Opposition fear aids government's ideologues

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Between the plans to end the furlough scheme and the proposal that banks should force into bankruptcy any company that is unable to repay its Covid-19 related loans, the estimate that there will be only 3 million unemployed in the UK by the end of the year looks like an increasingly optimistic scenario. The Chancellor is actually right to argue that the government cannot and should not protect all jobs for ever, and even right when he argues that some of the jobs where people have been furloughed no longer exist in any meaningful sense. We have zombie jobs in zombie companies, no doubt at all. What he does not know – and can’t know – is which jobs those are. Neither he nor anyone else can know with any degree of certainty which companies (and therefore jobs) will no longer be viable in a post-Covid world. What that means is that the actions he is taking (or in the case of refusing to extend furlough, not taking) will kill not only those companies which are no longer going to be viable, but many others which could potentially remain viable. Trying to force people back into work before the demand for the goods and services which they provide has recovered is another element of an overall policy which seems designed to maximise rather than minimise the numbers of jobs lost. His insistence that tax rises and/or spending cuts will be necessary because of the size of the deficit – an insistence based on dogma and ideology rather than economic necessity – will also add to the toll of jobs.

In that context, the suggestion gaining some support in Tory ranks that the pension age should be increased to 75 is the complete reverse of what is needed. What the economy needs is for demand to recover, and that means not only that the pandemic is seen to be under control, but also that people have both the confidence and the financial wherewithal to spend. Increasing the rate of bankruptcies and joblessness and delaying the pay out of pensions all have precisely the reverse effect. If, on the other hand, the state pension were to be doubled (which would bring it up from the bottom of the world’s developed economies and closer to the average) and the pension age reduced to 60 at the same time, the effects would be very different. Nobody would (or should) be forced to retire at 60, but many of those about to lose their jobs would then have the financial security to be able to make that choice if they wished. That would reduce the number of people seeking jobs (and therefore improve the chances that those looking for jobs might find them), and give more people the confidence to spend, thereby boosting demand and potentially creating more jobs.

It won’t happen, of course. Not because it can’t happen; the government could implement such a policy tomorrow if it wished to do so. One thing that the pandemic has demonstrated is that a government which enjoys a sufficient degree of monetary sovereignty can do almost anything up to the point at which its spending causes inflation. No, it won’t happen because too many politicians, from multiple parties, have invested too much effort and credibility over too long a period promoting the myth that deficits are inherently bad and that governments must balance the books, just like households. What that means is that the scale of the recession, the level of corporate bankruptcy, the numbers of unemployed people, and the level of relative poverty are all deliberate political choices being made by the UK government. Worse, they are being implicitly supported by the official opposition which lacks the courage or ability to point out the fallacy in the household analogy. Opposition politicians who are afraid to challenge because they fear the ‘how will you pay for it?’ question are almost as much to blame as those implementing the policies, because they are perpetuating a myth which serves only the wealthy and powerful.

Being right for the wrong reasons

Tweet I find it hard to disagree with Ed Miliband’s assertion that banks have become too large and financial power too concentrated in the hands of a few.  That alone is reason enough to want to see some of them broken up into smaller banks.

I’m far less convinced about his apparent belief that the additional competition which he expects to result will bring benefits to businesses, such as more lending.  The faith in “competition” as the answer to just about everything is what gave us the marketization of the health service – perhaps he isn’t so far away from Thatcher and Blair as he’d like us to believe.

Certainly, having more and smaller banks will lead to more competition; it’s the leap beyond that to the conclusions about who would benefit that I would doubt.  Smaller banks are likely to take less risk rather than more; they’ll be competing for the safest, most profitable, customers, not the riskiest ones.  And if banks aren’t lending to businesses at the moment, it isn’t because they can’t – it’s because of their assessment of the likely levels of risk and return.

Paradoxically, Miliband’s advocacy of breaking up the banks may actually have the opposite effect of that he claims.  Insofar as breaking up the banks is one of his better ideas, it’s for completely different reasons than those he gives.

Break up the banks

Tweet In calling for the break-up of some of the banks, the Governor of the Bank of England is talking a great deal of sense. It seems unlikely, however, that either a Labour or a Tory Government will take much notice of his call.

Following the Tory 'Big Bang' of deregulation, the distinction between the risky segment of merchant banking and the less risky section of high street banking became blurred. The two were allowed to merge - something which had previously been banned - and the result was that the risky element succeeded in gambling away the stability of the high street element.

We as taxpayers have had to bail them out. But it was mostly the collapse of the high street banks that we really had to avert; if the two hadn't been allowed to merge, the government would have found it a great deal easier to stand back and watch the gamblers take their richly deserved hit. And if they hadn't had the resources of our day to day banks to play with, perhaps the level of the damage they did would have been lower anyway.

Splitting the two segments back out makes eminent sense – and is by far the best way to ensure that the speculators do not destroy the financial services sector again, as they seem not only likely to do, but positively keen to do, if left to their own devices.

Different Planets

Tweet It seems that one of the hedge fund managers who made a fortune last year by short-selling British banks, and thereby helping to wreck the economy, is now planning to emigrate. He gives two reasons - the new higher rate of tax, and the proposed new regulations on hedge funds. Other hedge fund managers are apparently thinking along similar lines.

Now, many might feel that a person who managed to pay himself £28 million last year might feel able to afford to contribute a little more to the tax revenues of the government to put the economy right. But I find myself wondering how much tax he's actually paying in the first place.

His company, like many other similar companies, is a Limited Liability Partnership rather than a plc. LLPs are effectively exempt from Corporation Tax, so the company probably paid no tax at all on its profits. And generally speaking, profits from this sort of activity are treated by the Inland Revenue as capital gains rather than earned income, and therefore attract a lower level of tax anyway. So, all in all, the new rate of tax probably won't affect him very much.

As for the other reason, he apparently feels that his 'industry' has been abandoned by the Government, who are allowing the wicked French and Germans to drive through new regulations which will prevent his company and others like it from doing some of the things that they were doing previously.

Presumably these people feel that once we as taxpayers have finished bailing out the banks which the short sellers helped to wreck, they should be allowed to start all over again. I think not.

It's also interesting that some of these companies describe their activity as 'wealth generation'. It is not - it creates no new wealth at all, it merely redistributes existing wealth. Mostly redistributing our wealth to themselves.

Don't tell the banks

Tweet It often seems that, as fast as I get my various spam filters set up to avoid the stuff, so the spammers find some way of getting around the controls, and their missives get through. I've never really understood why they think someone is more likely to buy replica watches or Viagra just because the title indicates that the e-mail content will be something completely different.

Anyway, one of the successful ones to get through today offers me a way of beating the credit crunch and getting a 215% return on my investment. It's obviously too good to be true, of course. But I do hope that they haven't succeeded in getting through the spam filters at any of the banks – based on recent performance, they might just fall for it.

Bolting stable doors

Tweet The news that some of our most respectable banks have been completely taken in by what appears to be the most gigantic pyramid selling scam in history is pretty alarming, but is just another indication of the way that corporate and personal greed can blind people to reality.

Not everyone was taken in, of course. As the Sunday Times pointed out, a number of investors were savvy enough to ask how on earth someone could manage a return of 1% to 1.2%, month in month out, and never have a down month. One even said "We could never quite work out what it was that he did". But some major banks ploughed their - our - money in regardless, seeing only an incredibly high level of return and wanting a piece of the action. The net losses from this latest example of greed could be as high as £33billion.

I have to say that I have little confidence that this is the last bubble which will emerge from the wreckage of the world's financial systems. The way that people were taken in over the securitisation of dodgy sub-prime debts was bad enough; but if they have also fallen for a pyramid selling scheme on this scale, it seems highly probable that other problems will emerge as accountants (and hopefully the police) pore over the debris.

That gives me an issue with the government's latest scheme to pump more into the banking system by purchasing 'assets' from the banks. I don't know – and nor am I convinced that anyone else does – whether these 'assets' are actually worth anything, let alone the large sums which we as taxpayers will be paying for them. The only thing of which I am certain is that the amount of 'assets' being traded on the markets is significantly higher than the amount of real, tangible value underpinning them – according to some estimates, possibly by a factor of as much as 10:1.

At the bottom of all this mess are two main factors, it seems to me. The first of those is greed – the pursuit of unrealistic returns which out-perform the market, and which are believable only by suspending critical judgement. And the second is that the financial instruments being traded on the world's financial markets have become too complex for most of the people trading in them – never mind the layman – to understand. Derivatives of derivatives; betting on the outcome of other people's bets – this type of market making serves the interests of only the few, and for them to gain, the rest of us have to lose.

We need to take the time to clean out the stable, not just bail out the banks, and do it thoroughly if we are to have a basis for rebuilding confidence. That means a great deal more regulation over what banks and other institutions can or cannot do, and a determined effort to purge the markets of the gamblers and speculators who think only of themselves. And it means an end to some of the overly-complex financial instruments which are at the root of recent problems.

In that context, the call by David Cameron for an inquiry into the causes of the financial crisis sounded praiseworthy at first – until I read the small print. In fact, for all the brave rhetoric, his call for those who have brought about the downfall of the banking system to face the music seems to be limited to those who can be proven guilty of actual illegal actions, which means that the vast majority of those who have behaved in an utterly irresponsible fashion would completely escape his clampdown. Not really surprising, given that his party removed the regulations which would have prevented some of the daftest decisions being taken. (Gordon Brown, of course, even lectured the rest of the world on why they should do the same. For either to criticise the other over the causes of the crisis is less than honest.)

I am absolutely certain that Cameron's call for those who have behaved irresponsibly to be punished will not extend to the gamblers and speculators who fund his party, for instance. And even after all that has happened recently, his friends and backers, the short-sellers, are still at it – undermining the UK economy by short-selling sterling in order to make large sums of money for themselves.

Properly run financial markets are an essential element of the world's financial systems; but markets should be there, first and foremost, to serve our collective needs. A market which operates primarily to allow the greedy to make profits at the expense of others is not serving the interests of the majority. Given that we all depend on the markets to keep the economy moving, we have every right to insist that they be run in a way which is transparent and honest and which serves our needs.

Is small still so beautiful?

Tweet For years, opponents of self-determination for Wales and Scotland have pointed to the size of the two countries and argued that we were too small to be independent. The almost inevitable response of both Plaid and the SNP has been to point out how successful a number of small countries have been in recent decades. It was a sensible and logical counter argument – with the added bonus of being entirely true.

Does the collapse of Iceland's banking system, and the near bankruptcy of Iceland change the argument? I don't see that it does, although perhaps Iceland is less likely to feature as a specific comparator for a while!

The problems with Iceland's banks are not in any way the result of the small size of the country. Banks have failed in large countries; banks have failed in small countries – size per se hasn't really been a factor one way or the other. What has been more important in determining whether and to what extent any country has been affected has been the nature and extent of regulation and control of the banking industry.

Would a larger country have been better able to sustain the collapse, or rather the cost of the bailout? It seems to me that the real determinant of how well any country, regardless of size, could cope with the sort of bail-outs which are happening at present is more to do with the size of the banking sector as a proportion of GDP than with the absolute size of the country or its population.

For all the glee with which some seem to have seized on the problems in Iceland, claiming that they have 'proved' that small countries are worse off, I really don't see that anything has been 'proved' beyond the need for all countries to ensure that their banks behave in a prudent fashion. The real danger is that people who concentrate on the size argument fail to learn that simple lesson.

Investment begins at home

Tweet The collapse and nationalisation of an Icelandic bank has obviously caused problems for a number of local authorities in Wales. Some people have suggested that the councils concerned have made unwise decisions about where they placed their funds. The leader of the WLGA, John Davies from Pembrokeshire has said that "It would be wrong to apportion blame. These investments are done with sound advice behind them.", and on this occasion, I agree with him. The bank appears to have met all the relevant lending criteria which councils are advised to follow, and councils have merely been attempting to obtain the best return that they could get.

What I do question, however, is whether it is right that we allow – let alone encourage - councils to place their deposits overseas at all.

I understand the councils' problems; they receive part of their money in large blocks, and they also have to keep prudent levels of reserves for emergencies. As tax-payers, I'm sure we would all prefer that that money was earning interest rather than sitting idle, and we'd want them to be getting the best return. The nature of such investment by councils is also relatively short term – individual councils need to be able to get their hands on the money fairly quickly.

Nevertheless, I still wonder. As I've argued before, I think the biggest economic problem we face in Wales is how to get our GDP per head up to at least the UK average level. I don't see how depositing Welsh assets in foreign banks, even in the short term, is making much of a contribution to that end.

Clearly, given the constraints upon them, councils cannot directly use these funds for long-term investments which would lock up the cash, but perhaps if the councils and other authorities involved were able to act in a more collective fashion, they would have more flexibility overall. The sums invested in Iceland are large, but they're still just a fraction of the total which has been deposited in banks by Welsh authorities. The overall total fluctuates throughout the year, reflecting cash flows, but on any day of the year, there is still a sizeable amount of our money invested in banks and building societies, some of them foreign.

Retaining the money within Wales might well lead to a marginally lower return on investment for the authorities; but if the result was an improvement in the Welsh economy, the overall result for taxpayers would be beneficial. Put another way, 'best rate of interest for authority X' may not be the same as best value for the Welsh economy.

Instead of individual councils stashing away their own cash, why not pool the temporary surpluses of all Welsh public authorities and use at least the core minimum which will always be present to invest in the Welsh economy?

Who's really being decisive?

Tweet Whilst Gordon Brown endlessly reiterates the mantra that he is acting decisively, the Irish government has actually taken action, rather than just talking about it. And Brown's response is to raise doubts about what they've done - when he should be following suit.

The Irish have, effectively, guaranteed the whole of the deposits made in their banks, whilst the UK government proposes only to raise the level of guarantee from £35,000 to £50,000. It's a meaningless distinction. In reality, as one Labour peer has already pointed out, the UK government, whatever it says about imposing a limit, is for all practical purposes committed to a full guarantee - so why not just be honest about it?

A few days ago, I raised the question of how 'global' the crisis really is, drawing attention to places like Spain which have been relatively unaffected. The Economist carried an interesting article about how Spain managed to avoid the crisis so well. This could have been us – but for the obsession with allowing the 'markets' to do whatever they wish.

And, if any more confirmation was needed that the time has come to clamp down on the speculators and gamblers who have already done so much damage, the headline in yesterday's Daily Express certainly provided it. Not content with forcing a bank onto the rocks, it seems that the speculators were actually trying to wreck the rescue deal for HBOS. Not because it was a bad deal, not because the deal isn't necessary, but purely because they could make a bit more money by doing so. It neatly sums up the (lack of) values which drive them.

The People's Flag

Tweet The first elections of which I have any memory are those of 1964 and 1966, when Harold Wilson ended 'thirteen years of Tory misrule'. That wasn't his only good line - I particularly liked the one about the 'white heat of the technological revolution'. I would have voted for him, if I hadn't been too young - although I knew better by 1970, when I was no longer so young.

One of the other big issues of the time was the re-nationalisation of the steel industry, an election promise which was implemented by Wilson. Nationalisation then was about taking state control of 'the commanding heights of the economy' - and it was intended to benefit the taxpayer. All very different from the 2008 version of nationalisation.

In my mind, the shift happened under the Heath government between 1970 and 1974, when the failing aero engine company, Rolls Royce was temporarily taken into public ownership. I still remember the little ditty of the day:

The People's flag is deepest blue
We're buying up Rolls Royce for you
But if it makes a profit then
We'll flog the b****** back again

This year we've seen probably the largest nationalisations in history as both the UK and US governments bail out large financial institutions at the taxpayers' expense. These are not nationalisations aimed at long-term benefits for the taxpayers; they are short term expedients, forced on governments because they simply cannot allow some institutions to fail.

I agree that the governments were left with little choice; they simply could not allow these companies to fail. We need to recognise, however, that these bail-outs must mark a very significant turning point in the way the economy is run. The argument for light or non-existent regulation, and for high rewards for successful companies and individuals, has long been based on the assumption that those who take risks should reap the rewards.

But what has now become clear is that, in some sectors of the economy at least, the risk is ultimately borne by us as taxpayers, not by the people making, or benefiting from, the bad decisions. I cannot think of a more graphic illustration of that than the news that the people in America who ran Lehman Brothers into the ground have had their bonuses protected as part of the takeover by Barclays.

Risk and reward is one long-standing principle – but there's another we should bear in mind; the one about paying the piper. If we as taxpayers are going to end up shouldering the risk, then I think we have every right to expect that governments will exert much more control over the activities which create the risk. For too long, governments have turned a blind eye to the insane way in which the financial markets have been turned into little more than casinos, where even the gamblers have often not understood the bets they've been placing.

And there's another thing that governments need to look at as well. Recent events have been driven in large measure by corporate and individual greed, and often highly short term greed at that. Would the temptation to take silly, excessive risks be as great if the rewards available for so doing were not themselves silly and excessive?

Another day, another bank

Tweet The collapse and subsequent takeover of HBOS seems to have been made inevitable by a run on the shares, which forced the price into a downward spiral. It looks as if the speculators and hedge funds who drive share prices down in order to make money for themselves and their clients have selected a victim and concentrated their fire upon it. According to the financial pundits, there is more to come. Other banks are likely to be targeted next.

I referred to the way in which this happens in a previous post. Speculators sell shares they don't own to drive down the price, then buy them back again at a lower price and pocket the difference. It's called 'short selling'. Most of them do this in a way which is, incredibly, entirely legal – they 'borrow' the shares from the real owners for the purpose. Some, however, sell shares they don't own without even bothering to borrow some. That's called 'naked short selling'. It's illegal in most jurisdictions, but that doesn't seem to prevent it happening.

It's another world for most of us, but it impinges directly on the real world in which we live when such speculation and gambling creates profit for the few, and economic woe for the many.

We need to look again at the way the financial markets are (or, more to the point, are not) regulated. It cannot be right that the banks and funds on which we all depend can be threatened by gamblers and speculators; and it cannot be right that the financial stability which most of us need and depend upon can be thrown into complete turmoil for the benefit of a few.

And it is utterly hypocritical and shameful for the Conservative Party to use the credit crunch as part of their campaigning whilst their local campaign is being almost entirely funded by the sort of activity which caused the crunch in the first place.

PS – This man seems to be criticising Labour for not having done more to undo the policies of his own party. I suppose that we should be at least a little grateful that he understands how damaging some Tory policies were. His criticism is a fair one – but coming from this source, it is just more hypocrisy. I do wonder whether he has told the Tory party in this area that he favours regulation which would stop the activities which fund their campaign.