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Making banks safe

Robert Peston | 12:05 UK time, Tuesday, 28 April 2009

Let's talk about banks' capital ratios, or the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments).

Stay awake. This stuff matters to you.

For those who don't know, banks' capital is a buffer against the losses they always face on lending and investing.

It's supposed to be the guarantee to depositors like you and me that we wouldn't be damaged when banks' loans go bad or when banks lose money on trading in securities: the hurt would instead be felt by shareholders and other providers of assorted forms of risk capital.

Now one of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources - which is mainly their fault but also that of numpty regulators, who allowed banks to drive a coach, horses and an entire wagon train through international rules that were supposed to ensure they kept adequate amounts of capital.

A few banks - such as Royal Bank of Scotland, Switzerland's UBS, Merrill Lynch and Citigroup of the US - took leave of their senses with their manic lending (by the way, the FT's Gillian Tett gives a particularly hair-raising account of their descent into madness in Fools' Gold, her new book).

The way most banks stretched their capital resources in their lending sprees both pumped up a dangerous bubble in asset prices and meant that when the bubble burst they didn't have enough capital to cover the losses.

So taxpayers, all over the world, had to step into the breach.

We taxpayers have pumped hundreds of billions of dollars of new capital into banks - we've nationalised or semi-nationalised loads of them - because the alternative of allowing the banks to fail was too scary for governments to contemplate (there was no desire to see the mobs of anxious depositors which formed outside Northern Rock's branches in September 2007 turn into a rampage outside most other banks).

But to state the bloomin' obvious, this global banking rescue is not something we'd want to repeat in a hurry.

It's quite important therefore that measures are taken to minimise the likelihood that banks will again systematically extend far too much credit relative to their capital resources.

However, closing this particular stable door is by no means simple, for two main reasons:

1) banks are global businesses, so new rules will have to be agreed by governments and regulators all over the world (never easy);
2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system).

For me, one of the big questions (about which there has been almost no public debate) is whether we should endeavour to make safe the global financial system that developed over the past few years - characterised by massive flows of capital across borders and the packaging of debt into securities for sale to investors - or whether we should give that up as a bad lot and regulate ourselves into a simpler but possibly poorer world, in which credit extended in any particular country is more closely matched by savings in that country.

The efforts of most governments, including our own, appear to be to sanitize the globalised status quo. It's obvious in our case why that's happening: as a nation, we don't save enough to meet households' or businesses' demands for credit (so we have to import credit from abroad).

But our government is doing its best to preserve the structures of financial globalisation, without explicitly making the case for doing so.

By contrast, it's possible to see in the words and deeds of the governor of the Bank of England that he believes some important elements of financial globalisation need to be rolled back (the Bank of England has, for example, been much more cautious about helping to rekindle securitisation - the conversion of debt into tradable securities - than Downing Street would like).

Here's the danger: we'll muddle through and devise yet another sub-optimal regulatory system.

Some of the second order issues were aired yesterday by Adair Turner, chairman of the Financial Services Authority (although he raised one very important question, which is whether financial innovation will always engender instability, and whether it's now clear that the costs of that instability outweigh the benefits of innovation).

Strikingly Turner said he was "open-minded to a [proposal]...that large systemically important 'too-big-to-fail' banks should have to maintain higher capital ratios than applied on average".

This is a nod to an idea that the chancellor is planning to float in a couple of weeks in a white paper on reforming regulation of the banking system (and the US authorities are moving in the same direction).

For what it's worth, there are two reasons why it might make sense to force our biggest and most complex banks to hold more capital than their smaller, simpler peers: if big super-banks have the privilege of knowing that we as taxpayers would always bail them out in a crisis, surely they've got to put in place treble protection against the risk that they'd call on us for such help; also the costs of holding the extra capital might encourage them to slim down and simplify their operations.

That said, such a regime could achieve the precise opposite of what would be intended.

The public imposition of a higher capital requirement on, for example, Barclays than on smaller, simpler banks would be a public declaration that Barclays would never in any circumstances be allowed to collapse.

And, paradoxically, that could give an unfair competitive advantage to Barclays - because safety-conscious depositors might well choose to give Barclays a disproportionate amount of wonga in the belief that there are no circumstances in which that wonga could be lost.

Which is partly why some, like the Liberal Democrats, are in favour of the forced break-up of the likes of Barclays and Royal Bank of Scotland into so-called narrow banks, so that these sorts of competitive distortions are minimised and so that banks don't abuse ordinary depositors' cash by gambling it in the supposed casinos of wholesale markets.

As I've recently noted, the Tories have also come out in favour of dismantling the big banking conglomerates - and Mervyn King, the governor, has said it's an idea he would like explored properly.

Even so, Lord Turner isn't in favour of the prohibition of Barclays-style universal banks, and nor are the chancellor and prime minister. They believe that delineating wholesale banking and retail banking in a clean way is easier said than done.

Certainly what's been striking over the past 20 months is that disaster has not been confined to one kind of bank: there have been egregious losses and humiliation for universal banks, such as Citi, UBS and RBS, as well as for narrower, more specialised banks, including Lehman, Bear Stearns, Washington Mutual and Northern Rock.

Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system wasn't a bank at all: it was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay.


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  • Comment number 1.

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

  • Comment number 2.

    The only safe place is in the mountains.

  • Comment number 3.

    What about making tax payers safe Robert?

  • Comment number 4.

    I would contend that we are all just realising that this is not so much a Great Depression as a Great Con. And we are all in on it.

    We failed to hold our representatives to account. How many of us have trundled into the voting booth to cross a box because of party and not because of person? Our representatives have failed to hold opposition or government to account. How many MPs have voted not on principle but because the party have ordered them to do so? Our governments mismeasure economic indicators and ignore institutional bias for transient gain. How many of our governments put honesty before opportunity? Gain before truth? The ministries, the Bank of England, the FSA have overlooked the reality to concentrate on perceived wisdoms and ideology. How many times have the relevant authorities done other than carry out government policy rather than independently regulate their remits? And this goes on and on and on and on and on.

    It is for the same reasons the RBS board didn't rein in Fred Goodwin, the shareholders didn't rein in the board, the FSA didn't rein in the company, the government didn't rein in the FSA, parliament didn't rein in the Government, the people didn't rein in the parliament. We put fiction and an easy life before truth and hard work and this is the result; repeated millions of times over across the world.

    This is not a credit crunch nor a US subprime mortgage problem nor an economic downturn and certainly not a banking crisis. It is just in these areas where symptoms have showed.

    Fixing the economy is not the solution because the economy is not the problem. It is the philosophy behind our democratic processes that has lead to this, combined with specious policy and slack accountability. This must be fixed, but even now nobody dares mention the failure of all government in this catastrophe - government and opposition - and this is ultimately why this collapse is occurring. The markets are doing what electorates and the media have failed to do for decades: holding the governments of countries to account.

    The governments are very keen to bail out the banks because it makes it look like the banks' fault. But it really just shunts a symptom up the ladder. What is worse - RBS going bankrupt or the UK government going "bankrupt".

    Unless we start treating the root cause of this - governments wantonly mismanaging their economies and unless we, as a people, start holding governments to account and forcing them to be straight there will be no improvement and there will be no solution.

  • Comment number 5.

    "Let's talk about banks' capital ratios..."

    Do we have to?

  • Comment number 6.

    I'm pretty sure that in some parts of the world if any of these so called captains of banking / finance acted in a similar fashion as per the way a sizable portion have in the so called progressive west. I'm pretty sure we would have a coupla dozen show trials, to make examples out of the Banking / Financial wizards, not forgetting Nom Dom's and the likes, and throw in a coupla major tax exiles, just think of the pre election bounce M'ssr Brown and Co could achieve! The GOULAG's what needed!

  • Comment number 7.

    Your first post on reserve bankin, after nearly two years of bloggers asking you to dothis?

    And now you say we will be poorer, I see also that protectionism is alive and well. GB et al at the G20's statement was merely not to scare the horses in the stable wasn't it ;-)

    A return to the 70's for sure, oh and another OIL crisis!

  • Comment number 8.

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

  • Comment number 9.

    Surely a key aspect to this is that the recent economic philosophy permitted private institutions to inflate the money supply by creating structured debt products, and that the central bank's control of this by setting interest rates was grossly inadequate?

    In this case the central banks would need to take much stricter control of debt issuance, either by banning derivitive products entirely or by putting strict controls (licences?) on their creation. In other words, the central banks need to control the velocitiy of propagation of credit and debt much more closely than they have done since the big bang.

  • Comment number 10.

    I keep seeing and hearing the phrase 'future global economic growth', from economists,prime ministers, presidents, Robert, chancellors etc etc. Anybody who has done O Level Biology can tell you that unlimited growth is not possible whether it is economic or any other sort. So either this is virtual growth achieved by devaluing the currency or it has only been possible up to now because of virtually free energy. Can someone explain where the growth comes from if it is real?

  • Comment number 11.

    It was obvious for years that retail banks had seduced/bullied governments and regulators into relaxing capital adequacy requirements, in this Alice-in-Wonderland "world with no risk" that they invented.

    Surely some of the more sane media commentators *ahem* could have pointed out that - even if one misguidedly believed that risk had vastly diminished within the banking system - those banks that held vast amounts of the nation's wealth through customer deposits should have a cast iron obligation to safeguard that wealth against unforeseen disasters.

    I'm afraid that, once again, this is a classic case of the Emperor's new clothes. Journalists and opposition politicians who could and should have easily seen the potential for meltdown (and pointed it out) remained deafeningly silent, seduced as they were by the slick new paradigm being trumpeted by those oh-so-clever bankers with their corporate boxes at Lord's. Those academics who did question the new rationale were pretty much shouted down as being out of touch in their ivory towers.

    It's all very well blogging about how the rules must change now, but the point is that the rules should have been there before all of this. If the major commercial banks had been forced to retain proper capital provisions, the chances are that most or even all of our current problems would have been averted (or, at the very least, vastly diminished).

    We hear politicians and journalists parroting the party line that a) nobody could see this coming and b) we're learning from our mistakes. The truth is that plenty of rational risk-aware people could easily see this coming, but they did not hold the levers of power. And, as for learning from our mistakes, I thought that was what we were supposed to have done in 1929, 1987 and various other times....

  • Comment number 12.

    "the amount of capital banks are forced to hold as a proportion of their assets (or their loans and investments)."

    "Now one of the main reasons the global economy is in such a mess is that big banks systematically lent far too much relative to their capital resources"

    I am confused. Did the banks do something illegal? What does "forced" mean? Legally? And if they were forced to hold a specific proportion, how does that square with lending far too much relative to their resources?

  • Comment number 13.

    The alternative is for the larger banks to be part, perhaps majority, owned by the state with supervisory NED boards having small shareholder, TU, and consumer representatives among the members.

    This way the government could:-
    strongly influence lending/investment policies needing less external regulation,
    set fair and objective remuneration schemes for employeees,
    Ensure T&C's for individual/SME services in the public interest,
    generate an income for the state.

    Global financial system? Is there a credible business case now? GFS did not benefit the large majority of people in fact the fall out of its inherent instability has ruined the personal finances of thousands of ordinary citizens - good riddance to the innovators and high flyers of the finance world.

  • Comment number 14.


    Excellent post, nail, head & hammer!

  • Comment number 15.

    Well, it's been a long time coming, but at last we have an article that addresses the key issues.

    The alarming thing for me is that there has been no public debate of whether Globalisation is 'a good thing' or not. It is simply assumed to be so.

    Currently we have a system where we purchase goods from China, they save the money, which is then lent back to the west, which we then borrow, so that we can buy more goods from China, etc. etc. etc.

    This is crazy - it can never work long term. We just get an illusory sense of wealth, but it is all built on sand.

    We have to get back to a balanced economy, but with our politicians refusing to debate the issues what chance is there of that?

  • Comment number 16.

    VentilatorBlues - very interesting comments.

    A question though - how on earth can voters hold government to account over something as complicated as the global economy? Voters don't understand economics (or their own personal finances a lot of the time) and governments certainly don't either. Not even the boys and girls in the City understand!

  • Comment number 17.

    RP, I'm concerned at anything that makes the big banks stronger. To nit pick its not a case of not wanting to bail out the banks again in a hurry, we simply cannot, we have not made any inroad at all into the debt the recent bail outs have cause.

    To me if the goverment is determining key capital ratios, and the large banks are getting un unfair trading advantage then clearly they should have been nationalised.

    If small is beautiful, couldn't we have thought of this before mortaging the countries next 10 years at least.

    P.S. personally i don't think its right on a bbc's blog to give a web link to purchase another journalists book.

  • Comment number 18.

    Little boys and girls
    Come out and play
    The world is a stage
    The show goes on
    We all got riches
    We all got interests
    Do you want to sit around
    Watch your life going by
    When you can be anything you want to be
    When you can do anything you want to do
    Come on don't let it happen to you
    The show goes on without you

  • Comment number 19.

    Fully awake here recognising the world has changed.
    The age of global consumerism failed because it was unsustainable, being driven by greed and an unregulated crazy banking system.

    The industrial revolution ended the era, before the greedy period...
    The internet revolution starts this new one.

  • Comment number 20.

    Thank you for pointing out the fact that the American International Group was probably the main culprit in the
    down fall of our Economy in the UK. A very 'special relationship' we have with the sharks on the other side
    of the pond. Some of us with half a brain cell had begun to see the obvious. But it always helps to have it
    confirmed by an expert.

  • Comment number 21.

    A shame we have to reinvent the wheel at enourmous cost (to the taxpayer)

    When will we see legal action against those who peddled the overvalued assts. Northern Rock, for one, have simply walked away, with pensions and bonus's.

    If their customers had lied about the value of assets to obtain loans they would be doing time now ! WHEN is someone going to have their collar felt ! Ask the Question Robert next time you cosy up to the PM ?


  • Comment number 22.

    What about the re-instatement of the the US Glass-Steagall act, but on a global basis?

    This act was enabled to separate the risky investment banks from the everyday retail banks.

    This was the the main piece of legislation following on from the Great Depression period, that protected the entire US banking system... until it was scrapped earlier this deacade.

    Doh!...of course this can't be there would be no mechanism for privatising the profits and socialising the losses!

  • Comment number 23.

    "Stay awake. This stuff matters to you."

    Sorry, sir.
    It's just the hayfever getting to my eyes for a moment, sir.
    May I ask Smith Minor if I can borrow his pencil sharpener?

  • Comment number 24.

    The more I research the matter the more concerned I become over the continued influence of the 'Quants'. (These are the mathematical 'geniuses' that come up with the theories that underpin the measurement of risk. These are the guys who came out of the universities and elite business schools with PhDs in creating the credit crunch.)

    My main concern is that their (The Quants) influence continues and has not yet been expunged from the financial systems of the World. I believe that there is a very good argument that can be made that the false security that these fools gave the management of the banks - that there was little risk in what they were doing - is still being used to evaluate their (The Banks) present underlying relative 'strength'.

    It is all very well saying that the basic ratios of banking management should be strengthened but unless and until the flawed mathematical foundations of risk management is tackled at source there is no hope of the value of the banks being properly evaluated hence all of Robert's blog is thrown into question.

  • Comment number 25.

    #4 well said the question is why have BBC reporters NOT said that ?

    #6 A show trail would include Brown and Bliar too I think.

    Therefore we should bring back Glass and Steel with some extra bit'bobs
    and break up the banks too (20-30 banks would do nicely) , just like the Pubs.

    Then follow with the supermarkets, Farms and other area's too.

    Then take a look at the population issues as no one wants to discuss this either from an economic or "global Warming" "climate change" perspective ???????????????

    That is the real root of this "POPULATION" growing without any natural restraints. Countries should get back to a pre-1945 figure or even smaller

  • Comment number 26.

    Robert, this is the first decent article you have written for a long time, perhaps you need to take more holidays.

    I think its fair to say that the FSA can ponder on events and possibly come upwith an idea once a year that is both practical and useful. But giving air to its Chair who only has a knack of stating the obvious and clearly is having his strings pulled by the Government and mores the case No. 10 Downing Street, is nevver going to improve the situation for anybody

    Its a shame Vince Cable doesn't chuck in politics and replace the FSA Chair at least them we would see continuity of debate and clear answers that all stack up.

  • Comment number 27.

    I suppose that all this extra capital will be held in gilts.

    Thats convenient for the Government they have found someone to buy them.

    So Darling Gordon lends the banks money, they lend it back, and round and round it goes.

  • Comment number 28.

    If a higher proportion of British business and personal credit is to be funded by British savers, then this is not going to happen at the current ridiculous interest rates. Higher interest rates should not be an impediment to our emergence from recession, as the main problem for businesses who need to borrow is the availability of credit, not the price of credit. Business could also help itself by taking advantage of the devalued pound to go for exports. After all we all know it is not true that the UK is best placed to emerge from recession, it is just Brown/Darling spin. Therefore overseas markets for our goods and services should grow before domestic ones do. Domestically, personal credit expanded far to far during the boom (and it was a boom, pace Brown.) Wise UK residents will be repaying debt for some time to come.

    The Budget does, of course, give us hope that interest rates will indeed rise. The government's borrowing plans over the next two years are bound to lead to a rise in gilt yields, and the Bank of England could not allow the gulf between gilt yields and its own rate become too wide. (Well, it could indulge in mammoth QE by buying up large quantities of the new gilt issues, but Mervyn King seems to have no plans to go beyond his present targets for QE.)

    So, over the next twelve months I predict a gradual rise in Bank rate to about 4 per cent, and maybe some of us will join the Chinese in becoming savers.

  • Comment number 29.

    RP: "The efforts of most governments, including our own, appear to be to sanitize the globalised status quo."

    Robert - unless you have become an American overnight, the usual observation applies - you'll have more credibility if you get your own area of expertise right, spelling on this occasion, before stirring up feelings amongst others with your usual brand of mindless sensationalism.

    Again - nice to see you focussing on Barclays as usual, one of the few who have not been bailed out by the tax payer. You must have sold your holding at 57p or something.

  • Comment number 30.

    There is nothing fundamentally wrong with the banking system.

    What is wrong is that it is not properly regulated, and that bank executives have been failing in their duty to depositors.

    The failure in regulation was occasioned by the government, the treasury, the FSA, and the BoE. They are primarily responsible.

    The bankers were able to gamble with depositors money in all kinds of derivatives; they took advantage of lax regulation.

    Let us see all the people responsible held to account, let us see proper regulation, and let us see banks do what they are supposed to do.

  • Comment number 31.

    I've said it before (As have others) and I'll say it again:

    Adair Turner = Merrill Lynch Deputy Chair 2000-2006 (E.g. the Crazy lending years.)

    Is this the best person to be in charge of regulating, especially when it seems he's willing to protect the big boys so vigorously.

    I haven't heard in either your blog Robert or on the BBC's article about Lord Turners comments what he advises be the fractional reserve ratio changed from and to.

    Are we trying to avoid another 'rampage'? Everyone knows we're not going to get any truth out the stress tests in America, and I use the term stress with an extreme amount of irony. The same is going to be true here, breaking up the banks I'd almost be happy with, except of course they'd still be the connections of the central reserve system. Still it's better than letting them get away with fraudulent/irresponsible lending (depending on your POV) nay even paying for it out our children's pockets.

    Looking forward to the regulars on here riping this apart.

  • Comment number 32.

    Why was my first post moderated out?

    All I did was mention the following...

    fractional reserve banking
    capital ratios
    lack of truth
    exposure of the above

    ...all in one sentence.

    What could possibly be wrong with that?

  • Comment number 33.

    #21, Lord Mandelson was guilty of lying over his income to pbtain a mortgage from the Britannia Building Society - it is one of the reasons why he had to resign from the government previously. If he wasnt sent to jail then for, arguably, fraud, why should anyone else......

  • Comment number 34.

    U13794890 wrote:

    'Its a shame Vince Cable doesn't chuck in politics and replace the FSA Chair at least them we would see continuity of debate and clear answers that all stack up.'


  • Comment number 35.

    Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.

  • Comment number 36.

    Surely the whole central banking system was set up precisely so they can get away with doing this. Mr Bush to his great credit didn't play ball with Merrill Lynch so the rest all threw their toys out of the pram. Austrian Business Cycle theory also states clearly that when interest rates are low reckless lending follows. Do our legislators and senior bankers not read their own manuals? It is all too hard to believe in the form it has been presented to us. At least now we know who actually runs the planet, the bankers do.

  • Comment number 37.

    Oh and Robert,

    Thank you for your hard work over the last few months, I know a lot of the posters don't agree with everything you say, and I suspect a lot of things you want to say are er, 'moderated'. Still you're better than most 'reporters'.

    Also, is there any chance you could go back to China and find out why they are buying all those precious/rare earth metals?


    To the moderators, grand job.

    Far better than the 2 hours + lag times from before. Thanks for doing something about it.

  • Comment number 38.

    "securitisation - the conversion of debt into tradable securities"

    This reminds me of the sort of thing a dodgy butcher gets up to when he's making sausages - into the mixing bowl goes cheek meat, eyeball, ear gristle, great gobs of fatty flesh, steak that's on the turn, cheap filler, a little sprinkling of sage to disguise the flavour and some food dye to make it all look less green.
    Mince it and mix it until you can't recognise any of the individual ingredients, then extrude it into edible plastic skins.

  • Comment number 39.

    a decent effort from Mr Peston for a change

    clearly a longer-term view was and is needed, with much stricter regulation - having recklessly dismantled what regulatory systems we had built up since the 30s at the end of the 90s we have to pretty much start over; so we need Glass-Steagall tpe rules for the 21st-century but they have to be globalised regulations; this is going to be very very difficult to do but we must try

    we also need to 'think out of the box' to use that awful term; along with most people, I did believe that globalisation was, on balance, a good thing, though I had my environmental concerns; but I am no longer convinced; it's like discovering oil fields in Africa - sounds great in theory (at least in the narrow terms of improving GDP and standard of living) but when you look at it in practice it turns out that most LDCs have experienced a FALL in quality of life and INCREASE in corruption, arms imports etc etc as a result of oil/mineral revenues

    ahh but perhaps the same can be said about aid, you might say; and you might have a point

    I now suspect that globalisation is in fact A BAD THING if allowed to rip; bad for the environment, bad for people, bad for society

    For every example of a country that has done well from globalisation I bet that we can name two that have suffered, but of course a lot of this is subjective; from the World Bank or IMF point of view all growth is good, full stop

    Which makes me wonder about the very fundamentals of our growth mantra; why is it constantly said that Japan 'suffered a lost decade' in the 90s due to deflation and no-growth? at the end of that so-called lost decade, were not the Japanese wealthy, highly educated and enjoying the longest, healthiest life expectancy of pretty much any nationality?

    We should be looking at promoting systems of Fair Trade NOT Free Trade, and I'm not just talking about your purchase of cafetierre coffee at Waitrose once a week!

    A globalised, monetised approach is not optimal - as now proven yet again by the despicable and failed system of Carbon Trading

    As for AIG, which is often cited as the heart of darkness in the US, might I remind you that their CDS operations were based in Curzon St, Mayfair.......... in what was seen by them as the least regulated financial centre and therefore the best place to be!

  • Comment number 40.

    35. At 1:35pm on 28 Apr 2009, Wee-Scamp wrote:
    Banks...... shisters most of them... I'd much prefer taxpayers money went into helping Donnington race circuit get ready for running the British Formula 1 Grand Prix in 2010.

    Ahem!... I think you may have mistakenly put an 's' instead of a 't' in the word 'shisters'

  • Comment number 41.

    We are where we are and in the current circumstances introducing such increased capital requirements would only make the global recession that much worse.

    If the world is ever to return to the level of prosperity that it once had, or thought it had, we may be limited to ensuring that future crisis is are handled in a more timely and organized manner. It would seem that we lurch from one banking crisis to another. It is possible that the system is inherently unstable, given the feedbacks between asset values, unemployment rates, economic activity and the banks willingness and ability to lend. There are so many reinforcing feedbacks in fact that it is impossible to list them all here.

    Stabilizing the system is not an objective in itself - fostering economic growth capable of meeting our own and the world's aspirations for a decent standard of living is the underlying objective. It may be that to achieve the latter objective governments will have to stand ready to intervene when necessary to save the banking systems.

    We live in an interdependent world on one element of our economy depends upon other elements and a problem in one area of the world or in one area of the economy creates problems in other areas of the economy. Breaking the bank's up into smaller units will not eliminate these interdependencies. It will simply create a whole series of smaller shaky financial institutions that are still subject to these interdependencies.

    "Regulation if necessary, but not necessarily regulation" Regulation may be one way of mitigating this problem, but maybe there are other approaches that could be more effective. Notably may be governments should negotiate a common set of approaches to be adapted in the face of financial crises. Perhaps, for example, governments need to guarantee all bank deposits. Perhaps there should be a world stabilization fund. Let's put all the options on the table and then choose the best one, rather than seizing on one that is currently popular and may or may not address the real issues and in fact may make the current circumstance worse. Perhaps we need to increase the size of our social safety nets, which act against the direction of economic growth, adding money into the economy when money is needed and reducing the amount of money injected when the economy does not need additional injections. Perhaps we need a set of infrastructure programs on the drawing boards, pre-engineered and preapproved, ready to go when private spending dries up. We could choose those projects so that they contribute to future economic growth and well-being.

  • Comment number 42.

    > regulate ourselves into a simpler but possibly poorer world,

    I hoped we'd crossed the border out of cloud-cuckoo land. When the "wild lending spree" model collapsed into a mountain of debt, did it make us richer? Nope - unless you are a "Sir Fred". The wild lending spree didn't work, so there is no other option than to regulate ourselves, is there?

  • Comment number 43.

    How about we do away with money altogether, if money is the root of the problem?

    You don't have to be rich to be happy. No one talks about happiness anymore, it's always the wonga.

  • Comment number 44.

    I am fed up with this circular debate, just nationalise the banks and keep them nationalised, most of them are exactly that in finacial terms now anyway but are allowed to keep the same analysts and managers (the same self styled geniuses who got us into this mess)to run them!!

    It is clear the banks are too pivotal and the nature of human beings too greedy to ever allow banks to fall out of the control of the people through democracy again.

    If they are part of the private sector the nature of their game is profits, therefore the nature of their game is to look for and exploit loopholes in the reulatory framework so they can make lots of short term cash for themselves, that 'innovative' behaviour will always be rewarded, great for science and technology...a disaster for the global system of finance. It is about time governments recognised the difference and acted accordingly. They will not of course because you can not put a cigarette paper between the major political parties and high finance interests.

    Strewth do the bloggers here have to point out everything sensible ourselves with no help from the media!!!!


  • Comment number 45.

    #10 Peter_t_clarke

    "Can someone explain where the growth comes from if it is real?"

    An interesting question, and one to which i have struggled on occasion to find answer. I think the answer goes something like this:

    I get paid £100 per week. I spend it on rent (£50), food (£30) and clothing (£20). I therefore have no spare cash for anything else. The clothing I buy costs £10 to make and the manufacturer makes £10 profit.

    The manufacturer figures out a way to make my clothes more cheaply, so they cost £5 to make, rather than £10. the clothing manufacturer (for the sake of argument) reduces his prices to £15.

    Now I have £5 to spend on something else, the seller of which makes profit which previously was not there, whilst the clothing manufacturer still makes £10 profit.

    Now I know this is a ludicrous oversimplification, but I think it is where "growth" in a real sense comes from. Hence why the industrial revolution and the advent of mass production led to real "growth" and a huge increase in living standards across the board.

  • Comment number 46.

    Great article Robert, there is no argument that the global growth explosion of the last 15 years or so has been bouyed along with what amounts to unlimited personal credit for both companies and individuals. The only way that can continue in the long run is if the taxpayer takes on more of the risk assosiated with some of the banks lending, replacing the mortgage backed securities market for example so that enough mortgage product can be put onto the market to enable house prices to rise in a reliable way forever, without us going through massive crashes in the future.

    So, do we want unlimited global economic growth underpinned by the taxpayers, or do we have to try and build a more sustainable economy for the long term at the cost of slower more managable economic expansion?

    Well I think that the politicians would like the former, but most of us would prefer the latter. I get the feeling that all this public bailout money is taken for granted by these people and now its in the bank, so to speak, they want to get away with as little regulation as possible.

    With more taxpayer guarentees the banks can get away with holding less capital and dish out more credit, but if the have to stand on their own two feet, like the rest of us, our economy will be stronger in the long term, because the alternative is for all of us to underwrite our own borrowing, and when the next downturn comes, just how would the economy cope with that?

  • Comment number 47.


    precisely why he may be the right man for the job!

  • Comment number 48.

    ive followed your analsis of the melt down and understood more or less all of it! I only have one question, who made money out of chaos?

  • Comment number 49.

    Take a day off - be a "Business Editor" in the fullest sense. It is evident from many responses to your blog that this is something other readers would welcome. If you happen to read this suggestion (which seems unlikely) then please report on something other than banking - unless of course you are a closet banker in which case maybe it's time to come out!

  • Comment number 50.

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

  • Comment number 51.


    Interesting comments, but it all relies on the idea of holding people accountable. realistically nobody does.

    Think about it. You are help accountable by your boss at work because it's normally just one person. Now imagine you have 60 million. You can ignore them all by saying you're doing what the others have asked you to do. I'd like ot see them check!

    It's the same with local govt, with pension funds, with the city. There is no true accountability.

    We could solve this though. Follow a lead from America. No Prime Minister is allowed to be in power for more than 2 terms (10 years). Theyc an change the leader, but that leader has to be elected. Can you really believe that we'd have Gormless Brown under those circumstances?

    Secondly, finance. Stop the current situation with pension funds. Your company picks a pension fund for you and that's that. How fair is that? What if you don't like hte risk profile? Tough. Perhaps a better option would be that the company pays into MY pension fund. I pick where it goes, and if my employer goes bust that's fine because it's MY pension fund. If I have multiple employers I don't leave orphan funds dotted round the economic landscape, they're all in one place.

    Admitedly most people don't understand finance. So perhaps they better start to learn!

    But imagine a situation where YOU manage your pension fund. If you think things are reckless you can moev your money around to avoid exposure. If enough people move their money then the markets quickly realise what's acceptable. Perhaps as the holder of shares you also get to vote your shares yourself. I bet that would make the boards behave differently. And if the building societies get their act right they could provide pension bonds (simiilar to fixed rate ISA's) to entice fudns from the markets to the safety of fixed returns. It would certainly shake the market up, and in doing so it might bring about a greater sense of accountability.

    As to Govt. there's no hope of accountability there.

  • Comment number 52.

    48. At 2:10pm on 28 Apr 2009, llubnrut wrote:
    ive followed your analsis of the melt down and understood more or less all of it! I only have one question, who made money out of chaos?

    Doh!...the banksters of course!... aided by their long snouted political muppet friends.

    Seriously though...most of it has just disappeared into (not so pure) thin air i.e. from whence it came.

    Read post 9. Cassandretta21 for a beautifully concise explanation.

  • Comment number 53.

    43. At 1:55pm on 28 Apr 2009, lukeo1980 wrote:
    How about we do away with money altogether, if money is the root of the problem?

    You don't have to be rich to be happy. No one talks about happiness anymore, it's always the wonga.

    Couldn't agree more, my Nan and Granddad had bugger all and they were the happiest people alive!

    I have been reading this blog for the last yr now and it makes me laugh how everyone is always passing the buck onto everyone else for the mess we are in at the moment. I wonder just how many "bank blaming" people on here have mortgages at 5x their salary, maxed out credit cards and the latest gadgets/ designer things that are not exactly nessessary for their everyday existance.

    Maybe everyone should go back to being skint, working hard for a living and enjoying the simple things in life!!

  • Comment number 54.

    Capital reserve ratios were allowed to be relaxed as a result of the September 11th attacks, to help prevent a global downturn. The IT / Technology sector was already heading for a bust. It was done with the express knowledge and indeed permission of the central bank and government of the US (subsequently UK also). A lot of people were writing about it in 2003. Plenty of academic articles and press cuttings to back it up. Try

    [Unsuitable/Broken URL removed by Moderator]

    The conclusion from this 2003 paper is a gem

    "A key idea that emerges from this study is that disruptions to interbank payment arrangements, whether due to technological impediments or credit quality concerns, have been central to several banking crises and are likely to recur"

    In this instance the US government pumped $100 billion into their economy at the drop of a hat and the banks were allowed to reduce their liquidity ratios. The result was that the bombers didn't make a dent on economic performance. The full consequences of what became a permanent relaxation of policy were not thought through at the time.

    It's easy to paint the bankers as always being the bad guys. They were presented with new rules (albeit it very lax ones) to play with. Some politicians, too clever by far, thought there was a cure for boom and bust. We weren't booming and bust had been somehow avoided. The rest as they say is history.....

    Of course splitting retail banking from the world of international funny and moving away from universal banking should be an imperative, now that the initial crisis is over. The thing that I find the strangest is that the most important thing emanating from the PM recently has been a bizarre video on YouTube discussing his and other MPs expenses. What ever happened to doing what ever it takes to solve the economic problems?

    The current muddled set up of half nationalised (or not) banking behemoths needed to be sorted out.

  • Comment number 55.

    Robert, I did stay awake through your's a shame that Brown wasn't awake for all those years.
    "Swine flu"....considering the greed of our bankers, is that the new name for "yuppie flu"?

  • Comment number 56.

    "2) if we clumsily implement hastily and crudely devised requirements that all banks have to hold vast amounts of additional capital relative to their assets, there could be a permanent and significant reduction in the availability of credit - which could significantly reduce the potential for future global economic growth (we could all end up poorer from our natural desire to have a safer banking system)."

    But Robert ! As you point out, the only reason we had that 'extra credit' was that banks were not 'buying in' to 'Basle 2' and things like 'Sarbanes-Oxley', so we will never be as 'rich' as we were then, because it was all an illusion built on inverted pyramid of unstable, and wholly unsustainable, debt !!!

    The idea that the solution to this problem lies in finding some way to get back to the over-stretched, over-leveraged money supply that existed then is just proof that this hard lesson has taught us nothing.

    We ARE going to have to get used to living on less and living within our means, financially AND environmentally.

    The party is over, the hangover is kicking in, and those ashtrays, stains on the carpet, cans of half-drunk beer and all that washing up ain't going to clear itself up. Maybe someone has a 'Yellow Pages' ?...

  • Comment number 57.

    Warming to my theme above..(#24)

    Robert wrote,

    "Oh, and lest we forget, the single biggest stimulator of the excesses of the banking system wasn't a bank at all: it was AIG, whose crazy insurance of financial products gave banks the lethal confidence to lend to those who could never repay."

    But who justified these risk models - the Quants - the PhDs from the major business schools, funded and paid for by the banks/insurance companies themselves to provide false risk analysis models for the complex finance instruments.

    These guys are still assisting the banks to smash and grab their way though the Taxpayers' bail-out money!

    So I add them to my list of people that need to go for a recovery to happen - Heads of the institutions (BoE, FSA, Treasury) and all academic institutions that taught and trained these fake mathematical risk management systems - will there be anybody left! If only the risk management evaluation systems had been more sensible then the instruments of financial destruction would not have been created!

    We should be drawing up a list of academics (headed by the no regulation bunch Milton Friedman et all), but now also to include all speakers and attendees at any of the Quants conferences! They all need re-education!

  • Comment number 58.

    Adair Turner is doing a good job at the FSA (apart from wrongly defending its past mistakes when he wasn't there).

    So keep Adair Turner at the FSA but make Vince Cable Chancellor.

  • Comment number 59.

    Firstly I don't agree with your statement that if a big bank had been allowed to fail, depositors would be lined up outside. The Govt could have guaranteed all savers deposits, it didn't need to save the bank, The reason it didn't let them go to the wall is to do with the fact that the chinese etc would be unlikely to lend any money in future if their deposits weren't safe, plus the americans would have been mighty miffed if the UK hadn't coughed up for its CDOs and CDSs etc. The UK housing bubble was a blind to cover for this.

    As far as banks too big to fail - BREAK THEM UP into smaller units that CAN be allowed to fail. There would then be no need for the huge increase in capital ratios would there?

  • Comment number 60.

    #57 John_from_Hendon

    Following on from your 'Quant theory'...

    I believe it was Warren Buffet that coined the phrase 'Beware of Geeks baring mathematical models'

  • Comment number 61.

    #59 BlairWitch - surely the costs of guaranteeing all savers' deposits would have been more expensive than saving the banks themselves?? Sounds like bailing the banks out was the lesser of two evils to me.

    And if you break the banks up into smaller units, how do you stop them growing into big ones again? most of them were small to begin with.

  • Comment number 62.

    I'm an IT contractor (there I said it !) so wont get much sympathy there as fair enough I've earned some good money in the past...spent most of it though. Had my chat with the team leader last week, very inspiring ! Seems that the bank that we've bailed out with taxpayers money see myself and my buddies as too expensive, balance that against a 99.9% system availability and I'd say that was worth a penny or two ! Anyway he's been given CV's from India and despite him being unable to find even the slightest skill set in the relevant technologies he's been told to hire them. I'm currently working with a bunch that has a wealth of experience from a host of major organisations and we've pretty much seen and done it all. As I said earlier we've earned some good money too but the point is we've also been taxed on that money, we've spent that money down the shops, pubs, restaurants, on holiday, on cars, insurance policies, every week at sainsbury, on conservatories and home improvements, down the bookies but don't tell the other half ! and don't even start me on the kids christmas presents. Where will the boys and girls from Bangalore be spending there hard earnt cash ? here ? I think not... where do these organisations expect me to put my dole money when it eventually arrives ? into their bank ? will my colleagues and I be buying their products without an income, a deflated house price and a pension worth squat.

    There I've had my rant an rave and probably not much to do with the blog but I feel better for it.

  • Comment number 63.

    I rather fear that the Authorities are going to make a miss the point, complexed up hash of this - the two root cause of the crisis were lax monetary policy from the Fed and the absurd bonus culture in the financial services industry - the Fed has (I would hope) learnt its lesson, and so all we need is a Regulatory curb on bonuses - we can leave all else as is, apart from maybe increasing the minimum capital ratio by a small amount

  • Comment number 64.

    Government has abdicated its crucial role of controlling the money supply to private individuals. Capital ratios exist to give some pretence that there is a cap to the amount of money that banks create out of thin air.

    Until we make gold and silver the only forms of money we will always be at the mercy of fractional reserve lending.

  • Comment number 65.

    Maybe it is time for world leaders to stand back and radically review the way the markets work rather than tinker with them. Since the credit crunch first hit, the flurry of global reactive behaviour has been a necessary rollercoaster ride but also a distraction from addressing the root causes. And it is not just governments that can benefit from stepping back right now. It is easy to lose sight of what is truly important at home and work when you are caught up in a whirlwind of deadlines. The Survivors Guide To The Credit Crunch helps readers to create some slow time, to review priorities and to do some clear thinking. See the articles at

  • Comment number 66.

    The financial system, religion, global drugs policies, war on terror - IT'S ALL COMPLETE MADNESS.

    Still never mind eh.

  • Comment number 67.

    #33 and that is why we have so many problems, why was maddy not sent to jail or even had a court case ?. That shows how rotten the system has become

    #35 perhaps you would like taxpayers money helping me buy a farm.

    if not explain the difference please.

    smack of pet political policys and more corruption

  • Comment number 68.

    Good explanation, Robert.

    (Although you do have a bit of competition in being able to explain things simply..... in Post 9).

    But the gist of it is that this Labour government is still so desperately in love with the City after all these years, that it is absolutely happy to continue to allow the tens of millions of ordinary people in the UK to be ripped off left, right and centre by the money machine (..... that would be the unreasonable bank charges, the huge spreads between money deposited and money lent, the ridiculously large fund management fees for all investments/pensions/savings, the quite extraordinary levels of opacity in pensions systems, and so on and so forth.....), if this will attract rich people to London to build a so-called "world class" financial centre.

    "World class" my.....

    It is really is a Faustian bargain Gordon Brown and the rest of the government have signed up to, and for the good of the majority of people in the UK we need to get rid of it.

    (Just to add some clear evidence here - one can mention yet again that report by the RSA that you quoted yourself on pensions - which found that pension fund performance for the UK population depended solely on the level of charges imposed on those funds and were influenced not a jot by anything the managers of those funds did, meaning that this would seem to one of those clear occasions when we would do infinitely better by paying peanuts and getting the job done by monkeys).

    But thank goodness some people have got the right idea....

    "Which is partly why some, like the Liberal Democrats, are in favour of the forced break-up of the likes of Barclays and Royal Bank of Scotland into so-called narrow banks, so that these sorts of competitive distortions are minimised and so that banks don't abuse ordinary depositors' cash by gambling it in the supposed casinos of wholesale markets".

    I think Vince Cable should take to the streets......

    A lot of us would come along.

  • Comment number 69.

    By the way - we don't need banks of course. Nothing a few racks of servers in a secure basement can't deal with... counting credit... easy.

  • Comment number 70.

    Sounds brave Robert, but heard it all before. The blog is and always has been, can you get it into legislation? Meanwhile, are investors coming forward to buy out major banks' troubled assets? If not why not. Have we understood the so-called inconsistencies in the asset-backed securities buy out programme. Are we still focussed on neutralizing the cause of the crunch while being focussed at the same time on meeting the challenges of fiscal stimulus. Are there enough engineers for infrastructure spending to the tune of billions? I'm sure not a lot of attention has gone into oversight, it's a grand thing to talk about - you try putting it into practice, and I'm not alone in thinking that a lot of tax-dollar-pound spending will end up wasted.

  • Comment number 71.

    #62 totally agree in the same boat well almost, tried to replace with Indian's but they cannot gut the mustard , BUT are cheap.

    6 years ago in a pub in cornwall, chatting up 2 girls well talking to them, they were working at a care home But they were from turkey and bulgaria, and so was most of the others too except the top management.

    know there was then high unemplyement in cornwall at the time, why were local not doing these jobs ?

    You see most people have also swollowed the spin that the mass imigration in to UK was a good thing. Well it was not. put pressure on housing driving the price up.

    around the road 12 people share won house all working from abraod . Thats council tax/12 , then there is me and my family council tax/1

    and that does not include gas electric etc etc

    get the picture ,

    I have to earn more just to remain on equall terms.

    PS and Council tax has rocket too.

    we are not dividing 100/12 its 1400+/12

  • Comment number 72.

    International and Global Trade by definition goes worldwide and steps outside of national boundaries and of course National Tax Laws

    Companies buy products and servcies cfrom Country One then sell to an Offshore Company. The Offshore company takes a gross margin and sells on to Country Three ( Country 2 being a small Offshore but sovereign island)

    Banks and International Corporations have worked in this manner on all major projects and selling of subcontracted goods since the Second World War. What legal steps are we considring if these companies go via a third Party. They sell legally to the Offshore Company who simply sells on with a low tax take. Few IntraGovernmental Tax Rules have been either negotiated or agreed with the Offshore Industry.

    Ergo: The Worldwide Trade continues thus so does Global Banking. There is no alternative Financial System to set up as all trade still can be legitimate and legal via Offshore or Low Tax sovereign Countries. That is the nature of Trade, Finance and Capitalism. If each Country nationalises its own banks and China, Japan and Germany sell off their surpluses, global growth is dead in the water and we either stand still or have a Global Depression.

  • Comment number 73.

    I would do the opposite of what Turner and Brown want, its obvious from your book, that they are in the pay of the people who want this so that will be their opinion, and besides they cant sell any more peerages

  • Comment number 74.

    anything is better than what we have to suffer due mainly to this government's inept regulations and poor leadership in the banking sector.
    may be if those incharge of banks were to face criminal charges for negligence if they cause such problems again, we may get honest hard working bankers.

  • Comment number 75.


    Your logic is incorrect.

    I would give it 6 years before banks found a way around this new regime, another 6 after that and they will be bringing in the next financial weapon of mass destruction - by which time most of the lessons of today will have been forgotten and the regulator (which is supposed to be international by this stage) will miss it completely.

    "took leave of their senses with their manic lending " - WRONG, they did not take leave of their senses - they simply did what the market expected of them, and in fact what Capitlaism ENCOURAGED them to do.

    Here's some previous "triumphs of regulation".

    "No more 4 times lending" - Calls after the 88 crash and sadly gone by 2000

    "No more short selling without an uptick" - Introduced in 1928 to stop the Great crash, and removed by George Bush and the SEC in 2004.

    "No more shorting without holding the underlying (naked short selling)" - Introduced in 2005, promptly ignored by many market participants including many of the big players leading up to the current crisis.

    ...and some disasters which regulation was SUPPOSED to stop.

    - The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government

    - The loss of $7.2 Billion by Société Générale in January 2008

    - The loss of US$6.4 billion in the failed fund Amaranth Advisors

    - The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998

    - The bankruptcy of Orange County, CA in 1994

    - The loss of Barings bank due to Nick Leeson's actions

    ...the list is endless and still being added to daily - most of which I cannot comment on as they are ongoing...

    You may be happy putting your financial future in the hands of the regulators - but I have no reason to believe that 'it will be different this time'. This is akin to keep giving your junkie son handouts of cash in the hope that 'this time he won't go and get wasted with it' - the BIG difference being that you're related to your son and have a bond, we are NOT related to the financial regulator and have no such bond.

    The feeling of 'I told you so' in 10 years time will be no comfort for me - THIS MUST STOP NOW - DO NOT PUT YOUR FAITH IN REGULATORS THAT HAVE FAILED TIME AND TIME AGAIN.

    The virus is Capitalism - the cure is not more Capitalism.

    Maybe if the 'brains' of this world stopped putting so much effort into fixing this clearly defunct system and started thinking about a better and more radical way forward then it would provide some comfort.

    The alternative is social chaos and upheaval following the collapse of Capitalism which will do so much damage. Capitalism will not see out this century - and just like Global warming, it's not good enough for mankind to deal with the consequences when they happen, we MUST tackle the consequences before they start.

    We're all wasting our time if we think any slight adjustment to the current system will resolve anything in the long term.

  • Comment number 76.

    How appropriate we now have swine flu following all the troughing.

  • Comment number 77.

    64. At 3:07pm on 28 Apr 2009, truths33k3r wrote:
    Until we make gold and silver the only forms of money we will always be at the mercy of fractional reserve lending.

    JFK was the last big cheese to try and re-establish the US dollar to the gold standard...and we all know what happened to him shortly afterwards!

    Now you've got me started on the Warren Commission Report!...

    I visited Dallas a few years ago and went to the infamous Book Depository building...except it's been converted to a museum now, it's called the Assissination Museum. I think it was named that after JFK was shot. can go and see the window from where the actual shot was supposed to have been fired from, although it's now screened off with thick plate glass. It's been set up so realistically with the empty crates etc etc...and Oswald ain't there either! The only reason the window has been encased by glass is so that no fat American tourists can look out of the window...cos every single one of 'em would shout out 'No freakin way', 'No freakin way could he have shot JFK....he could've only have done that by hanging from the ledge by his toes, upsidedown and shooting the rifle over his shoulder'!

    Acknowledgemnts to the late great US comedian - Bill Hicks RIP

  • Comment number 78.


    "I keep seeing and hearing the phrase 'future global economic growth', from economists,prime ministers, presidents, Robert, chancellors etc etc. Anybody who has done O Level Biology can tell you that unlimited growth is not possible whether it is economic or any other sort. So either this is virtual growth achieved by devaluing the currency or it has only been possible up to now because of virtually free energy. Can someone explain where the growth comes from if it is real?"

    Peter - I could not agree more, the thirst for growth conveniently covers up the contradictions in the capitalist system. As long as the world grows the periods of over-production that Capitalism causes can be hidden (we give birth to more and more consumers) - however even the rapid pace of world population cannot keep up with the ridiculous demand for Economic growth.

    Hence - recession.

    It would appear that you have not read this in a book or heard it on the TV / Radio - but have worked it out for yourself with a bit of logic.

    Sadly you are a rare breed in that most people are happier to simply take Government hear say and media gossip as their sources of information and not apply the logic of their minds to conclude where the problem lies.

    Not once did any of the Bonus bandits ask themselves "WHERE DID THE PROFIT COME FROM" - for if they had they would have realised, like you, that the whole system is completely unsustainable.

    My hat is off to you sir.

  • Comment number 79.

    "...taxpayers have pumped hundreds of billions of dollars of new capital into banks ... because the alternative of allowing the banks to fail was too scary ..."

    Whoah, hold on there! Is the alternative of letting insolvent banks fail really so scary? Talk of long queues of depositors is just a straw man, there would be no problem in the government guarenteeing retail deposits. But bankruptcy, or at least a special resolution regime, would have allowed (would still allow) all those contracts for huge bonuses and obscene pension payments to be renegotiated, and would force bondholders to share the pain of shareholders. As it is, the goverment has saddled future taxpayers with unimaginably huge debts, just to make good bank creditors at 100p in the pound.

    This policy of making good on the banksters debts in full (contrast this with the treatment of LDV, or Woolworths, or Visteon) only seems fair if you are a member of the banking elite, or one of their apologists in government or the media. It makes no sense for the good of the country as a whole.

    Hand on heart, Robert: Don't you identify your own interest with the bankers'?

  • Comment number 80.

    All sounds good but come on - making money is all like the klondike !! When all this regulation is over and a few more years down the line the next younger generation of finance people who want to be 'fat cats' will think of an easy quick way to make money and the herd will follow. This generation of bankers will never own up to those coming through that they were failures and will not understand the next money making scheme anyway.
    What goes around comes around sooner or later. The youung will be exploring for the new gold soon.

  • Comment number 81.

    24 John_from_hendon

    Quants are ppossibly the next financial weapons of mass destruction.

    Hugely complicated formulas mean regulators and senior staff look away and don't check under the hood as they should do.

    Quant funds have been on the increase for some time - before the crunch came. Watch their rise carefully as you might be able to predict the next big one.

    Confuse and confound the opposition, carry on pillaging as before.

    The motto of the City.

  • Comment number 82.

    So nothing has really changed. The banks are still in a mess propped up by taxpayers who will have to work 'til they drop to pay for it.

    The government's in a mess because they're totally out of their depth and still hoping globalisation will save the day.

    Europe's in a mess because they are so bureacratic they are unable to modernise efficiently to cope with recession.

    The taxpayers have no idea what they are in for for not only are they stuck with billions of debt they also guarantee all the bad loans and mortgages of the banks. How much this will cost can only be determined as the recession progresses.

    No real plans to attack this recession are in sight.

    To summarise we have to sit it out until it reaches its final conclusion to see what is left. The optimists can only sing the same tune for so long.

  • Comment number 83.

    Of course we need to go back to basics and redesign not reform. You say the old system would have left us poorer. Let me turn it round the other way. The wealth we thought we had these past few years, we never really had in the first place. We just spent the future. And we can't put things right by deceiving ourselves that we can go on spending it, because the more of the future we spend, the poorer we'll all find ourselves when we get there. We were never as rich as we thought we were. It was all a con. Now we have to pay it back, go back to the standard of living we really have achieved and build from there.

    The point you make about banks big and small and insurance companies too all being prone to the same mistakes is a fair one. But surely the sensible way to approach this is to recreate the old tortoise and hare, retail and investment banking division, revive a version of America's Glass Steagal Act. High street banks should simply be forbidden from certain investment activities. Yes they'll give a lower return. But they will offer safety. For those not content with that, let them chase higher returns with investment banks and their fancy products. But let them understand that, if those banks get into trouble they WILL be allowed to fail. That way banks will not be able to hold us taxpayers to ransom again.

    Oh and speaking of cons, has anyone else heard of this South African ponzi scheme that collapsed today leaving loads of British investors bankrupt? The man who ran it has been arrested. Apparently it involved loaning money to the Salvation Army short term at high rates of interest, only the Sally Army were never actually involved and the loans never really took place. A friend just found out he lost everything.

  • Comment number 84.

    This financial stuff is getting to complicated. We need to forget credit cards etc and manage our personal affairs more sensibly ( the tin on the mantelpiece for the gas money etc)
    I think its called getting back to basics.

    I was amazed to read that according to the Chancellors budget the Government will have total receipts of £496 billion and expenditure of £671 billion in the coming year.

    If I have an weekly income of £496 and plan to spend £671 each week (on the basis that something will turn-up in the future) my financial advisor would warn me that I was heading for big trouble and my wife would put me in a headlock until I came up with a more sensible plan.

    Who is advising the Chancellor ?

  • Comment number 85.

    "Here's the danger: we'll muddle through and devise yet another sub-optimal regulatory system."

    Bank supervision was taken away from the Bank of England shortly after Labour came to power in 1997. You have to remember that in the 5 years prior to this we'd had negative equity, house prices falling and sluggish economic growth. Taking banking supervision away from the B of E reflected Labour's belief that the B of E was mainly responsible for that situation. Maybe it was, but no doubt Eddie George would have argued he never had enough regulatory fire power to stop banks lending too much into housing and property development in the first place?

    Labour's replacement system was utterly hopeless, (proven by the current situation.) The FSA weren't even aware of an impending crisis, even though everyone else had been watching their own homes rocket in value. In some years by 30%, 40% even 50%! Yet no one "up there" either thought to ask, is this going to work out badly or even if it was sustainable?

    That's why your comment about whether our politicians are only capable of devising "....yet another sub-optimal regulatory system," is particularly appropriate. The Point being our politicians have a lot of "form" when it comes to implementing bodies and regulations that DON'T work.

    Adair Turner isn't sure about what is needed, perhaps because his remit from government means they are loathe to put something in place that drastically reduces economic growth, through the supply of less credit.

    But as a taxpayer I don't ever want to come to the aid of a bank again, period! That's simply because this time those who were responsible have NOT been made responsible for the crisis. Some, like Fred Goodwin, have lost their jobs I know, but still they walked away with massive pensions, millions in redundancy etc and a very very comfortable retirement. Whilst the ordinary taxpayer/ Joe public is left to pay for (and suffer) the mistakes made by these people. In other words "we are the ones being made responsible for this banking crisis!"

    By the time this happens again, and it will one day if the power and the greed (and useless regulation?) for ever greater profits is allowed to overwhelm the rational, I sincerely hope that Unlimited liability shares has well and truly replaced the Limited Liability of Bank PLC shares. So that next time if it really does happen the people at the top really do pay for their mistakes!

    I say if bank shares legally had to be of the UNlimited liability kind, the need for the regulation of credit growth would be minimal.

    Instead what bankers are looking for today is Higher Charges, (to cover their losses and restore their balance sheets,) i.e making their customers pay for their incompetence. Trouble is most customers are also just gets uglier and uglier.

  • Comment number 86.

    #71 ps

    if I choose to live like that to make myself more competitive then the
    CAFCASS and Family Courts would stop me seeing my children.

    So its not a level playing field

    More simple down to earth reasons for the mess we are in

  • Comment number 87.

    #30 - hodgey

    Best comment of the day
    "There is nothing fundamentally wrong with the banking system"

    ....errr except nearly every major religion condemns or frowns upon it (Islam, Christianity), it ensures that the ruling class retain their power over the working class and that it continues the effects of colonialism well beyond the last colonist was booted out (Third world debt)

    ....but apart from that it's fundamentally perfect.

  • Comment number 88.

    We don't need more regulation, just better regulation. Problem is who regulates the regulators?
    As the Government is so tied to the financial institutions they can no longer be deemed independant, especially as their motives are so similar, i.e. impressive short term results regardless of the long term prospects. So who can be independant AND have the expertese to understand the consequences of action taken AND have the clout to deal with any institution stepping out of line with the regulators guidelines?
    Any ideas anyone?

  • Comment number 89.

    So whereas some banks were previously only "too big to fail", the implication is that they migth just be "too global to regulate".

    Well then I think that leaves people very little alternative other than to do away with them in their current forms.

    Why can't we all go back to national level banking - nationally licenced and nationally regulated - and, if necessary, nationalised banks.

    (If Barclays, or whoever, wants to do business in USA or Japan, then they get autonomous siste companies licenced in those places and comply with the regulatory regimes in those countries).

    Surely, at a basic common sense level, it just has to be crazy to have banks, or other institutions, that are bigger than the structures and systems used to regulate them. Otherwise it would just be like giving them 'sick notes' to allow them off of having to play by any rule book.

  • Comment number 90.

    The only thing the governments need to do is make banks smaller, break them up, this crisis and the resulting ill feeling was caused because the world could not handle the pain of a Citibank or RBS going bust, they were too big. The balance sheet requirements kind of do this but I can't help but feel it will make a very conservative industry that ultimately will hurt the public (expensive debt and harsh asset price corrections).

    The economy can handle crazy banks that push the envelope on the lending front but they have to be small enough to fail and be a small proportion of the overall industry, then the market will govern them.

  • Comment number 91.

    Robert, I feel that I need a diagram that connects flows of money from source, through the system, and back again, starting with £1. Not having majored in economics but logically minded, these circular dependencies in finance are doing my head in. Is there such a thing? However complex surely it can be done. Quite literally, the whole picture.

  • Comment number 92.

    Ah #91, I see you have the same problem I, #45 kindly supplied an answer to my question about real growth, but I suspect that the manufacturer on reduced his costs by buying materials or finished goods from some new cheap source so the £5 the customer gainde was simply lost by the original costly supplier.

  • Comment number 93.

    Its a difficult balance isn't it. Access to global credit or a poorer Britain. Maybe we should be working towards more saving so that we can be more balanced globallenders and borrowers. I'm surprised at how quickly Gordon Brown has tried to restart securitisation - it just assumes it wasn't really the problem (which after all, he is convinced was in the US). Yes, we need a functioning housing market, but property is still vastly over valued against anything but city salaries.
    The response seems to be more about pleasing the voters than a viable long term solution. The same applies to corporte lending. He hasn't tackled the saving /borrowing ratio at all. If he wants more lending, he needs more saving and that means a decent after tax and inflation return on savings. We haven't seen that for years. The whole thing needs a serious re-think with a long term rebalancing. Which party will be prepared to discuss it.?

  • Comment number 94.

    45 GBHRich

    "The manufacturer figures out a way to make my clothes more cheaply, so they cost ?5 to make, rather than ?10. the clothing manufacturer (for the sake of argument) reduces his prices to ?15."

    ...and how does he manage to make clothes more cheaply?

    The cost of raw materials remains constant (in proportion to the sale price)

    Has the clothing manufacturer invested in new technology that reduces the cost? and if so, how long before his competitors have done the same and the saving is gone?

    .....or does he reduce the wages he pays to his workers, either by reducing their hours, numbers or by making them work longer and harder in the sweat shop.



    The Capitalist chases a diminishing profit, his only option to survive in the market is to diminish the real wages of the worker.

    This is common place at the moment, how many times will you hear jobless people proclaim "I will do anything - I just need a job" during this recession as it gets worse and worse. How many people have already taken pay cuts (I know I have), how many people have had their hours reduced?

    Fred Goodwin's pension remains intact - the workers who worked for him are either sacked, on short time or had their pay reduced. This is how Capitalism works, this is how it survives - humans are now simply commodities and can be bought and sold as the market dictates.

  • Comment number 95.

    The FSA likes to use the word "reasonable" when it states how financial advisers deal with clients. It must therefore be "reasonable" for the public to expect the regulator to do their job properly and "regulate".

    Sadly, the FSA failed abominably in what could "reasonably" be expected of them - result? Their failure was the near failure of our entire financial system.

    Yet, they still have their jobs!

    Every man, woman, and especially child, will not only be paying for the FSA's failure for many years to come, they will also be funding their pensions!

    Good question from previous commenter - who regulates the regulator? Who does - I'd like to know.

  • Comment number 96.

    #92 peter_t_clarke

    "lost by the original costly supplier."

    ...and how? Suppose the original supplier is a cotton supplier (for clothing) - the cotton industry is fairly manually intensive for a modern industry (people have to pick the cotton in the fields by hand) - and that's where the original supplier cost his costs. the bottom of every cost saving you will find a worker, getting paid less or getting sacked. There is no other way to increase profits. The Capitalists will try to tell you there is, but it's simply not true.

    Look around you - see the bankers working in the local newsagents. I met one just the other day who is one of those 'energy certificate bods' the Government set up for rental properties.

    Despite what you say about bankers - the man had a degree in Economics and he's doing £50 appointments to check that lagging and insulation is up to standard.

    A worthwhile job maybe - but not for his skills and knowledge. It's called the de-skilling of the workforce and it ensures that the workers are constantly kept under the jack boot of the Capitalist.

    Why should anyone bother with higher education if this is how the system treats you.

  • Comment number 97.

    The simple reality is that we just cannot afford another big bank to fail. The money is not there to bail it out so it will just have to crash and wipe out both depositors and creditors. Maybe this is what we should have done last year but we had all been properly brought up to think that the government is the final guarantor to the citizen.

    This actually is where the entire matter resides. What actually is the function and purpose of government?

    The UK model is that government is there to protect the citizen, to provide certain services that enhance that protection, and invest in the future development of the country. However, the UK has a management problem in that the citizen does not feel protected, the public services are highly variable in their performance and the future has been very misconceived.

    The reality is that traumatic change has taken place and the status quo has been found very wanting. We have to move on.

    Banks must become manageable not just by the bankers but also by those responsible for regulating them. This means their size must be reduced and the regulators must be effective: so long as the regulation is effective the regulations do not need to be harsh.

    There has to be a separation of functions so that my retail bank is not betting on the commodity market with my life savings. The target driven bonus culture must be outlawed as not only does it not work it carries within itself the seeds of catastrophe.

    I will admit to being a fiscal conservative. I do not believe in Big Government, nor Big Business. I feel the latter two have been out of control for a very long time and I blame them both for the mess in which they have placed this country. Individuals should be held responsible before the courts for the decisions they made.

    There were insufficient checks and balances in our society to prevent the bank crash from happening which suggests to me that all institutions need to be constrained in size and influence. They have to possess a moral duty not to endanger the rest of society or they cannot be allowed to continue. However, I haven't a clue as to how we are going to do this.

    What I do know is that simplicity, transparency and little or no dogma will get us a long way. These are practical issues which are of common concern and nobody should be excluded from the debate for whatever reason.

  • Comment number 98.

    UK Output drops by 1.9%

    You don't seem to have picked up on this Mr Preston?

  • Comment number 99.

    #92 and #94

    it is too simplistic to say that reducing costs is merely the result of cheaper labour. It can be, and usually is, the result of technological innovation. One major way of reducing cost was and is mass production: Henry Ford did it with the model T and sparked real growth.

    "Has the clothing manufacturer invested in new technology that reduces the cost? and if so, how long before his competitors have done the same and the saving is gone?"

    That completely misses the point - that his competitors do the same does not destroy the saving, it enshrines it. The consumer now gets the same saving whichever manufacturer he buys from - the saving is not gone at all.

    Say what you will about capitalism, but it is the only economic model ever to lift the majority out of poverty - just look at China in the last 10 years to see what can be achieved. There are of course major downsides to capitalism, such as imbalances between the haves and have nots and the difficulties in regulation, but until someone comes up with a workable alternative, it is by some distance the best model we've got.

  • Comment number 100.

    #84 and in the budget they were trying to get people with 10 year old cars to go and buy new one on tic, as most likely even with the £2K discount they still could not afford one on any sensible measure.

    Most normally they would trade up to a 6-8 year old car etc etc.

    They are borrowing money or raising taxes (I taking my money that I could do wit hto buy X,Y,Z) to give away to people to go and borrow beyond there own means.

    just gooled No 10 and it came back with a lunatic Assylem.


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