As the Guardian puts it today:
[One] way of looking at this week's bank results would be that they show up precisely the problems with the government bailout. Barclays Capital is an investment bank inside a giant financial institution that enjoys implicit and explicit taxpayer support — in the form of loans, guarantees and all the rest. If ever there was an argument for splitting casino banking away from the essential financial services such as holding deposits, it was presented this week. Yet Alistair Darling and Gordon Brown refuse to contemplate such a policy. Both BarCap and Lloyds enjoy near-monopolies in their respective fields — yet the government has yet to call for megabanks to be broken up, and for greater competition to be encouraged. Stability in the banking system is a miracle, given the tumult of the past few months. But it is nowhere near enough.
Precisely.
Last September I was panicked enough by what I knew of the state of our banks to lay in food supplies — quite reasonably believing that the break down of cash payment systems was on the cards and social disruption was likely to follow. I blogged the issue at the time. I said this:
I admit I’m worried, very worried. I rarely lose sleep. I didn’t last night. But I woke up early. This is what I’d be doing right now:
1) Printing vast amounts of money. We really might need it. Runs on banks get worse when there is no cash to make settlement.
2) Holding talks on creation of a government of national unity. We might need it. If the banking system fails we’ll have a crisis as bad as a serious war.
3) Planning to suspend stock and secondary markets. They will not help in the current scenario.
4) Preparing emergency powers to control food, water and power supplies. If non-payment becomes an issue these could fail very fast.
5) Preparing to mobilise reserves to maintain law and order. When people are hungry or frightened they act irrationally.
6) Seeking combined German / French / UK and maybe Italian cooperation to bail out banks in places like Belgium, Denmark and maybe the Netherlands where they could not do it themselves. The EU is going to have to act, and if it can’t, it’s leading members will need to do so instead.
7) Preparing to suspend the claim of all offshore companies on banks, even if intra-group. The liabilities of these banks are in mainstream countries. The assets are offshore. Their claim on our states can be broken in this way.
I could probably add to the list after breakfast. That will do for starters.
Of course, none of this may be needed.
But it would be wholly irresponsible to ignore the possibility.
We won’t know if it is happening. I hope it is. I think it that serious.
We know that days after I wrote that the government was indeed prepared to suspect markets and all bank operations for as long as it took to stabilise the banks: my warnings were appropriate. The risks were as big as I had guessed.
And now just 10 months later it’s as if nothing had happened.
IT DID!
And we still need to fix it. We haven’t because what no one has ever delivered is something else I wrote about shortly afterwards — a strategy for our nationalised banks. We are crying out for one. But no one is delivering. That is some indication of the poverty of thinking in Whitehall, the City and our academia that live, seemingly universally it seems, in a hypnotic state of belief that the markets will deliver.
Now let’s face the fact that these banks are not operating in a market: they’re free-riding the state, and plan accordingly.
Let’s split them up, and keep as much capital as is necessary in the true banking system and starve the wide boys of investment banking of cash.
Let’s charge a tax premium for the fact that we provide the banks with an implicit guarantee.
Let’s regulate.
Let’s appoint those who have the capacity to think, manage and direct to their boards.
Let’s stop their access to offshore.
Let’s limit their ability to distort the economy by paying high bonuses by denying tax relief for all salaries over £200,000 and imposing progressive employer’s national insurance charges thereafter until bonuses simply don’t pay.
Let’s celebrate when some bankers leave the UK as a result — as the recession has proven — they are a liability, not an asset.
Let’s do this now.
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On the front page of the FT today is said that Golman Sachs traders made over $100m in trading profits every day of the first quarter bar two.
No doubt these profits will be used to pay bonuses the rest of us couldn’t dream of. The sooner these scumbags are on the street and on the dole the better it will be for all of us.
One of the most damning aspects of this government’s (and likely any future one) is the lack of emergency planning for this situation.
They have endless scenarios and drills for firemen striking, g20 protestors, thousands of alleged terrorists, people getting a mild dose of flu, even what the weather might be like in 50 years, but absolutely nothing for a small but significant section of the private sector blowing up, as it has done any time it’s been let of the leash.
One really does have to ask the question: “who exactly does run the Country and the banking system that is a central feature of the capitalist economy on which all of our lives depend?”. The government majors on the importance of banking to the economy & the right of depositors to be assured that their money is vouchsafe when entrusted to the care of a bank, but then it sets a limit of compensation £50,000 liability. The concept that a deposit becomes the property of the bank with the depositor simply being a liability on the bank has got to change. In the past bank managers that lost their customers money were severly punished. Today they go sailing into the sunset with their ill-gotten gains & fat bonuses for failing!
Too right Jim – banks should look after their deposit takers first and foremost. They shouldn’t get involved in lending – “neither a borrower nor a lender be” as my mum used to say. But that would be no fun for these cowboys. If they want to lend, they should do it with their own money, not that of their customers, who actually work for what they have. But then these City scum “don’t like it up ’em”!
Richard,
That is some indication of the poverty of thinking in Whitehall, the City and our academia that live, seemingly universally it seems, in a hypnotic state of belief that the markets will deliver.
We know they won’t.
Now let’s face the fact that these banks are not operating in a market: they’re free-riding the state, and plan accordingly.
I would argue the market was delivering a verdict on the banking system last fall. It was at that time the government (in sheer panic, see Paul above on the lack of planning/thought) invited the banking system to free-ride on the back of the tax-payers.
Georges
I am merely a badly educated but reasonably intelligent (I hope) pleb. But one thing for me, has come out of this financial crisis. I have become ‘aware’. I’m 55 years old next week but I look back now to my understanding of the financial world a year ago and consider that I was naive and ignorant and about 50 years younger. It would not have been possible to become educated about it without the Internet and serious sites such as yours Richard. Thank you.
You are entirely correct in your desire and reasoning for change but even given your sphere of influence, you cannot make it so.
I have come to the conclusion that the ordinary man in the street, who lacks any influence at all, has no inkling of the way that money works (or not) and so has absolutely no chance of understanding the announcements pertaining to money made by the government. I think that the government know this. A billion pounds is beyond the conceptualisation of many people. One Trillion gets into the league of how far away is 4 light years to the (next) nearest star.
How can people get up and protest when they cannot even understand the concept of the numbers? I believe this is why there is not protest and rioting. There is general dis-content but this is because most people can’t get their heads around the fact that banks “made up” the money that they lent. That the BoE is “making up” the latest 50 Billion of Q.E. As “money” – hard cash you could spend – it’s barely within my grasp and I deal with numbers as a computer programmer (just – most of my work involves Iceland!).
It’s a con-trick all of it.
To be presented this week with the profits of the purportedly privately owned banks both in the USA and the UK and the losses of the pseudo-public ones that we as taxpayers now almost own is just another kick in the teeth when we are mostly all down and barely concious already. As stated on many blogs this is simply privatisation of profit and socialisation of debt/risk. The banks are running the country and the world, in my mind is now established beyond any shadow of doubt.
P.S. The food – bored with canned beans and soup yet 🙂
Jim for Justice: “The government majors on the importance of banking to the economy & the right of depositors to be assured that their money is vouchsafe when entrusted to the care of a bank, but then it sets a limit of compensation £50,000 liability. The concept that a deposit becomes the property of the bank with the depositor simply being a liability on the bank has got to change.”
The problem is that depositors don’t generally want to just entrust their money to the care of a bank, they want to receive interest on it and that is achieved by the bank lending the money on, which entails risk.
The mindset of depositors needs to change. Either you give your money to the bank for safe-keeping, as you might do with a safety deposit box, in which case you don’t get any interest but your money is safe, or you give it to the bank to make a profit for you, in which case you have to accept that you may lose some or all of your investment. We can’t have it both ways.
Paul L (I’m bored with all you Paul’s not identifying yourselves – please do so distinctly)
I remain of the view that you live in a little fantasy of your own
Banks are not businesses – at least they are no longer. They are a cartel who supply a utility service with state support and guarantee that ensures our economy functions
Depositors cannot face risk because if the risk crystallised the economy would fail
So – who should be penalised in this tripartite arrangement – the government who bears the risk, the depositor who pays the tax to underwrite the risk or the bank that free-rides?
I think that’s a no brainer – but you get the answer wrong
Which is the evidence to support my hypothesis
Richard
I’m one of the Paul’s so have changed my moniker.
As Richard says, depositors can’t face a risk or the economy will collapse. If they want to gamble by chasing returns that’s their choice, but if they can afford to do that they’ve got too much money. If we banned banks from either lending or paying interest that would solve the problem at a stroke. But the vested intersts would squeal at that.
These banks have had it easy too long, taking money off poor people and lending to rich people. Time we took over the banks, took any deposits over £50k for the social benefit and told these cowboys to get a proper job. The banks have never done anything for the foetus.
Richard: “I remain of the view that you live in a little fantasy of your own”
And I take exactly the same view of you, Richard.
“So – who should be penalised in this tripartite arrangement – the government who bears the risk, the depositor who pays the tax to underwrite the risk or the bank that free-rides?”
The point, Richard, is that the government shouldn’t be making the public bear the risk and allowing the banks and depositors to free-ride. The government encourages people to take excessive risks and then cries foul when the inevitable happens.
Your comment that the depositor pays the tax is disingenuous. The depositor pays tax, but so does the bank. Even more significantly, somebody with no deposits will also be paying tax. We all end up paying for the guarantee the state provides, but the principle beneficiaries are the people with the largest deposits.
What you are defending is redistribution of wealth from the poor to the rich.
Paul L
Quite absurdly wrong
I want restrictions on what banks can do – Galls Steagall style and extra taxes on banks – including all investment banks – to pay for the guarantee
And I want no subsidy for investment banks – but massive capital requirements and restrictions on hedging etc
This is about curtailing free capital abuse by the rich
As usual you’re seeing the world in reverse
Richard
Richard,
What you’re suggesting is nothing more than a sticking plaster. You seem to think that the system of government regulation and guarantees just needs a little tweak here and there and all will be well with the world. It won’t. The system is fundamentally broken.
The more detailed regulation you put in place, the more banks will work to find ways around it which will often cause more problems than the original approach.
Any guarantee you offer will just encourage people to seek out the highest return regardless of the risk, because the risks won’t be borne by them. If you apply a tax across all banks to fund the guarantee, then you’re just forcing the more prudent banks to subsidise the risk taking of the less prudent banks.
Your approach may be well meaning, but it’s at odds with the way things work out in the real world.
I described the real world
Now, what do you propose?
As I said, the first step which needs to be taken is to move towards a system where we draw a distinction between deposit taking and investment in order to get some responsibility into the system.
If someone puts money into an account which pays interest, it should be made clear that account holder is getting involved in an activity which involves risk and that if it doesn’t pay off, they may lose some or all of their investment.
If someone puts money in an account which pays no interest because the bank doesn’t lend the money on, it should be made clear that the deposit is safe, as it would be if it was put in a safety deposit box and the law should ensure that the depositor is able to get their money even in the event of the bank failing.
People would then have a choice – take a risk, but with the understanding that the responsibility for any loss stays with the investor, or play it safe.
@Paul Lockett You do not diffetrentiate between ‘deposit’ & ‘investment’. If I invest I accept there is a risk. If I deposit I do not consider my money to be at risk. It is put at risk when bankers break all the rules of banking regulations by taking unacceptable risks that abrogate the ‘duty of care’ that they should have towards depositors. It is the callous indifference & grossly irresponsible manner in which bankers abuse the trust put in them that has been a major contribution to the banking crisis. ‘Your’ deposit investment money becomes ‘their’ investment money but they have nothing to lose if they fail to observe the rules of responsible risk management. It is the depositor and/or taxpayer who loses out.
@Jim for Justice,
I think what you say highlights the problem. We have people who want to have their cake and eat it. You can’t have an interest paying account with total security, unless somebody else is made to cover the costs of the risk you are taking.
If you receive interest on an account, it is because the bank is lending it on to someone else and that comes with an inherent risk – the risk that the borrower might not pay it back. Until people who invest in interest paying accounts begin to accept some responsibility for the part they play in the system, rather than painting themselves as blameless victims and trying to claim that it is all the fault of the banks, we’re not going to deal with the problem.
We need to make it clear to people who invest in interest paying accounts that they can’t expect to carry on privatising their profits and socialising their losses.
It is reckless lending with no colateral or insurance to back it that creates the risk. There was a time when to secure a loan you had to see the bank manager in person, and there was no way that you would get a loan unless he was satisfied that you could repay it and that if you failed to do so you were in breach of the terms & he could recover it. His job security depended on his ability to ensutre the bank did not get into any debt. Today you can turn on the telly, see an loan advert, pick up the phone & ‘bingo’ the next day pick up a new car. Maybe
(sorry…got posted B4 I finished!).. Maybe a slight exaggeration, but you get my point.. 😆
They should bring back debtors prison – bread and water for people who borrow more than they can afford. That would put an end to the rampant greed that is destroying society. I’d like to see these idiots slop out rather than watch Sky TV and lust after stuff they can’t afford.