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Paul,

But what if "The price is wrong!"?

As comment #17 on the previous blog states, the risk associated with greater lending has been under-estimated, and seems to be continued to be under-estimated. I made a similar point to Vickers et al:



"the phenomenal growth in debt witnessed these last 20 years may not be all
fully attributable to genuine economic investment and instead could be the
symptom of poorly judged credit issuing"

It was based on Peter Warburton's seminal work "Debt and Delusion". The
Neoliberal model of financial stability was to reign in inflation through a deliberate disregard for credit creation; the expansion of which was completely under-priced:

"The virtual elimination of the credit quality spread, in all its dimensions, ought to be regarded as a source of fear and trembling, not a celebration of capital market efficiency." (p.174)
"The highly developed consumer credit and securitised loan markets of the USA
provide an acid test of credit quality developments throughout the Western world." (p.175)

And so far, it seems that they have failed that test. The pursuit of competition
through de-regulation has helped to mask declining levels of debt quality through the appearance of benign risk levels. Risks which when potentially need to be shouldered by private institutions is being shifted onto taxpayers.

The stakes have just been getting and higher and higher since Warburton wrote
that in 1999, yet no-one seems to have the intelligence or balls to challenge
this fundamental assertion:

The debt is not warranted, and is severely under-priced. It is not "investment" debt that has been growing, but debt for consumption. Debt that has been peddled in ever greater quantity facilitated by fraudulent mis-pricing of risk!

Default is the only rational, equitable and moral solution (as in #23 on previous post).

Paul,

Page 191, Figure A7.1, of the ICB Interim report states that "Securitisation" should only reside in the "Permitted in non-bank institutions" box.

Can you get someone on the commission to explain exactly how this will work in practice given that "Securitisation" actually transcends Retail & Investment banking. Please, please, please swot up on the O2D model of banking described in some nice pretty pictures in my link at post #1.

The retail arm "Originates" the loan in the first place. So they must hand it over (i.e. sell it) to the Investment arm for them to package up and re-sell it!

Therefore, the Retail arm is de facto engaging in Securitisation! To declare it sits outside the retail sphere is a blatant mis-representation of how modern banking works! It is not the institutional form of banking that matters, but the monetary functions of banks (i.e. the flow and movement of money that Gordon Brown admits that he didn't actually understand!).

Is the wool getting well and truly pulled over our eyes, here? This is a firewall without any walls.

This is a more 'hard nose' view of interim Vickers that R Peston's and therefore immediately whets my appetite, scrawl on, Paul. There are issues of supervision, public ownership, governance and audit that seem to be passed by, not to mention setting standards for users - both personal and SME's.

It is all FUD.

Nothing will change until tens of thousands are rampaging through Waitrose, Pret-a-Porter and the other shops in Canary Wharf before standing outside the banks and shouting "Jump you fs!" whilst simultaneously texting Paul on his mobile.

I actually now realise why the banks rellocated to Canary Wharf - it is just so difficult for a mob to reach. By the time you have navigated the Dockland Light Railway you have lost the will to live let alone riot.

I wonder if this how the average Roman felt at the end of the Empire. Complaining about all those Visigoths coming and nicking their jobs whilst their own politicians, officials and bankers creamed off as much as they could hoard.

I wonder if any of our bankers are burying gold and silver on their country estates, ready to be found by some bloke in an anorak with a metal detector 2,000 years from now?

More importantly, will there still be anoraks 2,000 years in the future?

Appendix 7 is where it all falls apart. The only thing that will HAVE to be separated out is retail deposit-taking (which is already substantially protected in any case). So banks can put everything else in a 'non-retail' subsidiary and we have got precisely nowhere. The banks will ensure that everything important to running the economy is tangled up with everything else they so, so that, guess what, we have to bail them out again.
The acid test will be whether the rating agencies, in time, actually drop the banks credit ratings. If they don't we'll know that the implicit taxpayer guarantee for the banks is still firmly in place.

tweets suggest Mr Mason is going in two footed as the press conference.

Breaking news: ´óÏó´«Ã½ limits free speech!

I seem to be having trouble submitting more than 100 word comments since yesterday.

Sort of prevents any ability to coherently posit a logical train of thought, doesn't it (unless split into multiple comments, as above, however, Peston has a 5 minute time limit between comments!).

Apologies to readers if it therefore looks like Spam, but the ´óÏó´«Ã½ seem to be turning this blog site into a Twitter wanna-be.

A triumph of spin and mis-direction.

The banking sector, the ICB and the media all appear to have singularly failed to address the following:

It is the loan creation aspect of Retail that the Investment banks wants it sticky mits on, not the deposits!

Study the analysis by Steve Keen, here:



The Money Multiplier effect is bunkum. Credit creation preceeds money creation, not the other way round.

The Golden Goose is therefore the lending business.

No need to add more than another 6 inches onto the tsunami wall when we can rely on sheeple to clean up the mess

The idea that it is possible to divorce banks or near-banks from the liability of the nation-state that issues, manages and regulates the currencies they use and the jurisdictions they operate in seems to me to be a non starter, if the banks are multinational, private enterprises that can simply move their activities from one country to another, concealing their true position until they finally hit the buffers.

I think the only solution is to hold the Sword of Damocles over the heads of the directors and senior management and make them personally liable to a system of strict liability offences that would seem them serving life if they allowed their bank to get into a position to need a bailout and the same threat for any trader in a position to speculate so irresponsibility that this drove the bank over the edge.

Faced with the very real risk of life imprisonment and confiscation of all personal assets for allowing a bank failure to happen, I'd say that the culture would change quite rapidly - and the first one to go down would scare the bejesus out of the rest.

Too hard? Unfair?

Well, think on this.

If you analyse all crime and boil it down to money, i.e. the compensation/value of each individual crime - an oversimplification I know - then allocated all crime fighting resources according to the sources of our "monetised crime" profile, virtually every single policeman would be in the Square Mile of the City of London, as the majority of crime by value is committed by people and organisations based there, in terms of fraud, tax evasion and other serious offences.

Virtually no resources would go into shoplifting or burglary - small beer in comparison - violent crime? Again, even if you work out the compensation to the victims, a tiny part of the crime cake too small to bother with.

Make the punishment fit the crime - your future will be taken from you and your family will be stripped of everything if you allow your bank to be too greedy and take risks that lead to failure and public bailout - finally the "moral hazard" would have some real meaning for those in a position to choose to take these huge risks.

"Strict liability offences" are rare in law - the only one I remember is if the editor of a newspaper allows the name of a rape victim to be published - the name appears in the paper - the editor goes to jail - case closed. For banking I'd suggest the same approach to a small number of critical issues and key balance sheet requirements.

If there is no scope for courtroom wriggling and a defined set of offences, the slope from greed to jail would so so steep and slippery that at long last there would be a serious hazard to instil a new morality in banking.

This would remove the need for a massive regulatory system, it would mean that if other countries adopted a similar "personal risk" model would not need to harmonise the fine detail of their financial environment and competition could operate, whilst there would finally be some accountability at the personal level for the actions of the corporate leadership!

#13. richard bunning wrote:

'The idea that it is possible to divorce banks or near-banks from the liability of the nation-state that issues, manages and regulates the currencies they use...'

---------------------------

No, it's not the issuing of currency by the nation-state that's important...it's the ability of (private) retail banks to issue debt THAT IS THE POINT!

refer to Hawkey's post #11

The golden goose is the lending business of the retail banks!

This is what Glass and Steagall realised circa 80 years ago in the US!

14

So you's like to stop them issuing debt in the UK - IMHO they'll just issue it through a local subsidiary or off balance sheet entity in the Cayman Islands or some failed state jurisdiction in the back of beyond - I may well agree with you about the principle of their being able to issue debt at all, but we can only change things in the UK - the concept of Strict Liability Offences tied to risk profiles that result in life sentences and confiscation of all personal assets seems to me to be the only weapon which will fundamentally change the rules of the game and put in place a sanction that fits a crime that results in the entire country having to bail out greed.

'I will give you my detailed view when I have read the detail.'

As opposed to, one presumes, the viewed view provided having not read anything yet and rushed to meet the 24/7 dead air-phobic maw?