Millennium’s Credit Crunch Diary… July: Is it ALL about the Banks?

You would think from the news that the BANKS were the most important things in the British Economy.

And I’m afraid you would be RIGHT.

The financial sector is far and away the largest contributor to Great Britain’s Gross Domestic Product; our exports of financial services in 2007 amounted to TWENTY-ONE billion pounds, almost a tenth of ALL exports and more than from adding together our other two big sellers (that’s food and drink: £10bn and, embarrassingly, arms sales: £7bn).

Well now we’ve seen the results for the first half of the year for some of the BIGGEST BANKERS on the High Street. There are, as they say, winners and losers. And by “winners” this means the bankers and by losers this means us. Plus ça very much notes only no change.

The winners, then, include Barclays who were in the money to the tune of a fat-cat’s whisker under three billion pounds and HSBC who made a matching triple-billion profit; while the losers are the Lloyds banking pile-up who impressed the markets by losing ONLY four billion smackeroos, while the Bank that Started it All, the Northern Rock-Up, burned up a heft three-quarters of a billion quid as well. Slightly trucking this bend, The Royal Bank that WE Own of Scotland came in zero-point-zero-one-five billion in profit – Mr Evan on the The Today Programme called this “breaking even”, but really they ARE still fifteen megabucks to the good at the end of the day?

It’s easy to see this being reported as “privatised banks make profits; nationalised banks make losses”; that’s the very CONSERVATORY meme being floated by the press.

But of course it is ENTIRELY BACKWARDS – if a bank manages to make a profit it stays smugly private; those banks that make losses come begging to the taxpayer to get rescued. Losses result in nationalisation, not the other way around.

Look at the story more closely, though, and you’ll realise that it gets even WORSE: most of the profits are being made by the GAMBLING divisions; the “good” banking, retail banking where they take savings and make loans to people, those bits are taking a dive. In Barclays, the profits from retail banking shrank; in HSBC it was even worse and they made a LOSS; and in RBS the scale of losses was even more pronounced, and so the benefit of the bigness of the gambling win equally huge.

Does it MATTER, though, if the banks that make money make it from gambling? Surely, so long as they are winning they are not costing taxpayers anything? But that “so long as they’re winning” is the whole of the point – so long as you are gambling there is a risk, and sooner or later you are going to LOSE. And THEN we are going to have to PAY AGAIN.

Anyone saying “the banks ARE the casino and the House always wins” is just talking SILLINESS – the casino is the stock market and no bank is a large enough player to “own” the market as a whole; they’re all just bigger PATSIES no matter how deep the pockets of their dinner suits.

But from the banks point of view, on the one fluffy foot, it seems like all the REWARDS are in “casino” banking; while on the other fluffy foot, there’s less and less RETURN from doing “good” banking anyway.

Retail banking is depressed in two ways.

Firstly, there are the big, obvious losses from writing off loans that go bad.

To an extent this is a ONE-OFF big hit – and with a bit of fluffy foot-waving over the accountancy they can clear off any debts that they were a bit uncertain about but didn’t write off last year, and even cover themselves for some that might go bad NEXT year. The crisis has lifted the lid on all the sub-prime lending and this is the banks’ opportunity to make a clean breast of it all.

With that all put behind them, they should be able to carry on from here only incurring the normal, “expected” amount of debts going bad (because like all investments, making loans is a calculated risk).

And of course, “writing it off” in the accounts doesn’t mean they ever let go in REAL life, so some of these bad debts might still repay a bit of money.

So in that sense, these big losses shouldn’t be saying the bank has a future weakness.

But secondly there IS the ongoing problem of Credit Crunchiness, exaggerated by the Government telling the banks they need to keep more money in their safes, and thus preventing them from loaning more out to people who want to borrow.

Remember, the banks NEED a return on the loans that they make to cover all the fixed costs of having a network of High Street buildings and people to staff them. It they don’t make enough return then the business becomes less profitable.

It’s not because interest rates are LOW, though: banks “borrow” money from savers at a lower rate than they lend it out – so they ALWAYS make a profit on the difference. In fact, the credit crunch has given them the excuse to push UP that difference, because with fewer loans available people are forced to accept loan shark rates.

BUT, if the banks don’t lend ENOUGH loans out, then they don’t make enough of those “differences” to cover the running costs.

And remember too, if the banks DIDN’T have all those buildings, they wouldn’t have all those depositors and so wouldn’t have pots of money to go down the casino with, now would they?

So in the mean time, the “fun” arms of the surviving banks have been able to cherry-pick the profitable bits of their imploding rivals, so Barclays’ bloodsuckers have grown fat(ter) feasting on the remains of Lehman Brothers and the rest.

Mr George Turner has already explained to Lib Dem Voice readers how the profitable casino bankers have benefited from Government intervention in THREE ways:

1. They didn’t get dragged down with the banks that were sinking;
2. Reducing the competition has allowed them to squeeze more profit out of their customers: bigger fish, smaller pond, more fish food to go around;
3. All this was funded by a large increase in government borrowing, giving the banks loads of new government bonds to trade in – with the added bonus that the government has been using Quantitative Solace, er, A Quantum of Easing, er, PRINTING MONEY to buy those bonds back, essentially giving the banks FREE MONEY.

But on top of all that, there is the clear PSYCHOLOGICAL message that the Government is sending: if you gamble and win, you get to keep the winnings; if you go bust, we will save you – heads you win, tails we very much pay you anyway.

So the Government is, in so many ways, ENCOURAGING the banks to Carry On Gambling.

(Which presumably means Sid James is playing Mr Frown and Charles Hawtrey is Chancellor Sooty, with Kenneth Williams as First Lord of Darkness Mandy Mandlebrot telling them to “stop messin’ about”. Also starring Hattie Jacques as Ms Angular Meercat, Bernard Bresslaw as President Barry O and Barbara Windsor as the Italian Cabinet.)

Contrast the proposals for banking reform that the three main parties brought out over the last month:

Hard Labour would keep the current tripartite system but introduce a “Stability Committee” to oversee all three: less of a fourth leg on their three-legged stool, more a fifth wheel on their Robin Reliant. They’ll also introduce a “Cones Hotline” for consumer banking advice (assuming all the call centres aren’t given over to flying pig flu by then).

The Conservatories would abolish the current tripartite system and replace it with an entirely different tripartite system with most of the same powers given to different people. You can listen to Mr Dr Vince “the Power” Cable describing this as rearranging the deckchairs: here. (Or, you can read ME describing this as rearranging the deckchairs: here!)

The Liberal Democrats wouldn’t mess with the system at all because it’s not WHO does the regulating but WHAT the regulations ARE that is important. That’s why Mr Vince sets out firm ideas about what those regulations need to be: break up the banks that are TOO BIG, so that we don’t get swamped when another one has to be rescued; penalise the banks that try to dodge or get around the requirements to keep a reasonable reserve of capital to repay their borrowings; and make the bonus structures relate to LONG TERM share performance, not short term casino winnings, and make the bankers PUBLISH their earnings so that the light of truth can shine on their previously dark doings.

Meanwhile, in the rest of the economy, we remain confused as to whether there is light at the end of the tunnel, or just more tunnel at the end of the light.

House prices are starting to rise and so is the pound. But so are the unemployment figures and the number of shops closing and above all DEBT.

(In fact, rising house prices isn’t necessarily a GOOD THING, either – what with trapping people off the property ladder, encouraging another inflationary bubble, and y’know being at the root of the whole credit crunch crisis thing – but it does make people FEEL richer and optimism does HELP.)

This confusion may be why, at least as far as the political media coverage was concerned, the economy was left on the back burner while everyone went off to North Norwich for the Norwich North by-election.

The result was a foregone conclusion. That means that if you are in the Green party you expected to win it and if you are not then you expected Conservatory Chloe to be on her way to Westminster.

As it turned out, no one was surprised by the result (except for the Greens who went from fourth place to a magnificent, er, fifth) as the Hard Labour vote went everywhere except into the polling booth for Mr Frown, not so much an ANYONE but Labour but an EVERYONE but Labour outcome.

Mr Balloon’s Conservatories may have won there, and garnered the victory laurels – or nauseating media flattery, which is what we have instead these days – but there’s not THAT much comfort for him, and he and his planners will be looking rather nervously at an outcome that doesn’t see them break through the critical 40% threshold.

And Liberal Democrat candidate Ms April Pond went on from holding onto third place to became Doctor Who’s new companion.

In the aftermath, NOBODY called for the Prime Monster to resign, largely because Lord Mandelbrot had told them that there was no point, as he was going to be Prime Monster next anyway.

The CONTROVERSY of the month, though, is the launch of “A Fresh Start“, the Liberal Democrats’ desperately honest assessment of just how BAD things are going to be.

The big shock came with the suggestion that we might – that’s just MIGHT so far – drop our commitment to abolishing tuition fees.

Daddy Alex focuses on the way that this “cuts across our narrative“, and notice that already the odious Mr David Lammy has accused us of “playing politics” with tuition fees – this just a BIT rich, from the Government that lied and broke its promises not to introduce them.

On the other fluffy foot, contrast those thoughts with Auntie Alix, the only SENSIBLE person writing for Comment is Free-from-Sense, who was BRAVELY UNMOVED by the plight of the undergraduate.

(Personally, I think that there may be less of a fight about tuition fees than people expect. I mean look at Captain Clegg’s commitment to the Pupil Premium and the benefits of social mobility – it’s hardly inconsistent to suspect that he might be on the side of students too.)

The IMPORTANT thing here is that we are admitting that NOTHING is “off the table” when it comes to looking at how we are going to spend the nation’s cash.

Where the other two Parties are all TALK when it comes to “Hard Choices”, the Liberal Democrats actually spell out what those choices are going to mean. Even when it’s going to cause us quite some pain.

The RISK, though, is that we could also be discarding all the things that make us DISTINCTIVE, throwing the BABY ELEPHANT out with the BATHWATER.

Too often we hear the refrain: “all the parties are the same”. WE know that that’s not true, but people are thinking it. Mr Balloon manages to make the SOUNDS of promising to do something whilst committing to NOTHING. We – ever so slightly – might have managed to achieve the exact opposite.

So, my recommendation for the month: think of a way to show that we are DIFFERENT.

Luv from Millennium
(Now read nonimate my diary for blog of the year!)

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6 Comments

  • I don’t understand banking, so help me get my head around this.

    Let’s say that a bank owes the UK government £10 billion owing to intervention. This year it pays back £1 billion and records a loss of £800 million. The bank has reduced its debt and pays no corporation tax on the loss. However, using the same money, the bank could have paid back only £100 million and made a £100 million profit, on which they would have to pay corporation tax, weaseled down to £20 million or so.

    How does payback work? If the Bank of England loans money to a bank at pennies in the pound and effective corporation tax is 20%, the failed bank optimises by paying back the low interest loan and making a loss to avoid the high interest corporation tax. Groups within the bank that are profitable can grow without worrying about the tax man. And if anything goes wrong again, the bank will be picked up yet again.

    So what happens in six years or whatever when this bank become profitable, having paid off its rescue loans? The rescue loans were cheap, so UK citizens deserve further compensation from sale of bank ownership. And how much tax did we lose by allowing the bank to continue trading in the fashion prior to intervention, rather than breaking it up into unprofitable and profitable groups?

  • Sadly, although we are concentrating on the banks, the origin of the crash was the fact that China refused to revalue its currency against the dollar. This resulted in big profits for China which were then recycled to the West. At the same time Chinese goods were cheap, giving low inflation. Stupid bankers did the rest.
    As we come out of recession, nothing has changed, so we will be off on the same merry-go-round again, but this time the banks will be more careful and make even bigger profits.
    Also, Geoffrey Payne is right, but before the climate gets too bad, oil prices will rocket and bring the whole circus to a grinding halt again.
    Only the Liberal Democrats have the courage to embark on an oil substitution policy (call it CO2 reduction if you wish). The oil paradox is that when oil prices are low, we don’t need alternatives, when oil prices are high we can’t afford them. Only positive, realistic political action will break the circle.

  • Libdem Guru 9th Aug '09 - 12:16pm

    The challenge is: to be ELECTABLE by being DIFFERENT

  • Why all THE capital LETTERS all through your WRITING?

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