Financial Times

136420-illustration-of-rich-bankerHow the No camp is treating you like an idiot when it comes to finance.

One of the most nauseatingly repetitive drones to come out of the No campaign has been economic risk. If we go independent everything’s at risk. Nobody knows the future, but we know that independence would be different and that that’s a big risk. Risk, risk risk.

Earlier this week I saw, in what I can only assume is punishment for misdeeds in a former life, a debate between Murdo Fraser (CON) and John Mason (SNP) in Bishopbriggs. It’s hard to know whether the answers or questions are more stultifying sometimes, but something Murdo Fraser said really got me thinking. Paraphrasing a bit Murdo’s point was:

“Standard Life are a big financial services firm in Edinburgh and they’re really worried about independence. If they are, you should be too-they’re in financial services, and financial services is a big thing which although you can’t understand it, and I can’t understand it, people in financial services do, and can, and they’re right, because they’re big and involved in financial services.”

He followed it up with another, slightly paraphrased spiel about RBS:

“You’re absolutely right, moron audience member, RBS would’ve been Scotland’s responsibility because they’re based in Edinburgh. Only in the UK can we support unforeseeable, unavoidable acts of god like the financial crisis. Even financial services companies sometimes, inexplicably, get it wrong. But when they do the only option is grinding austerity, so belt up.”

John Mason did his best to refute the points without calling anyone a moron or holding up a copy of ‘What is to be Done?’ but still didn’t quite capture the real problem. The basic unionist message on financial matters is this: “This stuff is huge, too huge for you to contend with but very real, and the only way to keep it contained is to go along with the UK’s line on finance (don’t trouble yourself trying to learn what that is, just vote with it.)”

It misses the point about how complex finance is, so here’s a bit to clear some points up.

Firstly talking about ‘Financial Services’ is like talking about ‘Sport’ or ‘the Arts.’ Standard Life is a financial services firm, and so is RBS. In the same way that Celtic and Ferrari are both sports teams, or Opera and Ballet are both arts. Fine to talk about as a broad class of things in contrast to another broad class of things, but not great for differentiating between themselves. It’s the same with Financial Services-Standard Life do Pensions, Savings and Investments and Insurance, according to their website. RBS does Personal Banking, Private Banking, Business Banking and Corporate Banking according to its website. The two are about as unrelated as they could be without one of them specialising in agriculture.

So when Standard Life comes out and says it’s worried about the prospect of independence, and might consider moving its HQ for tax reasons, or whatever gloss it put on it, it’s really doing 2 things. First it shows its hand to other companies as a fairweather firm whose operations are primarily to do with managing money, not making it. Secondly it puts public pressure on the government to make it worth staying, usually in the form of financial incentives. Note the difference between Standard Life and, say, Aberdeen Asset Management (again, people who make money rather than manage it) whose stance on independence is summed up by their Chief Exec saying they already work in 30 countries and “one more’s not going to make any difference.”

Standard Life are worried they’ll have to pay a decent amount of tax in an independent Scotland, whereas Aberdeen are accustomed to making money wherever and however they can. Aberdeen’s point should be more worrying to anyone interested in legitimately restructuring our financial sector though, as anyone who’s for independence should be (even if they’re not as nerdishly excited by the prospect as some of us.)

What is regulation and why does it need reformed?

Regulation is the set of laws we have to dictate how financial services companies carry out their business. We need it to be reformed because it isn’t doing its job. Politicians are often happy to talk about the GFC because it lets them be a part of everybody’s pretence that they know what they’re talking about, and to simultaneously play on their mistrust of other sections of society. What they ignore is that while the GFC was extremely complex it can be talked about and understood in broad, if unpleasant terms. Regulation used to be a lot tighter than it is now-after the Great Depression in the 1930s began with a stock crash there were a number of rules implemented to stop the exploitative practices which had caused the crisis. Although there’s debate about exactly how long each part of the package was useful for the major portions were repealed towards the end of the 20th century. The most symbolic was the divide between retail and investment banks (high street banks you get your savings account from vs serious investment firms previously the domain of people with significant money to put into making more of it), which was repealed by Bill Clinton just before he left office in 2000.

People talk about firewalls or ring fences or partitions between retail and investment operations, and they’re important. As things stand there’s nothing to stop a single company from having extensive retail operations, providing things like current accounts and savings accounts to ordinary citizens, and then investment operations to maximise returns for shareholders, investors and high-wealth clients. The problem is that it’s tempting to use your retail outlet to prop up your more lucrative investment work. That’s exactly what happened with the GFC: high-level companies, RBS rather than Standard Life, went about making huge amounts of money essentially betting on packages of worthless mortgages. Betting on riskier bets they’d made through selling people mortgages they couldn’t afford.

Leaving aside the valid discussion about capitalism and its tendency to encourage people to spend what they can’t afford, it’s clear to anyone who isn’t an investment mogul that suggesting cultural changes in their organisations is never going to be a substitute for preventing organisations from doing both things at once (even investment moguls would probably concede that it’s a good thing for society as a whole, ignoring for a moment their own needs and those of their high-wealth clients.) Fortunately we’re in the UK though, so we have the benefit of rigorous government oversight of a very powerful, potentially very dangerous element of the private sector, right? Wrong. Successive Westminster governments have been cosy with the banking lobby, and either lessened the regulation we have over the sector or avoided putting it in place correctly (the current government is giving banks 7 years to separate their investment and retail operations, conveniently into the next government’s term and a very charitable timeframe given that it took several months to merge operations after the Glass-Steagall act bit the dust in 2000).

Remember what the Aberdeen chief exec said about one more country not making a difference? This is what we need to be thinking about when we set up regulation. Companies at that level exist to make money. They do it very well, with some achieving the mantle of being ‘Too Big to Fail’, that chilling refrain we hear, usually mentioned alongside ‘bailout.’ Westminster’s main parties are all so enamoured of the banking lobby that they can’t be trusted to regulate properly. The same is true of the mainstream political scene in the US, where even Democratic administrations have been complicit in stacking their most important governmental roles with ex-chairmen and former executives of the major banks, who in turn use their positions to secure weaker regulation and a crack at more money.

This is a crisis that plays out worldwide. Better Together or Independent really isn’t important unless you’re determined to sort this stuff out. Countries larger than an Independent Scotland would be, and larger than the UK is, capitulate in the face of pressure from global financial firms. What we’ve seen over the past 15 years or so is the exportation of greed as a commodity. When people talk about RBS being a ‘Scottish’ company they might be referring to the HQ building you see beyond the tramlines at South Gyle, but it’s a misnomer. RBS is global, with a dozen subsidiaries and well over 100,000 employees. Talking about it being in one country is an instance of the kind of small minded nationalism the unionist campaign encapsualtes, but in this instance it allows us not to take it seriously, and to believe two very different things at once-that on the one hand it’s our bank because its HQ is near our capital, and on the other hand that any associated risks can be managed without difficulty by being part of a political entity like the UK. While it’s true that the UK was able to bail out RBS it’s just as true that effective regulation could have prevented the crisis from emerging to begin with-and this is something which, again, has been done in the past (Glass-Steagall) and is being done right now (Iceland.) RBS is bigger than nation states, but with effort and courage on the part of our legislators we can put in place regulation to ensure that our community isn’t one to be exploited by such companies.

The idea that we can do something different is far from being pie-in-the-sky. Iceland did something very similar to what many of us have in mind here, and did it efficiently. The principle is simple; no community should ever have its stability threatened by a private company’s exploitation of the community’s behaviour. Setting up effective regulation is both simpler than you might be led to believe by many in the No camp and vastly more worthwhile. Next time you see Johann Lamont talking about the pound on TV remember it’s a trick, possibly unintentional (she may not realise herself how big a game finance is), to take our minds off what really needs to be done. This stuff matters more to us than most other things, and it’s an area the Union has an atrocious track record in-the opportunity to properly regulate our financial sectors is enough of a reason to vote Yes in itself. We shouldn’t be happy with the SNP either, we need to demand proper regulation and oversight, and to demand it from the outset of independence.

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  1. An interesting piece in Bella

  2. Brian Stobie says:

    Being treated like an idiot (about finance and economics generally) is normal, unfortunately.
    Though their whole lives, and the lives of their children, are affected by economics in a very fundamental way, people have no interest in it, passively accepting the propaganda they are fed by the media that it’s too difficult, and best left to experts and politicians.

    Rubbish – it’s not rocket science, and no maths is required.
    Read “23 Things They Don’t tell You About Capitalism” by Ha-Joon Chang, “Just Money: How Society Can Break the Despotic Power of Finance” by Anne Pettifor, and (for enthusiasts) “Debunking Economics – The Naked Emperor De-throned” by Steve Keen.

    Anne Pettifor’s book is especially pertinent where an independent Scotland’s finances are concerned.

    1. JGedd says:

      Still struggling through “Debunking Economics” myself, I have to admit (maths not being my strong suit.) However, I strongly suspect that people like George Osborne would also have difficulty getting through a demanding read like this. Unfortunately, he happens to be Chancellor of the Exchequer.

      1. flit2013 says:

        Do keep going with Steve Keen but also try Minsky directly as he is the gaffer. Keen is really trying to develop a mathematical model to fit Minsky

    2. Brian Stobie says:

      (I reply to myself…) The Ha-Joon Chang book I recommended should have been “Economics the user’s guide” – definitely no maths!.
      The “34 Things” book is pretty good as well, though.

  3. Ahem Hmm! (very good)

  4. YESGUY says:

    ok i think i got that , but will read it again to make sure.

    Finance and banking do need reform though , that a corporation can fail and the State takes the fall is WRONG in every way. Would it be too much to ask if independence will bring about these corporations being taken to court to answer for the last financial crash. Can we also take Westmidden to court for being too stupid for allowing this to happen. I would jail the lot not give them bonus’s to the scum who are responsible .

    Bloody bankers

  5. deewal says:

    “We shouldn’t be happy with the SNP either, we need to demand proper regulation and oversight, and to demand it from the outset of independence.”

    Yeah they’ve been really bad these last two terms and even forced us to have a referendum on Independence. Bastards. That’s it. I’m voting No.

    1. Adam Neilson says:

      The FCWG’s 226-page ‘First Report – Macroeconomic Framework’ (Feb 2013), and the later ‘Fiscal Rules and Fiscal Commissions’ detail how regulation and oversight should be implemented in an independent Scotland. Both reports have been endorsed by the Scottish Government and Mark Carney (his February speech mirrored both large parts of reports).
      Lady Susan Rice has been named as Chair of the proposed Fiscal Commission, and details of the other members will be released on 4th June (I think).

  6. Adam Neilson says:

    Read the ‘small print’ (the things our media ‘misses’) in all those company reports and statements, and you’ll see that the ‘uncertainty’ and ‘concerns’ have nothing to do with Scottish independence, but how Westminster responds to it. Most of those companies actually support a Sterling-based currency union, but are concerned that Westminster will punish Scotland for daring to vote ‘Yes’. It’s another example of ‘Project Fear’ – but on steroids. It’s a nasty, malicious, and irrational threat. Nothing more, nothing less.

  7. thisgreenworld says:

    Every choice involves risk. There are risks associated with being part of the UK and there are risks associated with becoming a separate country. How we feel about each set of risks is determined by who we trust and what levels of control we feel we have over those risks and the actions available to mitigate them.

    If anyone believes that the UK has done such a fantastic job of predicting, managing and mitigating risk to the benefit of the people, then they’ll vote no. If people feel there is more chance of effectively ‘owning’ the risk – and the responses – in a smaller, more democratic & accountable and fairer independent Scotland, then we’ll all vote Yes.

  8. joseph O Luain says:

    I’m still on medication after reading Nicholas Shaxson’s ‘Treasure Islands’ (Tax Havens and the Men Who Stole the World), and that was eighteen months ago ago Whew … !

    What struck me was Shaxson’s strong suggestion that elected legislatures simply don’t posses the technical know-how required to apply meaningful oversight regarding much of the financial legislation that they regularly pass into law. Most of which is drawn-up by the armies of lawyers and accountants employed by big-fiance.

    When Lamont et al talk about the pound it seems pretty obvious, to me at any rate, that they haven’t got a notion just how “big a game finance is.” I had it in my head once that I would, at a public meeting, ask Nicola Sturgeon about the SNP’s regulatory position vis-a-vis global finance and the City of Edinburgh in an independent Scotland. (That’s what what you do after reading Shaxson).

    I didn’t bother myself. I simply could not phrase the question in a digestible manner that might have been acceptable in the context of a public meeting.

    I seriously doubt whether Brown or Darling or anyone in the UK Parliament really knew what was going on around them, or why it was going on at all. I really, really do hope that I am in a small minority of dunces when it comes to understanding the arcane nature of global finance. I’ll continue to work-away at it, though.

    A first-class read from J. Simon Jones. Thank you.

  9. Tony Philpin says:

    Steve Keen is well worth ploughing through – and he has recommended that Scotland keeps sterling but not in a formal currency union as it is so unstalbe with all that hot money in London so easily repatriated in another crash – He is one of the few who predicted the macroeconomic crisis. Keen draws heavily for inspiration on Hyman Minsky’s Financial Instabilty Hypothesis which, simply, is in three stages. In Stage one finance an economy works by money being borrowed by people who are able to repay their loans – both interest and capital. Stage Two is more speculative and is symbolised as the interest only mortgage stage where borrowers can repay the interest but not the capital, and stage three is where neither part of borrowings can be repaid without relying on capital asset growth. This is basically a Ponzi economy where asset bubbles are essential for continued functioning, as is a continuously increasing level of credit. Note that the ConDems mortgage guarantee scheme simply creates another asset bubble with property prices hiked by the availability of cheap credit. Crash bang wallop, all over again. As soon as lending is even slightly reduced then the whole thing goes tits up – as in 2008. Crash. As 97% of money is created as debt by banks without any covering deposits (as in the UK) in the delightfully optimistic fractional reserve system of almost zero reserve banking then there are two easy solutions to stabilise the economy – one option is to ensure that we shift to central bank issuing of all money i.e. it is not automatically debt related – and/or we put prettty strong limitations on the size of capital reserves or ideally shift to full reserve banking which is very stable. Neither of these is acceptable to the financial sector mindset because it requires strong regulation. None of Labour, Tories or the LibDems have any strategy for genuine financial regulation so we are doomed to the repeat cycle of ‘boom and bust’ – now where did that phrase come from ?
    In an independent Scotland we have to address the macroeconomic issues to provide ourselves with as stable a system as possible. If companies cannot handle stability and need their shot of Ponzi then let them go – they are simply irresponsible gamblers. It is worth taking a look at how the Icelandics allowed their banks to go under rather than bail the criminals out and then jailed the bankers. That is a better model than the present one. And that is probably what they are afraid of. It is not uncertainty, or even risk, at all.

    1. bellacaledonia says:

      Thanks, really useful comment

    2. Simon Chadwick says:

      This is clearly true Tony, we are currently in Minsky’s third stage of the Ponzi economy. But what is the fourth stage? What comes next?

      1. Tony Philpin says:

        It’s cyclic. Largely predicated on confidence in the finance sector and hence tolerance of risk. So a behavioural psychologist will almost certainly be a better predictor than an economist. We’ve had several cycles since the 1929 crash. We could be in for a long period of stagflation. There could be a reformed and regulated finance sector but not until the neoliberals accept they have been wrong. QE really confuses the issue – ideally the central bank would be creating all the money supply and not just the 3% and the banks using QE to recapitalise on the cheap. A reconstructed system of central banks with full control of money supply is essential to break the cycle. Even a staged move towards full reserve banking would help stabilise the system.

  10. Derek Coghill says:

    I had a letter from Standard Life (I have some sort of a pension, apparently) which said that they were, in the light of the vote, preparing to shuffle some money into other accounts if need be. There was nothing about them moving house.

  11. Ken MacColl says:

    I feel sure that prior to 1999 Standard Life threatened to move their entire operation from Scotland if a devolved parliament was set up. Michelle Moan got rather more publicity for the same dire threat.
    Are they still here?

  12. purplebadger says:

    Bravo. Seriously, bravo.

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