The Hollowmen: Leaked ABC Funding Submission
[youtube]http://www.youtube.com/watch?v=yY4r0Co__R8[/youtube]
Banks: utilities or casinos?
I was at a very interesting little conference at the Liberal Club yesterday, on the ‘future of the financial industry’.
The first speaker was Vince Cable, who added his voice to those, like Martin Wolf of the FT and Mohammad El-Erian of Pimco, who say banks should become, or are on their way to becoming, more like utilities than glamorous investment vehicles.
Cable basically suggested a two-tier banking system: some retail banks would be considered crucial to the payment system and the economy, and thus ‘too big to fail’. They would be managed like electricity utilities, with very strict regulation, and owned, he suggested, through some form of public-private partnership, or as mutuals.
Any other financial players would be treated like hedge funds, and ‘would have no claim on tax-payers’ money should they fail’.
Bank of England governor Mervyn King weighed up the pros and cons of a similar model in a speech to a group of bankers on March 16:
“There are good arguments in favour – to separate the utility functions of a retail bank taking household deposits and running the payments system from the casino trading of an investment bank, and good arguments against – the difficulty of maintaining a credible boundary between those institutions that are eligible to receive government support and those that are not.”
Martin Wolf is in favour either of a complete utility model, or of mechanisms to let big banks fail :
The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.
Adair Turner, formerly a senior advisor to Merrill Lynch (before it had to be rescued by the US Treasury) rejected this division of banks into those we let fail and those that don’t, in his recent report. He came out instead in favour of banks putting aside more capital in the good times, to act as a buffer in the bad.
I asked Cable if he thought the government was fudging the essential unfairness of the present system, whereby banks have repeatedly kept the profits and socialised their losses:
“Yes, the government and Turner are turning their face away from the problem. At the moment, the system is obviously unfair. But the government wants to muddle through with it anyway. Turner’s argument is that hedge funds can grow so big that they acquire systematic importance and have to be bailed out.”
This is true – look at the example of Long Term Capital Management, the enormous hedge fund which threatened the stability of Wall Street when it went bust in 1998, because of the emerging market crises, and had to be supported by the Fed.
At the same time, hedge funds were then (and are today) unregulated. They are now going to be much more actively regulated by the FSA and SEC.This could prevent the rapid unsupervised growth of funds like LTCM – the FSA could have the power to intervene, and rein in the organisation’s balance sheet.
It seems to me that banks and hedge funds have enjoyed the largesse of tax-payers for far, far too long. It’s not just 2008: in the last 30 years, they’ve been bailed out during the 1998 crises (via the IMF), during the Latin American debt crisis (via Brady Bonds), and during the Savings and Loans crisis. They chronically over-extend themselves, and then turn to their friends at the Treasury and IMF for a bail-out, while tax-payers – whether in emerging markets or at home – shoulder the cost and the suffering.
Who is the bigger fool – the banks, for repeatedly getting into serious debt problems, or us, for repeatedly giving them the tax-payers’ money to go off and do it again?
Does Karzai read Global Dashboard?
Afghan President Hamid Karzai provoked international outrage with draconian restrictions on women and laws that explicitly sanction marital rape. A leaked copy of the laws obtained by The Times details new strictures for Afghanistan’s Shia minority. Women are banned from leaving the home without permission. A wife has the absolute duty to provide sexual services to her husband, and child marriage is legalised.
Terrible? Without a doubt. But it may also be good electoral politics. In a post in late January I mused on what US-style election consultants would tell Karzai to do:
In the run-up to the election, our consultant might say, having a another go at the international community might not be a bad idea. Kicking out a few human-rights NGOs would be a start and then he could ban driving by women, including by foreign women. In fact, why not ban all alcohol, including for foreigners. A raid on a restaurant frequented by diplomats might make good copy. And, like in Saudi Arabia, why not try to legislate that all women — again including foreigners — must wear headscarves at all times?
It looks like Karzai has done something very similar….
After the summit: what happens now?
I’ve already done a post with some quick reactions to the specifics of the communique, but before I pass out with fatigue, a final reflection on the day.
As summits go, today was a big success, particularly for Gordon Brown. If you thought Obama was warm about Brown’s leadership yesterday, that was nothing compared to some of the language he used in his press conference at the end of the summit – where, incidentally, he charmed the assembled press to the extent that they couldn’t help applauding at the end. ‘Things you seldom see’, as they say.
But at the same time, today was always – of necessity – going to be about fighting the immediate crisis, and trying to prime some kind of immediate-term economic recovery.
What remains so far unaddressed in leaders’ in-trays is a set of longer-term crises – and the need for longer-term recovery – on at least four key underlying issues: climate change; global economic imbalances; the issue of reserve currencies; and the need to head off another oil and food price spike, which could well get underway before the economic downturn is over.
All four of these issues raise big questions about changing the way the global economy works, and the need to ‘manage globalisation’ to make it more resilient, sustainable and equitable. All also involve big questions about power relations between the developed economies, emerging economies and low income economies. And most fundamentally of all, they’re inextricably interrelated with one another.
At the moment, as just about every commission, task-force or high level panel on international reform in recent years has noted, the international system deals with these kinds of issues in a particularly fragmented, ‘stove-piped’, silo-riven fashion.
That’s one reason why more and more of the hardest global issues get escalated to heads’ level, in bodies like the G8 or the G20. But as the track record of the G8 over the last decade demonstrates, heads’ level bodies don’t obviously have the capacity to cope with them. Initiatives and carefully crafted communique language all too often trump far-reaching, genuinely comprehensive action; it’s the old problem of the urgent crowding out the essential. That was the case before the credit crunch – and it’s doubly so now.
Obama the summit veteran
This post from Evening Standard political editor Paul Waugh is a must-read:
Much ink will be spilled tonight and tomorrow about Gordon Brown personally securing various victories in the G20 London summit.
But here’s a fascinating clue to the real power broker. Conducting himself assuredly as if he were a summit veteran rather than a first-timer, Barack Obama appears to have been the crucial player in securing a form of words on the thorny issue of tax havens.
American sources have now revealed that it was the US President who stepped in to knock heads together (in the nicest possible way) to get Sarko and China’s President Hu to come to an agreement.
In the final plenary session with just minutes to go before a deal had to be signed, Sarkozy and Hu were having a heated disagreement about tax havens. France wants urgent action, while China fears a crackdown would hurt banking centers in Macao, Shanghai and Hong Kong.
As they went through a revised draft, the exchange between Sarkozy and Hu got so heated that it was threatening the unity of the G-20 leaders’ meeting.
Sarkozy specifically was pushing for a list from the OECD to be included in the G20 Leaders’ Statement. China, which is not a party to the OECD, opposed any such list being included in the final Leaders’ Statement.
But Mr. Obama stepped between the two men, urging them to try to find consensus, and giving them a “pep talk” about the importance of working together.