Tuesday, 26 April 2016

Horror story

In response to my post about the lessons of history, Claudia Dias sent me this clip from The Times, March 31st, 1939:


Four months after Kristallnacht, and two weeks after Hitler's annexation of Czechoslovakia, the British government was still repatriating Jewish refugees. This group knew they were being sent back to almost certain death. No wonder they were hysterical.

Today, refugees in Greece face deportation to Turkey, and from there probable repatriation to their own countries. If they are denied the opportunity to claim asylum, as appears to be the case for some, this would contravene the Geneva convention on refugees. UNHCR representatives and aid agencies are being refused access to refugees sent back to Turkey. There are reports that refugees threaten to commit suicide rather than be sent back. Desperate people, desperate times.

We have learned nothing.


Related reading:

When the world turns dark








What have we learned from history?


Yesterday, at the final of the Kent Schools Public Speaking Competition, a young boy stepped up to the podium.

"What have we learned from history?" he asked. "We have learned that no good comes from killing people".

And he went on to speak eloquently, first of World War II: "There has never been another major war," he said.

True, there has not. The uneasy peace of the Cold War did not descend into outright conflict, though it was a near thing: the world very nearly went up in nuclear flames in the Cuban Missile Crisis of 1963. But have we really learned, or did we just find other weapons? War can be fought in many ways. 

Then he went on to describe, in poignant terms, the Rwandan massacres of 1994. He explained the unhealed tribal rifts that underpinned Rwandan society at that time. He commented that people who had lived together for years in apparent harmony suddenly turned on each other. In the course of three months, hundreds of thousands of people were brutally murdered.

The Rwandan genocide was indeed one of the most terrible events of our time. For those who have forgotten it - or who perhaps, being young, have never known about it - this is the (self-proclaimed) United Human Rights Council's description* of what happened:
On April 6, 1994, a plane carrying President Habyarimana, a Hutu, was shot down. Violence began almost immediately after that. Under the cover of war, Hutu extremists launched their plans to destroy the entire Tutsi civilian population. Political leaders who might have been able to take charge of the situation and other high profile opponents of the Hutu extremist plans were killed immediately. Tutsi and people suspected of being Tutsi were killed in their homes and as they tried to flee at roadblocks set up across the country during the genocide. Entire families were killed at a time. Women were systematically and brutally raped. It is estimated that some 200,000 people participated in the perpetration of the Rwandan genocide.
In the weeks after April 6, 1994, 800,000 men, women, and children perished in the Rwandan genocide, perhaps as many as three quarters of the Tutsi population. At the same time, thousands of Hutu were murdered because they opposed the killing campaign and the forces directing it.
Of course, it didn't suddenly happen out of the blue. As the Holocaust Museum explains, it was preceded by three years of civil war, never satisfactorily brought to a conclusion, which itself grew out of Rwanda's history of discrimination on tribal and ethnic grounds both under Belgian colonial rule and after independence. Genocide is never without cause. It is always "justified" by past wrongs and future fears. 

But....."We have learned from this", said my young speaker. "There has never been another genocide".

If only that were true.

The year after the Rwandan genocide, 8,000 men and boys were massacred in the killing fields of Srebrenica under the noses of UN peacekeepers. This was towards the end of the 1993-5 Bosnian War, in which about 100,000 people died, 80% of them Muslims. The Guardian, reporting on the 20th anniversary of the Srebrenica massacre, describes how the "great powers" - the US, UK and France - decided to "sacrifice" Srebrenica, which at that time was one of three UN-administered "safe enclaves", for the sake of "peace" in Bosnia. What kind of peace is it that is constructed on the dead bodies of thousands of civilians? The British prime minister Neville Chamberlain is vilified in historical narratives for his policy of "appeasement" towards Hitler. But what was this attempt to reach an accord with Serb leaders by sacrificing those who depended on the UN for safety, if not "appeasement"? How did Radovan Karajic's policy of "ethnic cleansing" differ from Hitler's "final solution", except in degree? Half a century later, the great powers still seek "peace at any price".

Then there is Darfur. This is the Holocaust Museum's account:
When the western region of Darfur experienced increasingly violent internal disputes over access to land and power in the 1990s, the Sudanese government responded by rewarding and arming local leaders who shared its ideology. Fighting began in Darfur when members of the Fur, Zaghawa, and Masalit ethnic groups created the Sudan Liberation Army (SLA) and attacked a government airfield on April 25, 2003. Another rebel group, the Justice and Equality Movement (JEM), joined the fight against the Sudanese government armed forces. 
In response to the April 2003 rebel attack, the Sudanese government began recruiting local militias and transforming them into semi-regularized forces known as the Janjaweed. A period of intensive, systematic targeting of the civilian populations from the Fur, Zaghawa, and Masaalit ethnic groups resulted in the deaths of at least 200,000 people between 2003 and 2005 alone. More than two million people—a third of the population—were displaced. 
The attacks often began with government planes bombing villages, followed by combined Janjaweed and Sudanese Armed Forces attacks on the ground. Villagers were killed, tortured and raped during attacks, and thousands of villages were destroyed. The greatest civilian tolls came during the forced flight that followed. Pushed into the desert without water or food supplies, many civilians perished due to malnutrition and disease.
Additionally, in the early years of the conflict, the government obstructed the delivery of aid to these vulnerable groups. Millions of displaced civilians settled into enormous camps, many on the outskirts of major towns in Darfur. Over 200,000 fled across the border into Chad. 
The conflict in Darfur continued well beyond this intensive phase, with the core effects of the genocide unaddressed, and today, violence continues sporadically across the region.
Nor is Darfur the only place where genocide continues. Today, Yazidis, Christians and Shi-ite Muslims are being murdered in their thousands by the monstrous ISIS, itself born of inept and ill-advised Western military interventions in the Middle East. As in the Rwandan and Bosnian genocides, those murdered are mainly men and older women. Younger women, girls and small boys suffer a different fate. In Bosnia, it is estimated that between 20 and 50 thousand women and girls were raped. Today, women and girls seized by ISIS become sex slaves: they are the spoils of war. Boy children are taken by ISIS to train as soldiers. Slavery takes many forms.

And genocide goes by many names. If we call it something else, we can pretend it isn't happening. We can pretend murderers aren't really murderers, and refugees aren't really refugees. We can justify doing nothing about it. What shall we call it today?

No good comes of killing people. But what have we really learned from our history?


Related reading:

When the world turns dark
Horror story

__________________________________________________________________________________

Image from the Baltimore Sun.

* The United Human Rights Council describes itself as an "Armenian youth committee". It is nothing to do with the United Nations, though its name and logo are clearly intended to suggest this. I have used its description of the Rwanda genocide here because it is accurate and succinct. This should not be taken as recommendation of the website. 


Wednesday, 20 April 2016

Kafka at the DWP


I've written before about the arbitrary and cruel judgments made by DWP frontline staff in relation to ESA claimants, particularly the mentally ill. And Guy Standing, in his excellent books about the precarious lives of the "new underclass", describes how the process of claiming benefits creates huge amounts of unproductive "work". Benefit claimants have to "earn" their benefits by what amounts to jumping through hoops. But I confess that - not being a claimant myself - I lacked real understanding of just how insane and tortuous the JSA & ESA system is.

Today, I read a powerful blogpost by Lizzie Cornish, a 61-year old woman who has found herself without a job and - because of women's rising state pension age - also without a pension. She describes her personal experience of claiming JSA and ESA. The story she tells is worthy of Kafka.

Lizzie (who is involved with the WASPI campaign) blocked me on Twitter long ago, so I have not been able to obtain her permission to quote from her post. But I think her story needs a wider audience, and maybe I can help in some small way to amplify her voice. So I make no apology for telling it here - in her own words.

This is a lightly edited excerpt. The whole post can be found here.
___________________________________________________________________________________
This is my story.... 
I have been a Carer to Nanny, my now ex-mother-in-law, (who is 101 years old) for the past 15 years, she moving here to live with me after our divorce. My time as her Carer ended a few months ago..and thus, I suddenly found myself thrown into the gutter, spat on by my once Beloved Country, turned from Carer to Scrounger within weeks. 
I was given the normal 8 weeks 'grace' period after you stop being a Carer, when you are given Income Support which includes the amount given as Carer's Allowance. During this time, I searched frantically for a job, filled in SO many applications online, endless forms, endless questions, endless (ridiculous) psychology tests, sending so much information about myself off to total strangers, not hearing a WORD back from most. I sent out DOZENS of applications.... 
The ONLY job I was offered was a Zero Hours one which legally gave me NO protection at all, for I could have been phoned up in the morning to find I was not needed for that day, for that week, even, were times quiet. This would have meant that any Working Tax Credit would be thrown awry too, along with Council Tax Rebate. Thus, endless phone calls, more forms to fill in, more and more confusion and stress. 
When my Income Support ran out, I applied for JSA. THIS is what some of the Pensions Ministers have said we should go on, feeling that this is RIGHT for us to endure for SIX YEARS until we reach their new pension age given to us! (You can only claim JSA for 6 months anyway) 
HERE is what EVERYONE applying for JSA or ESA is put through...and please, do NOT tell me this is RIGHT for ANYONE, let alone for 60+ year old women who have raised their families, cared for their elderly relatives and paid over FOUR DECADES of NI contributions! 
THE FORM 
*I* did NOT fit into their boxes, for you have to have had a 'real' job within the previous 6 months. I was a Carer, thus, I had no boss, no address, nothing that fitted their boxes...and my last 'real' job was in 2011, which would have ruled me out of getting JSA. Nanny needed me at home full time by then. She's registered blind (macula degeneration) and just could not be left for whole days or many hours. 
So, I rang them up and we did the form over the phone....it took AGES..and it also took AGES to get THROUGH in the first place, having to talk to a bloody ROBOT who kept asking questions and giving examples of the answers I could come out with! 
Well, I finally reached a REAL person and the form was filled in, they too finding difficulty in where to put me, but they sorted it eventually. God alone knows how many questions I answered...dozens and dozens...my life going into boxes yet again, tick, cross, cross, tick, yes, no, no, yes, no, no, no......... 
Then, I was given an appointment for an interview at my local Jobcentre. This was on a Friday. I went. Whilst waiting, I sat next to a lady who had just had her ESA stopped. She was in a terrible state. She was registered partially sighted, had a very bad leg, making it so hard for her to walk and countless other illnesses. She looked really poorly.... 
My name was called. I went to talk to the lady who called me. She was kind, The System was not. I HAD to attend a training course for 2 days, 6 hours each day, on the following Monday & Tuesday, elsewhere in town, at a course called 'Eat That Frog' (GEEZUS!!)...this was, apparently, an 'employability' course, where I'd learn how to do Interviews, etc..... 
I took a deep breath, resisted the urge to say "You CANNOT be SERIOUS?!" and explained that I was almost 61 years old (I now am) and thus, I KNEW how to do interviews. MY problem was GETTING an interview in the first place, as my age meant I couldn't even make it past the internet version of the 'paper sift'...and there are many jobs I simply CANNOT do now either, due to age/health, etc. 
I then asked how much this course was costing. The lady told me I'd probably self-combust if I knew...and she diverted my attention to my signature, asking me sign on a small screen so the computer would 'recognize' me next time, when I had to 'sign on'. My signing on day was the day after the course days...Wednesday. 
She told me it took about 4 signatures for the machine to recognize me. TWELVE signatures later, it still didn't know who the fuck I was! It took TWENTY signatures, by which time I had smoke coming out of my ears over the idiocy of this madness! I'm left-handed, thus I have to write backwards, every single day, to fit into a right-handed world, meaning that my writing is very untidy and my signature is barely EVER the same, each time I write it, because the stress of writing backwards, even 60 years later, is enormous as it messes up my natural brain pattern.. 
But, I digress......... 
I mentioned that with that day's visit to the Jobcentre, plus these 3 new visits to courses and to sign on, meant I'd have to spend almost £20 on bus fares and I didn't have the money! You can't claim bus fares back from Jobcentre visits...so, tough. I could for the course, but that would probably have involved many more forms, signatures, computers exploding over my writing and having to prove who I was via my birth certificate, or passport, driver's licence (don't have either of the last two) or whatever else insane documentation is required on the day the moon is blocking out the sun! 
Yes, I'm getting MORE stressed as I write this.......... 
Well, by the time I got home, I was in A Right State of nerves, anxiety, depression and ANGER, bloody FUMING ANGER, the sort where you can't sit down, because, damn It, I SHOULD have my PENSION not this Feckingly AWFUL STRESS being laid out before me! 
This state of mind, of being Out of My Mind, continued through the entire weekend and on Monday Morning, I CANCELLED learning how to Eat A Frog and went back to my GP instead, sobbing all over her (AGAIN!) and she gave me a sick note...because I've been under her for depression for a few months now, after I began to realize that NO WAY was I going to get a job in my 60s! 
I rang The ESA folks up. 
By now, I HATED Vivaldi's 'Four Seasons', the music The Robot lets you listen to whilst telling you how to phone in the early morning when it's less busy! 
It WAS THE FECKING EARLY MORNING and STILL I had to wait and wait and wait! 
Eventually, someone answered. We filled in ANOTHER FECKING FORM! 
I sent off my Sick Note the same day... 
Nothing happened. 
Days passed.....Nothing happened........ I rang them back.......... 
Shut the FUCK UP, Vivaldi!!!!!!!!! 
"Why not ring us early in the morning when we're less busy!" 
It's Springtime in VivaldiLand...and all is FAR FROM WELL! 
"For example, you can tell us you're phoning us because you have a problem with your form, or you've been overpaid, or you have another question to ask us...." 
FINALLY, I get through, to a lovely lass...her MUM is one of us, one of The 1950s women, so I tell her about The WASPI Campaign, of the five lovely lassies who came together to give us a voice to shout and scream with, to demand something is done about the shocking way we've been treated and to get our STOLEN pensions given BACK to us. She said she'd be sure to tell her Mum....and told me my claim was almost ready, but it was being dealt with by Caerphilly....odd, as I live in Devon, but apparently, they move things round the country when busy, so Plymouth was now sending things to Caerphilly.....and........................... 
We ended the phone call.... 
By now it was around the 11th of April. I'd had NO MONEY coming in since 30th March. 
So, I contacted my local council, applied for a 'Crisis Grant' to help with food, etc. 
Guess what? Yes, ANOTHER FECKING FORM!! 
EVERY sordid detail of my decline into ScroungerHood was required, every inch of my life written out before me.....before I could press 'send'.
 I sent.......
Next day, I got a phone call from them. They could not help, for I had the audacity to have £109.00 in my bank account. I sighed, told them that £100 of this was for Direct Debits and it was about to start coming out any day now. She said that didn't matter, I had money there that could be used for food and thus, they could do nothing. She suggested I apply for a loan from other sources. I asked how I'd pay back a loan with barely any money coming in. She avoided that. She also avoided explaining why the head of the council, our Tory Mayor, spent £20,000 on ONE FECKING PALM TREE not so long ago, having it shipped over from Spain! THEN, not bothered by the outpouring of RAGE from The People, he went and ordered another 12, at a cost of £12,000 this time, for them all, (far smaller ones) sticking them in the dual carriageway into town where they remain to this day, choking on traffic fumes.....This man owns 15 houses, 2 fields and a couple of garages...but *I* had £109 in my bank account, and even though I was shortly to have only £9 of that left, I had to GET A LOAN !!!!!!!! 
So, I had to go back to ESA again, to ask for an emergency donation of my claim...... 
Yes, you guessed it... Vivaldi, I'm sorry about this, but FFS, I now HATE your music! 
Robot Woman greeted me...I resisted the urge to tell her to just FUCK THE FUCK OFF, for my BP was OFF the scale by now, as was my Sugar Level...and being diabetic, this is, of course, lethal !! 
FINALLY, yet again, I got through and asked for help.... 
This time, I got a SourPuss, but I managed to keep relatively calm, explained I had NOTHING to live on and could they please HELP! I could sense her pursing her lips, doodling the word 'bloody scrounger!' on her notebook. She told me I'd be sent £39 by 6pm that evening...and we left it at that, but not before she also told me that this would be deducted from my £73 a week in 4 stages, of just over £9 a time. (!!!!) 
Well, the money came through! I threw caution to the wind and bought fishcake and chips! 
Then, yesterday I found over £40 had gone into my account...and I had NO IDEA why, but it was from the DWP!
So....
Yes......
You guessed it......
I phoned them back.......... 
It was STILL SPRINGTIME In FECKING VIVALDI LAND and Madame Robot was STILL Robotting, but EVENTUALLY I got through, this time to a very nice young man in Norfolk....He hummed and haaaed and finally tracked this payment being for JSA, the tiny bit I was owed before I'd gone on to ESA...and he told me there was another £20 or so due to go in today from ESA, or possibly JSA, to make up this, or that...and that tomorrow my FULL ESA of £73 and a few pennies, times 2 weeks, would be going in, seemingly without the £9 odd being clawed back for the emergency funding bit....at this moment in time, although it will undoubtedly happen later.... 
Well, slap my buttocks with a wet, depressed fish, because everything's depressed around me at this moment in time.... 
Today, I woke up ALMOST feeling that today I could COPE, just a fraction, for a few hours...BUT....then...the POSTMAN arrived and he brought with him another FECKING FORM! 
Oh, but this was no ORDINARY Fecking Form! No! THIS is a 'Capability For Work Questionnaire', you see.  
It has TWENTY PAGES of QUESTIONS! Of BOXES to fit yourself into, for YOU have had THE BLOODY CHEEK to be SICK, you see, to be DEPRESSED, to be SUICIDAL, to have ended up being Pensionless Pensioners made so ILL by having their pensions STOLEN that they can't even THINK STRAIGHT any longer....and therefore you will now be Weighed, Measured and Undoubtedly found to be WANTING!
You see, Mr. Postman brought me a form which asks me if I can walk, climb stairs, use my hands, raise my arms above my head, deliver orders, warn of dangers, etc.etc.etc.......
So far, I can't find the section marked "Are You Fecking Off Your Trolley With STRESS Yet?" but I'm SURE it's here somewhere! 
WHEN I've finally Filled In THIS FECKING FORM they will ASSESS it to see if I need Further Assessing by Health Professionals (Hold on, my GP KNOWS I'm NOT fit for work, as does my depression counsellor!)..whereupon I'll have to find my way to where The Assessors Live and Be Bloody Assessed, from the moment I arrive, my movements, my attitude, my appearance, my answers, my eye contact, my EVERYTHING!
After THIS, no doubt, they'll deem that I AM Fit for work..and...thus...just like that poor lady in the Jobcentre, way back up this War & Peace Epic of The Pensionless Pensioner, I'll have my ESA stopped and THAT will mean I'll have to RE-APPLY for JSA..
And we all know what THIS will mean, don't we? 
Yes, that's right, back to the phone...to Vivaldi, to Phoning Early, or Late, or Mid-Day or Mid-Way, to explain who I am all over again, in case some Poor SOD is trying to PRETEND that THEY are ME and I'm not ME AT ALL!! 
Vivaldi's Springtime all over again....Springtime For Hitler In Paradise..... 
___________________________________________________________________________________

Lizzie's tale is no doubt all too familiar not only to women in their early 60s, but also to men and younger women who have been forced into the JSA & ESA mincer.

Lizzie believes that the solution is for the Government to reverse the women's state pension age rises legislated in 1995 and 2011 so that she can have her state pension. If it did, she would never need to listen to Vivaldi again. But thousands of others, too young to qualify for the state pension, will still be condemned to spending hours on the phone, filling in badly designed and repetitive forms, and trying to make their case for support to overstretched and poorly trained DWP assessors. What a waste of time. What a waste of energy. What a waste of human life.

But what Lizzie really wants is an income. And she doesn't want to have to beg for it. Nor should she have to. It should be hers by right. Not a pension - because after all, others are suffering too - but a Basic Income.

I despair at those who dismiss Universal Basic Income because it wouldn't fix all the problems with the current benefit system. True, it would not. Other measures would be needed as well. But it would fix Lizzie's problem, and the problem of all those experiencing the uncertainty and despair of the JSA & ESA system, not to mention all those who are in poverty despite being in work. Isn't that enough?

Related reading:

Here I stand, I can do no other
An experiment with Basic Income - Pieria
A neoliberal case for a Basic Income, or something like it - Adam Smith Institute

Sunday, 17 April 2016

The Fund that isn't a fund

There is a great deal of confusion over National Insurance - what it is, how it works and what it funds. I have attempted to clear up some of the muddle elsewhere. But partly, it stems from the existence of something called the NI Fund. If there is a Fund, surely this implies that National Insurance contributions are invested? If so, those (like me) who insist that state pensions are unfunded are talking gibberish.

There is indeed a NI Fund. But it is badly named. It would be more accurate to call it the NI Clearing House. It receives NI contributions from workers and employers, and it disburses payments to pensioners and benefit recipients. As long as NI receipts exceed pension & benefit payments, the Fund runs a surplus. But when pension & benefit payments exceed receipts, the Fund runs a deficit.

When a clearing house like the NI Fund runs a surplus over a number of years, it builds up reserves. The NI Fund has significant reserves, mostly built up since the start of this century:


But although it has reserves, it is incorrect to regard the NI Fund as any sort of "managed fund". It does not invest NI contributions for a future return. There is no "pot" from which people can draw in retirement. Rather, the NI Fund reserves are a liquidity buffer, not unlike the cash reserves that banks are required to maintain in order to ensure that they can meet their payment obligations.

Payments into the fund vary with the business cycle: in a downturn, payments into the fund fall as unemployment rises. But the Fund must continue to make payments to pensioners and benefit recipients even when its income is falling: indeed, as unemployment rises, payments out of the Fund actually increase, since unemployment benefit is one of the benefits that it funds.

The cyclical nature of the NI Fund balance is clear from this chart:


The three "red zones" are the recessions of 1981-2, 1991-3 and 2009-10.

Clearly, if the NI Fund had no reserves, maintaining payments in a recession would be a problem. Holding liquid reserves is therefore a sensible prudential measure. To ensure that it can always meet its payment obligations, the Fund has a statutory requirement to hold liquid reserves of at least 16.7% of payments. And it holds these reserves in the form of government debt, not because government wants to "borrow" from the Fund, but because government debt is the safest and most liquid form of investment.

Historically, the Fund has always swung back into surplus after a recession. But this time, something has gone wrong. The chart shows that instead of the Fund returning to surplus after the most recent recession, it has gone deeper into deficit. Why is this?

Contrary to popular opinion, it does not appear that the increasing demands on the Fund are due to NI-funded working-age benefits (JSA, ESA and maternity benefits). Nor has the Government "raided" the NI Fund surplus to plug fiscal holes elsewhere, as some have alleged. The problem is pension payments. The pensions bill rose by £6bn between 2011/12 and 2012/13. This is partly because although people are living longer, pension ages have not been rising in line with increasing longevity. And as the post-war "baby boomers" retire, there are more claims on the Fund.

But the story is not entirely one of rising payments. On the receipts side, prolonged stagnation of wages puts downwards pressure on the Fund's receipts, while very low interest rates decrease the Fund's investment income: because of the need to invest in safe liquid assets, it cannot diversify to maintain its investment income.

Anyway, whatever the cause, the Fund is in trouble. In 2014/15, the Fund's deficit was sufficiently large to take it uncomfortably close to the statutory minimum reserve level, so the Treasury topped it up with a grant of £4.6bn from general taxation. Further grants will probably be needed in 2015/16 and 2016/17. The Government Actuary expects the Fund to return to surplus in 2017/18, but this forecast is dependent on the UK economy continuing to recover - and on reductions in payments due to planned rises in state pension age for both men and women. Should either of these disappoint, the Fund will continue to need top-ups from general taxation.

This touches on the WASPI issue. In the short-term, the solvency of the NI Fund depends in part on women's pension age reaching 65 by 2018, and the state pension age for both men and women reaching 66 by 2020. Rolling back even the 2011 acceleration of women's state pension age rises, let alone attempting to delay the rises legislated in 1995, would mean the NI Fund would remain in deficit for longer.

Of course, this is a matter of political choice. We could argue that the depressed receipts into the Fund are due to Government cost-cutting measures from 2010 onwards, and had a more expansionary fiscal policy been adopted, the Fund might now be in better shape. But I well remember the 2010 deficit panic. We really did fear we would walk the same path as Greece. For better or worse, we chose a government that promised us austerity. The 2011 Pensions Act, which so many people (including me) think was unfair, was a consequence of our choice.

But even with such controversial and upsetting changes to entitlements, the longer-term future of the NI Fund is still insolvency, as this chart from the Government Actuary shows:


 By 2035, there will be no NI Fund. Will there still be a State Pension? We do not know. If there is, it will presumably be funded from general taxation.

The National Insurance scheme is already unfit for purpose. By 2035, it will be pointless. We must reform it sooner, rather than later.

Related reading

The foolishness of the old - Pieria
Is funding for the State Pension really about to run out? - This Is Money

First two charts taken from Research Briefing: National Insurance Fund Accounts 1975-2014, (downloadable pdf). 
Third chart from Government Actuary's Quinquennial Review of the National Insurance Fund as at April 2010.  



Saturday, 16 April 2016

The building society broken by its own accountants



The Manchester Building Society is sinking. It has reported a post-tax loss of £4.9m and a fall in reserves of £5.4m. This is not a one-off disaster due to an external shock. No, these results are symptomatic of a deep underlying malaise. The Manchester is in terminal decline, broken not by the financial crisis, nor by regulators, but by its own accountants.

The Manchester's problems started in 2012, when it discovered that its accounting violated IAS 39 (IFRS 9) hedge accounting rules. For some years, it had been hedging its interest rate risk on fixed-rate mortgages with simple interest rate swaps. To ensure that the portfolio was fully hedged, it accounted for both the swaps and the mortgages at fair value. This explanation is from a Note to the 2012 accounts:
The total value of mortgages at 31 December 2012 that had been subject to interest rate swaps was £167.7m. The swap and the designated mortgages were accounted for using the hedge accounting principles of IAS 39. Under the terms of IAS 39, the Society had calculated the fair value of the swaps and the fair values of the mortgages at each year end, since 2006 when it first adopted hedge accounting. As the fair values of both the swaps and the mortgages vary over time by reference to LIBOR rates, there was some volatility in these values at each year end. IAS 39 requires that, when there is an effective hedging relationship in place, the volatility in the market value of the swaps are offset in the Society’s accounts by the fair value adjustment to the mortgages – in practice, these fair values offset each other as they are in opposite directions, with limited volatility remaining in the Statement of Comprehensive Income.
So far, so good. But in 2012, the Manchester discovered that it should not have been using IAS 39 hedge accounting:
The Society has now identified that the swap arrangements it had entered into in respect of these assets did not meet the technical requirements for hedge accounting under IAS 39.
In fact, the fair value movements in the swaps were correctly recognised in the income statement. The problem was the offsetting fair value movement in the mortgages. It did not exist (my emphasis):
As a result of this, the fair value movements in the swaps remain to be recognised fully through the Statement of Comprehensive Income, whilst there is no fair value ascribed to the mortgage assets and they are recorded in the Statement of Financial Position at their amortised cost. 
The gap was massive. As at 31 December 2011, the fair value that had been ascribed to the mortgages was £39.2m. All of this had to be stripped out. The 2010 and 2011 balance sheets were restated to reflect both the revaluation of the fixed-rate mortgages and the consequent unhedged loss on the interest rate swaps.

The 2012 income statement recorded a post-tax loss of £2.73m. But the restated 2011 loss was much worse, at £11.44m. The cumulative losses wiped out three-quarters of the Manchester's capital reserves:


Due to these unexpected losses, the Manchester recorded an additional Deferred Tax Asset of some £5m, anticipating 80% recovery over the next 10 years. But as we shall see, this was to come back to haunt them.

In 2013 the Manchester's auditor, Grant Thornton, resigned. Grant Thornton was subsequently fined by the FCA over its failure to spot the hedge accounting error. The Manchester is now suing it for negligence, claiming damages of £49m.

But the Manchester's accounting problems did not end there. In the 2012 accounts, the Manchester had confirmed that its 1999 PIBS issue was classed as equity. But in 2013, with a new auditor in place, it changed its mind. The 2012 accounts were restated to reclassify the 1999 PIBS issue as debt. Nor was that the only restatement. The Manchester also had to recognise a previously undiscovered insurance liability on a portfolio of Spanish mortgages:
It was identified during the 2013 year end audit that a particular clause of the mortgage contract meets the definition of an insurance contract; where a borrower dies or goes into long term care and a subsequent redemption receipt is less than the outstanding loan balance, the Society does not have any further ability to recover amounts from the borrower or their estate. The recognition of an insurance liability based on this insurance risk results in a prior year adjustment. The impact of the restatement is: An increase in provisions of £4.2m at 2012 (2011: increase of £3.1m) and an impairment loss of £0.5m in 2012 and reduction in interest and similar income of £0.2m, reflecting an adjustment to profit before tax of £0.7m, and a reduction in income tax of £0.2m and a reduction to 2012 opening retained earnings of £3.1m.
The cumulative effect of these restatements (plus adoption of a different accounting treatment for levies) reduced the Manchester's 2012 total capital by a further £7.6m, though £5m of this (the 1999 PIBS issue) was taken as a reduction in subscribed capital rather than reserves. In April 2013, the Manchester raised £18m of new CT1 capital with a PPDS issue.

During 2013, the Manchester sold its Lifetime mortgage book and its Icelandic debt assets at a profit of £1.53m, and it also exited from most of its interest rate swap portfolio. But despite this, it turned in a full-year loss of £7.1m. This was partly due to new impairment provisions of £8.7m, mainly on a third party mortgage book on which it discovered it could be liable for all losses. But £5m of the loss was due to write-down of the Manchester's Deferred Tax Asset. The Board was beginning to realise that the path to recovery for the Manchester would be an extremely rocky one.

The 2013 loss reduced the Manchester's capital levels so much that it was forced to stop lending. It became a zombie. Throughout 2014, it concentrated on shrinking its balance sheet and shoring up its capital. But there were no further disasters: it turned in a post-tax profit of £4.4m and its gross capital rose from 7.3% to 10.4%. The Board cheerily said that it would examine the possibility of returning to lending in 2015.

The cheerfulness was short-lived. The Manchester did not return to lending in 2015: the Board's investigation revealed that its core equity was too weak to support more lending. And the 2015 loss made matters worse.

The 2015 loss is perhaps the saddest part of the Manchester's story. It arises mainly from two enormous impairments that are themselves a consequence of the Manchester's decline.

The first is a £2.5m impairment of the carry value of the Manchester's head office. The Manchester simply no longer needs a building of that size. But as it is the Manchester's only branch, it is stuck with it.

The second is a further £4.3m writedown of the Deferred Tax Asset, making a total write-down of over £9m. That is nearly all of it. The Board has effectively admitted that the Manchester is unlikely ever to make enough profit to be able to use the tax asset to offset future tax liabilities.

The final nail in the coffin is the recognition, in the Notes to the Accounts, that the Manchester may not be able to continue as a going concern. It does not fully meet PRA capital requirements:
....there is a shortfall of £1.6m against this CET1 expectation as at 31 December 2015. Under the new regulatory capital regime effective 1 January 2016, at that date there is a £2.8m shortfall. 
After the year end, on 11 April 2016, the Society received new Individual Capital Guidance (“ICG”) from the PRA setting out the amount of regulatory capital the Society is required to hold. The Board has reviewed the capital resources following the new guidance from the PRA and has concluded that the ICG and CRD IV buffer requirements are met. The Board also concluded that the Society meets the quantitative aspect of the PRA buffer. As previously, the Society is expected to hold a certain proportion of its capital buffers in CET1 capital; this remains challenging under the new guidance and the Society may not meet these expectations going forward.
Realistically, the Manchester is unlikely to be able to increase its capital quality sufficiently to return to lending, But without a return to lending its long-term outlook is bleak. It desperately needs a capital injection. But from where will this come?

Issuing more core equity is a non-starter, because of the Manchester's mutual status and poor outlook. The best outcome would be a buy-out or takeover, perhaps - Co-Op Bank style - by a friendly hedge fund or two. Though the market for distressed mutuals is pretty thin, these days.

But if there is no possibility of rescue, then it will eventually become insolvent. Under new European banking rules, resolving it would mean imposing losses on shareholders and creditors. Those who bought the PPDS in 2013 may lose their entire investment, as may holders of the 1999 and 2005 PIBS. And in the worst scenario, large depositors may find themselves with a haircut.

The Manchester has joined the ranks of the living dead. Even if the Grant Thornton damages claim is successful, it will probably come too late to save it. Maybe the regulator will kill it off. It would be a kindness.
 
Related reading:

Manchester Building Society annual reports:
- 2015
- 2014
- 2013
- 2012

The FLS early warning system
Mortgages are dangerous beasts
Fighting for the soul of Britain's building societies - Coop News

Image from www.insidermedia.com.


Monday, 11 April 2016

Germany's negative-rates trap

Germany's Finance Minister Wolfgang Schaueble has long been critical of ECB monetary policy,. But now, as Reuters says, the gloves are off. In a speech at a prizegiving for an ordoliberal economics foundation last Friday, Dr. Schaeuble effectively demanded that the ECB raise interest rates.

The justification? Very low interest rates hurt Germany's savers, which are the bedrock of its economy.

There is a political dimension to this. Dr. Schaueble's party, the CDU, is losing popularity and desperate for pensioner votes. Dr. Schauble even went so far as to blame ECB monetary policy for the rise of the right-wing eurosceptic AfD:
"I said to Mario Draghi...be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy," Mr. Schäuble said.
This is outrageous. Dr. Schaueble is a politician, not a central banker. His attempt to influence the conduct of ECB monetary policy to gain domestic political advantage breaks both the spirit and the letter of Article 130 of the Lisbon Treaty:
When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body.
The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.
It seems that Dr. Schaueble no longer respects the Lisbon Treaty. Deutschland für Deutschland, and to hell with the rest. The cracks in the Eurozone are widening.

But leaving aside the political implications, is he right? Are ECB interest rates too low for Germany?

Representatives of German banks, pension funds and life insurers say they are too low. The Sparkassen association has long complained that very low interest rates threaten their meagre profitability, because they are unwilling to pass on zero or negative rates to retail customers. And pension funds and life insurers have promised income to their savers that they cannot deliver. Financial institutions are trapped, and savers are angry.

But in its October 2015 monthly report, the Deutsche Bundesbank cast doubt upon both the worries of financial institutions and the anger of savers. Firstly, financial institutions. It seems that German household saving preference is pretty inelastic to price:
...there is quite some evidence to suggest that real returns are not a major driver of the saving and investment behaviour of households in Germany. In actual fact, this behaviour has probably, in recent decades, been shaped chiefly by developments in (expected) disposable income, changes in the institutional framework (especially the tax and social security system), demographics, wealth levels and households’ preferences and (risk) attitudes. It appears unlikely that the – clearly volatile – real return(s) should be a dominant factor influencing saving and investment behaviour given that the latter has displayed constant patterns over time and been subject to only gradual changes.
So German households save firstly because they are (relatively) wealthy, secondly because they are ageing and thirdly because they are worried about the future. Real returns on savings are much less significant. Financial institutions may have promised savers the moon, but failing to deliver it is not going to stop people saving.

The Deutsche Bundesbank also points out that the returns to savers are not that low:
...the return on households’ financial assets – measured in real terms and taking into consideration all the major financial assets in the portfolio – is not as meagre as the low nominal interest rates on bank deposits would initially suggest. Alongside the currently low rate of inflation, this can be attributed in large part to the fact that households hold not only comparatively low-yielding bank deposits but also financial assets that generate strong returns. The total return since the outbreak of the financial and economic crisis may be down on average compared to pre-crisis levels, but since the early 1990s there have been repeated spells in which the real total portfolio return has been far lower still.
Indeed there have. This chart shows that real returns are currently around 2%, which is historically not bad at all:



This chart does however show that since 2011, the return on currency and deposits has been negative. So people who keep their savings in bank accounts are feeling the squeeze. And it seems that use of bank accounts is growing. This fascinating chart shows the change in German household investment behaviour over time:


Saving in "currency and transferable deposits" (physical cash and demand deposit accounts) has more than doubled since 2001, at the expense of more risky, higher-yielding investments. German households are accepting lower returns on savings in return for lower risk and greater liquidity - a clear sign of risk aversion. They are more concerned about the return OF their money than the returns ON it.

This is typical of an ageing society with a large middle class who cannot easily replace savings lost due to asset price falls. Germany is one of the fastest-ageing societies on the planet, and has one of the lowest dependency ratios, which does not bode well for the support of its elderly in the future.

The real return on a balanced portfolio being about 2% suggests that interest rates in Germany are not excessively low. Savers who are getting lower returns are paying the price of their own risk aversion. Though this doesn't stop them being angry. Understandably, they do not want to pay that price.

As we have already seen with Japan - which is even further along the ageing-society curve - the faster a society ages, the more risk-averse its population becomes and the more it tends to save. German households are unquestionably increasingly risk-averse. But they don't appear to be saving more. The German personal savings ratio has hovered at around 9% of GDP for a long time - and was even higher during the 1980s.

However, German households also have a horror of debt. The ratio of household debt to income has been falling for well over ten years:



This does of course to some extent reflect rising income among German middle-class households. But it also suggests that Germans are largely immune to wealth effects. Even with rising income and today's very low interest rates, they are reducing their household leverage, which is economically equivalent to yet more saving. Borrowing for consumption isn't something they want to do. They want to accumulate wealth.

Overall, the German household sector is a rising net lender. Guess what, so is the German corporate sector. And because both the household and corporate sectors are net lenders (i.e. running surpluses), and the German government is also trying to be a net lender (run a surplus), this adds up to FALLING domestic investment, since is not possible for a sector to be both a net lender and a net borrower. This chart from the IMF shows the widening gap between savings and investment:


(the chart only goes up to 2012, but the situation has not materially changed since then).

Now, saving = investment is an identity, so this gap must be closed somehow. This is the driver of the German current account surplus, currently 8% of GDP and rising. The inverse of the current account is the capital account. Germany's capital account is running a deficit equivalent to 8% of GDP. That means Germany is investing 8% of its GDP abroad, rather than at home. We should correctly view the German current account surplus as an inevitable consequence of an excess of saving over investment by all three domestic sectors - household, corporate and government. It has little do with wonderful German industrial production and everything to do with wonderful German thrift.

This is also where the ECB's low interest rates come from. Although the ECB looks across the whole Eurozone when setting monetary policy, Germany's economy is so dominant that conditions there inevitably have a very large influence. The excess of domestic saving over domestic investment puts downwards pressure on real interest rates in Germany, which inevitably flows through into central bank policy settings. This would still be the case even if Germany were not part of the Eurozone.

However, the other side of this is currency effects. Large and growing capital exports put UPWARDS pressure on the currency. Indeed the Eurozone's own capital deficit, which is itself partly due to Germany's capital deficit, is having exactly that effect: the Euro remains strong despite persistent attempts by the ECB to weaken it. But Germany's capital deficit does not respond to Euro strength, because Germany exports its capital mainly in Euros. So the ECB is fighting a battle on two fronts - externally, where it is trying to prevent the currency rising in response to Eurozone capital exports, and within the Eurozone, where it is forced to respond to the deflationary effects of German capital exports. This is a battle it cannot win.

The truth is that very low interest rates in Germany are not caused by ECB monetary policy. They are the result of a structural excess of saving over investment by German private AND public sectors. The prized "schwarze null" entrenches zero or negative interest rates. So if Schauble wants interest rates to rise, he should look to his own fiscal policy, not to the ECB.

To correct its capital account deficit, Germany needs to run a sizeable fiscal deficit, devoted principally to domestic investment but also to supporting the elderly (to improve household confidence and thus discourage excess saving). So what if this means breaking the Stability and Growth Pact. If Schauble can renounce the Lisbon Treaty over central bank independence, he can renounce the Maastricht Treaty over fiscal debt and deficits too. Bring it on.

Related reading:

A current account surplus is obviously a good thing, isn't it? - Notes On The Next Bust


Saturday, 9 April 2016

The illusion of value

I have been looking through my diary for the next couple of months. It is pretty crowded. Meetings, lectures, conferences, TV and radio appearances.....it is almost 7 days a week. It's nice to be busy, isn't it?

But as I look at this ridiculous schedule, I wonder why, if I am so busy, I am so broke. When I say "broke", I mean that I do not currently have enough money to pay my mortgage this month. I am hoping that those who owe me money for work I have already done (some of it dating back to January) will pay me in time. If they do not, I will once again be scrabbling around trying to borrow the money to pay my bills. I'm so tired of having to chase people to pay the money they owe me....

Looking further ahead, I only have enough paid work to cover my obligations for the next month or two. The summer is coming, and everyone goes on holiday then. Freelance writing - and teaching - dry up. So it looks very much as if I will once again be staring bankruptcy in the face by the end of August. I should be used to this by now, I suppose. It has happened every August for well over a decade, with the exception of 2014.

What was different about 2014? Well, things seemed to be looking up then. I was Associate Editor of Pieria, which gave me a small but steady income. I had lots of freelance writing. And I still had significant amounts of teaching. Financially, the tax year 2014-15 was the best year I have had since I left RBS in 2002.

But then it all went wrong. I resigned from Pieria in May 2015 after the commercial director sacked me from a project while I was out of the country, then wiped everything I had written in the previous month off the site without explanation. And inexplicably, shortly afterwards my freelance work all but dried up. By September I was facing default. Fortunately, some of my wonderful Twitter followers donated money so I could pay my bills. And since then, other freelance writing opportunities have turned up. But it is thin, very thin. And my teaching has declined too, not least because of the relentless squeeze on performing arts that the Government seems to think is the best way of diverting teenagers into the study of STEM subjects. My income in 2015-16 was less than half that of 2014-15, and it shows no sign of improving.

And yet, I am busy. Very busy. So why am I broke?

It is very simple. All of my speaking engagements and media appearances in the next two months are unpaid. Some of my writing commitments are unpaid, too - including, of course, this blog. And others are very poorly paid. I am working damned hard for very little return.

There seems to be a general expectation that I will give my time and my expertise for nothing, or next to nothing. I will give up entire weekends to speak at conferences for nothing. I will cancel my evening teaching to appear on TV shows for nothing. I will annoy my students by reshuffling all their lessons so I can do a lunchtime radio interview for nothing. I will devote time and energy to producing a quality piece of writing for nothing.

Admittedly, there is nothing new about this. As a professional singer, I found that people wanted to hear me sing but weren't so keen on paying for it. As a teacher, I found that people wanted me to teach their kids, but thought I should do so for love not money. Now, as a writer and speaker, I find that people want to hear what I have to say, provided it is free. I've changed what I do, but people's attitude to me is still the same. I am still not worth paying.

This is a terrible indictment of me. If people will not pay me, then they do not really value me. It does not matter whether what they want from me is singing, or teaching, or writing, or speaking. What am I worth to them? Nothing. Nothing at all.

And perhaps the fact that I have accepted so many unpaid commitments - and that finding it difficult to persuade people to pay me fairly has been a pattern for much of my life - also says something about my view of myself. How much do I value myself? Do I really believe in what I do?

I have hit a wall called "Pro Bono". Pro bono means "for good". But whose good? Not mine. And I doubt if it is all that good for others either. It is not good for people to think they can get something for nothing. We should expect to pay for quality. If we get into the habit of thinking everything is (or should be) free, we have no way of distinguishing the gems from the dross. Gold is fool's gold, and diamonds are paste.

So I have reluctantly reached a decision. I cannot continue to accept large amounts of unpaid work. I will honour existing pro bono commitments, but after that I will expect to be paid for speaking engagements, and for all writing assignments except for this blog. I will require a guest fee for all TV and radio appearances from now on.

And if the result of this is that I disappear from the airwaves and the blogosphere, so be it. It's been fun, but I can't live like this any more. For my own self-respect, I need to know whether what I am doing really adds value. If, faced with the prospect of having to pay me, people decide they would rather dispense with my services, I will know that the value I thought I delivered was nothing but an illusion. For in this world, value is measured in money. Flattery is pleasant, but it is not a measure of real value. If my work is of value, then I am worth paying.

So if the world does not value my writing, speaking, teaching or singing enough to pay me for it, I must find something that the world WILL pay me for. At present, I have no idea what. But of one thing I am certain. I can no longer live on the illusion of value.

Related reading:

The "something for nothing" society
The end of the road
I am a bank