Thursday, August 06, 2009

Hostage To Bankers

Pay up, or the economy gets it

Tyler likes markets. He trusts them far more than governments. He especially trusts them to deliver far better value for money than we're ever likely to get from governments.

But for markets to work their magic, the players need to be playing on a level(ish) playing field. And the problem we've got with these rapidly re-wedging bankers is that the field is very far from level.

The fundamental issue is the one articulated by St Vincent de Cable - banking profits are privatised but banking losses are nationalised. Whereas the bankers keep the vast bulk of the upside for themselves, any serious downside is shuffled off onto us taxpayers.

This week we were stuffed with our latest helping of downside, including 75% of the future losses on a highly dubious £260bn debt portfolio owned by Lloyds, and a further £700m salami slice of the Crock's rotten loan book (remember when we were being assured that the Crock's problem was one of liquidity rather than solvency? See here for a teeth-grinding reminder).

Meanwhile, every BBC bulletin is headlined by news of yet more banker bonuses, and demands that the government step in: bonuses should either be capped, or better still banned altogether. And while we're at it, shooting a few bankers outside the Mansion House wouldn't be a bad idea either.

So why is Comrade Brown so reluctant to act?

We know why.

He's desperate not to do anything that might damage the last-minute economic recovery he's praying for, and whacking the bankers might do just that.

He's also trying to stoke up bank profits so that they can start paying tax again. As we've blogged before, booming tax revenue from the financial sector paid for much of Brown's public spending slurge, and the current slump has blown a huge hole in the finances. According the Centre for Economic and Business Studies the tax loss from the collapsed finance sector this year alone will be nearly £30bn.

He's also acutely aware that the major banks do not have to stay in London.

In particular, HSBC may very well go back East. They are well advanced with their plans to list on the Shanghai Stock Exchange, the Chinese government is desperate for them to return, and it's surely only a matter of time.

Just as it may be only a matter of time before the ambitious Barclays/Lehmans operation relocates to New York. As BOM correspondent JW points out, if they are serious about rivalling JP Morgan, they'll need to move closer to where he keeps his cigars.

So there are certainly some big risks involved in pissing off the bankers.

But for us taxpayers, there are also some big risks in letting them get back to biz as usual - and we're not talking about their personal bonuses, which are a politics-of-envy sideshow.

As we've just seen demonstrated in vivid technicolor, we are currently standing as the ultimate guarantor of the entire shooting match.

That is a horribly expensive place to be. The IMF reckons the current bank bailout will cost us £200bn, or £8 grand for every single household (see here). And even if that doesn't escalate further (we're betting it will), the next bailout could be even bigger.

Sure, there's much talk of smarter regulation, including flexing regulation so that it toughens up during boom/bubble periods.

But recent events have shown us all too clearly we can't rely on our regulators to act smart. After all, they couldn't even regulate the Crock's pretty simple business, let alone being capable of spotting and calibrating bubbles to the extent of providing a sound basis for our entire regulatory stance.

So I'm afraid we have to KISS. We have to keep our regulatory structure so simple that even the stupidest regulator can operate it with a reasonable expectation of keeping us safe.

And that does mean breaking up the big banks. Just like the Governor of the Bank of England told us, if a bank is too big to fail, it's too big.

Crucially, we do have to split High Street retail deposit taking from investment banking activities - ie we need to implement our own Glass-Steagall Act (see this by the indefatigable Mr Stelzer).

The taxpayer has to guarantee high street bank customers against default on their own personal savings. Because history tells us that modern economies simply cannot operate if everyone keeps all their savings under the mattress.

But that is no reason to guarantee a bank's liabilities to its wholesale creditors. They are mainly other banks and professional investors, and they should be required to consider the risk of default before ever committing funds. If they get it wrong, they should take the hit.

Still less do we want our High Street banks visiting any of those famous casinos. Taxpayers should not be required to guarantee anyone at the tables - especially in a game of winner-takes-all.

The simplest way of ensuring all this is our own Glass-Steagall. We'll guarantee High Street bank deposits placed with regulated fire-walled High Street deposit takers, but nothing else.

In the circs, it's the only sensible to do. Surely everyone can see that.

Er, no. Neither Labour nor Tories are intending to do it.

Why not?

Because the bankers have scared the living bejeebers out of them. The bankers have threatened to leave and the politicos don't have the nerve to call their bluff.

So the playing field remains heavily tilted. Against us.

As the Major keeps saying, if you go bust owing the bank £500 grand, you're in trouble. If you go bust owing £500 million, the bank's in trouble. But if you go bust owing £500 billion, the taxpayer's in trouble.

The trouble is, speaking as a taxpayer, we just can't afford it.

PS Tyler can't remember if he's said this before, but back in the early 70s, he spent three months working for the NatWest bank, including a spell behind the counter. God, it was boring. But it was safe. And steady. It didn't go bust, and there were never queues on the pavement outside (see here for an uncensored clip from Bank Managers on the Job, 1975).

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