| Standpoint

June 2008

Much has gone wrong here. Carelessness in the use of words has led to false reasoning and bad prescriptions. In late 2007 the media routinely talked of the Bank of England’s loan to Northern Rock as “government money”, almost as if civil servants were writing out cheques to cover losses on mortgage loans in just the same way that they write out cheques to pay for hospitals and schools. But a loan from a government-owned bank is not at all the same thing as government expenditure on health and education. It must be serviced by interest payments and eventually repaid. The same is true of all lender-of-last-resort loans. Wolf says “the industry” (whatever that means) is “exceptional in the extent of both regulation and subsidisation”. But — if deposit-taking banks define Wolf’s “industry” and the lender-of-last-resort function is its “subsidisation” — he is simply wrong. If he took the trouble to inspect central banks’ annual reports over many decades, he would find that they have worked out ways — with their two key customers, the government and the commercial banks — to reconcile a lender-of-last-resort role with moderate profitability. Subsidisation has certainly not been the norm.

Secondly, the word “subsidisation” is astonishing in the context of modern British banking and the City. The year 2007 was indeed a difficult one for several large UK banking groups, but it is easy to check (again from annual reports) whether they were net recipients of subsidy or net taxpayers. They all paid tax — lots of it, in fact. Royal Bank of Scotland led the pack with £2,052m, then came Barclays with £1,981m, HBOS £1,365m and Lloyds TSB with £679m. Even Northern Rock paid tax of £31.4m as well as the interest on its lender-of-last-resort loan.

Finally, government regulation over the pay of individuals — individuals who respect the law, pay taxes and honour contracts — is an abomination in a free society. To point a finger at a particular profession (like “bankers”, whatever the word means) is potentially as dangerous as stigmatising racial or religious minorities. The British highbrow press, never slow to lecture others, has gone too far. A more measured and sensible analysis of the financial system’s difficulties is overdue.

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Tom MacFarlane

June 6th, 2008
8:06 AM

Nonsense on stilts. Only today The Independent has reported that the Competition Commission has reported that banks' customers are being ripped-off by ersonal protection insurance: "Taking out PPI can add £3,000 to a £7,500 loan. But many policy-holders have found that they cannot make a claim because they have a medical condition or are self-employed. Those who do claim find payments usually last 12 months or less." The inquiry's chairman Peter Davis, who is deputy chairman of the commission, said: "We've found serious problems with the PPI market and consumers are paying for the lack of competition. "Distributors don't appear to compete much with each other on either price or quality of PPI – neither do they appear to do much direct advertising to win customers from each other." Inquiry chairman Peter Davis: "We've found serious problems with the PPI market and consumers are paying for the lack of competition. "Distributors don't appear to compete much with each other on either price or quality of PPI – neither do they appear to do much direct advertising to win customers from each other." Which just about sums up the whole cartelised set-up. Funny how those who preach "free markets" turn out, on examination, to be supporters on oligopoly.

Tom MacFarlane

June 5th, 2008
12:06 PM

Tim, I wonder what Murray Rothbard would be writing about the current problems within banking and financial services? http://www.lewrockwell.com/rothbard/frb.html

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