Writ In Water

Today's headlines are all remarkably uninteresting. Hence, in vague acknowledgement that I am not living up to the various mantles I make liberty of, here is something a little different. 

In memory of an article in Blackwood's Magazine, 1818. 

How wrong you were.

**

Given without hope,

For hope implies expectation,

Given in memory,

Of a thought never told.

Rose that never fades,

Petal that never opens,

Thorn that never softened,

Stem that never broke.

Given freely,

In a world of indebted gifts,

Given in honour,

Of a code never known.

Seeded in a yellow river,

Dreamed in a silver bar,

Budded in red vines,

Flowered in white rain.

Given without hope,

For hope requires acceptance,

Given in memory,

A thought never told.                         

May 08, 2013

/Z

First In, Last Out

Its been a while since I managed to marshal a sufficiently coherent and in-depth response to a political, cultural, economic or other event to justify committing thought to virtual paper. However, with the recent local elections shoving UKIP into the spotlight as the current boat-rocking-phenomena, now seemed a reasonable time to poke holes in our electoral system.

**

Britain operators on a 'first past the post' (FPTP) system for the majority of its elections. This is a relatively simple system, you break the country down into districts, everyone votes, and the person with the most votes in each district wins. There are various alternatives, the most commonly touted of which is some form of Proportional Representation (PR). In a simple PR system everyone would vote, and then parliamentary seats are divided up on the basis of what percentage of the vote each group achieved. Before diving in to the advantages and disadvantages of each system, I want to take a step back and suggest the potential lineage and intentions of the two systems.

First Past the Post is clearly all about local representation. It is designed for a Parliamentary system where Members (MPs) are there to represent the interests and views of specific geographic locations. Although Party-Politics has wrapped its tendrils around our elections, the local nature of British elections still allows for Independents, 'single issue' local candidates and exceptional local representatives to cross party and ideological boundaries to secure electoral victories. Anecdotal evidence wise I quite happily voted for a local Labour MP who spent a considerable amount of time in and around the constituency on the strength of his local commitment, despite loathing the direction the central New Labour government was heading in.

On the other hand PR systems are designed with national party politics in mind. It aims to ensure that communities and groups that are not geographically concentrated are not marginalized or ignored. In a Parliament such as Britain (650 seats) a party would need only around 0.154% of the national vote to get a seat, more than enough to ensure that all manner of 'minor' parties can make their views and ideas known. Possibly as an intentional side-effect PR systems are also much less likely to deliver overall majorities, leading to coalition governments. Ultimately this limits the power of party leaders and mandarins (by forcing compromise) but also limits the dynamism and purpose with which a government can pursue its policies.

I'm going to take a slight detour now, and bring in my current pet-dislike; Political Parties.

Over the decades and centuries of British political life the flow of opinions, convictions and ideas has reversed, at some point it may have looked something like this;

Local franchised community > Member of Parliament > Political Party

The MPs took their cues (and got elected) on their empathy with, and ability to defend or promote, the ideas and interests of their constituency. MPs with similar agendas then banded together to form proto-political parties, with the support of various interest groups and noted individuals who shared similar ideas. The important thing here is that the Party itself is a function of people sharing the same ideas - not the origin of those ideas.

In today's world we have the exact opposite:

Party ""Think-tank/Policy Committee"" > Political Party Whip > Members of Parliament > Public

In effect the role of MP has changed, they are no longer there to take our opinions and run with them, they are there to sell the views of the party intelligentsia to the public. These think-tanks are in turn tiny, isolated, ideologically motivated groups, largely populated with upper class graduates, who have very little in common with a representative cross section of society.

This, combined with the nearly unassailable position our FPTP system has allowed the established political parties to form, means that one of the most horrendous cliches of our time really does seem to be true - the political class has hijacked our political system. For all intents and purposes democracy in western states with strong political party structures is dead.

To illustrate this point I'm going to introduce a bit of basic electoral maths.

At the local elections UKIP gained around 23% of the vote. Lets say they build on that, and at the next election they get 25% of the total vote. Let's also assume, for the sake of ease, that the Lib Dems continue to implode as a political force. UKIP isn't a geographically concentrated movement though, its pretty spread out across England (not so much in Wales and Scotland). So, let's say they get 25% of the vote in every single constituency.

In any given area either Labour or the Conservatives will be the dominant force, or, at worst, they will be closely tied (Safe and Marginal seats respectively). So each seat will play out something like this:

Randoms, independents, Lib Dems and Monster Raving Loonies:  10%
UKIP: 25%
Labour:  30%
Conservatives: 35%

The conservative and Labour votes will bounce around (50% or more in very safe seats at the expense of the other) but the stronger of the two will always come out ahead of UKIPs 25%.  That means, at the end of the day, that UKIP will fail to get a single MP elected, despite 25% of people voting for them. In a worst case scenario you can actually get this number up to 49% of people voting for them, and still no representatives (every single seat is split 49/51 with the 51s shared out between Labour and Conservatives). [On reflection this is actually even worse than it looks on the surface of it, the national vote would be 25.5% each to Conservative and Labour, vs 49% for UKIP - who still get no seats!]

So, (I hear you cry) why don't we use proportional representation! All our woes will be cured! On that basis (and using my numbers above), we'd end up with something like  228 Conservative MPs, 195 Labour MPs, 162 UKIP MPs and 65 randoms.  A coalition would need to reach 326 seats for a majority, suggesting the possibility of a UKIP/Conservative alliance, or even a minority government with UKIP agreeing to support on domestic policies. This is a very different position to the one we are likely to get given FPTP, and one which may seem to better represent the views and opinions of the voting community.

However... (no surprises here),

PR has one, fundamental, problem which I consider crippling; it puts even more power in to the hands of the political parties. In most forms of PR the various parties submit a list of candidates, and as the party gains votes it gets seats for the people on the list. Unfortunately the ordering of that list is then down to the party itself. So guess what? All the party apparatchiks and leaders are at the top of the list. At this point it becomes virtually impossible to shift the top echelons of the political parties. Even with only 1% of the vote (about 330,000) a party would still get 6-7 seats, and these would inevitably go to the party leadership. It also undermines the likelihood of a link between an elected representative and a given constituency or area. If elected officials are chosen on the basis of national proportions, there is no real link between a candidate and area of which they are eventually dubbed the 'representative'.

(I'm going to make a passing point here about Single Transferable Vote - this looks good on the face of it, but 'preference ranking' is often a disguised form of voting for a party.)

Just to make matters worse for the local representative, lets say you apply to be a local independent in a PR system. Your thinking goes - if I get a huge majority of people in my area to vote for me that should be enough right? Well.. not really assuming a 65% voter turn out, and a total voting population of 46 million, you would need 70,840 votes to each 0.154%, the threshold for 1 seat. Lets say your really... REALLY good. So good in fact that every single person in the geographical area which used to be your 'constituency' under FPTP votes for you (bucking the trend of a 65% turnout). Unfortunately that still may not be enough; because of the population imbalances throughout the country only 313 of the 650 constituencies have enough electors to get a local candidate up to the threshold for 1 seat. If the 65% turnout is assumed across all constituencies than no single area is big enough to get someone elected. (The largest bloc is the Isle of Wight with around 110,000 voters).

Solutions?

I'm going to present only one possible (and as usual fairly radical) solution to this mess in any detail; abolish the overlap between central government and local representation.

In the current system a MP is meant to be both local representative and through his party affiliations a salesman/supporter for the current ruling clique (also known as the Cabinet). Aside from the obvious conflicts of interest that are likely to arise from being responsible for both national policy and local interests, this focus on supporting and belonging to a party only reinforces the flow of ideas and control outlined above.

If, instead, MPs were elected to the House of Commons as local representatives, and Cabinet Ministers were elected entirely independently of this (i.e. you can't be both an MP and a Minister),  then some of this tension would be dissolved. The electorate would then pick both its local representatives (as in the current system), and its ministers in presidential style elections. The Prime Minister would lose his ability to reshuffle Cabinet (and with it a hefty chunk of power), and cabinet would lose its ability to run rough-shod over the House of Commons (since MPs would stand a better chance of being elected on local issues).

There is even the chance this would lead to a more ideologically diverse Cabinet. For example the public could elect a "Conservative" Foreign secretary and Chancellor but a liberal or Labour Home Secretary and Pensions Secretary. With Ministers ensured a five year term in office they would be freer to pursue long-term (and potentially painful in the short term) policies, without the risk of being ditched for political reasons, and without the ability to simply be reshuffled into another role their survival as a politician would depend on being able to convince the country, at the end of five years, to put you back into the same role for another five years.

The back-up plan, if all else fails, is to demolish political parties altogether.

> Remove party logo's on ballot papers (you get your name, that's it).
> Ban the publication of party/candidate lists
> Ban the use of party logo's, symbols or slogans on candidate's election materials and websites.
> Ban the whip in any way shape or form.

In effect a candidate can say what policies they support, they can even (if they want) copy the manifesto of a political body like the Labour party. But an elector will actually have to engage with that candidate and their election materials to find out who, and what, they support. No more just ticking the box next to the right logo!

Happy Trails

/Z

Trial By The Peerless (Part 2)

In a shocking break from my normal routine of struggling to find something to write about, I actually had a response to something! Please see the comment appended to my previous post. Since it seems impossible to provide a cogent reply without running afoul of this sites draconian character limits, I have responded herewith.

..

Hi James,

Many thanks for your response, as you noted I’m still banging the drum for a return to the 19^th century, but aside from general failure on that particular cause I’m otherwise well, I hope you are also.

I’ve had to split my response, since the original post was too long!

To take your points in turn;

The ability to distinguish justice from injustice is largely separate from IQ.

On the whole I would largely agree with this, as a standalone principle, and I am certainly not advocating the kind of testing that would screen out any save legal graduates. However, the anecdotal evidence I was indirectly responding to with this suggestion was of jurors for whom spoken and written English presented a significant challenge, for whatever reason. In the same way I would be completely unable to make a reasoned judgement on a trial presented to me entirely in Spanish, it seems unreasonable we are appointing juries without the necessary level of English to understand the topics placed before them. Likewise a systemic lack of knowledge into the roles played by the various components of a modern court system (for example the knowledge that a jury is responsible for coming to a ‘reasonable’ decision based on the evidence presented too it, or the presumption of innocence), seems to increase the likelihood of a decision based on considerations other than those laid down in our legal system.

The fraudster (alleged) being tested for his ability to commit fraud

While fully acknowledging the intentions behind this example, I would conjecture that we do in fact allow exactly this, should the defense choose to present it as evidence.  A defendant who could prove that for medical, physical or practical reasons he was incapable of committing the alleged crime would seem to have a significant defense.

People are people

I think this particular point may well be susceptible to various open ended arguments about how one defines “society” “community” and in particular “peer.” The particular point I was trying to convey here (quite possibly rather poorly) was that juries are largely selected on a geographical basis, which made sense historically because people in a particular geographical location would share many of the things which are usually used to define a community (language, history, social institutions etc). However, in today’s world of mass population movement, the spread of information technology and a near unprecedented level of information exchange, it is no longer reasonable (in my opinion) to automatically equate geographical location with common values and opinions.

Just to further this point I would suggest that as someone who spends a lot of time online (whether it’s writing a blog, reading articles, or gaming), and most of the rest of my time at work, the community I “live” in is in many ways made up of people all over the world. A significant portion of the colleagues I interact with on a daily basis live in India, China and Malaysia, yet for all my ‘global’ community, a trial by my peers would be drawn purely from the geographical district in which my internet connection happens to reside.

My other consideration would be that given the vast diversity of cultures throughout the globe and the vast array of topics on which those systems fundamentally disagree, it seems that even if ‘people are people’ those people come to fundamentally different conclusions on a wide range of topics based on their education, social, spiritual and economic upbringing. Whether it’s the death penalty, the role of women in society, the age at which an individual is considered ‘adult’, or even what rights are ascribed to an individual, people in communities all over the world have different norms. My request is to be tried by a community of people who share, where possible, a set of circumstances that in some way mirrors my own.  I should also point out that I make no attempt throughout this to ascribe any superiority to my views or moral opinions over anyone else’s. As I noted in the article, while I may disagree with others calling themselves my peers, I would not attempt to empathise (however much I may sympathise) with people from radically different backgrounds and cultures.

Precedent, Communities, and who qualifies

I acknowledge from a practical point this is a tricky one. At heart I feel one of the key problems here is a changing over time in the role of a jury (which I believe I mentioned). Once a jury had only the most basic guidance from legal codes, and was largely left to come up with what they felt was a “just” and “reasonable” decision. In the modern world the emphasis is often to decide on another’s state of mind, or to draw inferences as to motivations and actions for which there is no direct evidence. (In Ms Pryce’s trial the sole issue that should have been concerning the jury is whether she was placed in a situation such that she had no alternative but to accept what Chris Huhne wanted, this has very little to do with “justice” and is more pop –psychology).

We already allow judges to rule on the basis of ‘common sense’ and strict application of the law, in cases which do not carry jail sentences. Perhaps a solution may be to change the jury’s duty from deciding innocence or guilt to deciding sentencing? In this way it may be possible to return a jury’s role to that of “reasonable justice” based on shared community standards.

With regards to the issues of “who decides who your peers are” and “how long before you become British” I’m going to split this out into two responses.

Becoming British

The issue of immigration and the contribution of those not born in this country is one I’ve deliberately tried to avoid because it tends to rapidly descend into name calling and bigotry. That caveat given, I would argue that the institutions and traditions are more important than ancestry or geographical location. Becoming part of a community (in this case the particular brand of romanticised nationalism I ascribed too) is not a function of generations or family descendants, or even too which particular nation you belong. The fundamental commonality is belief in a national community. I would far sooner call the men and women I’ve had the honour of knowing from Spain, Sweden, Poland, Russia and elsewhere who still believe in the idea of a national identity part of my ‘community’ than a two hundredth generation native of the British Isles who is contemptuous of any ideal beyond personal fame and wealth.

Picking Peers

On this particular issue I am forced to acknowledge a practical difficulty. In part because any argument presented could immediately be twisted round to argue that habitual criminals should be tried by juries of other habitual criminals. This seems to therefore be self-defeating.

The professional jury may, in some way, counter this. Create a group of people who genuinely uphold the community standards against which you must choose to be judged if you wish to be part of the British community. Regardless of your race, religion, gender, age or anything else, if you are willing to have your actions judged by an independent jury who still give value to the notions of justice, duty, loyalty, dignity and genuine liberty then I would be willing to stand alongside you.

Is it a problem?

This is a difficult one also, since, by law, jury deliberations are secret. However, the Ministry of Justice (I cringe every-time I write that… its only one step away from MiniPax), did commission a study into how juries deliberate.  The full paper can be found here;

http://www.justice.gov.uk/downloads/publications/research-and-analysis/moj-research/are-juries-fair-research.pdf

Without regurgitating large sections of this, it does have some interesting conclusions.  The main thing I took away from it was that most juries struggle with legal direction (only 30% of jurors understand the legal directions given to them), but on the whole juries give relatively fair results (they don’t discriminate based on ethnicity, age or gender).  One thing that is touted as a strength in this paper, but which concerns me personally, is that juries are noticeably more effective where there is significant physical evidence (for example drug possession). If juries can only reliably rule on cases where there is overwhelming physical evidence they don’t seem to bring much to the table. Cases involving ‘state of mind’ or what a ‘reasonable’ person would do have conviction rates between 30-40%, compared with 53% on average, and 80% for the “strong evidence” crimes.

Purely from the anecdotal side of things, here a few examples;

R v Stephen Young on 2 counts of murder; a conviction was overturned when it was discovered four jurors had tried to summon the ghost of one of the victims using an Ouija board, and had been directed to vote guilty by the spirits of the victims.

An Australian drugs trial was abandoned after 3 months after it was found out that a number of the jurors where spending their time in court doing Sudoku because the evidence being given bored them.

A juror on a grievous bodily harm trial was discharged after asking for the defendant’s star sign and date of birth so he could use astrology to determine guilt.

On a personal note (this was a friend of a friend, but its someone I know by name if not an actual acquaintance), I know of at least one juror who had his family threatened if he didn’t return a not guilty vote, and another acquaintance served on a jury, and reported that they spend at significant period of time between each case having to explain the concepts of innocence and that the jury can’t deliver sentencing.

While I accept there is not a raft of evidence pointing to juries being incompetent, it also seems very little research has been done into this area. Maybe if more digging is done on this it would reveal that juries do not, on the whole, convict or acquit on the basis of laws, and if that is the case, and decisions are based on social norms and personal perception, my concerns about peer-groups becoming all the more pressing.

Thanks again for your post, it’s stimulating to actually have to formulate a response, and I hope you’re doing well!

Thanks

/Z

 

Trial of the Peerless

Trial by jury is a cornerstone of the British judicial system, and one which heralds back (like a surprising number of traditions) to ancient Greece. In the Greek play Eumenides it is Athena herself who appoints a jury of 12 and declares that in the event of a split, the decision must be acquittal. It is not hard to see how this has, over centuries, factored into our own views on innocence-before-guilt, and perhaps even the composition of a jury itself. 

..

But today we are confronted with a Jury which has fallen so far from the proverbial tree that they were required to ask a judge what a 'reasonable' doubt was, and more concerning, if a decision could be reached based on a reason that was not presented in court, and for which there is no factual basis. While I accept that the most likely explanation for the difficulties in the Vicky Pryce trail lie with a minority of jurors failing to grasp their role (an intractable 3 out of 12 would result in an inability to rule), the situation does neatly provide an opportunity to consider the role and nature of our juries.

Admittedly I am not the most unbiased of observers when it comes to the legal system of the United Kingdom, I learnt the basics of criminal proceedings at school age, pursued Law at A-levels, and briefly flirted with the idea of taking a degree in the subject. I am therefore, perhaps, not a sensible yardstick for an 'average' individual, and herein lies the core deficiency in the modern legal system.

As laws have become increasingly comprehensive and institutional the role of jury has changed from acquiring information and reaching a 'sensible' conclusion, to mapping an abstract and specifically defined legal concept into a real world situation. Legal knowledge, a strong grasp of the English language (and the extent to which it can be both bent and clarified), and a degree of abstract conceptualisation are now key requirements in a juror. With no selection process, and no minimum requirements, it is becoming increasingly likely that juror's lack the knowledge and ability to execute their roles appropriately.

Since presenting a problem without a solution would make me a democrat (in the words of Denny Crane), I will offer two such solutions.

Firstly; having been selected at random for jury service, each potential juror could be required to take a standardised test to ensure a level of English (spoken and written), and a core understanding of fundamental legal principles (such as the presumption of innocence) sufficient to undertake the role. While a counter-argument may be made that this would potentially exclude under-educated or non-English speaking segments of the population from the jury process, the only alternative seems to be to accept jurors knowing that they are unable to return a fair and reasoned verdict. Of the two evils, it seems that limiting the field is more in the defendant's favour - using the example of Ms Pryce's trial it seemed at least some of the jurors failed to grasp the concept that an individual is not required to defend themselves - they are innocent until their guilt is proven beyond all reasonable doubt.  As such I would argue that restricting possibly jurors to only those who know and understand the rights ascribed to a defendant can only benefit them, whereas introducing jurors who assume guilt (or apply a balancing test as in civil cases), would be prejudicial. Since a fundamental principle in our legal system is the primacy of the defendant, then minimum requirements for jurors is a (relatively) cheap and hopefully effective tool to reinforce our judicial system.

The second, more radical, option (and where would one of my posts be without radicalism), is to remove 'random' jury service, and make a professional jury service. Historically jurors were hereditary (it went hand in hand with certain other obligations of local nobles), and it can expected that they therefore received some form of training and initiation on how to conduct investigations and discussions. Likewise the experience built up over hundreds of trials is retained within the system. A professional jury service would provide an opportunity for jurors to gain a significant level of legal expertise (to enable them to better understand the interpret legal documents and evidence), and allow for 'specialisations'. One of the problems facing both defense and prosecution in complex fraud or other 'white collar crime' trials is the inability of the average jury to understand what the accused fraudster has actually done, or why its illegal, specialised "financial crimes" jurors would be able to build up the expertise needed to understand these cases, and make informed rulings.

The downside would be the potential monopoly on juries of certain segments of the population. It is easy to see how "juror" could simply become another middle-Britain profession along with accountants, architects, solicitors and engineers. This may lead to bias towards (or against) certain groups or crimes. While no system is perfect, it would seem some system of psychometric (or even MRI) testing to try and screen out the exceptionally biased would help combat this issue. Likewise, it is not immediately obvious that the bias would be towards guilt - after all plenty of legal graduates every year choose to pursue careers in defense to 'save the innocent' rather than prosecution. (I'm sure the larger salaries have nothing to do with it!).

 
Leaving aside the issue of how to acquire more qualified juries there is another point to consider here. The principle behind jury is "trail by your peers." In essence, you are judged by the community in which you are a part. This made sense in ancient Greece, where trials included potentially hundreds of jurors from the city in which you lived, it made sense in medieval and renaissance Europe where your 'jury' was made up of local free-man and nobles who probably knew you, your family, and were intimately acquainted with the local area. But is it still comparable to today's metropolitan world? Wiki estimates that 12% of the British population is not born in Britain. This figure quite possibly doubles if you include the children of non-British immigrants who have grown up in ethnically and culturally diverse communities. That could easily mean that the people who determine whether you spend the rest of your natural life in an 8 by 8 cell share neither your language, culture, religion nor history. Are these people truly a reflection of your "peers?". Likewise the medieval peasant or tradesman, tried by a group of other craftsmen and farmers, leads a broadly comparable life. Are the jet-set investment banker, the brain surgeon, the unemployed arts graduate and the median 'administration' worker truly 'peers' for one another?

I believe the answer to this is a firm "no". From a philosophical and ethical stand point I consider my entire worth is bound up in my knowledge, my experiences, the codes by which I lead my life, and by which I judge myself and others, and the decisions I freely make. Those codes and decisions are likewise bound up in my heritage, my culture and my shared history. Just as I would not insult those who lived through the struggles and triumphs of Russia's Great Patriotic War, or China's rebirth as the world's new super-power, or the war-swept ruins of Syria's collapse, by claiming to be their 'peers' I likewise take exception when those who claim to be mine without any understanding of the price and reward of unravelling reflexive thoughts, the emotional pride in nation which once defined an Empire, or the glory in a crystal cold winter night. Ultimately our motivations and actions are known only to ourselves, and if we judged ourselves more harshly, perhaps we would have less need of the traditional juries causing so many problems.

/Z

The Banking Crisis

 This is a bit less tongue in cheek, or even opinionated, than some of my other posts. The Banking Crisis was without a doubt one of the defining events of the first decade of the 21^st century. Its shadow still falls across discussions on politics, regulation, the role of the state, and economic theory. But despite that little evidence is publicly presented as to the causes of the crisis, or the long run costs it has incurred.  This is therefore an attempt to put some numbers on the costs to the taxpayers of ‘bailing out the banks’.

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A Note on Figures; The majority of this post is sourced from reports completed by the National Audit Office and the Treasury Select Committee, however, as a result of the this some of the figures are based around 2009-10 rather than 2010-11 or more recent.

Indirect and Cash

Stability was returned to the UK banking sector through two main mechanisms – direct (or cash) and indirect. Cash injections were used to buy shares and provide loans to (amongst others) Lloyds TSB, RBS, Northern Rock and Bradford & Bingley. These ‘direct’ interventions cost real money in the here-and-now, and, assuming no more major impacts to the system, it is predominately these costs which will need to recovered or written off by H.M. Government.

Indirect costs took the form of guarantees and indemnities provided through three special purpose vehicles (The Asset Protection Scheme, Credit Guarantee Scheme and Special Liquidity Scheme). Although significantly larger than the cash costs to the Treasury, these ‘indirect’ costs are only crystallised in the event of further default or difficulty in the Banking sector.  Peaking at a potential exposure of nearly £1 trillion (Maintaining the financial stability of UK banks; update on the support schemes. National Audit Office, Dec 2010, reference 676, Key findings) the possible costs of these guarantees have fallen to an estimated £512 as at the end of 2010.

I’m largely going to ignore indirect costs from now on.  Reports from the Treasury and NAO seem to suggest these guarantees are not going to be required, and many of the schemes are looking to wind down by 2014 (et al). This reflects a wider truth that the banking sector suffered from a lack of liquidity and confidence, rather than necessarily a paper bankruptcy (this is especially true for Northern Rock which was in a stable position on paper, but a loss of confidence caused it to fail due to a cash flow problem). The government stepping in with the ‘big guns’ of unlimited asset guarantees restored confidence, reduced the need for immediate liquidity, and ended the problem.

Cash Costs

The total cash cost of the bank bailout was around £133 billion (et al, Summary (2)) this covered the purchase of shares in RBS and Lloyds, and cash loaned to banks wholly owned by the government at this point (predominately Northern Rock and Bradford & Bingley). It also covers loans to various compensation schemes to cover client withdrawals.

These funds were not taken from other governmental budgets, but rather borrowed in their entirety. The National Audit Office puts the cost of servicing this debt at approximately £5 billion / year (or an annual interest rate of 3.76%). This on-going cost will exist as long as the loans and shareholdings remain outstanding.

From a practical perspective the bank bailout has therefore incurred a cash-flow cost of £5 billion per year, with the caveat that a future loss may be crystallised when the various share holdings are sold. This £5 billion forms approximately 11% of an annual interest bill of £46 billion (2012 Budget Executive Summary) or 0.7% of total government spending.

The likely losses incurred by a sell-off of the shares in RBS and Lloyds will depend entirely on the prevailing share price, and any pricing arrangements put in place to secure a buyer.  So, where does that leave us at present?

RBS

The calculation of the current value of the government’s holding in RBS is slightly complicated by the introduction of “B” shares in 2009. In addition to its holding of 65% of the ordinary shares in RBS, the Government also owns 39 billion “B” shares, created to allow a further injection of cash into the Bank without further ordinary share purchases. These B shares are valued at 50p each, receive a 250% preference dividend, and do not allow voting rights.

These “B” shares were issued at a value of 50p, which conveniently ties in with an approximate ‘buy in’ price for the government’s ordinary RBS shares of around 50p as well. All this means that while a line by line analysis of the government’s holdings is out of the scope of this post, we can get a reasonable estimate of the current position by comparing the current ordinary share price to 50p. Anything above would equate to gains come a sale, anything below a loss.

(Note; RBS had a 10:1 corporate action after the bailout, this means the ‘buy in’ prices for the government need to be multiplied by 10 if you want to compare to current prices).

At the current market price of £3.39, the government is facing a loss of 32%, or £17bn.

Lloyds

Luckily the Lloyds figures don’t seem quite so convoluted. The government bought a 41% stake in Lloyds for £21billion. This was entirely in ordinary shares, and therefore the published market capitalisation figure can be used to determine the value of a 41% stake. Using this approach a current value of £15.2billion, or a paper loss of just under £7bn is reached.

Options

The government seems to have several avenues on how to proceed with regards to its shareholdings. Although I’m going to provide some commentary on these, I’d highlight these are my own opinions, not quotes or paraphrasing from official sources.

1. SELL IT ALL!!
There is always the option for the government to just drop their holdings and get out now.  What this would actually do to the share price is troublesome, since it would almost inevitably precipitate a complete collapse in the already struggling shares, even assuming a buyer could be found. In practice this probably isn’t a realistic option.

2. Bit now, bit later

I’m putting this in for the sake of completeness, though it smacks more of a political move than an economic one. Selling off some of the holdings in the two banks would reduce the spectre of ‘state ownership’ and raise a bit of cash, but it would also lock in losses with comparably few tangible benefits.

3. Public-ize RBS

A rather radical move that was floated at one point was to just give the government’s shares to the taxpaying public. Probably a nice voter winner, but I have to agree with Vince Cable’s recent comments that this was unlikely to happen. Not only would this crystallise the full value of the bail out as a loss to the government, it would potentially hammer the share price when the markets become flooded with shares being sold by private investors.

4. Do nothing

Unless a single, large, buyer (such as a sovereign wealth fund) can be found, this is probably what’s going to happen. There is always the long run chance that the share price will recover, and once Lloyds and RBS find their feet they will begin paying dividends, which will largely go straight into the Treasury.  This is also what I’d personally advocate. Although both Lloyds and RBS have currently suspended paying a dividend while they repair their balance sheets and pay down liabilities, in the long run (it is an oft-quoted truth that shares should be held for at least 5-10 years), a return to dividend payments of around 4.6% (HSBC’s average yield), would both cover the costs of servicing the underlying debts incurred in purchasing the shares, and even offer a gradual net profit on the deal.

To Re-Cap

Just to bring all of these points together, and to provide a quick summary for use against the ranks of “Argh the government is collapsing because of the costs of propping up the banks,”

·         The Government provide around £133bn in cash to the banking sector.

·         That £133 billion was borrowed at an effective rate of around 3.75% per annum, incurring a servicing charge of £5 billion per annum.

·         For that investment the government got a stake in RBS and Lloyds which is currently worth around £24billion less than was paid for it.

·         That loss isn’t going to be crystallised any time soon since it looks improbable that a major sale of RBS or Lloyds will take place. As such the £24 billion is only a ‘paper’ loss.

If Today Were Year ZERO

Much is made, both in the media, and by people in general, about how the current social/economic predicament is caused by having to bail out the banks. What I hope the above has shown is that the actual, real, cash cost, of the banking crisis is currently around £5 billion a year. A fairly irrelevant figure compared to the £638 billion a year annual budget.

Another way of looking at this is that if all historic data, opinions and knowledge were wiped today, and then the government’s figures re-calculated based on outgoings and incomings today, the costs of the financial sector bailout would account for 11% of the national debt. While I would not try and claim 11% is immaterial, it means that 89% of the nation’s accumulated debt has to do with decisions unrelated to the bank bailout.

Seven Fat Cows, Seven Thin Cows

The concept of saving when things are good, to cover you when things go wrong has been around so long its spawned innumerable clichés. Never-the-less it’s a view which is largely ignored with regards to the financial sector. I’m going to wrap this analysis up by providing some figures to show that the financial sector provided far more in tax receipts than it eventually claimed in bail outs.

Unfortunately the readily available information available on the taxes paid by the financial sector only goes back to 2005/6. However, using this as a starting year, the tax receipts from PAYE and Corporation Tax (including the banking levy), as provided by HMRC (Pay-As-You-Earn and corporate tax receipts from the banking sector, august 2012, table 1), stand at £147 billion.

This figure alone covers the £133 billion cash bail out required, and that’s excluding the ‘boom years’ from the beginning of the 2000s through to 2005. While I don’t expect any government to simply sequester away huge parts of its tax take for the express purpose of then bailing out the economy when things turn sour, I do expect an acknowledgement that the government earned vast receipts from the financial industry throughout the boom years, and is still in a net position with regards to the banks.

Conclusion

In conclusion I’m going to reiterate a point that has run throughout this post. Financial costs can always be broken down into direct and indirect costs. However, much of commentary on the banking sector compares the theoretical ‘worst case’ scenario where all of the indirect costs materialise, with the immediate direct benefits (the £20 billion a year in tax the sector currently pays). Not only is this grossly unfair, it’s also completely misleading. Considering only the direct cash costs to the economy the bank bailout cost £5 billion a year. This is a trivial cost compared to the £120 billion a year spending deficit the current and previous government’s social and welfare policies have necessitated. Should the further £500 billion of contingent indirect costs be incurred we are envisaging a society where two huge corporations have been wiped out of existence taking all of their assets and holdings with them, where tens of thousands of business have gone bankrupt overnight, again without leaving behind any assets, and where entire cities worth of housing has vanished into holes in the ground. If we ever end up in that situation the problems of macro-economic government spending are going to be very, very, far down our list of priorities.

/Z