Chairman exiting his bank
In a real sense, human history starts with the creation of a social surplus, a surplus beyond simple subsistence. Such a surplus could be used for–indeed, was required to–build more complex societies. This included the literal building of the monumental architecture, the most striking creations from the existence of such surpluses.
More food, more babies
Merely increasing production does not mean there will be a social surplus. The normal tendency has been for population growth to increase to consume the food production available; given that the best way to manage farming and ageing was to have children. This Malthusian constraint continued to operate in human societies until quite recently–the history of China from 1700-1850 is a classic example of increased food production leading to population increasing faster than food production leading to a massive breakdown in social order (one of the deadlier such in history) with the loss of state revenue and diversion of resources to warfare undermining basic management of resources.
As I noted in a previous post, it is highly plausible that expropriating elites were what originally created the social surpluses enabling the building of more complex societies. For much of human history, it was obvious what was the dominant way to get access to social surplus: political power—either having it or serving it. Control of the means of coercion provided the dominant source of wealth. (And having the backing of the dominant coercive apparatus is still pretty useful.) With considerable amounts of said surplus being invested in the priests who helped manage both social complexity and expropriation by providing rituals of belonging; norm-advocacy; narratives of meaning, explanation and rationalisation; various services (calendar management, doctors of body and mind, teachers, engineers, scribes, mediators); plus formalised signals of commitment to the expropriating rulers and their social order.
To be sure, there was plenty of trade (and wealth from trade). Nevertheless, extracting surplus from peasants or controlling trade routes (and particularly trade nodes) was much the dominant source of wealth: especially inheritable wealth. In many early civilisations, the ruler was the dominant trader. If trade collapsed, that tended to both increase the dominance of wealth-through-violence while making it harder for any particular ruler to (re)establish control over a wide area—due to a lack of sustaining surplus to pay for the necessary extensive control. Collapse of an extensive, trade-managing (and so protecting) rulership often being the main cause of the collapse of trade in the first place.
The more centralised and territorial the generation of surplus is, the more it will attract attempts to seize it (hence the long history of territorial wars). This extends to our own period: having export wealth dominated by easily controlled primary production encourages both autocracy and civil conflict (pdf). Living in a society where wealth-through-the-means-of-violence, where centralised control of surplus, is not dominant is both historically rare and desirable.
It is impossible to achieve mass prosperity without getting out of the Malthusian constraint wherein increased food output merely leads to, and is consumed by, increased population. To put it another way, to evade the Malthusian constraint, the social niches people occupy have to be larger than subsistence. The more such social niches spread down the social scale, the more general prosperity becomes.
Ever since the rise of hierarchical societies, there have been social niches which were larger than subsistence; they were the niches of elites. Indeed, as Peter Turchin points out, one of the perennial problems of hierarchical societies is precisely the size of elite niches. If the elite increases in size faster than output, then competition for elite niches will ensue. That process has been one of the great drivers of history. (For example, the tendency for the ruling clan of pastoralist empires to breed enthusiastically likely helps explain the tendency of such empires to break up after a few generations as too large an elite fights over too few elite niches.)
For elite niches to occur in a society within the Malthusian constraint, a surplus has to be extracted from those lower in the social pyramid. To be on top of a social pyramid is to be on top of a process of surplus extraction. A process which continues in post-Malthusian societies. This is obvious enough in developing world kleptocracies (pdf), but is hardly unknown in developed democracies. Jon Corzine (CEO of MF Global, which has just gone bust in one of the largest bankruptcies in US corporate history) is an excellent example of someone living on top of the surplus pyramid:
based on his long years in the financial business, from CEO of Goldman Sachs to his current job as chief executive of the failing MF Global, Corzine is proof positive that on Wall Street you don’t have to be very good at your job to get paid a lot of money, which is why hatred of fat cats remains a bipartisan pastime—and will for the foreseeable future.
Pushing risk downwards
A standard way to live on top of the surplus pyramid is to push risk down the social pyramid. At its most brutal, it involves pushing the risk of starving downwards. But it can happen even in societies which have escaped the Malthusian trap. Consider this comment by the Rt Hon. Vince Cable MP, UK Secretary of State for Business, Innovation and Skills in a generally excellent speech about parallels from the 1930s for our times:
It is worth recalling just how brutal were the first dozen years after the First World War. Britain attempted to return to its pre War gold level, which meant chronic deflation to bring us back with world prices (what Southern Europe is attempting today). As a result, the price index which had risen from 100 in 1914 to 250 in 1920, fell to 180 in a couple of years and continued falling all the way below 150 in 1930.
The voices in the City clamouring for the Pound to be kept strong got what they wished.
But the consequences for the real economy were devastating; production fell by 22% between 1918 and 1921. The real value of debts rose and rose. The exchange rate was far too high and so our goods struggled on world markets. On some measures in 1931, our per capita GDP was lower than it had been in 1915.
No wonder Churchill made his lament about wanting industry more content, finance less proud.
That was pushing risk downwards with a vengeance.
Let us consider what “too big to fail” means. It means someone who borrows too much to buy a house can go bankrupt, but the institution which lent too many such people too much money cannot. It is a classic example of pushing risk downwards.
It is also a profound subversion of commercial society, which Milton Friedman liked to point out was a profit and loss system:
You must realize that what we have is not a profit system; it’s a profit and loss system. The loss part is just as important as the profit part. What distinguishes the private system from a government socialist system is the loss part. If an entrepreneur’s project doesn’t work, he closes it down. If it had been a government project, it would have been expanded, because there is not the discipline of the profit and loss element. If you have a really good idea, it may work. But remember, you’re gambling. That’s what makes it exciting, and that’s what makes it important. What rules out the mistakes is the possibility of making a loss.
To put it another way, any social system generates “barnacles”–resource-consuming social nodes that undermine the overall operation of the society. It is undermining or lacking a barnacle-removing process which is fatal to a social system.
But it can be very attractive to be a social barnacle. To be insulated from loss is a massive and corrupting privilege. To be insulated from loss while being massively paid for managing risk is offensive exploitation of the weaker.
What happens when the IMF moves in to do “structural adjustment” when a developing country has got into trouble from debt loaded on the polity but skimmed off within its elite? The risks are pushed downward. Debts which were allegedly to increase productive capacity get expropriated. The people best placed to assess the likelihood of that bear little or no risk from it (due to the IMF), so the risk gets loaded on to those who were not there (nor seriously represented) when the debts were negotiated and have little or no capacity to object or block expropriation. So the debt is loaded onto the ordinary folk of that society, but those who stole it get away with it and those who lent to those who stole it have the impact on them minimised. (The UN Convention Against Corruption [UNCAC]‘s asset recovery provisions represent, in effect, a regulatory attempt to deal with the problem of corruption–including to block debt diversion by kleptocratic elites–and none too soon.)
Forcing ordinary taxpayers to repay stolen debt is a fairly vile worship at the altar of financier privilege. The notion that the claims of high finance are so much more important than any other consideration. Claims whereby huge salaries and bonuses are paid, justified by management of risk which is pushed off on to taxpayers and those lacking such political clout. Which, as the UK experience in the 1920s showed, can be entire industries and workforces.
There is a kernel of truth in the claims of high finance. It is important that credit keep flowing. If the flow of funds completely freezes up, massive economic harm can be done.
But, and it is a very big but, the point of supplying that credit is to manage effort across time and the risks thereof. The point is to allocate the risks to those best able to manage them, not those least able to avoid them. If those lending funds to developing world rulers are not taking any responsibility for monitoring whether those funds are likely to be spent in way which will increase the capacity of the polity to pay back the loan, they are acting in a way strikingly different from how someone getting a mortgage or a business loan is typically treated. There, your capacity to pay, the use of the loan, matters a great deal; the asset is managed in a more typical commercial style. Hence UNCAC attempting to deal with what financiers have consistently refused to take responsibility for.
Of course, the rise of complex derivatives in the US mortgage market meant lenders were not doing that traditional role of carefully assessing use. But the model of not paying attention to the realities of use of the loan was already established in the sovereign debt market. With a similar justification in both cases–taxpayers would always be available to pay it back, house prices would continue to rise, so systematic downside risk was insignificant.
[If developing countries take on debt that is stolen, spent on patronage or simply poorly invested, the debt increases, not decreases, their economic and financial vulnerability. The contrast with ordinary business and household debt is marked--a loan which was likely not to improve the capacity to pay the loan back, whose only likely effect was to increase the financial vulnerability of the borrower, would not be regarded as a good commercial risk. Loans which increased vulnerability were also a feature of US mortgage markets, making the similarities between the corrupted public debt market and the corrupted US mortgage market even clearer.]
Unstable irresponsibility
Anything which systematically shields agents only from downside risk increases instability in the system. (And do so even if they only believe they are shielded from such–see any asset bubble of your choice.)
If risk-managing firms move from being (pdf) full-liability partnerships to limited liability corporations, that shields the actual managers of risk from downside risks. If the state makes deposit insurance compulsory, or otherwise guarantees deposits, that shields managers of risk from downside risks.
Such shielding of agents from downside risk tends to increase the private return to risk management while increasing the social costs. The obvious way to correct such systematic imbalance in downside exposure to risk is to have compensating prudential regulation. The argument for full deregulation of prudential regulation rests on firms as decision-agents-bearing-risks, but modern corporations separate risk and decision-making, leading to perennial corporate governance problems. It is actually rather foolish to analyse firms’ risk management without paying attention to their internal structures, since what institutional incentives exist will clearly affect patterns of behaviour.
There are wider grounds for prudential regulation of financial institutions, due to such considerations as herd behaviour in highly liquid markets being a rational response to limited attention resouces and to uncertainty. Uncertainty, information limitations, fluidity and the existence of financial assets meaning that demand is not an immediate function of supply (of non-competing products, to state Say’s Law [pdf] correctly)–since transacting can be deferred, leading to the “general gluts”/transaction crashes we call recessions and depressions–all make financial markets crisis-prone and crisis-generating.
Too big to fail is just an invitation to fail bigger (pdf). Unless there is compensating prudential regulation.[1] For anything which systematically shields agents from downside risk increases instability in the system.
The great fraud of the current global financial system is that quantifying risk largely eliminates it—if you are managing enough of it.
Worse, to be shielded from consequences is to be shielded from responsibility. To be shielded from responsibility fundamentally undermines moral constraints. It is, in a quite direct sense, morally corrupting. In the sense, and for the reasons, that Lord Acton meant.
If a system of financier privilege is corrupt at its core, it is hardly surprising if it generates even more blatant signs of moral corruption. Such as the Barclays Bank scandal where it systematically lied to manipulate market information, leading to scathing comments from the Governor of the Bank of England. Barclay’s corrupted social processes in quite a direct fashion, a society and economy those engaged in the corruption of are premier beneficiaries of (particularly its information flows). In the words of Lord Turner, Chair of of the Financial Services Authority:
There is a degree of cynicism and greed that is quite shocking. I think we would be fooling ourselves if we thought that some of the behaviour and culture evidenced in Libor fixing are not found in some other areas of trading activity as well.
Possibly it is shocking, but it is only surprising if you have not been paying attention to the incentives being created in financial markets for some decades now. (You can call it blowback, if you like.)
States and risk
If prudential regulation is an appropriate response to both the inherent features of financial markets and the provision of state-guarantees for deposits, then we are, yet again, confronting the paradox of rulership–that we need rulership to protect us from social predators but rulership is the most potentially dangerous form of social predator. For no institution separates decision-making and risk as thoroughly as rulership. Hence voting is a way of connecting risks facing citizenry to risks facing rulers. Alas, it is far from a perfect way of doing so.[2] To paraphrase Winston Churchill, it is the worst way of doing so; except for all the others that have been tried from time to time.
Examining the means by which financial markets have been corrupted, the operation of state power is laced through it. Whether it is the IMF loading stolen loans onto ordinary taxpayers, kleptocratic rulers, provision of implicit or explicit government guarantees, or the bailing out of failed financial institutions, states and their agencies have been major players in the destruction of prudence and so in the corrupting of finance.
The obvious political advantage for sitting on top of the surplus pyramid is in having plenty of surplus to throw around, including into political donations. It is not high finance’s only political advantage, however. The apparent complexity (and so obscurity) of what they do helps shield them from accountability while finance’s very crisis-generating capacity gives them the weapon of fear.
Which creates a perverse incentive structure–the more the finance industry can shield its decision-makers from downside risks, the greater the private return to risk-management but also the greater the social costs and so the more they are able to wield the weapon of fear to shield its decision-makers from downside risks.
While the evidence that political spending significantly influences results of election campaigns (or votes in legislatures) is limited,[3] donations do buy political access.[4] Which is clearly enough.
The first stage in dealing with a problem is acknowledging it. Markets–the operation of a profit and loss system–and voting–the imposing of “throw the rascals out” responsibility on rulers–are our barnacle-removing systems. Unless and until their interacting dysfunction is untangled, any apparent improvement will only be temporary. An industry whose central role is risk-management has become one where the management of risk is profoundly corrupted. Unless that is understood, and the implications grasped, we are set to continue to have a spiral of rising instability and ever-greater financial crises.
[1] Australia’s four pillars policy represents partial protection of the major banks with a trade-off of strong prudential regulation; the above analysis probably has limited application to Australia.
[2] Political competition is a rather limited Hayekian discovery procedure (pdf), for example.
[3] In the case of US Presidential elections, how much the campaigns themselves matter for the election results is something of an open question.
[4] Political donations are basically a measure of how important political access is to an industry. Hence the largest donors by industry in the US are finance, insurance and real estate (the former two industries need politicians to protect their outsized incomes by continuing to shield them from downside risks and the last operate in highly regulated land-use markets–indeed, one reason to regulate land use is to generate political funding).
132 Comments
Top notch post Lorenzo.
Interesting, again, how at the analysis/diagnostics level, there is across-the-thinking-political-spectrum agreement possible (even if we’d suggest different treatments).
I suppose this is one of the ways I tell the honest philosophical capitalists from the predators-in-capitalist-drag … the predators think prudential regulations, required to balance, are horrible impositions that destroy the efficiency of capitalism … in other words, want only to push the risk down to the 95% (via taxes or direct problems) while keeping the bulk of the surplus going up – socializing losses but with “flood up” profits.
Perhaps this is something to avoid the Malthusian nightmare of population growing with the surplus – if there is /enough/ of a surplus available to the majority to ensure security in old age rather than requiring the labor of descendants, then there is less pressure to have all those descendants.
Again – love the scope of the piece. Delicious.
Agree with Dave: great post. Love it.
Have you read Tim Harford’s Adapt which has some interesting commentaries on how to regulate financial industries so that the failure of one entity does not bring the whole thing crashing down? I just read it this weekend (you can tell I’m on hols with the kids, can’t you?) There should be room for failure of banks: but these “too big to fail” banks risk pulling lots of others down with them because of the way in which they are structured and the difficulty of untangling them once they fall.
I read this in draft before WordPress’s scheduling software posted it. At the time I thought you’d excelled yourself, and I still think that.
And I suppose, too late, I have come round to the ‘let them fail’ view, for all the short term pain it would cause. What we have now is akin to the 20 years of austerity everyone in Europe is facing in order to keep the Euro on life-support.
LE – the “too big to fail” is usually the point at which national security (physical or economic) demands nationalization.
I /did/ like the argument from The Economist with Northern Rock, where the recommendation was along the lines of “although we can’t say it without it leaving a bad taste in our free-market-loving mouths, nationalize it soon rather than bail out, then don’t sell the profitable bits off immediately, leaving the taxpayer with the burden of only the dead bits, but build it up again and sell equity gradually over a few years”
If there are bailouts, then the same degree of control by the white knight should be given – just as control/influence goes with equity or a massive holding of options.
The other way risk is diminished to the point of not encouraging prudence is with too fluid a market – money able to move in nanoseconds rather than be put at real risk: if capital can move without friction, then it can’t provide traction to do real work – the increase in “real-world” work being the objective one tolerates a finance industry in the first place.
Yes Lorenzo, I very much agree with earlier comments as to the worth of this post – thank you. Also I particularly agree with Dave’s comment @4 that the fluidity of markets is these days yet another layer to work through.
If anyone hasn’t read Cochrane’s linked pdf – which Lorenzo links as “too big to fail” I think – I would give it several thumbs up. The analysis there, and some of the proposed ‘processes’ are clearly restating what some of us here, by posts and comments, have been saying: definition of what is ‘worth’ saving and strict or legislated refusal to expand on that thus giving markets a firm expectation as to where the moral hazard iou ends, and their own foolishness takes over; removing from necessary banking service firms (we used to call them banks) those divisions which are impinging upon the basic functions; tying state-insured risk to only those functions considered systemic.
I’ll stop rabbiting on, but before I do, just consider another thing: this concept of too big to fail has moved into the big time – Greece, Italy, etc. and the same ‘moral hazard’ game is now being played out. I’m wondering (and I’m picking up on Dave’s comment here) if at this level there shouldn’t be some sort of ‘risk event’ whereby the 1/6/12/24 month bond auctions should simply have (say) 36 months added to their term, together with a reduction in their rates.
Then by all means let the clever dicks figure out if to hold or sell, but the debtor country is at least removed from this monthly auction process and can concentrate on the real problems. It’s like a condemned man being hung every Monday, at the moment.
Thanks for the post Lorenzo.
This is a fascinating post that helps put the current crisis in a historical perspective. I especially like the way you described the relationship between democracy and the market. I’m curious to see what future roles in risk management people will propose for each of our barnacle-removing institutions.
Also Lorenzo it now seems you have the wrong photo at the top. Must keep up
The Economist:
Yep, kill the traders. They ‘re all evil according to this Lord. Screw him as it isn’t true. In my days billions of dollars were transacted over the phone and no trade I recall had ever gone bad because a trader was lying. The population size is big enough and went on for long enough to know this is basically fact. However Lord Muck thinks he knows better. The English upper classes are truly disgusting at times.
Lorenzo. Decent post. I have one issue and that’s the one about too big to fail. Let them fail. Remove all the regulations and let people sort it out.
Here’s the problem. The governments want the best of all worlds. They want no bank to fail, least of all a big one. However they think they are able to do this with “wegulation” over “wegulation”. However it bullshit because banks fail for a simple reason. They are highly leveraged beasts and when there is a sudden adverse change in asset quality they are done for.
So what to do…? Remove regulation, let people know they are on their own and go away. If there is one regulation you want it ought to be with raising the tangible common equity to a higher level and that’s about it. If there’s a problem at a bank and it fails, the bondholders and the deposit holders become the shiny new owners of a big beautiful bank. That’s about it.
The trouble is that governments are only too aware that in the environment I’m suggesting leverage in the economy would fall and consequently economic activity too as the system adjusts to a lower leverage environment in the banking world. But of course the governments don’t want this because it becomes problematic for re-election in a recessed economy.
To this day, I don’t understand how the euro weenies haven’t asked the bond holders to move down a notch to equity. That’s where the real moral hazard in banking has gone.
Now, my figures will be wrong, but “order of magnititude correct” … Just pre GFC when The Economist was getting really concerned about it, going “dunno when, but it’s got to get ugly sometime in the next few years when these bubbles burst”, there was an article looking at sectors having percentage of US corporate profits, in other words, the cost of the sector for the.services provided. Over just a few decades, the finance sector rose from about 10% to 40%. If finance provides an efficiency gain to the rest of the economy, then 10% “payment” to the sector by the economy as a whole /might/ be worthwhile, but 40%? You’d want an efficiency gain of about 60% to make such a cost worthwhile.
But, as Lorenzo says, the sector is good at fearmongering to gain and maintain power. If a person or a political regime, this would be recognized as unworthiness for their position in power at least, or reprehensible tyrants at worst.
So, to free-market faithful folk here, if running a company or country, what percentage of profits would you think worthwhile for efficiency experts or efficiency gains, and/or what kind of return-on-investment or efficiency gains would you demand?
somewhere between zero and 100% is my guess, dave.
Look dave, financialized economies have huge potential for upward gains in living standards.
Now you cut that off with regulations and you end up fucking it up. That’s why legislative junk like Sarbanes Oxely was an atrocity.
Thanks for the words of appreciation. Some version of this has been brewing for some time and the Barclays LIBOR scandal just crystallised it for me.
kvd@7 No, it appears I had the correct person, the former Chairman.
JC@11 – you’d pay up to 100% of profits, year in, year out, for efficiency gains? In other words, you’d happily, year after year in perpetuity, allow zero profits (it isn’t capital investment which is relatively short term)? Seriously?
I was asking a serious question of those who think financial sectors serve a purpose for helping real economic activity, those who haven’t got my lefty “put the bloodsuckers all up against the wall, no blindfolds, no last cigarettes, and set the dogs on them to save bullets and feed the dogs” instincts (not that I am saying exposure to wild beasts should be a spectator sport).
No, seriously, what ROI would a responsible person pay for what kind of efficiency gains? If it’s less than what you’d get from capital works, why bother?
SL might poo-poo the “labor theory of value”, but this nonsense approaches an “existence theory of value” which should be reserved for great works of civilzation.
So … Serious question … Can I get some serious “gut feelings” please?
Nope Dave. Read what I said again. I said it resides somewhere between 0 and 100%, which basically suggests I have no freaking idea and only the market should decide that.
What i do know is that financialized economies that are able to get capital to people with goods ideas or finance existing businesses efficiently and the financial system that is vibrant and brimming with new ideas is a better system.
The old soviet model that some lazy economists have been suggesting where banks act simply as utilities is really stupid. It doesn’t prevent banks from failing in the same way as it would not have prevented some banks failing during the GFC simply because there was a sudden adverse downdraft in real estate values. Banks still would have failed or needed help.
Anyone who suggests they wouldn’t have is having a lend.
Lorenzo:
Libor is a published rate in the same way that mortgage rates are published. No one really cares how a mortgage rate is derived and if banks want to move around their published rate that they would lend to prime borrowers for 90 days, it’s really no one’s business other than their own.
If Libor no longer became a decent anchor another benchmark would rise as of course it has done.
This is just another witch hunt, that’s all.
Dave – 40% seems huge to me, and kind of unsustainable.
Tim Harford’s book (which I mentioned @ 2) has some interesting suggestions. In essence he says let the banks fail, but it’s more complex than that. He suggests a number of possibilities including:
1. Banks be forced by regulators to carry “cushions” of capital.
2. Using contingent convertible bonds so that if the bank crashes, the bond converts to capital – but as the Japanese experience in the 1990s shows there are downsides of this – CoCo bonds were called ‘death spiral bonds’.
3. Much better ways of handling bankruptcies if banks fail so that insolvency doesn’t take years and years to sort out – require banks to have contingency plans (sounds sensible to me).
4. Forcibly splitting a struggling bank into a good ‘bridge’ bank and a bad ‘rump’ bank (theory of Jeremy Bulow and Paul Klemperer). Bridge bank gets all the assets and only the most sacred liabilities (eg, savings deposits or business deposits). Rump bank gets no assets, just the other debts. Bridge bank still functions, has capital cushion and and keep lending, borrowing and trading. Rump bank owns Bridge bank, so creditors will get shares in still functioning bridge bank, and thus they are better off than just getting ruins of the original bank. Meanwhile bridge bank keeps running and the economy is not destroyed.
5. ‘Narrow banking’ – splitting ‘casino’ (high risk) and ‘utility’ functions of banks into two different entities (theory of economist John Kay). Narrow banks would be required to get a licence and would have to satisfy regulators that they were backed with capital, and would be the only ones which do all the basic consumer and business banking. Harford continues (at 207):
Thoughts?
LE@15: 40% huge? Unsustainable? Yep. Can’t get to the article at The Economist, but at http://www.huffingtonpost.com/2011/03/30/financial-profits-percentage_n_841716.html they point to 40% in 2007, 46% in one quarter of 2001, and after the GFC, getting back to about 30% already. So my memory wasn’t too bad. I think the 10% was in the 1960s – a time of optimism, real increase in.creature comforts of many, money for moonshots, …. maybe there is a correlation
If those who are true capitalists, not warlords-in-capitalist-drag, want to show capitalism won’t eventually and inevitably become perverted, unsustainable, and collapse, then this type of indicator is one that needs to be discussed and made reasonable, or you’ll see a /really/ vicious collapse, and get predators in marxist clothing. The GFC and this mess at Barclay’s are wakeup calls, surely, and the decent right need to wake up and get moving, or the finance sector will be like a black hole – if it’s the most lucrative game in town, it will attract investors, cash fleeing from businesses that put a chicken in the pot, a car in the garage and roof over the head.
As to the proposals to separate out casinos and “real” utility banking – as long as government support (real and implied) couldn’t filter across to casinos, then that’d be a start.
The other thing the separation could do is minimize the influence of the casinos on governments, if only by removing the cachet of being with a “proper bank” from the casino mouthpieces.
LE@15 thoughts? Yes, I have a few, and also questions, I have a lot. But the atmosphere is becoming a little too toxic, or clouded, to get through to the interesting stuff.
This concept of ‘narrow banking’ is not anything new – in fact it has been raised many times on many posts here and elsewhere for well over two years that I’ve been following your conversations. It’s a bit like the free speech issue: I completely support the idea, but don’t wish this to arbitrarily mean that I am forced to listen to everyones’ ravings. With banks (now a completely meaningless descriptor) I completely support the idea of merchant banking as well as what used to be “proper banking”, but I do not support the use by Dave’s “pirates” of funds either generated by traditional activities or guarentee-provided by government to pursue those “pirate activities”.
The book you mention is repeating what Lorenzo’s “too big to fail” link proposes regarding separation and close regulation of core function. Other earlier terminology such as “ring fencing” was simply another name for the same base concept. We have now dropped all pretense that the financial sector adds value to our national wealth, and is more akin to a visit to the racetrack or casino. I don’t object to either activity per se; it is more that I’d like the “pirates” to take their own money, not ours, or taxpayers’ (i.e. ours) upon default.
The simple fact is that the simple core functions of any banking system is to take on-demand deposits from investors, and lend those funds over much longer terms to home and business borrowers. That is to say, it is a basically unstable means of doing business, based simply upon the trust of those at call investors that they can get their money back as and whenever. That trust is provided by prudential management and firm and transparent regulation.
We have now lost this.
The other thing I find difficult in discussing these things is that when you state quite basic principles you are accused of ‘mouthing platitudes’ or ‘naivety’.
I don’t think that is helpful – but I do think it is quite an accurate summation of the current ills of both our financial and political systems. Since when did principle turn into derided platitude? I missed that memo.
Dave, yeah the notion is that government support would never be extended to casinos (it fails? bad luck, that’s part of the game) and that it wouldn’t be needed for the narrow banks which are much safer. Harford says that only the narrow banks get to call themselves banks, and the casinos have to call themselves something else.
Although as KVD says, the whole banking model is unstable! Amen to the call for prudential management and firm, transparent regulation.
KVD, entirely agree – the “pirates” should take their own money, not mine. I’d really resent my money being used to bail ‘em out – for one thing, as Lorenzo’s post points out so beautifully, it creates a terrible moral hazard situation.
Isn’t it interesting how this post has provoked broad agreement from everybody? Banks, take note: we’re all agin you if you pirate our money.
LE@19 – I suspect the “broad agreement” here, on this issue, is because there are fewer hypocrites here than out in the community.
Unfortunately the capitalists/free-market types here, who are not hypocrites, do have neither the mouthpieces to the public, nor the ears of government.
No, it’s the “pirates in capitalist drag” who have the greater influence, proclaiming themselves as having the blessing of the invisible hand, while destroying the conditions there an invisible hand can operate…. rather like the Borgia popes, actually, claiming to be the infallible voice of the sky fairy while breaking every rule in the book, screwing everything that breathed in every way possible.
The /banks/ don’t have to listen to the “decent righties” – and politicians won’t until the “decent righties” get the ears of the people – and you can bet that “decent rightie” logic is more likely to get an airing in the progressive news outlets rather than those mouthpieces of pirate plutocrats (trying to point out an issue without causing thread of doom as found elsewhere).
LE
Banks don’t pirate money to go play in markets. That’s pretty much a misunderstanding that most people have. They can do a few things like trade foreign exchange etc for which capital needs to be set aside, but for everything else like securities trading. it’s done in subsidiaries. Central banks don’t allow banks to own stocks etc without capital set aside at the bank level. They are set up as holding company structures with the deposit taking entity removed from the other activities.
No loans from the deposit side can go to the securities trading business although other banks are able to lend to these broker dealer subs at market rates. There may or may not be flow on guarantees from the holding company although I cant recall, however generally speaking the deposit/banking side is protected to ensure problems from one side don’t flow there.
The GFC wasn’t felt in the broker dealer units at US commercial banks. The stress occurred in the banks/deposit taking unit for the most part where they held mortgage back securities that went belly up. Banks lend money either directly or indirectly for real estate loans, so mortgage backed were a perfectly legit asset to hold.
KVD
Despite all the nonsense posted by dodgy sources and miscreants around the web, the repeal of Glass Steagall had no impact in respect to the injuries caused by the GFC. None.
Narrow banking is the crock. It would do nothing to prevent a rupture in the banking system. The asset side of the balance sheet would still be vulnerable even with sovereign debt as we’ve seen in euroweenieland
Example:
The banking problem in Europe is one the Left doesn’t want to talk about much these days. That’s because the genesis of the problem is something that they really prefer not to discuss.
A decent portion of the huge losses incurred by the Euroweenie banks is as a result of holding sovereign bonds, principally PIIG bonds obviously. Sovereign bonds are held for so called liquidity reasons (laughable). Unsurprisingly governments around the world attach little or no capital allocation demands to sovereign debt as they are considered Risk Free..hahahahhahahahaha Yep, so governments decree that sovereign debt is risk free and therefore doesn’t need capital set aside. As a consequence Euroweenie banks were buying lots of higher yielding PIIG debt. This of course helped these states continue on funding unsustainable welfare states and generalised debauchery.
So would the partitioning mentioned above have averted the GFC? Is there any way of letting banks fail without pulling down the economy as well?
Oh you’ve answered my question, never mind.
LE
Banks held mortgage backed’s in the banking entities because they are allowed to make real estate loans. Now it wasn’t just the mortgage backed part that caused them problems, but also straight loans with real estate orientation.
There was a sudden and uncontrolled collapse in real estate prices and hence the banking crisis. Narrow or wide banks, if there’s a real estate collapse banks are going to cop it. There’s really no escape.
And frankly, unless we want to move away from a our current system that has provided decent growth rates, you want banks to be reasonably leveraged so they are making loans and you want the security markets pumping away products and doing IPOs because a financialized economy is a good a healthy economy. It gave us the amazing stuff that came out of the tech boom for instance.
If we want a little more protection from banking the way to do it is simply raise the tangible common equity ratio and then get the regulators the hell out of the system. The markets will sort out the rest.
LE@2 No, haven’t read Adapt, but Hartford is generally good value.
SL@3 Iceland has done much better than Ireland because
(1) they let the banks fail (in particular, they were not so spectacularly stupid as to given the banks the open-ended guarantee the Irish Government did).
(2) they are not in the euro
DB@4 The Economist was actually following the normal IMF financial system meltdown playbook, which does seem the correct way to respond. President Obama was asked about that and he essentially said “that’s not the way we do things”. (True, but also code for “I am a black liberal Democrat President, I could only get away with that if I was a raging conservative Republican”–the only Nixon can go to China principle.)
kvd@5 Cochrane is pretty hopeless on macroeconomics, but very good on his actual area of expertise, which is finance.
JC@9 You are being unfair to Lord Turner, since what he was pointing to was deliberate fraud to manipulate the market.
People in repeated games tend to transact fairly, because they want to continue to transact.
I am agnostic on the proper level of prudential regulation, except for the principle of any systematic removal of downside risk by policy (defined broadly) has to be compensated for by increased prudential regulation.
JC@14 Barclay’s was fined a lot of money by a range of different regulators. It is one thing for a benchmark to be moved away from because it is not longer a useful indicator. It is quite another for it to do so through deliberate fraud, because that is a moveable feast.
The basic principle here is either don’t report or report honestly. Financial markets are fundamentally based on expectations, which are based on information. Corrupt the information and you corrupt the market. This is not a witch-hunt, it is a big deal–hence the action by the regulators.
It is true that it is also a lightning rod for a whole lot of other concerns, but the banks have no-one else to blame for that than themselves. Yes, politicians played silly buggers, but the banks put their noses in the trough and hoovered. Barclays took that one further and pissed into the common water supply of information.
I don’t think I am, Lorenzo. There was no reason to make a comment like that and it’s exactly what I would expect from an Anglo toff. This is just kill the traders type of talk.
Yep.
No amount of policy, short of literally not having any interest bearing assets on the asset side of a bank balance sheet thereby turning them into safety deposit boxes would reduce risk. Banks are generally leveraged these days at around 13:1 which means broadly there is $1 of equity for $13 of loans/risk, or 8% equity. You can see from this then that a major move in asset values or quality will fuck the banks no matter how much regulation there. Trust me, the US banking system wasn’t short of regulation before the GFC, as they were the most highly regulated entities in the world. Even if banks went the Japanese route taking in deposits and buying treasuries, it wouldn’t help them reduce potential risk of failure because of the inherent riskiness there is with sovereign debt.
It’s a witch hunt and drama “queening”. LIBOR is a published lending rate. The banks should decide themsevles what goes into making up that rate in the same way as any published rate or advertised product.
It’s not as though people aren’t able to use other benchmarks or that information about rate movements isn’t around elsewhere.
It’s a witch-hunt and gives the left more ammo to create their usual venom filled concoction of conspiracy theories and other assorted bullshit against da dreaded capitalism all made to look scholarly.
Maggie would never have fallen for this crap unlike the current stupid pretend conservative government in the UK.
The real story people ought to be focusing on is why are the governments giving themselves free status for the debt they flog into the markets to fund the welfare state, setting rules demanding banks hold a certain portion of their assets in government debt. The losses that resulted from this racket will cost the European taxpayer around E250 to E500 billion resulting from recapitalizations
First a correction with apology: I twice mentioned Lorenzo’s link as “too big to fail” when what I intended was his later link to a pfd by Cochrane which he put as “invitation to fail bigger”. I’m sorry about that, and I repeat his (pfd) link here for clarity. I do so because I would encourage a close read.
JC@22 unless you maintain a civil tone this will be my last comment in reply to your comments, but with that said, I’d make a couple of points in response:
1 The repeal of Glass-Steagall simply acknowledged the then existing position – that the damage had already been done: the provisions were being bypassed or worked around or flat out ignored. The failure was not the repeal, the failure was inadequate supervision of the quite flimsy defences built for an earlier more simple environment. So, yes – the repeal had no impact, because it was at that point an ineffective, unenforced piece of legislation. These are two different concepts JC. Just think about it.
2. You say “narrow banking is a crock”. Refer to that pdf (it’s only a couple of pages) to see, for instance, this para
So here you have a market participant (not a bank, but leveraged off bank-sourced paper leveraged at 30-1 in long term mortgages financed by overnight debt. I suppose my naive query is “when you say ‘the asset side of the balance sheet would still be vulnerable’ which particular bent 5 cent piece are you referring to as a legitimate ‘asset’”?
3. In reply to your@25 (which is directed to LE not myself: The ‘current system’ you speak of was estimated recently by the Finance Minister of either Germany or the EC (I forget which) to be concerned with legitimate capital raisings, IPO’s etc. only as to 25% of market turnover. The rest is racetrack/casino gambling. And as for “the markets will sort out the rest” well, that’s true – they have; but we the people are picking up the losing bets – not your almighty ‘market’.
In my@31 pfd stands for ‘please forgive dyslexia’ as opposed to pdf which stands for ‘wait while it downloads’
Sorry ’bout that.
KVD
What uncivil tone are you referring to exactly? My comments so far have been directly related to events and people who not on this blog and also relating to the points raised in the thread.
If you are referring to those comments and don’t like them, then you’re basically attempting to control speech and therefore you can take a long walk in the park.
Untrue. Until then banks were still not allowed to operate in the securities markets. Your source is unfounded. One of the biggest problem lenders and security originators was Country Wide- a non bank institution. You have also causally left out the participation of the GSEs leveraged at 125:1. Funny about that.
Bear stern wasn’t a commercial bank. KVD. Neither was Lehman. The guarantee would have come from the holding company. if it did at all. Monolines insurance firms did the insuring of these secs.
Need I repeat that shadow banking wasn’t commercial banking and up to that time had no way to facilitate the fed window. I suppose that’s just a mere detail to you though.
So what? What exactly is your point? You’re now indirectly making the absurd inference that liquidity provision is unimportant?
First off, no you haven’t taken the losing bet. I presume you live in Australia and not the US where TARP occurred. It may be news to you that the US taxpayer made a profit on TARP to the banks. The only part of TARP that has lost money was the administration’s action to assist the union pension fund in the car industry, where bankruptcy laws were deliberately forsaken and the bond holders took all the hit.
I presume you do realize that the Australian banks were basically done for too, right? They had to be given RBA support in all sorts of ways in order to avoid going to the wall as a result of mis managing their short term funding needs. They are notoriously backward in terms of capital market operations. They basically went belly up.
As I said, no need to TARP, just move the bond holders down a few notches.
1. “Losing bet” – I guess this means when the US government antes up for a second roll of the dice, and it comes up a win, well – there never was no problem? No, never, at all. (And why is it that over 90% of TARP went to banks? Were they the most reliable gamblers, or maybe just the deepest in hock?)
2. “Taxpayer made a profit”? Depends how you count the effects of the need to ante up for that second roll of the dice. We differ in measurement of ‘profit’.
and
3. “I presume you do realize that the Australian banks were basically done for too, right?” What a ridiculuous over simplification. Yes they required government guarentee. Yes they required very public support. No they weren’t trawling the gutters of the world’s financial markets. Yes, they are affected by world equity/money markets. No, I don’t think you are on top of your facts.
KVD.
You don’t understand bank trading operations. Very few trading operations are gambling. Most of them are trading on the back of customer order and business.
No, the taxpayer shouldn’t be footing any bill. As I’ve said for the 12th time or so, bond holders should and then depositors.
What’s ridiculous about the claim about Australian banks? It’s a fact they were. The commercial paper market through which they borrowed closed up and they had no sourcing left other than the RBA and the guarantee. You should really understand this stuff before you go spouting what is or isn’t ridiculous. Except CBA, the other banks were done for without government assistance. Fact.
So who were these silly incompetent businesses who managed to get themselves into a (TARP) position requiring taxpayer funds for a(nother) turn at the table? That would be your ‘banks’ – whatever that word means these days. You make the whole thing sound sort of inevitable. Why is that? Anyways – I love your “trading on the back of”. Perfect description.
As for Australian banks, any entity relying upon continually renewable funds in a market that is frozen is ‘stuffed’. Why the surprise? That’s basic accounting 101
JC@35 I posted a perfectly acceptable and polite reply to this – but it’s been swallowed, probably by some totally bored-out supervisor. Let me just summarise:
We disagree. One of us is probably in error. I am comfortable with that fact.
I think I found your reply, kvd – our hungry spammer had eaten it. We are having ongoing problems with someone trying to infect Ozblogistan with malware, unfortunately.
Never mind SL. I understand, and have been receiving repeated warnings which I’m sure Jacques is aware of. In any event, I prefer the above – my ver #2
What I find interesting KVD is what I’ve found most times. Conservatives and libertarian types really don’t get along. To libertarians, Conservatives are as statist as leftwingers.
I think libertarian attacks on Abbott will start pretty much on the 3rd day of his government.
People like Mel don’t really understand the huge differences between the two and mistakenly think that the Cat website is just a front for Lib supporters. It’s certainly pro-libs at the moment but only because we despise the left so much as a group. However there’s no real love for the libs, except insofar as a way of getting rid of this despicable government.
Sinclair has said that to me too re Abbott, JC. I suspect you’re right.
There’s degrees of leftist statism as well. When I was in first year uni and much more stereotypically left-wing than I am now, I dated a libertarian (to the disgust of many of my left-wing friends). He’s still a friend. Although I found some of his views really clashed with mine greatly (think unions, think welfare state, think gun laws) he was still far less irritating than the left-wing authoritarian types you got at uni activist groups from time to time. I hate being told what to do and how to think by anyone.
When I do those political survey thingies I come out as moderate left, moderate libertarian. I wonder: is this an odd combination?
THIS. Well, at least to this libertarian. Also, conservative nanny-statism falls over for the same reasons that lefty nanny-statism does: expensive, doesn’t do what it says on the tin, often makes the problem worse. It also likes the coercive power of the state behind it, sometimes in deeply unattractive ways:
http://www.cato-at-liberty.org/libertarians-conservatives-and-the-social-issues/
No not really. It probably is where libertarian really resides to be honest in a general sorta way.
Just as I thought, the regulators win also telling the banks to meddle with LIBOR. But that was good meddling though, because you know it’s the government.
http://articles.marketwatch.com/2012-07-03/markets/32516900_1_libor-submitters-jerry-del-missier-barclays-plc
Freaking amazing. Not!
I thought I’d indulge in other pursuits until Cyclone Joey blew itself out, but I see my name has been taken in vain in @40 so I thought I’d pop in and illuminate you all with the benefit of my wisdom
SL’s @42 is nothing more than bait and switch, although I’m in no doubt that the deception is not a conscious one. The proof of the pudding is always in the eating, and when one bites into this particular pudding, what one tastes is brain stem. That is, irrespective of the theoretical differences that exist on paper, right-libertarians and conservatives often behave similarly because they share the same base instincts. They are in truth conjoined twins sharing the same brain stem and whenever the passions are aroused atavism ensues and they squawk in unison.
Let me give three bloggy examples that demonstrate my point:
(1) Sinclair Davidson tells us he has no prob with gay marriage. How wonderfully libertarian. This one line message is buried deep on the thirteenth page of a long blog thread. Nonetheless, he publishes and tells his audience to take seriously a bizarre Saunders article that tels us that the homosexuals are closet Gramscians hellbent on destroying our institutions and leading us down the path to Communist hell. This is a clear case of Davidson’s inflamed brainstem overriding the cortex, thus giving credence to Saunders’ borderline psychotic fantasy.
(2) SL regularly tells us about her noble and enlightened commitment to free speech. How beautiful. How wonderfully libertarian. But when a gay boy acting alone wrote a letter to Online Opinion’s advertisers asking them to reconsider running ads on OO in light of OO allowing itself to become a platform for hateful anti-gay hysteria, SL’s passions were inflamed and she argued class/property interests, via beefed up secondary boycott provisions, must trump free speech.
(3) Our bloggie libertarians champion modernity and science. GM crops? You betcha! Human/machine hybrids? Where do I sign up! But Gentle Macchia? Hell no, with only a minority of exceptions, the passions pump blood to the brain stem and away from the cerebral cortex, mainstream scientists are dismissed as lefties, retards, conspiracists etc etc and grinning idiots like Matt Ridley, Ian Plimer and Lord Sir Monckton are deemed Great Prophets.
Is the pattern not obvious?
Nope, you’re delusional.
In fact one could be totally against gay marriage and still be considered libertarian for a host of reasons. Gay marriage is basically the demand that the state confer rights for a particular group. A lot of libertarians feel the state needs to remove itself from the relationship business altogether and marriage becomes a private affair.
Posting Saunders piece doesn’t offer any clue as to Sinc’s position on Gay marriage. I honestly don’t understand why you think he would be lying about it. He mentioned that the Saunders piece is worth a read and that was it. You’re attempting to make a mountain out of a speck of silicon Mel, as you often do.
Your just upset at your life time ban, that’s all. You should have thought about it then.
Perhaps libertarians have found common ground in the last few years because of the atrocities committed by the modern western left. I fondly recall for instance when the ALP was all for Free Speech and its biggest advocate. Do you?
Here, go here and get a decent understanding of the some libertarians positions on da glimate change. Hunt around his site, read and listen to him as he has a lot to offer.
David Friedman basically explains that the science and the economics of glimate change aren’t the same thing. Making assumptions and predictions beyond 30 years is a fools errand in any area. Almost everything you see around you will be substantially enhanced or replaced in 30 years, crops could be rotated several times over that period. The movement of people over this time is unpredictable. Has anyone really spent time figuring out the positives of a warmer world and netted those out. Don’t bother replying to this unless you’ve read a few of his pieces and demonstrate you have. If you don’t understand something then please ask and I’ll do my best to help you.
Then there the basic fact that no matter what the West does by 1950 and this guy, Muller from Berkley thinks western emissions stay flat the world’s emissions are going up as a result of the developed world. China is likely to go up by 6 times the US baseline, while India’s will rise about the same. Add in the rest of the developing world and you will have another equivalent of China. Future emissions are a developing world story and there’s nothing we can do about unless we find technology that is economically superior to emitting ones. Honestly, save you breath on this. Muller checked the global temp record and verified it last year.
Libertarians mostly believe that it is impossible to do much about this, so it would be better to adapt.
No debate on this Mel, until you’ve done your reading and watching assignments.
oops.. 2050.. not 1950..
On a separate note, I would like to see the practice of subsidising banks by allowing them to borrow from the central bank at highly dubious rates stop.
Very roughly, if I understand correctly, European banks are allowed to make a profit on buying PIGS debt (at 6.5% which they keep) and depositing it as collateral at the ECB in exchange for the ECB lending to them at 1%.
This drives PIGS yields artificially down and gives the banks a billion-dollar subsidy provided only that they are complicit in the conspiracy.
That is just one example, of course.
Another problem is that securities law makes it impossible for all practical purposes for say BHP to simply advertise on its website, say, Pilbara Bonds offering 7.9%+ an equity upside linked to margins at the new Pilbara site. So they go through a bank which drums up institutional investors and promotes it across retail funds and earns a fortune in the process.
The rent, as they say, is too damned high.
But in nearly every case the rent is statutorily imposed and we are the dumb fucks who a) vote for the ‘something must be done’ fuckwits and b) pay their goddamn ‘something must be done’ rents.
lol, kvd, I see the spamfilter still loves me and not you!
Heh Patrick! I can’t figure out if it’s to do with the ‘common sense’, coherence or libertarian filter setting. It’s playing merry hell with my Comments-R-Us autobot
It’s an equal opportunity comment muncher – it just chooses at random, I assure you! Most frustrating, but better than getting overwhelmed by ads for Christian Louboutin (I don’t even know who he is either?)
JC@various.
Lord Turner is a former banker.
More generally, your comments show the same moral blindnesses that have led both to the problems and the appalling public standing of banks and finance. It is hard to think of any business which relies on accuracy in information more than banking. If banks can “make up numbers” as convenient for them (as set out in these admitted statements [pdf]), why cannot their clients do the same in reverse? (And if your response is that the Greek Government did, well, yes precisely.)
A moment’s thought shows how much finance relies on a base level of trust and honesty. (As does commerce generally, hence the role of reputation networks; particularly in places where the general level of social trust is low.)
Indeed, your comments display the same attitude of pushing risks downwards, and do it quite unthinkingly.
A remarkable attitude to risk, as if it is eternal and immutable. There is a difference between suppressing risk, shifting risk and reducing risk. Much of the development of Western history has been about developing institutions and technologies that reduce risk (reflected, for example, in long term falls in interest rates).
Part of the secular reduction in risks–apart from technology, property and institutions–has been the ability to shift risk to those best able to manage them. That is central to what makes finance socially useful. If it merely turns into an operation in pushing risks downwards, then it becomes a vehicle for exploitation, not socially useful intermediation.
And, if as a result of the systematic suppression of downside risk banks have become much more highly leveraged than they would in a genuinely free market, well, that is rather my point.
First of all, you don’t seemed to have grasped my central point, which was not about any alleged lack of government intervention but the nature of same. Second, if you think US banks were the most highly regulated entities in the world, you have a deeply naive view of the level of regulation out there.
And, on the subject of Greece, let’s not forget the role of bankers in helping Greece hide its level of debt.
Lorenzo@52/53 – Yep. Yep. and Yep. I suppose a lefty cynic would say that markets depend on trust, and financiers are probably the least trustworthy suit-wearers on the planet apart from the politicians they have trained to sit up and beg.
It’s worse than the scams of selling florida swampland as prime real estate a century or so ago – with the victims turning to the same scammers for more land. Basically, the capital that was /said/ to floating around in the world wasn’t there at all – so either the financiers lied or where incompetent.
LE@51: “Christian Louboutin” … sounds like an enzyme to be injected into the brain and destroy connections between the frontal lobe and anything else, the “Christian” bit being that either it is in the vials suspended in holy water, or guaranteed to be so effective, it turns one into a sky fairy fan.
The outcome of the GFC, particularly in Greece, is that the pirates gave the advice (perhaps with do-what-we-say-or-else), others rating risk were incompetent at their job (or worse!), and yet the same mob responsible for the mess now actually have more control over political decisions than before the crisis. That’s a “hair of the dog that bit you” result … or more correctly, covering your hand in mincemeat and wafting it under the nose of the dog (who is hungrier because it has been fed less than usual for a year or two).
Lorenzo, he worked for a bank for 3 years, according to your link, according to your link.. from the late 70′s to the early 80′s. He’s a technocrat. He also seems to have a bug up his arse about the banks too. See here from your link:
OMG the Tobin tax? He supports the Tobin Tax? Lol
Prospect is a far left magazine. As I see it they basically stuck the British of equivalent Australia Institute economist as chair of that committee and when you do that you end up with the crazy statement that I first commented on, alerting me that this guy is slightly off balance:
What a disgusting, deranged and unfounded comment by a chair of the committee. He should have been fired right then by the government. This is a zealot on a mission.
Umm no that’s not what I said. I’m suggesting that this is a witch hunt and the more we delve into it, we find out that parts of the UK government apparatus and the Fed may have been on it asking the banks to fuck around with the rate. But again I say this is a published rate provided by the banks themselves. I’m still not seeing where is the requirement that the rate has to be derived in such a way, or using a particular method. Do you know?
Let’s really get down to the base problem here. It’s about money and compensation in the banking world especially traders. That’s where all the hate comes from. The pollies make it worse by hiring Crazy Lord Muckraker with a serious mental problem about banks and the people who work for them giving him a megaphone to sprout his craziness. Seriously how can anyone that supports the Tobin tax, thinks financialization per se is bad makes deranged comments like the one I linked to could offer any sort of expert opinion on these matters. I may as well go read Bird’s blog.
Or perhaps a humble acknowledgement that life is about risk and perhaps the things we do we think we reduce risk may not do that at all. VAR comes to mind.
If you cared to think a little, a large number of the products these banks sell are to do with reducing risk and yet this crazy Lord wants to kill the traders and do all sorts of shit because he has a bug up his bum about banks. We also have hangers on basically referring to trading operations as casino like activities. This is propaganda basically bordering on the insane.
And where eggsactly is the evidence this hasn’t been happening?
Then we agree, right? Free banking and let the risk be assessed by the markets come what may.
Really? Go through them
1.Internal auditors
2.External auditors
3. Compliance dept (possibly the most important dept at a bank now)
4. Fed examiners
5. Futures bodies auditors
6. Bond market supervisor auditor (the name escapes me)
7. State banking charter examiners
8. FBI phone number to anon report illegal activities
9. Audits for illegal cash washing (forget who does that)
Lorenzo, the US banking system has always been heavily supervised relatively speaking. There wasn’t a two week period for 16 years that i went through when I didn’t have an auditor asking me to explain this or that for perhaps and hour or more.
Let me understand this eggsactly. The representatives of a sovereign government request an investment bank to price up this or that swap. It turns out that the swap or derivative is an attempt to hide stuff and you attach the blame to the banks and not the government? Really?
Look, since the GFC LIBOR has essentially been a bullshit rate, primarily because of the fact that the banks, which create this rate through a daily survey, no longer have similar(ish) credit ratings. However I do understand perfectly that it has some importance because a lot of loans and derivative books etc are benchmarked of LIBOR. In other words since the GFC LIBOR has been a bullshit make believe that everyone in the markets recognized, as a bullshit rate for credit rating reasons.
It isn’t as though the British authorities (and others) haven’t understood this problem, because during the GFC these questions were asked and they found no solution. They actually thought it best to leave things as they were, although they fully understood just how crappy it was.
People need to understand that LIBOR is essentially a fictitious rate because the banks are asked each morning at what rate will they lend each other in particular currencies. These days, after the advent of the GFC almost no interbank lending goes on in the world unsecured and this therefore makes the daily construction of LIBOR even more laughable. In effect all the fuss that’s being created is over a rate that really doesn’t exist and virtually no business is conducted directly off it between the banks.
Now this is the real joke. If people want it to reflect reality, then LIBOR is going to be set higher than it is now and therefore there will be a lot more screaming and this time it won’t be the drama queen sort that we’ve been hearing. It will be because of higher rates necessitated by the reality of the situation. That is the banks aren’t prime credits anymore.
More than anything else I think what this shows is that LIBOR has had its day and there will be a rush to find another way to benchmark loans etc.
Now lets understand this clearly, if LIBOR was being set artificially low then lenders were doing well out of it theoretically.
Even more hysterically, the UK government apparatus and the Fed have been accused to nudging the banks to set the rate lower in order not to spook markets over liquidity issues at major banks during the crises.
As I keep saying, despite the protests, this is another example of false hysteria and we now see the usual gaggle of people with little to no idea about what goes on in this arcane area of banking suddenly becoming expertologists and LIBOR specialists when they are mostly getting their information from whacko sities.
There are potential legal issues involved here but not the sort people think. Non-bank, or no Libor lenders may (and the operative word is may) have an issue with the Libor banks as they could have set loans etc to their borrowers at lower rates than what could have occurred in the different world. That’s not my field though as LE or SL would have a better handle on this.
JC@55
Actually, not even close. It is a case of “that term, it does not mean what you think it means”.
And yes, Lord Turner is a technocrat who is also a former banker.
Lots of folk support a Tobin tax, proposed by a Nobel laureate. I don’t, on practicality grounds, but it is hardly a disabling position. But you are being wildly over-sensitive about his comment, just as you are being wildly insensitive about what Barclays was found to be up to.
Again, that term does not mean what you think it means. The term implies there was no wrong-doing, it is all made up. A bank does not roll over and pay such huge fines rather than fight them in court if there is nothing underlying it. Read the link I gave on evidence.
If you think this is just about envy, you really don’t get it. It is about arrogance, massive senses of entitlement and bad behaviour in the finance sector–the level of salaries and bonuses just make such that much more offensive.
Since I said more than once in the post that suppressing downside risk increases instability in the system, I really don’t get what sort of point you think you are making on risk.
That risk management is a central role of financial intermediation is both obvious and a central theme of my post, which you seem to have neither read properly, nor understood. Just as you don’t seem to understand what Lord Turner was actually saying; it was much more like the sort of rhetoric you hand out to naughty schoolboys. Part of which, no doubt, was a technocratic regulator covering his rear.
Oh, I don’t know–how about third world debt (see post), GFC to start with.
As for your list regulations:
(1) and (2) just means banks are public companies.
(3) means they are in business in the contemporary world.
(4) means they have a supervising regulatory body.
(5) and (6) means they are in the finance sector.
(7) means there are state regulations.
(8) and (9) means that illegal activities makes and needs money.
Since I never claimed that banks were not regulated–as clearly they are–I am unmoved by the information that banks are regulated. But if you think this is some remarkably high level of regulation in the modern world, you need to get out more.
JC@56
That is just inability to read plain English. “Role in helping” implies being accessories to someone else’s actions, which they were. And really, if you do not understand that what the banks did for Greece would, for a private sector entity, be prosecutable as accessory to fraud, you don’t get it.
JC@57 Again, you have not read the links, some of what Barclay’s has been fined for predates the GFC.
Speaking as a former statistician, no respondents cannot “make up” how they do their statistical returns. There is always an agreed methodology, otherwise it really is “ceiling statistics” (look at the ceiling and think of a number; a term from the old Soviet Union).
Since you apparently cannot read plain English, have not bothered to look at the facts of the case, have no idea about ideological placement, cannot recognise fraud when you see it (or, actually, don’t bother to look at it) and show the lack of any sense that there might be some other consideration than lets make lots of money which has got the banks into their appallingly low level of public esteem, your comments are less than persuasive.
Lorenzo@58 I support a ‘Tobin Tax’ on the basis that it is a means of generating substantial revenue from a not really productive (some would say damaging) sector of the economy. But I differ from most of the proponents who then seem to suggest that it be earmarked for “doing good things in the world”. I’d rather it lead to an offset of taxes in other more useful areas of the economy; I just see it as an extension of transactional value taxes like good old GST – with the added benefit of “discouragement” if you like.
We seem happy enough to go all holy about cigarettes – with the tax take there now far exceeding anything spent or likely to be spent on the health consequences; so why not put an easily administered transaction-based charge on what is essentially a very high volume, speculative process which does very little in the way of economic good? The possible revenue involved is quite mind boggling, but I’m more interested in the potential deterrant effect, and reduction of other taxing mechanisms.
kvd@59 A Tobin tax would have massive Laffer-Khaldun Curve problems, because financial transactions are so mobile, as Sweden found.
The notion of a globally imposed tax is a pipe-dream, since there would be huge benefits from breaking ranks.
L@60 I accept there are problems with transaction-type taxes, but would point out there are equally significant problems with other sorts of revenue raising approaches. (Take DEM’s latest offering re Porsche/VW; what a waste of unproductive effort) I just like the “neutral simplicity” of a transaction tax – more particularly one where there is little or no exemption attaching to the nature of the transaction. You point to the Swedish experience, but I note that “bond trading fell 85% and futures 98%”. This is noted as a “bad” thing whereas I simply see that as a very beneficial side effect of the approach – a bit like the (tongue in cheek) entirely coincidental reduction in smoking rates caused by raising that tax/duty.
As to a global approach, I see no difference in this problem to any other, once the main players come on board. If that could be made to happen then I’d suggest that those “rank breakers” could simply be subject to an arbitrary (and sufficiently high) penalty on all currency movements – set so that “joining the ranks” would be beneficial. All very naive? I guess so, but I’ve often wondered for instance why the world at large tolerates the so-called tax haven countries? They could easily, through the banking system, be isolated and arbitrarily taxed on all currency moved in or out at a level which would discourage their use fairly quickly. Pipe dreams possibly, but worth pursuing at least past the point of suggesting “it’d never fly”.
And finally, I’d distinguish the means of taxing from the aims of those organisations presently pushing for same; they seem to see this tax as an extra pot solely for their purposes whereas I see it as a flatter/fairer means of general taxation.
kvd@61 Part of my point is that the revenue raised would be insignificant, so the revenue argument for the tax collapses.
Indeed, the revenue raised would be so minimal that the chances of all jurisdictions agreeing are also insignificant, due to the benefits of having lower rates than everyone else (including no rate and getting your income from employment and incorporation fees).
I am generally leery of any proposal to increase transaction costs, since the entire history of economic progress has been very significantly based on reducing transaction costs.
I am also not convinced that the problem with modern financial markets is their scale. To the extent that it is a problem, it is a product of other issues which are problematic.
Lorenzo, we differ and that is fine, so no further argument.
I am just left to ponder the seeming inconsistency between the statement that with such a tax there “would be huge benefits from breaking ranks” and the statement that the “revenue raised would be insignificant” That seems like having a bet each way
FFS, he worked in banking from 1979-82. Describing him as a former banker is laughable. Looking at his bio suggests in fact he is the typical technocrat- expert at not much with lots of dust flying around.
Who cares that “lots of folk” support the Tobin tax, even crazed half wits like “Europe needs solidarity” Joe Stigliz do, as though a Nobel winner was supposed to give the appalling tax any legitimacy. Even Tobin himself in later years was appalled at the people who were attracted to this tax. And you know what, he was right. Locally we have eminent economists such as Mad Dog Bob Brown, Tubbsie Milne and Soviet money bags Rhiannon supporting the tax. That right there tells you the sort of people who go for this tax. It’s a tax on capital and it’s a tax on capital even before anyone has made a return. It’s an attempt by trogs like those I mentioned to slow down globalization, or at least that’s what they think.
Can you even present one single well known economist supporting free markets and globalization in favor of this tax? One name will do. You’re trying to paint lipstick on this pig and it’s not going to work.
Like anything, it also depends on the size of the tax. But as I said it’s perhaps one of the worst forms of tax ever conceived, so much so that the creator was embarrassed by the rodent support it attracted, which in itself is really funny. It’s an absolutely corrosive tax.
Nope I have been neither. In fact it seems that it’s you who is being overly sensitive and clutching at straws by suggesting Lord Muckraker is a banker when he’s nothing of the sort. It’s a preposterous suggestion and to then dismiss with that throwaway comment is laughable.
Yes they do. You seem almost childlike in the belief that the state can’t be faulted. If a firm sees the machinery of state after them they usually roll over, as we’ve seen in the US time and time again. You really are kidding if you think firms don’t. You see it in the US all the time and it appears this deplorable practice is catching on elsewhere.
Bull. It’s about envy and getting back at those who make more money than the average. Humans are like that and all of us need to be careful it doesn’t get the better of us. Lord Muckraker’s comment that started this goes some way to proving my point. He made a sweeping generalization like any out control zealot would. He would in fact be at home in the Australian Greens party where economic illiteracy and extremism is looked at highly in any potential candidate.
You really need to define eggsactly what you mean by suppressing downside risk. Once you’ve done that I’ll respond. It seems that you’re lending out this term to any loose argument you make. Define it.
It’s nothing of the sort. You’re simply excusing a zealot and a far left lunatic. The fact he supports the Tobin tax adds support to my claim.
You still haven’t addressed the issue that the various arms of the state appeared to have had inside knowledge as to what was going on with LIBOR. It’s as though this side of the dirty little story never happened, right? Any substantial comment other than an oblique sentence?
Except that’s not what you said, is it? You’re now clearly shifting the posts a little. This is in fact what you said in response to my first claim.
It also seems that you have difficulty in understanding English, and in this case your own.
Fact: The US banks were both the most regulated entities in the world and continue to be. You need to either concede or simply ignore the silly remark. Bluster and moving the goal posts won’t change that.
Take it up with the Greek government. Banks aren’t the world’s police.
Really? It seems that an entire category of so-called science is focused on making up stats these days. Go take a look at the upper echelons of the climate science community. Nothing they do can be trusted. In the same way anything Lord Muckraker says can’t.
It seems to me that you will excuse any form of zealotry as long as it agrees with your views.
I also noticed you haven’t really responded to the last comment I posted @57. For the most part LIBOR has been a made up set of rates since the GFC and I explained why and how. This simply is ignored by you as though it wasn’t occurring.
KVD
I’m shocked. Lol
Oh yea, like the carbon tax. Once Australia raises the highest one in the world everyone lemming like will no doubt follow. Not! You really offer some intellectual heft here, KVD. Loads of it. Lol
kvd@63 Because there is so little revenue to be gained from the tax, its benefits will be easily outweighed by becoming a preferred jurisdiction for financial transactions was my point.
Nice little graphic of the LIBOR rates quoted by different banks over time.
http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-3?fsrc=gn_ep
In an associated article (follow the bouncing links)
DB@65 This does look like getting bigger and bigger, with potential, apparently, for huge litigation.
It is the combination — we want big salaries for high pressure managing of risk BUT be bailed out by taxpayers when it goes wrong AND rig data as a normal activity.
L@66 – yes, didn’t link to the article you did – the more-than-one link (I think) comment gestapomatic tends to chew things up. One telling bit from that link:
And as for the Sergeant Schultz “I know nothink” being echoed by senior manglement – yeah – fingers in ears, eyes closed, given that (from same article at The Economist)
For myself this issue reflects a wider problem with the development of corporate culture over the last 30 years. For example, just a few days ago GSK was fined big time for something that Big Pharma has been caught out doing again and again. What they have done has resulted in many deaths, in previous cases estimates were in the 5 figure ranges(vioxx).
http://www.bbc.co.uk/news/world-us-canada-18673220
We need to take stock of corporate culture and realise that when we see an ongoing parade of crimes then it is not about a few bad eggs but about a culture that promotes bad behavior. I know this won’t happen because it is far easier to blame someone than identify the cultural dynamics that drive bad behavior.
It doesn’t have to be like this but as long as we continue in an unalloyed admiration of all things corporate it will stay like this.
Yes I agree John H. and on the mention made by Lorenzo@66 that “we want big salaries”, Mr Diamond is yet another proof of my “under a bus” valuation of an individual’s worth to a company. I mean, if you pay a guy 10million or so as an annual salary, you’d expect he was so vital that if he was run over by a bus (or in Diamond’s case thrown under it) then the company would cease trading, or go into some sort of lockdown until another equally valuable successor was (urgently) found.
Didn’t happen. Barclays moves on (in fact the share price went up); somebody else (or a group) temporarily picks up his duties; a search is instituted for the right replacement – maybe taking months. So what’s the high salary actually for if the individual’s loss is so readily covered? Talk about a con…
JC@64 Since you:
(1) still cannot read plain English;
(2) clearly cannot be bothered to look at the evidence;
(3) restate what I say so it is not what I said;
there is clearly not much point in engaging with you.
If you prefer “Lord Turner is someone with 4 years experience in the banking industry” then fine. I only worked for the former CES for 13 months as my first job, but it gave me insights into all sorts of aspects of bureaucracy, job markets, etc.
And yes, I do not think the Tobin tax is a good idea, but it remains one that is well within mainstream policy discussion.
I suggest you have a look at the level of regulation in the following industries
(1) land use in the UK or Australia
(2) finance in Japan
(3) almost any industry in the Middle East
(4) education almost anywhere
before you start claiming that US banks are “the most regulated entities in the world”.
If your attitude to evidence, logic and questions of morality are in anyway indicative of what passes for the same in the finance industry nowadays, no wonder it has the problems and public esteem difficulties it does.
A conservative blogger puts the LIBOR scandal in context
The Economist says something similar and then puts in a different sort of context:
WSJ also puts it in context. A context I’m sure you won’t like.
And By the way the TOBIN has not gone “mainstream” unless you’re starting to believe mental patients and Greens members are the new mainstream.
So all you’re left with now are pathetic put downs and abuse, Lorenzo, or Michael. Keep it nice hey? LOl
Anyone who could possibly suggest Lord Muckraker is a banker has serious issues with reality.
Here’s more from the WSJ outlook and review, which essentially agrees with my line.
The Wall Street Journal comes out with a decent editorial basically supporting a lot of my contentions.
When did the intrepid authorities receive the hot tip that LIBOR was being manipulated? Why only in 2007. LOl
And who informed the regulators of this evil deed being committed against the very underpinnings of the Western financial system, as Lorenzo is suggesting?
Why none other than Barclays. I’m sure KVD could concoct some conspiracy theory here.
So basically the regulators and the central banks all knew this crap was happening in 2007 and beyond. Fast movers these guys. These are the sort of people Lorenzo wants to rely on for additional regulation of the banking system. These are hares of the financial system.
And look which banks was really upset by the messing around. Why none other than Barclays.
So what did these intrepid hares of the financial system do to prevent these evil practices from continuing? Why the freaking encouraged it, that’s what.
And correctly, the WSJ diagnoses the real problem. With the world’s CBs at the time up to their neck in manipulated rates and all sorts of crap, it would be absolutely shocking if they weren’t attempting to persuade the banks to manipulate LIBOR too. Here:
And lookee here. Look at which regulator also received communication from Barclays. Why the Fed of course who was doing a great impersonation of Sgt Shultz from Hogan Heroes.
We then get to the emails. It’s always with the emails. So far, according to the WSJ there is absolutely no context and it looks like a selective dump.
The WSJ gets to the real crisis. A crisis of not even understanding what the questions ought to be in solving the problem of the financial markets and what I have been basically suggesting. Leave this stuff alone and allow the market to figure things out as it does a better job than the regulators of sussing things out.
Yep so true. Heavy duty regulation freezes everything in time and simply affords incumbency more power than they deserve.
Read the rest here, it’s pretty decent.
Barcalys bank Bash
http://online.wsj.com/article/SB10001424052702304211804577502943967390270.html?mod=googlenews_wsj
Lorenzo, one thing. You that support the status quo by supporting this witch hunt against the banks allowing Lord Muckraker off lightly with that appalling, ill-founded and zealot attack. Regulatory high-handed behavior simply freezes markets in time. I’m surprised you would fall for this caper. Instead of doing gram checks on blogs you’d be better off thinking and writing about this.
I
In the western world I meant to say. I would have thought you’d understand that generality.
Interesting comment coming from someone who argues that a person worked at a bank for 3 years in the late 70′s and after that only set foot in a bank to clear a cheque is a banker.
I worked in an accountants office during a summer break. I guess that makes me an accountant.
All I see are basically insults Michael. This is coming from a person who demands good behavior in others. Your hypocrisy would be amusing if it wasn’t that neurotic childlike sort.
Jenkins weighs in at the Wall Street Journal in today’s issue. Like me he sees the hypocrisy of the governments over this.
http://online.wsj.com/article/SB10001424052702304141204577510490732163260.html?mod=WSJ_Opinion_carousel_3
Some of Lorenzo’s mainstream supporters of the tax.
Economic luminaries such as:
In September 2006, George Monbiot argues in favour of a Tobin Tax, in his book Heat: How to Stop the Planet Burning.
- Good old Solidarity Joseph Stiglitz
Here’s Joe getting the shit pounded out of him by a hedge fund manager for being a doofus on the BBC.
http://www.youtube.com/watch?v=E4MAifsp-8E
Supporter: Fidel Castro – At the UN September 2001 World Conference against Racism, when the issue of compensation for colonialism and slavery arose in the agenda, Fidel Castro, the President of Cuba, advocated the Tobin Tax to address that issue.
In January, 2003, in Latin America, the Tobin tax was supported …….. the president of Venezuela, Hugo Chávez.
Yep, sure looks mainstream to me.
Welcome back JC! I must say I think you’re being a little unfair to Lorenzo since it was me, not him, which expressed support for transaction-type taxes. Feel free to fire away, but at least make sure you are pointing in the right direction
One other request: please note that I quite specifically@59 distanced myself from the “do good things globally” people who see it as a new pot of money, rather than as a replacement for the current tangle of taxes we all bear.
KVD
Really?
kvd@61
Oh look! I just quoted myself! Must have meant what I said, because I then repeated the dose @77
JC@73 said, quoting ….
/by/ government … or /of/ governments … or of political parties?
Nation states may have tanks and rockets and even nukes, but it’s the nation states that have the guns held to their heads – whether directly, or through well-trained politicians.
It’s an Axis of Weevils – corrupting and eating for themselves what we’ve created and need to consume.
LOl.
The Wall Street Journal knows who butters its bread.
For those who are really slow and dopey, let’s repeat the name slowly The … Wall … Street .. Journal.
Personally I’d take more seriously a character reference from Ted Bundy.
JC@various. Quoting the WSJ impresses me a lot less than it used to because its performance on monetary policy issues has been truly appalling.
And if the defence is “but they were bad too” that is no defence at all, just reinforcing the point of my original post about how widespread the moral corruption in the finance industry is. Which, if you had bothered to read said post properly (which clearly you did not, as you do not read my comments with any degree of accuracy) pointing the finger at state agencies was much of my point.
And yes, for the nth time, I agree the Tobin tax is a bad idea, it is just not a lunatic one.
Three out of my 4 examples ARE in the Western world. You really cannot read plain English. (And since you wrote “in the world” apparently you cannot write it either.)
The rest is just further misrepresentation and blather.
DB@80
If Iceland (population 320,000) can tell the banks to go jump, anyone can. Others just choose not to, a different matter.
Lol.
Interesting, so if they supported NGDP targeting everything else they say then would be fine? huh? And you accuse other people of blather, Michael? What nonsensical garbage you utter. The WSJ has a lively opinion section. You ought to read it occasionally instead of living in a bubble world. Jenkins for instance has never spoken a word about monetary economics, because like you he has no expertise, but unlike you he suddenly doesn’t regard himself as an expertologist on these matters. I guess a coupla of years tabulating stats on excel gives you the authority to speak on such matters? I can see why you would think Muckraker is a banker with his heavy duty 3 years at Chase in the late 70′s. That’s some seriously impressive banking resume there.
And where do you end up? Bash the WSJ, going full ad hom.. because they don’t support NGDP targeting or some such… they can’t be listened to on this matter. Aren’t you even in the least bit embarrassed you’re applying this form of argumentation?
Oh Bull. You’ve been hugging and kissing Lord Muckraker all the way through this discussion, which is what started this ball rolling and your entire stance has been one of bank bashing and essentially ignoring the elephant in the room… the impact and sordid behavior of the various government bodies that started this ball rolling. As I keep insisting, they are who is most responsible for this mess but go blaming the banks. You on the other hand suggest it’s a bank led problem. The WSJ piece shows how the authorities were complicit and in fact the prime instigators in screwing around with this benchmark from 2007 and right through the GFC. Barclays, Barclays was the firm that first warned the authorities about this problem and now they are the focus! yet you don’t even consider this slightly odd.
Yes it is a lunatic one and the fact that brand name lunatics support it ought to give clue. It’s a pernicious, dirty tax that, depending on the level, slows down globalization. It’s a tax on capital even before there’s a return, which shows how bad it is and it’s impact would of course slow down capital movements.
Umm and my point all along has been that US banks are the most heavily regulated entities in the western world. Asking me to go research middle east for instance is laughable. Furthermore you tried to argue that they were/are only lightly touched with regulation.
Think about it Michael.
Your argument against the WSJ’s weigh in is identical to the one presented @ 81 by Mel, the media studies undgrad and internationally renowned monetary economist/finance guru.
However at least you one-upped him by suggesting they have no credibility to discuss this because of their stance on monetary economics.
JC@85 how does your comment about Lorenzo’s argument differ from your own citing of Castro, Chavez et al as the deciding reason for opposing any form of transaction tax? I’m guessing your examples also designate which side of the road to drive on in their countries as well. But you’re basically suggesting we should do the opposite because… well, just because.
Seems Hugo and Fidel had a bit of company on the bus. Don’t laugh – this is serious stuff. And will become even more easily attainable when cash disappears from our economies in the next 30 years or so.
KVD
If michael wants to argue the mainstream nature of the capital tax by citing support coming from such luminaries as Castro and Huggy Chavez I’m not stopping him. He should feel free to. Oh hang on, he already has by linking to that wiki page.
Oh yes the 1000 left wing advocates letter in the Conversation. How could i forget.
Tell me was joe solidarity stigliz in there with his scrawl?
Jc if you wish to remain at the cute and frothy level of discussion then I can’t assist. I’m simply restating a quite self-evident fact that economies now work almost entirely on computer based systems, and the simplest, most easily verifiable means for any government to extract its pound of flesh is to abandon all the nonsense of what is and isn’t ‘revenue’ and go for the transaction weight – irrespective of source or reason.
I’ll leave the experts to argue the toss; what I’m saying is simply that transaction based taxes are more efficiently assessable, less easily ‘manipulated’ – particularly when cash is discontinued (as it will be), and may have the potential side benefit of removing the parasitic money traders from the economic mainstream. What possible value do they add, by the way?
For some reason you keep confusing what might be done with the proceeds of such an approach with discussion of the basic concept. Lorenzo himself can argue all he likes about the desirability; me – I’d rather deal with what I’m seeing as pretty well inevitable over the next couple of decades.
But I suppose there’s always barter – except somehow I can’t see Ms Rinehart swapping two holiday homes and a yacht for 5% of Fairfax on a regular basis.
JC@various Again, you clearly have no idea about what I think or what I read. Since you go for the Humpty Dumpty theory of meaning:
for both what you write and what others write, that is hardly surprising.
You are outraged that Lord Turner should say that folk in the finance sector have displayed both cynicism and greed when there is plenty of evidence of both, proceed to argue that both the cynicism and greed are justified and feel entitled to be as insulting, and misrepresent, as much as you want.
The massive sense of entitlement involved would be sinister if it was not so sad.
Your lack of self awareness is would be amusing if it wasn’t laced with venom and dishonesty, KVD.
Wasn’t it only two days ago you were wanting the job of the self elected speech cop until you were told to find one more suited to you obvious lack of talents.
You really are quite the economic illiterate aren’t you. There are book shelves written on the impact of different taxes, human behavior and consequences. I would suggest you start at B, being beginners.
Umm, haven’t we seen that sort of speech before? Let me guess…
Oh, as against other parasites.. like ummm the Jews for instances or farmers like the peasants in the old sov.
You illiterate. If something is legal and has a positive rate of return then it has a beneficial impact raising living standards. Largely unhampered markets have a good way of figuring that out. I would go further and suggest even those actions that are victimless but illegal also add to living standards.
Not at all. It’s your inability to comprehend and light headedness that makes you reach that conclusion.
You’re quite the sootthsayer aren’t you. A true economic tarot card reader.
And Michael argues it’s gone mainstream. Lol By mainstream what he really means that lots of lunatics are now unafraid to stand and be counted.
WTF?
Lorenzo, I would be extremely careful if I were you.
JC (Joe Cambria) knows you live in Melbourne and if you continue to disagree with him you may well face death threats, phone calls that attempt to interfere with your business etc..
I would take the fact that he is now using your first name, in clear breach of blog etiquette, as a veiled threat.
As an example of JC’s behaviour, in one of Tim Lambert’s threads concerning Joe Cambria, David Brooks (Brave New Climate) turned up to say he had to:
You’ll find it all here.
Joe Cambria is an extremely disturbed individual and I am sending this comment because I am concerned for your welfare. If you haven’t done so already, please take every precaution to protect yourself.
This is not a direct response to JC, more a continuation of what interests me about methods of taxing. It’s probably boring, so feel free to skip.
It seems to me that we are fairly shortly going to be faced with a cashless society, which I actually welcome, because it will make life a lot easier. In my own small retirement business I’ve seen cash (as opposed to cheques or eft) reduced from about 40% to less than 5% over the past ten years. On the outgoings side, where I used to write 50 cheques a month, and pay staff with cash, I now write about 8 cheques, pay no cash, and do all the rest via eft.
It seems to me that basically all my ins and outs are ‘independently verifiable’ – that is to say, my entire commercial life is deducible by reference to only one or two sources – my bank, and my credit card.
If you accept, as I do, that cash will fairly shortly disappear, then this means to me that any taxing authority with the appropriate powers will simply bypass my records and returns, and simply go to those external sources to decide what I should contribute. How is it that wage earners who forever have had to wear their income on their sleeve (group certificate) and accept up front without complaint losing 30% of their ‘transaction’ don’t demand the same sort of transparency from the rest of the business community?
I’m not talking economic theory here as to the ‘best’ or ‘most efficient’ means of paying for the society we live in; I’m just saying that the present means of tax gathering will change to an arbitrary assumption of ‘contribution’ based upon third party verifiable economic activity.
I just think it is inevitable. Not saying good or bad, not saying efficient etc. – just inevitable.
Not in the slightest Michael. I wasn’t outraged at all, but merely pointing out the fact that Lord Muckraker is a zealot and not the expert you think he is.
But let’s go on.
I actually stopped reading your thread at the point where you started to quote Lord Muckraker’s views on traders where without any attempt to substantiate his claims he suggested this sort of thing is prevalent. (Come on, this from the Chair?)
However, rather than agree with me that perhaps this was going way over the top you defend him suggesting his was a banker as though that was supposed to be some sort of defense.. I then look and see he spent all of three years working as a banker over 30 years ago.
Let me add another critique to your bank bash. You seem to suggest that banks etc try to push risk down the pyramid. This in itself shows a remarkable lack of understanding of what went on in the GFC and what appears to be going on now.
People that worked at bank and were at the helm of responsibility when things turned to shit, lost their jobs and in most cases a large portion of their wealth. See Lehman and Bear Stern and what happened to net “worths”, which in almost all cases was tied to the shareholding in those firms. Lehman personnel owned around 45% of their net worth in Lehman.
Next shareholders lost their value. Take a look at Citigroup stock price at what happened since.
These are of course just examples. However to argue that risk was pushed down at the benefit of the insiders shows you really have little understanding of what went on or perhaps you’ve preferred to gloss over it for ideological reasons.
The groups that I identified at the very beginning who weren’t hurt by all this and should have been were the bondholders and in some cases the depositors.
(I’ll ignore Steve Munn Mel’s sterling effort and see what happens).
oops Damn IPad.
That should read
Lehman personnel owned around 45% of their firm and in most cases their entire net worth in Lehman stock.
Okay.. are we seeing this in currency issuance? Dunno, haven’t looked.
KVD
Only until recently we had debit tax in Victoria. Everyone grumbled and complained about it. I’m not sure that governments will try that one again.
We also had a 10% interest withholding tax on interest bearing portfolio investment in Australia that was removed recently I believe.
We could, but I don;t think anyone is going back to those sorts of taxes here in a hurry especially since we have a current account deficit.
Lorenzo@90 said
Well, derrrrr, All men are mortal, Socrates is a man, therefore Socrates is mortal.
Fluid capital is not an end in itself, but a means to an end of better allocation of resources to produce something real.
A flexible labor force is good, providing that workers aren’t moving so fast that nobody gets enough time in any one chair to get actual work done.
If HR consultants were clipping coupons of hiring, firing, and reassignments, making most change jobs every day (or even swapping back and forth between the same jobs), arguing that a fluid labor market is legal, an end in itself, shouldn’t be slowed down, and they want their X% cut of every move, and threatened to rip up all the employment contracts that they were a party to if constrained to /useful/ levels of labor movement, then the HR industry would resemble the finance industry in parasitism and arrogance.
Lorenzo@83 said
Yes … others choose not to … but then, a 320k speck in the ocean may not have attracted the same attention of the finance industry in political donations as a place in the middle of Europe. The same degree of political upheaval here would almost see the Greens suddenly get a majority in their own right, or maybe having to form a coalition with the Katter Party. I doubt you can actually clean out the finance industry without cleaning the major political parties as well.
That’s why I’m so hopeful that it looks like the regulators and the politicians could get caught up in the LIBOR scandal … as well as other banks. Maybe, just maybe, capitalism can clean itself up if that happens.
Dave
Capitalism needs to be be left alone, not have a bunch of zealots and people that have never really believed in it start making suggestions (like Lord Muckraker) on how to “fix it”.
Look, I find this LIBOR thing preposterous for a lot of reasons. However one of the reasons Lorenzo used was that LIBOR is vital as a information source. This is silly especially within the context of the GFC and the recent ruptures in the EU.
Market participants ave been looking at credit default swaps as an indicator(s) of financial health. I can’t tell you the last time I ever looked at LIBOR or had discussions with other participants over LIBOR as it just a non-entity as an indicator for the very reason that everyone knows it’s an artificial construct, as banks don’t lend to each under LIBOR.
However that isn’t even my the point.
During the GFC and since, there has been a strong push by governments and regulators to ban trading in CDS’s. Talk about killing the messenger.
Worse still the EU essentially forced the governing body of ISDA to not define the Greek default as a default even though private bond holders were offered around 35% in the dollar. They did this to avoid the activation of CDSs. This is the sort of garbage we’re dealing with now.
Firms that took out insurance lost money even on that side because of government meddling.
Lord Turner is the Chair of the regulatory body, he has ex officio authority, if nothing else. And, from my reading of the emails, what he said was hardly unsubstantiated.
Lehman went bankrupt, so of course folk lost positions and wealth, that is what bankruptcy means. Lehman was also an exceptional case. Or weren’t you around for the outrage when the institutions receiving TARP funding proceeded to pay big bonuses?
And part of my point was the divorce between decision making and risk. Yes, equity holders took a hit. But that was hardly the only thing that went on.
Part of my point also was that the effect of suppression of risk was to increase instability in the system. My comments were much more directed to the lead up to the crisis, and why the crisis happened, rather than the crisis itself.
A blog etiquette point: either go back to using people’s internet handles or you will be banned.
Fair enough, I notice though that you haven’t mentioned anything about Mel’s comment and how that fits in both in terms of your etiquette ban threat and the discussion from yesterday over bringing up stuff like that?
Is that it’s acceptable… because of your own opinions that an obviously outlandish comment comes across as fine to you? is that it?
You saw what likely constitutes a couple of selective emails with context missing or may simply be as the WSJ suggested- big swinging dick baseless bravado. How does this suggest that what he said in basically painting every trader and banker to be in any way “substantiated”. How do you know? Wouldn’t it be better to wait and see what comes out?
A humungous % of bonuses paid at the time constituted contractual compensation arrangements. As far as I understood things at the time, the people who took losses at the banks or were (workwise) close to it didn’t receive bonuses.In fact they were fired. Bonuses were also paid to people on Wall Street that work on what is essentially piece work, ie brokers who are in commission pools payable at the end of the year an don’t use capital (or in fact very little).
No it wasn’t and I’ve made the point all along which you seem to avoid. Bondholders and preference shareholders didn’t get a haircut and they perhaps should have to some extent as pertaining to some of the banks that were in serious trouble. Not all were.
You need to explain that as I don’t quite get what you mean.
Sumner has a good explanation for the crisis and although I always had a trader’s view/hunch that was similar, it was difficult to put it into academic speak and explain it/why. I had a hunch the central banks fucked up big time, as I saw them waste time or actually spook the market with oppositional talk signalling they had no clue what was going on. They were talking about inflation concerns as late as May 2008 (even after Bear Stern) And so, according to Sumner, they caused the large crisis to occur compared to what should have been a localized problem in a specialized area of the bond market- sub prime.
The CBs were too tight going into the crisis and too slow to recognize the damage they had caused. To blame this on the banks is inaccurate in my book. Banks are margin takers in most of the stuff they do. They aren’t clairvoyants.
As for compensation….
Compensation has been an age old problem in finance especially. Do you go with higher salaries and anchor very high fixed costs or do you “variableize” comp depending on how the individual and the firm perform? I-banking has lots of peaks and troughs. It’s a far better idea to go with as much variable comp as you can in that sort of environment. It also fits in with the partnership days of old Wall street history where the partners took a small monthly draw and split the profits at the end of the year in order to be paid out of profits rather than what could turn out to be capital.
There is a difference between capitalism, the allocation of resources prudently, and the financial sector, which is meant to serve the rest of the system. The oil in the engine is neither the motive source, nor the destination.
Lorenzo’s point on risk dissolution, the lack of control … well … lefty me has a few words to that:
Or … indeed … such a nation, such a world.
Oh … yeah … not my words … I wonder which notorious lefty free-market hater wrote that? Hint … published 1776 … a little bit before Marx! Any takers?
Dave
There are all sort of “solutions” put forward. One interesting one, or at least I thought was interesting was unlimited liability to bank shareholders. All these sorts of things of course could work. However there are also trade-offs and this would mean bank cost of capital would rise as it is at the moment through Basel 3 (obviously Basel 1 and 2 were no good) and that means reduced lending and therefore leverage in the system.
However a decent amount of leverage in the system has had benefits by allowing consumers to access loans to buy new cars, homes or help finance their kids through education etc. Even for allowing people to take a vacation on a loan. This stuff has had benefits to the average person.
In other words the democratization of lending has had a beneficial impact at large.
Now, if we go down this road (higher cost of capital), it will mean less lending at the margin and of course less potential for a higher GDP. I need to me more than a little convinced on a blog that would be an obviously good thing.
One example of what Dodd Frank has done.
Because of onerous regulation banks basically no longer do pay day loans. These are loans for marginal, low paid workers. The end result is that it’s basically sent these people off to loan sharks and other assorted types where the fees are sky high. As I keep saying, welcome to the world of unintended consequences where the road to hell is paved with good intentions. Stop regulating especially, most especially from knee jerk responses as that’s all we’re seeing.
Mel @ 92: I said no more of that. Unless one of the others feels like rescuing you, you are now on moderation for the next week. I will let through comments by you if they are on topic, but I am not interested in your feud with JC or old history from other blogs.
Here: I think I started commenting at Barry’s around 2009.
I consider this to be one of the best blog threads in Australian about energy and energy needs. It was written by a guest poster there.
http://bravenewclimate.com/2009/09/10/solar-realities-and-transmission-costs-addendum/
KVD
You then have to explain this chart as money in circulation, that is currency, totally refutes your proposition seeing it continues to rise.
Your less-need for-currency theory seems to have been blown out the water.
http://research.stlouisfed.org/fred2/series/WCURCIR
Also, I don’t really understand your point- that a tobin tax would be more effective in a cashless society- seeing that 100% of all transactions such a tax is supposed to hit, are done electronically anyway.
Lastly, no thanks. With people like Benito Conroy and the ALP in coalition with the greenslime, the last thing people should do is give away physical currency seeing Conroy wants to control the internet.
JC@106 it is my opinion that we will inevitably move to some form of cashless society. This has good and bad consequences. I think the good outweigh the bad, but that is just my opinion.
The usual complaint about a transaction type taxing regime is that it will move people into a cash society – the so-called ‘black economy’. On just that point alone there are good reasons for replacing cash with some electronic means of payment and receipt. Point being, once a society is totally cashless it becomes very much possible and more effective to institute a taxation regime based upon what I earlier termed ‘independently verifiable’ data. Incidentally, I think it was Lorenzo who mentioned one particular concept which is called a Tobin Tax; my comments are directed more widely than the financial transactions that is aimed at.
Now whether or not that is a ‘good’ thing is a separate discussion as to whether or not it is ‘feasible’. A further separate discussion is what then is done with the proceeds. For myself I see it simply as a replacement for the hugely inefficient tax regimes presently in place.
I have my opinions on each of those things, and I’m not suggesting you change yours. But surely at least you must allow for civil discussion, and competing ideas – without the name-calling?
You suggested the cashless society is on it’s way. The chart I linked to suggests that it’s not. You lose.
The e-currency you have in mind though most likely won’t be the one that comes into being and you’ll find governments will attempt to snuff it out quickly. The most likely type will be some form of private E-currency that isn’t traceable and totally anonymous. This isn’t a good thing for welfare laden states by the way but wonderful for people outside the zone, or those that can manage to say inside the zone and participate.
You seem to envisage an unreal future. It seems to be one where everyone lays down and thinks of England while governments steal their money. In fact the opposite is likely as the web can’t be controlled without a large number of heavy boots resting people chests.
My bet is that it will appear from some country that takes a honey badgers view of things “I don’t give a shit” view of the rest of the world and is able to tolerate the abuse that will directed towards it Most certainly won”t be Switzerland as they’ve already rolled over. Could be Singapore.
Selective much? Go to comment 99. Read the threat, then go to 92, see what was said prior, which of course he was aware of and then come back to me about your civility argument.
JC@various. You continue to engage in the Humpty-Dumpty theory of meaning. Lord Turner’s comments were actually quite specific and clearly not directed to every trader and banker. It is difficult to take what you say seriously if you cannot read plain English sentences.
And getting outraged a comment about cynicism and greed when your defense seems to be that LIBOR was just a made up number anyway and who cares? suggests a great deal of cynicism.
People’s whose contracts were written on that basis probably care, for example.
Scott Sumner provides an excellent analsi\ys of the onset of the Great Recession which, as Lar Christensen explains nicely, had a great deal to do with central banks screwing up. But that level of economic disaster generally does.
Explaining the GFC is rather a different matter. There had clearly been massive perverse selection in the design of financial instruments. But the apparent belief in housing prices continuing to rise meant that lots of people took positions that only made sense if they continued to do so. Obviously, they did not. This massive set of one-way bets generated great instability when prices dropped dramatically. Hence suppressing, including systematically discounting, downside risk generates instability.
There has been a dramatic increase over time in income to finance. The evidence for commensurate social benefits from said increase is extremely thin. When you get that scale of divorce between private return and identifiable value-created you have to start looking for other explanatory factors.
kvd, I don’t share your certainty.
For starters, I don’t know what you mean.
Do you mean merely that ‘there will be nowhere to hide?’ This is already largely the case. If by the rest of the business community you mean subbies and small business, ok, they do get an easy ride. But have you seen the new Contractor Payments disclosure rules?
As for large businesses, of course their tax liability does reconcile to their profit which does actually reconcile to their cashflow statements, and both are audited.
Do you mean a cashflow tax? This was given serious thought by Howard following the Ralph Report (almost all of which was actually given serious thought unlike the useless Henry Report commissed by the feckless current muppetshow) but dumped as too radical, basically, and (thus) too hard.
If so, then first, there are good reasons why it was abandoned the first time which will be just as prevalent the second time (I suspect, although I could never prove, that the biggest is that you can’t favoritise easily under a cashflow tax). Secondly, no sooner would your cashflow tax with mandatory financial records disclosure be enacted, than people would develop sophisticated financial tools on usenet or darknet or tor servers or any other form of ‘dark’ internet.
You only have to read Robert Heinlein
Seriously, he thought a lot of it through more carefully than most eminent economists, such as the Robin Hood Tax idiots DB links to!
I’m blockquoting for ease, which I forgot to do above.
No I don’t. It’s you who seems to indulge in self-delusion. You’ve basically conceded most points yet seem to think that by calling me names or making smart alec jibes will somehow help your argument. It doesn’t. For instance you conceded Lord Mudraker is not a banker after finally agreeing he’s a technocrat… (But hey, he worked at a bank for 3 odd years over 3 decades ago lol). What’s also interesting is unless LE intervened the other day you were obviously fine with comment 92. Truly amazing display.
Really? Let me repeat them for you.
If you that’s somehow specific, then words in the English language only have the meaning you want to attach to them. Unfortunately you don’t have that right. That was a clear attempt to create to impression that it was widespread thereby attempting to tar lots of people with the same brush. This is why I continue to say he’s a zealot (in addition to writing that diabolical crap in Prospect, which even a economics luminary such as Bob Brown could have written with no one spotting the difference)
I find it amusing now that you continue with this charge thinking that somehow it will stick when you even refuse acknowledge the fact that his statement wasn’t “specific” as you say. He was in fact lobbing hand grenade attacking all and sundry.
Why would I possibly be outraged when I’m kind of amused seeing you lose any attachment to reality? Libor was in fact frequently made as the WSJ says. I note you don’t accept the WSJ’s claims because they don’t align with your views on monetary policy, which is supposed to be some sort of argument. It was made up because the CB’s steered the banks to making it up at times and also because the banks didn’t really lend to each other on the LIBOR benchmark. In other words, Lorenzo there was no bloody transactions on LIBOR anymore, as the banks were not lending unsecured to each other. However this seems to have gone right over your head. Yea, so pardon me for being cynical for those reasons.
Yep.
Not really.
How so? How was there perverse selection? Explain.
Interesting, so markets are volatile. Who knew? It seems to me that you haven’t understood what Sumner has been saying. He suggests that the stress felt in the sub-prime could have been localized if the CB’s had handled things better. He says the severity wouldn’t have been anywhere near as deep.
This sentence really makes no sense. You need to re-write it or at the very least explain it?
Do you have any evidence to your claim or will just an assertion suffice? I don’t mean linking me to someone that agrees with you, but hard raw evidence. In fact I will posit the opposite conclusion in the financialization actually helped grow the economy.
What on god’s earth do you mean? Elaborate please.
Can I make a suggestion? If you are going to use jargon, which isn’t understood in finance/economics lingo, you need to explain what exactly you’re trying to say by elaborating otherwise people have no idea what it is you’re talking about.
If you doubt me, then lets put it to the test with an academic economist and see if they figure out what you’re attempting to say in certain parts of your last comment for example.
Creating your own jargon without explaining what exactly you are trying to say makes it too difficult.
Lorenzo
I posted your last comment at cattallaxy highlighhting the problems I had in trying to understand what you’re trying to say
Here:
I’ll post any others as they come along.
Patrick@111 I’d love to discuss this further, but I keep getting spittle and slurs from elsewhere, which really have nothing to do with what is an interesting subject. Briefly I guess I see our present taxation system as a confusing mass of aims and objects, which could possibly be subdivided, and ‘reset’ so that I as an individual taxpayer, do not have to bear the inevitable costs of a) avoidance b) uneconomic rearrangement so as to minimise c) entirely artificial divisions between capital and revenue and d) penalty for mis-reporting.
It just seems to me that GST is a partial model for what might be achieved – except even with that simple base concept, there is an entire industry now devoted to avoiding or minimising one’s liability, and redefining the nature of transactions etc..
I do not wish to be seen as suggesting a “great big new tax” – more just a rationalisation leading hopefully to less time spent on avoidance and minimisation, more time spent on productive economic activity. As to whether it is possible to replace cash, well we did it once recently – 14 Febuary 1966 – but stupidly issued yet another anonymous, untraceable means of transacting. (and I do recognise it wasn’t possible then, but it certainly is now)
You mention that companies restate/reconcile their tax commitments to both their profit and their cashflow results. Yes they do – but I take that as an example more of the artificiality of our present system than some “good” thing that it is possible to do such reconciliations.
I hesitate to mention the kraken, but JC instanced a graph of US printed money in circulation. He took this as a proof that printed money was indispensible; I took it as a source of untraceable, unrecorded economic activity. The exponential growth in that graph represents economic activity not paying (never mind a fair share) any share of what we poor sods ante up.
I’ve now mentioned avoidance and minimisation a couple of times. Believe me I see both as secondary to the aim of replacing our current mess with something simple and clean and less intrusive upon economic decisions. People rave on about a “flat tax” (which I’d support) but they keep placing that concept within our present regime. There needs to be a complete rethink as to ease of collection, minimum economic bias, and maximisation of participation.
Finally you mention “dark” internet, and JC mentioned something about “the web can’t be controlled”. Call me a conspiracist, but the internet, or the web, has never been uncontrolled. To believe in some magical untraceable flow of funds without consequent title and ownership recording really is the stuff of sci-fi dreams.
JC@111 What Lord Turner said
What you said about what he said.
What I said, trying to be agreeable
What you said I said
And so on.
You also called Prospect a far left magazine and a former director of McKinsey’s far left because of, well, nothing really.
On the cynicism point, arguing that the regulators knew all about it is not really strengthening the claim that there is not something deeply rotten in the global finance industry.
The bundling of mortgages together in common securities meant that people were not really in a position to know what level of risk they were getting into as ownership of the risk was separated from information about the mortgages. If that is not perverse selection, not sure what is.
Yes, if you have a credit crunch and then make economic conditions much worse, the credit crunch will be worsened. Yes, quite so. But that is not why the Great Recession happened and was so severe. If that clarifies matters, fine.
As for
Apparently not lots of folk who were paid lots of money for their alleged expertise on precisely such matters.
On risk and instability, if a system generates a whole lot of one way bets then it is very vulnerable to events moving in the opposite direction. I don’t know how I can be clearer.
More broadly, policies which attempt to suppress risk can generate inbuilt inflexibility which actually increases vulnerability to large economic shocks. As Australian economic history demonstrated until we dismantled (most) of the Deakinite system.
On private return and social benefit, if we look at finance’s share of GDP in the US, we can see it has been increasing dramatically, particularly since 1980.
If we look at US economic growth, we can see there is effectively no correlation between the two.
So, the return to finance does not appear to be connected to rates of economic growth. Or, to put it in perfectly sensible welfare economics language, the private return seems not to be connected to any wider social benefi.
It does, however, seem to be connected to widening income inequality.
JC@112 If people want to comment here, they can. Leave it to them.
Just so I’m clear about variously “Lord Muck” “Lord Muckrake” “Lord Mudrake” “Lord Turner” having only three years at a bank.
Is this the guy who worked at Chase Manhattan Bank from 1979-82; was director of McKinsey & Co in 1994 after joining in 1982; then 2000-06 Vice-Chairman of Merrill Lynch Europe?
CHASE, a leading global financial services firm with operations in more than 60 countries. Chase is a leader in investment banking, financial …
McKinsey & Company is the trusted advisor and counselor to many of the world’s most influential businesses and institutions.
Merrill Lynch is one of the world’s leading financial management and advisory companies, providing financial advice and investment banking services.
Well, he’s obviously well out of his depth if placed in anything to do with banking. Not.
Lorenzo@114 – hear, hear! Good set of links to pull the point you make together, … Etc etc
But …
The same disrespect for interpretation of English, logic, data and human outcomes that have been heaped on your points here, are somehow, magically, able to smell like roses once passed through the back rooms of the major parties, emerging with near papal infallibility.
So … how and why would you (and other useful commentators of the left and unhypocritical right) say that the politicians we have all miss the point you make – one obvious to any child of enlightenment or classical values? Or maybe the politicians /do/ understand the point, but continue to support the pirates anyway? What does the lack of value created by the finance sector compared to it’s profits, say about our political system?
(serious question …. Not rhetoric from a lefty who wants financiers in front of firing squads)
A lot of experience, yes, but totally ignorant of the significance of LIBOR?
kvd, one issue I have with a transaction tax applied to the general economy (rather than just the finance industry) would be the way it advantages large companies (particularly vertically integrated ones) over smaller companies. A value added tax (like the GST) generally spreads the tax burden in a more size-neutral way.
desipis@118 before thinking about your comment, I’d be interested to know if you had a very good day last Wednesday? Hoping so…
DB@116 One notices that, in Australia, not so much. Admittedly, we have not had a full housing land price bust, so we have not been tested as much as other places.
Nevertheless, the claims of finance are at a bigger discount here, with stronger prudential regulation. This I put down to:
(1) Tricontinental, Pyramid and State Bank of SA. Our pollies and bureaucrats know it can end badly if you let it rip. On the other hand, those institutions are not with us any more. Institutions which fail will get wound up.
(2) Trade-offs. The Big Four banks want protection, so are in a weak position to complain about having strong prudential regulation as a trade-off.
(3) Floating mortgage rates. Voters care about interest rates and what banks cost in a very direct way. While it can lead to some egregious populism, it also is another discount on the claims of finance getting too frisky.
(4) Lack of global pretension. We are a second rank player fairly geographically isolated and know it. Playing global role games resonates a lot less.
(5) Pragmatism. We are just not a very overtly ideological society. Things have to be argued for in a practical way, so we are a bit less likely to be swept away by grand theories (or grand projects, like the European Project) than other places.
But these are also particular examples of Australia just doing public policy better than a lot of other places a lot of the time in recent decades.
kvd@119, the morning was a bit of a mixed bag, but the evening event made a good end to the day.
Or perhaps more accurately this what you first said.
I’m wondering why you left out the first comment and picked another further down the thread?
You later said he was ‘specific” with his criticisms. That’s just untrue. I’ll highlight the part that will help you.
Is the highlight any help?
No, that’s also not true. I call him a far leftist because that is what he appears to be with his scribblings in that magazine. In fact he’s a leftwing zealot. Again, you seemed to have missed what I said. Are you seriously implying that it would be somehow difficult for people’s political leanings at his level and maturity? Say it ain’t so. Now I don’t know if he always believed the things he uttered in the magazine, but he was certainly uttering leftwing slogans in the piece and at the Inquiry.
Fish rot from the head down. In this case the fish head was always rotten by the sounds of things. In fact it strengthens my case for free banking rather than what you support.
Oh please, mortgage backed securities have been around in the US since the 70′s. There was nothing new to them, just more of them. The players for the most part (yes Manly council etc are the exceptions which we’ll leave aside) knew or should have known what they were buying. Where was their due diligence?
Banks have been put back portions of the securities that were clearly fraudulent, however it’s a tiny fraction of what has been issued. Most of these relate to Country Wide, a non bank lender that Bank of America purchased during the GFC. I also suggest you reserve judgment in making these claims as there are number of put back cases going through US courts. To be frank it doesn’t look good for the seasoned investors at the moment.
Tell me, Australian banks currently have around 60% of their balance sheets tied up with real estate loans. Are these one-way bets? Homeowners in lots of cases have nearly all their net worth tied up in a home. Are these one way bets?
I think you’re confused with what you’re actually trying to say.
It’s a meaningless association. You don’t know the optimum level of financialization and no one else does either. However it would be far better with free banking and people their risk, starting with the depositor on up the food chain.
You have no evidence so therefore you’re just making an assertion that supports your prejudice.
Nonsense.
The US has or recently had around 12 million illegals that impact wages in the lower quintiles, To ignore this is to ignore reality. And there is also globalization that certainly had an impact.
But rather than looking at this so negatively like you are, the US also expanded it’s work force absorbing that clump and with globalization we’ve seen millions and millions of people taken out of poverty. Hundreds of millions in fact.
If you bothered to understand it, this has actually been a golden in reducing inequality in the world.
I think LE and SL should make that decision. Certainly not you, unless you’re claiming to be the blog owner. As far as I understand it’s not yours.
And you’ve yet to comment on 92 and 99 comments like I asked you before.
KVD
Jacques Nasser is the Chairman of BHP. He spent most of his adult life at Ford Motors.
According to your brilliant standards, does that make Jacqes a miner or an expert in the mining business?
Is McKinsey a bank now is it?
Who’s pleading he was ignorant on how LIBOR was set?
Do you even know who sets LIBOR at the banks, KVD. It’s not the freaking CEO in the morning for lord’s sake.
It’s the money desk or treasury as it’s known at the times. The people that work on these desks , at least when I was there were the schelps.
JC,
Do you have any evidence that ‘free banking’ would reach the ‘optimum level of financialization’? It’d help if you can do that without
Desi
What I do know is that if people understood their risk from depositor, bond holder to equity holder it would likely mean a lot less leverage. It would at least after the recent GFC and remain there for a while until people forgot again and the cycle goes around. I’m not rosy eyed to suggest it would solve all failure in the banking system or that leverage wouldn’t rise as the I-banks were leveraged to 35 to 1 before the GFC, but even here I think the regulators were the prime cause of hubris. Don’t wanna go into why.
However the impact is we wouldn’t have to worry about too big to fail and the taxpayers taking the potential hit.
You do realize that the US taxpayer made a profit from TARP, right? The part that lost money was as a result of using the fund to bailout the UAW* pension fund.
*United Auto Workers union
It’s really freaking interesting that I keep hearing about greedy bankers from the likes of lorenzo and some of the cheer squad here, but I don’t hear a freaking peep about the $40 billion lost in the TARP money bailing out the unions. They were never greedy of course. No siree. There was never even a hope in hell that money could be made back by the way. IT was a direct transfer from the taxpayer to the Administration’s buddies in the union movement. Unions greedy? Never! LOl
I’ll take that as a “no”.
JC, you do seem to be seeing “lefties” under every rock but I have to agree with your point about the ‘social usefulness’ of the financial sector. Any such usefulness is, in a properly free capitalist system, happy accident and a spontaneous effect of trading for private profit rather than the result of deliberate regulation. I also agree that increased regulation of market activity is inclined to reduce it (the same way means testing universal benefits ends up costing more than it saves) but we don’t have a completely 100% “free” economic system. We have a cobbled-together halfway house that has evolved over a couple of hundred years of marketised activity (in the UK at least) and I doubt that the purity of a free-for-all would be any more liberating than total regulatory control for those of us who profit or lose from the side-effects.
For the record: I’m not a lefty and I certainly believe unions can be greedy but that’s an external value judgement by without the benefit of psychic powers. For that reason I’m less concerned with the purity of intent and more interested in the banks compliance with the rules of conduct/procedures THEY CONTRACTUALLY CHOSE to subject themselves to voluntarily as a requirement of FSA authorisation to trade.
If the level of leverage remains low in free banking then no, there would likely to be decreased chances of a crash of the sort we had, though not necessarily the hit. But as I said I’m realistic about human nature.
You can’t stop business cycles.
Despite Lorenzo’s optimism Australia’s banking system would be in serious trouble if we took a 30 40% hit to RE. There’s no escape with bank balance sheets holding 60% RE. That’s just hubris.
JC@55
JC@122
And trying to be agreeable means attempting to find a formulation the other person is more comfortable with. That’s the point really.
And compared to your hyperbolic misrepesentations of Lord Turner’s comments, actually, they are pretty specific.
As for free banking, the arguments for it are quite strong. Hence my comment that
I agree the level of real estate exposure in Australia is not good, and have written at length about the problems of being so highly leveraged on bureaucratic approval (as land zoned for housing).
Sill, bit of a worry if banks cannot offset their risks as well as your average bookie.
More to the point, is the one way bets created by the “too big to fail” and the various implicit or explicit guarantees involved in the destruction of prudence.
Your comments on securitisation of mortgages seem to be saying their spread was not a great idea. And just because something has been around since the 1970s does not make it a good thing.
Illegals in the US may well depress incomes at the lower end, but they do not explain the surge in incomes at the higher end. And if the level of financial income jumps around in ways not at all connected to economic growth, then that is prima facie evidence that a lot of the former does not have much to do with the latter.
As for not stopping business cycles; probably not entirely but we (or, rather the RBA) do seem to be doing quite a good job in Oz of smoothing them out.
And, strangely, a post about the global finance industry is probably not going to have much to say about the unions. Nor penguins either. Nor global warming. Nor Julia Gillard’s vowels.
Though I am happy to agree that bailing out the UAW was a misuse of taxpayer’s funds.
Ha?
So you’re saying he didn’t make that comment I’ve been quoting? That was someone else that looks and sounds like him?
They can’t
You do realize that prior to the GFC regulators believed that the structure of US bank balance sheets were the work of pure genius, right?
Nothing wrong with the instrument as such.
If you read what I said you would see I wasn’t just “blaming” illegals. I said that clump of labor impacted wages at the bottom quintiles while demand for executive talent impacted the top- globalization caused this. I’ve never bought the inequality argument as it’s a bunch of horse shit in a relative sense (in the western world). It also glosses over the fact that millions over millions of people have clawed out of absolute poverty the last 20 odd years and as I said it’s been a golden age in reducing inequality around the world.
Giving voice to “inequalityites” is a form of enabling people to continue with a serious pathological condition I spoke about. It is possibly the worst human trait and the most serious of the deadly sins.. Envy.
Accusing bankers of being greedy and solely the bankers is retarded. We’re all greedy or none of us are.
Fair comment Deux.
I think you’re being a little too harsh on me with this though.
There’s only a particular strain I really don’t have time for.