Liberal Vision

Vince Spart rides again

What to say about about Vince’s speech that hasn’t already been said after forensic text analysis and critiques by right and left.

On this occasion I rather agree with Labour blogger Hopi Sen’s ‘Sad donkey runs free’ analogy. In substance Vince has said nothing new, his attacks on the banking profession as ‘spivs’ are pure populism, and his chances of persuading his coalition partners to change anything on the basis of such an analysis are slight.

After the activist cheer has died away in a week, the main impact of the speech will be to permanently lower his reputation amongst business leaders, a novel communications strategy for the Business Secretary.

Behind the rhetoric, competition and bonsues in banking are difficult regulatory issues. For example are the footballer salary figures involved in some trader bonuses evidence of weak competition? Or a reflection that an individual whose decisions turns £1bn into £1.01bn over a year for their clients is entitled to expect some share of the £10,000,000 profit that represents as their fee? That a very small number of people can make a lot of money is not unique to banking, or typical for most parts of banking which involve more mundane activities like managing accounts and loans.

Bank profits on loans are also problematic as evidence of market failure.  A major driver of the credit bubble was the misselling of risky loans as safe, but that manifested itself in not charging enough to cover the risk. Since the bubble burst charges have risen. At what point is this evidence of weak competition? How do banks reconcile this with endless demands from politicians to make risky loans to small business and those on low incomes at interest rates that do not reflect the risk premium? 

What element to reserve ratios play in this? To raise the capital reserves of a bank deemed at risk to the new levels required by the draft Basel 3 agreement  requires profitable transactions. Are these profits acceptable to Vince? Are they unacceptable when the reserve ratio is achieved?

Market concentration can be evidence of oligopoly and anti-competitive practices; but not always; contestability at home and global competition can keep large companies honest.  One of the largest advocates of domestic concentration during the crisis was the previous UK government, encouraging  for example Lloyds to buy HBOS. Not great evidence for the wisdom of the state in adverting and correcting market failure through political leadership.

Another Vince idea, separation of retail and investment banking facilities as a necessary basis for future stability would be more credible if the headline failure of the UK crisis wasn’t Northern Rock, a retail bank.

Outside competition issues how do the Treasury reconcile the attacks on bank profits with the need for the tax revenues from those profits to cover a government debt… in part based on over-optimistic spending commitments premised on bank profits?

Rhetoric about balancing the economy is the current political answer, but to do this either requires other sectors to grow relatively faster than banking, or shrinking the sector. The latter is not a wise growth or jobs strategy. The former… tends to require loans from banks.

Vince has something of a challenge in delivering on his rhetoric.