Category Archives: Banking

Banking, Economics, Financial Sector

Devastation by High Frequency Trading

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From time to time important challenges emerge from the most unlikely sources. Like the Investor’s Chronicle’s dogged 1970s uncovering of Denys Lowson’s criminality, Lowson being a former Lord Mayor of the City of London. Or Computer Weekly’s ultimately successful campaigning against the bureaucracy’s claim of gross negligence on the part of the pilots of Chinook ZD576 which crashed in 1994 on the Mull of Kintyre killing all 29 occupants.

Thanks in large part to Computer Weekly the real cause was revealed as software error in the helicopter’s computer system. Now the magazine PCPlus, whose prime focus is on the latest computer hardware and software, devotes 11 full pages of its current issue to what it refers to as the ‘virtual money crash’, and the role of High Frequency Trading (HFT) in producing what it describes as the ‘unpredictable and unstable world economy’.
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Bank Bonuses, Corruption, Economics, Political Decision

Looting and Rioting – Bob Diamond Again

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Over the past few days, the famine in East Africa, the US loss of its S&P triple A credit rating, the Murdoch disgrace, the Eurozone indebtedness and Greece’s odious debt, and even the World Championship Hen Races in Derbyshire, have all been driven from the front pages, at least in UK, by the looting and burning street riots. Consideration of their underlying causes and recommended solutions have dominated the media. Prime Minister Cameron, for example, expert in policing and broken societies, apparently wants to appoint a native from gun-toting America, to show British police how to do their job.

This blog’s intent is to flag up the impacts of theory on practice. The focus is mainly on the management and governance of real economy organisations, because they are what pays for our education, health and security, and they are where most of us work. The broad contention which has emerged from postings on this site, is that the theory which impacts on those organisations has had a profound, very widespread and more or less wholly negative effect. And that almost certainly includes some motivation for the looting and burning riots.
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Accounting profession, Banking, Economics, Political Decision, Ratings Agencies

Pushing the Economy with AAA Rated String

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Following the demise of Lehman Brothers almost three years ago, the then UK government, being committed free market idealists and N word phobic, pumped trillions of taxpayers’ money into the economy to keep it buoyant. But it did so by funding banks which would otherwise have collapsed, and then trying lamely to persuade them to pass it on to real economy businesses so as to maintain employment. But the banks were reluctant to pass the money on because they needed to rebuild their own balance sheets, having themselves made such a mess of them. The phrase ‘quantitative easing’ was really bank balance sheet easing, and had limited impact on real business and real jobs beyond the financial sector.

Now we are back in the same mess and the talk is again of quantitative easing for the same purpose. The insanity of persisting with the same dysfunctional strategy is the result of the apparently unshakeable belief in free trade, open markets, with minimised government, taxes and public spending. But quantitative easing won’t stimulate the economy and create jobs any more than it did the last time. The only difference between now and then is that instead of the banks being in greatest need, it is now nation states which are seen as the key problems and the focus of the credit rating agencies.
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Banking, Economics, Free Market Capitalism, Political Decision, Taxation

Tea Party Taxation

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US presidential candidate, Michele Bachmann, stands up for the ordinary people of America, the factory workers and housewives, who she says are telling her to stand strong against raising taxes and to fight to reduce government spending, as the way to America’s economic salvation. But even in the self-reliant, can-do US culture, taxes are unavoidable. They are needed to pay for national defence and security as well as those provisions of education, healthcare and social security which support the ordinary people. But, it is argued, raising taxes undermines the US economy and would even be immoral, especially taxes which resulted in the redistribution of income and wealth from one category to another.

The Tea Party approach is by no means unique to the US. Vince Cable may refer to them as ‘right wing nutters’, but the free trade, open markets, minimised government, spending and taxes, are part of the UK coalition government’s mantra of which he is part, just as they are of the GOP in the US. Successive US and UK governments have, since Reagan and Thatcher, broadly accepted these positions. But times have changed and what may have worked as recently as a decade ago, is no longer appropriate, causing harm to both ordinary people and the overall economy, quite undermining Ms Bachmann’s contention. For example, the effects of personal taxation have changed radically.
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Bank Bonuses, Corruption, Economics, Political Decision, Taxation

The Red Herring of Interesting Times

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These interesting times might take our eyes off the things that really matter. During a recent late night discussion on the BBC among the financial cognoscenti, one of the participants warned against getting drawn back into ‘the red herring of banker’s bonuses’. The real issues were the British government and police being in the pockets of the Murdochs, media plurality, the debt crises in Greece, Italy, Ireland, Portugal, etc etc and the future of the Euro, not to mention the changing world roles of the US and China as well as the developing famine in East Africa. Bankers’ bonuses were surely small beer against such giant issues.

Keynes argued that reducing taxes on the poor enabled them to immediately increase their spending which would stimulate growth in the real economy, thus reducing debt and creating jobs. Reducing taxes on the rich did not have that immediate effect, but, the argument ran in Keynes’ day, it enabled them to increase investment in the real economy thus having a long term positive impact on growth. That was then.
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Banking, Corporate Governance, Economics, Free Market Capitalism, Political Decision

The Untruths Which Rule the World

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There is quite a catalogue of actual and potential man-made disasters. They include the risk of Greece defaulting on its debts, followed by Portugal, Ireland and the collapse of the Eurozone, the hollowing out of real economy firms particularly in the UK and to a slightly lesser extent the US, the explosion in inequality of wealth and income symbolised by the obscenity of financial trader’s and bankers’ bonuses, the credit crunch, hedging and short selling, the size and power of financial sectors, the failure to distinguish between investment in real economic activity and purely speculative investment, growth of structural unemployment, the explosion of ‘hatred and contempt’ among ordinary people initially in Greece and Spain, poverty in sub-Saharan Africa, ideologically based policies of the IMF, WTO and the World Bank and the whole unsustainable enterprise destroying earth’s resources and climate, and even threatening human existence.
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Bank Bonuses, Corruption, Economics, Free Market Capitalism, Political Decision

How To Spend It

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The bonuses earned by the bankers, hedgers and various fund managers arise as a result of making fast, smart decisions about price movements in currencies, commodity prices, food, energy and key resource shortages, mergers and acquisitions and the like. The quick returns from such deals ensure that mini speculative bubbles keep getting inflated, and the smarter fund managers make money when the bubbles burst as well as when they inflate. And the smartest and biggest fund managers are able to create bubbles and control their inflation and bursting, that is except the really big, conglomerate bubbles that gather once in a while. So speculative trading continues to grow and the problem of how to spend the resulting bonuses keeps on growing too. It really is quite a problem.

It’s not as though it’s a one off. And it comes on top of a basic salary which very much more than pays for living expenses at quite a generous level. You can do the Veblen thing and go for some conspicuous consumption – conspicuous waste is really not regarded as attractive today even if one was so inadequate as to find it intrinsically appealing. But conspicuous consumption is still seen as admirable. The Financial Times ‘How to Spend it’ Saturday supplement provides some ideas. For example, £81,000 for the Philip Treacy hat as worn by Princess Beatrice (??) at the royal wedding, except it looks so silly. Or £78,000 for the ex-Kate Middleton St Andrews dress. Or a wrist watch, amount spent depending mainly on the weight of gold and diamonds. But really such spends, even if one felt desperate to bolster one’s identity that way, could only provide relatively minor contributions to solving the problem.
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Banking, Corporate Governance, Economics, Political Decision, Public Sector

The Lesson of Southern Cross

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(Originally posted 10.6.2011)On 1st September, 1976, Professor Milton Friedman of Chicago University, economic theoretician and Nobel laureate, addressed the Institute of Economic Affairs in London. The title of his talk was “The Road to Economic Freedom: The Steps from Here to There”. Friedman, being the quintessential free market fundamentalist, took a dim view of the mixed British economy with around 60% of national income then being spent by government. He prescribed the ‘shock treatment’ of low flat rate taxes and wholesale privatisation which a few years later Margaret Thatcher implemented.

His justification for privatising provision of education and healthcare was simplistic in the extreme. ‘There is,’ he argued, ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’ Friedman didn’t actually have any data to support this contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is’ (See Friedman, M, 1977, From Galbraith to Economic Freedom, London: Institute of Economic Affairs, p57).
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Banking, Economics, Political Decision

Change is in the Air

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There seems to be a fresh realisation that people do not necessarily have to put up with the tyranny of authoritarian regimes, despite the apparent demonstrations of power by those who dictate their lives. Thus: Tunisia and Egypt. Thus perhaps, with blood and violence: Libya and Syria, with Bahrein and Yemen in the rear, signalling to the Saudis that change is circling the airspace near them. But the Arab Spring may only be a small part of the story.

Authoritarian rule of the many by a privileged few, is not restricted to primitive dictatorships. The anger of their populations is shared by those in the democratic, “free” West. People are on the streets in Greece and Spain where the talk is of revolution. The aims remain incoherent because the annoyances are so widespread, but the anger is palpable. And it appears to be growing through the EU, even though their governments have all been democratically elected.
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Banking, Financial Sector, Political Decision, Resource Depletion, Shareholder Value

Glencore and their ilk are screwing the world

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The system is wrong, not the people. The financial sector is out of control and is screwing the rest of us. We know traders will trade in anything that looks like making a profit. We know they make profits out of rising prices, and falling prices, it’s just a matter of betting correctly. And we know, if they’re big enough, or close enough to one that is, they can start stories going which affect prices and then bet accordingly. Though we might have thought that was illegal. This month the Financial Times has run a series of articles on Glencore showing how they influence commodity prices for their own profit and everyone else’s loss, and how they are expected to increase their stranglehold in key areas.

Glencore, the world’s largest commodity trader, is in the news because its initial public offering of shares to the London Stock Exchange, scheduled for late May, is expected to value the company at between £60 billion and £73 billion, putting it comfortably in the FTSE100 index on its first day of trading. It may be big but the FT reports that Glencore has paid “almost no corporate taxes on its trading business for years in spite of bumper profits.” That may be no surprise since that’s how these financial sector firms are allowed to work, but the way it trades, revealed in relation to Russian wheat and corn, is more interesting.

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