The ultimate unwinnable wager

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There was a report a few days ago about the possibility that there had been some insider trading on a web betting – sorry, ‘prediction’ – site where some individuals may have made a killing by correctly ‘predicting’ either the attack on Iran or the death of the Ayatollah. It may, of course, be the case that the involvement of a Trump in the company hosting the ‘prediction’ market is a complete coincidence and/or that one Trump knew nothing about what another Trump was about to do. Perhaps there should be a market in predicting whether Trumps will gain financially from US government actions.

It is, apparently, possible to put money on a ‘prediction’ of almost anything. It seems that the same company hosting the bets on those ‘predictions’ also briefly ran a market in predictions of nuclear Armageddon. That market has subsequently been pulled, apparently because some felt that an attempt to make a bit of money betting on the deaths of millions of humans might be considered a little distasteful. To a compulsive gambler – sorry, ‘predictor’ – there is nothing that’s off limits when it comes to placing a bet, but the company running the market probably considered that whatever it had by way of a reputation would probably not be helped.

I found myself wondering, though, what sort of person would bet money on such an event. If the event happens, then the chances of the gambler being alive to claim his winnings are slim, to put it mildly. The chances of the company still being in existence to take the money from the losers and pay it to the winners are even lower. And what would the winners do with the money if there was no longer a functioning economy in which to spend it? Maybe those betting on nuclear destruction believe that nuclear Armageddon would not be so bad after all. The individual might survive a nuclear war, the company might still be able to organise the pay out, and the money would still be useful. But in those circumstances, the company would be able to argue, justifiably, that what just happened wasn’t nuclear Armageddon after all; and if the event didn’t happen, then those ‘predicting’ that it would happen would neither win nor receive any payout. It’s an essentially unwinnable bet for those predicting that outcome. There were some, apparently, willing to make the bet anyway. Even if they had advance knowledge that someone intended to start the nuclear war, it’s still a pretty stupid bet. As well as being tasteless.

Meeting the objective

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As others have pointed out, the Piers Morgan interview with Rishi Sunak a couple of days ago wasn’t exactly the pinnacle of journalism in the twenty-first century. Or at any other time, past, present or future. Somehow, however, it managed to tell us a few things about Rishi Sunak.

That he’s an inveterate liar we already knew, but denying that he's a betting man when he’s previously told us about his discovery of the joys of spread-betting on cricket was never going to work. Even worse - while he was doing his spread-betting he was also working on his day job as a hedge fund trader – which means that his paid job was, quite literally, to spend the day gambling. Just for good measure, that previous interview which he assumed everyone would have forgotten about also tells us that he sees nothing particularly strange about doing his personal gambling in office hours using office IT whilst he’s actually being paid to gamble for someone else.

His inability to avoid the trap which the self-styled ‘journalist’ laid for him is also telling. There are many things he could have said to avoid sealing the bet with a handshake – if he was going to try the ‘not-a-betting-man’ line, that was the time to do it, not after the event. His predecessor but one would probably have looked for a convenient fridge at that point, but Sunak couldn’t even manage that. He’s probably just become too accustomed to being bullied into things by his own party: faced with another bully, he just caved in.

Underlying all of this are real people, vulnerable people, being treated like pawns in a game by two men utterly lacking in empathy and understanding, for whom the odd £1,000 here or there is nothing. And in that sense, the interview was an outstanding success. It showed us exactly who and what Sunak and today’s Tory Party are – and that was the objective, wasn’t it?

There's more to bankers than bonuses

Tweet Bashing bankers is always good fun, and usually something which the victims richly deserve.  The EU proposals to cap their bonuses are hardly likely to prove anything other than popular with the majority of us.  The only surprising reaction to date has been the extent to which senior Conservative politicians have been willing to take the unpopular stance of opposing any cap on bonuses.

I can’t help feeling, though, that merely imposing a cap on bonuses is missing the point.  It’s not that I’m convinced by any of the arguments against a cap – far from it.  

The idea that they will take their banking elsewhere if they don’t get their own way sounds more like an argument in favour than an argument against.  And the suggestion that they are so uniquely talented and able that they need to be paid enormous rewards is surely a joke – these are the same people who thought that sub-prime loans were a jolly good idea, that credit default swaps were a good way out when it went wrong, and that gambling on derivatives with the money we put into our high street banks was perfectly acceptable.

No, none of that does anything to convince me.

Then we have the argument that the banks’ huge profits means that they pay a lot of tax, and we can’t afford to lose that money. That’s bringing us closer to my concern about whether a cap on bonuses is missing the point; because it’s not just the size of the bonuses which concerns me, it’s what they’re being paid for and how that profit is being made.  Capping bonuses doesn’t necessarily do anything to change that underlying activity.

Indeed; there’s a danger that the consequence might be quite the opposite.  If the total bonus available is less, does that mean that they’ll do less to earn it, or does it make them more determined than ever to earn the largest possible amount rather than settle for only half of what might be available?  Might it, in fact, incentivise them to take even more risks?

What few seem to be asking is where these massive profits on which we receive tax income actually come from.  Much of what the ‘investment’ bankers are doing bears as much relationship to the traditional meaning of ‘investment’ as does a fiver on the 3:30 at Newmarket.  It’s more to do with ‘taking a position’, to use their euphemism, on currency movements and ’trading’ in general.  It’s more like gambling than investment.  And if there’s one thing of which I’m certain when it comes to gambling it's that it doesn’t create any money; it merely recycles money.  Every profit is balanced by a loss somewhere else.

But, just like the lottery, the losses are usually spread in such a way as to be almost invisible.  Certainly, there’s an occasional ‘big loser’ to make up for the big winner; but generally speaking, as in most forms of gambling, there are a few big winners and a large number of small losers.  And the small losers from the banks’ casino approach to ‘investment’ are all of us.  That ‘profit’ is merely redistribution, from the many to the few.

It doesn’t even stop there though.  It’s clear that when they win, we lose; but it’s also become clear that when they get it wrong, they still win, and we still lose.  They’re gambling with our money, betting it against us, and doing it all with loaded dice.  And then they want us to be grateful that they give us some of our money back by paying as little tax as they can get away with on their profits and bonuses?  The amazing thing is that so many are falling for it.

The problem with banks isn’t that they’re paying bonuses; it’s what they’re paying them for.  And a cap on bonuses doesn’t even begin to scratch the surface of that issue.

Gamblers with systems

Tweet The massive failure and subsequent rescue of a Wall Street trader last week underlines the extent to which the trading floors of stock exchanges have been transformed from places which allocate capital to companies to casinos. 

The company itself blamed an ‘IT glitch’ for automatically placing  huge volumes of trades which sent the Wall Street share prices of 148 companies into a state of wild fluctuation.  Details of the ‘glitch’ have yet to be revealed, but as an ex computer programmer, ‘IT Glitch’ is not a term I can relate to. 

On this occasion, the computers may have done some silly things, but they were only acting on the instructions of their programmers – the glitch is ultimately a human one.  The human telling the computer what to do got it wrong – and the result of what was probably a very small error was the collapse of a company which lost £283 million in 45 minutes.

The response of the company’s CEO was remarkably sanguine – “Technology breaks”, he said.  It’s the reaction of a gambler, and like most gamblers, he and his company are unlikely to change their ways.

The fact that so much money can be won or lost in such a short period should worry us more than it appears to do in practice.  Much of the ‘trading’ on world stock exchanges is now automated.  Computers running sophisticated algorithms decide when to buy and when to sell; trading the same stocks over and over, thousands of times a minute, trying to leverage tiny differences in price by sheer volume and frequency of trading.  

Different computers using different algorithms compete with each other in tiny fractions of a second.  It’s even got to the point where the computer centres are being moved to be nearer to the exchanges – the time lost by a message travelling at the speed of light over a distance of just a few miles can put them at a disadvantage in this particular casino.

Whether the stocks and shares being bought and sold between the varying computer programs actually exist or not is an interesting but largely irrelevant question from the perspective of those involved.  All of this has nothing to do with the business of ensuring that companies employing real people to produce real goods in the real world have access to the capital they need, nor with investing in pension and insurance funds. 

It’s a casino, pure and simple.  And if there’s one thing worse than a compulsive gambler, it’s a gambler who has a ‘system’ with which he thinks he can break the casino.

With the exception of the shareholders in one particular company, who have seen the value of their shareholding plummet, we’ve got away with it this time.  There’s no guarantee that the next ‘glitch’ won’t have much more impact on us.  The best way of doing that is to put these people in real casinos, and leave them only their own money to play with.

More than beheading required

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It’s not so very long ago that we were being told that the UK’s top bankers had such ‘scarce and sought-after’ talents that they had to be paid huge salaries and bonuses for fear they might take those talents and abilities somewhere else.  It turns out that the immense talents being rewarded amounted, in some cases, to an ability to win when gambling with dice that they themselves were able to load.  It’s the sort of talent which, in any other walk of life, would be rewarded by a spell as a guest of Her Majesty rather than by a large bonus.

The spectacle of the big cheeses at the top of Barclays trying to hang on to their positions when everyone outside the banking sector can see they have become untenable is unedifying.  Their behaviour is not unusual, however – we’ve seen often enough in the past that people can have difficulty taking a sufficiently objective view of what they’ve done.  And that hasn’t been restricted to bankers - it's not dissimilar to some of the noises that we heard from MPs when the expenses scandal was at its height.

I’m sure that heads will be rolling before too long, and no doubt some will take pleasure in seeing them roll.  It’s not enough though – and there’s a danger that seeing off a few miscreants will be enough to remove the matter from the front pages.  Part of the problem is that the heads that roll will be replaced by other heads, and the probability is that the new heads will be drawn from the same small pool.  (After all, all those involved believe that the necessary talents are ‘scarce and sought-after’, don’t they?)

Does anyone really believe that the practices exposed last week were confined to one bank?  I, for one, don’t - and the news today that RBS had sacked some staff involved in similar activities confirms that it's more widespread than a single bank.  Staff in the banking sector move effortlessly between employers – at its worst, this means that those who screw up for one institution simply get appointed by another.  And the language in which some of the published e-mails were couched makes it clear that those involved thought that what they were doing was perfectly normal, and could see nothing wrong with it.

The Governor of the Bank of England has called for a culture change in banking.  That’s a bit better than merely removing a few heads, but I doubt it will be enough either.  Chris Dillow suggested last week that banking, by the nature of the beast, attracts precisely the sort of people who are likely to chase the money, regardless of morality.  Even were there to be an influx of new people coming in, it's more likely that they'll be swept up by the existing culture than that the culture will change.

In an editorial on the subject last week, the Western Mail suggested that it is ‘human nature’ to exploit weaknesses in the system for personal benefit.  I’m not convinced about it being the nature of all of us; but certainly for those driven first and foremost by personal greed, it’s a fair comment.

In any event, neither chopping off a few heads nor standing on the sidelines demanding culture change is likely to have anything other than a very short term effect.  The sector needs tighter and stronger regulation to ensure that it behaves in the interests of the economy and society as a whole. After all, if 'we didn't break any rules' is part of the line of defence, then changing those rules has to be part of the response.

We’re unlikely to get that, though.  It was notable that Cameron claimed a huge victory last week when he kept the UK out of the proposed new EU banking regime; a regime which might actually have helped by setting some common standards across the EU.  He'd sooner keep the UK out of tighter regulation in order for the bankers to make money at the expense of those who impose tighter regulation.  He, and his friends and donors, have more to gain by a bit of moral condemnation now followed by a swift return to business as usual.

Decisiveness isn't just for others

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Yesterday, Gordon Brown came out strongly in support of David Cameron’s position on the Euro.  The former Labour Prime Minister and the current Conservative PM are united at last in demanding decisive action from someone else – Germany, apparently – to bail out the Euro zone. 

I’m sure that it’s far from being the first time that they have agreed – after all, their economic policies presented at the last election were almost identical – but they usually manage to avoid saying it, and somehow pretend that there is a huge gulf between them.  But then, Gordon Brown isn’t the only former PM to seek to wear the mantle of statesmanship after losing an election, even if the garment doesn’t fit him any better than it has fitted its previous wearers.

That decisive action is necessary is, as far as it goes, difficult to disagree with.  It does, however, rather gloss over the analysis of cause which should precede that decisive action.  And most of all, it glosses over the UK’s rôle in the Euro crisis.

Any financial crisis of this nature has two elements which combine to impact on its seriousness.  The first is the financial problem itself.  On that score, there can be little doubt that Greece, the centre of the current crisis, has got itself into something of a self-inflicted mess after, to all intents and purposes, having doctored the figures to qualify for Eurozone membership.  That is not to excuse those who could and should have spotted the doctoring, such seems to have been the scale of it, but the root cause lies with Greece itself.

If the crisis were limited to that, I don’t doubt that it would be manageable with good will on all sides, but then the second factor kicks in – the reaction of the ‘markets’.  The way this factor is usually treated, one might think that market reaction can be treated as though it were a rational phenomenon; a group of people taking a long hard look at the financial fundamentals before coming to a considered conclusion about the prospects, and setting interest rates accordingly.

The reality bears little resemblance to that.  It is more a case of a group of wild animals stampeding in a particular direction because one of them got spooked and the others are afraid of being left behind unless they blindly follow.  It is often irrational and subject to a herd mentality.

And that brings me back to the UK’s rôle in all of this – for where is the pre-eminent European habitat of these wild herds if not in the City of London?  And how have they been allowed such free rein to bring down whole economies in the interests of pursuing their own narrow financial interests if not for the deregulation – or studious lack of regulatory action - by the last five UK Prime Ministers, Labour and Tory alike?

We undoubtedly need some decisive actions, but two of those are in the hands of the UK PM himself.  The first is a firmer regulatory control over the speculation and gambling in the City, and the second is the financial transaction tax which both parties in government have so firmly rejected.  Neither of those actions would do anything to touch the underlying problems, but they might help, at least a little, to stop the exacerbation.

But the UK Government seems intent on doing exactly that of which so many accuse (with some justification) the Welsh Government – criticising others as a substitute for acting themselves.

Gambling and trading

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If I went to the Business Minister in Cardiff with a business plan that said I was going to create new jobs by training people to go into the nearest casino and place a large number of large bets, I wouldn’t really expect the Government to offer me money from the ‘Economic Growth Fund’, no matter how well-paid the jobs appeared to be.

However, if I called the casino a trading floor, and said that I wasn’t going to train the employees to bet, just to buy and sell bets placed by other people, I’d probably be in with a better chance, in the light of this story from last week.

I’m unclear at what point precisely gambling and speculating becomes transformed into ‘financial services’; the dividing line is far from clear, although whenever I hear or read the word ‘derivatives’, I start to suspect that a line has been crossed. 

At one extreme, placing bets in a casino is clearly gambling; at the other extreme, there needs to be a market in which commodities are traded.  But somewhere between the two, ‘trading’ changes from being about the efficient exchange of goods to being a mechanism for complicated gambling.  And complicated gambling was a major factor in the financial collapse.

The Welsh Government’s apparent pre-occupation with ‘financial services’ is of concern.  The argument that 'it’s going to happen somewhere, so why shouldn’t Wales benefit?' is not one with which I am comfortable – it sounds awfully similar to the argument that 'someone will sell armaments to dictators so why not us?'.  It’s an excuse for putting morality and long term considerations to one side in the name of getting whatever jobs we can in the short term.

There is a parallel, in a strange sort of way, with the support shown by some for new nuclear power stations in Wales; in both cases the big questions about the sort of economy/ environment we want to create are cast to one side in the interests of short term advantage.

Taxing speculation

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I was pleased to see that First Minister Carwyn Jones has backed the idea of a tax on financial transactions.  The Tories, of course, immediately responded by opposing it.  The cynic might suggest a relationship between that and their main source of funding, but the arguments actually advanced are worth considering.

They are absolutely right, of course, to suggest that a tax in only some of the world’s markets would damage the industry in those markets, and probably drive some of the business elsewhere.  The question, though, is whether that’s a good thing or a bad thing.  They assume that it’s bad – I’m far from convinced.  Anything which reduces the volume of speculative trading and gambling seems to me to be a good thing rather than a bad one.  And sending the worst offenders elsewhere to do their business doesn’t exactly worry me a great deal either.

It’s also true that a reduction in speculative activity in the City would hit tax revenues.  The Tories refer to the large contribution made by financial services to the Exchequer.  As ever, however, things aren’t quite as black and white as that.  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.

So, in relation to the proportion of GDP which financial services represent, they actually pay less tax in total than other equivalent sectors; one of the reasons that they are good at making profits for their owners is that they’re also good at minimising tax payments.

And anyway, is the fact that an activity which is inherently undesirable generates a lot of tax a good reason for wanting the activity to continue?  I’m not convinced.  Over and above that, there’s the opportunity cost.  How much better off might we all be if all those clever people devising ever more complicated ways of making pennies at the margin in large enough volumes to be worthwhile applied their skills to more socially beneficial activities?

As for the line about not acting in Europe until the whole world is ready to act – that’s a recipe for no-one doing anything ever.  It’s not that dissimilar to the anti-wind farm argument that the UK can make no difference because we only produce 2% of the world’s emissions.  The longest journey starts with the smallest step; and if we believe that a financial transactions tax is the right thing to do, it doesn’t become the wrong thing just because not everyone is yet convinced.

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.

Controlling the markets

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Marcus draws attention to the extent to which ‘the markets’ now control policy, with governments being mere bystanders.  The Observer article to which he links also underlines the way in which governments are being changed undemocratically to satisfy ‘the markets’.

Saturday’s Western Mail had a leader column on the Eurozone crisis, which argued that two things are now necessary.  The first is that Germany must take the lead, and the second is that ‘the markets’ must give the Eurozone time to breathe.  I don’t know whether the first will happen or not; but I’m confident that the second won’t.

There is a tendency for politicians and commentators to imbue ‘the markets’ with rather more rationality than is actually justifiable; the idea that they should also show some responsibility or compassion to the people of countries such as Greece and Italy is about as likely as porcine aviation.

The economic idea of the market acting as Adam Smith’s ‘invisible hand’ to match buyers and sellers has long since been lost in the financial sphere, as individuals and organisations have realised that they can make money for themselves by speculating rather than buying or selling anything, let alone investing.  But as with any other type of gambling, one person’s profit is another person’s loss.  And the losers, in this case, are most of us.

If the speculators believe that they can make a profit by bankrupting a country or two, undermining a currency, or bringing down a few leaders, then no appeal to their better nature will stop them.  And even if it did stop some of them, there would simply be others who would pounce on what they would see as weakness to line their own pockets.

That doesn’t mean that the WM leader writer is wrong to want to see the markets giving the Eurozone a break; it just won’t happen voluntarily.  We sometimes seem to forget that the markets are a human artifice, not something with an objective existence of their own.  They were created to fill a social need, but have been subverted in the interests of the few – it’s another example of the 1% and the 99%. 

If we wanted, collectively and internationally, to re-assert social control over them we could do so.  The fact that so many of our politicians are unwilling even to countenance that merely underlines the extent to which those who benefit from the system also control the political agenda.

In many other contexts, people who enrich themselves at the expense of others, even whole countries, would be regarded as criminals.  Why do we allow ourselves to be so beholden to them?

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?

Ozonomics

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The way the turmoil on the stock markets has been reported, it appears all to be a matter of  a lack of something called ‘confidence’ by people called ‘investors’.  Whatever this ‘confidence’ stuff is, it seems to be pretty elusive.  ‘Investors’ can be full of it one day, and completely devoid of it the next, it would seem.

I’m far from convinced that ‘investors’ is the right description for people and organisations who are buying and selling stocks on the short timescales which are at work here.  Gamblers and speculators seem to be much more accurate terms.  They’re looking to maximise their own short term profits, or at worst minimise their own short term losses; ‘investment’ is surely a more long term activity.

It’s also not made entirely clear in what they have lost their ‘confidence’.  There’s no obvious reason why a company which was worth £x yesterday is suddenly worth a lot less today, nor why its performance is suddenly going to worsen.  I suspect that what these ‘investors’ have really lost their ‘confidence’ in is each other.  They are acting on the basis that someone else might sell before they do, so they’d better get their retaliation in first, or else they’ll lose out.  From then on, the herd instinct takes over.

It’s a dubious strategy over the long term, even in a casino.  But as a way of driving the world’s economy, it’s a lot worse than dubious.

Since this ‘confidence’ seems to be entirely a matter of belief rather than anything tangible, rational, or measurable, perhaps what we need is an all-powerful wizard to issue confidence certificates to anyone who’s feeling a little short of the stuff.  And if it turns out to be no more than a small man with a loud-hailer behind a screen, that doesn’t really matter – once people have their certificates, they’ll be fine.

I’d like to think that this was a tongue-in-cheek suggestion, but I wonder whether it is really very far from the reality of the system which we allow to control us.

Theft and blame

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Most people working in a large organisation will have seen the game of ‘Credit-stealing / Blame avoidance’ being played.  When things go well, everyone wants the credit – but when they go wrong, someone else is always to blame.

There’s also a power element to the game – the higher up the tree you get, the more people there are below you from whom you can steal credit or on whom you can dump blame.  It’s not unrelated to the habit of organisations which sack the workers when things go badly, and reward the managers when things go well.  Or in some cases reward the managers when things go badly, even before they sack the workers.  (This story about a boat race between a Californian team and a Japanese team expresses the attitude at its worst.)

Governments are not above a little bit of theft/ avoidance either.  I don’t doubt that if yesterday’s figures for the past quarter’s growth had been somewhat better, it would all have been the result of the magnificent economic management of the UK Government, and would have proved that we were on track.  But they weren’t, so it’s all the fault of those royals deciding to get married at a time of the year when there are two many bank holidays already.

And if there hadn’t been a royal wedding, then no doubt it would have been down to some other special factor, or, as a last resort, the overall world economic situation.  No matter what the outcome, there was never any danger that government policies would have been responsible for poor performance, nor that poor performance could in any way suggest that the government was on the wrong track.

Given the way that globalisation and multinational capital have led us into an increasingly intermeshed economy, I’m not sure how much difference government policy – even at UK level – really has on the fundamentals of economic growth and overall performance.  It certainly has an effect on who pays the price of failure, and alternative approaches could have shared that cost out much more fairly.  But I really do doubt whether a marginally different approach to spending and taxation (which is where the political debate has centred) could ever have had a significant effect on the GVA figures.

Most of the decisions which affect the economic fundamentals are not only outside the government’s control, they are outside any democratic control at all.  They have been outsourced to the markets and the money men; the speculators and the gamblers.  Unless and until we assert control over capital, it will continue to control us – and government claims or denials about economic performance will continue to be mere froth.

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.

Just moving it around

Tweet Bonuses are a part of the remuneration package of a lot of people in a lot of jobs; it isn't just bankers that benefit. And in principle, rewarding those who achieve targets can help to improve the effectiveness of organisations. There are, however, legitimate questions to be asked about the size of bonuses, and the basis on which they are paid.

It's a mistake to lump all 'bankers' together as though they were all the same – they are not. But they're not all in line for big bonuses either. The bankers who do the more mundane day to day stuff which we all depend upon to manage our money are performing a useful function - but they're not the ones in line for the big payouts. No, it's the gamblers and speculators; the ones who take all the risks with other people's money - they're the ones lining up to claim their rewards.

What some of the people in the financial services sector seem to be unable to understand is that it isn't the mere fact that they want to pay themselves bonuses which raises hackles; it's a combination of the size of those bonuses and the relationship (or lack of) with their contribution to the success of the organisations for which they work.

There is a great deal of difference between making people wealthy, and creating wealth. There is no doubt that the gamblers and speculators achieve the first; some people (and not just the bankers themselves) have become very wealthy as a result of their activities. But it isn't because they have actually created any wealth; all they've done is to move it around a bit.

Like Robin Hood in reverse, they actually take a little from the many to give a lot to the few. In that sense, their activities have not only been socially useless; they have actually been detrimental to the interests of most of us. The fact that some of them have threatened to take their 'skills' elsewhere unless they are allowed to be paid that to which they think they are entitled shows only how far removed they are from reality. I'm tempted to say 'let them go'; my problem is that I wouldn't wish them on anyone else either.

Useless bankers

Tweet Lord Turner's criticism of "much of the City's activities" as being "socially useless" is something with which I can disagree only in the sense that it is too mild. "Socially useless" suggests only that it doesn't achieve anything of value to the wider society; I think that it is positively damaging to the wider society, and the phrase which I have used repeatedly is that the activities are the high finance equivalent of anti-social behaviour - except it typically gets rewarded rather than punished.

Still, given the background and role of Lord Turner, it's a pretty stinging criticism, even if he doesn't go as far as I would.

Even if the activities themselves are 'merely' "useless", the fact that so many people are involved in activities which contribute nothing of any social value is in itself damaging. But it's actually much worse than that, for those activities have contributed to undermining, and eventually came close to destroying, the whole economic system. Whilst a few have enriched themselves through gambling and irresponsible risk-taking, they have done so at the direct expense of those who depend on pension funds and stability.

The response of some of those involved was pretty predictable. But I don't understand why they expect us to be frightened by their threat to go and destroy someone else's economy if we don't let them destroy ours. It sounds to me like the most socially useful idea that they've come up with to date. My biggest problem with it as a solution is that I wouldn't wish them on anyone else either.