience. But everybody should get this into perspective it’s not the end of the world or even the beginning of the end of the world. Things have been far worse than this; 1974 Britain had a government enforced 3 day working week. Power cuts and shortage of commodities particularly sugar I seem to remember were the order of the day. The recession of the early 80’s when I was starting my working life wasn’t a particularly rosy time either, that soon gave way to the boom years of the mid 80’s and the rise of the yuppie. Early 90’s another biggie which gave way to the longest continuous period of economic expansion Britain had ever seen, you remember that – the one that has just come to an end.

In a world of instant this and instant that, people’s expectation of action and effect has become distorted; an interest rate cut on Thursday lunchtime will not lead to the end of the recession in the following month.  Petrol prices have plummeted in the past 3 months, mortgage costs will be following them down, remember many people have mortgages that the payment level is set on an annual basis. These will start to fall typically from the February payment. Gas and Electricity prices will start to come down in the spring.

All these factors will lead to people having more cash in their pockets. However, what they need is the confidence to spend it rather save it. Mervyn King and Alastair Darling cannot give people confidence it’s something that will come from within!

Remember this famous mantra from Bill Clinton’s 1992 election campaign? I was in the states during that final month of the campaign and whenever the TV was turned on this was the cry from the electorate. I dare say that if there was an election in the UK in 2009 that would be the tag line from the opposition parties. Perhaps the cry should be:

 “ It’s Confidence Stupid”.

 What’s different in the economic landscape today compared to two years ago, the missing factor is confidence and without it we are lost. Confidence is the magic ingredient in so many things, love, careers being two good examples. Let’s look at Richard Branson, arguably Britain’s leading business person. Is he as clever as a chap with two heads? Although he doubtless has an IQ that is above average, I could probably nip to the back of the office and drag up two people at random that would out score dear old beardy in any given IQ test. Does he have innovative business ideas, mmmm airlines, mobile phones and fizzy pop had rather been done to death before he came and scrawled ‘Virgin’ across them. No, what separates him from the dull but worthy Arthur Pewty chap at the back of the office with an IQ pushing 200 and a great line in trousers made from man made fabrics is confidence. The confidence that 25 years ago lead him to say,

“Let’s lease some planes and start an airline”.

In matters emotional, the guys (or girls) with all the luck are not necessarily the good looking ones, they are the ones with the confidence to ask someone out on a date, knowing that the likely outcome is that they’ll agree to the date. Our dear friend Arthur with the large IQ isn’t getting a date because he’s never asked, as in his mind they would say no in any case.

January 2007 the world was still brimming with confidence, confidence that we could make the payments on that car loan, confidence that we could extend the mortgage and cover the increased payments, confidence that we would be in gainful employment in 6 months time.

Where has all that gone? It went out of the window when in August 2007 BNP Paribas decided that so many people in the US were not making their mortgage payments that that they could not place a value on the bonds that were at the far end of BillyBob and Emma-Lou’s mortgage payments. It had all got too much as their miniscule brains could not read the smaller print on the mortgage contract that said that the 2% interest rate was just for the first 6 months.

Once you can’t put a value on something it becomes effectively worthless thus all the banks’ balance sheets were full of worthless assets. A financial instrument just like your car or house has no intrinsic value; they are worth what somebody else will pay for them. Now, the banks are arguably architects of their own misfortune. The rather splendid idea of packaging up mortgage debts into bonds that you sell on to get the debt off your balance sheet is rather negated if you then nip out and buy in the same steaming piles that have been put together by other banks. That’s just selling something you knew exactly how risky it was (you lent them the money) and buying something that you’re not sure about.

So, that’s how we got here. The banks now need to rebuild their balance sheets. This involves lending much less to businesses and Joe Public and being far pickier over who they lend it to. I once read that for every dollar a bank loses their lending is reduced by 10 dollars. With the sort of losses that banks are announcing you don’t have to have the 200 IQ of our friend Pewty at the back of the office to see that there will be a massive shortfall between cash required and cash supplied.

This, as everybody knows is leading to mass layoffs in the banking and all other industries.

The way these layoffs are undertaken by businesses doesn’t help that magic confidence ingredient that the economy requires. A business seems to perform layoffs using the following timetable of events:-

1. Make an announcement that due to prevailing economic circumstances head count will be reduced by 15%. Consultation with workers’ representatives will take place and further announcements will be made in 4 weeks.

2. 100% of the employees clamp their wallets shut for the next 4 weeks as it could be them, 85% will have done this for no good reason as it’s not going to be them but just in case the wallet stays firmly shut.

3. Four weeks later the unlucky 15% will be served with their redundancy, they are likely to have 3 months notice, 3 months of being in the office/factory clearly sucking confidence away. The 85% that are left don’t particularly feel like booking a holiday and flaunting in front of the unlucky 15%.  

You can see from the above sequence of events that 100% of the people in a company reduce their spending dramatically for a 4 month period thus causing a ripple effect throughout the economy. 

Wouldn’t it be better to tap the unfortunate 15% on the shoulder one Monday morning give them a cheque and wish them all the best for the future rather than the protracted 4 month process outlined above ? It’s going to be horrible for them but it’s not going to be less horrible in 4 months time.

It’s quick, clean and all over in a day and the 85% can breathe a sigh of relief and get down to Currys for that flat screen telly, thus keeping the staff at Currys nipping round to Starbucks for a 3 quid cup of coffee flavoured froth and the economy slowly starts to get up off its knees!

So how can we fix this?  How can we look at this beast of a recruitment industry and see beauty in it? Well first we need to look in the mirror and ask ourselves, “Who is this business for? Who is it supposed to benefit?”

The answer to those questions obviously depends on what your role is - a recruiter, an agency or a candidate.

For recruiters (read the old-fashioned meaning of companies that actually employ people) it’s fairly simple - we want the best people for the lowest cost.

For agencies - we want anybody for maximum profit.

For candidates - we want an interesting job that pays a lot of money.

Well ok, I’ve over-simplified things and people aren’t that stereotypical in real life but it states the basic positions of the parties involved in this uncomfortable triangle.

The Bad and The Ugly

I don’t think I’m on my own here when I say that from a candidate’s view I don’t see what value an agency adds to the recruitment process.  They are simply an obstacle between the candidate and the recruiter, a third party that can shield the truth (both ways) between the other two parties.  This can’t be healthy and isn’t the best way to do business.

It used to be that an agency would send me a bottle of champagne and a box of Belgian chocolates at Christmas, but sadly those days are now gone……. I don’t even get a Christmas card any more!  So much for the brave new world where social networking is King!

The Good

I guess I shouldn’t gripe about the current system and its processes without having a better alternative up my sleeve.

Well I have got a better vision although to realize it will take time and you can bet there will be a lot of opposition from certain quarters……

Let’s all promote ourselves instead of using job boards. 

If all recruiters and agencies could find you for free and see when you’re available or looking for work then we can do away with all this cloak and dagger stuff.

Personal promotion online and networking - it’s the way forward.  Wave goodbye to job boards. 

I’m quite a fan of “Software as a Service” (SaaS).  The idea of having access to everything from anywhere is pretty appealing to me and I’ll give you a practical example of what I mean:

A couple of months ago a friend had asked me to prepare a quiz for her birthday.  Trying to plan things a little in advance for once, I wrote the quiz a week or so before the event and emailed it to her from my Gmail account asking her to get in touch if she had any problems with it.  That’s where I went wrong!

A day before the quiz I was at the airport waiting to catch a flight to Barcelona to see my brother.  I got a text message just as the flight was called……..”Hi.  Hope you’re ok.  Have you managed 2 sort out the quiz for 2moro?”

My heart sank for a second as I realised that she hadn’t received the email.  I had let her down.  If only I’d called her after I’d sent the email I wouldn’t be in this predicament!

I figured out that all was not lost as I strapped my seatbelt on.  Of course! My email (and all its attachments) were in the cloud somewhere.  All I had to do was get access to the Internet, logon to my Gmail account and I could sort it out. 

If this had happened five years ago I couldn’t have fixed it but with SaaS email it was easy.  Long live SaaS and Gmail!

If economies do falter further or go into free fall there are a two basic outcomes; unemployment will increase as companies tighten their belts or collapse and talented people in secure jobs will want to stay put.

At the same time, firms will be left with no choice but to do more with less and become inventive and creative (with little budget) to keep good people.

What’s left of 2008 and for at least the whole of 2009 will be a time for reflection for a lot of people.

Did we simply get too greedy?

Are we who and where we want to be?

Did we really sign up for this? 

We’ll all take stock of where we are to one degree or another.  Some people will take time off and disappear to foreign fields or their gardens.  Others will try to enhance their skills by self-studying. A few brave souls will consider finally committing to that big idea, that dream that they’ve been putting off for too long.

We’ve all longed for simpler, more fulfilling lives for years – maybe, just maybe 2009 is that year?