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Since the crisis, what has happened?

Why we remain in The Money Trap

12 points:

1. Central bankers, who were by and large not responsible for supervision pre-crisis , immediately sought to pin the blame for it on regulators, diverting attention from monetary policies – stoking the credit boom, failing to sound the alarm for what they were responsible for, which often included a duty to monitor the system.

2. There was strong political pressure to keep regulation light, especially in London, under Labour,  though that does not excuse the poor record of the FSA pre-2007; Gordon Brown was much in favour of light touch regulation, presumably to curry favour with the City and to show how “modern” he was, as in the gesture to sell half Britain’s gold at the wrong time.

3. Given the diagnosis, the official effort since 2008 has gone into strengthening capital, regulation etc etc with adverse implications for growth but little effort to recast monetary policies. Basically they have had to resort to increasing debt further because they had no alternative, partly for political reasons; but there was also an intellectual vacuum, plus encouraging borrowing and debt by negative rates which risk undermining the entire capitalist system.

4. Banks are better capitalised but not reformed. OK, ring fencing may be coming in – and the Americans may be thinking of imposing ring-fencing there instead of Dodd Frank. But it has all taken 10 years! Moreover nobody really believes that we have solved the “too-big-to-fail” issue – people still expect the huge banks will be bailed out in a crisis- indeed, not just bailed out, but allowed to continue to exist as Deutsche Bank without any change in the capital structure which means that these monsters are still trading with an unfair advantage.  This is holding back the entire system from proper market-led evolution.

5. We do not actually need these monstrous carbuncles, Deutsche (see this article for good investigatory reporting), Wells Fargo, Bank of America, Barclays, RBS etc etc. I said in my book, five years ago, that most of the big banks were heading for the break-up yard, because of their bad loans, refusal of taxpayers to underwrite them, inability to raise capital and sheer inefficiency. I was wrong.  I underestimated officialdom’s foolish determination to keep them afloat at all costs (the polite terms are “forbearance and denial”). These near bankrupt monsters are not fulfilling their proper functions in the economy. They, as well as hundreds of smaller, protected banks, especially in countries like Germany and Italy, their balance sheets loaded with cash, are barriers to innovation, enterprise and Schumpeterian growth.  Most of the big banks are still in a mess organisationally. They are opposed to innovation and cannot handle newcomers. According to people I talk to, they understand little about fintech, nor can they even open new bank accounts for anybody—e.g.I know of a wealthy man who cannot have a new account opened for his new enterprise for more than six months because none of the big banks are in a position to take on new accounts since their transaction monitoring system is not in place or because their organisational structure has forgotten about small companies.

6. The massive tax inducements in favour of debt, tax-deductibility of business interest, etc and against equity remain in place. This makes the system still highly vulnerable.

7. Is there really more confidence in the system, in money itself? Central bankers say there is, but how do they know? People like Professor Kevin Dowd have raised serious doubts about their so-called tough stress tests. Trust has not recovered. Without trust, money can’t work its magic. The quality of money declines as the central banks resort to desperate measures to maintain its quantity.

8. The revolving door between top bankers, top central bankers, regulators and politicians and political advisers has gone on spinning. Becoming a governor or deputy of a major central bank is now seen as a smart career move for somebody in mid-career, not as the pinnacle or crowing achievement of a career any longer. They have an eye cocked for the next chance, the next step on the ladder. What a bad example to youngsters! How can anybody not be cynical when they hear central bankers criticising the banks, with a wink in the eye and one hand behind their back waiting for the money?  Being governor has become, at best, a bureaucratic job.

9. Monetary policy is determined by short-term appointed economists who soon go back to academia or the City – after just another career move to get publicity. They can happily debate and toss coins and be interviewed in the media and disappear again. And since it all failed miserably with the crisis, it is no longer independent; governments actually call the shots.

10. There has been talk but no real change of culture about remuneration.  CEOs and senior bankers are still earning huge salaries and bonuses whatever way they are expressed.  Everybody in the game knows it is fixed;  pay and perks are in effect decided by consultants commissioned to rate the going pay for a job, which means that each time they do a survey, people up the rate, knowing they will benefit next time round. There is no true market, just a competition in rent extraction.

11. Policy makers are gripped so tightly by The Money Trap that in the UK, for example, not even the Labour Party has any plan for financial reform. This is despite the obvious fact that their supporters remain angry about the banks’ role in the crisis and the unfairness of the way it was managed. In fact Trump and May seem more in tune with people’s anger, though neither of them has any clue about economics.  In the US, the financial sector, whose misdeeds have cost the economy an estimated $20 trillion,  spent $2 billion on political activity from the beginning of 2015 to the end of 2016, including $1.2 billion in campaign contributions – more than twice the amount given by any other business sector, according to a study by Americans for Financial Reform. The prospective rewards are immense: as much as $218 billion could be returned to shareholders or reinvested in the banks themselves, boosting CEO salaries further, if all the deregulation the industry was seeking comes about.

12. Even more troubling is evidence of insider trading on a large scale, following the stunning list of scandals and price fixing (See Better Markets website). With markets hanging on every thread of evidence of central bank policy intention, the incentives are huge. According to a Wall Street Journal report (March 13, 2017) by Mike Bird U.K. government-bond futures often move sharply in the 24 hours before sensitive economic reports are released, a phenomenon that “suggests some investors may be trading with knowledge of official statistics before they are made public” .The analysis highlights Britain’s unusual practices in the handling of market-moving data: Over a hundred people, from Prime Minister Theresa May to dozens of policy advisers and press officers, can get to see some of the figures a day before they come out. In 59.5% of 172 data releases between April 2011 and December 2016, U.K. government-bond futures correctly anticipated the rise or fall that ultimately happened when economic data were published.

Equally, a European Central Bank-published study found suspicious trading ahead of seven regular U.S. economic releases, saying information leaks probably helped traders make more than $160 million in profits in two markets over six years.

It seems to me, also, although I am not aware of evidence for it yet, that some unconventional monetary policies provide heaven-sent opportunities for front-running and other corrupt practices based on inside information.

I know of one hedge fund that employs a cohort of former central bank officials to tell them the answer to only one question only: will interest rates go up, go down , or stay the same at the next monetary policy meeting?

There are, it must be said, some officials who have struggled to effect genuine reforms; one of them is Governor Tarullo of the Fed who stepped down last month. The banks are desperate to get a more pliant successor.  There are others, but the tide of money and influence is running against them.

European and North American economies may be doing a bit better, after 10 years of painful effort post crisis. But that is despite, not because of, the banks and financial sector.

We remain stuck in The Money Trap, do we not?