Mervyn King warns of financial meltdown if Banks not reformed: A slap in the face for George Osborne

So George Osborne has drawn a line under the Banks, no more need for banker bashing, the problems solved – Sadly someone didn’t tell Mervyn King!

Project Merlin was a disaster for George Osborne, a waste of time and effort with few results, in short the banks got off scott free, see previous post with an analysis here

Nevertheless, the media have largely gone along with the idea that we now draw a line under the banking issue and it is not seemly to keep bashing the banks.  However, this issue just will not go away.  Until systemic change occurrs the spectre of the banks hangs over us like a dirty great cloud of nuclear fall out.

The simple truth as analysed here in more detail –, is that the banks need to be regulated properly, taxed fairly, large banks broken up, and preferably, the splitting up of investment banks from retail banking.  We need to install capitalism back into our banking system so that they can be effectively denationalised, so that the rewards bankers get, match the risks they are taking.  Banks that are too big to fail are simply too big and need breaking up.

George Osborne has done everything he can to undermine measures to regulate the banking sector in the EU, while at the same time taking credit for any annoucements negotiated within the EU.

Osborne must be reeling this morning as he read his morning papers while having his breakfast.  The truth is that Mervyn King has said what we all know.  It is not IF another financial crises will happen but WHEN, if the banking system is not systemically changed. Keeping silent hoping it will go away in the way the coalition appears to be dealing with the problem, is not an option.

This is a healthy signal to the banks however, as the regulatory system will shortly be reverting back to the Bank of England from the FSA. This sends a signal that just maybe, (a very large maybe)  proper scrutiny of the banking sector will be on it’s way when the change occurs.

There was some good signs with the last report by the Independent Commission on Banking, that serious consideration of banking reform is on the cards.  We all have to hope that this is not watered down by the Bullingdon boys to help their friends in low places.


5 responses to “Mervyn King warns of financial meltdown if Banks not reformed: A slap in the face for George Osborne

  1. I don’t think splitting the banks up is feasible nowadays, but I’m all for Ha-Joon Chang’s proposition: financial products should be treated like drugs. Every time a new one is created, it should go through rigorous testing. If we are unsure, it is banned. Simple as that.

  2. Yeah, the splitting up of the investment arm of banks from retail is wishful thinking. The Clinton administration’s deregulation in 1999 was a watershed mark and the products of banks are so intertwined now it would be near impossible to do. We certainly have to reduce the size of banks though in order to allow them to fail.

  3. Yet this strikes at a fundamental concept of our economy. Any successful business sets aside some of its profit in order to expand the business and make more money.

    In this instance it seems we’re determining that the banks need to be penalised for being too successful; which is a strange message to send.

    In line with Cahal’s suggestion a greater examination of the systems in place and ones being formulated needs to be put in place. In terms of splitting the two major arms of most banks; perhaps a rule that those who assess a risk can’t invest in it?

  4. Another point is that the splitting up is a red herring. Northern Rock had no IB arm, and Lehman Bros. had no retail arm, yet the former was the first domino and the latter precipitated the worst of the crisis! HSBC also has both and drifted through the crisis relatively unscathed.

    On a positive note, King’s message seems to have been echoed by prominent economists and politicians across the globe and I think the possibility of real reform is becoming brighter.

    • Indeed, with the Independent Commission on Banking and the Mervyn King interview it would indeed seem that there is real hope of reform. However, George Osborne has a track record of opposing reform and watering down regulations. I think seeing is believing.

      With regard to splitting up the 2 arms of the banking sector. Only one person I am aware of actually predicted the credit crises to within months of it happening. It was a senator, in a speech in 1999, commenting on the Clinton administration’s deregulated of the banks. This was a watershed in banking, based on neo-liberal economic philosophy, partly on the basis that the more complicated the system and more intertwined, the safer it is. This was plainly false. One of the biggest problems was the trading in derivatives to (spread the risk), the problem is that there does not appear to be proposals to change this significantly.

      I will do more research into the splitting up of both arms of the banks – in truth however, as the banking sector is so intertwined in terms of risk and pricing of products, it is pretty much impossible to split them up now. The genie is out of the bottle, and it seems like we can’t put it back.

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