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Shouldn't banks work for us?

Robert Peston | 10:10 UK time, Tuesday, 1 December 2009

According to the distinguished journalist Alice Schroeder, Goldman Sachs bankers are buying handguns "to defend themselves if there is a populist uprising against the bank" (as per a hilarious article published on Bloomberg overnight).

If true, it's one of the more eccentric manifestations of the economic crisis caused - in part - by the excesses of those blessed bankers.

Canary Wharf skyline

Since the UK is officially now the only G20 economy in recession, the UK has a particular interest in fixing the flaws in the financial system.

As it happens, another one of those not-so-popular investment banks, Morgan Stanley, fears the UK may pay one of the steepest amounts when the final bill arrives, because it says that markets are currently under-pricing the risk of a fiscal crisis in the UK next year - which would lead to "some domestic capital flight, severe pound weakness and a sell-off in UK government bonds".

So it's reasonable for most of us to mutter "never again".

And although the path to rehabilitation has been meandering and occasionally bogged down by tedious national jealousies and squabbles, we can be reasonably confident that our banks will emerge a bit better regulated and a bit more intrinsically robust (though it's far too early to pass judgement on whether the reforms will be all they might be).

That said, I suppose I am a little surprised by how little exasperation has been generated by one aspect of our version of capitalism that was found wanting (and how) - which is the non-trivial issue of how our companies are owned.

In a nutshell, the owners of our banks did nothing to prevent them from taking excessive risks - and, the self-justifying bankers moan, some owners actually encouraged them to lend and borrow more than was prudent relative to their capital resources.

What's been the official response?

Well a Treasury-commissioned review by Sir David Walker - which was published last week - recommended that a bit of pressure be applied to investment institutions to either sign up to a fairly undemanding set of governance principles or explain in public why they won't do so.

These precepts include revolutionary ideas such as "institutional investors should monitor their investee companies" (do you think it would be reasonable to ask for my money back, if my pension-fund manager would not commit to doing this?).

Docklands clockAnd overnight, the Financial Reporting Council (FRC) - which will be the steward of the new investors' code - announced plans to amend the existing governance code that for years has applied to the executive and non-executive directors of all listed companies.

These modifications will be seen, I would guess, as mostly sensible.

I particularly like the idea that all boards should every year state in simple plain English a short account of their respective companies' business models: viz how those companies make their wonga over the long term and what the big risks are.

Just possibly, if Royal Bank of Scotland's board had done that a couple of years ago it would perhaps have treated its depositors as its most valued customers rather than taking them hostage, by lending and investing far more than was safe (some 50 times capital resources).

Also, the FRC will probably be applauded for trying to shift the balance of boards' responsibilities from box-ticking and formal compliance to a proper appreciation of their responsibilities as the custodians of the wealth-generating machines that pay for our pensions and generate our tax revenues.

In that context, there may be merit in the FRC's suggestion that each company's chairman, or its whole board, should face re-election every year: the directors should then be under little illusion about who they work for?

Or will they?

Because the chain of ownership - from saver in a pension fund, to pension fund trustee, to investment manager, to non-executive - remains as long, disjointed and dysfunctional as ever.

Arguably we have as yet seen little in the way of actual or proposed reform that would give us confidence that companies will henceforth work rather more assiduously for the millions of us who are their ultimate owners, as contributors to pension funds and other collective investment pools.

Also, in the case of banks, there's a second intrinsic flaw in the ownership structure, which is the potentially devastating asymmetry between the limited liability to losses of a banks' shareholders and the unlimited liability of taxpayers as the rescuers of last resort.

Sir David Walker identified this asymmetry, which encourages banks to take bigger risks than are necessarily healthy for the economy because the liability of the owners is capped.

However it is moot whether he or the authorities more widely have yet done enough to address it.

Here is what should really give us pause for thought: it is our agents, the investment institutions, who have limited liability, but not us, the savers who provide them with the funds to manage; we pick up all the bills, both when the value of the bank shares in our pension funds are wiped out, and when we underwrite the rescue of said banks as taxpayers.

Which is why, some would say, it is particularly hideous that either individually or collectively we have very little direct influence on the behaviour of individual banks or the reconstruction of the banking system.

Comments

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  • Comment number 1.

    I think that the Bloomberg article fails to mention that in the USA, many senior bankers were already carrying concealed handguns before the credit crunch/ banking crisis - this has been a cultural thing in some parts of the USA for a long, long time but there may well be a higher take up now.

  • Comment number 2.

    Banks run the world, not governments, who are dependent on the banks to finance their actions.

    So it seems pretty unlikely that the banks will ever work for "us".

    Simples.

  • Comment number 3.

    "...there may be merit in the FRC's suggestion that each company's chairman, or its whole board, should face re-election every year: the directors should then be under little illusion about who they work for?"

    But won't this feed the very short-termism that caused our current difficulties?

  • Comment number 4.

    "I particularly like the idea that all boards should every year state in simple plain English a short account of their respective companies' business models: viz how those companies make their wonga over the long term and what the big risks are."

    Call me cynical but do you really think the board members are going to sit down and produce these reports themselves or in reallity would this this be more revenue for the large accounting firms whoes audits did not raise issues of excessive risk taking in the past.

    In practice will this be much different from the sellers or derivatives providing the credit ratings thenselves

    Secondly lending should be prohibited well below 50 times capital resurces, End Of Story

    Finally, and i will not be too popular on this one, even us savers are to some extent to blame for picking above average performing funds without asking the question of how



  • Comment number 5.

    good to get focus on this. its amazed me that the "owners" have had so little coverage in the crisis so far. as, you point out, they should be able to set the direction of the company and the risk/reward balance of their money invested.

    you would think that all shareholders, whether an 80 yr old pensioner from hove, or a bestriped pension fund manager would be reasonably aligned. the only occasion i can think this does not happen is when pension fund managers are set bonuses for short term returns....

    the system is still broken if pension fund managers do not come under the same focus as money market bankers. why has this not happened?

  • Comment number 6.

    "It was no secret that of all the world's property bubbles, one of the very bubbliest had been in Dubai "


    ....and yet that didn't stop the estate agents selling (and continuing to sell) the dream of being a Dubai landlord.

    "proper appreciation of their responsibilities as the custodians of the wealth-generating machines that pay for our pensions and generate our tax revenues."

    no, no, no, no, no Robert - they do not 'create wealth' - they extract it from the production process in the form of excess labour value and then they redistribute it (at an interest rate) to extract more and increase their share of the cake we all eat from.

    Wealth can only be created at the point of production - via an act of labour on a commodity.

    You all still live in this fantasy world where money is made from thin air and you wonder why it collapses?

    There was an argument that the investment (or investor) is rewarded for the 'risk it takes' - however when you can invest recklessly and get it wrong and the Government is forced to bail you out - remind me what you're getting paid for again?

    Banks earn wealth simply from 'having wealth'.

    If you cannot see this at the current time then you really need to think harder.

    The banks gambled
    The bankers took their bonuses
    The gambles started failing
    The banks didn't have the money to pay for their promises.
    The Government had to step in to honour those promises.
    The tax payer will have to pay for the action.

    In all of the above only 1 person (or group) are actually generating wealth.
    It's the taxpayer through their production over the next 10 years

    The banks produced nothing
    The Government produced nothing
    The bankers produced nothing

    ...and still the same old tired and pathetic line of 'wealth creators' is used without ever thinking about whether it's true or not.

    Until people understand this (and the media stop lying about it) will we start to move on.

    I mean please stop me if I'm wrong - I am dying to hear how banks 'create wealth' without actually already 'having wealth' and restricting it's use through lending - creating it's own scarcity.

    If I buy up all the Bananas in the world tomorrow and then insist that nobody can have one, or a seed, without paying me the 'new price' - I will be better off.
    ...but what wealth have I created? All I have done is make everyone pay more for Bananas, I haven't improved the production process and I haven't even grown anything.

    Bananas just about sums up the countries outlook on this situation. Oh 'Woe is me, another recession, how unexpected'

    It's completely pathetic.

  • Comment number 7.

    Cultural differences here. You can buy a handgun in a supermarket in the US and every hick seems to have one. So insane as it sounds, its normal for the US.

    I'm not sure shareholders are the main problem. Many are nursing massive losses and were in no position to influence the banks.

    The days of proxy discipline are over. Just set rules, go in and enforce them and punish anyone who flouts them.

  • Comment number 8.

    #6 excellent blog as usual.

  • Comment number 9.

    #6 WOTW - I am sure you will not be surprised to hear that I agree with everything you have written.

    I think that the bankers and City folk who RP mixes with for these stories however do genuinely believe that they are creating wealth - they are wrong.

  • Comment number 10.

    Exhortation is no way to get the banks to change (or the investment fund managers). Too big to fail bail outs have destroyed for the forseeable future the value of free markets in that industry. Banks need supervising not regulating. Their management neeed to fear the tap on the door from the BoE/FSA. There needs to an active sizable public banking sector as an exemplar and real competitor to the privately owned banks.

  • Comment number 11.

    Robert Peston says:
    'Here is what should really give us pause for thought: it is our agents, the investment institutions, who have limited liability, but not us, the savers who provide them with the funds to manage...'

    It's time for a serious look at limited liability. See http://diarmidweirphotography.co.uk/wordpress/2009/11/rover-the-%e2%80%98phoenix-four%e2%80%99-and-limited-liability

  • Comment number 12.

    The Walker review is a complete joke.

    Committee, review, committee, better governance, try harder, committee, blah blah blah.....

    It's just more of what we have already, meaning bankers (employed by the regulator) pretending to sit in judgement of their mates (bankers working for a bank) when we all know that a year later they will themselves be getting a job with that bank, and therefore have an absolute personal interest in not making life too difficult.

    Self regulation just does not work.... neither in banks nor anywhere else.

    We need a complete revolution in banking - essentially laws to, on the one hand, make banks simpler and smaller organisations (i.e. separate commercial from investment banking, and limit the market share of companies to much lower levels than in any ordinary market) and on the other hand force them (anyone, indeed, who deals in money i.e. all 'financial services' companies which will include insurance companies, betting shops, hedge funds, investment companies, trusts etc etc) to declare much more information into the public domain - i.e. management accounts, details of sizes and numbers of fund providers and fund users - so the 'market' can take a view on them. If we did this, a whole new set of organisations would grow up to 'rate' the security, safety and performance of these companies, which would altogether do a far better job than the present, very few, ratings agencies who we know are in hock to the various financial institutions anyway.

    You are right that the huge number of levels of intermediation in the whole system lead not only to ridiculously high costs, but also a complete disconnection of one end from the other.

    The answer to this is not to force greater levels of disclosure of information from one level of this system to another, but to force disclosure from each level into the public domain, so that all of us can access it and which entirely independant third party organisations would then pick up, process and make an independant judgement about.

    What downside is there to greater public disclosure from banks about what they are doing?

  • Comment number 13.

    its too late now though, and it doesnt help that the very same companies who are operating in a closed shop control oil, and attempting to create and control a carbon capture market, have supercomputers and programmes that give them the edge over everyone else. They are spivs with a fancy name and gucci suit, they take their cut in a game that is fixed for them.

    So they can introduce as many rules as they want, the damage has been done already and they will just fix the game to make it look as if they are now doing the right thing but they wont be

  • Comment number 14.

    It is a fact of modern life that access to a bank account is vital to most people.
    Most people have no need for investment banking.

    As the banks themselves seem unwilling to separate into retail (high st) and investment (casino) businesses then I think that it is time that the government provided this service.

    A government bank should be established that provides the following services.

    Simple current account, no interest paid, no unauthorised overdrafts, no transaction charges*, DD and standing orders allowed, debit/cashpoint card provided.
    Simple savings accounts, instant access - BOE base rate paid.
    Longer term national saving scheme based on government bonds.

    *no transaction charges - there are four charges that are applied to most UK current accounts.

    1. unpaid item - where a transaction bounces due to insufficient funds
    2. paid item - insufficient funds but the transaction is allowed
    3. guaranteed paid item - insufficient funds but guaranteed transaction is allowed
    4. overdraft excess - this is usually an additional charge to 2 and 3

    Items 2,3 and 4 would no longer apply if overdrafts, unauthorised or otherwise, were not available.

    Item 1 is an insidious charge that costs the banks no more money than a standard transaction, it is there only to generate revenue (like they don't make enough money from the unearned interest on your current account alone)

    The accounts would have to be available Nationally through a chain of outlets right across the country, they would have to allow workers to have their wages paid in and benefit claiments to cash their giro's.

    What would you name such a bank, National Girobank sounds like a good one.(didn't we used to have one of those, kept the post office in business as I recall)

    The new national savings scheme could be called “Lend to Defend the Right to be Free ” (didn't we used to have one of those as well ?)

  • Comment number 15.

    Perhaps now would be a good time to consider seriously curtailing the limited liability of large companies.
    Remember limited liability was introduced over a century ago essentially to protect entrempreneurs. This protection is now widely abused, both by large companies and small ones. I can think of several commercial areas where individuals set up companies specifically to take advantage of booms in their sector and repeatedly go bankrupt to avoid paying their creditors and then start again.

  • Comment number 16.

    On the radical fringe, perhaps it would focus minds if all shareholders lost their investment if one of these banks went under. The public would still foot the bill for the recovery but I'm sure that such an event would never happen again.

  • Comment number 17.

    This is exactly why we HAVE to get back to a position where banks if they get it wrong go bust.

    I also wholly agree that a complete appraisal of a banks worst case position must be announced with its financial results i see no reason why this couldn't be done every 3 months.

  • Comment number 18.

    Well for me the end product thus far from all this is:

    Don't trust the Financial Services Authority.
    Don't trust any politician
    Don't take out a private pension
    Don't trust any financial product
    Don't trust a bank
    Don't believe that your savings can ever keep up with inflation

    Advice for the young: Whatch the video 'Money as Debt'



    Whatever you did previously regarding the money you earn, absolutely do not do it again.

  • Comment number 19.

    #6 Excellent post.

    Consider the role of Investment Bankers as wealth creaters.
    Buying a share and selling it at a higher price, creates a profit for the trader but has he created wealth ? Or has wealth just been transferred from somewhere else ?

    The Stock Market is a means of transferring staggering amounts of money from the real wealth creaters (The workers) to the Investment Banks. If this seems simplistic, consider that every time a Trader 'locks in' profits they have taken actual money from somewhere, this invariably will be pension funds.

    Investment Bankers need the market to move up and down, the more volatile it is, the more money is transferred. Any excuse can be used for the market to move, Dubai is a prime example. You can be assured that the 'professionals' made serious amounts of money on this market movement, and of course some were aware of the announcement in advance.

  • Comment number 20.

    You raisre the interesting point about the general inactivity of the major shareholders - the funds who are holding our money - at AGMs or other key times. They seem to play ballwith the management, presumably not wanting to rock the boat. Occasionally, someone does create ripples - I remember Anthony Bolton acting tough at some stage in the distant past, but this is a very rare occasion. I believe that we should expect more of these middle men who are supposed to be working on our behalf.

    As for the general public view of punishing bankers, we should all remember that if this country acts unilaterally to satisfy the public lust for blood, then they will up sticks and go to Switzerland, Germany etc and this country will be an even bigger loser. We need world concerted action by the G20, which is unlikely to happen, or do what we can to limit risk taking in future; expect to pay top people top pay; and preferably pay bonuses over a period of time and in their company shares to be taken at the end of say a 3 year period of time. Even that may be seen as too limiting by these top people who have us over a barrel and they would be off anyway.

    Real economics, I'm afraid.

  • Comment number 21.

    Hmm. The comments concerning 'wealth creation' above don't sit very well with me.

    The 'wealth' created can be used to purchase manufacturing/commodities and in principle, it is. You don't seem to acknowledge that a 'share' has a value in exactly the same way as any other chattel, object or manufactured process. I readily accept that the processes, products and systems have become opaque to the extent that value is distorted for financial gain- hence the need for regulatory upheaval, but to suggest that no wealth is created as a result seems wrong.

    I'm certain that i'm wading knee deep into an academic/philosophical debate so please do set me straight if what follows is flawed.

    In my mind the issue with the wealth creation leading to the present problems is revolves around the confusion created to mask the real value of the chattel, not surely that the 'wealth' used to pay for it does not exist or has less merit than any other wealth?

    Banks provide retail and wholesale functions. Little is said regarding the retail functions and if we're honest these services are pretty reliable, efficient, cheap and effective- to consumers at any rate. I am not talking about lending rates etc- I have little/no expectation of my bank trying to do anything other than make money from me. However as a consumer I have expectations in terms of ease of use and generally these are satisfied- I don't pay for any services I use.

    Entirely separate is wholesale/investment banking.

    If a retail bank makes money from lending, fees, commission etc I can't see that we can grumble- we're borrowing the money and the costs to us (should be)are clear at the outset.

    Your issues appear to be with wholesale banking but even wholesale banking represents lending to purchase something, even if other debt or ghastly CDO's. These are 'assets' and I can't really see why, in exactly the same way as someone selling items during a garage sale is selling items they have not manufactured, banks should not seek to make money, or 'create wealth' in that way. They can then take the profit and buy shares in a company manufacturing commodities, for example.

    I suppose the rub of what i'm saying is that if;

    Wealth can only be created at the point of production - via an act of labour on a commodity.

    Is it not right that the commodity can be shares and the point of production is when they're bought and/or sold?

    You wouldn't argue that the person selling items in a garage sale is not really creating wealth because they didn't manufacture everything they're selling...would you?

    The point regard regulatory change is that we need to know what the garage seller paid for the items, what they cost to make, and the sale price achieved so that we can assess the cost;benefit ratio.

  • Comment number 22.

    The more I learn about economics and the fractional reserve banking system the more convinced I am of the beautiful irony of our masters using it to bring the whole rotten edifice tumbling down.

    MV=PQ

    Ok the M is there now thanks to our masters.
    The Q aint changing or if it is its dropping
    So all we need is the V to up the P and I aint talking vampire blood
    Come on ! 0-60 in no time
    Spend first and if you spend wisely you may come out ahead
    Start the ball rolling. If you dont you may lose the lot anyway
    Come on you lovely boys and girls. You know you want to

    Man those mushrooms are goooood

  • Comment number 23.

    Presently there is no political will to do anything to control the bonus culture of our banking sector - too much tax take on these large bonuses. The BoE/FSA will allow them to operate as Somalia pirates ( who also have guns) and continue to hold the country hostage as they lead the way in the greed culture that is endemic in our society.
    Most- not all- banking management puts more time into ensuring their bonuses than running the business. Unlike the Somalia pirates the Bankers would rather scuttle the ship than miss out on yet another big pay day.

    Bank Boards care only for themselves and the people in the " bonus sharing cartels " that operate within their respective organisations. They only get there on the strict understanding that they do not consider the welfare of shareholders and customers.

    The present interest rate difference between deposit and lending rates is indicative of the collusion between banks and the regulators/government.

    Answer : The media and the voter must keep the pressure on and not forget as green shoots appear in the economy.

  • Comment number 24.

    Amusing bloomberg article. But Lloyd Blankfeim and Goldman are doing G.O.D.'s works - the works of G.O.D. - Gold. Oil. Dollars.

  • Comment number 25.

    #6 WotW - good post..

    The only thing the financial system should do that actually creates wealth is to help to distribute resources to the parts of the economy where they are most required to facilitate real production.

  • Comment number 26.

    Robert...How about a joint christmas present to us all and do a blog responding to #6, post of the year, I for one would be very interested to know your thoughts.

  • Comment number 27.

    Perhaps investment managers should have a responsibility to take the views of the investors they supposedly represent into account when using the voting rights acquired through the finds of those investors.

    Rather than just supporting the insiders club...

    Hopefully the 1 year contract proposal will be accompanied by severe limits on exit payments, where directors can make more through failure than success.
    Perhaps the success of part of Warren Buffet's approach of long term investment in fundamentally sound businesses should represent more of a model for the future than a constant chase for speculative short-term gains and the inherent instability that follows.

  • Comment number 28.

    Not a comment, but a question for Robert. Please would you satisfy my curiosity?
    What is the final balance between tax revenues generated by London/UK's Finance Sector and the cost of the bail-outs?
    I've not seen this angle reported or discussed anywhere else and it would be interesting to know the answer.

  • Comment number 29.

    If G-S bankers are having to carry artillery because they fear public attack they should really start asking themselves if they have taken the right career path. What is the point in living like that? How long before they start wearing stab-vests and flak-jackets?

    I am also more than a little bit tired of the way the language in this article seems to merge the behaviour of the banks into more general business practices.

    Businesses other than banks have to prove their standards, behaviour and processes to their auditors, government bodies and even their financial providers. It is the fact that the banking casinos seem to have been exempted from such oversight and supervision in any meaningful way is all part of the scandal.

    What is needed is that retail banking is divided from the casinos once and for all. Then there needs to be a full verification of all the bad debts in the possession of the banks so that we can all see our way forward. Then a suitable number of bankers need to appear in No 1 Court at the Old Bailey to answer charges under the Theft Act.

    This should be perfectly sufficient to bring the banks to heel. Of course a number of the casinos will promptly go bust either because they no longer have retail bank money to dip into, or because their debts are greater than their perceived assets. If pension funds get caught up in that mangle then I would rather compensate their members than bankers.

    If the political class are unable to force these reforms through then they should move aside and allow us concerned citizens to take the bull by the horns. This cannot be allowed to go on any longer.

  • Comment number 30.

    Shouldn't the banks work for "us"?

    Technically no they should not, they are publicly listed or privately held companies and therefore they are bound to work basically solely for the benefit of their shareholders or owners, first and only. That is the foremost legal requirement that is placed upon the boards.

    All the things that could be percieved as benefits of banks business to "us" are a by-product of this goal and all industrial processes seek to minimise the unwanted by-products. Local employment, such taxes as they cannot actually avoid/evade, community donations/sponsorships, the very little money they deign to bestow on local suppliers etc. are all just by-products of this one and overriding goal to gather as much money as possible for the benefit of the 'owners'. It is capitalism in it's purest form and without adequate regulation is inherently unstable and prone crashing.

    You can see in all these reviews and ideas even after the huge bailouts made to prevent disaster for these private business' that they still throw their weight around. Governments becuase they cannot get together to agree how to do it are being held ransom with basic threats to move our business elsewhere if you put regulations we don't like in place.

    You have to view all input from the industry in this light.

    What however is patently obvious from the weak kneed response of the worlds governments is that still the various national treasuries are still buying the banks threats to take their business elsewhere. The banks are effectively playing divide and conquer and on current evidence winning handsomely.

    The government has the prime opportunity with it's owenership of RBS to redefine how banks should operate - unfortunately they cannot afford to do it. They have to have it run like the gambling houses of old to maximise the resale value for a later date otherwise it will not recover it's money, money it could not afford.

  • Comment number 31.

    Bankers clearly need to be subject to clear scrutiny and control, because they:

    - gamble with other people's money;
    - where they get high bonuses if they 'win';
    - and very limited losses if they 'lose';
    - giving a clear incentive to take high risks.

    Unfortunately, the Government thinks that institutional shareholders are the people to provide this scrutiny and control, despite them being run by fund managers who:

    - gamble with other people's money;
    - where they get high bonuses if they 'win';
    - and very limited losses if they 'lose';
    - giving a clear incentive to take high risks.

    I don't see how this will work. It's asking one set of gamblers to regulate another.

  • Comment number 32.

    # 21 pawns_or_players

    Re your comments on retail banking...

    And yet its ironic that these banks quote the high cost of funds from wholesale markets in comparison to base rates as an excuse for charging high interest rates, and yet pay next to nothing for funds from another source, i.e. retail deposits.

    As you say, the actual underlying value of a share and its specualte market price are considerably disengagaed.
    The shareholding is in many ways wealth rather than wealth creation, the only forms of shareholding really potentially generating wealth being the purchase of additional stock, should the funds acquired then be utilised by the organisation to further increase production (i.e. real weralth generation).

    Most other forms of trade, are zero sum gain, merely trade and redistribution Although trade itself can add to total value, by having things produced in the most comparatively efficient places and ways e.g. enabling econmies of scale, accessing local resources, etc.; it does not directly "create" wealth.

    In many ways the wealth of the developed world is based on it using its historical wealth (including developed infrastructure) and influence to use much of the rest of the planet.

  • Comment number 33.

    #21 pawns_or_players

    In my opinion writingsonthewall is quite correct in that value can only be added at the point of production.

    Value is a term that is much misunderstood today.

    If you go back to Smith and Ricardo you will see that they used a version of the labour theory of value.
    But because this showed that labour was the ultimate source of all profit it wasn't a very convenient ideology.
    Hence the emergence of the vulgar economists and their marginalist version of value.
    This very conveniently fitted the surface appearance of each factor of production (land, labour and capital) getting its 'just' return (rent, wage and profit).
    This marginalist version is of use to microeconomists but of no use in explaining the economy as a whole, and hence the inability of today's economists to offer a coherent theory of crises.

    Marx refined the labour theory of value used by Smith and Ricardo.
    Hence many Marxists did forecast and can explain the recurring crises of capitalism.


  • Comment number 34.

    The UK is the only G20 country still in recession. Ok, but what does this actually mean. Not the official thing of still not being in growth etc. More, what does this mean relative to the other countries. They may be out of recession by being in growth but from what base? Where are the rest of the G20 in terms of their current position, in terms of their standard of living, unemployment, national debt ratios etc etc.

    Is it as simple as that if we are not yet out of recession then we are the 'worst' of the G20 or is there a danger that just concentrating on that phrase about us still in recession does not actally give a fair reading of where we are in relative terms and longer-term prospects. Please advise ...

  • Comment number 35.

    I think that seeing the crisis simply as the result of deliberate excessive risk taking is missing the main point. Share holders and the government,like the bankers themselves, did not appreciate the seriousness of the risks being taken, and to expect them to spot any new problems which might arise in the future is naive.

    It was the unexpected failure of the interbank lending system which caused and was the first symptom of the crisis. As long as only a few people put currency in tin boxes under the bed, money lent to a bank client and spent, usually simply involved a transfer of credit from one bank account to another, maybe even in the same bank. But, even if it were not, any balance left after these transfers had been netted up, could be adjusted by interbank lending.

    So for a bank, the process which gave the client extra spending power, involved only a few changes in the numbers stored in computer memory, no exchange of anything of significant real value - a near perfect money printing machine, offering profit without capital expenditure, with apparently negligible risk.

    The Bank of England tried to control this process, as far as the sterling money supply was concerned, by buying and selling bonds. In the future it should intervene more directly in the interbank wholesale money market.

  • Comment number 36.

    # 6 WOTW

    Shout out for your excellent blog, there should be a blog of the year award created for it. As P Diddy would say you are the crescendo.

    IMO, hopefully people will realise that investment income is completely unearned income. Unfortunately as manufacturing now makes up less than 15% of GDP i'm not too optimistic for a prosperous new year

  • Comment number 37.

    writingsonthewall well said.

    People are saving and scared. They aren't going to start consuming for years. The word from govt is cutting back public spending by £100 billion a year. Thats 5 million jobs at 20k pa gone, and thats without the economic follow through.

    So why is the market up since March. Traders cite China. But all I can see is a Maoist 5 year plan building factories and foundries when already vastly oversupplied. This is a policy founded on hope, which itself is driven by fear of rebellion from a government with a victim mentality.

    Here is the best investment advice you'll ever get.
    Accept that all your money and assets belong to your family not you. Have more kids. Send the children to private schools. Sell your home, pass the money on to your children and move in with them or get your parents to do the same with you. Open a family business, apprentice your kids and pass power to them when they get to their 30s. Never let a child stay unemployed. Call in every favour, beg if you have to, walk those streets and get that child a job. Leave none behind.

    This is all unfashionable so look at it another way. What pension fund guarantees to house you, feed you, nurse you, value your advice, and pass on all you've saved to your children. None. There isn't an investment in the world that can compete with your family. Not even Buffett.

    So there you have it. That's where we're heading. Large family homes and big extensions on existing homes, retired parents living with their children, many more family business' and many of them being home based, more children, more private schooling, a lot less borrowing particularly mortgages.

    And with this will come a more callous approach to the feckless, to single mums and to offenders. Because it's easy to give ones own money to the foolish, but not ones family money.

  • Comment number 38.

    I’m constantly astonished that absolutely no-one in the banking community is to be held responsible and accountable for what’s happened; this isn’t an unforeseen ‘act of god’, but the result of deliberate policies and decisions taken by the banking industry.

    Can you imagine any other sector where no matter how big a c##k-up you make you get to keep your job, go unpunished and presumably are free to make similar c##k-ups again? And get rewarded with big salaries and bonuses to boot.

    I’m also constantly astonished that governments so unquestioningly rush to prop up a sector that has so patently failed us.

  • Comment number 39.

    Love it No 6 - thank you!

    Things are all topsy turvy as Banks should indeed be answerable to their investors - both shareholders and customers - but most of the customer service does not assume that at all, and shareholders are not looked after well either.

    Too big for their boots?

    Is the business model simply a brokerage mixed with a classic turn on the clicks with added product lines to make up the potential profit?

    The issues of Flash misrepresenting the true situation - Britain being best placed, dah de dah and now being the last of the G20 with more bad info still to be uncovered, are key to any reality check and the recovery plan that has to follow.

    Gordon Brown is grossly neglecting the opportunities to truly audit the banks, find out the worst and get on with the plan. Is he an ostrich about this or does he really believe what he says?


  • Comment number 40.

    #6 WritingsOnTheWall - Well said that man/woman/gender-neutral noun.

  • Comment number 41.

    Perhaps you'd explain why in the 7 years before he successfully navigated Lehmann onto the rock the CEO trousered nearly $0.5bn in salary etc and yet none of that will come back ?
    Then perhaps you'd explain why banks had
    a) capital ratio's far in excess of Basle agreements
    b) why huge assets were held off balalnce sheet when they were still owned by the banks
    c) why it was felt that high risk assets could be made low risk by mixing them with other low risk assets?
    d) no not one regulator said or did anything to stop them ?

    Then perhaps we'd get a banking system that supports the real economy and the casino banks can do their thing - and carry the can if it goes wrong ..

  • Comment number 42.

    21. At 12:38pm on 01 Dec 2009, pawns_or_players

    "You wouldn't argue that the person selling items in a garage sale is not really creating wealth because they didn't manufacture everything they're selling...would you?

    The point regard regulatory change is that we need to know what the garage seller paid for the items, what they cost to make, and the sale price achieved so that we can assess the cost;benefit ratio."

    ....no, and that's why the garage sale doesn't make any profit, items are usually sold for less than they cost to manufacture. As the owner bought them at some point there is no wealth created (merely passed around).
    The only way the garage sale owner makes money is if he creates a scarcity unrelated to reality - i.e. There's only 2 of these in the world".

    This is what the banks do with money, they control it and they create false scarcity in order to ensure we pay for borrowing their capital. I could double the price of sugar by claiming there was a shortage - but I haven't actually added to the "wealth value of sugar" - I have simply adjusted the "scarcity perception" of the purchaser.

    There are 2 points to consider in this argument which sometimes mis-lead us into thinking value is added without actually doing anything.

    1) Sometimes commodities are moved to different locations, from an abundant one to a scarce one - this pushes up the price. However the labour value added was in the movement of the commodity to the new location (walking, riding, driving etc.) - we take movement for granted, which fools us into thinking profit has been made from nothing - ignoring our own labour value input.

    2) Empty land value - always brought out as a reason for defeating the surplus value theory. I mean fallow land has had no labour applied, but does have a value. Again this is down to our misleading scarcity argument. On the Earth, there is a finite supply of land - and most people realise this. However their perception of how much space there is can be altered by the restrictions placed around their own definition of 'land'. If I got in my space rocket and started a colony on the moon, suddenly 'land value' becomes insignificant because there is an abundance (and I mean living on titan, Mars etc) - showing there is no true value in fallow land except the perceived scarcity of it.

    We all need to start questioning glib statements like 'wealth creators' because to accept it without considering it is how Hitler rose to power in Germany. He suggested that the Communists were trouble makers and nobody actually thought 'but why would they be?'

    The same is applying here with banks and the banking system. We all ASSUME they are doing what we're being told - i.e. creating wealth - but where is the evidence?

    The crisis is related to the uncovering of this 'wealth creation' and the realisation that it was never created - and yet we had already assigned it a 'value'.

    In this respect Robert and his colleagues are as culpable as the bank owners - nice man though he is - he doesn't want to question the fundamentals he has been taught - and nor do many Economists - for fear of looking stupid.

    I discretely asked around the trading and support floors of the investment bank in which I worked and asked how many of these 'bright young things' had actually read Das Kapital - only 1 person confirmed they had (and yet they were all university educated) - and guess which area he worked in?

    ....RISK.

    That just about sums it up - the traders and managers tell themselves (and anyone else who will listen) how clever they are in their 'wealth creation' - but none of them has read the most fundamental critique to this the world has ever seen.

    I think it's typical of modern mankind to think it's fine to dabble in areas you don't understand - but then I suppose when you look deeply into the 'experts' often brought on to TV shows to comment - you can see why this might be.

    You and I don't attempt nucleaur physics and Quantum Mechanics because we don't have the understanding and it could be dangerous - so why do we not make this same allowance for those who work in the financial industry?
    Meltdowns in both areas are equally as destructive it seems.

  • Comment number 43.

    6 Writingsonthewall

    Well summed up.

    The report from Morgan Stanley should really wake people up but unfortunately they are still napping. And so they all will until the next crisis occurs.

    The banks are being recapitalised at the expense of the pound and the taxpayer.

    The government have issued a statement that there will be no cutbacks in public expenditure until growth resumes. Growth will involve even more debt raising which will increase interest rates and devalue the pound.

    Higher interest rates will cause a collapse in property prices hence the current recapitalisation of the banks to cope with writedowns and bad debts.

    2010 will be a bad year indeed and I agree with Morgan Stanley's assessment 100%.

  • Comment number 44.

    25. At 12:53pm on 01 Dec 2009, Reaper_of_Souls wrote:

    "The only thing the financial system should do that actually creates wealth is to help to distribute resources to the parts of the economy where they are most required to facilitate real production."

    ...and that is actually what they should be doing.

    Banks are simply resource allocators - entrusted by us to ensure that the areas that are in surplus can provide for the ones in deficit. They use the currency system to do this as it's easier than lugging bags of wheat, nuts and bolts, bags of sugar etc.

    They are clearly not performing this function efficiently.

    Worse still they are extracting a price for doing this - and then using that 'profit' to ensure they remain in contol of that function.

    It gets to a stage where too much has been taken out and we realise that there is a deficit and the bank requires a bailout.

    I'm not saying the state (in it's current form) is any better however, it has managed to mis-allocate resources for the NHS almost as well as banks mis-allocated resources to property bubbles.

  • Comment number 45.

    UPF advisory note 15

    The following is an advisory note issued by the United Peoples Front

    Members have expressed interest in the FRC, and its success thus far.
    As a consequence we detail the same below:

    The Financial Reporting Council (FRC) is a unified, independent regulator with a mission of promoting confidence in corporate reporting and governance in the UK.

    In respect of any mission success to date; none so far reported.

  • Comment number 46.

    #38

    Collectively our government/institutions have become beholden to the financial industry so completely that they have no plan B. From the 80's onwards we have been beholden to the city and financial industry as the driver to economic growth.
    Having abandoned a balanced economy in favour of a service based one focussed on the city (net balance of payments benefit to offset the huge sucking in of imports) we are left in an unenviable position, what else to do as a country to pay our way in the world?

    Our government is tied at the hip to the finance industry - how else are we to fund PFI, organise asset sales, privatise publicly held assets and companies, fund government debt, funnel funds to needy companies - banks, banks, banks and more banks.

    So don't be astonished - one of the earliest lessons in life is never to bite the hand that feeds you.
    Banks feed the government and it would be churlish to bite its' hand too hard - so a gentle gumming is all that is ever likely to happen.

  • Comment number 47.

    Posts 6, 21 & 33. Value what a lovely concept!

    Sorry to rain on everyone's parade but Writingsonthewall is wrong value can be added at other times than production. It can be added at the point of exchange.

    There is a difference between use and exchange value which I will demonstrate with an example.

    The raw materials are used to make a product (let us call it an LCD television for ease of example and modern relevance). The manufacturer has created value by turning the raw masterials into a finished good by the use of the raw materials, labour and the use of capital.

    The manufacturer then sells the item to the brand owner for whom the item has been manufactured, let us call them Sony, again for the sake of example. Sony pays the manufacturer the agreed price which we shall estimate at GBP 200 for ease of later calculation.

    In China the item has a value of GBP 200 being the price paid for the manufacture of the item. Sony seeks to make a profit by utilising the lower costs of Labour in China by selling the television in the UK where it can charge a higher price for the item.

    Sony utilisies the resources of a shipper and transporting company who arranges for the item to be shipped with many others by container to the UK. Sony pays GBP 50 for this.

    As such an additional amount of 25% of the manufacturing value has been created and upon arrival in the UK Sony sell the item to a retailer, who we shall call Argos, for GBP 350.

    By transporting the item to another market and then selling it to a retailer Sony has made a gross profit on GBP 100 after costs of production and transport.

    Argos then sell the item at GBP 400 in their store. Argos have increased the value of the item by GBP 50 less their overheads.

    The item was manufactured at a cost of GBP 200 yet finally sold at GBP 400 to the end user a doubling of the initial manufactring cost.

    Anyone care to disagree that value cannot be created after manufacture after reading this example?

  • Comment number 48.

    6 WOTW & 21 Pawns or Players

    I think WOTW's Marxist theories are a little too simplistic for the situation.

    The garage seller does add value merely by buying and selling using his skills to reallocate resources.

    The point is - HE CAN GO BUST!

    Until there is another separation of retail and wholesale banking as with Glass-Steagull, the problem will continue.
    And whilst it isn't, the money makers are laughing all the way to the ....



  • Comment number 49.

    #45 Kin A

  • Comment number 50.

    UPF advisory note 16

    The following is an advisory note issued by the United Peoples Front

    We at the UPF have been asked by members about the rate of return that one would expect from a UK fixed interest gilt. And as consequence we report as follows:

    In 2009 all the usual large net buyers of gilts, were all net sellers of gilts, and the only large net buyer was the Bank of England. These purchases having been made to avoid breaching article 104(1) of The Maastricht Treaty and thereby keep the government funded without officially breaking the rules.

    Robert Stheeman (The Chief Executive of the Debt Management Office) gave evidence to the Treasury Select Committee in early November and confirmed that when Q.E. stops, there could be a significant problem gilts.

    We have contacted one of our international branch secretaries in Singapore and he reported that demand for low fixed interest UK government debt was virtually non existent at present.

    As a consequence we do not advise members to invest in fixed interest UK government debt unless at the rate of interest being offered is greater than the increase in percentage terms of the UK national debt during the period 01.10.2008 – 30.09.2009 (this being the latest full accounting period to which we have access.

    For those of our members who do not have access to this information the increase in UK Government debt during this period was 29.28%.

    As a consequence we recommend that for fixed interest UK government debt our members should not acquire such if the rate of interest offered is less than 35%.

  • Comment number 51.

    The banksters are armed and dangerous.

  • Comment number 52.

    #6 - Writingsonthewall

    You and I don't usually see eye to eye on much but I think you've got it spot on this time.

    This global game of shuffling numbers around is not generating wealth in any way. If anything it's parasitic.

  • Comment number 53.

    #47

    You're showing us how prices get inflated and middlemen take profit, not how the tv is somehow growing in worth.

  • Comment number 54.

    WOTW excelent posts, however:

    "....no, and that's why the garage sale doesn't make any profit, items are usually sold for less than they cost to manufacture. As the owner bought them at some point there is no wealth created (merely passed around).
    The only way the garage sale owner makes money is if he creates a scarcity unrelated to reality - i.e. There's only 2 of these in the world"

    He still doesn't create wealth though does he? In the sense that he doesn't contribute to overall growth - he just reallocates a disproportionally large amount of money from the buyer to himself.

    Correct me if I'm wrong but overall growth only happens by finding new markets for existing products or drawing activities into the economy that were previously outside of it. As you mention somewhere else this is the contribution of trade, but buying and selling 'second hand' goods doesn't of itself add anything. Be they junk, cars, houses or shares.

    Personally I would like to add my voice to those calling for a proper discussion of limited liability. This was created as a way of attracting capital to potentially risky ventures - initially opening up new markets and then investment in manafacturing processes. Over the last 20 years this has been abused and has allowed the holders of capital to hold disproportionate control over the rest of us. At the same time we are increasingly moving towards a economy where large scale investment is not so important to create wealth - the much vaunted 'knowledge economy'. If the future store of value is inside peoples heads, why do we need capital to release it? And why do the providers of capital need to be protected above those providing the value?

  • Comment number 55.

    Such Financial Experts, or 'bankrobbers' as they have become to be known recently,shouldn't need guns as they can do an 'inside job'. Maybe the 'new regulation' is having an effect in the perceptions of these people as making the banks more difficult to rob...

  • Comment number 56.

    #47 Ian the Chopper

    Yes, value gets added at multiple times along the 'value chain' involved in the creation, shipping and sale of goods.
    And there is labour at all those points.

    (Chinese workers, shipping company employers, delivery drivers and dixons salespeople)

    However if 6 months later you decide that you no longer want this TV and would prefer to have a projector, you sell it to me for 300 GBP. This does not add any value overall, none of those workers benefit.

    This is the analagous case to shares - at IPO the money you invest goes to the company, further trades in that share do not.

    The Banks only make this trade efficient - the same as eBay could have done with the second hand TV - if they create any value it is here, not in the price of the assets traded.

  • Comment number 57.

    UPF advisory note 16 (revision A)

    The following is an advisory note issued by the United Peoples Front

    We at the UPF have been asked by members about the rate of return that one would expect from a UK fixed interest gilt.

    This revision has been issued due to one of our members indicating that the current Nominal Value of the DMO Gilt Portfolio (including inflationary uplift) should be used as a basis for calculating the percentage rate of interest, we have agreed and issue this revised notice.

    In 2009 all the usual large net buyers of gilts, were all net sellers of gilts, and the only large net buyer was the Bank of England. These purchases having been made to avoid breaching article 104(1) of The Maastricht Treaty and thereby keep the government funded without officially breaking the rules.

    Robert Stheeman (The Chief Executive of the Debt Management Office) gave evidence to the Treasury Select Committee in early November and confirmed that when Q.E. stops, there could be a significant problem gilts.

    As a consequence we do not advise members to invest in fixed interest UK government debt unless the rate of interest being offered is greater than the increase in percentage terms of the Nominal Value of the Gilt Portfolio (including inflation uplift) during the period 01.10.2008 – 30.09.2009 (this being the latest full accounting period to which we have access)

    For those of our members who do not have access to this information the increase in the Nominal Value of the Gilt portfolio (including inflation uplift) was 38.97% during this period.

    For investors taking a more long term outlook for the period 01.10.2007 – 30.09.2009 the overall increase was 60% .

    As a consequence we recommend that for fixed interest UK government debt our members should not acquire such if the rate of interest offered is less than 40% per annum.

  • Comment number 58.

    Pawns or players

    Garage sales are not wealth creation. Retailers are because they are part of the process of taking a raw material, adding labour and capital, to provide a product at point of sale.

    Leveraged gambling on the markets doesn't create wealth, it erodes the value of existing capital by transferring some of that value to the gambler. Deleveraging simply establishes the real value of assets. The problem is, it lets us know exactly how much value the gamblers have siphoned away.

    Without leveraged trading p/e ratios would sit between 10 and 15.

    Regulation will not drive banking away from the UK. The banks did that themselves by defrauding each other and their best customers, the world's pension and sovereign wealth funds. Once bitten twice shy.

    It's not just the Banks and Parliament. Fraud and Corruption have spread all over our country. From social housing allocation, to visa's and passports, via business regulations that maintains vested interests, a +million fraudulent mortgages not even investigated.

    Our press can pretend it's isn't happening. But don't think the rich and powerful looking for a site for a factory or financial services haven't noticed. We are in so much more trouble than is realised.

  • Comment number 59.

    #47 Sony seeks to make a profit by utilising the lower costs of Labour in China by selling the television in the UK where it can charge a higher price for the item.

    Chinese labour being paid as low as three dollars per day with a 3 dollar bonus for working at least 28 days per month is a bit more than utilisation

    Sony TV's for the European market are actually built in Solvakia. This may be more relvant to the UK's problems

  • Comment number 60.

    47. At 2:32pm on 01 Dec 2009, Ian_the_chopper

    I disagree, I had to pay £569.00 for our TV, and the kids have broken the hand set.

  • Comment number 61.

    47. At 2:32pm on 01 Dec 2009, Ian_the_chopper

    And another thing, having bought the HD ready TV I can't get HD tv unless I buy more things like HD players and cables and whatever else you need.

    It's people like you that give retail a bad name you know.

  • Comment number 62.

    #47

    Think the original point still holds water since in your example all the different stages can be adequatedly covered by the original phrase:
    via an act of labour on a commodity:
    by the acts of manufacture, shipping and sale all of which I would describe as acts of work upon the 'commodity'.

    The 'useful' function of a bank would be described as it's interaction between the stages - as in provision of the LOC, facilitation of the payments and conversion of currencies, facilitating the transfer of the money between each stage. A fee being taken at each stage.

    They are useful but at each stage they do not add value - they only facilitate the process and take their reward out of the process. IN their own right they create nothing.

    What banks and financial markets do very successfully is try in interpose themselves in as many stages as possible, even where there is no real need for them, why does a bank need oil or copper - it doesn't but does not stop them playing in those markets.

    Where the systemic fault lies is that our systems allow the bank to lend the customer the money to buy the LCD TV. This inflates demand for the TV so the maufacturer needs to make more, they borrow from the bank to fund the expansion. Each place in the chain the bank seeks to lend to create demand where none existed. This is where banks/bankers come to believe they create wealth, for if we had not lent the money then no LCD TVs would have been bought and no LCD TVs made.

    In small scale and isolated markets this is broadly beneficial, this is simplistically the whole purpose of FRB to increase the stock of wealth.
    However the more money they lend the more they make - so there is an intrinsic and systemic risk of over exuberant lending which is why they need regulating in these activities.

    If they are not regulated properly then they blow bubbles and bubbles always go pop.

  • Comment number 63.

    Post 53. There is a difference between use and exchange value.

    Writingonthewall takes a too simplistic Marxian view of value and trade. Matters aren't that simple. We do not have perfect markets and there is profit to be made in this imperfect market which is where people add value.

    Banks exist because one party (lenders) place a lower value on assets such as cash or natural resources than another party (the borrower). The bank acts as an intermediary in the trade and earns their income based on this difference.

  • Comment number 64.

    I've just joined the site and the reason I did it was because I've been following the debates with some brilliant posters here, such as writingsonthewall otherwise known as WOTW.
    Dear WOTW, I'd like to thank you for you contributions and please keep them coming, you've already have a strong following.
    Something I've always wanted to ask you if you would ever consider going public and perhaps entering politics? This country desperately needs people like you.

  • Comment number 65.

    No 54

    The point you make about the IP being in people's heads is a good one and one which caused some eyes to roll when I was seeking funding for a software house in 1979. Even with the government loan guarantee scheme it was a matter of finding a bank manager who understood the potential for a software house rather than one who needed there to be assets that could be realisable.

    The traditional banking judgement was that it was far too dangerous to lend to a company where the assets could walk out of the door, if the staff left. We did it and the bank showed us off as being a feather in their cap for being forward looking.

    What will be the fate of fixed interest gilts if the triple A rating goes because of political dithering prior to the next election?

  • Comment number 66.

    writingsonthewall, there you go, plamski gave you your first nomination, I second it, now come on, this is your time, it is now.

    Go forward for the Land of the Britains, for liberty, for justice, and for cheaper TV's.









  • Comment number 67.

    This is why ALL LENDING should be calculated on TAX paid by the borrower.

    If Government is insuring the banks it is indirectly insuring the loans.

    Keep it SIMPLE !!!!!!!

  • Comment number 68.

    Interesting take on Islamic vs Christian banking in that article! Unfortunately once again we have failed to comprehend the substance of the matter and try and reduce everyone into predictably behaving stereotypes.

    There is no official 'christian banking system' at all in the bible. Only a fixed set of weights and measures eg. we set the price of gold or the market does and everyone knows what it's worth vs their effort, work, product or service.

    It is unequal weights that are denounced as well as selling carnal services. Example. the case recently when some gentlemen were buying gold off the customers for less than the market price to make a profit.

    That's the dishonest way that makes people angry, plain old fashioned rip off.

    People are act out of anger when they are offended and think their rights have been violated. They believe they have some right to redress. Yet the apostle himself said, 'never avenge yourself but overcome evil with good'.

    Basically when our prices fluctuate we all get into a tizzy thinking oh I could have made off that but I lost. So the gloom sets in. Nothing against gambling the bible says, 'the lot decides between powerful opponents'. Fairs fair win or lose.

    the christian economy that I understand in the bible was that everyone worked and saved up a bit, in their own community, as much or as little as they wanted and just gave their excess to the other community that was working but made less. The just showed grace to one another.

    At all times however they were told their own money is theirs to do with as they please, to share or not as they wished so that basically 'he who gathered little had no lack' and 'he who gathered much had nothing left over'. That is meant to be what is in the torah, equality. but they said, you tolerate it if people put on airs, strike you in the face and make slaves of you' and aren't we gypping each other enough already?

    Who wants to spend day and night nagging people do what's right? don't! don't want to.

    The other interesting feature of bible, early christian beliefs was that, the adulterers were thrown out of the church and their financial support, and only genuine widows and orphans were enrolled to receive support, and some others as well the one who refused to work did not eat and they had the notion 'that the workman is worth his keep' that is what, food clothing housing etc. We have simply distorted the values of those things with slidy scales and unpredictable markets.

    Do not defraud people it says in bible. hold back wages by fraud, nothing against trading and making a profit, but where do you draw the line between a swindle and a good deal?

    People know what is right or wrong when someone has conned them or not but there are lots of warnings in the bible as well about what happens when people deviate from the true course.

    it's all predicted, known about understood seen witnessed observed but you still getting the backtalk. The character of cain who would clunk you over of head rather than admit to do anything wrong.

    deny everything!

  • Comment number 69.

    #47 Ian_the_chopper

    There is the difference between Marx's labour theory of value and Smith and Ricardo's.

    The classical economists had a theory that used the concrete amounts of labour and thought that this could explain prices.

    Marx introduced 'socially necessarily labour' which could only be known at market. Just because a capitalist makes a commodity does not automatically mean he can sell it.

    The 'socially necessary labour' is a market value, an exchange value as opposed to a use value.

    Individual products can be sold above and below their 'true' values but the market (economy) as a whole cannot add value outside of production (transport is an exception that Marx acknowledged).

    Capitalism in its attempt to maintain value (prevent capital devaluation in a crisis) creates ficticious capital.
    This takes the form of asset bubbles and government debt - exactly what we are seeing today.

    But ficticious capital has no basis in production and so does not resolve the crisis, merely transforms and postpones it.

    Hence the Marxist analysis that the current capital devaluation (as big as it has been) has not resolved the crisis in the rate of profit.

    More trouble for the capitalists and the especially for the workers to come.

  • Comment number 70.

    Post 59, Sony used to assemble some goods in South Wales so your point re Slovakia is very relevant. The Peugeot 206 used to be made in Coventry but the 207 is now made in Slovakia after the Slovaks got EU regional aid to build the plant for Peugeot.

    I wonder if Sony's decision to make tv's in Slovakia was swayed by similar aid?

    Electronic goods are made in China because the manufacturers are able to utilise a very cheap and available labour supply, as post 59 points out.

    As such they restrict the labour part of the production cost which enables them to either make the product cheaper to sell or increase the Capitalists profit. For some reason they seem more interested in the latter option.

    But that is a much bigger story altogether.

  • Comment number 71.

    UPF advisory note 17

    The following is an advisory note issued by the United Peoples Front

    It has been posted in response to 64. At 3:51pm on 01 Dec 2009, plamski wrote great things about our soon to be great leader writingsonthewall otherwise known as WOTW.

    Previously we at the UPF had noted that:

    Politicians were wholly engaged upon their own agenda of personal wealth creation.

    And we had therefore recommended at the forthcoming election, when casting a vote mark your X adjacent to the entrance of your local waste disposal point. And if you were unable to get to your local waste disposal point, contact your local authority and ask for a refuse wagon to visit you on polling day.

    However given that Writingsonthewall has now been nominated and seconded to act as a representative of the people of this country, we at the UPF now endorse him further and ask that you no longer place your X adjacent to a waste disposal point or ring for a refuse wagon, but instead place it adjacent to the posts of Writingsonthewall.

    For liberty, for justice, for writingsonthewall

  • Comment number 72.

    At last a debate on added value! Hurrah!

    Welcome to the real economy.

  • Comment number 73.

    65. At 3:57pm on 01 Dec 2009, Naomimuse wrote:

    What will be the fate of fixed interest gilts if the triple A rating goes because of political dithering prior to the next election?

    The UK’s AAA rating
    The first is A is given because you pay back the capital.
    The second A is given because you honour the interest payments
    The third A is given because you don’t water down the value of the gilt by printing more money.

    That third A is long gone, but not yet admitted to.



  • Comment number 74.

    #63 Ian_the_chopper

    Indeed there is a very big difference between use value and exchange value.

    There is not a single unit by which you can measure the usefulness of everything produced.

    Money only has meaning in terms of commodity exchange.

    Volume 3 of Das Kapital has a chapter on merchant capital, explaining that it is a form of surplus value (i.e. a share of the profits extracted in production).

  • Comment number 75.

    Thanks as always but they’re not interested in it Robert because they are making trillions transferring wealth from taxpayers to their coffers. Although if they did think about it, they should support efforts at transparency, supervision etc. There again unfortunately each is also its own special interest, so such internal reform is highly improbable.
    The big question is, why haven't ordinary taxpayers reacted more passionately and angrily to end the daily systemic abuse? Throughout most of the western hemisphere now millions are unemployed, millions have lost their homes, and most have taken a very substantial hit to their incomes, retirement savings and wealth. Without exception everyone can relate their frustration and how unjust it is.
    Most street fellows I find are quite open to the proposition that the country should act unilaterally, and should they up sticks and go to Switzerland, Germany etc then good riddance – and see how comfortable those countries regulators make them. That threat is so hollow, who in finance would ever knowingly leave London for… where?
    writingsonthewall could you please start a movement or something?

  • Comment number 76.

    47. At 2:32pm on 01 Dec 2009, Ian_the_chopper wrote:

    "Posts 6, 21 & 33. Value what a lovely concept!

    Sorry to rain on everyone's parade but Writingsonthewall is wrong value can be added at other times than production. It can be added at the point of exchange."

    Big fat WRONG there I'm afraid.

    "Sony seeks to make a profit by utilising the lower costs of Labour in China "

    All you have demonstrated is that the surplus value of Chinese labour is greater than the surplus value of the UK labour. i.e. closer to slavery (which is the ultimate surplus value - 100% (minus food to survive of course))
    The transporting of the product is irrelevant, it just adds into the total perceived value of the product - but in reality the movement may (or may not) add surplus value - it all depends if the tanker crew get paid fully for the hours of work they do and the responsibility they take.
    The total work done to create the LCD TV is the value (plus the raw materials) - the moving of it is not adding value - and nor is the exchange.

    If your argument was correct then if I sold my product to Bill, and he sold it to Fred, and he sold it to Simon etc. and each charged more than the previous we would be 'making money by selling' and we could all sit at home circulating commodities and living off them (but as anyone with any common sense can see there is no value being added)

    This example is a common confusion by what is meant by surplus value and what is meant by price.

    Are you saying that an identical LCD TV made in China is of unequal value to one made in the UK?
    Asides from the cost of labour to produce - what else is making the difference?

    ....the answer is nothing, the reason there is profit is because in China they work for less than a dollar a day - which on the price of a TV is tiny (assuming 1 TV per man, per day) - all the transporting is doing is allowing various parties to 'take a piece' of that undervalued labour as it passes.

    No value in moving commodities around the world I'm afraid - and I've even let you off from lecturing about the 'true cost' associated with the transport.

    I mean did the shipowner pay the true cost of shipping, or just the cost of the fuel? I mean did he contribute to the floods and desertification which will come as a result of his (and others) combined abuseof the environment by shipping things across the world when they could be made in the country of sale? - of course he didn't - which is why the next crisis will be environmental.

    Don't be fooled into thinking that just because a subject is complicated that common sense and logic don't apply!

  • Comment number 77.

    As usual good posts from WOTW, I'm rather concerned by Dempsters values for future interest rates :-0

  • Comment number 78.

    Two things went wrong: 1. there were no hangings of bankers in public squares. Should be considered an appropriate response to the greatest theft in human hitory, and 2., no hanging of elected officials who had the responsbility to provide oversight to insure this didn't happen. Should be viewed as an permanent recall action. Warnings were issued in 2001 and no political party took any actions and most blocked any attempts to curb this house of cards.
    Since neither happened the banks and investment firms are on their merry way and nothing has changed. No new regulations or laws, the same instruments that caused the problem are in current use today. In many institutions the very people who made these decisions are still in charge. Forgiveness amoung the rich and powerful is so encouraging.
    None of them have any workable solution to deal with the problems they have created except to blame the public for not spending and not saving more, which if that sounds a little distant from reality, it does because it is.
    Had the government decided to make the people whole and not the banks things would have worked out. If replacing the funds lost in accounts had happened, people would have been able to continue on and even make determination about where to place their funds or receive some changes in their banks to maintain those accounts. But our brilliant (corrupt) governments and economist thought that giving the banks the money for their dishonesty was the better way to go then people could re-borrow their own money, in addition to paying taxes to provide the banks with money, which of course makes no sense at all. And now they sit around wondering why the people have lost confidence. Maybe if someone actually accepted some responsbility that would be a good start. Captialism requires vigilent oversight and the government, all parties, failed in this responsbility. Call it corruption, ignornance, lobbyist....just plain failure is the fact. The reoccurance of financial schemes and economic failures might make people think this needs a new apporach but the bankers and wealthy investors like the system because they are never hurt during these events. We are all surfs guarding the castles but many may be sharpening their tools for other use. The members of the ruling court do not ride so freely in the towns and countryside these days.

  • Comment number 79.

    # 70 Ian the chopper thanks for reading my blog and for livening up the discussions, even if i'm going to stay a marxists

    #66 Demspter, No to cheaper TV's!, LCD's are 17,000 times more danerous than co2 emmisions apparently and think of all the co2 emmisions shipping them over here. A telly's a telly for goodness sake.

  • Comment number 80.

    75. At 4:26pm on 01 Dec 2009, peterdough wrote:
    writingsonthewall could you please start a movement or something?

    Well WOTW you can go for a movement or you can go for something.... which is it going to be?

  • Comment number 81.

    May be simplistic, but can't a regulatory system be devised whereby those carrying out these exotic financial trades and their managers are made personally liable for some of the losses if it goes pear shaped, as well getting a bonus if it works out.

    They might think about their actions a bit more carefully if they have to explain to their nearest and dearest that the house, cars, school fees and holidays had all just disappeared because a deal had not worked out..

    Thats what happens if you stake everything on a 100 to 1 outsider in the 3.15 at Kempton Park and it doesn't come off

  • Comment number 82.

    48. At 2:40pm on 01 Dec 2009, Elduderino01 wrote:

    "The point is - HE CAN GO BUST!"

    Now this is true - but as I think you are elluding to this is the reason cited as justification for making profit (which it often is) - then what happened with the banks?

    Also there is no measurement of this risk - because it's unknown. Markets claim this is aggregated out over time, but I would have to disagree as those who make huge profits are not making good risk assumptions and nor are those making losses (although in different directions).

    Finally, if the risk assessment was accurate then there would still be no profit, you would receive back the 'cash value' for the risk you took.
    In reality this can only be discovered post the production and sale. I mean if I create 1000 items without a single hitch there is no risk cost - however if the next 500 I have production risks which need addressing immediately (with capital) then there is a different risk cost associated.

    The solution to this is to 'insure the process' and settle the risk cost after the event. The only way to do this is centralised insurance of production risks - and we all know what that means....

  • Comment number 83.

    Buzz Buzz Buzz goes the honeybee
    And Twiddly Twiddly Tweet goes the bird
    But the sound of your little voice Writings
    Thats the sweetest sound I ever heard

    (nearly J Richman)

  • Comment number 84.

    Post 72. I know added value may seem a little "non real world" but the initial allocation of value between the units of production and how any "added value" is distributed is the fundamental basis on which the Capitalism versus the Marxist economy debate is formed.

    Probably the biggest concern most people have over the last boom that led to the current recession we are in now was the high amount of "profits" the banks and their staff took out of the system when it has been argued they had contributed nothing to the boom and only artificially boosted it for their own ends.

    They did of course take fees and commissions on all the deals they did whether they added value or not.

    People might want to consider whether private equity deals which load up a compnay with huge amounts of debt but allow managers to take huge short term profits and banks to take massive fees on debt issuances and debt rollovers add any value? Ex employees of Woolworths, Borders, MFI and many others might have a view on this matter.

    With the banks and Governments / regulators having made an almighty mess out of things the World Governments have called on taxpayers to bail out the banks via loans and future tax payments so we all have an interest in this.

  • Comment number 85.

    6 - WOTW

    Great post. Please keep them coming....

    I'll vote for you!

  • Comment number 86.

    Sorry, this is only loosely related to the article in that it is banking related, but I want to know how it is that a bank can do a share re-issue, which basically just slashes the price of shares currently held by people, without really raising any eyebrows. I can't really think of many, if any, other situations where people would be allowed to get away with that. Basically saying, that thing you have that is worth £1, is now worth about half that, because I say so and because I want people to buy more. Of course it is all supposed to be sweetened by the offering of more shares at a cut-price rate, which you can buy, presuming you've got plently of money just at hand. Thanks! I'm guessing of course that some banker somewhere will be receiving a handsome bonus for getting this re-issue sorted, and probably the same bankers would thought it'd be a good idea to lend loads of money to Dubai even though it was surely obvious that if there happened to be any kind of downturn that everything would come crashing down. But what do I know!?!

  • Comment number 87.

    54. At 3:18pm on 01 Dec 2009, MisterGC wrote:

    "He still doesn't create wealth though does he? In the sense that he doesn't contribute to overall growth - he just reallocates a disproportionally large amount of money from the buyer to himself."

    aaahhhh, that's because I said "The only way the garage sale owner makes money is if he creates a scarcity unrelated to reality"

    Makes money does not equal creates wealth - and this is another clever trick the media manipulates by confusing us into thinking 'making wealth' equates to 'making money'.

    I look at it like this simply - wealth or value is something which can be associated with the commodity - whereas money is simply paper which tries to numerically tie that value down. It's not a reliable indicator of value.

    Money should simply be used as a method to simplify exchange (so we don't have to work out how many turnips = 1 radish) - however it's being used to establish value, which is not neccessarily the same thing.

    I mean how many times have you paid £1 for a bag of crisps on a flight? You know what the cost of it is and yet you pay over the odds - why? Scarcity and the manipulation of it.

  • Comment number 88.

    54. At 3:18pm on 01 Dec 2009, MisterGC

    ...ps - I totally agree about limited liability - it takes the risk out of business and negates the need for a risk element to be added to the profit - and yet that element remains - I wonder why?

  • Comment number 89.

    64. At 3:51pm on 01 Dec 2009, plamski wrote:

    "Something I've always wanted to ask you if you would ever consider going public and perhaps entering politics? This country desperately needs people like you."

    ...now my blushes have receeded - I can tell you I am already in politics.

    The only politics that works - THE POLITICS OF REVOLUTION

    Spread the word, get prepared, it's coming...

  • Comment number 90.

    63. At 3:49pm on 01 Dec 2009, Ian_the_chopper wrote:

    "Writingonthewall takes a too simplistic Marxian view of value and trade. Matters aren't that simple. We do not have perfect markets and there is profit to be made in this imperfect market which is where people add value."

    So we profit from imperfection then? Who ensures the imperfect knowledge is not manipulated by those who have already amassed the power to do so?

    Why did the city say that Dubai was obviously a bubble - and yet many people who invested in it were not aware of this fact?

    If the imperfect knowledge in markets was not being manipulated you wouldn't get bubbles.

    There is no wealth created or value added in restricting your knowledge from another now is there?

  • Comment number 91.

    Assymetry is caused by banks being to big to fail. Mervyn King is right. Banks should not be too big to fail. They should be split up, and have the discipline of being allowed to fail if they behave stupidly,

  • Comment number 92.

    74. At 4:23pm on 01 Dec 2009, duvinrouge wrote:

    "Indeed there is a very big difference between use value and exchange value."

    I would argue that the problem isn't with defining the added labour value - but calculating it

    In a system so complicated it is hard to work it out - but the alternative used by Capitalists is a formula that shows the pricing mechanism - but is in fact inaccurate - but it's nice and simple so it will do nicely.

    The simplicity is why the market is popular - not it's accuracy. Only by assessing all the elements of production can you establish 'real value'.

    Inventors are the hardest, I mean what price do you put on the invention of Edison for example - certainly a lot more than he was paid for it at the time!

  • Comment number 93.

    Spot on #6!
    This is where the very nature of our entire economic model needs to be addressed.
    'Wealth' is not created by playing with numbers on a spreadsheet, it is created by doing work.
    Not neccessarily hard work; good work and smart work will go further than hard work. Someone who excels at a job will get a lot more done with less effort (thus creating more wealth) than someone not as good who gets less done but works 'harder'. The concept of 'hard work' needs also to be reevaluated- especially by employers.

    As for Roberts comments regarding the way companies are owned- I have been saying this since I first watched Trading Places as a child!
    This needs SERIOUS review. It is in fact at the very heart of what is wrong with the western business model. Point in case, Cadburys- which may well dissappear out of British ownership so that the current 'owners' (and the term could be considered quite loose for any plc) can get a temporary boost in income that in the long term has the potential to reduce the income and increase the outgoings of large swathes of British communities.

    With the way the current ownership systems work, many large corporations deliberately run things badly in order to ensure they do not get bought out by 'hostile' foreign buyers. More than one of the once nationalised companies has been bought by 'investors' who in fact did no more than asset strip then sell the company on.
    In what could be construed to be shrewd tactics, management take on more debt than they need in order to ensure they do not get targetted in this way. This keeps things that need to remain within the nation within said nation, at least mostly, but in turn this helps add to the culture of credit over savings that has demonstrably lead to the sad state of affairs we are in- and doubtless will lead us to it again and again and again!

    So the true problem is that so many companies are 'owned' by shareholders, who take a share of the profit in every dividend, but little to no share of the responsibility in the day to day running of the company and absolutely no share of any criminal charges or the like when a comapny is so gross negligent it defies belief. Yet why do most of the negligent acts take place? To increase dividends and share prices for the share holders!
    This in itself is a dichotomy. Why do management feel the need to work to keep the share price high? All it means is that it makes it better for the current 'owners' to cash out! But in boosting said share values, by use of high dividends and paper exercises in showing how they have increased profits and/or lowered running costs (often translated to making people redundant and outsourcing to India), they use up the monies that should be reinvested directly into the company. Instead they must turn to credit, and the cycle continues!

    The simple truth of the matter is that shares should not be able to be bought and sold in the way they are at present. Vast quantities of shares being created out of nowhere, lowering the value of exisitng shares but bumping revenues temporarily in order to off set this on the stock market is a bad idea. Allowing people to 'own' a portion of a company for just a few minutes, or even seconds, in order to profit from peaks and troughs in share prices is actually immoral when one considers how this is achieved- by someone else making a loss!

    Back to this suppossed 'recession' we are in...
    Ask yourselves this- How much less land do we have since the 'credit crunch'? How many fewer fields of corn, or dairy cows? How did the change in value of a piece of paper with a promisary note printed on it change the amount of workers we had in our nation, or the amount of iron, coal and stone in the ground than we had the day before? How does the value of a coin change the number of potatoes we are capable of growing in the ground?
    Then ask yourselves just how much we actually needed to rescue the banks that failed in their role...

  • Comment number 94.

    77. At 4:40pm on 01 Dec 2009, JavaMan1984 wrote:
    As usual good posts from WOTW, I'm rather concerned by Dempsters values for future interest rates

    They will only go to that if the BOE carries on with QE.

    For example a krugerand cost £436.00 in August 2008, now the same thing will cost around £740.00. Therefore you will need 69% more £'s to buy the same amount of gold. Gold appears to be simply tracking the increase of government debt.

    It's only inflation............ but its going some now.

  • Comment number 95.

    WOTW

    I'm genuinely confused with the wealth v money argument.

    Given that money is just paper / means of exchange what is wealth? Is it property, physical assets?

    Do Microsoft, Google or say the Rolling Stones create wealth or money? Or what about european sailors getting jewels from South America?

    Any enlightment appreciated...

  • Comment number 96.

    89. At 5:14pm on 01 Dec 2009, writingsonthewall wrote:

    'The only politics that works - THE POLITICS OF REVOLUTION
    Spread the word, get prepared, it's coming...'

    But how should we spread the word and prepare oh wise one?

  • Comment number 97.

    How about making shareholders responsible for the actions of their companies? After all, it is their money which is being used or abused.

  • Comment number 98.

    The calls for WOTW to enter politics are rather interesting.

    As soon as he was a politician and not a blogger we would not believe or trust what he said and the media would twist every truth into an untruth until we were not sure what he was saying at all.

    The politics of being elected is rotten - now all politicians know that whoever owns the middle ground gets elected the fight for that middle ground has removed any decision over policies and changed it into personalities or who is less corrupt/gets the least bad press. No wonder the electorate have stopped voting.

    The media obsession with sensationalising and inspecting every comment made and translating into what they want have also led to spin doctors en masse as a way of countering that problem which has led to a world of sound bites and statement after statement that means nothing at all.

    No Politician can afford to tell it like it is.
    Tiger Woods can not afford to tell it like it is - or perhaps he has but the media have told us differently and now we don't believe him.

    WOTW - keep on blogging - its easier and more fun to write about change than it is to enact change.

  • Comment number 99.

    #94 Ahh Gold. The Gold Standard. Much maligned. Much missed by me.
    Might we ever return to the Gold Standard ?
    Twould mean deflation may have to become fashionable again.
    Perhaps it might be worth a go if our politicians could contemplate ever cutting the monetary value of benefits and public sector salaries.
    Ties in very nicely with WOTW's value of money, wealth etc.

  • Comment number 100.

    WOTW - I'm grateful for the thought re your comments above.

    First - I agree that you should know what you're talking about before you begin talking. The irony with some of these blog comments is noted!

    However- this is a tad left wing isn't it?! Das Kapital?! Its a bit old, surely?! Labour theory of value is undone by globalisation/a global economy.

    Your issues are with a service versus a manufacturing economy and I can really see the pursuasive elements of your argument. But there are too many layers in the cake- we live in a complex world where even assessing 'real value' at base is intertwined with variables such as currency exchanges.

    There's been a lot of talk regarding TV's- yes they're cheaper in China, but its a step too far to say that the Chinese labour/production market is evidence in support of the labour theory of value. Chinese workers buy food and live their lives like any other worker. They don't pay the same price to live as we do. The Chinese currency is manipulated to such an extent that to assess and determine 'real value' is in itself impossible.

    The TV's are worth what someone is prepared to pay for them, not what the cost of manufacturing them was.

    The only way to value something/ an item is based on what someone is prepared to give up to own that thing. The great irony is that the Chinese workers probably wouldn't be prepared to give up anything to own a TV as there is no advertising industry and/or support infrastructure. So are the TV's best valued at their cost/production (aka 'real') value, their worth to the producers, or their value to others- the remainder of the market?

    I'd say the value of something will always be what some mug will pay for it and ultimately that means that bankers do create wealth because they sell shares and other commodities to other mugs like themselves.

    The issue is regulating those transactions not binning the whole system for a dictatorial economic model. Even the Chinese operate a modified free market economy.



    [Just poking a little fun regarding Das Kapital by the way, though if you had asked them whether they knew about Keynes you may have received a different response]

 

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