It seems paradoxical to tighten up lending standards while underwriting 95 per cent of some lending to new home owners. However the Government’s actions are understandable once one reflects upon a perpetual conundrum facing the banking industry.

It is normal practice in lending to charge a higher interest rate for more risky borrowers (and/or a larger deposit in the case of mortgage lending). The logic is that the lender (often a bank or building society in the case of mortgage lending) deserves greater compensation for taking on a riskier loan and needs the greater income from the loan to hedge the risk of default on other risky loans they may have. However with this practice there is a counter-current that works against the bank: the higher interest rate disproportionally penalises riskier (usually poorer) borrowers and so could trigger the default that the bank is trying to hedge against. Some banks refuse to charge higher interest rate to riskier borrowers, they simply refuse to do business with them or offer them a smaller loan.

Banks have looked for ways around this problem and one tactic used to reduce the negative effect that borrower default will have on a bank’s balance sheet is securitisation. Securitisation played a large part in the sub-prime defaults that triggered the financial crisis and so has had a pretty bad press since; however, as a purely theoretical concept, it is sound. Securitisation is the pooling of risk. By bundling loans together, risk can be spread around the system. One borrower may default but a bank holding a security of lots of different loans will expect the repayments of the other borrowers to cover such a loss. The problem, as was amply demonstrated in the crisis was that risk is often correlated: that is to say that as the chance of one borrower defaulting increases, the chance of others defaulting also increases. This is because lots of borrowers may default for the same reason, a recession for instance or a fall in house prices. A more effective securitisation method would look to bundle up risks that were uncorrelated, but with the housing market that can be hard to do.

The result is that we are perhaps stuck with the conundrum that faces the government and lots of the population today: we want people to own houses but do not want to encourage banks to offer loans to people who cannot pay them back. The Government and the FSA responding, to both concerns, took the two, apparently contradictory, actions mentioned above.

The real problem is that not enough people can afford houses: house prices are too high and no amount of subsidised lending will change that without seriously destabilising the financial system. With demand for houses outstripping supply, the solution is to increase supply. The Coalition has realised this and has taken steps to increase construction, there are proposals to loosen planning laws and use public funds to increase the stock of affordable housing. It is these supply-side reforms, in particular reform of the planning laws, that need to be completed and taken further. To this end the Government needs to face down the protests from those such as the National Trust and Greenpeace, who object to loosening of the planning laws. If such protests are allowed to win-out it is clear that there will be little room for anyone in future Christmases, whether at the inn or not.

In 2001 Portugal abolished all criminal penalties for personal possession of drugs, from cannabis to heroin, in an attempt to reduce the number of drug related deaths and the spread of HIV/AIDS. After several years there was tentative discussion about the success of Portugal’s scheme (see for example the Economist’s article of August 2009) and although I don’t intend to add to the debate about the decriminalisation of drug use here, I do hope to discuss one particular element of Portugal’s policy that I find laudable.

Rather than sending drug users to serve jail time, Portugal decided instead to focus efforts and funding on prevention and cure. Campaigns were set up to advertise, for example, the dangers of sharing needles and initiatives were encouraged that offered help to those drug users wishing to wean themselves off the habit. Prioritising treatment over punishment is perhaps a principle that should be adopted more widely in the world of legalised, yet harmful, substances. In Britain there is already some evidence that this is being done with reference to smokers: for example, surgeons treating smokers for smoking-related diseases are strongly encouraging their patients to join the NHS “smokefree” initiative that helps people to quit. Eventually it is possible that calls might even be made for NHS treatment to be refused to smokers who do not sign up to such initiatives, thus using a mixture of carrot and stick to encourage healthier habits. Naturally this raises the question of where to draw the line but there seems to be no reason why the same principles couldn’t be applied in other areas, for example to long term alcohol abusers.

It is clear that the UK and many other countries are moving steadily towards making life more difficult for smokers in particular. Smoking bans in indoor public places are now in place in several countries including China – home to 1/3 of the world’s smokers, and Russia intends to bring in a law to the same effect from 2015. New York has even taken steps to ban smoking outside in public places. In the UK meanwhile it will now be illegal to sell cigarettes from vending machines and there are questions about whether or not smoking should be banned in cars where children are present. Even political leaders, from Obama to Nick Clegg are being encouraged to give up (although whether smoking was simply another convenient stick with which to beat Nick Clegg is open to debate.) These legal changes are welcome in that they do much to protect non-smokers from the effects of passive smoking. However I hope I am not alone in saying that, particularly in a country that is fortunate enough to have a National Health Service, there should be a greater focus on helping current smokers to quit and giving them as many incentives to do so as possible. Only then can we really be sure of doing as much as possible to protect, for example, the children of smokers, who are twice as likely to take up the habit as the children of non-smokers. A radical overhaul in the NHS treatment of smokers alongside increased funding for the Quit campaigns might, in this way, be a step in the right direction to achieve that mixture of incentive and aid.

The vote that granted Palestine full membership of the UN Cultural and Educational Agency (UNESCO) could potentially have wide-ranging consequences for the role of international organisations within international affairs and their relationship with the United States.

The UNESCO bid forms a part of the Palestinian effort to bring their pursuit of an independent state onto the international arena, believing that gaining “international consensus” and support for statehood in this way will have a greater chance of success than the negotiations that continue to stall between the Israeli and Palestinian authorities. The strong backing within UNESCO for the Palestinians’ application, which saw 107 members voting for and only 14 against (52 abstained and 14 were absent)seems to vindicate this belief, especially as there is a possibility that it will lead to more successful bids, making Palestine a full member of other UN organisations. However, these developments are leaving the US in an increasingly difficult situation.

A law passed by Congress in the 1990s forbids the US from funding UN bodies that recognise Palestine, meaning that the US has already pledged to withdraw the $70-80 million dollars it gives to UNESCO every year: approximately a fifth of its annual budget. The difficulty here is that UNESCO’s operations might go into decline, but on the other hand another nation might step in and provide the missing funds, for example one of the BRIC nations, all of whom voted for full Palestinian membership. If the same occurred in other UN organisations the US might find itself overtaken by other member states who gain increasing influence through the resources they supply. America is already in a delicate position with regards to international law, with several countries refusing to sign bilateral immunity agreements with the US, instead confirming full allegiance to the aims of the International Criminal Court, despite US threats of withholding aid. Furthermore America is having to work hard to maintain support within the Middle East as the Arab Spring takes its course; having gained some soft power by deliberately taking a back seat over Libya, the US may stand to lose it again by taking such a strong stance in this case. Cynicism amongst Palestinians about the credibility of the US as a mediator between themselves and the Israelis is already high and a lack of flexibility over the UNESCO vote is only likely to increase it. Furthermore given that only 13 other countries voted against full Palestinian membership, (as opposed to abstaining) the image America portrays of itself is of a nation who believes that there cannot be “international consensus” unless they agree to it. America certainly isn’t alone in hoping for successful Israeli-Palestinian negotiations that lead to a viable two-party solution – Britain and other EU countries sympathise with this method – however, given that there is still a long way to go in the peace process, America must avoid being classed as a hindrance rather than a help within the wider international community.

It remains to be seen whether or not US and Israeli predictions come true about the damage this vote will cause to the Middle Eastern peace process, especially if Palestine successfully applies for world heritage status for historical sites within the West Bank and East Jerusalem. Undoubtedly, Israeli-Palestine relations continue to be a political minefield and UNESCO would be advised to tread carefully. However, for the sake of America’s reputation within the international arena they too must be careful not to isolate themselves from opinions that are becoming increasingly universal. In 1984 the US withdrew from UNESCO due to the latter’s increasing politicisation. Having re-joined UNESCO in 2003 in a bid to prove their adherence to human rights and human security America needs to avoid repeating history and cutting out its options for participation in international organisations that are steadily increasing in importance and influence.

In the run up to the Euro-crisis summit on Wednesday people discussed the bail-out fund, €1 trillion, €1.5 trillion, even €2 trillion?! It was a case of how big the bazooka needed to be. Unfortunately not enough thought has been given to examining where exactly this money will come from. This is important as simply stumping up cash can just transfer the risk from one party to another.

Carmen M. Reinhart and Kenneth Rogoff, in their seminal book ‘This Time Is Different: Eight Centuries of Financial Folly’ highlight the link between bank crises and sovereign debt crises: when a bank gets into trouble and is bailed out by the sovereign, the debt and the risk is simply transferred to the sovereign. We saw this happen in the recent financial crisis and we could be coming full-circle with European sovereign defaults threatening the same European banks that were previously bailed out.

The upshot of this is that risk cannot be brushed under the carpet. This is worth bearing in mind with plans to increase or ‘leverage’ the financial firepower of the EFSF. If European states are going to agree to guarantee a greater number of bonds issued by threatened states then this will put the finances of such countries at risk. If the ECB is to take a greater role in supporting the finances of the club-med states then this will also negatively affect the credit ratings of the Eurozone countries that explicitly stand behind the ECB.

In either case, the sovereigns that would be expected to foot the bill, France, Germany, etc, are themselves under increased financial pressure. Growth has slowed in nearly all European countries, European states will, in all likelihood, have to help their banks increase their capital in expectation of a write-down on Greek debt, and the majority are pushing through austerity measures that reduce the scope for any financial largesse.

While the Eurozone may need a bigger bazooka, there is no safe way to fund it. One other option is closer fiscal union, which looks increasingly likely despite German aversion to it. The other option is to transfer risk outside the Eurozone. In recent days there have been reports of Klaus Regling, head of the European bailout fund meeting with Chinese officials in a bid to get China to support the EFSF more than it is currently doing so. To all intents and purposes this is the closest thing to a ‘free lunch’ Eurozone leaders are going to get, however the ramifications of China holding far greater quantities of European debt are not clear. Politically, China will certainly demand a quid pro quo for its support, as one analyst recently put it: ‘China wants to get what it wants if it is to play a role in this’. Economically, China itself is facing some worrying developments, including rising inflation and a tightening of credit. Furthermore, it should be clear to everyone that Chinese sovereign debt purchases in the last decade contributed to the financial imbalances that were so evident in the wake of the financial crisis; there could be significant dangers of resuming or even increasing this trend.

One of the lessons of the financial crisis was that financial wizardry could not mitigate all risk, and in muddying the waters it could make matters worse by severing links of accountability in the financial system. Eurozone leaders should reflect upon this lesson when they seek to rearm the European bazooka.

The recent media interest in the Occupy Wall Street and Occupy London Stock Exchange movements has certainly been mixed. From sympathy to contempt to exasperation on the part of St Paul’s cathedral staff at least, the protests and people’s reactions to them are proving difficult to pin down.

Besides the recent accusation that protestors are at best “part-timers” (based on thermal imaging evidence that is somewhat disputed), there is also an accusation that the protestors are not putting forward any concrete, viable demands. The diverse reports about the protests and the many generalisations that seem to be made about those engaging in them, is perhaps indicative however of a deeper problem: the inability of society to engage successfully with government on the major issues of the day. Rather than dismissing the protest movement as utopian or aimless therefore, perhaps it is time that the government not only introduced more ways to inform the wider population about the banking reforms under discussion, but also gave them the incentive to learn by opening up avenues through which people could make their suggestions for improvement heard.

Although the media makes a valiant effort to explain developments in the financial system, it is little wonder that large swathes of the public either don’t understand or don’t trust the recommendations housed within the 3000 pages of the Dodd-Frank Bill and the 300 pages produced by the Independent Commission on Banking. Not only are the reforms set for completion in a distant future, but there is little faith that the Dodd-Frank Act in particular will improve financial stability given the influence the banking sector itself had on its creation. The government might be wise therefore to attempt to include a wider spectrum of people in the drawing up of future reforms and in the implementation of ICB recommendations.

During the 18^th century, if a controversial issue was raised in Parliament, it was not unusual for the British government to specifically request that petitions and further information be sent by constituents to their MPs. This meant that groups likely to be affected by the particular issue would be encouraged to come together in order to write to their MP explaining how the proposed legislation would affect them, either for better or worse. In this way, government could put together a clearer picture of “public opinion” on the matter at hand before debating it fully. Although the definition of “the public” may have changed since then, the spirit is still laudable and perhaps it is time that this spirit of public involvement was revived. The recent e-petition scheme is a step in the right direction but there is still a considerable level of scepticism amongst MPs that the petitions it might generate will be worthwhile – this attitude must change to prevent total disenchantment with the democratic process. The wider population deserves to be given more opportunities to make their voice heard without being branded as inconvenient, ill-informed, insincere or necessarily anti-capitalist. After all there is a great difference between being against capitalism and being against a banking system that favours banks considered “too big to fail”.

It is true that protestors need to spend more time defining their demands and finding like-minded people, even if this means splitting into smaller groups. The risk otherwise is that they will all be classed under the same umbrella and be judged as too disparate a group to possibly talk with a coherent and valuable voice. However, the government can also improve the situation by spending more time informing a woefully uneducated public on the complexities of the financial system and showing greater willingness to listen to them. They might achieve this by encouraging petitions or by encouraging MPs to hold information-gathering exercises within their local constituencies, which local businesses or members of the community could attend in order to put forward their opinions on the banking crisis. The process might not be perfect but it could at least signal a step towards a more successful engagement between a public who knows what it wants and a government that is prepared to hear what they have to say.

Without attempting to suggest that the concerns and views of the British public do not matter, how Germans and the German Government acts in the next 6 months could determine what kind of EU Britain decides to stay in or get out of. This is because the fate of the Eurozone and the single currency will have an immense affect upon the EU and the choice faced by Britain.

Those looking to opinion polls for guidance on the direction that Germany is heading in will be disappointed. Currently the German Financial Times is running an online poll asking readers: do you want the Deutschemark back? Current results indicate that 54 per cent of the 3,180 voters do. Earlier this month Reuters reported that 54 per cent of Germans wanted the Deutschemark back, but interpreting the poll was difficult as ‘only 43 percent of those asked thought the German economy, Europe’s biggest, would benefit from a reintroduction of the mark’. Other polls covered in the Telegraph and the Daily Mail in 2010 also put the number of Germans wanting the Deutschemark back at between 50 and 60 per cent. However many polls, including the poll covered in the Reuters report, seem to indicate that support for reintroduction of the Deutschemark has not grown since a year ago, leading some to conclude that the current crisis is not having as dramatic an effect upon German opinion as is perhaps expected.

What can be gleaned from these polls is that the German populace and the German electorate’s feelings on the Euro are far from clear. This is unsurprising given the way in which the German economy has both benefitted and suffered from the Euro. Going forward German businesses and the German people cannot decide whether the Euro will prove to be a noose around the German economy’s neck or whether it will continue to keep German labour costs down to the benefit of German exporters.

In contrast support for the Euro amongst German politicians seems relatively secure. Although Angela Merkel’s coalition partners the FDP have flirted with a more Eurosceptic line, they are arguably the most unpopular party in Germany at the moment. Furthermore the opposition SPD are more pro-EU, and pro-Euro than Merkel’s party. In short, even if ‘Eurozonesceptic’ (as opposed to sceptical of the EU as a political structure) Germans exist, there is not an obvious party which they can rally around.

Nevertheless it would be false to conclude from this that when push-comes-to-shove German politicians and the German people will unwaveringly support the Euro. The current stance of the German Government reflects the fact that Angela Merkel’s party is aware that voters are increasingly sceptical of the benefits of the single currency. The German Government has so far refused to consider French demands to turn the EFSF into a bank to buy the bonds of financially embattled Eurozone states. Furthermore Merkel and her ruling Coalition have also refused to entertain the idea that Eurozone countries move into a fiscal union, either directly through fiscal transfers or indirectly through jointly guaranteed ‘Eurobonds’. This firm line, seen by some as dithering in the face of calamity, may actually reflect a concern by the CDU/FDP that the electorate will punish them for appearing weak, a concern already buttressed by defeats for the parties in Lander elections.

The problem is that while the current stance of the German Government may make sense from a national political point of view, it is looking increasingly out of touch with economic reality. This is a concern because to all intents and purposes, Germany is the Euro and without firm action by the German Government the Euro will implode. While supporters of the Euro may despair at Germany’s current inaction, those opposed to the Euro, and I include myself in this, should not rejoice. The Euro, in its current form is unsustainable, but seriously reforming it, or disbanding it will require leadership. At the moment there is scant evidence of such leadership in the Eurozone, perhaps because Germany, likes its national psyche, seems to be pulling in opposite directions.