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On September 11th 2001, Al Qaeda sort to bring turmoil to the western world and the economic system.  Despite the massive loss of life and the permenent alteration of New York’s sky line, the effects were actually fairly minimal and short-lived.  Little did any one realise that the seeds of a much bigger, more effective threat to the global economy were already sown and germinating.  About seven years after the attacks in New York, the years of greed-based banking and investment policies, left to grow unchecked by anything even approaching adequate governmental regulation, produced its toxic fruit. Trillions of dollars, that’s with 12 zeros, disappeared almost overnight.

The loss of life caused by the banking failures may not be as dramatic and immediate as that caused by the actions of 9/11, but how many people will commit suicide because of their losses?  How many individuals might die from illnesses that could have been cured, but now lack the health care following redundancy? How many other lives have been ruined? How many people have worked hard all their lives, saving responsibly for their old age, but now face retirement with savings that pay little or no interest and/or share portfolios that are worth less than their original purchase price?

The reward for Al Qaeda, following its attacks, has been a sustained onslaught from the combined military of a multitude of nations.  The rights and wrongs of these actions and the overall strategy in Afghanistan are not the issue here.  The point is that western Governments have readily embarked on a multi-billion pound military action to pursue those who tried, but failed, to bring down the West.  The apparent rewards for the cheiftans behind the banking and finance industries are multi-million pound bonuses, severance packages and pension pots, with no action being taken against any of those responsible and many actually finding cozy, well-paid positions nessled up nice and close to the Government.  Only today (17th March), we learn that Sir Fred Goodwin is entitled to ANOTHER £3,000,000 on top of his already ludicrous pension pot.  How come these enormous amounts of money are only now becoming known? Has no one in our inept and useless Government thought to check ALL the figures yet?

Perhaps it’s time that those who caused and allowed the banking system to become so bloated with festering assets and attitudes should be treated with a similar degree of “extreme prejudice” as Al Qaeda.  To allow these people to have and continue to benefit from their poor judgement, excessive greed and inept leadership is ludicrous in the extreme and insults the vast majority of individuals who will inevitably bear the final costs.

Sir Fred Goodwin’s pension value keeps on climbing - “over £700,000 per annum for life” is the latest I’ve heard.  Apparently, this may prove to be impossible to prevent due to his contract.  Surely the harm done to the bank during his tenure of the hot seat breaches any sensible contract of employment.  Any normal member of the public who had failed so dismally would be lucky to leave with a month’s salary in their back pocket.  If the pension allocation would have been smaller if he had been sacked, he should have been sacked!

One alternative approach to Sir Fred and the other banking and finance whiz-kids, who have been taking multi-million pound bonuses for years, might be to mention the possibility of an in depth investigation of the accuracy of the accounts upon which their bonuses were calculated.  The recent collapse of the entire banking system proves that many assets held by the banks weren’t worth a fraction of their supposed value.  In this context, the accounts produced were false and misleading, whether by intention or not.  If the senior banking and finance executives are shown to have profited from inaccurate accounting, their assets would become liable for seizure.

These individuals, who can hardly be described as on the breadline, might prefer to pay significant proportions of their bonuses from the last few years into an emergency fund.  This could then be used to save some of the worst affected families from the harm caused by the greed culture that pervaded the finance system.  Priority could be given to those who, due to age, disability or other issues, have little chance of rebuilding their financial situation from scratch.  A few million pounds could help prevent 100 families losing their homes for the want of a few tens of thousands; a few tens of millions would bring similar help to 1000 families.  This wouldn’t solve the whole problem, but at least it would show willing, reduce the financial gain for those who contributed to the current global turmoil and save some of the poorest families from abject financial ruin that they may never escape without such helpcounting,.

As if we needed proof of the bare-faced arrogance and greed of the senior bankers behind the current financial crisis, Sir Fred Goodwin gives us more than we could have hoped for.  Having sat at the helm of the Royal Bank of Scotland (RBS) as it ploughed merrily towards the rocks, this 50-year-old knight of the realm can retire on a pension of nearly three-quarters of a million pounds a year. Sir Fred Goodwin has no qualifications in economics or banking.  Terry Wogan is more qualified in the field (many thanks to Private Eye and its reader William McHugh) and so are the vast majority of the former employees of RBS who are now unemployed.  Investors and shareholders in RBS have seen their savings, investments and pensions destroyed through the misguided policies enacted under Sir Fred’s inept captaincy.

When he was allowed to “take early retirement” last October, he magnanimously gave up his right to up to 15 months’ salary (approximately £1,300,000) and was praised by Alistair Darling for “doing the right thing”. Normal people would at best get one month’s paid notice if their work was found to be as flawed as Sir Fred’s leadership.  However, he accepted the addition of around £8,000,000 to his pension pot, taking it to around £16,000,000, ensuring he would receive £693,000 every year until he dies.  He is 50 now, so, if he lives to 80, he will get £20,800,000.  If he makes it to 100, he’ll get £34,700,000.

This is a ridiculous amount of money for any man to be paid for digging the garden, especially if his actions help bring about the financial ruin of so many.  It’s not as if he needs the money.  In the last year before the RBS collapse he received a total of £4,200,000, including a bonus of £2,860,000.  Surely the bonus he was paid was based on inaccurate accounting as many of the assets held were worth virtually nothing.   He also leaves with 2,530,000 shares in RBS, although these are now worth considerably less than he expected; Just ask any RBS shareholder how much they have been devalued! If Sir Fred was accepting bonus payments based on company profits calculated from inaccurate or misleading accounts, perhaps there may be some grounds for legal action and recovery of his assets.  Sir Fred Goodwin received his knighthood, on the suggestion of then Prime Minister Tony Blair, for services to the banking industry.  It would seem only reasonable for him to be stripped of his title in light of the true nature of his service to the banking industry and the the thousands who are now suffering in his wake.

This whole fiasco could have been averted, if only we hadn’t got such an inept Government.  It is all well and good making noises about taking legal action to block the pension payments, but Alistair Darling and, presumably, Gordon Brown could and should have stepped in to ensure Sir Fred would not profit further from his time running RBS from the outset.  Apparently, it was believed that Sir Fred’s entitlements were legally binding.  Well they should have read or got someone to read the small print.  When the reins of power are held by such greedy financiers, devoid of any conscience and self-interested politicians of such ineptitude, what chance do the little people stand.

The increasing number of stories mentioning “Quantitative Easing” seems to indicate that this drastic measure by the Bank of England is imminent. Quantitative Easing basically involves the Bank of England (BoE) making more money available, essentially printing more notes!  The “experts” say it’s more complicated than that and I’m sure it is. However, the net effect will be to pump more pounds into the system. My knowledge of historical economics is a little thin, but I seem to recall that similar strategies were used in Germany, Italy and Japan during the 20th Century and that the general effect has been to promote high levels of inflation.  The “experts” tell us that the issue of additional funds from the BoE will be controlled so as to prevent possible run away inflation, but how much faith should we or do we have left in the experts from the financial sector?

It strikes me that a simple, basic law of economics dictates that Quantitative Easing will cause more problems that it will solve.  The law of supply and demand dictates that the more scarce an item or commodity is the higher value it will command.  Conversely, when the supply of a commodity is increased, its value will decrease.  OPEC is regularly (although lately unsuccessfully) manipulating the price of oil by restricting or increasing production.  If the inherent value of the pounds in our pockets is decreased, the price of our food, fuel and other goods will increase in terms of the number of pounds needed to buy them.  This is inflation.  If the inherent value of the British currency decreases relative to foreign currencies, mainly the US$ and the Euro, the costs of importing goods and materials will increase.  This will also drive up inflation, but will also increase the cost of manufacturing in the UK putting more jobs and businesses at risk.

The traditional mechanism employed by the BoE to restrict inflation is an increase in the Base Rate, so, if the inflation rate does start to increase, we can expect the Base Rate to go up nearly as quickly as it was brought down.  However, under these circumstances, I guarantee that the High Street Banks’ reluctance to follow the BoE figure will be notably absent.  Furthermore, there will be no cap or collar to restrict the amount of interest mortgage holders will subjected to.  The Government has made a lot of the arrangement made with banks to allow borrowers at least six months of deferred payments on their mortgages before action is taken.  Woe betide anyone who has six months arrears on their account if interest rates reach the 15% or so seen in the late 1980s.

Through all this we must remember that this whole crisis was started by the greed of bankers and financiers and the incompetence of “light-touch” regulation by Government.  The BoE has tried to ease the crisis by lowering its Base Rate and the taxpayer has pumped money and guarantees at the High Street Banks, but they have failed to pass on the available funds or pass on all of the interest rate cuts.  This is why the strategies employed by the BoE and our Government have failed to ease the slump into recession, resulting in the possibility that Quantitative Easing may be upon us.  The continued greed and selfishness of the banks, coupled with the Government’s continued reluctance to impose regulation on them, may soon lead to actions being taken that will do financial harm to the people of the UK and the country as a whole for decades, even generations.

There is talk of Britain’s National Debt reaching one trillion pounds.  That is £1,000,000,000,000 or £16,667 for every man, woman and child in the UK.  So in our house we owe nearly as much through the Government as we do on our mortgage!  Thanks Gordon!

We are told that “light touch regulation” and large bonuses were and still are essential to the UK economy due to the taxes raised.  Between 1997 and 2007, the tax raised from the Financial Sector totalled £85 billion pounds, but the officially predicted increase in Government debt due the financial crisis is £250 billion.  Furthermore, earlier this week the CBI announced that the true cost would be at least £100 billion more than the official estimate. It would be nice to know how many billions were paid out in bonuses by the Financial Sector between 1997 and 2007!

A few weeks ago the Government announced the go-ahead for a third runway for Heathrow, with construction expected to start in 2015. Our beloved Government have pushed their plans through without any thought for local residents, the environment or democratic process. It only takes a modicum of cynicism to think it was hoped the announcement might have distracted from the attempt to slip amendments to the Freedom of Information Act through “under the radar” (see January 21st post).  They tried to justify the multi-billion pound project (and its bound to cost more than they estimate now) by highlighting the creation of jobs during construction, in operation and within the service industries locally. However, if construction doesn’t begin until 2015, the jobs will have little relevance to our current employment woes.  He have to hope that the three million plus unemployed predicted for the end of 2009 won’t have to wait six years for a job.  It would also seem from the announcement that the construction project may be handed to a Spanish company, so “British jobs for British workers” seems to be absent once again.  Why would we even consider handing billions of pounds and hundreds of jobs to the Spanish?

The whole project displays yet another example of New Labour’s inability to develop a cohesive policy and its contempt for the poor and rural communities of the UK.  Most people in the UK never fly, so the construction of another runway will only benefit the small proportion that do fly to or from Heathrow. The vast majority of people use cars for transport and, given the strict targets for carbon emissions reductions, any increase in air traffic will require a disproportionate reduction in road traffic.  The Government’s mechanism for encouraging a decrease in car usage is to increase the price of petrol, so we can expect the duty charged to escalate significantly in coming years.  In urban areas, where Public Transport may be a realistic alternative, this policy may be fair and effective.  However, in rural communities, Public Transport is frequently close to useless.  People in such areas will have to carry on using their cars, paying ever increasing prices for the petrol.  Thus, those in rural communities, where levels of income are considerably lower than the National average, will pay a carbon surcharge to support the flying habits of the better off.

With regard to today’s announcement of increased security measures introduced by HSBC, I would like to recount an event only 12 months ago. My wife and I were at a hotel in Birmingham and chose to eat at the restaurant. My wife attempted to pay using her HSBC Mastercard, but the transaction was refused. On closer inspection, we found that my wife had brought an out-of-date card, so I paid using cash. When my wife’s card statement arrived at the beginning of February, we were surprised to find that she had been charged for the meal.

We immediately telephoned the bank to point out the error and were told to contact the hotel for a refund. We did so, but were told by their accounts department that they had a refusal code from Card Services which confirmed that they hadn’t been paid by HSBC. This was the first cycle in a wild goose chase that continued until July; every month’s statement arrived with interest being charged and payments being taken from our joint account. When the same happened in July, the sixth month with the erroneous transaction on it, we were a little more aggressive with the bank and finally managed to speak to someone with more authority. We were then told that, as the 118 day time limit had expired, we would not be able to claim a refund.

We immediately telephoned the Ombudsman and outlined the situation. We were told to collect together all relevant paperwork and to contact the hotel for written details of the transaction refusal. However, within 48 hours, we received a letter from the bank informing us that they would refund the original amount of the transaction. Given that it would have been impossible for additional evidence to have been sent to the bank, all the relevant information must have been on their systems. Why had it taken the involvement of the Ombudsman before they actually looked at the evidence? Even when they finally settled the dispute by paying £40 to cover the costs of calls and interest charged, they claimed to be only doing so out of their generosity as the 118 day deadline had expired before we called the bank. However, in the same letter, the Customer Resolution Officer mentions the “first point of contact in February”.

Although the £40 payment may have covered the direct costs of their error, there was no compensation for the lost time or the stress and inconvenience of the prolonged dispute. The HSBC happily charges £25 per day if you are over your overdraft limit when this incurs them no additional costs. Why, when they are clearly and by their own eventual admission in error, do they consider their customers unworthy of any compensation?
This sequence of events raises a few issues, especially in light of the new security process which will inevitably result in more refused, genuine transactions:

1. Will the HSBC ensure that they will handle errors such as I describe above more honestly, efficiently and courteously? Failure to raise a transaction query at the first point of contact, as in our case, will result in customers being charged for goods and services they will have already had to pay for by other means.

2. Are they aware that erroneously refusing transactions will have considerable effects on their customers and will they adequately compensate for any financial and logistical costs that their customers may incur? As customers would be refunded for any fraudulent transactions on their card anyway, these new measures will not save customers money. Only the bank will gain financially from this new system and it would be rather unfair to make customers lose out as a consequence.

3. Will the onus on customers to detect, report and resolve disputes within the current 118 days limit still be so stringently applied? Will every dispute require the involvement of the Ombudsman before being resolved?

Other HSBC customers may like to be made aware that the HSBC is capable of charging their customers for refused transactions and has shown itself to be reluctant to rectify any errors.

So, according to John Varley, head of Barclays Bank, there is little, if any, chance of banks increasing the availability of credit to consumers and companies for at least 12 months, possibly 2 years!  Is it me or didn’t we, the taxpayers, supply the banks with billions of pounds to encourage them to do so NOW!  If the banks are unwilling to play their part in helping the recovery, we should take back the money and support they have been given.

Mr Varley also states that his industry should apologise for the failure of the economy and was going through a “public relations crisis”. He said, “We have to have a banking industry in which consumers have trust and in some cases that trust has broken down.” He goes on to say that “the industry should be self-confident about recreating that trust through time?’ I do feel that, but it starts by saying sorry. It starts by admitting things went wrong.”

In that case, try rebuilding the trust by going the extra mile to help, not perpetuate the problem!!!

The whole VAT reduction is clearly nothing other a stunt. The news was full of “two-and-half percent price cut stories”, usually pointing out how insignificant the reduction will be. Unfortunately, no one was checking their mathematics: the actual price reduction, assuming the whole VAT saving is passed on to the customer, will be only 2.12765%! Saving barely more than £20 on a £1000 purchase will be absolutely pointless, especially to low income families who could only make purchases with now unavailable (and unadvisable) credit! The reduction in VAT rate from 17.5% to 15% will have no affect whatsoever on our household budget: All of our income is spent on household bills, children’s clothes and food. We will gain nothing, but will end up paying for the privilege in years to come. The one regular purchase we make, through which we could have benefited, is petrol, but the cut in VAT is simply replaced by an increase in duty.

Was Mr Darling asleep while the increasing price of petrol and diesel exacerbated the effects of the credit/banking crisis by driving inflation way above Mr Brown’s former Holy Grail of 2%? We really could do with the price of transport coming down, especially in rural areas with completely inadequate public transport systems. The price of crude oil has come down by up to 75%; the price of petrol at the pump has come down by around 25%. Someone is doing rather well out of it already and it isn’t the consumers!

Like many/most people with variable rate or “tracker” mortgages, I believed that the rate of interest on our mortgage was something related to the Bank of England Base Rate. For those with fixed rate mortgages, the link is insignificant until the period of the fixed rate ends and a new rate is fixed. However, those with variable rate or tracker mortgages generally expect the rate they are charged to relate to the Base Rate. Sure enough, any increase in rate announced by the Bank of England (BoE) is rapidly followed by an increase in the mortgage rate charged and, therefore, the repayments taken. However, the recent “emergency” drops in Base Rate have taught us a rather different picture.

After the first 0.5% rate reduction announced in October, we were all told about LIBOR (London Interbank Offered Rate); the rate at which banks lend money to each other. This figure is determined by a group of 16 of the major high street and other banks, without any input from the BoE, government or any agency with any interest other than the profits of the self-same banks. Historically the LIBOR rate has been very close to the Base Rate, usually only about 0.2% higher than the BoE rate. However, in the midst of the worst financial crisis in over a century, caused largely by these banks, the LIBOR rate had not followed the Base Rate.

After the BoE announced the 0.5% rate cut in October, the LIBOR didn’t shift at all and the massive 1.5% cut made in November was, initially, met with the same complete lack of response. The banking organisations explained that, given the enormity of the shift in Base Rate, they would have to take time to consider their response. Such a considered response would make sense after small shifts in Base Rate. However, large changes such as those announced in this last quarter of 2008, surely indicate a wholesale change in financial markets and require immediate and unequivocal action.

December sees yet another 1% slashed from the Base Rate, now down to its lowest since 1951 at 2%. Many analysts had been anticipating an even larger drop, which could have resulted in the lowest rate in the 300+ year history of the Bank of England. Apparently, the previous reductions are not having the desired effects. Not surprising if little of the benefits are being passed on to consumers. Two observations might give further indications as the greed of our banks:
Will the latest Base Rate slash translate into similar cuts in mortgage costs to households across Britain?
When this crisis starts to resolve itself, how quickly will the LIBOR rate and the costs of our mortgages start tracking back up with the Base Rate as the latter inevitably increases to prevent run away growth and inflation?

More thoughts:
Those who speak against forcing banks to pass on the rates, believing that as commercial enterprises in a free market they should be left to run free of intervention. Wrong: This is not a free market! Mortgage payers are hardly free to take their business elsewhere (mainly because the banks are clinging on too their/our money), so there is no competition and so no incentive to give fair deals to mortgage payers.

Some banks are now moving their rates down – I’m starting a table who changes, by how much and when. I’ll post ASAP! Many are now mentioning “collars” – rates below which their lending rate will not fall no matter what the Base Rate does. Was there any such cap on upper limits when the rates went up to 15% in the early 1990s. I think not!