All bets are off on another financial calamity

Professor Prem Sikka

The banking crisis has been making headlines for the past three years. Bankers indulged in an orgy of irresponsibility, gambled other people’s money, lied about the quality of their products, published opaque and misleading accounts and collected telephone number salaries.

Yet there has been no public inquiry, no royal commission and no prosecutions, even though taxpayers initially coughed up £1.16 trillion in loans and guarantees to bailout the banks. This amount now stands at around £500 billion and is a major cause of the austerity programme.

The best that the Government has managed to do is commission a report from the Independent Commission on Banking, an organisation only created in June 2010. Its 358-page report shows no urgency and says that reforms can wait until 2019.

The ICB’s key recommendations include ring-fencing the retail side or the general deposit-taking and lending operations from the risky investment side of banking operations. Arguably, this would safeguard depositors and borrowers from any future banking crash. However, banks are given the option of deciding whether or not to ring-fence corporate deposits and loans. This leaves the door open for dubious transfers and creative games, and would make effective regulation difficult.

The banking crash showed that many banks were very highly leveraged and lacked the resources to meet their obligations. So the ICB proposes that large British retail banks should have equity capital of at least 10 per cent of risk-weighted assets. As a cushion against future losses, banks are expected to set aside a “loss-absorber” fund of between 17-20 per cent of certain assets. This is to protect taxpayers and reduce their exposure to future bailouts.

The proposals have generally been welcomed by the press and political parties in this country, but are unlikely to solve banking woes. A key problem has been the ability of the banks to create credit which has no relationship with the real economy. The ICB does not consider any of the issues arising from this. Why is the Government leaving the creation of credit and money to private corporations?

The Commission favours the corporate structure enjoyed by banks, but fails to address any of the systemic pressures that resulted in the current crisis. For example, as corporate entities, banks are susceptible to stock market pressures to report ever-increasing profits. This encourages banks to push shady products and indulge in excessive risk-taking. Banks, in common with many other corporations, are focused on the short term. The tenure of the typical FTSE350 chief executive is four years – and declining. In this period, they have to collect as much private loot as possible, because their economic success and media stardom is measured by remuneration. So there is every incentive to sacrifice the long term. Some of the pressures could be alleviated by alternative forms of banking ownership structure – for example, co-operatives, mutualisation, ownership by communities, employees or even nationalisation, but none of these are considered by the ICB.

Contrary to some press comments, the ring-fencing proposals do not embrace the Glass-Steagall Act, passed in the United States in 1933 and subsequently repealed in 1999. The ICB has not asked for a legal separation of the retail and speculative sides. Its “Chinese walls” proposals will not work. Many banks have complex corporate structures spawning the globe and many operate in tax havens with poor regulation. So it is not clear how these operations are to be classified or ring-fenced. Ring-fencing will not insulate banks from the pressures for higher profits and executive remuneration. Northern Rock did not have an investment arm, but went belly-up as directors sought cheap money to expand profits and remuneration. A legal separation and return to mutualisation for some banks may curb some of the worst excesses, but this is not recommended by the ICB.

Even if the banks are ring-fenced, the destructiveness of their gambling will still engulf society. In December 2007, just before the banking crash hit the headlines, the face value of the gambles (known as derivatives) on the movement of the price of commodities, interest rates, exchange rates and anything else, was $1,148 trillion. Global GDP is about $65 trillion. Just 1 per cent negative exposure or loss can wreck the global economy. Where will the money for gambling come from? Inevitably, it will be provided by financial intermediaries from ordinary people’s savings. If the gambles pay off, bankers and intermediaries will collect mega-bucks. If they don’t, then the savings of ordinary people will be decimated. Remember, ordinary people are never asked by fund managers or insurance companies whether their savings should be channelled into complex gambles. So the ring-fencing of investment operations will not shield innocent bystanders. The way to curb destructive gambling is by removing the benefit of limited liability from investment banking. Let the bankers play with their own money and do not permit them to dump their losses on others.

The ICB bemoans excessive remuneration for risk-taking, but thinks that voluntary codes will curb the excesses. Self-regulation has not curbed excesses in the past and will not do so in the future. An alternative would have been to empower bank employees, depositors and borrowers to vote on executive remuneration. It is doubtful that bankers engaging in aggressive practices would ever manage to secure enough votes for their telephone number salaries. But democracy does not enter into the Commission’s vocabulary.

The increase in the capital base may be welcomed, but the banks failed because they were unable to meet their financial obligations. Therefore, the focus should be on solvency or the availability of cash, but it attracts no particular suggestions.

Overall, the Commission’s report is a poor document. It has been produced without any public hearings and collections of facts. The holes in it make it unfit to be the basis of future regulation. For example, it says nothing about the conflicts of interests, incestuous relationship with credit rating agencies, predatory organisational culture that promotes dodgy products (such as payment protection insurance), opaque accounting practices, and the failures of

auditors, bank boards and non-executive directors, the capture of the regulators, or the need for responsible lending to generate jobs.

*This article first appeared in Tribune

Delusional IMF in the dark

Confusion and disarray is apparent in every national and global capitalist institution – and nowhere more so than in the corridors of the International Monetary Fund. Despite access to confidential data, they don’t really have a clue as to what’s going on. When Olivier Blanchard, the IMF’s director of the research, introduced its latest World Economic Outlook (WEO) with sombre demeanour and measured words, he wasn’t pulling his punches:

The global economy has entered a dangerous new phase. The recovery has weakened considerably and downside risks have increased sharply,” he announced. "Fear of the unknown is very high. Stock prices have fallen. These will adversely affect spending and growth in the months to come.

Blanchard added:

Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt.

Bad enough.

 But in the first paragraph of his foreword to the WEO, in which he calls himself “economic counsellor”, he makes an astonishing admission:

Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening. The second is a large increase in fiscal and financial uncertainty, which has been particularly pronounced since August.

To repeat – “a development we largely failed to perceive as it was happening”.

 With all the resources they have at their disposal, how did they get it so wrong? It surely does no good at all for the reputation of counsellors of all kinds.

 With their oft-repeated mantra of a recovery, of a return to growth, the IMF has consistently underestimated the scale of the crisis, and overestimated the ability of governments and central banks to do anything about it.

 They have deluded themselves, and they have deluded governments and central banks. In 2008, for example they forecast that the UK economy would fall by 0.1 per cent in 2009 but it actually fell by almost 5%.

 Now that the necessity of a global contraction is evident to anyone with even a smattering of an understanding of the limits to growth, the IMF both continues on its delusional path, but is simultaneously forced to change tack.

 It has downgraded its economic outlook for the UK, the US and Europe through to the end of next year, effectively pulling the rug from all the deficit reduction plans in the world. It now predicts that UK gross domestic product will grow just 1.1% in 2011, compared with its April prediction of 1.7% The US, it says will grow by just 0.4% more than the UK and may already be in recession. But at the same time it warns that “if growth threatens to slow down substantially”, if activity were to undershoot current expectations, countries like the UK and Germany should “consider delaying some of their planned adjustment”.

 Which means, says the IMF, that the UK Coalition, adamant that its brutal austerity programme must stand, will have to think again. Government spending cuts may have to be delayed to avoid a greater catastrophe.

 If you or I put up a piece of work like the WEO we’d be out on our ears, but the IMF is accountable to no-one. Its enforcers are due back in Athens next week checking on the government’s progress with cutting wages, putting people out of work, selling off national assets etc etc.

 So now it’s time to build alternative, revolutionary governments everywhere, with the power to implement the May 27th vote of the People’s Assembly of Syntagma Square which ends:

 ‘We will not leave the squares until those who compelled us to come here, leave the country: the governments, the Troika (EU, ECB, IMF), banks, the IMF Memoranda, and everyone who exploits us. We send them the message that the debt is not ours.”

Gerry Gold, Economics editor. A World to Win

Unemployment and Osborne: the crisis deepens

On 14 September the horror of this government’s austerity policies was brought into sharper relief with the publication of unemployment statistics showing unemployment has breached 2.5 million again.

But that figure hides more worrying underlying trends: in addition to the 2.5 million unemployed are nearly 1.3 million working part-time who want full-time jobs (up 15% in the past year) and over half a million working temporary contracts who want a permanent job. In effect therefore 4.4 million people are looking for work (aside from anyone in work looking to change job). Youth unemployment is the highest on record, while women’s unemployment is at its highest since 1988.

To compound this misery further the number of vacancies sank to just 453,000 – meaning there are about 10 people chasing every job. In the areas of highest unemployment (the north-east and London) that figure is likely to be considerably higher.

Despite Osborne’s rhetoric about the white knight of the private sector coming to the rescue, Tory cuts and austerity are damaging private sector jobs too. On 15 September retail sales data for August showed a further contraction. With unemployment rising, wages falling in real terms and benefits and tax credits being cut, how could the service sector expand?

The unemployment rise was entirely due to the government’s cuts programme as data showed the public sector had shed 110,000 jobs in the last three months alone. Ironically despite rising unemployment, the government is shedding jobcentre staff and even embarking on another round of jobcentre closures – including in Camberwell, south London.

The attack on welfare is not just on the staff who administer it though, but on people trying to claim and maintain a claim for jobseeker’s allowance (JSA). On 15 September, the National Audit Office showed that the take-up rate for JSA is just 53% - meaning there are over a million people entitled who are not claiming. Many will be too proud or ashamed to claim, given the stigma successive governments have heaped on welfare, or they might have been pushed out of the system by the increased conditionality applied.

Osborne and the Tory-led government are in turmoil. Increasing unemployment means rising welfare bills and falling tax revenues, exacerbating the deficit crisis they pledge to be resolving. Their solution will be to cut more, and the downward spiral will accelerate – sucking in thousands of wasted lives as collateral damage in Osborne’s failing economic experiment.

A version of this article will appear in the October issue of Labour Briefing

Three years after UK’s banking crisis, will reforms deliver?

Prem Sikka

Major proposals designed to reform Britain’s banking sector after its spectacular 2008 crash have been described as one of the biggest shakeups in a generation.

But they are likely be inadequate for a number of reasons.

Three years after the crisis saw banks such as the Royal Bank of Scotland and Lloyds caught up in the global sub-prime mortgage crisis, an independent banking commission has handed down its 358 page report into what went wrong.

The commission, headed by Sir John Vickers, suggests major reforms including ring-fencing the retail side from investment banking operations, arguably to protect depositors and borrowers from any future banking crash.

However, banks are given the option of deciding whether to ring-fence corporate deposits and loans or not – a notable concession to the banking lobby.

The report proposes a number of controls to limit the amount of money that can travel outside the newly established fence and regulators are expected to police it.

The banking crash showed that many banks were very highly leveraged and lacked resources to meet their obligations.

So the commission proposes that large UK retail banks should have equity capital of at least 10% of risk-weighted assets. As a cushion against future losses, banks are expected to set aside a “loss-absorber” fund of between 17-20% of certain assets.

This is to protect taxpayers and reduce their exposure to future bailouts.

The UK government is expected to implement the reforms by 2019, possibly in line with the global agreement on banking, the Basel III framework on capital adequacy.

So why will they be inadequate? Firstly, there is no scrutiny of the ability of the banks to create credit. As long as that remains the case, credit will have no relationship to the real economy and its ability to cause economic crisis will remain high.

The commission seems determined to ensure that banks remain corporate entities and all the pressures that such status brings.

For example, stock market pressures to increase earnings persuaded banks to engage in shady and risky practices. With the average tenure of CEOs at listed companies shrinking to four years, and still shrinking, executives have little incentive to think about the long-term issues.

Their focus is on private earnings and media star status. There is no consideration of the impact of systemic pressures on banking operations. The commission could have argued for consideration of alternative forms of ownerships.

For example, co-operatives, mutualisation, ownership by communities, employees or even nationalisation, but none of these are considered.

Neither does the commission mobilise democracy to check the selfish impulses of bankers. For example, it bemoans excessive remuneration for risk-taking, but thinks that voluntary codes will curb the excesses.

Well, they have not in the past. An alternative would have been to empower bank employees, depositors and borrowers to vote on executive remuneration. It is doubtful that bankers engaging in aggressive practices would ever manage to secure enough votes for their telephone number salaries.

The ring-fencing of the retail and investment arms is not the same as a legal separation and forcing banks to split their trade. Many banks have complex corporate structures spawning the globe and many operate in tax havens with poor regulation. So it is not clear how these operations are to be ring-fenced.

The commission does not scrutinise the funding of the speculative or the investment side of banking. Financial institutions are addicted to gambling.

At December 2007, just before the banking crash hit the headlines, the face value of the gambles (known as derivatives) on the movement of the price of commodities, interest rates, exchange rates and anything else, was $1148 trillion.

The global GDP is about $65 trillion. Just 1% exposure or loss can wreck the global economy. This speculative trading will continue to be funded with ordinary people’s savings by investment managers and financial intermediaries who will collect mega bucks if the gambles pay-off.

Otherwise innocent savers will pick up the losses. The commission could have argued for the removal of limited liability from all speculative trade so that speculators can’t dump losses on innocent bystanders.

The increase in capital bases may be welcomed but the banks failed because they were unable to meet their financial obligations. Therefore, the focus should be on solvency or availability of cash, but there are no particular suggestions.

The eventual reforms will inevitably be the outcome of political negotiations and bargaining.

Even if the commission’s proposals are fully implemented they are unlikely to cage the elephant for long because the systemic problems of banking and credit have not been addressed.

*This article first appeared on The Conversation website

The Super-rich shall inherit the Earth

When you mention the word 'oligarch' it has a particular resonance with the clique of men whose fortunes were made pillaging Russia following the collapse of the Soviet Union - most famous among them Chelsea owner Roman Abramovich and the now jailed oil tycoon Mikhail Khodorkovsky.



However, as journalist Stephen Armstrong proves in his book 'The Super-rich shall inherit the Earth' oligarchs are not solely the preserve of Russia. While, the not-quite-post-cold-war media is keen to emphasise corruption in Russia, we know very little of the internal affairs of the other 'BRIC' nations: Brazil, India and China - which all have very similar oligarchical systems in which a super-rich elite evades any government regulation or control and in which government seemingly serves their global power interests.



The sub-title of the book, 'The new global oligarchs and how they're taking over our world' reflects the emphasis that is given to these emerging world power states. It describes the litany of corporate manslaughter, government corruption, embezzlement, defrauding of entire population's resources. After six chapters one could easily get the disconcerting feeling a message of 'and that is why we must defend the West!' coming at the end.



Those hoping for a comfortable portrayal of the evils of Johnny foreigner, against the great democratic [sic] Anglo-Saxon model will be disappointed. The brickbats aren't just reserved for the BRICs.



In the final four chapters, Armstrong looks with intense scrutiny at the global oligarchs in the US and the UK, including - in a move bound to delight all UK Uncutters - chapter 9 'In which Philip Green couldn't give a fuck'. This book sadly written before the incoming coalition government had appointed the knighted-under-New Labour Sir Philip to carry out a review of government spending and procurement.



Another chapter details the in-crowd of Goldman Sachs as they migrate from government to investment bank and back again. It also explains why Lehmann Brothers was left to collapse while Goldman Sachs was saved.



All in all this is a refreshing look at the global economy: massive and growing inequality, freedom for the super-rich and increasing authoritarianism for the poor, and government no longer able or willing to defend its citizens against mobile global capital.



While Marx argued that the working man has no country, it is very clear that the super-rich require a sponsor nation - and they have several corrupt jurisdictions to choose from.