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August 03, 2011

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Stephen

That's a good insight. But in support of the Hayekians, I'd argue that the severity of the collapse was exacerbated by the over-regulation of the banking system. If the banking market had been more like a free market, newer and nimbler entrants would have taken over from the older dinosaurs, thus avoiding much of the disruption. (Smartphone customers are not much inconvenienced by the collapse of Nokia and RIM, because of HTC and Apple.) But because the regulatory barriers to new entrants in banking are so high, we're stuck with the incumbents as they thrash around, trying to get to grips with the new environment.

Alistair Mackenzie

Stephen - seriously lack of regulation was the problem(!)
Surely the capital requirements and anti trust actions of the existing banks has much more to do with this.
Also free markets only really work if there are multiple competitors, free markets can easily tend to monopoly left by themselves.

Not sure that Keynsians are as statist as you imply either. This was the application of Keynesian policies that was in fashion between the war and the eighties but not the whole story.

william

Not sure if I buy the report.

Let's consider one of the claims: that excessive risk-taking was a cause of the crisis and it wasn't dealt with properly by regulators. But why take excessive risks? If there is no upside, in the form of increased returns to individual traders, what is the point? Do they just like living dangerously with other people's money?

No - the problem was not so much with executive rewards in banking (and the fact that they are as ridiculous as in other industries does not excuse them), but with rewards for traders.

In addition, their regression uses comparative performance (CompPerformance) which, if grossly exaggerated by the banks prior to their subsequent fall, would suggest that executive pay _is_ out of line with other sectors.

Cahal

The Keynesian analysis of the crisis is that interest rates were actually too high, and - when combined with lack of regulation - this spawned CDOs and so forth. Keynes also advocated banning loans to speculators.

I also dispute there was a global savings glut argument you appear to be making (?) The average global savings rate over the 24 years ending in 2008 was 23%. It rose in 2004 to 24.9%. and fell to 23% the following year.

However, I agree with you about the management issue. You had massive institutions, with management who simply had no idea what was going on.

Small groups of traders who were basically the only ones that supposedly understood what was going on were essentially unanswerable to anyone. They often operated for their own profit at their firms expense.

Yves Smith's ECONNED has excellent detail on this process. Apologies for my slightly incoherent ramble.

Keith

In reply to Stephen I think the Banking crisis shows great flexibility at work. Profit driven bosses wanting to make obscene gains that most people cannot even dream about decided to let equally greedy traders operate with total unaccountability and secrecy in a way impossible in a more structured bureaucratic system. It is profit seeking flexibility that makes this possible. One down side of this is that the whole world economy is in danger when secret unaccountable innovation operates with no imput from the wider society affected by this. The world economy is like a feudal system before Parliament is invented. Most of the people affected have no right to be consulted on the decisions that may ruin their lives.

Phil

To be fair, Lloyds TSB were doing fine until Victor Blank got his tap on the shoulder from Gordon Brown - the current share price is largely the work of HBoS, by which I mean BoS. (The Halifax operation is probably the biggest victim in all this.) But this doesn't go against your argument, as Lloyds had a name for being rather boringly conservative and sticking to what it knew.

gclub

Good day! this is one of the most interested statement I have heard anyone said. I have always say to myself there are no rules telling us what to do, but rules telling us what not to do. We need to start making rules telling us what to do and we will see how creative our world would be. thanks,

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