A major Wall Street bank has released a piece of research which [inter alia] warns that the advent of a Corbyn-led Labour government in the UK would potentially have a more calamitous impact on London share prices that would 'Hard Brexit'. The markets have balanced out the 'risk' arising to future profits from firms if the government totally cocks-up the Brexit negotiations with the actual fall in the pound among world currencies and the day-to-day performance of the listed companies. The level of the stock market index would fall in the event of failure; but the possibility is factored in to buyers' calculations. On the other hand, the imponderable impact on the market of Corbyn actually becoming prime minister is inestimable. How far he would cling to his lifelong Marxist dogma [and how far his party would follow him there] cannot be predicated on any known basis of probability. Thus, the bank argues, there might be no 'floor' below which British stock prices would fall. Consequently, the Wall Street Crash of 1929 might be replicated, or even exceeded, once panic sets in among dealers who have no precedent for such a change in government to be assessed against.
The very worst case is a catastrophic Brexit followed by a collapse of the present government and the anointing of Mr Corbyn to preside over the chaos, while John McDonnell would try to enact some of his socialist plans. This is no longer an impossibility, with Dr Fox, Mr Davis and Boris Johnson working so hard to achieve the disaster that they cannot understand.
Meanwhile, the vicious charade of bitcoin continues. The 'price' of this nonentity is continuing to rise, giving strength to some of the unknown number of hundreds of other cryptocurrencies that are now on offer. An ever-wider range of investors, fearful of the very high level to which the world's leading stock indeces have climbed, have 'diversified' some of their holdings into these fanciful 'assets'. Some expect that [whatever they may say now] the central banks might have to buy cryptocurrencies to prop up the market: as they have propped up derivatives and other bets that existed before the crash in 2008. If the central banks do shore up the whole rotten fantasy, the real-world economy will be hammered even harder than it has been since 2008.
The prospect for Britain, host to the London market, is especially hazardous. Warren Buffer called derivatives 'weapons of mass destruction' but they have have been protected and the market in them has continued to grow. The traders in, and owners of, those assets remain complacent: that is what gives confidence to the cryptocurrency speculators. Real people have good cause to be worried; and Corbyn's communist-inspired views give no reassurance at all.
Showing posts with label markets. Show all posts
Showing posts with label markets. Show all posts
Tuesday, 28 November 2017
Sunday, 6 August 2017
Politics, Economics and Science
There are degrees that purport to qualify their graduands in 'Political Science': there are even some professorships under that title in British universities. That there is some degree of scientific precision in some aspects of the study of politics has been proved in recent British general elections, where 'Exit Polls' that systematically ask voters how they have actually voted have displayed an astonishing degree of accuracy; as demonstrated 24 hours later when all the votes are counted. I describe this accuracy as "astonishing" because it contrasts with Opinion Polls conducted right down to the day before the election, which are often wildly wide of the mark; thus, politicians and commentators who rely on them can grossly be misled, as were most of both those groups when the Tories' chances were over-rated and Labour's popularity was grossly under-reported in the polls before the election this year. This appears to show that people are in large measure unsure how to vote [or whether they will vote] until the last minute, while it can be inferred that many do not tell the truth in advance of their casting their ballots. After voting, people seem more confident that they can not be swayed in their decision-making by the lift of the questioner's eyebrow or their sniff of disapproval; so then they tell the truth, and the statisticians and psychologists who set and assess the actual questions to be asked are vindicated in the precise methods that they use.
The scope of 'Political Science' is much wider than this, of course. Where it combines statistical rigour with sound social analysis or experimentally validated psychology, interesting and potentially useful data are produced. But where it attempts to explain the underlying factors which make a population of humans behave in this way or that to determine the direction of government it can only follow the conclusions presented by sociology, psychology or history: and within each of those disciplines there is no agreement on what are the rock-bottom principles emergent from the study that should be followed by government with the same degree of authority as applies to Botany, Geology or Medical Science. There are, of course, fundamental disputes within the natural sciences; but there is also a sufficient consensus to validate measures that are taken to support public health, safe transport and the control of thousands of potentially dangerous substances.
Politicians with some degree of common sense - and many such people still exist, though their expression of their views is often limited by the need to have the support of their party at the next election - make a mix-and-match pragmatic personal portfolio of ideas drawn from the natural sciences, and from academic politics, history, psychology and sociology; and accept that they must be willing to change their understanding in line with new facts [including new false interpretations that capture the public mood]. This inner assessment of the situation is necessarily combined with what the electorate in the particular constituency where the politician is based understand and want. This is a precarious situation to be in and politicians usually recognise their vulnerability within the nexus of shifting popular opinion.
The biggest intellectual problem that many politicians face is that of Economics: the pseudo-science that has been captured by the Econocracy, the hegemonic advocates of the crazy dogma that markets can become so developed - on their own - that they produce results that could not be bettered by any amount of detailed direction from the political machine. The tragedy to which that dogma has given rise is that in the countries that have partially opened up their markets to untrammeled competition it has increasingly become apparent that untrammeled [or even relatively unrestricted] free operation of markets conduces against humans having an inner sense of wellbeing. This is now the very nub of political debate in the USA and in the United Kingdom, and must be a major theme in this blog for the next few days.
The scope of 'Political Science' is much wider than this, of course. Where it combines statistical rigour with sound social analysis or experimentally validated psychology, interesting and potentially useful data are produced. But where it attempts to explain the underlying factors which make a population of humans behave in this way or that to determine the direction of government it can only follow the conclusions presented by sociology, psychology or history: and within each of those disciplines there is no agreement on what are the rock-bottom principles emergent from the study that should be followed by government with the same degree of authority as applies to Botany, Geology or Medical Science. There are, of course, fundamental disputes within the natural sciences; but there is also a sufficient consensus to validate measures that are taken to support public health, safe transport and the control of thousands of potentially dangerous substances.
Politicians with some degree of common sense - and many such people still exist, though their expression of their views is often limited by the need to have the support of their party at the next election - make a mix-and-match pragmatic personal portfolio of ideas drawn from the natural sciences, and from academic politics, history, psychology and sociology; and accept that they must be willing to change their understanding in line with new facts [including new false interpretations that capture the public mood]. This inner assessment of the situation is necessarily combined with what the electorate in the particular constituency where the politician is based understand and want. This is a precarious situation to be in and politicians usually recognise their vulnerability within the nexus of shifting popular opinion.
The biggest intellectual problem that many politicians face is that of Economics: the pseudo-science that has been captured by the Econocracy, the hegemonic advocates of the crazy dogma that markets can become so developed - on their own - that they produce results that could not be bettered by any amount of detailed direction from the political machine. The tragedy to which that dogma has given rise is that in the countries that have partially opened up their markets to untrammeled competition it has increasingly become apparent that untrammeled [or even relatively unrestricted] free operation of markets conduces against humans having an inner sense of wellbeing. This is now the very nub of political debate in the USA and in the United Kingdom, and must be a major theme in this blog for the next few days.
Monday, 29 October 2012
Millicent Fawcett: Political Economist
Over the past few weeks I have been analysing Political Economy for Beginners [1870] by Millicent Fawcett, who is now famous as one of the originators of the modern feminist movement. While it is the modern myth that these women were all militants, hostile to the political system as it was before the enfranchisement of women, the history of Dame Millicent [as she became] was very different from that model. The little book on which I have been working was published in the year when primary education was made available at the state's expense to all children: compulsory attendance quickly followed. Millicent was at that time married to Henry Fawcett, a remarkable man who was Professor of Political Economy in Cambridge University, a Member of Parliament and a minister in the Liberal government. Although blinded in an accident in his 'twenties he pursued both his academic and political careers with great effect: so it is almost unremarkable that he married an exceptional woman. After Henry's relatively early death she continued to research and to write on economic and social issues, and earned huge respect in political circles and in society.
When the British government came under heavy international criticism for confining women and children in concentration camps during the Boer War, Mrs Fawcett was invited to go to South Africa to inspect the camps and to comment. She was chosen because of her reputation for integrity with intelligence. Her report was devastating and led to a rapid change of policy. Her example was heavily quoted as evidence of the worthiness of women to participate fully in the political process; and I believe that she would be astonished if she could see that even today women are heavily unrepresented on the judicial bench, in the cabinet and in the boardrooms of major businesses. There is plenty of work for the Fawcett Society still to do!
It is an incidental tragedy that the Governor of German South-West Africa [now Namibia] was called Goering: in the nineteen thirties his son Hermann, Hitler's closest associate, attributed the concept of Nazi concentration camps to the British original which Millicent Fawcett had condemned.
The full text of her first book is available on line, thanks to the University of California Library. I think that it is extremely important, both because of the authority and distinction of its author and because of the exact time when it was written and developed through a large number of successive editions. Mrs Fawcett was convinced of the validity of basic doctrines in nineteenth-century 'classical' Political Economy that were soon to be set aside by the new wave of Economists. The leader of the new movement in the United Kingdom [and, indeed, the entire English-speaking world] was the man who was appointed to the late Henry Fawcett's professorship in 1884, Alfred Marshall. There had been two strong candidates for the job: Marshall, who wanted to present the new 'Economics' as a 'science'; and William Cunningham who had effectively invented analytical Economic History. Cunningham would have been very firmly an exponent of Political Economy [as was Mrs Fawcett]: elucidating the principles that politicians should understand and incorporate into public policy in order to create the framework within which the economy could thrive and grow. Marshall shared with several thinkers of his generation a belief that Marxism was a real and present danger to the existing social, political and intellectual order, and since Marx had used selected principles from Political Economy to formulate his hostile analysis of 'capitalism' Marshall was determined to present a wholly different view of the economy.
During the past 150 years Economics has dominated thinking and policy about economic issues in the west; and its accumulated effect - especially in the United Kingdom - has been catastrophic. Economics has concentrated on refining a normalised model of market processes, combined with an increasingly frenetic assertion of the dogma that free markets are the ideal structure of an economy while all the evidence of the real world has indicated precisely the opposite. The ultimate catastrophe to which the Economic establishment made a major contribution was the rapid growth of markets that the impotent and uncomprehending regulators simply did not attempt to understand. Those markets - mostly in intangible 'products' which, in some cases, defied clear definition - produced the ultimate [almost terminal] market failure in 'finance' that came within an ace of undermining the entire Atlantic Economy. Firms passed from being notionally untrammelled entities to being nationalised or subject by government and state agencies to forced mergers into entities that were abjectly dependent on government and central bank funding.
If the regulators, central bankers and ministers of finance who held office between 1980 and 2007 had been educated in the principles that Millicent Fawcett elucidated they would have prevented the banks and securities firms from doing what they did. In the aftermath of the crash one leading British regulator said that a significant proportion of the activity that had gone on in the City of London and in other financial marketplaces was of no material benefit to the real economy: and he attracted a chorus of approval. Mrs Fawcett had been explicit on the differentiation of productive from unproductive labour.
While the essential principles of Political Economy, as elucidated by Millicent Fawcett, can be applied directly to the contemporary economy, some of the expression and most of the examples are incomprehensible except to expert historians. For example, her analysis of money supply was set in the context of the full gold standard, which has no relevance to the post-1931 world. I have therefore constructed a guide to the text, with extensive quotations that elucidate all the key principles in Millicent's words. I am now checking the guide for errors; and would welcome any offer to do some proof-reading or reality-checking.
Publication on-line soon!
When the British government came under heavy international criticism for confining women and children in concentration camps during the Boer War, Mrs Fawcett was invited to go to South Africa to inspect the camps and to comment. She was chosen because of her reputation for integrity with intelligence. Her report was devastating and led to a rapid change of policy. Her example was heavily quoted as evidence of the worthiness of women to participate fully in the political process; and I believe that she would be astonished if she could see that even today women are heavily unrepresented on the judicial bench, in the cabinet and in the boardrooms of major businesses. There is plenty of work for the Fawcett Society still to do!
It is an incidental tragedy that the Governor of German South-West Africa [now Namibia] was called Goering: in the nineteen thirties his son Hermann, Hitler's closest associate, attributed the concept of Nazi concentration camps to the British original which Millicent Fawcett had condemned.
The full text of her first book is available on line, thanks to the University of California Library. I think that it is extremely important, both because of the authority and distinction of its author and because of the exact time when it was written and developed through a large number of successive editions. Mrs Fawcett was convinced of the validity of basic doctrines in nineteenth-century 'classical' Political Economy that were soon to be set aside by the new wave of Economists. The leader of the new movement in the United Kingdom [and, indeed, the entire English-speaking world] was the man who was appointed to the late Henry Fawcett's professorship in 1884, Alfred Marshall. There had been two strong candidates for the job: Marshall, who wanted to present the new 'Economics' as a 'science'; and William Cunningham who had effectively invented analytical Economic History. Cunningham would have been very firmly an exponent of Political Economy [as was Mrs Fawcett]: elucidating the principles that politicians should understand and incorporate into public policy in order to create the framework within which the economy could thrive and grow. Marshall shared with several thinkers of his generation a belief that Marxism was a real and present danger to the existing social, political and intellectual order, and since Marx had used selected principles from Political Economy to formulate his hostile analysis of 'capitalism' Marshall was determined to present a wholly different view of the economy.
During the past 150 years Economics has dominated thinking and policy about economic issues in the west; and its accumulated effect - especially in the United Kingdom - has been catastrophic. Economics has concentrated on refining a normalised model of market processes, combined with an increasingly frenetic assertion of the dogma that free markets are the ideal structure of an economy while all the evidence of the real world has indicated precisely the opposite. The ultimate catastrophe to which the Economic establishment made a major contribution was the rapid growth of markets that the impotent and uncomprehending regulators simply did not attempt to understand. Those markets - mostly in intangible 'products' which, in some cases, defied clear definition - produced the ultimate [almost terminal] market failure in 'finance' that came within an ace of undermining the entire Atlantic Economy. Firms passed from being notionally untrammelled entities to being nationalised or subject by government and state agencies to forced mergers into entities that were abjectly dependent on government and central bank funding.
If the regulators, central bankers and ministers of finance who held office between 1980 and 2007 had been educated in the principles that Millicent Fawcett elucidated they would have prevented the banks and securities firms from doing what they did. In the aftermath of the crash one leading British regulator said that a significant proportion of the activity that had gone on in the City of London and in other financial marketplaces was of no material benefit to the real economy: and he attracted a chorus of approval. Mrs Fawcett had been explicit on the differentiation of productive from unproductive labour.
While the essential principles of Political Economy, as elucidated by Millicent Fawcett, can be applied directly to the contemporary economy, some of the expression and most of the examples are incomprehensible except to expert historians. For example, her analysis of money supply was set in the context of the full gold standard, which has no relevance to the post-1931 world. I have therefore constructed a guide to the text, with extensive quotations that elucidate all the key principles in Millicent's words. I am now checking the guide for errors; and would welcome any offer to do some proof-reading or reality-checking.
Publication on-line soon!
Friday, 9 December 2011
The EU and the Eurozone. What Should be Done Next?
Superficially, the easiest thing that could have been done by the EU in the last 24 hours would be to force Germany to open its coffers to 'save' the euro by buying all the bonds that may be issued or guaranteed by the puppet governments that have been installed in Greece and Italy, and may be installed in other economically failed countries. The spokespersons for the 'markets' - and representatives of the Obama Administration - will continue to press for a 'solution' on these lines whenever it appears that the new solution to the euro crisis is open to question.
In the 'markets' so-called hedge funds and other speculative investors have been stockpiling at-risk bonds when they could buy them cheaply, in the expectation that Germany would eventually be forced to 'support' them at higher prices. Germany has declared its commitment to the European Union, and to the euro, for decades and the marketeers think that pride and stubbornness will not let them back off from supporting the new dispensation. The Obama team of died-in-the-wool pre-2008 bankers have done pretty well to consolidate the position of their former employers since the big bail-out of the rationalised banks that were cobbled together in 2007-9.But they are well aware that the ramshackle result could begin to crack if the euro was disrupted, causing the US banks' holdings of euro debt to loose value. The US has been calling-in the moral obligation that is supposedly owed by Europe for US investment in defence during the cold war of 1947 to 1991. Time has moved on. The sensibly selfish basis for US policy, past and present, is clearly recognised and contemporary Europeans do not recognise a continuing obligation.
Germany in 2011-12 does not recognise an ongoing obligation specially to assist European countries that suffered occupation or destruction during the second world war. Huge reparations have been paid, the balance sheet has been cleared, and the anti-German current within Greek protest against financial stringency is self-defeating.
Germany should in no way feel obliged to assist a bankrupt state that got itself into the mess that its proconsular ruler is trying to resolve. Greece is uniquely in that perilous situation at this moment. The Greek people will suffer dramatically lower living standards for an indefinite future because Greek governments doled out more resources than the country had generated continuously for the past three decades. Though different parties won elections from time to time, each government had a popular mandate; and it is the misfortune of modern citizens in any state that they collectively carry responsibility for the accumulation of debts that the elctorate consented to being accumulated.Any Greek could have discovered that their huge salaries, early retirement ages and evasion of taxation were not only exceptional but also blatantly unaffordable when set against national economic data. The typical citizen may have chosen not to take cognisance of the facts: that dereliction alone stimulates fair-minded aliens to inhibit any sypathy for the unfortunate elderly who now have dramatically reduced living standards and no prospect of mitigation in their lifetime.
Economists have been allowed to dominate economic policy with the assertion that 'markets' are efficient. They have handed it down as 'scientific fact' that governments should so arrange affairs that markets are the drivers of the economy. This is utterly ludicrous. Markets are creations of human beings, and only have any life to the extent that human beings take part in them. The people exist under the protection of the state, they can make contracts because the state and its courts-of-law recognise them as legal persons. The companies that exist in markets are licensed to exist by the state. The contracts that people and companies make are only enforcible if the state's courts recognise them to be valid. The state has an unqualified precedence over any business structure and this is an inescapable fact: for Economists and their dupes to presume otherwise is profoundly dangerous.
People have an infinite capacity for cheating, crookery, and fraud; as much as they have the capacity to be creative in the arts and sciences. A few hundred people - mostly science graduates, many with PhDs - have become adepts in black arts that enable them to create derivatives and credit default swaps. They can - and some of them do - set up deals that are designed deliberately to exploit other market participants. They invent and trade in fantastic 'instruments' such as 'shadow shares' that enable a pension fund to put its money into bonds but in parallel with that to buy notional shares, with a promise that if the 'real' bonds fail and the notional shares retain value, then the firm that has sold the shadow share package is contractually obliged to give the pension fund value equivalent to the gap between the value of the bonds that they hold in comparison to the then value of the notional shares. The idea that any financial firm would be able to deliver on such a promise in the event of systemic market failure, without the sort of government support that the banks were given in 2008, is absurd. The contract - and the pension fund with it - would most probably be wiped out. But while the contract is operational [and untested] fees are paid to the conjurers, the pension fund managers get their salaries and the Trustees draw their fees or allowances: only the fund members stand to lose. The financial services providers have become even more blatant than they were before 2008 in the absurdity of the 'products' that they have offered; and the gullibility of their clientèle seems to be undiminished. The providers made Greek and Irish state debt appear to be sounder investments than they were, by enabling the holders of the bonds to 'hedge' those purchases with derivatives or ghost shares.
Markets that include such cajolery and sheer brass cheek among their trading methods, selling 'products' on which millions of peoples' future incomes depend which have no substance, are profoundly 'imperfect'. It is blatant that knowledge and understanding of the products and of the risks that are inherent in them are not equally understood by purchasers and the people who unknowingly depend on the outcome of the contracts. Essential rules of the system must be defined by the state, the traders must continue to be licensed by the state and the products must be subject to classification by the state. The infantile version of the Tobin Tax that has been proposed in the EU would have no significant impact in regulating the markets as they have evolved in London and New York. It would primarily be a regressive imposition on the day-to-day bank and insurance transactions of the mass of the population. If 'complex products' are to continue to be regulated as financial assets, much more intrusive regulation - more comprehensive than what is currently being proposed by the EU financial regulator - is needed.
But a completely different approach would be more sensible. At the very least, derivatives and most 'swaps'.and many futures and other 'asset classes' should be classified as betting slips; which is the simple truth. As bets, they should be regulated in the UK by the Gambling Commission, not the Financial Services Authorities. They should be subject to gambling tax and not susceptible to regulation by the EU Financial Services Commissioner and his empowering legislation. By trying to exempt Britain - specifically the 'City' - from any new restrictive EU financial services regulation David Cameron has had a Pyrrhic victory. He has not got any significant exemption for British financial services [which he repeatedly points out is 10% of the economy] and he does not have any inkling of the basic fact that much of the 'industry' that he is trying to protect is not finance, but gaming. The appropriate regulatory change should speedily be implemented: then the EU system of financial regulation would not apply.
It would make an amazing positive change to the continentals' perception of Britain and of the activities of the City if the suggested reclassification were to be carried out. If the British Treasury and Cabinet Office will ever be capable of taking this point, they can frame a regulatory regime that will be seen by the rest of the EU as exemplary. Britain's detractors would be wrong-footed and the rehabilitation of the UK would be facilitated. The City need not suffer any great loss of business, insofar as the players can convince their clients that the betting slips that they have been buying to hedge their investments will still serve the same purposes under a more appropriate and honest regulatory regime. I have only a scintilla of doubt that the City lobbies will oppose any reclassification of their 'proprietary' activities because their pride will be offended by their being classified as bookmakers and their greed will baulk at paying higher taxes on a different basis and possibly experiencing some loss of business. But the City and the government have a golden opportunity to escape the very real threat that the new Europe will much more massively deflate the City's income under its tightening and uncomprehending regulatory regime.
Away to the west Dublin has developed huge 'financial services' expertise that is currently underemployed. A swift-footed Irish government - safe within the carapace of the revamped eurozone - can go a significant way to develop a high-level bulk betting regime that could capture a great deal of the market that the City of London stands to loose. That threat [and the possibility that the Swiss may dabble in these markets] may help to persuade the City that here is a way forward.
In the 'markets' so-called hedge funds and other speculative investors have been stockpiling at-risk bonds when they could buy them cheaply, in the expectation that Germany would eventually be forced to 'support' them at higher prices. Germany has declared its commitment to the European Union, and to the euro, for decades and the marketeers think that pride and stubbornness will not let them back off from supporting the new dispensation. The Obama team of died-in-the-wool pre-2008 bankers have done pretty well to consolidate the position of their former employers since the big bail-out of the rationalised banks that were cobbled together in 2007-9.But they are well aware that the ramshackle result could begin to crack if the euro was disrupted, causing the US banks' holdings of euro debt to loose value. The US has been calling-in the moral obligation that is supposedly owed by Europe for US investment in defence during the cold war of 1947 to 1991. Time has moved on. The sensibly selfish basis for US policy, past and present, is clearly recognised and contemporary Europeans do not recognise a continuing obligation.
Germany in 2011-12 does not recognise an ongoing obligation specially to assist European countries that suffered occupation or destruction during the second world war. Huge reparations have been paid, the balance sheet has been cleared, and the anti-German current within Greek protest against financial stringency is self-defeating.
Germany should in no way feel obliged to assist a bankrupt state that got itself into the mess that its proconsular ruler is trying to resolve. Greece is uniquely in that perilous situation at this moment. The Greek people will suffer dramatically lower living standards for an indefinite future because Greek governments doled out more resources than the country had generated continuously for the past three decades. Though different parties won elections from time to time, each government had a popular mandate; and it is the misfortune of modern citizens in any state that they collectively carry responsibility for the accumulation of debts that the elctorate consented to being accumulated.Any Greek could have discovered that their huge salaries, early retirement ages and evasion of taxation were not only exceptional but also blatantly unaffordable when set against national economic data. The typical citizen may have chosen not to take cognisance of the facts: that dereliction alone stimulates fair-minded aliens to inhibit any sypathy for the unfortunate elderly who now have dramatically reduced living standards and no prospect of mitigation in their lifetime.
Economists have been allowed to dominate economic policy with the assertion that 'markets' are efficient. They have handed it down as 'scientific fact' that governments should so arrange affairs that markets are the drivers of the economy. This is utterly ludicrous. Markets are creations of human beings, and only have any life to the extent that human beings take part in them. The people exist under the protection of the state, they can make contracts because the state and its courts-of-law recognise them as legal persons. The companies that exist in markets are licensed to exist by the state. The contracts that people and companies make are only enforcible if the state's courts recognise them to be valid. The state has an unqualified precedence over any business structure and this is an inescapable fact: for Economists and their dupes to presume otherwise is profoundly dangerous.
People have an infinite capacity for cheating, crookery, and fraud; as much as they have the capacity to be creative in the arts and sciences. A few hundred people - mostly science graduates, many with PhDs - have become adepts in black arts that enable them to create derivatives and credit default swaps. They can - and some of them do - set up deals that are designed deliberately to exploit other market participants. They invent and trade in fantastic 'instruments' such as 'shadow shares' that enable a pension fund to put its money into bonds but in parallel with that to buy notional shares, with a promise that if the 'real' bonds fail and the notional shares retain value, then the firm that has sold the shadow share package is contractually obliged to give the pension fund value equivalent to the gap between the value of the bonds that they hold in comparison to the then value of the notional shares. The idea that any financial firm would be able to deliver on such a promise in the event of systemic market failure, without the sort of government support that the banks were given in 2008, is absurd. The contract - and the pension fund with it - would most probably be wiped out. But while the contract is operational [and untested] fees are paid to the conjurers, the pension fund managers get their salaries and the Trustees draw their fees or allowances: only the fund members stand to lose. The financial services providers have become even more blatant than they were before 2008 in the absurdity of the 'products' that they have offered; and the gullibility of their clientèle seems to be undiminished. The providers made Greek and Irish state debt appear to be sounder investments than they were, by enabling the holders of the bonds to 'hedge' those purchases with derivatives or ghost shares.
Markets that include such cajolery and sheer brass cheek among their trading methods, selling 'products' on which millions of peoples' future incomes depend which have no substance, are profoundly 'imperfect'. It is blatant that knowledge and understanding of the products and of the risks that are inherent in them are not equally understood by purchasers and the people who unknowingly depend on the outcome of the contracts. Essential rules of the system must be defined by the state, the traders must continue to be licensed by the state and the products must be subject to classification by the state. The infantile version of the Tobin Tax that has been proposed in the EU would have no significant impact in regulating the markets as they have evolved in London and New York. It would primarily be a regressive imposition on the day-to-day bank and insurance transactions of the mass of the population. If 'complex products' are to continue to be regulated as financial assets, much more intrusive regulation - more comprehensive than what is currently being proposed by the EU financial regulator - is needed.
But a completely different approach would be more sensible. At the very least, derivatives and most 'swaps'.and many futures and other 'asset classes' should be classified as betting slips; which is the simple truth. As bets, they should be regulated in the UK by the Gambling Commission, not the Financial Services Authorities. They should be subject to gambling tax and not susceptible to regulation by the EU Financial Services Commissioner and his empowering legislation. By trying to exempt Britain - specifically the 'City' - from any new restrictive EU financial services regulation David Cameron has had a Pyrrhic victory. He has not got any significant exemption for British financial services [which he repeatedly points out is 10% of the economy] and he does not have any inkling of the basic fact that much of the 'industry' that he is trying to protect is not finance, but gaming. The appropriate regulatory change should speedily be implemented: then the EU system of financial regulation would not apply.
It would make an amazing positive change to the continentals' perception of Britain and of the activities of the City if the suggested reclassification were to be carried out. If the British Treasury and Cabinet Office will ever be capable of taking this point, they can frame a regulatory regime that will be seen by the rest of the EU as exemplary. Britain's detractors would be wrong-footed and the rehabilitation of the UK would be facilitated. The City need not suffer any great loss of business, insofar as the players can convince their clients that the betting slips that they have been buying to hedge their investments will still serve the same purposes under a more appropriate and honest regulatory regime. I have only a scintilla of doubt that the City lobbies will oppose any reclassification of their 'proprietary' activities because their pride will be offended by their being classified as bookmakers and their greed will baulk at paying higher taxes on a different basis and possibly experiencing some loss of business. But the City and the government have a golden opportunity to escape the very real threat that the new Europe will much more massively deflate the City's income under its tightening and uncomprehending regulatory regime.
Away to the west Dublin has developed huge 'financial services' expertise that is currently underemployed. A swift-footed Irish government - safe within the carapace of the revamped eurozone - can go a significant way to develop a high-level bulk betting regime that could capture a great deal of the market that the City of London stands to loose. That threat [and the possibility that the Swiss may dabble in these markets] may help to persuade the City that here is a way forward.
Friday, 11 November 2011
Nudges, Bribes and Good Sense
The UK government has announced the imminent reduction of subsidies to installers of solar panels on houses. The subsidies have created thousands of jobs in a new 'market' that has been totally phoney. The government gives a guaranteed price, over several years, for electricity delivered from their homes to the National Grid, to households that install the panels. Such a large number of people opted to take the money, that it became unaffordable. Now 'industry leaders' are moaning that halving of the subsidies will 'cost' many of the jobs that would never have been created in the sort of 'market economy' that features in Economics textbooks.
Since 2007 the banking business in Europe and the USA has been in a similar position to the UK solar panel business. It has been subsidised by governments and Central Banks. Governments have bought shares in banks to save them from bankruptcy. Central Banks - led by the US Federal Reserve and the Bank of England; and now followed by the European [Eurozone] Central Bank - have created 'money' to buy bonds from banks, enabling them to meet their obligations: on the assumption that if this did not happen the banks would be bankrupted.
The difference between the two situations is that the solar panel business has been doled out tens of millions, while the banks have had tens of billions. So the British government feels able to pull the plug on the solar panel business, but not on the banks.The relatively modest bribes to encourage people to install 'green' energy cost too much on the scale that is applied to that sector: by contrast it would appear that the bribes required by the banks are apparently infinite.Since subsidies do not put any constraint on the banks, governments have tried 'nudges': hints, guidance, threats of organisational changes and the threat of a 'Tobin tax' [previously examined in this blog]. None of that has worked. So the time has come - is long overdue - for sensible direct oversight of banks' activities.
Governments are not subject to the banks: the banks depend on the state. The contracts that banks make, and the debts that people and firms owe to them, are only enforceable under the law that is provided by the state. The money in which banks trade, in which they record their assets and liabilities, is the property and the creature of the state. Governments try to tinker with the 'markets' in which the banks gamble with the 'money' that states and Central Banks have given them. They are wasting their time.
Markets have no ultimate power: their existence depends on governments. Yet the traders in the markets are arrogantly telling countries 'to get their act together'. This is a totally wrong perspective. Governments need to recognise their powers and the markets' weakness; and begin to protect the savings and the jobs of the people they purport to represent.
Since 2007 the banking business in Europe and the USA has been in a similar position to the UK solar panel business. It has been subsidised by governments and Central Banks. Governments have bought shares in banks to save them from bankruptcy. Central Banks - led by the US Federal Reserve and the Bank of England; and now followed by the European [Eurozone] Central Bank - have created 'money' to buy bonds from banks, enabling them to meet their obligations: on the assumption that if this did not happen the banks would be bankrupted.
The difference between the two situations is that the solar panel business has been doled out tens of millions, while the banks have had tens of billions. So the British government feels able to pull the plug on the solar panel business, but not on the banks.The relatively modest bribes to encourage people to install 'green' energy cost too much on the scale that is applied to that sector: by contrast it would appear that the bribes required by the banks are apparently infinite.Since subsidies do not put any constraint on the banks, governments have tried 'nudges': hints, guidance, threats of organisational changes and the threat of a 'Tobin tax' [previously examined in this blog]. None of that has worked. So the time has come - is long overdue - for sensible direct oversight of banks' activities.
Governments are not subject to the banks: the banks depend on the state. The contracts that banks make, and the debts that people and firms owe to them, are only enforceable under the law that is provided by the state. The money in which banks trade, in which they record their assets and liabilities, is the property and the creature of the state. Governments try to tinker with the 'markets' in which the banks gamble with the 'money' that states and Central Banks have given them. They are wasting their time.
Markets have no ultimate power: their existence depends on governments. Yet the traders in the markets are arrogantly telling countries 'to get their act together'. This is a totally wrong perspective. Governments need to recognise their powers and the markets' weakness; and begin to protect the savings and the jobs of the people they purport to represent.
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.
Subscribe to:
Posts (Atom)