bankers, politicians and the public

everybody wanted easy money and quick profits, the issue was bankers gambled with what wasn’t theirs – down to lack of integrity and regulation(see politicians) and a total lack of accountability, politicians have the problem of not really wanting to tell people bad news as it can cause election issues, and again they’re gambling with what isn’t really theirs, and aren’t properly accountable (*MPs in safe seats don’t get voted out), the public – well the fundamental problem they had was it was theirs and they were accountable

I blame politicians the most, ultimately what controls behavior is the law (where they failed totally in terms of financial regulation/accountabilty) and they’ve been overspending for years – something that you or I would not be allowed to do.

For me banks are more a mirror of what is going on around them than the sole driver of events, especially as they are relatively low profitably businesses that rely on massive leverage to generate their returns. This magnifies the good and the bad. Currently the bad!

When I started my professional life, the overall level of debt in the UK economy was 220% of GDP. Twenty odd years later it was closing on 600%. This gorging on debt happened across all sectors of the economy – governments, corporates, banks and households. Everyone was feasting and boy what a great time to be a banker!

By borrowing, we all allowed ourselves to bring forward our consumption and delay paying for it. And didnt we all enjoy it!?! Economists were given Noble prizes for arguing why this doesn’t matter. And Central Bankers went from being faceless beauracrats to global superstars earning millions on the lecture circuit. But at some point this gorging has to stop. The cycle has to be reversed. Payments have to be bought forward and consumption has to slow/be delayed. The future we and our children now face.

But towards the end of the gorge fest, we had a succession of crises where policy flaws became horribly exposed. What happened? More of the same. And so we come to the start of the current crisis. To correct previous errors central bankers flooded the world with liquidity at a time of artificially low interest rates. A double whammy and catastrophic error. Markets became grossly distorted and risk was mispriced globally. Then regulators introduce a system that made behaviour even worse.

So if you flood the economy and the banking system with money and you keep interest rates artificially low to correct for your past mistakes, and then tell bankers that it is half as risky to lend to some bloke with no money to buy a house rather than a big company with a strong balance sheet or lending to Greece is the same risk as lending to Germany, why are you surprised when banks do silly things deliberately or otherwise?

It happened in the past, it is happening now (mis pricing risk massively yet again) and will probably happen again in the future.

@samuri – banks are public companies owned by shareholders, banks have shareholders money and money they’ve borrowed (this includes money people deposit with them). When banks loose money its the shareholders money they loose first. Banks have lost a huge amount of money. It’s misleading to say banks don’t loose “their money” they aren’t private companies so like all public companies their money comes from a variety of sources. Most senior level bank employees have many millions tied up in bank shares so some of the money they are loosing is their own.

@pitchpro others have commented on your argument so I won’t add more to the “banks create money debate”, however with regard to bailouts. Governments around the world allowed many institutions to fail and investors in banks (be they private or institutional like pension funds) lost a huge amount of money. The “bail outs” given by governments prevented a real catastrophy, most of this bail out money was loans which either have been or will be paid back or guarantees which where never used (and on which the uk government, ie taxpayers made a profit in the many billions).

The uk government encouraged Lloyds to bailout (buy) HBOS which was a terrible error for them that has cost Lloyds and it’s shareholders many billions.

Bankers are just like you but they work in Finance, whatever they did is whatever most would do given the chance. Its the same reason Oil execs are happy to cause climate change and Food execs are happy to cause an obesity pandemic.

Shareholder return is all that matters, provide that, get well paid for a couple of years and get out.

banks have shareholders money and money they’ve borrowed (this includes money people deposit with them)

Thats quite misleading as the shareholders dont actually give the bank money to lend out when they buy shares do they

Secondly the money they lend out from depositors is still actually the depositor who could ask for it back at any time and they have generally not given the bank permission to lend it out – what is the MLR 10 % ish ie only 10 % of depositors could actually withdraw their money from the banks

Given this it seems reasonable to say its not the banks money they are lending out.
[/quote]

Most senior level bank employees

what % of banking employees actually have millions at stake in terms of the banks performance – it will be tiny – less than 1 % I assume so here you are somewhat over egging the oudding

I tend to agree with THM we all banked on the fact boom and bust had ended and loans were always safe and the future certain. We assumed payments would always be met and growth would be unabated.
The problem is the money is not actually there currently and its just down to how confident you are that you will get the money back be it my mortgage payments or an other debt.
that is you are gambling on the future to have a happier now.
Sometimes, with say a mortgage it makes sense sometimes it does not

Bankers are just like you but they work in Finance, whatever they did is whatever most would do given the chance.

at its extreme, like hard faced cold calling sales people, its not it has amoral folk who would sell their granny for a £5 bonus or sell their granny PPI she did not need. Essentially they care more about them than anything else. it attracts folk like this just like social work attracts folk who want to help. Not all bankers are like this but I imagine they are not like the general populace – this may be true of many professions though their qualities may be more palatable depending on your own personal moral compass

The shareholder capital thing may be slightly misleading (although that’s not jambalaya’s point) but it is still relevant. True, banks donot lend out their capital but every loan and indeed every asset that carries risk has to backed by a set proportion of capital (capital adequacy).

The funny thing about the whole issue of “banks making money”, is that (because banks are still essentially broken) the multiplier effect has gone into reverse globally. Hence the money being pumped into the system is not flowing through into the economy. Nor is it feeding (yet) into inflation. So much for the Quantity Theory of Money! One reason why GO cannot claim too much credit for the current recovery. It’s nowt to do with monetary policy. If he was honest about what his real policy was then may be we could give him some credit, but honesty would be embarrassing for him.

but every loan and indeed every asset that carries risk has to backed by a set proportion of capital (capital adequacy).

Is this like the MLR – ie 10 % ish so its still not actually secure?

Genuine question though I am loathe to ask you to explain 😉
Said in a friendly way not an STW way for clarity!
It is , to some degree, just down to faith or confidence. Right now they remember getting burnt in 5 years time they wont they will remember last years bonus till it all happens again.

It’s nowt to do with monetary policy.

It has nowt to do with it under thatcher either iirc. I think we can both agree, like GB ended Boom and Bust, he will take the credit for it.
To be fair I am not sure any govt [ or individual or company either] has that much influence over the global markets except Vince obviously as he is awesome – again no malice just banter – i shall stop if taken the wrong way as its not meant to be rude or goading – just say

Banks are not allowed to borrow out investors money, they legally ‘must pay the bearer on demand’ the sum. Banks are not allowed to use antibodies money. The money is created when you sign an agreement saying you agree to the payments, this is a legal cheque and can be written on toilet paper. At that point banks lend you the money. If investors have a million pounds banked the bank has to be able by law to pay back that entire sum. The loaned money is ‘created’ when you sign an agreement and this is legal.
Banks get the money from the trust and its printed on these agreements. Investors do not print money, they can’t it does not exist.
My feeling is the solution is to say that an no time should private investors (individuals) own more money than exists in the economy. Also no institution should be allowed to borrow money it does not have.

Reluctantly, I will respond. What is the MLR that you are asking about?

Plus remember in the event of failure shareholders come last in the peckin order of who gets their money back.

I have just spent all last week analysisng what is going on in Europe regarding essentially how one £1 injected into an economy becomes more that £1. Unfortunately for all of us, that is not happening at the moment. Working out why, is the fun bit!! This all puts Osborne and others in a bit of a pickle.

Don’t mind Vince. He’s my new mate, I knew nothing about UK nuclear policy until 48 hours ago! Then I read his/his departments strategy reviews. Fascinating stuff.

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 without 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 multiples 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 wanting 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.

http://www.youtube.com/watch?v=Hg_1iXbIjFQ&sns=em 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

Banks assets = 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

Banks’ liabilities: 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

I am slowly becoming aware of the extent of my ignorance and picking my fights 😛

😀 😉

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

e-mail in profile molgrips Paypal gift is fine with me – after all its not real so you wont mind

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.