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The Financial Crisis for Dummies

EconomicsPosted by john sloboda Sat, May 26, 2012 11:33:57
My colleague Richard Parncutt has just put together one of the best lay analyses of causes and solutions to the current global financial crisis that I have seen. It is as

http://www.uni-graz.at/~parncutt/financialcrisis.html

I am reproducing it in full here, because Richard's site does not have a reply post facility. Anyone wishing their response to Richard to be public rather than privately emailed to him, may post it here.

THE FINANCIAL CRISIS FOR DUMMIES: CAN’T SEE THE WOOD FOR THE TREES

Richard Parncutt

25th May 2012

Forget about all those pages and youtube files out there called "financial crisis for dummies". They are generally good and interesting, but they are not getting to the point. Their authors can't see the wood for the trees.


National debt, income inequality, and taxation

First of all we have a contradiction that is plain for anyone to see. National governments are struggling to pay their debts, while at the same time multinational corporations are making gigantic profits. In most countries, the gap between rich and poor has been steadily rising for decades (income inequality). Now in 2012, ordinary people in the middle and working classes are being asked to accept "austerity measures".

This is distortion of the truth (aka bullshit) and it should be identified as such. If money is needed, the people who should pay first are those who have it. Where else is it going to come from? Clearly, the rich are not being taxed enough. We should be taxing wealth more directly, in addition to income, and separately from it. We also urgently need transaction taxes (e.g. Tobin tax) to generate income and curb financial speculation, and we urgently need environmental taxes (e.g. carbon taxes) to combat global warming and other environmental problems. Regarding wealth tax, we need more transparency about the total wealth of individuals. Everyone with any net wealth (or at least those whose wealth exceeds a given threshold) should pay a fraction of a percent of that wealth to at least one national government every year.

What I am saying is not left-wing or right-wing. I am talking about rescuing the framework within which both left and right operate. That is the modern democratic system that we know and love, which is based on a balance between free enterprise and social security. This system is under threat and everyone is wondering what the solution might be.


Four ways to distort the truth: Complexity, bias, manipulation, and secrecy

Everyone is talking about the complexity of the crisis. But just imagine the following idea. Perhaps there is a simple solution, but we don't know what it is because it is somehow being suppressed. Perhaps the people doing the suppressing don't even realise they doing it. So who are those people? Clearly, they are the people who are profiting from the crisis and the system that caused it. Please note that I am not talking about some kind of plot. The people involved are not plotting, on the whole. They are simply looking after their own interests, as everyone does in one way or another. One of the ways that they do that is to promote complex accounts of the finance crisis. This makes them feel important, because they understand something that others do not. It also makes them feel comfortable, because it means the main problems that caused the crisis may never be addressed. The rich and their sidekick economists are right that there is a complex side to the crisis, but public awareness of this complexity will not lead to a solution. Instead, it will lead to confusion. I will argue on this page that we can reduce the problem to its main components. When we do so, it becomes rather simple. It is then possible to solve it completely and sustainably.

When discussing these issues, it is important to be aware of bias. When the rich complain about paying more tax and present complex economic arguments to justify not paying it, we should just ignore them, just as we would ignore anyone who is obviously biased. Of course most people want to avoid paying more tax and will try all kinds of methods to prevent that, including distortion of the truth. You can justify just about anything by quoting passages from the Bible, similarly, you can find an economic theory to justify just about anything. That does not mean it is true. But when a group of rich people start talking about increasing wealth taxes, our ears should prick up. more

If the rich are asked to pay more tax, they respond by manipulating public opinion. Since that is exactly what I am trying to do with this page, I should explain myself. I am not rich, so my means are limited. The wealthy are at a great advantage, because their contacts with individuals, colleagues, employees and media always depend on wealth. One of their favorite narratives is the "rags-to-riches story". It is true that many famous people dragged themselves out of poverty by a combination of good ideas, hard work and good luck, in a context in which social security was almost non-existent.

Think of Bob Marley. But the truth is that not anyone can do that, and the ones who did not succeed are not famous, so we cannot use them as examples. The least controllable factor is luck - being in the right place at the right time. Luck also includes the people with whom one interacts to get good ideas, and the motivation to work hard. It is a logical fallacy to conclude from examples like Marley that "anyone can make it". In fact, the probability that a person born in poverty will "make it" is very small, regardless of good ideas or hard work. The rich may or may not understand that, but that is not the point. The point is that they are generally good at looking after their interests (that's why they are rich), so they use their economic, social and political resources to spread such fallacies and justify the massive gap between rich and poor.

Another common form of manipulation is to claim that anyone on the left of centre is probably a communist who is plotting to take over the world and take away our freedom. Half a century after McCarthy we still have to deal with rich people and their sidekicks pedaling this kind of nonsense. It would be equally ridiculous to claim that all rich people are Nazis.

In the process of increasing wealth taxes, we must also target secrecy and increase transparency. Top of the list of problems in this area is the tax haven. The Swiss bank secret, for example, is surely one of the greatest scandals of all time. For decades, dictators have been stealing money from their own people, who live in poverty, and hiding it in Swiss bank accounts - with the full knowledge of bank officials who are also making money out of the deal. The individuals in Switzerland and elsewhere who are responsible for perpetuating this corrupt system have all kinds of excuses and are generally treated with respect. What could be more outrageous than that? We urgently need to make international agreements about wealth tax to ensure that people don't just shift their assets from one country to another to avoid tax. This should be an election issue in all countries. And it's not a question of how much we should tolerate tax havens and tax secrecy. There is never any plausible justification for these things. By democratic means we can and should get rid of them altogether. more


The end of national debt

We have grown so used to national debts that we think they are normal. But they, too, are outrageous. Consider this: When politicians borrow money for their country from private sources, they are obliging future generations to pay it back. But future generations are not consulted, nor are they generally very happy about paying other people's debts. If someone asks me to pay their debts, I am not happy about it. Why should future generations be happy about it? According to simple democratic principles, this widespread practice should be illegal.

If a country does not have enough money to meet its needs, just forget all those economic theories and get to the point. Of course public institutions can always be made more efficient - but that is seldom the main problem. If the government doesn't have enough money to finance the public sector, the main solution is taxation. Someone has to pay the bill! And given that the gap between rich and poor is far too wide in all countries, this generally means taxing the rich, because that is where the money is. You won't find much of it anywhere else.

Another method is to print more money, which causes inflation. That effectively reduces the assets of the rich. By using this articially created money (in fact money is always artificially created) to improve social services, the gap between rich and poor is reduced. In the end, this method would be similar to taxing the rich. When confronted with this idea, the rich just laugh and make jokes about how economically irresponsible it is to print more money. But in fact when you consider the main points and don't allow yourself to be sidetracked by unclear economic theory, printing more money is a reliable method of redistributing a country's wealth, provided the rich don't convert their wealth to other currencies in advance. You don't need an economics degree to understand that.

But it is more honest and direct to tax the rich directly. Even the rich would agree with that. Of course international exchange is a problem, but that is also a problem with wealth tax. In both cases international agreements are needed.


Three concrete steps

Given these arguments, how can we move toward a more stable and fair financial system? The problem will not be solved by complicated economic theories, which change from one generation of economists to the next. Besides, the problem is not only economic - it is also moral and historical. Here is a simple, transparent, practical solution:


1. Pay off existing national debts. This involves first establishing which debts were legal in the first place, because only they should be paid. In many cases, legal investigations will be necessary. These should happen in independent procedures within each country. If a debt is found to be illegal, it should be canceled. Having established which debts are legal, they should be paid off, slowly but surely. Since the gap between rich and poor is currently far too wide, that should primarily be achieved by taxing the rich.

Incidentally, a large part of the Greek national debt could be paid off by a combination of reducing local tax evasion and increasing local wealth taxes, combined with direct assistance from the European Union - similar to the

Marshall Plan after the Second World War, but financed by wealth, speculation and environmental taxes. I am talking about giving, not lending, and the numbers would be much smaller than the trillions spent by EU countries in 2008 to bail out corrupt banks. The Greek people may not be entirely innocent, but they are certainly not responsible for a global crisis that, as everybody knows, was jointly created by banks, corporations, governments, and those economists who could have warned them, but did not. It is undemocratic to treat the inventors of δημοκρατία as scapegoats while the guilty live in luxury. Perhaps the Greeks would be better off leaving the EU and regaining control of their currency, as described here.


2. Make it illegal for governments to borrow from private sources. Just repeating: National debts oblige future generations to repay them or to pay interest on them. But we have no right to force future generations to do anything, just as we have no right to reduce their quality of life through global warming. Moreover, if a sovereign nation has control over its own money supply and taxation system it has no need to borrow from private sources. Its income is based on taxation. Further information: link

For many people that is the most surprising assertion on this page, and it certainly surprised me when I learned about it. But this idea is surely perfectly clear and indisputable. What right do we have to borrow from future generations? None at all. What right do politicians have to give away a portion of the autonomy of their democratically elected successors? None at all.


3. Make it illegal for banks to lend money that they do not have. I expect that most bankers would object to this point, and present me with a cascade of impressive sounding economic arguments. But the problem is not economic, it is moral. Lending money that you don't have is a form of lying. Fractional reserve banking, as this practice is known, is remarkably similar to crimes such as fraud and counterfeiting. A bank's reserves should not be 5% or 10% or 20% of the money it is lending, it should be 100%, otherwise there is no money to lend. No wonder the economic system is in crisis. For further information look at the last few minutes of this video.

Again, this is a surprising idea when you first consider it. But on further consideration it is perfectly feasible. In fact, it is hard to imagine how the financial system could possibly work any other way. If you or I cannot lend money that we don't have, why should a bank? If I tried to make money by lending money that I had borrowed from someone else and charging more interest to my debtor than I was giving to my creditor, I would be committing a criminal offence. Besides, everyone would hate me when they found out. My reputation as an honest person would be ruined. No wonder we are not very impressed with the banks.


The bottom line

Underlying all this is a broader issue. The monetary system is, or should be, created, owned and controlled by democratic nations. Private companies are free to use it, but not to control it. Sovereign nations, not banks, must remain in control of the money supply. If we accept that principle, it follows that sovereign nations should never pay interest on debts to the private sector. Never. At the moment we have a situation where banks, not nations, have control over the money supply. People think they are living in a democracy because they vote for politicians in elections, but what actually happens after that is determined by big banks and corporations. This is a familiar problem, and what I am trying to say on this page is that there is a practical and feasible solution, and I am grateful to Bill Still for having made these points so clearly and forcefully.

If these simple principles are followed - and the transition will be easier than it appears, provided that existing, legally sound contracts are respected - we will get our free enterprise back. In free enterprise, there are many legitimate ways to make money, but they can generally be reduced to two categories: good ideas and hard work. Both good ideas and hard work generally benefit society, which is why free enterprise has been such a successful idea. Once you have money, you can lend it to people and demand interest, at which point we are starting to talk about capitalism. Capitalists rely on the legal system to ensure that they get their money back. If you are a bank, you can look after money for some people while at the same time lending that same money to others. The money supply is under the control of a democratically elected government. A legal system is in place that prevents people from tricking each other. The law prevents fraud, money laundering, phishing, political corruption. It also prevents suppression of competition by monopolies. From these examples it is clear that legal regulation is an integral part of free enterprise. By restricting freedom, they paradoxically make the system more free. But freedom was always a paradoxical thing.

An important point is that the law should generally prevent trickery. Democracy only works if voters understand the issues, so political honesty is an essential ingredient. The law should prevent people and banks from lending money they don't have, in order to make money on the interest; and it should prevent governments from borrowing from private sources, because they don't have the courage to tax the people who voted for them. Borrowing from the future is like taking money from babies, obliging them to pay it back they grow up. Don't worry about those babies, they won't object! That's not free enterprise, that's cowardice. I am also saying that we need a healthier attitude to taxation. Rich capitalists think they "made" their money. But money is not made by individuals, it is made by governments, and society is the ultimate source of any wealth. Paying back in the form of taxation is and always was a part of the deal, and deals are an important part of free enterprise. Right? So don't act like you're surprised or offended or something when the tax collector comes along, and don't waste your valuable time on tricks to avoid or evade tax. Instead, devote your time and money to generating good ideas and good products.

Another advantage of this approach is that it eliminates dependence on growth. It has been clear for decades that national economies cannot continue to grow forever, if only for ecological reasons. We are reaching the limit of our natural resources. So economic theories that continue to rely on growth are dinosaurs. We must give them up and plan for a future without growth. But people are still talking about growth, because growth makes it is possible to lend money that one does not have, and borrow money from the future. Growth enables such virtual debts to be repaid. Obviously, this time-honored idea is no longer working. It may be painful to give it up, but we will have to do it.

Governments are local or regional, but money is increasingly global. One of the most difficult challenges facing the human race today is the establishment of a democratically controlled global financial infrastructure that can enforce the principles that I have set out at a global level. An important task of such an infrastructure would be to ensure that rich individuals and multinational corporations are taxed in a fair and open manner, and the taxation is fairly distributed among national economies. Such an infrastructure would stop countries competing with each other to create the best conditions to attract investments/money: low taxes for big corporations, cheap labour, few environmental constraints, ignoring human rights violations. Instead, countries would compete to produce the best ideas and the best products - according to basic principles of free enterprise. Voters need to be informed about this problem so that it becomes a political issue in all countries. We should be electing politicians who are working toward this goal and developing realistic long-term solutions.

Like Sam Cooke in the song "Wonderful World", I don't know much about history, biology and so on, but I do know that one and one is two. I am not an economist, but I do understand some basic things about morality and I also think that I am able to distinguish the wood from the trees. This page is about the wood, but most of the information you can find on this topic is about the trees. Of course it is important to understand the detail, but until we start focusing on the main problems, everyone will be confused and the problem will never be solved.

The opinions expressed on this page are the personal opinions of the author. Please send me suggestions for improving this page. My email address is on my homepage. I thank John Sloboda and Emilios Cambouropoulos for their contributions and discussion.

http://www.uni-graz.at/richard.parncutt/



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The Eurozone's Vicious Circle

EconomicsPosted by john sloboda Thu, April 12, 2012 11:39:15

(This article posted on the web site of the New Economics Foundation puts Europe's financial problems, and the needed solution, in a nutshell. Why won't politicians do the right thing?)

http://www.neweconomics.org/blog/2012/04/11/the-vicious-circle-of-the-eurozone-crisis

Austerity measures won't save the continent.

James Meadway, Senior Economist

The eurocrisis is back, as expected. Greece is contained – at least for the moment – and attention has shifted to Spain. Twenty per cent unemployment, a shrinking economy, rising government deficits, and public and private debts totalling more than four times its national income have conspired to panic the financial markets. Spain has failed to hit the stringent borrowing targets set by the EU. Costs of borrowing for the Spanish government have shot up in the few days since Easter.

With weary predictability, the solution offered by the European powers is more austerity: sharp spending cuts now to reduce Spain’s deficit, and bring its public debt under control. Equally predictably, this is grossly misguided. Spain, up to 2008, ran consistent budget surpluses – unlike Germany. It was the financial crash of that year and the subsequent, very sharp, recession that provoked the deficits. As unemployment rose, and tax revenues fell, the gap between what the government spent and what it earned opened wider. The deficit exploded and the national debt rose.

Spain already had heavy debts. But they were not, in the main, owed by its government. They were owed by its citizens. By 2008, Spanish public debt was just 30 per cent of GDP. It has risen now to 79 per cent and continues to increase. But just as in Greece before it, by choking off economic activity, austerity actually increases the burden of the debt. In Greece’s case, its debt to GDP ratio was 130 per cent at the start of this round of crisis, in late 2009. By late 2011, after nearly two years of severe austerity, it stood at over 160 per cent. Spain, Ireland and Portugal have all suffered the same way.

Austerity is not just the wrong medicine for the wrong diagnosis. It is actively harmful. By insisting on austerity, the EU and major European powers are – in effect – placing the immediate needs of finance above any other consideration. It is hopelessly short-term at best and it is driving the whole continent into stagnation.

The imbalances behind the crisis

This is not a Greek crisis. It is not a Spanish crisis. This is a crisis of the European system. It is the direct product of deregulated finance and a dysfunctional single currency. During the boom years, easy credit masked real underlying weaknesses. Greater and greater injections of debt kept the European system moving. In particular, with different economies locked inside the single currency, effectively operating fixed exchange rates against each other, chronic balance of payments imbalances built up. In the north, countries began to run huge surpluses on their current accounts. In the south, these were matched by huge trade deficits, funded by debt. With currency adjustments ruled out, the imbalances became permanent. Spain ran annual current account deficits that reached 10 per cent of GDP or more, year on year.

When boom turned to bust, these deep weaknesses were exposed: and, worse yet, the debt overhang is immense. Spain is an acute example: a property boom, which at one point saw 12 per cent of the workforce employed in construction, was funded by cheap credit sloshing through the euro-backed financial system. Rising property prices helped drive greater borrowing. By 2007, average household debt had risen to 130 per cent of average household earnings, up from just 68 per cent in 2000. So government borrowing remained low, but private borrowing exploded. As the financial crisis broke, ending the property boom, those private debts turned bad. Spain, like the rest of Europe, now suffers from an immense debt overhang.

The problem of debt

Until that overhang is removed, the crisis will not end. The mechanism works like this. European banks, stuffed full of loans threatening to default, know they are weak. And they know all the other banks are weak. They fear collapse. This fear makes them reign in on further lending. As lending dries up, the risk of default and subsequent collapse increases. It makes perfect sense for each bank to tighten up its lending – they don’t want any more exposure to risk. But it undermines the whole system. This is the irrationality of private finance at work.

By the second half of 2011, this fear had begun to turn into a serious financial freeze. Spain and Portugal in particular were suffering enormously as capital retreated. Inflows of private funds, necessary to keep their economies moving, were drying up. In response to this, the new – unelected, note – head of the European Central Bank, Mario Draghi, authorised the flooding of financial markets with liquidity – hard cash. Tearing up the ECB’s own rulebook, over €1tr of new cash has been released electronically into European banks since December, through the so-called “Long-Term Refinancing Operation”

There’s nothing greatly “long-term” about this. The bulk of the new cash went straight back into the ECB’s own deposit accounts, European banks preferring the safety of the official institution to anything else out there. Very little went to businesses – the credit crunch did not end. But some went into buying up European government bonds, which, in the case of Italy and Spain helped reduce their costs of borrowing for a while.

These purchases, in turn, increased the banks’ exposure to those countries. With no recovery in sight, that debt threatens to default. That threat is now worse than it was before Draghi’s “rescue operation”. And the debt doesn’t need to actually default to allow fear and panic to spread disastrously throughout the financial system. The increased possibility of default is enough. Like an epidemic diseases, financial contagion can spread rapidly through the system, dragging country after country behind it. Spain is a big economy with substantial debts. But bigger still is Italy, with its €1.3tr public debt burden. It is also now back in the bond markets’ firing line.

Ending the crisis – the first steps

To break the crisis, two things need to happen. First, austerity must end. It is counterproductive, but it is followed because finance holds the upper hand. That means ending the swingeing spending cuts and looking to public investment to create sustainable jobs. Second, debts will need to be written off. They are the product of a bloated, crippled financial system and the rest of European society should not be expected to bear their burden. Nor can they: for as long as the debts demand repayment, prospects for any recovery are grim. For Greece, this will mean cancelling all of its outstanding public debt. For Spain, where private debt is the concern, this will require writing off household debts: a general amnesty being declared, perhaps along the lines recently implemented by Iceland. Of course, this will damage the banks; they will need nationalising and – unlike our own dear RBS, where public servants ape private greed – run democratically in the public interest. Capital and exchange controls, to prevent financial markets spreading contagion, will also be required. Countries like Spain and Greece will need to exit the euro to be in with a chance of achieving any recovery.

Until a serious break is made with the errors of the past, the continent will remain trapped. As things stand, there are no realistic prospects for recovery – although those who believe in magic free-market fairies may want to offer unrealistic ones. The pattern is familiar: each attempt to stave off the last crisis prepares the way for the next, worse, round of panic. That vicious circle must be broken, and broken in the interests of the people of Europe. The protests against austerity, from the occupations of the squares to the strikes, show the way forward.

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When Greece comes crashing down, everything come crashing down

EconomicsPosted by john sloboda Sun, February 12, 2012 23:12:35

Zeus Yiamouyiannis


Greece is the epicenter of a drama that threatens to unwind with all the intrigue and subterfuge of ancient Greek myths and tragedies. As with the legend of Icarus, big, and now bigger, transnational banks provoked the gods with their wax-and-feather financial fabrications to create the appearance of soaring wealth.

Now that they have flown too close to the sun and their wings have melted, these banks are being brought to earth by the obligations and consequences imposed by their fabrications.

Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves. They clothe themselves in their indispensability and shield themselves from accountability with tales about how many innocent citizens will be hurt if they don’t get their next bailout. It is as if they say, “We are above the law… We are the law.”

Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris. 
In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart.

When one abuses the laws and principles of mathematics and capitalism, claiming to be a faithful servant, consequence and accountability eventually catch up. The breaking point inexorably nears. Citizens are beginning to think, voice, and act:
“We can do without the false idols that call themselves banks. In fact, we need them to be dissolved for us to survive and thrive.”

Reality is the revenge of the gods.

Not just about fairness: Everything unwinds

This is not just about fairness anymore; it is about the exposure of central, global illusions that affect everyone, not just banks. For the last three plus decades, debt-fueled “growth” has instilled a life sense that everyone gets rich, values always go up, and no one has to pay. If those illusions evaporate than those citizens complicit in this failed fantasy may actually join forces with the realists (those who knew it was a scam all along) to produce unified citizen revolt. Hell hath no fury like the people spurned and lied to, even if many had some responsibility in welcoming and fanning those lies.

The implicit deal was this: We will collude so everyone gets rich going forward. We will collude so no one has to pay if there is any unwinding. (But, hey, it’s a new era, and that’s not going to happen!) Open default breaks the illusion, and austerity breaks up the collusion. This is why default has to be hidden, deferred, restructured. It is not just about chaos around party/counterparty risk (in particular, cascading claims that are not backed by anything). It is not even just about finance. It’s about all the other things that will unwind, culturally, politically, and psychologically, if Greece defaults and sets into motion the necessity of someone actually paying up. In short, recognition of reality has disastrous consequences for the status quo and its control myths.

The infinite growth meme unwinds: The cancerous economic obsession with infinite growth in a finite world is already unwinding, but will hit full force with cascading defaults. It is one thing to have a “slowdown,” and another to have your economic brakes lock up on you and your gears slammed into reverse. About the only thing that seems to be growing currently is the number of people partially employed or permanently unemployed. As a humorous aside, the situation is getting so pronounced that quality of life might actually have to replace quantity of possessions as the cultural indicator of the good life, and what would that do to the economy?

Politicians’ power of the purse unwinds: Greek politicians, like many other Western politicians, will do almost anything to get re-elected. The easiest way to do this is to pay people off, particularly government workers and constituents, in the form of generous benefits or pet projects. What happens if your tax base will not support this? You sell your political soul, defer, and/or hide the true costs of your largesse behind undisclosed derivative deals with Goldman Sachs that eventually put your entire country’s sovereignty in jeopardy. As a result, Greece’s former prime minister, George Papandreou, is now out after a very short term in favor of a unity government. Shady deals funded unsustainable perks that not only inflated popular expectations but created catastrophic debt and risk.

Guaranteed entitlements unwind: So now that the illusion of infinite growth is being exposed, the corresponding ballooning entitlements that enticed the larger public to become complicit in the illusion are becoming unglued. It would take almost a decade of gross national product to pay off the U.S. unfunded liabilities for Social Security, Medicare, and Medicaid, which exceed the staggering sum of 100 trillion dollars.

Retirement and health benefits cannot be paid out of fake prosperity and “notional” (i.e. imaginary) values. They require real services and products and an accepted public medium of exchange. (I will leave off the argument as to what constitutes “real” and “accepted” since even fiat currencies are dubious in this regard.) People will be forced to adjust their expectations and adapt their realities. With public and private pension plans also complicit in derivative scams to fund benefits, it will be no surprise if many pensions simply declare themselves bankrupt in the next decade.

The maximum profit mandate unwinds: We have reached such heights in our hysteria about growth and our psychological addiction to more-more-more, that we have seen stock prices fall, even with record revenues, if the corresponding company doesn’t meet expectations of even higher growth and revenue. It is getting to the point where a company cannot simply have a solid year and just pay out its dividends and maintain its good health. Instead companies have to be ever hopped-up on economic steroids and cost-cutting (i.e. shipping jobs to virtual slave labor in China) so as to not fall short of expectations.

These steroidal practices are destroying the companies and the means by which consumers can afford products and services. A relentless short-term focus serves no one in the end. “Maximum” less and less corresponds with “optimum,” because present assets can be cannibalized or revaluated to give short-term boosts to numbers, creating systemic and foundational deficits that destroy the health of a company and its surrounding society. Hopefully the idea and practice of optimum profit will replace maximum profit as the Great Unwinding continues.

The central question:

The central question, obscured by all the hand wringing and crocodile tears is simply this: Why should public citizens who have no stake in private enterprises, who received no profits or dividends, who had nothing to do with creating losses, be forced to pay for private losses? The only legitimate answer is, “They shouldn’t.” Anything that does not acknowledge this tenet is not functioning capitalism, and if it is functioning capitalism it cannot violate this tenet.

Yet we witness apologist expert after expert excusing this fatal breach in capital practice as “regrettable but necessary to save the system.” They seem not to have noticed that the system has already killed itself by violating its own foundational laws and principles. If anything, current conventional practice might be accurately described as an all-out anti-capitalist assault on democratic free enterprise.

So now the follow-up question is easy to answer: “Why are we paying for something we did not buy and had no hand in creating?” The answer: We no longer have functioning capitalism. Call it what you want— corporate socialism, crony capitalism, cancer capitalism, plutocracy, kleptocracy, oligarchy, neofeudalism— the system we have now is the equivalent of a private person going up to a stranger on the street and extracting “protection money” to pay for that private person’s underwater house mortgage.

As this simple fact grips the population, and people wake up to the present economic reality, there will be increasingly organized moves toward civil disobedience and alternative economy. “Cannot pay” will merge with “will not pay” since the only way to re-establish health and integrity in a corrupted economic system is to starve the cancers that have taken it over. This has already started with Occupy Wall Street, strategic defaults, and riots in Greece.

So if someone asks you, seeking to appeal to your fear, self-interest, and need for approval, if you are willing to “be responsible for bringing down the global system,” your answer should be an emphatic, “Yes.” “Are you asking if I want to bring down fraud, theft, abuse and the cancer that global finance has become for me, my neighbors, my children, and my children’s children? Are you asking me if I want to replace the current broken system with something that serves actual people? Not only, ‘yes,’ but ‘heck, yes.’”

By Zeus Yiamouyiannis, copyright February, 2012

http://www.businessinsider.com/the-first-dominoes-greece-reality-and-cascading-default-2012-2?utm_source=readme&utm_medium=rightrail&utm_term=&utm_content=6&utm_campaign=recirc

Read more: http://feedproxy.google.com/~r/google/RzFQ/~3/HmlrTodjA2Q/first-dominoes-greece-reality-and.html#ixzz1mDCnFI5a


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Good Capitalism

EconomicsPosted by john sloboda Sun, January 08, 2012 18:54:40
I'm reposting in full below a great short piece by the independent political economist Richard Murphy. In a few short paragraphs he has spoken more common sense about business than I have heard from any politician (of any political persuasion) or business leader. He also has a useful twitter account (@RichardJMurphy)

Richard Murphy for Prime Minister!!

Seriously, what are our political parties playing at?

A relative of mine attended a conference sponsored by the excellent "Positive Money" organisation (http://www.positivemoney.org.uk/). One of the speakers there was the veteran Labour MP Michael Meacher, who claimed (and no-one contradicted him) that there are only six people in the Houses of Parliament who really understand how money works. And he is one of them.

Is it lack of understanding that stops our politicians? Or is it, as Murphy suggests, lack of will?

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GOOD CAPITALISM
Richard Murphy
http://ht.ly/8lXbr - January 8th 2012

Ed Miliband has announced himself in favour of good business. I am delighted he has. So am I. It’s astonishing that some are saying that by declaring himself against spivs, chancers, asset strippers, speculators and tax avoiders he is somehow anti-business. Far from it: he’s declared himself very pro-business precisely because it is these people who are any-business.

But being anti-something is not good enough. Being pro-good business is what is required and that requires a clear understanding of just what a good business might be. I’m not seeking to offer a definitive guide here, but take these as examples. A good business:

1) Makes clear who it is so people know who they are dealing with

2) Makes clear who runs it

3) Makes clear who owns it

4) Makes clear the rules by which it is managed

5) Puts its accounts on public record if it enjoys limited liability, and does so wherever it is incorporated whether required to by law or not

6) Seeks to comply with all regulation that applies to it

7) Seeks to pay the right amount of tax due on the profits it makes in the place where they are really earned and at the time they really arise

8 ) Seeks to pay a living wage or more to all who work for it

9) Recognises trade union rights

10) Operates a fair pay policy so that the pay differential between highest and lowest paid in the company cannot exceed an agreed ratio that should never exceed twenty

11) Makes fair pension provision for all employees

12) Does not discriminate between employees on the basis of race, nationality, national origin, gender, sexual orientation, age, disability and similar such issues

13) Does not abuse the environment

14) Has a clear code of ethics that it publishes and is seen to uphold

15) Is transparent in its dealings with customers

16) Seeks at all times to minimise risk to those it deals with and takes all steps to ensure they know what those risks are

17) Accepts responsibility for its failings and remedies them

18) Works in partnership with its suppliers and does not abuse them

19) Advertises responsibly

20) Creates and supplies products meeting real human need

I could readily add to that list, which I do not think I have tried to prepare before. But the gist is obvious.

So what would this look like in practice, meaning how could this status be assessed? This was a question I was asked by a councillor last night who wanted to put good ethics into practice in his council’s procurement policies.

I hope that the assessment criteria for the above should be clear in most cases with the exception perhaps if the fact that this list clearly implies the need for country by country reporting to explain:

- What it is called where it operates meaning it must name each subsidiary and specify where it operates

- Its profit and loss in each country and jurisdiction in which it operates

- How much tax is pays on the profits it earns in each jurisdiction

- What its internal trading is so that its transactions within its internal supply chains can be identified

- How many people it employs in each jurisdiction that operates in and how much it pays them in aggregate plus their pension cost

- How much it has invested in tangible assets and working capital in each jurisdiction on which it works.

Only then is the data to assess whether it is a good corporate citizen available for assessment.

The final part in this equation is suggesting an assessment criteria for what is a good company. In some cases this will, again, be obvious from the suggestions made. For example, it might be expected that a company either recognises a union or it does not. However things are rarely that simple. Different subsidiaries in different countries may or may not recognise unions so composite scores are possible.

Other indicators can be prepared using this data. For example explainable and unexplainable presence in tax havens becomes an issue when the number of subsidiaries in such places are known. The proportion of trade through or assets in such places also becomes significant assessment criteria if country by country accounting data is available. The likelihood of tax compliance can also be assessed properly when country by country reporting data is available.

‘So what?’ might then be the question. What would be the point of all this? Well when things are measured behaviour changes, we know that. But more significantly the government is a major purchaser from many companies. If its procurement policy was based on the requirement that a company meet a minimum standard or no contract could be issued then this becomes a very powerful tool indeed, and those criteria need not be consistent. So, for example, in the case of PFI offshore might simply be a non-starter.

The point though is this: we can identify good companies and the introduction of country by country reporting would make the whole task a lot easier.

What this means is simply this: reform to our currently unacceptable corporate culture is possible. All it takes is political will and we can do it.

Is that will available? That’s the question.”

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