Financialisation is hale and healthy

There was so much talk about revolving doors between Wall Street and regulators. Mervyn King who wrote so eloquently about banks in ‘End of Alchemy’ ended up an advisor to Citigroup. Willem Buiter who was in the MPC in BoE did the same. Former Heads of Government do the same. Robert Zoellick and Robert Rubin come to mind. Former as Goldman Sachs advisor and the latter in Citigroup.

It is not for nothing that financial firms pay huge sums to have these people in their rolls. The latest is Blackrock that has agreed to pay a very generous sum to George Osborne, former British Chancellor, for very little work. The story is here.

So, the dominance of Finance has not really ended. The fight still has to be made and the road ahead remains long.

This blogger makes some good comments:

What are they buying? It’s not his economic expertise – he’d struggle to get a minimum wage job on that account – nor even his contacts. Instead, BlackRock is offering an incentive to the world’s finance ministers. It’s telling them that they too can get big money if they behave themselves in office*.

Such behaviour consists of giving the industry a favourable tax regime, lightish regulation, and ensuring a good flow of easy money. Osborne’s policy of fiscal conservatism and monetary activism had the effect of boosting asset prices (pdf), to the benefit of firms like BlackRock**.

It’s through mechanisms like this that capitalists gain undue influence over the state: there of course several other mechanisms, not all of which are exercised consciously or deliberately.

This influence isn’t perfect – we’d probably not have had Brexit if it were – but it exists. The idea that democracy means equality of political power is a fiction in capitalism.

You might think this is a Marxist point. I prefer, however, to think of it as a Cohenist one:

Everybody knows the fight was fixed
The poor stay poor, the rich get rich

Except that not everybody does know the fight is fixed, because the question of how capitalist power is exercised – like other questions such as whether capitalism impedes productivity or whether hierarchy is justifiable – is not on the agenda. But then, the issue of what gets to be a prominent political question and what doesn’t is another way in which power operates to favour capitalists.

I like this blog. Just ‘stumbled’ upon it. Don’t remember how. Even this post is a simple one and it makes sense.

Philip Stephens imagines Orwell

FT’s Philip Stephens has a piece on what George Orwell would make of Donald Trump. Really? Have they all become so unimaginative that they cannot think of any other topic than President Trump?

This is what he wrote in the article:

An “America first” foreign policy is part of the same construct. Mr Bannon, the ideologue who informs Mr Trump’s impulses, anticipates a civilisational clash with Islam and a war with China. The flirtation with Mr Putin is about confessional and cultural solidarity against an imagined barbarian threat.

This is the comment I posted underneath the article:

Imagined barbarian threat? Probably, Mr. Stephens does not read real news stories of ISI attacks on Sufi worshippers in Pakistan and, in general, four attacks in five days, etc. Plus, a steady stream of research from Europe and the U.S., have documented the impact of imports from China on communities and not just on jobs.

Some references for him:

(1) (ht: Niranjan Rajadhyaksha)


(3) Dippel, C, R Gold and S Heblich (2015), “Globalization and Its (Dis-)Content: Trade Shocks and Voting Behavior,” NBER Working Paper 21812

(4) ‘The surprisingly swift decline in U.S. manufacturing employment’ (Peter Schott and Justin Pierce)

Is there any law that forbids ‘liberals’ from being intelligent and being able to face, accept and address reality? Don’t they know that denial does not solve problems and hardens positions, making problems difficult to solve and conflicts inevitable? May be, I am being too harsh on them. May be, that is what they are craving for – conflict.

FT tries too hard

Another bad faith and mischievous article on the part of FT. Also a sloppy exercise. Some random quotes and surveys when the PMI readings for January are still showing an expanding economy. Manufacturing PMI was at 55.9, just a tad lower than 56.1 in December. Output growth was at a 36-month high.  Service sector PMI showed that activity eased but business expectations strongest since May 2016. Construction PMI showed activity slowing but still in expansion mode.

Those PMI surveys are more comprehensive in nature. Have more respondents. Had the second paragraph been worded differently, my comment would not have been needed. Here is how I would have worded it, to be accurate (But, then FT would not have its story!):

“While an Ipsos Mori survey of senior executives from more than 100 of the largest 500 companies found that 58 per cent felt last year’s vote was already having a negative effect on their business,  a stream of positive economic data and strong economic growth belie their pessimism.”

58% of 20% of 500 large companies? 11.6% of 500 large companies? Is that a story?

Can this newspaper do with some hard data than by running a story based on a survey of 100 companies out of 500 large companies?

FT will be doing a disservice to itself if it does not treat with respect its readers’ intelligence.

News that matter

American politicians and intelligence agencies are making too big a deal out of their claims that Russia interfered with their elections. Their interference in democratic processes in other countries is well known. Russia could not have influenced the vote. This comes across – whether intended or not – as an attempt to cast aspersions on the legitimacy of the victory of President Trump. This blog post by a blogger Michael Kreiger of the Liberty Blitzkreig blog is an important read.

Incidentally, Mr. Michael Kreiger has good posts on Trump’s cabinet picks. Read them here. They are critical observations and legitimate too. They echo my observations in my recent MINT column:

Indeed, whether the swamp is drained or allowed to remain would be very much determined by the actions taken with respect to the financial sector. Reining in financialization is the key to tackling income and wealth inequality and distortions caused to the real economy by debt (leverage, in general) and leverage-backed surges in asset prices. [Link]

Of course, in my MINT column, I had referred to a Wall Street Journal article that mentions that Trump appointees favour a higher bank capital ratio. That is a good thing.

Indonesia has chastised and cut off business with JP MOrgan for the latter has downgraded Indonesian sovereign bonds to underweight. Some wrote that the Indonesian stock market had been downgraded. I do not think that is right. In either case, it is an over-reaction. Needless. Only if there is a clear case of malintent as was between Morgan Stanley and Kazakhstan, then there is a need for governments to react. The former accumulated CDS on Kazakh bonds and worked to trigger a credit event. Read Gillian Tett commentary in 2009 on this.

When governments do this, they  attack the analysts’ integrity and independence. Then, when they do the same with stocks, governments lose their moral rights to pull them up or punish them in the name of good governance.

Apple deferred to China and pulled New York Times from its app. in China. It could not have happened to a more objective and balanced newspaper (?!)

China has further tightened the screws on foreign non-governmental organisations operating in China:

The legislation requiring the China offices of charities and foundations to find an official sponsor and file regular and detailed activity plans to the police is seen as one of the ways the ruling Communist party intends to cement its rule by asserting control over a burgeoning civil society.

China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China — ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation — will meet the law’s conditions before the January 1 deadline. [Link]

This is a sequel to what was done last April.

In an article peppered with unverified and anonymous comments, FT writers blame Brexit and Theresa May for China cooling off towards Britain. For all we know, it might be a good thing for Britain.

Further, China is squeezing South Korea hard because it had chosen to deploy a US missile defence system on its soil:

China has threatened some of South Korea’s largest companies over Seoul’s decision to deploy a US ballistic missile shield, according to several people briefed on the conversations.

Samsung and Lotte Group were among companies warned by a foreign ministry official during a visit to Seoul last week that their China business could suffer because of the Korean stance.

South Korean officials labelled a visit by Chen Hai, the ministry’s deputy director-general of the department of Asian affairs, as “highly irregular”. They said he ignored requests to postpone the trip until the new year and did not pay a courtesy call to his counterparts at the foreign ministry in Seoul. [Link]

One would have thought that this would bring South Korea and Japan closer. Is it bad diplomacy or is it a case of bad times for South Korea? Apparently, a non-governmental organisation set up a statue of a ‘comfort woman’ outside the Japanese consulate in the port city of Busan. Japan has recalled its Ambassador to Seoul. May be, who knows, some NGOs are still useful for Beijing?

May be, I am repeating it. This news about Indonesia is important too. The title of the article is appropriate. May be, this is justification enough for JP Morgan downgrade?

I wonder about the presumptive logic of the inevitability of Asian rise in the 21st century.

Misunderstanding the verdict

This is not an independent piece but a response to a piece that Martin Sandbu has written after the U.S. election results have been announced. His ‘free lunch’ piece (‘Silver linings for friends of liberal society’) may be behind a subscription firewall.

These are his two concluding paragraphs:

The populist wave of 2016 is not, therefore, the rise of a new, reactionary class, more the last gasp of a vanishing one. Few expected its death throes to be so violent, but that is still what they are. Attitudes among the young mean that time is on the side of liberal, open societies.

If those attitudes stay firm enough, this week may be remembered not as the when the floodgates opened to an ever-growing tsunami of illiberal populism, but rather as when its high water mark was passed. That, however, depends on the defenders of open society standing firm, to ensure its values are not washed away before the populist tide recedes.

This is a thorough mis-reading of the vote – from Brexit to Trump’s candidacy to Trump’s victory. First, one has to acknowledge the fact that Trump has won votes among the city-bred, educated, non-white, black and Latino voters. Similarly, Ms. Clinton had won votes among rural white men and women without a college degree. So, the voting fault lines are more blurred than what Mr. Martin Sandbu would like to have us believe. Of course, in few of these categories the vote share has been overwhelming in favour of one candidate. But, those are the exceptions.

There are many ways to interpret the voting pattern. One is Mr. Sandbu’s way. However, there are other interpretations too. One, it could be said that the young are relatively inexperienced and that, in the fullness of the time, they may come to appreciate the chasm between the discourse and delivery on globalisation and free movement of factors of production (both labour and capital). Two, populations are aging. So, more people will join the ranks of the old – the world over – and not the other way around. Our preferences and attitudes towards risk and cultural assimilations shift as we age. Third, with technology – robotics and artificial intelligence – many so-called educated young people will eventually feel the way that white under-educated men and women might be feeling today. It is not the ‘last gasp of the vanishing one’. It may be the beginning in which these distinctions between race, nationality and age profiles might be blurred. He may have to thank robots and their (Silicon valley?) creators in a future piece for uniting us all in our disaffection and frustration!

In any case, it is a betrayal of elitist thinking that those who have not spent time with formal schooling are not educated. They may be less complicated in their thinking.

It is good thinking on his part to spread the cheer among his colleagues who might be drained and exhausted. But, if he really wishes to see this as the ‘last gasp of a vanishing one’, many things need to change. Tax rates on top incomes (corporate and individual) might have to go up in some countries. Tax compliance has to be improved. Tax arbitrage has to be eliminated. Financialisation of advanced economies has to be rolled back. Executive compensation must be delinked from short-term stock price movements.  Monetary policy in many parts of the advanced world must be exorcised of the spell that asset prices have cast over it, for decades.

If Mr. Sandbu is yet to read  the paper ‘Stock returns over the FOMC cycle’, he might wish to do so to begin to understand the election verdict. Creative destruction of capitalism must be allowed to play its role instead of monetary policy propping up asset prices in the guise of delivering on output and employment growth. Recessions and slowdowns are necessary ingredients of a healthy economy. Once he has finished that paper, he can read the speech delivered by William White while accepting the Adam Smith prize from the National Association of Business and Economics.

Instead of the above, if defiance is his only response, then he should not be surprised if he and his fellow travellers continue to add to their exemplary record of failures in understanding and anticipating Brexit, American elections, etc.

Well, reading Gideon Rachman and Ed Luce in FT analysing the verdict, it is clear that the elites are far too steeply trapped in their own morass to smell anything other than the stink that their morass generates. This comment under Luce’ article sums it up well:

Edward Luce, Gideon Rachman and Martin Wolf will not reconsider their firm belief that they know better. Intellectual arrogance is an addiction that does not allow those with it to admit they have it. It leads to less relevance among serious thinkers which, of course these three are also incapable of admitting. As with the NYT, the FT has lost clout. Telling the world it is dumb, even stupid, if it does not agree with you has become tiresome. One wonders what Nikkei thinks of its recent purchase.

In contrast, this blog post by a Clinton supporter is far more mature and reasonable. It is a tragedy for FT that its senior journalists cannot write something like this.

p.s.: (1) Just a month ago, I wrote the piece, ‘The beginning of history’ in MINT. In my view, it explains the election result rather well.

(2) The Republican Party kept its control of both the chambers of the Congress only because of Mr. Trump:

After months of fretting that Mr. Trump would weigh down incumbent Senate Republicans, his strength instead buoyed GOP lawmakers in battleground states. With no wave of support materializing for Democratic nominee Hillary Clinton to bolster down-ballot candidates, Republicans swept through swing states, including many that President Barack Obama had won four years earlier. [Link]

(3) This WSJ video is quite useful in understanding who voted for whom

Brexit -an analysis of the High Court verdict

A court in the UK has decided that the UK Government must take the approval of Parliament for invoking Article 50 to set in motion the process of reversing its membership in the European Union.

According to the Court, the Parliament intended “EU rights to have effect in domestic law and that this effect should not be capable of being undone or overridden by action taken by the Crown in exercise of its prerogative powers…”.

This can be reasonably interpreted in two ways:

(1) If these rights had already been incorporated into domestic law, then there is no need to worry about them being taken away merely because UK would withdraw from the European Union.

(2) On the contrary, if those rights had been conferred on British citizens because they would be entitled to exercise those rights as EU citizens, then naturally those rights would be withdrawn once Britain is no longer a EU citizen. Indeed, those rights would no longer be relevant.

It appears, to me, to be like a hair-splitting argument to suggest that rights conferred on the British by the British Parliament on account of them having become EU citizens can be taken away only by the Parliament when the citizens have voted not to remain members of the European Union!

It is not as though British citizens’ fundamental rights were being conferred on them only by virtue of them being EU citizens and that they would be lost if Britain ceased to be a EU member. If so, that would be a matter for concern. That is not the case.

The rights of Britons as EU citizens would be unnecessary and an irrelevant consideration when they do not want their country to be part of the EU.

The preference to leave the EU – expressed in the referendum – overrides any consideration of the rights of only the UK Parliament to remove the ‘EU citizen rights’ that arose on account of the membership of the Britain into the EU. It is a non-sequitur.

The court has taken an extremely legalistic position without respecting the will of the people and its spirit reflected in the referendum verdict.

Indeed, all that the Parliament should do now is to pass a resolution to acknowledge the verdict of the people to leave the EU and remove the ‘EU citizen rights’ conferred on Britons on account of the passing of the European Communities Act 1972 and leave it to the Government to invoke Article 50 of the Lisbon Treaty as per the verdict of the Referendum.

In other words, the Parliament cannot and should not stand in the way of the Government respecting the popular vote. If it does not do so, there is no legitimacy for the Parliament itself for it derives its sanction and authority from the will of the people.

Some have taken to argue that the referendum vote was always non-binding on the Parliament and that it was only advisory in nature. That is flawed on two counts. One, the court ruling was not about that at all. Two, it was not communicated to the public, that their vote would be non-binding and advisory in nature, before the referendum vote.

The Parliament voted to authorise the referendum by a margin of 544:53. In England, the final margin between ‘Leave’ and ‘Remain’ was 6.8%.

A 8-page guide was sent out to voters in the week of 16th May by the Electoral Commission. You can access it here. This is the official document about the Referendum. It says nothing about the Referendum being non-binding or being advisory in nature.

It would be a reasonable inference on the part of the voters that it would be binding, especially when 544 Members of Parliament voted to authorise the holding of referendum. One would reasonably assume that the MPs also voted to accept the verdict of the Referendum, no matter how it went, considering how an overwhelming majority of them voted to authorise the referendum. If not, it should have attached a condition saying that the Parliament authorised the holding of the Referendum subject to the provision that it would only be advisory in nature. That was not done. Nor did the Bill introduced in the Parliament have anything to say about the non-binding or advisory nature of the Referendum. Nor did the Electoral Commission’s document mention that.

The FT has published some select extracts from the Court verdict here. The judges have said the following:

The 2015 Referendum Act was passed against a background including a clear briefing paper to parliamentarians explaining that the referendum would have advisory effect only. Moreover, parliament must have appreciated that the referendum was intended only to be advisory as the result of a vote in the referendum in favour of leaving the EU would inevitably leave for future decision many important questions relating to the legal implementation of withdrawal from the EU.

It cannot be said that a law is invalid as being opposed to the opinion of the electorate, since as a matter of law: “The judges know nothing about any will of the people except in so far as that will is expressed by an Act of Parliament.” [quote from the leading, 19th century account of the constitution by AV Dicey]

Yes, the briefing paper published by the House of Commons Library in June 2015 in page 25 says the following:

this is a type of referendum known as pre-legislative or consultative, which enables the electorate to voice an opinion which then influences the Government in its policy decisions. The referendums held in Scotland, Wales and Northern Ireland in 1997 and 1998 are examples of this type, where opinion was tested before legislation was introduced. The UK does not have constitutional provisions which would require the results of a referendum to be implemented, unlike, for example, the Republic of Ireland, where the circumstances in which a binding referendum should be held are set out in its constitution. [Link]

But, it is rather surprising that, before the vote actually took place, no one spoke or behaved as though the referendum was advisory in nature. If so, what the fuss was all about?

So, what should the ordinary voter make of this court verdict? What is the deemed advice of the Court to the Parliament which derives its sanction from the will of the people?

The judicial verdict raises a question on the very purpose of the Referendum. Why was it called if Parliament had the overriding authority? Why didn’t the Remain camp move the Court against the holding of the Referendum itself if it was not binding? Why did they wait for the result of the referendum to move the Court? Is it because the popular verdict went against them?

Yes, that is what seems to be at work. They wanted to have the cake and eat it too. The House of Commons Library Briefing paper published in 2015 suggested to the Members of the Parliament that the referendum was non-binding. Yet, the public was not told explicitly about it. Hence, if it went in their (‘Remain’ camp) favour, they wanted to make it binding. Since it did not, they want to argue now that it is non-binding, advisory in nature and that the Parliament had to first address the European Communities Act 1972, etc.

This is dangerously myopic. More than the Brexit vote, this has much deeper implications for the British society. Those who are crowing about the so-called ‘landmark’ verdict are declaring that their self-interest is more powerful than their intelligence, if any.

The Court, in my view, should have done the following:

(a) It should have dismissed the petition. [It did not do this].

(b) It should have told the government that the Article 50 could not be invoked before the Parliament removed the rights conferred on the Britons under the European Communities Act 1972. [Well, that is what the Court has done]

(c) It should have issued a ‘non-binding/advisory’ direction to the Parliament to fulfil its duties as per (b) above and thus respect the referendum verdict since it voted to authorise the referendum by an overwhelming margin, since it did not inform UK voters properly, adequately and repeatedly that their vote would be non-binding on Parliament, before the referendum took place and since it derived its sanction and legitimacy from the will of the people. [It has not done this]

A FT article on the Article 50 of the Lisbon Treaty published in July 2016 is here and the full text of the Article 50 is here.

Silly season of referendums

First, we had David Cameron’s referendum on Brexit. Regardless of the inevitability of such a backlash (read Hans Werner-Sinn’s sensible piece here), it was perhaps a stupid thing to do – less than a year after winning a more comfortable mandate to govern. Perhaps, it was as much hubris as it was their blissful ignorance of the ground reality that led to the referendum being called.

Then, we had the Colombian government putting its peace deal with rebels to a referendum vote. They rejected it.

Now, in the coming months, we have the Italian referendum. Contrary to popular perceptions, the referendum is not about Italy’s continued membership of the single currency. It is about reforms to the way their Senate functions. But yet, it has somehow morphed into a referendum on the Eurozone itself!

Whether they are stupid or if it is by design, it is quite surprising to see politicians contrive to conjure up such impossible situations for themselves. May be, secretly, some of them do want to see the existing order change? IF so, they are darn smarter than we give them credit for.