39 replies on “The Ruinous Fiscal Impact of Big Banks”
A brilliant article containing some important truths – all the more so given the status of the author.
The big banks in the United States are insolvent. They are carrying so much debt off their balance sheets. The United States is bankrupt. That’s why Bernanke is “Quantitative Easing” for all it’s worth (which is a fancy way of saying the primary dealers [Wall Street banks] are buying up the bonds [debt], and then the next day or a few days later are selling the bonds back to the Federal Reserve in exchange for cash.
This cash then flies off into emerging markets, commodities, causing all sorts of chaos in the rest of the world. Look at the rioting over food costs. That’s a direct result of the excess money (thanks to Bernanke’s quantitative easing) sloshing around and looking for the highest returns. Aside from some small supply and demand issues because of floods/droughts, most of the food costs are directly as a result of the excess money.
The United States is bankrupt. They are spending WAY more than is coming in in the way of taxes. In fact, as so many people are losing their jobs (because their manufacturing sector has been gutted and shipped off to China, a point which no one really talks about in the media and which most Americans are clueless about), taxation revenues are falling fast.
They are issuing bonds in the billions of dollars EVERY SINGLE DAY this month, which the banks are buying…as I said above.
The whole world at the moment is being run by the central bankers whose allegiance is to big banks. They are keeping interest rates low (which hurts the savers) in order to bail out the banks. Mervyn King says everyone must tighten their belts.
Hey, Mervyn, how about tightening up on the bonuses. For bankers to be paid bonuses for bringing the world to its knees seems insane to me.
Of course – they produce the money , if they pull in their horns after a unwise affair with some cow it has repercussions – you cannot tax thin air.
We need more research about the Irish Fiscal crisis of the 80s – my bet is that it was the result of huge money creation withen Irish banks creating a bubble in agricultural land – then when it became obvious the Brussels Farm transfers were linear rather the exponential the revenue was not there to service the loans – the banks began a recapilisation process that reduced the money supply.
Exellent article
I read Simon Johnson’s book entitled “Thirteen Bankers” up to about page 99. To me, he lacks an understanding of the psychology behind these people, how they think. It is almost as if he believes these financial crises happen by accident, that there is no collusion.
The book to read is “The Shock Doctrine: The Rise of Disaster Capitalism” by Naomi Klein, a Canadian. What a book! Just to read how the IMF and the world bankers waited and waited until the people were begging for help during the Asian Crisis in the 90’s, waited until they had nothing left, and then they swept in and bought up their companies, their infrastructure. What they did in Russia, South America, etc.
Naomi Klein was actually in these countries. She did incredible research in order to write this book. Read what she has to say. I can tell you, if you have an open mind, you will be shocked at what is and has gone on. You will not look at the world the same way again.
But kudos to Simon Johnson, just the same. He does get part of it.
@backwardsrevolution:
If you liked NK, try; Secrets of the Temple:How the Federal Reserve Runs the Country [William Greider – 1987].
It only got worse!
BpW
@Philip Lane
Hmmm. ‘Next up for the United States economic outlook is not necessarily another too-big-to-fail boom-bust-bailout cycle. It may well move on to too big to save, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country. ’
And Intellectual Rights and Lefts understand this …..
Ireland Banks – too big to save? Quiet! Ergo, if an intellectual right and/or left exists in Ireland? (responses on the back of a postage stamp please), then DEFAULT NOW is the ONLY SANE, SENSIBLE, and PRAGMATIC OPTION.
Pls do not allow anyone to sue Merril-Lynch in the interim – the BLIND political class are more than capable of guaranteeing the entire Debts of Bank of America.
Great article.
As to the paragraph quoted by David O’Donnell – they can only wreck a country’s balance sheet if the people have elected fools for leaders that let them do it and compound it by voting for more fools to do an ‘IMF lite’.
The whole bloody thing needs to go back to the start and banks should make a case for funding, like they make everyone else, instead of scaring a bunch of fools we call politicians in to underwriting their cowboy gambling.
@ backwardsevolution & Brian Woods.
Try ‘Confessions of an Economic Hitman’ by John Perkins.
The article wants to persuade us that banks,by being “big”, will destroy public finances.
The first point raised to support this argument is that a banker is supposed to have said that regulation will lead the bank to move country of domicile. I don’t think that’s JP Morgan’s position at all. Anyway not only would it be impossible, it’d be futile too. Regulation is increasingly similar around the world, even if it could move key operations. Most of all, banks themselves want good regulation. It makes sense – it is in the interests of both employees and shareholders ost of all to avoid financial instability. And I don’t see the link of this first point to public finances.
The second point in the article is banks don’t want bank regulation but rather spending cuts. Where does this come from?! There are some economists and strategists who see lower budget deficits as an essential condition for stability and stronger growth in the years to come (including many outside banks by the way). But spending cuts as a credo? Show me the evidence.
Now when I hear someone cite “one simple reason” for quite some story, in this case how the world economy got into trouble these past few years, I immediately get suspicious. Here I give up – the remaining points I find confused. It is of course more obvious than ever that financial crises destroy public finances. And vice versa too, out of whack public finances weakens the productive capacity of an economy too.
As for the very last point, many banks and bankers agree that bank capital needs to be raised. Easier said than done of course, especially in today’s difficulty conditions.
There is quite some research on size and risk. See e.g. here http://www.treasury.gov/initiatives/Pages/FSOC-index.aspx (Mr Geithner, last month) or read some of Mr Bini-Smaghi’s ideas http: // http://www.ecb.int/press/key/date/2010/html/sp100415.en.html And rather than pontificating, it‘d be good to build arguments based on recent argument and research.
It might be useful at some stage to think about why there are banks, and large ones too. One of the more vital functions of banks as allocators of capital – more so the larger ones in Europe – is to facilitate the distribution of government debt. Does that require strong banks for the process to work well? Most certainly yes. And if you want to figure out in detail what needs to be improved today, be my guest.
Is it possible to conceive of a healthy economy without healthy banks, at least some of them? No, not really (by the way, in Ireland’s context, that doesn’t mean that any of them – let alone all of them – imperatively had to be domestically-owned).
@all
Transcript of a Press Briefing by Caroline Atkinson, Director, External Relations Department, International Monetary Fund
Washington, DC
Thursday, February 3, 2011
[Blind Biddy brought this to my attention – I suspect she has opened bilateral discussions with the IMF on getting those ‘tenners’ back for those on disability …. And her white bazooka is fairly well polished up at the mo …. be curamach around Kingstown …]
QUESTIONER: On Ireland, you’ve seen the stories of the latest political developments, and I want to know if that affects how the program is moving forward or are there any further discussions going on, [including] possible changes?
MS. ATKINSON: Well, the elections are later this month on the 25th, and we will have the formal review mission for Ireland. I think the first and second reviews might be combined and take place just after that. So that will be the time when we will know what measures the new government will be putting in place beyond the program which has already been enacted.
QUESTIONER: Could I just ask you how the Fund could approach this issue of a changed political spectrum in Ireland. You know, how does the Fund then tackle a program then? There’s clearly discussions and the Fund is always open to changes, but could you just give us a general feeling?
MS. ATKINSON: The general view is that we deal with the government of the country regardless of where it is on the political spectrum. And it was very important in the case of Ireland and some other cases that we’ve seen broad parliamentary support for the underlying measures under the program. We’re, of course, open to discuss — we’ll have a broad framework for the best way to get Ireland’s economy back on track, aiming towards sustained and sustainable growth. And then within that framework, different governments would choose different measures, and we’re open to discuss those. We do, increasingly focus importantly on — especially when countries have big adjustment programs — on what they are doing to protect the more vulnerable to make sure that the socially needy are borne in mind with whatever policies are put in place.
QUESTIONER: Within these discussions do you also discuss targets or are those just not discussed? For example, the whole deficit target in Ireland. This is the big issue that the Labor Party has been bringing up –
MS. ATKINSON: The basic fiscal framework will, of course, be something that will be discussed. That’s one of the key elements of the program. I should also let you know that there will be a report published on Ireland, in a couple of weeks’ time that will be based on the technical missions that we’ve had earlier. So that will be something that will be available to you in the next few weeks. That will come before the next review, so in a sense it will be backward looking.
QUESTIONER: What kind of technical issues?
MS. ATKINSON: Well, it was a technical mission to see how things were going and check that the program is on track, that’s part of the extraordinary access policy.
@Ciaran
You talk of banks has if they are a vital but benign utility – they have a monopoly of credit creation !!!!, yet you see no problem with these institutions being outside the control of the state.
What is the state ? What poltical framework do you see in this power vacuum and who or what will fill it – what will give them legitimacy ? the ability to create money ? that should work out brilliantly.
Every little bank fiefdom will and indeed are creating currency as they can – with devestating effects.
The free market and all that – let me tell you the ability to coin currency is and will never be a free market function ,
In a civilisation collapse people may recognize money but not currency.
Witness the carnage that is the ECB which is the first central bank almost completly without a state as a host – it oversaw not a dramatic rise in goverment debt but in shadow bank debt during the last decade.
It does not see state debt as being important to the money supply period.
Also without settlement what are financial transactions between banks and their states , what is value ?.
The FX markets are completly out of control , betting on I know what – where is the fixed unit of account in such games – all the banks role now is to extract yield from existing capital via surplus extraction in all spheres.
The entire artifice is sham , nothing more.
Banks and their finance have completly divorced currency from the physical world although their criminality and avarice have effected the real world in so many many ways.
Tulips everywhere yet not a windmill to be seen – soon the tide will come in.
When the CEO of a big bank cannot understand its balance sheet, there is a problem.
The Glass-Steagall Act was repealed by Congress in November 1999, a measure that has been termed the “Citigroup Authorization Act.”
Robert Rubin had pushed for repeal of the Glass-Steagall Act as Treasury Secretary. He resigned in July 1999 and President Clinton called him the “greatest Secretary of the Treasury since Alexander Hamilton” – – President George Washington’s Treasury Secretary – – and the former Cabinet officer, who had spent 26 years at Goldman Sachs before joining the Clinton Administration, took a senior position at Citigroup.
Rubin who earned $17.0m at Citi in 2008, was not aware of the detail of $55bn of CDOs and other subprime-related securities on the group’s balance sheet. “The answer is very simple,” he told Fortune Magazine. “It didn’t go on under my nose.”
It gets worse…
The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43bn in mortgage-related assets!
On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. The Wall Street Journal said Rubin made $115m in pay since 1999, excluding stock options. Rubin told the Journal his pay was justified and that there were higher-paying opportunities available to him. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said. Asked if he had any regrets, Rubin said: “I guess that I don’t think of it quite that way,” adding that “if you look back from now, there’s an enormous amount that needs to be learned.”
Non, je ne regrette rien!
That surely sums up the attitude; no link of course with the lives that have been destroyed; philanthropy though buys some insurance!
Not surprisingly, I agree with most of what Ciaran O’Hagan has written. Where Simon Johnson has lost the plot a little is in providing ammunition for those who view this as some great Manichaen struggle between powerful, greedy bankers and the tribunes of the people in their spotless robes. This may be politically convenient, but, as Colm McCarthy has reminded us in the Irish context, anger is not a policy.
As a result an effective resolution of the current crisis – in a way that will minimise the incidence and severity of a repetition – must focus on two levels. The first relates to the exercise of economic and political power; the second deals with the detailed regulatory, legal and technical issues that Ciaran has highlighted.
Both levels are closely connected because what ever the policy/regulatory/technical bods come up with in New York, London, Frankfurt, Basle, Beijing or elsewhere must be enacted by politicians at least at the level of the G20.
There is no point seeking to return to the financial architecture that existed prior to Greenspan, Cox and Rubin (egged on by the big banks and the ‘useful idiot’ academics) persuading Clinton to ignite the bonfire of financial regulation that has engulfed the developed world. It had been in place since the ’30s and was badly in need of reform. We could have done without the ‘reform’ we got, but we can’t go back to the ‘status quo ante’. The lanscape is completely different now.
The banks recognise this and, I’m sure, are willing to co-operate in developing sensible policy and regulatory arrangements appropriate for the current landscape. But, equally, there should be no doubt, that they are determined to retain many of the advantages and privileges they have secured over the last decade – and they will apply all the political and economic power they have accumulated to this end.
The current protests in Egypt glaringly demonstrate the gutlessness, hypocrisy and complicity of politicians in the West. They have supported this and other tyrants to suppress any organised element in civil society that might hold them to account. All that is left are the army, the ineradicable extreme and the irredeemiably criminal or corrupt. So there is a logic to Mubarak’s claim ‘remove me and there will be chaos’.
The big banks internationally are employing a sophisticated version of the ‘Mubarak defence’. And they are employing it against the same gutless, hypocritical and complicit politicians. ‘If you break us up, or regulate us too tightly we might move operations and you will lose the tax revenue and employment we generate; whether we stay of go you will lose the benefits of financial ‘innovation’ and the cost of financing economic activity will increase.’
This pressure is felt most keenly in Britain which is addicted to the revenues generated by the City and to the City’s position as a financial centre representing a Britain ‘punching above its weight’. But it rings alarm bells in New York and Frankfurt as the balance of global economic power shifts inexorably eastwards.
It is good that some of those knowledgeable and influential in financial economics are coming forward with statements and analysis that might help to stiffen the spines of these gutless, hypocritical and complicit politicians, but it is very little and very late. Economics has failed – and been seen to fail – miserably in this entire debacle. Much is due to the extent that many economists have been useful, but well-rewarded, idiots for the financial moguls, but much is also due to the extent that their models ignore the exercise of economic and politcial power. Their fetish with markets blinded them to the actual behaviour of participants in these markets – and the frequent abuse of markets. And there is a risk that their currently preferred recommendation of increasing equity, derived as it is from these models, may prove entirely inadeqaute. It would not be the first time that economists, locked in the neoclassical canon, advanced reforms that had enormous implciations, both good and bad, that they didn’t expect, but which were entirely predictable if the ability to exercise economic and politcial power were taken into account.
The fundamental problem is that the final consumer, the poor sap who pays for everything, is not properly represented in all these deliberations. At least the Egyptians are doing something about it.
Do not see that the article enlightens me any more that before. OK, some specific detail, but the overall case has been amply described by many commentators: ‘Big’ banks are very hazardous to the economic well-being of a majority of folk and the country they live in.
Now what do we do with hazard: We assess risk (banks are high risk) and put real physical barriers between us soft humans and that hazard. Didn’t happen with banks: Barriers were dismantled! If you ignore the immutable chemical attributes of Nitroglycerine (a troublsome and treacherous substance) – try not to be disagreeably suprised when it detonates and removes bits of your anatomy.
Since we may be in the ‘reading’ frame of mind, try: Thorstein Veblen and J K Galbraith, both of whom regarded modern financiers and bankers as a bad dose of the pox. Your man Smith didn’t have much good to say of them either.
@CO’H: You might want to have a careful reflection on your economic Model-in Use. It looks suspiciously like Permagrowth. That model is on life-support and prognosis is very poor.
If you really want to corral finance houses and banks: Prohibit them from issuing any credit above what they already possess in liquid asset reserves. They want to emit 1, they own 1.
BpW
“First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.”
Private Eye magazine in its latest issue has a clinical look at Bob Diamond’s spin and it is very revealing but sadly not available on-line. Diamond claims Barclays was not dependent on any bailout money but the amount of liquidity support BarCap needed in the US to get through Q4 2008 was in the hundreds of billions of dollars.
After the last three years, I for one find the very concept of _private_ banking to be a discredited one, and would hold that big or small, it is private banks are ultimately ruinous to economies and societies.
Let me speak then, that most unspeakable of heresies: What is so wrong with simply nationalising the banking system?
The vast public bailouts have made it clear that banks are regarded by all in the land as a national asset, of systemic importance no less. They run on money from the public, lend to the public, provide service to the general economy, and when they run into trouble the public purse must save them out. They look like a semi-state body to me.
“Horror!” claim the detractors, “Bureaucracy!”, “Inefficiency!”. These seem to me to be arguments from the 1970s. I live in the twenty first century, and as far as I can see the profit motive and deregulation make private industry every bit as “inefficient” as the public sector from a customer(and shareholder) point of view . Indeed, the larger a company gets, the more like a government department it becomes as it accumulates layers of structures, red-tape, and self interests. Finally, the amount creamed off by management makes me wonder if private companies actually have a cost/benefit advantage over public services or not.
As to the argument about government power and abuses, this too seems to be an argument from the 1970s. The Cold War is over. Financiers, businessmen, and the west abandoned free and fair societies some time ago in their pursuit of the almighty growth, and bankers are even more morally bankrupt in this regard. I fail too see how so much money and power in private hands serves the interests of any republic.
So why not nationalise the banking sector? Let the state make a profit from their operation, and compensate the public for bailing them out. I can hardly see how state run banks could do a worse job than the current regime, regardless of the dictates of contemporary dogma.
@OMF,
Competitive efficient markets are the most powerful tools we have to assemble and process enormous volumes of economic information and to frame and execute economic choices. Thet also advance the liberty of citizens both individually and collectively. No state-run bureacracy could even hope to replicate this.
The problem we have is that politicians, in hock to their paymasters, have failed to impose effective competition law and regulation on the capitalists who subvert, rig and undermine markets to pursue their narrow sectional interests – and certainly to the detriment of the interests of most citizens and final consumers. And most economists fail to recognise this problem.
@ PH;
Like your two paras: Ideological, virtual assumptions: White and clean v Practical reality: Dirty and hazardous. Nifty.
Now, if your last sentence in #2 is accurate … … it would be useful to know why. Academic training? Conflicts-of -interest? Incompetence?
BpW
Competitive efficient markets are the most powerful tools we have to assemble and process enormous volumes of economic information and to frame and execute economic choices. Thet also advance the liberty of citizens both individually and collectively.
I don’t believe it.
I offer the contemporary financial crisis, the economic downturn, and indeed the erosion of rights and respect for rights in the western world over the last decade as direct counterexamples to your point of view here. All this has occurred during a time of unprecedented deregulation, laisse faire governance, and globalisation. We all followed the creed of the markets and look where it has gotten us.
I don’t say that you are entirely incorrect in your views, but in my opinion you have clearly taken them too far. Free markets are not the be all of everything. They have flaws—very significant ones—and cannot be relied upon to decide everything in our societies.
The problem we have is that politicians, in hock to their paymasters, have failed to impose effective competition law and regulation on the capitalists who subvert, rig and undermine markets to pursue their narrow sectional interests – and certainly to the detriment of the interests of most citizens and final consumers.
You are essentially taking the view that the referee and not the players are to blame if a fracas ensues on the pitch. The reality is that the players, the markets, are ultimately responsible for their own actions. Indeed, when the players actively bribe the referee and rig the rules to suit themselves, it’s clear where the problem lies. Instead of shifting blame to third parties, we must recognise that the markets are inherently prone to abuse and implosion and treat them accordingly.
No state-run bureacracy could even hope to replicate this.
And yet we have China, waxing ascendant. It seems to me that the mantras of western economics ring hollow in the modern age.
@OMF,
Surprisingly, we are not be as far apart as you might think. But we need to be clear on one thing. Capitalism, and not markets, is the beast that has the ability to generate socially and economically useful outcomes. But it is a beast that is inherently unstable, constantly mutates and is prone to periodic bouts of wreaking havoc. It must be shackled by markets, combined with effective competition law and regulation applied by the state, to generate useful outcomes. The state also has the ultimate responsibility for determining the provision and sustainability of public goods and of social and physical infrastructure, but is not required to provide or finance these directly.
Part of the problem is that it is considered rude to speak of capitalists and capitalism in polite economic, regulatory and policy-making circles.
However, one distinguished economist isn’t. Ronald Coase, the Nobel Laureate who provided us with profound insights on the firm, social cost and property rights (and who turned 99 last Dec.) has a new book out – “How China became Capitalist”.
@Obessive maths freak
It is the production of credit that needs nationalising , not the banks, then we will have freedom of sorts. – but in the absence of monetory governance and the rule of law nation states need to create their own monopolys to counter these international cabals as libertarian dreamers will be crushed by such raw power if they but lie down to these buccaneers.
@ PH: “But it is a beast that is inherently unstable, constantly mutates and is prone to periodic bouts of wreaking havoc. ”
That’s a virus! Better get the vaccine – or whatever,
The Market is not a vaccine. You need Level 4 Containment.
BpW
@BW,
Getting tangled up in the metaphors! Forcing capitalists to use properly the tools that markets provide is both prevention and cure, but it is a wise society which knows how much evil to tolerate.
And I don’t have a convincing answer to your question as to why most economists fail to recognise the problem of capitalists’ abuse of markets. There should be enough of them on this board to give it a shot, if they were so disposed. But, perhaps, they may not see it as a valid question.
@ Ciaran O’Hagan
‘Regulation is increasingly similar around the world, even if it could move key operations. Most of all, banks themselves want good regulation. It makes sense – it is in the interests of both employees and shareholders most of all to avoid financial instability’
I am sorry to have to say it, but that is a ludicrous assertion. Banks and bankers are in a competitive global struggle for profits and bonuses. Regulation is an obstacle to profit, it is naturally resisted. One of the best way to do that is to operate in less regulated environments where possible.
Another method is to introduce maximum complexity as possible into transactions. Complex opaque regulations, with loopholes designed in from the start, are the ideal, from a ‘business’ point of view.
‘As for the very last point, many banks and bankers agree that bank capital needs to be raised. Easier said than done of course, especially in today’s difficulty conditions’
Bank CEOs resist capital raising even in boom times, because high leverage facilitates looting. As Anan Adnati and her colleagues have clearly demonstrated, equity is not nearly as much fun for bankers to play with.
Booms and busts , deflation and inflation are all part of the game, in that they allow wealth to be extracted and transferred in various ‘abstract’ or impersonal ways. Notwithstanding the solemn rhetoric for publci consumption, the reality is that bank CEOs or the finance industry more generally have a vested interest in instability.
@Paul Hunt
What you appear to be saying is that competitive efficient markets are wonderful but that business is so corrupt that there is no such thing as a competitive market. It sounds like teenage virginity in Texas.
The US economy added a tepid 36,000 jobs in January, as severe winter weather slowed the pace of job creation, labour department figures showed on Friday.The increase in non-farm payrolls was much smaller than the 146,000 that economists had projected and marked a sharp decline from the previous month, when the US added 121,000 workers, according to revised figures.
@seafoid,
Nice try! But I’m not going to let you paint me in to that particular corner 🙂
We’re talking here about the ‘shakers and the movers’ in global banking and finance – and I believe it also applies to the top-level in most other sectors. The vast majority of people who do the grunt work in and for these organisations reckon it’s ‘not for us to reason why..’. Huge numbers of people in a whole range of trades and professions participate in reasonably, but not perfectly, competitive markets. The system works probably as well as might be expected given the ‘rich tapestry of human life’. But labour’s declining share of income in the developed economies – in particular the Anglo-Saxon ones – over the last 30 years tells its own story.
A global elite has emerged that exercises disproportionate political and economic power. They have exercised this political and economic power to escape from the discipline that competition in the market imposes. The challenge for politicians everywhere (who seek to represent the interests of most of their voters) is to expose this elite to the disciplines of the market. And economists have an important role to play in devising methods that politicians may employ to achieve this – but don’t seem to be desperately bothered.
@Paul Hunt
Have you ever come across “Wealth and Democracy” by Kevin Phillips ?
@seafoid,
I’ve come across mentions of him and his books in the dispatches, but haven’t read this one.
@ PH: Many thanks for your reply.
“… perhaps, they may not see it as a valid question.” Yep!
Not in any specific order or level:
1. Academic training will have a significant bearing. Say an economist had to have specific training in science/engineering, before qualifying. The latter professions would be most sceptical of many of the assumptions conjured up to assist in model formation.
2. Researching some aspect of economics might indeed be useful, but unless you ‘get out more often’, your intellectual and cognitive framing becomes increasingly narrow and focused. Ignorant experts is the term that has been applied here.
3. Your employer has a significant impact. That’s where your pay-check comes from!
I agree that caution is definitely needed when dealing with financial matters. The scope for chicanery and fraud is too wide. The GS Act was appropriate, but was repealed. This points to problems within the political sphere that must also be addressed. We will see what happens.
BpW
@ Paul hunt
It is well worth reading. He wrote it in the 1990s before the looting really took off and even then he was talking about a new gilded age.
Good article!
I paricularly liked the sentence explaining how banks (“mega” and obviously in our case not so “mega”) over a certain size need a: “….dumb sovereign to back them”.
@Brian Woods
According to you “ignorant experts” need to “get out more often”.
If public service salaries were correctly “bench-marked” a normal career path for most people would conceivably include 10-15 years public service and 25-30 years in the private sector.
In such circumstances IMHO the chances of having a “dumb sovereign” would be diminished.
@Seafoid
“He wrote it in the 1990ś before the looting really took off…..”
Therefore he must have also written it before “benchmarking” and “social partnership” also took off in Ireland.
Does anyone else see a connection here regarding Ireland?
@Seafoid
“He wrote it in the 1990ś before the looting really took off…..”
Therefore he must have also written it before “benchmarking” and “social partnership” also took off in Ireland.
Does anyone else see a curious connection here regarding Ireland?
@Brian Woods
1. Academic training will have a significant bearing. Say an economist had to have specific training in science/engineering, before qualifying. The latter professions would be most sceptical of many of the assumptions conjured up to assist in model formation.
2. Researching some aspect of economics might indeed be useful, but unless you ‘get out more often’, your intellectual and cognitive framing becomes increasingly narrow and focused. Ignorant experts is the term that has been applied here.
I remember a discussion re. medical training in the 1980s with a North of Ireland doctor who maintained that TCD dropping subsidiary demand fr every student to study history or Literature course simultaneously with medical degree narrowed the vision of the medical world drastically, till the “engineering” of medicine took over ominously.
Good article – needed said by someone like Simon Johnson. Max Keiser expresses his opinions let’s say more forthrightly – but the status quo find it easier to dismiss his views.
@Ciaran O’Hagan
“most of all, banks themselves want good regulation!”
As John McEnroe used to say “You can NOT be serious!”. I have to question the objectivity of someone who could post a comment so completely in denial sa your initial criticism of Simon Johnson above. It took me aback to such an extent that I took the trouble to google your name
Now it may be none of my business – but are you the same Ciaran O’Hagan who wrote in the Indo last September:
“Ireland’s credit for now is as safe as houses. The Exchequer is swimming in cash. And it has ultra-strong backing from the European authorities. A 6pc+ yield today on government bonds will prove a bargain, as long as the Government digs the Exchequer deficit out of its hole. ”
Who according to the by-line is a bond strategist at Societe Generale – a multi-billion dollar beneficiary of the 2008 US bailout of AIG.
(love that last phrase about digging the exchequer out of it’s hole BTW)
@ Livonian: Note your response. The term ‘ignorant experts’ was part of a quote by a retiring President of the American Society of Chemists. The full qoute is (in respect of PhD researchers):
“They spend their time learning more and more about less and less, and end up ignorant experts”
There is also the paradox of Skilled Incompetence. Take your pick.
@ Longhand: One may indeed get what one wished for! My idea was that it might be useful for third level colleges who ‘brainwash’ their undergrads with pre-digested pap (and very good pap it is too) to recruit some already qualified persons from diverse backgrounds. Some engineers make great surgeons. Some chemists make great economists. However if you recruit principally from the ranks of the Great Unwashed … ! Just a personal view you understand.
Some of you seem to think the article at the top of this post was … I judge it as mediocre. Try William Black (Prof). You will find some of his posts in the archive on http://www.itulip.com
BpW
@longhand
Nice blog – fascinating history of Depfa/HRE – what a can of worms is the IFSC!
39 replies on “The Ruinous Fiscal Impact of Big Banks”
A brilliant article containing some important truths – all the more so given the status of the author.
The big banks in the United States are insolvent. They are carrying so much debt off their balance sheets. The United States is bankrupt. That’s why Bernanke is “Quantitative Easing” for all it’s worth (which is a fancy way of saying the primary dealers [Wall Street banks] are buying up the bonds [debt], and then the next day or a few days later are selling the bonds back to the Federal Reserve in exchange for cash.
This cash then flies off into emerging markets, commodities, causing all sorts of chaos in the rest of the world. Look at the rioting over food costs. That’s a direct result of the excess money (thanks to Bernanke’s quantitative easing) sloshing around and looking for the highest returns. Aside from some small supply and demand issues because of floods/droughts, most of the food costs are directly as a result of the excess money.
The United States is bankrupt. They are spending WAY more than is coming in in the way of taxes. In fact, as so many people are losing their jobs (because their manufacturing sector has been gutted and shipped off to China, a point which no one really talks about in the media and which most Americans are clueless about), taxation revenues are falling fast.
They are issuing bonds in the billions of dollars EVERY SINGLE DAY this month, which the banks are buying…as I said above.
The whole world at the moment is being run by the central bankers whose allegiance is to big banks. They are keeping interest rates low (which hurts the savers) in order to bail out the banks. Mervyn King says everyone must tighten their belts.
Hey, Mervyn, how about tightening up on the bonuses. For bankers to be paid bonuses for bringing the world to its knees seems insane to me.
Of course – they produce the money , if they pull in their horns after a unwise affair with some cow it has repercussions – you cannot tax thin air.
We need more research about the Irish Fiscal crisis of the 80s – my bet is that it was the result of huge money creation withen Irish banks creating a bubble in agricultural land – then when it became obvious the Brussels Farm transfers were linear rather the exponential the revenue was not there to service the loans – the banks began a recapilisation process that reduced the money supply.
Exellent article
I read Simon Johnson’s book entitled “Thirteen Bankers” up to about page 99. To me, he lacks an understanding of the psychology behind these people, how they think. It is almost as if he believes these financial crises happen by accident, that there is no collusion.
The book to read is “The Shock Doctrine: The Rise of Disaster Capitalism” by Naomi Klein, a Canadian. What a book! Just to read how the IMF and the world bankers waited and waited until the people were begging for help during the Asian Crisis in the 90’s, waited until they had nothing left, and then they swept in and bought up their companies, their infrastructure. What they did in Russia, South America, etc.
Naomi Klein was actually in these countries. She did incredible research in order to write this book. Read what she has to say. I can tell you, if you have an open mind, you will be shocked at what is and has gone on. You will not look at the world the same way again.
But kudos to Simon Johnson, just the same. He does get part of it.
@backwardsrevolution:
If you liked NK, try; Secrets of the Temple:How the Federal Reserve Runs the Country [William Greider – 1987].
It only got worse!
BpW
@Philip Lane
Hmmm. ‘Next up for the United States economic outlook is not necessarily another too-big-to-fail boom-bust-bailout cycle. It may well move on to too big to save, which is what Ireland is now experiencing. When reckless banks get big enough, their self-destruction ruins the fiscal balance sheet of an entire country. ’
And Intellectual Rights and Lefts understand this …..
Ireland Banks – too big to save? Quiet! Ergo, if an intellectual right and/or left exists in Ireland? (responses on the back of a postage stamp please), then DEFAULT NOW is the ONLY SANE, SENSIBLE, and PRAGMATIC OPTION.
Pls do not allow anyone to sue Merril-Lynch in the interim – the BLIND political class are more than capable of guaranteeing the entire Debts of Bank of America.
Great article.
As to the paragraph quoted by David O’Donnell – they can only wreck a country’s balance sheet if the people have elected fools for leaders that let them do it and compound it by voting for more fools to do an ‘IMF lite’.
The whole bloody thing needs to go back to the start and banks should make a case for funding, like they make everyone else, instead of scaring a bunch of fools we call politicians in to underwriting their cowboy gambling.
@ backwardsevolution & Brian Woods.
Try ‘Confessions of an Economic Hitman’ by John Perkins.
The article wants to persuade us that banks,by being “big”, will destroy public finances.
The first point raised to support this argument is that a banker is supposed to have said that regulation will lead the bank to move country of domicile. I don’t think that’s JP Morgan’s position at all. Anyway not only would it be impossible, it’d be futile too. Regulation is increasingly similar around the world, even if it could move key operations. Most of all, banks themselves want good regulation. It makes sense – it is in the interests of both employees and shareholders ost of all to avoid financial instability. And I don’t see the link of this first point to public finances.
The second point in the article is banks don’t want bank regulation but rather spending cuts. Where does this come from?! There are some economists and strategists who see lower budget deficits as an essential condition for stability and stronger growth in the years to come (including many outside banks by the way). But spending cuts as a credo? Show me the evidence.
Now when I hear someone cite “one simple reason” for quite some story, in this case how the world economy got into trouble these past few years, I immediately get suspicious. Here I give up – the remaining points I find confused. It is of course more obvious than ever that financial crises destroy public finances. And vice versa too, out of whack public finances weakens the productive capacity of an economy too.
As for the very last point, many banks and bankers agree that bank capital needs to be raised. Easier said than done of course, especially in today’s difficulty conditions.
There is quite some research on size and risk. See e.g. here http://www.treasury.gov/initiatives/Pages/FSOC-index.aspx (Mr Geithner, last month) or read some of Mr Bini-Smaghi’s ideas http: // http://www.ecb.int/press/key/date/2010/html/sp100415.en.html And rather than pontificating, it‘d be good to build arguments based on recent argument and research.
It might be useful at some stage to think about why there are banks, and large ones too. One of the more vital functions of banks as allocators of capital – more so the larger ones in Europe – is to facilitate the distribution of government debt. Does that require strong banks for the process to work well? Most certainly yes. And if you want to figure out in detail what needs to be improved today, be my guest.
Is it possible to conceive of a healthy economy without healthy banks, at least some of them? No, not really (by the way, in Ireland’s context, that doesn’t mean that any of them – let alone all of them – imperatively had to be domestically-owned).
@all
Transcript of a Press Briefing by Caroline Atkinson, Director, External Relations Department, International Monetary Fund
Washington, DC
Thursday, February 3, 2011
[Blind Biddy brought this to my attention – I suspect she has opened bilateral discussions with the IMF on getting those ‘tenners’ back for those on disability …. And her white bazooka is fairly well polished up at the mo …. be curamach around Kingstown …]
QUESTIONER: On Ireland, you’ve seen the stories of the latest political developments, and I want to know if that affects how the program is moving forward or are there any further discussions going on, [including] possible changes?
MS. ATKINSON: Well, the elections are later this month on the 25th, and we will have the formal review mission for Ireland. I think the first and second reviews might be combined and take place just after that. So that will be the time when we will know what measures the new government will be putting in place beyond the program which has already been enacted.
QUESTIONER: Could I just ask you how the Fund could approach this issue of a changed political spectrum in Ireland. You know, how does the Fund then tackle a program then? There’s clearly discussions and the Fund is always open to changes, but could you just give us a general feeling?
MS. ATKINSON: The general view is that we deal with the government of the country regardless of where it is on the political spectrum. And it was very important in the case of Ireland and some other cases that we’ve seen broad parliamentary support for the underlying measures under the program. We’re, of course, open to discuss — we’ll have a broad framework for the best way to get Ireland’s economy back on track, aiming towards sustained and sustainable growth. And then within that framework, different governments would choose different measures, and we’re open to discuss those. We do, increasingly focus importantly on — especially when countries have big adjustment programs — on what they are doing to protect the more vulnerable to make sure that the socially needy are borne in mind with whatever policies are put in place.
QUESTIONER: Within these discussions do you also discuss targets or are those just not discussed? For example, the whole deficit target in Ireland. This is the big issue that the Labor Party has been bringing up –
MS. ATKINSON: The basic fiscal framework will, of course, be something that will be discussed. That’s one of the key elements of the program. I should also let you know that there will be a report published on Ireland, in a couple of weeks’ time that will be based on the technical missions that we’ve had earlier. So that will be something that will be available to you in the next few weeks. That will come before the next review, so in a sense it will be backward looking.
QUESTIONER: What kind of technical issues?
MS. ATKINSON: Well, it was a technical mission to see how things were going and check that the program is on track, that’s part of the extraordinary access policy.
http://www.imf.org/external/np/tr/2011/tr020311.htm
@Ciaran
You talk of banks has if they are a vital but benign utility – they have a monopoly of credit creation !!!!, yet you see no problem with these institutions being outside the control of the state.
What is the state ? What poltical framework do you see in this power vacuum and who or what will fill it – what will give them legitimacy ? the ability to create money ? that should work out brilliantly.
Every little bank fiefdom will and indeed are creating currency as they can – with devestating effects.
The free market and all that – let me tell you the ability to coin currency is and will never be a free market function ,
In a civilisation collapse people may recognize money but not currency.
Witness the carnage that is the ECB which is the first central bank almost completly without a state as a host – it oversaw not a dramatic rise in goverment debt but in shadow bank debt during the last decade.
It does not see state debt as being important to the money supply period.
Also without settlement what are financial transactions between banks and their states , what is value ?.
The FX markets are completly out of control , betting on I know what – where is the fixed unit of account in such games – all the banks role now is to extract yield from existing capital via surplus extraction in all spheres.
The entire artifice is sham , nothing more.
Banks and their finance have completly divorced currency from the physical world although their criminality and avarice have effected the real world in so many many ways.
Tulips everywhere yet not a windmill to be seen – soon the tide will come in.
When the CEO of a big bank cannot understand its balance sheet, there is a problem.
The Glass-Steagall Act was repealed by Congress in November 1999, a measure that has been termed the “Citigroup Authorization Act.”
Robert Rubin had pushed for repeal of the Glass-Steagall Act as Treasury Secretary. He resigned in July 1999 and President Clinton called him the “greatest Secretary of the Treasury since Alexander Hamilton” – – President George Washington’s Treasury Secretary – – and the former Cabinet officer, who had spent 26 years at Goldman Sachs before joining the Clinton Administration, took a senior position at Citigroup.
Rubin who earned $17.0m at Citi in 2008, was not aware of the detail of $55bn of CDOs and other subprime-related securities on the group’s balance sheet. “The answer is very simple,” he told Fortune Magazine. “It didn’t go on under my nose.”
It gets worse…
The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43bn in mortgage-related assets!
On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. The Wall Street Journal said Rubin made $115m in pay since 1999, excluding stock options. Rubin told the Journal his pay was justified and that there were higher-paying opportunities available to him. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said. Asked if he had any regrets, Rubin said: “I guess that I don’t think of it quite that way,” adding that “if you look back from now, there’s an enormous amount that needs to be learned.”
Non, je ne regrette rien!
That surely sums up the attitude; no link of course with the lives that have been destroyed; philanthropy though buys some insurance!
Somtimes I wish that there was a hell!
PIMCO’s Bill Gross says financial profession has failed miserably
Not surprisingly, I agree with most of what Ciaran O’Hagan has written. Where Simon Johnson has lost the plot a little is in providing ammunition for those who view this as some great Manichaen struggle between powerful, greedy bankers and the tribunes of the people in their spotless robes. This may be politically convenient, but, as Colm McCarthy has reminded us in the Irish context, anger is not a policy.
As a result an effective resolution of the current crisis – in a way that will minimise the incidence and severity of a repetition – must focus on two levels. The first relates to the exercise of economic and political power; the second deals with the detailed regulatory, legal and technical issues that Ciaran has highlighted.
Both levels are closely connected because what ever the policy/regulatory/technical bods come up with in New York, London, Frankfurt, Basle, Beijing or elsewhere must be enacted by politicians at least at the level of the G20.
There is no point seeking to return to the financial architecture that existed prior to Greenspan, Cox and Rubin (egged on by the big banks and the ‘useful idiot’ academics) persuading Clinton to ignite the bonfire of financial regulation that has engulfed the developed world. It had been in place since the ’30s and was badly in need of reform. We could have done without the ‘reform’ we got, but we can’t go back to the ‘status quo ante’. The lanscape is completely different now.
The banks recognise this and, I’m sure, are willing to co-operate in developing sensible policy and regulatory arrangements appropriate for the current landscape. But, equally, there should be no doubt, that they are determined to retain many of the advantages and privileges they have secured over the last decade – and they will apply all the political and economic power they have accumulated to this end.
The current protests in Egypt glaringly demonstrate the gutlessness, hypocrisy and complicity of politicians in the West. They have supported this and other tyrants to suppress any organised element in civil society that might hold them to account. All that is left are the army, the ineradicable extreme and the irredeemiably criminal or corrupt. So there is a logic to Mubarak’s claim ‘remove me and there will be chaos’.
The big banks internationally are employing a sophisticated version of the ‘Mubarak defence’. And they are employing it against the same gutless, hypocritical and complicit politicians. ‘If you break us up, or regulate us too tightly we might move operations and you will lose the tax revenue and employment we generate; whether we stay of go you will lose the benefits of financial ‘innovation’ and the cost of financing economic activity will increase.’
This pressure is felt most keenly in Britain which is addicted to the revenues generated by the City and to the City’s position as a financial centre representing a Britain ‘punching above its weight’. But it rings alarm bells in New York and Frankfurt as the balance of global economic power shifts inexorably eastwards.
It is good that some of those knowledgeable and influential in financial economics are coming forward with statements and analysis that might help to stiffen the spines of these gutless, hypocritical and complicit politicians, but it is very little and very late. Economics has failed – and been seen to fail – miserably in this entire debacle. Much is due to the extent that many economists have been useful, but well-rewarded, idiots for the financial moguls, but much is also due to the extent that their models ignore the exercise of economic and politcial power. Their fetish with markets blinded them to the actual behaviour of participants in these markets – and the frequent abuse of markets. And there is a risk that their currently preferred recommendation of increasing equity, derived as it is from these models, may prove entirely inadeqaute. It would not be the first time that economists, locked in the neoclassical canon, advanced reforms that had enormous implciations, both good and bad, that they didn’t expect, but which were entirely predictable if the ability to exercise economic and politcial power were taken into account.
The fundamental problem is that the final consumer, the poor sap who pays for everything, is not properly represented in all these deliberations. At least the Egyptians are doing something about it.
Do not see that the article enlightens me any more that before. OK, some specific detail, but the overall case has been amply described by many commentators: ‘Big’ banks are very hazardous to the economic well-being of a majority of folk and the country they live in.
Now what do we do with hazard: We assess risk (banks are high risk) and put real physical barriers between us soft humans and that hazard. Didn’t happen with banks: Barriers were dismantled! If you ignore the immutable chemical attributes of Nitroglycerine (a troublsome and treacherous substance) – try not to be disagreeably suprised when it detonates and removes bits of your anatomy.
Since we may be in the ‘reading’ frame of mind, try: Thorstein Veblen and J K Galbraith, both of whom regarded modern financiers and bankers as a bad dose of the pox. Your man Smith didn’t have much good to say of them either.
@CO’H: You might want to have a careful reflection on your economic Model-in Use. It looks suspiciously like Permagrowth. That model is on life-support and prognosis is very poor.
If you really want to corral finance houses and banks: Prohibit them from issuing any credit above what they already possess in liquid asset reserves. They want to emit 1, they own 1.
BpW
“First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.”
Private Eye magazine in its latest issue has a clinical look at Bob Diamond’s spin and it is very revealing but sadly not available on-line. Diamond claims Barclays was not dependent on any bailout money but the amount of liquidity support BarCap needed in the US to get through Q4 2008 was in the hundreds of billions of dollars.
After the last three years, I for one find the very concept of _private_ banking to be a discredited one, and would hold that big or small, it is private banks are ultimately ruinous to economies and societies.
Let me speak then, that most unspeakable of heresies: What is so wrong with simply nationalising the banking system?
The vast public bailouts have made it clear that banks are regarded by all in the land as a national asset, of systemic importance no less. They run on money from the public, lend to the public, provide service to the general economy, and when they run into trouble the public purse must save them out. They look like a semi-state body to me.
“Horror!” claim the detractors, “Bureaucracy!”, “Inefficiency!”. These seem to me to be arguments from the 1970s. I live in the twenty first century, and as far as I can see the profit motive and deregulation make private industry every bit as “inefficient” as the public sector from a customer(and shareholder) point of view . Indeed, the larger a company gets, the more like a government department it becomes as it accumulates layers of structures, red-tape, and self interests. Finally, the amount creamed off by management makes me wonder if private companies actually have a cost/benefit advantage over public services or not.
As to the argument about government power and abuses, this too seems to be an argument from the 1970s. The Cold War is over. Financiers, businessmen, and the west abandoned free and fair societies some time ago in their pursuit of the almighty growth, and bankers are even more morally bankrupt in this regard. I fail too see how so much money and power in private hands serves the interests of any republic.
So why not nationalise the banking sector? Let the state make a profit from their operation, and compensate the public for bailing them out. I can hardly see how state run banks could do a worse job than the current regime, regardless of the dictates of contemporary dogma.
@OMF,
Competitive efficient markets are the most powerful tools we have to assemble and process enormous volumes of economic information and to frame and execute economic choices. Thet also advance the liberty of citizens both individually and collectively. No state-run bureacracy could even hope to replicate this.
The problem we have is that politicians, in hock to their paymasters, have failed to impose effective competition law and regulation on the capitalists who subvert, rig and undermine markets to pursue their narrow sectional interests – and certainly to the detriment of the interests of most citizens and final consumers. And most economists fail to recognise this problem.
@ PH;
Like your two paras: Ideological, virtual assumptions: White and clean v Practical reality: Dirty and hazardous. Nifty.
Now, if your last sentence in #2 is accurate … … it would be useful to know why. Academic training? Conflicts-of -interest? Incompetence?
BpW
I don’t believe it.
I offer the contemporary financial crisis, the economic downturn, and indeed the erosion of rights and respect for rights in the western world over the last decade as direct counterexamples to your point of view here. All this has occurred during a time of unprecedented deregulation, laisse faire governance, and globalisation. We all followed the creed of the markets and look where it has gotten us.
I don’t say that you are entirely incorrect in your views, but in my opinion you have clearly taken them too far. Free markets are not the be all of everything. They have flaws—very significant ones—and cannot be relied upon to decide everything in our societies.
You are essentially taking the view that the referee and not the players are to blame if a fracas ensues on the pitch. The reality is that the players, the markets, are ultimately responsible for their own actions. Indeed, when the players actively bribe the referee and rig the rules to suit themselves, it’s clear where the problem lies. Instead of shifting blame to third parties, we must recognise that the markets are inherently prone to abuse and implosion and treat them accordingly.
And yet we have China, waxing ascendant. It seems to me that the mantras of western economics ring hollow in the modern age.
@OMF,
Surprisingly, we are not be as far apart as you might think. But we need to be clear on one thing. Capitalism, and not markets, is the beast that has the ability to generate socially and economically useful outcomes. But it is a beast that is inherently unstable, constantly mutates and is prone to periodic bouts of wreaking havoc. It must be shackled by markets, combined with effective competition law and regulation applied by the state, to generate useful outcomes. The state also has the ultimate responsibility for determining the provision and sustainability of public goods and of social and physical infrastructure, but is not required to provide or finance these directly.
Part of the problem is that it is considered rude to speak of capitalists and capitalism in polite economic, regulatory and policy-making circles.
However, one distinguished economist isn’t. Ronald Coase, the Nobel Laureate who provided us with profound insights on the firm, social cost and property rights (and who turned 99 last Dec.) has a new book out – “How China became Capitalist”.
@Obessive maths freak
It is the production of credit that needs nationalising , not the banks, then we will have freedom of sorts. – but in the absence of monetory governance and the rule of law nation states need to create their own monopolys to counter these international cabals as libertarian dreamers will be crushed by such raw power if they but lie down to these buccaneers.
@ PH: “But it is a beast that is inherently unstable, constantly mutates and is prone to periodic bouts of wreaking havoc. ”
That’s a virus! Better get the vaccine – or whatever,
The Market is not a vaccine. You need Level 4 Containment.
BpW
@BW,
Getting tangled up in the metaphors! Forcing capitalists to use properly the tools that markets provide is both prevention and cure, but it is a wise society which knows how much evil to tolerate.
And I don’t have a convincing answer to your question as to why most economists fail to recognise the problem of capitalists’ abuse of markets. There should be enough of them on this board to give it a shot, if they were so disposed. But, perhaps, they may not see it as a valid question.
@ Ciaran O’Hagan
‘Regulation is increasingly similar around the world, even if it could move key operations. Most of all, banks themselves want good regulation. It makes sense – it is in the interests of both employees and shareholders most of all to avoid financial instability’
I am sorry to have to say it, but that is a ludicrous assertion. Banks and bankers are in a competitive global struggle for profits and bonuses. Regulation is an obstacle to profit, it is naturally resisted. One of the best way to do that is to operate in less regulated environments where possible.
Another method is to introduce maximum complexity as possible into transactions. Complex opaque regulations, with loopholes designed in from the start, are the ideal, from a ‘business’ point of view.
‘As for the very last point, many banks and bankers agree that bank capital needs to be raised. Easier said than done of course, especially in today’s difficulty conditions’
Bank CEOs resist capital raising even in boom times, because high leverage facilitates looting. As Anan Adnati and her colleagues have clearly demonstrated, equity is not nearly as much fun for bankers to play with.
http://www.gsb.stanford.edu/news/research/admati_equity.html
Booms and busts , deflation and inflation are all part of the game, in that they allow wealth to be extracted and transferred in various ‘abstract’ or impersonal ways. Notwithstanding the solemn rhetoric for publci consumption, the reality is that bank CEOs or the finance industry more generally have a vested interest in instability.
@Paul Hunt
What you appear to be saying is that competitive efficient markets are wonderful but that business is so corrupt that there is no such thing as a competitive market. It sounds like teenage virginity in Texas.
The neoliberal economic model is banjaxed
http://www.ft.com/cms/s/0/19266d80-3061-11e0-8d80-00144feabdc0.html#ixzz1D04Q7i00
The US economy added a tepid 36,000 jobs in January, as severe winter weather slowed the pace of job creation, labour department figures showed on Friday.The increase in non-farm payrolls was much smaller than the 146,000 that economists had projected and marked a sharp decline from the previous month, when the US added 121,000 workers, according to revised figures.
@seafoid,
Nice try! But I’m not going to let you paint me in to that particular corner 🙂
We’re talking here about the ‘shakers and the movers’ in global banking and finance – and I believe it also applies to the top-level in most other sectors. The vast majority of people who do the grunt work in and for these organisations reckon it’s ‘not for us to reason why..’. Huge numbers of people in a whole range of trades and professions participate in reasonably, but not perfectly, competitive markets. The system works probably as well as might be expected given the ‘rich tapestry of human life’. But labour’s declining share of income in the developed economies – in particular the Anglo-Saxon ones – over the last 30 years tells its own story.
A global elite has emerged that exercises disproportionate political and economic power. They have exercised this political and economic power to escape from the discipline that competition in the market imposes. The challenge for politicians everywhere (who seek to represent the interests of most of their voters) is to expose this elite to the disciplines of the market. And economists have an important role to play in devising methods that politicians may employ to achieve this – but don’t seem to be desperately bothered.
@Paul Hunt
Have you ever come across “Wealth and Democracy” by Kevin Phillips ?
@seafoid,
I’ve come across mentions of him and his books in the dispatches, but haven’t read this one.
@ PH: Many thanks for your reply.
“… perhaps, they may not see it as a valid question.” Yep!
Not in any specific order or level:
1. Academic training will have a significant bearing. Say an economist had to have specific training in science/engineering, before qualifying. The latter professions would be most sceptical of many of the assumptions conjured up to assist in model formation.
2. Researching some aspect of economics might indeed be useful, but unless you ‘get out more often’, your intellectual and cognitive framing becomes increasingly narrow and focused. Ignorant experts is the term that has been applied here.
3. Your employer has a significant impact. That’s where your pay-check comes from!
I agree that caution is definitely needed when dealing with financial matters. The scope for chicanery and fraud is too wide. The GS Act was appropriate, but was repealed. This points to problems within the political sphere that must also be addressed. We will see what happens.
BpW
@ Paul hunt
It is well worth reading. He wrote it in the 1990s before the looting really took off and even then he was talking about a new gilded age.
Good article!
I paricularly liked the sentence explaining how banks (“mega” and obviously in our case not so “mega”) over a certain size need a: “….dumb sovereign to back them”.
@Brian Woods
According to you “ignorant experts” need to “get out more often”.
If public service salaries were correctly “bench-marked” a normal career path for most people would conceivably include 10-15 years public service and 25-30 years in the private sector.
In such circumstances IMHO the chances of having a “dumb sovereign” would be diminished.
@Seafoid
“He wrote it in the 1990ś before the looting really took off…..”
Therefore he must have also written it before “benchmarking” and “social partnership” also took off in Ireland.
Does anyone else see a connection here regarding Ireland?
@Seafoid
“He wrote it in the 1990ś before the looting really took off…..”
Therefore he must have also written it before “benchmarking” and “social partnership” also took off in Ireland.
Does anyone else see a curious connection here regarding Ireland?
@Brian Woods
1. Academic training will have a significant bearing. Say an economist had to have specific training in science/engineering, before qualifying. The latter professions would be most sceptical of many of the assumptions conjured up to assist in model formation.
2. Researching some aspect of economics might indeed be useful, but unless you ‘get out more often’, your intellectual and cognitive framing becomes increasingly narrow and focused. Ignorant experts is the term that has been applied here.
I remember a discussion re. medical training in the 1980s with a North of Ireland doctor who maintained that TCD dropping subsidiary demand fr every student to study history or Literature course simultaneously with medical degree narrowed the vision of the medical world drastically, till the “engineering” of medicine took over ominously.
Good article – needed said by someone like Simon Johnson. Max Keiser expresses his opinions let’s say more forthrightly – but the status quo find it easier to dismiss his views.
@Ciaran O’Hagan
“most of all, banks themselves want good regulation!”
As John McEnroe used to say “You can NOT be serious!”. I have to question the objectivity of someone who could post a comment so completely in denial sa your initial criticism of Simon Johnson above. It took me aback to such an extent that I took the trouble to google your name
Now it may be none of my business – but are you the same Ciaran O’Hagan who wrote in the Indo last September:
“Ireland’s credit for now is as safe as houses. The Exchequer is swimming in cash. And it has ultra-strong backing from the European authorities. A 6pc+ yield today on government bonds will prove a bargain, as long as the Government digs the Exchequer deficit out of its hole. ”
Who according to the by-line is a bond strategist at Societe Generale – a multi-billion dollar beneficiary of the 2008 US bailout of AIG.
(love that last phrase about digging the exchequer out of it’s hole BTW)
@ Livonian: Note your response. The term ‘ignorant experts’ was part of a quote by a retiring President of the American Society of Chemists. The full qoute is (in respect of PhD researchers):
“They spend their time learning more and more about less and less, and end up ignorant experts”
There is also the paradox of Skilled Incompetence. Take your pick.
@ Longhand: One may indeed get what one wished for! My idea was that it might be useful for third level colleges who ‘brainwash’ their undergrads with pre-digested pap (and very good pap it is too) to recruit some already qualified persons from diverse backgrounds. Some engineers make great surgeons. Some chemists make great economists. However if you recruit principally from the ranks of the Great Unwashed … ! Just a personal view you understand.
Some of you seem to think the article at the top of this post was … I judge it as mediocre. Try William Black (Prof). You will find some of his posts in the archive on http://www.itulip.com
BpW
@longhand
Nice blog – fascinating history of Depfa/HRE – what a can of worms is the IFSC!