And the $64,000 dollar question– if such a trifling sum can stand metaphorical duty in this context – is whether the government’s bank rescue plan is going to work.
At one level, it bloody well better do; ‘failure is not an option’ may be one of the worst clichés of modern management-speak, but just for once, this assertion is unquestionably true.
Moreover, I still have yet to see any obviously superior or even radically different ideas coming from commentators linked to the Conservatives, the Liberal Democrats or the even the hard left. So this is what we are going to get.
Most of the analysis I have seen this morning seems to suggest the plan is in with a shout of achieving its immediate aims. The collapse of a major British bank is unlikely in the short term, and as a result, credit markets will not freeze up entirely. Some form of lending to both businesses and consumers will continue.
In terms of the wider impact outside the Square Mile, the main political question becomes the one highlight by the Daily Mail, with its finely-honed deft populism, in its leader this morning: ‘What do WE get for our blank cheque?’
That’s a good question, especially as the blank cheque works out at around £2,000 per taxpayer. Let’s start by looking at how good this deal is for those forced to contribute to the whipround.
Essentially, the state will receive minority preference shareholdings in seven banks and one building society, in return for the £50bn needed to prop them up.
Doing things this way is a presentational plus point; Labour will be able to make the argument to the electorate that this isn’t a ‘something for nothing’ deal, because the government is getting an equity stake in the banks it assists.
But preference shares have both pros and cons. They are safer than ordinary shares, in that they earn a set dividend which must be paid before any other shareholders get a dividend. Hence the name.
If for any reason this dividend is not paid, then it is carried forward to the next year, again taking preference over dividends on ordinary shares.
Yet their very safeness precludes their holders from benefiting from the increasing dividends that ordinary shareholders typically enjoy as profits rise.
In other words, precisely because they minimise risks, they therefore do not maximise income. Accordingly, the guess has to be that low risk is part of the attraction here.
Preference shares do not carry voting rights, either. Labour will sell this point as a guarantee that there will be no ‘political interference’ in what will remain private sector concerns, thereby averting charges of wilful Old Labourism.
This is regrettable, on point of democratic principle alone. If public money is being forced to pick up the pieces, then the public should surely get a say in the way the beneficiaries operate in future.
Part of the problem over the last period has been the way in which bank bosses have concentrated on trousering bonuses, while disregarding any obligation to act in the wider social interest.
Taking and using a voting stake in the major financial institutions would be one way of ensuring this does not happen again. At the very least, it would enable the government to enforce responsible remuneration, rather than simply urge virtue from the sidelines.
It’s also worth noting that some preference shares are ‘convertible preference’ share, which can ultimately be converted to ordinary shares; astonishingly, it is not yet clear if this is the case in the Darling deal.
The argument for convertibles is that once the years of downturn that stretch out ahead of us are over, share prices could start to rise rapidly once again; converting the preference shares would then allow the state to share in the upside. If it turns out this option is not open, there had better be a good explanation as to why.
In short, this is not a deal that is going to make anybody fall in love with it; the free market right will find much that is offensive, and the social market left will find it unnecessarily timid.
Partial socialisation of the banking system is not a bad thing in itself. It’s just that it could have been handled so much better if the idea had been developed as part of a carefully considered strategy for greater economic democracy, rather than a hastily put together panic measure with a number of obvious drawbacks.
Posted at 14:02, 8 October 2008
Comments (20)
Moreover, I still have yet to see any obviously superior or even radically different ideas coming from commentators linked to the Conservatives, the Liberal Democrats or the even the hard left.
Dave,
Assuming the LRC is part of the 'hard left', are you really saying that the ideas put forward by John McDonnell here: http://www.guardian.co.uk/commentisfree/2008/oct/08/creditcrunch.banking
or LEAP here: http://leap-lrc.blogspot.com/2008/10/peoples-programme-for-crisis.html
are neither superior to nor radically different from Brown and Darling's plans?
I don't think the lack of voting rights with preference shares will matter a whole lot to be honest.
The FSA and the Government are going to have a major say in the remuneration arrangements of the banks - the FSA is due to publish something according to the Beeb. In any case the right of shareholders to vote on remuneration hasn't had much of an impact in my view in any case.
And I suspect that if the Government want a particular director off a particular bank's board they will make this happen. It won't come to a vote at the AGM.
IMO this does raise questions about the public company model. It's not like the failure of shareholders to keep pay in check is restricted to the banks.
But what might 'working' actually mean, beyond avoiding a bank insolvency or a good old fashioned run on the banks to put the Northern Rock shenanigans in the shade?
I think my family of 4 has just spent c£3300 to acquire a minority stake in some insolvent banks, loaned these same banks a further £13200 or so and suggested that if they pay me some trifling fee I'll insure them for another £16,500 worth of deals. Always glad to do my bit for the nation's economy.
But surely this must be just a teesiest bit inflationary? The debt is still there: there is simply more money than underlying assets. A sea of money has come crashing into the market to try to make people forget about it. The value of the debt will be diminished by an inflationary growth - as will savings of course. Not to mention wages. So what is the risk of 'working' meaning the City gets its' money back and we all embark on a re-run of the 1970s?
And talking about 'votes' what happened to a vote from MPs on the proposed giveaway, as happened in the US where they even had the gall to reject the giveaway - for 5 mins.
£50bn to the banks on the say so of who? - theft in a semi dictatorship.
Moreover, I still have yet to see any obviously superior or even radically different ideas coming from commentators linked to the Conservatives, the Liberal Democrats or the even the hard left.
Here's four: Nationalise them - sans compensation since they're apparently worthless, reflate to eat up the outstanding debt, tax the bejesus out of the rich to ameliorate the possibility of depression/poverty, use the newfound competitiveness to re-establish some sort of manufacturing base.
It ain't even that ideological, it's just common sense.
But surely this must be just a teesiest bit inflationary?
Massive inflation is inevitable
Amusing innit?...If you're that way out; they spend decades "squeezing (redistributive) inflation out of the system" whilst the wealthy are wealthy - as soon as they're up to their necks in debt the importance of inflation is, uh, reprioritized.
A supertax on high earners/those still with assets is the minimum acceptable quid pro quo for this shift in attitudes.
Does this have to be voted through Parliament or is it executive action? Does anyone knowd if a protest march is planned?
The SWP seem to have organised something for this Friday: http://www.respectcoalition.org/?did=1396
The SWP seem to have organised something for this Friday
Have they? The cheeky fucking frauds.
Unlikely. £50bn is a drop in the ocean compared to the losses incurred due to the unravelling a multiplicity of highly leveraged Ponzi schemes (otherwise known as derivatives trading) aimed at commodifying debt and repackaging it with an audacity that would have made the South Sea Company's John Blunt blush as the whole merry-go-round gathered pace.
The idea that confidence can be restored by plastering over the cracks with a few billion is gloriously optimistic. But maybe the whole shambles has to collapse in on itself before politicians put their prospects of directorships on the back burner and think about REGULATION.
Big Al Darling has just said on Channel 4 News that teh money they are shovelling into the black hole will be 'borrowed'. Borrowed from whom? I thought the whole point is that money wasn't circulating. So, we (the British taxpayer) borrows the money at a rate of interest and lends it out at another rate of interest that should cover our repayments. What if the banks default? (By the way, I wouldn't touch anything organized by the SWP or Respect with a ten-foot barge pole.).
Sue
Maybe you should pass this on to your husband (who voted for Boris as I recall):
Sept. 28 (Bloomberg) -- London Mayor Boris Johnson defended his city's finance industry against ``vindictive'' attacks in the wake of a banking crisis and pledges by Prime Minister Gordon Brown to crack down on bonuses.
``It worries me when I hear a Labour government suddenly deciding that it would be popular to punish the capitalists and to bring in new regulations to fetter the banks,'' Johnson told Conservative Party activists gathered today in Birmingham, England. ``I don't believe the way to protect the hard working mortgage holders of London is to launch a vindictive attack on one of the most successful industries of this country.''
``I say to the Labour government, you will not make this country or its capital more competitive by driving out talent,'' Johnson said. ``You can't regulate your way out of a recession, but you can regulate your way into one.''
That was said all of 9 days ago
'Financial Crisis
The Rebirth of Capitalism
(0)
8. Oktober 2008, 11:28 Uhr
The financial crisis is a symbol of the pitfalls of the capitalist system, but it does not have to lead to the system's demise, writes Axel Springer CEO Dr. Mathias Doepfner. Instead of capitulating to the demands of the German Left to nationalize the country's assets, it is time to restore faith in the free market economy, only this time with a greater sense of responsibility and principle.
Is this the End of Capitalism? Its enemies wish it were so. This so-called financial crisis may in fact be the greatest crisis of confidence yet experienced by the free market economy. In other words, the protagonists of the capitalist system could hardly batter their own convictions more effectively. The gravest danger is—next to the impact on economic growth and overall economic health—a long-term shift in peoples’ mentality. The depressing economic slump can only give strength to anti-capitalists.'
more
http://www.welt.de/english-news/arti...apitalism.html
This is a very interesting article in Die Welt by one of the most powerful men in Germany, Boss of the massive publishing empire Axel Springer, Dr. Mathias Doepfner, who is a convinced capitalist and deeply anti-socialist. In it he clearly states the pendulum is shifting to what he calls , the Far Left, , (in Germany anyway) and that the public is in a very angry mood indeed with the bankers, etc.
He clearly thinks the Left will benefit from this crisis which he predicts will go much deeper, I am not so sure, maybe in Germany, Spain, etc but here?
Matthew Smiles: Am I my husband's keeper?
In all fairness, I think avoiding risk is the method of choice right now, rather than maximising future income. I would be amazed if any government at this stage chose to gamble on potentially higher profits at the expense of stability.
LFAT is right. Quite a lot of speculation from Dave here. There is a parallel process going on is there not of pretty hard-nosed swaps of govt bonds for other securities. Reported by media as pouring money into the banks rather than a commercial-stylee transaction.
It's not a blank cheque though is it? That's not what the phrase "blank cheque" means. A blank cheque is blank, the amount and recipient are not specified.
Further, I'm struggling to see how increasing their tier-one capital is inflationary. Help me here; the definition of tier-one capital is such that increasing it must mean reducing the ratio of loans to assets, which is the opposite of inflation.
(Now, doing a Paulson and buying their dubious assets, thus replacing illiquid securities with reserve assets they could lend against, now that *would* be inflationary.)
Further, regarding the preference shares, the Government has or had "golden shares" in various ex-nationalised firms (Rolls Royce plc springs to mind) which gave it special rights, for example to veto a change of ownership. These were legally defined as "zero dividend special preference shares", IIRC. Perfectly possible to write the terms so that the state got certain powers of supervision, but without bringing the whole bank on the Government accounts (as would happen if they simply took a controlling stake in the voting stock).
To Sue
Not at all, but you were the one who brought up your husband's voting for Boris even though he was a staunch trade unionist. I would hope that the info I provided might make him ponder at least.
He has pondered on it, it was pondering on it all last weekend as she saw his shares plummetting.
That should be 'he saw...'. Not to forget his pension.