Category Archives: Banking

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
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Fighting Corporate Abuse: Beyond Predatory Capitalism

People are angry about corporate abuses: tax avoidance, asset stripping, fat cat salaries and bonuses and much else. Corporate capitalism has lost its moral compass and its social values. It has plunged the world into recession and austerity and contributed to growing social inequality. The prevailing focus on shareholder value has placed short term profit ahead of constructive investment. The current structures of corporate law and practice are clearly in need of radical reform.

And yet the underlying principles of corporate law – providing for external investment in enterprises which combine the labour of workers to produce goods and services – are not inherently wrong. They have worked over the years to increase prosperity and living standards in many countries. What is needed is a realistic and pragmatic programme to eliminate abuses and promote fairer and more productive alternative corporate structures.
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More Big Six energy rip- offs

The Big Six energy suppliers must be desperately worried. Dermot Nolan, boss of energy regulator Ofgem, is demanding that they explain to customers why they have not lowered gas and electricity prices following wholesale price reductions. They are quick enough to stick them up when wholesale prices rise; they must explain why they don’t cut them when wholesale prices fall. Not only that, but Ed Davey, energy secretary, says they need to ensure they pass on savings to customers as quickly as possible. The Big Six must be quaking in their boots. Or perhaps not!

They don’t pass price reductions on, for the very obvious reason that they don’t have to. Energy supply was privatised because of a simplistic and profoundly misinformed belief in the automatic efficiency and effectiveness of for-profit business and a complete lack of comprehension of what constitutes a competitive market.
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Capitalism to the Rescue

There are an increasing number of live initiatives for making the capitalist system more sustainable and equitable. Improving environmental, social and governance performance would be steps in that direction. Transparency in terms of measuring and reporting progress would also be important. Including content on sustainability and equitable governance in the mandatory curriculum for all secondary, further and higher education students might start to change the general understanding of these critical issues. Creating an alternative system of ethically focused capital markets and enlightened financial institutions might challenge the financial sector to a more enlightened capitalism role.

These initiatives are all positive and worthwhile. But if the generally held core belief persists, that a successful economy depends on people all seeking to maximise their own material self-interest, such innovations will remain niche, if they remain at all. Their impact would be both limited and short-lived.

The original purpose of the capitalist system was to fund industrialisation. That generated the economic gains for entrepreneurs and their stakeholders and the industrial infrastructure paid for by taxes, as well as providing for the common good by improving health, education and general living standards.
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The Real Worth of Co-operation

When all the dust has settled, it will be seen that the Co-operative Bank fiasco will have only added strength to co-operative governance and the co-operative ideal.

The origins of the co-operative movement go back to the industrial revolution and Robert Owen’s mill village at New Lanark. It was common practice then for mill owners to pay employees in funny money which was only exchangeable at the company shop where prices were fixed for the benefit of the owner. Owen’s employees at New Lanark were paid in real money and the company shop sold goods to employees at their cost price. That was the forerunner of the 1844 Rochdale Pioneers, the basic idea being to offer the common man an alternative to being fleeced by the mill owners.
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Why the ‘big six’ energy suppliers are “ripping off” consumers

David Cameron has recently claimed to know a thing or two about economics. So why is he surprised the privately owned ‘big six’ energy providers appear, as Ed Milliband put it, to be “ripping off” consumers? It’s not that they are particularly evil, unethical or exploitative, but that they are dominated by the same economic ideology which led the Thatcher government to privatise gas and electricity in the first place and which Cameron claims to understand. And that same ideology dictates that it is the legal duty of those private companies to maximise shareholder wealth. Such maximisation necessarily involves them in taking decisions which result in the disadvantage of parties other than shareholders, including, as far as they feel is judicious, their customers. So why is Cameron ‘disappointed’?

It is the ideology of Milton Friedman, simplistic populariser of the neoliberal belief. A cornerstone of the ideology is Friedman’s “empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.” The message was often stated. That particular quote is from a lecture Friedman gave to the Institute of Economic Affairs, free market think tank lobbyists, much loved by Margaret Thatcher, some 18 months after she had become leader of the Conservatives. The only supporting evidence offered by Friedman was that his son had pointed it out to him. If it turned out not to be true the basic justification for privatisation would be shown as quite spurious.
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Management and the Next Crash

The Chancellor of the Exchequer is generally pictured as commander of the economy, driving it through a dangerous jungle at the edge of Armageddon, threatened by mortal danger on all sides. Whether he is conceived of as a hugely intelligent and skilful driver, or an ill-informed purveyor of omnishambolic damage, is a matter of political belief. The fundamental error is in the estimation of his power to drive the economy. At most it extends to steering round relatively gentle corners and having some influence over speed. The effectiveness of these limited powers depends on the ability to see dangers far ahead and to make adjustments accordingly. The currently dominant economic ideology is a particular handicap to achieving such foresight. As Chicago Nobel laureate Professor Robert Lucas told the Queen, the best economic theory can do is predict that such events as the 2007-8 crash are unpredictable.

Lots of lessons have been relearned since Lehman’s bust, yet few substantive changes have been made. So it is predictable, and widely predicted, that there will in due course be another, most probably bigger crash than 2007-8. And after that, if no preventive actions are taken, there will be another. And another. Till the changes are made.
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