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A MANIFESTO IN THE MAKING

 

Manifesto Introduction
 
The party defines itself by the five core policies. So that members and non-members clearly understand what the party stands for, these cannot be changed. At present they are principles the details of which will be decided according to the party constitution
 
All other policies will be decided according to the constitution
 
Below is a provisional list of headings for the Mani-festo each with a link to a page
That page contains provisional ideas for discussion.

Read this, as work in progress. Only DRP paid up members can comment and so if you want to have your say:

 

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A NEW CONSTITUTION FOR BRITAIN
Constitution Design
Executive
House of Commons Senate/House of Lords
Autonomous Regions

Electoral System

Democracy
Judiciary
Constitutional Court Supreme Court
Functions of Government Public Services Board Monetary Policy Board

Monarchy

Civil Service

Republicanism

Liberalism

 


 

ECONOMICS
Banking

Corruption

Finance
Globalization
Monetary reform

Personal Finance

Austerity

Great Crisis

Government Finance

 

TAXATION
Tax havens
Corporation tax
Income tax
Wealth tax

 

REGIONS
Federal nation
Autonomous regions

 

INDUSTRY
Skills training
Industry needs
Business development
Export assistance

Employment

 

PUBLIC SERVICES
Health
Education
Utilities
Transport Road Rail Air
Social Housing
Postal Services, Telecommunications
Police
Fire Service
Prisons
Probation Service
Waste/ pollution

 

FOREIGN AFFAIRS
Europe
Commonwealth

Islamic World

USA
War
Defence provision

World

 

SOCIETY
Families
Social exclusion
Minorities and race relations,
Citizenship

Economic enfranchisement
Church of England
Civil Society
Deprivation
Youth
Meritocracy
Immigration

Ethical Issues
Humanitarian issues/Animals
Press and Media

 

NATIONAL PLANNING
National planning strategies
Coordination of regions
Transport

Energy/Climate Change

 

LAW

Justice
Human rights
Liberty
Economic rights
Citizenship
Penal reform
Vice
Drugs
Prostitution
Gambling

 

CULTURE
Arts
Broadcasting/BBC
Press

 

POLITICS
Political parties
Corruption
Protest
Political philosophy

Events

 

HISTORY

British Republicanism

Monarchy

Whigs

Recent Politics

 

SPORT/LEISURE

 

ENERGY

 

ENVIRONMENT

 

AGRICULTURE

 

CEREMONIAL

 

CIVIL SERVICE
Government departments
Prosecution Service

 

 

 

 


 

ISSUES DISCUSSED IN THE NEWSLETTERS NOT LINKED TO THE MANIFESTO

 

Whiggism

 

HISTORY

British Republican History

 

OTHER NATIONS

USA

 

 

 

 


 

 

4 Banning of exotic financial instruments

 

B. CREDIT DEFAULT SWAPS

 

Defenders of the practice of securitization argue that without it then most types of hedging would not be possible. There is not space here to go into this, but essentially hedging is a way of protecting your investment against unforeseen risk. Suppose you invest in a company in order to collect your yearly dividend payment. As with anything in economics there is a chance that the company will not perform as well as you thought. You can “hedge” this risk by for example taking out a derivative contract on the Footsie index. This means that if the value of your shares become subject to violent swings you will be covered by the relative stability of a large group of major companies. The beauty of the deal is that the "hedge" will not tie up any capital. You will only have to pay the regular premium, just as you would pay a regular insurance premium, Such derivative contracts can only exist through securitisation and so, without securitisation, you cannot hedge
But the most successful investor of modern times would never hedge in this way. He famously called derivatives ‘weapons of mass financial destruction’. His method of “hedging” consists mainly in good old diversification which requires no derivatives and so no securitisation. But mostly he doesn't hedge because he skillfully values companies. If you need to hedge with derivatives then you should not be in the investment business

“Derivative” has become a dirty work. The great US investor, Warren Buffet, famously called them “weapons of mass financial destruction”. But what did he mean by this? And was he right? Let us take it from the beginning.
* * * *
The first thing to understand is that from 1992 until 1997 there were fundamentally just two sorts of derivatives: traditional derivatives and credit derivatives. In 1997 an additional layer was added onto the whole system and these are called “synthetic derivatives”, but let’s leave these aside for the moment. We will just note in passing that, unlike traditional derivatives but like credit derivatives, they are wholly malign.  We will come back to them, for they are the crucial recent driver of the magnification of financial “instruments” that truly make bankers the “master of the universe” and drive the increasing inequality between the superrich and the rest of us.
Traditional derivatives are as old as trade and so, far from being “innovative”, go back to the earliest western civilisation 5000 years ago. Most would agree that “credit derivatives”, invented by contrast in 1993, are not really derivatives but were given that name as a handy way of aligning them with a traditional entirely respectable trading practice.
Many of us at some time will engage in a traditional type derivative even if we do not realise it. Suppose you agree to sell your house for £200,000 to a buyer. As we know, the actual final sale (completion date) at the moment of making the agreement to sell may be four months away, and during that time the price may have changed – up or down. But, in order to affect the sale, you and the buyer agree to sell in four months time at today’s price. Welcome to the world of derivatives.
The crucial element that has entered into this deal is time. Time must be writ large in understanding derivatives, for it is what makes a derivative a derivative. If all trading was effected at the moment the price was agreed there could be no derivatives. When you buy a good in a shop and pay cash or with a bank card the price is agreed and the exchange takes place there and then. This is a derivative-free piece of business because it is instantaneous. There is no element of time.
Let us think a little more about your sale of your house with the four month delay. Included and implied in this deal is what is known as a “swap”. The swap referred to is a “swap” of risk. Each party is taking on a level of risk for the no one knows for sure what the market price of the house will be in three month’s time. As a seller you accept the risk that the price will go up and you will be out of pocket. The buyer likewise accepts the risk that the market price will go down and so he or she will have paid too much. You are in effect “swapping” risks, and it is crucial to understand that the risks are real for both parties.
Now let’s move on to another kind of derivative swap and one that is probably the most common in the modern financial world – the “interest rate swap”. Although an interest rate swap may seem different to the swap involved in the house sale, the principle is exactly the same. After all, with a loan you make a series of service payments and so you can think of an interest swap a series of swaps just like the one you did with the house. And note we are still in the world of traditional derivatives and these are the good guys. The bad guys are credit derivatives and synthetics and these we will come to in a moment.
Suppose you are a medium size business (and this would include one with, say, 5,000 employees) and you want to take out a loan. The only deal on offer from your bank is a variable rate interest loan and the interest rate is, say, 2% over Libor, the London Interbank Offered Rate. Libor is a benchmark for bank lending and is, or was, considered independent of any particular bank’s interests and so, for all practical purposes, an objective measure.
But it may be that you are not happy with the variable rate loan. You have many unpredictable aspects of your business, the sales market, supplier prices, new onerous regulations, etc, and so the last thing you want is yet another uncertainty with a variable rate loan. This is where interest rate swaps come in very useful, and millions of them are transacted every year worldwide.
You approach a derivatives broker who finds for you an investor, called a “counterparty”. This counterparty will take out a loan with whatever arrangement they can find (or more likely already have one in place). Now there are two elements to any loan from a bank – the principle, i.e. the sum you borrow, and the interest repayments. An interest rate swap is exactly what it says on the tin.  You do not swap each other’s principles – only the interest rate part. Your counterparty pays your variable interest rate and you pay him or her at a fixed rate of interest. Hey presto! You have converted a variable rate with all its attendant risks into a fixed rate.
So what is the catch? The catch is, of course, that the counterparty will require a fee for taking on your risk. You pay a fixed rate of interest plus a fee to the counterparty. There is also the matter of the broker’s fee but nevertheless the stability that the deal affords to your business you judge is worthwhile and, as I have said, there are millions of such deals in existence. Interest rate swaps of this kind are a useful and constructive way of passing risk on from your business, which does not want interest rate risk, to businesses and individuals that want to take on such risk for a profit. They are not in any sense “weapons of mass financial destruction”. They have a constructive role to play in a modern economy.
You have to hold onto your hat to swallow what these are about, because they sound so outrageous and so are so obviously dangerous and destabilizing that it is difficult to believe they were ever allowed to be considered legal – and, of course, they still are.
Interest rate swaps, as we have seen, are good business for the counterparty and so understandably they would like more business like this. But unfortunately there are only so many businesses, in the example like yours. out there looking to swap variable rate interest rates for fixed rate loans. This excellent business seems to have hit a ceiling. The counterparties cannot go on getting richer and richer. Damn it!
But never underestimate the inventiveness of the banks and the complicity with them of the regulators. Enter in 1997 the perfect answer to generating more business: “synthetic derivatives”.
The interest rate swap business, as I said, seemed to hit a ceiling when there were no more parties for the counterparties to deal with. There were not enough ordinary businesses seeking to swap a variable interest rate for a fixed one. It is a fundamental law of business that any deal needs two – the party and the counterparty. But, with the introduction of synthetics, this 5000 year old economic principle was about to be violated and the financial world was about to suffer its biggest ever shake up. And the global inequality of wealth was about to be rocketed into the stratosphere.
The name “synthetic” is a good one. Because what these deal do is effective make the party to the counter party non-existent, unreal. This is brilliant, because it removes entirely the ceiling on the number of swaps that the counterparties (for all practical purposes the banks) can create. By divorcing the deals completely  from the real economy in this way, there was literally no limit to the number of swaps that could be created
This is what lies behind Hutton’s comment “What makes your head reel is the size of this global market. World GDP is around $70tn. The market in interest rate derivatives is worth $310tn.” The value of the market is over four times the value of all the normal world productive output.  Clearly there has been a complete delinking of these financial operations from the real world economy.
The recent growth of the derivative market has been made possible, above all, by synthetics. The need for a business to create an interest rate swap, as described above, put a limit and the number of swaps. But without the need for a party to the counterparty there is literally no limit on the amount of deals that can be done. It needs to be pointed out that there are other forms of synthetic instruments that have contributed to Hutton’s figures but the principle of them is always the same.
Let’s be clear. Synthetic trades are pure bets. There is no longer any question of providing “insurance” for a normal business giving them protection. Synthetic trades operate without being dependent on the real economy – but they nevertheless have an overridingly important significance for it.
An increasing amount of money is being made on the increasing number of synthetic contracts. But where is that increasing amount of money coming from? There is not space here to go into the way the whole financial edifice is constructed but ultimately that money can only come from one place – where real wealth is created, i.e. the productive working economy. This means it is the economic activities of those who make goods and provide productive services that ultimate must rise up the inverted pyramid to be channeled into the ever swelling coffers of the global superrich whose financial affairs alone can exist in the rarified economic world of synthetics.
The line of causation may take some tracing but ultimately the crushing poverty and wasted lives that we are seeing in Greece and Spain and elsewhere throughout the world is in large part a result of allowing to develop this whole massive layer in the world economy that contributes nothing productive but only serves to redistribute of wealth from those working in productive trading jobs to those who manipulate the system and play with the lives of the rest of us.
The freebooting activities of the global banks and their customers are at this time continuing at a pace. Their activities are sometimes definitely criminal and are sometimes practices that in a sane world would be treated as criminal. It is doubtful whether the managers in the banks recognise or are very interested in the difference. With regard to their own fortunes and right to remain at liberty (i.e,. not behind bars) there is certainly no discernible difference. They have no reason to regret the Libor scam or of the turning of the world financial system into an unregulated casino.
* * * *

 


 

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© COPYRIGHT. All content of this website unless otherwise indicated is the copyright of Peter Kellow. You may freely quote and republish content on condition that you acknowledge the author the source and give the link to the website www.democraticrepublicanparty.co.uk

 

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