[Closed] Bankers: was it really their fault?

whatever they did is whatever most would do given the chance

Maybe so, but in many respects, it's also an utter insult to people who manage to do complex, demanding & stressful jobs [i]without[/i] the need for obscene levels of "reward". My boss (Senior Sister, Emergency Surgical Admissions) faces daily pressures that would make many of the Alpha City types pish themselves with fear - and she does so for a salary that they would regard as pocket change.

**** 'em, tbh. If I wasn't so restrained by middle-class politeness, I'd get me a rifle and build a wall. 😈

Sorry pitch pro, but banks do lend out investors money (in the form of debt). In the past, and in the cases of HSBC and Stan Char still now, banks essentially lent out their deposits. In the past decade or loans exceeded deposits by [b]multiples [/b]precisely because banks lent out other investors' money. That was a key reason behind the crisis and why the rules are changing now.

MLR - I must be getting it wrong - surprising given my knowledge eh - I will just take the piss out of me
The minimum amount of depositors savings the bank must actually keep with the Bof E

Is the capital adequacy set at a similar percentage - ie they must only have a set % of it available that is less than 100%

Well, to answer the op I think it was:

The Banks:
• For lending money to people that couldn't afford it;
• For coming up with derivatives that let them offload mortgages to other institutions, and then believing their own hype that they were ok and stuffing themselves in the process;
• For being clueless about risk

The Rating Agencies:
• For rating those derivatives as AAA when they weren't so that those other institutions assumed they were ok;
• For being paid by the banks (so they were hardly independent);

The SEC/FSA:
• For being clueless to what was going on and applying a "light touch" when they should have been all over the banks/rating agencies;

The other institutions
• For believing the rating agencies etc;

The Government:
• For promoting a "light touch"
• For, whichever government it was, changed the law so that investment banks were allowed to use retail bank's "money";

The Public:
• For believing they could borrow money when they couldn't afford it;

Etc, etc, etc...

NO definitely not ...its our fault for [s]wanting[/s] having a requirement for money

if we didn't they could quite happily keep it all and we would be unaffected

Pitch pro - you should google de Soto and read a summary of his work. His classic book is too long for most of us. He argues along the same lines as you and is a brilliant read. A Peruvian economist with strong views on why banking is flawed. All linked to the idea of how banks "create" money and why this is/isn't flawed.

even a child should get this now, investors money allows the banks to loan money it does not have. 1 million in bank 10 million can be borrowed.

This is purposely made complicated so if the masses don't understand it they won't realise they are being scammed.

Cheers teamhurt I'll give it a read.

JY - you are merely showing you age, That was abolished some time ago, probably around the time you took your Econ A level :wink:. Banks currently hold voluntary reserves with BoE. Of course the amount they deposit with the Central Bank does affect the multiplier. But I dont want to get abused for introducing technicalities!

Ok, see if I can do better than cost of capital and profits v profitability

[b]Banks assets[/b] = cash, loans to you, me and others, and investments etc. All have certain levels of risk set by regulators

On the other side of the balance sheet

[b]Banks' liabilities:[/b] put simply, equity (investors money), deposits from you, me and others and debt (also investors money).

They have to keep a minimum amount of equity in relation to the level of their assets (weighted according to the risk). Since cash has no risk, the weighting is zero, so they hold no capital against cash. Since a loan is risky, you may not pay them back :wink:, the weighting is 100%. And banks have to hold a percentage of that in equity capital. This ranges at the moment and is going up, but to keep it simple assume 10%.

So if they lend you £100, they have to keep £10 ((100*100% risk factor) * 10%) as equity capital by regulation.

Since the crisis, new rules are also being phased in regarding the balance between loans and deposits and on the mismatch between short term deposits being used to fund long term loans. These are liquidity rules as opposed to capital adequacy rules.

Some "free-market" hey? 😉

PP - you will get a prize if you make it through the book. Money Credit and Banking but you can read it free in the web. I

https://mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290.aspx

He is associated with a RW school of economics but what he says about banking will appeal to many LWers. In short he argues that every deposit lent out should be backed by an equivalent cash reserve.

Now explain all this to millions of people and don't vote for a constituency that basically remanages the criteria of this banking system but never rewrites it so it fair. Changing political parties is the same as passing debt from one company to another recovery company.

cheers , not least for saying age and not ignorance, but I understand your point

One thing we really need to teach in schools is macroeconomics and capitalism, and especially the downsides of excessive debt. It's a complex system with many players and many incentives to misbehave in favour of jam today.

A lot, if not most of the general public had no idea how out of control things were and why buying so much on tick was a bad thing (all the nice shiny things would have to be paid for some day).

What I'm really shocked about is that house prices in London have gone up 10% in a month... less than five years after such a major bust and one we are still working out of, with most of the country struggling. Have we learnt nothing about over-borrowing?

What we need to teach children is marksmanship, then we need to put a bounty on 'economists' and other such purveyors of fairy tales.

Biggest credit crunch/crisis/total financial meltdown ever, and how many economists were out there in the media telling us that it was coming? How many were advising us that we should change our ways in order to prevent this? How many were advising governments and financial institutions that they were doing it wrong?

...and we still listen to their explanations with respect?

Ahm a gonna git me my gun....

Crikey, that's a bit unfair. As always the non-consensus views were drowned out (like climate change?). FWIW, the BoE was aware of the risk (in published documents) but like many others chose to ignore it. And we let the Governor off!?!?!?

JY - pleasure (?!?!) but you have really disappointed me 😉 ! I have thrown out the idea that banks are low profitabitilty companies three times in 24 hours and you haven't bitten once!!! 😉

that's a bit unfair

I don't think it is. Economists would have us believe that the things they say and the things they are taught and the things they teach others have credibility, that they can observe, assess, predict they way that economies will work, will react, will develop.

Well? Where were they when it counted?

the non-consensus views were drowned out

So it was a PR problem?

My feeling is the solution is to say that an no time should private investors (individuals) own more money than exists in the economy

Alright, but how do you define money? What actually is it?

Gordon Brown and Ed Balls. They proclaimed to have ended boom and bust, so they should take responsibility for the bust that followed.

To name just a few

Most famously Nouriel Roubini aka "Dr Doom" and made a fortune
Many at the BoE
Steve Keen down under in Aus
Krugman
Stiglitz
Wynne Godley here
Dean Baker
Soros
Shiller
The smart ones at the hedge funds who shorted the banks and are now billionaires !!!!

But people don't like to listen to bad news do they?

I have thrown out the idea that banks are low profitabitilty companies three times in 24 hours and you haven't bitten once

😀 😉

But people don't like to listen to bad news do they?

Yet economists seem to get away with not having a bloody clue, yet maintain a certain credibility. It's like magic!

I could post a list of the economic disasters that economists failed utterly to predict, but you'll know all about them.

I find it intriguing that any credibility at all is given to a subject that has failed so miserably yet again, while appearing to be a valuable source of advice and information.

Anyway, as you were.

Gordon Brown and Ed Balls.

Well I'm not sure how Ed Balls the Secretary of State for Children, Schools and Families, was responsible for the collapse of Lehman Brothers, but it's an interesting proposition.

No-one answered my question. Does money actually exist? I don't think it does, which is why banks can lend more than they own and we are dependent on their existence.

Some bits do mol, yes.

M1, the narrowest measure of money, includes the hard stuff - actual notes and coins in circulation!

I'm beginning to suspect that Crikey might be me. Never seen us in the same room together...

But that's what strikes me as bizarre about the whole chain of events. Yes banks, yes subprime mortgages, yes financial innovation that miraculously turns liabilities into assets and funds creating more liabilities, all that good stuff. Very exciting recession with lots of cool new things to be recessed about.

But afterwards, we turn straight back to the same people who were supposed to know what was going on in the first place, but didn't. We still cack ourselves at the threat that credit agencies will reduce our rating (even though they rated Greece as an A until mid 2010) despite them being so complicit in the subprime crisis, we ask the same economists who had no clue what was going on what's going to happen next and what we should do... It's like Molgrips going back to the same old mechanics 😉

PS yes I am fully aware that some economists were publically predicting what was going to happen, so let's add another level of weirdness, that the ones that got it right barely have any more voice now than the ones that got it wrong.

It appearers that learning economics teaches greed and selfishness.

http://www.bbc.com/future/story/20131022-are-economists-more-selfish

Economists have forecasted 9 out of the last 5 recessions.

Q: Why has astrology been invented? A: So that economy could be an accurate science.
Economic forecasters assume everything, except responsibility.

...and so on. Are we getting our haircut tomorrow Northwind?

Does money actually exist? I don't think it does

Thanks in advance

I agree with NW and crikey [ except the haircut bit everyone knows I love mine as it is].
It is not a science and its not that predictive. At best its approximate rules of thumbs. Financial institutes are largely faith based hence why none of it can account for panic and greed.
Take house prices we all know they will crash one day - if new people cannot enter the market its irrelevant what your house is worth if you cannot sell it. I doubt anyone can predict when it happens though we are ever getting closer.
If it helps I will predict boom and bust as an eternal cycle under capitalism.

so let's add another level of weirdness, that the ones that got it right barely have any more voice now than the ones that got it wrong.

It's not really weird at all. You're looking at it from the wrong angle - you're assuming what happened was completely unacceptable. You're not looking at the bigger picture.

The crises of 2007 was the logical conclusion of 30 years of neoliberal economics and deregulation on both sides of the Atlantic. A period of time which saw a massive unimaginable increase in the wealth of the 1%.

Sure, the Global Financial Crisis and all the economic instability it caused could hardly be described as desirable, but it didn't undo what had been achieved over the previous 30 years, ie, the massive accumulation of wealth in the hands of the few.

Furthermore those responsible for the crisis got off scot-free and the burden was placed firmly onto the shoulders of the people with no discernible wealth or power.

And in the case of the UK a banker friendly government was able to effectively use the situation in their favour and carry out widespread ideological motivated cuts in social provisions, and remarkably, to a great extent blame and demonize the poor people for the crises which the country was/is experiencing.

It would be wrong to dismiss neoliberal economics and believe that it requires a revaluation purely on the basis of the Global Financial Crisis, if you are a neoliberal of course.

So it's business as usual ......... no need to change anything, no need to listen to anyone else. Don't expect change.

ernie_lynch - Member
Gordon Brown and Ed Balls.

Well I'm not sure how Ed Balls the Secretary of State for Children, Schools and Families, was responsible for the collapse of Lehman Brothers, but it's an interesting proposition.

Ed Balls was economic adviser to Shadow Chancellor Gordon Brown in 1994. When Labour won the 1997 general election, Brown became Chancellor and Balls continued to work as an economic adviser to him. He went on to serve as Chairman of HM Treasury's Council of Economic Advisers.

Balls became Economic Secretary to the Treasury in the government reshuffle of May 2006.

By then, the damage was done! Only after that was he Secretary of State for Children, Schools and Families (27 Jun 2007).

Balls became Economic Secretary to the Treasury in the government reshuffle of May 2006.

And 2 years later Lehman Brothers went bust !

If that doesn't point the finger of guilt then I don't know what does.

For three years, the young assistant professor took his vacations at a country inn. He had an affair with the innkeeper's daughter. Looking forward to an exciting few days, he dragged his suitcase up the stairs of the inn, then stopped short. There sat his lover with an infant on her lap! "Why didn't you write when you learned you were pregnant?" he cried. "I would have rushed up here, we could have gotten married, and the child would have my name!" "Well," she said, "when my folks found out about my condition, we sat up all night talkin' and talkin' and we finally decided it would be better to have a bastard in the family than an economist."

Whats frankly unbelievable is that once again the axis of greed and stupidity that is the government and the banks are now conspiring to fuel another debt laden housing boom, in a short termist insanity that will inevitably lead to the same conclusion as the last one! They've learnt nothing. But then why would they when they all just walked away unaffected by the carnage they caused, and left the rest of us to pick up the tab?

Brown-Balls so smugly announced that they had put an end to boom and bust. Obviously there are myriad causes to the recession we had (which was not double-dip btw), but they could have done more to protect us and we could have fared a bit better.

At risk of undermining myself, I just don't like either of them!

At risk of undermining myself, I just don't like either of them!

So you confess !

Among other things, economics suffers from two things

Like politics, economics is weakened by the fact that people feel the need to define themselves according to certain "schools of thought" eg, at it's simplest Keynesian v Monetarism. It is unnecessary and unhelpful and leads to sterile debates. Current issues within monetary economics are a great example of this. Some feel the need to insist that certain relationships are constants for example despite evidence to the contrary. The interesting stuff comes from trying to understand why and how the thereotical frameworks may have broken down and why the constants are variables not constants. Economists should not fear this.

The ever-increasing domination of maths within economics gives people a false sense of precision. Economics is at best a social science without the precision that many believe in. IMO it is best studied in conjunction with politics and philosophy. This makes it a more "real" and useful subject.

At is best, economics give people analytical frameworks that allows themto make sense of the world around them. In fact, we are all economists every day, since economics is concerned with how we allocate scarce resources and none of us can escape this need ever day of our lives.

As an example, economics gives us a very simple set of tools that explain the "why" behind Binners points above.

So you confess !

I do, but I stand by the points made.

End of correspondence!

THM that is an exceptionally good post.

Why thank you! 😉

As always the non-consensus views were drowned out (like climate change?)

How refreshing to find an interesting and informative thread that the dickheads have stayed away from!

ZOMBIE APOCALYPSE! YOUR BIKE IZ SARACEN

Aaah, that's much better.

To answer the OP's question. Yes.

Banks started lending more and more money against the assets they had.
Other bankers were basically running the financial equivalent of the horsemeat scandal (Credit Default Swaps).

End result is that if a few people start defaulting on mortgages, banks are going to go bust. Banks are pretty important to the economy, and so the government had to prop them up. At some point the management of the banks will have realised that they had a free insurance policy in place...

You can argue that there's a place for regulation - see the split of Lloyds TSB, the BoE insisting that banks hold more capital to avoid the risk of banks going to the wall in future etc. Ultimately, the management of the banks went down a risky path, and the bet didn't come off for them.