What Obama's bank reforms really mean
President Obama certainly brought the recession to an end for political lobbyists yesterday.
In the past year, Wall Street spent around $500m on lobbying and in contributions to US legislators. That will probably sky-rocket this year, as Wall Street battles to prevent President Obama's proposals to break up the big banks from being passed into law by Congress (and as luck would have it, only yesterday the Supreme Court abolished the ceiling on campaign contributions by corporates).
But let's assume that the president's reforms stand a better than evens chance of being implemented in some form or other, simply because the banks have done such an impressive job of alienating themselves from the public.
What would it mean for there to be a prohibition on banks' involvement in running hedge funds, private equity and proprietary trading, and a new limit on the size of banks?
Well it depends on whether President Obama is using words with regulatory precision, or whether it is the spirit of the plans that matter.
Actually in the US, that distinction is less important: what he has in mind would plainly lead to a complete reconfiguration of the likes of JP Morgan, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs.
Goldman Sachs and Morgan Stanley would have the option of escaping the constraints by giving up their newly won banking status. But if that also deprived them of access to emergency funding by the US central bank, the Federal Reserve, well they would probably find that it became much more expensive for them to borrow (because creditors would see them as a much worse credit risk).
And that would significantly impair their profitability.
By contrast, in the UK that distinction between letter and spirit would be crucial. Because none of our banks are huge in the areas spelled out by Obama: Barclays has a private-equity fund specialising in the takeover of medium-size companies and tells me it closed down its prop trading desk a few years ago; RBS announced a few months ago it would be pulling out of prop trading.
If however Obama means - in a more general sense - that he wants to prevent banks that receive any kind of explicit or implicit taxpayer support from speculating for their own account and benefit, rather than on behalf of clients, well that would represent a profound cultural and economic shift for all the world's biggest banks.
The market seems to think that what Obama has in mind is specific rather than general - so Barclays' shares this morning have fallen just a bit, and RBS's are almost unchanged.
But that may be naive. Bankers tell me that they recognise Obama's intervention has profoundly changed the weather for international negotiations on the future of banking.
If America has abandoned its conservative approach to bank reform, which it has, there is a substantial probability that the model of the universal bank - one that takes substantial speculative risks underpinned by the insurance of emergency funding from a central bank and with access to cheap insured retail deposits - will be killed off.
Which is not the same thing as saying that the world will divide into pure retail banks and pure investment banks. The French, Germans and Swiss - with their long universal-banking traditions - will probably resist such a bifurcated banking industry with every last breath in their bodies.
But I think we can assume that in a general sense banks will be forced to go back to the basics of making money from the long-term risks of lending. Their involvement as traders on their own behalf in liquid markets will be reduced. And their role as providers of equity or quasi-equity to businesses from their own funds will diminish.
However let's be under no illusion that such reform would immediately sanitise financial markets for generations. It would serve as a spur to what has become known as shadow banking.
Much of the speculative risk-taking and clever-clever financial innovation would be driven out of banks and into proxy banks - and unless these proxy banks were supervised and regulated as closely as banks, chances are that the next financial crisis would simply have been shipped to institutions with different names (structured investment vehicles, hedge funds and so on).
Finally, as the shadow chancellor George Osborne said this morning, there may not be any point in the UK leaping ahead of the US with a unilateral reform agenda.
If a UK government massively restricted the activities of British banks in a way that was very different from the constraints of their overseas competitors, you can probably guess what British banks would do.
There's a fair chance that Barclays would move its legal home to Dublin or Amsterdam (where it almost went, when negotiating to buy ABN Amro a few years ago), Standard Chartered would up sticks to Singapore and HSBC could relocate to Hong Kong.
Only Royal Bank and Lloyds would be unable to budge, because the state as the biggest shareholder could order them to stay put.
UPDATE 12.01
The share prices of European banks, from Barclays and RBS to Deutsche and Credit Suisse, have now fallen quite sharply.
Which implies that investors have clocked the general significance of Obama's readiness to have a serious scrap with banks.
it means, as I noted earlier, that the global climate for bank reform has been changed by the American president very considerably, and not in a way that favours the status quo.
I'm 
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Much of the speculative risk-taking and clever-clever financial innovation would be driven out of banks and into proxy banks - and unless these proxy banks were supervised and regulated as closely as banks, chances are that the next financial crisis would simply have been shipped to institutions with different names (structured investment vehicles, hedge funds and so on).
But surely if these proxies go bust, the taxpayer would be safe, wouldn't they?
Let's hope there are global agreements to put the pit-bull banks on short leashes. I hope this is the start of the polticians doing that to all of them everywhere leaving the greedy bankers no where to go to; unless they use their bonuses to leave our atmosphere and build the first Moon Bank.
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I totally agree with CopperDolomite.
I hope that Obama gets his way with the greedy bankers and that the next Conservative Government (because let's face it! - Labour won't do anything to upset their friends in the City) follows suit. I just hope that Osborne doesn't renege on this.
Honestly, it's difficult to know who to trust to bring the bankers to heel, when so many of those making the decisions about them have their own personal stake in the banking world.
What price democracy?
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"In the past year, Wall Street spent around $500m on lobbying and in contributions to US legislators."
....and why would they do that - unless of course they desire something which they know is bad for the nation....
"There's a fair chance that Barclays would move its legal home to Dublin or Amsterdam (where it almost went, when negotiating to buy ABN Amro a few years ago), Standard Chartered would up sticks to Singapore and HSBC could relocate to Hong Kong."
......and when those countries fall into recession themselves - pulled in by slowing world demand - what next? I wouldn't be looking at Dublin for a while and the Far East is merely another bubble waiting to pop.
They just don't get it do they? - A massive overvaluation of the world Economy has built up over 10 years and the only solution (and it's not by choice, it will do it regardless of the Government tinkering) is massive devaluation - simple facts which Economists and Government think they can somehow ignore, or alleviate.
The bigger the boom, the bigger the bust - and I think this one has been ridden since the end of the war - all the great Economists expected a collapse after the war but got tired of waiting - but they were right. What they didn't account for is the stupidity of the populations to believe we're going up forever - hence the word 'confidence' being banded about so rigorously by politico and business moguls.
Car production fell by a third, when an unprecedented and global stimulus was used to boost demand (cash for clunkers etc.) and still production dropped by a third
If that doesn't set alarm bells ringing then you need to get your ears checked.
Overproduction - well if this isn't hard brutal evidence then what is required?
....or do we suppose it was simply the velocity of money and the amount in circulation which led to all those thousands of cars nobody wants????
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Excellent news, 2010,11 was looking a little dry for deal pipelines especially compared with 2009, with banks mostly recapitalised now and lending to (most) corporates not viable. The fresh round of bank restructuring deals will lock in another couple of record years for revenue and bonuses for these "casino" banks that also offer advisory services.
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Did anyone else listen to George Osborne on Radio 4 this morning...the slippery eel would not commit, on live radio, to completely separating the risky investment banking practices from the retail side of the banks...a leopard can't chage its spots!
Oh and by-the-way WOTW, Osborne was at it as well...stating that 'we' need the banks to be sound and strong again so that they can start creating wealth!
I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????
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No until they make it a capital crime to be a banker will we see any actual changes from the banks.
As far as I can see, the banks own each an every one of us, and we better not forget it.
On a personal level, they day the banks produce system that work for the personal and business customers (free same day interbank transfers, honest bank charges etc etc) I won't believe any of it.
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I don't see how these proposals would help the UK. Apart from RBS, all the banks that go into trouble were entirely or primarily retail banks (NR, BB, HBOS). In fact, the universal banks (Lloyds, Barclays, HSBC) proved to be more stable than the purely retail banks. So there's grounds for thinking that splitting banks into the two types will render the system less stable, not more stable.
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5. At 10:42am on 22 Jan 2010, freemarketanarchy
I heard him - slippery is being polite! It was an acknowledgement, at least to me, that if he ever makes it into government that he will never have any power over the economy or control over the financial industry, so he tried ever so hard not to upset the pit-bulls! Shocking.
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3 WOTW - tut, tut, you're doing it again.
"when they are pulled into recession by slowing world demand" an opinion, not a fact based on any current reality. Who is forecasting a drop in world "demand" in 2010 or 2011? Other than yourself? And what are you basing the opinion on? You really should stop issuing your political wish lists as economic facts.
"ridden since the war" . A completely misleading statement. World trade has grown pretty well annually since the Dark Ages and it will continue to do so in 2010 and 2011. At least it will according to all the stats I've seen. Of course the UN, World Bank, WTO and every business forecast/paper I've read on it could be wrong and you could be right.
"dropped by a third" - over what period? And does it tell us anything other than we have a recession in (essentially) the western economies. It certainly isn't a world recession. December's EEC car production was up 25% over December last year. Does that mean boom times are with us? Of course it doesn't, no more than your down a third predicts the end of the world as we know it.
As to alarm bells, if we listened to yours, not only would we all be deaf, but we would be spending most of our lives standing outside the building, instead of being at work.
TM StH
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5. At 10:42am on 22 Jan 2010, freemarketanarchy wrote:
"I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????"
you can shout as loud as you like, nobody will answer, simply because the truth will bring them down and the lies are so feeble they get picked to bits in seconds and they are already low on credibility.
It's very noticeable that no journalist as far as I am aware has actually tried to verify this fundamental question. I mean it's a simple one to explain - surely? and it would clear up a lot of anger directed at the bankers if they could explain their contribution to society.
What makes me chortle is all the Capitalists who attack - say Communism - because the centralised approach means that we all contribute in different ways and at different levels, but we all receive the same. They say this is unfair and prevents aspiration (which in Capitalist terms means - obtaining more than your fair share) - and yet we have a Capitalist system where the banks contribute NOTHING OF VALUE to the cycle of production and consumption other than restricting the availability of credit as they see fit - and they take far more of their fair share to boot
Great system - unmanageable, unplayable and unsustainable.
A very disappointing end to 500,000 years of human development
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How banks generate wealth:
1. By lending money to business who then buy and sell things and employ more people
2. By employing thousands of people who then spend money
3. By paying dividends to shareholders who then use those dividends to buy things
4. By paying dividends to shareholders who then use those dividends for pensions ~(less so now after GB introduction of £%bn+ tax on the dividends)
5. By lending money to individuals who then buy things
Following your line of thought, however, if non wealth generators are not needed, why do we have government for they are the biggest leeches in society
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Forgive me for being cynical but I don't see that Obama's bank reforms will make that much difference. It's a great idea but I feel it's just more political spin.
Perhaps he is trying to appease the disillusioned US voters but there doesn't seem to any substantial gain for humanity in these actions.
As more and more people are realising that the whole financial system is just a ponzi scheme designed to control people, it will become more and more pressured to justify it's existence. The host does seem to be fighting back though.
The knee-jerk reaction of this being a great solution is caused by it being a step in the right direction. It's just a step though.
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Obama's got the right idea.
How about restoring Glass steagall and the uptick rule ?
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writingsonthewall
Yes. And what is really terrifying is how the politicians gave the impression of being so ill-informed about the Healthcare Bill too!
I get the impression the US is viciously tearing itself apart and that the country is now an angry, nasty, intolerant, irrational place to be.
The mere existence of these paid-for lobbyists really bother me. They have destroyed debate and whipped up something verging on civil unrest for the benefit of their clients in the short term with complete disregard for the stability of their country over the long-ish term let alone facts (how long before the healthcare insurance companies crunble?)
No corporation should be allowed to play a part in a democracy because people, not corporations get to vote.
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Took the words out of my mouth 11!
I would only add
Taking deposits from, and paying interest to, the surplus side of the economy (generating wealth)
Lending money to the deficit side of the economy allowing for example entrepreneurs to build businesses (generating wealth)
Banking and economics 101
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"11. At 11:15am on 22 Jan 2010, yam yzf wrote:
How banks generate wealth:"
This should be fun! Go get him WOTW!
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I'd agree with 1. copperdolomite and 2. silenthunter.
When you say "proxy" banks, they won't actually be banks with money invested by ordinary people.
So if they go bust, they would not be bailed out, and we don't need to worry.
The other thing that maybe we should consider at the same time, to prevent excessive build up of gearing/leverage generally, is to tax debt.
Surely the fact that debt interest is tax deductible is part of what has historically made it so ridiculously cheap?
If this was done, we would find that while the cost of debt increases, the cost of equity would reduce, and this would lead overall to a reduction in the volatility of the system (... the economy).
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Oh dear - this is becoming a chore....
9. At 11:10am on 22 Jan 2010, remoteislander wrote:
""when they are pulled into recession by slowing world demand" an opinion, not a fact based on any current reality. Who is forecasting a drop in world "demand" in 2010 or 2011? "
Who 'forecast' the global recession (or are you not convinced we're in one?) - would the forecasts you refer to be from those institutions who are looking pretty silly right now because everything they have forecast since 2008 has been wrong?
"Other than yourself? And what are you basing the opinion on?"
Gilt yield curve.
"You really should stop issuing your political wish lists as economic facts"
Oh I don't wish for any of this and I am Apolitical as I do not trust any of the liars running for Government - which is the business of politics we are in.
""ridden since the war" . A completely misleading statement."
....go and tell JK Galbraith that - I'm sure he will be very interested to hear your counter arguments.
"World trade has grown pretty well annually since the Dark Ages and it will continue to do so in 2010 and 2011."
Based on what? A monetary / exhange system where the essence of value is lost through an inability to recognise what makes up value? What do you think the Bretton Woods agreement did to help world trade continue to rise despite there being no evidence for increased demand. I mean don't you ask yourself these questions? I mean how did the US go from being an industrial giant to being the worlds biggest 'in debt customer'?
How will world trade continue to rise when the biggest customer owes a lot of money to the biggest producer(s) - how do those producer(s) create demand when all they have is IOU's?
I am fascinated to know how you will explain that phenomenon - maybe you believe in aliens and their imminent appearance will produce the 'new market entrant' the world so desperately needs...
"At least it will according to all the stats I've seen. Of course the UN, World Bank, WTO and every business forecast/paper I've read on it could be wrong and you could be right."
Well why not - they were wrong before and I didn't predict - so that -1 to them and 0 to me!
"dropped by a third" - over what period?
2009 - one year - you can read it for yourself here....
http://news.bbc.co.uk/1/hi/business/8474080.stm
...of course the BBC could be lying, and I could be in cahoots with them to skew the truth just so I can wring my political agenda..
"And does it tell us anything other than we have a recession in (essentially) the western economies."
Yes, it tells us the consequences of failing to recognise (or even ask in your case) how we make profit simply through exchange leads to overproduction. Over supply of goods lead to fallinf demand - a recession - but of course I don't need to tell you that do I?
(and by the way I think in 5 months time it will officially be a depression)
"It certainly isn't a world recession."
Strange, that's not what the UN think
http://news.yahoo.com/s/afp/20100120/bs_afp/unworldfinanceeconomy
...or the IMF...
http://www.telegraph.co.uk/finance/financetopics/recession/5204054/IMF-predicts-world-recession-will-deepen.html
....or the WTO
http://article.wn.com/view/2009/11/28/WTO_looks_to_boost_trade_end_global_recession/
...it's funny isn't it - all these bodies you 'trust' for their forecasts and yet you don't want to quote them when they retrospectively counter your argument....
"December's EEC car production was up 25% over December last year. Does that mean boom times are with us? Of course it doesn't, no more than your down a third predicts the end of the world as we know it."
I'm not sure where you got this stat from, or what period it's for, but please don't forget that Governments have thrown millions into supporting this market. If there is a 25% rise then good - but a 30% fall which is during a stimulus clearly shows how bad things are - which was my point.
"As to alarm bells, if we listened to yours, not only would we all be deaf, but we would be spending most of our lives standing outside the building, instead of being at work."
No you wouldn't (I mean I'm not standing outside right now) - but you will be prepared. An alarm bell indicates there may be danger approaching, it doesn't mean it's a certainty (I mean have you ever experienced a false alarm?) - but it does indicate to those who hear it that it's time to get prepared for uncertain future events.
...but of course some people ignore the alarm and only try to leave the building once they see smoke and flames - which usually ends in a panic as all the others who think in a similar way trample each other on the way out - creating more didaster.
Why don't you come back when you're ready to engage in an adult discussion - kids should stick to boo ya politics as it's simpler to comprehend.
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Robert, you are talking cloud cuckoo land if you expect the banks to go to Amsterdam and Dublin to get away from a break up plan.
Both Ireland and the Netherlands have had huge issues with bank bailouts and won't want to or be able to shoulder the burden of bailing out more banks and certainly not huge ones.
Have you read any of the correspondence re the banking bail outs in Ireland and the political fall out that they caused.
Why would I want to up sticks and move if I was a bank when all I need to do it is split the other part of the business off? Actually I might want the act to go through so I can buy it at a knock down price via an offshore tax vehicle.
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At 11:37am on 22 Jan 2010, Noideaatall wrote:
"tax debt"
So, you want to tax money that is owed? So when you take out a mortgage, you want to be taxed on what you earn to pay it back and then taxed again for the outstanding value of your mortgage.
I hope I have seriously missed the point here.......
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"Much of the speculative risk-taking and clever-clever financial innovation would be driven out of banks and into proxy banks - and unless these proxy banks were supervised and regulated as closely as banks, chances are that the next financial crisis would simply have been shipped to institutions with different names (structured investment vehicles, hedge funds and so on)."
If we can separate the speculatory businesses from the rest we can leave them alone to an extent, as for every winner there will be a loser. Its like a big poker game where the main winner will be the tax-man. Anybody investing in any of these players should be left alone in the event of losing their shirts.
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SilentHunter wrote:
"I hope that Obama gets his way with the greedy bankers and that the next Conservative Government (because let's face it! - Labour won't do anything to upset their friends in the City) follows suit."
Labours friends in the City ?
The city doesn't have friends, just acquaintances. That's why they donate money to Labour and the Conservative’s as well as donating money to individual MP's election campaigns and spending millions every year lobbying whoever is in power at the time.
If you think the Conservatives are going to be any more rigorous in regulating the City or stopping the bankers from playing their nasty little games (if they're elected) then you must not remember anything that happened before 1997. Although to be fair, that seems to be a common deficiency amongst contributors on here who all seem to remember 1979-1997 as some sort of idyllic time in British history where the streets were paved with Gold, everyone had a job and the government were simply wonderful.
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There's a good blog by Paul Mason this morning over on the NN blogsite...
'Obama, banks: The myth of the capital cushion evaporates'
http://www.bbc.co.uk/blogs/newsnight/
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Wealth can only be created by adding value, making something that can be sold at a profit, building a house that can be sold, the list goes on. Banks lend money which they borrow from whatever source to lend to companies or businesses to enable THEM to create a profit from which the banks then take their share. They do not create wealth, they are just enablers.
But what do I know, I am just a 76 year old ex engineer who used to design and produce useful machines that people bought to enable them to add value. It also created a lot of employment. I still work part time, retirement is for wimps.
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19. At 11:45am on 22 Jan 2010, Ian_the_chopper
Hmm. I think Robert had his tongue firmly in his cheek when he typed the para re Dublin and Holland
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11. At 11:15am on 22 Jan 2010, yam yzf wrote:
How banks generate wealth:
1. By lending money to business who then buy and sell things and employ more people
Would that be with their 'special ability' to print money? I could lend money to businesses if I were allowed to print it. How did they accumulate that wealth to be able to 'lend' in the first place? Did banks produce goods and sell them on originally? - no. How can you generate wealth from a position of no wealth? I mean can you name some of the physical products of a bank? - it seems to me all they issue is promises of other peoples money.
2. By employing thousands of people who then spend money
'Employing thousands of people' - with their own money - that is very reasonable of them. I could employ thousands of people to pick the black bits from between my toes - am I a wealth creator? Am I good for society? By this argument Government (which you later criticise) is the biggest 'wealth creator' of them all! (or is this another 1 way argument?)
3. By paying dividends to shareholders who then use those dividends to buy things
Paying dividends from profits made from printing money under FRB. Lets suppose I am the bank, I take 50p from you every day through your use of the bank, savings, loans etc. but later I pay out the equivalent to you (as a shareholder) of 25p a day. Are you better or worse off?
4. By paying dividends to shareholders who then use those dividends for pensions ~(less so now after GB introduction of £%bn+ tax on the dividends)
Oh - this would be the 'pensions' which are no longer provided by the state - which coincidently is because the Government is in such debt to the banks and "High net worth" investors of Gilts. Once again, the system allows large tracts of wealth to be extracted from joe public and we should be grateful for the crumbs we receive back.
5. By lending money to individuals who then buy things
....again, where does this money which is used to lend come from? I mean go back to the first bank ever - and work your way upwards and you will see all the money the banks have to lend has been previously extracted by their activities. It also helps that banks maintain their position much longer than a human can live for (most banks are over 100 years old).
Why do individuals need to borrow money to buy things? Well if it's a genuine 'need' then its' because their wages are declining and they can no longer afford to pay for their basic substinence without borrowing - or do you think people "conciously choose" to get into debt? I've never met anyone in debt who actually wanted to be there - or who had a choice not to be.
"Following your line of thought, however, if non wealth generators are not needed, why do we have government for they are the biggest leeches in society"
Well we could get rid of them too if we didn't need to catch the banks when they demonstrate they do not understand 'liability and responsibility' - which coincidently is the reason for all Governments existence - the minority who cannot be self disciplined.
You see banks all call for 'freedom from regulation' but how many did you see begging for salvation in 2008 / 2009 from the taxpayer?
Is that how you bring up children? keep giving them free reign and bailing them out everytime they mess up? When do they learn the harsh realities of irresponsibility? - and the same applies to banks.
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11. yam yzf
'How banks generate wealth:
1. By lending money to business who then buy and sell things and employ more people
2. By employing thousands of people who then spend money
3. By paying dividends to shareholders who then use those dividends to buy things
4. By paying dividends to shareholders who then use those dividends for pensions ~(less so now after GB introduction of £%bn+ tax on the dividends)
5. By lending money to individuals who then buy things
15. STJim
'Taking deposits from, and paying interest to, the surplus side of the economy (generating wealth)
Lending money to the deficit side of the economy allowing for example entrepreneurs to build businesses (generating wealth)
Banking and economics 101'
OK. Now for Banking and Economics 201
When business 'buys and sells things' with borrowed money the benefit depends on the difference between the value of what was bought (labour and capital goods) and what was sold (final output produced) NOT the quantity of buying and selling. Therefore the monetary flows yam yzf and STJim refer to are NOT evidence of banks generating wealth. To the extent that some employees, savers and shareholders hold more money as a result of banks' activities, this may only be a REDISTRIBUTION of claims on existing wealth.
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14. At 11:29am on 22 Jan 2010, copperDolomite wrote:
"No corporation should be allowed to play a part in a democracy because people, not corporations get to vote. "
Unfortunately to achieve that you will need to remove money from politics - and most people are in politics for money (as the expenses and post-political jobs have shown)
It reminds me of the tobacco industry and the lies it told about smoking being healthy. Millions believed it and they even dressed men like Doctors to tell us so whilst the Government stood idly by taking the backhanders of death money.
...and now the same people want us to believe that banking is neccessary and we should all be grateful for it. They dress people up in suits and a tie to give the impression they know what they're talking about.
Anyone who has worked in an office (especially in the City) will know a suit is certainly not a reflection of intelligence.
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#5 "I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????"
Oh come on. Its not that hard. Imagine you own a large plot of land, and find that it has massive oil reserves underneath it. Many hundreds of millions of pounds worth at a conservative estimate. So you borrow a few million to buy equipment and hire some staff. Within 10 years you have extracted and sold a hundred million pounds worth of oil. You have paid back the bank loan with interest, and have employed many people, and have built yourself a mansion filled with tokens of your riches.
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15. At 11:36am on 22 Jan 2010, STjim wrote:
"I would only add
Taking deposits from, and paying interest to, the surplus side of the economy (generating wealth)"
.....which is only a fraction of the amount earned by lending out - but leaving that aside, can you explain how there is wealth generated by me lending you something and you lending it to someone else? If I give you a tenner and you lend it to Bob - what's the difference? If Bob pays you back £10.10 you have not 'generated wealth' - Bob has!
"Lending money to the deficit side of the economy allowing for example entrepreneurs to build businesses (generating wealth)"
...this is more accurate, but not totally - the entrepenuer does generate wealth if adds his labour to the idea - but if he simply employs others then they have created the wealth and he is just a non-wealth producing middle man.
"Banking and economics 101"
Countered by 'logic and common sense 101'
If the activities of a bank were undertaken by the state then the 'fee for lending' would be a tax - nobody would dispute it.
We don't like paying taxes because we feel money we have 'earned' is being taken from us for another purpose which may not benefit us.
...and yet this is exactly what the banks do - even worse, they use that money to 'improve the scope and reliability of that tax collection' - through the lending cycle, interest rates, penalties and debt collection.
It's all about how you look at it - clearly you cannot see the comparison between banking and taxation because you can only see the fictional theory of banks 'generating wealth'.
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16. At 11:37am on 22 Jan 2010, Wardy29 wrote:
"This should be fun! Go get him WOTW!"
I'm sorry to say that wasn't even a good effort - I have seen better.
I hope you see from my reply that I only work from the principle of logic and reality. I do not make claims I cannot reasonably explain - which is why the use of 'wealth generation' which is simply assumed by millions makes me so irate.
I mean if I started up a business claiming I could produce cold fusion - but couldn't actually demonstrate or explain it - would I be credible?
I may have bubbles in water - but is it fusion?
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If however Obama means - in a more general sense - that he wants to prevent banks that receive any kind of explicit or implicit taxpayer support from speculating for their own account and benefit, rather than on behalf of clients, well that would represent a profound cultural and economic shift for all the world's biggest banks.
That is what it is all about; if some banks want to play games declare them casinos and everybody knows it is just that, knows the risks. The rest can then go ahead and try to make a living, a business, a sustaniable economy and move things forward.
caw
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19. At 11:45am on 22 Jan 2010, Ian_the_chopper wrote:
"Robert, you are talking cloud cuckoo land if you expect the banks to go to Amsterdam and Dublin to get away from a break up plan."
He also forgot to mention Iceland and Dubai - I hear they are welcoming banks with open arms at the moment.
Maybe Venezuala?
Possibly he actually meant 'The Amsterdam Islands' (Ireland) which I believe are in the south sees and have not experienced banking as I believe it's inhabited by wildlife - which strangely don't need to borrow to survive!
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Do we want to drive the more speculative risk taking activities further into the shadows, with regulators having even less of a clue of how the finacial system is actually operating, I suggest not. Better to know what they are up to than cross our fingers and hope they wont blow the hole system up again.
What's important is not where these activities are done or whether the tax payer has an explicit obligation to underwrite them, if they cock it up again the 'tax payer' is still on the hook for the consequences with the resultant de-leveraging, asset depreciation and economic downturn that would inevitably follow. What's important is that risk is accurately assessed and mitigated throughout the whole financial system, spinning off the so called 'casino' activities into the shadows will only reduce the ability of the regulator to oversee and intervene appropriately.
Obama is truely in the mire, it will be impossible for him to u turn on this policy now, he will not get international consensus on this for the reasons pointed out in the article, he will have to go it alone much damaging the US financial industry. This is a real oportunity for the UK, we could take a lead on this with more appropriate banking regulation, I fear we will miss this oportunity.
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20. At 11:47am on 22 Jan 2010, yam yzf wrote:
"So, you want to tax money that is owed? So when you take out a mortgage, you want to be taxed on what you earn to pay it back and then taxed again for the outstanding value of your mortgage."
...why not - we're already being taxed by the banks for that service - the difference being that at least Government might do something good with it - the bank simply funnels it into some bankers pocket - who then uses it to buy a car which goes faster than he can legally drive but which uses 10 times the fuel and resources of a normal one.
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#26 & #27
A quick English lesson. Some definitions of wealth (dictionary.com):
1. a great quantity or store of money, valuable possessions, property, or other riches:
2. an abundance or profusion of anything; plentiful amount:
3. Economics. a. all things that have a monetary or exchange value.
b. anything that has utility and is capable of being appropriated or exchanged.
4. rich or valuable contents or produce5. the state of being rich; prosperity; affluence:
So, I believe that using definitions 1,2,3,4 & 5 and applying them to the banking sector show that STJim and my points are perfectly valid.
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24. At 12:00pm on 22 Jan 2010, cornishmaninyorkshire wrote:
"Wealth can only be created by adding value, making something that can be sold at a profit, building a house that can be sold, the list goes on. Banks lend money which they borrow from whatever source to lend to companies or businesses to enable THEM to create a profit from which the banks then take their share. They do not create wealth, they are just enablers.
But what do I know, I am just a 76 year old ex engineer who used to design and produce useful machines that people bought to enable them to add value. It also created a lot of employment. I still work part time, retirement is for wimps."
What do you know? - logic and reason. I should not be surprised as it comes from a Yorkshireman.
Don't worry the banks 'wealth generation' has ensured the nobody will be retiring from now on - it's work until you die folks.
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27. At 12:04pm on 22 Jan 2010, diarmidwp
Could not have put it better myself.
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Post 23, thanks for the link. An excellent piece by Mr Mason on this site.
I particularly liked comment 3 following on from the Life of Brian analogy in saying "Obama, he's not the messiah he's a very naughty boy".
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29. At 12:07pm on 22 Jan 2010, jonearle wrote:
"Oh come on. Its not that hard. Imagine you own a large plot of land, and find that it has massive oil reserves underneath it. Many hundreds of millions of pounds worth at a conservative estimate. So you borrow a few million to buy equipment and hire some staff. Within 10 years you have extracted and sold a hundred million pounds worth of oil. You have paid back the bank loan with interest, and have employed many people, and have built yourself a mansion filled with tokens of your riches."
Ask yourself these simple questions:
Who dug it out of the ground? Was it you, or was it the labourers and technicians you employed?. As the oil was free, the only difference between oil in the ground and oil you can sell is the labour you employ to extact it. How can you make a profit from that (unless you got your hands dirty?)
Why did you need to borrow the money in the first place? It seems it's merely so you can retain control. Had you assembled the workers and told them "there's oil down there and we all get a share if we dig it out" - then would the result not have been the same?
Lastly, you said you borrowed the money - so the bank charged you for that - so why does the bank get a cut of the wealth extracted from the ground even though it did nothing to contribute - other than restrict the supply of the resources you needed (labour, tools etc)
None of this process accounts for the long term consequence of digging that oil either (markets are too stupid). I mean what price is that oil the day we find out that a) There's none left and b) We're all going to suffocate / drown because of the oil we've been burning through the course of history.
Price does not eqaute to value - and the presumption of all humans is that it does.
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29. At 12:07pm on 22 Jan 2010, jonearle wrote:
"Oh come on. Its not that hard. Imagine you own a large plot of land, and find that it has massive oil reserves underneath it. Many hundreds of millions of pounds worth at a conservative estimate. So you borrow a few million to buy equipment and hire some staff. Within 10 years you have extracted and sold a hundred million pounds worth of oil. You have paid back the bank loan with interest, and have employed many people, and have built yourself a mansion filled with tokens of your riches."
You're missing one vital thing here (as is everyone who takes this position): it's the person who owns the land/extracts the oil who creates the wealth, not the bank who loaned him the money.
And by the way, where did the bank get that 'few million quid' from in the first place in order to lend it to him, eh? Answer that one!
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Post 33, very amusing.
Are these islands the source of the infamous "South Sea Bubble"?
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@11. yam yzf wrote:
"How banks generate wealth:
1. By lending money to business who then buy and sell things and employ more people
2. By employing thousands of people who then spend money
3. By paying dividends to shareholders who then use those dividends to buy things
4. By paying dividends to shareholders who then use those dividends for pensions ~(less so now after GB introduction of £%bn+ tax on the dividends)
5. By lending money to individuals who then buy things "
You missed some points:
A. The money that they lend belongs to the depositors and, these days, the tax payer. Thus, the depositor is a partner in the activity and is as entitled to a decent bonus when things go well as the iindividual who selects the investment.
B. The wealth creation is done by the businesses that they lend to, not by the bank. The bank is a facilitator, no more and no less!
C. In order to lend money to the businesses that actually produce, the genuine wealth creators, there have to be businesses that actually produce. One way or another, we have been and continue to run them down as fast as we can.
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As a Bank Manager who retired in the mid 90s one of my customers was a business established in 1979, with a first year turnover of £150,000, run by the 2 principals and an Office Girl. Diversification followed and by 1995 Turnover was circa £7 million. There had been substantial investment in machinery and workshop buildings and Staff number was in excess of 30. Net Profit was in the £750,000 range.
The commitment of the principals was, of course, the determining factor in their success but it is unlikely this would have happened without the support of my predecessors and the Banks' local Head Office.
This was not an isolated case and there were, of course, failures but by supporting businesses in good and hard times I know that the Bank helped maintain/create jobs and wealth and it is a nonsense to say they have never done so.
One caveat is that in those, not so distant, days Branch managers "knew" their customers and tried to "understand" their business. I'm not sure this is still the case.
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36. yam yzf
'I believe that using definitions 1,2,3,4 & 5 and applying them to the banking sector show that STJim and my points are perfectly valid.'
Valid maybe, but without value. Money is a claim. Its worth depends on what can be claimed.
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Well done Obama for taking on the vested interests.
Let's hope those Secret Service men are up to scratch, because it wont just be the nut jobs trying to bump him off from now on.
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26. At 12:01pm on 22 Jan 2010, writingsonthewall wrote:
In response to
"How banks generate wealth:
1. By lending money to business who then buy and sell things and employ more people"
WOTW said:
"Would that be with their 'special ability' to print money? I could lend money to businesses if I were allowed to print it."
The fact is the banks are afforded a priveleged position by the central banks on the basis that they have some derisory level of deposits as reserves.
Wouldn't it be nice if as individuals we could all be given this status? I can get my mate Steve to deposit £50, promise to pay him £52 at the end of the month. I could lend my friend Paul who's skint £500 until payday, when he pays me back £520 the Bank Of England can lend me the difference at 0.5% interest and I can make a nice little profit, without even bothering to worry about having different interest rates for depositors and lenders.
Why don't we all get in on it and we'll all be quids-in!!
One problem: hasn't this exercise diluted the value of the £? Doesn't that take a little bit of value from everybody who holds £s and puts it in my pocket? Isn't that a bit naughty?
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I believe that Obama has the support of most of main-street America and most of the European public.
One small group is against him in this matter.....those with all the money.
Are banks becoming more powerful than governments?
Are governments frightened of them?
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WOTW et al...you'll love the title of this piece over on the Telegraph's website...
"Banks have their 'The Wizard of Oz' moment"
http://blogs.telegraph.co.uk/finance/edmundconway/100003221/proof-that-the-bankers-scare-stories-were-wrong/
Splitting up banks may not be as disastrous as many have claimed.
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At 12:36pm on 22 Jan 2010, the_fatcat wrote:
"And by the way, where did the bank get that 'few million quid' from in the first place in order to lend it to him, eh? Answer that one!"
The answer is that they in effect print the money.
When the oil man spends the money it has borrowed, the balance in its account will be reduced, but unless someone puts it under the bed or buys government stock, the modern equivalent, so that a government can spend it, the balance will end up increasing a bank balance somewhere. Maybe in the same bank.
The point is that most of the money will remain in the banking system, and as long as the interbank lending system is working, net balances can be adjusted between banks.
The main reason the managements of building societies wanted to become banks was to gain access to this money making machine. So that their mortgage lending could be increased, inflating the house price bubble.
Inter-bank lending must be must be more strictly controlled in future. It was the stress put on this system that caused the "credit crunch" and our subsequent woes.
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36. At 12:21pm on 22 Jan 2010, yam yzf wrote:
"A quick English lesson. Some definitions of wealth (dictionary.com):"
Goodness, resorting to dictionary definitions...
"So, I believe that using definitions 1,2,3,4 & 5 and applying them to the banking sector show that STJim and my points are perfectly valid."
...errrrr how so? You have simply picked up a dictionary definition of wealth and regurgitated it and announced "That proves my point exactly" - the fact that half these descriptions relate to phrases built up over time by the misuse and mis-conception of 'wealth' i.e. 'The wealth of talent' (and can talent be appropriated in the Economic sense - I think not)
....and none of this actually demonstrates how banks generate this wealth. All this does is try to define what wealth is. I think you're confused by 'money' and 'wealth' - put simply, if you had the same cash in the bank today as in 2006 your wealth would have declined because the value of that money has declined. You have done nothing to reduce that wealth (i.e. spend) and yet it has diminished.
The fact that banks always appear to have wealth - assumed by the 'cash / money' front they have is more to do with the fact they can effectively print it.
If you want to do something useful why don't you consider how your wealth has diminished over the last 2 years without your 'money' being impacted. If the two are related then surely an impossibility?
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Ho ho ho...
sorry, Christmas is over, isn't it? But this is best present of all. Let's break them up and turn them into places that just keep our money safe - that's what banks are for.
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"one that takes substantial speculative risks underpinned by the insurance of emergency funding from a central bank"
Hang on... I thought the worst bad losses in america were made with respect to either direct or indirect mortgage lending? Certainly, that's how Freddie Mac, Fannie Mae, AIG, Lehman et al made such enormous losses in the last 2 years. Maybe we should ban banks from mortgage lending... If they cant get the basics right, god help us...
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42. At 12:46pm on 22 Jan 2010, Ian_the_chopper wrote:
Sorry I was misleading you - the island is in fact a 'potentially active volcano' and I was hoping that bankers might make a fatal mistake.....
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43. At 12:47pm on 22 Jan 2010, WolfiePeters wrote:
"C. In order to lend money to the businesses that actually produce, the genuine wealth creators, there have to be businesses that actually produce. One way or another, we have been and continue to run them down as fast as we can. "
...but wolfie - the banks have been 'making profits' while businesses have stopped 'generating wealth' - how can this be?.....what is the mystery?
....someone inform the world that it's the Government money which is producing the profits for banks because it certainly isn't business.
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44. At 12:50pm on 22 Jan 2010, Jaymak
Did you not ask yourself "How did the bank originally get in this position to be able to make the world spin upon it's decision whether to lend or not"?
I mean are we all born slaves and we have to earn our freedom?
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44. Jaymak
'...by 1995 Turnover was circa £7 million. There had been substantial investment in machinery and workshop buildings and Staff number was in excess of 30. Net Profit was in the £750,000 range.'
Quite so. Were they making cigarettes or schoolbooks? You see the point?
And 16 years is a long time for today's bankers!
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I'm really not convinved that Barclays and RBS are already planning to run down their proprietary trading businesses as you suggest. Surely Hester is planning to rely on these portfolios as a major engine for growth / returning to profitability in the next few years. I would also have thought Barclays would also have to be dragged kicking and screaming before they exited this business too, particularly as it's keeping Bob Diamond in the style to which he has become accustomed.
Can you clarify this comment? Maybe you're suggesting that any prop trading strictly related to PE, hedge funds etc will be run down. But surely prop trading is much wider and encompasses a massive range of other asset classes too e.g. interest rate, equity derivatives, FX, fixed income too. Do you mean to say that prop trading positions in all these asset classes are being unwound at RBS & Barclays just now?
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On your update.
It doesn't mean that the global market for bank reform has changed.
It demonstrates that scaremongering works and that this Obama proposal typical of the American approach is a unilateral decision without discussion or agreement from the broader global financial community. He will not achieve consensus acting in this way, his total disregard to consider his actions on other countries will backfire on him, this is not the way to achieve the reform the global banking system needs. It's regulatory protectionism, he is trying to bribe the rest of the world to follow his lead regardless of whether it suits their respective financial systems. He was reluctant to come to an agreement on the bonus issue, the rest of the world will be as equally non concilliatory with these proposals.
The markets have been on a virtual continuous rally since March last year, they were looking for an opportunity for a breather and pull back, and short sellers have been desperately looking for an opportunity to attack some equities. It is also close to year end and traders need to book profits to enable bonus payment calculations.
You seem to have an unhealthy appetite for fixating on negative sentiment towards Barclays, hope you are not abusing your position for some personal vendetta.
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# 11. At 11:15am on 22 Jan 2010, yam yzf wrote:
>
> How banks generate wealth: By lending money ...
No. That's how they generate _work_. Work is the opposite
of wealth, because a wealthy person doesn't need to go to work! The
only way you can create wealth is to reduce the need for work. We
are wealthy when we can live well without working.
The banks are just "make work" projects, pushing paper around.
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Some are saying this is just a popullist proposal and of course it is. Very popular with the ordinary people.
And also very very right. It has got to the stage where the taxpayers have had enough of money being sucked out of the system to those at the highest level when the health of the markets depends on the trickle down effect benefitting society in general.
Brown must be stunned at the news for he shunned Mervyn King who advocated this long ago together with the other parties and many bloggers I have read on here.
It is a warning shot that if the bankers continue to use us all as suckers and ignore the people at least the one government that really still matters will sort it for them. Bang on Obama.
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47. At 1:11pm on 22 Jan 2010, Wardy29 wrote:
"One problem: hasn't this exercise diluted the value of the £? Doesn't that take a little bit of value from everybody who holds £s and puts it in my pocket? Isn't that a bit naughty?"
Not if you can convince everyone you are a 'wealth generator'
All you need is a self serving Government (which isn't hard to find) and a thick media prepared to lap up every press release as opposed to getting of their backsides and finding a real story - oh and of course you need a banking license.
It's that last one that restricts people like you and me - for we don't have the huge amounts required to get one - never mind, maybe we can go to a bank who is prepared to lend us money so we can compete with it - fat chance in a world where making profit is the goal and helping your competitors hinders that.
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49. At 1:15pm on 22 Jan 2010, freemarketanarchy
Very amusing, I also saw a similar story on seeking alpha and quotes from the banks which were something like.....
"Why does Obama want to break up well managed and well capitalised profit making large banks"
...they still don't get it do they...
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** Message from banker. Please read it before continuing your ranting. **
Please stop the references to generic "bankers" as if we're all some homogeneous group who are about to be eliminated by this supposed development. I am a banker, but these changes will make no difference to me or many other bankers. In fact I welcome them, since more emphasis will be put on the residual activities including what I do.
Proprietary trading was not the main contributor to the losses and the resulting required "Funding" (not "Bailout", since it was paid back with interest in my firm) from the state.
Tone down your criticism and think about what happened and who "caused" the crisis.
Bankers were the main cause of this crisis, people were. Where I live in Asia we've got the same banks / bankers and similar (or even perhaps lower) lending standards. We're not in the same mess as you in the UK, since people here didn't take on debt for things they couldn't afford or shouldn't have been buying.
Stop complaining and feeling sorry for your self-inflicted economic downturn and realize how fortunate you still are in the UK compared to many other countries.
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And why do some City bankers use hand-free phones?
Could it be that they have one hand outstretched begging for public money, and the other hand busy stuffing it in their pockets?
Perhaps not, but they do seem to be "taking the mickey" out of the public.
Governments had a good opportunity to change the rules at the G20 meeting, but didn't complete.
Obama is leading the way, others must follow.
The implied threat..."let us do what we like, or we'll take our business elsewhere" must now be confronted, together, en bloc.
Western sanctions could be applied to banks, just as to countries... then we'll see if they take their business elsewhere.
Governments must rule, not the crazy-rich banking community.
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Here's something I've been considering recently.
The argument is that the free market (as it stands) assists in developing mankind through his 'aspiration' - the driver of Economic activity in a free market.
As this means 'accumulating wealth' in a Capitalist society with the intention of accumulating enough so they no longer have to work.
People who choose not to work are often described as 'lazy' - well they are where I came from and it's clear this is almost acceptable when applying it to the unemployed.
Therefore - the aspiration of society is a goal of laziness - it might take some work to get there - but the goal is to sit around and live off others work. The people who achieve this goal will be those 'most committed to laziness and inertia'.
...now which direction will society be heading in if we continue with a system driven by the 'aspiration of laziness'?
....maybe we'll end up in huge debt to the people who are doing the work (i.e. China).
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#20 it should not be beyond legislators to arrange to tax corporate debt without taxing individual debt. After all, companies can consider issuing shares, which individuals cannot do.
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The threat to leave the UK, US or other countries seems not to make sense. In general, there is now a hightened awareness of the risks between the state and resident banks. Any country that wishes to host banks by offering favourable conditions will surely find they are now viewed as a high risk by the bond markets and so will cost their citizen more. Suggestions that The City of London may move to Dublin surely cannot be serious. It is not credible that the Irish government could afford to underwrite these activities. If they did move, banks will be seen by investors as an increased risk and will have shot themselves in the foot. In short, it seems that the game is up, there is nowhere for banks to turn and the threat of relocation is an empty one.
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57 Diarmidwp
Original business Steel Stockholding. Moved into provision of " value added" services necessitating substantial inverstment in machinery.
Without this business would have died
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48. At 1:12pm on 22 Jan 2010, stevewo wrote:
"Are banks becoming more powerful than governments?
Are governments frightened of them?"
It's starting to look that way isn't it. After all, the UK Government probably doesn't fear Joe Public much, seeing as hardly anyone turns out at the ballot box these days.
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#41 Fatcat And by the way, where did the bank get that 'few million quid' from in the first place in order to lend it to him, eh? Answer that one!
The banks are allowed to, in effect, print money. This is a necessary function of capitalism. The problem is that the money that is made up out of thin air needs to match the increase in wealth that our labour (and the natural resources often used) has produced.
I don't understand why so many on here are attacking the basic and needful role of a banking system, when its how its run and regulated that is the issue. Its as crazy as saying we can govern ourselves, so lets ditch all governments as they are full of self centred expenses cheats.
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Basic lesson for Jaques Cartier No. 60
I want to start a business. Need borrow in addition to my own capital input. JQ agrees to lend it to me . Business fails -- everything lost-- JQ doesn't get his money back.
Alternatively I go to bank at which JQ gas deposits his funds. Same scenario unfolds except Bank has lost out but JQ still has his money intact.
Just "make work" organisations "pushing paper around"?
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# 66 WOTW
Love your posts - you're the engine of these blogs (even though you don't create any wealth) - but don't let yourself drift away into philosophical musings...
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Post 54. Touche.
Most of the supposed exile countries for the bansk have issues that might prevent the average banker from moving there.
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I do so enjoy a lunchtime reading WITW posts - always raises a chuckle.
Going back to his original question - how do banks create wealth, the answer is simple, they do not and probably never have done.
It is the businesses they lend to that create wealth - or if you want to follow WOTW logic, the people in those businesses who actually generate the wealth. All banking does is oil the wheels of trade to allow them to run smoothly.
WOTW, with very few exceptions banks do not print money. What they do is exploit a very simple concept that it is highly unlikely that depositors will all want their money back at the same time which means that banks can borrow for short periods of time from depositors but lend for long periods. Up until around 2000 UK banks had a lending book which was broadly equal to their deposits since then they have adopted the technically more efficient but also more risky solution of lending considerably more than their deposits on the basis that there was a very large wholesale lending market. At the macro - world economic level this is a good thing as it allows money to be circulated more quickly from unproductive parts of the world to more productive areas - again the point is money is not a wealth creator by itself but the businesses the money is lent to are.
The wholesale markets became so large because of the massive trade imbalances that have built up since the early 1970s between different parts of the world.
Going back to Robert's blog, personally I think US has gone for the easy cheap headline solution rather than actually tackling the problem. The real problem was not proprietary trading, hedge funds or PE but the fact that banks lent massively on property to people who can never repay. Partly that was driven by the fact that banks could sell on the loans (through their investment side) to other institutions, partly it was govt action (community re-investment act in US), partly by weaknesses in Basel II, partly because of mark to market accounting rules encouraged trading of loans and, yes, partly driven by greed of the bankers.
All those problems need to be tackled not just lets break up the investment bank solution
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69. Jaymak
'Original business Steel Stockholding. Moved into provision of " value added" services necessitating substantial inverstment in machinery.'
I'd be inclined to think you did a good job then. You had to assess the risk of default, record and administer the loan and deposits and bear default if it occurred. I expect you had a decent income for that but didn't get massively rich. And given the huge role the state plays in the banking system (backing the currency with its own money, insuring deposits and enforcing debt repayment) nor should anybody.
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Isn't the real point that banks must be able to go bust without either either crashing the whole system or loosing their depositors' money. This is not an impossible circle to square if all banks were required to buy 3rd party insurance for all private deposits that they held.
Granted the financial world would be a very different place - but isn't that the point if the banking world is not a very different place there will be a bigger and more devastating bubble and crash and this will happen with every increasing rapidity.
#64 Barry (the banker advocate)
Banker to most real people (that is those outside the finance business) refers to the whole quagmire of manipulators of money - as distinct from the makers of things. If you don't actually produce something then you are a banker. If you don't like what some parts of your business sector are doing in ruining your reputation see to it that they put their house in order - or failing that make something real!
I have for some time examined the culpability for causing this crash. My conclusions are the people who set up and managed the system of regulation - The Bank of England for being spineless in not managing the price of money (as they were quite well aware they should) so as the squeeze the excess cash out of the market that caused the bubble throughout the noughties (and before). (Ditto the Fed) Indeed, I bore people by insisting on the sacking of certain individuals as they don't appear to have the integrity to resign.
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This comment was removed because the moderators found it broke the House Rules.
taking all RP's posts for the last 2 days, it seems that the banks have shot themselves in the foot.
By recalibrating the value (?) of the securities( AAA + ) they hold and awarding themselves profit / gain on the revalauation they have shown the rest of us that they didn't have a problem in the first place but needed public cash to flush out the toxic bits of the equation.
This seems to have been a version of Pass the Parcel with defaulted loans in between the layers of paper.
By reinstating the smoke and mirrors they hoped to continue as before.
The winds of change blew away the smoke and the light reflected off the mirror was very illuminating.
Capitalism still requires someone to exploit.
Worker , saver, consumer.
Plus ca change.
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I may even have got this link from this blog about a year or so ago, but if you've not watched it give it a go,explains a lot
http://video.google.co.uk/videoplay?docid=-2550156453790090544&ei=Ir1ZS4PWOtbB-AatoPCuBg&q=money+as+debt&hl=en&client=firefox-a#docid=5352106773770802849
Sorry you'll have to cut and paste not sure how to make it a link on here.
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64. At 1:56pm on 22 Jan 2010, Barry wrote:
** Message from banker. Please read it before continuing your ranting. **
Tone down your criticism and think about what happened and who "caused" the crisis.
Stop complaining and feeling sorry for your self-inflicted economic downturn and realize how fortunate you still are in the UK compared to many other countries.
______________________________________
Thanks for your patronising contribution.
We will not tone down our criticism and we have thought about who caused the crisis. That is why we are criticising.
You present yourself as 'the decent banker'. Can I suggest you think about the effect that your 'decent banking' has on society? and, as for your suggestion that brits should stop moaning and think about how fortunate we are, I'm afraid we are beyond that this time so take a good look at yourself. Be warned.
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75. At 2:32pm on 22 Jan 2010, Justin150 wrote:
WOTW, with very few exceptions banks do not print money.
Really ? What is the fractional Banking Reserve System all about then ?
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"66. At 2:01pm on 22 Jan 2010, writingsonthewall wrote:
....maybe we'll end up in huge debt to the people who are doing the work (i.e. China)."
Eventually the Chinese will become wealthier and will seek to rely on their wealth to earn them an income. Then there'll be no-one at all to do the work. Or at least this is the logical conclusion of capitalism. In reality, things will unravel well before we reach this time.
In some ways it seems that capitalism itself is a Ponzi scheme, whereby the early entrants to the scheme get the chance to appropriate wealth from later entrants and those outside the scheme. If they have any sense they will be thinking about turning that wealth into hard assets before money becomes worthless.
Logically, as sources of cheaper labour have almost been exhausted now (after all, globalisation has a limit) the only way to keep the system going is to enslave more people - maybe debt will help achieve this?
Someone please tell me I am wrong - the thought of this is depressing.
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Instead of regulating banks, regulate the media.
Whenever a President, Prime Minister, Chancellor, etc. makes a statement don't broadcast or publish it for 14 days.
That would work wonders for straightening the graphs out, and without volatiliy the casino bankers would have to get real jobs.
Less is more. Smile nicely.
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I think it's unlikely that the banks will allow governments to do anything to threaten their favoured position.
After all, they do run things now.
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To 71. At 2:20pm on 22 Jan 2010, jonearle
I don’t want to ditch the banking system and I’ve have nothing personal against any bank or person who works in a bank.
However I do want to ditch the reckless lending.
Reckless lending ends up in destitution and misery for many, and children are often affected despite being neither mortgagee nor mortgagor.
And the only way you can get rid of reckless lending, is take control of the creation of money as debt.
If we had a state banking system, we wouldn’t need to act as guarantor for all the other banks.
They could carry on trading, investing and doing whatever it is they do.
But what they couldn’t do is create money.
And if they can’t create money they can’t blow up another housing bubble, which in turn means our children are more likely to be able to afford a place to live.
Leave things as is, and the boom – bust cycle will continue, with all the misery and hardship which follows in its wake.
I’ve used the phrase ‘debt slavery’ before, probably once too often. But ultimately reckless lending leads to debt slavery or destitution. And all the regulation in the world has failed to stop it.
Now we in the UK haven’t had to pay the full price for the reckless lending yet.
But if Mervyn King was signalling an end to quantitative easing in his Exeter speech earlier this week, perhaps we will soon.
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20 yam yzf and 67 Arthur Rusdell-Wilson.... regarding debt interest being tax free, you misunderstand me.
But I think a lot of other people on this blog also do not realise this fact (it probably only hits you in the face if you run your own private company, or if you are an accountant/FD in a public company).
The situation would seem to me to be designed to advantage those who take on debt, which just increases the overall volatility of our economy, and it works like this...
For you and I as individuals debt interest IS already taxed. It is not "tax deductible".
Some mortgage interest tax relief used to be available in the 1980/90's, but this tax relief was abolished by end of 2000 as it was thought to distort markets (by one M Thatcher). So you now earn a salary and if you have a mortgage or any other debts and have to pay interest on these, you cannot "deduct" this interest paid from the salary you earn, before calculating how much tax you pay.
In contrast to this however companies and corporations (and this includes strange vehicles set up by the likes of private equity houses etc) have ALWAYS been able to deduct the interest paid on debt, before calculating the tax. So, if for example we had two similar companies that make exactly £100 profit, but one of which is entirely equity funded, while the other is almost all debt funded and which pays exactly £50 interest, the former will pay tax on £100, while the latter pays tax on just £50. This makes debt interest at a corporate level 'tax-deductible'.
It would then be the organisation that supplied the loan and received this £50 interest that would normally have to pay tax on it (but the money-changers/private equity guys attempting to dodge as many taxes as possible would get round this by supplying this debt from a tax haven, therefore paying precisely no tax).
I would have thought that if "tax-deductibility of interest" distorts consumer markets, then it also distorts corporate markets, and if so it needs to be changed.
There is a link http://taxjustice.blogspot.com/2009/07/debt-equity-and-corporate-welfare.html
which explains more.
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#75 Justin150
"how do banks create wealth, the answer is simple, they do not and probably never have done.
It is the businesses they lend to that create wealth..."
Exactly the point that I (& I presume WOTW) have been making.
Value is not created outside of production.
That is, it is the difference between the value created by labour & the wage paid for the labour power.
This is the whole basis of the labour theory of value.
Finance provides those who own the capital to seek out those businesses that can provide the best return to them on their capital.
That is, it's role is help in the exploitation of labour.
Unfortunately for capitalists finance also creates fictitious capital.
That is, they distort the true rate of profit through increases in asset prices that comes through speculation.
This speculation is fuelled by the creation of money - the fiat money system.
Capitalism needs finance but the point is finance doesn't resolve the fundamental contradiction in capitalism: capital accumulation itself depresses the rate of profit & necessitates capital depreciation (recession).
Why on earth would we want a system that destroys lives through unemployment, house repossession, malnutrition, mental illness, etc simply because it suits those who owns capital?
Am I getting through?
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Finally, as the shadow chancellor George Osborne said this morning, there may not be any point in the UK leaping ahead of the US with a unilateral reform agenda.
>>>>>>>>>>>>>>>>>>>
Well none of our politicians has the guts to do that - Do they? The ECB will tell them what to do in due course?
Does anyone really think the UK has a free hand in any re-organisation of the UK financial industry when the UK is now substantially controlled by secret meetings in Brussels?
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64. At 1:56pm on 22 Jan 2010, Barry wrote:
"Bankers were the main cause of this crisis, people were. Where I live in Asia we've got the same banks / bankers and similar (or even perhaps lower) lending standards. We're not in the same mess as you in the UK, since people here didn't take on debt for things they couldn't afford or shouldn't have been buying."
I'm glad you've raised this because it's a 'standard defence' from the world of inequality.
Well lets look at it in detail shall we - here are the possibilites:
Banks don't make credit available - can customers default - NO
Banks make credit available - do all customers default - NO
Banks make credit available - some customers default - YES
As you can see from this short example it was the 'first event' of making credit available which must be achieved before anyone can default.
If that credit had not been extended then the defaults could never have happened - and that's a fact.
So how is it the fault of the borrowers? It seems to me that they can only default once the bank has already lent them the money
...and we're back to the burden of responsibility.
If the people are irresponsible for borrowing - surely that irresponsibility was pre-empted by irresponsible lending?
The last time I checked all borrowers are not 'qualified borrowers' - but all lenders are supposed to be qualified lenders under what regulation we have.
Get out of that one bankers.
....and I am not trying to hammer the cashier, or the other staff in banks - I am well aware of the inequality of salaries within a bank. However if they do not realise it's them who will lose their jobs in this recession then they need a serious wake up call. Their loyalty is misguided if they think defending the bank means protecting their employment.
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"87. At 3:19pm on 22 Jan 2010, Dempster wrote:
If we had a state banking system, we wouldn’t need to act as guarantor for all the other banks. "
I'm struggling to see how replacing a cartel with a monopoly is going to improve matters. I don't know what the answer is but I'm sure it's not a state bank.
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What is wrong with the USA. Billions must have been wiped off bank and other share prices worldwide today. Is Obama now taking up the Bush gauntlet to completely wreck the world.
Leave the banks alone, let them get back into profit, then introduce legislation. Worldwide, banks should stop all bonus payments until all of the money pumped in by state intervention is paid back.
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71. At 2:20pm on 22 Jan 2010, jonearle wrote:
"I don't understand why so many on here are attacking the basic and needful role of a banking system, when its how its run and regulated that is the issue. Its as crazy as saying we can govern ourselves, so lets ditch all governments as they are full of self centred expenses cheats."
Is it because you don't recognise that banks are effectively a 'private tax on wealth creation' but you do recognise a Government tax when you see one?
Did you elect / suggest / promote the banks to regulate the flow of capital for us?
I don't remember being asked if it was OK - and they are making a living from mine and everyone else's efforts.
If Governments behaved like banks then we would call it Fascism - but without the bigotry, as they don't discriminate. Changes imposed on your life without any say in the matter, no vote, no protest, nothing.
....just like the mortgage holders at Skipton felt when their SVR went up - but I suppose the answer is they can always switch (in an environment with less choice of building soc. and where there is a reluctance to extend credit to anyone who needs it) - yup.
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72. At 2:20pm on 22 Jan 2010, Jaymak
Basic lesson for Jaymak
"Alternatively I go to bank at which JQ gas deposits his funds. Same scenario unfolds except Bank has lost out but JQ still has his money intact."
...unless of course that bank has lent out more than it has in deposits and goes bang and JQ loses all his savings and he didn't even want to invest - he just wanted somewhere safe to put his money.
...but of course retail banks going bust never happens does it....
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84. At 3:14pm on 22 Jan 2010, Wardy29 wrote:
"Eventually the Chinese will become wealthier and will seek to rely on their wealth to earn them an income. Then there'll be no-one at all to do the work. Or at least this is the logical conclusion of capitalism. In reality, things will unravel well before we reach this time."
I love the presentation of the conclusion of Capitalism - we all sit around in deckchairs sunning ourselves because the work is all done by the expansion of money.
You've got to love the Economists who apply mathematics to a social problem and when their models don't fit - they simple create an 'ideal world' in their heads to make them look clever...
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Perhaps there’s another way of stopping the debt slavery scenario, you could pass The Finance & Loan 2010 Act.
The Act would allow banks to lend as much as they wanted to whoever they wanted. But a court will only enforce the loan agreement providing it did not create ‘debt slavery’.
For example :
You can lend a person three times their gross annual wage to buy house, and the loan will be enforced. But lend more than that and it won’t be. A court will enforce unsecured loans up to, but not exceeding, 25% of a person’s gross annual wage.
I have a feeling that would likely prevent reckless lending to individuals in the future.
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Thank you WOTW and others for clarifying the way that the term 'wealth' is being used here.
It would seem that the term 'wealth' is being used instead of the term 'value' or something similar.
Rightly or wrongly, wealth is measured in money. The banks generate money for workers, shareholders, consumers and customers. Ergo, they generate wealth.
Have a good evening all :)
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... just catched the business report on BBC TV news channel (the one shown around 14:45). The conclusion is (repeated several times in just a few minutes): Obama's move is purely political, it will not help at all from an economical point of view (none of the failures would be avoided...) - pushed throughout by the host and not denied by the guest (an 'economist' of some sort).
As I assume most people just watch TV news - another very wrong idea getting to the masses.... (I still believe he is one of the only one trying... )
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I have been to harsh on bankers.
At least they are paying their new tax - well the employed and salaried ones are.
Next up - contractors who use managed service companies to avoid paying tax despite their huge earnings. Guess where this practice is used frequently....?
The BBC.
So on the sliding scale of 'scum of the economy' are bankers above or below tax avoiding BBC staff?
This is the glory of inequality - when you start digging around you find that you are the only one playing by the rules.
This is the same fate that applies to all the honest car drivers - if you forget to renew your tax, or yourinsurance lapses and you forget - you will get caught - but only if you're honest enough to have your car registered properly.
...all the criminals don't bother - and therefore are unaffected by the fines and penalties they pick up whilst driving.
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92. At 4:01pm on 22 Jan 2010, Wardy29 wrote:
"87. At 3:19pm on 22 Jan 2010, Dempster wrote:
If we had a state banking system, we wouldn’t need to act as guarantor for all the other banks. "
I'm struggling to see how replacing a cartel with a monopoly is going to improve matters. I don't know what the answer is but I'm sure it's not a state bank.
Good point, but I’m not proposing a monopoly in banking, I’m proposing a monopoly on the creation of money. Other banks and investment business can exist, they just can’t create money that’s all.
The State can create it, can even lend it to them, but only the State can create it.
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I remember the collapse of Long Term Capital Management (LTCM) in the late 90s. I am also reminded of the Savings & Loans crisis in America in the 80s.
In the case of the former a 'small', unregulated entity took such outrageously large leveraged positions (managed by Nobel prizewinners no less) that its collapse posed systemic financial risk.
In the case of the S&L crisis in the 80s, it was the business model of a number of relatively small institutions and a domino effect collapse that caused such trouble.
I can't see anything in Obama's proposal that prevents what I see as the fundamental issue - a lack of deep, broad, and strong regulatory oversight. Much better that than try to change business models which, ultimately, will be circumvented by the next round of whizzkids...
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89. At 3:37pm on 22 Jan 2010, duvinrouge wrote:
"Capitalism needs finance but the point is finance doesn't resolve the fundamental contradiction in capitalism: capital accumulation itself depresses the rate of profit & necessitates capital depreciation (recession)."
I would expand this to suggest that many of the 'big economic changes' we have seen in the past are all to do with combatting this rate of profit.
Derivatives - allow the 'bringing forward of demand' by making 'bets' on future production / consumption - all fine as long as production keeps rising...
Bretton Woods - Floating exchange rates allowed nations to devalue their populations wealth without making it obvious (I mean imagine the current import / export situation if we had a 'fixed exchange rate')
Central banks - created to manipulate the interest rates in a futile effort to restrict the impact of the falling profit rate by making credit easier to obtain and the profit falls. Unfortunately logic tells us you cannot go below 0% interest (well practically anyway) - which just happens to be near where we are....
Gold standard (dropping of) - could you imagine the catastrophe if we now tried to tie 'money' to Gold - or still did? There probably isn't enough gold in the ground to give a backing to the amount of currency in circulation. The entire world has spent more than it actually has in resources - possibly not resources into the future - but certainly the ones which are active (i.e. dug up)
All these events and changes were presented as 'good for society' and neccessary when they were introduced - but in reality they were only there to tame Capitalism - all of which have consequently failed.
...I wonder what the solution will be this time....I hear they have found water on the moon....
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So many good points here but I'm drawn back to 66. (writingsonthewall's philosophical musings (as labelled by the_fatcat in 73)):
I do aspire to accumulating enough 'wealth' so I no longer have to work.
I'd like to do as little work as possible in order to be able to spend the rest of my days fishing.
You no doubt have a greater understanding of the financial tools out there but in pursuit of laziness and inertia I've chosen to plough some of my disposable income into endowments and pensions/superannuation schemes over the years.
So, if I (and there are probably many others out there in the same boat), get lucky enough to retire early, will we all be in debt to the people who are doing the work (i.e. China)?! I'd like to think that I've earned the extra fishing time after a) working for a living and hence b) feeding the government with taxes, and c) making regular contributions to the various financial institutions... call me naive if you like, or at least please enlighten me on where I've gone wrong!
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98. At 4:16pm on 22 Jan 2010, yam yzf wrote:
"Rightly or wrongly, wealth is measured in money. The banks generate money for workers, shareholders, consumers and customers. Ergo, they generate wealth."
Wealth is most certainly not money. Wealth is the total of 'value' - as you described, however this has nothing to do with money simply because of the manipulation of money by the financial system.
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Shout out for Obama, things seems to become simpler when you objectives don't seem to be to maintain the status quo for your old school boy network mates.
Share prices decline dramatically when it seems banks may be forced to be safer! crazy world
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To 104. At 4:39pm on 22 Jan 2010, Chris
Give a man a fish and he will eat for a day. Teach him how to fish, and he will sit in a boat and drink beer all day.
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98. At 4:16pm on 22 Jan 2010, yam yzf wrote:
Do you really work in the city as you suggest elsewhere? I am not really one for personal comments but there seems to be even a basic grasp of economics lacking here.
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Cutting through all the talk on wealth creation for a moment.....
Top of the list of reforms that should be made by any government should be to rid the world of “Interest-Only” mortgages – these things are absolute nonsense. They are a big cause of the problems we are having today.
Most of the people I know who moan to me about “greedy” banks and bankers are actually on “Interest-only” mortgages so that they can buy a house that they can’t actually afford or try their hand at being a property tycoon.
It seems to me that the “greed” is fairly widespread.
Perhaps the “man on the street” should have a long hard look at himself and realise he needs to give himself a shake.
I could talk about shopping/credit cards too but I won’t bother........I rest my case.
So it’s the government and the general public who are to blame for everything!
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WOTW,
I have been reading your contibutions to this board for a little while and, as someone above has mentioned, it does raise a little chuckle on a drab Friday afternoon. However, I feel you have reached new levels of idiocy:
"Well lets look at it in detail shall we - here are the possibilites:
Banks don't make credit available - can customers default - NO
Banks make credit available - do all customers default - NO
Banks make credit available - some customers default - YES
As you can see from this short example it was the 'first event' of making credit available which must be achieved before anyone can default."
Well done in spotting that if banks didn't lend, nobody can default...pretty high brow stuff your concluding.
There is the argument that a small percentage of defaults are the fault of the Banks for lending irresponsibly to people who are, frankly, too stupid to realise they can't afford it. But the whole point of a bank lending money is that there is an element of risk involved, risk of that money not being repaid, so to provide the incentive for that risk there has to be a fee.
It is essential that the banks take a fee out of this risk-taking situation, otherwise frankly they wouldn't do it. And if they didn't and we lived in a world without banks, would you risk lending your life savings to someone down the road to start a small business? Probably not. Banks are in the position to do this because they evaluate risk over 1000s of situations, make money on the ones that pay back, lose money on the ones that default in such a way (at such a price) to make a profit.
In the case you are suggesting where banks do not offer credit, how would anyone reading and contributing to these boards buy their home? How would any of them start up a company? How would any of their companies borrow money to build new offices/buy new equipment.
I think its about time you questioned what wealth are you adding? Presumably you have a job, how about adding more value to your company rather than bleating out nonsensical left-wing nonsense and winding up a bunch of gulible people into thinking that the world is about to swallow us all up?
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98. yam yzf
'Rightly or wrongly, wealth is measured in money. The banks generate money for workers, shareholders, consumers and customers. Ergo, they generate wealth.'
Yup! Just like this guy...
http://news.bbc.co.uk/1/hi/programmes/newsnight/8471187.stm
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104. At 4:39pm on 22 Jan 2010, Chris wrote:
"call me naive if you like, or at least please enlighten me on where I've gone wrong!"
You haven't gone wrong, the desire to not have to work once you have passed your ability to produce (i.e. Retirement) is perfectly valid. What should happen is the other people in the Economy - which include your children, nephews and nieces are supporting you through their taxes - just as you supported your elderly father / mother through yours.
The problem is that some people are effectively retiring at 35 having accumulated such wealth they no longer have to work. If these people are so talented - then surely it's to societies detriment that they now sit on the sidelines watching. If this wealth had been accumulated through labour then this person would be 'superman' as he is able to achieve a lifetimes production in 20 working years. The only way to achieve this is to make others work for you.
I would also point out that once again a retiree cites an activity (fishing) which is work to many people - and yet you do it for enjoyment. If you fish and eat your catch, meaning someone doesn't have to be paid to fish, wrap and deliver your dinner - then you are really 'doing Gods work' by preventing the wastage associated with consumption. Unlike the Goldman Sach's bankers who think 'Gods work' means 'sit around like Gods doing nowt all day but accumulating wealth that only the heavens could envisage'
It seems to me you are still productive and you have contributed to society through your labour in the past.
The same is not true for money meddlers - even those who did 'real jobs' before banking have extracted far greater than they have put in. The only word of caution I would have is you describe you built up your nest egg with 'disposable income' - but was it really disposable - or was it money printed off the back off speculation?
We all had disposable income 3 years ago - now it seems it never was disposable and we're now going to have to pay it all back somehow.
Finally I would also point out that the only reason you need to 'contribute to financial institutions' in order to have a pension is because the Government can no longer afford to run a realistic pension as it's been sliding into greater and greater debt with the private sector through gilt issues - something which has accelerated during this latest recession / bailout.
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You fail to understand how corrupt congress is and how the Republican media will sell these proposals as socialism or whatever new term they can invent to convince the ignorant that support them. Republicans have been very good at making deceptions that encourage people to vote against their own self interest. It is very amazing, but it does reflect the astonishing level of stupidity in the US. They just need some catch-phrase because their voteres will never take the time to learn the issue they just like creative words and terms like "liberal" to define anything they don't like. The banks will win this one too as they own congress. Representative government in the US means that the banks and big business are represented and the people are not but can vote for any candidate who has been placed for election by banks or big business. You can almost smell the rot from the corruption and the ignorant who will be betrayed and never understand. At least China sentences officals for corruption every once in awhile.
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This is total rubbish. Without the expectation that the UK taxpayer will wear the losses if any harm comes to Barclays 2trillion balance sheet the firm would struggle to fund at economic rates. They will be going nowhere as no-one else is stupid enough to provide this kind of insurance.
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110. At 5:11pm on 22 Jan 2010, anonymouse79 wrote:
"I have been reading your contibutions to this board for a little while and, as someone above has mentioned, it does raise a little chuckle on a drab Friday afternoon. However, I feel you have reached new levels of idiocy"
Ok - here we go again.....
"Well done in spotting that if banks didn't lend, nobody can default...pretty high brow stuff your concluding."
Well it does seem to have skipped some people by who insist that the default was entirely the fault of the borrower - it may seem simple, but I'm trying to alter my response for the audience - you'll notice I am not so 'simple' with every post.
"There is the argument that a small percentage of defaults are the fault of the Banks for lending irresponsibly to people who are, frankly, too stupid to realise they can't afford it. But the whole point of a bank lending money is that there is an element of risk involved, risk of that money not being repaid, so to provide the incentive for that risk there has to be a fee."
Ah - another risk v reward argument.
So enlighten us - how do banks assess risk? Do they listen to their Risk manager (well it appears not)
Do they understand risk? - well not really considering the financial world has 'insured' against the default of just about every company going through CDS - based on the assumption that not everyone will default at once - uh oh....
Who bears the risk? - well it seems banks are very good at lending 'other peoples money' so why does a bank take a fee for the risk that you, or I am taking unknowingly through our savings accounts?
What are the consequences of that risk? - Well as you can clearly see, the banks did mess up with their risk analysis - which is why so many needed bailouts. Who bore the brunt of that failure - well lets see, Taxpayer, Bank employees who got canned, Government, Businesses who could no longer access capital.....
So for something which banks clearly do not understand, they cannot manage and they bear no responsibility for - you want to charge how much for that 'risk taking'?
Quite bizarre - and you suggest I demonstrated into idiocy?
"It is essential that the banks take a fee out of this risk-taking situation, otherwise frankly they wouldn't do it. And if they didn't and we lived in a world without banks, would you risk lending your life savings to someone down the road to start a small business?"
...why does someone need to borrow to start a new business - have you ever heard of 'organically grown' businesses? - oh I see, you want it all, and you WANT IT NOW.
"Banks are in the position to do this because they evaluate risk over 1000s of situations, make money on the ones that pay back, lose money on the ones that default in such a way (at such a price) to make a profit."
...as long as you believe they won't all default at once - which is the fundamental flaw in every banks risk assessment. Ever read about the Great Depression where banks lent money to people buying shares because they believed that 'not all companies can fail at once' - and look how that turned out.
"In the case you are suggesting where banks do not offer credit, how would anyone reading and contributing to these boards buy their home?"
...have you considered that if we were not buying homes with credit issued (and printed) by the banks that house prices would be affordable and you could 'save up' for one?
My parents bought their first houses with cash - because back then the difference between wages and property was much less - they saved up.
Strangely they have 'never been repossessed' as a result.
The need to buy houses with debt show 2 things 1) The decline in real wages 2) Property bought with cheap credit fuels house prices and creates an unsustainable bubble (because if FTB's cannot get on - there is no market)
"How would any of them start up a company? How would any of their companies borrow money to build new offices/buy new equipment."
They used to have things called credit unions, or maybe they would do what some people do and their families lend them the money. The difference is the money is real and not simply fictional - which is what the banks are doing.
"I think its about time you questioned what wealth are you adding? Presumably you have a job, how about adding more value to your company rather than bleating out nonsensical left-wing nonsense and winding up a bunch of gulible people into thinking that the world is about to swallow us all up?"
Ah - personal insults, well as I have said before - how do you know this isn't my job?
As for 'left-wing nonesense, well you seem to be full of words but not really any viable points have been made.
....and you accused me of reaching new levels of idiocy? - I think you have done yourself a dis-service with your response.
Come back when you've stopped relying on that Economics books you once read and have seen the real Economic world and questioned what you were 'taught'
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113. At 5:22pm on 22 Jan 2010, ghostofsichuan
Don't worry, hungry bellies and homeless people cannot be won over with a catchphrase - I think Obama knows this which is why he's 'chosen his side'
Let battle commence.
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115 WOTW
An organically grown business is one that has not grown through acquisitions of other companies. It does not mean it has not used debt.
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I think the debate about the big questions relating to the nations finances and bank regulation and businesses like e.g. raid on Cadburys, is not really getting off the ground properly; because the fundamental principles are being ignored (and which are more penetrating and more far reaching than the 'wealth-v-value' debate).
The question is this:
If a business that could be e.g. be a bank, operates in any country and is operated, let's say, for instance in the UK: Do the owners or operators of that business operate that business as a 'right' or as a 'privilege' of the state?
The question may see rather trivial but the resulting thought processes and issues that raise are, I think, most profound and provide a better insight into 'what'? is going wrong and 'where'? - but not necessarily 'how'? and 'why'?
I think that if this question remains as 'un-addressed' (and be clear about one or the other rather than some smart alec saying its both) then the entire business system is undermined and is need of calrification through leadership.
That I think is the position that has been reached not only in the UK, but globally.
There are many issues that also arise depending on how the question is answered?
I think the answer to the question requires far reaching action, particularly by government and I'm not sure that the questions has ever been examined in great detail (but I'm still having a root around for something further on this)
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Just a note regarding Fractional Reserve Banking - as I read the comments on here it would appear people believe an individual Bank can simply take a deposit and 'print' x times the money deposited.
This is not the case - the money has to be in the system and if a bank wants to lend more than it has in deposits it has to borrow that money - it does not create it.
The whole system itself can create the money and this is how;
Bank A takes £100 deposit - its reserve requirement is 20%. As a result it must keep £20. Bank A is then able to lend £80 to Bank B. Bank B again keeps 20% (£16) and is able to lend £64.
The initial deposit is £100 but £144 has been lent - but at no point has Bank A or B "printed" any more money than it has received.
Bank A could have borrowed £500 from Bank C and lent that amount instead but again Bank C could not create that - it has to be in the system.
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115. WOTW
Quite brilliant - a classic post - you excelled even yourself!
Keep 'em coming....
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Wardy 29 - "Wouldn't it be nice if as individuals we could all be given this status? I can get my mate Steve to deposit £50, promise to pay him £52 at the end of the month. I could lend my friend Paul who's skint £500 until payday, when he pays me back £520 the Bank Of England can lend me the difference at 0.5% interest and I can make a nice little profit, without even bothering to worry about having different interest rates for depositors and lenders.
Why don't we all get in on it and we'll all be quids-in!!
One problem: hasn't this exercise diluted the value of the £? Doesn't that take a little bit of value from everybody who holds £s and puts it in my pocket? Isn't that a bit naughty?"
You absolutely could - of course you would need a license and conform to the necessary regulation such as showing you have anti money laundering controls etc etc which may cost you a little bit more than the £18 profit.
Of course you couldn't borrow money directly from the B of E but from the money markets with an adder on the base rate dependent on the risk that they judge you at. This is likely to be extremely high adder as you have no payment history and excessive risk concentration - your friend Paul may be a good credit risk in your opinion but of course if he got hit by a bus you would be in a bit of trouble.
I'm not sure how it has diluted the value of the pound - Steve will have £2 more, you have £18 more (less the interest you paid to your lender) and Paul has £20 less.
How is this naughty - Paul has obviously made a call that it is worth £20 for the service you provided him by giving him £500 sooner than he could have had it so I guess he is happy. How is that any different to you paying someone £10 to clean you car? You could have done it yourself but it is worth £10 to you to have someone else do it.
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Thank you WOTW for at least acknowledging my comments in this high-brow world of economics and finance. I do cook and eat the fish I catch but only when they're big enough - mostly they have to go back into the ocean to grow some more! I definitely contribute to the local bait shop.
I see your point about early retirees - alongside Premiership footballers these guys must have contributed the absolute least to society as a whole.
The definition of 'disposable' income is anything you haven't spent at the end of the month, which gets 'banked' (bad choice of words - put somewhere for a rainy day!). You're right about that too, there's less now than there was 3 years ago!
Errmm... trying not to get too political - I have made a large contribution to the UK State pension scheme but I kind of gave up on it being worth anything - I'm now in Australia hoping to self fund at some point...
Dempster - I'll get on that boat with you any day:)
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"Dempster
For example :
You can lend a person three times their gross annual wage to buy house, and the loan will be enforced. But lend more than that and it won’t be. A court will enforce unsecured loans up to, but not exceeding, 25% of a person’s gross annual wage.
I have a feeling that would likely prevent reckless lending to individuals in the future."
Bit harsh that Dempster - you're ruling out a significant proportion of the country from making a choice as to whether they buy a house or not. How would you like it if someone said sorry anyone over 6 feet can't go on holiday anymore because it is too much of a risk - I'm assuming you are over 6 feet tall! :o)
Also is someone with no personal debt wanting to buy a house 3.5 times their income riskier than someone with £30k personal debt buying a house of 3 times their income.
However taking your point to a more general level I think that it should be a requirement that for all secured and unsecured loans over a certain size (20K?) to go through a full budget assessment. So monthly income - monthly debt payments - allowance living expenses to leave a free amount of which can form a monthly payment amount. Although they would need to be some way of catering for self employed as well - which was the original point of self certs.
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I'm no expert Spike but isn't it/wasn't it the job of the Mortage Adviser to make sure the amount of the loan was within the realms of affordability. I suspect the Americans (and some of the rest) bypassed this principal, hence the 'Fanny'ing around which ensued...
Mostly irrelevant now - the banks have been burned and the limit will probably be around 2 times salary which, to be honest, won't get you much if you live in the real world.
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So Much anger on here and rightly so......
Stop for a moment though, any change in any environment ultimately leads to heart ache for some and happiness for others and not necessarily aimed at those who we vent our anger at. (think about your local post office closure and the effect this has on an elderley customer).
We all have bank accounts and the vast majority of us never needs to visit a bank. But if the world of banking changes then you can bet your bottom dollar that your high street branch is affected.
If it does then think about some of the effects this will have on you that you may never have considered. Whatever is thrown at the banks, then you can be assured that they will reap revenue from other means. Whether this comes from branch closures or increased charges, they wont lie down lightly.
Like any regulation of any industry, the cost will be passed down the line to the consumer. I'm not excusing this merely pointing out that at the end of the day, the aim of any capitalist institution is to keep generating profit. The high street is already littered with competition and what one bank does, ultimately the other will follow suit. So when you go looking for better savings rates, or a mortgage, or you are concerned about your long term investments, the result will normally be the same.
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119. At 6:08pm on 22 Jan 2010, spike1606
Fractional reserve banking lesson:
You have £100
Money in economy = £100
You put it in the bank, they owe you £100
Money in economy = £100
They lend out 80% to a borrower
Money in economy = £180 (the 80 they lent out and the 100 they owe you)
Result Economy now valued at £180 - hence 'money creation' of £80
Read all about it....
http://en.wikipedia.org/wiki/Fractional_reserve_banking#Exacerbation_of_the_business_cycle
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WOTW 126 - pretty much as I demonstrated although I related it bank to bank rather than bank to consumer although the principle is the same.
My point was that having received a deposit of £100 a bank on its cannot simply 'create' £400 to lend £500 and maintain a 20% reserve ratio - as I read many people's understanding on here and there is a big difference.
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Lets get radicle !
Remove the risk of lending then everyone can borrow at low rates of say 1% from a state bank.
Removing the risk is simple, fix a debt to the borrower for life until repaid (no bankruptcy allowed), if they default the debt goes to say a toxic bank and the creditor is repaid with printed money.
This printed money is then repaid with various tools like higher tax on wages of the debtor or reduced benefits for the debtor until repaid.
Only downside is 600,000 city workers are instantly redundant.
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From 1999 the UK economy has been reliant on the profits and bonus' generated by a global mis-pricing of tax-payer guarantees to the financial industry.
That model is dead.
Now the model is "make believe money". The tax-payer guarantee was a fiction, the cupboard was bare. Up started the printing presses and "make believe money" is everywhere.
What next. Reality? No more bread and circuses for the masses, the end of the empire illusion. This is a new world. Govts, business, intellectuals, none of them have grasped it yet. This is a paradigm shift.
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To 123. At 6:44pm on 22 Jan 2010, spike1606
I'm not stopping banks lending four times or even 40 times someone's income. What I'm saying is the court would refuse to enforce the contract if they did. In short they couldn't repossess the house.
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Chris 124 - to a point yes but it was neither properly required, implemented or far reaching.
For example a good mortgage advisor may have done a proper assessment today and approved a loan - however there was nothing strong enough in the system to prevent the borrower from taking a £20k loan out tomorrow.
I've read a lot on here about it being consumer responsibility and public greed that has driven this but I must admit I reject this - yes there was some stupid people and I have little sympathy for anyone who took on so much credit that the smallest shock pushed them into difficulties but the system should not have allowed their stupidity and short sightedness affect the rest of us.
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The first sentence had me chuckling!
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"I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????"
Banks do not generate wealth. They generate the illusion of wealth.
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>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
127. At 7:59pm on 22 Jan 2010, spike1606 wrote:
WOTW 126 - pretty much as I demonstrated although I related it bank to bank rather than bank to consumer although the principle is the same.
My point was that having received a deposit of £100 a bank on its cannot simply 'create' £400 to lend £500 and maintain a 20% reserve ratio - as I read many people's understanding on here and there is a big difference.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
you are missing the point spike 1606 - replace £ with.. apples. the 80 extra apples do not exist in the real world...
I like apples...
WOTW - your patience is ... incredible!
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Dempster - but the end result is the same thing. Or even worse the market that is there is at an extremely high interest rate.
I think we actually mean the same thing though - you just put a very blunt definition around it where as I am saying a wider ranging assessment of affordability is considered.
I'd like to say that this is my brilliant idea but its not - I live in Switzerland and that is exactly the system run here. When anyone takes any consumer credit the lender has to do a calculation to assess afford ability based upon monthly values:
Net income (has to be proved)
Accomodation expenses
Living expense (set amount determined by the regulator - for food etc)
Cost per child (set amount determined by the regulator)
Work travel expense (set amount determined by the regulator)
Monthly debt commitments (all debts must be registered)
Plus a couple of other things.
Based upon the amount the customer has spare, the lender can lend 36 times that amount (including interest capped at 14.9%).
Again that is consumer credit - loans and car leases. Mortgages work slightly differently.
Unbelivably it seems to work!
That means that there is no grey area for banks, consumers or regulators.
It works both ways as well - consumers have protection and controls but they also have no easy way out - if you default then the state can take up collection of the amount. So credit is not seen as easy and not abused.
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Switzerland sounds good, why re-invent the wheel here.
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Cedric I'm missing no point at all. My point was clearly in my second paragraph as I alluded to in my reply to WOTW.
Whether its apples or money the bank can lend out 80 apples of the 100 deposited and it will be no problem as long as the depositor does not want all 100 apples back before the borrower has paid the 80 back.
When its millions/billions people with apples (I'll keep it simple for you) the system works as long confidence is in the system as the depositors do not all want there apples back at the same time. That was recently on the verge of failure because FRB was allowed to run too fare - I do not deny or argue with that but in the same way that we shouldn't assume all planes are unsafe after a plane crash nor should we assume FRB is not the right thing - instead we should ensure that it is safer because the alternatives are no better, in my opinion, although WOTW disagrees.
Cedric - just to check you get the point would you like to propose an alternative?
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Spike1606 same system in France (strict affordability check for personnal loans and mortgages)
money is far more difficult to obtain other there compare to the UK / and still very few people complains about it really (the 'limit on affordability' often branded as a huge problem seems to be solely the hidden side of the 'we need you to try your outmost (and more...) to try and possess a house campaign'...
This allows for sane 'retail banking' (and certainly more coherent house price...).
Does not sort out the main current problems though.. over-evaluation of wealth by somehow including future possible earnings all together...
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135. At 8:29pm on 22 Jan 2010, spike1606
Sounds like a very good system
Control of credit = no debt slavery perhaps.
Still if it was me, I'd have the state controlling the creation of money.
That way the state gets the interest and can use it to benefit the country.
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Writingsonthewall:
How banks generate wealth?
In a very simplistic way, through the fractional reserve banking system. Say X number of people deposit money in a bank which totals £100. The bank then leverages itself, say for example, it keeps £50 in reserve and lends £150 to investors/borrowers etc at a certain interest rate. This is how the banks make their mony. But how can the banks lend £150, when it only has £100 to lend in reality? Well, this is where the real magic happens. The banks lend the money on the premise that all their depositors will not ask for their money back at the same time. The bank in question, obviously has to borrow an additional £100 in this case, at a lower interest rate. It almost appears that the banks created, £100 out of thin air. But ofcourse the risk lies with the bank, if it is not leverage itself prudently then it can go bankrupt (or get bailed out by taxpayers, as it happens!).The banks get rewarded for a)the service they provide to investors/borrowers and b) the risk that they take themselves by leveraging itself. But behind all of this lies a more fundamental truth, and that is: Money is created through credit. Amazing! Thats precisely how, new money is created - imagine a push, pull system. In that sense, money is (fiat money anyways!) created on the basis that todays investors/borrowers will be able to borrow money that really dosent exist today (in a very real sense- i.e. other than as credit), so that they can repay that in the future to the banks + generate additional money for themselves (which what the prime motivation, why they borrowed the money in the first place).....and thus the cycle continues.....
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Non-Fractional Reserve Model: (My penny's worth)
1.Shareholder invests in bank that runs a tight ship. (Capital/Reserves)
Saver deposits dosh for an x% return.(Reserves Grow)
Borrower asks for dosh and agrees to pay plus y%.
Everything runs swimmmingly and banker raids the y-x pot(Compensation). Shareholder gets dregs of y-x pot(dividend). Depositor draws dosh + x%.
2.As 1. until Borrower defaults -> banker raids the dregs (Compensation) -> Shares worth a fraction.
Depositors and shareholders want their money back and form a queue.
Depositors loose their dosh, Shareholders loose their dosh.
Investors and depositors in other banks have a smug grin until they get shafted.... Free market, no intervention. If this model doesn't work then why have banks?
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116. At 5:45pm on 22 Jan 2010, writingsonthewall wrote:
113. At 5:22pm on 22 Jan 2010, ghostofsichuan
Don't worry, hungry bellies and homeless people cannot be won over with a catchphrase - I think Obama knows this which is why he's 'chosen his side'
Let battle commence.
Yes. The homeless are now living in tented towns and cities they call Bushvilles, they look just like UN refugee camps, but with less facitilities and services (except the tents are more colourful in the US).
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Blow your mind
http://www.youtube.com/watch?v=3DPfKxOQGHU&feature=related
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5. At 10:42am on 22 Jan 2010, freemarketanarchy wrote:
"I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????"
There have been a few brave attempts so far, but I don't think anyone's answered successfully yet. I humbly offer my answer:
Banks generate wealth by making the process of using capital more efficient. There are two aspects to this:
1. They match lenders to borrowers more efficiently than the lenders and borrowers could do by themselves. For example, the capital of a depositor in London can be lent to a borrower (whom he does not know) in Birmingham who is able to use it more efficiently than any of the depositor's acquaintances. The benefits of the resultant increase in capital can be shared among the borrower (who provided the labour), the depositor (who provided the capital), and the bank (which enabled the efficient loan).
2. They assess the risk of default better than a lender can (or lose their own money if they can't), and also pool risk, so that the lending of capital can be done in more marginal cases than if a lender could only lend to his own acquaintances. (A lender lending directly to a borrower would want a higher rate of return when risking the whole amount lent, and the borrower might not be able to afford this). More capital therefore gets used for productive purposes.
This is genuine wealth creation, in the same way as creating a more efficient means to transport perishable goods from a producer to a consumer is wealth creation.
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28. At 12:06pm on 22 Jan 2010, writingsonthewall wrote:
14. At 11:29am on 22 Jan 2010, copperDolomite wrote:
"No corporation should be allowed to play a part in a democracy because people, not corporations get to vote. "
Unfortunately to achieve that you will need to remove money from politics - and most people are in politics for money (as the expenses and post-political jobs have shown)
And there was I being told they were there to work at creating a better society for all but instead it sounds like an ordinary wage just isn't enough for them. If they are there for the money (and most of them are) then they are not what they would like us to think they are.
Money corrupts - humans have understood that for thousands of years. Money has to be taken out of politics.
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Here's some interesting numbers:
If a bank lends money on interest only for a 25 yr mortgage at 4% over their borrowing rate, they make the value of the mortgage back when it's repaid in 25 yrs time (plus the original loan).
This means that they could break even if half of all mortgages defaulted.
Ok, so I've simplified this, banks are inefficient and have a cost to service the loan, people pay back early, repayment mortgages generate less profit, but 10% default ( a big percentage) could be coped with a 0.5% over cost margin (about a 1% mortgages in this market).
The real risk seems minimal, so how much profit do these banks need to make to make a decent living?
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#146 Crookwood wrote:
"The real risk seems minimal, so how much profit do these banks need to make to make a decent living?"
----------------------
£Squillions...it would seem!
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So essentially, people in THIS country are shunning bankers and the huge finance sector, which accounts for roughly 80% of our economy.
Right. The most recently available GDP data for the UK is $2.65 trillion. If we destroy the finance sector, as some of the more far-left inclined people would like to see, we, as a country would have a GDP of just £530 billion. That's about as much as Indonesia.
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#144 striped-pad3 wrote:
5. At 10:42am on 22 Jan 2010, freemarketanarchy wrote:
"I note that nobody on here has yet been able to answer your primary question...HOW DO BANKS GENERATE WEALTH??????????"
There have been a few brave attempts so far, but I don't think anyone's answered successfully yet. I humbly offer my answer:
--------------------------
Sorry!...but no.
Karl Marx got it (as he was the first to explain it!)
WOTW gets it and very concisely explains it on here many, many times...(btw WOTW if I ever met you, I'd buy you a pint!).
WolfiePeters (and many others) also get it.
The Bible understood the worth of money lenders to society.
The Koran understands the worth of money lenders to society.
I even believe Lord Adair Turner understands the worth of money lenders to society (i.e. socially useless!).
Think of religions as being the original regulators.
When the powerful Medici banking family dynasty in Italy, during the middle ages, were making piles of money, their greedy activities were regulated by the church...in that the church/religion convinced them that they would all go to hell and damnation for their money lending ways, unless they made huge concessions as reconcilliation!!!
Guess what?...those concessions involved altruistic activities such as building churches and sponsoring other worthy activities...such as ploughing money into the arts and culture....hence the Renaissance period...it employed many artists/sculptors etc.
What altruistic activities are the current banks involved in?
I read yesterday that Goldmans has donated a $1million to charity over the course of last year...do you really believe that? I don't.
They could donate the $Billions of their 'bonus pool' to the Haiti earthquake victims...but they won't.
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tomb123, where do you get your silly figures from? In 2007, financial services accounted for only 10.1 per cent of UK GDP.
Source: http://ukintaiwan.fco.gov.uk/en/doing-business/business-investment-in-uk/uk-business-environment/uk-financial-services/
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40. At 12:32pm on 22 Jan 2010, writingsonthewall wrote:
"29. At 12:07pm on 22 Jan 2010, jonearle wrote:
(example of land-owner borrowing money to pay for equipment and staff to extract oil below the property)
Ask yourself these simple questions:
Who dug it out of the ground? Was it you, or was it the labourers and technicians you employed?. As the oil was free, the only difference between oil in the ground and oil you can sell is the labour you employ to extact it. How can you make a profit from that (unless you got your hands dirty?)"
WOTW - I agree with some of the things you write, and the values you hold, but you appear to have a deep hatred of capitalism, whereas I've become convinced that there's really nothing wrong with it. I'd be interested if you could consider the following scenarios, and tell me which ones (if any) you think are unfair to someone.
There are three actors: Fred the farmer, Gerald the gardener and Phil the plumber.
Fred has a field of growing wheat, but it needs weeding, and he can't do it all himself. He expects that his crop yield will be reduced from 8 tonnes to 4 tonnes if he can't get skilled help.
Gerald has a leaking tap.
Phil would like his flower bed weeded.
1. Fred asks Phil to help him do the weeding in exchange for a proportion of the increased crop. They weed it together, although Phil doesn't know much about plants and pulls up some wheat, so it only yields 6 tonnes. Fred gives Phil 10kg of wheat at the harvest. Gerald has to make do with his leaking tap.
2. Phil fixes Gerald's leaking tap, while Gerald weeds Phil's flower bed. Fred weeds by himself, and only harvests 4 tonnes of wheat.
3. Phil, Fred and Gerald meet. They agree that (a) Phil will mend Gerald's leaking tap, (b) Gerald will do weeding in Fred's field (and he's good at recognising weeds), and (c) Fred will give 20kg of his 8 tonne harvest to Phil.
4. Phil repairs Gerald's leaking tap in exchange for a promise to do some weeding for him later. Later Gerald weeds Phil's flower bed. Fred weeds by himself, and only harvests 4 tonnes of wheat.
5. Phil repairs Gerald's leaking tap in exchange for a promise to do some weeding for him later. Later Phil agrees with Fred that he will tell Gerald to weed Fred's field if Fred will give Phil 20kg of his 8 tonne harvest. (Is there any difference with scenario 3?) Phil puts up with the weeds in his flower bed.
6. Phil repairs Gerald's leaking tap in exchange for 1g of gold. Later Phil offers Fred 1g of gold in exchange for 20kg of the future harvest, and Fred accepts. Fred offers Gerald 1g of gold in exchange for doing some weeding in Fred's field. Fred harvests 8 tonnes of wheat and gives 20kg to Phil. Phil puts up with the weeds in his flower bed.
7. Phil repairs Gerald's leaking tap in exchange for £20. Later Phil offers Fred £20 in exchange for 20kg of the future harvest, and Fred accepts. Fred offers Gerald £20 in exchange for doing some weeding in Fred's field. Fred harvests 8 tonnes of wheat and gives 20kg to Phil. Phil puts up with the weeds in his flower bed.
8. Phil repairs Gerald's leaking tap in exchange for £20. Later Phil offers Fred £20 in exchange for 25kg of the future harvest, but Fred refuses. Fred buys 20kg of wheat from another farmer for £20. Fred can't afford to pay Gerald, so he weeds by himself, and only harvests 4 tonnes of wheat. Phil puts up with the weeds in his flower bed.
9. Phil repairs Gerald's leaking tap in exchange for £20. Later Phil offers to lend Fred £20, in exchange for £25 after the harvest. Fred offers Gerald £20 for doing some weeding for him. After harvest, Fred sells 25kg of his wheat to Phil for £25. Fred pays Phil the £25 which he still owes him. Phil puts up with the weeds in his flower bed.
A few points to note:
(a) In all cases, the transactions are with mutual consent.
(b) The use of promises/gold/money allows a complex transaction involving 3 parties to be broken down into individual transactions involving only two parties at a time.
(c) Phil, by lending his money to Fred for profit in the last example, is not actually using his own labour to increase the harvest; but he is using the money which was earned in exchange for his labour. If he lends money to Fred to allow him to increase his harvest enormously, why should he not share in the extra wealth generated by that, just as much as if he were labouring on it directly? Everyone else benefits - Fred gets a much larger harvest, Gerald gets his tap fixed by an expert. It seems reasonable to me that Phil should be able to get more wheat than he would if he just bought it from another farmer, especially as he's risking his money - there's no guarantee that the harvest will be large.
In the oil example, you generally can't just get a load of people together and extract oil from the ground. The workers will want to be paid and equipment will have to be bought before the oil starts being sold.
If you can find workers and equipment suppliers who are prepared to defer being paid until the oil is sold, you're very lucky. Chances are they'll want something now. Perhaps you've already got something to give them which they want, or you can sell something that you already own to give them money. But if not, you need someone who's prepared to take a risk on lending you money or paying for equity in your undertaking in the hope that you will make enough money from selling the oil in future to pay them back. Why should anyone provide you with money for no reward beyond being paid back in that case? At the least they have to be compensated for the effort involved in deciding how big a risk they're taking. And if they could go off and do something else with their time and resources, why should they be obliged to lend their money to you? Surely you have to make it worthwhile for them i.e. by rewarding them with profit.
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137. At 8:45pm on 22 Jan 2010, spike1606 wrote:
Cedric - just to check you get the point would you like to propose an alternative?
Thanks to keep it simple...
the problem is to try to reverse many years of 'all can afford all' brain washing... (and anybody arriving in the UK from mainland Europe can tell you is/was quite intense)
What I had the chance to grow up with was along the lines:
you want money - you save
you want something - you work for it... first!
In my modest opinion (and as per your request)
- Retail banks should have no need to lend more than what they have from depositors - and no right to do so...
- All other 'gambling institutions' (including investment banking, hedge fund,...) can be more liberal... but I would still 'ban' short time money making tools and other market 'aberrations' (shares are supposed to be linked to the real world - buying bulk shares in the knowledge of a re-sell few days/minutes/seconds later for a quick buck is just a perversion of the system...)
the main problem of the current system as WOTW explains it so well is the separation of money/value and wealth (I think remembering there is now 6 times more money than the corresponding wealth in the world... and this was before any kind of QE or others)
this excessive amount of money was only justifiable (by the banks) if it could be circulated (forced down on as many folks as possible - in the false belief access to quick money was a right... and that you can own your home if you are on benefit... or assuring an interest only mortgage is no more risky than a rent...)
It will be hard - but I cannot see any other long term solutions. We need to bring comon sense back into the system....
Good night all!
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If a goose can lay a golden egg then what a wonderful thing awaits us if we kill and eat it?
Banks need regulation that protects the public. What we got here ladies and gentlemen is politics not policy. If you're slipping in the polls and Massachusetts votes in a Republican senator for goodness sakes then something must be done. Let's kill the bankers, nobody likes them anyway. Somebody in the crowd asks about Fannie and Freddie. The reply is to zip it. "We'd have to eat ourselves".
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149. At 00:05am on 23 Jan 2010, freemarketanarchy wrote:
"Sorry!...but no.
Karl Marx got it (as he was the first to explain it!)
WOTW gets it and very concisely explains it on here many, many times..."
Then perhaps you'd care to explain in what way I'm wrong, rather than just telling me that I am. Maybe, just maybe you might find that I'm right and that you've not understood something. Discussion rather than sticking fingers in ears and going "you're wrong, you're wrong, lalalalalala I can't hear you" is probably a more effective way to get to the truth of the matter.
"I even believe Lord Adair Turner understands the worth of money lenders to society (i.e. socially useless!)."
I think you'll find that Lord Turner said that *some* activities of banks were socially useless. Which indeed they are. In fact, some are actively harmful, such as lending to people who can't afford to repay.
"What altruistic activities are the current banks involved in?"
That's irrelevant to the subject of creating wealth.
As I said, banks create (some) wealth by making the process of using capital more efficient. I challenge you to demonstrate to me that I'm wrong. Perhaps you could do so with reference to my example of a lender in London and a borrower in Birmingham who is unknown to the lender, but has a great plan for, say, creating a very efficient wind turbine.
Of course I'm not denying that there's been a huge problem with the banks. But that problem has been more about terrible lending practices for the sake of huge short-term profits, rather than a fundamental problem with the role of private banks. The government should have let them go through administration, write off lots of their debts, and be recapitalised at that point once they weren't so burdened with overstated assets but all-too-real liabilities. Shame for the shareholders and some bondholders, but investing in or lending to badly-run banks is a risky business.
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tomb123
'So essentially, people in THIS country are shunning bankers and the huge finance sector, which accounts for roughly 80% of our economy.'
Ahem! I think you'll find it's around 32% by value added. See [Unsuitable/Broken URL removed by Moderator] p80. But why let dodgy numbers spoil a good argument! Did you ever work for Lehman Brothers?
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154. striped-pad3
'As I said, banks create (some) wealth by making the process of using capital more efficient.'
This is quite correct. You are also correct to emphasise the 'efficiency of capital' in the real rather than the monetary sense. Problems are 1) mainstream economics measures efficiency of capital on a monetary basis, which is frequently irrelevant to real value creation and possibly indeterminate (because asset return and price are not independent). 2) banks have also destroyed wealth by consuming a lot of resources to carry out zero or negative sum asset trading.
This means that a lot of the figures quoted to support the value of banking activity are transparently rubbish. Not surprisingly this makes posters here and others pretty sceptical of the whole enterprise. For, I hope, a balanced view see [Unsuitable/Broken URL removed by Moderator]
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155. diarmidwp
'I think you'll find it's around 32% by value added. See [Unsuitable/Broken URL removed by Moderator] p80.'
Well anyway, it's on p80 of the 2009 Blue Book. You can find it on the National Statistics web-site.
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#149 fremarketsandanarchy. Asking how banks generate wealth is a bit like asking how engine oil makes a car go faster.
Both are supposed to reduce friction and thereby enable other operating parts to work more efficiently and reduce damage to working parts, and both are essential to the long term operation of the machinery of either the motor engine or the motor of the economy.
The key diference is engine oil is not priced on the basis of the cost of the damage that would occur to your car if you tried to operate it without oil, but bankers price themselves on precisely that basis.
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156. Yes, me again
For, I hope, a balanced view see [Unsuitable/Broken URL removed by Moderator]
OK, so pdfs are not allowed. My mistake. Try this link http://www.diarmidweirphotography.co.uk/wealth_without_money/2010/01/understanding-money
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158. armagediontimes
'The key diference is engine oil is not priced on the basis of the cost of the damage that would occur to your car if you tried to operate it without oil, but bankers price themselves on precisely that basis.'
That strikes me as a very insightful analogy. What I think you're getting at is that banking is not priced close to cost, but priced at close to what the bankers can persuade us we have to pay to keep them. I think this is a fundamental economic issue that is widely manifested (think footballers, film actors, TV presenters etc). It's defended as market competition, but in another sense it's quite the reverse of true competition. It's a market rigged for the rich.
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re Comment #30 by WOW
"If the activities of a bank were undertaken by the state then the 'fee for lending' would be a tax - nobody would dispute it." and your ealier comments (#10)
Interestingly in most ex Communist eastern European countries this is exactly how it is. Banks don't have fees. They have taxes. Just like the government. There are no separate words for bank charges or government charges. They are all TAXES.
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** message from banker; please read before organizing a public stoning **
Kindly tone down the ranting, the jealousy towards bankers and take a bit of responsibility for the mess.
post no. 91. writingsonthewall.
There was and is plenty of credit made available here in Asia and interest rates were far lower than the UK for most of the last decade. People here just didn't borrow as much, were more frugal and didn't live beyond their means. If someone goes to a shop and wants to buy a fancy flat screen TV (or some other luxury good they don't need) but doesn't have enough money in the bank, they don't buy it. In the UK I understand a large number of people would whip out the credit cards or draw down on house equity or other loans.
You've lived beyond your means. The UK economy is now correctly (and painfully) rebasing itself to a lower level.
None of this detracts from the true point that bankers (and others) are overpaid. But I'm not seeing proper debate here - just a lot of ranting and an abdication of responsibility.
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And for all those wondering where money comes from and how it is created, I recommend this series on you tube "Money as Debt":
http://www.youtube.com/watch?v=vVkFb26u9g8
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162. At 06:41am on 23 Jan 2010, Barry
The debate you are looking for happened here on this blog over a year ago, way back when it first kicked off.
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111. At 5:16pm on 22 Jan 2010, diarmidwp
This guy has now been arrested and is being investigated for fraud. The Newsnight piece is not the first I've seen on this. Ben Goldacre at the Guardian wrote about it way back in November and the Randi Education Foundation offered $1 000 000 to these people if they could prove it actually worked last year.
The mystery is why it took so long for him to be arrested - people have died in Iraq because the security services were relying on this things!
(And why did the Newsnight journalists not mention the previous press reports?)
And to think this guy is an ex-police officer...disgusting.
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Peston above:
"what he has in mind would plainly lead to a complete reconfiguration of the likes of JP Morgan, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs".
How exactly will this come about? What we have in this "Pick" is (as always) opinion before knowledge. Why not undertake a serious piece of journalism that delves into the details? It's not in fact particularly complicated, but would require effort and some degree of work to set out the various divisions of these organizations and consider which, across varying definitions of "proprietary" could be impacted.
writingsonthewall,
There's a lot of deep thinking going on in your posts, no doubt the result of hours of painstaking study of wikipedia, Peston's Picks and other sophisticated sources.
The one constant I have noticed amongst these postings is the inverse correlation between knowledge and strength of opinion.
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At 10:58pm on 22 Jan 2010, Crookwood wrote:
Here's some interesting numbers:
If a bank lends money on interest only for a 25 yr mortgage at 4% over their borrowing rate, they make the value of the mortgage back when it's repaid in 25 yrs time (plus the original loan).
This means that they could break even if half of all mortgages defaulted.
Ok, so I've simplified this, banks are inefficient and have a cost to service the loan, people pay back early, repayment mortgages generate less profit, but 10% default ( a big percentage) could be coped with a 0.5% over cost margin (about a 1% mortgages in this market).
The real risk seems minimal, so how much profit do these banks need to make to make a decent living?
Crookwood - you have oversimplified it. You need to look it each year on a seperate basis of the 25 years.
In each year the operational cost alone is likely to be 1% of the investment each year.
The risk costs especially at the moment are uncertain but lets assume they are 2%.
So their margin has to be 3% above borrowing to break even - so at a 4% margin the banks return on investment is 1%.
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My prior post is to be moderated. Seems a little unfair to allow raving and ranting about bankers, but not criticism of Peston's Picks or bloggers.
In any event, I think this particular Peston's Pick points to some interesting issues surrounding the recent proposal from President Obama in the US. But the devil is in the detail, missing from this "Pick".
What would be interesting and educational for readers (including me) would be to set out the range of activities across the banks and consider which would be eliminated under these proposals, across varying definitions of "proprietary". For example, normal course lending presumably isn't proprietary risk, but extending a mezzanine level debt through the principal investment arm of a bank to fund a small company could be? Removing that from the scope of banking may not be beneficial.
If I was a journalist I would take a crack at dissecting this issue along these lines. Then question the counter claims from the banks, which may revolve around arguments that they had already reduced or eliminated principal investment, that the latter was less connected to recent financial crisis, and that there were certain advantages or synergies to retaining some degree of in-house proprietary positions. I'd be skeptical about these claims, but wouldn't be able to form an opinion without further data, unlike the audience here.
My moderated post had made some points about armchair critics in this debate relying on study of wikipedia and Peston's Picks.
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134. At 8:25pm on 22 Jan 2010, Cedric wrote:
you are missing the point spike 1606 - replace £ with.. apples. the 80 extra apples do not exist in the real world...
I like apples...
Beautifully illustrated.
Spike1606. Assume 10% reserve ratio.
Bank lends out £90 holds £10 Owes depositor £100 Money supply £100
Borrower spends £90 and recipient puts it in his bank
His bank lends out £81 holds £9
The £81 is spent and recipient puts it in his bank
His bank lends out £73 and holds £8
Even after just 3 circulations
The banks are holding £27 and are owed £244 They owe depositors £271
The 3 depositors think they have £271 in the bank but could not get it back from the banks if they wanted it at the same time
The final borrower is holding £73 in cash. Money supply £344.
WOTW and others have explained many times how the banks take their cut.
Of the 100 apples, 27 are with the bank and 73 are with the final borrower. However there are another 244 'make believe' apples out there. If 100 apples could originally be exchanged for 100 oranges, what do you think has now happened to the price of oranges and the buying power of an apple?
Expanding the money supply works if goes hand in hand with real growth in trade but it cannot go on forever and there are times when that growth does not exist and people dont want to borrow.
The Govt is trying to coerce people into borrowing by printing money because, unless the juggernaut keeps rolling... Well the banks just dont have enough apples for their depositors. Then it's Meltdown !
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# 64. At 1:56pm on 22 Jan 2010, Barry wrote:
> I am a banker, but these changes will make no difference
> to me or many other bankers.
It's a dirty job, but somebody's got to do it, like (say) dentistry etc.
But it doesn't take skill, like dentistry does. You just have to be
able to count. So the days of high wages are over. The President
has said so. Over to you, Gordon - drive the money changers from
the temple.
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169. rvaucbns
Excellent explanation - but in the 'real' economy it's much worse than your description of course.
As you say you've only taken it to three steps. Imagine if the third borrower (holding the 73 apples) deposits those with his bank - which just happens to be the first bank...They gain 73 apples, but immediately lend out 66 of them - making them even more exposed than in the first transaction.
Can any of those other posters who are trying to justify that banks 'create wealth' explain to us how Goldmans (and the banking system in general) can make their largest 'profits' ever in an imploding economy?
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Well, it is disappointing that no-one seems to have mentioned the Tobin Tax. That might not solve all these problems, but would exert a modestly restraining influence on some of the greed and stupidity that got us into this mess. And generate some much-needed funds for good causes like development and slowing climate change.
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The banks will of course argue that the people, to whom they are lending, are making real things and adding value and that therefore the example is unsound but what if the borrowers want the money/apples to buy oranges and are not certain that they can repay the banks?
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This site seems to have become dominated by crypto marxists and Fractional Reserve Banking critics but you don't need to be of either of these persuasions to see that the so called Investment Banks are grabbing wealth largely for their own senior staff. Good luck to Obama in amputating them.
Incidentally, I don't see why this would prompt any bank to move its HQ from NY (or London, if UK follows Obama's lead) - they still wouldn't be able to operate in US or UK, which is where the money and the generous Government support are. And isn't HSBC 'based' in Bermuda anyway. If Obama succeeds, the 'unversal' banks could simply reconfigure themselves as holding companies, with suitably demerged and downscaled subsidiaries but at least they wouldn't be able to blackmail the taxpayer again.
For my money, Paul mason gives a more dispassionate analysis
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Nothing will change until the politicians, legislators and civil servants, who are supposed to regulate the banks and multinationals on our behalf, are prevented, by law, from moving seamlessly from their present lucrative positions to even better paid jobs, immediately they leave office.
Stop the moves from Westminster to the Bankers Board Room swill bucket and then you might possibly deal with this obvious, glaring and obscene conflict of interest in which the taxpayer aleays loses.
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@151. striped-pad3 brought in the topic of extracting oil from the ground.
This is a very good example of wealth creation. Without the means to extract it, oil in the ground is worthless because it’s impossible to use. Oil out of the ground is a very convenient source of energy and, hence, valuable. The process of extracting the oil is costly. To be more precise, drilling holes and setting up infra-structure to start the extraction and production is extremely expensive. It’s a stage in the project where there’s a huge negative cash flow; oil companies call it the ‘cash hole’. One way or another, the ‘cash hole’ exists in any type of project, almost anything that we do to attempt to create wealth. But, in oil and gas, the cash holes are bigger and deeper and longer. It’s one of the reasons that oil companies are so big; basically, they have to be. Also, they are forced to plan their finances long-term, which wouldn’t be a bad practice for a lot of other industries.
However, bank loans to oil companies are more often to finance refineries and petrochemical plant and much less frequently to finance field development. Perhaps, banks don’t see a long wait for a hole in the ground with potentially nothing coming out of it as a good risk. And oil companies certainly don’t want to pay the huge interest rates banks would ask on such a loan.
The question is, even if the banks chipped in, who is creating the wealth? I accept the bank is facilitating it and deserves a reward. But, that goes for the local governments and population that sell licences to explore and produce and permit the infra-structure. For me, the wealth creation is by the oil company, its staff, consultants and contractors. Put it this way, the oil company could get the cash by taking a loan on a refinery, but it can produce the oil only by drilling the hole in the right place!
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165. CopperDolomite
'The mystery is why it took so long for him to be arrested - people have died in Iraq because the security services were relying on this things!'
Wonder who his bankers were! Will they own up?
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What Obama's bank reforms really mean?
I think that it means that a public campaign is needed to instigate/examine the constitutional questions of rights -v- privileges in 'UK business' by raising petitions such as the one below on the No 10 website.
For those who wish to sign a petition trying to keep Cadburys under British ownership - here's the link:
http://petitions.number10.gov.uk/CadburyBritish/
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#169 rvaucbns
"Expanding the money supply works if it goes hand in hand with real growth in trade but it cannot go on forever and there are times when that growth does not exist and people dont want to borrow."
That is why the EU wanted to expand into the previously agrarian economies of Eastern Europe.
A fresh supply of people to get into debt was required.
I'm not so sure about the EU welcolming Iceland though..
#176 WolfiePeters
Oil production - You hit the nail on the head by stating the Oil Cos have to drill in the right place.
No amount of money poured down the hole could make up for using more energy to obtain oil than you can get from that oil.
Absolute energy beats money anytime.
Gold makes no sense either. What can you actually do with gold?
Waste energy refining it?
Dig it up in one part of the world and bury it in another?
Energy is king.
Everything we have flows from it.
At present we live in the oil age.
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#165 copperDolomite
I am not apologising for this chancer.
However will his defence be that supplied this equipment so that the users could stop folk as and when they pleased?
Do we know how much money did actually change hands?
What is money anyway as long as the guard could perform a legal stop and search?
Agreed that this "equipment" should not be used on its own.
But in the "right" hands could be useful.
Heck. For the right money I could make a Mk 2 version!
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174. At 10:58am on 23 Jan 2010, StephenG wrote:
This site seems to have become dominated by crypto marxists and Fractional Reserve Banking critics
If I was to have a label, it would probably be 'capitalist' but that doesn't prevent me being able to see when I'm being shafted.
I'm no expert but it seems to me that the FRBS means that the moment I sell a product of value, that I have created, for money, I start to lose because that money is losing purchasing power. If I was able to trade my product for other products I need to live i.e. no middle man (the banks) the initial value would be maintained.
The other main offshoot of using money to reflect value, of course, is that it allows you to be taxed. Gone are the days when the king would come along and take a fraction of your produce. It is much easier if you are forced into selling your produce for money so that the State gets its share more easily and at the same time you are dragged into the diminishing returns spiral of the FRBS.
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181. rvaucbns wrote:
"it seems to me that the FRBS means that the moment I sell a product of value, that I have created, for money, I start to lose because that money is losing purchasing power. "
It's much, much, worse than that. Unless you are paid in cash and spend it straight away 'your' money nearly always ends up going through a bank. As soon as they get their grubby little hands on it it's whisked off to FRB fairyland to generate more profits for them, as well as at the same time contributing to diluting (in an imperceptibly small way) the purchasing power of your miserly earnings.
And banks demand to be paid billions for their 'services' - evidently a lot more than anyone else in the economic chain. Someone's having a laff - and we know who it is...
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Cedric 152 - your 1 for 1 example could be instrued as FRB with a 0% reserve requirement. The bank has 100 in deposits and lends 100 out - that was what you have said is acceptable. If however you are saying there should be higher reserve requirements I agree with you - still FRB though
Other than that you have no given another option to FRB - you have just merely said it would be better if people don't borrow.
rvaucbns 169 - there may be notionally more money supply but in fact in the real economy the more iterations (in the simple example) the less actual money is after the oranges. It started with 100 but after the 2nd iteration there is only 64 apples - the rest is held as deposits so is not chasing the goods.
The risk of FRB is absolutely that more people want their deposits back at the same time that exists. However the benefit is that depositers can store money and have the right to withdraw at any time and lenders can borrow money that is will not be recalled at any time.
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There is no way that the banks are going to take any notice of this and they will do anything to protect their profits and bonuses - and shafting savers and investors is at the top of their list. Look at Barclays: share price down by half and dividends at 0.3% - and still they pay themselves massive bonuses. The UK taxpayer owns 84% of RBS but cannot exercise any control over directors' remuneration.
If Obama or Brown pushes on with this sort of regulation of the banks, the result will be scorched earth - and the small savers and their pension funds will be wiped out.
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183. At 6:05pm on 23 Jan 2010, spike1606 wrote:
rvaucbns 169 - there may be notionally more money supply but in fact in the real economy the more iterations (in the simple example) the less actual money is after the oranges. It started with 100 but after the 2nd iteration there is only 64 apples - the rest is held as deposits so is not chasing the goods.
Sorry. I don't follow the logic of that at all.
In the example the amount that has, and will be spent is £90 + £81 + £73
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What about QE ? £200 billion. Whether it's funding Govt expenditure or not it's out there. In FRBS terms that equates to £1.8 trillion at a 10% reserve ratio.
Again I'm no expert but take the Monetary equation M x V =Q x P
where M = money in circulation
where V = no of circulations /iterations as previously blogged
where Q = real value of output (something like GDP ?)
where P = price level
OK we know M is up by £200 billion
There is no growth so Q is same or even lower
We also know that so far price level increases have been minimal
We also can surmise that V has dropped because people are not borrowing or that the banks are not lending as much.
So you could say that the equation works or reflects what is happening.
But what happens when the recovery gains momentum, the banks have strenthened their balance sheets and they start to lend again, as the govt wants. The extra £200 billion becomes £1.8 trillion. I think that is about 10% of the total money supply.
So M x V goes through the roof.
Are we going to get a corresponding increase in real output. I don't think so. My basic mathematics tells me prices are going to go through the roof ?
What am I missing here ?
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186
What you are missing is that BoE have declared they will, in due course, take the additional M back out of the system by seling back all the gilts they have been buying. In the meantime, V has been so low that monetary growth has been bobbing around zero, or less..
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186
I'm not sure what your missing but I have difficulty seeing how prices can rise without a corresponding rise in wages which doesn't seem very likely to me (but perhaps I'm missing something as well).
Rising taxes and interest rates are almost a cast iron certainty. Deflation is the more likely outcome perhaps?
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181
What you seem to be talking abput here is a return to barter, in which case we would all be living in a subsistence economy. Money isn't robbing you, it is vastly increasing the sales you make. Since your product must be of value, the use of money/credit (and credit is not a dirty word) is enabling the creation and exchange of a great deal more of this value than would otherwise be the case.
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185 - I explained badly
The point was it is not and cannot be chasing the same oranges at the same time - if someone has deposited an amount in a bank then rationally they do not require it for demand purposes.
So all the seperate amounts being generated require the current borrower to spend the money - the next borrower cannot borrow until the previous has already spent it so there is not overdemand due to FRB.
The total amount in the system then reduces as borrowers pay back.
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Robert wrote - "Much of the speculative risk-taking and clever-clever financial innovation would be driven out of banks and into proxy banks - and unless these proxy banks were supervised and regulated as closely as banks, chances are that the next financial crisis would simply have been shipped to institutions with different names"
Surely this is the task of those reforming the banking structure. If companies want to indulge in high risk Casino banking there needs to be a way of ring fencing that model from the real economy i.e. we don't pick up the pieces. Don't regulate them let them fail.
If someone wants to bet in a Casino and loses, the most we offer now is Gamblers Anonymous. Likewise with banks. This crisis was started by rocket scientists designing packages of dodgy and good securities and selling them to gullible banks,like HBOS and Northern Rock as A1 safe. We need to separate the activities and not allow moral hazard again.
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#186, #188
Stagflation is what we've got, rising prices and stagnating economy.
I'm sure an economist can tell us how to resolve it.
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All those who favour the Conservative "solution" should read Richard Anderson's article in the Business Page today. READ THE LAST COUPLE OF PARAGRAPHS. (Personally I don't believe Osborne will do any more than the Government - after all, most of his closest chums are bankers). The finance sector in the US is relatively small compared to in the UK. Though we all want to give the greedy & irresponsible bankers a good kicking, let's not cut off our nose to spite our face.
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This comment was removed because the moderators found it broke the House Rules.
189. At 9:34pm on 23 Jan 2010, StephenG wrote:
181
What you seem to be talking abput here is a return to barter, in which case we would all be living in a subsistence economy. Money isn't robbing you, it is vastly increasing the sales you make. Since your product must be of value, the use of money/credit (and credit is not a dirty word) is enabling the creation and exchange of a great deal more of this value than would otherwise be the case.
I agree.
What I have a problem with is the rate of increase of the stuff
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190. ** message from banker **
I'm seeing a lot of folks here praising the demise of banks and bankers alike due to the Obama plan.
Jacques Cartier in post 170 notes that what we bankers do requires no skill. I'm no genius, but I have two degrees (one arts, one science), did quite well at university (Cambridge) and after 10 years in the wretched business continue to find banking very demanding. I'm sure all the experts here won't agree; I must be lying as it's all a conspiracy.
I'm going to do some work now - I'm preparing to negotiate a billion dollar merger on behalf of my client. Hold on a minute, that can't be right! I'm going to do something obviously involving no skill, forcing people to use credit cards and take out mortgages against their will, use taxpayer funds to pay my bonus and spend the rest of the day playing golf. I might go and cause the next financial crisis while I'm about it.
For Pete's sake, take a bit of responsibility for your self-inflicted economic crisis and stop the banker jealousy.
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196. At 09:16am on 24 Jan 2010, Barry wrote:
I'm going to do some work now - I'm preparing to negotiate a billion dollar merger on behalf of my client.
Have a good one Barry.
Remember the more efficiency savings, the bigger your cut
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196. At 09:16am on 24 Jan 2010, Barry wrote:
"Jacques Cartier in post 170 notes that what we bankers do requires no skill."
Not necessarily 'no skill' - just that the skills required are probably possessed by quite a large number of educated people out there and the 'top' bankers and traders are certainly easily replaceable. Thus, in a truly 'free market' their salaries and bonuses should be a fraction of what they're actually being paid.
"I'm no genius, but I have two degrees, did quite well at university (Cambridge)"
Snap - scholarship as well! Perhaps I should try banking? Actually I did get an offer from Coutts many years ago, but turned them down and went off and did something 'artistic' and 'culturally enriching' instead. Silly me!
"I'm going to do some work now - I'm preparing to negotiate a billion dollar merger on behalf of my client. "
And how much do you expect to get paid for this? Are you saving anyone's life, are people going to die if this merger fails, or, more to the point, are you going to die? Thought not...
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196. At 09:16am on 24 Jan 2010, Barry
You sound stressed - are you hoping to increase your bonus and give it all to some of the world's poor? Hope so. I couldn't sleep at night if I earned a bankers bonus and had it all to myself - not after seeing in this world, some of the things I've seen.
See, the thing is. Well let me explain it to you this way. Way back before Pasteur, people didn't know about germs. But then the scientists figured germs and they had the evidence for it. A few years later people couldn't figure out if the material of hereditary was protein, nucleic acid or what. Now we know it is nucleic acid.
The skill comes in here. We look at the evidence. We don't forget the lessons learned by those who have gone before us. We wouldn't waste time, money or expertise convincing ourselves of spontaneous generation of life or that proteins were the chemicals of hereditary, making the same old mistakes, and then expecting to get paid for it! That would not be sensible, moral, professional....
However, it seems, bankers don't recognise a bubble when it smacks them on the behind, or worse, when it wrecks the global economies. And do they know what historical evidence is? You'd think the bright young things would finally get it after centuries, but alas....
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#198. the_fatcat wrote:
"Not necessarily 'no skill' - just that the skills required are probably possessed by quite a large number of educated people out there and the 'top' bankers and traders are certainly easily replaceable. Thus, in a truly 'free market' their salaries and bonuses should be a fraction of what they're actually being paid."
Not so. Very few people, regardless of their intelligence and level of education or experience in other fields, could simply walk into a bank and do what "bankers" do. (And the fact that so many contributors to this blog seem to believe that "banking" is a single skill merely demonstrates their lamentable lack of understanding of the financial sector).
Many people could, of course, do the job with the right training, but the same can be said for almost job or profession you care to mention. Bankers are no more nor less replaceable than anyone.
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200. At 1:48pm on 24 Jan 2010, rbs_temp
Well, you are right - most of us could do it after some initial training.
What people are saying, IMHO, is that bankers are no Einstein, no Hawkins, no Madame Curie; they are no more brilliant, no more talented than the rest of us.
All they have done is devise a means of convincing politicians to reduce regulations and then ran a massive bubble (and had the brass neck to hedge their bets against the very bubble they were creating).
Where they are rather dumb, is to not realise that the public have found them out; but then maybe they are just so cuaght up with gambling, they can't let go when the game is up and are trying to gamble one last time.
I'm sure many of the lower-tier gamblers have been just as badly conned, but since they have such a personal stake in the game, it is just so much harder and painful for them to face what is being done to them and by them.
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200. At 1:48pm on 24 Jan 2010, rbs_temp wrote:
"Many people could, of course, do the job with the right training, but the same can be said for almost job or profession you care to mention. Bankers are no more nor less replaceable than anyone."
Sadly, from what they expect to be paid relative to their equally-able peers in many other professions, many 'top' bankers would appear to think otherwise.
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#201. copperDolomite wrote:
"What people are saying, IMHO, is that bankers are no Einstein, no Hawkins, no Madame Curie; they are no more brilliant, no more talented than the rest of us."
I don't think any banker has ever suggested that they are as brilliant as Einstein, Hawkins or Curie. They simply happen to have chosen a career that has the potential to be very lucrative indeed.
I am not arguing for a moment that the banks that were bailed out by the taxpayer are right to pay huge bonuses - I feel, as do many others, I'm sure, that the money should be returned to the shareholders without whom the bank would not have survived - but some of the nonsense that is written here about those in the financial industry needs to be corrected.
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Barry @196 is an ace guy and he's off to negotiate the sale of Cadbury for a billion dollars for which he'll take his 2 %. Your friendly estate agent will take a photo of your house, advertise the details and take 2 % of what you sell it for.
A world class surgeon will save your life and he'll be paid £ 2,000 for his day of work. A world call engineer will re-design some petrochemical equipment, reducing greenhouse gas emissions and saving millions of pounds per year and he'll receive £ 1,000 for his day of effort.
Why do we accept that people involved in some financial transfer are entitled to a huge share for doing little very difficult or very useful?
And why do people in those sectors respond with stupid remarks along the lines, "Suck it up, you're just jealous. I've got a degree from Cambridge."?
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Me thinks thats we are all missing the point here why ? Obama wants his health reform in place but big business including banks are hellbent on not allowing this to happen yes I know we are meant to be in a democracy but get real. So heres the deal Obama "give me my health reforms or I will break the banks up" Big business "OK we are not happy about this but you leave us alone and although we dont like it we will let you health bill go through"
One horse traded for another deal done
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204. At 3:47pm on 24 Jan 2010, WolfiePeters
And why do people in those sectors respond with stupid remarks along the lines, "Suck it up, you're just jealous. I've got a degree from Cambridge."?
I reckon these people are just trolls - would you hire a billion dollar deal make who used language like that?
Would you hire someone for a position who pouted?
You'd think they could give a better explanation of what went wrong and what steps they are taking to ensure this never happens again. And answer the question WOTW asks almost daily on this blog.
I'm sure the ones who come here and pout are the IT network people, the marketing folk, the HR staff... Not the gamblers - they're too busy gambling or buying expensive toys...
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Banks are enabling mechanisms.
They take the money of savers and investors and for a fee, usually in the form of interest, they loan it to appropriate individuals and companies to enable them to generate growth and wealth usually by the buying and selling of goods and/or services.
During this process banks make a profit for themselves from the fee/interest charged less the tax paid to government and less the salaries and bonuses paid to staff.
This, however, is all based on the premise that the borrowers repay their loans plus the agreed interest in the agreed loan period.
Though banks have made provision to reward bankers for selling the banks' services by awarding bonuses, there does not appear to be any complementary process to deal with matters when the loans become toxic.
What steps do banks take to cover the repayment of toxic debts or do they just absorb the loss and pass it on to all their customers?
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Well this may be a bit simplistic, but having watched "Empire of the Seas" and hearing the references to the formation of the Bank Of Engalnd, followed by some fairly heavy reading of W Paterson et al it seems to me that the BOE, at the very least, facilitated the creation of actual wealth i.e. the British Empire and it almost certainly wouldn't have happened without it.
Those of a dogmatic nature might argue the finer points regarding winners, losers and labour value but in modern parlance the "outcome" was the same - Britain became wealthy.
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Ah, another day, another lengthy blog from the usual suspects; chitchat about Communist idealism and FRB.
Why is there this incessant dwelling on "how do banks generate wealth"? It seems it's because various people think they have somehow spotted an achilles heel that nobody else has noticed...? Banks are part of an entire system which generates wealth. Whether they directly produce a piece of equipment or gather apples is irrelevant. How does a teacher create wealth? A doctor? A lawyer? You may not believe that a services industry contributes to society in any way; I will beg to differ and am happy to provide examples.
As for FRB, rather than just spouting the evils of it, would anybody care to suggest what fraction they would like to see banks hold? 100% (ie, you can lend no more than you have on deposit)? In which case, what happens when a depositor calls back some of their cash? Is your bank now obliged to call in a loan to match? People take out loans for investment, from which they hope to make a return. They do not want the loan to be called in at any time, simply because some guy took 10 pounds from an ATM on Friday night.
I suspect that the argument, as ever, boils down to "I don't know, but I don't like it the way it is, because I blame it for the financial crisis".
I've said it before, but I'll say it again. There are all sorts of bankers, but it suits the angry mob to mix them all up together. In particular, please stop confusing investment banking, retail banking, prop trading, commercial banking and all the rest. If you don't know what they are, look them up. Just stop lumping them all together and pronouncing the entire industry worthless because you can't be bothered to inform yourself.
At the heart of this financial crisis were mortgage-backed securities. They were financial instruments backed, ultimately, by assets which turned out not to have a value commensurate with the price of the securities. For every mortgage-backed security that brought down a bank, there was a householder who had signed on a dotted line. We were all speculators in the property bubble, and to argue otherwise is simply denial of the facts. Why we think that we, the taxpayer, should not be picking up the tab when it was we, the taxpayer, who wanted to make a fast buck on overpriced housing seems to be just a method of passing the buck.
Of course, I'm not going to go so far as to say there wasn't unscrupulous lending. Of course there was. I'm not going to say that banks shouldn't have better managed their risk. They should. But it was risk that was taken by us, and passed to the banks.
It doesn't take a genius to see how the property crisis should have been managed. As prices rose and rose, it should have become obvious that this was an inflationary cycle and the price of borrowing should have risen to match. But, of course, house prices were excluded from the inflationary targets set to the MPC when determining interest rates. There were reasons for this, but unfortunately the way in which it was handled blunted one of our most powerful tools for controlling the economy.
The financial system should function with a government/central bank setting economic policy with the best interests of the economy at heart, the banks operating to deliver financial services to that economy and measuring their risks on the basis of informed decision on how the economy is to be handled, and a regulatory framework in place to ensure that the banks do not take irresponsible risks, either deliberately or through unnoticed correlations in various different sectors of the industry.
It is clear that there were failures at every part of this financial system, but to my mind by far the greatest was the complete abdication of responsibility for the long term health of the UK and world economies taken by governments of the time, eager for the cheap plaudits that come with seemingly endless growth and prosperity funded by cheap credit. In the UK, this was overseen by our now-Prime Minister for 10 years, and I really don't know why the likes of WOTW or copperDolomite aren't beating down the gates of #10 and pointing their anger in its deserved direction.
Maybe it's just easier to hang about on forums and rant about bankers instead....
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#206. copperDolomite wrote:
"I reckon these people are just trolls - would you hire a billion dollar deal make who used language like that?"
Probably not, but Barry didn't use language like that. Nor did he claim to be a genius. These are words that you and WolfiePeters have placed in his mouth (and then criticised him for as if he had said them).
What he said was, "I'm no genius, but I have two degrees, did quite well at university and after 10 years in the wretched business continue to find banking very demanding."
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#208. StephenBlencowe wrote:
"...it seems to me that the BOE, at the very least, facilitated the creation of actual wealth i.e. the British Empire and it almost certainly wouldn't have happened without it."
And, on a smaller scale, the banking industry has facilitated the creation of a great deal of personal wealth by means of providing loans for the purchase of homes and the starting-up of small businesses.
I don't recall anyone criticising the banks when house prices and the paper wealth of individuals were rising. Yes, there were many observations that the boom was probably unsustainable, but no-one was pointing the finger at the banks.
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#10
"A very disappointing end to 500,000 years of human development"
Mmmm it seems that small pockets did not benefit from development at all...don't be too bitter you have another 500,000 years ahead of you!
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I noticed an interesting article on Bloomberg about all this. It is entitled "Darling Says Obama Plan May Hurt G-20 Consensus".
http://www.bloomberg.com/news/regions/uk.html
It is a summary of a Sunday Times interview. Not much support for the Obama plan displayed. My take on this is that there is not much appetite for deconstructing financial services groups in the UK along Obama's lines. As Darling says in the article, and RP has alluded to above, different countries have different traditions when it comes to the organisational structures of financial businesses that have developed over time. Groups can migrate fairly easily if they feel they really must.
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LePlonk, #209.
Yours is probably the most rational post I have ever read on Peston's blog.
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To rbs_temp
@210 you are being a little hard on CopperDolomite and me. Neither of us accused Barry of using any words or took the jocular tone with which he closed his comment so seriously. In a situation where we might expect the finance and banking sector to show some professionalism and responsibility, we both pointed to the unfortunate tendency to defend that sector by accusing others of jealousy. Certainly, my intention here and in other comments has been to demonstrate that there are a lot of activities that are as vital as banking, require even greater skill and intellect and are often performed under much more difficult or unpleasant circumstances. In spite of that, individuals in those activities are by no means as well rewarded. This apparently arises because credit or cash transfers are not so directly involved. Moreover, few industries or sectors have received such enormous government support.
I'm sure that we all agree with your point @211 and LePlonk's @209, that the banks play an important role in our society and in wealth creation, but, contrary to what many, including our government seem to believe, they cannot and do not carry the UK forwards by themselves. Your word ‘facilitate’ is perfectly correct. That’s what they do or should do. But, there are many other industries and parts of our society that vital to our future and desperately in need of government finance if we in the UK are to look forward to a bright future.
On house prices, I believe a lot of us have been very worried about the growing bubble for a long time. If there was little comment on the BBC blogs, it would have been due to the BBC not opening the topic. It should be clear that many of us are still very worried about the high cost of UK housing. Expensive housing is a dubious wealth.
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Einstein dies and goes to heaven only to be informed that his room is not yet ready. "I hope you will not mind waiting in a dormitory. We are very sorry, but it's the best we can do and you will have to share the room with others" he is told by the doorman.
Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants. "See, Here is your first room mate. He has an IQ of 180!"
"That's wonderful!" says Albert. "We can discuss mathematics!"
"And here is your second room mate. His IQ is 150!"
"That's wonderful!" says Albert. "We can discuss physics!"
"And here is your third room mate. His IQ is 100!"
"That's wonderful! We can discuss the latest plays at the theater!"
Just then another man moves out to capture Albert's hand and shake it. "I'm your last room mate and I'm sorry, but my IQ is only 80."
Albert smiles back at him and says, "So, What do you think Obama's bank reforms really mean?"
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212. At 7:19pm on 24 Jan 2010, darksurfer wrote:
> Mmmm it seems that small pockets did not benefit from
> development at all...
You must mean the bankers. But we are making the changes
now to improve thier lives and integrate them into the world
of civilised people. They'll thanks us for it (eventually).
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209. At 5:27pm on 24 Jan 2010, LePlonk wrote:
> Why is there this incessant dwelling on "how do banks generate wealth"?
The banks no more "generate wealth" than a tap generates water! And who
would be so stupid to think otherwise? Of yes, bankers are that dumb.
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#215. WolfiePeters wrote:
"To rbs_temp
you are being a little hard on CopperDolomite and me. Neither of us accused Barry of using any words or took the jocular tone with which he closed his comment so seriously."
Really?
You paraphrased Barry's rational post in the following offensive manner:
"why do people in those sectors respond with stupid remarks along the lines, "Suck it up, you're just jealous. I've got a degree from Cambridge."?"
And Wolfie then picked this up and ran with it as if those were Barry's actual words:
"I reckon these people are just trolls - would you hire a billion dollar deal make who used language like that?"
The lack of an edit function on this forum means that the evidence remains for all to see.
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The really bad news (today Sunday) is that the White House wants Ben Bernanke to be reaffirmed - this pal of Mervyn King was responsible for keeping interest rates far too low for far too long that caused the bubble to grow to scarcely believable proportions before the crash of 2008. He is obviously unable to do the right thing even if he actually knows what the right thing is, just like Mervyn King.
If the USA reappoints this self acknowledged failure they will be doing the wrong thing. If he is reappointed the bubble economics will just grow like topsy as they did in the last decade and we will see inevitable further economic destruction.
Both Mervyn King and Ben Bernanke went to Harvard where they were taught that although the correct economic action would be to take a particular course of action (i.e. put up interest rates) because to quote Mervyn King the country would not have understood they needn't bother - this is precisely why these two regualtors failed and failed capitalism in such a profound and devastating way - they simple did not follow the rules for stability - both knew the rules and knew the risk they were running yet neither did their duty. And neither has the integrity to resign it seems, although after the fact both admit that they got it wrong. If a surgeon had so damaged a patient he would be struck off - so should both of these men.
Capitalism cannot hope to rebuild itself if it does not revert to properly managing the economy by the known and understood set of rules. These men knew the rules, but did not carry them out. We need people who do what the rules say they should do.
If there is too much money chasing too few goods you have to remove the excess money, by putting up interest rates as this is the only tool that you(we) have. In plain English, house price inflation is the worst possible kind of inflation. Both of these men knew this, and although their political masters would have hated it, they should have done what they knew that the should do and because they did not do it, this directly caused the bubble to grow which inevitably as night follows day lead to the crash. Now that have the gall to hang onto office!
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I was exaggerating a bit before to provoke a reaction.
In any event, if you read the variou inane posts I have submitted, none of what I have said detracts from the notion that we are overpaid and of course there are plenty of more important jobs requiring far greater skill. I think the industry should shrink and there are better places for these resources to be employed.
However, the fact remains that all of this (mostly incoherent) ranting towards bankers, treating us as a single homogenous group all supposedly "gambling" with other people's money whilst simultaneously abdicating responsibility for the current economic situation is just depressing and pitiful.
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209. At 5:27pm on 24 Jan 2010, LePlonk wrote:
Ah, another day, another lengthy blog from the usual suspects; chitchat about Communist idealism and FRB.
As for FRB, rather than just spouting the evils of it, would anybody care to suggest what fraction they would like to see banks hold? 100% (ie, you can lend no more than you have on deposit)? In which case, what happens when a depositor calls back some of their cash? Is your bank now obliged to call in a loan to match? People take out loans for investment, from which they hope to make a return. They do not want the loan to be called in at any time, simply because some guy took 10 pounds from an ATM on Friday night.
How about 50% ? and
Why not just make up your own absurd extreme example and then assign to it to people you are trying to criticise?
You obviously don't think there will be problem when FRB gets up to full pace and starts to work on the £200 billion QE. Why not just say so ?
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@222
You will know that in cases where the reserve requirement was 0%, the lack of regulation encouraged unsound practices which led us to the mess that we are in. Even a small requirement of around 3% would have helped. It is a complicated area, and one suspects that the regulators either didn't know what they were doing, or more likely were following political instructions.
FRB is integrally important to our system; but the credit explosion must be brought under control to avoid collapse. I don't see any signs of that, and it is high time that we got a grip on our self-serving government.
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# 216. At 8:41pm on 24 Jan 2010, nautonier wrote:
> Just then another man moves out to capture Albert's hand and shake
> it. "I'm your last room mate and I'm sorry, but my IQ is only 80."
> Albert smiles back at him and says, "So, What do you think Obama's
> bank reforms really mean?"
But where are the ones with IQs of 60? Are they in the separate waiting
room next door, labelled "Bankers and the socially useless"?
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# 221. At 02:04am on 25 Jan 2010, Barry wrote:
> all of this (mostly incoherent) ranting towards bankers, treating us as a
> single homogenous group all supposedly "gambling" with other people's money
> whilst simultaneously abdicating responsibility for the current economic
> situation is just depressing and pitiful.
The damage they've done is finally sinking in, fellows. Keep up the
pressure, and they'll all get it in the end. After all, we've got the
Pres on our side!
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225:
Central to this debate is what bankers do.
Mr Jacques Cartier from post 225 notes that the damage is sinking in. What is sinking in is the "depressing and pitiful" nature of the debate on this website; a surplus of opinion over knowledge.
I don't suppose many of those ranting here have had an offer from an investment bank or are in a position to apply?
Each year tens of thousands of people would apply to work in an individual investment bank from across top universities globally. Perhaps a 100 get offers and start. Each year a smaller and smaller number get promoted, others leave or resign to do other things; gradually distilled down to 1 out of those 100 by the time you get to the partner level.
What's interesting is that when we talk to students they see through the current hysteria and still want to join. We recently hired someone with top grades from a well known university and speaking 5 languages (far cleverer than me). That's right Jacques, we've all got low IQs.
Perhaps we should let bloggers run the firm?
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# 225:
> We recently hired someone with top grades from a well known
> university and speaking 5 languages (far cleverer than me). That's
> right Jacques, we've all got low IQs.
I know – they have to be _really_ stupid to loose £850bn, don't they? They have
to be hand-picked! On the other hand, I've got a Doctors of Physics on the left, another one on the right, and an MSc (computer Science) opposite me. I've got post-grad qualifications, I'm fluent in English and German, and I compute satellite orbits, molecule interactions and I run a data centre for the "big bang machine" at CERN.
So yeah, bankers do look a bit stupid, from where I'm sitting. They try to do “sums” don't they?
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227 - well put... listening to some here, arithmetics is the new field of advance in Mordern sciences...
I know many university students... and never hear any of them having any interest what so ever in banking as a carrier choice... not many students see 'sickening pays' as being a major factor when considering a carrier - they usually still believe in a better workd....
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Funny how Darling doesnt want to do the same as Obama and fight with banks
It is probably because he (the government) is long on banks?
A conflict of interest perhaps?
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# 229. At 12:38pm on 25 Jan 2010, sausage wrote:
> Funny how Darling doesnt want to do the same as Obama and fight with banks
We can't do with mavericks when we are all beating up the same bullies. If Myners and Darling don't get with the programme, we'll put the "Special Relationship" around thier necks, and hang them thier own rope.
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227, Jacques Cartier
You've unintentionally brought up an important and direct link between the proprietary trading theme covered in Robert Peston's article above and quantitative PhDs.
One commonly held view is that banks failed so catastrophically because they were overly reliant on internal risk models that in retrospect didn't correctly model the much greater propensity for supposedly "extreme" events to occur.
Who built those models? Quantitative PhDs... Hang on a sec, didn't banks hire PhDs in Physics at the trading departments, those who were being paid millions to structure the credit derivatives that lost so much money? Maybe we could do with less PhDs, less advanced modeling and good old fashioned, low-IQ people doing sums like me.
Quantitative skills, or "getting the numbers right" (for the low IQs like me), is critical in banking.
I think there may possibly have been an incorrect number, as you've referenced 225 (your own post) and should perhaps have been 226?
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An over long post to anyone who thinks some of us are too hard on those in banking and finance.
So you find me offensive to Barry. I have to say, though I obviously don’t agree with him about everything, from his comments, I find him likeable, intelligent, in possession of a sense of humour and certainly more wise of the world than I was at thirty.
Neither do I have such a low opinion of all aspects of the performance of our banks. My impression is that, on average over the last thirty years, the UK retail banks that I know, Lloyds, HSBC/Midland and Barclays, have treated private customers rather better than their competitors based in other parts of Europe. Of course, the gap has closed considerably over the last ten years and many comments on these pages have listed less desirable qualities.
Is it the expression ‘suck it up’ that you don’t like? Perhaps, I’ve worked too long with Americans. But they, like us, have learnt to ‘accept their hardships and get on with their lives.’ Isn’t that what you’ve been telling the rest of us to do, when we ask banking and finance to accept their responsibilities and to behave with restraint?
Now let me mention some history; you might consider it just nostalgia. But I’m close enough to nominal retirement age to take the liberty. When I was a child in the Midlands, at night you could hear in the distance the rumble and thump of rolling mills and forges. If you looked at the night sky, there was a glow from furnaces. Yes, we had an iron and steel industry. Did you know, up to well into the twentieth century, most of the cumulative production of iron and steel was in an area of a few miles in England? In the 1950s, the biggest car manufacturer outside of the US was British. We had a shipbuilding industry. How many ships were launched just on the Clyde? Now we don’t have the capacity to build a big ship in a UK yard! We have to build bits or, more sensibly, have it done in France! You might claim that they were old industries, but we also, for many years, had generated more electricity from nuclear power stations than any the rest of the world. Now, we have to buy the technology from France.
Tell me how it is the German, French and Italian governments and financial systems managed to modernise, nurture and grow their manufacturing, while ours disappeared. Certainly, manufacturers in those countries had bad times. The stories of BMW, VW and Fiat are known well enough. For years, Renault didn’t have any good times. Did their governments and banks keep these businesses alive just for nostalgia and sentiment? If so, they did well. Meanwhile, we lost so many great names and left desolation in their place. It’s bad for anyone to see their company turn to dust around them and I feel personally for those people, including those in banks. It’s so much worse for the less well educated. Workmen, it’s a word from the past these days in the UK, like crinoline. It’s not easy for workmen to re-train and do something else, especially when there isn’t anything else. And imagine a fifty something year old car worker in the 1970s asking a bank to help him start a furniture restoring business. You know what those who lost their jobs had to do?
I am privileged, I was fortunate that I didn’t suffer. Why? Because I had the inestimable advantage of having a self-educated father convinced of the benefits of good education and being born in the early 1950s. At the Grammar school, I found the most fantastic teachers, people who’d studied at our great universities thanks to winning scholarships and exhibitions. A miserable, offensive cynic like me had a maths teacher who’d studied at Cambridge in the 1930s, rubbed shoulders with the likes of Dirac and Hardy, and, after the war, become a teacher. And, before he retired, people like me were taught by people like him and there were many of them in physics, history, chemistry, modern languages... Ten years later, thanks to spending based on short-term thinking, they were almost all gone. Thanks to them, and a sensible exam system, I had privilege to study at one of those great universities. David Cameron wants recover that situation with teachers. But, today, only the most dedicated would stand in front of a class at the local comprehensive rather than enter finance, even on the same salary. My point here is that a good education is a wonderful gift and advantage; it is not any right of superiority. It gives us the chance to find our own small niche of genius, and I like to think everyone has some great talent if they can find it, and enjoy making a living out of it. It also gives us a lot of opportunities in the hard times that others don’t have. Change fields. Work abroad: how many European projects with little or no British sponsorship, loaded with British engineers?
When I left university, I found most of UK industry in a state of slow death. For any of it to survive, and it’s still true today, it has to be very well run, have some sort niche market, or be the best in the world by a good deal. Just best in the world is not enough. Do you remember Rolls-Royce in those days? They were, and still are, the cream of the world’s engineers. They got buried in the cash hole of the RB211 project (cash holes are inherent at the beginning of any big engineering projects) and found no banks or government to help them out. They were humiliated, taken into state ownership. Why did they even survive, not because they were so good? I’d suggest, it would have been so embarrassing for the Conservative government to have so many aeroplanes grounded for lack of spares, especially the RAF, that they would have been out of power for the rest of the century. What did Rolls-Royce do? They lived with the problem, tightened their belts, got their veteran engineers out of retirement and got on with it! And RB211 - it was a success and ran on until replaced by the Trent. Rolls-Royce and their shareholders still benefit.
What was growing in those days? Oil and gas in the North Sea was, though, through incompetent government, we missed out on so much. In fact, the incompetence helped to wreck the rest of our industry. The North Sea should have been a great legacy. The Norwegians and the Dutch built an engineering industry around it. Yes, some of our consultant engineers grew, but considering the potential we had in the UK, what we have achieved is pathetic.
All these failures cannot be just down to bad management or obstructive trade unions and I’m not placing the main responsibility on banking and finance either, though all of these have played their part. Undoubtedly, the rot comes from the top and that means government. Short-term thinking and an inability to see beyond the cash hole of a project started there and permeated down through banks and the rest of our society.
So now we are in 2010 and what do we have left. Well, there’s Tony Blair’s post-industrial economy, based supposedly on services and knowledge. The fact is that services are there to serve. The ones that serve customers outside the UK are eventually, not today or tomorrow, but eventually, going to close or move closer to their customers. And knowledge, well that’s what I export from the UK. And it’s difficult. If you export motor cars, they get old and the customers need new ones. The importing country may build its own car plant, but that takes time and they’ll be different cars from yours. But knowledge, you export once or may be three times and then the customer has the knowledge for good. If you want to stay in business, you have to keep making new knowledge and that is hard. And even if we succeed, if all the British PhDs from Cambridge are sitting by computers generating stuff, the whole lot will struggle to support our essential, non-producing industry, from Pizza delivery boys to bus drivers.
And we are back to Cambridge University, Rutherford, Dirac, Francis Crick, Frank Whittle and so many others. It’s a wonderful institution, more Nobel Laureates than France. Sadly, more of the recent ones are people who passed through. More research students than ever are non-British, which is not surprising, given that the UK academic pay structure is close to that of BA stewards. Now, our government is cutting money to universities and cutting its research budget, because of the economic crisis. The last, little hope we had is getting closer to going down the plug hole.
The point of all this is not to live in the past but learn a little from it: banking and finance have benefited while the rest is allowed to perish. Do you think the government saved RBS or any other bank, because they think they are useful? I suggest, they stepped in because it was the only practicable way of saving depositors. Even that was not for a sense of moral obligation to the public, but the sure knowledge that a sudden separation of depositors from their cash would have wiped out the Labour Party for ever. Those in banking and finance, consider yourselves fortunate. Consider yourselves in debt to a public, many of whom are far poorer than you and have learnt very well how to ‘suffer their hardships and make the best of their lives with dignity and restraint.’
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227:
One of the reasons I could never work as a trader is apparently you need to be 100% accurate and extremely quick with numbers. Even small mistakes, such as incorrectly quoting a simple number, could have a catastrophic impact.
Anyway, maybe one's better off doing the bread and butter, low IQ M&A work: I guess there will be fewer traders now, given what appears to be the proposal coming from President Obama.
I hope you're utilizing a greater degree of numerical and logical refinement for those satellite orbits than you do for your blogs :)
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232. WolfiePeters.
That is a very nuanced and meaningful post. I concur with many of the sentiments.
My context:
I am a banker and I have chosen to effect commentaries on these websites for the next few days to see the impact; taking a devil's advocate position. It probably will make no difference, no one here seems to be interested in questioning their own opinions or acknowledging their dearth of knowledge.
Now, I don't claim to be particularly intelligent, but I have had the advantage of working across a large number of countries (developed and developing), studied at a good university with some very thoughtful tutors and done various jobs before ten years of banking.
What I am seeing in this debate is a lot of bitterness, anger and resentment being applied to an entire industry, many of whom have zero connection with the current malaise. Of course, some subset of bankers were down right dishonest in their practices. However, whether they deserve most or just some of the blame I don't know, but I'm not seeing anyone recognizing that if ordinary consumers in the West (since this hasn't happened to anything like the same degree in Asia) had been a bit less greedy we might not be where we are. Perhaps it's much easier to abdicate responsibility and rant and rave at bankers than admit that.
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It's hard to escape the feeling that when the investment bankers start to squeal about Obama's plans, those of us on the outside can start to believe that he's really found the target and is hitting them where it's going to hurt most..unlike the way they reacted to the lovely Mr. Darling's ideas (a new tax on bonuses? No problem, old chap...).
In the meanwhile, something for Sir Fred - why don't you sign up with a publicly quoted company? Then, bearing in mind that things go down as well as up, we could all enjoy watching the impact on its share price, as well as its reputation...
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Bazzer Wise up
The bitterness, anger and resentment is being applied to the whole industry. You are right but instead of asking why, you assume that it is stupid people assigning blame to the innocent.
If retail banking and casino banking are tied up in the same entity what do you expect ?
You have decided who you think is at fault. Are we just supposed to accept your opinion. You're a banker. Come on !
When businesses make the kinds of profit your companies make it's because you have a monopoly or cartel going. We don't like it and as we have no choice but to place our savings with you and get a loan for our house from you it makes us angry and we are getting angrier by the minute.
And well done for going to university!
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Barry @ 234
Responses on these blogs range from ignorance to the downright abusive and the motivation is often unclear. Just don't take it too seriously. Often, the worst responses arrive if you write about something that you actually know a great deal about: be sure then there'll be someone ready to tell you that you're a total moron. And some of the interchange makes me laugh so much, I almost fall off my chair.
If it isn't already clear, I work as a consultant engineer, mainly to oil and gas. As far as many of the fuel consuming public are concerned, that makes me responsible for the destruction of the planet from the Niger Delta to the Ozone layer. In fact, I've done more, individually, to reduce greenhouse gases than the vast majority of the population.
It's more productive to be gentle and subtle in responses and search out the good points from the more intelligent people who disagree with you, then, sometimes, you can make some progress. A bit of spectacular provocation can add to the fun, though. At least, you can have a few entertaining coffee breaks in your working day.
Happy Banking
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@234 Barry
"I'm not seeing anyone recognizing that if ordinary consumers in the West (since this hasn't happened to anything like the same degree in Asia) had been a bit less greedy we might not be where we are."
Exactly how has consumer greed contributed to the crisis? Surely it is the responsibility of the banker to evaluate risk and lend accordingly? Are you suggesting that credit has been too easy? If so, why?
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Bankers are more to blame than consumers for the credit bubble. Morgan
Stanley's boss 'fessed up to drinking their own brew. The banks
believed their own hype, buying their own duff assets, the loans
to the world's greedy consumers they made only in order to sell to
greedy investors.
The banks prey on human desires, like all the most successful
businesses. Until someone comes up with a better idea, like Buddhism,
but without the painful process of enlightenment, it's probably going
to be like that.
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