July 20, 2014

Britain could be against bankers, bank lobbyist and bank regulators… but should never be versus its banks.

Sir I refer to Philip Augar’s “Britain versus the banks” July 19… what an unfortunate title.

Augar writing about Alex Brummer’s “Bad banks: Greed, incompetence and the Next Global Crisis” says the author poses the ultimate question for the authorities who have to decide “what sort of banking they actually want and the extent to which the market driven requirements of high returns through risk can be balanced with society´s desire for safe banking”.

What? “society’s desire for safe banking”? And what about all other society’s desires for banks… like helping to finance the creation of jobs?

Does Brummer for instance agree with that “market driven requirements of high returns [for banks]” and for which bank lobbyists convinced regulators to lower the capital requirements for banks when lending to what is perceived as safe, should trump the right of the “risky” small businesses and entrepreneurs of not being discriminated more than normal when accessing bank credit?

Sir, Just like Philip Augar starts by quoting JK Galbraith, so did I in my first article published in 1997 in the Daily Journal of Caracas, “Puritanism in banking”. In it I wrote:

“In his book “Money: Whence it came, where it went” (1975) [and of which the author signed a copy for me in 1978] John Kenneth Galbraith addresses the function of banks in the creation of wealth…

Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment. Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

And clearly, the almost fanatic obsessions of current regulators with stopping banks from failing, impedes these from helping out in financing the development we need but that of course entails a lot of risk-taking. It also, with its minimalist capital requirements for anything that can dress up as "absolutely safe" guarantees the growth of the Too Big To Fail Banks.

And I also wrote “Galbraith refers to the banks’ function of democratization of capital as they allow entities with initiative, ideas, and will to work although they initially lack the resources to participate in the region’s economic activity. In this second case, Galbraith states that as the regulations affecting the activities of the banking sector are increased, the possibilities of this democratization of capital would decrease. There is obviously a risk in lending to the poor.”

And indeed few regulations can be argued to be as anti-democratic as the risk-weighted capital requirements for banks based on perceived risks… something which is amazingly ignored in these days when inequality is much discussed. 

Sir, let me finalize again by quoting Galbraith from the same “Money”. “It should be the simple truth in all economic and monetary matters that anyone who has explained failure has failed. We should be kind to those whose performance has been poor. But we must never be so gracious as to keep them in office”.

Indeed we should, perhaps, not tar and feather those who had anything to do with Basel II… but we should send them home, not promote them, and the least of it all… allow them to have anything to do with Basel IV… as they have already contaminated Basel III.