A couple of quotes on bankers...

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First from Eamonn Butler at the ASI:

Let us not forget that after New York, London is the world's leading services centre. The sector brings in about £60bn in tax every year, more than 10% of the government's entire budget. We need it to succeed, and retain talent – which means paying them world market rates. That's what we do with footballers – John Terry is paid £6.7m a year, Wayne Rooney is on £15.1m and Steven Gerrard picks up £7.2m and got an MBE too. But football clubs are very small businesses compared to banks. Though a world footballing brand, Manchester United's capitalization is just £2.47bn; the market capitalization of RBS is seventeen times bigger, at £41.8bn. Should we be surprised if star performers in RBS are paid seventeen times what Rooney earns? But in fact we baulk when they are paid fifteen times less.

Absolutely. And let's not talk about how much income assorted ever-so-witty TV panellists get paid for their snide remarks and jokes that were funny the first time but, after several hundred slight variations, have descended into utter boredom. When regular panellists get £30,000 or more per show on the BBC there really is no room at all for them to criticise how much bankers get paid.

Second from Ogden Nash (as I like a little balance). From a poem entitled "Bankers are just like anybody else, except richer."

Most bankers dwell in marble halls,
Which they get to dwell in because they encourage deposits
and discourage withdrawals,
And particularly because they all observe one rule which woe
betides the banker who fails to heed it,
Which is you must never lend any money to anybody unless
they don't need it.

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It isn't social justice to encourage people to take out loans they can't afford. So why is it Labour Policy?

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You know the housing bubble that was a big factor in creating the mess we're in?

Let's remind ourselves what Clinton and Bush did:

The meltdown was the consequence of a combination of the easy money and low interest rates engineered by the Federal Reserve and the easy housing engineered by a variety of government agencies and policies. Those agencies include the Department of Housing and Urban Development (HUD) and two nominally private “government-sponsored enterprises” (GSEs), Fannie Mae and Freddie Mac. The agencies — along with laws such as the Community Reinvestment Act (passed in the 1970s, then fortified in the Clinton years), which required banks to make loans to people with poor and nonexistent credit histories — made widespread homeownership a national goal. This all led to a home-buying frenzy and an explosion of subprime and other non-prime mortgages, which banks and GSEs bundled into dubious securities and peddled to investors worldwide. Hovering in the background was the knowledge that the federal government would bail out troubled “too-big-to-fail” financial corporations, including Fannie and Freddie.

And let's remember something about this - it was the political greed of American politicians not the greed of bankers that did the damage. Here's what the Village Voice said back in 2008 about Clinton and Andrew Cuomo, then Housing & Urban development Secretary:

Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that — in combination with many other factors — helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.

Put simply, forcing banks to lend to people with high risk of default is a really stupid idea. And all the wiffle about social justice doesn't change the facts. Nor does forcing the banks to use "social lenders" make any difference. Yet the Labour Party are proposing just such a policy:

Labour has published proposals for a policy that it says would force banks to lend more in deprived communities and encourage lending through third sector financial institutions.

In an interview with Third Sector, shadow charities minister Gareth Thomas said that proposals in Open Banking: Building a Transparent Banking System, written by him and Chris Leslie, the shadow financial secretary to the Treasury, would require banks to reveal what they lent in each community and to lend a minimum amount in every community.

He said that where banks did not want to do it themselves, there would be an opportunity for them to lend through credit unions or community development finance institutions.

It all sound so lovely. Let's force the evil banks to cough up for regeneration. They can be forced to lend to poor folk in deprived places and everything will be better!

This isn't social justice, it's not redistribution, it's not reinvestment. It's a morally questionable lottery and anyone who thinks giving soft loans to poor people makes any sense needs his head examining.

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Letting politicians and the well-meaning run banks is a daft (and dangerous) idea

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The other day Vince Cable announced his new small business bank:

"We need a new British business bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy. Today I can announce we will have one. I am working with the chancellor to develop a state-backed institution that will combine up to a billion pounds of new government capital with a larger private contribution."

So there you have it – a super new bank run by politicians that will gallop to the rescue of all those dynamic little businesses that can borrow money from the nasty private banks (or indeed the nasty public-owned banks for that matter). For all that this looks and sounds like just another back-door bank bailout, Vince has his headline and a shiny new state bank to play with!

Now while this sounds like yet another rehashing of 1970s policies – picking winners, national investment banks and doubtless the white heat of technology – it is matched in its lunacy by the latest wheeze from Labour. This is the idea of making banks lend money to poor people:

Labour has published proposals for a policy that it says would force banks to lend more in deprived communities and encourage lending through third sector financial institutions.

The alarm bells are ringing loudly at this policy! Apparently the intention is to force banks to lend in poor places (on what basis is unclear) or else hand over dollops of cash to social lenders – charities, credit unions and so forth. The approach would:

...require banks to reveal what they lent in each community and to lend a minimum amount in every community.

Apparently this was a huge success in the USA where the Community Reinvestment Act was a factor in (although probably not the cause of) the housing-bubble that helped precipitate the financial meltdown we all enjoy today. So Labour in the UK is proposing a lending scheme targeted at people who won’t find it easy to repay the loans. To say this is irresponsible does not quite capture the whole picture. Assuming that the government’s moral suasion makes banks use credit unions and the like to do the lending, we face the added problem of banks run by politicians and the well-meaning lending to poor folk.

And this happens:

Leeds City Credit Union (LCCU) will be hoping yesterday’s sentencing of former manager Beverley Johnson for fraud will mark the end of the most traumatic chapter in its 25-year history.

Over the past five years, England’s biggest credit union has endured the fallout from chronic mismanagement which resulted in near complete financial collapse, two police inquiries, the former chief executive being forced to resign and finally an embarrassing court case thanks to a manager helping herself to the contents of members’ accounts.

LCCU’s mismanagement has been the subject of a long-running Yorkshire Post investigation which first revealed serious concerns as far back as 2007.

Imagine millions of – in effect – free cash landing into these organisations. Take a glimpse over the Atlantic again and look at how politicians and political favours nearly destroyed savings & loan institutions. And consider whether this sort of story might happen again here:

LCCU was shown to (be) rife with cronyism and nepotism, including major breaches of financial rules through favourable loans provided to staff and their relatives.

In one instance, the son of then chief executive Sue Davenport had received a loan for £14,205 when he was only entitled to £1,200. In another, Davenport’s daughter-in-law had been able to take part in processing a loan for herself at a preferential rate.

Criticisms from the Financial Services Authority (FSA) were also highlighted, in particular Davenport’s ability to exert an inordinate amount of control over the books. A letter written by the FSA to LCCU as far back as 2003 specifically referred to “the risk of intentional manipulation” – a risk subsequently shown to be one Davenport was willing to take.

Perhaps we shouldn’t take the risk of letting a coalition of the well-meaning and politics runs banks – it will end it scandal and crisis. And won’t help poor people – folk who need advising not to borrow rather than encouraging into taking out loans they can’t afford.

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How the state still wants to crush banking innovation...

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Or something like that;
 

Ethan Clay, 31 years old, opened Whalebone Café Bank seven months ago in his shop, Oh Yeah!, a year and a half after he was hit with $1,600 in overdraft fees from a local bank where his account was overdrawn by a series of checks.

Mr. Clay says he wants to offer an alternative banking experience, and has accepted small deposits and made small loans. He claims he isn't subject to banking rules because his operation is a gift-card savings account.

"It's a strange case, we don't have the authority to go close an ice-cream store," said Ed Novak, spokesman for the Pennsylvania Department of Banking. "But we are going to do something. You can't mess with people's money."

Those people with their money - they've a choice between Mr Novak's approved (and failed) bank system and Mr Clay's creativity.

...customers who make deposits earn interest in the form of "exclamation dollars." A $100 deposit is worth $5.50 a month that can be spent on ice cream, waffles and coffee in his store. It works out to be a straight 5.5% monthly interest rate, he said.

Whalebone Café Bank also loans money. Two weeks ago, Ryan Howard, a 33-year-old designer and photographer who occasionally works for Mr. Clay, said he needed $510 to attend a therapy workshop. He borrowed the money from Whalebone Café Bank, and is paying the money back at $60 a month, and will be charged $25 for the loan.

Mr. Clay said he has $550 from depositors and has loaned $1,700, an amount that includes some of his own seed money. "My goal is to get to $100,000 in deposits by Dec. 21," he said. "This is the prototype, but I hope to become the neighborhood bank."

This innovation and creative - capitalism at its finest - must be crushed by the grand alliance between the big banks and big government. A pox on them!

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More on that money stuff...

I was scrabbling around looking for something the other day and I stumbled across this book. I'd forgotten about it - which is odd given how much I'd been burbling about money recently. Flicking through I was again reminded why the case for competing currencies is so strong:

"We have always had bad money because private enterprise was not permitted to give us a better one.  In a world governed by the pressure of organized interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need.  Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.”

Government through force has prevented private money. In doing so (and once the inconvenience of money having any link to value was removed in the 1970s) those governments opened up the floodgates of state squander. We need a check on those governments, a means of preventing another grand economic debauch, something to prevent the deranged myth of valueless money from taking hold. And competition is the best check of all.

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More on the future of banking...sort of...

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Perhaps more a reminder that banking should be as much about saving as it is about lending. It seems that it takes Ram Singh, an Indian street child to remind us:

Just one among millions of street children who rely on menial jobs for survival, Singh is determined to make his work pay some sort of future dividend.

"I'm smart, but that alone isn't enough to start a business.

"I save money everyday, hoping to start something of my own. Someday soon," he said as he served glasses of India's ubiquitous, spicy milk tea in sweltering heat at a stall near the teeming train station.

We've rather forgotten this as a culture preferring instead to worship the mystic money tree in a basement on Threadneedle Street.

Learning the merits of saving would be a good - and right - thing.

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John Leech - another socialist in liberal democrat clothing

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The government's Faustian pact - a deal that still remains despite the financial train crash - with the banks has cost ordinary folk dear. Yet this so-called "liberal democrat" wants to make it even worse:

...although the taxpayers own 82% of the company, we do not have a rep on the board and cannot force the company to lend money to businesses and create jobs.

This man is an MP - elected to provide intelligent leadership - and he wants to "force" a bank that's lost £1.5 billion in a year to lend money it doesn't have to businesses. It seems the argument is that Vince Cable thinks this a good idea. And, of course, Vince is the man because he used to work in a big (oil) business so understands all this money stuff.

More to the point (and I don't know Mr Leech's background) our MP seems to have not the first idea about the duties and responsibilities of a company director. Generally speaking their first duty is to the company's interest. And right now this is to get the balance sheet fixed, pay off those bad debts and make RBS a viable business. Running the business into the ground by forcing it to make a load more bad loans on political direction is a daft idea.

Mind you, we could have let RBS go bust in the first place. That would have been a liberal response!

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Competition in banking? Now that's a radical idea...

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In that irritating way of today’s politics, the newspapers are report on a speech that Ed Miliband will make tomorrow. And Ed nearly gets it right for once:

The Labour leader will call for the big five banks - Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest - to become seven, with privately-run "challenger banks" to buy up to 1,000 existing branches. It is hoped that this will increase competition and choice for consumers as well as reduce bank charges.

I say ‘nearly’ because firstly banking isn’t driven by branches any more. For sure I have a ‘branch sort code’ but that’s pretty virtual these days and it’s a fair while since I actually visited that branch. And the future of banking lies in this virtual world not in grandly portico’ed high street branches.

Secondly, I should get to choose where I bank – if Ed’s banking reforms force me to change because they’ve forced my bank to sell its Bradford branch to a newly formed “challenger” bank, I shall be just a tad annoyed.

The problem with banking is that we have made it more and more difficult to operate as a retail bank let alone start up a new one. It didn’t use to be that way – governments passed laws that made it so:

As a result of these legislative changes, provincial limited-liability joint-stock companies started picking off private banks. After lengthy negotiations, three of the largest Quaker-run banking firms--Barclays (which had become Barclays, Tritton, Ransom, Bouverie & Company after a merger in 1888), Jonathan Backhouse & Company, and Gurneys, Birkbeck, Barclay & Buxton, along with 17 smaller Quaker-run banks, agreed to merge and form a bank large enough to resist takeover attempts. Barclays took its modern form in 1896 when the 20 private banks merged to form Barclay and Company, Ltd., a joint-stock association with deposits totalling an impressive £26 million. This marked the beginning of Barclays' tradition of service to farmers and fishermen.

And we have – for all sorts of reasons, good and bad – continued to pass laws regulating the activities of banks that acted to make it harder to start up a new bank. That made banks a special case in capitalism – because market entry was so hard, because banks could offer free banking to retail depositors, because banks had what we believed to be an essential partnership with government – for all these reasons banks had no good reason to focus on being the service businesses that they were once (and that their advertising still claims them to be).

While the big banks were careful cautious and focused on the day-to-day job of lending, holding deposits and such, this lack of competition didn’t really matter much. The public got truly awful service – banks elevated saying ‘no’ to a semi-religious status – but the banks weren’t threatening the foundation of the economy.

But then someone discovered the money tree and introduced bankers and governments to its wonders. By the wonders of this thing, banks and governments – in cahoots – could shower the economy with billions in “investment” while providing a bottomless purse of welfare, care and bacon paving. The essential partnership between banks and government was forged anew – in exchange for bankers making untold billions, politicians could bribe the voters with grand projects and freebies. The politicians would keep interest rates down (abetted as we now know by the bankers) allowing asset values to sour giving the illusion of great wealth and on the back of this higher taxes would allow for higher borrowing – more profit for the banks, more votes for the politicians.

We need more competition in the pretty straightforward job of taking my money, keeping it safe, paying it people I want it paying to and providing (at a charge) loans should I need them. It’s not a complicated business, there’s no reason why it can only be done by massive multi-national corporations. Yet that is the case.

If Ed Miliband had proposed such a real change – opening up banking licensing to the general market and allowing us to make choices about where we keep our money – that would have been interesting. Instead we get proposals to “break up” the banks and give us a choice of seven where there are now five. I guess that will suit the banks. And government still has that essential partnership with those banks. That hasn’t changed!

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The Banker's Dance

It is like watching one of those symbolic war dances – a haka perhaps or more likely one of those morris dances with sticks. Lots of faux anger and great threat but in the end none of the participants suffer – the violence, the punishment or the attack never happens.

This is the Banker’s Dance – a stately affair involving bankers, regulators, civil servants and politicians performing to an audience of PR consultants, financial advisors and management consultants while us ordinary folk press our eyes to a crack in the fence hoping to catch a glimpse of the grand ball.

Today – on top of screwing small shareholders, excessive and unjustified bonuses, complacency in the face of crisis and crippling the economy to pay for their misdeed – these people, the bankers, regulators, civil servants and politicians, have revealed that they don’t mind fixing the system in their favour. We’ve known that politicians and civil servants have done this for years – responding to the clamour of public opinion through the temporary manipulation of markets. A tax rise here, an interest rate cut there, maybe a new road or an extra payment for pensioners – spending other people’s money to cadge a few votes.

But now the partners of those politicians and those mandarins – the bankers – are shown to be cheats too. And that their so-called regulators were either complicit or too stupid to care. We – by which I mean the man in the Ford Mondeo and the woman on the 8:35 from Beckenham Junction to Victoria – are shafted but these grand people do nothing except play the game of false anger, mock condemnation and contrived critique. The words are there:

 

“This is a scandal. It is extremely serious. They've had a very large fine and quite rightly. But frankly the Barclays management team have some big questions to answer,"

"It is clear that what happened at Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees."

But does anyone believe this is different from that Maori rugby player screaming death and blood at his opponent? After the game – after the Commons statements, frowny appearances on the BBC and “we will act” articles in today’s chosen Sunday paper – the people making these statements (Osborne, Cameron, Miliband, Balls) will be stood at the bar with the people they condemn.

The stately dance has become a dark ritual, a celebration of the demonic bargain struck by politicians with banks to allow them the means to use tomorrow’s tax (and today’s inflation) to bribe chosen groups of voters. Not satisfied with encouraging us to vote to spend other people’s money, we voted to spend money that didn’t exist, to create a magical money tree.

And all the while the dancers piled up cash, assets and power while we – the poor suckers – piled up debts. Yet we carried on- and as we’ve seen in Greece will always carry on – pretending (are we really such fools) that it isn’t us who do the living and dying round here – that the magicians of government will solve all the problems.

That dance – that black dance – was the deal that made this possible. And it was, is, will be a monstrous deception. The greatest of great lies.

The thing we thought was a money tree? It’s a gibbet. And those dancers will hang us from it.

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...add sub-prime loans to business! Hey, that's a thought Vince!

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Sometimes I could cry. Vince Cable wants cheap loans to business from a state investment bank:

"It would almost certainly be necessary to lengthen the period in public ownership. It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance"

So fix the market, offer loans to people who can't pay them back at cheaper rates and all in the name of "growth". Are these people actually living on the same planet as me? Is their memory so short that they don't recall that it was cheap, government-sponsored loan-making that got us into the mess in the first place?

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Can we reduce the "poverty premium" without repeating those sub-prime mistakes?

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Niall Cooper from Church Action on Poverty has written a piece of what he calls “fair pricing”:

And secondly, fair prices.  Much of the ‘logic’ of the way markets have developed in recent years is to move towards ‘risk (or cost) pricing’ and away from shared risk.  Some of the assumptions behind this are extremely dodgy:  The majority of high cost lenders claim that their premium prices are based on the ‘risk’ of lending to low income customers… any yet, when customers pay week after week, year after year, the cost doesn’t go down.  But fundamentally, is it socially (or morally) acceptable to operate ‘cost’ pricing models which force the poorest to pay most?  How can companies square all their talk in recent years of corporate social responsibility, with charging their poorest customers the most?

It has become a mantra of anti-poverty campaigners that poor people pay something they call the “poverty premium”:

Lack of access to the best online prices, bank accounts and managing their budget via cash all adds together to give the poorest families the worst deals around. The result is a poverty premium that costs the poorest families more for the same energy, cookers and household items, credit and insurance than their wealthier peers.

The two prime culprits for this premium are energy and financial services especially lending. In the case of energy this is mostly about methods of payment – the understandable reluctance of people on low incomes to use direct debit as a means of payment. So, in reality, the whole problem is – as Niall Cooper implies – down to financial services. Especially since the ‘food desert’ argument turns out to be a bit of a myth.

“The U.S. Department of Agriculture defines a food desert as a low-income census tract where a large number of residents are more than a mile from a grocery store…. [L]ess than 4.5 percent of the U.S. population [falls into that category].

The question then is how to make is easier for poor people to access affordable financial services given that those poor people are less likely to repay loans, more likely to over draw and live in places where car crime and burglary heighten insurance risks. For this Niall Cooper suggests intervening in the market:

And if individual businesses are unwilling to offer products to low income consumers at fair prices (not least by claiming they can’t do so if their competitors don’t), then is there not a role for market intervention?

The problem is that – certainly where lending is concerned – we have been down this route before. After all mandating lending to high risk borrowers was a central driver in creating sub-prime problems especially in the USA. And if you introduce price caps (as Stella Creasy wants) without mandating lending to poor people then you kill the market entirely. The consequence of this is to create an even bigger problem for which the only solution is unregulated and illegal lending.

Rather than looking at forcing price cuts on suppliers, we should instead consider whether block buying is an option. Social landlords could, for example, purchase energy more cheaply than tenants and have the systems to collect payments in place already. And, certainly for contents insurance, the same should apply. It would be interesting too to look at whether local councils or social landlords could broker other insurances such as third party car insurance helping to spread risks and reduce costs.

If we look to new generation mutuals such as credit unions there are perhaps similar opportunities to reduce costs and spread risks. What we can’t do is wholly eliminate those risks (something the world is finding out very painfully right this minute) meaning that poor people will continue to have problems with access and pricing in financial services. In using co-operative solutions we can ameliorate these considerably and, in market terms, safely. Mandating prices simply takes us back into the financial disaster of sub-prime lending.

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