I rotate my newspaper reading where I can, and I was surprised to see that the Telegraph has one of the most inciteful explanations of how we have got to where we are on devolution.
I have long thought that Scottish Labour is largely responsible for our current mess, with their facile alignment of any difficulties in Scotland with the Tories and implicitly the English. Unable to get off this track, their disastrous campaign this summer in the elections for the Scottish Parliament was largely based around how only Labour and not the SNP could properly protect Scotland against "London". This was particularly ludicrous, as well as being implicitly anti-English, because the Scottish Parliament is responsible for devolved matters and not for the reserved matters for which the UK government (and so, using Scottish Labour's and the SNP's lexicon, "London") is responsible. Scottish Labour have been trying to out-nationalist the nationalists, which is bound to fail.
The headline to the Telegraph article somewhat misrepresents the article itself. The article suggests that Scotland having a semi-detached relationship with the UK under "devolution max" may be the end point - although perhaps Mr Brogan thinks that that cannot reasonably be described as a union. For my own part, as explained in this article, I cannot see how devo max would work without a complete rewriting of the UK constitution. It would make Nick Clegg's current playground hobby of rejigging the House of Lords largely redundant, since presumably the House of Lords would become some kind of federal or confederal chamber.
I doubt the resolve of both the Labour and Conservative parties to see such an arrangement through, and indeed both parties seem incapable of even talking about it. We are likely instead to end up with some half-baked arrangement leading to independence in a generation. So the headline may end up being right.
Which raises the question: When is the Labour party's navel gazing on this going to end, and they start saying something useful? At the end of the day, the future of the union (or otherwise) is in their hands.
Wednesday, 9 November 2011
Monday, 31 October 2011
A referendum
More on Greece and the Eurozone in this article I am afraid, but it is the issue which is going to shape events in the next year or two to a far greater extent than a referendum on Scottish independence, which is relatively neutral to those in the remainder of the UK, or some of the other legal issues I cover on this blog.
It appears that I was adrift on the 60% haircut for private creditors of Greek debt. Under the package agreed by the Eurozone last week it is "only" to be 50%, for the moment. But the Greek government has now out of the blue decided to hold a referendum on that package, apparently to take place around January.
This is an odd development. With Greek acceptance of the deal now in issue, it puts in doubt whether the EFSF can send more funds to Greece next week as proposed: I doubt anyone really thinks Greece can pay off any of these new "loans", but a minimum of pretence needs to be maintained nonetheless. We were earlier told by the Greek government that they will run out of cash in the middle of November. How will Greece fund itself in the meantime?
It is difficult to read the intentions of the Greek government with this surprising announcement. Is it to give the Greek people a taste of semi-default in the November to January period, as without the EFSF money it will not be able to pay public sector wages or pensions in full during the period?
Or is the referendum an attempt to get a better deal out of the EU in the hope that the EFSF money will still be credited to them next week and that they can hold a gun to the German government's metaphorical head between then and January?
In either case the dangers are immense, and are four fold. First, if the current package is rejected in the referendum, unless the EU agrees to fund Greece with real money transfers it can only result in sovereign debt default, which would leave the ECB with deficits which will require further funds from Eurozone members to finance on the public side. This is because the current 50% "haircut" agreed in the current package only applies to the banks. It does not apply to public authority creditors, and in particular to the ECB which has been buying Greek bonds on the market to make cheaper finance available to Greece. To have Greece potentially defaulting on its ECB support is startling and must be causing apoplexy in Berlin.
Secondly, in the event of such default, the "haircut" for private creditors will not be 50% but probably near 100%. When taken with the call-in of hedging insurance on the debt, it will leave a significant number of banks and other financial institutions insolvent, requiring further taxpayer support, which may exceed the ability of some Eurozone countries to finance when the support also required for the ECB's losses is taken into account.
Thirdly, a referendum decision against the deal seems likely to result in Greece leaving the eurozone, if only so that it can print money to provide temporary relief on its deficits, at the expense of high inflation, and also devalue its currency.
Fourthly, this will lead to immense pressure on Italy, Spain, Portugal and Ireland. I cannot predict what that will lead to, but it feels most unpleasant. A clearing of the decks with respect to Eurozone debt, accompanied by a period of recession in Europe (including the UK), may sound attractive as a resolution until it comes time to live through it.
A referendum is no doubt good for democracy. But in terms of the Greece and Europe, this is either clever brinkmanship by the Greek government, or lunacy.
It appears that I was adrift on the 60% haircut for private creditors of Greek debt. Under the package agreed by the Eurozone last week it is "only" to be 50%, for the moment. But the Greek government has now out of the blue decided to hold a referendum on that package, apparently to take place around January.
This is an odd development. With Greek acceptance of the deal now in issue, it puts in doubt whether the EFSF can send more funds to Greece next week as proposed: I doubt anyone really thinks Greece can pay off any of these new "loans", but a minimum of pretence needs to be maintained nonetheless. We were earlier told by the Greek government that they will run out of cash in the middle of November. How will Greece fund itself in the meantime?
It is difficult to read the intentions of the Greek government with this surprising announcement. Is it to give the Greek people a taste of semi-default in the November to January period, as without the EFSF money it will not be able to pay public sector wages or pensions in full during the period?
Or is the referendum an attempt to get a better deal out of the EU in the hope that the EFSF money will still be credited to them next week and that they can hold a gun to the German government's metaphorical head between then and January?
In either case the dangers are immense, and are four fold. First, if the current package is rejected in the referendum, unless the EU agrees to fund Greece with real money transfers it can only result in sovereign debt default, which would leave the ECB with deficits which will require further funds from Eurozone members to finance on the public side. This is because the current 50% "haircut" agreed in the current package only applies to the banks. It does not apply to public authority creditors, and in particular to the ECB which has been buying Greek bonds on the market to make cheaper finance available to Greece. To have Greece potentially defaulting on its ECB support is startling and must be causing apoplexy in Berlin.
Secondly, in the event of such default, the "haircut" for private creditors will not be 50% but probably near 100%. When taken with the call-in of hedging insurance on the debt, it will leave a significant number of banks and other financial institutions insolvent, requiring further taxpayer support, which may exceed the ability of some Eurozone countries to finance when the support also required for the ECB's losses is taken into account.
Thirdly, a referendum decision against the deal seems likely to result in Greece leaving the eurozone, if only so that it can print money to provide temporary relief on its deficits, at the expense of high inflation, and also devalue its currency.
Fourthly, this will lead to immense pressure on Italy, Spain, Portugal and Ireland. I cannot predict what that will lead to, but it feels most unpleasant. A clearing of the decks with respect to Eurozone debt, accompanied by a period of recession in Europe (including the UK), may sound attractive as a resolution until it comes time to live through it.
A referendum is no doubt good for democracy. But in terms of the Greece and Europe, this is either clever brinkmanship by the Greek government, or lunacy.
Tuesday, 11 October 2011
Very dangerous times, Part 2
Things have move on a little since my article of 3rd October.
Word on the street is that the apparent indecision in the EU masks a decision that has been made: it has apparently been concluded that the Greek government is incapable of reducing its budget deficit unless it no longer has the money available to it to spend, so the next tranche of "loan" of €8bn will not be made. Instead Greece will be allowed to default by renouncing its sovereign debt to 40% of face value, which coincidentally is the price at which their debt is trading on the open market, and any further financial assistance given to Greece will be in the form of emergency transitional relief. Things are about to get a great deal worse for people in Greece.
The delays are apparently now to allow all reasonable effort to be put into ensuring that the banking system does not collapse once the formal announcement of the default is made (the default will force the banks to crystalise the losses on their balance sheets), by recapitalising the banks and by restructuring one of the most vulnerable, Dexia. Whether Greek domestic banks are capable of being saved (and any EFSF effort or money is to be put into this) is not clear, but it is banks in other parts of the Eurozone, and in particular French banks, which are now the main targets of this recapitalisation. The remaining battles within the Eurozone are about whether the recapitalisation of French banks is to be a French taxpayer responsibility, or an EFSF responsibility to which other Eurozone countries, and in particular Germany, will contribute.
The EU/ECB appear to have gone on the path of short term pain for (possible) long term gain, but the question is whether Greek default can be managed without causing contagion to Portugal, Italy and Spain. In any event, little attention seems to have been paid to David Cameron's preaching to the Eurozone, quite reasonably given that the UK is not a member.
Meanwhile the UK government and Bank of England have gone on the opposite path of short term gain for (possible) long term pain, by starting a new round of quantitative easing. Quantitative easing comprises in effect a compulsory taking of a proportion of all UK denominated liquidated assets, such as banks accounts, cash ISAs and bonds, for the relief of debt in the UK by inflation. It puts more money in the economy but punishes the prudent, which is not sustainable as a long term model. It is particularly bad for people's savings in pension funds and for annuity rates because of the reduction in bond yields. The point that may be in danger of being overlooked is that the economy needs savings, investment and trust as well as short-term liquidity in order to prosper in the long term.
So two very different approaches to how to deal with sovereign and private debt. Time will tell which is the more correct. I would not necessary bet on this being the UK government rather than the German government.
Word on the street is that the apparent indecision in the EU masks a decision that has been made: it has apparently been concluded that the Greek government is incapable of reducing its budget deficit unless it no longer has the money available to it to spend, so the next tranche of "loan" of €8bn will not be made. Instead Greece will be allowed to default by renouncing its sovereign debt to 40% of face value, which coincidentally is the price at which their debt is trading on the open market, and any further financial assistance given to Greece will be in the form of emergency transitional relief. Things are about to get a great deal worse for people in Greece.
The delays are apparently now to allow all reasonable effort to be put into ensuring that the banking system does not collapse once the formal announcement of the default is made (the default will force the banks to crystalise the losses on their balance sheets), by recapitalising the banks and by restructuring one of the most vulnerable, Dexia. Whether Greek domestic banks are capable of being saved (and any EFSF effort or money is to be put into this) is not clear, but it is banks in other parts of the Eurozone, and in particular French banks, which are now the main targets of this recapitalisation. The remaining battles within the Eurozone are about whether the recapitalisation of French banks is to be a French taxpayer responsibility, or an EFSF responsibility to which other Eurozone countries, and in particular Germany, will contribute.
The EU/ECB appear to have gone on the path of short term pain for (possible) long term gain, but the question is whether Greek default can be managed without causing contagion to Portugal, Italy and Spain. In any event, little attention seems to have been paid to David Cameron's preaching to the Eurozone, quite reasonably given that the UK is not a member.
Meanwhile the UK government and Bank of England have gone on the opposite path of short term gain for (possible) long term pain, by starting a new round of quantitative easing. Quantitative easing comprises in effect a compulsory taking of a proportion of all UK denominated liquidated assets, such as banks accounts, cash ISAs and bonds, for the relief of debt in the UK by inflation. It puts more money in the economy but punishes the prudent, which is not sustainable as a long term model. It is particularly bad for people's savings in pension funds and for annuity rates because of the reduction in bond yields. The point that may be in danger of being overlooked is that the economy needs savings, investment and trust as well as short-term liquidity in order to prosper in the long term.
So two very different approaches to how to deal with sovereign and private debt. Time will tell which is the more correct. I would not necessary bet on this being the UK government rather than the German government.
Monday, 3 October 2011
Very dangerous times
So Greece has admitted what everyone thought, namely that they have not met the formal conditions for the release of a further unrepayable "loan" of €8bn, and they are in talks with the IMF, ECB and EU/EFSF.
We really are at crunch time here. It is conventional to blame Germany for being unwilling to take the steps necessary to underwrite Greek debts, either by way of eurobonds or by agreeing to borrowing being undertaken by the ECB secured against the EFSF at lower rates than Greece could ever manage, in order to enable further "loans" to Greece which can never be paid off but which would stave off default towards the private (banking) sector. The argument, probably correctly, is that German citizens will be far worse off if they allow Greece to default, with a domino effect on Italy and Spain; and since they have the economy to more or less stand it, why not have Germany underwrite Greek debt? However German citizens seem to want a bit of Bundesbank style rectitude established, and who can blame them. Whilst Germany holds the key to the puzzle, let it not be forgotten that Greek governments are at root to blame for the crisis. They deliberately, profligately and, in terms of the eurozone treaty, illegally incurred excessive indebtedness and cooked their books in order to hide it.
We have something of a smaller scale going on in the UK. The Tory party were only for a short time, during the Thatcher years, the party of the middle classes. They have gone back to 1950/60s-style "Toff Toryism", which is a brand of Eton Toryism which is generally content if they can keep their own money at the same time as more or less managing the country effectively. Their strategy for dealing with national and private debt in the UK is clearly to inflate it away: that means transferring funds from those in the middle classes responsible enough to save for their future (including their retirement) to irresponsible people who instead of saving have rung up very large debts, including the UK government itself. So in contrast to the stance of the German government, there is no moral high ground from the UK government here.
The Tories will do as little towards the middle classes as they can get away with without losing too many of their votes - their calculations are tactical rather than moral. From that point of view Ed Milliband's wooing of the aspiring middle classes at the Labour Party conference is an interesting and probably wise development. Probably he means it only slightly more than does, say, David Cameron, but at least it would be done with a warmer smile (or at least, would be should Ed Balls cease to be the shadow Chancellor.)
We really are at crunch time here. It is conventional to blame Germany for being unwilling to take the steps necessary to underwrite Greek debts, either by way of eurobonds or by agreeing to borrowing being undertaken by the ECB secured against the EFSF at lower rates than Greece could ever manage, in order to enable further "loans" to Greece which can never be paid off but which would stave off default towards the private (banking) sector. The argument, probably correctly, is that German citizens will be far worse off if they allow Greece to default, with a domino effect on Italy and Spain; and since they have the economy to more or less stand it, why not have Germany underwrite Greek debt? However German citizens seem to want a bit of Bundesbank style rectitude established, and who can blame them. Whilst Germany holds the key to the puzzle, let it not be forgotten that Greek governments are at root to blame for the crisis. They deliberately, profligately and, in terms of the eurozone treaty, illegally incurred excessive indebtedness and cooked their books in order to hide it.
We have something of a smaller scale going on in the UK. The Tory party were only for a short time, during the Thatcher years, the party of the middle classes. They have gone back to 1950/60s-style "Toff Toryism", which is a brand of Eton Toryism which is generally content if they can keep their own money at the same time as more or less managing the country effectively. Their strategy for dealing with national and private debt in the UK is clearly to inflate it away: that means transferring funds from those in the middle classes responsible enough to save for their future (including their retirement) to irresponsible people who instead of saving have rung up very large debts, including the UK government itself. So in contrast to the stance of the German government, there is no moral high ground from the UK government here.
The Tories will do as little towards the middle classes as they can get away with without losing too many of their votes - their calculations are tactical rather than moral. From that point of view Ed Milliband's wooing of the aspiring middle classes at the Labour Party conference is an interesting and probably wise development. Probably he means it only slightly more than does, say, David Cameron, but at least it would be done with a warmer smile (or at least, would be should Ed Balls cease to be the shadow Chancellor.)
Friday, 9 September 2011
Commission on the West Lothian Question
A junior minister, Mark Harper, made a written statement to the House of Commons yesterday about the Commission on the West Lothian Question. The statement said this:
It appears that this "Commission" is to be barely a commission at all. It will treat its considerations on the West Lothian Question as concerned only with how the House can "deal most effectively with business that affects England wholly or primarily". If only efficiency rather than issues of democratic accountability and fairness are to be considered, there is a simple answer which does not require a commission at all - leave things as they are. But the West Lothian Question, as devolution itself, is about more than efficiency, and its compass ought to be larger than that of a committee on procedure in the House. It shows that Cameron himself is largely uncommitted to this, notwithstanding his statements before the last election and indeed the Tory manifesto itself.
The statement was odd in another way. It rules out one suggested answer to the West Lothian Question, which is further to reduce representation from the devolved nations in the House, as was done in Northern Ireland after the Stormont Parliament was set up in 1924. I am not too fussed about that, since it seems to me to be a fairly half-baked idea to begin with, but it does show how the government is closing down the options and the commission's remit before even its terms of reference have been decided and it has begun its work.
As readers of this blog will know, in fact I think there is a relatively straightforward answer to this, which is to have a double majority requirement at Third Reading in the House of Commons for any separate Part of a Bill with only limited territorial extent, namely a majority in the whole House and in the territory to which the Part of the Bill extends. In the first instance, while this is being tested out, it could operate as a safety net in the same way that the House of Lords does, by comprising only a power to impose a delay of one Session where there is no territorial majority. This would enable a government to get its business done where it really thinks it needs to. I have previously explored this here, here, here and here.
If I was Harriett Baldwin faced with this I would not withdraw, but a new back bencher under pressure can find this difficult. It looks as if Labour, who are politically advantaged by current arrangements, have decided to talk her Bill out anyway. A private member's Bill is a public Bill debated in government time, and unless she can get sufficient members to attend to force a closure motion, Labour will find it quite easy to talk it out of time.
Update1: Harriett Baldwin has decided to press on because of the lack of detail in the statement. So she will now have to try and get it through Report stage without it being talked out on amendments.
Update2: Labour didn't manage to talk it out, but they won a vote against it 40-24, so it will proceed no further.
"The coalition programme for government set out our commitment to establish a commission to consider the ‘West Lothian question’.This statement says virtually nothing. It does not set out the membership of the Commission nor its terms of reference, and says very little that the government has not previously said in written answers that it would do, first by last Autumn, then by last Christmas and then by this Autumn. The main purpose is to get Harriett Baldwin to withdraw her Legislation (Territorial Extent) Bill, a private members ballot Bill which has made unexpected progress and is due for its Report stage today.I can now give the House more details on how that commission is to proceed.
The Government are clear that the commission’s primary task should be to examine how this House and Parliament as a whole can deal most effectively with business that affects England wholly or primarily, when at the same time similar matters in some or all of Scotland, Wales and Northern Ireland are lawfully and democratically the responsibility of the separate Parliament or Assemblies. The commission will not examine financing, which is being dealt with separately through various processes led by Treasury Ministers, nor does it need to look at the balance of parliamentary representation, given that Parliament addressed historic imbalances in representation between the constituent nations of the United Kingdom in legislation earlier this year.
Given the commission’s focus on parliamentary business and procedure, the Government believe that the commission should be comprised of a small group of independent, non-partisan experts with constitutional, legal and parliamentary expertise. We will also wish to consult with Mr Speaker and other parliamentary authorities on how the commission can best address this. We will also ensure that there is a full opportunity for the parties to have their say following the completion of the commission’s work.
We will bring forward formal proposals, including the terms of reference for the commission, after the conclusion of this short process of consultation and further deliberation. I expect that this will be in the weeks after the House returns in October."
It appears that this "Commission" is to be barely a commission at all. It will treat its considerations on the West Lothian Question as concerned only with how the House can "deal most effectively with business that affects England wholly or primarily". If only efficiency rather than issues of democratic accountability and fairness are to be considered, there is a simple answer which does not require a commission at all - leave things as they are. But the West Lothian Question, as devolution itself, is about more than efficiency, and its compass ought to be larger than that of a committee on procedure in the House. It shows that Cameron himself is largely uncommitted to this, notwithstanding his statements before the last election and indeed the Tory manifesto itself.
The statement was odd in another way. It rules out one suggested answer to the West Lothian Question, which is further to reduce representation from the devolved nations in the House, as was done in Northern Ireland after the Stormont Parliament was set up in 1924. I am not too fussed about that, since it seems to me to be a fairly half-baked idea to begin with, but it does show how the government is closing down the options and the commission's remit before even its terms of reference have been decided and it has begun its work.
As readers of this blog will know, in fact I think there is a relatively straightforward answer to this, which is to have a double majority requirement at Third Reading in the House of Commons for any separate Part of a Bill with only limited territorial extent, namely a majority in the whole House and in the territory to which the Part of the Bill extends. In the first instance, while this is being tested out, it could operate as a safety net in the same way that the House of Lords does, by comprising only a power to impose a delay of one Session where there is no territorial majority. This would enable a government to get its business done where it really thinks it needs to. I have previously explored this here, here, here and here.
If I was Harriett Baldwin faced with this I would not withdraw, but a new back bencher under pressure can find this difficult. It looks as if Labour, who are politically advantaged by current arrangements, have decided to talk her Bill out anyway. A private member's Bill is a public Bill debated in government time, and unless she can get sufficient members to attend to force a closure motion, Labour will find it quite easy to talk it out of time.
Update1: Harriett Baldwin has decided to press on because of the lack of detail in the statement. So she will now have to try and get it through Report stage without it being talked out on amendments.
Update2: Labour didn't manage to talk it out, but they won a vote against it 40-24, so it will proceed no further.
Thursday, 8 September 2011
New Labour and service provision
The Health and Social Care Bill passed the House of Commons yesterday and is off to the Lords.
Until this Bill passes the Lords we are still living in the New Labour universe so far as concerns health provision. Without intending to do so, my wider family have recently had to call upon its services on three occasions in the last three months in differing parts of the country (none of them involving me I am glad to say). One concerned a (relatively routine) investigation at a hospital in Hemel Hempstead. On two other occasions the services of acute medical centres at Nottingham and Watford were called upon.
From time to time we read horror stories in the newspapers of failing hospitals with incompetent management delivering bad and disrespectful service to patients, particularly to the elderly. My small sample out of the many hundreds of thousands who call upon the NHS each year is statistically not a sample at all, but it is all I have to go on, and the calls on acute medical services that my family have made have been at both ends of the age spectrum - a young man in his twenties and an elderly lady in her early nineties. In both of these cases the service has been unqualifiedly excellent. I was particularly impressed by the respect offered to elderly patients, and the concern that was taken by the medical staff to ensure that the elderly lady concerned was involved at all stages of the process - her wishes were taken as paramount - and at the follow up care that was offered.
This was at the macro (hospital) end of the process. But I have noticed change at the local scale. My own doctors' surgery have implemented a scheme whereby every patient who rings in for a non-emergency appointment will receive a telephone call the same day from the surgery's duty doctor to discuss the matter and how best to deal with it.
I cannot say that the last of those (the GP level) is due to policies of the former Labour government, and anyway so much depends on the commitment of individuals who decide that they want to make a difference. What I can say is that I have been greatly impressed by the service offered to my family by the NHS.
It is sometimes said that the question whether a society can be regarded as truly civilised is to be judged by the way in which it treats its sick and elderly. If that is the test, then on my small sample things are better than we sometimes fear.
Until this Bill passes the Lords we are still living in the New Labour universe so far as concerns health provision. Without intending to do so, my wider family have recently had to call upon its services on three occasions in the last three months in differing parts of the country (none of them involving me I am glad to say). One concerned a (relatively routine) investigation at a hospital in Hemel Hempstead. On two other occasions the services of acute medical centres at Nottingham and Watford were called upon.
From time to time we read horror stories in the newspapers of failing hospitals with incompetent management delivering bad and disrespectful service to patients, particularly to the elderly. My small sample out of the many hundreds of thousands who call upon the NHS each year is statistically not a sample at all, but it is all I have to go on, and the calls on acute medical services that my family have made have been at both ends of the age spectrum - a young man in his twenties and an elderly lady in her early nineties. In both of these cases the service has been unqualifiedly excellent. I was particularly impressed by the respect offered to elderly patients, and the concern that was taken by the medical staff to ensure that the elderly lady concerned was involved at all stages of the process - her wishes were taken as paramount - and at the follow up care that was offered.
This was at the macro (hospital) end of the process. But I have noticed change at the local scale. My own doctors' surgery have implemented a scheme whereby every patient who rings in for a non-emergency appointment will receive a telephone call the same day from the surgery's duty doctor to discuss the matter and how best to deal with it.
I cannot say that the last of those (the GP level) is due to policies of the former Labour government, and anyway so much depends on the commitment of individuals who decide that they want to make a difference. What I can say is that I have been greatly impressed by the service offered to my family by the NHS.
It is sometimes said that the question whether a society can be regarded as truly civilised is to be judged by the way in which it treats its sick and elderly. If that is the test, then on my small sample things are better than we sometimes fear.
Friday, 2 September 2011
Commoditised software
SCO v Novell
On Tuesday the 10th Circuit of the United States (federal) Court of Appeals gave judgment in the long running case of the SCO Group, Inc v Novell, Inc.
Some readers with an IT background may remember Novell, who were the first company to offer a decently priced and relatively usable networking system for small and medium sized businesses, with their NetWare product. Since the heady days of dominating this market sector, times have been harder for them (others have caught up), but they have been staking their future of late on commoditised software, in particular that offered by open source endeavours such as linux. IBM have also been investing heavily in this new sector.
This is not a small market to tap into. Practically all the automated trading systems of the large financial institutions are now running on linux, and in combination with the Apache web server it occupies a sizable chunk of the web server market, where it offers real competition to windows server products. Mega-sized web operations requiring high scalability and reliability now use linux as a first choice: if you use Google, Facebook or Wikipedia, or indeed read this blog, the services have been running on linux.
Linux
Linux is an extraordinary venture. It began in 1991 as the hobby of a certain Linus Torvalds who was trying to write an open re-implementation of the POSIX standard. POSIX is the standard, published by the International Standards Organisation, for unix-like operating system interfaces (I come back to unix again below). The defining feature of this venture was that Torvalds decided to release his computer code ("source code" in computer-speak) for this reimplementation using the General Public License (colloquially known as the GPL). The GPL basically provides that anyone can use and modify the code covered by it as much as they like, and freely transfer it to anyone they like, provided that if they make modifications to it they make the source code to the modifications freely available also. It is a copyright license from the author of the source code which in effect makes a bargain saying "you can use my code without charge, provided that you make freely available also any improvements to it which you develop: you don't have to use my code, but if you do, that is the basis on which you can do so".
This turned out to be a winning formula. Other individuals interested in writing a POSIX re-implementation joined in. Because it was freely available, a number of universities started including it in their courses on computer operating systems. More people started contributing, and it snowballed. When it became a fully usable server environment, a number of companies (including IBM) looking for an alternative to Microsoft Windows, which was at the time gathering to itself something of a monopoly, became involved. And so on it went.
Unix
Now back to unix. This was originally a proprietary operating system developed by Bell/AT&T (with a different flavour developed later at the University of Berkeley) in the late 1960s and during the 1970s. Over time, the interface and specification for this operating system became an international standard, POSIX, as later supplemented by the Single Unix Standard (SUS). POSIX is published by ISO and the rather larger SUS standard by the X/Open Group. Although the specification for the unix operating system is standardised and open, most of the implementations of it originally were not. There were and are a number of proprietary implementations of the standard, including those of Sun Microsystems, now Oracle (Solaris), Hewlett Packard (HPUX) and others. Some parts of these implementations were licensed from AT&T and other parts were separately developed by the companies concerned and therefore owned by them. A non-proprietary offering, deriving from the University of Berkeley source code which they subsequently made publicly available with any AT&T code removed, has been obtainable for free for a number of years, now known as BSD; but at that time at least it did not have the breadth of implementation (nor the commercial back-up) of the commercial offerings.
The important legal point here is that rights over copyright are intellectual property rights owned by the author, or a person to whom the author has assigned the rights, preventing copying. In relation to standards such as POSIX and SUS there is no legal preclusion of a re-implementation of the standard by freshly written source code, provided that any fresh re-writing is not done by copying from the original. What are called "clean room" re-implementations, under which the author of the re-implementation is forbidden from seeing the original, are perfectly legal from the copyright point of view.
Novell bought AT&T's unix from AT&T in 1993. They sold some of it on to the Santa Cruz Operation in 1995 (what this "some of it" comprised, later formed the subject of the litigation in SCO v Novell). In 2001 Santa Cruz sold to Caldera Inc whatever it was they had acquired from Novell. In 2003 Caldera Inc changed their name to "SCO" (presumably to make it resemble Santa Cruz Operation), and sued IBM alleging, amongst other things, that IBM had breached SCO's copyright in AT&T unix by copying some of AT&T unix into linux. At the same time, SCO brought test cases against some other companies using linux, claiming that linux infringed their AT&T copyrights by virtue of IBM's contributions and in a number of other ways.
Novell were worried about this. Like IBM, they were starting to get heavily involved in providing linux services to customers who would pay for support and for certain "add-ons" which Novell were providing. They stated that the proceedings against IBM, so far as based on copyright, and the other test cases, were bound to fail because Novell still owned the copyrights which were alleged to be infringed. Novell claimed that the 1995 deal did not in fact transfer to Santa Cruz the copyrights to the AT&T code, and instead only granted to them a right commercially to exploit the code and to add their own improvements. If true, this would kill all the copyright-based claims by SCO stone dead. SCO accordingly sued Novell on this.
SCO's allegations against linux were always going to be difficult to succeed on: SCO never publicly identified the code which they said had been copied, nor did they explain why linux was not an independent fresh creation which, as explained above, would not be constrained by copyright law. In addition, when still calling themselves Caldera, they had themselves marketed a linux product under the GPL so making publicly available the source code which in their subsequent litigation they claimed was still proprietary.
But none of this could get to court if they could not prove ownership of the AT&T copyrights alleged to be infringed, through the 1995 sale to Santa Cruz. They failed to do so. After a tortuous series of events and proceedings, which included SCO filing for bankruptcy protection1, in a federal jury trial in March 2010 the jury decided that Novell still owned the copyrights in question. SCO appealed to the federal Court of Appeals, and in their judgment on Tuesday the Court of Appeals decided that the verdict was to stand.
Commoditised software
The last legal road block to widespread commercial adoption of linux is now to all intents and purposes at an end.
What has happened is that high-grade operating system deployment has now become as commoditised as, say, water or indeed air. Companies such as IBM and Novell charge not for the operating system product itself, but for services they provide on top of the product. Their business model is now very different from that of, say, Microsoft, who derive a large part of their income from sales of the Windows operating system itself and their Microsoft Office products.
What we are likely to see in the future is a market dominated by both linux and Windows, but in differing sectors. Linux will be ubiquitous at the large scale end. Windows will likely hold on to a decent share of the small and medium sized business sector and more particularly the desktop computer, where Microsoft Office reigns and where individual users want the convenience of Microsoft's large range of consumer desktop offerings.
A modest proportion of the smaller business sector will likely also be retained by the other free POSIX implementation mentioned above, namely BSD. (It is also to be noted that BSD forms the basis of Apple's OS X operating system as used on Macs and some other of its devices. The distinguishing feature of BSD is that its licence does not require modifications and improvements to be offered back to the public domain, as in the case of linux, which makes it attractive to specialist hardware vendors such as Apple but unattractive to the service-based business models of IBM and Novell.)
The big battle is now on for mobile devices, namely tablets and mobile phones. Windows has become seriously squeezed in this area by linux-based offerings such as Google's Android, and we will have to see how this all pans out.
In addition, although copyright issues concerning linux are now dealt with, the US patent system allows patents to be issued in respect of software, whereas most of the rest of the world, including the UK, does not: in the EU, under the European Patent Convention "computer programs ... as such" are not patentable except insofar as they solve a "technical problem" (as opposed to a business problem) in a non-obvious way. Patent litigation concerning software will keep lawyers, in the US at least, well employed for some years to come, and the full extent of what is and is not covered by the European Patent Convention is also likely to be explored in future litigation. I may well come back to the last of these in respect of the recently initiated Spotify litigation.
___________________________________________
1 The way in which the bankruptcy court allowed SCO to use its creditors' money to proceed with its litigation ambitions is one of the more notable features of this case. Whether this is a particular feature of US bankruptcy law (which is a federal matter) rather than the particular predilection of the bankruptcy judge concerned, Judge Gross, is a matter I leave to whose who know more about US bankruptcy practice.
On Tuesday the 10th Circuit of the United States (federal) Court of Appeals gave judgment in the long running case of the SCO Group, Inc v Novell, Inc.
Some readers with an IT background may remember Novell, who were the first company to offer a decently priced and relatively usable networking system for small and medium sized businesses, with their NetWare product. Since the heady days of dominating this market sector, times have been harder for them (others have caught up), but they have been staking their future of late on commoditised software, in particular that offered by open source endeavours such as linux. IBM have also been investing heavily in this new sector.
This is not a small market to tap into. Practically all the automated trading systems of the large financial institutions are now running on linux, and in combination with the Apache web server it occupies a sizable chunk of the web server market, where it offers real competition to windows server products. Mega-sized web operations requiring high scalability and reliability now use linux as a first choice: if you use Google, Facebook or Wikipedia, or indeed read this blog, the services have been running on linux.
Linux
Linux is an extraordinary venture. It began in 1991 as the hobby of a certain Linus Torvalds who was trying to write an open re-implementation of the POSIX standard. POSIX is the standard, published by the International Standards Organisation, for unix-like operating system interfaces (I come back to unix again below). The defining feature of this venture was that Torvalds decided to release his computer code ("source code" in computer-speak) for this reimplementation using the General Public License (colloquially known as the GPL). The GPL basically provides that anyone can use and modify the code covered by it as much as they like, and freely transfer it to anyone they like, provided that if they make modifications to it they make the source code to the modifications freely available also. It is a copyright license from the author of the source code which in effect makes a bargain saying "you can use my code without charge, provided that you make freely available also any improvements to it which you develop: you don't have to use my code, but if you do, that is the basis on which you can do so".
This turned out to be a winning formula. Other individuals interested in writing a POSIX re-implementation joined in. Because it was freely available, a number of universities started including it in their courses on computer operating systems. More people started contributing, and it snowballed. When it became a fully usable server environment, a number of companies (including IBM) looking for an alternative to Microsoft Windows, which was at the time gathering to itself something of a monopoly, became involved. And so on it went.
Unix
Now back to unix. This was originally a proprietary operating system developed by Bell/AT&T (with a different flavour developed later at the University of Berkeley) in the late 1960s and during the 1970s. Over time, the interface and specification for this operating system became an international standard, POSIX, as later supplemented by the Single Unix Standard (SUS). POSIX is published by ISO and the rather larger SUS standard by the X/Open Group. Although the specification for the unix operating system is standardised and open, most of the implementations of it originally were not. There were and are a number of proprietary implementations of the standard, including those of Sun Microsystems, now Oracle (Solaris), Hewlett Packard (HPUX) and others. Some parts of these implementations were licensed from AT&T and other parts were separately developed by the companies concerned and therefore owned by them. A non-proprietary offering, deriving from the University of Berkeley source code which they subsequently made publicly available with any AT&T code removed, has been obtainable for free for a number of years, now known as BSD; but at that time at least it did not have the breadth of implementation (nor the commercial back-up) of the commercial offerings.
The important legal point here is that rights over copyright are intellectual property rights owned by the author, or a person to whom the author has assigned the rights, preventing copying. In relation to standards such as POSIX and SUS there is no legal preclusion of a re-implementation of the standard by freshly written source code, provided that any fresh re-writing is not done by copying from the original. What are called "clean room" re-implementations, under which the author of the re-implementation is forbidden from seeing the original, are perfectly legal from the copyright point of view.
Novell bought AT&T's unix from AT&T in 1993. They sold some of it on to the Santa Cruz Operation in 1995 (what this "some of it" comprised, later formed the subject of the litigation in SCO v Novell). In 2001 Santa Cruz sold to Caldera Inc whatever it was they had acquired from Novell. In 2003 Caldera Inc changed their name to "SCO" (presumably to make it resemble Santa Cruz Operation), and sued IBM alleging, amongst other things, that IBM had breached SCO's copyright in AT&T unix by copying some of AT&T unix into linux. At the same time, SCO brought test cases against some other companies using linux, claiming that linux infringed their AT&T copyrights by virtue of IBM's contributions and in a number of other ways.
Novell were worried about this. Like IBM, they were starting to get heavily involved in providing linux services to customers who would pay for support and for certain "add-ons" which Novell were providing. They stated that the proceedings against IBM, so far as based on copyright, and the other test cases, were bound to fail because Novell still owned the copyrights which were alleged to be infringed. Novell claimed that the 1995 deal did not in fact transfer to Santa Cruz the copyrights to the AT&T code, and instead only granted to them a right commercially to exploit the code and to add their own improvements. If true, this would kill all the copyright-based claims by SCO stone dead. SCO accordingly sued Novell on this.
SCO's allegations against linux were always going to be difficult to succeed on: SCO never publicly identified the code which they said had been copied, nor did they explain why linux was not an independent fresh creation which, as explained above, would not be constrained by copyright law. In addition, when still calling themselves Caldera, they had themselves marketed a linux product under the GPL so making publicly available the source code which in their subsequent litigation they claimed was still proprietary.
But none of this could get to court if they could not prove ownership of the AT&T copyrights alleged to be infringed, through the 1995 sale to Santa Cruz. They failed to do so. After a tortuous series of events and proceedings, which included SCO filing for bankruptcy protection1, in a federal jury trial in March 2010 the jury decided that Novell still owned the copyrights in question. SCO appealed to the federal Court of Appeals, and in their judgment on Tuesday the Court of Appeals decided that the verdict was to stand.
Commoditised software
The last legal road block to widespread commercial adoption of linux is now to all intents and purposes at an end.
What has happened is that high-grade operating system deployment has now become as commoditised as, say, water or indeed air. Companies such as IBM and Novell charge not for the operating system product itself, but for services they provide on top of the product. Their business model is now very different from that of, say, Microsoft, who derive a large part of their income from sales of the Windows operating system itself and their Microsoft Office products.
What we are likely to see in the future is a market dominated by both linux and Windows, but in differing sectors. Linux will be ubiquitous at the large scale end. Windows will likely hold on to a decent share of the small and medium sized business sector and more particularly the desktop computer, where Microsoft Office reigns and where individual users want the convenience of Microsoft's large range of consumer desktop offerings.
A modest proportion of the smaller business sector will likely also be retained by the other free POSIX implementation mentioned above, namely BSD. (It is also to be noted that BSD forms the basis of Apple's OS X operating system as used on Macs and some other of its devices. The distinguishing feature of BSD is that its licence does not require modifications and improvements to be offered back to the public domain, as in the case of linux, which makes it attractive to specialist hardware vendors such as Apple but unattractive to the service-based business models of IBM and Novell.)
The big battle is now on for mobile devices, namely tablets and mobile phones. Windows has become seriously squeezed in this area by linux-based offerings such as Google's Android, and we will have to see how this all pans out.
In addition, although copyright issues concerning linux are now dealt with, the US patent system allows patents to be issued in respect of software, whereas most of the rest of the world, including the UK, does not: in the EU, under the European Patent Convention "computer programs ... as such" are not patentable except insofar as they solve a "technical problem" (as opposed to a business problem) in a non-obvious way. Patent litigation concerning software will keep lawyers, in the US at least, well employed for some years to come, and the full extent of what is and is not covered by the European Patent Convention is also likely to be explored in future litigation. I may well come back to the last of these in respect of the recently initiated Spotify litigation.
___________________________________________
1 The way in which the bankruptcy court allowed SCO to use its creditors' money to proceed with its litigation ambitions is one of the more notable features of this case. Whether this is a particular feature of US bankruptcy law (which is a federal matter) rather than the particular predilection of the bankruptcy judge concerned, Judge Gross, is a matter I leave to whose who know more about US bankruptcy practice.
Friday, 29 July 2011
Internet access and censorship
Mr Justice Arnold gave judgement yesterday in the case of Twentieth Century Fox Film Corporation and Others v British Telecommunications plc. This concerned the Newzbin internet site, which is largely devoted to providing illegal downloads of films, in breach of copyright. A number of film companies sought an injunction against BT, which would require BT to block access to the site from their customers in England and Wales. Arnold J agreed to make such an order. The precise terms of the order will be settled at a further hearing to take place after the summer vacation in September.
The question to begin with is, why was this order necessary at all? Why not attack the source, namely Newzbin? The reason appears to be that the company and its internet site is located in the Seychelles. Either the film companies feel that the law of the Seychelles does not enable them to have the site closed down (an unlikely position), or that if they obtained such an order from the court in the Seychelles, Newzbin would just resite somewhere else, resulting in a never ending game of chase. The second is much the more likely reason, as such resiting has happened once already, the current Newzbin being already in its second incarnation.
I do not support breach of copyright. Although I do not watch films over the internet, I do stream audio, legally, via a paid-for site (Spotify) which has all the necessary copyright permissions and where a proportion of my subscription goes to the artists I listen to. Accepting the position that breach of copyright is wrong, the next question to ask is whether civil proceedings involving what amounts to a third party — the internet service provider — is the right way to do it.
This is because in such proceedings there is another and very important stakeholder unrepresented at the table, namely the public interest in the maintenance of freedom of access except on pressing public interest grounds which might override this right, and which is properly supervised and not done secretly. The important point here is that civil proceedings before a court are only concerned with whether a civil wrong is being committed, and if it is, what order should be made by the court to prevent it. Once on a test case such as this the court finds that there is a matter to be remedied under English civil law, a precedent is then set for other similar cases, and in theory there would be no need for further references to a court for a shut down of this kind: future blocking could simply be done by agreement.
This judgement is founded on a number of interacting pieces of legislative material, beginning with Council Directive 2001/29/EC (the Information Society Directive), as transposed into domestic law by the Copyright and Related Rights Regulations 2003 and Council Directive 2004/48/EC. The 2003 Regulations enable the court to grant an injunction "against a service provider, where that service provider has actual knowledge of another person using their service to infringe copyright" and "against a service provider, where that service provider has actual knowledge of another person using their service to infringe a performer’s property right". Arnold J thought the case fell within these grounds and that in the exercise of his discretion he should make such an injunction.
However, as mentioned the outcome of this case is that, on the principle of precedence in the law of England and Wales, the film companies could now in theory write to any internet service provider and ask them to block any particular site they do not like, and if they do not agree take the case to court and have their costs awarded against the ISP. ISPs do not like to spend their time in court, nor paying other parties' costs, particularly as they are not to blame, so they are likely in the end just to amend their terms and conditions of service with their customers so allowing them to block any site where requested by a copyright owner.
If it resulted in this, we would then have censorship without any checks of any kind, by a court or anyone else. This is wrong in my view. There has already been "feature creep" on this. The technology employed by BT to block customer access is called "CleanFeed". This was introduced by BT to prevent highly illegal internet child pornography being downloaded. Now by court order this originally limited purpose of child pornography is being extended to copyright infringement. Where next? And it invites the question, what is the difference between this new internet censorship in the UK and the "great firewall of China" established by the Chinese government?
The answer to the last point is no doubt that this one (Twentieth Century v BT) is about copyright infringement, and the other (Chinese censorship) is about political views. But where does this end? Whilst this case is based on a statutory provision (the 2003 Regulations), the court has a wider power at common law to injunct against civil wrongs, and there are many other grounds for tortious intervention which might exist under civil law. Should the ISPs next be required to block any site on receipt of a complaint from someone else that it, say, breaches their privacy? And after that?
This "what next" question has no obvious answer.
I think this area is too important to be developed by the courts unsupervised by appropriate controls applied via democratic processes, which need to be at least as good as the rights of appeal to a tribunal set out in the "three strikes and you are out" proposals of the Digital Economy Act 2010. That is itself a controversial Act with a number of shortcomings, but at least it provides for some safeguards for members of the public (and the public interest) as represented by the requirement for the Department for Culture, Media and Sport to make safeguarding rules after balancing the rights of members of the public to information and freedom, and whether the complainant had got their facts right, before the "three strikes" procedure can come into effect. Furthermore Arnold J's decision on what amounts to "actual knowledge" with respect to each of their customers renders impotent the provision of section 17 of the 2010 Act empowering the Secretary of State by regulations to make provision "about the granting by a court of a blocking injunction in respect of a location on the internet which the court is satisfied has been, is being or is likely to be used for or in connection with an activity that infringes copyright", which could have contained appropriate safeguards.
The fact of the matter is that civil procedure does not deal with hidden unrepresented interests of this kind well — and why should it, as civil procedure is based on the proposition that there is a dispute between two parties to be conducted in an adversarial manner, where costs are always at stake. The increased use by the courts of secret injunctions should be a warning to us on this. And it is simply not good enough for ISPs to make comfortable arrangements to introduce censorship by the back door under penalty of costs, which we may never get to hear about. We only know about this particular case because it required proceedings in open court. Later ones may not.
I have written to the Department for Culture, Media and Sport to ask how the Secretary of State intends to deal with this. It will be interesting to see what he has to say.
The question to begin with is, why was this order necessary at all? Why not attack the source, namely Newzbin? The reason appears to be that the company and its internet site is located in the Seychelles. Either the film companies feel that the law of the Seychelles does not enable them to have the site closed down (an unlikely position), or that if they obtained such an order from the court in the Seychelles, Newzbin would just resite somewhere else, resulting in a never ending game of chase. The second is much the more likely reason, as such resiting has happened once already, the current Newzbin being already in its second incarnation.
I do not support breach of copyright. Although I do not watch films over the internet, I do stream audio, legally, via a paid-for site (Spotify) which has all the necessary copyright permissions and where a proportion of my subscription goes to the artists I listen to. Accepting the position that breach of copyright is wrong, the next question to ask is whether civil proceedings involving what amounts to a third party — the internet service provider — is the right way to do it.
This is because in such proceedings there is another and very important stakeholder unrepresented at the table, namely the public interest in the maintenance of freedom of access except on pressing public interest grounds which might override this right, and which is properly supervised and not done secretly. The important point here is that civil proceedings before a court are only concerned with whether a civil wrong is being committed, and if it is, what order should be made by the court to prevent it. Once on a test case such as this the court finds that there is a matter to be remedied under English civil law, a precedent is then set for other similar cases, and in theory there would be no need for further references to a court for a shut down of this kind: future blocking could simply be done by agreement.
This judgement is founded on a number of interacting pieces of legislative material, beginning with Council Directive 2001/29/EC (the Information Society Directive), as transposed into domestic law by the Copyright and Related Rights Regulations 2003 and Council Directive 2004/48/EC. The 2003 Regulations enable the court to grant an injunction "against a service provider, where that service provider has actual knowledge of another person using their service to infringe copyright" and "against a service provider, where that service provider has actual knowledge of another person using their service to infringe a performer’s property right". Arnold J thought the case fell within these grounds and that in the exercise of his discretion he should make such an injunction.
However, as mentioned the outcome of this case is that, on the principle of precedence in the law of England and Wales, the film companies could now in theory write to any internet service provider and ask them to block any particular site they do not like, and if they do not agree take the case to court and have their costs awarded against the ISP. ISPs do not like to spend their time in court, nor paying other parties' costs, particularly as they are not to blame, so they are likely in the end just to amend their terms and conditions of service with their customers so allowing them to block any site where requested by a copyright owner.
If it resulted in this, we would then have censorship without any checks of any kind, by a court or anyone else. This is wrong in my view. There has already been "feature creep" on this. The technology employed by BT to block customer access is called "CleanFeed". This was introduced by BT to prevent highly illegal internet child pornography being downloaded. Now by court order this originally limited purpose of child pornography is being extended to copyright infringement. Where next? And it invites the question, what is the difference between this new internet censorship in the UK and the "great firewall of China" established by the Chinese government?
The answer to the last point is no doubt that this one (Twentieth Century v BT) is about copyright infringement, and the other (Chinese censorship) is about political views. But where does this end? Whilst this case is based on a statutory provision (the 2003 Regulations), the court has a wider power at common law to injunct against civil wrongs, and there are many other grounds for tortious intervention which might exist under civil law. Should the ISPs next be required to block any site on receipt of a complaint from someone else that it, say, breaches their privacy? And after that?
This "what next" question has no obvious answer.
I think this area is too important to be developed by the courts unsupervised by appropriate controls applied via democratic processes, which need to be at least as good as the rights of appeal to a tribunal set out in the "three strikes and you are out" proposals of the Digital Economy Act 2010. That is itself a controversial Act with a number of shortcomings, but at least it provides for some safeguards for members of the public (and the public interest) as represented by the requirement for the Department for Culture, Media and Sport to make safeguarding rules after balancing the rights of members of the public to information and freedom, and whether the complainant had got their facts right, before the "three strikes" procedure can come into effect. Furthermore Arnold J's decision on what amounts to "actual knowledge" with respect to each of their customers renders impotent the provision of section 17 of the 2010 Act empowering the Secretary of State by regulations to make provision "about the granting by a court of a blocking injunction in respect of a location on the internet which the court is satisfied has been, is being or is likely to be used for or in connection with an activity that infringes copyright", which could have contained appropriate safeguards.
The fact of the matter is that civil procedure does not deal with hidden unrepresented interests of this kind well — and why should it, as civil procedure is based on the proposition that there is a dispute between two parties to be conducted in an adversarial manner, where costs are always at stake. The increased use by the courts of secret injunctions should be a warning to us on this. And it is simply not good enough for ISPs to make comfortable arrangements to introduce censorship by the back door under penalty of costs, which we may never get to hear about. We only know about this particular case because it required proceedings in open court. Later ones may not.
I have written to the Department for Culture, Media and Sport to ask how the Secretary of State intends to deal with this. It will be interesting to see what he has to say.
Keep calm and carry on
We are getting more predictions of financial armageddon if Congress does not raise the US government's borrowing ceiling by next Tuesday. That is the point at which the US Treasury says that it will not have the resources to fund current levels of federal spending.
The story doing the rounds is that the US may be forced to default on its sovereign debt. This is simply nonsense, and serves no one's interests because it clouds the real issues surrounding the US budget deficit, which genuinely is becoming problematic.
First, the US's existing debt obligations. Contrary to these doomsday scenarios, the US is not going to default on its sovereign debt, because there is absolutely no reason to do so. The debt ceiling is just that, a ceiling, and it does not prevent roll-over when bonds expire at maturation. The US government will just roll over the debt by issuing new bonds to replace the old, as it usually does and will continue to do: there is zero chance that the US will default on its repayments of principal. What the US administration will be precluded from doing without Congress's agreement is issuing new bonds to fund new deficits on the current account.
There is of course the issue of interest on the debt. Will the administration choose to go into temporary default on interest payments? That is highly improbable, because it has plenty of revenue to meet its debt servicing obligations: interest expenses represent under 10% of federal tax revenues annually (excluding payments into the Social Security Trust Fund for accrued future social security obligations) of which about a half is held by non-US lenders, and it is pointless defaulting on interest when there is no need to do so, because it would very significantly drive up borrowing costs when existing debt is rolled over, possibly to unsustainable levels. Anyway, arguably the US constitution requires the administration to give priority to debt servicing, as section 4 of the 14th Amendment provides that:
So whilst the US Treasury have said they will reduce allocations pro rata to all federal departments beginning late next week, this will almost certainly not include the Treasury's own interest obligations on its debt.
So the dangers lie elsewhere. These are two fold. First, the accumulating debt is going to become unsustainable: it is currently $14.46tn, which is around 96% of GDP, and going up at an astonishing rate of over $1tn a year. The US administration simply has got to get the budget under control. It could do this relatively easily by raising tax rates, but the republicans, who control the House, are blocking this. On the other hand, the democrats, who control the Senate, are blocking major cuts in federal expenditure. So there is stalemate.
Secondly, the problem if Congress does not raise the debt ceiling is that there will have to be very significant and immediate cuts in federal expenditure, probably over 20% (I have not seen the US Treasury put a figure on it) which is going to cause major disruption to the US economy. A period of (albeit probably temporary) deflation is not going to help a world barely coming out of recession. It is going to be particularly bad news if it pushes more US financial institutions into distress and insolvency. This also seems to be an unknown. The only way to handle the budget deficit is on a planned basis, not by a single big hit taking place overnight between Tuesday evening and Wednesday morning.
So if a deal can't be reached, the problem is not default on US sovereign debt, but default on commercial debt in the US brought on by deflation, and its domino effect on the world financial system.
The smart money of course is on the House and the Senate doing a deal some time next week.
The story doing the rounds is that the US may be forced to default on its sovereign debt. This is simply nonsense, and serves no one's interests because it clouds the real issues surrounding the US budget deficit, which genuinely is becoming problematic.
First, the US's existing debt obligations. Contrary to these doomsday scenarios, the US is not going to default on its sovereign debt, because there is absolutely no reason to do so. The debt ceiling is just that, a ceiling, and it does not prevent roll-over when bonds expire at maturation. The US government will just roll over the debt by issuing new bonds to replace the old, as it usually does and will continue to do: there is zero chance that the US will default on its repayments of principal. What the US administration will be precluded from doing without Congress's agreement is issuing new bonds to fund new deficits on the current account.
There is of course the issue of interest on the debt. Will the administration choose to go into temporary default on interest payments? That is highly improbable, because it has plenty of revenue to meet its debt servicing obligations: interest expenses represent under 10% of federal tax revenues annually (excluding payments into the Social Security Trust Fund for accrued future social security obligations) of which about a half is held by non-US lenders, and it is pointless defaulting on interest when there is no need to do so, because it would very significantly drive up borrowing costs when existing debt is rolled over, possibly to unsustainable levels. Anyway, arguably the US constitution requires the administration to give priority to debt servicing, as section 4 of the 14th Amendment provides that:
"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned"This was originally designed to boost market confidence following the US government's repudiation of the debts of the Confederate government after the end of the civil war, but still stands as a general guarantee of government borrowing. Having said that, there is not too much distinction between a contractual obligation under bond warrants to repay at the due date fixed for maturation and meet interest obligations, and a constitutional obligation to really, really repay at the due date fixed for maturation and meet interest obligations. The amendment is window dressing, but window dressing with a purpose.
So whilst the US Treasury have said they will reduce allocations pro rata to all federal departments beginning late next week, this will almost certainly not include the Treasury's own interest obligations on its debt.
So the dangers lie elsewhere. These are two fold. First, the accumulating debt is going to become unsustainable: it is currently $14.46tn, which is around 96% of GDP, and going up at an astonishing rate of over $1tn a year. The US administration simply has got to get the budget under control. It could do this relatively easily by raising tax rates, but the republicans, who control the House, are blocking this. On the other hand, the democrats, who control the Senate, are blocking major cuts in federal expenditure. So there is stalemate.
Secondly, the problem if Congress does not raise the debt ceiling is that there will have to be very significant and immediate cuts in federal expenditure, probably over 20% (I have not seen the US Treasury put a figure on it) which is going to cause major disruption to the US economy. A period of (albeit probably temporary) deflation is not going to help a world barely coming out of recession. It is going to be particularly bad news if it pushes more US financial institutions into distress and insolvency. This also seems to be an unknown. The only way to handle the budget deficit is on a planned basis, not by a single big hit taking place overnight between Tuesday evening and Wednesday morning.
So if a deal can't be reached, the problem is not default on US sovereign debt, but default on commercial debt in the US brought on by deflation, and its domino effect on the world financial system.
The smart money of course is on the House and the Senate doing a deal some time next week.
Thursday, 14 July 2011
MPs get tough
Update: That was quick. It appears that a visit from the Deputy Serjeant at Arms was sufficient to persuade the Murdochs to appear next Tuesday after all. Quite what they think they have achieved by their side show before appearance is not clear.
________________________________________
There has been plenty of hypocrisy from the leaders of all the main parties in the phone "hacking" scandal involving the News of the World, and Gordon Brown's attempted explanation yesterday of his earlier close links with the newspaper proprietors concerned was both to type and frankly ludicrous. However this affair is now throwing up some very interesting legal and constitutional issues.
This is because the Culture, Media and Sport Select Committee of the House of Commons is reported to have ordered this morning the Serjeant at Arms to issue formal summonses to Rupert Murdoch and his son James to appear before them on Tuesday, the Committee having had their earlier informal invitations to appear refused by the two. There has been some suggestion, most recently on the BBC's website, that because the Murdochs are American citizens they can ignore the summonses.
In my view that is wrong, and that to ignore the summonses would be extremely foolish with respect to the Murdochs' business interests in the UK.
The House of Commons has the same powers at common law as courts of law to summon attendance of people before them and for the production of papers by them. A failure to obey such a summons is a contempt of Parliament (in the case of a summons by the House of Commons) or a contempt of court (in the case of a summons by a court). Such a contempt is punishable by a fine or imprisonment. There is no need for the House of Commons to apply to court for the levying of such a fine or for imprisonment: upon finding contempt it can of its own motion commit a person to the Tower of London, or another place of detention, for imprisonment should it wish, or levy a fine.
The House of Commons has, by its standing orders for public business, delegated the power to summon people and papers to a number of its select committees. The Culture, Media and Sport Select Committee is a departmental select committee established under standing order 152, and under order 152(4)(a) it is one of the committees to which that power has been so delegated. So the summonses issued by the committee are punishable as a contempt in the event of non-compliance.
I explored international jurisdictional issues involving courts of law in articles on the conflict of laws and on last year's Liverpool football club litigation. The principles concerning judgments of the House of Commons are similar. Presumably the BBC's reporter considers that contempt of Parliament may only be committed by subjects of Her Majesty, but I think they have that wrong.
Any warrant for commitment or fine issued by the House of Commons would not be enforceable in or by foreign jurisdictions. However, in my view it may be enforced against anyone within the United Kingdom and against any possessions within the United Kingdom. The fact that someone is a foreign citizen does not prevent them, whilst in the United Kingdom, being arrested, fined and imprisoned under a warrant of the House of Commons, any more than a foreign citizen remaining in the United Kingdom may escape arrest, trial and imprisonment for an offence committed whilst here. International law on such matters generally works on the basis of "my gaff, my rules" (to quote the "pub landlord" Al Murray). On criminal matters, there are various extradition treaties under which a foreign citizen who flees may be compelled by his own courts to return to the place where a serious offence was committed for trial, but that does not apply in this case.
So if either of the Murdochs fails to appear and remains in the United Kingdom, he may be arrested. Their options now are to appear, or to leave the UK. Leaving means in theory never setting foot within the UK again. But even if they leave, a fine may be levied against their assets within the UK, which includes by all accounts a large equity stake in a number of UK newspapers. Furthermore, a failure to appear before the committee may also affect any "fit and proper person" tests to which their UK-based activities are subject in the future.
So my strong guess is that (i) they will appear, and (ii) they will thereby make themselves look stupid by refusing the earlier informal invitation.
________________________________________
There has been plenty of hypocrisy from the leaders of all the main parties in the phone "hacking" scandal involving the News of the World, and Gordon Brown's attempted explanation yesterday of his earlier close links with the newspaper proprietors concerned was both to type and frankly ludicrous. However this affair is now throwing up some very interesting legal and constitutional issues.
This is because the Culture, Media and Sport Select Committee of the House of Commons is reported to have ordered this morning the Serjeant at Arms to issue formal summonses to Rupert Murdoch and his son James to appear before them on Tuesday, the Committee having had their earlier informal invitations to appear refused by the two. There has been some suggestion, most recently on the BBC's website, that because the Murdochs are American citizens they can ignore the summonses.
In my view that is wrong, and that to ignore the summonses would be extremely foolish with respect to the Murdochs' business interests in the UK.
The House of Commons has the same powers at common law as courts of law to summon attendance of people before them and for the production of papers by them. A failure to obey such a summons is a contempt of Parliament (in the case of a summons by the House of Commons) or a contempt of court (in the case of a summons by a court). Such a contempt is punishable by a fine or imprisonment. There is no need for the House of Commons to apply to court for the levying of such a fine or for imprisonment: upon finding contempt it can of its own motion commit a person to the Tower of London, or another place of detention, for imprisonment should it wish, or levy a fine.
The House of Commons has, by its standing orders for public business, delegated the power to summon people and papers to a number of its select committees. The Culture, Media and Sport Select Committee is a departmental select committee established under standing order 152, and under order 152(4)(a) it is one of the committees to which that power has been so delegated. So the summonses issued by the committee are punishable as a contempt in the event of non-compliance.
I explored international jurisdictional issues involving courts of law in articles on the conflict of laws and on last year's Liverpool football club litigation. The principles concerning judgments of the House of Commons are similar. Presumably the BBC's reporter considers that contempt of Parliament may only be committed by subjects of Her Majesty, but I think they have that wrong.
Any warrant for commitment or fine issued by the House of Commons would not be enforceable in or by foreign jurisdictions. However, in my view it may be enforced against anyone within the United Kingdom and against any possessions within the United Kingdom. The fact that someone is a foreign citizen does not prevent them, whilst in the United Kingdom, being arrested, fined and imprisoned under a warrant of the House of Commons, any more than a foreign citizen remaining in the United Kingdom may escape arrest, trial and imprisonment for an offence committed whilst here. International law on such matters generally works on the basis of "my gaff, my rules" (to quote the "pub landlord" Al Murray). On criminal matters, there are various extradition treaties under which a foreign citizen who flees may be compelled by his own courts to return to the place where a serious offence was committed for trial, but that does not apply in this case.
So if either of the Murdochs fails to appear and remains in the United Kingdom, he may be arrested. Their options now are to appear, or to leave the UK. Leaving means in theory never setting foot within the UK again. But even if they leave, a fine may be levied against their assets within the UK, which includes by all accounts a large equity stake in a number of UK newspapers. Furthermore, a failure to appear before the committee may also affect any "fit and proper person" tests to which their UK-based activities are subject in the future.
So my strong guess is that (i) they will appear, and (ii) they will thereby make themselves look stupid by refusing the earlier informal invitation.
Subscribe to:
Posts (Atom)