It really was the bankers . . . Mervyn King's speech on Monday

[Takver]

Surprised there hasn't already been a thread on this one - I know its very much benefit-of-hindsight, but still, surprising to hear the Bank of England governor saying this stuff:

"Not merely were banks? own reported profits exaggerating the contribution of the financial sector to the economy, so were the national accounts."

"it is hard to see why institutions whose failure cannot be contemplated should be in the private sector in the first place"

"Of all the many ways of organising banking, the worst is the one we have today."

Anyone who's interested & hasn't seen it, the text of the speech is here. There's also a summary by Robert Peston here, though the speech is def. worth reading in full, I think. Surprising also that the media hasn't (unless I've missed something) made more of it?

Thanks Takver, I certainly missed it. Wasn't it even on the radio?

Don't know as I've been away & just been catching up (well, I don't listen to the radio anyway, but generally keep an eye on the news on the net).

Ann Pettifor has a lot of wise words about the banks

I'm still not sure why a private sector crisis has had to become a public sector crushing.

I want to read aware mnetters posting about this. I haven't got huge amounts to say but I want to know what people think.

Good article, Winky.

Golem's blog is interesting reading, also looking forward to his book, though he does tend towards the purple-pen-brigade at times, I think.

Why a private sector crisis spilled into the public sector? Because 30s style bank failures are unthinkable, hence we spent vast amounts of public money propping up essentially bankrupt private companies.

That was one of the many interesting points in Mervyn King's speech, I thought - the acknowledgement that it wasn't a matter of a short term liquidity problem (ie a cash flow problem) being addressed by the government bailout, but that the banks are essentially insolvent.

Effectively, its no different from the old 70s style bailouts of British companies, propping up British Leyland and the like, but keeping lots of highly paid suits in jobs, rather than lots of car factory workers.

That's why I liked the fact that someone like MK is admitting that it is hard to see what the rationale is for these institutions being in the private sector.

" keeping lots of highly paid suits in jobs"

I think the difference is that when British Leyland went to the wall, jobs went. If one small bank had gone to the wall in 2008, some jobs would have gone and the FSA would have compensated deposits of up to £30,000 only - as happened with IceSave. If multiple banks had gone to the wall in 2008 it would not have been just jobs but also millions of peoples' and businesses savings, pensions and investments that went with them... and arguably, the British economy in a more wider sense.

He's right to point out that it was wrong for banks to take risks which, if they paid off, they (and to a lesser extent the treasury) benefited from but, if they failed, the taxpayer compensates for. That's why there are moves now to separate the riskier investment banking operations from the retail banking operations and why banks have to have more in reserve. So what he's saying isn't new exactly but it is in more direct terms than a BoE governor usually chooses.

I should add.... I have no evidence for this but would suspect that when George Osborne says that the government are putting the pressure on banks to get in line that Mervyn King, even though he is technically independent, is part of that operation.

That is true, Chil, but I think that MK makes a good point when he asks why at this point the banks are still private businesses, and why their shares still have value.

I do as it happens have a reasonable amount of sympathy for bank shareholders - I suspect plenty of them are like an elderly friend of my parents, who holds her savings largely in bank shares. She was advised to buy them as a low risk investment with the aim of living on the dividends, she certainly wasn't intending to participate in high risk - high payoff investment. And of course now she doesn't have those dividends, even if she does still have the shares.

But the bottom line is that if I were to make such risky decisions with my company, and it were to go pearshaped, there is no way that I would be bailed out by the government and still end up owning the company.

As to saving the banks saving the economy - well, up to a point, Lord Copper . . . I agree that it would have been much worse had the banks failed (pace Argentina a few years back). But there has been a very heavy price, as we can see from the cuts now taking place.

I'm actually amazed at how little anger there is towards the banks, and how little people are demanding real, solid changes to the way that they are set up.

It also frustrates me that this is played as a party political game. Yes, Labour were culpable in that they didn't see this coming (despite the fact that it has been bloody obvious for years), nor re-regulate the banks.

And they were certainly culpable of going along with the overstatement of the importance of the financial sector, failing to work to strengthen manufacturing, addressing growth in wage inequalities etc etc.

But despite what plenty of people post on here, the de-regulation of the banks goes back way before their time - and indeed in 1986/7 leading up to the Big Bang plenty of people had their 'moral hazard' warning lights flashing. And there were no voices from the Conservative benches crying out for bank re-regulation over the 10 years of the boom.

Takver - thanks for the link. Mervyn King's speech dramatically increased my understanding of banking. I highly recommend it.

The challenge of the 'too big to fail banks' is not an easy one.

Basel III relies heavily on historical information I guess that means it will 'prevent' the 2008 crisis happening again.

I agree with Chil - the separation of banks into 'high street' and 'investment' is not a new idea. And I got the impression it is Mr Kings' favoured option.

But - I wonder if this will create two types of banks - the 'high risk' investment banks with highly qualified, well paid bankers, and the risk free money 'retail outlet'. The rich will use the former and most of us the latter.

Would we as a society think that is a price worth paying for financial security and protection from risk?

"overstatement of the importance of the financial sector"

That's the crux of the matter. All the eggs, we discover, were in one big deregulated basket - and I accept that this did not happen solely in the last 13 years. But the spending decisions built around the revenue from those eggs are now questionable given that the forecasts for growth were also constantly overstated. The decision to invest disproportionately in non-revenue-generating public services and welfare was politically motivated based on the funds available at the time - just as the decision to do the reverse is today.

@jackstarbright... the main thing we will notice from the split between retail and investment banking (no more cross-subsidisation) will probably be the return of bank charges for transactions

"the main thing we will notice from the split between retail and investment banking (no more cross-subsidisation) will probably be the return of bank charges for transactions"

Chil - I agree, but see more to it than that. The 'alchemy' that King talks about gave average people a share in wealth creation (via very high interest rates) and allowed the poorest (in the US, anyway) access to home loans. Of course, it also lead to near global economic collapse.

Under the separation proposal, retail banks will only be able to lend their depositors' money to investment banks - not 'invest it'. The risks and the gains will be with those who invest their money in investment banks.

Whilst it may well be the only workable option - it is not without serious implications for society IMO.

You're right of course. Cheap loans, free banking, attractive savings schemes and so forth are less likely without the big money of the investment arm holding it all up.