Let banks fail, says Nobel economist Joseph Stiglitz

Generali

harry_w wrote: »

Yes, saving with a bank carries a risk; that should be minimal in a licensed bank within a sound regulatory framework. It doesn't imply the same type of risk as an investment.

As the government understood when faced with a very public bank run on Northern Rock, any perceived threat to retail deposits would risk starting a run on one bank spreading to others. If that were allowed to proceed it could lead to a general collapse of confidence in the any government, possibly in the state itself.

What I was taking issue with was your application of a term appropriate to investments to savings instead: "Why should my money be used to prop up the savings of unwise rich people?"

They're different, savings may or may not be guaranteed, but they're not 'propped up' in the way an investment might be.

[There are legitimate questions over the extent of any guarantees, the amount, the types of deposit/depositors covered and which banks (e.g. the blanket Irish guarantee is reckless). The only groups of savers I'd say have been 'propped up' have been rate-tarts saved from Icelandic banks and kept on the same rates of interest that attracted them offshore in the first place.]

I've no problem with insolvent banks going down with their liabilities, and I guess most British banks would have gone by now -- due to their own borrowing against a capital base of deposits to make poor investments in derivatives and bad loans against other assets which have since collapsed in value -- not from straining to 'prop up' savings at some extortionate interest rate.

In the wake of that and the capital flight I guess such a collapse would prompt, unless the bulk of retail depositors were adequately compensated, then I think it would be very difficult to re-establish a successor banking system.

The reality of the current situation is that the government are turning the economy inside out trying to prop up asset values and investments against deflation (denying savers any return on deposits with ZIRP, using emergency facilities to accept the 'troubled assets' and guaranteeing bank liabilities).

In general, it's debtors being propped up to protect them from the deflating bubble in asset prices and investments, not savers who could benefit from deflation, as long as it was a short sharp correction rather than the protracted deflation and long term economic stagnation under a gargantuan national debt, which government policies seem likely to achieve.

TBH I was grasping for a word a bit when I used the phrase 'prop up'. Guarantee is a much better word.

If I had my way, we'd have lots of very small banks rather than a small number of very large ones. Retail banks would be tightly regulated in terms of the products they could offer and there would be no Government guarantee for savings or perhaps a few thousand quid. There would certainly be no bailouts ever - quite explicitly.

Investment banks would be very lightly regulated and would have to plaster warnings all over every product that they sold. It would be presumed that investment bank products shouldn't be marketed to private investors except the rich, rather like hedge funds today - investment banks have effectively been operating as hedge funds for years so should be treated as hedge funds.

The bail out thing is going to end in tears.

b0rker

One of my teachers once taught me the value of money by burning a one pound note in front of our class and placing the ashes in the bin.

All this talk of letting the banks go down the tubes is merely talking about allowing banking computers to forget the data they once held. That is what money is. Data on a computer.

Actual physical money is only good for one thing. Wiping your a55.

The only money that should mean anything is the money earnt through sweat and hard work. Not interest. Not investment. Not money making money because some wise a55e5 decided that they knew how to make the rules of the game work in their favour.

Andrew64

I think that last October, RBS and HBOS should have been taken over by the government and then liquidated in an orderly manner. Then government money should have been made available to support the stronger banks like Lloyds TSB. As it stands, this government is just thowing money down a hole. Why should banks be treated differently to any other type of company? If they're insolvent, they should not survive.

harry_w

Generali wrote: »

TBH I was grasping for a word a bit when I used the phrase 'prop up'. Guarantee is a much better word.

If I had my way, we'd have lots of very small banks rather than a small number of very large ones. Retail banks would be tightly regulated in terms of the products they could offer and there would be no Government guarantee for savings or perhaps a few thousand quid. There would certainly be no bailouts ever - quite explicitly.

Investment banks would be very lightly regulated and would have to plaster warnings all over every product that they sold. It would be presumed that investment bank products shouldn't be marketed to private investors except the rich, rather like hedge funds today - investment banks have effectively been operating as hedge funds for years so should be treated as hedge funds.

The bail out thing is going to end in tears.

I don't see that would prevent investment banks and their rich private investors from flooding the financial system with derivatives that turn toxic.

Perhaps retail banking regulation would limit lending to prevent the non-rich from participating in the booms and busts which the upper classes and their bankers could still stimulate.

There is a need for more segmentation of banking, probably to revise Thatcherite reforms (mortgage market deregulation/demutualisation, and the Big Bang). Retail banking would probably benefit from clearer delineation between providers of savings and investments.

I think investment banks have effectively signed their own death warrant, they've been prime movers in bringing about this crisis. The US ones have redefined themselves to take advantage of TARP already. I see no reason to allow them to hop back over the fence if it suits them later. They've facilitated too much fraud (Enron, collusion with ratings agencies, corporate and personal tax evasion etc) to be allowed to maintain their activities on such a scale across so many markets.

There's no need to build up the next Lehman or Citigroup, they need to be broken up so that no institution is 'too big to fail' and shocks can be better absorbed within the financial system. Likewise many species of derivative have blown up because they became so abstract they couldn't be meaningfully valued. They're going to have to justify their very existance, and even if that can be done, the investors with a legitimate reason to own them needs to be revised (e.g. CDS without default exposure...naked CDS-ing?). The UK retail banks may have to be broken up after the concentration that's been allowed to take place in recent years, especially in recent months, and in the city, to go the reverse of the Big Bang.

I'm willing to tolerate measures to alleviate acute crisis and postpone restitution, but there must be a price to pay. If the government insist on propping up zombie banks, the surviving institutions must repay the whole value, even if it takes generations (the tax bill will endure for a similar timescale).

It would have been better for the government have steered clear of propping up the banks with free money (ZIRP) warping the economy and devaluing the currency and storing up a tax-bomb plus God knows what for the future (currency collapse, rampant inflation, years of stagnation under a debt mountain, ???).

People are inclined to save in the face of recession, I think there would be a lot that could be done to harness that to stabilise the financial situation facing the banks. It's critical to very visibly change the precarious situation of the banking sector. I'd be happy enough to see them go if there were reasonable protection for depositors and emergency bridging finance for industry & commerce.

But if they must be saved, it would have been better to have started by using the 'stimulus' from that pointless VAT trick to reform the absurd ISA system - raise the annual thresholds for a time-limited period to draw in the maximum amount of savings and investment into the banks. But to do that, the savers and depositors must know that they (not the banks) have guarantees while they remain within the new ISA structure.

Make them independent of providers in reality (not just in theory), owned and operated by customers, through which they can select providers of a variety of savings (fixed/variable/forex) and investments (equities/tracking funds, bonds, trusts, commodities), with weighting limits to prevent obviously reckless allocations.

I'd go so far as to say set up the facility for every adult in the country because the complexities of financial products are so daunting that many never get past the initial hurdles (tax status, market entry, transaction costs) and rely on investments that appear more straightforward - like the way bricks & mortar came to be trusted after some pensions disasters in the 90's. It might offer people a better view of the results of economic policies (omg they just killed sterling!). It might actually help people realise the link between the politicians they elect, the policies they carry out and the economic consequences.

The bailout will almost certainly end badly as people come to realise how they've been robbed and stuck with the bill for the party others enjoyed. It could get very ugly, but lets remember it was definately the bankers who started the class war this time.