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A sombre warning

Stephanie Flanders | 20:20 UK time, Tuesday, 20 October 2009

Mervyn King thinks that the government's efforts to fix the financial system have not gone nearly far enough - and could even be founded on a delusion. That's the not-very-hidden message of his speech to Scottish business organisations in Edinburgh.

Mervyn KingIt's not just this government that is being too timid. King thinks the entire G20 approach to reforming financial regulation may eventually have to be re-thought. Why? Because it's partly based on the assumption that once you have told banks that they are too important to fail, you can somehow prevent them from taking crazy risks on the taxpayers' dime.

"It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place. The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question."

This cri de coeur does not come out of nowhere. For some time now, policy makers and regulators around the world have recognised that rescuing the financial system had left them with what we economists might call the mother of all moral hazard problems.

In the past, bankers might have suspected that the taxpayers would bail them out if they got into trouble. But thanks to last autumn, they now know for sure.

This is what has been keeping a lot of central bankers awake at night the past few months: if they took all those risks before, when they couldn't be sure they had a safety net, what on Earth are they going to get up to, now that the insurance is there for all to see?

Mervyn King has voiced many of these concerns in the past. But never this bluntly, at least in public. Here's another killer paragraph:

"To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform. It is hard to see how the existence of institutions that are 'too important to fail' is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk. That is what economists mean by 'moral hazard'. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The 'too important to fail' problem is too important to ignore."

Logically, there are two solutions to the "too important to fail" problem. One is to accept that such institutions exist, but to impose tough regulations to reduce the chance that they will actually fail. That is broadly the approach being taken by the G20, with a belt, braces and chewing gum approach that will require banks to hold more capital, including more liquid capital, and put caps on total leverage (debt).

The governor says this approach "has attractions but also problems". We never hear about the attractions. But there are two pages of problems, the most important being that you never really know how much capital a bank is going to need - and we've been chronically bad at guessing it in the past. He says that requiring banks to issue "contingent capital" is an important way to beef up this approach. That is debt which turns into equity once certain emergency trigger points are reached. But you still have the basic incentive problem created by the belief inside the banks that they are too important to fail.

We knew that King favoured the more radical alternative - which is to "find a way that institutions can fail without imposing unacceptable costs on the rest of society". In essence, this comes down to separating out the essential, humdrum utility side of banking from the speculative, more casino side that has got us all into so much trouble. We taxpayers only underwrite the bit that's crucial to the broader economy, and by its nature doesn't involve so much risk.

Respectable voices such as the economist John Kay and Paul Volcker, the former Fed Chairman, have put forward suggestions along these lines. But it's fair to say that it has been dismissed as unworkable by the most mainstream opinion, including that of the chancellor.

The Conservatives have rushed to applaud the speech, and to remind everyone who will listen that George Osborne has said he thinks there is a case for separating some of the riskiest investment bank activities from plain old vanilla banking. But he only wants to pursue the idea at an international level. As a unilateral UK policy, the Tories have also dismissed it out of hand.

In his speech King says "it is hard to see why" it would be impossible to distinguish between different types of banking. After all, regulators do so all the time. "What does seem impractical, however, are the current arrangements".

In his blog, Robert Peston has often pointed out how un-radical the post-crisis reform agenda for banking has turned out to be.

For his part, Martin Wolf recently wrote a remarkably radical column in the FT, arguing that the financial sector has emerged rather less secure than the one we had before, and urging greater boldness. "The financial system is so inherently fragile that radical reform cannot be pronounced dead. It is only dormant."

Now Mervyn King has used his bully pulpit as Bank governor to turn up the volume on this debate. I doubt he did so lightly. But quite simply, he thinks that with the current approach, we will only have tackled the symptoms of the problem. The ultimate cause will come back to bite us - perhaps rather sooner than we might have thought.

The governor may not get his way. But in a week when policy makers and ordinary taxpayers are reading in disbelief of a forecast 50% rise in city bonuses, just 12 months after the biggest financial bailout in world history, his speech will add fuel to the fire.

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PS: An earlier version of this post mentioned a line which was in the text of the governor's speech, but not in the speech as delivered (an extract of which is now embedded above).


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  • Comment number 1.

    And Mervyn is absolutely right on this one.

  • Comment number 2.

    Banks have no choice but to lend longer term than the theoretical term of the current accounts and deposits (retail and wholesale) that fund the lending. This is their bread and butter business not speculation.

    If confidence goes then no bank can withstand the withdrawal of current account cash (subject to instant withdrawal and the failure to renew deposits.

    Banks can protect themselves against interest rate changes (eg 25 year mortgages can have interest rates which change monthly in line with base rate) but then can never get enough 25 year deposits to match 25 year loans.

    So provided banks have sufficient capital, governments should move to help them with liquidity when public confidence is lost and funds are withdrawn from a bank. This is in the national interest and although saves shareholders facing a bank failure, does not actually improve the shareholders position beyond where they would have been without the loss of confidence.

  • Comment number 3.

    That was quick! Bravo Stephanie.
    The banks are too big to be left to their own devices, is Mervin getting round to telling us that?
    Right now several governments in Europe are announcing measures to tax banks on their outrageous profits, but this news has trickled out, seemingly as unrelated decisions. I reckon governments world wide just don't have a clue how to handle the banks, but are trying to sneek up on them somehow…
    Our elected leaders had better sort out the banks, retail and merchant, before they suck the life out of everything.

  • Comment number 4.

    Retail and investment banking will never be separated.

    Why ? Because this allows the rich elite to gamble with money, safe in the knowledge that if something goes horribly wrong the taxpayer will bail them out.

    In fact it's not a gamble. It's a win for them and a loss for the British public in general.

  • Comment number 5.

    cri de coeur Stephanie.

  • Comment number 6.

    Hats off to Mervyn King for saying what many must be thinking.

    I was incredulous listening to the Today Programme that lenders are to take more responsbility for their lending. From where I am sat the banks seem to have adopted a similar to model those in the US peddling subprime mortgages. It was just their jobs to sell the credit and watch the money come rolling back in?

    When these people failed so spectacularly why are the governments and the inept regulators giving the financial industry another blank cheque book?

  • Comment number 7.

    Why is separation impractical exactly? I'm sure the banks will provide many reasons against it but why are we listening to them ?

  • Comment number 8.

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

  • Comment number 9.

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

  • Comment number 10.

    I can't believe how calmly this speech is being taken. This story is absolute dynamite.

    Can you imagine the depths of frustration that have driven Mervyn King to this very public rebuke of all other parties involved in reforming the financial sector? He has until now remained diplomatic, but has finally come to the conclusion that his diplomacy was winning no concessions. Reform, if it is to happen at all, must be forced through with the strongest of strongarm tactics.

    Well, Mr King has now lit the blue touch paper. Let us hope, for all our sakes, that this does not turn out to be a damp squib.

  • Comment number 11.

    I don't see the issue with a unilateral UK attempt to enforce something along the lines of the second Glass-Steagall Act.

    What needs to be taken is a carrot and stick approach, apply the regulation along with regulatory and tax carrots on the investment side, and you minimize the risk of them moving east - which the prospect of increased regulation is already doing.

    I can appreciate the Tories can't just be seen to be 'helping the rich', but the fact remains that taxes on those banks and bonuses form a large part of the UK's tax income, and prior to the bail outs not many were complaining when they funded the schools and hospitals, we need to retain the UK as a banking centre whilst re-balancing the constituents of GDP, not to start throwing the baby out with the bathwater.

  • Comment number 12.

    We need to learn lessons from the Islamic banking system...i.e. the interdiction of usury.

    Now...I just wonder why our troops are in Afghanistan...fighting for democracy perhaps?

  • Comment number 13.

    No amount of regulation and intervention will achieve what can be achieved by making banks behave like any other business. Let’s allow banks to fail, with retail depositors fully protected and shareholders and debt-holders left to carry the can. That will focus a few minds in the financial services “industry”.

  • Comment number 14.

    Pensfold, it appears that you have been living in a cave on an otherwise uninhabited island in the Outer Hebrides, and the entire financial crisis has passed you by.

    The situation you are describing is a run. The banks that failed or were rescued did not get into that position because of a run. There was only one run in the entire financial crisis, namely on Northern Rock. However, even in that case the bank was already long since doomed. They failed by overstretching themselves: primarily through relying on wholesale finance rather than retail deposits and purchasing instruments that they did not understand, but also in RBS's case through hubris-driven expansion plans.

    No, banks were not innocent victims in this crisis, they were front and centre, causing all of the problems. It amazes me that anyone should need this explaining to them in 2009.

  • Comment number 15.

    Why is nobody in Westminster listening? Is it because Gordon Brown simply wants to micro-manage every aspect of the world economy? Is he scared of telling the banks to put up or shut up? Or is he more interested in making political capital by ranting on about bonuses (but doing nothing) than actually preventing the next banking crisis?

  • Comment number 16.

    I'm having a problem with all this. For me a bank is there to provide a utility service, rather like water, gas and electricity. But Pandora's Box had been opened, at least by Thatcher, and so now we have any tom, dick and harry competing with any dick, harry and tom. Nothing ever in moderation of course, excessive competition demands excessive risks. Result? The cheapest vacuum-surviving, law-breaking (but all laws are removed) Amoeba wins!
    We can now certainly forget regulation because the resultant complex array of 'products' and their complex inner-structures means that we have a 'loop-hole at every neural-node'. It will not be possible to blame the banks next time - and they know it!

  • Comment number 17.

    The whole cheap credit boom made a false economy and the only idea these people have is to do it again, repeating the same old 'supply and demand' mantra.

    Professional footballers made be paid obscene amounts, but when they gamble it's with their own money and the global economy.

    We could all see it was a bubble, but we're supposed to pretend it wasn't and was just one of those things that happen and couldn't be foreseen? It's all quite depressing.

  • Comment number 18.

    @ 12 BankSlickerminustheR

    Quite, beautifully put, nearly good as Polonius.

  • Comment number 19.

    Mervyn King is slowly edging towards going what he (and his predecessor) rejected doing on several occasions in the past decade and that is to actually tackle the structural problems.

    The problem with actually tackling the banking problem is that the solution inevitably leads to a recession, but we now have no choice.

    Banks must be broken up. The banks must be induced to break themselves up. We cannot have just 4 (four) banks we need 50 (fifty) or more - so the 4 banks must de-merge themselves. This will re-establish banks that can fail which is essential for a market in banking.

    Money must again become valuable and have a real cost to borrow and pay a real return to lend. (This will inevitably cause house prices to drop substantially.) Without doing this there can be no rebalancing of the economy and improvement in the savings ratio.

    Mervyn King (and the Treasury, FSA and the MPC) is an abject failure as he rejected advice (from many sources including me!) that there was a problem of an imbalance in the economy for a decade or more. He now is frightened by his failure, but this is too late - he is not fit the be the Governor of the Bank. He has a five million pound pension pot so in all decency he should resign NOW.

  • Comment number 20.

    If Brown and the government wanted to stimulate the economy rather than the failed banks decide which businesses survive, he should have lent out a few £million via Zopa?

    Mandelson seems to be banging the competition drum over Royal Mail. Surely the UK government lending via Zopa would get money into the economy at the grass roots and provide some competition to the limited number of merged banks now controlling the market in our High Streets?

    Disclaimer. I lent out £100 via Zopa this year as much to make a protest against the banks. Now online discussing King's statement and Zopa with a chat friend via IM in California.

  • Comment number 21.

    Its wearying to have to wait for the people in power to just catch up with common sense.

    Creating fake money that Bankers recycle into huge bonuses built on a foundation of fresh air---even Goldman would be bust if the taxpayer hadn't stopped BoF,Morgan Stanley, Lloyds, RBs, HBOS from collapsing--- is ' a delusion'---oh! really?

    Personally, I wouldn't bother with regulation finely constructed: The Americans always cuff up one or two 'pour encuorager les autres'---it's a complicated situation, so cuffing up a couple of prominent bonus gatherers, and getting the Police PR dept to invite along a few web-video and stills camermen while investigations continue-- may well do more to acheive the desired end, than the next 24 months of aimless musing on possible regulation ...

  • Comment number 22.

    "but the fact remains that taxes on those banks and bonuses form a large part of the UK's tax income, and prior to the bail outs not many were complaining when they funded the schools and hospitals"

    Imagine that burglary is legal.

    Pro burglars, who declare their takings as taxable income, might well provide more tax than anyone else in the economy. However, they are actually providing nothing at all, because their tax "contribution" is merely the appropriation of existing wealth created by somebody else. So the "bankers provide loads of tax" argument isn't any kind of knock-down argument on its own. You need to demonstrate that the bankers create wealth and give some of that created wealth to the tax base, rather than merely moving other people's created wealth onto their ledger and then passing some on to the government.

  • Comment number 23.

    I cannot help but wonder: Is it not the case that this crises was brought about by what amounts to excessive bad-debt burdens? Regardless of due-dilligence and related issues - then if this is so, is that not also saying that an excssively large proportion of borrowers were in fact delinquent? I ask myself this because in any rational review of an economic climate conducive to the growth of new businesses, full employment and a contented population, easily available, low-cost credit must be a feature. Does not this crisis really reduce to the fact that the banks were convinced that the majority of their bad-debt exposure would be covered by their better quality borrowers, and other profit-making activities such as trading?

    Whilst I believe that there are certainly some working within the financial sector who have - from time to time - been less than properly diligent, I do not believe that this crises could have been avoided by any form of regulatory action, government intervention or similar. Ultimately, the lesson we all have to learn is one of personal responsibility, on the part of lender - but also borrower, which latter I believe will always comprise of a majority who are inclined to adopt a careless, even cavalier attitude towards such matters. I think we are suffering now because of this culture of blamelessness, this ability to deflect personal responsibility without batting an eyelid had finally reached epidemic proportions, the like of which has never before seen outside of a communist regime.

    Look at it this way. If the government (any government) were placed in charge of the Sahara, we would have a sand-shortage within a month. They would run out of money in a year due to the expense of recruiting sand safety specialists, sand movement, preservation, distribution, and marketing consultants, despite never being in danger, needing to move it, preserve it, distribute it, or create logos and strap-lines for it.

    The creators of wealth in this country are almost entirely small to medium sized businesses. They provide the fundamental means of generating employment and revenues on which banks and others are able to build large financial services businesses. Yet more of that money goes to pay for govt. than goes to banks. UK business people already suffer under a huge economic burden which effectively means that we work 3 out of 5 days a week in order to pay for a super-sized, over-paid horde of incompetent civil-servants, most of whom have quite literally spent our money employing each other in order to find new and ever more sophisticated yet fascile ways of blaming someone else, or just saying 'no' to the rest of us, about almost anything you can think of. Think about it for a moment and you will realise just how many of these pointless jobs there are. If you are unsure about this, google government employee salaries, and take a look at your local govt. website, then look at the growth in personnel and other expenditure over the last 10 years. You are on the internet, if you google it you will probably find it. I guarantee you will be shocked at the figures.

    With any luck, Brown will soon have to make the cuts we all know have to be made, and many of those pointless jobs will finally go. Whilst I know that the country's real workers (the small-to-medium sized businesses) will not benefit financially from such an event, at least we will have the satisfaction of knowing that this recession will probably have routed a substantial number of individuals whose main claim to fame is their remarkable ability to shrug-off all forms of personal responsibility, and their deft use of meaningless phrases such as "we have this under review pending an on-going process of evaluation".

    Perhaps best of all, with funds drying up, those govt. employees will be fast running out of their ignorant, passive-aggressive strategies designed to redistribute the the wealth that the silent majority of us generate for this country as a result of the creative, industrious and diligent work ethic that our country is often accused of lacking because of the high profile occupied by the wasters we somehow manage to employ in local and central government.

    Rant over (for now). :-)

  • Comment number 24.

    The current (old version) financial structures are no longer fit for purpose - this was evident from the start of the crisis. Their (the banks etc)sole ambition at present is to recreate the past because that's what they feel comfortable with irrespective of the insult it presents to those they so badly damaged (remember that many will die as a result of the credit crunch, it is not a victimless crime). Intellectually no government is yet ready to make the leap forward in thinking that must inevitably come in stripping out the power of the banks and whilst they dither they inevitably continue to loose the ability to shape the future to the Chinese and the other resurgent economies of the East.Time is now running out. They have perhaps less than 18 months to play with before change will be forced upon them rather than guided by them.A lack of outstanding leadership is perhaps the West's greatest problem. The general public is not impressed !

  • Comment number 25.

    Mervyn King may warn but he will not save you. All non oligarchs are headed for debt peonage and serfdom at best, catastrophic meltdown at worst.

  • Comment number 26.

    One of the main causes of the financial meltdown in 1929 was that banks had been combining low-risk deposit taking ('high street banking') with the highly risky activity of underwriting and trading in stocks and shares ('investment banking').

    To prevent a recurrence of this disaster, the Americans passed the Banking Act (often called the Glass Steagall Act) in 1933, which separated high street banking from investment banking and a similar separation was imposed in the other main economies.

    For 66 years the separation of investment from high street banking was highly effective but, after many years of intense lobbying by the banks, the Banking Act was finally repealed in 1999. Within 10 years, one of the main causes of the financial meltdown in 2008 was that banks had, once again, been able to combine high street banking with investment banking.

    Of course Mervyn King is right. Of course we should go back to regulatory position that worked perfectly for 66 years, until 1999. How can this possible be described as "unworkable", as reported in Stephanie Flander's blog? Those who ignore history are condemned to repeat it.

  • Comment number 27.

    The provision of credit in a society is the most basic of utilities. In "Western" societies, this has been in the hands of private banks with their mega-rich dynasties for hundreds of years.
    People are beginning to realise that it is the banking system itself that is the problem (see Fractional Reserve Banking & Modern Money Mechanics).
    Research the system and you will find that the only logical solution is for the people (through an institution like the already nationalised Bank of England) to create and control credit for the benefit of all in society, not just the very few.
    Taxes could even go down.

  • Comment number 28.

    Mervyn was at the helm when all this kicked off, he is only saying this now as it is too late and he can see the Tsunami coming.
    Bottom line the bankers and the brokers et al ran off with the cream and left us with the merd, why all these people have not been rounded up and jailed is beyond me as it is clear it was all a big fraud, and yet they have the temerity to say it was Mr and Mrs J Bloggs fault for running up their credit cards and borrowing too much, yeah right

    these stories are now like groundhog day and how long is it now over a year and nothing has changed.
    I tell you another thing Cameron posturing that we get some of the dunkirk spirit to get us over the hard times is as offensive if not more than the BNP using wartime images.

  • Comment number 29.

    One for JJ followers...

    'William Hague under pressure from US over Conservative allies in Europe'

  • Comment number 30.

    WJNMoore in message 26 is absolutely right.

    Why is everyone ignoring the lessons from history? Retail and investment (casino) banking should be entirley seperate. If we fail to do this, how long before the next credit crunch and crash?

  • Comment number 31.

    Mervyn King (many times over the last 18 months) as well as post nos. 4,5,7,10,11,18 and 26 above (as well as stanilic regularly) + Stephie tonight + many many others over the last 24 months, have identified the necessity to separate the 'utility' retail banks from the 'risky' investment banks is what is Evan Davies said on Radio 4 this morning...'Even rocket science is not that complicated!'


  • Comment number 32.

    KaitainCPS - having read your post, I can't resist asking what you feel the difference between a 'pro burglar' and the government is? I suspect the pro-burglar will not take quite as much of your wealth as the government. More seriously(?!), on the 'banks contribution' - the reality is that no system (of any kind) is 100% reliable and consistent in operation. Most UK banks use money wisely - many for hundreds of years without major mishap. Sooner or later, all systems fail, whatever their nature - e.g. cars, telephones and political systems. For the banks, increasing volumes of trade, and the necessity of dealing with ever more complex, hence expensive and yet often pointless regulatory issues (for which you pay the govt. to create and then pay the banks to work around - and if you still aren't happy you pay an IFA or a tax or pension specialist to work out for you.....), a great deal of pressure has been placed on the systems operated by the banks. Not just pressure to make profits, but pressure to provide free banking services and meet unreasonable employment criteria, etc.. It is a matter of public record that for 99.9% of the time, the banks have been very succesful at creating profits from their available resources. Those profits have provided pensions, investment returns, profits for shareholders and much more besides. They have enabled cheaper, more easily available credit terms for those that need it and were genuinely committed to repaying it. Sadly, many borrowers weren't, and aren't. Though it is true to say that the banks have traded instruments that were in a complex way, 'tainted' with suspected bad-debt, the reality is that the wealth created by the financial sector in the UK is almost entirely responsible for keeping this country's economic head above water, and given Brown a massive amount of money to waste. The contribution made to public funds by other sectors is individually very small by comparison, especially when you factor-in the unseen effects of the compensation paid to bank employees, who more often than not spend that money on mac-mansions and other 'stuff' - just like a footballer or anyone else making a lot of money - numerically you may see this as just a small but necessary part of the cycle that has kept the economy functioning - until it dissappears. Then you notice house-builders, car showrooms, restaurants and other small businesses in danger of failing in some areas, until these funds begin to flow again. It is a fact that every other sector relies upon the services delivered by the banks and financial institutions in order to survive and grow. If you want a demonstration, of banks ability to create wealth, just take a look at the FT. Remember that wealth is expressed in terms of ownership; money is merely the vehicle by which same is more easily exchanged. Without efficient, profitable and trustworthy banks (intermediaries), such wealth as exists would be concentrated in very few hands, leaving the rest of us with little if any opportunity to leverage whatever capital (intellectual, financial or otherwise) that we may have - in persuit of that wealth. Anyone that visited the former USSR or other E.European communist regimes will recognise this all too readily. These intermediary functions are of course the fundamental source of the profits made by banks. However on there own, these profits would not support a modern high street bank, let alone one that delivers basic services free of charge. Hence over time, the banks sought (and continue to seek) to create investment instruments, and to create the markets within which to trade these instruments for profit. I'm sure you can see from this that the banks don't pass on other peoples wealth to the government.
    As for the latter, on a lighter note - it's worth remembering that the only reason that most people give them half of their cash is because they have a bigger stick than they do. If you don't believe me, and you don't want to go to jail, you could try not paying your taxes, and then refuse to go with the police when they come for you. On the other hand, put whatever you can in the right kind of bank account, and the bank will at least give you more back than you put in.... :-))

  • Comment number 33.

    We had this a few times now. The governor is talking sense, publicly. Great one thinks, things must be moving in the right direction then. But then all that happens is the printing a more money and the use of taxes to stuff it right into the damn bubble and damage everybody's future even more. Labour can't win the elections, so why don't they just say okay, we had it all wrong and we have contributed to this mess, but we now use our final days to do something unpopular but inevitable. We let the damn bubble collapse and kick of the reforms that this country needs to overcome its debt addiction.

  • Comment number 34.

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

  • Comment number 35.

    34 I hope the moderators understand playin english

  • Comment number 36.

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  • Comment number 37.

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

  • Comment number 38.



  • Comment number 39.

    The Newsnight contribution on this was disappointing. A brief mention was given of the (rather uncertain) position of the Tories, but no mention of what was the really significant congruence - that Mervyn King was now saying _exactly_ what Vince Cable of the Lib. Dems has been arguing for months - that the two types of banking _must_ be separated.

    The BBC has been criticized recently for sticking to a 'two-party' approach to political commentary. Here was an ideal opportunity to demonstrate that the BBC recognizes that the third party has different, clearly-articulated views - and it failed the test!

  • Comment number 40.

    #2 Pensfold

    And you think basic deposits are what banks use to lend?
    The collapse wasn't due primarily to a run on the banks by depositors.
    It was due to dodgy assets created by excessive lending being considered risk free and used as a supposed solid capital basis for yet more lending and then the shattering of that illusion when there was a downturn.

    The analysis of government replacing deposits withdrawn shows a complete lack of understanding of the circumstances and is quite frighteningly naive.

    As to the timing issue, there are financial instruments around, such as bonds which can be issued over a 25 year period.
    But you will actually find that the core period of many mortgages is 3-5 years... after that reversion rates apply.
    The problem we do have is that some of those rates are tied to the artificially low base rate rather than commercial rates i.e. LIBOR.
    Offering base rate trackers can certainly create risk exposure without someone being stupid enough to provide cheap money to offset them.

  • Comment number 41.

    Mervyn King's comments seem to show pretty clearly why he's much better thought of than the treasury and the current mismanagers of the economy in government.

    What he's saying seems to be a statement of the obvious, yet those with the ability to fix the problem fail to do so, apparently as it might upset some of their pals in the city.. and would probably make them less employable in later life.

    Mr King's statement and the actions of the FSA seem to show pretty clearly why the FSA should be broken up ad its duties covered by the BoE (even if that is something the BoE would prefer to avoid).
    Of course with a clear over-riding perspective, capable people should be able to make things work... but they haven't done, there must be a deficiency somewhere.

  • Comment number 42.

    41 I endorse every word you say. Further the time is NOW. We need our big banks broken up so that their separated casino arms are in totally separated PLCs. We need regulation to stop the new utility banks setting up casino departments and to stop them lending money to casino bank PLCs.

    I am dismayed that George Osborne has not grasped this point. We will sleep walk into another crisis while we concentrate our fire power on bonuses.

    Incidentally, regulating what casino banks may do seems singularly pointless.

  • Comment number 43.

    And now for my favourite mantra - When are they going to split the retail banks from the casino banks ??

    All of Mervyn King's blatherings will come to naught if this one thing is *NOT* done !!

  • Comment number 44.

    No 11 "I can appreciate the Tories can't just be seen to be 'helping the rich', but the fact remains that taxes on those banks and bonuses form a large part of the UK's tax income, and prior to the bail outs not many were complaining when they funded the schools and hospitals, we need to retain the UK as a banking centre whilst re-balancing the constituents of GDP, not to start throwing the baby out with the bathwater."

    Interesting thoughts, especially in light of the still general usage of the term "banks" when what should be referred as "Retail or High Street banks and Merchant or Casino banks. Also,there seem to be *NO* distinction in most people's minds between the "nationalised" banks and the ones who haven't needed the Queen's shilling !!

    You mentioned "minimize the risk of them moving east". Have you wondered where the majority of profits for both HSBC and Standard Chartered come from ?? They are, to all intents and purposes, "Eastern" banks moving West !! Both these banks have operated under very stringent regulatory regimes in the East. Hence they tend to have less of the toxic stuff. The "strict" regulations still being bruited about here, have been in place in the East for some time now !!

    Merv the Nerve didn't "invent" those regulations. It's about the same as saying Christopher Columbus "discovered" America, oh, and there he found people there too !! Thurprise, thurprise, said Puddytat !! (Sorry, I'm a great fan of Tweety Pie !!)

  • Comment number 45.

    Wise words Mr King and this is from a banker by the way. He is absolutely right, separation of the core businesses must occur so that the failures of part of the organisation cannot be plastered over by the successes of the others.
    Clarity and transparency must be the order of the day, something that (paradoxically) we lost when regulation came in. I am not saying that regulation is wrong, just not done effectively.
    The answers lie within the system, it's whether those in charge have the will to sort it.
    I am convinced that an 'aftershock' from the recession will come soon - I hope I am wrong.

  • Comment number 46.

    No 14 "...but also in RBS's case through hubris-driven expansion plans."

    And oh, the hubris, the hubris !! Not satisfied with swallowing Nat West Bank like a minnow swallowing a whale, they tried to swallow ABN AMRO as well and got choked on it !! The joys of "leveraged buyout" !! Wonderful Americanism !!

    Next on the agenda, the Man U leveraged buyout !! At least Roaming Roman bought Chelski with his own cash. In fact, rumours had it that his various ex-wives probably cost him more than Chelski did !! Ah, to be so rich.....

  • Comment number 47.

    No 12 "We need to learn lessons from the Islamic banking system...i.e. the interdiction of usury...."

    ...and conspicuous consumption beyond your means....

  • Comment number 48.

    No 19 John "Banks must be broken up. The banks must be induced to break themselves up. We cannot have just 4 (four) banks we need 50 (fifty) or more - so the 4 banks must de-merge themselves. This will re-establish banks that can fail which is essential for a market in banking.@

    Perhaps we should start with banks that *HAVE* failed rather than a blanket curse on all banks especially on the ones that are still viable !!

    BTW which bit of Hendon are you in ??

    - your neighbour from just North of you !!

  • Comment number 49.

    No 21 "The Americans always cuff up one or two 'pour encuorager les autres'"

    Well, the Chinese "encuorager les autres" even more by taking a few "economic saboteurs" out and shooting them !! Nothing concentrates the mind better than the possibility of a bullet in the back of the head !!

  • Comment number 50.

    No 22 "Imagine that burglary is legal.

    Pro burglars, who declare their takings as taxable income, might well provide more tax than anyone else in the economy."

    Well, prostitution is legal in the Antipodes and they do declare their takings as taxable income !! Nothing like the "sneaking around in dark alleys" in "Puritan" Blighty !!

  • Comment number 51.


    BankSlickerminustheR (#29) And there we see them at it again, describing National Socialists as extrem right-wingers, when in practice, as statists, they are left-wing - the clue being the word socialist! It's neoliberals and neoconservatives (anarchists) who are extreme right-wingers. They go abaout fightig statism both at home and abroad. This should be obvious to anyone who can think about what they see logically. But sadly, the educated are usually verbally educated. They learn to bleat/repeat what they are told. It's a feminiozed brain thimg. The more going to university the better of course, even though it is dramatically dumbed down and dumbing down too. Only scientiosts see through this verbiage, and science is not de rigusr these days, it is 'geeky' or 'autistic'.

    This intenSional confusion sets up a mental state within which all sorts of other pernicious propaganda and double-talk penetrates.

    Here's one of the anarchistic think-tanks on the deception, spinning it for all it's worth mind. They are anti-state. That means anti public ownership of everythning, anti NHS, anti Royal Mail, anti state schools, anti....

    i.e. Anarchists .......with thoroughly modern makeovers.

  • Comment number 52.

    Given that the Glass-Steagall Act was only repealed in the 1990s it seems a bit much to claim that "it can't be done". It was done. So what has changed in the last ten years to make it impossible?

    The answer, I suspect is that the casino banks have become dependent on their retail arms, and probably also the taxpayer guarantee that comes with them. To suggest that the banks are now to complex for this simple solution to work is, to my eye, special pleading (if not just blowing smoke).

    As for the idea that this could only be done internationally. This looks like the result of more special pleading, if not threats, to decamp from London if the UK goes it alone.

    More proof, if more proof were needed, that we are politically chained to the City of Londaon - and that our Regulators do not control the banks: the banks control them.

  • Comment number 53.

    Another great article! This topic is really much more in line with what needs to be thought about to address this crisis and reform society away from the antiquated institutions of post-WW2, US-centric Bretton Woods.

    It goes back to the conversation recently I had with Reaper of Souls - that banks need to be reigned in and regulated, in some cases fully nationalised and made accountable to the taxpayer, to address the moral hazard problem and to allow private debt write-downs (through loan interest rate caps) without incurring further moral hazard.

  • Comment number 54.

    It's really down to the people now. They must make it clear to the politicians that they won't get voted for unless they sort this problem.

  • Comment number 55.

    Mervyn King is right. And the "attraction" of the present course of action is that it requires very little action on the part of the authorities. The Chancellor and the PM are not renowned for prophylactic, energetic and difficult actions to solve problems - just let 'em accumulate and sort themselves out seems to be their philosophy. The PM has always been most imprudent - he bangs on about prudence (wethinks he doth protest too much) yet on the Andrew Marr show a couple of weeks back he admitted the most prudent and stable period in his time in government had been ... 1997-99 ... when he slavishly followed the spending plans of the previous Conservative government(but he did not add that bit). After that it was all downhill, with spend, spend, spend - and for what effect? The Government was as irresponsible as the banks - something that is overlooked in this current lynch-the-bankers climate. The Government should be lynched as well. The question now is - would the Conservatives act on Mr King's advice? I doubt it.

  • Comment number 56.

    Mervyn King also launched a scathing attack on Goron Brown, first of all for the big part he played in allowing the crisis to happen when he removed the need to separate retail and investment banking (before we let Gordon Brown loose on our regulatory systems banks could not use current / deposit account holders money to fund risky investments - this alone would have obviated most of the need to bail out banks using tax payers money) and secondly for not learning the lessons and doing very little to prevent banks returning to their old ways. He also condemed labour for their mismanagement of the public finances generally. No mention of any of this in this article. Why not ?!?!?!?!? Sure the banks themselves played a part in this and should be condemed accordingly but this article gives the impression that the crisis in our banking industry and public finances is solely down to the banks which is a complete distortion of the facts.

  • Comment number 57.

    errata (#51) apologies for typos, sticky keyboard - must be all the frustration. How the freedom-loving USA has 'helped' the UK over the years? ;-)

  • Comment number 58.

    The answer is very simple. The general population should withdraw its savings from banks that refuse to curb bonus payments, and put their savings into institutions which agree to comply. This would create a run on many of the banks and force them come into line.

    The government is very close to beig complicit in a situation whereby we're going to rob the poor to pay the rich. And if they won't protect the citizenry, we need to use this simple but effective tool to protect ourselves.

  • Comment number 59.

    It is about time that someone in a senior leadership position in the UK society calls a spate a spate. We live in an unaccountable, injust financial system, where most banks can only win and the consumer (in the long-term) can only lose (via high debt interest charges, inflation, loss of pension funds, etc.) Currently, the biggest banks are not controllable by the government, they seem to live in a political space of their own. If any institution in a country is beyond political control, its democracy is severly damaged. Effectively, the government has no control over the direction the UK economy will take over the medium to long-term. Another bust or inflation spike could, and will, at any time ruin the governments planning.
    Please find many more arguments why this sad situation has to be changed now on the following web site:

  • Comment number 60.

    "But quite simply, he [King] thinks that with the current approach, we will only have tackled the symptoms of the problem. The ultimate cause will come back to bite us - perhaps rather sooner than we might have thought. "

    Just what is the ultimate cause then?

    Too big to fail, the ultimate cause?

    So if we split banking into 'utility' and 'casino' banking the problem is solved?
    There will never be another crash?

    Again, it seems so-called economists cannot understand the workings of the economy.
    The financial sector is seen in insolation from production, and that somehow the financial sector can be looked after and so not impact the real economy.

    Deeper analysis will show that the ultimate cause lies in production and that the financial crises merely express the underlying contradiction of capitalism, that is, that capital accumulation itself creates the downward pressure of rates of profits and so the devaluation of capital.

  • Comment number 61.


    "i.e. Anarchists .......with thoroughly modern makeovers"

    or thing I have noticed amongst "Libertarians" and other free market extremists is that they may rant and rail against the state, but guns and the military are fine.

    Naturally, if the pressure is to/for private 'ownership' - what does ownership depend on? Property rights and their enforcement.

    In short, anti-statism is pro-military. They just want the relative budget for the military and police to be upped.

  • Comment number 62.

    Does it really matter what Mr. King says? - no-one has any intention of taking his advice seriously, much less acting on it. Surely it could not be clearer; the political apparatus has been captured by oligarchs.

    If the population just sits around passively watching events unfold then who is really to blame?

    There is no way out, and stultifying passivity will likely turn to mass panic some time soon. Take a look at this, and understand the hopelesness of the situation

  • Comment number 63.

    "We shall all be paying for the impact of this crisis on the public finances for a generation."

    Hence the importing and high breeding of lots of low-skilled, uncritical via cogntive scotoma, but ever so grateful 'slaves' (of all colours and nationalities)?

    Now, if this is not so [see ETS (2007), Leitch (2006) and OECD PISA (200,2003,2006) NAA/QCA/'DfES' (2001-2009)], please show me the data which refutes it.

  • Comment number 64.

    #48 Ishkandar. No banks are viable absent massive state aid. Why do you think interest rates are zero? Why do you think the normal rules of accounting have been so disfigured and twisted? Why do you think there is a massive money printing operation under way? Why do you think 99 banks have collapsed so far this year in the US?

    It is this kind of fantasy thinking that guarantees the worst possible consequences from the forthcoming full spectrum meltdown.

  • Comment number 65.

    Ofr course Mervyn is correct in what he is proposing. But what are the acttractions of the status quo remaining? Having looked at some analysis of the profit generation of the big US banks by sector, it seems to me that you cannot strip out the investment/casino banking businesses of these banks as the other parts do not generate sufficient profitability to cover the anticipated losses to come in from loan defaults etc. I suspect the same is true of the big UK banks. As I see it, the investment banking arms of the big US and UK banks are making mega-profits from speculating in the stock markets and commodity markets with the cheap money provided by the US and UK governments. This is creating another bubble(s). In the meantime, the profits that are being made from investment banking are in part being used to cover losses being generated in other areas of banking and improve the capital base of the banks. What of course is offensive is that much of these profits are also being used to pay bonuses to bankers. What frankly irritates me is bankers claimimg that they are worth any bonuses - they are riding on the back of another bubble. I bet that even I could make lots of profits if you give me lots of cheap money to bet on a rising market and without any personal risk if I fail (Of course, when the market is falling, the poor returns are not to do with the poor performance of the bankers, but all do to with the markets). I'm afraid that in my view the big banks have got us by the you know whats. Splitting up the banks will create huge problems. However, the risk of leaving the status quo is that when the current bubbles burst, the whole financial system will be irretrievable.

  • Comment number 66.

    FrankSz (#61) "one thing I have noticed amongst "Libertarians" and other free market extremists is that they may rant and rail against the state, but guns and the military are fine."

    Look into the recent Armed Forces Act and the size of the UK military. Surely you have also seen the procurement issues? The libertarians may say nice things about the military, but what do they do? For that, see the Act. They have nobbled it with changes to rules of engagement and reponsibility, Human Rights etc.

    I mislead you not - I hope. In fact, I am happy to have an alternative explanation given for the full picture I paint across Public Services. One might be short-term anarchism and Balkanization of Britain in pursuit of a Greater EU. This is the only positive gloss which I can come up with, but even this doesn't ring true to me given the anarchistic 53 Article FCHR in the Lisbon Treaty...(and how long will it stay red-lined befoe the EU Court says such red-lining is illegal by majority vote?) :-(

  • Comment number 67.

    An excellent speech. Why have we not heard it months ago from any of our political leaders (Vince being the honourable exception)?

    Like many others who have commented, I am still looking for an explanation of why the UK cannot act unilaterally with its own form of Glass Steagal? Yes, people could still choose to put their savings with casino-type banks elsewhere in the globe, but then it would not be UK taxpayers doing the bailing out. Or am I missing something?

  • Comment number 68.

    Are the new set of MP's going to listen? Is proper reform going to happen?

    We can know the answer and I reckon the MP's rules will still be abused.

  • Comment number 69.

    No 23 "...and many of those pointless jobs will finally go."

    I wouldn't be too sure about that. It is the modus operandi of the Civil Service that it's the ones who suck up to their seniors least or are "too" efficient that are the first to go !! They are followed shortly by those who can be bullied into going !! It's usually the ones who spend more time politicking than actually doing what they were paid to do, that usually are safest in their jobs !!

    "...a substantial number of individuals whose main claim to fame is their remarkable ability to shrug-off all forms of personal responsibility, and their deft use of meaningless phrases such as "we have this under review pending an on-going process of evaluation"."

    These are known as Teflon-coated and another of their stock phrases is "Lessons have been learnt" when it is clear that the lessons have *NOT* been learnt at all !! Example - The Baby Peter case in Harringay !!

    "Rant over (for now). :-)"

    Good !! Now go back to bashing them !! :-)

  • Comment number 70.

    The general flow of our collective blogs seems clearly to be in the direction of a return to the perfectly feasible separation of 'casino' from 'high street' banking.

    Apart from avoiding moral hazard, separation would do us all a huge favour by making the issue bankers' bonuses irrelevant. If 'casino' banks were allowed to fail and were not subsidised by taxpayers' deposits, the casino banks would make far less profit and the bonuses themselves would shrink overnight. What a relief!

    No wonder the bankers are putting up such strong and determined resistance to a return to the status quo ante.

  • Comment number 71.

    No 25 "Mervyn King may warn but he will not save you. All non oligarchs are headed for debt peonage and serfdom at best, catastrophic meltdown at worst."

    ...or off to pastures new !! :-)

  • Comment number 72.

    It's one thing for Govt to be forced to step in from the outside and take controlling stakes in over half the high street banks, as well as issuing guarantees, insurances and other methods to stabilise them. Our eyes might water at the scale of the cost, but it's still safe to keep our money in British banks.

    It would be another thing entirely to effectively control those same institutions and THEN watch them go down again without hope of rescue from a too-indebted Govt. The controlling stakes should be exercised to ensure that what the Govt. (as owners) want to happen actually happens.

    As outsiders they were 'White Knights', riding to the rescue. As insiders with controlling stakes they are institutionally culpable if history now repeats itself. They will not be forgiven if they fail to exercise such control to ensure that this can never happen again. That's a political threat that no Govt. could ignore.

    The case for splitting the universal banks along the lines King describes is unquestionable. The question which DOES need an answer is 'Who has the moral and political will to enforce the split'.

    Osborne is disingenuous when he says that Britain cannot go it alone. If a universal bank (call it the Bank of Ruritania) is forced to split into retail and investment parts, the retail part being offered the usual Govt. insurances but not the investment part, which can fail. Next the Govt. refuses to guarantee deposits in unreformed universal banks. Everybody will flock to deposit their cash into the Retail Bank of Ruritania. The momentum generated will surely lead all the other banks to split rapidly, to avoid losing their customer base. The Govt. owns enough of the high street banks to enforce it's will.

    There is a downside, of course. Non-British banks will flock for the exits to avoid the split. There will be less credit available than there is even now. But many non-British institutions have left already since the Crunch began. The withdrawal from the market of their lending is a principal cause of the credit squeeze in Britain. And if too much easy credit was the cause of the bust then a return to sensible credit is a good thing.

    Investment banks will find domiciles more amenable to their type of risk-taking and the taxes on their profits (which they minimise anyway by use of offshore vehicles in tax havens) will not be taken by the British Treasury. So Govt. will have less to spend.

    Question for the public is this; Is this a price worth paying for an old-fashioned, Govt. backed, safe-as-houses banking system?

  • Comment number 73.

    Mervyn is on the button.

    It's a massive change and may reduce the GDP by 5%. But it is going to be worth it in the long run. Its going to take us 20 years to get us out of this mess, but the next one will finish us off for sure...

    The banks don't get it and never will, it is NOT in their interest to shut shop...

    I have doubted Mervyn's convictions in the past, but he has come through. Well done, brave speech and enjoy your retirement next year...

  • Comment number 74.

    No 26 "...For 66 years the separation of investment from high street banking was highly effective but, after many years of intense lobbying by the banks, the Banking Act was finally repealed in 1999."

    For many countries in the East, the terms and conditions of the Glass-Steagall Act still apply !! Just look at who came out of this mire earliest !!

  • Comment number 75.

    #61 FrankSz

    As you rightly say the private ownership of property (the means of production) requires state enforcement.

    Capitalism requires the State.

    The State is the rule of one class (capitalists) over another class (labour) through the threat and use of violence.

    This is why communists are against the State, as strange as that sounds given the history of the 20th century and the behaviour in the Soviet Union and all the other Communist Party dictatorships.

    Lenin understood the difference between government and the State, as his book 'The State and Revolution' makes clear.
    (I'll leave to one side his misunderstanding of Marx's two stages of communism).

    There have been a strand of communists who were always critical of the Bolsheviks and Maoists who look to sieze state power.
    An isolated nation in a capitalist world will become a one-party dictatorship no matter how well intentioned the individual communists may be, for without the power being in the hands of the party, the imperialist powers will take over (just look how the CIA operates).

    That is why there can not be socialism in one country and why they become one-party States where the party dictates to the people.

    Now that we have globalisation (the interdependence to a much greater extent of all the capitalist powers) revolutions in any one country are much less likely to be isolated affairs and world revolution much more likely.

    Then power will ultimately rest with the people in their local councils, even if delegates are sent to a world government body.

    The state does not equal government.

  • Comment number 76.

    I object the the Governor of the Bank of England quoting Churchill, who does he think he is, the BNP? Does he not know that certain things have been patented and copyrighted by the British army? At least, that's what some of its generals think.

  • Comment number 77.

    No 34-38 AmaM - Nothing with prejudice at all !! A(non-)I *cannot* be prejudiced !! They are simply using a program that rejects posts with words *not* programmed into it as acceptable !! A bit like the firewall rejecting emails from addresses not in its "acceptable" list !!

    Oh, the joys of computing in the hands of the computer illeterati !!

  • Comment number 78.

    Most people don't understand that when Glass-Steagall was brought in, it was in Roosevelt's era, and Roosevelt said he would work with Uncle Joe. In the 1930s Mussolini and Hitler were gurus, even in the USA!

    A return to traditional banking will mean a return to socialism. What we have seen since the end of WWII is subversion of Keynesianism. Those doing well in recent decades will fight any such return with all the ingenuity that they can collectively muster, and these are the cognitive elite (they are alas, low on agreeableness and conscientiousness ... which spells what?)!

    Most people here are just not thinking.... except 'magically' like kids.

  • Comment number 79.

    No 40 "As to the timing issue, there are financial instruments around, such as bonds which can be issued over a 25 year period."

    Long Gilts used to be the least favourite of the markets !! I'd bet that's changed a bit now !!

  • Comment number 80.

    ishkandar (#74) "For many countries in the East, the terms and conditions of the Glass-Steagall Act still apply !! Just look at who came out of this mire earliest !!"

    Interesting. Care to list them and their incumbent parties?

  • Comment number 81.

    duvinrouge (#75) "Capitalism requires the State. The State is the rule of one class (capitalists) over another class (labour) through the threat and use of violence."

    You write nonsense and you need to grasp that. Look to Stalinist USSR and the PRC today. The state runs the means of production it does not progressively sell it off to private (international) investors. You don't know what you are talking about, and that is an accurate description, it's not abuse or unkind. Governments in liberal-democracies roll back the state through making the state less effective. They keep telling you this. They also try to do so abroad, using NGOs and Human Rights, which clash with duties, which are key to statist forms of government.

    Capitalists are those who live via capital (and what it earns - see usury) rather than through productive labour. Workers include doctors, engineers. teachers etc i.e intellectuals and technicans.

    You don't understand the words that you are using, so you end up writing rubbish. What's more, you reject what you are told only because it doesn't match the nonsense that you believe. You believe nonsense because you have been unselfcritically introjected anarchistic propaganda, i.e. double-talk.

    What I've explicated for you and others is how things are really working. Just because that's alien to you doesn't make it false.

    Try to look more carefully and describe what is going on.

  • Comment number 82.

    I am still waiting for Democractic party of Japan to drop the bombshell with their bonds/yent thing. Can't wait for the next headline "USA DEFAULTS ON BONDS. WORLD REELS"

  • Comment number 83.

    Mervyn King's assessment is spot on. Alas he is too late. Due to his and the Government's myopic and naive idea that the banks were too big to fail and needed to be bailed up to stop the economy collapsing, their actions will actually facilitate the very thing they were trying to avoid, i.e. the collapse of the whole economic system. Of course it would be bad enough if this stupidity was confined the UK politicians, but Obama, following directly on from his predecessor, is simply pursuing the self-same policy across the pond.

    To be fair though, whatever they do now is too late, what we are actually seeing is the end of the line for an economic-based system of which, up until today, capitalism was the best method available.

    Alas, it was built on an illusion and required ever more phony money to keep the illusion going. This facilitated businesses, jobs and lifestyles, i.e. the way of life we have come to expect in the west, which our friends in the eastern bloc and developing world want to now experience for themselves. Unfortunately, for them - and for us - it cannot happen. We borrowed from the future to live for today and now the future has caught up with us. Capitalism ultimately met its match when it was confronted with a more sophisticated and technologically proficient world that demanded too much too soon.

    However, there is a positive knock-on effect to all this. We might have just saved the planet. For it is impossible to solve the world's environmental crisis by being wedded to a production/consumption (economic) model as the bottom line will always be about maintaining businesses, jobs and lifestyles first and foremost, with the consequences coming a poor second. Hence, the focus on taxing the consumer for consuming, rather than simply stopping the producers from producing in the first place, e.g. they want you to buy the car - they just don't want you to drive it!

    It will take the collapse of the way of life we have come to expect since the onset of the Industrial Revolution to confront the new challenges of today's world. As Einstein is attributed to have said "The significant problems we have cannot be solved at the same level of thinking with which we created them."

  • Comment number 84.

    FrankSz (#82) Can you elaborate please?

  • Comment number 85.

    We have been in the smoke and mirrors realm since John Law invented paper money and the banks took over the world.

    Coming off the gold standard was probably the final straw and we've been in la la land ever since.

    As long as everbody believes in la la land we don't really have a problem. Unfortunately for some, there are always people who will insist on showing how the conjurors tricks work...

  • Comment number 86.

    @ Lepus_Madidus

    Declaring a vested interest (I am Zopa's CEO) but hope the general point allows this past the mods. We don't even need government to lend at Zopa we just need a level playing field for Zopa vs banks in the tax treatment of lenders' losses. Our lenders are currently disadvantaged in that unlike banks they can't offset bad debts against their income from lending at Zopa. This doesn't seem remotely reasonable and certainly doesn't do anything to promote the growing P2P lending sector which offers a real alternative to the banks (for personal lending) without the pitfalls highlighted so clearly in Mervyn King's speech, and all without any taxpayer support. We have gained cross party support for this endeavour and are working hard on it but any further grist to the mill helpful....

  • Comment number 87.


    Can you SPELL it out?

  • Comment number 88.

    So the banking and political classes are being slowly dragged kicking and screaming towards a division between retail banking and investment banking.

    This is inevitable and one wonders why it is taking so long. The delay can only be due to vested interests. May I postulate the possibility that if the investment bankers do not have the substance of all those retail deposits behind them then their bit of the bank might implode like Barings did? Is this the nasty bit of the Credit Crunch that dare not speak its name?

    It is quite apparent that to allow the bubble to reinflate will create the conditions for at least one other crash. It would seem that the prevailing desire on the part of the state apparat not to cut their coat according to their cloth, the preference of the political class for their precious expenses and the bankers for their fat salaries and grotesque bonuses will lead to all the real sacrifices being made in the real economy. Do they have no idea as to what happened to the Bourbons? Or is a bourbon to them just another biscuit on the plate in the meeting room?

  • Comment number 89.

    Horse - bolted - stable door spring to mind.

    The Bank of England by all appearances seemed to do a proper job until many of its powers were taken away and given to jobsworths in the Treasury and FSA by this crooked government of ours.

    One can only guess at their reasons; increased tax take on the back of crime seems the most obvious.

  • Comment number 90.

    Mervyn King rightly raises the issue of Moral Hazzard and whether the banks are to big to fail. But is this the right question to be asking ?I would like to understand where is the moral hazard to those who in the BOE, FSA and major audit firms who stood by and watched, and made speeches in the Guildhall about how important it was to the health of the Uk economy that we maintain the city of Londons competive advantage whilst, we were clearly heading straight into the financial buffers.
    Gordon Brown, Adair Turner, Mervyn king et al are all still in their jobs and are now lecturing us on the "fact" that the whole crisis came about as the result of "greedy bankers and their bonus culture and imprudent lending practice"
    Nothing to do with 10 years of government monetary and fiscal policies or the failure in regulation, accounting and credit rating agencies practice reform.
    What is frightening is the professional commentators have seized onto this simplistic narative with its clearly defined villans and prattle on about bonuses whilst ignoring the fact that the majority of banks balance sheets are still not a true reflection of their assets market value.
    That the accounting system allows this "mis reporting" to continue is the real scandal If the banks were forced to write down their toxic assets the so called profits on which bonuses are being paid would in the main dissappear.
    Those calling for the banks to be broken up and the return of Glass Stegall Act seem to be missing the point that Glass Stegall only applied in the US and was repealled in the USA in response to pressure from US Banks who felt that NY was losing out to the deregulated markets in the UK and Japan.
    They also seem to forget that if the Uk banks are broken up they will just become takeover targets by said foreign banks.
    Back to Mervyn King and moral hazard. Moral hazard for bankers can be achieved if we implement a system whereby the risk that a bank runs is made transparent such that both share holders and depositors are aware that they run a greater risk of losing their money with bank A as opposed to bank B. to achieve this we need a better system of auditing of the banks and much greater financial transparency plus removal of the implied 100% safety net given to depositors and shareholders by the government.The role of the regulator would be to approve / disapprove all new financial instruments released into the market and publish an independent assessment of risk that investors and depositors in individual banks take rather than try to set out rules on lending and bonuses.

  • Comment number 91.

    There is no Mr King is ansolutely right in observations. The difficulty is the practical application of the split. If the UK goes it alone banks in other countries will exploit the weaknesses exposed by the breakups.

    The case for making bankers on obscene money 'leppers' in modern society is also now beyond question. These are the people who got not just us but also our childeren into this mess, yet they carry on as if nothing has happened.

    If we tax alone without international support then most of the decent business will run abroad. if we impose limits on the state owned banks then the talent will leave and the government shareholdings will suffer. This the mess of all messes. Its all we can do is give bankers the cold shoulder in social circles and turn them in the modern equivelant of the 'unclean'

  • Comment number 92.

    StephenBlencowe (#85) "As long as everbody believes in la la land we don't really have a problem. Unfortunately for some, there are always people who will insist on showing how the conjurors tricks work..."

    True. But the price for la-la land (and it is wider than the economics) is that it genetically selects, reinforces and rewards some of the darker dispositions in human behaviour - which is demonstrably self-defeating - looking at Liberal-Democracy's and their TFRs stripped of immigrants.

    In the end one has to make a choice - reality and its austerity vs. la-la land and extinction. In the long run it's about progeny vs short-term self-interest. Hedonism is beguiling/deceptive/misleading.

  • Comment number 93.

    @ zopagiles

    Do your lenders have the same business risks as banks? e.g. do they employ thousands of people, over hundreds of branches, using local services, creasting wealth for people other than themselves? If not why should the general taxpayer subsidice their extra risk for what is undoubtedly an extra return?

  • Comment number 94.

    Merv can be as sensible as he likes - it won't make a difference.

    Already the lobbying by banks against the Glass_stegal type seperation has started - what else did you think they were going to spend their QE 'free profit' on?
    Even bettter MP's are claiming poverty - so they will be only too happy to fill their boots with alternative forms of income.

    You're all wasting your time, the implementation of this will cost the taxpayer money and it will be removed within the decade following banking pressure and of course, any return to boom times when so many things are conveniently forgotten.

    Glass-Stegall was a good idea in the US - why don't you ask them why it was removed?

    Merv is on a one way ticket to getting fired - he's actually started telling the TRUTH - and that's not popular amongst the LIARS of politics and banking:
    "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many."

    ....and soon we will collect, just as soon as the rest of the country realises how much we're talking about.

    The NIESR have come up with a number - 7p in the pound increase on income tax.

    I think people will start to get it when they see their tax bill rising by a whopping 31%.

    Remember, if it's not a simple income tax raise then it will be taken indirectly - which is likely to impact some more than others (depending on the indirect tax used)

    This situation is merely worsening - not getting better as claimed.

  • Comment number 95.


    Electioneering. We have a very naive electorate. Verbally well trained to hear propaganda but not smart enough to see through it. High verbal skills are nothing more than versatile tongue-wagging and keyboard prancing. These are feminized-brain skills, not male. Able males make things and do things. We are rather short of those these days, alas. See manufacturing etc.

    It's a subversion, dysgenesis thing :-(

  • Comment number 96.

    Still nobody in the government has provided a satisfactory explanation as to why these bank bonuses are being allowed in banks where we have a major shareholding. Caledonian Comment

  • Comment number 97.

    There are 2 issues both of which need to be dealt with at an international level - this effectively means UK, US, Japan, Germany and Switzerland because in banking no one else really matters - you could make a case for the French being part of this (SocGen) but they will only cause trouble.

    The two issues are division of banks into retail and investment along lines of Glass-Steagel and the application of normal anti-trust rules to break up the banks that are too big to fail - although I think once you hive off the retail banking then it is only the investment banks that need to worry about being broken up.

    I can speak about US and UK (maybe someone else can comment on Japan, Switzerland and Germany) but at a retail end being loans to consumers and companies whilst there are some dominant players the market has a lot of competition already. In the US you have the big players: BofA, Citi, Wells Fargo but also super-regional banks and lots of local banks, in the UK we have the big 4 (Barclays, HSBC, Lloyds and RBS/NatWest) but loads of building societies and smaller banks (Co-op, Clydesdale Group etc).

    I think King is right but who is going to get the politicians to start the process. In UK we have a further problem in that the EU will want to control this, for reasons of power (and the French wanting to do over Albion again) nothing to do with whether it is right or not

  • Comment number 98.

    The situation for the US, UK & to some extent other western economies:

    ". . . a major contributing factor to Japan’s 10-year “Heisei Malaise” was the prevalence of “zombie finance”, where Japanese banks continued to provide support for highly inefficient, debt-ridden companies, commonly referred as zombie companies, and the government effectively allowed the banks to simply ignore their festering bad loans with lax accounting practices, including the absence of mark-to-market. Zombie financing in turn prevented the creative destruction necessary to clear the dead wood from various industries and prevented more productive companies from gaining market share."

    Banks like RBS, Lloyds, Citi & BofA are replicating the Japanese experience. Real western economies will suffer the same fate as did Japan's in the 90s. These banking zombies MUST be broken-up before they bust the whole system.

  • Comment number 99.

    I do not work in the financial services sector and have a completely unbiased view.


    Why are we listening to a man who has got so much wrong during the course of this crisis, (left it too long reducing interest rates and has undermined sterling all too often to name but two), in fact why does this man even have a job?

    The two UK banks that actually failed were Northern Rock and HBOS, both of which did not have investment banking divisions.

    The widely believed cause of the crisis was retail lending, specifically in the mortgage market, loans made to households, not the normal activities of investment banks in mergers and acquisitions or supporting fund raising for large corporations.

    The majority of people believe the cause of the problem lay in loans being made to people who couldn’t afford them on unacceptable terms. These losses on sub prime loans were containable, what brought the global financial system to it's knees and lead to a global recession was the mass panic and total loss of trust that ensued from the realisation of the interdependency of the global financial system.

    The causes of this crisis are manifold and complicated and will not be resolved in anyway by a separation of investment banking activities, they lie with: Flawed macro-economic policy ignoring the effects of growth in the money supply in monetary policy, poorly conceived regulatory systems(the tri-partite system in the UK), manipulation of the exchange rate by the Chinese authorities, the ignoring of structural economic imbalances by certain countries, speculation in the oil markets, the fact that governments dictate the price of money which means you can never have a truly liberal free market economic model nor a fully privatised banking sector.

    I hear a lot of talk about King being an eminent economist very much in the same way as Brown was touted around as a towering intellect, both suggestions are folly and probably the result of their own PR spin, we seem obsessed with viewing the people in positions of power as exceptional even when none are really worthy candidates of this accolade.

    N.B. Stephanie are you happy with your reporting of statistics in you previous blog entry?

  • Comment number 100.


    Of course putting this into force faces issues, but then retail banking isn't seen as being the most profitable business, so restricting licenses to carry out retail banking operations in the UK (or into the UK - if it can be got through the EU) would seem to offer an angle.

    I'd suggest retail operations could be run separately from the merchant banking, within the same organisation but "chinese walls" although a nice idea in theory tend to be circumvented in practice whenever there's something to gain.

    Perhaps we'll see mutuals develop once again and the likes of the Co-op continue to grow.
    Demutualisation and the carpet baggers didn't exactly help with the robustness of the system.


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