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May 182010
The following is the text of James Galbraith‘s written statement to members of the Senate Judiciary Committee delivered a few days ago.
At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.
Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. I have also heard the expression, “IBG,YBG;” the meaning of that bit of code was: “I’ll be gone, you’ll be gone.”
If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails ‚Äî those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the “Paulson Put” was intended to delay an inevitable crisis past the election. Does the internal record support this view?
Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson’s Eye. What is the appropriate response?
Some appear to believe that “confidence in the banks” can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.
But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.
In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.
Many readers of this blog will know that I argue that secrecy jurisdictions and the current financial architecture of the world are a fundamental threat to democracy and society as we know it.
James Galbraith agrees.
It’s good to be in the company of such men.
It’s profoundly worrying that we have people in government who have no clue ion this issue.
Let’s still hope Vince Cable can win the day. He has to.
I meet quite a lot of people who work in bond markets. Time and again they tell me about the shortage of good quality bonds – and the need for them.
They need them because an aging population needs the stability of bonds to underpin its risk averse investment profile.
We have an aging population. Look at the bulge of those retiring over the next few years:
The number of 65 year olds is about to jump, enormously. That’s because of the end of the war. people had a lot of sex to celebrate. And once in the habit they carried on. The bay boomers are going to retire over the next decade or so. Many of them will want to but UK gilts to underpin their pensions.
No debt: no security in old age.
That’s the deal for them.
So we need more government debt to ensure they have the old age they want to enjoy.
All of which says now is not the time to make debt reduction the number one economic priority. Creating a growing economy is. And debt reduction and growing economies don’t mix – not when there is mass unemployment at the same time, as we have.
In that case – blow the debt. As I’ve just shown, and as this logic shows, that debt is wholly marketable. The real problem is there are no jobs and so no prospect of growth in our economy. The private sector is doing nothing about that fact. And that’s why right now, as I have also shown, spending pays and cuts will be devastating.
I know there will be howls of protests in response. And every howler is wrong.
May 182010
I’ve a good friend who lives on Bryher in the Isles of Scilly. It’s beautiful. I recommend you go for a holiday.
My friend would never, I think, claim he’s an economist, but he asked a darned good question of me yesterday:
Hi Richard
As a matter of interest, all this debt that UK/USA et al have, who do we actually owe it too, is there a James Bond type Baddie that has lent us all trillions and is now wanting it back?
Cheers
Amazingly it’s the question few dare ask – which is why it is just so good.
Thankfully, because the stats are a little obscure within the Office for National Statistics, the BBC has done some of the job for me in answering he question. Their data is from last September, but is good enough.
This is who owns UK government securities:
Over time the movements looked like this:
So out of gilts then in issue of about £770 billion near enough one third was owned by insurance companies and pension funds.
Of the increase in debt since 2007 almost all has, through quantitative easing, been issued to the Bank of England.
The pattern of debt increase has been as follows:
As the right hand graph shows, it was financial intervention that fuelled quite a lot of the growth in debt. The reality is that this has, in effect, been financed by printing money through quantitive easing – which we had to do or the balance sheets of our banks would have collapsed and the economy as we know it would have ceased to function.
You’ll note that overall, overseas purchasers of UK debt have increased their exposure to the UK. The trend is continuing. As the FT noted yesterday in the first quarter of this year:
In the UK, foreign investors bought a net £20.37bn in UK gilts in the quarter from January to March, a record volume since data was first recorded in 1982, according to the Bank of England.
and
Foreign demand for US and UK financial assets has surged amid anxiety over the turbulence in European markets.
There’s no reason to think this trend will not continue.
Given quantitative easing has ceased, at last for now, there is unlikely to be growth in the Bank of England holding.
But let’s look at what this means.
Firstly 70% of all debt, or thereabouts, is UK owned.
At least a quarter of it is owned by the Bank of England – and therefore costs us, in effect, nothing. After all, the interest paid goes back to the government.
One third of it underpins old age pensions – almost all annuities used to pay UK private sector pensions are backed by UK gilts.
Big business is cash rich right now – because it is refusing to invest in anything (which is why the government must – remember this is a private sector generated recession) and until they have the confidence that their biggest customer – yes, that’s the government – is going to spend more they’re not going to invest. So the longer Osborne cuts the more cash there will be to buy his debt – even though we’ll all be worse off as a result and he won’t cut the debt pile by a penny as a consequence of his cuts because the private sector is refusing to hire the people he’s going to sack. and whilst the Euro is weak – and it’s going to be – gilts are a good place to be.
In other words, we have a stable, manageable and saleable debt.
All of which means making cutting it the number one priority of government an act of folly when the number one priority of government is to increase growth – and only government spending can do that.
All of which makes Osborne’s deliberate attempt to unsettle the market look grossly irresponsible. And all of which makes the claim we need an emergency round of cuts seem like just what it is – political rhetoric sailing us in exactly the wrong economic direction.
Hand on heart, I do not want to be Labour leader
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May 182010
Hand on heart, I do not want to be Labour leader | Jon Cruddas | Comment is free | The Guardian .
I like Jon Cruddas and have got to know him a bit over the last couple of years.
I like what he says here. And I admire him for saying it. His recipe is right. I think he’ also right to say he’s not the man to lead the party. But it has to listen to him.
His conclusion is spot on:
Labour has a chance to be bold. And at our boldest, we are Britain’s best hope for a freer more just country. The next few months will decide whether the party is ready to grasp that chance.
I hope they do.
May 182010
Huge tax bill ‘could saddle Rangers with £80m debt’ – The Scotsman .
The Scotsman reports:
Glasgow [Rangers football] club has reportedly been handed a £24m “assessment” by Her Majesty’s Revenue and Customs (HMRC) after an investigation into offshore payments made to players during the past decade.
The club fears the fine, combined with interest of £12m and possible additional penalties, could reach up to £54m.
As all commentators predict, some form of insolvency arrangement will follow.
As the report continued:
“We’ve been hit with a £24m ‘assessment’ from the taxman. The implications are horrifying. The interest could be £12m and there may also be a penalty element of between £12m and £18m. This is a desperate situation.”
The tax bill relates to alleged loans that Rangers players received from employee benefit trusts administered by the club’s parent company, Murray International Holdings, owned by Sir David Murray, who announced his decision to step down from the Ibrox board last August.
This is offshore tax abuse undermining society as we know it.
This is accountants and lawyers destroying something of real value through their greed and erroneous belief that tax avodiance is acceptable.
This is the harsh reality of the secrecy of offshore being abused to allow payments that were illegal in the UK – with that secrecy hiding them from view for so long the impact of discovery is potentially lethal.
There is a solution of course. It’s called openess, honesty, transparency and tax compliance.
Buty this may be too late for a number of clubs. The Scotsman notes again:
HMRC is also investigating the use of employee benefit trusts by a number of English clubs.
For more read the Christian Aid report on transparency in football.
It’s good to see, amongst the general air of gloom, that Jeremy Browne MP has become a Minister of State at the Foreign Office responsible for the Overseas Territories.
Why is that good news?
First he’s a Lib Dem, and that has to be good news for this job. Much better than a Tory in post
Second, he’s been associated with the left of the Lib Dems – and that’s also good news for this job.
Which means he may well keep the pressure up on tax havens.
I bet they’re sweating in Georgetown.
They should be.
FT.com / Currencies – Bets against the euro hit record levels.
Short-term speculators have raised their bets against the euro to record levels.
Positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, showed speculators extended their short positions in the euro from 103,400 contracts to 113,900 contracts, or $18bn, in the week to May 7.
With complete contempt for society as we know it the markets attempt to bring down the Euro, utterly indifferent to the consequences for democracy, ordinary people, peace or anything else.
And you wonder why so many of us want hedge funds regulated?
Let’s start with defending society as we know it as the opening bid and move on from there shall we?
May 172010
I wrote the following blog in June 2009. Now we have a government proposing to slash public sector employment it seems worth repeating it. The logic has not changed, at all.
“Give or take the public sector employs about 5 million people. If, as is demanded, there should be public sector cuts of at least 10% then maybe 500,000 people will lose their jobs.
I have considered the consequence of this by doing a simple exercise. I have done a case study on the cost of a person earning £25,000 per annum who is a single parent with a child of school age, paying £500 a month in rent and £700 a year in council tax losing their job. The assumptions are slightly simplifying: benefits are harder to calculate in more complicated households. The rate of pay is slightly above mean and significantly above median UK pay. But £25,000 is a good, round number.
The total tax paid and benefits received by this person look like this:
Now assume the same person was unemployed. They would get the following benefits:
The total lost to the government if this person loses their job in the private sector is the addition of the total contribution lost plus the total cost paid. That is £21,300.
It could be argued that the cost is less in the public sector because tax deducted goes straight back to pay the employment cost. It so happens the net effect is the same. In that case the comparison with the private sector is maintained here.
The actual cost is higher though. The person in work has disposable income of about £14,625; the same person unemployed spends £7,260. That is a difference of £7,365. In other words they are twice as well off in work as out of work. But, most importantly, of that difference at least 65% (http://www.statistics.gov.uk/pdfdir/qna0609.pdf table D using 2008 figures) will support other people’s wages plus the taxes they spend on goods and services. Assuming these other people pay taxes at about the same overall rate as the person in the above exercise (and this is likely) that means about 36% of that difference will indirectly go in tax as well. That’s about £1,700. So now the benefit of keeping the person in work is £23,000 and they are only paid £25,000. Put it another way: 92% of the cost of cutting a £25,000 a year job when we have less than full employment is paid by the state.
In that case it is abundantly clear that paying to keep people in work pays – especially and even particularly if what they do has long term benefit that saves cost into the future. That cost saving – for instance from green efficiencies – has only to be £2,000 for it to be entirely worthwhile creating a job out of government spending to keep this person in work.
And that is before any account is taken of the social costs of being in employment, which are substantial in terms of reduced crime, improved educational outcome, better health, and more besides.
Now let’s reflect on the fact that in reality the average direct cost of employing an average public sector employee is less than this. Let’s make it around £21,000 – more like median pay – and then note that 500,000 at this pay rate will supposedly save £10.5 billion in the wage cost of the government. Putting these half a million people out of work will save us about £0.8 billion. That’s misery for 500,000 people and their dependents to save just £1,600 per job lost.
That though is not the end of it. Total government spending (2009) is £671 billion, split down like this:
So to cut spending by 10% £57 billion of extra cuts are required on top of sacking 500,000 people. These savings would need to be made up of:
1. Reduced benefits, which will result in reduced consumer spending, or
2. Reduced payments to private sector contractors to provide work to the government.
Either way there is reduced demand. £57 billion of reduced demand. Of which 65% approximately will go to labour. That’s £37 billion of labour cuts then. At £25,000 or so a head (approximately) that’s over 1.5 million more unemployed.
That, with the losses from the public sector adds more than 2 million to unemployment – making well over 4 million in all. Some consider this likely, I know.
But what is the effect on public spending? Maybe 92% of the cost of this cost in lost wages will fall on government either by benefits paid or lost revenue. That’s £34 billion. And that’s before we deal with the massive social and crime related costs of that level of unemployment and the collapse in our long term prospects.
So, to achieve total savings of maybe a net £4 billion in borrowing (£3 billion net from private sector cuts and about £1 billion net from public sector employee cuts) this policy would put 2 million people out of work.
Now I know all the problems of extrapolation in here, and I know that not everyone will get benefits in the way I have outlined above (but those that don’t will suffer even more extreme losses in income – compounding losses elsewhere) but frankly all analysis in this area is moving into the unknown, economically and statistically speaking. And losses to government may also be bigger than I suggest – after all out of the £57 billion of non-labour cost cuts required £20 billion will be lost profits and rents – and they could result in £6 billion of additional government tax losses, tipping the equation in the direction of any cuts in government spending creating actual cost for the government.
Which makes clear that the logic of cutting government spending now when we have no jobs for those we make unemployed makes no sense at all. It’s profoundly annoying to have to reinvent the whole Keynesian argument in this way – because that is exactly what I am doing – but needs must precisely because so many do not seem to understand this obvious fact.
Of course this situation will eventually change: private sector demand will pick up and employment with it. But right now there is no sign of that and to cut now would, I can confidently predict, produce something like the outcome I predict here. Put simply: cut spending and we’ll increase government debt. Perverse you might think – but true, and exactly what Keynes predicted.
What is more, the reverse is true. Increase spending now and the multiplier effect which compounds the impact of cuts in the above analysis goes into reverse: more jobs are created, revenue flows to government, benefit spending falls and government debt goes down with it.
The answer is simple: if we want to get out of the mess we’re in we spend. It’s the only way to reduce government debt at this stage in the economic cycle. It worked in the 30s. It will work now. Nothing else will.”
That’s why the Tory cuts are going to be a disaster.
