Home > Economic policy > Don’t look at the bank behind the curtain

Don’t look at the bank behind the curtain

July 17th, 2011

The political impregnability of Rupert Murdoch and NewsCorp has always been one of those facts about the world that seemed regrettable but eternal. By contrast, the ability of the banks to emerge from their near-destruction of the world economy richer and more politically powerful than ever before certainly took me by surprise when it happened (partly motivating my change in title from “Dead Ideas” to “Zombie Economics”). John Emerson pointed out the other day that the head of risk management at Lehman Brothers, arguably the most egregious individual failure among the thousands of examples, was just appointed to a senior position at the World Bank.

But now it seems there is just a chance that the curtain might be swept away from even these wizards. The emerging theme in commentary is the corrupt culture of impunity represented by the press hacking scandal, MP expenses and the banks (here’s UK Labour leader Ed Miliband pulling them all together).

If Labor could tie the Conservative-Liberal austerity package to the protection of the systemically corrupt banking system, they would have the chance to put Nu Labour behind them (I noticed Blair has already credited Brown with killing the brand). Instead of putting all the burden on the public at large, they could force those who benefited from the bubble to pay for the cleanup. The two main groups are the creditors who lent irresponsibly, counting on a bailout and should now take a long-overdue haircut and high-income earners who benefited, either directly or indirectly, from the huge inflation in financial sector income.

I know it seems hopelessly naive to think the banks could ever be brought to heel. But they were, for decades after the Depression. And as impregnable as they look today, Newscorp looked just as impregnable three weeks ago, as did the CPSU and the apartheid regime in South Africa thirty years ago.

Of course this spring moment won’t last long. But perhaps there is enough momentum that it won’t be exhausted by Murdoch alone.

An unrelated note on Murdoch. Looking at the Murdoch empire, it seems clear that, before this scandal, it was much more than the sum of its parts. The scandal sheets both made money and did the dirty work for the political agenda pursued through the more respectable parts of the empire, while the electronic media business profited from the political favors (not bribes, of course!) handed out in pursuit of Murdoch’s goodwill. Now the opposite is true. The link to the tabloids is toxic for papers of record like the Times and the WSJ, which will certainly find owners of some kind. And News International is now a liability for the US and Australian businesses, as well as for Sky. Then there are the complications of potentially massive litigation liabilities.

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  1. July 17th, 2011 at 19:02 | #1

    The public are like the Morlock slaves freed from them after being under a close clamp for as back as memory, in some cases and I agree that our culture is too frail to withstand the next, hi tech, as yet unrecognised, Murdoch. Murdoch is only important as evidence of a move to repression and psychological control, and a working model of how heterogeny and homogeneity are imposed and maintained.
    Watching Brown take belated revenge in the brit parliament the other day, I thought,
    “Yes, the damage is done now, and in the end, you like me, have been happy to go along with it, provided we could duck the consequences of Murdochism ourselves (what else could we do?)”. The one healthy thing i could see was that Clegg finally asserted himself, Cameron is in with Murdoch as thick as a thief, as you would expect from a bastard of Thatcher.

  2. TerjeP
    July 17th, 2011 at 19:09 | #2

    By all means make the banks pay for their mistakes. But limit the exercise to those banks that actually made mistakes whilst allowing those that were prudent and sensible (eg most Aussie banks) to be free from any impost. In short punish specific corporations and individuals at fault not the industry at large.

  3. boconnor
    July 17th, 2011 at 21:49 | #3

    TerjeP @ 2. I don’t think the language of “mistake” is useful here. Banks and investors make loans etc based on their best assessment of risk. There is always a non-zero chance that their predictions of default will be wrong and that they will lose out on a loan that gets only partially paid back (or not at all). Such is the risk/reward gamble.

    And it seems quite bizarre that EU governments are treating bond holders as if their investments were guaranteed risk free, which was never the case. Particularly given the social and economic cost of that guarantee, which looks like putting a number of economies in purgatory for perhaps a decade.

  4. Ernestine Gross
    July 17th, 2011 at 23:16 | #4

    TerjeP @2, the problem with ‘the banks’ is really a problem of system failure. In the case of a system failure it is difficult to distinguish between those who were lucky and those who were prudent. At the risk of being ticked off for repetition, I’ll say it once more. The data collection on financial transactions, based as it is on the accounting framework, does not allow an adequate risk analysis (notwithstanding the Basel (latest number) and stress tests) and it does not help to disentangle the transactions into categories that would allow even an approximation of what you want.

    .

  5. Ernestine Gross
    July 17th, 2011 at 23:25 | #5

    boconnor @3, I beg to differ in your assessment of how the EU governments are treating ‘bond holders’. It is easy to talk about a financial category called ‘bond holders’. Who are they? Are they people who can afford to lose their meagre savings from working for 10, 20, 30, 40 and more years? The financialisation and privatisation of ‘the economy’ during the past 20 or 30 years resulted in just about ‘everybody’ becoming a ‘bond holder’ and a ‘shareholder’ via superannuation funds.

    By the way, when talking about bonds and risk, it is useful to distinguish at least between two types of risk, one is called ‘default risk’ the other one is called ‘price risk’. Within the EU the third category of risk, exchange rate risk, is the only risk the EU governments which belong to the Euro-zone shield.

    Perhaps you may wish to examine the curriculum of economics, commerce and business degrees to find out how much effort has been put into educating the people in post 1950 theoretical results.

  6. TerjeP
    July 18th, 2011 at 00:20 | #6

    Boconnor – Greece retains default as an option and the rest of the EU should leave them to it.

    Ernestine – if the stock market goes south people get hurt also. That is the nature of investment. If you invest in government bonds you ought to be take the good with the bad. And it ought to be increasingly obvious that investing in some governments is a poor investment decision. I have little sympathy for the idea that certain classes of investor ought to be a protected species. Let’s call it a learning opportunity.

  7. boconnor
    July 18th, 2011 at 07:49 | #7

    TerjeP @ 6 Well said.

  8. Freelander
    July 18th, 2011 at 08:25 | #8

    More events at Runnymede than any Spring; the barons are revolting. Don’t expect too much, but change there is, may be more than the middle east may be getting, in the long run.

  9. Freelander
    July 18th, 2011 at 08:31 | #9

    Further, why all the concern about the EU and PIIGS? The Republicans and Democrats have locked themselves into a game of chicken, and with highly defective people on each side, the chances of neither backing down before the markets speak are too great to contemplate.

  10. jrbarch
    July 18th, 2011 at 09:07 | #10

    Dear John,

    While we are bringing the press and the banks back to reality, why stop there? Let’s include the politicians and most economists in the package: from Warren Mosler -

    MMT to President Obama and Members of Congress:

    MMT to President Obama and Members of Congress:
    Deficit Reduction Takes Away Our Savings

    SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

    Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.

    The Federal debt IS the world’s dollars savings- to the penny!

    The US deficit clock is also the world dollar savings clock- to the penny!

    And therefore, deficit reduction takes away our savings.

    SO PLEASE DON’T TAKE AWAY OUR SAVINGS!

    Furthermore:

    There is NO SUCH THING as a long term Federal deficit problem.

    The US Government CAN’T run out of dollars.

    US Government spending is NOT dependent on foreign lenders.

    The US Government can’t EVER have a funding crisis like Greece-
    there is no such thing for ANY issuer of its own currency.

    US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.

    The risk of too much spending when we get to full employment
    is higher prices, and NOT insolvency or a funding crisis.

    Therefore, given our sky high unemployment, and depressed economy,

    An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.

  11. Ernestine Gross
    July 18th, 2011 at 10:40 | #11

    TerjeP, you write: “If you invest in government bonds you ought to be take the good with the bad.”

    Your dictum presupposes that an ‘investor’ knows that he or she has bought a particular type of financial security. Please prove that all depositors in private banks in various countries know that they are ‘investing’ in say Greek government bonds or US treasuries or credit swaps or corporate bonds or CDOs.

  12. Ernestine Gross
    July 18th, 2011 at 10:46 | #12

    TerjeP, let me slightly change my request. Please prove that depositors in private banks in various countries have access to information that allows them to know whether they are investing in say Greek government bonds or US treasuries or credit swaps or corporate bonds or CDOs.

  13. Ikonoclast
    July 18th, 2011 at 12:32 | #13

    The system is collapsing. The global financial system and the global civilizational system is collapsing. Although, perhaps retrenching or retreating might be a better term. We are at the high water mark now. With the system predicated on endless exponential growth, exponential increases in all resource utilisation and with the world being finite, there must of course be a high water mark.

    This financial crisis might appear to be wholly “financial” on a superficial analysis but it is actually a compound crisis combining a financial crisis, a crisis in (lack of) democracy and a finite resource limits crisis. These will feed into each other in a vicious spiral downwards. Our only hope is a peaceful, social democratic revolution which overthrows corporate growth capitalism and replaces it with a green, cooperative, renewable and steady state economy. The power to own or control excessive wealth and property must be curtailed. Private appropriation of natural resources must end. Public ownership and democratic control must be extended over all natural resources for environmental protection and sustainability.

  14. Freelander
    July 18th, 2011 at 20:51 | #14

    Don’t worry. It is only the West that might collapse. China probably won’t even have a recession. A meltdown will provide them with an excellent chance of continuing to buy up big. As for China stepping in to save the US. Don’t hold your breath. The US has been quite offensive of late, in a great variety of ways, as far as they are concerned. I expect they are of the view that the US is beyond saving anyway. China may save Europe, however. Australia won’t be too badly off, although regardless, we seem to be heading for an ugly quarter or two (precipitated by the strong Aussie dollar).

    We are lucky we live in the lucky country!

  15. Hal9000
    July 18th, 2011 at 21:28 | #15

    The US is both China’s biggest market and its biggest debtor. I doubt the Chinese will allow the US to collapse with equanimity. A loss of precious US exceptionalism is I suspect on the cards, however.

  16. stockingrate
    July 18th, 2011 at 21:55 | #16

    @Ikonoclast

    Agreed that physical limits have contributed to the crisis, especially oil in USA and Gas in UK, but also think competition from China is a factor as the losers in the West have not wanted to accept the decline. However it is not only corporate capitalism that can live beyond it’s means. Government- look at the massive state debt – bureaucrats have been keen to grow their empires. Lots of villagers have over loaded their resources with people. Householders in the Anglosphere have borrowed too much and built too-large houses.

    Collectivize farmland – no thanks.

  17. Freelander
    July 18th, 2011 at 22:02 | #17

    @Hal9000

    The reality is that China doesn’t need the US as a market. That belief (in the Chinese need for the US) is one of the many wishful thinking delusions Americans are under. As for the debt, China has already shown that it is not willing to throw more good money after bad. Combine that with the offensiveness of a variety of US actions and statements, and you have rationality and emotion suggesting the same course of action, which is, let the US sink.

  18. TerjeP
    July 20th, 2011 at 00:02 | #18

    Your dictum presupposes that an ‘investor’ knows that he or she has bought a particular type of financial security.

    It is a bit hard to buy a bond and not know you have bought a bond. So your comment seems a bit pointless.

    Okay a person might be exposed to the risk of governments defaulting because they deposited money in a bank that lends money to an unreliable party. However that risk is inherient in the banking enterprise. It is a risk you take when you outsource the task of finding a counter party for your loan. If you don’t like your bank or don’t think they are up to the task of managing counter party risk then sack them.

    On a personal note and mostly out of principle I would like to locate a bank that never lends to any government. If you are aware of one then please let me know. If there are none so ethical then perhaps it is a market failure that must be remedied with a law. A law prohibiting banks lending to governments. [/sarc]

  19. Ernestine Gross
    July 20th, 2011 at 09:12 | #19

    TerjeP, in a roundabout way, you do acknowledge the point I was making in my posts. I take it we agree that slogans such as ‘bond holders should not be protected’ are not helpful, given the complexity of the financial system.

    I have no problem with you not wishing to deposit money with a bank that buys government securities (‘lend’) but I can’t help you finding one of this type just as you can’t help me finding a bank which has a financial recording system that allows me to make a rational choice about the risk associated with depositing money. Rating agencies are worse than useless (on theoretical grounds – consensus ‘views’ are not compatible with the idea of a market – and on empirical grounds – GFC).

    I wouldn’t call the problem a ‘market failure’ but rather a failure in institutional design.

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