The news that the Cooperative Bank needs more capital is not, as such, news. It's been known for sometime, but a credit downgrade has highlighted the issue today.
What it does pose is a more important question, which is that given the over inflation of the property sector - which is not going away - and the resulting over leverage of many bank customers leading to excessive bad debt risk for all banks - is there anyone who can now bear the risk of banking but the state?
And in that case has the market economy now failed?
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Depositors are the banking form of Schrodinger’s Cat.
You don’t know if they are risk investors or storage customers until you blow the bank up to find out.
Because state finances are, of course, all in such great shape?
Of course they can still take on further debt/risk.. that’s because they (well, some of them) can print money and/or raise taxes. I’d be able to borrow at 1% if I had that sort of power. However, is there really any evidence to suggest that the state would be doing a better job? It’s not as if every government in my lifetime hasn’t been joining in the bubble-inflating games. In fact, they still are! Even after everything that’s happened we see Osborne inventing new schemes to ‘revitalise the housing market’.
Oh… and the failure of one sector, however crucial it is to the smooth operation of the wider system… does not necessarily equate to a failure of that wider system as a whole.
And in that case has the market economy now failed?
I think we should let the market actually work before pronouncing it’s failure. Perhaps if government let poorly run banks, such as Co-op, actually fail, we would see.
As it is, the market is indeed working in that it is telling us that Co-op is poorly run and has an unsustainable business plan. Let’s see what else the markets say without governmental intervention.
That would mean total bank failure
That is what happens when businesses are run poorly or have a flawed business plan. Let Co-op (and Barclay’s, HSBC, USB, etc) fail.
The alternative is to bail them out endlessly. It was wrong to do that in 2007-2009, it is wrong now.
So you’d like the economy to completely collapse which is what would have happened and will now?
Great idea
Then what would you do as the entire country wen hungry as the food chain collapsed?
So leave it to the market, eh? Seeking a contracting oligarchy. So very nice for some, economically efficient? I think not.
Carol
not sure that is helpful.
I remember having this argument with Richard & he made a FAIRLY COMPELLING CASE WHY we couldn’t just let the banks go down,but I don’t remember why.
I would so like to let the mofuggas go die & let’s be honest they deserve it.
Any ideas why we shouldn’t ?
If banks fail so does the food supply chain, overnight
And I don’t think that helpful to stability in society
Being as the state is propping up banks and they will likely fail if that support is withdrawn, it is only right that banking should be nationalised and made to work in the public interest rather than for the banks interest.
Would a fully nationalised state banking system provide funds for the real economy though?
Or just maintain the status quo?
I have argued for years bankibg’s infrastructure should be nationalised with licences banks paying to use it
Richard, is that on the basis that the State has proved so good at developing world class infrastructure?
Yes
Seen our road system?
Airports?
Oh, and BT works
And the National Grid
All state built
Interesting idea.
The usual left/right public/private arguments sometimes do not get to the core of the matter, and do not provide a workable solution.
Hybrid structures, like the Richard just suggested, can advantageously allow commercial risk to be separated from an underlying commodity which should not be in the marketplace.
Along with the NHS computer system, tax assessment and collection, border authority …
So IT hasn’t always worked
So?
Well software is a large piece of a banking infrastructure.
Indeed
And it works – sort of – although Frances Coppola has warned it is only just doing so now – as RBS proves, often
If the Co-op were to fail and the state did not intervene, where would customers turn? There is no way most of those who moved accounts from the Big 5 in disgust would ever want to rejoin their game. I moved my account to the Co-op a couple of years ago after I was assaulted by security in a NatWest branch when leading a peaceful protest against their practices. I was still a NatWest customer at the time. I even showed security my bank card to prove it; that’s how little that bank though of me. Moody’s says that the Co-op “underestimated the risks of that acquisition, especially against the backdrop of the continued weak economic environment”: an economic environment which most economic ‘advisors/experts’ said would be over by now. An economic crisis precipitated by the actions of banks such as RBS. Yet guess which one looks set to receive continuous support? Compare Co-op banks problems merging Britannia operations with the purchase of ABM Amro by RBS, which nearly brought that bank to its knees. The taxpayer and the state helpfully bailed out one of the worst offending banks of the financial crisis. A bank that, like many of the Big 5, lost many customers to banks like the Co-op. Because the Big 5 grew so big on the back of criminal practices that have made banks like RBS ‘the big players’, they are seemingly untouchable – ‘too big (up their own arse?) to fail’- and continue to receive continuous bail-outs in the form of QE, ‘Help to Buy’ and other schemes, plus subsidised interest rates for borrowing. The Big 5 banks led the way in the ‘Big Is Best’ battle; Co-op felt it wanted to expand their alternative the practices of the Big 5. Yet, ironically, in being influenced by the market led approach of those banks in wishing to grow rapidly, it is now in its current position. The market is failing all around us; whether that means the end of the market is another story.
I am a Coop customer
And very much hope to remain one
“Oh… and the failure of one sector, however crucial it is to the smooth operation of the wider system… does not necessarily equate to a failure of that wider system as a whole.”
Hmmmm……let us see how well the market performs if the government stops pumping in QE money, meaning the banks can’t bank against that QE money and pump it into the stock market!
Poof!! 🙂
The stock market is not the same thing as the ‘market economy’. It’s a place where, in the main, people trade second hand bits of paper which represent claims on real things.
The market economy is those real things.
But as we all know – in the world of leveraged finance that unreal activity constricts real opportunity
That’s why is matters
But much of this stock market activity involves mergers and aquisitions and asset stripping; activities that serve no real social purpose whatsoever.
Neither does the creation of many more futures created against real commodities that actually exist. Certainly futures when used properly are a perfectly legitimate method of insurance, but many are simply used to manipulate prices up or down.
A short sale, where someone can borrow shares, sell them to help manipulate prices down can buy these shares back at the new lower price and pocket the difference as profit.
One question; if stock market activities are apparently perfectly legitimate, then why do they have such a problem with oversight and regulation?
Stevo
I appreciate that there are many reasons to take issue with the stock market. However, again, I must stress the fact that it is not the same thing as the ‘market economy’, although there’s no question that it impacts upon it. Share price is a key performance indicator for companies and management, so the activities of a quoted company tend to be carried on with share price in mind (which can be both a good and a bad thing.. Richard alluded to the bad, but the pursuit of a higher share price can also incentive investment and innovation).
Mergers, acquisitions and ‘asset stripping’ aren’t inherently stock market activities though. Where a quoted company is involved in a merger/acquisition then, unavoidably, the stock market is involved. Also, it can be a source of capital for such deals (rarely, however, as we ‘prefer’ debt financing here).
Asset-stripping is more often a buzzword used by critics, than something that actually happens.. and it’s certainly not a stock market activity. In the main, the stock market wants increased long-term shareholder value, and asset-stripping, in the sense that you presumably mean it, doesn’t deliver that.
For the record.. I’m not a fan of the stock market. I think it serves a vital function, but not especially well.. and it’s a source of far too much unearned income for various people/organisations. However, let’s not confuse a bunch of numbers on screens with the underlying economic activity.
Hmmmm….angels dancing on the head of a pin come to mind. I am not really denying that the stock market is linked to commodities in the real economy. However, too much of its activity, short selling, pumping and dumping, futures manipulation and the aforementioned mergers and aquisitions and asset stripping are more the order of the day now.
Investment in a manufacturing company can take up to to two years or more for real profit to bear fruit. Manipulation of stocks, shares and prices can offer almost instantaneous profits. That is why the economy has become unbalanced away from real wealth and towards financialisation of the economy, or making money from money. It is not just the rise of credit default swaps and collaterallised debt obligations and other types of financial engineering that have brought this about, but also the manipulation of stocks.
This, along with the deregulation and rise of the financial sector, the outsourcing of manufacturing to other countries and unfettered globalisation have taken wealth out of the real economy and put it into the hands of bankers and financiers.
When the stock market is used to achieve what it original purpose actually was, that is, to raise finance for new industries, it is not necessarily a bad thing.
However, stock markets have become as much a glorified casino as the investment banks have.
The stock market is increasingly a place where computers trade electronic pieces of paper with other computers, millions of times an hour. Where the gain will be in fractions of a penny per transaction.
Or where other buy pieces of paper to stop some gaining for personal gain.
As for banks: personal deposits, up to a limit, are “protected” by the government.
But debts are not. Nor are mortgages.
And to be blunt about it, deliberately, by rumour or other means, pushing an organisation over the cliff is considered good practice. After all, someone is going to buy the bits; probably cheaply.
There is that good old city financial morals at work, again.
Don’t expect government help to be either forthcoming, or helpful. After all, someone is providing those good-old-boys in parliament handfuls of cash for “services”
It is no good moaning about city morals when we have government steeped in backhanders and expenses fraud. And that goes for many senior civil servants as well.
“As for banks: personal deposits, up to a limit, are “protected” by the government.
But debts are not.
I would say otherwise. In the case of bond holders and those that hold derivatives, they are amonst the first in the queue ahead of everybody else to get the money when banks are bailed out.
There are many methods to remove this debt; cross-cancelletion of debts between countries, turning debt into equity or creating enough electronic money to buy most or all of the debt and allowing banks to hold it permanently as a loss as an accounting measure are among the best of them.