Why do we never learn?

I found a fascinating report today. It dates from 1996 and is the Bank of England's report into the functioning of the Deposit Protection Scheme, the predecessor of the current Financial Services Compensation Scheme, which provides a measure of compensation to bank depositors and other small financial investors in the event of bank failure.

A Deposit Protection Scheme was one of the provisions of the 1979 Banking Act. But it was not the only provision of that Act, and in many ways not the most important. In the words of the Bank of England (my emphasis):
Before the introduction of the first Banking Act in 1979 there was no statutory requirement that a bank or similar deposit-taking institution be authorised to accept deposits or undertake banking business in the UK. There were disclosure requirements (Protection of Depositors Act 1963) on those institutions that advertised for deposits, including the obligation to include in their accounts prescribed information, which were examined by the Board of Trade. However, banks and discount houses were exempt from these requirements.
In other words, pretty much anyone could set themselves up as a deposit-taker and lender. Banking licences were granted by the Board of Trade without consideration of standing or conduct, and banks were not obliged to accept the Bank of England's supervision. Consequently there were a large number of effectively unregulated and unsupervised small banks, competing with each other for increasingly scarce deposits and lending mainly for property purchase.

The Secondary Banking Crisis of 1973-5 saw the near-failure of about 60 small lenders which had borrowed heavily on the wholesale money markets to fund mortgage lending. The Treasury, then responsible for monetary policy, had raised interest rates into double figures to fight inflation, and this caused a sudden crash in property prices and a spate of mortgage defaults. Concerned about systemic stability, the Bank of England opted to provide liquidity support for these banks to prevent their failure, a decision which cost it about £100m. No depositors lost any money, but there was widespread recognition that depositors' money had been at risk, and the excessive risks taken by these banks needed to be curbed. Following extensive consultation, the 1979 Banking Act was passed, which for the first time mandated the Bank of England to issue banking licences and supervise banks.

The Deposit Protection Scheme created by the 1979 Banking Act came into effect in 1982, and was almost immediately followed by a series of depositor compensation claims arising from the Bank of England closing down banks that didn't meet the criteria for either a full banking licence or a deposit-taker's licence (the 1979 Act distinguished between the two). But what happened later was much more interesting.

The report I found today examines 22 banks that failed and created potential claims on the Deposit Protection Scheme between 1984 and 1996. Most of these were small banks, but five were large enough to cause systemic disruption, and two - BCCI and Barings - are now household names. The fall of Barings remains one of the worst "rogue trader" events in history, and the extent of the BCCI fraud was exceeded only by Enron. Until recently, that is - the mortgage fraud in the US that underpinned the financial crisis looks set to be the worst corporate fraud in history, and the LIBOR rate-rigging scandal will run it a very close second. Or vice versa. Either way, BCCI and Enron now look like minor blips. But I digress.

The remaining three larger banks that failed were not known to me, so I looked them up. And what I found was fascinating and instructive. We simply do not learn from our past history: even though we put in place regulatory and supervisory measures to curb the excesses that lead to failures like National Mortgage Bank and Johnson Mathey Bank, over time we forget about them and we make the same mistakes again.....

National Mortgage Bank (NMB) was extraordinarily like Northern Rock. It borrowed on the wholesale markets to fund high-risk mortgage loans (yes, subprime existed in the 1980s!) which it then packaged up and sold on in an early form of securitisation. When BCCI failed, nervous money market lenders reduced wholesale lending, and NMB was forced to go to the Bank of England for emergency funding in February 1992. It all sounds horribly familiar, doesn't it? Except that Eddie George, then deputy Governor, kept the press at bay: the Bank of England resolved NMB swiftly and quietly, there was no panic and no run on the bank. What a contrast to the inept handling of the Northern Rock failure by an inexperienced Treasury team and emasculated Bank of England. The chairman of the restructured NMB, Ian Hay Davison, makes it very clear that in his view the separation of the Bank of England from bank supervision was the reason for the relatively poor handling of Northern Rock. But what I want to know is - given that the Secondary Banking Crisis was caused by high-risk property investments funded by volatile money market borrowing, and the failure of NMB was caused by high-risk property investments funded by volatile money market borrowing, why did the Northern Rock failure happen at all? Why didn't these failures teach regulators to monitor and control retail banks' propensity to over-borrow and over-lend when property prices are rising? Why are we STILL not making any attempts at all to moderate retail banks' risky behaviour?

Turning now to Johnson Mathey Bank. JMB was the banking services arm of a major precious metals company. Originally it was purely a bullion dealer and a member of the London Gold Fixing. But in the early 1980s, JMB expanded its activities into corporate lending, quickly building up a huge portfolio. The scale of its lending dwarfed its capital and it was heavily exposed to a small number of borrowers, some of whom turned out to be fraudulent. The decision to bail out JMB was made on the grounds of its importance in a very concentrated bullion business and worries about contagion causing panic in the wider banking industry. The Bank of England bought JMB for a nominal £1 and later sold it to Westpac. The concentration and riskiness of JMB's corporate lending portfolio led directly to the tightened reporting requirements for large exposures in the 1987 Banking Act. Yet if we fast-forward to 2008 - what caused the failure of HBOS? Yes, it was corporate lending: high-risk and fraudulent loans concentrated in particular sectors, dwarfing the bank's capital and funded by volatile wholesale borrowing. So given that the failure of JMB actually did lead to regulatory changes, how was HBOS allowed to happen? And since the cry at the moment is for banks to increase risky lending to risky businesses in order to "get the economy moving", what chance is there of anyone learning from this failure, either?

The third one was British & Commonwealth Holdings. Here is the first paragraph of the House of Lords judgement regarding Soden vs British & Commonwealth Holdings:

In 1988 British & Commonwealth Holdings P.L.C. ("B.& C.") purchased for some £434 million the whole of the share capital of Atlantic Computers P.L.C. ("Atlantic"). The acquisition proved to be disastrous. Atlantic went into Administration in 1990. The Administrators of Atlantic are the appellants in your Lordships' House. B. & C. is also in Administration. It has brought proceedings against, inter alia, Atlantic ("the main action") for damages for negligent misrepresentations said to have been made by Atlantic so as to induce B. & C. to acquire its shares. B. & C. has also brought proceedings against Barclays de Zoete Wedd Ltd. ("the B.Z.W. action") for damages for negligent advice given in relation to the acquisition of the Atlantic Shares. B.Z.W. has issued third party proceedings against Atlantic for contribution and damages.
Yes, you're right. B&C was bankrupted by an unbelievably stupid acquisition of a company already riddled with debt and technically insolvent, without doing proper due diligence and with fraudulent misrepresentation of the share price. The House of Lords finally dismissed Atlantic's appeal in 1997 - but by that time B&C had been dead for 7 years. The B&C failure happened in 1990. In 2008, RBS failed due to an unbelievably stupid acquisition of a company already riddled with debt and technically insolvent, without doing proper due diligence and probably with fraudulent misrepresentation of the share price. Whatever was learned from the B&C failure had evidently been forgotten by the mid-2000s.

In fact all the lessons from the bank failures of 1982-96 had been forgotten by the mid-2000s. I am not hopeful that the lessons of the failures of Northern Rock, HBOS and RBS will be learned either. The Bank of England's report into the 22 bank failures identifies five main causes of bank failure. In order of importance, they are as follows:

- Bad management (18 of 22)
- Poor asset quality (16 of 22)
- Liquidity problems (9 of 22)
- Fraud  (7 of 22)
- Dealing losses (2 of 22)

You will note that dealing losses comes last on the list. But which one are we paying the most attention to? Yes, dealing losses - hence that ridiculous ring fencing idea that gets far too much air time, and calls for structural separation that would achieve nothing but make everything more expensive. Why is no-one paying much attention to the top two - which are bad management and poor asset quality (i.e. highly risky lending)? These were by far the commonest cause of bank failure in the 1982-96 period. In fact they have ALWAYS been the top two causes of bank failure. 

Those who wish to return to some kind of "golden age" when there were lots and lots of little banks might like to ponder on the findings of the 1996 report:
Another relevant factor, but one which is not highlighted, is size. All banks are affected by macroeconomic conditions. But smaller less-diversified banks do appear — not surprisingly — to be generally more vulnerable to changes in market conditions than large banks which are diversified across a number of sectors and income sources.
So breaking banks up, restricting their size and limiting their range of activities DOESN'T make them safer. It makes them more likely to fail, not less. And the Secondary Banking Crisis shows us that when there are a lot of small banks all operating in the same sector, together they can create considerable systemic risk.

The message I am trying to give is this. Almost everyone seems to have an opinion about "how to fix banking". And some radical ideas are being considered. But no-one seems to be looking at what actually went wrong, either recently or in the past. If they did, they might come to different conclusions. For me, breaking banks up, separating retail & investment banking, full reserve backing for deposits - all of these miss the point. What is needed is consistent long-term regulation of the dull & boring activities of banks - deposit-taking and retail lending - and continual supervision of bank management. That's where the risks build up unnoticed. That's where the cause of most failures lies. Let's focus on controlling those, and stop worrying about the fruitcake stuff. It's really not important.


  1. I disagree with you on size. The point should be not to ensure that all banks survive but rather to ensure that individual bank failures do not drag the whole system with them. So as long as we want to keep private banks breaking them apart is definitely a prudent policy. If we want to have a couple of state-owned banks, like say in USSR where there were 6 big banks - 1 per large industry sector, then enlarging them is a prudent way to go.

    With regards to dealing etc then that was clearly a much smaller problem 20-30 years ago than today. But I agree that there is a clear regulatory overkill here today.

    1. Why is breaking them apart clearly a prudent policy, if small banks can carry as much systemic risk as large ones and are more likely to fail?

      I agree that dealing losses are likely to be a more significant issue today. But I'm concerned that in focusing on these, we are failing to address the core problems of mismanagement and risky lending, and are therefore setting ourselves up for another boom-bust cycle.

    2. Hm, you ask me "why"? But why should we keep them? What is so fundamental about banks that we cannot fail the failed ones? Why should I, as a taxpayer, care so much about people who make expensive mistakes? I am serious. What is your motivation?

      Systemic risk seems to me like another popular banner today. If we really want to deal with systemic risk then we should deal with the system and not with its risk. The problem however is that we have a system which is designed to fail (some comments below express it as well). Forest fire prevention is a snowball and a sure way to a systemic fire which sooner or later happens regardless.

      If we truly want to reform the system then we should touch its core parts. For instance we could separate fully risk free payments system, risk free savings system (but upto to a limit) and risky banking (lending) system. It is a simple and easy solution. However the next logical step would be to remove all bank regulation and supervision. And so they can fail as much as they want and as long as they want. What is publicly defined as risk-free (payments and savings) will be public and risk free (as de facto it is) and what is risk will be allowed to fail.

      I believe that alignment of incentives and removal of public subsidies is the only way resolve to problem of banks.

      If we remove broad public subsidies we might have to run a couple of public owned banks. But so what? I'd provide targeted subsidies to those banks/people who can be directly and publicly held responsible rather than provide broad market-wide uncontrollable and unaccountable fiscal helicopters under the disguise of independent monetary policy.

      We need to try to put the banking sector and banks on par with any other industry or sector. Though we can only try we shall try very hard. No amount of technological progress will ever free us from banks and therefore banking industry as such is invincible. This is its critical difference from any other sector in the economy. Since banks face zero external competition we should do our best to create other incentives. Which means weeding out those who proved incapable without ever looking back.

    3. I've never said that bad banks shouldn't be allowed to fail. On the contrary, several of my posts from last year called for banks to be allowed to fail. I'm just addressing some of the myths around banking, one of which is the idea that smaller is safer. It isn't.

      I agree with you about the need to look at the system as a whole and build in firebreaks and failsafe devices, rather than focusing on regulation and supervision of individual components. A component should be able to fail without crashing the system. At the moment it can't - and that is not to do with size so much as connectedness and market concentration. JMB was even in its time a small bank, but it was a very significant player in the bullion market, so allowing it to fail would in the Bank of England's view have created a systemic crisis.

      But safeguarding the system so component failure causes as little disruption as possible doesn't eliminate the need to design and manage components so as far as possible they don't fail. All of the causes of bank failure identified in the Bank of England's report were preventable. Therefore they should have been prevented.

      I don't think the history of state-owned banks is a particularly glorious one. Have a look at Spain.

    4. The concept of safety depends on the concept of systemic risk. If we redesign the system away from systemic risk then the problem of safety will be automatically resolved. E.g. if we separate risk-free activities from risky ones then the problem of safety, and supervision overall, will cease to exist. (I am not talking full reserve banking here because it is either accounting nonsense or implies full underwriting of private banking by the government.) And therefore I, as general public, stop being interested in what could have been prevented between independent private sector actors. Not my public business.

      Regarding state owned banks I think general views are very biased. Investments are to a very large extent publicly subsidized economic activities: in the form of public education, in the form of deposit guarantees, in the form of bank regulation and supervision, in the form of outright budget spending, in the form of various state owned and natural monopolies and so on. There is very little standalone private sector investment in this world and most if not all private sector investments ride on the back of public sector.

      Additionally, in the world of private banks which are able to screw up on a grand scale and run away with it, I think, it is very difficult to expect tremendous results from the state owned banks. There will always be anecdotes but they prove little because they are taken from our very faulty world which we try to redesign in the first place.

      But I think that if we allow for unconditional failure of failed banks (in a world without any banking supervision, i.e. pure market forces) like we allow companies in other industries and even whole industries to fail, we will need public banks in order to provide direction for private sector investments. This will simply say that the government is ready to subsidize investment risks in industry XYZ because of a, b and c. These subsidies will be recognized as fiscal transfers and shall attract private sector activity including private sector risky banking.

    5. But a big part of the problem is that things are considered "risk-free" or low risk when they are not. There is serious cognitive dissonance on this subject. For example, a large number of people think ordinary retail lending is low risk, compared to say derivatives trading - but the vast majority of bank failures have been caused by excessively risky retail lending, not by trading activities. Many people think deposit-taking is completely risk-free, to the point where they think if a bank's loans are entirely backed by deposits it can't fail. But unless deposits are locked in on the same maturity profile as the lending book, banks absolutely can fail due to deposit withdrawal (bank run). And payments systems can fail due to lack of liquidity (that's why Target2 uses central banks, which can create unlimited liquidity).

      I don't think there is any such thing as a risk-free activity, just as there is no such thing as a risk-free asset. It's a question of the balance of risks and their management.

      The job of banks is to accept and manage risks. When they fail - and even more, when there are systemic crises - it is because banks have not been doing their job properly. That applies whether they are public or private banks.

    6. It is not about people's perceptions. We told them that deposits are risk free and so on. So they believe it. But let me draw you a more complete picture instead of talking mysteries..

      We all know that any central bank in its own currency absent self-imposed constraints regarding convertibility is risk free. So we can easily segregate current accounts from the banking system, which are used for payment purposes, and move them, and current IT technology allows it, to the central bank which anyway is the cornerstone of any national payment system in any country. In one simple step we have separated payment system and banking system and made current accounts, which pay no interest anyway, risk free.

      In the second step we acknowledge that people generally have a right to save and therefore have risk free savings. So we open risk free (both credit and interest rate) savings accounts for everybody in the central bank.

      Thus everybody will get two accounts operated by the central bank: a current account for transaction purposes and savings account for saving purposes. Both are fully credit risk free. Savings account can pay inflation rate interest rate and this will eliminate a big chunk of useless financial sector which "manages" savings and a big chunk of government bonds machinery. The size of savings accounts shall be limited because we recognized that savings is a right but we do not want to "inflation"-subsidize excess savings. But these are all details which we can discuss separately if you want.

      So in this simple two steps we recognized the public nature of certain "banking" related activities and also made them risk free. Ignoring the transition period (and we will have to tackle a huge squeeze on banks' funding but I do not think it is a big problem and it can be easily resolved via state owned banks or even central bank funding of private banks during transition period) we have achieved complete separation of risk free banking services and risky banking lending.

      We also managed to "save" private banking as such and private risky lending without crazy ideas like full reserve banking. Private banks can also be made free of any regulation and supervision because they will have to compete for a priory risky funding. But so what? When everybody has a free will choice between risk free transaction account and guaranteed indexed savings account, why should public care if anybody decides to engage in risky bank funding term account with a irresponsible bank? So banks can fail every Monday if they chose to and none of that will be a concern of the government or central bank. At the end of the day private companies do fail every day and noone cries.

      Banks having to fund with "risky" deposits will have to pay up compared to status quo. This will obviously result in an easier monetary policy stance. But so what? We have removed adverse effects of monetary policy from the big share of wealth sensitive population and interest rates will thus really become a tool to regulate investments, i.e. like the whole mainstream economics assumes.

      Plus my previous discussion of state owned banks subsidizing certain industries and therefore reducing risk premiums that will be demanded by private banks for risky loans and therefore what banks will have to pay to private risky deposits.

      Yes, private bank balance sheets will suffer a serious cut. But what will be cut is pretty much wasteful lending subsidized by hidden transfer and regulatory arbitrage.

      I hope that I managed to outline (scratch the surface) how a new system can be build which contains both private risky lending (both by banks and to banks) and risk free "banking" services. I do not see anything impossible in this design and would be interested to hear your opinion.

    7. I don't have a problem with transaction accounts being administered by the central bank. It's the best solution to the need for safety, and it also addresses the problem that transaction accounting and payments services are fundamentally unprofitable for banks. But it would be impossible for people to have overdrafts, as the central bank cannot take credit risk. For poorer people and those with uncertain income flows this might be an unacceptable restriction, because it would force them to use very expensive short-term finance such as payday loans even more than they do at present.

      I totally disagree with you about the use of the central bank for savings. We already have a National Savings scheme, which is a Government savings scheme freely available to anyone and paying interest generally above inflation: to my mind it is under-used and could be greatly extended to provide a completely safe facility for small savings. Savers can also invest in gilts, which are the equivalent of National Savings - i.e. fully government guaranteed - and pay a similar return. There is therefore absolutely no need to provide personal savings facilities through the central bank. People can already choose not to save in banks, and many do.

      The squeeze on bank funding that you mention would inevitably have to be covered by liquidity support from the central bank. And unless lending in the future were very seriously curtailed - which would actually mean LESS lending to enterprises rather than more, since unsecured lending to business is far more risky than residential mortgage lending - this liquidity support would be likely to become permanent. In effect the central bank would permanently fund the lending of private banks. It would still be leveraging customer deposits, just with unlimited state backing. I can't see how that is going to encourage banks to be more prudent in their risk management.

      I don't think you should ignore the political issues around curtailing lending against property, which has for a long time been the principal focus of UK retail lending. Politicians like there to be lots of mortgage lending: people like to own their own homes: a whole host of other businesses such as estate agents, mortgage conveyancers, surveyors, builders, plumbers and the like all depend on a high proportion of people owning their own homes. And increasingly, people (and politicians) rely on property to fund elder care and top up pensions. When mortgages are cheap and easy to come by, people feel good, businesses related to housing flourish and politicians are happy. Seriously reducing the availability of mortgages - which is what you seem to be suggesting - might not be politically acceptable. We may end up with something much more like the US system, in which mortgage lending is federally subsidised, insured and supported.


    8. (continued....)

      There is also a cognitive problem for the public at large. At present risky deposits are insured against default. Under your scenario they would not be. How are you going to justify that to savers? And how would you ensure that in the event of a major bank failure, politicians wouldn't cave in and bail them out anyway? That's what has happened in the past. We really shot ourselves in the foot with depositor bailouts and, latterly, deposit insurance. It would be very hard to persuade people that they should in the future take risk that they don't take at the moment.

      And finally....if banks knew that the central bank would always fund them, why would they bother to seek commercial deposits? If it were cheaper for them to buy gilts and repo them at the central bank for funding at a few basis points, that's what they would do. And savers don't put risk money into savings accounts anyway - they put it into wealth funds of various kinds, or increasingly into non-bank savings and loan schemes. Banks would have to offer a better rate of return than those in order to attract risk money. There would have to be a substantial penalty attached to central bank funding to force them to accept risk deposits. What do you think that would do to the rates charged to borrowers? I can't see central bankers raising policy rates into double digits purely to force banks to rely on commercial deposits rather than central bank funding - it would make an already deflationary economic environment worse. And I can't see politicians accepting it either - especially as banks' need for gilts would create a ready means of financing government deficits. No, banks would be entirely funded by the central bank or by wholesale borrowing, and risk money would continue to go where it does at the moment - into funds and non-bank savings schemes.

      So, private banks would no longer offer payment services, they wouldn't offer safe deposit facilities, and they wouldn't want (or be able to attract) risk deposits. If private banks were additionally competing with state lending schemes, I can't see what purpose they would serve, and I can't see any way in which they could be profitable.

      Really your idea leads inexorably down the path of a fully state-supported banking system. I have a problem with state support where there is no state ownership or control. Moral hazard de luxe. Why not opt for full nationalisation and be done with it?

    9. I probably was not clear enough. There will be no funding of commercial banks by the central bank outside of a fixed transition period. Full point here. Though explicit and ongoing funding of commercial banks definitely puts central bank's skin into the game and should force central bank to look after the quality of assets first and then bother with any secondary self-invented rules or research papers.

      There will be no need to bail out risk deposits because the non-bail-out rule of any private bank will be made explicit beforehand. Banks will have to pay up for risky funding and therefore investors will care. However since banks will no longer administer current accounts, interest rate risk and liquidity risk will definitely becomes much less of a concern here significantly reducing the risk of bank runs.

      As for mortgages many countries have publicly sponsored mortgage lending programs. There is no need to have private banks in 90% of this "business". It is so plain vanilla that public sector, which in any case defines the rules (i.e. capital, liquidity) which make mortgages so profitable for private banks, can do it definitely not worse than private sector. Probably public sector can be even more efficient given lower greed and management overhead. And that even assuming that home ownership is a must which is cultural and therefore can also be changed given political will.

    10. And I probably was not clear enough. The only thing making it possible for private banks to continue in your scenario is state support in the form of central bank funding. Without that, the restrictions you impose on their activities and the intense competition with both state banking activities and non-bank activities would quickly eliminate them. We would end up with a fully nationalised state banking system, plus an unregulated, unlicensed shadow banking network for risk deposits and risk lending. The half-way house we have at present - an ostensibly private banking system which is in fact dependent on state support - would no longer exist. Perhaps that's what you want.

    11. I do not think that it would eliminate private banks. Seriously cut them down - yes, eliminate - do not think so. But if one removes interbank business (payments system driven) and mortgages how much will be left of the private banks anyway? And as a matter of fact the remainder is the core banking business which I am keen on keeping with private banks. If they are not able to compete for true investment lending with other sources of funding, then we probably do not need banks at all and I will not cry a single tear for them.

      I also forgot to mention your argument about various saving schemes. I do not know any details about the one in the UK, but many countries have similar direct/retail programs. I know details about the program we have here in Austria. It is not even a remote substitute to what it should look like. I can mention only one argument which is interest rate risk and which makes any such scheme essentially a speculative one for any saver who has no portfolio management capacity.

    12. The UK scheme is a Government-owned savings bank called National Savings & Investment. It has a range of savings schemes and bonds which are fully guaranteed by HM Treasury and offer a similar return to other insured forms of saving such as deposit accounts and gilts. Interest rate risk is no worse than on any of these other forms of saving.


    13. You have a way with words. Excellent work!

  2. Incredibly apposite analysis!

  3. You're biased against "small" groups to (unfairly) favour "systemic" groups while the most elite are (presumably?) meant to be able to operate independently without you (forced?) "assistance". I think you will find that Bank of Credit and Commerce International was 'allowed' to fail like Lehman because the status quo Drug Dealers in London & New York did not like the competition. Likewise, your calling the LIBOR issue a "rate-rigging scandal" while waxing lyrical against free interest rates instead of rates set by Policy committees shows how you're prevailing concern is just to see the people whom you most prefer with the ability for "rate-rigging", not any desire to have no rigging. Where regulators are not constantly competing, you seem to not understand, there's no incentive to not game their inside knowledge, which, quite clearly, is an ongoing issue to even the most casual. observer.

    Apparently, your solution is to keep "the press at bay" by hiding information from the market. That is not really a sustainable plan of action, as we are all beginning to slowly learn.

    Regulators do not about about protecting you as much as they care about protecting themselves, obviously!

    It is interesting to note that the Bank of England’s own superannuation fund, now valued at £3bn, is 87% invested in UK Government Bonds, almost all index linked. So much for a diverse portfolio and independence from vested interests.

    see page 11 of this report

    1. You are factually incorrect about BCCI. It was not "allowed to fail". Its banking licence was revoked in both the UK and Luxembourg after its auditors disclosed the true extent of the frauds it was enacting. In fact it should never have been granted a licence in the first place, because its complex opaque structure meant that no one country had responsibility for supervision. The arguments about who should supervise it went on for years and years, during which time it was effectively unsupervised. It is evident that it was set up to avoid supervision right from the start. You really should read the Bingham report (link in the post) - it's long, but very readable and absolutely fascinating.

      In the US, where there is regulatory competition, the result is patchy and inconsistent application of regulations and, as we saw with the utterly inadequate regulation of (among others) AIG, a race to the bottom on regulatory avoidance by both regulators and regulated. However, I'm not impressed with regulation anywhere in the Western world. It's all pretty ineffective. I've written about it here:


      You make some allegations against me that are unfair and unjustified. How exactly am I "biased against small groups and in favour of systemic groups"? All I said was that a number of small banks in a concentrated sector can create as much systemic risk as one large bank, and that small banks are more likely to fail than large ones. The history and the evidence supports me fully in these statements. Nowhere have I suggested that the "most elite" should be able to operate independently of regulation and supervision. Quite the contrary, actually.

      Regarding your supposition that I wish to "hide information from the market" - you couldn't be more wrong. The market was already well aware of Northern Rock's difficulties, as its rising cost of funding showed. It is the general public who should not have been told. The run on Northern Rock started when someone at the Bank of England told the press about Northern Rock's request for emergency funding. There was no need to disclose what should have been simply a normal function for the lender-of-last-resort, and by doing that the Bank made the Rock's liquidity situation far, far worse. The real problem is that at the time the Bank of England actually did not regard itself as the lender of last resort and had no "discount window" facility like that of the Fed, so a request for funding that should have been routine became an emergency. Interestingly, many of the concerns expressed by the Bank about BCCI during its lifetime centred on BCCI's lack of a single shareholder who could act as lender of last resort. Clearly the Bank did not see itself in that capacity.

      As for my comment about inept handling, I recommend that you read the National Audit Office's report into the handling of the Northern Rock failure. The inexperience of the Treasury and the "hands-off" behaviour and conflicted attitude of both the Bank and the FSA shines through.

      Please show me where I have "waxed lyrical" against free interest rates? I've discussed the setting of policy rates in previous posts, but that doesn't mean I oppose free interest rates. I talk about the real world, not a fantasy one - and in the real world, central banks set interest rates.

      And finally. You are welcome to comment here, but I remind you of my rules, which are:

      - please confine yourself to the subject of the post
      - please refrain from personal attacks on me or on other commenters.

      You have strayed dangerously close to the second of these in your comment.

  4. You want to regulate away collapses? But dislocations just build up and up unless you accept that deflationary busts are sooner or later inevitable: http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/

    1. This comment has been removed by the author.

    2. You're confusing normal business cycle deflations with financial crashes caused by bank failure. All of the causes of failure identified in the Bank of England's 1996 report are preventable. Therefore they should be prevented.

  5. I don't think the history of state-owned banks is a particularly glorious one. Have a look at Spain.

    Well yes (a resident of Spain writes) but the failure of Spanish banks was also a massive failure of supervision, in so far as the Banco de España (see this helpful guide) had not a clue what was going on. And didn't care, either. Nobody - not the politicians involved in the banks, not the professional bankers, not the BdE - gave a monkey's while times were good. And atop the whole pile was Rodrigo Rato, ex-head of the IMF and head of Bankia, who is now on trial for false accounting while small investors in Bankia lose their savings.

    What I'm saying is partly that I don't think the "state-owned" part was particularly the problem with our banks: it was the whole who-cares-while-the-milk-is-flowing-and-the-honey-is-sweet outlook which, it seems to me, pervaded banking culture and political life generally, in Spain and the UK and many other countries, over the past two decades. And I don't see what stops that happening again (unless, pehaps, times never are good again!) which may explain why, perhaps, "we" never learn.

    1. Very good point. Public and private are increasingly indistinguishable at the top level. So I suppose it doesn't matter whether or not banks are in public ownership. Just don't expect nationalisation (or privatisation, for that matter) to make them any more accountable or any less corrupt.

      I do feel sorry for the Bankia shareholders, particularly the customers of the merged banks to whom the shares (and pref shares) were mis-sold. Do you know if they have any legal redress?

    2. I'm afraid I don't. But there must be many well-informed people who do.

  6. Bigger banks have bigger costs, both in fees and transnational costs. Small and medium banks charge less than large and giant banks. We don't need so called too big to fail banks. We don't need transnational banking players, who, when they go under, drag entire countries/continents with them. What every country should have is a national banking system. The commercial banks should reflect the economic reality of the region. If it goes under, we let bankruptcy reorganization do its thing, and there won't be a national or transnational domino effect of bankruptcies. Banks have huge profits. Why? They're not producing wealth. All they do is an intermedidary service - providing credit those who need it. And under the present system, the international casino gets funded and expanded with tax payer money, while the physical economy is left to dry without capital and with exorbitant rates. Banks like to loan to bad governments, because if they default, they as bankers will be in charge of many a public asset. Banks are not being allowed to go under, because the powers that be want states to go under. What is bankruptcy, if not a changing of ownership, by having to not pay market price on assets, and if we're not talking about fiat here, we're talking about physical/productive assets/physical capital.

  7. Glass-Steagall could go a long way in rolling out the effects of the bailout and the constant moral hazard and derivatives pollution, that's gotten itself mixed with public finance. The italian intelligence service called the mixturing of financial derivatives with public finance, as a threat to national security. While the people's deposits are ensured by the government, the big investment houses will forever be encouraged to overleverage themselves and build up the house of card. Financial derivatives total astronomical figures, it's the quadrillions, and how much is the world's GDP? Barely over 100 trillion. Glass-Steagall with a two tier credit system, with a higher overnight rate, and a low fixed interest rate for investments in agriculture, energy, infrastructure, and industry. Public credit issued for such things, would solve the problem. Quit using that much liquidity, and lets start using bills of exchange.

    1. Oh dear. All the old myths in two comments.

      1) No, big banks DON'T have higher costs than smaller ones. They have lower costs. You want smaller banks, you will pay more for your banking services.

      2) International banks have a very important role to pay in international trade - and in international travel, too, since people like to be able to get money while abroad. Balkanisation of the global banking system wouldn't help anyone.

      3) Unsecured lending to businesses is just about the highest-risk form of lending there is. And banks are trying to reduce their balance sheet risks, not increase them. That's why rates are exorbitant and access restricted. It has nothing to do with what you wrongly term the "international casino" and everything to do with the simply horrible relationship of risk to return at the moment.

      4) Which "powers that be" want states to go under? Wrecking an economy doesn't help anyone - least of all its creditors. I won't go into the sheer idiocy of Eurozone economic policy here, but they don't want states to "go under". They genuinely believe that their foolish and harmful policies will repair states' finances.

      5)"Glass-Steagall" in my view would solve nothing. The debt crisis was caused by excessively risky and fraudulent mortgage and corporate lending on both sides of the Atlantic. Yes, we have a global derivatives bubble - but that's not the cause of the problem, it's a symptom of it. The US did not have a financial crisis in the Glass-Steagall era, but in my view that was because of tight control of mortgage underwriting standards and the role of the GSEs in eliminating interest rate risk for ordinary borrowers, not because of Glass-Steagall.

      6) Why do you want a higher overnight rate? Overnight funding is needed for payments in and out of ordinary people's bank accounts. Do you want banks to have to start charging people for payments?

      7) You want a state investment bank. I don't in theory have a problem with that, but how does that reduce the risk to the taxpayer of bad debts? As I said above, unsecured lending to business is about the riskiest form of lending.

      8) You want there to be no bank financing of international trade, and people (and corporations) simply to write each other post-dated cheques? Well, I suppose that is consistent with your desire for balkanisation of finance, but....I'm speechless. Talk about turning the clock back.

    2. I misspelled. I meant a higher standard rate for any other forms of credit which have no relations to industry, agriculture, infrastructure, and energy.
      Here's a graph which shows the average fees of financial institutions by size. http://www.ilsr.org/wp-content/uploads/2012/07/bank-fees.png
      Investment banks don't need deposits in order to acquier capital, smaller banks do. There's a conflict of interest between depository institutions and investment banks. GS was chipped away at, and finnaly abrogated in 1999. Right now, governments have no control on the money supply - it's all in the hands of the private banks. Prof. Keen proved it, and stomped P.Krugman on this issue.

  8. Or simply lets do away with interest and deposits. No more government insurance of deposits, and apply islamic banking principles. No more interest, no more derivatives, no more deposits. Banks will just leverage their capital in order to do business. They're not constricted by reserves anyway, when their making loans. QE doesn't work. So under islamic banking, if you want to get money for a house, you go to the bank, sign the deal, in which every fee is mentioned upfront, the bank buys that house for you, and sells it to you in installments, with a commercial adaos built in. That's how they make their profit. Will banks ever be fullproof? Definitely no. As long as they're run by greedy humans, they're gonna fail. And it's high time that the justice system treated banking faults as CRIMES, and not as ERRORS. Recently the Office of the Comptroller of the Currency said that it would not prosecute a particular banking institution guilty of so called "erroneous practices", because that would endanged the banking system - the confidence in it or what not. That's totally BS!

    1. "No more interest". So your ordinary person trying to save a bit for their future, and wanting a return on their savings - how would they get that?

      "No more deposits". Wow. Loans create deposits....

      "No more derivatives". So the farmer wanting to fix a future price for his crop so he can afford the seed and fertilizer to grow it won't be able to do so. Yes, that will do wonders for global food production.

      Incompetence is not a crime. Nor is greed, necessarily. And it is incompetence and greed that are the two biggest reasons for bank failure - as the Bank of England's report showed. Incompetence=mismanagement: greed=bad lending.

      I don't agree with the decision not to prosecute HSBC because of systemic fears. Crimes should always be prosecuted.

    2. No more financial derivatives in the sense of no more credit default swaps. Those futures that at least deal with physical products are ok. What I'm referring to is the manufacturing, packaging, and marketing, and circulating of bad debt, and fraudulent claims. I'm also a fan of Freigeld. If people want to save their money, they can buy bonds, stock etc. Money should be kept in circulation, in the real economy, and not in the corrupt temples of Wall-Street and London. There's so much capital out there that's going nowhere. I agree with Yanis Varoufakis when he says that this crisis is a savings crisis.

    3. Look, I'm not arguing that derivatives weren't abused. But I'm saying that the underlying issue is bad lending. As indeed you imply when you talk about the "manufacturing, packaging, marketing and circulating of BAD DEBT" (my emphasis). You want to stop the packaging etc. I want the bad debt - the risky lending - eliminated at source and no more created. The point of much of my writing in the last year has been that in focusing on the fancy derivatives we are failing to address problems in the dull and boring bits of banking, especially mortgage and corporate lending. The calls for separation of investment and retail banking come mainly from a popular belief that investment banking is "risky" and retail lending "safe". This is simply untrue and very dangerous. This post is intended to redress that balance. The fact is that most bank failures are caused by risky and fraudulent personal and corporate lending, not by derivatives. I'm sorry, but that's the truth.

      I agree with Varoufakis, actually. Hoarding by risk-averse investors, corporations and banks is crippling our economies. It's the final state of Irving Fisher's debt-deflation spiral. We have moderated the intervening stages, but we've still ended up with the same disaster.

    4. Greed yes. Incompetence no. FRAUD is the word you are missing here. These city banks are criminal enterprises. The derivatives are leveraging the possibilities for further fraud after the fact of mortgage fraud which you are saying is incompetent "risky" lending.

      What you have is a Gresham's dynamic at play here. Mortgage fraud by the banks is business SOP. Less so in the UK to the US, but still rampant.

  9. Right now, governments are the hostages of the bankers, and they're the ones who practice financial terrorism. Why do we even need a central bank? Let the treasury do it. That's the real power anyways. Use taxation and spending to control the cycle. Forget taxing currency from the people first in order to make a public investment in the economy. When the private sector starts to run deficits, decrease taxation and increase spending, when it's running a surplus, revert those policies. Investing in the physical economy will always yield physical results - increase of productivity, efficiency, and overall the increase of the energy flux density per capita and km2. We don't need a financial/intermediary class to endanger and substitute democracy and the rule of law.

    1. So your idea is that government should be the only bank? I suggest you read my discussion with the Russian commenter above. It may be that ordinary banking services will in the end have to be provided by the state. But there would I think still be a role for risk investment, which SHOULD NOT (in my opinion) be done with taxpayers' money.

      Your idea that government and central bank are the same thing has some merit. I tend to regard them that way too: to my mind the separation between govt & central bank, fiscal and monetary policy is entirely artificial and it makes far more sense to see them as simply aspects of the same thing. There are concerns about the corruptibility of politicians, though, and state banking and economic systems don't exactly have a glorious history. What you suggest is much like the Soviet Union banking system, which was a disaster. But perhaps you are too young to know much about that.

    2. Ms. Coppola, please don't be presumptuous. All systems work, albeit on different efficiency levels, but nonetheless, they work as long as corruption and incompetence is at a minimum. When that doesn't happen, it collapses. My economic preferences are aligned toward those of Alexander Hamilton and Friedrich List. I'm an adept of the Historical school of economics. I have no love for austrianism, nor for the various mutations of keynesianism. All money is debt, and all money is public - therefore, no one should be able to utter money or credit, save for society. That means that the legal representatives of the people ought to have open/transparent democratic proceedings, and vote on the necessary bills for the development of the nation as a whole. Money has no intrinsic value, and neither do physical resources. Human creative reason discovers and identifies that value and its uses. Thus, the economy should dictate the value of the currency and not vice-versa. Governments ought to protect and promote the general welfare of the people, and that means encouraging the productive powers of labor. Growth is not the same as development, and the only sustainable development is constant development. The real safeguard against inflation is technological develpment. Infrastructure creation, linking all the parts of the whole together, ensure equality of opportunity, and it prevent monopolies. That's why inland development was so threatening to empires which had maritime dominance. That's one of the reasons why WW1 happened. Whatever the banking system, give me bankers like Alexander Hamilton and policy makers such as Pierre-Paul Riquet and Friedrich List, and I can sleep soundly.

  10. Having spent my first career (17 years) at the Continental Bank of Chicago which, in 1984, became the largest bank failure in history up until then (and, I believe, held that record until Lehman), I would like to add a perspective. In a nutshell: regulations and controls are very important but they alone don’t serve a thing if the value structure of management gets out of whack. Thus, I consider it critical in any bank audit/review to make a comprehensive review and assessment of management’s value structure. Let me summarize my experiences at Continental.

    By the early 1980s, Continental was one of the last AAA-rated banks in North America. In early 1982, it was voted the best bank of a decade. It had fantastic controls. When it celebrated its 125th anniversary in the spring of 1982, media comments raved about the sound and solid business philosophy which the bank pursued. And in the first week of July 1982, the bank had to be rescued. Two years later it had to be nationalized.

    The business model and the controls of 1982 were no different from the business model and controls of the year I joined, 1972. The value structure of the people had changed. When I joined CINB in 1972, banking was a serious business. There was an unwritten code of conduct to act responsibly with OPM (other people’s money). I remember my seniors in Chicago, from the CEO down, hammering in phrases like “don’t give anyone the bank’s money if you wouldn’t also give him your own money”; “know the character of your borrower”; “we have 4 major constituencies (the customers, the shareholders, the employees and the society which allows us to do business successfully) and we have to respect all 4 equally”; “hard work and clean living is the basis for success”; etc., etc. Within 10 years, this value structure had turned upside down. All of a sudden, profits had become the name of the game regardless where those profits came from. We were now doing deals which the bank wouldn’t have touched with a ten-foot pole 10 years earlier.

    In the first week of July 1982, it turned out that CINB had lent over 1 billion USD to oil speculators in Oklahoma who, when visiting the bank, were known to have drunk beer out of their boots. The bank thought it had made tons of profits and then it turned out that those ficticious profits were 100% losses of capital (should not have been a total surprise when you are dealing with people who drink beer out of their boots…). When the bank’s Senior Auditor was asked whether he had ever brought his severe concerns to management’s attention, he replied that he was once, at the urinal, standing next to the Executive VP and mentioned to him that he had a lot of eggs in one basket. The Executive VP later said to investigators that he normally did not discuss business matters at the urinal. So much for the change in value structures. In the value structure of the early 1970s, Gordon Gekko would have been fired on the spot. A decade later, all large financial institutions were looking to hire Gordon Gekko’s.

    Banks should, by definition, be intermediaries; a means to an end and not an end in and by itself. Their core business is the transformation of risks and tenors, and the providing of services. A management culture which emphasizes that overall philosophy is quite unlikely to have its value structure get out of whack. A management culture which focuses excessively on the bank being an end in and by itself is prone to eventually get out of whack.

    1. Thank you for this. An interesting and really rather sad story, with a useful lesson. I agree with you about management value structures being key.

  11. To make a long story short you are right. By doing what you propose would essentially mean that asset bubbles caused by extreme lending would also be very fewer than now. The problem with policymakers is that they do not wish to change their ideology and prejudices they have worked to hard to obtain. The other issue is that regulators will actually have some work to do instead of just doing forecasts.

    You may also see this in the bail-out packages in Europe nowadays. Imposing austerity has not been working (they have the examples of Greece and Ireland for that) and yet they are trying to do the same to Cyprus and Spain now. Spiegel stated that Germany will soon follow. It appears that we need something of a revelation to change ideas.

  12. Hi Frances,

    Congratulations on your research. I’ll probably quote it in future articles of mine.

    However I don’t agree that full reserve “misses the point”. Full reserve provides a very neat solution to irresponsible banking and for the following reasons.

    Under the existing system, there is likely to be a panic and disbursement of taxpayers’ money as soon as a bank’s assets fall below the value of its liabilities (the latter being fixed in money terms). In contrast, under full reserve, the value of most of the different types of liability on a bank’s balance sheet float, just as the value of shares in a corporation float. If the value of the corporation’s assets halve, then the value of the shares will approximately halve. But that’s no reason to panic or for the disbursement of taxpayer’s money.

    As Mervyn King put it, “we saw in 1987 and again in the early 2000s, that a sharp fall in equity values did not cause the same damage as did the banking crisis.”

    The only bank liability that does not float are deposits which the depositor wants to be 100% safe, and which are therefor not invested: the money is just lodged at the central bank.

    Also much of what Игры рынка says is straight out of the full reserve book, far as I can see, e.g.:

    1. The “removal of public subsidies” to which he refers is inherent to full reserve.

    2. He wants to combine “private risky lending . . . and risk free "banking" services” Full reserve does that.

    3. He wants current accounts to be risk free and pay no interest: exactly what Richard Werner / Positive Money advocate (as do I).

    4. He wants interest paying savings accounts (limited to a small amount per person). That’s exactly what I’ve been advocating as part of a full reserve system. The latter accounts are not an essential part of the system, but they take care of the discontent amongst the masses that might arise if the masses were barred from having ANY SORT OF interest earning account. You can’t remove subsidised bread and circuses or subsidised banking from the masses too quickly.

    You claim that under full reserve (or Игры рынка’s system) “it would be impossible for people to have overdrafts”. Why? Banks (or other lending entities) continue to lend just as now: it’s just that the depositors who fund such loans foot the bill if the loan goes bad, instead of the taxpayer footing the bill (or possibly footing the bill).

    You say “It would be very hard to persuade people that they should in the future take risk that they don't take at the moment.” The answer to that is that on changing to full reserve, no one is forced to take on risk. Any monies a depositor wants to be 100% safe will be 100% safe, but that is TOTALLY INCOMPATIBLE with putting the money at risk by investing it (with the taxpayer taking the risk or part of the risk). So the depositor gets no interest. In contrast, if the depositor wants to take a risk, then fine: they get a dividend / interest. Heaven knows how many tens of billions are already invested that way on the stock exchange (either directly or via pension funds). Most people are not totally averse to risk.

    1. Ralph,

      I'm not going to debate full reserve here - it's not the point of this post. However I will make the following points:

      1) If current accounts become liabilities of the central bank, then overdrafts - which are simply negative balances on current accounts - would require the central bank to accept credit risk. That places the central bank's solvency at risk in a debt crisis. Whether or not this is important is a matter of some debate, but you can't just ignore it.

      2) You have not read properly what I said about people taking risk. Your proposal, which as you know I have read in some detail, presupposes that people would in future be prepared to accept risk on the same time deposits on which they currently accept no risk because of FSCS insurance. Your incentive for them to accept this risk would be continuation of the interest that they currently receive, since government backing (replacing insurance) would only apply to non-interest bearing sight deposits. That, frankly, is a pretty rubbish deal for time deposit holders. Why on earth would they continue to keep their savings in time deposits when they could buy gilts with them, or put them in National Savings schemes - thereby benefiting from 100% government backing while still receiving interest?

      Most people expect their interest-bearing bank savings to be safe. They do not regard them as "investments". You have a major education job to do.

    2. "If current accounts become liabilities of the central bank, then overdrafts - which are simply negative balances on current accounts - would require the central bank to accept credit risk"

      Why? How do you draw the connection?

      First of all, I personally see little reason for consumer overdrafts. These are part of the problem we suffer from at the moment which is unsustainable debt burdens and wealth distribution in many cases caused by over-consumption on credit pulled from the future incomes which were not realized. But this is just my personal opinion. If you still want to have consumer overdrafts, and central bank should clearly stay away from this business, then we already have good instruments and fully developed infrastructure for that - credit cards.

      As for corporate overdrafts then in my eyes it is an easily core banking lending activity which goes under the name working capital. So no problem here. Even if overdrafts become too expensive (even more then they already are) then it will just mean a slightly different cut-off point for generic corporate cash management. I do not see a problem here.

      So I really do not understand your concerns about overdrafts. Those would be my least problem. Could you please elaborate?

      "Most people expect their interest-bearing bank savings to be safe"

      This is what we told them and keep on telling. However most people defer consumption, i.e. save, and expect their savings to preserve purchasing power. However in the current setup purchasing power and interest rates are very much independent matters. The consequence of this is all types of forced speculation and related issues, i.e. when under negative "consumption" real interest rates people ineligible for new loans get additionally squeezed for the "real" losses on their meager savings and those eligible for new loans "earn" additional wealth from "real" redistribution paid by bank depositors.

    3. 1) Overdrafts are nothing to do with unsustainable consumption. They smooth uncertain cash flows, making it possible for people to pay bills when they have not yet received money they are owed. They are vital for small businesses and self-employed people in particular, who often have to wait a long time to be paid. I speak from personal experience here.

      Credit cards are not an alternative to overdrafts. Most people, including those with uncertain income flows, have essential bills such as mortgages set up as direct payments from their current accounts. In your world, if no overdraft facilities were available those people would either have to pay all their essential bills on credit cards or face the ignominy of having essential bill payments failed due to cash flow difficulties. And credit cards are certainly not the solution to small business cash flow problems - and nor is bank lending. If you don't want the central bank taking credit risk, then private banks would have to provide working capital/overdraft accounts with facilities for instant transfer of money to current accounts to cover bill payments.

      Interest rates on authorised overdrafts are considerably cheaper than credit cards.

      2). No, safety is what they expect, not what "we keep telling them". People have always regarded banks as safe places to put their money. There is absolutely nothing new about that.

      Ralph's proposal envisages that all bank lending would be provided from a pool of time deposits which people have explicitly permitted to be used for lending. I can't see why people would put money in such time deposit accounts at all, unless the rates were sufficiently high to make the risk worth taking - and that would mean much higher interest rates to borrowers across the board. SMEs, which are the highest-risk borrowers, are already complaining that they can't afford the rates charged by banks. Ralph's proposal would raise them even more. Raising interest rates to borrowers is economic tightening, since it discourages borrowing to fund business expansion. That's the last thing the economy needs right now.

    4. Hi Frances, You say “If current accounts become liabilities of the central bank, then overdrafts - which are simply negative balances on current accounts - would require the central bank to accept credit risk.” Nope. You are assuming that because when someone’s account is in credit, their money is held at the central bank (or any other institution) that therefor when the account is in debit (i.e. overdrawn), the lender must be the same institution. That’s exactly what DOES NOT HAPPEN under full reserve.

      Under full reserve all credit risk is carried by a commercial bank’s shareholders, bondholders and those depositors who want their money loaned on or invested.

      Re your point No.2, you’ve got a good grasp of the problems involved in implementing full reserve. There would certainly be difficulties involved in persuading the masses to go along with the idea, but that just derives from the fact that the existing banking system is subsidised, and weening people off subsidies is ALWAYS difficult.

      They discovered that in Ancient Rome when free bread and circuses were not up the expectations of the masses. But that does not justify free bread and ciruses.

      As to the size of current bank subsidies, there are different estimates, but Andrew Haldane estimated total subsidies to be several times bank profits. See para starting “Elsewhere..” here:


      If that is true, the existing banking system is a complete farce: it makes no economic sense.

      Your phrase “rubbish deals” for time depositors is a bit over the top, but certainly full reserve puts time depositors on a level playing field with respect to other forms of saving / investment, like investing in unit trusts. Indeed, Kotlikoff (and advocate of full reserve) SPECIFICALLY ADVOCATES making would be time depositors put their money into unit trusts.

      Re your idea that I have a “major education job to do”, that’s a good point. If I’d lived in Ancient Rome I’d have had a major education job to do in persuading the masses that they didn’t have a right to free entertainment at the Colosseum. But I’d just have battled on with said education. What would you have done?

    5. Ralph.,

      Either a current account is on the books of the central bank or it isn't. You can't start saying that an account is on the books of the central bank when it's in credit and on the books of a private bank when it isn't. You would have to devise a mechanism to enable credit risk to be transferred to a private bank. I've suggested one. How about you think about this too, instead of repeating assertions about who bears credit risk without addressing the practical difficulties that overdrafts present in your system?

    6. Good point about standing orders and direct debits when current accounts are all at the central bank. Though I do not think it is a problem at all and private banks would definitely come up with some product to solve this problem. But it is nevertheless an interesting point to think about. However even today not everybody has an overdraft and direct debits can bounce as well. I personally (luckily or prudently) never had such a problem and do not know what happens when a direct debit is bounced.

      And it at least partly has to do with overconsumption. People do bet on future and overdrafts are a way too easy and convenient product for such bets. Especially when some ancient religion virtually forces people to take those bets. Without the possibility of overdrafts the structure of economy would have looked different and the crisis would probably have happened much earlier and also much milder. But it is not a major point.

      As for safety of savings then this is what I propose without any backdoor massaging - 100% unconditionally safe and independent of any too big to fail or too small to bail out or whatever else deposits. Additionally, and contrary to the current system, savings would be indexed to consumer inflation which means they are also safe in their purchasing power (savings can be made available on a monthly notice period and indexed to MoM inflation rates or similar systems). Nothing like this exists in the current setup.

  13. Hmmm, they're less likely to fail because their size and power demands that they be bailed out, not charged criminally for their quite obvious crimes and generally threaten armageddon if they aren't catered to and obeyed.

    Banks serve no real social purpose that government itself shouldn't do. At best finance is an economic overhead. At worst they are a threat to democracy itself. That's where we are now.

    They are all insolvent. Take them into receivership, unwind their debts and reopen them as public concerns. And criminally charge and prosecute the elite fraudsters with some serious gaol time. They have caused massive damage and yes, deaths.

    Otherwise the losses will keep mounting and their damage to the productive economy will compound.

  14. I think there are not enough commercial lending out there.. we need more variety

  15. whoah this blog is fantastic i love reading your articles.


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