The Budget

Thanks for the info.

Fond memories of many years ago!

ATTB from George

No, let's be clear as to where this mess really comes from, and who is to blame.

Keynesian economics is flawed, to be sure, but the blame for our current pickle lies with the doctrines of neo-liberalism, and the politicians and their economic advisors who put it into action. Neo-liberalism, the prevailing orthodoxy for 35 years (but first put into action, tellingly perhaps, by the murderous quasi-fascist regime of Pinochet from 1973 on) is surely the most egregious and corrosive con-trick ever perpetrated on the Western democracies. At its heart is a catastrophic misreading of the way the world works - the misapprehension that markets are free, self-regulating and rational. They are none of these things: markets are built on sentiment, and worse, if left to themselves, degenerate into unaccountability, monopolism and cronyism, all to the detriment of everyone but the powerful elites.

In its current degraded and decadent state, neoliberalism has led to a vast system of corrupt and corrupting corporate oligarchies, out of control and answerable to nobody (our governments and law-makers too cowed, lazy, craven or dumb to intervene against them).

Let's take just one of these entities as an example. Look at virtually every corporate cock-up of the past decade, from the '08 financial meltdown, to Greece's travails, to the grossly underpriced (at great cost to the UK taxpayer) and botched sell-off of Royal Mail; one name is behind all of them, and that name is Goldman Sachs. This is a "bank" so out of control, so life-sappingly cynical and incompetent, whose tentacles have reached into every niche of public life; that it resembles a kind of rogue terrorist state, but one whose weapons of terror are built not on nukes or vast armies or suicide bombers, but upon incomprehensible financial products, bluff, ruthless greed, silencing of critics, egotism and a shocking sense of unearned self-worth.

It was not Keynesian economics that created all those financial products that nobody understood or who gave mortgages to people they knew would never pay them back; it was not Keynes' followers who created the vast pyramid schemes that characterises much of the late 20th/early 221st century finance system; and it is not Keynes' fault that many of your children (unless they go into banking or management consultancy) will struggle to find a well-paid job, or be able to afford a house. It was not Keynesian economics that stole your tax dollars and pounds to bale out failed businesses which were deemed "too important" or "too big" to fail; or made your job poorly paid, or made your pension pitiful.

It is the hopefully soon-to-be-utterly discredited creed of Hayek, Friedman, the Chicago Boys and all those other moral pygmies which is to blame. Keynes is largely irrelevant in terms of his ideas' ability to influence government and fiscal policy, and has been for decades.

We must not make the mistake of seeing the desperate scrabbling around (eg QE, printing more money) to solve a much deeper problem (neo-liberal orthodoxy) as the cause of the problem itself. It is not. There's only one way out of this mess, and that is to destroy the prevailing orthodoxy and dismantle the neo-liberal project.

On another note, I am rather shocked at this thread - I had always assumed that this forum was full of reasonably sophisticated adults, but I am aghast at the number of people who simply lay the blame of our current situation on Brown and Blair. Certainly they have to share the blame because they failed to stop the neo-liberal gravy train, or even to get off it - but that blame must also be shared by politicians, business leaders, law-makers, corporations and tax-dodgers the world over. Thatcher, Major and now Cameron must bear as much responsibility as Blair and Brown.

If governments stopped bailing out failed, badly-run and corrupt businesses and made a concerted effort to bring them to account AND collect the trillions of pounds salted away by taxing-evading corporations and individuals, we wouldn't need austerity.

Kevin

That's the most sensible posting on this thread/forum that I've read in a long while. I'm amazed how people blame this or that for the downfall of the UK economy, as though the UK could be immune from the near financial meltdown that affected the globe. The seeds were sown 20 or 30 years ago.

Very well said Kevin. It is a shame the way this interesting and informative thread has developed. And so predictably.

What Kevin said 

My, this thread has changed…

For my own twopenny worth I feel it’s easy to overcomplicate things. In my opinion, economic difficulty can often be summed up in one word. Greed.

Don’t get me wrong, I think it’s perfectly reasonable to try and enable one’s wealth (whether personal, corporate or national wealth) to keep pace with the cost of living and similarly to beat inflation, if that’s your desire and target. However to expect either of those with no ‘price’ to pay is plain greedy. And virtually everyone I speak to is greedy to an extent.

By illustration, let’s examine everyone’s favourite enemy, ‘The Banks’. (Now before I start, I should confirm there is no love lost between me and the banks, from inside or out, however they alone are not guilty for present ills.)

From a domestic perspective, most people wish to place their money in banks/building societies for security right? Now, if those same people wanted to store any other asset e.g. furniture, cars, antiques, whatever, they would probably expect to pay for that storage right? Not so with cash though, why’s that? In fact, far from paying for that storage and security, the depositor expects to more than break even and actually get paid themselves by the bank to store their money with them!

So the bank, has to use what is now their money to make a profit, from which they can cover their (ever higher) costs, pay out to shareholders or members and pay some interest back to the depositor. They have to re-circulate and invest that money in debt, business equity, physical assets and all sorts of variations on those themes. Now, investment of any sort carries risk. And even low risk does not mean ‘NO’ risk. Makes sense right?

But, every working day of my life, I have conversations with the customers of banks and building societies. Every day of my life I ask their customers some variation of: “Should the bank be taking risks with your/their money?” The overwhelming response is “No, not at all”. Too which I respond, “… Well, how do you expect them to earn enough to pay you interest then?” Silence then follows as a BGO dawns.

Even those that do acknowledge the banks need to invest for profit will invariably insist that while it’s reasonable to take some risk, that risk must be ‘low’ And yet, without fail, those depositors expect their bank to pay them interest for the storing their cash with them. Now that desire for some kind of alchemy, this ‘magic wand’ type of economics is greed. It’s a desire for something for nothing. No one wants to think about the awkward question of risk and reward.

As an example, during the ‘credit crunch’, savers didn’t wander into the West Bromwich B/Soc and think, ...how come the WBBS can pay me 6%, when National Savings is only offering me 4%? Is it because they’re in trouble? Is there greater risk here? Should I be worried? NO, common sense does not raise its ugly disapproving head and instead, savers pile in for the ‘6%’. The risk taking, being encouraged by the FSCS rules too.

To compound it, the banks (whether the beast that are GS or JPM or your friendly high street local) and the politicians then play along for their own greed. Whether financial greed or the type of greed presented in maintaining the status quo, not paying the price of ‘change’.

Instead of explaining very basic, common sense, economics to Joe Public, the politicians and the banks allow people to believe in the myth of ‘free banking’ and ‘risk free’ banking too, because it’s easier, it’s less difficult, there’s fewer ‘uncomfortable truths’. And, ad infinitum, instead of saying to the customer, well what you want doesn’t really exist, so you can pay us and have very little risk or we can pay you and you have to accept risk, they pretend that economics and magic do work together and you can have something for nothing. Offering products and services that often don’t work very well, if at all, repeatedly pretending that they have made alchemy real.

This in turn leads to further greed all the way along the food chains and out into society at large.

I do fundamentally believe that if we had to pay for our (really expensive) personal current accounts with their direct debits, ATM facilities, BACS  movements, branch and admin. centre staff et al, further if we did not expect returns even close to inflation for taking close to zero risk with our money, then the banks could make their profits from their basic services of ‘checking’ accounts, loans, deposit accounts and take less risk, show less greed, rather than continue trying to pretend that something that doesn’t really work, does.

Further, if we educated people more that common sense levels of ‘risk’ should not be scary and should be accepted and acknowledged as an everyday issue (particularly to us nice and cosy ‘Westerners) to allow those people to make an educated assumption about what those risks really are and why they are, then these myths about banking alchemy would be far less prevalent.

But in short, we are all to blame (although some share a higher burden of that blame than others...) for sticking our fingers in our ears and saying 'Nyah Nyah Nayh, can't hear you. My ignorance is bliss' and allowing the public, the banks and the politicians to all blame someone else.

Bravery is needed to say loud and proud "Look, this doesn't work. What you think is reality, isn't. This is how it works. Move on, deal with it"

There.

Not sure how Goldman Sachs are responsible for the Greek mindset of "don't pay tax" but hey ho.

Income tax receipts as a percentage of GDP are only 4.7%, the lowest in the eurozone and less than half the 10% in the UK. It would be good to think this is just because Greece has rock bottom tax rates but it hasn't - this is because for some people, what they actually earn and what they put on their tax forms are often different figures.

In 2011, Horst Reichenbach, head of the EU taskforce offering technical help to the Greek government, said the amount of unpaid tax was estimated to be "in the order of 60bn euros [£49.49bn]

/pedant

I never said that they were.

But even a cursory investigation will reveal that the Vampire Squid took advantage of the desperate Greek authorities and covered up the extent of Greek debt (with a series of complex debt swaps and derivatives) for its own gain. It had been doing this since at least 2003, and for this egregious fraud - which has bought misery on millions of ordinary people as well as further burdening EU taxpayers - it has still not been bought to account.

Wow !

If i want to "store" my "van", I expect to pay the garage to store it, keep it safe and return it when I ask for it. I realise that it costs them quite a bit provide safe storage and administration. When I take the van back it will have depreciated, despite being "unused".

If a "bloke" asks if he can "use" my van, I expect him to look after it as above, I accept it will have depreciated more, but I fully expect this "bloke" to pay me hansomely for having hired him the van to "use" in the first place. And what's more, I expect him to bear the risk of being able to pay me hansomely.

In order to ensure that he is able to pay me, I will either look at his business proposal very, very carefully, or accept collateral on his other assets such as his house. No, better still - I will do both, look at his business plan and take the collateral.

I see the banks simply operating as a "broker" between me and the "bloke". I don't expect them to absorb all of his business profit and leave me with sod-all. Otherwise, what's the purpose of a bank ?

And if the bank can't do this simple task efficiently, or get greedy about how much they charge for this administrative service, then its about time they ceased to exist.

Good response

Don, you are pretty much, asbsolutely bang on right.

The trouble is, far and away the majority of people don't look at who they're giving their money to very carefully at all.

Most depositors also expect the bank to give them a return on the money but not to use it for profit while in their 'care' by taking any risks at all.

And by and large, they don't charge personal banking customers! Most of whom make them no profit at all. Which is some of the problem.

Oh and the point I was leading too was in the very next paragraph which you chose to leave out...

"But, every working day of my life, I have conversations with the customers of banks and building societies. Every day of my life I ask their customers some variation of: “Should the bank be taking risks with your/their money?” The overwhelming response is “No, not at all”. Too which I respond, “… Well, how do you expect them to earn enough to pay you interest then?” Silence then follows as a BGO dawns."

A perspective you evidently don't share and good for you.

There are some really interesting arguments being made here.  I would though suggest that 'banks' can and should be evaluated as two distinct entities. The first is the retail side which most of use.  Here I think it perfectly reasonable to expect those banks to keep our money safe.  And since the banks charge interest rates to personal and small business borrowers well above base-rates, the 'turn'  they make on this enables them to provide retail banking services to those who stay in credit for no charge.  Are they taking a risk with our money? Well, in theory, yes, because some of those loans will go bad. But in practice, no, because the margin for those bad loans is always priced into interest rates charged.

And then there are the investment banks.  These largely have very different customers who are looking to make money, and experience has shown many aren't too fused about the nature of the 'packages' traded which might make them a fast-buck. Their customer need is very different and they expect to take risks. 

The problem comes when these two very different businesses take place within one bank and the inherit risks in the investment side threatens the security of the deposits made in the retail side.  Put more crudely, the irresponsible gamblers in the investment banks, motivated by the bonus culture, are prepared to take greater risks because they know that in the first resort the funds sitting in the retail side of the bank can be used to cover their losses and secondly if those funds are insufficient the government will step in and bail the bank out because of the fear of impact of the bank's collapse on millions of ordinary people (voters). That's why governments keep looking at the possibility of splitting these banks into two separate entities. Trouble is we're not starting with a green-field site.  

Yep, trouble is when the regulator demands each part of a business to be seperately accountable and separately profitable, with no 'cross-fertilisation' (as is happening right now, witness the instance for FS advice  firms in RDR) then taking profit from one area to fund losses another becomes against the rules and illegal all of a sudden!

Fascinating to read about banking and private depositors.

I am not remotely greedy, and use the Nationwide, which is the last major Building Society that is still a mutual, and thus is not subject to institutional investors' whims ....

Strangely, the Nationwide does offer competitive interest rates on deposits, and the risks are minimal as the main investments of the Society are in mortgage lending. And they are tough and old fashioned about the mortgages they offer. Very good mortgages, but don't expect to get one without a safe level of deposit ...

I would never put any money into a High Street Bank that was also an Investment Bank.

ATB from George

Kevin - we actually agree more than you would think - but remember this fascination with "growth" as the solution to all economic woes as well the easy money policy to permit the inflating away through currency devaluation is what makes it all possible.  And that is Keynesian.

That's why almost all the "top" economists (at least the policy wonks) these days are Keynesians.  Friedman liked central banking way to much for my blood.  As I mentioned, Krugman, whom they all worship is either just plain stupid, a useful idiot, or crazy like a fox as he lives a very comfortable life pontificating bullshit for a living.

Markets can be irrational for along time, but things eventually end up at what they are worth - that is the premise under which Warren Buffet has operated for decades, and why he is the greatest investor ever...notwithstanding that now because of who he is he gets sweetheart deals that you & I could never get.  (B of A warrants, anyone?)  But he made his bones by knowing what sh*t was worth, and buying it at a discount. 

Remember 1999 when "profits didn't matter" because of irrational exuberance?  Yeah, sure they don't matter, and all those hot sh*t whiz bang tech companies went tits up because they weren't worth anything.  The market WILL have it's way eventually, and things WILL be priced at what they are really worth.  It's like gravity - you can defy it for a while, but eventually you have to come down to earth.  And no amount of printed phony currency will change that.  And that IS a major component of Keynesian "growth".

GS and all their cronies are behind it no doubt, and the corruption (no wait, only Russia is corrupt) of our politicians and corporate leaders as they skew legislation to allow themselves to imbibe deeply at the corporate trough on the taxpayer's nickel/quid is NOT free market economics.  A true free market system with rational regulation and controls would likely be the best; it certainly offers the most opportunity for improving one's lot in life and comes as close to a meritocracy as we can get.  But monetary policy is being manipulated to where money itself is not priced at what it is really worth. Interest rates should be much higher, but a handful of men in suits control the meaningful money supply of the entire world.  But they have to, because if the rates were to rise, the inevitable bankruptcy of most Western economies woudl be an almost instant reality.

It all starts with monetary policy, and right now the price of money is being held artificially too low, which creates mis-allocation of capital, and is why we get bubbles.  Then bubbles pop, and the little guys get screwed because the manipulators (& their politician buddies) largely front run the mess they help create.

We (western economies) are following the same road that led up to 2008, only this time it will be worse when the axe falls.  But we need "growth", and the only way to get it is to print money.  Problem is, it's not working right now, and even with the US (and I cannot speak to other governments) cooked and totally fabricated statistics, it is painfully slow - all the money is going to the banks (no surprise, they run the system) while the Fed bloats its balance sheet and is pitifully under capitalized.

It's all going to unwind, and unwind fairly soon, and it will make 2008 look like a walk in the park.  I woudl like to be wrong, but I am pretty sure I won't be.  The US is bankrupt...and so is the UK, France, etc., etc...

First published in the British humour magazine “Punch” on April 3, 1957:

>

Q: What are banks for?

A: To make money.

Q: For the customers?

A: For the banks.

Q: Why doesn’t bank advertising mention this?

A: It would not be in good taste. But it is mentioned by implication in references to
reserves of $249,000,000,000 or thereabouts. That is the money they have made.

Q: Out of the customers?

A: I suppose so.

Q: They also mention Assets of $500,000,000,000 or thereabouts. Have they made that
too?

A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?

A: Not at all. They lend it to customers.

Q: Then they haven’t got it?

A: No.

Q: Then how is it Assets?

A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?

A: Yes, usually $500,000,000,000 or thereabouts. This is called Liabilities.

Q: But if they’ve got it, how can they be liable for it?

A: Because it isn’t theirs.

Q: Then why do they have it?

A: It has been lent to them by customers.

Q: You mean customers lend banks money?

A: In effect. They put money into their accounts, so it is really lent to the banks.

Q: And what do the banks do with it?

A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?

A: Yes.

Q: Then Assets and Liabilities must be the same thing?

A: You can’t really say that.

Q: But you’ve just said it! If I put $100 into my account the bank is liable to have to pay it
back, so it’s Liabilities. But they go and lend it to someone else, and he is liable to have to
pay it back, so it’s Assets. It’s the same $100 isn’t it?

A: Yes, but….

Q: Then it cancels out. It means, doesn’t it, that banks haven’t really any money at all?

A: Theoretically……

Q: Never mind theoretically! And if they haven’t any money, where do they get their
Reserves of $249,000,000,000 or thereabouts??

A: I told you. That is the money they have made.

Q: How?

A: Well, when they lend your $100 to someone they charge him interest.

Q: How much?

A: It depends on the Bank Rate. Say five and a-half percent. That’s their profit.

Q: Why isn’t it my profit? Isn’t it my money?

A: It’s the theory of banking practice that………

Q: When I lend them my $100 why don’t I charge them interest?

A: You do.

Q: You don’t say. How much?

A: It depends on the Bank Rate. Say a half percent.

Q: Grasping of me, rather?

A: But that’s only if you’re not going to draw the money out again.

Q: But of course I’m going to draw the money out again! If I hadn’t wanted to draw it out
again I could have buried it in the garden!

A: They wouldn’t like you to draw it out again.

Q: Why not? If I keep it there you say it’s a Liability. Wouldn’t they be glad if I reduced
their Liabilities by removing it?

A: No. Because if you remove it they can’t lend it to anyone else.

Q: But if I wanted to remove it they’d have to let me?

A: Certainly.

Q: But suppose they’ve already lent it to another customer?

A: Then they’ll let you have some other customers money.

Q: But suppose he wants his too….and they’ve already let me have it?

A: You’re being purposely obtuse.

Q: I think I’m being acute. What if everyone wanted their money all at once?

A: It’s the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?

A: I wouldn’t say that.

Q: Naturally. Well, if there’s nothing else you think you can tell me….?

A: Quite so. Now you can go off and open a banking account!

Q: Just one last question.

A: Of course.

Q: Wouldn’t I do better to go off and open up a bank?

I see where you are coming from Doc and, yes, we do seem to be close to agreement - but I still maintain that it is a lack of control and accountability rather than Keynes and his acolytes. Bizarrely, many neo-liberals have argued that it was too much regulation that led to the travails of 2008 and onwards.

I do agree with you 100% that the pursuit of endless growth is neither rational nor sustainable, and certainly bad for all of us in the long term.