Monday, October 25, 2010

Three years late, but never mind.

Banks should be broken up, Bank of England Governor Mervyn King warns

Mervyn King, Governor of the Bank of England, has thrown his weight behind breaking up the banks as part of wider reforms to protect the taxpayer from another financial industry meltdown.

Posted by devo @ 08:54 PM (2085 views)
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26 thoughts on “Three years late, but never mind.

  • I’m not sure which of Merv’s quotes I like best. It’s either this one…

    “Of all the many ways of organising banking, the worst is the one we have today,” he said.

    Or this one…

    “This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too.”

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  • “This crisis has already left a legacy of debt to the next generation.”

    Because we didn’t let the failures fail.

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  • all good stuff

    It will be interesting to see where this goes. Will a bank be just a bank? Who is going to set up a more risky investment if they think it will be all their own risk?

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  • Merv the Swerv’s being saying this for many years and it is one of the few redeeming viewpoints he has. He is of course, completely correct.

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  • Banks should be broken up eh…?

    Well let’s start with the Bank of England.

    It’s about time that the market was left to set interest rates instead of the bank and its absurd MPC

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  • crash bandicoot says:

    After reading some of the bank’s comments over the past week I keep thinking

    orchestrated boom

    orchestrated bust

    Have I been indoctrinated (I’ve never used double-line spacing before)?

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  • …says the Governor of the CENTRAL BANK.

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  • I think we’ve just not grappled with the grabbing bar stewards in merchant banking. It’s a bit like not liking Plod because of the officious spamcams or traffic wardens in your area. Baby and bathwater also comes to mind….

    We’ve not focussed on these people because too many people have “done quite nicely thank you very much” out of it. Now that people can see that we’ve been the victim of fools gold – alchemy as Mervyn absolutely correctly says – they might actually start to think that “I’m all right Jack” can’t apply for ever, for everyone.

    So let’s turn banks back into places that run accounts for your salary and lend you money for the car or house out of their own REAL reserves. And for derivative creation and other trading create completely separate institutions and regulate them as for example casinos are regulated. Get it wrong, and good night. That’s the best policemen for the money men.

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  • Merv must have looked in his crystal ball and seen a vision of pestilence resembling the great nation he once knew .

    Splitting up the banks is what should happen but will it ?

    Every now and again you get the odd ounce of encouragement , the recent proposal of consolidating old age benefits and removing means testing …. something which in the long term could have close to universal support like the NHS and be increased and developed into a respectable pension for all .

    Then a minute later your hopes are dashed by the rush to flog of the family silver and you get brought down to earth and realise a Govt for the benefit of the people in this country is wishful thinking .

    Would like to know what keeps the few good men and women , and it is only a few , in Westminster going .

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  • Speaking of meltdowns.

    Time to buy oil techieman. Don’t miss out again. Out @ $150.

    Le Crunch 🙂

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  • 2. quiet guy

    Do you smell another big bail out.

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  • 6. crash bandicoot

    This new orchesrated indoctrination is good.

    With double spacing, one can read between the lines.

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  • The first thing that needs to happen is to get rid of King, then increase interest rates and take the pain as we return to more normal and sustainable market conditions.

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  • 8. hpwatcher

    The price of oil will be creeping up. Watch inflation really rip and King will not be able to do anything about it.

    It’s the poor old banks again you see.

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  • There are two groups of people who support the concept of the banks being split up. Ignorant politicians who pander to popular sentiment and emotionally reactive individuals with a hopelessly inadequate knowledge base . It is actually not possible to split up the banks. Most of them are multinational entities that operate under many jurisdictions and if they felt threatened they would up sticks to a safer jurisdiction. These are private companies we are talking about and there is far too much banking competition to trouble the various monopoly commissions.

    The only serious (1986) research paper on the subject proved once and for all that banks with security departments were far less likely to suffer failure in a severe economic or financial episode. In Holland they once had a series of banks that were not allowed to have security departments and they also went a stage further by insisting that they had different types of customer (some of them even divided customers into religious groupings). The idea was to create ultra safe, best practice, disparate banks that would not interact domino style in the event of an economic/financial episode. Unfortunately they were all bankrupted by the same episode because they were not diverse enough to handle a serious shock. Banks with a securities department fared much better because they had more diverse business models and they were able to hedge some of their exposure to economic crisis. Research centred on the great depression has also proven that the capital adequacy of banks with security departments was better than those without security departments and more of them survived that particular economic disaster

    The answer is to have banks with as diverse a business model as possible. Allowing banks to operate without securities departments has been proven to be systemically dangerous. In a free society we must allow some smaller banks to operate without a securities department but their customers should be aware that they are likely to go belly up in the first serious recession because all their eggs are in one basket.

    The answer is to properly regulate banks and their securities departments. Our recent financial crisis did not happen because the banks had securities departments. It happened because the regulation and oversight of the wilder practices was inadequate. I don’t imagine this post will sway anyone with a political or emotional agenda. Ignorance is bliss but anyone who is interested in empirical proof and research should think twice before following the herd.

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  • Having given a technical description of TIPS, I have to also say that anyone who predicts deflation in the short/medium term is barking up the wrong tree. I am very well aware of all the money supply and destruction of capacity/credit/asset arguments. In my opinion, these arguments are well and truely made redundant by the recent addition of 2.5 billion people to the world economic base. In the old days we could more or less add up the quite stable number of white faces and work out future demand and supply. Now we have billions of new people who all want a share of the world resources. I have no doubt that supply will one day catch up with demand but in the meantime resources are strained and that means inflation. Sometimes we really don’t need charts and theories to tell us what’s staring us in the face

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  • Sorry, posted above in the wrong thread

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  • There are two groups of people who support the concept of the banks being split up. Ignorant politicians who pander to popular sentiment and emotionally reactive individuals with a hopelessly inadequate knowledge base .

    Depends what you mean by split. Remember, investment banks and deposit banks were always divided in the past. In part, you can thank the ecomomic vandal/lunatic Gordon Brown for that.

    Personally, I don’t think having massive banks helps the consumer. The big Lloyds/HBOS and Santander – which now consists of about 3 or 4 smaller UK banks – is simply not a good arrangement. More competition would be a far better thing, in my view.

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  • flashman,

    Sorry but the banks have diversified so much that they’ve become casinos. The illusion that they can spread the risk indefinitely has stopped in 2007. Securitisation has reached the top and the system collapsed. Splitting the banks is right.

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  • “sustainable market conditions” eh?
    But the whole credit based money system requires exponential growth, in order for the interest on loans to be repaid without default. And exponential growth is by definition unsustainable. So breaking up the banks does nothing to alter the inherent tendency of the banking system to generate unsupportable levels of debt, followed by crisis. That’s why M4 lending has risen continually since they started the time series in the early 1960s, come hell, highwater or recession. Until a couple of years ago…
    N

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  • “The illusion that they can spread the risk indefinitely has stopped in 2007. Securitisation has reached the top and the system collapsed. Splitting the banks is right.”

    ‘Securitisation has reached the top’ is a rather meaningless expression. When used properly, securitisation spreads risk. It can’t do anything else. What these banks did was take increasingly large bets in the same direction (which was a deliberate perversion of the intended purpose). Any regulator who knew his job would have hit the red alert button but the governments wanted the show to continue so it was ignored.

    Before the crisis we had one problem, which was dodgy regulation and irresponsible banks. Now we have another problem which is people screaming for changes, they don’t understand

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  • Flash
    What about the deflation that is being observed, e.g. in Japan, Ireland, and (I thought) the US?
    N

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  • nick: I posted the inflation thing here by mistake. It’s an interesting question, so stick it on the other thread, if you don’t mind

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  • 9. Flashman, Agreed, multi-nationals can’t be effectively dealt with unless they are in serious trouble and based in the UK.

    The UK based banks should have been put into administration and broken up, as required, when they first got in serious trouble. It is too late now, and worse they were given obscene amounts of state money, a small amount of which got spent on bonuses and undeserved executive pay!

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  • nickb @ 17 asked me how I reconcile the deflation being experienced in places like Japan with my ‘inflation’ post (or I think he did). There are all sorts of social, economic and arbitrage trends that can impact individual countries like Japan. In their case, they had an almighty multi-decade economic boom and it looked like they would, economically speaking, take over the world. They of course didn’t take over the world and their brand of deflation is the consequence of the demise of this world dominance expectation. However, the commodities market doesn’t care about their unique ‘deflation’ situation. Japanese factories and builders pay exactly the same amount in Dollars for copper as everyone else (notwithstanding the effects of currency fluctuation). Ultimately, the price of soft and hard commodities is the master decider of inflation/deflation levels and no matter what the local economic situation, there is no escaping the underlying trend (the current high valuation of their currency will of course mask inflationary commodity price rises for as while longer). If you’ve done regular business in Tokyo, you’d wonder at the supposed deflation because a cup of coffee or a taxi ride seems to cost more every year. Once Japan has worked through the collapse in price of several asset types (caused by the demise of the world dominance expectation), they will be buffeted by the same commodity price swings as everyone else. In a more humble way, Ireland is experiencing the same thing, in that they experienced an unsustainable, over-stoked boom and now assets prices and the size of the economy are falling. However their overall price indexes will eventually succumb to the master influence of commodity prices.

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