Leaders: Long-term danger in short-term stimulus

Published on 22/09/2012 00:00

WORDS spoken by chief investment officers of fund managers are normally buried deep in the financial pages of newspapers. But the speech made by Keith Skeoch, chief executive of Standard Life Investments (SLI), last night deserves wider attention.

Mr Skeoch and his colleagues make decisions affecting the pensions of millions of people. Those who make private provision for their income in retirement rely on people like Mr Skeoch to put their money where it will earn a long-term return and grow into a substantial sum and, therefore, a significant income at retirement. If the likes of Mr Skeoch make wrong decisions, a lot of tomorrow’s pensioners will be significantly the poorer.

Thus his comments, which go beyond the daily concerns of what company’s share value and dividends are likely to go up and what will go down, are of particular interest. And he has put his finger on a difficult problem – that in order to fix the imbalances that caused the recent financial crisis and subsequent recession, policymakers, albeit with good intentions, risk creating another different set of imbalances that are just as problematic.

A good example is the effect of quantitative easing. This is the injection of money into the economy to encourage recovery by the device of the Bank of England buying government bonds from banks and to a lesser extent from financial institutions such as SLI, giving the banks at least more money which they can lend to companies and mortgage-seekers.

Though the precise effect this has is hotly debated, there is some evidence that it is stimulating more economic activity than would otherwise be the case. But the side-effect, which greatly concerns Mr Skeoch and his ilk, is that the return they earn from government bonds is reduced. As these bonds are a major part of any pension fund portfolio, that depresses the value of future pension pots and private pension income. This new imbalance in turn makes pension fund managers look elsewhere for returns for their customers, which means, in the main, stock markets.

And this is where this year’s revolts by investors against unjustifiably high bonuses to directors, especially when share values and returns have shrunk, are important.

These uprisings appear to have worked in forcing boards to look less to short-term and short-lived bonanzas and more to guarding the long-term health of the company. But, he points out, other accounting rules designed to 
encourage prudence act in the opposite direction by demanding that values of assets be marked according to immediate market prices rather than their longer-term value.

The message, quite simply, is that policymakers need to step back and examine the wide screen impact of their actions. Otherwise policy conflicts will undo, albeit unintentionally, the reforms now being implemented.

Chief whip’s apology is not enough

Chief whips of political parties, in charge of making sure that MPs vote the way their leaders want, are notorious for using salty language and lurid threats. That language, however, is supposed to be confined to Westminster’s inner sanctums and definitely not used in public – still less to officers of the law.

Andrew Mitchell MP, the UK government’s chief whip, clearly forgot that when a police officer told him he could not take his bicycle out the main gates used by cars to exit from Downing Street to Whitehall and that he should dismount and use a pedestrian gate a few yards away instead. According to the police officer, Mr Mitchell used foul language which, under Scots law at least, would make him liable to be arrested and charged with a breach of the peace. Mr Mitchell denies being so abusive, but it is unclear why the officer, who stands by his version of events, should have invented it.

Indeed, this is a more serious incident as, presumably, the

police officer was simply enforcing standard security rules at a location that is under constant threat of terrorist activity. For Mr Mitchell to attempt to

undermine those rules, and to denigrate an officer responsible for maintaining them, is quite disgraceful.

Mr Mitchell has apologised and David Cameron has expressed severe displeasure. But to many members of the public, that will not be enough. The political damage is not just in the bad language, but also in the haughtiness of Mr Mitchell’s manner, allegedly telling the officer he was a “pleb” who should learn his place.

To many voters, that is symptomatic of the way the government thinks of them. Mr Cameron should sack his chief whip.