Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.
That’s Bank of England governor Mervyn King, speaking in Edinburgh on Tuesday night.
Apparently, we should all stop deluding ourselves that tougher regulation alone might avoid future crises. If something is too big to fail, then it should be reduced in size:
It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.
He’s cooled on the ‘living will’ idea, which he now believes would require too much regulatory interference. Instead, the governor favours the simple, radical approach of removing the utility aspects of banking from the casino bits:
The banking system provides two crucial services to the rest of the economy: providing companies and households a ready means by which they can make payments for goods and services and intermediating flows of savings to finance investment. Those are the utility aspects of banking where we all have a common interest in ensuring continuity of service. And for this reason they are quite different in nature from some of the riskier financial activities that banks undertake, such as proprietary trading.
In other industries we separate those functions that are utility in nature — and are regulated — from those that can safely be left to the discipline of the market. The second approach adapts those insights to the regulation of banking. At one end of the spectrum is the proposal for “narrow banks”, recently revived by John Kay, which would separate totally the provision of payments services from the creation of risky assets. In that way deposits are guaranteed. At the other is the proposal in the G30 report by Paul Volcker, former Chairman of the Federal Reserve, to separate proprietary trading from retail banking. The common element is the aim of restricting government guarantees to utility banking.
We had news from Mr King that his deputy governor, Paul Tucker, will be sharing details with us later this week on potential new “macro-prudential instruments” aimed at both moderating the growth of the financial sector and countering the macroeconomic effects of the credit cycle.
What ever they are, they sound painful:
The key point though is that parallel to the long-established role which monetary policy plays in taking away the punch bowl just as the party gets going, so there is a role for the central bank to use macro-prudential policy instruments for financial stability purposes by turning down the music just as the dancing gets a little too wild.
But how about QE — since most BoE-watchers were convinced the governor would use this speech north of the border to give us just a hint on future monetary pump priming?
Well, for what it’s worth, Mr King’s tone remains notably dovish:
Output is still well below and unemployment well above their levels of a year ago, and are likely to remain so for sometime. To keep inflation close to the 2% target, monetary policy tries to keep a balance between overall demand and supply. Judging that balance, given an impaired banking sector and the likelihood of a significant fiscal tightening over the next few years, is particularly difficult.
At the moment, inflation is 1.1%. Many have forgotten that only a year ago it reached 5.2%. It is likely that inflation will remain volatile over the coming year. It will pick up over the next few months reflecting higher petrol prices, recent falls in sterling and the reversal of the cut in VAT. Looking through these short-run factors, however, inflation will be determined by the path of money spending relative to the supply capacity of the economy. Over the past year money spending, which normally expands at around 5% a year, has fallen by 5%. That is already pulling down on inflation and will continue to do so until spending recovers. To put money spending back on a desirable trajectory is likely to require a pick up in the growth rate of broad money in the economy. That is precisely what our asset purchase programme, by injecting more money directly into the economy, aims to achieve.