Category Archives: banks

What is the main solution to the UK’s weak productivity growth?

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Chris Giles (FT) is examining why Britain is suffering from weak productivity growth. As part of his series, he wants to hear what readers think is the main solution to the UK’s weak productivity growth since the financial crisis of 2008. Share thoughts directly with him at ask@ft.com. Some may be published in a follow-up piece.

Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex, who tweets here, has already published thoughts on the subject. Briefly:

UK company dividends are high & investment low

This lack of investment and innovation means that the country’s productivity is low. The output per hour worked in the UK is about 16% below the average for the rest of the G7 advanced economies. The UK productivity is around 27% below that of Germany – despite the UK labour force working almost the longest hours in the western world and the country is neither rebuilding its manufacturing base, nor developing new technologies.

He itemises the boardroom dominance of accountants:

Sikka then argues that short-termism, leading to the neglect of the long-term prosperity of companies and the economy, has been accelerated by the boardroom dominance of accountants.

Compared with other developed countries, UK companies are paying out the highest proportion of their earnings in dividends.

According to the Bank of England’s chief economist, in 1970 major UK companies paid £10 in dividends out of each £100 of profits – but by 2015 the amount was between £60 and £70. 

And at the same time as paying this large percentage in dividends many companies were downsizing labour and reducing investment, lagging behind the EU average:

Sikka asserts that the most effective way to disrupt the accounting-think prevalent in boardrooms is by appointing directors who are focused on the long-term – appointing employees and consumers so that they can challenge the obsession with short-term returns and promote investment in productive assets.

Giles quotes Lord Andrew Tyrie, new chair of the Competition and Markets Authority, who told companies in July to stop “ripping people off” or face the full force of the watchdog’s sanctions. His focus is mostly on regulated markets such as banking and energy, where companies are accused of exploiting vulnerable households by extracting a “loyalty penalty” if they do not switch suppliers.

Lord Tyrie told MPs during his confirmation hearing for the CMA in April that retail banking and auditing were parts of the economy that did not work in the interests of the public or productivity.

Scott Corfe, chief economist at the Social Market Foundation, a think-tank, claimed that pro-competition moves had some potential for raising productivity growth rates. He suggested that consumers should be switched between energy suppliers automatically after several years to stop companies exploiting customer inertia.

See this video: https://www.ft.com/content/ae25a5bc-9405-11e8-b747-fb1e803ee64e (possible paywall)

After noting that since the mid-2000s, British industries have become more concentrated, with fewer companies enjoying larger market shares, Giles focusses on this ‘one key question’:

Is inadequate competition contributing to Britain’s feeble growth in output per hour worked? 

 

We look forward to the next article in the series.

 

 

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“Money-manager capitalism has ‘fed political revolt’ in America and Europe: Philip Collins

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In the Times, Philip Collins* writes that western “money-manager capitalism,” (term coined by Hyman Minsky), has changed the patterns of incentives and rewards in the economy, leading to stagnation in productivity and wages by reducing the capital investment that supports their growth.

He cites Erikson & Weigel: “A decade has passed since banks and financial houses began to crumble and took Western economies to the brink of collapse, but economic growth on both sides of the Atlantic remains weak. It is still determined more by governments and central banks than the animal spirits of entrepreneurial capitalism.

Economic developments before and after the crisis that started in 2007 have fed political revolt. In both America and Europe, people are angry about their poor income growth, and they indict the “one percent” or “the establishment” for pursuing policies that benefit the rich at the expense of the middle class. They feel that the age of cost-cutting McKinsey consultants, cheap capital, and Wall Street financial engineers brought prosperity to the professional classes, but that, as a result, everyone else’s expectations were revised permanently downward: “The revolt comes from both the Left and the Right, but the underlying premise is shared: capitalism hasn’t been working for me!”

Collins then adds that business investment has been falling as a proportion of GDP since the 1970s.

”Money that ought to be invested is instead flowing to shareholders in the form of dividends and buybacks. Too rapid a recourse to mergers is generating payments for unworthy executives and creating giant companies which do their best to evade fair taxation. All the while they buttress their position with expensive and effective lobbying to keep regulators sweet”.

He cites two sets of linked consequences

  • Unemployment among the young and low-skilled has increased and wages for those in work have stagnated.
  • The vast majority of the returns from the last decade of capitalist activity have accrued to those who are already rich in assets.

This trend within capitalism itself accelerated after the 2008 crash by central banks whose incontinent monetary policy had inflated asset prices.

Under capitalism it seemed, on the whole, that things could only get better. Growth made us more prosperous tomorrow than we are today. When that promise broke, the response was a growth in radical movements to the left and right.

The obvious answer, according to Collins includes:

  • shifting the burden of taxation away from income and towards wealth;
  • imposing a higher inheritance tax, to prevent large transfers of privilege;
  • taxing the capital gain on the residential home;
  • taxing land, of all the assets the least easy to hide;
  • cutting income tax for people who take home the average wage or less;
  • and earmarking some of the proceeds for the social care system which is a disgrace in a rich country.

Michael Gove, Secretary of State for Environment, Food and Rural Affairs, considers the deeper causes of populism. He believes that the British have seen so much of what they value which is beyond economics — whether love of place and landscape or the integrity of their cultural attachments — overlooked or ignored. He advocates:

  • reform of corporate governance,
  • better pricing of environmental costs,
  • changes to investment incentives and procurement rules,
  • “smarter” regulation
  • and no access for not corporate lobbyists.

But, Collins reflects: “Conservatives often give bold speeches which herald no action.

“After the expenses scandal David Cameron diagnosed all that was wrong with politics and proclaimed a radical plan to put it right, not a word of which ever materialised.

“In her first address as prime minister, Theresa May set out the array of social issues which would define her premiership. Mired in Brexit, we are still waiting.

“There is every chance that Mr Gove’s speech on capitalism will fall into the same category”.

Collins ends, ”The reason why the Conservative Party will not act . . . (is that) it is going to have to upset some natural-voting Conservatives. A state intervention to break up successful companies, an expansive set of welfare schemes and a government dedicated to imposing taxes on wealth. It doesn’t sound very likely from this government”.

 

 

Phillip Collins is the leader writer and columnist for The Times, chairman of Demos, Visiting Fellow at the London School of Economics, associate editor of Prospect magazine journalist, academic, banker and speechwriter

 

 

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Climate change should be placed “front and centre” of the central bank’s mandate to boost green investment

A Green Bank of England, Central Banking for a Low-Carbon Economy

Delphine Strauss (Financial Times) summarises advice in this report (link to pdf above) from the campaign group Positive Money.

It recommends that climate change be placed “front and centre” of the Bank of England’s mandate so that the central bank can boost green investment.

The report has won backing from Lord Deben, who chairs the independent Committee on Climate Change which was set up by the government to monitor the UK’s progress in meeting its statutory targets for cutting emissions:

“They are right to seek some radical measures, because the issues are radical. I think that monetary policy does need to reflect these risks”, he said, adding that central banks should do more to ensure the availability of green finance and divest from fossil fuel companies that showed no inclination to change their business.

The BoE has been reviewing UK insurers and banks’ exposure to climate-related risks and supports efforts to develop international standards for voluntary disclosure.

Mark Carney, the BoE’s governor, has repeatedly warned of the physical damage climate change could wreak on the economy and the risks to financial stability that might result from a sudden revaluation of carbon-intensive assets.

Positive Money argued that this concern for financial stability will look “incoherent” unless the BoE does more to boost investment in the transition to a low-carbon economy. Its report urged the government to rewrite the mandate of the Monetary Policy Committee to include green objectives explicitly and called on the BoE to look at ways to build climate-related risks into its macroeconomic models.

The Positive Money report urges the BoE to set an example:

  • by disclosing the carbon risks of assets on its own balance sheet
  • by ending the practice of buying bonds issued by fossil fuel companies
  • and by financing green projects via quantitative easing during any recession.

It argued that the BoE has unintentionally promoted high-carbon sectors because its criteria for asset purchases favoured the bonds of large fossil fuel companies.

 

 

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March visitors

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People from 6 countries visited the site in March.

There were twelve times more visitors from the USA than the next largest group from the UK.

 Top posts  

Brexit: moving away from globalisation towards self-reliance.

In this post, Colin Hines draws attention to Green MEP Molly Scott Cato’s publication and launch of a report by Victor Anderson and Rupert Read: ‘Brexit and Trade Moving from Globalisation to Self-reliance’. Read more here.

Prem Sikka: a critic of the Pin-Stripe Mafia

Accounting professor Prem Sikka received the Abraham Briloff award from The Accountant and International Accounting Bulletin.

The award was presented at a conference and awards dinner in London on 4 October – The Digital Accountancy Forum & Awards 2017. Read more here.

 

 

 

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Fiscal Money

Biagio Bossone, formerly at Banca d’Italia, the IMF, and the World Bank, an international financial consultant and Chairman of the San Marino Banking Association and a member of the Group of Fiscal Money, Italy, comments on an article in the Financial Times by Martin Wolf. 

“Mr Wolf agrees that the fiscal money proposal that we have developed and promoted for years is technically possible, albeit that “it would surely create hysteria in Northern Europe”. Well, it shouldn’t.

“Fiscal money would be issued as transferable and negotiable bearer bonds, which recipients would be entitled to use for tax rebates two years after issuance. Such bonds would carry immediate value, since they incorporate sure claims to future fiscal savings, and would be immediately exchangeable against euros or usable as payment instruments in parallel to the euro.

“Under European accounting rules, they would not constitute public debt. Fiscal money would be allocated, free of charge, to supplement employees’ income, reduce enterprises’ tax wedge on labour, and fund public investments as well as social expenses.

“Fiscal money is sometimes wrongly characterised as the anteroom of Italexit. Quite the contrary — it provides a way to overcome the eurosystem’s dysfunctionalities that condemn the Italian economy to a permanent state of depression”.

Fiscal Money has been proposed to the Italian government to boost aggregate demand and increase GDP without increasing public debt

In Social Europe, journalist Enrico Grazzini examines the main differences between various proposals:

  • Fiscal Money or Tax Discount Bonds (TBDs) are issued by the state and backed by the future tax revenues. TDBs would be assigned directly to the households, companies and (only pro quota) to government administrations as the best, and maybe the only way to overcome the liquidity trap and the austerity constraints.
  • Helicopter Money involves a central bank dropping free money straight into people’s pockets, recently advocated by many economists (such as Eric Lonergan and Martin Wolf, chief economics commentator at the Financial Times) as the very best solution of last resort to increase demand and face the next possible crisis.
  • and Quantitative Easing for the People, proposed by Labour Party leader Jeremy Corbyn, who would like the Bank of England to issue new money to finance a state bank and public investment as the optimum way to expand the British economy in an equitable way.

Bossone summarises: “Fiscal Money would allow Italy to expand domestic demand and improve enterprise competitiveness, while avoiding any increase in public debt and breaches of the fiscal compact. In fact, it would make debt sustainable, reversing the effect of years of austerity, and would remove any inducement for the European Central Bank to withdraw Mario Draghi’s “whatever it takes” pledge”.

For more information go to: https://monetafiscale.it/english-version/, https://www.zerohedge.com/news/2017-10-15/italys-parallel-fiscal-currency-all-you-need-know and https://www.socialeurope.eu/fiscal-money-better-helicopter-money-qep-beating-deflation-austerity

 

 

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Time for change: junk the Anglo-Saxon model* in 2018

The FT reports that senior executives at several of the largest US banks have privately told the Trump administration they feared the prospect of a Labour victory if Britain were forced into new elections.

It then referred to a report by analysts at Morgan Stanley arguing that a Corbyn government would mark the “most significant political shift in the UK” since Margaret Thatcher’s election and may represent a “bigger risk than Brexit” to the British economy. It predicted snap elections next year, arguing that the prospect of a return to the polls “is much more scary from an equity perspective than Brexit”.

Jeremy Corbyn gave ‘a clear response’ to Morgan Stanley in a video (left) published on social media reflecting anti-Wall Street rhetoric from some mainstream politicians in the US and Europe, saying: “These are the same speculators and gamblers who crashed our economy in 2008 . . . could anyone refute the headline claim that bankers are indeed glorified gamblers playing with the fate of our nation?”

He warned global banks that operate out of the City of London that he would indeed be a “threat” to their business if he became prime minister.

He singled out Morgan Stanley, the US investment bank, for particular criticism, arguing that James Gorman, its chief executive, was paying himself a salary of millions of pounds as ordinary British workers are “finding it harder to get by”.

Corbyn blamed the “greed” of the big banks and said the financial crisis they caused had led to a “crisis” in the public services: “because the Tories used the aftermath of the financial crisis to push through unnecessary and deeply damaging austerity”.

The FT points out that donors linked to Morgan Stanley had given £350,000 to the Tory party since 2006 and Philip Hammond, the chancellor, had met the bank four times, most recently in April 2017. The bank also had strong ties to New Labour: “Alistair Darling, a Labour chancellor until 2010, has served on the bank’s board since 2015. Jeremy Heywood, head of Britain’s civil service, was a managing director at Morgan Stanley, including as co-head of UK investment banking, before returning to public service in 2007”.

A step forward?

In a December article the FT pointed out that the UK lacks the kind of community banks or Sparkassen that are the bedrock of small business lending in many other countries adding: “When Labour’s John McDonnell, the shadow chancellor, calls for a network of regional banks, he is calling attention to a real issue”. And an FT reader commented, “The single most important ethos change required is this: publish everyone’s tax returns”:

  • In Norway, you can walk into your local library or central council office and see how much tax your boss paid, how much tax your councillor paid, how much tax your politician paid.
  • This means major tax avoidance, complex schemes, major offshoring, etc, is almost impossible, because it combines morality and social morals with ethics and taxation.
  • We need to minimise this offshoring and tax avoidance; but the people in control of the information media flow, plus the politicians, rely on exactly these methods to increase their cash reserves.

But first give hope to many by electing a truly social democratic party.

Is the rainbow suggesting a new party logo?

*the Anglo-Saxon model

 

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Money Week editor: ‘horrible’ side effects of quantitative easing and record-low interest rates

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Merryn Somerset Webb, editor-in-chief of MoneyWeek, is the best-selling financial magazine in the UK recently wrote in the Financial Times:

It has been a good week for billionaires.

The UBS/PwC Billionaires Report 2017 claimed the combined wealth of the world’s 1,542 billionaires rose by almost a fifth last year to $6tn: more than double the UK’s gross domestic product.

It has not been a particularly good week for governments.

They have to deal with the fallout from rising wealth inequality, and that fallout is getting increasingly nasty.

This kind of report does not do much for central bankers, either.

The rise of the billionaires is as much about financial globalisation as it is easy money, but every time a report lands on their desks, central bankers must stop to think about the economic, social and political havoc their policies have caused over the past 10 years.

The desperate attempt to avoid deflation via quantitative easing and record-low interest rates has had horrible side effects . . .

  • The rich have become much richer;
  • corporate wealth has become more concentrated;
  • soaring house prices have created intergenerational strife;
  • low yields have made all but the super-rich paranoid that they will be entirely unable to finance their futures.
  • Most markets have ended up overvalued (overvalued stock has a price not justified by its earningsoutlook or price/earnings ratio) – later, this will really matter.

This, while pension fund deficits and a constant sense of crisis have discouraged capital investment — and have possibly held down wages in the UK.

 

 

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