Friday, May 31, 2013

Marshall Auerback — Andy Haldane: The Counter-Reformation in Banking Has Just Begun

“Too big to fail” banks create three disastrous problems, any one of which should have been sufficient decades ago to convince our politicians to get rid of them.
1. They make a mockery of the phrase “free markets.”

2. TBTF bank failures risk causing global financial crises.
3. TBTF banks create so much economic power that it inherently translates into dominant political power and cripples our democracy by creating crony capitalism and the corresponding problem of “too big to jail.”
To judge from Haldane’s message, we still have a long way to go. For one thing, perhaps for reasons of time, his speech didn’t once mention the so-called “shadow banking system,” even though almost three-quarters of today’s credit intermediation in the U.S. takes place outside the conventional banking system. The big conclusion that one inevitably draws from Haldane’s analysis is that the structure of banking should be reorganized to promote both economic stability and economic development. Banking used to be a simple boring job; it needs to go back there.
The Council of Trent took place over a period of 40 years. If one is to interpret the underlying message of Haldane’s speech in Trento, we’ll be lucky if we can deal with today’s counter-reformation in banking in less than half that time.
Andy Haldane: The Counter-Reformation in Banking Has Just Begun
Marshall Auerback


Ralph Musgrave said...

There's a very simple way to stop any bank failing (TBTF banks and small banks). It’s to outlaw the basic and fraudulent promise made by banks to depositors. That’s: “you deposit $X with us, which we promise to repay, meanwhile we lend on or invest that money in ways that are not 100% safe and which mean the value of those loans and investments can fall below $X – in which case we’re bust”.

Depositors who want their money loaned on (i.e. who want their bank to invest their money on their behalf and earn interest) should carry the loss if it goes wrong. If I invest $Y in bonds in a corporation and it fails, I lose out. But if I plonk $Y in a bank which lends to corporations and it fails, the taxpayer comes riding to the rescue. Where’s the logic in that?

In contrast, if a depositor wants 100% safety, then their money should be lodged in a 100% safe manner: e.g. just lodged at the central bank. In that case it won't earn interest.

F. Beard said...

We don't need banks!

Endogenous money can be created as EQUITY; it need not be created as DEBT.

Some don't like to "share." Fine. Then let them borrow at free market interest rates from banks without a shred of government privilege - assuming banks could exist thusly to any large extent.