I recommend that you read Michael Lewis’s commentary in Bloomberg on former Bank of England Governor Mervyn King’s book, The End of Alchemy. Mr. Lewis is the author of Moneyball among others and the commentary is chatty, anecdotal, and hard to summarize. Here’s the kernel:
King’s starting point is that the 2008 crisis wasn’t an anomaly but the natural consequence of bad incentives that are still baked into money and banking — and so quite likely to create another, possibly even greater, crisis. “The strange thing,†he writes, “is that after arguably the biggest financial crisis in history nothing much has really changed in terms either of the fundamental structure of banking or the reliance on central banks to restore macroeconomic prosperity.â€
with this
The financial system, King reveals, is still wired so that a handful of well-connected people capture the benefits from risk-taking while the entire society bears the cost. Complexity was once used to disguise the risk in the financial system. Now it’s being used to disguise how little has actually been done to fix that system.
and this
The first thing that King thinks must be done is to separate the boring bits of banking (providing a safe place to deposit money, facilitating payments) from the exciting ones (trading). There is no need, he thinks, to break up the existing institutions. Deposits and short-term loans to banks simply need to be separated from other bank assets. Against all of these boring assets, banks would be required to hold government bonds or reserves at the central bank in cash. That is, there should be zero risk that there won’t be sufficient cash on hand to repay people wanting to flee any bank at a moment’s notice — and thus no reason for those people to flee.
I can’t remark on banking in the United Kingdom but in the United States the evils he’s trying to remedy are the purpose of the system. Let me put it another way.
If you reduce the risks of the system, the rewards will be reduced as well. If you reduce the rewards, there won’t be any cushy jobs in finance for former Fed governors or other alleged public servants. The whole object of the game is to offload risk on to the greater society while continuing to capture the outsized rewards. Those aren’t bugs, they’re features.
There’s no earthly way short of revolution (and I don’t mean figurative revolution) that his proposed reforms would ever be adopted, at least not in the United States.
“…still wired so that a handful of well-connected people capture the benefits from risk-taking while the entire society bears the cost. ”
Uh, yeah. One of the nominees for president touts her husbands tenure, a period when he signed into law the biggest regulatory rollback contributing to the crisis. And she gives wildly priced speeches to Goldman Sachs. Maybe they are well connected (snicker). Or maybe she is just very interesting. (Double snicker). Oh, and I know of three people on this blog site who have expressed intentions to vote for. So anyone expecting change?
Back when these sites were inundated with troubled bank essays I advocated the “standard model.” I still do. Start washing out the claims from the common equity up. Like a real workout. Not like a bank, or GM. Screw the connected.
“Against all of these boring assets, banks would be required to hold government bonds or reserves at the central bank in cash. That is, there should be zero risk that there won’t be sufficient cash on hand to repay people wanting to flee any bank at a moment’s notice — and thus no reason for those people to flee.”
WTF? Maybe the Kings English doesn’t translate well. Who will intermediate savers and investors? Better to slice things into commercial and investment banking.
The way I interpreted that was that he wanted a version of TastyBits’s full reserve banking.
This might be similar, but it is not the US financial industry. The problems Professor King has noted are similar to the ones of Sen. Glass and Rep. Steagall. He might be overthinking the problem, or there could be something more to the UK system.
I do not necessarily advocate for a fully reserve lending system, but the system as it is now is untenable. You cannot keep creating money by leveraging money that was created by leveraging money that was created by leveraging money that was created by … ad infinitum and assume there will be no consequences. Venezuela, China, and Europe are the result. The US might have enough stored wealth to never quite reach that point, but it can drag along the bottom for a long, long time.
When given the opportunity to fix the system caused by the repeal of Glass-Steagal, Democrats devised Dodd-Frank as an attempt to “eat your cake and have it too”. Rather than tell their rich donors that they would have to keep their hands out of grandma’s retirement account, the Democrats decided that they were smarter than their rich donors (who would never hire them because they were too stupid to make them any money), and Dodd-Frank has not even been a speed bump.
The simple solution would be to update G-S as needed. The boring banks are regulated, FDIC guaranteed, and fractional-reserve lending institutions. They cannot make a large return on any single investment due to regulations on risk taking, but the fractional-reserve lending means that they are actually lending multiples of their capital. In essence, it is as if they have substantially more capital, and subsequently, the returns on the returns on the actual capital will be significantly greater.
The dollar should be changed from a credit backed system to an asset backed system. Something like Professor King’s Central Bank’s pawn broker window might be workable for non-commercial (regulated/FDIC banks). To obtain dollars/pounds, you would need to exchange something of value, an asset.
“Uh, yeah. One of the nominees for president touts her husbands tenure, a period when he signed into law the biggest regulatory rollback contributing to the crisis.”
Hmm, I wonder who actually wrote that bill? Who was running Congress then? The banks may rent the Democrats, but they own the Republicans.
“there won’t be any cushy jobs in finance for former Fed governors or other alleged public servants.”
People look at campaign contributions, but this is what they should look at. The banking sector hires family too, including wives and children.
As I pointed out when we discussed inequality, I think we may really have reached the point where the wealthy have sufficient control of almost everything that could affect them to be safe from change. They control the media, government, schools, think tanks, contributions (especially the secret ones). They caused the worst financial crisis in 80 years, and almost nothing happens to them. Millions of lives ruined forever.
OTOH, have a sit-in and you are an awful rioter. People need to sit back and politely ask the bank and wealthy folk to stop this. That will definitely work.
Steve