Tuesday, 24 April 2012

The banks still just don't get it

If you really want a (relatively) quick, eye-opening and really quite shocking guide to just how little the banks have learned from the Great Recession of the last five years, you could do worse than download this PDF, a report on 'the Great Repression' and government debt by HSBC. I know, I know... But give it a go. It's worth it in the end. The key passage runs thus:

Financial repression results from policies which allow governments to fund their borrowing through imposing costs on others. Financial regulations can be used to force financial institutions to lend more to government and, hence, less to others – domestically and abroad – through, say, higher liquidity requirements. Quantitative easing allows government to escape the disciplines associated with market forces by pushing bond yields down to low levels even when fiscal policy is out of control. Real interest rates end up too low – even negative – and savers are penalised.

So, let's get this straight... Interest rate falls are the fault of high-spending governments. They want to go on spending, so they force central banks to print cash and basically rob savers. Hmm. Well. There's a lot of truth to this second point - and as the report rightly says, without growth we're going to face quite a few years of very, very acute pain.

But the document is very thin elsewhere, especially on the narrative of what's just happened to us. HSBC weren't one of those banks that imploded, taking many billions of your money with it - so we'll give them something of a bye on that front. But to say so little about the roots of the crisis - basically, faulty regulation and over-lending - is to both airbrush history and to misunderstand the real reasons for those low interest rates. Savers are not being expropriated (and they are) because governments went on a huge spending spree: they are suffering because banks did, backed by governments while they posed as a cross between a one-way bet and a cash machine. Get that wrong, and nothing else you say about anything will ever be taken seriously again.

And even though we're letting HSBC (above) off the hook marked 'it's your fault anyway', economic theories mobilised in the rest of the paper are pre-Keynesian and basically sub-BA level prejudices. Even Harold Macmillan would have said, as he once did while Prime Minister: 'this is a very bad paper. Indeed, a disgraceful paper. It might have been written by Mr Neville Chamberlain's ghost'. They're all here - all the misconceptions. 'Crowding out', whereby government borrowing is supposed to throttle private borrowing - even though central bank lending, so excoriated elsewhere in the paper, gives the lie to that assertion. The need for 'market mechanisms' in the credit market to impose 'discipline' on governments - as if failing to give a political and a social lead, ignoring the views of voters, and allowing Spain (for instance) to lapse back into recession will really improve confidence. The importance of savers - when what we really need are spenders, indeed a crazy spending spree like we've never seen before... Especially in moribund old Europe. I could go on. But I won't. Because little actual academic economists say is listened to inside pin-striped heads anyway.

And yet such people still dominate our public discourse about debt, default, currency management and growth. For how much longer are we going to tolerate such illiterates leading the debate?

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