Common Cents

Implication of Brexit

Ralph Murphy

(7/2016) The success of the United Kingdom’s Brexit vote has been met with general euphoria by Britons at regaining financial as well as border and political control against foreign influences. There has also been a wave of apprehension as to the nation’s near term course and related political and economic changes. Prime Minister David Cameron who was closely tied to the Remain campaign, said he will probably step down by October. Dates of formal disengagement from the European Union (EU) should be finalized by then, but financial markets are a current concern there and on the continent.

The real issue right now appears to be who controls Europe's financial markets and border security- defense interests. Defense is a conventional, chronic concern, but is secondary to what appears to have been a merger of private sector, corporate lenders with their respective central banks and "pooled" assets. Both are working capital and invested funds of private depositors. The firms can cover a "competence gap" with the Treasury money and it appears surreptitious. Poor investments seem routinely bailed out by their new access and it may have reached really problematic losses hidden by a Treasury fund that is so large that a call up of outstanding cash at any point in time is almost impossible.

American investment banks since the 1999 repeal of the 1935 Glass-Steagal legislation separating deposit from stock investors have been active in those markets both at home and abroad. Since 2008 investment banks have had a link to the Treasury and while much attention is focused on the return of specific loans- legal access makes their actions in "retail, wholesale, investment banking, and wealth management" almost risk free. That wouldn't be much of a problem, but since 2009 the bankers and affiliates seem very active politically and are having an impact on regional politics. They appear to "float" the loss - making EU ventures such as loans to Greece, Ireland and others simply a collective loss and non-repayment.

While American laws are legally tempered compared to the European Union- European Union officials can develop losses abroad that often go unnoticed as the Treasury money is so vast. Since the 2009 Treaty of Lisbon- the European Commission or executive EU organ that can dictate any social policy they want. This includes rulings on finance issues among its 27 current members. There is a shared currency to the euro introduced after 2002 for 19 of them, but the others were pegged to include the British pound which is taking a healthy correction to a slightly lower value which should boost exports if market signals warrant it.

American firms that seem to have been strongly influential in both the economic investments and associated politics include JP Morgan, Morgan Stanley, Bank of America, and Citigroup. They are closely linked to American politics and EU investments. They also may have strongly swayed Cameron's EU stance in that he did a complete turnaround on the issue since 2013 when he campaigned for Leave campaign support for a 2017 referendum. He strongly opposed the same measure this year without any change in his public position right up to the 23 June referendum. Again - he is to step down along with his advisors - while the Tories retain power. They were divided on the EU issue.

The British may take a snap poll but the Conservatives remain strong at Westminster and the main opposition Labour Party took a very similar Remain in the EU stand. Both are net losers on the issue. Change has to come from internal party policy directives and other EU nations are sure to also disengage as the EU’s promise has never been fulfilled. Unemployment has spiked at over 20 percent in some member nations. Government debt is impossibly high, but is hard to trace because losses are disguised.

In America and England a distinction is made between "Universal banks" offerings of both equities and deposit services. On the continent it is more routine. Deposit and stock investment in Europe is almost routine, as they can and do legally own and operate even gambling facilities such as casinos with demand deposit funds and bailouts for losses from the Treasury access. Large banks are more likely to be universal, but medium or small banks also can legally afford these functions. Relatively large banks include France's BNP Paribus, Credit Agricole and Societe Generale, Germany's Deutsche Bank, UK's HSBC link, RBS, Barclays and Chartered. There are numerous others.

The production and trade of commodities and manufactured goods across national borders does not appear to be a problem. Nations can pick or exclude goods with respect to need and probable reciprocity. The real concern seems to be the financial link between money producers, investors and buyers who trust their central bank authorities who often play politics with it. For example, when Greece didn't gain from a bond issue- the initial tranches just disappeared. Only government securities or bond issues should be tied to a desired currency value.

The system has to recognize and respect agreed borders in military security and financial matters. Central banks ideally would only have a money supply to support the private sector. Routine, federally approved programs obviously would need cash as well. They can't pool private sector assets as they become political funds to support various policies. The government cannot cover high risk or no-return investments because they often aren't vetted for or proficient at this. They must maintain a strong regulatory role relating to goods and services as well as credit-based bank risk aversion relating to investments.

Currencies should "float" to reflect varied economic actions in differing nations at a point in time. Each nation should have their own currency as well as central bank that is free from foreign policy presence. Also, it should avoid clear conflicts of interests- even real animosity- in cross cultural concerns of a religious or racial nature. England was the last major power to join the EU’s predecessor - the EEC (European Economic Community), and found it wanting. It is also the first nation to legally exit the EU’s restrictive debt structure. Regulated competition should prove the way forward. It may take effort, but the system would then reflect real human need. Opposing forces don't often share without a clear benefit. The UK recognized this fact and voted to leave. Others may follow shortly.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.