Where are the Admiral Byngs?
The acute phase of the banking crisis is apparently over. As we survey the wreckage—the sorry roll-call of failed and semi-nationalised banks—a thought occurs. Why have those at the top not been held more vigorously to account?
True, one or two senior bankers have left. Fred Goodwin received his P45 from Royal Bank of Scotland, although he was allowed to leave under his own steam with a golden goodbye. Victor Blank, the disastrous chairman of Lloyds, has finally been dislodged (though he will stay on to ensure a smooth handover).
But it's not enough. In America, the public stand bemused at the survival of Ken Lewis, the lantern-jawed buffoon running Bank of America. He clings on despite having blown apart his own bank by overpaying massively for Merrill Lynch at the height of the panic. Lewis seems to live in a parallel world. He recently swore he didn't need new capital, only for the government to declare shortly afterwards that the bank needed another $34bn. And in Britain, the continuance in office of Eric Daniels—the other half along with Blank of the comedy duo at the top of Lloyds—is a source of wonderment. Daniels has pretty much massacred a centuries-old institution. What exactly do you have to do to get the sack at a large bank these days?
It is not as if the US and British governments cannot winkle these people out of their jobs. In both cases, the state is the major shareholder and supplier of capital. So why don't they act?
It's partly not wanting to be seen to run these institutions directly. It's much easier to shelter behind the bulk of a blundering Blank than to expose yourself to pot-shots from crisis-hit customers. But that won't wash. Both governments have so much public money tied up in the banking sector they have a duty to protect it.
Moreover, there are bigger reasons to act. Public confidence in banking—just as it is in MPs—is going through the floor. In such situations it is important to discriminate between the good and the bad, the competent and the incompetent. Not all bankers were useless. But to prove it, the bad should depart. And that doesn't just apply to the state-controlled banks—but all of them.
And lastly, there is a behavioural aspect that shouldn't be ignored. As many have observed, many bankers have come through this crisis in better financial shape than the shareholders whom they exposed to reckless risk. The cost of failure hasn't been high enough. We can't claw back the cash but we can kick the bad guys out to drive home the lesson for the next generation. It brings to mind Voltaire's observation that in England "it is thought good to kill an admiral from time to time to encourage the others." He was referring to the execution of Admiral Byng, executed during the seven years war for failing to relieve Minorca. Where are the banking Admiral Byngs?
Congdon's on the money
The credit crisis is producing some odd bedfellows. Take Tim Congdon, who is one of our more hair-shirted monetarists. Congdon has been one of the leading supporters (and intellectual authors, if some are to be believed) of the quantitative easing policy pursued by the treasury and the Bank of England. This lines him up alongside those he would usually count as his intellectual foes—the Keynesians and big government men.
This does not mean that Congdon has cut all his intellectual anchors. Nor has he become enamoured of the monetary policies pursued by Gideon Gono, the central bank governor of Zimbabwe, whose banknotes now bear expiry dates. Quantitative easing is the application of a monetary solution to a monetary problem—namely how to maintain stable inflation when prices are falling and interest rates cannot fall below zero. In pursuing it, Congdon has thus remained broadly true to his own principles. They have simply come into alignment with those of others. This unholy alliance is of course temporary. It will fall apart when we move from quantitative easing to quantitative tightening (when the money that has been "printed" is withdrawn and incinerated) when I expect Congdon's hairshirt to make its reappearance.
No green shoots
I hesitate to enter the fray about the existence of green shoots. It is a perilous business calling the bottom of a recession, as Herbert Hoover found in June 1930 when he told a visiting delegation that had come to help stimulate the economy: "Gentlemen you have come sixty days too late. The depression is over." Barack Obama may not have gone so far with his cautious observation in March about stocks being cheap, but it may fare little better.
My own view about the recovery is closer to that expressed by Howard Davidowitz, an influential American retail consultant who observed recently that talk about a recovery was "preposterous." Davidowitz's view is that the crisis is now moving from the financial sector into the real economy and predicts that spooked consumers are finally "hitting the brakes." As consumer spending accounts for 70 per cent of economic activity in the US, that will leave a big hole. If Davidowitz is right, rising unemployment will lead to a wave of personal and corporate defaults—the same thing that snuffed out Hoover's false dawn 79 years ago.
The acute phase of the banking crisis is apparently over. As we survey the wreckage—the sorry roll-call of failed and semi-nationalised banks—a thought occurs. Why have those at the top not been held more vigorously to account?
True, one or two senior bankers have left. Fred Goodwin received his P45 from Royal Bank of Scotland, although he was allowed to leave under his own steam with a golden goodbye. Victor Blank, the disastrous chairman of Lloyds, has finally been dislodged (though he will stay on to ensure a smooth handover).
But it's not enough. In America, the public stand bemused at the survival of Ken Lewis, the lantern-jawed buffoon running Bank of America. He clings on despite having blown apart his own bank by overpaying massively for Merrill Lynch at the height of the panic. Lewis seems to live in a parallel world. He recently swore he didn't need new capital, only for the government to declare shortly afterwards that the bank needed another $34bn. And in Britain, the continuance in office of Eric Daniels—the other half along with Blank of the comedy duo at the top of Lloyds—is a source of wonderment. Daniels has pretty much massacred a centuries-old institution. What exactly do you have to do to get the sack at a large bank these days?
It is not as if the US and British governments cannot winkle these people out of their jobs. In both cases, the state is the major shareholder and supplier of capital. So why don't they act?
It's partly not wanting to be seen to run these institutions directly. It's much easier to shelter behind the bulk of a blundering Blank than to expose yourself to pot-shots from crisis-hit customers. But that won't wash. Both governments have so much public money tied up in the banking sector they have a duty to protect it.
Moreover, there are bigger reasons to act. Public confidence in banking—just as it is in MPs—is going through the floor. In such situations it is important to discriminate between the good and the bad, the competent and the incompetent. Not all bankers were useless. But to prove it, the bad should depart. And that doesn't just apply to the state-controlled banks—but all of them.
And lastly, there is a behavioural aspect that shouldn't be ignored. As many have observed, many bankers have come through this crisis in better financial shape than the shareholders whom they exposed to reckless risk. The cost of failure hasn't been high enough. We can't claw back the cash but we can kick the bad guys out to drive home the lesson for the next generation. It brings to mind Voltaire's observation that in England "it is thought good to kill an admiral from time to time to encourage the others." He was referring to the execution of Admiral Byng, executed during the seven years war for failing to relieve Minorca. Where are the banking Admiral Byngs?
Congdon's on the money
The credit crisis is producing some odd bedfellows. Take Tim Congdon, who is one of our more hair-shirted monetarists. Congdon has been one of the leading supporters (and intellectual authors, if some are to be believed) of the quantitative easing policy pursued by the treasury and the Bank of England. This lines him up alongside those he would usually count as his intellectual foes—the Keynesians and big government men.
This does not mean that Congdon has cut all his intellectual anchors. Nor has he become enamoured of the monetary policies pursued by Gideon Gono, the central bank governor of Zimbabwe, whose banknotes now bear expiry dates. Quantitative easing is the application of a monetary solution to a monetary problem—namely how to maintain stable inflation when prices are falling and interest rates cannot fall below zero. In pursuing it, Congdon has thus remained broadly true to his own principles. They have simply come into alignment with those of others. This unholy alliance is of course temporary. It will fall apart when we move from quantitative easing to quantitative tightening (when the money that has been "printed" is withdrawn and incinerated) when I expect Congdon's hairshirt to make its reappearance.
No green shoots
I hesitate to enter the fray about the existence of green shoots. It is a perilous business calling the bottom of a recession, as Herbert Hoover found in June 1930 when he told a visiting delegation that had come to help stimulate the economy: "Gentlemen you have come sixty days too late. The depression is over." Barack Obama may not have gone so far with his cautious observation in March about stocks being cheap, but it may fare little better.
My own view about the recovery is closer to that expressed by Howard Davidowitz, an influential American retail consultant who observed recently that talk about a recovery was "preposterous." Davidowitz's view is that the crisis is now moving from the financial sector into the real economy and predicts that spooked consumers are finally "hitting the brakes." As consumer spending accounts for 70 per cent of economic activity in the US, that will leave a big hole. If Davidowitz is right, rising unemployment will lead to a wave of personal and corporate defaults—the same thing that snuffed out Hoover's false dawn 79 years ago.
