Tuesday, 28 February 2017

Sir Philip Green and the Example He Sets: What ‘Justice’ Really Looks Like

This very short post is based on the news today that Sir Philip Green has, according to the general sentiment being displayed, delivered on his pledge to ‘sort’ the pensions crisis that had developed in the wake of the British Home Stores (BHS) collapse. In putting £363 million into a Special Purpose Vehicle, thereby allowing 19,000 employees of the failed high street giant to be put in a position, in relation to their pension, that they would have been in had BHS not collapsed, which is around 10-15% higher than they would have received if the pension-holders would have been entered into the Pension Protection Fund. Those with pensions of less than £18,000, around 9,000 of the 19,000, will be able to opt to take a lump sum and, if they choose to do so, Sir Philip Green may see up to £15 million returned to his pockets.

The general sentiment of the business press today goes along the line of the following: ‘Philip Green’s settlement… is a triumph for the regulator and for public pressure’; and Frank Field’s assessment of the settlement as an ‘important milestone in gaining the justice for BHS Pensioners’. For the pension-holders of BHS it is undoubtedly not negative news, but it is not a ‘victory’. The Guardian quotes a former worker of BHS who opined that the settlement was ‘the least Green could do’, as rather than be employed and be contributing to his retirement, the former employee is now unemployed and in receipt of state benefits. It is worth noting that the original deficit for the pension scheme was £571 million, which is over £200 million more than what was eventually paid and led the pensions regulator to reassess their own position and state that to value the deficit at £571 million was inappropriate on their behalf, because the figure takes into account the fact that the pension scheme would have had to pay an insurance firm to guarantee its liabilities.


So, whilst it is positive news that the pension holders who, through no fault of their own, have had to live with the stress of not having their future guaranteed for over a year, this saga paints a much more worrying issue when we widen our focus. Firstly, as far as Sir Green is concerned, the legal investigation into him and his conduct is now over. Also, as far as the saga itself, it demonstrated the absolute contempt that business elites have for the public, and their representatives, with Green slamming MPs for ‘excessive staring’ and conducting a particularly aggressive campaign against the questioning from democratically-elected representatives. If we look at the punishment for this whole ordeal, from depleting the resources of a British High Street fixture and then selling it to a bankrupt race-car driver for £1, to dragging the issue of recapitalising the pension pot that he himself had drained, it is quite remarkable what has been deemed to be appropriate. For this incredibly poor conduct, which is in breach of a number of sections of the Companies Act 2006, it was deemed that threatening to strip Green of his Knighthood be deterrent enough. In threatening legal action, and then settling for the £363 million today, the Government and regulators have demonstrated that financial white-collar crime is not ‘crime’ as we understand it. Putting this all into perspective, the Green family profited over £580 million from BHS, and have had to repay £363 million – £217 million is not a terrible ‘punishment’ to receive for ending 11,000 jobs; the retail tycoon’s £100 million Yacht and £46 million private jet can therefore be seen as trophies for profiting at the expense of the public. As discussed in a previous post, there was a feeling that there was a movement against this sort of venal abuse, a movement which may culminate in real and impactful changes into how a company may operate – the sentiment delivered today, that the settlement can be considered a ‘victory’, can almost stop those dreams in their tracks. Really, the sentiment in the popular quote from Samuel Johnson, that ‘the gallows doth wonderfully concentrate the mind’, in terms of real punishment via lengthy custodial sentences, are apt for people like Sir Philip Green, but in the world we live, just threatening to strip someone of their ceremonial knighthood is deemed punishment enough – the actual understanding of that difference is truly a blight on our ‘advanced’ society.

Monday, 27 February 2017

The International Non-Profit Credit Rating Agency: An Attempt to Inject Some Responsibility


This short post is concerned with the attempt by a non-profit organisation to inject some much needed responsibility and care into the credit rating industry. Based on a published article that is available here in its final form in The Company Lawyer, and here in its pre-published and different form, this post will look at the International Non-Profit Credit Rating Agency (hereafter INCRA) and its aims, as well as some of its shortfalls. Ultimately, it is concluded that whilst the endeavour is incredibly worthy and should be praised, the environment is skewed against newcomers to the rating marketplace, and especially those trying to reduce the impact of the venal 'Big Two' – Moody’s, and Standard & Poor’s.

INCRA was initially developed by the Bertelsmann Foundation in 2011, organically as a result of its research into the quality of nation states’ quality of governance via its Transformation Index. As such, the newly-imagined rating agency set its sights on analysing the creditworthiness of sovereign states, but by different methods to those utilised by the established rating agencies. We have already seen in Financial Regulation Matters that the issue of creditworthiness in the sovereign debt market is of pressing concern, with yesterday’s post discussing the potential disaster that may be looming if one of the constituent ‘dominoes’ falls i.e. Greece, Spain, or any other E.U. country that is financially on the brink. The fundamental call of INCRA is that a more comprehensive set of indicators and tools for research are required, so that the long-term socioeconomic and political aspects are further embedded into the rating process, far more than they are now. This difference is repeated throughout the fabric of the agency, particularly in terms of how it hopes to be financed; rather than submitting to the conflict-of-interest that is at the heart of the current failings of the ratings industry – the issuer-pays conflict – INCRA aims to be funded by a number of concerned but ultimately independent bodies, like the IMF and the G20.

More detail can be found on INCRA in the article and online. The issues facing the prospective agency however are great. The issue of funding is a major hurdle, because the prospective $400 million required is a) unlikely to be garnered from nation states who have their aims to influence the process, as will be discussed in a future post based upon a recently published article by this author, available in a pre-published and different form here and in its final form here, and b) the prevalence of the Big Three rating agencies mean that supplying an alternative is not likely to succeed. The article goes onto to suggest that the agency needs to merge with another endeavour that is concerned with rating in the correct way, the Credit Research Initiative, and that they should take advantage of a gap in the regulations so that the imagined merger would serve as a ‘check’ on the actions of the Big Three, free from any perceived conflicts of interest.


Ultimately, the issue is clear to see – the Big Two rating agencies in particular are engrained into the fabric of the economy. According to a work in progress by this author, available here, the credit rating agencies have been jostling for position throughout their history and the current era represents their most successful yet. As such, worthwhile and humanistic-based endeavours rarely get off the ground because of the might and the interwoven nature of the established order. However, rather than be disheartened, it is important that such endeavours are supported, amended as appropriate to meet the task ahead of them, and are ultimately put in a position to question the established order and provide clear-cut evidence of its failures – clear-cut evidence of its failures was abundant after the Financial Crisis, but unfortunately time washed away the disdain that should be directed towards the agencies; these endeavours can help return the spotlight to these agencies that were, and may be again at the heart of a financial crisis.

Sunday, 26 February 2017

The Ever-Increasing Problem of Rising Sovereign Debt: A Truly Systemic Problem

Speaking yesterday after releasing a global-macro outlook for 2017-18, the Vice President of the Credit Rating Agency Moody’s, Madhavi Bokil, announced that the Agency expects global activity to maintain its upward curve. However, there were a number of caveats that were attached to the announcement and one of them in particular will be the focus of this short post. Citing the shifts in economic policy emanating from the Trump administration in the U.S., which it suggests would affect the global economy via shifts in its views to trade and interest rates, and the risks associated with a deceleration in China’s economic expansion, Bokil is confident that ‘destabilising economic and policy dislocations will be minimal’ in the next few years. However, there is another caveat of Moody’s’ which is of interest when understood with a recent development within Europe.

Bokil continued by discussing that the political and fragmentation risks in the E.U. and the European area also pose a concern for global economic stability, and this is undoubtedly true. Yet, what this fragmentation-based risk may be is not certain, simply because of the environment within the E.U. at the moment. Fragmentation may come in the form of political breakdown, something which has been confirmed by the U.K.’s decision to leave the E.U., and the increasing rise of populist and nationalistic political parties on the continent, particularly in France with the Front National’s Marine Le Pen and in the Netherlands with the Party for Freedom’s Geert Wilders. However, this social breakdown is being predicated upon an economic breakdown which is the focus of this piece. Moody’s suggests that the general sentiment will be a maintenance of the upturn in global productivity, but what does this actually mean? Whilst productivity increases, there is also the matter of global debt, and that is increasing to astonishing levels. Standard & Poor’s, Moody’s great credit rating rival, announced on Friday that worldwide sovereign debt is set to reach a record high of $44 trillion, with the U.S. at $2.2 trillion and Japan at $1.8 trillion representing the most indebted countries. Also, the U.K.’s reduction in credit rating since the decision to leave the E.U. means that now the percentage of sovereign debt that has a ‘triple-A’ rating is at an all-time low of 7%, which suggests that there is to be an increase in debt at the same time as creditworthiness is evaporating. This issue is, arguably, the real threat facing global safety.

This issue of sovereign debt being a threat to stability is currently plaguing Europe. Speaking over the weekend, Germany’s deputy finance Minister, Jens Spahn, told reporters that Greece must not be allowed to be relieved of its debt obligations to creditors, mainly because of the precedent it would set to other E.U. nations that are teetering on the edge. Speaking with regards to the International Monetary Fund’s conclusion that Greece will need further debt relief, Spahn is mindful of two important aspects: firstly, other E.U. nations who are facing financial difficulties and who have adopted sweeping and deep-cutting austerity measures will potentially revolt if Greece is given relief on its debt whilst they are not; and secondly, he is acutely aware that German citizens, who account for the highest contribution into the European Stability Mechanism with 27% are, as a majority, against granting relief to Greece and are actually in favour of Greece leaving the Eurozone at a ratio of three in every ten German citizens. This situation is unlikely to be resolved at any point in the near future, which is an issue because the sentiment is that sovereign debt is continuing to increase regardless of such volatility in the marketplace.


The overarching issue is one of irresponsible growth. There are calls to increase spending in the U.S., despite record levels of debt, which would suggest there may be ‘Government Shut-Downs’ very soon in the U.S., whilst in Europe the fear that is gripping the bloc, in terms of doing everything to remain united, is potentially sowing the seeds of its demise; internal fractions are growing irrepressibly, which is arguably the main threat to global stability. The era of austerity in the E.U. is causing fractions that are causing shock-waves across the rest of the bloc, and how it deals with Greece will have an effect upon how the bloc develops. Unfortunately, there is no way in which this ever-increasing pressure will result in anything other than a massive eruption. The global marketplace, as intimated by Moody’s, is continuing to grow but that growth is based on a particularly fragile foundation – it is this arrangement which suggests that the positive outlooks that are coming from professional onlookers are based on a belief that this pressure will not erupt but, after the incredible year of 2016, it is potentially the case that an eruption of this pressure is likely and could result in catastrophe. The fragility of the E.U., when analysed in comparison to the newly-protectionist mantra of the United States, is reminiscent of an era that is etched into the human consciousness, as discussed in a previous post. It is hoped that this scar is not repeated by the culmination of these events.

Saturday, 25 February 2017

Peugeot and the Purchasing of Opel-Vauxhall: The Potential Systemic Effect of Expansion

Less than 2 weeks ago it was announced that the French group PSA, owners of popular car firms Peugeot and Citroën, were in talks with America’s General Motors over the sale of its loss-making European business Opel (whose U.K. arm is branded as Vauxhall). In this post, the focus will not be on the potential issue regarding the protection of workers after a takeover, something which has been dominant in the British press, but rather on the potential systemic effects that may result from the further acceleration of PSA’s growth. Whilst the issue regarding the safeguarding of employees' positions and, crucially, their pensions is of the utmost importance, the recent news is that the jobs and the pension fund (albeit currently operating at a deficit of £840 million) will be safeguarded until 2021, which in the current turbulent climate is relatively secure unfortunately. So, for this post, the focus will be on a potential issue that is currently developing, and will arguably be amplified, if PSA increase their market share to become Europe’s second-largest car maker.

The issue referred to above is that of the increase in auto-backed securitisation. Using the same process which saw millions of residential mortgages packaged together and sold to investors before the Financial Crisis, the financial arena is now witnessing the relative explosion of automobile-backed securitisation. Unfortunately however, in the same manner as the subprime crisis, loans taken out on cars are increasing whilst delinquencies on those loans are increasing also. In the U.S. alone in 2016, the year ended with just under $1.2 trillion left outstanding of auto-debt, which sits alongside a record rate of delinquency, measured at $23.27 billion. Now, there is a point to be made here off the back of these numbers. It is clear that the level of failures on these loans pales in comparison to the total size of the market, and one onlooker suggests that any fears of a financial crisis stemming from this arena are not to be considered because, simply, the financial institutions (banks) that were at the centre of the Residential Mortgage-backed Securities (RMBS)-induced crisis this time have much more capital to protect against losses. This point, that the environment has changed with regards to bank capitalisation and that the size of the losses cannot cause a systemic crash is a reasoned one, but it misses larger points.

Firstly, let us think about the environment which the commentator suggests is not fertile for a crash. Currently, the U.S. Government is looking at ways in which it can alter the regulatory landscape because, as Gary Cohn, the Director of the White House National Economic Council recently mentioned, American banks are the most highly regulated and overburdened banks there are. This, in conjunction with a change in the culture towards Wall Street, as discussed in a previous post, is yet another indication that the levels of capitalisation required at large banking institutions is set to be reduced, rather than increased. Secondly, the increase in car finance availability is seeing the return of predatory practices which accompanied the rise in mortgage availability, with the U.S. Department of Justice currently investigating the industry for fraud. So, there are cultural changes to the environment currently taking place in the U.S., and now, in Europe, the same thing is happening, with PSA’s purchasing of Opel/Vauxhall only adding to that transformation.

It was reported last year that the European Banking Authority is pushing for the lowering of capital charges for the securitisation industry in Europe, because it is believed in Brussels that securitisation is an ‘important means of encouraging capital markets-driven growth across the European economy’. This belief would have been solidified and made all the more important after the U.K.’s decision to leave the economic bloc, with E.U. leaders currently working together to increase prosperity in advance of the U.K’s exit. In advance of this increased belief in the wonders of securitisation, the PSA group had already accelerated their use of the financial tool via subsidiaries across Europe, which suggests that the combination of an increased fervour for securitised products will go hand-in-hand with PSA’s purchase of Opel/Vauxhall, which although represents the purchase of a company which has reported losses for over a decade still sells over 1 million new cars a year – the option to securitise heavily therefore comes with the prospective purchase.


Ultimately, the view that auto loans will not cause the next financial crisis is potentially accurate, but that view discounts the issue of sentiment, culture, and momentum. The Western degeneration of financial supervisory standards which is, potentially, just around the corner with the U.K.’s exit from the E.U. represents a fertile ground for relative success in the securitisation field. In the U.S., President Trump is reportedly developing his personally-induced ‘bull-market’, which is in direct response to his calls to help big business and cut regulation. The two sets of development play into a larger narrative of having progressed away from the Financial Crisis and its ills, preferably towards an era whereby the system has been insulated from the effects of the next bubble bursting. This narrative, when combined with any success in the financial realm i.e. auto securitisation, will result in the narrative perpetually developing itself until the obvious takes place and a bubble is created. The issue for this post, however, is that the time between the Financial Crisis and the development of this current bubble is far too short – the reduction of standards that were developed to protect us from a crash only ten years ago is a worrying development, and furthermore, there seems to be an increase in the amnesia that is a crucial ingredient in any financial disaster. So whilst it is correct to just focus on the effects of one small element and make judgement, it is incorrect to stop there – despite the nationalistic rhetoric currently dominating the West, there can be no doubt that this world is a connected world, and we must think larger if we are to foresee and protect against future devastations.

Friday, 24 February 2017

Steve Bannon’s ‘Economic Nationalism’: Far From Original, But a Common Antecedent

In a number of media outlets across the world, the noises coming out of the ‘Conservative Political Action Conference’ today are receiving more attention than usual, and this is simply because of the rise of Donald Trump and, perhaps even more so, the rise of Steve Bannon. The former Breitbart Editor’s influence upon the new U.S. administration has garnered more column inches than almost anything else, particularly due to his supposed influence on Donald Trump’s so-called ‘Muslim Ban’, with Bannon making it onto the front of Time Magazine accompanied with the title ‘the Great Manipulator’. However, for this very short post, the focus will be on a statement made by Bannon during today’s proceedings in the CPAC, rather than the wider political issues stemming from the new administration – a meaningful analysis is far beyond the scope of this post.

During the proceedings today, Bannon affirmed that the Trump Administration would deliver ‘an economic nationalist agenda’. This concept, whilst derided by certain media outlets as an imagined concept of Bannon’s mind, is quite the opposite, and is particularly easy to understand. As Bannon himself has intimated, an economic nationalist agenda is defined by its anti-globalisation ethos, and aims to counter the ‘governing creed which has put the economic interests of multinational firms and a wealthy elite above those of ordinary working class Americans’. This, in purely simple terms, is a damning and arguably accurate assessment of Globalisation’s effect upon the population, with previous posts discussing the increase in mortality and general deprivation since the Financial Crisis, engineered by financial elites at the cost of society. However, whilst the sentiment of Bannon can be readily disregarding owing to his other views regarding apocalyptic battles between faiths, and whatever other anti-humanist sentiment he expresses (not to mention his past amongst those financial elites), the promotion of ‘economic nationalism’ – founded upon the negative reaction to the Financial Crisis – will no doubt carry weight in this volatile era.

However, this idea of promoting ‘economic nationalism’ is certainly not original, and is usually the precursor to events that irrefutably change the course of human history. The issue is that economic nationalism is usually a response to a globalised, or at least far-flung financial crisis, which then creates tribalism and protectionism – the mentality that this breeds creates the seeds for protectionism in the form of aggressiveness. For example, the Panic of 1907 ushered in a protectionist and inward-looking response as a response to economic-based downturns, as seen with Theodore Roosevelt’s ‘Square Deal’ policies which had a focus upon ‘regulating the economy so that no sector – business, [labour], or consumers – would have an unfair advantage’. This protectionist sentiment then manifested itself by way of a hesitancy to commit to the First World War, with the U.S. being in position to make a telling contribution right at the end of the War in 1918. The same pattern can be seen before World War II, with the United States responding to an economic downturn (the Wall St. Crash and subsequent Great Depression) by ushering in an era of nationalist-based policies in the form of Franklin Roosevelt’s ‘New Deal’ agenda. Shortly thereafter, the same pattern of tribalism and protectionism inspiring aggressiveness culminated in the Second World War, with the U.S.’s hesitancy being witnessed again in the same manner – solely due to its incorporation of an inward-looking sentiment.


These aspects are discussed above not to denigrate the United States, far from it, but to make it clear that the U.S. has a responsibility to think twice before looking inward. The reason for this is simple; the transition from Global Superpower to protectionist and inward-looking observer is rarely without consequence, and usually to the widespread detriment of the global society. Americans, like any other nation, have the right to decide their own economic fate, but the importance of the United States’ economic decisions have wide-reaching consequences that often envelop much more than the economic realm. Rather than showing our disgust at the venal nature of the financial elite by turning ourselves away from the world, it is important that we instead develop a culture of severely punishing those who attack society in such a disrespectful and unforgivable manner. Unfortunately, Bannon’s words today demonstrate a double-assault – an approach which turns its back on the world that the country helped to shape, and the certified protection of the financial elite. Rather than listening to Bannon’s words regarding the ills of the ‘governing creed’, we must take notice of the actions of the administration, and more precisely their positioning of venal and centrally-connected financial elites at the heart of the administration, as discussed in a previous post. Steve Bannon is not calling for a revolutionary change of thinking, the like of which a lot of media outlets and his supporters are quick to discuss, but in actual fact is calling for the preservation of a familiar pattern in modern human history. The effects of this pattern have been felt before by humankind, and humankind is braced to see how this next phase of the same pattern concludes.

Thursday, 23 February 2017

Article Preview: ‘Credit Rating Agency Regulation in the UK If and When Article 50 is Invoked: Round Holes for a Square Peg?’

This short post previews an article that this author has had accepted recently by the European Business Law Review, scheduled for release in 2018. As the issue has just been raised in the financial press, it is worth going over the central thesis of the article and discussing some of its applicability to a forthcoming issue with regards to the regulation of credit rating agencies in the U.K. after it secedes from the E.U.

The article develops on the basis that the U.K. will trigger Article 50 and secede from the E.U., and that the terms will be such that the often-stated notion of a ‘hard-Brexit’ comes to fruition – in such a case, the U.K. will need to directly regulate the rating industry for the first time, because up until now the European Securities and Markets Authority (ESMA), i.e. the European financial regulator, has been tasked with overseeing the regulation of the industry, with the U.K. having to designate a ‘competent authority’ to act as the regional supervisor of the industry within its jurisdiction. The U.K. has so far designated the Financial Conduct Authority (FCA) as the competent authority, but this can be seen as a natural progression from the now-defunct Financial Services Authority’s designation of that role beforehand. The question the article asks is whether the FCA is the correct organisation to take on the supervision of the rating industry full-time after Brexit, if needs be (a so-called ‘soft-Brexit’ may still be negotiated), or whether there are other agencies within the U.K.’s regulatory framework that would be better suited.

The article goes on to examine the strengths and weaknesses of the other major components of the British regulatory framework, namely the Prudential Regulation Authority (PRA), and the Financial Reporting Council (FRC), as both have expertise that may be useful in designing the new framework to be built around the agencies. The PRA has a number of positive elements in this regard, but the ‘macro’ nature of its mandate mean that it may have difficulties in monitoring an industry such as the rating industry with the commitment and expertise it requires. The FRC on the other hand have direct experience of minutely monitoring an industry similar to the rating industry, the accounting industry (similar by way of its usage, and oligopolistic structure). However, the FRC’s track-record is not the best when it comes to remaining impartial in relation to the industry it is regulating, and is committed to a joint-effort with the industry, which the article suggests would be catastrophic with the ratings industry, given its extraordinary venal nature. Ultimately, the FCA is a good option for the U.K. Government, but it still has a number of problems which will only be exaggerated if it were to take sole charge of regulating an industry like the credit rating industry.

The article concludes by looking at the notion of a specialised ‘office’, which has been discussed in a previous post in Financial Regulation Matters. Ultimately, the issue remains that there is a potential of the need to regulate an incredibly venal industry in a time were the U.K. will be looking to retain its status as a financial power – it is hard to believe that the U.K. Government will see increasing regulations as a way to maintain that position in a world where it is without the economic support provided by being part of an economic bloc. President Trump, just days into office, began scything away at financial regulations, rightly or wrongly, and this is demonstrable of the new sentiment to have enveloped western Governments – it is starting to be seen as normal that we should once again fall at the feet of big business and hope that it does not attack us once more; the often-attributed statement of Albert Einstein seems particularly apt here:


            Insanity: doing the same thing over and over again and expecting different results.

Barclays’ Financial Results: The Use of Terminology to Create Distance

Continuing the coverage of the U.K.’s largest banking institutions revealing their financial positions, which has included RBS, HSBC, and Lloyds so far, this short post will use the financial report from Barclays, which was released today, to make a point about a theme that is developing amongst the most important banks around the world. During a report on the release of the figures, Barclays’ Chairman, John McFarlane, stated that although the results were very good for the bank, it still faced challenges because ‘a number of potentially material legacy conduct matters need to be resolved at acceptable cost’, by which he is referring to a number of investigations by regulatory bodies in to the bank’s conduct surrounding the Crisis. For this post, the focus will be on this continued use of the word ‘legacy’, which denotes a different era to the current era of banking – the issue for this post is that the era in question was only 10 years ago, and multiple infractions continue to this day, so the attempt to negate the actions of these banks as something that happened in another era is deeply insulting, and it is this that will be the focus of the short post.

Barclays has indeed posted good financial numbers this reporting season, with the headline being that the bank’s profits have almost trebled from last year. In attempting to downplay ideas of success at the moment, McFarlane mentioned the regulatory issues facing the bank, but concluded by stating that ‘I genuinely believe we can see the light at the end of the tunnel’ – the issue here is, what about your actions that led you into the tunnel? What can be done to stop you going through the tunnel again? Essentially, the first thing to do would be to understand the issues that blighted society a decade ago as systemic issues, but the opposite of this is emanating from the reports of these leading banks. RBS, a firm blighted by their conduct to this very day, relate their current problems to their ‘legacy issues’. Goldman Sachs cited their pleasure at putting their ‘legacy matters’ behind them when they settled with the SEC for $5 billion last year, and actions by both HSBC and Lloyds have been referred to in terms of their actions representing a ‘legacy’ and as different to the current incarnation.

This is all well and good if these firms really did move on from these periods and altered their approaches, but there is absolutely no proof of this. Barclays, as a key constituent of this ‘legacy’ narrative, is perhaps the best example to use to demonstrate the ludicrousness of this attempt. In 2012 the bank was fined £290 million for attempting to manipulate interest rates, known as ‘Libor’ and ‘Euribor’ (a rate of interest between banks), and in 2016 reached a further $100 million settlement with 40 U.S. States on the same charge – the total, inclusive of settlements with both British and American regulators, amounts to around £1.53 billion. The damage that regulators may cause from Financial Crisis-era scandals are yet to be determined, with the U.S. DoJ and U.K. Serious Fraud Office still investigating the bank (the DoJ has recently began civil proceedings against the bank after its refusal to settle), but the presence of post-Financial Crisis transgressions reveal that to understand their Financial Crisis-era transgressions as detached from everything else is not only dangerous, but downright delusional. The transgressions of RBS continued abound after the Financial Crisis, as discussed previously, and so too have Barclays’ transgressions (as well as many others like Deutsche Bank, HSBC, and this may be extended with the much anticipated release of Standard Chartered’ s results tomorrow).

The financial elite have attempted to cast the Financial Crisis as a solitary event, and we simply must not let them. The conduct of the banks and other financial institutions since the turn of the millennium was not down to hubris, but simply due to a weakening of the restraints that surround the venal monster that is the financial services. Not every element of the financial services can be categorised in this manner, of course, but the vast riches available for a short-term evacuation of responsibility and morality mean that there must be a constant and real restriction on the ability of people to transgress in such a socially-vital area, and not letting those actors who transgress paint their actions as a ‘one-off’, in spite of overwhelming evidence, is a good place to start.

Wednesday, 22 February 2017

The Need to Move Away from ‘Economic Empiricism’

Yesterday, speaking in front of the Treasury Committee, the leading figures of the Bank of England (BoE) sat and faced many questions. Whilst there were many issues discussed, particularly with regards to the Bank’s navigation of economic waters since the referendum decision to leave the E.U., it is a comment by Monetary Policy Committee member Gertjan Vlieghe that serves as the central issue for this post. Speaking rather candidly about the strengths and weaknesses of the Bank, he alluded to a much wider issue, which has ramifications for all of society; when discussing the ability to foresee economic disasters, Vlieghe said ‘we are probably not going to forecast the next financial crisis, or forecast the next recession. Our models are just not that good’. The results of the Committee’s hearings relay similar messages, like that delivered by Andy Haldane, the BoE’s Chief Economist, who stated that ‘we know that people find risk hard to understand; I find risk hard to understand’ – which is an incredible admission by one of the foremost economists in the country. But, this post will shy away from attacking economists, for the moment at least, and turn the focus towards the political elite. What we will see is that the political elite serve to function for the public via the economy (and consequently via economic thought), which may be termed as ‘economic empiricism’, as we shall see shortly.

Andy Haldane has been on somewhat of a campaign to speak as candidly as possible about the state of the economic profession. In January of this year he stated that not being able to foresee economic catastrophes like the Financial Crisis fundamentally affects the trust afforded to the profession, and that the economic models adopted failed to account for ‘irrational behaviour’ in the modern economy (which is demonstrable of the constraints of the discipline, although these constraints are rarely taken into account). This is undoubtedly true, but there is merit in attempting to ‘flip’ our focus, all the while remaining highly critical of the economic profession for its part in inflating and then rarely warning about the explosion – something which is beginning to define the modern era. For example, in the Committee hearings Jacob Rees-Mogg MP suggested that the bank should be more careful with its predictions, and that they should not present them as a ‘holy writ’ – this is true that the BoE has a certain responsibility and should take great care in administering information, but a critical question is this: ‘why should we accept, point blank, what the BoE say?’ In reality, we do not accept what they say irrefutably because, as the public are the ones who actually live within society, we assimilate information based upon a number of factors which are personal to us. The Government, however, do not do this to anywhere near the same degree; their reliance upon economics, as a discipline, to inform many areas of life which have no direct link to economics in reality, is almost absolute. This phenomenon has been referred to as ‘Economic Empiricism’ and has been debated for a long time, but essentially refers to the economic analyses of seemingly non-economic parts of life, with the approach having an almost devouring nature to it.

An analysis that may even get close to assessing the vast literature on this topic is far beyond the scope of this post, but an interesting piece by Professor Ben Fine makes note of the almost ‘colonial’ nature of economic empiricism, implying that it has long since had the capacity to colonise other social sciences. Continuing, Fine describes how there is an almost paradoxical element to the understanding because the nature of the economic discipline, traditionally, it to rely heavily upon its ‘sacrosanct’ methods without the necessary reflection and development, which is paradoxical because as the effect of this empiricism grows, i.e. the range of opportunities and the development of society accelerates as a result of its adoption, its potential for developing a well-rounded and considered approach fundamentally decreases. This fundamentally-encroaching development of what Fine labels as a focus on ‘utility maximisation’, above all else, has been described, and in the case of Nobel prize-winner Gary Becker accepted, as being akin to ‘Economic Imperialism’, as it continues to envelop the study of key elements of society like education, crime, and the core of society, the family as a unit. As this analysis cannot do justice to the study of this phenomenon, it will steer clear at this juncture, but in positioning this understanding it will be important to demonstrate the real-world demonstration of this.

In an earlier post in Financial Regulation Matters, we saw how newly-elected President Donald Trump is filling his cabinet with the elite members of the financial industry, which demonstrates the infiltration at the top levels of government by economically-trained individuals who are tasked with governing multiple elements of society. In the U.K., the Governmental Cabinet is littered with those who have studied Economics (in one form or another) including, but not restricted to: Jeremy Hunt; Liz Truss; Philip Hammond; Amber Rudd; Justine Greening; Greg Clarke; Sajid Javid; and Priti Patel. These cabinet members are in charge of areas like Health, Justice, and International Development, but it is clear to see that there is a theme running through their ideological development.


So, whilst the infiltration of economic thought is pervasive in the most influential governments, the question needs to be asked of what effect this is having. The earlier admissions by Vlieghe should demonstrate for us that economic thought is far from infallible, and in fact can be quite destructive if left unchecked – we already saw in a previous post that the effect upon society of this destructive element is now tangible, with an unforgivable spike in mortality being directly linked to the austerity measures put in place to protect against the impact of this inward-looking thought process. The purpose of this post is not to lambaste Economists, because to do so would be to miss the point entirely. Economic thought helps to expand society and deliver opportunities and a quality of life which has never been seen before in human history, but relying on that thought-process whilst simultaneously reducing the role of other disciplines is a certain way to invoke societal disasters. What is required is simple in theory, but would take a momentous change in consciousness – what is required is the increase in influence of other socially-concerned disciplines like sociology, law, politics, criminology, geography, and many more. This would increase the consideration afforded to policies that go on to effect society in every manner possible, but the crux of the matter is this – such consideration does not generate money, it generates well-being, and in this era that equation simply does not make sense to those that can initiate such change. Western society, at least, is responding to being attacked by finance by electing those who value economic thought above all else, which is an approach that is highly unlikely to bring about the security many claim they want. 

Lloyds Bank Financial Results: A Small Silver-Lining in an Otherwise Negative Week

This morning, Lloyds Bank announced that its profits had more than doubled to £4.2 billion, primarily boosted by its reduction of capital reserves to protect against Payment Protection Insurance (PPI) pay-outs. This very short and reactive post looks at the response to the release of the figures, just over an hour ago, and contextualises the seemingly-positive news with that of the wider picture in the banking industry at the moment.

The headline-grabbing figure will be the 158% surge in profits, which has not been seen by the bank since pre-Financial Crisis times. Yet, there was actually a drop in underlying profits and still the bank is setting aside resources to protect against the continued claims of negligence regarding the massive PPI scandal, although that provision has decreased from £4 billion last year to £1 billion this year. Recently, however, there have been a couple of news stories which sour this apparent success, both of which relate to issues recently commented upon in Financial Regulation Matters. The first concerns the criminal actions of HBOS bankers (owned by Lloyds) in Reading, which resulted in custodial sentences for those involved in a scam to drive customers to failure and then profit from the failed endeavours. Today, Chief Executive António Horta-Osório apologised to victims of the fraud, although he provided no information on whether the victims of the scandal would be paid compensation – something which must happen. Secondly, it has been reported recently that the bank is preparing to relocate a lot of its resources to Berlin in preparation of the U.K.’s secession from the E.U., which even though is not dramatically bad news for the U.K. (Lloyds will still be a predominantly British-centred company), the move adds to the narrative of financial institutions turning their back on the U.K. after its decision to leave the bloc – a narrative which is arguably being overplayed, because as Eoghan Murphy, Ireland’s Minister for Financial Services, said: ‘History happened in a certain way. You can’t just lift institutions and drop [them] somewhere else’.


However, the silver-lining from this morning’s financial news is clear to see: the U.K. Government’s stake in the bank has reduced to just under 5%, with some suggesting the ties to the bank will be finally cut by as soon as May 2017. This, in spite of the continued presence of the PPI scandal, is good news. It is therefore hoped that the tumultuous period for the bank serves as a reminder to them the next time they get involved with a practice that brings shame to the banking community – whether this happens or not is a completely different story. The relatively good news is needed, however, because we still await the results from RBS and Standard Chartered as the week draws to a close, and those results are predicted to be far from positive. The plight of RBS was discussed in a recent post, and Standard Chartered is experiencing a particularly turbulent period. The conclusion to 2016 made for awful reading for the British-based bank, who are facing probes in the U.S. over allegations of bribery relating to its business in Indonesia; if the allegations are found to be true, then the bank is facing triggering the DPA (DPAs were discussed in a previous post) that was agreed when the bank was sanctioned over its business with Iran – it seems that the infamous exclamation of a senior Standard Chartered executive, namely ‘You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?’ could be prove to be particularly costly. Ultimately, the small ‘bump’ in sentiment offered by today’s banking results may not last for very long at all. 

Tuesday, 21 February 2017

HSBC’s Embracing of the ‘Retreat of Globalisation’: The Potential Effects of a Controversial Track Record

In covering the continuing release of the annual results of the leading U.K.-based banks, the business press turned their attention towards HSBC as it began the week of financial reports, with Lloyds due on Wednesday, Barclays Thursday, and RBS and Standard Chartered both on Friday. Although there is plenty of analysis to be had regarding the 62% reduction in profits, this short post will focus on a particular line contained within an interview with the Chief Executive of the Bank, Stuart Gulliver. Speaking of the risks posed to the bank moving forward, he stated that ‘if Globalisation continues to retreat, as seems likely, we are in a strong position to capitalise on the regional opportunities that this will present, particularly in Asia and Europe’. The question for this post is this: ‘what standards, and what culture, will HSBC be bringing to these regions when it seeks to capitalise upon the retreat of Globalisation?’ When looking at the Bank’s recent record, particularly when it comes to Money Laundering, the question has merits because, if it seeks to approach these jurisdictions aggressively in the wake of an increase in regionalisation, then how it does so will be extremely important to understand – mainly so that some form of protection can be put in place to mitigate the damage that money laundering causes.

If we proceed on this premise that HSBC, a huge banking institution, will have a massive role to play if the secession of Globalisation does continue, then understanding its recent past is important. Unfortunately, the recent past of HSBC is dominated by transgressions which, in reality, lead to the conclusion that a regionalised world, with each particular territory vying for success (arguably via the increased incorporation of financial services without increased oversight), will be fertile ground for systemically-dangerous transgressions to continue, and even develop further. Yesterday’s post in Financial Regulation Matters, on the transgressions of RBS, which include the despicable practice of driving SMEs to failure and then profiting from the damage, was concerned with looking at the effect of the transgressions on the economy, and therefore society. With HSBC – a bank which has a much different composition to that of RBS – the transgressions are, arguably, much more sinister in nature. Whilst there are a number of financially-concerned transgressions recently that have come to light – the story of HSBC having to set up a £4m compensation scheme for overcharging customers via its subsidiaries, HSBC’s €33m fine for partaking in a cartel that rigged the Euribor, or the massive tax scandal concerning HSBC’s Swiss affiliates, providing just three examples – it is the Bank’s approach to the proceeds of crime and money laundering that causes the most concern.

In 2012, the bank agreed to pay $1.9 billion to U.S. authorities to settle claims that it ‘exposed the U.S. financial system to money laundering, Drug (and) Terrorist financing risks’, which is an extraordinarily strong indictment of its activities. The Permanent Subcommittee on Investigations concluded that ‘due to poor AML (anti money laundering) controls, HBUS (HSBC’s U.S. affiliate) exposed the United States to Mexican drug money, suspicious traveller’s cheques, bearer share corporations, and rogue jurisdictions’, whilst also adding that ‘HSBC’s compliance culture has been pervasively polluted for a long time’. This uniquely sharp rebuke would, one imagines, instigate an accelerated response to shoring up defences against such transgressions, but last year it was reported that this is simply not the case. Reporting last year, the British Press announced that Michael Cherkasky, an American lawyer appointed to HSBC as one if its foremost compliance monitors (as part of its settlement with the Department of Justice), had raised ‘significant concerns’ as to the pace of the changes required to shore up its defences. The Guardian also reported that HSBC had taken to hiring ‘princelings’, which it describes as the hiring of the children or younger relatives of China’s political leaders or of powerful executives at state-owned enterprises in China – clearly to gain favour in the region – which brings us neatly back to the claim made by Stuart Gulliver regarding the bank being primed to take advantage of the regression of Globalisation, particularly in Asia.


HSBC’s extraordinary reach across the globe, rightly earning it the title of a truly multinational bank, means that the standards it sets have a real-world effect. The careless attitude to money laundering, and dealing with rogue states etc., is a particularly dangerous aspect of a bank that seeks to ‘capitalise’ upon the regression of Globalisation. The regression, which apparently seems to be accelerating by the day with protectionist sentiments being offered in the U.S., the U.K., and increasingly within Europe, will lead to the reduction in oversight and regulation, as states vie to be prosperous in uncertain times; when we understand this in relation to the ethical fibres of the world’s leading financial institutions, then it is difficult to be positive. The fact that HSBC, RBS, and other financial institutions have just continued to transgress regardless of the public uproar after 2007/08 simply highlights the contempt that these organisations show for the welfare of society. Whilst absolute supervision and invasive regulation is politically impossible in this increasingly politically-conservative world, there is a growing need to increase the personal ramifications for transgressing within these institutions. For example, part of Stuart Gulliver’s pay is measured against the firm’s compliance ratings, and the recent drop from 75% to 65% resulted in a 2.5% cut in earnings, although his pay is actually rose from £7.3m to £7.7m because of performance measured against other areas of the business – in what way is this an incentive to oversee an effective compliance regime? The only way forward to truly effect a change in culture is to make people personally liable for their transgressions; the sanctity of the corporate veil is simply not supposed to protect against personal failings of this nature. Unfortunately, the deterioration of Globalisation plays right into the hands of those who prey upon their strategically-superior position and, with the increase in regionalisation, their position is becoming increasingly superior. 

Monday, 20 February 2017

RBS: The £55 Billion Question That Has No Answer

It was reported yesterday that the major banks in Britain will be ‘in the spotlight’ next week when they reveal their yearly figures. The article in the Guardian talks of the focus on HSBC, and the issue regarding an overhaul of their boardroom, and of Lloyds Banking Group, who are expected to show relatively positive results as it nears the end of its ties to the U.K. Government and the British Taxpayers. However, the focus for this post is in the Royal Bank of Scotland (hereafter RBS), and the rumour that it will post a loss of more than £6 billion, which would see it post a loss for the ninth year in a row, which is extraordinary. Whilst Lloyds were also assisted by the taxpayer, why is it that RBS continues to fall further and further into the red? This post will therefore look at this question, and it appears that a culture that is about, potentially, to see them punished for mis-selling in the lead-up to the Financial Crisis remains strong. There are a lot of allegations being aimed towards RBS and, admittedly, it is important to note that RBS denies all wrongdoing for the claims regarding employee mistreatment and SME-based fraud (how they will respond to the multi-billion dollar lawsuits coming its way in the U.S. is another matter) – whilst this is important to note, it is also important to discuss the allegations, mainly in order to paint a potential picture of this massive organisation that is seemingly only going one way and, potentially, taking a lot of taxpayer money with it.

There has been an abundance of analysis on RBS since it was first ‘bailed out’ by the British Government, so this post will focus on two issues in particular: the impending ‘hit’ that the bank will take when the U.S. Department of Justice (DoJ) seeks to quantify its punishment for selling toxic products in the lead-up to the Financial Crisis; and secondly, recent allegations regarding the internal culture of the bank which, if proven true, would show that RBS is, perhaps, beyond repair. The trajectory of the bank’s fortunes is nearing the point at which it can no longer be ignored – the question then is ‘what can be done with a failing bank as large as RBS?’ Usual practice dictates that the bank and its operations would be sold to the highest bidder, but the interwoven nature of modern banks means that it is deemed more appropriate to continue trying to save it, and with the post-Brexit pressures already starting to build, the U.K. Government is unlikely to want to break up a constituent component of its financial services armoury for parts.

Firstly, RBS is just moments away, relatively speaking, from taking a massive hit. This is not to say that the impending punishment by the DoJ is the only hit that the bank has, or will face because, as any glance at the business headlines will tell you, the penalties for appalling business practice just keep on coming for RBS. There are a number of fines that have been given to RBS, or are still pending, like the £1.3 billion fine for foreign exchange rigging, as well as the fraudulent practices involving consumer accounts and instruments – but it is the actions of the DoJ that should present the biggest worry to RBS. Recently, the DoJ has stepped up its litigation against criminal institutions, with a number of high-profile settlements (there is much less of an appetite for criminal convictions, as discussed in a previous post). The conclusion of the DoJ’s punishment of the rating industry occurred recently, as discussed previously, and in the banking sector Deutsche Bank and Credit Suisse settled for a combined $12.5 billion for fuelling the Financial Crisis. At the end of last year, Barclays, rather stunningly, refused to settle with the DoJ and, as such, consequently prompted a formal filing of a lawsuit from the DoJ alleging that the bank ‘repeatedly misrepresented the characteristics of the loans backing securities they sold to investors around the world’. For RBS, the damage that they will take is cause for speculation. The bank has been said to have put aside up to £6.7 billion for its impending punishment, but industry insiders suggest it could go as high as $12 billion, which would be an incredible indictment on its involvement in the scandal. The potential damage may be so large that it has scared off the Chancellor of the Exchequer from attempting to sell off any more shares, particularly as the last time this was attempted the taxpayer lost over £1 billion on a sale of just 5% of its holding in the bank.

So the bank is in jeopardy is being financially punished even further. This, quite rightly, is a worry – mainly because it decreases the chances of the taxpayer ever receiving any sort of return on its involuntary rescue of the criminal bank. However, rescuing a bank is not, initially, such a negative thing. Although it is extraordinarily distasteful to rescue private organisations that take huge risks for short-term rewards, in the conscious knowledge that their size means that they will be saved at the expense of the health of society, there may at least be some ‘profit’ for the societal resources (the loss in human life, as just one example, is certainly not worth it however, as discussed previously) – this is demonstrated by the Lloyds Banking Group which, although ‘bailed-out’ to the tune of £20.5 billion, is almost ready to be returned to the private sector in full. So, why is RBS performing so very poorly? It cannot be solely related to their performance before the Crisis, because other firms that were also implicated in the scandal are starting to turn the corner. Arguably, the answer lies in its conduct.

Recently, in Financial Regulation Matters, the issue of fraud against Small and Medium-sized Enterprises (SMEs) was reported after the case of a number of HBOS employees that were given multi-year custodial sentences for forcing business customers into positions were they were expected to fail, at which point the bank would pick up the pieces for below-value and consequently make a profit on their sale. Unfortunately, but as is usually the case with this often-parasitic sector, the fraudulent and despicable approach may not end with HBOS. It was reported this week that there are allegations that RBS is, ‘on a kind of industrial scale, falsifying the core files on SME customers, and the falsifications are allegedly enabling RBS to then win against these customers’. These claims have been in existence for well over a year, and have made the tabloid press on a number of occasions. In a move similar to HBOS, the ‘Global Restructuring Group’ – now defunct section of RBS – would drive firms to the wall and pick up the pieces – a process crudely nicknamed ‘Project Dash for Cash’; the bank denied this, but a series of investigative reports found complicity, and as such the bank has set aside £400 million to compensate customers affected by the despicable practice. To increase the hurtful damage caused, the FCA were passing the details of complainants, who had come forward in confidence, to the bank themselves, which further adds to the sentiment that finance is designed to act against the public, of which SMEs certainly count. Essentially, we have a case of a massive organisation that partook in a horrifically-impactful scandal, which only survived with the intervention of the taxpayer, and now continues to transgress by forcing SMEs (arguably the backbone of any economy) into failure and then falsifying the records to attempt to remove themselves from any punishment.


Ultimately, even though the allegations have been mostly denied, there is enough smoke here to suggest that a fire lays underneath. The allowance for £400 million to offset the compensation to be awarded to SMEs suggests a systemic fraud which could go onto effect other banking institutions if investigative reporting digs deep enough. The larger question at hand here is what can be done with regards to RBS? We have a bank which is losing money consistently, is dropping value so that the taxpayer’s stake cannot be sold – unless at an extraordinary loss – and who continue to transgress, essentially attacking the backbone of the British economy. The correct thing would be to let the firm die and remove it from our midst, as this once great institution has been infiltrated by the greedy and corrupt. However, this cannot be done. The need to recoup the money pumped into the bank is great, and the need to project a healthy financial sector post-Brexit is arguably greater still. The result is a miserable one; RBS will continue to be assisted by the Government so that it can recoup its investment - this is seen recently with the Government campaigning on behalf of the stricken bank to the European Union to disregard its state-aid infractions so that the need to sell branches, in a deal which may potentially represent an undervalued sale, is removed from the forthcoming plight of the bank. The U.K. Government has a £55 billion Albatross around its neck and there is no clear path as to how to remove it – RBS really is a shining example of what happens when you refuse to let an infected institution die and, unfortunately, it will be the British taxpayer who will pay the cost of that lesson.

Sunday, 19 February 2017

Alan Greenspan: A Career That Continues to Have an Impact, For the Worse

It was reported this week that on Thursday, in a speech before the Economic Club of New York, 91-year old former Chairman of the Federal Reserve (hereafter the ‘Fed’) Alan Greenspan stated that the Dodd-Frank Act 2010 was the ‘worst legislation since Nixon’s wage and price controls of the 1960s’, and that we ‘could do away with all financial regulation – almost all of it – if we did one thing, and that is raise the capital requirements of banks’. The debates about the merits of such a statement will only be touched upon in this post because, as with everything of this nature, the analysis could stretch to volumes. So, for this post, the focus will be on the effect of Greenspan over the years and, more importantly given the current climate, the effect that Economists can have in shaping the direction of society.

Alan Greenspan’s thinking about financial regulation is simple, as demonstrated by the contents of the speech. In it he discussed how raising the capital requirements of banks i.e. the amount of money that they must hold in reserve, would potentially lower the rate of lending, but that the people who would not get to borrow would be ‘loans we shouldn’t be making in the first place’. He continued by stating that with higher capital reserves, the ‘contagious defaults like 2008 and 1929’ would be almost impossible and that defaults by banks should be borne by the shareholders, and not the taxpaying citizen. This is clearly a simplified understanding, and Greenspan continued the speech by explaining his theories with complex charts that he himself acknowledged were tough to follow; he proactively advised attendees to ‘go get a bite to eat if you aren’t into this kind of thing’ before explaining the complicated charts. This facet, although seemingly trivial, is perhaps the most important aspect of the news story, and in explaining Greenspan’s career and the following which he has cultivated, it should become clear why.

Greenspan’s career is well documented, but there are certain points which are important for our understanding. Upon taking over the Chairmanship of the Fed in 1987 from Paul Volcker, on the request of President Reagan, Greenspan began a process which would see the so-called ‘Quiet Period’ (i.e. no serious economic crashes/systemic failures) brought to a tumultuous end, although this is debated by his supporters (or, formally, supporters of the notion of freer markets etc.). The decision to allow banks to establish affiliates that were able to deal in short-term commercial paper securities, a decision taken as soon as he had taken office, established a chain of events. Admittedly, the decision to open this source of business to commercial banks had restrictions, namely these products could not contribute more than 5% of the bank holding company’s revenues but, in 1997, the Fed increased this limitation to 25% - the 1990s, which included the Riegle-Neal Act of 1994 which increased competition between banks, and the generation-defining Gramm-Leach-Bliley Act of 1999, which effectively ‘eliminated the Glass-Steagall prohibition in banks engaging in proprietary trading and exempted investment bank holding companies from direct federal regulation’, can be rightly remembered as the era when large financial institutions we given the go-ahead to take extraordinary risks at the public’s expense and this era, in part, was designed by Alan Greenspan.

The era was rounded off with the Commodity Futures Modernisation Act of 2000, which ‘barred federal regulation of swaps and the trillion-dollar swap markets, and which allowed U.S. banks, broker-dealers, and other institutions to develop, market, and trade these unregulated financial products’. Although Alan Greenspan was not the only person involved in this systemic destruction of societal protection – other infamous names includes Senator Gramm, Former U.S. Treasury Secretary Larry Summers, and Former U.S. Treasury Secretary Robert Rubin – Greenspan stands as the lynchpin for a number of reasons, but one in particular which relates to his speech this week.


Alan Greenspan’s speech to the Economic Club was extremely important because of its timing. It was discussed in an earlier post in Financial Regulation Matters that President Trump is attempting to dismantle many parts of the Dodd-Frank Act, and such moves cannot happen with an intellectual foundation and it is for this reason that Greenspan’s speech seems calculated, rather than just coincidental. The Trump administration would be within its rights to focus upon the speech and the many supportive analyses that will undoubtedly follow, simply because it provides intellectual justification for their actions. Although Greenspan was renowned for his Chairmanship of the Fed, he is a revered Economist in his own right, and it is arguably this facet which has proven to be his most influential. Greenspan, along with a number of other economists, have championed the market in the face of the state, and when this is combined with being in the position to actually make changes, the effects are there for all of us to see. This viewpoint is shared by prominent Economists like Professor Calomiris who, quite forcefully, champions Greenspan as an innovator that should be revered: Calomiris often talks about Greenspan’s ‘skill as a beltway warrior, particularly with respect to his success in facilitating the geographical expansion of banks, broadening bank powers, and securing a prominent role for the Fed under the Gramm-Leach-Bliley Act of 1999’. Now, although the aim here is not to ‘throw stones’ and accuse people of complicity in the largest crash since the 1930s, this intellectual support for a regime that systematically shifted the balance of power to the wealthy elite and away from the public needs to be affirmed. Calomiris, as well as others, lay the blame for the Financial Crisis at the door of the Government, who they claim artificially inflated the mortgage bubble by way of its policies towards the Government-Sponsored Enterprises like Fannie Mae and Freddie Mac, which has some merit but is symptomatic of an issue within the Economic discipline.

The Economic discipline, as a whole, has contributed in changing society beyond all recognition. Its importance to societal progression is symbiotic due to the centrality of the marketplace within modern society. However, what this means is that Economists, perhaps more than those in other disciplines, really must demonstrate levels of responsibility rarely seen in other intellectual fields – the reason is simple, their words can influence movements that will change the face of society for generations. For this reason, Greenspan’s speech this week should be seen for what it is – it stands as the justification for the deregulatory rhetoric that is emanating from the Trump administration. Whilst there are many economists who behave responsibly, and promote their ideas – even if based on free-market principles – in a considered and measured way, there is an elite within the field that do not. Furthermore, the use of overly-complicated communication, which stands to mask the implementation and effect to the ordinary citizen who it will inevitably effect, makes the actions of Greenspan over his career arguably reprehensible. Through his work and his actions, along with others, the stage was set for a systemic withdrawal of resources at the cost of society, and for that there can be no justification. A recent biography of Greenspan was entitled ‘The Man Who Knew’ and, arguably, there is no better title for a man who was central to setting the scene of the ‘too-big-to-fail’ phenomenon. Yet, a more abstract criticism of Economics, and this does not relate to every economist, is its ability to prescribe solutions from within a narrow ideological box. Economics must be understood for what it is – it is a discipline that seeks to study just one component of society; the dangerous-but-increasingly accepted view is that ‘what is good for the economy is good for society’, a viewpoint attributed to Freidman, and this could not be more wrong. Why? Well, the reason is simple, and demonstrates why a multi-disciplinary approach to determining societal-direction is required, rather than relying upon the economics discipline. It was reported in the Lancet that, from 2008 to 2010 alone, the Financial Crisis may have caused an additional 500,000 deaths from cancer, based upon the lack of access to health, and the increase in stress more generally. Furthermore, a recent study suggests that, by the end of 2015, the U.K. alone had experienced the ‘largest annual spike in mortality rates for nearly 50 years’, with an additional 39,074 deaths across England and Wales representing a 7.4% increase from 2014-15 – the report deducts that the sharp increase can be linked to austerity measures, which stem from the systematic extraction of wealth in the lead up to the Financial Crisis.


The Economics discipline is a noble discipline, but its increased centrality to policy-making has made it a prime candidate to be hijacked by those who have little regard for societal welfare. What is needed after such a monumental crisis is a multi-disciplinarian approach, like that implemented in the ‘New-Deal’ regulations after the Great Depression, so that a number of perspectives can play a part in shaping how society moves forward and, hopefully, usher in a new Quiet-Period. Yet, there is no sign of this, and with the rhetoric from both Washington and London being focused on economic wellbeing, rather than social wellbeing, there is little prospect of the dynamic that brought about the Financial Crisis changing anytime soon.