Number of the Month

June 2012

Annoyance revisited

So, an NHS hospital trust is to be taken over and run by a "trouble-shooter" and new management team. We have recently already used, in relation to national and international debt, the headline "Isn’t it annoying when the inevitable happens?" but it applies accurately to this circumstance. The dreaded PFI has struck at last.

There is nothing that excites a bent finance director or devious finance minister more than the opportunity to hide borrowings off the balance sheet. Thus the billions wasted on worse-than-useless wind turbines are conveniently concealed as a stealth tax on energy bills and so do not appear in the new "honest" government pie charts showing how our onerous direct taxes are spent. The Private Finance Initiative was actually invented by Kenneth Clarke, mainly under the guise of transferring risk (which, incidentally, it has not done) rather than its true purpose, which was to borrow off future generations; but it was in the hands of his New Labour successor that it became a monster. There it lay, growing fat, concealed in the stench of its lair, largely undisturbed by the ineffectual probings of the establishment media. Inevitably it would stir.

Number Watch has been continually banging on about this for a decade, naturally to no avail. That original piece ended with this sentence: Perhaps at some time in the future someone will write the horror story When the borrowing had to stop.

What we could not know then was the astonishing incompetence of the politicians and bureaucrats who were striking hire purchase deals with the savvier private sector operators. The gung-ho insouciance of the Brown era has left a sour inheritance. If an ordinary individual had voluntarily signed up to such a usurious arrangement he would be described as "having learning disabilities" or whatever the current PC euphemism is for being daft. What is the trouble-shooter going to do, change the rules of arithmetic?

So, as ever, all we can do is say to Gordon "Here’s another fine mess you’ve gotten us into.

26/06/12

Imaginary numbers hit the headlines

Scandal after scandal shake the City of London, just as they have Wall Street. The latest is the revelation that LIBOR (London Interbank Offered Rate) has long been continually manipulated for gain by bank operatives. The numbers had little connection with reality and were simply invented by staff to suit the purposes of their trading colleagues. These numbers have an enormous effect on the populace, both direct and indirect. They are used to set the cost of mortgages and credit cards as well as many more obscure but influential types of contract. How could a democratic, civilised society get itself into a position where such prolonged criminality was even possible? The answer, as ever, lies with the actions of the detached political class.

It is a curious feature of politics that policies successful in the short term often become disasters in the long term. In this field the law of unintended consequences exerts a powerful influence. It operates through a series of sub-laws and the two that are most influential in this context are:

1. If you change the rules of the club you change the membership.

2. Authority shared is authority impaired.

It is rare for club rules to go through as dramatic a change as that experienced by the denizens of the financial centre of the City of London during the so-called Big Bang a quarter of a century ago. In tune with the political theories of the time, emanating mainly from the USA, regulation and tradition were swept aside. At the same time the nascent high-tech industries were being crushed by a brutal economic policy: for example, one of the few achievements of the previous administration was the Microelectronics Applications Project, a rare example of a successful government intervention. Over a thousand, mainly new and small, companies were involved. They were not subsidised, but their clients, the more traditional industries, were. Most of them were using their profits to develop new advanced products of their own. Those of us who were pioneering the new digital technology found ourselves giving talks to some of the most senior directors in established companies on the implications of the technology. A couple of years after the deflationary 1981 budget, virtually all those small companies had disappeared and, irony of ironies, the computerisation that was a major part of the Big Bang was installed by foreign suppliers. Undoubtedly some of them had the potential to grow into the important industrial giants of today. Meanwhile, many traditional unreformed industries were allowed to wither. Thus Britain became virtually a single industry economy. Against proverbial precept, it had all its eggs in one basket. So it was en route to becoming a basket case.

Just a generation ago London bankers and stockbrokers lived up to their caricature – bowler-hatted, pin-stripe suited and umbrella furled – as they streamed into the City on their diurnal mass-migration. They lived well, but not ostentatiously so, and their working life was highly regulated, if easy-going. Their motto was "My word is my bond" and, with a few notorious exceptions, they lived by it. Their country cousins, the branch managers, were widely trusted as long term business and family friends and advisors.

Now they are replaced by aggressive braggarts, who flaunt their excessive pay and bonuses, cocking a snook at both their clients and the owners of the businesses they exploit, the shareholders. Tearing up the rule book triggered an avalanche of capital and personnel, mainly from America, which transformed the City, virtually it seemed overnight. What more could any professional gambler want than the right to bet with other people’s money and cream off a substantial share of the profit? The ordinary bank staff were forced into a system that not only exploited themselves but forced them to exploit their customers by pushing on them products that were, to say the least, not in their interest.

Then along came Mr Brown, who moves in mysterious ways. One of his first acts in office was to sell most of the nation’s gold stock at the bottom of the market. No explanation was offered and none has been since. It has been widely interpreted as one of the most incompetent financial decisions in political history and has spawned many conspiracy theories. However you compute it, it cost considerably more than the Black Wednesday fiasco that had eventually brought down the previous government. This was the man who designed our present financial control system.

The bank of England was given freedom of operation in monetary matters, but at the same time emasculated. One of the many endearing traits of our Gordon is his love of complexity, so he thought up a tripartite system of control, dividing authority for supervising the financial sector between the Treasury, the Bank of England and the new FSA. At the same time he openly proclaimed "light touch" regulation. Could there be a more overt invitation to the more picaresque elements in the new City to do their worst?

The UK is now only a bit-part player in the world economy, largely thanks to the achievements of its political class. For this reason, the sources of many of its financial problems originate in the USA. Politics in that nation, including its electoral process, are dominated by big money. Wall Street, despite its shattered moral reputation, is still able to control much of what happens in Congress and unfortunately this includes measures for financial constraint. The disastrous repeal of the Glass-Steagall Act in1999 brings to mind the oft misquoted saying of George Santayana, "Those who cannot remember the past are condemned to repeat it". That act had been put in place to prohibit the sort of financial behaviour that had been a main contributor to the great depression, though it had been another act (Smoot-Hawley) that had so exacerbated that.

The failure of successive governments to protect mutual societies is a major scandal with disastrous results. First class building societies were converted to fourth rate banks, which played a major part in the debacle. Just as foolish were the "Chinese walls" that were supposed to prevent sensitive information from abuse within organizations and attracted derisory comments from nasty old cynics.

The question of whether the big bang was a good or bad thing might be moot, but at a time when we are experiencing the big bust following the big boom its mootness is itself moot. Equally, the reorganisation of national financial control was hardly a triumph of political reasoning.

Number of the month – 290,000,000

This is the magnitude in GBP of the Fine on Barclays for market rigging via LIBOR. Drop in the ocean, tip of the iceberg? Choose your own cliché.

02/07/12

 

Index, search box and begging bowl 

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