I have already written about how the Euro area might get out of the mess it is in, but having discussed it with others they asked me to write it as succinctly as I could, so let me write again.
The long term can wait
The Eurozone has long term economic problems that make it unlikely that it can survive as a single
currency area unless there is an unambiguous social policy associated with the currency of redistributing income and wealth from its high income earning areas to its peripheral areas that will always have lower incomes. To put it another way: unless Germany is willing to redistribute a significant part of its trade surpluses to Greece, Italy, Spain, Portugal, Ireland and others then the Euro project is destined to fail and always was. That, however, is an issue for another day. The Eurozone crisis that exists now is about current wealth distribution, how we recognise it and what we do about it.
Why we got here
Fundamentally the Eurozone crisis has developed because Germany has over expanded whilst the other parts have, comparatively underdeveloped. That is, of course, little more than a statement reiterating the observations in the previous paragraph, but without any redistribution of the resulting surpluses and deficits having occurred to date, as will be required in the future if the project is to survive, the consequence has been a massive wealth imbalance that underpins all the problems we have in Europe now.
Germany, by running surpluses on its trade account with the rest of Europe since the Euro began accumulated vast Euro surpluses in its banks. All other significant Euro countrdid, in effect, run deficits with Germany. Under the rules of the Eurozone these surpluses and deficits did not have to be cleared through cash payments (if they had been the imbalances could not have reached the current crippling levels, but that's another thing to address in the future and not cry about now). The result was that German banks lent the banks of other European countries the cash they needed to fund their deficits with Germany
And because the cash in those countries was not needed to pay Germany, whose low interest rates also reduced interest rates also reduced interest rates throughout the Eurozone three further things happened. First, fiscal deficits, many caused by
tax evasion, were not tackled because there was no pressure to do so; German banks provided the
money needed by government instead. Second, banks in the Eurozone outside Germany had much less reason to but their national bonds than would have been the case if the Germans weren't buying them, so many lent on property instead. It was the next safest thing to do in their view. Third, property values in non-German Eurozone countries rose as a result, in effect but not always directly financed by German banks.
When you're in a hole look for the ladder
The result was German banks became laden with debt owing by Eurozone but not German governments whilst the banks of the non-German Eurozone became laden with property loans. Now, of course, nothing is quite as simple as that, and this situation is not, but when you're in a deep hole what you need is a clear view of a ladder, and in this case simplification within the fair parameters of reality helps identify just where the ladder we need might be.
First, the banks
Now we have two problems. Post 2008, and the US property crash which in turn created a banking crash, Europe has had a property crash. It's not happened everywhere of course, but where it has the hole left in banks has been enormous. This is the Spanish crisis and the Irish crisis for example (it's also the UK banking crisis, though we have yet to acknowledge it). It's not been all the Greek crisis, where inappropriate belief in building infrastructure and borrowing without securing the public revenue to repay the debt, coupled with corruption, seems a bigger part of the problem, but let's also acknowledge that the Greek issue is a small issue for Europe.
Where there's been a property crash in Europe then it has followed without fail that there has been the need for a banking bail out (Spain and Portugal are simply not recognising this inevitability). So let me discuss these banking crises because they are, in turn, the cause of government funding crises.
The banking crisis is a solvency crisis, not a liquidity crisis. Property loans are by their nature long term; they are not repaid in the short term but over much longer periods than most other loans whether to individuals or businesses. So, current repayments in relation to loans are small. However, if the value of the property on which the loan is secured falls heavily (as has happened) then at some point - maybe several years or even decades in the future, although sometimes sooner, of course. Prudent banking rules used to require that these losses be recognised as soon as they could be anticipated. Under the accounting rules in use since 2006 however, promoted by the Big 4 firms of accountants via the
International Accounting Standards Board, these losses do not need to be anticipated but are recognised as they actually arise. This has meant that banks have acted imprudently since 2008 and have refused to recognise losses that they knew would inevitably arise. After four years those losses have now arisen and are growing. This is why we have a banking crisis in Spain and Portugal now: blame the auditors is a simple explanation to this one.
And now the losses are crystallising the assets of the banks are being written down and the inevitability of more losses cannot be avoided. As such the banks have now, technically (and maybe actually) reached a position of insolvency. This does not mean they can't pay out now. They quite probably can. What it does mean that overall they have fewer assets by value than they have liabilities - the amount they owe. As I say, that does not necessarily mean they cannot pay out now; what it does mean that they anticipate not being able to do so at some time in the future. That is enough to make them insolvent, even if they are liquid now in the sense that they can pay out anyone who demands cash at present.
The trouble is, once you begin to recognise the losses (as is now happening) and that in turn leads to an acknowledgement of the extent or property devaluation in the economy, what was a gradual recognition of the losses under the rules devised by accountants keen to support their banking clients becomes a rout. And that's happened in Ireland and is happening in Spain and Portugal now.
This means almost all banks appear insolvent near enough all at the same time. Despite which they can still function.
Restoring solvency
What is needed to ensure banks can survive is that their balance sheets be restored to solvency. This can only be done in two ways. One can be by generating
profit - which in the current environment and given the scale of losses arising in the economies in which these banks are working is unlikely to happen - or it can be done injecting new capital into these banks. In
double entry terms (and I am an
accountant) this means that assets are injected into the balance sheet matched by
share capital. Let me deal with that capital side first: since share capital is only repaid in exceptional circumstances this capital is not a
liability due for repayment, and that is vital, because that means that the assets injected to pay for that capital fill the hole in the bank balance sheet and ensure that the bank is solvent again.
So what are those assets used to pay for that capital? The obvious answer is that they should be new government bonds. There are problems however. Firstly directly issuing bonds for this purpose is contrary to EU regulation. Bonds have to be issued for general purposes and be made available to markets to trade, via commercial banks who in the UK at least give an undertaking to acquire the bonds the government issues in exchange. The result is that bonds can't be used to plug this hole; cash has to be. And whilst that cash might be used to buy bonds there is no guarantee that they will be. And this means that the government has to raise this cash to then give it to a bank with no guarantee that the banks will use this in the way the government wants, and all this to make good the deficit that the banks created by their own bad lending.
The result is that the banks are now both solvent and certainly liquid, but that is at the cost of the liquidity and maybe solvency of the governments who have bailed those banks out.
There is an obvious answer, of course, and that is to make sure of three things. The first is that the
asset injected is a government bond, and one that can only be marketed and so become liquid when the bad loans it is replacing in the bank balance sheet would have become repayable. That way whilst there is an asset which is underwritten and guaranteed it does not give rise to an immediate liquidity demand on the government that issues the bond, so immediately reducing market stress, which is the second part of this equation. The third part is a simple one, which is that the government issuing the bond has to take over and manage the bank to ensure that its solvency and liquidity are managed within these constraints. This means nationalisation; nothing else will do. Banks cannot be allowed to continue under their own management with a pretence that they are still under private ownership when quite clearly they failed and can only survive with state aid. That means that those needing bail out need to be state controlled, and those that aren't have to be heavily regulated to make sure that they do not abuse this situation, which would be all too easy.
Just change the rules
Only in this way can we rebuild banking without breaking governments and at its core there is a need for a change in regulation to allow the direct injection of new government bonds direct into failing banks to provide liquidity when it is needed, and not immediately, and all under state control. It sounds incredibly simply, but such a regulatory change is at the core of
saving banks, and our governments with it.
And then move on to government
So let's move to the position of those governments. They borrowed for three reasons. Firstly, because they could!
Money was being thrown at them - not least by Germany. Second they needed to borrow because they were running national deficits both on external and internal
accounts. And finally, they borrowed to try to keep their living standards up in an economic area where comparison was all too easy. In this respect they were like all those people whose incomes failed to increase in the last decade but who saw an eilte enjoying ever rising apparent well being and who borrowed to try to keep up with that elite. It is always dangerous to compare households and economies; on this occassion it is acceptable, but I won't make a habit of it because most economies can print their own money and so get out of their problems. The trouble was that was not possible in the Eurozone, which is why on this occassion the comparison can be made.
But that's also why the conventional way out of the crisis where so many European governments have found themselves is also not possible in this case: they cannot print their own money to solve their deficit problem, even if at cost to
inflation. And this is the nub of the crisis they face. They can't default because their currency is the same as that of other countries. And their bonds can be directly and immediately traded and arbitraged with those of other states. The constraints are artificial but at the same time incredibly real.
So what can be done about this? The need is to ensure that in effect the balance sheets of these states can also be restored. There are ways to do this, but only in a spirit of cooperation. First, Germany has to recognise that like it or not it is owed a fortune by the countries now being bailed out in Europe. The pressure could be reduced if it, and the EU allow them to bail out their banks in the way described above, but the reality is that this debt is also not worth what it was. Like the property's whose values have fallen to create the banking crisis the economies of these states have now been recognised to have fallen in value and right now they are not worth what they were. That's a fact. It is a fact that may change: values can rise as well as fall, but the reality is that the fall is real at present and if Germany does not come to terms with the fact that the debts it is owed cannot be repaid at present there is no way out of the situation we're in. It can demand repayment - but in a very real way can only have it by seeking to take over these states and manage them to ensure repaying Germany is the only priority in their economic management. That might be quite acceptable for banks, but it is not for states. A greater Germany cannot be an acceptable solution to this crisis for anyone, not least the Germans because they too must know how unacceptable and so unstable this would be.
Instead the debt has to be acknowledged, and be acknowledged to be due as nothing else will satisfy the German public. It must also be deferred. And it must also carry an affordable rate of interest. Dealing with this last point first, the inter government debts of these countries have to carry a rate of interest no higher than ECB
base rate. Indeed, 1% seems more than enough. And no roll up of the underpayment should be allowed: this rate should be what is payable. That way the liability is recognised but at such an interest rate let's also be honest, inflation will cover the cost.
From here to eternity
And as for the capital? Ideally of course this would be written off as we know bank assets have been written off, but that's not possible. These assets can't be written off that way so they do instead have to have their terms rewritten. They have basically to be allowed to role over indefinitely, with the debt being repurchased steadily by the ECB through a programme of qualitative easing to supply the liquidity to the banks that require it as and when those bonds would otherwise be repayable. That is how the UK is paying for its deficit: that is how the EU will have to pay for its too.
And let's address the German fear of inflation. Whilst the EU as a whole remains so massively underemployed the chance of any serious inflation is remote in the extreme. As and when it happens, the debts bought under the QE programme for the Euro could be resold if need be to counter that risk. But in the meantime the assets would have to stay on the ECB balance sheet indefinitely.
Such a programme could work: indeed, I am certain it would work. We could have banks that work, albeit under state control.
And we could have states that could be restored to viability.
And then the question of how Europe must support its peripheries in the future must be addressed. But that can only be done when the current crisis can be addressed.
And banking reform, bond issue reform. ECB reform and QE for Europe could achieve that stability, now. It just takes political will.
The alternative is failed banks, failed economies, more
austerity, more unemployment, failed states, failed democracies, a greater Germany that would be politically impossible, and worse than all that, the inevitable threat that this could and would lead to bloody conflict.
It's a choice then: nationalised banks and a viable
central bank for Europe or a failure of our democracies and all they represent.
It's not really a choice.
But there are those who refuse to embrace it.
NB: This blog may be subject to editing and correction in due course.
I think your solution is right. The problem is a nationalised banking system like you describe would necessarily mean a great loss of wealth and privilege for powerful people.
I can’t think of a single example in history where a redistribution of wealth and privilege of such a scale has not been preceded by bloody conflict and resistance. Can you?
These people will do anything – including supporting tyranny in the euro zone – to maintain the status quo. I can see dark days ahead and struggle coming s poverty compounds and austerity becomes more and more intolerable.
“Fiscal deficits, many caused by tax evasion, were not tackled because there was no pressure to do so” There’s even less pressure to tackle fiscal deficits if, having run up a bill so large it threatens to bankrupt the creditor, the creditor then relents and bails you out again.
“The Greek issue is a small issue for Europe.” In a sense you’re right and it is a small issue for Europe, but the problem is that it’s representative of the direction in which other – larger – countries in southern Europe are heading.
“This is why we have a banking crisis in Spain and Portugal now: blame the auditors is a simple explanation to this one.” It’s a bit unfair to blame the auditors for struggling to fully grasp and intervene early in an unfathomably complex market where dishonesty is rife. Ask yourself why Spain and Portugal was able to borrow using Germany’s creditworthiness in the first place.
“Quite clearly they failed and can only survive with state aid” All true but at some point we’ve GOT to let banks fail. Any business that gets bailed out whenever the going gets tough is never going to change and the idea that government regulators – proved time and again to be ineffective and behind the curve – can change the behaviour of these banks is wishful thinking. Bad banks must go bust, we’re killing the patient to keep the tumours alive.
“The need is to ensure that in effect the balance sheets of these states can also be restored” The balance sheets are the symptom not the root cause, the root causes are structural differences and productivity imbalances. No point doing spring cleaning if the house is sinking into quicksand.
“It’s a choice then: nationalised banks and a viable central bank for Europe or a failure of our democracies and all they represent. It’s not really a choice.”
Good article but the conclusion isn’t great here. The other option – the best one in my opinion – is returning sovereignty and currencies to the nation states, and breaking up the banks into Not Too Big To Fail entities and making it very clear that banking is a competitive and vital part of an economy, not a casino where all losses are backstopped by the taxpayer. The other elephant in the room here is that governments across the entire Eurozone are far, far too large. It would be one thing if they were large but efficient and competent, but they are clumsy, incompetent, fiscally incontinent, and some are corrupt.
People talk about ideas like ‘Peak Oil’ etc, I think an unacknowledged aspect to this crisis is one of ‘Peak Government’ in addition to banks that are bloated and impossible to regulate in their current form. The answer to issues of insolvent government is not higher borrowing to sustain governments with a track record of malinvestment and waste. The answer is the same as it is for the banks: Smaller, accountable, and NOT Too Big To Fail.
My plan does let banks fail – in an orderly way
Under this plan they cease to be indpendent agents.
Do it your way and we deliver masstarvation in two weeks as the food chain collapses. Is that what you want?
As for government- we need more not less – and more is the only way to get less banking, and yet more succesful markets
So I’m afraid much of your analysis appears weak.
Richard, if you are looking for a snappy metaphor/soundbite to describe the government’s policy “killing the patient to keep the cancer alive” would do perfectly.
What happens to the accrued debts and liabilities of a bank when it is nationalised?
Rather than having more banks dependent on panels of clueless politicians, how about letting a couple go? You didn’t address my points on competition, the fact that banks are extremely uncompetitive and reckless with people’s money doesn’t seem to be reflected in the rate at which they go bankrupt! A big of a warning sign there if you ask me.
How do you think these banks got so massive in the first place? Big Government requires massive amounts of cheap money to buy people’s votes with unaffordable social welfare, so they backstop all the banks with the understanding that it’s the taxpayers paying for it, and everyone gets to have their cake and eat it with no risk attached. Except the taxpayer that is.
Agree we need less banking, when I did my training one of the first thoughts that occurred to me was how circular it was and much of the process of ‘profit’ making was simply moving money from A to B and renaming it then skimming some off for myself.
So suppose we let RBS go
And several million people plus some major supermarkets would not have been able to pay for food
Think about the consequences for a moment
Now do you really want to have a couple of banks fail?
Are you willing to face millions unable to feed their children as a result?
How about living in the real world – and drop the useless dogma for a moment?
Or don’t you care?
That’s delightfully bombastic and emotional, Richard, I don’t think it’s particularly fair though. Viz bank runs and bank failure “An end in terror is preferable to terror without end.” But on a practical note, even if food stamps had to be handed out for a time, wouldn’t this be better than carrying on with the gargantuan moral hazard that constitutes the present system?
Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the UK and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.
What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger “stimulus packages.” The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory “wealth” effects without any meaningful link to lending or economic activity.
Two of my favourite graphs of private sector irrationalism:
1. Krugman blog December 15, 2010 ‘Invincible Ignorance’ has a link “Barry Ritholtz has a chart of the global housing bubble”. – quite some graph.
2. Krugman blog June 4, 2012 ‘Soros on the Euro’ graph of Greek and German government borrowing rates 1995-2011.
And the comparison Krugman blog December 29, 2010 ‘Ireland = Nevada’ gets to the nub sans graph.
Don’t overlook the matter of supply and demand when looking at Barry Ritholz’s graph. The UK has a chronic shortage of housing supply and high demand. There is oversupply in both Spain and Ireland. The irrationalism in the UK context is a planning system that encourages developers to build land banks and ride the inflationary rise in land prices, and when they do build, charge prices that reflect the price of the land (and prices of existing, larger houses), not the actual cost of building ever smaller houses on ever smaller plots. For the UK house buyer it’s a double-whammy, high cost land and crushed together, shoebox houses. In short, the UK has experienced not a house-price but a land-price bubble, and those trading up in the UK market from 2001 to 2007 rode the same bubble. Hence the popularity of all those TV programmes dedicated to the residentially ‘ambitious’. The other idiocy is that in the crowded UK the house buyer has been led to expect low density (high land use) housing following the US model, as opposed to the higher density (lower land use) models seen in Northern Europe. The government’s proposed planning free-for-all will only exacerbate the problem and continue to enrich the developers and opportunistic farmers.
Richard – You used the bogy word ‘nationalise’ which makes far too many apoplectic with its association with British Leyland, coal mining, railways etc. These guys have a fit at the word ‘regulation’.
Another, politically acceptable, way of controlling the banks might at least stand a chance of being considered.
I’m a Quaker
I speak plainly
Nationalisation is what I meant
So I used the word!
I’m not sure this is the time to beat around the bush
Why should “nationalise” be any sort of bogey word? When you look at what a nationalised BR delivered and compare it to (a) the near-bankrupt companies struggling to maintain a service after WW2 and (b) the shambles we now have on the railways, it looks like a rational choice.
Indeed!
I agree Richard…. I have been arguing since 2008 that only by socialising the debts can the crisis be overcome and the way to do this is to put the state coffers behind them through nationlisation and the guarantee of deposits (up to a certain level).
Brown and Darling baulked at this and persuaded lloydstsb to act as the government agent in taking over RBS …. All because they were terrified of the word and the deed. So what if we had a sovereign debt crisis..we have one but with a lot of cash and credit blown by the delay.
This must be a campaign within the labour party to wake them up to reality!
Richard
Thanks for the article. It’s a change to read something about the crisis which is so lucid and objective. When you say “And whilst that cash might be used to buy bonds there is no guarantee that they will be. And this means that the government has to raise this cash to then give it to a bank with no guarantee that the banks will use this in the way the government wants” is this QE that you are talking about, and if not, does the same argument apply to QE?
Yes – that is the problem of QE
For a critique see my work on Green QE
One of the most sensible and well argued contributions to the situation that I have read. What are the chances of any of it being adopted?
I suspect none at all
Nationalisation – let’s call it democratisation if that’s a preferable term for some – seems to many of us to now be the only practical way to exert any meaningful swift control over an out of control banking and financial catastrophe of epic proportions.
Immediate decisions then required would be:
a) debt Jubilee and an outright rejection of odious debts foisted onto the backs of the public (living and unborn);
b) massive programme of justice – inquiries, courts, jail time, confiscation (proceeds of crime/fraud);
b) democratisation of the broad money creation and supply and elimination of money-as-debt (http://positivemoney.org.uk);
c) Robin Hood Tax (FTT/FAT) to first and foremost force transparency onto the transactions of the shadow banking universe time-bombs and the hundreds of trillions in computerised bets;
d) massive new investment programmes with debt-free money (and/or wealth taxation) into job-creating activities that begin to reverse the rapid destruction of the only planet we have.
I fear that big ‘P’ Politics simply hasn’t got the capacity (yet/ever) to control the scale of events unfolding, so plagues of misery must surely continue and escalate before there’s any prospect of an Exodus from the insanity of our collective madness and the enslavement of the many by the arrogant few.
It seems to me that one of our problems (and referring back to you article before this one) is the middle man, or the consultant or large accountancy firm who all seem to skim off a very healthy profit for themselves. Throught the various bailouts and easings it would seem that the ‘facilitators have trousered a fair chunk of our cash for themselves. I read somewhere that it was as much as 10% but I have no idea if that is true or not. Perhaps this explaines how the UK’s richest people have become conciderably more rich during the financial crisis. Whilst not a banking issue we need look no further that the sale of the Harriers. Sold for a tiny amount of their value with the consultants facilitating pocketing £1m.
It is the curse of the rentier
And yet of course democracy gets in the way…..
On this blog every day you talk about how tax evasion threatens democracy, how tax avoidance undermines democracy and how off shore secrecy subverts democracy from its people.
Yet what is the point of your arguments fighting for democracy if you are then willing to ignore it or overrule it! Germany is not willing to underwrite other Sovereign debt or to allow money printing as you describe. It is not willing politically, from its Courts or from its voters in poll after poll, from every angle of democracy they refuse to do what you wish to see happen……..
Whatever results that brings for Europe and its people that is the democratic wish of the German people. If you are not willing to honour their decision then it fatally undermines everything you have previously claimed while “protecting” democracy!
I respect democracy, of course
But it does not stop me pointing out that in the process Germany is seeking to destroy the democracy of Europe
And when does that become an act of oppression?
@Richard
Is Germany a majority, then? Your post appears to suggest that the will of the german people should prevail, even if a european majority votes otherwise. I suppose it depends on what you see as the constituency: but we cannot have it both ways.
On present showing it appears to be accepted that if, say, Greece votes against the current policy they will be thrown out of the eurozone. It follows that if the measures are rejected and Germany refuses to comply then they, in turn will also be thrown out.
There is nothing undemocratic about presenting an alternative view and inviting people to vote for it: and that is all that is happening here.
And if Germany is thrown out for refusing to agree to measures that the rest of the Eurozone want, do you think those others will then be able to introduce those measures – especially pooled debt issuance – with no Germany to underwrite them? Please be sensible. If Germany is to underwrite the sovereign debt of other Eurozone members, it has to remain a member of the Eurozone. It is not in the others’ interests to force it to leave.
Frances
I think there is a reasoned counter argument which is that Germany creates such imbalance in the Euro it undermines the currency
A guarantee is not needed remember unless there is such an imbalance
In theory if all were equally weak in a euro without Germany they would suffer a devaluation but they could not go bust as they could print their own currency to then recapitalise their banks
Germany is not the only solution to the euro problem – albeit all ar problematic
Richard
Richard,
Yes, there is a strong argument for Germany leaving because of the distortion its economy causes in Eurozone economics.
However, “printing money” to bail out banks or sovereigns would still require treaty change even if Germany left – which would take time. And if other countries (Finland?) also objected to money printing, impeding the treaty change, there would then be a much more serious problem with sovereign debt, would there not, in Germany’s absence? The EFSF/ESM would have lost their largest contributor, and pooling debt would no longer be a solution. The only source of funds for distressed sovereigns would be the IMF, aarrghh! Yes, the euro would fall – but yields would soar. I don’t think this is an improvement.
As you say, there are no simple solutions. But forcing Germany out of the Eurozone would be a pretty desperate measure, I think.
Agreed – Germany leaving would not be easy
I was making the point it is possible
We need to be open to possibility right now
And the fact that pragmatism may not ever get us out of this mess
Time for some serious humour:
http://www.thedailymash.co.uk/news/health/sober-britons-risk-dangerous-levels-of-clarity-2012060729650
and:
http://newsthump.com/2012/06/07/fans-of-watching-self-obsessed-arseholes-turn-to-big-brother-as-leveson-inquiry-takes-break/
Who was it who said “human beings can only bear so much reality”? That is -only a limited amount.
T S Eliot
Humankind cannot bear very much reality.
Along with:
We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.
I thought this was a good reasoned article. But I despair at some of your solutions, although full marks for trying. I just don’t get “nationalise” the banks. Just what kind of State has the competence to run banks ? Even the Russians have found State control wanting.
How is the “State” going to find and reward management with the talent and enterprise to run the banks?
From the Treasury to the Ministry of Defence “State Control” has been shown to be amateur, wasteful and lacking entrerprise.
And why don’t you give Germany credit for its enterprise, hard work and organization?
Perhaps the rest of Eurrope should copy Germany, and not bleat for handouts.
This is simple nonsense
The state and shareholders are all largely anonymous
Decisions are made by people
They make mistakes in all parts of life – state and private sector included
As for the talent in banks – you mean the talent that has destroyed almost all of them?
Please stop making yourself look so stupid – as you do repetitively on Germany – by asking us all to be exporters at the same time
You’re fast approaching being blocked for time wasting
How hard is it to administer current accounts, loans and deposits within a regulatory framework determined by law? That’s all we need of banks.
I think you underestimate some of what banks can do
But you also make a good point – the more esoteric stuff is for investment banks – and they need have nothing to do with the banking that most of us see and need
Stephen that’s a very reasonable point, Richard appears obsessed with the state, that it is the panacea for all ills. What we really need to honestly assess viz the state is what it is capable of doing well and what it is not. Now, imagine the fecklessness and waste of the public sector and scale it up to the size of the investment banking sector.
The reason we have such poorly run banks is that they are run like a monopoly, the price of entry is deliberately set high, there’s little real risk of failure and even less of punishment. The idea that we can have some kind of People’s Commissariat for Finance running banks is completely absurd.
Where is the evidence of the wastefulness of the public sector?
Did it cause the current crisis?
The answer is a resounding ‘no’
And it is only the state who can break up bank’s monopoly
So like it or not – the state de facto is always responsible for them
Why not acknowledge it?
‘Richard appears obsessed with the state’? Get real!
Western governments, and this coalition in particular, are obsessed with the market. They believe it can do anything better; run hospitals, schools, universities, prisons, the police, social care, you name it. Under New Labour the market wormed its way in. Under Thatcher and this coalition it’s ideological sycophancy on a plate. That’s what I call a real obsession.
And the answer is in your reply. All markets, banking included, tend towards monopoly. How does it help to keep the state out of that?
The incursions of the market into what used to be seen as social provision, out of which it used to be considered unethical to make a profit because we all need (not just want) them, have been never ending since Margaret Thatcher. Ethics have gone out of the window in the name of profit and letting neo-liberal economics rip. The market’s top priority will always be profit, not care or quality. That’s what Stephen’s alleged ‘talent and enterprise’ goes into. Profit does not guarantee efficiency or quality, just more profit. It’s easy to advocate the ideology of market provision – until you or your family need one of these services, an operation, a policeman, a palliative care nurse, or a bank that doesn’t rip you off, and find that you’re paying through the nose for a load of small print, exclusions and a rushed, second rate service, where you do half the work yourself via your p.c. or that you don’t qualify at all because you couldn’t afford the insurance or didn’t subscribe for the right bits.
Your so-called ‘fecklessness and waste’ of the state sector is neo-liberal ideology, massively over-hyped by the press, egged on by private business, because it sells papers and gets ever more corporate control of every aspect of your life – for their profit.
Why don’t we privatise the government and have done with it? Abolish elections, leave running the country and sharing the profits to self-appointed boards of directors and the moneyed shareholders of UKplc. Efficient? Yes. Just, fair, ethical, caring, open and transparent, accountable, affordable? Forget it.
Those qualities aren’t obsessions, they’re the essentials of a civilised society. Without them we might as well sell the whole show to the United States Inc. now, where none of them matter as much as efficient profit making.
I suggest reading the Taxpayer’s Alliance website for an hour or two re. public sector wastefulness. It is endemic.
The current crisis is a sovereign debt crisis as well as a banking sector crisis, which implicates government borrowing in all this. I concede it is not only government borrowing that has caused this crisis, but it is half of the problem at least.
Oh dear
Go find some facts – not lunacy
Fully agree, Richard!!
An astonishing defiance of democratic norms has become an essential feature of European Union governance and is increasingly becoming its defining characteristic in the eyes of Europe’s citizens. Already in 2005, after the European Constitution failed in referenda in France and the Netherlands, it was simply repackaged as an ordinary treaty and passed via national parliaments; when that treaty was then rejected by the Irish in a referendum of their own, they were made to re-run their vote like schoolchildren who had failed a test. Last autumn, when Greek prime minister George Papandreou had the temerity to call for a popular referendum on the austerity package that will subject his country to years of impoverishment and social disintegration, he was swiftly forced to resign and replaced with a technocratic viceroy dispatched from the European Central Bank. The same month, a former European Commissioner, Mario Monti, was brought in to run Italy after Berlusconi lost the confidence of E.U. leaders.
The European Union and its neoliberal ideology has become the chief threat to nation state democracy. If the commissars in Berlin and Brussels are not prepared to rethink then countries such as Greece should be prepared to leave the EU however painful that might be in the short term.
I wish they’d make their minds up, one way or the other.
Apart from the dithering meaning nobody has any idea of what, where, if or whether…..there is the issue of holidays.
If Greece dumps the euro they can then adopt the drachma again and devalue….and I may get a decent holiday.
Just sayin’
In fact they may even be better-off out of the euro….which, let’s face it, is only any good if you have an active economy…..
An irony of the insolvency you describe is provided by the fact (which you acknowledge in other posts and is gradually seeping into public consciousness) that banks issue loans by creating money out of thin air. Now, when a mortgage goes bad (and even though the asset can be reposessed by the bank) there is an apparent capital loss. But really isn’t this loss just as imaginary as the money which was created for the loan in the first place? Live by the sword, die by the sword I guess.
Please correct any misunderstanding.
Loans create deposits
Note the order of flow
The problem is that people don;t like it when they can’t reclaim their deposits
It’s not the bad debt that’s the problem
It’s the failure to repay the resulting deposits that is the problem
The state underpins this risk
That is why banbks need to be under state control