Democratic Britain

Around a black hole there is what is called an event horizon. It is the point beyond which you can no longer turn back. In Hollywood films the event is often made rather dramatic with lots of shaking and sirens, as if it was like the lip of an approaching waterfall. It isn’t. In reality there would be nothing to mark it, no sign or apparent change. The Event Horizon would be hard to notice, much like a Tsunami out at sea. Just a small ripple you might not notice until it was passed.

And so it is in debt as well. In even quite large quantities debt can be fairly harmless. But beyond a certain accumulated mass it changes. There is now, I think, enough debt in the Fed, the Bank of Japan and the ECB that each of them is in the process of becoming a debt black hole. That is, the debt in them is so massive that it is gravitational, sucking at any and all of the debt and finance around it pulling more and more in to itself.

The problem is this. The Central banks have chosen to lend to insolvent private banks and to the nations that already bankrupted themselves trying to bail out their unbailable banks. In an attempt to make their lunacy seem sensible, the central banks assured everyone that they would only accept as collateral for the money they were lending out, the best assets the banks possessed. So the best of the insolvent banks’ assets were sucked in and cheap central bank loans flooded out. 

The central banks said that ‘now the banks were stabilized’ they hoped the banks would lend to the market and to each other thus allowing the broader economy and the banks themselves to be funded ‘by the market’. Neither happened. Why? Well the banks continued not to trust the quality of the assets they were offering each other as collateral. Not entirely surprising since the banks had already pledged the best of them to the central banks. Without trust-able assets as collateral – no loans.

So the banks were forced back to the ECB and the Fed for more loans. Of course they had already pledged their best assets. So began the gradual but inexorable loosening of criteria for what the ECB would accept as collateral. At first it was only AAA rated. Then it was bonds from ailing nations. Then it was anything that came to hand.  Which made the ‘market’, AKA other banks, even less keen on accepting as collateral whatever was left. And so on round and round. We have long since reached the point where the central banks like the ECB, either directly or washed first through a national bank such as The bank of Greece or Spain, has begun to accept almost anything as collateral.

When I say washed what I mean is the national bank in Spain or Greece or Ireland may accept some asset which is thoroughly sub-prime in return for a sovereign bond. That bond is then acceptable to the ECB as collateral because it is a Sovereign bond, which as we all know are AAA rated, for sure, for sure never going to default. However the more sub-prime, stinky, slimy paper the national banks are stuffed with, the more the sovereign debt is backed by a national bank which resembles a sewer of rotting rubbish, a nation in the grip of austerity and a contracting economy. Whatever pretty prime-time fictions you get hosed with each evening, this is the reality that dare not be reported. And we all know it. Ireland is in recession, Spain’s economy is contracting and so is Portugal’s. That is why ‘the market’ keeps hiking the interest it insists upon for lending to National banks. 

The result is that the private banks have already pledged anything good they had. They will not therefore lend to each other because they know none of them has any assets left which are worth anything. Thus they are forced to go back to the ECB and Fed for more money and those institutions are forced to take even more ropey assets in return for issuing even more loans.  Each time round, each new QE and new lot of money, sucks in more bad assets and makes any possiblity of private funding even more remote. The Central banks have swallowed the market. All debt and debtors are being drawn into ever tighter orbit. None will escape.

Now you might object that I have simply missed the point of the official policy. Certainly the National banks and the Central Banks have removed huge amounts of the toxic loan/assets from the private banks… and this we are assured is a good thing. This is called ‘cleaning up’ the banks. The rubbish is removed and in its place ‘good’ national and central bank bonds are put in their place, giving the private banks lots of good assets. And it does sound possibly OK when you hear it put that way and don’t think too hard about it.

But we have to remember a couple of things. First the bad assets have not ‘gone’. They still exist. They are still money which was lent out, which itself was often borrowed and thus has to be repaid, but which is not now bringing in any profit. Those losses are still warm and moistly rotting, just doing it in National and Central bank vaults now. Second, for all that the banks do now have sovereign and Central bank bonds to pledge, they are still, all of them, coming back to the ECB and the Fed for more QE easy money loans. This is because even though the banks have used that QE money to speculate on commodities and currencies to try to make a fast and out-sized profit – still chasing high risk and return – they still have huge liabilities (money they owe) not being paid for from income which is  not coming in from yet more bad assets which are nevertheless still  being held at imaginary values so as to make the assets side of the balance sheet look like it might balance out those liabilities.  Imagine a very long turd tied into a knot. 

But I digress.  My main point is that the banks, despite 4 years of never-quite-materializing recovery, still need loans from the central banks and still need to pledge assets to get them. How many more assets do they have? Probably many hundreds of billions. But they are increasingly awful. Which means we have an alleged recovery that must increasingly be fueled by the very debts and worthless dross it is trying to recover from.

Now just for fun imagine how many times any assets were re-hypothecated before they got to the ECB and how many times the ECB bond issued in return for those assets will itself be re-hypothecated. And then feel good about the solidity of the banks, the system and the recovery.

My guess is that as this year progresses banks will quietly bring rubbish back on to their balance sheets from off-balance sheet vehicles just so they can be slipped into the ECB. These would be assets that were declared worthless and written off for a tax rebate in the country of origin, before being moved to an SIV in Ireland where they would be declared at face value so as to be written down again and then pledged to the ECB at far above their real market value in return for an ECB bond which can be used to speculate against various nations and their debts.

 

More questions about the stability and probity of German banking this morning following on from the rumour of the €1 Trillion hole in German banks.

This from the 21st March  Wall Street Journal,

Deutsche Bank AG changed the legal structure of its huge U.S. subsidiary to shield it from new regulations that would have required the German bank to pump new capital into the U.S. arm.

The subsidiary is called Taunus Corp. It is the 8th largest Bank holding company in the US. Being listed not just as a bank but a Bank Holding Corp. has a very special perk, it allows the Holding Company to borrow from the Fed in times of crisis. Which Deutsche did.

Remember, that the only reason Goldman Sachs still exists, is that as the collapse of Lehmans engulfed Wall Street, Goldman was allowed to become a Bank Holding Company. It had never been one till that moment. Till then Goldman had been a Broker Dealer. And it was not alone in suddenly desiring to become a Bank Holding Company. As this article by Edward Harrison points out so did GE Capital hitherto a hedge fund, American Express (a credit card company),  GMAC (GM’s car financing arm) and Genworth Financial (an insurance company) all suddenly thought they should be come Bank Holding Companies. Sinners, all of them, they all changed their faith to gain salvation.

But salvation has a price. Being a Bank Holding Corp brings certain obligations and oversight which being a not-so-essential financial organization doesn’t. Quite reasonably, being allowed to suckle up to the Fed’s teet, comes with the obligation that the Fed get’s to tell you how much Capital you have to hold against your loans and liabilities – at least those within the Fed’s, jurisdiction. You can see why Goldman, for example, had never previously wanted to be a Bank Holding Corp.

Back to Deutsche and Taunus – they were happy to take the money in teh crisis but they now don’t want to pay the cost of obeying the rules.

This is a long running saga. In November of 2011 Bloomberg ran a story by the former cheif economist of the IMF Simon Johnson which pointed out that

The German bank, however, is thinly capitalized. Its total equity at the end of the third quarter was only 51.9 billion euros, implying a leverage ratio (total assets divided by equity) of almost 44.

There is precisely nothing prudent or safe about leverage of 44 to 1. It is considerably worse than the worst American banks and this is just the leverage of Deutsche’s on-balance sheet. If anyone were to add in the off-balance sheet we would all need a sit down.

But we don’t need those off-balance sheet figures to feel a little queezy about Deutsche and Taunus. In June of 2011 the FT’s Alphaville ran a peice which noted a letter written by the then Chairperson of the FDIC, the Federal body charged with insuring American Banks,

… in which FDIC chair Sheila Blair attacked an unnamed European bank for allowing its US holding company to operate with negative Tier 1 Capital. Taunus does fit the bill:

“…the end of 2009 showed a negative equity of $8.1bn. The important core capital ratio (Tier 1) was minus 7.4 percent – markets actually require a positive value of around ten percent. The [Federal Reserve] has previously regarded additional capital charges for holding companies unnecessary based on the adequate financial strength of their parent companies.”

In other words, previously, a bank which was a subsidiary of a larger bank could have negative capital holdings as long as its parent could be relied upon to bail it out. That has now changed and Taunus has to be solvent itself. As soon as this change became law Deutsche changed Taunus from Bank Holding to just bank in order for Taunus not to have to comply. And it did so …why?

Because Taunus is hideously under-capitalized and Deutsche doesn’t have the spare cash to ship from Germany to the US to shore up it’s US operation. At least not till a few million Greeks start really knuckling down to paying off Deutsche’s debts for it.

Of course this means the next time Taunus needs to borrow from the Fed it won’t be able to do so. A worryingly exposed position to put Taunus in and a measure, in my opinion, that Deutsche feels it has even more pressing problems to deal with at home.

Now I don’t wish to be accused of picking on Deutsche or the Germans so let’s refer back to the Wall Street Journal Article which points out that this move by Deutsche is merely following in the footsteps of our old friend Barclays Bank which did the same for its American operation.

One of the things this sordid little tale suggests is that Europe’s banks just don’t have enough cash or, much more worrying, enough acceptable assets to pledge to central banks for cash, to comply with regulations everywhere they operate. I think the banks are having to decide which regulator they will comply with and which they will thumb their noses at. And the decision is, which one will allow them to pledge the most worthless assets in return for loans.

This is regulatory arbitrage (law avoidance) of a rather desperate and dangerous kind.

LONDON – Historically, the term “fair trade” has meant many things. The Fair Trade League was founded in Britain in 1881 to restrict imports from foreign countries. In the United States, businesses and labor unions use “fair trade” laws to construct what economist Joseph Stiglitz calls “barbed-wire barriers to imports.” These so called “anti-dumping” laws allow a company that suspects a foreign rival of selling a product below cost to request that the government impose special tariffs to protect it from “unfair” competition.   Such dark protectionist thoughts are far from the minds of the benevolent organizers of the United Kingdom’s annual “Fairtrade Fortnight,” during which I just bought two bars of fair-trade chocolate and a jar of fair-trade chunky peanut butter. Their worthy aim is to raise the price paid to developing-country farmers for their produce by excluding the inflated profits of the middlemen on whom they depend for getting their goods to distant markets. Fair-trade products like cocoa, coffee, tea, and bananas do not compete with domestic European production, and therefore do not have a protectionist motive.   This is how it works: In exchange for being paid a guaranteed price and meeting “agreed labor and environmental standards” (minimum wages, no pesticides), poor-country farming cooperatives receive a FAIRTRADE mark for their products, issued by the FAIRTRADE Labeling Organization. This certification enables supermarkets and other retailers to sell the products at a premium. Third-world farmers get a boost to their income, while first-world consumers get to feel virtuous: a marriage made in heaven.   The fair-trade movement, launched in the 1980’s, has been growing rapidly. In a notable break through in 1997, the British House of Commons decided to serve only fair-trade coffee. By the end of 2007, more than 600 producers’ organizations, representing 1.4 million farmers and 58 countries, were selling fair-trade products. Today, a quarter of all bananas in UK supermarkets are sold under a FAIRTRADE mark. But FAIRTRADE-labeled products still represent a very small share – typically less than 1% – of global sales of cocoa, tea, coffee, etc.   The economic rationale for guaranteed prices is well known: stabilizing the prices of primary products, which are subject to sharp fluctuations, stabilizes their producers’ incomes. This argument inspired proposals – most famously by John Maynard Keynes in 1942 – to create “buffer stocks” for the main commodities, which would take supply off the market when prices fell, and add to supply when prices rose. Keynes’s proposal never made it into the Bretton Woods Agreement of 1944, and, while buffer-stock schemes re-surfaced in the 1970’s, they, too, went nowhere.   Left-wing economists like Raoul Prebisch, moreover, later advanced the theory of “declining terms of trade” for primary products: their prices’ long-run tendency to fall relative to the prices of manufactured goods. This tendency seemed to be at work from the mid-1980’s, as commodity producers experienced a persistent decline in prices. In addition, price fluctuations throughout that decade were huge, with dire effects on sub-Saharan African and other developing countries that were largely dependent on commodities for export earnings.   Since then, however, the price decline has been reversed. Food commodity prices have increased by 150% since 2001. This has raised farm producers’ income independently of the fair-trade movement’s efforts. The “declining terms of trade” argument has collapsed.   But primary-product prices remain much more volatile than the prices of manufactured goods and services, causing large fluctuations in producers’ incomes. This exaggerates the effects of booms and busts. So the issue of price stabilization has not gone away.   It is hard to see how the fair-trade movement can contribute much to solving this problem, because the only serious policy for stabilizing producers’ incomes is to control supply. But this is beyond the scope of fair trade.   The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from the free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.   This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.   Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality. Since producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.   But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.   That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.  

When the Chief Market Analyst of  FX Solutions, Mr Joseph Trevisani, in an interview on CNBC on 23rd Sept 2011,was asked about fluctuating currency values, his reply created a stir. What he said was that you had to look at what was going on in Europe –  everyone then expected him to mention Greece – but instead he said,

“There was a story out in a German newspaper this morning talking about a trillion euros, supposedly, unconfimed. of losses hidden in German Banks.”

He offered nothing further but the implication was that big players believed that the one stable and solvent European nation, the nation that was  supposed to bail out the others was sitting on a time bomb of its own. Which would mean that Germany, the nation that liked to lecture others about lying, was lying. Lying about a potential trillion euro hole in its banks.

The story was around for a while but then faded because no one could add much to it, let alone confirm it. Could it really be that German banks were hiding, and lying about, a trillion in undeclared bad debts? What debts could they be if they weren’t just the exposure to bad debts in Greece and the other southern nations we already knew about? And where could they have been hidden? No answers no story.

First the easy part – what could the debts be? It has been an open secret that the Landesbanks bought up two lots of debt as fast as the ink on the contracts would dry. The first was securities made from sub-prime US mortgages. A trillion Euros of this sort of debt was created and sold in 2004-5 alone. One senior banker at one of the banks which sold this debt told me the Landesbanks would buy these securities from them before the deals were even complete. Much as property speculators further up the same stream would buy the property developements before they were even built. That debt, I have been told more than once, is still there. Sachsen LB collapsed but others are still hoping something miraculous will hatch from their egg of shit if they just sit on it long enough.

This is a pattern of hopeful deceit that is rampant globally. So it really shouldn’t be a surprise that German banks are doing it too.

The other lot of debt is home grown. There is a vast amount of regional european debt which was considered AAA rated when it was securitized and sold on and which is still being held at par because of the now somewhat threadbare but still holding fiction that no nation will ever default or let one of its cities or regions default either. For example Depfa, the German bank,  made very large, long term loans at fixed rates which it then sold on in return for shorter term funding at floating rates. I know of several such deals: to Barcelona (a massive 20 year bond), another to Manchester, another to Luton for its bypass and a large number done with French arrondissments. My guess is that a large number of loans to places in nations not so secure themselves are held at par only because no one has been alowed to look at them very closely.

But that still leaves the ‘where are they hidden’ question. Because no one has actually seen a spread sheet with large negative numbers on it this remains what it has been –  a rumour. And it still is. The only reason I bring it up is that a couple of weeks ago I was told by a European banker  that he had come in to information from an insider in German financial oversight, that the debt was real and was currrently on the books of the 9 regional Landeszentral banks.

The Landeszentralbanks are the remains of the old Pre-Euro system when each of Germany’s powerful regions (remember Germany is a Frederal nation composed of what still are very powerful even if not quite autonomous states) not only had its own bank,  the landesbank of the region, but also had its own central bank. These central banks of the German states were slimmed down from 11 to the current 9 and the heads of these banks form part of the governing board of the Bundesbank.  According to what I was told the official who spoke said the debts were huge, the finances of his region, at least, were a mess and he, for one, expected the situaion to blow up by the end of the year.

As I say I cannot verify the truth of what my source was told and which I have just related. It could be a hoax though it seems an odd hoax for a German official to engage in. Or the official could be horribly wrong.

If we had not already suffered 4 years of blatant lies and manipulation on the part of all our banks and all our governments I might be loathed to believe this story or pass it on. But given what lies we know we have been told over and over by the finanacial sector and our politicians I do not feel that this rumour is impossible to credit.

If the story has any validity at all then it says that Germany and its banks are playing an even more desperate and far higher stakes game of extend, pretend and hope for miraculous growth, than ever Greece was, or Portugal and Italy are.

Post script – What isn’t a rumour is that there are real and large problems above and beyond the insolvency of Greece and soon Portugal as well, lurking in the Euro system and in Germany in particular.  One such problem, different from what I have written about, can be seen in this article from Der Spiegel. This article looks at the way the European banks are shackled together by the outstanding claims they have on each other. Which means the money they owe each other which would NOT be paid by any country that fell out of the Euro system. It just adds to the impression that the Euro has sown its member together in such a way that to part ,will rip the skin off them.

Imagine if you were in a plane and you looked down and spread out beneath you, majestic in the ocean, was an entire mighty battle fleet. And then it sank; Not just one, but every ship in quick succession. What would you think? Would you think it likely that in each ship, by some amazing coincidence, there had been a rogue officer and they had all gone mental at the same time?

Or if you were coming in to land at JFK in New York and as you watched out the window you saw a skyscraper tremble and then fall. Followed by another and another. And as they fell they crashed into those around them until the entire island was obscured. Would you think the people in the buildings must have done something collectively very stupid to bring the buildings down upon themselves? Or would you be thinking someone ought to find out the names of the architects, contractors and builders of those buildings?

The thing about the bank debt crisis is that it has not been one or two banks failing causing problems for other absolutely healthy banks. In every nation, almost every major bank has collapsed on its own. Who brought down who is a stupid question. Who shot who in a Mexican stand-off? Silly question. Who thought it a good system to get into a Mexican stand-off? Good question.

So far in this series I have always used the graphs for Barclays. I want to make it clear this is NOT because I think they were any worse than other banks. No better, but no worse.

What do you notice about these two graphs? Both show the same massive miscalculation of risk. Both show that the banks, Barclays and Societe Generale, one British, one French,  believed that the assets they were buying and the loans they were making from ’04 to 07 were getting safer and safer.  In neither graph is there the slightest hint of what was about to happen. Neither graph shows the banks having the slightest glimmering of awareness that the assets they were holding were in fact extremely risky and that that risk was about to explode and blow their arms off. The graphs show the banks felt their assets were still very, very safe indeed and the risk weighting of their assets should continue to be marked as a fraction of their face value.

This was despite the fact that, for example, the banks knew that $1 Trillion’s worth of Residential Mortgage Backed Securities of the most unstable kind, all written and sold in 04-05, were about to reset in ’07, from their teaser rate to a rate everyone knew the borrowers were never going to be able to pay. (Page 177 of The Consolidated Class Action Complaint against Citi for a graph and the text for fuller detail).

In 2008 Soc. Gen had to be bailed out. Soc Gen will say they weren’t. But they were, by the Fed. Soc Gen took $11.9 billion from the US tax payer to keep itself afloat. The FED funnelled this money via the bail out of  AIG when it collapsed. That AIG bail out was in fact a  bail of of the banks. Barclays too will claim it wasn’t bailed out. That too is a lie. They were, again by the Fed.

In ’07 the Fed created a special bail out funding mechanism it called the Term Auction Facility (TAF). The Fed would accept assets the banks could not use in the market (no other banks would accept them) as collateral for short term loans of 1-3 months. It was explicitly set up to deal with the bank’s crisis and fund banks that would otherwise run out of money and collapse. The two banks who drew the most funds from the TAF were those in green at the bottom. Dark Green is Barclays. Light green is RBS. Both banks were lent billions by the US tax payer who was forced to save both banks from collapse.

Why did the Fed force the US tax payer to save them? Because both were major players in the US sub-prime securities markets. RBS did collapse and was bailed out even more by the UK tax payer. Barlcays also required further bailing out. But being a far better connected bank than Scottish parvenu RBS, Barclays was able to get Sheikh Mansour, the ruler of Abu Dahbi and the rulers of Qatar to invest £7 billion in new shares.

Any way you care to look at it this too was a bail out which saved the bank from collapse.

 

Here is BNP Paribas another vast French Bank. In August of 2009 BNP Paribas closed 3 very large sub prime funds because they were bankrupt. The closures caused panic. Overnight the ECB felt forced to pump €95 billion in to global markets to steady them. It didn’t work. The next day it pumped a further €156 billion, the Fed pumped in $43 billion and the BoJ a trillion Yen. It was the beginning of the crisis. Is there anywhere in the chart of BNP Paribas’ estimation of its risks, any hint of a looming problem? No there isn’t. Of course BNP Paribas held those Sub Prime Risks in off-balance sheet vehicles. Off-balance sheet was and is used by accountants as a way of getting risks off a bank’s balance sheet. Only it didn’t work did it. When the funds collapsed they brought BNP Paribas to the brink. BNP Paribas also received bail out from the Fed.

Lest anyone think I am playing favourites here is the chart for Commerzbank, Germany’s second largest lender. It was bailed out in August 2008 when the German tax payer was forced to buy 25% of the collapsing bank for €18.9 billion.

Any hint in the graph prior to the 2009 bail out of problems? Commerzbank like RBS and the other German disaster Hypo Real Estate was felled in part because it was so vastly stupid as to buy a rival right at the top of the market. Commerzbank bought Dresdner bank, RBS bought ABN Ambro and Hypo bought Depfa. How could they have been so stupid? Well, each bank would have studied the ‘risk weighting’ of the assets in the bank they were buying. Does that help?

And that brings us to the larger point. While each of these graphs shows that each bank completely and uttely failed to see any of the risks it was running and was carrying, the failure is wider still. The failure was and is of the entire market and the rules upon which it is built. For the Liabilities side of each bank is connected to and to a large extent made up of the assets side of all the other banks. And the Assets side of every bank is tied to and, in large part, made from from the liabilities side of all the others. When people talk of ‘the Market’ it is an abstraction only. There is no even larger, daddy organization called ‘THE MARKET’. To return for a moment to my original analogy each bank is a hugely unstable tank of water, built like an upside down pyramid constantly being strained by the huge in and out flow pipes that feed and drain it. In this analogy ‘The Market’ is just the abstract summation of all the flow in all the connecting pipes that is hurtling from one bank to another at any given instant.

So it is silly to somehow imagine the market is a huge reservoir of stability separate from the banks and other institutions themselves. It is simply the sum of them. So if each bank is stupid, greedy, unstable and blind to the risks of its own construction and functioning – then ‘The Market’ is simply the sum of all that stupidity, greed and disastrous design. The market is not the cavalry. There is no cavalry.

 

We ended the last part of Propaganda Wars with the question,

“So what are the ways the banks ditched safety and robustness in favour of performance, profit and bonus package?”

To answer this we are going to look in more detail at the money banks lend out and are owed back (bank income) which is the Assets side of the balance sheet. Once again we’ll pick on Barclays. First thing to notice is that there are  Assets and what is called ‘Risk Weighted’ assets.

The difference? 20 odd years of all expenses paid, Basel I, II and III meetings in which it was decided that not all assets/loans are equally risky, plus the millions in bonuses paid to bankers for them to weigh the risk that any given asset /loan may not quite deliver.

The gap between those  two lines is supposed to be what makes modern banking so profitable, efficient and yet still completely safe. In the event it turned out it was actually a direct measure of  how much we had to bail them out when all that brilliance and regulation turned out to be bollocks.

The most astonishing thing about this graph is that it clearly claims that as we progressed through the nineties and up to the bubble, banking was becoming less and less risky. The world, according to this graph, was filling up with less and less risky assets. You may balk at this given what we all know happened but that is what the graph says all the same. In 1992 the gap between the face value of the bank’s assets and the fraction of that value that was considered to be risky or at risk was small. The risk weighted total was nearly 3/4 of the actual face value. Which means most assets were risk weighted at one. But as the global volume of debts, of mortgages, securities, derivatives (such as CDS and currency swaps) and bonds of increasingly indebted sovereigns grew and grew, the risk according to the banks became less and less. As the world became more indebted, as banks carried more and more of that debt with less and less equity to support it, the risk of the whole thing became less and less. That is what the graph says at least. Every bank, not just Barclays, carried more and more debt but claimed there was less and less risk in doing so. No where in this graph or in those just like it for the other banks, is there any trace or hint of the vast risk they were all running and which the system as a whole was accumulating.

In 2007, the moment when the first shudders of impending catastrophe ran through the global debt system, Barclays found the risk posed by their assets had plummeted from the 3/4 of face value that it had been in 1992 to less than a third in 2007. And the pattern is the same for all the global banks.

So what had happened in those 15 years? Can we believe the financial world had really become much less risky? Had assets become safer? Were there somehow billions of Dollars and Euros worth of newer, far less risky asset classes in existence than had ever existed before? Well we have four years of incontrovertible evidence that utterly refutes any such rosy notions. And yet, those who claim that there was and is nothing fundamentally wrong with the system, that what happened was just a passing crisis of confidence and liquidity, are in effect asserting that the graph and its claims are absolutely correct. And moreover the defenders of the financial status quo are continuing to assess risk now exactly as they did then. More of the same is what they are lobbying for. Much, much more.

Needless to say I don’t agree.What actually happened, I argue, is that the banks and regulators created the Basel agreements which the banks pretend to hate but in fact largely control. The bankers had decided they understood risk better than anyone else and should therefore be in charge of regulating it, reporting on it and profiting by it. And from this conviction Basel I, II and now III were born as the bastard offspring of the banker’s tumescent avarice and the regulators servile willingness to service them. What ensued was a revolting orgy of rapine excess behind a veil of sober sounding terminology and Basel agreements.

The Basel II agreement ruled that banks didn’t need to hold the same amount of capital against those assets that were considered to be of lower risk – lower risk weighted. This for instance is a typical risk weighting table based on Basel II.

Asset Risk Weight Cash and equivalents 0 Government securities 0 Interbank loans 0.2 Mortgage loans 0.5 Ordinary loans 1.0 Standby letters of credit 1.0

So for example government securities (the AAA rated kind only of course), because there is obviously zero chance of them not being paid,  carry no risk. Thus however many billions of euros worth of those a bank has, the total is multiplied by zero and that big, safe risk weighted zero is the ‘risk weighted’ amount the bank has to hold capital against.

As you can see a bank which chose to buy government securities in 2008 or even 2009 when most European sovereigns were rated as AAA, would be judged to be running zero risk from those securities and would therefore not have to hold any capital against them. Of course it is an oddity of banking logic that not all AAA rated risk-free government securities and bonds are equally ‘risk free’.

Thus it was well known by 2003 at the latest that both Italy and Greece had, since 2001 at least, been making major Currency-swap deals with big US banks whose purpose was to artificially reduce the amount of debt those countries appeared to have. The deals didn’t actually reduce the debt. In fact they increased it. But they did hide some of it long enough to ‘fool’ the regulators.

You remember them? They’re the ones under whose strict supervision the banks were allowed to calculate their own risk weighting on the assets, like government securities, they were holding.

So since 2001 at the latest the major banks would have been well aware that behind the official debt figures of several European sovereigns was a large hidden debt which would make something of a mockery of the AAA rating. So why buy them if the banks knew they were riskier than they appeared? Easy. The key is the lag time between what the official rating agency/government rating says and what the market says.

Once the market (AKA the banks) knew the real risks then the payments demanded on those securities and bonds would go up, making them more lucrative than safer securities and bonds from other countries. BUT because they were still officially AAA rated they could be held as if they were risk free with a risk weighting of zero. This is what we might call rating arbitrage or a case of officially sanctioned having ones cake and eating it as well.

On one side of every bank bankers would hold securities and bonds as risk-free assets while a few yards away on the other side of the bank a whole different bunch of bankers would be busy selling CDS on those same securities at ever higher rates as the ‘market’ judged them to be riskier and riskier. Riskier and riskier in the profit chasing bit of the bank but risk free in Basel and in the office where the bank’s risks were calculated.

In fact Basel II, which took many years of fine lunches and much expert cogitation on the part of the bankers and their regulators, went further. It decided that while some banks and countries (those not so brilliant ones run by foreigners) would be required to follow guidelines like the above chart, for the banks whose brilliance was amply attested to by their enormous…balance sheet, they would be allowed to move on to a new   “internal ratings-based” (IRB) system.

In this approach, institutions will be allowed to use their own internal measures for key drivers of credit risk as primary inputs to the capital calculation, …

subject, of course,

to meeting certain conditions and to explicit supervisory approval.

Yes, quite so! They decide their own risk according to their own model… but subject to approval.

All institutions using the IRB approach will be allowed to determine the borrowers’ probabilities of default while those using the advanced IRB approach will also be permitted to rely on own estimates of loss given default and exposure at default on an exposure-by-exposure basis.

Advanced IRB as well! Of course the models being used are proprietary and therefore NOT open to scrutiny by any outside experts. What do you think, if the bank’s experts came up with two possible models one of which gave a lower over-all risk weighted total which do you think the bank would go for? And if another bank came up with a model that shaved just a little bit more off the risk weighting do you think there would be a subtle pressure to match the undoubted brilliance of their competitor’s model? I leave you to decide if such a thing could possibly have happened at any point in any bank some time between the Basel II update in which this idea was enshrined in 2005 and the bank debt crash of ’08.

So on the surface, according to the official story and the banks own figures the bank’s strategy for stellar growth was to vastly increase the volume of assets they held (Loans made) relative to a tiny capital base (the definition of increased leverage) BUT to somehow do this without increasing any risk, in fact managing to lower their risk. And they did it, according to the banks and regulators, by inventing and then buying hundreds of billions of dollars and Euros worth of new kinds of low risk assets. Except that it was the banks who were deciding if an asset was risky or not.

In case you think I am exaggerating or, lacking in a PhD as I am, just not understanding the subtle brilliance of modern banking and its risk management, read what Mr Haldane, Executive Director for Financial Stability at The Bank of England has to say about it (See pages 9- 10). First his over all point about the brilliance of banking.

…virtually all of the increase in the ROE (Return on Equity = Profitability) of the major UK banks during this century appears to have been the result of higher leverage.

For most banks, the story is one of a significant increase in assets relative to capital, with little movement into higher risk assets (unit risk makes a negative contribution for most banks). Those banks with highest leverage, however, are also the ones which have subsequently reported the largest write-downs. That suggests banks may also have invested in riskier assets, which regulatory risk-weights had failed to capture.

May have failed to capture?! That is a polite way of saying the banks lied, the regulators obliged and we carried the can for all of them.

It gets worse. In this period of ‘financial innovation’ the banks had other tricks and articles of faith that allowed them to hugely increase the risks they ran without appearing to do so. One of the most important tricks was and is to trade one kind of risk for another. A mortgage held by a bank is what is called a ‘Credit Risk’. Credit Risk is the risk that the borrower might not pay you back. Market Risk, on the other hand is the risk that the price an asset can be sold for in the market can go down. Of course it can also go up which is negative risk.

It is an article of faith in the financial world that Credit Risk is greater and therefore carries greater Risk Weighting than Market Risk. The logic is that in Credit Risk all it takes is for the one borrower to default and you’re out of money. But if instead of a loan you hold a security made of slices of many loans, then you are not stuck with it even if some of the underlying loans start to default. You can always find a buyer. With a loan, the risk is all yours and depends on one borrower. With a security you can always sell the product and its risk. The risk is therefore often seen as off-loadable into the magic ‘market’.

So what the big banks did, en masse, was to stop holding and making loans to customers (between 2000 and 20007 loans to customers declined from 35% to 29% of total assets) but securities held on the banks trading books almost doubled. In the world of modern bank regulation if two banks each held a loan they could BOTH reduce their risk simply by selling their loans to each other and hold them as securities. As securities they would be lower risk weighted, even though the actual risk and the loans was identical. Where had the risk magically gone? It had been absorbed and guaranteed by ‘the market’.

But risks ‘in the market’ are not accounted for by anyone in any place. There is no measure of it. Like polluters around a lake each flushes their risk away, declares their own site to be compliant with the highest environmental standards and never notices the dying fish or the toxic bloom in the waters off shore.

A further reward of this happy arrangement is that loans are held  on the Bank Book where they sit inert as far as market price goes. Even if the value of the house on which the loan is given goes up, the bank sees no benefit. It is simply a loan bringing in a regular payment. The same loan held as a security is held on the Trading book where it has a market price. The value of a security, the price for which it can be re-sold, does benefit from a rise in the value of the underlying house. It is marked at what is called Fair Value or Mark to Market. And what is more that rise in value is marked directly on the banks profit and loss figures.

So in every way the structure of the regulations which the banks worked hard to shape makes it not only very easy to hide risk but to profit greatly by doing so.

What could go wrong? Well when the bubble burst and prices went in reverse, in 2008 alone, the losses on these structured securities was about $210 billion. Risk? What risk!

Of course the banks were insured for this sort of risk. They had thought it all through. That’s why they’re paid so highly. Sadly they had insured …with each other. Insuring risk was one of the bank’s other favourite strategies for seeming to reduce risk and to profit by it.  All banks as well as insurers like AIG wrote insurance for ‘risky’ assets, securities, CDOs (Collateralized Debt Obligations) etc. The writing of insurance had a symbiotic relationship with what it was insuring. The more risky the assets, and the more of them to insure, the more lucrative business there was available to any bank wishing to insure it. The more insurers there were the greater the apparent market which underpinned and guaranteed the insurance.  The ‘magic’ of the market as absorber of all risk coming in to play again here.

In the end everyone had risky assets they wanted to insure and everyone was keen to profit from insuring them. Do both and you were doubly smart. Your assets were ‘safe’, your bank ran no risks on thoset assets (low risk weighting profile) and you had another whole river of  CSDS ‘assets’ that were themselvs considered and rated as ‘low risk’. Derivatives like CDS are generally not seen as high risk because they are tradeable in the market, the risks are seen as remote, the risks can be laid off on other willing market bidders and anyway what they are insuring are reliable produicts from good banks staffed by very clever bankers.  All in all a wonderfully sound world build on pure, 100%, leveraged bullshit. As Mr Haldane notes (p.11), AIG from ’03 to ’06 made an operating income of $2.3 billion on its CDS. In ’08 alone it made a loss on these same products of about $40 Billion. Which the tax payer had to pay.

In short these clever ’structured’ products which were the engine of modern banking and still are, were a disaster. A disaster we are still paying for. And they make another appearance in the banks as well. Not the exact same ones, but ‘structured’ products also began to appear in the capital base of the banks as well. ie in the reserve of capital the banks must hold to underpin all the risk they were ‘not’ running. During this same period banks began to replace boring old investor equity with what they called Hybrid capital. The regulators just lay back and thought of England as usual.

Equity is boring like loans are boring. They just sit there. Hybrid capital puts the money back to work. The Capital is put into a ‘product’ that earns an income by being ‘invested’ but then after a certain date also returns the capital. They were guaranteed as a more efficient use of capital, more lucrative and yet also safe and reliable. But as the redoubtable Mr Haldane notes , again,

…such hybrid instruments have shown themselves largely unable to absorb losses during the crisis,..

Oops.

Now much as I like to quote Mr Haldane and  think he speaks more honestly than almost all his colleagues, I feel we are in danger of being sucked into banker-think here, in spite of ourselves, by this phrase “largely unable”. If the brakes on a car were guaranteed to stop it in case of need , but in the event were ‘largely unable’ to do so the manufacturer would be sued into oblivion. If a parachute was found to be ‘largely unable’ to open or slow the fall of the unfortunate who was wearing it, would we shrug and offer to bail out the manufacturer? If aircraft were largely unable to stay airborn would we wish to pay their executives large bonuses to ensure they didn’t go elsewhere to work?

The financial products of the bubble years,  in fact the entire market for them, which was made of the very same people who also manufactured them, FAILED. But none of the  rules which would apply to any other form of corporate and product failure have been thought applicable to bankers. And who thought they should not be seen in the same way? The people whose utter failure to regulate them was an equal part of the crisis, like Nitro is to Glycerin.

Bankers and their regulators lied about risk. They hid it. They did not think to ask where risk was accumulating but prefered to talk like wide eyed fundamentalist nut balls about the efficiencey of the hidden hand of the market to make all things work out, find their correct price and be honest about risk, as if it was some kind of coke snorting, dick head God-ling of the modern era.

We have to change the terms of the entire financial and political debate and confront the claim that the banks,as they are presently run, are  safe and necessary. We need to ask, safe and necesary for whom? It must no longer be what must society do to save the banks but what must be done to the banks to save society from them.

We need to do our own very simple risk benefit analysis of the banks. Do you personally get any benefit from a bank being very large? Do you get a cheaper mortgage from a bigger, risk hiding bank? Answer, NO. Big banks can often borrow more cheaply but they tend not to pass this on to us.  On the other hand, is there a risk to you from a bank being very large and hiding all sorts of risks, in order for its bonus pool to benefit? Obvioulsy the evidence from the last 4 years is an unequivocal YES. There is no argument on this point. We have a global crisis entering its fourth year with all central banks still having to keep interest rates near zero, even though doing so cripples pensions and pernsioners, because the banks still can’t fund themselves or pay for their on going losses without free money from Fed and ECB.

The banks, their system and their entire claim to be good at managing risk, have all proven catastrophically wrong. While banking is a necessity, the banks we have and the system they have built and profted from are in fact a massive and expensive systemic risk to everybody and everything else.  The analysis is clear. We get no benefit but run huge risks. In short there needs to be a ‘public good and safety’ requirement on banks and banking. They will of course say this is an unwarrented intrusion of government in to private companies. We don’t, after all, tell car companies how big they may become. True. But the banks themeslves have made it very clear that they see themeslseves as a very special case. Banks unlike any other kind of company are so systemically vital they cannot be allowed to fail. That is what they say. All I am doing is using this against them. If they are so systemically vital and different then they cannot complain if we treat them as special. It is utter lunacy to allow them to become a systemic threat to our well-being. So we should accept their special nature and the special threat they become if allowed to grow too large. We should recognize that the nature of market competition for finding loop-holes in regualtions, for ‘regulatory arbitrage’, makes it suicidally stupid to allow banks to self regulate, to set their own risk weighting, to be honest and above all to have any secrets. A secret becomes a lie as surely as a maggot becomes a fly. If a bank needs to keep secrets, we should wonder why and tell it it to go elsewhere. Banks may benefit from keeping secrets from each other. We, however, get no benefit from their secrets but do, self evidenlty, expose ourselves and our children to massive risks if we allow them.

To allow banks to become too large for the needs and good of the society they should be there to serve, is akin to giving planning permission for a massive chemical waste storage or nuclear storage facility to be built next to schools and hostpitals. No one would allow that. No one should allow banks to become unstable, implosive, socially destructive monsters. Especially when their main socially useful function can be done by smaller, safer banks.

Thank you for reading this. There is a lot more I would have liked to include in this but I will save it for the next part. I have two more parts then I will stop bothering you.

So far in Propaganda Wars we have looked at the Bank’s version of reality in which the banks were blameless victims of unscrupulous and fiendishly clever paupers who ‘took’ loans from the banks against the bankers better judgelment and will. In the next part we began to turn the tables and attack the banks where they feel they are strongest – in how they manage risk. We began with “Netting Out”, where Liabilities and Assets are supposed to cancel each other out leaving the bank, no matter how huge its balance sheet, no matter how seemingly exposed to losses, just this side solvent at all times. I suggested this sort of cancelling out is fine on paper but in reality is more akin to  people trying to swap sides in a rowing boat. I further suggested that this was why, despite the lovely graphs showing how it would all “Net Out”, in the event, nearly all the major banks went bust and had to be bailed out.

But in the spirit of fairness I ended by asking if the people moving about in a rowing boat analogy, fun as it is, was fair or a cheat? Are banks really that unstable? To answer that we have to look again at the graphs. These graphs show the history of Barclays Bank in the ‘bubble years’ of 1992 to 2007. They plot the massive growth of Barclays bank, its Assets and its Liabilites. The over all shape of these graphs and what I have to say about them would apply equally, however, to almost any of the big global banks (as we see later).

Assets and Liabilites are two sides of a bank’s “balance sheet”. So what exaclty is being balanced and is it a stable?

To answer both these questions we are going to have to move back and forth between the two sides of the balance sheet.

Don’t panic! Its a story of idiots, drunk on their own assurances of safety and brilliance but almost totally devoid of common sense and responsibility.

First thing to notice is how incredibly the bank has grown. The size of the bank is the height of the graph. It has grown from about an 180 billion pound bank to one of 1.2 trillion.  It has grown in almost every respect but one – the base upon which it sits. In the Liabilities graph to right take a look at the aptly coloured ‘thin blue line’ of Equity.  This is the money investors have put into the bank. It is the bulk of the bank’s capital. As you can see it was never big, but as the bank has grown it has become smaller and smaller relative to everything else.  Relative to the size of the bank’s total liabilities (money the bank owes to others) on the one hand, and its total Assets (money it is owed – which means money it has lent OUT Mortgages etc. ie Money at risk) on the other, the equity base of the bank has become vanishingly small. Which is a problem because that equity is the base upon which the security of the bank rests; It is money the bank would need to call on if – in the most unlikely event – some of the loans it had made didn’t work out.  Unlikely I know but bear with me.

Bankers and their regulators will often refer to a bank’s ‘equity base’. If you remember in the last part of this series I imagined a bank as a tank of water with money flowing in from assets/loans and out to pay liabilites. The Equity base would be the base of the tank and the reserve of money that remains in it, as funds flow in and out. The overall size of the graph relative to that very thin blue line of equity means we have a very, very large tank standing on a very, very small base. Not only that but there are massive pipes pushing and pulling huge volumes of money in and out. Basically Barclays is an upside down pyramid trying to remain upright while it contends with the forces of the flows in and out, which are orders of magnitiude larger than the volume of tank itself and even larger than the puny base upon which the whole thing rests. Stable? Not terrifically.

If you look at the growth of this and other banks over the last century, which Andrew Haldane, Director for Financial Stability at the Bank of England does here, you find that at the start of the 20th century the equity base of US and UK banks relative to the size of their balance sheets was 15-25%. By the end of the 20th century  this had fallen to about 5%. The base was 5% the size of what it was supporting.

This same ratio, of the base of the bank’s equity base relative to its operations, is also what is meant by the ‘Leverage’ of the bank. An equity base 20% of the size of the the balance sheet it underlies is a leverage of 4 times equity base. Equity which is  only 5% the size of the balance sheet is 20 times leverage! Which, it seems to me, does serious violence to the word ‘balance’.

But dramatic and stupid as this sounds, and is, it falls far short of describing the real predicament, because these figures are based only on what appears ‘on-balance-sheet’ and does not count the bank’s ‘off-balance sheet’ assets and liabilies. When these are counted as well leverage at the peak of the bubble was on average 50 times the equity base! And some insitutions (think Fannie and Freddie and AIG to name a but a few) were even higher.

Now to be fair we do also talk about a banks ‘deposit base’ because, even though deposits are a liability (the money belongs to their customers who can withdraw it) it is usually a fairly stable pot of cash which banks rely on. But even being generous and adding in the deposit base the picture doesn’t get much better. In 1992 Barclays’ deposit base and its equity together were larger than their total liabilities. A very safe and stable bank at little risk of disaster. Begining in 1998 this began to change with liabilites and assets outgrowing the equity and deposit base. By 2004 the real bubble began to grow and by 2007 equity and deposits were less than a third of the size of the bank’s business and its liabilities. This change in stability was overseen by both the very clever and well paid bankers and their very trustworthy regulators.

How unstable is this kind of leverage? Well to put it in terms of our analogy of the water tank, the equity base is the volume of the reserve that remains, separate from the in and out flows. With huge leverage (very large in and out flows) you can see that any decrease in the inflow (money coming in from loans or from the bank itself borrowing) and the reserve will be run dry in a no time at all. Which is precisely what happened in 07-09 at various banks and Insurers.

The strucutre of Barclays bank and all those like it, is simply unstable. Not only that but the banks and the polticians they bought and paid for have, over the last twenty years deregulated and dismantled almost all the safeguards that might have given the banks any robustness when it came to absorbing losses. The size of Barclays bank’s internal reserve (capital base) relative to the flows of assets and liabilities which run through it, make it shockingly unable to deal with fluctuations or shocks in flows of money in and out. In short the bank is structurally at enormous risk of failure – all the time.

The obvious questions are why are global banks like this? How did they get like this? And who let them? Sadly, the answers only make things worse.

First yet another analogy to keep in mind –  Boeing Jumbo jets are huge, over-engineered, immensely stable, robust and safe aircraft. Three engines can stop working and the thing can still fly and land. They are airworthy in every respect but are about as agile and resposive as they look – a Lazeeboy chair with wings. The modern jet fighter on the other hand is almost unflyable it is so unstable. Jet fighters are as agile as they are preciesly because they are on the edge of disaster all the time. They are engineered to be unstable – right at the edge of failure. The modern jet fighter is responsive in the same way as a pencil on its tip. Banks used to be built like Jumbos – for safety. Now they are engineered like jet fighters. It’s an analogy that might appeal to the testosterone addicted, morality-cripples of the banks, but it bodes ill for the rest of us.

So what are the ways the banks ditched safety and robustness in favour of performance, profit and bonus package?

Once again I hope you’ll forgive me for breaking here. I have to go away for work and thought to get at least this posted before I go.

With less than a month to go until Budget day, doubts over the government's austerity programme are growing. The National Institute of Economic and Social Research has forecast that the British economy will shrink this year. The Office for National Statistics has announced that, on the broadest measure, more than 6.3 million Britons are underemployed – the highest number since records began, nearly 20 years ago.   Even Moody's, arbiters of global finance, is no longer confident that the coalition's current strategy is working: on 13 February, the agency changed its outlook on the UK's prized AAA credit rating to negative, citing uncertainty over whether the coalition government's strategy of fiscal consolidation will succeed in reducing the debt burden.   All these doubts ultimately derive from a single source. Cutting public spending is not by itself a growth policy. Considered in isolation, it is an anti-growth policy. If it is the only policy on offer, it will eventually defeat itself, by undermining the revenue on which the government depends to balance its books. This much is almost universally accepted across the political and analytical spectrum - and so, as a result, is the need for a "twin-track" policy mix: one that offsets the effects of government attempts to reduce its wasteful spending with measures to promote growth.   But it is here, on the question of what these complementary, growth-oriented policies should be, that agreement ends - and where the coalition government's policies to date have proved unfit for purpose.   Mix and match   There are two basic approaches available. The first - and the one favoured by the government until now - is what we might call the "indirect" approach. This is to use monetary policy as the offsetting device. As fiscal policy is tightened, monetary policy is loosened - in the hope that private businesses and individuals will respond to lower interest rates by increasing their spending.   The second approach is what we might call the "direct" approach. Rather than relying on loose monetary policy to counteract the drag of fiscal consolidation, the government takes action itself - by cutting taxes or by increasing its capital spending even as it reduces current spending.   Which policy mix is best? Quantitative easing (QE) - printing money - is a growth policy. The willingness to resort to QE around the world after 2008 is certainly what stopped the slide into another Great Depression. But QE is not enough. As a recovery policy, it suffers from two snags.   First, its effect on aggregate demand is weak and uncertain. It is not enough for the central bank to print money; the money has to be spent. The piling up of corporate cash balances - more than 5 per cent of GDP in the United Kingdom - shows that the new money is not translating into increased spending. Some argue that this is a reason to expand QE. Judging by its most recent £50bn injection, the Bank of England's Monetary Policy Committee seems to agree.   However, unless people expect QE to be permanent - in other words, that the gilts bought by the Bank will never be sold again and that part of the public debt will therefore be monetised - they may well go on piling up cash in order to cover expected future taxes. So there is a limit to how far QE can be pushed.   Second, QE does nothing to improve longer-term growth prospects. People have started to understand that the UK needs a more balanced economy - one in which financial services are a lower share of GNP, for example. In so far as it succeeds in raising aggregate demand alone, QE simply freezes the existing structure of the economy at a higher level of output.   Exactly the same objections apply to the tax cuts being proposed by business leaders and some Conservatives. These cuts will put more money into people's pockets - but their effect on spending is less certain. Unless they are expected to be permanent, a large part of the additional money will be saved. Likewise, tax cuts of the kind being proposed are unlikely to do much to improve the balance of the economy: they just put more spending power at the disposal of the structure that already exists.   They have one additional disadvantage. Unlike QE, tax cuts would increase the deficit and, therefore, to be consistent with the government's overall deficit reduction plan, they would have to be matched by spending reductions elsewhere - which would mean further cuts in public services.   Collateral benefits   The first two snags can be avoided by an enlarged and accelerated programme of capital investment. This would inject demand into the economy directly without having to rely on the vagaries of a private banking system that is still deep in repair mode, or on the uncertain willingness of businesses and households to spend the proceeds of tax cuts. And rebalancing public spending towards the capital budget - rather than away from it, as under the coalition's current austerity plans - would also have strong collateral benefits.   In the short run, it doesn't matter whether the increase in aggregate demand takes the form of employing people to dig holes and fill them up again, giving every household a time-limited spending voucher or building a new railway. All that matters is that the overall level of spending in the economy is maintained - so that unemployment stops rising and, with any luck, begins to fall again. But from any longer-term point of view, increasing aggregate demand by capital investment is better, because it creates identifiable future assets that promise to fund themselves and improve growth potential.   Yet it does not overcome the third disadvantage, which is that it will increase government borrowing at a time when the markets are demanding that the government reduce its debt. So, like tax cuts, it will have to be matched by cuts elsewhere - and again at the expense of the public services.   That is why we have argued for a British Investment Bank with the power to raise money directly from the private sector, and which therefore does not add significantly to the government's deficit. The government's commitment would be limited to capitalising it: the bank's lending would be funded from the private capital markets. It would charge lower interest rates for its loans than ordinary commercial banks; while the long-term returns that it would offer investors - being higher than those obtainable from gilts - would meet the desperate need for higher yields by pension funds.   A further advantage of such an autonomous set-up would be to shield the investment programme from the so-called boondoggle effect - building, at political behest, roads and railways that lead nowhere and therefore have no passengers or freight. Although there would be an implicit state guarantee of returns, the record of public investment banks in other countries - such as the European Investment Bank, the Nordic Investment Bank and the German Kreditanstalt für Wiederaufbau - shows that if an institution is well run, these guarantees are never, or rarely, called upon.   A final question might be: if these investment projects are worth doing, why isn't the private sector already doing them? A complete answer would take us deep into the theory of "market failure".   Here, it is important to make only one central point: the uncertain prospects for recovery as well as the impaired balance sheets of banks and firms have generated a massive "flight to liquidity", with savings stuck in bills and gilts while the riskier projects on which growth depends go wanting.   A British Investment Bank operating on the principles above, with a cogent and adequately funded investment strategy embedded in its mandate, would be an ideal vehicle for attracting "frozen" savings into the mar­-ket. It would help address the current deficit of confidence and certainty about demand directly, rather than just praying for spontaneous reignition.   In particular, a national infrastructure programme would not only make Britain a more efficient place to do business but could also contribute greatly to the rebalancing of the economy away from excessive reliance on the City of London and financial services. Simple solution   In sum, while QE and tax cuts should not be excluded from the recovery policy mix, the main driver needs to be a programme of long-term capital investment. The simplest way to do this would be to use the government's balance sheet to bear some of the risk. But this will not happen under the current government. Fortunately, there is an alternative way of achieving the same objective.   On 21 March, George Osborne, in his Budget speech, should announce that he is transforming the Green Investment Bank into an institution that can make a macroeconomically significant - and direct - contribution to recovery and growth.   Robert Skidelsky is professor emeritus of political economy at the University of Warwick and author of "Keynes: the Return of the Master".
Felix Martin is a macroeconomist and bond investor, whose book "Money: the Unauthorised Biography" will be published in 2013    

The core claim of the Big banks and those who support them is that the financial system, as it is presently constituted, is not only fair and fit for purpose, but essential for our continued welfare. People should therefore stop complaining and knuckle down to suffer whatever deprivation is necessary. All must serve the greater good. Or as it should really be known – the Good of the Greater.

The banks are not frightened by a bank failure or two. As long as governments are prepared to force their people to bleed for the banks’ welfare it can actually be an opportunity. A bank failure is just a chance for the better connected ones to predate. Neither are they worried by a case of fraud here or an indictment there. They will settle for a sum which is of no significance to them, in return for a “no admission of guilt” clause. If necessary they are even prepared to throw one of their own to the baying crowd. No one in banking shed a tear for Fred the Shred. And why should they? Call him greedy if you want. See if he cares. He’d already sucked his millions from the wreak he left behind.

What scares the banks is any criticism that goes beyond claims of greed or fraud or even incompetence, and instead questions the system itself.  The sanctity and perfection of the system and its right to ‘regulate’ itself, is what they are totally committed to protect. The system is what gives them their status and wealth. Question that and you threaten them where they are vulnerable.

It seems to me therefore that it is high time we questioned not just the probity, or even the solvency of the big global banks but their  very intellectual foundation. It is time for us to wrench back the initiative from the banks.  The financial elite have spent all this last year rewriting history so that blame for the banking crisis has been turned away from them and laid instead at the door of ‘people’ and then entire nations who ‘took’ on debts they coudn’t afford . It is time to counter-attack and make the case, that it was and is the way that banks and banking go about their normal business that caused this crisis and are still causing it. We have to show that it was not a break down in an otherwise fine  system which caused this crisis but that it was a result and consequence of a system which is an utter failure at doing what it prides itself most on being able to do – managing risk. Not just a onetime failure but a systemic failure which presents an on-going danger to the rest of us.

So let’s be clear. There is no systemic risk at all in welfare spending, no matter how large it becomes, for the simple reason that there is no surprise in welfare spending. It does not jump out at you unexpectedly. Welfare and social spending are a slow moving behemoths that can be seen coming for decades ahead. The only danger is they will trample you to death if you are stupid enough to stand there for decades listening, slack jawed, to the competing teams of witless cretins whose flatulent play-acting is all that remains of our political process .

There is, I suggest, a very clear, present and on-going systemic risk and danger from global banking. It was, after all, banking not welfare which gave us the phrase ‘systemic risk’. Bankers deal in risk. The welfare state deals in…welfare. Like it or loath it, there is no ‘risk’ in welfare or in social spending. They are linear and entirely predictable problems. Banking on the other hand not only deals in risk, it manufactures it. Risk is what bankers bank on.

Don’t take my word for it. Andrew Haldane is the Executive Director for Financial Stability at the Bank of England. In his speech  at the London ‘Future of Banking’ conference held in July 2010 he said rather clearly (Page 14),

…banks are in the risk business…’

His entire paper was analysing the ways in which banks create risk and then systematically mislead us and even each other about what they have created. He goes on to say (Page 14),

…it should be no surprise that the run-up to crisis was hallmarked by imaginative ways of manufacturing this commodity, with a view to boosting returns to labour and capital. Risk illusion is no accident; it is there by design. It is in bank managers’ interest to make mirages seem like miracles.

The mirage he refers to is the contribution banks claim to make to our over all economic well-being and security.  [I would like to thank Peter Mountford-Smith for bringing this and other recent speeches by Mr Haldane to my attention].

So let’s go straight to  where the banks think they are strongest and where I think they are actually terrifyingly vulnerable – their assessment of risk, in both their assets and their liabilities. I have written about risk before, but this time I want to use the bank’s own figures against them. Stay with me. You won’t regret it. We’re going to reach inside the bank’s world, take a firm grip and then yank the whole thing inside out.

We’re going to use a series of graphs from  a paper given at an the annual IMF research conference in 2011 by Princeton economist Hyun Song Shin. The stats he uses come in turn from Bankscope which compiles and sells very reliable statistics on banks. The first two both refer to Barclays Bank from ’92 to ’07; the years in which the credit and debt crisis was incubated. The first is a graph showing how Barclay’s Liabilities have grown. The second charts the growth of Barclays’ assets over the same period. Together they are the two sides of the bank’s financial health. Assets and Liabilities. Money in, money out.

 

 

 

 

 

 

 

 

 

 

 

 

 

The above is what too Big To Fail looks like. It’s also how it got to be that way. That curve, ascending in a steepening upward trajectory, is what is loosely called hyperbolic. It is what disaster looks like. Some time between ’92 and ’07 Barclays and all the global banks became not only Too Big To Fail but also So Fundamentally Unstable that it was Inevitable They Would Fail.

Before we go on we need to be clear about what is an asset for a bank, and what is a liability. This requires making a sketch of how a bank works but it is not difficult and will allow us to understand clearly what bankers love to keep mysterious.

In essence if you want to understand a modern bank think back to those dark days you spent in school mathematics class looking, with a heavy heart, at problems which said, ‘There is a tank with water pouring in the top while a hole in the bottom is letting water out…etc” Remember those?  Hideous.  But a modern bank, in once sense, is nothing more than that tank of water. It is all about flows in and out.

An asset for a bank is money that other people owe to the bank. Which means the loans and mortgages the bank has extended to others that they will pay back. Those are its assets. The more loans the bank has made, the greater the flow of payments in to the bank, the greater its assets. So ‘assets’ are agreements that direct a flow of money IN to the bank. The bank’s liabilities are agreements that direct the flow OUT of the bank. Money it borrowed from, and thus owes to, others. Assets and liabilities. Flow in, flow out. Money owed to the bank. Money the bank owes.  It’s quite simple.  It all works so long as the in-flow matches the out-flow.

Which brings us to the first of the bankers articles of faith that I want to question.

Netting Out.

We are all now familiar with the fact that all the banks have vast debts which they often owe to each other. We also know how they are dependant upon each other for funding. And we know how, thanks to the multi trillion dollars trade in various kinds of derivatives, the banks are also exposed to huge bets on everything from currency values, to insuring each others debts. BUT, whenever the banks are questioned as to the stability of such huge debts and bets they will say, ‘Don’t you fret, it might look out of control, but our various debts, bets and assets all net out and what’s left is perfectly balanced.’ Which leaves most of us none the wiser. What they mean is that within any bank, the liabilities side (the left hand graph above) balances out with the assets side (the right hand graph), so that however huge the bank’s debts, they are balanced by what it is owed. When you cancel the assets and liabilities out against each other you find what the bank is owed is just a tiny bit more than it owes to others. If you look at the two graphs above you will see they are almost always identical with the assets fractionally larger than the liabilities.

What is more, the banks will also say that when you take the vast trade in derivatives, where the banks insure each other’s debts and make huge bets with each other, and compare who has bet what with whom, these trades also ‘net out’ across the system as a whole. That is, one bet cancells another so that the actual potential losses are small. This is often what is meant by ‘hedging’, where a bet one way is balanced or offset by a bet the other.

However, have you ever been in a rowing boat when two passengers sitting side by side have tried to change places? Taken as an idealized mathematical problem there is in fact no net change occurring, the total weight in the boat does not change. On paper, at least, equal masses simply swap over and at all times they cancel each other out. In reality however as soon as people start to move the whole boat is in danger of capsizing. On paper this never happens because it is just numbers moving and cancelling.  But in the real world large weights are almost impossible to balance. There will always be a moment when one person’s weight is not balanced by the other’s. And so it is in finance. Assets and liabilities in a bank, let alone in a vast system of banks, do NOT net out in perfect unison. And that is why, no matter what hedging they claim to have in place, no matter what netting-out ‘should’ occur, banks fail. As one bank fails or simply starts to lurch, tip and rock from side to side, that instability propagates through the system. This is real-world non-linearity at work. Netting out is a fiction maintained because on paper, in the idealized word of mathematics (linear mathematics that is), perfect netting-out works. However in the real world, even electronic debts of zeros and ones, move at different speeds, which in a crisis makes a mockery of the entire notion of netting out.

Netting out means the banks are tied in to a web of obligations to each other. They would like you to understand this as an arrangement which makes them stable. They talk of spreading the risk. In fact it does exactly the opposite. It propagates and amplifies the risk.  One boat on its own, rocking violently is a problem, but probably manageable. Now tie lots of boats together. As one rocks, it sets off others. Those other set off yet others. And they all create waves of instibility that buffet each other, in a more and more unpredicatble manor. Now we have systemic risk and ‘contagion’.

It is the failure of netting out across the financial sysytem that causes the otherwise mysterious ‘contagion’ we hear about. Bankers warn about the dangers of ‘contagion’ whenever someone appears reluctant to bail them out, but they are coy about what causes this ‘Contagion’. Contagion is the failure of netting out.

Of course I used the analogy of a rowing boat with people moving about. The question is was that a cheat? Are banks that unstable? To answer that we have to look again at the graphs.

 

Because I have been working so painfully slowly at the moment I will break again just so that I can get something posted and not extend this long silence. I will continue in other posts.  At the moment I think there will be at least two more parts to this series. I will try to get more  done. I promise. There are just other things pressing upon my time just at the moment.

 

 

LONDON – “Deficits are always bad,” thunder fiscal hawks. Not so, replies strategic investment analyst H. Wood Brock in an interesting new book, The American Gridlock. A proper assessment, Brock argues, depends on the “composition and quality of total government spending.”   Government deficits incurred on current spending for services or transfers are bad, because they produce no revenue and add to the national debt. Deficits resulting from capital spending, by contrast, are – or can be – good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country’s long-run growth potential.   From this distinction follows an important fiscal rule: governments’ current spending should normally be balanced by taxation. To this extent, efforts nowadays to reduce deficits on current spending are justified, but only if they are fully replaced by capital-spending programs. Indeed, reducing current spending and increasing capital spending should be carried out in lock step.   Brock’s argument is that, given the state of its economy, the United States cannot return to full employment on the basis of current policy. The recovery is too feeble, and the country needs to invest an additional $1 trillion annually for ten years on transport facilities and education. The government should establish a National Infrastructure Bank to provide the finance by borrowing directly, attracting private-sector funds, or a mixture of the two. (I have proposed a similar institution in the United Kingdom.)   The distinction between capital and current spending (and thus between “good” and “bad” deficits) is old hat to any student of public finance. But we forget knowledge at such an alarming rate that it is worth re-stating it, particularly with deficit hawks in power in the UK and Europe, though fortunately not (yet) in the US.   According to proposals agreed at an informal European Council meeting on January 30, all EU members are to amend their constitutions to introduce a balanced-budget rule that caps annual structural deficits at 0.5% of GDP. This ceiling can be raised only in a deep depression or other exceptional circumstances, allowing for counter-cyclical policy so long as it is agreed that the additional deficit is cyclical, rather than structural. Otherwise, violations would automatically trigger fines of up to 0.1% of GDP.   The UK is one of two EU countries (alongside the Czech Republic) that refused to sign this “fiscal compact,” acceptance of which is required to gain access to European bailout funds. But Britain’s government has the identical aim of reducing its current deficit of 10% of GDP to near zero in five years.   An argument commonly heard in support of such policies is that the “bond vigilantes” will demand nothing less. And the finances of some European governments (and Latin American governments in the recent past) have been so parlous that this reaction is understandable.   But that is not true of the US or the UK, which both have large fiscal deficits. And most countries were adhering to reasonably tight fiscal discipline before the crisis of 2008 undermined their banks, cut their tax revenues, and forced up their sovereign debt.   At the same time, we should not attribute current enthusiasm for fiscal retrenchment to such contingencies. At its heart lies the belief that all government spending above a necessary minimum is wasteful. Europe has its own Tea Party crackpots who loathe the welfare state and want it abolished or radically pared, and who are convinced that all state-sponsored capital spending is a “boondoggle” – just so many roads, bridges, and railway lines to nowhere that soak up their money in corruption and inefficiency.   Those who believe this are unfazed by the corruption and waste that characterizes much private-sector spending. And they prefer the total waste of letting millions of people sit idle (Brock reckons that 16% of the American workforce is unemployed, underemployed, or too discouraged to seek work) to the possibly partial waste of programs that put them to work, nurture their skills, and equip the country with assets.   One can criticize details of Brock’s case: a deeper understanding of Keynes would have given him a more persuasive response to the objection that, if state-financed projects were worth doing, the private sector would be doing them. Before long, we will have to provide answers to these questions, because the pre-slump fiscal rules that the Europeans are vainly trying to strengthen were not up to the job.   We are far from having worked out a post-recession theory of macroeconomic policy, but certain elements are clear. In the future, fiscal and monetary policy will have to work together: neither on its own can stabilize inherently unstable market economies. Monetary policy will have to do much more than it did before 2008 to restrain financial markets’ “irrational exuberance.” And we need a new, unambiguous system of fiscal accounting that distinguishes between tax-funded government spending and public spending that pays for itself.   Above all, we need to recognize that the state’s role goes beyond maintaining external security and domestic law and order. As Adam Smith wrote in The Wealth of Nations:   “The third and last duty of the sovereign....is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual, or small number of individuals; and which it, therefore, cannot be expected that any individual, or small number of individuals, should erect or maintain.”   Chief among these public works, for Smith, are those that “facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbors, etc.” Another piece of forgotten knowledge that Smith also mentions is the importance of education. He is right to do so, however much today’s deficit hawks seem, by their behavior, to prove the opposite.    

The Guardian, on its breaking news ticker, is now running a report from PA news wire under the headline “Hague: Syrian Leader should quit..”

The article says,

Some 137 countries backed a non-binding resolution at the UN General Assembly in New York supporting an Arab League plan that calls for Assad to step down and prepare the way for a new government in the Middle Eastern state….Mr Hague said the vote sent an “unambiguous” message to Damascus that the violence against protesters who have challenged the Assad regime must stop immediately.

Actually the message is far from unambiguous and raises several questions.

Assad has a brother and it is his brother who holds the power in at least parts of the Security services, critical elements with in the armed services and in the upper reaches of the police.  It is the President’s brother who in many of the most critical ways holds power. It is he who commands most of the mechanisms of repression and violence.

  Maher is the head of 4th Armoured Division and also head of an elite military division known, predictably, as    The Republican Guard. In addition, it is to him, that the commanders of rather powerful Shabiha militia  group report. That militia is made up exclusively of Alawites who are the minority group to which the Assad family belong.

  It has been sometimes suggested that President Assad uses his brother as the bad cop to his good, getting his       dirty work done without having to get his hands directly bloody. The alternative is that President Assad is what    he  seems, a quiet, possibly weak  man who was not supposed to inherit power and only did so after the death  of  his older brother, but who presents an acceptable face of the regime to the world. While just out of the  spotlight  is the brother who holds the real power and makes the real decisions.  

The reason I bring this up is because it raises the possibility that we could see the same game being played in Syria that the Western powers have been supporting in Egypt – namely that the visible figure head of repression and the status quo is sacrificed, so that the larger mechanism of business as usual can continue on. Mubarak was thrown to the crowd in order that the military could carry on. A situation that Egyptians have been slow to wake up to but now have. 

I think the Arab League would like to see far less change in Syria that the Syrians themselves. The Arab League, in my opinion, do not want to see Syria ‘destabilized’ which means not significantly changed, because of the central role the country plays in relations with Israel, Turkey and Iran. The leaders of the Arab Nations are, let’s remember, not democrats. They have shown rather clearly over the last year or so that they are  not in favour of democracy in their own nations let alone those around them. The Arab League would, I think, like Bashir Assad to go in the hope this will diffuse unrest as the departure of Mubarak did in Egypt. They would then like Syria to remain largely under the control of those currently in charge – the military and police. I think the Arab League would like the heavy hand of oppression to be seen to be removed so that a quieter ‘lighter’ hand of suppression can be re-established.

Stability is what the Western Powers are interested in not necessarily democracy. So when I listen to Mr Hague I find myself feeling deeply suspicious about what kind of ‘new’ government he really wants in Syria.

The podcast of the new economics foundation's ABOUT TIME event is now online at the LSE's website.   Robert Skidelsky, Juliet Schor, Tim Jackson and Anna Coote discuss the need for a shorter working week to distribute work more evenly across the population.    

History is written by the victors. It should be no surprise then, that the bankers have developed a very clear story of how the financial debacle happened and who should be blamed, and are now engaged in a campaign to have their version of events accepted and all others declared as dangerous demagoguery. What the bankers realize and so must we, is that unless you write the history, and so control the story,  you won’t be the victors.

It is imperative therefore that we expose the bankers’ narrative for the strait jacket of self-serving lies it is, and that we have our own.

The bankers’ version has the advantage that it is already accepted and endorsed by all wings of our political class, that the mainstream media lap up anything the super wealthy and their bankers say, and of course that the banking lobby has more heads than a hydra.

What is their version? Let’s look at one of the more recently created lobby groups the Job Creators Alliance.  According to their web site they were set up by ten of America’s present or former CEOs  for ‘…the defence of the free enterprise system…in the court of public opinion.” The web site goes on to say that it is their aim to “educate the public and policy makers…” and “…shape the national agenda….”

What is that agenda? Well its made quite clear on their web site in an article called “Markets don’t fail” in which it is declared that,

…the onset of the financial crisis three or four years ago was largely due in the US and the UK to excessive demand for mortgages from people who couldn’t afford them.

There, simple as that. Nothing to do with the banks or bankers, nothing to do with robo-signing, selling CDOs which were designed to fail so others could profit by betting against them. Nothing to do with banks lying about the worth of their assets or having a fundamentally stupid and unstable funding model. Nothing to do with insane leverage levels or ‘To Big To Fail’ institutions gambling with client’s money. None of that is to be allowed in to the public discussion. The entire discussion must be, from the bankers point of view, carefully managed.  The discussion, in so far as the public are to be allowed to partake at all, must be carefully shaped and steered, and above all, the assumptions from which it starts and by which its eventual outcome will be determined, must be set and controlled by the Bankers.

Thus it’s worth noting that the article I quoted from the Job Creators Alliance, in America, was also posted on the Adam Smith Insititute in the UK. A ‘think tank’ whose aim is, “… to promote libertarian and free market ideas.”   The  Insititute was very influential in the Thatcher Privatizations and has close links with the libertarian and Free Market US think tank, The Heritage Foundation.

The author of the article, Mr Jan Boucek, is not from either The Job Creators Alliance nor the Adam Smith Institute but from a company called  ECD which describes itself as ,

Mr Boucek is described as, “…an expert in international business communication and the finance media. He has extensive experience in message development, editing skills, coaching and personal development.” In other words he is a spin doctor.  Now anyone can write an article for another organization whose aims they share, but it does change how  we read his opinions when we know who he works for. None of this, however,  is mentioned by either The Adam Smith Insitute or the Job Creators Alliance. It seems to me there is a campaign but that those running it would prefer we not see it as such.

So the bank narrative is that the credit crisis was due to people demanding mortgages they couldn’t afford.  However, are ordinary people in a position to ‘demand’ a mortgage from a bank? It’s like that other phrase much used and approved of by the banks, ‘…people took on debts they couldn’t afford’. ‘Demand’ and ‘Took’ both try to make ordinary people the culprits and the banks the vicitms. But can ordinary people ‘demand’ and then ‘take’ a mortgage from a bank?

Al Capone took money from banks. You and I can demand all we like, but we can’t ‘take’ a loan unless the bank offers it. The fact is, the loans people couldn’t afford were  offered, advised and approved by the banks. It is the bank’s line of business to know if someone can afford a loan or not. That is what bankers do for a living. The bankers knew they were offering and ‘extending’ loans to people above what those people could really afford but did so anyway. And the bankers above them in the bonus pyramid approved.  Our guilt and greed was to ‘accept’ loans that were unwise and unstable. But we did not ‘take’ them from innocent bankers against their better judgement and advice.

Nevertheless the Bankers narrative of events is that markets don’t fail only people. Of course there have been some difficult cases of bank failure and even some cases of outright fraud. How to deal with those? Ah, well there we have the “One Bad Apple’ argument, which is usually teamed with the, ‘now under new management’, message development strategy.

One Bad Apple is from the same stable as ‘rogue trader’. Both are important strategies to ensure that any potentially damaging criticism of the system itself is deflected on to a lone or rogue element which we can then be assured, has been replaced.  Phew! Problen identified, corrected and now , if you please ladies and gentlement, just move along quietly.

And the ‘liberal’ press readily swallows both strategies. The New York Times ran an article in October 2011 in which it talked about how Citigroup had been found guilty of fraud and

“.. had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.”

As the article said, “It doesn’t get any more immoral than this.” But then just one paragraph later the author reassures us not to worry because that that was then but,

“Citigroup is under new and better management now,..”

Of course you might remember Goldman Sachs did almost the same thing and had to pay $550 Million to settle its case. But importantly for the banks and bankers I cannot say Goldman was ‘guilty’ of anything because it was not found guilty. Instead it was allowed to settle the fraud case with a $550 million fine which is far less than it would have made from its trading practices.  Far more importantly, the settlement allowed Goldman to walk away “neither admitting nor denying wrongdoing”. A careful peice of ‘message management’.

Now is Goldman under new and better management? NO. But no one mentions that. Just as they don’t mention that Deutsche Bank is also up on fraud charges. So is Bank of America. All the big four accountant firms were recently or still are under investigation. I could go on.

But instead I’ll just quote US liberal magazine Mother Jones from December 2011 which said,

“…the ‘few bad apples’ argument really is worth acknowledging…”

So the bankers’ sanitized narrative is that markets don’t fail, people do and when a bank or a banker is caught doing something fraudulent or immoral it is just a bad apple which is neatly replaced. Imperative is the message that there is NOTHING intrinsically wrong with the banking/finance system as it is now constituted. THAT is their central concern and version of reality.

The other side of their strategy, which I suggest we”ll see more of in the coming months, is to suggest those who oppose them are suspect or even dangerous. Note how Jamie Dimon, CEO of JP Morgan, took time before flying to Davos to give an interview in which he said, that anti-banking sentiment was,

“…a form of discrimination that should be stopped.”

How to stop it? Well one suggestion came from US lobbying firm, Clark Lytle Geduldig & Cranford in a memo sent to the American Bank’s Association on how to discredit the Occupy Movement. According to Reuters,

The four-page memo outlined how the firm could analyze the source of protesters’ money, as well as their rhetoric and the backgrounds of protest leaders.

“If we can show they have the same cynical motivation as a political opponent, it will undermine their credibility in a profound way,” said the memo,

Now the American Banks Association (ABA) was quick to say the suggestion had not been taken up. The banks have tried to suggest that this was an unsollicted, even perhaps a ‘rogue’ memo. In a word – bollocks.  Clark Lytle Geduldig & Cranford are not fly by night chancers who send off-the-wall suggestions on spec. They are a Washington institution. They are very, very well connected. The ABA are long standing clients. Their business is lobbying. They know their clients. They know what they are thinking, what they need and what they might like to hear. Memo’s don’t get sent out to America’s bank lobby on spec by the work experience intern.

The memo would not exist at all and certainly not suggest what it does if  the partners of Clark Lytle Geduldig & Cranford did not think this was already in their clients minds.

So I think we now have a rough outline of the narrative the bankers want endorsed and promoted. I think we also have an inkling of the measures they are going to deploy against those who oppose them.

That’s ‘Them’. What about ‘Us’ and our narrative?

Well here I find I agree with Jamie Dimon on one thing. He said generalized banker bashing was wrong. I agree. Blunt generalizations are not good enough. What we need are stout reasons that can be sharpened to a fine point and then used to stab (metaphorically only of course) deserving bankers through the heart.  Fortunately there are many such reasons and an almost equal number of thoroughly deserving bankers.

But I will leave that till part 2. Picking up the boys from school now beckons.

 

Back in June of last year (2011) I wrote about how there was such a demand for safe deposit boxes in Switzerland that,

 …if you want a bank box in Zurich today, they will require that you have a minum of half a million swiss francs on deposit in the bank, before they will even consider you. That is how short of space they are.

The same person,who told me that contacted me today to tell me that the demand for Safe deposit boxes has grown so hugely that in the area bordering Italy, hotels are now renting out their own safety deposit boxes.

First the Greeks now the Italians. Capital Flight in full effect. But don’t worry I am sure Mr Monti has it all under control.

The Centre for Global Studies has published Robert Skidelsky's collected writings on the economic crisis.   "I had to bring Keynes back into the picture... the reason we are not yet out of the woods, more than three years after the crisis, is that governments have been pursuing the wrong policies."   To order Skidelsky on the Economic Crisis, write to 207 Fielden House, 13 Little College Street, London SW1P 3SH.    

LONDON – Europe is now haunted by the specter of debt. All European leaders quail before it. To exorcise the demon, they are putting their economies through the wringer.   It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.   To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.   Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.   This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe? As British Prime Minister David Cameron put it: “Government debt is the same as credit-card debt; it’s got to be paid back.”   The next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”   Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.   That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.   This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.   First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.   Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.   Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.   Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.   Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.   As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt. But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.        

A little over a year ago on 1st November 2010 I wrote what I called “…a little bit of scurrilous speculation.”  In it I speculated that an unintended consequence of QE had been to spur several countries to think very seriously of how they could replace the dollar as their settlement currency for international deals. The [...]

As the economic crisis deepens, this is the moment to consider moving towards much shorter, more flexible paid working hours - sharing out jobs and unpaid time more fairly across the population.   nef's event About Time takes forward the ideas from its highly acclaimed report 21 Hours to examine how this could help to address a range of urgent social, economic and environmental problems we face.   On 11 January, the event brings together a panel of leading experts in partnership with the Centre for Analysis of Social Exclusion (CASE) at the London School of Economics:   Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick and biographer of J. M. Keynes, and Dr Edward Skidelsky, University of Exeter, and co-authors of the forthcoming book, How Much is Enough? Economics and the Good Life.   Juliet Schor, Professor of Sociology at Boston College, and author of Plenitude: The New Economics of True Wealth, and The Overworked American.   Tim Jackson, Professor of Sustainable Development at Surrey University, and author of Prosperity without Growth.   The evening will comprise of a public lecture followed by a drinks reception with the speakers.   If you are interested in attending please RSVP to Cam Ly (cam.ly@:neweconomics.org).   Save the date! This is an open conference, with places available to all on a first-come-first-served basis. Please arrive early to guarantee your place in the main theatre. Join us afterwards for a drinks reception at 7.30 pm.   Read more about the event at nef's website or at the LSE's public events page.  

I have a favour to ask. My friend Mark Tanner phoned me the other day to ask if I was going to enter the blog for the  Orwell Prize. I said I hadn’t thought about it. There was a tolerant silence followed by a gentle suggestion that I do think about it. I have and …well, [...]

The lies which got us to the purgatory we are in, are being told all over again, right now, in every bank in the Western World. Not by accident, but on purpose, by men with calculators and degrees, in the full knowledge of what they are doing, why and for whose benefit. Every religion has [...]