When Europe Saves Its Banks: Who Pays?

This is the title of a fascinating documentary produced recently by the Franco-German collaboration arte. Such serious and high-minded programmes are the sort of thing that would once have been produced by the BBC. The questions are deeply political: Who receives this money when the ECB ostensibly bails out countries? Does it really arrive at the poor citizens of Spain or Greece? Unravelling the truth leads to a journey that is protrayed as a thrilling detective story and is certainly a necessary and long overdue piece of investigative journalism.

The documentary is well framed. In Harald Schumann they have a experienced and well informed journalist on the case. He asks the entirely reasonable question: how can we claim to live in a democracy when our money is being given to banks but the banks will not answer questions about how they have spent it. And the politicians and bankers are equally coy about telling us how much money was spent and who received it. This is our money and if democracy is to mean anything we need answers to these questions. He also points out quite rightly that, if banks made bad investment decisions, they should bear the losses. At present they are actually gaining through the injection of public money in return for their bad investments.

The production company advertises the documentary as follows:

'50 billion euros in Greece, Ireland 70 billion, 40 billion in Spain: in the euro area, states are seen being forced one after the other - through astronomical sums - to help banks to compensate losses due to rotten loans. But who are the beneficiaries of such operations? It is asking this simple question Harald Schumann, essayist and brilliant economics journalist, travels Europe. He received a range of frankgly staggering responses. For those who have been "saved" are not - as we are made to believe - in countries in distress, but especially in Germany and France. Indeed, an important part of Payout ends up in the coffers of the creditors of the banks that have been saved. As financiers who made bad investments, they find themselves protected against loss at the expense of the community. And contrary to the rules of the market economy. Why? Who collects the money?'

Leaving aside the content, watching the documentary in either French or German provides a kind of symbolic representation of the beauties and perils of Europe. Culturally we all seem to be on the same side, but linguistically we are so divided. As an English speaker the programme comes across as something of a Tower of Babel, as you are struggling to hear the English speech behind the dominant language voice-over. Do not let this put you off, because the questions asked are the right questions, and the answers will liberate us to behave as citizens of Europe rather than victims of austeria.
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Ecodynamism Alive and Well in Stroud

A change of focus away from the world of global financial exploitation and towards local investment to develop resilience and build the green economy in our communities. A new renewable energy co-operative was born in Stroud on 25 January, when Ecodynamic's founding Community Share Offer was launched, appropriately enough in our local micro-brewery Stroud Brewery.

Ecodynamic has been founded in association with the Biodynamic Land Trust, as an anchor investor, to reinvest surpluses from renewable energy into sustainable food projects. Ecodynamic is seeking to raise £350,000 by 22nd March to purchase and run a new 55KW Endurance wind turbine in Cornwall. Shares have a projected annual return of 3% rising to 5% after year three over the 20 year life of the project. Greg Pilley said at the launch, ‘I will invest £1,000 in Ecodynamic to keep the local community investment revolution fermenting for renewable energy generation.’

Ecodynamic is applying to HRMC for EIS relief, which if successful, will allow UK tax payers to get 30% tax relief in year one, so a £1000 investment will attract £300 tax relief, if EIS is approved. As a mutual organisation, all members will have equal votes in how the society is run and what projects will be supported.

Founding Ecodynamic director Martin Large, (who set up Fordhall Farm’s pioneering charitable co-op structure in 2005-6, and who is a director of Stroud Common Wealth) says that, ‘Ecodynamic offers the attractive combination of both getting interest on your investment in a community energy project, which is backed financially by the government’s Feed in Tariff , and also reinvesting any surplus into viable food and energy projects.’

Ecodynamic directors are experienced in business, co-ops, renewable energy, farming, banking and finance. Ecodynamic respects co-op principles and has a vision to create a ‘co-operative turn’ towards a sustainable social economy, just like the West Mill Co-op. James Mansfield, also a Director, said ‘I see Ecodynamic as having tremendous potential to contribute to our society’s present and future wellbeing, by reinvesting surpluses from renewable energy projects into sustainable, biodynamic and organic food production.’

If you have some money to invest and you would like to see it used to build resilience into our local economies you know where to go.

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Economic Mood Music Darkens

What are we to make of the downgrade of the opinion of UK debt by credit-rating agency Moody? The chat on the airwaves is all about the politics of the decision. As noted by the Guardian last night, 'The chancellor has used maintaining the top credit rating for government bonds as one of the key arguments for the austerity programme.' So are we likely to see the flags out to celebrate the end of austerity? I think not so long as we allow vulture financiers to suck the life out of our economy, the process for which credit rating is just a sideshow.

The credit-rating agencies invented a profitable business for themselves by taking the responsibility for assessing risk on behalf of investors. My own local council, for example, is advised by the local authority financial advisor Sector, to only place its reserves in funds with triple-A ratings. This avoids the need for us to employ our own financial experts and outsources the risk if we make bad investments. The credit-rating agencies were paid handsomely for carrying this responsibility, although at no real risk to themselves.

The fear that was engendered around the loss of the triple-A rating relates to how this measure of risk relates to the cost of national borrowing. If Moody and friends decide that we are at greater risk of defaulting on our debts then investors will expect to be paid more for lending to us to reflect this risk. The cost of our borrowing would rise, and given its vastness relative to our economic output we might teeter closer to being obviously and publicly bankrupt.

So why have the rates barely changed in the market this morning? The answer is that the credit-rating agencies never had the power they claimed for themselves. Investors have taken on the chin the downgrades of the US and France. They are not interested in some end-of-term report but make their own assessments of how they can make the greatest return. Investors believe that UK gilts are a good investment because they believe that UK citiens will make good on them through their work.

Taking a wider perspective we can see that what has happened has been a change of cast: the credit-rating agencies that were used to bully us into unprecedented cuts to pubic spending have lost favour, but the policy continues. The real question for us should be whether we are happy to continue with a  means of funding our national economic affairs that accepts that a proportion of our wealth will be constantly siphoned off to financiers. This is the reality of debt financing and the performance around triple-A rating is the show that conceals the very real decisions investors are making about which country's citizens and resources will yield them the greatest returns.
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Vulture Funds Circle Argentina

With so many countries facing insolvency and only managing to pay their creditors by introducing destructive and unpopular cuts to vital services, the issue of how far the rights of corporate creditors extend into the realm of political authority is increasingly being tested. The institution of 'technocratic' (for which read anti-democratic) regimes in Italy and Greece was an initial indication that democracy would be sacrificed to the interests of global financiers. Argentina is the next test case.

Following its default in 2001 the majority of the country's creditors accepted a sizeable write-down on their investments. They had taken a risk and it had gone bad; they took the rap and moved on. But a minority held on to their bonds and sold them on to so-called vulture funds. These are financial funds who buy up such apparently worthless debt and then use aggressive means to force repayment. In this case, as explained by the Jubilee Debt Campaign, 'The vulture funds speculated on Argentina's crisis, buying debt in the hope that the country would go bankrupt, and refusing to join the vast majority of Argentina's "creditors" in negotiating a reduction in the value of their debt (even though they only paid a fraction of the value of it in the first place).'

The seizure of the Argentinian warship the Libertad in a Ghanaian port in October last year was a dangerous escalation in the activity of these vulture funds, with echoes of the exploits of the US filibusters in the 19th century. These privateers roamed across Latin America with their privately funded armies, creating mayhem and extracting resources at the point of a gun. The vulture funds now use US courts but the objective is the same: to subvert the sovereignty of national governments to the advantage of the US holders of capital.

The appeal that will be heard next Wednesday 27th in a New York court between the Argentinian government and the vulture find NML is a crucial stage in the struggle between democratic authority and corporate power. Last November a court in the same city ruled that Argentina must pay the face value of the $1.3bn debt to NML, a subsidiary of the hedge fund Elliot Associated. Please take whatever action you can to oppose this oppression by the interests of capital. The Jubilee Debt Campaign is organising a noise event in London you can also sign the petition supporting the government of Argentina.
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Co-operative Basics

How disappointing it was to hear that the Co-operative had withdrawn products containing horsemeat that had been on sale in their stores. At least in Britain, the history of the co-operative began as a response to food contamination in the new industrial cities, so it is particularly unacceptable for the shop to undermine standards for the sake of costs and competition. It was welcome that Peter Marks was the first boss of a food company to make himself publicly accountable, but, after their pioneering role in the areas of fair trade and trenchant opposition to food contamination, we expected better from the Co-operative and have been let down.

Part of the reason I am a member of my own Midcounties Co-operative is that I am expect them to adopt higher standards in terms of the way they treat their suppliers as well as their staff. As a business with members rather than shareholders the Co-operative is able to do this, even though being part of a competitive market puts pressure on its high standards. While corporates are legally bound to maximise value for shareholders, co-operatives are obliged to meet the standards required by their members.

This is one of many reasons why I have been involved in supporting co-operatives for the past decade, both through my own economic decisions and through undertaking research and publishing articles. I am now working as part of the Co-operative Commission set up by the Welsh Government. It has a wide remit: to find ways to strengthen the co-operative economy in Wales on the basis that a co-operative economy is more socially beneficial than a capitalist one. We will also be exploring the potential for taking mutual models into the realm of services currently provided by the public sector.

The Commission recently launched a call for evidence. What would be particularly useful is ways that political authorities in other countries have found ways to support the sector. Given that autonomy and self-help are guiding principles of the movement it is not always easy to see what role politicians can legitimately take, but many countries offer fiscal advantages to co-operatives on that basis that they achieve positive social outcomes. If you have examples of such policies please do respond to the call for evidence.
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Incredible Edible

In another quirky twist it turns out that the first identified source of horseflesh in the UK is in the Yorkshire town of Todmorden, which has thus far been famous for the community food growing project known as Incredible Edible Todmorden. Since the relevations that the FSA have found horse meat on the premises of a local abattoir there has been another round of reflection on how to inspect an regulate and increasingly complex food supply chain.

Since the BSA and salmonella scandals in the 1990s there have been periodic kerfuffles about where on earth our food comes from. In the academic literature the word most often used is that of 'provenance', which led to the food of origin appearing on the food label. But labelling is an inadequate response to consumers who wish to understand the provenance of their food, and not only because an abattoir that is capable of passing of horse as cow is hardly likely to be concerned about which farm the horses came from. To understand the deeper level of our connection with food we may need the French word terroir, a sense of the cultural connection with local soil expressed through food as well as other forms of folk culture.

Here is how I describe this connection in my book, The Bioregional Economy:

'The Gloucestershire love of apples is an example of what the French would call an attachment to terroir, the sense of pride in your local place and its specialities that could be taken as constitutive of a bioregional approach to provisioning. The contrast with a globalised market approach to provisioning is instructive. While the market economy needs global uniformity and standardisation, the bioregional economy revels in difference and local distinctiveness. The word ‘terroir’ comes, of course, from the word terre meaning land and it is this attachment to land, your local land, as expressed in the particular products it is suited to producing that lies at the heart of the ability of a bioregional economy to enable a process of environmental re-embedding.'

Of course buying local from farmers you know and, if you are not a vegetarian, eating animals that you have seen grazing in local fields, also offers immediate practical reassurance that you know what you are eating in a way a labelling system never can. For more on the delights of local provisioning in the Stroud Valleys please visit the beautiful blog Let Them Eat Hay by doyenne of the local food movement Helen Pitel.

So why have we moved from this satisfying local provisioning to a world of complex supply chains where regulation is virtually impossible? The answer is obvious: it increases the ability to extract value for the food corporations, which has also undermined the livelihoods of farmers. In a report from Green House thinktank published today, commodities expert Thomas Lines describes a world crisis for farming, a crisis of reduced agricultural incomes, and an ageing farming population. The author argues that a new approach is needed, building on known methods – a greater variety of staple crops, traditional farming techniques and agro ecology – to create a food system which is economically as well as ecologically more resilient and sustainable. His recommendation to farmers and growers north and south is that they should get themselves out of the market system and focus on providing good quality food for local markets.

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Irrational Expectations

For years leading up to the financial crisis it was obvious that the money within the economy was being misallocated. A tiny elite were managing to control most of the finance and were constantly and rapidly reinvesting it in ways that could make the largest and fastest returns for them. This led to inequality within and between nations and had devastating consequences for our health and our social well-being.

But the misallocation of capital has also destroyed the ability of the economy itself to function. Although I resist cultural explanations for the financial crisis, whose origin was political, the attitude towards money amongst those who consider themselves entrepreneurs is a significant part of the explanation for the continuation of the banking and financial crisis. The whole notion of money being used as a facilitator of economic activity has evaporated as 'investors' have come to understand their role as only one of accumulating profits for no effort. The irrational expectation of vast returns for no risk is now preventing the normal mechanisms of a capitalist economy from operating.

At the level of firms this is being demonstrated by the unprecedented hoarding of cash by corporations. During the good years companies learned how to make large profits but they did not learn how to spend them: the process of globalisation and weak power by labour unions enabled companies to achieve unfeasibly high margin. Now that times have changed they are refusing to reduce these margins but they are nervous about investing the cash. More importantly, their expectations about the sorts of returns they might expect for their investments are what economists would call 'sticky'--they have not changed in line with the vast changes in the economic environment. This has led to a situation where British businesses were holding as much as £750bn in deposits, around two-thirds of it in cash. The Reuters graphic shows the situation in the US, where this issue is the subject of considerably more debate than in Europe.

There is, of course, a simple expedient to resolve this problem. Just as the government should use the power it has through owning two of our largest banks to ensure that they lend into the productive economy, so the Treasury should create incentives for companies to spend rather than hoard cash. A new capital tax proportional to reserves held should do the trick. It would encourage companies to spend their own money, but allow the government to spend it in the interests of the citizenry if they refuse to.

For long years the problem of our economy has not been that there is not enough cash around but rather than it is in the wrong hands. As the political authority governments have the power to address this, but their decade-long ideology of impotence is preventing them from doing so. Meanwhile the politics of austerity grinds on, punishing the poor and crushing life out of the economy. On the private and public side those in power, wedded to an anachronistic understanding, are sucking money out of the economy and ensuring that the slump continues.
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The Dubious Quality of Regulatory Horseflesh

If the most enjoyable stories are those that right themselves and where the villains receive their just deserts then the sad career if Tim Smith has generated such a story. Here he is in 2005, explaining a profits warning for dairy giant Arla UK, of which he was Chief Executive. He did not explain how the corporate was part of an industry that put pressure on milk suppliers, driving families farms to the wall for the sake of increasing shareholder value. Arla Foods, the Danish parent company which is a farmer co-operative, for this or for other reasons appear to have decided they no longer needed Mr Smith's services and in April 2007 he left the company.

His appointment to head the Food Standards Agency took effect from 1 April 2008 (a hint there perhaps), although already in March 2006 was welcomed by The Grocer which noted that the FSA had previously regarded food industry appointments with suspicion and that his understanding of the 'the world of grey' would be particularly valuable. Grey food, grey morals, greyness between political and corporate power? One is left to guess what Warburton's boss Jonathan - he of the friendly personalised adverts - could possibly have meant by this. Perhaps he meant this sort of thing: Tim Smith in August 2010 assuaging our concerns about the inclusion of cloned animals flesh in meat products.

But I am losing my thread and we are close to the poetic finale of this narrative. For our hero Tim Smith left the FSA last autumn to move to Tesco, previous customer of Arla, and where he would now take the role of Technical Director, with a considerable responsibility for food safety. On his appointment, which he took up just last month, he stated his opinion that Tesco and the FSA shared the 'principle of doing the right thing by consumers'. With a great demonstration of ethical flair he had left his job at the FSA a month before his position at Tesco was announced, to avoid any suggestion of conflict of interest.

And so to the shocking revelation last month that one-third of the meat protein in Tesco value burgers was actually horsemeat. Normally the revolving door would have meant that the person who had failed to properly regulate the quality of low-grade burgers was long gone before the grossness was revealed. But in this case Tim Smith walked into precisely the wrong job, leading to a rare and therefore all the more enjoyable video of him taking responsibility and looking surprisingly ashamed of himself.  Interestingly, he fails to mention his former role at the FSA.

The question left open is the obvious one: who is checking up on the quality of the food sold in our supermarkets? When the relationships between politicians, regulators and the food industry is so close, who is protecting the interests of consumers? The Food Standards Agency was set up in 2001 in the wake of the salmonella and BSE scandals and as part of Labour's arm's-length regulatory strategy. Under John, now Lord, Krebs it took a conservative line, with Krebs also becoming notorious for attacking the quality of organic food. Their response to the horsemeat crisis? To meet with suppliers to discuss the problem.

This is the second FSA to utterly fail to protect the public. As in the case of the Financial Services Authority the reasons are clear: an ideological obsession with the right of business to control its destiny and the obligation to have free markets. The result of financial deregulation was the crisis that bankrupted the British economy. The result of deregulation of the food industry is likely to be slower and more insidious. Horsemeat in burgers is revolting but not especially threatening to our health. But what we can know about the levels of dioxins, heavy metals and other contaminants that might be finding their way into the food eaten by the poor in this country?
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Scottish Revenge Served Cold After 300 Years

Scholars of the history of money will recall the very special role played by Scots in the financial system of Britain and its empire. There is, of course, the story of these many Scottish men who acted as colonial administrators in both finance and accounting roles. But earlier still there was the part played by William Paterson and his ill-feared Darien adventure, that bankrupted Scotland and forced the 1707 unification. Paterson had earlier been the prime mover behind the privatisation of England's national debt through the establishment of the Bank of England.

What sweet revenge it would be, then, if at this very time when 300 years of running a state through debt has reached its inevitable conclusion of bankruptcy Scotland were to cut itself free and emancipate itself from debt-base money through the establishment of its own Public Bank. This was the proposal made by Ellen Brown at a presentation to RSA Scotland last November.

If the independence vote looks anywhere close to being a 'yes' then you can be sure that there will be a mad scramble for assets, both land and cash, and desperate attempts to ensure that control of Scottish resources are not allowed to pass into the grubby hands of Scottish citizens. Controlling the Banking system will be crucial to this endeavour. To prevent this and ensure that Scottish independence can live up to its name Ralph Leishman proposed concrete proposals for a Scottish Investment Bank on the model of the state-owned Bank of North Dakota.

According to Brown:

'North Dakota is currently the only US state to own its own depository bank. The BND was founded in 1919 by the Norwegian and other immigrants, determined, through their Non-Partisan League, to stop Wall Street money men foreclosing on their farms. . . All state revenues much be deposited with the BND by law.  . . The bank offer cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The BND underwrites municipal bonds, funds disaster relief and supports student loans. . . For the past ten years it has been paying a dividend to the state, with a quite small population, of some $30m a year.'

Although it is hard to grasp this from our vantage-point at the heart of global capital, around 40% of the world's banking is publicly owned, with the newly emerging economies of Brazil, Russia, India and China resisting urges to privatise the issue of credit in their economies.

While the miasma of confusion about what banking is and what banks are for continues to confuse radical commentators south of the border, in Scotland the discussion of such issues as public banking in the pages of the country's national newspaper is a hint of the great opportunities for freedom offered by Scottish independence.
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