Comments on: So the banks could lose us a packet after all http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/ Incisive and topical campaigns and commentary on today's issues and tomorrow's problems Thu, 09 Feb 2012 20:05:58 +0000 hourly 1 By: Waramess http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19877 Waramess Mon, 27 Jul 2009 08:30:53 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19877 Adam," banks taking short term deposits and lending long term is what banks do. This is NOT a new development" borrowing money when it is clear at the time of borrowing that you may not have the funds to repay is fraud and the banks commit it in a gigantic way "It’s all very well saying you want “the markets to re-invent the model” but the markets invented the current banking model." Not true. The banks in all countries invented the current system with the connivance of their Central Banks and with the implied protection of their Central Banks. Not exactly a market driven solution. Some good bed-time reading is The Mystery of Banking by Murray J Rothbard. If you are curious it is to be found on the Mises web-site www.mises.org down-loadable and free. Adam,”

banks taking short term deposits and lending long term is what banks do. This is NOT a new development”

borrowing money when it is clear at the time of borrowing that you may not have the funds to repay is fraud and the banks commit it in a gigantic way

“It’s all very well saying you want “the markets to re-invent the model” but the markets invented the current banking model.”

Not true. The banks in all countries invented the current system with the connivance of their Central Banks and with the implied protection of their Central Banks. Not exactly a market driven solution.

Some good bed-time reading is The Mystery of Banking by Murray J Rothbard. If you are curious it is to be found on the Mises web-site http://www.mises.org down-loadable and free.

]]> By: Javelin http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19876 Javelin Sun, 26 Jul 2009 16:40:54 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19876 John, I know this is a little late, but I look after credit derivatives IT at a tier one bank that came out of this crisis well. CDS are basically bankruptcy insurance. As such I think they would be better audited by actuaries rather than accountants. Accountants in my experience tend to work best when the future is well known, actuaries on the otherhand would take a more approriate view as auditors of these products. John, I know this is a little late, but I look after credit derivatives IT at a tier one bank that came out of this crisis well. CDS are basically bankruptcy insurance. As such I think they would be better audited by actuaries rather than accountants. Accountants in my experience tend to work best when the future is well known, actuaries on the otherhand would take a more approriate view as auditors of these products.

]]> By: StevenL http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19875 StevenL Sat, 25 Jul 2009 22:11:41 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19875 You can change 'the system' but you can't change human nature. These speculative asset price bubbles have happened throughout history. Just like the participant in a pyramid scheme becomes too irrational to do basic maths, people stupidly thought that we could all get richer to infinity by borrowing ever increasing sums of money and selling our houses to each other. This state of affairs suited the money-lenders' annual bonuses as much as it did the politicans' lust for popularity. If you remove central banking and allow 'the free market to create a sound monetary base' the fundamental flaws in human nature that cause these bouts of irrational behaviour will remain. There is no evidence to suggest that an economy free from central banking, monetary policy and capital adequacy regulation will become free from inflation, recession or even financial crises. You can change ‘the system’ but you can’t change human nature. These speculative asset price bubbles have happened throughout history. Just like the participant in a pyramid scheme becomes too irrational to do basic maths, people stupidly thought that we could all get richer to infinity by borrowing ever increasing sums of money and selling our houses to each other. This state of affairs suited the money-lenders’ annual bonuses as much as it did the politicans’ lust for popularity.

If you remove central banking and allow ‘the free market to create a sound monetary base’ the fundamental flaws in human nature that cause these bouts of irrational behaviour will remain. There is no evidence to suggest that an economy free from central banking, monetary policy and capital adequacy regulation will become free from inflation, recession or even financial crises.

]]> By: alan jutson http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19874 alan jutson Sat, 25 Jul 2009 09:36:34 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19874 Robert The problem is that business acounts have no such guarantee. If a Bank goes bust, then that business which has money deposited within it looses that money, and thus the business is at risk as well. Aware of commercial risk etc, etc, but the worry factor was the speed at which these Banks "seemed to get into trouble" No I am not in favour of a bottomless pit of money to bail out Banks, probably far better if all deposits were guaranteed by the Bank of England, then they (the Banks) could have gone broke without puulling down the rest of the ecconomy. The Bank of England is surely the one to monitor the financial strength of any Bank on a regular basis. The FSA has failed the insurance industry, and now has failed Banking, why is it still in existance ? Robert

The problem is that business acounts have no such guarantee.

If a Bank goes bust, then that business which has money deposited within it looses that money, and thus the business is at risk as well.

Aware of commercial risk etc, etc, but the worry factor was the speed at which these Banks “seemed to get into trouble”

No I am not in favour of a bottomless pit of money to bail out Banks, probably far better if all deposits were guaranteed by the Bank of England, then they (the Banks) could have gone broke without puulling down the rest of the ecconomy.

The Bank of England is surely the one to monitor the financial strength of any Bank on a regular basis.

The FSA has failed the insurance industry, and now has failed Banking, why is it still in existance ?

]]> By: Adam Collyer http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19873 Adam Collyer Sat, 25 Jul 2009 06:52:04 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19873 Waramess, banks taking short term deposits and lending long term is what banks do. This is NOT a new development, and it is NOT a gigantic fraud. Do you want the banks to stop paying interest on deposits and stop providing loans? It's all very well saying you want "the markets to re-invent the model" but the markets invented the current banking model. It would take interference from politicians to stop it and move to some other not-yet-invented model. What's more, it was not the short term retail deposits that led to the credit crunch. The problem was the investments that banks and other institutions made in packaged securities made up of dodgy loans and stamped with an AAA rating by the rating agencies. If you want culprits/ scapegoats for the current problems, turn your attention to the credit rating agencies who failed to understand the nature of systemic risk when they awarded rock solid ratings to toxic debts. They were much more at fault than the banks. Waramess, banks taking short term deposits and lending long term is what banks do. This is NOT a new development, and it is NOT a gigantic fraud. Do you want the banks to stop paying interest on deposits and stop providing loans?

It’s all very well saying you want “the markets to re-invent the model” but the markets invented the current banking model. It would take interference from politicians to stop it and move to some other not-yet-invented model.

What’s more, it was not the short term retail deposits that led to the credit crunch. The problem was the investments that banks and other institutions made in packaged securities made up of dodgy loans and stamped with an AAA rating by the rating agencies.

If you want culprits/ scapegoats for the current problems, turn your attention to the credit rating agencies who failed to understand the nature of systemic risk when they awarded rock solid ratings to toxic debts. They were much more at fault than the banks.

]]> By: Robert K, Oxford http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19872 Robert K, Oxford Fri, 24 Jul 2009 13:23:11 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19872 Exactly - if our economy was growing successfully then our money surely would be worth more, not less. The State has three ways to take money from its citizens: taxation, borrowing and inflation. De-basing the money supply is its stock in trade. Exactly – if our economy was growing successfully then our money surely would be worth more, not less. The State has three ways to take money from its citizens: taxation, borrowing and inflation. De-basing the money supply is its stock in trade.

]]> By: Robert K, Oxford http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19871 Robert K, Oxford Fri, 24 Jul 2009 13:21:29 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19871 Well, not necessarily. There is a well established mechanism to wind up failed companies called Administration. Northern Rock and the other banks could have been put into this process, under the auspices of the Bank of England. Depositors would have been guaranteed under the comensation scheme that was running at the time (up to £35,000). The business itself would have been broken up and absorbed by other financial services players. Well, not necessarily. There is a well established mechanism to wind up failed companies called Administration. Northern Rock and the other banks could have been put into this process, under the auspices of the Bank of England. Depositors would have been guaranteed under the comensation scheme that was running at the time (up to £35,000). The business itself would have been broken up and absorbed by other financial services players.

]]> By: Robert K, Oxford http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19870 Robert K, Oxford Fri, 24 Jul 2009 13:15:02 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19870 When my wife's aunt was asked for directions once, she paused before answering: "Well, I wouldn't start from here." I am not saying that no harm would be done if insolvent banks were wound up. However, the aspect of the current meltdown that I find most striking is that the banking sector has been for a long time one of the most highly regulated of business segments. The question I keep coming back to is how such a collapse has been possible given the existence of internationally recognised capital adequacy requirements (Basel I and II) and highly empowered regulators in every major economy. Your conclusion, if I read it correctly, seems rational enough: that the regulators have failed and thus a better, tougher, regulatory system is required. This is the conclusion that the governments of the UK and US have come to, so you are not alone. But I disagree. First, it is self-evident that our elected representatives are ill-equipped to order businesses how to organise themselves. Second, I believe that the regulatory regime distorted the market by creating a false sense of security in the banking system. The banks suspected, rightly, that their errors would be paid for by the state, and it was this that encouraged their recklessness. Thus the regulatory system is part of the problem, not the solution And the banks haven't changed. On the front page of the FT last week a US banker was quoted as saying that whatever system emerged from the wreckage it was inevitable that the state would have to stand behind the banks. So the question I would pose to you is this: a highly regulated banking system that is relied upon by national governments to create the fiat currencies they need to fund their election promises has fallen apart, threatening to take the world's economy with it: why would you want to preserve a system that has such destructive potential? When my wife’s aunt was asked for directions once, she paused before answering: “Well, I wouldn’t start from here.” I am not saying that no harm would be done if insolvent banks were wound up. However, the aspect of the current meltdown that I find most striking is that the banking sector has been for a long time one of the most highly regulated of business segments. The question I keep coming back to is how such a collapse has been possible given the existence of internationally recognised capital adequacy requirements (Basel I and II) and highly empowered regulators in every major economy. Your conclusion, if I read it correctly, seems rational enough: that the regulators have failed and thus a better, tougher, regulatory system is required. This is the conclusion that the governments of the UK and US have come to, so you are not alone. But I disagree. First, it is self-evident that our elected representatives are ill-equipped to order businesses how to organise themselves. Second, I believe that the regulatory regime distorted the market by creating a false sense of security in the banking system. The banks suspected, rightly, that their errors would be paid for by the state, and it was this that encouraged their recklessness. Thus the regulatory system is part of the problem, not the solution And the banks haven’t changed. On the front page of the FT last week a US banker was quoted as saying that whatever system emerged from the wreckage it was inevitable that the state would have to stand behind the banks.
So the question I would pose to you is this: a highly regulated banking system that is relied upon by national governments to create the fiat currencies they need to fund their election promises has fallen apart, threatening to take the world’s economy with it: why would you want to preserve a system that has such destructive potential?

]]> By: Waramess http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19869 Waramess Fri, 24 Jul 2009 07:43:41 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19869 The problem with banks lending out depositors money is that they take short term deposits and lend it long term. This leads to an illiquid banking sector whilst the Bank of England clearly does not necessarily provide the liquidity when needed. As observed by many in the past, the present system is just one gigantic fraud, and when your bank takes a six month deposit from you it knows at the outset it cannot guarantee repayment at maturity We have all been spoon fed to believe that our existing model of banking, whilst operating with smoke and mirrors actually works. Well we can now see how fundamentally unsound it is.. We have to let the markets re-invent the model without the interferance of politicians who will forever refuse to move from the present comfortable paper based, Bank of England/FSA controlled model. The problem with banks lending out depositors money is that they take short term deposits and lend it long term. This leads to an illiquid banking sector whilst the Bank of England clearly does not necessarily provide the liquidity when needed.

As observed by many in the past, the present system is just one gigantic fraud, and when your bank takes a six month deposit from you it knows at the outset it cannot guarantee repayment at maturity

We have all been spoon fed to believe that our existing model of banking, whilst operating with smoke and mirrors actually works. Well we can now see how fundamentally unsound it is..

We have to let the markets re-invent the model without the interferance of politicians who will forever refuse to move from the present comfortable paper based, Bank of England/FSA controlled model.

]]> By: Waramess http://johnredwoodsdiary.com/2009/07/23/so-the-banks-could-lose-us-a-packet-after-all/#comment-19868 Waramess Fri, 24 Jul 2009 07:28:34 +0000 http://www.johnredwoodsdiary.com/?p=4138#comment-19868 Couldn't agree more. Everything you say is spot on. Politicians have shown themselves totally incompetent in managing Fiat money. When I was young I used to go buy a leg of lamb for my parents and it cost eight shillings (40p) and the ONLY reason it now costs around £14 pounds is because of the appalling (mis) managment of paper money. Inflation, caused by governmental expansion of the money supply, is a wicked and unecessary shift of wealth from the poor to the rich. A gold based currency is not a panacea but is at least a good discipline for profligate politicians Couldn’t agree more. Everything you say is spot on.

Politicians have shown themselves totally incompetent in managing Fiat money. When I was young I used to go buy a leg of lamb for my parents and it cost eight shillings (40p) and the ONLY reason it now costs around £14 pounds is because of the appalling (mis) managment of paper money.

Inflation, caused by governmental expansion of the money supply, is a wicked and unecessary shift of wealth from the poor to the rich.

A gold based currency is not a panacea but is at least a good discipline for profligate politicians

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