There’s nothing to stop another financial crash
September 12th, 2012One of the great unspoken scandals of the post-2007 financial crash era is that no reform of the banking system has been put in place, though domestically the bank bail-out will cost UK taxpayers some £1.4 trillions by 2015 and globally the crash nearly collapsed the world economy. Despite those gigantic detriments, 5 years on next to nothing has been done. The Vickers Commission was set up, but failed to recommend the obvious remedy – splitting investment banking from the retail operations. Then the capital ratios proposed, inadequate as they were, were watered down after City lobbying, and then postponed to come into operation till 2019! Not only that, another source of great instability has been studiously ignored.
The reform of money market funds should be an obvious target if another crash is to be avoided. Money market funds were established in the 1970s as competitors to banks and have become one of the main short-term funding mechanisms for US and European banks. Dangerously, however, these funds and the banks feed on each other in potentially unstable ways. This was illustrated in 2008 when the Reserve Primary Fund signalled it couldn’t maintain its fixed value because it helf $875 of Lehman Brothers securities. That led to a rapid run on its deposits and the authorities had to intervene to prevent other funds toppling.
The US Treasury has estimated that as many as 105 money market funds holding total assets of $1 trillion could fail in the same way as the Reserve Primary fund did if any of their top 20 counterparties defaulted. The latter include many European banks since 30% of the assets of money market prime funds are European bank debt. So there could be another cascading crisis with weak banks drained of funding, only this time it won’t be queues of depositors lining up outside banks to withdraw cash – it will be corporate treasurers wiring money out of money market funds at any evidence of risk.
At such an event the investment companies that sponsored these funds would normally move to support them. But, as in 2008, if a parent won’t or cannot support them, investors have an incentive to take their money out and run. A money market fund is indeed like a banking system, except that there is no capital buffer at all. That means there is nothing to stop a run happening again. Last time it was the shadow banking system’s invention of financial derivatives that set off the financial hurricane; this time round it may well be the inherent instability of money market funds.
September 12th, 2012 at 4:36 pm
I disagree. The obvious solution the Vickers Commission should have recommended was to take money creation away from privately-owned banks. The subject of the private banks and their power over the money supply was raised briefly twice in the Vickers Commmission interim report; on page 65;
“Fifth, even before the crisis banks enjoyed various kinds of state support, including the effective right to create money, ….”
On page 98;
“Like narrow banking, a complete move from fractional to full reserve banking would drastically curtail the lending capacity of the UK banking system, reducing the amount of credit available to households and businesses and destroying intermediation synergies. To its proponents, this shrinkage of credit is a benefit, as it removes the current ability of banks to ‘create money’, a prerogative they consider should be reserved for the state.”
Any mention of this had vanished by the time the final report was published. It’s the heart of the problem though – so why aren’t you addressing it?
September 14th, 2012 at 9:33 pm
Sir, I watched you today 14/9/12 in the empty House of Commons reading your private members bill on Tax Avoidance and was heartened to see Labour addressing the issue.
I wish that Ed Milliband was bringing up some of the issues you have brought up. I think Ed needs you!
I have always been a Tory, but I am afraid that this particular Tory Government have made me see Tories in a very different light. I find that they have not kept to their manifesto. Everything they do I hate. On a daily basis they manage to alienate me even more, in fact on a daily basis they manage to infuriate me.
I am fed up by the shallow self serving career politicians we have and the stranglehold the lobbyists have over them.
I am tired of a government that governs solely for business interests and vilifies the population as a whole whilst extolling the virtues of bankers and their like. Your private members bill on tax avoidance is a breath of fresh air.
I worry that if Labour wins he next election we will just get another NuLabour Blairite Tory Government. Old fashioned Labour has now become so unpopular it appears to have disappeared. Media has been responsible for much of this I fear and a lot of anti nationalisation propaganda. Private sector is milking public sector it appears to me. Unions and public servants are subjected to derision in the media and blamed for everything.
We are taxed to the hilt. I have some savings but as an oap, I find taxes take most my income and I have to top it up by drawing on my savings. So I don’t favour any more taxation. Council Taxes are expensive and taken with income and VAT that is substantial amount when your total income is around £12000 pa.
I worry about the loss of workers rights for my children and the lack of pension provisions for them.
I do not like the thought of the government monitoring my web browsing or my phone calls or my emails. I am not a criminal so why do they need to know political views for instance.
Most of all I have found this Tory Government to be so deceitful in the way they operate on occasions and are quite brass necked, and smug on other occasions.
I do hope you get your private members bill through, but suspect you will be strongly opposed as the present useless tax avoidance bill is designed to be useless, it is just window dressing for the population as a whole.