Sunday, April 7, 2013

Policy success: Bankers carry on unabashed, unscathed and unashamed

In his Guardian column, Nick Cohen documents how since the beginning of the financial crisis bankers have carried on unabashed, unscathed and unashamed.

This is the direct result of the policy choices made by the global policy makers and financial regulators.  Specifically, they adopted the policy of failure containment and its corollary the Geithner Doctrine.

These policies are best expressed as the Japanese Model for handling a bank solvency led financial crisis under which bank book capital levels and banker bonuses are protected at all costs.  Yves Smith phrases it as: do nothing that will harm the profitability or reputation of big and/or politically connected banks.

To the extent that bankers have in fact carried on unabashed, unscathed and unashamed with their bonuses intact, except for a one year dip, the implementation of these policies has been very successful. So one can easily imagine why policy makers and financial regulators are expecting praise for their actions.

Unfortunately, it is the "protected at all costs" part of the Japanese Model that is proving problematic.

The problem is that by protecting banker bonuses, the burden of the excess debt in the financial system was placed on the real economy.  This burden has overwhelmed the real economy as predicted at the beginning of the financial crisis by your humble blogger.

The burden is in fact so large that despite massive fiscal and monetary stimulus the best that has been achieved is a Japan-style economic malaise (also known as on-going economic slump).

Regular readers know that there is in fact an easy way to end this economic malaise without resorting to central banks practicing new forms of money printing.  Simply adopt the Swedish Model and protect the real economy by using the banks as they were designed.

In a modern financial system with deposit guarantees and access to central bank funding, banks are designed to be able to absorb all the losses on the excess public and private debt in the financial system.  Banks can do this because the deposit guarantee effectively makes the taxpayers the banks' silent equity partner when they have low or negative book capital levels.

Of course, using the banks as they are designed results in bank book capital taking a hit, banker bonuses dropping precipitously and a shrinkage in bank consulting opportunities for current policy makers and financial regulators.

For most, that is a small price to pay to protect the real economy and preserve the social contract.  For policy makers and financial regulators, that is a price that to date they are unwilling to pay.

Conservatives, of all people, ought to have been horrified when the state used taxpayers' money to prop up lame-duck banks. Conservatives, who shout the loudest about scroungers living off the taxpayers, ought to have been the most concerned about sponging financiers.... 
In the 21st, honest conservatives might describe the public purse "as a vast source of corporate welfare for the moneyed classes"....
The right's folly lies in its inability to understand that bankers have not been bashed. Indeed, they have barely been slapped. The courts have jailed no one responsible for the crash. Instead of "a never-ending trial for financial war crimes", there have been no trials whatsoever. No one has sought to compensate the taxpayer by confiscating the bonuses taken in the bubble.... 
This palpable injustice allows me to summarise the coalition's failure to convince the public that "we are all in this together" in a paragraph.
The taxpayer injected about £65bn into RBS and HBOS in share capital. Those shares are currently showing a loss of £20bn. The overall cost to taxpayers is incalculably higher because we must now manage in a zombie economy with a crippled banking system that can't send credit to where it's needed. Yet rather than punish those responsible, the coalition has cut their taxes....
The parliamentary commission on banking standards' report on the collapse of HBOS, just published, has many virtues. Its greatest is that parliamentary privilege – a right to free speech Parliament will not extend to the rest of us – allows the commission to speak without authoritarian lawyers and judges blacking out the detail.
The commission's account of how HBOS's pre-tax losses reached £30bn breaks the bankers' mythology....
It was the same line Gordon Brown endlessly parroted. "A crisis that began in America" destroyed the British banking system. If it had not been for sub-prime loans in California and Bush's refusal to bail out Lehmans all would have been well. 
The banking commission, a strange but surprisingly intelligent group of MPs, peers and – only in England! – His Grace the Archbishop of Canterbury, takes the wishful thinking apart with admirable brutality. 
Lord Stevenson and his colleagues' version of events "represents a model of self-delusion", it says. HBOS suffered from a solvency, not a liquidity, crisis.... 
There is a more glaring fault. The banking commission condemns the FSA but, like the Tories and Labour, it will not recommend breaking up the banks by splitting their high street businesses from the investment business. Banks that were too big to fail and had to be bailed out by taxpayers in 2008 are still too big to fail in 2013. 
Grasp this point, and the complaints about "banker bashing" turn from the ridiculous into something more sinister. 
The banking lobby is so unscathed – so unbashed, unbattered and unbruised – it has the muscle to prevent an urgent and necessary reform and can act as if the crisis never happened.

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