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Ben Chu: How to spot a vested interest

Posted by Eagle Eye
  • Monday, 15 March 2010 at 11:51 am

Oliver Kamm of the Times agrees with John Rentoul that the banks are not a vested interest. He also argues that bringing back Glass-Steagall wouldn't work.  

 

And I agree with much of what he writes.

 

Were the banks grossly overleveraged? Undoubtedly. Were the incentives in the financial system dangerously distorted? Certainly. Were the regulators asleep on the job? Unquestionably. Would breaking up the large banks mean that there would never need to be another government rescue to secure financial stability? Probably not - such is the interconnected nature of our global financial system that it would be impossible to rule out another contagion that required official intervention.

 

But would re-imposing some form of Glass-Steagall - separating out the payments system from the inherently risky activities of the investment banking divisions - make the system much safer than it is at present? In my view the answer is unequivocally: yes.

 

Consider the situation we now have. A spate of mergers means our financial sector is more concentrated than before the crisis. And after the Lehman disaster, large banks know that they have a de facto government guarantee that they will not be allowed to fail. This drives down the cost of their funding because creditors know they will get their money back come what may. Where is the market discipline for bank managements here? Large banks have an incentive to load up on risk because they know that they will reap the profits if their bets pay off and taxpayers will reap the losses if they don't. The threat of bankruptcy - in the minds of both bank managements and their shareholders - needs to be credible. At the moment it simply isn't. How can this possibly be in the public interest?

 

I agree that proper regulatory curbs on leverage across the financial sector are necessary for all the reasons Kamm outlines. But I fear that he places too much faith in the ability of regulators to police the sector properly. In my view what is needed is a belt-and-braces approach: tougher regulation and structural reform (ie a return to the principles of Glass-Steagall).

 

As for the question of whether the banks constitute a vested interest, Kamm looks at the sector and says there isn't "an unaccountable concentration of power that needs to be broken up". I look at their "too big to fail" status and massive lobbying power and say: if this isn't an unaccountable concentration of power, what is?

 


Comments

If it looks like an elephant, smells like an elephant, and acts like an elephant, there is a fair c
brumbar wrote:
Monday, 15 March 2010 at 05:07 pm (UTC)
What ordinary people want is for their money to be secure and to earn a decent rate of interest. Many in the banking sector just want to get their hands on the money so that they can gamble with it. The present system gives savers no option but to entrust their money to speculators. It is also true to say that the banks have almost overwhelming poer. Neither of these situations can be allowed to continue. Unfortunately for Britain they now account for 30% of GDP. This makes it unlikely that politicians of any party will be allowed to make any serious moves to bring in the banking reform and legislation that is not only necessary, but that the people and the country need.