Popularism for the sake of it

There is little doubt that many bankers lost the plot completely and it still appears many haven’t yet bothered to take on board the lesson, but that doesn’t excuse populist policies by politicians to pander to the masses, particularly when the policies are irrelevant.

Popularism for the sake of it

Popularism for the sake of it

Splitting the banks; Protecting the safe banks; Cutting loose the ‘casino banks’; too big to fail  etc. All meaningless phrases but stirring up jingoistic positive emotions.


If we look at the so called safe banks – Northern Rock – the straw that broke the camels back in the UK. Not a bank too big to fail and not an investment bank, but a major mortgage lender Fannie Mae and Freddie Mac which broke the back of the American banking system, both mortgage lenders. These institutions, in a similar vein to all mortgage lenders were in a market of easy credit and high demand fuelled by sharply rising house prices, which led them to take ever greater risks in lending.

To enable them to continue with their rapidly extending loan books and retain a balance sheet to enable them to loan out more mortgages, the mortgage lenders borrowed from other banks by using as assets these mortgage loans. The Investment Banks, then bundled the loans together and sold those on. The various instruments used by the Investment Banks relied on knowing what was inside this bundle of debt and rather than picking out each loan individually themselves looked to the Ratings agencies to risk assess the loans.

Once people started to default on their mortgages the original lenders no longer had the income stream to payback their debts to their creditors  and immediately the Investment Banks started to question the real value of these bundles, whilst at the same time not receiving income from the ‘safe banks’ they had lent to in the first place. It transpired that the Ratings Agencies had been lax in assessing the risk of these bundles and the whole house fell down.

If people want to point a finger – it is at anyone who defaulted on their mortgage, the secondary fault lies with the ‘safe banks’ who not only made the original loans but then chased more capital by using these as assets, the third line is the Ratings Agencies who didn’t do their job. The ‘Casino banks‘ are four steps away from the reason for the collapse.

But let us move away from the facts behind the collapse and work with the faulty premise.

Investment Banks provide the capital to make the world of socio-capitalism work, without them there is no lending, raising of capital, currency risk management, futures pricing etc. and this fantasy world of socio-capitalism, which relies on credit will collapse in a heap as the only ability to trade will be through cash in hand.

Personal Banking – the safe banks – is but a part of, not apart from, the capital markets and for anyone to posit allowing Investment Banks to collapse at a whim in the future is the solution, is either deluded or a politician pandering to Popularism for the sake of it, as it simply will not happen.

Join Tim Whale on twitter for more thoughts from the outside.

 

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