Posts Tagged ‘banking’

August 10th, 2013

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Bad Haircut Day

As any lady will tell you, a trip to the hairdresser is a serious business. A bad haircut is not a good day out and could spark major dramas, which may reverberate for a long time. A trip to the bank, however, is generally not considered high on the list of things that could go wrong but in the last few months that has changed.

Banks have been pulling down the shutters for sometime now, starting with the very public collapse of Northern Rock in the UK. Long queues of customers outside a bank is never a good look and the UK government wasted no time in stepping in to guarantee the deposits of Northern Rock, fearing, quite rightly, a panic and a run on the banks. Nearly 6 years on, governments are still none the wiser about how to handle the situation where a bank falls into funding problems and finds its assets falling below its liabilities. The wholesale guarantee of deposits was a short term answer to a difficult situation and forced many countries, including NZ, to follow suit.

Since the parlous days of 2007/2008, time has passed, QE has reflated financial markets and deposit guarantees are no longer de rigeur. In fact, there has been a shift away from any kind of government underwrite and a move towards what is known as “The Haircut”. As the metaphor implies, this is not a wash and blow dry but a loss of hair. Whether it’s a trim, a short back and sides or a number one, is unknown. But be clear, this will not be something you are likely to be happy with.

The Haircut was made famous during the blow up of the somewhat shaky Cyprus banking system. Depositors woke up one morning to hear that their banks had been closed and they could not access their funds. Again, as we saw with the GFC, lax bank lending and dubious bank investments had created a very unstable situation for depositors. The new banking model, so glorified by the deregulated delights of the last 30 years, had allowed banks to lend or invest first and then look for deposits afterwards. This shift to banks as speculators, rather than lenders of deposits, had created poor incentives and a spiral of greed, as the search for easy yield saw voracious amounts of new lending. As is always the case, the party ended in tears and recriminations all round. The original Cyprus Haircut recently upgraded to a full Brazilian Wax (ouch!), with depositors foregoing a whopping 47.5% of their original funds.

So what for New Zealand? Well, the Reserve Bank has promoted an Open Bank Resolution approach, which essentially sees the banking system operating within the spirit of caveat emptor or for the layman, learn to read bank’s balance sheet (good luck with that). Deposit insurance is seen as a moral hazard, which makes absolute sense, but only if you have a very advanced understanding of how to work out the risk and liquidity profile of your bank. Let’s face it, so far we haven’t seen any evidence that even the central bankers can do this job. Still, the intent to make depositors responsible for where they stick their funds is admirable, if somewhat hopeful. So with that in mind, it pays to make cursory inspection of the capital structure of a bank, so you can see where your deposit ranks. (Long time readers of this blog will already know that a bank deposit is an unsecured liability of the bank!). Go figure. Essentially, bank shareholders take the first hit, which is appropriate, and if that cash runs out, then the scissors move down the line from unsecured bondholders to depositors and the dreaded covered bondholders. Let’s really hope we never get down that far, because I wouldn’t want to be picking over the legal carcass of a covered bond. Messy. Gareth Vaughan gives a clear explanation here (make sure to read the comments also).

I think the OBR has merits but really the Reserve Bank has a lot of work to do with its communication of the policy, as well as its explanation of how the banking system actually works. I’d prefer to see even a small deposit guarantee scheme (e.g. $50,000). It will allow the majority of the population to sleep well at night. And yes, the banks can pay for it (and afford it without breaking sweat). Generally speaking, the NZ banking system is well capitalised but it has some weaknesses in its reliance on overseas funding, though that has been reduced measurably with the increase in the Core Funding Ratio. There is more work to be done, especially around education, but we are moving in the right direction. This is just as well, since I for one, have no interest in waxing!

 

April 6th, 2013

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We are The People

It was a pleasure to host Icelandic Democracy activist Hordur Torfason and his husband, architect Massimo Santanicchia, in Christchurch a few weeks ago, as part of their New Zealand tour. Hordur is a wonderful speaker and spoke at both Lincoln University and the Aurora Center in Christchurch. He also held a more intimate session with some Arts Scholars at Canterbury University, which allowed for some fruitful discussion. I was very impressed by his calm demeanor and his overall approach to activism. He is no firebrand, as he prefers to articulate a more engaging approach. He does this by questioning people and drawing them into the construction and creation of any particular response or action. As a good journalist might do, he asks “why”, “how”, “what”, “who”….he often provides the “when”. He switches the popular activist discourse of action to discussion; “Does anyone understand what has happened?”; “What can we do about this?”; “Does anyone want to meet the same time and place next week?” and so on.

This approach creates a more open and iterative process of dialogue, where some form of consensus or action points may appear. Multiple and varied demands may be distilled down to have a more refined focus. In the aftermath of the Icelandic banking collapse, Hordur inspired the Cutlery Revolution and a process of introspection, investigation and reformation. With a background as a singer, songwriter, actor, playwright, poet and artist, Hordur uses creative methods to engage with the issue at hand, enabling people to be involved and have some input. The influence of the creative artist is detailed in Louise Amoore’s “Global Resistance Reader“, specifically in Part 4, with contribution from De Goede and Bleiker. They show that by using music, poetry, dance, comedy and other artistic forms, the activist can reframe the traditional discourse offered by the embedded elites and, thus, undermine their implied seriousness and, ultimately, their legitimacy.

He offers some important lessons about the problem of corruption, even in supposedly highly transparent countries, political oversight, and problematic links between politics, money and media. This has deep resonance for New Zealand, which has suffered similar problems for many years, under both political hues. In the end, people do have power and, most importantly, if committed, organised and engaged, can exercise that power at any time. One point that struck me was that the larger the disconnect between citizen and government, the more opportunity there is for both loss of engagement and control. In large countries, this is a real problem. It need not be so in smaller states, where access to representatives is easier and there are smaller degrees of separation between people. Finally, Hordur exhorts us to all be vigilant, as we can have no complaints if we just sit back and allow stuff to happen to us. For me this calls into question an issue I have been thinking about for sometime, namely our transformation from citizens into consumers. This has been a core part of the neo-liberal experiment, which has seen people focused on their interaction with the market, leading to a subsequent loss of connection with the concept of citizenship and a one way relationship with the state. I believe this is where our ultimate problems lie and, for me personally, this is reinforced by the Icelandic experience. The slow collapse of the post-modern debt-based financial system is a symptom of this malaise. The bubbles of change have been fermenting in many countries over the last decade and point to a subtle shift in how people view their relationship to the market and the state. Hordur’s story about Iceland is part of that process and is worth listening to. I’ve selected a talk Hordur gave last year, as it is quite focused and succinct and just 30 minutes of your time. Enjoy.

 

February 2nd, 2013

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The Great Transformation: Addendum

Karl Polanyi began his famous 1944 treatise, “The Great Transformation”, with the following words:

“Nineteenth-century civilization has collapsed. This book is concerned with the political and economic origins of this event, as well as with the great transformation which it ushered in”. His thesis was “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society”. As we continue to make our way forward in the 21st Century, Polanyi’s words are worth reconsidering. He noted that the success of the Industrial Age was based on four key pillars: a balanced international system, a stable financial system, the self-regulating market and the liberal state. The end of the balanced power system towards the end of the 1800s was the signal that the almost 100 years of near peace, was coming to an end. When the gold standard failed, it was the end. Polanyi notes,

“The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system….to liberal economists the gold standard was purely an economic institution; they refused to consider it as part of the social mechanism.”

When we look at the implosion of the current debt based monetary system, it is worth pausing to re-consider Polanyi’s thesis. As Europe considers the all or nothing integration and the US climbs slowly off its knees, the social importance of a stable and high functioning monetary system is slowly being recognised. This has been seen in the amazing efforts of global policymakers to try and fix the banking system, mainly by flooding it with new liquidity. Whilst this policy shift has seen a stabilisation of the system, serious structural problems remain. Many of those problems have been noted but little, so far, has been done to deal with them. At the same time, austerity, the normal medicine, is no longer regarded as a economic panacea, with both the social and economic impacts hitting hard.

But out of the chaos has come a shift in focus. Initially the response to the GFC was to protect the banks, to bail them out and, in repairing their balance sheets, to use them as a conduit for recovery in the general economy. Unfortunately, that plan didn’t work, for the simple reason that trying to get people to borrow, when they are trying to pay down debt at the same time, is simply unworkable. Still, the money flowed in and continues to do so with QE2Infinity, and continues to boost equity markets as bonds start to lose their shine. However, in the last 12 months there has been a gentle stirring amongst policymakers and researchers and a new focus on the process of money creation and how banking works and impacts the real economy. If anything, the GFC can be seen as a crisis of finance itself and this has finally brought the spotlight and interest into a somewhat arcane area, normally populated by monetary reformers.

One paper to catch people’s attention is “The Chicago Plan Revisited”, an IMF working paper by Jaromir Benes and Michael Kumhof. Interestingly, Jaromir was at the RBNZ from 2006-2008 as a research advisor, so I presume they will have read it. It’s an excellent paper and explores themes familiar to anyone who has been reading this blog over the last 5 years. To those new to the subject, it’s a very useful read as to how the banking system is currently structured. Benes and Kumhof investigate the way in which banking works currently and the proposal of Irving Fisher’s 1936 Chicago Plan, which called for a separated monetary and credit function. Again, readers familiar with the research of my colleague, Lowell Manning, will know he has done extensive work on Fisher’s Equation of Exchange and so it’s heartening to see a new look at Irving’s work.

Their conclusions were fourfold and supported the claims made back in the original plan that separation money creation and credit provision would:

1) Lead to much better control of the business cycle by providing a more stable monetary platform.

2) Eliminate bank runs.

3) Dramatically reduce net public debt.

4) Dramatically reduce private debt, as money creation no longer requires simultaneous debt creation.

This is quite a major shift in thinking within the hallowed halls of the IMF (it should be noted that this is not official IMF policy) and signals a recognition that those of us who have been talking about this issue for many years have finally been heard. It has even made the mainstream media and has even provoked some interesting commentary on banking and financial modeling at the Economist. The most important realisation from this research is that the business cycle is completely in the hands of the banks. Put simply, the banks are in charge of the economy. This will surprise many people, including many bankers, but will now allow us to have a proper debate as to what constitute a stable, efficient and equitable monetary system. The understanding that finance has such an enormous social, as well as economic, impact (and of course environmental) will hopefully see this shift transform into major systemic change. It is a long way from where we are now to a full 100% reserve backed system but it is possible that we can take incremental steps along the road.

Here is a video with Michael Kumhof explaining the Chicago Plan Revisited

 

August 23rd, 2012

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Steve Keen: Public Talk in Christchurch

Steve Keen is in New Zealand to present a range of seminars in Auckland and Wellington. He is also coming down to Christchurch to give a public talk. Details are below. It should be an interesting event.

 

Public Talk in Christchurch on September 8th at the University of Canterbury 

Economist Steve Keen in New Zealand 6-10 Sept 2012
Author of best-selling book Debunking Economics, Steve Keen is Professor of Economics and Finance at the University of Western Sydney. He is a speaker of international renown and a voice of reason in confusing financial times. He was recently interviewed by Kim Hill on Radio NZ National and he’s crossing the ditch in September to talk to New Zealanders about the economy.
Professor Keen will present an evening public lecture in Christchurch:

Saturday 8th September at 5pm – C1 Lecture Theatre, University of Canterbury, Arts Rd, Ilam
Professor Keen will provide an overview of conventional economic theory, briefly cover its short-comings in dealing with the current financial situation, and outline his analysis as described in his book Debunking Economics. He will bring his discussion of the global economy right up to the present, and take a look at issues in New Zealand, including the housing market, debt levels and asset ownership, that affect our nation’s economic well-being.
Q: Who will benefit from attending the Steve Keen public talk? 
A: Everyone who wants to understand the economy.
(Economists, analysts, policy-makers, academics, politicians, public servants, teachers, students, investors, home-owners, renters, business owners, commentators, monetary reformers, financial advisers …)
See www.talks.co.nz for further details on his Auckland and Wellington seminars.

 

December 11th, 2011

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To Print or Not to Print?

 

“To be, or not to be, that is the question,

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,

And by opposing end them.”  Hamlet, Act III, Scene 1.

It seems, after nearly 30 years of deregulated markets, that we face a sea of troubles ourselves. An extreme global debt deleveraging is upon us, the numbers too outrageous to even consider. Not only have we consumed beyond our means, we have mortgaged our future. Whereas once credit was difficult to come by and banks conservative in their lending (can you pay this back?), the brave new world brought us access to unlimited treasures, all paid for on a credit system, which had limited restraint.

As financial models became more complex and debt could be packaged, securitised and sold off, all sense of restraint was lost. Who owed whom was lost in a parallel universe of metaphor: swap, hedge, collateral, obligation, repurchase. Repaying principal and interest, in the old fashioned sense was put to one side. Can you afford the interest? Don’t worry about the principal, that will pay itself off as the price rises! Can’t afford the interest? Don’t worry, we’ll lend that to you as well, or have a holiday (from interest that is….keeps charging but pay it some other time). Tick, tock, tick, tock.

Maybe Hamlet wasn’t as crazy as he sounded.

As I explained in a previous post on the Euro, deleveraging debt is a painful process. As debts are written off, the money supply contracts, causing a contraction in the general economy. This creates a spiral where demand for new credit drops and this causes further losses to business, resulting in more job losses and so on. Traditionally, this has been dealt with by the lowering of interest rates, which hopefully stimulate demand for credit and reduce interest burdens. Sadly, this doesn’t work until the overhanging debt has been cleared out, by which time unemployment has risen and economic output has contracted to severe levels.

The road to austerity is a self-fulfilling process. Clearing the debt mountain will take many years and, perhaps, like Japan, it could be a decade or more. During that time people will be unemployed, machines will sit idle and resources will be untouched. In the 1930s governments stood back, waiting for the miracle of the market. None came. That is not a road we want to travel down.

As the shadow banking system starts to fall apart, it is time to plan and look forward to building a stable and local supply of money to see us through the hard times. Continuing to rely on overseas capital and ever increasing borrowing is a road to ruin. Our gross debt will hit $90 billion  by 2016, according to Treasury forecasts. The government talks of returning to surplus by 2015 but that is very optimistic. Even then we will still carry this debt for many years to come.

So is printing new money and spending it directly into the economy a better idea? I talked about this in a recent interview with Kim Hill and Radio NZ National, which you can catch here.

RadioNZ National Kim Hill interview

I have had an incredible amount of positive feedback since the interview and, interestingly, from a very wide range of people. There were a few comments about “funny money”, including a little pop from Nevil Gibson at the NBR. My answer to that is if you think this is funny money, try explaining the nearly $4 trillion that’s been used to buy debt off US banks! The feedback has confirmed the following: that there needs to be a clearer explanation on how the money creation process actually works (even though the RB has published on this here), that inflation needs to be better understood and that people are extremely concerned about the way the financial system is structured. We will be working on producing a simpler explanation to those issues.

In the meantime, around the world, there is a lot of new work being undertaken around the quantitative easing process and how that is not really working. Sushil Wadhwani (Goldman Sachs and MPC member in the UK) and economist (and former colleague of mine) Michael Dicks have looked at more direct interventions into the economy, noting that QE is a very roundabout way of trying to stimulate an economy. They look at directing lending to companies from the central bank and, more interestingly, at simply giving households a voucher to spend. You can read the brief paper here. Their proposals are in the right direction but do not go far enough. Nouriel Roubini recently wrote that direct spending on new infrastructure in the US would be much more useful than simply buying toxic bonds off failing banks.

What’s clear is that more and more economists and policy analysts are realising that QE is a sop to the banks, boosting their balance sheets and stock prices, at the expense of the taxpayer. Clearly this is a misallocation (and perhaps misappropriation) of taxpayer funds. Furthermore, even with trillions of $ of QE, there has been no inflationary effects at all. This is important to note when considering the direct injection of new money, as we have proposed, for the Christchurch rebuild.

As I noted in this recent piece for ChangeNZ, as long as there is surplus labour and resources, there will be no inflationary effects from new money. This has been confirmed from business sources, who note the economy is limping along at between 33-50% of capacity. So there is little concern over the direct effects of the new money in raising prices. The indirect effects through the banking system are also likely to be minimal, given a very low demand for credit across the economy. Indeed, with debt deleveraging in full swing, we are likely to see further reductions in debt, offsetting any new potential demand for credit. Still, credit numbers will need to be watched carefully and, at the same time, it’s important to note that the amount we are suggesting is only $5 billion. Ultimately the goal is a strong and locally managed financial system with price stability. That is something we have not had, despite the continuing myth of a central bank induced low inflationary environment. The time is right to consider an alternative way forward.

Perhaps we should leave the final words to Hamlet, as we ponder the road ahead:

The undiscovered country, from whose bourn

No traveller returns, puzzles the will,

And makes us rather bear those ills we have,

Than fly to others that we know not of?

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o’er, with the pale cast of thought,

And enterprises of great pitch and moment

With this regard their currents turn awry,

And lose the name of action..…”

 

 

 

 

 

 

 

October 16th, 2011

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Living Within our Limits

I was asked recently to give a talk to a small but distinguished group on “how to survive the global financial and ecological crises”. Easy uh! Well you have to start somewhere and have a rough idea of where you’re headed. For me, the more difficult the situation gets, the simpler the solution becomes. Essentially, changes that once would have been rejected flat out as unworkable, implausible and idealistic, are suddenly deemed more acceptable.

We are all conditioned to think and live within a certain paradigm or system. For many of us (especially readers of this blog), it’s considered to be democratic, liberal capitalism. More realistically it’s a neo-liberal system where free markets dominate at the expense of any concept of the public good. Markets will solve any problem. Actually that’s a truism. It’s the outcome that is often of dubious merit.

When I look at the Occupy Movement, I see a protest against this system, a system where people are secondary to profit, and the public is considered to be a wasteful and unnecessary construct. As John Key noted of the Christchurch post-EQNZ insurance problem, eventually the markets will sort it out. Again they will but there may not be any insurance for anyone for a while. This mirrors the government’s approach to managing our prisons: simply contract it out to private operators, who will manage it more “efficiently”. The belief in the idea of the “public” is slowly being eaten away by this neo-liberal fantasy that for profit organisations will always achieve the best outcome.

It will be interesting to see how this protest develops but it feels like it has legs. The outrage is fair and justified: the corruption at the heart of the political-financial system; the gaping inequalities; the disenfranchisement and the feeling that the whole system is built on sand. Over time the picture will be clearer and the protests may coalesce around a series of concrete demand but the consultative and participatory process is a fascinating starting point. Participatory, as opposed to representative, democracy is messy, frustrating, turgid, slow, tedious and annoying but that’s the whole point. It is built on allowing all people a voice and on allowing a process to develop. It is a far cry from the many bills rammed through under “urgency” in the NZ Parliament, with little debate or scrutiny for even our partially elected representatives.

I wish them well in their endeavour. In the meantime, I have three simple proposals to offer, as a starting point:

1) Monetary Dialysis - No more public debt; new public money; raise limits on bank credit.

2) Trucost pricing - Start pricing ecosystem goods and services.

3) Participatory Universal Income - Basic Income for all those participating in society; rebalanced tax system; provision of key public goods.

I focused on the first 2 ideas in my presentation, the outline of which is below. By repricing our economic system, both in the cost of goods and services, as well as the creation and volume of money, we will immediately realign it towards a path of lower volume but higher quality consumption. We will reduce the burden of compound interest, this alleviating the constant pressure to produce and consume. The UPI will restore the public good in reflecting all contributions to society and laying the foundations for a more stable, harmonious and prosperous world. Far fetched? Not really, when you think about it for a bit. My turn is over for now. Who is next in the stack?

About

"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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