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Paradigm reclaimed: new economic principles for finance

eddie — Thu, 06 Nov 2008 18:22:39 +0000

The predictable crisis in the global system is the most important sign yet that a new economics is emerging. The tragedy is that the crisis-ridden financial system has long since failed to do the basic job required – to underpin the productive economy, and the fundamental operating systems upon which we all depend. These have been variously neglected, taken for granted or cannibalised by finance. They include the core economy of family, neighbourhood, community, and society, and the natural economy of the biosphere, our oceans, forests, and fields.

Worse, even when the financial system has been working at full throttle, it corrodes the real economy by its sheer profitability and faulty measuring and dominates the policy priorities of politicians.

If nothing else, the crisis provides an opportunity to rebuild a financial infrastructure which does the job, which means investing – not just bailing out failed banks – but in loan facilities for an interdependent network of productive local economies that genuinely underpin life and works within the tolerance levels of the natural environment. This is now possible because the state owns a large slice of the financial system.

The priority of politicians is to restore the normal functioning of the banking and financial system. A rapid return to ‘business as usual’ is the plan, which will hopefully be accompanied by an ‘upside’ for taxpayers as governments are able to sell their equity stakes at a profit when normal market conditions return.

This is all very comforting of course, but is it actually such a good idea? After all, it was ‘business as usual’ that got us into this mess in the first place. We now have a unique opportunity to pause and consider what the financial sector is actually for and to put in place institutional and regulatory structures that enable it to perform these functions well.

new economics regards finance as a means to an end: to support inclusive, equitable and sustainable economic activity that creates real value – economic, social and environmental. It is difficult to argue that much of what the financial sector has been focusing on relates positively to these factors, or that a return to ‘normality’ would change this.

If our current system does not support these outcomes, the question arises as to what would. The following six principles are the starting point for rebuilding the financial system so that it supports, rather than corrodes, the real economy.

1. Scale

The financial sector is just too big. It is too big internationally and it is too big in many nations, particularly in the UK. It dominates the real economy and skews policy. Major institutions are also too big. We have created financial conglomerates that are both ‘too big to fail’ and riddled with conflicts of interest.

Regulators need the tools that were removed in the name of deregulation. To regain real regulatory control, all activities need to be brought onto the balance sheet and regulated appropriately. This means the Government must:

CREATE regulators with real power, making sure banks have more stringent capital ratios that vary to reflect changing risk, and force disclosure of lending and deposit-taking both by income level and geographic location, along the lines of the Community Reinvestment Act in the USA. This will guarantee some degree of financial inclusion and stop any more Northern Rocks from abandoning their core market and the local economy in pursuit of ever greater paper profits.

REDUCE the dominance of the financial economy over the real economy by reducing leverage ratios and putting in place regulatory triggers that can ease situations of financial over-extension.

BREAK up the big accountancy firms and credit rating agencies responsible for auditing banks and financial assets and end their reliance on selling consulting services to their accountancy clients. These institutions should be providing a public good, which is distorted by the drive for private gain.

The further removed investors are from real assets, the less knowledge they have about them, and the more their behaviour is driven by the psychology of the herd. The historical practice where banks knew and understood their sector, location and customers over the long-term is largely a thing of the past.

We need to reconnect investors and investments, and this is best achieved when finance is as local as possible. The principle of subsidiarity should apply. This requires regulators to have the freedom to control entry into different markets, including the targeted use of international capital controls where appropriate.

That means the Government must:

PROVIDE the appropriate level of lending to the most local level viable. This means rebuilding a local lending infrastructure, including community finance development institutions (CDFIs) and credit unions, and a new mutual sector to replace the one hollowed-out by demutualisation for short-term profit over the past generation.

TURN Northern Rock into a national loan board for low-cost housing and public works, along the lines of the US Government’s National Mortgage Association, Ginnie Mae.

GROW the post office network into a national banking system that delivers stable, accessible and dependable services to the public and to businesses, along the lines of the post office banks in Italy and New Zealand. It stands to be one of the best guarantees underpinning economic resilience, promoting financial inclusion and allowing people to invest and save with confidence and security.

REPEAL the Basel II rules which encourage self-regulation and give cheaper capital to the most leveraged and reckless banks, and replace it with flexible regulation that is tighter in boom times (see below).

USE flexible capital controls as an active tool of economic policy to exert democratic control over destabilising flows of finance without having to resort to emergency legislation, and reject international agreements that discourage other countries from doing likewise.

3. Stability

Booms and busts are inherent to financial markets and devastating to real economies. A related factor is maturity, with short-termism an endemic problem. Regulation could offset these forces by tightening controls in booms and loosening them in downturns, and by discouraging short-term speculation. For example, capital requirements could increase in upturns and fall in downturns, while a small financial transaction tax would discourage high-frequency, short-term trading, but leave longer-term investments unaffected. That means the Government must:

SET a sliding scale for regulation: from the smallest and most local institutions enjoying light-touch regulation, to the biggest having the strictest rules and severest controls. The current situation is the opposite of this. It has allowed big corporates and financial institutions the greatest freedom while suffocating small enterprise.

TAX financial returns on investment on a variable basis when they mature to privilege long-term investment over speculation. This would assist the sort of infrastructure and energy-usage change whose long-term benefits the short-term speculators are not interested in. This could also be done with a financial transaction stamp duty.

SET a Currency Transaction Tax to avoid destabilising runs on entire economies and to discourage the short-term, speculative movement of paper assets and to encourage long-term, sustainable investment. This will raise revenue and calm the speculative financial markets.

USE counter-cyclical capital controls which demand more safeguards from banks over savings and deposits in booms but enable them to support the economy during recession.

CO-OPERATE to investigate the establishment of a new global reference currency to underpin the global economy – along the lines of the bancor proposed by Keynes at the Bretton Woods summit – and back it by a basket of commodities. Re-establishing the link between money and a finite resource is a key step in reining in the financial sector and putting it at the service of the real economy.

4. Diversity
As institutions stopped specialising and became financial conglomerates, they converged on the most profitable activities. During the boom this was largely trading or speculative activities which paid handsome rewards but also fuelled the boom itself. The flipside was that less profitable activities – such as maintaining a branch network and providing financial services for low-income people – become ever more marginalised.

We need financial institutions to focus on specific functions and to do these well, not to chase the latest bandwagon. Formally segmenting the system by function ensures this diversity, but also allows us to regulate appropriately in each sector. That means the Government must:

USE their control over the high street banks to reverse the era of banking mergers, separating banks into core functions and specific markets, providing genuine competition for local business in the high street.

INVEST in social housing, including purchasing properties from defaulting mortgage-holders and renting them back to them at affordable social rents. Act to reduce the price of housing in the future, providing the means whereby local authorities and housing associations can buy land, and setting up Community Land Trusts to keep the cost low.

BUILD a network of complementary currencies to provide credit and independence to regions, towns, cities and neighbourhoods, and to provide low-cost or free credit to support sustainable local economies.

CO-ORDINATE international action to avoid a ‘race to the regulatory bottom’.

5. Value

Real value is not always the same as financial value, and may even be destroyed in the drive to create it. We need a more holistic view. Financial returns should not come at the cost of economic, social and environmental value, but should accurately reflect long-term improvements in these underlying factors. To achieve this we need to find ways to build in robust measures of social and environmental value. That means the Government must:

LICENCE and bring onto the balance sheet every special financial vehicle and every exotic financial instrument. All derivative products and other exotic instruments should be transparent and inspected as accountancy requires of all other assets. Only those approved should be permitted to be traded. Anyone trying to circumvent the rules by going offshore or on to the internet should face the simple and effective sanction of ‘negative enforcement’ – their contracts would be made unenforceable in law.

INCORPORATE triple bottom line valuations on a significant proportion of future loans, and more sophisticated measures of viability, including Social Return on Investment measures.

INTRODUCE new methods of local investment, including ‘People’s Pensions ’, linked to investment in local infrastructure, to provide secure savings vehicles for retirement, and local bonds as a secure investment vehicle for savers that also helps to finance essential investment and new infrastructure for a more environmentally sustainable Britain.

6. Democracy and participation

The crisis has highlighted the need for institutions that can take a global view but we also need these to act in the interests of all, not just the most powerful groups. This requires new mechanisms for real political participation at the supra-national level. Locally, we need different ownership models, such as mutuals and co-operatives, that work in the interests of their members, owners and local communities, rather than simply seeking out the highest returns. This adds diversity to the financial system and also enables local priority setting, accountability and participation.

We need a more pluralistic system of ownership, designed intelligently to align the interests of financial institutions with the broad public interest, locally, nationally and internationally. None of this will just happen. Left to their own devices, financial markets tend towards greater size and homogeneity of ownership and practice, rather than to appropriate scale, regional or sector specialisation or to a plurality of ownership forms. That means the Government must:

END the use of tax havens, many of which are actually British Crown Dependencies, and tackle corporate tax avoidance.

INSIST that the IMF and World Bank are governed as mutuals, with one member one vote not as profit seekers with one share one vote, because – just as governments and central banks around the world are showing – the profit motive is not able to extricate us from this mess and central banks and multilateral financial institutions must prioritise stability over returns.

INTRODUCE a moratorium on crash-related home evictions, and radical innovations to prevent a repeat of destructive house-price inflation. The credit crisis is inseparable from distortions in the housing market. While the Banks, which are at fault, have been bailed out to a previously unimaginable degree by the tax payer, thousands of hard-working home-owners face the daily insecurity of potential eviction as the recession makes it harder to meet repayments. This is deeply unjust, destabilising and imposes a huge burden on society. Evictions could be stopped and in their place could be put long-term plans for restructuring householders’ mortgage debts.

We need to combine these measures with an ambitious ‘Green New Deal’ which allows us to tackle the combined financial and climate crises in a co-ordinated way; to fight the recession whilst tackling energy insecurity and climate change.

A key test is how, in economically stressed times, affordable finance can be made available in a targeted way to kick-start new, low-carbon, energy, transport, food and housing sectors and to provide much-needed jobs. One of a number of useful precedents is the example of South Korea. Over many years it channelled lines of low-cost credit to strategic parts of its economy. The success of this policy can now be measured by how many of the sections of South Korea’s industry which benefited are now ‘world leaders’. We need similar vision today.

While the UK Government is not sitting down with a blank piece of paper to design an optimal financial system, it is closer to this position than at any other time in living memory.

We have a unique moment of opportunity.

If we want to draw a line under the mistakes of the past and build a financial system that supports equitable and sustainable economic activity, we need to take this opportunity, for it surely will not come again. The Government should reconfigure ownership and diversify the financial sector to appropriate scale to make sure that it becomes a driver of real and sustainable value creation that ensures we will not be condemned to repeat the mistakes of the past.

Mervyn King’s moment of clarity

Simon Birritteri — Sun, 26 Oct 2008 15:26:19 +0000

There is some truth in the old saying, “Don’t shoot the messenger”. Though his admission was certainly damaging, Bank of England governor Mervyn King’s statement Tuesday before businessmen in Leeds that, “It now seems likely the UK economy is entering a recession”, was not responsible for the precipitous fall of the pound that followed.
If anything, King’s was a deliberate understatement of the real position facing the UK economy. What was in reality most significant in his statement was his frank admission that on October 6 and 7 Britain’s banking system had been closer to collapse than at any time since the start of World War I.
King told his well-heeled audience that it is “difficult to exaggerate the severity and importance of those events. Not since the beginning of the First World War has our banking system been so close to collapse”.
Bank funds had started to dry up and it required the radical action of the £500 billion bank bailout to ensure the survival of the financial system. Even so, King insisted that the provision of liquidity by central banks was only “a sticking plaster” and not a substitute for proper treatment of the problems afflicting the banking sector.
King went on to speak of how “the plan to recapitalise our banking system, both here and abroad” meant we had “turned the corner” and begun “a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions.”
But this proved to be less convincing than his admission, as summarized by the BBC, that “this was one of the worst banking crises ever. He does not say in so many words, but the Bank of England, along with counterparts at the Treasury and the Financial Services Authority, seem to have found themselves looking over into an abyss with unthinkable consequences if they fell.”
The next day, the pound plunged almost five cents against the dollar and fell against the euro. The 3.4 percent fall to its lowest level since September 2003 was the biggest decline since September 1992, when investor George Soros drove sterling out of Europe’s Exchange Rate Mechanism.
However, King’s remarks could only have an impact if what he was admitting was what the markets already believed—that sterling is overvalued because of the dire state of the UK economy. In reality the UK is already in recession, something that Prime Minister Gordon Brown was also forced to accept in a speech to parliament the next day when he warned of a “sharp and prolonged slowdown”.
Moreover, the pound’s fall took place against a background of sharp falls on European and Asian stock-markets due to fears of a deep global recession with the United States at its epicentre.
The International Monetary Fund’s six-monthly study has warned that euro zone economic growth will almost grind to a halt next year, with zero growth in Germany, Europe’s most powerful economy. With Sweden only the latest European government to announce a $205 billion bank rescue, the IMF also warned Wednesday that more European banks might still fail. Private funding is “virtually unavailable” the IMF said, and banks will have to rely on public intervention, asset sales and consolidation. Europe’s banks have already been forced to borrow $72 billion in short-term loans from the European Central Bank, as other credit sources have dried up.
Even so, it is becoming clear is that the UK economy is perhaps the most exposed to the global downturn. The National Institute of Economic and Social Research has said the UK is on the brink of its first full year of recession since 1991 and that the economy will shrink by 0.9 percent in 2009, with consumer spending falling by 3.4 percent, business investment down by 3.8 percent and private housing investment by 17.1 percent.
The NIESR has warned that “The British economy will suffer next year as it experiences the worst setback among the G7 countries.” And if the government’s £50 billion banking bail-out did not succeed, the recession could be even deeper and longer. The NIESR said its forecasts assumed that the Bank of England would cut interest rates to 4 percent early in 2009.
The Ernst and Young Item Club predict that the UK economy will decline more dramatically still next year—by one percent—and that it has “deteriorated dramatically” in the past three months. The credit crunch would hit the economy “very hard”, it warned. Consumption will fall by 1.2 percent next year, with credit continuing to be hard to obtain and unemployment expected to rise.
It also predicts house prices will fall 14 percent by the end of this year, and drop a further 10 percent next year. Mortgage lending fell to its lowest level for more than three and a half years during September, according to the Council of Mortgage Lenders, ten percent less than during August and fully 42 percent below the level for September last year. Housing sales have fallen by more than half, down 53 percent in September compared with the same month in 2007. Andrew Clare, head of asset management at Cass Business School, told the Sunday Herald that housing prices could slide by a further 40 percent, “taking UK house prices to 2023 before they matched the level reached in 2007.”
The Confederation of British Industry has reported falling demand for UK made goods and a drop in output leading to the sharpest single-quarter fall in manufacturing confidence in 28 years, with 46 percent of firms reporting falling orders—the fastest decline since 1999. Many firms are planning to reduce spending on machinery and buildings, the largest cut back since the early 1980s. UK retail sales fell 1.5 percent below their September 2007 level, with Homebase, Currys and Argos reporting falling sales. “Christmas will be painful for much of the sector as consumers continue to batten down the hatches,” reported Ernst and Young.
This will lead to a massive rise in unemployment.
The CBI predicts that 23,000 manufacturing jobs will be shed in the third quarter and that this number will increase to 42,000 in the fourth quarter—a total of 65,000 redundancies. Such job losses in manufacturing will add to the hundreds of thousands in the financial, retail and service sectors.
The number of people out of work in the UK has soared by 164,000 compared to the previous quarter, the biggest rise for 17 years. Now at 1.79 million, or 5.7 percent, unemployment is widely predicted to stand at two million by December possibly rising to three million by December 2010—or nine percent.
The Chartered Institute of Personnel and Development said that recruitment is slowing and redundancies rising. “We’ll see hundreds of thousands of jobs being lost, and unemployment is likely to rise, certainly above two million. The question is how much further than that,” said the organisation’s chief economist, John Philpott.
The Sunday Herald, in a survey entitled “Capitalism isn’t working” noted that unemployment would rise across all sectors of the economy, all age groups and all regions.
It reported, “In the last turn-down in the 1980s some areas of Britain escaped, especially London and south east England. This time round, unemployment in London is already estimated to be 300,000 and rising daily as the City’s financial institutions re-evaluate their needs in a shrinking market. The latest unemployment figures appear to show increases across Britain and there is no evidence to suggest that the rise towards three million won’t be uniformly felt.”
This is politically significant in that both the Conservatives under Margaret Thatcher and John Major and Labour under Tony Blair and Gordon Brown depended on relatively better-off social layers predominantly located in the south east to provide a degree of social support for their pro-business agenda. Now even that is breaking up, threatening ever-sharper political and social convulsions.
The efforts by government to bail out the super-rich also herald massive attacks on working people. UK government borrowing soared to a 60 year record high of £8.1 billion in September and is projected to reach £64 billion this year or over 40 percent of GDP. With £500 billion already committed to supporting the banks it is inconceivable that increased levels of borrowing can be sustained without tax hikes and deep cuts in public spending and welfare programmes.

Heroes with feet of clay

Simon Birritteri — Sun, 26 Oct 2008 14:40:09 +0000

ALISTAIR Darling would have us believe that government policies have had no effect on the current recession – it’s a global phenomenon over which we have no control.

At the same time, he tries to cheer us all up by meaningless statements such as “I’m confident we’ll get through it.”

Of course we’ll get through it. Economies always get through recessions, but the questions are, in what state we will be and who will pay for it.

The Chancellor and the Prime Minister pride themselves on having bailed out the banking system by heaving billions of pounds at it and running parts of it with a view to returning it to the class of adventurists who broke it in the first place.

The role of the banks ought to be to provide investment to businesses and to loan money to people for large purchases that they can’t afford to buy outright.

Instead, they have become money-printing operations, dedicated to maximising profits by loaning people more than they can afford at premium interest rates and by gambling on futures markets.

And even now that the government has advanced huge sums to the banks at low rates of interest, they are still restricting credit to small businesses and are crucifying homeowners.

Public ownership of the banks could provide the stability for a new economic and political approach that would see working people not only survive the recession but do so by building a society with different priorities than those cherished by the neoliberal fanatics at the head of all three major parties.

Today’s recession and the financial meltdown that signalled its onset were caused by reliance on market forces rather than government involvement to champion the public interest.

Banks seeking to return to profitability will want to sack large numbers of staff and repossess homes. Building corporations will mothball house-building plans until the housing market revives.

And the energy transnationals will be happy to continue screwing us all with their manipulated markets. If “we” get through this recession without mass unemployment, increased homelessness and winter carnage through hypothermia, we need a different approach.

The government has shown with the banks that it can afford to invest when it has the will to do so.

That will has to be expressed by putting building workers back in jobs to thaw out the frozen housing schemes and by initiating a state-funded council housing drive.

Public works, especially on Crossrail and new high-speed inter-city links, must be prioritised and there has to be immediate action to sequester energy company profits to assist people faced with unpayable fuel bills.

There must be no return to new Labour’s adoration of the stinking rich, exemplified by recent media publicity given to Peter Mandelson’s holiday haunts.

The costs of this crisis should be paid by those who helped create it and who enriched themselves in the good times. It’s time for an effective wealth tax and higher taxation on big business and the rich.

Now that the Establishment’s economic heroes have been shown to have feet of clay, it’s time for an alternative approach based on justice and co-operation rather than avarice.

Time to cut the losses

Ellie Keen — Fri, 17 Oct 2008 18:25:04 +0000

In the last week, stock markets the world over have been showing the classic signs of bipolar disorder, but in the most concentrated form. Euphoric, manic, hysterical highs followed by the deepest depression. Much of it, say some of the commentators, is internally generated, the result of speculators feeding off each other’s panic.

But as everyone else knows, there are clear external causes. The soaring highs are the direct result of a renewed series of injections, by governments and central banks, of credit – the same stuff that the world’s financial system became addicted to and wholly dependent on during the “long boom”. It doesn’t help. Yesterday, the two largest Swiss banks UBS and Credit Suisse were obliged to seek new capital in a further attempt to prevent them turning into non-banks, ceasing to exist, becoming, as Monty Python had it, dead parrots. When the Swiss banks fall, there’s nowhere safe left for your money.

The stock market lows – a five-year retreat reached in the UK and back to the 1980s in Japan – are the result of an avalanche of indications that the recession is not only with us, but will last for years. Giant corporations are bankrupt, jobs falling off a cliff, house prices dropping like a stone. Even the price of oil has fallen back, as the speculators move their money elsewhere. China, which has powered the global economy, is cutting back and shutting down factories.

The Brown-led government, which has taken on the role of street-level pushers, are looking to raise the money that they are guaranteeing to the banks by issuing more debt to the investment markets. But there’s a limit to what can be raised. The rest will come from an assault on government spending, public services, the elimination of the legal guarantee for public sector pensions, and last but not least, any measures to deal with climate change – irrespective of Miliband the Younger’s pronouncement on an 80% emissions reduction by 2050.

Early signs of the brutal reality that will result came from the news that under Brown and Darling’s control, Northern Rock has been foreclosing, repossessing and evicting at double the rate of the rest of the industry. So much for the benefits of “nationalisation”.

Brown knows that the bankers’ bail-out won’t stop the rot, so he’s promoting a restructuring of the world’s economy, along the lines of the Bretton Woods arrangements that laid the basis for the post-war recovery and the boom years. The Financial Times says this is premature, adding:

“Lest we forget, Mr Brown himself was in charge of the IMF’s ministerial steering committee for a large part of the past decade and yet signally failed to implement the ideas he is parading. During this time, it was repeatedly explained to him that every early warning system devised by the finest minds in international economics, including those at the fund, either predicts crises that never arrive or misses those that do.” The paper of business is correct. The basis for restoring stability after a decade and a half of the Great Depression wasn’t Keynes’s proposals, but the massive destruction of surplus productive capacity and human lives during the second world war.

A much easier, less destructive way out of the mess would be to cut the losses, admit the capitalist system is bankrupt and make the transition to a new kind of economy altogether. One based on not-for-profit production, social ownership, self-management, planned production for need, distributed via an intelligent market informed by democratic processes and expressed preferences. That’s what we will be discussing tomorrow at the Stand Up for Your Rights festival. Be there!

Bankrolling Coal

Ellie Keen — Sun, 05 Oct 2008 12:49:58 +0000

Not just the Oil & Gas Bank

As national controversy grows over proposals for a set of seven coal-fired power stations, UK banks are fuelling the global coal boom – the ‘roll to coal’.

PLATFORM’s recent report, Cashing in on Coal, finds Barclays and HSBC trailing behind the UK leader in fossil fuel investments, RBS-Natwest. The report estimates that in the last two years, RBS was responsible for $15.93 billion of financing of companies involved in extracting or burning coal – compared to Barclays’ $5.79 billion and HSBC’s $10.10 billion – from Germany to India, from Portugal to Australia.

Financing coal mines and power plants in today’s carbon-constrained world can never be sustainable practice. However, RBS is involved in financing many of the most controversial companies involved in rapid coal expansion, some of which are engaged in practices with particularly harmful social and environmental consequences. The bank participated in two mega loans totalling $70 billion to German power-giant E.ON – either side of the company’s announcement of plans to build 17 new coal and gas power plants across Europe. E.ON has generated a great deal of controversy over its plans to build a new coal-fired power station at Kingsnorth in Kent – the first in 30 years in Britain. Its critics have included NASA scientist Dr James Hansen, a large cross section of NGOs ranging from the RSPB to the Women’s Institute and more than 2,000 direct action campaigners who took part in August’s Camp for Climate Action.

Elsewhere, RBS took part in providing $800 million of credit to Arch Coal, the US’ second largest coal producer. Arch Coal has been heavily involved in mountain-top removal mining (MTR) – a practice of blasting off the tops of mountains with powerful explosives, then dumping the mountain-tops into nearby valleys. Rather than remove the coal from the mountain, MTR involves removing the mountain from the coal. More than one million acres of biologically diverse hardwood forests in Appalachia, eastern USA, have already been decimated. For local communities, MTR means the loss of thousands of jobs, growing poverty and increased health risks from toxic coal sludge.

While providing billions to companies like E.ON and Arch Coal, RBS claims to be addressing the environmental and climate impacts of its operations. It is particularly proud of two recent events it hosted: its 2008 Annual Economic Lecture titled “Towards a low carbon economy” and the UK Low Carbon Economy Summit co-organised with the Department for Business, Enterprise and Regulatory Reform that took place at the Tate Modern in London.

In the event’s opening speech, RBS Chairman Sir Tom McKillop laid out his company’s position: “As a leading banking partner of the energy sector for many decades, RBS recognises its responsibility in addressing these challenges.” The statement would be commendable, were it true. While proudly advertising RBS’ $3.5 billion of support to renewables over two years, McKillop did not deem it relevant to mention the total volume of support for fossil fuel companies – and RBS has consistently refused to take any responsibility for that lending. Financing of coal companies alone was around five times that of renewables. As this double-speak becomes harder to sustain, McKillop is rapidly undermining RBS’ credibility in addressing climate change.

The government, alongside coal-burners like E.ON and RBS, argue that a supposed ‘energy gap’ in 12 years time justifies the expansion of fossil fuel infrastructure and deflect propositions for co-ordinated action on climate change. However, the recent Poyry Report by twelve of Europe’s top scientists lays out paths to a stable UK energy future that combines targets for reduced usage and increased efficiency of power, alongside stepped-up renewable energy programs. There is a clear need to find a path forward that ends our dependency on fossil fuels, as there is little point in keeping the lights on if the house is flooded.

RBS has positioned itself to take the credit for organising green conferences and lending to renewables. At the same time it is planning to keep providing the financial fuel that drives the global coal boom, locking us into decades of carbon emissions and pushing us perilously closer to the two degree tipping point of runaway climate change.

Read “Cashing in on Coal“

The Emperor's NEW new clothes

Ellie Keen — Mon, 29 Sep 2008 00:00:00 +0000

Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.

Albert Einstein

Once upon a time a smart guy found a way of making a synthetic product that appeared to be as good as gold. After explaining his findings to others he began to sell his products (mortgage backed securities) on the open market at prices that bought a handsome return. Gradually other clever people cottoned on to this and they began to produce similar products. For years the market grew as demand for these valuable commodities increased. More and more producers entered the market and imitated the actions of the pioneers. Yet, the new gold depended on one critical factor. Since the value of the products depended on the price of other assets, namely residential homes and commercial property, any change in these prices would have knock-on effects. Anyone who tried to explain this to the producers and purchasers of the new gold standard currency was reminded not to worry since the prices of housing and offices were only going in one direction. Therefore the new commodity could itself only increase in value.

The response from the doubters was that perhaps housing prices could fall since inequality and unemployment were increasing. As more and more capital was being invested in the strange financial products there was less and less available for investment in industry. Whilst the mortgage finance was increasing the jobs provided by construction companies, much of the new housing was being built in the suburbs and these depended on cheap oil to fuel trips to work in the city. If oil prices rose suburban housing would appear less attractive. Again the doubters were rebuffed and the market continued to grow. The only limitation was the ability of people to secure mortgages in the first place so as to continue to buy houses and many Americans were very poor and were unlikely to get loans. Then a bright spark suggested that since house prices were always rising, low-income, unemployed, and even blacks and latinos could be given loans and they could pay them back when their house had exceeded the original loan. This idea also caught on and banks and brokers feverishly lent money to these new customers so that the loans made could be converted into the new gold. At this point some commentators began to observe that there was now a great deal of the new gold in circulation and didn’t the value of the old gold depend on its scarcity. Around about the same time, others came forward with news that builders were having some trouble selling all those new homes they had built and that perhaps house prices were not going to rise indefinitely.

As these concerns were raised many of those who had bought the new gold at first denied there was going to be any problem. Maybe there was going to be a short-term blip in the housing market but this would soon be forgotten about. After all these things were to be expected, weren’t they? Despite their public confidence however, some of the owners decided to reduce their inventories of the new gold in favour of the old gold and even that other precious commodity, black gold. This had various effects: The price of gold and oil were rising even faster than the price of mortgage-based securities, prompting more investors to sell the latter and buy the former. As the oil price rose, more and more Americans found that living in suburban homes which could only be accessed by private cars run on oil was not economically viable. So they looked into the possibility of selling their homes and moving to the city to rent an apartment. As these events progressed, it became clear that there was now a glut of mortgage backed securities on the market as less and less people were willing to buy them. Those left holding the baby desperately looked around for support but for a time it looked like they would lose their shirts.

Now in a high state of anxiety these financialists rushed to the government, bearing expressions on their faces like the one worn by the uninsured teenager who has to tell dad that he’s crashed the family car. At first the government struggled to understand what the bankers were telling them and said don’t worry the market will take care of these things. After all the bankers had been telling government for years to let the market run the show. If the market price for milk is too low, don’t subsidize the dairy farmers. Let them go out of business and they can stop farming and become entrepreneurs. Simple as that! If the cost of food and fuel increases disproportionately for low-income households don’t worry, they can just work a bit harder and if the market also causes wages to fall then they can work a bit harder still.

This time however, the bankers shouted “don’t let the free market decide. That wouldn’t be fair to us because we deserve special protection and besides if you let us go out of business we can make things very difficult for you”. Happily, the government saw sense and decided to use all that tax money it had lying around to buy up the bankers products at a fair price. Of course this would mean that those improvements to the US healthcare system would have to be forgotten about and of course, in future many Americans would have to pay higher taxes to balance the governments books. Again the doubters began to whisper amongst themselves about potential problems such as civil unrest and the collapse of overburdened government institutions.

The bankers and politicians then summoned a very nice priest and they proceeded to pray earnestly to Mammon.

Batting for bankers

tim — Sun, 28 Sep 2008 21:32:12 +0000

Gordon Brown’s plan to “nationalise” Bradford & Bingley is simply a smaller-scale replica of the Bush administration’s bail-out of a banking sector bleeding to death from self-inflicted wounds.

The Prime Minister is batting for the bankers, intervening, with our cash, to ensure a resurgence of banking activity and private profits.

As with Northern Rock, over which government dithered for six months, transfixed by fear over the N word, Mr Brown is not opting for nationalisation to extend democratic control of the economy.

He plans to land us with £41 billion of shaky B&B mortgages, which no other bank is prepared to take off its hands, while selling the 200 high street B&B offices and savings business to other institutions.

This is in addition to the £20 billion plus interest that the government still has invested in Northern Rock.

These huge figures dwarf the costs associated with such proposals as a decent state pension, free prescriptions, abolition of student fees, provision of student grants, renationalisation of rail and utilities, which have all been rejected by new Labour on cost grounds.

As with imperialist wars, for which Mr Brown decreed that “whatever is necessary” would be found, new Labour has infinite funds to bail out the private sector and nothing but soft soap for measures to defend working-class living standards.

While working people are expected to tighten their belts, accepting below-inflation pay rises and job losses – 20,000 of which are likely in Britain’s financial sector alone – the reckless profiteers in banking boardrooms are cosseted by cash hand-outs.

The PM played to the gallery at Labour Party conference, insisting on greater corporate responsibility and a curb on excessive pay-outs, which seduced some trade unionists into believing that a change of direction was in the offing.

Don’t be fooled. The details of his B&B nationalisation plan illustrate where his priorities lie.

He and Chancellor Alistair Darling claim that their ministerial experience means that they are best fitted to see us through this latest crisis of capitalism, but they reject the view that it has arisen largely as a result of their obsessions with reliance on market forces and minimal regulation.

The B&B collapse also marks the utter failure of building society demutualisation, with every single society that opted for conversion to a bank and engaged in a voracious profits campaign, based on borrowing cheaply on world markets to fund buy-to-let and overambitious 125 per cent mortgages, going belly up to be swallowed up by bigger banks or rescued by the government.

In contrast, Nationwide, which has remained a mutual, has thrived and been in a position to help smaller societies facing difficulty.
Surely a reality check is called for by government leaders rather than a suicidal steady-as-she-sinks complacency.

The government’s neoliberal strategy is a disaster. It has failed and there has to be a change of direction or the boardroom excesses of recent years will return to haunt us, as will today’s attempts to resolve the crisis at the expense of working people.

B&B should certainly be nationalised as an entity, prime assets as well as bouncing cheques, and this, together with Northern Rock, should form a national bank to offer probity and stability in contrast to the reckless greedfest of the private sector.

The week that changed everything

tim — Mon, 22 Sep 2008 20:57:49 +0000

The last week has changed everything. A series of extraordinary events in the United States – from the collapse of Lehman Brothers to the forced sale of Merrill Lynch, from the state takeover of insurance giant AIG to the Federal Reserve’s emergency bailout plan – has transformed the crisis in the financial markets into an argument about the very foundations of the model of economic governance that rules the world.

For three decades the ship of global finance has been steered by the economics of globalisation – the flawed neo-liberal economics of the Chicago school. Their navigational charts for deregulation and liberalisation have led the global economy into a financial hurricane of unprecedented intensity. This crisis will prove immensely destructive – of the value of assets like property, of jobs, of pensions and investments, and of the hard-earned achievements of companies small and large, everywhere. Above all, the crisis will damage the lives and the futures of millions of blameless citizens, most of them poor.

Orthodox economists did not see the crisis coming, even as the financial hurricane hit land on what I have called “debtonation day”, 9 August 2007. They still do not understand it. They failed to warn their paymasters or the captains, crew and passengers of the finance-sector’s ships. Even now, their intellectual and policy maps offer no way forward.

This is because orthodox, neo-liberal economic theory pays little regard to the role of finance in the economy. Systemic insolvency is not permitted in the assumed world of orthodox economics. Very few members of the Chicago school have read Irving Fisher’s Booms and Depressions (1932); and if they have read John Maynard Keynes on the theory of money and interest, it was only to malign or marginalise his rationale for the regulation of finance. Instead, they lionised free-marketeer Milton Friedman, trenchant enemy of “big government”.

But in the single week of 14-20 September 2008, the public and even much of the media began to register the scale of the finance sector’s and governments’ intellectual and policy failure. No one – it seems – is fooled anymore. Free-marketers now embrace big government with a fervour that embarrasses socialists. Even more conservative voices in the establishment media have begun to challenge the flawed economics that they have for so long championed.

The world may be moving on its axis, but the change has not yet gone nearly far enough: for neo-liberal economists remain at the helm of the global economy, and continue to disseminate potent mis-diagnoses of what is happening. These economists include the world’s major central bankers and finance ministers. It is vital that their economics and their three principal delusions are challenged if the global economy is to be steered safely out of this all-consuming storm.

Three delusions

The first and most important of these delusions is the belief that banks and financial institutions are illiquid, when in fact they are insolvent. Systematic insolvency is, again, categorically excluded from world of orthodox economics. It was the failure of central-bank governors and finance ministers like Alistair Darling and Hank Paulson to acknowledge insolvency in the summer and autumn of 2007 that has prolonged and deepened the crisis. It is the failure to recognise insolvency now that lies behind the apparently endless, and ineffective flow of taxpayer-backed liquidity from central banks.

Second, central bankers are – thanks to their reverence for orthodox economic theory – allowing illusory inflationary pressures to justify keeping interest-rates high, and refusing to relax monetary policy. Despite a spike in oil and food prices, inflation is now falling. The deleveraging of asset prices (think of the fall in property prices) will force down a whole range of prices and if not checked, could lead to deflation. Deflation will be far more devastating to the population as a whole than mild inflation. The 1930s and Japan since 1990 are sobering precedents here. Central bankers must escape from the gridlock of orthodox economic theory and act now to check the downward, debt-deleveraging, deflationary spiral.

Third and most urgently, central bankers and finance ministers have to escape the constraints of orthodoxy – and think system-wide fixes not quick fixes. To ban a few short-selling speculators is but tinkering with a system that needs comprehensive overhaul.

Four solutions

What then should be done? Here are four steps.

First, a good place to start would be where Franklin D Roosevelt did in 1933 – by declaring a week-long bank holiday. The Federal Reserve, the Financial Services Authority (FSA) and the Bank of England could then take time and check the books of banks for well-hidden “toxic waste” – their massive undeclared liabilities, including more than $60 trillion of so-called “credit default swaps” (CDS). Only when regulators have a proper sense of the scale of the mess, can they take decisive and appropriate action. Right now they are sloshing buckets of our money about, unsure as to the whereabouts of the financial “weapons of mass destruction” that banks have concealed.

Second, there must be an end to “inflation targeting” – which is just a cover for keeping interest-rates high. High interest-rates are great for lenders/creditors, but a killer for debtors, and there are far more debtors in the economy than savers. If this financial crisis – and the planetary threat of climate change – are to be faced, there is a need for cheap (but not easy) money to help finance investment in energy security (for more on this theme, see the report I co-authored, A Green New Deal [new economics foundation, 2008]).

Third the Bank of England and the Fed should regain control over interest- rates – all rates. The interbank lending rate (the so-called Libor rate) should no longer be set by a closed committee of private bankers meeting daily at the British Bankers’ Association. Rates must be set by a committee accountable to society; and, when setting rates, it must consider the interests of all who make the economy work – labour and industry as well as finance.

Fourth, in order to again exercise control over all rates, the Bank of England will have to reintroduce capital controls. That might require a new international agreement, along the lines agreed at Bretton Woods in 1947.

All of this is doable as well as necessary. These are the initial system-wide fixes needed to deal with systemic threats; the public have every right to expect the guardians of the nation’s finances to implement them promptly.

If they are to do so, these guardians will need a new moral compass, new navigators and new helmsmen and women. But one thing that is not needed is a new navigation chart. That was provided by John Maynard Keynes in his The General Theory of Employment, Interest and Money (1936). Its ideas will today do just as well to restore the world to a period of stability as after the great depression of the 1930s. This was a period that Barry Eichengreen and Peter H Lindert (in The International Debt Crisis in Historical Perspective, MIT Press, 1991) described as “a golden era of tranquillity in international capital markets”.

To return to such a golden era, the money-lenders, speculators, and orthodox economists responsible for the gross failures exposed by the week that changed everything must stand aside – so that everything indeed can change, and for the better.

The answer is public

tim — Sun, 31 Aug 2008 16:27:04 +0000

Even the dogs in the street now know that something has to be done about the housing crisis, but the government is confused over what aspect of the crisis to concentrate on.

Its pronouncements have tended to prioritise the “need” to restore confidence in the housing market, which means stabilising the finances of lenders with cheap state loans.

This will do little to increase the number of mortgages being offered to first-time buyers or to assist overstretched homeowners hit hard by the rising cost of borrowing.

Banks and other financial institutions will use these cheap funds to ensure that directors and shareholders do not bear the brunt of the financial crisis.

The relevance of this approach to Britain’s real housing crisis oscillates between negligible and nil.

There are huge numbers of people who need decent accommodation but who are in a position neither to buy nor to rent privately.

The government has to draw a distinction between the financial crisis in the housing market, which was caused by the banks’ greed and reckless speculation, and the real housing crisis, which expresses itself in growing numbers of families and individuals being denied the right to a decent home.

New Labour ministers are too ready to accept the neoliberal argument that government should not involve itself in housing provision.

On the contrary, the housing crisis is so serious that it requires a response almost as determined as that needed after the second world war to overcome shortages and drive up housing standards.

The government-led, non-mandated retreat from public provision, ownership and management of housing has been a disaster.

Reliance on market forces in a situation of ever-growing demand has driven up house prices astronomically, reserved most local authority housing stock for those on benefits and driven low-paid and even average-income workers into the grasping arms of the private rented sector.

Government funding of new council homes, with a return to restriction of the right to buy, could make a real dent in homelessness and help to hold down runaway inflation in the housing market after the current slump.

It could also be used to enforce advanced environmental features to reduce pressure on energy and water resources. If the government restricts itself to bailing out the banks, it will fully deserve the contempt that it brings on itself.

Economy hit by inflation and threat of recession

tim — Fri, 22 Aug 2008 18:34:49 +0000

There has been a host of statistics in the last few weeks that testify to the increasingly serious impact the financial crisis is having on the British economy and the living conditions of working people. The rise in the cost of living has outstripped pay increases for the first time since the 1990s—meaning that the average person is now officially worse off.

According to the Office for National Statistics, the annual inflation rate has doubled in the last six months, reaching 4.4 percent in July, the largest rise since this index, the Consumer Price Index (CPI), began in 1997. It was much larger than expected and more than double the Treasury’s target rate of inflation, raising fears that the Bank of England will raise interest rates. The more broadly based Retail Price Index (RPI) went up by 5 percent in the 12 months to July.

As well as a 26 percent rise in petrol and oil, there has been a 13.7 percent rise in food costs, particularly meat, bread, cereals and vegetables, and a 16 percent rise in utility bills. The rise in the CPI will in turn trigger a 6 percent increase in rail fares next January.

The prices that manufacturers pay for their materials and fuel have risen by a colossal 30.1 percent in the last year. They have posted price increases on their domestic sales of 10.2 percent, the highest since 1982.

Yet the Bank of England had predicted last year that the CPI would reach 2 percent. It has been forced to revise its estimates, and expects inflation to reach 5 percent or more, later this year. Just last May, it had predicted a 3.7 percent inflation rate for the year. Now it recognises that even the 5 percent figure may be optimistic, as the risks are high, particularly if inflation leads to higher wages.

But even more importantly, the Bank has revised its forecast for the economy downwards. It expects zero growth in the economy for the next year, despite a boost from exports as consumer spending and investment tumble.

Mervyn King, the governor of the Bank of England, told a press conference, “There is no point pretending that what is happening is not happening in the world economy—that this unique combination of higher food and energy prices on the one hand and a sharp dislocation in the financial sector on the other—is going to do anything other than make the next year a painful adjustment for the UK economy.”

King added that the country faced a period of stagflation. “The next year will be a difficult one, with inflation high and output broadly flat,” he said. He noted that since employment prospects were not good, “labour market flexibilities” might offset inflationary pressures.

But he could not avoid pointing out that there was a risk that the economy would spiral downwards into a deep recession. King said that there were “bound” to be one or two quarters of falling output as a result of the credit crunch and rising commodity prices. Furthermore, house prices had further to fall due to the banking sector’s inability to raise money in the capital markets and the consequent mortgage drought.

He made it absolutely clear that the Bank would “remain cautious”—code for refusing to lower interest rates to stimulate investment and the economy—despite the fact that wage growth was lower than inflation. “Wages do not make inflation,” he said. “It depends upon what happens in firms.” In other words, if companies believed that they could pass on their own cost increases onto their customers, second order inflation would appear.

The governor insisted however that “We will come through it; inflation will come down.” When asked why he was so confident, King replied, “We will take the action necessary to see that it does.”

What this means is that the Bank will raise interest rates to whatever levels are necessary and force the working class to bear the cost of adjustment.

Already unemployment has started to rise. The number of people claiming unemployment benefit rose for the sixth month in succession, increasing to 864,700. Last month saw the number of new claimants rise at the fastest rate for 16 years. The unemployment rate now stands at 5.4 percent. Total unemployment, including those jobless for more than six months and thus not eligible for unemployment benefit, rose to 1.67 million.

Redundancies rose by 13 percent between April and June. This is likely to rise further with more than 10,000 layoffs announced in the building and financial sectors since the end of June. A number of high profile city centre developments around the country have come to an abrupt halt, while British Land has held off signing construction contracts for the prestige 47-story development for the City of London known as the Cheesegrater.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said that the rise in unemployment was “gaining worrying momentum.”

Total employment would have fallen had it not been for the increasing number of pensioners taking jobs. Pensioners have been hit by the failure of the state pension to cover even the most basic needs, leaving ever more of those above retirement age in poverty and forcing them to stay in or return to work. The number of pensioners in work has risen by more than two-thirds since 1997 to 1.33 million, meaning that the employment rate for pensioners increased from 7.9 percent to 11.7 percent.

There has been a 47,400 fall in the number of job vacancies to 634,900. The trends illustrate how the credit squeeze and inflation are affecting employment. Particularly hard hit have been vacancies in shops, restaurants and hotels, which fell by 18 percent in the second quarter of the year as consumers have reined in their spending. Vacancies in the construction sector fell by 12.6 percent and in the financial sector by 9.9 percent.

Last week, a report from the British Retail Consortium (BRC) found that the fall in the housing market was affecting the demand for household goods and furnishings on the high street. Annual like-for-like sales were down in July for the fourth time in five months. The BRC said that shoppers were reluctant to spend on non-necessities, and they now included clothes in the non-necessity category. The supermarkets were the only high street traders to report significant growth on July 2007.

With fuel and food prices rocketing, more and more people are falling behind with their mortgage payments and face losing their homes. According to Ministry of Justice figures released a week ago, the number of court orders for mortgage repossessions rose to 28,568 in the second quarter of 2008, a 24 percent rise on the same period last year and the highest since the second quarter of 1992, when 30,587 court orders for repossession were made.

Adam Sampson, the chief executive of Shelter, the housing and homelessness charity, accused mortgage lenders of “still using repossession as the first, rather than the last resort, despite being urged not to.”

The Ministry of Justice also reported that the number of people facing bankruptcy rose from 17,847 percent in the first quarter of the year to 19,158 in the second quarter, an increase of 5 percent on a year ago. The number of creditor petitions—served by people who are owed money—jumped by 17 percent in the second quarter to 5,625. The number of debtor petitions—personal bankruptcies—climbed nearly 4 percent to 13,533.

According to Standard and Poor’s, the credit rating agency, UK credit card companies are seeing an increasing number of people walking away from the credit card debt. Companies have increased their charge-offs—defined as repayments of principal and interest which they no longer expect to receive—by an average of 6.9 percent in June, up from 6.62 percent in March.

The Bank of England’s warning of a recession sent sterling tumbling against the dollar and the euro. On Friday, the pound fell against the dollar for the eleventh day in succession to $1.85, down 6.5 percent since July.

Prime Minister Gordon Brown, who used to boast as Chancellor of the Exchequer that he had abolished the cycle of boom and bust, has made it clear that public sector workers will see their pay rise by no more than 2 percent even as prices rise, and has encouraged private employers to similarly limit their pay increases.

While the Labour government has bailed out banks and mortgage lenders on the point of collapse due to their own semi-criminal and reckless policies, it has done and will do nothing to assist the millions of working people struggling with mortgages, rising bills and debt.

The global financial mess: blaming the victims

tim — Mon, 11 Aug 2008 21:52:30 +0000

We now know that on 9 August 2007 – which I called “debtonation day” – central bankers and regulators finally woke up to the scale of bad debts on the balance-sheets of banks and other financial institutions. On that day blindfolds were removed and scales fell from the eyes – of at least some of the key players in the finance sector. The “guardians of the nation’s and the world’s finances” finally began to emerge from a long period of stupid and unforgivable denial of the havoc wrought on the international economy by the privatised, deregulated and globally integrated finance sector.

But it has taken more than a year for the wider public to realise that “debtonation day” was but the prelude to a terrifying prospect: large-scale and prolonged economic failure of a globalised, highly integrated economy, built on a financial house of cards.

The floating world

In creating huge burdens of debt, particularly in the Anglo-American economies, private financiers have defrauded and deceived tax collectors, investors and regulators – a level of deception partially exposed on “debtonation day”. Worse, they have burdened the productive sectors of the economy – the companies that you and I work for – with unpayable debts, which have already begun to hurt consumers, bankrupt key sectors of the economy in the United States and Britain, and to weaken the economies of (among others) Germany and Japan. Now the private-finance sector – represented for example by the management and shareholders of Fannie Mae and Freddie Mac and Northern Rock – are holding a gun to the heads of regulators and politicians. The demand is that losses be socialised or nationalised. The alternative, they warn, is global financial armageddon.

Until recently the vast bubble of debt these private institutions created was regarded by orthodox economists, regulators, politicians and investors as representing real, and possibly eternal wealth. Their delusions fed on the economic mantra that asset prices (such as property, commodities, works of art, racehorses, or commercial brands) were rising because of a shortage of supply and an excess of demand for assets: not because they were being powered upwards by the availability of “easy money” or credit.

By finally admitting to the unpayability of debts on their books, and by making write-downs and write-offs, banks were and are in effect admitting to extensive deception of their fellow-bankers, regulators and investors. Each day brings fresh news of the destruction of wealth – and fresh allegations, such as the revelation that Merrill Lynch wrote off $9.4 billion in July 2008 (see Jeremy Lerner, “Citigroup results set to lift US stocks”, Financial Times, 18 July 2008). This brings the company’s losses over the last year to $19 billion – losses largely suffered by investors, including pension- funds.

It is reported that the Massachusetts secretary of state promptly charged Merrill with “fraud” and “dishonest and unethical” conduct “for creating and implementing a sales and marketing scheme, which significantly misstated the nature and stability of the auction-rate market. As a result, thousands of investors were abandoned with illiquid investments…....” (see “Massachusetts sues Merrill over auction securities”, Reuters, 31 July, 2008).

These losses and alleged deceptions have generated deep distrust in the whole sector, which stopped making credit available in the week running up to 9 August 2007, and thereafter tightened up on lending to all borrowers. This shortage of credit led in turn to the bursting of housing and other asset bubbles in the Anglo-American economies, and in economies like that of Spain.

Central bankers and elected politicians acted swiftly to refinance heavily indebted banks, and bail out incompetent managers and shareholders. However nothing has been done to remove the debt burden from borrowers in either the domestic or the corporate sectors. It was announced on 5 August 2008 that the British government is offering Northern Rock, a failed private bank now nationalised, a further £3.4 billion of taxpayer-backed funds. But the current Labour government in Britain has little consolation for their debtors. Northern Rock’s notorious “Together” loans were offered to a market of desperate people anxious to buy a roof over their heads in a rising market. These were set at 125% of the value of a property and six times the borrower’s salary. Now, the number of house repossessions by this government-owned bank has risen from 2,215 to 3,710 in 2007-08, an increase of 67%; more than two-thirds of 70% of these repossessions related to “Together” loans.

So while the British government is using taxpayer funds to socialise the losses of a bank whose gains were largely privatised, it is simultaneously punishing the Rock’s borrowers by evicting them from their homes. Herein lie the seeds of social upheaval and discontent.

The house of cards

The stupidity, poor economic analysis and sheer ignorance of those – central bankers, politicians, auditors – that have a duty to act as guardians of the nation’s and the world’s finances has had and will continue to have very grave consequences for the whole of the global economy, but also for millions of individual and corporate borrowers.

Their conduct stems in part from a failure of economic analysis. More precisely, the economics profession has failed to correctly analyse and alert policy makers to the impact of the finance sector – and of privatised credit creation – on the global economy. Indeed the economics profession has had a (not accidental?) blindspot for the role of haute finance in the economy, while at the same time encouraging its deregulation.

Now, just as the curtain is being raised on the house of cards built by the finance sector, so a cabal of economists is working to pull it down.

Their main concern is – of course – to protect the sector from governmental or democratic oversight and regulation, and to transfer private losses to taxpayers. To do so, they need to distract attention from the sector, limit debate, prevent a coherent analysis of the causes of the crisis emerging, and blind citizens to the “science” of finance.

The first tactic in the campaign to divert attention is to blame the victims. The most hapless of these are sub-prime borrowers – people in low-paid work earning $7 an hour in the poorest districts of Ohio (for example) who were persuaded by dodgy mortgage-floggers that they could take on a adjustable rate mortgage at “teaser rates”, go to the ball and have a roof over their heads.

The game of blaming the victim is conducted of course, in more elevated terms by the high priests of finance, and by the economics profession. One of these is Josef Ackermann, chairman of the board of directors of the Institute of International Finance, and chairman of the management board and group executive committee of Deutsche Bank.

Ackermann has explained the current financial crisis thus: “for the first time in history, a crisis triggered by US housing finance problems is having global ramifications” (see “How the banks can win back confidence”, Financial Times, 31 July 2008). No mention here of sub-prime borrowers, but the inference is clear: this crisis originated with those borrowers and with the property market, not with reckless credit creation by the private finance sector.

Others prefer just to blame “the bursting of the housing bubble” – which they would have us believe occurred simply as a result of spontaneous combustion. Alan Greenspan now argues that the “financial crisis is heralded, in fact defined, by sharp discontinuities of asset prices” (see “The world must repel calls to contain competitive markets”, Financial Times, 4 August 2008) In other words, it’s the spontaneous combustion of property and other asset prices, he suggests, that caused the financial crisis. We beg to differ and contend that it was the dramatic contraction of credit in August, 2007 that precipitated the collapse in asset prices.

The arguments put forward by Greenspan and mainstream economists has as its main goal the maintenance of the system of financial globalisation. To do so, they insist in effect that the crisis “is nothing to do with us, guv.” That way analysis of the role of the finance sector, and excessive credit creation can be avoided.

Yet another frequently repeated analysis is that the crisis was caused by the decision of the Federal Reserve to cut interest rates after 2001, in order to lessen the impact of an earlier crisis – the bursting of the dot.com bubble. So Chris Giles argues that “there is little doubt that the immediate cause of both the commodities price boom and the credit crisis has been low global interest rates” (see “Shifting down the gears…”, Financial Times, 5 August 2008).

Alan Greenspan, governor of the Federal Reserve, was indeed obliged to cut interest rates in 2001 as a reaction to the financial crisis of that time, tackling one of the increasingly frequent crises of international financial capitalism over the decades since deregulation began in the 1970s. The 2001 crisis was caused by easy, if costly credit (offered at high real rates of interest to corporates) blowing up and then bursting the dot.com bubble. It’s true too that Greenspan’s actions eased the crisis, and encouraged banks and other lenders to go on yet another spree, and lend even more recklessly. But if he had not acted, then the credit-crunch of 2007 would have occurred much, much sooner.

The fact is that while official rates of interest were low for a period after 2001, they had been much higher before. And even while official rates were low, few companies embarking on risky investment were able to borrow at these low official rates. But the credit-crunch occurred precisely because the scale and cost of debt was too high, so debtors began to fall into arrears and default.

The exit strategy

There is a frequently heard and self-justifying argument – expressed especially at times of crisis – that bankers have no responsibility for the amount of credit in the economy; they are mere intermediaries (like restaurateurs, one has said, “struck down by a sudden drying up of a food supply for which they have no responsibility”).

This argument is more than a little ingenuous. Bankers create their own “food supply” for serving borrowers: credit. Credit is not created by an outside body, like the Bank of England or the Federal Reserve. Thanks to the outsourcing of credit creation by central bankers and politicians, the provision of credit is overwhelmingly an activity undertaken by private banks, few of which have been, or are adequately regulated. The fact that credit (or “the food supply”) has dried up is entirely a function of the incompetence of bank managers like Adam Applegarth of Northern Rock, and of the loss of trust that he and others created between banks and other financial institutions. It has nothing whatsoever to do with governments.

The public – the borrowers, and therefore ultimately the victims of this vast private debt-creation machine – must not be fooled. Credit creation is a remarkable power, granted to banks and other financial institutions. By entering a number into a ledger, and guaranteeing the sum against an asset (like a property) a private financial institution can leverage very large sums of credit. The private sector has used these powers like a magic wand – to inflate a vast bubble of credit, or debt, which in turn inflated the housing and other bubbles.

Since JM Keynes and FD Roosevelt first argued that finance must be regulated – must be servant, not master of the economy – the finance sector and its apologists in the economics profession have lobbied, deceived, bullied and bribed regulators and politicians to prevent all effective regulation over its activities. They have also demanded the removal of all controls over the movement of capital and effectively removed central-bank control over the setting of interest rates.

On 9 August 2008, the anniversary of “debtonation day” it is incumbent on citizens to hold haute finance’s feet to the fire, and to demand strict regulation, transparency and oversight of the sector’s activities. But on this anniversary it is also important to begin to promote solutions.

I suggest that there are only two solutions to the credit-crunch. The first is a grand jubilee – the cancellation of all unpayable debts, the clearing up of balance-sheets, and the restoration of stability to the financial system. If this solution is unacceptable there is a second: to raise the incomes of the indebted, to enable them to repay debts, and to drastically lower interest-rates to enable companies to reschedule and repay debts.

If neither of these solutions are applied, the outcome will be the accelerated destruction of the financial system.

Fixation on the market

tim — Sun, 10 Aug 2008 21:14:22 +0000

The dreadful figures on the soaring rate of house repossessions give added emphasis to the decision of the Bank of England monetary policy committee to maintain interest rates at 5 per cent.

This was a decision that hit hard the struggling mortgage payers in the interests of controlling inflation which, it should be pointed out, is none of the mortgage-payers’ fault but can be attributed largely to fuel profiteering, speculation, oil and gas company super-profits and the resulting transport cost rises which affect almost every commodity.

It also brings into sharp focus the Financial Services Authority warning to lenders earlier this week that specialist mortgage firms are “too ready” to take court action against borrowers.

But these are not the only factors which have affected and damaged the 18,900 families who have lost their homes in the first six months of this year or the 45,000 whom the Council of Mortgage Lenders forecast will fall victim throughout the full year.

The real elephant in the room is, as seems to be increasingly the case, the policies of a government which point-blank refuses to abandon its fixation with the market and take real measures to solve a housing crisis which is totally of its own making.

Throughout the life of this Labour government, it has steadfastly refused to reverse its disastrous policies on council housing, attempting to drive a wedge between councils and their tenants with so-called arm’s-length management organisations, bribes to force occupants to relinquish their status as council tenants in favour of housing associations, reinforcing the ring-fencing of councils’ housing revenue accounts and blocking any attempt by councils to pick up their former role as the premier suppliers of social housing in this country.

This has led to a dearth of affordable housing at the lower end of the housing market, driving hard-up families into mortgage deals that they cannot afford, simply because there is little or no alternative except an over-priced and insecure private rented sector.

This, in turn, increases the scarcity of houses for sale at the bottom end of the market yet again and thus drives up the prices, overheating the housing market and making housing ever more expensive and ever less affordable, until such time as lenders get panicky as they see their borrowers becoming over-extended and start pulling in credit availability, causing the so-called credit crunch which then makes mortgages even more expensive.

Yes, of course, greedy mortgage lenders carry a portion of blame, lending even to those who clearly can’t afford it on the basis of trousering their commission and moving onto the next victim, leaving the families in their wake with a headache which gets worse as the bank tries to halt inflation by hitting those on the bottom of the heap.

But the majority of the blame must rest with a government which, for purely right-wing ideological reasons, will not countenance the public supply of anything be it health, housing or transport.

And it is the same government which handed over interest-rate setting to the bankers, in the certain knowledge that bankers’ solutions rarely benefit the low-paid. This government should be squeezing the profiteers in the oil and power supply industry until the pips squeak. Instead, it chooses to be an audience on the spectacle of bankers squeezing the poor, while it does its best to make the problems worse by ensuring that the low-paid remain exactly that.

Ombudsman demands government fund for Equitable Life insurance and pension victims

tim — Mon, 04 Aug 2008 13:44:44 +0000

A report by the parliamentary ombudsman, Ann Abraham, into the failed insurance and pension society, Equitable Life, took four years to compile.

Published recently, it states that more than a million policyholders left with lower-than-expected retirement income were the victims of “a decade of regulatory failure” by government departments and regulatory authorities. It identified 10 instances of maladministration by public authorities.

The ombudsman called on the government to apologise and to set up a fund to compensate policyholders for losses. While the report does not give a figure for compensation, the Equitable Members Action Group (EMAG) says that assuming about 70 percent of policyholders can show that they have suffered a loss, this would amount to about £4.5 billion.

Paul Braithwaite from EMAG welcomed the report, saying it was a “devastating indictment” of the performance of regulators over many years. “The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the society to suck in another £20 billion in pension contributions from more than one million new investors.”

The report is another political and financial crisis for Prime Minister Gordon Brown and the Labour government, which, with the Financial Services Authority, had sought to delay and rebut the original draft report with a 500-page rejoinder. Yet another of Brown’s measures—the financial services regulatory regime of which he was the architect during his 10-year stint at the Treasury—has come unstuck.

Not one of the institutions involved in the regulation of the insurance industry over an 11-year period—the Treasury, the Government Actuary Department (GAD), the Department of Trade and Industry, the Financial Services Authority (FSA) and its predecessors, the auditors, Ernst & Young, and accountancy body, the Institute of Accountants in England and Wales (ICAEW)—comes out unscathed.

The report reveals and confirms that the government’s real relationship with the City is one of complete subservience to the dictates of finance capital.

The 246-year-old Equitable Life, the world’s oldest mutual life insurer and a venerable City institution, was a major pension provider, responsible for more than £26 billion of investors’ cash. It announced in December 2000 that it would not be selling any new policies and was on the verge of collapse. This was the biggest crisis in the pensions industry.

Its failure was not the result of a stock market collapse, but of its own practices. It followed a House of Lords ruling one year earlier that the society’s payment of a differential bonus to policyholders, and thus its refusal to honour promises to make minimum payments to 90,000 people who had invested in the “guaranteed annuity rate” (GAR) pension policies, was illegal. Without the cash reserves of £1.5 billion needed to honour the agreement made when selling the policies between 1958 and1988, it was unable to find a buyer for the business.

Since then, it has wound down its activities and sold off most of its operations, transferring its sales force and non-profits policies to the Halifax Building society for £1 billion in February 2001, its subsidiary University Life to Reliance Mutual in December 2006, its £1.7 billion worth of with-profits annuities to Prudential in December 2007 and £4.6 billion of its fixed pensions to Canada Life in February 2007.

Its new management decided in 2001 to impose an across-the-board cut in policy values to the tune of £4 billion. The 1.5 million savers still with the society by 2001 faced low returns on their investment or a fall in the value of their policies if they moved them elsewhere. Those who continued to invest in Equitable Life’s with-profits policies saw the value of their savings slashed anyway, by more than 30 percent in three years, because there was not enough money to go around. This was also the case for some who were already receiving pension payments.

About 500,000 people are still saving for their pensions in the society’s £7 billion with-profits fund, either as individuals or via group pension schemes. But some 30,000 of them have died over the last eight years. Many of them were forced to live their last years in very reduced circumstances. Fifteen more die every day.

The parliamentary ombudsman’s report follows 12 other reports into different aspects of the Equitable Life fiasco commissioned by the government. One of these earlier reports commissioned by the Treasury, an interested party in the affair, by Lord Penrose, attributed most of the blame to the society. “Principally, the society was the author of its own misfortunes. Regulatory failures were secondary factors,” Penrose wrote.

His report said that serious failings among senior management went back to the 1980s, when the company had failed to set aside sufficient reserves for the guaranteed annual annuities. These were no longer sold after 1988 when the investment climate changed, making them too expensive to operate.

There was “a culture of manipulation and concealment,” and the society did not communicate details of its finances to either its policyholders or regulators. During the 1980s and 1990s, Equitable, as a mutual society without shareholders, had been paying out bonuses to its members—the policyholders—and concealing the fact that it had not built up sufficient reserves and was in effect running the guaranteed annuities on the back of new policyholders enticed by the bonuses and loans.

Penrose particularly criticised the chief executive between 1991 and 1997, Roy Ranson, for failing to provide pertinent financial information. He wrote that non-executive directors were “ill-equipped,” “ill-prepared” and “incompetent,” as regards the particular difficulties of supervising a complex life assurance firm. Ranson, in addition to being CEO, was appointed actuary at the firm from 1982 to 1997. This overlap of regulatory and executive functions led to confusion and conflicts of interest.

Penrose could not avoid the glaringly obvious and, going beyond his remit, criticised the supervision of Equitable Life. His report found that the system of regulation, which handled Equitable with a light touch, was “inappropriate.” The Department for Trade and Industry, in particular, had insufficient understanding of how to measure the solvency of a firm like Equitable, thereby allowing the society to get away with not putting aside sufficient reserves. The Government Actuary’s Department (GAD) was insufficiently tough on the society, failing to respond to changes in bonus policy and failing to demand disclosure from management.

However, he argued that there was no evidence of “maladministration or negligence” among regulators and said—letting the government off the hook—that as a general principle, “building false expectations of regulators can lead to a destruction of public confidence,” and he stressed that regulators themselves must inform consumers about the realities of the financial system. “Effective consumer education is essential.”

EMAG, Equitable’s policyholders, were not satisfied with this and asked the parliamentary ombudsman to review its supervision. But her first report in 2003 cleared the Financial Services Authority (FSA), one of the society’s regulators, of any failure of supervision in the run-up to its collapse. EMAG pressed for another and fuller investigation.

In 2005, the European parliament’s commission of inquiry—set up because the society had sold policies not just to UK citizens but to citizens in the EU—blamed the UK government for failing to ensure that EU legislation had been implemented properly. It also argued that the system of regulation was “excessively lenient” in failing to ensure that Equitable was solvent. It pointed out that there was no real prospect of policyholders gaining any redress under the UK’s legal and regulatory system. Consequently, the government had an obligation to assume responsibility and establish a compensation scheme.

The FSA tried to prevent the ombudsman from carrying out a second and more thorough investigation—and with good reason. Ms Abraham, whose remit by virtue of her statutory position was the effectiveness of the society’s regulation, reversed her original findings. Her report excoriated the government and regulatory authorities and accused it of maladministration for its role in the society’s collapse in 2000.

She argued that “those responsible for undertaking financial regulation should act in a way that is compatible with the duties and powers which Parliament has conferred upon them. Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report.”

Her report revealed a catalogue of failings and maladministration.

The Department for Trade and Industry and the Government Actuary’s Department (GAD) had regulated in a “passive, reactive and complacent manner.” GAD had let one person hold the role of both CEO and appointed actuary for more than six years, which meant that there was no potential whistleblower to protect investors. GAD had failed to question or resolve any of the issues that were apparent in the insurer’s annual regulatory returns, GAD had allowed the introduction of a different terminal bonus to policy holders that was the subject of the legal case brought against the society and ultimately led to its collapse, but failed to tell the regulators and raise the matter with the society.

While GAD and the FSA, which took over prudential regulatory responsibility in the last two-and-half years of the society’s life, “often initiated discussions appropriately with equitable,” they still allowed Equitable to get away with non-compliance. For example, they let it take credit on their books for reinsurance contracts that had not been concluded and did not cover the issue at the heart of the House of Lords ruling.

They failed to question the lack of crucial information on the society’s returns that gave an inaccurate picture of its financial situation, even though they knew that the ratings agencies were “misconstruing the company’s financial strength,” thereby enabling it to declare a bonus in 1999. The net result was that investors were making decisions based on false information. In the words of the ombudsman, investors “were thus actively misled.”

Furthermore, the FSA failed to ensure that Equitable Life warned new policyholders of the serious implications of losing the legal case that was then under way. Even after losing the case, the regulators sill allowed the society to stay open for new business despite the fact that it was then unsound. Finally, after the society closed for new business, the FSA provided information that was “misleading and unbalanced, with assurances being provided that the society was solvent, when that was in considerable doubt and was not the view of always held within the FSA.”

Despite the ombudsman’s trenchant and very valid criticisms of the regulatory authorities, she never deals with the more fundamental question. Regulation was and can never be more than a cosmetic device to licence the essentially fraudulent nature of the pensions and insurance-selling industry. It doubles when the need arises as the industry’s public relations arm.

In practice, “regulation” consisted of asking questions but being satisfied with bland assurances; allowing the society to continue selling new policies when it was essentially insolvent and give out misleading information; giving “advice” and not instructions; backing down when Equitable Life threatened a Judicial Review or ministerial intervention for going beyond its powers; and being fobbed off with reassurances about future profits, re-insurance arrangements and selling costs.

While the society’s policyholders have welcomed the thoroughness of the report, it is far from clear that the government will establish and fund a compensation scheme for the policyholders, as the report recommends. Chancellor of the Exchequer Alistair Darling is likely to argue that the government cannot be held liable for all the losses suffered by investors.

An earlier ombudsman’s report in 2006 that also found the government guilty of maladministration over advice given on occupational pension schemes that led to 125,000 people losing all or some of their occupational pension savings had recommended full compensation. The government immediately rejected her findings and the case went to the High Court, which ruled earlier this year against the government. One of its accusations was that the government had rejected the findings too quickly, which suggests that at the very least the government will drag its feet for as long as possible before making any announcement.

Though the government stepped in to rescue Northern Rock and shore up the banks via a “liquidity scheme” with hundreds of billions of taxpayers’ money, it is reluctant to compensate policyholders when its own official bodies are found guilty of maladministration.

EMAG has said it is “digging in for a long fight” and getting its members to write to MPs and candidates in marginal constituencies. Some lawyers have argued that policyholders could have a claim for “misfeasance in public office,” similar to the failed case brought by Railtrack’s shareholders.

The Financial Times, the City’s mouthpiece, provides an insight into the thinking of the financial elite. It called in a self-serving editorial for the government to fund limited redress, arguing that it is not the job of the taxpayer to bail out completely investors who put their money into an institution that gets into financial trouble. This would remove responsibility from the institutions, their advisors and investors. But more importantly, it would also lead the financial regulators to behave too cautiously or to regulate strictly. That of course would never do.

But there are, it argues, two strong reasons for partial compensation. Firstly, the moral case, since the authorities allowed Equitable to present misleading information to the public. “Secondly, there is a public interest in encouraging people to make long term financial provision for themselves so that an aging population looks less to the state for its pensions.”

As well as encouraging private pensions to slash welfare spending, the Financial Times is also concerned that nothing will disrupt the implementation of the government’s new national pension savings scheme, which would invest the public’s and employers’ compulsory contributions in the Stock Market.

Equitable Life is by no means the worst case in terms of the outcomes on guaranteed annuities. Patrick Collision of the Guardian newspaper noted that millions of pensions companies’ customers have received payouts that are worse than those of Equitable Life. He went on to use this, plus the fact that most of Equitable’s victims were doctors, dentists and lawyers, as arguments to support the government’s expected refusal to provide compensation at the taxpayers’ expense. He also pointed out that “by mid-2003 virtually every insurance company in the UK was technically bankrupt and receiving ‘waivers’ from the FSA.”

What he, like all the rest of the financial commentators will not say was that the case of Equitable Life and the failure of regulation to rein in the financial services industry demonstrate the absolute necessity for pensions to be publicly funded and provided.

Poor get hit as business walks free

tim — Sat, 05 Jul 2008 11:51:39 +0000

Even as the government admits to a £10 billion black hole in its finances caused by its gifting of tax back to businesses to plug their pensions holes, it looks set to U-turn on its policy to close corporation tax loopholes costing the exchequer tens of billions more every year.

Threats from major UK companies to relocate overseas or into tax havens has prompted a move to revise corporation tax rules following high-profile complaints that the UK’s taxation levels are significantly higher than elsewhere in the EU.

Pharmaceuticals giant Shire recently announced it would relocate to Ireland to take advantage of the low tax regime there.

While UK law stipulates a basic corporation tax of 28%, corporations on average pay closer to 22%, with some of the largest paying significantly under this figure.

A simplification of the rules mooted by the treasury last year would have closed loopholes which at present allow huge levels of tax evasion.

The UK has recently come under fire for itself maintaining more tax havens under British rule than anywhere else in the world, something which campaign groups argue has directly led to tens of thousands of deaths.

Corporate tax avoidance is thought to cost £25 billion every year – more than twice the amount these major companies were gifted by the government in tax breaks to allow them to refill the pension pots they themselves had emptied.

In two years, the same amount would pay for the total line of credit currently being offered to major banks as part of the credit crunch – £50 billion is being underwritten in loans to maintain the flow of money through the economy.

The same banks, along with a host of other companies, are already benefiting from government handouts this year to the tune of £10 billion, as they pour money into pension funds to keep them afloat.

This money, rather than coming from profits or business chiefs who were the investors who caused the problem, is being paid in from taxes.

Pension deficits have soared by more than £100bn in the past year, the Pension Protection Fund said recently.

Meanwhile, as the Treasury struggles to maintain its financial balance, fears are rising that the pensioners themselves could be at risk of falling prey to the 10p tax band changes which the government have proposed.

Up to 420,000 pensioners with small private pensions of up to £1,000 a year could start having to pay tax of £200 a year from next April, under new plans – potentially raising around £80 million a year.