Traditional Forms of State Regulation of Banking - Worth Another Try?

Enough of this wimpy stuff about bonuses. Bonuses aren't the point. How a given individual's remuneration package is divided between base salary and add-ons is a detail. The point is how large the overall payment is, and what the payment is made for. & payments to senior staff in state owned banks should be made for benefiting society -say by increasing lending to small and medium sized enterprises -   not the remaining private  shareholders of the bank.

Bonuses are a particular application of the whole performance related pay idea, which, as Tom points out, is looking  increasingly  untenable even to ex-heads of the CBI. There is also an argument about 'aligning incentives' of senior managers with shareholders to , er, prevent them stealing a firm's assets as they are otherwise thought likely to do. This is known as the 'agency problem' in corporate governance theory.  But its never been an argument I've understood: if you think someone may steal from you why give them a job which allows them to do so and then pay them what amounts to protection money?

So I think it may be time to return to a more traditional form of motivational incentives for senior bank executives.  Michael Hudson points out that,

"....banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. .....

Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices."

Worth a try?Just a Modest Proposal.

Two Speed Europe?

We've all woken up this morning to the breathlessly conveyed news that the European political elites have staged an all nighter with the result that most of them have agreed to sign up to a new Treaty to deal with the crisis in the Eurozone. But not Britain.

Predictably, the initial coverage in our domestic media is very much focused on the 'Europsceptic v Europhile' axis. Some idiot Tory backbencher seemed to claim we had left the EU on the the Today programme. This is plainly not true, but we do now formally have the much heralded 'two speed Europe'' coalescing before our eyes. 

Or we do if this new Treaty actually materialises and gets anywhere close to being implemented. This seems rather more important - and rather more of an open question - than the initial UK coverage is allowing for.

To recap: several European nations are, in effect, broke or teetering on the edge of insolvency (this is sometimes dressed up as 'experiencing severe liquidity problems'). For some of them this is primarily  a result of decisions to support failing banks, for others it is perhaps more about failing to establish any kind of effective tax regime.  They mainly owe the money to French and German banks - including, Peston says, increasing quantities to the Bundesbank itself.  This money is denominated in Euros. Let's put it politely: there are very reasonable grounds for suspecting these debts will not be paid or even serviced by the payment of interest. This might yet break the Euro and cause a disorderly return to national currencies - an event that could plunge the world into depression.

So the new Treaty is about imposing a unified fiscal regime on all the signatures subject to qualified majority voting. In other words, a very, very significant slice of national economic policy will be subject to ultimate control by 'Brussels' (understood as a Franco-German hegemony), not national parliaments. Since everyone pays at least lip service to the idea that the way out of the problem is growth ( because debts are easier to pay off out of a growing pot) the question becomes what policies should be pursued to achieve growth - and Brussels will get the final say on what those policies should be. & they really won't include deficit spending on Keynesian stimulus lines:

" Eurozone states' budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of gross domestic product.
• Such a rule will also be introduced in eurozone member states' own national legal systems; they must report national debt issuance plans in advance.
• As soon as a eurozone member state is in breach of the 3% deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of eurozone states is opposed."

 In short, this is a recipe for a Treaty which cuts living standards and the social wage across Europe by over-riding democratic mechanisms. Now Cameron et al have no objection to that per se - how could they, given their domestic policy ? - their beef is with the idea that the City of London might end up being regulated by Brussels rather than (un)regulated by Whitehall or the Bank of England. & it is the City of London and other bourses which have done so much to create this web of unsupportable credit in the first place. So the likes of Richard Murphy find themselves 'strangely conflicted' between a passed up opportunity to control the banksters and sighing with relief at escaping diktat by bureaucrat.

But let's leave that aside for a moment. Let's ask another question - are the plans for this new Treaty actually plausible? Will the peoples of Europe accept them? Or will various European governments, under pressure from their electorates,  find themselves increasingly looking for 'workarounds' just as they did over Maastricht and Lisbon? The 'optics' of this proposed new Treaty are all wrong - its an elite deal stitched up without reference to anyone. It's going to be be terribly politically fragile even if it does manage to stagger through to an actual signing.

The real two speed Europe we should be talking about is not Britain v (most of) The Rest - its about how the politics and the economics of this crisis are working at such different paces from each other, and have to work at such different paces or have governments face the loss of democratic legitimacy. This new Treaty seems an attempt to subsume the political  dynamic to the economic one, defined purely as the economics of financial markets.

The gut feeling of this non economist is that it ain't going to work. 

Addendum

Mason observes:
...by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy.

It has done what the US Republicans would like to do - and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal.

What's more no one yet even certain if it will convince the markets. 

Two Things Worth Browsing Today

The graphic is from here: it shows the changes in relative compensation between executives and average workers in the US over the last fifty years. Click on it to get an enlarged picture.

Keeping that image firmly in mind trot on over to Will at Potlatch, and consider his sharp eyed linkage of bankers compensation and last night's student protests.

"If bankers had just managed to keep a limit on their already-extreme levels of personal appropriation, then the financial crisis may not have turned into a fiscal crisis. Banks may even have remained a private industry, independent of the state. If George Osborne were just willing to treat higher education as a public good amongst many - in need of a harsh squeeze, but no more (he is, after all, a Tory) - then Churchill's statue may not be dawbed in graffiti this morning. But at a certain point, you have to consider the possibility that going too far is an economic and political strategy in its own right."

QE2: Pass the Parcel Redux

Blimey: Mason has explained it in a way even I can understand. Hard to believe he was originally a musical academic.

My precis: basically the Western financial system remains sitting on a time bomb of unacknowledged (i.e. unwritten off) debt. Quantitative Easing is a potential path - actually, the only potential path - out of this. But with that comes the real possibility of other bad stuff. Not inflation - suddenly, that's not the Big Bad Wolf any more (well, not for the moment) - but stagflation and, as seems to be already starting, a currency war. Oh, and no one can explain why QE might work.

But QE isn't enough on its own:

"There needs to be a defibrillating moment where ... large amounts of bad debt are written off in the private sector - above all in the housing market. Then consumers suddenly get access to credit again and then the big cash mountains of the private sector get thrown into the economy in the form of investment.

But for that to happen somebody has to take losses who has not already taken them. That means the banks: they have to take the big hit on mortgages and commercial property they have refused to take; that in turn hits the government, which in the US and UK has "guaranteed the losses" on hundreds of billions of bad debt for the cost of a few tens of billions.....

On top of that, once the final cathartic moment is over, the central banks then have to get out of money printing in an orderly way, allowing quite a bit of inflation to avoid choking off the recovery. One way to do this would be to temporarily abandon inflation targeting - to say: we will keep printing money whatever happens to inflation, until growth reaches a set target and stays there. Bernanke has toyed with this, and it will be interesting to see if he keeps the idea alive.....

QE2 will buy time. But in that time the governments have to act at micro-level to restructure the finance system so that it starts working again."

I think he's saying its time for another round of pass the parcel: when the music stops, someone is going to have huge losses in their hands. Mason says it has to be the bankers if this QE thing is to work - but this government seems to want it to be everybody else.

Balance Sheet Recessions

Via, I learn of the concept of 'balance sheet recessions' at Vox. These, apparently, aren't like normal recessions. Oh no: in a normal, 'textbook', recession capital and labour gradually trickle our of unprofitable sectors of enterprise and reassemble in new areas of endeavour where profits can once again be made. Not so in a balance sheet recession:

The financial crisis has put much of the banking system on the edge – or beyond -- of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market....

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of $2.1 trillion; Nouriel Roubini thinks the total is likely to be $3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent – or nearly so – than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults...deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset."

In other words, those people piously worrying about public sector economic stimuli 'crowding out' private sector investment are in cloud cookoo land. & even if he asks nicely Alistair Darling is unlikely to get the banks to move very much on lending to the 'real' economy: their first priority is to get back all the money they've lost and they'll do that by absorbing public spending onto their balance sheets until they're looking healthy again. Which took absolutely years in Japan.

This, I believe, is sometimes called rewarding successful risk management in line with market conditions. Me, I'm a simple minded soul, and I call it old fashioned class struggle. But with only one side fighting.

Total Bankers Redux

Dunc wanted to know where all the anger's gone a couple of days ago.

Look Duncan, the anger's over here, waving and shouting "coooee" at us:

"...Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.

Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

There are going to be some people who say that some of this stuff isn’t government subsidy so much as ordinary government contracting. After all, do we criticize Boeing for making airplanes or Electric Boat for making submarines during a war? If we don’t do that, then why should we be pissed about Goldman making a profit underwriting TARP repayment stock issuances, or Treasuries?

The difference is that Boeing and Electric Boat didn’t start the war. But these guys on Wall Street causesd this crisis, and now they’re raking in money on the infrastructure their buddies in government have devised to bail them out. It’s a self-fulfilling cycle — beautiful, in a way, but at the same time sort of uniquely disgusting. That they’re going to get away with it is bad enough — that they’re getting praised for it, for being such smart guys, is damn near intolerable."

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Of Fool's Gold, Belatedly

I've only just finished the book: and it is what everyone says it is, a sparkling good read. It is beautifully written with a clarity which most financial commentators can only aspire to. At a personal level I found her authorial 'voice' deeply humane. But it is told as a morality tale of small group psychology: the unstated implication throughout is that if only everyone was as sensible as the JP Morgan gang she foregrounds then things wouldn't have gone so wrong. History only make an appearance in the book in the form of hallowed company traditions; power structures are only 'the regulators'. Despite her clear understanding of the way in which the selling and reselling of increasingly complex derivatives let to a chain of unquantifiable risk linking the big institutions and national economies together she doesn't really present capitalist finance as a system. The best short assessment I've come across is a review by a commentator called Brigg57 on the Red Pepper discussion boards of all places.

I suspect the book is good enough to become the default 'popular' (i.e. used by the non specialist media) account of the origins of the credit crunch, a sort of Galbraith's Great Crash of 1929 in miniature. But it's not a critical account in any structural sense whereas Galbraith's book drips with contempt for the main players of 1929 and their methods. Which might be why Donald McKenzie in the LRB found so much in the Tett book to agree with.

So we still await an influential view on the current crisis which might politically resonate with the the deep if often inchoate unease at what the financial sector has actually done to our economy, society and state finances.

A Non-Economist Asks...

Anne Pettifor says bank money is not a commodity.

....most assume that credit = savings, and that only by mobilising savings or surpluses (generated by production of one sort or another) is it possible for banks or financial institutions to lend money to finance economic activity. In other words, that money (deposits/savings/credit) exists only as the result of economic activity; and those deposits/savings/credit then create economic activity.

On the contrary: it is bank money/credit that creates economic activity - and only then are deposits, surpluses and savings generated. And not the other way around.....

.....we do not have to beg powerful barons - or even rich country taxpayers - to hand over a portion of their savings. We simply have to “use the computer to mark up the size of the account” held by that poor country.

This is what banks were doing for their favoured private clients, and for the less-favoured sub-primers - with the active support of that great credit bubble-blower, Governor Alan Greenspan of the Federal Reserve. It explains why effortless and effectively costless credit creation has to be so carefully regulated. So that it is directed towards productive economic activity - not the kind of lazy, rentier ponzi finance capitalism of this past era when bankers lifted not a single productive finger but effortlessly grew richer and richer by the hour….

When you understand how easily credit/bank money is created, you realize that, unlike oil, or gold or Dutch Tulips, bank money is not a commodity.

Its a human construct, and all it requires to make a loan is for a man or woman to enter a number into a ledger/computer, and to check the loan against collateral and a potential repayment stream. As such there need never be any limit to the creation of bank money/credit."

Now in what sense is this true? Even bank money has a use value and an exchange value (interest rate), or so it seems to me. Help me out here people...and whilst you're doing so perhaps you might link your explanation into Willem Buiter's formidably technical exposition of the precise mechanisms by which the European Central Bank is propping up the big banks of the Eurozone. He appears - at least to my untrained eye - to be saying the banks have captured the 'State' (if the Eurozone can be thought of as a State which it isn't, quite) and that the 'human construct' of credit is simply being used to prop up the system as exists, at the expense of the people who live in it:

"...ECB’s enhanced credit support is mainly a slow and inefficient mechanism for recapitalising the banks - the ECB recently estimated short-term capital needs in the banking system of the Euro Area at about €280bn - without giving the taxpayers and other citizens of the Eurozone a claim on the banks in exchange, it turns the ECB into an agent of the banks (or more precisely of those in control of the banks and of the banks’ unsecured creditors) rather than of the 340 million citizens of the Euro Area."

What's My Line?

A comment in the post below has just reminded me that the single most convincing outline of an alternative 'what-to-do-about-the-banks' policy was provided by Richard Murphy, back in October but no one, absolutely no one as far as I can see, ever took up the idea and ran with it. &, on the net, last October might as well be neolithic times, as we've all got the attention span of goldfish. So go read it now and see what you think.

It's not a strategy for socialism tomorrow. But it is a strategy for structural reform, for breaking the hold of Big Finance on our economy. It is, to use that well worn phrase, a 'modernization' strategy of the Left. (Remember when the Left used to think it knew how to surf the wave of the future? Ah, such memories....)

Now, think about it, what is the Left without a vision of a future? It is a group of people who fight, and quite often lose, defensive battles. Battles to stop things changing for the worse rather than battles to make things change for the better. & I've had a lifetime of it and I'm feeling really, really sick at the prospect of doing it over again when the cuts come after the election.

So let's have Richard's network banking; let's have Boffy's and Chris' self managed organisations (which are more productive anyway); let's have an industrial programme of arms conversion; let's have a Greening of the economy; let's have a different way of looking at public service value In short: let's have some reason to live through the economic pain. Let's have a future.

It is true that the Tories and their allies are trying to log roll the country into the default assumption that cuts must come, and must come quickly and severely after the election whoever wins it. No doubt all those Keynesians are right to say we should wait till the upswing to cut, but the gilt markets might turn at any point and give us very little choice. & whilst I agree with Duncan's newly discovered Texan Post Keynesian that it's about income and wealth equality in the long run, I detect no enthusiasm for an equality of national decline.

It ain't enough for the Left to say 'it-was-the-rich-wot-broke-it-so-they-should-fix-it'. We need a programme. A new AES.

Best Comment on £9.6million p.a. to run RBS

The ever reliable Blood and Treasure:

"It was probably wrong to say that various banks were nationalized over the past year. It would be more accurate to say that after working for the banks as a regulatory contractor for a number of years, the government agreed to be taken over directly by them in a deal funded by the taxpayer. The new financial-political entity is now free to divest itself as much as possible of loss making non-core functions like education and health, freeing up money to remunerate Mr Hester and his friends"

Banks : Too Big Too Ignore

Willem Buiter doesn't like the idea of big banks:

"In banking and most highly leveraged finance, size is a social bad. Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.

• Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
• Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
• Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
• Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
• Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
• Only permit limited liability for narrow banks/public utility banks.
• Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem. That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

In the UK, the otherwise enlightened head of the FSA, Adair Turner, does not see a problem with banks of huge size and with a staggering range of unrelated or conflicted activities. Of all the parties that matter, only the Governor of the Bank of England, Mervyn King, is clear that ‘too big to fail’ is at the heart of the financial crisis we are trying to exit and will be at the heart of the next financial crisis that we are preparing so assiduously."

Stumbling goes further: we need smaller banks not just because big ones will drag us all down if they fail, but because otherwise we have no chance of influencing their behaviour and making them invest in firms, not households. But government policy is just to fatten 'em up and flog 'em back to the market to carry on as before, or so he very plausibly speculates.

So we have the outlines of three broad, overlapping but distinguishable, political economy worldviews:

1. The official position of both Tories and Labour: flog the banks back to the public sector once their balance sheets look a little less seasick, reduce the burden on public finances as soon as and as much as possible and twiddle the regulatory frameworks a bit at the edges. Those memories of the Great Moderation are so sweet that it seems impossible not to recreate that Arcadia, though perhaps we need a few more Black Swan management techniques.

2. The position of the 'guardian-priests' of the international financial system like Buiter, and, possibly, King: twiddling the regulations ain't going to work, though it is no doubt very necessary. We have to save the system from itself by radically redefining the power relationships between its component parts. We've had our Minsky Moment and we don't want another one. If that means governments - and tax payers - have to fore go some temporary relief, then so be it. We're playing for big stakes here and we can't afford to lose. Banks can't be so big as to potentially ruin us all. Interestingly, Vince Cable sometimes sounds like he's in this camp.

3. The position of the unbelievers: it's not just that our international banking - and shadow banking system - has proved so unstable, it's also how it operated before hand. Great inequalities were amplified and massive transfers channelled from poor to rich across the globe. Furthermore, in the heartlands, innovation and new enterprise was radically unattractive because it was so much less profitable to fund than consumption items, like housing, or simple speculation itself. We need to change this, perhaps for reasons of simple national competitiveness, perhaps for reasons to do with the need to green our economy or fry at some point before the end of the century. The banks should work for the rest of us, not the other way round.

What's interesting to me is that the debate around the wisdom or otherwise of stretching out or curtailing the current neo Keynesian demand stimulation policies - that whole 'Austerity v Growth' schtick - can be had within each of these perspectives*. So you get people who actually want very different things apparently agreeing with each other.

*2 hours later I discover Mervyn King has stepped forward to prove my point on this one. To Duncan's very great annoyance.

King's Men Discuss Egg Restoration Options

So Obama announces a new system of banking regulation which the FT editorial describes as structurally 'inelegant' but politically feasible - easier to get through Congress that a complete system re-design - and quite substantial in terms of content. Meanwhile the Governor of the Bank of England makes a public bid for more regulatory influence whilst the Chancellor remains apparently convinced that all is for the best in the best of all possible worlds of regulation. What are those of us outside the rarefied world of banking to make of all this ?

Basically these are 'All the King's Horses and All the King's Men' arguing about how best to put Humpty-Dumpty together again. Larry Elliot is scathing:

"...[after the] most serious financial meltdown in living memory. .....the government is planning no more than a slap on the wrist for the discredited bankers. The message from London – and from the Obama administration in Washington today – is that the chance for radical overhaul has been ducked."

Mervyn King's position is interesting because, on the surface, it appears more radical than that of either Darling or Obama. He wants to insure against systemic risks. He says its not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. But his answer is:

"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements. Or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three. Privately owned and managed institutions that are too big to fail sit oddly with a market economy."(My emphasis)

There is nothing here, on either side of the apparent argument, which questions the dominance of our banking sector over other bits of the economy. There is just a technical argument about how best to get the system working again in the long term and how to technically prevent another lash-up of the scale of last autumn. Nothing about breaking the banks up into manageable proportions. Nothing about holding on to some bits of the current nationalised banks as regional or industrial development finance agencies, nor even anything on the scale of Glass Seagall.

This, of course is a reflection of the big difference between now and the post 1929 period. Then the problem for Obama, Darling and King's predecessors wasn't simply an apparent systemic failure but the existence of systemic alternatives in the form of the still young Soviet Revolution and Fascist Germany. No such alternative exists today and it is very, very striking how little progress the Left has made in building any support for such an alternative despite the depth of the crisis.

"If we’re lucky, it won’t be any worse than Thatcherism."

There's a new benchmark in journalism about the economic crisis and the failure of the banks: John Lancaster's long but incredibly rewarding, incredibly clear and incredibly angry piece in the current London Review of Books. He brings a novelist's clarity to the necessary unpicking of otherwise arcane banking euphemisms. Go educate yourself.

I'll restrict myself to two delicious quotes. First, here he is summing up after a long, penetrating description of the nature and origin of toxic assets and Anglo American governmental attempts to deal with the crisis:

"Many of the banks will turn out to be insolvent. In that case the bank is nationalised, or at the very least goes into administration and receivership. Then, a number of options become available, one of the principal ones being to break the bank up into the viable part of the business, which will eventually be refloated back onto the market, and a ‘bad bank’ of dodgy assets which must be sold off (or arguably held until the values recover) in whatever way makes the most possible money for the taxpayer.Nobody in power wants to do that. Nobody with power in the banking system, and nobody with power in government. Both the British and the American plans to help the banks are very, very, very expensive variations on the theme of sticking their fingers in their ears and loudly singing ‘La la la, I’m not listening.’ This is what’s happened so far."

Second, here he is on the meaning of the disaster:

"....the cost of the financial crisis is going to be paid not over a few years but over a generation, we have a perfect formula for a deep and growing anger. Expectations have risen a lot, over the last three decades; that’s going to have a big impact on how furious people feel about the hard years ahead. The level of future public spending cuts implied in Darling’s recent budget – which included the laughably optimistic idea that the economy will grow by 1.25 per cent next year – is greater than the level of cuts implemented by Thatcher. Remember, that’s the optimistic version. If we’re lucky, it won’t be any worse than Thatcherism."

It's worth remembering this when you hear different economists or politicians comment on this or that latest tactical development. Take that business of the threatened S& P downgrading of Britain's creditworthiness for instance. Basically the siren voices of the Right claimed this was a sign we were heading for a Sovereign default and having to go cap in hand to the IMF. On the other hand people from Left and Centre tended to say, no, this is about a recognition of what we already know and, in any event, there is absolutely no chance of Britain going bust because it will, in time, balance its books through cuts and raised taxes after the election. But that last quote is Lancaster saying what the future is going to look like if the second set of voices are correct - in other words, that's the optimistic scenario.

Fishy Property Rights

Michael Hudson provides a delightful insight into Icelandic property rights.

"...after the war, British trawlers competed with Icelandic fishing boats for the rich cod and other fish. After a series of showdowns extending into the 1970s, Iceland became the leader in establishing the 200-mile limit to define international sea rights....... Iceland issued licenses representing a specified proportion of the annual permitted catch, whose magnitude was set each year based on the estimated fish population. In contrast to classical economic practice, these licenses were not auctioned off each year by the government so as to recover fair value for the nation’s natural resource in the sea. Rather.... they became permanent, and naturally have risen in market price over time. The initial holders – the leading political insiders a century ago – have bequeathed them to their heirs, to be rented out to the actual fishermen or simply kept them in the family. Iceland’s Treasury receives no benefit from harvest the seas. Licenses simply have become a rent-extraction fee, a payment to the former insiders and their successors."(My emphasis)

& it's terribly, terribly crude of me I know, but I can't help thinking, as I read about banking being back on the up, that something very similar has happened in the UK, only with money, not cod.

"Who's this 'we', Paleface...."

"I used to believe this state capture [by the finance sector] took the form of cognitive capture, rather than financial capture. I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture."

Willem Buiter - Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions - enters the 'relative autonomy' of the state debate. It's contracting, according to him it seems.

We're still playing pass the parcel with the unimaginable levels of debt, and the governments of the world are primed to pass them onto - well, not to those who created them, but the rest of us:

"For political expediency reasons, cuts in public spending are likely to fall first on maintenance, public sector capital formation and other forms of productive public expenditure, including spending on education, health and research. Welfare spending in cash or in kind is likely to be the last to be cut"

You don't have to expert in socialist theories of the state to understand this point. Try this analogy: every time a economist on TV uses the word 'us' or 'we' remember the old Lone Ranger joke.

He and his faithful Native American companion Tonto find themselves surround by a Sioux war band, and the masked man asks, "What are we going to do now Tonto?""Who's this 'we', Paleface...." comes the response.

So it is with the banking bailouts.
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Toxic Assets: An Ingenious Solution

Just say they're not toxic. No one will be able to challenge you. You could re-build your balance sheet without any legal qualms then.

No, really. It would be perfectly proper accounting practice.

Still don't believe me? OK, try this guy or these folk.

Disrupting the City?

Two snippets from the Today programme this morning brought the craziness of the current impasse into sharp focus for me.

First, we had the 'anarchists-are-coming-to-get-us-better-dress-down-and-hide-under-bushes' story about City fears of violence next Wednesday on the G20 protest. Rick exhibits a healthy dose of skepticism about whether this will prove anything more than an opportunity for the corporate security staff and police to play soldiers. No doubt some folk in black ski masks may smash a few windows for the cameras though....and the cameras will then depart allowing the police to, ahem, robustly restore order. Cue shocked Daily Mail headlines. (Not about police brutality)

Secondly, we heard that Barclay's shares have soared on news that it won't have to seek financial aid from government. Cue 'green shoots of recovery' headlines in the press no doubt.

To fully understand the relationship here, I advise a careful reading of Willem Buiter's blisteringly angry article on moral hazard which touches on the Barclay's tax memo debacle amongst other issues. You may particularly wish to note his view that,

"Financial nonfeasance, misfeasance and malfeasance thrive on opaqueness, complexity and lack of transparency.....banks ... may be reluctant to accept the state as a major shareholder [because of] the more intense scrutiny of what the bank has on its balance sheet that this is likely to imply."

He goes further:

"What we have seen and continue to see in much of the border-crossing financial sector, however, is a ... literal form of moral hazard: a lack of morals in some key participants in the financial system dance causing major hazards to the financial well-being of millions of powerless victims. Corrupted morality putting at risk genuine, wealth-creating financial intermediation, innovation and risk-taking. This is moral hazard strong..... It makes me sick to see an entire branch of human endeavour brought into disrepute by the actions of a relatively small (but still far too large) number of masters of the universe. There will have to be a reckoning, and not just in the court of history."

Unlike Naomi Klein et al I have nothing against Starbucks per se. I've never really understood why they always get their windows stove in. I don't own a dog on a string and I've no idea how to make a petrol bomb. On the four or five occasions I've ever been in the middle of a demo which turned into a riot I've always beaten a hasty and cowardly retreat.

But I think I know who the real enemy is. & it's not the Class War Buffoons.

Where's My Pitchfork ?

Tom over at Labour and Capital doggedly works his way through the smoke and mirrors provided by the financial sector to justify its own behaviour. His patient unravelling of their arguments about executive pay and 'agency' theory are a model of intellectual engagement and sheer hard graft. Despite once describing himself as a 'weedy social democrat' in my comments box, but I think what he does is more useful than almost all the stirring denunciations of the evil bankers and the rule of capital from the Marxist blogosphere.

Well , mainly I do. But every so often one come across something like this on Bloomberg's about Hedge Fund pay levels:

"The industry’s top earners last year were James Simons of Renaissance Technologies Corp., who took home $2.5 billion; John Paulson of Paulson & Co., $2 billion; John Arnold of Centaurus Energy LP, $1.5 billion, and George Soros of Soros Fund Management LLC, $1.1 billion, according to a survey published in the April issue of Institutional Investor’s Alpha magazine.

Average pay at hedge funds was $794,000 in 2008, down from $940,000 a year earlier, Alpha magazine reported. ....Chief executive officers earned an average of $2 million last year, while chief investment officers made $1.4 million, according to Alpha’s survey. Senior portfolio managers took home $1.1 million and senior traders were paid $790,000."

This is a quote from an article about hedge fund pay falling by 25%.

At times like this Tom's social democratic patience is the furthest thing from my mind. I want a pitchfork, a burning brand and the rest of the peasantry to join me in in a Jacquerie. I really mean it. These levels of remuneration are beyond comprehension.

But even breaking a few windows seems a horrible crime of unpardonable magnitude according to the Press.

I Think too Small Sometimes

Willem Buiter examines why the European Central Bank can't easily do Quantitative Easing, the anti-deflationary move de jour. It's a hugely technical article that I'm not going to pretend I fully understood (Any of my fellow non bankers care to explain a seigniorage Laffer curve without consulting Google? Thought not). But the idea at the heart of it seems simple enough to me: a central bank can only properly function as such if it has the backing of a tax raising state.

In normal times, a lot of effort is put into making this backing as ambiguous as possible to reassure markets that they are free from direct political control - hence the so called independence of the Bank of England. But the BoE is 100% owned by HM Treasury. The ECB is owned by 27 national central banks, each with their own constitution and particular relationship to their home state.

Buiter indicates that the markets are pricing in the possibility of default by some Eurozone national governments - particularly Ireland, Greece, Portugal, Italy and Spain (in that order of risk). So,

".... it is reasonable for the EBC/Eurosystem to insist on a joint and several guarantee by all 16 Eurozone governments for any Eurozone government debt acquired by the ECB...... Such a joint and several guarantee does not exist at the moment - a reflection of the absence of a fiscal Europe and a fiscal Eurozone...The ECB has no fiscal back-up. There is no guarantee, insurance or indemnity for any private credit risk it assumes. "

So it can't easily do Quantitative Easing. Which would seem to suggest either clever folk like Buiter convince them to sort out some 'held-together-with-string' temporary fix (which he doesn't think will work given the Fortis experience), something big has got to change in the democratic architecture of Europe or, simply, deflation beckons across the Eurozone.

Back in December I wrote,

"That hoary old Marxist chestnut of a question, the relative autonomy of the State, may rear its head again. A thousand undergraduate essays ...... will be dusted down and regurgitated. But the old essays may be missing the point. It may be that the thing to explain in 2009 is not the 'gap' between direct class power and State action which Miliband and Poulantzas tried to theorise, but the speed and nature at which this gap decreases."

But I was talking about the UK, not the EU. I think too small sometimes.

A Shrinking City?

So the experts who translate these things for us mere mortals are giving Lord Turner's report on financial regulation a decidedly muted reception. Indeed, the idea that there can even be apolitical regulation is coming in for a bit of a bashing more generally. As far as I can make out, Turner's report is an attempt to put Humpty-Dumpty together again, to restore the City of London to a position where it can feasibly reclaim its role as a major - and hugely profitable - world financial centre.

But never mind whether Lord Turner's proposals will help achieve this - is it actually even a plausible long term aim?

One aspect of the current situation is that it is a crisis of international economic power relations: America - and the West more generally - have been living off the surpluses generated by the BRIC countries and oil producers. World trading arrangements and currency dealings have been calibrated to facilitate this. (If I was still a young hot head I'd start muttering about financial imperialism at this point in the argument, but I'll spare you the purple prose). These have broken down to an extent, and the BRIC countries, most especially China, need to be given a greater voice in how the system works. This must imply that, if and when a more stable system is successfully put together again (that might take some time), these countries will get more out of the new status quo than they got out of what went before. So, in relative terms at least, The US and its epigones - like the UK, above all - will get less.

In the light of this, what are we to make of Robert Peston's warning not to throw out the baby with the bathwater? He says,

"We can perhaps all agree that the UK became too dependent on growth generated from the City.During the past few years, when 10% of economic output, a third of growth and many tens of billions in tax revenues were generated by financial services, we did have far too many of our eggs in one basket.Many would say our dependence on the City was the culmination of decades of failure to broaden the base of our economy: an indictment of the industrial policies of successive governments.But to say that the City became relatively too big and important does not mean we should shrink it to nothing.That would be a fast route, almost certainly, to penury."

At one level this is true: over-night change in our basic national economic structure is simply not plausibly. But we can't go back to where we were before. This isn't simply an emotional spasm of leftism in response to the amoral and anti-social behaviour of the financial world (though I'm with Richard on that one).

No: its about a hard-headed sense of what's happening in the world. If the financial system via which savings transfers from East to West is broken, and the East wants more power in any revised system, then our comparative advantage as a nation in these issues will begin to seep away. Not instantly, of course - and perhaps not even without a few false dawns of temporary upswings along the way. But the probable line of development is clear.

So quite apart from the important and necessary debate on what else this country should do, we also need to be clear about what we want to do with the City - a smaller, more humble City sure, but still a financial centre.

Here's a idea: let's have a system of finance with a three fold purpose, enshrined in statute:

• To direct capital to productive, innovative, employment creating enterprises;
• To ensure a adequate return on the pension funds of millions of people
• To provide mortgages at a safe and sensible level.

& a system of regulation which made judgments on these grounds and these grounds alone.