By Chris Cook
When history is written, the collapse of Lehman Brothers will be seen as a moment which defined the collapse of a complete economic paradigm and its accompanying ideology.
That this was so became apparent to me during a ten day visit to Iran in the immediate aftermath of the collapse during which I met many of the elite. On the one hand there was unrestrained glee at the fact that the very financial sanctions which were aimed at driving Iran to the negotiating table had protected Iran from the then ongoing financial meltdown.
But as it sank in that the entire economic raison d'etre of the Iranian “reformists” - ie privatisation and debt-fuelled economic growth – had been bankrupted alongside Lehman, and that there was no “Plan B”, then the initial glee was rapidly replaced by more sober reflection.
One year later, it is appropriate that the best commentary I have read so far on the subject of the Lehman collapse was that in the Financial Times yesterday (15th) by the historian Niall Ferguson.
In essence his point is that if it had not been Lehman which failed, then it would pretty soon have been an even bigger bank, such as Citigroup, and in that case the fallout would have been that much greater. Ferguson's view was that in the months that followed, the opportunity to reconfigure the banking system was lost and he concluded:
“If only we had learned from Lehman that no bank should be “too big to fail”, we might still have a real capitalist system, instead of the state-guaranteed monstrosity that is the real legacy of last year's crisis. If only.”
In a system where money is created by banks as interest-bearing credit, the true economic function of a credit institution, aka a bank, is in fact to provide a framework of trust in respect of those to whom they extend credit, i.e. borrowers.
This implicit guarantee by credit institutions of the borrowers' credit has historically been backed by proprietary pools of capital of an amount specified by the Bank of International Settlements in Basel. The interest charged by credit institutions essentially comprises three elements: operating costs; default costs; and profits to shareholders.
Now that the principal economic rationale of a credit institution – that of guarantee - has been assumed by the State then we have the worst of all possible worlds. As Stanley Baldwin said in 1931, in demolishing the power of the press barons, Rothermere and Harmsworth, the surviving banks now enjoy
“Power without responsibility – the prerogative of the harlot throughout the ages”.
Delicious
Digg
Reddit
Facebook
StumbleUpon
all of the benefits from productivity improvements have flowed to capital, not labour,
All the benefits from productivity improvements have flowed to the treasury!
Any improvement immediately attracts a tax so gordon can spend it for you -- so any desire/attemt for improvement is entirely crushed, because any benefit will be Gordons -- what greater disincentive to economy could their possibly be?!
Whether the treasury pump their windfall into
The sad fact of the matter is that we have been in an unrecognised recession for maybe the last 30 years, as nearly all of the benefits from productivity improvements have flowed to capital, not labour, and the rich have got richer as a result of this unearned income.
So in real terms earned income has stayed flat at best while costs - particularly housing costs - have risen.
We, and this extends way into the middle classes, have made up the shortfall with credit, and many have used the bubble in property prices as a quasi-ATM source of credit.
The tax system we have - of taxes on earned income and on transactions - is the way it is because this is what suits the privileged and the wealthy who frame both the narrative, and the policies that flow from the narrative.
Tax is not the cause, but the symptom, of the systemic problem. There is nothing whatever stuffed under Gordon's mattress. We are taxing the wrong people, in the wrong way.
The titanic sank, many passengers died, the human race survived.
I know the banks are essential to prop up the disaster that is our socailist/labour government, but they are not particularly important to me - nor many individuals in this country.
They are not *that* important to most people because, if you need credit to exist then you are already living unsustainable. Using temporary credit to optimise your cash flow may be handy, but if it is essential then you are living beyond your means.
Credit is just another drug - you start to use it for an extra 'treat' now and then -- but if you aren't careful you become dependant on it, and soon (if you aren't careful) you can't live without it.
The villan of the piece is the taxman - while you are using credit for a 'treat' he is sneaking in and stealthing away any surplus the credit gave you, while you are using credit to get a particularly good deal he is sneaking in to steal your 'windfall'.
In this way the taxman (government) turns what was supposed to be a 'treat' into an essential.
If (for instance) an americans spend twice as much of their income on health as an englishman does -- where is the 'half' we save actually going? I don't have a pile of cash under the bed? do you? If not, then where is that money (as if we didn't know - its stuffed under Gordons mattress).
so in future you have to use credit just to get by.
However that does nothing to address the size of the tax burden.
My 'gut feeling' is that 20% is the absolute maximum that someone might be deprived of - if the state needs more than that to persist then the state is a duffer and probably should 'go bust'.
However that 20% is a limit, not a target.
Or is there a level of 'richer than you' that you will accept is reasonable?
Or is there a maximum percentage taxation that you will accept as a limit?
The relative stuff is all nonsense - what is your absolute position? What is the maximum level of taxation of the 'rich' that you consider acceptible and what do you base that figure on?
If you can't answer you are stuck back at my first para...
Cameron is worried about bonuses too, but he has shown that he is weak and ineffectual about dealing with the problem. Unfortunately Labour is showing that they do not want to solve the problem either.
Taxing bonuses would give a good message to the electorate. It would say that people should be rewarded for "going the extra mile", but that all income should be treated the same when it comes to tax. If the government were to take this approach, and since bonuses are simply a tax dodge, you will find that bonuses would disappear over night. Problem solved.
Add just one word and it sums up the government stance on oh so many things:
Power without accepting responsibility - the prerogative of the harlot ........
We should cut taxes on earned income, all right, but start taxing the unearned income the rich get from the rents derived from privilege. The extent to which bonuses are "earned" income is an interesting question.
These defaults, which will require further recapitalisation of the banks, include commercial property loans; borrowings by Private Equity firms; and increasing numbers of defaults by once-prime borrowers who have lost their jobs and cannot now keep up the payments.
We're just coming to the end of the Phoney War: the real conflict is on its way, and my take is that this will be obvious to all before the end of the year.
Japan showed us what happens when you get the mother and father of all property bubbles, and they also showed us how impossible it is to get out of a debt deflationary trap once you are in it.
We may be in the G7 but what sort of club is that? It's a debtors' club, and in particular, it's an energy debtors' club.
How many barrels have the G7?
If you think that all that is necessary is to change the captain on the Titanic then you are dreaming, TT. There is nothing - and I mean NOTHING in the policies of any of the parties which remotely begins to address the problems we are in. Nothing short of systemic fiscal reform will solve the problems we currently have.
It could be a hell of a lot better (and was before Brown got his hands on our money), but look around the world - it could be much, much worse.
Our system puts us in the G7 - how much higher is there to go? Japan found out what happens when you get so far ahead that you leave the rest of the world behind -- you end up having to stop and back track while they all catch up.
Brown has been suffocating us for over a decade and our face has gone blue - but he hasn't killed us yet, and as soon as he is gone it will only take a few gasps for us to be breathing normally again - we will have loads of ground to make up, but we will be firing on all cylinders again.
What doesn't kill you makes you stronger - and our (attempted) killer has less than a year of freedom left.
One of the problems of the financial crisis has been the drying up of these loans. Remember, these are not "bad" loans insofar as they represent spending that people cannot afford, they are "good" loans in that they help expand the economy. Without the banks the economy cannot run, and the actions a year ago were taken to prevent the economy collapsing. Allowing the banks to fail would have been catastrophic because these banks would have brought down many profitable companies with them.
Lehmans was an investment bank. The Glass-Seagall Act was created in 1933 in the US to separate investment banks and commercial banks, the former being high profit, high risk, casino banks making money out of thin air, the latter being the sort of banks that keep the economy running. The final vestiges of the Act was repealed in 1999.
So what was the result? Well, a bank from the North of England which was created to help people buy their own homes almost collapsed because a totally different American bank lent mortgages to Americans who could not afford them. I say "almost collapsed" because that bank, Northern Rock, only survives now because it was nationalised. And this is where you have not quite got the situation right. The banks were not just given money. The government (through UKFI Ltd) bought preferential shares in those banks. This provided cash that helped prevent the banking system from seizing up - "liquidity".
This is how banks work anyway - they have shareholders who provide capital - so the government is just a big shareholder. Those preferential shares can, and will, be sold. This is the dirty secret that politicians are not talking about. It is possible that those shares will be sold off at a profit, but that will inevitably mean holding on to the shares for a long time. But even if they are sold without making a profit, it will mean that at some point in the future these shares will be sold and the government will have access to billions. All parties hope that this will be about a year before a general election when they are in power, ie a war-chest for tax cuts. Have you wondered why the Tories have said there will not be tax cuts untill a second Cameron term? The reason is that they know that in 8 or 10 years time UKFI will be wound up and you can bet that they will not put all of that money into paying off the national debt.
As to bonuses, well this is where the politics occur. You could argue that since the government is the biggest shareholder of these banks they should be able to dictate to the board about how the bank is run. This argument has been mooted as the reason why Barclays decided that they would prefer a cash injection from a Middle Eastern prince than investment from UKFI where there was a possibility of political meddling. The problem with nationalisation is the issue of political intervention. Darling decided not to go for full scale nationalisation of all the high street banks, and the replacement of the management with civil servants. This makes sense if you want to sell off the government investment in a few years. But it also meant that it was less easy to make political moves like controlling bonus payments (or indeed, pension payments). Unfortunately for Darling, he is not being commended on this decision and instead he is taking criticism for not interferring in the banks.
Personally I am happy for bankers to have bonus payments as long as they are taxed at a rate higher than income tax. (And I do mean taxed, non-dom status should not be applied to bonuses.) Bonuses, of course, are simply tax dodges, and the way to solve the bonus problem is to fix the issue of taxing the rich.
Works for whom?
Lehman - and its aftermath - demonstrated that the combination of compounding debt and private property in land fundamentally does NOT work - other than to concentrate wealth in unsustainably few hands. This current credit crash is just the latest demonstration of a cycle which has existed since Babylonian times.
But this time it's different, I think, because of the sheer cosmic scale of the asset price bubble. The deflation of this still has a long, long way to go, because the earnings to support these financial claims simply do not exist.
The "free" market you laud - based upon conventional debt and equity capital - has conclusively and terminally failed. I do not believe that Humpty can be put back together again, and you only have to look at what is going on in the real productive sector to see that the financial markets will resume their downwards trend sooner rather than later.
Systemic fiscal reform is the only solution, because a free market can work - but only without the participation of unproductive rentiers. I believe that the process of transition to such a networked, disintermediated market is well under way.
Lehman provided a clear end to a particular bubble - without it the bubble would still be expanding - especially as a general election is approaching.
Fundamentally the system works - it has been proven to work, you have to expect corrections - the longer they are artificially put off the bigger/more expensive they will be.
Having survived Lehmans collapse, banks think they know where the limits are, and will feel far more comfortable getting close to them in future - this is not a good thing.
“If only we had learned from Lehman that no bank should be “too big to fail”, we might still have a real capitalist system, instead of the state-guaranteed monstrosity that is the real legacy of last year's crisis. If only.”
This is the absolute key. A free market requires/demands that the worst businesses fail - this opens the market for better businesses and free up resources for them. Banking regulation should be entirely focused on government forward planning to manage banking failures - a bank failing should not be a big deal (to anyone other than its shareholders).
FWIW: This isn't really about banks per-se, it is about the governments wider role in ensuring a working free market, but otherwise keeping its nose out. No private sector business should ever be in a position to take down the state and taxpayers.
David Smith in the Sunday Times was suggesting that the banks should become agents of the Treasury, and be paid as a service provider to allocate credit = money - which actually costs nothing to create, whoever creates it.
I do not believe agency is a good model, in that a conflict of interest remains, and I prefer a partnership model, in respect of which I have written extensively on Labour List.
The bottom line is that the days of banks as value-extracting middlemen/ rent seekers are coming to an end, and if they are to survive it will be as value adding service providers.
I am not very good with banking stuff ( so i might make myself look silly ),
if a bank is going to faiing why does giving it a billion make it sucsed ? surely if they failed most of the deposits would have been safe and the good parts of the bank would be bought by another bank/investmant group .
what i dont understand is before this happend they were having big bousnes and after we give them x billions they still have big bounuses and as i understand all the bad loans will be picked by the taxpayer ?
If i have this right ( which i doubt) what was the point of giving them x billions to start again and carry on with big payouts ?
ricki
I hope that our government will think very carefully just in case they decide not to save Vauxhall.
It will be quite a defining moment.