back to article So why the hell do we bail banks out?

Much to my joy, I have been asked a question I can actually answer. As opposed to those difficult ones, like does my bum look big in this, do you love me and has your cocaine use ever been more than recreational? That question, coming from Reg reader John Smith 19, and it is, in essence, well, why do we bail out the banks? …

  1. Frenchie Lad

    And the Perpetrators

    Thanks for the clarification but a second article on why the punishment for bringing a bank to its knees is practically non-existent seems necessary to get the full picture. I'd get more punishment for stealing a quid than bringing an economy to the brink of meltdown.

    And as en extension to the above: how about a discussion on director's responsibilities?

    1. Pen-y-gors

      Re: And the Perpetrators

      Yep, I can understand why we bailed the banks out.

      What no-one has explained is why the top three or four levels of bank management were not left swinging from lamp-posts throughout the City as a lesson to others.

      Remember Admiral Byng

      1. Tim Worstal

        Re: And the Perpetrators

        Re both of the above comments (sorry, top two)

        Because being venal, stupid, lax, greedy, incompetent, misguided and plain flat out wrong simply aren't crimes.

        Thankfully, or I'd be in a hell of a lot of trouble.

        A great deal more sympathy with the idea that rather more should have been fired. But criminal proceedings? What was there being done that was actually criminal? By the laws as they were at that time which is the only way you can charge someone with anything?

        1. Anonymous Coward
          FAIL

          Re: And the Perpetrators

          "What was there being done that was actually criminal?"

          http://dealbook.nytimes.com/2010/07/15/goldman-to-settle-with-s-e-c-for-550-million/?_r=0

          http://www.scotsman.com/business/finance/no-evidence-found-of-rbs-wrongdoing-1-3278989

          Dear Tim, please, stop it. Finance is so full of sh*tbag greedy bastards who think that without them the world will be lost! Finance people even had to invent a "Nobel" for themselves for Pet's sake! But because they have the politicians in their payroll we are screwed. They will keep playing with money that it's not theirs.

          1. Anonymous Coward
            FAIL

            Re: And the Perpetrators

            > Dear Tim, please, stop it.

            Not gonna happen, and Upton Sinclair explains why:

            <QUOTE>

            It is difficult to get a man to understand something, when his salary depends on his not understanding it.

            </QUOTE>

            http://www.goodreads.com/quotes/21810-it-is-difficult-to-get-a-man-to-understand-something

            I'm having a very difficult time reading this article as anything more than a Goldman Sachs propaganda puff piece.

            1. codejunky Silver badge

              Re: And the Perpetrators

              @ ST

              "I'm having a very difficult time reading this article as anything more than a Goldman Sachs propaganda puff piece."

              Is that due to the source of your salary?

              1. Anonymous Coward
                Anonymous Coward

                Re: And the Perpetrators

                > Is that due to the source of your salary?

                No. I don't work at Goldman Sachs. Never did. But, nice try.

                1. codejunky Silver badge

                  Re: And the Perpetrators

                  @ ST

                  "No. I don't work at Goldman Sachs. Never did. But, nice try."

                  Sorry I just followed what you said-

                  "It is difficult to get a man to understand something, when his salary depends on his not understanding it."

                  "I'm having a very difficult time reading this article as anything more than a Goldman Sachs propaganda puff piece."

                  I didnt find the article too difficult so if you can find someone of reasonable intelligence (and their salary not dependent on it) to help you through you should be fine, however I will mention that once you understand it you may disagree with the article. That leads you into the realm of opinion which your intelligent friend could help you articulate into a well worded comment to further the discussion on this thread.

                  Glad I could help and I look forward to your reasoned and well thought through opinion.

                  1. Anonymous Coward
                    FAIL

                    Re: And the Perpetrators

                    1. The quote about someone not understanding what they are being paid not to understand is not mine. It's Upton Sinclair's, and I believe I provided the appropriate reference. It applies, as a general rule, to most, if not all, of Worstall's articles.

                    2. Whether you found the article difficult or easy to understand is of no interest to me, and completely irrelevant to my point, or to the overall point of the article.

                    3. I read the article. The usual Worstall reality-denying bullshit. The article itself conveys no information whatsoever. It's just a collection of propaganda talking-points. Prime example:

                    <QUOTE>

                    Monetary theory, financial economics, these areas draw rather more of the loons to the arguments as moths to the flame than normal [ ... ]

                    </QUOTE>

                    That word of "loons" may very well be the word the article's author dwells in. I woldn't know, they're not in my calling circle. I do know that there exists another world, where MT, financial economics, etc, aren't discussed by "loons being drawn in like moths to a flame". That's the world I am familiar with. In that world, one must be able to solve PDE's and read and understand financial maths. That is a barrier to entry. I'm very glad it's there.

                    Anyone who openly admits that they can't solve - or even understand - a PDE, or the money creation multiplier effect, but finds it appropriate to label those who can as "loons being drawn like moths to a flame" pretty much disqualifies themselves from being taken seriously, even as an economics journalist - whatever that is. On the plus side, such a person does provide a considerable amount of free but unintentional entertainment value.

                    4. You don't know me, and you have no clue who I am. Therefore, any inference you may draw - and provide here - about my place of employment - current or past - is pure speculative bullshit on your part.

                    5. You appear to experience some English comprehension challenges. Perhaps you should ask a friend to explain to you what I meant by "I'm having a very difficult time reading this article as anything more than a Goldman Sachs propaganda puff piece." What you wrote as a follow-up to my quoted sentence is an incoherent non-sequitur.

                    Hope this helps.

                    1. Tim Worstal

                      Re: And the Perpetrators

                      The loons and moths thing was to refer more to the Positive Money, Anne Pettifor wing rather than anything else. Perhaps also the Austrians calling for 100% reserve banking.

                    2. Squander Two
                      Facepalm

                      @ST - Another humourectomy victim

                      Hey, ST.

                      I understood Codejunky's joke. I suspect a lot of us did. It was quite good, but not a big deal. Your continued point-by-point denunciation of it is, if I may say so, hilarious. It's like one of those turgid Wikipedia explanations of a Monty Python sketch. It doesn't look like the hilarity is deliberate, but, if it is, hats off.

                      Meanwhile, if you are going to insist on being so awfully literal (as well as vice versa), apart from the fact that you're deploying yet another variation on the tired "EVERYONE WHO DISAGREES WITH ME IS BEING BRIBED! IT'S THE ONLY POSSIBLE EXPLANATION!", you appear to be implying that Tim writes what he does because he's in the pocket of the world scandium mining industry, such as it is. I have to admit, I haven't been made aware of the corrupting scourge of Big Scandium till now. You really do learn something new every day round here.

                    3. codejunky Silver badge

                      Re: And the Perpetrators

                      @ ST

                      1. I am assuming you made that quote thinking it applied to your situation. If not then I dont get why you applied the quote to your comment but I guess it is irrelevant.

                      2. From your quote it sounded like you were struggling. I only suggested a remedy.

                      3. Now that sounds like what your other comment should have said instead of the amusing but loon sounding 'Goldman Sachs propaganda puff piece'. I am amused that you think monetary theory and economics doesnt bring out the loons but this is a public discussion forum so yeah it likely brings in some 'interesting' views. If you think you have one then feel free to contribute something to the discussion. Otherwise you are the entertainment value for having nothing better to say than a quote you wont stand by and claiming propaganda (which is what loons do say!).

                      4. And I dont give a rats furry behind who you are or where you work. You painted a target on your ass while being an ass but you were free but unintentional entertainment value. I took your quote and applied it to your comment. It has obviously hit a nerve which may have been your intention against tim, or maybe you just didnt think it through.

                      Tim has publicly expressed his views and knowledge in this article not only for consumption but also discussion and I dont like that you feel the need to put him down 'for your free entertainment' to make yourself feel good and yet contributing nothing of your apparent wisdom. You sir are a bully.

                      5. Your choice of quote implying Tim not expressing your view as his salary being dependent on it, and your comment claiming it is a propaganda puff piece. My chosen interpretation- your having a difficult time reading this, and It is difficult to get a man to understand something, when his salary depends on his not understanding it. Hope you find that more coherent and I hope I have made my point.

                      Agree or disagree with their views I would prefer the reg team continue to contribute their news, thoughts and opinions because it makes for enjoyable and informative reading. And I hope the unqualified put downs, as yours was, doesnt make it feel like a wasted effort for them.

                      1. Anonymous Coward
                        Anonymous Coward

                        Re: And the Perpetrators

                        > I am assuming you made that quote thinking it applied to your situation. If not then I dont get why you applied the quote to your comment but I guess it is irrelevant.

                        > Your choice of quote implying Tim not expressing your view as his salary being dependent on it,

                        Another collection of incoherent non-sequiturs.

                        I have no idea what you are talking about.

                        Suffice it to say that I don't "make quotes". No-one does, at least not in English.

                        I may very well be misunderestimating your strategery here.

          2. lambda_beta
            Linux

            Re: And the Perpetrators

            Counting only the pool of bonus money (not salaries), employees of the New York security industries in 2014 earned almost twice as much as the total income paid to all employees in the US who worked full time at the minimum wage ($7.25). - Bureau of Labor Statistics

            1. LucreLout

              Re: And the Perpetrators @lambda_beta

              Ok, sure, so why is it you feel that is a problem?

              I've earned what would have been minimum wage, had it existed at the time, though that was before I put myself through the expense and hassle of getting qualified and embarking on a career.

              How much of my salary do you feel entitled to take from me to give to my former colleagues who didn't bother? And why?

              Add up the footballers, or the musicians, or the z-list celebrities on strictly come to the jungle on ice, and you'll find the same tale. So why is it you have a hardon for the bankers?

              1. lambda_beta
                Linux

                Re: And the Perpetrators @lambda_beta

                I really don't have a hardon for bankers. Maybe a lepton, but not a hadron. The point is that none of the other groups you mentioned - footballers, or the musicians, or the z-list celebrities etc., ever get bailed out by the government for screwing up. Not only did we bail out the banks, we put people in charge of the bail-out who originally screwed it up. Wasn't that the point of this discussion?

                1. Squander Two

                  Re: And the Perpetrators @lambda_beta

                  > The point is that none of the other groups you mentioned - footballers, or the musicians, or the z-list celebrities etc., ever get bailed out by the government for screwing up.

                  No, those groups get given money by the government, whereas the bailouts (at least in the UK) were loans.

          3. Tom 13

            Re: Dear Tim, please, stop it.

            I'd upvote your post except I KNOW the NYTimes is as much culpable as the bankers they want to hang. While I'm not familiar with the scotsman, given your lead was the NYT, I expect they are too.

        2. Anonymous Coward
          Anonymous Coward

          Re: And the Perpetrators

          The caveat to your comments "What was there being done that was actually criminal? By the laws as they were at that time which is the only way you can charge someone with anything?" is that if (and I believe they did) they had any input into any change into any regulation that allowed them to get into that position, then they should have been punished. I think Sir Terry put it best: "... Lands confiscated, house pulled down, page torn out of history."

        3. Chris Miller

          @Tim

          Could a case not be made that they were trading while insolvent, and that the directors should therefore have unlimited liability for the debts? A friend of mine resigned as Investment Director of a UK insurance company for precisely this reason (it was taken over as a 'rescue', and I don't think the facts ever came out).

          I'm not going to join in the cry for hanging and flogging, popularly attractive though it may be, but I think there's too much sheltering behind limited liability. Directors of large companies are very well paid and should assume their share of the risks, just as directors of small businesses have to (by necessity).

          What sticks in the craw is the Fred Goodwins driving perfectly good businesses into the ground and then walking away with their pensions and (historic) multi-million pound 'bonuses' intact. If they had the bailiffs around repossessing their Bentleys and their agreeable chateaux in Provence, it might focus a few minds.

          1. Tim Worstal

            Re: @Tim

            Trading while insolvent's an interesting one. Because the audotirs of a couple of the banks did go to the BoE.

            "Excuse me, but we think that if you're not going to provide liquidity support then the bank might be insolvent. And we'd need to provide a note to the accounts stating that."

            "If you add such a note to the accounts then the bank will be insolvent. So, yes, we will provide liquidity support."

            No note to the accounts because not insolvent because liquidity support promised.

            True story dat.

            1. amanfromMars 1 Silver badge

              Re: Re: @Tim

              Hmmm. Hi, Tim Worstal, Thanks for the clear snapshot of a most unethical business. And re dat true story .........

              That sounds far too much like a perverse corrupt conspiracy to be anything else but one to self server to failed entities the goods to remain in office and do everything and every one over again whenever the system is not fundamentally changed and in the command and control of others with other leading agendas.

              And it is such a shame which puts the blame fairly and squarely on the present pussies in pseudo power and fiat control, that they are not all in penitentiary custody awaiting RICO Act prosecution.

              And if things haven't been changed fundamentally, are there myriad vectors still available for exploitation, and as long as you realise and are comfortable with the fact and fiction that it is a walk on the dark side and into webs and dark pools which are highly irregular and certainly unconventional, is it fabulously lucrative and amazingly exciting to the nth degree.

        4. LucreLout

          Re: And the Perpetrators

          What was there being done that was actually criminal? By the laws as they were at that time which is the only way you can charge someone with anything?

          Nothing, but the mob don't like to hear that, they just want to lash out at those they perceive as "the rich" in a childlike politics of envy fuelled rage.

          The important part missing from your article is, of course, politics. Map the (former) labour strongholds over the head office locations for the bailed out institutions, and it becomes clear that buying votes was an equal concern with preserving an economy.

          Most people simply never realise that management at the banks is no better than management was at Rover, or the ship yards, or still is at the unions (Len, I'm looking at you). One of the central problems is that the people who get ahead in large organisations are those good at "networking", rather than those good at their jobs and the jobs to which they aspire. Absent a change there, nothing changes.

          Speaking as one who worked in the City at the time, and still does, we should have allowed more of the banks to go bust. It would have been disruptive, but would have moved us past this strop the voters persist with, making banks the new Maggie. It's counter-productive, and when the next credit crunch arrives, and all the banks are foreign owned, the country will get absolutely hammered. The BoE can't just make new money with impunity, see Zimbabwe for reasons.

          1. fajensen
            Flame

            Re: And the Perpetrators

            Nothing Err - What?!

            http://www.rollingstone.com/politics/news/will-hsbc-deal-come-back-to-haunt-loretta-lynch-20150209

            What most people wont realise is that "government" is working together with crooked businesses for a mere percentage of the loot (and a nice con-sluttant gig later). Law enforcement at this level is pretty much about securing that the looters keep a-looting and closing the door on any emerging competition.

            When the mob beats down their front doors, that's when justice is served and we shall of course celebrate with a cognac and a good cigar.

          2. Anonymous Coward
            Anonymous Coward

            From an insider

            > Speaking as one who worked in the City at the time, and still does, we should have allowed more of the banks to go bust. It would have been disruptive, but would have moved us past this strop the voters persist with, making banks the new Maggie.

            Agreed. But woul dit have worked? Lehman's went bust, with thousands of workers out on the street with zero notice. Do the public remember that and think that maybe thre was some balance between banks going bust and banks being baile dout? Do they fuck.

            Similarly, althugh, yes, the British banks had all sorts of structural problems which made them vulnerable to the Crunch, everyne knows the Crunch started in the US. So who do the British public demand be punishd for the Crunch? American bankers? Do they fuck.

            > The important part missing from your article is, of course, politics. Map the (former) labour strongholds over the head office locations for the bailed out institutions, and it becomes clear that buying votes was an equal concern with preserving an economy.

            I was at Citi in 08. Without giving details of why, I firmly believe that the second round of US bailouts wre an object lesso nin cronyism, corruption, and politcal cluelessness. The first round, perhaps not, but the first round sent the message that a second round was possible, which encouraged said corrruption.

            I am now in RBS. While I do believe that the problem with bailing a bank out si that it puts bad incentives into the market (as I witrnessed at Citi), I have to admt that that appear snot to have happened here. RBS are absoluitely not having a mad spending-and-risky-trading spree while not giving a shit because tyhey know they'll be baild out. The entire culture of the bank right now is very mucht hat they never want it to happen again. So that's good. Restructuring isn't very exciting, so doesn't make the news, but, believe me, there is a helll of a lot of it going on. And Ross McEwan rweally is a pretty good CEO. Knows the bank inside-out.

            The government have also insisted that banks ring-fence their retail side from their investment side so that, next time a bailout is needed, the government have the option of bailing out just the retail side to protect the public while leaving the investment arms to suffer the consequnces of their own mistakes -- smoethign which they literally could not do in 08 because retail and investment were all rolled up as one corporate entity. I suppose they might use that option or mgith not, but they'll have it. Seems reasonable to me.

            Another thing that is happening is... well, think of it as the writing of an instruction m,anual for the bank. Another observation the government made was thast, if bank A goes insovent and hands over all its assets to bank B, that's all very well, bank A has survived the weekend, but how do the people at bank B know how to run bank A which they suddenly own? In 08, they would have had to wing it. If it happens in the future, they'll have documentation of all the necessary procedures handed to them with the assets so that bank A not only remains solvent but also remains properly operational. Again, good plan. Pretty rare to see such a sensible common-sense bit of regulation.

            As Tim says, it's amazing that poltiicians have got so much of this stuff right. But, on this occasion, they really habve. Weird.

          3. Tom 13

            Re: Nothing, but the mob don't like to hear that

            Maybe in Ole Blighty, but not on this side of the pond. The banks were making mortgages they knew couldn't be repaid. They knew this because their analysis software told them so. They did it, because if they didn't the bank regulator were going to hit them with totally bogus redlining charges and inhibit their ability to operate.

            Knowing they had bad loans on the books and that they COULD lose their shirts if the shareholders found out, they went looking for a way to get rid of it. The solution they came up with was MBSs. Slice up the bad loans, mix them with good loans, and they're no longer bad loans, they're mostly good loans. Which would have been okay except they overvalued the mostly good loans. Also, as the first adopters were making money hand over fist, there were subsequent waves of businesses who took it up. The end result was MBSs that weren't even mostly good loans.

            So criminality all the way around.

        5. fajensen

          Re: And the Perpetrators

          Because being venal, stupid, lax, greedy, incompetent, misguided and plain flat out wrong simply aren't crimes.

          Perhaps - but, I do believe that Fraud, Money Laundering, Tax Evasion and Funding Terrorists is at least frowned upon by "society"; it's certainly a crime when I do it!

        6. Tom 13

          Re: What was there being done that was actually criminal?

          Underwriting loans they KNEW couldn't be repaid.

          Granted, they were doing so under threat of law from crooks in Congress. While Pen was focused on banking management, that doesn't mean politicians shouldn't have been amongst them.

          Moreover, this does point out the biggest flaw in your liberal take on Adam Smith, which both Friedman and Hayek have pointed out: nobody (including groups regardless of certs and/or size) is smart enough to foresee all of the outcomes of any given decision, therefore governments shouldn't mandate charity, no matter how allegedly noble the intentions. Charity must by its very nature be ENTIRELY VOLUNTARY.

          1. Squander Two

            Re: What was there being done that was actually criminal? @ Tom 13

            > Underwriting loans they KNEW couldn't be repaid.

            > Granted, they were doing so under threat of law from crooks in Congress.

            Well, exactly. One can argue that underwriting unrepayable loans is wrong, but you can't claim that it's criminal when the politicians have quite specifically ruled that it is not doing so that is illegal and that you will be prosecuted if you don't do it.

            And, you know, much as I love to blame Congress for this one, ultimately Representatives who saw their white constituents getting mortgages that were denied to their black constituents and tried to redress the balance may have been misguided, may not have understood the long-term implications, but weren't criminal. It wasn't a diabolical scheme to bring about a recession. It was a mistake. The road to hell is paved with good intentions, and, the more I understand about the Crunch, the more I see good intentions at every stage of the clusterfuck.

            But the public don't like that. Something bad happened: it can only be a crime. So we must punish the criminals. Even if we can't point to a single law that was broken. Punish them anyway.

            My view is that anyone who's joined the banking industry since 2008 is obviously not to blame for the Crunch and has a right to claim to be part of the team who are trying to clear the mess up. The public don't see it that way. If you were still at school doing A-levels in 2008, graduated from university in 2012, and now have your first entry-level job in the City, the public believe you are an EVIL BANKER who they can and will blame for the Recession and for whom they will demand collective punishment for your "crimes". That alone makes it perfectly clear what the "crime" in question is: it's having the wrong job.

            1. david 12 Silver badge

              Re: What was there being done that was actually criminal? @ Tom 13

              >may have been misguided, may not have understood the long-term implications, but weren't crimina

              Criminally stupid? The reason that Aus didn't get caught in this trap is that it got in early. Deregulation, and low-start loans to people who couldn't afford them, in the hope and expectation that the rising tide of the economy would pull them out of debt.

              But Aus had the good fortune to make those two mistakes consecutively, not simultanously. .Small number of legit loans to people who couldn't afford them, small number of dishonest loans to people they could con money out of.

              The USA had that example right in front! They could see what happened with deregulation! They could see what happened with low-start loans! So they went ahead and made both mistakes, and at the same time! They got large numbers of dishonest loans to people with no money!

              That's not just ignorant. That's not just stupid.

              1. Squander Two

                Re: What was there being done that was actually criminal? @ Tom 13

                Hey, you want to make the argument US Congresspeople should be punished for this, I'm not fighting. But they are not the "criminals" most of the public want punished.

      2. Nick Leaton

        Re: And the Perpetrators

        Because it was also a regulatory problem. The regulator sets the ratio.

        Now ask why the state would leave off 9,200 bn from its debts, the pensions?

        Yep, because MPs, any MPs would be dangling from the lampposts.

      3. william 10

        Re: And the Perpetrators

        You make the assumption that the Banks and there Employees where the only ones to Blame for the failures. In truth the politicians where just as much to Blame (if not more so) as the Bankers that failed in there duty to the electorate.

        In the US, despite all the evidence of fraud in the subprime mortgage market, the US Congress manipulated the rules under which Freddie mac & Fannie May effectively participated in this fraud.

        In the UK, the government of the day change the Bank borrowing rules that then forced the banks if they wanted to stay in business to borrow ever larger volumes of money and participate in every more risky ventures. If the borrowing rules where not changed then the British banks that failed like Northern Rock or Bradford and Bingley or Nation Wide would not have happened.

        Also if the UK government would have insisted the regulators did they Job, the PIP scandal would have been spotted earlier and never been the issue it became.

        1. peter_dtm

          Re: And the Perpetrators @william 10

          and let's be sure we know WHO was to blame for the changes in the law (laws put in place following the 1920's crash - to explicitly stop what happened from happening )

          In the US President Clinton

          In the UK Blair (& Brown)

          I'm sure Tim can remind us all which law it was that Clinton had removed (Shannon Act ??) whilest insisting Fredie & Fannie leant to high risk borrowers (the 'poisonous' mortgages that infected the whole system - even now); and that great economic giant Blair & Brown matching the insanity this side of the pond - boom & bust indeed.

          The greedy capitalist bankers aided; abbetted; encouraged and coerced by the 'great' socialist leaders

          1. Tom 13

            Re: sure we know WHO was to blame for the changes

            Not quite. Part of the problem here, and part of the reason why the pols were all so eager to bail out the banks is that almost all parties had their hands dirty. The retraction of the laws started under Daddy Bush. Granted, I don't think his changes alone would have broken the system, but they opened the door for Clinton to claim he was just extending what had already been done. I would certainly agree that Clinton's minions at Fannie and Freddie greased the skids for the downfall.

        2. Tom 13

          Re: In the US, despite all the evidence of fraud

          In the US, it was the politicians who mandated the fraud. And a long time before it became manifest to the point that even W was begging Barney Frank to tighten the regs. Never forget Barney's reply: "I think I want to roll the dice on this a little longer."

      4. Fibbles

        Re: And the Perpetrators

        Remember Admiral Byng

        Byng did the best he could in a difficult situation. I'm not sure that applies to those in the city.

      5. Anonymous Coward
        Anonymous Coward

        Re: And the Perpetrators

        there's a Byng Street, five mins walk away from the Citi / HSBC / etc offices in Canary Wharf. It's the "wrong side of the tracks" though - so no-one walks past on their way to / from work, no-one to say "who he" ...

      6. DaveDaveDave

        Re: And the Perpetrators

        Basically, because the idea that we should is thinly-veiled antisemitic propaganda, based on old blood-libels updated to the modern day, with 'bankers' in place of 'Jews'. Most people know that at some kind of subconscious level, and it explains both the fervent support of those like you, calling for lynch mobs, and the reluctance normal people feel to have anything to do with your hatred.

    2. Gordon 10

      Re: And the Perpetrators

      a fair comment. That ain't really economics though. People tend to focus more on the bailout and less on the proper apportionment of responsibility though.

      If people and media had been less hesterical about the size of the bailouts and more focussed on ensuring those who made dubious business decision were held to account we might have had a once in a lifetime opportunity to stop the sort of executive weaselling that we have seemed to imported from the states.

      Note however that weaselling behaviour is in part cultural not economic it's got so the consequences of weaseling out of something is nearly always lesser than the consequences of taking responsibly for your actions.

      Until the media and the public are willing to admit people can make genuine mistakes and forgive them for it the situation is not going to change.

      Personally I blame Clinton he underlined the rot. Contrast that with Paddy PantsAshdown who admitted an affair and his popularity went up.

      Until we have lower tolerance for weaseling and higher tolerance for those making a mistake and admitting it nothing is going to change. We have the worst of both worlds at the moment, maximum weaseling and maximum hysteria from the press and public.

  2. Doctor Syntax Silver badge

    Maybe another reason?

    If we make the banks small-enough-to-fail we don't have to bail them out for the damage a failure could do to the overall system. But if such a bank does fail then it takes the deposits of its savers with it. From a saver's point of view any bank is too big to fail.

    So if I'm a saver then I might consider keeping my cash under the mattress instead of putting it in a bank. I might also draw out my salary or pension as soon as it's paid in - look, no float. Neither response is good for the economy as a whole.

    This can be handled in two ways, first a deposit guarantee scheme, which is to some extent a bail-out mechanism, or far more draconian regulation. And while the latter might sound a good idea it does seem liable to an out of control regulator trying to micro-manage everything and everyone.

    1. Tim Worstal

      Re: Maybe another reason?

      We have the deposit insurance. Up to €100k, part of being in the EU. Similar in the US. And the banks (and thus us, the depositors) do get charged for this at about market rates. The bank levy isn't charged upon deposis that are covered by this scheme either: it's made very clear the difference.

    2. Anonymous Coward
      Anonymous Coward

      Re: Maybe another reason?

      "So if I'm a saver then I might consider keeping my cash under the mattress instead of putting it in a bank. I might also draw out my salary or pension as soon as it's paid in - look, no float. Neither response is good for the economy as a whole."

      Inflation means cash loses value over time. That's why nations consider it prudent to have some small but controlled rate of inflation to encourage people to put the money into the system. Cash in the mattress doesn't flow, and economic flow (money moving from person to person) is the lifeblood of the economy. That's why liquidity is important: liquid assets can move quickly.

      1. Eddy Ito

        Re: Maybe another reason?

        Inflation means cash loses value over time. That's why nations consider it prudent to have some small but controlled rate of inflation to encourage people to put the money into the system.

        True but currently, given the bank rates are hardly keeping up with inflation, it doesn't seem people would put much of their money in banks which would then lend it out. Instead they turn to other markets such as bonds, stocks, etc. which are much less liquid. Yes I understand the liquidity returns on the other side of the transaction since if I buy $1000 worth of stocks or bonds someone else has $1000 in liquid currency but that doesn't seem to get many mortgages granted.

      2. This post has been deleted by its author

      3. Doctor Syntax Silver badge

        Re: Maybe another reason?

        "Inflation means cash loses value over time."

        Indeed it does. But if people are concerned that they could lose the entire deposit they'd prefer to lose some of the value. In fact at today's interest rates bank deposits are losing value.

        Or to look at it another way, if someone you'd never met emailed you from Nigeria to offer you 10x bank interest rates would you lend him money?

        1. Tom 13

          Re: In fact at today's interest rates bank deposits are losing value.

          Regardless of the interest rate paid to savers, deposits never kept pace with interest rates. I do recall back in the Carter days my mother signing up for the outrageously high interest rate of 13%. Of course at the time inflation was running around 17%. When it matured we were barely able to roll it over into one at 8%, with inflation running around 10%.

    3. The Axe

      Re: Maybe another reason?

      Don't mix up the bank failing due to insolvency against failing due to lack of liquidity. Banks have failed due to the later, you can get your money, just not right now.

    4. Diogenes

      Re: Maybe another reason?

      I suggest you look up the history of the late 1920s bank crashes in Europe. A smallish bank fell over, that started runs on other banks, which in turn crashed, which caused more runs .... until banks in the US, South America and Australia started falling over.

    5. david 12 Silver badge

      Re: Maybe another reason?

      >If we make the banks small-enough-to-fail we don't have to bail them out

      >for the damage a failure could do to the overall system.

      This was not the first failure of the American banking system. See (just one example), the "savings and loans crisis". In which the sector was to big to fail. Which is what you get if the sector is made up of a 1000 failing banks, or if the same sector is made up of 3 failing banks.

      The banking system is a public utility like water or roads. In Aus, left-side governments started banks because they thought that public utilities should be in public hands. Then left-side governements ran their banks (eg State Bank of Victoria) into failure, and they had to be bailed out.

      Simple ideas like Government owned banks, or more-smaller-banks, have already been tried. Whatever their advantages, they have been proven to be not solutions to the public-utility-requiring-bailout problem.

      1. codejunky Silver badge

        Re: Maybe another reason?

        "Simple ideas like Government owned banks"

        Banking requires capitalism to be worth doing. Governments are generally incapable of capitalism because it doesnt buy votes.

        1. Anonymous Coward
          Anonymous Coward

          Re: Maybe another reason?

          Governments are generally incapable of capitalism because it doesnt buy votes

          Government do not really care about votes, it's a diversion. Politicians are primarily elected by their party, NOT by the electorate, it's an aberration when someone gets in ahead of the fix. If anyone challenge the party with an opinion, they get whipped into place. The party apparatus is where the power is and actual politics is determined. The parties are not up for election - which is good for stability in the sense that we can elect a new government and get less than 2% variation in the governments priorities. Business likes that.

          For the politicians themselves, the pay & bennies are the same either way, as the opposition or the government. The reason they still want to govern is that there is more graft possible on the government side, but, the really juicy bits are sucked up by the "Sir Humphrey"'s inside the central administration.

    6. Richard Conto

      Re: Maybe another reason?

      Ideally, if the bank is small enough to fail, government (in the US, FDIC) deposit insurance will protect the depositors from loosing their money (although they may loose access to it for a period) and the bank can be either wound down or taken over by another bank. The shareholders get nothing - and with luck, the bank management gets banned from the industry. The system (as a whole) hist a speed bump, but keeps on going.

      But "Too Big To Fail" banks claim that without the knowledge in the heads of the banksters and the existing relationships, the bank will collapse bringing down the national (or world) economy, and so the banksters have to be left in place because only they can understand the horrible mess they've gotten things into.

      I don't pay enough attention to what's happening in the UK (and the EU) as far as "Too Big to Fail" banks, but here in the US, there doesn't seem to be any effective effort to reduce the size of these banks or the consequences when they suffer mass delusions of competency - if anything quite the reverse.

      What's more, the disease of "Financial Experts" is bringing many state and local governments down as the consequences of decisions made a decade or so ago when Wall Street banksters convinced the political parties that unregulated government insurance (backing) was better than regulated government insurance (backing) when certain new financial instruments (scams) were developed.

      1. Anonymous Coward
        Anonymous Coward

        Re: Maybe another reason?

        > But "Too Big To Fail" banks claim that without the knowledge in the heads of the banksters and the existing relationships, the bank will collapse bringing down the national (or world) economy, and so the banksters have to be left in place because only they can understand the horrible mess they've gotten things into.

        > I don't pay enough attention to what's happening in the UK (and the EU) as far as "Too Big to Fail" banks

        See my comment here for how this is actually being addressed.

  3. Frenchie Lad

    Longer Term Impact

    You mentioned that the central bank can and does print money to cover the liquidity issue. Fine, but if it does and the value of the overall economy doesn't go up (it can't as these loans are only to cover a technical issue) we're consequently left with more money in the system which should trigger inflation. What surprises me is that with these bailouts and QE, inflation hasn't raised its head. Is there something fundamental going on?

    1. Gordon 10

      Re: Longer Term Impact

      That's a good question for Tim. Why hasn't QE driven inflation?

      1. Tim Worstal

        Re: Longer Term Impact

        The proper answer is that it has. Without it we'd have had deflation, we haven't, it's worked. But let me come back to this as a full piece in a couple of weeks.

        1. Nick Kew
          Flame

          Re: Longer Term Impact

          Money printing has driven inflation. Lots of it.

          But not - directly at least - QE. QE was in fact driving inflation that had already happened (but was masked in silly, irrelevant price indexes by the rise of cheap Chinese goods). The real inflation was seen in house prices in the big bubble of about 2000-2005, which did the real damage, robbing the future to enrich the already-rich (house owners). The banks lending money that will never be repaid created a gaping hole, which QE then plugged.

          The late, great, Terry Pratchett explained the whole system beautifully, though only in passing. He called it the Pork Futures Warehouse. And that was long before the crash!

          Some of us who saw the bust coming actually took the trouble to find out about saver protection. I even forewent Icesave's market-beating interest in 2005/6 in favour of something on lower interest but protected, for which of course I was duly penalised.

          As for bailouts, THEY SHOULD NOT HAVE HAPPENED. Depositor protection (including emergency measures to feed cash machines) would've cost a whole lot less. More than half a decade on, we should've seen the rise of new alternatives to traditional banks, yet they're limited to small niches by bloated zombies standing in the way of innovation. Bailouts are a negation of all that's good about capitalism! And of course they have knock-on effects:

          - a long-term massive deficit placing a deadweight on the future

          - interest rates detached from reality

          - the rise of a zombie economy

          - underwriting leverage on and income from land and housing, financially privileging rentierism over productive investment. Even (by some reports) prostituting Prime London to the global super-rich as an asset class like gold that never leaves the bank vault.

          - trashing of pensions for anyone not already retired but within maybe 25 years (from the bailouts) of it. And its corollory: the zombification of of many companies with the misfortune to have been running final-salary schemes.

          1. Anonymous Coward
            Anonymous Coward

            Re: Longer Term Impact

            "Depositor protection (including emergency measures to feed cash machines) would've cost a whole lot less."

            REALLY? How about putting up some numbers to back up this assumption, not to mention the potential economic knock-on impacts of a domino effect if a "too big to fail" bank really did fall over, taking everyone's deposits with them (including those above the protection limit as well as those of small businesses that likely wouldn't be protected).

            1. Preston Munchensonton
              Boffin

              Re: Longer Term Impact

              REALLY? How about putting up some numbers to back up this assumption, not to mention the potential economic knock-on impacts of a domino effect if a "too big to fail" bank really did fall over, taking everyone's deposits with them (including those above the protection limit as well as those of small businesses that likely wouldn't be protected).

              I can't speak for any impact in the EU or UK, but in the US the bailout total that we know about was $700B (i.e. the TARP program). If every person in the US had a bank account claim of $100K, the sum total of insurance payout by the FDIC would have been about $300B. And I think it's safe to assume that the numbers would have been far fewer than that.

              1. Charles 9

                Re: Longer Term Impact

                Your math's off.

                A population of 300 million (3.0x10^8) drawing $100K each (1.0x10^5) would result in a debt load of 30 TRILLION (3.0x10^13). In case this doesn't sink in, that's greater than the US Sovereign debt to date and well over 1/3 of all unfunded US obligations for the forseeable future.

                1. Tom 13

                  Re: Your math's off.

                  His math's good. You didn't take into account statistics. No way in hell I'd collect on the $100K for a bank failure. Hell, I'm barely a blip on that market even now when I've actually built up a small amount of buffer. Maybe 10K tops. Statistics tell me I'm above median for my salary (US, not region), and again above median for my savings. Even my roommate/landlord who probably falls into top 5% by salary and again for savings might collect about half that $100K. His money is all in the house and retirement plans.

          2. Doctor Syntax Silver badge

            Re: Longer Term Impact

            "the zombification of of many companies with the misfortune to have been running final-salary schemes"

            Gordon Brown had done a lot of damage to final-salary and private pension schemes way before this. I reckon the pension companies could and should have raised the profile of this: every year when they sent out projections they could have added another projection - what the pension would have been without the tax raid.

            1. Anonymous Coward
              Anonymous Coward

              Re: Longer Term Impact

              And before Gordon Brown did his thing, a substantial number of the CBI's finest businesses had decided to stop paying into the pension kitty for a number of years, in what was laughably called a "pension holiday". After all, that money belongs to the shareholders, not the workers.

              Leading light behind those bright ideas was a bloke who at the time was called Digby Jones.

              He's still around, now Baron Jones of Birmingham.

              While he was Minister for Trade and Investment, the Telegraph described him as "the walking personification of the spirit of big business at its corporatist worst". And they'd certainly know, both by virtue of their readers and their owners.

              1. Chris Miller

                Pensions holidays

                A lot of companies were required by HMRC to take pensions holidays, because the taxman thought that businesses were reducing their tax liability by overpaying into the funds.

      2. LucreLout

        Re: Longer Term Impact@Gordon

        Why hasn't QE driven inflation?

        It has, just not supermarket price inflation. Look at asset prices, such as art or supercars. For years before QE you could buy a Ferrari 308 for around 10-15k. Now they're around 40k, and were never a sought after classic. We've got 5 year old Porsche's selling second hand for more than they cost new (GT3), with the market having reached bargepole territory. There's your QE driven inflation right there.

    2. Tim Worstal

      Re: Longer Term Impact

      In the provision of liquidity two things:

      1) The amounts provided aren't the sort of amounts that would impact upon future inflation. Just not economically significant at that level. It's that the central bank can, theoretically, print any amount that is important (and one eurozone problem is that the central banks cannot, only the ECB can). Further, when the liquidity crisis is over, the banks hand the cash back, reclaim their security and the central bank cancels the new money. So, no permanent increase in money supply.

      2) QE is a bit different. M4 is the money supply that matters for inflation reasons. This includes all bank credit created by the banks. There's usually a decent link to M1 (base money or cash) and M2 (M1 plus central bank deposits by banks) and that connection is V, the velocity of the circulation of money. Normally reasonably static is V. But it drops horribly in a recession brought on by financial panic or crash. So, QE creates vast new amounts of M1 and or M2, but it doesn't make all that much difference to M4. Or, rather, given that V has fallen, it stops M4 shrinking and us then getting deflation. And this is why to do QE rather than anything else. Because it's reversible (at least in theory). So, as V rises to more normal levels we can draw that M1 back out of the system (by selling off the bonds bought with it) and cancel it thus preventing V's rise from setting off a massive boom in M4 and inflation.

      All of that's not quite right in proper technical terms but it's a reasonable trot through the logic of it all.

      An awful lot of people don't like QE but has been a remarkably successful policy. UK and US would have been more like Spain and Portugal (but not as bad as Greece) without it.

    3. Tom 7

      Re: Longer Term Impact

      The reason why we haven't had inflation is because the money did not end up in the economy - if merely filled a hole the banks had made. None of it has 'trickled down' - it never does.

  4. Anonymous Coward
    Anonymous Coward

    Fractional reserve

    I have often wondered why the fractional reserve percentage is so low. Yes, I know that by having a very low percentage it means the banks have more money available to lend out but I would think a reserve of about 50% would be a better proposition from the point of view of those of us 'lending' our hard earned to them.

    Another thing, what would be the effect of removing the speculation sections from the banking sections and making them separate companies? Would this reduce the risk of the bank going bust?

    1. Tim Worstal

      Re: Fractional reserve

      50% is way too high. 6, 7% is enough. People jsut don't turn up demanding all their cash that often.

      Speculation? This is the "ring fencing" that everyone is talking about. Can't use retail deposit money to finance investment banking.

      1. Tom 7

        Re: Fractional reserve

        Whatever fractional reserve you have above the natural level of growth (historically 2%Pa for several hundred years - its really hard to tell of late) you add a positive feedback loop which leads to instability unless you match it with inflation. If the finance sector grows faster than the economy as a whole it becomes parasitical rather than potentially beneficial.

      2. Yet Another Anonymous coward Silver badge

        Re: Fractional reserve

        because if you ring fence 7% then your competitor ring fences 6%, makes a profit on the 1% and undercuts you. So you ring fence 5%, and they ring fence 4% ........

        1. Anonymous Coward
          Anonymous Coward

          Re: Fractional reserve

          "if you ring fence 7% then your competitor ring fences 6%"

          To which the very obvious and initially very reasonable sounding answer is: regulate, to ensure a fair safe and level playing field, and do it properly.

          Unfortunately for Joe Public:

          a) regulators have a long standing tendency to be insiders whereas what's often needed is an outsider who can cut through the BS

          b) the regulated community often has a tendency to misdirect the regulator. In the case of the "investment" banks and their complex financial derivatives, look at stuff like hypothecation, re-hypothecation, and so on, where the same asset can be counted several times. Imagine if you used your house as the security for five separate 100% mortgages. That's re-hypothecation (it isn't, but it's close enough).

    2. Nick Leaton

      Re: Fractional reserve

      The regulator got it wrong.

    3. Tom 13

      Re: Fractional reserve

      I wouldn't go 50%, but I would go 10%. It's the minimum you should be able to pay on any item for which you want to take a loan.

      There is a caveat, which is that the reserve requirement is the ultra-big, ultra-crude lever the Fed (or its EU equivalent on your side of the pond) uses to manage the money flow.

  5. Duncan Macdonald

    Make directors bear losses

    If a bank needs to be bailed out (insolvency not insufficient liquid cash) then the directors should be required to forfeit all their income from the bank over the previous 5 years (salary, bonuses, stock options, pension contributions etc). Making this change to the banking laws would make them far more careful about getting into the positions that could make a bank fail.

    1. Anonymous Coward
      Anonymous Coward

      Re: Make directors bear losses

      The directors of Megacorp are personally and individually responsible for the corporate successes of Megacorp, that's why they get their personal Megabonuses.

      And exactly the same logic says that the directors of Megacorp are also personally and individually responsible for the corporate failures of Megacorp, which is why they should either accept that personal responsibility and pay the price, or not be eligible for Megabonuses. Fair's fair, right?

      Applies outside banking too.

    2. LucreLout

      Re: Make directors bear losses

      Making this change to the banking laws would make them far more careful about getting into the positions that could make a bank fail.

      You're assuming a level of competency on the part of the directors that may not exist.

      However, clawbacks seem a reasonable way to share out the pain, alongside the bond and equity holders. I'd suggest going further than 5 years though - for stock options you really need to go back 10, and its those that make the senior staffers the real money.

    3. Tom 13

      Re: Make directors bear losses

      Meh. If the bank failed I think that's sufficient proof of such complete incompetency that the protection of the corporate veil should be pierced. Make them liable to the full extent of any assets they own whether or not connected to their stint at the bank. I'm assuming you're including corporate officers in "directors"; if not, them too.

  6. captain veg Silver badge

    gosh

    Interesting and informative article, non-dogmatic, even implicitly acknowledging that capitalism is not some natural state of being but a (remarkably successful) human construct that can, and should, be regulated to produce desirable outcomes. Tim, I salute you. More like this, please.

    -A.

    1. Jason Bloomberg Silver badge
      Paris Hilton

      Re: gosh

      But it could have been cut down to a succinct -

      "So why the hell do we bail banks out?"

      "Because these banks are systematically important".

      1. Chris Miller
        Headmaster

        Re: gosh

        I think you man "systemically".

        (Blame autocorrect - I always do.)

  7. Nick Leaton

    Lehmans

    Lehman Brothers was insolvent (probably, it had huge losses on some California real estate deals) as well as being illiquid

    ========

    Wrong. On Liquidation, the value obtained exceeded the liabilities. It was illiquid

    1. Tim Worstal

      Re: Lehmans

      UK Lehmann, yes, illiquid not insolvent. But US? Not so sure.....

    2. Nick Kew

      Re: Lehmans

      On liquidation, the "value" was based on lots of assets that should have been written down to (or near) zero but for QE. Same applies to other bank balance sheets.

      Tim, an idea for another article. Debunk the orthodoxy about Lehmans being the cause of the big crash. It was of course not the cause of anything (except perhaps Barclays picking up some assets on the cheap): rather it was an effect of the credit bubble.

      And more widely, how bailouts starting with Northern Rock led to precisely the outcome they were supposed to prevent.

  8. OzBob

    While of course they needed to be bailed out

    the way they sat on the proceeds from government rather than trading their way out was pretty cynical. personally I would have advanced them 3 months worth of float, and then released further monies monthly depending on how much extra they had loaned out. Instead I saw shopkeepers loading their credit cards up (at interest north of 20%) because they could not get credit elsewhere.

    1. codejunky Silver badge

      Re: While of course they needed to be bailed out

      I like how banks were blamed for being quick to hand out the money leading to the crash. Yet expected to throw the money out of the windows once the crash had occurred. Damned if they do, damned if they dont

    2. I ain't Spartacus Gold badge

      Re: While of course they needed to be bailed out

      OzBob,

      One of the problems of banking/capitalism that Tim doesn't cover in this article is that banks are pro-cyclical.

      This means that instead of countering booms and busts, they inflate the booms and worsen the busts. So during the height of the boom, when they should be saying "oh dear this is looking too bubbly, let's wind our necks in and borrow less" - they actually lend more - as that house is bound to keep going up in value for the next ten years...

      Then the bust comes. And now they won't lend to anyone unless they can prove they don't actually need the money, however good their business plan or credit is. They get all cautious, having just had their fingers burnt in the preceeding boom. So they shrink their balance sheets in order to become more solvent, but this reduces the money supply, and the credit avaiable to the economy to pay for growth and investment.

      Regulation often makes this worse. Because the regulators are under political pressure to rein the banks in. And so during this recession our governments were making banks expand their fractional reserves (to make them more liquid) and raise more capital (to make them more solvent). This was for good and understandable reasons. There's an argument to say that they should have told the banks that they needed to have these larger capital buffers by about 2015, but were allowed to run less safely before that. But it would be pretty politically indefensible, and took a risk - that's pretty much what the Eurozone did - they stuck their heads in the sand, then had to bail out Greece to the tune of nearly €300 billion in order to save the German and French banks who'd recklessly lent to them. They also then implemented the bailout incompetently, fucked up the Greek economy in the process, and are now blaming the Greeks for their own (and Greece's too) massive clusterfuck, such that the Greeks can't pay, the banks are off the hook and the governments have put themselves in the firing line.

      Anyway an example of counter-cyclical measures would be unemployment (and some other) benefits. Because these are paid out automatically, the government will pay out more of them as joblessness increases, and pay falls, during a recession. These are called automatic stabilisers. The government now spends loads more during recessions, something that didn't happen in the 30s, and this helps to keep the economy from cratering - and makes the recessions shorter and less painful.

      There's an idea to make banking regulation counter-cyclical. So that in the boom times, they'll have to maintain a higher fractional reserve or capital adequacy ratio. Thus meaning they can't lend as much, and stoke the bubbles as hard. Then when the recession comes, the pressure will be released somewhat, in the hopes they'll now be more willing to lend, having sustained smaller losses from the collapse of the boom, and having more money on hand. In a big scary recession like the recent one, that probably wouldn't work. But it might have made the 1990-91 recession a lot less steep, for example.

      1. codejunky Silver badge

        Re: While of course they needed to be bailed out

        @ I ain't Spartacus

        I like your comments on the banks being pro-cyclical but I dont think its a bank issue, its a private sector issue. During a boom people and businesses (including banks) go nuts and buy houses/equipment/services they cant afford, and in a bust they pay back the money they borrowed or default.

        I wonder if the recession would be less painful if people had some financial sense instead of the crazy over-consumer problem we do have. I start the blame with politicians and education but lack of financial planning means that it isnt just the poor that suffer and need welfare support but the self made poor also.

        When I look at the desire and desperation for credit I do worry sometimes as the people using it are often the ones to add to the problem.

  9. Crumble

    If interest rates drop any lower it'll be cheaper for us to keep our savings under the mattress rather than put them in a bank. Won't that make the whole system collapse? Will we need laws to prevent people hoarding cash?

    1. Nick Kew

      'twas another nail in the coffin of money as a store of value.

      Though to be fair, that's nothing new. Debasement of the coin was an important factor in the decline and fall of the Roman Empire, to take just one example.

  10. Anonymous Coward
    Anonymous Coward

    Wrong question

    Your'e asking the wrong questions.

    (1) Why does banking regulation allow banks to gamble with their assets?

    (2) Why are banks allowed to charge you £20 for going 1p overdrawn for one day, and pay you no interest for investing/looking after your money in a current account for an entire year?

    (3) Why could banks offer a 3.5% 25-year fixed rate mortgage in the 1950s, but today, are allowed to "draw you in" to a mortgage with a lowish interest rate, and then raise the rate at their whim?

    (4) Why does capitalism's "competition" not produce ONE bank which offers fixed fair rates?

    1. Tim Worstal

      Re: Wrong question

      Fixed rate loans have never been a feature of the British market. In the US, only exist because of Freddie and Fannie. 25 year fixed rate just isn't something an unadorned market will provide. Waaaay too much risk in it for the lender.

      1. captain veg Silver badge

        Re: Wrong question

        Fixed rate home loans are pretty much the only kind in France. The market certainly doesn't have any appetite for anything else. Any idea why that might be?

        -A.

        1. Tim Worstal

          Re: Wrong question

          About a third of new French morgages are variable rate. About 0.5% (with current rates this low, that's a lot) cheaper.

          I was a bit too strict above. A free market will provide fixed rate, it'll just be more expensive than variable rate. Someone, somewhere, has to take the risk of rates changing in general and if it's the bank they'll charge more.

          1. Chris Miller

            @Tim

            A commercial fixed rate mortgage has to include horrendous penalties for early repayment. Otherwise it becomes a one-way bet - if rates rise, the borrower is quids in; if rates fall, they can just refinance. I don't know how the FNMA and FHLMC manage this problem.

            [I suspect you're completely aware of this, Tim - I just thought I should spell it out.]

      2. Nick Kew

        Re: Wrong question

        How do Freddie and Fannie differ from today's government mortgage support schemes in the UK?

    2. Steve Knox

      Re: Wrong question

      (1) Why does banking regulation allow banks to gamble with their assets?

      Because an economy where assets do not move is a dead economy. Banks lending those assets moves them around. ANYTHING you do with an asset is a gamble. Banks' gambles are generally less risky than other options (except when they stupidly believe some shysters who claim to have found a magical formula to remove the risk from sub-par mortgage loans, for example.)

      (2) Why are banks allowed to charge you £20 for going 1p overdrawn for one day, and pay you no interest for investing/looking after your money in a current account for an entire year?

      Because you've deposited into a crappy account at a crappy bank. If you're not getting any interest in your money, put it somewhere else, and that bank will have to change its policies or fail. If your account has no short-term overdraft allowances, then, again you've got a crappy account at a crappy bank. It's your responsibility as a depositor to seek out the best place for your money, and what you just described isn't it.

      (3) Why could banks offer a 3.5% 25-year fixed rate mortgage in the 1950s, but today, are allowed to "draw you in" to a mortgage with a lowish interest rate, and then raise the rate at their whim?

      Because the nature of the real estate market has changed. In the '50s, real estate was considered almost exclusively a long-term investment. Nowadays, there are people and industries who buy properties with the full intent of either reselling or refinancing within 5 years or less. Those adjustable rate mortgages were designed for those people and industries. But people in general don't read the fine print, so a lot of people with no intent to resell or refinance have made the mistake of getting a loan that doesn't fit their borrowing goals.

      (4) Why does capitalism's "competition" not produce ONE bank which offers fixed fair rates?

      Because "fair" is subjective, and your definition of "fair" doesn't match that number at which the banking market has arrived. Some of that is certainly due to inefficiencies in the market, but how much depends on your definition of "fair".

      1. Anonymous Coward
        Anonymous Coward

        Re: Wrong question

        "ANYTHING you do with an asset is a gamble. Banks' gambles are generally less risky than other options."

        I presume you're not aware of those banks who are prohibited from gambling? And equally you are presumably not aware of those banks who are prohibited from charging interest on loans?

        I'll leave other contributors to work out what I'm talking about.

      2. codejunky Silver badge

        Re: Wrong question

        @ Steve Knox

        Just want to say I have no idea how you got down votes for that comment. Well said

    3. Tom 13

      Re: Wrong question

      1) It's not gambling, it's a risk. There's an important difference between the two, and why my earlier Barney Frank quote is so damning. Anybody who doesn't know the difference should never be allowed near the regulatory mechanisms for banking.

      2) Because the cost associated with the deposit account probably equal the interest earned on the float, whereas the other is a loan and your failure to pay indicates an increased risk of default. If you are going to actually default, the bank needs to know sooner rather than later. The quicker they can either take you to court to recover their money or write off the loss if that is the case the sooner they can return to profitability.

      3) Because the 1950s were a magic time in America. Pretty much everybody else had been bombed to hell and back and we were the only ones with any sort of industrial capacity. That has changed, as it should have.

      4) Because the socialists have all decided it's too important to have a banking system that won't fail, so the banks aren't actually a capitalist construct, their a socialist one masquerading as a capitalist one. For the socialists this is a win-win. Their policies always fail so they always get to rail against the capitalists when it is actually their policies which are at fault. You can think of it as a boot stomping on your face - forever.

  11. Lars Silver badge
    Happy

    Glass-Steagall Act

    Some points about the Glass-Steagall Act by you Tim Worstall.

    Are Europen banks as damned unregulated as in the "wild west".

    https://www.youtube.com/watch?v=nTWfa-iO9Nc

  12. FelixReg

    100 identical banks are, together, too big to fail

    Break up the huge banks. To the extent that the resultant little banks share environments, they'll flock.

    So instead of 1 big bank tanking, 100 little banks go off the cliff together.

    They all share their regulated environment, for starters. And, given the nature of money, more than that part of their environments are shared.

    Isn't this what was true in '07? Seems like they all had to make liar loans, for instance.

  13. Anonymous Coward
    Anonymous Coward

    The moment they introduced paper money (and non-paper) as there is no accountability it was destined to go tits up, should have stuck to gold coins...

    1. Anonymous Coward
      Anonymous Coward

      should have stuck to gold coins

      Assuming for a microsecond you are serious, explain to me the merits of a system where the size of the economy suddenly increases when someone finds gold in a hole in the ground.

      An expanding economy needs an expanding money supply; gold only works if the available gold matches the size of the economy. Charlemagne had to use silver currency and start rewarding his followers with land because there wasn't enough gold (partly due to Europe being isolated by Islam). A gold economy is simply unworkable in a modern society, and was already pretty unworkable in the medieval era. If California and South Africa hadn't come along, the end of the gold standard could have come a lot earlier.

      1. Anonymous Coward
        Anonymous Coward

        Re: should have stuck to gold coins

        That and the global economy meant there were a lot more influencing factors. There's a reason it's called a "hard" economy: it's too rigid, unable to react and flex to changes. That's one main reason countries switched to "fiat" economies.

  14. Uncle Slacky Silver badge
    Stop

    Why not nationalise all the banks?

    Surely such a vital element of the economy shouldn't be in private hands, in much the same way as other things that people rely on, like health care and public utilities?

    1. Anonymous Coward
      Anonymous Coward

      Re: Why not nationalise all the banks?

      People would counter the public sector can't hope to be as efficient in any given industry. And banking requires flexibility because economies can change: sometimes quite suddenly. Anyway, the banking world today is mixed: private companies doing most of the moves with state-run banks providing the backstop.

    2. Tim Worstal

      Re: Why not nationalise all the banks?

      You've noted that most of the public utilities are in fact in private hands? In the UK they most certainly are.....

      1. Uncle Slacky Silver badge

        Re: Why not nationalise all the banks?

        Indeed they are, but they shouldn't be. It always makes me laugh when I hear UK govt ministers claiming that they will lower utility bills, as if they have influence over them whatsoever.

      2. Will 28

        Re: Why not nationalise all the banks?

        This in fact goes to one of my very central questions about government. We keep being told that our public sector can be privatised in order to benefit from industry efficiency / productivity.

        Most of us hear this and think - "can't you just get it right as a public company?".

        Tim, I ask you a very simple question, why can't a public sector company compete?

        1. Anonymous Coward
          Anonymous Coward

          Re: Why not nationalise all the banks?

          Public companies simply have different pressures placed upon them. Private companies generally have one chief thing motivating them: turn a profit, or failing that break even. Any company that can't go in the black eventually runs out of capital and has to fold, so there's a natural pressure to perform. Public companies have government backing, so worse comes to worse, the government can allocate funds as needed to keep things running. Plus, being the linchpin of a country, government institutions tend to have an innate (perhaps "macroeconomic") momentum; adding something to the government is a lot easier than taking something out. You can also see this sometimes in apex private companies: ones that have managed to secure a dominant position in their given industry. Once you're at the top, you can take it easy a bit, and those with the ability to do so start to pull strings and try to establish sycophantic bureaucracies (what we'd call "corruption").

          Perhaps I'm missing a thing or two, but this should serve as a "nutshell" explanation for the idea of private-sector efficiency.

          1. Chris Miller

            Re: Why not nationalise all the banks?

            There are four ways in which you can spend money.

            You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.

            Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the present, but I’m very careful about the cost.

            Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!

            Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

            Milton Friedman (1912-2006)

        2. Tim Worstal

          Re: Why not nationalise all the banks?

          It is, in theory, possible for a public sector company to be as efficient (and even, in theory, more) as a private sector one. That isn't, generally, how it works out though.

          I've always rather liked the left wing argument about why British Leyland etc failed. Because the management was crap. Well, OK, so I'm not sure I believe that but let's accept it. That means that you're saying that public sector companies end up with crap management. Which could be one reason why they don't do so well.

          Another argument often heard is that public sector companies are able to take optimal, not merely profitable, decisions. An example often given was that there's public benefits, public goods, from water and sewage supply. Thus government should run them because only government would provide the larger, optimal, level of investment rather than merely the profitable one.

          Which is OK as an argument. Except reality: when the water companies were privatised the investment rate went way, waaaay, up. Because under government control they'd been deliberately underinvesting in order to keep public borrowing down.

          But the real argument is that public sector companies are going to be run by politics and politicians. The concerns of politics and politicians don't notably include efficiency. Making sure that my political friends get their share (whether Tories with capitalists or Labour with unions etc) comes rather higher up (err, lower down?) that Maslow's Pyramid for a politician. So, public companies are run for political reasons, not efficiency reasons.

          Please do note that this entirely allows such political running of companies to be "better" if that's the way you want to describe it. Fairer, more democratic, whatever. It's just that they're most unlikely to be as efficient given that efficiency isn't the driving concern in how they're run.

          There's also an entirely different line of argument. Which is that a monopoly, whether private or public, will be equally inefficient. That it's competition that drives efficiency. And there's no point at all in turning a public monopoly into a private one (and if you do you're going to have to be very careful indeed with regulation, like water, a natural monopoly for an area, or the Grid). Here the argument isn't that the private monopoly will work better, but that if you've got a public company "competing" in a market then the competition is at a disadvantage simply because they don't have that state support. Thus you want to chuck everyone into the private sector so that you do in fact have proper competition.

          TL:DR version: public companies could compete but practical experience tells us they don't.

          1. Anonymous Coward
            Anonymous Coward

            Re: Why not nationalise all the banks?

            "public companies could compete but practical experience tells us they don't"

            Girobank competed so well while in the public sector that it had to be shifted from public sector to private, where it could be discreetly shut down without fuss. Fancy that.

          2. dogged

            Re: Why not nationalise all the banks?

            I'm shocked at the number of (semi)-public French companies running British utilities. Trains, the Severn crossings, etc...

            It's like it's ALWAYS better for private industry to run things than the public sector unless the public sector in question is somebody else's.

            1. Anonymous Coward
              Anonymous Coward

              Re: Why not nationalise all the banks?

              " the number of (semi)-public French companies running British utilities. Trains, the Severn crossings, etc... It's like it's ALWAYS better for private industry to run things than the public sector unless the public sector in question is somebody else's."

              Close but no cigar.

              It's always better for there to be an opportunity for the City to earn megafees.

              There are fewer (but not zero) opportunities for the City to earn megafees from pure-public-sector operations in the UK.

              Privatisations and arms length and so on offer loads of opportunities for megafees, and who cares about the bigger picture. So, sell the family silver and everything else too, so long as there's a decent cut for the middlemen and advisors.

            2. Tim Worstal

              Re: Why not nationalise all the banks?

              "It's like it's ALWAYS better for private industry to run things than the public sector unless the public sector in question is somebody else's."

              Well, yes, that fits quite neatly into my explanation. The French politicians couldn't give a rat's arse about the British unions, capitalists, politics, voters and so on. Because none of them have any influence over whether a French politician gets elected or not. So, a state run company from outside the polity under discussion might well be able to run a company on efficiency lines.

              The end result of this is that the French should run the British trains and the Brits the French ones. Odd, but a logical end stage of the argument.....

              1. dogged

                Re: Why not nationalise all the banks?

                Given the state of the M48 bridge, their efficiency lines are about on a par with those of local councils who can't be arsed to fix potholes.

                Mind you, it is possible to force their hand...

          3. Anonymous Coward
            Anonymous Coward

            Re: Why not nationalise all the banks?

            "There's also an entirely different line of argument. Which is that a monopoly, whether private or public, will be equally inefficient. That it's competition that drives efficiency. And there's no point at all in turning a public monopoly into a private one (and if you do you're going to have to be very careful indeed with regulation, like water, a natural monopoly for an area, or the Grid). Here the argument isn't that the private monopoly will work better, but that if you've got a public company "competing" in a market then the competition is at a disadvantage simply because they don't have that state support. Thus you want to chuck everyone into the private sector so that you do in fact have proper competition."

            Well, a natural monopoly is the way it is because the market will tolerate EXACTLY ONE entrant. They'll tolerate what would otherwise be eyesore or NIMBY elements as necessary evils if it's coming from ONE necessary source. But once you have MORE than one, then the eyesores become points of contention. Utilities are a prime example of natural monopolies. Utilities carry with them lots of nasty infrastructure as a necessity of their line of work (water pipes, power poles, etc.), and a competitor would need to install their own infrastructure to match, creating the NIMBY issues I mentioned.

            1. Tom 13

              Re: Why not nationalise all the banks?

              Natural monopolies live in peace with their unicorn neighbors right next door to the Yeti.

              1. Charles 9

                Re: Why not nationalise all the banks?

                So how do you live with two competing utilities without having two competing sets of infrastructure (since the utility will also own the infrastructure as a matter of control)? Note that most industries with high upfront but low marginal costs trend naturally toward monopolies simply because this structure always favors the incumbent who's already gotten past the high barrier of entry.

        3. codejunky Silver badge

          Re: Why not nationalise all the banks?

          @ Will 28

          "why can't a public sector company compete?"

          I think they can and they should. For example private pension companies have been having a wonderful time fleecing people with higher charges and the government has responded with NEST. It is a public pension scheme which sticks to low cost index trackers and so should cause the private market to either offer something for the money or to reduce their charges.

          The problem with public sector companies is they tend to be monopolies and public or private a monopoly sucks. People complain about privatising the various utilities but the home phone industry exists thanks to privatisation. We now have service and choice! A private monopoly can abuse its position to take money off people for shareholders/directors/etc. A public monopoly forces people to pay it through increased government mandated stealing (tax) while having no requirement to be any good. Neither are good but the public sector is also supposed to be the regulator as well as the provider. Which wastes tax money and becomes unaccountable.

      3. Tom 13

        Re: most of the public utilities are in fact in private hands?

        No they're not. They're mostly in that limbo between government run and private. This limbo tends to combine the worst elements of both with the benefits of neither. But sloppy thinking people who are out to help the poor tend to like this arrangement. It makes them feel good.

  15. crayon

    Wrong Answer

    "Banks' gambles are generally less risky than other options"

    Not when they take the assets of their retail division to fund the speculation of their gambling division (euphemistically called "investment"). Once upon a time banking was free and banks made an honest living by lending money. Now you get charged for the privilege of putting money into a bank and for the bank to gamble your money on speculative "investments".

    "And banking requires flexibility because economies can change"

    Flexibility such as the ability to game interest rates and currency exchange rates, offer tax evasion services, and whatever other criminal activities banks have been found guilty of that I have missed.

    "Speculation? This is the "ring fencing" that everyone is talking about. Can't use retail deposit money to finance investment banking."

    The only way to stop it is a complete separation of retail banking to any other type of banking. The so called ring fencing will only last until the greedy bastards find a way around it.

  16. Whiznot

    The Great American Ponzi Economy doesn't work without larcenous investment bankers flogging vast quantities of phony paper. Real GDP is very small so politicians need the help of colluding banksters who generate paper income in the form of a bubble. The irony is that the more money the banksters steal the healthier the economy appears before the inevitable crash.

  17. phil dude
    Pint

    bank of dave?

    anyone else see the documentary of a guy called Dave trying to make his own bank?

    Looks like a stitch up.

    P.

    1. dogged

      Re: bank of dave?

      http://www.channel4.com/programmes/bank-of-dave

  18. bollos
    FAIL

    it's gambling.

    they say "managing risk", but it's *gambling*. we gave something like £320 BILLION of tax payers money to bail out failed gamblers in the city of london. they should have not got one penny of our money. now we have zombie dinosaur banks shuffling along, propped up by tax payers money when they should have gone extinct already and allowed fresh new well run institutions to take their place. this is evolution!!

    1. silent_count

      Re: it's gambling.

      I occasionally wondered about just that. What's to stop the CEO of a 'too big to fail' bank from going to the casino and betting the bank's float on 23 red? If it works, the CEO made a masterful investment and gets a bonus. If it loses, the bank gets a government bail-out (and the CEO probably gets a bonus anyhow for their skills in negotiating with the government).

      Heads I win. Tails you lose.

      1. fajensen

        Re: it's gambling.

        Not A Single Thing - Just look at some ISDA statistics, the nominal amount of the worlds over-the-counter derivatives (= unregulated junk) just increased during the bailouts meaning that the fu.. er banks were just printing more of the garbage, now that they had the ECB to sell it to!

  19. bollos
    FAIL

    reserve lending.

    the problem we have had with fractional reserve lending is that they have NOT kept to their side of the equation, bbbbbecause *they are gamblers*! the theory is, that 10% of loans go bad, so you need to keep 10% of your loan book *as liquid assets* (i.e. cash), in case of problems. too often it is the case that these piggy bankers have dipped their grubby little trotters into this reserve and gambled with that as well. sooooo when any call comes on this reserve and it's not there, bingo, liquidity problem. these banks should not be bailed out, they should be allowed to go bust and the insolvency process allowed to pick over the bones and sell off anything decent to new investors. the ONE THING banks have to do is manage risk, if they can't even do that then they have failed in their primary function and should fail and be replaced.

    1. SImon Hobson Bronze badge

      Re: reserve lending.

      > the theory is, that 10% of loans go bad, so you need to keep 10% of your loan book *as liquid assets*

      I don't think you get the difference between liquidity and profitability.

      If 10% of your loans go bad, then you need to charge roughly) 11% more for a loan than you pay for your borrowing. Ie, the 90% of loans that don't go bad, have to finance the 100% of your borrowing.

      That is simple profit and loss.

      Liquidity is something different - as explained in the article.

      Bank borrows a chunk of cash from it's depositors - ranging from *very* short term (ie I get paid at the end of the month and I don't (quite) spent it all at once), through short (say 90 day notice accounts), and medium (various 2, 3,5 year deals). They lend that to some bloke called bollos as a mortgage - for (say) 25 years. Lets assume bollos is a good chap and pays back the mortgage in full - no losses there. But, if the people who lent their money to the bank all want it back quickly - then the bank can'/t repay it there and then. Not because of any bad debts - but simply because they've loaned it out for a longer timescale.

      If the depositors wait, then they can all get paid back as bollos pays off his mortgage - and after 25 years they'll all have been paid back in full.

      Much the same applies to businesses. There is profit and loss, and there's cashflow.

      Put simply, if you sell stuff for more than it costs to buy in/make it plus the costs of paying staff, R&D, rent, etc - then you make a profit. If you sell more, then you make more profit.

      But if (say) your customer only pays you 3 months after you have to buy stuff in, and your supplier insists on being paid in 1 month, then you have a funding gap - your cash has to go out before it comes in. So you need some cash reserves - and the more you sell, the worse that becomes.

      As an aside, regardless of profitability - most businesses fail on cashflow. Some fail while being healthily profitable, and with good order books.

  20. amanfromMars 1 Silver badge

    Knowledge is power and can be extremely dangerous. Take care, y'all

    You said it, Tim …… It's capitalism, stupid! You screw up then you lose everything although it is/is it so stupid in smarter capitalism whenever you screw up someone/anyone else loses everything? It is certainly perverse surely and very corrupting.

    And this is a short video which all who have reached this far you might like view to get a deer understanding and firmer handle on the reality of their position in a greater scheme of things ……. The Federal Reserve Explained In 7 Minutes

    And all central banks mirror and acts as does the Federal Reserve.

    1. Anonymous Coward
      Anonymous Coward

      Re: Knowledge is power and can be extremely dangerous. Take care, y'all

      But with a bank, it's not just the bank that loses it. Don't forget the depositors. Unless you're saying they can lose everything through no fault of their own (since it's hard for the average person to notice if a bank is failing until it's already over the event horizon). And before you mention deposit insurance, don't forget small businesses who likely wouldn't be protected as well as those with decent-sized retirement savings over the cap. Plus there's the matter of just who pays to bail out the depositors (the government, meaning taxes or the like) since the bank has no more hide to scalp. Remember, there IS such a thing as the Domino Effect. The American Great Depression started pretty much with one little thing that snowballed, and it took World War II to get America out again. If history repeats, given the scales today, human civilization as we know it might not survive an encore.

  21. Anonymous Coward
    Anonymous Coward

    A good read

    But I think the why can be explained more succinctly in terms of what would have happened if all the failing banks had simply been allowed to fail. I don't think that would have been pretty. The system failed, yet we were mostly allowed to simply get on with our lives regardless.

    1. Tom 13

      Re: I don't think that would have been pretty.

      I don't either. But it would have been prettier than what will happen when if finally all comes falling down. Because it will eventually all come falling down. Bailing them out last time with very little impact on anyone including 95% of the people who caused the mess pretty much guarantees they'll do it all over again. Indeed, we seem to be well on our way with a US stock market bubble that already exceeds the housing bubble.

  22. G Mac

    So many wrong ideas to make it sound we can do nothing

    Wow. Rolling out the Loanable Funds Theory, eh? A real Upton Sinclair effort there.

    This has been shown by the various money measures to be be complete ass backwards. Banks make loans, and if they don't have enough reserves they borrow, first from other banks (ah, the Libor), then from the Central Bank. They make money of the spread from the loan to what they borrow.

    Next, when a bank is illiquid, "Bagehot's Dictum" is supposed to apply - lend freely against good collateral at penalty interest rates. What was done for the GFC was the only the first part.

    Next, apart from a few minor lackeys, no high ranking officials and their ilk have won an orange jumpsuit have paid the price for the GFC, even though scandals of Libor rigging, FX rigging, mortgage fraud, asset mismanagement, etc. have had billions (that is with a B) been paid in fines. Immaculate crimes.

    Compare with with the S&L crisis from the late 1980's where over a 1000 folks got prison time (try Charles Keating for a start).

    So no, none of this has to be. You can handle illiquid banks, but make sure the incentives kick (like charging high interest) to dissuade bad behaviour.

    Then, for crimes, actually send folks to prison. Versus say Eric Holder saying that following up crimes at large banks may have an economic impact. Um, no, again ass backwards.

    But articles like this make it sound like we are main street is impotent. It is not, but we have to hold politicians feet to the fire to get this rolling.

    1. Anonymous Coward
      Anonymous Coward

      Re: So many wrong ideas to make it sound we can do nothing

      "Then, for crimes, actually send folks to prison. Versus say Eric Holder saying that following up crimes at large banks may have an economic impact. Um, no, again ass backwards."

      The bank executives learned from the S&L crisis. They always keep themselves (make themselves appear to be) one stage removed from what would be considered the actual decision-making. IOW, they set up a web of plausible deniability and reasonable doubt to turn the law against you. Then one lies, the rest of them swear by it, and the accountants cooked the books long ago.

    2. Tim Worstal

      Re: So many wrong ideas to make it sound we can do nothing

      Well, yes, except in the S&L thing real crimes were committed. You know, stealin' 'n'stuff.

  23. ecofeco Silver badge

    Fraud, extortion and the right connections

    ^^ Cause>Threat>Trump card.

    That's why we bailed out the banks. All else is smoke, mirrors and crack pipe smoking.

    The US and British financial industry literally brought us to the brink of WW3 and the repercussions are still far from assured or safely assumed.

    1. ecofeco Silver badge

      Re: Fraud, extortion and the right connections

      Thumbs down? Not letting facts get in your way I see.

      http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104

  24. PleebSmash
    Trollface

    @every comment

    Say that to Worstall's face, in London.

  25. xperroni
    Devil

    But uncle Tim, I want to hear them pigs squeak!

    OK, I see why we'd shore up an institution that would create too much collateral damage if it just crumbled.

    What I don't get is why the people who oversaw such disasters can get off without so much as a slap in the wrist. Hell, some of them get bonuses!

    So long as the banks get our money, can we get their executives to return the favour by doing a little dancing number over at that traditional floor, Ye Olde Gallows? Thank you.

    1. Anonymous Coward
      Anonymous Coward

      Re: But uncle Tim, I want to hear them pigs squeak!

      Two words: plausible deniability. They can reasonably say this was no fault of their own and they were just triaging, thus they were performing their duty and earned their bonuses, and there's really no way to prove beyond a reasonable doubt they were in on it.

      1. ecofeco Silver badge

        Re: But uncle Tim, I want to hear them pigs squeak!

        There is plenty of proof of premeditation and it's right at your fingertips, but they really were/are to big to jail and there is also no shortage of sleazy sycophants apologizing for them.

        Start here http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104 and read the entire series by Matt Taibbi.

    2. I ain't Spartacus Gold badge

      Re: But uncle Tim, I want to hear them pigs squeak!

      In one sense, the people who oversaw it all did get scalped. We loaned the banks central bank cash, against assets, and that kept them liquid. We also then decided that they needed even more money, to keep them solvent, and we gave them that. And took shares in return. So the government diluted the shares of the existing shareholders, in exchange for re-capitalising the banks. And that means that the people who were ultimately supposed to supervise the boards of directors did get scalped. The shareholders.

      Of course shareholder democracy seems to have broken down (if it ever worked properly at all). But it's still the shareholders who own the company, and so are taking the risk on their investment. In the case of RBOS, the government now owns 70%, leaving only 30% of the company they used to own to the original shareholders.

      A way to claw back bonuses, and to structure bonus incentives better, would also be good. But it's notoriously hard to do.

      1. Doctor Syntax Silver badge

        Re: But uncle Tim, I want to hear them pigs squeak!

        "A way to claw back bonuses, and to structure bonus incentives better, would also be good. But it's notoriously hard to do."

        Just thinking out loud but...

        Say we have a special share class that is used for share options. The only way to exercise such options is to buy this class of share. When the govt takes new shares for a bailout more shares of this class get issued but the proportion of dividends allocated to such shares doesn't get expanded in proportion so it's only the share option holders who get their shareholdings diluted and devalued. Could this have any traction?

        1. Tim Worstal

          Re: But uncle Tim, I want to hear them pigs squeak!

          I can't recall which bank did this (maybe Credit Suisse?) but a bloody good idea. When bonus time came around everyone's bonuses were paid in those securitised mortgage loans that had fucked up big time.

          Did rather concentrate minds.....

          1. Anonymous Coward
            Anonymous Coward

            Re: But uncle Tim, I want to hear them pigs squeak!

            But it would only work if EVERY bank was forced into it, probably by regulation. Otherwise, a competitor would make an offer to an executive of unrestricted options and steal heads. Look, while the proles hate all the golden parachutes, these parachutes are usually the only things keeping executives in the company and not jumping ship to the competition. High-level executives tend to live in a seller's market meaning they can pick and choose.

  26. RLWatkins

    distinction between a bank and an investment bank

    Here in the US "banks" were, up to a time, required to keep their depository institution functions separate from their investment banking functions. The depository stuff is pretty low risk. The investment stuff is pretty high risk. We had to bail these banks out for the reasons you cite because the two got mixed: they were doing investment banking with depositors' funds. If they'd stayed separate we'd have been able to allow the investment banking to fail, as it should have done given the stupid risks they were taking, while the depositors remained in the clear.

    1. Tom 13

      Re: distinction between a bank and an investment bank

      No, the banks in the US failed because they made to many bad home loans. That's why the focus on Freddie, Fannie, and what's their name who no longer exist out west and whose "assetts" are now polluting all the remaining banks.

      1. Anonymous Coward
        Anonymous Coward

        Re: distinction between a bank and an investment bank

        " the banks in the US failed because they made to many bad home loans. "

        So the world of non-transparent complex financial derivatives and the people profiting from creating and selling them wasn't involved at all?

        Dream on.

        Too many bad home loans was indeed A Bad Idea but would have been ultimately recoverable.

        Packaging these bad loans up into tradable financial products in strange ways and pretending that doing so made the well understood risks go away, despite all the arithmetical and logical evidence suggesting otherwise, and then selling these non-transparent products so widely across the banking sector that every bank thought every other bank was at risk? That's what made it end so badly.

      2. Anonymous Coward
        Anonymous Coward

        Re: distinction between a bank and an investment bank

        " the banks in the US failed because they made to many bad home loans."

        No. the banks fraudulently sold junk bonds, and gave out loans knowing they couldn't be repaid.

  27. Anonymous Coward
    Anonymous Coward

    Houses are consumer goods.

    Remember? They really are. They are not savings vehicles nor are they investments for anyone but landlords. They are not even investments for farmers. For a farmer, a house is just another item he is obliged to carry on the expense side of his ledger. You might well enjoy living in a house of your own, but please do not be deluded into thinking that the money you have borrowed against it is a guaranteed investment that you can live in for a while.

    Back when I was in high school, we were taught tp put at least half our savings into a house. So, we did. Then we all began retiring at about the same time and look what happened to the price of real estate and the banks that had loaned money out for the purchase of houses. What we did during the sixties and the seventies all but guaranteed the tragedy of 2008.

    Bailing out the banks is not a solution. It is the underlying problem that needs to be fixed and so far, on one knows how to do that. Look at what is happening to Greece. The United States is in no better shape than Greece is. The only difference is that Greece is tiny and we are huge. The Greeks are now going broke because they borrowed a trillion dollars to build a bridge across the Gulf of Corinth. We are going broke because we tried to bear the defence load for the whole of the West while paying out for exorbitantly expensive social welfare programs. The United States is now in debt to the tune of $114 trillion; and our debt is growing at a very rapid pace. Our Congress refuses to make real spending cuts. They insist on keeping the United States government as large and as intrusive as it is now. I cannot hold out any hope for anyone that matters will change. You are all well advised to standby for an unexampled crash.

    1. fajensen

      Re: Houses are consumer goods.

      The United States is now in debt to the tune of $114 trillion;

      You are assuming that this has to be paid back?

      The world does not really work that way - sovereign defaults were quite normal up till 1980's or so when it suddenly became "bad form" to soak the creditors.

      Eventually the US is going to go for the straight default or some way of printing itself out of the whole, soaking the holders of US securities. When you know that you will run away from the bill, then it is perfectly rational to run the bill as high as possible - all those USD are buying real things; and the flood of money is even pushing up prices so the Chinese and other competitors have to work harder to get the USD they need to pay for their stuff.

      The US is not going broke because of the debt, one cannot go broke when one does not have to pay what one owes; the problem in the US is that the economy cannot grow fast enough to support the looting and fraud perpetrated by the CEO's - similar to what happened to the USSR; The ruling elite sets itself up to loots the hell out of the country, after a while the looting is perfected and all value is instantly vacuumed up and squirrelled away in secret accounts, the economy dies. Partly because there is no surplus capital to invest with, partly because everyone stops participating in the sucker game and use vodka, favours or cash for exchanges.

      1. Charles 9

        Re: Houses are consumer goods.

        "Eventually the US is going to go for the straight default or some way of printing itself out of the whole, soaking the holders of US securities."

        The government is forbidden from doing that, as the Fourteenth Amendment specifically states. "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

  28. S4qFBxkFFg

    @Tim

    As an alternative to bail-outs, how about making it illegal for a limited liability company to hold a banking licence?

    It would certainly increase the scrutiny of management by shareholders, although I'd consider the main benefit to be the comedy value of bank share prices occasionally going negative. (Are the exchanges even set up to do that?)

    edit:

    Also, "ATM machines". Don't do that.

    1. Tim Worstal

      Re: @Tim

      Well, without limited liability there'd be no shareholders. Everyone would be a partner (there is actually one bank still without limited liability. But it's necessarily small sa it can't get capital from hundreds of thousands of people). Investment banks, up to the 1980s, were in fact such partnerships. Goldman still was until, umm, late 90s, mid 00s?

      Without said limited bit having a stake in a bank would be like being a Lloyds name in the 70s and 80s. And people have learnt that lesson, unlimited liability when it's not actually you running the risks.....

  29. jdoe.700101

    Automatic nationalisation for TBTF

    Why don't governments declare that any bank deemed to big to fail will be automatically nationalised without compensation to the shareholders? That would seem to concentrate senior management and wake up the institutional shareholders. After all who really cares about unvested bonuses, when you already own a couple of houses, cars, and have cashed in multiple previous bonuses.

    1. Anonymous Coward
      Anonymous Coward

      Re: Automatic nationalisation for TBTF

      Except such a law would NEVER pass the legislatures. Banks are a powerful lobby, recall. Plus there will be cries of SOCIALISM and ROBBING FUTURES since, recall, many large shareholders are in fact market funds and the like who are pooling the resources of many individual investors. There's just too much risk of knock-on effects. Besides, the people in charge of the banks are likely to be able to pull off tricks to liquidate their assets before any kind of nationalization occurred. Being the insiders, they can move faster than the government can.

  30. Anonymous Coward
    Anonymous Coward

    Has that assumption been tested?

    Thank you for your article. I take it to be a description of the thought process and "received knowledge" of mainstream economists rather than axiomatic truths.

    However, there is something that still bothers me, and is the "too big to fail" argument.

    I remember very well when in the weeks before the American's latest (at t he time) "what could possibly go wrong if we invade this country" moment back in 2003, everyone was so worried about the expected oil supply disruption, and back then the "conventional wisdom" was that oil prices above $50 would basically spell the end of the world. A couple years later it shot up to over $100 and we're still hear, bitching about how $60-ish a barrel is too low.

    So next time we argue that X is too big to (be allowed to) fail, why don't we just put the theory to the test? Be nice, and probably beneficial in the long term, if as a society we could become a little bit less risk averse than we've turned to in the last half century. While not a big fan of him, I think I'd rather have a Churchill than a Chamberlain (I'd probably still have a Chamberlain over a Cameron, mind).

  31. Anonymous Coward
    Anonymous Coward

    so, what to do if you think a crash is around the corner?

    Sell the house?

    Buy gold? Or soap or whatever?

    1. Tom 13

      Re: so, what to do if you think a crash is around the corner?

      Productive land is always a solid investment. Especially if its also got a decent water source. Also, invest in precious metals (gold, silver, lead) and non-hybrid seeds. Sheep and chickens would probably also be in order. Not so sure on cows unless you've got a big family. Maybe a couple of goats and a few pigs.

      Well, that's a start at least.

      1. Anonymous Coward
        Anonymous Coward

        Re: so, what to do if you think a crash is around the corner?

        Especially if its also got a decent water source

        "They" have fracking to take care of that!

  32. Anonymous Coward
    Anonymous Coward

    Money creation in the modern economy

    "which is about picking up the stuff being saved by some portion of the population and moving it over to where it can be invested in what some other sector would like to consume"

    This is kind of a primary schools pupil's understanding of a Bank. And while the author of this article identified and analysed the flaws and necessities that need to be solved in our current economic system very well, he shows a complete lack of knowledge in even the most basic banking frameworks today. Hence, the conclusions are completely meaningless.

    This can not be corrected in a post, but if somebody wants to inform oneself rather than just picking up buzz words for a pub argument, I recommend the following search terms: "Money creation in the modern economy", "Money supply (M0, M1, ...)","Credit money" (also debt theories of money).

    Here an interesting factoid from the text books that should help to keep thinking in the right direction: If a person would to repay it's loan in one go, that money is then not in the banks vaults, but effectively no where (removed from the economy as the text book calls it, destroyed as a normal person would say).

    1. Anonymous Coward
      Anonymous Coward

      Re: Money creation in the modern economy

      "Here an interesting factoid from the text books that should help to keep thinking in the right direction: If a person would to repay it's loan in one go, that money is then not in the banks vaults, but effectively no where (removed from the economy as the text book calls it, destroyed as a normal person would say)."

      Not necessarily. The removed encumbrance means the bank is more liquid. That's why they don't mind too much if you pay off your loan. It means they have the freedom to dole out a new loan to take its place.

      1. Anonymous Coward
        Anonymous Coward

        Re: Money creation in the modern economy

        Not necessarily. The removed encumbrance means the bank is more liquid.

        Maybe.

        Or Maybe the dumb-as-a-sack-of-broken-hammers-bastards made bonds out of my debt and sold them to someone, probably another branch of themselves, to fix an artificially high asset price that they could then leverage 150:1 by placing it as collateral for a loan to themselves?

        That would explain why my former bank was so pissed that I suddenly paid off a 20 kEUR loan, they where gouging me at 16% p/a for, that they closed all my accounts, cancelled my cards, login ... and didn't bother to send me an analogue letter in the mail either. I had to call customer service!!

        1. Anonymous Coward
          Anonymous Coward

          Re: Money creation in the modern economy

          "That would explain why my former bank was so pissed that I suddenly paid off a 20 kEUR loan, they where gouging me at 16% p/a for, that they closed all my accounts, cancelled my cards, login ... and didn't bother to send me an analogue letter in the mail either. I had to call customer service!!"

          And what happened to the money IN those accounts? They usually can't just close an account without your permission since it's YOUR money in there (otherwise, you could file a legal action to reclaim the money).

          1. Anonymous Coward
            Anonymous Coward

            Re: Money creation in the modern economy

            They sent a check for the account balance. *Just* the check. I was like "Eh? - wtf is that?!, "huh? - cant login???". At least I managed to fix the bills before the direct debits started to bounce and generate penalties. Now, I don't use direct debit. I pay "manually". Less risk.

    2. Anonymous Coward
      Anonymous Coward

      Re: Money creation in the modern economy

      "if somebody wants to inform oneself rather than just picking up buzz words for a pub argument, I recommend the following search terms: "Money creation in the modern economy", "Money supply (M0, M1, ...)","Credit money" (also debt theories of money)."

      Or find out the origin of the following quote, which is probably four decades old, and read around it a bit:

      “The process by which banks create money is so simple the mind is repelled.”

  33. Bogle

    No running in the hall

    Probably a dumb question based on a mis-reading of the article but couldn't we (her Maj's government) have allowed RBS to go bankrupt and *then* stepped in to buy them out at a much more reasonable, and realistic, price? If the point of the bailout is to stop a run on the bank couldn't we have still prevented the run by being quick with the bankruptcy / buy-out announcements?

    1. amanfromMars 1 Silver badge

      Oh dear, what a shame .... not!

      Probably a dumb question based on a mis-reading of the article but couldn't we (her Maj's government) have allowed RBS to go bankrupt and *then* stepped in to buy them out at a much more reasonable, and realistic, price? If the point of the bailout is to stop a run on the bank couldn't we have still prevented the run by being quick with the bankruptcy / buy-out announcements? .... Bogle

      Hmmm, yes, quite so, Bogle ...... but that would only be to the majority advantage if governments and banking weren't into the forming of a conspiracy against equitable systems of man management and the creation of private profit from public toil.

      You have to get over the notion that governments are primarily there for the people whenever they are there to better self server themselves at the expense of the people, although that does rely on the system being kept in pig ignorance of the shenanigans floated by dodgy administrations, and that luxury is fast disappearing and proving systemically problematic to attack or defend oneself against.

  34. J.G.Harston Silver badge

    I don't have your money, it's in Bob's house, and Bill's house!

    (Grabs pitchfork)

    EVERYBODY TO BOB'S HOUSE!!!!

  35. Justthefacts Silver badge
    WTF?

    P2P lending

    Zopa & Ratesetter perform maturity conversion, by allowing the loans to be tradeable between lenders. Given that P2P lending performs exactly the same function as TBTF banks, surely governments should also underwrite / bail-out P2P lenders? Why does the bailout argument only apply when Classic Big Banks stand to lose money, and not when P2P lenders stand to lose?

    Alternatively, for such a strategic national interest that taxpayer must subsidise it by 300bn every couple of business-cycles, why couldn't UKGov just run a nationally-owned online P2P lender?

    P2P achieves much lower market friction than classic banks, so this should actually make free-marketeers very happy 5% saver rates, 5.5% individual borrower, 7.5% business borrower, what's not to like. Surely not that "free-marketeers" are actually special pleading on behalf of large banks with an entitlement culture, and explicitly against efficient capital deployment to businesses that are free to make a profit or fail.

    1. fajensen

      Re: P2P lending

      "Market Friction" is what pays for the free whores & blow offered at those exclusive resorts where the decision makers are invited to seminars on "How deregulation and Zero enforcement is Good for YOU^H^H Society"!

  36. Jim 59

    Because London would never allow its local industry to go into decline.

  37. Anonymous Coward
    Anonymous Coward

    Another week, another set of billion-dollar fines. Banking as usual.

    So here we are again, this week various countries are fining (criminal fines not civil penalties) various global financial institutions billions of dollars/pounds each (ie a couple of days turnover). This time it's for a foreign exchange cartel, if I've understood right.

    And as usual, managers are only responsible when things go right and they deserve a megabonus, not when things go wrong and they deserve (you choose).

    No wonder the big banks see little reason to trade honestly and fairly, when any penalty they do occasionally pick up can and will be passed straight through to their paying customers.

    Banks behave badly, banks eventually get found out (not by regulators or auditors but by internal whistleblower in this case), banks get criminal convictions, banks have their wrist gently slapped, banks (and bank management) continue to do business largely the same way as before

    Market forces don't seem to be working out quite right here. Not for the non-banksters anyway (and that includes any banks that are for some reason trying to play an honest game and hoping for a level playing field).

    http://www.bbc.co.uk/news/business-32817114

    http://www.wsj.com/articles/global-banks-to-pay-5-6-billion-in-penalties-in-fx-libor-probe-1432130400

    Highlight: The possibility of five large banks pleading guilty to criminal charges in a single day—including the largest and third-largest U.S. banks by assets, J.P. Morgan and Citigroup—would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business. But other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations. The five banks said they expected little disruption to business.

    1. Anonymous Coward
      Anonymous Coward

      Re: Another week, another set of billion-dollar fines. Banking as usual.

      "Highlight: The possibility of five large banks pleading guilty to criminal charges in a single day—including the largest and third-largest U.S. banks by assets, J.P. Morgan and Citigroup—would have been unthinkable only a few years ago, when executives warned the fallout from such a move would be disastrous to their ability to conduct business. But other large overseas banks have pleaded guilty to criminal charges in the past year, with minimal effects to their operations. The five banks said they expected little disruption to business."

      They were ready for this one, and really $5.6B between the five of them isn't exactly a crushing blow. Plus, like others have said, as a last resort, they'll pressure Washington to comply or they can threaten to pack up. They're more than Too Big to Fail, they're Too Big to Ignore because what happens to Washington's precious tax revenues if some of these big banks with their assets and so on suddenly pull up stakes? It's the same problem with oil companies; how do you deal with a company whose threat to move out and deny you their taxes has a noticeable effect on the balance books?

      1. Anonymous Coward
        Anonymous Coward

        Re: Another week, another set of billion-dollar fines. Banking as usual.

        "how do you deal with a company whose threat to move out and deny you their taxes has a noticeable effect on the balance books?"

        That's real easy.

        Companies are run by people. People like to think they are personally and individually responsible for the success of their company, therefore by the same token they are personally and individually responsible for the failures (and criminal wrongdoings) of their company.

        Their personal and individual megabonuses for 'success' logically mean there must also be significant personal and individual downsides when things go wrong, but somehow that hasn't happened yet.

        If they don't like carrying personal financial risk as well as having a guaranteed megareward even if they fail bigtime, they can be on a flat wage, maybe even a zero hours contract, like they want for the rest of us.

        It's only fair isn't it?

        Watch them clean up their act if that was to happen.

        1. Anonymous Coward
          Anonymous Coward

          Re: Another week, another set of billion-dollar fines. Banking as usual.

          "It's only fair isn't it?

          Watch them clean up their act if that was to happen."

          But the thing is, they have the leverage to cheat the system. Essentially, being a huge multinational corporation and such, they can play countries against each other: try to make them play ball and they'll tempt another country to balk, take their ball, and go there instead.

          Essentially, huge multinationals are global players unto themselves, with only the lack of a standing army keeping them from being basically sovereign powers like they essentially are in Gibson's Sprawl trilogy. They're not too worried about the law because they can influence the law if they have to.

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