There have been two fundamental decisions taken by UK governments in my lifetime that have haunted politics ever since they happened. The first was the decision by Mr Heath and then the British people to join and stay in the EEC. The second was Labour’s decision to drive various commercial banks into financial difficulty, only to then put large sums of taxpayers money into them as new share capital.
This second decision overshadows current public debate. It has made possible the Corbyn challenge, seemingly offering free money to spend on public sector projects by printing cash to pay the bills. Regimes that have tried this elsewhere have usually found it ends in very high inflation, high debts and a crash.
The crash and bail outs of 2007-8 has led to a general dislike of the banks, when flourishing trusted banks are an essential component of any successful free enterprise economy.The bank manager may rarely be liked or loved, but does need to be respected and listened to. Every individual, family and business needs a bank account to settle bills, a savings account if they have a surplus, or an overdraft or mortgage if they need to spend more than they earn for sensible reasons like buying assets.
It has spawned a rash of policies to show different parties are tough on banks – with higher taxes, larger fines, bigger penalties, more regulations. Of course any bank executive or bank breaking the law should be prosecuted and punished appropriately, but turning banks into a cash cow for the government just delays the rebuilding of their balance sheets and limits their capacity to lend more to finance recovery. If taken to extremes it could also lead to their exit from the Uk altogether, with the loss of employment and tax revenue that would bring.
I fully share the popular distaste for taxpayers money being pumped into large businesses that have been and will be rich again.I can’t defend large share subsidies to RBS when the bank carried on paying very large salaries and bonuses to staff at a time when there was an obvious need to control public spending. This single act has encouraged a cynicism about politics.People hear the political attacks on banks and bankers but see the political action of the Labour government pumping in collosal sums without demanding fundamental reform of pay, bonuses and activities as the price of equity support.
At the time I urged the Bank of England to use its normal facilities to lend against security to keep the banks out of grave financial trouble. The Bank instead gave us all a lecture on moral hazard and set its mind against lending. With the FSA the Bank failed to demand that the commercial banks reined in excessive lending early enough. Once it had occurred they then demanded it be sorted out more quickly than was possible, and made their worries public to make runs on the weakest banks likely. The crisis was not just bad commercial banking but also dreadful Central banking.
Once the publicity created the crash, the government then caved in and gave large sums in new capital. Instead they should have gone for controlled liquidation, propping and supporting the deposit base and the general commercial activities that were crucial with loans, and demanding the sale of the more exotic and overseas assets to help slim the groups and pay some of the bills. Shareholders and bondholders should have taken the hit, not taxpayers.
Allowing competing private sector companies subsidised capital without demanding reform was a moral and political disaster. It has led directly to a feeling that different laws apply to the banks and to an attitude which thinks that one bad policy mistake justifies more such mistakes. It has led directly to some assuming that money printing is now acceptable and could work on a larger scale for wider purposes. It has also led to a new hostility between the many voters and one of the nation’s leading economic activities which still pays a lot of the bills. I will look at its consequences for the two main parties in a future post.
August 16, 2015
Indeed you make the point well. It is all very corrosive to the economy and politics. The lack of real competition in banking is a huge problem. They now they have very misguided and over the top regulation and slotting rules which are costing a fortune in pointless valuations and over restricted lending to sound customers.
How on earth can it be right that banks can get away with paying so little interest (often nothing at all) to depositors yet are able to charge margin of base/LIBOR + 2.50% and even 30%+ to borrowers who are often a far better risk than the bank and secured against assets?
Where is the competition authority and why are they doing virtually nothing about the barriers to entry and enforcing some fair competition in banking?
Best just to cut out these expensive middle men I find. I see Gordon Brown is to say labour needs to be credible on the economy. Well he never was and rightly paid the price. Alas Osborne is also acting like a socialist with his job destroying wage controls, double taxation of landlord interest, greencrap energy, huge over taxation and over complex taxation and many other total insanities.
August 16, 2015
Osborne is also selling RBS at a loss, which is the other side of the same coin as buying at too high a price, as Labour did. All part of the same crackpot plan. Socialists who take money from the productive middle and give it to the unproductive rich and poor.
August 16, 2015
At least with Corbyn we might have some honesty. I’d rather we knew where we stood.
Surely it’s better to know ahead that the guy will flood us with migrants, screw up financially, increase taxes etc. rather than with Cameron be told you will halt migration, reduce debt, reduce taxes, English votes etc then do the exact opposite!
August 16, 2015
It would go against commonsense and anyone’s day-to-day life experience to doubt what you say JR.
To say the Labour Party is “populist” in its phoney war on the rich is polite beyond reason. Their prey is the gaining of office. Many Labour politicians on every tier of their Party have regurgitated Party lines whenever requested to do so. They have continued membership of their Party during Clause Four, then through a complete jolt to the Right with New Labour; have been FOR the selling of council housing in their Manifesto , then AGAINST it in the next Manifesto then FOR it again. Against “Imperialist wars ” then FOR them, then AGAINST.
Whilst it is normal and natural within political parties to have a spectrum of views, a “broad church”or, as I heard Mr Stephen Kinnock MP ( Lab ) on TV term it “Big Tent ” ( ? sic )-…to behave like political chameleons with such complete volte-faces is not. Unless you are dishonest.
At certain points in the last 40 years there should have been mass exoduses from the Labour Party of its members either to join other existing parties or form new ones. There were no such leavings except by a few individuals with honour.
So, we are dealing with a Labour Party who will criticise and harm the Banks, the Trades Unions, Welfare benefits, employment possibilities and drive down wages of the working class if 3 months before a General Election or when trying to be a candidate Leader they think they will “Get into Office” …”Get Elected”. Anything to “Get elected” .
If tossing the caber and speaking Dutch were thought likely to get the Labour Elite elected they would be on the look out for a braw girder-eating Scotsman wearing wooden clogs to teach them how.
August 16, 2015
“At certain points in the last 40 years there should have been mass exoduses from the Labour Party of its members either to join other existing parties or form new ones. ”
“To say the Labour Party is “populist” in its phoney war on the rich is polite beyond reason. Their prey is the gaining of office. Many Labour politicians on every tier of their Party have regurgitated Party lines whenever requested to do so.”
I think you could safely say the same about the Tories…, perhaps more so
August 16, 2015
“At certain points in the last 40 years there should have been mass exoduses from the Labour Party of its members either to join other existing parties or form new ones. There were no such leavings except by a few individuals with honour.”
We do not have political parties in this country so much as brands; they do well under effective brand managers and poorly otherwise. When the brand manager believes his product line-up needs refreshing, he introduces a new one or two and perhaps drops some older ones which have become unfashionable (political Brylcream). However, the most important thing is how the brand is presented to the consumer, not whether it is wholesome or necessary. Sometimes, the brand needs to be repositioned to appeal to a different, growing rather than declining constituency such as people who do not believe they themselves are English or people who believe themselves to be posh, but it has nothing whatsoever to do with a belief in what is right for this country. Getting acceptance of a new brand has proven to be extremely difficult, even if its health giving properties were objectively higher than the brand with which it competed: the SDP was a nine days wonder to be subsumed into the old Liberal brand. Launching a new brand is much easier when it has prior recognition, such as that of ethnic nationalism (SNP) or Saving the Planet (Green), rather than a different future for the country (UKIP).
Our dysfunctional politics stem largely from the FPTP electoral system under which the largest minority party (most popular – actually, least unpopular brand) rules over the majority that preferred other brands. The consequences of our system have been seesawing policies with huge costs for the country and the economy with devastating and irremedial damage to indigenous industries. The FPTP system has made it all but impossible for a new broadly-based party to arise and offer a better future for our country; furthermore, the legacy of failure of the traditional parties in office, their cynically narrow appeal to a particular group or groups whilst in office to the exclusion of others, has made many people believe, unfortunately, that not being ruled by them and, alternatively, ruled by Brussels, is the least worst option.
August 16, 2015
Indeed, I would be more worried if people like Liz Kendall/Yvette Cooper were in office rather than Jeremy Corbyn
zorro
August 16, 2015
Fair enough though it may be to say “The bank manager…. does need to be respected and listened to” a prerequisite for ever doing any of that again is to have deserving banks and bankers.
Too many of those culpable in this last crash, the devastating nature of which upon the economy as a whole must be taken into account, seem not only to have escaped responsibility but rather have been rewarded. Could that be chiefly because they are being listened to and respected by those in government?
August 16, 2015
Booker: “Brussels decided to impose a massive cut in the allowable quotas ……. When Guernsey protested that this was in breach of the 2012 agreement, the UK’s fisheries minister, George Eustice, responded by banning Guernsey’s boats from fishing in UK and EU waters. ”
Well well, George Eustice, the great Tory hope of the Eurosceptic movement, once such a vocal opponent of the EU, now in government illegally applying European Union restrictions of a sovereign country.
Tories: The European Union, Party before Country
August 16, 2015
Yes Labours bank bailout and their policies which led to the bust were one of the great economic errors on the postwar period. Indeed you were I think alone in making the points above at the time – official Conservative opposition to this disastrous policy at the time was unfortunately very weak. Although Labour have lost 2 elections they do still seem to be managing to dodge the real blame for the Great Recession which they caused. No one would be listening to Mr Corbyns socialist drivel if the issues were properly understood as set out above.
August 16, 2015
In what way is Corbyn different to current and past government policies? The currency and all major banks only exist in their current form because of massive money printing and borrowing. The UK’s deficit and debt are enormous. We have lived on the promise of future payment of our debt by our children for 20 years at least.
As far as I can see Corbyn differs only by his nationalization plans and his opposition to illegal wars.
August 16, 2015
collosal – spelling
August 16, 2015
Pedants obviously don’t need a spell chequer.
August 16, 2015
Basically I don’t believe that they understood what was really happening and being completely overwhelmed took the easy way out. In addition their advisers may well have had vested interests.
August 16, 2015
So are you saying that regulation hasn’t change at all since Libor rates were changed at will or that insufficient regulation which still allows public money to prop up the banks is the problem?
You see what I am trying to extrapolate from the bigger picture and your other posts which add up to ‘a power nest’ is an identification of the politics which are trying to bring us to our knees. I am just a little Nurse , but the general well being of my country is also important to me.
August 16, 2015
It is not just labour is it? You only have to listen to the behind the scenes Chatham house briefings by Conservative ministers, I am sure you know what they say in these as much as I do. The Conservatives, for instance, agreed with, and pushed for, further much higher levels of immigration of Indian nationals, in the information technology business, in a conscious attempt to win further sales of UK financial services to India (a badly thought through swap, which has little chance of producing equal earnings for the UK to our downside costs, and completely contrary to their public position on cutting immigration). They chose to try and sell extra financial services on the back of decimating the (domestic ed)UK information technology workforce. It is clear the political class and the leaders of the financial services are much too much in the same bed, to the exclusion of all others. That is the reality. You know this to be true. It should be no surprise that people are anti the financial services industry.
August 16, 2015
And the only reason its not highlighted every single day is that the main opposition parties and media are pro more immigration. So we are left with other aspects, like, big bonuses to bosses running companies in financial meltdown balied out by the tax payer. The financial services industry is treated by politicians as a special case, what about the earnings for this country our information technology used to earn (its not longer cash positive due to state manipulation) and so on?
August 16, 2015
The problem the Banks have is that they have changed hugely in the way they treat customers.
Gone are the days of old when your local Bank manager was a respected local community member, who took an interest in local business, the community and his customers, to be replaced by a figures only zombie ,who had to get permission for everything from their Regional office who themselves just ticked boxes.
Gone are the days of sensible but simple financial advice , now replaced with money grabbing, commission earning, complicated schemes which always appear to be in the Banks interests first and the customers last.
Gone are the days of simple personal service, to be replaced with machines.
Gone are the days of a simple savings account where you could save when you had spare cash to earn a bit of interest and put it on your savings book as a record. Only to be replaced with set monthly amounts, with accounts on line, where a whole range of passwords are needed and when systems crash or refuse to operate.
Instead we now have the old service replaced with miss selling of almost everything that you can imagine., mortgages, insurance, PPi, rate swap guarantees, manipulation of interest rates, huge margins on loans, low interest rates for savers, charges for accounts, huge margins on foreign currency.
Then we have the casino investment, commodity bonus culture,where win or lose they all get paid for playing with investors money.
Yes Brown was wrong to Bring in the FSA, who failed to spot anything wrong,.
Yes Brown was wrong on Regulation.
But the High fee earning audit companies all failed to outline the faults as well, at least publicly.
As for the Banks, they simply have themselves to blame for their present reputation.
August 16, 2015
Fractional reserve banking is always technically insolvent. In a 10% reserve system there are 10 claims on each reserve unit of money. All ten people think they own it or have sole claim to it. That’s a recipe for disaster. Its insolvency, by definition. There are insufficient reseves to cover all claims. Because at some point in time, with a probability of 1, 11% of the money with be demanded and payment will default and a bank run will ensue. Now the reserves are far less, some banks are geared over 30 times reserves.
In 1913 the global central bank system was created , starting with the FED, to underwrite bank reserves and stand ready to create new reserves by repo’ing govt debt. Iow bank insolvency was underwritten by the taxpayers via the taxation of inflation. And then the die was cast. Since then the banks had no incentive to lend prudently. The central bank had their backs and moral hazard was etched in stone.
Labour just happened to be in govt when the dam broke. It’s going to break again, this time maybe on your watch.
The entire system is a farce and immoral.
Reply If all wanted their money out at the same time the bank is illiquid not insolvent, so the Central Bank is meant to lend all the cash needed to pay out depositors against security of the assets
August 16, 2015
BTW in this funny money system by reserves we mean cash. Notes and coins. Their next trick will be to ban cash. You can’t make it up.
The fractional reserve system arose out of goldsmiths holding customers gold in storage for safekeeping and issuing IOUs on that gold instead of lending out the gold itself. Eventually more IOUs on each oz of gold existed than their were oz of gold. This worked until the amount of actual gold demanded for withdrawal at one time equaled the reserve ratio plus one. Then a run ensued.
Now we don’t even have any gold, the reserves are also IOUs arising from printing them to by govt debt. One piece of paper (or cheap coin)created out of thin air to buy another piece of paper which was created out of thin air and protected by legal tender laws forcing people to use the IOUs as money. Under the threat of violence and incarceration if you disobey.
We have a system of irredeemable money built on debt that can never be extinguished.. Only new debt of different duration can be exchanged for old debt.
August 16, 2015
Apologies for the endless addendums.
To distinguish a gold based system from an irredeemable money system, gold is not a IOU. Gold has no debt in and of itself unlike reserves do in an irredeemable fractional reserve system. In a gold based system all debt can be extinguished by a suitable price of gold. In an irredeemable system you can only swap one IOU for another. The debt can never be extinguished. You can never “cash out” you always will hold an IOU debt.
August 16, 2015
So how do you buy this gold in the first place?
Presumably you either borrow or pay cash.
So its not a perfect currency commodity, its just an alternative store of value like diamonds.
And its reccord shows its value to be just as volatile as any paper currency.
August 16, 2015
sound money , as known as far back as none less than archimedes, must have the properties of being divisible, portable, fungible, non-ubiquitous, not consumed by industry, durable and desirable.
diamonds fail abysmally on not being fungible(every diamond is unique) , and if it were not for the central sorting cartel controlling supply , they would be ubiquitous. You don’t understand sound money.
And finally the price of gold is volatile because the dollar derivative that the price is quoted in is volatile. If I quoted the price of gold in zim dollars it would be even more volatile.
August 18, 2015
Gary
You are actually asking us to implement a zero sum economy. Blimey that really does take some luddite thinking. Oh and doing away with any form of digital transfer of money.
Good luck with living in a puddle in the dark ages
August 18, 2015
Gary
Total tosh, I suggest you bone up on the history of banking and how it was the Goldsmiths that effectively started fractional reserve banking and IOU lending against gold reserves. You talk the biggest pile of twaddle
August 16, 2015
” Only new debt of different duration can be exchanged for old debt.”
That’s exactly right. Money is an IOU of the issuer. The solution, to the problem of debt, if there is a problem, isn’t to go back to gold. There really isn’t enough of it and the price swings about too erratically. It would make just as much sense to link the £ to the price of Uranium, Aluminium or even Oil.
It’s better to understand that we need the government to hold that liability or debt. Without it we don’t have any financial assets. So the problem of the government having too much debt isn’t the debt itself. Government can assume as infinite amount and no-one can force it to repay. Indeed it can’t repay.
The problem is that too much Government debt means that we have too many financial assets, which can lead to higher than acceptable levels of inflation. Not right now though. So if inflation is not a problem, neither can Govt debt be a problem.
August 17, 2015
uranium , aluminium and oil make terrible money. Uranium is hardly easily portable in your pocket. Nor is oil. Oil is not fungible, oil is different depending on where it comes from. Aluminium is the same as nickel, it’s everywhere. It’s an industrial metal not a monetary metal.
Keep thinking of examples, the more examples that you come up with , you will eventually see that only gold is sound money.
August 18, 2015
Gary
er gold is an industrial metal too, oh and its finite oh and China has most of it.
You are attacking the problem from the wrong end
August 18, 2015
Gary
And who invented the fractional reserve banking system ? Oh thats right the gold dealers, so your solution to currency problems has exactly the same flaw
August 19, 2015
gold is not a zero sum economy. you divide the units down, that means the money supply increases without inflation. in a fiat system you multiply the units up by counterfeiting new ones.
yes fractional reserve banking was started but the goldsmiths and it was no good then either. But at least you had sound money underpinning it that could be used to mark the credit to market. Now it’s infinitely worse, the underlying is itself a credit note. debt cannot ever be extinguished.
August 16, 2015
The use of so much public money to the Banks has made it imperative that they accept and implement the Vickers recommendations ( basically splitting up the commercial and merchanting activities ) . It was only when the “across the counter sector” decided that they were just as able to become merchant bankers that the problem arose . Many mistakes were made and over-risky loans went wrong .
August 16, 2015
“The crash and bail outs of 2007-8 has led to a general dislike of the banks”
Thanks for the indirect reminder that the bank bail outs took place BEFORE the start of QE in March 2009, so please could people stop incorrectly and ahistorically claiming that the purpose of QE was to bail out the banks?
It is fair to say that the need to rescue the commercial banks and prevent a meltdown of the entire financial system, and the clumsy way that was done, left the UK government with such huge liabilities that normal gilts investors started to worry about whether it would be able to honour its bonds.
But the bigger worry was the government’s ballooning budget deficit even without taking into account those financial interventions, with the recession knocking back its revenues fell and increasing its spending, especially on social security, so that in 2009 it was having to borrow a quarter of the money it was spending.
That was when QE was started, with the Bank of England BAPFF subsidiary making the first purchases of previously issued gilts from gilts investors using newly created money loaned by the Bank on March 12th 2009:
http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxSTxTDxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=16&TM=Aug&TY=2015&VFD=Y&html.x=17&html.y=17&CSVF=TT&C=JS1&Filter=N
while in parallel the Treasury continued to sell new gilts to much the same set of investors at much the same rate; and its purpose was to bail out the government, not the banks.
August 16, 2015
“With the FSA the Bank failed to demand that the commercial banks reined in excessive lending early enough.”
As the prudential supervision of the commercial banks was no longer the job of the Bank, Brown having transferred that task to the new regulator, the FSA, I find it difficult to see why people think that they should blame the Bank and its Governor Mervyn King.
Brown wanted to adopt the EU model, which involved giving the national central bank, the Bank of England, operational independence with respect to monetary policy, and passing the role of supervising commercial banks to a new independent regulator, the Financial Services Authority.
I recall reading in the FT at the time that Eddie George, then Governor of the Bank, was so strongly opposed to the second part that he had threatened to resign over it; and in a way it was a great pity that he did not follow through on that threat, as that would have brought the matter to the attention of a much wider public.
It is worth pointing out that the same thing was done in Ireland, for the same reason – that it was the EU model, and of course Ireland was going to join the euro – and with equally catastrophic consequences.
As I have said before, although JR always seems rather hesitant about publicising the fact, the man who Brown first put in charge of the new FSA, and who messed up on a grand scale, was allowed to quietly slip away out of the limelight when the crash came, and so his name is little known to the general public; I suppose that is why people have always picked on the much better known Mervyn King to take the blame.
Reply The bank retained responsibility for systemic risk, and was one of the three parts of a tripartite total responsibility
August 16, 2015
“It has made possible the Corbyn challenge, seemingly offering free money to spend on public sector projects by printing cash to pay the bills.”
I’d say that has been made possible much more by the signal failure of Osborne to expose the real reason why the Labour government started QE in March 2009, followed by his own additional £175 billion of QE when he had become Chancellor.
That second episode of money printing which was arranged by Osborne was more for his convenience, than because it was essential to avoid the coalition government having to make drastic and economically damaging cuts to public spending as had been the case with the Labour government in 2009, the year leading up to the election.
Initially in January 2009 when Osborne condemned money printing as “the last resort of desperate governments when all other policies have failed”:
http://news.bbc.co.uk/1/hi/uk_politics/7817623.stm
he was on the right track, albeit he was a little premature with that statement; but by first falling silent on the matter, and then actually doing some more money printing himself, he has helped to give Corbyn’s proposal a credibility which it should not have.
You can see the consequences from some of the comments made on this blog, putting forward specious theoretical reasons why it is not only perfectly OK but actually essential for the government to keep getting the Bank to create more money for it to spend.
August 16, 2015
Denis,
Just on a point of information: Except for loose change, all money is now either printed or created in a computer. That’s where it comes from!
August 17, 2015
Bank of England banknotes now come from De La Rue, which will no doubt use computers but is not itself a computer, and those physical banknotes still provide the legal foundation of our monetary system.
August 16, 2015
Yes JR, but you have not mentioned the actual criminal behavior of most banks (PPI, LIBOR etc.) which has been so deep and entrenched.
The integrity of banks was damaged by their own widespread lawbreaking.
Pay deals for their managements is completely biased and self serving, as it is administered by committees nominated by the management and nearly immune to shareholders opinion.
Let’s hope that when (if?) the plan for ringfencing the retail will come to pass, we will some rationalization in behavior and remuneration.
August 17, 2015
I think that fine sentiments need to be converted to actions. RBS is now making an operating profit but for 7 straight years has not made an overall profit. Yet it has not been broken up – to generate more competition – and it has not been forced into liquidation.
Instead, the Chancellor has started a drip feed of RBS shares at a substantial loss – it looks to be only a small loss but don’t forget the 15% inflation that has occurred between purchase and sale. It’s not George Osborne’s fault – it was Gordon Brown who paid too high.
There is a general point to make about Directors’ remuneration. Isn’t it odd that anybody should determine their own remuneration within a company? I find arguements about ‘the going rate’ a little unconvincing when the largest salaries go to CEOs of bloated corporations that no longer make a high return on capital. It’s a little surprising that shareholders don’t look after their own interests better.
I understand that Germany has a law stating a maximum ratio for the highest pay to the lowest pay in a company. Would Mr Redwood care to comment on the advantages and disadvantages?
August 17, 2015
An excellant description of the consequences of letting the shareholders off their responsibility to ensure the business they own is run properly and pays the price when not. I think not only has trust been undermined in bankers, who are thought by many to have more or less ‘gotten away with it’, worse still it has undermined trust in capitalism, even though this to my way of thinking was far from a capitalist solution. This boosts still further the Corbyn agenda and will quite probably need a careful response in the coming years to avoid it becoming too much the recieved wisdom.