Sunday, October 18, 2009

Breaking The Bank

The original bank breaker was 91 when he filmed this

What about those bankers, eh? What are they thinking of? No sooner do we bail them out, then they're stuffing their pockets again.

As we've blogged before, we have no problem with highly paid bankers.

Highly paid bankers, we like. As far as we're concerned, they can pay themselves as much as they can stagger home with.

It's just their huge subsidy we don't like. We don't see why we should subsidise them to make a fortune at our expense.

To reiterate (see here for fuller version), our bankers have always got a whacking great subsidy from the rest of us via the explicit and implicit guarantees we provide on their debts. Which, as long as they were laying all those lovely golden tax revenue eggs, we were prepared to turn a blind eye to.

But when a whole batch of those eggs smashed open and we saw they weren't real gold, we naturally got somewhat pissed. Especially when the IMF told us it would likely cost UK taxpayers $200bn.

So given that, and given the fact that some of these banks are now in direct public ownership, and given the fact that their profit surge reflects the extraordinarily low interest rates implemented to shore up the banking system, you might have thought they'd go easy on the old bonus bonanza for a while.

Wouldn't you?


No chance.

So what should we do?

As we've said many times before, the obvious and necessary step is to break retail high street banking away from investment casino banking (a new Glass-Steagall). We continue to guarantee (and heavily regulate*) high street banks, but investment banks are on their own. Granny's high street bank deposit is safe, but the Bastard Corporation's super-enhanced Teir 2 capital notes are not.

And we announce it loudly to the world. We say: "London remains the global centre of casino operations, and we will do everything to enhance its position, including light touch regulation. We celebrate and embrace its high rolling players. They can snuffle up as much as they like; they can buy up Holland Park and Oxfordshire; we will never impose punitive personal taxation upon them. But... and this is an important but... nobody should assume we are guaranteeing them at the tables, because we are not. If they lose your family fortune, it stays lost. Buyer beware."

Ah, you say, that's all fine and large. But Lehman was already a pure investment bank, yet when it went down it brought down the roof. So would a new Glass-Steagall actually work?

Sure, Lehman was a pure investment bank, so in theory its collapse should not have brought the world down. But the problem was that everyone had assumed the US government would stand by it. Nobody had ever said what we're proposing is said now, so when Paulson pulled the plug, it came as a huge shock. Nobody was any longer sure of anything.

If the rules were spelled out clearly in advance, we wouldn't have that problem. And because their cost of capital would increase, investment banks would find it much harder to grow so big they could never be allowed to fail.

Focusing on bankers' bonuses is focusing on entirely the wrong issue.

*Footnote - We've heard it argued that experience with the Crock shows that splitting investment and retail banking isn't the real issue - after all, the Crock was a pure retail bank. But actually, all the Crock proves is that our retail bank regulator was incompetent. The FSA did a truly shocking job of regulating Northern Rock, as the subsequent enquiries showed. And that experience ought to make us even more wary of assuming those same stumbling regulators are somehow capable of regulating global megabanks which incorporate both retail and investment banking under one roof. It's pure fantasy.

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