Davos – can the summiteers look down and see the real economy?

Davos is a time for overpaid bankers and consultants to rub shoulders with the senior regulators and government officials who determine the rules for their money making games. Once again, just like last year, regulation will be a big topic of conversation.

Governments will be saying they want more of it. They will argue their favourite syllogism – Our purpose is regulation. Regulation has just failed. Therefore we need more regulation. Big businesses will be saying – Our businesses agree we need lots of regulation. We can live with all the regulation we currently have. If you impose any more the money making machines could break down. Both these stances are idiotic.

There will also be a delicious dance over the canapes. The politicians wil be seeking opportunities to cash in on the rich vein of public anger about bankers, polishing soundbites on how they too like President Obama will be tough on bankers and the causes of bankers. The bankers and consultants will be responding off the record saying that they cannot take too much pain, tactlessly saying that they are in a vicious squeeze already which means no remuneration over £1million until things have calmed down a bit.

The truth is there were both market failures and regulatory failures to create the Great Crash. Competitive markets work, rewarding the successful and customer friendly and weeding out the unsuccessful. The banking market is not a properly competitive market. In the UK the Competition authorities were asleep at the wheel or ordered by the government to turn a blind eye to the competition failures. They allowed mega banks to emerge, when they should have blocked the takeovers and insisted on more competition. We need to make the elaborate competition machinery work properly. That does not require more law or more regulators. It just requires a few senior regulators in the current structure to break up over large banks and to prevent new mega banks emerging from anti competitive mergers.

Most people agree there does need to be some addtional regulation on banks and other deposit taking institutions besides enforcing a competitive market. We need the reassurance that the banks will be able to pay our money back. That requires regulation of cash and capital. Again, that is already part of the present system. There are plenty of highly paid people who are meant to do that. The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets.

Large companies like all present regulation because it keeps competitors out. They have spent the money on complying with it, and don’t want that changed. Just because the regulators and the large companies agree does not mean we should. The truth is much current regulation is a waste of money, an anti competitive practise, a nonsense which does not keep our money safe. If Davos wanted to do somehting that actually helped get us back to stronger growth it needs to do three simple things:

One: Assert the need for more banks and a much stronger enforcement of competition policy. The UK could pledge to create half a dozen new banks out of the two it currently owns
Two: provide simple counter cyclical rules on cash and capital to ensure we have better endowed banks in future
Three : Prune the other regulations, so more businesses can start up in competition against the established players.

Bolting on more rules to a system which does not work is a bad idea. Failing to create a competitive banking market means business as usual.

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27 Comments

  1. Simon D
    Posted January 28, 2010 at 8:03 am | Permalink

    I agree with your three solutions. The first will also help the taxpayers recoup some money.

    I would add that we should force all banks to focus more on customer service – a skill they conspicuously lack – and less on the thrills of the casino side of banking and the multi-millionaire bonus culture at head office. I would make everybody earning more than £500,000 spend a week as a teller in a deprived area of the country to see how the other half lives.

    Meanwhile, for the Government, the spin script says it is business as usual: Lord Myners knows best.

    • james harries
      Posted January 29, 2010 at 12:27 am | Permalink

      Well I agree too. Except that for the life of me I can't think what these "simple counter-cyclical rules" might be. Please suggest some, after (of course) explaining to us exactly where in the cycle we are now and less exactly where we'll be in (say) four years time.

      Reply: Uk currently at bottom of cycle. US 2 Qs into recovery.

  2. Andy
    Posted January 28, 2010 at 10:20 am | Permalink

    The problem with capitalism (don't get me wrong, I'm a through and through capitalist) is that it inevitably leads to monopoly (of two competitors, the bigger will eventually big enough to buy the smaller). Or in the case of banks, near monopoly.

    Society has chosen to address this problem with the quango. The monopolies and mergers commission (or whatever it's called these days). They have manifestly failed. The problem is not that banking should be regulated, the market needs no regulation — provided it is vibrant. If there were 10000 banks instead of 100, then none of this banking crisis would be a problem — those that failed would fall, as in every other sector. One can almost argue that the regulation encourages large mergers, since a large bank probably only needs one building full of lawyers, that means in any merger one large building of lawyers is not needed.

    There is no downwards pressure on size.

    Here is my idea then: progressive corporate taxation. Now, I don't have the familiarity with banking to be able to set the thresholds and percentages, but if we were to create a system where a merged bank paid more tax than two unmerged banks, wouldn't that create a pressure not to merge?

    As a separate effect it would also encourage small businesses. We recognise that poor people shouldn't pay tax since a pound has greater marginal value to a pauper than it does to a millionaire. Why then is the same not true for a company? Small companies have no money — why then do they have to have the millstone of corporation tax around their neck at the very time they need every penny they can get for growth? It would be better for the economy if the 20% that they pay were being given to, say, an employee than the government.

  3. gac
    Posted January 28, 2010 at 10:44 am | Permalink

    Apparently there are 2,500 or so delegates.

    They are either having a laugh, a big jolly, or both.

  4. Lola
    Posted January 28, 2010 at 10:53 am | Permalink

    Yes yes yes all true about the economic stuff, but let's talk about Davos. I've lived there. It's better in the summer than the winter – lots less posers, especially at this time of year. I recommend the Meierhof. I spent 11 days there couple of years ago. So why I am telling you this? Because summer season 11 days half board at the Meierhof all in including travel was less per day all in than 10 days in an allegedly top class B&B in Norfolk. Even with Darling Brown Balls recent devaluation it's still pretty competitive. So the question is, is why is the UK so expensive? Which brings us back to reg-yew-lay-shun.

  5. Lola
    Posted January 28, 2010 at 10:57 am | Permalink

    "The only change we need to is to have a few people in each major jurisdiction who know how to do it properly. It does not take many people in the UK, as the banking market is so concentrated. If you get the top ten banks right you have sorted out the problem. One person could do that, armed with the right regulatory powers, if he or she understood bank balance sheets. " Actually it needs two people. One who really does understand the balance sheets and one who is a highly sceptical pro market uncorruptable ruthless enforcer and who is by nature deeply suspicious of banks.

    I know just the right technocrat for the first job and I'd love a crack at the second if only to see the buggers squirm.

  6. D Carr
    Posted January 28, 2010 at 11:07 am | Permalink

    Absolutely right (as usual) with your analysis, John. We need politicians who are for the people, not themselves (as America is beginning to reassert).

    As an aside for interested readers, your colleague Daniel Hannan is debating with Theodore Dalrymple in London in February, I see. I've just ordered a couple of tickets, I think a small number are still available. (The details are here)

  7. alan jutson
    Posted January 28, 2010 at 11:11 am | Permalink

    John

    I think your comment "One person could do that, armed with the right regulatory powers, if he or she understood Bank balance sheets"

    He or she would probably want one or two helpers, but in essence it really should be simple enough.

    The problem we have had for decades is that we never seem to have had correct and simple regulation that works, and we certainly have never had a person in charge that gives you any confidence that they actually know the business in a forensic way.

    The other problem of course is Government interference, by Politicians who know absolutely diddly squat about the finance system.

    The old saying "a little knowledge" has never been more true.

  8. Neil Craig
    Posted January 28, 2010 at 11:36 am | Permalink

    That last is indeed why big businesses are so equivocal about more regulations. They provide higher barriers to entry to new competitors.

  9. John Bracewell
    Posted January 28, 2010 at 11:37 am | Permalink

    This sounds like a Job Spec for a Chief Bank Splitter.
    I hope you get the job, I can see you being very successful and it is a required and worthy task.

  10. Richard Manns
    Posted January 28, 2010 at 12:13 pm | Permalink

    I hope that Cameron's team agree with you; just sometimes, I wonder if he'll be a Heath rather than a Thatcher.

  11. English Pensioner
    Posted January 28, 2010 at 12:37 pm | Permalink

    One of the problems with big business and the salaries / bonuses being paid, is that the majority of shareholders don't care what the companies do as long as they bring in a profit or the shares rise in value. This is because the bulk of shareholders are insurance companies, investment funds, unit trusts, etc, and where the managers' own bonuses depend on the profit they make. Thus, as with the Cadbury shares, they were happy to sell out and turn a quick profit rather than stick with an apparently progressive company for the longer term.
    No major shareholder ever gets up at an AGM and suggests that the top management are overpaid. Only when this starts to happen, and the investment funds take an interest in the company rather than just an interest in it's profit will anything happen.

  12. Frugal Dougal
    Posted January 28, 2010 at 12:41 pm | Permalink

    Perhaps if a future government were to boycott Davos, it would make a louder comment about its policies than if it were to send officials along the lines you define.

  13. Javelin
    Posted January 28, 2010 at 2:34 pm | Permalink

    Ireland is an interesting case – because it is subject to EU monetary control it must resort to Irish Fiscal control.

    What the Isih have done is to reduce spending by 7% (Eur4B), NOT increase spending as Brown has done.

    Ireland is on the road to recovery – we are still climbing out the pitt of the Great Recession.

  14. Demetrius
    Posted January 28, 2010 at 5:01 pm | Permalink

    Could someone explain to me why there is now so much regulation on people who do the work and provide the essentials of life, but so little on gamblers, fraudsters, and the secretive hoods who run so much of the City finance rackets?

  15. chefdave
    Posted January 28, 2010 at 5:51 pm | Permalink

    Its not so much the Great Crash as the Great Bailout. I still waiting for the house price crash, not much sign of it yet.

    We can adopt as much or as little regulation as we want, but it wouldn't have stopped the bust and it won't stop similar style breakdowns in the future.

    The key is dealing with the housing market, we shouldn't get too hung up on the bankers, they just gave people what they wanted; debt. What's important is to understand why we wanted so much debt in the first place.

  16. Will Harding
    Posted January 28, 2010 at 9:41 pm | Permalink

    How I wish the political elite had a year of real life running a building business employing 20 people at it's peak then watching it dissolve away in the crash. Then trying to start a small manufacturing business but having to sell it because of cash flow problems. Maybe if they had lost almost everything and then found that it was impossible to get a job and just as impossible for a previously self employed single male to get any help or benefits from the system they might understand. We're not in or recovering from a recession, this is a depression largely caused by politicians and their flunkies. Things will get much worse for quite a long time and people won't like it. I've found that I can make money online and it's about the only way for me to do so. The start up costs for a business offline are huge. Rent, business rates, other council payoffs mean that even for a small shop you have to budget hundreds of pounds a week before you've even opened the door. I can live very cheaply but it's not even worth trying a traditional business as too many people have their finger in the pie.

  17. Mike Stallard
    Posted January 28, 2010 at 10:31 pm | Permalink

    As Lola remarks, the current system cannot go on much longer. Why is Britain so very expensive in every way? Ans:= because we are godly European men. (Erm…..)
    The Bank of England, before it was politicised in the name of Freedom by the current government, had a Governor who had hundreds of years experience to draw on. Please could he have his powers back? We are going to need a wise, experienced, professional and skilful man at the helm when the economy adjusts to the new world order – and this could happen very fast indeed like a terrible tsunami or earthquake.
    Toxic debts? Government guarantees to all banks? HSBC moving Head Office to Shanghai? Government owning banks which it cannot afford in the vain hope that they will turn a profit?
    My economic recommendation: Mr Micawber for Chancellor!

  18. Lindsay McDougall
    Posted January 29, 2010 at 3:54 am | Permalink

    This wasn't the biggest idiocy at Davos. President Nicholas Sarkozy of France called for a return to fixed exchange rates and a New Bretton Woods agreement, 39 years after Nixon floated the dollar and most other nations followed suit. Floating has had almost no downside.

    No doubt he will want fixed exchange rates to be controlled by the wretched International Mischief Fund, which is headed by grossly overpaid Frenchmen. There is only one sane attitude to fixed exchange rates, Bretton Woods and the IMF as an institution.

    KILL 'EM AND BIN 'EM.

  19. no one
    Posted January 29, 2010 at 5:25 am | Permalink

    apparently peter mandy mandelson travelled in first or business class on the same plane that boris was travelling in economy to this conference

    says a lot that simple bit of information

  20. Javelin - the Obama
    Posted January 29, 2010 at 8:32 am | Permalink

    We just had a few very good IT contractors leave and to work in Singapore and Germany. They left because of the 50% tax. these guys were senior, experience and experts in pricing and risk in the front office.

    The UK will be a less profitable and riskier place because of it.

  21. Freeborn John
    Posted January 29, 2010 at 12:44 pm | Permalink

    I don’t know much about the banking industry, but am intrigued by the idea of having lots of small banks that compete with one another rather than a few giant ones.

    I understand that from the Great Depression until the 1970/80s, there were restrictions in the USA such that no bank could operate in more than one US state. This kept banks small, such that if one of them failed it would not overwhelm the entire system. But the trend towards globalisation in all industries has been felt in banking too and now we have not just international banks like Abbey-Santander, but real giants like the nominally British HSBC which would wipe out individuals and businesses in so many countries around the world should it ever go under that the UK taxpayer would never be able to protect them all.

    One approach could be to have global regulation, but a single worldwide regulator robbed of any alternative regulatory models would likely evolve like any monopoly into an institution with a tendency to over-regulate. This is especially so considering that the costs of regulation are not borne by the regulator themselves, but by the businesses that must comply with their rules.

    So I am wondering if we can keep the benefits of competing national regulatory regimes in an era of global banks? Is there a way to ring-fence say the part of say HSBC that operates in the UK and regulate only that bit from London? Or perhaps for the UK government to only use UK taxpayer money to protect UK-registered businesses and citizens from having their deposits wiped out by any bank in the world, with other governments being called upon to underwrite the savings of deposits that their citizens and businesses deposit in the UK? If this is not possible, then UK regulation of global banks based in London would not seem feasible and either a world regulator emerges (which is likely to be bad monopoly itself) or the global banks should be broken up and rules instituted around the world similar to the old ones in the USA that prevented banks operating in more than one US state.

    Apologies if these are basic questions, but it seems quite a conundrum to me!

  22. ikh
    Posted January 30, 2010 at 4:00 am | Permalink

    John, I agree with the vast majority of this article but, as usual, their are bits that I don't agree with.

    One: Assert the need for more banks and a much stronger enforcement of competition policy.

    Agreed.

    But I am not happy with the following sub-clause, splitting up the banks that we have shares in. Let me explain why.

    Firstly, we do not wholely own RBS and we are not majority shareholders in Lloyds. Other shareholders have legal rights ( and quite rightly so )

    It would not be difficult to solve the problem with RBS. I believe the government holds 84%. if we purchase another 6% we then have the legal right to by out the remaining 10% and as 100% owners we can do as we wish.

    Buying out Lloyds would require tens of billions, which I don't think is realistic.

    Secondly, splitting the banks up would be very expensive and destroy the investment we have in them. Lets take the Lloyds HBOS merger as an example ( ignoring other shareholder issues, sort of ).

    Lloyds has kept most if not all of HBOS brand names. However, they have been disposing of the branch network as fast as they can. This is something that is very expensive to re-create. They have also laid off tens of thousands of staff. This would be expensive to re-create and the loss of knowledge is permanent.

    Lloyds will have done a lot of work to integrate computer systems and will have thrown away many of the HBOS software systems making revival difficult and expensive.

    All in all this would mean that we, the taxpayer, would take a huge hit on our investment in the banks to try to split them up.

    But, I think that there is a better way to ensure more competition, that we both agree is needed. But I'll come to that later.

    >Two: provide simple counter cyclical rules on cash and capital to ensure >we have better endowed banks in future

    Totally agreed.

    >Three : Prune the other regulations, so more businesses can start up in >competition against the established players.

    Lets start by listing what we have in competitive banking:

    RBS
    Lloyds
    Barclays
    HSBC
    Santander
    Nationwide
    Tesco's and Virgin are attempting to break into the financial services market and have shown inclination to become banks.

    That's not bad but it is far from perfect from a competition point of view.

    I'm much more interested in seeing new entrants to the markets.

    Why is that Virgin and Tesco are holding back from becoming retail Banks. Why have French and German banks not entered the UK retail market? Why have U.K. banks not entered the French and German markets.

    To my mind, breaking the barriers to entry for banks is far more important then spliting up banks.

    Just my 2 pence worth.

    /ikh

  23. Mark
    Posted January 30, 2010 at 12:59 pm | Permalink

    Chrystia Freeland's article in the FT about the Canadian banking system (What Toronto can teach New York and London – direct linking prohibited) is an excellent analysis as to why Canada has not had a banking crisis. In summary, capital requirements are conservative, off balance sheet vehicles almost unknown so the risks are all visible, mortgages are offered on conservative terms and financed likewise (low levels of securitisation), business risk of major institutions diversified through participating in all banking sectors, principles based regulation that works, and the culture is less raw.

    Contrast the idea that bankers at Davos are now said to be in favour of a global banking insurance levy. What that really means is they'd like to carry on with the same reckless practices as before, but with the bailout fund funded by customers, since as Jamie Dimon (JP Morgan CEO) pointed out "All businesses tend to pass their costs on to customers." And if the illusion of the fund being large enough to cover the next crisis is shattered, then tant pis. In the mean time, bankers plan to reward themselves generously for taking outrageous risks. Not on my dime, buddy!

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    Posted March 17, 2010 at 5:39 pm | Permalink

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