| 31 January 2010
It's very confusing to read the newspapers at the moment, with
every economic pundit peddling his or her own nostrum for how to right the wrongs
of the banking sector. And over Davos the air has been positively blue with
a cloud of conflicting agendas for our economic future.
Well, I'm a financial journalist as well. If they can do it, why
can't I? So here goes! You have been warned; now is the time to stop reading.
To begin with a history lesson: Bang!
Big Bang, that is. The process by which partner-based investment
banking firms were absorbed (at mind-blowing cost) into commercial banking firms
who wanted to be 'universal' banks. Mostly this happened in the early 1980s,
and the process largely demolished the centuries-old model in which people with
capital formed private partnerships in which they could make or lose money without
any embarrassing onlookers such as shareholders.
It's fact that investment banking (m&a, ipos, what is now
called private equity, and all the trading that is associated with these activities)
can make silly amounts of money, and occasionally lose it as well. How can there
be any objection to that if it is done in private? There never was any; the
problem has come with the fact that the clever wheeler-dealers who make these
enormous sums of money now do it in the full public view, and that makes them
vulnerable.
The marriage of private and public banking, with a substantial
injection of 'popular capitalism', led to securitization, itself nothing new
(every public company has been 'securitized'), but a dangerous weapon in the
hands of deal-obsessed investment banking magicians. This was the moment at
which, with hindsight, the regulators should have set up a structure to measure
and control the risks being generated by new instruments such as CDOs. But the
regulatory structure is compartmentalized in every country as well as internationally:
retail banking, insurance, futures and so forth.
Understanding the reasons for the collapse that ensued is not
to withhold blame: there was a Faustian pact between the politicians who need
growth to show off to their electorates (and certainly don't understand 'rocket
science'), the inexperienced young bankers who dined out on toxic mortage debt,
and perhaps most culpable of all, the ratings agencies, themselves totally unregulated
and unsupervised, who allowed and encouraged the ball to continue long after
midnight. But it's very difficult to blame the investment bankers; they were
just doing their job.
There's no going back, however. Any sort of forcible separation
between commercial and investment banking a la Glass-Steagall will simply set
back international economic growth by a decade. The ignorance of politicians
about investment banking and the popular anger that results can be cured by
education - you can see this process taking place already as more and more hacks
like myself come to understand that investment bankers are a necessity. 'The
unacceptable face of capitalism' was Edward Heath's comment, and the Germans
simply call them 'locusts'. But we have to accept them, like root canals and
traffic wardens, as a part of our complex society.
As to preventing the next 'crash'? Well, we can't. While human
nature stays as it is, booms and busts are as inevitable as love and infidelity.
What can be done is to fine tune the regulatory systems, try to bring them up
to date and to stop them lagging behind innovation quite so badly in future.
And most of all, say no to any 'solution' put forward by politicians, because
they are the very last people capable of understanding the problem.
You have been reading an entry on the following blog:
Jeremy Hetherington-Gore Unleashed
Jeremy tackles the difficult issues head on!
Contact: jeremy@lowtax.net
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