It’s Clegg’s fault

Someone asked “has there ever been a worse politician than Nick Clegg”?, and at first sight it is hard to think of one, other than GW Bush. And actually, most American politicians.

But Clegg has been spectacularly rubbish. He has squandered the opportunity of coalition and  politically, ruined his party. Financially, it was already ruined.  He could have, should have been a much feistier coalition partner, not afraid of the odd harsh word (they are different parties, anyway) but always standing up for what is right. He’s failed, but for the nation as a whole, his biggest failure came last Thursday.

If Clegg, not Cameron, had been doing his job, Thursday night’s Brussels fiasco could have been prevented. Cameron was doing his, for the sake of his mates and his toxic backbenchers, but Clegg was asleep in Sheffield.

Clegg doesn’t have a country to run. He doesn’t have the Eurosceptic baggage that Cameron has, he speaks several languages, and he could have spent time building alliances before the meeting.

With those alliances in place, there might not have been the need for a Tory veto at all; if Clegg had done his job, the options on the table might have been palatable even to Cameron.

Had he been in Brussels, as he should have been – he’s Deputy Prime Minister, after all – he’d have been able to say to Cameron, as he was considering his veto at four in the morning, “Listen, Dave, don’t be such a twat.” Or words to that effect. He might have been able to negotiate a better deal on the Tobin Tax – “yes we support it in principle, and we will agitate for it internationally, but it must be global, so we want a deferred implementation”.

But he didn’t. He was asleep in Sheffield.

What a useless fuckwit he has been.

The City’s Broken Business Model

It is, of course, quite wrong to refer to “The City” as if it were something homogeneous. There are dozens, hundreds, of different business activities in the the City, from sandwich-sellers to shipbrokers, and not all of them use the broken model by any means.

But many do. Investment banks, fund managers, bond dealers and  insurance brokers for a start.

The common key feature of this model is commission-based sales, with profits taken early.

The broken part of it is that profits and risks are time-mismatched.

Time and again we find mis-selling scandals, bubbles and other regulatory failings that prompt soul-searching all round with this common factor at its core.

Although it’s the problem from a few years ago, I’m going to look at sub-prime mortgages to try to illustrate the problem.

You start with an estate agent (real estate agent in the US). He (or she) will get commission if he sells a property. The commission is paid when the property is sold. He finds someone who wants to buy, but doesn’t have the money. So he puts them in touch with a mortgage broker. He, too, gets commission when the mortgage is sold.  Sub-prime mortgages are a bundle of products, including the actual loan secured on the property and a series of other insurance “products” intended to help bail out the lender when the deal goes titsup. All of these are essentially promises, made by the poor person, to pay so much a month for the next twenty-five years or so.   In many cases, these promises could never be kept…. which we’ll come to later. But the person selling the property and the mortgage to buy it don’t need to worry about that, because they will get paid their commission when the sale goes through, whether or not the buyer breaks his promise at any time over the ensuing twenty-five years.

The lending bank then has a mortgage on its books, and the associated money now in the property vendor’s bank account. To lend more, it needs more money to lend.  The institutions with the most money are pension funds, with billions of contributions made every month looking for somewhere safe.  Until 2007/8,  US residential mortgages were considered pretty safe.  The bank can sell its mortgage to the pension fund, getting more money to lend out on another mortgage; the pension company gets the interest on the mortgage.  But no pension fund wants the grief of collecting gazillions of interest payments from mortgagors, or the hassle of chasing them when they default, so the banks sliced, diced and repackaged their mortgages into instruments that were more practical for pension funds to handle. They then sold these instruments to pension funds, paying their brokers a commission for the sale, and booking profits as they did.  The slicing-and-dicing was supposed to minimise the risk associated with these instruments, but it failed to do so; sure enough, poor people couldn’t keep up payments on a mortgage, and the value of the instruments crashed. But many people in the chain had already made a lot of money from them, in the various commissions paid at every stage of the chain.

Commission percentages, paid up-front, discourage brokers of any sort from acting responsibly. The incentive is to do the deal, and pass the risk that someone won’t keep their promise further down the line.

But this model is profitable, until a crash comes. Commission in one form or another is booked as a profit. Banks were making loads of money from commissions, and they still do. It poisoned the way High St banks operate. Visit your local bank manager, and you won’t get friendly advice, you’ll get a salesperson on commission trying to sell you a product. Banking products are generally speaking lopsided promises: a big sum of money one way, in return for the promise of lots of little sums of money into the future.

Now there’s nothing wrong with commission as an incentive, in principle. It’s just that it should be  paid when promises are kept, not when they’re made.

 

Where does the money come from?

Simple question, really.

We’re told that the City is essential to the economy. We know that Labour dared not do anything about it, because of the tax revenues it generates.

It generates lots of money and its highly-paid staff pay lots of taxes that are used to to pay for public services.

But what’s not clear is where the money actually comes from.

City banks are profitable. Nothing wrong with that, on its own. But when even the bankers don’t really understand how the profits are made, we are in trouble.  And I’m not sure they do.

My experience tells me that institutions profit from my money. They don’t profit in proportion to the profits they earn for me, but in proportion to the products they sell to me. If those products (like the pension and endowment savings policies I’ve bought over my lifetime) turn out to be worthless, they’ve already made the profits.

We got wise to most managed funds. Endowments stopped making any sense once the tax relief went, but we were still mis-sold them. A lot of insurance was mis-sold.  Packages of mortgage debt were mis-sold, and I am sure somewhere there’s someone who’s got units in a gold-plated sovereign debt fund that’s not so gold-plated now. But when it was sold, the bank profited in two ways. First, by offloading junky assets at the top of the market; next by taking a commission on the sale.  Every IPO/MBO cycle results in the bank profiting and the ordinary saver losing out.

My hunch – no, it’s much more than a hunch, it’s a conviction, but I haven’t done the detailed analysis to prove it – is that all the surplus profit made by the City was generated by looting its clients’ money. Not real profits, then, but theft.

The only wise investment I’ve made in my lifetime has been in my house. That’s the same for most of my generation, and it’s had two bad effects. First, it’s priced the next generation out of the market; and second, it’s meant that there’s been no capital or money or – ultimately – talent  left for doing real stuff that actually makes us all better off.

The NHS and patient data

David Cameron is sweetening the controversial announcement that he’s planning to talk to pharmacos about data mining the NHS’s clinical data with a promise of faster access to newer treatments….

But (and for someone who’s as strong on personal privacy as I am on corporate transparency, this is perhaps counterintuitive) – I think he’s on to something.

The NHS’s collection of patient data is  a fantastic resource that’s just not exploited. Partly it’s because it’s mostly in trolley-loads of folders with paper notes and printouts of various incompatible scan machines, partly because the question of patient confidentiality – and supposed need for individual consent – has always stopped it being exploited.  But if it were mined effectively, doctors could get a lot better at prescribing.  There has to be lots of evidence that bulk statistical searches of the data would show up – evidence of drug interactions, positive and negative, that we don’t know about, clues to preventing and curing all sorts of disease. It’s frankly irresponsible not to try to release this data to medical research.

Of course, patient confidentiality must be respected. But  orderlies  telling the paparazzi that a Z-list star’s in A&E are a much more serious threat, and much harder to manage.

Properly anonymised, this resource should be made available, not just to pharmacos, but to anyone who’s interested.

 

 

My point, reiterated

Knowledge – information – is power. Trite but true.

Governments and corporations know more and more about us, from our shopping preferences to our location at any time to what tax we pay.

Yet we know less and less about them.

It’s time to turn the tables.

Governments and corporations should know nothing more  about us individuals than they need to to do the jobs we have entrusted to them.

We, on the other hand, as citizens have a right to know everything that our government does on our behalf, and as stakeholders a right to know everything that corporations do.

In the information age, these basic rights to know are the keys to our liberty.

 

 

Tax evasion and the deficit: another argument for reform

This article by Eoin Clark makes the case that the total tax evaded under New Labour  is – within ten percent or so – the amount by which the national debt – the accumulated fiscal deficit –   grew over the period.

Therefore, the argument goes, if there had been no tax evasion, there would now be no additional debt, to which we must of course add a giant CETERIS PARIBUS, and an even larger reminder that they never are. Nevertheless, some part of the principle still applies – if more people paid more taxes, the deficits and the debt would have been smaller.

So what are we to do about it? The answer, “deal with tax evasion”, is far too glib. People evade taxes because the tax system is full of loopholes. You cannot simply close them without triggering many unintended consequences….. and it is a fair bet that every loophole is there because some particular lobby group lobbied for for it. Some of them even you will agree with. There has to be a clear exposition of how to deal with tax evasion.

There needs to be a total rethink on what taxes are for, why we pay them, and how we should collect them. Fair taxes, transparently levied on a concrete, objectively-determined base, to pay for an appropriate set of communal services.

Tax avoidance and evasion are possible because we have a broken tax system: one in which tax advisers prosper. Simplify taxation, so everyone pays everything that they should and tax advisers turn their talents to something productive rather than leeching

Note that I am not saying we should outlaw tax advisers. We should just stop having a tax system in which they can prosper by playing off evasion and avoidance – in which there is no demand for tax advisers. The existent of a tax advice profession is a strong indicator of a tax system that is too complex.

Tax and Liberty

On Twitter,  I follow people of many different political persuasions, for the sake of “balance” whatever that is.

The libertarians – with whom, as a liberal,  I tend to sympathise – view all taxation as theft; while the tax-justice people think the same of tax evasion.

Tax is illiberal: it’s something that’s compulsory. On the other hand, I don’t see how any nation state can function without taxes, and – like it or not – we live in a world of nation states. It is, on the whole, better to have a nationality than to be one of the world’s dispossessed refugees.

Nation states are organisations to which we as citizens belong. As free citizens, we should have the right to decide whether or not to belong to a particular state, depending on whether we support its values or want to live in the territory it controls, and so we enter into a compact with that state, to obey its laws and to pay its taxes. We are unfree to the extent that we cannot always freely choose which of the worlds’ nation states to belong to; as a liberal, I think all states should have liberal criteria for citizenship (and never, though this is for another rant, based on ethnicity or faith); I would like to be able to choose to be a citizen of Israel or Japan or China or the USA or Liberia or Britian, depending on where I wanted to live and whose values I held.

But because we can’t freely choose our nationality, we are not fully free citizens. Like it or not, we have to obey the laws and respect the institutions of the nation to which we belong, and that includes paying taxes. We are free to argue that taxes should be less or more, or that certain laws should be different, but we do have to pay the taxes prescribed by law. When taxes become semi-voluntary, as they seem to be to Goldman Sachs, and when the rich can pay lawyers and tax advisers to reduce their tax bill, we have a broken and unjust tax – and legal – system. It is right that the authorities should tighten loopholes; it is wrong that they should do deals on a handshake with American investment banks.

I don’t see the moral or ethical distinction between a rich person paying a lawyer to pay less tax and a poor person not declaring his cash work to the benefits office because if he did they’d cut his benefits pound for pound. One is lawful because it is lawyered, the other technically criminal, both are the result of a broken tax system.

Kelly’s Cobblers

Sir Christopher Kelly’s ideas are pathetically timid.

The party funding problem is easy. Parties won’t like the answer, but it will be better for democracy. Which is why they won’t like it.

The only sensible cap on donations is £10k less than the one suggested by Sir Chris..

No party donations at all. Just a membership tariff. Up to each of the parties to decide what it should be, and it could be flat or sliding, based on income, say.  But you only get to pay your subs to belong to your party.

As for ensuring compliance with this rule, regular readers of this blog will know that I have the answer to that. Do I have to spell it out again? Oh all right then. Parties, your books must be open to all your members to peruse in real time. It is their money you are spending, remember?

OK, parties: now, to fight elections, you will need to recruit members.

You will need to make yourselves relevant to voters between elections to keep your coffers full.

You will need to stop courting the wealthy, because they will not be allowed to pay you any more than any other member.

You will need to embrace democracy in deed as well as in rhetoric.  Tough, I know – it goes against every fibre of your constitution.

You may even have to be honest and transparent to the people who pay you.

 

Balls’ balls

Just to say that Ed Balls’ proposed VAT cut is the most idiotically stupid proposal I’ve heard from a politician since he made his boss cut VAT to 15%.

Not because VAT is a good tax – it’s regressive and illiberal, dictating how people should spend their money (food, books, children’s clothing) to save tax – but because footling around with 2.5% here or there creates a massive admin headache for small businesses and makes little difference to the price on anything but the big ticket items which are usually bought on credit. Yet it creates a £13bn hole in the government’s finances.

Balls could be right that we need some fiscal loosening, but – if so –  it would be much more effective to spend £13bn on infrastructure projects than on this bonkers vat cut.

If you’re going to reform VAT, abolish it.

 

the current crisis.

I have been trying to express my views on the current financial crisis – the one that surfaced in 2007/8 and is still going on – in a single page.

This is my latest attempt to do so.

 transparency: a declaration about the continuing crisis

Transparency is the natural disinfectant that today’s corrupt capitalism needs. Markets aren’t working, but it’s because they are broken, not because markets don’t work. All over the world people buy and sell stuff in markets. And when it works well, capitalism delivers, as capitalism has delivered us the technology which will allow us to control it.

Today’s markets have been corrupted by breaking promises. A whole string of promises that could never be kept and should never have been made are now being broken. Promises that the baby-boomers could have as long and as wealthy a retirement as their parents. Promises that pensions would be worth saving for, promises that poor people would repay impossible mortgages. Promises made by politicians in exchange for our votes. Promises wrapped up in secrets and lies, tied into knots by lawyers for brokers and dealers who have stolen and snorted away the money they promised to look after for us and for our heirs and our parents.

Governments are entangled by loans, bonds, taxes, debt and deficits into a system corrupted by secrets, lies and broken promises. As is each of us with overdrafts and student loans, our savings, mortgages and pensions, taxes and benefits. Yes, Mr Cameron, we are all in this together: tangled in a mess where all we can see is that the more promises the powerful break the richer they become.

We know that untangling the mess will not be painless or easy, but it will be easier if we can see what threads lead where. Let the light in.

We are not against capitalism; we are against corrupt and broken capitalism. We want capitalism to keep on producing the brilliant stuff, the stuff that’s made when brilliant people work passionately together, the technical stuff that could help us to sort out this and all the other messes we’ve got ourselves into and all the other cool creative stuff that capitalism at its best can make.

“Sunshine is the best disinfectant” said the learned judge, so let the sun shine on capitalism’s dark corners and shady conspiracies.

No more secret deals. Let no contract bind unless it is published for everyone to see. Let no court enforce any agreement made or held in secret. Open the government’s books for us to read, to see how our government is spending our money, so every government ledger and every official document is searchable by Google – and by all its competitors.

And what applies to government must also apply to companies – but not to individuals.

As individuals, we have a human right to privacy.

Human rights matter: they are to protect individuals from the excesses of groups like companies and governments.

The most pressing change is to contract law: henceforth, we the people of the world will witness every contract made. If it isn’t published, it isn’t binding. No more secret deals.

Then we change company law. Every shareholder should have a right to know exactly what a company is doing with his or her money at any time. For public companies, whose shares anyone can own, this will mean that the books must be online and searchable. Not just an annual report, nine months after the fact, but the bank balance this instant.

The phrase “commercial in confidence” implies a conspiracy; a conspiracy that should be unlawful.

When we can see everything that they do, they will not be able to lie to us.

Then it will be our responsibility to sort out the mess.