We mean it this time! We really do!
Reckless banks will be allowed to go to the wall so taxpayers never have to bail them out again, George Osborne will announce today.It's common in parts of London to hear a Cockney slang phrase that goes something like "don't tell porky pies"- which, for you Americans who don't speak English, means effectively, "don't lie". Evidently this is one maxim that the high and mighty Chancellor of the Exchequer rather forgot.
The Chancellor will outline plans to ring-fence high street operations from the reckless ‘casino’ investment arms that caused the financial crash.
And in what amounts to the biggest shakeup of the banking industry in decades, he will threaten to forcibly break up banks that break the rules.
Mr Osborne will use a speech at the Bournemouth offices of JP Morgan to promise that no bank will ever again be ‘too big to fail’.
‘When the RBS failed, my predecessor Alistair Darling felt he had no option but to bail the entire thing out,’ he said.
‘Not just the RBS on Britain’s high streets, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.
‘I want to make sure that the next time a Chancellor faces that decision they have a choice – to keep the bank branches going, the cash machines operating, while letting the investment arm fail.
‘No more rewards for failure. No more too big to fail. No more taxpayers forking out for the mistakes of others.’
In a past life, I used to work at a large British international investment bank, and I had a ringside seat to the Panic nearly 5 years ago in which banks worldwide were bailed out after a series of positively baffling policy responses on the part of the Fed, the Treasury, the Chancellery, and virtually every other major government organisation involved in regulating the financial sector. The idea that the British government will somehow fail to bail out banks that they themselves have labelled systemically important is utterly fatuous. I remember very clearly the day the CEO of that company made a global firmwide vidcast in which, after a bit of blather about coming together as "one bank", he stated with perfect clarity that the FSA, FINRA, and the Federal Reserve had basically assigned banks ratings such as SIFI (Systemically Important Financial Institution), NSIFI (National proverbial), and GSIFI (Global proverbial). In other words, every bank knew where it stood in relation to the industry in the eyes of the governments they dealt with every day. The people at the top ranks of these global banks will not hesitate to use that knowledge for their own ends- and these people are neither stupid nor, contrary to popular belief, evil. They are merely men, sometimes strong, sometimes weak, sometimes wise, sometimes foolish, and forever Fallen. They will act rationally in accordance with the incentives they are given. They will push the balance sheets of their firms to the very limits of what will be tolerated under the xSIFI designation- and then beyond, because that is how you make a profit in modern credit-based banking under a fiat-money regime.
Are global regulators really stupid enough to believe that this will not happen???
The correct policy response to the Panic was to let the banks fail. That is still the correct policy response today. Iceland did precisely that, and the much-ballyhooed global freeze-out of Iceland's markets and firms failed to materialise. And yes, I am quite well aware that this would mean that someone like me would probably be unemployed for a long time. That does not change the fact that it was the right thing to do. Banks like Lehman, Bear, Merrill Lynch, BofA, and every last problematic British bank, should have gone bankrupt. Their assets should have been stripped and sold at fire-sale prices, which is what happened to Lehman. ( I am fully aware that there were a fair few shenanigans surrounding the sale of Lehman's North American business to Barclays. I do not require a reminder of events to which I myself was a witness.) The suffering and pain would have been immense. But, if you were there 5 years ago as the banking sector was imploding- as I was- and you could have seen into the future, into the Second Great Depression, would you really have argued that this would somehow be better?
Instead, the British and American governments injected billions of dollars into a banking system that they themselves created and supported. The entire global banking system today is built on foundations of sand- or at least, credit, which is of roughly the same consistency. And they have deluded themselves into believing that this course of action was correct, just, and responsible. It was nothing of the sort. They threw money that was not theirs into a futile attempt to stave off the inevitable debt-deflation that must come whenever a massive credit bubble pops. The only reason the world has not sunken into a deeper depression now is because government debt is substituting for private debt. It will only take a bank the size of, say, Barclays or Lloyds TSB going bankrupt to topple the entire house of cards.
What really amazes me is the conceit of these people. They honestly believe that one more law, one more regulation, one more bloated and easily corrupted regulatory agency, is all that will be required to clean up the banking sector. They never once stop to think that in fact they are the problem. The proliferation of easy credit, courtesy of absurdly low interest rates around the world, has guaranteed that the next credit bubble will be far larger and even more devastating than the last one.
I should also point out the immense personal cost of these actions to those who work in the industry. It's easy to demonise bankers and traders who make millions in bonuses and base pay every year, but understand that there are hundreds of thousands of others that support those businesses every day who do not deserve that wrath. They seek to do a job as best they can, and because of the stupidity and folly of their governments and leaders, they have been forced to endure half a decade of stagnant wages, low to zero bonuses, and the constant psychological threat of losing their jobs. The fun and joy of working in this industry is gone. The challenge of solving difficult problems is disappearing. In its place, they are faced with an ever-growing regulatory machine that is both absurdly complex and infuriatingly self-contradictory. It sometimes comes down to one regulator wanting size 14 font on a risk sign-off and another wanting size 12. Seriously. It gets that absurd.
Government regulators around the world think that standardising derivatives, banning exotic and structured businesses, and separating investment banking from deposit-taking institutions will solve the problems. They won't. They think that forcing all derivatives to go through central clearing houses will lessen systemic risk. It won't- going through central clearing actually increases systemic risk, because each member of a clearing house pays a (rather substantial) fee to be part of that house. One member goes down, and suddenly the clearing house itself is at risk, which puts everyone at risk.
These people are trying to regulate businesses they don't understand, with tools that don't work, and refuse to recognise that they themselves are the problem. And then they wonder why no one believes their lies anymore.