Friday, 4 April 2014
Vince Cable blunders.
Vince Cable, the UK’s “Business Secretary”, is currently in the lime light because he sold off (i.e. privatised) the postal system, Royal Mail at much less than market value.
But there is a more serious and damaging policy he has pursued for a year or two, namely opposing improvements in bank capital ratios, with a view to encouraging more private bank lending: i.e. boosting the already elevated levels of private debt. Now those elevated levels of private debt were one of the main factors behind the crunch!
It really is jaw dropping: we had one of the worst crashes since 1929 about five years ago: caused by irresponsible and excessive bank lending and inadequate capital buffers. And that was followed by about four years of excess unemployment. And what does the UK’s “Business Secretary” want to do? See a repeat of the whole charade in five or ten years’ time!
Of course the reasons he opposes capital ratio improvements are obvious. There are three reasons as follows.
Politicians and political parties the world over receive millions from banksters, designed amongst other things to thwart better bank regulation. Or as Senator Dick Durbin put it, “Banks are still the most powerful lobby on Capitol Hill . . . . . and frankly they own the place”.
Politicians often think that because shareholders want a higher return on their money than depositors or bondholders, that therefor increasing capital ratios increases the cost of funding banks. And banksters encourage politicians in that belief. However, as Messers Miller and Modigliani explained, there is a very simple reason for thinking that bank funding costs do not change much when capital ratios change.
And it’s not just me that claims bankers are into the above intellectual dishonesty, i.e. that they’re a bunch of liars. Robert Jenkins, member of the Financial Policy Committee described banks’ opposition to improved capital ratios as “intellectually dishonest”. (That was the front page leading story in the Financial Times, incidentally.)
Increased bank charges due to the removal of bank subsidies are OK.
There is however ONE REASON why bank costs (and hence charges made to their customers) would rise. But it’s an entirely acceptable reason, and as follows.
Grossly inadequate capital ratios are risky, and who carries that risk? Well the taxpayer carries a fair chunk of it: witness the hundreds of billions of taxpayers’ money used to bail out banks. So… if capital ratios are increased, that effectively means a reduced subsidy for banks. Thus bank costs and charges rise a bit.
But subsidies ARE NOT JUSTIFIED, unless someone can produce a very good social reason for a subsidy. Indeed, improved capital ratios would, as Vince Cable claims, reduce bank lending. But that would not reduce GDP. That is, assuming the latter standard piece of economics is correct (i.e. that subsidies misallocate resources), then improved capital ratios would actually INCREASE GDP.
Put that another way, if banks are subsidised, then interest charged to borrower / investors will be artificially low: i.e. below optimum. So…. remove the subsidy, an interest charged will be optimum, or at least nearer the optimum.
3. The belief that only private banks can create credit/money.
Vince Cable almost certainly doesn’t understand that the economy can be stimulated simply by creating and net spending more base money (i.e. CENTRAL BANK created money). By “net spending” I mean government spending net of tax collected. I.e. those on the political left would want more government spending, while those on the right would want less tax, so the term “net spending” covers both what a left of centre government would want to do and ditto for a right of centre government.
In other words, Cable thinks that stimulus can only come from private banks – i.e. from more private debt.
The reality of course, as Keynes pointed out, is that stimulus can be implemented simply by printing and net spending more central bank created money into the economy. That “Keynsian” point is also made in this Positive Money item.