Banks - Lest We Forget

[louisiana]

If we have banks that are too big to fail, and each time bail them out to prevent failure, those banks will tend to behave in riskier ways in order to maintain the same level of risk.

Further, if we compensate all savers who lose their savings in failing institutions, then people will tend put their money into any old pile of Ponzi. (Remember the Icelandic banks offering stupid rates of interest?) Again, they are merely maintaining their risk level.

In other words, by guaranteeing both sides, government has raised the bar on risk to an unacceptable level, and as a consequence opens itself up to sovereign bankruptcy.

We need to return to a situation where there are many small institutions that are not too big to fail. And we somehow need to ensure that people, investors, are not absolved of all responsibility for risk management in their personal affairs.

I don't think it's realistic to say that we can control the risk through regulation of institutions (with only approved institutions being added to the approved list for savings protection, for example). It's clear that regulation has been poor to date (and how do you regulate a bank that's not even in the EU?) and we just don't have the resources any more to build bigger empires of regulation.

Modern complex society has built vast edifices of regulation in many spheres that has proved inadequate because people will always behave like people i.e. find the holes, the gaps, be subject to corruption, tick the boxes without doing the analysis, the regulators get too close to the regulated etc., and cause all kinds of unexpected (and seemingly expected but unplanned for) consequences to occur.

[Mick Mac]

SeanMacGabhann Wrote:

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> Hmmm - if you have no money to pay the mortgage,

> the bank doesn't lend you the money again, ittakes

> the house off you

>

> You COULD borrow the money from friends or family,

> but they will be rightly pissed off if they see

> you driving a new car the following month

As long as it meets the terms of the borrowing it can do what it wants (subject to any restrictions in the terms of the loan).

Don't pay the mortgage? - I'm not aware of the banks defaulting on the terms of the borrowing. And if they did the loan would be renogiated. At that point the government can put additional restrictions on the actions of the banks as a condition of renegotiating the loans.

They obviously did not restrict the payment of bonuses, as they would have not needed then to impute the bankers bonus tax. And I'm not aware of the banks breaching the terms of the original bail out monies? are you?

[peckhamboy]

So basically, what we're saying is that the government didn't impose sufficient or appropriate conditions on the banks when it offered additional liquidity, so now we should tax them as punishment?

[pk]

Jeremy Wrote:

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> And let's not forget the 2010 bonus tax... and

> income tax on top of that... actually

or indeed yesterday's/today's bank levy

[SeanMacGabhann]

thanks banks are defaulting on payments simce the bailout - that's not the accusation. But if they have money for bonuses after the bailout where has that come from?

[peckhamboy]

Ummm, profits maybe? Let's get this straight - the UK government did not give every bank a large loan to pay off its debts, which is now being used instead to give huge bonuses to staff. The govt made available large amounts of cash on condition that the cash was used to lend to other banks, in order to help put an end to the liquidity (ie cash flow) crisis. Banks that took the cash (and not all banks did) were required to make certain commitments and to repay the money at a set interest rate over a set period.

Once the liquidity crisis passed, banks were able to operate on a more normal footing and made large profits. Some of those profits were ring-fenced to repay govt loans. Banks were free to do as they liked with the rest - some would have been distributed as dividends, some kept in reserve to satisfy the increased capital adequacy requirements imposed by the govt, and some distributed to staff by way of bonus.

Worth noting as well that a large number of bonuses in banks will be contractual rather than discretionary, so the banks have no choice but to pay them.

Worth also noting that the govt is getting a much better return on loans to banks than would have been available on the open market, plus it bought shares in banks at rock bottom prices - LTSB for example is probably close to double the share price it was at its lowest. So far from taking all our money and not giving it back, the banks are actually proving to be quite a lucrative investment.

[Jeremy]

Worth also noting that when it comes to paying staff, keeping the company (our investment) afloat is more important than making a political statement or keeping the tabloids happy.

[mockney piers]

? First they came for the quangos,

And I did not speak out because they're a bunch of squandering bureaucrats who perform no useful function.

? Then they came for the students,

And I did not speak out because I got through university when it was free so stuff them.

? Then they came for half a million civil servants,

And I did not speak out because there are 172 civil servants who earn more than the Prime Minister and that made me very angry.

? Then they came for the police,

And I did not speak out because I'm looking forward to committing more crimes and not getting caught.

? Then they came for the BBC,

And I did not speak out because Rupert has repeatedly assured me that the BBC are evil leftie wastrels.

? Then they came for the armed services,

And I did not speak out because I never thought they were all heroes anyway.

? Then they came for mummies on child benefit,

And I did not speak out because anyone earning 44K a year can always cut back on au pairs and tapas.

? Then they came for the arts,

And I did not speak out because a couple of DVDs on a Friday night is all the culture I need.

? Then they came for council tenants,

And I did not speak out because only losers live in council houses and I am not a loser.

? Then they came for rail subsidies,

And I did not speak out because I can drive there cheaper.

? Then they came for my pension,

And I did not speak out because I'm not going to be old and poor for ages.

? Then they came for the community centre round the corner,

And I did not speak out, although I'll miss the Spanish evening classes, and the jumble sales they used to run were good, and my nan went there a lot, and I guess they kept those annoying kids off the streets.

? Then they came for the benefit cheats,

And I did not speak out because anyone on benefit is a cheat in my book.

? Then they came for my local hospital,

And I did not speak out because I'm not planning on being ill any time soon.

? Then they came for the bankers,

And I said Oi! No! Bankers perform a crucial role in our economy and their obscene bonuses must be protected at all costs.

? Then they came for my children's future,

And I did not speak out because they can jolly well make their own way in life.

? Then they came for all the projects the last government started,

And I did not speak out because the entire global crisis was Gordon's fault.

? Then they came for the public sector,

And I did not speak out because the private sector can easily absorb half a million unemployed losers on part-time minimum wages.

? Then they came for something fundamental,

And I did not speak out because "we simply can't afford it".

? Then they came for the welfare state,

And I did not speak out because I'd forgotten what life was like before we had one.

? Then they came for my next-door neighbour,

And I did not speak out because cuts aren't a problem when they happen to someone else.

? Then they came for me,

And by then mine was just another livelihood on the bonfire and nobody gave a damn.

? And then they smiled, state rolled back, job done.

courtesy of Diamond Geezer

[SeanMacGabhann]

I don?t want to punish anyone

I agree we need banks to be in good shape to help any recovery

But I wonder just how bad a job someone in charge of a bank has to do before we can say they were bad

[DaveR]

Loads of them did a really shit job - creating, selling, buying assets that (it turned out) no-one could really value properly, lending too much to too many people (who wanted to borrow but weren't worth it), creating perverse and dangerous incentives in their business and bonus models - there are lots of valid criticisms. And many of those failings led directly to them needing to be bailed out, and there being a massive credit squeeze, and lots of other negative consequences. And if UK corporate governance was more effective (and that's a whole other story) lots of bankers would be paid less and some would be out of a job.

BUT, is it reasonable or sensible to say (as the first page of this thread largely does) banks are primarily to blame for the current state of the public spending deficit and there is a realistic alternative to fairly dramatic cuts in planned spending? Answer, no. And whether we like it or not, the financial services sector will have to play a huge part in the recovery we are all hoping is on the way.

[louisiana]

The financial services sector, like all other sectors, will do what is in its own interest. Why would they do anything else?

Recovery? What recovery? We're facing peak oil and hence the likelihood of vastly increased prices for anything derived from oil and anything using oil, peak a whole lot of other resources in the not too distant future, Western countries loaded with debt, a still very possible sovereign debt crisis in various countries, a global change in the balance of power (China etc.), a global population *explosion*, increasingly skewed income and wealth distribution in many Western countries (including US and UK), a whole lot more unemployment to come.... Rather than any recovery, I think we are facing crunch time.

[SteveT]

the financial services sector will have to play a huge part in the recovery we are all hoping is on the way.

wrote DaveR.

It is rather like saying "the water in the bottom of the boat which is made us sink will eventually help us out of this mess it got us into"

They have surely lost any credibility in the market they once had, so I doubt they are going to re-flate the economy with what they now have to offer the general public.

The only way out as far as I can see is to produce goods which every one abroad wishes to buy, and when we have to compete with China Japan Korea Malaysia India Thailand USA etc. I do not see it happening until we can match them on price and quality.

Don't hold your breath then.

[SeanMacGabhann]

DaveR ? good points all but rather than get all of the blame, I think banks are actually getting away with none of the blame in practice. I think this thread is a cheap shot at banks, but when people rush to defend them I think they in turn go a bit OTT

Louisiana ? all of that MIGHT happen, but when push comes to shove, this species is as capable of getting itself out of a hole as it is messing up. Let?s wait and see. I doubt living in the shadow of the cold war in the 60s was any better but things have a way of working out

[mockney piers]

Exactly. Plus we're probably talking 50 years for significant changes and by recovery people really mean will my house price go up again in a year ;)

And I'm with Sean, things will change for those with ie boats across the atlantic, balloon airfreight, no strawberries in winter etc, but why all doom and gloom?

Whereas those without won't notice much, except that all those cheap bullets and guns fuelling endless war might be a bit harder and pricier to come by, which can only be a good thing surely.

[Mick Mac]

louisiana Wrote:

-------------------------------------------------------

> The financial services sector, like all other

> sectors, will do what is in its own interest. Why

> would they do anything else?

>

> Recovery? What recovery? We're facing peak oil and

> hence the likelihood of vastly increased prices

> for anything derived from oil and anything using

> oil, peak a whole lot of other resources in the

> not too distant future, Western countries loaded

> with debt, a still very possible sovereign debt

> crisis in various countries, a global change in

> the balance of power (China etc.), a global

> population *explosion*, increasingly skewed income

> and wealth distribution in many Western countries

> (including US and UK), a whole lot more

> unemployment to come.... Rather than any recovery,

> I think we are facing crunch time.

Jeez - you must be nice to live with. Such optimism.

[louisiana]

SeanMacGabhann Wrote:

-------------------------------------------------------

>

>

> Louisiana ? all of that MIGHT happen,

Some of it has already happened or is happening.

[louisiana]

Mick Mac Wrote:

-------------------------------------------------------

> louisiana Wrote:

> --------------------------------------------------

> -----

> > The financial services sector, like all other

> > sectors, will do what is in its own interest.

> Why

> > would they do anything else?

> >

> > Recovery? What recovery? We're facing peak oil

> and

> > hence the likelihood of vastly increased prices

> > for anything derived from oil and anything

> using

> > oil, peak a whole lot of other resources in the

> > not too distant future, Western countries

> loaded

> > with debt, a still very possible sovereign debt

> > crisis in various countries, a global change in

> > the balance of power (China etc.), a global

> > population *explosion*, increasingly skewed

> income

> > and wealth distribution in many Western

> countries

> > (including US and UK), a whole lot more

> > unemployment to come.... Rather than any

> recovery,

> > I think we are facing crunch time.

>

>

> Jeez - you must be nice to live with. Such

> optimism.

I'm a realist.

There's plenty we can do to dig ourselves out of the hole, but let's not kid ourselves we're not in a hole.

Also plenty of joy being reported elsewhere today (Lloyds Corporate Markets):

***

Irish Banking - no gold at the end of this rainbow

October 2010

We maintain a cautious outlook for the Irish Banking sector, primarily because of uncertainty around future economic growth. Disappointingly, the National Asset Management Agency (?NAMA?), a special purpose vehicle set up to help kick-start new lending and support wider economic recovery, has to date done little to improve conditions.

[SeanMacGabhann]

Louisiana ? I?m not saying all the indicators aren?t there if you look for them. Or that many of those things aren?t happening. I?m just saying historically we have been in holes before. It may well get a lot worse before it gets better. But if I?m stuck in a shelter for a couple of years until then I?m going to want to do it with people of a sligtly sunnier disposition

?you know, if we ever get out of here, we?ll be eaten by rats?

Yes, I know?. Now pass me another marrowfat pea

[Jeremy]

Irish Banking... whatever next?

[Huguenot]

It's a shame that people are still getting bogged down in cursing Britain's lack of 'manufacturing' capability.

Not only is it a fallacy that manufacturing is fundamental to a successful economy, it's also a fallacy that the UK is badly off in this respect, and that other economies are trumping us.

As a percentage of the economy, 'industry' in developed countries represents 24% in the UK, 22% in the US, 19% in France and only 26% in Germany. So that makes us more industrial than most of our direct competitors.

The thing to remember with China's 46% of 'industry' is that it's mostly generating low cost, low complexity, commodity crap from workers with salaries of 50 quid a month who are on the cusp of a revolution in rejection of these destructive labour policies. China has no 'service' economy because the workers are too poor to affford anything but bare essentials.

Their outdated working practices can easily be outcompeted through automation, from which China has nothing to gain. In fact automation will lead in increasing amounts of 'free time' for everyone, so it's worth considering how we can create a business filling that free time for people around the world.

Success for Britain will come from delivering services with a USP that builds upon our proven strength - this means finance, pharmaceuticals, technology, entertainment and communications.

I can understand how unsettling that must be to a generation who prefer the black and white simplicities of manufacturing, but it's time to either change or fail.

When you know that, you understand why Gordon was in with the City.

An obsession with manufacturing is really about being unable to make the mental leap from the Britain best characerised by Carry On at Your Convenience

[mockney piers]

is this in the wrong thread? I can't see a single reference to manufacturing in any of the three pages.

It is an interesting point though, the FP article I referred on another thread had a section on how Japan suffered because it failed to rebalance its economy away from manufacturing to services as it became better off resulting in a lack of competition, poor provision and ridiculously high prices for services, and ultimately caused terrible problems for the Japanese economy.

I relink here, it's a very good read and worth 15 minutes of people's time, if they have 15 minutes spare.

http://www.foreignpolicy.com/articles/2010/09/30/the_japan_syndrome?page=full

[HAL9000]

SMG - Historically, every civilisation prior to ours has collapsed - often leaving barely a record of its demise: only the centuries of 'Dark Ages' that followed in their wake.

I agree with louisiana - the future for the so-called western economic system looks dire. The idea that it is somehow different this time sounds like wishful thinking, in my view.

[Huguenot]

Well,that's because you're skim reading Mockney ;-)...SteveT made this observation about 10 posts ago:

"The only way out as far as I can see is to produce goods which every one abroad wishes to buy, and when we have to compete with China Japan Korea Malaysia India Thailand USA etc. I do not see it happening until we can match them on price and quality."

[mockney piers]

"Historically, every civilisation prior to ours has collapsed"

Really? Not a popular view these days.

You've been eating gibbon again haven't you.

[mockney piers]

I can't imagine how I missed that post Huguenot ;-/