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GUEST POST: Rob Waller on the bank profits

August 4th, 2009 Posted in Uncategorized by


There is something really rather annoying about Barclay’s and HSBC’s financial results

Barclays has announced an 8% rise in first-half profits, boosted by its investment banking division.

Pre-tax profits for the first six months came in at £2.98bn ($5bn), although this was slightly below analysts’ forecasts … HSBC reported half-year profits of $5bn, although this was about half what it made in the same period a year ago.

And it’s not that a bunch of cough-bankers are going to get some rather nice bonuses this Christmas. It’s that we actually fell for the Government line that if we didn’t bail out the banks the world would end.

Clearly Barlclays and HSBC prove that some banks were fine. They didn’t need our money and they scraped through the storm anyway. Which suggests the credit crunch wasn’t quite the end of the world moment that we were led to believe.

And what makes it worse is this…

Barclays said it had gained more investment banking clients thanks to the acquisition of some Lehman Brothers businesses in 2008.

The addition of some of the Lehman businesses also “increased significantly” Barclays’ presence in the US, the bank said.

The US now accounts for about 40% of its income.

It’s as if Jim Rogers scripted it. One might almost suggest that the free market was functioning as it is meant to. I.e. bad business — Lehmans — fails, good business — Barclays — gobbles up surviving good assets on the cheap and makes a profit.

Quite why we didn’t let the free market do its thing is beyond me. Because I’m not sure being part owner of a bunch of failed banks is such a good thing — considering we’re now responsible for the bad assets as well as the good. Unlike Barclays.

Rob Waller sits on the NCC of the Libertarian Party and regularly posts for the LPUK South East Blog.

17 Responses to “GUEST POST: Rob Waller on the bank profits”

  1. Steve Says:

    Ummm…. We were on the verge of a deflationary spiral, the banks were not lending as they were meant to, and the ‘animal spirits’ (as Keynes called them) were leading to many good businesses being dragged down too. Gillian Tett’s excellent ‘Fools Gold’ is probably the best of the first tranche of credit crunch books.

    Of course, we should be separating out retail banks and investment banks so that we could let them go under. We should be regulating them properly so as not to allow them to introduce systemic risk again.

  2. Tristan Says:

    Quite why we didn’t let the free market do its thing is beyond me

    The free market isn’t in play here either. The banking sector is one of the most heavily regulated portions of the economy, it is not possible to describe it as ‘free market’ unless you can cope with a cognitive dissonance which rivals that of authoritarian socialists when they talk of freedom and democracy.

    What these results show is that Barclays and HSBC are better at playing the various regulatory regimes than their competitors, not that the the free market has worked.

    The government claimed we were on the verge of a deflationary spiral so they could be seen to be ‘doing something’ which tends to go down well with voters.
    The banks saw an opportunity to benefit further at taxpayers expense so they went along with it.

    I’m interested how you propose to ‘regulate properly’. You must be some superhuman genius to know how to do that. Why don’t you cure all the world’s ills whilst at it? They should be simple if you can regulate banking properly.
    Its the regulation (which no doubt was termed being regulated properly at the time it was introduced) which set up the incentives to behave as they did.

  3. Steve Says:

    Which incentives encouraged them to make CDO of ABS? It was a lack of understanding of the causation of mortgage defaults that allowed them to leverage themselves to the hilt. It was a lack of regulation that both allowed this leverage and to sidestep Basel.

  4. RobW Says:

    @tristan I never said the free market was at play.

    @steve watch the Rogers video linked. You can’t have deflationary spiral when the government are pumping huge amounts of money into the system. Also if you look at the figures we’ve experienced very little deflation in the last 60 years. And deflation can be a good thing if prices are over-valued as they are with housing.

  5. Steve Says:

    But you’re confusing cause and effect. We don’t have deflation because of loose monetary policy and a fiscal response. And it might be good for housing prices, but it would be disastrous for everything else. Also check out Dean Baker- who predicted the housing crash- on the huge consumption gap which faced us. It might well mandate another stimulus.

  6. Steve Says:

    Also, the Jim Rogers video looks a little silly now that the FTSE has had the biggest monthly rise for the last 6 years. Keynes has worked.

  7. IanPJ Says:

    The assets that US banks, and any foreign bank operating in the US, were legally obliged to create under the Community Reinvestment Act, creating loans worth more than their balance sheets outside of their normal risk models was the single causal factor.

    That the banks created the CDO’s outside of the regulatory frameworks in order to mitigate those risks, and that many other banks saw a quick and easy buck to be made merely compounded the problem initially caused by politicians was in some way to the Banks credit, albeit a totally unsustainable one.

    HSBC and Barclays have shown that where Banks had refused to be sucked in by political interference, they have managed to survive, whilst those now under the ‘care’ of government such as Northern Rock are still posting large losses. (£720m in six months, result today)

  8. Steve Says:

    HSBC and Barclays do plenty of other things other than mortgages. Northern Rock does not. That’s not a valid comparison.

    Blaming the Community Reinvestment Act is also putting ideology ahead of a dispassionate review of the facts. Even if it did allow lending to those that shouldn’t have lent to (free market theory presumed that they would simply remortgage after their introductory offer ran out…which didn’t happen), the under-regulated market in credit derivatives led to massive overleveraging and the creation of systemic risk which amplified the normal housing downturn with trillions of toxic assets and hard-to-value assets.

  9. Steve Says:

  10. RobW Says:

    @Steve how exactly do we regulate against this sort of thing? Every time it happens we regulate and then some financial whiz kid works out a ‘foolproof’ way around the regulations.

    Ultimately the only way you can regulate against this risk is to let the bad banks and assorted businesses go bust.

    Otherwise you end up with the phenomenon of socialising debt and privatising profit.

    Also you really shouldn’t place any credence in the rise of the FTSE. None of the fundamental drags on the economy have changed — unemployment is still rising and so is public debt.

  11. IanPJ Says:

    @Steve, lets get the wording right shall we. The Community Investment Act did not allow secondary lending, it mandated it.

    Politicians playing in markets they knew nothing about in order to give the impression of ending boom and bust by forcing lending to an estranged market rather than let a natural financial cycle occur.

  12. Tom Papworth Says:

    “Quite why we didn’t let the free market do its thing is beyond me”

    Politicians don’t win votes by doing nothing. They win votes by being active.

    One cannot prove a counter-factual (“If we’d left things alone we’d be better off”) but the politicians can point to where we are now and argue that they “Saved the world… er… banks.”

    Keynesian responses appeal to politicians because they suggest that politicians are essential and even useful. The free market makes politicians unnecessary and even harmful. It shouldn’t be hard to figure out why free markets are not allowed to do their thing.

  13. Tom Papworth Says:


    I’ve not watched the Jim Rogers video, but I’d caution against reading too much into the current froth in the FTSE.

    Two theories may be worth considering here:
    1) The widely recognised phenomenon of the Double Dip Recession
    2) The obvious results on both asset prices and inflation of loose monetary policy.

    I’ll allow 1 to speak for itself (there’s plenty out there to read). As for 2, to suggest that “Keynes has worked” ignores the fact that it may have “worded” for entirely Hayekian reasons: the loose money is creating new distortions in the market and encouraging further irrational exuberance which will require a further correction down the line.

    The government may very well have sown the seeds of the next recession in its response to this one!

  14. Julian Harris Says:

    “Keynesian responses appeal to politicians because they suggest that politicians are essential and even useful.”

    Indeed, plus – Keynes didn’t invent this form of interference, he merely attempted to justify it. A great boon to the politicians of that time (and, alas, our time).

  15. Steve Says:

    Rob W & Tom Papworth- partially agreed. Clinton should never have repealed Glass-Seagal and allowed the creation of banks that genuinely are too big to fail. However, if you read Gillian Tett’s excellent ‘Fools Gold’ you’ll see that free market fundementalists persuaded regulators to essentially ignore their own regulations: the use of credit derivatives were applied to discount the capital requirements under Basel II. The licensing of products that were impossible to value were done because banks persuaded regulators that counter-party risk could be self-regulated, which turned out to be hopelessly naive. We should have had more regulation, less self-regulation and created an industry that allowed for banks to fail.

    As for fundamentals- the rise in public debt was because of a basic transfer of debt from the private and corporate sectors to the public sector. The stimulus, recaping of the banks and loose monetary policy have essentially allowed both sectors to repair balance sheets. Now we have averted the possibility of a deflationary armageddon, recovery in those sectors will allow the government to slash spending, raise taxes and pay down its debt over time (and in more economically certain times). With such a massive drop-off in consumption, good solvent companies were going to be dragged down with the bad. ‘Irrational exuberence’ would be replaced with ‘irrational despondency’ and the opposite of a bubble takes place- uncreative destruction as well as the necessary creative destruction. Perhaps the loft apartment needed to burn down, but we shouldn’t have let the whole house burn down with it.

    Ian PJ- this very well may be true, but the derivatives market (which relied on self-assessed counter-party risk) allowed leverage to amplify this to an extent never seen before.

    Mortgage defaults happen in every recession. Financial ‘innovation’, greed, the failures of self-regulation (will ‘Value at Risk’ models survive?!) and the creation of instututions too big to fail, made this from a recession into the prospect of a depression. It’s like confusing morning sickness and pregnancy to blame this on a few bad mortgage loans to poor people.

  16. Geoffrey Payne Says:

    If LD libertarians follow through the logic of their position, they really should be attacking Vince Cable a lot more, as he has led the interventionist case for mitigating the financial crises.
    Personally I happen to think that Vince Cable is spot on of course.
    But I am curious as to why Libertarians who are not usually backwards in coming forwards with their opinons are so muted when it comes to commenting on the performance of Vince Cable.

  17. Gandhi Says:

    Geoffrey: Vince Cable can’t make his mind up without consulting the party line, hence it’s rather pointless trying to form an opinion of him. If you cherry-pick, it can sometimes sound like he knows what he’s talking about. And I do mean sometimes.