Economics for 2010, or How The Banks Were Brought To Heel

[despaer]

I don't believe it. It looks like I am going to be forced to praise a politician, an activity which I am generally not in favour of at all. The individual in question? That would be Barack Obama, for having had the courage to step right out and say that having received vast amounts of taxpayer support, the banks are going to be expected to repay

Comments

[justoneway]

I think that both our governments and the US governments measures are really a bit blunt when it comes to their reform potential. They are not going to do what needs to be done. They are both primarily focussed on salvaging something from the mess rather than instituting some kind of risk management reform. That is fair enough and worth doing but let's not pretend it will change anything in the long run.

The risk management issues that led to the crisis are not contained in one place but scatterred throughout our financial systems. Short term risk encouraging bonus structures are one problem. Inadequate capital asset regulation is another. I also believe that the structure of our mortgage market with it's reliance on brokers and volume chasing by lenders is a problem. The archaic and inadequate state of our rent laws are another contributer because only homeowners get the control they desire over the place they live. All these things should be fixed with more sustainable long term actions. There are other issues too. But those are some.

I think that bonus reform would be beneficial. If the bonuses had to be earned based on longer term performance I think that would discourage such spiky risk taking behaviours.

Capital asset ratios should be higher but more importantly, the assets that can be included as capital should be weighted differently. I think that assets whose growth are effectively non-contributory to GDP (this includes many of the products whose leveraging created the holes that had to be filled) should not be counted as assets in these ratios. It is fine to continue the markets for them but the institutions should not be able to use them to create money that gets pumped into the wider economy. That simply devalues everybodies work and accumulates financial power into larger and larger institutions. The net result of that is socialised losses. I would also like to see enforced seperation of investment and retail banking but unpicking that Gordian knot without crashing the lending market will be a massive headache.

Some mortgage market reform is in process with lenders having to pay far closer attention to their clients even if they came through a broker. I have no clue as to how to stop volume chasing low profit business models in lenders, I suspect it is a demand issue. It may be alieviated by the reduction of money creation that would occur as a result of tighter capital assset regulations.

The demand issue could also be alieviated by making renting a more attractive prospect. When a landlord is totally within his rights to dock your deposit because you put a picture hook in his wall, it is understandable why people don't want to rent. Rentals should be actractive in the short and long term with tennants generally ceded a reasonable amount of control over the property that they live in.

Long term aims should be to shift the investment attitudes of the wider populace away from housing and into economicaly contributory industry. Like that is going to happen in our lifetimes.

[despaer]

I have to say I don't think our bonus tax measure is that clever. It smacks, as Simon said, of a government who really don't care about anything other than getting re-elected and want popular press on their side. The reason I thought the USA measures were so good is that they don't punish a bank for being big, they punish it for lending assets they don't hold. A traditional building society under this model won't get caned as the tax only applies to loans not backed by tangible assets (this catches the likes of RBS and Lehmans).

This in turn means that those lenders who are liable to chase the sort of high volume, low checking business even if they have some assets to back them are risking only their own money. (e.g. HBOS, Bradford and Bingley models).

Must say though I agree with you about the rent system. What I don't know is how one gives the tenants more rights and control without putting the property at considerable risk as although there are many good honest tenants, there are also lots of very suspect ones and it's jolly difficult to house them if they have the right to wreck the place and don't have the assets to pay for the damage.