Illusory benefits

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One of the arguments for the deregulation of financial services during the Thatcher era (and largely endorsed by the failure of Blair and Brown to make any attempt to re-regulate) was that these industries were of enormous benefit to the UK economy.  It was an assertion which went largely unchallenged at the time, and there is a danger that it continues to go largely unchallenged as the sector gets back to ‘business as usual’.

But, apart from the obvious problem that financial services are a part of the explanation for the dysfunctional economy of London, and the imbalance between that economy and the economy of the rest of the UK, I think we should be challenging much more critically whether we really benefit to the extent claimed.

The obvious point to make is that although the sector generated huge private profits up to 2007, it did so by creating huge liabilities in the process.  The crisis then led to those liabilities being transferred from those who had incurred them to the state, and thus to all of us as citizens.  In terms of risk and reward, they took the rewards, whilst we ended up carrying the risk.  It’s not a sound basis for an economy.

Secondly, the sector actually created very few jobs, compared to the amounts of money involved – moving money at the press of a few buttons creates fewer jobs by value of turnover than moving widgets coming off the end of a production line.  It will never be the answer to unemployment, particularly in a Welsh context.

Then, there’s the question of tax payments.  It has been claimed that financial services accounts for around 8% of the UK economy, but contributes 25% of corporate taxation to the Treasury.  As far as it goes, that’s true.  But because the sector employs so few people relative to the turnovers involved, the total taxation from the sector – adding together both company taxes and personal taxes paid by employees – comes to more like 7% of the total, marginally less than its ‘fair share’, purely on GDP comparisons, and significantly less than one might expect looking at the overall profitability of the sector.

Yet despite all these obvious questions, the political establishment seems wedded to the belief that expanding financial services, and creating the circumstances for that expansion, is somehow essential to the success of the UK, or Welsh, economy. 

Part of the reason is to do with the way in which the bankers and financiers have influence at the top table.  In 2010, just over 50% of cash donations to the Conservative Party came from companies or individuals in the financial services sector, and both Cameron and Clegg come from that background themselves.  The Coalition’s support for the sector should come as no surprise.

Reasons for the Labour Party’s attachment to the sector are less clear.  Schmoozing with Rothschilds on yachts in the Med may be a factor, but I suspect that the interchange of staff between the sector and the Civil Service, particularly the Treasury, means that advisers to governments – of whatever colour – are incanting a supportive message.  Labour’s rhetoric against boardroom salaries may sound better, but it’s unlikely to go beyond rhetoric, and it is, in any event, fiddling at the fringes.

‘Retail’ financial services – high street banking, insurance etc. – have a vital role to play in our life, and we certainly need to attract more of those to Wales.  And it would be nice if that wasn’t just call centre jobs as well.  But we’re better off without the gamblers and speculators.  And we’d be better off if we could put some distance between them and our real economy as well.

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.

Playing the game

Tweet I suppose that it is inevitable that the Government always tries to take the credit when the economy is going well, and blames world conditions when things are not going so well. I can't remember a government of either complexion in London which didn't try the same tactic, and Gordon Brown is no exception.

Equally inevitably, the Opposition always tries to paint the good news as something which would have happened in spite of the government's action (or even better as the result of their work when they last had a turn in government), and the bad news as the direct result of government action - or inaction.

It's all a bit of a game really. The players seem to enjoy it, but I'm not sure that it is terribly helpful in terms of addressing the real issues. The truth, as ever, gets lost somewhere in between.

Certainly there are some things which affect the economic cycle which are completely out of the hands of government. Given that simple fact, it is a complete nonsense for any government (or opposition) to claim that it can exercise complete control over the economy. It is entirely fair to point out, however, particularly in relation to the recent events in the financial markets, that governments of both parties have made deliberate choices to reduce the amount of control and regulation which they can actually exercise.

On the specific question of the financial crisis, Cameron is right to point out that Brown has not done enough to re-regulate the markets; but that is more than a little disingenuous when what it really amounts to is a criticism that Brown and Labour have not done enough to reverse the silly policies of the Tory years. (And it would sound a great deal less dishonest if his party wasn't financed to a significant extent from the profits of irresponsible and unregulated markets).

There are things that governments can do, however. And on this score, both Labour and the Tories have shown a serious lack of imagination. Adam Price has set out a number of interesting suggestions for actions which can be taken. I'm biased – of course. But this is the sort of imaginative thinking which we need if we are not only to get through the current crisis, but also tackle the essential job of growing the Welsh economy for the longer term. And, as I've noted before, we should all want that, whether or not we believe that Wales should be taking more responsibility for her own future.

The man is not for turning

Tweet I'll admit to never having been a fan of globalisation, whether economic or cultural. Reading Marcuse (One Dimensional Man) in the 1970's was a significant influence on the development of my own political philosophy, and as I recall, Sartre said something along the lines of "merely insisting on being Basque is itself a revolutionary act".

At a cultural level, Welsh nationalism is at least partly about maintaining human cultural identity and diversity, and at an economic level, it combines with environmental concerns in supporting a more localised economy. Localised is not necessarily the same thing as protectionist or isolationist, nor does it exclude the promotion of trade with developing countries in ways that assist them. But when I read that shrimps are caught off the British Isles, landed in Scotland, and then shipped to the Far East to be shelled before being shipped back to Scotland for packing – then I know that globalisation has gone too far.

That's an absurd example, obviously – although there are plenty more like it – but one of the consequences of globalisation has been the creation of long thin supply chains; and I think even supporters of globalisation ought to be more worried about that than they appear to be. The complexity built into the supply of goods and services, coupled with rigorous attempts to ensure 'just in time' delivery and reduce the amount of 'working capital' employed by businesses, makes the whole economic system extremely vulnerable to a failure at a single point.

The failure of financial markets has hinted at that; but there are a range of potential events in the real world which could be even more devastating. As a simplistic example, I'm not convinced that people really understand the potential economic impact of a major flu epidemic in the Far East, even if no-one in the UK even caught a cold.

What sparked this train of thought today was reading about David Miliband's speech in Cardiff last night, where he seems to have said that the financial turmoil won't deter Britain from continuing globalisation. I struggled to find any trace of a logical basis for that statement. It reminded me of the remark attributed to Keynes, "When the facts change, I change my opinion. What do you do, sir?".

It worries me that, in the face of a clear warning about the way in which globalisation has led to an essentially US problem being exported to the rest of the world, the response seems to be to accelerate the process of locking us into an approach which has an increasing potential for systemic failure. The facts have changed – shouldn't policy also change to reflect that?