Everybody seems to have an opinion on what has happened in the banking system over the last year or so. I thought Phoenix should share it’s thoughts as well.
I can think of three sayings that I was taught when I started work in the 60’s and they are still true today;
1) There is no such thing as a free lunch.
2) The greater the reward, the greater the risk.
3) If it seems too good to be true, it probably is too good to be true.
It seems as if, at the end of every cycle, everybody forgets these basics. They were forgotten in The South Sea Bubble, in the tertiary banking crisis in the 70’s, in the Lloyds insurance markets in the 80’s and again in the sub-prime markets in the noughties. For god’s sake, in the Lloyds crisis it seems as if nobody knew the meaning of the word “unlimited”.
When the institutions that take our money and “promise” to keep it safe, lose sight of the risks they are taking with it because they want to earn bigger bonuses and profits, it is time for reform. But what to do?
Thankfully, we only need to look to history to provide us with an answer.
What we need is a separation of the retail/joint stock banks from the investment/merchant banks. Retail banks (the ones licensed to take our money) should be prevented from buying speculative “banks” or the instruments they invest in such as “collateralised debt obligations” or “credit default swaps”. These instruments can make enormous profits but equally can result in huge business-ending losses. As we have seen this leads to state bail-outs (with our money).
Don’t get me wrong, I don’t think the activities should be prohibited, it’s just that the speculation should be left to the speculators. Let them gamble with their own money but not with yours and mine. If they wish to operate a casino, and can fund it from their own resources, so be it. If they win, good for them, if they lose, tant pis.
The USA passed legislation ensuring that this system was in place in 1933. It was not repealed until 1999 and it was called the Glass-Steagall Act. The system worked pretty well for 66 years and collapsed less than 9 years after it was repealed.
Surely it is time to get back to that sort of legislative control, where the Bank of England can regulate the banking industry by applying different levels to cash ratios and liquidity ratio’s etc. Increasing these ratios makes the banks operate more cautiously. But if we do, get ready for the whingeing from the banks. Why? – because commercial banking is not speculative and generally makes steady profits. This profile, while it provides excellent pay and benefits for staff, does not pay huge bonuses to the individuals.
Isn’t this what we want??
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