There is a very telling article in the FT this morning that was posted in reaction to Itay's new windfall tax on bank profits. This opened by saying:
Windfall taxes are a blunt policy tool. They may fill government coffers in the short term. But they also hit investor confidence and future business prospects. That is doubly true when levies are big and haphazard.
It closed in a similar tone, having been disparaging throughout, noting:
Governments that mount tax raids on a whim can expect to forfeit receipts via higher risk premia on their financings. The shareholders who finance the quasi-public utility of commercial banking will wonder whether their pockets will be picked just once, or repeatedly.
Its supposed sting was in the tail:
European bank stocks are cheap for the reason that these institutions are the playthings of politicians.
How wrong, I wondered, could the FT be on an issue as important as this? The answer would seem to be near enough one hundred per cent.
They have made four fundamental errors.
Firstly, they presume that banks are agents independent of government. That is very obviously untrue. Theit whole existence is based upon government regulation.
Secondly, the FT appears to think that a bank's ability to manage money is, once more, independent of a government. It is not. The existence of the currency and the bank's ability to manage it is, once again, entirely dependent upon government because the government chooses to create that unit of account and then permit banks to deal in it. The banks are about as independent of government as my left arm is of the rest of my torso.
Thirdly, it would seem as if the FT thinks that a bank's reaction to a government's monetary policy is something for it to decide. Given that they are regulated entities whose existence is entirely dependent upon the government, that is an absurd proposition.
Finally, the FT appears to think that it is within the right of markets to penalise governments for having the temerity to impose their will upon banks, whose existence is entirely within their gift. Yet again, this idea is utterly illogical. Maybe the FT did not notice the era of quantitative easing. If they had been awake during it, they would have realised that governments are, in fact, not in any way, dependent upon the financial markets to fund their activities. Instead, those financial markets are utterly dependent upon the government to provide them with many of the instruments that they wish to trade, including government bonds.
Banks trade at an apparent discount to value precisely because they are not understood, including by bankers and most especially, it would seem, by the FT. No wonder we're in a mess.
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On a positive note, the FT is owned by Nikkei, a Japanese company. The owners are to be applauded for the amount of editorial independence they have given the FT. That said, articles of this type, carrying the assertions they do would be greeted with a combo of puzzlement if not mirth in Japan by those knowledgable about how gov finance and gov – bank realtionships work in Japan. & yes Japan has its own set of interesting problems.
Perhaps one needs to regard such articles as low-grade propaganda, the kind of stuff that needs to be published from time to time to allow people to point (at a paper of record) and say, if the FT says it it must be true (even though as this august organ points out, it is wall to wall nonesense & has zero grounding in reality). We can be sure that senior vile-liebore figures are even now reading the FT tosh and nodding in agreement.
Well, you have pretty well wrapped it up , Richard. Of course, if they weren’t highly regulated institutions we can be fairly confident, left to their own devices that would be bust in short order, and take us all down. But of course, they know, and we know the Government would ride to the rescue, saving them from themselves; at all our expense. Come to think of it they come close to busting the system, even when they are regulated. Where does the FT find this stuff?
Please send them a letter.
Done….
I am in agreement. But while Italy has jurisdiction over Italian based banks, its currency is the euro and that is controlled by the ECB, which is supposed to be independent. It did succumb to political pressure in 2011 and Dragi said it would ‘do what it takes’.
I would imagine the Italian govt has less room for manoeuvre than ours. Obviously even as a member of the EU, we controlled the pound subject to EU rules but does being outside actually give us a ‘Brexit benefit’?
Mr Stevenson, I’m sure that you did not intend to be amusing, but I burst out laughing at this part of your comment “the euro and that is controlled by the ECB, which is supposed to be independent”.
The members of the ECB board is largely drawn from the finance sector, finance academia and national central banks. Draghi was ex-Goldman Sachs. Lagarde is ex-IMF and previous to that law (Baker Makenzie) & then gov (French state). All six executive board members are “safe pairs of hands” – they have been groomed over decades to be that, and don’t have an original thought in their heads, they are in short ciphers/puppets etc totally detached from reality.
Mike-to be familiar- you are right about the background of the people who run it and their ideas.
It is designed to not to be controlled by the European Council -the elected leaders- or the Parliament , which is directly elected. It would seem for the same reasoning as the FT -how dare democrats presume to control them?
The Western World seems hung up on the idea of ‘independent central banks’. Some would like them to be independent in practice because politicians can’t be trusted. Others think dividing control of the economy is to its detriment. I am of the second opinion.
My other point is that while a member of the EU we had to conform to the EU rules, so does being out of it give us a freedom to take control of the banking system in a way that we couldn’t before? So far I haven’t found ay Brexit benefits.
Thank you, Richard.
Long time reader, but first time commenter.
I work in banking, including in regulatory and trade policy during from 2007 – 16, and second your contention.
I know the FT well from those days, have much doubt about their technical knowledge and reckon they fished for this nonsense from banksters or were given some talking points, perhaps from former colleagues, to confect into a story.
I am against windfall taxes – taxation should be predictable. There should be a better way of taxing their profits, in particular, those gained from interest paid on reserves.
However, in the absence of that better system then windfall taxes make sense. Indeed, in the face of such huge profits at a time of austerity it is a racing certainty that they will be imposed. Both banks and energy companies would do better to propose better systems of tax rather than just whinge. Richard, I am sure you could advise!
Windfall taxes are a reasonable response to windfall gains from windfall interest rate rises.
I second Richard’s reply – the whinging on the business news on R4 this morning was pathetic too (I nearly had to get the violins out) – it was a window into a world that seems totally cut off from reality along the lines of ‘Oh look at all this money we are earning – I wonder where it comes from -yah?’
You can imagine one of them happening upon a foodbank and being puzzled as to why they exist and not being able to link it yo their up turn in profits because in the tiny one-eyed bankers mind, they MAKE money, when instead we all know that they actually just MOVE IT around from those with very little to those with the most.
Completely agree that they should be taxed on the unearned profits from leaving cash at the BoE earning 5.25% whilst fleecing savers.
Completely agree that a windfall tax is the answer for here and now in the short term.
But looking further ahead we need a more systematic approach….
Agreed
There my be more on this tomorrow
The FT is – much like most (if not all) of the right-of-centre simply the shouty-shouty tool of a certain ideology. No analysis needed, everything is an opinion piece devoid of understanding – but hey if the narrative sells, who’s bothered?
As the famous quote goes, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
How long would an aspiring journalist at the FT last if he were to point out the nonsense of much of the perceived economic wisdom about banking? In fact, how long would an aspiring economist last at the BoE if he pointed out similar nonsense?
Still amazed that the BoE published the article, “Money Creation in the Modern Economy” back in 2014. Those higher up the greasy pole must have taken their eyes off the ball to allow that. Luckily for them, journalists at the FT and other media outlets have managed to remain studiously ignorant about money creation and what banks actually do.
Other than Andy Verity, has any journalist/economist as much as mentioned it?
It would be wonderful if somebody was able to buttonhole Rachel Reeves and/or whichever worthless Tory chancellor is in place at the time with a question about money creation on live TV in the lead up to the next election. If their answers could be fact-checked, it might get some attention. I’d imagine the media gatekeepers would make it almost impossible for such an interchange to occur. Guerilla questions required, perhaps? We’d need somebody to go onto QT, get themself selected to ask a softball question, but then actually ask something a bit more pointed…
Might even make QT worth watching!
Thank you.
In early 2020, I was invited to address Labour members in Islington. The secretary, no longer a member since Starmer took over, and I are friends and former (City) colleagues. Both of us are socialists.
Part of my talk was about how many prominent journalists earn more from moderating business panels, voicing over training and marketing films, and making speeches or taking part on panels, both at home and abroad. The extent of these roles is not well known or understood. They are rarely declared, especially the blatant conflicts of interest and highly remunerative side hustles. By prominent, I mean presenting agenda setting programmes or writing columns and being able to control narrative, and harass or discredit opposition to neoliberalism.
Some have become heads of public affairs at big firms or lobbyists at consultancies. Readers may remember Michael Cole, one of many. Benedict Brogan was at the Telegraph and is now at Lloyd’s Bank. Brogan’s wife heads OfCom. That’s the caste at the top of this polity.
The talk became stormy. There were some former and current journalists present. One current hack, well known to railway enthusiasts and commuters, took it personally and walked out after I refused to apologise for implying that much, if not most, of the MSM is corrupt and partisan and rarely knowledgeable. When I pointed out which firms, here and overseas, pay well and attract hacks wanting to do their bidding / lobbying, dirty work even, I was accused of anti-semitism. I feared that that this ritual smear would reach my employer and lead to dismissal. It has been used to silence many people, not least Corbyn.
I’m pleased to see the Guardian is quoting you this morning in an article about interest payment on government debt held by the BoE. I