Why Osborne is getting it right on banking

Rex Burr

It is strange to see a Tory Chancellor seeking to exercise control over the self-appointed, self-serving elite of the financial industry while our ‘socialist’ leaders seem reluctant to intervene. It is clear that Gordon, who claims to be working hard for the people, is setting himself up for a job in the ‘City’ when he is thrown out of Downing Street.

Fergus Pickering

Splendid post! I don't know shit about banking but I do know these bastards ought to be hanged, drawn and quartered. So a chap like you, who knows his stuff, is a pleasure to read. Well I read most of it before lassitude... Keep it up. And three cheers for young George!

Simon Stephenson

Well written Mark.

For those who are interested in this subject, there's more detail to be found in an excellent article in Prospect by Jonathan Ford, called A Greedy Giant Out of Control.

http://www.prospect-magazine.co.uk/article_details.php?id=10443

DavidDP

Hear hear.

Making sure the sector isn't ultimately dependent on taxpayer subsidy and nationalisation to survive if it fails is solidly, and soundly, conservative thinking.

TrevorsDen

Correct and a welcome dose of common sense compared to rubbish spouted elsewhere.

Indeed this comment...
'5) Despite the shareholders getting nothing, the financial intermediaries have seen their incomes go through the roof.
Something is clearly - and massively - wrong here'
... matches what i have said. Just where do the profits come from for these bankers and what good has come from the work thy allegedly do?

Just how, given the massive unemployment and dire financial state of virtually every developed country, just where have these massive profits suddenly come from?

Fox in a box

Good post Mark, that drives straight to the heart of the issue.

And for all the cat calls he endures "Boy" George is quietly getting on with assuming the gravitas he will surely require to get his arms around this thing.

No wonder Labour are desparate to destroy the man before people realise he's actually quite good.

Tiberius

Fraser might even acknowledge some time soon that my alternative choice to Mandelson for Spectator politician of the year, George Osborne, was not some fit of insanity.

2trueblue

The profits come from the percentage of your funds they charge you to lose your money that they have invested for you. The rates to savers is derisory, try borrowing at such great rates.

Also don't forget all those trillions that governments have pumped into the system, it has to show up somewhere.

Ken

Strikes me, given the public anger still out there, an incoming Conservative chancellor would have a unique window of opportunity to take very substantial action against the bank deviants.
Not only should he do as you suggest but also retroactively punish those who brought down the system and wreaked such massive damage on all our lives.
These were criminal acts by a selfish group of money manipulators and the case should not be too difficult to prove.

Snowman

Mark & co;, be careful what you wish for, you may get it.

Where did the money that doubled the NHS budget come from, you reckon? What was it that allowed mortgage holders to spend tons of cash on new cars, holidays, second homes and stuff? What paid for the policy mishaps from Iraq to the IT fiasco at the NHS, ha?

Reverting back to Glass-Seagall is akin to switching from cars to horse-drawn carriages. Romantic, safe and all that, but with no future. We drop the cars, and there will be other takers, the Chinese perhaps? So far they’ve virtually monopolized large scale manufacture, they may have a go at financial services, too. Capital ain’t what they are short of; and hungry they are, too. The productive assets of financial institutions go home in a lift each evening, there’s no reason the lifts shouldn’t be in Hong Kong or even Shanghai.

And another thing: you aware that around 40% of the tax take came from institutions run by those nasty, greedy, vile bankers. That excludes their spending the sickeningly high bonuses on real estate, expensive trinkets and things, here, in this country.

It wasn’t the size of the institutions that brought them down, neither was it the size of the remuneration of the banking villains. It was the deliberate push by those that set the rules and those that were supposed to check them to go for the sky. That’s where we should look for the real culprits.

Percy

Just another example of where the lumbering oaf Broon is so out of touch. People won't be happy 'till some of these batards are locked up.

Edward Sutherland

Good post, Mark. The millions of small investors and taxpayers have been screwed for far too long by these financial intermediaries.

Beer Moth

Well said Mark Bathgate. A relief to see that not all commentators on these pages, are still polishing the 'wealth creators' brass plaque.

Snowman.

If we benefit so much from the actions of bankers, then why did they need to come to us for a bail-out, which has not been paid back, whilst the huge bonuses trundle along?

You state that measures to regulate this sector, are "Romantic, safe and all that, but with no future". Who would wish for a future of having these idiots tapping up the public purse whenever they topple their pile of cards?

As for any so called 'trickle-down' - Where does this go? Real estate purchases equals inflating the price of homes so that no locals can afford them; any luxury items they buy are more likely to have been made in Italy, Germany or far east.

It's not so much the characters themselves, but the system they espouse, which needs to be flushed out. But it is disheartening to see and hear them happily snorting back up to the trough.

Snowman

Beer Moth @ 8.13:

The banks had to be bailed out, letting them go under would have probably finished civilised society.

To keep telling the banks how to run their business may not be the smartest way to ensure the taxpayer money lent to them gets recovered, and the taxpayer shareholding yields a profit.

It wouldn’t have been beyond the capability of any of the banks to come up with a switch from cash bonuses to deferred share option schemes or stuff like this. They haven’t. Arrogance of solipsistic egos at play, I reckon, the more they get kicked and the more painful the kicks the better. You get me right, my sparring friend. Me no defender of the bankers, only of the financial sector.

If the demand for the financial instruments the banks handle exists, and it seems to by the look of their performance, then someone will always cover it. If it ain’t NY or the City, it will be someone else. Me but a poorly educated Slav, but I reckon it could as well be the City. You disagree, I take it.

Simon Stephenson

Snowman : 10.55pm

"Where did the money that doubled the NHS budget come from, you reckon? What was it that allowed mortgage holders to spend tons of cash on new cars, holidays, second homes and stuff? What paid for the policy mishaps from Iraq to the IT fiasco at the NHS, ha?"

In large part this came from taxation of income that was illusory. Income that was derived from little more than an inflation of asset values made inevitable by the ever-repeated political message that for social reasons the bubble in these values would not be allowed to subside.

This is the story of the last 15 - 20 years. Society, through their politicians, believing that they have gained control of all the levers that govern economic activity, and that therefore the doors have been unlocked for them to set in motion all the fantasies dreamed of by big-statists down the years. A sea-change in the level of prosperity made possible by the removal of much of the risk that caused us, historically, to be cautious and prudent.

But now, of course, as we realise that asset values are a matter of opinion, neither controllable nor guaranteeable by the state, we begin to realise that much of the "income" from the past was not really income at all, and that the public-sector expansion that came from taxation of this "income" has in reality not been paid for by production of value but by borrowing against asset inflation.

So the public-sector expansion of recent years has ultimately been funded by our creditors, and, as long as we are not allowed to default, it will eventually be paid for by future generations - in addition to having to fund their on-going public-sectors.

How very grown-up we have been, haven't we?

dh

snowman....must be a banker.
I disagree completely with yr post!!!

Beer Moth

Snowman.

I'm not anti-City, I'm against the unbridled adulation of its activities, at the expense of a serious and long-term policy of keeping the wider economy in a healthy, contributing condition.

What I object to - because it simply will not get us back to being a fully functioning developed nation - is the notion, current since the mid-eighties, and showing worrying signs of resilience, that the manipulation of existing capital is on its own a big enough engine to meet the needs of the nation.

Frank P

Simon Stephenson

A well considered and coruscating post. Thank you. You're right, it's a government run Ponzi scheme similar to the one Bernie Madarse is doing big bird-lime for, but much more extensive. And this time nobody will get nicked. Not related to the Commish of Cops for the Metrollups are you? If you are, have a word in his shell-like, he seems a bit more clued up than his predecessor and face less in-yer-face.

Snowman

Dh at 12.14:

Suppose one should be glad the noun you went for to describe me doesn’t start with w. Come on, give us a break, former bankers are human, too, you know.

Simon Stephenson @ 11.2666:

Spot on, wouldn’t even try to confute a dot of your take on things. But it’s hardly the fault of just the banks, is it.

Leaving aside the criminally insane notion that the economic regime under which we plod through life needs to switch off here and there, re-shift capital flows, accommodate the new, correct or create new skills and stuff, just few tweaks here and there could have prevented the near meltdown.

Things like keeping mortgage advances below the value of the real estate, avoiding mortgage advances to people with shaky credit history, mortgage providers’ leverage to wholesale money markets fixed as percentage of assets and their maturity, a lid on securitisation of primary financial instruments and stuff like that. Just one simple measure like the inclusion of the cost of housing in the CPI index targeted by the Government may have helped the BoE to keep the cost of money higher than was the case. All this falls under the responsibility of those governing us, not the banks.

Beer Moth @12.32:

Point taken, my sparring friend.

What genuinely frightens me is that the rightful and valid wrath of the public fuelled by the culpable politicians and exacerbated by the arrogance of the banking fraternity may kill off a valuable chunk of our economy. Hard to see what to replace it with if that were to happen. It would pain even more if other countries were to step in into the breach. The sector’s truly global, so fiddling with a part of it that happens to live here ain’t smart at all.

In regard the manipulation of capital for its own sake I’m afraid, that’s not an invention of our society. The size and the nature of the instruments may have changed, but the idea of it remains the same.

Paul B

Agree with Fergus and what others have written Brilliant post Mark. Best I have read onsite for a long time. Thank you

Paul B

Simon Stephenson, I agree with your conclusions. In short we as a population and most of all the State, have borrowed money, we do not have or had, with our future generations as guarantors. Disgraceful.I am ashamed.

Snowman

before anyone spots it, in my response to Simon Stephenson the sentence that starts with 'leaving aside...' should be in the negative. Apologies.

Mark Bathgate

Few points:-

For the avoidance of any doubt, I am very pro-City. I just think it is highly important to recognise that there is a difference between the "City" and "banks". The vast majority of City firms are run without government subsidy or favour, hence have never been near the headlines either for screwing up and needing bailout or seeking favour through lobby or threat to politicians.

The City has for several hundred years been successful as a result of the it's competence, ability to deliver value to clients and investors, and it's underlying probity. That reputation has been severely damaged by the events of the past year, and the business culture and practices of the past decade. Markets are not meant to be a zero sum game - your clients and investors are meant to profit from your actions, not exist as a source of plunder.

The Thatcher government was willing to be highly interventionist in the private sector were there were failures of competition - hence the first City Big Bang - hence strong history in the Conservative Party of intervening to ensure economic performance was delivered.

The fixes to the financial sectors problems are not regulation and tax (except where firms are already only viable due to taxpayer subsidy), but a focus on competition and market based triggers.

A fundamental revamp of financial sector law to empower shareholders would clearly be a major step in the right direction.

Getting the market working, and allocating capital rationally in the long term interest of shareholders, should be the focus of policy.

Recognising that Labour rigged the market for short term tax gains, short term credit growth to create a false feel good factor and to help their mates in certain firms should be the starting point for this debate.

Joanna

I agree with post of the comments above - a brilliantly insightful post. All credit to Osborne. When people see the hostile reaction he gets from some vested interests in the City they should wonder why - because they recognise that he's a threat to their cosy cartel. Now we need the mainstream media to become less in thrall to the City giants. Speccie - lead the way!

DavidDP

"The banks had to be bailed out, letting them go under would have probably finished civilised society."

And that state of affairs should continue, should it? When manufacturing was like that, we reformed it.

MikeG

Excellent points, well delivered

Unfortunately they don't tell all the story:

The bank bailout is ongoing and will be for years, by way of an astonishing regime of interest rate arbitrage that is a huge ongoing hit on the host economy. The only way to deal with it is to somehow cut loose the bank trading balance sheets. Our brilliant Government has given these Sovereign status.

You need to ask why the world's biggest credit boom has resulted in such poor GDP growth. The only boom has been in some asset classes. From now on we will be looking at credit contraction, or at least no longer growing.

Some economies are facing terrible and probably insurmountable demographic and public funding crises

What does an economy do when it has allowed manufacturing employment to be exported and patched over the situation with credit expansion, and the credit is then withdrawn? The answer is high long term structural unemployment and consequent public funding burden. This, by the way, is why the credit did so little for GDP.

Oh dear, I could go on but losing the will to live

Mike

Simon Stephenson

Mark Bathgate : 5.37pm

"The City has for several hundred years been successful as a result of the it's competence, ability to deliver value to clients and investors, and it's underlying probity. That reputation has been severely damaged by the events of the past year, and the business culture and practices of the past decade. Markets are not meant to be a zero sum game - your clients and investors are meant to profit from your actions, not exist as a source of plunder."

What caused it to become a source of plunder, though, Mark? Do you lean towards the idea of an enlightened, constructive industry led/forced into inappropriate actions by political decisions made elsewhere? Or is it closer to think that as the financial sector is not isolated from the Me-Me-Me culture, the effect of this, as elsewhere, has been to place successful plundering well above value-creation as a career objective?

I'm afraid that I take the view that we've lost the general sense of a linkage between output and reward. It's been widely demonstrated that massive rewards are more easily obtainable through acquiring someone else's wealth than through creating new wealth, and the attitude of most of an entire generation has become that there is no more noble an occupation than lawful leeching.

There's little point seeking to change behaviour while this attitude continues to prevail.

Simon Stephenson

Relevant and complimentary to this thread are two recent postings to the Telegraph by, respectively, Liam Halligan and Joseph Stiglitz:-

http://www.telegraph.co.uk/finance/comment/liamhalligan/7061976/Osbornes-big-chance-to-follow-Obama-and-win-universal-appeal.html

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7061058/Joseph-Stiglitz-Why-we-have-to-change-capitalism.html

Major Plonquer

Wait a minute!! You said, 'Someone who had invested in the US or UK stock market would have seen their investment in real terms (net of inflation) fall by over a third.'

NON SEQUITUR!!!!

How one earth can the performance of the Stock Market be related to the performance of the financial sector? Its investors (buyers and sellers) who drive stock prices, not brokers.

As much as we all agree bankers are arseholes this is like blaming inflation on the corner grocery shop. If you want to write about economics you should perhaps understand the basics. Get a grip.

raincoatoptimism

This should be the job of the FSA, not Osborne - the world has turned upside down. But it will be shortlived, if the banks can hold a labour government to ransom - a party speccie hacks will all assume are controlled by the unions - then I'm sure it won't be difficult to work out what will happen with a Tory government - one that will be avowedly funded by big business, ask Ozzie Osborne yourself, he's not ashamed. It does mean that he will a puppet.

Snowman

Mark Bathgate @ 5.37:

Mark, quite a gap between the sentiment enjoined by the original posting and the ‘few points’ later in the blog, I’m sorry to say, and not much of a principal quarrel with the latter.

Had the banks gone overboard on credit creation and asset financing, had they focused too much on the bottom line, had they indulged in a culture of unchecked greed and stuff? Of course they did, and this must change.

But beyond the pursuit of the insanity, had the banks also not delivered by facilitating the financing of many a project, from small ones like car loans to massive ones like the pipeline connecting Russia with the West by-passing central Europe? Many of thse are bearing fruits today, or will do so in the future. Listen to Jeremy Warner: ‘Look through the smoke of the present bust, and there’s a whole world out there brimming with opportunity and growth. And it isn’t the foresight of regulators and governments that created this infrastructure, but excesses of financiers and consumers’.

Having got kicked in Massachusetts, Obama morphed into a serious populist overnight by singling out the banks as the villains of the world, and the likes of Goldmans didn’t help by carrying on with the same cash bonus idiocy of the past. And our dear George jumped on the bandwagon hoping that the enraged public will give him the vote. Madness galore.

If we are not careful, we won’t kill the goose, it will be snatched by the more perceptive farmers of the East. Could you point me to any legislative measure conceived in haste that actually did much good?

And another thing: why do you reckon the regulations of the banks in times of the insanity failed, ha?

I tell you, if I may. Once a bubble gets hold of any market it’s too late to stop it. Only one player has the power to put an end to it. The market itself. Mervyn King (or Greenspan) could have nipped the real estate bubble, the root of the insanity, by hiking the cost of money. Can you imagine what would have happened if he did? I reckon he would be gardening today, with not much of any pension cursed by politicians and the public alike. As would anyone else from the FSA or the Treasury.

The only regulation that works is the one that prevents bubbles. I may be but a poorly educated Slav, but I reckon that devising it will continue to escape the mankind for as long as human ingenuity exists.

John Richardson

Mike G.

In my humble opinion you are closest to an accurate appraisal.
Though I would add that manufacturing employment was not 'allowed' to be exported.
That was the design.
The gap created by the removal of real wealth creation was deliberately covered over with easy credit/debt.

Why ?

N.W.O.