Sorting out the banks Two MPs put forward some challenging v iews


            Matthew Hancock and Nadhim Zahawi, two talented MPs elected in 2010 for the first time, have produced a thoughtful and challenging book about the banks.  They are rightly critical of the greed and rashness which drove some in the banking system in the run up to the Credit Crunch. They are especially critical of the strategy pursued by RBS, which put the bank at great risk and ended with the taxpayer taking it over. They are also critical of the failure of the elaborate system of regulation put in place by Gordon Brown, which so lamentably went wrong  in 2005-10.

             Their major remedy makes a great deal of sense. They say we need to move from the highly complex and detailed rules based approach to regulation that so obviously failed in the last decade, to Big picture regulation. They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless, and needs to change if the bank is to retain regulatory permission.

               As thoughtful authors, they challenge the economics assumption that people behave rationally. They comment on how waves of   optimism in the City can lead too many people into excessive greed, with remuneration systems in large banks encouraging rashness with other people’s money.  That is why the banks need a referee who will supervise the way they play the game, and prevent them from excess. Such a regulator needs to have a keen eye for the cycle, and an understanding of human nature. He or she needs to be above the game, and able to see when it is running out of control.

                     They also urge a better balance on Boards, with a stronger role for independent directors who could also in theory offer more restraint at times of excessive enthusiasm. Their proposals on more women on boards have captured more of the commentary than they warrant. Their fundamental point is one about how large banks should be regulated.

                        They also agree with the views on this site that we need more banking competition in the UK market. I hope they will support moves to sell off parts of the UK government’s banks holdings with a view to creating more successful and manageable UK High Street banks. As Matthew himself has said, the disciplines of capitalism including the possibility of failure need to be restored to the banking system. That means more smaller banks. This can be allied to regulation which protects depositors and provides living wills which ensure the orderly wind up of any bank which does still overstretch. Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.

                  It is good to see two MPs making a thoughtful and good contribution to the wider debate about the Credit Crunch and banking crisis.  Their book is “Masters of Nothing” published by Backbite Publishing. It’s a good read. As they say:

                  “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state.  A truly free market should promote innovative new entrants and allow market leaders to be challenged. ” They condemn the “rewards for failure culture” which were “bestowed on men who drove their banks to ruin”. The FSA enforced its detailed rule book, but without breaking any rules “banks remained under-capitalised, toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’and outrageous risks were taken…”  Exactly. Labour had not deregulated UK banking. It was regulated in great detail. It was also regulated in a way which missed the big picture, which failed to spot the elephant in the room – the underlying weakness of the banks and the extent of the overextended credit.



  1. Mike Stallard
    September 8, 2011

    The BofE is the second oldest Bank in the World (1694). You might have thought that because of this it could be trusted, without outside interference, to be a good referee, just like it used to be once before.
    Politicians and Civil Servants have also been around a long time too. But their strength is that they are made up of normal people who have decent, normal judgement.
    When Mr Brown single handedly and, yes, arrogantly, changed the system in favour of the politicians he did the country a very bad service, allowing the professionals to go for it unchecked and penalising the little people who got snowed under with paperwork.
    Yes, we ought to get back to the traditional system immediately.

    Sounds like a good read.

    1. Robert K
      September 8, 2011

      I wouldn’t be too dewey-eyed about the old setup. The BofE didn’t do much to prevent the secondary banking crisis of the early 70s or the property crash of the late 80s.

  2. norman
    September 8, 2011

    This can’t be the same Matthew Hancock who has stuck his head above the parapet a few times on The Spectator blog over the last year.

    That one made posts that were economically incoherent, full of schoolboy errors and largely ridiculed by all and sundry (which isn’t unusual for the internet, granted).

    Needless to say he hasn’t been back.

  3. Alan Redford
    September 8, 2011

    What would a couple of MP’s know about banking? They’ve tried their hand at running all sorts of things – steel factories, car manufacture, telephones, health, education – every one turned into a financial black hole and ended in abject failure. Keep them away from banks please. If they want to learn to run something – start with a whelk stall.

  4. Alan Redford
    September 8, 2011

    “They condemn the “rewards for failure culture” which were “bestowed on men who drove their banks to ruin”. The FSA enforced its detailed rule book, but without breaking any rules “banks remained under-capitalised, toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’and outrageous risks were taken…””

    Substitute ‘Country’ for ‘banks’ – and you have the epitaph of our Dear Leader, Gordon Brown.

  5. Antisthenes
    September 8, 2011

    The ideas here appear to be mostly rubbish just a ramshackle rearrangement of regulation with no practical solutions. The root causes are over regulation that kills competition, government polices that encourage asset bubbles that must eventually burst, bailouts that reward failure and encourages recklessness and government ideology that has debased society so that incompetence and corruption is allowed to flourish. The idea that more woman on boards will improve the situation is pure nonsense, too often now equality undermines merit and leads to mediocracy (not that women should be excluded but should be appointed to such posts only on ability).

    1. lifelogic
      September 8, 2011

      Yes they (BBC/Polly Toynbee) types never seem to be able to decide if woman are the same as men (and therefore discrimination is the only explanation for their earnings or positions) or they are different and more on the board would thus give a different feminine approach due to perhaps better communication, less testosterone and woman’s alleged fabulous multitasking skill.

      Perhaps they could finally make their minds up.

      1. lifelogic
        September 8, 2011

        I see Prince Charles is on his hobby horse yet again. He warns of human extinction – Mankind will become extinct, the Prince of Wales has warned, unless humans transform our lifestyles to stop mass consumption, run away climate change and destruction of wildlife.

        Perhaps he could lead by example for a change. Maybe by telling us the size of his houses and perhaps reducing them to say 600Sq ft or so in total. Perhaps reveal his heating bills, his cars, helicopters, planes, trains and travel arrangements.

        The CO2 output caused by the recent wedding, by his staff and all the many guests descending from around the world with their travel arrangements to the recent wedding for example.

        I have it on good authority that he drives rather fast in his Aston Martin too on occasions.

        Or perhaps he could just shut up and stick to defending quack medicine and the many other incompatible faiths.

      2. lifelogic
        September 9, 2011

        You say “they challenge the economics assumption that people behave rationally”.

        Who, on earth, has ever though that people behaved rationally. Have they not seen all the churches, wind farms, pointless wars, quack medicines, quack cosmetics and slimming products in the average chemists. No rational person could ever think that people behave rationally but they do so occasionally.

        For example if you pay them better, not to ever work and have children at others expense many of them will indeed behave rationally as we seen.

  6. Stuart Fairney
    September 8, 2011

    “They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless”

    Because the state knows best? I think not, and of course the B of e’s power stops at Dover whereas capital is truly international. No solution at all.

    “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies”

    Monopolies cannot exist in a truly free market, they only exist as a result of regulatory barriers that a ‘newly strengthened’ B of E could create.

    Seriously JR, more state is not the answer here. If this is the best the bright young things of the tory party can come up with… well I was going to say I won’t vote conservative any more but that ship has sailed.

    Are there any Austrian free-market, pro-freedom types left in the tories or are you all social democrats a la Mr Cameron?

    1. Robert K
      September 8, 2011

      Good point on monopolies – they can’t exist without coercion

    2. sm
      September 8, 2011

      Why keep ‘fractional reserve banking in place’? when alernatives exist which circumvent (self regulate down to stability- like a Thorium fission reactor) a lot of the issues and problems experienced above.

      1) competition 2) regulation 3) risk/reward, 4) macro-economic control, 5) seperation of powers, 6) stable counter-cyclical growth.

      I would appreciate JR’s and others critique of Positive Money as outlined by nef,university of southampton. The one page exec summary is a good short read.

      1. Steve Hemingway
        September 11, 2011

        The root of the problem is the deposit guarantee, and the moral hazard it creates. If depositors had to think about which banks were sufficiently well capitalised to trust with their money we’d end up with much lower levels of gearing and hence much safer banks, much as in Adam Smith’s own day, in fact.

        No doubt John Cridland would claim that this would increase banks’ costs and hence the interest rates they charged to borrowers, but this is utter nonsense.

        Rule-based detailed regulation always leads to regulatory capture. Why else would banks end up with a debt to equity ratio of 30?

        It is true that equity funding does lead to higher corporation tax than debt funding, but that’s just an arbitrary decision of HMRC to treat costs of debt and equity differently in computing Corporation Tax. Banks have such enormous carried forward losses I can’t see any of them paying any CT for decades anyway, however they are funded.

  7. lifelogic
    September 8, 2011

    We need to remove the incentive for employees to gamble bank money on the – heads I get a big bonus tales the bank looses basis. The employee only perhaps looses his job at the worst. Capital should take the main risk and rewards. Senior management are not properly controlled by shareholders – the mechanisms are far too weak and senior people are able to take huge bites of shareholders money as remuneration, bonus, share options and pension while destroying shareholder value at the same time.

    You say “living wills which ensure the orderly wind up of any bank which does still overstretch. Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.”

    Indeed these “wills” need to ensure that the lending and deposit taking are can continue safely rather than having to demand funds back of good borrowers and that shareholders and bondholders take the loss. Perhaps a prescribed separation of lending bank and gambling bank should it over stretch itself.

    Also you say: “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state.”

    Indeed this happens in energy, the legal and medical professions, energy certificates and the old HIP packs and many other areas. The “no claim no fee legal” actions, with endless TV adds and free ipads for claimants, are also highly questionable as are employment tribunals which have no proper balance of risk reward.

    We need also to encourage whistle blowers who can report fraud and accounting actions often just done to massage accounts to mislead.

    How can a bank raise capital with a prospectus with expensive lawyers and accountant all over it showing good health one day and produce regular accounts and yet collapse completely so shortly afterwards. Yet no one has done anything wrong?

    The main problem for the economy now though is that banks that are snatching money back from good borrowers who need it for their business or charging absurd fees and margins. Government owned RBS group seems to be the worst offender. Lack of perhaps just small amounts of lending can handicap a business, reduce profits and limit growth. So less tax revenue for the government. The government shooting itself in the foot as usual – as with the immoral and counter productive 52%.

    I hear reported that Osbourne cannot produce the report into 52% until after April 2012. Why not? One person and a few hours on the revenue records and the back of an envelope should be more than enough. I could do it for nothing if he has no one free.

    Indeed everyone already knows it is mad anyway.

  8. Gary
    September 8, 2011

    These two don’t have a clue. 1) the fractional reserve system is the problem and 2) no amount of
    (central planning) , short of abolishing it, will fix it. It is a pyramid scheme.

    They should read “Fractional Reserve Banking ” by Rothbard, for an in depth explanation.

    You seem to have a penchant for regulation, why not just let the market do its work and let the banks fail ? Them being on life support is ruining us.

    1. Robert K
      September 8, 2011

      good points

    2. Stuart Fairney
      September 8, 2011

      I would place a small wager that less than half the new intake of the parliamentary conservative party even knew who the great man (Rothbard) even was. A much greater wager that less than half have read any of his writings.

    3. uanime5
      September 8, 2011

      Given what happened in 1929 in the USA when the banks failed history has taught use that leaving things to the market results in the worst possible outcome.

  9. Gary
    September 8, 2011

    Put it this way. If they can explain how they can formulate a regulation to prevent fractional reserve banking from being inflationary, they may be into something. They won’t be able to. It is impossible. If you stop inflation in a fractional reserve system the system collapses. When you make a loan with newly created money, and the loan does not lead to a proportional increase in gdp, the loan us inflationary. By definition. And that is true for most loans.

    1. sm
      September 8, 2011

      We could spend debt free money (cash) into existence (DO NOT give to the banks directly) and increase the reserve requirements of the banks towards 100% (reducing the debt based interest earning ) slowly. The banks can then move to intermediate only.

  10. davidb
    September 8, 2011

    The basic point that allowing monoplolies to form is dangerously uncompetative is a universal one. In the past few decades however, many industries have not been stopped from forming such positions. The banks are but one sector. A handful of companies dominates food retailing. A handful of companies manufactures cars. What are the power utilities really? Is that really competative?

    The industry I operate in has grown to be dominated by a small cabal of companies. I have watched for 30 years as one US domiciled conglomerate in particular has bought up everything they could. Along the way they have closed factories in the UK which made good products well, hyked the prices of spare parts well beyond inflation and fair worth, restricted access to products and colluded with OEM’s to effectively rip off their customers. But at no time can I remember reading about any reference to the Monopolies Commission.

    I don’t believe that those great and good who get appointed to such high minded bodies – and I would be pretty certain some esteemed ex poacher from the Lords would be appointed to regulate banks in your scenario – would actually have much of a clue where to start or how to stop this monopolies problem.

    I know which mergers I would have opposed in my industry. I suspect many of your readers know examples in their industries, but I would wonder how many mergers which we all know to be anticompetative were actually stopped?

    1. Robert K
      September 8, 2011

      Refer to the points above about monopolies. They can’t exist in a free market. There will be periods when a small number of companies dominate a market but if they exploit their market position competitors will take market share. The only time this won’t work is if the state steps in to manipulate the competitive environment.

  11. Caterpillar
    September 8, 2011

    I wouldn’t disagree with JR’s post, particularly having not read the book, but I would have some caution to the possible interpretation of the general quote;

    “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state. A truly free market should promote innovative new entrants and allow market leaders to be challenged. ”

    It can be easy to assume that becuase an organization has power in the visible market for goods/services that it is gaining supranormal profits due to distortions of the visible market. Some firms may well have paid for these visible market failures through investments in strategic factors (I think Barney said something of this sort a few decades ago), and if strategic factor markets were perfectly competitive (and remain so) then resource allocation efficiencies may still be in place. I am not saying this is the case in banking, but I am just saying there needs to be care in large generalisations (- even though I am making one myself).

    Additionally on innovation I think the importance, and indeed correctness, of Schumpeter mark 1 and Schumpeter mark 2 are still researched and debated – hard to measure and hard to develop policy.

  12. Brian Tomkinson
    September 8, 2011

    JR: “toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’ and outrageous risks were taken”

    If this was allowed under accountancy rules then those rules are useless and must be changed if this isn’t to happen again. If they were not allowed under the rules, what were the auditors doing and why haven’t criminal proceedings been taken against the directors of the offending banks?

    1. Robert K
      September 8, 2011

      If shareholders appoint managers to come up with such dodgy arrangements they, not taxpayers, should pick up the bill when it all goes wrong.

    2. Robert Christopher
      September 8, 2011

      The answers to these two questions will dictate which direction this discussion will take.

      Until then, the only option is to wait for a suitable response.

  13. javelin
    September 8, 2011

    Agreed with a lot of comments. Perhaps the bigger pictue than the ‘bigger picture’ you mention is the political will to hand power (and hence RESPONSIBLITY) to the Bank of England – and by implication the politicians.

    For me Gordon Brown shifted interest rate decisions to the BofE primarily because he didn’t want the political risk of making the decision himself. And ironically he wrote a book on cowardace, or whas that heroism – I cant remember.

    I think the low interest rates being disjoint from the rest of the economic management meant things could not be controlled in a joined up way. I would like to see the BofE MPC make recomendations to the Chancellor, rather than make the decision for him. Gordon Brown could have dealt with it this was – but like I said he wanted to avoid political risks.

    So the question for me is HOW is the BofE going to spot the unhealthy banking practices from the healthy ones. One of the problems was the incorrect risk attribution by the rating agencies – especially to mortgage backed CDOs. I think this may be at the heart of the problem. The BofE needs to understand risk / reward ratios in order to identify toxic assets – and so will rely on the rating agencies more than historical figures.

    As someone who was the heart of the Credit Default Swaps in the one large global bank – who didnt lose money, I think the seperation of retail depositors money from commerical money should absolutely be done. But it should be done through competition – as well. New banks should be opened that promise not to ‘gamble’ with depositors money. There should also be very different rules about asset ratio between the depositor and investor backed banks. I think as a depositors you need to know that your bank will not go bankrupt. They should be called Deposit banks. Banks that merge the two entities should be called Investment Banks – to indicate the risks to customers.

    In a way we need, a sort of, return to Building Societies and Life Companies. But the problem with them they were bought out by investment (backed) banks who bought the building societies during their boom years – to get their hands on the depositors money to use in their investment arms. Subsequently when the bust came the depositors realised why they should have quit after receiving their shares.

    The argument for merging the two styles of banks is done purely by the investor banks to get their hands on depositors money. I don’t believe the argument that free banking will disappear. A deposit only bank should be simple and well managed and should be able to pay for itself.

    1. Caterpillar
      September 8, 2011

      “I would like to see the BofE MPC make recomendations to the Chancellor, rather than make the decision for him.”

      I completely agree with this, and that the Chancellor should then make a statement in the H of C. Nevertheless, I suspect that when the Governor approaches the Chancellor towards the end of year for agreement to make further asset purchases, the Chancellor will essentially have to agree, he will not point out that inflation has not returned to target or remind the Governor that under and over target are meant to be viewed symmetrically (so 5% is similar to -1%). Having the Governor and MPC give advice which the Chancellor and Govt respond to can clearly be far more integrative, but without a new Governor & MPC members, and without Opposition support for a change the eminently sensible will not happen. Even today the calculations that admit to taking savers’ money and giving it to debtors has had no political outcry; it is now the BoE that decides and implements what are essentially redistributive taxes (on wealth not even earnings) – all 650 MPs ought to be concerned that this role has been passed on, I don’t hear 650 MPs complaining, I am not sure I have heard one.

    2. A different Simon
      September 8, 2011

      Under your proposals would the deposit protection scheme be changed so that it only applied to Deposit banks and did not apply to Investment banks ?

      Would deposit banks get all their money from depositors or take central bank money and lend it out as a money multiplier ?

      If a deposit bank could not invest money in companies then presumably it would have to lend it that would free up a lot of money for investment .

      Would the taxpayer be left with any liabilities i.r.o. investment banks ?

  14. Major Loophole
    September 8, 2011

    Your best piece in a while Mr Redwood.

    I think I can trace the rot in (at least some of) our high street banks back to around 1996/7 or so. Local branch managers were moved/retired off and replaced with ‘Business Managers’ at larger, more central branches in the drive for ‘efficiency’. At first this had limited effect because the old branch managers who knew you and your business were still accessible. But not for long: younger, less experienced ‘bean counter’ style managers soon displaced the old hands and, crucially, were given LENDING TARGETS, the meeting of which, of course, led to qualifying for our old friend—the BONUS.

    This structure led to something truly insidious: the dropping of previous funding promises once a lending tatget had been met; the loss of a promised facility/loan imposed from further up the hierarachy. In my own case, a loan promise (agreed ‘on the nod’ —standard practice in the property development field—as I had been doing with them for 20 years) was reneged on between an exchange of contracts and completion, leaving me without the funds to fulfill the contract. The emergency loan to replace the lost bank facility and avoid default cost me over £100,000—it was either that or lose literally everything. I found out later that the loan promise had been (a) made in the first place to reach a lending target and (b) was withdrawn because that target had been met from other loan agreements. Fred the shred banking was well under way.

    Alistair Heath at cityam (hat-tip Dan Hannan’s blog) just wrote:

    “Equity should be wiped out; top management fired; contracts suspended; and bondholders made to take a huge hit. All bad assets should be auctioned off and sold to the highest bidder.The banks should then be recapitalised and reprivatised as soon as possible, with the aim to minimize any taxpayer losses.”

    Consider this in terms of what the banks themselves do to customers who experience cash flow problems, often relatively minor ones: call in debentures or take over charged properties and ‘fire sale’ them at any price no matter how far below value that may be, wiping out equity in the process. Lets just say that again: “wiping out equity in the process.”

    What’s that old saying about a dose of your own medicine?

    1. Electro-Kevin
      September 8, 2011

      A friend now working as a train guard tells me this was so. He a professional banker in that era. In fact there are two of them now collecting tickets on trains and both are highly intelligent and well educated men much valued for their hard work and integrity. (They are joined in their work by a geologist and a former design engineer who developed diesel engines for a leading British company.)

      Why aren’t they still in banking ? They are barely 50-years-old. They tell me that their ‘uninteresting’ style was unwanted and that they were pushed out.

      One can’t help thing that – despite the elephant in the room – it suited the ruling politicians to have a ‘booming’ economy regardless of whether or not the money was fake. It was good cover for a lot of dodgy reforms and new laws.

      If a schnook like me was bewildered and asking “where is all the money coming from ?” then I’m sure the politicians were too – obviously not hard enough though.

      The people lapped it up along with their Premiership football and Super Sized Mackie Ds.

      Many of us have got what we deserve.

  15. lifelogic
    September 8, 2011

    Looking up Matthew Hancock and Nadhim Zahawi on WIKI I see that the former is another PPE man (rather worrying) but perhaps later rescued by working for his parents software company and some later study at Cambridge for a Masters in Economics.

    The latter did Chemical engineering. Good the more engineers the better, in general, I tend to think – even if only chemical ones. At least they can usually understand how systems, maths and mechanisms work in the real world. Unlike the endless steam of Lawyers who tend to think we need yet more laws and more Lawyers to dictate everything from the top down.

  16. Ralph Musgrave
    September 8, 2011

    The idea that the Bank of England should have the “the authority and the power to be able to tell a large bank that its strategy is too reckless…” is naïve. Various regulators had that power prior to the crunch, but they just got swept along with the irrational exuberance.

    I suggest there is a relatively simple set of rules which would greatly reduce the chance of, and/or severity of booms and busts (as advocated by Prof R.A.Werner, Positive Money and the New Economics Foundation). These rules are thus.

    1. Prohibit the creation of money by private banks. The result would be a far more stable money supply.

    2. As advocated by Mervyn King, give depositors a choice between 100% safe, taxpayer guaranteed accounts, and on the other hand, accounts where their funds are used for commercial purposes. Money in the former would be lodged at the Bank of England and would earn little or no interest. Money in the latter would earn interest, but there’d be no compensation if the relevant private bank went bust, and quite right.


    1. Gary
      September 8, 2011

      Your first point. Don’t prohibit them. Allow people to choose which currency they want to use. The devaluing stuff the banks print , that erodes peoples savings, would soon be shunned. The most sound currency would win out. Douglas Carswell’s proposal would effectively ensure that. That is the truly sane proposal.

    2. Mark
      September 8, 2011

      After Overend, Gurney collapsed in 1866 the BoE learned how to regulate successfully – and did so for most of the 140 years until the collapse of Northern Rock in 2007 (well, until its powers were removed). They were certainly not above telling banks that some of their activities were unacceptable, and letting that fact be known among their competitors: the Old Lady was said to twitch her skirt or raise her eyebrows. It worked, because further sanction could also be imposed – but mostly because such a judgement led to great circumspection on the part of competitors in dealing with a miscreant.

      If you prohibit banks from creating money then they are no longer banks, but simply security operations. The key is not preventing re-lending of deposits, but controlling the maximum gearing to prudent levels.

      The idea that we should be encouraged to invest in gilts and treasury bonds (government guaranteed debt) doesn’t sit well with me. There is already far too much compulsory investment in these instruments by pension funds and banks themselves. Government debauching money through permanent deficit spending is where our inflation problem really starts: don’t make it easier for them. Instead, force them to live within their means.

      A major problem with banks is that we have little idea of how risky they are when we make a deposit in them. Contrast with investing in shares where reports and accounts at least used to give a fair picture of the business and the associated risks. I’m sure most Northern Rock depositors thought it was as conservative as the building society it once was, rather than dependent on secret offshore funding to feed its mortgages. After all, they weren’t getting returns commensurate with the risks. It might be better to require the bank to advertise its credit default swap price – the professional market perceived risk of it going bust, if you like. That might be better informed than a credit rating institution or regulator – at least if off balance sheet accounting was largely banned.

      Reply: The “secret” funding was detailed in public documents, and was the most stable part of an unstable bank.

      1. Mark
        September 9, 2011

        An analysis of what happened to Northern Rock:

    3. Conrad Jones (Cheam)
      September 8, 2011

      100% Reserve, 100% Agree.

      PositiveMoney is campaigning to:
      1. Make banks ask our permission before they gamble with our money
      2. Make Banks tell us how they’ll use our money
      3. Remove the bankers’ licence to ‘print’ money and use any newly-created money for public benefit.

      At present, newly created money ultimately is only created for Bankers benefits – with the Government towing the line.

      This will remove the need for taxpayer funded Bail Outs.

      Some MPs are now recognising that the Policies being drawn up by the PositiveMoney team could be passed by Parliament if enough MPs recognise and understand the failings of the current system.

  17. tangentreality
    September 8, 2011

    Having been working in the financial services sector for nearly 10 years, I can associate with this view of the regulation extremely well. The regulation is onerous, disproportionate and inappropriate. That is not to say that regulation is not necessary – it demonstrably is – but in it’s current form, it is not fit for purpose.

    The FSA has spent the last 10 years focusing its efforts on regulating the provision of financial advice, under the impression that this is primarily responsible for the ills of the sector. However, complaints data indicates that banks and building societies account for nearly 60% of all complaints, and the macroeconomic situation speaks for itself.

  18. javelin
    September 8, 2011

    Just to add – I think what gets people about the banking crisis is that they understand that there are people who “trade/gamble” with their money and take risks. I dont think many people have a proble with that. The thing I think that shocked people was that this trading/gambling was done with their money. I think that they felt the regulators were ultimately responsible because, whilst they were told, they were not told adequately that their deposit accounts were at risk. The deposit protection scheme doesnt really help – and requires you to save money across many banks.

    I think ultimately its the fact the regulators didnt protect their money that riles them.

    1. Robert K
      September 8, 2011

      Tough. If you lend money to someone and they pay you interest, you are taking a risk. It’s up to depositors to choose a bank that they consider safe. It’s not up to reglators to make sure all banks are safe.

    2. Robert Christopher
      September 8, 2011

      I agree.

      Most people would say that people who manage their own risks, whether aiming to be a pop star or an investor, deserve to be rewarded for success, as long as they pay their way. “Paying their own way” includes covering their risks and having a “plan B”.

      Banks do not manage money; they manage risk. Risk? That was abolished as soon as the phrase “an end to boom and bust” was coined, so no need for a “Plan B”, is there?

      We can now see that the total sum of risks in the system were not zero. This was because so many small “local risks” were ignored due to this political phrase; too many people interpreted activities and results outside their own area in the best possible light and, in many cases, wanted to keep their jobs.

      If regulators cannot detect these problems, then why are they paid so much?

      I wrote a comment about how the dangers of ‘groupthink’ highlighted in Lee Smolin’s book on string theory could also be usefully applied to ‘climate science’ here
      “He [Lee Smolin] lists some of the attributes of “string theory” politics in the chapter called “How do you fight Sociology”:
      1. tremendous self-confidence, leading to a sense of entitlement and of belonging to an elite community of experts
      2. an unusually monolithic community
      5. a disregard for and disinterest in the ideas, opinions, and work of experts who are not part of the group, and a preference for talking only with other members of the community.
      6. .. interpret evidence optimistically …. believe results are true because they are “widely believed”

      It looks like these same observations can be observed again in banking, sovereign debt decisions and general EU accountability!

  19. oldtimer
    September 8, 2011

    It is worth recalling that Lehman`s was an investment bank and incentivised its staff with deferred compensation in the form of shares in the bank. The core of its problem was a very high debt:equity multiple (c45x IIRC), holdings of doubtful securities and a gross failure to acknowledge the risks involved.

    It is also worth recalling that the weaknesses in the risk assessments conducted by the investment banking community were observed by the FSA and the Bank of England before the collapse but nothing was done about it. This was reported by Andrew Haldane in his speech Why the Banks Failed the Stress Test (13 Feb 2009)….
    “A few years ago, ahead of the present crisis, the Bank of England
    and the FSA commenced a series of seminars with financial firms, exploring their
    stress-testing practices. The first meeting of that group sticks in my mind. We had
    asked firms to tell us the sorts of stress which they routinely used for their stress-tests.
    A quick survey suggested these were very modest stresses. We asked why. Perhaps
    disaster myopia – disappointing, but perhaps unsurprising? Or network externalities –
    we understood how difficult these were to capture?
    No. There was a much simpler explanation according to one of those present. There
    was absolutely no incentive for individuals or teams to run severe stress tests and
    show these to management. First, because if there were such a severe shock, they
    would very likely lose their bonus and possibly their jobs. Second, because in that
    event the authorities would have to step-in anyway to save a bank and others suffering
    a similar plight.
    All of the other assembled bankers began subjecting their shoes to intense scrutiny.
    The unspoken words had been spoken. The officials in the room were aghast. Did
    banks not understand that the official sector would not underwrite banks mismanaging
    their risks?”

    In essence the models were wrong.

    The same issue (a wrong model) applies to that other slow motion car crash for the UK economy – government energy policy. This also relies on a model based on a very questionable hypothesis. The difference is that this model is driven by single issue pressure groups with the enthusiastic backing of MPs.

  20. Gary
    September 8, 2011

    What capitalism are these two talking about? It cannot be free market capitalism. Where in free market capitalism does the the govt make up over half the economy ? Where does a body have a monopoly to set the base interest rate ? Where do banks get underwritten by the taxpayer via the same monopoly that sets rates? In a free market, where do these same banks have sole monopoly over creation of the money ?

    Their premise is wrong. All that follows is also wrong.

  21. Shade
    September 8, 2011

    I heard Matthew on the Today program yesterday. As I have not read the book, I was left with the impression that he thought the collapse of the banks was all down to greedy bankers and irrational customers. In their usual manner, the Beeb failed to highlight the fundamental reasons for the problems which, according to your article, are well aired in the book. Namely, the role of politicians, the failure of regulation as a result of political meddling.

    Clinton started the practice of giving mortgages to people in the US who could not afford the repayments. It was then just a short step by the professionals into hiding the potential problems by packaging the rubbish up with better assets in increasingly complex derivatives. Governments of all persuasions encouraged this miracle, with considerable gusto, with our own leaders welcoming the taxes raised from the “profits” and praising people like Fred Goodwin and James Crosby.

    I can’t believe that the problem would have arisen (in this country) had the Bank of England been the sole regulator of banks with Eddie George as its Governor.

  22. waramess
    September 8, 2011

    Making almost no ssense at all. Just something different. They seem not to understand that it was over-regulation that got us into the mess; the concept amongst others that a triple a rating removed risk, period.

    Remove regulation entirely ensure a wide range of competition, give retail depostors priority but no government guarantee and accept that banks will go into liquidation from time to time. That would make the book worth a read.

    ….but politicians would first need to give up the idea of their omnipotence…..fat chance.

    1. uanime5
      September 8, 2011

      Either you have regulations and competition, or you have neither. Without regulations you just end up with monopolies, cartels, and collusion.

  23. Iain Gill
    September 8, 2011

    “Big picture regulation” sounds too much like the Bank of England becoming police force, judge, jury, and law maker all at once. And all the challenges of a police force, ie the officers will be getting paid less than those they police and are likley to have less political power. There need to be some basic rules which can be applied fairly and which are clearly understood in advance of business plans being formed. Banks need to be allowed to fail, and for that they need to be smaller, and we need to protect deposits and not the whole institution. Failing of the worst performing businesses is good for the wider economy! The worst performing businesses being saved by the tax payer removes many of the incentives to do a good job (same as the worst hospitals in the nhs should be allowed to shut and give the patients money to go elsewhere).

  24. Kenneth
    September 8, 2011

    We have the worst of all worlds. We have a near cartel of banks which is effectively colluding with the government.

    In my view we should EITHER have a true market and accept that occasionally a bank will fail OR we should have one nationalised bank (or one for each nation of the union, let’s say).

    When a company accumulates excessive capital (and too many others go bust), this suggests in imbalanced market. True markets cannot lead to excessive capital as competition saves the day.

    The culprit in my view is usually in the shape of government interference. That is why large companies become ever larger under left wing governments and especially the previous Labour governments. If you do not want excessive capitalism and cartels do not vote Labour!

    1. uanime5
      September 8, 2011

      Actually under right wing Governments companies accumulates excessive capital because the right wing is heavily connected to large businesses. Right wing Government also remove regulations so businesses find it easier to collude and form cartels.

      More Government interference and regulation would halt this.

      1. Kenneth
        September 9, 2011

        Business was weighed down with more regulation that ever in the last Labour administrations. However the big companies continued to dominate as they played to the regulations (and helped draft some of them!).

        However I agree there can be interference from right wing governments as well. Politicians doing favours for friends is bad (and immoral). However implementing policies that leave us with structurally unbalanced markets is far worse.

        Take, for example the current proposals to rid ourselves of the ‘claim culture’ and excessive insurance premium. That particular scam was brought about by Labour’s interference.

        The Labour Party paw prints are everywhere. I could weep at the damage they have done to our country.

  25. cynicalHighlander
    September 8, 2011

    They are especially critical of the strategy pursued by RBS, which put the bank at great risk and ended with the taxpayer taking it over.

    We have taken nothing over as all we have done is given the losers at the money casino taxpayers money to carry on as usual. If as assumed that we part own the bank then since the US bankrolled them as well they are also shareholders.

    (unchecked ref deleted-ed)

    They included the Royal Bank of Scotland, which was propped up to the tune of $84.5 billion,

  26. Rebecca Hanson
    September 8, 2011

    It may be useful to add some vocabulary of regulation to the insights provided here and that is the vocabulary of

    Purpose-led inspection vs. Process-led inspection.

    Regulatory bodies tend to gravitate towards process-led inspection – that is defining processes of inspection and following them. This happens if the purposes of inspection and regulation are not clear, if inspectors are appointed who do not command the personal and professional respect of the brightest and best in their industry and/or if inspectors which to protect their own interests.

    Purpose-led inspection, where the purposes and parameters of inspection are defined (to protect against unacceptable practice which could include unacceptable levels of risk to the state) requires a very different inspection culture where inspectors are highly respected individuals who can work with substantial freedom to investigate issues.

    I’ve written a blog about how inspection in education could shift from a process-led culture to a purpose-led culture which may give some insights into the wider issues here.

  27. A.Sedgwick
    September 8, 2011

    In short a beefed up Quango to oversee the Banks.

  28. Robert K
    September 8, 2011

    The banking system failed because of the unwritten and unspoken assumption that the state would bail it out if it went bust. Sure, individual banks failed because of excessive risk taking but the scale of the disaster was amplified by the regulatory environment and the egregious relationship between the state and the bank. The disaster was that there is a banking system at all, rather than an environment in which individual banks compete with one another to provide the best service to their customers and go bust if they fail. If you want banks that act in the best interests of their investors and depositors – whether that is prudently for a modest return or riskily for a higher return – then the last thing you need is the state insisting that the banking system be “safe”.
    No-one suggested the depositors of Barings should have been bailed out by the state when it went bust. Quite rightly, the first to lose their shirts were shareholders, then the bondholders and finally the depositors (of course the taxman is first in the queue when a business goes bust, but that’s a separate topic). The difference this time around is that it is a “systemic” collapse. So let’s scrap the ruddy system and treat banks like everything other market segment – no-one worries about collapse of the supermarket “system”.
    There is no reason why there should be statutory backing for bank deposits. Indeed it is immoral to have such backing, as it forces taxpayers to absorb the risks taken by depositors as they seek a superior, riskier, return on their assets. The only involvement the state should have in the administration of the banks is to say: “if you go bust we will never, ever, under any circumstances advance a single penny to bail you out”. If the state made this clear, a much wider variety of banks would emerge. Depositors seeking a high return might put their money into the Superior Return Fractional Reserve Bank of Athens, get a 20% interest rate on their deposits and hope for the best. Risk-averse depositors might put their money into the Wokingham Ultra Safe Bank Plc, where they pay for the privilege of having their twenty-pound notes sealed in deep vaults protects by armies of goblins in hope that clever young wizards won’t crack the locks.
    A regulator is never in a better position than an executive or an investor to determine an appropriate level of risk. Risk taking is essential in economic activity. The biggest rewards often come to those who take the biggest risks. It’s civilisation is founded on. A regulator would have said to Columbus “Sorry, it’s too big a risk to sail over the horizon; there be monsters there. Stay at home.” The evil that has been inflicted on UK taxpayers is that the state wants to sustain the lie that a fractional reserve banking system (i.e. where banks lend out more money than they receive in deposits) can be inherently risk free.
    The authors are right to challenge the assumption that economic actors behave rationally. It’s one of the more stupid assumptions that lie at the heart of the macroeconomic theorising so beloved of policymakers. But the idea that a rule-maker should control waves of waves of optimism and economic greed is silly.
    As for the composition of boards and the remuneration of executives, that’s up to the owners of the bank – the shareholders. It’s nothing to do with depositors or regulators. If a depositor doesn’t like the board of a bank he can withdraw his savings and put them with a board of directors he does like.
    I absolutely agree that a more fragmented and diversified banking arrangement is needed in Western economies. The way to achieve that in the UK is to break up banks currently held by the state into a range of entities with risk profiles ranging from near zero to extremely high and introduce the regulatory promise I outlined above. If the banks with near zero risk profiles prove popular, then more banks will go down the risk-free route. If the zero risk banks fail to flourish then we can be sure that depositors are happy with a higher risk/reward profile and will accept the consequence if their bank goes under. It should be up to depositors to arrange insurance for their deposits – there should not be a state-backed guarantee.
    Free market capitalism does not fail or succeed, it simply describes the sum of economic activity when left to its own devices.

    1. Robert K
      September 8, 2011

      Sorry should be “it’s what civilisation…”

    2. Bazman
      September 9, 2011

      So basically what you are saying we had a nationalised banking system run by private companies that when became nationalised remained private? A bit like the railways and other state subsidised private fantasies. Who’s profits are privatised and losses nationalised with the users and taxpayers footing the bill. All cheered along by apologists and vested interests.

  29. Joseph McCaffrey
    September 8, 2011

    The only regulation that would work in something as complicated as the financial system is the free market, yes I agree that we should deregulate and encourage competition – but I don’t believe that it would be prudent, far less democratic to give the BoE the power proposed. The real elephant in the room is the implicit and explicit guarantees to bail out bust banks and individual depositors which massively reduces the emphasis on risk in the cost/benefit analysis and also is the main block to competition because creditors know that it is safer to lend to the big bangs. How about removing all current regulation, replacing it with firm regulations on transparency and then enshrine in law the phrase that ‘neither the bank of england nor anyother part of government will bail out an organisation in financial services or its creditors’

  30. Magnolia
    September 8, 2011

    I agree and am very proud that Conservatives have put forward these ideas.
    Over a year ago I wrote comments on this blog that put forward the idea that our kind of capitalism was broken and that the winner takes all form of it was as destructive as a state monolith. I thought we needed a kind of middle way capitalism with plurality of provision from lots of competition. I wanted a ten mile radius of no tax for all producers or manufacturers to encourage start ups and consolidation of establishing businesses.
    Everyone who lives in a market town knows that the big supermarkets are preventing smaller food retailers and others from being able to compete. The supermarkets aren’t bad but It seems that there is a failure of conditions which ensures ‘good enough’ competition which could be dangerous in the long run.
    There are now similar problems developing in the petrol/diesel market where independent stations cannot compete with supermarkets who run their fuel pumps as loss leaders. All over the country people are losing their local petrol station because all of us are chasing the lower price.
    Small farms are going out of business and larger one’s are taking their place. There used to be five farms in my village twenty years ago and now there’s only two. That cannot be good practise for the longer time frame where different animal breeds and plant species might be needed for our survival.
    I would also say that, for similar reasons, I believe that the large global currency and policy areas of the world have caused the financial crisis, not by them being not large enough for safety, but by them being too large to adapt and evolve in quick enough time to problematic changes.
    The best systems of control regulate themselves continuously at the smallest face or unit where change can happen as forces kick in when things get a little unaligned. The biological system of blood glucose control and valve and pressure moniters within factory systems are examples of regulatory systems which don’t cause fatal collapse. They are ongoing and continuous and have evolved or are designed to come from within. Perhaps the lessons of these could be applied to financial matters .
    I believe that even within England we need different tax and perhaps also currency values for different areas to allow the ‘failing’ parts to more quickly regain competitiveness and evolve to catch up with the best areas as soon as things start to go awry.
    I need hardly say that the Eurozone is another example of the failure of the big is better mantra. Big might be stronger for a plank of wood ar a muscle but not for institutions, professions or social systems.

  31. Gillian Swanson
    September 8, 2011

    “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state.”

    So why are we allowing the private banking system a virtual monopoly over the creation and distribution of an indispensable public utility: our means of exchange?

    As long as the commercial banks have licence-by-default to increase the money supply, issuing brand-new purchasing power in the form of compound interest-bearing loans to the customers, and for the purposes (most often speculative and inflationary) of their choice, we will never enjoy economic stability.

    As long as we depend on the banks for liquidity, they cannot be allowed to fail, whatever the cost to taxpayers; and, as experience has repeatedly proved, they will always find a way to get round even the most stringent regulations.

    The answer is not regulation. The answer is to update the Bank Charter Act of 1844 (as suggested here:, making it as much a criminal offence for these private businesses to issue new non-cash (digital, electronic) money as it already is for them to print notes or to mint coins.

    If notes and coins can be issued by public authority, and sold to the banks at a profit to the nation, why not the non-cash money which now constitutes the overwhelming bulk of the money stock?

    Better still, why not spend this new non-cash money into circulation on the maintenance and improvement of infrastructure, rather than letting it continue to offer private businesses the opportunity to cream compound interest off our means of exchange at source?

    Not only would reform along these lines boost public revenue without cost to taxpayers, while simultaneously cutting down on outgoings by eliminating the need to insure and bail out potentially delinquent private businesses.

    It would also be of immense benefit to the banks themselves, since, no longer having any public role, they could compete for customers in the open market without government interference in their internal decision-making, setting their own interest rates and bonuses – and, of course, accepting fully the consequences of their own actions.

  32. waramess
    September 8, 2011

    Capitalism was never perfect; it’s always up for a free lunch and almost always at the table of the government. Don’t be suprised at the capacity of the free market to jump on an opportunity to earn their keep the easy way rather than have to compete in the big bad free market.

    The banks were offered a free lunch or two and they eagerly went for it. How much easier to concentrate on packaging up bad risk to look like good risk and to get their mates at the rating agencies to massage the ideas a little, than to go and compete.

    It was of course the Central Banks that gave them the free lunch of putting as much triple a risk on their balance sheets as they liked without the need for a material amount of capital. It was of course the Central Banks that have encouraged mergers until competition was to be squeezed out of the market on the false premise that the fewer banks there were the easier it made the Central Banks’ job.

    Why complain about the Capitalist system then, and why consider the Central Bank a good font of regulation when it should be clear that they are not? Why consider that regulation produces a better system than no regulation when it is pretty clear it will not?

    Regulation has brought two of our biggest banks to their knees; they have been taken over by the government and if the price of their CDS’ is anything to go by they will in the next few months bring the government to it’s knees.

    Not a pretty picture that regulation has painted, is it?

  33. stred
    September 8, 2011

    At present the BoE appears to be collaborating fully in the treasury scheme to rob savers and inflate away debt. We have an effective wealth tax of 28% x 5% p.a. on assets. Fat chance that they could be trusted to regulate anything.

  34. andre michel
    September 8, 2011

    “They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless, and needs to change if the bank is to retain regulatory permission.”


    “Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.”

    The Bank of England should have the authority and power to tell the PUBLIC ie depositors, that its strategy is too reckless. Then depositors money will no longer be protected in that bank. The depositor may then choose to stay there with possibly a higher rate of interest commensurate with the risk, or move to a safer bank with a lower rate of interest but guaranteed by the Government. Just as with food, it’s all about labelling; that’s the Governments proper job.

  35. andre michel
    September 8, 2011

    Sorry, I missed an apostrophe. Government’s.

  36. Gary
    September 8, 2011

    The only regulator that is required is the fear of failure and bankruptcy to rein in the greed. Millions of players conducting millions of transactions every day will each make this calculation. That is the axiom of the free market. Get the govt out of their way.

  37. Bernard Otway
    September 8, 2011

    Vis a vis more women directors,I have been married 3 times[cue hoots of ironic laughter]
    each time my earnings were “ours” and her earnings were hers,likewise a project or job done to earn money,the profit [Earning in TOTAL] accrued to her “BUT’ the expenses “costs” were paid out of ‘OUR” My earnings,therefore profit without any costs.If that thinking is translated into major decisions in the likes of Barclays “GOD HELP US ALL”.

    Reply: I think we want the world to move on from this approach to the roles and responsibilities of men and women

  38. Bernard Otway
    September 8, 2011

    Why not bring back the Building Societies,and for that matter why do not the existing societies pay depositors a decent rate of interest, add to that a margin to cover their costs
    say 2% and lend ONLY on houses bought at PROPER value and at a multiple of Maximum
    of 4 times salary.What depositors get is a crime and is destroying the very idea of thrift and putting aside for the future,what would be wrong with depositors getting 5% and borrowers
    paying 7% on loans a £100,000 loan would cost in simple interest terms £7000 per annum
    or £583 per month

  39. Conrad Jones (Cheam)
    September 8, 2011

    Mr Redwood,

    We are lucky enough to have two examples of how to deal with a Banking Crisis provided by Ireland and Iceland.

    Chose to bail out the Banks and enforce austerity measures on it’s population.

    Chose to refuse to bailout the Banks as it realised that it’s Banks had accumulated so much debt that it could never be repaid and therefore allowed the Banks to fail.

    Professor Michael Hudson has stated that he believes that Europe should follow the model provided by Iceland (Not the Irish Model).

    He also states that many Investment Banks who were bailed out (some we know about, others the Federal Reserve is keeping secret about) act in ways that make them appear similar to criminal enterprises. No conspiracy, just legalised (questionable practice-ed), paid for through Banking Lobbyists in Washington DC to persuade Politicians that a Free Market Economy requires less regulation and guaranteed Bail Outs through Depositor Insurance schemes pretending to protect the Public.

    No doubt you agree with this view that Iceland is the path that Europe and the United States (as well as ourselves) should take?

    Perhaps you could point this out to George Osborne and David Cameron so that we don’t crucify wages of the people who work for a living in this Country.

    Banks still expect taxpayers to pick up the tab when another financial crisis hits:

  40. Alan Wheatley
    September 8, 2011

    Should not consideration of the way forward or financial services include a look at Building Societies? Although some have had financial difficulties, many seems to be doing fine.

    Would it make sense for Building Societies to offer an alternative to Banks for proving so-called retail banking services?

    Would it be wise to legislate to prevent Building Societies converting to Banks, given that those that did all failed.?

  41. Gary
    September 8, 2011

    Hancock was a BoE economist, according to the wiki. That is probably all you need to know.

  42. Denis Cooper
    September 8, 2011

    Gordon Brown took the “prudential supervision” of banks away from the Bank of England, where there was accumulated experience, and gave it to the newly established FSA, where there was none.

    It’s hard to believe that this transfer of responsibility from old hands to novices played no part in creating the conditions for banks to be allowed to go off the rails.

    But there’s also the question of bonuses – not as much the actual sums involved, as the way that the bonuses were structured to reward short term perfomance.

    Because a “Long Term Incentive Plan” which runs for just three years is not “long term” at all; in fact it’s not even “medium term”.

    In the context of performance-related rewards for senior managers “long term” should normally mean a period significantly longer than the economic cycle, so that they have a strong personal interest in ensuring that their company will survive the next downturn, when it inevitably comes, and can then prosper again; and the bonuses should be structured in such a way that they can continue to reap a substantial part of their rewards for the survival and success of that company even after they’ve ceased to work for it.

  43. outsider
    September 8, 2011

    If you want safer banks, just announce that the market-distorting deposit guarantee scheme will be wound up in 4 years time and watch banks scrabble to present themselves as the safest and most cautious.

    If you think that is too drastic, then limit the taxpayer guarantee to banks and building societies that follow a simple prudence code. It would cover exposure to risky wholesale deposits, exposure to non-market derivatives, hedge funds and private equity buyouts and maximum loan to value ratios. Then let the market decide.

    All the clever structural ideas seem to ignore two basics: 1) banks are operating in a global market, not a British market and 2) We have a keen and active takeover market that would soon gobble up any bank that did not maximise profits and growth or follow a low-cost distribution model and sell it to an overseas rival.

    Extra competition from smaller banks would last about six months, unless the deposit guarantee was dropped.

    1. Denis Cooper
      September 9, 2011

      I can’t believe that any banker was encouraged into more risky behaviour by the reassuring thought that the bank’s retail depositors would be protected by the FSCS.

      My experience is that banks aren’t much bothered about the interests of their retail customers, even those who’ve been loyal customers for decades; the security of customers’ savings would be the last thing on the mind of a banker as he engaged in another round of speculative transactions, while the additional bonus he might be awarded if his speculation succeeded would figure much larger in his mind.

      If the FSCS was simply abolished, as some advocate, then that would run against the longstanding stated government policy of trying to encourage people to save, which is a good policy on both moral and practical grounds because it helps to develop some degree of financial self-reliance and makes it less likely that people would immediately be thrown into dependency on the state in the event of adversity, and a policy which should be furthered not reversed.

      My main concern about the FSCS is that it’s a form of collective insurance organised among retail deposit takers, but as I understand with a flat rate levy rather than with different premiums set for different deposit takers according to the assessed riskiness of their different business models.

      In my view the best answer would be a legal requirement that personal savings accounts offered to the general public must be 100% covered by commercial insurance, where the insurance companies would set premiums according to their assessment of the risk that the bank or building society would go bust and they would then have to pay out.

  44. Vanessa
    September 8, 2011

    What! Give back the Bank of England the powers it had before that toddler, Gordon Brown, kicked them all away? What a good idea. It kept the banks in line for nearly 70 years. Wasn’t it called Glass Steagal (or similar), but with the EU making it illegal for the BoE to quietly sort out a bank which had stepped out of line (as it used to be able to do) and so keeping everything ticking along nicely, it has to shout from the roof tops that all is not well. Well done the EU, another idiotic directive to destroy something which worked for decades. When will anyone in the tories have the guts to tell the truth. Hague has gone native and thinks that you can reform the EU – does he not realise that the Lisbon Treaty has been signed by 27 different countries and that they will not be too pleased with one signatory complaining all the time. DID ANYONE READ THE BLOODY THING BEFORE THEY SIGNED IT ????????

  45. lola
    September 8, 2011

    As thoughtful authors, they challenge the economics assumption that people behave rationally. They comment on how waves of optimism in the City can lead too many people into excessive greed, with remuneration systems in large banks encouraging rashness with other people’s money.” Au contraire. The City’s response was rational. If the State’s money managers abuse their monopoly by recklessly expanding money and credit and hosing it at the Banks it is an entirely ‘rational’ response of bankers to go to excess. In much the same that paying unemployment benefits begets unemployment.

    This financial debacle starts and ends at the door of Gordon Brown’s office.

    The problem is the Coalition is so innefectual it has been unable to deal with the incompetent regulatory legacy of the Brown Terror and quickly shut down the Failed FSA. It is blithely continuing the work of the last administration and in its last year or so will seek to leave a lasting lefty legacy that will take years to undo.

    1. sm
      September 9, 2011

      But the banks create the money at point of loan agreement/need subject to asset ratios. If they were unable to create money. Then the government organ would have to create it directly,spending it or by reducing appropriate taxes, inflation/deflation of the money supply would be controlled directly.

      If you mean QE and ZIRP for banks i agree.

      Positive money see links above.

  46. zorro
    September 8, 2011

    Separate deposit and investment banks – no tax payer bailouts – moral hazard rules – Yes I know John will talk about Lehman’s but I do not think that the contagion would have spread so rapidly if so many ‘chancer’ banks had been allowed to be so profligate with other people’s money (mainly their own created money) and intertwine themselves so completely into the insanity of the various investment ‘vehicles’ which they used to camouflage their incompetence and greed. In short, greed was the ruling passion not a sense of improving society by one’s actions.

    We would be better off without fractional reserve banking but it was invented to speed up ‘growth’ in the industrial world and later, through globalisation, the whole world…(or at least give that impression…and of course to increase profits). Any system will fail ‘positive money’ or otherwise unless moral hazard rules apply.

    In any case, I am in no doubt that the current crises are by no means an accident. It would be impolite of me to suggest such people as Bernanke or King with their degrees and qualifications were ignorant or stupid and I would not wish to tar them with such a label and I don’t think that they are stupid……


  47. Electro-Kevin
    September 9, 2011

    Off topic if I may, Mr Redwood.

    £43m to police the Notting Hill Carnival ? An interesting comparison might be the proportion of policing costs for the Reading Festival which took place that weekend.

    We know that there had been the riots a few weeks earlier but this was nothing to do with the Afro/Carribean community as you’ve already correctly stated. So why the disproportionate amount of policing costs ?


    Might we ask how many criminals who were banged up in prison at the time were involved in the rioting ?

    It may seem like a stupid question but then I feel that certain people are being wilfully obtuse and disingenuous about the penal system.

    I can make a tenuous link with the economy if you like.

    The odds are quite high that we will experience an economic depression.

    We – The People – can handle it. But only if good law and order is in place and property and life is protected.

  48. Daniel McKean
    September 9, 2011

    Always enjoy your blog, Redwood.

    A few questions:

    Why do you think Western governments encouraged wreckless behaviour in banking?

    Also, I’ve been thinking a bit about manufacturing in UK. It seems that UK has a lot to boast about when it comes to ‘hi-tech’ manufacturing (aerospace, pharmaceuticals etc), but of course this requires highly talented engineers and most people aren’t highly talented engineers. Although some say that all sides have benefited as low value manufacturing has moved to the far-east, many argue that we should be doing more of it ourselves. Since companies would rather see their factories in the east, would it be such a bad idea for the government to create jobs in the kind of manufacturing that doesn’t require highly skilled Cambridge graduates? If at least a fraction of the 1 million workers Labour added to the public sector had been producing things (be they textiles, bicycles or the British flags you spoke about in another piece!) rather than ticking politically correct boxes surely we would surely be better off now? Those workers would probably enjoy their jobs a lot more, too. People who are released from prisons could also lend a hand, rather than reoffend.

    reply: they were persauded by so called experts who ran the regulatory systems “independently” that the world had newly learnt owo to control all this risk, which was nonsense.

    Yes, more manufacturing jobs of all kinds would be welcome, which requires other changes to policy which we discuss here from time to time.

  49. RDM
    September 9, 2011

    How refreshing is that?

    More banking competition, more business models (Technology Relationship Banking), more investment in the real economy!

    I don’t suppose the book is available to the unemployed? Cheap!

  50. Tedgo
    September 9, 2011

    I think it is interesting what is now going on in the Icelandic bank collapse saga.

    The assets of the banks have now been identified and will be returned to the depositors, once the current court case is sorted out (The hedge funds are challenging the payout procedure as they will be the last in line to receive anything).

    This is as it should be and seems to me to reinforced the view that the people of Iceland were not responsible for the banks debts. Most of the assets found were outside of Iceland and to which the people of Iceland did not benefit.

  51. Bernard Otway
    September 9, 2011

    OK John what then do you propose I and those like me do in the circumstances I mentioned
    in my 3 marriages,HOW do I MOVE ON,am I just supposed to in my late beloved Mother’s
    words ‘LIE BACK AND THINK OF ENGLAND”,or accept the absolute INEQUALITY in what MY situation was and IS like ,so in my impression of what you say in reprimand of me ,I and others [Millions] should actually be in a “Boil the frog situation”,in my opinion you are advocating GROSS INEQUALITY,even your former colleague in her column in this week’s Express Highlights that the war is won from feminism’s side BUT that now they are actively SEEKING grievances for the SAKE of it.Your words actually make me wonder IF life is actually worth living,but rest assured that your attitude and others like it just make me MORE ANGRY and at my age 66, that makes me have a DANGEROUS MIND as well as lots of others,ask my first two wives and my two children plus grandchildren especially the boys also all my friends from the early 60’s who ALL think like me,Feminism was AIMED at US and now we are extremely resentful ,particularly given that we have been good husbands and fathers. You cannot make us go away much as you would like to,I invite you to visit our Aged club and talk to fellow men most much older than me to guage
    their even more angry thoughts.

  52. Andrew Gately
    September 11, 2011

    I think if you really would like to hear from two people whose opinion mattered I would choose Fred Goodwin and Adam Applegarth.

    They have the experience and understanding of the crisis and what needed to be done last time and what has to be done to avoid future disasters. Unfortunately both of these individuals have been victims of a witch hunt and gagged.

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