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wonderpup

Redistribution And Reward

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The question of the redistribution of wealth is at the center of much contemporary debate in both Politics and Economics- and has always been a contentious issue because it involves taking from some people and giving to others, which seems to conflict with our basic notions of fairness and the right to keep the fruits of one's labour.

There is however another form of redistribution that is just as important in my view but much less discussed- and that is the redistribution of risk.

The deal in Capitalism goes like this- those who work hard and take the most risks will gain the most reward- these people are the 'wealth creators' the entrepreneurs who are the driving force of capitalism.

But if we cast our eye across the current economic landscape this risk/reward paradigm seems to be changing. The obvious example here has to be the Bankers; for decades they assured us that their vast rewards in the form of pay and bonus's were an authentic reflection of their skills in the successful management of risk- it was for their ability to assess and exploit uncertainty that they were so well rewarded.

Then came the credit crunch and we discovered that far from containing and managing risk the bankers had in fact done something close to the opposite, they had disseminated that risk so widely and so incompetently that the entire global economy was under threat of collapse.

What was supposed to happen next- according to the narrative of Capitalism- is that the Bankers lose their wealth- they had failed and so their wealth was forfiet- this is how the game works-or so we were led to believe. But- of course- that is not what happened- instead of losing their wealth they were 'bailed out' by the state- and the reason that they were bailed out is simple- they had succeed in transferring the risk of their own failure onto the state- they had become 'too big to fail'. And so they got to keep the rewards that their risk taking had gained but the risk itself was socialized and for them had little or no consequences.

Another area in which we see this pattern of risk transfer is in the labour market. In the past being an employee usually meant that one was paid on the basis of attendance at work- you arrived at 9 o'clock and left at 5 and your pay was based on this contracted period of time. What this meant however is that the employer was exposed to the risk that he would be paying for worker hours that were not profitable if business were slack- and this risk was one of the factors that made starting a business risky- you could find yourself paying for employee hours during which no income was generated to pay for those hours.

The solution to this risk would be to transfer it onto the employee by offering him a contract that ensured that he only got paid for productive work, not for those periods in which no work was available- the so called 'zero hours contract'. What these contracts represent is the transfer of business risk from the employer onto the employee. Yet we see no recognition of this increased employee risk in terms of their reward- in fact in many cases taking on this risk has led to a reduction of their reward as their hours of paid work have declined.

Also because these contracts of employment are based entirely on hours worked there is no provision for any kind of cover for illness, so the risk of illness is also now shifted entirely onto the employee.

Another area in which we see this shifting of risk is that of pension schemes, where companies that are purchased or refinanced in various ways such as M&A deals will shed their pension liabilities and obligations despite the fact that their employees might have contributed for decades to these schemes- presumably the state will once again step in to bail these schemes out or pick up the pieces.

This theme of the redistribution of the risks inherent in Capitalism away from business and onto the individual-either as a taxpayer or an employee is one of the great achievements of Neo Liberal economics- but it's a redistribution with some interesting caveats. Take limited liability- this legal construct is designed to explicitly protect an investor from the full losses should a company he is invested in fail- whatever the merits of this protection of the investors it contrasts starkly with the growing lack of protection on offer for the employees of the companies being invested in-many of whom will not be participants in the market at all since they will in many cases not even have a private pension.

So while the idea of the redistribution of wealth is labeled 'class war' by some- I suggest the redistribution of risk from the top to the bottom could also be described as a form of 'class war' in which the Capitalists are engineering a situation in which they get to keep most of the reward while taking less and less of the risk.

The meme of 'restructuring' the labour market is essentially what I have described above- a process wherein the inherent risks for which the capitalist claims his reward are shifted away from business and onto the employee- who is also the taxpayer that in many cases is paying the price one way or another for this new form of risk free enterprise.

Conduct the following thought experiment- imagine a proposal is made in Parliament that all debt obligations on the part of the individual are to be reconstituted as 'Flexi-debt'- which is a form of debt repayment that is linked to monthly income. This is how it would work; suppose you had a mobile phone contract that required a monthly payment but for some reason your income this month was reduced making that payment difficult- under the terms of 'Flexi-debt' all you need do is contact your mobile phone provider, explain your problem and they will agree that you need not make a payment this month. You still owe the debt but it's repayment is flexible and depends on your income. The same applies to rent payment or Gas bills ect ect.

Imagine now the screams of anguish from every corner- imagine the frenzied lobbying as every billing entity in the country descended on London to plead their case. And what is that case?

Well I would guess it would go something like this; 'We could not possibly conduct our business on this kind of flexible arrangement- it would lead to chaos because we would not know from one month to the next what our income would be- we could not plan or organize for the future ect ect.

But surely this cannot be right?- after all is this not exactly what many of these companies are proposing that their own employees do? What is a zero hours contract if not 'Flexi-employment'? And if these companies find the prospect of 'Flexi-debt' so terrifying then why do they wish to inflict this same kind of uncertainty on the people they employ?

The stench of hypocrisy here is hard to ignore once you have taken the time to wake up and smell the coffee served to you by a zero hours contract waitress employed by a multi billion pound corporation that evades it's taxes.

Edited by wonderpup

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Another area in which we see this shifting of risk is that of pension schemes, where companies that are purchased or refinanced in various ways such as M&A deals will shed their pension liabilities and obligations despite the fact that their employees might have contributed for decades to these schemes- presumably the state will once again step in to bail these schemes out or pick up the pieces.

To "shed" liability for a defined contribution scheme usually required either:

(1) the selling shareholders to do a deal with the pension trustees whereby the trustees release the Company from it its obligations to the pension fund (usually requires a large payment from the selling shareholders to the pension fund);

or

(2) the company to be placed into administration, the selling shareholders only receiving any return once the pension scheme and all other creditors have been made whole.

In scenario (2), if the value of the company is insufficient to make the pension scheme whole then liabilities may fall upon the state. In this situation the Company was insolvent already (as the sum of its assets could not meet its liabilities - including those to the pension fund) and as such was a car crash waiting to happen, the selling shareholders get wiped out in the scenario. Rather than let the Company fail, putting its employees out of work and leaving a large hole in the pension fund the best solution is often to sell the business as a going concern as this realises the best recovery for the pension fund and creditors.

This point aside I agree with the rest of your post....

Edited by Exiled Canadian

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Beautifully put Wonderpup, which is why I would never accept or apply to a zero hours contract....perhaps what might happen with the increase in zero hours contract is that more people will work on the black market, avoiding tax and using the zero hours contract as a legitimate 'front' to placate the tax man?

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You forget the constant re-distribution of wealth to the property owning and rentiers.

With land leveraged to the money supply, land prices always rise at multiples of incomes. Untaxed gains.

And not just that but by keeping rates low to keep the credit flowing and the money supply growing, it means that debts are eroded even whilst land prices are multiplied and rents are collected.

A process of asset acquisition takes place whereby property owners can leverage up their property multiple times and watch their debts disappear as their asset holdings grow.

Contrary to what we are told that low rates are to save the poor, in fact the most highly leveraged are the rich who have assets to pledge.

The property owners' gains do not mainly come from their own improvements but from the community:

1. The money supply

2. Accessibility to local earning power

3. Improvements by the community such as roads and rail.

4. Planning permission

5. Views and the like

The community needs to wrtest back this unfair re-distribution of unearned wealth.

What he said.

It is all about capturing increases in asset prices and the rents that can be obtained from the control of resources. It is going to continue sucking the life out of the rest of the economy until the whole thing implodes.

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Another area in which we see this shifting of risk is that of pension schemes, where companies that are purchased or refinanced in various ways such as M&A deals will shed their pension liabilities and obligations despite the fact that their employees might have contributed for decades to these schemes- presumably the state will once again step in to bail these schemes out or pick up the pieces.

To "shed" liability for a defined contribution scheme usually required either:

(1) the selling shareholders to do a deal with the pension trustees whereby the trustees release the Company from it its obligations to the pension fund (usually requires a large payment from the selling shareholders to the pension fund);

or

(2) the company to be placed into administration, the selling shareholders only receiving any return once the pension scheme and all other creditors have been made whole.

In scenario (2), if the value of the company is insufficient to make the pension scheme whole then liabilities may fall upon the state. In this situation the Company was insolvent already (as the sum of its assets could not meet its liabilities - including those to the pension fund) and as such was a car crash waiting to happen, the selling shareholders get wiped out in the scenario. Rather than let the Company fail, putting its employees out of work and leaving a large hole in the pension fund the best solution is often to sell the business as a going concern as this realises the best recovery for the pension fund and creditors.

This point aside I agree with the rest of your post....

I had in mind those situations in which a company is bought out with mostly borrowed money- the bulk of the purchase price being loaded onto the books as debt that eventually sinks the company while the originators of the scheme have long since made out like bandits via the large 'fees' they award themselves for their efforts- leaving the employees without pensions and the state with the costs. In these cases the 'car crash' was carefully engineered to maximize the short term gain of a few at the expense of the many- another example of risk manipulation that turns Capitalism into a rigged game.

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In 1909 a dangerous subversive explained the issue thus.
“Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labor and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived. … the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done.” (13)

Who was this firebrand? Winston Churchill. As Churchill, Adam Smith(14) and many others have pointed out, those who own the land skim wealth from everyone else, without exertion or enterprise. They “levy a toll upon all other forms of wealth and every form of industry.”(15) Land value tax recoups this toll.

http://www.monbiot.com/2013/01/21/a-telling-silence/

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The Law of Rent.

The party which makes combating this law it's single priority, will lift millions out of poverty and reward the average family massively.

Instead, we get socialists fighting to take money from the rich with one hand, only to watch it to be given back with the other. It's rather sad and pathetic really.

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Bass makes the point in this talk that people take huge risks because they place a bet, it works they get a big pay day. Lose the money and they get sacked but have been paid for a year.

The problem with risk is that those taking it don't foot the bill. This is moral hazard not the nonsense about if you have fire insurance you'll take less care of your property, I have no idea where this stupid argument came from but I have house insurance and I don't put lighted candles next to the curtains because I think feck it I have house insurance!

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The Law of Rent.

The party which makes combating this law it's single priority, will lift millions out of poverty and reward the average family massively...

That's what the LibDems should do - revert to Liberalism, and stop conceding principle to short-term (and failed) political calculus.

Disclaimer: I'm a liberal. Economically liberal, political liberal, socially liberal; and not in the US sense.

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We've had thirty-six years of neoliberal, free market capitalism - easy credit, Big Money and the systematic dilution of financial rules set up in the wake of the Great Depression. So much so that the unregulated free market has assumed the status of natural law, despite the fact that it's failed singularly to deliver on any of its promises, or even match the economic record of the post-WW2 era to which it is ideologically opposed. Even prior to the Crash in 2008 there was no empirical basis for believing that free markets delivered optimal economic outcomes, and the conceptual framework used to justify said belief has since been proven to be logically inconsistent and computationally impossible. Minsky taught us that financial systems, when left to their own devices, are inherently unstable. More generally, we now know that markets and economies are not stable, quasi-static and self-regulating - there is no Invisible Hand - but dynamic, nonlinear and prone to runaway collapse. Regulations, prosecutions and constant vigilance are what is required to keep them upright and stable.

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The stench of hypocrisy here is hard to ignore once you have taken the time to wake up and smell the coffee served to you by a zero hours contract waitress employed by a multi billion pound corporation that evades it's taxes.

See

http://www.theguardian.com/commentisfree/2015/may/18/britain-political-elite-fooled-us-again

This is what politics looks like in Britain nowadays, once the newspapers have their japes and the politicians leave the TV studios: it is about justifying an extractive business class that wants to lean on taxpayers to pay their way, even while lecturing the rest of us about welfare dependency. And it doesn’t change all that much whether the Tories or Labour are in Downing Street. The Cresc team looked at who reaped the rewards from growth over the past three decades. Under Thatcher and Major, the top 10% of all working-age households took 29p in every £1 of income growth. Under Blair and Brown, their share actually went up, to 30p in each £1. Cresc found that New Labour bumped up the share of the poorest economically active households from 0.5% to 1.5%. Taxes and benefits evened that up a bit – the same taxes and benefits that are now deemed unaffordable. So much for trickle down.

This is what all the misdirection has been about: taking our minds off the fact that Britain is a soft touch for businesses that want taxpayers to pay their way, and politicians who count on the middle classes to feel richer, not through their wage packets, but by their house prices, their no-frills flights, their luxury buys from Lidl. What a trick has been pulled on Britain by its political and business elite: never have so many people had their pockets picked at the same time.

Edited by dothemaths

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SocGen Bosses Knew 'Rogue Trader' Kerviel Was Taking Massive Risks

20150518_kerviel.jpg

Bosses at French banking giant Societe Generale were aware of the activities of "rogue trader" Jerome Kerviel, a top detective working on the case reportedly told an investigating judge, according to France24. The French investigative news website, Mediapart, quoted Nathalie Le Roy as telling judge Roger Le Loire she was "certain" that Kerviel's superiors "could not have been unaware" he was taking wildly risky bets on derivatives. However, as Bloomberg reports, SocGen, in a statement released on Monday, that several judicial decisions have assigned exclusive criminal responsibility to Kerviel, adding "it’s just the opinion of a person and not based on the discovery of new documents."

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e.g. The Glazers. What value do they add?

Or Branson with buying Northern Rock when he was allowed to buy the company off the government simply by weakening its capital strength once in his grubby hands. Yes, he literally mostly used its own reserves to buy it off us on the cheap and thrust it back into the risky category...the risk of which was ours in the first place when we bailed it out.

I think the glazers have done exceptionally well, really managed that business well. It was a £575m business when they took it over, they have had their most successful 10 year period under them and are now valued at £2bn, having just signed the best shirt deal in British history. They've turned nothing into £1.62bn, as the debt is currently £380m.

Look at what 4 yanks have done to LFC (Valued at £300m) and imagine what they could have done to Man Utd.

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I think the glazers have done exceptionally well, really managed that business well. It was a £575m business when they took it over, they have had their most successful 10 year period under them and are now valued at £2bn, having just signed the best shirt deal in British history. They've turned nothing into £1.62bn, as the debt is currently £380m.

Look at what 4 yanks have done to LFC (Valued at £300m) and imagine what they could have done to Man Utd.

£2bn in this market, that can change. It's out of sight from 1989 when Knighton's £20m offer for the club (+ extra £10m to directly invest in the club) being accepted (but some of his backers pulled out on him).

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I think the glazers have done exceptionally well, really managed that business well. It was a £575m business when they took it over, they have had their most successful 10 year period under them and are now valued at £2bn, having just signed the best shirt deal in British history. They've turned nothing into £1.62bn, as the debt is currently £380m.

Look at what 4 yanks have done to LFC (Valued at £300m) and imagine what they could have done to Man Utd.

Nothing to do with the Sky TV deal then?

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£2bn in this market, that can change. It's out of sight from 1989 when Knighton's £20m offer for the club (+ extra £10m to directly invest in the club) being accepted (but some of his backers pulled out on him).

The point is, they leveraged the club 10 years ago and have quadrupled it's value. £380m debt this year up from £350m down to some administration thing.

Nothing to do with the Sky TV deal then?

Which one, there's been 4. And no, they increased the marketing team from 4 people to 120, started selling deals like the £600m training shirt deal, the 750m Adidas shirt deal.

Say what you like about the Glazers, but fools they aren't and as a club we've won more under them than in any other 10 year period.

Turning nothing into a profit of £1.62bn is a work of genius. It's not like we've not been able to attract top players to the club in that time either.

I think the vitriol directed at them is unfounded and unfair. Watch the club throw another £150m-160m at players and listen to the whining.

Edited by Hairy1305

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