Reflections on Big Bang

Today was a momentous one in financial circles as it is the 30^th anniversary of Big Bang – the day which marked the deregulation of many of the restrictive practices which had previously characterised the City of London. It marked a turning point for many of the small firms which had formed the backbone of the City’s financial expertise, and which were soon to be swallowed up by the international giants with deep pockets. It also marked an end to the gentleman’s club atmosphere which had hitherto prevailed: Long boozy lunches were out and an era of sober hard work was ushered in. In his history of the City of London, the historian David Kynaston records that it was once previously impossible to take a train from the stockbroker belt in Surrey to arrive in London before 9 am. Pretty soon, people had to get used to the idea of early starts, and 7 am became the norm. After all, the markets never sleep so why should you?

For those committed to the cause, the monetary rewards were high. But whilst a City job may have initially served as a way for ‘barrowboys’, as young traders were once known, to advance their career it soon became evident that a sharp suit and quick tongue were not going to be enough to compete in an increasingly technical world. The concentration of PhD scientists and mathematicians employed in finance today would put many a university faculty to shame. But questions have been asked over the last three decades about whether much of what the City does is socially useful. It does keep many economists off the street, so that is probably a bonus. However, the criticism that too many of the smartest people are diverted towards finance and away from more socially productive roles is valid. Even more pernicious is that fact that the scrutiny to which companies are now subject means that many CEOs and finance directors look no further ahead than the next set of quarterly results. That is hardly a new criticism but it does seem to have gained momentum in recent years.

In the wake of the crash of 2008, the problems of footloose capital and lax regulatory oversight were laid bare. The industry created many products which those selling did not fully understand (anyone for a CDO, or even a CDO-squared?) let alone those buying. Caveat emptor is all very well but what about caveat venditor? Such products indeed yielded no social benefit, and adding poorly understood risks to an overly indebted financial system contributed to the severity of the crash. People sold such products because they were rewarded for doing so. And this highlights the fact that as the financial industry evolved, the compensation structures did not. Thirty years ago, partners were the rainmakers who brought in the money and were rewarded handsomely. But they also had a financial stake in the company and if it went south, so did their finances.

However, many people in the brave new world were paid as if they were partners when they were merely hired hands, playing with the company’s money and not their own. This created a series of false incentives which encouraged the monster to feed on itself. It also explained why many institutions were so keen to hide a lot of their debt off-balance sheet. Had it been discovered earlier, many practices would have been stopped earlier and a lot of people would have become less rich.

Remember the crash of 1987? Remember how we were all horrified in 1995 when Barings went bust, as a “common” trader laid waste to a blue-blooded institution? Or BCCI? Or Michael Milliken and a host of other unsavoury types? For all the fact that regulators are trying to clean up the banks, and indeed banks themselves are doing their best to snuff out many of the risks, we will never be able to make them 100% safe. The seeds of the 2008 crash were arguably sown by Big Bang and we are living with the consequences today. But for all the bad things which resulted from the great financial liberalisation, London did get something out of it as it helped to regenerate it as an international city. For anyone who doubts how far we have come, look at the photos of Docklands in 1986 which was emerging from a post-industrial wasteland. The shops and office blocks of today did not exist, and anyone who considered buying the newly built residential properties was considered slightly mad. But what an investment return it would have yielded!

The go-go days of 1986 will never return. Nor will the City which it usurped. One of my favourite stories of the pre-Big Bang days concerns two brothers who fought in World War I. Cyril Frisby won the Victoria Cross, the highest UK military award for valour. Lionel merely won the Military Cross and the DSO. Both subsequently worked on the floor of the London Stock Exchange and in order that people could distinguish which brother was being referred to in conversation, Lionel was universally and memorably referred to as ‘The Coward.’ Try that sort of behaviour on a trading floor today and see how far you get …

Exeunt the expert

The cult of the expert is very much under attack and nowhere, it seems, is this more evident than in the realms of central banking – and by extension, economics. This was eloquently expressed in a thought provoking article written by the journalist Sebastian Mallaby in The Guardian entitled “The cult of the expert – and how it collapsed”.  The thrust of the argument is that by depoliticising monetary policy and handing it over to technocrats, central bankers have been able to side step many of the checks and balances which exist in our democratic system. This in turn has allowed them to amass a very large degree of influence, enabling them to take decisions which may not necessarily be in the best interests of society as a whole.

Mallaby, who has recently published a highly acclaimed biography of Alan Greenspan, argues that the man formerly known as Maestro was “the ultimate embodiment of empowered gurudom.” Whilst Mallaby’s criticism is restrained, he offers a powerful indictment of Greenspan as one who combined “high-calibre expert analysis with raw political methods” with the former acting as cover for the latter. That is a pretty serious charge because in effect Mallaby accuses Greenspan of being an unelected official using his position to wield political influence – in other words subverting the democratic process. If, as Mallaby claims, “he embraced politics, and loved the game” that might explain why Greenspan hung around as Fed Chairman for so long (almost 19 years). One way to limit the degree of power which officials are able to accumulate is to set term limits for central bank governors – as indeed the Bank of England and ECB have done.

But this debate is about more than the way in which Greenspan went about his business. It is about whether decisions taken in the last eight years have been in the wider interests of society. Perhaps this has not always been the case, which explains why public discontent with technocratic policy making has risen so strongly. However, what is missing from Mallaby’s critique is that governments have failed to step up to the plate. As a consequence central banks have had to do all the policy heavy lifting because governments have refused to countenance fiscal easing. This is in part the result of political ideological conviction and partly due to the teachings of influential economists like Robert Lucas who argue that fiscal policy is ineffective. In a bid to bring together these disparate economic arguments, we have been subject to the ridiculous notion of expansionary fiscal contractions, used by some economists and politicians to justify why a tight fiscal stance can help boost the economy.

As a result economists are open to the charge that they do not know what they are talking about, and it is notable that a large proportion of the reader comments under the Guardian article ridiculed the economics profession. This is understandable for, as I have pointed out before, central banks have increasingly been portrayed as institutions designed to manage the economic cycle and in the wake of what happened in 2008 they have failed on that score. But this view is too simplistic. For one thing, it is generally the media which sets up economists as “experts.” We can provide some context and a little understanding of what is happening, and what is likely to happen if certain policy choices are followed. But we are not soothsayers.

It is not a “failure” if our predictions for GDP growth at the start of the year turn out to be half a percentage point too high or low, or if our monthly projections for the upcoming CPI inflation or unemployment rate turn out to be off by 0.1 percentage points. Getting the general direction of travel right will suffice. It is true that the profession failed to foresee the crash of 2008 but economists were not alone in that. The causes of the crash were far more complex than many politicians were prepared to admit in the immediate aftermath but suffice to say that blame can be shared across governments, financial regulators, central banks and households themselves. Indeed, the great lessons economics taught us in the wake of the 1929 crash were: (i) there is a role for government in helping to get the economy back on its feet; (ii) beggar-thy-neighbour tariff policies are self-defeating and (iii) fixed exchange rates can exacerbate the extent of shocks. Lesson (ii) has been taken on board across the globe but particularly in Europe, lessons (i) and (iii) have to a greater or lesser extent been ignored.

Policy prescriptions are like fashion – they change over the years. As Mallaby noted in his article, “the inflationary catastrophe sparked by 1970s populism has faded from the public memory, and no longer serves as a cautionary tale … [but] The saving grace of anti-expert populists is that they do discredit themselves, simply because policies originating from the gut tend to be lousy. If Donald Trump were to be elected, he would almost certainly cure voters of populism for decades.” So the economics profession is going to have to take all the abuse hurled in its direction on the chin. But whilst macroeconomics takes a lot of stick for its forecasting record, there have been lots of interesting real-world applications emanating from the field of microeconomics (auction theory and contract theory to name but two). As Noah Smith pointed out in an excellent blog post (here) “if you think that predicting recessions is economists’ only mission in life, think again.”

Is central bank independence all it is cracked up to be?

Regular readers will know that I am not a fan of combating the current economic ills purely via easier monetary policy and I do believe that both the Fed and BoE have been rather tardy in their monetary responses in recent years. Arguably, the Fed could have raised rates at a faster pace, and there was a window of opportunity for the BoE to have done so in 2014 as the unemployment rate breached the threshold levels which were seen as an obstacle to action. Indeed, a widespread belief is gaining ground that further monetary easing is likely to be counterproductive, given the distortionary effects this has on markets and the distributional impacts on savers. However, we have given central banks operational independence to focus on an inflation mandate and we have to leave them to get on with that job.

This makes the recent spat between UK politicians and the BoE Governor all the more remarkable. Prime Minister Theresa May noted a couple of weeks ago that, “there have been some bad side effects” from the current monetary policy “with super-low interest rates and quantitative easing” and that “a change has got to come.”  This prompted Governor Carney, who has already faced fierce criticism from pro-Brexit MPs regarding his impartiality during the referendum campaign, to respond that he would not “take instruction” from politicians about how to handle policy issues. Politicians have returned fire, and then some, with former Conservative leader William Hague writing yesterday that “eight years after the global financial crisis [central banks] are still pursuing emergency policies that are becoming steadily more unpopular and counterproductive. Unless they change course soon, they will find their independence increasingly under attack.” Whilst a good debate is healthy, that is tantamount to a threat. And one which most economists find unacceptable.

For one thing, central banks are not charged with distributional policy issues. That lies solely in the realm of government. If governments have not used the fiscal space created by the lowest interest rates in history, which after all were delivered by central banks, that is purely their own fault. Moreover, at a time when governments have been conducting an aggressively tight – and pretty regressive – fiscal stance it makes sense to keep monetary policy as lax as possible. It is called policy coordination and is what the Fed did during the first term of the Clinton Administration of 1992-96. We might not like the fact that interest rates remain at their emergency lows after eight years, but monetary policy prevented a much more dramatic collapse than might otherwise have occurred. With central banks having done the heavy lifting for all this time, what politicians should now be saying is, “thanks, we will take it from here."

Threats to central bank independence are not new, of course. The US Fed has been subject to Congressional badgering for years, as Alan Greenspan’s autobiography makes clear. The ECB’s unconventional policy measures have routinely been scrutinised by the German Constitutional Court, to ensure that they do not fall foul of the letter of the law. But is central bank independence all it is cracked up to be?

The independent central bank par excellence is the Bundesbank, which successfully delivered low inflation and stable growth for Germany for almost 50 years. Whilst the academic evidence suggests that they do deliver lower interest rates than non-independent central banks, this may be more to do with the trend towards more independence at a time of low inflation. Indeed, like many other aspects of monetary policy, they may simply be a fad which serves a purpose for a while but ultimately fall victim to a change in economic fashion, like monetary or exchange rate targeting. Indeed, there has been a tendency in the last 20 years to entrust the running of central banks to academic economists, not career bankers. Whilst they undoubtedly have a better understanding of monetary theory, which has allowed them to be more creative at finding solutions as interest rates hit the lower bound, I wonder whether the more restrained bankers of old would have been quite so tolerant of the liquidity build-up which contributed to the crash of 2008-09?

There is a school of thought which says that independent central banks were created to solve a problem which no longer exists – the reduction of inflation to tolerable levels – and that whilst they may be good at slowing the inflation process, they are not so good at reflating economies. There may be something in this, and we should not overlook the fact that the biggest financial crash in history took place on the watch of independent central banks. So there is nothing mystical or immutable about their independence. But the point of independence is to allow them to do things that politicians do not always like. Sometimes these things may be inconvenient, but if politicians want to change the landscape they need to have a grown-up discussion about the mandate, not issue threats.Political dialogue? There's a novelty!

Taking a pounding

As comments from British UK politicians increasingly point in the direction of a hard Brexit, currency markets have made their own judgment on what this means for the economy by heavily marking down the pound. Indeed, the FT reported this week that the trade weighted index fell to its lowest since the data were first compiled in the mid-nineteenth century. One way to think of the exchange rate is in terms of risk-adjusted uncovered interest parity. The UIP condition simply says that the expected change in the exchange rate is equal to the interest differential between two countries. But the movement in sterling since June is far bigger than can be explained by interest rate movements. Economists tend to explain away such differences by assuming it represents an exchange rate risk premium. In the case of the UK, this has just got a lot bigger.

This risk premium reflects unidentified risks (e.g. the breakup of the UK in the wake of the EU vote). It ought more properly to be called the uncertainty premium, reflecting the fact that economists characterise risk as something which can be priced but uncertainty as something which cannot, although this may be a matter of semantics. One concern is whether the international financial community will continue to fund the UK’s current account deficit, which at 5.9% of GDP in Q2 2016, is the largest relative deficit in the industrialised world. As MPC member Kristin Forbes noted in an excellent speech earlier this year “current account deficits of this magnitude can increase a country’s vulnerability to a sudden stop in capital flows and correspond to a difficult economic adjustment as the deficit reverses.”

Pre-referendum, the current account deficit had little impact on currency market thinking. One of the reasons for this is that the UK’s net international investment position (NIIP) remains decent, at just -3% of GDP at mid-year – way above the -25% to -30% range traditionally associated with a “sudden stop” in funding. Up to now there have been few indications that the rest of world is unwilling to lend to the UK. A lot of this is to do with the structure of the UK’s balance sheet. As BoE Deputy Governor Ben Broadbent pointed out in a speech in 2014 the UK balance sheet is (i) underweight sterling; (ii) overweight maturity and (iii) overweight risky assets. Point (i) implies that the UK balance sheet is exposed to significant capital gains when the currency depreciates. Point (ii) suggests that to the extent the global yield curve is upward sloping, the UK earns “carry” on its international asset position. And point (iii) suggests that rising global equity prices are good news for the UK’s asset position.

Putting all these together suggest that the NIIP is likely to remain well supported for now, which in turn implies that the UK will remain a good credit risk and should not have to worry about attracting the capital from abroad to fund its external deficit. But this does not mean that the pound will not depreciate further. Indeed, to the extent that the risk premium is volatile, the pound could go higher or lower from here depending on the market’s assessment. However, as Forbes noted in her speech “sterling tends to depreciate during periods of heightened UK and global risk.” Although the risk of a “sudden stop” is limited, if foreign direct investment slows as a result of the EU vote, it may mean that the UK becomes more reliant on “hot” money capital inflows which will increase sterling volatility.

Even if the pound does not go lower from here, the fall over the past three months will make its presence felt in the inflation statistics sooner or later. This will make consumers worse off if not compensated by a rise in wages – which is unlikely given that a potential Brexit will raise the competiveness pressures on corporates. The BoE’s ready reckoner analysis indicates that a sustained 10% depreciation of sterling will increase CPI inflation by around 0.75 percentage points “after two to three years.” With the pound having fallen by 15% since 23 June, we are setting ourselves up for a rise of 1% in inflation over and above what would otherwise occur. The attempt by Unilever to push through a 10% rise in the price of Marmite, which was resisted by Tesco, was merely the first sign of things to come. And for those of you taking part in the EuroMillions lottery, you may have noticed that the price of a ticket recently rose by 25% which (a) raises the stakes if you want to try your hand at becoming a millionaire and (b) materially reduces the rate of return at the lower end of the prize scale.

The puerile effort by commentators such as Simon Heffer to suggest that “the City traders betting against the pound are ignorant teenagers without the foggiest idea what Brexit means” is a complete misrepresentation of what the international community believes Brexit means for the economic future of the UK. Foreign investors now face far greater political and economic risks associated with their investment in the UK. This is not about teenagers pushing buttons (not that there are any teenagers working in FX markets). It is hardened investors making an assessment of what Brexit means for the UK and it is a message we ignore at our peril.

Truth and lies

Having watched the second US presidential debate between Hillary Clinton and Donald Trump, there was little doubt in my view as to who had the better of the argument. Trump was big on promises but Clinton far better on the facts. However, that does not mean all people thought that the Democratic nominee carried the day. It was classic rope-a-dope stuff. In fact, it reminded me of watching the middleweight boxer Herol Graham, who was extremely skilled in the art of ring craft. He was so evasive that before he turned pro, he used to make money in pubs by tying his hands behind his back and asking customers to try and lay a punch on him. He was so good that no-one ever got close. Until one day he got into the ring with Julian Jackson, one of the hardest punchers in the business, who hit poor Graham so hard he was unconscious before he even hit the canvas.

The question is can Clinton find a sucker punch to knock out Trump? Early on during Sunday’s bout, The Donald survived a few uncomfortable early rounds, but managed to come through the period when he was subject to criticism for misogynistic comments which would surely have felled many seasoned politicians. And I was amazed when the moderator, Anderson Cooper asked, “can you say how many years you have avoided paying personal federal income taxes?” Trump’s answer was, “No, but I pay tax, and I pay federal tax, too.” A politician who refuses to answer questions like that normally has no chance in an election. But like Herol Graham, Trump slipped the punch in a masterful fashion and it seems that whatever you throw at him, Trump keeps on coming. Welcome to the world of post-truth politics.

We have had our own experience of this phenomenon in the UK during the EU referendum campaign. It seemed not to matter what arguments were put forward – if they did not fit with the stylised “facts” which determined the nature of the campaign, then they were obviously “lies”. This clip, which shows Boris Johnson testifying before the Treasury Select Committee in March, highlights how the Brexit camp were able to distort the truth in ways which sound reasonable but were in fact a total misrepresentation of EU laws for the  purposes of making a domestic political point.

Of course, the past master at truth distortion is Russian president Putin who, according to The Economist leads “arguably the country (apart from North Korea) that has moved furthest past truth, both in its foreign policy and internal politics.” It went on to note that during the Crimean campaign “state-controlled Russian media faked interviews with “witnesses” of alleged atrocities, such as a child being crucified by Ukrainian forces; Vladimir Putin, Russia’s president, did not hesitate to say on television that there were no Russian soldiers in Ukraine, despite abundant proof to the contrary.”

The trust-your-gut instinct has been supported by a general erosion of trust in institutions and the proliferation of social media, which allows people to cut themselves off from those with different viewpoints and to hear only what they want to hear (so-called homophilous sorting). Such behaviour should (and does) worry economists. Although I argued recently that there is a strong normative element in economics, we rely very heavily on economic data to support our arguments. So when Trump tells American voters that “we’re the highest taxed nation in the world” he is way off. When he tells them he can eliminate the US national debt “over a period of eight years” while still pushing a "very big tax cut," he is living in fantasy land. When he says (as he did after winning the New Hampshire primary) that unemployment is "probably 28, 29, ... 35 percent; I even heard recently 42 percent," it’s pretty easy to go to the BLS website and see that they are reporting a figure around 5%. In plain terms, he is pandering to the prejudices of that part of the electorate which wants to believe that because things are not as rosy as they once were, they must be a lot worse than the government is telling them.

It was the same story during the Brexit referendum, when we were spun a web of lies based upon Michael Gove’s deceit that “people in this country have had enough of experts.” This led to a situation in which all the dire predictions of what Brexit might do to the economy were ignored because the fact that the UK runs a trade deficit with the EU “proves that the EU exports more to the UK than the UK does to the EU”.  The fact that 47% of UK exports go to the EU whilst only around 16% of EU exports go in the other direction rather suggests the opposite. As the US politician Daniel Patrick Moynihan once said, “Everyone is entitled to his own opinion, but not his own facts.”

Banks: Safety in numbers

I have spent much of the last week involved in banking issues, either talking with banks about their business plans or about them in the context of the Money Macro & Finance Research Group annual conference. One of the takeaways from the week is that insiders and outsiders, not surprisingly, view the sector’s problems differently. Banks are concerned to restore profitability and have outlined their business plans contingent on the current legislative environment, which they believe is sufficient to strengthen their institutions. Many academics and policy makers, on the other hand, want to make banks even safer in order that the integrity of the financial system is maintained and to ensure taxpayers are protected in the event of further problems. Either way, it is a sign of the times that we spend so much time on regulation issues today. A decade ago, financial stability was both a business and intellectual backwater.

Looking at the big picture, there is still a lot of debate on whether the banking system is safe enough. Sir John Vickers, who chaired the Independent Commission on Banking, does not believe it is. Earlier this year he strongly argued that the ICB’s recommendations on capital adequacy had been largely ignored and that banks do not have nearly enough capital to withstand shocks. This is a view which the Bank of England does not share. Vickers’ argument is that although holding equity capital is costly for banks, because investors expect high returns, “high returns make sense only if they compensate for risk ... which is best done by more equity, not less.” In his view, the BoE argument that leverage ratios were ten times higher before the crisis means only that banks today are too risky versus stratospherically risky prior to 2008.

But whilst the argument is sound enough, John Kay points out that efforts to measure bank leverage, as required under the Basel III legislation, represent “bogus quantification.” We cannot adequately measure bank ‘riskiness’, and efforts to put a precise number on it give us a false sense of security. In any case, it is not as if banks were not regulated previously, as anyone who tried opening a bank account even prior to the crash of 2008 can testify. It is more the case that bank regulation was previously misdirected.

This highlights that there is a trade-off between the safety and usefulness of regulation. As Kay points out, the rising numbers employed in compliance represent a heavy tax on banking activity, and banks themselves are being forced to make costs savings in other areas to ensure they can meet the regulatory challenge. Ironically, we will only know that the outlays on additional compliance are being well spent if they prevent banks from incurring the wrath of the regulator. So the less they are in the headlines, the better. But since the actions of regulators on the other side of the Atlantic appear more as a capricious attempt at extortion, it may not matter how much banks spend if they are operating on a far-from-level playing field.

It is interesting when talking to banks about their business plans to note that they are taking a highly pragmatic approach. So long as they have a clear view of what they have to do, and the timeframe under which they have to operate, they seem broadly happy with where we are heading. Indeed, there appears to be a lot more certainty today than there was a year or two ago, when bankers complained that the regulatory goalposts were being moved far more quickly than seemed necessary. It would thus appear that, in the UK at least, the field of bank regulation is beginning to mature. In its early stages, bank regulation was focused on emergency balance sheet repair and there probably was an element of on-the-hoof policy making. Today, we are able to look forward with a bit more certainty, and I am also left with a sense that banks and regulators talk to each other more than they once did.

Macroprudential policy has thus become a key element in the policy armoury. There are some concerns that it may become a substitute for monetary policy – at least in part. For example, the regulators might prevail on banks to change lending practices, thereby operating on the credit supply side, rather than using interest rates to regulate credit demand.  In future, when (if) interest rates return to more ‘normal’ levels, that might be a cause for concern – particularly if the current creeping trend towards the politicisation of monetary policy gathers pace. But this is not exactly a new problem: indeed, for a long period after 1945, the UK operated a form of macroprudential policy in the form of credit rationing. Given what we know happened to the banking system prior to 2008, I wonder why we gave it up.

In sorrow and anger

Contrary to what many economists might believe, economics is to a large degree a normative discipline. Economics cannot exist in some kind of value-free environment: The decisions which people take are conditioned by the society around them, and as a result it is incumbent upon us to try and describe the factors which shape the social background against which we are operating. But assessing the political environment which is shaping the current UK policy agenda is becoming a profoundly depressing exercise. 

In the course of this week the Conservative government has taken a sharp lurch towards the right of the political spectrum, which raises the likelihood that the process of exiting from the EU will be a much more painful process than previously imagined. This in turn means that the economy will be adversely affected, which can be expected to result in many people being made a lot worse off than is necessary. Since last weekend, we have heard the prime minister outline an agenda which cannot be described as particularly pro-business. The PM is proposing additional legislative and regulatory burdens on companies which were led to believe they would benefit from a reduction in the (imaginary) red tape which is strangling them from Brussels (at least that's what they told us). Meanwhile, her successor as Home Secretary, Amber Rudd, suggested that foreign workers should not be able to "take the jobs that British people should do". Rudd also indicated that companies could be forced to publish the proportion of "international" staff on their books.

The large swathes of the British press which criticised former Labour leader Ed Miliband for his supposed anti-business stance could surely never have imagined that 18 months later their preferred choice of party would introduce a stance which makes his policy look almost libertarian. Whilst it is laudable to try and curb the excesses of those businesses operating under conditions which are a throwback to the Victorian era, it is quite another to adopt a populist agenda which is outright damaging. According to the prime minister “too many people in positions of power behave as if they have more in common with international elites than with the people down the road.” This may play well in a conference hall, but when it comes down to the wealth creators that every country needs, it pays not to antagonise them too much – particularly when many of them can simply transfer their production or switch their investment to jurisdictions which are far more welcoming.

As Philip Collins wrote today in The Times, 23 June appears to have been “recast as a mandate for illiberal domestic policy.” And as Jenni Russell put it in the same newspaper yesterday “British politics is now driven by blind faith.” The Conservative Party today is supposed to be the heir to Mrs Thatcher’s vision, adopting the sort of free-market policies designed to boost the functioning of the British economy. But for all the faults of the Conservative governments of the 1980s, it is hard to see Mrs Thatcher going along with the policies which are now up for discussion. Her former aide, Charles (now Lord) Powell, argued recently that she would never have voted for a policy as self-defeating as Brexit. The blessed Margaret may have had her run-ins with her EU partners, but there was always a sense that she understood what was in the best interests of the UK economy. Moreover, she treated her political opposite numbers throughout the EU with a lot more respect than the current government seems to be displaying towards its EU partners.

Such disrespect is likely to be one of the reasons why French President Hollande now appears to believe that a tough negotiating stance is necessary during the Brexit negotiations. It is also the reason why German Chancellor Merkel is hardening her opposition to the British stance. Such uncertainty does nothing to bolster international market confidence in the UK, and whilst the 9% flash crash in sterling overnight may have been largely the result of algo trading, it hammers home the risk that UK assets are “resting on a bed of nitro-glycerine” (to use Bill Gross’s phrase from 2010).

As deputy Italian foreign minister Mario Giro said yesterday, “This is not the UK we have always known.” He also opined that the immigration discussion is “taking on those tones that we see in eastern Europe.” And the unedifying sight of UKIP politicians engaged in public dispute in the European Parliament in Strasbourg does nothing to raise the political status of a country which the rest of the Union will only be too happy to see depart.

Back in the 1960s, former prime minister, Alec Douglas-Home, was asked whether he was up to the top job. His reply, in a self-deprecating jibe at his supposed lack of economic skills was, “No, because I do my sums with matchsticks.” Compared to some of the incoherent ramblings currently passing for policy, Baron Home of the Hirsel is beginning to look like a contender for the Nobel Prize in economics.