In response to an FT article by Martin Wolf on 31st May 2016, entitled ‘Central Banks as pawnbrokers of last resort’
"What happens if lenders decide banks might not be solvent? If they are depositors or short-term lenders, they can demand their money back immediately. Without aid from the central bank, the only institution able to create money without limit, banks will fail to meet that demand. Since a generalised collapse would be economically devastating, needed support is forthcoming.
Over time, this reality has created a Red Queen’s Race: governments try to make finance safer and finance exploits the support to make itself riskier”
The last sentence goes towards the heart of the issue, the relationship between the government and the banks, in particular the primary dealers. But it does not go far enough. Until this relationship is cleaned up, Lord King’s ideas, though otherwise sensible, will have no more fundamental effect than painting a wall to cover up dry rot.
In the US, for example, this is what the dry rot looks like: The primary dealer banks are the people who:
1. Have a monopoly on buying the government’s debt
2. Write the key banking legislation, for example the amendment to Dodd Frank, which put the taxpayer back on the hook via the addition of derivatives to the FDIC
3. Fund the never-ending re-election campaigns of the Congress on both sides of the aisle
4. Fund the universities that produce a constant stream of banker friendly Neo-Keynesian economists who then find themselves on influential committees
5. Operate a constant revolving door policy between themselves, the regulators and the New York Fed
6. Provide the President with Treasury Secretaries and other senior officials
With that as a backdrop let’s examine your sentence again:
“Over time, this reality has created a Red Queen’s Race: governments try to make finance safer and finance exploits the support to make itself riskier”
Governments try to make finance safer? Is that what Robert Rubin and Larry Summers were doing when they trashed Glass-Steagall under President Clinton? Or were they were feathering the nests of their buddies on Wall Street by continuing the financialisation of the economy?
There is no ‘Red Queen Race’ – there is a cesspit of cronyism that oozes moral hazard to anyone willing to look at it honestly and talk about what they see openly.
Sadly there is very little of the latter. If you want to ‘get on’ in Congress, in academia, in the regulators, or in the media…with few exceptions, it is best not to upset the banks.
An example of the ‘hold’ the banks have over the media occurred a few weeks ago on “Mornings with Maria” - a Fox News show hosted by Maria Bartiromo, a veteran of Wall Street coverage, previously with CNBC. She was interviewing Helen Davies Chaitman, one of the US litigators representing the victims of the Bernie Maddoff Ponzi Scheme. Ms. Bartiromo, who had clearly not been briefed by her researchers, asked Ms. Chaitman what she was there to talk about. She replied (in paraphrase) that she was there to talk about the criminal activities of Bernie Madoff and his banker JP Morgan…what then ensued was a near heart attack for Maria, a lot of noise in her ear, a hastily called commercial break and a vanishing act from Ms. Chaitman. Since then Ms. Chaitman has had no more media invitations, despite the fact the title of her book: ‘JP Madoff: The unholy alliance between America’s biggest bank and America’s biggest crook’, has quite a catchy title – one that any self respecting media organization would want to investigate…if it were truly interested in making the banking system safe.
In summary Mr. Wolf - Lord King, along with governments, regulators and the media are dancing around the handbag. These reforms will not make the banks safe, because they will not solve the fundamental problem of systemic corruption and cronyism. In my opinion, many of the most powerful bankers in the world are no better than the Gambino family – they just wear more conservative suits. No amount of lipstick will make that pig look pretty.