If you listened to UK politicians yesterday you would think the banking crisis was solved. 300 odd pages of report from John Vickers and a promise to implement plans after the effective careers of all currently involved in politics and banking are over and apparently the problem is solved.
With respect to all in question, no it isn't.
Robert Reich, a former US Labor Secretary tweeted overnight:
50% probability Greek default. US banks counter-party debt huge. Prepare for another Lehman Brothers. Second big bank bailout on the way?
I'd argue on two counts. Greek default is inevitable. It's disorderly default he's referring to, I think. And there's no question mark at the end: that's also inevitable.
As the Guardian has said in an editorial on Vickers this morning:
The careful cost-benefit terms in which .. concession[s] to the bankers [are] justified stir deeper questions. The commission has measured every dimension of finance's problems, but the crisis has bent the yardsticks. They talk of removing subsidies so risk can return to a market price, and yet investment risks are not currently priced by reason but by depressed animal spirits. There are some really bold ideas for breaking from the slump, such as a national investment bank to put idle hands and idle money to productive work. The commission, however, opted to stick within the conventional wisdom, stating blithely on page one that it is never for the state but for "the private sector disciplined by market forces" to make investment decisions. But after all that has happened, it is not longer good enough to hold the old truths to be self-evident.
I agree: on blackboards in economics seminars markets great make decisions. In practice they're made up of people with no magic power and no greater ability to know what to do than the state. Worse though, because they think they are superior they pay themselves more and still, as we've seen, get it spectacularly wrong.
All of which is why I argued yesterday that the state has to be ready now for another failure by bankers, as it is inevitable.
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As you say Richard, this report is likely to be overtaken by events in the Eurozone which will demonstrate, as you’ve so often said before, that nothing has been done to prevent another banking crisis; dumping the cost of the bankers’ fecklesssness on society as a whole, and leaving the same people with the same culture and neoliberal ideology in charge of the banking system was ever only ever going to lead to more of the same.
If a bank is really too vital to the economy to be allowed to fail, but is about to do so then this is an example of market failure, and the only solution is for the state to run the bank in the wider national interest.
Sorry to be a pessimist but is it not true that ‘ordinary’ banks are quite capable if going bust even without their investment bank wings. It quite simple, you just make stupid ill-informed loans. HSBC were very good at doing this. Yes to a national investment bank!
Yes. Three of them did – Northern Rock, Halifax BOS and Bradford & Bingley. None of these had an investment arm. RBS does have an investment arm, which did contribute to its awful losses, but the main reason for its failure was the disastrous attempt to acquire ABN AMRO.
I have lots of issues with Vickers. But given the approaching disaster even something as limp as that would be better than nothing, because it would afford some protection to smaller customers. There is very little time left to prepare. 2019 is just ridiculous. By that time the whole lot will have collapsed.
Is it not about banks massively expanding their mortgage books into a massive housing bubble, also does it make sense for banks to pay out bonuses out of accounting profits when in reality they are making losses when their real collateral is priced to market prices.
Sarah Palin, USA:
“Yeah, the permanent political class — they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money — to taxpayer dollars. They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest — to the little guys. It’s a slap in the face to our small business owners — the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power”
Unfortunately she is of the right…….but so right about things. Some of them.
I know that people like to dicuss the big economic issues but my view is that the banking crisis is not fixed simply because we cannot rely upon the numbers. Lets remember that the accounts signed off by the “big four” were mis-stated by trillions; the subsequent write down of overvalued assets and increase in undervalued liabilities was staggering.
The financial reporting standards were running way behind the increasing complexity of the instruments traded and there was a collective failure of boardrooms, rating agencies and auditors. This has not been addressed by Vickers.
Accounting / auditing practice in the USA plays second fiddle to the lawyers and this has resulted in a string of debacles.
Lets fix the basics. Simple question – who is the Government spokesman on accounting issues?
Fully agree.
Never, ever believe anything published by the “big four” – or their lapdog lackeys at the ICAEW.
If audits were conducted properly, honestly and openly more than half the world’s problems would vanish over night.
The problems facing the UK economy (and the banks that feed on it) lie in an inability to generate real wealth because of a lack of a manufacturing base. As a result the UK is now incapable of producing sufficient “finished goods” to trade with other nation’s finished goods.
Instead we trade raw materials to China who then adds value to them using cheap labour to produce/assemble finished products which are then sold back to the UK. In other words China is trading in it’s 1.3 billion people labour resource!
Without a strong manufacturing base and the efficient use of indigenous labour resources (distinct from “cheap” labour) the Western economies will collapse along with our worthless banks.
Factor in general incompetence (and tax dodgers) at the highest levels and the future looks bleak indeed.