BBC BLOGS - Newsnight: Paul Mason

Archives for August 2009

Radical capitalist proposes direct action at Canary Wharf

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Paul Mason | 12:04 UK time, Thursday, 27 August 2009

"Just imagine that bond is a cake. You didn't bake the cake but every time you hand somebody a slice of cake a little bit comes off, like a tiny little crumb, and you can keep that...and Pierce & Pierce collects millions of golden crumbs."

That's how Sherman McCoy's wife explains investment banking to her daughter in Tom Wolfe's Bonfire of the Vanities.
It was written in the 1980s just as the golden crumb business was taking off, but stands as a simultaneously profound and facile explanation of financial speculation. You don't bake the cake, you don't eat the cake; but for the trouble of handing around the plate you get to collect crumbs.
This is the essence of Lord Turner's attack on large parts of speculative finance as "socially useless" in his Prospect interview. He says:
"It is hard is to distinguish between valuable financial innovation and non-valuable. Clearly, not all innovation should be treated in the same category as the innovation of either a new pharmaceutical drug or a new retail format. I think that some of it is socially useless activity. On the other hand, I don't know whether that means the world would have been better off without any credit default swaps, or simply some credit default swaps."
Turner has done something unthinkable, and almost unsayable for a member of Britain's financial elite. He has called into question the size of the City, its dominant role in British capitalism and indeed the social legitimacy of speculative finance for modern capitalism. No wonder the City grandees have been biting their cufflinks off with rage this morning.
Much of the financial innovation he believes is socially useless is done in the area of derivatives: where you trade the risk on a thing rather than the thing itself. Call it crumbs, call it betting, here are some facts (from the Bank for International Settlements):
The total value of all "over the counter" derivatives outstanding in December 2008, in the world, was - take a deep breath - 591 trillion dollars. World GDP is about 60 trillion so you could say financial speculation economy is notionally ten times the value of the real economy. A more relevant figure is the gross market value of all these bets, a staggering 33 trillion - or half of world GDP. Of these by far the largest slice of the cake is interest rate swaps: 18 trillion in market value, 418 trillion in notonal trading.
Now there is a useful and a speculative purpose in doing an interest rate swap.
Paul Mason Bank Inc lends Joe Bloggs Corp a million dollars at ten per cent interest. I swap this fixed interest rate contract for a million dollars worth of credit card debt contracts that might fluctuate between 8% and 12% depending on what the central bank does with interest rates (and yeah, in your dreams you get a credit card APR of 12%). I am simplifying here but stay with me.
Why would I do the swap?
A) To protect another part of my business that loses out if the central bank raises interest rates. This is me hedging against an interest rate rise. I lose out on the swings but gain on the roundabouts if I can swap my 10% interest for 12%. Gottit? Then obviously there is ...
B) To speculate and make money without having to do any work. I could be simply betting I will make a profit out of the swap and it serves no socially useful purpose.
Let's break this down the elements of Turner's critique because it is a pretty radical critique. He says
i) The speculative part of this activity is not socially useful
ii) It tends to suck up talented people into lucrative "innovation" activities who could be better employed inventing a cure for cancer or discovering the next sub-atomic secret of matter
iii) The UK economy's reliance on these activities is not a strength but a weakness.
iv) We might need a transaction tax to curtail it.
This is the most radical thing Turner has suggested today. The Tobin Tax idea is simply a tax on transactions. We already have one in the UK in the form of stamp duty payable on share transactions.
Tobin's original idea was to tax currency exchange transactions at 1%, later reduced to 0.1%. The aim is to encourage people to use these derivative and speculative transactions only for what is useful, not to summon wealth, yachts, attractive dinner party companions and all the political influence that goes with that out of nothing.
Tobin claimed his idea was hijacked by anti-capitalists and offered a profoundly capitalist defence of the plan - not as a way of raising money but as a way of suppressing short-term speculation.
Now Turner's variant of the tax is not specifically aimed at currency speculation but at the massive and proliferating world of speculative trading in general. There is no way of knowing how much OTC derivatives trading is speculation but if we propose that half of it is - and that by taxing it it ceases to exist, then, at 0.1%, the total amount raised if it were applied globally would be $295 billion (half of 591bn, which is a thousandth part of the total).
That - even in a world of trillions - is a lot. It is much more than the combined declared profits of the US, Swiss and UK registered investment banking industry in the year before its collapse.
Of course a speculation tax would not need to be applied globally: London is the major financial centre for derivatives (figures here), with $591bn a day tradeed in forex alone, followed by the US with $287bn a day. Now here is a spooky coincidence: the UK's 591bn daily turnover of currency exchange is the exact same figure as on thousandth of the outstanding annual value of all derivatives. So if you halved that (on the crude principle of half of transactions are useless and go away if you tax them) it would cost the UK forex dealing industry 1/365th of its turnover to implement a Tobin tax.
(I use these figures just for illustration of course: the UK would not pay it all. Lets say Britain pays its fair share - say a quarter of the global sum. Its still 70 billion; it's still er, quite a large amount)
This of course would transform the City of London as an entity. Some might say finish it off as a free floating island of finance in the world economy. It would drive trading offshore. But at the April G20 meeting the world's leaders began the process of curtailing the concept of "offshore" tax havens.
From all this it can be seen that implementing a Tobin Tax would be hard to do, and require international co-operation. The sums raised would be large.
The question raised would be global. And it would be this: are there any politicians out there prepared to grasp the possibility that a large part of the speculative finance that lobbies them, wines them and dines them, sponsors their eco-friendly conferences, pays into their favourite charities and above all shovels large volumes of ordinary income and corporation tax into their exchequers might actually be, as Turner puts it, socially useless.

Let me know what you think, and if any of my figures and explanations are wrong. Finally of course there are some interesting ramifications here that qualify this post for the tag "political shenaegans". The BBC is having a lot of trouble summoning up City voices to rubbish Lord Turner - possibly because, while these are just his personal views, he is also their regulator with the power to give any institution what my friend in start-up finance calls, holding up one finger, the "rubber glove treatment".

Oil, Megrahi and energy security

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Paul Mason | 19:55 UK time, Friday, 21 August 2009

The official line is, the freeing of Megrahi had nothing to do with oil, indeed nothing to do with the British government. So is it paranoia to see remarkable coincidences between Britain's oil interests in Libya and the Lockerbie bomber's return to Tripoli?

John Roberts, energy security specialist at Platt's says not. Libya has wanted Megrahi back for many years; the fact that is happening now, he believes, shows the UK's relations with Libya are being influenced by the commercial situation, which is pretty crucial.

Libya has the ninth largest oil reserves in the world, at 44 billion barrels, and until 2005 these reserves were off limits for the west.

Since 2005 there's been a rush of foreign companies staking their claim on Libya's oil.
BP signed a $900m exploration deal in 2007, but has been hampered by disputes with local authorities. British Gas and Shell also have exploration deals. Russian giant Gazprom has been awarded exploration licences. The Canadian firm Verenex has made significant discoveries of oil but is now locked in a battle with the Libyan government because it wants to sell a stake to the Chinese.

So far, so funky: oil giants battling with each other and the feisty Libyan national oil company to grab a piece of the action. This is normal for the oil business and does not need prisoner release to make it any more like a Bond movie than it normally is.

However it's not the whole story. What is new is the urgency with which the UK and other governments are starting to address the issues of energy security. When a giant pool of untapped oil comes onto the market what politicians are thinking about is not just commercial advantage - it is the coming resource crunch.

Little more than a year ago the world was in the grip of an oil price spike that was driving the cost not just of petrol but also, by knock on effect, basic foodstuffs through the roof. Mismatch between supply and demand, of just a few hundred thousand barrels, amplified by speculators, drove the price of a barrel of oil to $140.

Those who fear an oil crunch point not to reserves, or to the growth of China, but to the slow growth of oil production capacity as the key danger.

According to the International Energy Agency, proven oil reserves are 1.3 trillion barrels - enough to power the world for the next 40 year; but production is shrinking in many mature fields. By 2015 an extra 30 million barrels a day of production capacity needs to be created. At present, only 23 million are planned. There is, says the IEA, "a real risk that under-investment will cause an oil-supply crunch in that timeframe"

Oil is not the only area where resources and due process are getting mixed up. China has arrested executives from Australian iron firm Rio Tinto, allegations of espionage surfacing only when a merger between Rio and a Chinese firm failed. Russian police harassed BP executives in a disputed oil venture over minor legal issues until they were forced to leave the country.

To calibrate how much has changed it's worth remembering that, at the time of the Lockerbie atrocity, Britain was a net oil and gas exporter. Russian pipelines ended in East Germany. A small oil country like Libya could be frozen out of the international community. Now Libya's production - and its capacity to expand up to maybe 3.5 mbpd - is a vital part of the world energy security story.

If BP's little local difficulties in Libya now suddenly go away, few in the oil industry will be surprised. Libya's large gas reserves also look critical for the UK, perched at the end of Russian-supplied pipeline system that does not look like it is enhancing our energy securty much.

So, if this has been realpolitik, it's some consolation that every other energy-dependent country in the world is also playing the game.

The recovery's coming - but the UK's taken a permanent hit

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Paul Mason | 19:17 UK time, Wednesday, 12 August 2009

Here's my take on the August 09 Inflation Report. First, the good news, Quantitative Easing is working. Now the bad news: working means avoiding a catastrophe. It's taken £175bn - and says my interlocutor Doug McWilliam of the CEBR will probably take another £50bn - just to avoid a prolonged slump.

Even with 0.5% interest rates right through to 2011 and the full £175bn still in circulation until then, the Bank of England is predicting inflation will undershoot the 2% target for CPI. That means we should expect interest rates to be low for at least that long. It also signifies the recovery is going to be pretty appalling: weak and fragile.

The Bank's famous "fan chart" looks mighty perky - a near symmetrical V, centering on the last three months, showing that - although the recession is not over, the fastest period of shrinkage is over. But there are serious risks - both global and intrinsic - that this comes out worse than they think.

Here's the problem. QE, together with the 680bn guarantee for the bad assets of Lloyds Group and RBS, has begun to turn banking around. But there is scant growth in lending to individuals - and loans to companies are still shrinking. And so the Bank's main target on QE - expanding the money supply - is, well, off target. Growth of broad money (M4) has slumped and continued to slide even after the Bank started printing money. That's because while money makes its way from the BoE to the banks, it does not make its way in sufficient quantities into the pockets of borrowers or businesses.

Let us put it brutally: to save the banks the real economy's recovery is being delayed and perfectly healthy companies sacrificed. The governor of the Bank told me today this was more or less inevitable - we'll be discussing with politicians whether there are alternatives.

On top of all this there is a political variable: the Bank's growth projections today are based on the Labour budget figures. If, as the Conservatives have indicated, they rip these up and tighten faster there will be question marks over the growth projections.

Today's unemployment figures only tell half the story of the jobs market: pay freezes, short time and hyper-flexible work practices are contributing to the rapidity of recovery - but also to the permanent hit to economic demand that will dampen economic growth for the first half of the next decade.

Tonight we've got a trio of front-line politicians to discuss this, together with former MPC dissident David Blanchflower. Tune in at 2230 on BBC2.

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