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Bank of England wins victory - but for what?

Robert Peston | 09:30 UK time, Monday, 6 July 2009

Macro-prudential policy is supposed to be what will prevent future bubbles in credit and asset prices from being pumped up to lethal size.

According to Andy Haldane of the Bank of England (him again) it's a "new ideology and a big idea" that will "shape the intellectual and public policy debate over the next several decades, just as the Great Depression shaped the macroeconomic policy debate from the 1940s to the early 1970s."

Bank of England

And there will be a bit about it in this week's paper on financial regulation from the Treasury.

Also, I can say with near certainty that it will be "done" or "managed" by a new committee attached to the Bank of England - and that the composition of this committee will probably be as set out recently by Lord Turner, chairman of the Financial Services Authority.

In other words the committee would be chaired by the Governor of the Bank of England, Mervyn King, and would contain perhaps eight other members, drawn 50:50 from the Bank of England and the FSA. You'll note however that the Bank would have the majority and would be deemed to be in the driving seat.

So King can put up the bunting in the magisterial parlours of the Bank of England. He appears to have won the argument that macro-prudential policy is something that the Bank of England should do.

But the sharp-witted among you will have noticed that I haven't spelled out what the Bank of England will be doing as and when it actually does macro-prudential policy.

And that's not because the practicalities of macro-economic policy are obvious and boring.

Quite the reverse: as Mervyn King pointed out in a recent speech, macro-prudential would "contain a number of instruments to reduce risk, both across the system and over time" but "we are a long way from identifying precise regulatory interventions that would improve the functioning of markets".

In other words, we know what we want macro-prudential policy to do: we want it to prevent banks and other credit institutions from lending too much for the health of the economy during the boom years, and also - which is the more immediate problem - to discourage them from lending too little during a recession.

But we don't really know how that should be done, what the levers would be to regulate credit at the level both of national economies and of the global economy.

There are plenty of jolly good ideas.

A ceiling could be imposed on all banks in respect of how much they could lend relative to their equity resources, a so-called leverage multiple, which would be raised or lowered according to whether credit markets were over-heating or freezing over.

Or there could be a variable regulatory tax on incremental lending, which would increase the cost for banks of making new loans during a boom period by forcing them to hold more capital relative to those additional loans (and would reduce the cost when the economy slows down).

Which may all sound straightforward. Except that the financial economy is like a great blancmange, and if you squeeze it in one place there's always a risk that it will splurge out where you least expect or want.

So, for example, the Macro-Prudential Committee would have to be constantly watchful to make sure that newfangled credit institutions weren't being created to avoid the new fetters.

There's also a conviction on the part of the Treasury - which some would say is misplaced - that it would be inappropriate to impose these constraints just on banks and institutions operating in Britain, that there would be damaging ramifications for the competitiveness of our economy and of the City if there weren't an international agreement that macro-prudential policy is the future.

And you won't be the least surprised to know that securing such international agreement is proving rather more challenging than herding cats.

Two final points.

First, how will we know when banks are lending too much and that asset prices are rising to unsustainable levels? It's blindingly obvious with 20:20 hindsight vision that this is what happened from 2005-7. But alarm bells were not ringing sufficiently loudly for the super-brains at the Bank of Engand, the Treasury and the FSA at the time.

Second, are we absolutely sure we need a new Macro-Prudential committee armed with new tools and levers, as opposed to giving the Bank of England's Monetary Policy Committee a new and second target - to curb systemically excessive lending - to add to its anti-inflation mandate?

As Howard Davies, director of the London School of Economics and former Deputy Governor of the Bank of England, has pointed out, there is an interesting logical issue here.

As and when a new Macro-Prudential Committee instructs banks that they must lend less, credit will became scarcer. That will have the effect of making loans more expensive, which is another way of saying that interest rates will go up.

But isn't varying interest rates what the Bank of England's Monetary Policy Committee is supposed to do, in order to fulfil its mission of keeping inflation in check.

Of course, we've all discovered in the past couple of years that the MPC's powers to fine tune interest rates in their many and varied forms throughout the economy are more feeble than it believed.

Even so, will the economy really become a safer place if we have one body - the MPC - using its interest-rate tool to achieve one outcome (controlling consumer-price inflation) and another body - the Macro-Prudential Committee - using another interest-rate tool (variable leverage multiples or capital ratios) to achieve a different but related outcome (preventing dangerous asset price inflation).

That said, both committees would - as I've said - be sitting under the expansive roof of the Bank of England. But some may nonetheless fear that their separation would lead to muddle and confusion that could damage the economy.

Comments

Page 1 of 2

  • Comment number 1.

    RP - you wroe an excellent article about why Bankers aren't worth it at end of last week - ie massive growth of Financial Services Sector was all funded by risks and gambles which eventually started being lost and the crash happened. In actual fact growth of FS sector has been similar to any other sector over last 100 years without this distortion.

    On grounds any new body is going to ensure (?????) that this growth/bubble does not occur again then surley the Government now needs to rethink its strategy for the future prosperity of this country.

    So many of our eggs are in the Financial Services basket and yet this model has now been proven to be flawed.

    As a government/country it is crucial that we admit past mistakes, retrench, go through some rela economic pain and misery and come out of the other side with a new model.

    People can only do this with strong leadership and clear, well communicated leadership. I think this means a number of things.

    1) Spin doctors have to go.
    2) Media need to change from witch hunters to truth portrayers.
    3) A new leader has to come forward - none of Brown, Cameron, Clegg fit the bill in my opinion.

    As I don't think the above three things are very likely then we are in a lot of trouble.

  • Comment number 2.

    An amusing quandry; surely both groups would be running at odds with each other and achieve nothing or worse create some positive feedback of sorts that will spiral beyond control?

    Merv seems to be taking a lot of power recently; too much one might say...

  • Comment number 3.

    Sounds like another quango that ought to be burned before it even gets built.

    It may have fine aims, but sure as eggs is eggs, it will get tied in beauracracy and become a self-serving gravy train (or should that be boat?).

  • Comment number 4.

    I would agree that eventually we will begin to define the intellectual and political debates of the next fifty years or more. Fortunately, or unfortunately, we are not there yet. We are still dealing with the collapse of the previous intellectual and political debate the dust from whose fall has still has not fully settled.

    With regard to the intended state of `macro-prudential policy' I am left pondering a sentence which includes the words `Titanic' and `deckchairs' in it.

    This whole matter is bigger than a committee or even a structure of committees. Until the politics is addressed, until it can be seen that the transgressors are punished everything done is a mere stop-gap. It will be a long time I fear.

  • Comment number 5.

    Why would a govt hold back a bubble. They would suggest it is not a bubble but the new norm @no more boom or bust'
    This is all just window dressing. The world is too globalised for any one country to regulate their own systems.
    BREAK UP RETAIL AND INVESTMENT BANKS. SIMPLE.

  • Comment number 6.

    It won't work. If government cabinet ministers have to get an accountant to file their tax returns, there is NO chance the government is willing and able to create and effectively administer any financial regulations.

    If there is enough money in it, it would take an accountant, one of 280000 we have, very little time to find gaping holes and bypsses, all perfectly legal, in any financial regulations.

    Finanial regulations and bodies are tulchans for spinning the public.

    The only effective way is to adjust the personal risk-reward balance for the people involved. Significantly increase personal risks and make it stick, greatly decrease potential personal rewards.

    The bulk of the personal rewards should spread over many years (20?), held by government, and used before any governement handouts and baiouts.

    Loss or gains should be counted only when all risks are closed, and costs and liabilities paid. eg. when loans are fully repaid.

  • Comment number 7.

    Why not restore the Mortgage limit to three and a half times Salary ?
    With or without a contribution from second Incomes (partners etc).

    Why not cap the Credit limit an individual can borrow on cards and personal loans ?

    That way people would not be able to overborrow so easily as they could in 2007 and still today.

    The securitisation and sale of mortgages and personal loans should be barred. This is manily an American idea, and this shifting of the Buck has been the main cause of the subprime crisis.

    If Loan agents had not been able to sell on dodgy loans this crisis would not have developed in the first.

    Securitisation removes responsibility from the Lender and passes it on to a naive owner (our Pension Funds via our banks).

    The only people who profit are the Commission driven Bond dealers who really do not seem to care what they sell and to whom they are selling it.

    The ratings Agency's are worse than useless, having no more idea than anyone else what a securitise Bond is actually worth !!!!!

    So do away with the securitisation of mortgages and loans and you limit the potential danger to the financial system in future.

    Very simple.

    Too simple for the over paid bank directors.

  • Comment number 8.

    All well and good, but it seems to me that this is a mere smoke-screen. The real issues need to be dealt with by policy today, not high flauntin' thoughts about the world of 20 years time which may never come about.

  • Comment number 9.

    bubbles, blips, these terms mean nothing to joe public except that they either have a job and money in the bank or they face unemployment and no money.
    bankers should be honest enough to tell the public the truth, even if it is at odds with parliment.
    we all have to tighten our belts and accept the coming grief, pay freezes are on the cards unless your a banker or mp, both will get pay rises due to the good job they have done (ruining this countries ecconomy).

  • Comment number 10.

    Interesting thoughts - I wonder though if people who run the Banks and regulate services will have enough will power to sustain policy when the current climate of instanst rewards or ignorance is so embedded in this country.

    Ketan
    PS See my 5 year old desribe the credit crunch
    http://www.youtube.com/watch?v=q7olaCw_gc8

  • Comment number 11.

    The MPC has alot to answer for in terms of the fuel of excessively low interest rates - it is a quango that should be terminated. The BoE should be devising tools to regulate the macro economy for long term sustainability including dealing with the ludicrous ease of obtaining personal credit including mortgages.

  • Comment number 12.

    "Macro-prudential" policy eh?
    Is that anything like "common sense".
    I'll say this yet again.....thousands of us clearly saw this coming (without any knowledge of sub-prime).
    Overheated. Runaway. Free-for-all. You don't need "macro-prudential policy" to see any of that....just good sense.
    Many of us still think that the Serious Fraud Office should be taking a look at some sectors of the financial industry.
    "But that won't help the economy?"....no, but it will stop them doing it again.
    I've heard many bankers calling it "madness" and "stupidity", but it was possibly far more sinister than that.
    The Serious Fraud Office would probably do more good than all the "macro-prudential policy" in the world.
    Self-cert mortgages, based on a pack of lies?
    Were vast bonuses paid out at a time when executives possibly KNEW that their banks were in the process of failing?
    The role of other agencies?
    I don't know the answer to these things, but are they being fully investigated?
    Some may say that if a fraud is relatively small, and affects a few people for a few million, it is a fraud.
    But if it is massive, and affects nearly everyone for hundreds of billions, then it is called a "crisis".
    Is that not the nasty truth here?
    If the public weren't legally defrauded, were they not morally defrauded?

  • Comment number 13.

    The Bank Of England
    The treasury
    The FSA
    Alex Ferguson
    Jose Marinho
    Sir Phillip Green
    Sir Richard Branson..

    It doean't matter who is put in charge of managing it - THE SYSTEM CANNOT BE MANAGED.

    DON'T YOU GET IT?????
    WHY ARE THEY STILL ARGUING ABOUT WHO SHOULD FAIL TO MANAGE IT NEXT TIME?

    It's been out of control since the 14th Century - what makes anyone think they're going to be able to manage it now?

    I will offer £20 to anyone who can cite a person or body in history who has been proven to 'manage the Capitalist economy' effectively. (i.e. stop the boom and bust cycles)

    .....just 1 - and the £20 is yours...

  • Comment number 14.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 15.

    #7 supercalmdown

    A simple answer to your questions, because people won't be able to MAKE PROFIT if you imposed any of your suggestions.

    If you cap lending you will hear the wails and screams of banks about "restricting business growth" all the way from the City to Westminster.

    If you ban the securitisation of mortgages, banks will find another way to re-package debt in order to sell more of it. Don't forget, securitisation was a nice way of replacing the previous money fleecer - and boom creator - the endownment mortgage.

    However, apparently this system doesn not promote - nor require greed to run. So as long as everyone starts acting in moderation togethe.....whoops, someone just went out on their own and offered 3.75x wages mortgage by a 'cash back deposit', it looks like I'll have to follow suit..

    ....and round and round and round it goes..where it stops, who knows!

  • Comment number 16.

    I agree with #5 eatingantonyo

    WE MUST SPLIT UP THE RETAIL BANKING SECTOR FROM THE CASINO INVESTMENT BANKING SECTOR (A LA GLASS-STEAGALL LEGISLATION).

    We must learn from history. It makes no difference that the banking system is said to be more globalised now. It's been internationalised for hundreds of years.

    The BoE would act as the lender of last resort for the retail banking sector, thus protecting the real economy. The casino investment banks would have to stand on their own where moral hazard would not apply. If they recklessly gamble away then they should be allowed to fail, just like Lehman Brothers. The banks now know that moral hazard does not apply to them anymore.

    If this is not enacted and we have the situation whereby an institution becomes too big to fail (moral hazard out the window!) and that then is simply an argument for nationalisation of the whole banking industry.

    Perhaps the argument should be about whether private companies should be allowed to be able to create fiat money (in the form of loans) in the first place.

    Usury....the evil of the love of money was written about 2000 years ago.

  • Comment number 17.

    The BoE is right that macro-prudential policy is going to be unworkable unless it is done on a global level, which will be unachievable.

    Just imagine what would have happened if, two or three years ago it had been announced in London that the major banks were going to have to start reducing loan books to increase their capital ratios. There would have been huge uproar, and the likes of Barclays, RBS, HBOS and co, let alone Goldman Sachs, Morgan Stanley etc etc would have gone screaming to the govt threatening to move their HQ's lock stock and barrel to New York, fire thousands of people in the UK etc etc, and the 'money' lobby would have had Brown and Darling wrapped even more round their little finger than they already are.

    That was then, but in future the most likely country to decide not to participate in a 'macro-prudential' game would be China. What are the chances of having them abide such rules when the potential benefits of breaking them are so huge in the short term?

    This new big idea is really a non-runner, although it's failing will perhaps not become apparent for maybe 20-30 years yet.

  • Comment number 18.

    13 (writingsonthe wall)

    I propose 2. Mr Goldman & Mr Sachs.
    They appear to be managing the entire Capitalist economy very nicely -for their own needs.

    Don't moderate this out please, just my valid opinion.

    Regards,

  • Comment number 19.

    The bubble was partly due to the Fed / BoE intervening in credit markets to lower the interest rate, i.e., pushing the price of credit below its market clearing level. They thought this was a good idea, so even if they had had the authority they would have been very unlikely to intervene in credit markets to lower the supply of credit by raising capital requirements, i.e. restricting the supply of credit below its market clearing level.

    The real problem here is excessive government intervention in credit markets. More intervention will not help: we need LESS.

    (i) Don't try to set interest rates: we don't try to set other prices in the economy do we?? Let the BoE simply print enough money to keep notes and coins growing with real growth in the economy.

    (ii) Don't provide a crazy backstop to the banks. If a big bank goes bust, the govt may in very special circumstances need to provide cover to the creditors, but the institution should then be wound down.

    We are living in LA LA Land if more govt is the solution to this mess.

  • Comment number 20.

    The last 18 months have surely proven that external regulation doesn't work. So let's have more of it whilst confusing responsibility is not the answer but yet another glib, power grabbing bit of ultimatly useless set of jobs for the same "old boys" who did nothing whilst we got into this mess. Stupidly I still think we need a) some leadership and b) the nerve to re-evaluate the entire financial system. A) is not currently available and b) too entrenched with vested interests to happen. Are we due a revolution yet? That's what it will take.

  • Comment number 21.

    Does 'macro-prudential policy' include ensuring there actually ARE mechanisms whereby errant banks CAN be put into adminstration and CAN be made bankrupt?

    Because if it did, then I reckon the bank shareholders might be much more concerned about the abilities and personalities (e.g. compulsive risk-takers, liars, reckless fools, incompetent yes-man) of the people who they allow to be CEOs and CFOs in their banks.

    That in turn might result in considerably more regulation of banks from within by the people whose dosh the banking 'big chiefs' are playing around with. Add to that a different type of 'reward' package, perhaps including some sort of bond or security that the CEO puts up, out of his/her own pocket, to insure the bank against bad performance.

    Until there is adequate moral hazard to prevent the cowboys and mavericks, all these comments from BOE and FSA are, at best, just well-intentioned spin. The real danger is that it could be being used to keep up the appearances to the public that they are managing the situation, whilst they are really trying to protect the interests of the banks.

    Probably what we need is some form of nationalised high street retail bank - a bit like the old National Girobank. Perhaps working out of Town Halls and GP surgeries and community centres. No - no fancy wholesale, globalised gobbledygook, just straight forward basic consumer banking, all contained with the UK and under proper UK regulation and guarantee.

    THAT would allow those who don't trust these globalised banks that are 'too big to fail' to easily take their business elsewhere.

    The globalised banks only have one possible sanction, when push comes to shove, and that is the risk that their investors, shareholders and customers 'vote with their feet'. That is the only tool that can genuinely be used to 'reign them in'. We all know that. Actions speak louder than words. So the way the banks are desperately trying to tie in every flippin' service with 'but you need to move your current account over to us', tells us everything.

    The actions of the FSA and BoE seem to be trying to ensure that ordinary people will never have any alternative access to services unless they bank in certain very particular ways. Whilst, for example, the Co-operative Bank is probably an alternative, they are geographically restricted if you're the sort of person who want to do business 'face-to-face' in a branch.

    If all the major economies created and ran their own 'national' bank services, then the existing global banks would be 'reigned in' globally and would no longer be a threat to world stability.

    Whilst banks can not be made bankrupt or go into administration, maverick behaviour is 'rewarded' by the government bail-out safety net. You want to stop maverick behaviour? Then remove the reward for it.

    You want to stop people putting more and more money into the hands of those who might use it dangerously? Give them an alternative, safer, place to put their dosh.

    Oh, and if some of the banks were to shrink as a result of the fear of bankruptcy or because a percentage of people walked their money down the road to an alternative, then the competition for the CEO and CFO jobs would improve and just might push cause postive changes in the calibre of the bank senior managers we ended up with.

    Sounds almost like a win/win to me.

  • Comment number 22.

    #16 BankslickerminustheR

    "Usury....the evil of the love of money was written about 2000 years ago."

    ...and ever since it was written the greedy have tried to convince us it wasn't true.

    Why isn't anyone asking the REAL question - what do we need the banks for anyway?
    The operation of lending money would continue without some fat pinstripe charging us for the pleasure of lending back our own money stolen from our forefathers in previous lifetimes.

    Don't forget how these banks came into their money in the first place. War, colonialisation, exploitation, slavery, theft of natural resources.

    All deemed to be socially unacceptable these days - so why are the banks still profiting from these previous crimes?

    Proceeds of CRIME are now taken back by the state - WHY ARE THE BANKS EXEMPT - WHO DICTATES HOW FAR BACK THE CRIMES GO?

    Smash the syndicate.

  • Comment number 23.

    Is Labour trying to placate King before the next election by appealing to his pompousity in giving him further power?

    Having done so much damage leading the MPC and BoE, he can now do further damage leading this new body.

    Still if it stops him undermining Labour and leaking stuff to the tories, Labour clearly regards the damage he further does to the economy as worth it.

    I don't know whether we as taxpayers paid for King to occupy the Royal Box at Wimbledon on so many occasions, but I would vote for the taxpayer to pay for him to attend other international tennis tournaments, preferably for long periods, and in far flung places.

  • Comment number 24.

    It sounds like window dressing to me. It is very worrying that everything has gone back to the same old.... Bankers have their bonuses back, MPS can fleece us for expenses once more. I heard on the news that securitisation is back, so we won't know where we can safely put savings.

    It seems to me that Brown has reignited the bubble. I don't know when the real crash will come, but I do know that there is much, much more in the pipeline. The only people not to suffer will be those who cause the problems.

  • Comment number 25.

    Remedy to Recession or my Illusion

    The regulation to banks is absolutely necessary, which is wisely pointed out in your article. In the following, I mention a little beyond the banks for the same consideration of wishing this recession to be end sooner.

    Headache:

    Lack of fund for investment in development to stimulate the economy and solve the job losing problem

    Tips and Hopes:

    Find out all kinds of development potential areas, put them into list, encourage people to engage in the production in order to be fruitful. For example: agriculture, forest producing, fruit and wine producing, food processing, redecorating and refurbishment of old properties, entertaining industry, fine clothes and shoes production and exportation, river fish raising, leading customers for more consumption (promotion from the shops periodically with themes, discounts, competitions), encouraging people go shopping after work in the evening, enrich the social shopping in the evening, and weekend. Shopping potential of customers might be further explored in different areas, to different groups.

    If government has financial ability, it can develop some big project, and contract it within the country. Which field and area will it be, still need to be researched. It can either be in farming, agriculture, or in transportation, construction, environment or other industry. To get the effect more efficiently, I think it still need to be put half percent consideration to more achievable development, which can bring out fruit within years. Government and central bank should accumulate, save and master money in easy times for financial difficult times, when it can get the money out to stimulate the economy. If profits only flow to private top riches, and cannot be filtered partially for the governments deposit, it might be hard for it to save the private companies and the country when they are out of order.

    British product in cities are not more expensive that those in European countries, but perhaps a little more expensive than those in United States. Is there any opportunity in using these price and cost difference?

    Encourage people to save more, spend more, and be confident of their ability for future, and trust the countrys future. This can be achieved partly by asking media to promote sunshine side of life, and stand up for peoples happiness, being relaxed, having privacy and respect to humanity.

    A person might fail in one aspect, but he may be right in another views. To step forward, he should keep cool, relax, fair, diligent, and optimistic. The same applies to the country. There are gaps between illusions and remedy, but sometimes they can be filled by more remedy tips, devotion, insight, knowledge and experience, trial, failure, and try again till success.





  • Comment number 26.

    Surely the issue is conflicting goals - we want growth and we want to be competitive so we can win. We also want stability.

    The reality is we can't have both so we have to choose.

    If we choose stabiltiy then we have to restructure a very different financial sector. One based on mututality and a return to the conservatisim of pre Thatcher banking and credit availability. We would have greater stability and a financial sector more tied to the real economy.

    We wouold also have lower growth and therefore increased presssure to re - equalise society.

    Or we can fiddle about with the current system and accept that the price of growth is instability.

    This new radical solution just does that - it's about as radical as a garden tea party.
    Seem to be doing sonething without actually doing anything very much - then when the heats off back to business as usual.





  • Comment number 27.

    One can only wish the dreamers running the finanancial system well, as they once again pretend to turn the sows ear "economy" burgher into a reinvented silk purse to be duly emptied and resold to the ever willing pension funds .

    As for higher interest rates on money created from thin air ,it ammounts to the same thing ,daylight robbery.

    Surely now that the shareholders of banks know that they can lose their shirts on banking bubbleomics ,they will be more attracted by banks under tighter regulation ,their appetite for self delusion having been severely satiated by events .

    The gay Gordon Brown shirts thought they could fool all of the people all of the time with their goose steps

  • Comment number 28.

    Here's a nice journalistic summary of this dliemna (thanks to sutara @21)

    Reckless fools - or feckless rules - that is the question.

  • Comment number 29.

    Why the bankers need to be better regulated.

    Why oh why, do we keep on asking can we trust the bankers to what is best for the economy (as opposed to doing what is good for themselves) when we know that since deregulation all they have ever done is to steal our money by selling us fools gold.

    Why oh why, do we continue to pay our senior bankers and leading businessmen so much when we know that most of them are little more than privilaged MBA clones, with little understanding of the businesses they control and even less affinity with the employees they are supposed to be leading.

    Why oh why, are we continually discussing the best way to regulate the markets and directors behaviour when the simplist solution is to make sure that a clause is inserted in all directors contracts to say that they will personlly accountable and liable for their failings when they are in charge. And when they fail to make it a criminal offence for them to recieve more than the basic minimum. These people need to learn and better understand the harsher realities of their failures.

  • Comment number 30.

    * 21 Sutara "You want to stop people putting more and more money into the hands of those who might use it dangerously? Give them an alternative, safer, place to put their dosh."

    I agree totally, this is the main antidote to the current failure in banking regulation.

    The other key is to restore trust. That's the first thing that's needed because the credit crunch is a result of the collapse of trust. As a basis for reforming the system, there has to be total transparency and there has to be justice. As stanilic @4 says, "until it can be seen that the transgressors are punished everything done is a mere stop-gap."

    If the BoE can't see what an important issue this is, they may as well give up before they start. They have to understand that we no longer assume people are motivated by what's best for the country/world. In fact, trust is so tattered, we assume the worst possible motivation from every party on everything! Not an easy starting point.

    Those countries that won't play fair by prosecuting transgressors should no longer be trade partners, all countries must clean up their act using the laws that are already in place. Then we can begin talking about global agreements.

    At the moment, we're like people drowning in deep water, and we don't know if what's swimming towards us is a lifeguard or a shark!

  • Comment number 31.

    Whatever happened to the so called banking 'corset'? When I taught Economics in the 1970s I remember this as a device whereby the clearing banks were told by the Bank of England to deposit large sums with the Bank at times of excessive bank lending. This money was effectively sterilised and couldn't be used as a basis for credit creation.Interest earned on these sums was prohibitively low.Those were the days when it was considered normal for the State to intervene in the macro economy to prevent excessive lending. A shame that Chancellor Brown seemed to have neglected what, at the time anyway, was thought to be a useful government lever.

  • Comment number 32.

    Isn't the root cause of the problem that the BoE has a very blunt instrument for tackling infaltion? By ONLY using interest rates to keep CPI inflation between 2-3%, we effect other areas of the financial system that also rely on interest rates. As such, the BoE was responsible in large part for the credit crunch, by making borrowing too affordable for homes, businesses and banks alike. But they had to set the interest rate where they did, to ensure that CPI inflation (which, of course, does not include house prices). Inflation should be controlled by a number of tools (e.g. taxes), not just interest rates. That would allow interest and inflation to be de-coupled, giving our masters more freedom to control the "macro-prudential policy" (what a ghastly phrase!). However, that would probably mean putting interest rates back into Treasury hands, to allow joined up thinking with taxes.

  • Comment number 33.

    If you are not happy with retail and casino banking being linked, putting our future in peril or with fat cat banker bonuses or with big banks too big to fail, then opt out with your savings - Open a credit union account - all deposits used as micro loans to local people. Full FSA depositors guarantee. My local credit union is paying 5% interest. If enough people opt out, the banks will listen and perhaps morality will return (!)

  • Comment number 34.

    #24 economaniac wrote:

    'It seems to me that Brown has reignited the bubble.'

    ----------------------------

    Would that be...to 'reignate' the huge bubble of explosive gas!!!

  • Comment number 35.

    It would appear that all of the above is just waffle and a waste of time...

    "US lurching towards 'debt explosion' with long-term interest rates on course to double"
    http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

  • Comment number 36.

    "How will we know ... that asset prices are rising to unsustainable levels? It's blindingly obvious with 20:20 hindsight vision that this is what happened from 2005-7."

    Actually, it was blindingly obvious without hindsight to anyone without a vested interest. How could house price growth of 10%-20%/year against wage inflation of 3%/year be sustainable?

    You can't even excuse the government that this was out of sight, with Gordon Brown's pledge to not allow house prices to rise out of control.

    Finally, I find it hard to believe that this possibility wasn't voiced when Gordon 'no more boom and bust' Brown took housing costs out of the inflation index, and thus directly caused the boom which is the main cause of our current crisis.

  • Comment number 37.

    #33. rogcay wrote:

    "My local credit union is paying 5% interest. If enough people opt out, the banks will listen and perhaps morality will return"

    Does your local credit union also offer debit cards, ATM cards, standing order and direct debit facilities? Online financial management? Can you withdraw your cash anywhere in the world?

  • Comment number 38.

    #6 puzzling wrote:
    "The only effective way is to adjust the personal risk-reward balance for the people involved...

    The bulk of the personal rewards should spread over many years (20?), held by government, and used before any governement handouts and baiouts."

    There's a simpler way of doing this. Bonuses could be mandated to be made in stock call options, thus providing the incentive for directors to look to the long term rather than the short.

  • Comment number 39.

    36. OrcusMaximus wrote:

    "I find it hard to believe that this possibility wasn't voiced when Gordon 'no more boom and bust' Brown took housing costs out of the inflation index, and thus directly caused the boom which is the main cause of our current crisis."

    There is little, if any, statistical justification for including asset prices in the inflation index.

    It is all very well saying that the crisis was "obvious" - everyone knew that house prices were reaching unsustainable levels - but knowing what to do about it was another matter entirely. To have raised interest rates would have pushed an already-overvalued Sterling even higher, causing pain to our manufacturing base, adding to the strain on already indebted households and, no doubt, attracting as much criticism from the regulars on this blog as the failure to act is. Hindsight makes experts of all of us.

  • Comment number 40.

    #26 mariansummerlight wrote:

    "Surely the issue is conflicting goals - we want growth and we want to be competitive so we can win. We also want stability."

    Very good and well put.

    However, the only bit I don't understand is 'win what?' - are we in a race for 'best growing country ever'?

    The nation (or rather the decision makers of the nation) seem to be convinced that this is a race - and that there is a prize, and that the instability is worth it.

    There is no prize for fastest growth - power in the world is dictated by the number of nukes you have, not how fast you grow as a country.

    This is compounded by the inaccuracy of growth numbers - they strictly report straight financial wealth - as if the country was a business. However a country is not a business and sometimesit's growth cannot be measured in this way.

    I think Sweden is one of the most developed and fastest growing countries in the world - however not according to growth figures (it's about 22 in the world rankings).

    This is because the development and growth of Sweden has been more social than financial. It has a very advanced recycling system (years ahead of the rest of Europe), a very progressive and successful criminal and justice system and a reducing reliance on imported energy.

    So in the race for growth, there is no prize, the measurement is inaccurate and the goals seem cloudy at best. Is this a race we should be going through all this turmoil for?

    Doesn't sound like it to me.

  • Comment number 41.

    The BIG problem with this BIG idea is that it ignores the small detail buried in micro-economic concerns. Without some form of differentiation between property-based and production-based activity, all of our wallpapering over the cracks will not last for long.

    These sectors of the economy work in different ways; they often pull in different directions; they need different measures. These measures need to address both incomes and investments, probably through reformed taxation.

    Only then can macro-measures, such as interest rate manipulation, stand a chance of working for the benefit of the whole economy.

  • Comment number 42.

    Regulations to discourage and limit large bonuses should not be necesary for peopel like Tom Hunter and Chris Hohn who have probably gave much more to charity than that they save on taxes.

    They are the genuine philanthropists, unlike other who would spend a fraction of tax haven tax savings to wear a coat of philanthropy and buy a title.

  • Comment number 43.

    #37 rbs_temp

    "Does your local credit union also offer debit cards, ATM cards, standing order and direct debit facilities? Online financial management? Can you withdraw your cash anywhere in the world?"

    .....will your bank in 6 months time? and if it does, will it be free?

    Me thinks not - free banking was never free, it was being paid for by inflated assets.
    There will be a rapid withdrawl in these services, or the cost of them will rise as the high street banks reign in their outgoings.

    P.s. 'Online financial management' is just a fancy way of viewing your account online. There is no management involved (except by yourself) - which makes it ridiculous that the bank includes this in the title as if it's actually offering something.

    ...one born every minute in the world of banking....

  • Comment number 44.

    #33 rogcay & #37 rbs_temp

    I would recommend the Co-operative Bank...it's the only ethical bank around!

    It's not just my opinion...

    The Co-operative Bank has been named 'Best Financial Services Provider' at the Which? Awards 2009.

    'Highest with customer satisfaction within retail banking' by J.D. Power and Associates.

    ...and to boot, the chairman, CEO and senior directors are not paid obscene salaries or bonuses (or is it boni?...who cares just as long as they're not ludicrous).

  • Comment number 45.

    #39 rbs_temp

    Excuse me if I've got the wrong end of the stick with this:

    "There is little, if any, statistical justification for including asset prices in the inflation index."

    Are you saying that house prices were not linked to inflation?

    WHERE DO YOU THINK ALL THE MONEY WAS COMING FROM?

    The inflation in house prices gave people access to additional amounts of cash through re-mortgaging. This cash was then spent in the wider Economy giving the impression that wealth was being created out of nothing.

    House prices have EVERYTHING to do with inflation, maybe not in countries which have a small home ownership level - but in Britain it's crucial to the rise in spending and therefore the rise in inflation.

    If house prices were included in the BoE's inflation target, they would have been putting the brakes on long, long before the crash happened.

    Whether it would have made much difference, nobody knows - but I know that not including it was always destined for disaster.

    There were people up and down the country screaming that this was a bad measure - however the sound of tills opening and of rolls of money being counted drowned them out.

    It's not a case of hindsight - it's a case of the people who decide not knowing what they are doing and the people who will benefit convincing them it's a good idea by supporting their party.

    You can trakc back through Pestons blogs and find hundreds of references to the RPI / CPI argument long, long before the crash.

  • Comment number 46.

    The reason the banks act recklessly is that the people who run them make more money in the form of bonuses the more business they undertake, and profits they post.

    So by far the simplest way to stop reckless behaviour is to decouple the staff remuneration from the amount of business being done, or profits.

    I would set the maximum salary of anyone working in a PLC at around £150K. If they want to earn more than that let them set up their own company and risk their own money. If they are so marvellously talented as they think they are, surely they should be able to make money using their own capital.

  • Comment number 47.

    Robert, from your article I understand the Macro Prudential Committee (unhelpfully named MPC - is this deliberate?) to be able to tell individual banks to cool it down a bit, since if individual banks take different levels of risk and have different levels of leverage raios from other banks, the new Macro Prudential committee must be able control banks at that level.

    This contradicts Howard Davies "logical issue" and comparison with setting interest rates.

    Interest rates will hit anybody and everbody, and is a blunt instrument - hence the reason why the current MPC wasn't able to control the asset bubble without hurting those we don't want to hurt.

  • Comment number 48.

    #39 rbs_temp wrote:

    "To have raised interest rates would have pushed an already-overvalued Sterling even higher, causing pain to our manufacturing base."

    ----------------------------------

    ...er...what 'manufacturing base' would that be then?

    It's funny...those two words have been used in the same sentance for as far back as I can remember. That was when we actually had a manufacturing base in this country.

    Perhaps we should have switched the words to...our 'finacial services base' as the times changed...though maybe it never happened for a sound reason!

  • Comment number 49.

    39 rbs_temp wrote:

    "There is little, if any, statistical justification for including asset prices in the inflation index."

    Excuse me? There is plenty of statistical justification for keeping the largest household cost in the inflation index.

    "To have raised interest rates would have pushed an already-overvalued Sterling even higher, causing pain to our manufacturing base, adding to the strain on already indebted households"

    I disagree. What makes our manufacturing base globally uncompetative is the high wages which are necessary due to the high cost of living.
    Reduce the housing cost, you reduce the cost of living, and improve our global competitiveness.

    Removing the housing costs from the inflation index was a cynical act designed to keep the voters thinking everything was fine, but actually selling them all into lifetimes of debt-slavery. Yes people could have chosen not to buy, but how many were strong enough? The pressure was/is intense due to the media, government, and others with vested interests telling them to buy now, or forever miss out.

    "Hindsight makes experts of all of us."
    OK. Here's a prediction:

    Regardless of who wins the next general election, we will see higher interest rates and unemployment in 2010-2011. This will cause house prices to crash even further, maybe to 2002 levels. Buy now at your peril.

  • Comment number 50.

    Instructor Selector says you better tighten up your belt and watch the ride

    Things Are Getting From Bad to Worse Everyday

    Everything Crash

    (The Original Reggae Hitsound)

  • Comment number 51.

    # BankSlickerminustheR 34

    Yes, I did mean the vast bubble of explosive gas will be reignited! Unfortunately, I will be blown up with it as I have a pension which, when I cash it in, will be paid in worthless pounds sterling.

    Any ideas on how best to position yourself?

  • Comment number 52.

    "Macro-prudential policy"...more financial "waffle", used to great effect by the industry to confuse the public whilst covering up a multitude of sins.
    But it doesn't fool me.
    The financial industry had simply become rotten to the core, corrupted by greed and ego, and overseen by a government that "looked the other way".
    A lot of this terribly intelligent sounding financial twaddle can be found coming out of the back of male cattle, but the public have wised up to this lot.
    They might do better to speak in plain English, with a small amount of honesty thrown in.

  • Comment number 53.

    #48. BankSlickerminustheR wrote:

    "...er...what 'manufacturing base' would that be then?"

    I realise that it's almost accepted as gospel truth on internet forums - and particularly ones such as this, whose contributors are primarily right-wing and reactionary - that the UK has no manufacturing base, but in fact the UK still has a significant manufacturing sector. It is responsible for around a sixth of the UK's national output, accounts for over half of UK exports, and undertakes 75 per cent of all business research and development. It employs about 3.5 million people directly, and many more indirectly through the supply chain and service industries.

  • Comment number 54.

    There is, Robert, at the heart of the Bank of England's proposal a void. They are being ingenuous if the do not admit to their own errors of policy in the run up to this economic disaster. On the other hand if they admit to the problems and their lack of understanding and/or courage they are admitting that they are not fitted to be part of the solution.

    Either way we are stuffed....

    Mainly because nobody has yet grasped the central role of a sound money policy in working towards a recovery. Sound money is money that has a reasonable price (4-6 percent range). People talk about it but nobody has the guts to actually implement it.

    None of this tinkering with committees will work unless and until the central reality is grasped. (And that cannot happen before a General Election, no matter who wins. and that can't happen till after Christmas because of the need to ratify the Lisbon Treaty. So it is entirely predictable to for the next six months we will not start recovering, or even putting in place policies that might lead to a recovery.) In short, we have six months of gambling on the stock market combined with a steady deepening of the economic slump in the real world.

  • Comment number 55.

    This is one of the most decent societies on earth, and it shouldn't be so complicated. After the excellent comments on the 'Bankers aren't worth it' blog, here's a few desirable outcomes this country can work towards

    A) break up ALL the banks and create for example 3 tiers of risk -

    (1)a govt. guaranteed system for depositor money (the current account) which offers depositors the convenience of not keeping cash in the mattress and the ability to access it through ATMs, etc. This need not offer any interest, and is simply the 'plumbing' of the system much like water supply so hat people can pay each other, transactions can be completed, salaries can be paid, etc. Frankly there is no reason why banks even need to be involved in this, and this takes away a major reason for bailing them out. Basic salaries for all only, no bonuses.
    (2) A savings account system where the deposit understands that there is risk and no guarantees, but which pays out higher interest and lends to perhaps the prime mortgage market, safe conservative business loans, etc. Banks that offer these can and occasionally will go under, taking depositors' funds with them, but this acknowledgement can from the start be built into their cost of capital, margin / collateral reqiurements, etc.This will automatically create a fair market, since they can fail if they misbehave. This will cap and moderate remuneration.
    (3) A casino system whereby investment banks, hedge funds, PE houses, venture capitalists, underwriters, credit card issuers, sub-prime lenders, etc. etc. play with SHAREHOLDERS' funds only. Any individual citizen wanting higher returns is welcome to buy shares in these organizations. Bonuses galore if that's what the shareholders approve. Who is anyone to tell someone else what to do with their money.

    B) Understand and acknowledge that house price inflation is undesirable and immoral. It robs young people and the unborn of their future earnings and standard of living. The government must declare that there will be NO MORE HPI going forward - period, and that government policy will ENSURE this by whatever means available. It is blindingly obvious that the market does not necessarily work in society's best interest when it comes to this sensitive issue of shelter. If Plasma TVs go down in price, we all benefit. The same applies to housing. And buying a 100k studio for 250k 5 years' later becase it may go to 500k after that is something the British relish doing. Unfortunately one doesn't get a ferrari instead of a ford, its the SAME house, but with moe debt and more misery on the unfortunate occupant.
    One of the most important ways to ensure this is to follow the German housing model, with large govt.-sponsored agencies owning thousands of flats for rent, with security of tenure for the tenant, proper standards in the landlord-tenant relationship and no stigma to renting. This ensures labour mobility, and people buy much later in life when they have identified where they can settle, AND HAVE SAVED UP THE MONEY.

    I do not blame the British public for desperately trying to buy houses. It is the logical reaction to 6 decades of high HPI and a rotten thieving pension system. But take away the blind acceptance and expectation of continuous housing inflation and you take away MOST of the problems of over-leveraging, greedy bankers, self cert mortgages, buy-to-let, misery of mortgage-holders squashed into a 300k 1-bed flat, etc. etc.
    The Americans enjoyed a high standard of life till very recently partly due to cheap housing. Then they caught the British disease and look where it has taken them.
    It may be unwise to spend with you don't have and buya house with a mortgage, but when you expect housing inflation to effectively transfer that debt burden to the next generation, it is downright immoral. This is one of the most decent socities on earth, and the attitude towards housing is exasperating.
    C) Follow the Norwegian? model of pensions, government controlled but independently run, low cost and held for the benefit of everyone. Surplus private savings can go into either of the 3 levels of risk as mentioned above. Get rid of the plethora of IFAs, fund managers and other idiots who swindle the public, charging them for the privilege of losing their money for them. How many more crises do we need before this useless lot are booted out? Along with the politicians, it is these people who should have held companies' and banks' management to account.

    D) As someone pointed out in the earlie blog, there is a huge amount of hypocracy on this blog, cursing banks and bankers whilst merrily taking loans from them, running up credit card debt, etc. i.e. living beyond your means. It is this and debt generally that should have the stigma attached, not renting or saving. The banking system is also a MECHANISM by which a society achieves its financial goals, and the hard fact is that the British public's own greed, short-sightedness, financial illiteracy and 'must have it now' culture have been splendidly catered to by the banks. Why blame them, they did nothing illegal. Neither did the BTL investors who seem to be the target of so much invective.

  • Comment number 56.

    #49. OrcusMaximus wrote:

    "What makes our manufacturing base globally uncompetative is the high wages which are necessary due to the high cost of living.
    Reduce the housing cost, you reduce the cost of living, and improve our global competitiveness."

    Utter nonsense.

    A fall in house prices does not lower the cost of living, as the majority of households have mortgages that still have to be repaid.

    Furthermore, the increase in in interest rates that you believe would have solved all our ills would have increased the cost of servicing those mortgages, thereby pushing up the cost of living and therefore, by your own logic, pushing up wages and lowering our global competitiveness even further.

  • Comment number 57.

    #45. writingsonthewall wrote:

    "House prices have EVERYTHING to do with inflation"

    Absolutely!

    But the cowards at the Bank of England didn't and still don't have the guts to admit that their policy judgements over more than the last decade were and indeed still are WRONG and were a substantial contributory cause of the bubble economy that has now burst! They still will not admit in public that it is impossible to return to these days in the next decades. This is their cowardice and this is what is mostly rotten in our regulatory system and its management - in private they will admit that they should have had interest rates substantially higher for well over the last decade but they are still running a zero interest rate policy with all its negative consequences. They are buffoons!

  • Comment number 58.

    #55 Courteousnewcitizen. You say:

    "This is one of the most decent societies on earth"

    You also say:

    "...house price inflation is undesirable and immoral..."

    You express the view that UK pensions are the consequence of a "rotten thieving pension system"

    Tell me, how do you reconcile the first statement with the 2nd and 3rd statements?

  • Comment number 59.

    37. At 1:13pm on 06 Jul 2009, rbs_temp wrote:

    "Does your local credit union also offer debit cards, ATM cards, standing order and direct debit facilities? Online financial management? Can you withdraw your cash anywhere in the world?"


    Probably not, but the Post Office offers credit cards, car insurance and lots and lots of other so-called 'bank' services - the credit cards are via a tie-up with the Bank of Ireland. (And you probably have one near you).

    Also, NSandI offer some good savings and investments options (government backed).

    And the Co-op bank also offers 'bank' services. Though due to them having few branches, probably most people would have to do business on-line (though their cards can be used in lots of other people's ATMs) plus you have the bonus of their 'ethical' approach to business and that they are a mutual owned by their customers.

    In fact, I reckon the Co-op is the most helpful bank I've ever had dealings with and would rate their customer services as second to none.

    As opposed to the ongoing 'nightmare' experience of dealing with Santander ..... but hopefully not for much longer! I wonder if the FSA should go into Abbey and check that Santander have not forced Abbey's Customer Services Managers to have certain parts of their brains surgically removed. The utter codswallop they give out to customers has to be heard to be believed!

    I've said it before, and I'll say it again, if you don't like the globalised banks - who can not go bankrupt or into administration - hamdling your financial affairs, then there ARE alternatives.

    Oh and you can use any Visa or Mastercard just about 'anywhere in the world' - assuming that is you can still afford to travel to 'anywhere in the world'.

  • Comment number 60.

    29. At 12:35pm on 06 Jul 2009, godfreybrown wrote:

    "Why oh why ..."


    Because it suits the politicians to let it be so.

    It may not suit the electorate, nor the UK economy, but it clearly suits the politicians (and perhaps also some senior civil servants) who may well want to keep on the right side of certain banks for a number of personal reasons.

    And that is why it probably won't change.

    Of course, you may be in a postion to change some part of it for yourself, e.g. by taking your business away from banks that you consider to be immoral, or unethical, or who don't do business in the way you would like them too.

    But I don't reckon you should really expect anyone to come along and sort the banks out, because there are just too many undisclosed personal interests.

    Banks are great globalised entitites nowadays and are as powerful (and probably as corrupt too) as some national governments.

    I was thinking that we really should have, in view of their power, not just a United Nations, but a United Bankers. Preposterous? Why? Have you never heard the song, "Money makes the world go round"?

  • Comment number 61.

    56 rbs_temp wrote:

    "A fall in house prices does not lower the cost of living, as the majority of households have mortgages that still have to be repaid."

    It reduces the cost for first time buyers.
    It reduces the cost for growing families who need to move up the ladder.
    It reduces the cost for people who need to make sideways moves (stamp duty).
    It reduces the inheritance tax payable.
    It reduces the cost for parents who need to subsidise houses being bought by their children.

    Agreed that increasing interest rates will increase repayments, but inflation will steadily erode the real cost of repayments.


    "Furthermore, the increase in in interest rates that you believe would have solved all our ills would have increased the cost of servicing those mortgages, thereby pushing up the cost of living and therefore, by your own logic, pushing up wages and lowering our global competitiveness even further."

    Nope, that's the beauty of (low) inflation. It steadily erodes away the debts, so that small rises in interest rates will not cause large increases in repayments (in real terms).

    However, the large rises in interest rates which are inevitable due to the need to service the government's debt mountain ARE going to be catastrophic, and could so easily have been avoided.

    If you go on a binge you are going to get a hangover.

  • Comment number 62.

    Look at real base asset value, value it and underpin it as having no growth until such a time persons improve the asset value with a proven capital expenditure and an approved revaluation of the asset (collateral). It is the value of an on going business/income with a realistic view to the future that ought to be seen as the base to lend any business or person to do more business, collateral as important as it is just part of the responsibilty in lending. We need some basic down to earth rules/laws and an overseer with teeth. This Macro-Prudential Policy/Thingy may be the way to go, I can see that it may be very difficult to get right though.

    My way of looking at it is rather simplistic but here is hoping that it gives a nibble for further thought.

  • Comment number 63.

    In engineering: to be in control of anything, you need three things:
    1) Standards (Where you want to be; in some measurable units)
    2) Actuals (Where you currently are; in the same, timely, measurable units)
    3) The Power to Change (the mechanisms to change, or at least influence, Actuals so they are closer to standards)
    When any of these three elements are missing, there is no control. How do these any of these proposals stack up against these criteria?

  • Comment number 64.

    28. At 12:16pm on 06 Jul 2009, writingsonthewall wrote:

    "Reckless fools - or feckless rules - that is the question"


    Oh, neither, I'm afraid.

    If only it was as innocent as that!

    There's every suggestion that it is a highly organised and promoted
    series of systems and mechanisms in order to protect the interests of a minority.

    And it interacts / interfaces with the political and democratic systems.

    I mean, just where DOES all that money for an election campaign come from? Well some of it comes from people very interested in ensuring the continued supremacy of globalised banks over governments and other providers of services.

    Stephen Green (HSBC Chairman) stated in a recent BBC World Service interview that banks were "too big to fail in the sense of applying the normal processes of bankruptcy and administration - you can't do that"

    So, if banks can't go bankrupt or into administration, then the Government had no alternative to (or intention of doing otherwise than) bailing the banks out.

    If RBS had been making cars, or building ships, they would very probably been allowed to go into administration. But they were a bank and the rest, as they say, is history.

  • Comment number 65.

    #51 - economaniac

    I hear the best position to take up in these times is the one where you put your head between your legs and prepare for the arrival of a massive tax supository.

  • Comment number 66.

    #59 Sutara

    I believe that to make up for the lack of Co-op branches you can do some banking inside post office branches (while they remain open).

    Without sounding like an advert - I agree with your sentiments, I do not use it myself but my partner runs her business account from it and is very happy with the service.

  • Comment number 67.

    Are The Banks Going To Refund Bank Charges Now ?
    (i.e. Disproportionate / Scam For Going Overdrawn )

  • Comment number 68.

    58. armagediontimes wrote:

    #55 Courteousnewcitizen. You say:

    "This is one of the most decent societies on earth"
    You also say:
    "...house price inflation is undesirable and immoral..."
    You express the view that UK pensions are the consequence of a
    "rotten thieving pension system"
    Tell me, how do you reconcile the first statement with the 2nd
    and 3rd statements?

    Let me have a go -

    1) This is one of the most decent societies on earth as we have a high level of accountability and transparency in government.

    2)HPI is undesireable and immoral, and is demonstrateably due to government action. We know this from the transparency in govermnent referred to in statement 1.

    3) Not too sure about Courteousnewcitizen's 'rotten thieving pension system' statement. Maybe he's referring to Gordon Brown's pensions raid. We know about this due to transparency in government, and can do something about it due to accountability in government.

    There we are! All three statement's reconciled.

    Incidentally, I like Courteousnewcitizen's idea of following the German housing model. Security of tenure would make renting a much more attractive alternative for a family.

  • Comment number 69.

    common sense not ideology

  • Comment number 70.

    65. writingsonthewall wrote:

    "I hear the best position to take up in these times is the one where you put your head between your legs and prepare for the arrival of a massive tax supository."

    Tee hee. Best economic analysis I've heard for a long time.

  • Comment number 71.

    #56. rbs_temp

    You're nearly there with your analysis - but you're missing a vital extension to it. You said:

    "Furthermore, the increase in in interest rates that you believe would have solved all our ills would have increased the cost of servicing those mortgages, thereby pushing up the cost of living and therefore, by your own logic, pushing up wages and lowering our global competitiveness even further."

    ....but if you're a monetarist then the lower interest rates allowed the homeowner to re-mortgage and take the expected value (which the property hadn't fulfiled yet) and spend it on crap - like TV's and fast cars etc. This had a big effect on inflation as there was simply 'too much money in the system' - thereby pushing up inflation.

    The remortgaging of property - was effectively bringing future money forward as cash today. The increase in the supply and velocity of money pushed prices up - making exports less competitive etc. etc.

    A rise in interest rates about 6 years ago would have made people think twice about continuously remortgaging - and what they were spending it on. It would have slowed the housing market down and possibly slowed growh slightly - all of which are politically dangerous (which is why it didn't happen).

    That's what you get when your Governments aims (getting re-elected) are not the same as yours (steady growth).

    ..and I'm just talking about homeowners - never mind the BTL idiots who were TELLING ME things like this:

    "Oh it's simple, all you do is buy a property, rent it out, re-mortgage it (because it will be worth more) and use the extra cash to buy the next one"

    I screamed insanity - but they wouldn't listen. Once again the spectre of greed haunts the Capitlaist system.

    What were they going to do? Sit by and watch everyone else making money?

    ....and that's how the SYSTEM works.

  • Comment number 72.

    #37 rbs_temp

    "Does your local credit union also offer debit cards, ATM cards, standing order and direct debit facilities? Online financial management? Can you withdraw your cash anywhere in the world?"

    No. But a much better question is why doesn't the Government provide such a set of capabilities as a public utility? NS&I does indeed provide an interest-bearing instant access savings account with ATM cards and telephone banking. I can't really see why that can't be extended to include standing orders, debit cards etc - thus providing a real competitor to the banks and their current accounts.

    Taking this further, we now live in a largely cashless society. The Government used to be responsible for printing the cash. Now it should be responsible for running its electronic replacement as a public utility. The banks are rubbish at providing this capability (security is pathetic with no proper encryption to deal with spyware, and any time I try an buy something from a vendor I haven't used before, or use an ATM machine abroad I find they've blacklisted my card). The whole current account system needs taking away from the banks and running instead as a "national grid". The banks can just be left with doing savings and loans (preferably without any Government guarantee if they go bust). If they don't have access to our current account cash, then their ability to cause future asset bubbles will be greatly reduced.

  • Comment number 73.

    #59. Sutara wrote:

    "And the Co-op bank also offers 'bank' services. Though due to them having few branches, probably most people would have to do business on-line (though their cards can be used in lots of other people's ATMs) plus you have the bonus of their 'ethical' approach to business and that they are a mutual owned by their customers.

    In fact, I reckon the Co-op is the most helpful bank I've ever had dealings with and would rate their customer services as second to none."

    So you're admitting that it is not really possible to avoid using banks altogether, but only to choose the bank that you consider the least unethical? And even then, you admit that it will still be necessary to make use of the facilities offered by the other banks? I thought the entire point of your posts on this subject over the months has been that is is possible to completely avoid using banks.


    "Oh and you can use any Visa or Mastercard just about 'anywhere in the world' - assuming that is you can still afford to travel to 'anywhere in the world'."

    Lots of people can still afford to travel, and to travel further than ever before. Historically low mortgage rates and full-service airlines falling over themselves to attract passengers with low fares mean that overseas holidays have never been so affordable.

  • Comment number 74.

    66. At 4:24pm on 06 Jul 2009, writingsonthewall wrote:

    "Without sounding like an advert - I agree with your sentiments, I do not use it myself but my partner runs her business account from it and is very happy with the service."



    Actually, I have so little business with them - one 'RSPB' credit card that I hardly ever use - that I'm probably not really qualified to comment, but when Santander / Abbey screwed up my request to pay money to the Co-op to pay off the credit card account, the Co-op (because of the missed payment) reduced my credit limit on the card.

    The positive thing being that when I explained to the Co-op that I only missed the payment due to Santander's incompetence, they agreed to re-instate my former credit limit, which I thought was very reasonable of them. (And vastly more reasonable than the way Santander / Abbey treated my complaint about the incident!)

    (O.K. I did have give the Co-op copies of my correspondence to Santander and the Banking Ombudsman and all that stuff to 'prove' the case).

  • Comment number 75.

    Robert,

    The BoE canvass the types of instruments that could be introduced - see Financial Stability Report in June :-

    Gross quantity: Direct controls on the level or growth of lending.
    Asset mix/quality: Concentration limits, reserve requirements, maximum
    loan to value/loan to income ratios.
    Controls on lending rates.
    Gross quantity: Direct controls on the level or growth of liabilities.
    Debt mix/quality: Structural funding limits.
    Debt/equity structure: Various types of capital requirement can constrain
    the structure of bank liabilities, including risk-weighted capital requirements,
    leverage ratios, dynamic provisioning, and capital requirements which are
    linked to the growth of certain lending concentrations.
    Controls on deposit rates.
    Taxation of debt issuance and debt interest
    Control of lending margins and haircuts

    Doesnt it occur to anyone that such systemic control might as well be conducted via nationalisation. How will banks maintain control over profitability if these controls are introduced? There is double standard in politicians saying ' leave banks in the private sector' but then direct all their key decisions. The danger starts to arise when the new rules act to prevent/deter lending to riskier entrepreneurial activity and direct it toward safe investment-grade businesses. SMEs and start-ups will suffer!

  • Comment number 76.

    We obviously need further regulation and I'm not sure if Mervyn's idea is the right onen (it could be).

    But any regulation that cannot be understood by the general public is obviously too complex and likely to be abused.

    For everyone's sake lets hope they just make it simple so everyone can understand it, and if it all goes Pete Tong we'll know who to blame.

  • Comment number 77.

    Sorry folks!

    My #74 hs rather drifted off of topic. Mea culpa.

    But it just underscores, for me anyhow, that the interventions of the BoE and the FSA, and the employment of highly paid big bank CEOs and the like, does not necessarily translate into good customer/investor experience.

  • Comment number 78.

    For what indeed, Robert, shutting the stable gate after the horse has bolted. Anyone close to the action knows there's no other way to reign in the excess that's led to the disaster the world's having but to have your inspectors in there, leaning on boards under threat of revoked licenses and so on. A sound strategy to solving 90% of the world's problems. At the same time penalties are going up. Now if these regulations had been in force all along, Wall Street included, I doubt very much we would be sitting here today in the kind of slump the world is going through. It bodes well, though it's entirely too much, too little, too late to avoid this crisis. Still it's not too late to charge the ones who caused it.

  • Comment number 79.

    How come in all this there is never any mention of The People's concerns being acted upon in their own country? Why does this mentality of letting all decisions and actions be taken solely by politicians and regulators persist? Why are The People excluded from taking control ever?

    Why for instance is their no officially recognised forum where members of the public can register their concerns at developing problems like assets bubbles and when sufficient concern has been raised by the public, our representatives and agents are legally compelled to act?

    For ages, we dissidents gathered at websites like housepricecrash.co.uk to express our concerns over sky high property prices but no-one listened to us, so isn't it time to give The People a means to blow the whistle and insist on action?

    I surely can't the only one to have noticed how, in this day and age of great technological and scientific advances, the public are shut out of the running of their own country?

    Democracy? Demockery more like.

  • Comment number 80.

    Why on earth don't Brown/Darling/Mervyn King just revert to the system before Brown screwed it up: let the B of E regulate the banks: capital adequacy, debt to income ratios and the like; and bring the Money Market back into sanity - stop it being hijacked for short term borrowing to fund long term lending.

    The last thing we want is another committee to make good the fact that this tripartite control is useless.

  • Comment number 81.

    I'm, sorry Robert but can you explain how Andy Haldane's macro economic stability whatsit is any different to the responsibility of the BOE for UK financialstability set out in the 2006 MOU between G Brown as chancellor, M King as Guvnor of the BOE and Callum McCarthy as head of the FSA.

  • Comment number 82.

    By a 'rotten thieving pension system' I mean our current system where a hardworking but financially illiterate exployee has thousands of pounds taken off his wages and gifted to a fund management industry that skims entry fees, management fees, renewal commissions, costs, etc. etc. off it and then attempts to 'beat' the market, failing most of the time. This cannot be right.

    By a 'decent society', I refer to my experiences in the UK over the years that I have lived here as an immigrant. On almost all counts, this is the fairest country in the world, whether it is the universality of NHS or the support to single mums or asylum seekers or police protections of radical religous preachers, or the endless committees and enquiries we have into the slightest hint of wrong-doing. It is therefore saddening to see this society's future be abused whether by politicians or the banking sector, and the best way of stopping that will be to see through the illusion of housing wealth and the dreams that these people have sold to Joe Public, leaving him in debt whilst they party in a tax haven somewhere. The germans recently legislated against government deficits, a supremely mature move that recognizes and safeguards the interests and prosperity of those not running things, i.e. savers/pensioners, the young and future generations. It is high time the British public demanded this sort of maturity from politicians and regulators.

    So it is reconciled, YES we are a decent society, and we are being FOOLED into stealing from the future by a useless political and financial system.

  • Comment number 83.

    Is it good English to say "Bank of England wins victory"
    I would have described the global financial situation as
    "Bank of England loses a defeat.. or a shed load of the nations wealth"
    If life is a bowl of cherries, they went moldy and stale and taste bitter

  • Comment number 84.

    Glad to hear this stuff is being explored but it feels like there's still a lack of imagination at the top. The question for years has been how to create tools with a bit more fine-tuning...for ages economists have known that the interest rate on its own cannot accurately control both consumer inflation and house prices.

    It's going to take a bit more creativity to come up with a workable answer but one option is to use behavioural economics: to measure and moderate the decisions of consumers in a more precise way than changing interest rates could do alone. How could this work? Full details here:

    http://www.knowingandmaking.com/2009/05/new-article-at-voxeu.html

  • Comment number 85.

    73. At 4:58pm on 06 Jul 2009, rbs_temp wrote:

    "So you're admitting that it is not really possible to avoid using banks altogether, but only to choose the bank that you consider the least unethical? And even then, you admit that it will still be necessary to make use of the facilities offered by the other banks? I thought the entire point of your posts on this subject over the months has been that is is possible to completely avoid using banks."


    I've made it very clear that there are alternatives if people want to do something about banking with the big globalised banks - especially because they view them as immoral or unethical.

    These alternatives include 'ethical' banks, Mutuals, Credit Unions, NSandI, to mention the most obvious ones.

    What I have not sought to do is to dictate to people what they 'ought' to do with their finances.

    I have encouraged people to reconsider whether they are dependent upon the banks or whether that is a load of old tosh from banks who would like their customers to believe they are dependent upon the banks' services.

    I don't need a credit card - and I could easily do without it. I mainly keep it because I like that bank.

    But if people do want credit cards, they can get them from loads of sources and they don't need to be tied to any particular bank for them.

    Oh, and you can get foreign exchange at the Post Office too.

    Don't be fooled - the banks do NOT have a monopoly on financial services. Just because they are bigger and brasher and throw more money at advertising - there are alternatives.

    I encourage people to either drop teh big banks or at least reduce down their interactions with them ... because that is the only way rein big banks in.

  • Comment number 86.

    I don't think it is possible to regulate the economy to prevent the kinds of problems we are in now, in the end it will boil down to us taxpayers underwriting the banks loans forever, so they won't get stung by asset bubbles on the way up, and feel confident to lend when times are tough! No one who is supposed to regulate the economy has the guts to stand up and rock the boat when times are good!

  • Comment number 87.

    Wake up everybody and get a grip.
    Bank regulation does not actually mean anything.
    There is no science behind it.
    Nothing to measure and compare against.

    Mervyn and his merry men are nothing but figure heads.
    The game that they are overseeing is one of bluff and counter bluff.
    Human psychology is the underlying force that keeps things moving.
    The herd instinct primarily.

    Unfortunately the real economy is minuscule compared to the never never la la land of the financiers.

    But the financiers rely on the real economy to both bail them out and give their instruments some value.
    No value - no financiers.
    Meanwhile they keep milking the real economy and just cannot understand why everybody else does not do as they are.

    Regulation would be a joke. The bankers would moan on like stuck pigs that their trade was being curtailed.
    Make no bones about it. Meaningful regulation would by necessity mean job losses in the city. Big time.
    And who would pick up the pieces? Yep. You got it. The real economy.

    So. Any government has a choice to make.
    Expand jobs in banking or expand jobs in the real economy.
    The real economy has been stuffed since the early 1980s.
    The government really likes banking.
    No nasty raw materials to be consumed.
    Just all good clean fun.
    Except of course it needs the real economy.

    But heck human psychology knows no bounds.
    Those clever bankers will soon think of ways to outsmart international markets and suck in money.
    It is just a real shame that a real economy is a real necessity..



  • Comment number 88.

    #82 couteousnewcitizen. Would one of "the endless committees and enquiries we have into the slightest hint of wrong-doing" that you refer to be the Hutton enquiry by any chance?

    #86 muggwhump. I do not know what taxpayers you are referring to. According to the Bank of International Settlements the gross value of outstanding derivatives contracts is $592 trillion. I think you will find the burden to be too great even for the most willing taxpayer.

  • Comment number 89.

    The danger is the banks convince the policy makers this is all too difficult. The following suggestion is not perfect but lets at least start from simple beginnings:

    In the same way the MPC has a 2% figure for inflation why set a target for the ratio between leverage and return on assets for the UK banking sector. Don't create another committee, just give the MPC responsibility to monitor this figure and report to the Chancellor if it is significantly exceeded.

    The only tricky question is what powers to give the MPC to control leverage? Firstly create an MPC Leverage Sub-committee consisting of the Chairman of all UK-operating banks, which would meet monthly in advance of the MPC meeting. It would be compulsory for all Chairman to attend each meeting. At that meeting members would individually report their leverage figures and targets.

    Control mechanism? Easy. Continue with the current practice of the minutes of MPC meetings (now including the Leverage Sub-committee) being fully public. Not one of the banks would dare exceed the stated leverage target.

  • Comment number 90.

    Macro-prudential policy.

    That sounds like external inspectors somehow untangling all the waffle from banks to establish if they are doing 'dodgy' things, e.g. taking bad risk, failing due diligence and stuff like that.

    How about a different approach?

    Why not remove the 'safety nets' whereby banks get bailed out, and also put in place better governance arrangements inside bank boards, by regulation or law, whereby it ceases to be so difficult for shareholders to 'rein in' (or chuck out) a bad CEO, Chairman or whatever.

    That is, the priority should be to change things so that banks are internally motivated to 'toe the line', rather than having external policemen constantly checking them from outside.

    With a bit of regulation twiddling, the conditions for being granted a UK banking licence could include a number of governance criteria, including mechanisms for the investors to rid themselves of cowboys or mavericks that make it into the boardroom.

    With a bit of regulation twiddling, there could be an appropriate enough mechanism whereby banks COULD be made bankrupt and COULD be put into administration.

    Hell, we're in the day and age where even politicians accept that the electorate needs to have ways to get rid of dishonourable MPs, so why shouldn't similar standards apply to senior bankers?

    Coupled with a need to clarify - to be granted a licence - acceptable criteria by which Directors are selected and appointed (and permitted to stay in post), together with evidence that these criteria have been met, then banking might just take its first step in regaining the trust of the public.

    Add in to the mix a 'national' high street retail bank service to make it easier for disenchanted customers and investors to 'vote with their feet' and I reckon that bankers would soon adapt to being both 'squeaky clean' and 'seen to be squeaky clean' because that would be the side of their bread that was buttered.

    You want to change the behaviour? Change the rewards and sanctions structure.

    And my advice would be for government and regulators to do that very quickly as the global banks are already too big and complex (and cunning) to be effectively controlled by national governments as it is.

    I can already hear the bankers saying, 'Hang on, you can't just rush in and change everything, you know"..... "it's all very complicated and technical" .... "and we'll legally challenge it" .... and ....

  • Comment number 91.

    7. supercalmdown has mentioned some common sense approach. I nominate you for the BoE governors job. You cant do worse than slow, inept mervyn king and Co.

  • Comment number 92.

    I agree with a lot of posters that we should not create another quango and certainly not under the leadership of Mervyn King.

    All this quango will do is regulate the last crash and miss the next crash.

    With regard Mervyn King it is about time that his role in the crash was examined.

    He raised interest rates from 3.5% to 5.75% an increase of 64%. The average income during the period was 10% leading to a huge drop in the standard of living.

    He refused to act to ease liquidity problems because of moral hazard whilst the ECB and Fed took a more pragmatic approach. The result the run on Northern Rock.

    He didn't listen to bankers who complained he just didn't get it. In the end the treasury had to rail road him into the special liquidity scheme.

    He did not see the recession coming unlike Danny Blanchflower.

    He has now reduced interest rates to low a rate.

    He introduced quantative easing which has not worked.

    In short he is a waste of space and like Brown is an ego maniac control freak.

    I think he should be sacked.

  • Comment number 93.

    RP: First, how will we know when banks are lending too much and that asset prices are rising to unsustainable levels? It's blindingly obvious with 20:20 hindsight vision that this is what happened from 2005-7.

    2005-07? I would say the entire last decade! Didn't you yourself explain on this forum how the British borrowed so much, they started to have net debt or negative savings almost a decade ago. Do negative savings not very very clearly show that there is FAR too much lending going on. How can that not be obvious?

  • Comment number 94.

    As best as I can tell, they will wait awhile before they steal again. No incentive to steal from empty banks, now is there.

  • Comment number 95.

    Murky-prudential policy is supposed to be what.

    Please is the best they can do. It is all about penalty is it not. So why not set some simple rules and a decent penalty. Answers on a postcard please. Or do we need a building full of people and a decade to try and do it. Why is there the pretense this is difficult. Reward is related to risk. Risk management is related to penalty.

  • Comment number 96.

    It is very simple to stop banks lending too much. Mandate that interest rates are at least 1% above inflation that includes asset prices.

    That way you will never have 'free' money that caused this boom and depression.

  • Comment number 97.


    #96 gruad999

    Unfortunately you cannot command foreign banks interest rates.

    They would all lend here and the domestic banks would all be crying foul.

    We live in a global market place where any bank anywhere can make a few scribbles on a bit of paper and then charge interest.

  • Comment number 98.

    "Macro-prudential policy"

    is that bonus earning bank-speak for "the blinkin' obvious"

  • Comment number 99.

    Any future planning and regulating should work on the basis that the lowest common denominator or worst qualities always takes precedence with money matters such as greed, risk, overpricing, ripping-off customers, fraud, theft etc

    It would be best to track and record everything that moves with the ability to accurately replay all events.

  • Comment number 100.

    MPC ? Here we go again...new labourspeak but in the end ya know the conservatives would call it the same. Why ? Coz the civil servants make the speak up.

    In the end its like what a lota commentaters here have said: Because of globalisation our economic future is out of our hands, I doubt we will get lucky.

 

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