Herewith a belated Halloween cartoon - Nightmare on Wall St is mostly about tricks and provides very little in the way of treats.
From cat and girl, via get rich slowly.
Recently in Economics Category
There are people who don't like Simon Jenkins, but I am not one of them. Even where I disagree with him, I always love his writing. Today's Guardian features a classic Jenkins rant about the miscellaneous silver linings to the financial crisis. Here are a couple of clips to seal the deal.
"Carbon-crazy plans for totemic City skyscrapers modelled on cheese-graters, testicles and mobile phones are being torn up."
"While it may be too early for a bull market in gaiety, we can surely start investing in sanity and pragmatism."
Now go read it, please.
On Tuesday I went in Robin's place to a lunch organised by the Chamber of Commerce, addressed by Hector Sant of the Financial Services Authority. Oddly, given the interest you might have expected from the political parties, or even the Scottish Government, there was no-one else there from politics.Mr Sant was an interesting speaker, although constrained as a regulator and unable to give very frank answers to many of the questions. In the case of a question about the need for HBOS to merge with Lloyds, the Scotsman reports him saying that:
..it was obvious the authority was "content with the capital being raised by HBOS".
Yes, he did say that, but then he went on to explain the circumstances under which that assessment had been made, i.e. on the assumption that the proposed merger would go ahead.
I'm not taking a view on the merits of the tie-up, but the fact is there'll be annoyance at the FSA at how he's been misrepresented. Peter Jones has it more accurately in the Times - see the second last paragraph - but that made for a far less newsworthy story.
It's not my usual crowd, bankers. Outside Prestonfield there was an ostentatious helicopter on the lawn (not Hector's, but we couldn't find out whose), and inside a man remarked to me how he felt left behind at a recent Bentley owners' club bash for not himself having a helicopter. I did feel very sorry to hear that someone might have to cope with such an extraordinary level of poverty.
Pleasingly, I also found myself sat next to a resident of Forth Ward, and gave her what I think was a well-received pitch for a vote for Kate Joester (informed by Kate's passionate address to the local party a couple of weeks ago).
The Prime Minister and the Chancellor announced their bailout before the markets opened on Wednesday, and if equity prices are any guide, the results so far are not looking promising (and yes, I also hate graphs like this where the x axis isn't zero).
What I'm now worried about is that the influential City people will say to Gordon "Oh, see your bailout, it wasn't enough: can we have some more money, please? If not, it'll be everyone's pension funds that suffer", as per the classic Bird and Fortune sketch.
Any further reach into taxpayers' pockets won't be any more successful at stabilising the markets, and will just leave the Government with more debts to service while tax receipts drop. Also, as many have noted, the Daily Mash is spot on with this: "The government is to invest £500bn of your money in British banks so they can lend it back to you with interest."
Surely the response should instead be driven by the actual public good? Policymakers should be looking first to protect the people with mortgages they can't pay, the councils who put it all on black in Iceland, the small businesses who can't borrow to tide themselves over, and the others who are suffering outside the Square Mile.
If that requires market intervention (which would look very different to the existing plans), so be it. Perhaps HMG should start taking equity shares in property in exchange for state-backed mortgage guarantees. Perhaps they should be using the already-nationalised banks to lend to good businesses directly, not the seized-up banks. One of the few things Vince Cable's got right about all this is when he compared lending to banks with pushing on a piece of string.
Some of the mortgage-holders (and all of the councils) have simply done the wrong thing and taken too much risk. The next step should be to ensure that these same mistakes can't be made again: no more taking our Council Tax and stashing it with the buccaneer capitalists ever again.
However, I worry that Labour will simply be terrified of the City's threats, and that they'll go ahead and shovel more money into the fire. I do hope I'm wrong.
The millennium bug never materialised, nor did the gigaburger bug, both of which were based on limited numberspaces running out.The US debt clock has had a real problem of this sort, though. As the BBC report it, the board was put up in 1989 to highlight the federal government's debt reaching a then-shocking $2.7 trillion.
They're upgrading the clock now the total is over $10 trillion, but are thinking ahead and adding two more zeros in case they ever find themselves a quadrillion dollars in the hole. It's a pretty prudent course of action. After all, McCain might still win.
(image from the often-wonderful Pundit Kitchen)
The cliches and metaphors burgeon around us as the markets collapse, and hacks breathlessly trade roller-coasters for dominoes, or offer injections in the heart of the whirlwind. Much of this verbiage is produced because no-one really knows what is going to happen, but they certainly know it's dramatic.
For example, the Newsnight panel last night was 100% journalists and politicians, all without the faintest idea of what the bailout might deliver, let alone where the markets might take us next. Newsnight Scotland went one better, relying on vox pops before running a journalist-only panel (including Douglas Fraser's new incarnation as Economic Disaster Correspondent for the BBC). They didn't know how it would turn out either, it turns out.
No offence to either panel, but the producers might have been better off pulling in some serious economists, historians, and even economic historians. The comparisons might have been more rigorous, and the options set out more clearly.
Economists are famous for their widely diverging opinions: this would be an asset. It would have been more enlightening to have had debate with a Friedmanite, a Keynesian, a Marxist, a Green, plus someone from the soggy New Labour/New Conservative managerial centre. Constructive disagreement would be better, given the gravity of the situation, than the usual synchronised hand-wringing.
In these circumstances, with fear and uncertainty dominant, George Osborne has done the tactically correct thing - supporting the package in principle, but with some caveats. He has no idea whether it'll work, but opposing it now would expose him on the upside if the £500bn bailout does deliver for the markets and for Labour. If it doesn't work the Tories benefit anyway, politically, and the caveats will cover him. Nick Clegg did much the same, although he chose to support the proposals while comparing Brown to the captain of the Titanic.
Here's a counter-prediction. It won't work. None of the strands of the Brown/Darling bailout affect the core problems - those worthless debts and opaque derivatives, the housing bubbles here and abroad, and the wider systemic failures of regulation and oversight. Sure, they can cut interest rates and try to reflate the bubble, but wouldn't it be better to rebuild our economy on a somewhat more substantial basis, one that could be literally sustainable?
I don't think I've ever done that before. Let's see: war, homophobia, racism, climate change denial, fraud, hypocrisy. Nope, never agreed with them on any of that. Yet the $700bn plan to nationalise US banking losses put Obama on the wrong side, backing Bush despite the cost to his own plans, while the only congressional opposition came from the Republicans, specifically Senator Shelby, who said:"What troubles me most is that we have been given no credible assurances that this plan will work. We could very well spend $700 billion or $1 trillion and not resolve the crisis. Before I sign off on something of this magnitude, I would want to know that we have exhausted all reasonable alternatives. But I don't believe we can do that in a weekend."
Now, they've got absolutely the wrong end of the stick about the plan. Republican Senator Jim Bunning said the plan was "financial socialism, and it's un-American". I always thought socialism was about giving money from the rich to the poor, not the other way round as per the Bush/Paulson/Bernanke plan, but perhaps I misread Uncle Karl. While their specific concerns are not the same as mine - 180 degrees away, in fact, given my sympathies are with this lot - the conclusion was the same. This plan is bonkers and it won't work.
But now even the Republican opposition has collapsed - presumably they finally worked out that the plan was a massive give-away to their pals - and it'll all go through. Will the credit ratings agencies now do what they'd do to anyone else picking up these toxic debts, and mark down the US Government for the first time from AAA? If you're looking for signs of the impending end of the American imperial phase, that would be a pretty clear one.
Incidentally, over here, the New Labour response is as weak and captured by the markets as the Obama response. Will Hutton wrote today, backing the scheme, that "Once again, the left is coming to capitalism's rescue". Is this a model of capitalism the left should really want to rescue, even with his sea of caveats?
Brown's response was also a mass of absurdities and inconsistencies. He decried the "age of irresponsibility" which he himself has sponsored, then in the next breath said:
"I have told President Bush today that facing global turbulence Britain supports the US plan. Whatever the details of it, it is the right thing to do."
Isn't it irresponsible to support a plan like this irrespective of the details? It's the classic failed politician's response, and it goes like this. Something must be done, and this is something, therefore this must be done. We should perhaps be grateful that this time he's not recommending wasting our money. Nevertheless, this whole scenario feels as though the Joker or the KLF have been put in charge of the global banking system.
The debate about the demise of capitalism banking crisis now plays out partly online, as one would expect, given the scale of the problems. The $700bn US bailout plan may unravel, and the Wall St Journal claims 'Wall Street' no longer exists (fancy a namechange then?). As Joe Stiglitz put it to the Today programme earlier this week, "they've now found a sucker, the American taxpayer, to take [these debts] off their balance sheet". The Lloyds TSB acquisition of HBOS may now face opposition too, although the scandal is less obvious and the opposition more muted.
People get bored by the technicalities of banking and finance - I know I do. But these deals have one thing in common: the bankers get let off the hook, and the public loses out. In the first case, the US Government's "bad bank" would use taxpayers' money to pay off Wall Street's gambling debts (as MacWhirter noted), and in the second case Lloyds gets to waive competition law to snap up HBOS.
In the face of all this turmoil, the Americans have at least got their internet-related satire working much more effectively than us. First, in the spirit of the FAILblog, I give you Henry Paulson and Ben Bernanke giving evidence on their massive gift to the rich prudent measures to restore confidence in the banking system:
Next, here's some pseudo-spam that's been going round. Thanks to Aaron for the spot.
From: Minister of the Treasury Paulson
Subject: REQUEST FOR URGENT CONFIDENTIAL BUSINESS RELATIONSHIP
Dear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
Today is, as you landlubbers have no doubt forgotten, International Talk Like A Pirate Day. By what is nearly an extraordinary coincidence, Parliament was yesterday discussing buccaneering of another sort. Here's Patrick challenging the consensus:
If you want to go a bit further back and look at what happened to our old mutuals, this educational film by Terry Gilliam really is the best summary. It also sets out how the fightback might look.
Part 1, Part 2 below.
The title, incidentally, is my favourite pirate chatup line.
In the beginning, there was the Bank of Scotland, the Halifax Building Society, Lloyds Bank and the Trustee Savings Bank (wikipedia links). In 1994 Lloyds took over the TSB, and in 2001 the Bank of Scotland took over the Halifax. Now, all four are one megabank.Both these original mergers saw high street banks take over organisations which had begun as very different beasts, operating on less purely commercial lines.
155 years ago, the Halifax began as an extremely prudent building society, operating "for the mutual benefit of local working people". In the mid-90s the lure of unsustainable profits proved too much for the Halifax, and £19bn of wisely-saved assets were just given away during the demutualisation.
This was the beginning of the end of Halifax, and just four years after it was floated on the stock exchange, it was swallowed up by the Bank of Scotland. I know it's unfashionable in Scotland to care about what happens south of the border, but at the time it was clear that the town of Halifax had lost a substantial asset, as had the working people who were the original intended beneficiaries.
The TSB, for its part, was an aggregation of small savings banks, run by trustees along "democratic and philanthropic guidelines". By 1970 there were 75 such banks, holding the then substantial sum of £2.8bn in assets. In 1984 they were united by legislation, and the TSB became virtually indistinguishable from the other high street banks.
It took just eleven more years for this new more commercial entity to be swallowed by Lloyds Bank, although in this case a small element of the philanthropic guidelines were retained, as 1% of pre-tax profits still go to charity.
In both these cases, creative and prudent Victorian financial structures were gradually stripped of their purpose and their capital. Private and secure institutions floated on the stock market as the short-term gains from speculation, massively leveraged loans and exotic derivatives grew more appealing.
The depositor was essentially forgotten, and these banks competed to throw more and more money they didn't have at the mortgage sector, before trading these worthless debts as if they were actual assets.
Looking at the latest merger, it's dependence on exactly this money-go-round which caused the collapse of HBOS. Lloyds was a suitable buyer precisely because it had retained far more prudent approach to the secondary markets.
Personally, I am convinced that there are clear models we should pursue if we want to see a sustainable future for financial services. First, there are still building societies. The Nationwide in England may be the largest UK-wide, with £159bn of assets, but we have our own mutual stars like the Dunfermline Building Society. There's definitely room for more.
Second, there are banks we will surely never see a run on, prudent organisations which invest in society and which rely on deposits, not inter-bank lending. The Cooperative Bank and Triodos are the two most obvious examples. The Royal Bank of Scotland would be well advised to get on board with this more sustainable model as quickly as possible (and, while we're on the subject, to reject schemes like Sakhalin 2), although I know it'd take a massive amount of work to do so.
Thirdly, we are seeing a small rise in the role of credit unions, which operate in line with many of the original social objectives of the building society movement.
In the longer term, if we have institutions which are based on this limited element of Victorian values, we will be able to weather these storms. They're traditional Scottish principles, too, as Patrick pointed out at First Minister's Questions today. Thrift, self-reliance, sustainability, and even prudence. We'll be lost without them.
Update: here's what that ??? should look like.
Last week Gordon Brown, the former chancellor, declared himself now open to changes in Scotland's funding arrangements. This was widely interpreted, not least by John Swinney, as movement on fiscal autonomy, but it wasn't anything of the sort. He actually said "The Scottish Parliament is wholly accountable for the budget it spends, but not for the size of its budget. And that budget is not linked to the success of the Scottish economy."
What would it look like if the block grant were linked to the success of the Scottish economy? For these purposes let us pretend that growth in GDP is an comprehensive indicator of success.
If Scotland's economy shrank, the block grant would shrink in tandem. Poverty would increase, and the need for government funding would grow, yet Scotland would be given less money to fund the relevant services. Conversely, the less support Scotland needed, the more money would be provided.
Let's imagine, though, with their limited economic levers, that Salmond and Swinney manage to engineer some localised Irish-style flim-flam boomlet that didn't spill over into Cumbria and Northumberland. Would UK tax revenues then really be diverted north of the border in massive amounts? Unlikely.
This is a long way from fiscal autonomy, which is the right to raise taxes as the Scottish Parliament sees fit. It's more like performance-related pay.
And because the most important economic powers haven't been devolved, Scotland's budget would be even more directly dependent on the vagaries of economic policy largely set in Whitehall.
Brown's quote could be extended: "And the success or failure of Scotland's economy is not linked to the powers of the Scottish Parliament." But that would take him places he doesn't want to go.
