Afternoon:
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The way The Wall Street Journal reported it yesterday, Britain has turned into one gigantic experiment in which you and I are the drugged-up mice.
"Britain, the world's fifth-largest economy, offers a prime testing ground for policies to counteract the global financial crisis, which stems in part from a bursting housing bubble. Its banks depend heavily on financial markets for the money they turn into mortgages and other consumer loans - lending that has helped make Britons the world's most indebted consumers."
Continued the Journal: "Now those markets have effectively shut down, putting the British banking system and the economy at risk."
To try to kick-start those markets, the Bank of England has put in place a £50 billion funding package. At his power breakfast with bank chiefs last week, Gordon Brown stressed the importance of this increased liquidity reaching homeowners. This was greeted with bemusement by some of the bankers present, who felt he was putting first-time buyers and those without large deposits ahead of the dangers to the wider economy.
They impressed upon him the systemic risk if the logjam wasn't solved. So it is proving, with yesterday's news of the £50 billion rescue being accompanied by warnings the banks were unlikely to pass on the cash to borrowers. They want to hang on to the money to boost their own reserves.
There is a guilty party here - and it isn't the consumer. Yet, judging by what has occurred, we could be forgiven for thinking so. We are being made to suffer for the folly of others.
It was the bankers who embarked upon crazy gambles designed, ultimately, to inflate their already vast year-end bonuses. When that piece of pure speculation, buying bundles of mortgages from trailer-park America - people they normally wouldn't let through their polished doors into their marble halls - goes horribly wrong, they point out to the Prime Minister they have got the economy by the short and curlies. Unless he bails them out, the country collapses.
But there is another guilty party, too. The fact is the Government and Bank of England have sat back and done nothing to prevent the banks' stranglehold on the economy from tightening. As the Journal points out, we're "the fifthlargest economy" but we're also "a prime testing ground" because no other economy is so tied up with financial services and other countries do not have our level of borrowing either.
The banks may argue that consumers have also played their part, that we didn't need to splurge in the way we did.
Well excuse me - if you're subjected to a daily bombardment of loan offers and inducements, eventually even the strong will crack.
No, when the dust has settled on this crisis, the authorities and the banks need to take a hard look at what went wrong. We've been here before of course, most recently with the dotcom boom and bust of 2000. Then, it was agreed: we can't allow a situation to arise in which companies are so stupidly over-valued. The points were aired and quickly forgotten.
Somehow, we have to stop this cycle from occurring again - particularly as we've been made aware the economy is so tied up with the health of the banks. But if we're not careful, it will.
Already, the omens aren't good. The banks have continued to pay their own people handsomely, regardless of the panic elsewhere. So Bob Diamond at Barclays Capital will still get his £21 million bonus - despite Barclays taking a £1.3 billion hit on subprime loans. At Bear Stearns, the US bank brought low by the debacle and taken over by JP Morgan, key employees are having their pay boosted in order to make them stay.
It's as if the banks don't get it - or do, but don't care. Very few senior bankers have lost their jobs, none have been required to repay their bonuses, and they have continued to make record payouts to their shareholders.
At one of the organisations where the amount written-off has been among the biggest, they have identified the problem. UBS, the giant Swiss bank, has suffered £18.7 billion losses. An internal report says its incentive schemes were a root cause. Long-term measures, designed to lock-in staff for years to come by rewarding them through share options, were scrapped. The traders were put on short-term deals, designed to produce quick results.
Normal checks and balances went out of the window. "Essentially, bonuses were measured against gross revenue, with no formal account taken of the quality or sustainability of those earnings," said the report.
This is what has to be curbed. But one bank acting on its own isn't enough - they have to be pushed from competitive self-interest to collective action. One solution is regulatory. There is a precedent for this. In 1933, following the stock market crash and amid the great depression and bank failures, the US passed the Glass- Steagall Act, separating retail banking from risky investment banking.
In 1999, President Bill Clinton repealed Glass-Steagall - a move that some observers have said put the conditions in place for the subprime disaster and its consequences. There are those who say that the proper response to this current drama is to introduce a version of Glass-Steagall.
Certainly there are calls for banks to face tougher regulation but this would come at a price - it's precisely this lack of pernickety rules that has enabled London to steal a lead on New York for financial business. We may enshrine some safeguards in a statute but we may be doing ourselves out of a future.
Something, though, has to give. We can no longer have a situation where banks are allowed to take absolute risks and yet not be allowed to fail. The system of awarding bonuses based on one year's performance has to go. If they are going to enjoy this hallowed position in our society and not be subject to heavy legislation and even windfall taxes on their profits, banks need to be forcibly reminded of their responsibilities and they must respond.
There is little wrong with the fundamentals of our economy yet it's been brought down by the excesses of the banks. Britain must stop being a testbed. As the International Monetary Fund has pointed out, there are some very real dangers abroad which could spell global economic meltdown, such as rising energy and food prices. The last thing Britain needs against that backdrop is to be paying a heavy price for the greed of its City high-rollers.
Reader views (1)
Once again, the socialist genius for getting most things wrong emerges, and us poor taxpayers get it in the neck - again! And Brown is proved (again) to be the absolute antithesis of the financial wizard he believes himself to be. It's a wee way down the track yet, but all those PFIs are lining up to bite us poor taxpayers in the backside too.
- Kiwi Expat, London, UK, 22/04/2008 19:38
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