Why we should have let the banks go bust

LizzieS_2

penguine wrote: »

From Moneyweek:





I was in favour of bailing out the banks at the time, because I thought the consequences if we didn't would be devastating for the rest of the economy. I'm starting to wonder if I was wrong.

Is it too late to stop bailing them out?

Never too late, but you are then creating a much smaller collection of markets who by default has more power.

The consequences of allowing bankruptcy of the banks could be deeper - deposits are guaranteed to a great extent, amounts owing to the bank are the real problem (there is nothing in mortgage/credit card/loan agreements that allow the banks to call in payment early due to their own bankruptcy, ultimately if no other lender steps forward, the Government would probably end up taking all these future debts due to the banks themselves meaning taxpayers have to stump up more).

The key, as already mentioned is for the Government to nationalise banks when helping them out - to create a greater profit later for the mugs who have effectively paid for it.

econo_2

Could just go back to the gold standard. Imagine some actual fiscal responsibility. Trouble is it won't make much chat for us all here though I guess!

Alan_M_2

CLAPTON wrote: »

lets have some examples of speculation

-in the 19th century in the US, speculators would offer farmers money today, so they could buy and plant seed in exchange for them selling their products at the fixed agreed price... now one year on that may be a good deal or a bad deal but was that immoral.. did both parties benefit or suffer.

- most (virtually all) housing in the UK is build by speculators.. i.e. they build before they have orders.. bad or good

-almost 100% of retail outlets (tescos etc) buy and offers goods before they have firm orders..i.e they are speculating... bad or good.

so what do you mean by speculators?

That's kind of where I was coming from, it's all tied up together at some point or another.

It's difficult to define Speculation and normal banking as there will always be this big grey area where they both merge.

Generali

Alan_M wrote: »

That's kind of where I was coming from, it's all tied up together at some point or another.

It's difficult to define Speculation and normal banking as there will always be this big grey area where they both merge.

My definition of speculation is buying an asset for a capital gain rather than it producing an income without you putting in significant 'sweat equity' (aka work).

For example, buying a house to sell in a year for more money is speculation. Buying a house to rent out for a viable cashflow is an investment.

Alan_M_2

Generali wrote: »

My definition of speculation is buying an asset for a capital gain rather than it producing an income without you putting in significant 'sweat equity' (aka work).

For example, buying a house to sell in a year for more money is speculation. Buying a house to rent out for a viable cashflow is an investment.

Yup, I see that, still it would be terribly difficult to divorce the two completely.

I see three categories if we're using the above as examples....

1. Mortgage to buy a home
2. BTL - Flipping
3. BTL - Long term rental yield.

Number 1 is private banking....

Both 2 & 3 are commercial in my view.....they always used to be.

Still one is much more speculation than investment and I've always agreed with that view, but from a banking point of view they are both effectively businesses and should be treated as such.

The trouble with that is two sets of mortgage departments and two sets of underwriters that in reality could effectively do the same job is two sets of overheads......so the banks merge to reduce costs and provide a better service and the risks eventually merge.

Whilst it would be ideal to have completely separate entities for private an commercial, it's actually commercial pressures (i.e. running costs) that will always end up forcing the two back together.

Degenerate

Pal wrote: »

The Banks should have been (and should still be) completely nationalised as a condition of financial assistance. Then we can bail them out knowing that we should have pretty strong businesses which can be re-privatised at a profit in a few years.

I've yet to hear a sound explanation of why this would help anything. The Government has already aquired huge stakes in these banks, which could indeed be sold at a profit if the banks have recovered sufficiently in a few years. As the biggest shareholder in these institutions, it is able to exert a huge influence over how they are run - indeed, the bigger concern has been not to interfere too much, as we want them to remain viable as private institutions.

What benefit is there to wiping out the existing shareholders and having to pay them compensation? The share prices plummeted and their stakes have been massively diluted anyway, so they have born a loss from the crisis. Those that hold the shares now are taking a long term view of their future value. Furthermore, the continuing existence of publicly traded shares gives the government ongoing price discovery, and the opportunity at some future point to either to drip-feed shares back into the market, or have the government shareholding bought back, thus concentrating the shareholding in the existing shares. These are easier options, and likely to realise greater value, that than dumping the lot wholesale in a privatisation event.

Getting back to the original article, although this is Moneyweek, and therefore not really fit to wipe my a**e with, they do kinda have a point - but thankfully it doesn't apply to the UK. After the bailouts we didn't fiddle or fudge, we took the pain of massive, pessimistic writedowns back in January. Whilst this did enable doom-mongers (including the opposition front bench and European politicians looking to distract from their own problems) to point and shriek about "Bankrupt Britain", it actually sorted us out quite nicely for an early recovery.

Degenerate

Alan_M wrote: »

In my simple mind I thought all the deposits were put in a central pot and the bank was then allowed to lend out or "play" with 10-11 times that amount of money.

Have to try and correct this misconception. They don't get to lend out money they don't have. Depending on their capital reserve ratio, they lend out say 90% of their deposits, and keep the rest in reserve. The "money multiplier" effect comes from the fact that despite having mostly been lent out, the money on deposit remains supposedly available to the depositor.

Example:
Person A deposits £100
Bank lends £90 of it to person B
As far as person A is concerned, he has £100 sitting in the bank, but person B has £90 so there is now £190 of money in existence from the original £100.
Person B buys something from person C
Person C deposits the £90 in a bank and £81 of that gets lent to person D etc...

Degenerate

matthewcb wrote: »

As things stand now, have *any* of the banks learned from this? They've made plenty of low/middle ranking staff redundant, but the people who made, and will make, the decisions have not really had any hardship at all. So, really, what's the incentive to reform?

It's not as if the bailouts took all the pain away - the shareholders have borne massive losses and they are ultimately responsible for appointing the board, so in theory there should be a route for the consequences of excessive risk-taking to feed back to the decision makers. Unfortunately, it's pretty evident from things like the Goodwin saga that this channel is broken. Shareholders are apathetic and not closely enough involved in company operations to make a difference. Boardroom cultures have evolved that serve only themselves rather than their shareholders.

The best solution I can see would be a system that makes directors take most of their remuneration in the form of shares that cannot be sold for a period of years.

Thrugelmir

Degenerate wrote: »

Getting back to the original article, although this is Moneyweek, and therefore not really fit to wipe my a**e with, they do kinda have a point - but thankfully it doesn't apply to the UK. After the bailouts we didn't fiddle or fudge, we took the pain of massive, pessimistic writedowns back in January. Whilst this did enable doom-mongers (including the opposition front bench and European politicians looking to distract from their own problems) to point and shriek about "Bankrupt Britain", it actually sorted us out quite nicely for an early recovery.

The bailouts have done little more than move toxic liabilities off the banks balance sheets and potentially make all of us personally liable. Recovery is dependent upon the economy. Bailing out the banks has only freed up the wholesale money markets. Money to lend will still remain restricted for an extended period yet.

Degenerate

Thrugelmir wrote: »

The bailouts have done little more than move toxic liabilities off the banks balance sheets and potentially make all of us personally liable. Recovery is dependent upon the economy. Bailing out the banks has only freed up the wholesale money markets. Money to lend will still remain restricted for an extended period yet.

You talk of the banks and the economy as if the two are somehow independent, when clearly the health of the banking sector and economy are inextricably linked.

Lending is indeed still restricted compared to where it was, but it's been steadily improving, since the big write-downs. Thanks to adequate state support, we do not have zombie banks here.