Political Economy

On the 27th September 2009 I made a speech to the English Democrats AGM and autumn conference entitled “  The ABC of Banking Regulation” (http://bit.ly/u2vCYM). I made the speech because as I said, “It [the bank crisis] happened because we had the lightest touch, and probably the most dysfunctional, bank regulatory scheme going”. The recent report on the Royal Bank of Scotland failure (the RBSR) by the Financial Services Authority, who were responsible for regulation, appears to agree with me.

Overall I am happy with the progress to date. Some of the matters I suggested have turned up as proposals or have been enacted. But we still face tough times and there will have to be a greater degree of  implementation of these ideas if we are to build a stable base for the future.

My A was accountability. I suggested that in order to achieve this we should have something akin to the Sarbanes-Oxley Act in the USA. The difference would be that bankers, the directors and senior managers, would go to prison for 5 years and suffer a £5,000,000 fine if their bank needed saving by the authorities. I still think that this is the one regulatory change that would ensure compliance with prudential banking practices. The RBSR is suggesting fines and exclusion from working in banks again for those who transgress. This is far from enough.

I had two Bs, both of which have been taken up by the coalition government. First was to put the Bank of England in charge of the regulation of banks and other depositary institutions. The second was based on a law in cybernetics called “Ashby’s Law of Requisite Variety”. Put simply this states that any regulator must have as wide a range of control measures available to it as there are ways of change in the system. The economic system is, and always will be, subject to wide gyrations that we call “boom and bust” caused by a variety of events. The regulatory authority must have a similar wide range of responses available and not just, as in the Bank’s case, the ability to raise or lower interest rates to control inflation. The coalition’s response to this suggestion has been the “Financial Policy Committee” which has wider powers of intervention.

I had three Cs; clarity, capital and compensation.

Clarity referred to stopping the ability of banks to create opaque, multilayered derivative product that are sold “over the counter” and thus in secret. The dangers are self-evident. The opaque nature of the the security makes it much more likely that that collapse will occur and the secret nature of the transaction means that banks do not know who holds this toxic junk and so will stop lending to other banks, the so-called “contagion” effect. The Frank-Dodds Act in the USA is in the process of moving these transactions to open exchanges where much greater clarity exists. The final report of the Independent Commission on Banking (The Vickers Report) has proposed the banning of dealing in derivatives by the ring-fenced commercial arms of banks whilst the investment banking arms going through a process to improve clarity, somewhat.

It became clear that banks relied too much on borrowing and not enough on their own capital as well as having a deficient method of risk calculation, which would in itself lead to too little capital. I was being far too optimistic. The RBSR infers that there may not have been any risk calculation on occasions.

The new rules under Basel III will increase capital levels and the UK wants to increase the levels of capital held by larger banks even more (the EU on the other hands wants to reduce the levels of capital proposed). It was clear that increasing the levels of capital would result in lower level of lending and liquidity in the banking system. This is very evident in eurozone banks, where the appalling level of management of the system, has meant European banks withdrawing cash from the international system where its effect will be felt not just in the EU but in developing countries as well as elsewhere in the world.

I suggested that some of the problems of increasing capital could be overcome by requiring (investment) banks to insure against sudden, but infrequent, requirements for increased capital. This could be done by a mixture of government and private sector insurers, provided that the premiums that go to the government are deposited in a ring-fenced fund to keep off the sticky fingers of politicians who, when it comes to giving goodies to voters using someone elses money, can show a degree of “stickiness” that far exceeds that of your average banker!

The third C is compensation. I suggested that commercial banks could be subject to a significant regulation including control of compensation. In return directors and senior managers would not be subject to custodial sentences if the banks needed saving. The RBSR suggestions concur with my mine on this matter.  The question of excessive compensation is still an issue and solutions are still being discussed. There is no sign yet of criminal penalties, a situation that needs to be speedily changed.

My D was for division. I felt then, and still feel, that investment banks and commercial banks must be split. The Vickers report is recommending a half-way house of strict firewalls. I hope this succeeds but fear it will not. We should remember that investment bank are by nature risk taking and piratical institutions. If they were not they would not be successful.  Whilst a group of greedy investment bankers have within their line of sight a pile of someone elses money sitting in deposits they will move heaven and earth to get their hands on it. The subterfuges they will employ will often not be discovered by the regulators who will end up being powerless to stop it. Only the strong threat of a prison sentence could have any hope of stopping this behaviour.

If we are to have a strong banking regulation system in a sea of lighter touch regulation it will be all too easy for the banks in the later environment to undercut UK regulated banks in their product and service pricing hence leading to a decline in English banking. To do this we need to take powers to tax companies, fairly, that have used foreign products that are cheaper due to easier regulation. This should not extend to taxing solely on the basis of cheapness, some of which is due to efficiencies. There is no sign of this yet. This was my F

My L was for government to stop being lead by the nose by bankers and to start leading themselves. This, at least in the UK, but not it would appear in the EU, is starting to happen.

The score to date is zero for A, two for B, two halves for C, a half for D, a zero for F and one point for L, a total of four and a half out of nine suggestions or 50%. We still have a long way to go. It will be interesting to see what emerges.

What I have found most amazing about the comments on Cameron’s veto is that very few of those participating, from BBC reporters, presenters and interviewers to the vast herds of unwashed politicians and their advisors,  is a complete lack of understanding of the part that financial markets will take in determining the future of the euro and as a result what needs to be done.

The fact that so many politicians, both in the UK and in Europe, fail to understand even the simplest of economic realities is of course why we are in the situation that we are in and the reason why it could yet all end in tears.

Prior to the summit the Germans wanted a treaty whilst the French did not.

The Germans were of course responding to the long-term requirements for stability with little understanding of the urgent need for significant short-term action, whilst the French, who do not want their deficit budgeting exposed to the full force of the European court, as a treaty would have required, were focused on the short-term requirement at the expense of long-term stability.

The British are not going into the Euro but were interested for reasons of trade and stability in both the long-term (changes to the Eurozone rules on governance) and the short-term (the big bazooka).

Not being in the Eurozone, nor having any intention of being in the Eurozone, there was absolutely no need for the UK to send its budgets to the Commission for prior approval. In spite of this Cameron was willing to enter into a treaty with such a requirement, provided it was made clear that the City was a key matter for the UK just as the CAP is for France and manufacturing policy is for Germany. This the French and the Germans refused to admit, to their eternal discredit.

The EU was already requiring the UK to soften its position on bank regulation (despite what the Sarkosy said) and the UK believes that the EU move is wrong-headed and will hasten the next financial panic, a belief in which I concur. The Tobin tax proposal was also seen as a problem. The Germans and French are not attacking the ability of London to rule its financial matters for the good of the EU. Their only intent is to continue the harm to London and the UK that has already occurred, to the benefit of their two countries.

What did others in the EU think in the run-up to the summit. An article in the 8th December Kindle edition of the Financial Times makes it very clear:

1. The president of the Commission called every EU head and warned them “that if they agreed to change the treaties they had better be prepared to deal with the consequences”
2. In Finland parliamentarians had prevented their government for agreeing to the treaty setting up the rescue fund.
3. In the Netherlands, which has a minority government, the pro-EU opposition parties threatened to call an early election if treaty changes were agreed.
4. In Slovakia, which is facing elections, “EU issues have become pre-eminent”
5. Ireland, which is desperately trying to appease Germany, did not want to have a referendum on the treaty changes.
6. In the UK, despite what the coalition has said, there would have to have been a referendum.
7. In Germany the Free Democratic partners in the coalition have said they would hold a referendum to block an element vital to the eurozone’s €500bn rescue fund,
8. The FT quoted one European diplomats as saying of a treaty change “Even if we would succeed, we may end up with a perfect treaty but no Europe to govern”.
9. In pre-summit meetings core eurozone countries urged reforms without a treaty or only limited ammendments, These included Belgium and Italy
10. Even Portugal wanted a short-term solution

So why were 25 heads of state backing Germany’s idea of a treaty? The answer of course is that they were sucking up to the Germans, hoping to gain through flattery, and at little cost to themselves, the benefits they could not gain for themselves. This has happened because Germany has benefited hugely from the Euro.

Before the Euro the Deutschmark was very strong and, as a result, Germany’s trade was more or less in balance. On the other hand the exchange rate of the Euro against other countries was an average of the various economies in the Euro and this would have been much lower. As a result Germany has benefited from a low exchange rate and its exports have boomed.

The Germans of course think that this is down to them but in reality it is a transfer of wealth to Germany from, not only all other Eurozone countries, but any country to which Germany exports – legalized theft if you will. Germany should be willingly using the wealth it has extracted from the others to back them up now that the bad times have come. But like all robbers this is not going to happen easily. Hence the crowd of fawning sycophants in the Hall of The Robber Baron telling her how great her ideas are and how, if only it wasn’t for that little weasel, they would happily be going along with it. Liars, liars, liars.

If Cameron’s strategy was to bring down the euro and the EU it is clear that his best strategy would have been to agree, softly, to the Treaty and then engage in months of vicious negotiating not only fighting for relief for the City of London and UK manufacturing but also for the inclusion of clauses that would get right under the noses of the president of the Commission, Finnish parliamentarians, opposition parties in the Netherlands, the Slovakians, the Irish, the German Free Democrats and European diplomats, before floating it off onto a sea of hostile referenda and parliaments.

To his credit Cameron did not take the “European” option as the French, German and many others would have done. Instead he showed a degree of honesty and integrity which is quite lacking in European politicians, showing them up for the cynical and dishonest bunch that they are; and for this he has incurred their eternal enmity.

In saying this I am damning Cameron with faint praise. He has shown that at heart he is a European, despite his sometimes heated rhetoric against it; he has shown that whilst the playing fields of England might be a sound foundation for going to war to save the Europeans from a tyranny they are incapable of stopping themselves, they are entirely irrelevant for engaging in politics with them; that at heart he does not have the best interests of England or the people of England at heart; interests that are best served by leaving membership of the EU.

He has instead committed the worst political blunder of his life; he might have saved the Euro! On the other hand the long known weaknesses of the eurozone and their equally long predicted outcomes have come to pass. But it is the same old crew who connived in the eurozone deception and caused the current probem who are still in charge. Will they succeed this time. Well pigs might fly but it won’t be a pretty sight.

The Europeans, who have got what they wanted all along, but none of whom were brave enough to vote for it at the summit are going all out to pin the blame on the UK, presumably because they all secretly think that they cannot succeed and they will be able to blame Cameron. Will Mr Cameron expose the lying and lack of integrity of European politicians when he makes his statement to Parliament on Monday? Will he claim, rightly, that he did more than anyone at that summit to secure the best chances of saving the Euro? Will he make very clear to Parliament that the eurozone now has the best chance of success it will ever get? Will he make it clear that the European politicians are men and women without honour, their word is never to be trusted and their lack of interest in anything except their own advantage at the expense of England’s makes them unfitted to be allied with now, or in the future. Will he call for a referendum on Europe NOW!

Well that pig will not fly! Instead we risk being tied to a Europe of no growth for a decade. Outside the EU we can develop and engage in innovative approaches to growth and social justice. Inside the EU we will remain subject to the dead hand of corrupt and deceitful European politicians.

As the months go by the chances of the people of England retaining a National Health Service get lower and lower.

The latest shock is the news that, compounded over five years, the efficiency target for hospitals is 37%!. John Appleby, chief economist at the King’s Fund was quoted in the Financial Times (29th April) “Its like the unit cost of a hip operation has got to decrease by 37%. How?”

Currently a hip operation costs about £6,000 so a 37% decrease will mean a cost of £3,780. We all know how this will happen. Cut a theatre nurse or two,  reduce the ward staff, cut corners on the rehabilitation and no one will ever know that the quality of the outcomes drop because they will not be measured.

So much for the conservative election pledge to protect front line services with “real terms” increases.

As the FT article said this “may have made it more likely that struggling [English] NHS organisations will be offered to private companies rather than merged with existing foundation trusts”.

In a recent blog, http://bit.ly/ifLlwG, I pointed out that to get a high quality, high value for money health service current research indicated that first you had to spend money on creating the health structures focused on, and with sufficient throughout to deliver, high quality care. Once you have this costs decline because the high quality reduces readmissions (rework), and legal claims (warranty costs) as well as reducing the time required to effect the cure (reduction in cycle time so reducing costs of hospital stays, clinics and so on) and the high throughput reduces unit costs through better utilisation of fixed costs.

The coalition’s NHS strategy for England is schizophrenic, based on political dogma and is almost unbelievably uncaring about those of use who have to use it.

The English Democrats manifesto has a strict recall of an MP by his constituency clause. Coupled with AV working to ensure that politicians produce programmes that are acceptable to more than half the voters would ensure that the sort of fraudulent election promises made by the conservative party would no longer be possible.

So on the 5th May vote English Democrat and vote YES on the referendum!

According to the BBC http://bbc.in/bARDUv the local government expenditure is to be cut in Scotland by 5.6%. Since the Scottish government received only a 4.16% cut in the money given to it by Westminster this seems rather hard on the people of Scotland.

But do not forget that English authorities have already had to make cuts in the last fiscal year, cuts that the Scots were allowed to defer to this year. So the local government cuts this year are actually the total of two years’ cuts.

Mark you had Westminster also started to remove the £4.5 billion subsidy to Scotland that comes from English taxpayers at a rate of £1.1 billion a year the Scottish government would have faced a cut of 7.9% this year. Had this resulted in a pro-rata cut in Scottish local government expenditure of £0.4 billion it would have resulted in a 9.8% cut. A cut that covers two years

Odly enough this is still less than the 9.9% average cut in the central government grant to English local authorities for one year. http://bit.ly/dGmUUK

So when you are told in England that your services have been cut just remember that overall they have not been cut and that the Scots are spending your money on their comfort!

Having lived in England for nearly 36 years I feel at last able to comment on politics. It’s not that I have never been involved or taken an interest in politics(more of that later) but as a Yank I have always been aware that even the natives of these islands are not always aware of what is going on. Let me explain.

To an American British Politics have always seemed quirky. I admire the power given to call elections and all the other posturing that goes with it. Much better that the brash, in your face, American political machine,where everyone fits into a category (nice-eh?) and campaigning goes on for so long that it becomes more like background music. Somehow it all seems to fit with other British institutions like cricket test matches and Bank Holidays. However British is not a word I would use these days. These are largely English institutions. And as the English as a people awake and grasp their identity, my question is: Have they left it too late?

As I watch the politicians on the box doing their bit to ‘sell’ their wares to us I want to shout at them: ‘You just don’t get it!’ I believe that they have not really understood the mind of England. Lack of choice offered by the politicians as they compete to sell us their wares or disparage their opponents wares stops them from hearing our real questions. ‘Why are the English denied their country?’ Why are the ‘suits’ in Europe telling us what to do? Why are we not allowed to hear any views apart from the main ‘approved’ political voices? All they really want to do is tell us how great their ‘big idea’ is compared to their opponents’.

Don’t get me wrong, I am impressed that anyone can stand for Parliament provided they have £500 to waste. What they don’t get is an equal platform for the ideas that they bring (however different) to be heard. Big is heard; small is not. Oh unless you have a controversial platform that just manages to not be legally proscribed like the BNP. Or you are a ‘single issue’ party like UKIP.

In America only folk with access to a good political machine stand for high office. And access to that machine brings much needed cash to pay for all the endless advertising that is required to make a dent on voters’ consciousness. Come on, if you are putting out ads during prime time you have to compete with all the various life changing products on offer. I want a politician who can at least offer me the same thrill as an end to wrinkles or instant weight loss.

So my question is: What has this to do with Democracy? Is it just mindless posturing by a controlling elite who are just slickly manoevring the voters into a pre-determined selection. I am not surprised that so many people don’t bother to vote. The whole thing feels like manipulation and I sympathise with voters who don’t want to be part of it. If Democracy is brought into disrepute then the only alternative for the people is revolution! Something the Yankees know a thing or two about!