Private and Public Sector: To each their own

As I have argued before, (see eg August 14, 2011 post: EU & USA: The right policies can come from the center) our times call for a system that provides the basics to each human and leaves them free to pursue or not the rest.

As I wrote in said post "Most political parties and political/policy platforms to the right and left of the center miss the concept that some things are better done by the market, some are better done by the public sector (aka the state). Each has activities where it is stronger than the other. Neither the (financial and other) markets nor the state should be an object of political or philosophical worship!"

Eg social security including healthcare insurance and healthcare itself are better provided by not for profit state owned or run systems (aka the European Social Model).

The current crisis in Europe and the US does not mean that European cannot support its Social Model. It means that not only social security but banking as well (except maybe for investment banking) are better run without a profit making goal by the state. If the state is to guaranteee all or most deposits, which it should, then why not own/run the banks too?

As I proposed:

"The center I am referring to recognises both:
a) the need to secure peoples' basic needs and
b) to give people more freedom in pursuing wants and dreams

in their work/economic or social or other aspects of their lives"

That is the basis for policy making in 2011. For the 99%. The private for profit sector is better at doing many many things. But not those that constitute basic needs such as healthcare and banking/savings keeping.

Is it time to consider the unthinkable? Nationalisation of the banking industry?

In a past post, back on November 9, 2009, titled: Is free market capitalism fatally flawed?, I argued inter alia that:

a) The economic system in many countries today is flawed but that system is not free market capitalism

b) A key factor leading to the flaws and resulting popular dissatisfaction with the current economic systems are major flaws in competition laws and related supervision of the markets.

c) the BBC World Service poll results show need for better functioning free markers and better welfare state, both!

d) The BBC World Service poll results show the need to secure peoples' basic needs and for giving people more freedom in pursuing wants and dreams in their work/economic or social or other aspects of their lives.

e) Neoliberalism and conservatism tend to underestimate the fundamental human "need" for basic needs including the security of social security

f) Most political parties and platforms miss the concept that some things are better done by the market, some better done by the public sector. Each sector has activities where it is stronger.

Instead we are flooded by ideologies that either theologise the markets and demonise the state and its public sector (eg most Libertarians) or, to an increasing again level, the opposite, ie theologise the state and its public sector and demonise the private sector.

Modern systemics and dynamics are complex and volatile thus they are difficult to grasp. Thus some resort to the aforementioned and other simplistic models that have IMO confused the public opinion.

What is the solution? Not simple, but a basic element of any model I have in mind is:

To have the state/Society guarantee all its members that rain or shine their basic needs will be covered and then let them go out to real free markets to pursue their wants.

Well, basic banking falls under the "needs" part and given the performance of so many banks in so many OECD countries in the last few years, it is maybe time to consider the unthinkable (after all banks did get temporarily nationalised, officially or effectively, in the UK, the US, etc and now in Ireland, etc. Something that before 2008 only Chavez would consider! But 2008 has brought down many myths re the systemics of the economies we live in and if the taxpayers are to foot the bill for saving banks, then they have a right to own them in return (ie nationalisation).

As per investment banking, it should remain private but be 100% separated from basic banking and those who use them should do that at their own risk (ie policy makers and regulators must make sure that none of them becomes too big to fail again).

It is about separating needs from mere wants and about separating low or no risk from risk encompassing finance.

Radical times call for radical policy making.

"If the climate was a bank they would already have saved it."

I do not agree with the ideology, policies and politics of Venezuela's old style Socialist President Hugo Chavez but I have to say that his comment at the COP15 Copenhagen UN Climate Change Conference holds, alas, water: "If the climate was a bank they would already have saved it."

According to The Economist, bank bailouts around the world have cost the equivalent of 5% of world GDP.
According to a study conducted for the UK government, Climate Change financing would cost 1% of world GDP per year.

Bank of England: the financial system has been significantly more stable over the past six months

The Bank of England is today, October 18, publishing its bi-annual Financial Stability Report (PDF, 74 pages). The Report provides the Bank’s current assessment of conditions affecting financial stability and discusses ways to strengthen the financial system in the future.

Inter alia, the Report identifies that the financial system has been significantly more stable over the past six months.

This was underpinned by the authorities’ sustained support for the banking system and monetary policy measures.

Low risk-free interest rates and reduced uncertainty have led to a rebound in a range of asset prices.

Primary issuance in many capital markets has resumed, reducing financing risks for some borrowers.

The market rally has boosted bank profits, lowered concerns about potential future losses, and has enabled banks to raise further external capital.

Banks have also been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.

At the same time, the Report notes that after such a prolonged period of exuberance earlier in the decade, it is inevitable that some banks around the world have overstretched balance sheets. They will take time to adjust, and in the meantime remain vulnerable to the risk of less rapid than expected economic recovery.

Around the world, a number of borrowers, including in the commercial property sector, have large refinancing needs in the coming years. And while funding costs remain low, there is some risk of market participants accumulating excessively risky positions, which could unwind abruptly when yield curves eventually rise.

Over time, and consistent with maintaining lending into the real economy, many banks will need to reduce leverage further, extend the maturity of their funding and refinance substantial amounts of funding as official sector support is withdrawn.

While their profitability is relatively buoyant and market conditions broadly favourable, banks should take opportunities to strengthen their balance sheets, including by not distributing an excessive amount of profit. That will reduce the risk of disruption to the flow of credit in the future.

In relation to safeguarding financial stability in the future, the Report says that, in the medium term, the root causes of this and previous systemic crises must be tackled – excessive risk-taking in the upswing of the credit cycle and insufficient resilience in the subsequent downturn.

It also says that: An expectation that ‘too important to fail’ firms will receive public assistance, and that unsecured, unsecured wholesale creditors will not share losses, has exacerbated both the boom and the bust.

That calls for a robust, multi-faceted policy response. Regulatory policies should give greater emphasis to systemic risks across the cycle and across institutions, as set out in a recent Bank discussion paper (The role of macroprudential policy, November 2009). They should be complemented by structural measures to contain the spread of risk across the system. And because failures of financial institutions cannot and should not be prevented, the resolution framework will need to be extended to limit the impact on the wider economy.

Technically demanding but interesting read, huh!

Credit mediator in France and in Germany

Following on France, the German government has also announced the appointment of a credit mediator to work with banks and companies. This is driven by concerns that banks do go lend enough to companies, especially mid size and small ones (SMEs). The German mediator's term starts next March (2010).

UK: Some sectors need more regulation, but many need much less

In the UK (but this is also relevant for many other countries and more the capitalism - regulation - needs of micros and SMEs discussion (see post), there is much debate going on regarding heavier supervision and regulation of banks and other financial services. Eg the government's Financial Services Bill and the issue as to whether a watchdog (eg the FSA) should have a word over top exec pay in banks.

IMO, whereas banks may need to be more heavily regulated due to their "too big to fail" nature as part of the economy and their involvement in the daily lives of most people (as far as retail banking is concerned), radical deregulation IMO is urgent for SMEs and micro companies in many other sectors of the UK economy (and other economies).

Not to mention that IMO a radical re-think of the total model of financial services and banking would be in order in the UK, the EU, the US, almost everywhere. A comprehensive re-think of what is the reason of being of banks, their business model (especially the presence of many different and some difficult to appreciate types of risks), all aspects, in parts and as a whole, would be in order, in the aftermath of the crisis.

But in any case, banking is not a "business as usual" or "business" in general. It has complex systemics and structures that are far reaching and cut to the bone of any economy and the people.

So, what about top exec pay in banks? Should anyone "interfere" in those "contracts". Well, for one, the Plenary of the stockholders should, but that applies to any company in any sector whose shares are traded (publicly quoted, see "Corporate Governance" or what I prefer to call "Corporate Democracy"). Should a retail bank have the pay of its top execs approved or vetoed by "the state"? Only when and while it has borrowed money from the state or the state is a shareholder? Or in any case, because banks "need" to be bailed out in case they may fail because they are "too big to fail"?

By the way, more than 100 banks have failed or been "closed" by the authorities in the US this year. Of course FDIC reimburses all deposits of up to a certain level (the rest was part of a depositors "risk"). But banking and its systemic role and effects in an economy as most economies are today, especially in the UK and the US, are much more than just the deposits, isn't it?

Oh we do live in interesting times. Quite a curse.

Eurozone bank lending down in September! Why?

While most EUropean governments, including those 16 in the Eurozone of the EU, have spent quite a lot of money to try to help banks and boost lending to consumers, companies and home buyers-mortgage holders, data from the European Central Bank (ECB) shows that Bank loans to companies in Eurozone declined in September at an annual rate of 0.3% after a +0.1% annual rate in August!

The equivalent rates for loans to households was also negative, -0.3%, in September, after -0.2% in August.

Mortgage related lending in the Eurozone declined even more, -0.6%!

Now, why is this? Some seem to argue that these data are a result of lower demand for loans, as companies, households and mortgage holders are tiding up their "internal" finances. Hm!

As as as companies (in the Eurozone) are concerned, I am willing to "buy" this "theory", since Service and micro and small companies do not have as many capital needs as industry does/did.

But I am not sure, who can?

In any case, the news tend to re-enforce my theory that in this Services - post-industrial era for the US and the EU, economic modeling and policies have to account for the new reality: That the core of the economy are micro and small companies and Services, and that it is their "needs" that policy makers have to understand, first, and then address. And that a key need is better and less regulation, which now suffocates small firms.

Banking & Financial reforms

Can the G20 adopt binding rules to regulate bank behavior?
Are UK, French + German leaders realistic or is it "rhetoric"?

Is the French plan to put a cap on bankers' bonuses "unworkable" (as A. Darling claims)?

US: the "pay czar"

The government has appointed a "pay czar" to review executive compensation packages for firms that have received government bail-outs.

Meanwhile, it is said that many banks wish to repay the loans/aid to the government in order to avoid its controls on them.

Germany: Bank bail-outs

This week, the German cabinet agreed to propose to the parliament a scheme to enable the country's banks to remove remaining "toxic" assets from their balance sheets. How? The banks will be able to swap their toxic debt for government-backed bonds worth 90% of the value of the toxic assets. In return they will pay an annual fee. This toxic debt will be "stored" for up to 20 years. If approved by the parliament, the scheme will be financed by Germany's existing 500bn euros bank rescue fund.

NB: I recall, some weeks ago, that a proposal had been agreed by the German government cabinet (a historic coalition between the country's two main parties, the Christian Democrats and the Social Democrats) that would allow for the temporary "nationalisation" of any German banks, if needed. I have not kept up with the issue (eg was it finally agreed and was it passed by the 2 chambers of the German parliament?), and I am not sure how it relates to the above scheme.
The Bank of England's announcement that it would keep interest rates unchanged at 0.5%. The Bank of England also said it would pump an extra BP 50 bn into the UK economy via purchases of government and corporate debt, extending its planned spending to £125bn.