Bears, Bulls, and the cost of the bailouts ..

News has broken today of the Audit Commissions’ report on the cost of bailing out failed British banks.

They report that the cost of the bailouts equates to a burden of £40,000 for each of Britains’ 26 million households, or as just reported on BBC tea-time news, £14,000 for each and every one of us.

The Commission emphasised the Government was right to salvage the collapsing banking system. I’d be in agreement – but only to the extent that there was no viable alternative that anyone could suggest in the heat of the crisis.

What irks me is that the banking system could get itself into such a precarious condition and neither the Treasury, the Financial Services Authority, nor the Bank of England could intervene. It is a failure of regulation. ..No! … Rather, it was a failure of recognition, then consequentially a failure of intervention and regulation. The above named tripartite regulatory authorities failed to see the extent of the exposure to risk. For all their schooling, qualifications, experience and ample salaries the people paid by the state on wages funded by the taxpayer did not protect the very people whose interests they were supposed to protect. Now we have to pick up the bill.

The Banks had gotten themselves into a fix. It’s not that the Banks did this by contributing to wealth creation by funding enterprise. No, the root of the problem lay inventing and investing in ever more creative ways to cream wealth of others. Complex financial wheeler-dealing that has no authentic economic function other than creaming other folks wealth ratcheted up exposure to volatility and risk because of the simple fact of being entirely geared to market confidence. In a ‘bull’ market everybody is confident and financial instruments are traded at inflated prices.

Confidence rises in bull markets. The market trend supports the confidence. However, infinite rises are not sustainable. Sooner or later, a free thinker among a minority will bet against the market trend, when others follow suit the bubble inflated with confidence will deflate; sometimes as fast and as ludicrously as the party balloon you inflate then release to “thlbthlbthlbthlb-phut” around the room! It’s now a ‘bear’ market. Values are wiped of assets and matters no longer seem ‘so safe as houses’. It’s both a long haul to re-inflate the balloon and delusional to think we can successfully knot it off when eventually fully inflated.

Risk is a consequence of economic evolution. Think of the economy like an onion with layers. At is heart is are the most biologically authentic economic functions. We need food, shelter and clothing. Only when those are satisfied can we greater economic activity around, say, plush fitted kitchens, conservatories, foreign holidays and such like. These are comforts rather than essential needs. We can distinguish them hierarchically.
It happens that competition drives efficiency. We’ve become very efficient at meeting these needs and consequentially, as matters stand, not everyone can be engaged working in these economies. Displaced people can become ever more inventive in trying to trade their efforts for someone elses’ wealth. So, while manufacturing declined the UK moved to a service based economy. Governments and Chancellors placated us. The thing is ‘service’ is not always functionally authentic in terms of human need. It can range to the downright deceitful or unlawful. Emergent sectors of developed economies represent continuing divergence from biologically authentic economic functionality. Each successive of our layer of our economic onion gets less authentic and with a greater potential for risk. When considered against the hitherto successful and collaborative division of labour that had been beneficial to the proliferation of the human species in the transition to agriculture and in moving to the age of industrialisation, continuing economic evolution appears to have increasingly undesirable traits. Greed and risk being two.

Have Banks willfully contributed to the systemic failure?
Small businesses have struggled for survival. Small businesses are important to us and to the economy. Irrespective of whereabouts in the functional hierarchy of our economic onion a small business is placed, be it food, manufacturing, or service, the local economic hyper-cycles of small businesses are closer to the individuals authentic and biological needs to feed the family and clothe the kids. Big businesses on the other hand are all about the balance sheet and profit and loss. When businesses invest in automation, constantly compete against each other to make efficiency savings people are casualties. Every redundancy is a virtuous economic hyper-cycle undermined and devalued.
Surviving small businesses are an exception. Medium sized businesses have collapsed and are a dying breed. Economies of scale have disadvantaged small and medium sized businesses; paricularly those in competition with larger ones and nowhere more apparent than on the high street. Banks have offered disadvantageous terms to smaller businesses for decades. Mergers and acquisitions amongst the bigger fish just keeps on moving relentlessly forward. Satisfactory economic hyper-cycles are being eroded. While big business, Marks and Spencer and Tesco spring to mind, invest in ever bigger DCs the units they vacate are unlikely to be filled by new occupants for some time. They will lie empty just like the smaller units neighbouring them on once economically active business and industrial estates. It’s efficiency and progress, apparently.
Blame cannot be wholly attributable to big business. As it stands they have competitive advantage over small businesses but we got there by consumer choice and buying habits. We thought one-stop shopping, price cuts, BOGOFs, convenient access and parking for retail parks and malls, and apparent value for money was in our own best interests. Thinking along more anthropological lines such a supposition looks increasingly uncertain. We need to be in employment and economically active to enjoy the malls.

You might think all the above sounds like the rant of an anti-capitalist. I have never been against free market capitalism. I have been stewing for almost one whole year. Thoughts have evolved. At times the evolutionary progress of my thinking had me wondering if I was adopting anti-capitalist sympathies. Fortunately, further thought evolved and now I recognise how one great pro-democracy theory is emerging.

People are displaced, disengaged, and disenfranchised. Meanwhile, the lobbying power of the ever bloating corporates gets greater and greater. We live in an age where features of continuing economic evolution is counter democratic. We’d do well to recognise how it is all going wrong. Certainly I view my personal liability to £14,000 of bailouts as being counter-democratic.

Food is fundamental. It is surprising how far thought can progress after that recognition.

‘Bulls’ and ‘bears’? ‘Sheep’ and ‘lemmings’, more like.


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