First with Financial Comment from Arabia

Will the markets ever teach bankers a lesson?

with 2 comments

If the global financial crisis had been allowed to take its course then hundreds of thousands of bankers around the world would be unemployed by now. There would be no record bonus pools and governments would not be thinking up ruses to tax far too highly paid bankers.

That is the price of market intervention. Governments and politicians just can not resist jumping in to save their economies, even if it means propping up the evils that caused the problem in the first place. It is the lesser of such evils.

Mea culpa

But who is really culpable? Who actually set interest rates so low that credit risk was miss priced? Well, the central banks surely have to be rated as government institutions too.

However, bankers are more than the messengers now being shot for their efforts. They have been directly rewarded for doing fairly mundane work while taking zero capital risk, and then reaping the exceptional rewards according to compensation systems devised by themselves.

You can understand the public outrage. Now come the payroll taxes and levies to recoup this largesse and prevent some of it staying with the bankers who caused – or at least contributed strongly, to the problem.

But you have to wonder if the real problem is still not with government institutions that allowed the credit boom in the first place. Why did the Federal Reserve not take a smaller recession in the early 2000s instead of letting the debt crisis roll-up into something much bigger? Why did the Bank of England let house prices rip?

Surely at the root of this systemic failure is not the banking community – greedy and grasping as it might well be – but the keepers of monetary prudence. The punch bowl was not taken away in good time from the bankers’ party. In future it should be.

Liquidity withdrawal

Indeed, arguably the punch bowl was topped up too quickly and with too much money last year, and in too many countries. This excess will now have to be drained out of the global financial system, or else the system will eventually collapse again of its own accord, just like party goers who have had too much to drink.

For artificial liquidity brings its own destruction in the inflation of asset values to unsustainable levels and their inevitable collapse that ruins borrowers, and ultimately lenders too.

The public reaction to the excesses of bank bonuses is just the beginning of this necessary policy reversal, and if it is not then heaven help us all.


Written by Peter Cooper

January 19, 2010 at 10:28 am

Posted in Banking

2 Responses

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  1. Only after all the banks are nationalized after the next banking collapse. Since the bankers personally made billions by taking excessive risk, and since true reform has not happened thanks to their lobbyists handing out the cash in Washington, the next meltdown could be far worse than the 2008 crisis. You might need some gold when that happens. But it could take another 10 years, or it could happen next month.
    Economist Paul Farrell isn’t too optimistic on the MarkerWatch web site in his latest article, writing that the ‘fat cat bankers are destroying capitalism AND DEMOCRACY.’ I wonder how much pawn shops will pay for a nice HP laptop computer? Maybe I need to learn how to erase everything inside it first. “You’re looking for Bill who?”

    Bill Simpson in Slidell

    January 20, 2010 at 2:24 am

  2. “Why did the Bank of England let house prices rip?”

    Because Gordon Brown removed mortgage interest from the Bank of England inflation measure, presumably to converge with the euro. The BOE was put in an impossible position.

    peter c

    January 19, 2010 at 1:58 pm

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