Who really owns the money?

From many comments on the current financial crisis in Greece - and from the utterances of the Greek PM and his so-called Finance Minister - I get the impression that a majority of people have no idea of how Banks operate, and even less idea of where they get the money. It doesn't seem to register that the 'money in the bank' is actually 'owned' by the people who deposit it there, not the Bank. Nor do they seem to appreciate that the friendly 'High Street' banker is in a totally different league to the so-called 'Merchant Banking' operations in the City. For one thing your High Street manager doesn't get to play with Fund Investment - probably the worst he can do is lend a client a bit too much or allow to big an overdraft.

The guys in the city are another world. These are the guys who can move billions at the touch of a button, the men who lend huge sums to companies and to governments. But there are also limits to how much and whose money - and again, it isn't theirs or the banks. Once again, it is money entrusted to them by investors and depositors. The trick is that the Banks work for their investors and their shareholders - famously a court in the US decreed in the 1930s that the sole function of a corporation is to make a profit for its shareholders. That is what banks do when they lend anyone money, which is also why most of us don't borrow any more than we need to. After all, why pay more than you absolutely have to for the privilege.

There is much fulminating about the Banks having lent too much, or the Banks making profits at the expense of the people - but who forced anyone to borrow the money in the first place? Until the 1990s, Bank Regulation meant they had to 'hold' in their vaulty a considerable portion of the money deposited with them. Then, presumably in the belief this would bring 'growth', governments decided to allow a bank to lend almost everything it held on deposit. Thus, if a depositor put in §100, the bank could lend a borrower §90, and when he paid that into his bank account, they could lend up to §81 of that, and so on ... That fueled the 'credit boom'.

The next problem is that of governments themselves. They have, in reality, only the money they can gather in taxes to spend. If you push tax to high, the big money leaves and tax revenue falls, so goivernments are forced to balance spending and income by taking loans usually organised by the IMF. The alternative is to simply 'print more' a trick that saw the value of the British Pound collapse under the free spending Labour governments of the 1970s. Those who scream about how the €uro has 'denied nations their democratic right' to resort to the printing presses forget that the value of the money is only as good as the gold, trade or whatever that underwrites it. Bank of England notes still contain the legend 'I promise to pay the bearer on demand ...' and technically you could take your Bank Notes to the Bank that issued them and demand the hard cash in coin, preferably gold.

For years now the Greek crisis has been brewing and all the other countries caught up in it have managed to find solutions. Some, like Ireland, took the pain, fixed their overspending problem, and are now recovering, others lag, but are dealing with it. Greece alone has refused any reform. Their PM and Finance Minister have caused enormous frustration by repeatedly coming to the table with the same empty hands. As one Minister put it, they smile, they shrug, and say, you make a proposal, we'll consider it. Now they claim they want the debt written down - in other words, they want to stick their hands into the pockets of every taxpayer, depositor and investor yet again, and take even more out of everyone else's pockets while still refusing to reform their freespending.

More worrying is the fact that many of those asked, on leaving the Polling Stations, say they voted No to 'punish the banks' or to 'punish Brussels'. Fine, but tomorrow, when the banks have nothing to offer, or when Tsipras and his henchmen print Drachmas and try to pass them off on a 1 for 1 basis, it will probably take less than 24 hours for the value to crash.

Well, the people have spoken. Whether they stay in the €uro or not is a moot point. Some believe Europe will bend over backwards to keep them in. I'm not so sure they will, Mr Tsipras and his Finance Minister have annoyed everyone. So they refuse to pay their debts? Greece will find it incredibly hard to get fuel, medical supplies and a whole range of other things they can't make themselves. Countries having to work on 'cash up front' generally run into massive problems very quickly.

Will it 'kill the €uro' as so many British commentators and media 'experts' seem to hope? I doubt it. That would cause a much, much bigger problem economically for the International community than many realise and it will hurt everyone. It might be a good idea for all those journalists, campaigners and the rest, calling for Europe to 'write off the debt' or 'give emergency aid' to back off a little and consider. The Greek Referendum has been used to 'send a message' and to cover up the fact the Greek government refuses to carry out meaningful reform of an economy based on other people's money.

The Greeks have been living on and spending everyone else's money since they cheated their way into the €uro. They were eager enough in the early days to get into the €uro for the very simple reason the Drachma was shot to ribbons and only just still viable. They wanted the €uro then, because it gave them, they thought, a limitless source of funds to cover their profilgacy. They've made no effort to collect their own taxes, they allowed capital to vanish, and even the EU subsidies to disappear into projects that were just to boost the wealth of a few. They've been refusing to reform for the last five years, and now its caught up with them. Mr Tsipras wants 30% of government debt written off - which means the rest of the EU, the depositors and taxpayers must pick up his bill, presumably so he can carry on spending.

I know what my answer would be if I were a bank manager and a debtor approached me with that sort of demand. This argument is not about 'democracy' or even control of their own economy, it is about paying your own way, and paying your debts. They don't 'own' the money supply, neither does Brussels or anyone else - it belongs to us, the taxpayers, depositors, and investors.

Brain Drain

My thanks to Josephus for a couple of recent reports and articles on matters close to both our hearts. The first was an item on the finally published report on the tragic deaths of firefighters in Warwickshire in 2007. The report states, inter alia, that the Fire and Rescue Service training system had become limited in scope, and required significant review. It went on to say that the "Integrated Personal Development System" (IPDS) "competence based scheme" was not meeting the services' expectations as personnel were training to complete "portfolios" rather than focusing on "firemanship".

Funny that, this was exactly what both Josephus and I identified and argued when the scheme was first "rolled out" with great fanfare as the future of fire and rescue service training. The reality is that both of us were long enough in the tooth to have witnessed the failures of so-called "on station training" and "learning on the job" when not reinforced by formal progression training with examination and practical assessment. No amount of "ticks in boxes" can ever substitute for experience reinforced by knowledge, yet the champions of IPDS (all, one might add, rewarded with 'Honours' or very nice promotions and postings for their efforts) publicly declared that "knowledge of theory was unnecessary, you only had to know how to 'do' something".

Tragically, their wonderful scheme is now showing just how deeply flawed IPDS is. Deaths on duty have climbed steeply since its introduction and the scrapping of knowledge based examinations. There are other factors in play as well, however, one being played out right before our eyes at the present moment. While, on the surface, the battle over Fire Service Pensions appears to be simply about changing the retirement age, it is part of a much deeper ailment. It is now openly declared that a fire fighter should not expect to spend his/her entire career in the service. One young HR Director (in my day this post would have been filled by a crusty and battle scarred SDO or ACFO), blithely told me at a meeting that she discouraged people from thinking they could expect a 30 year career and a pension. In her view it was "healthy" for the Service to have a high staff turnover. Worryingly, at least in the meeting, the CFO of the FRS concerned, agreed with her!

Which brings me to the second article. It is rather long, and can be read here with the title "Inside the World of HR" . The author opens with the experience of Tesco, just a few years ago set to take over the world - or so it seemed - but now in deep trouble financially. The article identifies one of the major flaws that has entered business in the last 40 or so years - the haemorrhage of knowledge and experience due to high staff turnovers. The author cites several studies conducted by scientific bodies which identify that fact that any organisation actually 'owns' about 10% of its "knowledge" - the other 90% is in the heads of its employees. Now most employers will argue they "own" that as well, but the fact is they don't, and can't. Each individual has developed special and unique experience, it cannot be transmitted in any other way than the much maligned "sitting next to Nelly" system of sharing. Add to this now the most revealing findings of the studies cited in the article I've linked.

Most major organisations have a 15% per annum change of staff. The authors of the study from which that comes argue that this is a success; according to them, it makes business more flexible and less likely to be "locked into" the past. However, what they don't acknowledge is that it takes, on average, only 7 years for any organisation to undergo a complete change of staff at that rate. With that goes all knowledge of what worked and what didn't work in the past. Thus, as with Tesco, wheels get reinvented, mistakes get repeated and ultimately, a successful and healthy business ends up in trouble.

The reason is quite simple. It takes at least a year (in the FRS it is regarded as 2 years for a recruit firefighter and, in the past, a further 4 years as a firefighter before you could be considered for promotion) for a newcomer to an organisation to learn the ropes and become fully productive. Now comes another devastating statistic - in all the studies cited the maximum length of time most spend in an organisation is 5 years. So, as an employer and, if I'm lucky, my new recruit today, will have just reached his/her most useful range of knowledge and experience when they depart, taking 90% of the knowledge and experience I could use, with them. As the author of the article shows by example after example, this haemorrhage of knowledge and experience is steadily destroying organisations.

There are a number of factors at work here, among them the prominence and power of accountants who see everything in the short term and in terms of "cost". Pensions "cost" so the solution, for an accountant, is make sure you have only the minimum numbers qualifying for one. Experienced and long serving employees "cost" in terms of higher salaries, benefits and "on costs" such as pension contributions - so reduce the number you have on the books as much as possible. Then there is the whole question of "management" as a "profession" (and I'll confess that I have a number of "Management" qualifications). The academic belief that there is such a profession is, in my view, serious wrong. "Management" is a function, not a "profession", and, if one cares to look at the most successful managers in the world they are all people who have a very wide understanding and deep experience of the things they manage. If you want examples of poor management practice, look no further than an organisation which has "generalist" managers parachuting into senior roles with little or no understanding of what they are managing.

I was amused to see that the author of the article I have linked, cites the UK Civil Service as just such an example.

How does one fix this situation? I'm inclined to think it will require a major shift in thinking, and a return to the idea that a career is for life and not just a short term step on the ladder to the next "job". It will require a total rethink in what is being taught in MBA and various other "Management" courses, and it will require a complete change of direction in "Human Resources" so that the value of retaining staff, and the knowledge and experience they hold will be seen. It is perhaps too much to hope for that the "short-termism" of our western business culture can also be eroded and the longer vision held by other cultures adopted.

Answers on a post card please ...

The Pensions Debacle ...

I used to have a quote on my office 'action board'. I can't recall who said it originally, but it summed up the constant state of financial difficulties over a wide range of issues. It said simply: Don't expect me to drop everything to deal with some crisis caused by your lack of planning.

As I follow the dispute between the serving fire fighters, the government, and the employers over their current pension age and pension provisions, I am constantly struck by how the pensions crisis is now the fault of the fire fighters, pensioners and everyone else. It is a crisis created by the abysmal planning and practices of the politicians and civil servants (who have looked after themselves very nicely - thank you), and it could have been foreseen - in fact some did - more than sixty years ago. The Fire Fighters Pension Fund should have been revised in 1974 when the service underwent a massive re-organisation and expansion, but then, as now, all the politicians and civil servants involved saw, was a nice source of 'revenue' from all those extra contributions.

The root of the problem actually goes back, in the UK, to 1908, when a Parliament dominated by middle class and aristocrats with a paternalistic mindset, voted to create a State Pension to be paid to all working class men reaching the age of 70. It seemed safe enough at the time perhaps, as the average age at death of 'working men' then was a mere 45 years of age. Note the pension was only for men at the time, but post WW1, it was expanded to include women and the retirement age was lowered - but what everyone failed to notice was that the introduction of the first generation antibiotics, better working conditions, healthier food and access to better medical care also increased the life expectancy of the people it covered. Suddenly many more people were qualifying for a pension - and drawing it for longer. Did Parliament, the civil service or anyone else make any change to the way they were funding it? No. They continued to collect the small contribution each worker paid into it, and treated it as 'revenue' to be spent on any and every pet project and expansion of the State.

This is a particularly sore point for the fire and rescue service personnel. There were, and still are, very good reasons why they retired at 50 or 55. Only officers above the rank of Senior Divisional Officer could continue to 60, and it all has to do with your reflexes, your bodies ability to recover from heat and cold stress, injury and general health and fitness. The vast majority of people cannot achieve the levels of fitness now being demanded of fire fighters at age 50, let alone 55 and as for at age 59 - forget it. Worse is that the Minister concerned and his civil servants are being decidedly 'economical with the truth' when they say that only a small number of fire fighters will be affected. Their own report states that as many as 90% of fire fighters could fail to maintain the fitness level at age 55. They are also failing to be honest about how much the fire fighters are contributing to their pensions. Where the majority of Pension Funds have taken between 4 and 9% of salary from their members, the Fire Fighters are contributing 14 -17% of income.

It doesn't take a genius to realise that our local and national politicians have squandered the money (we won't mention Gordon Brown's raid of 8 billion on private pensions that destroyed the majority), treating the contributions as a nice way to subsidise the local and national tax pot. Of course, it would all have been fine and dandy as long as the workforce continued to grow. As long as more people were 'in work' and paying into the pot, everything is hunky-dory and we can get away with this sort of economic sleight of hand. Unfortunately, the 1930-40s dream of 'full employment' and state run industrial and commercial activity fell apart - and the politicians and civil servants can't bring themselves to admit that it was not only never achievable, but is a direct cause of their present crisis.

Not one penny of the money they have collected for the last 106 years was ever invested to cover the promises they made year after year, election after election. As for the Treasury's 'economists' - I wouldn't trust them to invest the small amount of money I once had in an ISA! Frankly, if anyone ran a business the way they run the national economy, the Serious Fraud Squad would be considering a major prosecution. The fire fighters have a right to be up in arms, and their current Chief Fire Officers are as much to blame as the politicians they serve. The various Local Authorities have taken the contributions from the men and women in their service for years and used it to subsidise the Rates and now the Community Charge.

Now that the revenue is shrinking as they cut down the service side (while expanding the paper shufflers and 'non-operational' side), they want to cut their losses by blaming the fire fighters. There are claims that a fire fighter that is fired at 51 because he can't maintain the fitness level or has been injured, can be 'redeployed', but this is false. Until ten years ago, he or she could have been, but since Labour' modernised the service, all the posts they could have been redeployed to have been stuffed with 'non-operational' and non-fire fighting staff. It was claimed then that this was 'cheaper' - so the fact that these folk are now, on average, earning the same as or more than the fire fighters they replaced is possibly another small problem the politicians are being 'economical with the truth' about. The truth is - and the reality - is that someone being 'let go' for health or fitness reasons at 51 is highly unlikely to find employment at anything like the income he or she enjoyed at that point. Nor will they be able to claim their full pension, or any pension until they reach 60 and then the new threshold of 67 for the State Pension.

Tough one, and I'm sure all the lovely and caring politicians and civil servants will pat him or her kindly on the back, and tell them the usual platitude that it's a tough deal, but you could have made provision for this contingency yourself ... Then they'll take their gold plated tax payer funded pensions and their knighthoods and laugh all the way to the bank and the bistro.

I have used the fire fighters as an example here, but the truth is that all pension funds are in the same state, and all pensioners and contributors to pension funds are being put under similar pressure. Suddenly it is their fault that the Treasury, the politicians and the civil servants have, down the years, squandered the money they have taken from us. If an insurance company did the same with its policy holders premiums the courts would deal with it very quickly indeed. Perhaps that is what we should now be doing, bringing prosecutions for fraud against the various public bodies that have taken our money on false pretences and now want to change the rules to shift the blame.

Now there's a thought for those of a legal mind and ability ...