Funny -- I didn't know he was a banking specialist. (In fact, I thought that he was clueless on just about every subject but quite happy to dabble in them all and force the experts to bend to his iron will -- it seems that I stand corrected!)
I am fairly confident that Mervyn King is something of a banking expert though...
Just to let you know where I stand on this, Mervyn is dead right that retail banking should be firewalled from investment banking. This would prevent the risk that failed speculations by the investment banking community will impact on the life savings of the man on the street. This separation of function is exactly what the Glass-Steagall Act of 1933 was all about, put in place for the exact same reason after the last similar credit implosion that caused the Great Depression. It is interesting to note that we didn't have any serious credit implosions since Glass-Steagall's 1933 inception, until it was repealed in 1999 -- since when we have had a couple of beauties so far this millennium, and I think it is safe to say there will be more as things stand right now.
Let the investment banks grow as large as they wish, there is no problem with "too big"; only with "too big to fail". The real issue is investment banks grow fat by risking money that is rightfully yours and mine, as depositors, not their own -- so when their speculative bets turn bad and they take massive losses, the money they lose is yours and mine not theirs, and so to prevent public outcry the government are forced to step in and cover those losses in order that you will be able nip down to the bank and draw out your money when you want to, and you won't turn up on either Threadneedle Street or Parliament Square, carrying placards and pitchforks demanding that the bums all be thrown out on the street so you can hang them from lamp posts where they belong. Let them make bets and profits as large and ridiculous as they like, but remove the requirement that they will be bailed out with our taxes when it happens. Disallow them from putting the money of depositors at risk.
As Merv says, some people say it is impractical. But I would point you at the Glass-Steagall Act of 1933, just one more time in this missive, and point you once again to the fact there were no massive credit blow-ups while it was in place until 1999, to demonstrate that it is entirely possible and in fact it would appear highly desirable.
So, how could Gordon think otherwise? Perhaps he has a few friends that benefit from the status quo, eh..?
Wednesday, 21 October 2009
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