Deposit Insurance – Who is it for really?

Government backed Deposit Insurance is like the rip cord on a parachute. It is the thing you know will save you if it all goes horribly wrong. As long as it is there you can pull it and the parachute will open saving you from otherwise certain death. The government guarantees your money if your bank goes bust. In the UK the limit is £85K per account. Double that for a joint account.

It’s just nice to know it is there. Nice to think that whatever other injustices are heaped upon us, in extremis there is still one ultimate guarantee our government has in place for us. It may be only there as a last resort but at least it is our last resort. It proves that there is at least one way left in which our governments are still trying to look out for and protect the best interests of us, the people. In this one way at least the purpose of government for the benefit of the people has not been corrupted or removed.

Or at least that is what I used to think.

A friend of mine did a little digging for me in Greece recently. What he found is that at least one major UK bank is deeply involved in capital flight from Greece and quite possibly from other European nations as well. This bank which I won’t name if you don’t mind has been advertising to Greeks-with-savings that they should switch their savings from their Greek bank to this UK bank. So far so ordinary. Unsavoury, predatory perhaps, but not illegal.

What piqued my friend’s interest was that the bank was telling prospective clients that this was not the Greek registered part of the bank family but a branch of that bank’s UK operation. For the sake of clarity let’s call the bank RBHS. No such bank exists, I’m sure you’ll agree.

RBHS was telling clients it was a branch not of RBHS Greece but RBHS UK. The money would be available to the client in Greece but on deposit in either the UK or they also offered Cyprus.  Why,  you might wonder? Why go to the bother of opening a branch of (or at least something connected directly to) RBHS UK when you already had a Greek operation?  My friend asked. The answer he was given was that the money would then be guaranteed under the UK deposit guarantee scheme run by the FSA/FSCS (Financial Services Compensation Scheme).

So what was being sold to prospective Greek clients was that they should move their money from their Greek bank to UK registered and run RBHS because if the Greek bank went down as part of a Greek exit from the EU and euro then the Greek state might not fully cover the deposit. It might, but then again, it might not.  Would the client really want to take such a risk when by simply switching banks to RBHS UK their money would be guaranteed by the British government and British tax payer?

Now just take a moment to think about that.

There is, of course, absolutely nothing illegal about this and British Banks were not and are not the only ones doing it. It was something like this that got the Icelandic banks in such trouble in the UK.  But it did set me thinking.

RBHS could claim they were just doing what banks do, expanding their deposit base. But this avoids the point doesn’t it? If RBHS wanted to expand they could just as easily do it by expanding RBHS Greece. It would all be part of the global RBHS bank group? Why emphasize the advantage of it being RBHS  UK?

IF RBHS UK or the whole of RBHS were to collapse, the British compensation scheme would pay money not just to British residents but to anybody resident anywhere in the world who had put their money in to RBHS UK. This is quite different to what would happen to people who had put their money in to parts of RBHS registered and regulated in their own countries. RBHS Greece would come under and be backed  by the Greek scheme only, like any other Greek bank, but a branch of RBHS UK operating in Greece would be covered by the British scheme.

RBHS is gaining business and profit by using the British compensation scheme as a value added to solicit deposits. RBHS is able to say to foreign, in this case, Greek clients – at absolutely no cost to itself –  your money is safer with us because it will be guaranteed by the British Scheme, itself backed by British banks, the British Treasury and ultimately the British Tax payer.  What this means is that IF RBHS UK or RBHS globally were to collapse money would fly not just to UK people’s accounts but also fly off-shore to accounts of people who have never lived here, never paid taxes here and contribute nothing to this country.

Now there are all sorts of objections to what I seem to be saying here, I know. For a start the banks will say they pay for the compensation scheme. This is actually not quite true. It is true there is a levy which the banks pay in to. This levy did not and would never cover the cost of a major default. The UK scheme has a credit line from the UK banks of about £1 billion. Sounds a lot, but when Bradford and Bingley, which is tiny compared to the UK’s big banks, went under the UK compensation scheme, the FSCS, had to go to the UK Treasury and Bank of England and borrow about £15 billion. UK government borrowing went up accordingly.

The banks will say ‘Yes, but we pay the interest.’ Which is true. But we, the  UK tax payers are still on the hook for the now £12 billion or so with no timetable,  according to the FSCS itself, for getting that money back. In the mean time we are told (by politicians advised by the banks) that we must make austerty cuts because we are in too much debt. So WE are the ones paying in more than one sense, NOT the banks. The banks will repay us when they feel they can. Which might be a very long time. We on the other hand are required to pay at a moment’s notice, to cover the stupidity and bad management of risk-taking banks and to suffer the long term austerity our governments force upon us.

So let’s think about this again.

RBHS touts for deposits abroad by saying the UK tax payer will guarantee the money. RBHS draws up a contract with its customers which thrusts upon us an obligation to compensate these new clients wheresoever they might live and work. No one asked us. AND WE GET NO BENEFIT. If RBHS were to go down our money would go abroad.  Never to be seen again because the person who got the compensation lives and is a citizen of a different country. This is why Iceland in the end said they would not compensate UK depositors. Thus UK banks like RBHS are putting us in the position the Icelanders found themselves in. And they are doing it because it profits THEM not us. We, the  residents and tax payers of the UK get NOTHING from this business. We provide RBHS with a valuable guarantee with which they gain business. We get nothing but a huge liability. The money going to RBSH UK does not benefit the UK Treasury. If you think such new business will cause the banks to pay much more in tax then you need to wake up. Any extra profit will be moved off shore to a low tax territory.

Surely we get something out of it? Well, RBHS gains deposits which helps it support more loans which expand its balance sheet which makes it even more too big to fail. That is what we get out of it.

All this prompted me to reconsider what the Deposit scheme is for and who really benefits from it. Sure it does save our money in that extreme crisis moment as the depositors of Bradford and Bingley can attest. But that is the only moment when we benefit from it. On the other hand the banks benefit from it all day everyday. Sure we can’t have a two tier system where national depositors get guaranteed but all johnny foreigners get zip. So I understand the blanket nature of a bank guarantee. But it has mutated hasn’t it? There is no need for RBHS to operate ‘RBHS UK’ in Greece when ‘RBHS Greece’ already exists. There is no need for our guarantee to be brought along with salemen to entice foreign depositors to withdraw funds from their own banks so they and the bank can parasitize another nations’ deposit scheme. 

Once again something that started life as a good idea, protecting you and me, (and this is true for every nation not just the UK) has again been mutated by the banks in to something it was not intended to be. It is another example of how the banks pervert everything they touch. If we had banks which were cautious, conservative and small relative to the size of the nations whose guarantee they rely upon, then we could perhaps accept the situation as it has mutated where national guarantees are increasingly tied to an international web of deposits and depositors. But our banks are none of these things. They are irresponsible, risk addicted and unstable. 

The short version of all these words is that the banks deposit guarentee is only incidentally for you. It is mainly for the banks. It is part of the huge but largely hidden subsidy which every nation pays to the global private banking sector.

 

I would be really interested to know if anyone knows whether figures exist from the governments or the banks themselves showing how different banks’ deposits break down by country of origin?

 

FSCS Annual accounts and report - http://www.fscs.org.uk/uploaded_files/Publications/Annual_Reports/annual-report-2011-12.pdf

Subscribe

Subscribe to posts by email

95 Responses to Deposit Insurance – Who is it for really?

  1. Neil Wilson October 23, 2012 at 2:40 pm #

    The deposit scheme is there to reduce the cost of lending. Nothing more, nothing less.

    It costs the UK nothing because we create Sterling out of thin air.

    If the Greek depositor ends up covered by the UK scheme then they are covered in Sterling. To use that money they would have to buy something from the UK or swap it with somebody that wants to buy something from the UK.

    You either cover deposits by an insurance scheme, or you expand the BoE balance sheet to cover it ‘in specie’.

    ” Well, RBHS gains capital which helps it support more loans which expand its balance sheet which makes it even more too big to fail. ”

    Deposits aren’t capital. They are deposits. At best it reduces the bank’s cost of funding by releasing collateral

    • Golem XIV October 23, 2012 at 2:57 pm #

      Not sure I agree with you.

      If we did create sterling out of thin air as MMT points out we could and should I would agree. But as it stands we insist on this crazy business of selling debt and paying interest on it. Which the government then says we can’t afford and must be offset by austerity.

      I’m not agreeing with this way of doing it. I’m just noting it is what we are saddled with at the moment.

      I agree deposits aren’t capital – I’ll amend that – but they are coveted as the deposit base which allows borrowing and their balance sheet to expand. This is what you are saying I think – the lower cost of borrowing. Fine but have the Greek deposits in the Greek part of the bank under the Greek guarantee. Let them do what they can for the cost of borrowing from there. What is the problem with that?

      I also agree that a deposit scheme is needed and is a good thing. All I am pointing out is that it is being used now far more for the benefit of the banks than for us. It is not necessary for the scheme to be used to guarantee depositors in other countries. The bank can run with each part of the RBHS empire regulated and guaranteed by the nation it is in. Not have them parasitize a more attractive guarantee to cover all their deposits whereever they tout for work.

      Having them guaranteed by our scheme is not necessary for us and does not benefit us at all. It makes our bank unwieldy, too large to fail and ties one nation to another in ways that create the sorts of unpleasantness we saw between Iceland and the UK.

      Are these things not worth pointing out?

      • csw October 24, 2012 at 5:01 pm #

        This is the nature of deposit insurance. The principals (domestic depositors) don’t care how their deposits are used, or the fact that they are commingled with speculative foreign deposits, since they are “guaranteed” and hence rely on inept, understaffed, and/or corrupt agents who overwhelmingly care enough so long as they aren’t fired or promotions not withheld. The bailouts are a remote event that the populace will not care about until they occur.

        Introduce a program with moral hazard and eventually, with enough time, actors will find ways to take advantage of it. No matter what legislative changes you make, there will always be loopholes if the financial incentives are sufficiently perverse. And, in this case as you accurately describe, deposit insurance will always provide those incentives for the banks who can increase their deposit base. The choice is not to modify the program to eliminate the waste or fraud, but to decide if it is worthy to exist in light of the moral hazard it introduces.

  2. Maria das Santos October 23, 2012 at 3:20 pm #

    Portuguese banks,particularly Banco Espirto Santo,in 2010 were “encouraging”expat Portugues to move their accounts to London with the explicit understanding that the BoE would underwrite the deposits to the £85000 level.Looks like the rest of Europe are catching on.

    • Golem XIV October 23, 2012 at 3:45 pm #

      I didn’t know that. These details from the ground are invaluable. Thank You.

  3. daveTshave October 23, 2012 at 3:23 pm #

    I’m sure your point is worth pointing out Golem. I think Neil is nitpicking, not questioning the basis of your piece. It’s just another example of regulatory arbitrage. Your Bradford & Bingley example nicely illustrates the smoke and mirrors which the insurance scheme really is. This is a straight government guarantee of deposits and hence the deposits will flow to the regulatory environment which provides the greatest certainty that the guarantee will be met.

    I’d imagine most of the attraction for the depositors is that Stirling deposits also offer a hedge against the euro or Greek banking sector going completely pear-shaped without a Grexit.

    • Golem XIV October 23, 2012 at 3:44 pm #

      Thanks for the encouragement. I hadn’t thought of your last point. It’s a good one.

  4. John Souter October 23, 2012 at 8:43 pm #

    Excuse my ignorance but haven’t I read recently RBS intend in the near future to disassociate themselves from the government scheme, thereby releasing themselves from the £100 million cost?

    And aren’t deposits the mainstay on which their fractional reserve gambling ratios depend on? Perhaps if the ratios were based on the banks own capital we would have far less of a bail to offset their fail.

    And is not the ‘we’ who create around 94% of Sterling out of air so thin, its practically stratospheric, the banks.

    And, are there not traders who specialise in currency dealings? Why should their gambles be covered just because they hold Sterling.

    • Golem XIV October 23, 2012 at 9:11 pm #

      RBS is getting out of the Gov.’s Asset Protection Scheme which they set up to insure uninsurable assets.

      • John Souter October 24, 2012 at 7:37 pm #

        David – I am aware of that and the questions posed were aimed more at Neil Wilson’s comment.

        Surely whether the insurance covers dubious assets or deposits they are interconnected within the overall viability of the banks and both underwritten by the public purse.

        • Golem XIV October 24, 2012 at 9:34 pm #

          Quite so. Sorry I didn’t pay enough attention. Apologies.

    • Mike F November 4, 2012 at 9:06 pm #

      Neil Wilson and John Souter:

      97% of the UK’s money supply is created by commercial banks themselves at the point where they make a loan. The loan itself is an additional deposit, not based on money presently on the bank’s books. The additional 3% is made up of notes and coin upon which the Bank of England reaps seignorage for the Treasury.

      The Bank of England also creates ‘central bank money’ when it initiates bond purchases or other ‘asset relief’; the main function of Bank of England thin-air money creation however is to credit the central bank accounts of commercial banks in order to raise their allowed loan capabilities. That is what QE is – a simple accounting trick whereby the central bank credits the central bank accounts of the commercial banks participating in the central bank system (in the UK this is all banks above a certain balance sheet level, £50 million I believe).

      Commercial bank deposits have nothing to do with the amount those banks lend – the capital reserve requirement applies to the central bank account balance of that bank in relation to its declared balance sheet. A bank does not lend money that it has on deposit. A bank loan is by definition the creation of additional deposits. The ‘fractional reserve’ system applies to central bank account/balance sheet ratios, not high street deposits.

      As for deposit insurance, how many people would use a bank these days if (A) it wasn’t required in order to have a job or a home and (B) their money was not insured by the government? Not many, I’d venture. So we can see what the insurance scheme is for, to keep people comfortable with the idea of having their money in the bank.

      So why do we insure the banks? Because they have our establishment in their pockets, plain and simple. For the cost of the bailout, we could have sent a cheque for £4000 to every person in the UK – do you think we would have had a recession if that had happened?

  5. richard in norway October 23, 2012 at 10:48 pm #

    Mr king is saying the banks need recapitalizing again.

  6. bill40 October 23, 2012 at 11:03 pm #

    Golem,

    I must confess I bank with HSBC UK for all my earnings in China, as most expats do with any bank. I never made the connection of banks extending this largesse to non UK nationals.

    The dangers of racking up debt in a foreign currency are hideous in the extreme. That nice Mr King was reported in the Telegraph today gently suggesting the banks banks should admit their unrepayable debts.

    We’ll never know the scope of this wheeze I’m afraid.

  7. Phil October 23, 2012 at 11:37 pm #

    Richard in Norway – you beat me to it! : )

    “King warns Bank action reaching limit”

    http://www.ft.com/cms/s/0/1249dca8-1d28-11e2-abeb-00144feabdc0.html#axzz2AA9QuovA

    “Sir Mervyn urged banks, in particular, to recognise the need to accept many of their pre-crisis loans would ultimately go sour. “I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and RECAPITALISATION (my emphasis) of their financial systems,” he said.”

    “Sir Mervyn argued that it could not prevent the economy’s painful but necessary long-term rebalancing. People would inevitably realise that their futures would be less bright because of the financial crisis, which “has rendered unprofitable some of the investments made before the crisis”.”

  8. M_T_Wallet October 24, 2012 at 3:05 pm #

    £85,000 – isn’t this a case of not being worth the paper it is written on? If several banks collapse at once, a scenario which happened in all but name 4 years ago, then where does the money come from to compensate? Other banks? BoE printing?
    Surely the money would be worth an awful lot less very quickly? Or am I being stupid?
    Who would get first dividend on the apparent money?

    • Golem XIV October 24, 2012 at 5:52 pm #

      I don’t think you’re being stupid at all. The questions you ask have radically different answers depending on which theory people believe.

      The money wouldn’t be printed up it would be eletronically ‘printed’. Would this cause inflation? No. If banks went down a lot of the value being claimed would dissapear with them and the newly printed money would hardly even replace what dissappeared from the electronic ledgers of the banks.

      Don’t forget cash is not the ony kind of money. In fact it is less than 10% of teh mney in teh world. Most ‘money’ is electronic and in teh form of debt/credit. This is the problem we need to rid ourselves of. Or at least very, very tightly constrain.

      • Mike F November 4, 2012 at 9:14 pm #

        M_T_Wallet, you’ve asked the question. Here’s the answer:

        With a deposit insurance scheme in place, it is guaranteed that banks will always be bailed out, as a bailout will always be cheaper for the government than paying off the deposits insured under the scheme. Absolute ironclad guarantee.

        That in turn means that once the bailouts begin, a cycle of crisis/bailout/austerity/crisis again puts the country in question into a death spiral, the consequence of which is eventual default by government, full nationalisation or a total redesigning of the banking system. The only variables are the speed with which it takes place and the black swan/social distortions caused by ongoing austerity/crisis, e.g. the unexpected rise of fascism in Greece.

  9. JohnnyForeignerSweden October 25, 2012 at 6:42 am #

    “Sure we can’t have a two tier system where national depositors get guaranteed but all johnny foreigners get zip”

    Why not? This is the case with a majority of all other tax funded activities, e.g. health care.

  10. orville October 25, 2012 at 12:14 pm #

    I had a read through the first 20 pages of the IMF paper linked to here recently, “The Chicago Plan revisited”.

    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

    Excellent stuff. May this be the most realistic way of effecting change – a push for wholesale reform to full reserve banking? I’d be interested to hear MMT proponents view on this.

    Whilst this would obviously be a radical shake-up of the status quo the big positive is that it wouldn’t necessarily need a revolution to implement.

    I’m going to have a go at the rest this weekend. Lots of heavy financial mathematics but I do have a degree in it so I shouldn’t be lazy.

    • Charles Wheeler October 26, 2012 at 12:19 pm #

      Here’s Marshall Auerback’s view: ‘The Chicago Plan’ does not deserve to be revisited.: http://goo.gl/No0hZ

      • orville October 27, 2012 at 9:06 am #

        Thank you Charles. What are your views? Mr. Auerback is, I think, saying a lack of credit would stifle productivity. I can understand his concerns. I don’t necessarily agree though. Could not there be a creation of new money for new ventures? A group of people decide something could benefit us, and money is printed to do that something?

      • richard in norway October 27, 2012 at 11:11 pm #

        The answer surely is that the central banks make money available to lending banks, they could also make the money available at different rates of interest depending on which kind of bank it was. For example loan at 5% to a bank providing mortgages but at 1% to a bank lending to SME’s, the central bank could even loan at negative rates in exceptional circumstances

  11. Drfrank October 25, 2012 at 1:13 pm #

    It is really worthwhile to think about a scheme with much lower amounts of deposit insurance, like only just enough to see you through an Argentina style bank holiday, say three to six months worth of spending.

    That would mean that depositors large and small would be more exposed to the bank, and would have to have some easy way to evaulate the depository’s safety and security.

    And that in turn would force a lot of what is hidden into public view. Or else clearly put the risky stuff banks do, the speculative trading in derivatives for example, clearly onto the bank’s funding sources that are getting paid for it.

    • Mike F November 4, 2012 at 9:20 pm #

      Drfrank,

      A major problem in the system is that a bank account is required. So there is a de facto monopoly by the cartel which no amount of caveat emptor or smell-testing can bypass. If a worker is required to have a bank account in order to have a job, then there is no way that it is really down to the worker to choose a bank which behaves properly and take the hit if it doesn’t because in a captive market, nobody behaves properly. That’s what cartels are. OPEC doesn’t give a damn what we think of them because they know we need their oil, and no matter what they do, we will still buy oil from them. If access to work means access to a bank account, then the banks have carte blanche to do their worst, end of story.

  12. Marty Heyman October 25, 2012 at 2:31 pm #

    Deposit Insurance passed because the financial industry recognized it was a huge boon to them. In spite of the whining about their “contribution” which they turn around and pass along to their customers in many ways, it is very much in their best interests. Neil is right that it reduces their cost of lending (as if there was any cost of lending in a virtually unregulated fractional reserve banking scheme) but more importantly, it guaranteed the taxpayer would cover at least the depositors’ losses. It turns out their gamble was correct and that that public burden was sufficient to support bailouts of even bigger portions of (all?) the losses (and then some?).

  13. YankeeFrank October 26, 2012 at 10:28 am #

    The idea that we should be happy to loan money to these failures because — “hey, we get the interest!” — leaves me speechless. I wish I could go to a bank and demand money from them, and when they balk, tell them — “but you get the interest” — and the coffers open and pour out my $10 million loan. These charlatans are willing to say anything, and appear grasping, greedy and foolish all in the same breath, just to get their hands on taxpayer money to “save” themselves from their own failure.

    If it was anyone but the banks they would be laughed out of the room. But somehow, bankers enjoy privileges and rights anyone else would be ashamed to demand.

    One day, and it can’t come too soon, they will collapse again of their own incompetence and greed, and this time I think the people will begin to take our revenge for what they’ve done and continue to do to us. The anger people are feeling against these bankers should give them pause, but it doesn’t because they think they are untouchable. They are not.

  14. ArtSmith October 26, 2012 at 1:39 pm #

    Not strictly on topic but this article exhibits some of the same clarity of argument that this blog produces esp about arbitrage between sovereign states like Greece and the UK.

    Plus the term ‘Monetary Fascism’ is snappy and to the point ;-)

    http://www.zerohedge.com/news/2012-10-25/guest-post-dark-age-money

    • johnm33 October 26, 2012 at 10:02 pm #

      that nails it down ‘monetary fascism’ , and the curse of it is there’s no way out without a fight, and they’ve hired all the guns.

  15. Phil October 26, 2012 at 7:21 pm #

    Great article

    http://www.guardian.co.uk/commentisfree/2012/oct/24/stop-protecting-rich-market-forces?fb=native&CMP=FBCNETTXT9038

    “The poor are told that their states are bankrupt because their previous governments splashed out on welfare payments for them.

    They – especially if they happen to be from the “lazy” eurozone periphery countries – are lectured that they have to pay for the “good times” they had with “other people’s money” by working harder at lower wages and by accepting lower levels of welfare provision, with more stringent conditions.

    Of course, this narrative is completely misleading. The current budget deficits are mainly the outcomes of the fall in tax revenues caused by the financial crisis, rather than excessive social spending.

    In fact, in the runup to the crisis, countries like Spain and Ireland had run budget surpluses (for a decade, in the case of Ireland), while the deficit levels in other countries, except in Greece, were at manageable levels.”

    He omits the cost of the bailouts, but we’ll let him off.

    • Mike Hall October 27, 2012 at 2:42 pm #

      On this theme, I recently found Greek economist, Kostas Kalevras’ blog with some excellent posts including this one using the sectoral balances in the Eurozone to analyse what really happened:

      http://kkalev4economy.wordpress.com/2012/10/20/looking-into-the-greek-euro-era-from-a-sectoral-balances-approach/

      Some very illuminating charts & data & demonstrates again how powerful the sectoral balances approach is in gaining an understanding of the macro situation. Very easy to follow too.

      It also becomes obvious that the present Euro system could never be sustainable.

  16. Mike Reps October 27, 2012 at 5:04 am #

    Golem

    Just a few points to add. Perhaps in this game of “bank run” musical chairs the winner becomes the bank that attracts the most deposits. It is not a foregone conclusion that these foreign deposits become liabilities if they are the result of a commensurate stress to the system. In addition, I am unsure whether a UK Bank would then turn around and lend on Greek real property in light of the entire country “exiting” the jurisdiction of any possible recourse.

    I think the real losers are the UK Exporters and Savers who now have to contend with a strengthening Pound and lowering interest rate. The UK Importers (consumers) and Borrowers (consumers) get a reprieve.

    • Golem XIV October 27, 2012 at 10:28 am #

      Hello Mike Reps,

      I agree I don’t think UK banks would lend in Greece. But them having Greek deposits is not a pre-requisit to lending there anyway. The deposits are only a liability for the Deposit insurance scheme not the banks.

      Interesting the divergence between what Osborne and King chose to say about our economic situation.

  17. groop October 27, 2012 at 9:41 am #

    Another great article.

    Would it be practical to have the deposit guarantee scheme phased out and available only to banks that perform certain functions? do not have off-shore brands, matched to the amounts lent to UK business.

    Is it possible to consider using the scheme as a tool to drive behaviour?

    • Golem XIV October 27, 2012 at 10:24 am #

      In theory yes. It would certainly be possible to tighten the whole business of UK branches in other countries.

  18. Phil October 27, 2012 at 12:21 pm #

    Wonder how far this lawsuit will get?

    “Major Banks, Governmental Officials and Their Comrade Capitalists Targets of Spire Law Group, LLP’s Racketeering and Money Laundering Lawsuit Seeking Return of $43 Trillion to the United States Treasury”

    http://www.cnbc.com/id/49555671/

    Shan’t hold my breath.

  19. Mike Hall October 27, 2012 at 3:29 pm #

    A bit off topic (but it’s all related eh?) – an interesting blog especially for UK readers highlighting the ‘conflicts of interest’ in the NHS privatisation carve up:

    http://eoin-clarke.blogspot.co.uk/2012/10/its-official-first-privatised-nhs.html

    Linked from Tom Hickey at Mike Norman economics blog. (An excellent MMT/Post Keynesian aggregation blog plus Mike’s own blogs & media appearances.)

    Speaking of excellent news aggregation blogs, I recommend ‘GFC & MMT Daily’ (or weekly) with email service. Picking up a lot of interesting blog & media output with quite a broad outlook besides MMT/Post Keynesian.

    http://paper.li/vvakrina/1323671554?utm_source=subscription&utm_medium=email&utm_campaign=paper_sub#

  20. Joe Taylor October 27, 2012 at 4:45 pm #

    Sorry to cut across the conversation but I don’t know anywhere else as good as this forum to get the right answer.

    I’ve been heavily engaged in a long sequence of comment to the Telegraph article about the IMF suggesting that the power to create money as debt via loans should be taken away from them.

    Someone has just posted “The Bank of England is an independent public organisation, wholly owned by the Treasury Solicitor on behalf of the Government, with independence in setting monetary policy.”

    Is that statement correct, please?

    Joe

    • steviefinn October 27, 2012 at 6:58 pm #

      Joe – Not sure whether this helps :

      http://www.bankofengland.co.uk/monetarypolicy/Pages/overview.aspx

      • Joe Taylor October 27, 2012 at 10:35 pm #

        Thanks but not really Stevie – this looks more like it http://www.darkpolitricks.com/2010/01/who-owns-the-bank-of-england/ but having followed this blog for some time I trust what I see here rather than what I can browse for.

        • Mike F November 4, 2012 at 9:27 pm #

          Joe, according to the Bank of England, they are a wholly owned subsidiary of the Department of the Treasury, and any profits made by the Bank are paid directly to Treasury. Another view is that the Bank is a private company that masks itself by having subsidiary status but, like the Federal Reserve, having certain ‘original’ shareholders (identities unknown) who benefit from Bank policy. The Bank has the independent ability to set interest rates since Gordon Brown changed the rule under New Labour, although how independent that is in practice I don’t know.

          What is true is tax revenues are gathered, government bond sale revenue received, public services paid for and interest on national debt paid from a unified account, making it very difficult indeed to know whether our taxes actually go towards any services at all, or whether we are merely taxed to pay interest on the debt, and the debt is rolled over and grown to supply services.

          Opaque isn’t the word.

  21. steviefinn October 27, 2012 at 11:34 pm #

    Joe – I posted the link as the source for the statement you quoted. I had it at hand because I had been looking into how they reach their decisions – who votes etc. I got it wrong though, the quote was actually from the BOE wikipedia page which I had read at the same time but did not save.

    http://en.wikipedia.org/wiki/Bank_of_England

    I thought if you knew the source of the statement it might help you to decide whether it was valid or not. I was not backing the statement up I should have made my intentions clearer by leaving it to a later time, instead of replying on my way out.

  22. Daniel October 28, 2012 at 4:21 am #

    off topic,but another instance of how the regulators are treating fraudalent bankers with undeserved deference,considering they are proven criminals. I reckon the Financiers got tapes of high profile judiciary and politicians in flagrante delecto with the pet village donkey.

    http://rowans-blog.blogspot.co.uk/

  23. Tam October 28, 2012 at 3:10 pm #

    Hmm, interesting to hear that British banks are touting for business in Greece, but not sure that I agree with your conclusions.

    I’d have thought that increasing a bank’s deposit base is, in itself, a pretty sensible thing to do and a fairly low risk way of improving the balance sheets, (although it’s also deeply cynical because the money flows will obviously weaken the Greek banks in the process).

    Of course, if as you suggest, these deposits are being used to fund risky investments, then that’s a different matter, but everything else being equal, I’d suggest that raising a bank’s amount of deposits makes the bank stabler and less likely the deposit insurance will be needed in the first place?
    (sorry my only comments are ever contrary ones! I agree with you most of the time, but there never seems any point commenting on those occasions!)

    • Golem XIV October 28, 2012 at 3:35 pm #

      Hello Tam. Good to hear from you.

      I agree it certainly will make the banks more stable – all other things being equal. But it doesn’t make the nation any more stable because it just makes the banks bigger. There is zero chance the banks would get extra deposits and not use them to lend further.

      I just don’t think branches of one nations’ banks should operate in another. A part of the bank family regulated, registered and guaranteed in and by that other country – fine.

  24. Joe Taylor October 28, 2012 at 7:28 pm #

    Hi David

    As a member of Equality NW, I understand that you’ve provisionally agreed to give a talk in Manchester December 5.

    All being well, as part of that talk, could you please comment on Positive Money’s suggestion that, because 97% of all the money in circulation is created by commercial banks as debt, legislation should be put in place to prevent banks creating money out of fresh air – with all the obvious catastrophic results – and that power should be vested in an agency, totally independent from the banksters and politicians, with all the appropriate checks and balances, whose sole purpose is to create to the money the real economy needs to function and to ensure that money serves the welfare of the entire population, not a tiny fraction of the population to the detriment of the rest. If such legislation was put in place, what would be the likely consequences?

    Hope you can touch on that issue on the night, as part of your talk.

    Rest assured that we ‘Up North’,will do our best to ensure you have a full house on the night. Be great if anyone else following the blog could be there

    Cheers, Joe Taylor

    • Golem XIV October 28, 2012 at 8:25 pm #

      Hello Joe,

      You can rest assured I will defnintely be talking about that.

      • Phil October 29, 2012 at 7:49 pm #

        Just in case anyone from the forum is thinking of coming, the date has now been changed to Thursday 6th December.

        • Geowaverider October 31, 2012 at 1:21 pm #

          Phil

          I’m interested in attending, but the only link I can find is to Facebook and as I don’t do Facebook and won’t be doing any time soon I could with some information on venue/time etc.

          Thanks

          Brian

  25. Joe Taylor October 28, 2012 at 9:33 pm #

    Going to really push for a big turn out.

    Take care mate

  26. Patrick Donnelly October 29, 2012 at 12:41 pm #

    It socializes the losses and allows the profits to be recklessly increased, on paper, so that when the credit bust comes, the bill is immense and delivered to the taxpayer.

    What a silly question????

    Banks that need a guarantee, are always TBTF!!

  27. Phil October 29, 2012 at 10:24 pm #

    Turns out the ”hippy scum” had a point

    http://www.independent.co.uk/news/uk/politics/top-bank-of-england-director-admits-occupy-movement-had-a-point-8231521.html

    ‘Andrew Haldane praises ‘loud and persuasive’ protesters who succeeded because ‘they are right’’

  28. Dave (aka Frog2) October 30, 2012 at 1:00 am #

    Phil , don’t hold your breath !

    Andy Haldane of the BoE has been making interesting noises for years now, but we are a very very long way from regulatory solutions. In fact I’d go so far as to say we may not even have started ..

    The difference between plea bargaining, and Defered Prosecution Agreements, this guy has got it right ?

    ” DPAs will now become the de facto benchmark for dealing with City financial crime. The banks and the financiers are going to have a field day. They are willing to pay fines quite happily; they pay compensation quite happily; they will pay costs quite happily, because it doesn’t come out of their pockets, so it doesn’t hurt them one iota. The financial penalties only hit their shareholders, so it does not matter, and who cares anyway!

    They will agree to any proposals a prosecutor asks for, because it will only mean throwing other people’s money at the remedial requirements. They will sit back, nod their heads, commit to everything they are asked, and then get on with the business of engineering more financial crimes.” 24/10 blogpost

    http://rowans-blog.blogspot.co.uk/

    • Phil October 30, 2012 at 11:58 pm #

      Yes, I agree.

      And I love Rowan’s work.

  29. FallingLeaf October 30, 2012 at 1:11 pm #

    I was there for Haldane’s talk last night and even chatted to him briefly at the end. Whilst his is a truly brilliant mind, I shared some of the crowd’s worries about his optimism and the scope of his thinking: regulation has a limit and so did he, sadly. For instance, when the questions turned to tax havens, he didn’t answer or truncated his answer because of his remit with the BoE. So, it was unfortunately very limited. Still a worthwhile talk and if there is audio, I urge you to hear it as the other panellists had a lot of great worth to say.

    However, there was also a leaflet being handed out at the Occupy talk about the creation of a free market in water, that was frightening. Richard Sandor, who created the wonderful (sarcasm) carbon trading scheme that allows countries and corps the buy the right to pollute now wants to do that with water. And he’s promoting his new book ‘the Good Derivative’ (I kid you not) at the LSE next Monday, I think it’s important to get people down there and hold him to account: http://www.londonconversation.com/#/news/

    The LSE talk: http://www2.lse.ac.uk/publicEvents/events/2012/11/20121105t1830vNT.aspx

    Also, David, one of the things Haldane said was that deposit insurance is covered by the banks, not the taxpayer, “a point that’s often overlooked”! I am a bit baffled by that…

    • Hawkeye October 30, 2012 at 1:44 pm #

      FallingLeaf

      I was at the talk last night too. Quite a masterful performance by Mr Haldane. This wasn’t his most explosive of talks (INET and others were more analytically focussed). For me, he has shown that he can be as gifted a salesman as he is an analyst !

      He might well be trying to do his best “from within”, but certainly there are some things he’s unwilling to look at / discuss, as they are “way beyond his pay grade”.

      For me the one killer question I was bursting to ask was about fraud, and the complete absence of criminal investigations into what is wholesale larceny. We really needed someone like Rowan Bosworth-Davies to put some home truths to him on this.

      Bit of a shame that the coherence, clarity and concision of the questions was sadly lacking. To put bank regulators and politicians on the ropes will need some skilled and cohesive questioning, and the topic of fraud is surely the single biggest opportunity to expose the banks as parasites.

      Would be good if you could post a link to the Water Market flyer that was handed out.

      • Jamie_Griff October 30, 2012 at 3:09 pm #

        I was there too!

        I have to say I was lot less impressed with some of Haldane’s answers – whether he’s speaking “from within” or not is no excuse for disinformation.

        To acknowledge the existence of a regulatory race to the bottom is commendable – to argue that we’ve already reached the bottom is codswallop.

        Limiting the scope of what’s regulated to a narrow focus on capital requirements and chinese-wall separation of investment and retail banking is what Yves Smith would call ‘drunk under the streetlight’ behaviour (looking for your keys only where it’s well lit).

        Ignoring vast swathes of credit instruments which can be held off-balance-sheet and which were instrumental in driving demand for consumer credit* because we’re too scared to go after them simply isn’t good enough. It’s certainly not evidence of us turning things around in the battle for tougher regulation.

        To say that the banks cover the cost of deposit insurance is utterly laughable as Golem points out above. A clear distortion of the truth.

        Sorry to get all ranty but it really annoyed me.

        *This is the major flaw in Haldane’s summary of the causes of the crisis. Financial engineering created credit products which produced massive returns to bankers but which required loan creation as raw material for securitisation. We, the consumers, didn’t all suddenly decide to start borrowing more, and sub-prime borrowers didn’t lend themselves money. The demand was created by the banks and filled by lenders.

        As Nomi Prins, former Goldman Sachs managing director put it (as quoted by Yves Smith in Econned):

        “Wall Street pushed lenders. Lenders pushed borrowers. That’s how it worked. Don’t let anyone tell you otherwise. If you can borrow at 1 percent and loan it out at 6 or 8 or 13 percent, you can make money. Even the squirrels in my backyard can make money on that play.”

        Merely separating investment and retail banks does nothing to stop the investment banks blowing credit bubbles and nothing to squash the originate and distribute model of loan creation. It does nothing to stop ‘systemically important’ institutions taking on too much risk and needing huge taxpayer funded bailouts.

        AIG, the single largest recipient of taxpayer funds in the 2007/8 crisis wasn’t even a bank.

        • Hawkeye October 30, 2012 at 3:45 pm #

          Hi Jamie

          Totally agree.

          I wrote my ICB submission on Securitisation itself being the problem (not the structural assimilation of Retail & Investment banking per se). The ICB clearly identified it as a problem in their Terms of Reference at the outset (along with excessive credit creation), and then completely ignored it in their interim & final report !! Proof positive that Vickers was a whitewash !

          I was hoping to try and blow out some of Haldane’s points in the Q&A, but it was too much of a bun fight, and I risked descending into an incoherent ranter like some of the other attendees.

          Maybe we need to carefully assemble “The case for the prosecution” against bankers. The aim would be to prove, beyond reasonable doubt, that it was pernicious “lending” that caused the crisis, and that political and regulatory capture is behind it. The case would benefit from someone like Rowan Bosworth-Davies and his knowledge of the Theft Act 1968 and Fraud Act 2006, as he believes existing legislation is sufficient to prosecute. Only the political will is lacking.

          • Jamie_Griff October 30, 2012 at 6:49 pm #

            I remember reading your ICB submission at the time, it was strong stuff.

            I think you’re right about building the case for prosecution too. The arguments surrounding fraud – particularly what Bill Black refers to as control fraud – and looting are underdeveloped outside of academic circles.

          • Hawkeye October 31, 2012 at 3:48 pm #

            Thanks again Jamie

            I wonder if Mr Haldane has contradicted himself about Deposit insurance. I’m sure one of his papers talks about this at length. Either Banking on the State or the $100 billion dollar question.

            I recall that he referred to the deposit guarantee as greater state backing for banks, whereas once upon a time banks were at the mercy of sovereigns.

            I wonder if he is indeed positioning himself very carefully, as someone I met afterwards who used to work at the BoE said that he always was the Golden Boy.

          • Jamie_Griff November 1, 2012 at 3:11 pm #

            From Andrew Haldane: Banking on the State:

            “Laeven and Valencia find that coverage limits for deposit insurance schemes on average increase fourfold in relation to GDP after systemic crises.10 As with liquidity insurance, there has been a secular expansion in the scope and scale of deposit insurance.

            “If protection of depositors is felt to be a public good, these losses instead risk being borne by the state, either in the form of equity injections from the government (capital insurance), payouts to retail depositors (deposit insurance) or liquidity support to wholesale funders (liquidity insurance). The gains risk being privatised and the losses socialised. Evidence suggests this is a repeated historical pattern.

            Maybe what he meant to say on Monday is that bank contributions cover the cost of deposit insurance… until they don’t.

          • Hawkeye November 1, 2012 at 3:59 pm #

            Nice spot, Jamie

            I was just thinking along those lines this morning.

            Saying the banks cover the insurance is a bit like saying they pay a risk premium. However, if the “risk event” is ever likely to be triggered then where actually does the cost get recovered from? From a notional account sitting at the London Bankers Association, the BoE, the Treasury?

            This still leaves at least three key unanswered questions:
            1) Who is the actual custodian of the premiums that the banks “pay into”?
            2) What form and present value is this “fund”?
            3) And who is the ultimate guarantor should this fund not be sufficient to cover costs?

      • Phil October 31, 2012 at 12:45 am #

        Hawkeye,

        I’m friends with Rowan on Facebook. He made this comment on the Haldane talk:

        “Beware of Greeks bearing gifts! The same quote goes for senior policy makers from the BofE. It’s hard to disagree that the Occupy movement managed to focus attention on a global criminal conspiracy, but I fear that Andrew Haldane may be seeking to tap into the supporters of the Occupy Movement to give legitimacy to the financial reforms which are supposedly taking place in the UK. When we see Bank CEOs gripping the rails at the Old Bailey, then we will know that real reforms are taking place, but until that happens, I remain dubious.”

        Rowan was once button-holed by a City grandee after he had given a compliance talk. The senior banker said: ‘Oh, you’re Rowan Bosworth-Davies – I’ve read your work with some interest but you know, you’re quite wrong. People like me will never be prosecuted. We’re a protected species.”

        When he was a policeman in South London he could arrest and put away any murderer or bank robber off the street. When he wanted to investigate fraud in the City, he had to get the *permission* of a Minister of State to *talk* to the banker in question.

        And that just about says it all, doesn’t it?

  30. FallingLeaf October 30, 2012 at 2:08 pm #

    Hawkeye, thanks for the reply. I did post the leaflet, but it’s here: http://www.londonconversation.com/#/news/

    if you fancy bowling down there on Sunday, give me some sort of contact and I’ll email you. I also got the guy’s email address so I can ask him more about it, he’ll certainly be there.

    Yeha, I do think that fraud is one thing that just barely came up. The problem with these meetings is everyone’s got their one peice of the pie that they think should be delt with: environment or regulation or fraud or inequality. We have to somehow find a structuring narrative, something to square the circle and I don’t even know that we can. In that sense, maybe Haldane’s regulatory-oriented pragmatism is the right wya, I just don’t know. but yes, Rowan’s work and insights need to be much more widely publicised.

    • Hawkeye October 30, 2012 at 4:03 pm #

      Hi FallingLeaf

      Thanks for the link again. Didn’t scroll down the first time, so missed the details on the flyer.

      I think that chap with the flyers didn’t quite convey his issue clear enough (plus was out of scope for the meeting last night). I’m on board with the cause, enforcing private property rights on basic necessities such as air & water is an absolute red line in my book.

      Once “the market” controls the essentials of life, humanity might as well pack up, as we will have surrendered the very basis of living.

      Looks like I have a diary clash on Monday, as I’m planning to go the Tax Haven talk by Richard Murphy:

      http://mondediplofriends.org.uk/calendar.htm

      Any other Golem groupies going, then let me know.

      P.S. I’ve offered a basis on which to create a cohesive “case”. See the comment above to Jamie. The public understands Fraud. The public does not like being defrauded or lied to. Look at the outrage and publicity around LIBOR manipulation. It is clear that modern banking is engaged in wholesale looting. See section 7 of the following:

      http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2011/01/Russell-Bradshaw-Issues-Paper-Response1.pdf

      • Phil October 31, 2012 at 1:01 am #

        Bloody hell, I wish I lived in London.

        Hawkeye and Falling Leaf, I’ll actually be down there for the third week of November, if you want to meet up for a chat and see if I can contribute in someway. Any ‘case for the prosecution’ can be pushed following our talk by David in Manchester.

        • FallingLeaf October 31, 2012 at 10:35 am #

          Hi Phil, welcome to the party! The more the merrier but it depends when you’re down, November is the cruellest month for me and I’ve got classes most evenings. Let us know on here when exactly you’re down and we’ll get some sort of Golem Faithful (London Parish) meeting. I can also tell you all more about what I heard Haldane say at the end and what we talked about.

          • Hawkeye November 1, 2012 at 11:39 am #

            Hi FallingLeaf

            Please let us know how the talk on Monday goes. Either on this site or the Forensic Statistician site:

            http://forensicstatistician.wordpress.com/

            People like Sandor (and other mainstream economists) confuse the ownership & trade of products as wealth, when in fact this is merely a justification for inter-personal debt.

            In the words of Ruskin “There is no wealth but life”.

          • Hawkeye November 1, 2012 at 11:41 am #

            P.S. Would be good to get a quick summary of what Haldane told you afterwards !!

          • Phil November 3, 2012 at 1:25 am #

            Hi,

            I’ll be in London from Saturday 17th to Thursday 22nd. I’m free all day everyday except for about two hours at midday when I’m Chi Kung training in Lambeth! ; )

            Are you on Facebook?

          • Hawkeye November 5, 2012 at 1:27 pm #

            Hi FallingLeaf

            Monday 19th Nov might be best for me. Perhaps meet at the Occupy Economics WG at Friends House.

            Drop me a note nearer the time, either on here or at Forensic Statistician site.

      • Roger Lewis October 31, 2012 at 10:50 am #

        On Wholesale Looting.

        https://www.youtube.com/watch?v=ky0TRkS0tIY

        • Phil November 3, 2012 at 1:27 am #

          Brilliant!!

  31. Rowan Bosworth-Davies October 31, 2012 at 1:48 pm #

    Gentlemen, thank you for your faith in my knowledge to think that I might be able to throw some light on these dark questions. I will write my next blog on a detailed analysis of why I believe we have sufficient legislation to deal with these problems, and I will explain how the laws work (or should work if we had some agency with the necessary bottle to do the business)! If you have any ideas how we might disseminate these views more effectively, I am always open to suggestions and advice. Has anyone given any thought to our putting on our own workshop or seminar to which we could invite those people who think like us?

    • Hawkeye October 31, 2012 at 3:56 pm #

      Rowan

      I’d very much look forward to a blog article explaining how the current law works. I’m also very supportive of the idea of a workshop / seminar where there is chance to fully understand the legal basis of Fraud.

      The Occupy Movement is often lambasted for not having a clear or cohesive critique / narrative. The topic of Fraud is clear, coherent and compelling. If there is a two tier justice system in the UK, the population will be up in arms about it. It goes totally against the British sense of fair play.

      I’m happy to help out with some of the logistics and doing my bit to raise publicity.

      • FallingLeaf November 1, 2012 at 7:38 pm #

        Rowan, Jamie, Hawkeye – I believe Occupy Economics meet twice a week at Friends’ House (where Haldane spoke). Maybe a good palce to start promoting?

        • Hawkeye November 2, 2012 at 6:08 pm #

          Hi FallingLeaf

          I will check out the schedule on the Occupy site. I presume you refer to the “Economics Working Group” meetings.

          Monday 5th clashes with the Richard Murphy talk, and I can’t make next Friday. If you are attending, please suggest that they look into the topic of endemic fraud.

          Will drop a note on here the next time I plan to attend something like this.

          Cheers,

          -Hawkeye

    • Jamie_Griff November 1, 2012 at 3:13 pm #

      This is excellent news – can’t wait to read it and start promoting it…

  32. Dave (aka Frog2) October 31, 2012 at 6:21 pm #

    Rowan,

    Good to see you here, having only just discovered your blog from Daniel’s link on the 28th.

    Dave, in France

  33. groop November 1, 2012 at 1:21 am #

    I agree with the comments re: loans/credit/debt being expanded beyond the ability of people to cope. This is presumably not a problem to the lender if they are able to securitise and package the debt – take a commission and punt it onto someone else.

    I sometimes wonder what the effect would be if one simple piece of legislation was enacted – namely – if a lender wishes to lend – its completely up to them – but the loan has to stay on their books until it is paid off.

    Surely this would have a sobering effect on lenders who cannot now pass the toxic parcel. However, I’m not sure if the party was in full swing – whether they would themselves recognise this, and take their own punch bowl away.

    Maybe it has been suggested before – but it seems like a simple method to focus lending – and possibly even get back to a purported benefit of the financial system in order to do a better job of allowing capital flows to areas that are sound.

    Just a thought – and as this is an excellent blog – i wondered if anyone had any thoughts on this.

    • backwardsevolution November 4, 2012 at 3:07 am #

      groop – that’s what I’ve been advocating as well. Make these lenders keep the loan on their books – no securitizing. When they have to hold the hot potato, you can bet they won’t be fooling around.

      Protect depositors, then tell the banks they can lever up as much as they want, but they are holding onto the dynamite. And when they blow, they WON’T be bailed out by taxpayers.

  34. Hawkeye November 1, 2012 at 9:19 am #

    Hi Groop

    What you describe (retention of loan issuance to remain with the issuer) is the foundation stone of banking since time immemorial. It is called “Originate and Hold”, and was the only permitted structure of bank lending. Only since the early 1990s was the new policy of Originate-to-Distribute (O2D), aka Securitisation, permitted.

    I submitted a critique of O2D to the ICB / Vickers Commission 2 years ago:

    http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2011/01/Russell-Bradshaw-Issues-Paper-Response1.pdf

    As stated above in my comment to Jamie_G this was completely ignored in the final report, despite it being a prominent concern in their own “Issues Paper” !

    Here are the key points:

    1) The very structure of separating loan origination from ownership awakens deep rooted concerns about the exploitation of asymmetric information, namely Adverse Selection and Moral Hazard
    2) The expectation of market operations to effectively regulate credit risk is shown to be unfounded, instead resulting in ill-conceived and excessive lending practices
    3) The recent growth in debt levels therefore may be masking a more fundamental issue of declining debt quality, such as debt for consumption and Ponzi financing
    4) Risk transfer practices mean that poor credit risk judgements are increasingly likely to be borne by unsuspecting counter-parties such as underwriters of Credit Default Swaps and central banks enjoying Government support
    5) Finally, the climate for fraudulent activity is amplified as Government support for institutions with the potential for suffering losses (on securitised assets) increases.

    • groop November 1, 2012 at 6:46 pm #

      Hawkeye,

      Thankyou for the link and the terminology.

      Would there be actual practical difficulties in moving back to this foundation stone?

      • Hawkeye November 1, 2012 at 7:05 pm #

        Hi Groop

        I would have thought that trying to unpick the existing O2D arrangements would be a mess and merely just create revenue for accountants and lawyers. It might just cripple the banking system and leave the tax payer on the hook.

        The sensible approach would be to announce a date from which no new securitisation (O2D) can be originated. That way we work them out the system.

        The second suggestion would be to begin investigations into whether there was indeed intentional mis-representation of loan quality among the existing arrangements and prosecute to the full extent of the law (to include financial clawbacks to recoup losses and cover the cost of investigation).

        This is essentially a slow and steady purge of the toxic waste in the system.

        • groop November 1, 2012 at 9:59 pm #

          Hawkeye,

          That seems a sensible approach to set a date when no new O2D can be originated. I wonder if it could be tied into the deposit insurance too e.g. only deposit insurance for banks that only ‘Originate and Hold’.

          That would seem to be a clear choice for depositors between boring but safe banks and others that would be clearly demarcated as being riskier.

          • backwardsevolution November 4, 2012 at 3:24 am #

            Hawkeye – great post. Groop – great suggestion re deposit insurance being tied to “originate and hold” banks. But with housing booms lasting quite a few years, as a CEO at a major bank, making huge compensation and gigantic bonuses, would I really care if it all fell apart several years down the line? By the time the boom ends, these guys are filthy rich, the company explodes, and the government ends up bailing out the depositors.

            It’s a start, but has to go further. Interest rates, being kept artificially low, just cried out to speculators to enter the housing (and commodity) markets, which drove prices higher. Many banks were accepting 0% down. It needs to get back to where down payments are substantial, where people have to save for a few years before entering the market. That slows the process down, and since speculators want to get in and out, they’d think twice too.

            And the amount of warehousing of commodities by major Wall Street banks (probably the same in Britain) and in China is unbelievable! There are warehouses full of copper (and other metals) in city after city in the U.S., artificially keeping prices up.

            It’s a free-for-all fraud-fest.

  35. John Souter November 1, 2012 at 5:49 pm #

    Re: the lack of convictions and Haldane’s epiphany.

    I recall in 2008 the woman who was the then spokesperson for the BBA arguing -”surely it is better we allow the experts to sort this out?” I regard Haldane’s Mea Culpa along the same lines of a disingenuous exercise in damage limitation.

    Along the same lines we has the FSA headed by Lord Adair – The same Adair who, while head of the Inland Revenue, considered the best way to get the corporate overlords to pay a ‘reasonable’ amount of tax on their corporate and private profits was to take them out to lunch and appeal to their ‘Old Boy’ morality and their commitment to cricket.

    Hardly makes him a suitable candidate as a regulatory tiger does it?

    Now to the paucity of convictions – It’s not the fault of the Law. The Fraud Act of (2006) – even the Bills of Exchange Act 1882 cover most, if not every casino roulette played out pre and post 2008 but for laws to work they have to be actioned, and for that to happen governments and their regulators need to develop a backbone rather a corpulent gut and flaccid cojones.

    So there you have it – a government committed to cleaning out corruption would soon have the canaries singing in Berkeley Square in the hope of hanging on to their Bentleys.

  36. Phil November 3, 2012 at 1:37 am #

    Since we are now expecting further bank bailouts before the end of the year (see Paul Tucker and Mervyn King’s comments in the FT a few weeks back) might we view Haldane’s comments as an attempt to buy Occupy off lest they pile back into the City once the farm is thrown at the zombie banks again?

  37. Dave (aka Frog2) November 4, 2012 at 11:51 pm #

    Phil

    Good one ! Distributed to my mates.

  38. shaun s November 5, 2012 at 10:25 am #

    Bit late but here is the next canary in the coalmine for Taxpayer bailouts of deposit insurance.

    Russian money in Cyprus; http://www.zerohedge.com/contributed/2012-11-04/bailout-russian-%E2%80%9Cblack-money%E2%80%9D-cyprus

    German (secret service) report slipped out somehow. 150% of Cyprus GNP – at least.

    • Phil November 5, 2012 at 2:12 pm #

      Great link. Thanks Shaun.

Trackbacks/Pingbacks

  1. Links 10/25/12 « naked capitalism - April 9, 2013

    [...] Deposit Insurance – Who is it for really? Golem XIV [...]

Leave a Reply