Friday, 31 July 2009

My Point Exactly

It really gives me no comfort to be right for just once in my life but it seems MPs in the Treasury Select Committee have confirmed my thoughts.

Namely, that the FSA and Government's new proposals on 'Macroprudential Regulation' are in fact just a rehash of the same regulatory policies in place prior to the Credit Crunch. It also confirms that that the FSA 'failed spectacularly' in monitoring banks in the lead up to the financial meltdown. It must come as a sick joke then that a) the same body and executives at the FSA remain in force, b) that they are responsible for re-writing the policy for the future and c) that a total of £17m was paid to the staff of the FSA in bonuses.

Oh yes, it wasn't just banks at the old bonus game - £17m amounts to nearly £8,000 for every one of the 2,500 FSA staff, of which Hector Sants, CEO of the FSA, alone gets over £100,000 bonus on top of an annual salary of over £900,000 while Lord Adair Turner gets over £200,000 for his part time work as Chairman.

It's a complete joke and a sham.

Central to the new policy, if it can be called new, is that the tripartite system involving the Bank of England, the FSA and the Treasury should remain intact. This may surprise most and even the MPs reckon it should stay but they have criticised the proposed reforms as merely being 'cosmetic'.

In fact, more alarming was the notion that in his evidence to the committee, the Governor of the Bank of England, Mervyn King, had 'no idea' what the Government's plans on reform were. This really smacks of another disaster in the making and having all just spent vast sums of money on bailing out the financial system to allow greedy banks to just do it all again, everyone seems to forget that there is a limit to the seemingly bottomless pit of money which is the taxpayers' pockets.

At no point does the system recognise that it is taxpayers who are at risk here. It seems that the safety net will always be the same and that we should just grin and bear it. Why there is not wholesale reform of the entire banking industry so that there are clear lines of differentiation between what forms of banks do that ring-fences risk so that the public does not have to pay for stupid mistakes is beyond me. Yes, it will slow the pace of growth and it will reduce the risks that are taken meaning economies will have to slow down but that IS THE CENTRAL ISSUE.

You cannot grow economies when the growth is not real.

The whole point of the last 10 years is that banks were making profits out just pushing debt around, all links to the values underpinning the debts were lost because no one cared. The profit was in trading the debt not in the debt being serviced. Traditional banking values have been lost after deregulation which has spawned a high risk gambling system which relies on no one asking questions just taking a profit on every, more convoluted trade.

The system requires fundamental overhaul and it will be painful because it is the responsibility of every official to make sure that the same weasels don't come kicking us for money again. What happened in the banking industry was our problem this time around because we were given so much credit based on poor asset assessments that we spent it all and craved more spawning a massive boom. Well, it is better we are told that credit will be tighter, more stringently managed and that the boom is over - and lump it.

Instead, the whole system is rigged to do exactly the same again and that is what the MPs have spotted. As Joseph Stiglitz has pointed out, by saving the system as it is we have just started the countdown to the next crunch, the next in a long term cycle of booms and spectacular busts and at each cycle the economies will get ever weaker so survival will be less likely.

I'm no economist but even I can see that.

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