The following article in the Guardian showcases the tragedy of flooding. Having spoken to victims of flooding in Stonehaven, it is clearly absolutely devastating. There is irreparable damage to much of your possessions and possibly the fabric of your home or business, cleaning up the mess can take months and dealing with insurance companies can dominate your life for a year or more.
With climate change, extreme weather and flooding are predicted to be more common. It is critical that there are resilience plans in places at all levels of government and the local community. It is positive that Councils in Tayside have worked to ensure community resilience plans are in place.
Angus and Mearns Lib Dems, specifically Councillors and representatives from Stonehaven, introduced a motion at Lib Dem conference, that was passed and adopted as policy, calling for agreement between the Scottish Government and the insurance industry to ensure that victims of flooding are treated fairly and not hit with punitive premium rises.
I was delighted to support this motion and reassured that it was adopted as Lib Dem policy.
There is still an issue with regard to the Scottish Government formula for funding flood defences. The current formula is based on a simplistic per-capita basis.
The Scottish Government provided funding for an early warning system for flooding, which is now available by clicking here for Floodline.
There is therefore the information available needed to target flood defence funding where it is most needed. Therefore it is sensible that the Scottish Government modify there formula for providing flood defence funding to be based on where it is most needed rather than a simplistic per-capita basis. We made that call back in 2010, and the suggestion is still valid to ensure flood defence funding is targeted where it is most needed.
I take it all back, the NSA clearly have our best interests at heart. It seems so obvious now that they have identified it. How could we have been so stupid? Terrorists are so obviously using Angry Birds as a training tool for attacks on our critical agricultural infrastructure and using it as a inspiration for a vicious plot. How did we not see this before?
Since the Syria conflict began in 2011, I have advocated that for humanitarian reasons, we need to be prepared to act if, and only if, necessary to prevent mass civilian casualties. I fully appreciate that there are many different factions involved, and intervention would be extremely difficult. Lessons from history show that despotic regimes can be forced to comply with international law and conventions if confronted with a genuine willingness to intervene by the international community. Saddam Hussein was believed to have been complying with UN resolutions by Hans Blix and the IAEA prior to the invasion of Iraq, because there was a credible threat of interventions.
Given the complexity of the Syrian situation and the perception that Western intervention is only done in self interest, I have advocated from the start that we should be building new alliances, and applying diplomatic pressure on the Arab League to take a lead on ensuring the conflict did not escalate into a humanitarian disaster. Unfortunately the Arab League’s initial intervention proved to be a damp squib. On the other hand, John Kerry did form new alliances in support of intervention after Assad’s use of chemical weapons, which will hopefully lay the ground work for future relations between the West and Middle East.
This latest article demonstrates again that the paralysis in the West over intervention in Syria, has yet again allowed a humanitarian disaster to unfold.
There is an argument that suggests that the US were too hasty to act after Assad’s heavy use of chemical weapons, and that the solution of destroying the stocks only came about because the Lib Dems in the UK government were not prepared to support the bombing. However, I believe that whilst the Lib Dems allowed for the window of opportunity for this option to be explored, this solution was only possible because the US showed a willingness to intervene on humanitarian grounds. The massacre of thousand by chemical weapons demonstrates that Assad did not fear intervention in the slightest until a credible threat was given by the US.
Nor was the solution of destroying the chemical weapons something the emerged just within that time frame. On the contrary, the US Government began preparation for the disposal facilities in February 2013, months before the 21 August attack in the Ghouta region.
The US had identified a solution for Assad’s chemical weapon arsenal and the Ghouta incident provide the opportunity to deploy it. Assad would only comply with a credible threat of intervention, and the US needed to demonstrate that it was not acting unilaterally. With old alliances not provide the support, John Kerry rightly chose to look elsewhere for support, before heading to Russia to get agreement on a solution that dealt with the chemical weapons, but did not require intervention.
John Kerry toured a number of countries to secure their support for action, growing past the traditional alliances that no longer match the security challenges we now face. I would seriously hope that this is the start of a new diplomatic relationship with the Middle East, that encourages the Arab League and other multinational groups to take a lead in their regional security.
Building new mutually beneficial relationships is the long term approach needed for Syria and for the Middle East, and should have begun in 2011, not in reaction to Assad’s use of chemical weapons.
I have over the years tried to highlight the national disgrace that was the NHS Programme for IT, and raising awareness that billions of pounds wasted by the last Labour government. I have been relatively quiet about this, since the Coalition government started winding it down.
This is how the Labour party handled your money. Should we ever trust them to run our economy whilst any of Gordon Brown’s back room team were involved?
But just as a final review, this is what the National Audit Office had to say about it in 2011:
“Today’s NAO report concludes that the £2.7 billion spent so far on care records systems does not represent value for money. And, based on performance so far, the NAO has no grounds for confidence that the remaining planned spending of £4.3 billion on care records systems will be any different.”
And this is what the Public Accounts Committee had to say a month ago:
“The benefits flowing from the National Programme to date are extremely disappointing. The Department estimates £3.7 billion of benefits to March 2012, just half of the costs incurred.”
Yesterday, Ed Miliband said the chief executive of Royal Bank of Scotland, Stephen Hester should not receive a bonus this year.
If Labour wanted control of executive pay of state owned banks, then they should have made renegotiation of contracts a condition of the bailout when they were in power.
Labour should have also demanded that all front office investment banking staff in those banks had to re-apply for their jobs, without any guaranteed bonuses.
Labour left the coalition toothless to deal with the issue. Once the banks returned to operational profitability, they lost the legal financial justification for placing investment banking front office staff under consultation to review pay and conditions.
Today, Vince Cable has proposed a series of measures to give shareholders a binding vote on executive pay, and crucially, given Sir Fred Goodwin’s deal at RBS, exit packages.
Vince Cable found himself unable to address high pay at RBS, Lloyds and HBOS, thanks to Labour’s failure to address the issue when it bailed out the banks.
Vince has done what Alistair Darling should have done, and proposed the legislation he needs to get the powers the government needs.
As the largest shareholder in RBS and other banks, the government will now be able to control the executive pay at those institutions, and fix the problems Labour created.
During the 2010 General Election, a campaign got under way in support of a ‘Robin Hood Tax’. The suggestion seemed to have fizzled away but has been gaining some steam recently. In particular, the Archbishop of Canterbury has come out in support of the proposal, in the midst of #Occupy movement’s presence at St Paul’s Cathedral.
The proposal on the face of it, has merit, focussing a tax on high risk speculative casino banking that created the Credit Crisis, the worldwide recession and the continuing troubles in the global economy.
However a deeper analysis shows that the Robin Hood Tax (RHT) is actually counter productive when it comes to reforming the banking sector, preventing a similar crisis in future and getting our economy moving again.
Firstly, a disclaimer. I spent 10 years working in the IT departments of Investment Banks in the City of London, before leaving 7 years ago. However there is no love lost between myself and the City. Whilst I have friends from my time working there, particularly those in IT, I have little sympathy for the poor risk management that led to my former colleagues prompting the credit crisis.
What is the Robin Hood Tax?
The Robin Hood Tax is a type of ‘Tobin Tax’ whereby a tax of 0.05% of the transaction value would be levied on all banking transactions, where the financial institution is speculating with its own funds, as opposed to investing customer’s money.
The arguments in favour are that this could raise £250bn globally, and £20bn in the UK alone. As the tax is only on trades that banks make with their own money, the tax cannot be passed on to their own customers. Supporters want the tax to donated to charity and to help banks repay the damage they have done to the global economy.
Criticism has focussed on whether it would drive the Financial Services sector away from the UK, a crucial part of our economy and the need for it to be implemented globally to be effective.
Objectives for Banking Reform
There are some clear objectives that need to be reached by global banking reform, and any proposal needs to be assessed against them. The objectives must be to:
- Ensure that a similar crisis cannot happen again by reducing high-risk investment
- Get Banks lending to sound UK businesses to stimulate growth
- Recoup the money invested in bailing out the banks
- Protect our savings from the excesses of high risk banking
- Address the ‘bonus’ culture within the banking sector
Unfortunately, on examination, the Robin Hood Tax is actually counter productive on the first three of these and unhelpful for the other two.
High Risk Banking
Now, 0.05% does not sound like very much, does it? Until you realise that the profit margins on low risk transactions are between 0.1 – 0.2%, which means that the Robin Hood Tax would be a 25-50% tax on profits.
Sound implausible? If you look at the RHT website, it claims that the £20bn raised in the UK will be based on taxable income of £90bn, i.e., a 22% tax on profits. This would be on top of 20% Corporation Tax.
Crucially, the tax is levied whether the bank makes a profit or not. Given that the amount of tax raised is based on the amounts traded, rather than the profits, this means that in a bad year for banks, they would pay £20bn in tax, even if they were to make a loss
I am not arguing that we should feel sorry for the banks or that a higher level of tax on profits would be unfair or unjustified (although I do object to major taxes on companies that are not in profit).
The important thing to realise is that this will prompt banks to make more high risk investments, not less.
To understand why, we have to understand the recent history of investment banking. As banking went global, electronic and hugely profitable through the 80′s and 90′s, the large amounts of money being made led to a lot of healthy competition, that in turn led to profit margins on trades being squeezed right down to 0.1% of transaction value. Banks were still able to make large profits, because the amounts being traded were so huge. A single £20m trade could still give a profit of £20,000. The RHT would then take £10,000 of this.
To maintain profit margins, banks invented new investment products, for which they were able to charge a hefty premium. When first introduced, products like Swaps, Convertible Bonds and Credit Derivatives were able to command profit margins of up to 2%. However the cycle always repeated and increased competition squeezed profit margins.
This cycle has led to banks inventing more and more exotic products, that were increasingly risky.
And here is the nub of the issue. Adding a 50% tax on profits on low risk, well understood, well managed banking transactions will simply drive banks to trade higher risk, higher profit margin products, just as increased competition has led them to do over the last 30 years.
Products like Futures, Options, Swaps, Swaptions and Convertible Bonds, were once high risk, poorly understood, high profit transactions. They are now the staple of Investment Banking and most banks can trade them perfectly safely.
Credit Derivatives and complex securitisation structures are the high risk, high profit exotics that have brought the world economy to a stand still. And we should not be encouraging banks to trade them until they are better understood and managed.
So the Robin Hood Tax would prompt banks to trade higher risk investments, not lower.
Liquidity and Volatility
Unfortunately here I need to add in some banking jargon. Liquidity measures how easy it is to buy or sell in the market. The more buyers and sellers there are, the easier it is to buy or sell something.
Volatility measures whether prices go up and down smoothly and gently, or jump up and down dramatically.
When a product is liquid, and you need to sell to avoid making a loss, then it is easy to do so and the price does not change dramatically. If a product is not liquid, and there is a major problems, the market will slump quickly, and you cannot sell easily, leading to major losses.
For example, the current UK housing market has very few buyers and sellers. The result is that no-one really knows how much houses are worth. You can put your house on the market for what you think is the right price and end up having to sell for a lot less, potentially losing money. Try to buy in a good school catchment area, and you can find you have to pay through the nose. The market currently has low liquidity and high volatility.
Simplistically, liquidity is good, volatility is bad. In fact decreasing liquidity increases the riskiness of a product.
The Robin Hood Tax by definition is intended to stop banks trading as much of their own money. As a result this will make products that are currently reasonably risk free, less liquid, more volatile and in fact more risky.
There is a knock on effect, in that other, non-banking investors will shy away from investments that they cannot sell out of easily, decreasing liquidity further.
Again, the RHT will prompt increased risk, not decreased.
Get Banks Lending and Investing in Business
As well as retail banks directly lending money to small and medium sized businesses, the investment banks also provide crucial credit and capital to larger businesses through buying shares and buying corporate bonds.
These are not always high profit investments by banks and form the more mundane part of an investment bank’s business operations.
Again, an additional 0.05% tax on the buying and selling of shares and corporate bonds will likely mean less investment into British companies.
And again, there is a knock on effect with other financial institutions. If banks are not buying when companies either go public and sell shares, or when they try to raise money through corporate bonds, then they price per share will drop or the rate of interest for borrowing will increase, due to the lower demand.
An added knock on effect is that venture capital funds are less likely to support start up businesses, unless they are confident that there is a vibrant market for them to go public.
The Robin Hood Tax, by discouraging banks investing with their own money, particularly in low profit investments, will lead to a decrease in investment and lending to businesses.
Getting Our Money Back
The UK Government borrowed eye watering amounts to bail out and buy a number of UK banks to stop them collapsing. Given the scale of borrowing, the only way to recoup this money is to sell the banks back into private hands.
Unfortunately, the markets are fully aware of this and know that at some point in the future, the Government will be selling large quantities of bank shares. The markets know exactly what price the UK government paid for the banks, and the shares in banks have continued to trade under that price since 2008.
The share price of any company is directly linked to its profitability. Taxing an additional 25-50% of profits will lead to a dramatic fall in the share price of the state owned banks.
Which means that the Government will struggle to sell off the banks and get back the money they have invested.
Frustrating as it sounds, we need our retail banks to be healthy and profitable to help get the country’s finances back on track.
So the Robin Hood Tax would make it harder for the UK government to get back the money it has invested in the banks, and at £20bn per year, it will take years to recover that money through the tax, and that is only if none of it is given to charity.
Protecting our Savings
The Robin Hood Tax does not in any way address the need to protect our savings from speculative trading by banks with their own money. In this case it does nothing to harm it, beyond encouraging riskier trading.
Investment banks have merged with retail banks to take advantage of the large holdings of the retail arm to borrow more heavily and more cheaply for speculative trading. The key is to split up the investment and retails arms to stop the investment arms ‘leveraging’ our savings for high risk trading.
Again, the Robin Hood Tax does nothing to address the bonus culture within banks. At this point, I should state that I have no objection to bonuses linked to profits, preferably long term profits. However there is a case, I believe, to end guaranteed bonuses, whereby a trader gets paid a substantial amount, irrespective of their trading performance.
In the next two articles, I will address a couple of key questions. If the Robin Hood Tax does not address our objectives for banking reform, what will? I will also look at the causes of the banking crisis, other than the banks, which are increasingly ignored by the ever more emotional coverage of the banks.