Brian Micklethwait, over at his personal blog, links to a sentiment that states that it is wrong to blame the private sector banks for the current problems, given that the underlying cause of the credit/property bubble was cheap credit as supplied, ultimately, by central banks. Central banks are not creatures of the free market and would not exist in a world of pure laissez faire. So obvious to us, it hardly needs to be said. But outside our little intellectual bailiwick, you’d be be surprised – or perhaps not – to realise that saying such things still gets you a funny look.
As purely personal evidence, let me cite an experience last evening. I went along to a financial seminar in London’s Bloomsbury district, where various folk, including Anthony Hilton of the London Evening Standard and Angela Knight of the British Bankers’ Association were holding forth. Q&A ensued. Yours truly asked a question about what the panelists thought was the role of central banks and governments in causing the current SNAFU. You could almost smell the palpable relief on Knight’s behalf that she had heard someone not try to pin the blame entirely on private banks. My god, she thought, here’s a guy who has not bought the statist line that what is happening was caused by big, evil private banks. I have to say I found her answer on how the central banks mucked up was quite convincing although she by no means accepts the idea that the existence of central banks as such is a problem. As a lobbyist for the existing fractional reserve banking industry, she is certainly no Ludwig von Mises, but still.
I sense that some of the banking industry’s more independent-minded figures are getting really angry at being pilloried for sins outside of their control. The banking industry, however, cannot win any battle for hearts and minds until they are absolutely transparent about their own financial affairs, and until some of the leaders of the banking industry begin to embrace genuine free banking rather than the quasi-statist mess that we have now. Let’s face it, given the reputation of banks at the moment, what do they have to lose? The current option – hope for the best and take taxpayer’s money – is not proving to be very successful.
They’ve all huddled together for protection under the State’s umbrella. The other side to accepting regulation and direction by said State is The State picks up the pieces when things go wrong. Both banks and Government believed it would not go wrong so neither was too troubled by what would happen if it did. Now it has, the regulatory system is found wanting and the taxpayer is being robbed blind.
We never asked for this and we never voted for this. Nor have we a say in the profligate spending and dilution of the currency that is about to commence.
The first step to free-er banking would be for one to remove itself from the Financial Services Compensation Scheme. At the very least it would mean should any more fail, that bank wouldn’t be lumbered with any of the cost.
I’m surprised the Building Societies haven’t made a similar move yet. They haven’t been so reckless. Perhaps they feel not being covered by the FSCS brings with it too much negativity from a customer’s point of view. It would have to be explained smartly to get the point across that it was a positive step.
Perhaps a new bank or building society, free from the baggage of the last decade of regulations and wholesale funny money, would be able to hit the ground running.
The trouble with the bankers is like Bitzer in that profound study of social mores, Shaun The Sheep, as soon as a bone is offered and thrown off they go into the sunset leaving sense and system behind. History tells us that it has happened all too often before. Quite how you control a rabid banker is one of the great mysteries of time.
James Chanos – who is noted for his analysis to support shorting stocks has made a couple of interesting observations:
On valuing bank assets by “mark to market” he noted that loans are a major (perhaps the major % of assets) class of assets, and they are not marked to market, but are valued at face, with a reserve established for the performance of the overall portfolio of loans. So, he doubts that dropping mark to market will have as dramatic effect as some urge.
He suggested that reduction of the reserve required for Basel II could have far more impact.
There is a place where “Central” Bankers could play a major role (and where they have done to the effect of some “freezing” of transaction levels).
Think about it. Drop B II to 1.3% and see what happens. Of course, it will take a few years to get it back up again (absent economic Viagra).
On “Central” Banks, strictly speaking, the U.S. Fed is not a “Central Bank” in the European sense, since its districts are owned by and responsive to their members. It is not an organ of the Government, although it is influenced by legislative (political) forces (e.g., the “full employment” provison).
Gareth, I’m not sure how Building Societies work in the UK, but my suspicion is that they are essentially similar to Savings & Loans and similar institutions (generally called “Thrifts”) in the US. Those institutions have deposit insurance just like banks (in fact, for the last 15 years or so the FDIC has managed both insurance funds). This is ancient history now, but in the early 90’s we had a smaller “trial run” of the current crisis (called the “S&L Crisis”) which involved thrifts (and there actually was another one about a decade earlier than that, too). The story of how that came about is too long to be recounted here, but the bottom line is that it ended up costing the US taxpayers many billions. The contagion didn’t spread to the rest of the banking sector because in general thrifts are much smaller than commercial banks (no “too big to fail” nonsense).
Frankly, I’m not sure what good it would do for a financial institution to “remove itself from the Financial Services Compensation Scheme”. They’re still insured by the same regulator and still subject to a very extensive and intrusive (and dysfunctional!) regulatory scheme. Are you thinking of this simply as a marketing ploy, so they can say to their customers “we didn’t take the money”? To whom does that appeal (other than maybe a handful of iconoclastic Samizdatista-types)? Where’s the advantage in swimming against the current in times like these?
“But outside our little intellectual bailiwick, you’d be be surprised – or perhaps not – to realise that saying such things still gets you a funny look.”
On Monday the Taipei Times published an article by one Professor Werner Sinn of the University of Munich which downplayed the risk of inflation whilst making the claim that deflation is the more likely prospect (thus providing an academic justification for printing money to offset the costs of government debt).
I wrote a rebuttal of Sinn’s article Tuesday lunchtime and emailed it to the editor forthwith – I still have had no reply and it has not been published.
The editor obviously thought that letters on organic food and cycling paths were of greater importance to all those Taiwanese people worried about the future. Utter bastard.
Of course the fractional reserve banks are quite capable of creating a boom-bust cycle without a Central Bank.
They did so repeatedly in the United States before the creation of the Federal Reserve system in 1913.
Indeed that was what the Fed was for – to protect the fractional reserve banks (and the corporations that depended on them) from the consequences of their own folly.
In modern language the Federal Reserve was created for the purposes of “corporate welfare” – that is what it is FOR (and is the reason so many people have doubts in their gut about it – they suspect it is a swiddle, even if they do not understand the details).
However, the whole idea of the Fed is fatally flawed – its “rescue missions” make the basic problem worse.
They do not prevent a bust – they put off the bust, and make it worse.
This is what we see now – the consequences of the endless rescue missions of Alan saves-the-world Greenspan and his side kicks at the Bank of England.
He was a like a latter day Ben Strong (also called a “free market” person) of the New York Fed in the late 1920’s.
By the way Ben Strong was a hero of Milton Friedman – this is a window into basic failings in the Chicago School.
Almost needless to say the policy reaction to the present bust is terrible.
I can not find the words to express how terrible it is.
There seems to be this pathological aversion to assigning blame to private market players for some libertarians. I would say that is counterproductive and wrongheaded. After all humans are not perfect and this point is IN FAVOR of free enterprise. If nobody ever made a mistake or failed, socialism could work. This mentality is dangerous!! Banks can make mistakes! they DID make mistakes. Our question is the deeper one…What structural incentive misallocation was responsible for this gigantic error?