Sep 25 2009
Questions for the G20
We need to be tough on bankers, tough on central bankers, and tough on the causes of bankers. The crisis was not just a set of banking mistakes. It was also a set of monetary policy and bank regulation mistakes.
At the G20 the easy way out is to blame commercial bankers and shadow bankers, to demand they pay themselves less (ever a popular cause), promise or threaten tougher regulations and go home with a political job well done. The media should not let the governing classes off so lightly.
Did lots of commercial bankers make a mess? Yes they did. They did lend too much and borrow too much for their businesses. How do you stop them doing that in the future? By controlling the amount they are allowed to lend for any given amount of capital and cash they hold. The US and the UK are right about that part of their response.
In the short term though, that poses a problem. We start from a position where banks were allowed –even encouraged – to be imprudent. Governments after all urged them to lend more to good causes, to people without homes, to governments themselves. Central banks set low interest rates, the green light for more lending. If we immediately make them prudent there will be a further contraction of credit and activity, which could weaken the banks further. It requires fine judgement to impose the right lending controls, and to show how they will get tougher as things improve. We need to change from pro cyclical to counter cyclical regulation – stoke the fires when we are cold, and quench them when things are too hot. The current authorities did it the other way round with disastrous results.
Did bankers pay themselves too much? Yes, some did. None of the proposals on the table suggests a way to stop individual bankers in the future being paid large sums. There is talk of some overall control on pay in total, and some talk that bonuses need to be based on longer term performance. What I cannot support is large banker salaries and bonuses that result in their banks seeking public subsidy to pay the resulting losses.
There are two answers to that. The first is, the state should not in future subsidise banks as they just have. By all means act as lender of last resort on tough terms to prevent a solvent bank going down, but do not offer share capital and subsidy on the taxpayer. Regulators should act long before a major bank is in danger of becomign insolvent. The second is, insist on more smaller banks, so no one bank is large enough to hold a country to ransom. The UK government can insist on RBS and Lloyds splitting themselves up in the UK so we can have more choice and smaller banks. Smaller banks will pay smaller salaries and be more attentive to their customers. They will work harder to offer value and service.
My critics on this site complain that I am weak on bankers and tough on the public sector. Far from it. I am tough on both, as both made this crisis. My critics wish to exonerate the Bank of England for its wild ride of a monetary policy, lurching from boom to bust and now trying to lurch back to boom again. We need a better Bank. It needs to be less open to short term political influence, run by people who can judge the cycle better and who understand the lags between interest rate changes and changes in activity and prices. We need a better banking regulator, who understands the importance of setting sensible levels of required cash and capital, and realises that if things start to heat up too quickly we need to tighten, and if they are cooling too fast we need to loosen.
My critics ignore my pleas to be tougher on the bad banks. I campaigned against subsidy and share capital from taxpayers, telling them to lend them short term what they needed and order them to sort themselves out. I opposed the HBOS merger which the Board of Lloyds wanted – along with the government. I am now campaigning for a more competitive banking industry. I would not allow any further UK mergers by banks that already have a substantial high street presence.
The G20 is unlikely to come up with the regulatory changes that a healthy banking industry require. Posturing on bankers pay is not the answer. It will also be more humbug given the salaries and bonuses the UK government have approved for RBS and Lloyds. Any journalist hearing the UK government saying they support controls on pay should just ask them what they are paying Stephen Hester at RBS.
14 Responses to “Questions for the G20”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
There are bank, banks, and banks. As a child I had an account in the Trustee Savings Bank. As a young adult, I went to a local bank. Local businessmen I knew also used local banks. They did not do anything fancy, just ordinary day to day work. They were one thing, necessary, useful, and reliable. Lately, these have all gone, and nothing much has replaced them locally. We are all prisoners of the megabanks who have relegated ordinary basic necessary banking to a disregarded inconvenience, whilst they explore the wilder shores of speculation and risk. When as an OAP I try to find an ordinary account, I am faced with a quasi-teenager trying to flog me a financial product that has high risks and grossly unsuited to my needs. Others of my age have been ripped off mercilessly. So why do people wonder about our attitudes to megabanks and their political lackies?
Still not exposed is the reason WHY the crisis started. Clinton legislation in the early 90’s made it illegal to discriminate against the improvident. (Tom Lehrer foresaw this with his army song in the 1950’s). As ever well meaning leftie guff with any nasty effects ignored. Vendors sold these products to all and sundry and collected the commissions. Smart bankers got shot of the problem by bundling them up and selling them on to smart asses who were employed by banks but had no personal loss to bear in the event of failure – unlike stock jobbers and the like before Big Bang here. And the cycle continued. Meanwhile Brown, Balls and his ilk meddled with banking regulation so that no one was ultimately responsible. The FSA has been a huge and expensive failure directly attributable to Browns management – like everything else he does. Northern Rock should have gone down; only saved for partisan labour reasons. The Halifax had already wrecked BoS, but Brown gulled Blank into the Lloyds deal, for the Labour interest, not the national interest. This crew are vile. The echoes are in the Rover deal. Byers for partisan reasons took the P4 bid. The guys were given this opportune and ran with it. Labour as ever has no understanding of human nature – while is why Socialism is idealistic but bound to fail and wreaks havoc wherever it is allowed to flourish.
Perhaps your critics forget that we have two probems to address:first what we do about the current situation and second what we do about going forward.
What was done was done; we may forever debate whether it might have been possible to let the banks fail.
Maybe they were too big to fail, perhaps the laws on bankruptcy made failure too problematic and perhaps the politicians and regulators might have curbed bonuses; we will never know
Then there is the matter of what we do about it for the future.
I for one agree that the banks should be split up. It was the failure of the regulators that allowed them to get so big in the first place. All became big as a result of aquisitions, none though organic growth.
It was felt, incorrectly, that a large bank could better withstand the shocks of catastrophies such as the sovereign defaults of the ’70’s. Instead it just meant they would be ruined by even greater catastrophies.
We should ensure that in the future the banks all small enough to fail, and we should allow them to do so without interference.
We should change the law on bank liquidations to give retail depositors and personal current accounts priority in the event of a liquidation and then…..we can let shareholders worry about bonuses.
What is the government doing? Nothing, other than tinkering around the edges.
Saving the banks was a knee jerk reaction by a bunch of headless chickens , let us not allow the headless chickens the opportunity of re-writing history at leisure
I think your last paragraph puts it all in a nutshell. What I’m waiting for is the first workplace disciplinary case pointing to the behaviour of bankers etc as a precedent for various sorts of behaviour.
We asked a well-respected Conservative colleague of yours if the leadership intended to use your knowledge, skills and easy communication style in the next government.
His reply suggested that your influence is greater in your present role of ‘Blogmaster’ and ‘Sidelines Guru’ (our words of interpretation!) than it would be in the shadow cabinet.
How about the cabinet proper though?
This theme and question runs through the responses of many of your contributors so we wonder what are your own thoughts?
Reply: There are more Shadow cabinet members than there are Cabinet places.
This was in an interview Lord Mandelson gave to the Daily Mail yesterday. “But he warned: ‘The Government has relied too much and for too long on financial services growth as a driver of British economic performance. It won’t come back on the same scale. We took this growth for granted for too long.’”
Gordon Brown almost certainly knew that the banks were out of control and speculating wildly but did nothing about it (remember light touch regulation) because the huge tax revenues their speculation provided to fund his profligacy.
I do not doubt that Gordon Brown is a well meaning bloke, unfortunately at the very heart of his thinking is a fundamental flaw – more and more public spending is an inherent good.
Read more: http://www.dailymail.co.uk/news/worldnews/article-1215708/As-polls-growing-public-dislike-PM-Mandy-delivers-stark-warning-Lighten-Gordon.html#ixzz0S6u57CQ9
I noted there are comments in the G20 about having to deal with the imbalances in the various economies, between the debt consumer economies and the producing saving economies. This is the heart of the issue about the banking collapse, for the strains in the banking sector was a direct result of this.
Yes bankers were too clever by half collateralising debt that kept out consumer binge economies fuelled with credit/debt, but the people who should have called time on this were the Governments , who didn’t, worse stoked the consuming binge. In this Brown’s finger prints were all over the banking collapse, for he had damaged all forms of savings, pensions , savings, where rates collapsed to record lows that resulted banks like Northern Rock lending long whilst borrowing short of the international credit markets, leaving property speculation as the only game in town, meanwhile our balance of payments disappeared deep into the red.
So its not surprising that politicians are leading the lynch mob looking for bankers to string up, if they didn’t and the mob stopped and thought for a moment, they might just realise that it’s some politicians who they have at the end of their rope.
Split the banks, I dont see why a banker gambling with my deposit should earn huge bonuses in the good time and also when the bank is bailed out because he lost! Split deposit banking from investment banking, those who want a banker to gamble with their money can do so.
Excuse me for spoiling the “bash the bankers” party, but financial services is one of our most successful industries. The City provides financial services to the world. London is one of the three pre-eminent global financial centres. Of course salaries and bonuses are high. That is what you expect in a thriving industry with huge competitive advantage.
Were those well-paid bankers really responsible for this crisis? I say not. Mervyn King claimed in that BBC program that RBS and HBOS were close to shutting their doors one day last October. That is patent and errant nonsense, unless the BoE was completely failing to do its job.
Were those banks insolvent or just illiquid? Either way, Mr King is talking rubbish.
If the banks were insolvent, they could have gone into receivership. There is no reason why a business in receivership should not continue to trade. Receivership would have provided a way to run down those businesses in an orderly fashion, if it really is true by some amazing coincidence that they both went bust on exactly the same day.
More likely there was simply a liquidity crisis. In that case, one of the prime functions of the BoE is to be lender of last resort. The BoE therefore absolutely failed in its duty to provide the missing liquidity.
It is far more reasonable to blame the Bank of England for this crisis than to blame well-paid managers of private sector banks.
Waramess Reply:
September 26th, 2009 at 9:53 am
…and far more reasonable to blame he politicians who direct the Bank of England in almost all matters (independent, pah)
Much is made of the large bonus’ payed to bankers, because apparently they take huge risks. Do they? I would suggest they take no risk at all as all their actions are underwritten by the tax payer.
I found this: scroll half way down to see the image -sums up what I feel about bankers.
I have just watched Paul Mason on Newsnight reporting that the G20 have specifically backed Gordon Brown’s rather than the Conservative approach to the economy, and how helpful this is to Labour.
The G20 is setting itself up to be some new kind of global economic manager. Given that everyone at the G20 represents the staus quo – ie they are all serving leaders of their countries/parties – it is hardly surprising that they focus on providing photo opportunities and presenting themselves to a compliant mainstream media as saviours of the world, descending in their thousands to 5 star hotels. They’re not exactly going to say “Sorry, I screwed up. was behind the curve” are they?
Given, as seems likely, a new G20 infrastructure is implemented, how much room will there be for any country/administration that goes against the current consensus? It will be another EU.
I remember the letter from 365 economists who were proved so spectacularly wrong in the first Thatcher administration. Will we have a Tory party that has the conviction and courage to turn things round once again? I don’t have a lot of confidence in Osborne’s abilities in finance/economics, or in Cameron’s ability to take decisions that are painful rather than palliative.
Yet another cogent, sensible posting.
I have just one point to add; the loan:deposit ratio should tend to 1:1. Anything else is just counterfeiting.
Many blast the gold standard as being backward and unworkable but it had many merits.
Firstly, inflation, under the gold standard was impossible.
Secondly, inflation, being non-existent, could not be used by governments as a means of taxation by stealth.
Thirdly, a country’s economy would be automatically AAA-rated.
Fourthly, people could safely save for their retirements.
How could this be achieved? Ron Paul has the answers. Libertarianism is the ultimate conservatism. Democracy gives power to the majority to negate the rights (and the wealth) of the rest of society.
How can that possibly be considered to be just?
How about a bonus for not crashing the bank? As these people cannot be replaced by anyone then they should get billions whatever the result. What! They already do? I want my money back. I blame it on the unions myself. If we could find some way of smashing them then all would be well. Bring back Maggie!