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?
Showing posts with label banks. Show all posts
Showing posts with label banks. Show all posts
Tuesday, 17 October 2017
Monday, 4 September 2017
Deserving Bank Shareholders?
The 'rescue' of various banks in the crisis of 2007-9 took various forms; partly depending on how far the crisis had run when the individual firm faced insurmountable difficulties, and partly depending on the perceived degree of blame that was laid at the door of the organisation's management.
I am moved to write this piece today because former shareholders in Northern Rock - a historically worthy building society based in north-east England - got nothing when their firm was taken over and dismembered by the government; while Lloyd's and Royal Bank of Scotland kept their names and their structures, and the shareholders retained some of the equity under Treasury tutelage. The Northern Rock shareholders have retained their organisation, and while some former shareholders have accepted their losses and moved on, a hard core has revived the claim that as the government will make a net 'profit' from selling off parts of the firm, it should now reimburse some of the losses that individuals suffered.
This is a technically complex, legally difficult and morally ambiguous area for debate, and I will just make two basic points.
One is that Northern Rock and the Royal Bank of Scotland were both based away from London, and both had rather buccaneering chief executives who became heroes in their regions. Although RBS had a nationwide shareholder base, largely due to the absorption of other major banks into the group, the board was largely focused in Scotland. It only became apparent how far off the rails RBS was going when a 'takeover too far' collapsed precisely as the liquidity crisis hit all the banks. The urgent need of the bank for a rescue of very large proportions placed it abjectly at the feet of the government, and ad hoc measures were taken, of necessity. It was decided that such a large entity could not be made to vanish, as Northern Rock was allowed to disappear: hence the restructure of the RBS conglomerate is still ongoing.
The principal asset of Northern Rock was a large book of mortgages on residential properties; which has over the succeeding years been sold profitably; largely because the policies of almost-zero interest rates and quantitative easing have resulted in a steady rise in house prices so that the assets of the old building societies have been consolidated in market 'value'.
The key point about the need to 'rescue' Lloyd's is that this was only necessary because Lloyd's board - without an time for consultation with the shareholders - had agreed to rescue Halifax Bank of Scotland, a conglomerate of a massive building society and a Scottish bank that had pursued similar policies to those of RBS. Lloyd's conservatively-managed balance sheet could probably have survived the storm without the HBOS increment of problems: so the Lloyd's shareholders were the least disadvantaged in the restructuring that was judged to be necessary in 2008-9.
The Northern Rock shareholders should have been more vigilant as the company's lending became more reckless: instead they were hubristic. Similar complacency affected the RBS shareholders until it was too late to 'save' the firm. The HBoS merger was dumped on Lloyd's shareholders by a board that was anxious to help the government. Lloyd's wide constituency of shareholders had no say in the decisive action that precipitated near-bankruptcy. RBS shareholders were complacent through a decade of increasingly reckless management. Northern Rock shareholders [mostly] gloated in the national success of their local bank until the truth was borne in on them. These attitudes have more-or-less fairly been rewarded since the crisis.
And, of course, Barclays shareholders are still taking action to challenge the possibly-illicit actions that their firm took to stay technically solvent.
These issues will run and run, but so far I think that rough justice has been done.
I am moved to write this piece today because former shareholders in Northern Rock - a historically worthy building society based in north-east England - got nothing when their firm was taken over and dismembered by the government; while Lloyd's and Royal Bank of Scotland kept their names and their structures, and the shareholders retained some of the equity under Treasury tutelage. The Northern Rock shareholders have retained their organisation, and while some former shareholders have accepted their losses and moved on, a hard core has revived the claim that as the government will make a net 'profit' from selling off parts of the firm, it should now reimburse some of the losses that individuals suffered.
This is a technically complex, legally difficult and morally ambiguous area for debate, and I will just make two basic points.
One is that Northern Rock and the Royal Bank of Scotland were both based away from London, and both had rather buccaneering chief executives who became heroes in their regions. Although RBS had a nationwide shareholder base, largely due to the absorption of other major banks into the group, the board was largely focused in Scotland. It only became apparent how far off the rails RBS was going when a 'takeover too far' collapsed precisely as the liquidity crisis hit all the banks. The urgent need of the bank for a rescue of very large proportions placed it abjectly at the feet of the government, and ad hoc measures were taken, of necessity. It was decided that such a large entity could not be made to vanish, as Northern Rock was allowed to disappear: hence the restructure of the RBS conglomerate is still ongoing.
The principal asset of Northern Rock was a large book of mortgages on residential properties; which has over the succeeding years been sold profitably; largely because the policies of almost-zero interest rates and quantitative easing have resulted in a steady rise in house prices so that the assets of the old building societies have been consolidated in market 'value'.
The key point about the need to 'rescue' Lloyd's is that this was only necessary because Lloyd's board - without an time for consultation with the shareholders - had agreed to rescue Halifax Bank of Scotland, a conglomerate of a massive building society and a Scottish bank that had pursued similar policies to those of RBS. Lloyd's conservatively-managed balance sheet could probably have survived the storm without the HBOS increment of problems: so the Lloyd's shareholders were the least disadvantaged in the restructuring that was judged to be necessary in 2008-9.
The Northern Rock shareholders should have been more vigilant as the company's lending became more reckless: instead they were hubristic. Similar complacency affected the RBS shareholders until it was too late to 'save' the firm. The HBoS merger was dumped on Lloyd's shareholders by a board that was anxious to help the government. Lloyd's wide constituency of shareholders had no say in the decisive action that precipitated near-bankruptcy. RBS shareholders were complacent through a decade of increasingly reckless management. Northern Rock shareholders [mostly] gloated in the national success of their local bank until the truth was borne in on them. These attitudes have more-or-less fairly been rewarded since the crisis.
And, of course, Barclays shareholders are still taking action to challenge the possibly-illicit actions that their firm took to stay technically solvent.
These issues will run and run, but so far I think that rough justice has been done.
Sunday, 30 July 2017
The Very Basics
It is some time since I simply stated the basic assumption on which this blog is based. Although it was one of the earliest principles of Political Economy to be established, I have repeatedly cited Millicent Fawcett's introduction to the topic in her Political Economy for Beginners, which was published for use in the elementary schools which all children were legally enabled to attend under the Education Act of 1870. The book can be accessed on line via the Library of the University of California. I recently commented that it is highly appropriate that Mrs Fawcett is to become the first woman honoured with a statue in Parliament Square, Westminster.
It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.
When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.
Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.
In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.
The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.
In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.
Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.
It is a truism today that when the British economy comes under examination, there is a focus on the deplorably low productivity of employment in this country. Just scratch the surface of any such discussion, and the shocking fact emerges that productivity has scarcely improved [and in some sectors of the economy it has declined] since the financial crisis took hold in 2007.
When she mentioned productivity, Mrs Fawcett also dealt with productiveness; which is virtually never mentioned at all in the current discussions. Yet for Mrs Fawcett - as for me - it is the very key to understanding the basic economic problem that bedevils the country.
Productiveness means the extent to which any economic activity yields a surplus [of output, that can be converted to cash] that is used for investment. The investment may be applied to expanding or updating the plant that yielded the surplus, or to training the people who work there, or to recruiting better-skilled people; or it can be invested in other sectors of the economy. There are three main ways in which such cross-economy investment is facilitated:
1. by firms transferring profits from one part of the complex organisation to another, or
2. by the surplus being given to shareholders or bondholders as dividends or bonuses, which they can reinvest at their discretion,or
3. by firms that retain some profit as reserves or receivers of dividend depositing the money with banks, which the banks then lend to firms with ideas for expanding or improving production.
In any of the above circumstances, there is a realistic prospect that many [though not all] of the investments will improve the productivity of the sector in which the investment is made. Sometimes an investment fails, because it is wrongly timed, or a mistaken choice of technology is selected, or inept individuals are selected to manage the investment; or for a dozen other reasons: and the more risky the investment is, while it may yield spectacular returns, it also carries a higher degree of probability that it will fail.
The crucial fact is that the only way to raise productivity [and production] in general is if the productiveness of the system is properly understood and a sufficient proportion of the surplus that is generated sector by sector is applied optimally to investment in those sectors that will contribute most to the productivity and productiveness of the economy in the future. In simple terms, unless investment is the absolute focus of business thinking and of economic policy, the economy can not succeed optimally: because everybody in a decision-making role is looking in a wrong direction. Warren Buffet has become an international celebrity by persuading people to let him make investment decisions with their money; and by delivering excellent results [overall] for decades on end. Mrs Fawcett would have approved of him, strongly.
In Britain, especially since the crisis of 2007-8, profitable businesses have been piling up cash reserves and returning cash to investors [through special dividends and share buy-backs]. In the current circumstances, shareholders who receive these cash bonuses use them to meet current spending because real earned incomes have been tightening; rather than making their own independent investment decisions for the future. This situation has greatly been exacerbated by the combination of institutional and policy disasters that have meant that major investing institutions [such as pensions funds and insurers] are discouraged from making equity investments.
Economic policy has become a conspiracy against productiveness, rather than a stimulus to investment. That is contrary to the basics that Mrs Fawcett set out for elementary schoolchildren in 1870: and the shocking fact that cabinet ministers have no notion of the concept of productiveness is a wonderful measure of the intellectual regression through which Britain has descended since the nineteen-twenties, when fantasy Economics was allowed to supplant the truths of Political Economy: because simplified mathematical models were easier to teach than the complex inter-relationships that are exposed in Political Economy.
Sunday, 16 July 2017
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.
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.
Friday, 2 November 2012
Simple Truth
The debate on the EU Budget, and more specifically about how much the UK should properly pay into it over each of the next seven years, is becoming heated. Since a majority of the 27 member states are net recipients of funds from the EU it is to be expected that a simple majority will be in favour of the biggest possible increase in the budget. The relatively few states that are major contributors to the budget will claim added weight to their arguments: but in the final decision each country has one vote and can exercise only one veto. The exercise of the veto by any country does not cancel the budget, but holds it at the previous year's level until the next annual debate. Whatever the outcome of the forthcoming meeting may be, it will have only a small impact on the formation of individual member governments' views in preparation for the next round of discussions about the future of the Union in the Council of Ministers.
One forthcoming issue that is being heavily signalled in London as a crunch point is the deliberation on proposals that the EU Parliament has already approved for the tightening of regulation, and the unification of regulation, over the 'financial services' sector of the economy. There is a huge amount of debate about the definition of the sector. The crisis of 2007 is generally ascribed to misconduct by 'the banks': but in fact a great deal of the reckless financing was done by firms that were not registered or regulated as banks. The main continental European businesses that wandered into the risky business, which was centred on London and New York, were registered and regulated in their home territory as banks. So it seems obvious to Europeans that the new regulatory regime must focus on preventing the things the continental banks got wrong when they ventured into anglophone markets in the noughties. During 2008-9 Britain and the US responded to the crisis by making the enfeebled non-bank institutions that survived [after Bear Stearns and Lehmans had gone under] merge into banks and thereby get a measure of protection from the banks' balance sheets; which could then be supported by cash injections from government and central banks. This created an unprecedented situation where it was not technically wrong to refer to the casino segments of the markets as segments of 'banking' or of 'the banks'.
Only one company that was known as an insurer - AIG - was ruined in the crisis: and that only because a tiny London-based offshoot was so utterly idiotic as to 'insure' the financial institutions through so-called credit default swaps. The rest of the massive insurance world was completely resilient to the crisis. Yet insurance is being subjected to heavy-handed retrospective requirements that will massively disadvantage the industry. In this the EU is behaving as stupidly as did the mavericks in AIG. There has been a little give by the purblind politicos, but the international leadership of the London Insurance Market - which has been unchallenged since 1700 and remains just as robust today - remains at threat. Thus dis-aggregation of insurance from the present EU regulatory proposals is essential.
Even more important - and further from the comprehension of the eurorats as they luxuriate tax-free in their favoured Brussels restaurants - is the necessary differentiation of the functions of the casino from any sort of banking. Proposals for a 'Financial Transactions Tax', whether it is to be a fraction of one per cent or several percentage points, presumes a commonality between 'real' banking, casino 'banking', insurance, and other 'financial services' such as shipbroking and arbitration. Derivatives, swaps, spread bets and most futures are simply gambling slips: they have some legitimate uses in offsetting perceived business and social risks for real world trade and industry; but they are based on the purchase of a ticket which is priced according to an assessment of future probabilities and such calculations are therefore wholly speculative - as all bets are. Such contracts should not be counted or taxed as a sub-category of banking transactions.
A price is paid by the entity that considers that it is mitigating perceived risk through a gambling contract, and there might in the future be a payment to the gambler if the predicted eventuality occurs; but no twist of the imagination could set the contract in accord with payments under normal regulated banking contracts. The subject matter of the contract is a bet: so its legal status should be defined in accord with betting laws, the conduct of market participants should be regulated by a gambling commission, and the transactions should all be subject to gambling tax.
Three distinct regulatory regimes are needed: for insurance, for gambling and for banking. No elaborate differentiation between 'retail' banking and [non-casino] 'investment' banking, as perceived by the British Vickers Commission, is necessary. The EU proposals for financial services as a whole, as they stand, are likely to be significantly more detrimental to business growth over all sectors of the economy, seen from this perspective, than they are recognised to be by those who think that they are defending the London Market. The learning curve that London's defenders must climb should be even steeper than that they realise if they are to present the real issue to the European authorities; and one doubts that they will have the capability even to recognise the point that is made above.
One forthcoming issue that is being heavily signalled in London as a crunch point is the deliberation on proposals that the EU Parliament has already approved for the tightening of regulation, and the unification of regulation, over the 'financial services' sector of the economy. There is a huge amount of debate about the definition of the sector. The crisis of 2007 is generally ascribed to misconduct by 'the banks': but in fact a great deal of the reckless financing was done by firms that were not registered or regulated as banks. The main continental European businesses that wandered into the risky business, which was centred on London and New York, were registered and regulated in their home territory as banks. So it seems obvious to Europeans that the new regulatory regime must focus on preventing the things the continental banks got wrong when they ventured into anglophone markets in the noughties. During 2008-9 Britain and the US responded to the crisis by making the enfeebled non-bank institutions that survived [after Bear Stearns and Lehmans had gone under] merge into banks and thereby get a measure of protection from the banks' balance sheets; which could then be supported by cash injections from government and central banks. This created an unprecedented situation where it was not technically wrong to refer to the casino segments of the markets as segments of 'banking' or of 'the banks'.
Only one company that was known as an insurer - AIG - was ruined in the crisis: and that only because a tiny London-based offshoot was so utterly idiotic as to 'insure' the financial institutions through so-called credit default swaps. The rest of the massive insurance world was completely resilient to the crisis. Yet insurance is being subjected to heavy-handed retrospective requirements that will massively disadvantage the industry. In this the EU is behaving as stupidly as did the mavericks in AIG. There has been a little give by the purblind politicos, but the international leadership of the London Insurance Market - which has been unchallenged since 1700 and remains just as robust today - remains at threat. Thus dis-aggregation of insurance from the present EU regulatory proposals is essential.
Even more important - and further from the comprehension of the eurorats as they luxuriate tax-free in their favoured Brussels restaurants - is the necessary differentiation of the functions of the casino from any sort of banking. Proposals for a 'Financial Transactions Tax', whether it is to be a fraction of one per cent or several percentage points, presumes a commonality between 'real' banking, casino 'banking', insurance, and other 'financial services' such as shipbroking and arbitration. Derivatives, swaps, spread bets and most futures are simply gambling slips: they have some legitimate uses in offsetting perceived business and social risks for real world trade and industry; but they are based on the purchase of a ticket which is priced according to an assessment of future probabilities and such calculations are therefore wholly speculative - as all bets are. Such contracts should not be counted or taxed as a sub-category of banking transactions.
A price is paid by the entity that considers that it is mitigating perceived risk through a gambling contract, and there might in the future be a payment to the gambler if the predicted eventuality occurs; but no twist of the imagination could set the contract in accord with payments under normal regulated banking contracts. The subject matter of the contract is a bet: so its legal status should be defined in accord with betting laws, the conduct of market participants should be regulated by a gambling commission, and the transactions should all be subject to gambling tax.
Three distinct regulatory regimes are needed: for insurance, for gambling and for banking. No elaborate differentiation between 'retail' banking and [non-casino] 'investment' banking, as perceived by the British Vickers Commission, is necessary. The EU proposals for financial services as a whole, as they stand, are likely to be significantly more detrimental to business growth over all sectors of the economy, seen from this perspective, than they are recognised to be by those who think that they are defending the London Market. The learning curve that London's defenders must climb should be even steeper than that they realise if they are to present the real issue to the European authorities; and one doubts that they will have the capability even to recognise the point that is made above.
Saturday, 30 June 2012
Banking Shock?
It is astonishing that anyone could be surprised by the latest major scandal to be published about the bankers. Of course they manipulated the London Market Offered Rate of interest: LIBOR. Of course they sold completely inappropriate derivatives to small businesses. They have run the financial system on the basis of blatant veniality for the last few decades.
The Rating Agencies are paid by the firms whose stock they rate: and by 2010 they had completely blown away their wholly spurious reputation of earlier years, when the uselessness of their ratings of billions of dollarsworth of badly-cobbled 'securities' and other instruments was made clear. It is incredible that five years on from the crunch of 2007 they remain recognised [by regulators, actuaries and accountants] as holders of the magic means by which stocks, shares and gambling slips issued by other firms are regarded as possessing 'value' in financial markets.
This suspension of disbelief in respect of the Agencies' ratings of company stocks helps to explain how the banks have continued to get away with a similar - and even more obviously corruptible - standard and measure of 'value' in the banking sector. Nobody has had any excuse for believing that any valid standard of competence or integrity has been attached to the daily announcement of libor [and of other median rates of interest] in the London Market. These figures, which are used as numeraires in millions of transactions worldwide every day, are based on data that are submitted by employees of the regulated UK banks. Since the nineteen eighties these same institutions have been deeply embroiled in the business of the London Market on their own account, as well as in the role of agents for other investors.
After two years of investigation by the regulatory authorities, during which the libor has been produced on the accepted basis, it has been admitted publicly that Barclays:
First, both in the good times pre-2007 and during the consequential crunch, massaged the data that they submitted for inclusion in the libor computation to support "the sneaking arts of underling tradesmen". The supposed data that the bank submitted were adjusted to support the day-to-day convenience of their trading counterparties and their chums. They supported their own market positions by influencing the rates that were authoritative in the Market.
Subsequently, after the extent of the crunch had begun to become clear, Barclays continued wantonly to mis-state the data better to facilitate their traders taking up and winding-down borrowings.
There is no reason to believe that the other banks that contributed data were significantly immune to the temptation to use the libor methodology to their advantage. More confessions will be made; and trivial fines [without criminal charges against offenders] are expected to be imposed on the other banks. Thus the whole of the UK's regulated home-based banking business have massively more undermined than had already been done by the crunch itself.
In the same week, just past, the RBS.group remained unable to rectify a disastrous, inept and incompetent 'upgrade' to its retail software that kept millions of customers from effecting transactions. This was reputationally at least as bad among less sophisticated customers as was the damage to 'wholesale' banking in the credit crunch that they could not understand. Then it was announced that thousands of firms had been invited to buy betting slips that had cost them heavily when interest rates had fallen: some of the 'invitations' had been presented as conditions that must be accepted by the client firm as a term for being granted some other facility by the bank. Many firms were ruined and many more suffered serious difficulty in finding the cash that was necessary to keep going through the slump.
The pathetic politicians have mouthed what their puerile advisers have recommended they should say in response to the multilayered revelations. They have demanded - or promised to establish - 'inquiries' informed by 'independent' 'experts' selected from the usual gang of lawyers and quangocrats who have drawn fees from the system that has promoted the decline of the once-robust economy..
Ordinary white British folk already know all too well what happened. Since 1980 successive governments of both parties have grovelled to accommodate the demands of the most pushy segments of the finance sector of the economy, because they were declaring expanding turnover and creating jobs and paying taxes that partially made up for the politicians' systematic destruction of the 'real economy'. They never were and never will be capable of self-regulation in any particular. They never were and never will be capable of making objective statements about the 'value' of anything that they conjure into existence. The delusion that the empowerment of market participants will endow them with responsibility towards society or to the body politic was most powerfully asserted by Margaret Thatcher and her sycophants; and was maintained by Major, Blair and Brown. David Cameron has neither the intellectual capacity nor the will to understand the consequences of this ruinous litany; and sneering Osborne has every interest in letting Cameron founder, in the hope that he will become the leader of a dying Tory Party.
It is certain that within the current political structure the government will not respond adequately or in good time to the next phases of the crisis that the political class has fostered; that the bankers will continue on their exploitative progress; and that the economy will continue to decline. Nobody can seriously claim to be surprised by any of it!
The Rating Agencies are paid by the firms whose stock they rate: and by 2010 they had completely blown away their wholly spurious reputation of earlier years, when the uselessness of their ratings of billions of dollarsworth of badly-cobbled 'securities' and other instruments was made clear. It is incredible that five years on from the crunch of 2007 they remain recognised [by regulators, actuaries and accountants] as holders of the magic means by which stocks, shares and gambling slips issued by other firms are regarded as possessing 'value' in financial markets.
This suspension of disbelief in respect of the Agencies' ratings of company stocks helps to explain how the banks have continued to get away with a similar - and even more obviously corruptible - standard and measure of 'value' in the banking sector. Nobody has had any excuse for believing that any valid standard of competence or integrity has been attached to the daily announcement of libor [and of other median rates of interest] in the London Market. These figures, which are used as numeraires in millions of transactions worldwide every day, are based on data that are submitted by employees of the regulated UK banks. Since the nineteen eighties these same institutions have been deeply embroiled in the business of the London Market on their own account, as well as in the role of agents for other investors.
After two years of investigation by the regulatory authorities, during which the libor has been produced on the accepted basis, it has been admitted publicly that Barclays:
First, both in the good times pre-2007 and during the consequential crunch, massaged the data that they submitted for inclusion in the libor computation to support "the sneaking arts of underling tradesmen". The supposed data that the bank submitted were adjusted to support the day-to-day convenience of their trading counterparties and their chums. They supported their own market positions by influencing the rates that were authoritative in the Market.
Subsequently, after the extent of the crunch had begun to become clear, Barclays continued wantonly to mis-state the data better to facilitate their traders taking up and winding-down borrowings.
There is no reason to believe that the other banks that contributed data were significantly immune to the temptation to use the libor methodology to their advantage. More confessions will be made; and trivial fines [without criminal charges against offenders] are expected to be imposed on the other banks. Thus the whole of the UK's regulated home-based banking business have massively more undermined than had already been done by the crunch itself.
In the same week, just past, the RBS.group remained unable to rectify a disastrous, inept and incompetent 'upgrade' to its retail software that kept millions of customers from effecting transactions. This was reputationally at least as bad among less sophisticated customers as was the damage to 'wholesale' banking in the credit crunch that they could not understand. Then it was announced that thousands of firms had been invited to buy betting slips that had cost them heavily when interest rates had fallen: some of the 'invitations' had been presented as conditions that must be accepted by the client firm as a term for being granted some other facility by the bank. Many firms were ruined and many more suffered serious difficulty in finding the cash that was necessary to keep going through the slump.
The pathetic politicians have mouthed what their puerile advisers have recommended they should say in response to the multilayered revelations. They have demanded - or promised to establish - 'inquiries' informed by 'independent' 'experts' selected from the usual gang of lawyers and quangocrats who have drawn fees from the system that has promoted the decline of the once-robust economy..
Ordinary white British folk already know all too well what happened. Since 1980 successive governments of both parties have grovelled to accommodate the demands of the most pushy segments of the finance sector of the economy, because they were declaring expanding turnover and creating jobs and paying taxes that partially made up for the politicians' systematic destruction of the 'real economy'. They never were and never will be capable of self-regulation in any particular. They never were and never will be capable of making objective statements about the 'value' of anything that they conjure into existence. The delusion that the empowerment of market participants will endow them with responsibility towards society or to the body politic was most powerfully asserted by Margaret Thatcher and her sycophants; and was maintained by Major, Blair and Brown. David Cameron has neither the intellectual capacity nor the will to understand the consequences of this ruinous litany; and sneering Osborne has every interest in letting Cameron founder, in the hope that he will become the leader of a dying Tory Party.
It is certain that within the current political structure the government will not respond adequately or in good time to the next phases of the crisis that the political class has fostered; that the bankers will continue on their exploitative progress; and that the economy will continue to decline. Nobody can seriously claim to be surprised by any of it!
Tuesday, 8 November 2011
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.
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.
Wednesday, 14 October 2009
Bank Profits and Bonuses
The international bankers have again achieved what should be imposible.
They have made very significant profits, from which they are paying large bonuses; making fools of the politicians who bailed them out at such huge cost just a year ago. Ministers demanded that bonuses be limited: they have not been; though there are some cosmetic changes in the timing of when the rewards will go into the blokes' pockets.
How do they manage this, when things are getting tighter for ordinary people and for 'real' businesses?
The answer is, that they trade with others of their ilk in imaginative contracts, not in reality,
This is explained in Nuclean Economy, acessible via this blog.
They have made very significant profits, from which they are paying large bonuses; making fools of the politicians who bailed them out at such huge cost just a year ago. Ministers demanded that bonuses be limited: they have not been; though there are some cosmetic changes in the timing of when the rewards will go into the blokes' pockets.
How do they manage this, when things are getting tighter for ordinary people and for 'real' businesses?
The answer is, that they trade with others of their ilk in imaginative contracts, not in reality,
This is explained in Nuclean Economy, acessible via this blog.
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