Category Archives: Financial Sector

The role of the financial sector and its management

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.

Is Modern Monetary Theory the Answer?

Economic theory continues to evolve as it always has.  That is partly because the real world economy is itself continuously evolving.  But it is also partly because economic theories are far from perfect, but are retained till something better comes along.

Monetary theory is a highly pertinent example right now, given the evolving role of money. As a means of exchange, it has long been reduced to the role of lubricant for relatively minor transactions, with further reduced usage of notes and coin being trialled during the coronavirus lockdown. As a store of value it has long been outperformed by many alternatives of varying security from property to financial speculation. And its lasting function as a unit of exchange is now largely maintained in electronic form enabling further possibilities.

Neoclassical economic theory emerged in mid 19th century as the inadequate but mathematical expression of self-interest maximising humans, profit maximising businesses and efficient markets free from government regulation which the theory promised would be no longer subject to booms and slumps.

That was the context in which monetary theory was given its first coherent expression by Irving Fisher in early 20th century.  It was in the form of a simple equation of exchange: MV=PT, where M is the quantity of money, V the velocity of its circulation, P the overall level of prices and T the volume of transactions taking place in the given time period.  While the equation is a truism and identifies macroeconomic quantities, their content is largely immeasurable and its various interpretations susceptible to simplistic political debate.

Fisher became notorious for his repeated assertion that the stock market had reached ‘a permanently high plateau’. That was just before the 1929 Wall Street Crash, which was followed by the Great Depression, imposed and prolonged by the continued focus on M with policies of austerity. That was only ended by Roosevelt’s relaxing austerity and focusing on V with publicly funded New Deal job creation schemes aimed at putting money into the hands of the poor, who had no choice but to spend it immediately for their survival, thus increasing V and so generating further economic recovery.

The 1970s stagflation was observed by Piatier as having been caused by OPEC’s 400% oil price rises and the stagnation arising from the maturing and decline of 2nd industrial revolution industries.[i]  But neoclassical theorists argued stagflation to be the failure of Keynesian economics, thus enabling monetary theorists to resume control.  But after two decades of application, even leading quantity advocate Milton Friedman admitted the theory had largely failed.[ii]

The lessons of 1929 had been set aside and forgotten as demonstrated by the relearning experience of the early 21st century, a period referred to as ‘the great moderation’ for which both politicians and economists at the time took credit.  That was just before the 2008 crash, which was followed by a decade of austerity in the real economy, which produced only disappointing results, despite massive Quantitative Easing (QE) for the financial economy banking sector – an estimated $14trillion worldwide. [iii]   

That is the context in which Modern Monetary Theory (MMT) emerged, taking account of the limitations of the former theory as well as the evolving possibilities of money itself.  MMT explains how a government that issues its own currency, can control and guide its economic growth absolutely without monetary constraint. That must be the holy grail of modern economy. It does so by promoting growth when needed by increasing the quantity of money in circulation. It could also slow growth by increasing taxation if inflationary pressures threatened to exceed what is advisable. Control of money supply and taxation can both be selective so that the direction of economic growth can also be set. The avoidance of booms and slumps is thus held to be firmly within the grasp of MMT competent governments. The validity of such assumptions will become apparent over the next few years and hopefully it won’t simply be a repeat of the 1929/2008 learning experiences.

Within that broad model, the explosion of new technologies is enabling governments and central banks access to many more detailed control mechanisms which MMT can accommodate. It is a highly dynamic situation in which MMT will continue to develop or could even be replaced by alternative theoretical approaches. One such, currently being promulgated, is Transfinancial Economics (TFE), which takes fuller account of the technological possibilities of developing QE for the global economy.

At this point in time, the possibilities of economic theory, notably of MMT, appear immense, but unpredictable.  As always, the theory is underwritten by political considerations which were previously focused on the M-V dichotomy.

Now, the extreme possibilities of new technologies, make the Real and Financial economic divide absolutely crucial.  The Real Economy is what could produce the needs and wants of everyday life for all people within an environmentally sustainable context. The Financial Economy was initially established to raise the finance for the canals, mills, factories and railways of the first industrial revolution. But since then it has found easier ways of making faster returns than paying for those Real Economy activities. So the Financial Economy has become predatory on the Real by a variety of means, including a process of increasingly sophisticated Merger and Acquisition (M&A) followed by systematic asset stripping and closure of Real Economy organisations. 

It is a process which is ignored since the distinction between the Real and the Financial Economies is not made, a fact celebrated by the simultaneous combination of austerity and QE, symbolic of the global combinations such as tax haven corruptions and the climate crisis.

That Real-Financial dichotomy, so vital to Remaking the Real Economy, is completely ignored by economic theory, including MMT. In orthodox measures such as GDP, a $ is a $, whether it is earned through care home services, bets on the financial casino or prostitution.

However, MMT controls enable both money supply and taxation to be selective, so that the direction of economic progression could be focused on the Real Economy making the financial sector resume its former more restrained role as supportive provider of finance.

Moral philosopher Adam Smith started his inquiry into the nature and causes of the wealth of nations with observation of real economic activity (pin making), rather than theoretical argument. There was no theory at the time.  Real economic activity clearly didn’t require a theory. Today, further progression without detruction might be better achieved if freed from theoretical constraints and diktats.

[i]  Piatier, A., (1984), ‘Barriers to Innovation’, London: Francis Pinter.

[ii] Friedman, M., (2003), in interviews with Joel Bakan for the documentary film ‘The Corporation’, see [accessed 10.January 2020].

[iii] Martin, F., (2014), Money: the Unauthorised Biography, London: Vintage Random House.

The Importance of Competitive Markets

The general purpose of all business should be to innovate and grow, developing technologies, employees and products, delivering value to customers and shareholders as well as for the common good (which includes for future generations living on this planet), through their operations in competitive markets. This is a worthwhile aim from which the economy as a whole and the general population should benefit. That is the arguable aim of ‘light touch regulation’. It is ‘light’ so as to avoid the bureaucratic strangulation of competition and the benefits that flow from it.

But there is a huge flaw in this reasoning. The basic assumption is that unregulated markets are competitive. But the reality is somewhat different.  While most markets are competitive when they first emerge, as they mature, the most successful players achieve greater market shares and in due course become dominant. Such markets are not at all competitive, but are in effect controlled by monopolistically empowered leviathans. Continue reading The Importance of Competitive Markets

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

Fighting for Fairness in 2016

Fighting for fairness and social justice for the population at large may be a minority concern at Westminster, but it has considerable appeal beyond that bubble. The problem is how that legitimate, democratically supported pursuit might be achieved, without any un-British revolutionary disturbances. That is the recurrent problem for Parties seeking social justice for all. Traditionally, they only come to power following prolonged periods of social injustice. And the only Parties currently onside are the Greens and Corbyn-led Labour.

We’ve been here before. The 1929 Wall Street crash followed by Hoover’s austerity driven Great Depression. That ushered in Roosevelt’s presidency and the stimulus driven New Deal, the second wave of which he introduced as follows:
“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that government by organised money is just as dangerous as Government by organised mob.” Was that really 1936?

That quotation is borrowed from “What a Waste”, a study of the disastrous social effects of outsourcing of public services to private business interests reviewed in the previous posting on this site. It also includes a quote regarding the disposal of public assets from Joseph Chamberlain in 1885:
“Some of them have been sold; some of them have been given away by people who had no right to dispose of them; some of them have been lost through apathy and ignorance; some have been stolen by fraud; and some have been acquired by violence.”
Continue reading Fighting for Fairness in 2016

Screwing care homes still makes the easiest money

Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.

Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%.

£500million of debt is a popular care home sum. When private equity Blackstone acquired Southern Cross, then leading UK care home operator, it sold the freehold of the care homes, pocketed £500million proceeds, lumbered the care home business with the costs of leasing back their homes, floated the business on the London Stock Exchange and beat a rapid retreat. It took around 5 years before the rental payments bankrupted Southern Cross. Meanwhile Blackstone were able to repeat the predatory exercise with the £500million.

The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.
Continue reading Screwing care homes still makes the easiest money

Ring-fencing or Separating Banking Activities

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.
Continue reading Ring-fencing or Separating Banking Activities

Devastation by High Frequency Trading

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’.
Continue reading Devastation by High Frequency Trading

Glencore and their ilk are screwing the world

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.

Continue reading Glencore and their ilk are screwing the world

Why Don’t We Make the Bankers Pay?

In the United States, Goldman Sachs, hugely profitable out of the financial crisis, still rules the roost. According to Senator Carl Levin, chair of the senate permanent sub-committee on investigations, in the report on Wall Street and the Financial Crisis, it’s a “sordid story” of a “financial snake-pit, rife with greed, conflicts of interest and wrongdoing.” Levin said he would be recommending Goldman executives be referred for criminal prosecution. But that’s barely news. Goldman have paid for their criminality before. In the UK this startling story is hidden away in a few short paragraphs on page 26 of today’s Guardian (15th April). It hardly qualifies as news. Because everybody knows.

Continue reading Why Don’t We Make the Bankers Pay?