Mandatory share voting for transparency, accountability and fairness

“….Sunlight is said to be the best of disinfectants ……”; Louis Brandeis.


What we want is transparency in financial transactions because we believe better accountability and fairer taxation will flow from transparency. What we have is an opaque system that gives unnecessary privileges to the rich and to their agents and that disenfranchises the taxpaying, investing citizen.

Radical solutions, in the old sense of the word, that work from the root of the problem from within structures are preferable to “post facto” regulatory or legal external add-ons.

The existing structure of corporate governance is meant to endow shareholders with the responsibility (commercially, financially, legally and morally) of managing the company in exchange for right to draw on the profits that accrue. Sadly, it has evolved into system where almost no one can be held accountable and the collection of profits is disintermediated by pension funds and investment vehicles.

Some of these funds and vehicles, as shown by Legal&General’s APPG testimony last week, recognise the systemic weaknesses in the current shape of regulation and practice and are attempting to use the voting rights of shares to directly assert changes in corporate behaviour. This is to be applauded and assisted.

A very simple way to do this would be make a small change to the Companies Act making it a mandatory requirement for a share to have exercised its voting rights in the preceding years Annual General Meeting (AGM) before it can collect any dividends in the following year.

The effect of this will be to make visible what are the actual investment policies of the companies and the funds and to empower those demanding responsible behaviours.

There is no intrusion into privacy here as shareholder registers of public companies are just that; public. There is very little administrative burden here as the share register is already meticulously kept and processes for counting votes are already in place, even if they are infrequently used. The change requires only one extra data point to be added to the already computerised registers.

We want shareholders to start taking responsibility for the privileges that they have been granted; they have voting rights, let them be seen to stand up and, transparently, explicitly state what side of the debate about commercial, financial, legal and moral practice they stand on.

The transparency will be immediate but it must be said that the desired change will take a bit longer to come through. It will take some effort to rouse the ultimate beneficial owners, the citizens, to assert their rights and to change the direction of the commercial leviathans. But instead of “pushing on piece of string” they will be pushing on an iron lever.

Egypt’s chance

Democracy is best defined, in my opinion, by Lincoln’s timeless phrase from his Gettysburg Address as

‘government of the people, by the people, for the people’.

The key phrase in this definition is ‘the people’. It is a bit sparse but that eliminates any opening for sophistry or legalistic parsing or, heaven forfend, theological mental reservations.

‘The people’ means just that, ‘the people’. All of them. Not your tribe or cohort or clique. Not the majority that elected you

Participating in elections and winning them does not make you a democrat. Governing in the long term interests of all of the people is what makes you a democrat. That and giving up power gracefully when the electorate push you off the perch…..

Revolutions are brutal, ugly things that come wrapped in a shiny layer of hope and excitement. Simon Schama has a fine article about it in the FT. The Egyptian revolution has so far looked exactly like every other that has gone before.

In the chaos that obtains at a time like this, we should be grateful for the small mercies that mean we have not yet seen a ‘Terror’ or a famine. That does not excuse Mr Morsi from the sins of grabbing power and governing exclusively in the interests of his own faction.

Agreed, the army’s intervention has done nothing to advance the cause of ‘selling’ democracy to Islamic fundamentalists. But I do not think many of them were in the market for a new methodology of governance.

There is a slim chance that the ‘reset button’ that the Army has pressed might allow for a fair and competent and unprejudiced administration to eliminate some of the economic and social injustices that the Mubarak regime imposed, and the Morsi regime was refining, which are the principal causes of dissent and dissatisfaction amongst Egyptians.

Democracy’s best hope is that fairness will beget fairness and we know well that extremism only begets extremism. That said, I would not wager much on democracy’s chances in the Middle East. Democracy is a delicate flower that takes a long time to take root in carefully constructed vessel of finely balanced tensions. The hot arid passions of the region offer no such succour.

Pharisees of Abortion

“Sex sells but we refuse to admit that we have been bought and refuse to help those who are caught out.”

Both sides of this debate are posturing about the correct formulation of laws for this jusisdiction with respect to abortion. Neither of them is addressing the reality of the situation or the environment that brings these personal crises about.

I have not heard one voice raised to ask for better education about and services for sexual health at any stage in the proceedings. Nor have I heard anyone query the awful sexual culture that mis-shapes our self-awareness and our expectations of ourselves and others.

We choose to live with a ubiquitous and pervasive manipulative abuse of our psyches whereby sexual imagery is used to sell anything and everything possible. This constant presence of a distorted and perverted sexual undercurrent means that our wider sexual culture is also dysfunctional. This affects men and women differently but equally and makes it harder, much, much harder, for people to learn to respect, understand and enjoy their relationships and their bodies.

The evidence for this is everywhere around us. However, since people are affected inversely to their wealth and privelege, those most hurt have the least chance of having their voices heard or of effecting any change.

It is also true that we do not educate, formally or informally, our young, or ourselves, properly about this, literally, ‘vital’ subject. Rather we prefer to stumble around in a miasma of half-truths, religious dogma and haphazard experience and insist on passing this ‘fog’ on to our children.

The final hypocrisy is that we have abortion on demand in this country for those who can afford it but we avert our delicate sensibilities from this reality. So those unfortunate enough to have been caught out by the contradictions between our overtly sexual suggestive culture and our covertly delivered information and strictures are then abandoned by us and delivered up to whatever the ‘market’ enables them to do for themselves. Even as we reel from revelation to revelation about abandoned babies, about Magdalene laundries, about abusive priests and manipulative bishops, about corrupt politicans and greedy bankers and negligent civil servants it seems that we are refusing to learn from past mistakes or change our ways.

The teacher Jesus is recorded as having had many confrontations with the authorities of his day, known as the Pharisees. The constant refrain of these encounters was the Pharisees attempts to trip up Jesus on points of law whereas his concern was always for the wellbeing of the individual.

Whether it is in our refusal to assist those in mortgage slavery over a twisted intepretation of ‘moral hazard’ arguments, or our insistence on putting bankers and bondholders interests before those of the widows and orphans over a concern for the proprieties of contract law or our refusal to confront the cosy arrangements of the professional and administrative elites at the expense of those in their care and charge, it is clear that the Pharisees are in complete charge of every aspect of life in this jurisdiction of expertly honed “Irish solutions to Irish problems”.

A pox on both your houses, then.



Safer banking that works….

The ‘battered can’ that is the Irish economy has been very firmly kicked as far down the road as anyone could possibly imagine the road extending. We have imposed on the next two generations an interest-only mortgage payable in 35 years time. It is a fabulous piece of financial ‘legerdemain’ from a country which, during the boom times, couldn’t borrow money for 25 years!

Loudest amongst the voices ‘spinning’ and ‘shilling’ for the deal were those who said that growth and inflation will erode the many billions down to a mere bagatelle.

There was absolutely no guidance given, from people who have screwed up their growth forecasts for the last three years running, as to where 40 years of continuous growth was likely to come from.

Growth comes principally from small businesses. Many of these fail, some do moderately well and some do spectacularly well, generating through ‘creative destruction’ economic and cultural transformations such as that achieved by Apple.

Small businesses need credit. Credit that they are currently not getting from Ireland’s pillar banks.

Ireland’s banks have not been ‘reformed’. Minister Noonan took various bits of dead banks and cobbled together 2 Frankenstein-ian monsters that are part zombie and part vampire. The zombie part can be seen in the inability to do anything new or to think for themselves. The vampire part can be seen in the suffering of families in negative equity mortgages.

Can banks be reformed? Can anything be done to prevent a re-occurance of a lending boom? Are we stuck with ‘Too Big Too Fail’ and all the real ‘moral hazard’ that that entails, which is, of course, globally much worse now that before the crisis erupted.

I believe that there is a lot that can be done, without requiring much capital, that would give us safer, simpler and more effective banking. Sadly, none of these suggestions are those being promoted abroad by Messrs Vickers and Volcker.

The recipe is quite simple. Take out the systemic risk from ‘clearing banks’, make banks smaller and simpler and tweak both ‘capital requirements’ and ‘deposit guarantees’ so that they penalize gigantism and speculation.

Financial theory and corporate practice and investor preference has turned away from ‘conglomerates’. But that is what ‘Universal Banks’ are. Given the linkages across the whole economy and the multipliers inherent in finance, then banks should be actively prevented from running multiple financial operations under a single capital/shareholder structure. An example of a practical implementation of this would mean no creditcard operations alongside deposit taking/lending amongst other divestitures.

On a different tack, ‘UB’ has a strategic weakness that imperils the whole economy and that is not found anywhere else in finance, is abhorred in the ‘real’ economy and for which banks are unable to advance a rationale. In equity markets, in futures markets, in commodities markets, and elsewhere, we have exchanges for the transmission of risk. In the real world we separate out energy transmission from generation and we separate making drugs from prescribing drugs.

Why do we allow banks, which advance credit, to have ownership and control of the transmission of credit/liquidity/cash. This is an historical accident whose time of tolerance has passed. From ‘This sucker could go down’ to ‘your ATM’s will shut’, the loss of the ‘clearing system’ has been used to frighten the citizens into propping up bankrupt banks.

If the clearing system is so vital why do we allow those who pose the greatest risk to it to be its owners and operators. The existence of the other exchanges and of SWIFT show that it is not a requirement of financial markets.

So, lets strip out the ‘network’, turn it into a ‘utility’ and pay an annual dividend based on usage out of the resulting ‘seignorage’.

The banks will still get a ‘big slice of this action’ but they will be specialists in what they should know best; risk diversification for those from whom they borrow money through prudent diversified lending.

The whole economy will then be a more secure and stable business environment. It will have at least 2 independent and near universal payment mechanisms ( clearing and credit cards) with PostOffice/Govt ‘giros’ a possible third (which should be strengthened/expanded).

Most nations have a ‘TBTF’ problem that the crisis responses have made worse through further concentration. For most economies we need to return to the 1990 numbers of independent banks and either legal or fiscal barriers put in place to prevent a reoccurrence of ‘TBTF’. Andrew Haldane of the Bank of England has proved that there are no economies of scale for mega banks so let us get rid of these ‘dinosaurs’ before they trample us all into penury.

The rule should be that there should be enough banks with enough capital to fully absorb the loss of 1 bank without the others falling below the prescribe capital ratio. Therefore an economy with a 10% fractional reserve rule should have 10 banks operating at 11%. The rule implies that the larger the number of banks the lower fractional reserve allowed and vice versa, which provides a nice competitive pressure against ‘TBTF’.

Many will say that this will make banking expensive to which the only response can be “Do you like the current consequences and costs of cheap banking?”.

Who is the most important person in a bank? Yes, that’s right; it’s the depositor, that tender flower who needs a government guarantee before they can be persuaded to part with their money.

The primary function of a bank is to return to the depositor the whole sum of their money plus the promised interest.

The person who lends to the bank so that the bank may on-lend the money does so because they believe that the failure rate of bank loans will be small enough and profits of the successful loans will be big enough to deliver on that promise and perhaps leave a fair return for the bank’s shareholders.

The calamitous history of banking means that depositors cannot now be persuaded to part with their mattress stuffing in the absence of a government guarantee. The fact that any such guarantee would have to be met by the “nearly perfectly congruent with the depositors” set of people known as taxpaying citizens is a deliciously vicious irony that until now was hidden from the perception of the underwriters i.e. the citizen/taxpayer/depositor.

This timidity has turned out to be the greatest single source of ‘moral hazard’ and expense in the world of finance. In the case of Iceland, her citizens refused to be taken for the ride by external risk takers speculating on non-domiciled assets. In the case of Ireland, her citizens proved to be the ultimate ‘patsies’ who seem content to pay for their politician’s mistakes, the politician’s developer friend’s mistakes and the mistakes of foreign bond fund managers.

The action of the Irish Government in giving a ‘blanket guarantee’ was the equivalent of being the first to whip out a knife in a fist fight. It required other small states and then practically all states to do the same and only raised the chances of someone getting seriously hurt. It is probably only fair that it turns out to have been the Irish who turned out to be the ‘hurt one’.

We can see clearly now that we all want to live in ‘nanny states’ that protect us from our own follies despite the impossibility of this ‘Ouroboros’. It remains to be seen whether these costs will be sufficient to finally break the depositors ‘trust’ in banking and turn us all into ‘Belgian dentists’.

In the absence of governments with the moral courage and business acumen to abandon the state underwritten contingent liabilities known as ‘retail deposit guarantees’, what can be done to protect depositors.

They have all had a good object lesson in ‘caveat emptor’ but I fear that most of them and their governments are refusing to see the world in such cold terms. Otherwise why would everyone be happy to see the can still being kicked down the road.

Depositor insurance guarantees were meant to give confidence to retail small depositors so as to enhance credit availability in the economy of the State issuing the guarantee. These schemes were created in the age before globalization, before the mega-banks and before the easing of capital controls.

They can now clearly be seen as a source of ‘moral hazard’ in banking, perhaps the largest single source.

If we are keeping globalization and free capital movement then the situation where fundmangers in Country Y place funds with a bank in Country X who lend them for asset acquisition in Country Z is clearly anomalous. The people of X are not getting the jobs, cash-flow, properties or taxes generated by the asset in Z. Further, they have no control over the evolution of the economy in Z. Lastly, it is the antithesis of capitalism that the risktakers in Y can seek to evade the consequences of their informed, professional but un-profitable choices.

Deposit guarantees must be limited to covering exposures taken in the economy underwriting the guarantee. A simple ban on foreign lending by any bank claiming guarantees for its deposits will suffice to close this unnecessary risk. The citizens and fund managers seeking higher yields abroad must be exposed to the risks they actively choose to take. They will still be free to move their money where they want but they should not be able to expose the citizens of third party countries to the downside of risks the third party countries have no control over and no gain from. Equally, banks can choose to forego the guarantee in subsidiaries that they set up for the purpose of pursuing higher yielding gains abroad.

I am acutely aware that many bankers will howl at the notion of losing the implied hidden subsidy of the broad guarantee but “hey, life’s a bitch” is the only possible answer, given the losses that have been imposed by banker negligence.

I think that gamblers should be free to gamble, speculators to speculate and savers to save. But one should not have recourse to the capital of the other.

With respect to commonly held criticisms of banking structure and practices, I would point out the primary cause of problems was ludicrous valuations on residential property in terms of ratios of price/income, debt/equity and real/reported incomes. There is always much convenience in self-serving after the event analyses. Culturally, everyone wants to avoid blame. What can now clearly be seen to have failed in the boom were things like solicitors due diligence about conveyancing and banker ‘prudential lending guidelines’. This patter was echoed in many countries.

The mortgage backed securities and associated embedded derivatives have not failed functionally to a significant degree in their own right. The failures have very largely come from underlying elements such as valuation rather from intrinsic mechanics of the securities themselves. To this end, while I am critical of the manipulative practices of some of the very large institutions in predatory structuring and position-taking I do not see much advantage to abandoning these ‘hammers’ because the ‘carpenters’ have abused them in the past.

Secondly, too much has been made of the ‘Volcker rule’ and the ‘Vickers ring-fence’ as panaceas. I find the ‘ring-fence’ to be in-organic, un-wieldy and prone to ‘interpretation’. It has already been watered down and delayed considerably and, I expect that given Her Majesty’s Governments addiction to the tax take from the City, that it will be further watered down and delayed.

With respect to the Volcker Rule, the gap risk and other exposures inherent in ‘plain old banks’ implies customers imposing risks that neither management nor shareholders may be happy with so there exists an obligation on the part of the bankers to modulate these risks. Given the new tools and techniques available to hedge risk this can be done more efficiently than ever before. However, this is virtually indistinguishable from ‘prop trading’ which leaves the ‘rule’ open to interpretation.

As I said at the start of the article the recipe for better, safer banking is part historical norms and part ‘the Tao of Unix’ (‘system components should do one thing well and interoperate with other parts’). The elements are as follows;

  • Breakup TBTF banks to more GNP proportionate size with spare capital to absorb a bank failure under the rule I proposed above.
  • Further break up the banks to essentially ‘single line of business’ entities.
  • Put the ‘clearing system’ into a public utility run as a usage-based-dividend co-operative (and build/strengthen other payment mechanisms).
  • Limit deposit guarantees to lending secured on assets within the domicile of the guarantor.

Putting these reforms into place would create a competitive banking industry that could not be a ‘tail that wagged the dog’.

This post first appeared on the Progressive Economy site on Monday, 18th Feb., 2013

Britain and the EU; a dysfunctional relationship.

It has been suggested that the British are considering leaving the EU because of their revulsion at the excessive bureaucracy, waste and inefficiency therein.
This misses the point completely.

The British are in favour of leaving the EU in the same way that they are in favour of bringing back hanging. They will do neither. The peculiarities of British electoral maths mean that the issue will get a hearing and possibly even a vote. But there will be no ‘Brexit’. I will happily wager the price of dinner in any of Dublin’s establishments on that.

One consequence of the Global Financial Collapse has been a search for scapegoats and a rise in extreme-ism, disproportionately seen on the right, as people retreat into nationalism and the traditional blaming of foreigners for their self-inflicted follies.

The ‘hangers and floggers’ of the British right have been venting their spleen and, given the general air of frustration and unhappiness that besets all OECD polities and economies, have found a larger audience than usual.

Given the existence of a coalition government in the UK, the Conservative party leader is extremely sensitive to encroachments on his unsteady perch at No10. These encroachments have come from his right in the form of UKIP, the ‘acceptable face’ of Britain’s reactionary right. So, in order to resist this hemorrhaging of support, Mr. Cameron has to allow the issue an airing. It is a measure of his political insecurity, more than his incompetence, that the issue has galloped away from his control somewhat.

It should be noted that this is an ‘English’ prejudice. The Welsh do not entertain this nostrum and the Scottish independence movement is strengthened by its commitment to the ‘European ideal’ and its admittedly prosaic manifestations.

But, above all, the British are a practical people. Their economy is massively dependent on the tax take from the City of London. A third of their manufacturing exports go to the EU. And, most importantly, their ‘significant other’ in what they like to think of as a ‘special relationship’, the USA insists that they stay in the EU.

The costs and losses of any fundamental change would be enormous and mainstream British opinion knows this; in its brain if not in its heart.

Granted there is a deep and abiding inconsistency in the attitude of the British to ‘Europe’. Three times in 220 years, the British have expended vast amounts of blood and treasure to rescue Europeans from their own folly. This means that culturally, at a visceral level, the British perceive ‘Europe’ as a source of trouble and strife. Consequently, they have never been fans of the EU.

The tragedy of this prejudice is that much bloodshed and loss might have been avoided or mitigated, by using a ‘stitch in time’ approach, if earlier and much cheaper interventions had been attempted by an engaged Britain. Certainly, Britain’s short-sighted imposition of massive war reparations after WW1 set the long-term stage for the rise of ‘National Socialism’ in Germany.

The deficiencies of the current form of the EU owe much to the British preference for dialogue and interaction with their former, and conveniently still Anglo-phone, colony than with their closer, polyglot, troublesome neighbours. A serious engagement in the shaping of the EU in manner more suited to British norms would have been to the benefit of all of the EU.

Not least to the British themselves who operate the second most opaque and centralised government in the EU, with first place taken by ourselves who use the un-modernised Victorian version of their apparatus. I prefer to see the ‘sausage being made’, however ugly and unattractive the process to closed-door or back-room deals so beloved of our own crony-politicians.

Yet for all of their complaining, the British are the most rigorous implementers of EU directives. The inconsistency of whining about these directives after the fact rather than negotiating to change them beforehand is hard to grasp from so practical a people.

I, too, would prefer to see an EU that more emphasis on inputs and less on outcomes, put more emphasis on function and less on structures and process and was more interested in balancing last years books that budgeting for next years increments. The recent evolution of the EU has been of the ‘one step forward and two back’ type and, for sure, we are living out the maxim of married the Euro is haste and getting to repent it at a long drawn out leisure.

But it is disingenuous to reiterate ‘English’ shibboleths about the costs and deficiencies of EU governance. The bloated apparatchiks that many complain of amount to 22k people who cost us a tiny fraction of EU GDP to administer the three and half ring circus that is the Commission, the two Parliament and the Councils.

Personally, I’m with Churchill in preferring ‘jaw-jaw to war-war’. The costs of freighting our domestic politicians and bureaucrats to Brussels and Strasbourg is far less than the costs of sending armies out to die. The sight and sound of these posturing and self-aggrandizing panjandrums can be tedious, if not actually odious, but it is far less so than what we beheld in the former Yugoslavia during Europe’s most recent failure of engagement and dialogue.

On that note I would warn the Eurosceptics to be very very careful of what is that they wish for.

The silence of the lambs….

I’m not a parent. This may give me an unbiased view or, in the eyes of the ‘opinion vigilantes’, disbar me from speaking.

I read the proposed amendment. Then I read the current version. It’s hard to spot the difference even with the explanatory notes.

My sense of it is that this is the best wording that could be achieved while leaving the rest of the tottering edifice that are the antiquated ‘social provisions’ of Dev’s Constitution in place.

Which makes the amendment into a modern fig leaf covering a monstrous carbuncle.

The existing wording has caused some awkward moments and embarrassing situations for the “powers that be” in their hallowed courts and secretive chambers over the past few decades as our society has evolved out the McQuaid-ian straitjacket that it was reared in.

At the same time as these few awkward legal tangles were being ‘threaded’ the State and its agents were engaged in wholesale neglect of the children in their charge.

Children were being abused and were abandoned to the clutches of their abusers.

Young people were systematically deprived of their rights by extra- and quasi-judicial processes and abandoned into penal servitude for decades.

Children died in their dozens while in the direct care of the state.

When abuses were happening under the control of minority faiths an equally blind eye was turned.

When the matter finally got some attention, the States answer was to send someone who had been suborned by a secret society to negotiate with the superiors of that society. So, it is no wonder that the deal was totally unenforceable and biased.

Finally, when the tide web out on the “Euro Boom”, we saw that the Dublin skyline was forever changed by the presence of two world-class stadia but the children’s hospital that should have crowned Eccles St is nowhere to be seen.

For all its fine words, complex processes and Christian ideals, the State and its agents have an appalling history of neglect, negligence, fecklessness and hypocrisy in the field of child care.

The consequences and legacies of this history continue to be felt to this day and the nugatory gestures of contrition and compensation so far granted only rub salt into the un-healing wounds of the victims.

Do not grant the authorities and their factotums the fig leaf of propriety and concern that this amendment represents. They desire to cover up their legal discomfitures while preserving the form and principles of the rest that shabby and outdated Constitution.

Until the State has made proper restitution and has clearly amended its ways and habits in the day to day practice of its child care regime, then money spent on a Constitutional Amendment is an insult to those currently physically sick or mentally scarred by the States past maladministration.

Our founding document contains a fine promise to cherish all the children of the nation equally.

They deserve better care, a better Constitution and a better nation than they have had over the last hundred years.

Vote No to the amendment because our children deserve better.

‘This’ FTT is wishful thinking & ham-fisted…

Tax policy in this jurisdiction is a mess and has been so for a long time. This mess has been a significant contributor to the State’s fiscal deficit through the use of ‘pro-cyclical’ transaction taxes and through tax-breaks that exacerbated pre-existing construction dependencies and excesses in the domestic economy.

I welcome TASC’s effort to debate and suggest much needed development in this crucial aspect of fiscal reform, especially in light of the regressive aspects of the last budget.

However, I am very sad to see another transaction tax being proposed and in a manner at odds with the quality of the rest of the analysis. I refer here to the Financial Transaction Tax (FTT) which has the superficial qualities of a betting tax in that it seeks to punish a perceived vice while raising lots of money for the Exchequer and, at the same time, making life harder for everyone’s favourite “scapegoat du jour”, the bankers and hedgefunds.

I am not against an FTT in principal. In fact, I support the idea. But I am against badly designed public policy of any type and the FTT as proposed here falls into that impractical category.

The core of the FTT idea is that low transaction costs and excessive liquidity facilitates speculative trading in markets dominated by financial corporations which leads to price gyrations that hurt the ‘real economy’ while generating ‘excess profits’ for the ‘players’ in these markets. An FTT, it is supposed, would ‘calm’ these markets while at the same time raising money that could better be spent by Government on ‘widows and orphans’. Derivatives trading comes in for especial criticism in this regard as a ‘smoke and mirrors’ ‘work of the devil’ excessive extravagance of markets.

The TASC paper supports the draft EU Commission proposal for a transaction tax on bonds and shares at  0.10% and at 0.01% on derivatives. No mention is made of foreign exchange or commodities trading. The report includes a sentence “The proposal (the EU Commission one) was focused on open market activities and movements (i.e. trading) and excluded inter-bank transfers and trades which might occur in the normal course for business.”

After this prescription several reasons are advanced in the report to support the introduction of the FTT. Firstly, to ‘establish real-time monitoring mechanisms for the various flows of financial transactions happening each and every day’. Secondly, to raise lots of filthy lucre for the Exchequer. Thirdly, to stop speculative trading, the bullying of small nations and profiteering that damages the ‘real and useful’ economy.

I should like to point out, before critiquing this proposal, that the root cause of the OECD economies problems was the repeated and consistent overvaluation of property assets (residential and commercial) and, in Ireland’s case, the attendant excess supply of same over the decade after the repeal of the Glass-Steagall Act. What systemic failures there were happened in the areas of securities ratings and poor legal administration; neither of which are remedied by an FTT. I am in favour of massive reform of how we do banking but, again, I would rather we have effective and productive reform than mere public whippings of various “Aunt Sally’s”.

On a first point, the rates suggested, while seemingly trivial, are in fact massive proportions of the current quoted prices. It is not made clear whether these rates are the total or the individual counterparty rates but it is clear that both sides to any trade are to be taxed. Even if it is the total due, where derivatives are quoted in spreads of 4 or 5 basis points (0.01% is a basis point), then a tax rate of 1 basis point is a rate of 20 or 25%. Where bonds are quoted in spreads of less than 25 basis points this is a 40% tax rate. Further, if derivatives are the real ‘bogeyman’, why are they being charged the lesser rate?

There is no explanation of why foreign exchange trading is excluded which is most odd since, despite our obsession with the evolution and fate of the ‘Euro’,  the EU is still a multi-currency construct. Nor is there a rationale given for the exclusion of commodities which means that fuel oils and foods are not covered yet these are indeed major components of the ‘real’ economy.

Excluding trades ‘which occur in the normal course of business’ is meaningless and would provide a get-out clause for all and any trades since these are all transacted out using the same processes and settlements.

A further major omission is that there is no mechanism suggested where transactions by non-financial corporations for practical hedging purposes of the financial risks of the ‘real economy’ can be excluded from the tax net. So the FTT as proposed will fall equally heavily on those with genuine need but less financial expertise.

The suggestion that the authorities are not aware of market prices and flows is fatuous in the extreme. The Central Bank is a Bank and has its own dealing room and it participates daily in a small but distinct manner in the principal markets. In addition, there is a large and comprehensive reporting mechanism for most forms of transactions. Lastly, the ‘need for real-time monitoring’ argument is further revealed as nonsense in light of the fact that ALL derivatives settle at some significant date point after they are entered into so the need for ‘realtime’ data is superfluous.

With respect to the notion that the yield would be significant several points arise. This forecast makes the same error that the DoF was excoriated for over its dreadful VAT return forecast of the last budget. It is undeniable that anyone one who accepts the existence of ‘elasticities’ must accept that there will be a reduction in trading volume, especially as suppression of volatility is a prime aim of the tax. There is no assessment of the likely volume impact provided here or referenced. It is also suggested that the FTT tax would come out of profits and not be passed on to consumers. I am not aware of a single instance where tax burdens are not passed on to consumers and no mechanism is suggested that could ensure this result.

In the case of profiteering and speculating at the expense of small nations, it is in the nature of human beings to describe profitable trades as ‘investments arising from one’s own insight and inspiration’ and to attribute loss making trades to the ‘speculative actions of others’. Every transaction requires a buyer and a seller and as such implies someone who believes an argument/opinion and one who disagrees. Shorting of bonds or shares is not a unilateral action. Further, where ‘short selling’ has been banned it normally creates more sellers unsettled by the change in rules and the whiff of panic and, consequently, usually worsens the situation.

In capital owning democracies, people are entitled to decide whether they believe a governments policies are credible/effective and to vote with their assets if they disagree. Manipulating market rules to suit Govt. preferences is a form of censorship and suffers from all of the hypocrisy and ineffectiveness that goes with censorship.

I note also that the report indulges in discussing “the best place to use the additional resources an FTT would generate.” This section smacks of counting chickens before they are hatched. More importantly, hypothecation of tax receipts is generally regarded as poor practice for a whole host of reasons .

Lastly, I would like to point out the complete absence of complaint or comment by the banks themselves on this topic.

Partly, of course, it is because they know that any such pleading on their part would likely harden hearts and prejudices against them. The real reason is because it will cost them practically nothing to circumvent the tax. The FTT makes explicit the intention to tax trades in their ‘domicile’. So, in exactly the same way as every trade executed on Wall Street is booked through entities in the Grand Cayman Islands, every trade in Dublin, London, Paris and Berlin will be routed through entities in Gibralter, Jersey or Malta the day after the legislation is passed and, consequently, hardly any ‘transaction tax’ will be collected. And this will happen without moving a single trader or company. The EU proposes to tax on the basis of residence but if the US authorities have not managed to shut down the Cayman loophole, I do not see how the EU with its vastly more complex legal hinterland will be able to do the equvalent.

This FTT proposal is long on wishful thinking, short on concrete details and absent a working knowledge of the operation of the market and its systems. Proponents of it need to “up their game” somewhat in order to have it gain serious consideration.

This article was posted on Progressive Economy on Tues., Oct 2nd.

An edited version of it was posted on on Fri., Oct 12th.


Miracle on O’Connell St. …?

We live in an age of wonders.

Just 2 weeks ago we saw Clerys executed and brought back to life faster than Jesus, courtesy of the laying on and writing off of taxpayer provided bank capital.

The smooth and efficient process whereby the ‘execution’ of this artifact of Mammon was decided upon, a ‘saviour’ obtained, an ‘executioner’…sorry, ‘receiver’ of the corpse appointed and a ‘resurrection’ effected within the space of 24 hours, courtesy of a compliant judiciary, is a testament to our trust in shibboleths of our most dearly held faith, “Capitalism”.

Another such wonder is the transformation of legal fictions into ‘people’ by the prophets of the US Republican Party by means of granting them rights such as ‘freedom of speech’.

On this side of the ‘pond’, ‘right thinking’ people are inclined to roll their eyes in knowing awareness of our smug superiority, when we hear the Republicans attempt to assert that notion. Indeed, the Republicans seems strangely conflicted in their urges to grant rights of personhood to corporations and foetuses in the name of ‘liberty’,while at the same time constraining the rights of humans in the cause of fighting terrorism.

Our smug superiority is based on belief that such gross distortions would never be allowed to exist in our civilized post-Modern ‘liberal’ economies with our fine human, civil and trade-unions rights protections.

The hypocritical reality of life in Ireland is that there is a brutal contrast between the modern privileges accorded to corporations and the Victorian morality implied in laws affecting persons is a sad illustration of the ongoing hypocrisy of our culture and inadequacy of our governance

The resurrection of Clerys as a redeemed, forgiven and re-empowered business by means of Bk of Ireland’s realistic 50% write down in its debts, all within 24 hours stands in stark contrast to how all of the banks and all of the politicians and all of the courts treat the citizens of this ‘republic’. This level of write-down for personal debts normally implies bankruptcy for the ‘sinner’ for eight years which is a temporary financial ‘hell’ despite it’s trade description as ‘purgatory’. Yet this level of debt write-down is exactly what is required by a large proportion of our young mortgage holders if they and the wider economy are to have any chance of recovery and redemption.

This double standard is applied in many other areas of life.

We go to great lengths to bring foreign capital and corporations into this company but we erect barriers to migration despite the talents and qualifications of many of the migrants. We allow any kind of financial agglomeration but have only recently allowed divorce for humans and have relegated same-sex unions to a ‘second class’ status. We have a legal limbo where abortion is concerned with potential extreme legal and social sanctions but killing a corporation for private gain (to avoid loss or tax) is barely frowned on.

And yesterday the Governor of the Central Bank said that we needed to do more to facilitate the ‘restructuring of businesses finances‘. Yet for the last 3 years his organization and the Dept of Finance and the Government tried give more power to the banks (our most privileged corporations) at the expense of the citizens. The proposed new bankruptcy legislation puts the banks and not the courts is the driving seat when ‘restructuring people’s finances’.

That these absurdities are taken as ‘normal’ is a measure of the dysfunction of our society. We are engaged in a program of punishing the citizens for the mistakes of the banks and the administration in order to prop up the absurd property values the banks fostered so that the banks can escape the consequences of their greed and incompetence.

Welcome to modern Ireland where corporations have more rights and better rights than people. We are clearly second class citizens and while we might not actually be the ‘slaves’ of the corporations…. it sure feels like it.

This post was republished by the on Sunday, Sept. 30th, 2012.

A ‘purp’ walk for banking….

We all had a pleasantly salacious time last week watching various white-collar villains being hauled before the courts and given “good talking to’s” by our esteemed judiciary. In the vernacular I believe this is referred to as the ‘perp walk’, where the fourth estate gets to harmlessly indulge our ancient tendencies to ‘hue and cry’ and ‘witchhunt’.

All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.

Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.

So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a ” ‘purp’ walk” for banking, that is, let us take out for a stroll the notion of the ‘purpose’ of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.

What we have

We, currently, have what are called ‘universal banks’, that is, they do ‘everything’ with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, ‘invest’ money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from ‘exposures’ or risk taking we inadvertently allow them to enter into with our money. About the only thing they don’t do is print the damn stuff, despite what some ‘theorists’ will tell you.

This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an ‘accident’ that disregards the prudential structures that exist in all other financial markets

Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an ‘Exchange’ which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the ‘clearing system’.

Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the ‘clearing banks’ are prone to failings in this.

There is, also, an embedded conflict of interest in the fact that banks are allowed to charge ‘advice fees’ for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is ‘enforced’ to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….

A further issue is that its ‘risk management tools’ (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.

Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.

Lastly, our banks insist on being given a Government guarantee for their ‘raw material’ (our deposits) so that they don’t have to take responsibility for their profligacy. This exposes us to their ‘moral hazard’ and gives them a free embedded option, known, on Wall St., as the “trader’s put” (the trader can ‘put’ you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of ‘moral hazard’ on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.

So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.

It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it’s a spoilt child with a cocaine habit driving the family car.….with the family on board.

What we need?

Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) “not so much” and 2) “not so big”.

In the ‘Anglo-Saxon’ world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.

We need to preserve this function in banking and that is the only thing we need to keep.

Getting from here to there

Domestically, we have been witnesses to Lenihan’s and Noonan’s ‘Frankenstein-ian’ misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of ‘pillar banks’ has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.

Contrary to the assertions of those ‘on the take’ from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.

Internationally, we have only seen the Vicker’s Commission in the UK consider any changes to the structure and nature of banking. The concept of ‘ringfencing’ has a pleasant and well-meaning ‘ring’ to it but it has not been shown to be either ‘organic’ or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.

So, having dispensed with the current situation without reference to the classic Kerryman’s ‘directions’ joke, we have to ask what road do we take to get to a stable safe banking system.

The Prescription

There was nothing wrong with ‘Glass-Steagall’ apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single ‘business lines’ for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of ‘ringfencing’.

This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don’t see why it doesn’t apply to the banks.

It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial ‘conglomerates’. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these ‘business lines’ is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy’s need for payment clearing mechanisms.

Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that ‘audit’ and ‘consultancy’ should not be provided to businesses by the same firms.

For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.

This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we ‘guarantee’ the deposits but the problems come from the loans. How can one guarantee the loans? You can’t in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.

A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these ‘professionals’ for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.

I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won’t be able to do business overseas that is their problem not that of the State or its taxpayers.

In order to square the circle of competition and robustness and redundancy,  I would want to see the ‘mutual’ sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth ‘player’ in the credit advance/banking sector.

As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.


These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.

If the bankers say that they will be ‘hamstrung’, I say that they have ‘hamstrung’ the whole economy and that they should get used to suffering like the rest of us.

The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won’t get too big for our boots.

There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that ‘discussion’ the civil servants are responding ‘how high?’ when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won’t then we should get involved in it directly.


Those reforms in bullet form are;

  1. Create a utility clearing function to separate credit risk from payment transmission.
  2. Create single business line banks by divesting credit card businesses
  3. Forbid advice fees
  4. Remove the ‘deposit guarantee’ from funds lent overseas
  5. Reconstitute a fourth major lender from the old ‘mutual’ entities
  6. Reconstitute the PostBank

This article was re-posted on the TASC ‘Progressive Economy’ blog here on Mon, 6Aug, 2012.

This article was re-posted on here on Sat, 18Aug, 2012.

Danny Boyle’s Olympic Welcome

‘Be not afeard: the isle is full of noises’

                                                                          The Tempest, William Shakespeare


At some point in their histories, most nations experience a revolution that changes everything about them. The United Kingdom had a revolution that changed the whole of human existence. In 1709 Abraham Darby smelted iron in a blast furnace, using coke. And so began the Industrial Revolution. Out of Abraham’s Shropshire Furnace flowed molten metal. Out of his genius flowed the mills, looms, engines, weapons, railways, ships, cities, conflicts and prosperity that built the world we live in.


In November 1990 another Briton sparked another revolution – equally far-reaching – a revolution we’re still experiencing. The digital revolution was sparked by Tim Berners-Lee’s amazing gift to the world – the World Wide Web. This, he said, is for everyone.


We welcome you to an Olympic Opening Ceremony for everyone. A ceremony that celebrates the creativity, eccentricity, daring and openness of the British genius by harnessing the genius, creativity, eccentricity, daring and openness of modern London.


You’ll hear the words of our great poets – Shakespeare, Blake and Milton. You’ll hear the glorious noise of our unrivalled pop culture. You’ll see characters from our great children’s literature – Peter Pan and Captain Hook, Mary Poppins, Voldemort, Cruella de Ville. See ordinary families and extraordinary athletes. Dancing nurses, singing children and amazing special effects,


But we hope, too, that through all the noise and excitement you’ll glimpse a single golden thread of purpose – the idea of Jerusalem – of the better world, the world of real freedom and true equality, a world that can be built through the prosperity at industry, through the caring nation that built the welfare state, through the joyous energy of popular culture, through the dream of universal communication. A belief that we can build Jerusalem. And that it will be for everyone.