From the subprime to the ridiculous

Mervyn King, Governor of the Bank of England, fulminating on the need to restructure the banking sector last night - Bloomberg reports:

Bank of England Governor Mervyn King stepped up his call for governments to tackle the dangers posed by banks that are “too important to fail,” saying new capital rules won’t shield taxpayers from funding any future bailouts.

“The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history,” he said in a speech in Edinburgh late yesterday. He indicated that one solution could be to split up banks and separate riskier activities from more stable businesses such as taking deposits.

And in the Times today, a piece on the Centre for the Study of Capital Market Dysfunctionality, which informs a lot of the FSA thinking:

At the heart of the centre’s work is the recognition that capital markets do not operate as classical economics supposes. Traditional theory is based on the idea that investment decisions are made by an infinite number of self-interested, rational households.

That is bunkum, Dr Woolley argues. The reality is that investment decisions are taken by their agents — fund managers, who have different priorities and enjoy access to better information. “Incredibly, the academics fail to take into account the agency problem,” Dr Woolley says.

It is a problem that permeates financial services. Agents — fund managers, pension fund consultants, bankers, brokers and company directors — all stand between assets and their beneficial owners. Quite rationally, they behave in ways not in the interests of their clients.

Their presence is highly distortive, raising the cost of capital and drastically shrinking investment returns. Dr Woolley estimates that without the agency problem, private sector pensions could be twice as large. “And that’s probably being conservative.”

People who laud the huge size of the City as evidence of its success have got things competely about-face, Dr Woolley argues. “It’s testament to the malfunctioning of markets, not their efficiency,” he argues.

All very fine and good, but it would seem its just a lot of hot air for all its impact on the banks, which are preparing to pay individuals massive bonuses again (based on their "success" at having stayed alive from the money used by having to bail them out in the first place). Today, Lord Griffiths of Fforestfach, vice-chairman of Goldman Sachs International said (as reported by the Times):

...said that British taxpayers should “tolerate the inequality” stemming from the investment bank’s plans to dole out a record $22bn (£13.4bn) in pay and bonuses this year for the sake of the “common good”.

Apart from one Mdmlle. Antoinette's famous "Let the Eat Cake" quip*, this is about as strong a tell you will get that the bankers do not believe the Government, Bank of England or Regulators will touch them as they prove that they (like an earlier generation of French nobility) have learned nothing, and forgotten nothing, from the Crunch.

Lest we forget, it was their greed and folly that brought it about, and it was our (taxpayer) money that saved them. I thought the deal was they paid us back, not paid themselves with it. And all this at the same time the said Government is softening up the taxpayer for a c 7p in the Pound tax hike to pay for the hole left by paying for the banks that are now paying them....oh, never mind, you get the picture. Without some form of concerted action, the Taxpayer is going to be royally ripped off by all parties - again.

So what, I hear you ask, has all this got to do with the New Technologies, that this 'ere blog talks about most of the time? Well, in about two hour's time The Chancellor, Alastair Darling, will be interviewed by Social Media on questions We The People put to him, thats what.

And following on from the impact recent campaigns such as the Trafigura campaign, the Vox Populi using Social Mediums may just start to self organise itself and get its voice heard high up in the Faulty Towers to actually change the natural propensity of bankers, bureaucrats and politicos to help themselves to your money at the slightest drop of a living standard.

As Reuters' Head of Mobile, Ilicco Elia (who is facilitating some of this and took the picture above put it today:

"Next year will be most interesting, esp. with our new found 'Public Voice' hope we can put it to good use"

So, here are the details:

At 1:30pm British time on Wednesday, October 21, Reuters is hosting an exclusive Web 2.0 interview with Darling and we want you to send us your questions to put to the top man from the Treasury.

From the crippling global recession to the debate over bankers’ bonuses, it has been a tumultuous year at Number 11 Downing Street. You may want to quiz the Chancellor on one of these topics, ask him about the government’s plans to prevent another downturn or how Labour plan to defy the polls and win the upcoming general election.

During the interview we will put as many of your questions as possible to the Chancellor and will be running a liveblog of the event.

Leave your question in the comments box below the article (over here) or via Twitter (using #askdarling) and join the Web 2.0 interview with the Chancellor.

So, get your questions ready, good people. And if you need prompting, here are a few thoughts:

- The sum of UK bank bonuses this year will be a shade lower than c £100bn, which funnily enough is not far off the UK public sector shortfall - do you plan to tax citizens yet again for the shortfall, or would you consider taking some of that money back directly from the bankers?

- To quote one Twitternaught at the moment "the only 'economic recovery' is for the bankers, the rest of us are going to pay for the mess." For a generation, probably - £1.3 trillion is a lot of money. Would Mr Darling like to comment on the disparity between Mr King's and Lord Griffiths of Fforestfach's views and tell us where he stands on "the common good"?

- Mr King, Mr Turner and most thinking people believe the banks have been handed trillions of dollars with no requirement to change themselves, and G20 attempts at reform to date have been laughable - what guarantee can you give that the banks will not just cause the same problem again, in fact worse as they now know they will be bailed out?

Taxpayers of the World Unite, we have nothing to lose but our life savings, our homes, our kids' education money and our retirements!

Update - so I attended the virtual session, virtually - the transcript is here but my overall take is that it was a ducked bill of platitudes, here are some examples:

- "I wanted banks to behave far more responsibly. We've got to comply with G20 conditions."

- "We've made it clear there can't be any rewards for people who have failed."

- "People across the world are saying 'we won't tolerate tax havens'."

Clearly the sort of stern stuff to make overbonussed bankers, hedge funders joining the Sleight Flight to Swiitzerland, and Sir Fred the Shred et al all quake in their boots while they are filling them

The questions from the participants were in the main very sensible and pertinent, I thought, and would be a good set of issues for HMG to think about as being on the "real electorate"'s mind (ie not the beasts they seem to get in focus groups, judging by some policy decisions) going forward.

Kudos also to Mr Darling for attending, I think he came across quite well as a real person - which helps to build trust in tough times in my view

PS I only really wrote this article for the headline

*But did she actually say it? mais non! (Hat tip Shefaly for pointing it out in the comments below)