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Labour should back a co-operative rebuilding of finance

23/08/2011, 02:46:18 PM

by Peter Jefferys

Behind the noise of this summer’s events – the riots; phone hacking; Gadhafi’s fall – the great economic issues facing Britain have been largely muted. Of course had this not been a summer of scandal, war and looting, the huge losses and gains on the stock market and the dearth of growth worldwide would be much firmer in the public consciousness. People are already feeling this deep crisis through its ramifications: the rising costs of living and terrible jobs market. We are in a highly precarious position, with many comparisons made to the scale of the crisis in 2007/08 and we must pay close attention to the solutions being offered by the Government and our shadow team.

It is equally vital, though, for Labour to look beyond the day-to-day fluctuations of markets and even quarterly growth figures in order to form a vision for the future of the economy. The Shadow Chancellor has offered a sharp critique of the Government’s economic strategy, but Labour must also have a positive alternative for fairer financial services. A vision that would appeal to voters and reduce the risk of future crises – after all, financial services are at the heart of the current problems.

This is much more than simply advocating ‘banker bashing’ – short term measures of retribution on the city of London. We would do well to remember that financial services are integral to our economy and to the lives of citizens, access to credit and banking services are import right across the economy and our society. Rather, we need to think about long-term, sophisticated changes of emphasis in what sort of financial services we support.

Nowhere is this clearer than with the future of Northern Rock. Labour advocated an approach in the 2010 manifesto that would have seen Northern Rock depositors take back ownership within a new ‘Co-operative Building Society’. Re-mutualisation would reverse the failed Tory policy of allowing Building Societies to become risky shareholder owned banks and create a much safer organisation, unlikely to require a future taxpayer bailout. The Chancellor, however, has decided to flog-off the Rock with no consideration of its future business model. We have a petition to stop the sale here.

Beyond Northern Rock, we are campaigning for a greater emphasis on the role of financial mutuals – such as building societies and credit unions. Financial mutuals are member owned, rather than shareholder owned, meaning that business decisions are taken in the long-term interests of customers, rather than the short-term interests of capital. Labour did much in power to support financial mutuals, but more is needed to increase the diversity of financial services provides. Labour should support the creation of a ‘diversity index’ and corresponding diversity threshold for UK financial services, in order to ensure that such services are not dominated by a few, pseudo-monopolistic plcs.

We are also advocating a new international approach for the rating and regulation of financial products and services. Labour should support much needed reform to Credit Ratings Agencies (CRAs), the bodies which severely mis-rated financial products in the run up to the banking crisis and recently caused unnecessary woes through a downgrade of American sovereign debt, initially based on a $2 trillion miscalculation. The current business model of ratings agencies is a classic conflict of interest – CRAs rate the quality of financial products but are paid for by the same institutions that create and sell those products.

Just yesterday, the former head of Moody’s launched a stinging attack on CRAs, suggesting that there is a longstanding culture of intimidation and harassment within the companies from management to analysts, ensuring that ratings match the needs of clients (large financial institutions).

Given the failure of CRAs to adequately rate debt in the run up to the crisis and the current unnecessary pain caused to the American economy, the time is rife for reform of CRAs. The Co-operative Party advocates the creation of a UN backed mutual Credit Ratings Agency, to be funded by contributions from investors, member countries and debt issuing organisations. The mutual structure would ensure that no one funder has undue influence, giving far greater credibility to ratings issued. This is a great ambition for Labour to get behind, as it puts democracy at the heart of the international financial system.

These policies offer the basis of a co-operative vision for the future of financial services that Labour could get behind. Injecting democracy and other co-operative values into financial services would provide a positive Labour Co-operative alternative to the Coalition’s inaction and de-facto endorsement of the status quo.

Peter Jefferys is the policy and campaigns officer of the Co-operative party

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Osborne and Cameron’s eurozone delusion – the contagion is airborne and the UK is getting sicker

08/08/2011, 11:55:34 AM

George Osborne and David Cameron are deluded.

There’s a long list of topics to which that statement might apply, but right now, one is more important than the rest – contagion from the eurozone crisis.

Contagion normally refers to the transmission of eurozone woes to Britain via UK banks’ liabilities in the crisis areas. The greater the exposure, the worse the contagion.

This conventional view of contagion is based on direct contact between banks and infected areas. That’s how the Treasury looks at it and why the government thinks the UK is insulated. Last week George Osborne boasted that the UK was a “safe haven”. Then on Friday, William Hague declared “We’re not in the firing line”.

But what the Bullingdon boys haven’t understood is that the contagion is airborne.

A cursory look at movements in banks’ share prices shows how limited direct eurozone liabilities have translated into plunging prices.

Recent estimates of the exposure of UK banks to public and private debt in the trouble spots were £82.5bn for Ireland, £65.4bn for Spain, £40.5bn for Italy, £14.8bn for Portugal and £8.6bn for Greece.

These might seem like big figures, but for a sector as large as UK banking, worth £7000bn, they are worrying but hardly critical. The latest IMF healthcheck on the UK assessed banks’ exposure as “manageable”

In comparison, since the start of this financial year, the big banks’ share prices have plummeted – RBS has fallen 31%, Lloyds has fallen 46% and Barclays has fallen 35%. Only HSBC has been somewhat insulated, but even they have dropped 14%.

The reason for the collapse is that negative city sentiment has been turned into self-fulfilling fact by the stampede of the hedge fund herd. The link to liabilities no longer needs to be real, it just has to exist in the fevered minds of city traders.

The result of this shift in transmission mechanism for contagion is that the economy is in far greater danger than the government understand or at least is letting on.

If the trend in bank share prices established since April continues, RBS and Lloyds will return to the level where the government had to intervene back in 2008, by Christmas.

Speak to any trader or analyst about what they think will happen if there is a crisis event in the eurozone, like a default, and they are all agreed: there will be a run on the banks similar to the crash of 2008.

The only thing they view with equal certainty is that there will be a defining crisis at some point.

Estimates on the scale of the carnage vary, but in this situation a single day’s losses across the banks would likely top one third of share value.

Anything on this scale, following on from the last few months will potentially send the most vulnerable – RBS, Barclays and Lloyds -into freefall. Sentiment is already too negative and the share prices already so low that one big shock could tip them over the edge.

That would bring Hobson’s choice for the government – bailout mark two accompanied by a massive rise in the deficit and a potential UK sovereign debt crisis or the collapse of some of the UK’s biggest banks.

Take your pick. Either way, we would be in the same position as Portugal, Ireland, Greece, Spain and Italy. No credit, no confidence, no money and too much debt.

The crisis would have been fully transmitted from the eurozone to the UK.

As Osborne and Cameron phone in government from their holidays, they are content in their contagion delusion. But the reality is that the UK is no more insulated from the impact of a eurozone crisis than the French were protected by the Maginot line at the start of World War 2.

Their criticism of Gordon Brown was that he failed to fix the roof when the sun was shining. There’s some truth in that.

Now, on their watch, it’s been raining for months, the water has soaked into the timbers of the house and the eaves are bowing. But still there is no action.

If and when the roof crashes in, they and they alone will be to blame.

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Small man, big world

30/05/2011, 12:00:52 PM

Jonathan Todd

The financial crisis was unprecedented and complex. But the left’s interpretation of it tended to be straight-forward. Banks and bankers were bad. Government and politicians were good. Government saved the banks from themselves and would stimulate economies. This enlarged role for government made a “progressive moment” inevitable. Yet government is now being scaled back and the left is out of power across Europe.

The left must move beyond its misconceptions to recover. While Labour’s plans to close the deficit concede limits to government’s size, George Osborne was much quicker than Gordon Brown to acknowledge such limits. The lesson of the debate on the deficit during and after the general election is that the left cannot be abashed by fiscal reality. It must confront it squarely. This is a lesson that Barack Obama might now reflect upon as debate in the US on the size of government moves to a similar place to that in the UK in the six months or so prior to the general election.

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The glorious game has become an inglorious free-market free for all

14/04/2011, 01:30:44 PM

by James Mills

“‘Tis a glorious game, deny it who can, that tries the pluck of an Englishman.” Is the chorus annually sang at the start of the Shrovetide football game, a precursor to the modern day version of the ‘glorious game’, still played every year in Derbyshire on Shrove Tuesday, which demonstrates the key community ties that link the origins of our national game.

Similarly, many of the modern day football clubs originated from community based teams that grew into the social sinews of their local areas. Although many of them nowadays have ballooned into monolithic globally recognisable brands, they are also national treasures as well as assets that employ thousands and inspire millions. Most important of all in a globalised world they remind us of the most important thing of all, locality.

On Monday the banking commission laid out plans to prevent another banking collapse by protecting retail banking from investment banking, which a few years ago exposed some of the fallacies of free-market economics. On the same day, Arsenal, known as the ‘the bank of England club’, was added to the growing list of foreign owned clubs in the Premier League. Could you imagine the streets of Paris, Munich, Milan, Madrid or Barcelona staying as quiet as the streets of London are, if this was their club? (more…)

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Spain faces up to unpleasant economic realities, says David Mathieson

25/07/2010, 11:20:54 PM

The celebratory soccer binge over, Spaniards are once again having to face up to some unpleasant economic realities and along with the rest of Europe Spain has just published the results of a stress test on its banking system. A report on financial services would not normally be the stuff of conversation in the bars of Madrid but most people are aware that the consequences could be serious. Apprehension has again replaced euphoria. For Prime Minister Zapatero the findings will have far reaching political consequences: confidence in his socialist (PSOE) Government is at a record low and the revealed weaknesses in parts of the Spanish financial system will not improve the national mood. So far, Spain has avoided a Greek style meltdown but renewed trust in the Spanish banking system is essential if Madrid is not to become the new Athens.

Up to now debate on the crisis in Spain has focussed on the state of the public finances and the growing fiscal deficit – the difference between the Government’s income and spending – which is now around 11.5% of annual income. Over the last couple of years unemployment has soared to 20% – the fastest increase in Europe – and nearly two million people have stopped contributing to the social security system. Consumption and investment have slowed (trade between the UK and Spain, for example, fell by more than 30% last year) and Government revenues have collapsed.

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