Why Austerity in Britain Has Run Its Course • Hedge Funds and Mad Men Don’t Mix

To boost growth, the Iron Chancellor needs to loosen his grip

The bad news never stops for U.K. Chancellor of the Exchequer George Osborne. On Dec. 5, he had to announce that economic growth this year will fall below zero and the country’s debt will go on rising as a share of the economy even longer than he had pledged.

Osborne’s midyear budget statement was the moment for him to relax austerity and introduce convincing measures to stimulate the anemic levels of investment and growth that now threaten long-term damage to the economy. Unfortunately, Osborne continued to play the role of Iron Chancellor, arguing that to loosen fiscal policy now would spook markets, drive up the U.K.’s low borrowing costs, and put it on “the road to ruin.”

In lieu of real change, he proposed a set of well-intentioned but ultimately insignificant policies, restricted by the need to make the package as a whole fiscally neutral. Osborne did not need to be this cautious.

The chancellor did act to redirect government money in a few ways likely to produce growth. He said he’d reduce the nominal rate of corporation taxes to 21 percent from 24 percent in 2014 (compared with 35 percent in the U.S.). He also increased by a factor of 10 the amount of capital investment that U.K. companies can make exempt from taxes each year, to £250,000 ($402,300) from £25,000.

Osborne scraped together £5 billion to spend on schools, transportation, and flood defenses. He also set up a body to eliminate the regulatory gridlock that’s blocking development of shale gas in the U.K. and promised tax breaks for exploration, ahead of a new policy aimed at increasing Britain’s production and use of natural gas. These are all intelligent ideas that may boost construction and employment in the near term, and growth in the longer term.

The scale of the projects, however, is too small to be significant. The Ernst & Young Item Club, an independent group that examines U.K. budgets, figured that the £5 billion infrastructure package might increase growth by 0.2 percent. It recommends a package of similar spending worth £14 billion.

We don’t argue with Osborne’s original decision to embrace austerity — the hole that the banking crisis blew in the U.K.’s finances was huge. Yet a lot has changed over the past two or three years, and Osborne should recognize it. If he sets out a clear plan to bring down debt in the medium term, the benefit of his bid for credibility is that markets will probably believe him and understand the need to give a modest boost to the economy as growth stalls. In the next few months the British chancellor should use the trust he has built to ease austerity’s grip.

Lifting the ban on advertising by hedge funds puts investors at risk

The U.S. Congress probably didn’t mean to turn the $2.3 trillion hedge fund industry into a breeding ground for fraud when it passed a law designed to make it easier for small companies to raise capital. That may well be the result unless the Securities and Exchange Commission steps in with new rules.

Congress passed the Jumpstart Our Business Startups (JOBS) Act with bipartisan support, and President Barack Obama signed it into law in April. Among its provisions, this misguided piece of legislation allows so-called private placements and hedge funds, lightly regulated private investment pools that serve the wealthy and institutions, to advertise their wares to the public for the first time.

Not only is this a bad idea, it’s unnecessary. High-performing hedge funds aren’t having trouble raising money to invest. In September, the last month for which data are available, funds in the top 10 percent as measured by investment returns picked up an additional $10 billion to manage. The bottom 10 percent had an outflow of $6.4 billion.

It isn’t hard to see what lifting the ad ban might lead to: Underperformers will flog their funds on the airwaves, on websites, and in the pages of the financial press, aiming at unsophisticated investors eager to get the same fabulous returns as the Wall Street elite.

The SEC should ensure that only accredited investors — those deemed sophisticated and wealthy enough to assess risks and absorb losses — can invest in advertised hedge funds. Generally, these investors must meet an annual income or net worth test, currently $200,000 ($300,000 for a couple) and $1 million, respectively. But these financial thresholds haven’t been updated since 1982. To bring the benchmarks up to date, the agency should raise the income standard to $500,000 for individuals ($750,000 for couples) and net worth to $2.5 million, and then index them to inflation.

The agency can apply the same advertising and marketing guidelines to hedge funds that it already applies to mutual funds. For example, mutual funds disclose their fee structures, provide performance metrics based on standardized yardsticks, and reveal their underlying investments.

The potential risks to hedge fund investors are greater because of the funds’ opacity and their compensation structure, which encourages managers to bet big and grab a share of any profits. Many hedge funds hold thinly traded or illiquid investments, making it impossible for investors to withdraw their money on short notice. Rules should require hedge funds to spell this out.

Markets benefit when smart oversight enhances transparency and promotes integrity. Allowing unfettered hedge fund advertising would be a significant move in the opposite direction. The SEC has a duty to write the necessary regulations to safeguard the investing public.

To read Simon Johnson on systemic risk and Jonathan Weil on Glass-Steagall, go to: Bloomberg.com/view


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