The Vickers Review 3 – Investment and global banking

Let me say something unpopular. The UK should drop the anti banker rhetoric. The sport of banker bashing may have come in handy for unpopular politicians facing their own crisis of probity, but time has moved on. Banking is a most important part of the UK economy. London and the Uk benefits from acting as host to some the world’s largest banks. They generate jobs and incomes which circulate in the UK. Banks may contain poor directors and managers who make bad mistakes. They may pay some of their people too much – rather like football and parts of the media. They may not serve us as well as we wish – like the parts of government. Nonetheless we are better off with them, warts and all, than if they left.

Some of the banks criticis take the view that they will always be around, so why not have another free hit. I would not be so sure. Change is mighty rapid in today’s world. Industry has been hollowed out to the East very quickly in recent years.There are many global centres working away to dislodge some of London’s biggest and finest. As the weight of world trade , world wealth and world activity gravitates more to the East there will be a natural pull for banks to set up their headquarters there as well. London and the UK are engaged in a fight to keep or grow what we have.

It is true that there were excesses in Investment banking in recent years. These were made possible by monetary authorities pursuing very easy money policies, and by Regulators who seemed relaxed about the excess until late in the day. The Vickers Review needs to examine how cash and capital controls could be used counter cyclically, to prevent excess when markets are doing well, and to help stave off disaster when markets are doing badly.Success in creating better regulation, sensitive to the market cycle, would be good for the future of London.

Above all the Review should see that we still have something to be proud of in the City. You do not see Germany bashing motor manufacturing, its core activity, nor France complaining about the problems the drinks industry can create. The UK has done enough self flagellation.

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17 Comments

  1. Posted September 12, 2010 at 8:34 am | Permalink

    Agree, in the absence of a major manufacturing sector, evidenced by the massive balance of payments deficit, the city should be nurtured,

    I consider that it needs more than an absence of “bashing” it needs a reduction in income tax to 40% again
    If the city is to be retained and the private sector to take up the slack of the public sector fallout then the PS tax burden needs to be reduced.

    • Posted September 12, 2010 at 11:11 pm | Permalink

      Well, sort of. Retail bnaks no longer lend for investment in real wealth creating businesses. They lend for consumption, egged on by clueless governments in the confused belief that that helpls business.

      As regards income tax, if we find absolute abolition unpalatable at least reduce it to a flat rate of about 20% on income above say 12500 per annum. To be radical I'd also set a maximum income above which income would be tax free, say about 115,000 per annum.

  2. Posted September 12, 2010 at 9:47 am | Permalink

    Whatever the Vickers review proposes it will be worthless unless it results in a system where banks are allowed to go into receivership and then bankruptcy and not one penny of taxpayers funds are required in the process.

    After that we can happily let the banks fight it out with the politicians in the secure knowledge that the taxpayer will never again be on the hook for either the misdemeanours of the regulators or the banks

  3. Posted September 12, 2010 at 11:46 am | Permalink

    Are you aware of where money comes from, what it is and that banks do not "loan" money? Seems strange to ask does it not?

    Nearly all money, created as debt, out of nothing (ex hihilo) by private institutionons (banks) , charging a supernormal, monopoly profit (so called interest), is used to buy land title, location value?

    About 70% of money is created privately this way. The "interest" is really an unearned income because it had a zero cost of production for its creator. Almost zero capital and labour has been invested in its creation. No work or economic productivity at all was done by the bank to command that income. You see, banks do not "lend" depositors money. They create it out of nothing.

    This so called "interest" is in proper economc terms known as "RENT". The return to the ownership of land. The banks now being the modern day landlords, owning about 50% of all land as collateral for mortgages.

    Banker bashing is simply some asking that some of this monopoly profit being skimmed off by the more senior bankers be stopped. And rightly so. They did nothing at all to earn it.

    The queston arises, as to who actually did earn it. Who do you think that might be? And shouldn't they get this income instead? And what happens if they do not macro economically? Crunch!

    • Posted September 12, 2010 at 7:29 pm | Permalink

      Cllr Robin Smith: "The "interest" is really an unearned income because it had a zero cost of production for its creator. "

      I disagree that it costs a bank zero to make a loan. It has to pay its employees, buy and pay for its premises, pay for its utilities. It doesn't have zero risk either.

      The interest rate on a loan reflects a number of things:
      Risk – will the bank get the [it's, or it's depositors] money back?
      Risk – will the legal authority [the government] debase the currency to reduce it's own debt costs? A bank does not want just the capital back if it's only worth half what it loaned. The interest rate will include a component that reflects the rate of inflation.

      Some banks actually do take deposits too.

      And by the way, when the loan is repaid, the money created from [you claim] thin air, is extinguished. In the mean time hopefully the debtor used it to make his factory more efficient, or expand his business.

      If it was just used to pump the price of your house, well, we know where that leads.

      Cllr Robin Smith: " .. Banker bashing .." Some of us didn't want the banks bailed out anyway. That would have sorted the senior bankers out, toute de suite. But the political class know which side of the bread their butter spreads!

    • Posted September 12, 2010 at 11:13 pm | Permalink

      End of fractional reserve banking then?

  4. Posted September 12, 2010 at 12:41 pm | Permalink

    The bankers used to be the goalkeeper of the team. A key role demanding care and certain skills. But then he got drunk and in his stupor went wandering off all round the pitch trying to do too many other things. We have now lost the game and all we can do is to try to minimise the scale of the defeat. Either we substitute the goalkeeper or we try to sober him up and keep him between the sticks.

  5. Posted September 12, 2010 at 12:48 pm | Permalink

    Good point on the French, now, why are we bashing our brewing industry?

    • Posted September 13, 2010 at 11:48 am | Permalink

      Sorry but there are no longer any major British-owned brewers, only some local and regional ones.

  6. Posted September 12, 2010 at 3:38 pm | Permalink

    I agree. Bankers should not be castigated, per se. Trouble is banking has been cartelised, and that is a problem. This State Sanctioned cartelisation gives the Banks the power to continue to rebuild their balance sheets at the expense of their customers. Solve that conundrum and you may de-toxify them.

    I have met many many bankers, and there are people who are very good indeed. There are also a lot of numpties. Maybe that's a function of large corporations, but dealing with them can be exceedingly frustrating. They become just another dysfunctional bureaucacy. Solve that as well and you may detoxify them.

  7. Posted September 12, 2010 at 8:56 pm | Permalink

    You don't see them propping them up, though, either. Had the bad banks been allowed to go to the wall, with depositors protected, and the good ones survive and prosper, we could safely "they had it coming". As a Country, we just cannot and should not support activities which have no moral hazard, be it benefits claimants who can't be bothered to find work, inefficient French farmers or badly managed banks. Businesses which make profits year after year and pay tax shouldn't be propping up others which take the "big gamble" and either win the jackpot or, if it all goes wrong, get pulled out of trouble by the Government anyway, with their structures intact.

  8. Posted September 12, 2010 at 8:56 pm | Permalink

    It is equivalent to the average income tax payer paying benefits to the person who blows it all on the lottery. You have said here before that the answer to this is to create smaller banks from the rubble of those standing, but the rubble is just having cement added to it by the hapless depositors who have nowhere else to go with their cash. You say that the casino and retail sides of banks should be managed differently, but that isn't happening either. There have been no moves by your Government to break up the banks into competitive units. Instead an effective cartel still operates which is giving HMG and depositors zero to 2% on cash whilst charging hefty arrangement fees and scurrilous margins on lending. And the margins are still going to play the lottery in the investment banking business. The banks will lend to businesses, but the fees, margins and restrictions are such that few wish to borrow. The banking system is important, yes, but we need one which operates on a moral and honest basis, not a "Monte Carlo or bust" mentality.

  9. Posted September 12, 2010 at 8:59 pm | Permalink

    I'd like to point out a couple of minor differences between German auto manufacturers and banks here and abroad. The German companies have not built a system that has brought many countries to bankruptcy. They have not accepted vast quantities of public money that has lumbered tax payers with debt for decades to come. They do not charge exorbitant fees and predatory interest on loans that should never have been granted. Nor have they indulged in fraud so massive the authorities dare not prosecute for fear of what will happen to the confidence that currently, just about, keeps the system going.
    What BMW, Mercedes and VW do is build very good cars that people WANT to buy. Does anyone WANT to deal with a bank?

  10. Posted September 12, 2010 at 11:21 pm | Permalink

    OK, I agree that we need our UK bankers for the reasons you give, but let's not forget that the reckless actions of a relatively small number of them have ruined the lives of countless innocent people. At least let's do something to stop it happening again.

  11. Posted September 13, 2010 at 2:35 pm | Permalink

    Derek Duncan: "At least let's do something to stop it happening again. "

    Reintroduce and enforce sensible leveradge limits.

  12. Posted September 13, 2010 at 9:34 pm | Permalink

    I note that my posts on these topics are considered not merely contrarian, but controversial and perhaps too accurate and dangerous to be allowed to be published promptly while there is a danger they may be read.

    • Posted September 14, 2010 at 10:04 am | Permalink

      My post that explains the role of Michel Barnier and steps needed to ensure competitiveness of UK banks is still missing.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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