When is a scandal not a scandal – when you put the word banking before scandal. There have been so many banking scandals recently that failed to lead to criminal investigations and arrests that if I asked you “what you thought of the banking scandal” you would probably have to reply which one? Mis-selling of PPI, mis-selling of premium accounts, fixing the Libor rates, using the banking driven recession as an excuse to call in loans from struggling businesses whose assets were worth liquidating, even though lending to such businesses to boost the economy was supposed to be a condition of the bail out cash… The list is endless, it seems to have no beginning and, with no credible legislation to curb the banks excesses in the pipeline, it has no foreseeable end. Let’s call it the “omni-scandal”, now you no longer need to ask “which one?”
The omni-scandal started when modern banking became the economy rather than being a servant of the economy. For a generation politicians have been using the wrong measures to persuade us that the economy is doing well, becoming fixated on GDP growth and FTSE 100 share values. Stock market gambling became an economic policy, greed became god and the measures of economic performance became the measures of greed, not of wellbeing. We started to miss the whole point of the economy, to create a mechanism for the most efficient way for people and organisations to trade value. Measuring a value and people centric economy would involve focusing not just on growth but on wellbeing, income parity, social mobility and the business performance of SMEs rather than large corporations. You might think I am tipping my hat to the Scandinavian model but it’s more like the German model.
Capitalism needed to redefine itself, once “better than Communism” didn’t hack it any more. Growth and wealth creation became the UK’s mantra when it could have been shared prosperity and added value manufacturing as in Germany.
New job creation papered over the cracks regardless of the quality or pay rates of those jobs. At Scottish Enterprise in the 90s I told the head of inward investment that I had concerns about all of the technology assembly and call centre jobs coming to Scotland and that we should focus on smaller, higher value added inwards investments. To my surprise,he agreed wholeheartedly and said that the call centres were just a quick fix and he had always planned to move to higher value added smaller projects but politicians had put a stop to that as 200 call centre jobs got their picture in the paper but a 10 person R&D lab didn’t. Short-termism is always easy to justify, you just say “what we need right now is…” but what we always need right now is the long term vision to keep building for the future, politicians can’t see past the next election. Call centres, retail and assembly jobs kept the unemployment figures down but beneath the headline figures and the measures of greed the purchasing power of ordinary folk took a hit, increasing the gap between rich and poor and storing up problems for the future.
The consumer debt led crash that should have happened in the late 90s and early 2000’s was delayed by one of the worst case studies in short-termism. The UK Government led the way in relaxing regulation of the financial sector, removing checks and balances that would have stopped consumer lending over-heating and investment speculation risk reaching unmanageable levels.
This amounted to a two-pronged attack on common sense by Labour Chancellors Gordon Brown and Alistair Darling, allowing consumer spending to create a false economy as more and more spending was based on credit at short-term high interest rates. As the personal debt bubble expanded so did the economy and Brown laughingly promised us an “end to boom and bust”, when all he had manufactured was a delay to the bust which would now be bigger and more devastating than the natural cycle. However, we never reached the personal debt breaking point as the banks, betting on falsely AAA rated packages of debt based on massively over valued US mortgages, imploded the economy when the true value of the investments was revealed.
Almost 70% of our economy is related to consumer spending and when a high percentage of the population find it tough to make ends meet then economic growth stagnates. Many families are now adjusting their lifestyles, living with high personal debt and only being able to make minimum payments has become the new normal. Low inflation and rising wages are starting to create a falsely positive view of the retail sector’s future prospects. In other words, we have an unexploded economic time-bomb called consumer debt that drags on the economy and has only avoided exploding due to low interest rates keeping mortgage payments manageable. Everyone personally pays interest so, once again, the banking sector is protected.
In amongst this the omni-scandal lives, with George Osborne looking to sell off the UK Government’s 87% public stake in RBS. The state bought RBS at 502p promising to recoup much of that investment and even make a profit on it but the current price of 362 is nearly a £13bn loss. In January 2014 I wrote “Darling invested £45bn of taxpayer cash into RBS under an arrangement by which we are unlikely to ever to see most of it returned”. I never expected a profit but why accept such a loss when, if interest rates can be kept low and we don’t get impatient with slow growth and create unhealthy levels of inflation, the share price of RBS should rise? RBS will soon be able to unload its share in Citizens bank, the deal over mis-selling with the US regulators (costing $3-$7bn) should be nailed down by the end of the year, ending uncertainty that may already be over-reflected in the RBS share price, and the £22bn worth of bad assets should be liquidated, so the worst will be over for RBS by the end of the year.
The Chancellor’s justification for selling early and adding £4 / £5bn to the losses comes in the form of a report commissioned from banking advisory firm Rothschild which states that the bank will benefit from not being in public ownership; well they would say that, wouldn’t they? I wonder if Rothschilds advised Gordon Brown to see off the BOE’s gold at below market value too? The advice to sell the shares now at a loss is because the markets will get more confident in RBS if less of it is owned by the public sector. If I wanted to justify cancelling Christmas I would commission a report by an advisory firm staffed completely by overfed turkeys.
Business for Scotland – The Campaigning Business Network