See-through Society – transparency

Cleaning Up

Chuka Umuna, the Shadow Business Secretary, recently called for companies in the UK to declare their tax payments to Her Majesty’s Revenue and Customs (HMRC). This followed the widely reported, bad publicity surrounding the minimal tax payments made in the UK by Amazon, Google, Starbucks and many others. Whilst not wishing to name and shame, he believes that all companies should glory in the tax they pay. Justin King, head of Sainsbury’s, one of the big four food retailers in the UK, made a similar statement, suggesting that consumers could make change happen through their custom. International Corporations have been cleaning up by transferring their tax liabilities to low tax regimes and tax havens – they can virtually choose where to pay tax.

Nick Clegg, the leader of the Liberal Democrats and Deputy Prime Minister, states in his most recent letter to LibDem members: “The idea of combining a strong economy with a fair and transparent society is something that will also be seen in an international context this year when we host the G8 in Northern Ireland.”

Transparency is becoming the mantra of the well-meaning in society and many would say “about time, too”. While not the answer to all of societies’ ills, it is a precursor to re-directing society towards solving some of the greatest problems we have – because transparency of key information allows people (civil society) to make informed decisions – either on their own (through the marketplace) or through their government.

Sweeping away the leaves

For years, organisations like Transparency International have campaigned for dramatic improvements in the way governments, publicly owned organisations and companies provide important information. The danger with secrecy (and the UK remains a very secretive country) is that beneath the opacity of information lie secrets that those with vested interests wish to keep hidden. Whilst secrecy is always claimed by Governments to benefit all of us where they wish to enforce it, the evidence is usually to the contrary. The benefits of secrecy accrue to vested interests and results in economic mismanagement at best – at worst, in countries which are, for example, resource-rich and economically poor, it leads to mass corruption, impoverishment of the mass of people, illness and suffering.

Economics and economies thrive on the open availability of good information and only monopolies thrive on secrecy. It is only when information is made available that proper judgments can be made by the mass of participants in the marketplace.  In a world population of billions, markets can only work where information is not controlled from the top down. Stockmarkets and financial markets depend on the freest possible flow of information to the widest audience and there has been a progressive move towards freer access to information along with the spread of technology that enables it to be used. The driving force is the same human one that drives freedom and democracy. There is an inherent motor behind individual freedom and the right to self-govern and the same motor drives transparency because it is with transparency that the potential can be seen and with transparency that informed decisions can be made.

Transparency is not closing your eyes when the wind blows

In the UK, a nation that always appears to be governed by a conservative mindset where change is difficult, where the Official Secrets Act dominates, where GCHQ and CCTV appear ubiquitous, where the challenge to maintain a fairness between an open society and a society that bears down on terrorism often seems so far weighed in the latter’s direction, the motor for transparency often seems to be running in neutral. Conservatism (especially in England) means keeping things the same and with direction from the centre. This often means that vested interests operating from the centre or with the centre will disallow the move towards more openness. The Labour government provided a Freedom of Information Act, for example, to the chagrin of its then leader, Tony Blair., who was and remains a centrist. In a sense the provision of the Act was odd, because Labour remains as much a centrist party as the Conservatives. Nevertheless, the human motor for more transparency was stronger than the urge to opacity in this case – even if the Act is not itself allowing the freedoms desired.

Yet, it was a step towards a more open society and towards transparency that many countries would relish. A free press (the subject of so much discussion following and before Leveson) has helped to unearth the secrecy in banking, for example, that has plagued the UK for centuries. Manipulation of LIBOR, money laundering, sub-prime casino banking and support for tax havens may have helped to make London a key banking centre but it did not insulate the UK from the collapse in 2007 – it made it far worse – and “only when the tide goes out do you discover who was swimming naked” (Warren Buffet commenting on naked transparency). Sometimes, opening our eyes hurts.

Nothing to Hide?

One example of eye strain concerns the opacity of the banks and their cozy relationship with Government (not just in the UK). The secrecy allied to the special relationship has hindered the UK to an intolerable degree. Under Nigel Lawson (one of Margaret Thatcher’s Chancellors) the post-manufacturing society was hailed as the future as banks gained more freedoms and we all kept our eyes closed. Yet, we now see Germany as Europe’s economic motor because of its manufacturing prowess and the revitalization of the British motor industry (although hardly any it owned by Brits) is now lauded much louder than our “success” in financial services. The illusion of banking remains, though – as a key driver of the economy rather than what it really is – a provider of services that should assist the real economy. And the illusion has been propped up by a lack of real transparency which enables banking to remain a secret society.

Transparency is the ability to be strong enough to reveal information because there is nothing to hide. The true strength of transparency is the confidence that it portrays. So, the opportunity for companies and Governments to be open, to be transparent, only exists where there is not much to hide. Clearly, international companies that are paying virtually no corporation tax on sizeable UK earnings have something to hide; clearly, those (companies and individuals) who put money into offshore tax havens or to secrecy jurisdictions may have something to hide.

If banks and individuals had nothing to hide, Wegelin, the oldest Swiss bank, which is closing as a result of its plan to take on all the clients of Swiss banks that had decided to be more transparent with the US authorities over tax evasion would still be open for business. Their clients, who wished anonymity, made their way to Wegelin – which had been founded in 1741. They knew they were doing wrong and Wegelin knew the same – and the bank is closing after a hefty fine from US regulators and after 271 years. Secrecy was in the bank’s DNA – it could not evolve to the realities just beginning to dawn in the 21st Century. It became extinct.

So, lack of transparency in a world with eyes opening can be also hurt and be expensive and the US executive is now proving to be vigilant on  behalf of transparency on a world-wide basis – as is the US Congress which passed legislation in 2010 called Dodd-Frank. Part of this related to section 1504 which requires extractive industry companies registered with the SEC (Security and Exchange Commission) to disclose their revenues and taxes paid on a country by country basis worldwide. This includes all companies registered on the NYSE no matter where they are based. The EU looks to be following this example so that the people of resource-rich, economically poor countries will know how much money their precious natural resources raise in annual income and then can follow through what their Governments do with that money.

However, the American Petroleum Institute and the US Chambers of Commerce (vested interests if ever there were) are trying to fight back and have initiated a law suit in the US to nullify section 1504

How curious that libertarians fight on behalf of secrecy – the proponents of a free market arguing against a main tenet of economics – free information.

Battle lines are being drawn – the light and the dark.

21st Century Schizoid Man, King Crimson’s take on Spiro Agnew, was written in 1969 but the 21st Century does even now witness such schizoid tendencies characterized by corporate and governmental secretiveness, emotional coldness and apathy that typifies the illness. The lack of openness is world-wide and exhibited by the Chinese authorities’ suppression of its Southern Weekly newspaper when an editorial criticizing Chinese leadership was thrown out and one supporting the leadership was superimposed. Anyone reading Martin Jacques book “When China Rules the World” would not be surprised at the suppression. It characterizes the central leadership of this “civilization state” but Jacques argues that we see it too much with western eyes. But, what if we in the West are right and democratic freedom and openness are the motors that drive our human endeavours? What if the Chinese have, for 2,000 years, actually got it wrong. As China grows stronger, the move away from freedom for information will intensify and Chambers of Commerce will battle against laws for transparency that they will argue provides Chinese firms with advantages. This is a battle that has to be fought world-wide.

Our pursuit of progressively greater freedom (whether press freedom, open markets, democracies, freedom of speech) and equality (of race, religion (or non-religion, sex, sexual orientation and more) appears to be the real motor rather than the schizoid tendencies of the centrist control of monopolies, dictators, and vested interests. Transparency is a hugely important base upon which this basic human drive can persist. In a post-2007 world where the risk is that wealth is being driven to the top 1%, the drive for transparency is fundamental.

Going Soft on Power

We are all looking back on 2012 as the year when the UK has been said to lead the way in a number of areas – the Olympics, Sir Bradley Wiggins and the Tour de France, Murray and the US Open, James Bond and the Queen, with Danny Boyle wrapping it all up to show the UK on the side of good.

But, like every nation, we are not just the nice guys. The UK has also become better known internationally for bribery and bank irregularities (LIBOR fixing, money laundering for terrorists), the Leveson inquiry into the press and phone hacking, the indictment of our police over Hillsborough, alleged police wrongdoing that led to a cabinet minister resigning (Andrew Mitchell) and Jimmy Savile reminding us all of what this country was like just recently.

So, 2012 has been a very strange year for the UK – a “curate’s egg” of a year. Monocle Magazine (itself named after an eyepiece that was popular in the 19th Century) rated the UK the world’s top “Soft Power” in 2012 as a result of the Olympics, Murray’s tennis feats and James Bond (among other things). Yet, at the same time, our banks are being shown up for massive failures on LIBOR, HSBC’s lack of control and willingness to allow money laundering on an exceptional scale and the recent Rolls Royce bribery allegations.

The UK is home to amazing ideals and potential: from sports stars and a tremendous passion for sport, home of democratic freedoms, a country based on welcoming the world to its shores and an internationalism based on a long-lost Empire and a need to be important but be seen to be doing the right thing; an independent spirit that makes us not want to be subsumed in Europe or the USA but to straddle the middle and be all things to all.

The UK is also home to the World Wildlife Fund and to a host of NGO’s and charities that see the UK as the centre of the struggle for the world to be a better place. Our aid programme (directed by DfID) is well-meaning even if sometimes misguided (recent nonsense in Rwanda being a good example).

Yet, business and financial irregularity brings our self-righteousness back to earth with a bump.  While we may be able to export a high degree of soft power through our great sporting and artistic talents, a nation like the UK has to be wary that its reputation is not completely destroyed by letting our ancient mercantile and trading instincts come first. Sometimes we don’t know if we are on the side of James Bond or SMERSH.

Britain’s “export” trade

The UK was a mercantile nation well before becoming the first into the Industrial Age and its Empire was established on the back of pioneering instincts and a trading mentality – heavily mixed with politics and ownership. Our wealth was built on the back of exploration and an eye for what sold well – whether it was gold or slaves.

Whereas the Chinese and its tributary system did not seek to rule the countries with which it traded, the UK sought vertical integration through Empire. It exported its laws, its systems, its language and its instincts throughout the world – the good and the bad. Writers like Niall Ferguson have debated whether, on balance, the British Empire has done good or bad overall, but, like the apology being demanded currently for Turing, this is history. As AN Wilson so majestically says in “The Elizabethans”, it is hard for us to look back on that age with the eyes and experience of the 21st Century.

What matters today are the after-effects of the actions taken and also in the actions being taken today along with the belief systems that are current. While Monocle may be right that we export some good and reap some soft power, the UK also exports some bad that may well negate the soft power that we so want to aspire to at a time when the West’s economic power is diminishing fast. Joseph Nye calls the mix of soft and hard powers,  our overall “smart power” and we are in danger of losing the “smarts”

When Transparency International – UK was setting up its “Defence against Corruption” project and I was an adviser to them, a great deal of discussion took place about how corruption has three legs  –  the corrupted (the government and individuals who were bribed), the corruptor (usually a company that did the corrupting) and the nation where the corruptor was based.

Much of the discussion around TI’s Corruption Perception Index is about the first, but the latter two are as much party to the corruption as the corrupted.

When Jack Straw originally produced his white paper which ended with the introduction of the Bribery Act (a very late addition to the codifying of our laws and the subject of many years fighting between NGO’s and companies as well as between the UK government and OECD – where we had signed up to the OECD Anti-Bribery Convention many years before), he pointed out that the UK was a relatively bribery-free nation.

It is true that since the times of Samuel Pepys (when anything could be bought through bribery) the UK has cleaned up its act at home. As we became wealthier, we became less corrupt (although there remain many instances of bribery and corruption still).

However, in some ways we became more Confucian – we were most obsessed with doing right at home and exported our worst sins overseas. Companies from the UK in many industries such as energy, construction and aerospace and defence bribed for business. As the recent ITV programme “Exposure” aired on 10th October, 2012 showed, bribery by British firms overseas remains too common despite the Bribery Act. Rolls Royce is accused of two major acts of corruption in Indonesia and China dating back several years. It will have to show that its systems and policies are now consistent with the Bribery Act requirements or staff could be held culpable.

National reputation – national character

In the defence industry, the cry was always “If we don’t bribe, the French will”. The Chinese and Russians may be the chief bribing competitors these days but we have now enacted the Bribery Act – so, by law the exporting of bribery by companies from the UK should be at an end – including any company that does any business in the UK.

Maybe the issues that have been uncovered at Rolls Royce are old news but many concerns persist and suggest that the short-term gain mentality remains. In a posting from October I reported on a Financial Times article (from a survey by FTI Consulting) that showed a third of board members in the UK would bribe if they felt it was needed to win business. This worrying statistic shows clearly that the UK’s soft power base is in danger.

Our 2012 national reputation was portrayed in Danny Boyle’s Olympics opening ceremony as quirky but unselfconscious; a nation of tremendous artistic, scientific, engineering and business success, caring and cultured. Ai Weiwei summed it up well in an article in the Guardian (it is well worth reading the whole article:

“Brilliant. It was very, very well done. This was about Great Britain; it didn’t pretend it was trying to have global appeal. Because Great Britain has self-confidence, it doesn’t need a monumental Olympics.”

This was a characteristic portrayed throughout 2012 – a year when our sporting achievements have been at their highest in athletics, in golf (along with the rest of Europe), in tennis, in cycling and in cricket (we even beat New Zealand at rugby). Only in football (our national sport) has a less than successful and a less than wholesome image been portrayed.

But, maybe this is where the link may be. Football has become a huge business and business has no ethics of its own – we are continuously told that companies have no souls (as tax avoiders such as Google, Starbucks, Amazon and the rest show clearly). Football was a working class sport but is now a multi-billion pound successful business. Its sporting soul has disappeared as our exports grow – its “self-confidence” becoming mere hubris.

Soft power and hard exports

It could be said that football has not suffered yet along with its financial success (it still has its fan base). It took someone like Lord Coe to defeat the doomsayers that forecast the Olympics in London, with its huge corporate branding, would go the same way but it was a success with real people. Football remains hugely popular but the corruption in FIFA allied to racism at football grounds in Eastern Europe and the huge pay gap between the performers (being paid £20,000 and upward per week) and the fans means that its brand is continuously being corrupted.

If, in the age of smart power, if it is to be a continuing success, brand UK has to be clear and focused, not tainted by bad business ethics. It means not just abiding by the rules of international business but setting the standards – to take advantage of the good will that has been gained in 2012.

This means swapping the short-term (unreal) benefits of poor, 19th trading standards (where bribery and corruption was rife) to set real standards that are enshrined in the 2011 Bribery Act but where the UK has not put in the resources to implement the Act, where the US has shown a willingness to prosecute its own malfeasants in a way that shames successive UK governments.

Soft Power has to become (to use Nye’s term) smart power. Smart power is the ability to take advantage of the benefits that come from our leadership in key areas and to trade on them. Danny Boyle (through the Olympics opening ceremony and his refusal of a knighthood) shows the way away from the 19th Century mercantilistic British norms to a UK that has the ability to lead the world with its soft power allied to economic and political capabilities. This means waking up to what the 21st Century could mean – a global economy where improved communications can kill a business in progressively much shorter times as well as upsetting the benefits that the likes of Tolkein (The Hobbit is a classic British tale) and Fleming and the rest have provided to the country as a whole.

It means being self-confident enough to be seen to espouse good business not business at any price or any cost. There was no government reaction to the FT report cited above. There should have been. Doing good business is becoming the next stage of capitalism – we should be at its forefront as the challenge of the Chinese and others (who aspire less to this cause than the vocalized western consensus since WWII) grow: good business rather than bad business.

This is a hard ask in the depths of recession – but, if the UK is to capitalize on its soft power base, then a UK for the 21st Century has to be built on a smart power base – rather than simply going soft.

The Financialist-Political Complex

The Military-Industrial Complex is now old news

 

Investment banks ran amok and created financial disaster; Governments bought up the debt and have created sovereign debt bubbles and a crisis in the Eurozone; banks are now found to be rigging LIBOR and potentially costing savers and borrowers billions of dollars; banks are accused of rigging software that would have told regulators they were channeling drug money and terrorist finances through the banking system; small fines are levied which provides a huge rate of return on those “misdemeanors”.

So it goes on and on from when “the tide went out” in 2007 and we have forgotten the ever-depressing news from just a few years ago. Back in 2009, Lloyds TSB (now 43% owned by the British Government) was fined $350m for similar offences to those HSBC are alleged to have committed.

The US Department of Justice alleged that dating back to 1995, Lloyds falsified wire transfers involving countries or individuals on the US sanctions list.

In effect, the bank removed customer information so that transfers would pass undetected through sanction-focused filters at US banks, violating US federal law aimed at starving terrorists of money in certain countries.

Manhattan District Attorney Robert Morgenthau said: “The Iranian banks have money on deposit in London with Lloyds. They were having Lloyds send the money to the US and beyond and stripping the identification.”

In a statement, Lloyds TSB noted that it set aside £180m last year pending the settlement, and said that it “does not anticipate any further enforcement actions.”

Now, HSBC have made a similar settlement and the regulators are lauded for their achievements three years after the almost-forgotten Lloyds TSB case.

Nepotism

Government, politics and financiers have run nations together for hundreds of years. It is unlikely to change anywhere or anytime soon. What properly functioning societies should be able to do is to work to prevent the worst wrongs being committed. We clearly have not managed that in the last five years and our counter-balancing systems are not in place.

Especially in the USA and UK (but the same is true elsewhere as well) Governments and politicians in most major parties have contrived to provide the finance industry with freedom and have reduced the risk of failure to almost zero. This is now a tired story, repeated many times. Yet, five years on from the initial discovery of sub-prime devastation in the USA, has anything changed? Do we even recognize the real problems?

The nepotism within the family of government and finance persists and becomes more insidious. Banks and the finance industry are by far the most favoured by politicians. Bankers and financiers understand what drives the business of politics as well as what drives the engine of business on which they depend. A core problem is the very understandable reluctance of politicians (and in most cases their lack of understanding) to do anything. Democracies have lost the grip over a key element of our societies – and there is little being done to remedy that problem.

The reasons are simple: one the one hand, banking provides the lubrication for economic growth and, during good times, huge tax revenues ; on the other, political parties are funded by those who have made and still make their money in banking and finance. This is especially true in the USA and UK – which are heavily tilted economically towards the finance industry, but it is also true in the EZ land wherever banking exists (internationally, nationally or regionally, politicians are usually in hock to the finance industry). The interlocking of politics and banking is extraordinarily tight – it has been for a long time. We should not be surprised that very little is being done now to change this. Governments bailed out the banks by taking on their debts and continue to supply massive liquidity to the banking system. The combination of economic growth, tax receipts and party donations is too big for them to ignore.

Post-2007

We say the word changed post 9/11, but what changed post-2007, after the banks were shown to have failed our economies. Sure, many people now vilify the banking community as they do wartime con men or spivs. We feel that the banks and the bankers (especially those in investment banking) have taken us all for a ride. This was a ride they could not lose. They made huge money for themselves as individuals on the upside and lost nothing on the downside. True, a few like Fred Goodwin and recently Bob Diamond have lost their jobs – but, they remain seriously wealthy, having never actually paid for mistakes in the way an entrepreneur would have. They haven’t lost their homes whereas many others have. The risk: reward ratio was and remains massively in favour of bankers and the banks. Nothing has changed.

Banks that are too big to fail are still in place and the Vickers Review in the UK envisages nothing more than Chinese walls between the casino elements and the more traditional forms. Chinese Walls in banks (!) – the same banks that have engaged in LIBOR fixing, in sub-prime marketing, in money laundering. The same banks that are deemed to have dubious ethics and poor control systems, where compliance officers resign because of the lousy job they do and are given as good a job elsewhere in the business (just like arms manufacturers did for their staff caught bribing in the 1980’s).

Banks have now taken on the mantle of the defense companies that were ridiculed in the 1970’s and later for corruption on a world-wide scale (and where corruption continues in many, but differing areas). From the introduction of the Foreign Corrupt Practices Act – FCPA – in 1977 in the USA (which is now under sustained attack in the USA by Chambers of Commerce), it took over 30 years for the UK to pass the Bribery Act and it will take many more years to ensure proper implementation. It is a relentless task to keep corruption under control – society has, though, a way of dealing with it, an understanding of it and a willingness to keep at it.

The Military-Industrial complex remains in place but it is no longer the ogre it once was (in the West anyway – even if the corruption engaged in by China, Russia and other newer entrants is destabilizing that market and affecting the resolve). Now, a bigger threat is the Financialist-Political complex (see Forbes July 2012 – Beware the Financial-Political Complex ) that has forever been in place and is now assuredly seen as a major threat. The only benefit of the financial disasters of 2007 is that the Financialist-Political Complex is no longer under cover – it is now there for all to see just as the Military-Industrial Complex was “uncovered” by Eisenhower in the 1950’s. The big question for the rest of society is what to do about it.

Tom Armistead (http://seekingalpha.com/) described Financialism recently:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.
I would add that Financialism should also include the undue influence that banking and finance have on politics, politicians and governments.

An FCPA for the FPC  (Financialist-Political Complex)

The inherent corruption of the investment banking industry, its progressive drive towards Financialism and its close relationship with Government means that it will take enormous sense of purpose and quite some time to make a change.

What the world needs is an FCPA not just for Financialism but for the Financialist-Political Complex – the FPC – where the world of banking and crazed financial instruments has bank-rolled governments and carries governments and politicians by its supposed economic force.

An FCPA for the FPC would mean that we first have to recognize the problem. It is not just a problem of the banking industry but a recognition that financialism and government are too intertwined and need to be separated – especially in the USA and UK, but, because the world is a global market, world-wide in a way that the OECD convention bribery made the FCPA a world-wide requirement.

  • We need to ensure that tax havens (the spiritual and economic home of financialists) are deprived of their tax haven status.
  • We need to ensure that taxes are paid where profits are made and that the virtual reality world of financialism is not allowed to exploit loopholes in tax regimes.
  • We need to ensure that political parties are not beholden on financialism so that funding for political parties is through contributions limited in size to, say, £10,000 or $15,000 or €11,500 or similar per person or company or association or union.
  • We need to ensure that that the financial instruments of the financialist industry are separated from the rest of the banking industry – not just by Chinese walls but by legal separation into separate entities.
  • We need to ensure that compliance regulation is strong in all countries allowed to carry out international banking and that compliance officers and managers are independently regulated and independent from those who sell financialist products. FATF needs to be given real powers but the OECD and other multi-national organisations should seek to ensure that banking and politics are kept apart and that influences are controlled. This will not inhibit growth – the disasters of the last 5 years have shown the impact of poor banking – its cost is in trillions of dollars.
  • We need to ensure that risk:reward ratios are proper and commensurate with those faced by entrepreneurs – who risk their homes and all their wealth. Managers should not see upward only rewards at the expense of shareholders and society.

The FCPA that led to the OECD anti-bribery convention and later to the Bribery Act in the UK was a forerunner that helped to shape the course  that the western world took in terms of governance and anti-bribery. Its impact, itself, is in danger of being blown off course by the economic problems caused by the financial collapse of 2007 as much as by the new players of China, India, Russia and Brazil. Nevertheless, it shaped a cultural direction that has endured and has done much to re-shape the military-industrial complex.

The financialist-political complex is where the military-industrial complex was before 1977. It needs a massive change in our culture and an understanding that it is not just focused on the banks but also the governments and politicians that depend on them so much that need changing.

Let me finish with another quote from Tom Armistead:

Banks need to be returned to their primary purpose, which is to serve the real economy, as financial intermediaries between those who work, save and invest, and those who need funds to create new means of production, or to buy a home, or a car. 

To go slightly further:

Banks and the whole finance industry need to to be separated from their nepotistic relationship with Governments and politicians so that their interdependence is no longer the massive risk that forces all of us to pay for it. We need an FCPA for the FPC – the financialist-political complex.

EZ money – you can Bank on it!

It is just like a circus act – spinning plates as the audience waits for one to fall. When one falls, the act is over and they all fall. The plates – the Eurozone and banks – are spinning still – just – but the spinner is tiring, there is less time to go and the plates are shaking wildly.

 

Both the European banking system and its impact on the Eurozone are in critical mode. The illnesses are not being treated – we are merely ameliorating the symptoms. The new package of measures announced on 29th June provide some breathing space but the banks are the same banks as they were before and the Eurozone has exactly the same problems as it did on the 28th June.

 

Twin Devils: EZ and Banking

 

Banking is a devilish concoction – see my earlier posting: https://jeffkaye.wordpress.com/2012/02/05/banks-and-time-travel/

which focuses on the Mephistophelean trade that banking makes with us – the bringing forward of tomorrow’s wealth into today (with our soul in return). No government since money was invented has properly understood banking or had the ability to control it and democracies are ill-suited to manage the banks, the bankers or their products (although that is not a case made for ending democracy!).

 

On the same day that the EZ nations announced their new answers to the EZ crisis, UK banks were being vilified for their LIBOR manipulations and for wrongly selling interest rate insurance to small businesses (many of which collapsed under the strain of the repayments when interest rates collapsed under the banking-induced downturn in 2008). It couldn’t be made up!

 

The EZ nations horse-trade over more loans to the banks which bypass the sovereign debt obligations of Italy and Spain, amongst others. Banks will get loans directly from the ECB (for example) – which means that Germany will guarantee 50% of the loans, but France, Italy and Spain will also carry a burden.

 

The twin devils are fighting for their existence and the markets applaud every move – but, the problems persist.

 

Twin headache

 

Banks have existed far longer than the EZ and will outlive it. The likelihood is that the EZ nations, fighting for the survival of the Euro, will continue to miss the point. Banks are not, in the main, national entities, they form part of a world-wide consortium. Banks are a supra-economy and their product – money – can be created easily and changes time – lending and borrowing transform today’s problems into tomorrow’s – in a way that nothing else in economics can do.

 

Banks’ ability to transform time (the magical transformation that lending and, to some extent, insurance provides) is exactly what has provided the EZ with its problems – and the issue that wrecked Lehmans and nearly wrecked the US banking system. The banks’ inability to control themselves within reasonable and rational limits of lending has now been transferred to the countries where they are based. Sovereign debt has been amassed to cover the time travelling antics of the banks. Twin problems.

 

Paying it Back

 

Most economists are unclear about the problems that banks provide when unregulated on a macro-economic scale – all governments suffer the same lack of understanding, Money is not just easily created and employed, it effects transfers between time that equilibrium-based traditional economics does not understand. A loan provided to a company at an interest rate with payments spread over many years represents the ability of that company to achieve something now rather than later. The debt is paid off through interest (the economist’s price of money) and over time. Discounted cash flow techniques (based on interest rates) debase the future – eventually, it completely discounts it as though it was worthless.

 

But, the price of money is not just the interest rate. Price is repaid from tomorrow’s debt mountain when the debts pile up beyond the ability of payers to pay. The devastation of the Greek economy and young people’s work prospects in Spain testify ingloriously to this. The price is a heavy burden when the macro-economic effects of out of control banks are misunderstood. Supply and demand curves for money are meaningless when money is more or less free and money becomes free very often in society – which assumes a zero risk. It happened in the 1990’s and it happened just prior to 2007/8 – money was free because it was being created from nothing – by new forms of leveraging in secondary and tertiary markets that no-one understood. Interest rates were of no use as bankers and financiers scoured the market for easy bets (for that is what they were).

 

Now, we face many years of deleveraging – where yesterday’s over-leveraging is paid back – where time travel gets reversed. It must be that the discounted cash flow calculations were wrong – the assumptions were riddled with errors.

 

3D Chess played with blindfolds in different time zones

 

Economic management of banks and of sovereign debt makes assumptions based on projections that are misunderstood. Fund flows and interest rates that are meant to cover the supply and demand parameters miss the critical build-up of debts at a national level and at an international level. It is the mass of debt and the difficulty of managing that debt pile against a continuously changing assembly of poorer and poorer borrowers that constantly defeats bank management. The constant desire to bring forward projects from tomorrow into today – whether by an individual or a company or a government – feeds that process. It is the drive to consume now, the size, complexity and continuous shifts that make the problem so much greater than it was in the 19th Century.

 

3D Chess played with blindfolds and over different time zones looks easy in comparison and the answers are not easy to come by. The answers being implemented are micro-economic in the way that individual banks are required to increase capital ratios, for example.

 

The complexity in a period of deleveraging allied to a need for growth is enormous. Governments cannot (over time) have it both ways. Most developed nations are over-leveraged having borrowed far too much out of tomorrow’s wealth. At the same time, we are being told that we need more growth to help repay the debts. There is a limited intelligence involved here – or just maybe that the limited intelligence of politics is competing with economic reality. We should all be aware that for those countries in a downward spiral there are but three ways out of this: to deleverage (i.e. pay back debts); to reflate and debase a currency; to default – or a mix of the three. In the US and UK, reflation and currency debasement has been attempted; in Greece, there has been a default; elsewhere in Europe, the can keeps getting kicked but it looks more and more likely that German taxpayers will pay out for Italian and Spanish profligacy without the huge institutional and cultural changes that would make the investment worthwhile.

 

What’s the answer?

 

Governments have been trying to control banks for hundreds of years and failed. In the 21st Century, complexity has risen as has the ability of major banks and their staff to manipulate markets and manipulate customers.

 

This is not just a banking or EZ crisis – we have now to question our economic judgement and whether capitalism as we have practiced it for the last fifty years works. Just like corruption, banks and bankers will swarm into any gap that the market allows. It is not much use to anyone to swing the pendulum back and forth on regulation as economies grow or splutter.

 

After all, the problems in banking and in the EZ are problems of economies and problems that are due to a laissez faire relationship with growth as measured by….money (GDP). The only targets that we (not just the UK but world-wide) measure our success in is in money. The only targets are GDP targets – growth targets are GDP.

 

What is the answer? The answer lies in our ability to bring quality (and ethics) into our economic affairs.

 

Quality vs Quantity

 

As the Chinese and other developing nations rise up the GDP scale and as the world continues to use up its natural resources, we have not assessed why we continue to follow 19th Century economic principles that propose that we spend our way to happiness. GDP growth is important as societies develop – as hunger is eradicated, shelter is found, clothing is ensured and jobs provided. How important it is when we are “grown” is the debate that is now needed. Growth in what?

 

The rush for money (what seems to be the mainstay of society) is what has rushed the banks and EZ into the mire. We don’t understand the impact we are having on the next generation and beyond in terms of debts built-up and resources squandered.

 

We now have a quality vs quantity argument that underlies all the short-term “solutions” that we read about. The right answers require the right questions and the right questions may include something like: “do we need to use up tomorrow?” – that is what banking is, a discounted cash flow estimate of the future where everything is translated into numbers and where quality is completely overcome by the quantitative.

 

Numbers are in charge – and therefore banks (based solely on numbers) are at the forefront of such an economy. EZ crises are based on money and the addiction to numbers – GDP and growth. While this continues, so will our willingness to allow banks to seek out new methods of extracting tomorrow’s benefits to today.

 

To untangle societies from the rush for loans and products that banks supply (and EZ countries end up securing – and paying back through taxation) we should address the root cause – our predilection to the amassing of tomorrow’s money or its equivalent at the expense of tomorrow’s quality of life. Our kids and their kids deserve better – ask young Greeks or Spaniards.