Seasoned users of ‘ready’ money may already be noticing a backlash against cash. While cardholders swipe and type, cash customers must ride the glare of chafing chip-and-pins, maddened by the mutual fumbling over miniaturised coins. Travellers’ only rescue from a ticket queue longer than their journey is a machine which laps up plastic, but chokes on all but the most freshly-ironed banknotes and gives no change. Sales are shifting at double-digit rates to an internet which recognises Mastercard, Visa and PayPal infallibility, but sees no virtue in any non-virtual token.

Paper profits

Not long ago, people in power loved paper money. It was a commercial invention, devised to circumvent the physical inconvenience of gold and silver. Instead of issuing invoices which then had to be swapped for precious metal, buyers and sellers started trading the bits of paper, only rarely visiting the bank to withdraw the underlying riches. Private debt had become a convenient form of currency, fulfilling the traditional requirement of storing value and speeding up exchange. This also had immense political advantages, freeing rulers from the fiscal inconvenience of scarce and theft-prone bullion.

Governments could now print notes to represent their official reserves, keeping these locked in suitably fortified central banks, and once people trusted the paper currency, more could be issued – an especially useful tactic for rulers struggling to squeeze subscriptions from their nobility, or keener to raise an army than the accompanying tax. Medieval kings and emperors could only expand the money supply this way by clipping the gold and silver coins, or smuggling base metals into the mint. Their modern successors have the happier option of issuing public debt, spending more now while passing the bill to taxpayers still too young to vote.

Issuing more public debt than private investors want to hold – today’s innocuous sounding ‘quantitative easing’ – is traditionally condemned by monetarists as cruelly clawing-back the handouts through a hidden inflation tax, but this is an occasional public indulgence in a practice that’s second nature to commercial banks. They routinely make loans that are a multiple of customer deposits, pushing assets (and corresponding liabilities) far above what is actually held in reserve. Indeed, governments only rush to quantitatively ease when banks are on their collective knees because their credit has ceased to flow.

Paper money enables the same capital to be put to work in many places simultaneously. Productivity is multiplied by turning each asset into collateral for another, and re-lending many times the wealth that used to sit idly in a vault. Securitised debt may recently have stalled the world economy, but it’s only an extension of the forces that previously drove it. That’s why governments splashed the blank cheques to redeem the chequered banks.

A bullet through the wallet

If paper money opened all these doors, why is its future in any danger? For the same reason that an abstract axe hangs over the Royal Mail, printed newspapers and music on disc. Just as we could get value from precious metal without minting it, we can now get value from an invoice without printing it. Once money’s more manageable as an electronic pulse, suspicion surrounds those who still want it in physical form.

The problem with paper money is that it leaves no ‘paper trail’. Governments have long resented the way cash transactions enable legal traders to sidestep taxes, and illegal traders to launder their profits into regular circulation. The growing skill of forgers also challenges the most jealously guarded monopoly of sovereigns, who aren’t flattered when their likeness runs off someone else’s printing press.

More influentially, big retailers and manufacturers curse cash deals that fall outside their customer databases, so it can’t then be ‘mined’ for appropriately personal marketing ploys. They also regret needing a fleet of armour-plated couriers to empty and fill their cash-heavy tills. Finance directors declare war on the ‘off card’ transaction, which lets executives scupper the expense tracking system with improbable taxi fares and budget-busting bar bills.

Cash stands accused of causing banks to crash and civilisations to clash. Lenin famously viewed debauching the currency as the quickest way to undermine capitalism. Hitler came close to putting such pecuniary subversion into effect, with a wartime scheme to bomb Britain with banknotes, a road to ruin via rampant inflation. Guy Fawkes’s belated knighthood, for services to the global firework industry, is obstructed by his financially illiterate choice of tactics. Instead of lighting the blue touch-paper, he should have been faking the banknote paper and causing an unsustainable credit explosion.

Governments seeking faster, cheaper and more visible transactions are keen to kill the dollar bill – and its counter-clogging counterparts in the euro, yen and sterling zones. Corporations are equally concerned to stamp out logistically wasteful, electronically untraceable cash flows. To meet their demands, innovators who once promised a licence to print money now offer grand designs for making it vanish. Amid a general dearth of political visions, that of cashless society stands out like a viable mortgage in a sea of sub-prime debt.

Why cook the books when they can be vaporised?

In the brave new banknote-free world, cards will rule even at the bus stop and corner store, with mobile phones as an alternative means of payment. The mobile internet will move against cash by spreading direct transfers that have already shot down the once-mighty cheque. Formerly well-thumbed Adam Smith, Charles Darwin and Elizabeth Fry will be banished to the portrait gallery, while royal heads retreat to the postage stamp.

If robbed of officially sanctioned cash, won’t people just invent their own? Economies that ran short of legal tender were famously quick to adopt a replacement, from cigarettes in prisoner-of-war camps to elaborate IOUs in post-Soviet Russia.

However, the death of cash means only the de-materialisation of money, not its disappearance. Indeed, the biggest danger is that paperless money be further detached from underlying wealth, drowning us in devalued riches. Air Miles already rival the world’s major currencies in terms of quantity and acceptability, but so many have been created that running flights for them all would fry the world before a fraction of the holders could fly round it. Second Life is shielded from excess of virtual currency only by the infinite expandability of online real estate.

Prophets of the cashless economy promise that risks of monetary excess will be reduced, with every deposit and withdrawal electronically matched. New regulatory schemes to avert further meltdowns, including a giant register of to check that banks’ balance sheet assumptions really add up, underline the faith in data-based trading to guarantee transparency and monetary stability.

What of those who can’t afford a plastic card, aren’t online and don’t carry a mobile? Cashless commerce will compound an already serious digital divide. Those barred from the virtual marketplace may have to form their own cash-trading communities, until connections to new networks are as ubiquitous and affordable as those of the savings banks and post offices they replace. Pulling out a banknote could soon be an act of solidarity with the socially excluded, but you’ll still have to swap them on windy street corners, after the tobacco smoke has cleared.

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The Great Escape

Aside from Lehman, banks have bounced back with their businesses and bonuses intact. Many have already returned to profit, with their investment banking units – whose speculative gambles were at the heart of last year’s problems – now helping to support the commercial side as it writes down its bad mortgage debt.

Lloyds, which looked to have bitten off more than it could chew by acquiring HBOS, is now a legally sanctioned giant that controls around one-third of UK mortgages and current accounts and a quarter of its business banking. Barclays, once viewed as perennially ripe for acquisition by a larger group, has now joined their ranks by cherry-picking Lehman at minimum cost. Fortis, facing bankruptcy a year ago, has announced a major UK expansion in alliance with Tesco. Merrill Lynch and Citibank continue to issue their uncompromising analysis of other firms’ finances, having buried the obituaries that were being written on their own a year ago.

Houses of Parliament at dusk.

Most of the management teams that presided over near-bankruptcy are still in place, enjoying undiminished performance and retention bonuses. Many of those dramatically turfed out of their Canary Wharf offices in September 2008 already have their feet under a comparable desk on someone else’s trading floor. And of the bosses who bet their banks and lost, there is none whose golden parachute failed to open. Even Lehman ex-CEO Dick Fuld is on hire as a consultant, just round the corner from Wall Street. Sir Fred Goodwin’s RBS pension, big enough to be a one-man stimulus package, attracts powerless resentment but continues to flow.

Meanwhile, the governments whose quick thinking made this possible are condemned, for the budgetary cost and for the scale on which their bailouts and loan guarantees seem to have feathered high-financial nests. Ironically, the more successful their rescue plans and the faster the financial world returns to normal, the worse is the electoral fallout. Gordon Brown, architect of last September’s global rescue, enjoyed a ‘bounce’ when turmoil and recession were at their worst and now sees his ratings fall with every sign of economic recovery.

Incumbents are being punished without regard to political stripe, so the by-election reversals are as bad for Angela Merkel’s Christian Democrats as for Brown’s New Labour. Bankers have become, like Ronald Biggs and Abdelbaset al-Megrahi, once unspeakable prisoners who walked out of jail, leaving condemnation raining down on those who let them out.

Sowing the Sense of False Security

Were bankers just lucky? Sadly, past crises showed a similar pattern. The biggest banks basked in the knowledge that they were ‘too big to fail’, even before the recent deepening and widening of their global interconnections. Many were emboldened in their retrospectively reckless gambles – on mortgages, securitisations and derivatives – by assurance that the state and its regulators would step in if their luck ran out.

emboldened in their retrospectively reckless gambles

With their deposits insured, their liquidity underpinned by a central bank, and their riskier loans apparently underwritten by credit default swaps, banks would have been foolish if they hadn’t taken increasing risks in pursuit of higher returns. Indeed, the management of HSBC – the only ‘Big Four’ bank to ride serenely through last year’s storms – had endured years of onslaught from activist shareholders aghast at its refusal to run down its capital, raise its leverage and gamble like the rest.

Bicycle helmets can prevent head injuries in many common accident situations. Yet their increased use is not associated with a reduction in such injuries – because helmet wearers take more risks, and are treated less carefully by other road users. Similarly, traditional banking safeguards encourage borrowers and lenders to take more risks. We’re usually grateful that they do. There were few more reckless gambles than building the first horseless carriage, microcomputer or oil-well, but lives were transformed for the better by those who did.

In most sectors, however, competition puts limits on risk-taking. Customers will go elsewhere if the firm’s product becomes too dangerous, and shareholders will desert it if the way it makes profit becomes too dangerous. Tragically, competition in financial services seems to have the opposite effect, driving companies to take more punts and fewer precautions. Customers flocked to Ice-Save because of its improbably high interest rates, shareholders to Lehman because of its impressive rates of return.

Counterproductive Competition

Alerted in 2000 (by the Cruickshank Report) to banks’ unusually high and consistent profitability, the UK government made a fundamental and possibly fatal choice. It didn’t want to regulate banks’ rates of return, as it traditionally did with highly concentrated, highly profitable utilities like electricity, gas and telecommunication. So it decided to make banking more competitive; and to encourage the combination of commercial banking, investment banking, brokerage and insurance so that big financial groups could compete along more dimensions.

In retail banking, competition meant narrowing the gap between savers’ and borrowers’ interest rates, and making up for the consequent loss of profit by offering more commission- and fee-based services. From this came banks’ substantially increased use of wholesale financial markets to raise funds, using collateralised debt as security, and the high-pressure selling tactics that led to serial mis-selling episodes. In investment banking, competition meant an erosion of low-risk trading profits, based on identifying and amending asset price misalignments. It led banks to preserve those profits by borrowing (‘leveraging’) more heavily to multiply the diminishing margin, and to supplement them with more investment in purely speculative asset-price movements.

no government can afford to jeopardise the financial sector’s profit recoveryno government can afford to jeopardise the financial sector’s profit recovery

Competition in insurance, and derivative markets, meant that bankers could often buy cover for adverse price movements. They didn’t realise (or didn’t like to mention) that the cover was ultimately underwritten by another part of the same group, or that it couldn’t possibly pay out if a general asset-price downturn caused the risks to become systemic.

Competition for the apparent expertise required to design and trade these exotic new instruments led to a steep inflation of banking and insurance salaries, topped by an even greater explosion in performance bonuses and executive share options. So banks’ profits underwent the desired moderation – but due less to competition than to the diversion of cashflow from shareholders to bonuses, and the large sums that had to be set aside for potentially non-performing investments and debts.

With banks still in delicate health until their mortgagees recover, and businesses under strain until banks can resume normal lending, no government can afford to jeopardise the financial sector’s profit recovery. So the grand regulatory schemes of a year ago, to change the rules and rebuild firewalls between financial activities, have been quietly put aside.

Banks that once, as a cosy cartel, enjoyed big private profits and got the state to subsidise their losses, have now shown that they can pull off the trick even more successfully as a competitive, deregulated industry. No wonder the politicians who pulled the world back from the brink, a year ago, are now being pilloried for letting those who pushed it there off-the-hook.

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Hazard of banking: risk of falling.

How we answer this question will have a profound effect on how we now approach financial regulation – and the regulation of many other activities with unpredictable and potentially damaging effects. Until now, we have tended to take a ‘risk-based’ approach to future contingencies. This means, crudely, calculating the financial impact of what could go wrong, and the probability of its going wrong, and multiplying the two to put a monetary value on the cost if things go wrong.

The Taleb view leans in favour of a ‘hazard-based’ approach, which focuses on the impact of the disaster when it occurs. This means paying more attention to extremely unlikely events that have serious consequences. If such ‘Black Swans’ had been taken more seriously, the calamitous events of 2007-9 would have been better prepared for, or detected and averted at a far less damaging stage.

While recent events have been something of an oil slick to the Black Swans argument, hazard-based thinking risks extreme caution and conservatism. The chemical industry is currently up in arms over an EU switch towards hazard-based assessment, which would grade compounds according to their toxicity – what they can do if people are exposed to them – without regard to the likelihood of such exposure. It’s like taking the impact part of the risk-based calculation, but leaving out the probability part.

paying more attention to extremely unlikely events that have serious consequences

Critics say it is an intolerably strict implementation of the precautionary principle: the sort of approach that would ban all cars because of the fatal consequences when they hit pedestrians at speed, or disconnect all houses from piped gas because of the occasional explosion. But there may be factors that justify its application to financial services, even if it’s a retrograde step regarding fertilisers and detergents.

The risk-based approach may have fallen down by underestimating the likelihood of extreme events, and the severity of their impact when they happen. Both underestimations arise from the extreme interconnectedness of the financial system compared with other sectors. Instead of spreading and transferring risks so that mismanaged financial institutions can fail in isolation, globalisation and financial innovation appear to have heightened interdependence so that a few misguided players – Northern Rock and Lehman Brothers in 2007-8, Long Term Capital Management in 1998 – can rapidly jeopardise the whole global economy. When the costs of retrieving the situation run into billions if not trillions, the case is made for preventing the hazard, however remote its likelihood of occurrence seems to be.

Defenders of the risk-based approach would say that this is still too cautious. In curbing hazardous practices (like high leverage, securitisation, derivatives trading and credit default swaps) because of the immense damage when something goes wrong, we would forgo the equally immense benefits these confer most of the time, when everything goes right. We still risk the financial equivalent of keeping all cars behind a red flag because of the occasional road death if they travel at normal speeds.

curbing hazardous practices of the immense damage when something goes wrong

But are the benefits really so immense? This question has long been asked by those in the ‘real economy’ mystified by the source of bankers’ and brokers’ vast wealth, and was raised in August by none other than the chair of the Financial Services Authority, one of the regulators at the centre of the recent banking crisis. Lord Turner admitted that some banking activities may be ‘socially useless’, and some financial innovations simply complications introduced to give intermediaries extra profit, like a roadblock at which highwaymen extract their toll from honest traders.

Turner is not the first to point out that, if financial services are supposed to grease the wheels of commerce and reduce transaction costs, then it is not obvious why the financial sector grows rather than shrinks as an economy grows richer. The bonus-fuelled bankers say they are promoting investment and growth by letting enterprise raise funds more cheaply, get higher returns and reduce or insure against risks.

At root, though, the most useful contribution of banking is the very basic one: channelling short-term savings into longer-term investment and supplying liquidity to businesses that must buy before they sell. These operations can be – and until recently were – run and regulated separately from those of higher-risk investment banking. If the growth of exotic ‘wholesale’ operations in London and New York is not essential to – and now endangers - the safety of ‘High Street’ borrowers and savers, then a hazard-based approach to the financial sector may be justified. Less like banning the car than fitting compulsory anti-lock brakes.

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Even so, the consequent short-term rise in public borrowing – to a projected (and likely exceeded) £175bn in the UK this financial year, from £30bn in 2008/9 – puts a strict cap on what can be afforded for the NHS, schools, universities, and the rising numbers in the real economy who lost their jobs when banks lost their capacity to lend.

For years, Britain’s financial firms – especially those clustered in the City of London – justified their stratospheric pay and comparable political influence through their disproportionate contribution to the economy. According to Reforming Financial Markets, the Treasury’s response to recent troubles published in July, financial services generate 8% of our national output, employ more than a million people, and finance our otherwise unsustainable appetite for imported food and manufactures, contributing £38bn to the balance of payments even in the crisis year of 2008.

Bank of England, London.

The financial sector – with important centres in Leeds, Edinburgh and the south-west as well as London – is also credited with paying over £250bn in tax and National Insurance since 2000. The tax on financial incomes was, as The Love of Money Programme 2 showed, a significant contributor to the revenue boom that allowed the new Labour government to spend more on hospitals and schools after 1997.

But now that it’s absorbing rather than enlarging the nation’s wealth, people are bound to ask if finance can still justify its unusual size and influence. Even the chairman of the Financial Services Authority, Lord Turner, has been forced to raise the issue. Turner stunned the City on the 27th August by wondering out loud if our bankers, brokers, insurers and investment managers have moved from dynamism into sclerosis. He actually dared suggest that the industry the FSA regulates has grown too large – and that it promotes too many financial transactions, making the case for a Tobin Tax to slow the flows and stop investors chopping and churning so frequently.

Is Turner right? The argument that Britain’s finance has grown too big for its bonuses goes much wider than its recent implosion and the budgetary black hole. Even in the good times, critics argued that the City starved UK industry of capital through its century-old preference for investing abroad – and starved it of skilled labour by sidetracking top minds from real into financial engineering. Policies designed to make the UK attractive to foreign money were accused of holding back domestic enterprise – by keeping interest rates and the exchange rates too high, demanding short-term profit, and regulating so lightly that excessive risk-taking and fraud were bound to arise.

The big City ‘s usual defence is that its growth reflects success, caused by Britain having a comparative advantage in financial services. We therefore don’t just produce them for ourselves, but sell them to the rest of the world – capturing a useful chunk of other nations’ savings, which we can usefully invest in our own industries, infrastructures and public services. But there’s a darker side to this expansion, which Turner was already raising in speeches earlier this year. Being a financial hub makes the UK unusually exposed to risk, and contagious loss of confidence, when the wheels fall off the banking wagon. And some (if not most) of the sector’s recent profit may have come from adding to financial costs – by extracting a ‘rent’ from the real economy – rather than reducing those costs, and assisting industry, as an efficient financial sector is meant to do.

Finance is 8% of Britain’s GDP and is still a lot smaller than manufacturing’s 14%. The finance share has dropped from a peak of almost 11% in 1986, not least because that year’s Big Bang substantially cheapened many of the services it sells to other sectors. That deregulation was followed by an investment boom which helped some of those sectors (especially IT and other non-financial business services) grow substantially larger.

UK stock market data on a computer.

True, our major banks (and, in America, the biggest insurance company as well) have been given substantially larger assistance than the car, steel, coal or textile industries could have dreamed of during their consequently more protracted and painful structural upheavals. And whereas these industries had to shrink to survive, finance has been supported so it doesn’t have to downsize. That’s because bank collapses can send much bigger shock waves through the economy than any factory or mine closures.

On the other hand, UK agriculture – contributing less than 1% of GDP and half a million jobs – receives an ongoing subsidy of over £3bn per year. Farmers say a continued flow of home-grown food, and a working countryside, are essential. Bankers maintain (with economists’ support) a continued flow of credit is equally vital; and that we wouldn’t get on affordable terms without the investment instruments and risk transfers that financial markets provide.

Of course, most household saving and small business investment is done through commercial ‘High Street’ banks, which for most of history were separated from the City-based investment banks, and could be so again. But Turner’s FSA has, instead, sanctioned a deeper integration between commercial and investment banking, passing over the chance to re-impose a separation. The investment side, leeching capital a year ago, is now propping up continued losses on the commercial side. So it looks as if your High Street (or internet) bank will remain securely fastened to a very large, and still poorly understood, financial reprocessing unit in the backstreets of east London - whether the regulators believe it’s an essential extra limb or just a peacock’s tail.

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Uncle Sam money bank.
[Image © copyright liquidlibrary (RF)]

It’s true he’s crossed swords in the past with these fellow masters of the universe, and spurned their takeover offers in better times. But in banking circles, that’s supposed to kindle respect for the warrior, not deny them the lift from the White Knight in their moment of need.

Some of the top bankers whose institutions collapsed into government-backed rescue in 2008 were victims of a new financial universe, in which they were genuinely out of their depth. They had channelled the assets to smart investment-banking teams whose exotic trades in complex products were beyond their understanding, but whose years of high profit told their own story. They could plead a genuine ignorance of the bank-breaking risks that went with those high returns, having been brought up in a world of simpler products and more restrained competition, where complicated bets and split-second trading weren’t essential for good quarterly results.

But Lehmans’ downfall was, as the Love of Money’s eye-witness accounts confirm, the result of much more ordinary mistakes with traditional, straightforward financial products. Under Fuld’s watch the bank ran up too much debt, and pushed too much of its assets into house construction and purchase in the United States. Compared with JP Morgan – a big winner in the acquisitions bloodbath of 2008 – its exposure to derivative contracts was tiny. But its leverage ratio – of loans to the realisable assets they were secured against – was over 40 to 1, far above its major competitors’. When banks started raising the cost of credit, even to other banks, Lehman quickly slid into the same situation as many of the homeowners it had dealt with: unable to pay the interest out of its much-diminished income, waiting helplessly for foreclosure.

Toy house on dollar bills.
[image © copyright Photos.com]

Investment banks routinely use leverage to multiply the profit when an asset rises in value. It’s the same technique that households use when they buy a house with a mortgage. If you buy it for cash and the price rises 10%, your capital’s made a 10% return (plus a little bit extra if you count the rent you avoided paying). But if you pay for only 20% and borrow the rest, that 10% price rise gives you a 50% return.

The downside of leverage, which many have experienced in the past year, is that it also multiplies the loss when prices fall. That needn’t hurt, if you can afford to hold on to the house until its price recovers and the capital gain returns. But for banks, which must regularly mark their assets to market and face margin calls from their creditors, it isn’t always possible to wait for good times that may be round several awkward corners.

Fuld, determined that Lehman should eclipse Wall Street’s other investment banks, had additional reasons for high leverage. Although he’d overseen substantial growth, his bank was still substantially smaller and less well capitalised than the giants it was taking on. It’s also possible that, as a master of grand strategy, he hadn’t been watching the accounting details and wasn’t fully aware how overstretched the balance sheet was. Visionary bosses usually work best when they’ve got a trusted, methodical second-in-command who can fill in the details and administer the reality-check. In Fuld’s case, it isn’t clear that anyone was close enough to play Baldrick to the runaway Blackadder.

Tragic heroes are rarely felled by circumstances alone. There is usually an opposing player who, if not actually plunging the knife, at least arranges the sword so the protagonist can fall on it. In the case of Lehman, two vultures were circling: Bank of America, run by the affable Ken Lewis; and Barclays, led by the quiet-spoken Group boss John Varley and the hard-driving investment banker Bob Diamond.

Did their rescue plans, on which Fuld was counting, genuinely come to nought, after genuine struggle for an eleventh-hour solution? Or did they, as some Lehman insiders suspect, deliberately withhold assistance until the bankruptcy allowed them to cherry-pick the assets at a fraction of the cost? Could Treasury Secretary Henry Paulson genuinely see no way to stop Lehman sliding into bankruptcy? Or was he still smarting from an earlier rivalry, when he was running Goldman Sachs and Fuld’s resurgent bank was threatening to eclipse it?

Commercial confidentiality, and the survivors’ code of honour, mean it may be a long while before we know the answer. But a character who does so little to be liked, by his rivals or his regulators, is almost certainly hiding many more cherubic chief executives in his long shadow.

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But Schmidt says newspapers’ disappearance would be a “real tragedy”, and his company is exploring ways to form partnerships to shore up their revenue. Google gladly attacks the revenue streams of academic publishers, telecoms and TV broadcasters. So why the worry about flattening Fleet Street?

Newspaper circulations were showing signs of decline before the arrival of the search engine, but their problems have escalated since. Easy access to ‘free’ news blunts people’s appetite to buy the printout, and reader loyalty is harder to build with rival titles just one click away.

Newsstand
[Image © copyright,
Photos.com]

Going online has in many cases boosted the number of readers, while accelerating the loss of subscribers – widening exposure for those who spin the words, but ultimately erasing the return on investment for those who own the keyboard.

The instant availability of news, from reliable sources at no cost, looks like a triumph for the freedom of information - complementing the rise of ‘freeware’ as an alternative to expensive proprietary software. But providers of free online news and digital archives are getting genuinely worried about their impact on the paper-based article. They’ve realised that news is a ‘public good’ in its economic, as well as its literal sense.

Once information exists, society benefits by making it available to everyone. Yet if this stops news gatherers recovering the costs of assembling and checking the information, they’ll cease to do so. Free online channels, and the search engines that retransmit them, might find that they’ve killed the media goose by relaying the golden eggs.

Opinion palls

The legendary Guardian editor CP Scott famously observed in 1921 that ‘Comment is free, but facts are sacred.” The downside is that facts are also expensive. Because the same breaking news travels quickly down all wires, newspapers distinguish themselves by the quality and quirkiness of their analysis and interpretation.

But the centrefold opinion pieces can go bizarrely off-beam if the front-page facts they pick up are not accurate. If the costs (and insurance premiums) of sending correspondents to the front line keep rising, while the revenue from selling their stories is driven down, an ever taller tower of free comment will be built on an ever less solid reporting foundation.

In the past, newswire errors with global repercussions – such as the Chinese re-attribution of an 80s heart attack from skiffle king Lonnie Donegan to president Ronald Reagan – were rare enough to make headlines in themselves. Newspapers’ nightmare scenario is that, with commercial pressure shifting resources from costly news to free comment, such misapprehensions could become commonplace and increasingly unnoticed.
Substituting blogs for professional journalists’ reports, and mobile footage for a camera crew’s, can make for further-flung and faster-delivered as well as cheaper coverage.

But it isn’t clear that these new, subject-generated news sources are as accurate or objective as the old professionally mediated ones. If the old don’t survive, there will be no way to check. Even where professional journalists are retained, and not drawn into the blogosphere, their dwindling numbers reduce the scope for monitoring colleagues’ fact-finds, or countering the spin applied by organizations and politicians increasingly skilled at squeezing self-penned news through the Fourth Estate’s unguarded gates.

Restoring the public good?

titles are coming under pressure as falling revenue meets rising print and distribution costs

With other costly-to-produce but freely accessible resources, like roads and policing, the ‘public goods problem’ is solved by having governments pay for provision. But democracies have long rejected state-sponsored news media, regarding the BBC as an exception and Soviet-era Pravda as the truth-twisting rule. Public agencies are trusted to build communication channels – including the internet – but not to sponsor or supply the messages that flow down them.

Private, profitmaking news media are rarely free of bias, and some of the best-read newspapers disappeared because their literate but low-paid readers weren’t the type the sponsors valued. Against this, media historians like the economist James T Hamilton have shown that newspapers’ coverage broadened, and grew less partisan, when the need for advertisers forced them to seek a wider audience. And private lossmaking media may have an even worse impact.

The problem, as Google’s Schmidt confessed recently to Fortune magazine, is that the new channels now swiping papers’ subscribers and advertisers have no way to put the genie back in the news-stand. “Google can’t make the cost of newsprint go down. We also can’t materially change the way consumers behave… We have a mechanism that enhances online subscriptions, but part of the reason it doesn’t take off is that in the culture of the Internet, information wants to be free.”

After decades of investment in reputations and brand-names, the big newspapers still have a significant hold over electronic news flow. They might solve the cashflow problem if, OPEC-like, all agreed to start charging for stories that currently circulate freely. But coordinating such a move is near-impossible. And if achieved, it would soon be undermined by new channels conveying similar items free of charge.

So some of the best known titles are coming under pressure as falling revenue meets rising print and distribution costs. America’s Christian Science Monitor is ending its print edition, while Britain’s The Independent is forced into a resource-sharing arrangement with the rival Mail. The New York Times’ abandonment of charges for its op ed pages means only the financial press still dares to charge for online access.

But even the Financial Times is downsizing in line with its deflating subject matter, and other broadsheets are unable to adopt the tabloids’ shape without suspicion of a matching diminution of content.

At least that’s one upside from the credit crunch. It used to be feared that the wealthy investor class would continue to get an accurate picture of the world through their paid-for pink pages, while the rest had to settle for an ever more diminished and distorted view via station-platform freebies.

Now it’s clear that those who paid twice the price for their news feed, plus an expensive Bloomberg screen, were no better financially informed than the average Metro reader. Perhaps we’re all being made to pay for that free information.

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About the author

Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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In China, India and the Middle East, as Max Flint discovered on his trip to Dubai for The Money Programme, gold’s attraction as a safe store of wealth has never really gone away. Given the scare stories circulating about the state of some banks, particularly in China, it’s unsurprising that many households still prefer to keep their savings in a jewellery box than a bank vault. Some analysts lucratively anticipated the emerging world’s gilt-edged appetite a decade ago.

Elsewhere in the world, gold’s decorative role now competes with some fast-growing industrial uses – as a component in electronic circuits, catalyst for speciality chemical production and air filtration, corrosion protector, and upmarket dental substitute. Industry absorbs little more than 300 tonnes from an annual world consumption of over 4,000 tonnes, but it means those stocking up at the souks and bazaars have some powerful corporate buyers to haggle against.

Gold bars
[image © copyright Photos.com]

Even after this year’s rise, gold price is less than half its last (1980) peak price in real terms. The run-up hasn’t been as smooth as that for oil, or even platinum, and there are plenty of reasons why it might be short-lived. There’s a large global stock – held by central banks, individuals who hoarded it before the long price slump, and speculators who bought during the recent recovery – which will be offloaded whenever the price goes too high. Many of those industrial users can turn to substitute metals when gold gets too expensive.

And if Federal Reserve chairman Ben Bernanke is right, the dollar zone (including China) is already through the worst of its inflation fears and bank scares, so less in need of gold as a precautionary investment. In calmer times ten years ago, gold’s future looked decidedly bleak.

"if they’re left holding too much when the price goes down again, at least they can wear it to the next party"

No-one knows how big the available stocks are, and those looking to sell have an interest in concealing how much they hold. Prices could suffer if too many analysts raise their estimates of the ‘free’ supply. As big gold trades are still confined to a small number of exchanges and traders, there are also suspicions that these can manage price movements, to smaller players’ disadvantage.

But just as the fight for Olympic glory is driven by motives beyond money, it’s more than financial calculation that makes investors go for gold. Otherwise, we’d see more of them buying the shares of gold mining companies – whose risks are spread wider, because the same seams often yield other metals – or of precious-metal investment funds, not sinking their funds directly into shiny bars.

After the great stock market crash of 1929, one chastened speculator observed that he’d have been better off buying $1000 worth of beer than $1000 worth of shares in the company that brewed it. The remaining stock would have been worth more – and given something to drown the downside sorrows in. There may be a similar motivation behind the old bulls’ return to new bullion. If they’re left holding too much when the price goes down again, at least they can wear it to the next party – and shake hands with their banker without having to count the rings.

Weblinks

• How to get rich in a recession
• The colours of money
• Join the debate
• Rough Science: Properties of gold
• What is money?
• Silver and gold bring health and wealth
• The Aussie Gold Prospector
• Watch the trailer 

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About the author

Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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