Tuesday, 27 December 2011


This year, for the first time in my life, I was faced with the prospect of being alone on Christmas Day. I have no doubt it will not be the last time. My children will fly to new nests in far-away places, my friends and family will gradually leave this world or become too frail to travel.  Being alone, often for extended periods of time, is characteristic of elderly life. I look forward twenty years and realise that much of my future will be spent alone.

I choose my words carefully. I said "alone". I did not say "lonely". Being alone does not necessarily mean being lonely.

At Christmas we assume that anyone who is alone must of course be lonely. There are campaigns to persuade people to visit elderly neighbours and take them to jolly Christmas parties at special centres for the elderly. Personally I can't think of anything worse than spending three hours in a hall full of total strangers being patronised by well-meaning youngsters determined to ensure that I "have a good time". Or, for that matter, spending an hour in the company of a neighbour that I don't know, because she hasn't spoken to me the rest of the year, and with whom I have nothing in common.  I would be far lonelier in such company than I would be in my own home with music, books, a telephone and, above all, memories. And I would resent having to be grateful to such people for showing me the "kindness" of disturbing my aloneness.

Loneliness is the state of having no real relationships. Fake, transient episodes of "company" for the sake of "human contact" are no substitute for the real thing. For me, the relationships I have with authors through their words, with composers and performers through music and with my family and friends over the telephone or through my memories are more real than anything that can be created by strangers in a couple of hours. I suppose I have always been comfortable with my own company, and what works for me would not work for everyone. There are no doubt people for whom the prospect of being alone at Christmas is indeed terrible. But we should not assume that that applies to everyone.

Nor should we assume that because someone is in the company of family and friends that they are not lonely. The woman whose husband sits and reads the paper, or watches the television, or surfs the net while she prepares dinner.....who says not a word to her while they eat, then leaves her to the dishwashing while he returns to whatever he was doing before. She may be lonelier in the company of her husband than the elderly lady next door whose husband died ten years ago.  Or the family at war among themselves, whose conversation is only of trivial things, who substitute presents for love and who guard their feelings for fear of being hurt.  Or the people who are embarrassed to share anything about the pathetic reality of their lives so put on a good show to impress their "friends". Are these people not lonely? Are they not, in reality, perhaps lonelier than those who we assume must be lonely simply because they are alone?

But why is being alone at Christmas apparently so much more terrible than being lonely the rest of the year? Why do we put in the effort at Christmas to speak to neighbours that we otherwise ignore? Why do we send Christmas cards to family and friends that we don't bother to speak to from one year-end to the next? There is nothing in the Christmas story to justify such obsession with transient human contact and presents as symbolic restitution for the love and care that we withhold the rest of the time.

We have come to believe that Christmas is a time for being with family and friends, for parties and socialising. Shops sell party clothes and party food. Being alone seems terrible when everyone around you is apparently having the perfect party, spending time with the people they love, who love them. But is this really what is happening - or is this just the show we put on to hide the hollowness and unreality of our lives?

The Christian festival of Christmas celebrates God made man, come among us to die.  Among the presents that Jesus is given is myrrh, used for embalming corpses. And in our secular Christmas, too, there is death. More marriages end at Christmas than at any other time of year. More people get into serious financial difficulty at Christmas than at any other time of year.  More people commit suicide at Christmas than at any other time of year. It seems that in our expectation of the perfect party we substitute transient contact for real relationship, and when we fail to achieve our expectation the shallowness of our desire is exposed and we are left with nothing but despair.  At the heart of our parties and socialising is loneliness, emptiness and a desperate search for love.

In the end, this year I was not alone. My children decided to spend Christmas with me.  So I don't know if I would have been lonely. No doubt I will find that out at some time in the future. We are all lonely at some time in our lives. And we can be just as lonely among people as we can when alone. "Human contact" alone is not enough. It is the quality of our relationships that matters - and that is born not from trivial conversation on one day in the year, but from care and concern for each other day in, day out throughout the year. When we know we are really loved by the people closest to us, we can be alone at Christmas without being lonely.

There are indeed many lonely people at Christmas. But many of them are not alone.  Do you notice them?

Wednesday, 21 December 2011

The ICB's fig leaf

It was announced on Monday 19th December that the Independent Commission on Banking's (ICB) proposals for reform of the UK banking system would be accepted in full. Or not quite, actually - HSBC managed to wring a concession from the Government that it would not have to meet higher capital requirements for business it conducts overseas.  As HSBC's overseas business dwarfs its UK business this is important for them, but the quid pro quo must surely be that problems in the overseas businesses cannot be bailed out by its UK operations. The ringfencing proposal should help to achieve this, although it remains to be seen how well this would hold in practice.

Inevitably, there have been criticisms of both the proposals themselves and the Government's handling of them.  Tony Greenham of the New Economics Foundation (NEF) wrote this post describing why he believes the proposals are ineffectual. I think the Vickers reforms are indeed ineffectual, but not for the reasons Greenham gives.

These are my concerns about the proposals.

1) Ring-fencing and full legal separation

Ring fencing will only apply to three banks – HSBC, Barclays and RBS. And the Government has also announced proposals to reduce the size of RBS’s investment banking significantly and force it to concentrate on retail and corporate lending as its major business activities. So that leaves only two whose investment banking operations might conceivably present a serious threat to their retail arms.

I have previously criticised the ringfencing proposal as failing to address the risks in retail banking, which were the main cause of UK bank failure in the 2008 failure crisis. However, I accept that ringfencing would make universal banks easier to resolve in the event of a collapse.  And as I noted above, it may prevent HSBC and Barclays from using their UK retail bank to support overseas operations.   

Full separation would not provide greater protection than a ring fence unless steps were also taken to prevent retail and investment banks from trading with each other. Northern Rock was heavily involved in “risky” securitization with the assistance of a tame investment bank. It was fully separated from that investment bank.

This whole proposal is a cave-in to the demands of politicians for a headline-grabbing solution. The ICB was primed to look at the options for separation, and the media and political hype around the idea of a "UK Glass-Steagall" meant that it was difficult for the ICB to propose "no separation" as a serious alternative. But the Glass-Steagall Act in the US applied to a banking environment that is very different from the UK's. We do not have their extensive investment banking sector, we do not routinely securitise retail loans and we have no equivalent of the American GSE. There is no way that American-style regulation is appropriate for UK banking.  It seems yet again we have looked across the pond for an instant solution to our problems, rather than doing the painful job of analysing the faults in our own system and coming up with our own solutions.

2) Lack of competition in UK banking 

The Lloyds/HBOS merger should have been unwound. The ICB report concluded that it was a mistake, but it chose to protect the Brown government’s reputation instead of doing the right thing by the British public. Frankly I thought this decision – explicitly stated in the report – was disgraceful. The merged Lloyds/HBOS business is the largest bank in the UK and dominates the UK mortgage market. Forced sale of branches is no substitute for breaking it up.

Nor did the ICB consider the future of RBS and Northern Rock, the other two nationalised banks. It did not look at the possibility of remutualising Northern Rock or breaking up RBS (demerging NatWest). Both of these would have given clear indication to the UK banking sector that further concentration is not acceptable. Because the ICB failed to address this issue, Northern Rock has now been sold to an existing player in UK banking (though admittedly one that did not previously have a high street presence), and RBS remains a publicly-owned megalith with no clear business direction.

This failure is bad enough.  But the ICB was mandated to consider ways of improving competition in banking. It has actually recommended practically nothing that makes any significant difference. There are no suggestions for ways of lowering barriers to entry to new entrants into the banking marketplace, apart from a minor tweak that might make it easier for  customers to switch accounts. There is no consideration of appropriate regulation of alternatives to traditional banking or ways of relaxing the stranglehold that clearing banks have on payments. The banking sector desperately needs more competition. These proposals do little to encourage it.

3) Higher capital requirements 

The additional capital requirements will at the present time be very difficult to raise without asset sales and serious cuts in lending activities, which could potentially have a catastrophic effect on a very fragile economy.

To my mind the ICB's proposals rely too much on simple increases in amount of capital and do not address the far more difficult question of how capital is allocated. For that they rely on Basel – and that I think is partly the reason for the delayed implementation to 2019, which is also the Basel III final implementation date. Capital allocation in the financial crisis turned out to be utterly deficient, because the banks were allowed to use their own models to calculate risk weightings for more complex instruments, and because some classes of asset turned out to be much riskier than their weightings would suggest. Basel III still relies on bank-calculated risk weightings and therefore does not really address this matter adequately. Increasing the capital amount without vastly improving its allocation is an expensive and inefficient way of reducing risk.

I wish NEF writers - and other critics of the Western banking system - could get out of their heads the idea that the size of a bank’s asset base is an indicator of its risk. It is not. We should pay far more attention to the quality of its assets – including getting some proper regulatory supervision of risk weighting calculations – and the size of the gap between lending and borrowing maturity profiles. Unfortunately the ICB  ignores these completely and simply throws money at the problem.

4) Regulation and supervision of banking activities

The ICB does not address the appalling failure of regulation and supervision by the Fiinancial Services Authority (FSA). It makes no recommendations for a more rigorous regulatory and supervisory regime that is less open to errors, conflicts of interest and corruption.

I have little confidence in the new regulatory body replacing the FSA, since it is under the aegis of the Bank of England (which notably failed to supervise BCCI and Barings adequately), and seems to be made up of many of the same players who failed so spectacularly to regulate or supervise HBOS, RBS and Northern Rock. Giving people a second chance to get it right after making errors of such magnitude seems like crass stupidity to me.

5) Risks in retail lending

No curbs are proposed on retail lending activities, despite the fact that it was excessively risky retail lending that brought down three of the four UK banks that failed in 2008. Instead, the ICB's report preserves the commonly-held – and totally wrong – belief that the financial crisis in the UK was caused by investment banks “gambling” with retail depositors’ funds. It wasn’t – it was caused by retail banks speculating on property. Yes, the worldwide crisis was focused more on investment banks, tho even there the ultimate cause was the excessive risk and fraud in American mortgage origination and securitization. But the UK crisis was definitely one of RETAIL banks.

In short, these proposals are long on "shock and awe" and short on anything that will make a real difference to the way in which banking is conducted in the UK. Banking is boring, and proposals to make it safer even more so. The nitty-gritty detail of loan-to-valuee caps, loan to deposit ratios and the like don't interest the media or politicians - which is the audience that the ICB plays to. So we may now go ahead with a half-baked separation of investment and retail banking, which will only really affect two banks, and higher capital requirements, which we dare not implement until the means are in place to calculate the allocation adequately and the economy is strong enough to take the increased cost and tighter criteria for lending that will result from them.  We won't, it seems, make the deep detailed adjustments that we really need. Or if we do make them, it will be despite, not because of, the work of the ICB.

The ICB's proposals are nothing but a fig leaf.

Monday, 12 December 2011

Nightfall in Euroland

On Friday 9th December, the leaders of the 27 European Union members held a summit to try to resolve the Euro crisis. In the few days before that summit meeting, Chancellor Merkel of Germany and President Sarkozy of France produced a proposal for closer fiscal union among the 17 Eurozone members.  Key elements of the proposal are:
  • member states to balance their budgets and keep debt and deficits in line with existing provisions in the Stability and Growth pact.  
  • there would be supervision from Brussels of member states' budgets and debt issuance plans, and sanctions such as fines for those who did not abide by the rules
  • the European Stability Mechanism - a larger and better bailout fund, but still mainly dependent for financing on existing member states, although the proposal does invite external contributions - would be introduced in July 2012, running alongside the existing EFSF instead of replacing it as previously planned. 
  • there would be no further haircuts for private sector bondholders
  • funding would be provided to the IMF by member state central banks - not of course specifically to fund Eurozone bailouts, since that would breach the IMF's terms of business, but of course the IMF would be bound to help out, wouldn't they?
,It was believed that this proposal would require treaty change, and therefore all 27 members of the EU would have to agree to it.

The British prime minister, David Cameron, attempted to force through changes to the proposed new deal for closer union. The full text of his changes is here, but they amount to imposing a UK veto in areas pertaining to financial markets and regulation.  Existing EU practice allows decision-making in these areas to be done by Qualified Majority Voting, which would in effect mean that a tighter, more unified Eurozone could consistently out-vote the UK and therefore impose on the UK's financial sector  regulation and taxation against the will of the UK government. It isn't correct to suggest, as some commentators have, that Cameron was trying to evade tighter regulation of the financial sector, or prevent imposition of a Financial Transactions Tax (FTT). In fact paragraph 2 of the proposed changes would allow the UK to impose higher capital requirements than the EU requires and unilaterally implement the ring-fence recommended by the Vickers committee. And the FTT is not mentioned in the proposals at all - and it would require all 27 nations to agree to it anyway. No, this was simply an attempt to preserve the UK's authority over its financial sector, which dominates its economy.

When Merkel and Sarkozy made it clear that they would not agree to Cameron's changes, he refused to agree to their proposal. Unfortunately this resulted in the 17 Eurozone countries, plus 6 non-Euro countries, deciding to go it alone on tighter fiscal union despite the UK's opposition. It is unclear what the effect of being excluded from this Euroclub would be for the UK. The European press have almost universally consigned the UK to the outer darkness, and the UK press have generally been pretty critical of Cameron, although some right-wing writers have been more positive. Some American writers have been negative too: Reuters  concluded that Cameron's action would be disastrous for the UK, which would end up being isolated.

But Felix Salmon (also writing for Reuters) took a completely different view. And for me, Salmon gets it right. You see, Cameron's action is completely irrelevant. Who cares whether the UK is in or out of a fiscal union that is born out of a desire to maintain a fundamentally flawed currency union, and is itself fundamentally flawed?  It isn't going to happen. As Walter Munchau points out in the FT (paywall), it is unclear whether a "treaty within a treaty" is legally possible. And it doesn't address the real problems in the Eurozone anyway:
  • the underlying balance of payments problem is completely ignored - deficit countries would have to implement painful austerity measures without corresponding easing from surplus countries:
  • there are still no sensible proposals for recapitalising national banks: 
  • the ECB would still be unable officially to support countries in trouble through unlimited debt purchases or capping yields on their bonds
  • the bailout funds (two of them now) would remain underfunded and unable to tap the ECB for funds since neither would have a banking licence: 
  • issuance of pooled Eurozone debt (Euro bonds), and eventual replacement of national debt, is still off the table because of Germany's opposition to the whole idea of fiscal transfers to weaker states.
What is proposed is not a fiscal union in any meaningful sense. Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union, and overall budget-setting and taxation for common expenditures. No such facility is proposed for the Eurozone - and indeed the governance proposal, which envisages the Eurozone remaining a coalition of national states, would make this impossible.  What is proposed amounts to the same old mantra of "fiscal discipline", based upon the Stability and Growth Pact that was flouted from the start, but this time brutally enforced with painful sanctions and accompanied by dilution of democracy in the weaker nation states. Germany can have democracy, it seems; but Greece, Italy, Spain and Portugal cannot.  And as I've explained in a previous post, austerity measures in deficit countries without corresponding fiscal expansion in surplus countries will eventually drive the whole area - including the surplus countries - into recession. 

But an even more immediate problem is the weakness of the European banks and the ongoing flight of capital from the European banking system. Liquidity for European banks is becoming a real problem, because banks don't trust each other enough to lend funds: and many banks are poorly capitalized and potentially insolvent in the event of sovereign debt writedown. And investors are removing their funds at a rate of knots - selling their holdings of sovereign debt from deficit countries, selling their holdings of bank shares and debt, and even (in Greece) removing funds from bank deposit accounts. Capital is leaving the Eurozone: the Euro is falling and safe haven investments such as US Treasuries are trading at negative interest rates.  The financial sector is calling for a "big bazooka" to backstop sovereign debt and stem the capital flight. It didn't get one from this summit, so the European financial system will continue to haemorrhage money. Eventually it will bleed to death, and there will be massive banking failure that will make the 2008 crisis look like a minor blip.

In fact the summit was a massive failure. It didn't address the real problems in the Eurozone, and therefore it solved nothing. The Euro is still doomed, and the countries of the EU - including the UK - are still facing economic disaster because of it. Salmon's description of the summit as "disastrous" is accurate and damning.

Yes, the UK may be eclipsed in Europe. But over the Eurozone, darkness is falling.