It looks like the German plan of simply asking banks to do the Eurozone a favour by rolling over their bonds into new, discounted, long-term issues could prevail at the European summit.
There is no way that this model can be rolled out across Greece, Portugal, Ireland, Spain and Italy. It’s not a solution.
I suggest why we got into this mess, and what we need from government to get out of it, in a new blog on Forbes, here.
Having just put up several blogs before 8am it seems odd to say I might be going into blogging purdah, but needs must.
The Courageous State – my book to be published in September – is making good progress. 37,000 words are now done and the project is a month old. Those words are already being edited by the publisher, but that still leaves 23,000 plus to do – and some of the toughest to write at that.
So blogging may be a but on the thin side for the next week or so whilst I focus on cracking on with that. Even I’m beginning to think a book of this cale might be ambitious in six weeks or so.
From the Channel Online TV:
Online greeting card company Funkypigeon could soon become the latest fulfilment business to set up in Guernsey.
The business is recruiting on the island, but they will not yet discuss why they want to make the move over the Channel.
One reason could be that rules on Low Value Consignment Relief or LVCR mean their goods would be exempt from VAT, but that is not something the States encourage.
Three things are clear:
a) Osborne’s announcements clearly aren’t having an impact.
b) The ‘not encouraging’ stance of the States is toothless.
c) Radical action to stop this abuse is now needed.
Will Osborne deliver? Who knows?
Let me stress, straight away, I’m not suggesting the Tea Party are physical terrorists. But in conversation yesterday an idea occurred to me.
Suicide bombing changed the whole environment of terrorism. Suddenly we faced people for whom what had been presumed to be the ultimate deterrent – risk of their own death - held no threat. The terms of engagement changed, utterly. No one has yet worked out how to deal with it.
The Tea Party may be politically similar. As has become clear in their attitude to the discussions going on in Washington, they don’t care about their chance of re-election when negotiating on the budget deficit. All they care about is killing the government. The normal sanction of political life – the loss of office – holds no threat for these people. That changes the rules of engagement. We don’t know how to deal with it yet.
Both groups are extremist. Of course they’re operating in radically different ways. But both have the aim of destroying what, for reasons of dogma, they consider to be the enemy which the vast majority would consider otherwise. And in the process they’re quite willing to sacrifice their own selves.
It’s not how we think democracy works. I’m not yet sure how we handle it.
To continue yesterday’s metaphor…it looks like the Archduke may survive after all. Merkel and Sarkozy supposedly have the umpteenth deal to save the Euro without making fundamental change and Obama is going to agree to slash spending and not increase taxes after all (the ultimate failure of the Courageous State).
We may get through the next week without financial meltdown.
The fact tat banks are insolvent despite that will however mean that this problem will recur, soon. Liquidity may remain intact for now, and that’s advantageous. But the crisis of solvency remains. Only radical action will solve that.
I see the National Audit Office has said:
HM Revenue & Customs faces a significant challenge in securing a £1.6 billion reduction in running costs over the next four years, at the same time as increasing tax revenues, improving customer service and achieving reductions in welfare payments, according to a report today by the National Audit Office.
That’s an understatement.
They might just as well have said they can’t do it - because that’s the reality.
Worse, the harm of trying is going to be high. I note this:
OVER a quarter (26 per cent) of large businesses are considering a full or part relocation abroad, with Britain’s high and complex taxes remaining their main cause for complaint.
More than half (58 per cent) of the businesses eyeing a move to foreign shores cited tax issues as a leading factor, according to research by HMRC.
Around one in five (19 per cent) of those considering a move cited general business tax issues as their primary complaint, while 13 per cent said that more favourable tax conditions in other countries had prompted them to consider a move.
Over three quarters (78 per cent) of HMRC’s “large business service” customers said that the administrative burden of tax compliance had increased from 2009 to 2010.
Read between the lines – that says poor service is driving people away. Not tax rates. And that’s the fault of the people at HMRC – there’s just not enough of them.
It’s economic suicide to cut tax staff when you need every penny of tax revenue you can get.
Recruit more people now: that answer is simple. Let’s cut this deficit. Not increase it.
The TUC published a new pamphlet by friend and sometime co-author Howard Reed yesterday. As they said of the pamphlet, which is entitled Fairness and Prosperity:
The UK is a far more unequal society now than it was 30 years ago, and three-quarters of the public agree that the gap between rich and poor in the UK is too high. But if policymakers were to enact policies to reduce inequality, would this jeopardise the UK’s economic performance?
Today’s new Touchstone Extras pamphlet, written by Howard Reed, reviews the latest evidence on the relationship between inequality and economic performance across countries and finds no support for the idea that there is a ‘trade-off’ between inequality and prosperity. Indeed, there is strong evidence that countries with higher inequality have worse performance on a range of health and social outcomes.
The report also discusses theories that can rationalise these findings, and recommends policies which would help reduce inequality from its current very high level in the UK.
Well, I think that undersells it. As Howard says in the report:
This Touchstone pamphlet asks whether a more equal distribution of income would jeopardise the UK’s economic prospects. Indeed, is more equality just what we need to improve our prosperity and well-being?The assertion that less inequality is “part of the good society” resonates strongly with most people on the left and centre-left.
This pamphlet shows that this is a sensible belief:
• The UK is a very unequal country, and this inequality is the result of a major shift in income distribution in the 1980s and 90s.
• There is a conventional economic view that asserts that inequality is a price a country has to pay to achieve economic success. But a comparison of the performance of equal and unequal countries does not back this up.
• Indeed, there is evidence that some redistribution enhances economic performance.
• International comparisons provide very strong evidence that inequality is linked to poor health and social outcomes.
• The theories to explain this relationship are still being developed. This pamphlet outlines two of these – that inequality has harmful psychological effects and that poor outcomes follow on from deprivation, which is more common in unequal societies.
I warmly welcome this report – which I think is a valuable contribution to debate – and which also strongly complements the thinking in my own forthcoming book.
Whilst the UK obsesses with phone hacking, Murdoch and idiots with shaving foam I have a strong suspicion that right now is just what July 1914 felt like. The world and its scandals seemed to be going on as normal, but around the corner untold trauma awaited then, and may do now.
Almost unnoticed it seems in the UK the US is moving towards defaulting on its debt. That’s the result of acts of the utmost and craven irresponsibility on the part of the Republican Party, but it seems like it’s going to happen nonetheless unless something little short of a miracle happens. Hundreds of billions will be wiped off the value of the world’s banks as the value of US bonds falls. And tens of millions of Americans will have their lives thrown into turmoil, at least temporarily.
In Europe leaders, in an act of craven irresponsibility, are refusing to compromise on a deal on European debt. Merkel is simply refusing to recognise that her country’s currency is causing a crisis within Europe that requires her country to make compromise if resolution is to be found. The result is that there will at the very least be massive market turmoil as contagion spreads on sovereign debt in much of Europe, risk of default rises and the burden of financing beocmes unaffordable for many countries.
In both cases politicians, acting in the interests of small sections of the community whose interests they serve are refusing to act in the common interest. The consequences will be profond. It is likely that serious sovereign debt defaults might happen in August. The impact will be enormous: we simply do not know how far the consequences will spread or in what amount, but given the enormous capacity of markets to turn molehills into mountains contagion is highly likely once this process starts.
The risk of bank insolvencies – inclduing in the UK – is very, very high. We are facing a situation where once again we have the prospect of cash not being available in cash point machines sometime soon.
I keep wishing that this feeling on my part was just melodrama, but I last felt this way in the weeks running up to the crash in 2008, and I was right then, and unless something dramatically changes over the next couple of days, I fear I am right now.
There are, however, some differences. First of all, this crash will be much more significant, of wider scale, and long-lasting. We’re not seeing the collapse of one investment bank this time triggering a crisis, we’re seeing the collapse of confidence in the two major currencies in the world, and the inability of the government of the largest country in the world to pay its debts and of maybe five European countries to do likewise. Last time was, in comparison, a minor crisis.
That is the first downside, and that it is enormous. There is a second outside. This time we seem to have politicians, whether they be Merkel, Cameron, Obama or others who do not have the political capital to now deal with this situation. That is extraordinarily worrying.
On the upside, there is just a chance that someone will rise to the challenge and address the fundamental issues that are going to arise. There are two of them. The first is that we will have insolvent countries. This can be remedied by them defaulting: that will be inevitable. That however leaves banks with a second, dual crisis. The first is of solvency, and the second is of liquidity. Solvency is a long-term issue: many of these banks will not be able in the long-term settle to their liabilities as they fall due. Liquidity is a short-term issue: simple shortage of cash, and that’s not the same thing solvency. However, in this case because a crisis of confidence in the Euro may arise they may coincide.
That means that we need to have a massive disaster management plan in place to get us through the potential crisis that August represents. I admit that I don’t have time to write that whole plan this morning, but here’s an outline of what is needed.
First we have to accept that this time there is no prospect of banks of surviving as independent entities: in most cases their capital is going to be wiped out. If that happens nationalisation is the only course of option we have available to us. And it is also the only way we can go forward to reform banking for ever. That is a silver lining, although maybe a while in coming.
Second, there is absolutely no way round the fact that governments are going to have to, in effect, print vast amounts of money. Quantitative easing is going to be on the agenda again, and very rapidly. Short-term cash injections will be necessary, partly through recapitalising the banks with new taxpayer funds which will have to be raised through the issue of bonds, and those bonds will have to be purchased by central governments is no one else will have the capacity to do so. That is printing money, by any other name. The process of issuing that cash through banks will on this occasion have to be ignored: there is no point in pretending that governments can’t borrow from their central banks when commercial banks will at that time have to be under state control.
Third, once that round of what will in effect be crisis driven quantitative easing is complete I strongly recommend that governments must move towards green quantitative easing. This is the way forward once the immediate crisis is over because major capital injections into the broader economy will also be required to assist recovery from this crisis which will result in a significant risk of a massive increase in unemployment throughout Europe, the USA, and elsewhere. Saving the banks will not be enough this time, rebuilding our economies is what is required, and what was not happened to date, to our cost.
Fourth, what happens after this? Well, banking will have to be restored: I make no pretence that banking should remain a state-owned activity for ever, but wise countries will ensure that banking is returned to the private sector on a very different basis to that on which it is operated to date. Mutualisation is essential for some parts of banking. The splitting of investment banking from plain vanilla banking is vital: nothing else will do. Significant control over speculation is essential: banks continue to threaten our well-being because of that speculation, and the contagion which may precipitate this crisis is the consequence of it. And yes, we will need financial transaction taxes to make sure that there is sand in the mechanism of speculation, as we will also have to take action against the world’s tax havens to ensure that banking is not moved offshore and beyond this regulatory environment: we can no longer afford the risk.
Such a programme will require enormous courage on the part of governments. I have no idea if that courage is available. I really rather hope it won’t be necessary, but in my heart I have this deep fear that we are on the edge of a precipice. This can still be averted. European leaders may take bold action this week to avert crisis, and give breathing space for a negotiated way forward on debt. Obama might find a way around the Tea Party. I can hope. But realistically, the possibility of catastrophic failure of the financial system has to now be recognised to exist and to fail to plan for that right now would be negligence on the part of any government, anywhere.
Perhaps my greatest fear is that planning is not happening either; that too many will be complacent about this being a crisis that will be ‘ over by Christmas’. That is what they thought in July 1914. Heaven forbid that people will look back and say that is what was thought in July 2011. But unless some very serious action is being taken now that could be the case. And whilst I have no fear of war arising from this, at least as yet, my fear that what might happen in the next month will have untold consequences in terms of turmoil, disruption, anguish, and simple despair for hundreds of millions, if not billions of people, is very real whilst I still cling to the hope that it is misplaced.
Christian Aid issued the following press relase within the last hour:
Christian Aid today welcomed Prime Minister David Cameron’s backing for legislation that will force companies to reveal the taxes and fees paid to governments in every country where they operate.
Speaking in Lagos, the Prime Minister said the EU should follow the example of the US, which has introduced a new law to force mining and oil companies to be transparent about their payments to the regimes where they are extracting wealth.
Christian Aid believes that measures taken by companies trading internationally to conceal their profits and shift them off-shore where little or no tax is payable deprives developing countries of at least $160bn in lost tax revenues each year.
Dr David McNair, Christian Aid’s Senior Economic Justice Adviser, said: ‘The Prime Minister’s call is very welcome. It follows other remarks he has made during his trip highlighting the importance of effective tax systems as a means of enabling developing countries to achieve economic independence.
‘The amount at present lost to developing countries through tax dodging by companies trading across borders is one and a half times the amount rich countries contribute in aid every year.
‘Requiring companies to reveal what they pay with regard to each project they undertake is one step towards curtailing such widespread tax abuse, and will help prevent the bribing of politicians to secure contracts.
‘But EU legislation needs to go further. In order to ensure companies are paying the right amount of tax, we need more information on how the taxes they do pay relate to the profits they make.
‘The money lost to poorer countries through tax dodging could make a significant difference to services such as health and education in the countries affected.’
Christian Aid also welcomed the Prime Minister’s call for greater economic integration between African countries, and increased investment in infrastructure as other essentials towards greater economic self-reliance.
Likewise, the Prime Minister’s restatement of his government’s pledge to increase the aid budget substantially was warmly welcomed given the continuing needs of developing countries.
I welcome the Prime Minister’s comments. I welcome Christian Aid’s comments.
The time for country-by-country reporting has come.
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