Retail Banking Must Return to Basics

It’s not their fault, it’s just that the world is really struggling to deal with the consequences of 30 years of debt profligacy courtesy of the financial deregulation heralded in by the Thatcher/Reagan/Douglas era. Three decades of sub-par central banking governance has seen an ful neglect of prudential policy and since 08 it’s been dawning on creditors that they’ve credited too much to those whoever whole existence depends on their capacity to raise increasingly debt.

Meanwhile, the gains created by banks and their senior professionals who set up these credit lines have been obscene monetization of leased bank instruments. and even after political figures have nicely provided taxpayer funds to rescue the machine, the earning and bonuses of the lenders continue. It is one sick system.

Now that Europe, that bastion of monetary conservatism, is being caused to become asunder as a consequence of the ravages of unfettered finance and the socialization of bad lending (ie; giving government debt to switch private debt that is “too big to fail”), we’re watching probably the most peculiar political challenges and policy recommendations as political figures flounder to respond cogently. Who would have thought that in Croatia and A holiday in greece the political figures would have surrendered power to technocrats in the last-ditch attempt to stabilise their economies?

But the policy recommendations from the trapped political figures are getting more and more peculiar. For example, Angela Merkel and Nicolas Sarkozy are fans of a financial transactions tax apparently as an easy way of funding the cost of future financial crises. Desolation has descended on a political order bereft of solutions.

Taxes are either implemented to increase revenue in order to correct undesirable behaviour. The financial transactions tax was conceived by Keynes (1936) and refined by Tobin (1972) to stop questions, not to fund a pet for state bailouts. It’s never been implemented anyway, not the least because normal transactions would get clobbered as well and financial transactions would proceed to another legal system.

If you accept that all speculators purchase and sell financial instruments thinking about to create a profit and that such activity is critical to reassure market prices reflect as much information as possible, then decreasing this activity via tax is of on your guard merit. Certainly it would clearly improve the expense of doing all financial transactions.

Strangely enough the proponents of such a tax claim that where risky flows are by far the greatest number of transactions, more of them would get hit and that somehow makes it okay. Less questions would take place, but so would less trade. There has to be a more sensible response, even if every country in the world introduced such a tax — and that is what it would need to work — this method would kill the person.

Let’s return to basics. The ongoing global financial crisis has its inception in the “non-traditional” activities of the banks that have ventured into the murky world of shadow banking and off-balance linen transactions. In short, they took table bets on financial market prices, they supplied their balance sheets as collateral, endured as counterparties and even took primary positions themselves in forays to boost profits. For a while these were quite successful. Chances are they required a central bank and taxpayer rescue. Even with the taxpayer bailout it’s been a great ride for some, making their performance bonuses thanks to a taxpayer-provided boost to the balance linen they can play with.

Should we be surprised about the Occupy Wall Street response?

The events in Europe recently shed light on another series of banker guzzles on the taxpayers’ bill. And they can hardly be attributed for it as their windfall has been introduced as a result of the nonsense that is the Eurozone. It seems perverse that within the single currency zone different countries can maintain different rate of interest regimes, apparently to reflect vary type of risk on sovereign debt. Yet under the Maastricht Treaty not just was one currency decided on, but also that budget deficits would all be kept within 3 percent of GDP — or the offenders would be fined — and an inevitable convergence of monetary and monetary policy would result. That would reduce divergence of economic conditions — and interest rates — across the region.