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Tuesday, 25 December 2012

Seasonable Weather

It is 07.10am on Christmas Day: a day when I was determined not to enter this site at all.

However, a couple of minutes ago my attention was drawn to the window by the noise of exceptionally heavy rain: and that distraction was immediately followed by the rattling of the windows under a strong gust of wind. The morning is unusually mild for late December. The streets of Wapping, like fields in most of the island of Britain, have large areas of standing water which have no exit via the sodden land or the clogged drainage system.

It is hard to remember that the first months of this year confronted the  nation - especially in Southeast England - with a threat of acute water shortages due to an unprecedented succession of dry winters. Since then there has been no wholly dry day. Summer was a washout; and the winter has come in with unprecedented flooding.

This unusual climatological conjugation has refreshed the debate on global warming; with the 'pros' saying that they always predicted extreme climatic events, and the 'antis' responding that there is a long history of incidents of exceptional weather and anyway temperatures in the UK are lower than a decade ago.

The already-impoverished economy is being taxed heavily [both through state taxation and through energy bills] for the construction of inefficient windmills that will shortly experience metal fatigue, concrete cancer and other highly-predictable evidence of the harebrained concept of relying on such a source. Meanwhile the authorities - the Department for the Environment, OFWAT the economic regulator of the water industry and the Environment Agency that controls water abstraction for human use - have all stood firm against more funds being taken from 'hard-pressed families' to build reservoirs, desalination plant and other new net sources of water supply. The current flooding - a monumental, unusable surplus of water - will eventually drain away; but in the next drought it will be remembered; as will politicians' assurances that there will be no future threat of standpipes in the streets of London.

In the days when most people went to church and to Sunday School every child knew the Old Testament story of Joseph and his prophesy that seven good harvests would be followed by seven years of crop failure. So convincing was he that Pharaoh put him in charge of a scheme to collect surplus crops from all over Egypt and store them for distribution in the lean years, which duly followed.

Britain did not use its [past generations of affluence adequately to develop the infrastructure: roads, railways, water services, telecommunications, nuclear power, flood defences and the other essential components of a stable advanced economy. The present tragic flooding is a prophetic signal, a clear marker of the extreme events to come, for which the country is not prepared. The cause of some significant events may - or may not - be global climate change; but that is immaterial to the key fact that a past of profligate consumerism based on borrowing, benefits-for-all, unlimited immigration and the replacement of home-made commodities by imports has left the country almost totally exposed to whatever Nature may throw against it.

Well done, the 'Economics Profession'!!

Friday, 21 December 2012

Bonkers About Bankers; Wet About Water

The British media are currently commenting both on the future regulation of the water industry and about the report of a Parliamentary Commission that has been discussing the changes in banking regulation that the Treasury is likely to bring forward following the Vickers Report which proposed the saparation of retail from wholesale banking.

The common thread linking the OFWAT licensing package to the Vickers proposals is the attempt in each case to crystallise an illusory distinction between 'wholesale' and 'retail' operations. Behind both follies lies the Economists' dogma that 'competition' is a good thing; which in the crazy world of contemporary politics is pitted against the bureaucracy's recognition that a failure either of the domestic and industrial water supply or of the accessibility of cash to households and firms would be both economically and humanly cataclysmic in its consequences.

If the supply of water or of 'retail' bank accounts was left to rampant open competition with no restraints, some firms would grow by using both fair and unfair tactics; while others would be driven to bankruptcy. A failed bank or water company could leave its customers destitute or dying; so retail competition in banking and in water trading must be underpinned by a system that would ensure continuity of supply to the customers of failed suppliers. Hence the appearance of retail competition is pursued, by the politicians who hold the ring between ideologues and bureaucrats; who have some inkling of the extent of the damage that was done to the economy by the near-collapse of banking in 2008 and who are desperate to avoid being blamed for another ruinous cock-up.

At present both the water business and so-called banking are vertically integrated. Banks deal with every sort of financial transaction from managing children's saving accounts to ensuring that their whole complex pattern of operations has sufficient liquidity at all times. Water companies convey the fresh water supply from lake, river or aquifer to the kitchen sink [and Water-and-Sewerage companies carry the process forward to the point where the cleaned waste is returned to the environment]. Dogged Economists have come up with suggestions that in both cases 'retail' operations should be separated - or, at the least, 'ring-fenced' - from the risks and costs that are incurred in the 'wholesale' sectors if the industry; and that a show of competition, albeit closely controlled by regulators, should be fostered in the retail market. All this complex bureaucracy would be paid for by the users of banks and of water so that Economists would be able to claim that suppliers would be pushed a few metaphorical inches towards the nirvana of marginal cost pricing [a fantastical concept that any non-economists can pursue on Wikipedia if they have a few days to spare.

It is generally conceded by all observers except currently-orthodox Economists that water supply is a natural monopoly. So much capital is invested in securing abstraction points, purification plant, water mains, distribution pipes, customer connections and meters [where they are in use] - and in providing the energy to pump the water around the system - that it would be unimaginably expensive to install a second, third or fourth supply network simply to provide competitors for the incumbent company. The prices that customers would have to pay to finance the construction and maintenance of the unnecessary additional infrastructure would be prohibitive: to which must be added the maintenance costs for systems would be used at significantly less than their capacity. The nutters who propose 'competition' simply because that is the ideal of Economic Theory would love to be able to ignore the material realities of of water supply. The coalition government appears to be content to leave the physical infrastructure in the hands of geographical monopolists; albeit expressing some pious hope about eventually making it easier for new companies to take over access to raw water. This could only be achieved by changing the pattern of abstraction licenses, whose award is in the scope of the Environment Agency: not of OFWAT, and would almost certainly require the expropriation of some of the assets and contractual rights belonging to the incumbent companies. Economists argue that provided the new entrants could offer water at source at a 'wholesale' price that was competitive with other sources, the distributors would be compelled to buy a proportion of their supply from the new competitors. Alternatively, the distributors would be compelled to receive the water into their systems, and pump it around to the connection points at which the competitor's [or an associated business's]  customers would be billed by a 'retail' water company that would be a separate entity from the delivery company.

Anybody who pretends that cost to the customer would not increase with the creation of a raft of new companies that employed chief executives and nonexecutive directors on the usual terms, bearing the advertising and other costs of competition should look across at the energy sector, where boards are highly-paid, where competition is ritualistic under a fanciful regulator, and within which absurdly expensive green objectives are met by compelling customers through their bills to throw enough subsidy to constructors of windmills and nuclear power plant - and even converting coal-fired power stations to using biomass [which is increasingly challenged on ecological grounds]. The cost of capital for all the companies will also increase with every increase in the uncertainty of the companies' income flow that follows from fake competition and from the appropriation of upstream assets from the companies.

With sulkily expressed threats that they will return to the government's preferred agenda of legislated pseudo-competition as soon as possible, in the face of near-unanimous opposition from the industry, OFWAT has withdrawn a recent threat to change the basis of remuneration for shareholders within the price review due in 2014. It is still threatened that the regime will be changed to fit Economists' models; but the danger is deferred for an indefinite period.

Meanwhile the banking business gets massively more coverage in the media than does water; partly because editors and journalists do not recognise the immense difference between unconditional human needs, represented by water,  and the availability of convenient services, such as banking: and also in recognition of the fact that finance is under much more obvious scrutiny as the Economics editors and commentators try to elucidate the debate around the 'Vickers proposals'. Vickers has proposed, and the Establishment has rallied around the concept, that a 'retail-wholesale' bifurcation of banking should take place. The UK Treasury policy is said to be that the corporate structure of the post-2008 financial conglomerates should not be changed; in line with the pretence that the amalgamated banks will eventually expose 'where all the bodies are buried' and hygienically dispose of the remains. Meanwhile it is proposed that operating divisions within those massive entities - and in  the immensely smaller niche firms that operate as specialists in that sphere  - should manage 'retail' banking on the assumption of being underwritten by the government: while 'wholesale'  areas of the agglomerated leviathans would be allowed in theory - to fail. Even if this were practicable - which it is not - it would not address the basic issue. Very simple tests can confirm that a colourless liquid is or is not water; and more-complex tests can verify whether identified water is potable: equally simple tests can verify whether a passage of credit through a succession of bank accounts is financing a real-world transaction that supports material business [or business with a material objective, such as insurance or investment for pensions].

But just as a water company could not guarantee the current high level of service to British consumers if it did not control all the processes in the supply sequence, so a 'retail' bank needs to operate knowledgeably in the wholesale arena to ensure the best returns on investments for its shareholders and to give assurance to all its customers that they can receive their deposits - in cash - on demand. To concentrate on the wholesale-retail issue is nonsense. As has been argued previously in this blogsite and in thousands of pre-blog, pre-twitter era discussions I have argued - and asserted - that in finance the essential distinction is not between retail and wholesale but between categories of 'products'. In terms of the flow of business in this millennium, transactions to fund the movement of goods around the world and to support material industry - including investment - are swamped by contracts [and by the consequential notional flows of money] that are outstanding in the betting games of derivative and futures trading, short-selling and the multiple other forms by which 'banks' hove been institutional gamblers. Far from ensuring the liquidisation-on-demand of their retail depositors' assets, they made the whole banking business.insolvent: compelling already-bankrupt governments in the US, Spain and the UK to raise massive financial packages to rescue the complex banks. The logical split is that of finance from gambling: with banks that have retail operations being unconditionally forbidden to gamble. That simple measure would massively increase the stability of banking, and would set a tight cap on the losses that governments and central banks could be expected to bear in the peculiar event of the fortuitous failure of a retail bank.

As Britain's retail banking inescapably passes under EU regulatory control, the innovative and globally significant high gambling business could flourish even better than before if it was pushed wholly outside the banking regime. It could grow in importance as an employer, an export earner and a source of taxation.

Friday, 7 December 2012

Posh boys out of their depth

Britain has had an interestingly depressing week; slightly enlivened by news of a royal pregnancy which two Australian yobs turned into a personal tragedy.

The Conservative Prime Minister showed how  far he was out of touch with the strongest conservative element in society by expressing his determination to bring in [and push through] legislation to permit homosexual couples to 'marry'; while denying civil partnership to heterosexual couples.

The worst news of the week, however, was the demonstration of ignorance by the finance minister, the Chancellor of the Exchequer, in his 'autumn statement'. George Osborne had to admit that his strategy had failed abysmally: and then he announced that he would intensify his pursuit of it. He would take yet more money in taxation; a small part of which would be used to support 'shovel-ready' projects to build tunnels and road improvements and schools that would employ people and increase demand for construction materials. He will increase old-age pensions and maintain the hugely-unpopular overseas aid budget while reducing allocations of finance to most other areas of government, including the health service. Despite the benefits to millions of people being reduced or capped, the total allocation to benefits will increase because the misery generated by moral and economic collapse is spreading to an ever-expanding cohort of underpaid as well as unemployed and helpless people. The need to pay benefits has developed the deficit and will further reduce economic growth, which will soon be in the negative.

These are the consequences of over half a century of ruinous economic policy, implemented by machine politicians [regardless of party] at the behest of Economists. I have spent the last few months again revising my presentation of the basic principles of political economy, which were set aside in favour of the fantasy theories that form the basis of Economics. When the 'iron laws' derived from political economy were followed, Britain had the most dynamic and successful economy in the world. So much wealth and power were accumulated that the country has been able to pillage the last vestiges of national wealth until now: but the stock is now very close to exhaustion. Ordinary people can sense it, and recognise the incomprehension displayed by the political class [and, of course, by Economists]. The lack of confidence is near crisis point.

There is a way forward. It will be no less stressful to follow it than it will be to sink into the morass into which Cameron and Osborne are conducting the nation: their way points to abject poverty and despair on an unprecedented scale: the alternative must be worth a try.