Archive for January, 2011

Catabolic Collapse – Phase 2?

A recent blog by John Michael Greer clearly explains the background to his theory on Catabolic collapse, and why we are likely to be in the midst of a second shock wave to hit Industrialism. Greer dates the first shock wave to be in 1974 when much of the UK & US Industrial base began to disintegrate.

I’ve recently read two of his books (The Long Descent, and The EcoTechnic Future) both of which are informative and uplifting. Greer manages to temper visions of the future to establish a sensible middle ground that falls between the absurdly optimistic common perception and the hardnosed Dystopian (Mad Max) view.

I’ve not covered much on the link between Economics and Energy yet, but watch this space.

Categories: Economics, Energy

Peek-a-boo accounting

A recent article in the Telegraph has challenged conventional wisdom surrounding the financial crisis:

“the controversial International Financial Accounting Standards (IFRS) had allowed banks to hide risks so that profits and bonuses were inflated”

“the accounting standards allowed the banks to look far more profitable than they were. The financial crisis exposed the shortfall that had built up.”

States testimony to the House of Lords Economic Affairs Committee. First we don’t see the risks on the banks balance sheet, then “oh-o” next we see a tidal wave of risk. Given that banks can self determine the value of assets held on their books (Mark to Model or Fair Value, rather than Mark to Market) the scope for banks to unduly influence, even manipulate, the value of assets on their books is considerable.

The testimony referenced in this article just gives more weight to the argument that the banks were indeed insolvent during the crisis rather than the publicly portrayed line of having “liquidity” difficulties.

Telegraph – Bumper bonuses and flawed accounting

Regulars to this blog will know that one of the key methods identified for hiding / misrepresenting finance risk, was brought about by de-regulation of loan handling; Originate-to-distribute, otherwise known as Securitisation:

Is modern banking fundamentally flawed?

Categories: Finance and money

Is the Finance sector good value for money?

January 13, 2011 4 comments

It seems that the public can be roughly divided in to two camps:

– Those that believe that the financial sector is efficient, beneficial & necessary (either because of genuine belief, or mere apathy /ignorance on such matters)
– Those that have suspicions about the actual positive contribution the sector plays to our economy

One of the major debating points is the contribution that the financial sector makes to Gvt tax revenues.

Let’s look at this holistically, by assesing the sector contribution to UK Gvt coffers as a proportion of total asset base used to generate that tax take. Think of the following as a form of macro-economic Return on Capital Employed (ROCE).

Firstly, the tax income, related to GDP:

Manufacturing GDP: 17% Tax contribution: 59%
Finance & business services GDP: 26% Tax contribution: 12%

This means that the Finance & services sector is the largest contributor to our GDP figures, but is woefully under contributing to the nation’s tax revenues. Manufacturing is proportionately paying 6 times the amount and therefore far more efficient at lining the Gvt purse than Finance & Services.

Now if that weren’t enough to unsettle you, then compare the asset base used by each sector to generate the tax income. I’m anticipating that the Manufacturing sector will mainly state tangible (fixed) assets on it’s balance sheet (factories, plant, machinery etc.), and I’m taking a punt here that this will amount to say about 1-1.5 x GDP in assets (UK’s total wealth is about 3-4 times GDP, and assuming manufacturing has a slightly higher share of that than their GDP contribution would state so let’s call it about one third).

Whereas the Financial sector has 5 times GDP on it’s balance sheets, i.e. more than the nation’s total wealth (source: Andrew Haldane’s Banking on the State).

Now, remember one person’s assets is another’s liabilities. So, Manufacturing creates 59% of our nation’s direct tax take by employing about one third of our wealth. Plus, if any of these businesses go bust, then at least we still have some physical assets that have the capability of generating future income.

Whereas Financial serives generate only 12% of tax by employing nearly one and half times our nation’s wealth. Oh, and those “assets” held by the banks, most of it is not tangible and has little or no “replacement value”, it is paper claims on future earnings.

It seems that the ROCE of the financial sector is about one tenth of manufacturings contribution. And I don’t see them paying ridiculus bonuses or holding the tax payer to ransom.

When you look at it properly, the financial sector doesn’t really seem that good value for money, does it?


Tax statistics source: 2006 Summary Supply and Use Tables for the United Kingdom (Summary SUTs)

Categories: Finance and money

Everything’s rosy, of course……

“HSBC sees China and America leading global mega-boom” blasts the headline from the Telegraph yesterday:

“The greatest global boom of all time has barely begun. Over the next forty years, economic growth will quicken yet further as the rising powers of Asia, the Middle East, and Latin America reach their full stride.”

Right, so everything’s rosy in the world of global economics. Until, of course, you read the small print:

“HSBC works from the assumption that mankind will avoid the energy crunch and overcome the eco-deficit, a term used to describe the world’s depletion rate of non-renewable assets. It calls for $46 trillion of investments in alternative forms of energy to break out of the carbon trap, and head off a supply crisis that could derail growth.”

So we have a headline grabbing message with no caveat whatsoever, yet the body of the article explains that the assumptions behind the forecasts are of stupifying proportions. In order for the Mega Boom to materialise we just need to find as much cheap and easy energy sources as we’ve been used to the last 100 years or so, we need to stop damaging the environment and we need to find more clean water and cheap food to feed everyone, plus we need to invest far more money than we’ve currently spent bailing out the banks.

I think we can just sweep these little assumptions under the carpet, can’t we? Doubt they’ll affect the outcome of the forecast.

Bad science, bad economics, and bad journalism.

Categories: Economics

What you talking about Wallis!

The result of the Son of Wallis Challenge is in, and unfortunately my submission didn’t win.

The short article Securitise This! addresses the issue of declining credit quality, created by securitisation. Here is a quote from the announcement:

Russell Bradshaw also addressed securitsation, basing his submission around the vital insight that nothing in the process itself offsets this agency problem because “… credit risk can’t be qualitatively transformed (as assumed within the market based competition for lending), instead it just gets absorbed or transferred.” According to Bradshaw, “… banks receive the right to profit from appropriately containing or avoiding risk, not because of their ability to convert the risk to a less hazardous state.” Therefore “… the turning over of banking functions to a seemingly competitive market has at best yielded superficial hopes of improved customer choice but, more importantly, has masked a more serious issue of the mis-selling of credit and gargantuan risk transfer to the public purse”.


Other submissions also focussed on Securitisation, providing suggestions for reducing moral hazard (i.e. make loan originators more accountable for loan quality) and conflicts of interest (such as on the part of ratings agencies) created by this financial innovation:

This competition comes at an intriguing time for Australia. So far they appear to have avoided the financial crisis, but as Steve Keen has been pointing out for a while, they are harbouring worrying asset price inflation in the housing market. The latest post from Steve about declining lending standards “smacks of desperation”:

Categories: Finance and money