Imrecon

I have been reading the story of MG Rover in the independent inspectors' report published last month by the Department for Business, Innovation and Skills (Volume I and Volume II).  It's a sad story, but an illuminating lesson about when things are set up to go wrong, they go wrong.

Many years ago, for my maths degree, I read Thomas Kuhn's ‘The Structure of Scientific Revolutions'.  It came back to me this summer when I read Andrew Smithers' recent book, ‘Wall Street Revalued - Imperfect Markets and Inept Central Bankers'.  Smithers writes about a Kuhnian paradigm shift in financial economics, on the Efficient Market Hypothesis.  As I'll argue, at stake is up to 2% on the cost of equity assessment for regulated businesses.

31 July 2009 - Provisional UK GDP figures for the second quarter of 2009 were announced last week and the CAA has also published provisional passenger data at UK airports for June 2009.  The new data allow me to update my comments after Q1.  The new data give a strikingly different picture.

What profit should be allowed for in a price cap?  It is always an important question for a price review - very material[1] and symbolically significant.  Because most of us know what it is like to have a mortgage, we have an innate understanding of the cost of capital.  We also have a sense of the justice of it - if it is set too high, investors will get undeserved gains at the expense of consumers; if it is too low, they will suffer undeserved losses and important investment may not happen.  It is politically potent.