Ghastly Dance: Financial Repression

It's a rule: governments act in their own interests, and so do monopolists. For most of human history, these two look each other in the eye, and like what they see. Soon enough, no-one else gets a look in.

It now seems inevitable that this ghastly mutual attraction is once again going to shoulder aside the interests of you and me and the rest of the economy, let alone the interests of fairness or even prudential common sense, in the re-shaping of the banking industry. Naturally enough, it comes tricked out in the most reasonable and ethically self-congratulating disguise: in order to ensure that greedy bankers never again etc, the government's going to ensure raised bank reserve and capital requirements, are going to keep an eye (and maybe a thumb) on the amount of credit extended, and doubtless provide a guiding hand to ensure the right people get the credit.

I could go on - and probably will soon enough. But suffice it to say that what's being proposed as our salvation is simply financial repression in one guise or another. Oh, it'll mean your savings are allocated even more poorly than before (which matters if you want a pension or an economic infrastructure), but never mind, it's for your own good. In fact, it's very markedly for the government's good, because if the government can mandate (or regulate) a monopoly position for banks, it'll be able to tax them both overtly (stand by for windfall taxes) and covertly (by creating a captive market for their debt).

Meanwhile, for the incumbents - ie, for the bankers - all the regulation is just a further entrenchment of a monopoly power which they have already abused to very nearly the destruction of the entire economy.

And the logical outcome of this is, of course, that there are plenty of people who want to get on-board this new financial repression/financial monopoly gravy train. Step forward Metro Bank, step forward Virgin Money. And step forward Lord Levene, a former chairman of Lloyds of London - a man so keen to pitch himself into this new monopoly that he's raising money on the AIM market before he has even put in the time to think of a name for his wretched bank. As someone might once have put in their prospectus: 'a company for carrying out an undertaking of great advantage, but nobody to know what it is' called.

I wonder - I seriously wonder - whether the politicians of all stripe who lobby for this disgraceful entrenchment of failure, know what they are doing. Can they be so bereft of imagination that they don't know what they are doing? Can they not grasp that there is an alternative which takes apart the monopoly, rather than entrenches it?

'Now all my tales are proved untrue,

And I must face the men I slew.

What tales will serve me here among

Mine angry and defrauded young?'

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.