I have rabbited on about sprinklers in buildings on several occasions in the past, most notably in the context of the Grenfell Tower disaster in Kensington. I do it today in the context of another issue that has surfaced in the media in the past 24 hours: namely the fact - as officially recorded - that fewer new schools are built with sprinkler systems than in past decades.
Sprinklers are devices to produce a heavy shower of water inside a building that is on fire, and if they are properly installed to a good design [and an appropriate specification of devices used] they massively reduce the risk of destruction of the contents of the building and of death and serious damage to people and animals. There are advanced techniques for drying-out water-damaged assets.
The aspect of the prevalent free-markets dogma that is most directly damaging to human beings is the reduction and removal of controls that prevent dangerous structures and situations from being permitted. There was an almost-golden age of safety in factories and public buildings, when the local fire brigade had the power to insist that safety systems like supplementary escape staircases and sprinkler systems had to be installed in a building before it was granted a 'fire certificate' that permitted a range of uses of the premises. Buildings with fire certificates were usually acceptable to be insured - with their contents, including liabilities to people and to other entities than the owner or operator of the building - but nevertheless the insurance companies employed their own Inspectors who could enter the premises and check that safety systems, including sprinklers, were appropriate and properly maintained and fully functional. That last sentence is important, because it is possible to have a well-designed system that is regularly inspected but which can be switched off [or the water turned off] by human oversight or negligence: or as part of the preparations for a fraudulent insurance claim for loss of goods kept in the building which were burned in a fire where the sprinklers 'failed to operate'.
The free marketeers have been dominant in the United Kingdom since the Labour government submitted to the International Monetary Fund [IMF] in 1976: in return for being allowed a loan which was intended to 'stabilise' the external value of the pound sterling during a period of extremely high inflation and 'industrial strife', the Callaghan government accepted [very reluctantly] the free-market dogma that the Thatcher regime was to embrace after their election victory in 1979. On that reckoning, the free markets dogmatists - the Econocracy - have dominated society and the economy for forty-one years [though I have pointed out several times that 364 then-practicing Economists signed a letter to the Times in 1982 rejecting the dogma that was to gain hegemony by 2002].
The period since the autumn of 1976 is exactly the period of Britain's absolute decline as a manufacturing country. We have wantonly destroyed coal mining, most steelmaking, large-scale commercial shipbuilding, our separate aircraft industry, the mass production of textiles and most of the armaments industry [including even the capacity to supply uniforms for a mass military]. The economy has grown because new industries have arisen in high technology such as pharmaceuticals and microprocessors, and in the games and the entertainments industries; due to the brilliance of British inventors, some of them in the university system. The balance of payments deficit has been mitigated by sales of much of the new intellectual property to aliens.
At least equally important for the growth of the economy has been the expansion of government and personal debt. Some of the government's debt has been hidden from the official balance sheet, for example in the PFI schemes by which schools and hospitals have been built and funded by businesses on the understanding that the government [or agencies including the NHS and local authorities and their semi-independent social housing departments] will pay for the use of those buildings when complete. Those charges will for decades to come be paid out of the users' annual budgets; and the debt that would otherwise be required to build them is not listed in the public accounts.
In order to pare bits of expenditure off the public accounts, both from the admitted debt for construction and from the the running costs of premises, devices like sprinklers have been made optional. Building operators - including providers of social housing and free schools and the trusts that manage [and profit from] 'academies' - are exempted from costly requirements such as installing and maintaining sprinklers. Thus the 'economic burden' of building and operating the facilities is reduced: and so is the safety and utility of the premises.
The extreme shabbiness of this policy has rightly been attacked by the Commissioner of the London Fire Brigade, Dany Cotton. Human lives - even those of children is school and in care - are at unnecessary risk: due to the implementation of policies directly derived from Econocratic dogma. Thus has Economics become directly and fundamentally inhumane.
Showing posts with label insurance. Show all posts
Showing posts with label insurance. Show all posts
Wednesday, 25 October 2017
Monday, 11 September 2017
This Day - 9/11 - and the Knell of the Free Trade Fantasy
September 11, in the UK and many other countries, is summarised as 11.9.17. But in the USA they put the month first, hence 9.11 or 9/11. The date 9/11 has become even more rooted in folklore and the media as the descriptor of the terrorist attack on New York than is 'ground zero' as a synonym for the site at which the destruction was centred. It is purely coincidental that on this same date in 2017 an unprecedented storm has struck the mainland USA in Florida.
Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.
Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.
Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.
The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.
It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.
The Econocratic idea that there should be free trade in every field simply does not work in this area.
What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book' - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.
Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.
Both insueBoth insurers and reinsurers
Besides providing an opportunity for him to show, for a second time, that he performs better in the context of a natural catastrophe than George W Bush did, Donald Trump has completely overcome his verbal incompetence in addressing this calamity. If he reverts to his usual bluster once the crisis is passed, his recent performance will quickly be forgotten: but, for the moment, his image is greatly enhanced by his mobilisation of congressional Democrats to expedite relief programmes.
Both New York on the 'original' 9/11 and the present [diminishing] hurricane Irma are proof that in a world where both the weather and the wickedness of human beings can create unprecedented catastrophes, a system of untrammeled free trade cannot prepare social and economic institutions, or the political system or the psyche of individuals to cope with unprecedented calamity. While it is probable that any extreme weather or earthquake event that we have recently experiences has been exceeded by many greater events before humans existed, we live within the record of human experience. In a much reduced timescale than the period over which we have economic records, the insurance business has grown sophisticated, within its own parameters, in coping with disasters that affect businesses and individuals' estates [i.e. all their material assets] by paying for repair, replacement or reinstatement of assets that are damaged or destroyed by flood, fire, storm winds and other catastrophic and humdrum accidental causes.
Insurers are even prepared to take on concentrations of obvious risks, such as the tower blocks in the City of London or at Canary Wharf; and the homes, hotels, shops and offices in Tampa and other built-up areas of Florida. But they only take on those risks on strictly defined conditions. The properties must accord in full with the building standards that apply to the type of building and its location; which, of course, represents a massive restriction of free trade imposed by government. Thus Florida can ban construction that does not provide assurance of its capacity to withstand storms of the force of Irma. No government can compel insurers to extend insurance cover to building that do not meet building regulations that the insurers do not accept as sufficiently robust for the perceived risks that could operate in the area where the asses are placed. There are many instances where state authorities in the USA will only allow insurers to operate if they take on risks in categories that the firm would not accept: so they simply do not write such business in such areas. In one case, over many years, one major US insurer did not write some categories of business within the state where they were headquartered. In the UK, where expectations of catastrophe are much lower, properties susceptible to serious flooding can only be insured at affordable premiums under conditions established and guaranteed by the government. Thus the accessibility of insurance is limited by the choices that have been made by political bodies; to which companies have to conform.
The idea of complete freedom to build almost any sort of home anywhere in a hurricane-high-risk area cannot survive the need for structures to meet requirements for both health and safety and for insurance; while the state authorities and relevant utility companies exert their right nor to provide a road, or sewerage, or water or gas supply to property that is inappropriately sited in terms of risk management. Thus, to a very considerable extent, taxpayers are protected by not having their communal resources and assets put at risk by buccaneering businesses.
It will be interesting [and often very sad] to see how far the sort of system of building regulations that has been implemented in Florida in recent decades has been set up in the various territories through which Irma passed. How much property has been insured, to what extent, with what exclusions: in the end,this will show how much loss will fall on the well-capitalised and highly organised insurance business and how much will fall on people who had to take the risk themselves.This will emerge over the coming weeks. But the key point to note here is that insurers and governments necessarily collaborate to make any sort of insurance, and any sort of sophisticated structure or business activity viable.
The Econocratic idea that there should be free trade in every field simply does not work in this area.
What does work, is collaboration between government agencies and insurers to ensure that when people [personally as as managers of firms] make investment decisions that are rational in the geographic and temporal context, then viable insurance is available at a fair price. There may from time to be small differences in the price [the premium charged] for an insurance product in any month, but these arise from the need of competing insurers each to maintain the balance of their 'book' - their total range and cover of risks - so that it meets their template for the mix of business. by making small adjustments in the price, up or down, one insurer brings balance to the book while all their competitors experience a countervailing movement of business away from them. This helps all the books to be balanced as the companies plan, all the time.
Primary insurers who supply policies for individuals and households and for all types of business constantly balance their book of business internally. They also buy reinsurance so that larger losses than they want to accept on their own balance sheet, which could drain away too much of the company's own capital. Reinsurance is a highly efficient market in which capital providers find a profitable way of investing their funds until more lucrative possibilities emerge.
Both insueBoth insurers and reinsurers
Tuesday, 5 September 2017
Aveva: Another Case Against British Policy
The technological software company Aveva is a very successful Cambridge spin-off company. Although in a different field of activity from ARM, it shares many similarities with the firm that Mrs May allowed to go to Japanese owners in her first days in office. These include the availability of talent and significant start-up funding in physical and intellectual proximity to Cambridge, and strongly competent management.
This company has become a world leader in an area where there is an almost-infinite global demand for their software, which provides a template for designing almost any process plant and the structures in which it can best operate. It is growing promisingly, and could probably have a great future on its own. However, a leading French company has decided that they way forward [regardless of Brexit] is to take Aveva over, then incorporate some of its operations into Aveva, and profit further.
There is no French university in the global big league: where Cambridge, Oxford and the leading London colleges are stars; so it makes sense for the intending French owners of Aveva - as with the Japanese owners of ARM - for the time being [at least] to maintain and even extend the operations and the investment at the Cambridge site. Cross-fertilisation and the simple buzz of social and physical proximity to talent are huge benefits that Britain gains from having top quality intellectual resources.
Even the dim politicians who are dawdling about the Brexit discussions, and balking at the inevitable decision that any sane leaders have to take, that Britain must remain within the European Economic Area must see, yet again, that Britain has huge resources of inventiveness that have for centuries been the country's greatest economic asset. Discussions about how far the UK can collaborate with EU institutions that will keep the UK in the closest contact with the intellectual developments forging ahead are a very important aspect of the whole Brexit debate. There are some signs that collaboration and the transfer of people between UK and continental universities are already being reduced by the irrational fears which people like Liam Fox and the 'hard Brexiteers' are unconsciously fostering in people who are concerned about their personal futures.
As with the concentration of intellectual and technical resources in insurance and banking in the City of London, so with the leading universities the concentration of technical and scientific talent in the British hubs is massively greater than anywhere on the continent. If the City or Cambridge University is weakened by any sort of boycott by the EU, it will not enable the French to build up Paris as a hub for finance, or Bonn or Bologna as a global technology giant: any spiteful weakening of British institutions will merely strengthen New York, Singapore and other non-EU business centres, and the great universities of the USA as foci for research. Specialist journalists have been making this point effectively over some years, but it has not yet spread into the wider public consciousness and has barely touched the limited wits of the political class. It would be hoped that the example of Aveva would enlighten them, but my expectations of those woodentops are extremely low.
This company has become a world leader in an area where there is an almost-infinite global demand for their software, which provides a template for designing almost any process plant and the structures in which it can best operate. It is growing promisingly, and could probably have a great future on its own. However, a leading French company has decided that they way forward [regardless of Brexit] is to take Aveva over, then incorporate some of its operations into Aveva, and profit further.
There is no French university in the global big league: where Cambridge, Oxford and the leading London colleges are stars; so it makes sense for the intending French owners of Aveva - as with the Japanese owners of ARM - for the time being [at least] to maintain and even extend the operations and the investment at the Cambridge site. Cross-fertilisation and the simple buzz of social and physical proximity to talent are huge benefits that Britain gains from having top quality intellectual resources.
Even the dim politicians who are dawdling about the Brexit discussions, and balking at the inevitable decision that any sane leaders have to take, that Britain must remain within the European Economic Area must see, yet again, that Britain has huge resources of inventiveness that have for centuries been the country's greatest economic asset. Discussions about how far the UK can collaborate with EU institutions that will keep the UK in the closest contact with the intellectual developments forging ahead are a very important aspect of the whole Brexit debate. There are some signs that collaboration and the transfer of people between UK and continental universities are already being reduced by the irrational fears which people like Liam Fox and the 'hard Brexiteers' are unconsciously fostering in people who are concerned about their personal futures.
As with the concentration of intellectual and technical resources in insurance and banking in the City of London, so with the leading universities the concentration of technical and scientific talent in the British hubs is massively greater than anywhere on the continent. If the City or Cambridge University is weakened by any sort of boycott by the EU, it will not enable the French to build up Paris as a hub for finance, or Bonn or Bologna as a global technology giant: any spiteful weakening of British institutions will merely strengthen New York, Singapore and other non-EU business centres, and the great universities of the USA as foci for research. Specialist journalists have been making this point effectively over some years, but it has not yet spread into the wider public consciousness and has barely touched the limited wits of the political class. It would be hoped that the example of Aveva would enlighten them, but my expectations of those woodentops are extremely low.
Thursday, 31 August 2017
Flood, Fuel Prices and Human Costs
The tragic flooding in Texas and Louisiana over the last few days has no precedent in the history of North America, and its consequences will only emerge in full over several years. The immediate effects are that thousands of homes will need to be replaced or majorly reconstructed, a massive proportion of the infrastructure will have to be reinstated and transport links repaired. Mercifully few deaths have been reported so far; and the life-saving capabilities shown by thousands of ordinary small-boat owners and their helpers have been both effective and heartwarming. Much of the damage is insured; probably more is not insured because damage on this scale had previously been inconceivable, so there is a huge cost to be met by the public purse and by private individuals.
The main industry in the area is oil refining, with a huge proportion of the United States' refining capacity being concentrated along the coast of the Gulf of Mexico: precisely where the hurricane [as it then still was] hit the coastline. It is forecast that global oil production is now so flexible that the loss of any oil wells to active exploitation in the coming weeks will have no significant impact on the availability or the price of oil, as such. However, the loss of massive refining capacity for [at least] a period of weeks will significantly affect the availability of petrol ['gas'] to American drivers and of refined fuel for domestic and industrial purposes. There may, therefore, be a period of raised prices for refined oil products, partly because the net supply is cut, but more because to deliver fuel from places other than the Gulf coast requires longer supply-lines, the use of different pipelines and more vehicles to move the products to their consumers, and thus the costs of actually making the petrol and heating oil available will rise significantly until the gulf refineries can begin operation again.
One of the problems that the refinery companies are already tackling is the fact that thousands of staff have had to move from their homes; and a large proportion of them will not be able to reoccupy their homes for many months. Thus, though the operation of the refineries may not suffer much as a result of inundation in the flood [because many measures of damage mitigation could be taken after storm warnings had been issued], the need to rehouse so much of the labour for many months had not been taken into account in the contingent planning of the refining companies. The unforeseen costs of these measures to secure attendance by the workforce - over several months, at least - will add to the increase in the price of petrol and other refined products, and will extend the period over which the price increase will endure. This may be sufficiently significant to add a fraction of a percentage point to US inflation.
So, while the human and social costs are rightly the primary concern at the moment - and for some time to come - the economic consequences of the flooding [and the relative small amount of wind damage that has occurred] will be long-lasting and significant. They will also require the entire risk-management approach of the community and of its major employers to be recast. Nature is constantly stressing her power to disrupt humanity's activities, and to show that our risk management was not sufficient. This is the first lesson of the Texas tragedy of the past few days.
The main industry in the area is oil refining, with a huge proportion of the United States' refining capacity being concentrated along the coast of the Gulf of Mexico: precisely where the hurricane [as it then still was] hit the coastline. It is forecast that global oil production is now so flexible that the loss of any oil wells to active exploitation in the coming weeks will have no significant impact on the availability or the price of oil, as such. However, the loss of massive refining capacity for [at least] a period of weeks will significantly affect the availability of petrol ['gas'] to American drivers and of refined fuel for domestic and industrial purposes. There may, therefore, be a period of raised prices for refined oil products, partly because the net supply is cut, but more because to deliver fuel from places other than the Gulf coast requires longer supply-lines, the use of different pipelines and more vehicles to move the products to their consumers, and thus the costs of actually making the petrol and heating oil available will rise significantly until the gulf refineries can begin operation again.
One of the problems that the refinery companies are already tackling is the fact that thousands of staff have had to move from their homes; and a large proportion of them will not be able to reoccupy their homes for many months. Thus, though the operation of the refineries may not suffer much as a result of inundation in the flood [because many measures of damage mitigation could be taken after storm warnings had been issued], the need to rehouse so much of the labour for many months had not been taken into account in the contingent planning of the refining companies. The unforeseen costs of these measures to secure attendance by the workforce - over several months, at least - will add to the increase in the price of petrol and other refined products, and will extend the period over which the price increase will endure. This may be sufficiently significant to add a fraction of a percentage point to US inflation.
So, while the human and social costs are rightly the primary concern at the moment - and for some time to come - the economic consequences of the flooding [and the relative small amount of wind damage that has occurred] will be long-lasting and significant. They will also require the entire risk-management approach of the community and of its major employers to be recast. Nature is constantly stressing her power to disrupt humanity's activities, and to show that our risk management was not sufficient. This is the first lesson of the Texas tragedy of the past few days.
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.
Thursday, 2 August 2012
Four London Markets
Until the so-called 'big bang' in the middle of the nineteen eighties there was a complex of specialist markets: retail and wholesale insurance, retail and business banking, building societies, pension funds, investment management, stock broking, stock jobbing, bond trading, bill trading and several others. Some merchant banks covered a range of these functions; but they all kept clear of retail banking and of all categories of insurance. After the bang most of the non-insurance functions were pretty quickly subsumed into large conglomerates: as a general rule, only the firms that remained under the control of families stuck to a selected range of specialist functions, while the majority leapt into a spectrum of activities that was so broad that the central board of directors could not possibly hope to maintain adequate oversight.
That all came unstuck in 2007-8 and now there is mounting tension between the City of London, weakly 'supported' by the UK government, and the Commission of the European Union who want to impose common methods of regulation and taxation over all finance sectors in all EU member states [and not just the eurozone]. The press is slowly becoming cognisant that insurance will became increasingly expensive if absurd rules of reserving - which may be relevant for banking - are imposed on insurers, More recently feature articles and leaders have been written on the crazy proposal that pension funds should similarly be undermined; shrinking the value of all past and future pension contributions and building up a huge increase in old-age poverty for the future.
It is now urgent and vitally important that the UK government - and, in this, the Labour opposition should declare complete support for the position - declares unconditionally that they will protect the interests of investors, savers [including contributors to pension funds] and those who wish prudently to insure their assets in a rational and affordable system.
It is also crucially important for the survivial of the economy that the international earnings of the financial industries are at least maintained. Assuming that the irrational and irresponsible system of giving traders bonuses proportional to turnover [however risky] rather than on the basis of achieved real profits is replaced by a more rational system of remuneration, it is likely that the income-tax yield from the City will decline hugely; and alternative sources of government revenue will urgently be required if the national deficit is to be diminished. If the historic and entirely rational requirement for reserving by insurers is maintained [and if the daft actuarial preference for bond over equity investment is set aside] that sector can remain the world leader. The Vickers Commission's recommendation that 'retail' banking should be separated [in regulatory terms, if not by separation of ownership - though that would be desirable] from 'wholesale' has been accepted by the government and should be implemented: though fears of the government compromising and thus undermining the separation are mounting. Given that Vickers will, to some limited extent, be implemented, attention should then be focussed on driving genuine wedges between materially useful merchant banking and the huge mass of activity that is appropriately called 'casino banking'.
Before the intrusion of modern Economics in the eighteen-seventies, Political Economists had tought - correctly - that a distinction should be draen between 'productive' and unproductive investment. Productive investment laid down the basis for more production in the future; unproductive investment provided products that were consumed in ways that did not put anything into future economic activity. That distinction should be restored, and those wholesale financial activities that conduce to the facilitation of productive investment should be in one category [let us call it merchant banking] and those that manage purely speculative finance or hedge financial deals unrelated to material economic capital formation [casino finance] should be in another category. Merchant banking should be regulated and taxed as banking is managed by governments all over the world. Casino finance should be registered, regulated and taxed for what it is: betting. Just as appropriate regulation and taxation have made London casinos popular among global high rollers, and the retail British betting industry has been highly successful, so both face-to-face and online finance gambling in futures, derivatives, short-selling [of shares not owned by the sellers] should be legalised and regulated and taxed as a great British business. Before anyone else does it, the City should develop on its great tradition as the magnet for an expanding global trade in bets, which is what most of the turnover was before the crunch. The credit crisis has arisen largely because governments mistakenly adopted and monetised the so-called "banks'" gambling debts; and part of Britain's way out of the mess can be speeded by optimising on the existing City expertise.
In due course, real productive investment must enable industry [including creative industrial sectors] to grow and provide an increasing part of the national product; but for a quick fix the opening of the casino finance business - on an open and honest basis - is the primary feasible option.
That all came unstuck in 2007-8 and now there is mounting tension between the City of London, weakly 'supported' by the UK government, and the Commission of the European Union who want to impose common methods of regulation and taxation over all finance sectors in all EU member states [and not just the eurozone]. The press is slowly becoming cognisant that insurance will became increasingly expensive if absurd rules of reserving - which may be relevant for banking - are imposed on insurers, More recently feature articles and leaders have been written on the crazy proposal that pension funds should similarly be undermined; shrinking the value of all past and future pension contributions and building up a huge increase in old-age poverty for the future.
It is now urgent and vitally important that the UK government - and, in this, the Labour opposition should declare complete support for the position - declares unconditionally that they will protect the interests of investors, savers [including contributors to pension funds] and those who wish prudently to insure their assets in a rational and affordable system.
It is also crucially important for the survivial of the economy that the international earnings of the financial industries are at least maintained. Assuming that the irrational and irresponsible system of giving traders bonuses proportional to turnover [however risky] rather than on the basis of achieved real profits is replaced by a more rational system of remuneration, it is likely that the income-tax yield from the City will decline hugely; and alternative sources of government revenue will urgently be required if the national deficit is to be diminished. If the historic and entirely rational requirement for reserving by insurers is maintained [and if the daft actuarial preference for bond over equity investment is set aside] that sector can remain the world leader. The Vickers Commission's recommendation that 'retail' banking should be separated [in regulatory terms, if not by separation of ownership - though that would be desirable] from 'wholesale' has been accepted by the government and should be implemented: though fears of the government compromising and thus undermining the separation are mounting. Given that Vickers will, to some limited extent, be implemented, attention should then be focussed on driving genuine wedges between materially useful merchant banking and the huge mass of activity that is appropriately called 'casino banking'.
Before the intrusion of modern Economics in the eighteen-seventies, Political Economists had tought - correctly - that a distinction should be draen between 'productive' and unproductive investment. Productive investment laid down the basis for more production in the future; unproductive investment provided products that were consumed in ways that did not put anything into future economic activity. That distinction should be restored, and those wholesale financial activities that conduce to the facilitation of productive investment should be in one category [let us call it merchant banking] and those that manage purely speculative finance or hedge financial deals unrelated to material economic capital formation [casino finance] should be in another category. Merchant banking should be regulated and taxed as banking is managed by governments all over the world. Casino finance should be registered, regulated and taxed for what it is: betting. Just as appropriate regulation and taxation have made London casinos popular among global high rollers, and the retail British betting industry has been highly successful, so both face-to-face and online finance gambling in futures, derivatives, short-selling [of shares not owned by the sellers] should be legalised and regulated and taxed as a great British business. Before anyone else does it, the City should develop on its great tradition as the magnet for an expanding global trade in bets, which is what most of the turnover was before the crunch. The credit crisis has arisen largely because governments mistakenly adopted and monetised the so-called "banks'" gambling debts; and part of Britain's way out of the mess can be speeded by optimising on the existing City expertise.
In due course, real productive investment must enable industry [including creative industrial sectors] to grow and provide an increasing part of the national product; but for a quick fix the opening of the casino finance business - on an open and honest basis - is the primary feasible option.
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