Greenspan's medicine still needs time to work

Lloyd's of London; ITN shenanigans

Alan Greenspan, chairman of the Federal Reserve, upped the dosage again yesterday – the seventh time he has cut short-term US interest rates this year – and though there are now at last clear signs of the patient beginning to respond to therapy, he admits he may have to do more to stop a further weakening in the US economy. The new feature this time around is slowing growth abroad, which is compounding the weakness in business profits and capital spending.

The usually reliable Conference Board index of leading economic indicators is showing its third rise in as many months, a reasonable enough sign that the revival in economic activity anticipated for the end of this year may indeed come to pass. The bigger question, perhaps, is how long lived that revival is likely to be. With luck, planned tax rebates will combine with the new low interest rate environment to keep consumer spending strong, offering a solid platform from which business confidence can rebuild.

But if growing job insecurity causes the consumer to start battening down the hatches as well, then all bets are off. The fourth quarter recovery would turn out to be no more than a blip on the road to prolonged recession. What is certainly true is that the stock market is indicating a more serious economic downturn than we have so far seen. According to data from Lehman Brothers, the present bear market is already the second worst fall in US equities relative to bonds since the Second World War, and the fourth worst fall in the last century. Only the bear markets immediately following the 1929 crash, the first years of the Second World War, and the early to mid-1970s, are worse.

Of course, the way in which this hierarchy of stock market calamities is constructed is a bit misleading, since most bear markets in equities are accompanied by an almost equally vicious bear market in bonds. This time around, bonds have moved in the opposite direction to equities, as prices adjust to what looks likely to be a prolonged period of low interest rates and low inflation.

It may still be too pessimistic to be predicting outright recession, either in the US or the UK, but there remains a lot of excess to be worked out of the system after the over indulgence of the late 1990s, and it is premature to expect any kind of a sustained economic or stock market revival any time soon.

Lloyd's of London

Come on in, the water's wonderful. Yesterday's proclamation from the Association of Lloyd's Members that the famous London insurance market is on the verge of "a period of significant profits" that promise to enrich its individual "names" (those that underwrite the market's liabilities with their capital) will prompt a cynical laugh in many quarters. You don't exactly need to be in your dotage to remember the way incompetence, negligence and fraud impoverished and worse a whole generation of Lloyd's names. So serious was the damage to reputation and capital that it's a wonder the market survived at all.

Since then, of course, Lloyd's of London has cleaned up its act, ditched unlimited liability, submitted to external regulation and opened its doors to foreign brokers, and today it once more commands an important position in world insurance markets, particularly in marine and aviation business. The fact remains, however, that unless you were lucky or clever enough to have been stuck into the right syndicates, it has continued to be hard to make money out of Lloyd's.

The Association of Lloyd's Members makes the point that on the whole, individuals operating as traditional Lloyd's names have outperformed the corporates that now provide the market with the majority of its capital. Even so they would still have lost money, and quite a lot of it too, over the last five years.

The ALM's prediction that the market is poised to move substantially into profit is reasonable enough given the way premiums have hardened over the last year. More contentious is the idea that the upturn will last longer than in previous cycles, depending as it does on the premise that difficult economic conditions will continue to shrink the total amount of insurance capacity. Things are obviously much better for Lloyd's members than they've been for quite a while but, even with limited liability, it's a brave individual who takes the plunge.

ITN shenanigans

The Broadcasting Act is a strange and unwieldy piece of legislation if ever there was one. Nowhere is this more apparent than in the Channel 3 News Ltd consortium, which is seeking to relieve ITN of its contract to produce ITV's news bulletins from 2003. A more unnatural mix of bedfellows is hard to imagine, and it's one entirely imposed by the constraints of the Act.

Leading the challenger, one must assume, is Rupert Murdoch's BSkyB. But the Broadcasting Act limits any one company to a 20 per cent stake, this in the presumed interest of plurality and independence, so there are four other partners of equal size. For the record, they are a mix of the bold, (Bloomberg); the slick (CBS); the ambitious (Chrysalis); and the obscure (Ulster Television).

Their rumoured bid of about £35m per year to produce News at Ten and ITV's other bulletins would save the network around £10m annually. ITN has also cut prices, so ITV should get a bargain, whichever way it turns. In most other respects, however, the contest is a farce. It beggars belief that ITN, owned by its own gang of five – Granada, Carlton, Reuters, United Business Media and Daily Mail & General Trust – will lose. Since Granada and Carlton control the ITV network, it takes a rather spectacular leap in logic to see why they would want to award the contract to someone else.

ITV is being careful to ensure that a fair and transparent selection process precedes its meeting of network grandees in mid-September to select the winner. This should at least ensure that once ITN is re-selected there can be no accusations of foul play. ITV isn't even required to select the lowest bid. All it has to do is ensure that the process of selecting ITN is open and transparent.

You have to wonder why Channel 3 News is bothering at all. Aside from the regulatory quagmire, there are wider issues involved. ITN is actually the only profitable broadcast news service in the UK, but that is only because it piggie backs off the monopoly of ITV. The other news services are cost, not profit, centres. Sky News, the most popular of the seven 24 hour news channels available in the UK, still loses millions every year with profits a receding prospect now that the very limited subscription fees it once got from cable homes have been undermined by the BBC offering News 24 for free.

In this game of subsidy and losses one endgame emerges: consolidation. The BBC, thanks to the licence fee and its mandate, will plough on, but Sky and ITN will eventually find it useful to call a truce once new broadcasting rules – due in 2003 – allow mergers. That would leave Britain with two domestic TV news channels: one profitable, the other licence fee supported. SkyTN, anyone?

j.warner@independent.co.uk