Stability in Financial Systems
Adverts talk about get the strength of the insurance companies around you and you say that it’s as solid as the Bank of England.
I am a Control Engineer by training and one of the topics that is important is the concept of stability. Since I learned it all in the 1960s, the definitions have increased in scope a lot. I would describe a system as stable, as one that when you displace it, it returns to the same state of rest.
So as an example of a stable system, if you take a ball-bearing or marble in a typical kitchen bowl, it will lie in the bottom. Give it a small push and it will oscillate in and run round the bowl, until what friction there is returns it to the bottom. If however you balance the ball on say a football and give it even the tiniest push it will run off the edge. That is an unstable system.
In everything we do, we always should deal with stable systems.
So let’s look now at a small savings bank with a 100 branches or so.
Rumours are circulating that the bank has made a silly investment on say the 15:30 at Cheltenham and the horse fell at the third fence. Well, not really! But a banking equivalent!
So savers start to panic, as for many, it is the only savings they have. And when they panic, they withdraw their funds and put them under the nearest mattress. Or at least a metaphorical one!
So the problem goes round in circles, from more panic and withdrawals, until the bank has nothing left to pay out and goes bust. We’ve all seen runs like this on banks and hopefully we don’t want to see any more.
So are there any stable financial systems?
Current, deposit and savings accounts in reputable UK banks and building societies, could probably be considered stable up to a government-guaranteed limit of I think £85,000. It’s all laid out here. but then is it worth it for an interest rate of about 3%?
I have a strong feeling that Zopa, the peer-to-peer lender, is also a stable system. Other companies of the same type may well be too! but I am not as familiar with them as I am with Zopa.
Let’s look at an adverse event, that might affect Zopa.
Suppose another peer-to-peer lender gets involved in a mis-selling scandal or suffers a run because of some very bad publicity.
Let’s say this causes a lot of possible borrowers to look elsewhere. Now as demand has dropped, lenders, who are still keen to lend money, will drop their rates to account for the new situation. And then in turn these lower rates will entice more borrowers, thus restoring the system to where it started.
What actually helps the system become stable is that each lender has control of their own little feedback loop and as there are thousands of lenders, the system will adjust very quickly.
In a bank say, there will be one guy taking the decisions and they have a high chance of making a wrong one. All you need for a stable system, is for the average in something like Zopa to get it right. As Zopa uses a computer algorithm, every decision is taken according to the same rules.
You can look at other scenarios with Zopa and I haven’t found one yet, that doesn’t return to a stable position.
This stability could be your guarantee of a safer investment. I haven’t obviously got access to Zopa’s full data, but just like water finds its own level, a balance is probably struck between lenders and borrowers.
FT Says Afghans Want Local Trial
The shooting of Afghans by a rogue US serviceman, is absolutely awful and I dread to think where it will lead. I think if I was a soldier out there now, I’d be watching a few Black Adder Goes Forth videos, to get myself invalided home.
The FT this morning is claiming that the Afghan government want a local trial.
I hope that Afghanistan doesn’t have the death penalty!
Getting The Wife On The Board
We all know that we need more women on the board of both public and private companies. But is Volkswagen Chairman Ferdinand Piech taking this a bit too far, by getting his wife, Ursula, on the board, as reported here on Bloomberg?
I’ve served on committees with board husband and wife on them and they are a nightmare. You spend all the meeting trying to get a concensus and wo-betide you, if the wife has been outvoted by the group including her husband. She will then spend all night changing his mind, so you have to go through the process all over again.
So do Volkswagen know what they are getting themselves into?
Surely, there must be another woman in Germany, who would do a better job than the Chairman’s wife!
Cleanup Solutions
I saw a guy on the Tube this morning with Cleanup Solutions on his smart black T-sheet. As I read it out of the corner of my eye, I thought it was called Cheerup Solutions!
Now there’s a name for a company!
America Has Too Many Lawyers
This must be true as lawyers are now suing the law schools for producing too many lawyers and it’s reported in today’s Times.
I think we’ve had the same problem here for some years, as C always said that when she retired, the new barristers wouldn’t or couldn’t afford to do the important work she used to do with respect to sorting out children, as there was no money in it.
She always said that fewer and better lawyers, might produce some, who had the conscience and ability to do the work she did.
There is always the old joke.
Q. What do you call a 1,000 American lawyer at the bottom of the sea?
A. A good start!
Zopa And A European Transaction Tax
There has been a lot of talk and some would say hot air lately from politicians about a European Financial Transaction Tax. This morning I heard on the radio, that such a tax would reduce the value of pensions dramatically, as every time your pension provider bought or sold a share or bond, you’d pay tax on it. It would probably mean that annuity returns would drop significantly.
On the other hand, if you look at Zopa, which gives me similar returns to what I would expect from my pension or annuity provider, I would hope they are outside of a European Financial Transaction Tax. Unless of course, the tax means that every time we make a transfer from our bank account, 0.01% goes to a central fund in the EU to bail out countries like Greece and Italy.
I would think that if any British Prime Minister allowed that, we would see riots, like we’ve never seen before.
So one of the advantages of an investment like Zopa, is that it should be outside any proposed European Financial Transaction Tax. On the other hand, this just might get the EU to make companies like Zopa illegal or ensure that every lender was registered with some new bureaucracy. Remember that a civil servant’s first duty is to create more jobs for others of his ilk.
So my advice to those who want to have a safe place for their savings, might find Zopa and the other peer-to-peer lenders, a safer place than stocks and shares.
The Royal Docks Terminal of the Emirates Air-Line
These pictures are a few bad ones of the new Royal Docks terminal of the Emirates Air-Line.
It looks like that once the fences come down, it will look a lot better. The line will also give a new route to the O2 and spectacular views of London.
The terminal is a short walk from Royal Victoria station on the Docklands Light Railway.
Note that since the original post, I’ve added a few pictures of the intermediate cable towers. These pictures were either taken from or around West Silvertown station or from the top deck of a 474 bus, which runs from Canning Town station along the line of Docklands Light Railway to London City Airport and further to the east.
A Good Safety Slogan
I took this picture on the site of the Royal Docks terminal of the new Emirates Air-Line.
A Good Safety Slogan
It’s so obvious, I’m surprised I’ve not seen it before.
Smokers’ Mess Outside a Pub
I took this picture outside a pub yesterday morning.
Smoker's Mess Outside a Pub
Isn’t smoking a filthy habit! I’m sure the road-sweeper will agree.
Council Employees Tax Avoidance Schemes
I have been amazed for some years at the enormous salaries trousered by some top council employees. After all, you can’t say that they do a creative job that adds value. Now it appears that many of these employees are paid through companies to avoid tax, according to a report by the Public Accounts Committee. The chair of this committee Margaret Hodge is quoted on the BBC as saying.
This is a tax avoidance scheme which is totally wrong. Where you are a public servant it’s not right you should be paid in a way that avoids tax
I agree! If George Osborne is looking for a place to raise money in the budget, he could declare these contracts illegal and raise perhaps a billion or two.
It would appear that my council, Hackney, is one of the worst offenders, with 39 employees being paid this way.
The Anonymous Widower 