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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.
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In the logic-all-of-their-own that central banks postulate when they have their ears bent by the Treasury, this paper and its conclusions does make a perverted kind of sense when you consider that the U.K. government is stuck with its vast holding in RBS. The only way it could ever be rid of the RBS albatross is for RBS to have some vague hope of (eventually) earning its way back to being something other than a complete basket case. Apart from, ironically, the central banks’ own ZIRP policy, the biggest threat to this is endless redress for wrongdoing. And permission to return to the good old days when the likes of RBS could operate with impunity as state-sponsored criminal enterprises would be icing on the cake.
So signals that regulators may now go easy on the banks in general — and especially RBS which is one of the biggest bad actors you can find — might be thought to help in the process of trying to nurse RBS back to being a vaguely plausible investment case.
The last thing the U.K. government would want to do is to find that it has to provide RBS with more capital if it can’t get shot of it before the next crisis hits (or even if it’s not a full-on crisis, merely fairly sizeable whacks to fixed interest asset classes). As the majority shareholder, it couldn’t not participate in any rights issue. Nor can RBS be put through any coherent resolution without the U.K. government having to write down billions.
Hence maybe this is why we’re now seeing smoke signals from the BoE that U.K. banks are to be — again — made fine-proof. If the markets (literally) buy it, it might help with an RBS float. But it’s pretty desperate stuff.
Clive, FWIW, I’m increasingly interested in the metaphors around banking, which seem to still come out of early 19th c invention of engines, all of which used ‘fuel‘ as a central tenet: ‘the money supply fuels the economy’. Economics seems drenched in outdated, antiquated metaphors where ‘fuel‘ is always and everywhere a good thing, with no polluting externalities, and no downside costs.
Hence, what matters is ‘efficiency’: it’s moneyAsEngineSpeak, so to speak.
Lordy, it’s all petrochemical: from a time when chemical and mechanical engineering (and physics) were in their relative infancies and whaling schooners were sailing out of Nantucket.
Fuels don’t lie, cheat, or steal — continuing to use fuel as a central metaphor enables banks, economists, and central bankers to put their fingers in their ears and howl “La! La! La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great for us!!” After all, calculus had been invented by the 1820s — so math + moneyAsEngineSpeak = economics.
Egads.
In that paradigm, Bill Black is a mere scold, an oddball, a scruffy prophet in the wastelands, so to speak.
If money were more widely regarded as a social tool: recognized as a tool that requires communication, social networks, and flourishes within civil society, then Haldane’s observations would be met with “Doh, you betcha!”
Then, also, Bill Black’s observations that crime actually does exist, and often looks exceptionally respectable, would be impossible to ignore.
Timmy Geithner is probably not a fan of: (a) Bill Black or (b) the idea of money as inherently social. Fuel is an emotionally sterile construct to work within; it enables one to avoid moral qualms, or any sense of personal responsibility when ‘engines blow up’, or when they ‘run out of fuel‘.
The fact that Haldane’s observations and analysis are not more widely embraced suggests that somehow the business schools, economics departments, and bankers all still use thought processes shaped in the era of whalers seeking blubber for lanterns and lamps. Also, they probably still receive endowments from the Kochs, Exxon, and other fuel obsessed interests.
Egads.
Until the metaphors move to biology, with a concomitant recognition that some kinds of ‘fuel‘ (aka Coke, Fritos, Doritos, donuts) work for short-term energy bursts, but carry extremely negative longer term costs, I doubt that even the best attempts to muddle through will get us out of this mess. Without amendment, this system is going to do one of two things: (1) implode (not too violently) or else (2) blow up (social unrest).
I have no idea what the banker equivalent of ‘chard, lettuce, and celery’ would be, but some bright mind ought to be thinking about it. (You distinguish yourself as such a mind; I hope that my metaphor is not too offensive…)
I interpreted Brexit as a ‘tea leaf’ that the banks could no longer be made fine-proof without triggering social unrest. Then I read your comment, esp:
The way that I read this, contemporary economics and finance leads to utter, unmanageable disaster from which there is absolutely no way out. The engine ‘melts down’, so to speak. I feel as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic) measures, and in the end the systems of thinking that created these problems are precisely the mental pathways that keep people stuck in a labyrinth of dysfunction.
Banking needs to be completely rethought, using the social sciences, which include the realities of criminal conduct corroding the system to such a degree that it is threatening to implode. I’m moving toward being agnostic as to whether this is a good thing, or not. Either way, the present systems as I’ve read you describe them do not seem even remotely sustainable.
I’ve been reading up on old — as in, ancient — banking history too (the Hoare family is very well documented for example). While by the standards of the time banking could be insanely profitable, it could — in the complete absence of any government backstop — be the cause of catastrophic ruin if mismanagement crept in.
And it is remarkably apparent that for the society of the time (17th and 18th centuries), banks were most definitely not seen as inherently integral or integrated into a nation’s economic development and certainly not monopoly suppliers of “fuel” to provide temporary goosing of industrialization. Or, in short form, today’s banking and financial emerged as a result of industrialization but did not create it.
So yes, tinkering at the periphery is not going to solve the current core problems.
Bank of England became integrated right at the end of the 18th century. It was the single-handed act of William Pitt and a bit of legislative sleight of hand.
If you have half an hour to look at the economy chapter at http://www.houghton.hk you will see some revelation of how he did the dirty deed although you will need to read between the lines to achieve full penetration. Good luck
Many thanks to both of you!
I’ll try to get to the houghton.hk this weekend…
Are they trying to get out in front of the RBS revelations? What is the BOE liability for RBS problems these days anyway?
Shoulda read Clive’s comment…
Nah, just send it to Mark Carney ( ;-) )
That means aggressively restricting bank risk-taking (prohibition) and regulating them so they operate as utilities is the preferred approach. Yves Smith
I would think the preferred approach would be to eliminate the shame accounting, that is, to make bank liabilities with respect to the population genuine liabilities and not largely a sham.*
Besides, shall the rich still be the most so-called worthy, under utility banking, of what is, in essence, the PUBLIC’S credit, including that of the poor?
*This will be 100% evident if cash is eliminated and one tries to cash a check.
making banks utilities is the only solution that is not a contradiction because letting banks operate competitively for profits (which are directly based on their very own commodity – a commodity that they in fact create!) is like letting doctors profit by creating illness… only considerably more blatant
Your diagnosis is correct; “loans create deposits” but only largely sham liabilities wrt the population – so the accounting is bogus. So the solution is to make those sham liabilities real liabilities.
Don’t know what you mean by utility banking. Shall the rich remain the most so-called credit worthy? Please elaborate?
But to actually make them real liabilities is beyond the realm of banking and ecomomix – as Haldane says – no banking system can absorb the liabilities of the system as it exists… I think
The liabilities of the banks are for good ole inexpensive fiat. So let’s create what’s needed and distribute it equally to all adult citizens and let the banks borrow it from us. Otherwise, the abolition of government-provided deposit insurance would be very deflationary.
That is, the PROPER abolition of government-provided deposit insurance would be very deflationary.
I think utility banking, as Yves talks about, means that banks are restricted to very specific boundaries and profits limited to stg. like 3% (or less now) and they serve their communities first and foremost; they cannot be gamblers and speculators and the firewall between commercial banking and investing is strictly enforced… you know – the way it used to be
… you know – the way it used to be
Suppose I live in a community and need a loan to automate the jobs of a local factory away? Is that just?
In the past that would be impossible or new jobs would be created to replace the old jobs (supposedly). These days? Apparently not.
So the way it used to be is just not adequate anymore. Nor was is ever just, for that matter.
Of course neither private credit creation nor usury should be illegal but why in the heck do we subsidize them? Since both loot the poor, the least so-called creditworthy?
Because progress? Yes, we’ve had progress – progress toward WWIII.
Yves, in your first paragraph let’s fine them, not fin them. Finning’s too good for them!
Aiee, thanks for the catch! Yet again my typo bane!
Disagree with Bill Black’s statement that the authors of this paper are financially illiterate. I believe they are very much aware of the probable economic and social effects of their proposal, know exactly what they’re doing and how inimical it is to the public interest.
Those who have coldly and deliberately caused others so much economic and emotional damage should be serving time, not being covertly accommodated and given a free pass by central banks to pave the way for their further recidivist criminal behavior. Further, these large financial intermediaries should be broken up and the deposit-taking side of their business legally separated from their speculations in derivatives and other nonproductive financial activities that place the payments system at risk.
Also appreciated Bill Black’s observation about secondary damage from government austerity policies.
Further, these large financial intermediaries should be broken up and the deposit-taking side of their business legally separated from their speculations in derivatives and other nonproductive financial activities that place the payments system at risk. Chauncey Gardiner
Speaking of the payments system, why must it work exclusively through the banks? A Postal Savings Service that made no loans and the end of government provided deposit means we would have TWO payments systems – an at-risk, not necessarily liquid payment that worked through lending institutions and a risk-free payment system that did not.
correction, should read: an at-risk, not necessarily liquid payment system that worked through lending institutions
Another correction, should read : government provided deposit insurance means …
Sheesh! Too many brain farts.
Breathe.
You made a good, and important point.
Totally overlooking minor typos ;-)
This speech by Minouche Shafik would be hilarious if the situation weren’t so serious. The fact is QE has failed to have any significant positive impact on the UK economy so now the B of E thinks that if the banks’ capital weren’t to take such a big hit ( LOL ) from fines there would be queues of prospective borrowers around the block ready, willing and able to take on massive loans because the banks would be able to lend so much more money . Are they desperate or what ? It’s the system stupid !
Bill Black: “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.'”
Why not just call them what they are—“Treason Profits.”
A Mafia Don always skims off the top of his organization. There might be a name for that that would seem to fit. Banksterism is a regulated industry?
It is called Executive Compensation.
You see, Goldman Sachs is everywhere and doing exactly what it wants with world finances.
This may be a simplistic argument, but here’s another reason the banks rationale is a bunch of BS. If the banks hadn’t stolen so much due to fraud, the rest of the private sector would have more cash and would be less likely to need a loan in the first place. But not needing a loan is anathema to these jerks.
Bill, in saying “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”, are you saying that they can use deposits to make loans? I’m not certain I understand what you are saying here.
Banks do not make loans from deposits. Their loans create new deposits. Loans precede deposits.
Loans precede deposits. Yves Smith
Unless the deposit is from Federal spending, then the deposit has no corresponding loan from a bank.
Otoh, I suppose one might say that Federal spending provides tax credits and so is a loan to the public but that’s another story …
Maybe Bill is saying that 26% of bank deposits are the result of Federal spending and since Federal spending creates new reserves 1-for-1 with the new deposits that the reserve ratio (reserves to deposits) is 26% – very high compared to the legal requirement (do we still have one?)
But banks are not reserved constrained since they can borrow them from each and since the Fed stands by to make sure the system has adequate reserves anyway.
So the mystery remains.
I know that, but it wasn’t clear to me that that was what Bill was saying in what I quoted. But I take it from your comment that you think that Bill was saying what you just wrote. If so, then fine.
I was (and still am) confused too.
Can someone please explain how what Bill Black said squares with MMT?