Via BaselineScenario, I landed on this article by Joe Nocera. It needs no explanation. It lambasts the American Bankers’ Association for lobbying against the Consumer Protection Bill that has been watered down by Mr. Barney Frank already. It is self-explanatory. I do not want to spoil your fun by citing selectively. Read the whole stuff, yourself.
Then, there was this typical hardhitting speech by Merwyn King at Edinburgh on the banks, similar to his Chatam House speech in June. TGS had blogged it here and wrote about it in MINT here.
Excerpts from the most recent speech:
If our response to the crisis focuses only on the symptoms rather than the underlying causes of the crisis, then we shall bequeath to future generations a serious risk of another crisis even worse than the one we have experienced.
To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.
The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history.
It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place. The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the “too important to fail” question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.
Although there are no simple answers, it is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities. The case for a serious review of how the banking industry is structured and regulated is strong.
If unsustainable capital flows provided the fuel and an inadequately designed regulatory system ignited the fuel, the past two years have shown how dangerous it is to let bankers play with fire.
When I read that Darling and Brown have hit back at King, I sensed that he had said something right.
Of course, my good friend Jim Walker, in a note to his clients, called King (not personally but as a central banker) a hypocrite. Strong words. I do not know or cannot recall whether King belonged to the ‘can clean but cannot lean’ school. Nor am I as ready as he is, to absolve the industry of its collective responsibilities – capitalism without morality ≠ free markets or competitive markets.
Yes, central banks (more particularly, the Federal Reserve under Chairman Greenspan of which Mr. Bernanke was a member) have a very large share of the blame. But, not the whole share.
I would argue that other central banks had to ‘dumb down’ to low interest rates thanks to Fed’s ultra-low interest rates. Otherwise, in a world of capital mobility, currencies rise to unsustainable levels and further hollow out manufacturing and physical share of GDP that is already hollowed out by globalisation and offshoring. That would only have hastened the arrival of the exaggerated importance of finance in national output. So, blaming King is harder than my friend Jim Walker makes it appear.
One Tim Exall writing for the FT seems to echo my friend Jim Walker, however:
Perhaps, however, there is an even more fundamental problem to address and, if so, Mr. King himself would clearly be one of the principal suspects… What has the recent move towards zero rates done, for example? It has encouraged more asset bubbles and excessive risk-taking, and punished savers – and this at a time when we are told we must save more.
This column by Martin Wolf started well. Precise, well written and concrete. Towards the end, he leaves things open-ended and inconclusive by reiterating the issues that are open. I say, why not cap salaries/compensation?
If I take risk and get rewarded for it and if I fail, you take the loss, don’t you have the right to restrict how much I make out of the risks I take (do I really take the risk, in the first place, if the loss is yours?)?
In fact, I should make zilch, nada, nothing, given the asymmetric pay-off. So, merely restricting pay seems like a slap on the wrist.
Further, if it discourages ‘talent’ from joining banks, so what? Whom did this talent benefit? For whom is this talent needed? Public interest? It paid itself and the executives hired them paid themselves when the talent made short-term profits at the cost of future losses to be borne by tax-payers. Perhaps, the talent is better used elsewhere in the society. It might be a blessing in disguise for the economy, for the society.
Read what Emanuel Derman has to say on the issue of banks’ profits:
Usually when someone buys an out-of-the-money put and can’t pay cash, they have to fund it with an out-of-the-money call, the two options together comprising a costless collar. So, the banks that got saved by the taxpayers should, in all fairness, be short a call to the taxpayers, and their profit and upside above some reasonable level should belong to taxpayers now that the call is in the money.