Bitcoin Marches On

Nobody really knows what 'Bitcoin' is, or what damage it can do to the global economy. Some people know [but do not tell] who invented this 'virtual' pseudo-currency; several dozen people and firms have made money from trading in it, and it is rumoured that some people and firms have played in the market and lost.

No government has responsibility for bitcoin; but several governments could find themselves dealing with a crisis which arose from reckless or careless trading in this medium to the extent that it impinged badly on their national economy. It would be unconscionable if any government required its taxpayers to assist any firms or persons who found themselves in a bitcoin crisis; and it would be politically disastrous if any government thereby plunged its citizens into a decade of reduced living standards as the British government did with the bale-out of the banks in 2008.

There have been plenty of warnings from well-known market players, to the effect that this totally unregulated free-enterprise market has no substance and can thus cause major disruption in any economy that allows assets designated in this nonexistent medium to take a prominent place in anybody's asset register.

Despite this, and despite asserting even a few days ago that they would never allow their platform to be used for bitcoin-denominated trades, the CME [formerly known as the Chicago Mercantile Exchange] has announced that bitcoin will be allowed in trades passing through their books. It is immaterial that this is experimental, and is envisaged only ever to be a small sideline in the market. The big point is that one of the world's largest and most important exchanges has legitimated this bastard child of greed.

Gordon Brown's memoirs are being marketed, for a big launch next week. He would not have wished it, but the commentariat will concentrate primarily on his failure to develop a mature prime ministerial personality [with the resultant tantrums and failures] and on his success - with Alistair Darling, the Chancellor of the day - in 'saving' the world banking system; at the long-term cost of the British people. In extracts that have been released already, Brown makes it clear that he deplores how completely his successors [the Tory-Lib coalition, the Cameron government and now the May regime] have totally failed to reform and rebuild the banking system so that it has the clarity of structure, the strength of reserves, and the separation of banking from wholesale gambling that were shown by the crisis to be absolutely necessary.

The Bank of England has warned that some 75,000 City jobs will migrate to Europe unless Britain gets a Brexit deal that keeps the country within the European Economic Area: but that is just the start of the catastrophe that could be played out if the bonkers Brexiteers ally with the 'free markets' lobby of wholesale gamblers in making the claim that any losses from legitimate banking and financial trading within the EU context can be replaced by growth in 'virtual' finance and betting.

Media muckrakers have found that Jacob Rees-Mogg was a notably unsuccessful fund manager in the period when Gordon Brown was at the apogee of his power, before the 2008 market failure. He is not a believable prophet of supposed good times that can follow from a 'hard Brexit'; nor is any other of the vociferous minority who are agitating for Britain to be plunged at the deep end of the shark-infested global market: if any of those buffoons comes out as an advocate of bitcoin, that will be proof positive of their intellectual limitations and perversity.

Intellectual Property and Corporate Power

One of the key components of my 'dissident' approach to economic science [or political economy] is my assertion that all ownable things - assets - come in four categories:

1. Keyn. anything in the category that J M Keynes described as chartalist in his definitive Treatise on Money. These are all the immaterial creations of the human mind that can be claimed as the possession of the person who invented them, or of the person who was able to capture such command over them as would be recognised in a court of law. Thus people and corporate entities [governments, local government, institutions, companies etc] come to be the 'owners' of control of the land, and owners of shares, stocks, bank deposits, patents, copyrights, brand names, trademarks etc. Most defined keyns can be sold . The most massively increasing category of keyns in the contemporary economy are items of intellectual property [or 'intellectual keyns' shown as ik in my text].

2. Quon. A material asset whose price includes both the costs of assembling the material thing and a charge for the intellectual property that the owner of the object is able to enjoy with the material thing. The owner of the ik sells the user a right to enjoy the benefits of their brand, and the intellectual property that inheres in the object.

3. Jev. A material asset whose price when resold is determined by its perceived rarity and aesthetic quality, rather than by its cost of production or its contemporary usefulness in any material sense to the owner. Thus this category covers antiques, works or art etc; which can be bought and sold and which - over time - often appreciate in retain price, so they can be assets of increasing inventory 'value'.

4. Marcom. These are commodities which are sold at prices that equal, or are close to, the cost of production and delivery [allowing for a reasonable return on capital to the producers and distributors], with no premium for any ik such as occurs in the price of a quon.

There are huge implications that arise from this differentiation of assets. I refer to two today.

A. Firms that are licensed and regulated as 'banks' have huge privileges. In particular, because they manage keynic money for natural and corporate persons they get special guarantees from the state. The most extreme version of this protection was the 'rescue' of the banking system in 2007-9, whose effects are still affecting everybody in the advanced economies. Despite the huge direct and indirect cost of 'saving' the banks, governments and their agents, the central banks [e.g. the Bank of England] have done nothing that definitively separates the socially-necessary and economically-indispensable banking functions of the huge complex firms that include banking divisions from the parts of the firm that trade in stocks and shares, bonds, investment advice, creating and trading in derivatives and futures and other speculative keyns. Thus the entire western world remains at risk from rogue trading or sheer incompetence in these pampered businesses. This remains one of the biggest risks to civilisation; even allowing for jihadism, rogue states, cybercrime, plague and famine.

B. Hundreds of thousands of people and firms own ik that has become increasingly desired by more and more people over the past twenty years. Computer games, films and records and all accessed from cyberspace, and social media have become massive foci of consumption; and although the ownership of such assets is widely diffused, a small number of points of access are used by the vast preponderance of users. Thus Google, Alibaba, Facebook and a few other leading points in the cyberworld are absolutely dominant. The creators of these platforms have established their intellectual property with immense rigour, and are constantly extending their [patented] means of checking on their customers so that they can increasingly tailor 'special offers' that will tempt them to spend their money and their time at the profitable direction of the ik owner. This gives more power over the consumers and their world to a small number of firms than has ever been held by firms that control material commodities. Economic models have not even begun to cope with it: the Econocracy have been content to monopolise their fantasies while Silicon Valley has established a much firmer hegemony than the professors can comprehend. Politicians are increasingly exercised by the new sort of power that is held by the dominant holders of the ik that shapes hundreds of millions of consumer's lifestyle; and don't know what to do about it. They can't even work out how to tax the massive cash flow that they receive.

My basic taxonomy of economic assets forms a basis on which public control, exercised by the political system of the state, can properly be established over the cybernauts within a sensible structure of political economy. One small step for man?

QE: The Social Cost

The Labour governments of Tony Blair and Gordon Brown [1977-2010] progressively moved from following their Tory predecessor's conservative budgetary policy to creating a deficit on government spending [the amount by which the government spent more than their income from taxes, tolls etc]. As Chancellor of the Exchequer, then Prime Minister, Gordon Brown made a very quaint use of the word 'investment'. It has been normal for a couple of centuries [at least] to use the word 'spending' [or expenditure] to mean the amount that is spent on pay-as-you-go government activity, and the word 'investment' to mean spending on projects that have a net cost as they are undertaken, but which it is hoped will yield an economic or a social dividend - ideally, both - when they have been completed. Under Labour, this distinction was eliminated. 'Investment' was just part of current spending: it just sounded better to make it seem as if some future return was in mind.

Alongside this abuse of words [and of common sense] the Labour government introduced the wildly irresponsible PFI concept, by which a school or a hospital building [which could be seen as an investment for the long term, in the conventional understanding of the term] would be built by a private contractor who could then charge a rent for the building while it was in use. This crazy system meant that the contractors, and the funders with whom they formed consortia, would be able to take a high rent from the health service or the school governing body. In addition, many such contracts gave the builder the right to undertake all maintenance work - at their own 'costing' - for several years, at the expense of the user of the building. This obviously provided a massive drain on the income of the user organisation when the premises came into use. As the premises had often been designed many years before they came into use, the designs were often very much less that state-of-the-art when they became operational. Thus taxpayers were involuntarily having to meet these charges.

Thus, when the Tory-LibDem coalition came into power they were horrified at the 'out-of-control' public spending obligations that they confronted. They decided that the burgeoning annual deficit on the national budget must be reduced: then they experienced their own brainstorm, and decided that they must cut future spending projections by the state. Hence began the regime of 'austerity'. Under that regime, public spending has been held down; almost as a matter of faith.

This policy was imposed in 2010, just after the Bank of England had become used to administering its programme of Quantitative Easing, as explained in the previous two blogs. The orderly queue of bankers was allowed each to encash approved securities for new credit, which they could then spend as they wished. This meant that they could keep in being the securities whose existence had been threatened by the market crash of 2007-8 until they came to their term dates; and an increasing proportion of them could be sold once their face-value had been restored [more or less] within the highly flexible wholesale finance market. So while people running public services were increasingly constrained by what they could spend - including on wages and social benefits - the banks could lend more money to firms and to individuals. Not many firms needed to borrow from the banks: the successful among them could derive all the investment they needed from their profits and from share issues; the unsuccessful drew in their horns and hoped to survive. Furthermore, the government provided modest funds to help some classes of start-up and developing businesses [although most of the more successful of them fell prey to overseas takeover, whereupon the technological innovation that they embodied was alienated].

In both the public and the private sectors, wages were constrained; in the public sector by the austerity rules, which included either nil or 1% increases each year. The private sector was able to import staff from less high-wage countries, and a consensus of commentators accepted that the combination of immigration with the appallingly low level of skills among the indigenous British population kept wages low; in both cash terms and real terms. Hence after 2010, most people found that the only way to increase their spending on consumption was by borrowing. Loans and credit card debts were freely available, so people borrowed; largely to buy imported commodities. So the balance-or-payments deficit burgeoned, while the government struggled to keep public spending within the limits that Osborne and then Hammond vainly aimed to enforce. Unsecured household indebtedness increased, alongside the debt that the UK owed to the rest of the wThen it became apparent that QE had another perverse effect on ordinary people. After the financial crisis, new starts in house building had reduced to a record low level; and virtually nobody was building social housing. Thus the resale prices on existing properties increased: but with interest rates set at their lowest ever level by the Bank of England the cost of borrowing [per pound] seemed affordable. Cassandra-like warnings that people who had mortgaged their property heavily might not be able to maintain payments when interest rates rose received scant attention.To get a new home, people had to borrow the money to buy expensive new properties on terms that profitable to their constructors. Mortgages were freely available for house buyers with even modest incomes, thanks to QE and government schemes to enable a minority of first-time buyers to enter the market. The majority of would-be first time buyers could not find the cash deposit they needed to enter the housing market; and anyway their incomes, especially for those burdened by student loan debt, could not support the ongoing cost of house purchase. In addition to the existing poor, there was a growing cohort of nearly-poor, including many graduates. In the next blog I will examine the pattern of poverty in Mrs May's Brexit Britain, and relate it to QE and to austerity.

QE For Ten Years: Saving the Banks and Smashing Society

My last blog began with a second reference to the ten years that have elapsed since the collapse of Northern Rock told the public - and the unobservant Econocracy - that there was a crisis already well developed in the world of banking. More than a year before the Northern Rock event hit the British system, the USA had had its own crisis in the collapse of several institutions which the Clinton regime had induced to accept 'sub-prime' mortgages. The term sub-prime was not in common currency in the UK, and the USA was far away, so not much notice was taken of those events even in the London money market.

Within the US financial system, it had slowly become apparent that the sub-prime mortgages had been sold on [in the manner described yesterday] as parts of securities which were just bundles of debts where the borrowers would [in the main] carry on making the payments they were contracted to make: thus the buyer of such a security was effectively buying a cash-flow of future payments. The original lender of the money would retain the duty to collect the payments and pay the interest on the security, and there would be an allowance for the proportion of the borrowers who would default on their payments. So the original price of the security was based on a supposedly objective view of what it would yield to its owner during the term for which it was valid. On that basis, the security could be sold on, for inclusion in larger or more inventive types of security. The sub-prime mortgages were a category where the borrower was very likely to default, and the continuing decline of the old industries in what were quickly becoming known as the 'rustbucket' areas meant that many families lost their main earnings and could not afford the repayments. Defaults on payments of sub-prime mortgages seemed, at first, an American problem: but during 2007 an increasing proportion of securities traders became worried about UK securities that included packages of mortgages issued by banks and building societies whose lending had become [by all historic comparison] reckless.

Among these was Northern Rock, which was borrowing credit in the wholesale market [see last two blogs in this series for details] in order to lend to new customers. The lending was reckless: more than 100% of the asking-price for the house was available to clients who were taken at their word as to how much they earned. This sort of lending [in which the Rock was only the most conspicuously adrift from traditional caution] led to clever traders realising that securities based on Northern Rock loans, and securities containing a 'repackaged' share of Northern Rock, may not perform as promised. So the wholesale market stopped buying Rock securities: and the Rock had no ready money in its tills beyond the usual daily turnover. Hence, as customers heard the rumours and queued with their documentation to demand their own money, the firm failed and [as explained previously] the government instructed to Bank of England to provide the money that the customers were demanding. After the crisis the residue of the Rock was sold off: its trading branches were taken over by Virgin Money and most of them are still trading, and the mortgage debts were sold to firms that managed the run-off so that most of the securities that the Rock had sold were successfully [and profitably] carried forward to their terminal dates.

Behind this happily makeshift resolution of the crisis caused by one smallish [albeit prominent] firm, the financial markets as a whole were beginning to panic about the multi-trillion pound market in securities that had been built up by 'innovative' firms that had been making their own paths to untold wealth by taking the fullest advantage of the market freedom created by the Thatcherites on the urging of the Econocracy in 1986. Within a year of the Northern Rock crisis, there was an emergent crisis throughout the market. Nobody could be sure which securities contained how big a proportion of debt that might become 'sub-prime' if the root provider of the cash flow failed. So the Bank of England was instructed to copy the US Federal Reserve, which had already begun an indefinitely large open-market operation which it called QE: Quantitative Easing. Though the detail is mind-bogglingly complex, the principle is simple. The banks were told to form an orderly queue, and slowly to arrange their portfolios of securities so that they could present government bonds at the Bank of England which would [in essence] 'print money' with which they bought the government securities [and just kept them in their vault, metaphorically]. Thus any bank could get cash by selling government securities to the Bank, and use that cash to fund the orderly winding-down of the 'assets' in the market. Those that were considered 'toxic' were disposed of cheaply, and holders of the rest of the mass of securities could resume trading, albeit cautiously. Nobody realised, when Britain adopted QE in 2008, that the queue would continue shuffling to the Bank asking for cash until now: but that has happened. it has saved the banks and the wholesale securities trade that lies behind the banks; but it has been ruinous to the economy in which human beings depend, and to the society that binds humans into a community. This is the subject for the next blog. 

Carney in Jackson Hole

Mark Carney is due soon to return to Canada and make a political career in an environment free of worries about the pound sterling, the European Union and Theresa May. While Trump survives in the US presidency there will be a small risk for Canada in the future of the North American Free Trade Area, but in other respects Trump cannot hurt Canada; and if his failures drive down the value of the US dollar, this will be to the benefit of the Canadian currency and economy. Britain's problems may be of passing interest to Mark Carney post-Bank of England, but he will have [nor will he want] any part in addressing them.

George Osborne is a co-culprit with Cameron and Clegg in most of the disastrous aspects of the Coalition and subsequently the Conservatives' economic policies, but it is generally accepted that he alone drove through the decision to bypass Bank of England insiders, and all other Brits who might have had a claim to be considered as Governor of the Bank of England, and opt to advise the Queen to appoint the clever Canadian. Carney was appointed when the policy of Quantitative Easing and low interest rates had been entrenched by the previous management of the Bank, who had reacted to the meltdown of world banking as a crisis of moral hazard until Chancellor Alastair Darling sounded the alarm and compelled them to act positively [if not entirely sensibly]. Since his appointment, in retrospect, Carney has not had much to do. His 'forward looking' comments about the British economy in context, and what the Bank may or may not do about lending and about interest rates have all been falsified by events; to the extent that some journalists have made a joke of his predictive capabilities. He participated in 'project fear', the campaign to scare the British electorate into voting to remain in the European Union even after the continentals had grossly insulted David Cameron [and, by implication the country that he represented] by their contemptuous dismissal of his half-hearted attempt to make the"ever-closer union" less objectionable to sensible Brits. When the referendum result was announced, before there was time for any deep observation of its short-term impact on the economy and on the currency, Carney led his outfit into panicky and wrong decision to lower interest rates further and to continue 'printing money' that the banks could then lend and drive asset prices [especially house prices] ever higher even as real wages continued to fall.

Mark Carney seems a pleasant man, and has a reputation for high intelligence. His record in Canadian banking is excellent: his record at the Bank of England gains him nul points. Later this week he goes to the US ski resort of Jackson Hole to meet the other governors of central banks, with a massive audience of media, to exchange platitudes. The real meetings of central bankers, that matter, occur in the context of the Bank for International Settlements at Berne; and sometimes the governors have influence when they gather with their countries' finance minister in the context of the G20, G8 [or whatever number gather, dependent on which countries are in favour with the USA]. The annual performance at Jackson Hole, beside allowing opportunity for some private chatter and data swapping, allows some more speculative statements to be made. This year, it is expected that the Chair of the US Federal Reserve Board will indicate the approximate scheduling of future interest rate increases; and that the Chairman of the European Central Bank will indicate that it is his organisation's plan to begin policy tightening, within the next year. Carney will have nothing to say. The Bank of England is still stuck like the proverbial rabbit in the headlights, mesmerised by Brexit, Trump and the fear of Britain being alone in the world without a Churchill able to summon up the Few, the Dunkirk Spirit and the resources that were handed to stand-alone Britain by President F D Roosevelt.

Mr Carney's children have already gone back to their Canadian educational institutes, and he will follow them soon. He has learned a lot, but been unable to do anything. His experience in Britain has fitted him better for his future career in Canada; and Britain gained nothing from his presence with us here.

How British Governments Have Made Life a Misery for Millions

Academics in the University of Manchester have published data [mostly derived from well-known official data] which shows that death rates among younger people in the deprived areas of northern England have increased over the past twenty years, while in the south there has not been a similar outcome even though dangerous drugs have become more common and alcoholic abuse has continued. The difference is that more people in the north take intoxicants more prolifically than in the south, and they do this in cold homes where their bodies are less well fed than those of the majority of southerners.

As one commentator on the TV said, as she was shown with the background of a canal and a derelict factory, this was the ambiance that viewers expected to see as she summarised the Manchester data. In the course of this presentation the term 'diseases of despair' was deployed to describe the effects of depression, alcohol and drugs in a society which appears to offer no hope of a better lifestyle. The lives that are to be seen in soap operas and other apparently-commonplace programmes, seem so different from those that the inhabitants of deindustrialised backstreets as to be unattainable. Coronation Street, Victoria Square and Ambridge occasionally present a denizen with a drink, drug, psychiatric or personality problem; and such individuals appear as searing exceptions to the societal norm, that enter into the script with the approval and encouragement of the lobbies who try to highlight those problems; but after a point has been made, the problem is removed from the script, and the characters return to lives that may be far from ideal, but which are far superior to those of hundreds of thousands of the most deprived people.

I used personally to bridle at the use of the term 'deprived', whether used of the people who experience these diseases of despair or the areas where they live; but as austerity has tightened the grip of despair and disease in these places I have recognised that these areas and these people have indeed been deprived. The schools are less well equipped and the teachers are more dispirited than in 'nice' southern towns; the hospitals have less resource and the dedicated staff are less able to give time to patients when the demands on them are swollen by staff shortages; provincial public transport is cut dramatically as London contemplates Crossrail Two; across the country Libraries are closed and the entire social infrastructure is squeezed.

Today, August 9 2017, has a good claim to be the tenth anniversary of the day when it became absolutely apparent - to anyone who understood the financial world to any degree - that there was a major problem emerging from the apparent technicalities of the financial markets which would affect the real lives of everybody in the money-using economy. It took fourteen months until the 'financial crisis' [or 'credit crunch'] reached such an intensity that government action, co-ordinated with the Bank of England and the authorities in the USA and the major European markets, was unequivocally necessary. It was essential that something absolutely drastic was done was done, or the financial world as we knew it could simply cease to function.

How had this happened?

The Thatcher governments were guided by Economists who suggested that 'the market' could grow best without government interference, and that organisations like trade unions impeded the market in finding the optimum way of allocating resources through society. So the Thatcherites deliberately removed support from coal mines and shipyards, and protectionist cover for steelworks and other industries that has previously been regarded as 'essential'. Simultaneously they reduced the excessive 'rights' that had been given to the unions under Labour governments; to the extent that workers' rights were placed at a discount of almost 100%. The result was massive deindustrialisation across much of the country. The Conservatives ignored this dereliction, because the financial services were largely replacing the losses to national income that came from factory closures. The 'big bang' of 1986 set the financial institutions free to develop their own fantasy markets: just at the time when computers placed unprecedented processing capability at their disposal. Transactions could become more complex and take place much faster than had every been contemplated when unknown forces were freed.

The economy continued to grow - in terms of gross aggregate turnover - because the growing financial sector constantly found new ways of creating purchasing-power from thin air, by creating new financial devices; of which one of the most prominent was securitisation. This device enabled the 'retail' banks and building societies to lend far more money than they could have loaned if they had remained dependent on their depositors to provide them with the stock of money to be lent. Now the lenders simply lent more, then bundled the mortgages and the credit-card 'balances' into blocks or 'packages' which they sold to institutions in the new 'wholesale' financial market. Thus money could constantly be recycled through new loans; and it was considered a triumph of innovation: until it became apparent that many mortgages [starting with 'sub-prime' mortgages in the USA] would never be repaid. Concern about the security of the 'securities' escalated during 2008 as more and more of the financial 'instruments' that had been traded through the wholesale finance sector came under suspicion as having no substance behind them. Eventually the Bank of England [backed by the government] promised to buy enough 'securities' [using newly-created credit] to keep the financial sector funded with : and they created billions of pounds of 'cash' every month for several years to keep the system rolling on.

In saving that fantasy world, that had been created by a tiny fragment of the population, the real world in which most people lived had to bear the cost of the exercise. At first, it all seemed to be a technical matter; but later a conflict opened up between the demands of the financial sector and the real economy: and by then the government was so committed to saving the financial world that real people in the real world had to forced to accept lower living standards and lesser public amenities. This began slowly under the Gordon Brown government, and consequently the government rapidly expanded its borrowing to continue funding social commitments.

Then came the coalition government, in 2010. To the incoming ministers, the amount of debt that the former Labour government had been incurring was unsustainable. Month after month, as the taxation that people had paid stagnated, the government had borrowed what was necessary to keep public and social services going. Large areas of the economy - especially of the real economy - imploded and ceased to pay taxes to the state or wages to former employees [who also ceased to pay taxes when their incomes failed]. Thus the temptation to borrow yet more to compensate for the failure of the material economy was pressed upon the new government: which boldly decided that the deficit must be eradicated. So austerity became the essence of the coalition's economic policy; and mass misery was ensured. Since most of the misery was well away from Westminster politicians and civil servants could ignore the consequences of their actions. And because there was no place for humanity or reality in their model markets, the Econocracy could ignore the situation entirely.

The Fantasy Powerhouse and Historic Reality

Andy Burnham, having moved into the new [and partly undefined] job of a civic mayor has joined in the clamour - which resonates over the Pennines but hardly gains a mention in the London media - as to what has become of George Osborne's 'Northern Powerhouse'. The idea, such as it was, was to persuade Chinese and other foreigners to invest in Manchester and Leeds [and possibly Sheffield and Liverpool], to begin to lift those cities out of the post-industrial depression into which the Thatcher-Major-Blair-Brown-Cameron-Clegg continuum had left them. The concept was predicated on the assumption that there were no significant government funds, beyond the mega-scheme for a bifurcation of the [Chinese financed]  HS2 railway to Manchester and to Leeds, north of Birmingham and perhaps some electrification of other lines in the north [to be paid for by the Network Rail budget; not by the government directly]. So a great bubble of talk was built up, Vice-Chancellors pledged their universities to help with surveys and research and local councils hoped to bring their districts into a new co-prosperity sphere.

No material structures were built. A few alien takeovers were made of firms in northern cities. Then came the Brexit vote, Mrs May, the removal of George Osborn and the dissolution of his verbal construct. He asserted that the powerhouse concept would continue, but [notwithstanding his editorship of a London paper] he was just a voice who occasionally visited the wilderness of the north.

Thus the desolation that Andy Burnham sees dragging on into the future is the most realistic prospect for the areas that were exposed to Osborne's 'powerhouse' fantasy. This contrasts directly with the picture as it was half a century ago. Under the Labour Government of 1945 the supposedly exhausted and bankrupt country that is depicted in Econocratically-influenced history set about rebuilding the railways. They began with a massive northern powerhouse project: a fully-electrified, largely newly-routed railway over [and through] the Pennines, between Lancashire and Yorkshire and planned to link with electrified east and west-coast main lines between the midlands of England and the midlands of Scotland. The massive Woodhead Tunnel was driven through the higher hills on the route, and the new Sheffield-Manchester route was a subject of national celebration when it was completed. While the primary use of the railway in its early days was to carry goods, and especially coal as the great source of power for the new economy, it was seen as a significant first step in modernising the entire rail network, as was to be done on the continent over the next couple of decades.

Then came Mr MacMillan and the motorways; and the decision that the country would not afford to develop the railways and new roads: even though the continentals were doing just that. Then, eventually, came Blair and Cameron and the promise to phase out coal burning power stations; which was logical as the Thatcher gang had shut the mines and coal - unlike oil, which had been found under British home waters - had to be imported, to the detriment of the balance of payments. The last vestiges of the real, material northern powerhouse were destroyed: symbolised by the closure of the Woodhead Tunnel. Sheffield and Manchester are now linked by a meandering branch railway and by an overcrowded M62; and there is no sign that this will change. This exemplifies a total and dramatic failure of governance, in what used to be a great country.

Just a footnote, on debt. Consumer debt - especially car loans - is a worry for the Bank of England, whose officials have begun to bang on about it. The government is silent on the matter, so far. When the Woodhead Tunnel was being built, the government directly controlled consumer debt: there were controls of hire purchase, a set minimum for the deposit that had to be paid in cash, and control of the period over which the debt could be spread. No-one felt unduly oppressed by such regulation: it was all accepted as being part of a plan for postwar reconstruction of the economy, that people could see was working as homes became available and the roads were repaired after wartime destruction and decay. Hope and promise were in the air: so control of credit was no harm at all. Now the government is under the influence of the Econocrats who would oppose any reintroduction of state control of credit, which [they say] is the business of the banks and the supposedly-independent Bank of England. So we are exposed to a credit crunch, again: to set alongside material failure of the economy.

Economics - Again

A few days ago, I had a brief discussion with a student of History about my views on Economics and the Econocracy, referring him to the website of the Post Crash Economics Society where I first saw the very apposite term, Econocracy. On our next encounter [in the pub where he earns a crust as a part-time barman] he told me that he had mentioned my stance to a friend who is studying Economics; and the friend had vehemently disagreed with me. Perhaps we will be able to have a face-to-face discussion some time. In the mean time, I will post here today the briefest summary of my views.

I had the great good luck to go up to university when classes were small - my year in Politics and Economics comprised just 12 students - but teachers were good and libraries well resourced. The era of electronic access to data had not yet arisen, so we had to read: and we read voraciously.

At that time what we now call neo-Keyesianism was in the ascendancy, and models of the entire economy had been constructed in the National Institute for Economic and Social Research [NIESR], in the Treasury and in various universities. Given the state of development of computers at that time the models were crude and simplistic, and they could only be manipulated laboriously. Nevertheless, estimates could be made of the impact on the modeled economy of the policy options that were available to governments. These options came in two categories, monetary policy and fiscal policy. Monetary policy involved the creation of money; implicitly by the Bank of England on behalf of and with the authority of the government that owned the Bank. Banning the creation of money was a means of limiting the rate of growth of the economy; and encouraging the Bank to create money to lend to the trading institutions in the economy was a way of stimulating the growth of the money supply more generally. It was taken as a sign to the commercial banks that they could risk making more loans of their own money [deposited by their customers] whenever the Bank of England was stimulating the money supply; thus the amount by which spending could increase was very much greater than the amount by which the Bank increased the supply. Any commercial bank could borrow money from the Bank of England at a 'bank rate' [later called the 'base rate'] which was publicly announced; and lending by commercial banks was made at rates higher than the bank rate. The banks charged their customers rates of interest that varied according to the perceived riskiness of the loan. When the Bank of England had the nod from the government, it lowered bank rate; which was a clear indication to all the banks that they could drop the rates they charged to their customers, and perhaps risk extending the range. Thus a drop in bank rate, accompanied by an increase in the Bank of England's willingness to lend, signaled that banks and their customers should invest to expand the economy; thus expanding trade generally and stimulating economic growth and job opportunities in many sectors of the system could be increased.

However, at that time there were major constraints on the expansion of credit extended by banks. Their customers were required to pay cash deposits on durable consumer goods, and were only allowed to borrow a set percentage of the purchase price. Thus the spread of TV sets, washing machines and other desirable consumer goods was slowed down by the legal requirement for would-be buyers to save up for the deposit before they could enter into a hire-purchase agreement under which [having paid the deposit] they could pay off their borrowing while they had the use of the device. The firms that made the television sets were protected from foreign competition by import tariffs and controls on the amount of foreign currency that businesses could buy: so the system of monetary policy operated within a physically controlled system of protection. The present situation, where consumers can borrow huge amounts of credit and thus create the 'consumer demand' that 'drives' the economy was unthinkable. The world in which neo-Keynesiansim appeared to thrive was utterly different from the world in which we live now; and over the next few days I will outline how that change happened.

I try to keep my blogs at a modest length, and hope that anyone who becomes interested in my ideas will word-search through the archive.

What Comes Next, After North Sea Oil?

Mrs Thatcher's government's economic and social policies were made viable only by the fact that her era coincided with the United Kingdom being able to exploit the oil and gas reserves that had been found under the North Sea over the previous couple of decades. The tax revenues derived from those resources largely funded the welfare state, enabled the government to give redundancy pay and early pensions to unwanted employees from the nationalised industries, and maintained the nation's defences. The material fact of having sufficient gas to meet the national need, and a significant oil supply that diminished the need for imports, enabled the country to shut down the coal industry almost completely. 

Those were the material conditions in which the financial revolution of 1986 was facilitated: and the financial services [with their related activities like the courts and arbitration services] were opened to the international community and became a significant earner of foreign exchange. The loss of the textile, crockery and steel industries was mitigated by the sale of financial and related service globally. In particular, Britain's membership of the European Economic Community as it went through the transition to the European Union enabled London to become the unchallenged financial hub of the Union. It will be interesting to see how far President Macron, as an ex-banker, is able to steal business for Paris in the coming years; but that will be a side-show compared to the issue that is being considered here.

The key fact is that material assets - oil and gas - enabled the immaterial activities of 'the City' to become established as major export markets. Simultaneously, the incomprehension of successive governments as to what was happening in the domestic financial services market was building up to the crash that almost brought down the entire economy in 2007-8. New forms of contract, most particularly securitisation, enabled the domestic financial sector to grow in an unprecedented ways to an extent that was way beyond the regulators' power to comprehend or to control it. Securitisation was developed simultaneously in the USA and the UK, as a means whereby borrowing by some firms and most individuals could be lifted off the books of the banks and building societies that made the original loans, and sold on as new forms of security to suddenly emerging 'wholesale' traders and investors. This meant that the retail banks reduced the amount of lending in their books, and could lend more again; which loans could then be securitised: and so on. The debts owed to their banks by small and medium-sized firms largely remained with the banks, because they were recognised to be too risky for securitisation. But the mortgages and credit card debts owed by millions of ordinary people were seen as safe debts to be securitised. Thus when the crash came, the banks faced the fact that they had many billions of pounds of debts from smaller companies on their balance sheets, most of which the companies could not settle in the depressed condition after the crash. So the debts were kept on the books, the Bank of England allowed the banks to cash in government bonds in sufficient volume and value to make those books look balanced, and a huge problem for the future in the form of 'zombie' companies was created [and it now seems almost permanent: impossible in the near term to resolve].

Meanwhile the financial institutions collectively have carried on lending pretty freely to house buyers with reliable incomes, fueling a boom in property prices for the sectors of society than can afford to maintain their repayments and causing a major social division between those who can 'buy' homes and those who can not. Juggling money to keep the mortgage market expanding, largely by expanding the money supply through the Bank of England's 'quantitative easing' trick, has maintained the illusion that 'owners' of property are asset-rich: and this has kept the economy buoyant with regularly reported 'growth' of the Gross Domestic Product of the economy. This is all based on a bubble of credit; about which the Bank of England is becoming increasingly concerned.

Meanwhile, the 'real economy' of goods made and imported and exported and consumed has shrunk to a minor proportion of the domestic economy. The country has become import dependent: to a degree that ongoing sales of financial and related services to the rest of the world will not enable he country to pay its way. Departure from the European Union, even if the UK is able to retain its status as the financial hub within the European Economic Area, will make this situation worse.

It is usually condemned as old-fashioned and uncomprehending to stress the overriding importance of the material economy. But the success of Germany as a material-exporting country [of high-value-added products] is the living demonstration of the point. The reckless use of North Sea assets to finance a material standard of living that the country can no longer afford, and to fund a finance sector that has exacerbated the nation's problems, is a horror story which will haunt economic reality for at least a generation to come: and no politicians are preparing to cope with it.

Definition, Differentiation and Sense

Yesterday in Liverpool the Chancellor of the Exchequer told a 'business audience' [the CBI and guests] that the government must 'hold its nerve' to strike a balance between the legitimate aspirations of public sector workers and 'the taxpayer'. Such arrant nonsense could only emanate from a scriptwriting team that includes Economists.

The simple truth is that all public sector workers are taxpayers. Some, in the most simple jobs and on short-hours contracts may not pay income tax; but they are open to assessment for the tax and to national insurance. In all other aspects of life they are taxpayers: as drinkers, smokers, buyers of petrol and owners of TV sets.

While the Corbynite faction in the Labour party might include some extremists who mentally separate 'capitalists' from 'workers' and both categories from the rest of society, that is equally nonsensical. Even if their investment in shares and bonds is as exiguous as their slowly-accumulating 'pot' of savings in a compulsory minimum pension scheme, virtually everyone in employment willy-nilly has some capital. Those who have been lucky enough to 'buy' their homes [even though the mortgage lender often owns more of it than they do, and there is always a risk of them falling into 'negative equity'] do have a capital asset so long as they have 'equity ' in the house or flat.

Over the last weekend the media emphasised the bizarre situation that a very large proportion of the new cars that people 'buy' are effectively on loan from finance companies. The user is logged as the owner, but the loan agreement that enables her to obtain the vehicle is such that at the end of the initial loan period [say, two years] the 'owner' has not returned enough cash to the lender for the residual ownership of the vehicle to be given to the user. So the user is tempted to buy another new car on a similar contract to the last one, and the used car passes from the lender into the second-hand market. The lenders are usually able in total to recoup the discounted price at which they buy the cars from their manufacturers. The users are able to feel proud of their new car every couple of years. The economy contains a rising amount of 'unsecured personal debt' in the form of car loans; and the Bank of England can begin to worry about the sustainability of the whole edifice. So the Bank may require the lenders to hold larger balances of 'tier one' capital, which means that they can lend only a smaller proportion of the funds that they have on their books; thus the number of new car loans available in the ensuing months may be reduced, and the demand for new cars may decline. In that way, the impact of the Bank will be to reduce demand in the material economy; which can impact adversely on employment statistics, sales figures and manufacturing output. Thus [at least, in theory] 'excessive' borrowing by a man who works in a car factory can indirectly lead to the tipping-point in the money market that leads to his redundancy. This may seem a far-fetched example, but it does illustrate the principle that at least some producers are also consumers and borrowers.

So if Philip Hammond wants to convince the country that his endeavour to maintain at least the basic outline of Osbornian austerity is in the nation's interest, he has to begin with the recognition that 'taxpayers' and 'public sector workers' are not discrete sets of people. We are all in this together. It may be easier for Economists and statisticians to separate out aspects of whole individuals and put them in separate categories for some illustrative purpose; but in the end we are all entire people who necessarily live in a mixed economy. Simplistic Thatcherites may still try to separate the good 'private sector' from the parasitic and inefficient 'public sector', and some voters can always be conned into accepting that sort of categorisation. But anyone who experiences the wonderful care of the hard-worked staff of the NHS in a family crisis becomes very much harder to convince of the case for despising and oppressing the public sector and the people who sustain it.

Both Corbynite categorisation and Tory classification of people and activities are unsatisfactory. The present government's stand, largely derived from bad Economics, and sustained by a dogmatic assertion that 'debt is bad', is becoming indefensible and ministers are rushing to differentiate themselves from it. Labour's policy is mercifully opaque.

There is an urgent need simply to recognise that we all live in a mixed economy, that we have badly scrambled the mixture, and need rationally to reconstruct it.

Rates of Interest 2

The present situation in the UK, where there is effectively no interest rate, leaves a free-for-all in financial markets. Mortgage lenders are able to raise cash at very low rates of interest, and lend it on to intending homebuyers at rates which are very much lower than those which prevailed in the years down to 2007. The Bank of England has several times become concerned at the amount of lending that is being advanced against peoples' homes, because they are aware that a collapse of property prices would leave millions of households in a situation of 'negative equity', where they owe much more in the debt that they took on to buy their home that they could get from selling the house. Thus the Bank and the government ask the lenders [principally, banks and building societies] to limit the amount that they lend. This limitation is set on the aggregate of money advanced to all home purchasers, rather than on categories of property or classes of home buyers [such as the young, or people of limited means].

Alongside the mountain of debt that house-buyers have been allowed to accumulate, the same people have been encouraged to borrow to maintain their standard of living as real wages have declined for the majority of the population; hence the amount of unsecured debt [that which is not 'covered' by the 'value' of the borrowers' material assets] has escalated alongside mortgage debt. In the bizarre Britain that has been created since 2008, sales in the shops largely depend on the customers borrowing a significant  proportion of what they spend. Thus Economists on the television tell citizens that the 'dominant service sector' of the economy is what 'drives' the growth of the system. So when government representatives talk about the UK as a successful, growing economy; indeed as the 'world's fifth-largest economy'; they are talking about a reckless growth of debt owed by the British people to the financial system and to the foreign firms that are prepared to advance credit to British firms and institutions. The whole thing is unsustainable; and unless rational economic policies are explained to the electorate, and adopted by them, a crash much more catastrophic that that of 2007-8, or that which followed the 'Wall Street crash' of 1929.

As the country most addicted to debt, we can be sure that the United Kingdom will suffer more than others when the inevitable crash occurs.

Rates of Interest

The media employ thousands of Economists, whose principal roles are to unravel the impenetrable prose and the ludicrous dogmas that permeate their subject, and to explain economic policy to the victims on whom it is inflicted. These Economists have been allowed more air-time and column inches in the past few days to explain how the US Federal Reserve Board can raise the controlling rate of interest in the US economy, while the Monetary Policy Committee of the Bank of England has done nothing since it foolishly lowered the bank rate after the Brexit vote last year. This arid discussion is slightly enlivened by the fact that the Governor of the Bank of England and the Bank's Chief Economist have very recently made public statements which appear to be conflicted. The Governor says the time is not yet ripe to raise the rate, the Chief Economist seems to think that it is just the right time.

Interest rates in all the major western economies [though not in some well-run states, like Canada] were lowered to historically absurd levels in 2008, as governments and central banks strove to shore up the world's banking industry as the monumental extent of their past reckless gambling became clear. The supply of money to the banking system was expanded beyond all historic precedent, and interest rates were reduced to a fraction of one per cent. In effect, monetary policy was abandoned in face of the perceived need to avoid an economic collapse that would make the slump of the nineteen-thirties seem like a trivial glitch in the long process of growth in the global economy.

A whole generation of adults has grown up in a world where there has been no regime of interest rates. The lack of interest in Economic History on the part of most university teachers of Economics has compounded this issue. So here is just a brief reference to the 'real' world that existed before 2007. That world was epitomised in the British economy between 1819 and 1914.

After paying for the wars against revolutionary France and reactionary Napoleon by high taxation and high inflation, the British government decided to stabilise the monetary system. This was achieved through the implementation of a new Bank Charter Act. The Act specified that the Bank of England could issue a limited amount of paper currency, under the condition that the notes would be exchangeable, on demand, at the Bank for fine gold at a specified rate. Thus banknotes were as 'good as gold' and the amount of them could only be increased as the Bank's reserve of gold increased. The Bank could also lend notes, at a standard rate of interest that was known as the Bank Rate. If the Bank increased the Bank Rate, that signaled that money was only available to borrow on stiffer terms, and investors were thus discouraging from taking higher risks. When the Bank rate was reduced, credit was relaxed and business relatively boomed. While most private borrowing and lending was undertaken by agencies other than the Bank of England, at higher rates of interest than the Bank Rate, rates on private loans rose and fell in response to the changes in the Bank Rate. Thus control of the system was established by the Bank: and that has effectively been abrogated since 2008.

More on this topic to follow, but the above dollop is enough for one day.

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.

Guff at the G20

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

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

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

Mastering Markets

Media commentators, and the tame Economists who provide them with sound-bites, continue to talk of 'the markets' as independent entities that have the power to undermine national economies and even multinational agencies in their endeavours to stabilise the prices of currencies [against each other] and national debt [quoted in an external currency: e.g. US bonds priced in the Yen or the Euro]. A market is merely a social structure. The dealers in markets are companies that are registered [and taxed] under the laws of specific countries, so the implicit assumption that they somehow exist as agents over which states have no control is a silly outcome from economic theory. Market participants are susceptible to government control at work, no less than they are subject to regulation when they drive home in their cars. If governments opt not to control the behaviour of marketeers, or use arcane and ineffectual methodologies that are concordant with Economists' theorising, any resulting detriment is their responsibility.

Back in the simple world that existed before the Big Bang of 1986, banks [which were then recognisable as a specific group of trading businesses] were subject to the corset. Just as a material corset pinches in the waistline of a person who is embarrassed by obesity, so the banking corset limited the extent to which each bank could expand its business. Banks were told the limits, and they obeyed: sort of, for a time. But then the Bank of England, as the regulator, allowed the rule to be 'bent': the Bank turned a blind eye to window dressing. The banks were required to demonstrate that they were keeping to the rules on one date each month; which allowed them to manage the timing of loans and repayments so that they went significantly about the permitted level for most of the month. It was by making and all-but-breaking such rules as the corset that old-style regulation became discredited. But if the rules and the methodologies had been imposed effectively they need never have become discredited. The supposedly gentlemanly banks of the pre-big-bang era slid around the rules: and their successors have continued to do so.

The present situation in both global finance and in domestic stock markets requires control. History shows that market players ignore rules that are not enforced, and try to manipulate rules and principles that are enforced; so we should be prepared now to treat market participants with firmness - and no exceptions - if rules or precepts are broken.Then new, simple rules can be made and new precepts for the conduct of market operatives can b established.

Within share markets, rules should specify that only registered owners of shares could ever vote on those shares: and company secretaries [or equivalents] should be required to certify compliance [with draconian penalties for breaches].  A corset can be applied to movements in the valuation of shares, such that sales and all other types of transfers of shares are frozen after the price has moved up or down by more than 1% in a day, or 2% in any three-day period. The period of the freeze would then be announced by the regulator, and would not be less than the time necessary for the buyers to pay for the last shares sold and register their new ownership. Exactly similar rules could apply to sales of state bonds and other financial instruments. Derivatives, swaps and other gambling slips that are created and traded as 'hedging' instruments should be subject to gambling tax of at least 10%, and subjected to gambling laws and the regulation of the Gambling Commission. The Commission could establish its own corset on the creation of each class of betting instrument.

Market participants and their conduct can be controlled - and should be controlled. The control need not be complex: just the opposite. The best control would be simple control, and breaches of both the rules and the principles must be punished by both financial levies and penal servitude.

Price Inflation: the Peak?

Today sees the publication of a figure reporting the increase in prices between September 2010 and September 2011. Even on the scaled-down index that government now prefers shows this to be in excess of 5%.

The only significant segment of the population whose incomes will at least have increased to match price increases are the elite at the top of organisations who are able to negotiate bumper increases: senior executives in companies and the owners of successful businesses. It is notorious that their incomes have increased by more than inflation [on average] usually as a 'package' of a generous salary combined with a bonus linked to an easily-changed performance target, generous expenses and large contributions to the 'top hat' personal pension fund. Despite the envy and anger that many people express about this disparity, it is notable that many jobs exist in luxury shops, restaurants and other services that supply the rich: the British super-salariat and the many rich foreigners who resort to London as a place to spend parts of the year. If that trade was reduced dramatically unemployment would rise as activity declined in London and around the major racecourses and golf clubs, and in the many firms and farms that supply the luxury trades. The great majority of employees have accepted static wages, or just slight increases, rather than try to force their employers to pay them more that might lead to a reduction in the number of people employed. Even so, there is a growing apprehension that in the absence of rising demand firms will begin to shed labour that they have 'hoarded' over the past couple of years in order to keep their skills base intact.

Economic growth is negligible, consumer demand is declining for many everyday products, and there is no sign that this pattern will change. Just now, the Bank of England has begun to extend the pattern of quantitative easing by which the money supply is expanded. While there is a vigorous debate on how far this activity will assist growth in the 'real economy' there is very little doubt that it will cause devaluation - a further drop in the value of the pound against other currencies - so imports to Britain will become more expensive and that will add more to the pattern of price rises in this import-dependent country. There is no sign of an end to the grim round: and the government has no plan to change policy.