Citigroup aren’t fit to give advice on banking never mind energy policy

One of the main critics of government investment in renewable energy in Scotland – the Citigroup investment bank – failed to predict the financial crisis, was one of the four banks most involved in and hardest hit by the sub-prime mortgage crisis – and invests heavily in tar sands, oil and coal (1). Given it’s inability to know what it should invest in itself in it’s own area of expertise – banking – why should anyone accept Citigroup as experts in an entirely separate area – energy policy?

The New York Times website reports that Citigroup required not one but three government bail-outs in the US, totalling $45 billion. The US Securities and Exchanges commission also charged Citigroup with telling investors it had invested only $13 billion in subprime mortgages, when the real figure was $50 billion (2).

This makes me less inclined to take their advice on anything. These are bankers who can’t run a bank and lie to investors, offering advice (with likely ulterior motives) on energy policy – something they have no expertise in.

Their other ulterior motive is likely to be their own heavy investment in coal, oil and tar sands compared to a relatively tiny stake in renewable. The Rainforest Action Network found that in 2010 Citigroup invested $34 billion in the former and less than 2% of that amount in renewables , including heavy investments in tar sand projects in Canada (3).

It could well be that some of the investment banks who are writing reports praising the Scottish government’s renewable energy targets also have ulterior motives (perhaps having invested in renewable themselves) and wanting to promote them as a result.

There are other more reputable groups criticising the Scottish government’s renewable energy target of 100% by 2020 as being unrealistic and likely to increase fuel poverty – like the Institution of Mechanical Engineers - but I still wouldn’t trust a company with a record like Citigroup’s to advise me on picking my nose never mind on energy policy.

(1) = CNN 15 Oct 2007 ‘Citi profits tumble as execs scramble’, http://money.cnn.com/2007/10/15/news/companies/citigroup_earnings/index.htm , ‘Citigroup is among a handful of banks that have been hard hit by this summer's subprime mortgage crisis. Three other banks - JPMorgan Chase (Charts, Fortune 500), Washington Mutual (Charts, Fortune 500) and Bank of America (Charts, Fortune 500) - are scheduled to report quarterly results this week.’

(2) = NYT.com Business 19 Oct 2011 > Companies > Citigroup Inc, http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html

(3) = Dirty Oil Sands blog 11 Mar 2011 ‘Citi needs an intervention’ By Brant Olson | Rainforest Action Network, http://dirtyoilsands.org/blog/article/citi_needs_an_intervention

(4) = Institution of Mechanical Engineers ‘Scottish Energy 2020? A target too far?’,http://www.imeche.org/Scottish-Energy-2020?WT.mc_id=HP_110661

Private creditors and banks' refusal to write down Greek debts likely to lead to Argentina style default

The Guardian has reported that German Chancellor Angela Merkel tried to get Greece’s private sector creditors, including the banks, to forgive some of Greece’s debts to them as part of a bail-out package for the Greek government. Some IMF and other economists argued for the same thing (1) – (2). The banks and other private creditors refused (3).

If they continue in their greed in refusing to give up any of the money owed to them Greece will most likely default on it’s debts and they will get not one penny.

French President Nicholas Sarkozy has claimed that leaving the Euro is not an option for either France or Greece as if they did their debts would still be denominated in Euros, the Greek and French currency would be worth far less than 1 euro per unit of currency and so their debt would effectively increase (4).

However if Greece has defaulted on all it’s debts this would not be a problem for them. It might affect their balance of payments negatively (i.e increase the value of what they import compared to what they export) but compared to the harsh conditions set for bail-out and the massive size of Greece’s debts this might seem like a minor problem.

The IMF and Greece’s governmental creditors in the EU have set the usual conditions of privatisation of public services and assets, sacking of public sector employees and cuts in welfare payments (5).

The privatisations demanded include the privatisation of water, which will price many of the poorest out of being able to afford water at all. Privatisation of water supplies led to cholera epidemics when it was done in South Africa as many people couldn’t afford piped water any more; and to riots in Cochabamba in Bolivia after the foreign water firms who bought up Bolivian water infrastructure started charging for the entire cost of new investments by raising prices in advance to cover the whole cost of major investments up front (6)  - (9).

They also include electricity (10). This would remove the revenues of one of the few public services that could turn a profit from government.

If the Greek government agrees to all this the likelihood is that the country will be tipped into a second even worse ‘double dip’ recession. Given that and massive public opposition to the rescue package conditions, since most Greeks don’t see why they should pay for the decisions of bankers and politicians who caused the crisis through lobbying for and implementing deregulation of the financial sector across most of the developed world, it seems likely the Greek government will either have to default, partially or entirely, on it’s debts, or else it will fall and whatever government replaces it will be forced to.

The IMF and EU conditions on the bail out are not addressing the main cause of Greece's debts either. This is tax avoidance through corruption. Many people and companies who can afford to, bribe officials or politicians to allow them to evade taxes altogether, resulting in the gap between tax revenues and government expenditure and placing the tax burden on those who can least afford it - the people and small businesses who can't afford to pay bribes (along with those who could but decide it would be wrong to) (11).

Defaulting on a large percentage of their other foreign debts did not work out badly for Argentina, in fact leading to it finally getting out of a situation of mass unemployment and massive debt. The debt default and repudiation of IMF conditions was followed by rapid growth which was interrupted briefly in 2009 by a recession caused by the global financial crisis, followed by more rapid growth. (The table on this link shows Argentina’s growth rate since 2002 if you change the start year to 2002.)   (12) – (14).

 Argentina did have help from Venezuela’s government, which had a surplus when oil prices were high due to the Iraq and Afghanistan wars and tension over whether there’d be war with Iran. Venezuela funded Argentina paying off it’s debts to the IMF. Foreign creditors were then forced to accept 25% of the money initially owed to them (15) – (16).

As a result last year Argentina was  able to pay off  it’s debts at a rate equivalent to creditors getting 51% of what was initially owed to them despite suffering a recession due to the global financial crisis and having to default on debt payments again in 2009 (17) – (18).

Development economist Ha Joon Chang has pointed out that many developing countries have defaulted on their debts without disaster ensuing in the past and they were rapidly able to get new loans from new investors (19).

The IMF is usually far more concerned with what is good for foreign creditors than what’s good for the people of countries it’s imposing conditions on for loans and grants, because it’s funded by the richest countries and they appoint it’s head.

 

(1) = guardian.co.uk 17 Jun 2011 ‘Germany climbs down over Greece bailout demands’,http://www.guardian.co.uk/world/2011/jun/17/greece-bailout-germany-private-banks

(2) = guardian.co.uk 03 Jun 2011 ‘Anger mounts in Greece as eurozone ministers edge nearer to bailout deal’,http://www.guardian.co.uk/business/2011/jun/03/greece-debt-crisis-second-bailout-talks

(3) = See (1) above

(4) = EU business 27 Jun 2011 ‘Sarkozy says France will propose new plan to aid Greece’, http://www.reuters.com/video/2011/06/27/greece-debates-new-austerity-plan?videoId=216516632

(5) = Reuters 14 May 2011 ‘EU,IMF pushing Greece to fully privatise utilities – reports’,http://www.reuters.com/article/2011/05/14/greece-economy-idUSLDE74D02920110514

(6) = See (5) above

(7) = J. Pauw (2003)‘The politics of underdevelopment: metered to death-how a water experiment caused riots and a cholera epidemic’ in  Int J Health Serv. 2003;33(4):819-30. http://www.ncbi.nlm.nih.gov/pubmed/14758861

(8) = Water Justice 19 Oct 2004 ‘The UK Government and Water Privatisation’,http://www.waterjustice.org/analysis.php?componentID=2&articleID=83

(9) = The Nation 28 Jan 2005 ‘The Politics of Water in Bolivia’,  http://www.thenation.com/article/politics-water-bolivia

(10) = See (5) above

(11) = BBC Radio 4, 11 Feb 2010 'From Our Own Correspondent - No Tax Please we're Greek', http://news.bbc.co.uk/1/hi/programmes/from_our_own_correspondent/8509244.stm

(12) = BBC News 21 Nov 2002 ‘Crisis-hit Argentina defaults on debt’, http://news.bbc.co.uk/1/hi/business/2471617.stm

(13) = Guardian 02 Apr 2009 ‘Argentina heads for return of debt default that 'left it out of the world' seven years ago’, http://www.guardian.co.uk/world/2009/apr/02/argentina-debts-economic-crisis

(14) = Trading Economics -  ‘Argentina GDP Growth rate’, http://www.tradingeconomics.com/argentina/gdp-growth

(15) = guardian.co.uk 19 Dec 2005 ‘Goodbye and Good Riddance’,http://www.guardian.co.uk/business/2005/dec/19/argentina.internationalnews

(16) = See (11) above

(17) = Guardian.co.uk 16 Apr 2010 ‘Argentina to repay 2001 debt as Greece struggles to avoid default’,http://www.guardian.co.uk/business/2010/apr/16/argentina-to-repay-2001-debt

(18) = See (12) above

(19) = Ha Joon Chang (2010) ‘23 Things they don’t tell you about capitalism’, Allen Lane, 2010

Tobin Tax campaign returns as Robin Hood Tax

An expanded version of the Tobin tax first proposed by Nobel winning economist the late James Tobin in 1972 has been renamed the Robin Hood tax and already has the support of the British Prime Minister, the German Chancellor and the French President. It also has the support of hundreds of economists.

Another Nobel winner, American economist Paul Krugman; and former World Bank economist (and now a critic of it) Joseph Stiglitz both back some kind of Tobin tax. Oxfam, the World Development Movement and many other charities and trade unions on both sides of the Atlantic and the Channel back the Robin Hood tax.

The tax would be on large scale currency transactions by banks and other financial institutions, most of which are speculative (i.e basically gambling on a huge scale). So it wouldn’t affect buying some currency for a holiday for instance. The proposed rate is about 0.05% - a very low rate but enough to bring in considerable tax revenues given the vast size of many currency transactions. (The ‘Robin Hood Tax’ covers some categories of transaction not covered by the original Tobin tax – perhaps because new forms of currency and stock market speculation have developed since the 1970s)

The tax would discourage currency speculation, like the current speculative trading on the Euro or the run on the pound on Black Wednesday in the 1990s, by making it less profitable. At the same time it would generate large amounts of tax from big banks, hedge funds and other large firms which would mean first that if banks went under again the tax would mean they would be paying for their own bail-outs – and it would leave plenty left over to spend on helping the poorest, education and protecting the environment we all rely on for our survival.

The Obama government has been being lobbied heavily by the hedge funds, the banks and their representatives in ‘free market’ (read oligopoly) ideologue groups like ‘The Heritage Foundation’.

A Mr. Duvet (was that name chosen to sound warm and safe during cold weather?) was a spokesman for the Heritage Foundation on the UK’s Channel 4 News a few months ago. He explained that the 0.05% tax (half a per cent) was more than the banks and the hedge funds (massive gambling outfits) could bear. (After all they’d only just been bailed out for billions). He went on to suggest a VAT tax be introduced in the US, presumably on the grounds that the Heritage Foundation couldn’t give a toss about the effect of a tax with no relation to income on the vast majority of people.

On 8th November 2009 Obama’s Finance Secretary Timothy Geithner rejected the Tobin tax saying “A day-by-day financial transaction tax is not something we are prepared to support” and that the economy required a stimulus rather than more taxes.

Obama’s falling approval rating in the US and the Democrat’s loss of Ted Kennedy’s seat to a Fox News and Tea-Party backed Republican may change that yet though. Immediately after the loss of that seat Obama announced that banks taking deposit accounts would not be allowed to continue hedge funds and other speculative operations – they would have to become separate firms. He may yet be open to being persuaded that a Tobin or ‘Robin Hood’ tax won’t do his poll ratings, his election results or his prospects of reducing the US budget deficit any harm.

To read more or to sign up as a supporter of the Robin Hood tax go here.

Cameron's speech pretends 'big government' caused public debt, when de-regulation has caused private debts, bailed out by the public sector

David Cameron’s speech on the economy presents public debt as if it’s the cause of the economic crisis, when the actual cause is private debt, created by the same de-regulated ‘enterprise economy’ which he offers as a solution to the crisis (1).

Most public debt is not the result of ‘big government’ over-spending on the public sector, but of big companies donating to political parties and getting massive subsidies from the public sector as a result.

The most notorious example is of course bailing out debts run up by private banks due to a mixture of deregulation by liberals and conservatives alike on both sides of the Atlantic and an attempt by the Clinton administration to provide housing for the poorest without public spending or public housing , by requiring banks to fund it. The banks refused to accept a loss on this and played pass the parcel with the debt instead (2).

Much of the rest of the public debt, from PFIs and PPPs to Export Credit Guarantees for British Aerospace, is also due to government subsidies to big private companies under both Conservative and Labour governments.

Cameron claimed he would end the “undermining of our public sector professionals”, while simultaneously instituting a public sector pay freeze and cuts.

This continues the strange belief that all money going to the public sector impoverishes the private sector. In fact private firms would struggle to operate without education, transport and law enforcement; and cutting public sector pay and jobs is likely to lead to knock on job losses in the private sector.

If we were living under a vast state economy that allowed no private firms to compete he might have a point. The reverse has been true under Labour and Conservatives though - a few huge private firms in each sector buy massive public subsidies with relatively small donations to party funds.

The last time the Conservatives won an election claiming it would reduce unemployment caused by Labour was 1979. Thatcher’s government rapidly increased unemployment to over 3 million.

Sources

(1) = Conservative Party 02 Jan 2010 ‘Speech, David Cameron: We can't go on like this’,
http://www.conservatives.com/News/Speeches/2010/01/David_Cameron_We_cant_go_on_like_this.aspx

(2) = NYT 30 Sep 1999 ‘Fannie Mae Eases Credit To Aid Mortgage Lending’,
http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html