When Mervyn King told all these bailed out bankers in Edinburgh that the ’Too-Big-To-Fail Syndrome’ was the right issue, however, all hell broke loose
The great Regulatory Debate is going off at sixes and sevens in every direction except the right one. The G20 meets in Pittsburgh to bash the bankers over their bonuses, but that’s the wrong issue: “It‘s the liquidity, Stupid!”
Now Lord Adair Turner, chairman of the FSA, is out to address that issue by bottling all those bonuses up in the busted banks bailed out by the state, but then the other banks will lure these frustrated bonus-earners with better deals and his bailed-out banks will under-perform. If that’s what he wanted to achieve, fine. We taxpayers just want our money back, asap.
When Mervyn King told all these bailed out (Scottish) bankers in Edinburgh that the ‘Too-Big-To-Fail Syndrome’ was the right issue, however, all hell, as in No. 10, broke loose. All that King said was that Glass-Steagall’s separation of retail and investment banks and insurance companies should be reconstructed for modern times, not least because it worked exceptionally well for 66 years until the Draft Dodger in the White House got rid of it in 1999 for all the wrong reasons.
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The short-term tenant on an unassured tenancy in Downing Street with that ‘great clunking fist’ has got big bother boots to match and has certainly left his footprints and handprints all over this Banking Crisis: first, he sold off half the UK’s gold reserves at the all-time low in the market; then he spurned Lloyds offer to take over the Northern Wreck; then he greased the merger of Lloyds and HBOS and produced HBUST instead; then he shoved the Bank of England down the unproven Quantitative Easing route of Gordon Brown re-election Prospect Avenue with £200.0 billion, and the man named after the colour brown, who used to be a cross-dresser called Prudence, has presided over the loss of 750,000 jobs in manufacturing, the worst budget deficit, the biggest national debt and the biggest social security budget ever. So what is the reaction of this super-powered bungling bodger to the real regulatory issue that dwarfs all others?
“Northern Rock was effectively a retail bank and it collapsed. Lehman Brothers was effectively an investment bank without a retail bank and it collapsed. The difference between retail and investment banks is not the cause of the problem. The cause of the problem is that banks have been insufficiently regulated at a global level … We will be doing that at the G20 finance ministers’ summit”.
I cannot recall another comment from a Prime Minister that comes anywhere near the sheer stupidity of this one. What King has belatedly realized is that regulation as currently conceived and practiced can never work, let alone on a global basis.
Lord Turner has an equally daft idea: “Regulators will be permanently camped inside the banks, making case-by-case decisions on what was acceptable and what wasn’t,” according to The Sunday Times (25 October). I ask you! So all those regulators who weren’t smart enough to get a job at Goldman et al. sit there telling the guy who did get that job that he can’t depress the Enter key until they’ve worked out what he’s doing!
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What King was doing was addressing the greatest risk of all: systemic risks that could bring the whole world’s financial system down and cause Great Depression 2, and Global Crunch came within an ace of doing just that. What King has realized is that a global deconstruction of the existing financial order is essential to avoid a Minsky Moment.
Minsky? He’s the guy who wrote 25 years ago that Big Government and Big Financial Institutions would destroy the capitalist system, which they have shown that they are perfectly capable of doing, and indeed their responses to this crisis are setting the system up to do just that – the Fed has doubled the US monetary base in just the past year!
Minsky pointed his finger at the financial sector’s overall size as the cause of the increasing severity of the boom-and-bust cycles. The best thing for regulation and the economy will be the removal of the “one-eyed git” from No. 10. Hang in there Mervyn, they’re greasing up the removal vans, but we need you to stay.
Stephen Hill is Economics Editor of Spear’s. He is currently finishing an 85,000 word analysis of the crisis, Global Crunch: the Why; What, Who, Where of What the Hell is Going On, which includes proposals for a very different approach to the regulatory issues than are currently under discussion.
