In a banking crisis, many – or most – banks flirt with insolvency. They stay in business through cheating, lying, and blackmailing the state. As I said in a speech in Tokyo in January 2009:
The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.
Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.
Back in April last year… bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.
Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.
This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery.
The Eurozone is now riddled with zombie banks, all using their too-big-to-fail status to distort the response to depression in the European periphery, while the deceptions of British banks are steadily being exposed, with Barclays currently in the firing line. In the United States, too, a pattern of rampant criminality is steadily emerging. Liars. Cheats. Blackmailers. Guilty as charged.
But as the Leveson Inquiry has shown, the British media has many of the same bad habits. Not just a willingness to break the law and bully both the powerful and the helpless, but a casual mendacity, where the story is pre-determined and facts are twisted to give it as much viral zing as possible.
We don’t know each other, but I want to offer you a deal: You each give me £20,000. And that’s it. What do you get in return? Well, it’s a fair question but I can’t even promise to pay it all back. But let me assure you of this: your hard-earned cash will keep me in the style to which I’m accustomed. And that’s got to be good for all of us. So I’m sure you’ll agree that 20 grand is an absolute bargain. Indeed, I would call it a once-in-a-lifetime offer; only I can’t promise not to come back again.
You’ve probably guessed that the transfer I’m talking about has already happened. Each man, woman and child in Britain has already handed over £19,271. And our money has gone to the banks.
That’s a carefully crafted hook, reinforced in the last paragraph (“next time, the British might need to cough more than 20 grand each”) to hammer the lesson home. It’s designed to be picked up on Twitter and Reddit, and grumbled over down the pub, all driving eyeballs to the Guardian’s website.
But as a meme, it’s deceptive at best. If 63 million UK citizens had each coughed up £19,271, the total bill would be around £1.2 trillion – but that’s more than the UK’s entire national debt which exceeded £1tn only at the end of last year. It’s simply impossible for the government to have dished out so much money to our banks.
So what’s going on here?July 5, 2012 at 12:36 pm | More on Economics and development, Key Posts, UK |
Matt Taibbi in Rolling Stone:
To me what’s missing from all of this is the “Holy Fucking Shit!” factor. This story is so outrageous that it shocks even the most cynical Wall Street observers. I have a friend who works on Wall Street who for years has been trolling through the stream of financial corruption stories with bemusement, darkly enjoying the spectacle as though the whole post-crisis news arc has been like one long, beautifully-acted, intensely believable sequel to Goodfellas. But even he is just stunned to the point of near-speechlessness by the LIBOR thing. “It’s like finding out that the whole world is on quicksand,” he says.
Aditya Chakraborty in the Guardian:
July 4, 2012 at 6:51 am | More on Economics and development |
At a hearing in the US last month into how JP Morgan lost up to $9bn in the UK in derivatives trading, congresswoman Carolyn Maloney commented: “It seems to be that every big trading disaster happens in London.”
This is surely where the pressure from the Libor scandal needs to be directed. Miliband is right to demand a public inquiry. But rather than a nice, compact affair that can be swept under the ministerial carpet, any investigation needs to understand how to reform the finance sector so that crises like these don’t recur; and so that banks actually work in the public interest rather than hire propagandists to pretend they do. Because in the end, financial reform is not about technicalities, but about politics: deciding what role banks should play in an economy, and what kind of economy we want.
And just as the Leveson investigation has unpicked the toxic intimacy between the Murdoch empire and the political classes, so any inquiry into finance needs to expose the strength of its grip on our politics.
In the wake of the Lehman’s collapse of 2008, there was much talk about how the relationship between state and finance would be changed in the public interest. Those efforts were effectively killed off by the finance lobbyists and, if we’re honest, the unpreparedness of progressives in Britain to seize the opportunity. The Libor scandal offers a second go at the same argument. We either have it out this time, or we run the risk of repeating 2008. Only next time, the British might need to cough more than 20 grand each. A lot more.
July 3, 2012 at 8:58 am | More on Influence and networks |
Many fragile states suffer from incoherent legal systems. Whereas in developed countries, one single system exists and is effectively enforced, in fragile states multiple systems work side-by-side, each weakly enforced, and often operating in contradiction with each other. Creating a unified and robust system of law is one of the biggest challenges these countries face.
In most cases, this incoherence is a direct product of colonialism. One system, often with the greatest relevancy to local populations, has roots in the precolonial system of governance. It may have evolved a lot since then, but is still based on local circumstances and institutions. The state, itself a product of foreign rule, follows another system, based on Western legal tradition, imported from abroad. Neither is consistently or equitably implemented. Corruption distorts outcomes. Officials (whether those of the state or local leaders) lack training. Favoritism is common. more »July 3, 2012 at 12:46 am | More on Africa, Economics and development, Middle East and North Africa, South Asia |
I have something very urgent to do, but instead I have found this, which kind of proves the point in a satisfyingly circular way. From Aaron Ausland’s blog, ‘Staying for Tea’
I don’t know if creativity is a finite thing, but I do know that once I started blogging and tweeting, I began using a greater measure of it for things of questionable value.
With accompanying cartoon entitled ‘Applied Creativity’ (and the blog post has loads more, allvery funny and too true…)
July 2, 2012 at 10:27 am | More on Off topic |
I was doing some thinking on possible ways that the post-2015 MDG/SDG scenarios might play out after the launch of the SDG process at Rio+20 last week. I’ve come up with six possible outcomes, based on the relative levels of political agreement within each of the the two tracks, which might be useful in framing how organisations think about and plan for the post-Rio post-2015 world (these, of course, represent the extremes, and outcomes at various points along the different continuums are also very possible).
There is also a huge unknown in how the two tracks will relate to each other, and the various permutations of that aren’t covered here. It’s quite plausible, for example, that a failure to agree on SDGs would poison the atmosphere to such an extent that even quite high levels of agreement on the post-2015 MDG framework don’t result in an agreement. But here are some possibilities, and I’d be really interested in any other scenarios that people are developing (the meaning of the ‘Christmas Tree’ ‘jigsaw’ and ‘bullseye’ frameworks are explained here):
June 29, 2012 at 11:47 am | More on Economics and development, Global system |
From the Economist:
June 29, 2012 at 9:25 am | More on East Asia and Pacific, Economics and development |
It is not exactly news that the world’s economic centre of gravity is shifting east. But it is striking how fast this seems to be happening. In a new study on the economic impact of urbanisation the McKinsey Global Institute, the research arm of the eponymous consultancy, has attempted to calculate how this centre of gravity has moved since AD 1 and how it is likely to move until 2025. Although the underlying maths (which involves weighting the approximate centre of landmass of a country by its GDP) has to be taken with a pinch of salt, the calculations show that the centre is rapidly shifting east—at a speed of 140 kilometres a year and thus faster than ever before in human history, according to Richard Dobbs, one of the authors of the study. The main reason for this is rapid urbanisation in developing countries, in particular China.
June 28, 2012 at 9:29 am | More on Influence and networks | 1 Comment
Wind extinguishes a candle and energizes fire.
Likewise with randomness, uncertainty, chaos: you want to use them, not hide from them. You want to be the fire and wish for the wind. This summarizes this author’s non-meek attitude to randomness and uncertainty.
We just don’t want to just survive uncertainty, just about make it. We want to survive uncertainty and, in addition –like a certain class of aggressive Roman Stoics —have the last word. The mission is how to domesticate, even dominate, even conquer, the unseen, the opaque, and the inexplicable.
Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, uncertainty, opacity, adventure, disorder and stressors. Yet, in spite the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile.
Antifragility is beyond resilience or robustness: the resilient resists shocks and stays the same; the antifragile gets better. It is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation cultural and economic success, corporate survival, good food recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance… Even our own existence as a species on this planet.
A delicious tale from this morning’s Telegraph:
French secret service agents tasked with protecting President Francois Hollande “forgot to pack their guns” while on a recent trip to a climate conference in Brazil, it was reported on Wednesday. In a highly embarrassing Inspector Clouseau-style blunder, the presidential guards from the elite GSPR unit only realised the guns were absent upon arrival at Rio de Janeiro Airport.
They usually travel with a secured briefcase containing an array of firearms. But when they sought to present the weapons to customs officials, they were nowhere to be seen. “They searched the (presidential) Airbus with a fine tooth comb, to no avail,” according to French satirical weekly Le Canard Enchaîné. It later transpired the guns had been left at the Elysée Palace in Paris.
This meant that for the duration of the trip, the bodyguards’ only means of protecting the French president were their “bare hands”, Le Canard reported. “In police memory, it’s a first,” one elite officer was cited as saying.
The end of impunity for bankers? How Spain’s indignados are using crowdfunding to bring them to justice Mark Weston
Following the collapse of the bank he was running until earlier this year, Rodrigo Rato probably thought he would be able to slip into a quiet, if tarnished retirement.
A former managing director of the IMF and minister of the economy during Spain’s boom years, Rato stepped down as executive chairman of Bankia in May after steering the group onto the jagged rocks of a €4.5b government bailout. Rato had bragged about the bank’s huge portfolio of loans and deposits, and it was floated with great fanfare on the stock exchange last summer. Within a year, however, buckling under the weight of a mountain of bad loans, the bank had had to be part-nationalised (for a description of how it happened, see this FT article). As well as institutional investors, hundreds of thousands of unwary Bankia customers and thousands of members of staff persuaded by their trade union that the stock was a safe investment found themselves out of pocket.
A few weeks after Rato’s resignation, his successor revealed that the net profit of €309m in 2011 that the bank had reported was in reality a €3b loss. The stricken entity would need an additional €19b bailout, and become the major trigger for the European Union rescue package announced by an embarrassed Spanish government earlier this month.
This latter revelation sparked the interest of Spain’s “indignados”, the loose association of young protesters who spent much of the middle part of 2011 camped out in the main squares of Spain’s biggest cities. The movement has been fairly quiet of late, but the Bankia debacle has roused it from its slumber. Deciding that Spain’s bankers had been getting away for too long with misleading the government, shareholders, customers and, well, everyone else, they took action.
The target was Rodrigo Rato, the idea to sue him and his colleagues for falsifying the firm’s accounts in the lead-up to the IPO. Having obtained support and crucial information on the board’s activities from a group of ten disgruntled shareholders, the indignados’ umbrella organisation 15-M needed to find €15,000 to meet the costs of filing the suit (the breakdown of those costs is detailed on the group’s website). Many of its members are unemployed, many others are students or low-paid workers. None had the means to take legal action single-handedly. What to do?
Ingeniously, they turned to crowdfunding to raise the money. Like its more famous cousin Kickstarter, the website goteo.org allows those in need to solicit funds from anyone who feels like contributing. In late May, therefore, as El País reports, 15-M began a Twitter campaign to drum up interest, under the hashtag #15MpaRato. At 9am on 5 June, the goteo.org page was launched. Within an hour it had received 11,000 visits. By 2pm it was in danger of crashing because of so many donations, and had to change servers. Within 24 hours, the fundraising target had been surpassed, with a total of €19,413 accumulated in donations of between €1 and €500. ‘Of every 40 attempts,’ reported a 15-M member based in Seville, ‘only one managed to make a successful donation.’
Rato and his colleagues will now have to stand trial, and the success of the fundraising effort has encouraged dozens of other Bankia shareholders to add their weight to the campaign. 15-M are seeking punishments of up to six years for those responsible for the bank’s demise, and preventive custody and an embargo on their assets in the meantime. In the pre-internet days, it would have taken months or years to raise the money to pursue such a case, but as one 15-M member remarked to Spain’s national TV station, with the power of crowdfunding, ‘fear has changed sides in the battle between those at the top and those at the bottom.’June 26, 2012 at 5:16 pm | More on Economics and development, Europe and Central Asia, Influence and networks | 5 Comments
The FT has this as lead story this morning:
The European Union would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times. The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union.
First, it’s welcome that we’re finally seeing evidence of some seriousness of thinking in Europe about what it will take to get through this crisis, rather than the crappy one-step-at-a-time incrementalism that’s characterised everyone’s response so far.
Second, this probably is a necessary component of a solution that will actually work, if the plan is to keep the Euro going.
Third, if this did happen, note the distinction that would then exist between the EU and US approaches: in America, the consequence of fiscal irresponsibility isn’t to pass the back up the chain (to the federal government), but rather to throw it down the chain (hence how many cities and municipalities are facing bankruptcy).
Fourth, Commission staff must be almost fainting with excitement at the idea of so much power shifting to Brussels.
Fifth, if EU leaders did decide they were willing to contemplate this major shift, then they would have to get serious, at last, about Europe’s democratic deficit. For all that NGOs love to paint the IMF as anti-democratic, actually countries do face a choice about whether to seek an IMF bailout (with conditions attached, yes) or not. Under this proposal, if I understand it correctly, EU states who’ve messed up their finances would not: they would have no option but to shape their budgets according to the wishes of a bunch of unelected bureaucrats in Brussels. Hard to see that working out as a politically sustainable arrangement.
Sixth, if EU leaders were to get serious about Europe’s democratic deficit, then we’d be straight back to the whole circus that was the attempt to agree a European Constitution last decade. Open question: is the Eurozone crisis serious enough that the French and other European electorates would be better disposed to such an agenda now than they were in 2005?
Seventh: against this backdrop, it becomes obvious why the UK government’s strategy of separating the governance of the Eurozone from the governance of the EU as a whole makes zero sense.June 26, 2012 at 6:56 am | More on Economics and development, Europe and Central Asia | 2 Comments
Why do you blog ?
From the New York Times Book Review.June 26, 2012 at 12:21 am | More on Off topic |
The comprehensive Data report released today by the One campaign reveals that the flow of aid from Europe to developing countries fell by €700 million in 2011, the first such drop in almost a decade. The crisis in the Eurozone and the squeeze created by austerity measures are taking the blame for this, with Greece and Spain having – understandably – made the largest cuts in their development budgets.
So far, much of the commentary has concentrated on what this means for the EU in terms of its pledge to contribute 0.7% of national income towards achievement of the Millennium Development Goals by 2015. Although the UK, Ireland and the Netherlands are on track to meet this target, many other European countries will have to stump up billions more in order to do so. This is a tall order at a time when cuts in public spending are being made across the board.
However, new research from IPPR and the Overseas Development Institute (ODI), also published today, suggests that this debate is missing the point somewhat. Instead of focusing on ‘getting to 0.7%’, more attention needs to be paid to addressing declining levels of popular support for aid.
In February and March of this year, IPPR and ODI held a series of deliberative workshops around the UK: in London, Newcastle, Edinburgh and Evesham. These sessions gave us a chance to have in-depth conversations with diverse groups of UK voters, both to hear their views on various aspects of the aid and development debate and to better understand the values and attitudes that underpin them. The messages we took from these were mixed.June 25, 2012 at 5:39 pm | More on Economics and development | 3 Comments