30 October 2010

Follow the money

Any intelligent observer who was paying attention must have learned since 2008 that the money system is the trick that facilitates the control of the global economy in the interests of a tiny but powerful minority. So when any proposals are made to change the way that money-banking system works we should pay great attention.

On Tuesday Mervyn King, the Governer of the Bank of England and therefore the man responsible for both banking in the UK, monetary policy and the pound sterling itself, gave a speech in New York (aka Capitalism Inc. HQ) where he said explicitly that 'Of all the many ways of organising banking, the worst is the one we have today.' (Full text available here.) This is the clearest indication yet that capitalism is in the course of a major adaptation: the key to who will gain and who will lose will be in the design of the money system that will emerge.

King's central point in terms of critique seems to be similar to that made by my good friend Mary Mellor in her book The Future of Money, namely that it is simply unfair that a system so unstable as that of fractional reserve banking should be guaranteed by the public so that, in the now familiar cliche, the losses are socialised while the profits are privatised.

According to Robert Peston's summary of the speech, King argued that the hastily agreed Basel III accords are insufficient guarantee for publics who still stand behind their banks. For those do not spend their time watching the pin-stripes, Basel is the place where international bankers go to decide amongst themselves what is the least they can agree to tinker with their business model to keep the world's politicians happy (again: note the location).

What Mervyn King was arguing for, in the heart of the banking beast, was the abolition of banking as we know it. He proposed two alternative models. The first is already the subject of wide debate and would require a complete separation of retail and investment banking. The second is more interesting and known as 'limited purpose banking'. It works on the insurance model inherent within mutual approaches to finance and, as far as I can understand, leads to a situation where we really are ‘all in it together’, since the risks between capital and personal investments are pooled, with businesses and households sharing risks, but within different kinds of 'banks', operating with different degrees of risk.

Mervyn King places his hope in the Independent Commission on Banking, whose members are all well-steeped in the capitalist money and banking system, and are sure to recommend an adaptation that does nothing to change the status quo in terms of the sharing of economic power within global capital. Perhaps it is time to launch our own People's Commission on Banking in response. This could propose that the creation of money should be in the public, not the private sector, thus solving all King's problems at a stroke. I propose Mary Mellor for Chair.

22 October 2010

Debt is a Feminist Issue

The gendered nature of the globalised capitalist economy is evident at many different levels. Empirical studies of women at the top of financial corporations appear to be absent from the peer-review literature, but even The Economist has suggested that the causes of the 2008 crash were partly hormonal.

The figures for women’s share of the world"s resources, as collected by UNIFEM are a shocking catalogue of inequality. Perhaps the most striking statistic is that ’Women perform 66 percent of the world’s work, produce 50 percent of the food, but earn 10 percent of the income and own 1 percent of the property’. In many countries women face discrimination in terms of property ownership, as we did in this country until the passage of the Married Women’s Property Act in 1882.

The study of economics is also dominated by men.To quote from an academic study from York University, ’Women make up approximately 30% of the research/PhD students, 15% of the lecturers, 10% of the readers/senior lecturers and 5% of the professors. Males in standard full-time academic jobs are twice as likely to be at a senior level (above lecturer) than women (46% compared to 23%).’ In the 41 years that the Swedish Bank has been given a prize for economics, a woman has only won it once, and then she had to share it.

So the world economy is dominated by men, the corporations who control it are dominated by men, and those who study it and inform policy are also largely men. When these policies are implemented, at least in the UK, they are done so by a cabinet which includes only one woman, plus a token other without portfolio.

Since women have so little economic power, they can have had correspondingly little responsibility for the economic and financial crisis we are in. So how can it be just that they will bear the majority of the pain? We are not all in this together: women who care for children and other relatives are more likely to receive benefits that will now be cut. They will be left picking up the pieces for the broken society that results from the devastation of public services. They are disproportionately likely to work in the public sector and so more likely to lose their jobs.

In the 40 years since the implementation of the Equal Pay Act women have seen their influence and their control over property increase in the UK, but until we have equal access to economic power we will always be an easy target.

20 October 2010

Who do we owe the national debt to?

On this day when we finally hear the details about the cuts that we have been bullied and battered with for the past six months, it might be helpful to have a bit of a recap about what the alternatives are for dealing with the huge debt that we are left with after the banking bailout.

Many commentators have pointed out that there are two sides to the public balance-sheet and that the focus on cutting the spending side, rather than raising more revenue through increased taxes, especially on the corporate sector which has done so well from our largesse, is an entirely political decision. Another approach which is available even within the existing capitalist structure could involve managing the economy into a smaller and more equal form, thus achieving the sorts of social side-benefits that are identified in The Spirit Level.

But on this morning, of all mornings, let us look beyong the political rhetoric and think about the hard finance of the situation. That takes us to the question many outside the media bubble are asking: who do we owe this money to? And in a world where nearly every government is facing a similar problem of massive debt, could we not all come to some agreement to forgive each other and start again? In following up on the accuracy of a statement by George Osborne that the interest we are paying on the debt is going to foreign governments, my friend and colleague Barbara Panvel has done the bit of research necessary to answer the question about who the money is actually owed to, and the answer raises a whole series of new questions.

The figures, from the website of the government Debt Management Office, indicate that much of the money we are paying on our national debt borrowings is not going to foreign governments, as George Osborne gave as a justification for the need to urgently cut the size of the debt, but rather to our own good selves in various guises. So the cuts programme is really an example of robbing Peter to pay Paul. The data shown in the graphic indicate that only 29 per cent of the gilts currently in circulation are held by overseas investors, with slightly more (30%) being held by UK insurance companies and pension funds. The figures also indicate that nearly a quarter of our own national debt currently belongs to the Bank of England, which I assume is the result of the quantitative easing policy.

So who would lose out if we acknowledged that repayment of a debt on this scale is inconsistent with living in a civilised society, and began a policy of negotiating with creditors that they would not see the whole of their lending repaid? For those who have investments in pension funds, they will see their pensions reduced while their services are protected, so it will be a trade-off, but one that is fairer because those with larger savings will lose more, in contrast to the spending cuts that hit the poorest hardest. The overseas and other financial institutions would also lose out but this could be seen as compensation for the massive investment bubble they benefited from, and gained from, and which caused the banking and credit crisis that landed us all in this mess.

So there are a range of alternatives, with different degrees of challenge to the existing economic system, that are available to the UK government. To suggest that destroying the remaining vestiges of solidarity in our society is the only option is the big lie for our times.

19 October 2010

Monbiot on the Money

As regular readers will know, I do not always see eye-to-eye with George but here I think he is spot on. This is just one symptom of the adaptation of capitalism in the wake of financial crisis and with the prospect of environmental and energy crises. Our actions and discussions should be informed by a sense of this historical moment, rather than undermined by the attempts to create chaos and fear that Monbiot identifies:


18 October 2010

Limiting Educational Aspiration

The blizzard of policy announcements since May has been quite bewildering. Journalists and academics are reeling at the pace of change, and much of what is being proposed seems both illogical and inconsistent. In my own area, that of higher education, the aim of the policy seems fairly clearly: to reduce the number of young people going to university. Raising fees from £3,000 to £7,000 or more is not a funding measure but a rationing measure.

The Telegraph headline may read 'too many middle-class students at university' but is not very informative until we have a clear idea of what 'middle class' means. As the cuts proceed it appears to be the very concept of 'middle class' that is being squeezed. Perhaps we could have a more informed debate if the sociologists who used to explain to use what class meant had not all been removed from their posts during the 1980s Thatcherite purges.

Clegg argues that tuition fees led to an unfair system of admissions; the Lib Dems graduate tax would ensure social mobility. The actual policy has focused on cutting costs, so the 'too many students' part stuck but the graduate tax was lost. Two posts in a row citing Clegg unfavourably might be considered unfair, but he has foolishly allowed himself to be the fall-guy for the coalition's policies. It's a small step from 'too many middle class students' to 'too many students', and naive Nick has done the Tories dirty work for them.

For those who missed the announcement because they were looking down a Chilean mine, and to those whose minds cannot accept it and are still asking 'eight-teen per cent?', let me repeat here that the policy proposed by the erudite Lord Browne is that the teaching grant should be cut by 80%. In future the government will only subsidise medicine, science, engineering and modern languages degrees. The sorts of courses we need our thrusting businesspeople to be equipped with, which is unsurprising given that Browne and Cable (who will implement this policy on behalf of the coalition) are both veterans of the corporate oil industry.

The savings that will result from this reduction in funding a civilised society is £3.5bn. In comparison with the size of the bailout this seems like a drop in the ocean. Corporate pressure has already diminished the standards of education in our universities; this will convert them into external training departments for the globalised business elite. As well-qualified young people who choose to enter employment rather than university displace their less well-qualified contemporaries unemployment rates are sure to rise, bolstered by the cohorts of university teachers whose skills will no longer be required. The savings will be cancelled out but this does not mean the policy is misguided, since its aim was always political rather than economic.

The Browne Review promised to ask searching questions about what our universities are for, but none of the most important questions were considered. How might our cleverest citizens prepare society for the transition to a low-carbon economy? How do we balance the interests of business and citizens in determining curricula? How might universities be models of transition institutions, rather than following an export-led growth model of education?

These questions were not asked because Lord Browne already knew the answer to his own question. Our professors are required to work in the service of business and to prepare a new generation of serfs to do likewise. Critical thinking is off the menu: the new paradigm will be developed elsewhere.

15 October 2010

Mortgaging our future; stealing our assets

Financial engineering is a phrase that has become part of our normal vocabulary when thinking about the 2008 crash and its aftermath. Like genetic engineering, which implies that the botchery of implanting crocus genes into rice is akin to building the Clifton Suspension Bridge, the phrase is unduly respectful towards the City whizz-kids. Financial fraud is obviously closer to the truth.

It is worrying, therefore, that so many of the cabinet have a background in the financial world and owe their exalted status to its riches. And more worrying that the techniques they learned there are creeping into policy-making at local and national levels. The offending item of policy is what is being called 'tax increment financing' - a piece of misleading spin typical of the 'financial engineers' who brought us credit-default swaps and leverage.

At the Lib Dem conference Clegg claimed that tax increment financing was ‘the first step to breathing life back into our greatest cities’. It is hard to see how shifting debt from central to local government is breathing life. At a time where debts are in the process of destroying what we have come to think of as civilisation it seems more like the kiss of death.

The theory is that public infrastructure can be funded through borrowing, which will be repaid as a result of extra taxes that will be generated because this infrastructure, say a road, will encourage the development of more property, say another supermarket. This is using financial engineering to engineer economic growth and forcing the pace of development. It is also putting local taxpayers at the mercy of developers, since infrastructure (like roads) that would serve their interests will find funding, whereas infrastructure that will not (say, a care home for elderly people) will not.

The word from the Treasury is that tax increment financing would operate within a ‘carefully designed framework of rules, which the Government will work closely with local authorities to design’. The nature of liabilities and the assignment of collateral will be key here. Depending on what the detail says, this could be a way of allowing developers and financiers to take control of local infrastructure and the most important local asset: land.

6 October 2010

Chinese Check Us

For a while now it has been obvious that China is the dominant global power, and that it has accumulated, by a combination of skilful strategem and sheer hard work, the power to pull the plug on the US economy at any moment. It is almost exactly a year since Hilary Clinton's humiliating visit to Washington, when she almost begged the Chinese not to do this. When we hear that China is now offering to also buy the Greek debt – for which we might read by the Greek economy, given the way things stand in that country just now – it raises intriguing questions about why China became a 'state capitalist' country in the first place.

The use of that phrase implies that China is following the rules of the same economic game, perhaps with different motives. It is clear that China has understood the money-work nexus that lies at the heart of the capitalist game but there seems no reason to assume that they have any respect for the game itself. They have responded to its rules by keeping a rigid control over their own currency (a fact much bemoaned in Washington and the pages of The Economist alike), and working extraordinarily hard to displace the need for most of the other labour in the global marketplace.

Meanwhile the the shift in the designation of the Chinese currency away from the yuan (as it was traditionally called) to the renminbi (or people's currency) implies a shift from a domestic to a global currency. In much the same way that China accumulated pieces of eight that the Spanish had minted in their new world colonies, it is now accumulating hoards of US paper. Although the renminbi is surely the most powerful currency in the world today, it is not held as reserves by foreign governments. So long as China is prepared to buy US debt and use it as a trading currency then the dollar is secure. Once it decides its economy can grow on the basis of domestic consumption alone it could easily just walk away, leaving the dollar to crash.

In conclusion we can see that China is winning the work game and is also winning the money game. So far China has used this power to gain access to the world's rapidly diminishing resources, especially by striking deals in Africa that are far more favourable than those that Western nations have offered. Compared to our primitive and short-term economic thinking, the Chinese appear to be demonstrating a master play: as they have adopted our industrial methods and excelled us in their use, so they are playing the economic game we invented better than we are.

On a more conspiratorial note, what are we to make of the inscrutable Mr Li who, according to John Lanchester's book Whoops! was instrumental in creating the algorithm that lies behind explosion of collateralised debt obligations that led US traders to destroy the global financial system:

'Li had been sent to North America on a government scholarship in the late 1990s to learn about capitalism. . . In 2000, while working at J.P.Morgan, Li managed to apply a piece of mathematics called a Gaussian copula function to the creation of CDOs' (p. 97) His paper, published in the Journal of Fixed Income, was attractively titled 'On Default Correlation: A Copula Function Approach'. It offered a way to model how different types of stocks move up or down in value together. This enabled the financiers to reduce the risks associated with mortgage-backed CDOs to a single number and the trade took off.

To imagine Mr Li on a mission for the Chinese government is too appealing to be true, but one way or the other it seems that the 'state capitalist' power has out-manoeuvred the 'market capitalist' power and we are all just waiting to see when they will assert their authority.

4 October 2010

Gwlad Golff

I consider myself a Welsh patriot. I have been watching Wales play rugby since I was 7 or 8, I once used the word hiraeth in an academic paper, and I would live in Wales now if it were not for the fact that the more rampant nationalists made me feel that I had to apologise every morning for my English father. I am beginning like this lest you think that what follows is an example of the tired English chauvinism towards the Welsh that has offended me all my life.

On this day when the world's attention leaves Newport for another 400 years or so I have to ask: what is Wales doing hosting the Ryder Cup? Golf is not a sport: it is a statement of corporate intent. Golf is a game indulged in by men in suits who rarely have another opportunity to walk on grass. That it attracts spectators is as inconceivable to me as that there are hordes of crowds at the world paint-drying championships.

Thomas Friedman, author of the best-selling tribute to globalisation The World is Flat lists his ability to play golf in Bangalore as a demonstration of the equalising power of corporate capitalism. Here is how he starts that world-beating book:

'No one ever gave me directions like this on a golf course before: "Aim at either Microsoft or IBM". I was standing on the first tee at the KGA Gold Club in downtown Bangalore, in southern India, when my playing partner pointed at two shiny glass-and-steel buildings off in the distance, just behind the first green. The Goldman Sachs building wasn’t done yet; otherwise he could have pointed that out as well and made it a threesome. HP and Texas Instruments had their offices on the back nine, along the tenth hole.'

You do not need to be very much in touch with your local environment to realise that a game devised in windy, rainy Scotland does not transplant well to Bangalore, and consequently the water demand associated with golf's tracking of the movements of corporate executives has disastrous environmental consequences. In Dubai, apparently, they play golf on sand instead.

The word on the street is that ticket sales for the Ryder Cup at Celtic Manor were poor – even before nature decided to take a hand and send two of the rainiest days we have seen for months. (And before you amuse yourselves at the expense of the Welsh weather, just pause to think how long it will be before you will be grateful for – and paying for – the liquid stuff we have in such abundance.) I am genuinely not pleased about this, in spite of my squirming amusement at the desperate attempts to market Newport as a world city of culture and the hideous waste of resources spent prostituting ourselves to the global executive class.

What has always distressed me most about Wales is it inferiority complex. We have one of the most naturally beautiful countries in the world, with all the resources necessary to thrive in a bioregional future. Energy resources abound, population is sparse and the soil rich. And what about the likes of Dylan Thomas and Tom Jones: laughter, music and a depth of talent in poetry and spirituality could ensure a deeply fulfilling life. If only the Welsh economic planners would stop trailing along after the US management consultant's last-but-one bright idea.

1 October 2010

Irish Tribe Buck the Markets

It seems that finally, a developed country has reached the point of saying ‘enough is enough’. Enough of transferring bank losses onto public balance sheets and destroying the public services that a civilised society requires. Enough of allowing the financial sector to create fictitious wealth at our expense. That country is Ireland and the outburst of discontent with the hegemony of the financial markets is emerging from the main opposition party Fine Gael.

Fine Gael Spokesperson on Enterprise, Trade & Employment, Leo Varadkar TD argues the banks took on the risky loans so it should be the shareholders who take the consequences, not the taxpayer. Under the party's so-called Good Bank policy, the National Assets Management Agency 'will pay the banks up to €54 billion for €77 billion of property loans. If the losses on these loans turn out to be very large, as many experts predict, our proposals could save the taxpayer up to €15 billion.' Given the much greater size of the UK banking sector, if we had adopted a similar policy it could have reduced the money paid to banks by a sum similar to this year's public sector borrowing requirement.

Refusing to respond to the shotgun demands of the banks that they receive their next fix of capital at the public expense is a bold but inevitable strategy in a country whose public borrowing is now ten times the size it is permitted by Eurozone rules and which has been on the verge of banktruptcy for at least a year. So much for bank debt, but what of the state? When the governments of Latin America got their people into excessive debt in the 1980s eventually they reached a point of refusal. The result was that the debts were ‘rescheduled’—either extended over a longer term or reduced so that credits got a proportion of their original loans back. Similarly, following Argentina's financial collapse in 2001, a solution was eventually negotiated where creditors received only 70% of their original loans.

In the case of Irish national debt, Fine Gael has been very careful to make the distinction between the debts of banks that are based in Ireland, and therefore backed up by the Irish government, and the debt that the government itself has taken on in the name of the Irish people to pay for its services. This was predictable, since Varadkar knows that the government will be turning to the market to sell more debt and its credibility must be maintained.

The UK government has taken a different tack through its Quantitative Easing policy. This has enabled it to wipe out chunks of our national debt on the sly. Money is created from thin air inside the bank of England and then used to buy bank national debt from the financial organisations who hold it. My assumption is that, since all such debt is time limited, it will quietly decay inside the bank's 'vaults' until it reaches its sell-by debt and goes to 'bank heaven' or perhaps--to keep my metaphor consistent--the rotten-money skip round the outside the back door of the bank. The banks are happy, since they now have 'real' capital that they can use to fill the black hole on their balance-sheets; the government is happy because its debt-to-GDP ratio looks more respectable than otherwise. We should be happy since this is less debt for our children to pay back.

Two questions remain: why are we not negotiating with our banks and their shareholders over how much of their fictitious wealth we agree to take responsibility for; and why should we not use the Quantitative Easing policy more creatively instead of seeing our public services decimated?