economonkey

The trouble with bankers

March 25th, 2008

Usually on this site I write features about various aspects of the financial system, leaving Lance to concentrate on the current affairs opinion pieces. But it’s becoming increasingly difficult to remain dispassionate.

The financial system is having a bit of a wobble at the moment, rather like that earthquake that hit the UK recently, knocking a few glasses off the shelves and knocking a few minor celebrities off the front pages, at least for a day.

What has been called a ‘credit crunch’, and ignorantly predicted to be ‘over by Christmas’ (though, like the war, nobody states which year), is actually something rather more serious: in all probability it’s a return to normality. Risk is now being priced back into investments, default spreads are widening and, in general, everybody’s paying more for their money.

Which is as it should be. The last five years or so have seen a collective delusion on the part of economists, central bankers (with some exceptions), financial journalists, house buyers and consumers.

Of course interest rates will stay low (never mind inflation). Of course house prices always go up by 10% a year when wages rise by 3% (never mind the impossibility of the maths). Of course it’s different this time (no, it never is). Of course the UK has a miracle economy based on selling financial products and ever more expensive houses to each other, and doesn’t need manufacturing (unlike the Germans, for example).

To use the vernacular for a moment, it was all bollocks. If something appears too good to be true, it is. Or, more succinctly, TANSTAAFL (there ain’t no such thing as a free lunch).

Unfortunately, while this particular lunch was a 12-course affair at the Ritz with a lavish wine list and more than a few wafer-thin mints to follow, the diners have long since left the table. Those who are left behind must pick up the tab.

The diners were bankers. The dinner was debt. Those left behind are the tax-payers, and we are expected to pay, either directly or indirectly.

So what actually happened? Well, encouraged by ultra-low interest rates, banks blithely lent money to dozy dullards who lied about their incomes, took on extra debt via Mortgage Equity Withdrawal (which used to be known as a second mortgage, a sign of poverty) and sold their souls for a hovel to call their own. The bankers then cheerfully securitised the loan, chopping it up into little pieces and pretending it was worth more than it actually was, and kept it off the books by flogging the pieces off to all and sundry… and even bought some of it in the process. Talk about believing your own spin.

All of this was fine as long as house prices continued to rise, as long as there was always a greater fool to take on ever larger debt in order to prop up the pyramid scam. Eventually, though, the limit was reached, in the UK as well as the US. Debt, as discussed in a previous feature, is a promise of future work, and there’s a limit to how much work any one person can promise to do in one lifetime.

But that’s not the interesting bit.

What’s interesting is what happened next.

You see, bankers have always justified their obscenely high salaries and bonus structures on the basis that they take huge risks, that they can be out of a job with little or no notice, that banking is an unforgiving world of cut and thrust that only the truly heroic and well-paid can possibly survive.

So it’s odd that they cried “Mummy!” when things started to go wrong.

And they’re still crying now, but there’s menace in their cries. A recent article in The Times quoted a senior banker as saying “The governor [of the Bank of England, Mervyn King] doesn’t realise that bank profitability and stability of the system go hand in hand.”

Translation: “You scum have to keep our bonuses coming, otherwise we’ll destroy you.”

Nice to see it in black and white.

If you believe what you read in the mainstream press, it’s true. We have no option. We must either bail out the banks directly, using tax-payers’ money that will be on the government’s balance sheet and will therefore directly reduce the availability of cash for the NHS, the MoD, education, etc…. or the Bank of England bails out the banks by printing new money which will instead steal from all of us by devaluing the currency and leading to inflation.

The alternative would be… oooh, nasty. End of the world stuff. Armageddon. Fire and brimstone. Rioting in the streets. Red-hot pokers where the sun don’t shine. You really wouldn’t like them when they’re angry.

Apparently the banks own us. They get the profits in the good times; we get to pay for the losses in the bad times.

However, you shouldn’t believe everything you read in the mainstream press. After all, whose money are we talking about here? It’s ours, isn’t it? All that money that was lent to Buy-to-Lose speculators for cardboard flats in crime-ridden city centres… that’s our money. And, thanks to the miracle of fractional reserve banking (which I’ll discuss in a future article), our money was lent out not just once but many times.

So, these bankers who think they own us, who think that the tax-payer must give them lots of money because the alternative is the end of the world, are actually dependent on us continuing to keep our money in their banks. If we all took that money out in cash, they’d be stuffed.

“So would we”, you might think. But actually that’s not true. Moving money to apparently safer institutions (such as NS&I and mutual building societies, perhaps) might destroy the more reckless, shoddily-run banks, but the system itself would survive. The situation is not as one-sided as some journalists, who may have vested interests, would have you believe. Northern Rock was ‘rescued’ more as a result of political interference and incompetence than any rational strategy; perhaps Alistair Darling believed the bankers’ threats too.

Banks go bust all over the world. It happens more often than you might expect. There is rarely, if ever, a need to prop them up with tax-payers’ money. Insure deposits by all means, but don’t bail out the lenders. The fear of failure breeds success in other industries, and so it should with banking.

I agree with Mervyn King. I’m not picking up the tab for this gluttonous feast.

(c) Alex Cruickshank 2008

The author is not amused.

Entry Filed under: Features