No one who has read this blog for a while can have much doubt as to my sentiments about much of the so-called investment market that is focussed in the City of London. In general I think that this activity is, like all gambling arenas, rigged against the players (in this case, those who save) and in favour of those who make the market. And I make no apology for describing the activity as gambling, because that is what it is, for all the air of respectability and pseudo-science in which it is wrapped.
That vast numbers of people are now forced, through near compulsory engagement in work place pensions, to contribute their earnings for others to use as stakes in this little understood process offends me considerably. Each month a mass of money is sent to the markets to buy a share of a largely fixed pool of assets and as a result prices invariably rise and so the system is designed to produce a veneer of ongoing positive returns until such time as, inevitably, the sham implicit in supposed market valuations is seen for what it is, and we have a crash. Crashes are as hardwired in as are the sham gains generated by what is, in effect, grand-scale market rigging in the intervening periods.
Add to this my distaste for opacity and an absence of accounability. Then we get tracker funds. Or, worse, the manufactured funds like ETFs (Exchange Traded Funds) and REITS (Real Estate Investment Trusts), which wrap equities and bonds inside a second vehicle which is itself quoted and charges a fee for the supposed insight that the managers supply (but rarely do) and we have an outcome that is opaque, potentially illiquid and very often downright exploitative. It is the place where the rentier goes when all else has failed.
So, HSBC is, according to the FT, eyeing up ‘green' ETFs as its big new investment market, even though many of the underlying assets are as likely to be green as the coal miners in FTSE4Good.
And, as another FT article today exposes, REITs do not provide solid, property back returns: they simply track stock markets with a dollop of wholly inappropriate tax relief thrown in to sweeten the return.
Such activity is part of the culture that also gave us monetary policy. As the FT has noted today, monetary policy should be consigned to history and fiscal policy should replace it. I have already discussed this. But there is a dimension that I did not mention, and which the FT ignored. That is that fiscal policy demands that the tax reliefs and allowances that are effective tax spends, in that they give tax revenue away, need to be reappraised if it is to really work.
The City of London is massively tax subsidised. Over 80% of all financial assets are invested in tax incentivised arrangements. Pension funds dominate, but ISAs and other arrangements are also subject to tax relief for no apparent gain for society, but much for bankers. This needs to be reviewed and with it the whole logic of investment needs to be reappraised.
As Colin Hines and I argued in our report issued in December on funding the Green New Deal, if tax reliefs on pension funds and ISAs were changed so that all ISA funds had to be used to buy Green New Deal bonds, issued and guaranteed by the government, and 25% of all new pension savings had to go into Green New Deal related activity, then £100 billion a year could be released for Green New Deal investment in the UK.
The stock markets would get less money.
But money would be released for real investment instead.
People would then see what their savings were creating.
And they would understand the process they were engaged in.
Whilst tax reliefs would be used for the common good.
Bubbles would be avoided.
And the government guarantee that is involved is directly equivalent to the cash deposit guarantee already supplied by the government for most ISA funds now.
This is fiscal policy at work.
And it is policy that shatters rentier capitalism by creating real investment in real assets for use by real people in the real society in which we live - rather than the make believe world of the City.
Fiscal policy is not just about changing the way we control inflation. Fiscal policy is about changing the way we run the economy, for the common good.
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Just for the record – REITs actually own physical property inside a company structure..and the author of the EFTs article David Stevenson is no more than an enthusiastic private investor who in this article is highlighting a note about “factor” investing – basically driven by quants so i really don’t think you would want to hang your hat on that.
Just a point about your idea about your green new deal ISAs – the whole point about the stock market is they provide an exchange and liquidity. Would your ISAs be illiquid? Or would the secondary market be provided by the Government and if so who would establish the price?
What’s the price of a bond redeemable in cash at the end of the term, with a penalty for early redemption, as is familiar in the savings market?
And what’s the cost to the government of that?
Sorry to have the temerity to point out that every statement here is wrong. A REIT, for example, is just a property company that might run physical properties or hold shares in other property companies or some combination of the 2. It would take a long time to correct all of your errors. Maybe you ought to do some research before parading this level of ignorance…
I know what a REIT is
I did not make mistakes
On the topic of REITs, the primary reason why REITs have become so popular is their tax advantaged status — which a self proclaimed tax “expert” might be expected to at least have some clue about. REITs are able to avoid corporate income tax as long as a fixed percentage of their net income is paid directly to investors — thus avoiding double taxation… if you really did know about REITs I suspect you would have pointed this out..we all know you just cribbed it from a newspaper
You may have noted I referred to tax advantage
Very politely, you’re trolling and it’s very unattractive
“Diogenes” says:
“It would take a long time to correct all of your errors. Maybe you ought to do some research before parading this level of ignorance”
You didn’t “correct” all his “errors” because you couldn’t and you can’t. Nothing could be more obvious.
Interesting choice of pseudonym btw.
https://www.medicalnewstoday.com/articles/314595.php
https://www.ancient.eu/Diogenes_of_Sinope/
Marco …..”REITS (Real Estate Investment Trusts), which wrap equities and bonds inside a second vehicle”..this is clearly not true as i pointed out in my initial reply
Maybe the detail was also lost on you also..
There are other inaccuracies and misleading comments but we move on..
But that is what they can do
You agreed so
REITs don’t wrap around equities and bonds… they own physical property and manage those properties.. could be commercial, retail, student accommodation etc… by doing so they provide investors access virtually impossible (certainly in a diversified manner) they could not do themselves..
So that’s your nit pick, and it is also an extraction
And that was never the lint of the article which you have deliberately missed
So very politely, stop wasting our time
You’ve done much – and continue to do much – to change the language and the narrative. For that you deserve enormous gratitude. But much much, much more needs to be done. And this also relates to your previous link to Heiner Flassbeck’s blog. Flassbeck laments the lack of people with the necessary communication skills and the barriers to their ability to function effectively in the current political and economic system. But it doesn’t need political geniuses. We elect politicians on the basis that they have or will be able to secure sufficient knowledge about the essential features of the challenges or circumstances they confront and to make judgements in the public interest. Sometimes they’ll get it right; sometimes they’ll get it wrong. And if they get it wrong we can kick them out or compel them to change (or both). As a result, what is crucial is the body of knowledge and information available to them and voters.
But if this body of knowledge and information is characterised by out-dated and damaging dogma and self-serving illusions generated and perpetuated by the wealthy and powerful, then the outcomes, by definition, will be seriously damaging to the public interest. And that is where we are.
Previously I’ve highlighted how terms like economic rents, rent-seeking or rentier capitalism mean very little to ordinary voters. The reality is that the outcome of much of the behaviour of most companies that deal directly with the public is theft. And it is quite simply theft even if it is officially authorised. Businesses who require their workers to function as if they are self-employed are engaging in theft. Most people have an instinctive understanding that this is theft, but, since it appears to be officially authorised, they feel powerless and feel compelled to accept it. But it rankles. What is required is statutory empowerment of collective action by consumers and by workers who are disengaged from the current manifestation of trades unionism.
The firms that provide digital platforms are providing what now have become utility services and should be regulated as utlities – in the same way as providers of electricity, gas or water networks. Advances in technology have not rendered the long-standing principles of utility regulation redundant. In fact the principles and practice are even more relevant and necessary. But is is not, and should not be, the kind of regulation the kind of regulation that is practised in most of the advanced economies outside of the US and Canada. That regulation was been reduced to a form of negotiation between the regulated firms and suborned regulators.
Firms that provide digital communication platforms should be treated as publishers, because that is what they are.
And when it comes to asserting the primacy of fiscal policy it is necessary to describe fiscal policy as what it really is. Otherwise, one is conceding far too much ground to the defenders of the current failed dogma. Fiscal policy is simply the implementation of decisions on public spending and taxation made collectively by voters and carried out by those whem they elect – and implemented in the broad public interest. And these decisions impact and are designed to impact on the behaviour of all other sectors to ensure economic stability to the extent that is possible. This totally over-turns and rejects the current damaging and nonsensical dogma that all sectors other than government should be free to behave whatever way they like and that the government sector should be totally adaptive and take sole responsibility for economic stabilisation when monetary policy has run out of tools.
And the balance between collective decision-making on public spending and taxation at the national and local levels needs to be shifted decisively to appropriately empowered and resourced local authorities.
The focus has to be on collective action and decision-making so as to reclaim the public realm (in other words, our common wealth).
The most salient point in Richard’s post is that, via government enforced saving through auto enrolment pensions, stock markets and the pensions industry has become a giant Ponzi scheme backed by state funded tax relief. Current pensions are being funded by artificially inflating the value of stock markets by pumping in new entry money. The increase in stock values has little to do with the skill of managers as the value is driven by Ponzi money but who can still pay themselves large bonuses well in excess of their true value both to society and savers. The history of the private pensions industry is one largely of failure for workers induced to save whilst those promoting the schemes have sucked the cash out in fees. There is nothing to believe this won’t happen again. The only time workers had proper security in pensions was through final salary pension schemes and these have now all disappeared for new entrants.
It’s odd how you got it and some others did not…
And what do final salary pension schemes invest in?
And, are final salary pension schemes safe? Only if public sector; I would suggest.
FWIW I totally agree with using tax reliefs to allow investment in something useful to society. And agree that much of the financial world exists only for its own benefit.
Another great article and some equally interesting responses…
The ‘investment market’ is another elephant in a cathedral full of elephants that illustrate the direction of travel by our government.
It is rarely pointed out that this is actually just a giant casino and whilst people sell knowledge, skills and insights into how to ‘invest’ in the markets, there is almost no natural price discovery mechanism or fundamental logic to the way in which they behave. To illustrate the point, over the past month, the US Fed has been printing $billions and pumping it into the bond and stock markets to try and tame various aspects of the ‘markets’; how is it possible to make an informed investment decision when this occurs?
The historically low global interest rates (which persist well beyond their initial ’emergency’ designation in the UK at least) have created an unfathomable level of distortions which are nearly impossible to unravel. As a brief example, low rates reduce the motivation to deposit savings into banks and incentivise people to hunt for yield in higher risk assets, so a large portion of cash rich (formerly savers) have redirected capital towards other assets (property, stocks etc), which not only puts banks at risk, but also creates a much larger systemic issue if markets go awry.
Whilst I completely agree that a Green New Deal fund/bond issuance is a worthy concept, it is a concern that this will ultimately become another vehicle to be manipulated by ‘the City’ for their casino – there is no way that £100 billion could slip past their grasp without some fees being distributed. It is plausible that this is why the climate issue has been allowed so much media coverage, since it allows governments to funnel funds towards ‘deserving companies’ for a justified cause.
How did the billions of pounds from government schemes help those needing truly affordable housing… or did it just help the profits of the housebuilders?
Unfortunately, we now cannot see the elephant for the elephants. 😉
“That vast numbers of people are now forced, through near compulsory engagement in work place pensions, to contribute their earnings for others to use as stakes in this little understood process offends me considerably.”
Me too! And as you know there is also the divestment issue. Pensions put the power in the hands of unelected fossil people whose main interest is to preserve the status quo.
Too true….
There are other consequences of the growth of this form of “investment savings”.
Amongst the many reasons given for not voting Labour encountered out canvassing last month, I was told that one couple of retired teachers had said that they believed that a Labour government would “reduce the value of their investments”, referring to the tax free lump sums from their pensions, invested into stocks and shares ISAs.
I assume that they had read or heard this somewhere, or maybe they will have been warned by their friendly “Financial Adviser”, who will be collecting a nice annual fee.
Much as I deplore the workings of the financial markets, I am not sure what the alternatives are – for many, putting something away for retirement is a good thing.
Try what I am saying on the Green New Deal
I am not anti-saving
I am anti-destructive saving
I do not think all saving is destructive – and risk the wrath of MMTers by saying so