There’s no doubt that Italy needs some strong guidance but with Super-Mario’s appointment democracy has gone out of the window. This sets yet another very dangerous precedent in the EU’s gradual erosion of democracy.

This isn’t the first time that the EU has dictated that a democratically elected politician should be removed. In 1999 Austria was threatened with sanctions after Jorg Haider was elected to the Austrian Parliament and became a cabinet member of the coalition government.

Haider was a right-wing and controversial politician but for EU leaders to call for sanctions was unlawful since there is a non-interference clause in EU law. This means that the EU can have no say in the democratic process of any member state, no matter who gets elected.

But while Haider was definitely undesirable, he wasn’t a nation’s leader.

So where does this leave us with Super-Mario and who on earth is he anyway?

The first thing to consider is that he isn’t a proper politician. He’s never stood for election in anything.

This means that he cannot fully appreciate the political risks involved in what he’s doing. It also means that he has nothing to lose if he botches it all up, he doesn’t have to face re-election. On the plus side, the fact that he doesn’t have to worry about re-election means that he may be able to make tough decisions without fear of the political fallout.

The second thing to bear in mind is that he’s an EU insider, a yes-man. He was a European Commissioner appointed by Berlusconi, far from an elected position. This means that (in my view) he’s going to be reluctant to say no to anything the EU asks him to take on for the sake of Italy’s economy, even if it means severe hardship for his country.

The final thing we should know is something that will certainly work in his favour: he’s an economist. But is he an economist with the insight to realise that a bailout, based on a loan, is a not a sensible way to sort out a country’s debt problem?

I hope for Italy’s sake that he has the balls to make the necessary decisions to put the country on the road to stability. Italy’s borrowing costs are now at a record high and the markets are waiting with bated breath for decisive action.

The problem, and every EU politician knows this (but would probably never admit it), is that the Greek people will never vote in favour of slashing their ill-gotten gains (especially since the austerity plans will benefit banks more than anyone else).

This means that the EU and IMF have a very unsavoury set of options: they either allow Greece to default and thus face the market turmoil and threat to lenders; they renegotiate the bailout conditions; or they boot Greece out of the Euro and/or the EU altogether and allow them for sort it out themselves.

Personally, I think they should do all three.

It has become obvious (at least to me) that the Greek politicians care more for saving their own careers than they do for saving the Greek economy.

But anyway, here’s what I think will happen in the coming months:

• The ‘no’ vote will force the EU and IMF back to the table to try and renegotiate the austerity demands, thus giving Greece more favourable terms (and making the Greek Prime Minister look like a saviour to his people).
• The Greek government will never be able to implement cuts in spending quick enough to avoid a default. So the EU and other lenders will try and stage a controlled default.
• The lenders (mostly banks) will write off even more Greek debt in an effort to avoid having to throw more good money after bad on their balance sheets.
• The Greek Government will drag their heels on implementing any austerity measures that they end up agreeing to. They’re so used to cooking the economic books anyway so a little more fudging will take a while to be noticed.

First off: the ring-fencing doesn’t go far enough. It will still allow the investment and retail arms of banks to be intrinsically linked. See george-osborne-falls-short-the-bank-firewall-is-a-sham/ for more on this. The government should break the banking sector up into separate retail and investment businesses.

Second: they still haven’t tackled the problem of debt derivatives and the danger they present. Warren Buffett considers many debt-backed asset classes, such as Credit Default Swaps, to be the biggest weapon of mass destruction on the planet (and he’s been proved right in recent years). Unfortunately debt-backed asset classes are still widely available, still unregulated and still poorly understood by investment bankers.

Third: I’m unconvinced that the government really wants to change anything any time soon, in fact I think that they’re reluctant to implement the recommendations of the report at all. The reasoning behind this is that the timescale is far too long. Why wait until after the next general election when the country really needs banking reform as soon as possible?

The Federation of Small Businesses (FSB) is calling for the reforms to be done much sooner. They accuse the banks of stifling economic growth and business stability because they’re still  not lending at affordable rates or without unreasonable conditions attached (if they’re lending at all).

Fourth: The long timescale for implementing the recommendations will give the banking lobby ample time to derail the plans.  In this, the government is at a disadvantage to the banks; the government is unable to think beyond the next general election whereas the banks can take a longer view.

I’m convinced that over the next 4 years these plans will be watered down as the banks plead poverty and their lobbyists get stuck into buying political influence. If the Coalition is ousted at the next election then we’re back to square one, since the banking industry can then attempt to convince the next administration that the banking reform is unworkable or even unnecessary.

Further to that, it’s possible that the economy will improve and public opinion will become indifferent to bank reform. Then there will be little political imperative to make any changes.

Fifth: There is still the issue of toxic debts being held by many banks. These are loans that were made by the banks to those who were not in a very good position to be able to pay it back. In many respects it would be worthwhile for the bank to just write these debts off as soon as possible since keeping them them skews the reporting figures.

Sixth: The worldwide debt crisis is far from over. Almost all western economies are suffering under the weight of unmanageable government debt. Much of these debts have been funded by banks, so if (or rather ‘when’) any government (such as Greece) defaults then banks will suffer as a result and this will make their finances  even more difficult. From this the banks would argue that reform is impractical (and too expensive).

Seventh: The government is reluctant to damage the financial sector in the UK. This is because London is now the  financial capital of the world and brings in a lot of investment, creates a lot of jobs, and generates a lot of taxes. If the government creates a regulatory framework that is too restrictive then some financial institutions will move  offshore (or so they threaten).

In this I think the government should just let them go.  If the banks (especially the investment banks) want to move and continue with speculative and risky investments then let them be a burden to another country, we certainly don’t need them and the destabilising affects they create.

Not only that, but we certainly don’t need banks that generate massive profits but don’t pay taxes http://www.guardian.co.uk/business/2011/feb/18/barclays-bank-113m-corporation-tax

Yes we might lose the status of financial capital but if that’s the price of a stable banking sector and business economy then it ought to be worth paying.

So here’s my prediction on the Vickers Report and banking reform: Over the next four years the banks will worm their way out of the most stringent Vickers Report recommendations. They will plead poverty, drag their heels, threaten to leave the country, buy political influence, commit to a long and drawn out PR campaign and just delay the implementation of the reforms for as long as possible. I think that under all of this pressure and delay the government’s commitment will wane and public interest will move on.

Thus, I’m convinced that little will fundamentally change in how bank finances work.

Fundamentally it’s fairly simple: government finance is, in many way, just like a household, you can’t continue borrowing bigger amounts forever. Unless you continually increase your income you’ll eventually  run out of money to keep up the repayments, or the lenders will decide that you’re unable to maintain your position and start asking for payback. The US has had it’s credit rating downgraded (meaning that they’ll pay a higher rate of interest on what they borrow) and that’s just the beginning.  The markets know it and are reacting accordingly.

If they don’t get to grips with it the markets will eventually realise that (underneath the well-polished political veneer) Uncle Sam is in as bad a shape as Greece, with an increasingly high proportion of GDP being taken up by interest  payments on debt. At that point no amount of political wrangling will get them out of the hole, the world’s biggest debtor nation will be held to ransom by their creditors and the dollar may lose it’s position as the world’s reserve currency ( this would destroy the US economy but is the absolute worst case scenario).

Sadly it’ll be ordinary Americans who pay the price, the political elite have done well to fill their own pockets by mortgaging the future wealth of the country.  Tony Blair and Gordon Brown did very similar in Britain but have been exposed, something that American voters should be calling for at home.

The great thing is, businesses can keep “open as usual” thanks to bartering. It’s nothing new, in fact, before a monetary value was put to note and coin, that’s how the world worked. So is it time for bartering to come back? It already is!

You wouldn’t know it, but bartering is big, on a world wide scale. There are barter networks full of thousands of businesses, all looking for the next good trade; but why!?

Barter makes use of something that almost every business has; idle resources. If a business has idle resources, there is room to make or save money using bartering. By thinking outside of the box, businesses can start to get their revenue figures back on track.

Idle resources could be anything; it really depends on the business. A web design firm may be paying staff 8 hours a day, but only have enough work for 6 hours a day. A camping wholesaler may have gone a bit crazy with the whole “economies of scale” approach and been left with 1,000 extra sleeping bags; items they might never sell!

Using the barter system, they could do a two way exchange and swap goods/services they don’t need, for ones they do. Sounds simple? Not always!

Barter networks are great things. One of the main problems with the barter system is a business may find another business offering what they want, but the feeling is not mutual. The transaction will never happen without a facilitator.

Most barter networks have something called “trade dollars” and this is what helps them become the facilitator. So if a business charges $50 per hour for their time and barters 10 hours services, they are gifted 500 in trade dollars. They then use those trade dollars to purchase goods/services in the barter network that they require.

A lot of businesses barter their goods/services out at a lower rate, to ensure they are running at full capacity. They pick up extra business (possibly even long term clients), but this has no direct affect on the consumers that pay the sticky prices they offer on a day to day basis.

Business is changing. Cash sales might be down for the majority, but this can be easily compensated by getting involved with bartering and making use of those idle resources!.

And in my view that’s a good thing.

You see, for too  long now the market has been going up (see chart below), it went from around 4500 in May 2009 to over 6000 in January this year. It looked like a bull market despite the fact that the UK economy was in a dire condition.

If you’re an investor this might seem like a very good thing, very impressive growth. Unfortunately, this growth was based on short-term thinking and a perceived worldwide financial recovery while ignoring what’s actually happening in the broader economy.

But short-term thinking isn’t responsible for the current nosedive in the markets, it’s debt that has cause this.

Lots and lots of debt that just won’t go away.

This debt isn’t the fault of company directors or market traders, it’s the fault of governments. This debt is sovereign debt where governments have borrowed more than they can afford to pay back.

A good example is Greece, where they are currently having to borrow 125 billion Euros a year just to help pay for all of the things they’ve committed to spending. And this is a problem for Greece because they owe more than they can hope to pay back any time soon. Government income has gone down and now the country can’t pay it’s debts.

This kind of borrowing is known as a budget deficit: the expenditure of the government is more than the government actually brings in from tax and other revenue, so they’re forced to borrow. Budget deficits are common and not normally a problem if the government can pay and lenders are willing to fork out.

So here’s a quick explanation of how a budget deficit works: Imagine that a government wants to build a major road but they don’t have enough cash in the bank to pay for it. So they ask the markets to lend them money through buying a bond, which is effectively a loan with a given rate of interest. It’s a bit like a mortgage on a house; you don’t have the money in the bank to buy outright so you borrow the amount over a period of years while making regular payment to pay it off.

These bonds can be bought and sold like many other market assets. The government itself guarantees the loan and most governments are seen as ‘safe’ borrowers because governments usually borrow within safe limits and normally don’t go broke.

When an economy is healthy and tax income is enough to pay the loans (and the interest) then everyone is happy. Voters are happy because government spending often creates jobs and the lenders are happy because they are getting their promised return on investment.

However, when the market thinks that a government is borrowing too much or suspects that a government might not be able to pay the loans when promised, the first move is to downgrade the credit rating of that government and increase the interest rate. This then discourages that government from borrowing more because the loan will cost more to pay back.

And this is what has happened to the USA in the last 48 hours. Their credit rating has gone from AAA (the highest rating possible) to AA+ (the next one down). This may not seem like a lot but the US government is now going to have start paying a little more to borrow money and, since they’re borrowing half a trillion dollars a year, that’s going to mean a heck of a lot of extra interest.

The USA has been borrowing almost one and half billion dollars a day (that’s $1.5oo,ooo,ooo) to stay afloat. And over the last week the US Government finally realised that it was unsustainable and they were going to have to either raise the accepted level of borrowing or cut spending immediately. They’ve actually decided to do both, which is a sensible move. Although, personally, I don’t think that they’ll cut spending that much at all.

The problem is that the markets have reacted badly through fears that the USA would default on it’s debts, in other words they might not pay what they committed to when they issued bonds to the markets. The USA has, for many years, been seen as a safe borrower. Now the US government has to realise that they are not bigger than the markets and that debts will eventually have to be paid back.

But who is to blame for the US deficit problem?

Well, during the Clinton administration the US budget was balanced, there was no deficit. But Bush started his wars in Iraq and Afghanistan and borrowed heavily to pay for them, thus putting the United States into debt at levels not seen since the 2nd World War.

And so, over the last few weeks, this uncontrolled borrowing has been brought into sharp focus. The markets have panicked, realising that the market growth over the last few years was based on nothing more than false confidence.

But it won’t be the end of it. This borrowing cycle has to be put to death. In my view governments should only spend what they earn (same with households really). Then your finances won’t be at the mercy of lenders and markets.

Since the beginning of the current credit crunch I’ve become increasingly convinced that governments who’ve been reckless with their finances should be allowed to default. It’ll cause major upheaval in the financial world but only for a short time. The politicians responsible will be quickly ousted, the lenders will realise that governments aren’t the safe borrowers that they thought (and lend more cautiously), and we’ll all have to start living within our means (which has to be a good thing).

But until the budget deficit concept is properly managed, governments can always be held to ransom. And I’m not a fan of that at all.

The front page headline should be: “WE’RE SORRY”, “WE WERE WRONG” and “WE APOLOGISE”. To Milly Dowler, to the families of 7/7 London bombs, to the families of fallen British soldiers, and all the other people that the News of the World have illegally and immorally phone hacked. These people will now never have a printed apology from the newspaper that has exploited and betrayed them.

The decisi0n to shut down the paper so suddenly is a calculated and cynical risk-management-damage-limitation business choice, nothing more. The News of the World was starting to face a serious backlash from the public, politicians and other media. We were outraged that a newspaper could hack the phone of a (at the time) missing teenager, interfere with a police investigation and possibly give her family false hope.  Set in motion by revalations in the Guardian, the Twitter and Mumsnet outrage was joined by BBC headline news, Under increasing heavy online pressure News of The Worlds advertisers started backing out. A wall of shame was being prepared for next Monday to list the remaining advertisers. That has all now been cut off: close the paper, get rid of the problem and never have to say Sorry

Even I pesimistically predicted on twitter that any boycott of News of the World wouldnt last very long. Maybe a few weeks, just until the next juicy footballer sex scandal. Lay low for a while, have a couple of Cheryl Cole front pages, and readership would be back to normal I thought. 

I dont think anyone expected this. Rupert Murdoch has sacrificed a national newspaper and 200 journalists to protect his wider business (and future  SKY TV takeover deal?) and save and protect disgraced News International (and former news of the World and Sun editor, Rebekah Wade/Brooks) who was editor in charge at the time of the phone hacking.

Cynical and calculated, damage limitation – closing the News of the World looks like a victory for those planning a boycott, the battle against the News of the World has been won! But theres now nothing left to boycott tomorrow (SO? the NOTW has gone) – yes but theres nothing left to act as a focus of public anger and outrage. I predict the public anger will abate and Murdoch / News International can close ranks and defend its position and manage the scandals and battles to come.

Are there bigger and worse allegations/relevations to come? Most definately, there has to be,  and Rebekah Brooks will be at the centre of it all. And now theres 200 hacked-off ex – News of the World staff with inside knowledge (with a 90 day gag clause in their contract?). There are bigger problems with News International, the relationship of the powerful media to politicians and the police. More questions to be asked:

What are the links between political parties and the media? Why/how did Coulson come to work for the Prime Minister? How much did Cameron know? What cover-ups have occurered in the past? Has there been incompetance or corruption in the Police? Was Tony Blair keen for Labour not to expose phone hacking? (and Why?) Who else has been hacked? Which other newspapers have done the same?  Why are the Murdochs protecting Brooks? Will Murdoch’s Sky takeover deal go ahead?

I dont care if you agree or disagree with the above, if you’re politically left or right. But if you are thinking about buying a News of the World tomrrow as a souvenir, just think:

 If I buy this, I am ok with a newspaper hacking a murdered teenage girls mobile phone, for a sake of a story?

The challenge for the civil service unions is that many civil servants (even union members) can’t see the point in one-day strikes. Most civil servants are frustrated by the government’s attempts to change the pension entitlements (as most of us would appreciate) but going on strike and losing a day’s pay really doesn’t have much of an impact.

Most striking civil servants would have gone back to work on Friday to find that little has changed but that the work left undone lies waiting. This then puts pressure on the staff to catch up with the backlog.

The interesting thing is that the government really holds all the cards in this situation. The unions will struggle to call out an extended strike because many civil servants can’t afford to take too many days of unpaid time off. Not only that but the unions don’t really have the clout that they once had with the workforce and many civil servants aren’t even members.

However, the teacher’s strike had a bigger impact since many parents couldn’t go to work because they needed to stay home to look after kids who would normally be at school. Thus the teachers found themselves getting little sympathy from the public at large.

Having been a teacher myself for a while I can appreciate that it’s not an easy job. The holidays are generous but the stress of managing classes and the work that goes around them (not to mention the endless stream of government initiates) makes it very draining to say the least. Many teacher work 60+ hours a week at a rate of pay that would be considered poor in the private sector.

Still, not all teachers went out on strike. But the number that did was big enough to brass off large numbers of parents.

While the teachers were on strike, thousands of employees were forced into an unplanned day off work and many employers were left very unimpressed by the teachers’ action (since small businesses really miss even one employee being off work). And the customers (the children who were meant to be in school) are now a day behind in an already overfull curriculum.

As a result, many folks have even less sympathy for teachers. Despite the long hours and high levels of stress, teachers still get nearly 12 weeks holiday a year and their pensions are part funded by tax payers (even if their pensions aren’t that great any more anyway).

The government only has to watch the teaching unions make their own lives more difficult through calling a strike. Then, with right PR, they can easily swaypublic opinion against the teachers by blaming them for such disruption to parents’ working lives.

So, what has the strike actually changed? Not much really!

So, what has he done?

Basically, very little of any substance.

They set up Project Merlin to get banks lending (particularly to small businesses) but it hasn’t really made much of an impact. Evidence from Chambers of Commerce and FSB indicates that business lending is still not very forthcoming.

The banks agreed to pay less in bonuses.  But that means little since the banking sector is struggling so bonuses were going to be down on recent years anyway.

The Chancellor introduced an extra levy on banks but it will only bring in an extra £800m, which isn’t much when compared with banking profits (especially since Barclays only pays about 3% tax).

They’ve forced the banks to keep more capital reserves which reduces the likelihood of another bailout since they can call on their own money if they get into difficulty.

The Independent Commission on Banking suggested breaking up the banks to split off retail and investment banks but George Osborne’s solution is to put into place a ‘firewall’ between invesment and retail banking and this is where I take issue.

In my view the bank firewall is a sham.

And here is why I think that:

1. The fact that investment and retail banking are still linked means that there is still little to stop the retail banks from allowing the investment arm from taking risks with the bank’s (or rather the clients’) money. They will still be the same company and there is no imperative for the retail arm to do due diligence on investments made.
2. If the investment arm fails and takes all the retail arm’s investments with it then the firewall will be worth nothing. Even former Chancellor Lord Lawson as expressed doubts about how it watertight the firewall would be since the pressure to make a profit will encourage banks to find workarounds for the sake of profits (something banks are very good at).
3. Investment banking isn’t banking at all, it’s a financial service. It’s purely for making profits on markets and nothing to do with deposits and lending. Retail and investment banking should be considered very distinct business types.

So here are my suggestions to improve the situation:

• Break the banks apart to make retail banks and investment banks into standalone businesses. Thus the investment companies could be allowed to fail (as Lehman Bros did) and the retail banks would be less affected. In the USA, retail banks are not allowed to engage in investment activities.
• Regulate the debt derivatives markets. Debt derivatives are very complex and very few people understand them, even among those in the investment banking sector.
• Regulate the investment ratings agencies such as Moody’s and Standard & Poor. The ratings agencies were heavily swayed by the banks who created complex debt derivative products that were inherently high risk. Thus the ratings agencies gave A ratings to investments that should have been considered junk.
• Force the banks to do proper due diligence (as they do with lending) with any investments they make. Lack of due diligence is the reason why banks invested so heavily in debt derivatives that they simply did not understand.
• Change the rules so that the CEO and other board members of any bank that fails will face jail time if it can be shown that the bank has taken on unnecessary risk with client’s money. After all, the money that the banks use belongs to their clients and shareholders and not to the bank.

These moves will help to avoid the likelihood of retail banks getting too heavily into risky investments that they don’t understand. The knock-on effect is that the chances of retail banks failing will reduce significantly.

If we rely on the banks to regulate themselves then we’ll be back in the same boat sometime in the near future. However, it seems that governments have a habit of ignoring the past when tackling the banking sector.

However, some local authorities seem to be in love with Tesco so much (and Leicester City appears to be one of them) that it seems that they want to allow a store on almost every available corner. And, therein, lies the problem.

You see, Tesco has no real interest in the local economy – only in opening up as many stores as possible to steal market share and therefore increase profits. In itself this isn’t an issue, that’s what the business world is like.

But I take issue when local small retailers are negatively affected and livelihoods are destroyed as a result of poor decisions made by councils to allow Tesco to pop up everywhere.

I have an example just round the corner from where I live. There is a row of about 10 shops including a newsagent, a butcher, a baker and a small Tesco (sadly no candlestick maker). There used to be a small fruit and veg shop but it closed down not long after Tesco opened up (with the loss of two full-time and 3 part-time jobs).

So here’s what’s happening: The small businesses can’t compete with Tesco and, as a result, they are struggling (with one down already).

It may just be a matter of time before the newsagent closes because Tesco sells newspapers, magazines, cigarettes, sweets and National Lottery tickets. I hope the bakery doesn’t close just because Tesco sells bread, cakes and sandwiches. And the butcher has seen a reduction in business because (no surprise here) Tesco sells meat and pies.

I think it would be a social and economic travesty if the small local businesses close and those jobs are lost as a result of Tesco being allowed to squeeze out the competition.

Now I’ve heard the argument that Tesco normally creates jobs when it opens a store. And yes, people are employed.

But think about this: if all of those small businesses mentioned above have to close, then how many jobs are lost as a result? Typically under these circumstances, more than the Tesco employs. Another consideration is that the profits from a local Tesco won’t be spent in the local economy, it goes to shareholders. Owners of small businesses tend to live close by and spend their money locally.

I’ve also heard it said that there’s little that a local government can do to stop the likes of Tesco opening stores. However, this just isn’t the case. A local authority can legitimately block (or indefinitely stall) such developments in the interests of local economy and general social well-being.

What I’m saying is this: it’s very naïve and short-sighted of local councils to allow Tesco to open up little stores everywhere. It negatively affects the local economy that they’re supposed to be trying to support and grow.

So, if you run a small local retail business and are worried that Tesco (or any of the other express/metro chains) will encroach on your business then you should contact your local councillors and lobby hard. It’s also worth your while joining the Federation of Small Businesses (FSB) and asking your local branch committee to help with this (since the FSB is a lobbying organisation).

You might also consider starting a campaign group of your own to get support and additional effort from others.

Whatever you do, don’t sit on your hands a whine about a situation that you might be able to change. Yes, it’ll take some work but what’ll happen if you do nothing?