The banks are unpopular with the public for a variety of good reasons. They are the whipping boys of the politicians for less good reasons. The government has every wish to blame the whole economic crisis on greedy bankers, to suppress the role of incompetent government, regulators and central bankers. The public hates the banks, because it sees it has had to put huge sums of money into them, only to watch as their senior personnel continue to take large sums out by way of pay and bonus.
It is high time we had a proper debate about what went wrong and what should be done to have a better banking system in the future. I despair of getting such a debate in the Commons with my Labour and Lib Dem colleagues. They simply refuse to engage with the many points I make about the history of the crisis and the sensible way forward. They find it an inconvenient truth that the regulators were heavily involved and maybe they made mistakes.
What went wrong?
1. The Monetary Policy Committee followed boom and bust policies, bloating money and keeping rates too low for too long, then squeezing too hard and keeping rates too high.
2. The government followed boom and bust policies – expanding its own balance sheet too much, spending and borrowing too much in the boom, and then forcing the private sector to take all the hit when we lurched to bust.
3. Between August 2007 and the end of 2008 the authorities kept the markets starved of money when over borrowed banks needed access to funds. That is when the Central Bank should have made more cash available in the usual way – by way of short term loans against good security – to avoid the crash. There was no need for any major UK bank to go down.
4. The regulators led by the government blamed the banks for the crash from September 2007 onwards, and decided to make it worse by lecturing the banks in public on how weak they were instead of working behind the scenes to make them become stronger. Usually transparency is right, but in this area the regulator needs to work in private to avoid triggering a run on a bank. Having made the errors in the boom, the Regulators should have given the over borrowed banks time to adjust, allowing them to raise new capital, sell assets, split off businesses, run down their loan books, cut costs or however they chose to do it.
None of this is jobbing backwards – this is what this site said throughout the gathering crisis.
What should they do now?
The approach of the government should be different for RBS from the rest. RBS is state owned. It has received large sums of subsidy. It cannot go offshore or hit back against the UK authorities. It should be broken up, into a series of competing banks. These should be sold to maximise the returns for taxpayers.
Other banks should be placed under a prudent regime controlling their cash and capital. There is no need for a future banking crisis if we have competent regulators who understand the mistakes made in 2007-8. Today the regulator should relax the cash and capital controls, because they are too tight for the conditions.
Will taxpayers get their money back?
The government wants to ease taxpayer grief by claiming close to the election that we are poised to get our money back from Lloyds and RBS. They are adjusting the figures to try to create this happy outcome. They are knocking all the fees, charges and special revenues off the purchase price of the shares. Yet these receipts were connected to the whole package of financial support, not just the share purchases. This flatters the position.
It is unlikely taxpayers will make a profit the way the government is going about it. It would be possible to get all the money back we invested in the shares if the proposals above were adopted. One of the reasons is the pound has fallen so much, making the overseas banks owned by RBS worth more in devalued sterling.