What is it about banks?

I just dont get the problem about banks.

I have read around extensively and every commentator and article I have been able to find takes for granted that banks must be bailed out and that any failure to do so will have catastrophic consequences: not one of them says why, with the honourable exception of an article from the Cato Journal: a neoliberal body, so far as I can tell, which does not agree with this otherwise almost complete consensus.

http://object.cato.org/sites/cato.org/file.../5/cj16n1-2.pdf

It looks to me as if their focus is on the malign influence of regulation, which if they are neoliberals is what you might expect: but at least they offer some explanation as to why banks are assumed to be so special. But even this does not make much sense to me.

So far as I can tell the idea is that banks are more interconnected than other businesses and this means that failure of one is more likely to spread through the industry than would be true for, say, a manufacturer. That appears to rest on the fact that they are each others creditors and debtors and also to some extent to the fact that there is no real substance to much of what they d,o and so no way of telling a solvent from an insolvent bank. Thus their security is really a matter for the confidence fairy and if that fairy turns away there is no floor under the bank which prevent its complete failure. That would seem to be supported by what Mr Dimon said about the JP Morgan debacle at the senate committee yesterday: they adopted a new risk assessment model because Basle 3 demanded stricter controls: and it turned out less strict and led to the losses. "Risk Assessment" is a dirty word to me, closely related to "epidemiology". This is not because there is anything inherently wrong with either concept, used appropriately: it is because it is my own experience that they often mean "crystal ball gazing", and are as much use as interpreting the flight of birds, if you want to predict the future. And that is what they are used to do, very often. This utter woo is at the heart of the neoliberal project and it has infected every part of our public life. I seldom hear it challenged.

But the real question is why it matters. Banking is in one sense an industry. It exists to make money. In the neoliberal conception a company or an industry which cannot achieve that must fail: intervention is always wrong and it always makes things worse, no matter how well intentioned. Except banks.

But what actually happens when a bank fails? Some folk lose money, certainly, just as they do when any company fails. Some folk lose their jobs; again, no difference there. Because of the interconnectedness there is said to be contagion and so perhaps the whole industry fails: well that is never good and the consequences can be very severe, as we have seen when almost the whole of the mining and the ship building industries were allowed to fail in this country on neoliberal grounds. I would not wish that on any community dependent on a single industry. But banking is not actually much like that, most places. It is like that in the city of London, and so if the industry were to fail we might see the square mile turn into a jobless desert: it was good enough for Clydebank, when the shipyards closed: it was good enough for Motherwell when the steel works shut down: it was good enough for whole swathes of Wales when the mines closed. Why is it not good enough for the City of London? We are not told and I really want to know

Edited by FionaK - 29/1/2014, 15:25

www.bbc.co.uk/news/business-18284747

The link is to a typical article in the mainstream media. It purports to explain the financial crisis and it has a nice picture. But unfortunately it does not explain anything at all, to me.

The danger appears to be runs on the banks: that is when the people who keep their money there ask for it back, all at the same time. The banks don't have the money, so they can't pay and the bank collapses.

Either the money exists or it doesn't. Apparently it doesn't. My problem with this is that I cannot see what has changed: the money never did exist. If we stop believing in fairies they die. But there is no difference in the real world if all the fairies die, and I cannot see why there should be if all the banks die. There would be some horrible confusion while people adjusted, to be sure. But folk would still be making stuff and moving it about.

Yesterday it was announced that the UK banks are to get more money from the Bank of England. It seems that this is to be done it 2 different ways. The first chunk is to be secured by assets and those assets can be anything at all: previously the assets had to be real, at least on the face of it. But now toxic assets are to be treated like good assets for the purpose of giving the banks money. The second chunk is to spefically dedicated for lending to business. So far as I can gather there is no statutory force behind this expectation. Since that was what the banks were supposed to do with the previous chunks of money they got, and they did not, I am not awfully clear why this is different.

This government has taken a machete to our welfare state on the grounds that "you cannot solve a debt crisis by taking on more debt". You dont have to believe that: but they say they do. Yet that is exactly what this is: the banks are in debt and we are increasing their debt. Once again I am asking myself why banks are different.

It seems to me that the government believes that there is a whole lot of demand for debt out there. If only the banks would lend businesses would grow and we would all benefit. As I said before, they believe that they can cut our incomes and our savings through the austerity they are imposing: and at the same time they believe we can increase our spending and indeed wish to do so. It may be I am missing a step and if so I will be very glad to hear what that step is: because on the face of it this seems unlikely.


We are told that the problem is that people have been spending more than they have: on frippery like pensions and welfare and stuff. In the real economy that just can't happen, so far as I can see. We are told that there is debt: well if there is debt someone lent the money. We are told that sovereign debt is owed to the financial institutions: so they must have had the money to lend. We are told that private debt is owed to financial institutions: so they must have had the money to lend for that as well. Where did they get it from? I do not propose to consider theories of value (though they are obviously relevant): my problem is not abstract. However money is generated it is subsequently distributed and how it is distributed is a matter of political choice. However it happened there is this reality: it ended up in the hands of financial institutions. Either they invented it or they appropriated it.

We know that the share of the money in the hands of the very wealthy has been rising: and the share for the rest has been falling. That is a matter of politics alone: and there is no practical reason why it should be so. If we had taken a different decision then a greater proportion of the money would be in different hands: in hands of workers and/or in the hands of governments. That means that neither governments nor ordinary people would be in debt. Or at least not to the same extent.

In any economic system everybody contributes to produce whatever we make. Say the group is 10 people and they grow 100 lbs of potatoes. Say one of those people contributed all the seed potatoes (for this purpose it does not matter where she got it) and the other 9 did all the work. What are we going to do with our 100 lbs of potatoes? Depends on your politics.

We could agree that all the potatoes belong to the person who had the seeds. In that case what we do with them is entirely up to her. She has options

A person needs 5 lbs of potatoes just to survive. So she decides she will keep 55lbs of potatoes for herself and give 45 lbs of potatoes to the rest. That is one possibility.

Or she can decide to keep 64 lbs of potatoes and give 36 lbs of potatoes to the rest. Now the others must borrow 9 lbs of potatoes from her to survive: they owe her. She says that this will mean there is more seed for next year and so there will be more potatoes and they will be able to repay her and have more for themselves. But she still decides next year: and it is possible that she has not actually got as much potato wealth as she feels is enough: so she doesn't actually give them any more next year: she will the year after...but not yet. But they can borrow an extra 9 lbs of potatoes so they have more to eat: so that is ok. And then, she will foreclose and demand her potatoes back. And berate them for living beyond their means. She will let them have the equivalent of 4 lbs of potatoes and they will have to tighten their belts while they repay her.

We could, of course, decide that the potatoes do not all belong to the person with the seeds. We could decide that some of them belong to each person: either equally or in any other proportion we think good. Or we could decide they do all belong to that person, but we are going to impose a levy for the good of the group and any potatoes beyond 5lbs will be taxed so we have some dried potatoes in common to give to anyone who is too ill to work: or to allow someone who is smart to stop working and get an education.

I think we can do that retrospectively, if we choose: we made a mistake. The mistake was in thinking we were a group of 10 with interests in common....

Edited by FionaK - 15/6/2012, 14:18

I haven't read this report yet, but since you mentioned you were looking for a report on the rationale for bailing out banks, here's one.



picked up from the (often very alarmist, and highly neoliberal in most ways) zerohedge blog.




something wierd going on with the URL button, so I put the urls inside a code tag.

The problem I see immediately with that paper is that it assumes that banking and finance are the same sort of thing as natural disasters and other physical matters: they are not.

It is really an extended metaphor so far as I an see: but it seems to have a contradiction at its heart: on the one hand it proposes that the financial system has been essentially unchanged for about 200 years: on the other it argues that in the last 7-10 years it has changed its nature so that it is now very vulnerable and so are we all in consequence. This makes no sense at all to me.

I do not see any reason to accept that this is a system akin to the human body or the environment: nor do I see any reason to suppose that the crash of a bank or 10 is akin several natural disasters.

Finance is not a natural system nor does it have anything in common with those. It is man-made and man-controlled if we wish it to be. As it is currently constituted it is causing a great deal of harm and attempting to preserve its current state is causing yet more. But the question at the heart of the paper is why on earth would we wish to preserve it? Why would there be the kind of alarmist consequences they assert but do not justify?

According to this paper if there is no money and no credit and no financial mediation then there will be collapse: ok let us accept that. What reason is there to suppose that if we let the banks collaps there will be no money? What there is will still be there, and the rest is illusory, so there is no substantive change. Money is properly the sole preserve of governments. So long as governments are there there will be money. The change which allows banks to control the money supply is a cause of the problem but it is not a necessary thing at all. We can reverse it tomorrow if we wish.

Similarly, why should the collapse of banks mean there is no credit? If I, food producer A, decide that I will not release my vegetables on to the market because I do not trust that the purchaser is creditworthy it is fine so long as there is some other purchaser: but in global collapse such as this envisages there won't be. So what am I going to do? Keep the stuff and allow it to rot in the field? Why would I do that? I am not swapping my vegetables for money: I am swapping them for other goods: that is what trade is. Credit is a promise that will get those goods a some point. Yes I need confidence that will happen: but my suppliers have not changed and my customers have not changed. So if trust them now why would I not trust them in the future? I have the impression that the authors cannot imagine that which they purport to outline. Although they mention the different hats that money can wear they do not seem to distinguish them in any practical way.

It is true that they talk of money as a way of mediating transactions: and so it does. And so can any entry on any computer or any piece of paper. Government can produce as many of those as it likes. My problem is that so can banks and I can't tell the difference. We can sort that: compare rentenmarks. Let the banks hold as much worthless paper or computer entries as they like: it will not make any difference at all if government has scrapped the currency they represent and replaced it with another.

I see absolutely no reason nor any argument within this paper to accept that


They assert it more than once: the do not demonstrate it at all. Much like every other paper I have seen so far

Edited by FionaK - 16/7/2012, 18:36

I was particularly struck by the unquestioned assumptions in the article and I wanted to consider just one of them, because it seems to me to illustrate the problem.

In section three it talks about "Reverse economies of scale in critical infrastructure" and it has this to say:


That is obvious nonsense. Yet it seems to be the premise which underpins this part of the argument. As such it demonstrates a feature of the whole paper: it takes cetain assertions as given and proceeds to build a case on them

So let us look at this, in the context of the case being made.

On the one hand the authors talk of the inter-relatedness of things and this is the basis for their argument that we must look at the global economy as a series of increasingly interconnected things any one of which, if it fails, will lead to systemic collapse. For the purpose of this part of the argument it ignores that proposition, however. For here they are talking about a utility as a stand alone business, and there is the inherent presumption that it is a profit centre. Well it isn't. It is a cost of that same global system. Or, if you prefer, it is an end product that we buy as a whole society, for the good of that society.

In their conception
We are talking about a utility here. Like water. The cost of maintaining a water supply is the cost of the infrastructure; maintenance and running costs. They don't change except with inflation and with efficiency savings deriving from new technology. Demand does not enter into it unless the utitilies are privatised: and that is one of the very obvious reasons why they should not be private. A nationalised water system is the most efficient, quite clearly. There is no possible argument to suggest otherwise because, as they say, it is stupid to build water pipes running parallel to each other and belonging to different companies. So we don't. The "grid" is shared, as they acknowledge. Why then, would we pretend that this is not a common resource and charge "customers" for the water? The only reason for doing that is to squeeze profit out of it, for the private sector.

There is no escaping the cost: nor the need of every citizen for water. We are not free to take our custom elsewhere, and although we can use less there is a limit to that. That limit need not be rationed by price: in fact it is indefensible to do it that way. Yet there is no discussion of that basic proposition.

It is always difficult to critique a paper as long as this one is but each small section I look at is predicated on just such assumptions: and you cannot build a case on false premises no matter how many of them there are: 10 broken bottles do not hold more water than one broken bottle

Water is a universal need and a rich person does not need any more than a poor person. He may wish to have more, but if we have a problem affording water then frankly his swimming pool can go hang no matter how much money he has. Because this is not about price.

http://www.reuters.com/article/2012/07/31/...E86U0KL20120731

1900 jobs cut will save 3 billion euros????

You do the sums....

You think banks plan for long term???

http://www.project-syndicate.org/commentar...rbert-f--tofall

This paper seems to come to similar conclusions to my own. It is nice to know that other people don't wholly accept that banks should be treated so very differently: and also to see it made explicit that what they are doing is effectively blackmail

One of the things I have been told is that the banks cannot be allowed to fail because if they did that would lead to starvation very quickly. The argument is that nothing could be paid and the ATM's would be empty and it would generally be disastrous. That has never made any sense to me because the money would still be there; the buildings would still be there; the staff would still be there. There is no reason at all for the problem asserted to arise, so far as I can see, and I have never had a satisfactory answer to my question about this. It is another of those assertions which have surface plausibility, if you happen to be asleep. That is all it has, I think

I have been confirmed in this conclusion by observing Iceland, which did indeed let its banks collapse and where no such consequences ensued. Today I read the judgement in the case brought against Iceland by ESA (see Iceland thread) and this impression was reinforced. What struck me was the time line which was included in that judgement.

On the 6th of October the Icelandic parliament adopted emergency powers which included power to create new banks.

Landsbanki collapsed on the 7th of October 2008. The same day the Icelandic financial services authority (FME) took control of a shareholders meeting and suspended the board of directors. They appointed a winding up committee which assumed the full authority of the board, with immediate effect.

Between the 6th and 9th of October FME established new banks.

Between 9th and 22nd of October domestic deposits in Landsbanki were transferred to the new bank, under the emergency powers

That is precisely what I thought could be done: and it was done. There is no argument in defence of bail outs on grounds of civil collapse. Another big fat lie from our plutocrats, so far as I can see

So the new boss at Barclays has made a statement in the form of a foreword to the bank's "strategic review".

http://group.barclays.com/Satellite?blobco...2&ssbinary=true

Mr Jenkins (for that is his name) says he recognises that "banking lost its way in recent years". I love that: they sound like babes in the wood, all innocent and orphaned and not at all to blame.

He says they were "putting short term profit ahead of long term interests" and I love that as well. I was wondering about the implied distinction between "profit" and "interests": the implication is that interests might include someone other than the bank: but it does not say so. Perhaps it is a typo and he meant to write "interest" ? Interest is something bankers know about: interests, if taken to include what might be good for anyone outside the bank, not so much.

But for me the phrase could be more honestly rendered as: "putting theft of all the money in the world ahead of any idea of not ruining millions of lives across the world"

He goes on to say " We have defined our purpose as helping people.. to achieve their ambitions in the right way". Presumably that is the sole purpose of making 3,700 redundant? They have all been individually assessed and the best help that can be offered is unemployment benefit? He says on the back of this that he "wants them to choose Barclays". Well admittedly a lot of those staff might have chosen "banking" or "a job" rather than specifically choosing Barclays: but somehow I am not sure that is the real problem

Mr Jenkins says there "can be no conflict between good results and good values". Can there not? I accept there need not be: but cannot be? I rather think the history of the financial crisis shows that he is telling fibs.

Then there is the excruciating way he tells us about their "rigorous programme of work" to "Transform" (new buzz word for them) the bank: the elements are

1. Turnaround: which I take it means reverse the fall in profit
2. Return Acceptable Numbers: which I take it means reverse the fall in profit
3. Sustain Forward Momentum: which I take it means increase profit

Much of the fall in profit is due to fines and liabilities due to misselling of PPI: they are high and they are of the bank's own making. I understand that the share of profit going to executives and staff is to fall from 42% of company income to 38%, which if you read it quickly looks like Mr Jenkins might get a pay cut: but then there are those 3,700 people who are losing their jobs: that might account for some of that.... It is certainly not obvious to me how any of this piffle represents a "new values driven culture and direction"

An IMF working paper has examined the "implicit subsidy" which large banks enjoy because they are "too big to fail". The proposition does not relate to direct bail out: but rather to the reduction in the cost of borrowing which arises from lenders confidence that those banks will be bailed out if necessary.

You will recall that some banks, notably Barclays, did not get a direct bail out and they held this out as an indication that they were well run etc. That claim has been demolished by the Qatari connection and the Libor fixing which have since emerged: but this paper stands even if such covert actions had not existed. It has long been recognised that banks which were not directly bailed out still enjoyed a benefit from those bail outs in the form of more stable markets and increased confidence that they would not fail. That has normally been confined to a short term effect at the time of the crash. These authors differ. What they are saying is that all the big banks get an effective subsidy all the time.

The authors conclude that there should be a levy on bank profit because of that privilege, and that this should be in the form of tax to extract the value of what is, in effect, a public sector subsidy. That might go some way to offset the damage to confidence in the sovereign debt if you happen to think that is real in any way: and for practical purposes it is, since governments choose to believe it is.

There is some uncertainty about how to measure the amount that should be levied but one figure proposed is 0.8%. Bloomberg has put some numbers on that for America, only: and they consider that it amounts to $83 billion a year: which is not to be sniffed at if government debt and deficit bother you.

Bloomberg also notes that such a levy would wipe out the profit of the top 5 banks. If that is true (and they have figures to support it) it implies that these banks make no profit at all from the control and management of $9 trillion dollars worth of assets etc. I find that hard to believe, but it rather depends on what is counted as profit and that in turn depends on how much tax they want to pay. On the face of it they must be the most incompetent people on the planet. You may have already come to that conclusion, however.

http://www.bloomberg.com/news/2013-02-20/w...on-a-year-.html

http://www.cresc.ac.uk/sites/default/files...anking%20V2.pdf

An interesting paper which provides much information about the influence of the financial institutions and their privileged position wrt to the political process. Worth reading in full, I think

As people here know, I believe that much of what we do is informed by "narrative". We make stories about the world and we act on the assumption that those stories are true. I do not think we can help this. We can try to apply critical thinking to those narratives and that is useful: but nobody can rely on facts and evidence to come to conclusions about everything because we do not have time. We assume that there are "experts" who can tell us what is happening and what it means, and we prefer a coherent story to uncertainty, for the most part. There is nothing wrong with that. If our "experts" really are experts they know far more than we do about their particular field: and we should take their views seriously. But there are many occasions when the "experts" are not experts at all, if what you mean by that term is someone who has deep knowledge and an objective approach to the interpretation of that knowledge. This can be seen in science, which is the fundamental reason for our faith in experts: they gather facts and they conduct elegant experiments to test hypotheses, especially in the hard sciences. The findings are solid: but neither what we choose to test nor how we interpret those results are solid in the same way. Choices of that kind are made by people, not by scientists: and people are informed by their own unquestioned assumptions and understandings. We deal with that problem through a variety of mechanisms but mainly through transparency. Scientists publish their work and they detail what they did and why they did it and what they conclude from the results they obtain: and all of that is open to review and to question. It sort of works: it is better in hard science than in "social science" since most people do not have a basic political stance on the behaviour of stars or of particles: but even there there are limits which derive from our humanity. This is demonstrated in the aphorism that old paradigms do not shift with new knowledge, but rather when their defenders die out. Not the whole story, but certainly a strong part of how knowledge progresses. It is very difficult for an established scientist to admit that his whole career and contribution is worthless because he did not understand something important which emerged late in his life: some can, but most resist. So do we all. When new knowledge arises it is slowly accepted and the extent to which this happens is also dependent on our status as story tellers: new facts don't change paradigms: but new and better stories do.

If you are wondering why I raise this in this thread it is because of experience in discussing banks in recent months. What has become very clear to me is that there is a story about banks in this country: and that story is that they are the drivers of our national prosperity. According to this view banks and financial institutions are the life blood of our state, our social security, our economy, and on and on. In support of this position facts are adduced, such as the contribution they make in the form of tax: both corporate tax and the proportion of the total tax take paid by the elite. London is a major financial centre and most recently the decision by the EU to cap bankers' bonuses had caused outrage in this country. We are told that the banks and financial institutions will move outside the EU: and that this will be a disaster particularly for the UK. What is curious is that many are disgusted by the behaviour of the banks and financial bodies; many consider the bonuses they pay themselves to be obscene; many have a dim appreciation that they caused the crash which has impoverished us all. And yet they have persuaded a great many people that they know what they are doing, on the whole: that the disaster they caused could not have been foreseen; and that any action which restricts their freedom to act in ways that seem good to them are likely to make the situation worse. We cannot regulate them effectively and we should not: for that will result in economic collapse and we will all suffer. That is quite an astonishing story, but it seems to resonate.

What is really being argued is that banks are a force for social good: this is a narrative which has been promoted and accepted for a very long time. It is less secure than it was, because of the crash: but it is strongly embedded. There are few alternative narratives by now and those there are do not get a platform because all of the people who inform the public have already committed to the story. This is particularly noticeable in the case of the BBC, which is disappointing. I have some faith in that institution as a source of information but in the case of economics it never ceases to disappoint. It is required to provide balance: but the hegemony of neoclassical economics means that balance takes the form of presenting two sides of the same story. The "balance" is represented, for example, by debate between neo Keynesians and neo Liberals. As we have seen in other threads, they agree about the fundamentals and their dispute is about the detail, only. That is as good as it gets, in the mainstream, and that is not surprising because the people who present themselves as "experts" within the media have all bought the paradigm: they all believed the neoliberal story (if they did not they would not have their jobs) and mostly they defend it. Why would they not? Those who have doubts need to develop a whole new story from the bottom up: and that takes time. But the media must comment all day, every day: it is hardly likely that they will devise a fresh approach, on different assumptions, on the hoof. So much for a "free press", constrained by few journalists who must Phil Space and have not time for much more than regurgitating what they are fed by corporate press departments; proprietor demands (informed by the fact that they are themselves businessmen); the perceived value of apolitical balance (which fails when the differences are cosmetic); and their own commitment to the prevailing narrative and what it defines as important.

The effect of all this is to narrow the scope of the discussion to exclude alternative stories. And if you repeat something often enough it does tend to be accepted.

So the story of the financial institutions is that they are socially useful and we cannot do without them. Politicians have accepted that story even after the crash, and policy is designed on that assumption. This way of telling the story skips over the main question: which is: Is it true? This paper addresses that

The first important point in the linked paper is that what appear to be independent analyses are not. Reports produced under the stamp of the Treasury, for example, were produced almost exclusively by the financial sector constituted as a "working group", and disguised as the same sort of investigation we knew in the past. Those earlier investigations took evidence from a wide variety of bodies and the conclusions were informed by different interest groups. Although they look similar the current reports do not draw on other groups: and this is related to the abolition of those alternative power bases outlined in the "accountability" thread. The input is monolithic and, not surprisingly, the output represents only one interest group. But the public are probably not very aware of that, and presume that such reports take evidence from all sectors of society: which gives them authority they are not due.

The second point is that the financial sector itself defines what is to count, when considering their value to the wider society: so they add up the tax contribution from the financial sector; export earnings; and employment generated: and they come up with a big number. They do not consider the costs of that contribution, so the number is not a net figure.

The paper makes an attempt to look at the net figure. First it discusses the tax contribution. It is difficult to determine the true figure of tax paid and collected by the financial sector, for figures are not collected in that way. It does not seem unreasonable to adopt the method used by the financial sector itself, so that is what they do. On that basis the tax contribution from financial institutions between 2002 and 2007 amounts to £203 billion. However after 2007 the government had to bail out those same institutions and the authors use IMF estimates. According to that body the direct costs of the bail out were £289 billion: and the full cost including loans and guarantees was £1,183 billion. The latter figure is of course too high: in that some of the guarantees etc were not taken up. But it is clear that the costs outweigh the tax take even on the most conservative calculation of money paid out directly. It can, of course, be argued that some of that money will be recouped when the nationalised banks are re-privatised. But that does not alter the fact that austerity has been imposed because of the bail out: the pain is now, and even if the sale of those assets reverses the position it is doubtful that the public will benefit. Yet that is the plan.

The authors then turn to the claimed contribution of the financial sector in terms of employment. Again it is difficult to estimate this because of indirect effects, which are always a problem in any sector under consideration. Nonetheless the authors state that direct employment in the financial sector has been more or less flat since 1992. This, despite huge increases in profit and activity. Nor does including indirect employment raise the total by very much. On these estimates finance employs about 1..5 million people, which is less than the 2 million or so employed in manufacturing even in its current parlous state. Manufacturing employment has declined a lot in the last decade, but the growth in financial business has not taken up any of that slack. So when it is claimed that it is an important source of employment one must ask "relative to what". It is of no social benefit if a sector become a bigger proportion of employment because other sectors have shrunk, rather than because it has generated additional jobs.

The paper covers much else of interest, and I will not continue to outline the points it makes, for I have no more time now. I may come back to it: but in any case the link is there if you are interested