And the Risk-Takers Shall Inherit the Earth

One of the themes running through this blog for the past year has been a howl of protest at the transfer of value to a tiny, over-indulgent section of the world's population. The asset bubble enabled those controlling the world economy to acquire a vast share of the planet's value. Now those who failed to make a killing from some of their risky financial dealings are turning to the prudent and thrifty to make good their losses.

This is the essence of the heartfelt complaint from Graham Beale, chief executive of the Nationwide, at the size of his company's contribution to the financial compensation fund that the FSA require all financial organisations to belong to. Savers who chose the mutual, low-return, low-risk form of financial investment are being required to pay £250m. The FSA regulated building societies tightly, preventing them from joining in the asset bonanza, but now the losses have come home to roost they are expected to compensate those who did.

The Nationwide is required to pay more into the compensation pot than the London-based insurer-of-last-resort Lloyds. The unfairness stems from the fact that the amount levied relates to the amount of retail deposits an institution holds. So, in effect, the mutuals are being punished for being prudent and for having the confidence of small investors. The dealers in footloose venture capital are correspondingly favoured by the scheme, although their chances of needing compensation when risky investments turn sour are higher.

More iniquitous even than the plight of the Nationwide is that of the credit unions, whose members are some of the poorest in our society and whose mission is to encourage thrift and wise management of money amongst those who have least. Each credit union, with its hard-saved and comparatively tiny asset base, is being forced to pay a levy to the fund that insured the gambling of the super-rich.

Despite the temptation to join in the financial frenzy that lured some of the mutuals off their path of virtue, co-operative financial institutions have always operated with prudence and high ethical standards. But, like the credit unions trying to proselytise the catechism of thrift in a world that rewards greed, they must hope that their members have faith that they will get their rewards in heaven since here on earth Mammon seems to have the ear of the regulator. Tweet

When is a risk not a risk?

Today the the talk is all of the additional money we are now required to find in the future to pay for the past mistakes of banks. This time the discourse has shifted subtly. Rather than bailouts this is, apparently, insurance.

Let's spend a while to ponder that concept of insurance. The original insurance companies were mutuals, which meant that it was a way of genuinely sharing risk. The risk was that something would happen that you couldn't afford to pay for. Perhaps you would die and there would be nobody to earn money to feed your children; or your house would burn down and you would need money to rebuild.

Once you privatise insurance the risk becomes the sort of risk a gambler enjoys. Now we have a whole new profession - the actuary - whose job is to do the complicated statistics that enables a company to charge each person enough so that the small number of catastrophic events that befall the minority of policy-holders will cost less than the premiums taken from all - thereby generating profits for the company.

In this situation we are still dealing with sharing of risks between people whose chance of facing disaster is more or less the same. But the sort of insurance we are talking about in the financial world - when it comes to AIG, for example - is of a different order entirely.

Companies that ensure 'financial products' that they don't understand and can't investigate closely are gambling on something over which they have no control. The financial companies that create and sell the products are simply passing the risk down the line. In the good times the insurers are raking in premiums and making money for old rope. When the bubble bursts they are going to be the first to go bust, since they are at the bottom of the pile.

Apart from us, of course. Because under the pyramid of bad debt sits Joe Public. Today we are being asked to 'insure' the losses of Lloyds and RBS. The problem with the use of the word 'insurance' to describe the £600bn. we are going to oblige our children to pay is that the disaster has already happened. We know that the loans made by the banks will not be paid back. This must represent another creative move by the financial engineers: a move into ex-post-facto insurance. Tweet

The Richness of Life

I've just had the pleasure of reading Cider with Rosie for the first time. Like everybody else I'm amazed I never had the opportunity before - it was a school favourite everywhere except my school, it appears. The explanation must be to do with my Victorian schoolmistresses fears about the possibile influence on tender minds of the scene under the hay wagon. They clearly felt that the face-slashing reality of Brighton Rock was more suitable for pre-pubescent girls.

For whatever reason I'm glad that this gem has been saved for my middle years and now comes to me at around the same age Laurie Lee was when he wrote the book - and very nearly in the same place as well. The village of Slad is only a couple of miles up the road from where I'm writing this. And I have been spared the stifling, smelly, repressive atmosphere of school as a permanent association with the book.

Everything about Lee's writing is rich, as is the childhood he describes. People who live around here and who knew the author and still know his widow tell you that it isn't realistic. That he has rose-tinted spectacles on. The major criticism is that he doesn't portray the family as poor enough. The spendthrift single mother and her frequently bootless, snotty-nosed children as seen from the outside do not match the wealth that Laurie Lee clearly found in the Gloucestershire countryside.

I was listening to Haydn's Creation recently and for the first time - I think because it was sung rather than spoken - thought about the second sentence of the bible: 'The Earth was without form - and void'. This is how death feels to those who live close to the earth: an absence of the teeming, messy variety of life at this time of year. As we have used technology to gain mastery over nature so we have strangled and stifled this life.

The UK economy is based on financial services - 73% of our economy is now in the services sector, and most of this is financial services. What could be more alien to life than this 'industry' which lures us through life with the attraction of money, especially money via pensions (by which time we are really too old to enjoy it and life has passed us by) and persuades us (the insurance 'industry') that we can use money to prevent the accidental disasters that are an inevitable part of life. A paltry attempt to use the meaningless and worthless construct of money to keep life at bay. Tweet