Posturing over the pound

The debate about what currency Scotland could, would or should have has sprung into life now that the SNP's white paper proposal for 'keeping the pound' has been rejected by all of the major Westminster parties, and the Liberal Democrats too.

This represents a new stage in the debate, with the stakes ramped up for both sides. But if we sweep aside the political posturing, the debate over the last few days has revealed - to this disinterested observer - some interesting truths:

1. The establishment is worried by the prospect of a 'Yes' vote

The unity among the leaderships of the Tories, Labour and Liberal Democrats (and UKIP incidentally) reinforced by the unusual decision to publish the advice of a senior civil servant is a clear indication that the establishment is concerned about the prospect of Scotland seceding from the union.

You might argue that this consensus is a reflection that currency union is a bad idea (especially for Scotland), but Sir Nicholas MacPherson's letter and the statements of the three parties (working together for a No vote under the Better Together banner) go further than criticising currency union and contain some ridiculous scaremongering. The 'no' side - ahead in all the polls - is obviously worried though.

And it has good reason. If Scotland votes to leave and is refused currency union, it could quite legitimately reject the UK debt (a possibility acknowledged in MacPherson's paper). However, even if Scotland took a share of the national debt (based on population size) it would have a debt to GDP ratio of 81%, compared with 104% for the rest of the UK (according to an NIESR paper).

The Treasury paper implicitly acknowledges these possibilities but implicitly says the UK would get its way because "an extensive wrangle about [Scotland's] share of the debt would increase uncertainty and hence its funding costs". What it doesn't say is that is true too for the remaining UK ... and that's why they're worried.

2. HM Treasury believes the Euro is still bad for the UK

It believes that economic union is problematic without political union - and that economic independence is incompatible with currency union. In this it is right: witness how a technocrat was imposed in Italy and government policy imposed in Greece (and elsewhere) under Eurozone orthodoxy.

3. The SNP is economically bankrupt

The SNP clearly lacks the confidence to argue for an independent currency under a central bank of Scotland. Instead it wants a more familiar and convenient currency union with the UK, knowing that it will inevitably mean that Scotland would not be economically independent.

At best Scotland might get one seat on the Monetary Policy Committee of the Bank of England (given size of economy or population), and the interests of the Scottish economy would be totally marginalised (it is arguable that is the case now since the Bank of England largely operates in the interests of the City of London's square mile, but then why vote for independence only to accept the situation of pre-independence?)

As such an 'independent' Scotland under the SNP's vision would leave Scotland as a crown dependency, similar to the Isle of Man or Jersey. Given that Salmond's economic vision has previously been to turn Scotland into a tax haven, maybe that's the aim. Scotland as an outpost of the City of London?

4. The UK banks are still fragile, and if they crash again the establishment will bail them out again

The Treasury paper states "Scotland's banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk". So the Westminster consensus still believes if banks fail they should be bailed out exactly as before. They have learned nothing from the greatest crash in over a century - their neoliberal ideology remains unshaken. The SNP does not demur from this, nor suggest the Icelandic route.

Conclusion

These points do not make the case for either a yes or no vote in the referendum. What they point out is that however Scotland votes, it will be governed by people unable to govern in their economic interests.

What is also reveals is that the referendum debate is likely to step up, with more vitriol and posturing, that will make independence negotiations more difficult if Scotland does vote yes.

Osborne ‘slays Lloyds goose for quick buck’

Chancellor sells £3.2bn stake in profitable bank 

MINISTERS began reprivatising Lloyds yesterday, flogging off a £3.2 billion stake in the once failing bank.

Chancellor George Osborne hailed the sell-off as evidence that Britain was “turning the corner,” but economists raised concerns that the banking sector was merely returning to the light-touch approach central to the severity of the financial crisis in the first place.

Investors snapped up the stock at 75p a share – just above the 73.6p average the Treasury paid in the £20.5bn bailout the bank at the height of the financial crisis.

The taxpayer’s stake has been reduced from 38.7 per cent to 32.7 per cent, with no further sales for at least 90 days.

Mr Osborne said the sale eased the national debt by £586 million, based on a paper valuation of the shares on government books, though that figure is subject to Office for National Statistics approval.

The Tory Chancellor said: “This is another step in the long journey in putting right what went so badly wrong in the British economy.”

But left economists warned that the fire sale would be bad for Britain in the long term. Left Economics Advisory Panel co-ordinator Andrew Fisher said: “Lloyds was bailed out by the state, and propped up with public money.

“Now Lloyds has returned to profit, rather than maintaining a long-term income stream, it is being sold off for private profit.

“This is slaughtering a goose that lays golden eggs for a one-off fry-up, even leaving aside the government’s criminal failure to use its public stake in the banks to change banking culture or invest in the public interest.”

And the Socialist Economic Bulletin’s Michael Burke warned that the sell-off was “a return to the system we had before.”

“It’s a drive by the government to bail out the most failing aspects of the private sector – that of light-touch regulation in the financial sector, while imposing austerity cuts for the rest of society.

“They’re selling off one of our assets instead of using the profits for regeneration.”

This article first appeared in the Morning Star

 

MP calls for RBS sale 'at all costs'

by Luke James

A privatisation-mad Tory MP today demanded that profitable parts of the publicly owned RBS bank must be flogged at all costs.

Andrew Tyrie (pictured), who chairs Parliament's commission on banking standards, wants to let privateers cherry-pick parts of the bank and make the taxpayer shoulder bad debts.

Splitting RBS into good and bad banks was just one option given in a recent report by the cross-party commission.

But even austerity-obsessed Chancellor George Osborne is believed to be unenthusiastic about the prospect.

Mr Tyrie has now urged the Chancellor to examine the "future structure" of RBS as "a matter of urgency."

In a letter to the Financial Times laced with bankers' jargon, he argued: "Formal accounting conventions should not be allowed to get in the way of what is best for the economy."

Left Economics Advisory Panel co-ordinator Andrew Fisher said the misplaced debate centred on "what is the best way to privatise RBS."

He explained: "Tyrie argues the taxpayer will get more in the sell-off if the public first absorbs the toxic debts as a 'public bank.'

"Osborne worries that the public bad bank would worsen his deficit figures and that the toxic debts aren't too bad anyway."

But Mr Fisher said: "Labour should be calling for a publicly owned bank that can invest in new infrastructure to create jobs, reduce unemployment and operate in the public interest - something neither side of the Osborne-Tyrie pantomime cares about."

This article first appeared in the Morning Star

Lloyds bosses to speed up privatisation with 70% payout

by Luke James

Bosses of bailed-out Lloyds bank revealed today they will hand a massive 70 per cent of profits to shareholders in a bid to speed up privatisation plans.

Chief executive Antonio Horta-Osorio issued the invitation to asset-strip the part-publicly owned bank because private investors have so far only shown modest interest.

The government owns 40 per cent of Lloyds, acquired when it saved the bank from collapse in 2008 with £17 billion of public money.

Ministers are desperate to flog the stake - and so cut the public out of dividend payments - because of their privatisation obsession and have offered Mr Horta-Osorio a £2 million bonus to deliver the sale.

His plans to give away a staggering 70 per cent of profits by 2016 would mean that Lloyds pays higher dividends to shareholders than any other bank.

Leading left-wing economist Andrew Fisher said it was a "slap in the face for the British public, who bailed out banks like Lloyds.

"It makes it clear that what many of us have said all along is true - we nationalised the debts, while the profits are privatised," said the Left Economics Advisory Panel co-ordinator.

"Lloyds's grotesque dividend and executive pay bonanza comes at the expense of its customers, the taxpayer and its own staff - at a time when over 3,000 job cuts have been announced."

This article first appeared in the Morning Star

Tory home loan bribes 'unwise'

 
by Richard Bagley

Tory Chancellor George Osborne revealed his latest desperate "big idea" for housing today that will see more of our cash used to bribe banks into lending to people who can scrape together a mortgage deposit.

He plans to gamble £12 billion on high-risk 95 per cent loans where the state will act as a guarantor.

That means we will pick up the tab for some of the loss in case of a default.

Mr Osborne claimed following talks with construction firms that the extension of the Help to Buy scheme was "about getting behind those who aspire to own a home."

It will cover houses priced up to £600,000 and will only help those wealthy enough to save a 5 per cent deposit.

With average house prices at around £150,000 in Scotland and Wales - rising to a whopping £454,000 in London - people in the two nations would need at least £7,500 in cash to qualify for the mortgages or over £22,000 in the English capital.

The government's obsession with fuelling the housing market even drew criticism from Bank of England chief Paul Tucker.

He described the scheme as "unwise" in the long term because of fears that it will help reinflate a housing bubble that has left hundreds of thousands packed into expensive private rented accommodation.

Construction union Ucatt general secretary Steve Murphy accused Mr Osborne of "fiddling round the edges of the housing crisis.

"If the government wants to begin to solve both issues then they need to be investing and building social housing which will get skilled workers back to work and will also provide homes for the millions of people who are currently in ina
dequate accommodation."

Left Economics Advisory Panel co-ordinator Andrew Fisher ridiculed the Chancellor's announcement.

"After three years of economic failure, Osborne's great new strategy for growth is a house price bubble," said Mr Fisher.

"The Help to Buy Scheme is an admission of political failure and of the continuing fragility of UK banks.

"This is nationalising the risk and privatising the profits again - a bank bailout by stealth."
He added: "The solution is not subsidies for the big construction companies instead of the banks, but for councils to borrow and build to meet local need."

This article appears in today's Morning Star

UK banking reform bill won’t curb reckless risk-taking

Prem Sikka

Some four and-a-half years after the banking crisis that has resulted in massive public debt and a deep austerity program, the UK government has finally unveiled its Financial Services (Banking Reform) Bill . The Bill is going through parliament and is expected to become law by the end of the year.

The legislation will require UK banks to insulate everyday banking activities associated with savings, deposits and loans from more volatile investment or speculative activities, by introducing a ringfence around the deposits of individuals and businesses. Thus two subsidiaries under the same parent company are envisaged. This separation is advocated because investment banking indulged in excessive risk-taking and accelerated the banking crisis.

Bear Stearns, Lehman Brothers and Northern Rock are often held out as exemplars of this reckless risk-taking. Prior to its demise, Northern Rock had a leverage ratio (the relationship between total assets and shareholder funds) of 50 while Bear Stearns and Lehman had leverage ratios of 33 and 30 respectively, thus making them highly vulnerable to small declines in the value of their assets.

For five years before its collapse, Bear Stearns generated almost all of its income from speculative activities. About 80% of Lehman’s income came from speculative activities. Other banks also indulged in an orgy of speculation and, by December 2007, the global face value of derivatives stood at $1148 trillion, compared to a global GDP of only $65 trillion. No one can consistently pick winners and, when their financial fortunes turned, it set off a domino effect.

Many counter parties to complex financial instruments were in danger of defaulting on their obligations and thus threatened the collapse of whole system. The UK government bailed out the system with loans and guarantees of nearly £1 trillion.

Critics claim that ringfencing will increase administration costs and capital ratios, leading to reductions in the amount of credit in the economy and thus investment and jobs. The Bill is based on the premise that, in the next banking crisis, the government would rescue the retail side, but would probably let the investment side sink. This threat may discipline banks and spare taxpayers the expense of bailing out the entire system. The ultimate sanction is that if banks do not ringfence satisfactorily by 2019, then the regulator can formally split their operations.

The Bill sounds good, but is unlikely to be effective. It does not impose any personal costs for reckless risk-taking. Ringfencing is not the same thing as a legally enforced separation (two independent entities operating retail and investment banking). The Bill does not say what precisely is to be ringfenced as savings can be placed in many exotic securities.

Derivatives have been described by the US investment guru Warren Buffett as “financial weapons of mass destruction”, but the government has yielded to the banking lobby and will permit banks to locate “simple” derivative products — whatever “simple” means — within their retail banking operations.

What if funds flow from a ringfenced entity to non-ringfenced entity via a foreign subsidiary or affiliate in a place where there is no such separation? Would this be a breach of the ringfence? The Bill does not provide any examples of what a breach of ringfencing looks like, though the Treasury will have powers to prohibit unspecified types of transactions.

The lack of precision will fuel uncertainty and encourage banks to play creative games in deciding which side of the ringfence some assets and liabilities are to be shifted. The regulator is expected to negotiate the details with the banking industry.

Ringfencing will neither hermetically seal investment banking nor prevent its contagious effects from spreading. For its speculative activities, investment banks will continue to raise finance from retail banks, pension funds, insurance companies and others. They will still have the benefit of limited liability.

In the event of losses or a crash, investment banks will be able to dump their losses on to the providers of finance and thus infect the whole financial system, and will inevitably force governments to bail out the system again. The only remedy is to ensure that investment banking is accompanied by unlimited liability: investment banks are free to speculate as long as their owners can personally absorb the losses.

Investment banks may entice corporate executives to provide funds with promises of huge returns, which might boost their performance-related pay, but can land stakeholders with huge losses. Therefore, the Bill should have required that prior to transacting with investment banks, organisations should seek permission from their own stakeholders.

This would have prevented innocent bystanders from becoming the victims of speculators. Perhaps effective reforms will come after the next banking crash.

This article first appeared on the Australian site The Conversation

Osborne 'delusional' on City slicker regulation

From the Morning Star

John Millington

Left economists labelled Chancellor George Osborne "chronically delusional" today after he attempted to play the strong man by promising tough financial regulation.

There will be "no ambiguity about who is in charge" when taxpayers' money is at risk, Mr Osborne insisted in a keynote speech at the World Economic Forum in Davos.

The Chancellor unveiled new laws to boost the power of the Treasury during times of financial crisis.

The measure is part of a wide package of reforms which will scrap the Financial Services Authority and introduce a new regulatory framework made up of the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority.

The Financial Services Bill, published after nearly two years of consultation, gives the Chancellor the power to veto decisions made by the Bank of England when dealing with bank bailouts and other interventions, in an attempt to avoid a repeat of the Northern Rock collapse.

"I hope that we will never again see the paralysis and confusion that did so much damage when the latest crisis hit," he said.

The Bill means that in a crisis, when taxpayers' money is at risk, both the responsibility and the power to act will rest with the Chancellor of the day.

But LEAP co-ordinator Andrew Fisher was left unimpressed by Mr Osborne's gesturing.

"The reform of the finance sector is not a question of better oversight to ensure functioning competitive markets, but of democratic control to ensure markets are subordinated to social need,' he said.

"The failure despite ministerial begging to get even government-owned banks to lend, and the ineffective quantitative easing policy, are the desperate acts of those clinging to an outdated and failed ideology.

"We need public ownership of the banks and democratic control of credit issuance."

'Poor decisions' led to £45bn RBS collapse, says feeble FSA report

Morning Star
Monday 12 December 2011
by Rory MacKinnon, Corporate Affairs Reporter

Financial watchdog chief Lord Turner stated the bleeding obvious today in a 452-page report on Royal Bank of Scotland's failure which said "poor decisions" were to blame.

Political economists rained down ire on the Financial Services Authority chairman's "pathetic" findings after a year-long investigation into the 2009 collapse.

Lord Turner pinpointed "multiple poor decisions" by directors which ultimately ended up with the bank needing a £45 billion bailout from taxpayers to fend off closure.

Failures included aggressive expansion with "inadequate due diligence," such as the 2007 takeover of Dutch high street bank ABN Amro, and dangerously low levels of capital permitted under "light-touch" regulation.

He said that the bank had suffered from an over-reliance on high-risk, short-term funding and had made substantial losses in credit trading which were underestimated by both the bank itself and regulators.

The FSA chief also blamed the "systemic crisis" the world over.

But Lord Turner only briefly touched on "underlying deficiencies in RBS management" that made it "prone to make poor decisions."

And he justified the failure of the FSA to spot the spiralling crisis as a side effect of it working "against a backdrop of political pressures for a 'light touch' regulatory regime."

Left-wing commentators were left unimpressed.

University of Wolverhampton Professor Roger Seifert dismissed the report as "pathetic."

Regulators' own lack of skill and technical expertise "was never the issue - it was a complete lack of political will," he said.

"It was not a minor failure or lack of skills and technical expertise.

"It was a failure at the heart of the liberal government."

Left Economics Advisory Panel's Andrew Fisher said the findings underlined the need for the government to take the banking system into taxpayer hands.

"The failure of RBS was due to a regime sanctioned by successive governments that instituted banks as the dynamic driving force of the economy rather than as safe depositories," he said.

"The banks and wider finance sector manage our money, our mortgages, our pensions.

"Their existence is essential for our day-to-day lives, our homes and our futures.

"This is a systematic failure to which the only sustainable solution is public ownership and control."

And Tax Justice Network economist Richard Murphy said: "Regulating better a structure that is inherently flawed will never give us the right answer.

"Reforming the system as whole is the only way forward now - and this is the elephant that dared not trumpet in this report."

£2bn profit RBS keeps on sacking

Bailed-out bank Royal Bank of Scotland is back in the black and lending again - but still continues to sack their own workers.

The 83 per cent state-owned bank posted third-quarter pre-tax profits of £2 billion today, following a £678 million loss earlier this year and a £1.6bn loss in 2010.

The bank reported £8.1bn in lending to small and medium-sized enterprises (SMEs) - just shy of the £8.2bn target set out under the government's controversial Project Merlin deal last year.

The news came within a week of government figures which showed that Britain's banks are turning down more than one in three applications for small business loans - ignoring a key part of the deal.

The Office for National Statistics reported just 65 per cent of small business loans were approved in 2010, compared with 90 per cent in 2007.

But it revealed that RBS was still the biggest fish in the small business pond, providing 40 per cent of SME loans in Britain compared with 35 per cent in 2010.

The report brought RBS small business lending to £23.6bn so far this year - around 5 per cent short of the Project Merlin target.

But economists savaged the bank today for persisting with mass lay-offs despite its multibillion bounce-back.

The bank announced plans to axe more than 20,000 jobs in the wake of the 2008 bailout.

And RBS chief executive Stephen Hester said yesterday the cuts would continue "to reduce the impact on customers and shareholders of the regulatory and market developments."

Left Economics Advisory Panel co-ordinator Andrew Fisher blasted the banker's comments, saying that they showed the bailout had failed to change City culture.

"It is sacking workers to generate dividends for shareholders on the back of taxpayer pounds, while continuing to make risky and bad investments through its Global Banking and Markets arm.

"This is further evidence that the bailout was the privatisation of public money, not the public ownership of private banks.

"What we need is the full public ownership and control of UK banking to end the culture that has led our economy to the precipice and to direct investment where it is socially useful," he said.

This article appeared in the Morning Star on Saturday 5 November

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

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 future of the Northern Rock: questions for the re-mutualisers

There's a new campaign being led by Labour MP Chuka Umunna to remutualise Northern Rock, with a letter supporting the proposal published in the Guardian and an EDM tabled in Parliament.

The proposal has cross-party support with two Conservative MPs co-signing the Guardian letter, along with a Liberal Democrat and even Unite General Secretary Len McCluskey.

As I argued in October 2008, there should be "a return for the public" for the huge loan bailout and subsequent nationalisation of Northern Rock.

I have to say I'm currently only lukewarm about the campaign. I'm instinctively sympathetic - my savings and current account are both with a mutual - but I'm just not clear on how re-mutualising Northern Rock would work, and if it would be fair to taxpayers who after all are the ones responsible for its continued existence.

Sadly, neither the letter, EDM nor campaign page answer these concerns - it just tells me mutuals are more accountable, democratic, and that it would be popular, none of which I would dispute.

The questions I have for the campaign are therefore:

• What is the benefit for the taxpayer? The taxpayer collectively saved Northern Rock so why should only current customers benefit?

• Which bits of Northern Rock are we talking about - it was split into good and bad over a year ago, and with differing results - and will the taxpayer be again left with the bad bit? Gerry Gold raised this here on LEAP blog

• Why not just keep Northern Rock in public ownership and use future profits to fund public services?

• Shouldn't former employees benefit too? Over 2000 have lost their jobs since 2008 - yet it was their taxes that paid to 'save' it as much as anyone else's. And would this be a building society model or would staff have a governance role too? If so, what?
  

• Also, what about a benefit for all those whose homes were repossessed early by the lender as it aggressively tried to repay the government loans it received?

For the time being my opinion remains that Northern Rock be publicly owned and publicly controlled. It's already the former, but we should be campaigning for the latter - it seems fairer than re-mutualisation.

Don't scare off the banks, says Demos

Amid all the suffering - unemployment, welfare cuts, redundancy notices, pay freezes, etc - some of us have turned our frustrations on the banks. Thankfully the self-described 'leading independent think tank in British politics' (Demos) has come to their rescue with a new publication by New Labour's former City Minister Kitty Ussher.

The Guardian reports that Ussher carried out in-depth interviews with senior bankers and gleaned anecdotal evidence that suggests banking may be on the verge of leaving the UK citing rising taxes, threats to split the big banks and scrutiny of bonuses. Hmm, the 'we'll go overseas' line. Ironically the Economist recently gleaned some anecdotal evidence of its own that "they might be bluffing".

Ussher's report asserts that UK-based banks employ "1 million people and supporting a further 500,000 – and data showing the sector brings in £53bn in tax, 11.2% of the UK's total tax take". So best not push them away or that's 1.5 million jobs gone and £53 billion in tax down the swanny?

But Ussher, rather conveniently, conflates two issues: elite speculative investment bankers with the banking sector. Allow me to elaborate. Let's say Bob Diamond and his ilk despair at the bank levy, 50% tax rate, and the findings of the Vickers Commission and decide to relocate their head offices to Zurich. Does that mean every branch of Barclays would close on UK high streets and its 60,000 staff be made redundant? No, in fact no branches would close, and all but a global elite of staff would still work and pay their taxes in the UK.

Funnily enough, I have an ally in the Financial Times too - which wrote the below in its editorial earlier this month:

Such threats should be faced down, not just because they are unreasonable but because they are of questionable credibility.

It is not clear what “moving abroad” actually means. Were a bank such as Barclays to shift its headquarters, the impact on the UK would surely be minimal as it would still do much of its business and pay taxes in the country.

What is more likely anyway is that rather than upping sticks altogether, some banks may reduce their new investments in Britain. This might make the City slightly less of a hot spot, but it would not be a disaster. And were it to be the price of financial stability,this would be a price worth paying.

So where did Ussher's '£53bn in tax' figures come from? Again her anecdotal assertions are of "questionable credibility". Given the total corporation tax take in the UK was only £43 billion in 2010-11 this seems a pretty fanciful calculation. Indeed the report doesn't explain how the figure was arrived at, just that PriceWaterhouseCooopers calculated it.

So what do the banks - not their staff - contribute in tax? According to the Richard Murphy penned TUC report - The Corporate Tax Gap - not much. It says that as well as benefiting from an £850 billion bailout from taxpayers and the Bank of England during the recession, banks are able to offset their £19 billion [cash value] of tax losses between 2007 and 2009 against paying tax on future profits.

In 2009 Barclays paid just £113m in corporation tax - just 0.26% of total corporation tax and a would-we-miss-it 0.02% of total tax receipts.

Let's say the four big UK banks are similar to Barclays - that's 1% of corporation tax receipts and 0.08% of total tax receipts. And we wouldn't have to bail them out again (not that we should have done before without full nationalisation).

Despite what Demos might tell you, there is little to be lost from the departure of these parasitical tax avoiders. Nevertheless expect the Cabinet of millionaires to pay more attention to Demos than to LEAP.

Banks' bluster can't disguise lightweight levy

The UK bank bailout was £1.3 trillion. The UK’s big five banks made pre-tax profits of £15bn in the first half of 2010. Let’s estimate the second half of 2010 was as good and their annual profits were £30bn. Bank bonuses were estimated to be over £7 billion last year. Osborne's levy of £2.5 billion (and let's see how much is actually collected) is a drop in the ocean - especially when Osborne is cutting corporation tax every year for the next four years.

Very good analysis in yesterday's Morning Star:

This levy will not do

Judging by the headlines it's been a tough week to be a banker. Not only have they been subject to "Project Merlin," which set minor restrictions on their multimillion pound bonuses, but they also have had the levy on their borrowing increased. Times are indeed tough for the leading members of the top 1 per cent of earners. Or are they?

Chancellor George Osborne slapped - well, more precisely, tickled - bankers with the levy at the beginning of the week following a period of prolonged procrastination by the Treasury over the question of limiting their runaway bonuses.

But far from being a "pre-emptive strike against the City," as the Telegraph exclaimed earlier this week, the levy is tame and easily manageable by the banks.

So what are the facts? Well, the government aims to increasing the levy on banks' borrowing to £2.5 billion this year, an extra £800 million on its previous plan.

This represents an annual tax of 0.075 per cent on the value of all of the debts of British banks.

The coalition is adamant that the levy on bank balance sheets is the best way of making sure companies make a fair contribution to tackling the deficit.

However, despite banks reportedly being "livid" at the levy, unions have described the move as a mere "drop in the ocean."

The £2.5bn figure represents only 10 per cent of the overall profits made by Britain's banks last year.

And when you consider that banking profits were in the region of £25bn, compared to the National Audit Office statistics showing that the financial sector still owes £90bn to the public following the taxpayer-led banking bailout, to say that the banks have got off lightly is an understatement.

Despite this City representatives have suggested that the higher levy calls Osborne's commitment to bankers and big business into question.

This seems odd given the news - as if Star readers really needed it - disclosed earlier this week that more than 50 per cent of funding for the Conservatives' general election campaign came from financiers in the City of London.

Over £11m was donated, according to an investigation by the Bureau for Investigative Journalism, a figure which puts real meaning into the saying: "He who pays the piper, calls the tune."

Unions and even the shadow Labour cabinet have highlighted this link as proof of Osborne's inertia in dealing with the banks and their behaviour.

Left economists have been busy too, providing much-needed analysis and counter balance to the agenda being thrust on the British public over this issue.

Left Economic Advisory Panel co-ordinator Andrew Fisher and left economist Michael Burke point out that, as a result of the coalition's cuts to corporation tax, the rise in banking profits will actually be higher than the £800m increase in the levy that Chancellor Osborne is imposing.

"Corporation tax is being reduced this year to 27 per cent - this would save £1.1bn for the UK banking sector," Fisher tells the Morning Star.

"One also has to look at how banks manage to disguise their balance sheets, for example through subsidiaries and how much the Treasury actually collects."

Fisher adds that the bank levy will only pull in an estimated £10bn over the next four years, while welfare will be cut by £18bn over the same period as the government pushes to slash Britain's budget deficit.

"The poor are paying more for a crisis they did not create," says Fisher.

And scant regard has been paid to any possible and immediate alternatives.

Although differences exist in exactly what to do with the banks, left economists are clear that it is not simply a question of how big the levy is. They argue that the whole relationship between the state and the bank must change.

"The way out of the banking crisis and the economic crisis is the same - instructing the banks, starting with the state-owned banks, to lend for productive investments," says Burke.

"This would both increase their profitability, to the benefit of taxpayers, and boost growth to the benefit of all."

University of the West of Scotland Professor John Foster goes further.

"The only way to get money out of the hands of speculators and into the productive economy is for the retail banks to be fully nationalised - and for the government to close down the centres for unregulated speculative banking and tax avoidance in Britain's crown dependencies," he says.

Update: excerpt from Prime Minister's Questions on bank bonuses. Miliband exposes Cameron's rhetoric, but Cameron's retort is fairly spot on to be fair.

Beware the mea culpas of the Central Banks

It seems to be fashionable now for leading figures inside central banks to issue mea culpas. Their statements are along the lines of: perhaps the bank bailout was wrong; the taxpayer shouldn't have bailed out the banks.

Yesterday the Deputy Governor of the Bank of England, Paul Tucker, surprised a few people by saying "something has gone wrong with capitalism, with the very heart of capitalism". After the bank collapse of 2008 that can hardly be argued. However his remedy is that banks must be allowed to fail for capitalism to "work".

Tucker is not coming over to some sort of progressive anti-bank position or becoming an advocate for regulation. Quite the opposite, he is echoing his counterpart on the Federal Reserve's FOMC (the US equivalent of the Bank of England's MPC), Charles Plosser, who epitomises the increasingly vocal, laissez-faire camp, which calls for an end to an active monetary policy to support economic recovery.

Appropriately enough, Plosser was speaking in Chile (petri dish of Friedman's 1970s free market disaster) on Monday. It was the usual mystification thesis of the 'invisible handers': nothing can be planned, the market moves in mysterious ways, there is no alternative; and other total blather. Here's an excerpt:

"Successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year in advance and anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make such forecasts."

Well free market economists don't. Hence why Plosser was completely taken by surprise by the credit crunch of 2008.

What underpins these public statements from Tucker and Plosser is not a mea culpa on behalf of the banking sector, but actually a coded hands-off warning: State intervention is out of fashion now, because it bank regulation is now on the agenda and because the rest of the economy might demand government support.

The Morning Star today quotes Professor Roger Seifert and me in response to Tucker's comments yesterday:

Professor of Industrial Relations Roger Seifert said banks should be nationalised but the state would have to play an increased role in the long term to "regulate banking behaviour."

"The short-term position would be to nationalise failing banks permanently then use them to encourage behavioural change in other banks through more progressive employment and lending policies, linked with community and government projects," he said.

Left Economics Advisory Panel co-ordinator Andrew Fisher welcomed Mr Tucker's acknowledgement that "something had gone wrong with capitalism."

But he added: "To let one of the big banks go bust would see millions lose their savings and tens of thousands lose their jobs. The Labour government was right to step in and nationalise. However, with that nationalisation should have come democratic public control with fair rates for savers and borrower alike and investment targeted at creating sustainable jobs.

"While Tucker recognises the inherent flaws in the finance capital system, his free-market solution is the exact opposite of what any socialist would want."

Bank bonuses the symptom not the cause

The sight and sound of Barclays CEO Bob Diamond running rings around a committee of Westminster MPs should bring an end to the ideas that bankers’ bonuses can be controlled, that the financial sector can be regulated, or that the worst excesses of capitalism can be reined in.

These are the ideas that have sustained the economic and political debate since the crisis blew up in 2007. Those tied to the for-profit economic model, which includes most parliamentarians, took their cue from rafts of self-styled “economists”, analysts, commentators. They had in various ways blamed the removal of regulation during the Thatcher/Reagan years for the gaseous balloons of dodgy credit that enveloped the world during the globalisation decades.

Of course, the chorus of disapproval only started when the burden of mortgage and credit card debt became unsustainable and the payment defaults detonated the balloons’ volatile contents. Until then, the world was in thrall to New Labour’s friends in the City, and the Blair/Brown triumphalism that trumpeted “the end of boom and bust”.

Diamond is pretty much the apotheosis of spokespersons for the capitalist class and he wasn’t pulling any punches when he said that the time for “remorse and apology” was over. In asserting that banks should be allowed to fail, he issued a sharp slap in the face for the whole process of bailing them out in the first place.

This led governments and central banks around the world to massively expand their debt and pass the responsibility for repaying it on to their unwilling and increasingly unruly populations, their children and their children’s children, if the system is allowed to continue.

And if banks should be allowed to fail, so, it seems, should the countries who’ve tried to bail them out, or have been caught up the global debt tsunami. Portugal is in line to follow Greece and Ireland.

Philip Augar, author of The Greed Merchants: How the Investment Banks Played the Free Market Game puts it as clearly as you could want:

High bonus payments are a symptom of a problem, not its cause. The banking settlement was deficient because it did little to address the asymmetries in the universal banking business model. This model causes investment banks to jeopardise global financial stability in bad times whilst allowing bankers to cream off film star compensation in the good times. The global reforms have done a bit to improve financial stability but almost nothing to constrain the profitability that produces the bonuses. That profitability arises from a business model that gives banks in general and investment banks in particular the best possible view of global economies and markets. They are able to use this information advantage to load the dice and generate super-profits. This is where the bonuses come from and this is why the banking lobby worked so hard and so successfully to defend the model.

The “business model” Augar is talking about is profitability. So now is the time to ask the question of questions: why do we need to organise the whole of society around the for-profit business model? The spectacular failures of the last three years are signs of a system at the end of its days.

Rather than trying to prop it up, at an unbearable cost to billions of ordinary people, we must put it behind us, setting our minds to the future of a society that produces for the needs of everyone, not the bonus-yielding super-profits for a few. That is the agenda for a global network of People’s Assemblies.

Gerry Gold
Economics editor
http://www.aworldtown.net/
12 January 2011

False Economy

The TUC has launched a new website - False Economy - spelling out "why cuts are the wrong cure".

This video sets out why we shouldn't be suffering for the crisis caused by the finance sector:

Why cuts are the wrong cure from False Economy on Vimeo.

There's also the ability to add details of the cuts in your area and provide testimony of how the cuts affect you.

Are the banks about to fail again?

Last month the Irish government bailed out the banks again, forcing their budget deficit to balloon to an astonishing 32%. It was all too familiar, the banks have once again been bailed out with public money, yet remain in private control and with very little regulation or oversight. There was even the Irish Finance Minister, Brian Lenihan, popping up to say the biggest bank, Anglo Irish, was too big to fail.

People of course said that about Lehman Brothers, but it failed and the world did not implode. What has vanished though is many Irish jobs, welfare rights and public services - all apparently necessary to avoid a crisis. Instead the collapsing demand in the economy caused credit rating agencies to downgrade Ireland back in July.

And so to the UK, and today the New Economics Foundation (NEF) has published a report Where did our money go? Building a banking system fit for purpose, which warns "[UK] Banks set to demand fresh bail-out in 2011" and cites increased borrowing by them.

It also highlights the a "shocking" lack of information on how banks had used the bail-out money. Like Ireland a lack of ownership and control accompanied the bailout - criticised with great foresight by LEAP Chair John McDonnell at the time - and now we may be on the brink of further collapse.

Referring to the NEF report, LEAP's Graham Turner, from GFC Economics, said "the Bank of England also warned in its June Financial Stability Review that there will be a huge increase in refinancing requirements for UK banks in 2011. This remains a systemic threat."

Like Ireland again, the UK is about to embark on unprecedented mass public spending cuts - which would sap demand from the economy, and could possibly simply be the precursor to funding another bailout for the bankers.

If the UK banks do suffer a second round of collapse, then it is time to nationalise the assets as well as the losses and control the sector for public good not shareholder and speculator gain.

There's an excellent piece in today's Morning Star on this, Banks on the brink yet again - well worth a read.

Lloyds racks up £1.6bn profits from cuts

From today's Morning Star

Louise Nousratpour

Taxpayer-backed Lloyds Banking Group has boasted of a "significant milestone" when it announced half-year profits of £1.6 billion.

The result came as a marked turnaround on the £4bn of losses seen a year ago and was better than expected by most analysts in the City.

Lloyds, which is 41 per cent owned by the public, claimed that sharply lower bad debts had helped its recovery, with losses on loan defaults more than halving in the first six months of 2010.

However Left Economics Advisory Panel Andrew Fisher refuted the banks version of events.

"The profit is not due to successful operation, but due to private equity-style asset-stripping with 16,000 jobs cuts, pensions cut and branches sold off to Santander," he said.

Mr Fisher added sarcastically that the taxpayer should be pleased with the profit because "with a 41 per cent stake we should be welcoming over £650 million into the public coffers. That figure would more than pay for the Health in Pregnancy grant that was abolished in the last Budget."

Finance union Unite said that the profits had only been possible because of staff who had worked "tirelessly in extremely difficult circumstances."

National officer Cath Speight said: "Since the formation of the bank there have been over 16,000 jobs lost and those who hold the key to the success of the bank continue to face insecurity and uncertainty about their futures because of the sale of bank branches.

"Employees have also suffered as Lloyds severely curtailed their future pension benefits."

Lloyd's profits contributed to a combined haul of more than £11bn from the four major high street banks.

HSBC reported a bumper £7bn half-year profit on Monday.

HSBC bank big-wigs brag of super-profits

From today's Morning Star

Louise Nousratpour

Banking giant HSBC has boasted that it had more than doubled half-year profits to £7.2 billion - prompting demands for a windfall tax and the nationalisation of the banking system.

The British-based group's super-profits roared 121 per cent ahead in the first six months of this year as bad debts plunged to their lowest level since the financial crisis.

In Britain, where HSBC cut 4,600 jobs last year, profits totalled £1.3 billion, an increase of 26 per cent. The bank has also set aside £6.2bn in staff pay, bonuses and benefits for the first half of the year - up 7 per cent on a year earlier.

Left campaigners said that the recent super-profits announced by the corporate sector confirmed that we are not "all in this together," as Prime Minister David Cameron keeps telling the nation, with big business flourishing while Chancellor George Osborne "robs ordinary people of £6bn in austerity measures."

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The eye-watering figures from HSBC reinforce the fact that the corporate sector has had a good recession.

"We are seeing the same phenomenon whether it's BT, British Gas or the banks - corporate profitability restored to or above pre-recession levels, while the recession they barely felt is used as an excuse to cut jobs, suppress wages and raise prices."

Mr Fisher warned that a "stark class warfare" was being waged by the Con-Dem government and "its corporate pals who were given £25bn in tax breaks in the last Budget.

"The reality is that the government still holds over £850bn in bank assets.

"There is no need for a single job to be cut or for a penny to be taken away from a single public service."

Communist Party of Britain general secretary Rob Griffiths renewed the labour movement's demand for a windfall tax on all super profits and for the banking sector to be brought in-house to plug the deficit and fund public services.

"Banks were kept afloat because the government and the Bank of England pumped £1.3 trillion into Britain's financial system, yet the working class are being forced to pay the cost of the crisis while the fat cats grow fatter on their ill-gotten gains," he added.

Britain's other major banks are due to report their results later this week. Part-nationalised Lloyds is forecast to report £800 million in profits, while the 83 per cent state-owned Royal Bank of Scotland (RBS) is expected to post interim profits of around £200 million.

Labour leadership frontrunners David and Ed Miliband have both called for the recently introduced banking levy to be doubled.

David Miliband told a south London party meeting on Sunday that the tax, expected to raise £2bn a year from banks, was "incredibly small."