The Case For Regulation: How To Tame The Banking Sector

Deregulation of the financial sector is widely accepted as one of the contributors to the recent banking crisis that reached a peak in 2008. The repeal of the Glass-Steagall Act in 1999 permitted the formation of one-stop super banks. Many institutions held and traded enormous portfolios of complex financial securities, the risks of which were not even sufficiently understood, let alone adequately provided for. During this time there was a degree of uncertainty between the FSA and the Bank of England over whose responsibility it was to regulate the banks. Things got out of hand. 

Then again, over-regulation was also a contributing factor. As explained in more detail in a previous article, the government’s involvement in the banking sector to guarantee deposits for individuals, and the central bank’s involvement as a lender of last resort, creates an environment which incentivises excessive lending and debt creation.

However one weighs up the factors, it is generally accepted that the banking industry will always require regulation, or at least for some time to come, and many urge that strict rules should be put in place as soon as possible to prevent any of the calamities of the financial crisis from reoccurring. 

This article discusses the merits and limitations of the new bank regulations proposed in the UK and gives some thoughts about an alternative solution. 

Κάνουμε το πατριωτικό μας καθήκον

Today has been a mighty day for democracy. The Prime Minister of Greece, George Papandreou, announced earlier that he will put the new bailout and debt write-down package to the Greek people in a referendum. Finally, the people of Greece are being allowed to have their say in their future. "The command of the Greek people will bind us," says Papandreou.

In recent months, the country has been surviving hand to mouth from EU bailout financing in order to prevent a default on sovereign debt that would send a shockwave across the other European economies. But the bailout funding has not been without strings attached. Representatives from the European Central Bank, the International Monetary Fund and the European Commission, who have come to be known as ‘the troika,’ have been making regular trips to Athens to evaluate and oversee the progress of austerity measures and public sector reforms designed to reduce the budget deficit but which so far have only plunged the country deep into recession. Athens and other major Greek cities have seen massive riots and demonstrations against austerity measures and most blame the current government for selling them out to overseas dictators. Without a referendum, a peace offering to the people, Papandreou will most probably be unable to avoid early elections.

The referendum will allow the Greek people to approve the latest deal proposed at the summit last week, details of which are still pending, but will provisionally be a new €100bn bailout loan and a 50% write-down of Greek government debt held by private creditors. The referendum may, in the end, boil down to whether or not Greece will remain inside the Euro or not. If they accept the bailout package, it will mean years of austerity and financial hardship. If they reject it, it will mean full default, chaos, and a serious reassessment of their European relationship. More importantly, it will allow Greece to regain some dignity and decide for herself what the next move shall be. 

Whatever the outcome, the fact that the government has finally realised it cannot go on ignoring the people, bodes well for democracy as a whole and greatly strengthens the case for referendums in other countries too. Let it be the first of many.

Monopoly Money 2: Don’t Blame The Capitalists

This is the second post in a three part series on money. The first part can be read here. 

The recent Occupy protests have mainly targeted the banking sector. Demonstrators have held signs saying everything from: “Capitalism in cancer,” to “You got bailed out, we got sold out,” to “No bears, no bulls, just pigs,” get it?

Protesters have camped outside Wall St. and the London Stock Exchange etc, where many of the wrongdoers can be found. However, this isn’t where the root of the problem is. The protesters should really be outside the Federal Reserve or the Houses of Parliament and the Bank of England.

The blame for the economic instability and unfairness that people resent is being laid on capitalism, and when people think capitalism, they think banks. Although capitalism does of course create inequalities and embraces greed as a positive driver of prosperity, it is not the enemy. Capitalism creates the wealth and jobs that we all want to see. It is the government’s involvement in the banking system that has entwined banking and politics and sown the seeds for yet another credit driven recession. 

In the first post we talked about how the central bank creates money through ‘quantitative easing’ and the reasons it gives for doing so. We asserted that inflation = people getting poorer, and I stand by this generalisation as being true for the vast majority. 


However, there are some groups of people who stand to benefit from the government’s money creation activity. In this post I talk about who these people are, how the government’s policies are designed to benefit them and hence why we are the 99%. 

Daylight Robbery

The financial crisis of 2007/2008, aka the credit crunch, brought about some shocking events in the world banking industry. As I am sure you know, the housing bubble, inflated with the easy credit and the fashionable casino banking of the 21st century, burst spectacularly in 2007 resulting in plummeting values of real estate securities, a lack of liquidity for financial institutions, widespread evictions and foreclosures in the housing market, the collapse of huge financial institutions and, consequently, global economic recession. But we are still feeling these effects today. The banks still haven’t managed to shake off the bad debt and get back to doing healthy business. Why is that?