(Available on the BBC website here.)

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.

At least the latter was well leaked – what isn’t these days? – and gave me time to think about the ICB.

The ICB is actually something quite amazing, not to mention something entirely Lib Dem.

Sir John Vickers was given the remit and resources to step back and have a long look at banking. He talked to bankers, regulators and – most importantly – actual people. The final report was a wide-ranging and considered plan to fundamentally change banking in the UK. It is referenced in Paris, Frankfurt and New York.

And now the British government has done something really unusual. It has followed-up. This is no Simpson-Bowles deficit reduction committee in the US – attacked, dissected and promptly forgotten. This external academic study is going to become policy.

A lot of people are unhappy about this. The ring-fence is the main lightning rod for criticism – see Angela Knight and the British Banker’s Association – but the Government is going to implement it, essentially unchanged from how Sir John imagined it, in this Parliament. There’s plenty of time before then and now, however, not least if the Government accepts the Joint Committee’s proposal to wait before implanting higher capital standards.

More time for capital requirements may seem like a sop to the bankers, but many MPs of all stripes have been calling for a slowdown in the pace of reform given the current economic circumstances. That said it’s quite possible that a slower pace for enhanced capital requirements is both a boon to the bankers and good for the economy – unfortunately these things are rarely simple and never black and white.

Whilst the pace of change is under debate the Government has agreed in principle to the need for capital higher requirements than stipulated in Basel.

There have been conflicting reports on whether Britain can implement capital requirements above and beyond those decided in Brussels. The Chancellor thinks we can. Andrea Enria – Chairman of the European Banking Authority – seems less sure.

The problem remains that Brussels regulations are not even close to completion, and even if they do decide upon maximum harmonisation (preventing the UK from going higher on capital) there is more than one way to skin the capital cat.

Ultimately a good day for the ICB then. But there is a wider point. There are hundreds of work streams in London, Brussels and Washington that will impact on financial services. These are all intended to cure the ailing economy and prevent another crash.

In medicine when more than one drug is pumped into the patient there is a chance they can interact in unexpected and sometimes detrimental ways. The likelihood of interaction increases with the number of drugs. Each drug may be used with beneficial intent, but the combined result can be disastrous.

And so it is with financial services. The sector needs radical reform but too many cures will kill the patient.

* Ben Norman works on financial policy at Cicero Consulting.

‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email if you are interested in contributing.

If money rules the world, then surely whoever rules the world controls the money supply?

Many of us would, therefore, assume that the Bank of England creates money and regulates its supply to the economy, thereby controlling inflation and interest rates. However, whenever we look to finance a house, car, business project, etc, we invariably turn to the banks (in the absence of a wealthy benefactor).

Banks work on an unremitting profit motive which drives their decision-making process, investing heavily in speculative bubbles to turn quick profits, the bubbles so large that they ultimately burst the world economy.

Consequently, financial investment affects us all, yet we have little control over the decision-making process, or the opportunity to voice our displeasure except through ‘Occupy’-style protests.

Liberal Democrat policies call for a re-balancing of the economy, but we should do more to ensure sufficient checks and balances are in place to stop the economy, and society as a whole, being brought to the brink of another economic collapse.

Although Vince Cable and Nick Clegg have identified market failings within the financial system and pledged to establish a Green Investment bank, Regional Growth Fund and Technology Innovation Centres to encourage more socially responsible lending, the root cause of the debt crisis has not been addressed.

The power banks yield lies in their ability to create, not lend, money.

Banking and investment throughout the world relies on banks leveraging their depositors’ funds by a ratio of 1:9. This is frequently referred to as ‘fractional reserve banking’. Unsurprising 97% of the money now in circulation has been created in this way, plus interest.

The Vickers Commission on banking pitched short of a full split between investment and retail banking, and failed to address that fundamental issue of rising debt and public exposure to private risk: the creation of money by banks.

Last year the Financial Services (Regulation of Deposits and Lending) Bill proposed to address this imbalance. The Money Reform party has been established to address the problem of rising debt, the Positive Money campaign launched to raise public awareness, and the All-Party Parliamentary Group on Economics, Money and Banking to discuss the issues.

The leadership of the Liberal Democrats has overlooked the root cause of our national debts; we need to collaborate with the aforementioned organisations to bring about the significant structural readjustment of our financial system.

The creation of money should be placed under the independent control of the Monetary Policy Committee, not at the hands of bonus hungry bankers with an eye on their next Porsche.

* Mark Hofman is a Lib Dem member in Harrow and stood for local election in 2010.

What the BBC doesn’t point out is that this a complete victory for the Liberal Democrats – particularly Vince Cable. When the banking crisis broke , we quickly decided that we had to ensure that the state couldn’t be put in the position again where it had to bail out the totality of what the major banks did. We accepted that, in order to maintain confidence in the system, the Government would always have to stand behind individual bank account holders, but we could see no reason why we should all have to guarantee the more risky “casino” activities of the big banks.

We agued that a British version of the US Glass-Steagall Act should be introduced to restrict how banks could use depositors funds and to ringfence the Government’s liabilities in the case of a crisis.

At the time we were in a small minority. In the Lords, when I advocated splitting the banks on the lines which Vickers is now suggesting, the Labour front bench responded with withering scorn. Today, in response to a Parliamentary statement on Vickers, they have had the brass neck to say that the Government hasn’t acted with enough urgency to make this change!

Initially, with the exception of a few independent-minded Tory peers, the official Conservative position was, at best lukewarm. And as we’ve seen, as the banks have , in a display of brazen self-interest, sought to argue that the sky would fall in if these reforms were made, there has been considerable nervousness amongst some Conservative cabinet members about which way to jump.

They have now jumped – into the Lib Dem camp.

There has been a lot of sound and fury over recent days about the pace at which the reforms will be introduced. Even here we’ve seen considerable movement, with the Government suggesting today not only that there will be legislation to implement Vickers before the next election, but that some of it could be in the Financial Services Bill, which is currently undergoing pre-legislative scrutiny. Final implementation may run to 2019, to coincide with completion of the introduction of the new Basel capital rules, but the die has already been cast and the banks will now have no option but to start beginning to change their behaviour.

We have a tendency in the party to fail to shout about our achievements in Government and to quibble about what are essentially straightforward Lib Dem wins.

This is a straightforward Lib Dem win. We must make sure that the country realises it.

Dick Newby is Co-Chair Parliamentary Treasury Policy Committee

There is a widespread expectation in Whitehall that the Vickers Commission will recommend isolating retail banking from other banking activities, but without demanding that companies be split up. Internal firewalls and the like will be demanded instead.

It is also widely expected that the Vickers Commission will not demand its proposals are implemented promptly, either recommending more measured implementation or by staying a little vague on the matter. Arguments against rapid implementation that people have made include both the technical complexity of introducing changes and the hotly contested question of what the impact of rapid implementation might be on the economy. As the Financial Times has argued, it is not that hard to side-step the economic issue, making it “a poor reason to delay”.

But unless Vickers demands prompt implementation, the combination of the technical issues and the pressure from the banks means that implementation is likely to be pencilled in for several years away. That will present the government with a tricky political problem: how do you make a genuine intention to introduce a change in the future sound credibly different from a deliberate attempt to kick reform into the long grass? Perhaps Vince Cable at the height of his popularity would have been able to get away with a “trust me, I really mean it” approach but given the strength of public feeling on the matter (though not a strength of feeling that has actually motivated many people to switch their own bank accounts) that would be unlikely to work at the moment.

So it means the government is probably going to go for legislation as that would give much more substance to promises that change will indeed be coming. Moreover, the politics of this could turn out quite nicely. There is very strong pressure from parts of the financial system to minimise reform. Putting legislation through Parliament will see the Parliamentary pressure coming overwhelmingly in the opposite direction – for bigger, faster reform – providing the government with political support to see off the lobbying push. Indeed, we may well see the that the ironic outcome of the pressure from large parts of the banking sector to delay reform is to end up producing reform in which they have far less say than if it had been quicker and without Parliamentary legislation.

It’s three months since Lib Dem MP Stephen Williams first proposed the privatisation of its 83% stake in RBS and 41% in Lloyds by distributing shares to the public. Here’s what my co-editor Mark Pack said about the idea at the time:

Giving everyone shares in the banks: Stephen Williams’s proposals examined (7th March, 2011)
Stephen Williams’s plan is to give shares owned by the government in the banks to everyone on the electoral register. A floor would be set so the shares could not be sold until they had passed the price paid by the government and individuals would only keep any gains made above that floor price. In other words, as the shares rise in price and get sold the government gets back the funds it put into the banks and, if the banks do well, the public gets to profit from that. … there are plenty of questions that the scheme raises, but as this is a proposal designed to help set the political agenda rather than a finely worked out imminent piece of legislation, that is as much a compliment as anything else. It’s a good contribution to the debate. The Facebook page to support this proposal is at www.facebook.com/supportpublicshares.

Toby Fenwick of Portman Capital Partners LLP explained the technical aspects of the scheme further here:

The Independent View: How the Stephen Williams plans for the banks would work (11th March, 2011)

The proposal to distribute the shares to the UK people is innovative, and as the British people will participate without having to provide cash up front, it has fairness at its core. Over time, the scheme is likely to deliver a profit for recipients, over and above the repayment of the £66bn that was spent to rescue the banks in the first place. The press has understandably been focussing on the individual’s profit, with some critics suggesting that the Government should simply sell the stakes to fund additional debt reduction, tax cuts or additional public spending. This is based on the assumption that the amount of money generated by the share sales would be equal under both scenarios. We think this is inaccurate. We believe the act of distributing the shares will significantly increase the total receipts to the taxpayer.

It’s been quite amusing to see the Cleggphobic right-wing press work out how to attack the Lib Dem leader without appearing to be wanting to deprive their readers of the shares the taxpayer has paid for.

As a result, the Telegraph and Mail have largely played the story pretty neutrally. To add to Tory confusions, John Redwood has enthusiastically backed the proposal.

The Guardian has had fewer compunctions in dismissing the idea out-of-hand, instead advocating that the state ‘hold on to these banks and use them to foster a sustainable recovery’: because of course governments can be trusted so much better than individuals. Though even the Grauniad has hedged its bets by opening a poll to ask readers whether they back the plan: so far, there’s a slim 53%-47% majority in favour.

What do Voice readers think of the propoal to give away shares in the state-owned banks? Feel free to show your working in the comments thread, below…

While Nick’s proposal represents exactly the kind of fairness that Liberal Democrats seek to bring to this government, young people should be included. I believe that this scheme should not be limited to those on the electoral roll; rather shares should be given as Stephen Williams suggested to all those with a National Insurance number, thus including 16-18 year olds, and for those under 16 shares should be held for them in a trust until they turn 16. As the economy begins to recover these shares will increase in value and give young people the financial support at a most vital time of their lives, and would be a clear reaffirmation of our commitment to the next generation that they will not pay for the mistakes of a few of the current generation.

Today I have written to Lib Dem parliamentarians, urging them to extend the allocation of shares in Royal Bank of Scotland and Lloyds Banking Group to those aged under 18. Administering the scheme through NI numbers and a trust scheme would be a step towards achieving this. Liberal Youth will help in any way possible with developing policy in such a way as to achieve this.

This government has a responsibility not just to prevent an increase in the debt burden the next generation will inherit, but also to mitigate the damage that the banks have inflicted through the recession on young people. They are suffering the worst of the recession: they should not be excluded from the benefits of the recovery.

Tom Wood, is Chair-Elect of Liberal Youth. He takes office as the National Chair of Liberal Youth for one year commencing July 1st 2011.

As Norman says:

From the top to the bottom of the party, there is a hankering for clear yellow lines running through government policy.

However, where those lines should be drawn to best reassert the Lib Dems’ independence, is much harder to agree.

There are clearly several potential areas where there is scope for Lib Dem radicalism to emerge within government. The Voice’s Mark Pack suggests that it is over the issue of banking reform where we should be aiming to exert our influence now:

“It is one of those issues that’s very dear to people’s hearts and is also a substantive issue that’s really important to get right for our future economic health and well-being,” Mr Pack says.

“I think overall the public is much more on the side of people like Lib Dem Business Secretary Vince Cable, who are saying the banking system really needs to change radically, than those Conservative traditional types who really seem to think: ‘Let’s just let the finance sector do what it always does’.”

And what of tuition fees, the policy that has come to dominate the Lib Dems’ first year in government?

Lorely Burt, the MP who chairs the Lib Dem backbench business, innovation and skills committee, acknowledges the party will need an internal reckoning on the issue before the next general election.

But she is wary of revisiting the government’s policy.

“It’s been a source of very great regret to us and by the next general election I’m sure we’ll come out with another policy but I don’t want to go there yet – my wounds are still healing on that one,” she says.

But with key details about the new higher education scheme still to be agreed, including how places at universities are allocated, Ms Burt insists MPs’ reticence on the issue does not mean the Liberal Democrats are bowing out of the debate altogether.

“We are very much looking forward to the White Paper. That is an area we’ll be very keen to look at from a fairness and Liberal Democrat perspective,” she says.

You can read the piece in full – including contributions from David Hall-Matthews and Councillor Chris White – over on the BBC News site here.

The dividing line appears to be on how best to achieve this.

Those who subscribe broadly to the neo-classical or neo-liberal economic world view believe that banks will start wanting to lend as the economy recovers and businesses become more viable. This ‘leave it to the market’ approach is something which Lib Dems should (and do) reject, not just on this issue but on a wide range of others.

Many take the view that since the government ‘bailed out’ the banks, they should be forced, in the ‘national interest’, to lend more.

The weakness of this argument is that it risks merely re-inflating the economy on the back of cheap and easy credit, which would just store the same problems up for the future that we are living with now.

It is in the public interest for capital to be widely available in the economy, if it is not then all that will happen is that those who already have the resources already, whether big businesses or property owners, will be able to continue to dominate the economic activity of the country in their own interests, because any challengers won’t have access to capital.

If the government are not happy with the current level of capital being provided by the banks, and want to see it increased, then they need to ignore any calls to ‘force’ the banks to lend more. Forcing them to do something would be detrimental to the public good as long as the taxpayer has a stake in the banks.

If banks are forced to lend to uneconomically viable entities then the banks will become less economically successful themselves, and thus make less in profit, hitting their ability to pay tax to the treasury, to repair their balance sheets and to repay the taxpayer for the ‘bail outs’ they received.

At present the big banks have two options when it comes to lending. The first is to lend to the private sector, bearing the risk of an economy which, while moving stoutly in the right direction, is still fragile. The second is to lend to the government, potentially at a lower rate of interest than to the private sector but with almost 100% certainty of being repaid.

Whenever the UK Government borrows, in the form of Gilts, banks and pension funds snap them up. This reduces the pool of money available to lend to the private sector.

In economics this is known as ‘crowding out the private sector’, and is a problem which arises in different ways across a number of different economic theories and methods. The latest UK inflation, trade and to an extent unemployment figures showing some signs of moving in the right direction without any major surgery being needed, as I indicated would happen here.

There is however still a huge amount of spare capacity in the economy, with none of the means of production being deployed to their full potential, and a particular problem with labour and enterprise. To do this the government to continue on the path it is on, of reducing its own borrowing requirements, freeing up financial institutions to lend to the best of the private sector.

At Lib Dem Spring conference in Sheffield last month, delegates overwhelmingly supported the Social Liberal Forum (SLF) motion Tougher Action on Banks and Bonuses. The interim report published recently by the Vickers Commission on Banking went some way to addressing the problems within the industry , but as we predicted in our speeches to the SLF motion, falls far short of Liberal Democrat policy which calls for:

• A break up of banks deemed ‘too big to fail’ into smaller, safer entities
• Greater transparency on pay, with top earnings to be fully disclosed in all state owned banks
• A split of high-risk banking away from ordinary high-street banking, with no State guarantee for the former
• Greater support of local credit unions and mutuals
• Measures to be taken to tackle financial exclusion for the vulnerable

There is much to commend in the Interim report, not least its direction of travel; it represents the first attempt to rein in the power wielded by inadequately regulated banks, and makes some welcome recommendations that should increase competition in the retail banking sector.

The report is, however, silent on many of the pressing issues, and is thereby in keeping with other recent, official and so-called “independent” reports (e.g., the Walker Report on Corporate Governance, and the Davies Report on Gender Equality) – sadly, it’s a rather tame affair. Mainstream commentary suggests that the proposed reforms don’t go nearly far enough; indeed the banks’ relief at being let off the hook was instantly reflected in the rise of bank shares on the stock market.

The refusal to recommend the break-up of the banks and divorce the retailing side from the “casino” investment side is a cop-out. Vickers instead proposes that “Fire Walls” be created to divide the two activities within each bank. This is as unconvincing as what used to be termed “Chinese Walls” that were meant to safeguard against internal conflicts of interest in financial institutions and audit firms. But who is going to robustly police and regulate these “walls”? Vickers offers no advice on this crucial aspect of its main recommendation, and the evidence from recent years suggests that leaving such regulation to the industry would be ineffective.

Furthermore the Vickers report has nothing to say on ballooning executive pay and bonuses which through perverse incentives were largely responsible for the malaise at the heart of the system. This isn’t just a ‘bash-the-bankers’ viewpoint; a report by Ernst and Young for the banking lobbyists the Institute for International Finance suggests that top bankers’ pay remains largely unreformed, as does the risk culture in such organisations.

The Interim proposals are to go out for consultation over the next six months after which the Final Report will be produced. That’s gives the British Bankers’ Association even more time to lobby to have these initial proposals watered down still further, and makes it all the more important that Liberal Democrats take a firm lead in instituting the party’s policy.

The banking industry wants nothing more than to restore as much of the pre 2007-crash status quo as possible. The Coalition government, via Vickers, should require the banks to come up with positive and robust proposals that would minimise the risk of taxpayers having to fork out if/when the next crisis occurs.

In the run-up to the publication of the Interim Report, press reports indicated that the Government would take a tough stance towards the banks. After its publication, it appears that within the Coalition there is now a growing consensus to accept the Vickers’ proposals – in so far as they go these proposals are a good first step, but Government policy needs to go further. This makes it crucial that before the Vickers Commission’s final report is published, Liberal Democrats in government work hard to implement the radical but necessary proposals set out at Conference and restore banking to its rightful place in the economy – as a safe servant of a vibrant economy, not as a powerhouse that continues to nationalise risk and privatise profit.

UK banks’ retail operations should be “ring-fenced” from their investment banking arms, the Independent Commission on Banking has recommended.

However, in its interim report the commission stopped short of recommending the two should operate as separate entities.

It said more competition was needed in retail banking, including the sell-off of more Lloyds branches.

The commission’s final recommendations will be published in September.

Robert Peston adds,

The big banks will claim that putting their retail banks into subsidiaries would impose significant extra costs on them – because it would force them to raise and retain more capital (which is expensive), and it would increase what they pay to borrow. Their fear is that these incremental costs would put them at a disadvantage compared with their international competitors.

However the ICB says that the banks have exaggerated the size of this new financial burden. It calculates that the extra costs would be a good deal less than the £12bn to £15bn a year estimated by the consultants Oliver Wyman in a report prepared for the banks.

Perhaps more importantly, the commission is convinced that the social benefits of the reform – in respect of reducing the likelihood of destabilising financial shocks that increase unemployment and cut growth – would significantly outweigh the costs.

Lib Dem peer Matthew Oakeshott, who has been extremely vocal about regulating banks further, has welcomed the proposals:

Lord Oakeshott has just given his seal of approval to the work done by the Vickers Commission on banking, declaring it an “excellent piece of work“.

The fact that Lord Oakeshott approves of the suggested remedies for making the banks safer and more competitive is significant: it means that the Lib Dems in the coalition are unlikely to try to toughen up the proposals in the coming months.

Research by Reuters shows … the impact of any big bank departures on the economy, government finances and the City of London’s pre-eminence as a financial centre would be extremely limited…

In terms of taxes alone, Commercial Secretary to the Treasury and former banker James Sassoon told members of the House of Lords in February that large banking groups were expected to contribute around 20 billion pounds ($30 billion) in tax for the 2010-11 tax year.

Crucially, though, that figure includes indirect contributions such as income tax paid by bank employees. Of his 20 billion pound tax-take figure, Sassoon says the proportion contributed by pay-as-you-earn income tax and other social contributions is 80 percent, with corporation tax making up the remaining 20 percent.

You can read the full report here.

Nick Clegg has called for widespread reform of Britain’s banking sector in the hope that the country becomes less reliant on what he called “overwhelmingly important” companies.

An interim report on the subject from the Banking Commission is due out next month and Clegg has pre-empted its release with calls for the influence of the banks to be reduced in the interest of the wider economy…

The banking commission will deliver initial findings on April 11th, with a final report due by the end of September.

In an interview with Reuters this month, Lib Dem business minister Vince Cable warned the banking industry that heavy lobbying would not affect the government’s zeal to reform the sector.

The motion also called for Liberal Democrats to “ensure that the recommendations of the Vickers Commission are carried out in full”. As the commission has yet to report, that is a rather risky proposition – but with the general mood about major banking reform promising to back something whose details we don’t yet know didn’t seem to concern most people. (As it happens, I think the Commission’s recommendations are likely to be ones the party will want to support and to see enacted promptly, but outsourcing policy making in such a way on other topics would probably have been very controversial.)

The motion was passed overwhelmingly, with only a small number of votes against and in a hall much fuller than usual for a Sunday morning emergency motion slot.

Meanwhile, Caron Lindsay has asked the apposite question When is it ok to scream and swear at a 14 year old?

UPDATE: The Social Liberal Forum, who proposed the motion, have written up the debate on their site.

The proposal to distribute the shares to the UK people is innovative, and as the British people will participate without having to provide cash up front, it has fairness at its core. Over time, the scheme is likely to deliver a profit for recipients, over and above the repayment of the £66bn that was spent to rescue the banks in the first place.

The press has understandably been focussing on the individual’s profit, with some critics suggesting that the Government should simply sell the stakes to fund additional debt reduction, tax cuts or additional public spending. This is based on the assumption that the amount of money generated by the share sales would be equal under both scenarios.  We think this is inaccurate.

We believe the act of distributing the shares will significantly increase the total receipts to the taxpayer through the combination of two distinct effects. Firstly, it changes the dynamic from having a few very large sales of shares by the Government, into a large number of very small sales by individuals. Secondly, the distribution moves the vast majority of the shares back to the market in a single transaction, rapidly expanding the “free-float”, whilst simultaneously removing the large seller. This is known as removing the overhang on the shares.

Under a conventional privatisation, the Government sells blocks of shares over a number of years. The problem for the Government in this case is that the market knows both the price paid (and therefore what the Government needs to recover) and how many shares the Government has to sell. Under these circumstances maximising value is like trying to play a game of poker where your opponents can see your hand.

The ‘price’ of a Government placing under a traditional privatisation programme will have to be at a significant discount to the true ‘value’ as investors will expect to profit from these transactions. This discount to value is likely to be even greater for the initial placings as investors will be aware that the Government will have further shares to sell. Whilst this ‘overhang’ remains, there is greater risk attached to buying shares and investors will demand a higher return through a greater discount to value.

Investors will anticipate that share sales are likely as soon as the Government is in a position to recoup its investment. Consequently, the banks’ shares will underperform their market peers above the Government’s breakeven price until the overhang is removed.  By contrast when the Government’s last shares are sold, the price is likely to rally – with all the subsequent profits going to the private sector.

Transferring the shares to individuals means that, for example, in the case of RBS the number of shares in circulation would increase nearly seven-fold overnight. This means that tracker and benchmarked funds which mimic the FTSE index would need to increase their holdings of RBS shares by seven times in order to maintain their relative weightings.

This then creates demand at a pricing point at which there is limited supply, as the public has no incentive to sell unless the shares rise significantly above the Floor Price. Thus, the distribution itself, removes the discount between ‘price’ and ‘value’ required in a conventional privatisation. This maximises total receipts to Treasury and the public.

Portman Capital Partners LLP is registered and regulated by the Financial Service Authority and is incorporated within England & Wales. Portman Capital LLP works for a range of clients irrespective of their political persuasions or creed and furthermore is not aligned, nor a subscriber, to any political party.

‘The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email if you are interested in contributing.

It’s a neat idea, and one of the first substantive plans for what the government could do with its 83% of RBS and 41% of Lloyds. As is to be expected with any plan for such a controversial area, it raises a number of questions.

First, the government only gets back the money put into the banks if people sell their shares. If people hold on to them, those funds do not come back to government – and in particular that means a large source of possible government funds ends up being highly dependent on what can be very volatile stock markets. Such uncertainty would apply to other policies too – including direct government selling of shares on the stock market – but it is still an issue.

Second, even leaving aside the uncertainty, would this route raise more or less money for the government than a straight-forward sell off of shares? Stephen Williams and colleagues think so, as their Q&A explains,

The absolute and relative size of the Government’s shareholdings in Lloyds Group, and RBS make it conventional exit through share sales impossible at a reasonable price. In other words, shares would have to be sold at a substantial discount over many transactions over a number of years. This increases the risk that the public would never get its money back – as has happened in the US, where the Obama Administration has lost at least $10bn in selling a tranche of its GM shares.

Third, the degree to which shareholders have failed to hold boards of directors to account has been bad enough even with big institutional shareholders, let alone with mass small-scale shareholdings. But given how poor institutional shareholders have been, would this situation really be that much worse?

Fourth, by giving the same amount of shares to everyone, there is a neat piece of simplicity combined with fairness. Because the sale of shares would be subject to capital gains tax, the initial allocation of shares would have the virtue of simplicity whilst subsequent capital gains tax revenues would mean that the richest end up paying more of what they have been given back in tax.

Fifth, although I said “simplicity”, relying on the electoral registers raises issues of principle and practicality. The principle is about whether the electoral register should be used solely for electoral purposes. The practicality is about the accuracy of the electoral register. The offer of money in return for being on the register would most likely be an extra incentive for people to register, but what about then deliberate fraudulent register entries? Having a system that is resistant to fraud makes the idea not quite as simple as it looks at first.

(Strictly speaking, it’s not just the electoral register the proposal uses. As the Q&A explains, shares would go to “those on the electoral roll for UK elections who are resident in the UK for tax purposes. In addition, non-UK nationals serving in HM Forces and their dependents should be eligible on the same basis”.)

In other words, there are plenty of questions that the scheme raises, but as this is a proposal designed to help set the political agenda rather than a finely worked out imminent piece of legislation, that is as much a compliment as anything else. It’s a good contribution to the debate.

The Facebook page to support this proposal is at http://www.facebook.com/supportpublicshares.

Getting your share of the banks: Stephen Williams

He writes:

The Government offered to emasculate the Independent Commission on Banking as it tried to strike a deal on bank bonuses a few weeks ago. I am told it backed off only when Sir John Vickers, chairman of the inquiry, and his entire committee, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf threatened to resign…

It has now emerged … that the chief reason the banks took part [in Project Merlin] was to lift the threat that Vickers’s commission would recommend a major restructuring of the banking industry which would have the potential fundamentally to alter how they do business and where they make their money.

The views previously expressed by members of the Independent Commission on Banking have already given a pretty clear indication that it will recommend radical reform to the way banking is run in Britain – an outcome that Liberal Democrats inside and outside of government have been pushing for and without having a meeting of minds with George Osborne on the topic.

That the banks tried to head off any such recommendations – and failed – reinforces the likelihood that the Commission will make radical recommendations. That will be unpopular with some of the largest banks yet also (and in part as a result) be politically extremely difficult for the government not to act on, especially as top regulator Lord Turner is also continuing to speak out in public in favour of major changes.

For years the received wisdom has been that they make huge profits so they must be simply wonderful, Masters of the Universe, the jewel in the crown of the British economy and so unlike the broken-backed manufacturing sector. But how do they do it? I can see why top footballers are paid a fortune and why Apple’s brilliant innovations are so profitable. But banking?

The suspicion is that, far from creating wealth, they redistribute existing wealth to themselves – and that, like polluters, they do so by avoiding part of their costs. They book the profits, others pay for the cleanup.

This is what Andrew Haldane, Executive Director for Financial Stability at the Bank of England argues in a paper published last year [PDF] with systemic risk cast in the role of pollutant. He is not alone in this view; the New Economics Foundation (NEF) recently concluded that banks are getting hidden subsidies.

Even before the crisis, the ‘Too Big To Fail’ (TBTF) banks were benefiting from a market perception (correct as it turned out!) that the government would rescue them in a crisis enabling them to raise funds more cheaply than would otherwise have been the case. Haldane calculates that this covert subsidy averaged over £50 billion between 2007 and 2009 – a roughly equal to their annual profits prior to the crisis.

As for the bailout itself, Haldane argues that its direct cost may be less than £20 billion, or a little more than 1% of GDP, depending on the eventual losses. If a crisis comes along, say, every 20 years this is (sort of) affordable given that the UK banks had 2009 pre-tax profits of around £23 billion.

This would be bad enough if it ended there – but it doesn’t. The really big cost is the damage to the wider economy. Haldane estimates that UK output was around 10% lower than it would have been absent the crisis. In money terms this is equivalent to a loss of £140 billion for the UK just for 2009.

And it gets worse. Experience from past financial crises shows that the output loss is likely to persist for years – in other words the resulting recession is more likely to be L-shaped than V-shaped; it’s a step change, not a transient glitch. Haldane calculates that the Present Value of the persistent loss is between £1.8 and £7.4 trillion – roughly 1 to 5 times GDP. (It’s a big range because the assumptions are necessarily approximate; the important point is that it’s BIG relative to the economy.)

In addition to the TBTF subsidy, the NEF identifies other subsidies enjoyed by the banks, in particular ‘Quantitative Easing’ and ‘Make the Customer pay’ subsidies. NEF couldn’t get enough information to estimate the first but for the second they used mortgage data and certain investment banking fees to estimate “at least another £2.5 billion per year”.

However, these figures do not appear to include the cost to retail savers of ultra-low interest rates that the banks are not passing on to their borrowers. Channel 4 News recently put this at £20 billion per year.

NEF highlights the profit from ‘debt seignorage’. It’s hugely profitable for banks to create debt because they earn a percentage and laissez-faire regulation hasn’t constrained their behaviour. This has driven the excessive growth of the banking sector. Until about 50 years ago its size relative to UK GDP was relatively stable at around 50%. Since then it has grown so fast that it is around five times annual GDP while leverage has gone from 6:1 to 50:1 or more. It’s financial Jenga.

The effect has been to ‘financialise’ the economy, creating economic rent for the banks in the form of excessive mortgage payments etc. NEF doesn’t quantify it but it must be massive – roughly in proportion to their bloated size. Basically it’s a complex Ponzi scheme which, like all Ponzi schemes, enriches its sponsors while impoverishing the rest. Inequality is a by-product.

But perhaps the biggest distortion of all is the diversion of talent away from the real economy. As a nephew who recently graduated in engineering from Cambridge put it, “Why would I go into industry when I can earn many times more in the City?” We cannot run a successful economy staffed only by the B team. No wonder there is so much unemployment.

The inescapable conclusion is that, far from being paragons of economic virtue, the banks are subsidy junkies that badly distort the economy. Without the hidden subsidies their profitability would be more like the rest of the economy – as would their salaries.

Although attempts to encourage an increase in bank lending are by no means over, the combination of those slow talks and the paying out of large bank bonuses, has not exactly been winning the banking sector friends in government, even amongst Conservative ministers let alone amongst Liberal Democrats.

Barclays was tonight accused of making a mockery of attempts to call a truce with the government over “banker bashing” amid fresh expectations that its chief executive Bob Diamond would be awarded a bonus of at least £8m.

After months of talking with the banks, the coalition is yet to announce a deal, codenamed Merlin, under which the industry would to agree lending targets of up to £190bn and show restraint on bonuses in return for less criticism from the government.

The talks with the banks have been led by Diamond’s predecessor John Varley and tonight Lord Oakeshott, a Liberal Democrat treasury spokesman, appeared to suggest the bank was making a mockery of those discussions.

“Barclays are shaking hands with government over project Merlin while holding up two fingers to the country with the other,” Oakeshott said.

You can read the full story here.