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 commentard John Smith 19, and it is, in essence, well, why do we bail out the banks? …

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?

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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

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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.

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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?

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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.

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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.

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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."

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@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.

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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.

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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.

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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.

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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.

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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.

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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?

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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" ...

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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.

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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!

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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.

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ST

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.

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@ 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.

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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.

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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.

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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

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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

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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.

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@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.

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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.

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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?

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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.

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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.

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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.

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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."

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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?

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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.

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Bronze 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.

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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.

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