Thursday 30 September 2010


There seems to be a strong consensus that the economic problems are due to bankers. A recent poll showed this, Vince Cable showed his economic competence by conflating bankers spivs and gamblers crippling the British economy, Finance Ministers across the world are trying to restrict bonuses to financiers (actually, apart from in the UK they aren’t, but they are talking about it).
This worries me; not because the bankers will be upset – they will cope particularly as they will continue to earn lots of money, but because misunderstanding the cause of the problems makes it more likely we will do the wrong things to so solve them.

The real problem was that we all borrowed too much – individuals, banks and especially governments. We spent money we didn’t have causing house prices in particular – but all assets as well – to artificially rise. This was enabled because governments encouraged banks to gear up, to lend more, to need less capital to support their business. Governments did this because the resulting short term boom made them look good. I say Governments: not all did this; many Asian ones didn’t, not all Europeans did. Iceland was the poster boy for carelessness, but the US, the UK and Eire were not far behind.

I know the banks did some very stupid things – not all of them; for example JP Morgan and HSBC had a “good crisis”- but many lent foolishly, created products their managers didn’t understand and effectively went bankrupt; their shareholders have generally suffered as a result. But the rest of us did stupid things as well, and so did our Governments who not only encouraged the excess but also increased their own borrowings. They also did not get a decent reward for the guarantees they provided the banking system. And who voted for those Governments? Supported their public spending? We did.

If we want to know the cause of the problem: look around.

The UK's public sector deficit is because public spending got out of control. The banks were bailed out but mostly by guarantees which have lapsed; some taxpayer money was invested directly, but a small amount compared with the deficit and it is likley to be recovered at a profit. The bankers therefore played a small part in the problem and in fact there are three ways the banks and bankers are helping us get out of our economic problems:
- As they become profitable, the money we put into them becomes worth more. The state will profit from their investment;
- Banks employ a lot of people and finance and associated services remain one of our few world leading businesses which generate a lot of earnings from overseas;
- Banks and bankers pay a lot of tax.
We would miss them if they went. It’s easy to say we wouldn’t: but who would then pay the bills?

The problem we have to solve is one of excessive consumption – by ourselves but mainly by our Government. That is the problem that needs fixing. Punishing bankers for our mistakes may make us feel better but will stop them from supporting the economy.

No comments: