Banker Bonuses – A quick comment

Just a quick comment on banker bonuses and specifically the bonus of Mr Hester at massively bailed out but STILL loss making RBS.

The argument I have heard frequently in the media (most recently this morning on the Today Programme on radio 4 this morning) is that the bonus really has to be paid because it is the necessary recognition that Mr Hester is doing a good job at making the bank less disastrously awful than it was. We should also pay him because otherwise he and others might leave. We, the tax payers, would then find we could not retain the best people. They would leave to go to better paying banks.

There are so many stupidities in this line of reasoning it boggles my brain that they are all so blithely acepted without comment or question by the  journalists, broadcasters and generla chip munching morons .

First let’s just apply the argument to another profession. Let’s say a teacher who is doing a very good, top flight job in her classroom. Not only does she not have a the kind of bonus scheme that we are told is absolutely necessary for bankers, but more importantly, no matter how  brilliant our teacher is, she is currently being told that because of the economic situation she can’t have even an at inflation pay rise never mind a bonus.

So Mr Hester and his like must be rewarded extravagantly (his basic salary, before any bonus, is about £1 million) but teachers and the rest of us must accept real terms cuts to our earnings.  The logic for Mr Hester that it is absolutely necessary to reward those who do a good job far above and beyond  the basic salary which they are being paid presumably for doing…a good job?! The same logic is NOT applied to the rest of us because …well.. you understand we’d love to reward you but times are tough and well..we are all in this together.

Have I got that right? Have I missed something?

Then there is the – “Oh. Well. I see why you’re upset at this but if we don’t just swallow this unfortunate inequality then we risk losing the best people “- argument. Once again let’s apply this to our teacher.  If this line of argument is so very important and persuasive WHY have none of the people who make it EVER been heard to worry that teachers and nurses and Police detectives and thousands of other rather skilled people will leave their professions because they are NOT being paid bonuses, or even decent salaries, for doing their jobs well?

Speak up Tory boys! I can’t hear you.  Little louder please so we can all hear.

Why do bankers have a ‘basic’ salary and then a bonus. While the rest of us just have a ‘salary’. It seems that a mere ‘salary’ for them is just too ‘basic’. While for us, it’s all there is. No one questions. 

The argument is that bankers need to be rewarded or they will leave, but neither our leaders nor the bankers give a stuff if good teachers leave their profession nor highly qualified nurses? Because their children aren’t taught by those common sort of teachers in state schools? Perish the thought of mixing with the ‘un-bonus-ed’!

Or maybe it just never occured to our leaders and ‘betters’ that the same logic should be applied to us all. You see forigve me for getting a little angry but I could have sworn I heard someone say we were all in this together.

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170 Responses to Banker Bonuses – A quick comment

  1. Jonahsdad73 January 27, 2012 at 11:40 am #

    It’s about time someone came out with the argument you’ve just put. Heaven forbid that £1million+ per year be considered enough to get by on. Clearly a hefty bonus is required too. Sounds like greed to me.

    I also like the argument that the bonus must be paid as there is a contractual obligation. I am sure most public sector workers believed there was a contractual obligation in relation to their pensions, but obviously that doesn’t need to be respected.

    Grrrrr!!!!!!!

    • mikems January 30, 2012 at 12:29 pm #

      It’s another paper thin tory argument. Public sector workers do actually have contracts concering pay and pensions.

      Mr Hester’s contract does not have anything about bonuses in it.

      If Hester had a contract and it was being broken then there would be some slight similarity, but he simply hasn’t and there is no sense in the comparison.

      But, once again, this simple and obvious point is frequently ignored by the professional journalists who sit and listen to all these lies, half-truths and talkiing points without a quibble.

      • Synopticist January 31, 2012 at 10:32 pm #

        Yeah, right.

        How the hell are they getting away with that argument?

  2. Hawkeye January 27, 2012 at 12:03 pm #

    I seem to recall many years ago in my yoof, I unwittingly cost my company a loss of about £1000. Some money was was stolen (robbed) from the shop safe whilst I was on duty.

    The company felt duty bound to sack me for negligence and then deducted the full amount of the loss from my final month’s salary (which at the time equated to one months salary!).

    No reward for failure. In fact the opposite.

    Somewhat unwittingly then, I was of the status of an Equity investor in that company. If it lost money, then so did I.

    There was a time when bankers were Equity Partners, and so any loss would actually hurt the pockets of the management. But not anymore.

    The 1% of this country have no intention of accepting the role of Equity investors. They want to accumulate wealth and power, whatever the level of success (or failure) they achieve, their firm achieves, or even the country achieves.

    Even Adam Smith himself would weep.

  3. Andy Williams January 27, 2012 at 12:47 pm #

    The obvious answer is to legislate bonuses. If a company offers bonuses, golden handshakes, parachute payments then they must be offered on a pro-rata basis to the entire workforce. Even the tea lady.

    • Hawkeye January 27, 2012 at 3:54 pm #

      Andy

      Legislating bonuses & wages etc is prone to so many problems.

      There was a time when the super wealthy (and banking in particular) followed an Unlimited Liability Partnership model:

      “Interestingly, banking was slow off the mark. Limited liability status was at first not taken up enthusiastically. Bankers appeared to prize unlimited liability. It served as a safety certificate for depositors, a badge of prudence. ‘A depositor would be much more likely to trust his money with a bank whose shareholders he knew must yield up to him the uttermost farthing’. This from the lips of a banking expert of the day.”

      http://www.bankofengland.co.uk/publications/speeches/2011/speech525.pdf

      This is the very essence of an Equity investment. Those most able to bear the brunt of any losses are the ones who have pledged the most.

      Symmetrical Risk & Reward.

      However it soon ended. So nowadays, Hester et al enjoy all the Reward for no Risk. That is the injustice of our times:

      “the risks from banking have been widely spread socially. But the returns to bankers have
      been narrowly kept privately. That risk/return imbalance has grown over the past century.”

      Those are not the words of a barmy Lefty, Occupy or Anti-Capitalist protestor, but the words of the head of financial stability at the BoE.

      Alas, Andy Haldane’s sage advice seems to fall on deaf ears.

    • Sitar January 27, 2012 at 10:52 pm #

      Andy – especially the tea lady (or tea man)!

    • mikems January 30, 2012 at 12:32 pm #

      That and a progressive tax and pay system that redistributes the piles they’ve already accumulated.

  4. David Wood January 27, 2012 at 12:55 pm #

    So, If the bonuses are not paid Hester and his odious ilk will leave for pastures new. This is the same argument that the BBC put forward as the rationale for paying people like Jonathan Ross the eye watering sums that they do. Well, isn’t there a finite number of jobs in the finance sector? Do not all the banks currently have serving CEO’s? What are Hester and his chums going to do when they stomp out in their hissy fit – apply for Bob Diamond’s job?

    Conversley, let them go, I am sure that there are many more civil servants where Hester came from only to eager to step up to the line and fill his shoes.

    This is just a bluff and the government have not got the balls to call it.

    Glad to see you back btw.

    • richard in norway January 27, 2012 at 1:55 pm #

      Good point, the argument doesn’t hold water because there aren’t so many top jobs and the competition is intense. And anyway how good are these folk, cut their pay and if they leave replace them with someone Hungery to prove themselves

      • Hawkeye January 27, 2012 at 4:03 pm #

        I thought these people believe in market forces?

        If the “price” for such talent as Mr Hester is high, then surely the Invisible hand should act to bring on board more Supply of such talent, thus bringing the “price” back to equilibrium.

        Or is hypocrisy perfectly acceptable these days?

        • Sully January 28, 2012 at 7:05 am #

          More than acceptable, it is entrenched. Europa’s common creed.

          • mikems January 30, 2012 at 12:33 pm #

            Surely free markets, not Europa, an innocent lady.

        • Phil January 28, 2012 at 6:49 pm #

          great observation Hawkeye

    • john o connor January 30, 2012 at 11:27 pm #

      Listen, we have had the same excuses in Ireland for years. The ‘top’ tv presenters getting 1m per year cos if we don’t pay they will move elsewhere. God knows who else will take them as they are mostly considered uncharismatic donkeys, but aint it funny how each country uses the same reasons for overpayment of failures while the ordinary joe soap cant make ends meet

  5. Joe Rourke January 27, 2012 at 1:21 pm #

    Golem

    l wrote up a comment for you before on RBS’s extra reckless lending behaviour in Ireland maybe an expose would help everybody feel better about these bonuses ?

    They are active in the courts so its coming out in detailing and they are firing their low level workers here.

  6. John Souter January 27, 2012 at 2:23 pm #

    Just to add another dimension – Hester is awarded £940,000.00 in shares. At present the share price is around £0.25; because it’s in shares he has no tax liability until he sells them, but in the meantime he can use them as collateral for a loan from his bank, pay no tax on that and work towards the loan being written off in future.

    Then add to the mix, the £940,000 x 4 shares are pretty near rock bottom price wise – they go up say by a factor of 4 and Hester has a bonus of $4 million.

    Tough times?

  7. Theresa Griffin January 27, 2012 at 2:37 pm #

    I agree so much with your comment. I too was listening to radio 4 this morning driving to work and found myself shouting aloud to the radio similar comments as yours. Not only have the bankers robbed all of us, now they are holding us to ransom!!! Why and how do they get away with it??

    • Phil January 28, 2012 at 6:52 pm #

      New Labour pandered to them. The Tories get half their funds from them.

  8. old dog January 27, 2012 at 3:23 pm #

    Heard it this morning Humphreys was a disgrace, its all so we can get our money back and more when the bank’s sold – yeah right. So many lazy assumptions.

    On a general level i feel elements of the bbc are “getting it” at last, not just messrs peston n mason, andrew marr over last couple of weeks and jonty bloom at lunchtime today, quite a revelation,

    • Hawkeye January 27, 2012 at 4:01 pm #

      old dog

      True, there does seem to be a slow shift in acceptance of unorthodox views on the BBC lately.

      I recall Steve Keen was on Hardtalk last November. And this year we have had David Graeber and Phillip Coggan on Start the Week.

      P.S. I saw Phillip Coggan at the LSE last week, and was blown away. He truly understands the origins of money, gets that this crisis is a fundamental battle between Creditors & Debtors, and that the US Dollar as reserve currency is under threat. There was nothing new in what he told me, I was just stunned that a former FT journalist and Economist columnist would be quite so frank:

      http://www2.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=1311

  9. effem January 27, 2012 at 3:35 pm #

    There is absolutely nothing anyone can do about this mockery.

    • richard in norway January 27, 2012 at 3:56 pm #

      Thats not very encouraging :smile:

    • Golem XIV January 27, 2012 at 4:02 pm #

      Actually I think there is quite a lot we can do but it takes organizing and we have got out of the habit or thinking we can work together. I think the fact that we are subtly and sometimes not so subtly told that collective action is either somehow morally suspect or old fasioned or simply won’t work, should be the sign for us that these are things those in power do not want us to consider.

      • davem January 30, 2012 at 9:32 pm #

        I agree we can work together – please let’s all talk about this – what should we do, how should we organise ourselves?

      • Wirplit February 2, 2012 at 1:52 am #

        For example…
        in December I sent a copy of your piece on the collapse of MF Global and the games with re hypothecation to the 4 MEPs representing the SouthWest asking for their comments on the practice and its implications. Sent via write to them which makes it really easy
        http://www.writetothem.com/

        Two have replied

        The Lib Dem MEP Sir Graham Watson wrote:

        “I have recently written to Internal Market Commissioner Michel Barnier in light of the collapse enquiring about Europe’s resilience to similar events. I would be pleased to revert to you with the “Commissioner’s comments when I receive them”

        while the Conservative MEP Giles Chichester wrote:

        ” I have consulted my colleague on the Economic and Monetary Affairs committee of the European Parliament about your letter and attachment. She tells me it is probably true and all too possible and that the so called six pack of the EU legislation is part aimed at tackling the problem”

        He goes on to add:

        “…all I can say is thanks for adding to the already high level of uncertainty with regard to our economic and financial future! We live in difficult time and I don’t think I have heard any credible solution yet. Have you?”

        So I guess it all helps…

    • davem January 30, 2012 at 9:33 pm #

      I disagree

  10. Sean January 27, 2012 at 6:25 pm #

    What was is 13 months between Northern Wreck and the bailout, and HMG bailing out RBS?

    13 months to understand the situation and get ready a disaster policy…but no instead of bailin it was bailout.

    And all that flows from that is the “tory boys” fault?

    If there was no bailout then they would be no bonus would there?

    If I was Hester I would be gone already, who needs this shit.

    • Golem XIV January 27, 2012 at 7:53 pm #

      No Sean,

      What happened at both Northern Rock and RBS was firmly on Labour’s watch. I think I have made it clear I have no love for any of the parties. My comment about the Tory boys was directed at those Tory boys presently in office. Were it the odious Labour lot I would find an insult for them.

      There should not have been a bail out and then, as you say we would not need to worry about bonuses for them either.

      As for Hester going – I would be delighted to see the back of anyone who thinks a million in salary isn’t enough for what he does.

      • john o connor January 30, 2012 at 11:40 pm #

        How about this one……Last week it came out that a civil servant (Irish) will soon be given a retirement package of 530,000 at the age of 56! Now I ask you this? How many other countries under IMF ‘assistance’ have ever given payments such as these? Also, these payments are quite common throughout the public and civil service

    • Phil January 28, 2012 at 7:11 pm #

      When asked what her greatest achievement was Margaret Thatcher replied: “Tony Blair and New Labour. We forced our opponents to change their minds.”

      The ideology of the last 33 years has been a Tory ideology. Numerous Conservatives spent the Blair years crying that he had stolen their clothes.

      Not only have the upper-echelons of the Labour party lost the balls to challenge the status quo, they have accepted it as the only trick in town.

      And bailouts didn’t just occur in the UK. The commie-lefties in Bush’s administration managed to pass the $700bn TARP and siphon further trillions to Wall St.

      • mikems January 30, 2012 at 12:36 pm #

        GW Bush was the biggest nationaliser in history, apart from Vladimir Illyich Ulyanov.

      • john o connor January 30, 2012 at 11:43 pm #

        commie-lefties and Bush?? right-wing christian fundamentalists more like

  11. The Happy Hobbit January 27, 2012 at 7:16 pm #

    Woah people. Lot’s of spleen-venting going on here!

    OK, I’m going to put myself up here to be shot down in flames….

    Let’s put RBS aside for the moment. Banks in general are private companies who have shareholders, and whose employees – from post room staff to board members – have contracts and terms of employment. If we are still espousing a form of ‘enlightened’ capitalism, then surely the only people who should have a say in salaries are those directly connected with the company (including shareholders). As a small business man, I don’t expect anyone out there to tell me how much I should pay myself or my staff (when I evenutally employ some!)

    ‘But we’ve poured trillions into the banks!’ I hear you scream. ‘We’ve been bailing them out left, right and centre!’

    Well yes. And that’s our fault. We should have screamed at the politicians to let the f@$kers fail. And in my view, we still should be. Loudly. From the rooftops. (BTW, No one has yet adequately explained to me the consequences of banks failing – any offers?)

    But the fact is that, aside from RBS, Lloyds and the ‘bad bank’ of Northern Rock, we, the tax payer, don’t have shares in institutions like Barclays, HSBC, JP Morgan or, heaven forfend, the Great Squid. Oh, and don’t come to me with ‘Pension fund investments’ etc. You stick your money into an investment vehicle and expect to have a say in the salary of one of the companies that investment is placed into? Give me a break!

    My point is this. I may despise what has been done by the ‘Greedy Bankers’ as much as the rest of the commentators on here, BUT, a private company is a private company, and we have NO SAY in what they pay themselves.

    Now, RBS et al, well, that’s a slightly different matter. I’d like to digress for a moment and ask what is probably a very niave question. Why can’t state owned companies make profits for the state with the result that our tax bills are reduced, or more schools and hospitals are built? No-one has ever answered that for me either. If we own 85% of RBS, I want them to make billions in profit so we get those billions directly back to us. Or am I missing something obvious here? And if I’m not, then if Hester can pull in billions in profit, I’m happy to let him have a few million as a bonus.

    Hmmm. Maybe the current reaction to his bonus is precisely why state companies can never make a profit. Just a thought.

    Go on then… I’m wearing the overalls. Fire away…

  12. Golem XIV January 27, 2012 at 8:06 pm #

    Hello Happy Hobbit,

    I agree with you inprinciple that the pay in a private company is the business of that private company. And if they pay incompetent people too much and fail as a result that should be their look out. But it hasn’t been has it?

    As soon as they play the ‘Too big to fail’ card it ends. Too big to fail is an abomination but it had at least better be a symetrical one. If Too big to fail means they need/demand public funds then the public gets to have its say. SImple as that. JP Morgaqn was bailed out. So was Barklays – from the various US emergency funding conduits. They all were.

    As for your question about state owned companies making profits I think it is a very important question. What privatize profitable companies? The mythology is that companies cannot be profitable when in state hands. Utter bollocks. They can and are misused by stupid politicians. But our banks have proved rather spectacularly that private companies can be disasterously run too. So what is the difference?

    Generally companies are privatized in order to forcibly renegotiate pay and conditions> once that is done hey presto teh company becomes more ‘efficient’ and those in charge claim to be brilliant CEOs.

    I’ll stop because I fear this is becoming more spleen venting. And as you say it can be unedifying.

    • Mike January 28, 2012 at 6:28 pm #

      I want to second that. It’s one thing to believe that government should stay out of private business – I’m with you on that up to a point. It’s another thing entirely, however, to use government to shore up a failing business (or to subsidise it on a daily basis) and then argue that the business is private and therefore beyond government reach.

      The banks not only received government support during the crisis. The banks are among the most heavily subsidised sectors in the UK. The government guarantees deposits, because without such a guarantee people would stash their cash in a mattress – this effectively makes the government an underwriter, except the banks don’t pay a premium the way anyone else has to for insurance. The banks create the majority (97%) of the money in circulation electronically, therefore avoiding the seignorage due on the 3% used in notes and coin – that seignorage, by the way, if required by law on 100% of the money supply instead of just the 3% in notes and coin, would bring in nearly £400 billion per year for the Treasury. The banks create money from nothing due to a legal loophole never closed in the UK, and yet they are legally allowed to charge us interest on that money, which they pulled out of their magic box.

      The idea that any bank is a private company is preposterous. Money is the life blood of a nation, and it is a fundamental public service – an agreed medium of exchange to facilitate trade between market actors not producing mutually desired goods or services. Anything to do with the monetary supply of a nation is by definition of interest to the people and their (putative) representatives, the government. These banks are not private now, if ever they were. They just have paper status as privately incorporated companies, but then so do most of the departments of government, police etc.

      So the argument that they are private and therefore shouldn’t be subject to government oversight or influence is a canard. They’re publicly funded when it suits them, so let them be publicly regulated when it suits us. And if the “talent” decide that a mere million isn’t enough for their toil in the Square Mile, let them go somewhere else. Except they won’t, since it’s a nonsense threat. And even if they did go, how would we be worse off without them than we are now with them?

      Phew. *deep breath*

      Okay. I’m done. Rant over.

      • Phil January 28, 2012 at 8:06 pm #

        Don’t apologise for ‘ranting’ Mike. That was an excellent overview of the situation which the vast majority of people have no idea about.

        • Mike January 29, 2012 at 9:53 pm #

          Thanks Phil. I just didn’t want to seem like I had a bad case of forum-itis.

      • mikems January 30, 2012 at 12:45 pm #

        I respect your righteous outrage, but are wrong about all this magicking money out of thin air stuff.

        Banks use current asset values and the likelihood of repayment to establish how much they are going to lend. So when asset values – houses, shares, CDS etc – are high, and can be immediately turned into ready money in the market, they aren’t magicking money out of thin air at all, they are making judgements about asset values and repayment and whether they will continue to remian high and liquid.

        Normally this works fine because most people pay back and asset prices aren’t obviously full of inflated value – or rather there is still capital available to invest in them and pump them up. However, when these asset values collapse and larger numbers of defaults happen, then it seems as if the bank has been overlending.

        The real crisis is what lies behind the asset value inflation and that is historically accumulated capital looking for ever greater returns in relatively smaller real world markets.

        If we change the banking system to make sure that no lending above capital reserves was possible, we would face immediate credit problems, but also, and this is the killer, the value of the capital can’t be guaranteed either no matter what it is made up of, gold, silver, fairy farts or whatever. It could all crash in value in unregulated capitalist markets.

        So no minor changes in the way banks operate will get close to dealing with the real problems – overaccumulation of capital and its inability to reabsorb itself into productive investment.

        • Hawkeye January 30, 2012 at 1:29 pm #

          Mikems

          The “magic money” theorem is based on the fact that banks can generate liquidity “as if from nowhere”.

          Yes, they do tend to take pledges in the form of existing assets when issuing a loan. But ultimately, they are expanding both sides of their balance sheet (Assets & Liabilities). Adair Turner of the FSA openly explains this.

          Private Banks have expanded their balance sheets more than 10 fold (to 450% of GDP) in the last 40 years. This is just leverage, pure and simple. Fictitious liquidity, and fictitious capital even.

          This article explains in a bit more detail the argument:

          http://forensicstatistician.wordpress.com/2011/05/25/how-a-bank-works-modern-miracle-or-just-a-mirage/

          As does this article about “duration mismatch”:

          http://www.zerohedge.com/news/guest-post-loan-exchange-wealth-income

          • mikems January 30, 2012 at 1:42 pm #

            Yes, I understand all that, but if it is that simple why aren’t they using the magic money formula now?

            Because all the lending they do is based on current market prices and liquidity. In good times every thing goes up including the amount of capital offered in money markets, which are used to fund lending, as we found out in the crash.

            There is no technical banking fix that will stop capitalism collapsing in crisis and I worry that those who place all the blame on the current banking setup – ignoring the fact that previous regimes in banking have also collapsed, including the no credit except based on capital reserves one – are concentrating on a symptom not the disease.

            By all means regulate the banks and make them hold more capital or less. It doesn’t matter. They will still struggle when the capitalist cycle reaches its peak and the level of absorbable capital is reached.

            None of this is new – including the demand that banks must rely on deposits and capital for loans. The very first banking/capitalist crisis, brought about by overinvestment in non-profitable railways in the 1840s in the UK, was treated in exactly the same way as modern banking critics are doing now, with a collapse in some other areas of overinvestment and bubble.

          • Hawkeye January 30, 2012 at 2:55 pm #

            Hi Mikems

            I see where you are coming from with the symptom & cause argument, and the reference to prior crises.

            The work of Carlotta Perez gives a great overview of the re-currence of crises, and links this to technological changes:

            http://www.amazon.com/Technological-Revolutions-Financial-Capital-Dynamics/dp/1843763311

            Credit expansion creates the climate to exploit new technologies but alas it’s feedback mechanism has a delay in it which means overshoot and collapse. That is what is happening now. I agree with you that unprofitable investments (of the Minksy Ponzi financing type) have escalated to the point of non viability.

            This is consistent with the Kondratieff Wave theory, whereby the world has experienced five major technical-economic cycles:
            (1) 1771 – The First Industrial Revolution in Britain, based on mechanization of the cotton industry
            (2) 1829 – The Age of Steam and Railways
            (3) 1875 – The Age of Steel and Electricity
            (4) 1908 – The Age of Oil, the Automobile, and Mass Production
            (5) 1971 – The Age of Information and Telecommunications

            This current crisis is pretty major though. It is the supercycle to end all supercycles. There is no energy and resource based innovation to provide a 6th upthrust – in fact the IT based 5th wave is pretty dubious, in my book. Just look at where we are on the Limits to Growth model:

            http://forensicstatistician.wordpress.com/2011/05/27/is-economics-a-real-science/

            The financial crisis has shown the stresses in the system. Catabolic collapse awaits us round the corner:

            http://thearchdruidreport.blogspot.com/2011/01/onset-of-catabolic-collapse.html

      • johnm33 January 30, 2012 at 8:37 pm #

        more rants like that please, More in that vein here http://www.macroresilience.com/2012/01/ I’ll chuck this in the mix too http://www.macroresilience.com/2011/10/05/a-simple-policy-program-for-macroeconomic-resilience/

        • Mike January 30, 2012 at 11:47 pm #

          Mikems -

          Check what Mervyn King and Martin Wolf have said about the manner in which money is created. Check out http://www.positivemoney.org.uk, who are doing some of the most important work in the UK right now. Check out the testimony of Marriner Eccles in 1933, the work of Frederick Soddy, Irving Fisher, the list goes on. You’re conflating apples and oranges.

          The reserve capital requirements by which banks’ total permitted leverage is calculated (the Basel rules) are based on their capital reserve accounts at the central bank, in our case the Bank of England. One of the reasons why liquidity (i.e. lending) has not increased since all the quantitative easing is that the majority of that easing went into sovereign bonds and directly into the banks’ capital reserve accounts, the logic being that by raising their capital reserves, the ceiling on their total leverage would be raised and this would allow them to get back to lending money into the economy. Instead it has created a churn on the stock markets and a flight into derivatives, CDS and commodities the likes of which we haven’t ever really had, since a lot of these financial instruments didn’t even exist the last time we had a Great Depression.

          The Bank of England produces quantitative easing through the creation, by keystroke, of what they call “central bank money”. This comes into existence at the point where they credit an account and make an entry in the ledger. It is magicked out of existence when the underlying asset or security is sold/redeemed, and the ledger entry is balanced out by an erasure, which is to say that when debts are paid, money disappears and when debts are created, money is created. The money they create is used to buy up British bonds from pension funds and the like, and is also used to credit the capital reserve accounts of the private banks as I said before. The latter is essentially free money for the private banks, which they have mostly thrown into further bets on the collapse of the entire system. I have yet to meet a banker or City worker of sufficient rank or intellect who is not completely convinced of (and invested in) a full, comprehensive, systemic collapse. Traders at JP Morgan have been calling a 20 – 30% crash in house prices in the UK for between February and April since the middle of last year, for example.

          The private banks, i.e Barclays, HSBC etc., do the exact same thing as the Bank of England in terms of money creation, except through commercial lending direct to the customer, be it a house buyer or a small business or a corporate enterprise. When a loan is made, the money is created as an entry in the client account. You seem to be confusing lending criteria with money creation. The manner in which they decide to whom to lend, for how long and to what amount is utterly immaterial in the long run. They create the money which they lend, based solely on the promise of the debtor to pay it back under threat of loss of collateral, out of thin air, and then they lend it out at interest far exceeding the base rate of the nation, as if that base rate even had anything to do with their own money creating activities. Not only is the money created as an interest-bearing debt, but only the principal of the loan is created and not the amount needed to service the interest. This means that as the money of the principal inflates the money supply, the service of the debt actually shrinks the money supply, since there is more debt in existence than money. At the latest figures which I have heard quoted, if all the debts in the UK were repaid, we would have used all the money currently in circulation but still collectively owe about £300 billion to the banks, despite having literally no money.

          Hence the irony of the Depression that most people don’t yet realise we are in: the tendency in straitened circumstances is to service debt and reel in discretionary spending. As we service our debts, the money supply shrinks, drying up liquidity in the form of available money for enterprise and economic activity. Simultaneously, the banks, being well aware of the trend, are not willing to lend more money into the economy – they prefer to use the glorified casinos of the equities and derivatives markets to place bets based on the trends they are observing.

          Meanwhile, the banks find that their accounts look less and less attractive as the values of their “investments” fall, so they have to hold on to more of their capital to shore up their reserves, and this puts a damper on new lending. More energy and time goes in to shifting troubled assets off the books, which in turn, after a while, destabilises the market as we saw in 2008. Market instability leads to the parking of money rather than the spreading of it, which in turn lowers the velocity of money through the economy and the volume of economic activity, which leads to less business loans and more defaults,, which leads to more instability, more troubled assets, less lending etc. A death spiral, if you will, in which the magic money is used to prolong the period of drain circling before it all goes down the tubes.

          Also, as Golem has covered here in great and excellent detail, another death knell for the system is the fact that most of the banks now no longer trust each other, as the willingness of Goldman, JP Morgan, MF Global, Lehman et al to utterly screw each other for extra ducats has undermined even the most basic faith in the intentions of their colleagues. Add this “fuck you buddy” mentality to the fact that they all know the system is going tits-up, and what you have is essentially a last hurrah of orgiastic proportions as they all try to wring the most available profit and asset control out of what’s left of our ailing industrial societies before The American Century turns into the biggest weenie roast in history.

          There is a stunning resistance, even within financial circles, to comprehending the enormity of a system in which money is genuinely created out of nothing, at the push of a button, by private interests epically removed from any consideration to the public good. Ben at Positive Money has met with cabinet ministers, MPs and even members of the MPC who have no clue as to how money is created. Most economists don’t actually know how money is created. They are taught to assume a market in which perfect information allows consumers to dictate an accurate facsimile of their social, political and moral attitudes through their purchasing habits, making a free market a perfect representation of the will of the people. However, they do not study the manner in which information is manipulated, the manner in which money is created nor the manner in which the very market which they purport to study is actually contained within a broader human, psychological framework which is itself a byproduct of a combination of centuries of accretion and active manipulation. To say nothing of the rank ignorance of much of the “experts” as to the role of the natural world in all of this.

          Once you factor in very real limitations on crucial resources, such as oil, copper, phosphates and water, and throw into the mix the fact that in an integrated, globalised world, any wobbling in one place creates ramifications and ricochets hitherto unknown to us, what you end up with is a kind of juggernaut, only moving forward because of the momentum of its constituent parts, all of which are in various stages of failure or critical instability, until eventually the inertia builds up and an awful silence falls over the wreckage left in its wake.

          Or, you know, I could be wrong.

          • mikems January 31, 2012 at 4:20 pm #

            I’m sorry, but money isn’t created out of nothing.

            It is created for circulation as part of he entire system of commodity exchange and value retention.

            All of that ignores my argument : that tinkering with banking rules ignores the real cause of the crisis, the overaccumulation of capital and its inablity to reabsorb itself into the productive process.

            It also ignores the fact that we have had similar crises to this in the past, when the banking system was regulated as you would like it now. So why do you have faith in it?

            You say that ‘money’ is created out of thin air. But it simply isn’t. It is advanced into money markets, by its private and corportate owners for a rate of interest.

            That is part of the profits gained from the previous cycle of capitalist investment, the residue being hoarded, reinvested in existing businesses or used to by other assets of all classes.

            Tell me, if all money is created anew everytime someone borrows money from the bank, where does it all go? Does it all just keep disappearing at regular intervals, or does it stop being real money? No, it ends up in other bank accounts, as a result of other commodities being exchanged or sold or built or whatever, at a profit and it is then ready to be deployed as credit or capital in the next cycle.

            Capitalism has crisis built into it. It is part of its DNA. We have seen all of this before. We should learn the lessons at long last, not keep returning to easy remedies, which inexplicably, previous generations didn’t bother with. But they did bother and the remedies didn’t work. If they had, we wouldn’t have any crises now.

            And for all the Minsky’s you give me, I give you Marx. Therein lies the real explanation of this and every other crisis, but volume 3 of Capital, on the capitalist system of production as a whole, is particularly rewarding.

          • Hawkeye January 31, 2012 at 4:31 pm #

            Mikems

            You ask: “Where does the money go that is created out of nowhere?”

            The answer is that the loan creates its own deposit. The two are created simultaneously on each side of the bank’s balance sheet through double entry book-keeping. So our debts are complete fabrications, and our deposits are too! How ironic, eh?

            Minsky is worth studying on this. I did form a solid reply to you (see above), and would also add some references to Steve Keen who has implemented the Minsky model with Dynamic Simulations.

            I’m sure that you’d enjoy this article:

            http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

          • mikems February 1, 2012 at 12:48 pm #

            The double entry book-keeping explanation is not an answer to my question.

            Where does this money that is ‘created out of thin air’ go to after it has been ‘created’?

            Does it disappear after a while or is it now real money, used in the economy?

            Of course it is the latter. Where you are going wrong is imagining that it is created anew, when really it is being recycled from the previous investment cycle. It is former profits, offered to money markets, put in deposit accounts, made available to the credit system in all its myriad forms.

            In short the whole process of capitalist production, credit and investment, is a continuous cycle, not a machine that constantly has to create ‘new’ money to keep it going. Profit is generated by this cyclical process and appears as ‘new’ wealth. That is what you are confusing with the bank’s accounting system.

            I have explained about asset values and capital. I would appreciate some recognition of that argument : is there some form of capital that retains its value regardless of the wider market conditions? Is there something that can always be traded at a certain price, guaranteed into the future, even just after a crash? An answer is important here, because, after all, if money is just made out of thin air, why stop doing it when a crisis happens? It shouldn’t make any difference.

            Finally, another unanswered objection to the ‘money out of thin air’ argument : why are people proposing a return to as system that has also been found to be utterly inadequate during crises in the past? What sense is there in demanding a technical change in credit arrangements within the banking system when it won’t prevent future crises?

            When is it going to become acceptable to study capitalism and all its branches of operation, including banking, as it actually is, rather than proposing changes that have already failed historically?

            The response the first banking/capitalist crisis in the UK in the 1840s was the same : clamp down on lending, increase capital requirements, increase security. But just ten years later, with all these reforms in place, wild capitalist investment was again causing a bubble in railways which ended up with another deep recession and banking crisis.

            Surely to god it is time that all those of us who are able to study and understand these things actually do the hard work required, rather than leaping at quack explanations and solutions.

          • Hawkeye February 1, 2012 at 3:15 pm #

            Mikems

            I don’t disagree with you in many respects. An earlier post of mine said that “Credit expansion creates the climate to exploit new technologies but alas it’s feedback mechanism has a delay in it which means overshoot and collapse. That is what is happening now. I agree with you that unprofitable investments (of the Minksy Ponzi financing type) have escalated to the point of non viability.”

            Where we appear to be disagreeing is about the origin and nature of money. I have offered an explanation of where money comes from; the endogenous money theorem. You seem to be ignoring this, and then asking “where does the money go”. Which is a completely separate debate!

            I’m firmly of the opinion that money is just “virtual wealth” and often becomes disconnected from the real productive capabilities of an economy (c.f. Frederick Soddy, as referenced by Mike above).

            Money (as in cash in hand, or that resting in a bank – so let’s say Narrow money) is really “Negative Inventory”. It is a token that represents future purchasing power. The assumption is that the real wealth of the economy can deliver on this at some point in the future.

            Financial crises occur when the growth expectations fail to materialise.

            Capitialism was able to pick itself up from some hefty bruisings in the past because it was able to clear the slate of excessive debt claims (through default, devaluing or inflation), re-organise and then look for new growth sources. This is not incongruent with the position taken by David Harvey.

            I’m describing the system as it has occurred. If that description is correct then it makes a fairly prominent prediction though, and that is that this time around Capitalism will struggle to re-invigorate growth, not just because we are failing to wipe clean the slate of debts, but because the real economy is plateauing in terms of productive capability, owing to cheap energy constraints.

            See:

            http://www.golemxiv.co.uk/2012/01/banker-bonuses-a-quick-comment/#comment-14829

            Finally, I don’t recall offering any solutions, or giving you the impression that I had spontaneously made up my mind about all these things – so I am a bit surprised why you feel it necessary to assault me with the comment about “leaping to quack explanations and solutions”.

          • mikems February 2, 2012 at 12:26 pm #

            Where does the money come from?

            Is it magicked out of thin air by banking accounting practices, or is it part of an entire system of circulation of capital that creates profit?

            If it is the accounting sytsem then you need to account for where it comes from and where it goes.

            Loans are repaid. You pay your mortgage. You pay back your credit card. Why do you leave that out of the equation?

            What about security on loans? If you want to buy a house, what does the bank do? Does it turn to its computer an ‘create’ a few hundred thousand new pounds, or does it demand the actual house itself as securtiy on the loan? What about the seller? How is the seller paid? Is it in magic money or is it in a real transaction, with a real sum of money moving into the seller’s account?

            Your explanation misses out those facts : profits have to be reinvested somewhere, if not in renewed production then into credit or asset values of one sort or another; security has to be offered to secure a loan which can be liquidised in the event of default. That is real value, as traded in the current markets; loans are repaid, thus resupplying the lender with the money lent. This happens immediately the loan is granted and taken together with all the other loans being repaid will generally balance with what is being offfered in credit, but with profits attached.

            Also credit markets actually exist. Please explain thier function if banks can just type in figures into a computer tyo create credit.

            What you say is necessary to prevent crises has already been overthrown as a ‘solution’ to previous crises.

            Finally, how will changing the bank’s acconting system effect the real economy and prevent future crises?

          • Hawkeye February 2, 2012 at 3:59 pm #

            mikems

            Thanks for the reply and the thoughtful questions.

            My argument isn’t solely about changing the banks accounting system to rescue all ills; although I do believe that it is currently flawed. The point I am making is that by fully appreciating how money creation (i.e. current bank accounting system) works, we can then understand how the last 30 years has given a misleading sense of normality, stablility and progress. If we first pull away this smokescreen we can then start to see some even more uncomfortable problems lying ahead (some of which I share with the Marxian / Harvey viewpoint). Our two viewpoints are not necessarily conflicting.

            97% of the UK’s money supply is commercial bank money. Created at the stroke of a keyboard in terms of increasing the Asset & Liability side of their balance sheet (i.e. balance sheet expansion). Yes, when anyone pays back a loan, the money supply is decreased. However, the tendency under current policy arrangements is for the system to net out at an increasing rate of lending (mainly to try and stave off a debt deflation, which is what happened during the Great Depression of the 1930s). This what is uncapsulated in the Minksy model, and there are many prominent people who take this view (including Lord Adair Turner of the FSA), so it is not a crank / crackpot view. See:

            http://neweconomics.org/publications/where-does-money-come-from

            Yes, much of modern bank lending is based on raising finance against existing assets. This isn’t really helping the real economy grow though, it just creates asset price inflation. If people can’t get the jobs or income in the future (owing to failing economic growth or wage growth not keeping pace with debt expansion), then we have a credit crunch. True profit (surplus value) can only materialise through genuine productive capacity improvements, yet the current system deludes itself that we are making profits.

            I don’t recall ever claiming that implenting a policy of restricting this practise would provide elimination of future crises. You keep attacking a strawman of your creation, not mine. In fact, if you go back through the posts I have made, it is quite clear that I foresee a very stark crisis looming owing to the following:

            1) Global Energy production capability is peaking out in true economic terms (EROEI)
            2) Energy is required to drive the global economy (See the “Useful Work Growth Theory” by Ayres & Warr)
            3) Energy is also extremely essential for running a major military force
            4) Economic Growth is required to “pay-back” the enormous debts undertaken by individuals, corporations and Gvts

            Therefore Supply (point 1) is unlikey to be able to meet Demand (points 2, 3 & 4).

            I don’t disagree with you that Capitalism is endogenously prone to crises. All of Capitalism’s crises are a tension between the longage of expections (embodied in excessive debt creation) confronting the shortage of real productive growth capability (which is limited by energy & resource inputs).

            However, this crisis is likely to be vastly more severe than any previous ones for the following reasons:

            - the debt overhang (embodied expectations of future growth) are far higher than before
            - very few efforts are being made to reduce / clear the debt overhang
            - there is no new energy / resource based innovation that can be relied on provide a new growth trajectory

  13. hans January 27, 2012 at 8:13 pm #

    How much did RBS recently loose on the sale of it’s airline leasing company to a Japanese consortium? Anyone hazard to guess!

    • Synopticist January 28, 2012 at 7:23 pm #

      There was a stroy on ZeroHedge a while back, that they also lost a cool couple of million by filling in a form on a CDS claim the wrong way. I never saw any MSM reportage, which is hardly suprising really.

  14. Pat Flannery January 27, 2012 at 8:37 pm #

    I’m inclined to agree with Hobbit. Discussing what bankers pay themselves is taking responsibity for them. Our most fundamental position should be that they who choose to live by the free market sword should die by the free market sword. What we lack is clarity. We must insist that governments and free markets be separate. Failure and risk are part of the free market system just as human casualties are part of war. We are trying to wage bloodless economic war. What we need is economic blood in the streets. Starting with unsecured private bondholders. Their dead carcases should be littering the fields by now.

  15. Ian G January 27, 2012 at 8:57 pm #

    Over on the FT comments which are usually well informed, I was disappointed to see a lot of people saying things like ‘well Hestor was not responsible for the mess so he deserves that bonus’. What? I was not responsible either but do I get a bonus? The logic and pandering to the assumption that these guys are a breed apart beggars belief. Once you let go of the idea that these guys are the goose laying golden eggs, it all becomes clear. Of course we are not helped by the ‘wisdom’ of Gordon Brown making sickening obsequious arse licking speeches in the past which seemed to have cemented in their minds that they are ‘special’ in some way. I still see comments saying that ‘well it is a bit much to pay but if they go who will run the banks that make so much money for us’. People really believe that is the case.

  16. Pat Flannery January 27, 2012 at 8:59 pm #

    The EU governments, who say that they are merely trying to prevent contagion, not siding with the private bondholders, should show their sincerity by giving the green light to the Irish Government to write off the unsecured debt of the now defunct Anglo-Irish Bank.

    Ireland is now the lab animal of the EU technocrats. If these EU/IMF financial technicians are sincere in their economic experiments they should ease the austerity burden on Ireland by cutting off the dead weight of unsecured private bondholders. They should let their patient breathe. It is going blue and will flatline if squeezed any more.

    If their professed motives are to be believed, the Troika should ensure the success of their Irish experiment by doing the obvious: pronounce the former Anglo-Irish unsecured bondholders dead on the table, before their corpses contaminate the entire Euro rescue operation.

  17. Zardoz January 27, 2012 at 9:42 pm #

    Just a quick reply to the Hobbit.
    All those other banks you mention – they have & do benefit hugely from the taxpayers.

    They have not had an obvious ‘bailout’ in the sense that RBS has been literally given a cheque (hell, to pay RBS’s debts they had to mortgage the Bank of England Building!) but they benefit from knowing that they will not be allowed to fail – the govt will either print or tax to cover any losses they make.

    This is worth billions, indeed if it was not taken into account all the banks would have to be acknowledged as insolvent.

    Asymmetric risk! Our taxes, either past present or future, cover any risk to their profits.

    Z

    • The Happy Hobbit January 27, 2012 at 10:05 pm #

      Hi Zardoz

      As Golem, Pat and many others have pointed out, ‘too big to fail’ is one of the main issues that needs to be challenged. But if the banks were told they would definitely not be bailed out, that they would be allowed to fail, would you then still expect to have a say over the pay of their board?

      • Charles Wheeler January 27, 2012 at 10:44 pm #

        That’s a big ‘if’.

        Lehman’s was allowed to fail (though Dick Fuld did ok), but had the ‘domino effect’ that should have been a natural consequence of Lehman’s failure – i.e. the collapse of AIG … Goldman(?) been allowed we are told it would have been ‘the end of civilisation as we know it’ – which suggests the the activities of large listed companies is more than a ‘private’ affair.

        If a company is ‘too big to fail’ – then it is ‘too big’, as in the case of RBS, and intervention in the public interest is fully justified.

        If ‘the market’ operated as it does in neoliberal textbooks you might have a point. In the real world, all sorts of asymmetries ensure that the market is rigged. Absent of intervention, markets operate to polarize wealth and political power, which can then be used to ‘capture’ the regulatory framework, control fraud will take care of the rest.

        When the economy was booming and banks were extracting profit hand-over-fist we were told that the bonuses were justified by their results, now we find that those profits were illusory we are told that the bonuses are necessary to repair the damage caused by the bonus culture [nice work if you can get it, pt. 424].

        Of course, the remuneration committees are all inter-linked, so pay awards at one institution can be used to justify increases at the next. Similarly, shareholders are dominated by the institutions whose ceos benefit from the merry-go-round.

        We don’t have a ‘free market’, we have an oligarchy in which a small elite are intent on squeezing the life out of the goose that lays their golden eggs.

  18. Olive Green January 27, 2012 at 10:38 pm #

    I liked this cartoon:
    http://www.guardian.co.uk/theguardian/cartoon/2009/dec/04/steve-bell-fat-cats-cartoon

  19. Olive Green January 27, 2012 at 10:54 pm #

    Great post Golem. You might like this article from 2001 by Michael Young, the man who originally coined the term ‘meritocracy’. I think he hits the nail on the head.

    http://www.guardian.co.uk/politics/2001/jun/29/comment

  20. Natty January 27, 2012 at 11:07 pm #

    Clearly if Mr Hester and his peers were running the country instead of Cameron, Osbourne and Lansley, then within a few years our national debt would be cleared, the economy would be booming and we would all be rich. They should be appointed as civil servants immediately and paid £2M each to manage our economy, health service and schools. These must be the sort of people we need, we shouldn’t let them waste their talents in as pointless a career as banking.

    • Golem XIV January 27, 2012 at 11:13 pm #

      Dear Natty,

      More comments like this one please. I laughed. Someone should have been on hand to take a picture.

      • rich in portugal January 28, 2012 at 12:17 am #

        money sucks.discuss

      • mikems January 30, 2012 at 12:48 pm #

        They’ve been sacked.

  21. Oireachtas Retort January 28, 2012 at 2:51 am #

    New CAO of nationalised Allied Irish bank here landed a salary and “extras” close to 1m. Only a fraction of the € 864,553,314 that will go to the bank’s Snr Unsecured bondholders next month mind.

    Same arguments, we need to attract the best talent etc etc
    What would we do if Ireland’s bankers upped and left in the morning

    Always good to remember in among all the handwringing those all the way down the ladder have their “packages” linked to the top.

  22. deepgreenpuddock January 28, 2012 at 3:47 am #

    I notice Marina Hyde asking for calling the bluff of the resignation threat. Apparently the board and Hester threatened mass resignation if there was no bonus.
    I wonder what is the value of RBS now.
    It’s a curious situation that has developed, where it would appear that there is a limited range of people who are equipped to do a certain job. The strategy just seems extremely wrong headed-to have people who are so key to continuing economic activity. If the activity is so critical one would think that that merited legislation above many other less critical activities.
    What i mean is that, if you have a super critical function it is madness to allow all the skills and knowledge to be concentrated in the hands of a single person. It would not make sense to have say, a defence system where all instrumentality focusses on a single person.What if that person has a cerebral haemorrhage? Does that cause the critical system/company to collapse too?
    If a role is so critical it is essential to build a network of informed people around that role who can deputise in the event of a problem. in fact it is an enormous folly to be paying people who place themselves in such a critical role. Personally i simply do not believe it. If Hester is actually organisationally smart-one of the first things he would do is contingency planning. and a board would be failing if it did not oversee that the chief exec dod not put in place detailed plans.

    Anyone knows that and there is absolutely no decent sized organisation which could not continue functioning in the event of a head dropping dead. Even schools have contingency plans for such eventualities. The head of the organisation is responsible for that planning and if there is no plan then he must be judged to be negligent.

    So the reality is that the idea of the ‘superman’ on which the entire success or failure of the enterprise hinges is actually just part of the cult of the individual.

    There are undoubtedly talented people in particular activities but these people are not unique, or even rare. They are simply the people who have had a particular career path and an appropriate education to set them off on that career path where they acquired the contacts and connections to allow them to function in that environment.
    I would suggest just falling back on the contingency and waiting for a suitable person to emerge, as they no doubt would.

    We have to be able to determine merit more reliably. Stephen Hester could possibly have turned his abilities into a different areas and let’s say, now be the Chief Executive of a very large NGO with huge complex projects and equally complex political demands to the ones that Hester deals with –and be on 90,000 or some other similar paltry sum. The talent would have been no different. The process could be reversed. How many talented people have followed other career routes for any number of reasons and get by on much smaller sums.

    I also have reservations about other activities which seem to attract rewards out of all proportion to merit. The Harry Potter books are fine -no criticisms- and JK Rowling has worked hard but for the life of me i always wondered why a writer in a less commercial genre gets much less despite similar merit.

    What about Geoffrey Archer who, I have heard, was simply a marketing vehicle while someone else, a professional writer, wrote the great majority of the words, on contract.

    Such anomalies really need to be re-considered afresh.

    • mikems January 30, 2012 at 12:52 pm #

      It’s all shrouded in mystery and talked about as if bankers were ancient priests with access to the word of god. Of coufrse it is the select few from the ruling class who get these jobs, because they are in on it all.

      But our local tech colleges could be revived with banking GCSEs running alongside the apprenticeship courses (do they still exist? do the colleges?). We could have evening courses on investment banking etc, if it is an actual skill.

      Millions of BTEC bankers competing for the top jobs, that’s what a responsible govt would give us.

    • david thompson January 31, 2012 at 10:56 am #

      Archer’s books were written by a’ professional writer’? Surely not!

    • Doug February 4, 2012 at 9:26 pm #

      Great post but why oh why do you need to have a go at authors at the end , people buy their stuff and make them wealthy unlike bankers etc who hold us to ransom and don’t even slightly entertain us.

  23. bill40 January 28, 2012 at 11:59 am #

    Before I comment on this post can anyone help me here? I post mainly on economic matters from an MMT point of view. I am now banned from commenting from the Telegraph, Guardian,Independant and the Times. I give as good as I get am I really so offensive that I’m banned, whilst the racists,bigots and plain mental, continue without such actions?

    Anyway onto the matter in hand. There is no correlation between wages and performance especially at the top. George Monbiot wrote an excellent article on this, as did Prem Sikka. The corrosive damage to nation states is coming from the top.

    All hail our leader Golem because there is not a single party in any G20 country prepared to stop this madness. Mainstream writers like Ambrose Pritchard Evans, jeremy Warner and Larry Elliot get round to spelling out the problem. Then they baulk at the logical conclusions of their own arguments.

    Like Paul Mason on Newsnight they know if they report the truth they’ll have no job.

    That’s why we come here.

    • Jim M. January 28, 2012 at 6:46 pm #

      bill40:

      Getting banned from the msm sites is a badge of pride ’round these parts!

      • Synopticist January 28, 2012 at 7:31 pm #

        Yeah, the Guardian especially seem to have totally abandoned their old vaguelly left stance since embracing the libdems. You get the smuggest right wing idiots posting banalities about “socialism, as practiced by New Liebore”, but get banned for criticisng the editorial line from the left.

        It’s worrying, because the rightwing TINA agenda is winning the misinfomation war.

        • Phil January 28, 2012 at 8:31 pm #

          Bill,

          can’t you just create another sign in/ username?

    • mikems January 30, 2012 at 12:56 pm #

      I too have been banned from the hypocritical Guardian for refusing to accept the unchallenged presence of race haters and Nazi lovers on their boards.

      I used to post as socialistMike, but they sent me to Siberia some months ago.

      You were never offensive, bill. You are a decent person who, quite rightly, got upset by the hate-speech and the trolls.

      The censors there take any chance to get rid of articulate left-wingers.

    • mikems January 30, 2012 at 1:33 pm #

      As for no mainstream party challenging it all, even Sarkozy is being forced to talk tough by pressure from his left.

      Hollande came out for a public investment bank, has said he will demand changes to European law to re-allow state investment and has called finance his and France’s main enemy.

      All the parties in France are talking much more left than they were, partly under pressure from a revived PCF campaign allied with the Parti de Gauche in the Front de gauche, which isn’t pulling its punches in the least and which is rising in the polls.

      Given the rhetoric from those who don’t mean it – Sarkozy, Hollande, Bayrou, Le Pen – one must presume that the French people are demanding sweeping changes.

  24. Golem XIV January 28, 2012 at 12:07 pm #

    Hello bill40,

    I am sorry you have been banned at all the places you mention. I can’t comment on the jusitce or injustice of it as I don’t think I have read any of your comments over in those places. But I can say if your comments there, are as they are here then I have not the slightest notion of why you would be banned,

    Your comments here have seemed to me to always be as they should be, interested, interesting, polite and seeking to engage rather than belittle.

    Their loss is our gain.

    • bill40 January 31, 2012 at 12:38 am #

      Cheers Golem,

      The Torygraph and indie have let me back but I’m not allowed to insult James dellingpole, I hurt his feelings apparently.

      How I will bear this on my conscience I don’t know, I must be strong and live with my remorse.

      • rwtwm February 9, 2012 at 3:44 pm #

        bill40:
        You hurt James Delingpole’s feelings?

        Legend.

  25. Art Smith January 28, 2012 at 12:32 pm #

    I am not an apologist for the finance industry in any way, shape or form but Hester appears to be supervising the managed decline of RBS in a way that I approve of. The banking industry needs to be shrunk, simplfied and slowed down. I make a distinction between the CEO’s of Lloyds and RBS and degenerates like Bob Diamond of Barclays.
    I take the point that the arguments deployed to justify bonuses don’t seem to apply outside the rareified field of investment banking but can’t shake the feeling TPTB are quite happy for individual bankers to draw fire. Much as it galls me to say it bonuses are probably a side issue for now. Scapegoating a few named individuals is a way for them to realease a little pressure building up in the population without fundamentally addressing reform of the system.
    For the record I support the idea big remuneration packages should come with big risks to the individual. The concept of a ‘guaranteed bonus’ is an abomination. Repeal limited liability. If you screw your business to the point of insolvancy it should bankrupt you and make you unemployable in your field of ‘expertise’ for the rest of your life.

    • Phil January 28, 2012 at 8:36 pm #

      ”but [I] can’t shake the feeling TPTB are quite happy for individual bankers to draw fire.”

      I agree.

      As side from the obvious faces in governments (of any stripe) who else constitute TPTB? Andrew Haldane and Mervyn King at the BoE talk a good game at times but it all happened on their watch.

      It IS systemic, but systems are upheld by key decision-making individuals – who are they?

  26. Charles Wheeler January 28, 2012 at 12:40 pm #

    Michael Hudson supplies a well-timed article on the banking industry:

    “The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. But now it is the banks that are needy, relying on governments for funding – capped by the post-2008 bailouts to save them from going bankrupt from their bad private-sector loans and gambles.

    Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. The process has gone furthest in the United States. Joseph Stiglitz characterizes the Obama administration’s vast transfer of money and pubic debt to the banks as a “privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.” Prof. Bill Black describes banks as becoming criminogenic and innovating “control fraud.” High finance has corrupted regulatory agencies, falsified account-keeping by “mark to model” trickery, and financed the campaigns of its supporters to disable public oversight. The effect is to leave banks in control of how the economy allocates its credit and resources.

    If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. So this is not only an opportunity to restructure banking; we have little choice. The urgent issue is who will control the economy: governments, or the financial sector and monopolies with which it has made an alliance.”
    http://goo.gl/6jTAW

    • Doug February 4, 2012 at 9:38 pm #

      You’ve inspired me to coin a new descriptive term ( I think ),,,,, The Talibankers …….I leave it to others to make the appropriate comparisons.

  27. steviefinn January 28, 2012 at 1:47 pm #

    I have no idea what the salary or bonus amount of somebody who was running a fully nationalised company would be, but I’m sure it would be nowhere near the level of Hesters. How about calculating 85% of his pay & bonus to the equivalent of a public employee & the rest worked out to greedy banker scale. Of course it would never work because of the talent issue, the usual, blah blah, go elsewhere, blah blah, need the best people etc, Seems as though these supermen/women are needed for the banks but presumably anyone will do for a state owned company. Maybe the whole worldwide banking system needs reforming simply because, judging by the evidence, even the super highly paid mega talented omnipotent human beings such as Dimon, Moynihan etc have only so far managed to screw the whole thing up.

    I personally think that the biggest talent these people possess is being able to make politicians grovel.

    http://www.moneyweek.com/blog/the-myth-of-talent-00115

    • Pat January 29, 2012 at 12:10 pm #

      Stevie

      Unfortunately, a lot of people at the top of state businesses are overpaid as well, even if not quite in the league of the bankers. e.g. in December 2010 the head of ESB (Irish electricity supplier) was being paid an annual salary of €752k (http://www.guardian.co.uk/business/ireland-business-blog-with-lisa-ocarroll/2010/dec/06/ireland-public-sector-fat-cats)

      It is also worth having a look at the following more recent info on public sector pay from the EU – compare senior management remuneration with hours worked, particularly for Ireland…

      http://www.iiea.com/blogosphere/public-sector-pay-at-a-glance

      I would be in favour of a fair ratio between the lowest-paid and highest-paid employees in a business. Maybe something of the order of 1:10 or 1:12 would hit the mark?

      • steviefinn January 29, 2012 at 1:20 pm #

        Pat
        Yes you are right, I think Ireland is particularly bad for it, I think I remember that Ahern & Cowen paid themselves almost the equivalent of Obama, for running a country which has an economy & population roughly the size of Birmingham in the UK. I agree with the 1:10 / 1 :12 ratio, they have had the run of the trough for far too long.

  28. John Souter January 28, 2012 at 2:15 pm #

    There is more sense in this post and the thirty odd comments it has generated to date than probably all the Machiavellian bull shit cluttering the air around Davos at the moment and during the recent past. But there they have a singular purpose which by definition concentrates minds and simplifies the tasks namely – to protect their investment by minimising risk through socialising losses and cost while retaining control and profit.

    As long as the situation continues where ‘markets’ control the actions of sovereign nations and the effects are aided and incorporated by the politicians they are in a win – win position whether the ‘market’ is up, down, stagnating – or whether the ‘market’ involved has any ‘real’ purpose or substance other than a creation to serve mythical values.

    Facts:

    1) Northern rock was a warning. For the UK it was treated as a singular failure but similar events in the USA were building into the precursor for a tsunami.The failure of the UK government was a triumph of hope based on ignorance served on the plate of hubris.

    2) No business on this earth is too big to fail. Politicians above all should be aware of this, since they have been the cause of many failures of industries in the past as and when it suited them. The lesson to be learned here is that no government should have the right to save any business or corporation with public funds or by invoking public liability without a mandate from the people giving them permission to do so.

    3) In today’s world experience has shown democracy is not served by parliaments having sovereignty. That such an arrangement means democracy ends at the ballot box then is used as a euphemism for short term, grab – what -you – can and play towards the next ballot tyranny.

    4) The myth of private good – public bad. This is corporate drivel. There is absolutely no reason why the administration of a nations resources or it’s utilities and infrastructures cannot be as efficiently run for the good of the nation as a private business is run for the good of its investors. The simple answer is for the State to allow it to be run as a private business in all aspects of hiring and firing, salaries and bonuses, profit and loss, even to the point of bankruptcy – but in normal circumstances the State gets the dividends.

    5) More important than the mantra of less government, is the need for more effective government.

    Get ‘democracy’ back into the heart of the nation and this crises and all the dross it has exposed will dissolve in all its surreality overnight.

    Democracy is the cure, all others are merely placebos.

  29. Syzygy January 28, 2012 at 2:24 pm #

    There was a ‘banker’ called Jeremy who phoned the Stephen Nolan R5Live programme at about 11.45 pm last night.

    He explained regretfully that the problem is that UK workers are still overpaid. Wages must be reduced to allow us to compete with China. Obviously, to steer us through these difficult times, we need to pay people like Hester even more.

    This was the first time that I’ve heard the real neofeudalist agenda being aired on the BBC .. will heads roll?

    • cynicalHighlander January 28, 2012 at 6:28 pm #

      Yes I heard Jeremy as well whilst being held for over an hour on the phone before being apologised too for not fitting me in. It was quite apparent how some members of the public follow MPs and some economic ‘experts’ views as talking sense.

    • Phil January 28, 2012 at 9:04 pm #

      And do these people consider how the vastly inflated property prices – which underpinned so much of the banks’ ‘profits’ – would be paid for if everyone was on Chinese wages? The arse would drop out of their rigged markets before you could say ‘Nihao’.

  30. mebumu January 28, 2012 at 3:55 pm #

    On a slightly different note, looks like Greece will be forced to give its Sovereignty to the Troika (sorry if this has been mentioned already): http://hat4uk.wordpress.com/2012/01/28/6-00am-greeks-stunned-as-troika-takes-power/

    • steviefinn January 28, 2012 at 7:33 pm #

      Is it just me or does anybody else think that Greece is turning into a kind of modern day equivalent of Vichy France ?

      • John Souter January 28, 2012 at 8:09 pm #

        Stevie -Vichy France! – no then the enemy was easily identified.

  31. Pat Flannery January 28, 2012 at 9:18 pm #

    It is becoming clearer and clearer to me that the current global financial crisis is primarily a personnel problem. The fact that the same people who drove the world’s financial armada onto the rocks are still on the bridges of the nations’ ships, tells it all. The question therefore is how to effect a worldwide financial crew change, not reward them.

    The first thing that needs to happen is for some nation such as Britain to take the lead and redefine the job description of its top bankers and hire “other” talents.

    I can’t guarantee that a general crew change will prevent a global financial meltdown at this late stage, but I can guarantee that if we leave the present personnel in charge we will have a worse catastrophe than World War I. The two situations are eerily similar.

    The second thing that needs to happen IMMEDIATELY is the breaking up of the “too big to fail” banks. Surely that is the most logical and the most urgent action of all. If something is “too” anything, should not immediate steps be taken to regularize it?

    Britain is in the best position to lead on this. Your (largely unwritten) Constitution is based upon the Supremacy of Parliament. You can therefore LEGISLATE solutions in short order. In times of emergency you have done so in the past. You are in the unique position of being a democracy with totalitarian power. At critical times it has been one of your greatest strengths.

    The main problem now is one of perception. This existential threat to Britain comes from within – from “The City”. This Battle of Britain will not be fought on the Churchilian beaches; it will be fought in the living rooms of Britain. Your current Prime Minister is a “City” man. What if Churchill’s mother had been German, not American? ‘Nuff said.

    The solution this time will therefore not come from 10 Downing Street. You must reach into your history and provoke a Parliamentary backbench revolt. Catastrophe can only be avoided by LEGISLATION. And everybody has a hand in that as everybody has an MP.

    Never in Britain’s long history has there been such an existential threat, not from the Spanish Armada, not from Napoleon, not from the Kaiser, not even from Hitler. I hope the British people stop drinking their media “Coolaid” and ACT.

    Blogs like this are the 21st Century equivalent of the 16th Century (Spanish Armada) beacons. They can quickly spread the news all across the country that a defensive LEGISLATIVE solution is readily available. Together we can make democracy real, not just a word in endless polemics.

    The British Parliament needs to form a Banking “New Model Army”, with the national interest its only mission. Isn’t that what Parliament did in the 17th Century and every time since when there was a military threat from either outside or inside?

    You Britons need to rise up and send your current Financial Royalty to the Tower and throw out their gaudy baubles from your Parliament. Much as we Irish (for good reason) hate your Oliver Cromwell, he did what needed to be done in the England of his time.

    Sorry for the hyperbole if excessive, but these are indeed critical times for all of us worldwide and Britain could play a crucial role, as it has done so many times in the past. I sincerely hope you do because we here in America are governed by a cadre of Wall Street bankers whose lobbyists “Occupy Washington” and our democracy is reduced to a sham.

    Please don’t let that happen in Britain.

    • John Souter January 29, 2012 at 9:40 am #

      Pat F -The sovereignty of parliament and it’s unwritten constitution is in a large part the problem that defines the deficit of democracy in Britain and underpins its establishments.

    • Keekster January 30, 2012 at 2:05 pm #

      You’re right. Unfortunately the Parliament does not have sovereignty over the Square Mile in London, and there is a representative in Westminster who represents their interests that sits behind the speaker I believe. The public are spoon fed propoganda via the BBC and Rupert Murdoch. As predicted by Ravi Batra, I dont they will not rise up and do anything until the middle classes are at subsistence levels. Un/fortunately that is a work in progress. The mainstream parties are all supporters of the status quo, neo-liberal, pro corporate sycophants. Until fresh political thinking enters parliament, say a new ‘pirate party’. Nothing will change.

      • Phil January 31, 2012 at 12:26 am #

        Thanks Pat, at least for your thoughts.

        Whilst I understand the skepticism, I abhor cynicism – it’s self-fulfilling and self-defeating – therefore those of who are privvy to better knowledge of current events must take every opportunity to harry and cajole the media, our MPs and even our friends and relatives. Write to your local newpaper, your national newspaper of choice, your MP, post on Facebook/ Twitter, get out on the streets and hand out leaflets. Whatever it takes until it becomes the status quo becomes unsustainable.

        Of course it might not work, but at least you can say you tried.

  32. Seanán Kerr January 28, 2012 at 10:26 pm #

    Dan Pink in his book Drive show how rewarding people with money for performance actually has a negative effect on their results. The theory being that when people are fiscally incentivised a great deal of their mental creative/problem solving efforts is being invested in wondering “what will I buy with all this lovely money.” So their thinking is more focused on the money and getting more of it, than on the job itself. Which might in part go some way to explaining why high proportion of bankers are (to quote Patches O’ Houlihan) about as useful as a cock-flavoured lollipop and the bonus culture as well as being morally abhorent is also functionally abhorent too.

    I’m simplifying a tad, but you can either buy his book, watch this presentation at the RSA (worth watching for Matthew Taylor’s excellent questions alone) http://www.youtube.com/watch?v=_mG-hhWL_ug or watch the shorter RSA animate version http://www.youtube.com/watch?v=u6XAPnuFjJc the talk is also available as a podcast.

    • Golem XIV January 29, 2012 at 11:44 am #

      I think we all feel honoured that our humble discussion has prompted a quote from the great Patches O’ Houlihan.

  33. Patricia January 29, 2012 at 12:33 am #

    A slight diversion but we have had a revolt here in Christchurch New Zealand against the Council awarding its CEO a $68000.00 odd increase because of what he had to deal with during our earthquakes. So many people have lost everything that the collective ire of the people just rose up. A call was made to Goverment to investigate the legality of the Council’s decision to give such an increase. The Mayor said that was the market rate for such CEOs but the people said they were the Market and they said no. The CEO, who was holidaying at a beach resort in Australia when he gave his interview, which of course added to the people’s ire, said he was taking it and that was that. However, yesterday, he said he would now not accept the increase but apparently the people want his blood – well his resignation anyway. There is to be a public meeting outside the Council buildings on our 1st February. It will be interesting.

    • Pat Flannery January 29, 2012 at 3:24 am #

      Keep us informed Patricia. I like your “We are the Market” retort. Sounds soooo Kiwi. Good onya Christchurch. It might be “the remark (shot) heard around the world”.

      BTW, been to your city twice, loved it.

    • John Souter January 29, 2012 at 9:44 am #

      Patricia – Good to hear – democracy being actioned.

    • Golem XIV January 29, 2012 at 11:46 am #

      “We are the market!” That is Brilliant.

      • Dave January 29, 2012 at 2:00 pm #

        Patricia –

        I loved that one too, and am copying your post to my aged Ma in the Far North .

        frog2 ( not yet banned from Guardian CiF.. )

      • Pat Flannery January 29, 2012 at 9:45 pm #

        Golem,

        How about “We are the Market” for your next documentary?

        You have most of the work done.

    • Ed Porter January 31, 2012 at 3:58 am #

      As a fellow Kiwi I am delighted you posted this Patricia, as I also thought it had relevance to the general them of ‘over-pay’.

      And just as per my post further down, the reality is that the guy is now doing the job for the same remuneration as before – i.e. without the $68,000 extra. So, remind me again why we needed to pay him $68K more !?!

      Therein is that absolute misbelief that is trotted out by 100% of human resource remuneration committees around the world – that they “need” to pay such and such a salary to get such and such a person. Its simply not true, and the Christchurch City Council CEO case proves it.

      The same proof could be obtained by reducing the salaries of anybody on US$250,000 equivalent per annum, by, say, 10 – 15%, How many of them would throw their arms up in the air and say they “wouldn’t stand for it” ? Probably 100%. How many would actually end up resigning ? Probably no more than 10%.
      (after all, why would you leave when you knew that all ‘similar’ jobs around the globe were also seeing remuneration cuts ?).

      Just as referencing ‘other peers’ has become the norm for obtaining pay rises, it stands to absolute logic that if you want to use that benchmark then you must accept pay cuts when those ‘peers’ are seeing downward pressure on their remuneration. You can’t have your cake and eat it.

      So, who is going to set the ball rolling ?

  34. bobbi January 29, 2012 at 4:54 pm #

    thanks for what you do

    and Patricia: +10!

  35. Mike January 30, 2012 at 12:52 am #

    In case this hasn’t already been mentioned in this thread, http://www.bbc.co.uk/news/uk-16783571. So it seems the guillotine will continue to gather dust for now.

    Also, the continued drumbeat for a more centralised Europe under unelected EC governance is at the fore in this article: http://www.bbc.co.uk/news/world-europe-16761087. Basically, the author and the people quoted are suggesting that the pesky democracies stubbornly clinging to control of their own finances are the reason the euro is on the skids and that the way forward (in terms of inevitability and desirability) is the control of national budgets by the central authority.

    Tick tock, brothers and sisters. War is Peace. Freedom is Slavery. The BBC gets more like the Ministry of Truth every day.

    • Troy Prideaux January 30, 2012 at 8:00 am #

      “In case this hasn’t already been mentioned in this thread, http://www.bbc.co.uk/news/uk-16783571. So it seems the guillotine will continue to gather dust for now.”

      Also mentioned on yahoo.com too – which is a good thing!

  36. John Souter January 30, 2012 at 1:17 pm #

    Reference Patricia’s post and democracy in action in Christchurch.

    Why don’t I feel so good about Hester renouncing his bonus?

    Could it be he was persuaded by politics rather than the ire of the people?

    Is there such a thing in this day and age as a trusted political solution?

  37. simoncz January 30, 2012 at 3:32 pm #

    The bonus is one thing but the really annoying part is that Mr Hester has already trousered something north of 25 million quid for his efforts on our behalf. He’s been in post approx 4 years and has become wealthy in that time. And that assumes he was skint before he started. It’s obscene.

  38. Charles Wheeler January 30, 2012 at 7:21 pm #

    Banking Deregulation: Glass-Steagall – an insider’s view: http://goo.gl/29b53

  39. Charles Wheeler January 30, 2012 at 7:58 pm #

    Byron Dorgan, Nov 4 1999:

    “And as banks get bigger, of course, we also have another doctrine. The doctrine in banking at the Federal Reserve Board is called, “too big to fail.” Remember that term, “too big to fail.” It means at a certain level, banks get too big to fail. They cannot be allowed to fail because the consequence on the economy is catastrophic and therefore these banks are too big to fail. Virtually every single merger you read about in the newspapers these days means we simply have more banks that are too big to fail. That is no-fault capitalism; too big to fail. Does anybody care about that? Does the Fed? Apparently not.

    I, obviously, am in a minority here. We have people who dressed in their best suits and they just think this is the greatest piece of legislation that has ever been given to Congress. We have choruses of folks standing outside this Chamber who spent their lifetimes working to get this done, to say: Would you just forget all that nonsense back in the 1930s about bank failures and Glass-Steagall and the requirement to separate risk from banking enterprises; just forget all that. Time has moved on. Let’s understand that. Change with the times.

    We have folks outside who have worked on this very hard and who very much want this to happen. We have a lot of folks in here who are very compliant to say: Absolutely, let me be the lead singer. And here we are. We have this bill, which I will bet, in 5, 10, 15 years from now, we will be back thinking of this bill like we thought of the bill passed in the late 1970s and early 1980s, in which this Congress unhitched the savings and loans so some sleepy little Texas institution could gather brokered deposits from all around America and, like a giant rocket, become a huge enterprise. And guess what. With all the speculation in the S&Ls and brokered deposits and all the things that went with it that this Congress allowed, what did it cost the American taxpayer to bail out that bunch of failures? What did it cost? Hundreds of billions of dollars. I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail? How did we think that was going to help this country? Then to decide we shall fuse it with inherently risky enterprises, how did we think that was going to avoid the lessons of the past?

    I am not anti-bank, anti-security or anti-insurance. All of them play a constructive role and important role in this country. But this country will be better served with aggressive antitrust enforcement, with, in my judgment, fewer mergers, with fewer companies moving in to the “too big to fail” category of the Federal Reserve Board, with less concentration.

    This country will be better served if we have tighter controls, not firewalls that allow these companies to come together and do inherently risky things adjacent to banking enterprises, but to decide the lessons of the 1930s are indelible transcendental lessons we ought to learn and ought to remember.”
    http://goo.gl/9pB5x

    • simoncz January 30, 2012 at 9:00 pm #

      I just watched those videos. Stunning. This guy was like he could read the future.
      If anyone can say “I told you so”, it’s this guy. Incredible.

      • Charles Wheeler January 30, 2012 at 9:15 pm #

        Yet… who’s heard of him?

        Meanwhile Larry Summers is mooted as head of the World Bank.

        Lewis Carroll – your time has come.

        • simoncz January 31, 2012 at 12:10 am #

          I sent the link to Karl Denninger at Market Ticker in case he’d never seen it. It’s more an American thing albeit that whatever happens over there usually hits us too. I think it deserves to go viral.

      • Charles Wheeler January 31, 2012 at 12:11 pm #

        Of course, the BIG LIE perpetrated by neoliberals is that nobody could see the crash coming. In fact, there’s a long roll call of people who argued it was inevitable. As Steve Keen says, only a neoclassical economist could pretend that the accelerating levels of private debt leading up to the Main Event were irrelevant on the grounds that debtors and creditors balance each other out!

        The S&L crisis referred to by Byron Dorgan represented a dress rehearsal – but instead of being taken as a warning, served as a user guide. As Robert Sherrill wrote in 1990:

        “If anyone still had faith in the system, the savings and loan adventure surely must have brought him to his senses and to his knees. The gambling debt of $500 billion ($150 billion plus interest and other incidentals)–or will it be, as some economists predict, a trillion four?–that the S&L industry left with the taxpayers has prompted even that deadpan Tory, George Will, to remark in wonderment, “We seem to have a capitalism here in which profits are private and we socialize the losses. Why are we, in effect–if you’re big enough, if you’re a huge bank or a savings and loan–why, in effect, are we guaranteeing everything? … What I’m asking is isn’t there a way to reform the system so that the taxpayers don’t get stuck with what happens when you have deregulation and risk taking that goes wrong?”

        The answer to his question is: No, there is no way to reform the present system, because the system is owned and controlled by those who are ruining it. Voters, ordinary taxpayers, have nothing to say about it.

        Martin Mayer, a conservative economic historian, has seen his world crumble and become meaningless. The capitalism he set his watch by has stopped ticking. He finds the thrift mess almost unbelievable: “Players entered the game through a government charter and continued to play, however severe their losses, in violation of all capitalist principle–courtesy of a government that continued to insure their borrowings. This was not an accident: it was public policy.”

        When he talks about “players,” he makes it sound like customers at a casino. And that in fact is what it has become. Capitalism has become the Big Casino, with players guaranteed against loss, because in effect they have bought the house managers. That is public policy.

        Mayer predicts plaintively that “future sociologists…will study the irruption of criminality into what had been conservative, even beneficent, organizations….They will seek to learn why the fiduciary ties that had set the unspoken, self-dignifying rules of a competitive society had been so grievously weakened in the late years of the twentieth century.”

        But in fact, this has never been a competitive society, neither in the mythical “capitalist” commercial world nor in the even more mythical “democratic” world of politics. Big-big uncontrolled money has ruled both through special privileges, and the S&L disaster simply illustrates again what Mayer calls “the corruption that must ultimately infect any government where the costs of running for office are greater than those that can or will be borne by the relatively small community of the public-spirited.”

        Nevertheless, though it is obvious that the tottering commercial banking world needs tighter regulations than ever, the industry and the Administration push on pell-mell for deregulation. In fact, the dismal condition of the industry is being used by the deregulating claque as their strongest, and weirdest, argument. Just as St. Germain, Garn, Pratt and Wall argued that the best way to help zombie thrifts recover was to remove all regulations so that they could “grow out” of their problems, now Bush, Fed chair Greenspan, Treasury Secretary Nicholas Brady, Seidman and others demand that the government dismantle what Seidman calls the “archaic laws” that for many years have controlled commercial banking. They, too, want to “grow out” of their perilous condition. What these laws do is protect the banking industry from its worst instincts by insisting that banks remain banks, and not become gamblers, hucksters and hustlers in other lines as well.

        The deregulators will probably make their big power-play next spring, when, under mandate from Congress, the Treasury Department must come up with its “reform” plans for the banks. You can expect the other side to try to sell some blind horses to us, like offering to swap a lower ceiling on deposit insurance for wholesale abandonment of regulations–as if the rotters wouldn’t be just as happy engaging in risky activity under a lower ceiling as they have been gambling under the present one. If there is a double agent to be on guard against, it will be Donald Riegle, chair of the Senate Banking Committee. He and the moneylenders are–could any old saw be more apt?–thick as thieves. Riegle is recorded as receiving $200,900 from S&L officials and PACs between January 1981 and May 1990–second only to California’s Senator Pete Wilson ($243,334). Now that S&L money is seen to be tainted, Riegle has scrambled to redeem his reputation by returning $120,000 of it. But the commercial banks have stuffed his pockets too, and there is no record of his having returned any of that money.

        Recently Greenspan–that trustworthy fellow who guaranteed the morality of Keating and was one of the chief boosters of junk-bond purchases by S&Ls–guided his Fed colleagues into a disastrous decision. They ruled that J.P. Morgan (Morgan Guaranty Trust) could trade and sell corporate stocks. With this cloven hoof in the door, other banks will follow, and that will be the death of the Glass-Steagall Act, which Congress passed in 1933 to separate commercial banks from investment banks and thereby control some of the outlawry that had caused thousands of banks to fail. Next they will probably be targeting the Bank Holding Act of 1956, which was intended to keep banking out of commerce, and the McFadden Act, which limits interstate banking.

        What Greenspan, Seidman and their gang say to critics is, Oh, we want banks to be banks, too, but we want them to be universal banks. Which can be translated to mean uncontrolled banks, banks completely unfettered by regulations that restrict their operations–in short, pretty much a return to the reckless and lawless 1920s and early 1930s, which, if measured by the drama and excitement of collapsing financial structures, had it all over the 1980s.

        Brumbaugh, for one, is dumbfounded by what he’s seeing. “The administration and Congress just don’t want to acknowledge the problem,” he says with a sigh. “This is déjà vu all over again. You can’t believe it’s happening, but there it is.”
        http://goo.gl/7qS2I [this is a reprint of the original article from Nov 19 1990 http://goo.gl/QIIE6 [Brumbaugh lost a research post as a result of sticking his head above the parapet: http://goo.gl/DOzj0 ]

        Michael Lewis wrote Liar’s Poker as a cautionary tale on the perils of casino capitalism in the 1980s, only to see it taken up as a recruiting manual.

        Brooksley Born made a valiant but futile attempt to rein in the deregulators [ http://goo.gl/S1TL ] but was sidelined by Greenspan, Rubin and Summers

        Warren Buffet famously tagged OTC derivatives as financial WMDs

        The collapse of LTCM [see Roger Lowenstein's When Genius Failed] could serve as the epitome of hubris

        And yet, since then we’ve seen the effective Enronisation of the financial system, shell companies and ‘special purpose vehicles’ proliferating across the shadow economy – Nicholas Shaxson’s Treasure Islands exposes how tax havens, far from acting a simple piggy banks of a few of the super-rich, have become integral to the world economy – with the result that, to remain competitive, most large corporations have to funnel their business through esoteric ‘offshore’ operations – leaving small and medium sized businesses at a disadvantage as bad practice drives out good (‘what is permitted becomes necessary’).

        But the constant refrain is that the meltdown was an Act of God nobody could have foreseen (and which, by extension, nobody could be blamed for not foreseeing) – paradoxically, the ‘tyranny of the expert’ gambit is used to browbeat the non-expert into accepting that expertise was no defence against the playing out of a scenario that couldn’t have been predicted (Gillian Tett’s Fool’s Gold takes this line, arguing that the derivatives designed by the rocket scientists at JPM were misused in ways their originators couldn’t have foreseen).

        The truth is, that many both inside and outside the industry could see that leveraging x30, x40 and above couldn’t be sustainable in the long run – but, hey, in the long run we’re all dead.

    • Ahimsa January 31, 2012 at 10:50 am #

      Thanks for sharing, Charles. So prescient..

      1999: ..The doctrine in banking at the Federal Reserve Board is called, “too big to fail.” Remember that term, “too big to fail.”..

      How has this speech not gotten more coverage?

    • Phil January 31, 2012 at 8:15 pm #

      Charles, you find and post some brilliant stuff but that one is awesome. Many thanks.

      • Charles Wheeler January 31, 2012 at 10:37 pm #

        This is Byron Dorgan’s earlier Washington Monthly piece of Oct 1994:

        Very Risky Business
        “So what is this thing called a derivative? Bankers and speculators maintain it’s just hedging, a perfectly normal practice to manage risk. Farmers hedge, so do banks and businesses. So what’s the big deal? Derivatives have become much more than managing risk. They have begun, in some cases, to look like a financial casino where the decisions are wagering decisions, not business ones. Derivatives may well be the most complicated financial device ever—contracts based on mathematical formulas, involving multiple and interwoven bets on currency and interest rates in an ever-expanding galaxy of permutation. Of course, what individual investors knowingly do with their own money is their own business. But when financial institutions are setting up what amount to keno pits in their lobbies, it’s something that should concern all of us.

        In the peculiar market of recent years, successful exotic derivatives have been a miracle drug for bank balance sheets, not to mention the dealers who are shovelling in millions. It’s not surprising, then, that these banks and dealers are resisting reform. What is surprising is that the Office of the Comptroller of the Currency (OCC) and the Federal Reserve agree, too, that legislative reform is unnecessary. “As far as the Federal Reserve Board is concerned,” Chairman Alan Greenspan testified in May, “we believe that we are ahead of the curve on this issue as best one can get.” Why would Greenspan, in light of the mounting evidence, soft-peddle the problem? Partly, it’s the old story. Because the Federal Reserve, like other banking regulators, tends to think more like the people it is supposed to be watchdogging—in this case, the banks and the larger financial community—than they think like the rest of us. And in fact, in the case of the Federal Reserve, it is the industry it is supposed to oversee: The members of the Federal Reserve are bankers.

        I have introduced S. 2123 in the U.S. Senate, which would prohibit banks and other federally insured institutions from playing roulette in the derivatives market. If an institution has deposits insured by the federal government, it should not be involved in trading risky derivatives. Of course, what investors do with their own money is their own business. (And of course, dealers must be required to tell their customers when derivatives are involved; in the Piper Jaffray debacle, customers did not understand what was happening.) But what banks do with money insured by the taxpayers is another matter entirely.
        http://goo.gl/a1U36

  40. bill40 January 30, 2012 at 9:17 pm #

    Charles,

    nobody is listening. For all the fuss and noise we have made, for all the education and knowledge we have tried to spread, the real enemy, the shadow banking system has grown since 2008.

    http://www.fintools.com/docs/Warren%20Buffet%20on%20Derivatives.pdf

    Sad, but true.

    • steviefinn January 30, 2012 at 9:32 pm #

      I suppose it was inevitable due to the nature of the beast. I don’t think it will end until like a gigantic over stuffed stomach it finally bursts. Hopefully then there will be a reckoning.

      Fair play for your efforts within the MSM blogs, you at least tried.

      • Pat Flannery January 30, 2012 at 10:22 pm #

        The good news is that people are listening to Bill Moyers and his guests. He has retired many times but is always brought back by popular request.

        I would recommend that you favorite his web site:
        http://www.pbs.org/moyers/journal/index-flash.html
        and never miss a program.

        I had the great pleasure of chatting with him for a few moments here in San Diego a few years ago. He is an American treasure.

        • Hawkeye January 31, 2012 at 4:20 pm #

          Bill Moyers makes Jeremy Paxman look like the uptight public school toast-rack that he is.

    • Charles Wheeler January 30, 2012 at 10:19 pm #

      The crash has simply acted as a cue for the 1% to ransack what’s left of the economy in realisation that this version of the Gilded Age is over: http://goo.gl/tT4Y2

      I guess the trick will keep working as long as they can continue to pitch taxpayers v. the young, the old, the sick, the disabled, the public sector, the non-working poor, the working poor, single mothers, pensioners, students, immigrants, protesters, benefit claimants, etc. – until most people realise they’ll probably occupy a number of these groups at some point in their lives. Even Daily Mail readers can get sick, become disabled, grow old, lose their job …

      http://goo.gl/8Gbg7

    • Troy Prideaux January 31, 2012 at 11:20 pm #

      Bill, for what it’s worth (not much) – I’m listening :)
      Thanks for that link too. I had a basic understanding of how derivatives worked, but never really understood why they were so popular with traders. That document pretty much spells that answer out very clearly.

  41. Troy Prideaux January 30, 2012 at 10:57 pm #

    Once again, a myriad of gold nuggets within these posts. Hats off and thanks to all!

  42. Ed Porter January 31, 2012 at 1:52 am #

    If he wasn’t paid the bonus, would he stay at RBS for the salary ?

    Ahem, I suggest, Yes.

    So, remind me why the bonus needs to be paid again then ?

  43. steviefinn January 31, 2012 at 12:48 pm #

    I found out today what a trillion dollars looks like. The constant talk of billions & trillions seems to diminish the reality of the amounts involved, but when you look at this, for me anyway it brings it back into perspective. Took me sometime to stack it in the backyard…..just kidding.

    http://1.bp.blogspot.com/-5njsAmkuZ2I/Tjb3UEHYyWI/AAAAAAAAAL0/vCa_Djo8ggY/s1600/one%2Btrillion.jpg

    PS The red blob is a fella.

    • John Souter January 31, 2012 at 1:02 pm #

      Stevie – he must be the .01 of the 1%. And he’s not going to get that lot into his pockets?

  44. John Souter January 31, 2012 at 2:12 pm #

    Any law or system that doesn’t give primacy or privilege to the effect it has on humanity is bereft of conscience, morally bankrupt and therefore the tool of tyranny.

    • Troy Prideaux January 31, 2012 at 2:31 pm #

      Also: regulations are there to protect people. The vast majority of regulations that exist are introduced from a reaction or experience of harm caused to humanity, not from some theoretical potential likelihood.

      • Charles Wheeler January 31, 2012 at 3:06 pm #

        “Don’t take a fence down until you know the reason it was put up.” G.K. Chesterton

      • Hawkeye January 31, 2012 at 4:25 pm #

        Troy

        Reminds me of the excellent observation by Karl Polanyi, that all impetus for free-market de-regulation was PLANNED, whereas all regulations and labour protections were reactions to crises!

        That irony would be wasted on most Neo-Liberals.

        • Troy Prideaux January 31, 2012 at 10:59 pm #

          Hawkeye & Charles – thanks! A couple of gems!

  45. Charles Wheeler January 31, 2012 at 7:18 pm #

    As Sir Fred loses knighthood, a sobering tale: http://goo.gl/DSvNX

  46. simoncz January 31, 2012 at 9:10 pm #

    Every Telegraph blogger has already posted a piece decrying the loss of gong suffered by Fred. I think the (knighted) Barclay brothers are trying to whip up a feeling that people found out to be charlatans should not lose their baubles. I wonder why?
    The speed at which their articles were posted makes me think they were either already written or they got phone calls originating in the Channel Islands demanding 500 words or else.

  47. StevieFinn January 31, 2012 at 11:31 pm #

    Kinda sums it up:

    http://www.scotsman.com/news/cartoon/the_scotsman_cartoon_21_01_2012_1_2070262

    • John Souter February 1, 2012 at 3:40 pm #

      Stevie that is the nearest the Scotsman has come to publishing a truth since circa 2006.

  48. steviefinn February 1, 2012 at 6:59 pm #

    Golem on the daily bail, with some more details on the Irish bondholder bailout.

    http://dailybail.com/home/rothschild-bank-and-goldman-sachs-are-both-on-the-list-of-bo.html

  49. Pat Flannery February 1, 2012 at 8:22 pm #

    There is hope. America still has “a few good men” e.g. New York’s Attorney General
    http://wapo.st/y3VNDK

  50. davem February 1, 2012 at 8:58 pm #

    ‘Where Is the Uprising from the Left?’
    http://www.spiegel.de/international/world/0,1518,812208,00.html

    • Charles Wheeler February 1, 2012 at 11:04 pm #

      Fukuyama is all over the place as ever. He seems to have engineered a career out of being spectacularly wrong on major issues, so now seems to be hedging his bets by firing his opinions from a scatter gun. You’d need to go through the article line by line to tease out all the contradictions, but this statement stood out: “So I think the convictions of Tea Party activists are sincere, they are not manipulated by billionaires. But it is true that they mobilize against their own economic interests and for the interests of elites they should despise. I still do not fully understand why they do that.” Really? Fox News? Koch Bros? MSM owned and controlled by billionaires? Where do they get their ideas about government and taxation from?

      • Troy Prideaux February 2, 2012 at 5:54 am #

        Most of his answers seem to make reasonable sense though, at least on 1st glance.

      • Synopticist February 2, 2012 at 7:26 pm #

        Yeah, true enough, they’re manipulated, but theres something else at work amongst the young libertarians of the US.

        Theres a nostalgia for the frontier society i think, a longing for the time when young guys with guns and a weak society could force their ways on others.
        Plus the petty-bourgiouse fear throughout the ages, that people poorer than them might be getting a hand-up from the government.

        Better to drink a cup of piss from the elite, as long as people further down the scale than them have to drink 2.

  51. dave February 2, 2012 at 11:07 am #

    i believe that the massive salaries/ bonuses that abound, are in place as ‘hush’ money.

    Many in the financial industry suspect that the firms they work for, are in fact ‘firms’, in the old school, London sense of the word, but they care not, as the carrot is expontially larger than the (thus far illusory) stick. (‘firm’ is a 1950′s, UK, self imposed term for a criminal collective, particularly one based in London)

    So, by the time they scramble their way to the top, they are not surprised to find that this IS, IN FACT the case. By now, of course, they have the proof in the palm of their hands. So, those palms need to be greased, well and often, lest that ‘Geezer blows the gaff on the whole shooting match’ (puts an end to the game by revealing all to interested parties…us). ;0)

    I don’t think we need to look into it any more than that. It’s simply a ‘firm’ paying those in the know, to keep very, very quiet about the colossal robberies they pull off, week in, week out.

    As a famous gangster once wrote, around his 10 year anniversary of ‘going straight’ and working in the City: ‘The crime i did back then is nothing relative to the crime i do now, and no one even so much as asks a question, ever’. Sorry, i can’t find the exact quote or name.

  52. Hawkeye February 2, 2012 at 11:23 am #

    Interview with Michael Hudson:

    http://michael-hudson.com/2012/01/padding-banksters-pockets/

  53. John Souter February 2, 2012 at 1:22 pm #

    A video I urge you listen to – http:// subrosa-blonde.blogspot.com

    Who founded the EU and their influence today. by Rodney Atkinson.

    Never heard of him and have done no research as to his provenance but it’s chilling stuff and adds to my constant concern on the EU’s democratic deficit and it’s modus operandi in the present crises.

  54. Charles Wheeler February 2, 2012 at 7:36 pm #

    “The pay of bankers at large financial institutions – and not only those majority-owned by the taxpayer – represents a market failure of gargantuan proportions. When profits at these institutions were up in the boom, the bankers paid themselves a king’s ransom. When profits collapsed in the bust, they continued to enjoy lavish bonuses. And now that the share prices of their institutions are bouncing along the bottom, these same bankers are still in line for unfeasibly large rewards. There is no observable link between pay and performance here, and certainly none between employee remuneration and shareholder value. The only way to make money out of a big bank these days is to work for one.”
    Ben Chu http://goo.gl/l427Zb

  55. Patricia February 2, 2012 at 10:53 pm #

    Well the latest from Christchurch New Zealand. The protest against giving the CEO of the Christchurch City Council an increase in salary was well attended with a wide cross section of the people who demanded the resignation of the CEO (they used to be called Town Clerks) and the Mayor (who is just a show pony) with Council elections within 6 months. The Government which said said no to both demands has appointed an observer who was previously the Mayor of Nelson AND a marriage guidance Councillor……… The people’s response was that they gave the Government two weeks to think again otherwise there will be more protests. The Government’s response was they would disband the Council and put Commissioners in to run the Council. (Theyhave done that before with Environment Canterbury – around two years ago – and we still haven’t had new elections.). So we will see
    what happens. Oh as an aside at the end of the Protest the people gave a thank you to the Police and St John’s Ambulance. I liked that bit. I have just returned from Melbourne so I wasn’t able to attend and the above is what I have read.

  56. Chris February 3, 2012 at 12:24 am #

    Great thread! I was particularly enjoying the debate between Hawkeye and MikeM. I’m not sure if Hawkeye specifically responded to this question from MikeM:

    “What about security on loans? If you want to buy a house, what does the bank do? Does it turn to its computer an ‘create’ a few hundred thousand new pounds, or does it demand the actual house itself as securtiy on the loan? What about the seller? How is the seller paid? Is it in magic money or is it in a real transaction, with a real sum of money moving into the seller’s account?”

    Apologies if I missed something but if Hawkeye or someone else could clarify on this point I’d be very grateful as it’s the aspect of e.g. positivemoney’s critique that I struggle with.

    • Troy Prideaux February 3, 2012 at 2:07 am #

      I’m certainly no expert in this area but I’m pretty sure it’s real money. Even money created by central banks at the stroke of a key I’d consider real money. It’s injected into the economy and hence why we generally see pretty constant inflation growth over a prolonged period of time.
      Maybe money created from asset valuation increase can be considered pretend money. Like central bank money, it can be created from thin air, and it can be used as money through leveraging, but it’s not real like the central bank creation as it’s based on pure sentiment. This is what I assumed was the bases on the GFC – trillions of “pretend” dollars created and actually masqueraded as real money injected into the markets and economy to provide artificial growth. When trillions of this “pretend” money suddenly disappeared off the face of the planet via the asset bust, it needed to be replaced with real money in an attempt to balance up the money supply again, even if it was originally artificial to some extent. What’s not debatable is the mismanagement of that process, but I suppose it is complex.
      Anyway, that’s my naive impression and I’m open to be educated on where I’ve strayed off the tracks.

    • Hawkeye February 3, 2012 at 10:45 am #

      The Pandora’s box has been well and truly opened !!

      I have been trying to set aside some time to write a full piece on the nature of money, in order to make a clear and compelling case. Time pressures coupled with my own obsessive need to write something definitive on the subject has meant that I am way behind on this. However the comments, questions and feedback from commenters here (e.g. mikems and Chris) is especially helpful.

      Here is a neat little video that explains the process by comparing money to plumbing:

      http://www.youtube.com/watch?v=WefdeNLup3M&feature=related

      For a more technical / academic approach I strongly recommend the work of Prof Steve Keen, and these papers are a good intro:

      “the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.”

      http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

      http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/

      Chris: Here is a specific answer to mikems’ question you re-stated:

      Q:“What about security on loans? If you want to buy a house, what does the bank do? Does it turn to its computer an ‘create’ a few hundred thousand new pounds, or does it demand the actual house itself as securtiy on the loan?”

      A: It does both. As stated previously from the perspective of the buyer the bank creates a new deposit in your account (ready to pay the seller), which sits in it’s “Liabilities” side, and allocates the loan as an “Asset”. It has expanded its balance sheet by the face value of the loan. As buyer you have pledged the home as “security” against the loan, and so the bank treates this as a viable asset. What the bank has actually done is undertake “Maturity transformation”. It has taken a long term income stream (your mortgage repayments) and converted it into an instant deposit amount ready to give to the seller. It has forfeited nothing (except perhaps its future solvency) whereas you have pledged a physical asset.

      Q: “What about the seller? How is the seller paid? Is it in magic money or is it in a real transaction, with a real sum of money moving into the seller’s account?”

      A: The buyer’s bank reduces the deposit in the buyers account (the liability goes away), but it has to hand over an equivalent asset from it’s balance sheet which is most likely to come from its Central bank deposit fund or other “near money” assets (used for inter-bank clearing). The payment is made not quite in “magic money” now, but Gvt sponsored “fiat money” (e.g. treasuries / gilts).

      Just remember that almost all money (97%) is really “magic money” loaned into existence as initially private credit arrangements, which then become converted within the banking system into slightly less privately accepted credit arrangements (via the Central bank). Only when you take out any “real” cash in the form of notes and money, then it is a completely socially endorsed credit note that the holder can exchange for real goods & services. But most bank created credit money doesn’t really enter circulation in this manner, it is just electronic record keeping within the banking system.

  57. Chris February 3, 2012 at 12:55 pm #

    Many thanks Hawkeye for your detailed response and the interesting links.

    “Q:“What about security on loans? If you want to buy a house, what does the bank do? Does it turn to its computer an ‘create’ a few hundred thousand new pounds, or does it demand the actual house itself as securtiy on the loan?”

    A: It does both. As stated previously from the perspective of the buyer the bank creates a new deposit in your account (ready to pay the seller), which sits in it’s “Liabilities” side, and allocates the loan as an “Asset”. It has expanded its balance sheet by the face value of the loan. As buyer you have pledged the home as “security” against the loan, and so the bank treates this as a viable asset. What the bank has actually done is undertake “Maturity transformation”. It has taken a long term income stream (your mortgage repayments) and converted it into an instant deposit amount ready to give to the seller. It has forfeited nothing (except perhaps its future solvency) whereas you have pledged a physical asset.

    Q: “What about the seller? How is the seller paid? Is it in magic money or is it in a real transaction, with a real sum of money moving into the seller’s account?”

    A: The buyer’s bank reduces the deposit in the buyers account (the liability goes away), but it has to hand over an equivalent asset from it’s balance sheet which is most likely to come from its Central bank deposit fund or other “near money” assets (used for inter-bank clearing). The payment is made not quite in “magic money” now, but Gvt sponsored “fiat money” (e.g. treasuries / gilts).”

    What I don’t understand from your explanation Hawkeye is when you say on the one hand that the bank creates a new deposit in the buyer’s account through “maturity transformation” ready to give to the seller, but then that when the seller is paid for the house he/she receives “an equivalent asset from [the buyer's bank's] balance sheet” in the form of “near money” assets such as government gilts. So the seller doesn’t receive the money that was created “ready to give to the seller” , but receives in payment an existing asset of the buyer’s bank’s?

    Also if the seller is a normal homeowner, how is it possible for them to receive the proceeds from the sale of the house in the form of government gilts? Or does the seller’s bank convert the “near money” gilts from the buyer’s bank into a corresponding electronic deposit in the seller’s bank account?

    Going off on a related tangent, has anyone come across this court case – http://en.wikipedia.org/wiki/First_National_Bank_of_Montgomery_vs_Jerome_Daly where a defendant was allowed to keep the house his bank was trying to foreclose on by arguing the bank hadn’t offered any consideration for the property but had simply created the “money” as a book-keeping entry?

    • John Souter February 3, 2012 at 2:13 pm #

      OK Chris -forget the fancy language and terms -here’s my take on it.

      It all stems from Fractional Reserve Banking – which simply means a bank has only to keep a fractional amount of any deposit in reserve while the rest can be used for investment. For this exercise and for simplicity we will call the reserve 10%.

      So a house owner wants to buy a new house for £250k. The house he presently has is sold and he’s made £50k equity on it. He needs a £200k loan to buy the new one and the bank agrees it’s worth £250k and it will have a deposit of £50k and a secure asset notionally worth £250k.

      But the £50k it has as cash needs only £5k to be kept in reserve the rest £45k can be used for investment and within the same system the £45k can be extended to cover £450k of investment.

      But in the banks case you use the same system in reverse to apply towards the £200k that has to be raised for the mortgage and in doing so you only have to commit £20k of direct exposure to the ‘loan’ and then only as much as that if you’re a bank that sticks to the fractional rules.

      So in effect the house buyer has deposited £50k with the bank and signed a liability for £200k with his house as security – the bank has gained £30k with a secure return from interest on £200k for years to come.

      Again for the sake of simplicity we’ll say the mortgage is £10k p a. Four years and the bank has recovered all the supposed ‘real’ risk it took in the deal, yet, if 20 years of pristine mortgage payments later, shit hits the fan of tough deals and tough times, the bank forecloses in order to protect it’s position?

      For £20k of exposure the bank has had £200k of returns and holds £250k of security and still it claims ‘ownership’ of the asset, when in fact the only legitimate (and even then its morally doubtful) base it has for any claim, might be the 5 remaining years of mortgage repayment less interest calculated on early repayment.

      In essence that’s the issue being addressed in the Daly case.

    • Hawkeye February 3, 2012 at 2:33 pm #

      Chris

      Thanks for the reply.

      Q: “So the seller doesn’t receive the money that was created “ready to give to the seller” , but receives in payment an existing asset of the buyer’s bank’s?”

      A: You need to think in terms of bank balance sheets, and understand their role as “intermediators”. The buying bank expanded their balance sheet at first (creating the loan and deposit at the same time), then reduced it when they “paid” the selling bank. However, the buying bank’s Asset mix is now different; it has a consumer loan on it’s books (with which they receive a steady income of mortgage payments), but less of the Central Bank assets (as these were handed to the seller’s bank). This bank has increased its leverage. The selling bank’s balance sheet changed as follows; it now has additional Central Bank Assets (from the intra-bank transfer), but has to chalk up an equivalent amount of liabilities (i.e. the money in sellers deposit account). It’s balance sheet has risen, but it’s leverage has reduced (it has pretty meaty Assets to back up the deposit liabilities).

      Q: “Does the seller’s bank convert the “near money” gilts from the buyer’s bank into a corresponding electronic deposit in the seller’s bank account?”

      A: In a way yes. Although as described above the seller’s bank doesn’t actually convert it as you describe, it simultaneously holds both the near money “gilts” as Assets, and the electronic deposit (liability).

      Broad money expansion, and bank balance sheet expansion go hand in hand. As the Steve Keen article states, Central bank money creation (narrow money) lags private bank credit creation by about 1 year – it is always playing catch up. Money is created when new loans are issued, and money is destroyed when loans are paid back (as this deflates bank balance sheets).

      As for the court case you mention, I would say that in the strict eyes of the law the judgement is correct: a bank does not offer anything tangible and equivalent in exchange for issuing the loan. This is what many people misunderstand, it does not hand over to the borrower, someone else’s deposits. Modern banking merely comprises the deliberate obscuring of ownership title.

  58. steviefinn February 3, 2012 at 9:14 pm #

    Another question for you Hawkeye, if you don’t mind. Seems to me that there is a lot of people in the UK looking down their noses at the mess the Europeans are in. ” Typical Johnny Foreigner ” sort of thing. I was wondering what would have happened to the UK if we had taken up the Euro. Surely we would have been the king of the PIIGS, what with Northern Rock, the rest of the banks & the QE that has taken place. Our debt levels are the worst & yet there is this English channel, we are above this mentality that is really annoying me. I wouldn’t mind putting a few people right about the fact that we are no different & certainly no better, just want to get my facts straight.

    • Hawkeye February 4, 2012 at 10:43 pm #

      stevie

      That’s a big “if”, to ask “if the UK had joined the Euro”. I’ll try and answer it in two parts. On the superficial / practical level, then in many respects if we had joined the Euro, I agree that the UK would be the worst looking horse in the glue factory. Our excessive private debt, banking leverage and Gvt debts would put us at the top of the PIIGS pile not just in terms of ratios, but absolute terms too. So, on the face of it, by not joining the Euro, the UK has retained an element of monetary independence to deal with a crisis such as this. But I wouldn’t be so smug about this, as people like Peter Oborne have been!

      I recall seeing a chart / table that showed that the UK has de facto devalued by about 20% relative to other currencies. So by pushing up the cost of our imports, and especially food, fuel and other essentials the BoE has preserved our ability to service debts in nominal terms, but only through stealth financial repression on the UK population.

      The second key thing to consider is the strategic game being played, beyond the tactical policies & outcomes I mentioned above. In a way, the pound is like an extension of the dollar – the European enforcer of dollar hegemony. The US was probably happy to have the Euro around, as long as it played by their rules. But if it strayed, or started to get too big for it’s boots (like accepting as payment for Oil transactions – a la Iraq, Iran & Libya) then, well it needed knocking down a peg or two.

      In sum, the pound is only doing OK at the moment thanks to the watchful gaze of its big brother, the dollar. But if dollar hegemony gives way, then the pound is completely screwed too.

  59. Robin Smith February 4, 2012 at 6:39 pm #

    The trouble is Hester IS doing a good job for the bank. But not for the rest of the world.

    Bankers get high pay because they are extremely good at helping the company collect economic rents. Banks are the best examples of this. So the bank pays them well.

    But economic rent is “unearned income”. No capital invested. No labour invested. Its the return to the rental stream from the rising value of the nation. The “land” value. Community created value.

    So banks are not creating any wealth and exchanging it with other wealth creators in a free trade market. They are sucking wealth out of the economy in a closed monopoly market. The profits of monopoly are a tax to everyone else. Its not even capitalism. There is no capital involved. Not even for a moment.

    The sting in the tail is there are 23 million home owners trying to do the same thing at a much lower level. Collect the increasing price in their house. The economic rent. Wont happen though. The homeowner must pass it on as mortgage “interest” immediately to the bank. Just like a tenant to his master the landlord. But they are still trying.

    So in the end Home Owners are our worst nightmare. 23 million of them ready to make the first party unelectable for 20 years, the lifetime of a mortgage, for proposing we abolish their robbery too. Much bigger problem than banks

    I think its time we got over this hypocrisy. All of us.

    See here for more detail:

    http://gco2e.blogspot.com/2010/09/banks-are-21st-century-landlords.html

    http://highpaycommission.co.uk/submissions/the-cause-of-high-pay/

    • Hawkeye February 4, 2012 at 10:49 pm #

      A good point Robin, which basically says that a sizeable proportion of the UK population is hardly ever likely to “get it”.

      Perhaps many people will only ever truly wake up from their delusions of rentier grandeur when the whole thing completely falls apart. At that point though, who knows who they will blame for the mess.

  60. Susan February 6, 2012 at 7:26 am #

    here in the USA on Fox news, they ridicule the teachers for their cushy jobs and 50K per year salaries, along with their pensions – they act like the teachers are ripping the taxpayers off.

    And then Fox news will claim that 250K is not excessive for the Wall Street banksters.

    http://www.huffingtonpost.com/2011/03/04/jon-stewart-teachers-walls-street-fox_n_831243.html

    • Troy Prideaux February 19, 2012 at 1:10 pm #

      hehe… very good. I enjoyed – ta!

  61. Nick Brans February 17, 2012 at 1:45 pm #

    I found all the media reporting on this issue missed the point and the comments from politicials were pointless and banal. There were two key points for consideration:

    Mr Hester’s bonus was to be paid in shares. If I were awarded a bonus in shares, it would be an incentive to work hard and ensure the share value increased. This seems to work well at John Lewis Partnership.

    RBS made many redundancies during the course of the last year, a necessary move but it would be a tad crass for the man making those redundancies to then accept a bonus having caused ex-employees such misery.

    Quite odd to have two opposing views, but I think declining the bonus was the right thing to do after making those redundancies.

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  64. Peter f Amott April 14, 2012 at 12:12 am #

    Just stumbled across this website, and not sure by whom it has been established as there is too much to read – but it looks like it is seeking true fairness in the UK. I will comment on RBS and the BBC, as these were my introduction to this Site. That said, I think whoever is in control of it should place the submissions in reverse date order.

    RBS is an opportunity lost – the first action on behalf of taxpayers should have been total closure of its Defined Benefit Pension Scheme (Final Salary) to new and existing members, in addition to which no bonuses should have been payable until and and unless the existing Pension deficit has been cleared. The second action should have restricted its Mortgage Lending so that the money lent was money that RBS and associates was holding on behalf of Depositers – the Bank should not have been allowed to borrow from Money Markets or other third party resources. Thirdly no lending money against Priciple Residence to enable Buy to Let. If allowed to continue, Buy to Let mortgages only at Commercial Rates of Interest. Fourthly Government should bring in Law for the forseeable future, that allows UK Residents only to purchase Residential Property, or Commercial Property with potential to be converted to Residential. Yes this would cause some that have borrowed foolishly into negaitve equity, but that needs to be addressed sometime.I have much to say, but the first thing Government should have done when they took office was ……………. Close all Defined Benefit Final Salary Schemes to new and existing Members. Not just the Public Sector, but as mentioned above (RBS), Private Sector as well. If you are interested in seeing how such schemes can be used for personal benefit why not check out the Pension being accrued by the CEO of Nationwide Building Society.(The ‘We’re on your side’ slogan is as bad as ‘We’re in this together’. Right! More to say if anyone is interested. Last thing for now – in some of the copy above, the BBC was referred to as potentially ‘The Ministry of Truth’. Just check out its pension deficit, and the number of Scheme Trustees that cannot be impartial because they are members of the scheme. If Defined Benefit Pensions are not stopped, at least cap the salary to (say) £20,000 per year, to stop all those on excessive gravy train benefits from further ruining the UK Economy. Let them take risks with the stockmarket and interest rates like the rest of us.

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