Category Archives: Economics

Banking, Corporate Governance, Economics, Political Decision, Social values

Occupy the City as well as Wall Street

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The Occupy Wall Street protest has been described as a deeply instinctive movement to defend America’s traditional values. So far, it has been a peaceful, dignified and respectful, almost wistful, restatement by disparate groups of belief in fairness, individual freedom, democracy, the rule of law and, of course, the social mobility embodied in ‘the American dream’. The protest is against corporate America’s deliberate destruction of those values, through the greed and dishonesty which has been largely justified by theoretical economics.

Demonstrably, the theory doesn’t work. It led directly to the current crisis in which 99% of the population are continuing to pay for the excess of the 1% who caused the problem and who continue to enjoy excess. The bottom 25% are required to shoulder the greatest burden of all, with the bottom 10%, even in the world’s richest economy, being reduced to genuine poverty.

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Economics, Social values, Society, Stakeholder theory

Matters of Belief

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People are, and have always been, able to persuade themselves to believe the weirdest things. If a theory is not testable then it is either rejected or it becomes a matter of belief, which people can be readily persuaded to accept and even proclaim with varying degrees of conviction. Economic theory is by no means unique in this.

A hundred years ago, there being no tv, cinema or even radio, people tended to socialise mostly face to face with real people. And even in godless England, much of that interaction was within the context of the Christian church. Children attended Sunday school, went on Sunday school treats and outings, and in due course were confirmed as church members and regularly attended its services. That was where girls and boys very often met up. In the absence of mass hi-tech entertainments, they joined church youth clubs, played sports for church teams, contributed to church concert parties and drama societies, participating in, and being entertained by, their various amateur productions. As a consequence they were imbued with a set of values which were essentially benign and had some influence over how people behaved to each other. Fairness, honesty and generosity were at the core of those values and were publicly proclaimed, far beyond the church, as the acceptable way to behave. It didn’t mean people believed all the detail the churches promulgated. They didn’t have to. Christian doctrine was a matter for theologians. The mass of people were not overly exercised about the details of belief.

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Economics, Political Decision, Regulation, Taxation

Neoclassical Endogenous Growth and a 50% Tax Rate

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Former UK Chancellor Alistair Darling’s memoir describes Gordon Brown’s approach as ‘a shambles’. As illustration, the much quoted description of a speech by the former Prime Minister about “neoclassical endogenous growth theory”. Brown started before the speech was fully written, so that part way through delivery, “a hand appeared from behind a curtain and handed him the rest of the speech.” It may sound pretty shambolic, but much more important than that: what was Gordon Brown doing talking about neoclassical endogenous growth theory in the first place? He was shadow chancellor at the time, not some first year economics undergraduate. It’s an example of what Keynes described as the “madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

In this regard at least, Gordon Brown was far from unique. Politicians, bankers and business people tend to retain a residual belief in the academic ideology they learned at university and business school. When it’s relevant they seem likely to act according to its dictates, and to be eloquent in its defence, no matter how obviously stupid it appears to be. Thus the current debate about retention of the 50% tax rate for those earning over £150,000 pa.
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Bank Bonuses, Banking, Economics, Financial Sector, Political Decision, Regulation, Taxation

Ring-fencing or Separating Banking Activities

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The Independent Commission on Banking (ICB) is expected, when it reports next Monday, to recommend ring-fencing investment banking (the speculative ‘casino’ activities) from the traditional bank role supporting the real economy. The aim of ring-fencing is said to be to ensure the government never again has to use tax payers’ money to bail out the banks when their speculations go wrong.

However, ring-fencing is a hugely ambiguous concept. No doubt the ICB will deliberate at length on its chosen interpretation. But why bother? If the aim is to insulate traditional banking from the high risk, high return speculation, why ring-fence? Why not separate the two completely, as they were prior to deregulation? Then, if the ‘casino’ banks create a bubble that bursts, they can be allowed to go to the wall with a more limited impact on the real economy. But the bankers wouldn’t like it.
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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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Economics, Moral Hazard, Political Decision, Society, Taxation

Who’s Breaking Society Now?

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David Cameron is following a long line of prime ministers claiming that British society is in moral decline and ‘broken’. The country has always been ‘going to the dogs’. Harold Macmillan suggested it all started when we stopped going to church on Sundays and so lost any regard for what he referred to as ‘Christian charity’. Three questions arise: Is it true? What is the cause? And what can be done about it?

The British system of social relationships between people, and the structure of social institutions and organisation which shape our association with others, are by and large fairly harmonious. Our daily experience of interactions with others, no matter the degree of difference between our ethnicity, gender, age, ability, or economic position, is generally based on mutual consideration and courtesy. Only among football crowds does consideration habitually give way to overt antagonism and even then it is almost invariably laced with humour. Rioting and looting is an exception, and the generous efforts of people in the clean-up operations confirmed the general rule: society is not broken. Yet.
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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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Economics, Political Decision, Public Sector, Regulation

Big Society Public Services – the Next Government Shambles

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The Open Public Services White Paper, announced on 11th July, sneaked out under cover of the Murdoch mess, looks like being the next government created shambles. Like its approach to the NHS, it betrays a breath-taking lack of common-sense and understanding. The government claims its aim is to improve the quality and reduce the cost of all public services. This magical result is to be achieved by opening them up to provision by private and voluntary organisations, in competition with their existing public providers.

Mr Cameron has referred to five main aims in introducing his white paper: choice, diversity, accountability, decentralisation and fairness. The first three are standard shibboleths of the free-trade, open market ideology. They are quite irrelevant to the mass of people facing austerity. People don’t need choice so much as good quality, reliable provision where they can access it. The same applies to diversity. Choice and diversity may both be features of open competitive markets, but have little relevance to the provision of health and social services. Except on purely ideological grounds.
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