SSE - Crooks can be green and Scottish too

From Herald,  4/4/13

   Scottish and Southern Electricity has been charged £10m by Ofgem for mis-selling its gas and electricity. Apparently, its telephone sales people were bamboozling potential customers by giving them “misleading and inaccurate” information about prices. They also reported that the Pope is believed to be Catholic.

I'm sure action will be swift. Two years ago Ofgem castigated the energy companies for having 300 different tariffs. This year they have 900. Last month Ofgem reported that the energy utilities were raking in record profits of £110 per household, because wholesale energy costs were falling. So the energy companies announced that they were going to put their prices up even higher.

This is called regulation? Only in the same way that sub-prime mortgages were regulated. Ofgem insists that it is not in the business of setting prices – heaven forfend. Its job is to ensure a competitive market. Well if this is competition, I'd hate to see what a cartel would look like.

Perhaps Ofgem might get better results if it tried penalising the wrongdoers just a little more severely. Tapping them on the wrist and saying “naughty naughty” tends not to work in our high powered global business environment. £10m is about 0.003% of SSE's annual revenues which last year were over £30 billion. Do you think that this penalty is going to make them change their ways? SSE has form here and were found guilty of doorstep mis-selling in 2012 and fined £1.25m. Gosh, that must've hurt.

If we're printing money it should go to poor people who spend not bankers who hoard.

    Imagine being asked to pay your bank for the privilege of depositing your money in it. Most of us think that we are victims of reverse bank robbery already. But actually give them money to take our money? The Bank of England moved rapidly yesterday to insist that the policy of negative interest rates, floated by bank official, Paul Tucker, was “very blue sky thinking” and anyway wouldn't affect the deposit rate that is paid to ordinary savers, only big banks. Though, as we'll see, that isn't strictly true.

The main reason the Bank of England is talking about negative interest rates is to force the banks to lend to business. Much of that quantitative easing money that is being printed and handed, effectively, to the commercial banks is being redeposited with the Bank of England. Yes, the banks get electronic money from the Bank of England; then they deposit it back with the Bank of England to earn interest on the cash it has printed.

You might think that is the economics of the mad house, and you might well be right. But in the paradoxical world of high finance, this is considered a sound monetary policy.

Banker bonuses? Give them to everyone.

There's a very simply answer to the problem of banker bonuses.  Give them to everybody.  No, I'm serious.   The banks are only in existence because of the hundreds of billions in state support.  Had it not been for the guarantee of public money to back up their dodgy asset base, not just direct capital injections but liquidity, asset swaps and loans, even the nominally private banks like Barclays would have gone under in 2008 because the entire financial system would have collapsed and their assets would have been valueless.   

   Very well then.  In future, when the banks hand themselves bonuses, the public should get equal, if not greater bonuses for having underwritten their profits in teh first place.  It's only what the banks would do were the situation reversed, and they were lending to government.  They call it interest.  So seven billion in bonuses  to investment bankers?  Seven billion to us.  Twenty billion in City salaries?  Twenty to us.  

  Such would be the condition for any future public support for banks.  If some banks reject this they can reject this arrangement and go out on their own, but they would really be on their own.   Then we would see what the state guarantee is really worth in the market where it counts.  Can you imagine anyone putting their money in a bank today that would have no future access to any public support?  Exactly.  They would be out of business tomorrow.

Let's have some capitalism for capitalists.

My Big Idea for 2010? Simple. Bring back capitalism. No, I'm serious. I may be a superannuated socialist who thinks the banks should be nationalised and has always supported the redistribution of wealth. But right now, we need a bit of capitalist rigour to sort out the mess left by the financial crisis. It's time for financiers to start paying for their mistakes, honouring their debts without rushing to the state for another bail out. Just like Margaret Thatcher said of the old nationalised industries thirty years ago: no more lame ducks; no more feather-bedding.


Capitalism is supposed to be about competition - failing firms are supposed to go out of business so that capital can be re-assigned to profitable businesses that are producing things that society wants and needs. Capitalism cannot function when one set of capitalists is given privileged access to public funds in order to insulate them from market forces – and provide them with lavish profits they haven't earned. Yet that is exactly what has happened over the last eighteen months – and on a colossal scale. Hundreds of billions of pounds have been thrown at loss making enterprises which just happen to be called banks. As the governor of the Bank of England, Mervyn King, famously put it, in what must be the quote of the year: “Never has so much been owed by so few to so many, and with little real reform”.


The investment banks who brought us the 2008 crash learned that if their debts are big enough, and their losses large enough, then they become “systemically important” and can expect to be rescued by the state to prevent a collapse of the entire financial system. The banks actually have a lot in common with the old state enterprises in Communist states of Eastern Europe in that they have no competition and no risk of failure because of their access to public funds. But we surely learned from the Soviet experience just how dangerous it is to allow a small clique to seize control of the economy, whether bankers or communist party bureaucrats.


The West's financial oligarchs have plunged the world into recession, destroyed millions of jobs and consumed vast amounts of social capital, but like the old Communist bosses in Russia, it didn't cost them personally. They have been insulated from risk by the state. Their share options may have fallen somewhat in value, but thanks to the billions handed to them by the government, and reduced competition, banks like Goldman Sachs are richer than ever and paying the biggest bonuses in history. Even state owned Royal Bank of Scotland, officially the worst bank in the world, has been handing million pound bonuses to the very executives who made RBS a by-word for irresponsible speculation. They say, without irony, that they must reward excellence or lose their best people.


What sticks in the craw is that many of these people – the Fred Goodwins, Andy Hornbys, Eric Daniels - used to be the cheerleaders for Thatcherite private enterprise. Financiers were the first to condemn trades unions in the 1970s for their restrictive practices, their leap-frogging pay claims and their lack of social responsibility. Yet here they are, snouts in the trough, arguing for parity with other plutocrats, demanding special deals, ignoring the impact of their selfishness on the rest of society. These very banking executives used to claim that the free market had to be protected from the dead hand of state control. Now here they are running to the state for bail outs, equity injections, interest free loans, asset protections schemes – anything to protect them from the very system they imposed on the rest of society. It's one law for them, another for the rest – the mission statement of the economic parasite since the days of Feudal privilege.


Really, there is no more pressing issue facing our legislators as the British economy hauls itself wheezing out of recession in 2010. Whoever wins the next election must deliver a very clear warning to the City of London: never again! There is no free lunch any more. Banks that are bankrupt must go out of business. Directors must lose their jobs and bonuses. Bank shareholders must lose all their equity, as in any other risk venture.. Same with other loss-making organisations that have been seeking government support like gas guzzling car manufacturers, property speculators exploiting near zero interest rates, quasi-nationalised train companies and fly-by-night PFI providers.


If we don't draw a line under this now, the behemoth banks, knowing they are too big to fail, will simply return to irresponsible lending and derivative trading exactly as before. Actually, they're already at it. Have you wondered why the banks that were at death's door a year ago are now making vast profits again? Why their share prices are rising so fast? Well, first of all, the government – that's you and me – has taken hundreds of billions of bad debts off their books in asset protection schemes so they don't have to register these as losses.


But that's only the start. The banks are currently borrowing money at 0.5% interest rates from the Bank of England and then buying government bonds that pay around 3.5%. That is as near to free money as it is possible to get – except that the money ultimately comes from us in our taxes. Banks are also using this cheap money to speculate on shares, hence the recent stock market boom, and in commodities like oil and gold, which have been making splendid returns recently. What they are not doing is lending to productive industry- which is still at record low levels - or to first time home buyers.


Banks don't make things, apart from debt, so it's often hard to understand quite how they make their profits. They use impenetrable jargon like “bid-offer spreads”, “discount window”, “carry trade” “derivative trading” which mystifies the whole process. But at root it isn't that difficult to understand. Say I lend you £100 at 1% interest for one year , and you then lend that £100 pounds to someone else at 10%. After twelve months, you get back £110, but you only have to pay me back £101. That's almost exactly what the banks are doing. It is like magic. And that's what financiers really are – conjurers who fool us into thinking that they can create money out of nothing.


Trouble is, they also fool themselves. And this is how the great credit bubble began in the early years of this decade, when interest rates were kept too low for too long after the 2000/01 dot.com crash. Banks were able to make huge profits, lending out cheap money at ever greater multiples of their core capital. They didn't care who they were lending it to because, they believed – rightly – that the government would come to their rescue the in the end. Only one thing will prevent the bankers blowing up another credit bubble: the fear that they may lose everything if they go too far.

One final thought: the rest of us could do with taking a look at our own financial behaviour too. The banking crisis may have been caused by the greed and irresponsibility of a financial kleptocracy. But we have all participated in the creation of the credit economy – most obviously through the housing bubble. People have grown used to their homes 'earning' more that they do by working at a job. We have become addicted to living on debt: equity release, credit cards, mega mortgages, overdrafts, student loans, car leasing arrangements. Instead of trying to live within our means, we have sucked hard and long on the teat of credit.


This has served the long term interests of the banking oligarchs, but we cannot ignore our role as the bankers willing little helpers. Clambering greedily up the “housing ladder”, exploiting tax breaks on property ownership, demanding such high prices for our real estate that first time buyers have been priced out of the housing market altogether. And if the mortgage becomes too much we expect the government to cut interest rates to magically wipe away our debts, just like the banks'. Millions of home owners with large mortgages have had tax free windfalls of several hundred pound a a month in 2009 thanks to near zero interest rates. People with huge debts are being given a free ride. Older people are being bribed to stay in big homes they don't need while young families can't get anywhere to live. Britain has become two nations: the home owners with their subsidised loans and the rest who can't hope to afford to join them. And ultimately it's all paid for by money printed by the Bank of England – a sure fire recipe for hyper-inflation.


When I was a naive young man, I campaigned for a socialist economy in which the commanding heights of capitalism were brought into public ownership and control. Well, in a way it has happened. The state now owns large chunks of the banking system, and has supported the rest of it through a whole range of bail out measures, from buying toxic loans to acting as lender of last resort to banks bereft of liquidity. But this isn't promoting the common good. We have created a bastard synthesis of finance capitalism and communism – a system of socialism for the banks. Time for a little bit of Thatcherite medicine to be applied to people who were so keen to apply it to the rest of society. Let's have some capitalism for capitalists.