28 May 2009

And the Risk-Takers Shall Inherit the Earth

One of the themes running through this blog for the past year has been a howl of protest at the transfer of value to a tiny, over-indulgent section of the world's population. The asset bubble enabled those controlling the world economy to acquire a vast share of the planet's value. Now those who failed to make a killing from some of their risky financial dealings are turning to the prudent and thrifty to make good their losses.

This is the essence of the heartfelt complaint from Graham Beale, chief executive of the Nationwide, at the size of his company's contribution to the financial compensation fund that the FSA require all financial organisations to belong to. Savers who chose the mutual, low-return, low-risk form of financial investment are being required to pay £250m. The FSA regulated building societies tightly, preventing them from joining in the asset bonanza, but now the losses have come home to roost they are expected to compensate those who did.

The Nationwide is required to pay more into the compensation pot than the London-based insurer-of-last-resort Lloyds. The unfairness stems from the fact that the amount levied relates to the amount of retail deposits an institution holds. So, in effect, the mutuals are being punished for being prudent and for having the confidence of small investors. The dealers in footloose venture capital are correspondingly favoured by the scheme, although their chances of needing compensation when risky investments turn sour are higher.

More iniquitous even than the plight of the Nationwide is that of the credit unions, whose members are some of the poorest in our society and whose mission is to encourage thrift and wise management of money amongst those who have least. Each credit union, with its hard-saved and comparatively tiny asset base, is being forced to pay a levy to the fund that insured the gambling of the super-rich.

Despite the temptation to join in the financial frenzy that lured some of the mutuals off their path of virtue, co-operative financial institutions have always operated with prudence and high ethical standards. But, like the credit unions trying to proselytise the catechism of thrift in a world that rewards greed, they must hope that their members have faith that they will get their rewards in heaven since here on earth Mammon seems to have the ear of the regulator.

27 May 2009

Establishing a Mood

Last week two of the credit rating agencies - Moody's and Fitches - downgraded the rating they award to a slew of mutual financial instutions in the UK - the old-style building societies which have survived the current turmoil well and are taking in massive levels of new lending from members.

The building societies are actually in a strong position, since they own real assets - houses - rather than the phoney assets owned by banks. The agencies explain this downgrading on the basis that these assets are less valuable because of falling house prices. Yet the stress-testing of the Britannia that preceded its recent merger with Co-operative Financial Services indicated that even a house-price fall of 60% would not threaten the solvency of the business.

So is this a genuine concern about the solvency and viability of these businesses or a political move by the capitalist businesses that are seeing their credibility shattered and money move into the co-operative financial sector?

The official version is that the credit rating agencies take an objective look at the market and then provide a neutral assessment of the financial health of various companies. The reality is that they are making the market. If they downgrade a company it finds it harder to borrow money and must pay a higher price. They are actually manipulating the value of companies - and even countries - and in a time of such uncertainty this gives them anti-democratic power. Questions are being raised about their role, which now appears more political than forensic.

We can begin to see how they are using this power. They downgrade the UK, which is creating money to pay back our national debt, but not the US, which is following the same policy. Back in January the French financial regulator called for political regulation of the activities of credit rating agencies. At that stage concern was that they were too optimistic about the money-generating activities of the companies that created the boom. Their attempt to undermine viable and democratic institutions and governments should raise even greater concern.

22 May 2009

One Day All Money Will be Created this Way

In an earlier post I questioned what might be the limitation on the policy agreement between the Bank of England and the UK Debt Management Agency that one can create money from thin air which is then used to buy UK national debt. For a while I have been calling for a transparent process to reduce the the level of this debt from the unpayable quantities announced in the Budget. I now realise that there is a very murky version of such a policy already in operation.

So what prevents the UK government from eliminating the whole of our national debt in this way, by creating money from thin air, or what Mary Mellor calls 'fresh air money'? The traditional response would have been 'Inflation' - because 'once the economy picks up again' there will be too much money in the system. The created money is buying debt that was generated to pay the debts of the banks. So the fact that the Bank of England is countenancing this suggests that nobody expects the 'assets' that we have bought from those banks to ever be worth anything. They are not a future inflation risk because they are as worthless as we always expected - debt and definitely not assets.

Such a policy of creating money to repay our own debt cannot possibly make the UK less solvent, since it is removing the quantity of debt and thus improving out balance-sheet. So why is Standard & Poors threating to downgrade our credit-worthiness as a nation from three stars to two? Leaving aside the question of how much weight we should attach to the views of these agencies that were quite happy with the banks' utterly worthless assets, why should they be making this announcement now?

It seems that there is a struggle going on at the heart of capitalism and this is a shot across the bows of governments that are reneging on the deal they made with corporate investors and the sovereign wealth funds controlled by national governments - the two groups who buy UK national debt.

How does it affect the corporate bond-holders if much of our national debt is simply eliminated by sleight-of-hand? One would have thought that it would have increased their ability to extract work from the labourers of Britain to pay the interest on their gilts, since they are now competing with fewer holders of gilts for their share of this value.

As for national governments holding sterling as reserves, they may become uneasy (queasy?) about the value of these assets, since the QE buy-back policy suggests an inability to support the levels of debt that have been taken on by the UK government. But again, the reality is that as the level of debt is managed down, the ability of UK plc to make good on what remains is increased.

The real issue is a political one. Money is being created from thin air to enable banks that extracted huge amounts of value during the asset bubble to carry on functioning - to maintain themselves as ongoing concerns that can thus continue to hold these 'assets'. What must really frighten the board of Global Capital Inc. is the thought that we, the revolting peasants of these islands, might demand that money is created in a similar way to pay for schools, hospitals and the others services that are so under-financed.

So the downgrading of national debt is a shot across the bows of a government that has increased investment in the public sector in recent years - the lastest move by the privateers to establish their power over our national economic life following a time when the government was forced to introduce a de facto socialist regime. It reinforces that massive transfer of value to the rich that the bank bailout represents, and reinforces the rules of the capitalist game that those who earn must work for their living, while those who own need not. Creating money directly is a head-on challenge to these rules and this is why it must be undermined.

19 May 2009

Transitional Demand for a Town in Transition

We have reached the exciting stage of 'no turning back' with our local currency here in Stroud. As we go into shops and pubs making the case for the Stroud Pound many people ask 'What is the point of a local currency? Can't we just decide to spend more money in our local economy?'

Our currency is designed on the model of the German Chiemgau, which itself follows the model of the Worgl - the holy grail for currency enthusiasts, which allowed its small Austrian town to flourish like an economic oasis in the midst of the desert of inter-war Depression. The money, like most natural systems, deteriorates over time, which is intended to increase the speed with which it changes hands. This is the key feature that underpinned the success of the Worgl experiment.

But whether or not this works in Stroud, launching a local currency is an important political move, because it is a transitional demand. According to Len Arthur:

'Transitional demands are those which relate to current grievances and seem a legitimate solution but if won would create a direct challenge to power resources of those who dominate.'

Making your own money is a practical response to the failure of the capitalist economy and a commitment to your local community, but is is also a real and immediate challenge to the system itself and the monopoly on money creation by the banks. This is the reason why the Worgl system was shut down by the Austrian state. We are waiting with interest to see the reaction here if the currency is a success.

11 May 2009

No Woe-Worn Creature

I've mentioned William Cobbett on this blog before, that time with reference to his reflections on the cottage economy. During the ferment of political activity that led up to the passing of the Great Reform Bill in 1832, Cobbett travelled the country reporting on the dreadful conditions being faced by working people. What he witnessed is reported in his endearing style - stranded between sentimentality and indignation - in his Rural Rides.

Cobbett visited Stroud in September in September 1826, when the British economy was suffering one of its periodic slumps, to the extent that he mentions more than 100 acres of fields which had racks for drying the newly dyed cloth on tenterhooks which were completely empty.

In spite of the interruption of trade and the low level of wages Cobbett notes that Gloucesteshire is a rich land. He finds none of the tough Northern attitudes here and the overseers and magistrates 'do not presume that they are to leave any body to starve to death':

'this is England, and not in 'the North', where those who ought to see that the poor do not suffer, talk of their dying of hunger and applaud them for their patient resignation! The Gloucestershire people have no notion of dying with hunger; and it is with great pleasure that I remark, that I have seen no woe-worn creature this day. The people seem to have been constantly well off. A pig in almost every cottage sty; and that is the infallible mark of a happy people.'

Cobbett enjoys an in-joke with his political economist reader, mentioning his meeting with a local plumber on his way to mend the pipes for 'Squire Ricardo' who is so rich that nobody would consider him a neighbour. The famous theorist of political economy lived near Stroud at Gatcombe Park, now home to Princess Anne. One of his sons was MP for Stroud following the Reform.

We are frequently accused in Stroud of being softy southerners, of having an easy job of the Transition. A friend cautions me to always be aware of the hat-grit balance when extolling the virtues of the bioregional economy. Do I dare to delight in my locally made hat while others in more depressed economies are struggling to survive?

There is a balance to be struck between the donning of the hair-shirt and the practice of joy. As Rob Hopkins points out, we are unlikely to tempt others to join us in the transition to a low-carbon future if we make it sound so unappealing. Likewise in modelling the future we want to build we should take care to ensure that there is restfulness and joy in our own lives.

7 May 2009

Gilty Secrets of the Treasury

For those whose interest in what the hell the government is up to with our monetary policy continues, I offer the Debt and Reserves (as if!) Management Report 2009/10 from the government's Debt Management Agency. I bet that looked like a cushy number when the tender went out.

There are some great data and graphics indicating the horrendous debt situation we are in. The report also informs us that the some of the auctions of government debt have had ‘largeer than average tails’ as a result of ‘volatile gilt market conditions’. A helpful note informs us that ‘the tail is the yield at the lowest accepted price less the yield at the average accepted price’, in other words the debt is getting harder to shift. This is confirmed by the admission that there was an ‘uncovered’ auction on 25th March, i.e. some of the debt remained unsold. (This is illustrated in the second reproduced graphic.)

Here is how the report describes the introduction of quantitative easing:

On 19 January 2009, the Government established the Asset Purchase Facility (APF) to enable the Bank of England to ease credit conditions in corporate debt markets by making purchases of private sector assets. On 5 March 2009, the Monetary Policy Committee of the Bank of England (MPC) announced its decision to use the APF for monetary policy purposes by purchasing £75 billion of assets (the majority of which would be gilts) in the following three months financed by the provision of central bank reserves. The asset purchases are designed to influence the quantity of broad money as a supplement to setting the level of the Base Rate.

In February Mervyn King got the wind up about the buying back of our own debt and wrote to the Chancellor to require that ‘It should not alter its issuance strategy as a result of the transactions undertaken through the Asset Purchase Facility for monetary policy purposes.’ The Chancellor maintained that the objectives of monetary policy had remained the same, and that these remained ‘to minimise, over the long-term, the costs of meeting the Government’s financing needs, taking into account risk, whilst ensuring that debt management policy is consistent with the aims of monetary policy’.

I'm afraid I can only bear so much of this deliberately obfuscatory prose. It does nothing to change my view that we need to have an up-front and just negotiation about how the debt is removed from the economy, together with a revision to the money-creation system that makes a similar bust impossible in future.

Yesterday, the Treasury Select Committee criticised the Treasury for focusing the money created through the QE policy on managing the monetary aspect of the problem, rather than supporting the real economy, which was the justification for the policy and the reason the Bank of England agreed to it. So far of the money created £2.8bn. has been spent on corporate debts, compared with £51bn. used to buy up government debt.

6 May 2009

Revaluing the Wasteland

T. S. Eliot gave the wasteland a bad name. But then he did begin his famous poem with the words:

APRIL is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain.

Some cruelty! And he doesn't even mention the bluebells.

Yes, yes, I know he had a sort of spiritual wasteland in mind, where humankind had strayed off the path of learning Greek and revelling in high culture. His pessimistic view might have been tempered somewhat if he had strayed off his own path of intellectual endeavour and found his way into the highways and byways of the real Wilderness.

I have a soft spot for Eliot, though. Something about the cadence of his writing rather than the recondite content. And not unconnected to the fact that one of my first boyfriends caught me with a short bit of his verse involving a rose-garden - no doubt the wildest sort of place Eliot himself ever strayed into.

But I digress. What I meant to share with you was the vast range of uses that peasants once put wastelands to. This was before the days of the National Trust, when non-agricultural land was available for foraging rather than recreation. The study by J. M. Neeson called Commoners indicates just how much they were able to provide. Obviously there was grazing and the possibility to gather firewood and other materials that were used for fires — furze (gorse) and bracken (fern). Commoners also took hazel loppings to make hurdles for penning sheep, and fern was also used for animal bedding and, once burnt, its ash was used to make soap. In addition:

'Reed was plentiful and valued most as thatch for roofs and also to cover the stacks, ricks and clamps for all kinds of crops and vegetables. Rushes — bulrushes — were equally plentiful, waterproof, and woven into baskets, mats, hats, chair seats and toys. . . they were also good for bedding, as a netting in the plastering of walls, and wrapping for soft milk cheeses. They made cheap, bright rushlights too' (Neeson, 1989: 166).

The list of foraging crops, especially nuts, berries and fungi is equally long, and as varied as were the possibilities for salad crops and herbs that could be gathered. It is clear from these accounts that the commoning lifestyle offered two other characteristics crucial to a bioregional approach to provisioning: seasonality and shared experience.

The dismantling of the commons was disastrous for commoners but crucial for the growth of the industrial market system, which they were required to staff. Neeson’s account makes clear the link between the ending of subsistence and the population explosion which Malthus and other political economists later bemoaned. She also chronicles how the move from commoner to labourer undermined the resilience and self-reliance of British citizens.