Monday, 13 February 2012

Hate the Player or the Game?

In the words of the esteemed Henry Ford (yes the car maker guy) "If people understood the banking system they would revolt!" Our entire financial and political system is corrupt. For example in the U.S recently it was proven that large banks had been paying property valuers to over value homes. Although this doesn't seem so contraversial at first, it means the customer then pays a higher price and so has to borrow more money and consequently pays more in interest on their loan to the bank. In any other industry this would be considered a scandal, racqueteering perpetrated by thugs and miscreants, however because this crime has been comitted by men in sharp suits with psuedo-legitimate job titles the affair has been virtually ignored. Sadly this is only the thin end of the wedge, the more we peer through the murky waters of our financial and economic system the more prescient Ford's words seem to be.

The over-inflated house prices signal to greedy banks that there is money to be made, despite the fact that the smoke comes from a fire of their own ignition. In their greed the banks then lend too much money to people that can't pay it back, safe in the knowledge that they will sell on the risk anyway. Despite the fact that the banks know that the debt is toxic, they can do this legitimately on the financial markets because the debts are insured by companies that also rate the loans as secure meaning they are more likely to be bought for a higher price and in another curious little kick-back the insurance service is bought again and again. Everybody wins...

Unfortunately and innevitably, sooner or later the people who borrowed too much can't repay their loans. The insurance companies are asked to step in but quickley exhaust their reserves and fold. This sets off a chain reaction of people losing money, from the institutions that bought the debt, through the businesses that invested in the institutions, down to the employees and beyond, out into the economy at large. Among other things, this means less deposits in the banks which can't cover their depositor obligations due to the consequent lack of liquidity. Fortunately up pops the Public Sector (us tax payers) who save the banks and everyone's deposits. The down side is that the money has to come from somewhere (or so we're told - why it couldn't be leveraged against the banks' assetts is beyond me) and so public sector employees lose their jobs / pensions / salaries setting off another chain where there's less spending in the economy and so the private sector too has to cut costs and lay off employees. This means even less spending, less tax receipts and so less support services for those that need as a result of the now innevitable NHS cuts etc... which also mean less job opportunities. Still with me? So far we have covered basic economic effects of a faulty or misused system, but here's where it really starts to get dirty.

The men and the companies that caused the crisis are fine because the companies that they own have limited liability meaning they can only lose what's in the business and not the personal possessions of owners to meet any debts. The board members are fine since they were making ridiculous wages in the first place, and anyway, they sold their shares long before anyone else knew that trouble was brewing. They went on to invest that money in commodities such as gold which are cheap since everyone outside the loop is buying shares in their businesses instead as, thanks to the insurance companies on their payroll and accountants like Enron's, these look on paper as though they are [still?] making a profit.

When the trouble finally hits the front pages, money haemorrages out of the stock market and into commodities meaning that the value of their holdings sky-rockets overnight, all thanks to the mess they made in their own industry. The value of stock market linked pensions disintegrates however, since they were invested in the "sure thing" investment opportunities that never really existed and have just rolled over and taken their last breath. Meanwhile all the people that didn't cause this are told we have to bite the bullett and pay our share for the Public Sector rescue, while those that did continue to take bonuses beyond the dreams of most of us and anyway dodge their tax because their money is sat in untraceable offshore accounts.

Wealth generates more wealth precisely because of the way that our system is set up, but it also encourages the people that benefit to protect that system. The scary part is that this does not just mean the Bankers themselves, newspapers, T.V., film companies and all large business are owned by this small group of super-rich individuals that stand to gain. Even worse, the only defences that we are our democracy and our judiciary, have you ever seen a poor barrister or a starving politician???

We shouldn't blame people for accepting gigantic rewards because the system is set up to deliver these and natural selection dictates that we are all looking for an advantage (would you turn down a £3m bonus?). The problem is not the people, its the structure and those in charge of regulating it. And anyway, until we start to demonstrate some power to bend this sytem to our will, we don't have a hope in hell of controlling those within it!


  1. Farmdonkey

    Firstly excellent writing. I guess this type of behaviour is what makes the UN say the biggest threat to governments ALL OVER the world is the widening of the gap between the HAVES and the HAVE NOTS.

    Do you run a country to the benefit of the creditors ( normally banks ultimately), in which case the citizens become cash cows to be milked. The banks are happy, but citizens not, or you run it for the citizens, in which case the banks will ultimatley make it more expensive to get money for the governments to run the country?

    Maybe i have oversimplified a response, but I think that there must be a way to limit and reward accordingly without HUGELY rewarding the executives and bankers , based on long term success and investment into small businesses and people?


  2. Thanks for the compliment, and good points, it would be nice if we could limit the rewards some people recieve but I think something is wrong when the system we have built society on needs to be moderated in this way. This issue extends far beyond the banks, it even transcends politics since none of the parties are really making constructive suggestions on how it can be dealt with. Fundamentally we have allowed international businesses to grow so large that they are more powerful than the governments that are charged with the responsibility of regulating them. It's like asking a twelve year old to referee a premier league football match without any cards in their pocket. What exactly are they supposed to do when things start to go wrong?