Fractional Reserve Banking

Why, in an environment of rising interest rates, was credit so readily and cheaply available? The answer lies with the distorting effects of international capital flows and growing global imbalances.

Until recently, the US and UK balance of payments current account deficits got bigger and bigger year by year. Offsetting these rising deficits were ever-larger surpluses in China, Saudi Arabia and Russia, among others.

Put another way, major industrialised countries were borrowing in ever-increasing amounts from high-saving emerging economies ...

During this period of plenty, the UK economy became increasingly unbalanced.

Exporters were hit because capital inflows shoved the value of sterling skywards.

The domestic economy flourished because, for any given level of policy rates, the supply of credit was bountiful.

We're now paying the bill for this earlier excess ...

Stephen King 19 January 2009

Who to blame for the Great Recession?

In 2007 it was the-then Sir Fred Goodwin's £49bn acquisition of ABN Amro that signalled that the markets had peaked and were about to crumble.

Every financial crisis has its totemic moment; a decision that even at the time seems to defy logic and in retrospect is seen as an act of gross stupidity.

Yet it takes more than one individual banker, no matter how powerful, to make a crisis and when the historians come to chronicle the Great Recession of 2008-09 the list of guilty men and women will include more than one former knight of the realm.

Here, then, is a (far from exhaustive) list of those who might be considered most culpable – who caused, exacerbated or failed to prevent the worst downturn in the global economy since the 1930s ...

Gdn  03 Feb 2012

Alan Greenspan

Bill Clinton

Gordon Brown

Margaret Thatcher

Mervyn King

Ronald Reagan

Financial Crisis

False optimism alone won't find jobs where none exist

Victims of the Work Programme are tasked with sorting 'private sector deleveraging' ...

"We are by definition an optimistic organisation," Paul Brown, a director of the Prince's Trust, told me ...

What does strike fear into me is the coalescence of denial, where political expedience merges with the positive thinking agenda, and it all dovetails with the erroneous sense that it's somehow "political" to articulate how bad a situation is ...

Even Ed Balls, writing in the Mirror on Wednesday, said "Families, pensioners, young people and businesses already know things are tough."

That's all true ... But when people are constantly asked to look for jobs that aren't there, you need to do a bit better than "everybody's got it tough".

I understand the Prince's Trust, and the necessity of its enthusiasm ... But I still say this is a dangerous game.

The BBC complements the latest figures with a "How to get a job in retail" guide (I can give you the short answer: accept one third of the minimum wage and let them pretend you're an "apprentice"– that'll get you a job).

David Cameron says the Work Programme is the "biggest welfare to work scheme since the 1930s", when all it amounts to is a set of large payments ... to 18 companies who are then contracted to harry people into jobs that don't exist ...

This is the kind of situation that leaves people feeling alienated, not just from the world of work, but from the world altogether.

Gdn  15 Feb 2012

The Debtwatch Manifesto

The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment.

The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century.

Its unwinding now is the primary cause of the sustained slump in economic growth.

The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging ...

debtdeflation.com  03 Jan 2012

Economic Policy

Who to blame for the Great Recession?

In 2007 it was the-then Sir Fred Goodwin's £49bn acquisition of ABN Amro that signalled that the markets had peaked and were about to crumble.

Every financial crisis has its totemic moment; a decision that even at the time seems to defy logic and in retrospect is seen as an act of gross stupidity.

Yet it takes more than one individual banker, no matter how powerful, to make a crisis and when the historians come to chronicle the Great Recession of 2008-09 the list of guilty men and women will include more than one former knight of the realm.

Here, then, is a (far from exhaustive) list of those who might be considered most culpable – who caused, exacerbated or failed to prevent the worst downturn in the global economy since the 1930s ...

Gdn 

Alan Greenspan

Bill Clinton

Gordon Brown

Margaret Thatcher

Mervyn King

Ronald Reagan

Financial Crisis

Ireland at the end of the road

The crash has been the one of the steepest and most disastrous of any developed country since the Second World War.

By the time of the global financial crisis of 2008, Ireland’s banks were awash with loans, mostly to property developers; the notorious ‘world’s worst’ Anglo Irish Bank, which was later nationalised, alone held €72 billion of loans – half of Ireland’s GDP.

Bank guarantee schemes, an €85 billion EU/IMF bail-out (including up to £7 billion from the UK), loss of economic sovereignty and, ultimately, a change in government followed.

In the past four years, Irish property prices have fallen by as much as 70 per cent, with further decreases predicted for this year.

At least 40 per cent of all Irish home owners are now in negative equity.

In addition, they carry the largest mortgage debt per head in the world.

More than one in 12 mortgages are in arrears of more than three months.

‘In their rush to freedom, the Irish built their own prisons,’ the American financial author Michael Lewis recently wrote.

‘And their leaders helped them to do it.’ ...

Tel  14 Jan 2012

Austrian business cycle theory

Business cycle

Boom Bust: House Prices, Banking and the Depression of 2010

Are banks heeding King's bonus call?

By the end of September 2011, the big three banks had amassed a bill of around £9bn to pay their investment banking staff.

Using figures provided by Barclays, HSBC and bailed-out Royal Bank of Scotland, it can be estimated that the three were expecting to pay £3.9bn, £3.1bn and £2bn respectively on employment costs for the first nine months of the year ...

How does the £9bn total compare with the same time a year ago? Then the number was a little over £10.5bn so it represents a fall of around 15% ...

The Bank's Financial Policy Committee – the body set up to look for systemic risk – is also preparing to look at the way the performance of top bankers is measured.

One influential FPC member – Andy Haldane – has already produced figures showing that bankers' pay at the seven biggest US banks would have risen from $2.8m to $3.4m on average between 1989 and 2007 if it had been based on return on assets (risks) rather than return on equity (shareholders), which had sparked a tenfold rise to $26m on average by 2007 ...

Gdn  05 Dec 2011

Welcome to the living dead economy

Hayek would say that the zombie-like state of affairs has been due to the refusal to allow banks that lent irresponsibly to go bust ...

Gdn  04 Dec 2011

Shareholder interest is a thing of the past

SFO joins US inquiry into bank practices

The action by the SFO comes as details of potential lawsuits against major banks on both sides of the Atlantic emerged ...

Tel  03 Sept 2011

Banks 'still expect taxpayer to pay for their failure'

State-backed banks 'could pay for 1p cut in tax'

Goldman Sachs faces fine over 'misconduct' at former unit

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

Reckless Endangerment

Author Michael Lewis On Wall St's Delusion

Please let's not pretend that averting the next Lehman will be easy

If the Dodd-Frank Wall Street reforms, which became law last year, had been in place back in 2008, Lehman Brothers would either not have failed, or would have been wound down by regulators in an orderly fashion. The panic of September 2008 would never have been.

Or at least this is the conclusion of an analysis conducted by the Federal Deposit Insurance Corporation, the regulator that has shored up confidence in America's banks since the Great Depression ..

Read the report closely, though, and it is slightly less soothing or plausible ... a hard-headed analysis would admit that a lot of things would have had to go right to achieve the rosy outcome that the FDIC paints.

Such an analysis would also point out the many things that might still go wrong, even under Dodd-Frank ....

Ind  23 Apr 2011

Dodd–Frank Wall Street Reform and Consumer Protection Act

The stated aim of the legislation is:

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.    [DFWSR]

Frank-Dodd Financial Reform Act, the SEC and whistleblowers

... my experience of watching companies for thirty years says that managers in a corporation study their superiors very carefully to get cues on how to perform their jobs. This creates a corporate identity ...

Sometimes this can be comical ... Sometimes, it’s not so comical ... For example, the recently deposed CEO of BP seems to have created a corporate environment where safety rules were ignored ...

If the boss has a bad temper and routinely humiliates subordinates in public, lower level managers will feel free to–maybe even compelled to–do so, too.

If he shows his belief that it’s good to stretch the limits of the law in business dealings, subordinates may feel obliged to try to follow him, or even outdo him, in this, as well ...

A bad-tempered CEO ... who pushes the envelope on compliance with securities laws isn’t likely to be happy if a subordinate says someone in the firm has crossed the line.

The path of least resistance for HR in cases like this is to try to make the whistleblower go away.

As soon as the whistleblower identifies himself by lodging a complaint, he may well have stigmatized himself in the eyes of his colleagues and superiors ...     [PSI] 

Frank-Dodd ... and whistleblowers

Frank-Dodd Approach Won't Fix the Mortgage Mess

Too big to fail

Volcker Rule

Dodd–Frank Wall Street Reform

Inside Job – review

Perhaps the most sensational aspect of this film is Ferguson's contention that the crash corrupted the discipline of economics itself.

Distinguished economists from America's Ivy League universities were drafted in by banks to compose reports sycophantically supporting reckless deregulation.

They were massively paid for these consultancies. The banks bought the prestige of the academics, and their universities' prestige, too.

Ferguson speaks to many of these economists, who clearly thought they were going to be interviewed as wry, dispassionate observers.

It is really something to see the expression of shock, outrage and fear on their faces as they realise they're in the dock.

One splutters with vexation; another gives vent to a ripe Freudian slip. Asked by Ferguson if he has any regrets about his behaviour, he says: "I have no comments … uh, no regrets."

This is what Ferguson means by "inside job".

There is a revolving door between the banks and the higher reaches of government, and to some extent the groves of academe.

Bank CEOs become government officials, creating laws convenient for their once and future employers ...

Guardian  17 Feb 2011

Inside Job: how bankers caused the financial crisis

Inside Job

Ernst & Young 'sat by silently' as Lehman Brothers tried to hide financial troubles, lawsuit alleges

E&Y, one of the world's "Big Four" accounting firms, is alleged to have approved of Lehman's increasingly frequent use of a device known as Repo 105 that allowed the bank to sell troubled loans before it released results and then buy them back afterwards.

"These Repo 105 transactions had no independent business purpose and were designed solely to enable Lehman to manage the company's financial balance sheet 'metrics'," the 32-page suit alleges ...

According to the suit, E&Y made more than $150m (£96m) in fees auditing Lehman's books between 2001 and the 2008.

The suit goes on to allege that the E&Y auditors working on Lehman failed to act on concerns about the use of Repo 105 raised by Matthew Lee, then a senior vice- president at the bank ...

Telegraph  22 Dec 2010

Repo 105

The real problem isn't banks, it's investors

"The banks are a symptom of investor fear and greed."

... the highly regulated and taxed public markets on the New York Stock Exchange and Nasdaq are being superceded by largely unregulated and lightly taxed private markets ...

Shadow banking is like the hidden economy. It is a way to avoid tax and the scrutiny of the state.

Lehman Brothers was a shadow bank. So was Bear Stearns. They traded derivatives of assets rather than the assets themselves.

A shadow bank, or the shadowy subsidiary of a high street bank, can put assets like mortgages, shares or bonds in a basket, divide them up and sell them again, as Lehmans and Bear Stearns did, and they are classed as a derivative.

A patsy credit reference agency verifies their value and gives a stamp of approval.

A regulator, no matter how vigilant, cannot see what is inside the derivative to make its own judgement ...

At the heart of the problem is the investor.

Banks, fund managers, corporate lawyers and accountants are merely the agents of investors ... investors are a rapacious breed who chase the high returns at almost any cost ...

And the problem is they can be wealthy individuals, ordinary pension savers and sovereign wealth funds.

Only by limiting their activities can we hope to control the banks and then regulate the financial system ...

All the dodgy products at the heart of the financial crisis were bought by sophisticated pension funds, investment trusts and sovereign wealth funds.

They sacked their advisers unless they could deliver double-digit returns ...

Guardian  01 Nov 2010

How The Shadow Banks Hijacked The Fed

The way to regulate hedge funds is through their providers of leverage

American Theocracy

Financial crisis of 2007–2010

Big Bang's shockwaves left us with today's big bust

... the Tories' deregulatory spree in the 80s could have done as much to bring about that out-of-kilter economic model as the forces of globalisation, which helped to undermine manufacturing.

Dolphin says: "People talk about comparative advantage as if it's God-given and just emerges, but we know that's not true.

"Big Bang was important in cementing Britain's advantage in finance.

"The fact that we had this growing financial industry did attract a lot of capital.

"Those capital flows, other things being equal, would have pushed sterling up, and therefore will have accelerated the decline of manufacturing."

Dolphin points to the fact that, as the power of finance grew, Britain consistently ran trade deficits, year after year:

"It produced a casualness about the decline of manufacturing and the collapse of all competing sectors which is really quite jaw-dropping." ...

Obs  09 Oct 2011

Banks may ask for more cash to plug £750bn funding gap, says thinktank

We are back to what The Guardian's Lary Elliott called 'Keynes Lite'.

This is a 'system' in which you have unregulated banking in boom times; and massive Keynesian-style bailouts when it all goes pear-shaped.

On no account can the system be reformed, since politicians look forward to high-profile jobs in banks when they lose power at the next election

The New Economics Foundation said the government needs to do more to address the borrowing requirements of the high-street banks, which still rely on funding from the Bank of England two years after the collapse of Lehman Brothers.

Many of the emergency funding schemes put in place during the crisis run out by the end of 2012, which means that banks need to find or replace £750bn of funding.

NEF calculates that the banks will need to raise £25bn a month – up from £12bn a month now – to plug the funding gap.

If they cannot, they may need more help from the government to keep operating ...

Andrew Simms, co-author and policy director at NEF, said that "for all the talk of learning lessons, the banks have been left largely untouched".

He added: "They appear no more transparent or accountable, and scant new regulation has been implemented to prevent a repeat of the crisis."

The report points out that although banks are being propped up by the taxpayer, lending has stagnated and interest rates on loans for businesses and households are in some instances higher than they were before the banking crisis.

NEF has previously published a manifesto for better banking in which it calls for a Post Office bank based on the existing post office network to be created and the setting up of a green investment bank to finance low carbon projects ...

Guardian  04 Oct 2010

Hegel on Wall Street

Supernanny, Wall Street needs you

Banks may need new bailout

UK 'On Cusp Of Second Banking Failure'

Where did our money go?

Hegel on Wall Street

" ... regulation is the force of reason needed to undo the concoctions of fantasy."

What bankers do, Hegel is urging, is satisfy a function within a complex system that gives their actions functional significance.

Actions are elements of practices, and practices give individual actions their meaning. Without the game of basketball, there are just balls flying around with no purpose.

The rules of the game give the action of putting the ball through the net the meaning of scoring, where scoring is something one does for the sake of the team ...

The function of Wall Street is the allocation of capital; as Adam Smith instructed, Wall Street’s task is to get capital to wherever it will do the most good in the production of goods and services.

When the financial sector is fulfilling its function well, an individual banker succeeds only if he is routinely successful in placing investors’ capital in businesses that over time are profitable.

Time matters here because what must be promoted is the practice’s capacity to reproduce itself.

In this simplified scenario, Wall Street profits are tightly bound to the extra wealth produced by successful industries.

Every account of the financial crisis points to a terrifying series of structures that all have the same character: the profit-driven actions of the financial sector became increasingly detached from their function of supporting and advancing the growth of capital ...

A system of compensation that provides huge bonuses based on short-term profits necessarily ignores the long-term interests of investors.

As does a system that ignores the creditworthiness of borrowers; allows credit rating agencies to be paid by those they rate and encourages the creation of highly complex and deceptive financial instruments.

In each case, the actions — and profits — of the financial agents became insulated from both the interests of investors and the wealth-creating needs of industry ...

What market regulations should prohibit are practices in which profit-taking can routinely occur without wealth creation; wealth creation is the world-interest that makes bankers’ self-interest possible.

Arguments that market discipline, the discipline of self-interest, should allow Wall Street to remain self-regulating only reveal that Wall Street, as Hegel would say, “simply does not know what it is doing.”

NYT  03 Oct 2010

The currency war that no one really wants to talk about

Towards the next credit crunch

So much for international co-operation.

The G20 ... is refusing to discuss the huge imbalances in the global economy that made that crisis possible in the first place.

It's no surprise governments are keen for their currencies to fall in value: it makes it easier for them to export ... governments ... representing two-thirds of the global economy have been pursuing some form of depreciation strategy.

Will this be the number one topic at the next G20 meeting in South Korea in November? Not if the Koreans have anything to do with it.

They've been intervening in the markets themselves, but, more significantly, they're also concerned about upsetting their neighbours in China, the biggest currency manipulator of all.

For Tim Geithner ... [under] pressure at home from American politicians representing exporters unable to compete with their rivals in China because of the artificially low value of the renminbi, MrGeithner's pleas to Beijing to let its currency float more freely have largely fallen on deaf ears.

An international effort might have been more effective, but it's tricky to assemble such an alliance when so many countries are copying China's lead.

It's every country for itself out there right now ...

Independent  29 Sept 2010

Tension mounts as China and US trade insults over currency

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como ...

If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added ...

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.



Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China ...

Telegraph 06 September 2009

Boom and bust capitalism won't be fixed

(Ben Bernanke) ... was picked to join the Fed because he provided academic cover for Greenspan's view that asset bubbles do not matter.

He blamed credit excesses on Asia's "saving glut", arguing that reserve accumulation by export nations suppressed global bond yields. That let the Fed off the hook for its own role in driving the US savings rate to zero – and consumption through the roof – by holding interest rates below "Wicksell's Natural Rate".

It is this twin-sided nature of Bernanke that raises nagging questions about his reappointment as chairman of the Fed. He has admitted errors: it was wrong to think the sub-prime crisis could be contained. But he has yet to acknowledge that his economic ideology is deeply flawed.

Bill White, former chief economist at the Bank for International Settlements, said the error of the central banking fraternity over past 20 years has been to cut real interest rates ever lower to keep the game going. This has lured the world into a debt trap. The effect is to keep drawing prosperity from the future – until the future arrives.

"It does the job for a while but moves in interest rates have to be ever more violent to achieve the same effect. My worry is that we may have reached the point where the policy ceases to work altogether.

"These imbalances come back to haunt you, and that is where the world now is. People have been induced to bring forward purchases by taking on debt and there has been a massive expansion in corporate investment," he said.

Economists call this critique "intertemporal misallocation". It is a favourite of the Austrian School. It plays almost no role in the "New Keynesian" thinking of Bernanke.

His reflex is to see any fall in demand as an outside shock to be corrected by extra stimulus. What he does not accept is that the adrenal glands of the economic system have been depleted by perpetual credit stimulus, giving the world a form of Addison's Disease ...

... Bernanke's certainty is troubling.

The thrust of his academic writings is that the Depression was a "financial event" that could have been avoided if the Fed had flooded the economy with money (by bond purchases) to prevent a banking crash.

This theory – half-Friedmanite – has merits. The Fed made horrible mistakes. But it neglects other causes of the slump: industrial over-capacity created by the 1920s bubble, so like today.

It also led to the Greenspan doctrine that central banks can let stock market and housing booms run their course, stepping in to "clean up afterwards".

Bernanke spelled out the policy bluntly in his 2002 speech. "The US Government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost," he said.

The "no cost" flippancy grates now. Washington says the damage will lift the US federal debt by $9 trillion (£5.5 trillion) over the next decade, pushing the total towards 100pc of GDP. In any case, the Fed cannot use this machinery so easily after all. Foreigners own 40pc of US Treasury debt and have a partial veto on the policy. Overt attempts to "monetise" US debt will cause the policy to short-circuit. Investors will dump US bonds ...

Telegraph  25 August 2009

The role of interest rates in theory and practice

The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.

• Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk.
• US government policy encouraged high-risk lending through support for Fannie Mae and Freddie Mac (which had explicit government targets of providing over 50pc of mortgage finance to poor households) and through the Community Reinvestment Act and related regulations.
• Regulators and central bankers failed to use their considerable powers to stop risks building up in the financial system and an extension of regulation will not make a future crash less likely.
• Much existing banking regulation exacerbated the crisis and reduced the effectiveness of market monitoring of banks. The FSA, in the UK, has failed in its statutory duty to "maintain market confidence".
• The tax and regulatory systems encourage complex and opaque methods of increasing gearing in the financial system.
• Financial institutions that have made mistakes have lost the majority of their value. On the other hand, regulators are being rewarded for failure by an extension of their size and powers.
• Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions.

As such, no significant changes are needed to the regulatory environment surrounding hedge funds, short-selling, offshore banks, private equity or tax havens.

A revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline. These should include:

• Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.
• Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.
• Enhancing market disclosure by ensuring that banks report relevant information to shareholders.

This should be reinforced with central bank action to ensure that:

• Proper use is made of lender-of-last-resort facilities to deal with illiquid banks.
• The growth of broad money is monitored together with the build-up of wider inflationary risks.

Yours faithfully,

Dr James Alexander, Head of Equity Research, M&G; Prof Michael Beenstock, Professor of Economics, Hebrew University of Jerusalem; Prof Philip Booth, Professor of Insurance and Risk Management, Cass Business School; Dr Eamonn Butler, Director, Adam Smith Institute; Prof Tim Congdon, Founder, Lombard Street Research; Prof Laurence Copeland, Professor of Finance, Cardiff Business School; Prof Kevin Dowd, Professor of Financial Risk Management, Nottingham University Business School; Dr John Greenwood, Chief Economist, Invesco; Dr Samuel Gregg, Research Director, Acton Institute; Prof John Kay, St John’s College, Oxford; Prof David Llewellyn, Professor of Money and Banking, Loughborough University; Prof Alan Morrison, Professor of Finance, University of Oxford; Prof D R Myddelton, Emeritus Professor of Finance and Accounting, Cranfield University; Prof Geoffrey Wood, Professor of Economics, Cass Business School.

Further reading:

Verdict on the Crash: Causes and Policy Implications by Philip Booth et al.iea

institute of economic affairs 12 May 2009

Who is to blame for the economic crisis?

Ministers 'to blame' for financial crisis

Central Banking in a Free Society

Globalisation has led to the development of two groups of countries – those running big trade surpluses and those running big trade deficits.

Germany and Japan provided the machines and high-grade capital goods that allowed China to become the source of low-cost manufactured goods.

Countries where the industrial sectors had been hollowed out over the decades – such as the United States and Britain – were ready buyers for cheap imports.

Inflation fell, allowing interest rates to fall ...

Ironically, the crisis is proving to be even tougher for the advanced surplus countries – Germany and Japan – than it is for spendthrift Britain and America.

Production was cranked up in expectation that the US would continue to be the global consumer of last resort, but the collapse in consumer and business demand has exposed the over-reliance of surplus countries on exports ...

Guardian 26 April 2009

White, blue-eyed bankers are entirely to blame for the world financial crisis that has ended up hitting black and indigenous people disproportionately, the president of Brazil declared.

In an outspoken intervention as Gordon Brown stood alongside him, Luiz Inacio "Lula" da Silva pledged to make next week's G20 summit "spicy" as he accused the rich of forcing the poor into greater hardship.

"This crisis was caused by no black man or woman or by no indigenous person or by no poor person," Lula said after talks with the prime minister in Brasilia to discuss next week's G20 summit in London.

"This crisis was fostered and boosted by irrational behaviour of some people that are white, blue-eyed. Before the crisis they looked like they knew everything about economics, and they have demonstrated they know nothing about economics." ...

Lula used a colourful analogy to illustrate his demand for tougher regulation of financial markets.

"We do not have the right to allow this crisis to continue for long. We are determined to make sure the world financial system is vigorously regulated. You go to a shopping mall and you are filmed. You go to the airport and you are watched. I can't imagine that only the financial system has no surveillance at all."

The president then turned his fire on the media for demonising immigrants: "The great majority of the poor are still not getting their share of the development that was caused by globalisation. They are the first victims. I follow the press and I see that prejudice is a factor against immigrants in the most developed countries." ...

The prime minister said: "The newest fallout from this banking crisis that has hit the world is the reduction in trade. Chinese exports are down 25%, Germany's exports are down 20%, Japan's exports are down more than 40%. So we have to act on trade as we are acting on banking reform and on economic growth.

"At the G20 next week we will debate further measures. Ninety per cent of all world trade is financed by credit. Credit has dried up dramatically in recent months, it has increased the costs of trade for businesses in every country. The international community cannot stand aside."

Guardian 27 March 2009

As the world is seized with anxiety in the face of a spreading financial crisis, the one place having a considerably easier time attracting money is, perversely enough, the same place that started much of the trouble: the United States.

American investors are ditching foreign ventures and bringing their dollars home, entrusting them to the supposed bedrock safety of United States government bonds. And China continues to buy staggering quantities of American debt.

These actions are lifting the value of the dollar and providing the Obama administration with a crucial infusion of financing as it directs trillions of dollars toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without lifting interest rates.

And yet in a global economy crippled by a lack of confidence and capital, with lending and investment mechanisms dysfunctional from Milan to Manila, the tilt of money toward the United States appears to be exacerbating the crisis elsewhere.

The pursuit of capital suddenly seems like a zero sum game. A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.

“Virtually all of the low-income countries are in very serious trouble,” said Eswar Prasad, a former official at the International Monetary Fund and a senior fellow at the Brookings Institution, the liberal-leaning research organization in Washington.

He went on: “This is the third wave of the financial crisis. Low-income countries are getting hit very hard. The flow of private capital to the emerging market has dried up.”

Private money invested in so-called emerging countries plunged from $928 billion in 2007 to $466 billion last year and is likely to fall to $165 billion this year, according to the Institute of International Finance ...

NYT 08 March 2009

(Blog by) Rapture 02 Mar 09, 10:13am

Subprime isn't the main problem. If it was then simply closing down subprime would be the simple answer.

Everyone wants to find a simple answer. In truth the subprime market became a problem only because the Banks were greedy. When a subprime mortgage was sold it had a teeser rate. This rate was kept low so the monthly payments were affordable. The typical teeser rate was around 2.5%. Then as detailed in the large amount of small print the rate increased to a typical rate 4 or 5 times higher. It was only when the subprime customer was faced with paying not $600 per month but $1,800 per month that the defaults started.

Then the problem was made worse by the lenders. Instead of entering an agreement with the customer to accept a payment level they could afford they simply went for repossession. The Banks believed that they could get their money back by selling the properties. Only as the lending dried up there was no buyers.

No matter which way you look at this issue all roads lead back to greedy short sighted Bankers. The mess they have left behind and the lives that they have destroyed will be around for decades.

The sensible route is to agree affordable payments and to stop the damage getting any worse. If as has been reported elsewhere that the top level Bankers had any experience of living on a 'Normal' income they would not have behaved as they have.

Guardian 02 March 2009

... three big structural changes help explain the mess the US now finds itself in.

The first is that a profound shift in the balance of power between labour and capital over the past three decades has resulted in nugatory increases in real earnings for most people but massive rewards for those at the top.

The second is that the US is living beyond its means at every level. In recent years, it has spent $106 (£71) for every $100 it has earned.

The third is that Wall Street has grown in size and importance as more of America's manufacturing capacity has been exported overseas.

America, as the world's can-do society, found a way of making this work for a time. More women worked, which disguised the fact that male incomes were under pressure. Couples worked longer to maintain their spending. When both those avenues were exhausted, they took on more debt.

Borrowing was a readily available option because the shifting of production from North America to east Asia created big trade surpluses, particularly for China. Beijing had to do something with its export earnings and it parked a large chunk of them on Wall Street.

This influx of capital helped push down borrowing costs, while the cheap goods from Asia kept the lid on inflation and allowed the Federal Reserve to keep interest rates low.

Cheap money drove up house prices, so consumers used their homes as cash machines. House prices only continue rising if there is a flow of first-time buyers, and these were found by offering mortgages to those who would normally have been disqualified. These were risky loans which Wall Street disguised by putting them into a blender with good-quality mortgages and selling them on to anybody who would buy them.

Many investors, including UK banks, did.

Inevitably, the housing bubble burst ...

Guardian 21 November 2008

Neuroscience has shown that the hormone oxytocin influences behaviours associated with bonding, trust, and suppression of anxiety. Rather apt work has been done by neuroeconomists on subjects participating in a game called Investor. Nasally administered oxytocin doubled levels of trust among players. This prompts the thought that instead of pumping billions into the money markets, governments might more cheaply have sprayed oxytocin up the noses of bankers and speculators.

The serious point here is that the financial meltdown is a classic display of non-rational behaviour. Greed prompted dangerous risk-taking, and was followed by panic that made stock markets plunge wildly, causing a number of blue chip companies to collapse or be nationalised. Unless serious steps are taken to avoid a repetition, as soon as everything stabilises the sequence will restart. The profit motive appears to trump all other motives, by any legal or near-legal means available. It will reassert itself and eventually get out of hand again. ...

The global financial meltdown and the melting of the polar caps both emphatically teach the same thing: if there is one thing we cannot afford, it is unbridled profiteering.

A.C. Grayling 05 November 2008

There’s quite a debate going on regarding concerns Francine McKenna and I have raised regarding the problems of banks failing after Big 4 auditors issued unqualified audit reports on their accounts, implying that they thought them going concerns for the coming year.

So, let’s get some facts straight. For example, Lloyds TSB plc issued its 31.12.07 accounts on 21.2.08, unqualified. HBOS issued its accounts for the same year end on 26.2.08. The director’s report (page 148) included the statement:

Going Concern

The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and consequently the going concern basis continues to be appropriate in preparing the accounts.

Richard Murphy

Tax Research UK 11 November 2008

What is emerging is three schools of thought, or culprits if you like. These can be termed the "macroeconomic school"; the "regulatory school"; and the "banking school".

The first, in effect, blames no-one and abstracts away minor consideration of institutional arrangements and political personalities to focus on the big picture.

The scenario is quite simple, really. It starts from the well observed premise that much of the money that flowed into the western economies over the past decade came from China ... That, in turn, originated in their large trade surpluses with us.

In effect, we consumed more than we earned, and the Chinese lent us the money to carry on doing so ...

... on this view, it is really no one's fault, except, perhaps, our own, because of our unquenchable desire for cheap DVD players, lovely homes and lack of fear about debt ...

However, people never look to blame themselves first ...

What is happening now is a reflection of that; we have to pay back our debts and cope with a transfer of wealth and income to China. The financial sector has to shrink and rationalise. We basically don't fancy making that historic adjustment.

Hence our second school of thought.

This is the one that holds most attraction for the politicians and public. As we see with the conspiracy theories over the death of Princess Diana, the public are unwilling to accept simple explanations. They usually want to blame someone.

Up to a point, they are right, though. You can have more or less effective people working as regulators; more or less satisfactory structures; and more or less satisfactory attitudes. It is difficult to argue that the UK's arrangements were perfect on any count ...

Third is the banking school of thought. On this view, the blame lies with the banks ... the growth of the banks' balance sheets over the past few years was impressive; but it was driven by a dangerous increase in leverage (they borrowed too much as well) and by making less and less prudent lending decisions.

Should the FSA or the Bank of England or the Government have stopped them? They could have tried harder but the regulators can't make the bankers' commercial decisions for them, and it was those that were flawed ...

Of course, these schools of thought are not completely mutually exclusive. In reality, it is more a question of where the balance of blame attaches.

Sean O'Grady 03 November 2008

According to Rockström, one of the key ways in which diversity was lost arose from the uniformity of criteria that have been used to judge economic success. One example of this is value-at-risk (VaR), the measure used by banks to report their potential losses from trading financial instruments.

Since the late 1990s, it has been standard practice for banks to publicly report VaR measurements. When use of this measure was proposed, critics argued that this would encourage herd behaviour, with banks rushing en masse to sell off assets that were depressing their VaR numbers, but their concerns were ignored ...

Bar-Yam thinks models of complex relationships such as those between predators and prey can help prevent such systemic problems, and show regulators how they can modulate market behaviour in a more sophisticated way. "We haven't had the scientific tools to do this for very long. But we can now model the global system and capture the key collective behaviour that causes collapse."

"At its core the science of complex systems is about collective behaviour," Bar-Yam points out. "The invisible hand of the market is collective behaviour." The problem till now, he says, has been that economic policy has failed to take into account the complexity and consequent unpredictability of such behaviour. In the absence of testable models, people "try to believe what they know really isn't true", he says - for instance, that real estate values always increase.

The remedy Bar-Yam proposes is to subject economic policies to verification with the same sort of rigour that is normal in science. That has never been done. "But with recent scientific advances, I believe we can now truly inform policy."

New Scientist 22 October 2008

In a nutshell our banks and other financial institutions lent too much against the security of over-valued assets, largely residential housing and commercial property.

And to obtain the funds they lent to households and business, those same banks were too dependent on credit from wholesale and overseas sources (net wholesale funding of our banks went from zero in 2001 to £625bn by the end of 2007).

So when the penny dropped that the value of houses and property was falling fast, two terrible things happened at the same time: the overseas and institutional providers of all that incremental funding wanted their money back from our banks, because the formal or informal collateral underpinning that funding was shrinking; and the capital foundations of the banks were eroded by actual and prospective losses on loans that had been made into those frighteningly pumped-up housing and real estate markets. ...

BBC NEWS 22 October 2008

The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies.

But the flip side of China's export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets 'round the world, driving up the price of everything from Florida condos to Latin American stocks.

That gave central bankers a choice:

Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward?

Alan Greenspan's Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating ...

So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that.

Moreover, the Fed's track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet.

Financial engineers built huge mountains of debt partly because they expected to profit in good times -- and then be rescued by the Fed when they got into trouble.

Washington Post

Richard J. Greene warned where "Fiat Money" was heading back in 2004.

Going back to Bretton Woods the decison was made " ... to treat the dollar as a substitute for gold ..." a regime which came to an end in 1971, when President Nixon ended convertability with the following results:

Between 1948-1969 world money reserves increased only 55%, since that time they have shot up more than 2000%. See any connection? ... [RJG]

According to a small but powerful group of America's financial decision makers ... the chief cause of the credit market meltdown is not folly, or reckless lending, or the demise of America's financial management. It's an accounting rule.

Mark to market is a seemingly innocuous term for the requirement that companies, banks, hedge funds, mutual funds and the like report the market price of the financial instruments they hold and trade.

In the past five years Wall Street firms created huge volumes of new kinds of complex securities, such as subprime bonds and collateralized debt obligations, which are investment vehicles built out of subprime bonds securities.

These securities lacked long trading history or deep markets. To value them many outfits slipped the surly bonds of mark to market and assigned a value to them based on so-called mark to model. (In other words, educated guesses based on algorithms.)

When credit started to go bad, market participants had to write down the value of such assets. For institutions holding on to bank loans—assets for which there is an active secondary market—marking to market was relatively simple ...

But for the complex new financial instruments, the valuations became far more unstable. Many hedge funds and financial institutions had borrowed huge sums of money to buy assets for which there wasn't an active market ...

In establishing value for assets, funds and banks often relied on newly created indices, such as the Markit ABX indices.

Since those indices are actively traded by investors, they can be driven up and down (mostly down) by speculation and fear.

The end result: the banks and funds holding subprime bonds (which is to say pretty much the entire global financial complex) have been forced to massively cut the mark-to-market value of their holdings because those values are based on the incredibly pessimistic indices ...

Newsweek.com 01 April 2008

Paul Craig Roberts argues that it is the dollar's status as the world's reserve currency, and the distorting effect this has had on policy, which is the root of the problem:

Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the US economy.

If the subprime mortgage meltdown is half as bad as predicted, low US interest rates will be required in order to contain the crisis.

But if the dollar’s plight is half as bad as predicted, high US interest rates will be required if foreigners are to continue to hold dollars and to finance US budget and trade deficits.

Which will Washington sacrifice, the domestic financial system and over-extended homeowners or its ability to finance deficits?

The answer seems obvious. Everything will be sacrificed in order to protect Washington’s ability to borrow abroad.

Without the ability to borrow abroad, Washington cannot conduct its wars of aggression, and Americans cannot continue to consume $800 billion dollars more each year than the economy produces ... [PCR]

is on the same track:

The real roots of the crisis lie in a flawed response to China. Starting in the 1990s, the flood of cheap products from China kept global inflation low, allowing central banks to operate relatively loose monetary policies.

But the flip side of China's export surplus was that China had a capital surplus, too. Chinese savings sloshed into asset markets 'round the world, driving up the price of everything from Florida condos to Latin American stocks.

That gave central bankers a choice:

Should they carry on targeting regular consumer inflation, which Chinese exports had pushed down, or should they restrain asset inflation, which Chinese savings had pushed upward?

Alan Greenspan's Fed chose to stand aside as asset prices rose; it preferred to deal with bubbles after they popped by cutting interest rates rather than by preventing those bubbles from inflating ...

So the first cause of the crisis lies with the Fed, not with deregulation. If too much money was lent and borrowed, it was because Chinese savings made capital cheap and the Fed was not aggressive enough in hiking interest rates to counteract that.

Moreover, the Fed's track record of cutting interest rates to clear up previous bubbles had created a seductive one-way bet.

Financial engineers built huge mountains of debt partly because they expected to profit in good times -- and then be rescued by the Fed when they got into trouble.

Washington Post 05 October 2008

Richard J. Greene warned where "Fiat Money" was heading back in 2004.

Going back to Bretton Woods the decison was made " ... to treat the dollar as a substitute for gold ..." a regime which came to an end in 1971, when President Nixon ended convertability with the following results:

Between 1948-1969 world money reserves increased only 55%, since that time they have shot up more than 2000%. See any connection? ... [RJG]

AS GOVERNMENTS struggle to prevent the global financial crisis turning into a deep worldwide recession, attention is also turning to the longer-term problem: how to avoid a similar crisis happening again.

When politicians meet in Washington DC in December they are likely to agree that the "loose touch" approach to financial regulation of the past two decades will have to give way to tighter controls.

But the global financial system now operates at a level of complexity no one has ever tried to tame. How do we re-engineer it so breakdowns don't happen again?

One place to start is the science of complexity itself.

We now know that large interconnected systems, such as the weather, can behave in unexpected ways: for example, small changes can trigger fundamental shifts. New understanding of the principles governing such complex systems offers hope that the global financial system can be got under control.

The snag is that politicians will have to accept that costs are likely to be involved ...

Days before winning the 2008 Nobel prize in economics last week, Paul Krugman of Princeton University published an analysis which concluded that the rapid increase in cross-border investments since 1995 is what allowed a local shock - the collapse in inflated US real estate values - to propagate globally, especially through highly indebted investment firms that can respond to a loss of money in one place by pulling back credit anywhere in the world.

Krugman noted that "these channels are not yet part of the standard analysis". This is exactly the kind of linkage that the complexity theorists say economists have been missing ...

... In 2007 the Federal Reserve Bank of New York published a study, based in part on testimony from ecologists and engineers specialising in complex systems, which concluded that while vast sums were spent assessing the risks of individual investments, almost nothing was being spent on systemic risk - which could be much more grave.

"It is really frustrating to me and others that the warnings were not heeded," says ecologist Simon Levin of Princeton University, who was one of those who testified - all the more, he points out, because increased connectivity doesn't just propagate trouble, it makes the whole system less diverse and more vulnerable to dramatic shifts ...

According to Rockström, one of the key ways in which diversity was lost arose from the uniformity of criteria that have been used to judge economic success.

One example of this is value-at-risk (VaR), the measure used by banks to report their potential losses from trading financial instruments.

Since the late 1990s, it has been standard practice for banks to publicly report VaR measurements.

When use of this measure was proposed, critics argued that this would encourage herd behaviour, with banks rushing en masse to sell off assets that were depressing their VaR numbers, but their concerns were ignored ...

Bar-Yam thinks models of complex relationships such as those between predators and prey can help prevent such systemic problems, and show regulators how they can modulate market behaviour in a more sophisticated way.

"We haven't had the scientific tools to do this for very long. But we can now model the global system and capture the key collective behaviour that causes collapse."

"At its core the science of complex systems is about collective behaviour," Bar-Yam points out. "The invisible hand of the market is collective behaviour."

The problem till now, he says, has been that economic policy has failed to take into account the complexity and consequent unpredictability of such behaviour.

In the absence of testable models, people "try to believe what they know really isn't true", he says - for instance, that real estate values always increase.

The remedy Bar-Yam proposes is to subject economic policies to verification with the same sort of rigour that is normal in science.

That has never been done. "But with recent scientific advances, I believe we can now truly inform policy."

New Scientist 22 October 2008

‘Financial Services: a UK perspective’

Let me start by saying what a privilege it is to address the Hong Kong and British Chambers of Commerce today.

This is my first visit to Hong Kong since I was here in 1997 and my first as Economic Secretary to the Treasury.

It is remarkable how much has changed, and how much, in essence, remains the same.

And I am delighted to acknowledge the success you have achieved, especially in these days of unparalleled change and opportunity for the economy and in particular for the global financial services sector.

As the UK City Minister I am struck by the many similarities between our financial traditions.

The UK’s financial tradition as a free, fair and open global market has resulted in tremendous growth in London’s international financial markets in the past decade – over-the-counter derivatives turnover up by 770%, foreign equities turnover up by 260%, cross-border bank lending up by 160% and foreign exchange turnover up by over 60%.

Just look at the international nature of the City today – London has more foreign banks than any financial centre.

It is the location for the headquarters of six of the world’s ten largest international law firms. And for 200 foreign law firms who recognise the importance of English law for global trade.

This is demonstrated none more so than by HSBC, with its headquarters in Canary Wharf and an international network comprising over 9,500 offices in 76 countries and territories in Europe, the Asia-Pacific, the Americas, the Middle East and Africa.

And it is listed in exchanges in 5 financial centres, including London and Hong Kong.

In my first speech as City Minister at Bloomberg in London, I argued that London’s success has been based on three great strengths – the skills, expertise and flexibility of the workforce; a clear commitment to global, open and competitive markets; and light-touch principle-based regulation.

Here in Hong Kong too you have great depth of talent working in your financial services sector. The fact that it employs some 180,000 people and accounts for 12 per cent of GDP underlines its importance to Hong Kong’s economy.

And you also abide to the principles of open markets. You are highly regarded in the UK as the leading international financial centre in Asia, and rightly so.

It is not by chance that Hong Kong is now the home to the region's largest fund raising and management centre, the second largest stock market, and the third largest banking centre.

More importantly, Hong Kong has benefited greatly from the phenomenal growth we see in China, and has served as a gateway for mainland funds to be invested overseas with distinction, as reflected by the fact that it attracts more IPOs than anywhere else bar New York, both in terms of value and number of transactions in 2005, with all of the top 5 IPOs coming from the mainland - and all this before the planned Hong Kong-listing of the Industrial and Commercial Bank of China, expected to be the largest the world has ever seen.

Some in Britain feared that the challenge of globalisation, the emergence of major financial centres like Hong Kong and new technologies, and the switch from physical to virtual trading platforms would threaten London’s place in the global economy.

The fear was that increased international competition would slowly erode London’s stature as a geographical financial services cluster.

In fact the opposite has been true – London has not stumbled, but prospered. And it is now the leading global financial hub, a key international partner for regional financial centres around the world, like Hong Kong.

There are now 160 Hong Kong companies investing in the UK. Hutchison Whampoa alone has assets worth £14.7 billion in the UK, employing more than 27,000 people.

Major Chinese companies such as SINOPEC and Air China are listed both in London and Hong Kong stock exchanges, the latter raising £558 million in 2004.

2 Hong Kong companies are also listed on AIM, with a combined market capitalisation of £57 million.

Far from weakening London’s standing, global financial integration and the emergence of new economic powers and regional financial centres have all strengthened the importance of London as the best partner for financial centres round the world.

I am determined to keep it that way.

We also know that globalisation and the rapid pace of change means that these trends would reverse very fast if we get things wrong.

So we are proud of our success, but we are not complacent. We in Britain know we need to work hard to keep our place as the leading global financial centre.

So today I want to highlight some of the concrete steps we are taking.

And I want to set out how, working together even more closely, we in London and Hong Kong can deepen the relationships between our financial sectors in the coming months.

London as a global financial centre

Over the last three centuries, London’s success has been based on:

- Our commitment to the rule of law and the highest professional standards;
- A determination always to innovate and respond to new challenges;
- Our ability to attract talent from round the world; and
- Our long-standing tradition of openness and internationalism.

Countless men and women working hard across the City must take credit for London’s success.

But government decisions also have an important role to play, for good or ill.

Let me remind you.

In the 1970s, the decision not to emulate the adverse regulation and tax policies which severely hampered parts of the American financial markets and drove Eurobond business from New York to London in the early 1970’s.

These regulations helped to push dollar deposits into Europe and increase the costs of doing business in the United States.

In the 1980s, the liberalisation of the City of London and the opening up of our markets – the so-called Big Bang and the raft of consolidations, takeovers and influx of foreign institutions and talent, which followed - was decisive.

Then in the late 1990s, came our decision to establish a single regulator for financial services, replacing the fragmented, overlapping and self-regulatory system we inherited.

People tend to remember the Chancellor’s decision in 1997 to give the Bank of England operational independence from Government and the responsibility for setting interest rates. I believe the companion decision to establish the FSA was just as significant.

And most recently in this decade we have been determined to respond to events and new challenges and enhance London’s global standing and light touch regulation.

Let me give you three examples:

First, the Financial Services and Markets Act put in place a new regulatory regime based on principles not rigid rules, statutory independence, transparency and a rigorous assessment of cost and benefits.

The FSA, under the leadership of Sir Howard Davies and Sir Callum MaCarthy, has confounded those who feared the FSA might become a heavy-handed and inflexible regulator.

Today our system of light-touch and risk-based regulation is regularly cited - alongside the City’s internationalism and the skills of those who work here - as one of our chief attractions. It has provided us with a huge competitive advantage and is regarded as the best in the world.

Second, we have fought off proposals in Europe which would have undermined London’s standing as the leading global financial centre.

On the Savings Directive we fought and won the argument for a solution to tackling tax avoidance that was workable and took account of global realities.

On the Prospectus Directive we forced a fundamental rethink. The original proposal would seriously damaged Europe's corporate bond market.

The directive that was adopted has made it simpler for companies to raise capital on a Pan-European basis.

With the Markets in Financial Instruments Directive (MiFID) there was a danger that its pre-trade transparency provisions would damage liquidity in equities trading. We worked to ensure that the final provisions were proportionate and workable.

And third, we have resisted pressure for heavy-handed responses to US corporate scandals. Four years ago, the WorldCom accounting scandal broke in the US.

The calls from Parliament and commentators were for a regulatory crackdown. And we could have sought easy headlines.

Instead, we responded with a measured, proportionate response. We were initially critised for that, but the alternative approach, as the Americans have found with Sarbanes-Oxley, would have been wrong for Britiain.

I believe that we were right not to go down that road.

I am very well aware that regulatory mistakes can be very costly. And we are determined that our regulatory regime continues to be the best in the world.

Securing London’s future

We need to continue to build on London’s characteristic strengths of openness and internationalism and to attract business.

This means continuing to improve the UK as a location for business compared to competitor countries, investing in infrastructure and skills, but also supporting what makes London a creative and dynamic city.

We have set out our ambition for London’s financial centre to become even more successful, and the steps this Government will take with the industry to realise this objective which include the establishment of a high level group to develop a coordinated strategy designed to help ensure London’s future success.

There are also some big challenges we will have to deal with in the coming months – in areas from maintaining a managed but open approach to migration, to improving the transport structure in London.

We have made it a priority to ensure that the integrity of London as a financial centre is maintained and that we do all we can to cut off the financial networks that underpin organised crime and terrorism.

I met Stuart Levey, Under Secretary of State at the US Treasury, on Monday and we agreed to continue the close co-operation between our two departments on these issues.

In my early months as the new City Minister I have also highlighted two areas in particular where London’s position could be seriously damaged if we were to take the wrong approach.

Those two areas are:

•the regulation of the London Stock Exchange; and

•the implementation of European Directives in Britain.

In both these areas I want to set out today our approach for the coming months.

First the London Stock Exchange

The UK has for some years been open to overseas investment in UK exchanges. LIFFE, ICE Futures and Virt-X are all owned by overseas companies.

NYMEX Europe was established by an overseas company. And EDX London is a joint venture between a UK and overseas exchange.

Overseas interest in UK exchanges has in part reflected our regulatory regime.

The principles based recognised investment exchange regime is internationally respected.

Our regime has been flexible enough to accommodate the significant changes in exchange’s business models in recent years, but rigorous enough to ensure that UK markets have a high reputation for probity.

Questions have been raised about our approach to exchanges following NASDAQ’s interest in acquiring the London Stock Exchange.

I have discussed this matter widely in recent months and in responding to those questions I have made two points absolutely clear.

First, the government is neutral with respect to the nationality of the ownership of the LSE.

Second, our interest in the ownership of the LSE is that it should not affect the existing light-touch, risk-based regulatory regime under which the exchange and its members and issuers operate.

The FSA has also made clear that the way it operates the UK’s regulatory regime in respect of exchanges is neutral to the nationality of ownership.

However, in his statement of 12 June, Sir Callum McCarthy, chairman of the FSA, made clear that overseas ownership of the LSE exchanges raises uncertainties about the regulation of the exchange and its issuers going forward.

It has been put to me that the right approach is Government intervention to protect the LSE from foreign ownership. I reject this argument.

This would fly in the face of the traditions that have underpinned the City's success. A policy of protecting “national champions” would damage, not bolster the interests of London and the UK.

The Government’s interest in this area is specific and clear: to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business.

That has made London an economic asset for the UK, for Europe, and for countries throughout the world. I can therefore announce today that the UK Government will now legislate to protect our regulatory approach.

This legislation will confer a new and specific power on the FSA to veto rule changes proposed by exchanges that would be disproportionate in their impact on the pivotal economic role that exchanges play in the UK and EU economies.

It will outlaw the imposition of any rules that might endanger the light touch, risk based regulatory regime that underpins London's success.

Nothing in this legislation has any consequence for the nationality of the ownership of UK exchanges. It will neither make overseas ownership easier or more difficult. We remain open to overseas investment that will continue to be able to benefit from our regulatory regime.

Second, European regulation

Some commentators have feared that European directives in the financial services arena could undermine London’s competitiveness and impose unnecessary burdens on UK-based financial companies. It is right we remain vigilant to these risks.

But the right way to do so is not to walk away from, but engage with our EU partners and fight our corner when necessary.

And faced with EU proposals, there are three hurdles we must clear every time.

First, we must ask whether a new regulation is necessary.

Second, we must take a hard-headed approach to any negotiations to ensure that our national interest and the wider EU interest are advanced.

Third, we must ensure that all new regulations are implemented in a sensitive and light touch manner. That means no unnecessary and burdensome gold-plating.

The Transparency Directive is a good example of our approach to implementation. This is an important directive. A common approach to disclosing information about issuers of securities is crucial for efforts to foster growth in the EU and deepen the single market in financial services by better allocation of capital.

I believe the Treasury has done a good job of negotiating the details, working closely with the City and our EU partners.

Now, in implementating it in Britain, we must minimise the burdens which result.

We have already decided to exclude most public companies from the directive’s requirments for notification of the acquisition or disposal of major shareholdings.

And, we have committed to clarifying to whom companies are legally liable for disclosures about their finances made under the directive.

Today, I can make another announcement to smooth implementation and avoid unnecessary gold plating.

Companies will only have to follow the financial reporting requirements of the directive where their financial year begins on or after 20 January 2007.

This will allow a significant number of companies additional time to prepare for the new financial reporting obligations under the directive.

The City have told me that they want Britain to reject ideological approaches to Europe – in favour of a pragmatic approach that reflects the reality of London as a global financial centre.

That is precisely what I am seeking to deliver: a London strengthened as part of a European single market for financial services.

We will not stand up for City interests by leaving the table or withdrawing to the extremes and anti-European fringes of the big European debates.

That is no way to stand up for the City or for Britain and – under this government at least – that will not be our approach.

Conclusion: deepening ties between London and Hong Kong as a financial centre

I hope I have demonstrated that we in London are not complacent – and are willing to act when necessary.

In recent years, we have won notable success with foreign listings not only from Hong Kong but from China, Russia and the former Soviet Republics and also in the growing interest from the United States – with twice as much foreign equity traded in London as in New York, and AIM, the world’s leading market for smaller quoted companies.

I am determined these trends will continue:

Already the UK is the home of 26% of all European headquarters for companies from North America and Asia-Pacific – and the numbers of companies choosing the UK is increasing. 6 Chinese companies are currently listed on the main London market.

In addition, 38 Chinese companies are listed on AIM, up from just 3 in 2004. A second Hong Kong company has also started trading on AIM just six weeks ago.

I want us to go even further and make the UK and the City the place of choice for new listings and European headquarters.

Today our location provides a bridge between the time-zones of Asia and America – an increasingly important quality in a world where a single business or supply-chain needs to operate across continents with ease, and where financial markets adapt to price sensitive information twenty-four hours a day.

London and Hong Kong can both succeed and prosper as leading global financial centres but only if we think globally and are open to competition and new ideas.

I know that you are taking forward initiatives to enhance further Hong Kong’s position.

Let us agree today to work together through a strengthened partnership to ensure London and Hong Kong will grow and prosper together in the years to come.

edballs  13 Sept 2006

The reason that such non-corporate solutions will not be adopted is because they strike not just at the roots of the credit crunch, but at the roots of credit-oriented growth.

It is the antithesis of the fractional reserve banking and fiat currency which enable governments and bankers to conjure money out of thin air, and without which growth would come to an end.

The imperative to wind-down the use of fossil fuel by 2030 cannot possibly be met if the sort of growth to which Gordon Brown refers is to be the driver of policy:

"In the next 20 years the world economy will double in its size and wealth and we have a great opportunity to win new business, new jobs and prosperity for Britain."    [GDN]

The only stable economy will be one driven by ecological imperatives, and that is not going to happen whilst policy makers pursue growth.

"Greed really has become a part of America’s value system.

"Get as much as you can, while you can, and don’t worry about the other guy.

"Corporate greed often exploits the poor for greater profits.

"Political greed makes promises never meant to be kept in order to achieve position.

"Personal greed sets us free from a sense of responsibility to the community, and establishes love of self as the greatest commandment."

Joe Thorn.net

Alan Greenspan

Credit Crunch Explained

Fiat Money Systems

Fractional Reserve Banking

Fractional Reserve Banking

Loss of liquidity, not insolvency

Men and testosterone

The causes of the Credit Crunch

The Depression of 2010

What is Humanity’s worst Invention?

What caused ... global credit crunch?