Economics: September 2008 Archives

Agreeing with the Republican right.

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jokerburnsmoney.jpgI 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.

Internet and real life converge.

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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

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 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

Prepare to be boarded.

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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.

Financial mathematics.

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bankmaths.jpgIn 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.

Index-linking the Union dividend.

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brownchancellor.jpgLast 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.

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About this Archive

This page is a archive of entries in the Economics category from September 2008.

Economics: October 2008 is the next archive.