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Why Mervyn King wants to break up the banks
There are real fears of another cheap money bubble inflating, this time directly underwritten by taxpayers
Bank of England Governor Mervyn King last night added his voice to calls for a fundamental reappraisal of the way the banking system is structured and regulated.
Speaking in Edinburgh, home to both RBS and HBOS, King called for the break-up of the country's biggest banks, arguing that regulation alone cannot prevent the financial speculation that results in bank failures.
He described the £1tr of support given to banks by the taxpayer as "breathtaking" and "unsustainable".
"To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform."
The notion of "too big to fail", King argued, is essentially flawed: “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history."
The Governor's comments came ahead of today's Conservative Party announcement of a new working group to help implement plans to scrap the Financial Services Authority (FSA) and pass supervisory powers to the Bank of England.
While King's comments put him at odds with Chancellor Alistair Darling, they will give new momentum to efforts to curb the world's biggest banks.
Today the British Bankers' Association will warn that a hasty implementation of new rules could impact badly. "There is a price for stability," said Angela Knight, chief executive of the BBA. "We are urging regulators not to bring in reforms too quickly, which could constrain the economic recovery and diminish growth."
Commentators note that just one year on from the near-collapse of the banking system the cure the world needed then is despised now.
Says Martin Wolf in the FT: "It now has what it wants, but hates it. As joblessness soars and the hopes of hundreds of millions of people are blighted, the financial sector’s survivors are thriving. Even bonuses are back. Policymakers have made a Faustian bargain. Success feels like failure."
Guaranteeing the banks with public funds has made the the system more perilous, says Wolf. "Open-ended insurance of weakly regulated institutions that take complex gambles is intolerable."
With the Centre for Economics and Business Research announcing today that it expects British banks to pay out £6bn in bonuses this year, up 50 per cent on 2008, populist outrage is building. Last week Goldman Sachs announced it was stepping up its charitable donations, but that news was easily smothered by the sheer size of its growing bonus pot. And with fears also increasing that a cheap money bubble is again inflating - this time directly underwritten and guaranteed by taxpayers - calls for action are becoming urgent.
King suggested last night separating basic banking services like saving and lending from riskier speculative activities, because forcing banks to carry more capital would not necessarily deter them from taking on too much risk in pursuit of unsustainably high returns.
In the US, the administration is furious the banks are awarding record bonuses so soon after the taxpayer bailout and lobbying against reform. Lawrence Summers, the Obama administration's chief economist, rejects the bank's argument that once bail-out funds are repaid, bonuses are nobody else's business.
"There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system," Summers pointed out. "Wall Street was no small part of the cause of the crisis, and Wall Street needs to be part of the solution," he added. ·
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The problem they have is that not all banks have been rescued by governments, only the bad banks in those countries that were badly regulated (basically the US, UK, and some of continental Europe. However there have been no rescues in much of the world (Australia, Brazil, China just to name a few places in alphabetical order)
So what the government in the UK has done is to buy the bad banks whilst promising the taxpayer that they would make a profit out of it, whereas in reality, they never had any idea how this could be achieved.
What they should have done is simply take full ownership of the failing banks, thus underwriting the assets and liabilities, then flood the market with liquidity (which they did) to ensure that contagion didn't spread to the good ones. They would then have had 3 choices 1) run the banks themselves in open competition with the still private banks, but in the way they thought "best" (which common sense tells you probably wouldn't have worked too well) 2) sell whatever they could - to foreign banks if they were worried about competition (which would have needed massive guarantees and/or writeoffs frrom the government or 3) manage an orderly run down (which would also mean they wouldn't get their money back).
The current solution of nuturing them back to health not only carries massive moral hazard (i.e. everyone knows that the government will reward the worst banks with a bailout package, so they have no incentive to be better at what they do) but also means that the only way for the banks to generate the money to repay the government is to return to business as usual, as that is the only thing that will generate enough profit to repaythe government.
the problem in all this lies in greedy government determined to keep debt fueled growth going to the last possible moment, and a weak regulatory framework that had been devised by incompetent bureaucrats.
How seriously can we take Mr King's comments. Given that Mr. King stands to benefit from the proposal by the Tories to give more power to the Bank of England, is he not just parrotting a line to keep in with what he assumes will be his new bosses. It seems like another General Dannant moment to me of using your position of impartiality and trust to criticise the Government essentially on behalf of their political opponents. His comments seem too simplistic and ignore the fact that whatever is done by way of reform and regulation needs to be internationally agreed to be effective.
So we bail out the banks, the banks pay bonuses. We then get a proposed basic income tax hike to 27% plus retirement age put back to 70, according to proposals put forward by the IoD. This is pretty obviously unsustainable. The rise and rise of the plutocracy will be at the expense of the middle-class. This is the (other) Road to Serfdom.
Greed, greed and more greed. Banks, companies who buy national services, politicians. Then we have daily examples of scammers, phishers and outrighter fraudsters.
One way or another all the above are thieves to add to those who make false unemployment and disability claims.
Strangely it is starting to seem the only honest people with integrity are the self admitted burglars who accept prison as part of their professions cost.
Where do banks and financial institutions get off telling us that after loan repayment to the tax payer what they do with their money has nothing to do with us. Sorry Mr Banker you only still have a bank because we bailed you out. Taking that money to save your sorry asses, you gave up whatever imagined rights you feel you have, in the same way the honest thief gives up his right to freedom when he gets caught.
Oh and how about you banks being charged a national interest tax to pay off the interest we are paying for borrowing the money to enable you to continue.
We keep hearing from you and our crooked politicians who have also been stiffing the taxpayer alongside the benefit cheats, about how you are entitled and how the country, nay the world, would have gone down the proverbial pan if you hadn't been allowed to legally steal our monies. Personally I think that is scaremongering and BS fed to us ignorant masses who can never hope to understand your complicated financial schennanigans, so you can pay these fantastic bonuses to the same people who were so woefully stupid as to put us all in such a position in the first place