How the market fails to provide what the customer wants

 There is no better modern example of the market failing to provide what the customer both needs and wants than the computer industry. If it was driven by the customer, the computer industry would produce hardware and software which was easy to install,  had continuity of use, was simple to use and was supported by adequate help lines and manuals. The industry signally fails to do any of these things.

Hardware and software are of course purchased in ever greater volume and computer services, including maintenance, continue to swell.  But that is not an indication of customer satisfaction. Rather, it is simply a reflection of how computers have become an inescapable part of our lives, not only as obvious computers but also in the guise of so many of the other machines we use – everything from phones to intelligent clothes. Business and public administration have become so dependent on their use that they cannot do without them. That being so, whatever is on offer, however unsatisfactory, is bought out of sheer necessity.  The computer companies have the modern world over a barrel.

It might be objected that although most people cannot completely escape computers at their work, they do not have to bring them into their private lives. Yet increasing numbers buy computers for private use.

Why do they do that if the machines are so unreliable and demanding? Simple: once a significant minority have private computers and business uses them very widely, it becomes very difficult for the rest to resist, not least because businesses and government increasingly require those dealing with them to do so by computer.  But there are other pressures as well.

We have long passed the point where a handwritten document is  likely to be read by most people in business unless it involves an order or payment. Now, except between social contacts, everything must be wordprocessed to be acceptable.  A word processor or access to one has become a sine qua non  for anyone who wishes to be taken seriously.  Even amongst private individuals a letter is increasingly seen as unusual or even quaint.

With emails, we have not come to the stage that telephone ownership reached  a quarter of a century ago when not to have a phone became considered eccentric, but we are rapidly moving towards it.

Employers increasingly wish to contact employees by email wherever they are and this means the choice is often between having a computer and email at home or not having a job.

Those with school age children, whatever they think of computers, find it next to impossible to deny their children not only a computer but access to the internet, both because the children want it to match their peers and because they have been brainwashed into believing that a computer is a necessary educational tool.

In short, people are increasingly being driven to become computer owners  and users  not because they actively want to,  but because they feel isolated and excluded if they remain computerless. Again, aswith the analogy between telephones and emails, within the foreseeable future,  someone without a computer is in danger of becoming in the eyes of the majority as much as an oddity as someone without a TV is now considered.

The Wealth and Poverty of Nations – David Landes

Published by Little, Brown and Co 1998 650 pages)

As my old history master never tired of saying, Wealth Is  Power! That is the reason why the cause of  nations becoming rich or staying poor is so fundamental a  political and social question.  It is also an infinitely  intriguing  subject, being  in principle beyond a  definitive answer  because any ascription of importance to any quality or event  judged relevant to the matter is by its nature subjective.  However, objectively  unanswerable as it may be,  it is  important to continue to address the subject because it has become a central part of  the ideological battleground  between the First World and the Third World, East and West,  Left and Right.  

 To this ideological battle David Landes brings an antidote to the anti-western forces which are so strongly entrenched in  the Third World and amongst the elites and ethnic minorities  of the First World. Driven by a deep knowledge of the subject,  he refuses to take uncritically  the “right-on” party line on colonialism, slavery and, indeed, the causes of  national wealth.  In fact, this book is an abattoir for  sacred cows dear to the progressive mind. As Mr Landes  is an American academic, this is a particularly brave stance to adopt  in the hysterical atmosphere of the typical modern US campus. On that count alone he is to be congratulated.

Two themes dominate Mr Landes’ thinking. The first and lesser is  the colonial experience,  particularly of  European  colonialism, since the fifteenth century: the second is industrialisation.

Mr Landes dismisses the claim that colonialism was the primary cause of the wealth of European powers or their  cultural offshoots such as the United States, by pointing to inconvenient  facts such as the experience of Spain, the greatest power in Europe between 1500 and 1650, and Portugal. Despite the immense wealth generated by their American  possessions, as societies they remained poor even during their period of greatest material gain from the Americas. Nor did their rulers achieve financial respectability – the  Spanish Crown managed to go bankrupt in 1557, 1575 and 1597.

As for the slave trade, one may point to the wealth  of  Britain at the time of abolition and in the century which followed. In 1807 Britain’s GNP was approximately 200 million pounds. By 1914 in was over 2 billion pounds. (Prices in 1807 and 1914 were approximately the same as far as these things can ever be judged) At most, Mr Landes  allows that the wealth received by Britain from the slave trade, India and the Americas may, but only may,  have slightly accelerated the first Industrial Revolution.

 The Industrial Revolution drives the book. For Mr Landes,  the question of the wealth or poverty of nations  only becomes  important  after the onset of industrialisation:

“The industrial revolution made some countries  richer,  others  (relatively) poorer;  or more accurately,  some  countries made an industrial revolution and became rich; and  others did not and stayed poor.” (page 231 ) Prior to industrialisation, the disparity in wealth between states, regions and even  continents  was relatively small.  Come the  Industrial  Revolution and massive disparities begin to appear. For Mr  Landes, it is to the success or otherwise in industrialising which is the primary cause of present disparities in national wealth.

 Mr Landes’ general interpretation treads a well worn path.  He views the historical process of industrialisation as twofold. First, comes  a pre-industrial preparatory period  in which irrationality of thought is gradually replaced by scientific  method  and what he calls  ”autonomy  of  intellectual inquiry” (page 239) , that is, thought divorced from unquestioned  reliance  on  authority,  irrationality, especially superstition.  At the same time technology begins to be   something more than by- guess-and-by-God. This gives birth to  industrialisation by creating both the intellectual climate  and  the  acquired  knowledge,  both  scientific  and  technological,  necessary  for the  transformation  from  traditional to modern society.

Those are the bare bones of Mr Landes’ argument. He backs it with considerable detail.  All the usual suspects for the causes  of the  Industrial Revolution are paraded  and examined: technological, intellectual, cultural,  social, political, legal, economic, natural resources and climate.  Mr Landes gives greatest weight to intangibles such as intellectual  development,  political  maturity,  legally enforced respect for private property and a sound system of   money and credit.

One of the great strengths of the book is Mr Landes’ refreshing determination to pay attention to what actually occurs rather than what theory says should happen. Thus he goes against the economic fashion of the age and  questions  that  shibboleth of classical and neoclassical economics,  comparative advantage,  the idea that countries  should manufacture what they are most suited to in the circumstances of the international market. Mr Landes cites the instance of the Englishman John Borrow, who in 1840 urged the states of the German Zollverin to concentrate on growing wheat, and sell it to buy British manufactures and comments: “This was a sublime example of economic good sense: but Germany would  have  been  the  poorer for  it.  Today’s  comparative advantage…may not be tomorrow’s.”  

At a time when casual and gratuitous public insult of the  English is commonplace, the book is a salutary reminder of how disproportionate an influence this country has had on  the world. Two of the chapter headings will give a flavour of  this: “Britain and the others” and “Pursuit of Albion”. In the latter Mr Landes is emphatic on England’s importance:

 ”The Industrial Revolution in England changed the world and  the relations of nations and states to one another…The world was now divided between one front-runner and a highly  diverse array of pursuers. It took the quickest of the  European “follower countries” something more than a century to  catch  up”.  (page 168). In other  words,  without  England  industrialisation would have been at best greatly delayed and  at worst have never occurred. (To that immense influence, may be added the Empire, the founding of the United States by  involuntary  proxy,  the development  of  parliamentary  government, the international success of the English language   and the individual likes of Newton, Locke and Darwin.)

Mr Landes also gives the modish lie to the idea that  Englishness is a weak or non existent plant. When examining the reasons for the first Industrial revolution occurring in these Islands, Mr Landes (he refers to Britain but it is  clear from the context that he means England) lists among the prime causes precocious English nationhood viz: “To begin with, Britain had the early advantage of being a nation. By that I mean not simply the realm of a ruler, not simply a   state or political entity, but a self-conscious, self-aware unit characterised by common identity and loyalty and by equality of civil status…Britain, moreover, was not just any nation. This was a precociously modern, industrial  nation.” Page 201).  

Before English readers get too bigheaded, it should be added that Dr Landes is distinctly critical of Britain’s failure to maintain the momentum of their initial industrialisation and  cites as dreadful warnings to others such failures as  Britain’s inability  to keep the lead in the chemical   industry in the nineteenth century and the dismal story of our car industry since 1945.

There is one part of the book which the reader should treat with caution. Mr Landes spends the first two chapters lending  rather uncritical  credence to the  distinctly contentious idea, much favoured by the Left and the Third  World,  that Europe was above all of the world especially   favoured  by  climate  and  natural  resources,  while  sub-Saharan Africa was especially disadvantaged by Nature.

 However, even here he redeems himself by refusing  to make this a prime cause of differences in national wealth. At best, in Mr Landes’ eyes,  natural advantages are necessary  but not sufficient conditions for industrial progress.

In the end David Landes, like every historian, economist and sociologist before him who has considered the subject, of necessity fails to provide an absolute explanation for the phenomenon of the wealth of nations.  What he has achieved  is a work of very considerable scholarship, which describes  and  analyses  the  multifarious  possible  causes  of disparities in national material success as comprehensively  and intelligently as any work the reader is likely to put their hands on.

Readers afraid that economic history is dry stuff should put their fears behind them. David Landes has an easy literary style and litters his text agreeably with anecdotes and surprising  facts in the manner of  Fernand  Braudel’s  Capitalism and Civilisation.

Do you want this potential terrorist target in the heart of London?

The United Kingdom Centre for Medical Research and Innovation (UKCMRI) was granted planning permission for a research labratory on 16 December. This is a consortium comprised of the Medical Research Council (a taxpayers funded body) , Cancer Research UK, the Wellcome Trust and University College London which is part of London University.

If built the research centre will be handling dangerous viruses which are permitted under a level 3 biohazard licence, viz:

“Biohazard Level 3: Bacteria and viruses that can cause severe to fatal disease in humans, but for which vaccines or other treatments exist, such as anthrax, West Nile virus, Venezuelan equine encephalitis, SARS virus, variola virus (smallpox), tuberculosis, typhus, Rift Valley fever, Rocky Mountain spotted fever, yellow fever,
and malaria. Among parasites Plasmodium falciparum, which causes Malaria, and Trypanosoma cruzi, which causes trypanosomiasis, also come under this level.”

The Medical Research Council currently handles even more toxic viruses n their Mill Hill site, namely, those which are permitted under a level 4 biohazard licence, viz.:

“Biohazard Level 4: Viruses and bacteria that cause severe to fatal disease in humans, and for which vaccines or other treatments are not available, such as Bolivian and Argentine hemorrhagic fevers, H5N1(bird flu), Dengue hemorrhagic fever, Marburg virus, Ebola virus, hantaviruses, Lassa fever, Crimean-Congo hemorrhagic fever, and other hemorrhagic diseases.”

To place such research on the site would be criminally irresponsible under any circumstances even if both the physical security and biohazard hygiene were first rate because of the risks of a terrorist attack. However, there can be no rational public confidence that will be the case because UKCMRI have persistently refused to give any details about how their security arrangements will be handled, even in terms which would not compromise their security, such as saying whether armed guards will be used or even whether the security will be directly employed by the consortium or sub-contracted out. There will also be groups working within the centre who are not directly working for the consortium and the public will have access to some areas. To undertake the building of the centre under these circumstances would not be merely criminally reckless but touch the confines of lunacy.

There are also issues with the disruption caused by building and the contamination of the bidding process for the site by Gordon Brown, who interfered with the process even before the formal bidding period was ended. Details of these issues can be found in my objection to the planning application which forms the first posts in the blog, as well as the detailed objections on security grounds. All the objections to the planning application which require proof are supported by documents.

Write to your MP and complain. Raise a stink wherever you can.

Further details of what is happening can be found at 

 http://ukcmri.wordpress.com/

The increasing IQ demands of modern society

 Take a simple everyday example of how everyday life has rapidly become more complex in our own society. Fifty years ago if you looked in the pockets of the ordinary working man you would find a wallet which probably contained money and the odd photo or a scrap of paper on which notes had been made: the pockets of a middle class man would contain what the working man’s contained plus probably a cheque book and possibly a driving licence. Today the pockets of most people will contain cash, a wallet a wide variety of credit, bank and store cards, a driving licence and a mobile phone.

All the person, whether working class or middle class, had to worry about fifty years ago was not losing any of the things they carried. If they did lose them, the most that they were likely to have to do was cancel their cheque book and get a new licence. Now most people have to not only worry about what the person fifty years ago had to worry about, they also have to deal with a great deal more. They must remember passwords to use their cards and, should they lose any of them, they not only have to cancel the cards and get new ones but have the added worry of identity theft.

That is just a one example of what the modern industrial society demands of its members. It does much more. Vast numbers of laws are passed which no person however conscientious can be expected to master (that includes lawyers) and the state imposes hideously bureaucratic procedures for everything from applying for a passport to gaining welfare benefits. The modern state even in in its most benign forms also increasing interferes actively through attempts to micro-manage the lives of those who come under its sway, whether that be congestion charging, the sorting of rubbish for environmental or the imposition of highly intrusive surveillance practices such as high-tech ID cards. More generally, it imposes ideologies such as political correctness on its population through the use of political propagandising and the passing of laws to make dissent difficult or simply illegal. That is what the benign form of the modern state does: its more malign incarnations do the same things but in a more extreme manner. All of this is mentally demanding and exhausting for any person to take on board and of course most people do not even try let alone succeed in knowing and observing every new law or de facto official custom.

But it is not only the state which makes increasing demands on the emotional and mental resources of its people. Partly because of technology and partly because of the demands of ever widening competition as national trade barriers are lowered, large private companies have joined the complexity party. Customers are expected to increasingly serve themselves, whether that is through the use of websites, automated telephone systems, onsite computer such as ATMs and checkout machines in supermarkets. It is increasingly difficult in many of the ordinary spheres of life to engage directly with another human being. (I examine the implications of computers in more detail in  Appendix B)

A nasty question arises from this increasing complexity: are the demands made on humanity by the advanced modern state such as to distract them from learning things which previous generations learned. Do people today know much more about processes but have far less general knowledge than they once had? My feeling is that this is precisely what has happened. Does this make people on average less intelligent because the intelligence of erudition is reduced? If so, does this imply that populations as a whole are becoming less intellectually competent or merely intellectually competent in a different way? I suspect it is the former because the intelligence of erudition is the main source of human competence.

There is also the worrying prospect that technological advance may be proceeding so rapidly that the demands it makes on people in general may eventually outstrip the society’s general IQ capacity. At the least, the additional demands are leaving millions of people in an increasing precarious position – an IQ of 80 is the point at which most psychologists would say that a person begins to struggle to live an independent life in a modern advanced society such as Britain. Approximately ten per cent of the population of Britain have IQs of 80 or below. That is six million people.

Nailing the “We’re all in this together” lie

Amongst the many obnoxious lies put about by the coalition is the claim that “We’re all in this together”,  which is embellished by their other parrot cry  of “the rich are being hit harder than the poor”.  This is obvious nonsense because the poorer you are, the less discretionary spending you have.  

Let’s take an example. Compare the position of  a banker with an income of £2 million a year against a hospital porter earning £15,000.  Assume they are both single.  If the banker finds his tax bill rises from 40% to 50% tax , he will still take home around £1 million. It will make no meaningful difference to the way he lives.  If the porter finds his tax bill increased by 5% he will lose around £500 taking into account his personal tax allowance.  That would have a significant effect on his life.

The message is simple: the richer you are, the less you will be affected; the poorer you are, the more you will be affected.

The coalition’s behaviour is all the more obnoxious because of the background of its leaders.  These are men and women who are at best genuinely rich and at worst comfortably off. In the case of the three most dominant players – Cameron (NuTory Boy); Osborne (OldTory Boy) and Clegg  (leader of the Party for Adolescents) – all have backgrounds which have handed them the lives of rich men on a plate through the accident of birth.  They are also firmly in the mould of modern professional politicians, being able between the three of them to muster a meagre 10  years of employment outside of politics, and that is stretching it.

Cameron was born into a family which has extensive connections with the financial world, his father being a senior partner at the stockbrokers Panmure Gordon. His great-great grandfather Emile Levita, a German-Jewish financier who obtained British citizenship in 1871, was the director of the Chartered Bank of India, Australia and China. Cameron’s great-great grandmother, was a descendant of the wealthy Danish Jewish Rée family.

Educated at Eton and Oxford, he  Joined the Conservative Research Department straight after Oxford.  In 1994 he left to become Director of  Corporate Affairs at Carlton Communications, a media company which won the ITV franchise for weekday TV.  He left Carlton in 2001 and was elected an MP in that year.  The journalist Simon Heffer describes his seven years with Carlton as Cameron being employed as “a PR spiv”.   It does seem rather odd that a man without any background in the media should have been appointed to a senior media post at the age of 28. Perhaps this was a case of not what you know but who you know.

Osborne comes from the  an Anglo-Irish family which was  part of the old Ascendency in Ireland. He is heir to a baronetcy. His father co-founded the fabric and wallpaper firm   Osborne & Little He was educated at St Paul’s School and Oxford.   Coming down from Oxford in 1994 he joined Conservative Research Department and remained employed by the Tory Party until his election in 2001.

Clegg’s  father is   Nicholas Clegg,  chairman of United Trust Bank. He has various Ukrainian, Russian and German strains in his not too distant ancestry. His wife is Spanish.  Clegg  was educated at Westminster School, Cambridge,  the University of Minnesota and the College of Europe in Bruges.  Something of a professional student. He spent a gap year as a ski instructor, had a summer working as a junior in an Helsinki bank  and had some short lived work in the media both at home and abroad. In reality, his working career, if it can be called that, did not start until he was 27 when he obtained a post with the  European Commission. He became an MEP in 1999,  which lasted until 2004,  and an MP in 2005 between leaving the European Parliament and becoming an MP, he became a partner of a political lobbying firm, GPlus.

As can be seen, these are people who will never have known any anxiety about where the next pounds was coming from; never had to fret over putting a roof over their family’s heads; never known any insecurity about the future. Yet now they dare to inflict upon those who do know such fears a disproportionate burden of greater poverty, poverty resulting from the reckless incompetence of politicians in allowing bankers and their ilk to behave as the chose and the unrestrained selfishness of the bankers and their ilk who became caricatures of the rootless capitalist. It is also a savage irony that these creatures should bleat on about the wonders of private enterprise when they have so little experience of it.

The massive void between the likes of these people and the public can be seen in the decision to increase the foreign Aid budget by 40% at a time when so much has been cut which will affect the people they are supposed to represent, namely, the British. The Aid budget will soon exceed £9 billion a year.  That £9 billion alone would have funded the cuts in child benefit and provided the money to engage in what is sorely needed, a massive programme of council house building.

Why all the banks should be nationalised

 Until Lehmann Bros went down  (Sept 2008) it was still just about possible (although it took a good deal of credulity) to honestly believe that Northern Rock was simply a one-off  economic disaster, but once Lehmann had started the ball rolling last year it was soon  unmissably obvious that the entire banking system in the developed world was infected with the same criminal recklessness with every one being insolvent because all required government action to keep them afloat whether it be direct investment or government backed schemes such as Britain’s Asset Protection Scheme.  That being so, the  most rational  course would have been to force the banks into administration on the usual legal grounds of their demonstrable  insolvency and then go for immediate and complete nationalisation with no automatic compensation to shareholders because the banks were  insolvent.  The state would then have had legal responsibility only for bank deposits  and  a distribution to shareholders and other creditors would only be made if realised assets exceeded the liabilities, a distribution which would never occur because the liabilities were so vast there would have been nothing to distribute. However, for reasons of  British public confidence and international politics something would have had to be paid to the shareholders and other creditors.  

 This action would have immediately solved, as far as it can be solved,  the problem of a lack  of investor and depositor confidence because the entire weight of the British taxpayer will be behind the banks, which in an advanced economy is the best security there is. It  would also,  in all probability,  have cost a great deal less than what the crisis has already cost and what it is likely to cost in the future.   At worst it would have placed no greater burden on the taxpayer because we are already underwriting every financial institution while giving the additional benefits of allowing government to  rapidly (1) ) direct lending to where it is most needed immediately, namely, business. (2)  institute procedures to prevent reckless banking and (3) ascertain the true extent of the bad debts insofar as that could  be done. I say as far as possible because  debts can easily change their status from sound to bad as an economy worsens. In addition,  many of the financial devices used to market and circulate the sub-prime debt are so complex it is possible that no one really understands them. Indeed, they may have been  deliberately made impossibly complex to ensure that they could not be understood. Nonetheless,  an estimate could be made which  would at least give an order of magnitude of the toxic loans.  For example, it  could tell us that the debts were in the trillions rather than the hundreds of billions of pounds. 

 There is an obvious danger which would have to be guarded against. A banking system under state control would be prey to politicians manipulating bank operations  for their own political advantage, for example,  by extending credit freely supporters or, more broadly, instructing banks to apply looser lending rules  in constituencies which they hold  than in constituencies held by their political opponents. The worst case scenario is that they would  plunder the banks for their own personal pecuniary advantage. The check against such abuses is  unambiguous legal restrictions on what can and cannot be done by banks with thumping legal penalties for those who ignore the law and regular surveillance of the financial position of politicians and bankers.  

 Apart from dealing with the present crisis there are three good general reasons why banks should be nationalised. First, banking cannot simply be treated as another industry.  Money is the petrol which drives the economic engine. Take it away and a society is reduced to barter. An advanced society rests on a viable currency and a stable and reliable supply of credit.  It is simply too fundamentally important a matter to leave in private hands,  something which is tacitly admitted by British governments for  the taxpayer has long underwritten the vast majority of bank deposits. Once other restrictions were removed in the 1980s and 1990s this  allowed the traditionally staid British retail banks to borrow recklessly because the lenders know the taxpayer stands behind them.

 Second, the banks and their ilk  are the prime drivers of the growth in the money supply through their massive expansion of credit (when a loan is made the money supply increases by the amount of the loan, because the lender still owns the money and the borrower has the use of it.) The lack of proper controls over lending has effectively privatised control of money, with the financial institutions being allowed to contaminate the currency by creating money of widely varying quality. An analogy would be with a currency based on gold  with the government minting to a consistent standard,  while allowing private companies to mint coins to whatever standard they chose. Nationalisation puts the  control of the money supply back into public hands.

 Third, all modern banking is fractional reserve banking, that is, the bank holds liquid reserves which are only a small percentage of its debt. Thus it has considerable similarities to pyramid schemes (or Ponzi schemes if you must) because both rely on the sociological trait that in normal times only a small percentage of investors/depositors will want to withdraw their money at any one time. When times become extraordinary and there is a run on a bank, the bank rapidly becomes insolvent because it has little liquidity, . the reserves held being only a tiny proportion of the total liabilities of the bank in advanced economies. This is unlikely to radically change while banks are in private hands. Hence, private banks in places such as Britain  would  always be very vulnerable to runs on them if the state did not guarantee  most or all of the deposits. With British  banks in public hands the problem vanishes, insofar as it will ever vanish, because the depositors know it is guaranteed by the taxpayer.

 Bank nationalisation does not mean general state control of the economy. It is quite possible to retain capitalism for most other economic activity. It is only ideologues such as Marxists who think otherwise as they attempt to fit reality into their ideology rather than adjusting their ideology to reality. If something is practically possible – and this is – then human beings can decided that is how they wish to live. Supposed ideological necessity is no necessity at all if the ideology does not capture the mind.

 Nor would the nationalisation of the banks mean that the state would be the only source of credit. Companies could still raise money through rights issues and the sale of bonds. Private equity companies could continue provided they took only money actually owned by an investor, that is, the investor had not borrowed to make the investment.  Retail companies could fund their own credit schemes. Loans and investment on a personal basis could still be made.

Britain is  getting the worst of all worlds at the moment and will continue to do so if the banks remain in private hands.   They are propped up with country-ruining sums of money yet very little control is being exercised over them. The weasel-worded  policy of  “quantitative  easing” – the virtual-world   equivalent of printing money – which has so-far (November 2009) put £175 billion into the economy has not persuaded the banks to release the purse strings on lending to either private individuals or business. That is true even of  the banks  which are part or wholly owned by the  taxpayer:  RBS, Lloyds, Northern Rock and  Bradford and Bingley, Instead the banks are re-building their balance sheets at the taxpayers’ expense and, most shamefully, massive remuneration is being paid to the people who got us into this mess.  When the self-serving cries of  “We must pay the market rate to get and keep the best people”,   it should be remembered that not only are these the class of people who created the mess,  making money through  banking  is considerably easier now than it was before the recession began. because so much banking capacity has been lost.

In one sense the banks  cannot  be blamed for what they are doing because they are on one hand being instructed by government to re-build their balance sheets to provide greater security for their future trading and on the other to lend more to businesses and loosen  the reins on mortgage lending. They cannot do both, especially as much of the credit supplied in Britain prior to the recession was foreign originated, a source which has now dried up, and politicians of all sorts are yelling about the irresponsibility of  125% mortgages and mortgage multipliers of  six and seven times income. The result is businesses failing for want of their previously normal credit and the housing market limping along as first time buyers are effectively squeezed out of the market by 25% deposits and  3-4 times salary mortgage multipliers and many who need to re-mortgage finding to their horror that they cannot do it on affordable terms. However, that is not an argument to allow banks  to continue in private hands but an argument to nationalise, because it is quite clear that they will not behave in any interest other than their own while they remain nominally independent or are taxpayer owned enterprises waiting to be returned to private hands and still being run as quasi-private companies with,  in the case of RBS and Lloyds Group, the absurdity of having shares traded on the stock exchange while the taxpayer feeds  what are essentially insolvent businesses with seemingly endless and mind-shaking sums of money. 

The extent to which British  banks were serving their own purposes without regard to any other consideration  before the financial roof fell in can  be seen from their  massive reliance on foreign business, viz:: “Whitehall sources said that they had discovered that some major UK lenders – including RBS, HSBC and Barclays – have had only 20 per cent of their balance sheets made up of “traditional” loans to UK households and firms. Meanwhile, up to 80 per cent is tied up in loans toforeign nationals and companies, bond issues and other investments. “  ( Patrick Hennessy, 80 per cent of bank lending ‘went overseas’ 17 Jan 2009 Daily Telegraph )

 It would have been best if the banks had been nationalised right at the beginning of the present crises. However, the delay has taught the public one very important lesson, namely, that private enterprise is amoral and will always follow its own rather than the national interest.

 How much would nationalising the banks cost?  The honest answer should be no more than it takes to soak up their debts because the reality is that British banks were all insolvent when the rot set in after the demise of Lehman Brothers in 2008. Those banks which did not directly take taxpayers money, most notably Barclays and HSBC,  survived only because  of Government action such as  the Asset Protection Scheme which allowed them to lay off the risk on vast amounts of sub-prime debt  and the avalanche of money created through the printing of money by virtual means, otherwise known with quaint dishonesty as Quantitative Easing. As the debts of the banks vastly exceeded  the assets the normal consequence  of insolvency would be for shareholders to receive nothing because their shares would be worthless and  there would be no money to distribute to them after paying what was realised to the creditors.

 Many readers at this point will be saying, hold on, our economy is heavily dependent on financial services in general and the  City of London  in particular,  and much of  the money  government spends comes from the taxes drawn from the financial services. Won’t nationalising the banks kill the goose which lays the golden egg?

 The size of the financial services sector is large but it accounts for only a small part of  British GDP. Estimates of its size vary but most  are  in the range of  7-10 percent of GDP. IFSL Research puts the contribution of financial services for 2007 (the height of the boom) as low as £7.6 billion  put employment in the financial services in 2008 at 1.03 million and their positive contribution to the balance of payments  in 2007 at £36.9 billion,

That leaves a great deal of other British  economic activity and employment. Even with every financial institution in the country nationalised most of that banking activity would remain. In addition,  the profits to be made by cautious state banking would substitute for substantial parts of the current tax revenue which is spent by government. Moreover,  as economic commentators and politicians are beginning to acknowledge,  Britain’s heavy reliance on financial services has caused  the British economy to suffer  more than any other advanced nation in this recession  because the catastrophic losses sustained by the banks were proportionately larger because the banking sector was larger (Britain is the only major economy not to have come out of recession by November 2009). Arguably, reducing the proportion of  Britain’s economy which is dependent  on financial services would be a good thing in itself, although nationalised banks restricted to cautious banking should not get into the same sort of difficulty  again. 

As for the tax revenue derived from financial services, this is far from being a dominant funder of British government spending.  For example, the reported tax take from the City in the  financial year 2008/9 is £32.5bn (Open Europe 28 7 2009 Government reveals City firms contributed £32.5bn in tax revenue in a year) This is  interesting for two reasons: firstly, the £32.5 represents only around 5% of  the total UK budget spend for 2008/9 (excluding the bank bail-outs).  Hence, the idea that the City is massive  driver of tax revenue is objectively wrong. 

Secondly,  the tax paid by  the City is tiny compared with the amount that the taxpayer has pumped into the banks so far – hundreds of billions and perhaps as much as a trillion. Therefore, the total amount in taxes contributed by the City since 1997 is almost certainly much less than the taxpayer has had to pump in to date. Moreover, the pain is far from over because the banks and their ilk are almost certain to have further massive bad debts to announce which will result in more taxpayer support.

If we can only guess at what the ultimate cost will be to the British taxpayer, it is clear that that the sums involved are so vast they will  swallow up many years of the tax generated by the City. For example, if  the £2.3 trillion national debt figure is reached, that would mean the profligacy of the banks and their ilk in Britain would have saddled the taxpayer with  around £1.7 trillion pounds (the national debt before the Northern Rock crash was less than £600 billion.). Taking the £32.5 billion tax figure for the City in the past financial year, it  would require approximately  52 years of  tax revenue from the City at that level to meet the £1.7 trillion the taxpayer may have to service and/or pay down  if the predictions turn out to be anywhere near correct.

Even the City’s  contribution during the boom years is overstated, viz.:  “…we are apt to attribute the sudden spurt in Britain’s prosperity in the mid- to late-1980s to a deregulated and reinvigorated City, it owed far more to the massive windfall from the North Sea. Take a look at the numbers. In 1979, when Margaret Thatcher came to power, the amount Britain owed, as a nation, was £88.6 billion. In the subsequent six years, taxes from the North Sea (which had been pretty much non-existent previously) generated an incredible £52.4 billion. “(Edmund Conway Telegraph 4 11 2009).

There is also the question of the amount of tax bankers actually pay compared with what they would pay if they were under strict PAYE, the fate of the vast majority of British employees.   The Daily Telegraph reported (James Quinn  16 Oct 2009) that the tax due on a Goldman Sachs bonus pot of £13.5 billion  for 2009/10 would £2.5 billion.  Let’s do a bit of arithmetic. Suppose all of the Goldman Sach’s bonus pot of £13.5 bn is taxed at 40%. That would be £5.4 billion. Of course they will all have personal allowances and be taxed at the standard rate of tax up to the point where 40% rate comes into play. However,  balanced against those reductions are the NI contributions, both employee and employer, and the new 50% tax band above £150,000. That duty  would almost certainly substantially outweigh reductions caused by  the lower rate tax band duty and the personal allowances.  However, for the sake of simplicity,  let us assume that the higher rate tax band and the NI c contributions  merely balance out the lower rate tax and personal allowances. Instead of the £5.4 billion due at the 40%  tax rate the Treasury is only slated to receive less than half that amount (46.20% to be exact).. The balance is tax avoided at best and evaded at worst.  If it is only £2.5 billion the average real rate of tax on their entire earnings will be around 18% based on the entire sum being taxed at 40%., although  it could be even lower in reality depending  on  the balance  between  tax allowances and the lower rate tax band and national insurance and the higher rate tax band, possibly as low as 15%.  That would be a  substantially lower rate of tax than a worker on average pay under PAYE. Nationalise the banks and that type of  avoidance  would become a thing of the past if politicians have the courage and lack of self-interest to control banking  remuneration. 

The City of London has not been a boon to Britain, but an albatross waiting to be hung around all our necks.