Well done for creating a spectacular straw man: the “feral economy”. I work in finance, does that mean I am not real? Or am I feral? Should I be carving wood instead? And why is the over-mighty state always the solution on this “liberal” website?

From the longer version:

“And if necessary the countries of Europe and beyond will have to demand that banks deposit their cash in Treasury Deposit Receipts with central banks (as happened in the UK in WW2) to ensure resources are taken out of the feral economy and made available for the public good at a time of national and international crisis.”

TDRs were a deliberately deflationary move. Suck the excess liquidity out of the system to offset the huge inflationary pressures coming from the fiscal stimulus of the large borrowing on war expenditure.

So Ritchie, right now, when we’re all worrying about deflation, not inflation, would spring upon us a deflationary policy.

Reverse all that quantitative easing, the effects of those low interest rates, clean up the monetary expansion that’s been going on.

He actually, while worrying about recession, is advocating tight money.

Is there no beginning to this man’s knowledge of economics?

@AnotherTom
Congratulations on your career choice, no doubt made for the most altruistic of reasons. Have you or your company made loans to people you know would stuggle to pay them back? Have you missold pensions? Have you made risky investments for people labelled cautious investors? Have you been involved in insider trading? Or a Ponzi scheme? Have you tried to encourage people into debt by raising their credit card limits without asking them (as a reward for managing their account so well)? Are you or your company profiting from creating so much debt you needed a bail-out from the over-mighty state as you call it?
Do you ever ask yourself if you are really contributing to the society you profit from or are you one of those rich people who laugh at those less fortunate than yourself calling them chavs etc?
I would say feral finance is a good term. Feral animals are those that were once tame and living in a household who then leave to revert to a wilder existence. If we remember that economics has a etymological relation to ‘household’, implying responsibility for more than oneself, then feral fits exactly. Privitization of profits, socialization of losses. The feral catch their prey whilst the household suffers.
Still what do you care…you’re probably aiming to get out of finance early with your ill-gotten gains. And what do all those finance people do who have made so much money from collecting small (!) increments from the circulation of money…they buy land!!!! Ha, ha, ha, ha, ha! You lot don’t even practise what you preach! Total hypocrites!

Pray, what do you do PhilJoMar?

@3 I don’t know any ‘finance people’ of which you speak. I do lots of people that like to insult the financial industry from a position of ignorance.

This really is a word salad of incoherence. You say that the health of the ‘ real ‘ global economy is deteriorating and as evidence you cite recent moves in financial markets. Yet, you also claim financial markets are not real. So if they are not real, they would only be nominal so why cite them as evidence for your real health thesis? Financial markets have turned bearish for very simple reasons. The US which is the biggest economy in the world is not growing very fast and apparent past growth has been revised down. Moreover, the eurozone does not work and it is obvious to everyone but the EU. The uncertainty in Europe is dragging everyone else down.

” And the effective interest rates Italy and Spain are paying have gone over 6% when Germany is paying 2.4%…”

Yes, and if or when Italy reaches 7%, they will be at the point of no return where the snowball effect of debt takes over. The Italian government bond market is the 3rd largest in the world because they have so many outstanding bonds. Do you really think investors can’t work out the potential catastrophe that Spain and particularly Italy poses to the global economy? The yield that you identify is precisely why investors are dumping risk assets and seeking safety. Hey, it is not real so nothing to worry about. The Eurocrats thought that they had solved the problem and pissed off for their summer vacation. The ‘ feral ‘ ones are delivering their judgement.

This really is a classic ‘ undermine currencies ‘ How, by buying them? There have been huge moves in EUR/JPY, EUR/CHF, USD/CHF, USD/JPY. That is not attempting to undermine the Swiss franc and Japanese yen, it is people in Europe seeking protection in Switzerland because the euro does not work and something eventually will give bigger than Greece et al. If global growth is going to be weaker, then the yen will appreciate. Nobody is undermining currencies, as the free floating currencies are doing exactly what one would expect them to do.

“That unproductive wealth, whether held as cash or placed in assets that have near liquidity such as shares, property, derivatives, hedge fund and other portfolios, has had enormous consequences. There are many; let me just note two.

The first is that the refusal of the owners of this wealth to engage it constructively in the economy has been a contributory factor to under investment, stagnant real wages, and the rise in what has effectively been enforced borrowing by far too many households struggling to make ends meet . ”

That is complete waffle. How the hell can someone holding shares be a ‘ contributory factor to under investment? You do know if they were newly issued shares that it provides companies with capital to invest? If they were bought on the secondary market, it would make no difference to investment. Hedge funds contributing to stagnant wages and households excessive borrowing is a new one on me. I heard hedge funds also cause cancer. It looks to me that some on the left are going the same way as the crazier elements of the right, and living in a world of an entirely made up reality.

@2 – We’re worried about deflation at a time of, er, over 4% inflation, expected to rise past 5% again. Right.

@6 – No, the made-up world is the one of unearned capital, where your work has an ever-decreasing effect on your income.

@Leon

“No, the made-up world is the one of unearned capital, where your work has an ever-decreasing effect on your income. ”

I think you mean unearned income from capital. I tend to agree to a point and would support taxing capital at a higher rate if labour taxes were cut. Of curse, the biggest unearned income of them all is from land, but you do not support a LVT.

@2 : “He actually, while worrying about recession, is advocating tight money.
Is there no beginning to this man’s knowledge of economics?”

@6: “This really is a word salad of incoherence”

Sunny – every time you publish a piece by Richard Murphy on economics, it is demolished by people from both right and left who know what they are talking about. Anyone would think that you want your blog to be known for economic illiteracy. RM simply doesn’t know what he’s talking about. He’s an embarrassment.

@9 – I don’t support a LVT, because I am yet to see any study which addresses the basic problems which I’ve brought up, no. The council tax point alone, where the very poor, unemployed and students suddenly have to pay…

And the overall rate of tax can be debated, but I don’t see why unearned income should be taxed any lower than earned.

According to current press reports, those active in the finance markets evidently believe that there is the prospect of another international recession:

Japan’s moves today follow action by Switzerland yesterday. Both countries have had to resort to desperate measures to stem a damaging appreciation in their currencies as investors parked billions of dollars in perceived safe-havens amid fears of another global recession.

The Swiss National Bank (SNB) yesterday slashed interest rates by half a percentage point and unveiled plans to increase the stock of francs by SfrF50bn (£40bn) to weaken the currency.
http://www.telegraph.co.uk/finance/currency/8680740/Japan-follows-Switzerland-by-weakening-currency.html

@ 2

‘Is there no beginning to this man’s knowledge of economics?’

Says the fellow of the right wing Adam Smith Institute, the people that brought us the poll tax…..

(BTW Adam Smith’s conception of capitalism and the Frankenstein monster we have of it today bear as much relation to one another as gunpower does to the atomic bomb)

as for “July 2011 felt like July 1914 did”

He sorta pinched my line, which was “September 2008 was like August 1914″ , there are some people – like Tim Worstall & Tim J – who think like some Edwardians did in August 1914 that “it will all be over in a few months then things will be back to status quo ante”.

As has been pointed out elsewhere, these people are like cartoon character Wile E. Cayote; they’ve run off the edge of the cliff their feet are pedalling like hell but really there is nothing underneath them any more.

Maybe it’s not clear but I’m sympathetic to those that criticise finance. I just wish they’d do it for the right reasons instead of making up their own nonsense and then browbeating people with their idiosyncratic political beliefs.

The August-October 2008 crisis was a crisis of liquidity; since then the ‘system’ has been progressively working out excessive debt structures. Some were capable of being easily restructured – many synthetic CDOs for instance were just obliterated – while corporate debt positions have been boosted by stable economies and ultra-low interest rates. However, there remain areas of excessive debt that are much harder to restructure, and sovereign debt is one of these areas, for (to my mind) obvious issues about justice and burden-sharing.

Moreover, and it is well recognised, the sovereign debt crisis stems from decisions made in the run up to the launch of the euro rather than the credit bubble of 2005-7.

@14: “The August-October 2008 crisis was a crisis of liquidity.”

Not just a liquidity issue, surely? There was also a glaring principal-agent problem. As Alan Greenspan put it in his testimony on 24 October 2008 to the US House of Representatives Oversight Committee:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

Note also in today’s news: Lloyds posts £3.25bn loss after PPI mis-selling costs
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8680743/Lloyds-posts-3.25bn-loss-after-PPI-mis-selling-costs.html

He sorta pinched my line, which was “September 2008 was like August 1914? , there are some people – like Tim Worstall & Tim J – who think like some Edwardians did in August 1914 that “it will all be over in a few months then things will be back to status quo ante”.

If we’re going to go around again, I believe my line is “Well, la luta continua and all that, but if the left want to put forward a great overarching economic strategy they’d better get their skates on.”

This the point where you call Luis Enrique a patronising c*** and then storm off in a huff I think.

@14 – Do you call, incidentally, calling for the re-mutualisation of the Northern Rock as “browbeating people with their idiosyncratic political beliefs”?

The recent systemic crisis in financial services – verging on a global scale – is a hugely magnified version of the earlier Savings & Loan Association crisis in America in the 1980s and 1990s:

“The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of about 747 out of the 3,234 savings and loan associations in the United States. A savings and loan or “thrift” is a financial institution that accepts savings deposits and makes mortgage, car and other personal loans to individual members—a cooperative venture known in the United Kingdom as a Building Society. ‘As of December 31, 1995, RTC estimated that the total cost for resolving the 747 failed institutions was $87.9 billion.’ The remainder of the bailout was paid for by charges on savings and loan accounts—which contributed to the large [US] budget deficits of the early 1990s.”
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

My insight into that crisis came from reading Donald Campbell: Incentives (Cambridge UP 1995, later revised 2006)

Sadly, the authorities seem not to have drawn the appropriate lessons from that earlier systemic failure – most likely because governments and the financial authorites in Britain and America continued to indulge in the delusion that “light-touch” regulation of financial institutions and markets was all that was needed to ensure systemic stability, security and integrity. There was, perhaps, a time when banks were regarded as trusted institutions. But not any longer.

@17

“that’s a challenge Courageous States have to face. And doing so is possible; the techniques are available. New, green, quantitative easing, spent into the economy, and not just given to banks, can reclaim this feral world and it’s resources for the real economy. Forcing new investment policy onto funds that have been exposed to feral policies, such as pension funds, can reclaim these assets for ordinary people. I explain how here. And if necessary the countries of Europe and beyond will have to demand that banks deposit their cash in Treasury Deposit Receipts with central banks (as happened in the UK in WW2) to ensure resources are taken out of the feral economy and made available for the public good at a time of national and international crisis.”

@17 I’m ambivalent about mutualisation. Some of the biggest screw-ups seen in UK finance were made by building societies seeking to boost yields via commercial property in particular. If people think mutualisation in itself will lead to better lending practices then I wouldn’t agree.

I do think there is a perception that the financial sector is “other” and that the industry would do well to try to bring itself closer to the actual needs of people by presenting alternative forms of service, ownership, approach etc.

Just one of the issues is that retail banks evidently took the Monty Python Dead Parrot sketch as a guide to best practice sales techniques:
http://www.youtube.com/watch?v=4vuW6tQ0218

@15 there were many many things going on in the second half of 2008, but the critical issues in August-October 2008 concerned liquidity – a sudden switch from hugely excessive liquidity to a complete drought.

@22: there were many many things going on in the second half of 2008, but the critical issues in August-October 2008 concerned liquidity – a sudden switch from hugely excessive liquidity to a complete drought.

Yeah – but why did that happen? Because the banks stopped lending to each other. Why was that? Because banks stopped trusting other banks not to default on their inter-bank loans even when the loans were under-pinned by financial instruments as collateral. And why was that? Because the financial instruments were very likely to have little or no value if it came to a default to repay an inter-bank loan. Warren Buffett warned us back in 2003:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

Question: if banks don’t trust other banks, why should their customers trust banks – especially after all that mis-selling of PPI?

@23 yes and no. From the first half of 2007 many people in the credit market stopped pricing risk (because to do so was uncompetitive) and instead began pricing off liquidity. When liquidity conditions changed abruptly in Q3 2008 it was not possible to instantly reverse back and try to revert to pricing against risk because uncertainty was so great, magnified by the collapse of Lehman.

http://www.cashandburn.com/2011/04/sailing-on-pool-of-liquidity.html

@23 and it was little or nothing to do with derivatives so please stop endlessly quoting Buffett.

@ 16

“If we’re going to go around again, I believe my line is “Well, la luta continua and all that, but if the left want to put forward a great overarching economic strategy they’d better get their skates on.”

yeah because the current version of neoliberal capitalism is working so well isn’t it?

Huge, unprecedented bailouts by the public sector to save the private sector, turning private debt into public debt, the the neoliberal client politicians off loading this public debt and turning it into private debt again for the ordinary joes in the population.

You think this is sustainable? Dream on mate. When Charles Moore of the ‘Telegraph’ is questioning neoliberal capitalism you’ve got BIG problems fella.

Jog on.

@23: “”When liquidity conditions changed abruptly in Q3 2008 it was not possible to instantly reverse back and try to revert to pricing against risk because uncertainty was so great, magnified by the collapse of Lehman.”

The problems with Northern Rock – because it couldn’t borrow enough in the interbank market to sustain its mortgage portfolio – first emerged in the autumn of 2007, a year before Lehman Bros collapsed. At least part of Northern Rock’s credibility problem in the financial markets arose from its policy of high loan-to-value mortgages:
http://www.debtwatchdog.com/will-the-100-per-cent-mortgages-return-Article-140.html

The problems of RBS mostly relate to its (daft) decision to acquire ABN Ambro in 2007:
http://www.independent.co.uk/news/business/analysis-and-features/was-abn-the-worst-takeover-deal-ever-1451520.html

With the mis-selling of PPI on a grotesque scale, few can now seriously believe the banks in Britain are managed according to the rational principles of that capitalist banking model we are supposed to believe in.

@25: and it was little or nothing to do with derivatives so please stop endlessly quoting Buffett.

Nothing to do with subprime mortgages underpinning derivatives used as collateral for interbank loans?

C’mon. On the evidence, bankers are mostly pretty dumb and many are little better than crooks and spivs.

26 – well come on then. Let’s have your overarching economic strategy to replace free-market capitalism. Should be easy.

@27 these conversations are difficult because the newspapers have never accurately reported the financial markets in the last decade. Indeed for most of that time they have actively misreported the markets. So your links are not particularly useful to your case.

If by derivatives you include securitisation then I would agree. But Buffett – if I remember correctly – was referring to CDS which is not the same thing. With some hindsight we can see that CDS had some influence on the crunch – when packed into CDOs – but this was relatively minor compared to the great sucking sound of the total withdrawal of liquidity in Q4 2008 / Q1 2009.

“Do you call, incidentally, calling for the re-mutualisation of the Northern Rock as “browbeating people with their idiosyncratic political beliefs”?”

I call it theft from the taxpayers personally.

I’ve nothing againt mutulals, think they’re a just fine form of organisation. But N Rock is currently owned by the taxpayers. “re-mutualising” it means giving it to the depositors. That’s a gift from taxpayers to depositors.

You wouldn’t advocate giving the government owned shares in Lloyds to Lloyds shareholders: so why would you in the case of N Rock?

Now, if you’re going to sell N Rock to them and that’s what gets the best price: well, good luck to all who sail in her.

@31 – Yes, but you’d call a food subsidy scheme for poor people theft, so I really don’t care what you think.

” The problems with Northern Rock – because it couldn’t borrow enough in the interbank market to sustain its mortgage portfolio – first emerged in the autumn of 2007, a year before Lehman Bros collapsed. At least part of Northern Rock’s credibility problem in the financial markets arose from its policy of high loan-to-value mortgages: ”

Yes, they did have a load of shit on their balance sheet and were toxic in the interbank market. However, if the BoE had done their job correctly, they would not have required to be nationalised. Moreover, what really tipped them over the edge was Robert Peston announcing on the BBC, that the bank was running out of money. Easily one of the most irresponsible pieces of journalism ever on a major news source. Pretty easy to work out who in the Treasury was his source. Same source as in the midst of the 2008 banking crisis when RP was causing gyrations in bank share prices, as he released market sensitive information on his blog. A totally disgraceful situation when half the City of London were paying more attention to a BBC journalists blog than they were to Bloomberg. As I said, if the Mervyn King had accepted their assets as collateral rather than demanding government bonds ( later changed ), the Treasury would never have needed to nationalise them.

Anyway, what a day and it is not over yet. A bad U.S. jobs number tomorrow, and it will be time for the hard hats.

Huge, unprecedented bailouts by the public sector to save the private sector…

I thought the hard left was all in favour of nationalisation? You just can’t win with some people.

@29: “but this was relatively minor compared to the great sucking sound of the total withdrawal of liquidity in Q4 2008 / Q1 2009.”

But the withdrawal of liquidity in 2008/09 was due to the massive contraction of interbank lending and that was because banks no longer trusted the collateral put up as security for interbank loans.

The liquidity failure was because the financial instruments typically put up as collateral weren’t trusted – and that despite the award of 3As to many of the instruments by the credit rating agencies.

@32: “However, if the BoE had done their job correctly, they would not have required to be nationalised. ”

That’s arguable for reasons that are at least illuminating

By reports, the BoE was tardy about stepping to unilaterally bail out Northern Rock because it saw Northern Rock problems as mostly or entirely due to the bank’s own bad business model, its dependence on interbank borrowing to finance its assets and its practice of maintaining a high loan-to-value mortgage portfolio.

Rightly or wrongly, the BoE believed its intervention would give credibility to the prevalent belief among banks that the BoE would step in to “socialise” banking losses regardless and thereby promote high(er)-risk lending practices by other banks in pursuit of customers and profits – the so-called “moral hazard”.

This implit guarantee of bail-out regardless – whether by the BoE or the government – to preserve systemic stability allows the banks to borrow more cheaply than they otherwise could (because of the lower perceived risk of lending to banks) and that enhances the profitability of banks, especially so with British banking because the market for retail banking is more highly concentrated than in other peer-group countries.

In America, views among economic professionals are split on whether it was prudent there to allow Lehman Bros to fail. On the moral-hazard argument, it was the right course but not so in respect of concerns about contagion.

As an outside observer to this – albeit with professional economics nous – the BoE position made sense. As and when the systemic stability of the whole banking system became an issue with the problems of RBS and HBOS, the government stepped in with nationalisation of RBS and by waiving competition policy guidelines allowed Lloyds to acquire HBOS with government funding. Btw Lloyds is my bank and I told my bank manager that acquisition was “not a good idea” before the deal went through.

You are confusing different things, Bob. Of course, the Bank should not socialise banking losses. It’s the Treasury’s role to intervene to save a bank if anyone is going to do it. However, the role of the BoE is lender of last resort and that is a different thing altogether. The BoE under Mervyn King refused to fulfill its role of providing liquidity as lender of last resort. Mervyn King specifically would only provide liquidity against government debt securities. He knew full well that the banks did not have the short-dated government debt that he was demanding as collateral. They only had MBS and ABS etc for use as collateral and he said that those were ineligible collateral for the central bank. Moreover, they did not have short-dated government paper because the Debt Management Office under pressure from the pension funds had hardly issued any in recent years. He must have know that. He even denied in front of a Select Committee that the BoE had a lender of last resort role. The man is totally useless.

Clearly, the BoE position did not make sense, since they later relaxed the collateral rules after causing chaos in the banking sector.

“But the withdrawal of liquidity in 2008/09 was due to the massive contraction of interbank lending and that was because banks no longer trusted the collateral put up as security for interbank loans.”

Again, yes and no. What had happened in the interbank market was that the banks had been partly/largely replaced by ABS-linked money-market funds (ABCP). This was the so-called “shadow banking system”. They suddenly stopped operating in Q3 2008, and were the conduit by which much of the financial system saw its liquidity end.

@33 – Ha! I’m in favour of worker ownership. There are multiple views on the left, unlike the monolithic block of the right, with their single answer to everything! (/partly sarcasm/)

@36: “The BoE under Mervyn King refused to fulfill its role of providing liquidity as lender of last resort. Mervyn King specifically would only provide liquidity against government debt securities. ”

As an economics grad from half a century back, I do know that about the BoE’s role as ‘lender of last resort’ and how that function evolved – so I’m not confused and as an external observer have tried above to explain Mervyn King’s rationale as best I can.

He did not think that the BoE was required to bail out a failing bank which was failing because of its own peculiar high-risk business model and thereby encourage other banks to also engage in higher risk lending in pursuit of customers and profits. The Americans allowed Lehman Bros to fail in the autumn of 2008 for similar reasons. The FED could have bailed out Lehman Bros.

Mervyn King is not a fool. He is taken seriously as an economist in America. He has very able senior staff. Under the Osborne plan for restructuring central banking and financial services regulation, Mervyn King will be chairing not only the Monetary Policy Committee as before, he will also chair the new Financial Policy Committee. That is surprising if he is as useless as you claim he is. But there are substantive unresolved issues as to whether it is prudent to vest so much power relating to the administration of monetary policy and the regulation of financial markets in one person. But that is Osborne’s choice.

The banks were greatly to blame for the mess they created. Opaque financial instruments, many awarded 3As by the credit rating agencies, and high risk lending policies are part of the relevant narrative. Predictably, the banks and bankers are trying to fudge that. Try this brief from mid July on Britain’s outstanding national debt, which usefully distinguishes how much is due to financial interventions, not just in Northern Rock but also in RBS, Lloyds/HBOS etc:
http://www.economicshelp.org/blog/uk-economy/uk-national-debt/

Since they changed the collateral conditions his original interpretation was self-evidently wrong.

They did not have a clue what they were doing.

“The panic in Threadneedle Street exposed ”
http://www.telegraph.co.uk/finance/markets/2816194/The-panic-in-Threadneedle-Street-exposed.html

http://www.telegraph.co.uk/finance/economics/2816231/Northern-Rock-made-Mervyn-King-panic.html

Tim Congdon.

“When the Northern Rock crisis broke last August, the Financial Services Authority responded appropriately. It tried to marry Northern Rock, which could not fund itself in the wholesale markets, with Lloyds TSB, which had a strong network of retail branches. But Lloyds TSB was worried that even the retail network might not be able to raise enough money, and sought to borrow from the Bank of England.

This would have been a classic lender-of-last-resort arrangement of a kind that the Bank of England had undertaken before. Alistair Darling is said to have vetoed the facility on advice from Mervyn King, the Governor of the Bank of England.

Since then King has insisted that it is not the Bank’s job to provide long-term finance to Britain’s banks. He seems to have repudiated the lender-of-last-resort role. ”

“Two conclusions cannot be avoided. The first is that it would have been better if the Bank of England had reacted to the recent troubles in the same way that it did, so brilliantly and effectively, in past crises. The support should have been pre-emptive and low-key, and it should have come as a traditional lender-of-last-resort loan. It ought to have been unnecessary for the Treasury to offer the strange mishmash of “money” that is now available on semi-confiscatory terms. ”
http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article4944138.ece

“But there are substantive unresolved issues as to whether it is prudent to vest so much power relating to the administration of monetary policy and the regulation of financial markets in one person. ”

Just as well he is retiring in 2013 before he has time to screw up again.

The bottom line is the Bank and particularly King turned a bad situation into a general banking crisis. Although, at least he is not Trichet.

@40:

I’m completely unconvinced by the spin in those quotes – which largely reflect the continuing pressures from bank lobbying to blame others for the consequences of the greed and incompetence of their management so the bonus culture can continue unabated..

I don’t take Congdon seriously:

“Since then King has insisted that it is not the Bank’s job to provide long-term finance to Britain’s banks. He seems to have repudiated the lender-of-last-resort role. ”

That’s rubbish. Last resort lending by the BoE was historically not intended to provide long-term funding for banks but short-term support to alleviate temporary liquidity problems which arose from unexpected market conditions, not from the flawed business models of failing banks. The US FED allowed Lehman Bros to fail for much the same reasons that motivated King’s tardiness in bailing out NR. The banking career of the chief executive of NR ended abruptly – as did that of Fred Goodwin in RBS.

In 2008, my bank kindly appointed a large lady with a fiercesome Scots accent as my personal investment adviser. In the autumn of 2008, apropos nothing I had said, she came out with: The Scots make good bankers. I said that must be why RBS and HBOS have recently found it necessary to launch rights issues to get new capital.

She quickly changed the subject. Bankers assume their customers are all a bit stupid or ignorant, which explains the high volume of complaints and the massive mis-selling.

“Last year [2008], figures published by the Financial Services Authority (FSA) showed that almost a million people complained to their bank. The figures also revealed that six out of 10 of these complaints were rejected. By contrast, the Ombudsman Service rules in favour of the consumer in almost six out of 10 cases, although for certain types of complaints the ‘uphold’ rate is far higher.” [September 2009]
http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/6206351/Bank-complaints-dont-get-mad-get-even.html

“Customers complaints about banks, insurers and other financial companies have risen by 15pc in the last six months, according to new figures published by the Financial Ombudsman Service.” [February 2011]
http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/8352085/Banking-complaints-rise-by-15pc.html

“A courtroom defeat for banks over the mis-selling of payment protection (PPI) insurance resulted in a surge of new complaints, figures show. The Financial Ombudsman Service has reported receiving an average of 900 PPI cases each working day in April, May and June. In April, the banking industry lost its High Court challenge to new rules on the sale of PPI.” [2 August 2011]
http://www.bbc.co.uk/news/business-14371756

“Yes, but you’d call a food subsidy scheme for poor people theft,”

No, that I’d call merely stupid.

If you want poor people to have more money to spend on food then give them more money. Don’t set up some subsidy scheme.

Very like my objection to “social housing”. If you’re worried about people not being able to affrod somewhere to live, give them money. Don’t wall off some vast chunk of the housing stock into some strange parallel economy.

Housing benefit, not social housing.

Bob – I’d be much more convinced by your arguments if you didn’t always try to impose your own anti-banker narrative on them all. Given how the financial markets work, segmenting out one group doesn’t make much sense, and anyhow the group that you are trying to blame (“bankers”) aren’t homogeneous. You mix up the failures of retail banking with investment banking, UK with global etc. There were enormous intellectual failures across the entirety of finance so identifying only private sector bankers as the culprits while defending the Bank of England makes you look like you have a political agenda (as with the original poster).

Richard W,

Why should the Bank accept ABS, MBS etc as collateral at its discount window? Surely these securities were not “high quality, highly liquid” collateral, which was NR’s problem. I don’t understand how the Bank acting in such a way would help it to fulfil its LLR role.

“Bob – I’d be much more convinced by your arguments if you didn’t always try to impose your own anti-banker narrative on them all”

Anything, anything to distract attention from the scale of public complaints about Britain’s banks and the truly appalling service banks provide while screwing their customers and claiming the inalienable right to BoE bailouts should bad business models and high risk lending lead to failure.

We are awaiting the final report of the Independent Banking Commission, chaired by Sir John Vickers, which is due in September.

The current drift in structural reforms of banking is:

- higher capital requirement ratios to reduce likelihood of failures
- mandatory passing of regular stress tests – preferrably more stringent than the last set of EU tests
- ring-fencing of investment banking operations so investment banking can be allowed to fail without adversely impacting retail banking operations
- to allow banks to fail but with a deposit insurance scheme in place to protect retail depositors.

King was tardy about last resort lending to Northern Rock in 2007 because he believed that the bank had brought on its own problems in pursuit of gaining customers and making profits. His understandable concern was that bailing out NR would encourage other banks to engage in higher risk activities in pursuit of profits secure in the belief that the BoE would inevitably bail them out if failure became likely. He tightened rules for acceptable collateral for last resort lending because at that time interbank lending had stalled because banks were wary of the collateral being offered in support of interbank loans. All that made good sense to me as an external observer – and I fully understand why it so upset the banks. Nothing must be allowed to jeopardise the scale of banking bonuses.

Bob, I’m now even less sure I know what you’re talking about. The “enormous intellectual failures” I mentioned above include those within private sector banking as well as the public sector. Your analysis appears to keep on trying to distinguish one from the other, while all the time you pepper your critique of global financial issues with situations you’ve had in your local branch. According to this line of logic, if you had been treated well by your local bank manager then the financial crisis would not have happened.

“He tightened rules for acceptable collateral for last resort lending”

Really? Do you have a cite for this?

Sorry, I think I’ve given the comments italics.

“According to this line of logic, if you had been treated well by your local bank manager then the financial crisis would not have happened.”

I was merely giving examples of how banks treat regular customers – and I don’t accept that the BoE behaved badly in the financial crisis for reasons that I’ve already explained at length.

So far here, no one has explained how and why that analysis is wrong. There have just been the predictable personal slurs to distract attention from the failings of the banks, a style of online debating that I’m very familiar with from the online debates about Britain joining the Eurozone c. 1999. I was seriously told then that there were no sane objections to joining the Euro !

Before I retired from the civil service mid 1998, the department in which I worked was treated to a seminar presentation by Christopher Johnson, chief economist of Lloyds Bank, on why Britain should join the Euro. We had a robust exchange of views. Least anyone doubt this, the said Christopher Johnson produced a book: In with the Euro, out with the Pound (Penguin 1996) – I keep a copy handy to remind me. If he reads the news, he will perhaps now understand why that wasn’t a good idea. And I mention that to show how seriously bad the economic advice of banks can be.

I have no idea why you’re banging on about the Bank of England which is why I haven’t tackled it. It’s performance didn’t have much to do with the global financial crisis version 1, nor what’s happening now.

In the markets I occasionally come across people who like to talk about the BoE in wistful tones. These are usually people from the days of “gentlemanly capitalism”, ie pre 1986. As it happens they usually like a good moan (and a drink).

Try this from Saturday’s Economist:

“One key measure of the humbling of British banks is that their profit has slumped 58% from its peak four years ago.” [6 August 2011]
http://www.economist.com/node/21525448

But never mind, bank bonuses are holding up well despite the fall in profits:

“The financial and insurance sector paid out £14bn in bonuses in the last financial year, unchanged from the year before, despite government pressure on banks to curb excessive pay-outs.” [FT 20 July 2011]
http://www.ft.com/cms/s/0/e2e673ae-b22a-11e0-9d80-00144feabdc0.html#axzz1Ts0pwPgt

The bankers are screwing their shareholders in addition to their customers and clients by mis-selling. Of course, the bankers here know why I’m saying all this. As David Cameron has said, civil servants are “enemies of enterprise”:
http://www.guardian.co.uk/politics/2011/mar/06/david-cameron-civil-service-enemies

44. vimothy

Richard W,

” Why should the Bank accept ABS, MBS etc as collateral at its discount window? Surely these securities were not “high quality, highly liquid” collateral, which was NR’s problem. I don’t understand how the Bank acting in such a way would help it to fulfil its LLR role. ”

Well in addition to a Lender of Last Resort role, the Bank also has a Market Maker of Last Resort role. See here Paul Tucker accepting that the Bank had a MMoLR role.
http://www.bankofengland.co.uk/publications/news/2009/041.htm

If private credit markets are frozen then the Bank are not doing their job if they are not doing all they can to unfreeze them. The assets that NR had were illiquid and the central bank refusing to accept them as collateral only made them more illiquid. The Fed and ECB did not apply such strict rules and that is partially why the 2007/08 liquidity seizure affected the UK banks so badly. They later changed the rules and allowed asset swaps in exchange for UK Treasury Bills. However, at £50 billion it was wholly inadequate.
http://www.bankofengland.co.uk/publications/news/2008/029.htm

Mr King would have argued that it was not appropriate for the central bank to take credit risk on to its balance sheet. However, leverage is not a constraint on central bank solvency as long the credit risk is denominated in sterling and consists of non-index-linked securities. The central bank is not going to go bust lending in its own currency.

Moreover, one really needs to recall why the UK banks did not have many UK Treasury Bills. Some undoubtedly were chasing yield in the higher yielding securities. However, the main reason was because the DMO had hardly been issuing any. After the pension funds lost so much in the dot com crash, they pressured the DMO to only issue long-dated gilts so that they could match their pension liabilities. That is why the UK outstanding stock of gilts has a long maturity profile. Much longer than everyone else. Therefore, there was dearth of Treasury Bills and that exacerbated the UK liquidity squeeze. A similar dearth of short-dated US Treasury Bills is why the BoNYM are currently charging funds for the right to deposit money with them. Mr King must have known that banks did not have Treasury Bills, and why.

If the illiquid securities presented credit risk to the Bank, they should and did apply haircuts on the swaps. The problem is they did everything too late with NR, and they were constantly behind the curve with inadequate measures throughout 2008.

“Mr King must have known that banks did not have Treasury Bills, and why. ”

Mr King was also likely aware that the banks were pushing suspect financial instruments as collateral for loans which is why interbank lending gummed up. He probably didn’t want the BoE to be caught out which is why he was insisting on secure Treasury Bills, which the banks could buy on the market to use as collateral.

The sad fact is that few now trust banks, including other banks as well as the customers of banks. The banks have to blame themselves for their plight but I fully understand the reasons for all the diversions and distractions being deployed to try to push the blame onto others. I just don’t think it will work.

” He probably didn’t want the BoE to be caught out which is why he was insisting on secure Treasury Bills, which the banks could buy on the market to use as collateral. ”

Hmm. Ever heard of penalty rates, Bob?

1/ Have you not been paying attention. There was a dearth of UK Treasury Bills. For example, the Treasury Bills that the Bank used when they were forced to relax their collateral rules in the Special Liquidity Scheme were newly created by the Treasury’s National Loans Fund and sold to the Debt Management Account for on-lending to the Bank who then used them in swaps with the commercial banks.

2/ Banks would need to buy Treasury securities before they can use them as collateral for borrowing. Not much help to banks when they have to refinance their lending.

You appear to be under an illusion that there was something normal about Mr King demanding only government paper as eligible for central bank collateral. Throughout the 19th century century most of the BoE balance sheet consisted of commercial bills. Moreover, during the 1980s, commercial bills exceeded claims on the government on the BoE balance sheet several times over.