Breaking Up the Banks

Mervyn King has called, again, for the banks to be broken up, so that what we call retail banking is separated from what has become known as investment banking. This blog fully supports the Governor and has advocated this course continuously.

There is good reason for this. Well capitalised retail banking, following sensible lending criteria, is not only critical to a modern, or indeed any, economy, but it is also systemically safe. There will be failures among businesses reciving finance and some private borrowers will run into trouble. Overall the system is designed to cope with this and historically has. A permanent government guarantee of depositor funds would place very little actual risk at the door of the taxpayer. This is especially the case with the establishment of the new Financial Policy Committee at the Bank of England to run alongside the MPC, as part of the Coalition’s plans to re-organise the arrangements by which the financial industry is supervised.

Investment Banking is different. The nature of the trading in which it engages amounts to gambling. It creates its own electronic money de-facto, by creating, then valuing, then trading in, financial instruments so peculiar that nobody is able to explain exactly what they are. The sums of money are so vast that they exceed many times over the GDP of the whole world. These mind boggling sums flash from screen to screen from one trader to the next in millions, billions and trillions. When things go wrong and the crunch comes, the so called instruments are all but worthless and the trillions of dollars in this electronic racetrack are nowhere to be found. This is because they never actually existed in the first place.

With the cry that they are too big to fail, the taxpayer is called upon to come to the rescue with real hard cash to fill the vacuum in the balance sheets and coffers in some of the world’s top financial companies. Because they are organised in such a way that these preposterous financial fornications are entangled in the banking security of ordinary people, governments round the world had to respond, ours to the biggest tune of all.

What is required is the separation of this proprietary gambling from orthodox banking, of which it should never have been allowed by Big Bang to become a part. Then when trouble brews, the taxpayer can pass by on the other side and let them crash, wiping out their assets, salaries, bonuses and all, as well as the greedy shareholders who backed them. The crash would be spectacular and hard working people who do all those things which are socially useful rather than socially useless, would look on, most enjoying the spectacle and many rubbing their hands with glee.

That prospect and that prospect alone will ensure these gamblers, calling themselves investment bankers, mend their ways. The Governor is right. He deserves  support.