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Saturday, 30 June 2012

Banking Shock?

It is astonishing that anyone could be surprised by the latest major scandal to be published about the bankers. Of course they manipulated the London Market Offered Rate of interest: LIBOR.  Of course they sold completely inappropriate derivatives to small businesses. They have run the financial system on the basis of blatant veniality for the last few decades.

The Rating Agencies are paid by the firms whose stock they rate: and by 2010 they had completely blown away their wholly spurious reputation of earlier years, when the uselessness of their ratings of billions of dollarsworth of badly-cobbled 'securities' and other instruments was made clear. It is incredible that five years on from the crunch of 2007 they remain recognised [by regulators, actuaries and accountants] as holders of the magic means by which stocks, shares and gambling slips issued by other firms are regarded as possessing 'value' in financial markets.

This suspension of disbelief in respect of the Agencies' ratings of company stocks helps to explain how the banks have continued to get away with a similar - and even more obviously corruptible - standard and measure of 'value' in the banking sector. Nobody has had any excuse for believing that any valid standard of competence or integrity has been attached to the daily announcement of libor [and of other median rates of interest] in the London Market. These figures, which are used as numeraires in millions of transactions worldwide every day, are based on data that are submitted by employees of the regulated UK banks. Since the nineteen eighties these same institutions have been deeply embroiled in the business of the London Market on their own account, as well as in the role of agents for other investors.

After two years of investigation by the regulatory authorities, during which the libor has been produced on the accepted basis, it has been admitted publicly that Barclays:
First, both in the good times pre-2007 and during the consequential crunch, massaged the data that they submitted for inclusion in the libor computation to support "the sneaking arts of underling tradesmen". The supposed data that the bank submitted were adjusted to support the day-to-day convenience of their trading counterparties and their chums. They supported their own market positions by influencing the rates that were authoritative in the Market.
Subsequently, after the extent of the crunch had begun to become clear, Barclays continued wantonly to mis-state the data better to facilitate their traders taking up and winding-down borrowings.

There is no reason to believe that the other banks that contributed data were significantly immune to the temptation to use the libor methodology to their advantage. More confessions will be made; and  trivial fines [without criminal charges against offenders] are expected to be imposed on the other banks. Thus the whole of the UK's regulated home-based banking business have massively more undermined than had already been done by the crunch itself.

In the same week, just past, the remained unable to rectify a disastrous, inept and incompetent 'upgrade' to its retail software that kept millions of customers from effecting transactions. This was reputationally at least as bad among less sophisticated customers as was the damage to 'wholesale' banking in the credit crunch that they could not understand. Then it was announced that thousands of firms had been invited to buy betting slips that had cost them heavily when interest rates had fallen: some of the 'invitations' had been presented as conditions that must be accepted by the client firm as a term for being granted some other facility by the bank. Many firms were ruined and many more suffered serious difficulty in finding the cash that was necessary to keep going through the slump.

The pathetic politicians have mouthed what their puerile advisers have recommended they should say in response to the multilayered revelations. They have demanded - or promised to establish - 'inquiries' informed by 'independent' 'experts' selected from the usual gang of lawyers and quangocrats who have drawn fees from the system that has promoted the decline of the once-robust economy..

Ordinary white British folk already know all too well what happened.  Since 1980 successive governments of both parties have grovelled to accommodate the demands of the most pushy segments of the finance sector of the economy, because they were declaring expanding turnover and creating jobs and paying taxes that partially made up for the politicians' systematic destruction of the 'real economy'. They never were and never will be capable of self-regulation in any particular. They never were and never will be capable of making objective statements about the 'value' of anything that they conjure into existence. The delusion that the empowerment of market participants will endow them with responsibility towards society or to the body politic was most powerfully asserted by Margaret Thatcher and her sycophants; and was maintained by Major, Blair and Brown. David Cameron has neither the intellectual capacity nor the will to understand the consequences of this ruinous litany; and sneering Osborne has every interest in letting Cameron founder, in the   hope that he will become the leader of a dying Tory Party.

It is certain that within the current political structure the government will not respond adequately or in good time to the next phases of the crisis that the political class has fostered; that the bankers will continue on their exploitative progress; and that the economy will continue to decline. Nobody can seriously claim to be surprised by any of it!

Monday, 25 June 2012

Panic Over? Rio Plus Twenty

Rio+20, the attempt to re-run the grand climatic congress of 1992, has ended with a very muted statement from a heavily diluted attendance: some 'captains and kings' were there, but not the global First Division who had returned home from the previous week's G20 meeting to plan what to do in the absence of a Grand Plan for the global economy.

The positive outcome from Rio is recognition that climate change is NOT the number one priority for humanity as a whole. The climate change deniers have muted their criticism, while the fanatics who had extended the wilder projection for anthropogenic climate change to a demand for an immediate reduction in the median lifestyle of the human race have lost their role in driving the debate.

There is now a consensus that the biggest issue facing the planet and all its inhabitants is themselves: our numbers are even more urgent that the problems arising from what humans do to the ecosystem. The sheer number of humans who are being bred - and projected to be bred in the next few decades - presages crises in food, water and living-space. So far the advance of technology has fed the human race and given the majority better healthcare and entertainment than at any time in history. This achievement makes Hitler's ambition to achieve lebensraum for a couple of hundred million of postindustrial Teutons look even more regressive and silly than it was in his own lifetime. The world accommodates vastly more people than he would have thought possible.

In our time the use of technology to save millions of unborn and infant lives has funded by a series of highly sophisticated media campaigns mounted by charities; and by politicians who regard 'international aid' as an important foreign policy tool. Yet all this transfer of wealth has set up hundreds of millions of individuals to face an existence of inadequate resources. Every baby saved in an under-resourced country that has no democracy and little freedom for enterprise is potentially the parent who in twenty years time will hold up starving babies to the international news media. The Malthusian crisis is upon us. While T R Malthus is usually cited as a doom-monger, it should be noted that he warned of starvation and war in the event that humans do not act sensibly. He argued in favour of responsible parenthood. He urged that couples should recognise the risk of overpopulation threatening living standards, and control the number of pregnancies so that the hazard would be avoided. People could then indulge "the exquisite gratifications of virtuous love" sure that they would not generate a by-product of mass starvation and socio-economic disaster. He could not have predicted the means by which sexual activity has now been decoupled from the probability of pregnancy, for those who choose to use preventative measures; and [as an Anglican clergyman] he would have deplored the easy accessibility of abortion as a method of birth control.

But as a scientist he would have recognised that there are now ample means by which population can be controlled: or even reduced to a degree that becomes a major national concern, as in Russia and Japan. Many millions of humans do not know about chemical, mechanical and surgical means of population control; but even more millions are banned by religious injunction, tribal demands, social norms and misplaced masculine vanity from practising methods of which they have at least some sketchy knowledge. In many countries misnamed 'culture' enslaves women by keeping them from taking their own choices abut the use of their sexuality. It is urgent that the terms of the global debate are raised from the misunderstanding of Malthus - that his objective was to demonstrate the inevitable consequences of human fecklessness in breeding the species. His central point was to emphasise that there was choice for humans to make, and to plead for sense in sexual behaviour. The quantitative issue should be subordinated to the more important issues of human choice, freedom, equality and quality of life.

Thursday, 21 June 2012

Cyprus and Russia [Not Forgetting the Ukraine and Belarus]

Cyprus is a fascinating island. In the centuries when the island was occupied by the Ottoman Empire the Sultans mostly left the Greek majority population to a semi-autonomous existence under the rule of an ethnarch - the acknowledged leader of an ethnic group - who in this case was the Archbishop of the Orthodox Church. By a complex pattern of historical accidents the Archbishopric had developed strong links with the Orthodox people of the Russian Empire, particularly as a significant landowner in the Ukraine. The Archbishop's land was seized by the Communists and fell under the appalling mismanagement of the collective farm system: but the lost wealth was lamented and remembered through subsequent generations of Cypriots.

Britain grabbed the sovereignty of Cyprus at the Congress of Berlin in 1878, when the weakened Ottoman Empire was compelled to surrender some territories in order to be allowed to keep the rest. Disraeli's government saw Cyprus as a useful base in the 'near east', close to the main Suez Canal route to India. Come the nineteen sixties, and despite the abandonment of the Empire, Britain was under pressure from the USA to maintain a presence in Cyprus because its location gave the island a unique advantage as a listening-post into communications throughout the Middle East and the Soviet Union. RAF bases on the island also provided a staging-post for transport into the region, not least to get emergency supplies from the US to Israel  in times of war. Thus when Cyprus was granted independence in 1960 [a situation deeply compromised by the resistance of the Turkish minority to the majority wish for union with Greece] Britain retained the sovereignty over the key bases, which included the listening-posts: this remains the situation now, of huge value to the USA in relation to Iraq, Afghanistan and Iran.

Both before and after independence the strategic situation of Cyprus was of great interest to the USSR, which led to the KGB encouraging the development of a tourist trade from the communist Warsaw Pact countries; some of which was a cover for espionage. Among the 'tourists' and alongside the spies were the gangsters who were tolerated as 'fixers' in the dysfunctional planned economy, who began to make deposits in and investments through Cypriot. banks. The collapse of communism and the disgusting economic free-for-all that the Yeltsin regime could not control led to a massive expansion of the flow of funds into the familiar and highly accommodating Cypriot banks. Cyprus was a member of the EU, and this made the island an even more attractive money-moving location for the nouveau riche from the former USSR. Tiny Cyprus has become one of the largest investors in the Ukraine and in Russia: returning funds deposited by large and small oligarchs from those countries. The tradition of the Greek-speaking Cypriots in regarding Greece as their natural partner led to Cypriot Banks investing very heavily in Greek state bonds and bank deposits: which has given them a massive 'haircut' as the Greek assets have become worth much less.

It is of huge interest to the Russian, Ukrainian and Belorussian depositors in Cyprus that the negative impact of the Greek collapse should not wholly be exported to Cyprus, diminishing the value of bank deposits on the island. Many of the richest Russians are very keen indeed that Cyprus should remain in the eurozone, and large loans [at least three billion euros] have already been made to Cypriot institutions. There is at least a probability that official Russia will become the saviour of the Cypriot banking system, by providing a bail-out that will preserve the valuations in euros of immense private investments that represent a significant proportion of the plundered national income from the past two decades. This potential twist in the eurozone crisis is well worth watching.

Tuesday, 19 June 2012

Guff at the G20

Some of the people who are regarded as the most important 'leaders' and office-holders in the world have been to the seaside in Mexico with the ostensible purpose of stabilising the global economy. The slow-motion unwinding of the eurozone has been extended by the emergent powers placing additional credit with the International Monetary Fund so that it will be available to be pumped into Europe: conditions will be specified but it is most unlikely that these would be so draconian that they would ensure that the euro collapses. Low-grade politicians who hold on to power by default in countries outside the eurozone have again admonished those inside the common currency to get their act together; once more these focus on trying to bully Germany into dissipating its savings on helping other eurozone countries. So far, Germany has declined to obey, and the President of the EU Commission has blamed 'North America' for the crisis.

My analysis firmly locates the origin of the global financial crisis in London, England. With the 'big bang' of 1986.the Thatcher government smashed the traditional division of financial transactions in the City of London between stock brokers and jobbers, banks and merchant banks, separate exchanges for different types of transaction, self-regulation within each sector and ultimate oversight from the Bank of England [which preferred to steer market members into approved ways of working by winks and nods and secret meetings]. The phrase big bang had become central to theoretical physics, to describe the moment immediately after the creation of the universe when its great expansion and diversification began. By applying that phrase to the finance sector enthusiastic commentators implied that here was a new beginning in a newly structured market that could grow immeasurably and bring great profit to the participants: who could then be taxed to meet some of the growing deficit on government income as industry was destroyed while farming and fisheries were left to wallow under heavily protectionist EU regulations. The rapidly advancing capabilities of computers enabled the markets to be operated at speeds and with complexity far beyond the former trading patterns that had depended on word-of-mouth and typewriters. New types of 'product' - most obviously derivatives and new processes for securitisation - burgeoned on an almost astronomical scale, and old contract types such as futures were reformatted and used in vastly different new ways. The world's banks brought business to London and Wall Street looked set to lose the dominance of global markets that it had gained in the nineteen-thirties and consolidated through the Second World War, Marshall Aid and Cold War. Ferocious lobbying of the politicians in Washington led to the repeal of legislation that had mandated the separation of 'retail' and 'wholesale' banking,  and had differentiated banking from broking; with the specific intention of enabling Wall Street to compete with the City of London. Small differences in regulations led globalised businesses to put some business in New York, some in London and a little in other centres such as Hong Kong and Singapore.

Thus far the London big bang was the origin for the new pattern of trade; but then the US government decided to tap into the markets in the interests of social engineering. Given that such huge and flexible financial markets existed, surely they could be required to lend money to people who sat at the bottom of the heap in society. Let even the poorest become home-owners and thus gain some pride of possession and learn to earn the money necessary to service their mortgages and care for their homes. Mortgage lenders were required to allocate some of their funds to 'sub-prime' mortgage borrowers: two government-backed institutions underpinned the mortgage market, but the wholesale market practitioners became increasingly keen to securitise 'bundles' of mortgages and re-sell the securities into the general financial markets. After a very few years just about every bank and securities manager included some sub-prime mortgages buried within their so-called 'assets'. Once it was demonstrated that hundreds of thousands of feckless Americans were not paying their mortgage debts or maintaining their houses well, it was clear that some portion of the 'value' of many hundreds of thousands of 'assets' was non-existent. Thus the trigger for the crisis was squeezed in North America, but financial institutions from all over the world were deep in the mess and the resultant reckoning is ongoing. American sub-prime lending was the mechanism for the disaster; but its origin lay in the reckless gamble by the Thatcher government.

Sunday, 17 June 2012

A Week in Politics

Harold Wilson, the British Prime Minister from 1964-70 and 1974-76, was a very big presence in his day: and he famously commented that 'a week is a long time, in Politics'. The nine days since my last posting show the truth of this dictum. There has been a huge amount of politics talked, notably in Washington DC and in Europe and in Egypt. The Argentinian president followed the maxim that failing regimes try to focus public attention - preferably passionately - on foreign policy issues. Syria descended further tragic mess; and the UN ran to form by withdrawing to the comfort of the safe hotels. There is no good news from Iraq or Afghanistan. Egypt was shocked but not surprised to see the military putting limits to democratic institutions even as the presidential reached its uninspiring second round. Germany again warned the Greek electorate that there was no concession available on the agreements that past governments have already committed the country to implement; and we will know the people's reaction within 24 hours. China has taken measures to restore economic growth nearer to the trend of recent years, while demonstrating concern about imbalances in the structure of the economy: India's growth has weakened and the impact of corruption and inefficiency in the state has been more conspicuous as some sectors of Delhi have had water supplies cut off. NOTHING that most people would regard as worth-while has been achieved: and the economic circumstances of the human race remain insecure.

In little Britain the government and the Bank of England have announced yet more hesitant and dubious initiatives to increase lending to businesses and to their customers. Within the eurozone Spain's convalescene faltered despite the massive bailout that has been promised; and on the back of that setback the vulnerability of Italy has again been demonstrated in the price set on government debt, and Dutch banks have been downgraded by a rating agency. The fantasy of a bureaucratically focussed 'Europe' is the most threadbare that it has been in half a century; but yet the people who hold irrelevant offices within the highly-remunerated outfit act and talk as if they are the solution: while almost everybody else recognises that they are the problem.

The outcome of the Greek election may exacerbate issues: it will not lead quickly to any resolution of them.

Monday, 11 June 2012

Dubloons for the Dons

Today's German press is highly critical of the fudge by which the eurozone is to bail out the Spanish banking system with a fund of up to 100 billion euros, by means to be clarified at an indeterminate cost to the currency union in general and to Germany in particular. In some editorials the term 'blackmail' is used frankly; in others the same analysis is more delicately expressed. While Greece and Ireland were implicitly deemed to be 'small enough to fail' Spain [like Goldman or Morgan] has been treated as 'too big to allow it to fail'. The eurozone could survive without Greece and Cyprus; provided there was no domino effect on Spain or Italy: but the impression over the past week became a conviction that if Spain was allowed to collapse financially the eurozone would be under terminal threat and the whole European project would massively be enfeebled.

All the eurozone finance ministers were complicit in the round of conference calls that took place at the end of last week. All their governments have become almost-unconditionally susceptible to being organised by Germany into a superstate. The details of the fusion, and of the way the inner union will articulate with the non-euro EU member states must be settled quickly; and Germany will predominate in all the discussions. The vulnerabilities of Italy and France are so significant that neither will have a veto on the integration process: and the influence of the eurorats in Brussels will be diminished in favour of the smooth suits in Frankfort.

The first few hours of trading in international markets after the announcement of the purported loan-guarantee to the Spanish banks demonstrated that supernational gamblers would only give credibility to the package when they can see the funds actually allocated by the Germans. The package was announced on trust: and it was not trusted. The eurozone expressed an intention to support Spanish banks, in circumstances where no fund had yet been established from which the guarantee could be converted into a series of payouts. 'The markets' on which the prices of Spanish [and Italian] bonds have fallen since the 'rescue' was announced are only in a tiny proportion driven by real-world firms [such as pension funds] that hold such bonds as part of their long-term investment portfolios. The majority of recent purchases and sales of state bonds and of bonds issued by south European banks are speculative gambles: the 'value' of the bonds is utterly irrelevant to the gamblers, who are interested only in making a gain by rightly predicting a rise or a fall in the price of the euro in terms of dollars, sterling, yen or other currencies. The market reaction strengthens the Germans' hand: the Spanish deal - and any subsequent deal for Italy or France - will only have credibility if Germany actually places resources in the appropriate backing funds. Chancellor Merkel faces elections: she and her party will be annihilated if they are perceived to have sold the German taxpayer short. Serious negotiations must now begin, with the collapse of the euro as the imminent threat. The eurorats will posture around the periphery, but the power unconditionally rests between Berlin and Frankfort; the modern and the medieval capitals of the German Reich.

Britain has blundered into the position where most of the electorate want the UK to be separated from this whole mess: so it can't be all bad!

Thursday, 7 June 2012

Ruddy Countenance or Bloody Cheek?

W S Gilbert was famous for his repartee. One much-quoted example was when he was waiting for a cab outside his club, well wrapped against the winter weather, when a young man came out and assuming that Gilbert was a porter he ordered the older man to call him a cab. Gilbert mused aloud whether he admired the man's ruddy countenance or resented his bloody cheek.

Mrs Merkel would have had no doubt today, in receiving her importunate visitor to Berlin. It was downright cheeky of David Cameron to come from an ill-governed and deeply indebted country outside the eurozone to demand that Germany [a well-governed, minimally indebted country inside the eurozone] should open its people's coffers to support ill-managed banks and Spanish national pride. He received a degree of courtesy that he did not merit.