It has been fashionable to bash banks and bankers ever since the 2008 crash. Politicians have often been keen to criticise, as they enjoy finding a category of people more unpopular than themselves. The commercial banks were a useful whipping boy when there had been a monumental failure of monetary policy. The Regulators had allowed or encouraged the banks to expand credit and investment banking activity too far too fast, and had then sought to collapse the asset bubble and bank sheets too quickly when they changed their minds. They obviously wished to public to concentrate on the banks that failed to manage within this unreliable framework, rather than on those who had created a boom bust cycle.
Today the US banks are largely mended and capable of financing a reasonable recovery. The UK banks have much stronger balance sheets and have taken much of the pain for past bad loans and wrongful trading practices. RBS still struggles to make a profit and to put it itself in a strong enough position to return to the private sector. On the continent there are more weak banks.
A successful economy needs a group of competing commercial banks capable of offering low risk savings products to savers, and lending the money on to individuals and companies that can afford to borrow. The hatred of debt that is often manifest in many modern commentaries is unrealistic. A growing and flourishing economy needs some debt. Young people need to borrow to buy a home or to establish a business. They can repay the debts out of future earnings. Larger companies need to borrow to put in large scale modern plants to meet future demand. They can repay the debts out of future revenues and profits from the plants. Property companies need to borrow to put up good modern buildings, which they can let to other users in the society to pay off the borrowings.
Some worry about the overall level of debts. This should not be a reason to deny new borrowers who have plenty of unpledged income the opportunity to buy a home or capital asset on borrowed money. If 35-50 years olds have borrowed too much, there is no need to take it out on 20-35 year olds who may have good cause to borrow. If a government has borrowed too much – and the UK government has not – it need not prevent individuals and companies in that country borrowing more.
Mr Trump and his Treasury team are wanting to relax the credit creating banks a bit. That will be a healthy development. The US needs more investment in productive capacity, homes and infrastructure. There are companies and individuals who could afford to borrow to help do this. The UK too needs to ensure a sensible pace of additional private borrowing to continue a decent rate of economic growth.
February 24, 2017
“… banks capable of offering low risk savings products to savers, and lending the money on to …” Although I do not like much about the credit/money creation process, and I do like the concept of economic saving (lowering consumption now so resources can be used to create new economic capital) – It is not obvious, to me at least, how a “lending the money on” model could work for the whole of a modern economy.
February 24, 2017
Good morning.
Competition, competition, competition ! You simply cannot have enough. The more you have the greater the incentive to be better in so many ways to you competitors. Competition drives innovation and lowers costs.
The government needs to find ways to encourage new banks to come onto the market. We saw new forms of lending at the height of the depression, or ‘Great Recession’ as our kind host likes to call it, but that is one model.
Another area is greater tax relief on savings. But this will not be of only worth until interest rates begin to rise and, personally, I do not see that as it will kill both the high street and the housing market which has become too heavily debt fuelled.
February 24, 2017
The small business borrower worries that the lender may take arbitrary and destructive action if plans are disrupted. Big companies often bully small suppliers in the (often)confident belief that they dare not risk a dispute when the bank is looking over the borrower’s shoulder.
Lenders need to be repaid, of course, and to make a profit, but most lending now assumes that the borrower has a crystal ball. Woe betide the borrower if the ball is misty.
February 24, 2017
Should there be some form of Government enquiry into RBS. It’s almost as if it’s become a cash cow for various US government agencies.
It seems all they have to do is walk up, knock on the door and they hand over 3 billion dollars.
I mean it’s been going on so long do they even defend themselves any more.
It’s over 50 billion for Christs sake
In a hundred years will they still be paying out fines for things nobody even remembers?
It’s a national scandal
How many times will they be fined for selling toxic loan portfolios?
February 25, 2017
Indeed
February 24, 2017
As you were once one you will not like my verdict.
Banks borrow money from the general public at none existent interest rates. They then lend it to others at very high interest rates while demanding security against the loan. Foe want of a definition they are usurers, modern day Shylocks. They have government by the short and curlies because government are their greatest customer. Do not therefore expect government to do anything about the problem.
February 24, 2017
It is government which keeps the interest rates at rock bottom because it is so in debt.
February 24, 2017
The problem with the Banks was not just that they allowed too much borrowing, although that was a fault in some cases, but the fact that they have acted like loan sharks by demanding instant repayment of overdrafts and loans from solid well performing companies and individuals, who were sound and a good risk.
Then we had the spiv type miss selling activity of PPI, Insurance, investment schemes of many types, the one sided interest guarantee type of business loan, which meant heads they won, tails business lost, with not only additional massive added costs, but time consuming worry and stress.
We now have allowed them a massive increase in their margins, where the difference between depositors money and those who borrow has increased massively.
Then we have a reduction in customer service with the closure of local branches and the interrogation of customers when they want to withdraw, or even more laughably deposit money in their own accounts.
Couple all of the above with the loss of the traditional type of Bank Manager who used common sense and local knowledge, who has now been replaced with a box ticking regional control system, and the fact that new customers seem to be able to get a better deal on many products than existing customers, is it no wonder trust in Banks has reduced.
February 24, 2017
Off topic I really think a General Election is too good an opportunity to miss before Labour kick out Corbyn. Can it be brought about this May?
February 24, 2017
Banks should not be able to create money by issuing debt. Banks’ confidence and the confidence of those who would lend to them should not be the major factor in the level of broad money within the economy.
Many on here regularly write that the government can not run out of its own currency but if banks can create money at a greater rate than wage rises it is inevitable that ordinary people will be priced out of purchasing assets and their wages will be worth less.
February 24, 2017
Narrow Shoulders,
I partially agree and partially disagree. The existing situation of large banks creating money which is used largely for asset speculation has gone far too far. On the other hand I would not like to see money creation fully under big Govt control. I think details and transitioning are complex but what I’d like considered is a combination of
(I) Govt money creation for infrastructure projects (a measure of social credit)
(II) Community banking e.g. For SMEs, existing housing stock etc (a measure of German style banking)
(III) Regulation (investment vs speculation) of existing large banks (a measured London)
(IV) Easy access to and education about peer to peer currencies using block chain (a measure of private competition)
Even with (I) a tax system is still needed to help guide resources where markets fail.
February 25, 2017
@ caterpillar
Much in there that is good. I disagree with using tax to modify behaviour as the temptation to raise further income once the tax becomes the norm is rarely resisted by politicians and fiscal drag always makes virtuous taxes onerous.
February 25, 2017
I primarily mean tax to shift consumption – investment balance, so net cashflow for business and expenditure for personal. Taxing demerit / bads is a secondary issue for me.
February 24, 2017
The continuing travails at RBS and the sclerosis in the U.K. Banking sector remind us again what a catastrophically foolish policy the Brown bailout was, as pointed out at the time (alone in Parliament as I recall) by JR. the US method was far from perfect, but much better than the Brown policy. The US also now has in place sensible leverage rules – the one thing that ensures safety in the banking sector. All the other EU banking regulation, such as the silly pay caps, could be junked in favour of a one page rule on leverage constraints.
February 25, 2017
Very much agree about leverage controls.
Government should print it’s debt, repay the banks and then use leverage controls to regulate the flow of money into the economy.
That would buy 10 years to sort the monetary system and in the meantime no interest is payable but no deficit should be run.
February 24, 2017
Trump is a business man and his decisions will reflect this.
Unlike our parliamentarians who have no experience outside Westminster.
We have expensive energy only today we have an article about burning hundreds of years old forests to power what were perfectly good coal stations.
The stupidity of politicians is boundless.
We’re just waiting to see you capitulate to the EU like some defeated rabble.
February 24, 2017
Nevermind the banks; WELL DONE on Copeland!
Please get the Article 50 notice in then call a General Election!
February 24, 2017
Peter
Let us leave the EU first before we talk about holding general elections.
All the remainers would want is the opportunity to vote to stay.
February 24, 2017
UK banks are totally uncompetitive paying virtually nothing for unsecured deposits while charging borrowers huge margins and fees. Often to borrowers who are a far better credit risk than the bank. There is clearly no effective competition in the UK banking market and they are further hampered by misguided government regulations. Why is the government allowing them to get away with it?
It hugely harms UK productivity.l
February 24, 2017
Property investment loans now nearly all seem to Limited to 5 years and they often will not consider any other income you have in addition to the rente from the property being financed. Often hard to borrow on existing assets to invest in anther venture or business too. It is holding the UK back.
Excellent article by Allister Heath in the Telegraph yesterday on the dire problems of the EU. .
February 24, 2017
There is no magic in receiving money and lending out the same money at a profit . Banks are simple re-circulatory machines giving the public a money lending service . They have – in the past , made loans on terms that have induced levels of borrowing beyond the means of some to pay back , this activity was exposed and the banks were made to suffer . Some banks have exploited their position by over-paying their management and short-changing their customers ; in some cases these banks have been penalised by heavy fines extending over many years .
Since the Vicker’s report there is little evidence that Banks have effectively separated their commercial and merchanting activities . Frankly it is scandalous that this straightforward discipline has not been enforced . Banks have much to answer for and still need to put their house in order .
February 24, 2017
Sorry, but I can’t help but understand these weasel words as saying that banks should be allowed to go back to whatever they were doing before 2007-2008.
And regarding Trump, it seems to agree with his “No new regulation, cancel whatever was introduced post-crisis”.
After all, no sweat, in this Monopoly game, the bankers will not be sent to jail and the “people” will be very unlikely to go through the Start and get £20,000.
February 24, 2017
Mrs Thatcher was born a Methodist. The Methodists frown upon too much debt. Same for the Quakers who founded Barclays and Lloyds. Their business model was based on work ethic not greed. The banks today could learn a thing or two from the diligent Quakers, and borrowers in general, from thrifty Methodists.
February 24, 2017
And great news from Cumbria. The people of Copeland have said no to socialism and no to populism, and yes, to sensible, balanced, pragmatic Conservatism.
February 25, 2017
Except that Theresa May is clearly a tax borrow and waste, greencrap socialist in essence.
February 24, 2017
Why is RBS allowed to continue making losses of EU contribution proportions? Had professional administrators been appointed in 2008 the Bank could have been returned to private ownership years ago, albeit in much leaner form. The valuation of the Bank by Government through the years has been optimistic to put it mildly and the market price at about 50% of the purchase price seems realistic. The Government on behalf of the taxpayer should just sell our shares, take the hit and move on.
February 25, 2017
Ripping of sound customers while making huge losses at the same time. The damage caused by RBS to tax receipts and company profits (through mistreating customers) is at least as big as the banks huge cumulative losses. Yet still huge salaries are paid to the people, for failing to manage the bank properly.
February 24, 2017
Only after decades of demonstrably furthering the public interest will bankers be entitled to any relaxation of the condemnation they deserve for their greed-driven sins of the recent past, albeit then ably assisted in their perfidy by Chancellor Brown’s badly devised regulation.
Why has the answer to inadequate banking provision been permitting zombie banks to soldier on, all the while paying generous bonuses? I accept we have witnessed the creation of the so-called challenger banks and that will be welcomed up until the time one of them goes bust. Why did the Government’s industrial strategy not provide for a renewed ICFC?
February 24, 2017
The hatred of debt that is often manifest in many modern commentaries is unrealistic. A growing and flourishing economy needs some debt.
================
No problem with that.
The conditions are
The asset purchased with the debt generates an income (or savings) that exceeds the debt interest and capital repayment costs. Plus a margin for safety.
So when we apply that to government borrowing it fails that simple test.
If a government has borrowed too much – and the UK government has not
Why focus on the ‘borrowing’ debt? 1.5 trillion pounds.
There’s the money that you have ‘borrowed’ from the public for their old age. That’s 10 trillion on top.
Then there is the PFI, nuclear clean up, losses on insurance. All debt. Why do you want that debt hidden down the back of the sofa.
If we look at the last published numbers from the ONS.
Between 2005 and 2010 the pensions debt alone quadrupled to 5,010 bn. An annual rate of increase of 636 bn pounds.
I’m interest in why you think that is affordable.
February 25, 2017
I agree, “the UK government has not borrowed too much” surprised me, too. But perhaps I’m just following conventional wisdom and need something explaining to me. I’d like to hear the explanation.
March 1, 2017
““the UK government has not borrowed too much”
I agree with JR. It has not. Firstly we need to appreciate that the pound is essentially an IOU of government so governments do have to assume a liability for all issued money, plus all issued bonds and other securities. In other words currency issuing governments have to assume financial liabilities so that the rest of us have financial assets. Most so-called govt borrowing is the swapping of one type of IOU for another. Is it really possible to borrow back one’s own IOUs?
It’s those financial assets which does present a problem to Govt. If we spend them too readily we end up with too much inflation. Of course that’s why the Govt has to keep tabs on bank lending. When banks lend it is generally to people who want to spend. That spending is no more nor less inflationary than Govt Spending.
The UK economy is some £2.1 trillion. So that means it needs £2.1 trillion of spending to keep it going. Or more like £2.2 trillion if we want to engineer 2% inflation and aim for some growth too. The Government can’t know how much everyone else will spend so it has to fine tune its own spending to compensate for what everyone else does in the economy.
February 24, 2017
If a government has borrowed too much – and the UK government has not – it need not prevent individuals and companies in that country borrowing more.
===============
To put the debt in personal terms. It comes to 400K per tax payer.
Can the median tax payer, 26.5K a year service that debt and the interest costs?
The UK state has too much debt, and its started to go very badly.
People have handed over real wealth to the state. The state has spent it. There is no capital.
It’s the direct cause of wealth inequality.
If that money had been invested, Mr Median just retiring would be sitting on 900K in a fund. He has nowt. The state spent it, and created negative wealth, debt, in the process.
Mr Median is down over a million quid.
February 25, 2017
The state spent it, and created negative wealth, debt, in the process.
The state would not recognise a real investment even if it bit them on the arse.
March 2, 2017
“To put the debt in personal terms. It comes to 400K per tax payer.”
The national Debt of the UK is about 90% of GDP. Which works out to be £35k per capita.
So, does this mean that fewer than 1 in 11 UK residents pay taxes? I think not.
The National Debt of Germany is about 80% of GDP. The USA has a debt of 106% of GDP. Japan has 220% of GDP. As far as I know the bailiffs aren’t evicting the Japanese from their island home. Nor are they likely to.
And we don’t owe this money to Mars! We owe it to ourselves. We own the financial assets which is the flip side of Govt debt.
February 24, 2017
“and lending the money on to individuals and companies”
Commercial banks don’t “lend out” deposits or reserves. The loanable funds theory, which you’re referring to here, doesn’t apply to our modern monetary system.
Bank loans create deposits.
Alongside government deficit spending, commercial bank credit creation is the other avenue of “money creation”.
February 25, 2017
Did you spot where all those annual government budget deficits, the “national debt” are being stored? In the non-government horizontal (private sector) storage tin shed; where they are renamed “private sector SAVINGS”.
February 24, 2017
Even from a more leftish perspective than most on this blog I would agree that much of the criticism of bankers has been misplaced. If Govt creates the conditions for misbehaviour to be profitable then misbehaviour, by bankers, is exactly what we’ll get.
The GFC, in both the UK and USA, was entirely the result of excessive lending in the private sector. Both countries run large trade deficits and someone in the UK and USA has to borrow to fund those deficits. Govt want to minimise its own borrowing so that means its down to you and I to borrow, usually for the housing market, to keep the economy moving. The result is an asset bubble in property prices. The result is depressed aggregate demand in the economy as we all struggle to make our debt repayaments. The only remedy Govts can see is to reduce interest rates to encourage more private borrowing to compensate for excessive levels of previous private borrowing!
It can’t go on. And the next time we have a 2008 crash we’ll see banks go to the wall as they did then. Improved banking regulations will help but they aren’t the complete answer. A stressed chain will always break at the weakest point. So if its not the banks next time it will be something else that will have to give and produce several years of chaos.
February 26, 2017
Peter Martin: “I would agree that much of the criticism of bankers has been misplaced.”
The problem is, not ‘the Bankers are wicked’, the problem is the Bankers and the Politicians are in bed together. The first has bought the other, then when their banks go under because of their greed and incompetence, the second pays off the first with other peoples money.
£104 billion of public money to RBS and a case in point.
March 1, 2017
Yes I do sympathise, but what would be the alternative to saving the RBS? Letting it go bust, I suppose. But, then what about all the depositors?
Do we compensate them? It would cause chaos in the economy if we didn’t. Either way the fallout and the cost could have been much greater than even the figure you mention.
Reply The alternative as I set out at the time was controlled break up/sell off of assets as they would do now under a living will.
March 1, 2017
Peter Martin: ” to saving the RBS?”
Well, we don’t yet know if it has been ‘saved’!
It’s still losing £7bn per year and these financial crises are coming ever more frequently the next one will probably destroy RBS and all that money will have been thrown away anyway.
Peter Martin: “the alternative”
Allowing the companies and individuals who took on the crappy investments to lose their money. Winding up the investment arm there and then.
Every UK individual with an account was covered at the time for £50,000 or was it £100,000 by the governments guarantee scheme. There are many people with accounts in RBS and Nat West who have never seen £1000 in their account.
There may have been a requirement to keep the businesses afloat and provide cash flow, while the commercial investment arm was liquidated the losses realised and written off.
We could have returned the commercial banking arm sans the international investment arm back to business within a week.
Normal commercial banking would have resumed quite quickly.
There is nothing sacred about a bank.
February 24, 2017
Luckily the market always deals with failure and the big retail and commercial banks have failed to deliver.
Fin Tech, crowdfunding , peer to peer lending and challenger banks will do for the “big 6”
As the government has manipulated interest rates to suit themselves it means saving is pointless. In the past young people saved with a building society in order to get a mortgage
This is no longer possible as their is no interest and of course a lots of young people are already saddled with education debt
What we need now is an alternative mortgage market that enables young people to have a manageable long term debt in property with innovative ways of funding highly priced property
RBS is in massive need of being broken up and sold off before it becomes totally worthless
February 26, 2017
libertarian: “government has manipulated interest rates to suit themselves it means saving is pointless.”
That has been the goal of government policy. Force the savings into circulation – spend your savings – and take on debt. All to ‘stimulate’ the economy.
libertarian: “of course a lots of young people are already saddled with education debt”
Destroying the capital market of the future.
February 24, 2017
Banks were the tipping point for the Financial Crash, but, since then, they have been unfairly used by Politicians to cover up political failings.
The reason why Western economies have struggled to get back on their feet is because of the burdens imposed by the welfare state. It is the fiscal drag of the welfare state that is holding back Western economies, particularly those in Europe, from recovering.
The question that needs addressing is when will the welfare state collapse under its own weight, ie., for how long can an ever shrinking number of tax payers who receive no in work benefits/tax credits go on supporting an ever increasing number of people who pay no or little tax?
The US has been able to recover far quicker than Europe because of its smaller welfare state, and because of cheap energy from fracking.
The welfare budget in Europe needs drastically pruning back, indeed as does the state as a whole, and we need to start realligning our energy policies to procure cheap reliable energy if Europe is to reinvigorate its economies.
February 24, 2017
Banks were once institutions that were renown for their integrity and honesty. That cannot be said to be true today. The decline started some time ago when they ceased being privately owned and moved to being public companies and when financial manipulation thanks to technological improvements that promised considerable returns became possible . Hastened when the banks realised that they had financial preeminence such that governments would not allow them to fail regardless of performance or honesty. Bailouts, QE and a raft of regulations ensued with the express purpose of keeping banks solvent in which it appears to have been generally successful.
A departure from using market forces to punish failure and reward success. That role being taken by government instead whose past performance in picking winners and losers is dismal to say the least. So using QE and the like to prop up banks will in all likelihood prove in the end to have been a big mistake and not the success it appears.
February 24, 2017
Banks as they now exist cannot be decent. Fractional reserve banking is fundamentally fraudulent. If any other business takes in a £100 but is allowed to lend £1000 or more on the basis of having £100 it would be regarded as criminal behavior. That means their entire business model is based on fraud. It is backed up by government underwriting their losses on irresponsible gambling and widespread criminal activities helping drugs gangs and rigging financial markets. How can you expect a decent bank from that?
February 24, 2017
Andy M
Fractional Reserve Banking is more than 400 years old, the problem arose when Nixon adopted a fiat currency in the 1970’s and ended the Bretton Woods agreement
February 25, 2017
libertarian: “the problem arose when Nixon adopted a fiat currency in the 1970’s and ended the Bretton Woods agreement”
Nixon didn’t come off the gold standard because he wanted to, he took the US off the gold standard because he had to.
February 24, 2017
And when leading Conservatives such as Boris Johnson go out of their way to promote ‘Greed is Good’ instead of talking about ‘Work Ethic’ and demonstrating (as a historian) how 1. Greed led to the crash of the 1920’s, the great depression, the Nazis and WW2 (as well as our own recent serious recession) and how 2. Work ethic (+ natural ability – both energy and brains) leads to stable businesses and economy, citing leading bankers such as the Quaker James Barclay, founder of Barclays (and no, you don’t have to be dour like some Quakers, no doubt, were to a degree).
February 24, 2017
I will continue to criticise bankers where their excesses and dubious practises threaten to bring down the very creditable and worthy system you describe. The errant and selfish people who manipulate the financial services industry, and who couldn’t care less what happens to others, just as long as they get their cut.
Could you tell us how much money fractional reserve banking creates out of thin air; what do you think about the US Federal Reserve essentially being a private bank that makes its owners a truly astronomical amount of money because of their monopoly; and do you feel enough has been done by way of legislation to fend off another banking crisis?
The sovereign debt we currently have, that almost doubled to its present level over night, might be manageable by your estimates, and that is because of historically low interest rates, yet our public services such as the armed forces, the police, our prisons, and the NHS are currently being squeezed ever more tightly. Were those interest rates to go up, things would get tighter still to the point where a crisis becomes a catastrophe, and that wouldn’t look very good on Mrs. May’s CV.
Tad Davison
Cambridge
February 24, 2017
Do you think that the bank of England should always have been in charge of the banks?
February 24, 2017
The banking experiment that started in the 70s when the usa came off the gold standard, will go on as long as they can get away with it or the digital currency are worthless through inflation and leverage but before that happens the IMF will issue SDR drawing right to governments banks and big corporations backed by gold but not to the public unless you are rich really rich while will have to make do with own worthless currency.
February 24, 2017
Someone care to explain why private banks are allowed to create / print money? And if you don’t believe private banks create money, see the opening sentences of this Bank of England article:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
February 26, 2017
Private banks should not be allowed to create “state backed fiat”. They should create their own.
Private banks that effectively need state funds should be effectively wound down.
Losses should be imposed on the senior creditors and they should be required to hold and pay insurances for “protected deposits” to 3rd party insurers.
The government should create its own money and spend it into existence on sound infrastructure eg a robust national grid. Or perhaps even direct it to individuals or use it to bring in a flat tax with a high personal income allowance or basic allowance with no means tests.
The increase in money supply should be subject to votes in parliament, with fiscal and monetary policy being directed in the treasury. Of course we would need direct democracy to enable the people to “support” parliament in making the right decisions.
February 25, 2017
JR: “RBS still struggles to make a profit and to put it itself in a strong enough position to return to the private sector.”
The most recent announcement from RBS, another whopping £7bn loss this last year, takes the total paid by the British government to £104 Billion since the crash.
If the government had really wanted to ‘stimulate’ the economy, it would have been better served by winding RBS up and paying each member of staff £1,000,000 directly.
You would have crystallised the losses, and cauterized the wound. How many small businesses would have sprung out of that?
Instead you’ve got a gaping wound that is still haemorrhaging money and an enormous rate a decade later.
February 25, 2017
I agree APL.
It’s caused by incompetent and stupid politicians who would have everyone believe they know best, when quite evidently, the opposite is true. And then they wonder why we hold them in so much contempt.
Tad
February 26, 2017
Tad Davison: “It’s caused by incompetent and stupid politicians ..”
One in particular has cost us £104billion to keep his parliamentary seat for an additional thirty six months.
Not a particularly good deal.
February 25, 2017
This was actually the subject that brought me to this site and I left my first commets about banking. Ironically the issues I highlighted then have not changed.
The problems with bank for SME’s and individuals stems from money laundering legislation (The Proceeds of Crime Act, etc). This legislation has nothing to do with stopping crime. In practice it stops business expanding quickly because the banks assumes any change in activity is the result of crime unless there is evidence to the contrary.
I had a real issue with Barclays Bank last year. While investigating what happened to me I discovered UK banks have freozen and close bank account of people who were promoted in work and received a large pay rise. These bank actions prevent those individuals from borrowing and that can last for 7 years.
We need a new legislature framework that assumes business activity and individuals are law abiding unless there is evidence to the contrary. At the moment it’s the other way round and honest business and individuals are prevented from borrowing due to the paranoia that flows from the acts