Sunday, December 18, 2011

The End of Free Banking (Again)?

The vague and lengthy declaration that retail and investment banks need to be split at some point in the distant future is going to be announced tomorrow. Desperate cries of horror from the banking lobby will follow as they always do. The most usual horror story designed to bring fear to the masses is the idea that free banking would become a thing of the past.

It's a good threat but one that will only be pulled out as a very last resort. Oddly enough, its coming about would be a sign of victory for the public. Banking most profitable asset is their customer's inertia; The infinite number of "you're more likely to change ... than your bank." There's a reason for that and that's not seeing the bank suck money out of your account. Should they start making it visible, customers will notice and all the efforts banks have been forced to make to smooth the process of transferring current account supplier will begin to haunt them.

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The Electoral Smell of 2007

There's something about the Conservatives recent showing in the polls which makes me think back to 2007 and wonder whether they are thinking whether it's the best time they are going to get to call an election considering the ever diminishing forecasts for the economy.

David Cameron's use of the veto seems to have persuaded the voters that he will stand up for our interests in Europe. They aren't used to that and have been calling for it for a long time. It's never been the most important issue so it's questionable how long this bounce for the Tories will last. In their favour it may bring back the UKIP supporters into the fold.

The Liberal Democrats look to be a shell of a party with their integrity shattered due to not voting against student fees rises. The taint still shows, over a year after the issue passed, indicating it won't go away this parliament and will weigh heavily on them in the next election.

Labour are suffering a real crisis of leadership. Ed Milliband was always a risky prospect. He has 3 factors affecting how he is perceived that he will not ever shift:
  • The support of the unions secured his victory
  • As a key member of Gordon Brown's team he is implicated with the creation of the economic mess
  • The "betrayal" of his brother David
Top that all off with having Ed Balls as his No.2 then you have an unelectable party whose leadership had far too much dealings with the problems in the economy. Now that the most prime ministerial candidate as next leader is invalidated, David Milliband being second best the first time around leaves too many open goals, there is a struggle to find a credible replacement.
If the best they can come up with is Yvette Cooper, her 18 months as Chief Secretary to the Treasury and simply referring to her as Mrs Balls introduces the same problem.

Still, it won't happen yet I feel. The all important constituency boundary changes is the vital advantage that the Conservatives need to remove doubt from the result. If the Labour leadership remains unchanged then October 2013 is the time to look for.

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Monday, December 12, 2011

The Distractions of Europe

There are some big moving pieces shaping life and thought in Britain today. Prime Minister David Cameron taking the nuclear option to the EU. The governments junior coalition partners poor reaction to it. Though no-one is surprised the Conservatives and Liberal Democrats disagree on Europe. The question is, as the gravitational mass of the Euro crisis increases, can the coalition sideline the issue and still work together?

Some are amazed that Cameron used the veto. It's a threat, you're not really supposed to use it. He couldn't sign a new treaty without an uncomfortable referendum and leaving a large chunk of his backbenchers furious. The public is mostly favourable that, finally, a British leader is willing to stand up to Europe. The protection of the City of London didn't seem the issue to me and if it was I am shocked that we'd otherwise so easily had over sovereignty regarding the national budget.

The EU summit, where the weapon was wielded, went on to produce another plan to fix the eurozone crisis. Sadly, it is there to fix the next crisis and does little if nothing to address the current problems. The politicians have been shielded by the central bankers move on November 30th to bring extra US dollar liquidity into the transatlantic financial system. It's only today that the effect has worn off and the markets have taken a big tumble again.

And as much fun as the geopolitics are, there is outright refusal to address the real problem. The financial system. Richard Koo rightly points out the absurdity of having near zero interest rates and instead of borrowing cheaply, paying down debt is the order of the day. We work to a fractional reserve banking system. That means money paid back is money destroyed. It has to be replaced with fresh borrowing to keep us treading water. And in order to grow it has to be replaced with greater borrowing than what is repaid.

We can't pay down debt and have growth unless existing wealth is put to work. If we're not going to fix this unoptimised system and won't accept a write down on debt then I only see one path to generating the growth that'll turn the economy around. The existing wealth of the elite and cash rich corporations needs to be put to use on new/small enterprise, where innovation will be most significant and the next major companies will be born from.

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