July 12th, 2012
The American economist Adam Posen, a member of the monetary policy committee of the Bank of England, recently told a conference in Edinburgh that it’s high time the UK lost its “bank fetish” and stopped treating banking as strategic industry. He said we need counter-cyclical taxes on real estate and that we must call the bankers’ bluff.
Speaking at the Just Banking conference in Edinburgh on April 19, Posen said:-
“Governments who promote particular industries … tend to distort political decision-making and tend to distort the incentives for that industry to behave.
“Every major economy has its protected industry that gets romanticised. In the US it’s usually agriculture; in France it’s agriculture; in Japan it’s rice farming, even though they don’t eat rice that much any more; in Germany it’s automobiles — pick your country, pick your poison.
“In the UK, however, and this is where it makes it worse, the fetish is banking. And the problem is, if you have an auto industry that you favour and you waste too much money on it and you protect it, you basically put a tax on everybody in society because it’s big and because everybody pays too much for their autos and you probably get less good cars; it’s bad. But it’s essentially just ‘I write a cheque and some of the cheque goes to nothing’.
“If you have a bank, and you encourage a bank to be too big, and it goes wrong, you will be writing cheques until your grandchildren’s lifetime. That is one of the biggest lessons of the crisis. That if you have banks which have balance sheets larger than your country’s GDP, you can get into very serious trouble.
“Alistair Darling in his memoirs speaks about the height of the crisis at which point the UK government had to intervene to bail out, take over, fund RBS and Lloyds / HBOS. And there’s this chilling moment when realises looking at the balance sheet of RBS, wow that is roughly the same size as UK GDP. Now it turns out that wasn’t as dangerous for us as it was for say Iceland or Ireland or even Switzerland. Why is that?
“Well a few reasons, and Alistair talks about this and others have as well. First the Irish, and the Icelanders, and to some degree even the Swiss went really crazy. So they had bank balance sheets that were several times the size of their economies so, when something went wrong, it was just inconceivable how they could ever pay it back.
“The second thing is, geniunely, the UK for good reason had more assets, and more capital markets, and more credibility in markets to draw on to say: ‘okay this is a very large amount of money but we can spread it over 10 years, if people give us financing we’ll be able to do it, and that is exactly what is happening’. Third, to be fair, whatever the sins of the various UK banks, there is some sense in which these banks were genuinely good, and so there was more value left in them than, say, the Icelandic banks.
“So there are a lot of reasons why you can’t just say [let’s impose] a hard rule: 100% of GDP and don’t let the banks [balance sheets] get any bigger than that.
“But you can come a lot closer to that rule than you might think, without costing yourself very much, and what some colleagues of mine at the Bank of England and elsewhere in the public sphere in the UK would argue, legitimately, is to say well Adam this is only a problem if you think you can’t set up a regime where the private stakeholders in the banks are liable for the costs when they screw up …. [talked about resolution regimes etc]
“There’s a reason that hasn’t happened yet and that’s because, as the banks get bigger, not only do their incentives get more and more perverse, but their sway over governments gets more and more perverse — and it’s not about direct political corruption and they’re big and important (that’s intellectually uninteresting and one would like to think we can avoid that), it’s because as they get to be too big, the costs to the economy of disrupting them becomes very scary even to well-intentioned policymakers ….
“I think it’s important that we continue to question every time a public official, let alone a banking executive, stands up and says: “We need to have a globally competitive financial centre here in the UK, we need to have world-beating banks we need to have national champions like this. We have to push back and question that very hard.”
Posen added that we need to “push back” on stories promulgated by apologists for the banking sector. For example when they talk about the tax revenues they generate, he said this needs to be countered by the periodic costs of bailing them out. He also said international banks with a presence in the UK ought to be forced to separately capitalize their UK subsidiaries and finally poured cold water on the typical industry scaremongering that the financial sector will somehow up sticks and leave London if the politicians attempt meaningful reform.