Jeremy Warner's Outlook: Bernanke is a good choice for the Fed, but he hasn't been left with an easy legacy

RWE plans to float Thames Water; Britain's new brain drain gathers pace
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The Independent Online

Has he chosen well in Ben Bernanke, a career economist who has been heading up the President's Council of Economic Advisers? The proof will be in the eating, but by opting for the bookies' favourite, Mr Bush demonstrates that he hasn't yet entirely surrendered all sense of judgement. With the US economy in such delicate shape, this was not the moment for a surprise, ill-qualified appointment.

The starting point for thinking Mr Bernanke a sensible choice is that Mr Greenspan is in many respects an impossible act to follow. Over 18 years of generally faultless rule, Mr Greenspan has elevated the position of chairman of the Federal Reserve into a god-like status. A cult of personality has developed around the role, and there is an almost religious faith that comes from Mr Greenspan's longevity and wisdom in his ability to calm crises and do the right thing. He had become in every sense an icon.

No one could readily step into these shoes, and indeed it is the abiding criticisms of Mr Greenspan that he had allowed the direction of US monetary policy to become so personalised. Rebuilding the Fed's credibility as an institution, rather than as a personification of Mr Greenspan, must be one of Mr Bernanke's first priorities. In this he should be greatly assisted by his apparent belief in inflation targeting.

Under Mr Greenspan, the Fed has had no formal inflation target. His approach has rather been one of "risk management", requiring a high degree of trust in his judgement on where the balance of risk in the economy lies - inflation or growth. By introducing a formal target, Mr Bernanke would dispense with the uncertainty and lack of transparency which surrounds US monetary policy.

One criticism of Mr Bernanke is that he's too hung up on the risk of deflation - a obsession he apparently acquired through painstaking study of the Great Depression - and therefore insufficiently alert to cyclical bouts of inflation. While serving as a member of the Fed's Open Markets Committee, it was he who advocated the use of "unconventional" policy action to counter the threat of deflation.

It might also be possible to criticise him as too much of a Republican (but then so was Mr Greenspan) and perhaps insufficiently experienced of top policy jobs for such high office. Yet the real problem he's got is that Mr Greenspan was representative of a golden age of US economic expansion. The next phase of development may be a good deal less benign. In such circumstances, Mr Bernanke will struggle to emulate his predecessor, however good he is.

RWE plans to float Thames Water

RWE is not the first company to discover that water and electricity do not mix and it probably won't be the last. Having splashed out £6.8bn on Thames Water five years ago and a further £4.2bn on American Water Works a year later, the German utility is now planning a partial sale of the two businesses through an initial public offering, almost certainly at a discount to the price it originally paid.

It is not yet clear whether RWE Thames Water, as it is now known, will be refloated in London, New York or Frankfurt. But it does appear that RWE's chairman, Thomas Fischer, has decided which investment bank will get the mandate - step forward WestLB, where the chief executive just happens to be one Herr T Fischer.

The plan, according to reports from Berlin, is to list about one-third of the water business initially, the rationale being that RWE could reinvest the proceeds more profitably in its gas and electricity division.

A year after buying Thames, RWE swooped on npower, where it quickly discovered the opportunities for cross-selling electricity to water customers were limited, as was the scope for cost savings. Thames has also been a high-maintenance business, with RWE forced to invest a further £2bn in the London water mains on top.

The then chief executive of RWE, Dietmar Kuhnt, matched Thames Water's all-time share price peak when he bought the business. He also paid top dollar for American Water Works, a deal which took place in the shadow of the 9/11 attacks. Even at the time, everyone said he was paying too much, and so it has proved.

Britain's new brain drain gathers pace

If you work in the vicinity of London's Canary Wharf, as I do, you could reasonably draw the conclusion that the whole world has come to work in Britain. Here it is almost as common to hear French, Italian, German and even Russian spoken in the bars and shopping malls as English. What's more, these newly arrived seem to be the cream of their generation - bright young middle class-types, drawn like bees to the honey trap of London's boom in investment banking.

They are very welcome, the more so as it seems the reverse brain drain - that is, the number of graduates leaving these shores to work overseas - is a much more prevalent phenomenon.

According to a report by the World Bank, nearly one-sixth of Britain's stock of working age, British born graduates - or 1.44 million - live and work overseas, which is proportionately more than anywhere else in the world. What's more, recent figures from the Office for National Statistics appear to confirm the numbers are on a rising trend.

If immigration into Britain is at a record, so too is the number of Britons leaving these shores for a better life overseas. The new additions tend to be unskilled. The losses tend to be the highly skilled and educated.

Is this a good or a bad thing? One of the report's authors, Frédéric Docquier, draws the obvious conclusion that it must be bad for a country to lose the economic benefit of those it has so expensively educated and trained, yet I'm not sure he's entirely right about this.

In the developing and Third world, high levels of emigration arguably bring a net economic gain, since those who leave tend to remit so much. The social cost may be another matter, but in general the amounts that can be earned overseas are much higher than back home, creating a big inflow of wealth. Even for a developed country, to lose so many graduates may not be as harmful as it seems. Well-educated Britons are in general leaving to work overseas not because they have to but because they can. They speak the language of international business,and are in demand the world over. Britain is a small and overcrowded island. It is also rich, culturally vibrant and economically productive, so it is only natural that human capital should be one of its biggest exports.

As Ireland has discovered, it is actually extremely helpful economically to have a large and growing overseas diaspora. Many of these people will eventually return, bringing new skills, wealth and a different set of perceptions with them, even those who don't tend to retain a residual affection for the old place, which enormously enhances the country's political and cultural position in the world.

Nor is this latest bout of graduate emigration like any of the previous, economically or disaster-driven waves of emigration from Britain. With greatly enhanced mobility, we are seeing the beginnings of a genuinely global market in skills. It is only natural graduates should be in its vanguard.

Unfortunately, you can always have too much of a good thing, and if graduates are leaving because rates of pay and tax are becoming uncompetitive, then in the long term that spells big trouble. The evidence suggests this is not yet the case - lifestyle, opportunity and adventure are more frequent determinants - but it could easily become so.

j.warner@independent.co.uk

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