The City will lose Euro clearing to technology – not Brexit

Despite all the respectful pondering about BREXIT timetables, citizens’ rights and trade deals, there is a full blown war already underway between the City of London and the EU. This particular war began before David Cameron even put a promise of a referendum in the 2015 Conservative Party Manifesto, and will linger for many years to come whatever the outcome of BREXIT negotiations.

The Europeans are really irked that clearing of the EURO is not accomplished in Europe. The fact that the UK never joined the EURO but the City of London profits from its presence is a subconscious irritation to the Brussels elite, which would not have gone away even if the UK had voted to remain on 23 June 2016.

The Europeans want clearing of the EURO to happen in Europe, and are pretty determined to take control of this lucrative business one way or another. They feel clearing of their currency should take place inside the geographical area where that currency is administered and legislated. In 2011 they proposed a “location policy” (which required clearing houses handling significant euro-denominated business to decamp to the Eurozone so they could be more closely monitored). It took legal action from the Bank of England and the then Chancellor George Osborne to defeat this land grab of a policy.

Recently the Europeans have leaked a draft law which pledges to give the Eurozone power to relocate the EURO clearing business out of London and keep it inside the EU after BREXIT negotiations have concluded. The reaction of the UK media and establishment to the latest threat was predictable panic and fear, but many who write and talk about the subject don’t seem to understand the underlying strength the City of London has.

Clearing is the process where two sides of a trade (the buyer and the seller) are matched off against each other, and the product (shares, swaps, bonds, derivatives etc) and money changes hands (think of a middle-man). This all happens at central clearing houses and are facilitated by banks and brokers.

Do not underestimate the size and importance of this activity to the City of London. London is the world’s clearing centre, dealing in hundreds of trillions of pounds each year, in more than 20 of the world’s major currencies.

The reason London has gained such a powerful position in the clearing market is obvious. London has a common language (English), and British courts are especially highly thought of in terms of business law, which governs the majority of international business transactions. The City has a unique ecosystem where skilled workers are already located in a desirable place to live, and where the regulatory, legislative, funding, technology and creative centres are all in the same place with established relationships. This centralisation of skills and competition results in economies of scale which benefits the end users. The development of this ecosystem took decades, and would take decades to replicate in Paris, Frankfurt or Amsterdam. As a House of Lords report highlighted, the City of London is more at risk of losing business to New York than to Europe in the short term.

This is the key point, the City is a centralised place where economies of scale result in millions of pounds worth of savings. If the Eurozone was successful, and moved EURO clearing to somewhere in Europe, it would fragment the industry and would harm the EURO. As Mark Carney talked about in his recent Mansion House Speech, European onshore companies only accounted for 25% of global activity in EURO swaps, meaning 75% of EURO clearing could still take place in the City of London, even if EURO clearing was conducted inside the Eurozone.

Japan is an example of a country which forces its own companies to clear inside Japan, often paying 2 or 3 basis points more for the pleasure of doing so! More Japanese Yen is cleared outside of Japan than inside, meaning their currency is less liquid inside Japan than in the world financial centres. Europe would have a very similar outcome to Japan if it goes ahead.

More troubling for our friends across the channel is that the Eurozone cannot agree where the EURO clearing centre should be, and there is a real possibility that EURO clearing becomes even more fragmented once inside the Eurozone, with French banks clearing Euros in Paris, German banks in Frankfurt, Italian banks in Milan and everybody else clearing in Brussels or maybe Amsterdam. This would be a total disaster for the EURO and the Eurozone, and would result in a loss of all economies of scale and ultimately higher prices and slowed technical development which would make European businesses less competitive.

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It is highly unlikely despite all the bluff and bravado that the European bureaucrats will take Eurozone clearing back to Europe. If they do, it’s for purely political reasons rather than for the good of their people and economies. Not the first time they will have acted in this way, but I am not sure the switched on businesses, banks and financial institutions would tolerate such a move.

The debate around clearing will continue to be a factor for the remainder of the Brexit negotiations, and any throw away comment from the continent gives fuel and ammunition for those who want the Brexit negotiations to fail. However realistically, the City of London is set to dominate global clearing for years to come.

The biggest concern for the future of the City of London and its thousands of workers is not a self-harming move back to the Eurozone, but the endless march of technology and artificial intelligence. Fintech is huge in the UK, and is regarded as one of our strengths as a country. It’s only a matter of time before one of the very ingenious tech companies deliver a system which transforms the clearing industry forever.

Blockchain is the “relatively” new kid on the block and could ultimately dominate clearing moving forwards. Conceptualized in 2008, Blockchain is the web based technology where Bitcoin transactions are processed, by creating a secure, ever growing database and ledger of transactions. This disruptive technology would need to be adapted and harmonized to be able to adapt to the financial regulations and structures which underpin the current clearing houses, but many people believe that clearing will be fundamentally different (or even totally redundant) by 2025 and Blockchain will be at its core.

The clearing industry is rife for modernisation. It’s been almost 20 years since the LSE changed their settlement period for UK listed shares via CREST from 5 days to 3 days. In 2017, should it really still take 3 days to pay or receive funds for stocks and shares you bought or sold electronically? We can transfer money between bank accounts in real time, shops are now offering same day delivery for products you buy online, so it’s only a matter of time before shares, futures, options, bonds, derivatives and commodities will all be cleared in real time using a new or reformed system.

So to conclude, the Conservative Government and the City of London must prepare for fundamental change, loss of revenue and loss of jobs in the square mile of the City of London, the march of technology will see to that. It may be Blockchain, or it may be another form of disruptive technology, but it won’t be Brexit, or the bureaucrats and politicos of Europe which does the damage.

The Economics of the ‘Underclass’

Poverty: the norm of the third world and the scourge of the first. In Britain, it conjurers images of economic deprivation, homelessness and empty plates. But what does the term ‘underclass’ bring to mind? Is it an image of extreme poverty? An image of a life akin to that led by Diogenes? For most, it’s a difficult term to define. It is the product of Charles Murray, an American political scientist whose definition of the term was that it referred not to a degree of poverty, but a type of poverty. This ‘type of poverty’ was not defined by wealth or general lack of economic capital, but more specifically by behaviour, social position, education and single-parenthood. In essence, Murray’s definition laid the blame for the underclass with the welfare system which he characterised as over-generous, allowing a group of what were, in his mind layabouts and drop-outs to sustain themselves without the necessity to find a way out of their deprivation.

Now, this is a hotly debated topic, and I have no intention of getting drawn into the debate surrounding Murray or his theories of the underclass. Rather, I wish to re-appropriate his term ‘underclass’, define it in a different way and show how in fact, the problem is very much one of economics rather than social or cultural deprivation.

My definition of the new modern ‘underclass’ is of, as Murray argues a type of poverty not categorised by social factors, but fundamentally economic ones. My argument is that this ‘underclass’ is a group whose poverty is the result of an economic system and policy which by its very nature disadvantages them. It is not, as Murray argued the result of the welfare system propping them up and allowing them to survive, but of an economic policy forcing them down and thus perpetuating their ever elongating miserable existence.

Two examples will suffice to demonstrate how our current economic policy acts as it does, or at least has the potential to force people into an economically-deprived underclass. The first is the elderly, or more specifically those without private pensions to rely on. This group has always been one of the most disadvantaged by the economic policy and system of the past decades, relying in many cases entirely on the state to support them in their old age; but the state and its policy has routinely failed them. These people are not part of the underclass because they are socially-deprived or simply lazy; on the contrary, most have worked all their lives, often in the public sector and have always done the right thing; ‘no one in their right mind believes that this group has volunteered for membership’, as Frank Field put it. Yet, so many live in abject poverty which has even been known to kill.

They are poor because the economic policy, particularly of the past 7 years has brought the axe down hard on this section of the population. Councils, whose responsibility it is to care for these pensioners have seen such harsh cuts that most are now ‘at breaking point’ and simply unable to fund social services for elderly pensioners. Fuel poverty is at record levels among this group (1 million live with this Victorian affliction), as is the number who say they struggle to feed themselves, or have to chose between a warm home or a full stomach. And despite this, our economic policy continues to force them ever further into the underclass, or it at least has the potential to. The announcement in the Conservative Manifesto of the intention to scrap the ‘triple lock’, the system whereby pensions rise by either inflation, average earnings or a minimum of 2.5% depending on which is the highest is deeply troubling in relation to this group. Until now, this in many cases has been the only thing keeping many elderly pensioners with state pensions above water, and its removal could spell disaster.

Ultimately, these people are and will be the victims of an economic policy and system fixated on economic growth for the sake of economic growth; money for the sake of money and profit for the sake of profit. Statistically, the economy may be growing, but most elderly pensioners, like many other members of our underclass do not feel its benefits because it is quite simply not orientated towards them. They are the victims of a policy which fails to recognise the reliance upon it of these people, who it swats into the dirt in favour of paper growth over real benefits: it forces these people into the underclass and it keeps them there.

But what of our second example? This is a difficult one to define, and I do so by simply calling them working-class blue collar families, often with children. Now, here again economic policy has forced them into the ranks of the underclass; in many cases disproportionately effecting the children caught in the underclass ‘trap’. Between 2011 and 2015, 4.6 million people were recorded as living in ‘perpetual poverty’; and a large proportion of this group was, and still is low-wage family units. Over the past 7 years, they have been systematically deprived of vital state aid which has seen the number of children living in poverty rise to 3.7 million. Food-bank use too is into astronomical territory. Even those whom one would not associate with food poverty, yes that’s a real thing in 21st century Britain, like nurses are relying on the charity of others just to survive. Now, Theresa May famously tried to argue ‘there are many complex reasons why people go to food banks’. But, as many have very helpful pointed out, the main reason people have to use food-banks is because they can’t afford to eat and put food on the table for their families, as unbelievable as this is in modern Britain.

And again, as with elderly pensioners, the economy may be statistically growing, but these millions fail to feel its benefits. The inflation rate in April 2017 was 2.3%, but for the same period average weekly earnings adjusted for inflation and excluding bonuses stood at just 0.1%. The problem is plain; the economy is being fixed for the sake of fixing it. Inflation is rising, but house-building is not and a 300% increase in homelessness over the last 7 years is the result yet further adding to the ranks of our underclass. In places, Britain resembles something Hogarth would recognise.

Current economic policy and its practitioners treat the poorest, our underclass, like lazy ‘proles’, failing to realize that in doing so they are making life worse for many thousands of already struggling people. The assumption that people are poor because they are too lazy to solve their own problems, and a general distain for the most vulnerable is all to clear. The removal of certain benefits from the unemployed for instance, a clear symptom of this ‘poverty is your own fault’ mentality has had a detrimental effect upon thousands, in so many cases bouncing the most severe consequences onto the poorest and most destitute children in our society.

And, returning to this subject of children in our underclass, many of whose parents already rely on food banks and who routinely go to school hungry, the proposed removal of free school meals from many millions of poverty-stricken children has to be the last straw. No longer does our economic policy by its innate nature cause child poverty, now its actively trying to find savings by taking food out of the mouths of the most vulnerable: Its no longer simply enough to deprive poor children, now we have a policy which seeks to starve them as well. ‘Decrease the surplus population’; no doubt this will be the next conservative slogan!

Taking a glimpse at the Rothschild Bank

Emmanuel Macron is the youngest President France has ever seen, stamping his name into the fabric of political history. Although he is considered by many in France as the best of a bad bunch, his victory at the mere age of 39 is undeniably impressive. As a British bystander, taking a loose and yet concentrated interest in Macron’s campaign, I couldn’t help but notice the constant repetition of that same description: “former Rothschild investment banker”. It was as if his association with the Rothschilds was more significant than his time working in a senior position in Mr. Hollande’s staff, or, as Minister for Economy under Manuel Valls.

Having heard some rather far fetched conspiracy theories concerning the Rothschilds’ ability to manipulate global affairs, I thought it would be interesting to have a closer look at the bank’s history and how they operate. For lack of wanting to entertain internet conspiracy – as some would now considering we have a former Rothschild banker as French President – I have steered clear of any David Icke type sources. Lizard shape shifters aside, the Rothschild story remains an interesting one.

Mayer Rothschild

Originating from Germany, the Rothschilds became a prominent family, establishing banking and finance houses in 18th Century Europe. Mayer Rothschild (1744 – 1812) sent his five sons to live in various capital cities across the continent. When in Frankfurt, Naples, Vienna, Paris, and London they set up individual banking establishments under the Rothschild name. Effectively, the Rothschild bank was the first of its kind to work across international borders. By lending to governments helping to finance war operations the family was able to accumulate bonds and support additional wealth from a vast array of different industries.

In true aristocratic fashion Mayer Rothschild wanted to keep his empire very much within the family. This required a certain amount of inbreeding between cousins. It has been reported that four of Mayer’s granddaughters married grandsons, and one poor girl married her uncle.

Of Mayer’s four sons, Nathan Rothschild (1777-1838) was the biggest success. Based in London, Nathan was the pioneer of international finance. Soon establishing himself as the central bank for Europe. He monopolised Europe’s financial systems brokering for kings, bailing out national banks, and funding the development of infrastructure that sparked the beginning of the industrial revolution. In this time he established the bank we know today as N M Rothschild & Sons Ltd. England’s seventh oldest bank in continuous operation.

Nathan’s major benefactor came when he took an enormous gamble during the period of the Napoleonic Wars. In 1811 N M Rothschild & Sons managed various subsidies that the British government sent to their allies and loaned them the funds they needed to pay their army. Effectively Nathan was single handily financing the British war effort. At the same time, however, unbeknownst to the British, he was also funding Napoleon Bonaparte behind their back.

His gamble came when the war was coming to its crescendo in 1815 with the battle of Waterloo. Nathan’s network of couriers reported the grave losses being faced by Napoleon to the British government. As the information did not come from their own scout the British were sceptical of this report and rejected it as mere fallacy. Instead they were convinced the British were on track to lose the war. Seeing an opportunity, Nathan Rothschild enhanced these rumours and sold all his bonds on the English market in light of the Brits’ apparently grave future. After such a loss British bonds would be plummet in worth. His influence surged a panic in financial England with a mass selling of bonds that quickly resulted in the collapse of the London stock exchange.

Knowing that the British were actually on course to win the war, the Rothschild network began to start buying back British bonds at record-low prices. Two days later Wellington received the news that Napoleon had in fact suffered a crushing defeat. British bonds went back up in price and the Rothschild bank was in complete control of the London stock exchange.

Nathan’s cunning manipulation of two warring factions and the British financial elite paid off in almost immeasurable amounts. As of 2015, the British government was still paying back the money owed to the Rothschild family from the Napoleonic period. That is a lot of debt.

Today, the Rothschild bank is one of the world’s largest independent financial advisory groups specialising in private wealth, asset management, and merchant banking. The family, like many who maintain such a high level of wealth, are involved in charitable pursuits across the globe. Their main office aside from London is based in in Switzerland; the Edmund de Rothschild Group.

There are those that claim the Rothschilds still maintain a monopoly over Western financial markets through their control and ownership of the world’s central banks. These are denounced by any officially trusted financial source with such claims usually being attributed to the anti-Semitic nature of the discussion. For example, Rothschild & Sons reported a net revenue of 423.8 million GBP in 2015 when Morgan Stanley racked up a huge 37.95 billion USD revenue in 2016. The difference here is significant.

The Rothschilds remain an extremely tight knit and yet influential player in the financial game. With only around 2,800 employees their affairs are handled by very few. With such responsibility so thinly spread it is not surprising their work is handled with a serious amount of discretion.

Considering the way they revolutionised international finance the Rothschild family history is remarkably interesting – the even after only having scratched the surface here. Will Macron bring this Rothschild investment style to the French economy with the same success? Only time will tell.

A National Investment Bank? Come off it Corbyn

It seems almost everyone thinks that the Tories have this election in the bag. With the latest ComRes poll giving the Tories 50% of all votes, it’s not hard to see why. But perhaps there is good reason for this. Labour leader, Jeremy Corbyn is not just a friend to controversy, he also seems to flirt with very silly ideas. One of many is the idea of a national investment bank, which he says would enable £500 billion worth of investment in infrastructure and industry. This would allegedly create one million new jobs, which might seem like a nice thing until you remember that unemployment in the UK is now hovering around 5% – the best it has been in a long while.

Corbyn’s idea seems even more preposterous when you also consider the current national debt of 1.6 trillion. But the idea of a National investment bank is not just unnecessary, it is foolish. The track record of the idea is really rather shocking. Tony Benn’s similar National Enterprise board in the 70s threw money at all kinds of wacky things. From British Leyland motors, to British leather, money was spent where it would create no wealth. Meanwhile private industries in the tertiary and quaternary sectors grew and those industries that Benn’s National Enterprise Board tried to protect simply fizzled out.

There is no reason that a rebranded version of Benn’s failed project would do any better. It would just lavish taxpayer’s money on projects run by those with political connections, creating arbitrary jobs in Labour seats. And even if you concede that the National Investment Bank’s job creation is a good thing, the kind of jobs that it aims to create are not going to help the kind of people who need helping. Gone are the days when building roads required hard unskilled labour. The kind of people who are likely to be employed to build infrastructure nowadays are engineers, operators of technical machinery, and other skilled and educated individuals who are unlikely to be unemployed.

A national investment bank has the potential to really hurt private investment too. The enormous amount of borrowed money required to pull it off would mean issuing extra bonds, which in normal times means competing with private firms for investment funds. Private firms would have to pay more to borrow, or re-consider their own investments – meaning less private capital spending on factories, machine tools, training, R&D, and housing. So when the government borrows to fund its own investment, private investment has to fall. Occasionally government investments are worth it, but boondoggles like the Millennium Dome are de rigeur. When even the most switched on venture capitalists find it difficult to pick sound investments, technocrats with no commercial experience are likely to find it impossible. Because of this, the national investment bank is not just unnecessary, but completely unworkable.

Rupees, Pounds, and Pints

As a Brit, I love a good bargain, and a bargain in the Mediterranean sun is better than any other. There I was on a recent trip to Italy seeking such financial relief, only to be left retorting the impotence of my home currency. Political risk in the UK is seeing the pound creep ever lower against the dollar and the euro. The pound is now 0.4 per cent lower against the former and down 0.2 per cent against the latter. What was once a crisply chilled (albeit frothy) cheap beer abroad has become a distant memory. Escaping London prices has never been so difficult. All this has me begging the question: Will we ever get our so very British pound to once again go the proverbial extra kilometre? How should we expect the resurgence of the pound to come about?

The rhetoric surrounding Brexit since the referendum has been somewhat limited but none the less consistent. The word uncertainty has never been so prominent on the English tongue, and this uncertainty, specifically economic, is born from British political risk. As a member of the single market one is able to trade freely with 31 different states (including four non-EU states) with the main benefits being the free movement of resources e.g. people and goods, resulting in great efficiency and security. You know where your materials and labour will come from and that they can be brought together without too much hassle.

Upon leaving the European Union the UK steps into the unknown. The security and efficiency of the single market will be left behind. This is not to say that it cannot be found elsewhere, it is just we don’t know exactly where Britain will find such security and efficiency. Or even whether such economic comfort can be mirrored in, for example, the World Trade Organization (WTO).

In an effort to reassure the government’s wide economic prospects, The Chancellor, Phillip Hammond, has visited India to discuss possible future trade deals with our friends from the Commonwealth. On the face of it India may seem like an investor’s goldmine. It is the strong hold for growth in the South Asian region with their GDP for this year being measured by the World Bank as 7.6 per cent and rising to 7.8 per cent in 2018.

Philip Hammond with Sushma Swaraj, External Affairs Minister

But trade deals involve politics, and politics inevitably introduces complexities beyond mere statistics. A trade deal with India could throw up various conflicts of interest for a government that is supposed to be delivering on the will of the people.

Currently, only 1.7 per cent of British exports go to India in comparison to the 44 per cent that is sent to the EU. As a destination, Britain is last on the top five list of countries India exports to. The stronghold developed during the British Raj has very much depleted and yet the legacy of colonial rule is something many Indians still feel very strongly about. Realistically, our position for bargaining is not as strong as Theresa May would like to make out.

Phillip Hammond wants to offer India further sales of the UK’s financial services, our second biggest export to the EU after IT and Telecoms. British financial services have always been internationally regarded with London seen as the world’s leading financial city, however, such sales wouldn’t come without a cost. Immigration and working visas are a hot topic for the Indian government who will want to push for freer movement of Indian workers to the UK. A cost that would undermine the main reason why many of those on the leave side voted as they did: to tackle and reduce migration.

The conundrum of maximising economic growth while satisfying national political demands has never been so tricky. The government’s initial efforts with India do well to highlight this. British economic hopes took a further blow after the Financial Times reported officials have rendered the possibility of a deal obsolete. Negotiations with the EU will continue for at least two more years. In the meantime, our position in said negotiations could be damaged by the Chancellors failed efforts for pragmatic economic discussion outside the EU.

Risk is determined by uncertainty. The failure of a bilateral between the UK and India leaves Britain even more uncertain about the harsh realities of life outside the EU. The economic risk surrounding Brexit will continue to build until we find some concrete positives results regarding negotiations or talks beyond Europe. Trying to deal with Brussels, consider the British electorate, and open up to the rest of the world all at the same time will be the hardest political economic task undertaken this century.

India hasn’t dampened the markets’ mistrust in the pound and the British economy moving forward. It will most likely be years before we can determine our currency so proud once again. What is worrying is the realisation that historical links and so called old friends do not necessarily pave the way for bilateral development. Something the government like to emphasise as a foothold for British influence across the globe.

As risk increases, life in the pound will continue to become more expensive. The price of a cold beer has never been so complicated, nor uncertain. As summer roles around, we continue to wait for an economic reprieve.

Breakdown of the EU’s 60-year-old Convergence Machine

Saturday marked the 60th Anniversary of the Rome Treaty, with the idea of a convergent and cohesive union being a primary aim for the European project over the past six decades. A joint EU statement asserting its “undivided and indivisible” nature was symbolic of the rhetoric on show from leaders across the continent. Economically, however, the view from the White House that “shared prosperity” has been central to the project appears increasingly misplaced, with unity suffering as a consequence. Narratives of lazy Greeks and authoritarian Germans in recent years highlight how central fixing this problem is for the EU to ensure that its seventh decade isn’t its last.

In 2000, Italian GDP per capita was similar in size to Germany, and the prospect of having a common currency was perceived as being a way to ensure that both states continued to grow at the same pace. Fast forward 17 years and Italy remains worse off than it was in 2007 while Germany has seen its economic performance improve considerably. Its GDP is now 20% ahead of where it was ten years ago and shows little sign of stopping. Such circumstances are evident across Europe, with southern states facing a string of economic difficulties while the northern powers continue to surge ahead. At the centre of this divergence are the elephants in the room – the Euro and a lack of solidarity.

Let’s draw a comparison with the UK. Here London is the engine room of economic growth, and it subsidises the rest of the country as a result. The more impoverished regions of Northern Ireland, Scotland, and Northern England can utilise the structure of the United Kingdom in order to gain from London’s growth. Similarly, in the US rural areas are subsidized by New York and California. The common British and American identities allow for this, but a common European identity remains illusory, and the same solidarity in economic structure is therefore almost non-existent within the EU.

Economic union has made the situation on the continent worse rather than better, as some countries – Germany foremost among them – have gained from the common currency at the expense of others. Germany now has an undervalued currency thanks to weaknesses in the south, offering it huge trade benefits. Poland is able to ‘dump’ workers in richer states, and blocks any attempts to change the laws around this. Despite gaining from such a design, these states are unwilling to show reciprocity to southern states whose exports and economies have suffered from an overvalued currency and an austerity-driven ECB. Unemployment has exploded in the main Mediterranean states. In Spain, it has doubled from 9% to 18% in the past decade. Greece has seen the same statistic rise from under 10% to almost 25%. No surprise that young people are migrating to colder shores, then.

Yet while one balloon deflates, another inflates; Germany’s unemployment rate is at its lowest level since before its reunification. The animosity that has been visible between the northern and southern states since the sovereign debt crisis reared its head is hardly a shock.

What can the EU do to rectify this? Tax and spend? No powers to do so. Enhance educational policies? See above. Improve social welfare systems? Same again. Granting the EU such powers would equate to sacrilege in many European capitals at a time of rising nationalist sentiment. Here the lack of a shared identity is proving a roadblock to any initiatives for reform, allowing the issue to fester.

The warnings that an economic union requires a political one have an almost clairvoyant ring to them two decades on from the birth of the monetary union. Yet it didn’t have to be this way; the existence of a social cohesion fund granting €63.4 billion between 2014-2020 to more disadvantaged parts of the continent show that mechanisms promoting economic convergence can be set up. Only by being built on this economic convergence can greater social cohesion solidarity emerge. However, the convergence machine has been broken for a long time and must be repaired for solidarity to be more than just a nice buzzword.

The Bogeyman Fallacy of Evil ‘Unregulated’ Banks: How Free Banking Could Bring Transparency, Stability, and Choice

There is a phantom menace that Marxists hold dear. Indeed, in the times of milk and honey following the overthrow the bloated bourgeoisie and the ascension of Comrade Corbyn, ‘unregulated’ banks will take their place as the sworn enemy of the workers in the songs and legends of the bards. Even now, the myth builds. Bankers, let loose by a free market, milk the people of their hard-earned money whilst the Tories in parliament watch with idle glee. Lily Allen, hero of the working classes and mother of the revolution, even mentioned it on twitter the other day. She wondered aloud why it was that Britain could ‘afford unregulated banks’, whist it couldn’t afford to throw more money at the NHS and pay teachers the piles of money they deserve for their selfless and heroic service.

https://twitter.com/lilyallen/status/833284090853982209

Lily Allen, as is often the case, is dead wrong. Firstly, she seems to have confused public and private spending; since an unregulated banking system, i.e. a system free from government intervention, would be privately run and not cost anything from government coffers. Secondly, the banking industry is probably one of the most regulated industries in the UK, and has been for decades. The simple truth is that banking is far from a free market. Marxists like Allen are so dogmatic in their committed assertion that free-markets are bad, that even evidently unfree markets like banking must be a free market. Why else would it be so bad?

If only Lily Allen had bucked her long and colourful history of being wrong and was correct in her accusation. We have intervention in the banking market to thank for many of the problems we attribute to the industry. Let’s take the banking crash in 2008 as an example. Whilst many people like to think that the collapse was an inevitable symptom of capitalism; a by-product of greedy free markets, it was in fact a result of state intervention in markets that should be free. Big banks love regulations, which is probably why they spend so much time lobbying for them in Westminster and Brussels. They can afford crack legal teams to navigate bureaucracy and locate loopholes to exploit, whilst their smaller competitors cannot. Regulation passed by American and European governments in the lead up to 2008 pushed out small firms, distorting the market in favour of large firms, fostering a proxy oligopoly. Big banks – we’re looking at you Lehman Brothers – had become ‘too big to fail’. They represented so much of the market that if they were to collapse, they would bring most of the economy down with them. It is therefore unsurprising that when they did collapse following the bursting of the housing bubble, that governments chose to pump loser firms with taxpayer money to keep the economy afloat; creating hordes of zombie banks dependent on corporate welfare. They knew then, and they certainly know now post-bail out, that they don’t need to be responsible. The government will pick up the pieces, save the losers, and happily sponsor a disparity of competition and a dearth of fairness in the market. Talk about laughing all the way to the bank.

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Government presence in the banking industry doesn’t stop at bailouts and legislation; it is part of the banking industry’s very fabric in the UK. The Bank of England holds a monopoly on currency. It also possesses the authority to set interest rates, basically dictating the price at which banks can lend or borrow money. Whilst this is hardly unorthodox – almost the entire world runs on this system – it is by no means unregulated. If Lily Allen was indeed correct in stating that our banks are unregulated, we’d all be living in a free banking society, not one with a central bank.

Free Banking hasn’t had a presence for some time now but when it did, such as in Scotland until 1844 or British Canada until 1914, the results were positive. So why did central banking replace free banking? Most central banks were formed by governments with one idea in mind. They wanted an institution that would lend them masses of money, on agreeable terms, with few questions asked. Governments sought also, as they always do, to expand control over the economy. What better way to do this than to grant a dictatorial monopoly on determining interest rates to a central bank? Now the government can attempt to slow or speed spending if they so wish. As well as that they can print more money, which is basically government sanctioned counterfeiting, to reduce the value of money; eroding savings and wages whilst falsely inflating prices. With that in mind regulation and intervention sounds rather sinister, doesn’t it? This is cronyism, not capitalism.

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Why then, do so many people lament the idea of unregulated banks? Deregulation has become a bogeyman to villainise free markets, perpetuated by those with a fallacious understanding of the economy. When the government regulates banking and currency, it merely expands its control over the individuals it is sworn to serve. But how could free banking, a system where there is no central banks and very little regulation, work?

Historically in free banking economies, basic money was determined in either gold or silver standards. Minting gold or silver coin was normally monopolised by the government, in an effort to keep the value of these coins steady and provide an official base for free floating competitive currencies. Banks would then distribute banknotes and allowed people to open accounts denominated in whatever standard, normally gold or silver, had been determined by the government. Banks endeavoured to make their currency widely accepted by other banks in order to attract customers. Banks were forced here to accept all forms of currency, striking mutual deals with their competitors to accept each other’s notes and give customers a reason to bank with them. Private notes stayed more or less at the same value as their competitors. Retailers had no problem accepting different notes, just like they don’t have a problem today with accepting various checks and credit cards from differing banks. Notes in free banking economies proved to be more reliable than central banking societies. Unlike government backed issuers, free banks can’t purposely devalue their currency and get away with it, it’s a breach of contract. They can’t take on risky procedures like dishing out more than they have in their reserves or making questionable investments, because risky banks would prove unpopular with consumers, who can easily look elsewhere. In a free banking system, competition and choice places power in the demand side of the market, empowering consumers and gives consumers true sovereignty over banks.

Free banking is transparent, stable, and maximises consumer power. Which is presumably why governments would rather opt for a central bank. No matter how often Marxists like Lily Allen insularly reassure themselves that capitalism is bad, that the poison touch of government is good, and attribute all wrongdoings to free markets, there is a simple fact that remains. The freer the markets, the freer the people. Banking and currency is no exception. In fact, it’s a sterling example.

Government “Investing in Small Businesses” is a Farce

A recent press announcement reported that Scottish Enterprise, the main economic development agency funded by the Scottish Government, has £15.2 million investment in Aquamarine, a wave energy company that went bankrupt last year. This follows a £16.3 million investment in Pelamis, another wave energy company, which was biggest write-off in the agency’s 25 year history.

One thing you can guarantee is that if the government has to fund it, it’s not worth funding.

To most people the idea of Government giving grants to small businesses is relatively benign. Why not give the little guy a leg up to compete with the big boys?

Sadly this attitude belies a basic lack of understanding of market forces and the role of the investor on a free market.

The purpose of an investor is to try to predict – from all of the potential projects and producers they can possibly choose from – which ideas are most likely to be successful. Consumers have to make choices over what to buy with their limited resources out of every product available to them, so what they buy is a pretty good indication of what they value. Most consumers are money oriented and always on the lookout to save a dollar.  Small business owners need to apply various trending techniques to engage with their value-oriented customers by offering freebies, after sale services and also by issuing discount vouchers. The huge increase in usage of vouchers has given massive impetus to online shopping.

Managing to guess correctly what people are going to want in the future is no easy feat, and doing it well is providing an invaluable service by limiting waste through overproduction of things people don’t want. Resources go on advancements which people decide, of their free volition, improve their lives.

If an investor chooses wisely then they will receive a more generous a return on their investment, and vice versa. This means that people who make good decisions with financial resources become more wealthy and have more resources to invest in projects, while those who make bad decisions will soon find themselves out of pocket with less capital to squander on wasteful investments. In this way the market has a natural mechanism for allocating resources to good custodians of those resources: people who excel at spotting a good idea.

It’s a beautiful system because the only way investors can grow their wealth is by making it available to the community. If they decide to spend it instead it goes to someone else, if they hide it under a mattress their wealth will stagnate, and if they save it in a bank someone else will lend it out on their behalf.

Government simply does not have “skin in the game” and therefore is likely to allocate money along political lines rather than those which serve the preferences of average individuals.

There remains a prevalent belief that the enlightened self-interest of investors who stand to gain from investing will be insufficient to inspire the rich to part with their money, and so there is a necessary role for Government to step in as an investor. This, in fact, was one of the central doctrines of John Maynard Keynes who believed that markets, left to their own devices, were likely to suffer from a chronic lack of investment as-such because they were inherently unstable, and so there was really no rational basis for making investments in long term projects.

If entrepreneurs who do have “skin in the game” are unwilling to risk their hard-earned pennies on a potential failure then the government certainly has no place playing poker with the hard-earned pounds of the tax payer.

Fundamentally, the idea that small business will always be at the mercy of large conglomerates is largely a left wing myth. Yes, in several ways big business has the advantage – they can buy inputs in bulk for cheaper giving them economies of scale, they can avail themselves of large advertising campaigns, they can (regrettably) lobby the government for special privileges, contracts and unearned advantages, and may have other privileges, but they are at a disadvantage in at least one important respect. The larger a company is the more difficult it is for any one individual or group of individuals to keep a handle on all the relevant information necessary for making good decisions in the interests of the entire body. Large organisations tend to chunk down into smaller bodies of up to 150 people, and then these bodies have to be coordinated from the top down.

Because of this, some areas of the body are likely to be running more inefficiently than others, and changing the protocols of production over a mass scale may be slow, and slower still the larger scale the production is. Picture the relative difficult in changing the course of an oil tanker as opposed to a number of smaller, more agile crafts. Small agile businesses – which may not be able to compete with Goliath competitors as a whole – can still chip away at sections of their markets by being more in touch with consumer preferences on the ground. They can cater to niche preferences with personalised services and superior, custom-made products, while Goliaths produce standardised products for mass consumption. A good selection of Davids and Goliaths will give consumers the best choice. A large company may be in many markets, while a David only needs to monitor a few, and can monitor them with precise clarity owing to the small scale of their operations. A number of Davids can chip away at a Goliath from all angles and even bring him down if he gets too complacent.

Sometimes people worry that large corporations will just buy out successful small businesses to prevent this from ever happening, but even those worries are misplaced. If David has a great product, and Goliath has a large infrastructure and access to larger markets, absorbing David’s product into his company can only help a far greater number of people get access to whatever advancement might otherwise remain a niche product.

All this is not to say that there is nothing government can do to even the playing-field for start-ups. There are many ways the Government can help small businesses compete with large established conglomerates, and in doing so help increase the number and quality of option available to consumers, but these do not involve handing out tax payer money to pet projects. Making it easy for small businesses to hire people without too much (or any) form filling and bureaucracy will save them time and money consulting experts, simplifying the tax code will stop them having to employ expensive accountants, and stripping back the regulatory structure so that rules are intuitive and easy to comply with will save a heap on lawyers. Big businesses can afford to have these employees on staff, small businesses often cannot.

When anyone can start selling and hiring the moment they have an idea for an innovative new business we will soon see a renaissance of people “pulling themselves up by the bootstraps.”

Let’s demand a better British agricultural system post-Brexit

With Brexit looming, the time to discuss the future of British agriculture is now. “Britain’s farmers will need help” says the Financial Times; “Farmers who vote leave now in deep regret” claims the Independent. But don’t worry, there’ll be some provision, promises Theresa May’s government, in some form, and at some time. But what do we really want and, more importantly, need to see in the coming months of negotiation?

Well, The National Trust has called for a total reform of the subsidies programme, and that is a fantastic place to start. It is time to tear back the basic income support system and consider the work of our farmers in an environmental market context. As it stands, the current system sidelines successful arable methods, crushes incentives to innovate, and wraps agribusiness in regulatory red tape.

Subsidies, and the broader government approach to farming, entirely fails to account for the negative externalities created by the industry that effect not just the UK, but contribute massively to the global climate change dilemma. Ignorance is no longer an option for us, we cannot continue to ignore this pressing issue, no matter how politically inconvenient it may be.

Once upon a time, subsidies for agriculture made a lot of sense. When you have inelastic demand for goods and an inelastic supply of produce, you need to be able to stay in business and produce even when you have a bad year. But a lot has changed since then: our crops are much hardier now, and more controversially, we pump our cattle with so many chemicals and antibiotics before killing them off within just a few years that we overwhelmingly over-supply animal-products. This means that the British consumer has access to British milk and Angus steak at a cheaper price, but  is not paying the full cost. The subsidised price does not take in to consideration the environmental implications that the product has had throughout the process.

The peculiar thing is that no other industry is still subsidised this way, because when an industry struggles and fails, we don’t tolerate it. Instead we import from another country that has a comparative advantage in that sector. In this sense, protectionism over free trade has very serious consequences for our environment and the taxpayer.

Ultimately, there are two points to take away from this discussion:

First, this is a golden opportunity to do something about the disaster that agricultural subsidies have become. The system is a cesspit of government failure, and it is draining obscene quantities of money that can be better spent elsewhere. Brexit provides not only the opportunity to reevaluate the system, incentivise innovation in farming, and put the free market first… but it presents the chance to save billions.

Second, it is time to start talking about agriculture in the environmental context that is the unfortunate reality. Pastoral agriculture is the leading cause of water pollution, deforestation, and emissions contributions globally. We need to internalise those externalities, and we can do so through the free market price mechanism and allowing producers to embrace consumer demands.

This is a big discussion, and one that is long over due. However, we have a very real opportunity to demand a better system that not only helps the industry and consumers, but helps the environment.

Here’s why rent controls will only aggravate the UK’s housing crisis

In his 2016 Labour Party Conference speech, Jeremy Corbyn claimed to have a great plan to ensure that “every British family” would have the “basic human right” to a decent home. His great plan? The same plan that has failed over and over again to provide homes for the most needy, from New York to Francisco to Stockholm: rent controls.

We are in a housing crisis with record numbers living with their parents and Britons paying the highest rents in Europe. Unless there is some drastic increase in the housing supply, young people are going to find it more and more difficult to find rental properties at all. And the best way to prevent the much–needed growth of the housing supply? Rent controls. Ironically, the very same measures that so many young people rave about will be the measures that later come back to bite them. To ensure the housing market supplies enough homes for future generations, it must be allowed to work properly – and that means freedom not control.

In a well–functioning market, supply will, eventually, match demand. At any given price, sellers will supply a certain amount of whatever product they offer to the market. The higher the price, the more they will be prepared to offer. A relatively high price is an indicator that demand outstrips supply and it encourages sellers to push more of their product onto the market. In the rental market, a high price encourages landlords to invest in building more homes.

Conversely, when prices are low, they don’t bother. The cost of opening up new rooms and homes to renters can be very high and, when the return is pittance, there can be little incentive to do so. Normally this is fine – the price is low because there’s no demand and so building extra homes would be a pointless exercise. However, when prices are held low despite booming demand, disaster strikes; there are lots of people wanting homes and an insufficient number being rented out. That’s the ugly inevitability of Corbyn’s great plan.

As with most government policies, with rent controls there are winners and losers. Whilst the losers here overwhelmingly dwarf the winners, it is worth looking at who the winners are to assess whether rent controls actually work to help the poor at all. The evidence would suggest not. When rent prices are held artificially low, current renters have little incentive to move out. These people are getting a good deal and they know it. With huge waiting lists for rent–controlled accommodation, moving out would mean moving into a less attractive area with grossly inflated prices. And why would anyone do that? These winners – often with higher incomes than those living in non–rent–controlled properties – stay in their homes for far longer than they otherwise would. New entrants to the property market don’t stand a chance.

A good demonstration of the colossal number of losers that rent restraints can produce is Stockholm. The Stockholm system is similar to that proposed by Corbyn, characterised by very slow rental rises and massive failures. There is a huge shortage of rental properties available making it nearly impossible to get a direct contract; with a queue 500 000 people long it can take well over twenty years to get to the top of the pile. Without connections or a willingness to enter the black market which inevitably formed as a result of the restraints, poor would–be–renters are stuck. Even the “winners” are losers; the lack of new housing means that they suffer a Stockholm syndrome–esque predicament, attached to houses they would rather leave due to a lack of alternatives rather than out of any real desire to stay.

Stockholm’s tragedy could become London’s. Sadiq Khan’s calls for rent controls to be introduced in the capital are just another in a long stream of proposals intended to help the poor but actually likely to have quite the opposite effect. Rent controls tend to work a treat for relatively wealthy long–term tenants who pay small sums for homes others would be prepared to pay much more for. However, for every household that benefits from the bargain, there are many more that get left behind. Young people wanting to live near where they grew up face a terrible choice between living in their parents’ back bedroom (and quite possibly never finding a place of their own) and having an unwanted property to themselves, one many miles away from their preferred location, outside of rent controls and so with rent far greater than that which they can truly afford.

Rent controls do not protect the poor; they punish them for not getting their hands on rent–controlled property first. There is an abundance of evidence showing that rent controls are an ineffective tool to help the poor, with economists from across the political spectrum practically unanimous in saying that rent controls reduce both the quantity and quality of available housing. Rents are high because there aren’t enough rental properties available – to bring them down we must allow prices to indicate this shortage. This means freeing the market rather than trying to control it. Rent controls nearly destroyed Britain’s private rental sector before; let’s not let them come back to finish the job.