The London Stock Exchange has been in the news for precisely the wrong reasons in the past few days. Following the announcement that the very successful, reputedly abrasive, chief executive was leaving one significant shareholder took a very public stance to assert that the chairman should go and the chief executive should remain. Rumours swirled about clashes of personality, secret payoffs and dirty work at the crossroads. After entertaining the speculative journalists for a couple of weeks it is now announced that both chairman and chief executive are to go: the chief executive soon, the chairman in 2019. The publicity has been unsettling, and the Exchange is now said by some to be a vulnerable takeover target; with the owner of the New York Stock Exchange said to be a keen potential buyer.
There is no doubt that, despite regulatory and chauvinistic forces preventing a proposed merger with the German stock exchange, the chief executive has been very successful, multiplying the share price very significantly: he will no doubt leave with very significant financial reserves to underpin his aim to grow vines.
Over the decades, there have been many examples of chief executives who dominate and build up hugely successful companies; often for them to be ruined within a few years after the great man stands down. One of the most spectacular in my lifetime has been Arnold Weinstock of the English Electric Company. Over the spectrum from domestic appliances to world-class warplanes, this conglomerate company built a steady reputation for business success and thus declaring decent dividends. For most of the couple of decades while Weinstock ruled the company in a highly individual and essentially conservative way, the chair was occupied by the complementary character Lord Nelson of Stafford whose emollient, confident handling of the formal business of the company [including shareholder relations] left the chief executive the space he needed to manage in his own way.
After Weinstock's retirement there came in people who teachers in Business Schools would undoubtedly rate higher than Weinstock on all the measures of formal competence that are emphasised by academic commentators [especially those in third-rate British business schools]. With major reorganisation, changes of name and restructuring, the next generation of managers destroyed the business in a very few years.
What is left of the 'clever end' of the old English Electric Company, the aeronautical facilities in the north-west of England that have survived until now within more recently cobbled-together conglomerates, are being reduced - and are very much under threat of closure - as a consequence of cuts to the defence budget, combined with the increasingly prudish opposition to the sale of aircraft and arms to regimes that purists consider to be oppressive. There is a very present danger that the United Kingdom will soon forfeit any capacity to build military aircraft: while Brexit [if the buffoons have their way] will lead to the slow exclusion of UK manufacturers from Airbus.
Lords Weinstock and Nelson together took a major part in enabling the UK to be at the very forefront of defence technology: and one of the ways in which they helped this process was by including the defence-oriented projects within a larger conglomerate that made significant profits from its consumer electrical goods. Thus the some of the defence contracts, for some of the time, could be priced at less than full cost because of internal subsidy by the company. This pricing structure also applies to the suppliers of components for the major projects in the defence arena. It is extremely important in France, where the heavily-state-supported viability of the aircraft industry is maintained with constant nudging from the state.
Britain has lost both the Weinstocks and the appetite to enable them to maintain their niche in the "military-industrial complex" which is essential for any state that hopes to be a power in the world [or even in the neighbourhood]. Before the last dregs of the potential to restore the complex have drained away, it behoves the wider public to recognise what we have had, and are so close to losing for ever.
Showing posts with label New York. Show all posts
Showing posts with label New York. Show all posts
Thursday, 30 November 2017
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.
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.
Tuesday, 24 October 2017
Concorde: A Retrospect
On this date in 2003 the last flight by a British Airways Concorde carrying paying passengers flew in to Heathrow. Hundreds of Thousands of people made sure that they could see - and hear - this spectacular aircraft for a last time. There were a few more final flourishes, including one in which half a dozen of the 'planes flew up the Thames estuary towards the airport; then that unique sound vanished from the skies. A few of the aircraft have been kept as museum pieces, but they are naturally regarded as relics rather than as harbingers of great things to come.
The aircraft were first mooted in the nineteen fifties, and a joint venture was sealed with France; long before Britain was admitted to the Common Market that was to mutate into the European Union. Harold Wilson's Labour government strongly considered aborting the project, on cost grounds; but it was decided that this joint exercise with France, that would put Europe ahead of the USA and the USSR, was too important to abandon. Tony Benn, in a short episode of ministerial office, returned from conversations in Paris to report that the project would definitely go ahead: and that the name of the craft would be spelt in the French way - with an e on the end - to stand for Europe, enterprise and a whole string of other e-words that I cannot remember [and it is not worth looking them up].
To fly in Concorde was a very special experience. It was all-first-class [except on specially booked flights] and the space in the cabin was extremely limited. There were four carefully-designed small seats in each row, with a relatively narrow aisle and a low ceiling. Takeoff was spectacular and the craft quickly got to supersonic speed, which was shown on an indicator at the front of the cabin. The westbound journey to New York took almost four hours: which meant that the 'plane arrived in America a little earlier [on the clock] than its takeoff time from London. I was intrigued to find that a lot of people booked westbound flights on Concorde to enjoy the experience of 'beating time'; then they traveled eastbound on less cramped aircraft.
Some people became inter-continental commuters - a few, mostly media figures, on a weekly basis - and claimed to feel no ill-effects from the experience.
The venture was demonstrated soon to be uneconomic. It became a flag-flying exercise for British Airways, Air France and their sponsoring governments. There were no orders from alien airlines, and while the USA and USSR developed and even tested supersonic passenger jets there was no marketed competitor to Concorde.
The context in which this happened was that of the cold war. With the development of nuclear weapons, the competing powers of NATO and the Warsaw Pact needed aircraft that could deliver such weapons with minimum chance of being intercepted before they got over their target. The development of fast fighter 'planes reduced the chances of even supersonic bombers being successful; so began the concentration on inter-continental ballistic missiles. The British and French governments decided jointly to try to create a market for supersonic aircraft in commercial use: and Concorde was the spectacular result. But it was never cost effective. The amount of the most highly-refined fuel needed to get it [and keep it] airborne, in ratio to the number of passengers who could be carried, was never going to be economically efficient. Commercial aircraft constructors saw the future in large-bodied, relatively economical sub-sonic 'planes: of which the Boeing 747 and the European Airbus became the best-known workhorses.
Some of the technology that was developed for supersonic flights was of use generally in the aircraft industry: but that knowledge was mostly acquired from the bomber programmes; Concorde was not needed from that point of view.
As the small stock of planes aged, so maintenance costs increased, fuel efficiency declined and it became clear that passengers in general preferred the relative economy and comfort of wide-bodied aircraft in which first-class passengers could have beds, business class could have comfortable divans, and everybody had space to move around. The British and the French had proved what could be done. Tens of thousands of people had enjoyed the unique experience. But that was that.
Was it sad? Not particularly. It was they way of the world: 'how the cookie crumbles'.
Was it wasteful? Yes, but nobody much minded.
National pride was enhanced.
France was helped to develop the capability to build big, twenty-first century aircraft for which the Brits made some of the parts.
France can still design and build fighters: Britain has surrendered that capability.
The relative efficiency of the bureaucracies of the two states was sharply differentiated by the whole venture. The French remain focused, chauvinistic and effective. The British have remained indecisive and have continued to axe promising projects every time austerity is called. The British are probably the better engineers: but that fact is always eclipsed by political reality.
The aircraft were first mooted in the nineteen fifties, and a joint venture was sealed with France; long before Britain was admitted to the Common Market that was to mutate into the European Union. Harold Wilson's Labour government strongly considered aborting the project, on cost grounds; but it was decided that this joint exercise with France, that would put Europe ahead of the USA and the USSR, was too important to abandon. Tony Benn, in a short episode of ministerial office, returned from conversations in Paris to report that the project would definitely go ahead: and that the name of the craft would be spelt in the French way - with an e on the end - to stand for Europe, enterprise and a whole string of other e-words that I cannot remember [and it is not worth looking them up].
To fly in Concorde was a very special experience. It was all-first-class [except on specially booked flights] and the space in the cabin was extremely limited. There were four carefully-designed small seats in each row, with a relatively narrow aisle and a low ceiling. Takeoff was spectacular and the craft quickly got to supersonic speed, which was shown on an indicator at the front of the cabin. The westbound journey to New York took almost four hours: which meant that the 'plane arrived in America a little earlier [on the clock] than its takeoff time from London. I was intrigued to find that a lot of people booked westbound flights on Concorde to enjoy the experience of 'beating time'; then they traveled eastbound on less cramped aircraft.
Some people became inter-continental commuters - a few, mostly media figures, on a weekly basis - and claimed to feel no ill-effects from the experience.
The venture was demonstrated soon to be uneconomic. It became a flag-flying exercise for British Airways, Air France and their sponsoring governments. There were no orders from alien airlines, and while the USA and USSR developed and even tested supersonic passenger jets there was no marketed competitor to Concorde.
The context in which this happened was that of the cold war. With the development of nuclear weapons, the competing powers of NATO and the Warsaw Pact needed aircraft that could deliver such weapons with minimum chance of being intercepted before they got over their target. The development of fast fighter 'planes reduced the chances of even supersonic bombers being successful; so began the concentration on inter-continental ballistic missiles. The British and French governments decided jointly to try to create a market for supersonic aircraft in commercial use: and Concorde was the spectacular result. But it was never cost effective. The amount of the most highly-refined fuel needed to get it [and keep it] airborne, in ratio to the number of passengers who could be carried, was never going to be economically efficient. Commercial aircraft constructors saw the future in large-bodied, relatively economical sub-sonic 'planes: of which the Boeing 747 and the European Airbus became the best-known workhorses.
Some of the technology that was developed for supersonic flights was of use generally in the aircraft industry: but that knowledge was mostly acquired from the bomber programmes; Concorde was not needed from that point of view.
As the small stock of planes aged, so maintenance costs increased, fuel efficiency declined and it became clear that passengers in general preferred the relative economy and comfort of wide-bodied aircraft in which first-class passengers could have beds, business class could have comfortable divans, and everybody had space to move around. The British and the French had proved what could be done. Tens of thousands of people had enjoyed the unique experience. But that was that.
Was it sad? Not particularly. It was they way of the world: 'how the cookie crumbles'.
Was it wasteful? Yes, but nobody much minded.
National pride was enhanced.
France was helped to develop the capability to build big, twenty-first century aircraft for which the Brits made some of the parts.
France can still design and build fighters: Britain has surrendered that capability.
The relative efficiency of the bureaucracies of the two states was sharply differentiated by the whole venture. The French remain focused, chauvinistic and effective. The British have remained indecisive and have continued to axe promising projects every time austerity is called. The British are probably the better engineers: but that fact is always eclipsed by political reality.
Wednesday, 18 October 2017
A Macron-Merkel Plot to 'Destroy' London?
The world has been so intrigued by the bizarre conduct of President Trump that far too little attention has been paid to the oddity of the French president. Mr Trump has been ridiculously intrusive in sharing his rapidly-changing views with the media and in the Twittersphere: M Macron has been tight-lipped to an unusual degree; and there have been many reports of his contempt for the media. He has been reported as saying - to his own staff - that there is no point in him giving interviews and press conferences because his intellect is so far superior to the norm that people simply will not understand his statements and his answers to questions. His path to office has been engineered by the old establishment of the 'higher schools', who experienced the agony of the Hollande regime and were determined to seize upon the national consensus that politics had reached a nadir. Thus they presented a new sort of candidate from a new generation: a man with few friends and a most peculiar private life. His allies engineered a parliamentary landslide, and he appears to be in an unassailable position with a clear popular mandate - to be 'different' - backed by a parliamentary majority.
With these assets, he is attempting - as half a dozen of his predecessors did - to attack the established position of the trade unions and of the farming interest, and to try to change the culture of work generally in France. Given the fact that recorded French 'productivity' is very much greater than the British, and not far inferior to the German, it is unclear why he thinks that such disruption is desirable or necessary; but he is having a go anyway: and it fills column inches in the press.
His career record includes a few years with a major international bank, where he greatly refined his spoken English and learned how far ahead of French practice in banking and finance are the systems in new York and London; and how much bigger are the financial markets in those centres - and in Singapore - than in Paris. He also gained a perspective an the depth of support that the London finance sector has, from a huge array of specialist lawyers and a raft of support professions such as actuaries, arbitrators, loss assessors and adjusters. Some English-speaking critics reckon that he has developed a profound envy of these markets, and that he came into office with a determination to push Paris as a rival to those centres even though the ancillary trades there are massively under-developed.
Doomsters in London have now come up with the idea that he has decided to use the Brexit opportunity to diminish London massively: and that he has enlisted Angela Merkel and the gnomes of Frankfurt to his plot. This is seen as the hidden agenda behind the determination of a loyal, ambitious and deeply egocentric Frenchman, Michel Barnier, to use his role as EU negotiator with the UK to delay and diminish whatever settlement the UK can achieve with the EU. This sort of conspiracy theory can be very powerful in times of massive uncertainty; and the absence of any such plot - as with any negative argument in politics - is ultimately impossible to prove.
Mrs Merkel grew up, graduated and worked in the German Democratic Republic, and presumably had to learn Marxist dogma sufficiently to be allowed into university and into a research post. There is very little evidence that her education since 1990 has included any significant familiarisation with serious political economy. Her chancellorship has been supported by strong and well-informed ministers who have dealt with economic affairs and with business: she has read appropriate speeches, but no significant initiative has been attributed to her [other than the catastrophic decision to open Europe to mass immigration, which will mark her rule throughout future history]. It is possible, but improbable, that she has actually committed to any scheme systematically to attempt to smash the London market which - as is being stressed today - is an irreplaceable asset to world trade that even Germany and France rely upon heavily.
As a boy growing up in Lancashire, I became used to hearing older people say: "The French will never forgive us for saving them in two world wars", whereupon a minority said: "the First World War, yes: they don't like admitting that they needed us. But in the Second they hated us for disrupting their comfortable collaboration with the Nazis: remember, we bombed them and fought our way through France. DeGaulle was very much in a minority until the Americans put him in power."
It would be no surprise to discover that Macron grew up surrounded by the French mirror-image of such sentiments.
With these assets, he is attempting - as half a dozen of his predecessors did - to attack the established position of the trade unions and of the farming interest, and to try to change the culture of work generally in France. Given the fact that recorded French 'productivity' is very much greater than the British, and not far inferior to the German, it is unclear why he thinks that such disruption is desirable or necessary; but he is having a go anyway: and it fills column inches in the press.
His career record includes a few years with a major international bank, where he greatly refined his spoken English and learned how far ahead of French practice in banking and finance are the systems in new York and London; and how much bigger are the financial markets in those centres - and in Singapore - than in Paris. He also gained a perspective an the depth of support that the London finance sector has, from a huge array of specialist lawyers and a raft of support professions such as actuaries, arbitrators, loss assessors and adjusters. Some English-speaking critics reckon that he has developed a profound envy of these markets, and that he came into office with a determination to push Paris as a rival to those centres even though the ancillary trades there are massively under-developed.
Doomsters in London have now come up with the idea that he has decided to use the Brexit opportunity to diminish London massively: and that he has enlisted Angela Merkel and the gnomes of Frankfurt to his plot. This is seen as the hidden agenda behind the determination of a loyal, ambitious and deeply egocentric Frenchman, Michel Barnier, to use his role as EU negotiator with the UK to delay and diminish whatever settlement the UK can achieve with the EU. This sort of conspiracy theory can be very powerful in times of massive uncertainty; and the absence of any such plot - as with any negative argument in politics - is ultimately impossible to prove.
Mrs Merkel grew up, graduated and worked in the German Democratic Republic, and presumably had to learn Marxist dogma sufficiently to be allowed into university and into a research post. There is very little evidence that her education since 1990 has included any significant familiarisation with serious political economy. Her chancellorship has been supported by strong and well-informed ministers who have dealt with economic affairs and with business: she has read appropriate speeches, but no significant initiative has been attributed to her [other than the catastrophic decision to open Europe to mass immigration, which will mark her rule throughout future history]. It is possible, but improbable, that she has actually committed to any scheme systematically to attempt to smash the London market which - as is being stressed today - is an irreplaceable asset to world trade that even Germany and France rely upon heavily.
As a boy growing up in Lancashire, I became used to hearing older people say: "The French will never forgive us for saving them in two world wars", whereupon a minority said: "the First World War, yes: they don't like admitting that they needed us. But in the Second they hated us for disrupting their comfortable collaboration with the Nazis: remember, we bombed them and fought our way through France. DeGaulle was very much in a minority until the Americans put him in power."
It would be no surprise to discover that Macron grew up surrounded by the French mirror-image of such sentiments.
Monday, 11 September 2017
This Day - 9/11 - and the Knell of the Free Trade Fantasy
September 11, in the UK and many other countries, is summarised as 11.9.17. But in the USA they put the month first, hence 9.11 or 9/11. The date 9/11 has become even more rooted in folklore and the media as the descriptor of the terrorist attack on New York than is 'ground zero' as a synonym for the site at which the destruction was centred. It is purely coincidental that on this same date in 2017 an unprecedented storm has struck the mainland USA in Florida.
Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.
Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.
Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.
The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.
It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.
The Econocratic idea that there should be free trade in every field simply does not work in this area.
What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book' - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.
Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.
Both insueBoth insurers and reinsurers
Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.
Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.
Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.
The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.
It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.
The Econocratic idea that there should be free trade in every field simply does not work in this area.
What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book' - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.
Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.
Both insueBoth insurers and reinsurers
Monday, 17 July 2017
High-Speed Idiocy: and Some Sense
Today will see another series of announcements on the scheme to build a completely new high-speed railway between London and Birmingham, with branches to Manchester and Leeds.
I am one of the many who deplores the London to Birmingham venture. The existing line from Euston takes only 70 minutes, non-stop. The need on that route is for more capacity to take stopping trains that can bring commuters more effectively into London from towns and cities on the route, and on feeder routes to that line. The environmental damage that it will inflict is immense, and the cost will be added to the effective national debt [from Britain to aliens, largely Chinese state-owned enterprises] even though it is to be wrapped up as corporate lending. That borrowing will have to be paid for: so if British people decide they cannot afford the prices that will be slapped onto tickets to travel on HS2, the cost of the daft first-stage enterprise will either be offloaded onto the prices of rail tickets nationwide, or onto taxes.
The so-say second stage: or, at least, investment in the improvement of main rail routes for travel across the north midlands and the south of northern England, is absolutely essential. Direct trains from Sheffield to London have been improved, and thus times on the route via Chesterfield, Derby and Leicester, with a sideline to Nottingham, are acceptable. The fast trains on the west-coast mainline that bypass Birmingham on the way to Edinburgh and Glasgow do not serve any major city in northern England: and they are slowed down by stopping at some selection from the list of Crewe, Warrington, Wigan, Preston, Lancaster and Carlisle. The history of railway company formation, and the consequential construction of lines, means that there are various cities and towns to be served in Yorkshire, causing there to be barely-adequate services to York, Leeds, Bradford, Wakefield, Halifax, Huddersfield and Hull from the metropolis: only after Northallerton is there a clear principal route via Darlington, Durham, Newcastle and the north: and this all leaves Sunderland and Middlesborough at the edges of the map. Huge expenditure is needed on that infrastructure to bring it up to the level that is common on the European continent. Half a century has been spent closing railways and parts of routes and despoiling the railways of the land that could have been sold to provide the cash to fund updating of the system. While the Osbornian HS2N plan may not be feasible, the investment is necessary: and it should come from a state-led infrastructure pool to which crowd-funding from the British people should be added. It is not necessary to add to the public external debt of the nation to improve this infrastructure: the state should lead, the people can follow, and the spending that will be generated by the construction work and then the operation of the lines will help to revive the economy. It is necessary to build not just 'strategic' main lines, but the ensure that all the 'bypassed' towns - even Darwen and Accrington - are effectively linked in to the new system.
Before one gets too depressed at the present state of the British railways, one should look at the home of capitalism, the United States of America: and at its financial capital, New York. There the railways are in a state of extreme dereliction: with collapsing bridges, five-mile-an-hour speed limits, frequent derailments at the major stations and [literally] century-old wiring providing power to some routes. President Trump trumpeted his intention to change all this, with massive investment in infrastructure, including in his home city: but so far he has cut down on the Obama-era commitment of federal investment.
Thought must be given to the effects of economic thinking, both in the neo-Keynesian era and in the more recent period when 'rational markets' theory has predominated, on the real structure and infrastructure of human life in the urban environment. It is Economics that got us down into this mess: economic dogma will not help us out of it.
I am one of the many who deplores the London to Birmingham venture. The existing line from Euston takes only 70 minutes, non-stop. The need on that route is for more capacity to take stopping trains that can bring commuters more effectively into London from towns and cities on the route, and on feeder routes to that line. The environmental damage that it will inflict is immense, and the cost will be added to the effective national debt [from Britain to aliens, largely Chinese state-owned enterprises] even though it is to be wrapped up as corporate lending. That borrowing will have to be paid for: so if British people decide they cannot afford the prices that will be slapped onto tickets to travel on HS2, the cost of the daft first-stage enterprise will either be offloaded onto the prices of rail tickets nationwide, or onto taxes.
The so-say second stage: or, at least, investment in the improvement of main rail routes for travel across the north midlands and the south of northern England, is absolutely essential. Direct trains from Sheffield to London have been improved, and thus times on the route via Chesterfield, Derby and Leicester, with a sideline to Nottingham, are acceptable. The fast trains on the west-coast mainline that bypass Birmingham on the way to Edinburgh and Glasgow do not serve any major city in northern England: and they are slowed down by stopping at some selection from the list of Crewe, Warrington, Wigan, Preston, Lancaster and Carlisle. The history of railway company formation, and the consequential construction of lines, means that there are various cities and towns to be served in Yorkshire, causing there to be barely-adequate services to York, Leeds, Bradford, Wakefield, Halifax, Huddersfield and Hull from the metropolis: only after Northallerton is there a clear principal route via Darlington, Durham, Newcastle and the north: and this all leaves Sunderland and Middlesborough at the edges of the map. Huge expenditure is needed on that infrastructure to bring it up to the level that is common on the European continent. Half a century has been spent closing railways and parts of routes and despoiling the railways of the land that could have been sold to provide the cash to fund updating of the system. While the Osbornian HS2N plan may not be feasible, the investment is necessary: and it should come from a state-led infrastructure pool to which crowd-funding from the British people should be added. It is not necessary to add to the public external debt of the nation to improve this infrastructure: the state should lead, the people can follow, and the spending that will be generated by the construction work and then the operation of the lines will help to revive the economy. It is necessary to build not just 'strategic' main lines, but the ensure that all the 'bypassed' towns - even Darwen and Accrington - are effectively linked in to the new system.
Before one gets too depressed at the present state of the British railways, one should look at the home of capitalism, the United States of America: and at its financial capital, New York. There the railways are in a state of extreme dereliction: with collapsing bridges, five-mile-an-hour speed limits, frequent derailments at the major stations and [literally] century-old wiring providing power to some routes. President Trump trumpeted his intention to change all this, with massive investment in infrastructure, including in his home city: but so far he has cut down on the Obama-era commitment of federal investment.
Thought must be given to the effects of economic thinking, both in the neo-Keynesian era and in the more recent period when 'rational markets' theory has predominated, on the real structure and infrastructure of human life in the urban environment. It is Economics that got us down into this mess: economic dogma will not help us out of it.
Saturday, 22 October 2011
Capitalism in Crisis?
The waifs, strays, agitators and rent-a-crowd who have settled outside Saint Paul's Cathedral are living under various banners, of which one of the most prominent declares CAPITALISM IN CRISIS.
It appears that the majority of the squatters broadly equate capitalism with 'bankers' who are inferred to be rich, exploitative, dishonest and void of social conscience. It is probable that a great majority of the British population would endorse that view of bankers, or at least of 'City bankers' or 'wholesale bankers' [as distinct from local retail branch bank counter staff]. But is the equation of 'capitalism' with 'banker' in any way valid?
The City of London and New York banking sectors have been hugely successful in the era since the regimes led by Margaret Thatcher and Ronald Reagan fostered liberalisation of the rules, enabling them to develop a completely reckless cats-cradle of interdependent innovations that made increasing use of developing computer software and passed way beyond the ken of inadequate regulators. Few people could explain how this system crashed and what was the nature of the collapse: but everyone has experience of the consequences, and can see the pathetic attempts of political systems to capture some sort of control over phenomena that they do not understand. The Economists do not fully understand them either: some Economists understand some features of the system and of the crisis very well, and have sensible policy suggestions: but nobody can definitively say to what extent this or that 'expert' has the right answer.The debate is close to stalemate; but it is increasingly obvious that the crisis occurred in 'banking' even though it subsequently threatened the existence of the economy as a support mechanism for human beings.
Few people in or out of politics, inside or outside the 'Economics profession', doubt that human survival in all the industrial and 'post-industrial' countries depends on developing the 'real economy'; and specifically on developing what is broadly [and therefore pretty meaninglessly] described as 'manufacturing'. No materially productive plant can be created without capital in the forms of buildings, services to those buildings, machinery, supplies, ancillary services, trained labour [which is in itself expensive] and a cash float to pay the bills until sales revenue cover costs. Society cannot survive without capital. So what is 'capitalism', and does the addition of the suffix confer a morally or socially negative inferior - or even hostile - aspect to the necessary investment funds? It is highly improbable that any of the 'protesters' could answer that question in a credible manner.
It appears that the majority of the squatters broadly equate capitalism with 'bankers' who are inferred to be rich, exploitative, dishonest and void of social conscience. It is probable that a great majority of the British population would endorse that view of bankers, or at least of 'City bankers' or 'wholesale bankers' [as distinct from local retail branch bank counter staff]. But is the equation of 'capitalism' with 'banker' in any way valid?
The City of London and New York banking sectors have been hugely successful in the era since the regimes led by Margaret Thatcher and Ronald Reagan fostered liberalisation of the rules, enabling them to develop a completely reckless cats-cradle of interdependent innovations that made increasing use of developing computer software and passed way beyond the ken of inadequate regulators. Few people could explain how this system crashed and what was the nature of the collapse: but everyone has experience of the consequences, and can see the pathetic attempts of political systems to capture some sort of control over phenomena that they do not understand. The Economists do not fully understand them either: some Economists understand some features of the system and of the crisis very well, and have sensible policy suggestions: but nobody can definitively say to what extent this or that 'expert' has the right answer.The debate is close to stalemate; but it is increasingly obvious that the crisis occurred in 'banking' even though it subsequently threatened the existence of the economy as a support mechanism for human beings.
Few people in or out of politics, inside or outside the 'Economics profession', doubt that human survival in all the industrial and 'post-industrial' countries depends on developing the 'real economy'; and specifically on developing what is broadly [and therefore pretty meaninglessly] described as 'manufacturing'. No materially productive plant can be created without capital in the forms of buildings, services to those buildings, machinery, supplies, ancillary services, trained labour [which is in itself expensive] and a cash float to pay the bills until sales revenue cover costs. Society cannot survive without capital. So what is 'capitalism', and does the addition of the suffix confer a morally or socially negative inferior - or even hostile - aspect to the necessary investment funds? It is highly improbable that any of the 'protesters' could answer that question in a credible manner.
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