You have to hand it to those bankers. They are very creative in finding ways to argue that life for them should continue more or less as it did before, despite the spectacular damage that they have exacted on the global economy.
Had the industry put together a reform program, or even fessed up to the damage they hath wrought? Heavens no, it’s clear that if they huff and puff enough, they can block any serious measures. That does not mean that absolutely nothing will happen, mind you. The industry may have to submit to some indignities so that the politicians can say they have collected a few scalps, but these changes are certain to be in areas that have high PR value but will not inconvenience the bankers overmuch.
In fact, the banksters are better situated than they were before. Now they enjoy explicit state support, a huge web of safety nets, and super low interest rates with virtually no strings attached. The onus is on the officialdom to claw back from this industry-favoring position. Even if the financiers have to concede a little ground, they seem if anything to have benefitted from this wreck-the-global-economy exercise. No reason not to do it again.
An egregious argument for doing little to nothing comes from Josef Ackermann, chairman of Deutsche Bank via the Financial Times:
A deluge of financial regulations threatens to harm economic growth, one of the world’s top bankers said on Friday, in what appeared to be the start of a concerted fightback by the industry against feared regulatory overkill.
Josef Ackermann, chairman of the Institute of International Finance, the global bankers’ association, and head of Deutsche Bank, said governments were not paying enough attention to the aggregate impact of the reforms being proposed.
“There is a trade-off between maximising stability of banks and optimising growth of the real economy. That balance [should] not be forgotten,” Mr Ackermann told the Financial Times. He warned that the entire economy would “pay a high price” if regulation went too far.
Is there an iota of proof for this assertion? We are suffering from a financial sector that has become preoccupied with serving its own interests as opposed to providing services essential to modern economies. At least in the US and UK, banks take a larger chunk of GDP than they did in the early 1980s, and that result probably holds across advanced economies.
Has growth been any better in the era of lightly regulated banking than during the immediate post World War II era of heavily regulated banking? Even before you threw in the cost of the global financial crisis, the answer is no. Now you can argue, correctly, that the years right after World War II saw conditions not in place now (rebuilding war-ravaged countries). But we’ve had some special circumstances of our own, namely, two technology revolutions, first personal computers, then the Internet. But the general point nevertheless holds: the premise behind Ackermann’s remark is wildly counterfactual, and the onus should lie with the bankers to prove otherwise.
But instead we get this:
Mr Ackermann complained that the banking sector had not been properly consulted before the latest regulatory proposals were announced at the G20 summit in Pittsburgh, and called for intensive talks before final decisions were made.
“We need to start again with an intensive dialogue between the private sector and the public sector on the strategic questions, on the technical details, including what is the economic price of certain things we are doing,” he said.
Yves here. Now it is reasonable to assume there will be a cost associated with reform measures (charitably assuming they actually come to pass). For instance, calling for banks to hold more capital will raise funding cost. But I don’t see that as entirely negative. Overly cheap credit is what got us into this mess in the first place, and the notion that continued low-priced debt is a good thing (for anyone other than bankers) is spurious. Ackermann’s grumbling may be in reaction by a proposal by the IMF’s Dominique Strauss-Kahn to tax the banking sector.
In general, it is important to recognize that effective insurance is not free. We want effective insurance. But by arguing that imposing any costs on the banks (Ackermann acts as if he is worried about the borrowers, how touching) is a bad idea is tantamount to saying any type of insurance against future financial train wrecks is a bad idea. The worst is that this is probably not mere posturing. Ackermann and his colleagues are no doubt sincerely convinced that the role of their banks, as currently configured, is desirable and necessary.
Ackermann is also negative about reforms implemented on a national level:
He also warned that the global financial system could fragment if regulators in different jurisdictions continued to try to tighten their control over banks “at a local or regional level”….
Global banks aimed to match savings and investments globally, he said. But “we should be very aware of the risk of some sort of fragmentation” into national pools of capital.
Yves here. One can argue this either way. The research of Kenneth Rogoff and Carmen Reinhart suggests that periods of large international capital flows are accompanied by frequent financial crises. Smaller international capital flows are probably pro-stability.
But invoking the “fragmentation” issue is curious, because it suggests Ackerman wants regulations handled on an international, coordinated basis. He may be sincere, or he may recognize that the odds of international cooperation are so low that trying to bring about an international effort is a great way to assure nothing happens.
However you look at it, the fact that the banks who caused this crisis presume they can negotiate with governments as equals is no doubt an accurate reflection of where things stand. Which means that we of the great unwashed can look forward to continuing to subsidize them.