Category Archives: Economic

Britain, Economic, Environment, Government, Politics, Society, United Nations, United States

Climate change and the need for a global price on carbon…

CLIMATE CHANGE

The recent findings of the United Nations Intergovernmental Panel on Climate Change (IPCC) are alarmingly clear. The environment is incontestably warming – evidenced through the fact that each of the past three decades has been successfully warmer than any since 1850 – and it is now beyond reasonable doubt that human activities are the cause.

The IPCC report, the fifth of its kind, whilst not containing much that is absolutely new, does offer a higher degree of certainty than the previous report delivered in 2007. It is now as sure that human beings are causing climate change (a probability of 95 per cent) as of cigarettes causing cancer. This is not the judgement of politicians or those campaigners with vested interests, but the consensus of thousands of scientists from all over the world. With scientists having considered all the available evidence, one can only hope that it will banish the scepticism of the ignorant.

The effects of the alterations in the Earth’s environment are already being felt, and not just in extreme weather patterns. The polar ice sheets are thinning, sea levels are rising and the oceans are increasingly acidic. But of concern is what is still to come. The likelihood that rising temperatures will stay below the 2°C threshold, above which changes become catastrophic, looks far less achievable.  Quantifying this is not difficult if we consider that we have already burned through 54 per cent of the ‘carbon budget’ calculated to equate to a spike of 2°C.

Without radical action, the inference implied is that the outlook is bleak. Yet, the politics of long-term, counter-factual disaster-avoidance are no easier now than they were in the past. Last week, The International Development Secretary made all the right noises, commenting that Britain must play its part, only to be countered by the Chancellor who judges the green agenda an unaffordable luxury in times of public austerity. Ed Miliband, talks of a good game, too, with his pledge of carbon-free electricity by 2030. However, his promise to freeze energy bills raises serious questions about where the investment will come from and has already spooked potential investors.

In America, John Kerry, U.S. Secretary of State, responded to the IPCC in stirring terms… ‘This is yet another wake-up call: those who deny the science or choose excuses over action are playing with fire.’ But while Mr Kerry went on to affirm that the U.S. is ‘deeply committed to leading on climate change’ Congress is in the midst of yet another budget fight, upon which Republicans are demanding that any new borrowing is conditional on the weakening of carbon-emission regulations.

The sceptics are certainly right when they say that the cost of mitigating climate change is high. But it is also unavoidable, and the longer we delay the greater the bill will be – both in terms of money and human lives. We must then, throw, all we have at the problem, from the incremental (such as better insulation for our houses) to the fundamental (re-thinking how industry and transport, for example, uses energy). And then there is the thorny diplomatic issues over who should pay – the rich countries that did the historical polluting, or emerging economies from the developing world that are now industrialising in double-quick time.

Ultimately, though, the solution lies with the market. Europe’s ground-breaking carbon trading scheme has floundered, and with its price being meaninglessly low it could be easy to write it off. In America, President Obama’s hopes for national cap-and-trade were dashed by the Senate, leaving only a smattering of regional initiatives. The Australian Prime Minister wants to repeal his predecessor’s ‘carbon tax’. Despite the teething problems, however, a global price on carbon is vital and must be a priority. With China and South Korea now putting together their own schemes, there is at least some progress being made in dealing with the climate change threat.

Standard
Banking, Britain, Economic, European Union, Financial Markets, Government, Society, United States

What the banking crash five years ago has taught us…

BANKING FIVE YEARS ON

THE last five years have been the most nerve jangling and traumatic in the modern history of the British economy and for the City of London.

It is only now, on the 5th anniversary of the collapse of the 158-year-old investment firm Lehman Brothers – and after intensive ministrations from the Bank of England – that the UK economy has started to splutter back to life.

However, the banking sector, which should be a bedrock of the economy, remains vulnerable and susceptible to external shocks, and to scandals of its own making.

The Central Bank administered strong economic measures, namely in the form of a staggering £375 billion of extra cash into the UK financial system.

It has held the official bank rate at a historic low level of 0.5 per cent for more than four years and it is currently heavily subsidising the cost of buying homes as well as supporting smaller enterprises through its Funding for Lending scheme.

Finally, it appears to be working, and forecasters are quickly revising their predictions upwards as every part of the economy – from the dominant services sector, to manufacturing and construction – has begun to take off.

In the Chancellor’s March Budget, the independent Office for Budget Responsibility (OBR) predicted that gross domestic product would expand by a miserly 0.6 per cent this year.

The Paris-based OECD has doubled its forecast to 1.8 per cent and some City forecasters say the economy is expanding by as much as 3 per cent.

House prices are moving up firmly in many areas and not just in overcrowded and overcooked London and the South-East.

The jobless rate is currently 7.7 per cent and falling more rapidly than many critics could have imagined.

But it would be wrong to get carried away. UK output is still 2.8 per cent below where it was before calamity struck in 2008. In contrast, the German economy has expanded by 2 per cent and the United States by 5 per cent.

Despite the new born optimism of many British forecasters, it is safe to say that the whole edifice of the UK upturn is built on worryingly fragile foundations.

No doubt, the most important lesson of the terrifying events five years ago is how important a functioning banking system is to the creation of wealth.

..

ACCORDING to the former Chancellor, Alistair Darling, Britain was ‘on the brink of what could have been a complete and utter calamity’.

Cash machines at the Royal Bank of Scotland and Lloyds Banking Group came within two hours of running dry. The economy’s restoration to full health cannot possibly happen until these two banking High Street giants have been restored to the private sector.

Yet, half-a-decade on from the near collapse of these two banks, the struggle over how to re-privatise them is nowhere near being resolved.

Consider RBS. Stephen Hester, the man brought in on a salary of £1.2 million by Gordon Brown to turn the bank around, resigned after a fractious relationship with Chancellor George Osborne. At the behest of the Parliamentary Commission on Banking, merchant bankers NM Rothschild is investigating how to split off RBS’s flawed investment-banking arm from the retail operation that serves the public and small firms.

Until it reports, the important job of extending credit to new and growing businesses has been put on hold and the process of returning the Government’s 80 per cent in the bank to the public has been suspended.

Lloyds, though, does look in far better shape. Under an EU ruling, it has separated out 632 High Street branches and relaunched them under the revised TSB banner.

But its return has been less than smooth.

In the aftermath of the financial crash, the bank emerged as one of the biggest providers of Payment Protection Insurance (PPI) policies in which customers were mis-sold expensive insurance schemes to cover debt repayments. It was required to spend £4.3 billion in compensation, part of an industry wide bill of some £14 billion.

PPI is just one of the egregious scandals to emerge since the financial crisis. In June of 2012 Barclays Bank agreed to pay a fine of £290 million for rigging the LIBOR interest rate that helps to set the cost of corporate loans, mortgages and other commercial transactions.

..

BRITAIN’S highest paid banker, Bob Diamond – who earned more than £100 million in his years at Barclays – was forced to resign.

Even the most respected and safest names in British banking have found themselves in the dock.

The mighty HSBC admitted it had been involved in money laundering activities for Mexican drug cartels and Middle East terror groups.

London-based Standard Chartered was forced to own up to billions of pounds of sanctions-busting transactions with Iran.

And to top it all, the world’s largest and most blue-blooded bank of all, JP Morgan lost $6 billion in 2012 at its London branch after engaging in high risk trading in credit default swaps.

There are now signs, at least, that regulators in the U.S. and Britain have forced a clean-up of our banking system by imposing heavy fines and penalties and by forcing the errant institutions to accumulate fresh capital.

But looming over the City is the spectre of the eurozone, which is caught in a ‘doom loop’ – a self-perpetuating cycle that relentlessly racks up both national debts and those of banks.

The recovery, then, at best is being built on the most fragile of foundations.

Even if our banks manage to overcome the already formidable problems, the medicine itself already used poses its own future dangers in the shape of surging inflation and higher interest rates that could eventually be as frightening as the events of five years ago.

Standard
Arts, Britain, Economic, History, Philosophy, Politics, Scotland, Society

Quantum Leaps: Adam Smith (1723-1790)…

‘UNINTENDED CONSEQUENCES OF INTENDED ACTION’

Scottish philosopher of morals, politics and economics, Adam Smith was a contemporary of the Empiricist, David Hume (1711-1776), and is very close to him in outlook and philosophic temperament. His lectures on ethics and logic were published under the title Theory of the Moral Sentiments but he is most famous for his work of political economics, The Wealth of Nations.

Favoured philosopher of Margaret Thatcher and darling of Conservative economists, Smith is famous for his views on private property, the free market economy and the doctrine that ‘unintended consequences of intended action’ will be to the benefit of society at large. The idea behind this most fortunate if true of principles is that in intentionally serving one’s interests one unintentionally serves the interests of society as a whole.

'The Wealth of Nations' is one of the most important and deservedly read works of economic and political philosophy in the history of Western thought.

‘The Wealth of Nations’ is one of the most important and deservedly read works of economic and political philosophy in the history of Western thought.

A simple example will illustrate the essence of Smith’s idea. Suppose that Jones, in seeking his own fortune, decides to set up and run his own business, manufacturing some common item of everyday need. In seeking to provide for his own fortune, Jones’ entrepreneurial enterprise has a number of unintentional benefits to others. First, he provides a livelihood for the people in his employ, thus benefiting them directly. Second, he makes more readily available some common item which previously had been more difficult or more expensive to obtain for his customers, thus easing one, if only minor, aspect of their lives. The forces of market economy ensure that these unintentional benefits occur, for if Jones’ workers could find more profitable employ elsewhere they would either cease to work for him or he would have to raise their salaries in order to secure a workforce. Likewise, if Jones’ product was available more readily or less expensively from some other source, Jones would either go out of business or be forced to lower his prices to a competitive rate. The model assumes the absence of a monopoly, both in the labour and economic markets.

The belief that ‘unintended consequences of intended action’ will be of benefit to society held great imaginative power over the industrial philanthropists of the 18th and 19th Centuries and provided the philosophical groundwork for the later ethical theories of Bentham and Mill. However, criticism is not hard to come by. It is surely a blinkered view, if comforting for the entrepreneurial capitalist, to suppose that pursuing one’s own self-interest constitutes a magnanimous and philanthropic act towards society at large. One has only to review the social history of industrial Britain, to witness the treacherous and exploitative working practices of the industrial age, the extreme poverty and degrading social conditions of the suffering working classes, to realise Smith’s idealistic model has far more serious ‘unintended’ consequences. What has largely brought an end to such conditions in the industrialised West is not a triumphant adherence to Smith’s principles in Western economics, but a shifting of the poverty and exploitative working practices from one part of the world to another. In other words, the living conditions of those in the West has improved to the detriment of other countries just insofar as the labour required to support Smith’s economic philosophy has been removed from Western societies and transferred to those of the Third World.

Related:

Regardless of one’s political views on Smith, The Wealth of Nations is one of the most important and deservedly read works of economic and political philosophy in the history of Western thought. It needs to be read and understood by its detractors as much as it does by its supporters.

Standard