Mervyn King was right last night when speaking at the Lord Mayor’s banquet:
If some banks are thought to be too big to fail, then, ... they are too big.
And:
It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.
The implication is obvious. he is calling for investment (casino) banking to be split from retail banking and management of banking transactions that underpin our economy.
Of course that is the right thing to do: we cannot have the possibility of complete melt down in our simple ability to pay each other because bankers want to play roulette with our money. But that’s what Alistair Darling want to continue to let them do.
It’s sad when a Labour Chancellor is so out of step with society at large and even the major banking regulator. Darling has made clear he thinks the issue is as much one of cultural reform as anything else.
He’s wrong. As I noted in a press release yesterday:
Darling is right: we do need better people in the boardrooms of banks. More women, more trade unionists, more people who can robustly question the whole model of banking and who have the mindset to do so. Banks failed in part because of a collective myopia.
But they also failed because investment banking was allowed to dominate retail banking. Because our basic capacity to make payment within our economy was almost destroyed by gamblers willing to stake other people's money on bets which they ensured gave them an upside and others the downside. This basic utility - the control of our money - has to be reclaimed from such people. That requires massive banking reform.
And we have to ensure that never again can banks cut and slice debt in tax havens and sell it as good when it was anything but, with resulting cost to us all. That means bank accounts, their access to offshore, the regulatory capital dedicated to offshore banking, and the regulation of these places has to be massively reformed. Ignore any of these and the crisis will come back again, and again, and again.
At least the Bank of England seem to get it.
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But who are “better” people? And who appoints them? A major issue has been that the banks at board level, and indeed at top management simply did not understand, nor know what their people were doing or why. All they knew was that the figures looked good. What is needed is people who can both understand and be capable of controlling what is going on, as well as having a broader remit. In a long life there are few leading trade unionists that I would let loose on a bank, let alone the collection of political celeb’s and media functionaries who would find their way onto the new “social awareness” boards. Why not try some real businessmen for a change?
The real problem is that “investment” is essentially about playing the land value game, lending money for “asset” (=land) purchase in the expectation that its price will continue to grow for ever.
The foolish banks get in on the act since they imagine they can use the “security” of the assets (whose value is pumped up by their own activities), as a basis for profitable lending.
The only way to prevent this is for governments to collect the rental value of land and use it as their principal source of public revenue.
But let us never forget that the following of the opinions of the credit rating agencies, that the regulators induced, brought on much worse systemic concentration of risks than the “too large to fail” banks.
And don’t get me wrong I was one of the few ones who spoke out against the “too large to fail” while they were still considered to be too large to fail and people kept mum about them. While an Executive Director at the World Bank in May 2003 I told a workshop of some hundred regulators for all over the world “Knowing that the larger they are, the harder they fall, if I were regulator, I would be thinking about a progressive tax on size”.