John Vickers, author of the post 2008 banking review in the UK started a skew of comments on banking in the FT that has spread all over its pages this morning. To summarise his argument, using an FT headline:
The Bank of England must think again on systemic risk: volatility in bank stocks underlines the importance of strong capital buffers
Martin Wolf is not so sure, saying:
The world economy is not necessarily heading for a crisis, it is probably just heading for a slowdown – but risks abound. Moreover, such risks are bound to affect banks, particularly those of bank-dependent Europe. The weakened banks will then damage economies.
But adds the caveat:
Policymakers must remain aware of these downside risks and do what they can to avoid adding to them. One thing remains clear: banks are still the weak links in the global economic chain. People worry about the health of these huge, highly leveraged, extremely complex and opaque behemoths. They are undoubtedly right to do so.
Which makes his opinion look like an each way bet.
John Kay is specifically concerned about such bets in the form of derivatives. His argument is that:
Accounting practices provide an appearance of precision that may be a poor guide to a world characterised by multiple risks and radical uncertainty. The superficial information we have from balance sheets and capital adequacy calculations understates the scale of complexity and interdependence in the global financial system. Market participants are right to be sceptical, and nervous, about banks.
Or, to put it another way; in 2008 we did not know about the risk in mortgage based lending and now accounting is failing us on derivatives. I very strongly suspect that is true.
For good measure John Plender's doubts relate to central banks:
What are the limits to the power of central banks? That is arguably now the most important question in global finance. Since 2009 investors have staked their all on the notion of central bank potency. Last week the doubts set in seriously, contributing not a little to the market turmoil. The remarkable thing is that scepticism did not dawn earlier, given a charge sheet that looks challenging, to say the least.
There is justification in his argument: if John Kay is right then central banks are as in the dark as ever they were, except that as Plender says:
The rout in the markets is, among other things, a belated recognition of what ought to have been obvious – namely, that the retreat from unconventional central banking measures was always going to be exceptionally tricky. The most difficult trick is to manage an orderly decline in the price of assets that had first been puffed up by the world's leading central banks.
The obvious is, of course, always anything but to most people most of the time, and so it was with QE. I'll exempt myself: I wrote of these dangers and the need to address them in 2010.
So what does a central banker say? Neel Kaskaria, a Fed insider in 2008 and now the new head of the Minneapolis Federal Reserve is reported by the FT to have said:
the largest US lenders remain “too big too fail”
and that:
that efforts to regulate the big banks since the financial crisis had not gone far enough.
For good measure they also note this:
A break-up should be on the table, alongside a plan to turn the largest into public utilities by “forcing them to hold so much capital that they virtually can't fail”, he said. Taxing leverage throughout the financial system to “reduce systemic risks wherever they lie” should be considered as well, he added.
The risk, he reckoned, was equivalent to a nuclear reactor meltdown, saying:
We know markets make mistakes; that is unavoidable in an innovative economy. But these mistakes cannot be allowed to endanger the rest of the country
He clearly thinks banking does that. So do I.
In that context it was good to hear John McDonnell speaking last night about the review he has set up of the Bank of England mandate, headed by Danny Blanchflower. I have no idea whether this review fell out of the furore I caused last summer on the issue of Bank of England independence in the context of People's Quantitative Easing: if it did I do not regret it.
Banking remains out of control. I think it entirely rational for markets to realise that. And it is also rational for them to realise that as a consequence there are serious risks for the real economy flowing from that lack of control?
Is Martin Wolf right that this will result in a soft landing? I can hope so. I can worry otherwise as well. What I do know is that there is a job of reform to do and George Osborne is moving in all the wrong directions with his pro-banker, weakening of reform programme and that John McDonnell is moving in the right direction. But we have a long way to go still. And Neel Kaskaria may have the right goals in mind.
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“George Osborne is moving in all the wrong directions with his pro-banker, weakening of reform programme and that John McDonnell is moving in the right direction.”
This observation raises a number of questions for certain identifiable groups and individuals.
In the first instance, does this observation stem from an analysis of what is happening economically which is anywhere near congruent with reality?
If so, and secondly, is there any liklihood of George Osborne and the Conservative and Unionist Party, currently in Government, ever moving in a direction which will take us away from catastrophe rather than hurtle towards it?
If not, which group of forces is in the best position, with the policy ideas, analysis and narrative, to move us in a more sane direction and am I/we helping or hindering the process?
The question then, is this: do indebted nation states with a hollowed-out tax base have the cash to bail out all the banks?
Maybe they will, this time.
There will be another banking crisis, and another.
Sooner or later, there will be a banking crisis that the Bank of England, the Fed, the BoJ and the Bundesbank cannot raise money to bail us out of.
I guess they will have to perform some variant of fiat money and off-balance sheet debt write-downs, pretending that the money is both real and not with recycled terminology from the QE programme; and I guess the markets will swallow it because they have to…
…And I’m assuming a felicitous mix of competence and rationality from governments and markets that consistently display the opposite.
Technically bailing out a bank cost nothing
It’s the knock on that does
And having a government that understands that
“Technically bailing out a bank cost nothing”
here’s Bernanke on the very topic:
“Its not tax money. The banks have accounts with the Fed….So to lend to a bank, we simply use the computer to mark up the size of the account…it’s much more akin to printing money than it is to borrowing.”
As you say, Richard, it’s the consequences that are the ‘cost’ low interest rates/malinvestment/ housing costs/commodity prices worldwide…etc
Indeed: money is created by fiat and can be written off by fiat: but that is not to say that money isn’t real. There are real consequences: a knock-on, as you say, of real investments and real assets with an impact on real lives.
The question there is how we shape reality by careful use of fiat: Green QE or asset bubble QE or none, stable growth, hyperinflation or credit crunches; a productive economy for the benefit of all, or neofeudal rent-seeking for the exclusive benefit of the few.
Yes – the private banking sector is a nuclear threat. It is a law unto itself.
The central banks are just stymied by bad thinking – austerity and worrying that they are crowding out the private sector.
Never mind the miners and left wingers being the enemy within: it is private banking that is cuckoo in the nest and they all need dealing with once and for all.
And bailing these banks out does cost nothing but if after that George brings in yet more austerity for those who did not cause the crash then that will bring on a real nuclear winter economy wise.
We need to spend to save, never mind saving to spend. When will these highly paid idiots realise that? We don’t have to do that forever, but we need to do it NOW.
Neel Kashkari’s full speech is worth a read or listening to here…
https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail
It’s odd that a central banker from the world’s most ardently capitalist supporting country can say such radical transformative measures, while John McDonnell would be accused of being a communist sympathiser, anti-business and a threat to our national security for uttering such things in London?
“Some other Federal Reserve policymakers have noted the potential benefits to considering more transformational measures.6 I believe we must begin this work now and give serious consideration to a range of options, including the following:
Breaking up large banks into smaller, less connected, less important entities.
Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.
Amazing, isn’t it?
All he needs to do is quote him now
I was going to paste a link to the same speech, but Keith was there first. An astonishing speech from the conservative wing of the Fed
Myself and siblings, our first savings account was with the Post Office, used to put such small amounts in, shillings. Then when we were really grown up and looking for mortgages, building societies were the next step. When they all became banks and gave themselves eye watering salaries, the real reason some say the changes were made, well, it was not a change for the better. I know it is history, just a thought. Call me old fashioned, because I am.
Austerians need to be confronted by their own logic; they need to explain where the money came from to purchase the £375 billion of gilts from our banks. The fact that this money has been electronically created needs to be emphasised on a regular basis.
There is a cost to society, it is called an “opportunity cost” – a concept common to project appraisals and one that will become increasingly important as the existential threat posed by “too big to fail” entities begins to crystalise. Within the public sector there is a requirement to identify alternative spending objectives in order to measure which route offers the best return ie £375 billion on purchasing gilts versus £375 billion spent on the NHS.
What I have wondered ever since 2008, is why bailing out banks must be all or nothing. The Government insures the banks, just as I insure my house. But when I insure my house, the amount of cover is limited. With banks it is still a blank cheque.
My suggestion is that the State sets out how much it is prepared to insure an individual bank for.
Small depositors would be covered completely.
Shareholders and bondholders would get nothing if the bank collapsed.
Larger depositors would be covered only to the extent that the bank was making socially useful loans. The more productive investments the bank made, the more of its deposits would be covered.
If shareholders knew that they would lose their investment if the bank made bad bets, they might exert a stronger discipline than any colander legislation.
One other possibility would be that as a price of insurance, senior management and directors would carry unlimited personal liability in the event of failure.
But I guess Richard has already thought of eight reasons such ideas would not work.
I have
You propose wiping out equity and I can live with that and debt haircuts
Bail ins from big depositors are harder – many are businesses that could be wiped out through no fault of their own
And the big risk us simply systemic failure – and we still cannot afford that
Bail-ins should be putting the fear of God into every business or moderately wealthy person in the country that uses private banks for day to day transactions or perceived low risk/short term savings accounts.
This is precisely why deposit taking banks should be taken out of the hands of private sector who use leverage on so called secure deposits to speculate in the financial markets.
We cannot allow our national productive capability to be put at risk by a bunch of addicted gamblers who can do what they like with their own money but should not be allowed to go on a debt fuelled, steroid taking, cocaine snorting binge at the casino they call the City of London and the international financial markets.
Do IFRS or the new UK reporting standards help? As I understand it, in many cases, they require the actual value of derivatives to be shown on the balance sheet (or whatever the statement of assets is called these days).
No
They do not reveal the risk
Here’s an interesting article on how banks LITERALLY have their finger on the nuclear option!
https://www.commonspace.scot/articles/3468/trident-how-the-banks-have-their-fingers-on-the-button
Puts a whole new perspective on why Trident is a so important to so many of our elected and unelected lawmakers.
Revolting.
“Are banks a nuclear threat?”
No. If they all went bust tomorrow, the owners of production would keep producing, and consumers would keep consuming.
The accountants would, I expect, be mighty nonplussed/minused.
And how would people pay each other?
Any trusted IOU.
https://en.wikipedia.org/wiki/Irish_bank_strikes_(1966%E2%80%9376)
Things were still done before money was invented.
Odd why banks are still described as too big to fail/jail.
Not seen much about the Iceland solution to 2008 in the UK media.
Oh come on!
Did you know Ireland at that time?
And what worked in a state of 325,000 is not replicable – although bankers in prison would be good idea