Monday, 19 October 2009

That's how you do it!

The ever-delightful Wat Tyler:

As we've said many times before, the obvious and necessary step is to break retail high street banking away from investment casino banking (a new Glass-Steagall). We continue to guarantee (and heavily regulate*) high street banks, but investment banks are on their own. Granny's high street bank deposit is safe, but the Bastard Corporation's super-enhanced Teir 2 capital notes are not.

And we announce it loudly to the world. We say: "London remains the global centre of casino operations, and we will do everything to enhance its position, including light touch regulation. We celebrate and embrace its high rolling players. They can snuffle up as much as they like; they can buy up Holland Park and Oxfordshire; we will never impose punitive personal taxation upon them. But... and this is an important but... nobody should assume we are guaranteeing them at the tables, because we are not. If they lose your family fortune, it stays lost. Buyer beware."

Ah, you say, that's all fine and large. But Lehman was already a pure investment bank, yet when it went down it brought down the roof. So would a new Glass-Steagall actually work?

Sure, Lehman was a pure investment bank, so in theory its collapse should not have brought the world down. But the problem was that everyone had assumed the US government would stand by it. Nobody had ever said what we're proposing is said now, so when Paulson pulled the plug, it came as a huge shock. Nobody was any longer sure of anything.

If the rules were spelled out clearly in advance, we wouldn't have that problem. And because their cost of capital would increase, investment banks would find it much harder to grow so big they could never be allowed to fail.

Focusing on bankers' bonuses is focusing on entirely the wrong issue.


RobW said...

Don't think you should guarantee any banks. It sends out the wrong message about banking. All banking contains risk, high street banking will still work like a ponzi scheme.

Ultimately people need to be more risk averse or at least recognise their money is not completely safe in a bank so they should diversify their savings portfolio.

Obviously people can choose to ignore this. But again the responsibility lays in their hands.

Obnoxio The Clown said...

"Guarantee" = the deposits of savers, that is all.

Ross said...

"So would a new Glass-Steagall actually work?"

Not only was Lehman Brothers not covered by Glass Steagall, had it still been in force Goldman Sachs would have gone bust too.

Glass Steagall was an act of economic illiteracy 3/4 of a century ago and it should never be resurrected.