The Sheer Cost of Opacity

So I think I can build a new and better financial system, do I?

It's not just that the opacity of the current banking system is wrong: you give your money to a bank manager, who promises to pay you a fixed return whilst he feels free to do with it whatever he and his derivatives team can imagine, and take the profit on it. Nor is it just that the opacity of the credit decisions he makes is likely to lead systemically to bad decisions - though it does. These are reasons why the commercial banking system is bad in principle.

But in practice, commercial banks are even worse. By which I mean they offer a rotten deal to the saver, and a rotten deal to the borrower. And, of course, the rotten deal they offer is the practical consequence of the opacities behind which they hide.

Right now, Bank of England data tells me the average interest rate on banks and building societies' time deposits is 0.31%, whilst the average interest rate on a personal loan is 13.38%. In other words, you the depositor are getting 0.31%, whilst they, the bank, get 13.07%. In terms of dishing out the meal, that's one potato for you, and 25 for the bank.

Yes, we're at an extreme point just now, but over the last five years, the average banking spread between fixed deposits and personal loans is just under eight percentage points, whilst the average deposit rate has been just 3.5%. One potato for you, two and a bit for the bank.

So personal loans are a bad deal? Well, yes, but so too are five year fixed mortgage rates at 5.35%, when you consider they're getting your deposit for 0.31%. That's one potato for you, and nine potatoes for the bank.

And you wonder how they pay those bonuses.

My guess is that these extraordinary banking spreads are only going to get wider in the next few years, as the costs of regulating the dangerous opacities of the system grow, as the cost of recouping the losses of their previous bad credit judgements are maintained, and the baleful influence of the inefficiency of the nationalized banks is felt more widely.

But what this means is that these ridiculously excessive banking spreads means we have not just the motive to build a post-bank financial system, we have the means. Somewhere between nine and twenty-five potatoes worth.