Until the so-called 'big bang' in the middle of the nineteen eighties there was a complex of specialist markets: retail and wholesale insurance, retail and business banking, building societies, pension funds, investment management, stock broking, stock jobbing, bond trading, bill trading and several others. Some merchant banks covered a range of these functions; but they all kept clear of retail banking and of all categories of insurance. After the bang most of the non-insurance functions were pretty quickly subsumed into large conglomerates: as a general rule, only the firms that remained under the control of families stuck to a selected range of specialist functions, while the majority leapt into a spectrum of activities that was so broad that the central board of directors could not possibly hope to maintain adequate oversight.
That all came unstuck in 2007-8 and now there is mounting tension between the City of London, weakly 'supported' by the UK government, and the Commission of the European Union who want to impose common methods of regulation and taxation over all finance sectors in all EU member states [and not just the eurozone]. The press is slowly becoming cognisant that insurance will became increasingly expensive if absurd rules of reserving - which may be relevant for banking - are imposed on insurers, More recently feature articles and leaders have been written on the crazy proposal that pension funds should similarly be undermined; shrinking the value of all past and future pension contributions and building up a huge increase in old-age poverty for the future.
It is now urgent and vitally important that the UK government - and, in this, the Labour opposition should declare complete support for the position - declares unconditionally that they will protect the interests of investors, savers [including contributors to pension funds] and those who wish prudently to insure their assets in a rational and affordable system.
It is also crucially important for the survivial of the economy that the international earnings of the financial industries are at least maintained. Assuming that the irrational and irresponsible system of giving traders bonuses proportional to turnover [however risky] rather than on the basis of achieved real profits is replaced by a more rational system of remuneration, it is likely that the income-tax yield from the City will decline hugely; and alternative sources of government revenue will urgently be required if the national deficit is to be diminished. If the historic and entirely rational requirement for reserving by insurers is maintained [and if the daft actuarial preference for bond over equity investment is set aside] that sector can remain the world leader. The Vickers Commission's recommendation that 'retail' banking should be separated [in regulatory terms, if not by separation of ownership - though that would be desirable] from 'wholesale' has been accepted by the government and should be implemented: though fears of the government compromising and thus undermining the separation are mounting. Given that Vickers will, to some limited extent, be implemented, attention should then be focussed on driving genuine wedges between materially useful merchant banking and the huge mass of activity that is appropriately called 'casino banking'.
Before the intrusion of modern Economics in the eighteen-seventies, Political Economists had tought - correctly - that a distinction should be draen between 'productive' and unproductive investment. Productive investment laid down the basis for more production in the future; unproductive investment provided products that were consumed in ways that did not put anything into future economic activity. That distinction should be restored, and those wholesale financial activities that conduce to the facilitation of productive investment should be in one category [let us call it merchant banking] and those that manage purely speculative finance or hedge financial deals unrelated to material economic capital formation [casino finance] should be in another category. Merchant banking should be regulated and taxed as banking is managed by governments all over the world. Casino finance should be registered, regulated and taxed for what it is: betting. Just as appropriate regulation and taxation have made London casinos popular among global high rollers, and the retail British betting industry has been highly successful, so both face-to-face and online finance gambling in futures, derivatives, short-selling [of shares not owned by the sellers] should be legalised and regulated and taxed as a great British business. Before anyone else does it, the City should develop on its great tradition as the magnet for an expanding global trade in bets, which is what most of the turnover was before the crunch. The credit crisis has arisen largely because governments mistakenly adopted and monetised the so-called "banks'" gambling debts; and part of Britain's way out of the mess can be speeded by optimising on the existing City expertise.
In due course, real productive investment must enable industry [including creative industrial sectors] to grow and provide an increasing part of the national product; but for a quick fix the opening of the casino finance business - on an open and honest basis - is the primary feasible option.
Showing posts with label Big Bang. Show all posts
Showing posts with label Big Bang. Show all posts
Thursday, 2 August 2012
Monday, 2 July 2012
Reshaping the Banks
The Vickers Commission on the UK banking business has already proposed that the banks' 'retail' and other activities should clearly be separated; and the government has promised to enact that policy. This would in itself have made the future banks very different from those of the recent past; and now more change is in the air. New scandals have emerged very recently - the manipulation of libor and the reckless mis-selling to small firms of inappropriate [and ineffectual] 'protection' against interest-rate changes - to add to the existing flow of compensation funds to individuals who were mis-sold payment protection insurance by their banks. International financial institutions, a swathe of small and medium-sized businesses and individuals have all been cheated by the London banks.
For several decades successive governments have complacently observed the increase of trade in the finance sector of the economy, and have taken more than ten per cent of the nation's taxes from the sector. This was seen as largely compensating the country for the destruction of material industry. That progress is now likely to be slammed into reverse by the restructuring of banking firms, by new UK and EU regulation, and by international traders moving activity away from the discredited London Market. Thus the situation is nothing less than a disaster for the British economy and for the sixty million human beings who depend upon it
The principal asset of any financial firm is its reputation for integrity in its employees' intentions and its efficiency in administration. Despite the impact of the credit crunch, London has been seen as a reliable market until very recently. Before the start of the millennium the London Market was dramatically changed from the gentlemanly world that existed until the early nineteen eighties when the Thatcher government initiated the 'big bang' which created the environment in which huge conglomerates were created which undertook almost the full range of financial services [insurance was the great exception] and developed massive markets in a great variety of new 'products'.
The traditional business of banking was to receive deposits from customers who want their money to be in safe custody until they have a use for the spending-power, to hold reserves proportionate to the deposits so that customers can always access their funds when they want them, and to lend the rest of the money they have to firms and to people who have viable economic uses for it [investment, house purchase, trade finance etc]. Alongside basic banking by 1850 there had emerged a small cohort of 'merchant banks' that managed international transactions and currency exchanges and advised firms on aspects of business development, including decisions whether to sell shares or bonds to increase their capital, and when and how to try to take over other firms. Alongside the banks and merchant banks were specialist trades of stock-broking and stock-jobbing, discounting government securities and other niche markets: each of which was self-regulating under the oversight of the Bank of England. After the big bang these activities were brought together in new conglomerates, many of which formed as - or were absorbed by - international conglomerates; and their turnover increased massively. However, the emergence of the 'new' economies of Asia and Latin America meant that in the new millennium London's share of global banking trade and of profits quickly declined, from more than ten per cent in 2000 to less than five per cent in 2011. Many of the 'products' in which the global banks trade have been invented in London, but can be used anywhere. London remains highly innovative and attracts people from all over the world to learn and to practice their trade in London before they take their skills home. Many such individuals develop a liking for the lifestyle that has been available in London for the highly affluent, and several of those buy homes in London even when their employment has moved elsewhere. Thus house prices in the British capital remain high, conflicting with a nationwide trend for all but the finest houses to decline in price as individuals' access to mortgage funding becomes more difficult.
Most of the new trade that was developed since the mid-eighties of the last century was misguidedly regarded as 'banking'. It was gambling, speculation. Derivatives, most swaps and many forms of futures were just bets: neither party owned any assets related to the deal: in the first instance they were bets about how the prices of assets would move in the future, but they quickly moved on into guesses about how derivatives, futures and swaps would move in the future. People and firms who place the right bets [for them] at the right time in the development of the market situation can make profits from which hey can mitigate anticipated losses due to risk events such as adverse currency or interest-rate movements: such hedging can be beneficial to the clever, lucky players. Many other punters enter into contracts and escape from them without making significant losses. This has all added to the 'banks'' turnover, and the traders who have been granted bonuses on the basis of their turnover have thrived. The credibility of these markets is now at risk: and it is becoming impossible for the conglomerates to hold enough reserves on their balance sheets both to be able to fund for potential losses in the esoteric markets and to provide investment funds for 'real' businesses at the same time. So investment is suffering. The way to end this nonsense, as had many times been stressed on this blog site, is to recognise the gambling contracts for what they are, and to regulate them and tax them appropriately. If it is prepared to take the risk a conglomerate could have a retail banking subsidiary, and a merchant banking, stockbroking and bond issuance subsidiary which offers a mergers and acquisitions advisory and assistance service; both of which must be separately capitalised and conformably managed according to the rules set by the bank regulators. Such a conglomerate could also apply for a gaming licence for a separately-financed casino subsidiary that managed and issued derivatives, swaps and futures. If such a subsidiary satisfied consumer demands it could continue to grow the business as a complex of hedges for clients who understand what the market is offering them and what costs and risks are involved.
London casinos attract international high rollers:UK regulation of gambling is good and creates consumer confidence. There are grounds for hope that a regulated market in swaps, derivatives and futures could thrive and grow: but let it never be called banking, nor have access to the reserves that are accumulated to support the proper activities of retail or merchant banks.
For several decades successive governments have complacently observed the increase of trade in the finance sector of the economy, and have taken more than ten per cent of the nation's taxes from the sector. This was seen as largely compensating the country for the destruction of material industry. That progress is now likely to be slammed into reverse by the restructuring of banking firms, by new UK and EU regulation, and by international traders moving activity away from the discredited London Market. Thus the situation is nothing less than a disaster for the British economy and for the sixty million human beings who depend upon it
The principal asset of any financial firm is its reputation for integrity in its employees' intentions and its efficiency in administration. Despite the impact of the credit crunch, London has been seen as a reliable market until very recently. Before the start of the millennium the London Market was dramatically changed from the gentlemanly world that existed until the early nineteen eighties when the Thatcher government initiated the 'big bang' which created the environment in which huge conglomerates were created which undertook almost the full range of financial services [insurance was the great exception] and developed massive markets in a great variety of new 'products'.
The traditional business of banking was to receive deposits from customers who want their money to be in safe custody until they have a use for the spending-power, to hold reserves proportionate to the deposits so that customers can always access their funds when they want them, and to lend the rest of the money they have to firms and to people who have viable economic uses for it [investment, house purchase, trade finance etc]. Alongside basic banking by 1850 there had emerged a small cohort of 'merchant banks' that managed international transactions and currency exchanges and advised firms on aspects of business development, including decisions whether to sell shares or bonds to increase their capital, and when and how to try to take over other firms. Alongside the banks and merchant banks were specialist trades of stock-broking and stock-jobbing, discounting government securities and other niche markets: each of which was self-regulating under the oversight of the Bank of England. After the big bang these activities were brought together in new conglomerates, many of which formed as - or were absorbed by - international conglomerates; and their turnover increased massively. However, the emergence of the 'new' economies of Asia and Latin America meant that in the new millennium London's share of global banking trade and of profits quickly declined, from more than ten per cent in 2000 to less than five per cent in 2011. Many of the 'products' in which the global banks trade have been invented in London, but can be used anywhere. London remains highly innovative and attracts people from all over the world to learn and to practice their trade in London before they take their skills home. Many such individuals develop a liking for the lifestyle that has been available in London for the highly affluent, and several of those buy homes in London even when their employment has moved elsewhere. Thus house prices in the British capital remain high, conflicting with a nationwide trend for all but the finest houses to decline in price as individuals' access to mortgage funding becomes more difficult.
Most of the new trade that was developed since the mid-eighties of the last century was misguidedly regarded as 'banking'. It was gambling, speculation. Derivatives, most swaps and many forms of futures were just bets: neither party owned any assets related to the deal: in the first instance they were bets about how the prices of assets would move in the future, but they quickly moved on into guesses about how derivatives, futures and swaps would move in the future. People and firms who place the right bets [for them] at the right time in the development of the market situation can make profits from which hey can mitigate anticipated losses due to risk events such as adverse currency or interest-rate movements: such hedging can be beneficial to the clever, lucky players. Many other punters enter into contracts and escape from them without making significant losses. This has all added to the 'banks'' turnover, and the traders who have been granted bonuses on the basis of their turnover have thrived. The credibility of these markets is now at risk: and it is becoming impossible for the conglomerates to hold enough reserves on their balance sheets both to be able to fund for potential losses in the esoteric markets and to provide investment funds for 'real' businesses at the same time. So investment is suffering. The way to end this nonsense, as had many times been stressed on this blog site, is to recognise the gambling contracts for what they are, and to regulate them and tax them appropriately. If it is prepared to take the risk a conglomerate could have a retail banking subsidiary, and a merchant banking, stockbroking and bond issuance subsidiary which offers a mergers and acquisitions advisory and assistance service; both of which must be separately capitalised and conformably managed according to the rules set by the bank regulators. Such a conglomerate could also apply for a gaming licence for a separately-financed casino subsidiary that managed and issued derivatives, swaps and futures. If such a subsidiary satisfied consumer demands it could continue to grow the business as a complex of hedges for clients who understand what the market is offering them and what costs and risks are involved.
London casinos attract international high rollers:UK regulation of gambling is good and creates consumer confidence. There are grounds for hope that a regulated market in swaps, derivatives and futures could thrive and grow: but let it never be called banking, nor have access to the reserves that are accumulated to support the proper activities of retail or merchant banks.
Thursday, 27 October 2011
Gambling
Today's news contains much good, and many items where it is clear that risk is being accepted by governments on behalf of populations who have little understanding of what is at stake. We will take three instances.
One.
27 October 2012 is the twenty-fifth anniversary of the 'Big Bang' in the City of London and the wider British financial market. A tightly managed group of self-regulated professions whose members largely bore personal financial responsibility for their actions [and set their own ethical standards] was replaced by an open marketplace. Foreign firms bought the stockbrokers and jobbing firms and began to use them as bases for gambling on an ever-expanding scale on their own account, abandoning the former focus on customer relations. Their leaders spoke about accepting and managing 'risk'; until 2007 when their frozen gambling debts were so great that governments had to bail them out to prevent systemic collapse of the economy. Because they paid a huge amount of tax on their reckless transactions the financial markets became the great favourite of British governments [especially the Brown-Balls Labour lot]; and it remains conventional wisdom that their 'markets' are essential components of the British economy. So there is yet more risk eventually to be absorbed by a debilitated economy; and little evidence that the politicians have a better understanding of this situation than did their predecessors in 1987 [except Ken Clarke, who is still there and may have learned a lot].
Two.
The Eurozone leaders have gone home to bed after a very late night session, content that they have shored up the system for an indeterminate period during which they will move slowly towards some sort of fiscal union. The longer the negotiations go on, the more risky situations will arise and the more scared the less-well-managed economies will periodically become, and the more the Germans will have their way in determining the shape and structure of the final deal.
Like it or not, there is now a 'two-tier' European Union. The in-crowd of the Eurozone have huge benefits and massive risks in their refreshed situation. Their banks have been bullied into surrendering 50% of the cash that the Greek state notionally owes them: and the whole Eurozone will now try to compel the Greek government to stay in the Euro and eventually pay up their remaining debts in Euros rather than in a putative devalued Drachma.
The outer circle is composed of the willing Euro-abstainers like Britain, the Czech Republic and Sweden and of the reluctant who have simply not passed the economic tests that Greece should never have been allowed to self-certify - especially Poland. There is little probability that the outer ten will have the slightest wish to seek the sort of coherence that is essential among the insiders. Some of them will still seek admission to the Eurozone. Some may form informal alliances, such as the former members of EFTA who joined the EEC together in 1973 [Sweden, Denmark and Britain] and may forge a new relationship with the other ex-EFTA members Norway and Switzerland who are in the European Economic Area but outside the European Union. If this step were taken it could prove an attractive alternative option for Poland but may not be attractive to the Czechs or Hungarians. There is all to play for: no option is risk-free, but there are now clear options.
Three.
The British Office for National Statistics has announced that Britain can expect the population to exceed seventy million by 2030. This is perceived to be 'good news', in that millions of immigrants and their children will be of working age, offsetting a steep forecast risk that there will be a doubling of the number of people over ninety years of age who will impose heavy costs on health and social services. This assumption entails huge risks; not least the fact that there is already a growing anti-immigrant sentiment. That politicians have either ignored the hardening of the popular mood, or stigmatised it as 'racist', is a major risk for the coherence of the country. There are real worries about Muslim colonisation of the country [and, indeed, of the Continent], which will not be assuaged by bland political reassurances. Demography is becoming dicey!
One.
27 October 2012 is the twenty-fifth anniversary of the 'Big Bang' in the City of London and the wider British financial market. A tightly managed group of self-regulated professions whose members largely bore personal financial responsibility for their actions [and set their own ethical standards] was replaced by an open marketplace. Foreign firms bought the stockbrokers and jobbing firms and began to use them as bases for gambling on an ever-expanding scale on their own account, abandoning the former focus on customer relations. Their leaders spoke about accepting and managing 'risk'; until 2007 when their frozen gambling debts were so great that governments had to bail them out to prevent systemic collapse of the economy. Because they paid a huge amount of tax on their reckless transactions the financial markets became the great favourite of British governments [especially the Brown-Balls Labour lot]; and it remains conventional wisdom that their 'markets' are essential components of the British economy. So there is yet more risk eventually to be absorbed by a debilitated economy; and little evidence that the politicians have a better understanding of this situation than did their predecessors in 1987 [except Ken Clarke, who is still there and may have learned a lot].
Two.
The Eurozone leaders have gone home to bed after a very late night session, content that they have shored up the system for an indeterminate period during which they will move slowly towards some sort of fiscal union. The longer the negotiations go on, the more risky situations will arise and the more scared the less-well-managed economies will periodically become, and the more the Germans will have their way in determining the shape and structure of the final deal.
Like it or not, there is now a 'two-tier' European Union. The in-crowd of the Eurozone have huge benefits and massive risks in their refreshed situation. Their banks have been bullied into surrendering 50% of the cash that the Greek state notionally owes them: and the whole Eurozone will now try to compel the Greek government to stay in the Euro and eventually pay up their remaining debts in Euros rather than in a putative devalued Drachma.
The outer circle is composed of the willing Euro-abstainers like Britain, the Czech Republic and Sweden and of the reluctant who have simply not passed the economic tests that Greece should never have been allowed to self-certify - especially Poland. There is little probability that the outer ten will have the slightest wish to seek the sort of coherence that is essential among the insiders. Some of them will still seek admission to the Eurozone. Some may form informal alliances, such as the former members of EFTA who joined the EEC together in 1973 [Sweden, Denmark and Britain] and may forge a new relationship with the other ex-EFTA members Norway and Switzerland who are in the European Economic Area but outside the European Union. If this step were taken it could prove an attractive alternative option for Poland but may not be attractive to the Czechs or Hungarians. There is all to play for: no option is risk-free, but there are now clear options.
Three.
The British Office for National Statistics has announced that Britain can expect the population to exceed seventy million by 2030. This is perceived to be 'good news', in that millions of immigrants and their children will be of working age, offsetting a steep forecast risk that there will be a doubling of the number of people over ninety years of age who will impose heavy costs on health and social services. This assumption entails huge risks; not least the fact that there is already a growing anti-immigrant sentiment. That politicians have either ignored the hardening of the popular mood, or stigmatised it as 'racist', is a major risk for the coherence of the country. There are real worries about Muslim colonisation of the country [and, indeed, of the Continent], which will not be assuaged by bland political reassurances. Demography is becoming dicey!
Subscribe to:
Posts (Atom)