Regulation, Regulation, Regulation

In todays Financial Times, Friday 27th February, William Buiter has a characteristically timely and thoughtful item on the business of regulating financial services. It makes a great deal of sense, in particular about getting the show on the road now for the future, instead of leaving it to the future and allowing the uncertainly and chaos to develope further.

Investment And Expenditure Policy

My favourite uncle had a coal round, which depended on his horse and cart. Unluckily, his surplus of revenue over costs went on racehorses that were much less reliable than his carthorse. When the carthorse died, in the absence of people to give him credit, his business ended. He then became a labourer, still needing to work into his 80’s because he was short of national insurance entitlements. I think a lot of my uncle these days.

Stanford, Madoff, Ponzi, And Brown

Above - Charles Ponzi

Demetrius Submission to the OECD December 2008 re HNWI's:

As a resident, taxpayer, and pensioner of the UK, who was called to the colours to serve The Queen, and who had no national insurance entitlement as part of the economies in the payment of conscripts, it is my considered view that the UK Government is engaged in a vast system of payola for the benefit of the international HNWI elite. It may be more by accident than design but for the several elites of the London Mediocracy it is a happy accident whose arrangements they are reluctant to dispute or to reform in any way. The consequence is that the UK Social Security Budget has come to be a gigantic Ponzi scheme for which the ordinary people, and notably the poor, are paying a heavy price. There are associated dire effects across the world for the poor in regimes which are corrupt or vulnerable.

When I am obliged to go to my local hospital to have my inner workings divined, at the end of the line is an HNMI being recompensed for their contribution to a Private Finance Initiative. Unluckily the added costs this imposes is causing my local health trust to reduce key services in several sectors, notably the Accident and Emergency unit I and my neighbours too often need. The Government PFI has sown the wind; we are reaping the whirlwind. The block of flats I live in had a Property Management Services company that at one time was UK based and financed. After a series of takeovers the PMS then became a small part of a financial group owned by an HNWI, highly regarded in the worlds of the media and finance for a vigorous approach to realising income streams, yachts in Monaco Harbour, vintage Rolls Royce cars, and a celebrity lifestyle in St. Tropez. To achieve this, our service charges were increasing at well above the rate of inflation, and the accounts padded with junk fees and various other devices for maximising returns. The flats are inhabited by elderly and largely disabled pensioners many of whom are now desperately close to the margins of financial survival. When asked about this the PMS in question simply referred us to the local Benefits Agency that is to apply for government money to pay off the extra service charges. Then there is the rental housing market sector. The UK Housing Benefit Scheme to allow “affordable” rentals is notorious for fraud and manipulation, and has been a source of huge profit for property investors etc. very many of whom one way or another are exporting their income and profits as HNWI’s.

The UK has sharply rising Council taxes, also attributable to a clutch of expensive PFI schemes from financial firms owned and run by HNWI’s, the outsourcing of services to HNWI owned companies, and misguided investments in Icelandic Banks, fees payable to other HNWI’s. The electricity company we have was once a UK operation, now it is foreign owned with HNWI money and all of us have had endless trouble with the billing and direct debit charges. Those who have opted out to read our own meters and pay by cash face a significant penalty in the structure of charges. Both the Councils and the Power Utilities benefit from Government grants one way or another.

The trains I use sometimes, heavily subsidised by the Government, also are eventually owned by HNWI’s somewhere, and the fares have been going up sharply and as for travelling, well, sometimes you get on a train to find yourself somewhere totally unexpected having been rerouted to meet management targets during the course of the journey. My income is enough to pay tax, but my local Inland Revenue office is now only leased, having been sold to an HNWI who is based in Bermuda. My occupational pension, once state run, is now managed by a firm belonging to another HNWI who might be on Mars. One could go on through so many functions of Government, notably Defence, but enough is enough.

Beyond Government but still with the advantages of lax regulatory or tax facilities denied to the ordinary citizen or the poor, my insurance company, once a specialist UK firm has gone to a Private Equity HNWI based I believe on a remote Pacific Island vulnerable to rising sea levels and the odd tsunami. Since it was taken over, it seems to be the same; but detailed inspection of the micro footnotes in the documents suggests subtle changes that reduce the insurer’s risks. My bank, once centred on Birmingham, seems to have gone East somewhere in order to be able to pay huge bonuses to HNWI’s. When I go into the local branch it reminds me of the amusement arcade in the City where I grew up, which I was discouraged from visiting on the grounds of moral dangers, and the questionable nature of its staff. The other savings establishments still available are eventually HNWI based in places I can hardly spell, let alone find. They all churn their products and rates to my disadvantage.

At one time, in all these basic connections common in developed countries, I knew who I was dealing with, where they were based, and with a little effort, find how they operated, financed, and dealt with their businesses. This is no longer the case, and moreover if I feel inclined to comment adversely in public I am all too liable to find an expensive firm of City of London solicitors coming after me with writs and demands for millions as compensation for hurt feelings and unwonted comment.

I confess, I may just be a little, only a little I assure you, prejudiced by personal experience.

This is in what is often laughingly called a “developed” nation. What the scale of the harm done to the poor and the ordinary people in countries that are far more vulnerable is can only be imagined. In my own view the UK is not simply a victim but has a governing and media system, The London Mediocracy, that is at the centre of the problem through its complicity in the worst of the abuses in the City of London financial system and the network of tax havens in UK related jurisdictions. I can hope that the OECD is sincere and determined to confront, act, contain and control the tax evasion and avoidance implicit in the global world of the HNWI’s.

The key is a reliable information stream that enables action. Neither the OECD nor an individual tax jurisdiction will find this easy, and the concept of “Co-operative Compliance” is simply a fond hope in an ugly world, there is little or no hope of extracting full disclosure from the HNWI’s or their helpers. The present arrangements in Tax Information Exchange Agreements do not give automatic or certain exchange because of the constraints imposed. A person becomes an HNWI by working the system and playing the angles, this will not change by voluntary action. They are part of interlinked elite who serve firstly their own interests, and secondly the interests of their peers if only as self interest.

The financial centres of the world are full of firms of very able, highly educated and trained people who are dedicated practitioners in the trade of tax avoidance, and structuring funding, income, payments, fees, and accounts to that effect. In those countries, such as the UK, where the political capital is also the financial centre of the jurisdiction, there are major vested interests all highly involved with existing processes of government and legal systems with impact at all the highest levels. At its extreme, as in the UK those who question the operations of HNWI’s cannot publicly discuss or criticise them because the UK Government in alliance with the EU has put in place stringent privacy conditions.

There are systems already in place in banks across the world, allegedly making them all in effect one large mega-bank that allow communication and data recording across the world. This is done through the support office systems. Consequently, it has to be possible to find some means of accessing this source through the establishment of some sort clearing system designed for the collation and audit of tax and related data. Failure to co-operate should mean some sort of exclusion from a licensing or other means of control of status and function for the banks and other financial entities concerned. At the same time knowledge of information of the need for action and the role of the OECD should be conveyed to the peoples of the world at large.
It is the UK Government that presents the prime problem, not only because of its complicity with the excesses in the City of London, but its attachments to very many of the more active tax havens. It is claimed that they need to be financial centres because there is no other economic role for them. In fact, many of the local population consist of very low paid service labour living in either shanty towns or quasi-barracks dominated by gang cultures, with often a large disenfranchised even lower paid migrant population to support them. In the wider world the Department for International Development may seem very active, but if the money trails are followed they lead inevitably to financial organisations in the grip of the HNWI element. The DFID has a web site that presently features radio and TV soap operas as a major achievement, doubtless to the benefit of the London media. One wonders if they feature the shopping malls being provided, and the other consumer delights of urban life, that all lead back inevitably to an HNWI in a tax haven, that seem to be the characteristic features of UK funded development. In all this the activities of a Madoff and his like in New York are simply provincial small fry. It is the big boys and girls in government who the Godfathers (and mothers). The damage that has been done is all too visible and it is the greater damage that they are capable of in the future that has to be stopped, by whoever can take on the role and the work. The OECD should lead the charge.

Sunday Times 22 February 2009 - Dominic Lawson:

A Ponzi scheme that's conning us all
Dominic Lawson

I’m sorry to ruin your weekend but I believe you are the victim of a gigantic financial fraud. This does not mean that you are a holder of one of Antigua-based Sir Allen Stanford’s certificates of deposit, which the US Securities and Exchange Commission alleges were sold on an entirely false prospectus. Nor am I referring to the victims of Bernard Madoff. The British public has been unaffected by that gargantuan Ponzi scheme, which was marketed almost entirely in North America. Yet here in the UK we have our own fraudulent scheme, on a scale dwarfing even Madoff’s operations - and it is run by the British government. For more:

http://www.timesonline.co.uk/tol/comment/columnists/dominic_lawson/article5780663.ece

Vroom, Vroom, Screech, Clunk.

Extract from an interview between Demetrius and a Minister of the Crown while waiting for a bus.

D. Right then, lad, what's up with t' car industry?

M. The industry is undergoing a period of review and reconfiguration to meet the challenges of the future and to take advantage of the upturn, next month or perhaps a little later.

D. Oh aye, you mean you're in trouble again?

M. Far from it, we are satisfied that there are many opportunities and the Governent will take a close interest in stimulating progress.

D. Been there, done that lad, back in the 1970's. Nationalisation didn't work.

M. We have moved on from then to a new template, we now have major global companies closely involved in the future of the industry, and we look forward to continued momentum.

D. You mean you sold out. Helped by all the investment banks and the rest.

M. It represented major expansion for the important finance sector in promoting economic growth. They are critical to economic growth and they played a major part in the industrial structural reforms.

D. So who were the banks concerned then?

M. (The bus has arrived, and the Minister is elbowing his way past the children, pensioners, and disabled to be first on, and throws his answer over his shoulder.) The ones we have just nationalised.

The Krays - What If?

The Krays were arrested in 1968, but only after they had gone public, and had killed just too many people. If however they had kept their heads down, and restrained themselves, things could have been very different. The income stream from their ventures might have been channelled into legitimate investments. If (again) they had ridden the problems of the early 1970's and gone into property, given their influential friends and contacts how far could they have gone in business, media and the arts with wise distribution of their funds?

Could we have been looking at Life Peerages? Positions on notable bodies, almost certainly the BBC and perhaps one ITV board or another, and if a lurch was made into politics just what junior ministerial posts might they have had? Something in the Home Office, perhaps, to do with policing and public order? Maybe, given their experience, the Ministry of Defence dealing with recruitment matters? Or even the Treasury, giving much needed down to earth guidance on revenue raising, and schemes for redistributing income?

They might have been amongst the leading Quangocrats of New Labour after 1997. Then, of course they might have reached the heights of the financial sector, perhaps chairing banks and investment companies, and advising on financial regulation.

How different it all would have been.

Economic Theory For The Day

THE DAS FLIEGEN-SCHWEIN THEORY OF ECONOMICS

As there are a lot of theories being brought into play to explain what has been happening, it is time to develop some new, well, nearly new, thinking on issues of political economy. In the 1950’s the hot money academically was on Keynes ideas versus Marxism-Leninism, both of which gave me problems then as a Late Victorian Radical. Marxism-Leninism could not and it was found, did not work, and it all ended in a collection of ruthless oligarchs. Keynsian ideas sounded nice, and they were intellectually. The trouble was the real world and especially politicians. To operate his ideas you needed to make the right decisions; however politically difficult, and at the right time. You also needed reliable statistics, and as we know politicians in government hate the statistics they have to deal with to be reliable or to be unwelcome.

So I have developed my Flying Pig theory of economic history. The German name, Das Fliegen-Schwein is to make it sound more convincing academically and to the unlettered media. It suggests that is in each generation or historical period a government has it most cherished prestige, aggressive, or politically popular ideas that it sells hard, builds its policies and structures around, and they intend to last forever. There are far too many to list. In the UK we have had our share, notably the British Empire. In Europe Napoleon did his best but ran out of men. In Germany the Third Reich was supposed to be good for a thousand years. There was a Holy Roman Empire, and an Ottoman Empire, all gone. More recently there used to be The American Dream. In the Middle Ages if a war lord gave all his loot to the church then he went to heaven. In 1425 the Chinese Emperor cut off contact from the rest of the world in order for his power to be absolute for all time. That did not last too long either.

In financial terms the UK started off in 1945 a fixed exchange rate, based on the 1926 figures, in order to maintain its position as a world power (using American money). That failed almost within months, so the fixed rate went to a lower figure. This lasted until 1966 doing untold economic damage until we crashed out to a lower figure. That then held until the mid 1970’s when at last that Flying Pig was grounded, and in the 1980’s Mrs. Thatcher managed to persuade people that another Flying Pig, subsidising defunct 19th Century industries at the expense of everything else was no longer feasible. Unluckily the cure for this, associated with similar ideas in the United States of America, eventually launched a flock of Flying Pigs.

Amongst these flights of fancy in the UK, was the notion of trusting money merchants, who as non-tax paying “Non Doms” and High Net Worth Individuals with their wealth, albeit sent away to tax havens, most of which were linked to the UK to create a huge financial services sector that was the equivalent of taking in each others washing. This propped up a London property market which deformed the economy and created a national bubble, exported world wide. But the government were never in control of this, so it fell to ground in its own good time, and it will not be a soft landing. There was debt creation, churning the Gross Domestic Product figures higher and higher with government and personal debt. To keep the employment figures respectable public expenditure was vastly expanded beyond income. Another Flying Pig is the pension entitlements of public sector workers that can only be maintained if the other Flying Pigs remain airborne.

To return to the 1950’s there were other branches of economic theory on offer related to this or that. One was a disregarded attachment to classical economics that morphed in America to monetarism. There was the Austrian school, now showing a welcome return. Another was corporatism, a hangover from the early communitarian/temperance movements, and another was Welfare Economics. This was not as its name may suggest. It required a hard analysis of what exactly we were doing and what it was supposed to be for in real terms rather than money or other terms. It was a difficult area, and also relied less on mathematics than a real appreciation of what was happening on the ground. This seems now to be running in another form in the Eco movement. But the idea of trying to establish what living in the real world nvolved and how to stay stable was anathema to the politicians and the media.

If you want to try your hand at some proto Welfare Economics try Shopping Trolley analysis when idling your time away at the check-outs. How many of the goods in peoples trolleys do they actually ”need”, not want, not marketed, or the rest, but need in the strictest sense of the word? For example, some essential unpackaged foods, and not much else.

Another is the motorway test. If you want to increase economic growth simply persuade people to make lots of unnecessary journeys around motorways rather than saving, and build huge centres for them to visit that are full of useless tat for them to spend money that has been borrowed to buy it, so creating additional monetary flows in interest payments.

Such an idea would be absolutely crazy wouldn’t it? But it one of the Flying Pigs we have been worshipping for the last couple of decades, and now it is dead, the only solution the Government can think of is to try to resuscitate it, and try to catapult it airborne before the next election.