Wednesday, September 30, 2009

100% reserve banking

Why narrow banking alone is not the finance solution

"What entered the crisis was, we now know, an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead."

Posted by letthemfall @ 10:11 AM (3511 views)
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14 thoughts on “100% reserve banking

  • Capitalised, schmapitalised. To get from risky 4% capital ratio to a safe and solid 10% capital ratio (which is mentioned either in that article or in Lex at the back) all you have to do is convert approximately quarter of outstanding bonds into shares. Seeing as bank bonds are trading at huge discounts (very difficult to track down) of between 1a and 80p for £1 nominal, this shouldn’t be too much of a wrench for them.

    It is basic maths to work out how many shares they should be issued to keep the value of their investment roughly level before and after. (It’s all a bit circular, as debt for equity swaps increase the total value of shares, obviously, but having a better capitalised bank means that the bonds still outstanding are “safer” and hence go up in value).

    If the former bondholders don’t want to own shares, they can sell them in the market, can’t they?

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  • The EU have suggested splitting banks. At present, they are too big to fail….which is a threat to the whole UK. As shopping mall stores close, companies in the commercial property market are starting to default, that could leave banks with many more losses.

    It seems reasonable to split the banks. But I can’t see this current government spending any time doing it if it doesn’t score votes.

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  • There is no need to regulate or split banks.

    The financial world is only able to operate in the way it does because it is permitted to use and abuse the huge inflows of pensions and savings money that pours into banks and managed funds. This ‘good’ money is used as the system bedrock. Derivatives and exotic vehicles could not be created and traded in such numbers if financial world was not able to get its hands on and corrupt this ‘good money’

    There was a post the other day about a Boulder City official who lost their money. It is a great example of the astonishing naivety exhibited by governments and investors.

    A typical managed fund/pension fund pays hundreds of staff and runs an expensive building. They also pay commissions, fees, taxes, spreads and slippage when they ‘churn’ your investments. How on earth did this Boulder chap think they could possibly make enough trading profit to pay for all that and still give him a healthy return? The answer is that they cant. The illusion of profit can only be maintained by massively leveraging their investors’ money and hoping for an extended boom. Obviously this strategy will result in investors, periodically, losing most of their capital.

    The leveraged bets placed on behalf of people’s savings and pensions lead to ever more leveraged bets and exotic vehicles that spill out into other areas of the banking world. If the banking system lost control of this bedrock of good money, they would have to stick to simple stuff like taking deposits and handing out loans from their deposit book.

    By law, pensions and savings should be invested in low risk vehicles run by government departments or non-profit cooperatives. Make the current managed fund thievery illegal and the too big to fail problem and bonus culture will go away

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  • There is no need to regulate or split banks.

    If a bank is too big to fail, then it is too big.

    I find it incredible that after all we have been through, someone would think that statement acceptable.

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  • @ Flashman, an even better idea would be not to have these big pension funds, that’s where things go wrong.

    We ought to work out what all the tax breaks for pension savings “cost” (about £50 billion per annum), scrap the lot and cut taxes by the same amount (that’s about 8p off income tax, or even better we could scrap VAT – and yes I know VAT receipts are £75 billion odd, but if you got rid of it, profits would be higher so there’d be more corporation tax coming in).

    Then everybody has higher disposable income to spend, save, invest or speculate as they please. If some individuals lose money, then that’s no great shakes. I doubt sorely whether many people would invest in something mad like AAA rated MBS’s.

    Similarly, company pension funds should be shut down and every member should get a chunk of shares, bonds etc which they can in turn keep as savings or sell up (to spend or pay off mortgage or whatever).

    @ hopwatcher – banks AREN’T too big to fail, they can’t fail (see my comment number 1).

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  • mark wadsworth: agreed. Pension funds in their current form are an abomination

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  • Okay, I will go back and have another read.

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  • cynicalsoothsayer says:

    Unfortunately the masses are too stupid to save for old age themselves, in the same way that they buy overpriced houses. They’ll end up on state pension/benefits.

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  • hpwatcher: I’m not sure you understood the gist of my post. I am suggesting that we treat the disease, not the symptom. If we banned the type of managed fund activity I talked about in my post, banks would not have got so big that they need splitting.

    Endless legislation and adjustments only serve to further corrupt an imperfect system. We need root and branch changes of the sort suggested by Mark Wadsworth

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  • @ Cynical “Unfortunately the masses are too stupid to save for old age themselves, in the same way that they buy overpriced houses. They’ll end up on state pension/benefits”

    As it happens, the tax-payer funded pay-as-you-go state pension is the cheapest* and most reliable way of doing things. It is impossible to make windfall losses or gains, there is simply nothing to worry about. It is better to know you’ll get £120 state-guaranteed pension per week than have people speculate on your behalf (you might get what you hoped for – but you might get a lot less). Sure, the economy grows in fits and starts, but there will always be money coming in, it’s not like waking up one morning to find your employer is bankrupt and all the pension fund money was invested in worthless rubbish.

    We can argue about whether we should have a flat rate citizen’s pension (my favoured option) or some kind of contributory thing (where people who have paid more tax get more back), and if so how high a weekly pension “should” be, how fast retirement ages should be increased and so on, but that’s just details.

    *The figures for “private” pensions are insane – contributions in, about £50 billion per annum, value of tax breaks £50 billion per annum, pensions paid out £50 billion per annum. Where does the rest go? Well, see Flashman’s comment…

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  • IMO the aspirations surrounding pensions have become ridiculous with well paid executives expecting to become landed gentry on retirement. At a lower salary level the expectancy is to have the income equivalent of the formerly mentioned well paid executives – mortgages are usually paid off on retirement. We are encouraged to put crazy percentages of our salaries into pensions, therefore forever planning for the future – what a grind, what a treadmill. No wonder people recoil and decide “what will be will be”.

    My way would be a basic state pension which we contribute to all our lives. Anything extra sort it out for yourself.

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  • flashman, markw,

    The ridiculous state of pensions is partly to blame for the rush into buy-to-let. Dare I say it, maybe they were right to invest in property rather than save into a regular pension scheme?

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  • Sorry, Mark + Flashman,

    I completely disagree with you both. Putting more repsonsiblity in the hands of the state is not really a solution, just a blank cheque for ineptitude, corruption, and money wasting on an even grander scale, papered over by ever increasing taxation. On another note (in case you were unaware), the state run pension scheme is frankly a fraudulant ponzi scheme.

    I prefer personal responsibility, and freedom of choice over when I retire, and where my retirement money is invested (be it a pension fund, bank account, or tulip bulbs).

    Of course there will be those that make the mistake of not saving for retirement, but freedom also includes taking responsibility for your mistakes and not imposing the mess on others.

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  • mark wadsworth says:

    @ Drewster, just about anything is better than saving into a regular pension scheme!!

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