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Friday, 17 November 2017

Derivatives: The Looming Disaster

As if the total failure of government in the face of Brexit was not enough of a problem for the British state all on its own, the potential catastrophe in the area of Financial Derivatives can make all other considerations trivial.

It is very hard for me - who has been a horrified observer of the development of this market through the thirty-or-so years when it has been in existence - to get my head round what is involved when derivatives meet Brexit. Most people have never had the time to understand this type of 'product', and have never felt the need to do so. Yet as far as the international financial community is concerned derivatives are by far the largest set of 'assets' that they trade in. The bankers have induced their customers, taking in all other financial traders and pretty well every firm that does real-world business, to take part in derivative business as part of the process by which unknowns and unforseeables can be wished away from the the business scenario.

As the financial world has plunged headlong into cyberspace, the possibility of counterfactual events unsettling the market has increased. In response, very clever people have developed ever-more 'advanced' derivatives. Back in the Thatcher era, when the concept was now, most derivatives were derived from real-world events; such as the incidence of severe thunderstorms in the American midwest. Insurers found that the damage that such storms could do to crops was severe; but it was highly specific to very small areas where the storm might well destroy the crop in one large field but leave the surrounding area unaffected. Meteorologists set up businesses, equipped with satellite observation and reasonably sophisticated computer programmes, that could certify whether a storm was likely to have hit a particular farm at a given map reference on a given date: this enabled an insurer of the crop to make a snap judgement, whether to accept the claim at once, or whether to investigate whether it was genuine.

This enabled a secondary business to be established, whereby the information derived about the probability of of an event [such as storm damage] occurring could be tidied-up and used as the basis of a bet on the probability of storms causing damage. Such contracts enabled insurers, and bankers who lent money to farmers, to hedge against the actual occurrence of damage. Most areas do not have storm damage in any period, so a derivative based on the probability of a storm occurring leads to no payout: but if a storm does occur, the insurer can claim against the contract and thus meet at least some of the costs of real storm damage.

Once real-event related derivatives were deemed to be viable, there was an explosive expansion of derivative contracts. The probability of an asteroid striking New York is pretty low: but a derivative can be envisaged to cover it, and offered to firms that may be anxious about concentrating their property investment in that city; and why not earthquake damage as well? Such contracts could support insurers' capital; but they soon became a means of dealing with any possibility for loss both in the real world and in the fantasy world that the derivative creators were  erecting in cyberspace. Nowadays, any improbable 'risk' can be subject of a derivative and companies are [effectively] required by their financial advisers to place their bets on the subject matter of the derivative that they want to sell.

This huge trade in bets based on synthetic probabilities is focused on the great financial centres in New York and London. The world, led by the other countries in the European Union has bought and sold derivative contracts that are legally based in the UK: and now some clever observers have pointed out that all London contracts - ever since the market was invented - have been governed by the law of England within the overall regulatory system of the EU. Some commentators have suggested that all these contracts would become void when the UK leaves the EU at midnight on 31 March 2019: unless they can all be re-written - which is an impossible task. The ministers in Mrs May's government do not even seem to be able to understand the need to keep lorries crossing the channel taking components to and from factories in the UK and on the continent: so how can they be expected even to listen to the apparently-esoteric arguments that will be put to them with increasing urgency about derivatives [and other 'products' like options]?

This country is hurtling towards a disaster that will make the 2007-9 'crash' seem nothing. The calamity will occur in markets that the ministers probably don't want to understand: but those ministers will bear responsibility for the biggest-ever financial crisis if they continue on their present course. The headbanging Brexiteers are driving us all towards ruin: and if they succeed, they will plead innocence.

Ignorance and stupidity are no defence, in law or in the court of public opinion.

Thursday, 16 November 2017

Fiddling the Books

When Railtrack - notionally, a privatised company - was declared bust, its assets [railway lines, signalling systems, many stations, masses of land etc] were seized and a new government agency called Network Rail carried on as Railtrack had done. Under the daft scheme of privatisation that was undertaken by the Major government, the infrastructure was [mostly] put under Railtrack/Network Rail while the train operating companies competed for franchises to run the trains on the Railtrack infrastructure.

In a crazier development, the government began to subsidise Railtrack [and continued with Network Rail] by giving them money to make improvements, and allowing them to borrow money for track maintenance, updating signals systems, making level crossings safer etc. They also began to subsidise some of the franchised train operating companies as well. These companies could run on a relatively slender capital investment, as the majority of the rolling-stock on the railways had been privatised separately to leasing companies that leased the trains to the operators. The leasing business was quite exclusive and was generally profitable; but where there was doubt as to whether the mass purchase of updated trains would be affordable to the leasing company or the operators, the government opened the taxpayers' assets yet again to pay for the new trains.

The net result is that the people [as a whole] are paying more, per capita, in real terms than they did under British Rail; for a service that is in some cases inferior to British Rail when it was strapped for cash.

A few years after the Railtrack debacle was ended - by the creation of Network Rail - some bureaucrat noticed that the growing debt ascribed on the books to Network Rail was in fact guaranteed by the government; that Network Rail was ultimately part of the state apparatus. So the Railtrack debt was aggregated with the national debt: which made the government's debt-reduction target even less attainable.

And now, suddenly, some other bureaucrat has noticed that housing associations are established as companies. So their aggregate debt [which has been accounted as part of the national debt] should be shunted off the government's books: and that is to be done.

The political importance of that decision is that the government is under huge criticism for the failure of 'the system' to address the dearth of 'affordable housing'. The housing association sector will now be pressured to borrow masses more money - at the prevailing low interest rates - to provide a partial solution to the housing crisis. If the bureaucracy had had the simple common sense to shunt the housing debt off the state's ledger seven years ago, when Osborne began to implement his austerity mania, thousands of homes could now be in use. Under the present regime, politics never offers the right response, even to the most obvious and urgent social issues.

Wednesday, 15 November 2017

Good Old Ken

The MP for Rushcliffe [Nottingham] had agreed to stand down from the House of Commons, had the general election that cost Mrs May her majority not been held. If the last parliament had run to its full term, he would have retired with a good grace.

As things are, Ken Clarke ran again in the recent snap election, and is thus able to take a prominent part in the Brexit debate. As he emphasised in the Commons yesterday he has consistently supported the Tory party's pro-EU stance 'for the fifty years while I have been a member'. The Conservative Party was firmly in favour of remaining in the Union up to and during the referendum. Then Cameron ran away; and the party in a shuffling, sullen way declared that it was bound by the referendum result that almost none of them had expected.

As most of the party wallowed in stunned stupefaction, the tiny minority of Tory MPs who I call the headbanging Brexiteers stepped forward with the fantasy that the referendum vote obliges the UK to leave not only 'the European Union' but also the EEC and the European Economic Area. That this course of action would ruin the country - quickly - has not been considered by the loony right.The thousands of lorries that bring components to British factories from other factories located elsewhere in the common market, and take components the other way, are essential to the continuity of most of profitable UK industry, would be stopped dead in the event of a 'hard Brexit'. This would be calamitous: yet Mrs May is pressured to let it happen [largely, by letting David Davis spin out the sham negotiations until there is no time for rational argument to triumph].

Ken Clarke could be a powerful voice for commonsense; but instead he hankers after the Edward Heath vision of a Britain absorbed into Europe [thus removing the Irish question, as I mentioned the other day].

Britain must leave the corrupt sham democracy of the EU: that was the referendum result. But the economic benefits of the European Economic Area can be salvaged. It is tragic that Kenneth Clarke's obsession with a lost dream prevents such a competent political figure from pulling his weight at this crucial time.

Grace Mugabe

In yesterday's blog I said that Robert Mugabe was unassailable. I still hold to that; but an delighted to recognise that in restating their loyalty to the President the leaders of the Zimbabwean army have asserted that there are 'criminals' surrounding him who are despoiling the state and threatening the Constitution.

Chief among the 'criminals' is the president's wife, Grace: who is half his age and irrationally ambitious. No longer prepared to be left as a manipulator of the next president [whose succession is seen as imminent, in view of Mugabe's age and medical frailty] she has been maneuvering to be designated as the successor. Meanwhile she has raided the state's income and assets as if they were her own, with legendary shopping trips to European, Asian and South African luxury outlets. Meanwhile, and more alarming, her sons have been allowed to spend vast sums of money on their own luxuries and indulgences.

It appears that some leaders in the army [apparently in contrast to a suborned police farce] have a strong sense of constitutional propriety. Following the recent dismissal of the Vice-President [who has sought refuge in China] the army has decided that things have gone too far. Apparently following a meeting in China, the army chief has acted. It is going to be fascinating to see how things play out over the coming days; not least, how the UK and the US will react to the obvious hand of China in this situation.

If the defenders of the Constitution succeed, this will be a great moment for the whole of African democracy.

Tuesday, 14 November 2017

A Glance at Africa

In a Quiz Night yesterday the teams were each given a map of Africa with just the coastline and the boundaries of states shown. The object of the exercise was simply to identify twelve of the very many states that now litter the continent; but the impact of the map was to cause serious reflection about a whole range of issues.

One person emphasised how few straight lines there are, other than the borders of Egypt. This is such a contrast with the boundaries of the majority of states in the USA, where straight lines seem to predominate. Thus arises the observation that although the borders were mostly set in colonial times they tend to follow geographical features, notably streams and rivers [which objectively exist, and cannot readily be shifted] to save all the hassle of establishing and maintaining artificial boundary markers. Donald Trump's wall would be an inconceivable project even along a small length of frontier in Africa.

The next obvious observation was that the borders were very rarely drawn to grant territorial integrity to some ethnic group: all over the continent ethnic groups [even quite small ones] are split between states, and most states have complex ethnic composition which makes political and social compromise difficult - sometimes impossible. The world paid attention - briefly - to the trouble attendant on the two recent attempts to run a fair and free election in Kenya, which is a reasonably sophisticated state with strong institutions and functioning [though anachronistic] legal system. As the frontiers are drawn, the Kikuyu are very clearly the dominant ethnic group: therefore they have a majority in parliament. One hereditary opposition leader drawn from another tribe, whose advancing age makes it impossible that ethnic change would occur to enable his tribe to predominate, has asserted that the system is simply undemocratic and withdrew from the second-run of the election. In his terms, Kenya cannot ever be a democracy in the sense that there is an alternation between parties of government. It may be possible to form some sort of coalition, provided the subordination of the smaller populations is inbuilt into the mindset of the participants.

Some states in Africa come close to being genuinely democratic, with stable governments [think Botswana and Namibia]; but the majority do not. In some, dictators [some of them second-generation] rob the country of wealth for their own gratification; in others war lords control massive swathes of land with conscripted armies that exploit the population to grab the resources that provide the funds with which their guns and bullets are to be replaced.

For the last few decades while the Soviet Union maintained the mission to spread Communism around the world various regimes and guerrilla movements were supported; while South Africa and Rhodesia [as long as they existed in their ugly, racist form] sent expeditions and counter-guerrilla units to oppose them. The further such operations were conducted north of the Limpopo River, the more secure were the governments in Pretoria and Salisbury that armed uprisings were little threat to them. The former colonial power, Britain, ultimately intervened to close down the beleaguered Rhodesian government and force the whites there to accept black majority rule. A democratic constitution was bequeathed to the local politicians, of whom the most powerful were those who had led the various exiled armed groups. For only a couple of years, there was a semblance of following the constitution: then the largest ethnic group [the Shona] grabbed control. The Matabele, who had collaborated most effectively with the white settlers, suffered most as a brutal policy of 'Africanisation' was imposed. White settlers' farms, especially the large ones that were among the most successful businesses in Africa, were occupied and ruined. From being a major exporter of crops, the new Zimbabwe [named after a set of ruins that had been ascribed to a forgotten African 'superpower'] became a net importer of food and the economy collapsed. The president who presided over this disaster was - still is - Robert Mugabe, who is honoured all over Africa as a former freedom fighter. His position is unassailable.

Britain could not make the ex-Rhodesia a democracy. A large army from any of the former colonial  'powers' could not bring peace to Libya, the end to ethnic tension in Kenya or a terminus to any of the other conflicts and stresses to which Africa is prone; and none of the former colonists would think it worth spending scarce resources on political reconstruction in Africa. Even China has recognised the limits of its formerly-aggressive 'economic colonisation' of parts of the continent. The general opinion in even the most democratic and high-minded advanced countries is to leave the Africans to stew in their own problems: and to sell them such military equipment and luxuries for the ruling elites as they can buy, cash-on-the-nail. Nineteenth-century European children were told of their countries' 'civilising mission' in spreading their imperial control over the 'dark continent': twenty-first century  children are told virtually nothing about an embarrassing post-colonial inheritance. And there the matter is left to lie.

Monday, 13 November 2017

A Symbolic Bonnet?

I was brought up, long ago, with the constant admonition: 'do not mock the afflicted!'

I usually avoid doing so; but sometimes it seems that a voluntarily-adopted affliction makes an important point about the person who has adopted it. I increasingly feel this about the prime minister's selection of clothes. I recognise that she is tall and slim: as many leading models are, so there is an amplitude of clothing for women of means who are of those dimensions to choose from. Mrs May's choices vary between the odd and the wildly eccentric; and yesterday at the Cenotaph I thought that she established a new, abnormal norm. The black bonnet that she had selected - possibly it was even designed for her - looked like something that a war widow of 100 years ago would have dressed her teenage daughter in for a remembrance event: yet it was also vaguely reminiscent of a German army helmet. Yesterday it simply looked anachronistic on a grown woman.

But for me it also epitomised her situation. She gambled on winning enough seats in the Commons for the Conservative Party so that she could discount the ten-to-twenty headbanging Brexiteers who for various reasons - including pure stupidity - want to risk national economic ruin by interpreting the referendum result of 2016 as authorising the government to leave the European Economic Area altogether, on a cliff-edge date at the end of March 2019. As she totally misjudged the one-woman campaign that she ran, she lost her majority; since when the headbangers [and the DUP] have dominated her field for policy options. She has retreated into a psychological bunker, from which - so it is rumoured - she continues to radiate confidence that all will become well in the best of all possible worlds: sometime. And meanwhile, as M Barnier has said, the clock on the exit door is ticking.

Yesterday the Sunday Times - never known as a Labour-supporting vehicle - gave a prominent page to an article in the name of Jeremy Corbyn [which was, therefore, at least authorised by him]. In it he presaged a shift of parliamentary arithmetic, implying his recognition of the fact that while virtually all members of the Commons accept that the referendum result [though many of them think it unfortunate] must  - at least, minimally - be implemented. But he also accepts that an overwhelming majority of members have come to recognise that to leave the Common Market and the European Union in a simple step would be a calamity for the country.

To demand a general election - which may become necessary if Mrs May is defeated by the defection of any section of her party - would mean that the current crop of MPs have abdicated all responsibility. It is deeply unclear what the result of a general election would be: but the most probable outcome would be a small renaissance for the LibDems, the Scots Tories at least holding their position, no change in Ulster, Labour gains in Scotland [but the Nats still in the lead] and no clear result from England. Labour might just be the biggest party, though the Tories have an equal chance of that; so the construction of a coalition would be a slow and painful business: while the Europeans could fold their arms and enjoy the British discomfiture and the tick of the clock.

The last time when Britain was in a comparable situation was in June, 1940; when a paralysis of government [albeit, with a strong Conservative majority] faced an existential threat. Talk of coalition was in the air; and Labour had already made clear that they could not support a Chamberlain-led government: though they also accepted that the Tory majority required that any coalition was led by a Conservative. In the crucial debate, as a government supporter spoke for the government, a fellow member challenged him to "speak for England". The government left the debate with a clear majority, but the loss of confidence in them was equally clear. Chamberlain - a sick man - resigned, and the amazing, anachronistic career of Winston Churchill reached its apogee.

Corbyn is no Churchill: he is no patriot, he has supported obnoxious alien regimes acting on the lines of the traduced anti-patriots of whom W S Gilbert wrote they admire "all centuries but this one, and all countries but their own". Corbyn's recent adoption of statesmanlike utterances - at odds with his career-long posturing - is utterly unconvincing: but if he were to prove capable of keeping to manifesto promises [and capable of keeping his close associates within those bounds] he might be useful in the hour of crisis. 

Sunday, 12 November 2017


Yesterday and today the British commemorate the people killed and injured in military campaigns: the official ceremonies are usually focused on those who were serving the crown in the armed forces and the police, fire and ambulance services [as in the London bliz and in Northern Ireland], but allied and associated units are also remembered as thought appropriate. In Australia and New Zealand 11 November stands coequal with Anzac Day, when those two countries recall the carnage wrought upon the Australian and New Zealand Army Corps [hence, the Anzacs] under incompetent British generalship at the invasion, siege and retreat from Gallipoli in the First World War. That tragedy is regarded as the episode that made both Antipodean countries aware that being loyal to the British crown - or even to the British Empire - was not the permanent best bet for the future of their peoples. So far they have stuck with the monarchy, but it is very widely anticipated that on the death of the Queen both countries will take the opportunity to review their constitutional position.

It is absolutely incredible that the Queen still reigns in Australia and New Zealand - obviously, under total constitutional restraint - 101 years after the disaster of the Dardanelles became apparent. It is incredible that Britain and Northern Ireland settled down in 1919 to live under a constitutional settlement that was temporarily patched up until the Irish Free State could be set up in the 'twenties without full-scale war between the Republican/Fenians and the Ulster protestants: a conflict in which the British army, navy and newly-minted Royal Air Force would have been of ambiguous loyalty.

I have mentioned in recent days that the headbanging Brexiteers will not have their way because the Irish question will prove intractable. Peace in Ireland can only be maintained - 99 years on from the first Armistice Day - by keeping the Good Friday Agreement and all that stems from it. Edward Heath combined his failed attempt at peace in Ireland [epitomised in the Sunningdale Agreement] with Britain and Ireland joining the European Common Market together in the expectation that the two would eventually surrender their statehood to the 'ever-closer Union'. John Major led huge steps towards peace in Ireland based on keeping the UK tightly within the Union [as it had become with the agreement - however completely understood - by Mrs Thatcher]. Then the apparently fresh, young Tony Blair was able to bring the process to a very satisfactory conclusion entirely within the EU context. Ireland has always been a major constraint on British policy, and anyone who dismisses that issue as unimportant in the run-up to 'serious' Brexit negotiations is in for a very major shock.

Returning to the main point of today, we can note that the monarchies which had obviously been defeated in the war - the many sovereign German princes, the Empire of Austria and Kingdom of Hungary, and [in effect] Russia - were wiped out; and red revolutions were attempted in Vienna, Budapest, Munich and Berlin. Soldiers with their weapons in hand put down the risings in central Europe, while the navy and the army mostly sided with the workers in Russia to permit Lenin to grab power.

But in Belgium, where much of the country had been devastated by the war, the king returned as a national hero. In Britain during the war there had been rumblings about the king being a German - which, in ancestral terms, he was - leading to the proclamation of Windsor as the royal family surname. The king loyally supported his ministers, while intervening to keep crass generals - first French, then Haig - in supreme command even though their stupidity could not be concealed. Haig accepted assurances that the third major assault on the Somme, known as the Battle of Paschendael, would succeed because such an efficient artillery barrage would be launched before troops were sent 'over the top' that all the barbed wire in front of them would be destroyed and 'not even a rat' would be able to survive the gunfire. The men went over the top, the barbed wire was in place; and as soon as the artillery barrage was lifted the Germans restored their machine-guns to be ready to slaughter the British, Canadian and Indian infantry who were sent forward. Then came the rain, and the churned-up ground turned to deep mud; but Haig sent more and more troops forward for four months, until the Canadians' capture of a small ridge of land enabled the idiots at HQ to proclaim the battle a 'success'. That was just one of the most conspicuous, crass, wastes of human lives that went on from Mons in 1914 until November 11, 1918.

Almost every street and every extended family in the United Kingdom - including, then, Ireland - suffered casualties. Yet the regime, the politicians, the generals and the king were exonerated from blame: individual generals were the subject of loathing from conscripts whose companions had been killed, injured and deprived of their reason as a result of the commanders' stupidity and arrogance, but the regime was not seriously challenged on the mainland of Britain. However, the losses of the war - in men, industrial output wasted, foreign debts incurred and international power - could not be ignored. So a huge propaganda effort, such as had never before been seen, was launched: with massive effect. A temporary 'Cenotaph' - a tall plinth for a coffin - was erected in Whitehall for the first anniversary of Armistice Day, and 'the Glorious Dead' were honoured as national heroes. A couple of years later the 'unknown soldier' was disinterred from a war grave in France and moved to Westminster Abbey, so that every bereaved mother could imagine that her son would ever after be honoured by kings, princes and politicians. That could only continue if kings and princes were kept in place; and so the regime was more deeply cemented in national sentiment than ever before.

This is a spectacular achievement, adopted throughout the Empire and the United States; and with a similar set of events in France and Belgium. Its force in maintaining the socio-economic order is rarely recognised: but the Irish dimension is again being exposed.