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Yves here. It might be possible to see the Bank of England article that makes baseless arguments against fining banks for predatory and crisis-inducing conduct if it pointed out that imposing costs on corporations was a poor remedy and the right approach was to punish executives instead. But we see no such argument here.
This paper is particularly distressing since it walks back some of the work of the Bank of England’s former director of financial stability, Andrew Haldane, widely regarded as one of the most original and astute economists of his generation. In a Haldane paper I’ve cited often, The $100 Billion Question, Haldane treat the cost of periodic financial crises as an externality, just like pollution. The correct remedies, depending on the level of social costs versus private gain, are taxes or other costs to make the actual cost of the product reflect the true societal cost, or prohibition. With a simple back of the envelope workup, Haldane demonstrates that the the cost of financial crises are so high that making the banks bear them would wipe them out. In other words, banking as now constituted is destructive from the standpoint of the community as a whole. It is purely predatory. That means aggressively restricting bank risk-taking (prohibition) and regulating them so they operate as utilities is the preferred approach.
Yet notice how the Bank of England article whinges about requiring banks to bear far less then the true cost of their reckless and self-serving activities, and relies on dubious economic claims to justify its conclusions.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
Elite bankers and the pathetic economists who serve as apologists for their frauds specialize in proving our family saying that it is impossible to compete with unintentional self-parody. The subtitle of the WSJ article providing the latest proof is “Fines on banks translate into $5 trillion of ‘reduced lending capacity,’ bank says.” The “bank” referred to is the Bank of England, which is supposed to be the UK’s primary bank regulator. To be kind, the “study” by BOE is so embarrassing that a better descriptor of the BOE would be “fraud enabler.”
“The roughly $275 billion in legal costs for global banks since 2008 translates into more than $5 trillion of reduced lending capacity to the real economy,” Minouche Shafik, a deputy governor of the Bank of England, told a New York conference of regulators and bankers Thursday.
BOE’s methodology and “logic” (which it did not make public) are easy to guess. It is not sufficient that elite banksters are able to become wealthy from leading the worlds’ most destructive financial frauds with impunity from prosecution, civil suits, and enforcement actions. It is vital that the banks no longer be fined for conducting these massive frauds. When banks are fined they lose some of their profits from these epidemics of frauds, bid-rigging cartels, predatory lending, aiding and abetting elite tax fraud, and money laundering for terrorists and violent drug cartels. For the sake of brevity, I will call these collectively “fraud proceeds.” Banks remain highly leveraged despite modest increases in capital requirements, so the BOE’s staff is assuming that each dollar of fraud proceeds that the banks lose to fines reduces total bank size by $18.18. They are assuming that the typical bank has a miserably inadequate capital requirement of slightly over five percent.
There are a number of fatal problems with BOE’s “logic” and (unstated) methodology. First, under the BOE’s “logic” the more profitable banks become by defrauding their customers the faster the economy will grow. The bank CEOs who led the three most destructive epidemics of financial fraud in history were apparently Soviet-style (pun intended) “Heroes of Capitalism.” Except, of course, what they actually drove was a massive financial bubble that produced the Great Recession. The projected loss of GDP in the U.S. due to the Great Recession is $24.3 trillion – and the loss of eurozone GDP is far larger because their economic losses have occurred over a far longer time and have been far deeper than in the United States. Only central bank economists would be so dogmatically divorced from reality and so moral challenged that they would think that allowing banksters to keep their fraud proceeds and avoid all accountability for their crimes would be good for the economy.
Why would making additional fraudulent and predatory loans be good for the economy? Unsurprisingly, the BOE leader did not even discuss this issue. They simply assume, contrary to the relevant criminology and economics literature, that when banks make more loans it means the economy most grow productively. The opposite is true when the loans are fraudulent and predatory.
Second, the BOE has falsely assumed that the banks are lending less because they are capital-constrained. Overwhelmingly, however, corporations are sitting on enormous cash positions. They are not investing because of their CEOs’ perverse incentives and because of weak demand arising largely from austerity. If the corporations are not eager to borrow, then lending by banks will be reduced. The WSJ journalists did make a related point about the BOE’s flawed logic.
In the U.S. at least, banks in recent years have attributed tepid lending growth to lack of demand, not their inability to supply credit.
If anything, banks have been awash in deposits, which they have struggled to put to work. Over the eight years since the crisis took hold in the third quarter of 2008, loans as a percentage of deposits have averaged about 74%, according to Federal Deposit Insurance Corp. data. This means banks have had firepower to make additional loans.
Third, even if banks that committed these epic frauds were not lending because they were capital-constrained because of the loss of some of their fraud proceeds to fines, they could respond by raising their capital. That would be good for them and the world, but bad for bank CEOs. Bank CEOs make sure that their compensation systems are perverse, so increased bank capital (which reduces leverage) can reduce the bonuses of all bank officers and employees. Bank CEOs overwhelmingly structure the compensation systems to be perverse from the perspectives of the public and the shareholders. Bank CEOs ensure through these perverse incentives that banks will be run in their self-interest, so they typically oppose proposals to substantially increase bank capital.
The key question is whether the BOE presented this financially illiterate “logic” in order to signal that there should be an end to recoveries by UK victims of epic predation by all their major banks through the indefensible sale of payment protection insurance (PPI) and an end to the (rare) prosecutions of the world’s largest bid rigging cartels (Libor and FX). We know from releases of documents from the House Financial Services Committee that the UK successfully intervened to press the U.S. Department of Justice not to prosecute HSBC or any of its officers for its eager actions for roughly a decade to launder roughly $1 billion in drug proceeds for the Mexican Sinaloa drug cartel.