They're sharks, not vigilantes

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Talk of ‘bond vigilantes’ has risen again this week in the light of a significant sell-off of government bonds, not just in the UK but in other major economies as well. The term is one we should reject absolutely: the word vigilante makes them sound like some sort of irregular financial police, doing their bit to keep the politicians in line and on track. It’s a complete misnomer – they’re profit-hungry sharks seeing an opportunity to make more profit for themselves by extracting interest from governments.

The first thing that we need to understand is that for every bond which is sold, someone has to buy it. No buyer = no sale. Those selling bonds are deliberately selling at a loss; someone who sells £1,000 worth of bonds (which the government has committed to redeeming for £1,000 at maturity) for £800 is crystalising a loss of £200. If the rate of interest on the bond is 3%, they would expect to receive £30 a year in interest. Since that amount of interest is fixed, the person buying the bond will now receive £30 a year on a holding they bought for £800 – a rate of interest of 3.75% - and still expect to get £1,000 back at maturity. Not a bad deal for them. It’s worth noting, though, that for all the talk of increasing rates of interest on bonds, the amount being paid by the government each year hasn’t changed by a single penny. A fall in the price of traded bonds does not cause an increase in the cost of existing borrowing.

So why would someone sell a safe asset for less than its nominal value? Well, if they believe that the government will have to respond by paying that higher rate of 3.75% on any new bonds issued, they will end up with a better-paying asset. And in that case, for new bonds issued, the cost of government borrowing has indeed increased. Both seller and buyer have managed to increase their income from interest paid on their bonds as a result. They will have seen an opportunity to make money and taken it. In none of these transactions is there any moral or economic judgement about government fiscal policy, let alone any attempt to enforce a particular policy. Indeed, it’s almost the reverse – the impact of fiscal policy is merely to create a belief that interest rates will have to rise, and the consequent belief that ‘other people’ will seek to take advantage of that increase, causing the whole herd to move. The belief, based entirely on the notion that government funding is dependent on bond issues, becomes self-fulfilling. Far from enforcing stability and discipline, the profit-seekers positively benefit from instability and chaos.

The conventional neoliberal economists and pundits tell us that, in order to avoid those rises in interest rates, governments must never ‘upset the markets’. What they mean by that is that governments must never take any actions which might create an opportunity for the traders to push interest rates higher. That in turn is based entirely on the assumption that governments must always borrow, on the markets, any money that they do not raise in taxes – in short, the assumption that the household analogy for government finances is true. But what if it isn’t true? What if the government does not need to balance its budget and can simply run an overdraft with the central bank? That goes to the heart of the debate about what money is and how it works. What gives the bond markets their alleged power is the adherence of governments to the household analogy for government finance, not some universal law of nature. An approach to economics which recognises that the constraint isn’t the availability of money but the availability of resources which can usefully be deployed would strip that power away. Neoliberal ideology is artificially constraining governments – we should be asking who benefits.

"The markets won't allow it"

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Faced with rising energy costs, largely as a result of Trump’s disastrous war in Iran, the former Tory Chancellor, Jeremy Hunt, told us that: “The markets wouldn't allow the kind of intervention I was able to do in 2022”, and suggested that any assistance to households would have to be far more targeted. There are, of course, good arguments both for and against targeting of assistance, and that’s an argument which will continue for the foreseeable future, whether in relation to energy costs or any other policy. Governments will make choices; the question, however, is whether they will make those choices on the basis of their own judgement as to what is right, or whether they will follow the neoliberal line that ‘the markets’ have such a stranglehold on policy that they will make the decision. Sadly, the current Chancellor seems to be as much in hock to that neoliberal argument as her predecessor.

Markets, as argued here previously, are an effective way of matching buyers and sellers, and can perform a highly valuable role in any economy. But markets which constrain, or even determine, government policy have ceased to be a tool of society and have set themselves up, instead, as our masters. ‘Markets’ are not objective arbiters of right and wrong, they don’t come out of nowhere with rules set entirely by themselves. They are, rather, a human construct, designed and built by people with the aim of facilitating economic activity. They are not impersonal forces which react in a considered way to events in accordance with predictable rules – market movements are the agglomeration of a large number of individual bets about the probable direction of future movements or, rather, bets about the way in which other participants will bet on those future movements. The idea that governments should allow their policies to be determined by markets which have been captured by gamblers and speculators is a complete abdication of responsibility, and a capitulation to vested interests.

Giving credence to the idea that ‘markets’ can and should control what governments can do comes naturally enough to those who support neoliberal economics and the obsession with abiding by arbitrary fiscal rules. The problem that we face is that the government and the official opposition are united in swallowing the lie – Reeves and Hunt are interchangeable. Austerity and economic inequality are two sides of the same coin – we’ll only escape from both when we re-establish the role of markets as servants rather than masters.

Taming the markets

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It is a given that Trump’s statement about talks with Iran is a lie. Working out which part of his rant is the lie is much harder – maybe there are no talks at all; maybe there are some sort of indirect talks taking place through an intermediary; maybe (as Trump himself has hinted) the talks are taking place with someone who has no authority to hold them (and therefore to implement any agreement), and whose life is under threat if the regime currently in power find out he’s talking to Trump; perhaps he’s even talking to the late Shah’s son in the mistaken belief that he can put him back on the throne. With Trump, any or all of these are possibilities: the nearest thing to a certainty is that the statements coming from the regime in Iran are more likely to be true than anything Trump says. Only time will tell which lie he is telling.

Meanwhile, one of the apparent certainties is that the words emanating from Trump’s phone fingers can and do move markets. As a direct result of Trump’s claim about talks, conveniently issued shortly before markets opened, oil prices fell and stock market prices rose – two of the outcomes most highly valued by a man who measures the success or failure of everything in terms of increasing the wealth of himself and his billionaire friends. Superficially, it’s a puzzle as to why this happens. After all, those involved in the markets know as well as I do that the truth is a stranger to Trump’s lips, and that whatever he says now will probably be reversed in days, if not hours. What makes them place such trust in his words?

The answer to that lies not in what any of those involved in speculative buying and selling themselves believe might or might not be true, but in what they think that other speculative traders might or might not believe. If you believe that everyone else is going to be selling oil (pushing the price down) or buying stock (pushing the price up), then it becomes a race to sell or buy before everyone else does so in order to turn a quick profit. (And if you can get hold of some advance information, speculation – or even simple betting – becomes easier. It’s an obvious hazard when dealing with a ‘leader’ who sees personal and family enrichment as an entirely legitimate goal.)

That brings us to the problem with markets. As a mechanism for matching genuine sellers with genuine buyers, markets are an extremely effective process. They have, though, been largely hijacked by people who have no interest whatsoever in the ‘things’ they are buying and selling; it is the process of buying and selling in itself, with the prospect of turning a quick profit, which attracts them. Commentators describe volatile markets as a ‘problem’, but that’s only true for those genuine buyers and sellers. For speculators, volatility equals opportunity. The consequences of that volatility are felt in the ‘real’ economy by all of us, whilst a minority redirect wealth to themselves. For as long as legislatures allow this situation to continue, markets and the economy they support end up controlling us, when they should be serving society as a whole. Where are the politicians willing to tackle this scourge?

Volatility and spooking aren't exactly the same thing

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Last week, just before the Budget, the Guardian published this article about the ‘power’ of the bond markets over governments. Whether it entirely supports the contention that the government must at all costs avoid ‘spooking’ the markets is another question. Indeed, one trader made it clear that “What you really crave in this industry is movement, volatility”. It’s the opposite of what the government wants, but speculative traders thrive on it. Volatility, of the sort which is described as ‘spooking’, is what helps the speculators to turn small margins on huge trades into profits for themselves. Those speculators actually want the government to surprise them, in the hope that they are better placed to react than their competitors and make a killing – stability is boring and largely unprofitable.

As with so many aspects of the financial markets, the underlying issue is that markets created to fill valid social needs have been captured by people who are driven by a culture of greed and gambling. The government takes in peoples savings in return for bonds on which it offers savers a fixed long term interest rate; large institutional investors hold those bonds as part of pension funds and life insurance funds. For all of those players, market stability is a definite plus, enabling them to plan with confidence. But the gamblers and speculators who use those markets for their own purposes want no such thing; they want the sort of volatility in which they are each trying to second guess each other and from which some make a profit and some make a loss by making multiple large trades in rapid succession. Far from being ‘spooked’, they are actually delighted by what they see as opportunity.

The question we should be asking is not about how we limit what governments can or should do to keep the markets stable, but about what we need to do to control and manage markets in a way that they serve social needs rather than constrain policy options. To date, humanity has not found a better way of matching buyers and sellers than using markets, and markets perform a useful social function. There is, though, no such thing as a ‘free’ market: all markets work under a set of rules. The issue is who sets those rules and in whose interests they operate, and to what extent those markets should be allowed to become the playthings of gamblers and speculators rather than performing the socially useful function of facilitating exchange. What Reeves and Starmer have decided – like all the other Tories in the recent past – is that they are happy for those markets to be captured by selfish interests, and for those interests then to have a veto on what government policies are, or are not, acceptable. The argument that there is no alternative is merely an excuse to justify what their ideological perspective tells them to do anyway.

We shouldn't be driven by speculators

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The market for government bonds works in what looks to most of us a very strange way. Despite the newspaper headlines about rising interest rates, the interest rate is actually fixed for the whole term of the bond. What appears to make the interest rate change is that the bonds can be traded, and the price at which they are traded doesn’t necessarily bear any relationship to the amount which the government accepted into savings when it issued the bond or the amount which it is obliged to return to the saver when the bond matures. So a £100 bond issued at 3% for 30 years will cost the government £3 a year in interest, and the government will refund £100 at the end of the term. In the meantime, that bond may have been bought and sold many times at varying prices: for anyone buying at less than £100, the interest rate will look higher than 3% and for anyone buying at more than £100, it will look lower than 3%. But, to the government, it is always £3 per year. For any new bonds, the government might need to match the apparent interest rate being paid on existing bonds, but changes in the bond market price do not and cannot affect the cost of existing commitments.

It means that headlines about rises in the rate of interest increasing the cost of ‘borrowing’ and putting huge additional pressure on the government can be misleading. They only increase the cost of ‘borrowing’ on any new bonds issued, not on all bonds currently in existence, although one wouldn’t necessarily understand that from the headlines. There are a number of factors which have pushed the rate for new bonds upwards, not all of which are in the control of the Chancellor. Many of them are part of global rather than local trends. The extent of the impact of the required higher rates depends on whether, and to what extent, the government is obliged to issue new bonds to cover its spending. The Chancellor and government choose to believe that they have no choice in the matter, a conclusion which pushes them inevitably in the direction of austerity and/or tax rises, which just happens to suit their own ideological view. It isn’t the only view, though. As Professor Richard Murphy points out, the government could simply stop issuing bonds and wait for the price to fall, as it inevitably will.

Murphy isn’t alone in challenging the tyranny of the bond markets. There was a letter from another professor in Wednesday’s Guardian addressing the question of bond markets very succinctly. To quote Professor Kushner, bond traders “…strive to reduce long-term stability to short-term volatility in order to multiply transactional opportunities”; in other words the price (and therefore the headline interest rate) is very largely being driven by gamblers and speculators out to make a quick buck rather than by investors making long term decisions. A half-decent Chancellor would seek to isolate us from, rather than fall into line with, the interests of such casino capitalism. It really is time to challenge and smash the hold which these people have on economic policy rather than allow them to cripple the ‘real’ economy in which most of us live in order to satisfy their greed and selfish interests.

Markets and casinos shouldn't be the same thing

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Here’s a statement that some might be surprised at me making: Markets work. As a way of matching buyers and sellers, or capital with investment opportunities, markets are an effective and efficient method, better than anything else humanity has managed to devise thus far. There are, however, two caveats.

The first is that there is no such thing as a completely ‘free’ market. All markets have rules by which they operate. One of the reasons for that is that the assumptions used by theoretical economists when considering markets – that all participants have equal power and that all have perfect knowledge of what is happening – are blatantly inaccurate. Markets can only work effectively if those (and other defects) are corrected, so we have rules which must be followed. There will always be disagreements about what those rules should be, but the key issues are who makes the rules and in whose interests they operate. Those arguing for completely ‘free’ markets are invariably arguing for markets which are slanted in favour of those with the most power and the most knowledge. No surprise there.

The second caveat is that a real market is about those basics mentioned above, such as matching real buyers with real sellers, exchanging real things. Yet, when it comes to the world’s financial markets, most trading is nothing to do with that; it is, instead about gambling and speculation, with people trying to leverage large trades for very small profit margins on a day-by-day or even hour-by-hour basis. And in some cases, what is being ‘traded’ (i.e. being bet on) isn’t even something with any real existence beyond acting as a gambling chip. Crypto currency is a case in point. It has no real ‘value’ and its price fluctuates wildly. As a means of winning (or losing) a fortune in  short time, it’s ideal, but its value as any sort of ‘investment’ is doubtful, to say the least. Yet, lured by the improbable apparent ‘value’ of these ethereal ‘assets’, some governments are trying to pretend that they are real enough to be treated as investments by the man or woman in the street.

It's perhaps obvious why Trump would wish to do this – he has after all issued his own bit of crypto, from which he’s made a lot of money at the expense of his cult followers. It’s less obvious why the UK Chancellor would be considering anything similar. There’s nothing wrong with seeking to regulate crypto currencies as such (although the whole point of some of them is to set them up in such a way that they are very difficult to regulate effectively, not least in order to facilitate tax evasion), just as other types of gambling are regulated, including for the safety and protection of the punters. Seeking to regulate them as though they were ‘investments’, however (which is what she seems to have in mind) is dangerous, and risks creating the impression that an inherently risky proposition has somehow been rendered safe. It’s a bad message to be giving out.

How real is paper wealth?

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‘The markets’ have reacted fairly predictably to Trump’s puerile attempt at a conjuring trick by registering some dramatic drops. The analysts tell us that this reflects their pessimism about inflation, interest rates, and economic growth, all of which are likely to be adversely affected by the trade war which Trump has kicked off. Whilst I don’t doubt that economists (most of them, anyway – there are always some who’ll take a different view) do indeed see Trump’s actions as a threat to economic prosperity, I wonder if that’s what ‘the markets’ are really reacting to. It probably would be the case if markets were doing what classical economics says that they do, which is matching capital with investment opportunities in expectation of future profits. But if those same markets are actually more about gambling and speculation, which is probably the reality behind most trading, then what really drives them is an attempt to second guess what other players will do in response to tariffs in the hope of turning a profit by making a better guess than those other players.

It underlines that share prices an extremely poor indicator of economic value; they often bear little relation to the value of the underlying economic assets which they nominally represent. And their volatility makes them a poor measure of the wealth of their owners. To take just one simple but current example, the share price of Tesla has plummeted since Musk got involved with Trump’s administration. He’s still a very wealthy man, on paper, but his total wealth is apparently a lot less now than it was a few months ago. In his case, the scale of things means that it makes little practical difference, but the question is whether ‘paper wealth’ is a sound basis for assessing anything.

That’s relevant in the context of the increasingly strident calls for a wealth tax here in the UK. Whilst the idea appeals to many of us, assessing the amount of wealth owned by an individual is not a simple or straightforward task, especially if the value of a significant component of that wealth can vary from day to day – or even hour to hour. And non-paper wealth – property, land etc. – is not easily realisable or assessable without being realised. What is easier to assess, albeit still difficult when the tax system is complicated and people can afford to pay expensive advisers (although both of those obstacles could be overcome by a government intent on fairness), is the income generated by that wealth including, of course, any increase in value from the date of acquisition to the date of disposal of any asset. We certainly should do more to tax the wealthy, but taxing the wealthy isn’t necessarily the same thing as taxing their wealth. Their income is a lot easier to get at.

Vigilantes and gamblers

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The Guardian carried a story the day before the budget, wondering whether ‘bond vigilantes’ would punish Rachel Reeves with a Truss-style market meltdown. Curious word, vigilante, with at least three different connotations that I can think of. The first – showing my age – takes me back to watching Mr Pastry on the TV as a child on a Saturday afternoon. There was one episode where, misunderstanding everything as usual, he wanted to become a village aunty. It has a warm, cosy feel to it – the idea that kindly people are looking out for others. A more dystopian version is where gangs of vigilantes roam the streets imposing their own version of the law, by force if necessary, meting out punishment to those who refuse to comply with their rules. Somewhere in between the two lies the concept of people acting together to assist the enforcement agencies in upholding the law.

The ’bond vigilantes’ referred to by the Guardian don’t fit any of those categories. These are people who are looking to turn a penny by trading bonds, in massive quantities, with the intention of leveraging the odd few pennies here and there – multiplied, of course, by the millions of bonds involved. They are more akin to gamblers and speculators than law enforcement officers. They claim to be using their judgement on financial events, such as the budget, to guess as to whether rates of return will go up or down as a result. In truth, they aren’t really even doing that – they’re actually guessing about whether other traders will guess that rates will go up or down and placing their bets accordingly.

Bond market speculation isn’t like betting on the geegees though. When it comes to horses, the number and size of bets placed may affect the odds that the bookies will give you, but they don’t make the horses run any faster. In the financial markets, the bets placed directly affect the outcome as well. If enough people buy and sell bonds in a way which anticipates a rise in the rate of return, then the rate of return will rise, and vice versa. The sad part is that the neoliberal governments, of whichever party, with which we have been saddled for decades believe that things have to be this way, and they have no choice but to follow the dictats of the markets. Their power is constrained mostly by their own lack of imagination.

A level grades are a blunt instrument

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The report last week that the UK Government is being ‘forced’ to fund more places in English universities to train doctors and dentists as a result of ‘grade inflation’ raises more questions than it answers. At a simplistic level, the problem is easily understood – if pupils get higher grades at A level than would have been the case had they sat exams, then more people will meet the grade-based criteria for entry onto the courses. But if those people are suitable to become doctors and dentists under one system, what is it about sitting exams which would somehow have made them unsuitable? If Pupil X gets an A* when assessed by his or her teachers but ‘only’ a B in an exam, why is the same pupil, with the same knowledge and abilities, doctor material in the first case but not in the second? How do we ‘know’ that pupils with an A* grade obtained in an examination can go on to be successful doctors and dentists, whilst those with a B cannot?

Using grades obtained by an adolescent in his or her last year at school as an absolute determinant of his or her future career prospects seems almost designed to waste a lot of potential talent. Clearly, the grades obtained by pupils at A level tell us something about how much work and effort those pupils have expended, how much knowledge they have accumulated, and how likely they are to apply themselves to their work at university, but they aren’t – and can’t be – as definitive as the way in which they seem to be being used. Exams are in some ways a blunt instrument; they are not an assessment method which suits all, and the circumstances in which a pupil finds him or herself on one particular day may not be representative of that pupil’s general character and approach. And although all of us want those providing our medical care to have the necessary knowledge and expertise, it’s not at all clear that the precise grade obtained in A level Biology is a particularly good indicator of that.

We know that there is a shortage of doctors and dentists in the UK, and that the UK is simply not training enough to meet our needs. We also know that this is a problem which cannot be resolved quickly, given the length of time it takes to train people. But neither is it a recent problem: it is a long-running problem under successive governments, whether Tory or Labour, which share an ideological commitment to competition and markets. What this so-called ‘grade inflation’ underlines is that that shortage is not a result of a lack of people wanting to become doctors and dentists, nor is it a question of their suitability for the role. It is the result of decisions by successive governments to limit the number of places, largely on financial grounds. They have made a deliberate choice to train fewer than we need and recruit people trained outside the UK instead, in the process not only rejecting many of those who want to follow careers as doctors and dentists and have the ability to do so, but also depriving other countries of the benefits of their own investment in training. Any government which was serious about providing proper health care for its citizens would start by looking at how many people it needs to train to provide that care and then provide enough places to meet that need, rather than setting a financially-driven cap on the number of places and filling those places through market-style competition. It is yet another example of a government decision driven by ideology rather than need.

I agree with the Daily Mail

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Now that’s not something I’ve said before, and I may never say it again.  But the fact that I agree makes me wonder whether they’ve really thought through the implications of what they’re saying.

The practice used by holiday companies of charging significantly more during the school holidays than they charge during term time does indeed make it difficult for many parents, and leads directly to the sort of case we’ve seen recently where parents find themselves before the courts for failing to send their children to school.  The practice is, however, based on what economists call the law of supply and demand.  When demand is high, prices rise, and when it’s lower, they fall.  And what the Daily Mail is calling for is, effectively, government regulation to force the companies concerned to ignore that law of supply and demand.

As it happens, that’s precisely why I agree with them.  Markets are a human construct; all markets work within sets of rules and the question is really about who should set the rules and in whose interests they should be set.  I’ve always been in favour of the idea that governments should act in the wider social interest by setting rules and constraints on how markets should operate.  Supporters of entirely ‘free’ markets believe, on the other hand, that markets are there to enable individuals to pursue their own selfish interests with no outside intervention; some will win and some will lose.  There’s a significant ideological divide there.

One of the consistent themes of papers such as the Daily Mail during the Brexit campaign was that we should abolish all that horrid EU regulation which was constraining businesses from making profits by doing what they thought was most in their own interest.  That is in direct conflict with the position which they’re taking today.  So, has the Daily Mail switched ideologies overnight?  No, of course not; they’re just taking a populist position on the basis that it will help them sell newspapers.

It neatly underlines one of the problems with populism.  Combining a series of policies which are individually popular can never create a coherent or consistent whole; quite the reverse.  For that, we have to start from principles or ideology.  On that, the gulf between me and the Daily Mail is as large as it ever was.

Brexit realities - 2

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The real drivers for Brexit were ideology and British exceptionalism.

If those arguing for Brexit weren’t primarily driven by their own views on immigration, what was driving them?  It’s a curious mixture of two different but overlapping world views.  There are exceptions to every generalisation, of course, but the hard core of Brexiteers is to be found in the right wing of the Tory Party, and their soulmates in UKIP.  Their mindset is one in which ‘the market’ should determine everything, and any regulation or control which prevents companies from making money is inherently bad.  They really do believe in an economic free-for-all to the greatest extent possible, and accept that there will be winners and losers as a result (although, coincidentally I'm sure, they and their circles will mostly be winners).

It’s a short term and essentially local view of what’s ‘best’, and not conducive to global action on issues such as climate change, but then, many of them don’t accept the science of that anyway.  They have an instinctive hostility to rules and regulations on what capital can or can’t do, blame the EU for much of that (overlooking the tiny little fact that it is common regulation which makes the single market operate at all), and believe passionately that freed from all controls, capitalism will deliver ever-increasing wealth from continued exponential growth.

The second driver is British (or perhaps it might be more accurate to say ‘English’ in this context) exceptionalism.  It is axiomatic to them that:

·         Westminster is the ‘mother of parliaments’ (although the term doesn’t actually mean quite what they think it means),

·         the BBC is the ‘best broadcaster in the world’ (a statement for which they have no evidence other than their own opinion),

·         the UK isn’t really part of Europe (as in ‘we’ve always had a global perspective rather than a European one, even if we’ve had to intervene to sort the Europeans out a few times’),

·         we ‘punch above our weight’ (which they see as a good thing, even if others see it as wanting to be the school bully),

·         we’ve given the world our language and culture (and what a bunch of ingrates they are), and

·         we really are unique and very special.

The key thing that we have to recognise about this twin-pronged mindset is that it’s all axiomatic to them; mere evidence-based arguments are never going to shift people who have their own 'alternative facts' from the course on which they have set themselves and us.  Yet trying to use evidence to persuade them to change direction is the approach which most are adopting in response.  It’s an approach doomed to failure.  

Winners - and losers

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Remember how, not so very long ago, the gamblers and speculators did their very best to wreck the Euro in their greedy attempts to turn a few pennies?  We were told often and bluntly at the time that we should count our lucky stars that we hadn’t joined the Euro project, and that it had been doomed to fail from the start.

Since the referendum on June 23^rd, those same gamblers and speculators have seen a new chance to turn a few pennies by betting against the pound, and the result has been to drive the value of sterling down.  Strangely, those same people who told us when this happened to the Euro that this showed what a disaster the Euro-zone was now seem to be telling us how wonderful this is for the sterling zone. 

Of course, the situation is not identical, but there is one clear point of similarity, and that is that the movements in currency aren’t being driven (despite what the news reports regularly say) by ‘investors’ making their wisest guesses as to what the future holds, but by gamblers and speculators who allow their computers to trade autonomously in pursuit of very narrow margins by repeatedly buying and selling the same things.  It’s a complete distortion of what ‘markets’ are supposed to be about, namely fixing the price at a level acceptable to both those who want to buy a product and those who want to sell it.  It’s gambling, pure and simple – and like all gambles, there are losers as well as winners. 

And, just as with the problems of the Euro-zone, there’s no need to guess who the losers are.

Getting away with robbery

Tweet Bankers' squealing about people being beastly to them is nothing new.  Nor is the idea that people earning vast sums of money for undertaking activities which are of dubious worth at best end up sincerely believing that their salary in some way reflects their ability or value.

But arguing, in effect, that they should be allowed to continue to bend or break the rules as and when it suits them, and take reckless short term decisions in the hope of making a quick buck, and do all that with impunity, is surely an illustration of how far they have become removed from the real economy in which most of us live.

I’m not entirely convinced that the proposals to claw back bonuses for up to seven years go far enough to rein in the gamblers and speculators who masquerade as bankers, but it’s at least a start.  The real requirement is for multinational action to bring the money markets back under control and make them work for society rather than for the bankers.  But the problem we face is that those making the decisions genuinely seem to believe that the crash was just the result of a few bad decisions, rather than an inevitable consequence of the way in which we have allowed people to turn markets into casinos.

Fiscal Union

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Staying on the European theme, the latest conventional wisdom seems to be that the difficulties of the Eurozone prove that the UK’s decision to stay out was the right one.  I’m not so sure – the problem is that we only get to run history once, so it’s impossible to be certain how things might have turned out if a different decision had been taken.

It is surely at least possible, however, that the currency itself would have been stronger and more able to resist speculative pressure if the UK had been part of it from the outset. 

It’s not just that the UK is the third largest economy in the EU, and that having one of the biggest players staying outside was inevitably going to cause continuing doubt about the project.

It’s also that, by staying outside the Eurozone, the UK did two other things which were less than helpful.  Firstly, it provided a home within the EU itself for the financial speculators who have done so much to undermine the Euro in particular and the global economy in general.  And secondly, sterling provided an alternative currency to use in financial trading on those markets – credible alternative currencies are a key element in the operation of the financial markets.

I doubt that such considerations will affect for one moment the view of those who have been hostile to the single currency from the outset; and as I noted above, I cannot be certain that things would have panned out very differently.  My point, though, is that those who are claiming that the UK Government’s decision was the ‘right’ one cannot really be that certain either.

One other point, almost as an aside.  If it is true – as many are now claiming – that monetary union is impossible without fiscal union, where does that leave the idea – proposed by some nationalists – that an independent Wales could continue to use sterling? 

It’s not an exact parallel, of course, but neither is it a completely irrelevant one.  Being part of a monetary union implies similar fiscal policies; the lack of that has been the Euro’s weakness, and the need for it the justification of many for staying out.  Those fiscal policies can either be set jointly, in some sort of club or federation, or be set by the larger partners and imposed on the others. 

That’s the choice facing the Eurozone; it would also be the choice facing members of any sterling zone.

In whose interest?

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In response to sustained pressure from his own backbenchers, David Cameron has strongly stated that whilst his top priority for the Euro summit is to find a solution for the Eurozone, he will veto any changes which threaten the UK’s interests.  So far, so good; it’s difficult to argue against that in principle.

What’s a lot harder to see is how a failure to achieve a solution to the crisis can possibly be more in the interests of the UK than being prepared to yield a little.  And for the Prime Minister even to talk in the terms he’s been using almost invites the speculators to continue betting on a failure to reach an agreement.

But what’s least clear of all to me is how he is deciding what is, and what is not, in the interests of the UK.  It seems to boil down to protecting the rights of the speculators and gamblers to continue the sort of activities which have done so much damage over such a lengthy period.  And protecting their interests is not at all the same thing as protecting the UK’s interests – in fact, there are plenty of people who might suggest that the two are actually in direct conflict.

It makes for good rhetoric, and cheers up his own supporters (including those people in the City who make such generous donations to the Conservative Party), but it will surely look to many as though he is prepared to go on sacrificing the interests of the many so that the few can continue to enrich themselves at our expense.

It's an ill wind...

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That would be a kind interpretation of what one trader had to say about the possibility of a further economic collapse.  Too kind, in fact – far too kind.

It’s unclear whether he’s as central or as influential as he makes out, but I suspect that he’s only saying what many others of those involved in the ‘markets’ are thinking but have more sense than to articulate so publicly.  There will be many of them who have been placing large bets on a negative outcome for the Eurozone in the hope of enriching themselves and their clients at the expense of ordinary working people in countries such as Greece.

So what?  What’s wrong with a little flutter, whether on the horses or on the markets?

The problem arises when the act of betting starts to affect the outcome of the event on which the punters are betting.  In horse racing, it doesn’t matter how many people back the favourite; the amount of money bet on a particular horse will not affect that horse’s performance directly.  (It may encourage dishonesty or nobbling, of course, but that’s an indirect effect). 

In the money markets however, the betting directly affects the outcome.  This isn’t a case of a quiet wager between friends about where prices will be tomorrow or next week; these bets are made by trading in the instruments, and that trading affects the price.  If enough people bet on a particular outcome, then that outcome becomes more likely.

Supporters of the financial markets would argue that the outcome in fact reflects the collective wisdom of the experts in the field.  From that perspective, it’s a bit more than a mere gamble, because it’s about predicting what is likely to happen and planning to benefit from that outcome.  So, if collective wisdom says that Greece is going to default, then protecting themselves and their clients from the effects of that is just doing their job.

It is the fundamental untruth behind that apparently reasonable line which the comments of this one trader expose so clearly.  The betting on a Greek default isn’t driven by collective wisdom at all, but by naked self-interest.  They want Greece to default so that they can make money as a result.

The question for the rest of us is why we allow the financial system on which our daily lives depend to be run in such a fashion.  Why do we allow capital to remain as king?

Still at it

Tweet According to yesterday's Sunday Times, 3.5% of the market value of FTSE100 companies has been lent to hedge funds to be short sold in an enormous bet that share prices will be falling. It's not as high as the 5% which was on loan during the financial crisis in June 2008, but it's still an awful lot of shares.

The short-selling game means that the hedge funds who have borrowed the shares sell them for one price and then buy them back at a lower price before returning them to their rightful owners, and pocketing the profit. Well, actually, they profit most of the profit; part of it goes to the Conservative Party, and part gets paid to the people who loaned them the shares in the first place.

But if they've made a profit, who's made the corresponding loss? After all, when it comes to share-trading, every profit must be balanced by a loss somewhere. The answer is that the owners of the shares – often pension funds, which effectively means an awful lot of us - have made the loss; they loaned the shares when they were valued at one level, only to get them back when the price has fallen. The total value of their assets has fallen by the difference.

Well, not quite. Because the hedge funds have paid them a small 'rent'; a share of the profit for the loan of the shares. So their loss is less than it would have been if they hadn't loaned the shares out. From their point of view, it's an apparently rational decision, because if the price was going down anyway, then they may as well mitigate the loss by taking at least a share of the profit made by the short-sellers.

But the really big question is whether the price would really have fallen anyway - to what extent are short-sellers simply betting on something that would happen anyway, and to what extent is the volume of selling which they do actually influencing the price on which they are betting? The greater the volume of shares that they can sell, the greater the influence they have on the outcome.

If they are influencing the price by their selling, then the action of those who lend them the shares to sell becomes a great deal less rational; they are then, after all, creating the loss which they are seeking to mitigate. They'd still do it though, for the simple reason that if others do it and they don't, then they still get hit by the losses but have none of the mitigation, and that affects their overall financial performance.

The practice is crazy when it's just betting; but it's insane if the people creating the losses are doing so deliberately purely because everyone else is doing it, and they can't afford to be left out. It's more Prisoner's Dilemma than roulette. 3.5% sounds like a small proportion, but it's enough to drive prices rather than simply bet on them.

Short-selling does not create wealth – it simply redistributes wealth from the many to the few. It should be outlawed.

A missed opportunity

Tweet I was disappointed, but not really surprised, at the decision last week to allow the short-sellers to start trading bank shares again. Nor was it any great surprise that the announcement was rapidly followed by further large falls in the price of banking shares. It's not yet been entirely clearly demonstrated that the two are directly connected, but there can be no doubt that the recommencement of short-selling in bank shares will inevitably make them more volatile.

No doubt the Tories – largely funded by profits on this sort of activity – will be pleased that their donors can start their gambling again, but it's bad news for the rest of us. Most of all, it looks like a major missed opportunity to reconsider what the markets are for, and how they should be organised and controlled.

To listen to some free market supporters, one might think that 'the markets' have some sort of existence independent of human society, and that we should all accept that we have to do whatever 'the markets' tell us. It's not true of course, and never has been.

Markets are a human invention, and they can often be an efficient way of trading goods and services. But we should never forget that markets are there to serve us, not the other way around; and we should be ready as a society to regulate and control the activities in our markets in order to make sure that they serve our needs as humans and societies.

The problem is – and although this isn't the only cause of the current financial disaster, it's certainly a contributory factor – that some markets, particularly financial markets, have become more akin to casinos than places for the exchange of goods and services. Gamblers and speculators have been betting on future movements of prices – and not just betting on them, but speculating in such large sums that they actually influence prices in a way which enables them to make money. They may become wealthy as a result – but they haven't actually created the wealth which they accrue, they have merely redistributed it – to them, and from the rest of us.

Best of all, from their point of view, is that they seem to have found a way of betting with our money. When they win, we lose, and when they lose – er, we still lose. Now, I don't have any great moral aversion to people betting, as long as they do so in places where they are staking their own money, where all those involved understand that they are betting, not investing, and that they can lose as well as win, and where their betting does not cause problems for the rest of us.

Using the markets as a casino adds no value to human society and works against the interests of most of us. There should be no place in an orderly market for people to use them in this way. Rather than re-opening the flood gates, the government and regulatory authorities should be using the opportunity to look again at how we can ensure that markets are made to operate in the interests of society as a whole.