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Notes from Africa 2: Kenya

September 27, 2021

A series of notes from the world’s developmental frontier…

In logistical terms, Kenya is the most important country in East Africa. British colonial investment in the port of Mombasa and the rail line – dubbed the ‘lunatic line’ because of its cost and ambition — from Mombasa to Kisumu on Lake Victoria, and later to Kampala, means Kenya has long dominated trade access to Uganda, Rwanda, Burundi and the eastern portion of the Democratic Republic of Congo (DRC). Mombasa also handles a portion of Tanzania’s international trade. This logistical significance, the possibility that Kenya could become a manufacturing centre for the region, and the existence of fertile land along the coast, in the Western Highlands to the north-west of Nairobi, and around Lake Victoria, have long engendered optimism about development prospects.

From independence in 1963 to 1980, Kenyan growth averaged an impressive 7.1 percent. However, the start of a series of fiscal crises and World Bank and International Monetary Fund structural adjustment programmes in 1980 saw average growth fall to 2.9 percent from 1980 to 2003. Since 2004, growth rebounded to an annual average 5.4 percent. In each of these periods, Kenya was comfortably ahead of the overall sub-Saharan growth rate. With nominal GDP per capita of US$2,075 in 2020, Kenyans are the most prosperous citizens among major East African economies. The poverty rate, on the World Bank’s US1.90-per-day measure, fell from 44 percent in 2005 to 37 percent in 2016. Ostensibly the most impressive feat in the long run has been educational gains. In 1967, Kenyans had an average of just 1.7 years of education; today the figure is 10.7 years. Unfortunately, testing suggests that much of the education is of low quality; according to the World Bank, 60 per cent of 19-20 year olds who have been through secondary education still fail to meet basic literacy standards.

Déjà vu colonialism all over again

What stands out most in Kenya is how little government imposed itself on the economic structure inherited from the colonial era. In agriculture, there was a significant redistribution of white settler-owned land. However, this was a response to the insurgency by landless black farmers that started in 1952 – known popularly as the Mau Mau rebellion – which drew a policy response during the colonial era. From 1954, the Swynnerton Plan supported ‘loyalist’ and generally well-to-do indigenous farmers to move into cash crops like coffee, from which they were previously barred, on consolidated and privately-owned landholdings. From 1962, on the eve of independence, the British government funded the Million Acre Settlement Scheme which purchased white settler farms and again generally favoured better-off black farmers, with typically less fertile areas allocated for ‘high-density’ settlement by poorer and landless farmers. The post-independence government of Jomo Kenyatta went along with this approach, with Kenyatta famously dismissing landless Mau Mau rebels as ‘hooligans’. This was despite strong research evidence in the late 1960s that the poorer farmers with smaller holdings, who were also given much less agricultural extension support than better-off farmers, performed better.[i]

After Kenyatta defeated and ousted a minority of progressive politicians in the late 1960s, Kenyan agricultural policy showed striking continuity with the colonial era. The major difference was that the elite of large-scale landowners was now black. The Kenyatta family itself became, and remains, one of the biggest landowners, including a vast tract of thousands of hectares that extends north-east of Nairobi towards Thika and other large farms in what were known as the White Highlands – the region scheduled by the British as a white-only farming area. The redistribution of land to a black elite, limited redistribution to ordinary Kenyans, and the growth of black cash-crop farming was enough to stabilise the rural situation after independence. Tea did particularly well and continues to account for one quarter of Kenya’s export earnings. However, government agricultural policy has been remarkably passive. The great bulk of agricultural exports, including tea, continue to be unprocessed in the absence of investment to add value locally. Only 13 percent of land with the potential for irrigation has been developed and farming remains 98 percent rain fed. And where members of the African Union have been committed for almost 20 years to spending one-tenth of their budgets on agriculture, Kenya’s leading rural research institute, Tegemeo, puts the Kenyan share – including national and local funds – at around five percent. In the past two decades, the estimated contribution of agriculture to overall growth has been higher in Ethiopia, Rwanda and Tanzania than in Kenya.

When significant developments do occur in agricultural markets, they tend – as with so much in Kenya – to be driven by elite political interests or those of particular ethnic voting blocks. Jomo Kenyatta’s successor, Daniel arap Moi, built up the National Cereals and Produce Board, which bought up surplus maize, often at above-market prices. The vast majority of the maize surplus in Kenya comes from Moi’s ethnic Kalenjin base area in the Rift Valley.[ii] Under current president Uhuru Kenyatta, a son of Jomo, the Kenyatta family business Brookside Dairy became Kenya’s dominant milk processor, buying up competitors and acquiring a market share around 45 percent. In 2020, the Kenyan government banned the importation of cheap Ugandan milk, apparently in breach of East African Community (EAC) trade agreements. According to Kenyan economist David Ndii, under the Kenyatta government since 2013, milk processing margins quadrupled, the cost of processed milk to the consumer doubled and the price paid to farmers, at its nadir, halved, although it since increased following protests. 

Plans that were not. And now China

Policy plans are sometimes announced in Kenya, but they have never proven to have implemented substance. After the fall of the Moi regime, a much-heralded Strategy for Revitalising Agriculture was announced in 2004. It delivered little before being abandoned in 2010. A grand plan of the current president promised to increase the share of manufacturing in gross domestic product (GDP) to 15 or 20 percent by 2022, with 500,000 or one million new manufacturing jobs created. Different targets appear on different pages of the presidential web site, perhaps an indication of the lack of seriousness the promise.[iii] In the event, according to World Bank data, the manufacturing share of Kenya’s GDP fell from 10.7 percent in 2013, Uhuru Kenyatta’s first year of office, to 7.5 percent in 2019, a record low in the independence era. One, real-world indicator of the state of industrial policy in Kenya is a sprawling, 2,000 hectare dustbowl with a few small buildings 60 kilometres south of Nairobi. This is ‘Konza Technopolis’, a high-tech production centre and suburb announced in 2008, with a master plan approved in 2013. Today, the only real evidence of progress at Konza is a web site with various digital images of what was hoped for.[iv]

The Kenyan government’s inability to deliver on its economic policy agendas may have contributed to its interest in infrastructure projects outsourced to Chinese firms. A journey along the country’s logistical spine, from Mombasa via Nairobi to Eldoret, reveals a large number of Chinese road projects currently under way. Around Mombasa, there are several operational sites including the Dongo Kundu southern bypass with four bridges that will connect the route south to Tanzania to the main Nairobi road. On the south side of Nairobi, the first phase of a planned expressway to Mombasa, currently contracted as far as Machakos 40 km from Nairobi, is under construction. Within the city, there are several other projects. In the north-west of the capital, along Waiyaki Way, the 27km Nairobi Expressway, some of which is elevated, will connect the north-west of the city to the international airport in the east; construction is at full throttle. A second route north-west out of Nairobi via Ruaka and Ndenderu has a Chinese financed and constructed road in progress. Around Nairobi, there are several more ongoing Chinese road construction projects.

Three hundred kilometres north of Mombasa, at Manda Bay near Lamu, the Kenyan government engaged China Communication Construction Company (CCCC) in a US$480m contract to build the first three of 32 planned berths at a new port it claims opened a first berth in May. The facility, in a remote part of the country, is part of the grandiose Lamu Port-South Sudan-Ethiopia Transport Corridor (LAPSSET), designed to link the economies of three countries to Lamu, which requires large additional investments in road networks. In April 2021, the government in Nairobi announced it has signed with CCCC for 453km of highway construction, including a 257km link north-west from Lamu to Garissa, at a cost of US$166m.

Much the biggest, and most controversial, Chinese project is Kenya’s new Standard Gauge Railway (SGR). The link from Mombasa to Nairobi cost a reported US$3.6bn and an extension to Naivasha, 110km north-west of Nairobi, a further US$1.5bn. The logic of the investment was to reduce freight costs, and accelerate freight times, all along the key logistical route through Kenya to Uganda and the rest of central Africa. However, this does not seem, so far, to have happened. While shipping costs per container on the Mombasa to Nairobi section, which opened to freight in 2018, are similar to road haulage, the addition of depot charges and the cost of moving containers from the railway to final destinations increased costs by up to 50 percent. China’s Exim Bank terms for the loans for the line required guarantees of minimum container volumes which in turn led the Kenyan government to compel all inbound containers destined for the Nairobi region to use the rail service. Despite this, the line has posted substantial losses – US$200m (KSh21.7bn) from inception to May 2020 according to the Ministry of Transport. In 2019, China decided not to provide the further US$4.9bn loans required to complete the connection to Uganda.

It remains unclear what the outcome of the rail project will be. At Naivasha, an Inland Container Depot has been constructed for container transfer to trucks, but is not yet operational. At the same time, a 24km link line is being built by Chinese contractors to connect the SGR to the old, colonial metre-gauge railway (MGR), which Chinese firms have been contracted, along with the Kenyan military, to refurbish. At one site in Eldoret in March, a small team of Chinese was overseeing the reshaping of colonial-era railway sleepers with an imported stamping machine. The Ugandan government announced in 2021 that it will also refurbish its stretch of the historic MGR. What this means for freight costs, however, is impossible to say. Containers will have to be moved between rail bogies on different gauge tracks. The temptation for the Kenyan government to force containers to use the two-gauge route in order to recoup its vast investment may be difficult to resist, leading to monopoly pricing. But if freight costs do not fall across Kenya and into central Africa, the economic logic of the rail project is defeated. Kenya already runs a trade deficit of around six percent of GDP, and higher freight costs will only increase the export shortfall. The World Bank’s 2013 report that said the SGR did not make economic sense appears to be vindicated.[v]

Debts up, revenues down

According to the China Africa Research Initiative (CARI) of Johns Hopkins university, Kenya is one of the top five African countries contributing to revenues of Chinese engineering and construction companies, along with Algeria, Nigeria, Egypt and Angola. CARI identified 43 Chinese loans to Kenya, totalling US$9.2bn, by the end of 2020; at US$6.1bn, loans for transportation projects are second only to Angola. From the Kenyan perspective, the Chinese projects saw public debt as a share of GDP rise from 39 percent in 2013 to 66 percent in 2020, with an increasing share from more expensive commercial sources. According to David Ndii, half of debt is now domestic, at rates of interest over 10 percent, accounting for three-quarters of interest payments. Meanwhile, government revenue as a portion of GDP fell from 18.1 percent in 2013-14 to 16.1 percent in 2018-19. The IMF this year described Kenya as ‘at high risk of debt distress’.[vi]

The situation places great weight on Kenya’s vaunted private sector to carry the economy forward. Entrepreneurial innovation in Kenya is certainly impressive. M-Pesa (meaning ‘mobile money’), the mobile phone-based payments and lending service developed by Kenya’s Safaricom, has come to be used by more than 70 percent of the population, and expanded regionally. Kenya produces significant numbers of agile, private-sector start-ups every year. Peter Njonjo, a former Africa executive with Coca Cola, started Twiga Foods in 2014, which provides the logistics to link farmers with small-scale retailers. Unable to overcome the product quality problems of smallholder farmers in an environment of weak government support, Twiga is integrating larger-scale commercial farms in the region into its city-focused distribution network. It is a typical case of the Kenyan private sector adjusting to what is possible and Twiga has won investment from the World Bank’s private sector lending arm and Goldman Sachs. ‘The lack of government involvement has led the ecosystem to evolve in a very informal way,’ says Njonjo. The private sector’s job, he says, is to find a way through this.

Kenya should be a processing hub for farm products. Led by private sector firms, regional trade in foodstuffs is already much expanded. In March, for instance, potatoes on sale in Kenya are likely to be from Tanzania, plantains from Uganda, reflecting relatively stronger growth of regional trade in East Africa compared with West Africa. Nonetheless, the space available to the private sector in Kenya is less than the government’s rhetoric suggests. There are still more than 300 state sector firms operating in the country despite decades of World Bank and IMF-led ‘reform’ programmes — in retail, manufacturing and agri-processing sectors among others. At the same time, as a recent World Bank report observes: ‘Prominent government officials often have large private sector interests and influence public procurement and government priorities through the use of proxy companies.’[vii]

As noted, Kenya has run ahead of the average sub-Saharan growth rate for several decades. To recognise more of its potential, however, the country needs more competition and more export-focused private sector activity. However, it is difficult in the current political climate — dominated by a small number of what Kenyans term ‘royal families’ that consistently failed to frame an economic development agenda — to see this happening. Kenya, for instance, opened Export Processing Zones in the 1990s at the same time as Bangladesh; but policy implementation failings mean that today Kenyan EPZs employ around 50,000 workers versus four million in Bangladesh. The more likely trajectory for Kenya is towards another debt crisis and a new round of World Bank and IMF interventions. Before that, there will be the next Kenyan election, in 2022, and the possibility of renewed ethnic violence on which Kenyan politics all too often feeds.


[i] Leo, C. (1978). The Failure of the ‘Progressive Farmer’ in Kenya’s Million-Acre Settlement Scheme. The Journal of Modern African Studies, 16(4), 619-638. 

[ii] Poulton, C. and Kanyinga, K., 2014. The politics of revitalising agriculture in Kenya. Development Policy Review32(s2), pp.s151-s172.

[iii] See https://www.president.go.ke/enhancing-manufacturing/  and https://big4.delivery.go.ke/  The manufacturing targets were one element of an agenda called the ‘Big Four’.

[iv] See https://konza.go.ke/

[v] See https://africog.org/wp-content/uploads/2017/06/World-bank-Report-on-the-Standard-Gauge-Railway.pdf for main conclusions.

[vi] See https://www.imf.org/en/News/Articles/2021/04/02/pr2198-kenya-imf-executive-board-approves-us-billion-ecf-and-eff-arrangements

[vii] World Bank, 2020, Systematic Country Diagnostic: Kenya, World Bank, Washington: DC.

The carpet-bagger, the Etonian and the murderer

March 30, 2021

What a great story this is from the FT. It turns out that Lex Greensill, sleazebag Ozzie founder of recently collapsed Greensill Capital, former British Prime Minister ‘Brave’ Dave Cameron, and murderous Saudi tyrant-in-waiting Mohammed bin Salman went on a camping holiday together in the desert last year. It must have been tremendous fun.

More recently, Brave Dave, a highly-paid adviser (with a potential US$70 million of share options) of the delightful Lex Greensill, sent numerous text messages to the private number of British Chancellor Rishi Sunak urging him to extend special Covid loans to Greensill. Unfortunately, the phone reception in Oxfordshire is so poor that Dave has been unable to respond to journalists’ enquiries.

It is reassuring to see, in the wake of the Global Financial Crisis, that almost nothing has changed in the nexus between amoral financial services ‘professionals’ in the City of London and on Wall Street and Establishment politicians who fill their boots with the sector’s cash flows after leaving office. Greed is still good.

Also breaking since late last week is the story of Archegos Capital Management, founded by Bill Hwang, who was fined US$44m by US securities regulators in 2012 for trading on insider information about Chinese banks, but managed since then to borrow of the order of US$40 billion from global investment banks. Bill built an investment portfolio of around US$50 billion at its peak with as little as US$1 of equity for every US$8 of debt. He used derivative, total-return swap contracts as the basis for his portfolio, which meant no one could track the huge positions he was taking in the market (well done regulators — who are those mugs who said you’d learned your lesson?). Actual ownership of the stocks stayed with the prime brokerage units of the investment banks, which held them as collateral against the loans they extended to Bill.

What a great plan. The only, small oversight came with the recent sell-off of the kinds of growth stocks Bill liked to buy. When the investment banks asked Bill to put up more margin, it turned out he couldn’t or wouldn’t. Last Friday, the investment banks panicked and dumped an estimated US$20 billion of stock in a handful of firms into the market, with a predictable impact on prices. Credit Suisse (which was also a lead financier for Greensill and for the unfortunately named 2020 long-firm fraud Luckin Coffee) is headed for a hit of US$3-4bn, Nomura one of up to US$2bn.

Robert SmithArash MassoudiCynthia O’Murchu and Jim Pickard in London. 29 March 2021


Lex Greensill had penetrated the British establishment, forging close links with the country’s highest-ranking civil servants and ministers and lobbying for lucrative government contracts.

Now the Australian financier had a new sovereign client in mind, where wealth and power were more concentrated and the right relationships could transform his business: Saudi Arabia.

Before Greensill Capital collapsed this month, one of Lex Greensill’s favourite anecdotes was a camping trip he said he had taken with David Cameron and Saudi Crown Prince Mohammed bin Salman. Accompanied by the former UK prime minister, who was now his paid adviser, Greensill visited the desert with Prince Mohammed, the kingdom’s de facto leader, according to three people who heard his account of the journey. 

One of the people placed the trip during January or February 2020, shortly before the spread of coronavirus largely halted international travel. Flight records for Greensill Capital’s four private planes show a series of trips to Saudi Arabia in the first three months of last year.

A second person who heard Greensill’s account of the trip said the Australian financier explained he bonded under the night sky with the Saudi royal, commonly known as MBS, over the fact the two men had both studied law at university.

Greensill Capital declined to comment. The Saudi embassy in London declined to comment. The Financial Times has attempted to ask Cameron about the account of the desert camping trip several times, but the former prime minister has ignored the inquiries.

His role in the company’s downfall has come under growing scrutiny, after the FT revealed he lobbied former colleagues for greater access to emergency government Covid loan schemes.

Cameron, who once stood to make tens of millions of pounds from Greensill share options before the company’s collapse rendered them worthless, visited Saudi Arabia publicly in October 2019, attending the so-called “Davos in the Desert” summit in Riyadh.

The trip — a year after the murder of journalist Jamal Khashoggi by Saudi agents — was criticised at the time by Amnesty International, which said the former prime minister’s attendance would be “interpreted as showing support for the Saudi regime” despite its “appalling human rights record”.

Cameron, who charges at least £120,000 per hour for speaking engagements, frequently used Greensill’s corporate jets to travel around the world, according to several people familiar with the matter.

The FT has also seen a photograph of him aboard one of these plushly furnished aeroplanes. Flight records for one of Greensill’s aircraft show numerous trips to and from Newquay airport, which is around half an hour’s drive from Cameron’s holiday home in Cornwall. 

Greensill’s fleet of aircraft, an unusual luxury even for the largest multinational companies, came in useful during another visit to Saudi Arabia. In August 2019, SoftBank chief executive Masayoshi Son and his top lieutenant Rajeev Misra had been holding meetings in the commercial centre of Jeddah when they were invited to visit Yasir al-Rumayyan in the capital Riyadh.

Rumayyan was head of the country’s Public Investment Fund, which is in turn the largest investor in SoftBank’s $100bn Vision Fund, which has backed valuable start-ups from Uber to DoorDash.

As the men looked to change flight plans, Greensill spoke up to offer them a ride on his private jet. Some of those present were amazed the unassuming Australian had his own plane.

But Greensill, then 42, had recently cemented his status as a billionaire thanks to SoftBank’s investment in his eponymous finance company. He explained he had not one, but multiple aircraft. “We need it for clients,” one attendee recalls him explaining. “We need an air force.”

Greensill’s engagement with Saudi Arabia was multi-faceted. Last June, senior Greensill executive John Luu spoke at the “UK-Saudi Virtual Fintech Week”, an event hosted by the UK’s Department of International Trade and the British embassy in Riyadh.

The event’s marketing material touted the UK’s “progressive regulators” and Saudi Arabia’s “young and tech-savvy population”. “We are a firm that not many people have probably heard of,” Luu said at the event. “And yet, at the same time, our reach is pretty broad.”

He went on to explain that Greensill Capital was not only “part of the family” of Saudi’s PIF due to the company’s backing from SoftBank, but also that the finance firm had “just penned an agreement to become joint-venture partners” with the sovereign wealth fund. “As part of that, we’re establishing offices in Riyadh,” he added.

PIF did not respond to a request for comment. Luu, whose LinkedIn profile described his role as “spearheading Greensill’s expansion into Saudi Arabia”, also said at the event that his company had contracts with “some of the largest companies in the Kingdom”, but declined to name any of them.

The one company that seemed to be the target of a multiyear charm offensive in the country was state-controlled oil company Saudi Aramco. Greensill frequently touted that his company was in line to win a lucrative contract to offer so-called supply-chain finance to Aramco, according to people familiar with the matter.

Also known as reverse factoring, Greensill’s signature financing technique involves paying a company’s suppliers upfront at a discount and is known for its ability to flatter corporate balance sheets. The finance company never actually ended up providing any supply-chain finance to the oil company, however. Aramco, which also counts Rumayyan as its chair, declined to comment.

Greensill was also involved in some even more speculative financing proposals in Saudi Arabia. During the 2019 trip to Jeddah, SoftBank executives were examining how they could help the desert kingdom modernise the holy city of Mecca, which draws millions of visitors each year during the Islamic pilgrimage known as the hajj.

Different companies in the Vision Fund could play a role: US construction start-up Katerra to build new structures, Hong Kong artificial intelligence specialist SenseTime to offer facial recognition, while India’s Oyo could help set up hotels for visiting pilgrims. And Greensill would package all this up into investment products to finance the project.

Son at this time believed the Australian financier was capable of funding increasingly grand schemes, according to people who know the SoftBank founder. He even frequently introduced Lex Greensill by a pithy nickname: “the money guy”.

“He was part of the overall solution for a smart city for Mecca,” said a person involved in the talks. “That’s why Lex was down there. He was doing the financing.” The grand vision, again, never came to fruition.

Additional reporting by Anjli Raval

Twenty-two years old

March 1, 2013

Bradley Manning was 22 years old when he was arrested. Today he entered his plea in military court after almost three years in US military detention. His long statement was read with composure and, at face value, reflects a person who stands by the logic of what he did.

Manning’s story is well-reported in The Guardian (and this is tangentially important). This 20-minute video is a useful introduction if you are not in a mood to read, but the idea that he was mad rather than rebellious does not stand up for me.

It remains for the USG to prove that Manning endangered national security. In the court of public opinion, I do not think this will be possible.

 

More:

One way to think about what Manning did, and the significance of it, is to watch this documentary about the US dirty war in Iraq. (It builds on a celebrated New York Times magazine cover story from 2005.)

Elections in Disneyland

February 18, 2013

Only a week now and the kids are asking: ‘Who’s gonna win, daddy?’ How do I know, when the people running are larger than life itself.

 

Mickey Mouse. The original cartoon character. He’ll make you laugh. He’ll make you cry. And if you are under 20, he may well offer you cash for a quick one. Mickey has posted a late surge in the polls as many Italians conclude that no one will ever be funnier.

Ital election Mickey face

Ital election berlusconi face

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mini Mouse. Billed as a new kind of mouse, Mini turned out to be much like Mickey — all talk, talk, talk — but not nearly as funny. Mini speaks English, but who cares except the foreigners who pay Disneyland’s bills? May have to move to Brussels.

Ital election mini

Ital election monti

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goofy. Definitely funny. Appears daily in the piazza encouraging citizens to shout ‘Fuck Off’ at no one in particular. Indubitably a new kind of political animal. However a lack of facial grooming and tendency to piss on public monuments leaves the average Italian concerned he undermines the national image for form over substance in all things.

Ital election goofy

Ital election grillo red beret

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Donald Duck. What’s the problem with Disneyland? If only everyone listened to Donald, Disneyland would run fine. Donald is a well-meaning, somewhat gruff old time favourite, yet somehow never quite as funny as Mickey.

Ital election donald duck

Ital election bersani

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected outcome: Coalition of family favourites. Loads of laughs for everyone except Italians.

Ital election that's all folks

Thought food

January 31, 2013

Here is a rather powerful piece of writing – particularly the historical analysis in the first half — encouraged by The Guardian’s George Monbiot having turned 50.

It connects up to this article about Nick Clegg who, I think, fails to recognise that if the Liberal Democrat party cannot be more principled than the Labour party, then there really is no reason whatsoever for its existence.

 

Completely separately

Have I entered a parallel universe, or did I just give a speech to a large conference in the US at which these were the newspapers people were reading?

Image

A perfect 10

November 28, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There have been a few of these cock-ups in recent years. But this latest one takes the biscuit.

The People’s Daily, mouthpiece of the Communist Party of China, has reprinted a story from The Onion claiming that North Korean leader Kim Jong-un has been voted ‘sexiest man alive’.

The Associated Press explains here. Or read the same in the Washington Post. The original Onion article is here. Sadly The People’s Daily has now taken its story down.

Fit for a King

October 21, 2009

Mervyn King, governor of the Bank of England, finally comes out and tells it (more or less) like it is. Bless him. In a speech to businessmen in Edinburgh, Mr King observes that the Anglo-Saxon financial system has so far been bailed out, to the tune of trillions of dollars, with no fundamental change in the way the banking system operates. Huge bonuses will again be paid to bankers this year-end, despite the fact their earnings depend on a limitless supply of almost free taxpayer money. We give them free money, they make a profit: clever stuff.

Mr King suggests this is unfair, paraphrasing Churchill: ‘never in the field of financial endeavour has so much money been owed by so few to so many,’ he says. The solution turns out to be the same one that people like the governor figured out 80 years ago, in the wake of the Great Crash. The retail and investment functions of banking need to be separated, so that speculative activity by investment bankers faces a serious prospect of punishment by bankruptcy when things go wrong. When every kind of financial function is merged under one roof, this does not happen. In the latest crash: ‘Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them,’ says Mr King. ‘And they were right.’

Of course Mr King does not mention America’s Glass-Steagall Act of 1933, which split banking functions in order to ring-fence speculative activities. That would be tantamount to admitting that banking regulators have not learned anything for the best part of a century. But his logic is exactly that of Glass-Steagall when he describes banking functions that are necessary to the community and those which are simply a matter of private speculation: ‘The banking system provides two crucial services to the rest of the economy: providing companies and households a ready means by which they can make payments for goods and services and intermediating flows of savings to finance investment,’ says Mr King (he could have put the second point more clearly by saying that banks, uniquely, provide working capital to industry). ‘Those are the utility aspects of banking where we all have a common interest in ensuring continuity of service,’ he goes on. ‘And for this reason they are quite different in nature from some of the riskier financial activities that banks undertake, such as proprietary trading.’

Mr King’s reflections on the financial crisis are about as candid and thoughtful as anyone connected with government in the UK or the US has managed in the past year. He is quickly supported by a forceful opinion piece from Martin Wolf in the Financial Times. Sadly, however, it is highly unlikely that there will be a new Glass-Steagall Act on either side of the Atlantic. The senior economic advisers to the Anglo-Saxon governments, whether Fat Larry Summers or Alastair ‘Hello’ Darling, are far too spineless and mired in the mathematical drivel of ‘modern’ economic theory. There will be an incremental regulatory ‘solution’ to the financial system’s instability, involving new rules relating to capital adequacy. This has been tried for decades, and does not work because banks’ prudential requirements for capital vary over the economic cycle and cannot be reduced to a workable regulatory formula. Still, there will be lots of new jobs for regulators until the next financial crisis.

A simple, radical solution, as Mr King recognises, is what is actually needed. It should not be embarrassing to admit that what people figured out in the 1930s is better than what their successors thought in the 1990s (when Glass-Steagall was finally repealed under Bill ‘Mind-On-Other-Things’ Clinton).

 Moreover, there is one new thing that governments could do to stop the cycle of ever more severe financial crises that has afflicted the world since the end of the Bretton Woods fixed exchange rate system in 1971. There is not a hope in hell that this change will be discussed, let alone happen, but it is worth mentioning. The change is simple: end the absurd tax treatment of corporate debt, whereby interest on debt is deductible as a business expense before taxes are paid. This is not the case with equity, where dividends have to be paid after tax. The contrasting, and logically indefensible treatment of debt and equity in contemporary tax systems first encourages companies (including banks) to load up on debt, and second discourages the creation of more employee-owned firms. It is one of those things that is so dumb, so fundamentally wrong, that it is not even discussed.


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