Showing posts with label damage. Show all posts
Showing posts with label damage. Show all posts
Sunday, 3 July 2022
Monday, 20 June 2022
BREXIT - The Great Taboo in British Politics
George Parker and Chris Giles in The FT
As he battled to save his job this month, Boris Johnson warned his MPs not get into “some hellish, Groundhog Day debate about the merits of belonging to the single market”. Brexit, he warned his mutinous party in a sweaty House of Commons meeting room, was settled.
Later that day, Johnson limped to victory in a confidence vote, but only after 41 per cent of his MPs had voted to oust him from Downing Street. He is safe for now but the defining project of his premiership — Brexit — still hangs like a cloud over Britain’s fragile economy.
Johnson may not want his party “relitigating” Brexit but neither does Sir Keir Starmer, leader of the opposition Labour party, around a third of whose supporters voted Leave in the 2016 referendum. Nor does Andrew Bailey, governor of the Bank of England. Rishi Sunak, the chancellor, would rather talk about something else. Brexit has become the great British taboo.
But as the sixth anniversary of the UK’s vote to leave the EU approaches, economists are starting to quantify the damage caused by the erection of trade barriers with its biggest market, separating the “Brexit effect” from the damage caused by the Covid-19 pandemic. They conclude that the damage is real and it is not over yet.
The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate, trails other industrialised countries, in spite of lavish Treasury tax breaks to try to drive it up. Next year, according to the OECD think-tank, the UK will have the lowest growth in the G20, apart from sanctioned Russia.
The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur.
That level of decline, worth about £100bn a year in lost output, would result in lost revenues for the Treasury of roughly £40bn a year. That is £40bn that might have been available to the beleaguered Johnson for the radical tax cuts demanded by the Tory right — the equivalent of 6p off the 20p in the pound basic rate of income tax.
Despite these sobering figures, Johnson’s complaints about the prospect of “relitigating” Brexit was exaggerated, intended to portray himself as the victim of a putative plot by pro-Remain MPs. In fact, British politicians — and the wider country — are still traumatised by the bitter Brexit saga, and deeply unwilling to revisit it.
Still, this month has seen the first stirrings of a debate that until now has been buried as the evidence of Brexit-induced economic self-harm starts to pile up. Few are talking about reversing Brexit altogether, but another question is being asked: should the UK start to explore with Brussels ways of softening its edges?
Show, don’t tell
Downing Street insisted this week it was “too early to pass judgment” on whether Brexit was having a negative impact on the economy, which could be heading into a recession. “The opportunities Brexit provides will be a boon to the UK economy in the long run,” Johnson’s spokesman said.
Both Johnson and Sunak insist that it is hard at this stage to separate Brexit’s economic impact from the shock of Covid. In the meantime, the prime minister promotes the “benefits of Brexit”, such as new trade agreements with Australia and New Zealand and the freedom for the UK to set its own rules.
Sunak has promised a reform of rules in the City of London, including reforming the EU’s Solvency II rules to allow insurers to spend more money on infrastructure projects. He has announced eight new freeports with special tax privileges.
But economists have not yet been able to find any significant positive impacts of these policies. Some, including Johnson’s patriotic promise to put a “crown stamp” on pint glasses in pubs and to allow traders to sell their wares in pounds and ounces, are primarily symbolic.
Critics of government Brexit policy are routinely derided. Suella Braverman, attorney-general, last week accused the ITV presenter Robert Peston of “Remainiac make-believe” after he challenged her over the government’s unilateral plan to rip up the Brexit treaty relating to Northern Ireland. Braverman claimed the so-called Northern Ireland protocol had left the region “lagging behind the rest of the UK”. In fact, Northern Ireland (the only area of the UK to remain in the EU’s single market for goods) is the best performing part of the country, apart from London.
When Bailey appeared before the House of Commons treasury committee in mid May, the BoE governor acknowledged that his predecessor Mark Carney had made himself “unpopular” for saying Brexit would have a negative effect on trade, but that the bank held to that view.
Kevin Hollinrake, a Tory member of the committee, says Bailey was trying to avoid becoming a political target and was “deliberately avoiding” talking about Brexit. “It’s a singular issue for the UK,” the MP says. “We have changed our immigration rules. It’s about non-tariff barriers. You’ve got to be willing to look at what’s happening on the ground.”
While some gloomy predictions have failed to materialise, such as former chancellor George Osborne’s 2016 warning of a recession immediately after a Leave vote, there is growing evidence that Brexit is causing more lasting damage to UK economic prospects.
Ministers are becoming more reluctant to proclaim the economic upsides of Brexit. Kwasi Kwarteng, business secretary, was asked last week at the FT Global Boardroom to list some Brexit benefits. He focused on the UK’s ability to respond swiftly to Russian aggression in Ukraine — “it has substantial benefits particularly in international policy” — rather than on business. Sunak’s allies say the chancellor’s approach is to “show, not tell” on Brexit, pushing through City regulatory reforms rather than giving boosterish speeches on its economic merits.
The fallout in data
The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports. It did not recover. This sharp depreciation was not followed by a boom in exports as UK goods and services became cheaper on global markets, but it did raise the price of imports and pushed up inflation.
By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages.
Some households, such as those relying on state pensions, were compensated in higher benefits, but the CEPR team found no overall offset with higher incomes. “The Brexit vote delivered a swift negative shock to UK living standards,” they wrote.
While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border.
Economists have used this point in time to contrast how the UK’s trade performance compares with those of other countries before and after the TCA’s imposition. The results have been increasingly ugly, especially for small companies trading with Europe.
Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found.
The same group found food prices had risen as a result of Brexit. Comparing the prices of imported food such as pork, tomatoes and jam, which predominantly came from the EU, with those that came from further afield such as tuna and pineapples, it found a substantial Brexit effect. “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research.
Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade following Covid and the UK sits flat”.
The third visible effect of Brexit on the UK economy has been in discouraging business investment. In the first quarter of 2022, real business investment was 9.4 per cent lower than in the second quarter of 2016. That fall was mostly due to Covid, but it had flatlined since the referendum, ending a period of growth since 2010 and falling well short of the performance of other G7 countries.
Weak investment is a particular worry for Sunak, who sees business investment as the route to greater prosperity. Before departing the BoE in 2020, Carney told a House of Lords Committee that Brexit uncertainty was holding back business investment. Worse, he said, business planning for various Brexit scenarios was taking up a lot of management effort. “Time spent on contingency planning is time not spent on strategic initiatives,” he said.
Since then, negative perceptions of the UK have continued among business with the chancellor finding he had little bang for his £25bn buck of super deductions in corporation tax to encourage capital spending. As Bailey told MPs last month, the super-deductor was “not at the moment having the impact that was expected”.
Complaints about high immigration was one of the most contentious issues of the referendum, with a central promise of the Brexit campaign being tougher controls over the number of people entering the country. While net immigration from EU countries has stopped, with effectively no change apparent in the two years to the end of June 2021, net immigration from non EU countries has remained high, with 250,000 in the latest year.
Collateral damage
There is, as yet, little appetite among Britain’s political leaders for a return to the EU — even if the other 27 member states were prepared to open the door. Even the pro-EU Liberal Democrats admit reversing course is a long-term aspiration, rather than an immediate goal.
As part of his attempt to avert a coup, Johnson wrote to MPs this month that he had “created a new and friendly relationship with the EU”. The opposite is true. Brussels restarted legal action against the UK this week over the Northern Ireland protocol: relations are at rock bottom.
The EU has warned that British scientists will be excluded from the €95bn Horizon research programme as “collateral damage” in the row about Northern Ireland. The prospect of any kind of rapprochement at the moment, at least while Johnson remains prime minister, seems remote.
But in recent weeks, a tentative debate has started over whether the UK would be better off trying to reach accommodations with the EU to smooth trade in some areas, rather than launching a new front in the Brexit war with unilateral action over Northern Ireland.
In an article much-discussed at Westminster, the pro-Leave Times columnist Iain Martin wrote this month: “To deny the downsides of Brexit on trade with the EU is to deny reality.”
Tobias Ellwood, a former Tory defence minister, suggested Britain should rejoin the EU single market to soften the cost of living crisis, and said there was “an appetite” for a rethink and claimed polling indicated “this is not the Brexit most people imagined”. And Daniel Hannan, a leading Tory Brexiter, repeated his longstanding view that Britain should have stayed in the single market under a Norway-style relationship with the EU, while adding that to rejoin it now “would be madness”.
Anna McMorrin, Labour shadow minister, was recorded telling activists: “I hope eventually that we will get back into the single market and customs union.” She was forced to apologise by Starmer: such talk remains dangerous in political circles.
Even so, a Starmer-led future Labour government would change UK relations with the EU. The party’s mantra has become “make Brexit work”: rejoining the single market may be off the agenda, but Labour wants to find ways to improve on the bare-bones tariff-free trade agreement Johnson negotiated with the EU.
Rachel Reeves, the shadow chancellor, told the Financial Times last year that Labour wanted to strike a deal with the EU to reduce the most onerous paperwork and checks on food exports. The party also wants an agreement with Brussels on the mutual recognition of professional qualifications.
Even among the Eurosceptics in Johnson’s cabinet, there is now an acceptance that the UK should be seeking to rebuild economic relations with the EU, including in areas like the Horizon programme, to avoid exacerbating the looming cost of living crisis.
“Would I like to be in a better place on Brexit?” asked one pro-Brexit cabinet member. “Yes, absolutely. But we’ve got to find a way of doing it without it looking like we’re running up the white flag and we’re compromising on sovereignty.”
Tuesday, 13 January 2015
Mani Shankar Aiyar on Charlie Hebdon
Courtesy NDTV.com
I was as horrified as you to hear of 12 lives being lost in the armed assault on a Paris satirical weekly for their repeatedly sneering at the Prophet of Islam (PBUH) and running cartoons denigrating him and the religion he has brought to hundreds of millions of families the world over. That such horror at terrorism was not just my reaction as a non-Muslim to the Paris outrage, but widely shared by Muslims too was brought home to me by a statement issued by a collegium of Imams and preachers of Bahrain who said: "Violence and extremism have always been - and still are - the biggest enemies of Islam, and contravene its teachings, tolerance and genuine precepts. All countries should take unified stances against terrorism. We call for the need to devise a unified international strategy to combat its forms and manifestation everywhere."
That precisely reflects the position taken by the Dar-ul-Uloom. It precisely reflects my own personal position. To go by the Congress President's reaction, it also reflects my party's position: "The Congress President, Smt Sonia Gandhi, has condemned the cowardly and dastardly terror attack on Media in Paris. Shocked at the audacity of the gruesome act, Smt Gandhi said that extremism and intolerance will never be able to curb freedom of expression and will only result in perpetuation of violence."
What then is the controversy about? It is about my describing the incident as a "backlash" to the War on Terrorism. That is not a justification of terrorism. It is an explanation. The distinction is important. I condemn terrorism. I do not commend it. If, however, war is declared on terrorists, it is stupid to imagine that the terrorists will take it lying down; inevitably they will hit back - that is a consequence we have to be prepared for.
Charlie Hebdo, the satirical weekly, was so obviously on the hit list that it was virtually inviting a reaction week after week. The threat to the Editor was so palpable that he had been personally provided with just about the highest level of security that France could offer. Why the magazine's office was not protected with an adequate posse of armed security is being investigated. But it also reflects the mind-set that thinks the West can mount a war and get away with little or no loss to themselves. The West is so militarily powerful and so technologically superior that it is able to unleash an unequal war in which their resources in money and machines cannot be matched even remotely by those whom they are combating.
Therefore, terrorists resort to an asymmetrical response. They target non-combatants by way of avenging themselves on those whose war machines kill - daily - scores, hundreds, even thousands of the non-combatants in whose midst the terrorists live and shield themselves.
A dead innocent is a dead innocent. Terrorists deliberately target the innocent. The War on Terrorism does not target innocents. It kills them indiscriminately by way of what is delicately called "collateral damage". But the loved ones and the community are equally affected - whether the killing is deliberate or incidental. The rage is the same. The urge to revenge is the same. For, as Gandhi said - and I quoted him to the TV agency - "Violence begets violence".
The West is near perfecting the art of killing their enemies (plus "collateral damage") without risking their own lives. When eight American body bags returned from Somalia, Bill Clinton immediately called off the operation "Black Hawk Down". When eight Pathan bodies of helpless mothers, hapless children, and innocent by-standers lie in the midst of the carnage wrought by a Drone attack, the wailing families do not react differently. They seek justice, each in his or her own way. The Drone wins out because even if it is downed, as it is unmanned, no American family is left with a tear in its eye. When terrorists attack, they know they are going to be killed - or kill themselves. They take the vicious consequences of their vicious action. The Drone just flies away - to come back another day.
Till even the First World War, war was fought on the terrain of war - the battle-field. Those who died or got injured were soldiers.
Civilians only accidentally got in the way. That changed when the Germans started assassinating mayors of towns where snipers shot at German soldiers. It horrified the world and contributed more to Britain coming in against Germany than perhaps any other single action. Not even into the Thirties had men been desensitized to the atrocity of civilian beings killed in armed attack. Picasso earned eternal fame because his painting captured and symbolized the horror experienced by all civilized people at the aerial bombing of the Spanish village of Guernica.
But by the Second World War, these niceties were abandoned. The terror opened by the Nazis through their Blitzkrieg on England, followed by their merciless genocide of Jews in the East European countries they occupied, started the process of desensitizing the hitherto-unknown horror of innocents being mown to death.
Stalingrad finally dulled sensitivities to the point where Churchill could order the bombing of Dresden and kill more innocents in a single night than all the terrorist attacks since 9/11 and after.
Truman's atom bombing of Hiroshima and Nagasaki removed the final constraints on sparing non-combatants the terrible fate of the battle-field. Since then, it has been open house for those with the military means to do so.
I was posted as a young diplomat to Hanoi in the middle of the US-Vietnam war. Day after day, twice a day, US Air Force planes would pound the city without regard to civilian habitation or military target, shooting to death and severely injuring any living being - man, woman or child - they could fit into their sights. Uncounted millions died. Many were non-combatant civilians. A young British colleague said to me that American U-2s flying at such speed that they could cross the country in 10 minutes at a height of 60,000 feet could take a photograph of the saucer I held in my hand that would be more accurate than my naked eye could see. "How," he asked, "do you think these guys on bicycles will ever drive them out?" The bicyclists did; they won. But only after millions of civilians had been slaughtered.
I condemn what happened in Paris with all the strength in my voice. It was dreadful. But I regard all forms of terrorism, especially by armed force that takes the lives of non-combatants as equally - perhaps even more - terrible. That is why my heart bleeds when 1,500 Palestinians are killed in their homes by bombs rained on them from the skies because they have the temerity to ask for the right to return to their homeland. The Modi government had little or nothing to say about that outrage. It is this lack of balance in the BJP's approach to terrorism that fills me with dread and despair.
Most of us Indians, except the fringe lunatics of the BJP-RSS-Sangh Parivar, have learned millennia ago to live with diversity, indeed to celebrate our diversity, for out of it is forged our unity as a nation.
For the West, however, diversity is a totally new experience. They have been compelled for economic reasons to import millions of Third World labourers, and since an arc of Arab countries lies immediately south of France on the other littoral of the Mediterranean, most of France's imported labour comprises Muslims from the Maghreb. France wants them to become Frenchmen as if the Arabs had fostered 1789 and never been subjected to colonial rule. The Arab Muslims wish to remain themselves, notwithstanding their having emigrated to France for the same economic reasons that have led to France and other Western countries importing them in such large numbers. Hence, stupid measures like insisting that no Muslim schoolchild in France may wear the hijab that her sisters wear in their home countries will result in a backlash.
I was as horrified as you to hear of 12 lives being lost in the armed assault on a Paris satirical weekly for their repeatedly sneering at the Prophet of Islam (PBUH) and running cartoons denigrating him and the religion he has brought to hundreds of millions of families the world over. That such horror at terrorism was not just my reaction as a non-Muslim to the Paris outrage, but widely shared by Muslims too was brought home to me by a statement issued by a collegium of Imams and preachers of Bahrain who said: "Violence and extremism have always been - and still are - the biggest enemies of Islam, and contravene its teachings, tolerance and genuine precepts. All countries should take unified stances against terrorism. We call for the need to devise a unified international strategy to combat its forms and manifestation everywhere."
That precisely reflects the position taken by the Dar-ul-Uloom. It precisely reflects my own personal position. To go by the Congress President's reaction, it also reflects my party's position: "The Congress President, Smt Sonia Gandhi, has condemned the cowardly and dastardly terror attack on Media in Paris. Shocked at the audacity of the gruesome act, Smt Gandhi said that extremism and intolerance will never be able to curb freedom of expression and will only result in perpetuation of violence."
What then is the controversy about? It is about my describing the incident as a "backlash" to the War on Terrorism. That is not a justification of terrorism. It is an explanation. The distinction is important. I condemn terrorism. I do not commend it. If, however, war is declared on terrorists, it is stupid to imagine that the terrorists will take it lying down; inevitably they will hit back - that is a consequence we have to be prepared for.
Charlie Hebdo, the satirical weekly, was so obviously on the hit list that it was virtually inviting a reaction week after week. The threat to the Editor was so palpable that he had been personally provided with just about the highest level of security that France could offer. Why the magazine's office was not protected with an adequate posse of armed security is being investigated. But it also reflects the mind-set that thinks the West can mount a war and get away with little or no loss to themselves. The West is so militarily powerful and so technologically superior that it is able to unleash an unequal war in which their resources in money and machines cannot be matched even remotely by those whom they are combating.
Therefore, terrorists resort to an asymmetrical response. They target non-combatants by way of avenging themselves on those whose war machines kill - daily - scores, hundreds, even thousands of the non-combatants in whose midst the terrorists live and shield themselves.
A dead innocent is a dead innocent. Terrorists deliberately target the innocent. The War on Terrorism does not target innocents. It kills them indiscriminately by way of what is delicately called "collateral damage". But the loved ones and the community are equally affected - whether the killing is deliberate or incidental. The rage is the same. The urge to revenge is the same. For, as Gandhi said - and I quoted him to the TV agency - "Violence begets violence".
The West is near perfecting the art of killing their enemies (plus "collateral damage") without risking their own lives. When eight American body bags returned from Somalia, Bill Clinton immediately called off the operation "Black Hawk Down". When eight Pathan bodies of helpless mothers, hapless children, and innocent by-standers lie in the midst of the carnage wrought by a Drone attack, the wailing families do not react differently. They seek justice, each in his or her own way. The Drone wins out because even if it is downed, as it is unmanned, no American family is left with a tear in its eye. When terrorists attack, they know they are going to be killed - or kill themselves. They take the vicious consequences of their vicious action. The Drone just flies away - to come back another day.
Till even the First World War, war was fought on the terrain of war - the battle-field. Those who died or got injured were soldiers.
Civilians only accidentally got in the way. That changed when the Germans started assassinating mayors of towns where snipers shot at German soldiers. It horrified the world and contributed more to Britain coming in against Germany than perhaps any other single action. Not even into the Thirties had men been desensitized to the atrocity of civilian beings killed in armed attack. Picasso earned eternal fame because his painting captured and symbolized the horror experienced by all civilized people at the aerial bombing of the Spanish village of Guernica.
But by the Second World War, these niceties were abandoned. The terror opened by the Nazis through their Blitzkrieg on England, followed by their merciless genocide of Jews in the East European countries they occupied, started the process of desensitizing the hitherto-unknown horror of innocents being mown to death.
Stalingrad finally dulled sensitivities to the point where Churchill could order the bombing of Dresden and kill more innocents in a single night than all the terrorist attacks since 9/11 and after.
Truman's atom bombing of Hiroshima and Nagasaki removed the final constraints on sparing non-combatants the terrible fate of the battle-field. Since then, it has been open house for those with the military means to do so.
I was posted as a young diplomat to Hanoi in the middle of the US-Vietnam war. Day after day, twice a day, US Air Force planes would pound the city without regard to civilian habitation or military target, shooting to death and severely injuring any living being - man, woman or child - they could fit into their sights. Uncounted millions died. Many were non-combatant civilians. A young British colleague said to me that American U-2s flying at such speed that they could cross the country in 10 minutes at a height of 60,000 feet could take a photograph of the saucer I held in my hand that would be more accurate than my naked eye could see. "How," he asked, "do you think these guys on bicycles will ever drive them out?" The bicyclists did; they won. But only after millions of civilians had been slaughtered.
I condemn what happened in Paris with all the strength in my voice. It was dreadful. But I regard all forms of terrorism, especially by armed force that takes the lives of non-combatants as equally - perhaps even more - terrible. That is why my heart bleeds when 1,500 Palestinians are killed in their homes by bombs rained on them from the skies because they have the temerity to ask for the right to return to their homeland. The Modi government had little or nothing to say about that outrage. It is this lack of balance in the BJP's approach to terrorism that fills me with dread and despair.
Most of us Indians, except the fringe lunatics of the BJP-RSS-Sangh Parivar, have learned millennia ago to live with diversity, indeed to celebrate our diversity, for out of it is forged our unity as a nation.
For the West, however, diversity is a totally new experience. They have been compelled for economic reasons to import millions of Third World labourers, and since an arc of Arab countries lies immediately south of France on the other littoral of the Mediterranean, most of France's imported labour comprises Muslims from the Maghreb. France wants them to become Frenchmen as if the Arabs had fostered 1789 and never been subjected to colonial rule. The Arab Muslims wish to remain themselves, notwithstanding their having emigrated to France for the same economic reasons that have led to France and other Western countries importing them in such large numbers. Hence, stupid measures like insisting that no Muslim schoolchild in France may wear the hijab that her sisters wear in their home countries will result in a backlash.
Monday, 2 July 2012
Investment Banking - An organised Scam masquerading as a Business
Let's end this rotten culture that only rewards rogues
The
Barclays rate-rigging scandal has once again exposed a world where men
and women with little skill and no moral compass can become very rich
very fast
Barclays boss Bob Diamond. Photograph: Dylan Martinez/Reuters
Investment banking is an organised scam masquerading as a
business. It is defined by endemic conflicts of interest, systemic
amoral behaviour and extreme avarice. Many of its senior figures should
be serving prison sentences or disgraced – and would have been if
British regulators had been weaned off the doctrine of " light touch"
regulation earlier and if the Serious Fraud Office's budget had not been
emasculated by Mr Osborne. It is a tax on wealth generation and an
enemy of honest endeavour – the beast that is devouring British
capitalism.
The £290m fine on Barclays for rigging the interest rates in the inter-bank market is a defining moment. Not just for Barclays but for every bank with which it colluded. Barclays had the wit to come clean first – the first of many banks to suffer political and moral opprobrium for illicitly inflating its profits. It was also trying to protect itself from "reputational damage" – not wanting other banks' assessment of its creditworthiness to become public .
In the light of what we now know, that seems laughable. But between autumn 2007 and spring 2009, Barclays was fighting for its life as an independent bank. Had the news surfaced that other banks harboured such doubts about its credit standing, Barclays might have ended up being owned by the British taxpayer like RBS and Lloyds.
As the FSA reports, senior treasurers and the corporate affairs department were both keenly aware of those risks and anxious they should be averted. It beggars belief that the top of Barclays did not know what measures it had to take to pull through. It had to lie about the rates it was paying to borrow money.
This came easily because the practice had become habitual. The London interbank offer rate is set each day at 11am in all the key currencies lent and borrowed in London. Each major bank submits the interest rate it is paying to the British Bankers' Association and the average becomes the benchmark rate for most of the world's loans and financial contracts. For example, there are some $554tn worth of so-called interest rate derivative contracts whose price is linked to Libor – manufactured products whose alleged purpose is to hedge the risk of unexpected interest rate changes in a world of floating exchange rates and free capital movements.
In fact, there is no way that these instruments can insure against system-wide movements. Some bank has to lose by being the sucker paying out, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer. Derivatives should rather be seen as economically purposeless constructs whose ease of manipulation in opaque markets makes the investment banks rich – while the rest of us take our chances.
Over the past few years, more and more light has been thrown on how banks profit by trading on their own account in so-called "proprietary trading" – dealing in derivatives, while another part of the bank makes a market for buyers and sellers in those self-same products. First of all, they can take positions on a vast scale because they are enormous banks with their deposits effectively guaranteed by the taxpayer. Next, they rig the benchmark interest rate on which the price of many derivatives are based, made easier still because so many derivatives are custom-made. This means that deep non-manipulable markets are hard to construct; it's also easier for derivatives to aid and abet tax avoidance. And lastly, as Goldman Sachs' "Fabulous" Fabrice Tourre revealed, the banks actively manage both the buyers and sellers. Thus they know which way the prices are likely to move from hour to hour.
Managements have little incentive to manage such a business because their own extravagant bonuses depend on its success. Even if they were minded to insist on proper behaviour, so much of the action takes place over hours and even minutes – hence they have to give phenomenal discretion to the teams running the trading desks. Managers cannot possibly monitor their real-time positions or second guess why they have been taken – the reason why rogue traders can lose banks billions, as one recently did at JP Morgan in London.
Much has been said about the rotten culture in investment banking – now from both the prime minister and the governor of the Bank of England. But the regulators, the British government and bank managements – all genuflecting to the wisdom of the age that free markets make no mistakes – allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.
A rotten culture does not emerge from thin air. It emerges from structures that encourage rotten behaviour – and Britain, following the false gods that free markets and financial services were its economic future, created such structures big time, cheered along by a cross-party alliance that extended from Boris Johnson to Gordon Brown. Now is a decisive moment for both the City and the economy. The City's reputation is at rock bottom. Meanwhile the economy acutely needs a financial system that backs wealth-generating innovation. We need a determined root and branch reform of British finance to restore international trust, develop the national economy and to bring an end to the mis-selling scandals. In RBS's case, the bank was even unable to discharge for a week its basic function – allowing its customers to transact financial business.
A start has been made with the promised implementation of the Vickers commission's recommendations to ringfence investment banking from commercial banking. The ringfence, weakened by George Osborne under intense pressure from the banks, should be strengthened to produce a de facto separation. In particular, "prop" trading desks should operate as fully separate units with their own boards, balance sheets and capital. The measures should be rolled out as soon as they become law rather than delayed until 2019.
That is only a start. The banks and the British Bankers' Association can no longer be allowed to set Libor: this task must now be done by the Financial Conduct Authority that is to succeed the FSA. London must also fall into line with international practice and require all derivative trades in the over-the-counter market to post appropriate collateral. London can no longer be the wild west of international finance where American and European law can be flouted. I would go further and require all financial instruments to be traded in organised exchanges.
There is also the question of ownership: shareholders exercised far too little influence over bank managements. Worse, their short-termist behaviour encouraged banks to look for sky-high fast returns to keep them happy. The Ownership Commission ( which I chaired) argued for the creation of new ownership mutuals that pooled the voting rights of institutional shareholders. This would both anchor ownership to set more reasonable profit expectations, and give owners real muscle in a dialogue with managements.
Banks need such better, engaged ownership – and fast. The British government, owning RBS and Lloyds, should give a lead in what it expects from banks. In particular, it should take a lead on remuneration.
In my fair pay review for the government, I argued that private sector executives should put a proportion of their pay at risk to be earned back by doing their job properly; only then should they be eligible for an equivalent bonus. There would be no question of Bob Diamond trying to win brownie points by giving up his bonus. Under earnback it would be automatically forfeited.
The Financial Services Authority has begun to show how regulation could work: five years ago it would never have launched such a bold and revealing inquiry. George Osborne is breaking it up just when it should be backed and reinforced.
The £14m cut in the Serious Fraud Office's budget since 2008 should be restored in full. There should be arrests, trials and imprisonment. And there should be an independent Leveson-style inquiry into investment banking and the causes of the financial crisis.
So far, there has only been the whitewash report in 2009, co-chaired by Sir Win Bischoff and Alistair Darling, arguing that as little as possible should be done to regulate the City. It was a disgrace.
As far as possible, the underlying causes of the over-inflated size of finance should be addressed. If there were less exchange and interest rate volatility, there would be less underlying demand for instruments to protect against it. This is, of course, the case for a system of managed exchange rates and a European single currency.
Instead of deifying floating exchange rates as the magic bullet for all economic ills – the default position of the British economic establishment across the political spectrum — floating rates should be seen as another driver of our over-inflated financial sector.
Britain needs to rebalance and develop its economy – and it needs to start by reforming finance. This could be the moment the process begins, laying the basis for a remoralisation of our economy and a new industrial revolution. But it means confronting the biggest lobby of them all – big finance. Any takers?
The £290m fine on Barclays for rigging the interest rates in the inter-bank market is a defining moment. Not just for Barclays but for every bank with which it colluded. Barclays had the wit to come clean first – the first of many banks to suffer political and moral opprobrium for illicitly inflating its profits. It was also trying to protect itself from "reputational damage" – not wanting other banks' assessment of its creditworthiness to become public .
In the light of what we now know, that seems laughable. But between autumn 2007 and spring 2009, Barclays was fighting for its life as an independent bank. Had the news surfaced that other banks harboured such doubts about its credit standing, Barclays might have ended up being owned by the British taxpayer like RBS and Lloyds.
As the FSA reports, senior treasurers and the corporate affairs department were both keenly aware of those risks and anxious they should be averted. It beggars belief that the top of Barclays did not know what measures it had to take to pull through. It had to lie about the rates it was paying to borrow money.
This came easily because the practice had become habitual. The London interbank offer rate is set each day at 11am in all the key currencies lent and borrowed in London. Each major bank submits the interest rate it is paying to the British Bankers' Association and the average becomes the benchmark rate for most of the world's loans and financial contracts. For example, there are some $554tn worth of so-called interest rate derivative contracts whose price is linked to Libor – manufactured products whose alleged purpose is to hedge the risk of unexpected interest rate changes in a world of floating exchange rates and free capital movements.
In fact, there is no way that these instruments can insure against system-wide movements. Some bank has to lose by being the sucker paying out, then becoming the weak link in the system which, in an extreme case, has to be bailed out by the taxpayer. Derivatives should rather be seen as economically purposeless constructs whose ease of manipulation in opaque markets makes the investment banks rich – while the rest of us take our chances.
Over the past few years, more and more light has been thrown on how banks profit by trading on their own account in so-called "proprietary trading" – dealing in derivatives, while another part of the bank makes a market for buyers and sellers in those self-same products. First of all, they can take positions on a vast scale because they are enormous banks with their deposits effectively guaranteed by the taxpayer. Next, they rig the benchmark interest rate on which the price of many derivatives are based, made easier still because so many derivatives are custom-made. This means that deep non-manipulable markets are hard to construct; it's also easier for derivatives to aid and abet tax avoidance. And lastly, as Goldman Sachs' "Fabulous" Fabrice Tourre revealed, the banks actively manage both the buyers and sellers. Thus they know which way the prices are likely to move from hour to hour.
Managements have little incentive to manage such a business because their own extravagant bonuses depend on its success. Even if they were minded to insist on proper behaviour, so much of the action takes place over hours and even minutes – hence they have to give phenomenal discretion to the teams running the trading desks. Managers cannot possibly monitor their real-time positions or second guess why they have been taken – the reason why rogue traders can lose banks billions, as one recently did at JP Morgan in London.
Much has been said about the rotten culture in investment banking – now from both the prime minister and the governor of the Bank of England. But the regulators, the British government and bank managements – all genuflecting to the wisdom of the age that free markets make no mistakes – allowed a business model to be created in which men and women with very little skill and no moral compass could make themselves millionaires in a very short time. They contributed zero wider economic value but created immense systemic risk for the rest of the economy.
A rotten culture does not emerge from thin air. It emerges from structures that encourage rotten behaviour – and Britain, following the false gods that free markets and financial services were its economic future, created such structures big time, cheered along by a cross-party alliance that extended from Boris Johnson to Gordon Brown. Now is a decisive moment for both the City and the economy. The City's reputation is at rock bottom. Meanwhile the economy acutely needs a financial system that backs wealth-generating innovation. We need a determined root and branch reform of British finance to restore international trust, develop the national economy and to bring an end to the mis-selling scandals. In RBS's case, the bank was even unable to discharge for a week its basic function – allowing its customers to transact financial business.
A start has been made with the promised implementation of the Vickers commission's recommendations to ringfence investment banking from commercial banking. The ringfence, weakened by George Osborne under intense pressure from the banks, should be strengthened to produce a de facto separation. In particular, "prop" trading desks should operate as fully separate units with their own boards, balance sheets and capital. The measures should be rolled out as soon as they become law rather than delayed until 2019.
That is only a start. The banks and the British Bankers' Association can no longer be allowed to set Libor: this task must now be done by the Financial Conduct Authority that is to succeed the FSA. London must also fall into line with international practice and require all derivative trades in the over-the-counter market to post appropriate collateral. London can no longer be the wild west of international finance where American and European law can be flouted. I would go further and require all financial instruments to be traded in organised exchanges.
There is also the question of ownership: shareholders exercised far too little influence over bank managements. Worse, their short-termist behaviour encouraged banks to look for sky-high fast returns to keep them happy. The Ownership Commission ( which I chaired) argued for the creation of new ownership mutuals that pooled the voting rights of institutional shareholders. This would both anchor ownership to set more reasonable profit expectations, and give owners real muscle in a dialogue with managements.
Banks need such better, engaged ownership – and fast. The British government, owning RBS and Lloyds, should give a lead in what it expects from banks. In particular, it should take a lead on remuneration.
In my fair pay review for the government, I argued that private sector executives should put a proportion of their pay at risk to be earned back by doing their job properly; only then should they be eligible for an equivalent bonus. There would be no question of Bob Diamond trying to win brownie points by giving up his bonus. Under earnback it would be automatically forfeited.
The Financial Services Authority has begun to show how regulation could work: five years ago it would never have launched such a bold and revealing inquiry. George Osborne is breaking it up just when it should be backed and reinforced.
The £14m cut in the Serious Fraud Office's budget since 2008 should be restored in full. There should be arrests, trials and imprisonment. And there should be an independent Leveson-style inquiry into investment banking and the causes of the financial crisis.
So far, there has only been the whitewash report in 2009, co-chaired by Sir Win Bischoff and Alistair Darling, arguing that as little as possible should be done to regulate the City. It was a disgrace.
As far as possible, the underlying causes of the over-inflated size of finance should be addressed. If there were less exchange and interest rate volatility, there would be less underlying demand for instruments to protect against it. This is, of course, the case for a system of managed exchange rates and a European single currency.
Instead of deifying floating exchange rates as the magic bullet for all economic ills – the default position of the British economic establishment across the political spectrum — floating rates should be seen as another driver of our over-inflated financial sector.
Britain needs to rebalance and develop its economy – and it needs to start by reforming finance. This could be the moment the process begins, laying the basis for a remoralisation of our economy and a new industrial revolution. But it means confronting the biggest lobby of them all – big finance. Any takers?
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