Category Archives: Corruption

Destruction by organised money

80 odd years ago, F D Roosevelt argued that Government by organised money was just as dangerous as Government by organised mob. That assessment was shaped by experience of the run up to the 1929 Wall Street Crash which was followed by the austerity driven Great Depression. We now know it’s much more dangerous than that: leading to the destruction not just of jobs and whole economies, but many of the ecological systems we benefit from on planet earth.

He identified organised money as comprising “business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism (and) war profiteering”. Eisenhower added the “military-industrial complex”. Today, strands of academia and the social media would be included as they argue and promote the theoretical constructs which provide the coat of respectability for organised money’s activities.

The financial sector was largely called into existence to finance the industrialisation process which began in the 18th century and proved far beyond the capacity of the then possessors of capital, mainly the landed gentry. But the sector quickly found far easier ways of making bigger and quicker returns than by long term investment in industry. So the components of organised money came to dominate the financial sector with the ‘robber baron’ excesses which led inevitably to the 1929 crash. That pattern was repeated in the four decades leading up to the 2007-8 crash and subsequent austerity driven decade of lost opportunity.

Those lessons have been rejected by those in power. Government is dictated by organised money whose self-interested criminality is well documented. The Economist described the financial sector as mired in ‘a culture of casual dishonesty’.[i]That culture ignores unprecedented inequalities and denies the imperatives of ecological sustainability. It accepts, simply as a cost of doing ‘business as usual’, the fines for fraud and criminality, so long as they are paid by the corporate entity and the individual decision makers are not held personally responsible.

The saga of such criminality is far too long to reference here. The Financial Times reported that, ‘between 2009 and 2013 the 12 global bankers paid out £105.4bn worth of fines to European and American regulators.’[ii] They were fined for rigging the Forex market, as well as rigging various commodity markets, also for money laundering on behalf of various terrorist organisations and for Mexican drug cartels, not to mention tax evasion and the most energetic avoidance. Those 12 global banks had also made additional provisions in their accounts for a further £61.23bn of anticipated fines for crimes which presumably they knew all about, but which had not yet been uncovered. So a total of £167bn, which was ‘unlikely to be the final hit.

Most financial houses appear to have been behaving in similar fashion as indicated in Remaking the Real Economy.[iii]

So government by organised money is not just predatory on the real economy, and exploitative of the public, but in serving its own sectional interests, it has developed sophisticated means of avoiding and evading taxation and is willing to act with criminal fraudulent intent. Organised money is openly criminal and dominates government, notably in the US and UK.

The net effects are to create ever increasing inequalities of wealth and income both within and between economies, which must at some stage be reversed by whatever means. It also initiates all manner of ecological destructions which must similarly be reversed but within a defined time span.

One of the two first moves has to be to recognise the naked criminality of organised money which includes much of the financial sector. And to correct it.

The other move must be for classical/neoclassical economics to be set aside and disregarded in favour of understanding the practical realities of a modern economy . But that is another story.

Impending Disaster, made in Davos, by Bilderburg

Our world is headed towards disaster. That appears to be widely accepted; as are the reasons for it and what should be done to change direction to a safer, more sustainable, future. The Green Party exists for little else. All that is lacking is the power to achieve that change. Disaster is defined in many different dimensions: climate change, global population growth, unsustainable inequality of wealth and incomes within and between nations, global food insecurity and many other measures of impending doom. The underlying reason why those in power steer their disastrous course, always assuming they are not motivated solely by their own short term self-interest, is their belief in a fundamentally flawed version of what was formerly known as political economy.

Nobel laureate Paul Krugman flagged up one of the most basic errors of the currently dominant Friedmanite take on neoclassical economics [‘Challenging the Oligarchy’, Krugman, New York Review of Books, 17th December, 2015]. Friedman had argued that the development of monopolistic businesses was of no importance since it made no real difference. Krugman identifies that as one of Friedman’s fundamental errors. A complementary Friedman error was to claim business had no responsibility other than to make as much money as possible for stockholders. No wonder discredited ex-Barclays CEO Bob Diamond regarded Friedman as his ‘favourite economist’!

Market power has huge implications for economic behaviour. Failure over the past three decades to pursue anti-trust regulations vigorously has been a major reason for the economic trends we are now experiencing. Krugman identified two as of major importance: the financialisation of business and the ever increasing degree of inequality. Neither is sustainable in the long term, but it is unclear how their termination will be achieved.
Continue reading Impending Disaster, made in Davos, by Bilderburg

Greece Again

So the ECB has agreed to raise its limit on emergency loans to Greek lenders by a further €900m over one week. And acting on the assumption Greece will stay in the Euro, the plan was finalized to provide a €7bn bridging loan to avoid a default on Monday. In response, the Tsipras government has caved in over EU’s insistence on more austerity – tax up, pensions down. So Eurozone finance ministers have agreed to talk about an €86bn rescue package.

What does it all mean?
Continue reading Greece Again

The Greek Example

What would you do if you’d lent loadsamoney to someone and they didn’t pay you back as agreed because they were unemployed and didn’t have the necessary? Would you demand they stop eating so they could repay a bit? Would you start taking stuff from them in lieu of interest payments? Would you threaten them with even worse deprivation, if they didn’t repay in full as agreed? Or would you realise you’d been stupid to lend them all that money in the first place without checking their ability to repay, without even checking if they had a job with some regular income?

Greece can’t repay its debts and the more austerity is enforced, the less able will Greece become. Unemployment already stands at 26% with youth unemployment around 55%. More austerity will only increase those figures reducing Greece’s capability. Martin Wolf suggests the loans to Greece were made recklessly, without due diligence, because the purpose of the loans was not to help Greece but to protect the Euro [‘Greek debt and a default of statesmanship’, Financial Times, 28/1/2015]. Greece exiting would be an example others might follow. So, while exit could be damaging for Greece, for the Euro it would be disastrous, reducing it to the category of an exchange rate peg, rather than a solid currency.

In the aftermath of the 2008 crash, there was much debate as to whether stimulus or austerity would be the best way to return economies to health. The 1930s experience, addressed by the application of common sense and common humanity, saw economies revived by the stimulus exampled by Roosevelt’s New Deal. This hard-learned lesson has been highlighted before at https://gordonpearson.co.uk/2014/10/22/a-new-new-deal/#more-1127
Continue reading The Greek Example

Defending the System

What do Hillsborough, Lance Armstrong, Jimmy Saville, Lady Butler-Sloss and the Institute of Economic Affairs have in common?
The United Kingdom is a relatively congenial place to live. It is fairly tolerant, generally law abiding and relatively non-violent, with the expression of extreme views really not very welcome. UK is like its weather: far from perfect but relatively moderate. And yet! That very tolerance permits of exploitation, so long as it is not too explicit, overt and extreme. Such a system is surely worth conserving and defending.

At the original inquest on the 96 football fans who died 25 years ago at Hillsborough, the coroner wrongly recorded a verdict of accidental death. Twenty years on, and only due to the heroic persistence of relatives of those who died, the police and all public agencies were required to release all relevant documents. Police files were found to have been systematically doctored (116 alterations to statements) so as to absolve the police from blame and suggest some Liverpool fans were responsible, a point forcibly picked up by the Murdoch owned Sun newspaper. In 2012, the original inquest verdicts were quashed and new inquests ordered, and apologies were offered all round from the Prime Minister, the local Police, the Football Association and the then editor of the Sun. The legal process rumbles on (http://hillsboroughinquests.independent.gov.uk/) at huge expense to ensure the system will be seen to at least make nominal improvements for any future Hillsborough disasters.
Continue reading Defending the System

Centrica and the Existential Lie

The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.

In real competitive markets, exploitation of customers, employees and the rest, for the sole benefit of shareholders, is constrained by competition. So everyone benefits. But where a market is carved up between a small number of monopolistic giants, exploitation is inevitable. Some markets are like that. Gas is one. So are most privatised markets because government attempts to create pseudo competitive conditions invariably fail, succeeding only in establishing an additional layer or two of bureaucracy to handle the unavoidable extra regulation.
Continue reading Centrica and the Existential Lie

Glencore, PwC and Horsemeat

Back in July last year, this site pondered what would replace the public company, formerly the most powerful institution in the economy (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). Its numbers had halved over the past decade and the number of small and medium sized firms’ initial public offerings had declined by more than 80%. Shareholders’ funds appeared to be no longer of much worth to the public company, the flow of money having been reversed so that shareholders, and indeed the whole financial sector, were now taking rather than investing, Nevertheless, media interest in the FTSE100 and other stock market indices continues unabated, even though they only measure betting activity on such as M&A rather than real new investment. A posting last month offered a reasoned explanation of how democratic capitalism, which had delivered so much and promised so much more, appeared now to be approaching the buffers – http://www.gordonpearson.co.uk/20/democratic-capitalism/.

The still dominant Friedmanite version of capitalism is now being seen to self-destruct with its array of naïve beliefs and illegality. Company law (eg Companies Act 2006) charges company directors, Friedman’s ‘corporate officials’, with the legal duty of looking after the best interests of the company having regard to the long term and to the interests of all stakeholders. Friedman argued they had no other duty than to make as much money as possible for shareholders. Friedman clearly won hands down against the law, and that despite the fact that ‘corporate officials’ have legal contracts of service and employment with the company, not its shareholders, and those contracts invariably charge them with the duty of looking after the company’s best interests.
Continue reading Glencore, PwC and Horsemeat

The Culture of Irresponsibility

Just over a year after his arrest, Kweku Adoboli’s case has finally reached court. He is in the dock nominally for fraud and false accounting, but actually for losing his employer, Swiss bank UBS, around $2.3bn. Now at last, Adoboli’s defence lawyers have the opportunity to make his case. Which is: that the bank had turned a blind eye to Adoboli and fellow traders exceeding their risk limits so long as they continued to make money. That was the custom and practice at UBS, as it was at Société Générale when Jérôme Kerviel lost them over $6.5bn, and earlier at Barings when Nick Leeson lost them $1.3bn and their independent existence.

Trading in deliberately opaque securities is not based on detailed analysis of fundamental values for which the banks, having acquired special expertise, might be responsible. Decisions are made fast, on the basis of the trader’s personal conviction. If they get it right they are rewarded for their “talent”, if they get it wrong often enough, as Adoboli did, they are designated “rogues” and risk getting locked up. In an unregulated market, there’s no time for hierarchical control or responsibility to be exercised. If a trader had to get formal approval from on high before closing deals, they would quickly cease to compete. So the banks delegate responsibility to the front line, where the culture of irresponsibility rules. Much as it has among the Libor traders which Barclays and others enjoyed. The only reason there aren’t many more ‘rogue traders’ is because the vast majority of trades are now fully automated, and three quarters of them of the ultra-fast variety. Even if Adoboli isn’t locked up, he and many of his former colleagues are certainly redundant.

Investment banks (and many other intermediaries) have made massive profits out of the deliberately opaque swaps and derivative ‘products’, inevitably and deliberately creating speculative bubbles. While those bubbles are inflating, money is sucked out of the real economy of manufacturing and non-financial services, from which returns are relatively mundane and long term. The economy thus becomes unbalanced while the bubbles inflate, with the real being preyed on by the synthetic. And when the bubbles burst, the real economy suffers massive destruction. Under the current UK regime, it’s the banks which are bailed out at huge cost to the taxpayer, not the manufacturers. So real jobs are laid waste.

The Americans who share the ideology are, for all their wild Tea Party excesses, less naïvely committed to it in practice. Lehman Brothers was allowed to go to the wall, while General Motors was bailed out. Successive UK governments allowed its motor industry, among many others, to go to the wall, while bailing out its dodgy banks.

Investment banking’s culture of irresponsibility has gone viral, far beyond the financial sector. Neoclassical free market ideology dominates important parts of the academic, political and industrial nexus. Conservative Party treasurer, Lord Fink, is apparently not embarrassed to argue that Britain should aim to compete with tax havens so as to create more jobs in the City of London. Nor is he widely regarded as a total buffoon for making such a suggestion that would obviously speed up our race to the bottom, with ever more of UK manufacturing laid waste and the City accommodating ever more of the world’s financial parasites.

It really is time for a change of direction. The first necessary steps to rebalancing the economy are fairly obvious, though as noted a few weeks back, the madmen in authority may be reluctant. See http://www.gordonpearson.co.uk/06/our-madmen-in-authority-the-bullingdon-intellectuals/

The Glencores, Xstratas and Blairs

Almost 18 months ago Glencore first featured on this blog – Glencore and others are screwing the world – a posting which highlighted the predatory nature of financial monsters like Glencore. The Financial Times had reported Glencore’s ability and willingness to fix commodity prices for their own profit and everyone else’s loss and how they were expected to increase their monopolistic stranglehold in key markets. Glencore was in the news at that time because of its imminent initial public offering of shares to the London Stock Exchange which was expected to value the company at between £60 billion and £73 billion and facilitate its further expansion through mergers and acquisitions. The FT also reported how the world’s largest commodity trader had paid “almost no corporate taxes on its trading business for years in spite of bumper profits.”

The FT’s report described how Glencore had exercised their monopolistic power to raise prices in the Russian wheat market for a quick profit, at the expense of those millions already struggling on the breadline. That was revealing of the sort of business Glencore is, and the sort of business practices it was prepared to embrace in order to make its money.
Continue reading The Glencores, Xstratas and Blairs

Modifying the Capitalist System

Goldman’s Lloyd Blankfein, Citibank’s Vikram Pandit and, of course, Barclay’s Bob Diamond, all have something in common. Even their normally acquiescent shareholders have been moved to express concern about their latest round of excess, greed and thuggery. But they are only the tip of the ice-berg. It has become custom and practice for top people to take spectacularly from the businesses they command. Whether their take, largely for unacceptable performance, is £5m or £67m makes little difference. It obviously bears no relation to their true worth: their talent, or their hard work.

These are the unacceptable faces of capitalism, the reasons why people have so little trust in the integrity of corporate business. They are why people are demanding ‘new models of capitalism’, ‘ethical capitalism’, ‘capitalism with a conscience’, etc. And why Ed Milliband makes the clear distinction between what he refers to as ‘good capitalism’ and ‘bad capitalism’.

But capitalism with a conscience won’t work. We may all start out with a conscience, but if the system tempts us with untold riches for doing not a lot, then most of us are likely to fall for it. Our intrinsic good intentions will be crowded out by extrinsic incentives or greed. The problem is making the system proof against that simple human frailty. Continue reading Modifying the Capitalist System