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What Obama's bank reforms really mean

Robert Peston | 09:52 UK time, Friday, 22 January 2010

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).

President ObamaBut 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.

Comments

Page 1 of 3

  • Comment number 1.

    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.

  • Comment number 2.

    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?

  • Comment number 3.

    "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????

  • Comment number 4.

    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.

  • Comment number 5.

    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??????????

  • Comment number 6.

    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.

  • Comment number 7.

    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.

  • Comment number 8.

    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.

  • Comment number 9.

    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

  • Comment number 10.

    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

  • Comment number 11.

    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

  • Comment number 12.

    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.

  • Comment number 13.

    Obama's got the right idea.

    How about restoring Glass steagall and the uptick rule ?

  • Comment number 14.

    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.

  • Comment number 15.

    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

  • Comment number 16.

    "11. At 11:15am on 22 Jan 2010, yam yzf wrote:
    How banks generate wealth:"

    This should be fun! Go get him WOTW!

  • Comment number 17.

    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).

  • Comment number 18.

    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.

  • Comment number 19.

    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.

  • Comment number 20.

    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.......

  • Comment number 21.

    "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.

  • Comment number 22.

    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.

  • Comment number 23.

    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/

  • Comment number 24.

    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.

  • Comment number 25.

    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

  • Comment number 26.

    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.

  • Comment number 27.

    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.

  • Comment number 28.

    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.

  • Comment number 29.

    #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.

  • Comment number 30.

    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'.

  • Comment number 31.

    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?

  • Comment number 32.

    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

  • Comment number 33.

    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!

  • Comment number 34.

    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.

  • Comment number 35.

    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.

  • Comment number 36.

    #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.

  • Comment number 37.

    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.

  • Comment number 38.

    27. At 12:04pm on 22 Jan 2010, diarmidwp

    Could not have put it better myself.

  • Comment number 39.

    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".

  • Comment number 40.

    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.

  • Comment number 41.

    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!

  • Comment number 42.

    Post 33, very amusing.

    Are these islands the source of the infamous "South Sea Bubble"?

  • Comment number 43.

    @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.

  • Comment number 44.

    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.

  • Comment number 45.

    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.

  • Comment number 46.

    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.

  • Comment number 47.

    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?

  • Comment number 48.

    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?

  • Comment number 49.

    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.

  • Comment number 50.

    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.

  • Comment number 51.

    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?

  • Comment number 52.

    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.

  • Comment number 53.

    "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...

  • Comment number 54.

    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.....

  • Comment number 55.

    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.

  • Comment number 56.

    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?

  • Comment number 57.

    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!

  • Comment number 58.

    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?

  • Comment number 59.

    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.

  • Comment number 60.

    # 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.

  • Comment number 61.

    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.


  • Comment number 62.

    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.

  • Comment number 63.

    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...

  • Comment number 64.

    ** 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.

  • Comment number 65.

    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.

  • Comment number 66.

    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).

  • Comment number 67.

    #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.

  • Comment number 68.

    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.

  • Comment number 69.

    57 Diarmidwp

    Original business Steel Stockholding. Moved into provision of " value added" services necessitating substantial inverstment in machinery.
    Without this business would have died

  • Comment number 70.

    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.

  • Comment number 71.

    #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.

  • Comment number 72.

    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"?

  • Comment number 73.

    # 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...

  • Comment number 74.

    Post 54. Touche.

    Most of the supposed exile countries for the bansk have issues that might prevent the average banker from moving there.

  • Comment number 75.

    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

  • Comment number 76.

    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.

  • Comment number 77.

    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.

  • Comment number 78.

  • Comment number 79.

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

  • Comment number 80.

    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.

  • Comment number 81.

    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.

  • Comment number 82.

    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.

  • Comment number 83.

    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 ?

  • Comment number 84.

    "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.

  • Comment number 85.

    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.

  • Comment number 86.

    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.

  • Comment number 87.

    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.

  • Comment number 88.

    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.

  • Comment number 89.

    #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?

  • Comment number 90.

    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?

  • Comment number 91.

    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.

  • Comment number 92.

    "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.

  • Comment number 93.

    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.

  • Comment number 94.

    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.

  • Comment number 95.

    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....

  • Comment number 96.

    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...

  • Comment number 97.

    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.


  • Comment number 98.

    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 :)

  • Comment number 99.

    ... 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... )

  • Comment number 100.

    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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