Plan 'B"
Tony Curzon Price
October 9th 2008
Face up to it: the Brown re-capitalisation plan may not work. The banks have relied to a massive extent on Credit Default Swaps, a sort of insurance on lending. They have given themselves false comfort, and in some cases very real cash-flow, on an insurance pyramid that will not hold-up under even modestly higher default rates. Liabilities under these insurance contracts are vast. One hedge fund was insuring 100 times its cash base before it went under. If the banks that we are now the proud part-owners of end up being heavily exposed to these liabilities--the total CDS market is measured around $50 Trillion, almost 1000 times more than the Brown rescue--we should just cut our losses and let the banks go under.
The problem is the protection of the real economy. The Federal Reserve has shown the way here, with its direct lending to companies, started 2 days ago. We should start a new state bank, recruit bankers and accountants from the City, and get them to work on lending to the real economy. At first, they will not have the time to distinguish good and bad loans. They will have to be lax but short-termist in their lending decisions. Their task will be to rapidly and efficiently become ``relationship bankers''--understanding the underlying businesses they are lending to and setting appropriate and gradually tougher lending terms. Once financial flows to the real economy are safe, the state bank should be broken into 10 identical pieces and with 9 sold to private investors who will operate in a new regulatory regime. The tenth should remain in state hands, as a benchmark bank, a way for the state to stay close to what is happening in the markets.
It is disturbing that the Brown re-cap was hatched by the Treasury, the Bank of England and top bankers. The trouble any regulator has is that the people who best understand the business and the crisis are the people you are trying to regulate. This is the basis of every regulatory capture. You cannot trust what the knowledgeable say to you. If the liabilities of the banks start to mount, let's make sure this plan B is ready to be deployed.
Comments
Tony--I admire your prescience, but you might want to check the date at the top of your post.
Thanks Hobbes :) (changed date from August to October -- all those 8's, 10's and "Eights" in both month names...)
BigC - I think there are lessons that should be kept from the 60's and 70's nationalisations. One is that competition often has a real role in curbing the natural tendency of bureaucracy to serve its own interests---competition is a form of "divide and rule". We don't want the finance equivalent of British Leyland serving us. Of course, hyper-competition has been part of the problem we're in and needs to be kept in check - part of the information generated by the "10th bank".
But I guess we've also learned from the 80s utilities privatisations that _ownership_ is not acutally fundamental---regulation is the important part. We could have the 10 banks all state owned and rely on "good" competition to do the work it can do within state ownership. But when the state is 100% owner, can we trust the regulation to be in our interest? We face the same problem towards our elected representatives as Brown and Darling faced towards the banks: with their superior information and executive power, how will we find out the truth about what they're up to? Divide and rule can work against natural potential abuses of power, but it does not work all by itself; the invisible hand is also the weakest one!---it needs us to be political as well.
Tony
I think competition should be a tool of democractically accountable agency - it is not a substitute for it. It should be one of the ways we keep control of those with power. If you think of every financial transaction carried out in a day in the UK; each one needs some amount of oversight; that oversight requires some amount of information extracted and brought to salience. It is truly a huge task.
A single financial monopoly will need a lot of tracking, no matter who it is owned by. There was a great Buffet quote I linked to from "The World" the other day, over here: "
BUFFETT: ... managing complex financial institutions where the management wants to deceive you can be very, very difficult.
Having several institutions all of them doing similar things does not solve all the problems of accountability --- that was certainly the mistake of neo-liberal ideology from utilities to finance --- but it is part of the toolkit. You can ask: ``why is your lending for new hospitals so much smaller than the other institutions?" rather than ``why is your lending for new hospitals £xxxm?" The first question is tougher on the institution than the second question.
So I'd like to see the 9 banks separated off and independent _of_each_other_ (though I don't really mind where the ownership is) because accountability can't afford to throw away "divide and rule" as a way of controlling concentrations of power.
Elites have repeatedly proven themsleves incompetent, in the UK possibly more than elsewhere in Europe --- my current genealogy of missed opportunities points the finger at the Wilson era's failed modernisation of the 1960s, when elites (of both capital and labour) had no more imagination and leadership than to try to find a social arrangement that would preserve the divisions of imperial Britain. This is not (yet) a society where responsible democratic accountability on its own can do the work done by the divide and rule of competition.
Tony
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