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Wednesday, 29 June 2016


The Referendum voting 52/48 for Brexit (UK giving up its EU membership and its special privileges within it) was intended to restore full sovereignty to Parliament, but may yet find Parliament is indeed sovereign and not the people. There are many examples of parliaments overriding EU referenda results. But, so far all MPs who are asked state they will totally respect the poll result. Brexiteers may soon learn they are not getting what they hoped for and were promised by their unelected leaders. And further that they'll get the opposite of what they expected? Our MPs and voters cannot claim to be experts about trade, economics, immigration and international politics, but that does not restrain their sense of political certainties. They believe in democratic votes and majorities and sovereignty of the people and forget the elephant in the room is international big business who clearly said they don't want this. If voters don't take care to care about business, will business feel a duty of care for them? The Spectator magazine thinks Tories were never more divided since the Corn Laws. But Brexit is also a rural revolt and cities versus their hinterlands, and Little England versus Great Britain. Rioters attacked one of my great great grandparents, Prime Minister the Duke of Wellington, in his carriage and at his home in 1830 for his opposition to electoral reform (conceived partly as a solution to rioting by rural workers). he granted full civil rights to Catholics. The Iron Duke was so-called after he erected iron shutters at no.1 London to defend against stone throwing mobs. A similar mob who stoned Apsley House, voted on 23rd June mass against class and small towns against big cities. Our British love of irony is now being fully tested - possibly to destruction. Brexit's English supporters paradoxically say they want "Independence" without immigrants sounding just like Scottish Nationalists in 2014 except for the latter saying they need more immigrants. We will find out in coming months how much independence Europe will decide it wants to have from an anti-communitaire UK. The irony of this? It is that Brexit lost. Brexiteers don't know that much yet because Remain also lost big time and most people foolishly imagine that if one side lost it means the other side has won? I'll try to explain why Brexit has also lost, and done so bigtime?
Wellington as an anglo-irish patrician knew when to be defensive not offensive. He cared for his men like a landlord cares for the peasants far more than was usual and he wept after victory at Waterloo, knowing after nearly thirty battles he never wanted war again. He worried about, or just humorously quipped, when his men were over-exuberant in their cheering, in an aside, this won't do as it smacks too much of the men expressing their own opinions - he, not a natural or modern Democrat was not a one-sided nationalist. Wellington was a natural European, old school, if a mere "Sepoy General" according to Napoleon. he was a pragmatist judging by his wars and politics, not the type to ask the masses (who hadn't a vote) what they thought other than to check they knew what they were being told to think or do.
Voters are never experts or leaders but led. They have views, needs, fears and feelings, but for fixed opinions (like we all know to do, don't we?) they judge, often collectively or socially, if they can, about whatever it is they are told by leaders or experts or employers, and thereby where to place their trust or find out by dint of personal inquiry, asking questions. Too often questions sound to them, to us, like answers. We hear questions clearly but not the answers. Only education teaches us questions are not answers and travel teaches us how the same questions sound different in foreign places. Experts were more insulted (outfall from the last recession and financial crisis) in the campaign than both sides of the campaign insulted each other. Everyone it seemed wanted to agree the EU is a busted flush and blame the Euro, and creeping Federalism and low growth, notwithstanding these are not pressing problems in the UK or in many other member states or that UK by leaving would make risky problems considerably worse?
Democratic opinion is not pure, free, or bottom-up. And in this referendum there was precious little Q&A - everyone sounded like they knew for certain and if not then the question or answer was classed as humbug, dismissed as Project Fear or opportunist and populist lies. Voter opinion is heavily influenced by whatever is said top down and whatever confidence and belief in leaders is thereby won bottom up.(Legislators think restoring capital punishment would win a referendum. So, why refer EU membership to a referendum? One rule of politics used to be don't ask the voters a question you can't comprehensively answer!) On balance, honesty plus integrity versus their opposites, or intuition versus expert opinion, who do we think provided sounder argument in the referendum campaign? And do we think it was that simple or too complicated. What wins over the media's loudhailers, soundbites or paragraphs, directives or explanations? One thing we agree on is the matters at hand are not simple, no simpler than any political-economy gripe.
Whatever the outcome was going to be, this was not about playing safe, but gambling big - how exciting - Scottish referendum repeated with even bigger stakes on the table - all in, risked on a single throw or hand of cards, not a month's pay packet, but the house, job, and the childrens' schooling - maybe not all of that, but enough to worry about excessive risk and the vice of gambling, not fun, serious, and wild impatience if other ways of changing circumstances are safer with better odds, only slower, and no heroics, the Sinn Fein choice: bullet or ballot? And this is England, why should true English care about Scotland or Ireland if co longer feeling like colonialists or control freaks - anyway, maybe, it's them wild Celts who are trying it on with us Saxons - this was the view of a British Eurocrat with a safe permanent job after twenty years in Brussels whose pension had just gone up 10% in sterling terms? Gambling is said to be the last socially acceptable vice and the principal vice of politics and in both cases winning is temporary while losing is permanent. Gamblers get enormous Faustian buzz from throwing long term onto short term, the deeds to the farm, not just the car keys or gold watch, onto the green baize into the pot - such an aristocratic gesture - who knew the country contained so much reckless bravery, so much showiness, poker faces and fake smiles, so much esprit de nation? And doing so, this time, on never more than roughly 50/50 odds - what self-belief, can only be knowing confidence or a con trick, one or t'other, not both; one had to be false, surely?.
Winning is a dangerous fix for history's gamblers. They remember the dream even if they lose. Once gamblers experience winning against the odds or just dream it they are hooked on luck, doomed to try again and again until nothing's left. When Conservatives behave like this it is shocking to see them gambling the nation's past or present certainties for future uncertainty - that we expect only from extremist nationalists and social revolutionaries. Churchill did it when the country's back was to the wall and the threat to democracy and freedom most deadly. He gambled, but not by going to the country, yet knowing the struggle would be long, the costs bankrupting, potentially fatal,. However much he was a nationalist or Imperialist he was warring on for all countries. He was thoroughly an internationalist, not a Boris, Gove, Farage Little Englander.
But, today's circumstances are not extreme, the EU, Muslims at war with themselves and The West not the EU's fault, an evolving political economic product of 70 years of internationalism committed to democratic rights and free markets, however imperfect, still brilliant and wonderful. Yet, listening to Brexiteers one might be forgiven for thinking wartime and of EU as the Despotic Evil Empire run by demagogues (unelected Elect) conspiring to steal English birthrights by forcing us to accepts millions of aliens into our homes and social security queues. Our birthright is not to have to compete at home with Johnny Foreigner, aka Turks, Poles, and every 'other other'.... let's keep that competition out of sight, over the horizon, in trade and whatever aid, not let the buggers shop in our high streets and make out in our sink estates? Even if Brexit is somehow in some degree or reconfiguration better or best, and maybe just marginally so, this cannot be the best way of getting Brexit or of stopping it, won or lost by a single blow at the polls.
Brexit won a battle but lost the war and of course Remain has also lost and the EU has lost too. Who knew all could or would lose; don't games have winners and not just losers - this is not a game - except this sounds too much like saying everyone loses in war. But why has Brexit already lost its gamble too? One reason is that both sides are gamblers but neither of them are The House, the Gaming Club that always wins eventually, the world's multinational system, game without borders, mobile capital able to alter its home/host structures easily. Or maybe we should say the UK was a co-owner of the casino and decided it was more honest to join the players, become one of the little guys. Anti-establishment urges is surely something to do with that idea? Following the banking crisis there is very strong feelings against casino finance and plenty of voters who liked to say they would be happy to be free of the City of London and its greed and insulting attitudes to everyone and everything not playing in their game.
There are many ironies of why both lost, Brexit in particular: Brexit wanted to restore sovereignty to Parliament but that was shredded, devalued, pounded into brain damage, but the monitor's showing life and recovery likely, out of coma in 2-7 years, plus 10 to get well? What began as a solution to a tear in the Tory party flag has instead rent it asunder, Liberal Democrats were all but killed off but might now try digging themselves up to exit the graveyard Labour too, tattered and limp, the only other UK party of government available - take daily antibio + steroids. What was to free our economy is now bringing on recession, disinvestment and capital flight. A plebiscite to empower the majority only handed power to a cross-party minority, 37% of the electorate. Cutting immigration to take migrants' jobs from them will soon trigger mass unemployment Pressing for radical EU reform has bounced right back to become revolution at home - nice trade? Expecting to confirm our central place in Europe (only if Remain won) maginalized us in Europe and globally. Trying to unite the UK around a shared nationalism (or internationalism) now disunites poisonously, fatally? An effort to enthrone Conservatism dethroned it; all the kings men cannot put Tories back together again! Trying to secure national borders made UK more vulnerable, a victim of international forces. The irony list could go not.
Was there ever before in history, except unwinnable wars, a time when such a set of political choices led, in every major aspect, to the opposite of whatever was intended at the outset? - not just hindsight talking or is it; ask what risk assessments were done; why no Plan B or C? One thing for sure (to economists at least) recession was coming down our way soon. All the data told us economists we're well past cycle peak. The recession starting now won't however be blamed on Bankers or Bureaucrats but on Brexiteers. Had Remain won, the blame would land on bureaucrats and economists.
The recession starting now (2 years early) should force a substantial % of Brexiteers into a 90 or 180 degree turn around. Then parliament after a general election can reassert its legal sovereignty to declare the referendum void, voided by unexpected events, by the experts, shock surprise, having spoken true after all. We, maybe a few only, in time looking back may judge how much was really that and how much desperately manufactured to make it seem so by the elephant in the room, by the unelected commercial interests who have big stakes but don't get a vote except by 'voting' with their feet and their bank balances?

Saturday, 25 June 2016


The Brexit Vote in one day looks to have wiped $2 trillion off financial assets in world markets. One quarter of that roughly will be UK and sterling assets added to which in time would be a similar size fall in property values, beginning with a fall of about 10% immediately - a rough guess only so far. The hit to banks' share values will require additions to banks reserves and shrinkage in bank lending - many individuals and companies will have their bank loans pulled. Of mortgages currently outstanding, on average borrowers have lost because of the Brexit vote one quarter of their net housing equity. UK banks may benefit short term from rise in net foreign assets measured in sterling by about £25 billions, assuming 10% exchange rate depreciation. My guess is about £250 billions in loans to businesses by banks are now at risk of being called in early. But, thankfully, these loans may not be cut any time soon thanks to the Bank of England's standby fund with which to finance the liabilities side of banks' balance sheets (in the central bank reserves) to cope with the economic shock of Brexit of precisely £250 billions. This amount can support about half of all UK banks' loans to UK businesses, which were already severely cut, halved, since 2009. UK big businesses issued more corporate bonds and there were net private capital inflows and substantial foreign direct investment, though this has now turned sharply negative i.e. outflows. Across the rest of the EU in the last seven years business loans by banks were cut by one quarter. Lower bank lending has a lot to do with EU slow growth since 2009 in both the UK and the Euro Area (EA, also called eurozone). Low growth is also because private capital flows are not funding trade and payments imbalances as before but making them worse. Hence, trade volumes are down as countries seek to balance their current accounts in a confederation of 28 countries where one third run trade surpluses (worth 2 times China's trade surplus or two time Germany's with the counterpart deficits shared among the 20 EU net importers) and the other two thirds deficits. The main reason for higher national debt and lower growth has been zero growth in bank lending and a shift of several hundred £ billions over the past seven years from relatively productive business lending to relatively unproductive property lending. In the Euro Area the shift from business to housing loans was about Euro 850 billions equating to 7% of Euro Area GDP (For those who are sometimes unsure what GDP means it is net output of the economy = all wages and salaries plus net profits as how we measure the value of work plus whatever is the net foreign trade balance of each country in goods and services). When UK leaves the EU, the EU will have an external trade surplus with the rest of the world about the same size as that of China - hardly evidence of economic weakness, but perhaps worrying to the rest of the world, not least to the USA? Lower bank lending is inevitable in retail and commercial banking. How Brexit will shrink investment banking and wholesale markets in the UK is another question? The City of London and Canary Wharf's financial services may lose much of its international business including Euro-denominated issuance and secondary market transactions, forced to re-locate into a jurisdiction inside the EU or into the Euro Area to bolster its stability - at a cost in UK based employment, tax revenue and a worsening of the UK’s current account deficit with the rest of the world? On the one hand the ECB can for regulatory and systemic risk management reasons insist that Euro denominated capital market clearing transfer into the Euro Area. But that in itself may not mean institutions and thousands of jobs following too. London remains a profoundly large skills centre, attractive in many ways, and a possible refuge from transaction tax, and trading and issuance remain while clearing is elsewhere. The threat of systemic risk or other regulation requiring firms and trading to move may overlook that European banking regulations are part of UK law and not just part of EU law. The UK giving up EU membership does not automatically mean banks are no longer subject to Basel II/III, Solvency II and their formulation within CRD law.
In the weekend after the murder of MP Jo Cox, when the referendum campaign was put on ice, Remain Campaign leaders Cameron and Osborne had intended to talk about the economic bounce of hundreds of billions that would flow into the UK following a majority to retain EU membership. And in the Chancellors' annual Mansion House speech, George Osborne was to warn on the impact on threats to UK financial services if Britain leaves the EU. In major banks, such as JP Morgan, Deutsche, BNP Paribas, HSBC etc., jobs will go not only in London we are told, and that is going to happen. London and the rest of the UK have already lost several hundred thousand finance sector jobs since 2009. The BBC news site reported Mathilde Lemoine,former advisor to French Prime Minister Dominique de Villepin, chief economist at Rothschild Banque Privee and member of French High Council of Public Finances, saying transactions for firms across the EU in euro-denominated securities - a large and important part of UK based financial markets operations - would transfer into the eurozone for execution and clearing as an ECB supervisory requirement - adding that many foreign banks, European banks and also non-European banks will relocate to the eurozone. Some will transfer people and business to Dublin.
Some of the argument about the impact of Brexit on the finance sector in the UK and London is provided by the following paper: There is concern that UK based banks, insurers and asset managers etc. will not be eligible for the single market in financial services and its so-called "passport". But that is not obvious necessarily. All banks' branches have to be licensed and appropriately capitalised in each country anyway and they include many banks and other financial institutions from outside the EU in each major EU country. Home and host country supervisors can also overlook each other's reports to take a holistic view of financial institutions wherever they operate in Europe. Arguably, with a lower £ exchange rate the overheads and wages cost of operating in London and or elsewhere in the UK can become more attractive to foreign banks and others. Many banks have also domesticated more of their own borrowing and reduced their international balance sheets since 2009. The real damage to banks may arise only when full-blown recession arrives, when economic activity generally slows dramatically and property values fall. Euro Area commercial and retail banks have grown their exposures to property considerably to match and overtake UK banks so that generally property lending is now 60% of the combined total of all business and household lending. This is a greater risk concentration than in 2009. Mortgage backed securities will again deteriorate in cash-flow and ratings as default rates rise as many recent borrowers experience negative equity and higher delinquency and vacancy rates. Pulling business loans and shrinking banks' customer lending balance sheets will add to the downturn in business. And among contractors and other suppliers to financial services and all other business sectors there will be a rise in closures and bankruptcies. Brexit, even before it comes into full effect, should bring forward UK recession including a fall in trade both internally and externally and capital flight that will not be greater than increased savings by households and businesses as they refrain from new investment and are either voluntarily or forced into deleveraging (reducing their bank debts). Recession is to be expected anyway before 2020, but will now come earlier and be much worse than it would otherwise have been had UK voted to remain in the EU. UK unemployment that is currently just above 5% (1.7 million) will likely more than double and exceed current unemployment rates across most of the EU of 10% (and in EA of 9%), giving UK the third highest unemployment in Europe, which measn below that of Greece and Spain. There are currently about 17 million unemployed in the EU excluding the UK. UK unemployment can be expected to approach 4 million once recession is confirmed and has matured into a full-on Depression (meaning a longer period of falling output than six months) by 2018 (when the USA economy will also be turning severely down). Why should unemployment rise so high in the Brexit crisis and recession? Employment is at its highest just now for many years and unemployment at its lowest for 10 years. In 1984, it was over 12% with over 3.5 million out of work. There are almost 9 million people of working age in the UK who are not in the labour market and are deemed economically inactive. On the assumption that for every person not in employment of working age 3 people are required to support them who are in work, and that these three also support variously one and half others (children and pensioners with some help from the state and private funds), then 2-3 million more UK unemployment means 15% of the workforce out of work and another 3 million experiencing lower income or less support. When today 15% experience poverty that could almost double! In the countries worst hit by the sovereign risk crisis, where unemployment rose to between 12% and 25% and youth unemployment much higher, and given that Brexit triggers a sovereign risk type of crisis for the UK it seems realistic to expect unemployment to more than double to a level not dissimilar to that experienced in 1984. The high unemployment then did not trigger social revolution because the government was popular after winning the Falklands War. Whichever new Conservative government leadership emerges over the coming months it is unlikely to be popular. The question of immigrants is not an easily solvable one although there is little doubt that a sharp rise in unemployment will choke off the officially calculated, net inward, migrancy count. Even if a new leadership looks as if migrancy is being reduced that will coincide with higher unemployment and not therefore the result intended by many Leave voters who believed they were being outcompeted by migrants for jobs.
One irony in all of this is that youth unemployment will be expecially worse, much higher than the aggregate of say 12%. Youth unemplyment (those aged 16-24) are almost a third of all claimant count. 16% of youth are unemployed today. This will surely double to 30%. And yet it is the young who voted most fervently for remaining in the EU. Young voters however, while they voted by almost two thirds to one third to remain, only 54% voted (compared to 65% of all voters), but the young will live longest with the consequences of the country's decision, a decision won by those over 50 and over 65 who are already mostly out of work and pensioned off. Those who are heading for pension funded retirement soon and who voted to leave will have immediate worries about how far stock prices and property values will fall and what this means for their remaining quality of life and standard of living in retirement? While what is happening to UK youth job prospects may be described as ironic, for the older voters, for the 'turkeys who voted for Christmas' their votes may be described as a paradox. For all who voted to remain that the losses already recorded at over £4,000 per person, the amount that so-called 'Project Fear' warned of, but which are likely to get far worse before they recover, their anger at all this irony and paradox will be one of complete rage and disgust and in this I am with them. The next government leadership is facing internal and external challenges that will be as testing as what might be described as something similar to requiring intelligent policy-making equivalent to running a war-economy in peacetime?

BREXIT ECONOMY MONITOR - UK loses its no claims bonus

Voters on all sides of the EU vote including those who did not vote are in shock at the unexpected result – a majority of 52/48 for ending UK membership of the EU – and the rest of Europe and much of the rest of the world are also stunned. In any major question it is realistic to begin with one third for, one third against and one third undecided. In the outcome of the UK referendum only 37% of the UK electorate was sufficient for the 52% majority for leaving. 34% of the electorate voted to remain in the EU. 29% of the electorate did not vote. The political campaign of Leave and Remain failed to sway more than 15% of undecided or indifferent voters? Many of them may have been voters who felt unable to judge the complex question and who felt they could and should leave the decision to others who apparently did know what way to vote? The older the voters the more they voted to leave and only the oldest segments, those over 50 and over 65, voted in majority to leave but this was sufficient for a simple majority gained by 1.9% or 634,000 voting to leave instead of voting to Remain. Older voters had the least to gain or lose for themselves and perhaps felt freer to vote according to their gut-feel rather than according to any hard-headed assessment of consequences.
Older voters have most of their life experience in post WW2 decades of improved economic progress and of stability, recovery and protection from economic shocks, in decades when the welfare state and international policy making was growing and evolving. Younger voters' lives have been more dominated by experience of international economic crisis and awareness of global inter-dependencies such as global ecology and climate change, and have become more aware of, and open to, internationalism in culture, travel, education, employment, consumerism and internationally shared moral outlook and universal values. To younger people the world appears less intimidating in respect of differences in traditional cultures, ethnicity, religion, human aspirations, notwithstanding its various wars and conflicts, including economic migrants and political refugees. Differences across the world are for many young people matters of curiosity rather than threatening their own traditional values. At the same time young people are also the foot solders of armed reaction to defend traditions, but not we hope in large numbers in Europe thanks to Europe's internationalism, and not in the UK, not after its own recently ended 30 years of low intensity war about regional nationalism. The Leave campaign leadership celebrate what to them is peaceful revolution by the ballot box, and a revolution in direct defiance of the advice of the vast majority of the political establishment and of business and finance leaders and experts. There is now a renewed nationalist anger, however, in Ireland and Scotland because English voters appear to have ignored or dismissed the risk that voting to leave the EU could lead eventually to a splitting apart of the UK? There is immense anger among young people about how older people voted. Majorities for leaving in regions where two thirds of voters live, in all but three regions, most notably in the Midlands and on the East Coast where people living in poverty are between 20% and 25% of households and where cultural participation rates are lowest and jobs in tourism and tourist numbers are least. Differences in educational attainment or youth unemployment or other factors such as children living with parents and housing shortages do not seem to be factors that coincide with the voting pattern. Scotland and Northern Ireland are two regions with acute concerns about their status in the UK and whether it can continue or may be changed by the referendum vote. London is the most internationalist part of the UK in every respect and therefore had a strong and obviously compelling logic, economic, social, and cultural, for remaining in the EU. What is most striking, however, is that all regions of the UK voted to leave except Northern Ireland, Scotland, and London.
If the Brexit vote had gone the other way there would have been an economy boost and bounce in the UK and an affirmation of its majority commitment to internationalism, to its youth and to the future, to remaining dynamic and outward looking. The world's financial markets were on balance anticipating that. There are many UK and foreign investors who now feel misled and are facing losses they will by any means seek to recover from, and in the first instance by now expecting prolonged relative falls in UK output and asset values reflected in falling exchange rate and dramatically worsening current account (worsening financial balances with the rest of the world short term and longer term). The world economy and financial markets cannot resume business as usual; all major trends are disrupted and values (all relative) are made more uncertain and volatile. The UK is more than the 5th largest GDP economy ($2.8 trillion, 1% of world population and 3.7% of world GDP). In the last 7 years the UK economy recovered fitfully and slowly in line with the USA from the financial crisis and recession by attracting capital flows because of its relative status as a safe haven from other countries and regions of greater uncertainty, and did so because of the UK status as a stable democracy and conservatively managed economy, becoming also a major tax haven with a stable currency relative to other major currencies, and where property investment could expect far above average asset appreciation gains compared to those in other developed economies. With the Brexit referendum vote the UK has spectacularly lost its credibility as a safe haven, a stable currency, etc. Financial inflows that previously benefited the UK, on which the property boom in London relied, are now reversed. USA, Switzerland, Japan, Germany are the immediate recipients of capital flight from the UK. Risk is like insurance and the UK overnight lost its no-claims bonus. It will be years, possibly one to two decades, before trade, investment and capital flows will again focus on UK without a significant "tail risk" cost.
At this time it is very hard to imagine or foresee any event or agreements that could arise to offset or reverse the politics and negative economic consequences of the Brexit vote. Like an insurance policy, the UK economy will now have to pay higher premiums in all of its economy dealings for an indefinite period. The UK along with the USA are obviously both past the maturity peak of their closely conjoined economic cycle. Cyclical behaviour is unavoidable and inevitable and therefore it is not hard to estimate their next recession being due to arrive in 2018-2020. The Brexit vote and the accompanying economic shock with private capital flight will trigger the UK's next recession earlier than expected, beginning immediately, and make that shock downturn more severe and longer-lasting i.e. longer and harder to recover from. If negotiations and new agreements are conducted intelligently there can be a softening of consequences, but this will stretch and test the technical, legal, financial and general macroeconomic policy skills of UK and EU leaders extremely, and do so beyond all previous precedents. If the internationalism of Europe is to survive with its political credibility intact and economic benefits demonstrable and assured the EU dynamics will have to transform dramatically and urgently. Whatever happens the UK economy may become the victim of what the rest of the EU needs to do now for itself much as the Greek economy was squeezed almost mercilessly for the sake of protecting the EU's Stability Pact rues and assumptions? What did go wrong in the EU in the wake of the financial crisis in banking, the recessions, and the sovereign risk crisis, was painfully low growth recovery (near stagnation)as the EU switched from being a mutually supportive region of economic convergence to one of medium term divergence with the risk of long term divergence threatening its continuity and financial sustainability. The EU Commission was not allowed to grow its financial resources to deal with widening imbalances as private capita flows worsened the trade imbalances within the EU. A huge responsibility for the Euro Area was delegated onto the balance sheet of the European Central Bank. It responded well and even beyond anyone's expectations but without clear and coordinated political policy guidance and without lessons thereby learned and turned into new formal policy directions. The UK over 40 years has relied like all other EU members on the EU institutions for policy making and for many thousands of important agreements. Like an oil painting with many layers over many years and generations of artists refining the detailing, the UK has now taken an oil rag to that EU shared canvas and wiped its part not clean but into a mucky mess where the painting work has to start again beginning with many fundamentals, with a lot of surface preparation and under-painting. But are to avoid or mitigate first going through a painful relearning process that may include massive rise in unemployment, further major loss to the industrial base and a shredding of much of the UK's financial services and other industries? Just as the financial crisis triggered a massive questioning and self-doubt and general loss of confidence. much anger and few precise or agreed answers, the UK crisis, a crisis for itself, for the EU, and for the international system, the questioning will now have to embrace far more than just banking and finance. And, again, we may find it very hard to understand and agree policy solutions. There are dramatic events elsewhere and great economic uncertainties and fears. The UK crisis may just be one dimension, however poignant and intellectually challenging, perhaps even dangerous in security consequences including UK break-up, one dimension of a so-called 'perfect storm' gathering together and correlating globally? When the so-called "global financial crisis" did not lead to a revolutionary change or adjustment to the standard theories of political-economy, the macroeconomics profession may now be face with a bigger and more comprehensive challenge and one where our political constituencies and electorates will not have the patience for anything that sounds like more of the same as before or a re-booting to try to return to any point in the past. New solutions will have to be genuinely new and for that we have to work a lot harder and be open to embracing solutions that appear counter-intuitive and even profoundly paradoxical. Are the politicians and their electorates capable of accepting such innovations as may be necessary to avoid economic calamities and more new wars? At certain times in history the world appears to be about choosing between military action and economics, between armed conflict and coordinated trade policy (why the EEC/EU was created and the Cold War eventually ended), between nationalism and internationalism? The skills and political capacities of economists to respond effectively to what is happening in the world are perhaps never more needed or vital to the world's future prospects of peace or war than they are now?

Sunday, 11 January 2015

Joseph Stiglitz wrote

"At long last, the United States is showing signs of recovery from the crisis that erupted at the end of President George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world. But it is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening. If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long term. Then again, it could be worse. Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow. In most European Union countries, per capita GDP is less than it was before the crisis. A lost half-decade is quickly turning into a whole one. Behind the cold statistics, lives are being ruined, dreams are being dashed, and families are falling apart (or not being formed) as stagnation – depression in some places – runs on year after year." It is less that the damage is long term than that the efforts at recovery are the wrong ones. Europe's combined national governments could not agree on a communitaire coordinated responses that would mitigate the extreme imbalances, and so the job became perforce delegated to the ECB. The ECB had to replace Eur1.5tn roughly three quarters of bank deposits including inter-bank loans that afrom 2010 fled 'north' out of Portugal, Italy, Ireland, Greece, Spain. Two third of this has returned or been replaced. But, the renewed anxiety about Greece is causing a another phase of capital flight. Germany and other net exporters and UK (the first economy to benefit from US recovery) are not throwing money at the Mediterranean economies in crisis; the net flow is the other way about. The EU differes from USA insofar as extreme trade and payments imbalances are explicit within the EU and Euro Area without sufficient compensating rebalancing transfers as in the USA. Stiglitz sounds non-plussed by the EU's ineffective or negative action given that it at least has - "The EU has highly talented, highly educated people. Its member countries have strong legal frameworks and well-functioning societies. Before the crisis, most even had well-functioning economies. In some places, productivity per hour – or the rate of its growth – was among the highest in the world. But Europe is not a victim. Yes, America mismanaged its economy; but, no, the US did not somehow manage to impose the brunt of the global fallout on Europe. The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro. Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone. The current mess stems partly from adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition. Hubris has also played a role. How else to explain the fact that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong? These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed. In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. At least the International Monetary Fund has owned up to these intellectual and policy failures." There tends to be an asymmetry within cycles, in that US downturns are transmitted faster to the euro area (and the rest of the world) than upturns: it takes around two quarters for downturns to be transmitted from the United States to the euro area, while it takes around six quarters for upturns. Second, taking into account estimates of potential output and output gaps (using those provided by the European Commission), the euro area as a whole tends to exhibit milder downturns, but also slower rebounds compared with the United States. A third important stylised fact is that recessions associated with financial crises, as well as those associated with credit crunches and house price busts, have typically been particularly severe and protracted. japan is a ood example where government recovery measures focused on refinancing the banks rather than refinancing the underlying economy. Arguably much the same has been occurring in the EU post-2008. Similarly, refinancing government and or the banks combined with austerity measures in government programmes and no effective pressure on banks to maintain and grow but not shrink bank lending to the rest of the economy is not a recipe for boosting general GDP growth. Stiglitz goes on to say: "Europe’s leaders remain convinced that structural reform must be their top priority. But the problems they point to were apparent in the years before the crisis, and they were not stopping growth then. What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself, and a reversal of austerity policies, which have failed time and again to reignite economic growth. Those who thought that the euro could not survive have been repeatedly proven wrong. But the critics have been right about one thing: unless the structure of the eurozone is reformed, and austerity reversed, Europe will not recover. The drama in Europe is far from over. One of the EU’s strengths is the vitality of its democracies. But the euro took away from citizens – especially in the crisis countries – any say over their economic destiny. Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy – only to have the new government continue on the same course dictated from Brussels, Frankfurt, and Berlin. But for how long can this continue? And how will voters react? Throughout Europe, we have seen the alarming growth of extreme nationalist parties, running counter to the Enlightenment values that have made Europe so successful. In some places, large separatist movements are rising. Now Greece is posing yet another test for Europe. The decline in Greek GDP since 2010 is far worse than that which confronted America during the Great Depression of the 1930s. Youth unemployment is over 50%. Prime Minister Antonis Samaras’s government has failed, and now, owing to the parliament’s inability to choose a new Greek president, an early general election will be held on January 25. The left opposition Syriza party, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls. If Syriza wins but does not take power, a principal reason will be fear of how the EU will respond. Fear is not the noblest of emotions, and it will not give rise to the kind of national consensus that Greece needs in order to move forward. The issue is not Greece. It is Europe. If Europe does not change its ways – if it does not reform the eurozone and repeal austerity – a popular backlash will become inevitable. Greece may stay the course this time. But this economic madness cannot continue forever. Democracy will not permit it. But how much more pain will Europe have to endure before reason is restored?" Austerity policies are intuitively chosen by politicians who do not grasp how piublic and private sectors interact and who assume they can act significantly independantly of each other. There is limited understanding of how the public sector has sole responsibility for dragging national GDPs out of recession and how in EU especially this has to be an EU-wide effort. yet, the smaller the European economy the more it is assumed to be less dependant on EU-wide policy when the opposite is true.

Sunday, 21 October 2012

Citicorp - Vikram Pandit's ejection

When a CEO and COO both are sudenly ejected we assume a corporate power-play. In this case the failure that appeared to trigger hands-on Chairman Mike O'Neil's acceptance of Pandit's and Havens's resignations, according to the FT, is the Federal Reserve (US banking regulator) decision to "fail" Citibank's stress test results and stop its proposed share buy-back and insist the bank build up its reserve capital instead - an argument that could also be applied to non-guaranteed bonus pay-outs. Pandit's original appointment to head up Citi was opposed by the FDIC. Pandit also had a reputation for impatience and angry outbursts - not surprising in view of the travails of Citi in 2007, a bank that would have been broken up if not for the international legal and regulatory cost complications. The problems of the stress tests on the 19 top US banks are onerous on top of their dumbed-down macro-economic simplicity. Three failed last March. It is simply remarkable that Citi could not deliver sufficient intelligence to do this job well. The Fed reviewed the bank balance sheets to determine whether they could withstand a crisis that sends unemployment to 13 percent, causes stock prices to be cut in half and lowers home prices 21 percent from today's levels. Citi's failure was a shock. Analysts expected the bank to pass after it reported two years of profits and some expected the bank to increase its dividend to 10 cents a share and buy back stock. Pandit opted to buy back stock, to reward shareholders, try to boost the stock after over 80% fall and thereby annouce return to normal health. Instead the stock fell in the after-market. For banks that failed, the Fed can stop them from paying dividends or buying back stock. The Fed can also force them to raise money by selling additional stock or issuing debt. In fact regulators can force the bank to do anything it deems necessary including selling assets. Smith Barney was sold by Citi at below book value. The Fed has conducted the stress tests each year since 2009. March this year was the first time that the results were made public. The problem is really that banks on both sides of the Atlantic have never had it spelled out to them clearly and forcefully what their central banks (regulators & government) have done for them and what is expected of them. Banks are like any major private corporations extremely unwilling in any case to give in to regulator and government pressure, to be dictated to, because that sends a long term precedent. They have failed to appreciate what the regulations (Basel II etc.) demand, essentially that the banks are fully conscious of their macro-economic circumstances. This also demands having risk officers and macro-economists in the boardroom, which most bank main boardrooms fear and resist absolutely because it means granting techical experts the power to stop short-termist high risk decisions. The Credit Crunch overlay on recession (US and UK beginning in 2008) doubled the nominal (unrealised) capital losses of the major banks. The central banks and governments stepped in and effectively refinanced half of the loss in expectation that this would be recovered over a few years out of collateral and security cover of bad loans and investment losses. The banks had to recover the other half by selling assets, cutting costs and rebalancing their balance sheets. The continuing weak economies of the US and UK and later of the Euro Area when it entered its full recession after 2011, meant that assets including operating units had to be sold bekow book value (at a realised loss) and cost-cutting has been sluggish (not least to maintain bonuses and because major risk accounting and general ledger systems all need replacing). Changing the profiles of balance sheets cannot be done quickly except in derivatives exposure, which does not according to the accounting rules make a big enough difference to capital reserve requirements. The most important changes in the balance sheets require US and UK banks especially to shift loan exposures from property lending to industrial production and that means from higher to lower margins. The banks are most reluctant to do this even though it would do most to improve economic growth, especially by boosting small business lending. A macro-political problem is that banks resist mightily the idea that they should forego short term profits for longer term economic health. This is the battleground that regulators if given enough political support must focus on. It is what the banking regulations are primarily concerned with - the role of bankiing in the wider economy.

Tuesday, 31 January 2012


Tobin Tax - and the Merkozy version that David Cameron rejected to protect the City of London's premier position in world markets? He may or may not have understood issues of its practicality? Probably not, since if he believed it to be unworkable he might have said so or simply gone along with it until the idea falls over? But, of course, the spat between Cameron and Sarkozy (ongoing) is a political win-win.
No one is asking publicly, however, whether taxing wholesale financial dealing transactions is technically feasible?
Whose and what massive computing facility will be needed to track & tax, or is it to be reported only by the taxable firms and are they all known in every jurisdiction when so much trading volume is cross-border?
There are enormous technical problems facing the whole concept. It is an idea that plays well with the general public and may even put the fear up some bankers who should know better. The fact is that it will take years to create a workable tax system. What are the problems?
- all cash markets do not officially report all transactions, most of them none:
- FX (foreign exchange trading) we know only its size as a rough guess from a periodic survey every few years covering only a few weeks in one month (a survey coordinated by the bank of International Settlements - BIS)
- Bonds markets turnover are only reported by what is transacted in exchanges (to be found glob ally in FIBV data), but that is a very small %, less than 5% of the total
- Money markets trading has no officially collected reported data and few people know how to even estimate what it might be - a few $trillions for sure
- We know a lot more about derivatives trading volumes because these go through exchanges, mostly, but not all; many are between banks and their clients only
- ditto commodities, which is almost all through exchanges
- there are issues about black box trading, dark pools, all the various alternative trading system engines
- every deal type has various transaction types - most complex to calculate principle amounts?
- we don't have a definite taxonomy, a set of inviolate standards to define all deals by type. Many are easily redefined, reclassifiable, which can be an interesting game if there are vraiable tax rates depending on deal type!
- should authorities tax both ends of a deal and everyone in the middle the same?
- what happens when deals are struck between jurisdictions with different tax rates?
- clearing houses only report netted data so gross data has to be estimated roughly
- internal crossing networks within large banks, institutions & universal groups is a major unknown that will tax banks and others how to measure for tax pruposes.
- It follows therefore that deals would have to be all reported gross and principal amounts, buy & sell & intermediary amounts, and maybe the tax is exerted on spreads as representing the true principal being traded in some cases. The standards are not well-defined for this.
- Would we have zero tax for internal intra-group deals? But, that would be considered a massive competitive advantage grossly unfair to medium and small financial firms.
- Also, how are multi-legged deals to be taxed? A first deal gets broken apart and re-used in further deals including all that goes via inter-dealer brokers? This is more akin to accounting and risk adjustment transactions to support an original deal. Would a tax on dealing result in higher risk-taking because all the secondary and teriary transactions for risk mitigation are taxed?
- How is market-making dealing to be tax classed when it is merely to stir the market and keep prices liquid & known?
- Shouldn't there be a tax difference between what is a customer deal and what is own-book trade or merely swapping (whether bed & breakfasting or not) between wholesale professionals.
- Will banks load all the cost of any tax onto customers?
- Then too, the publicly stated 0.01% or 1 basis point tax is ridiculous because it cannot apply to all markets since some operate on much smaller spreads & margins than the % tax imagined (according to news reports). Tobin suggested 0.5% (half a basis point) and others suggest 0.01% to 0.1%. All of these can swamp margins in one market or another.
- In FX 0.0005% can be a typical spread. Would FX (and other markets) volumes fall to such a level that liquidity and price discovery suffer to the extent that tax on taxable profits fall more than the amount raised in a transaction tax?
- Lastly, politicians and their public imagine that gross turnover in the markets is real money. Most traders have no idea either what is real in the sense of actual cash transacted as opposed to credit and derivative security or unsecured 'trade credit' in finance. The actual sums committed to the secondary markets are churned hundreds of times in a year. The apparent equivalent of the whole of world GDP is traded every week for 40 weeks a year! Of course, that is not really what is happening - it is 85% merely churning and moving prices.
Tobin years ago said his tax was unfeasible. He revived it again later. Some experts have proposed a two tuer tax to account foir the vast bulk of trading described as "noise", when really it is somewhat more than that! Others obsequious to the idea claim that modern technology makes exerting the tax, just like "stamp duty" to be eminently feasible, even easy. They must be either errant fools or paid consultants?
If a financial tax like some kind of fixed or variable stamp duty was to be made in some way realistic it should probably tax wholesale market balance sheets like a witholding tax rather than try to tax every line item of deal volume. Stamp duty tax on stock exchange equities trading is the easiest because there the spreads are largest. There is also little evidence supporting capital flight because of variations in stock exchange taxes. These are ultimately paid by customers of course!
The Merkel-Sarkozy-Tobin Tax supporting politicians and advisors imagine that several hundred $billions could be raised for good global causes. worth more than most countries' GDP or over half a per cent of world GDP. But who pays in the end?

Saturday, 10 December 2011


The Euro like many great but complicated projects has different storylines. There are the simple versions for general public consumption and what politicians find to be useful sound-bites that are difficult to challenge technically, and then there are the more complex deeper reasons that risk technical arguments beyond the capacity of most politicians to master and that are therefore deemed suspiciously suspect because they are above the capacity of the public to usefully (politically) understand. The consequence is policies promoted for misleading even spurious reasons.
The reasoning that led to creation of the Euro and its support system the Growth & Stability Pact (also known as The Maastricht Criteria) had a number of political motivations including closer integration picture-framed by a few simple practical ideas for the public to understand such as easier cross-border trade and savings for tourists on currency conversion costs. The most important reasoning however was really to create a currency too big to be played with to the extent of its credit being severely damaged by the markets, a currency that would not suffer the blackmail of the markets as in the case of Sweden and the Nordic currency crisis of 1991-3, The ERM crisis of 1992-3, the Sterling crisis (termed "Black Wednesday") of September 1992 (and of some importance the Latin American currency crises of the late '80s and Mexico in 1994-5 and East Asian in 1997-9).
The first paradox therefore is that clearly the money markets have in fact been able to discredit the Euro system to such an extent that like the earlier ERM with its narrow bands it is struggling to survive. If it falls apart, partly or wholly, market speculators have a golden opportunity to make short term large gains by shifting in and out of different Eurozone countries' equities, bonds and currency holdings.
When the Euro was created (January 1, 1999) and in the months leading up to this date the money markets lost 10 interest rates, currencies and bonds differentials to trade in and out of. A lot of markets liquidity was lost and investment banking gross trading profits of several hundred $billions a year. Money had been made by aggressive speculators in the ERM (also known as currency snake) years. The essential ingredient facilitating successful speculation (including short-selling)is a rigid system with transparent rules that can be easily tracked by the markets. The narrow bands within which currencies within the ERM were allowed to move were manna to the speculators.
The second paradox therefore is that in creating the Euro to be resistent to market speculators it was furnished with rigid transparent rules in terms of maximum ratios of budget deficits and of gross national (government) debt as a % in ratio to GDP. In the first years of the Euro a certain latitude was permitted including in the case of the largest economy of the Eurozone, Germany. Following a brief Eurozone technical recession in 2008 (a shock response to the international Credit Crunch) it was obvious that the next speculative opportunity would be loss of confidence in soverign debt as measured by the Euro's ratio rules. Such sovereign debt crises have always been triggered after a recession when governments increase their budget deficits and national debts in order to pull their economies out of recession.
That this should be especially a problem for the Eurozone and Euro system was easily predicted by many experts, though ignored and voted down at several IGCs. The Delors Plan and European Recovery Plan both of which advocated a trillion Euros to smoothe differences between economies netering the Euro was voted down by Germany, Netherlands and UK when supported by all others. Germany and UK especially were adamently opposed to brussels getting its hands on such a large spending reserve.
The markets speculators have merely had to wait for the Euro's first important recession to test its structure. The experts doubted how any currency could be sustained through and after a severe economy downturn if it is not directly supported by government finances. The Euro was only supported by the European Central Bank whose flexibility is constrained and whose ability to respond to some countries problems more than others is politically and constitutionally limited.
Brussels economists planning for the Euro in the mid-1990s told me privately that they believed The Maastricht Treaty was too simple and too inflexible. But because of the political drive behind the Euro it would be a disaster to drop the Euro plan, a disaster to delay it, and a disaster to proceed with it! The politicians and others had painted themselves into a tight and unsustainable corner. It was hoped that after five years of low growth and higher unemployment against trend caused by The Euro's introduction that lessons would be learned and a more sophisticated system introduced. Such a system should take better account of different GDP growth paths of each national economy, allowing for some that were growing based on heavy bank lending to property thereby causing trade deficits and those were growth was predicated mainly on export surpluses and therefore on banking lending to industry.
In the first decade Greece for example was praised year after year for contributing to Eurozone GDP groth much above its weighting in the Eurozone economy. It did not matter that Greece ran up the biggest trade deficit in the OECD relative to its GDP. Current account (external) payments balances were not part of the Maastricht Criteria. Ireland benefited to from excessive praise. While its GDP seems to be growing fast because of its massive trade surplus relative to GDP, the fact that it had huge current account payments deficits (uniquely so) was ignored! The system of rules was too simple.
When the ECB and other central banks set interest rates there are rules and obligations at work. But they are flexible; matters of judgement that make the interest rate decisions very difficult for the markets to predict and to successfully speculate against. This ambiguity in how decisions are arrived at and what they mean is a very useful policy tool that became evacuated from the Eurozone, especially so once Germany (with alongside other net exporters) was no longer in breach of the ratio rules.During the Credit Crunch (not yet over) banks and later governments that refinanced their banks using government bonds (not bills i.e. on-budget, not off-budget) the great anxiety was to bring down the cost and raise the certainty of supply of loans to banks (to recycle their funding gap finance) and to governments (to keep borrowing costs in line or below that of the rate of GDP growth and of government revenue growth).
German banks and the banks of net exporters (also called competitive economies) are heavily exposed to industry where lending margins are tightest and herefore their cost of borrowing is most critical to banks' profitability and solvency. As those competitive countries could appear so much "stronger" than deficit countries in the politics of the European Sovereign Debt Crisis their cost of borrowing would fall slightly as the deficit countries such as Greece especially found their cost of borrowing soaring. This is a vicious beggar-my-neighbour strategy. And this alone is enough to severely discredit the Euro Project and the prospects of its sustainability.The third paradox is therefore that a Euro system intended to integrate surplus and deficit countries works only when there is growth and appears to fall apart when there is recession! It is failing the essential solvency test that of surviving intact over a whole economic cycle.
With the Euro Sovereign Debt Crisis the European Central Bank that was created to be free of political interference has been displaced spectacularly by the central role in financial structuring taken by leading politicians, by the leaders of the "major powers" in Europe. This is a fourth paradox. It is linked to a sixth paradox that the European Union of equals regardless of size has morphed into a Union where the largest players dictate the economics of the smallest players. This in the case of Greece reminds us of the Munich Agreement of 1938 that dictated the dismemberment of Czechoslovakia without the Czechs at the bargaining table! The European Community, European Union and Eurozone predicated on European integration for the avoidance of war ever again is risking precisely again political disunity and potential for cross-border and civil war violence and possibly military or comparable dictatorships. This is the seventh paradox that financial and trade integration to make war (or near warlike disputes) impossible is now the single biggest factor in Europe's disunity.
In part it is the mindfulness of this that prompts Merkel and Sarkozy and others to seek tighter integration through fiscal unity and more rigid deficit and debt rules. They hope the amrkets are appeased by a rigid common order. But, we have plenty of experience to show us that transparant rigidities in the system encourage aggressive speculation.
It is repeated often that Germany above all fears currency collapse as in 1923. It has a practical fear certainly of a high Deutschmark destroying its trade surplus if the Euro system collapsed and the Eurozone members returned to each having a floating national currency. But, in 1923 the German currency was destroyed by short-selling speculators precisely because it was confined within a rigid system of enforced war reparations payments and dollar shortages. There was no flexibility allowed until it was too late. That the Merkel-Sarkozy proposals and the austerity measures enforced on Greece and Ireland and others are foolishly based on increasing the rigidity of the rules and that takes us further deeply into all the paradoxes above.
Aplying the rules will become even more severe and untenable if the crisis after Austria then more severely engulfs major economies Italy and Spain! The markets will not let up; they cannot so long as the liklihood of worsening crisis persists. It will do so for additional reasons. The Eurozone is in the early period of its normal recession, a recession only to expected that is on schedule to anyway regardless of the Euro Crisis as macro-economists can predict this merely based on past history!
Once Germany cannot politically sustain keeping within the bounds of the Maastricht budget deficit ratio perhaps only then will the Euro system be allowed to become more intelligent and more flexible! The sooner the better for all.It is a political problem of the first order in the wake of the Credit Crunch and Banking Crisis and the various austerity programmes for politicians to be seen advocating any solutions however sensible that sound like "funny money" or "painless" or gaming the system by allowing flexible responses. The mistrust of the voters and their cynicism and anxieties currently are boundless. It will take politicians of truly major statesmanlike stature to explain a truly Communitaire policy response and be believed involving cross-border trust and everyone sharing the blame, burdens, and the rewards according to financial need and not merely according to economic size. A relaxation of the rules and more flexibility in their interpretation plus more sophistication and complexity can supply a relatively painless solution for Europe and the world.