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2011: the year of smoke and mirrors

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Let’s look back at 2011, a year when those in power sought to use as much smoke and mirrors as possible to keep the truth from their citizens.

The longest running smoke screen is, of course, quantitative easing. A particular favourite as it keeps interest rates artificially low by creating a bull market in UK government debt. This is, of course, all too good to be true. As the Telegraph points out: “By switching on the printing presses, the Bank of England, which is 100pc owned by Her Majesty’s Government, is buying up a third of the debt owed by Her Majesty’s government. The Treasury is becoming ever more in debt to itself. It’s as strange as that. 

Luckily for Mervyn and Dave, the situation has become so bad in the Eurozone that the bond vigilantes continue to regard this fiction as the lesser of two evils when confronted with the prospect of the wholesale collapse of the Club Med countries. Not surprising, then, that the beleaguered boss of the Bank of France has just cried out in frustration at the apparently stronger credit rating of perfidious Albion. Don’t worry Monsieur Noyer, we’re unlikely to be able to keep the QE fiction going for much longer.

Back in July, I had the temerity to suggest that bank, airline and textile stocks should never feature on investors’ buy lists. Not even I realised just what a terrible mess the banks would be in as they go into 2012. 

The simple fact of the matter is most Euroland banks are bust – and ours would go down with them if it wasn’t for two other giant smoke and mirror jobs that have been put up in the past month by the central banks. Namely, unlimited lending of dollars by the big three; and the ECB offering three year loans at one per cent to the region’s banks. 

These desperate actions perfectly demonstrate how bad things are. Markets are currently breathing a sigh of relief that the central bankers have responded to the cry of “do something, anything” but the illusion of activity won’t last.

Back on the home front, the FSA has been belching clouds of smoke with its recently published 420-page report into the circumstances behind the demise of RBS. The appointment of an insider, in the shape of the ex-banker and regulator Sir David Walker, to stop the FSA hiding embarrassing facts was not encouraging. Unsurprisingly the FSA plumped for the old PR trick of a “Snow White job”, deflecting criticism by apologising for being asleep at the wheel. This seems to have satisfied most commentators but gloriously misses the point, which is that first and foremost the FSA is a political body not an independent regulator. 

It implemented the disastrous “light touch” banking regulation because the government told it to. So long as it goes on wanting to keep politicians happy, it will be as much use as the proverbial chocolate teapot.

Lighter smokescreen and mirror moments were provided by News International and the Royal Wedding. It was most entertaining to watch the Murdoch clan trying to defend the indefensible, ranging from the physical acrobatics of Rupert’s wife at the Select Committee hearing, to the mental ones of James as he continues to deny all knowledge of mass phone hackings. 

The Royal Wedding reminded us all how good “The Firm” is at conjuring up fairytale princesses to take the nation’s mind off the grizzly business of everyday living. Long may that continue.

There are, though, two little rays of light that can be spied through the smoke. Firstly Osborne & Co do seem to be exhibiting some understanding of the need to encourage equity investment into small companies with their widening of EIS and VCT criteria (NB: subject to Brussels approval!). Would it be too much to hope, though, that in 2012 CGT is abolished on trading in small cap stocks, thus instantly making a huge difference to the liquidity and hence capital formation in this vital area of economic growth? The second ray of light is, of course, Dave plucking up courage to say no to Merkozy. This rickety cart drawn by the Merkozy pantomime horse threatens to run away with our interests and we are quite right to distance ourselves from it. 

Well done, Dave. Just don’t lose your bottle in 2012!

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My 2012: Wonga’s Errol Damelin
My 2012: Markco Media’s Mark Pearson
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