15 September 2010
Smith, author of Econned: How unenlightened self-interest undermined democracy and corrupted capitalism and who formerly worked at Goldman Sachs, McKinsey & Co and Sumitomo Bank, says the Basel III reforms — which will require banks to hold common equity equal to 7% of total assets, up from the current ridiculously low level of about 2%, and tighten up on what constitutes equity — are bound to fail.
She quotes from Financial Times’ columnist Martin Wolf to prove her point (including this: “To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored”). But Smith also accuses Wolf of pulling his punches.
Rather than just tinkering around the edges or further tolerance of further half-baked thinking from browbeaten politicians (and bank lobbyists, such as the BBA’s Angela Knight, who take us for idiots), Smith calls for a radical change in approach towards the banking sector. The first step, she says, is to stop the pretense that banks are private sector institutions.
“The reality is that banks can no longer meaningfully be called private enterprises (yet no one in the media will challenge this fiction) … we’d rather limp along with a defective and increasingly costly model than challenge deeply held political beliefs.”
Reading this piece, and having interviewed Andrew Smithers, founder and chairman of Smithers & Co, earlier this year*, has made me even more confident about the situation in which we now find ourselves — and the need for reform. Here’s a longer excerpt from Yves’ piece:-
“Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large.
“But the subsidies go beyond that. To list only a few examples: we have near-zero interest rates, which allow banks to earn risk-free profits simply by borrowing short and buying longer-dated Treasuries. We have the Inland Revenue Service refusing to look into violations of real estate mortgage investment conduit (REMIC) rules, which govern mortgage securitizations. We have massive intervention to prop up real estate prices, with the main objective to shore up banks; any impact on consumers is an afterthought.
“The usual narrative, ‘privatized gains and socialized losses’ is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension its incumbents, as a bastion of capitalism.
“The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state-supported …
To read Yves Smith’s article in full click here.
- *The interview with Andrew Smithers will be published in the second edition of Bloomsbury Publishing’s QFINANCE, which will be in the bookshops next month.
- To read my earlier blog post, ‘Many banks set out to defraud but the authorities continue to turn a blind eye’, based around an interview with William K Black, click here