A Banker Regrets the Behavior of Banks

Keith Wilde.

The following brief text comprises two recent postings by a veteran banker and monetary theorist to an Internet conversation among a small group of specialists. (Interested readers of ER can find out more about the subject and its participants by entering "Gang8" in a search engine. Michael Hudson, whose work has been reported previously in this space, is one of them.) In this selection, Christopher Meakin provides some personal details along with his commentary on trends in banking and finance.

Selected by permission of the author and very lightly edited.

It wasn’t always This Way

I am appalled by the cavalier way the big British banks are now screwing their customers, in public, without remorse, without conscience.

It troubles me all the more because, 20 years ago, I was head of Public Relations (and in effect of Marketing also) for HSBC, duly based at its then-world HQ in Hong Kong. That was several years before it bought Midland Bank here in the UK, thus obtaining for itself a substantial footprint in the European retail banking market for the first time, and moving its world HQ to the huge building straight across the Thames at Canary Wharf which I am currently looking at out of my study window.

Prior to that I was European PR Director for what was then Chemical Bank of New York, based here in London. Nowadays that same bank has grown into JP Morgan-Chase. As it happens the current chairmen of both banks, until they move on, are thus personal friends, having worked closely with each of them before they ascended the final rungs of the corporate management ladder.

At Chemical, 1979-84, I consider I had the privilege of seeing the height of true courteous banking – high-tech for sure; we were the highest tech bank in the world – but still regarding the customer as king.

Yet from about 1990 onwards it has been downhill all the way. I am appalled what Stephen Green – a devout Christian, believe it or not – is apparently condoning since he became Executive Chairman of the Bank last June, 2006. Stephen and I were the closest of friends at HSBC, and are still in contact – same university, same subject, even the same tutor in the leading British economist Walter Eltis.

I am not sure what can be done about the current unfairness and mess inflicted by the retail banking industry but I am powerfully reminded of the arrogance of companies like Standard Oil, and of Duke’s tobacco empire, which led the USA in the early years of the 20th century to introduce its trust-busting laws.

Here in the UK we have a Monopolies Commission, we have a clutch of Fair Trading Acts on the Statute Book, but we also have a socialist government which is nevertheless craven to big business (which does not elect it) and wholly unwilling to stand up for the rights of the ordinary citizen/consumer (who does elect it).

It is strange, and really rather unpleasant.

Chris Meakin, London

Civilization Seems to Require Regulation

A second post from Chris Meakin on the same day, April 26, 2007:

It’s a funny thing. Geoff Gardiner and I (former bankers both, he with Barclays which is about to tumble into bed with ABN-Amro) approach it from one starting-point, Kevin D. and James C. from a quite different and distinctly more socialist starting-point, yet we all seem to end up in the same place.

I am beginning to believe the big banks should be broken up, just as the trust-busters of the USA smashed Standard Oil into five regional chunks, and returned to their origins as regional, personal banks.

I am also beginning to think the USA was right with its Glass-Steagall Act which forbade retail banks from also becoming investment banks. While I think the American McFadden Act which forbade American banks from operating in more than one State was over-restrictive its heart was, it now seems, in the right place after all. Both Acts have been repealed by Congress since the 1980s.

I am also beginning to wonder whether we should not advocate regional banks which are trust-based, rather than limited companies which are profit distributing, to carry out the basic functions of retail banking:

Holding accounts, taking receipts, handling payments;

Moving funds from one account or location to another;

Converting funds from one currency to another;

Holding the savings of individuals, paying interest;

Making loans to individuals, charging interest;

Selling strictly financial services such as banker’s drafts;

Operating debit cards to do much of the above electronically;

If they are still popular, running credit cards.

Such banks should be subject to a strict capital adequacy ratio. They would not be allowed to indulge in high risk, high profit activities. So they would not need avaricious shareholders. They would also be permitted to do business for private companies but only those with fewer than – say – ten shareholders.

They would be more like a continental Giro, and their overwhelming emphasis would be on individual service, and local people knowledge. As I was taught when I first went into banking "always lend to the man, never to the asset." That wisdom went down the tubes almost 20 years ago.

This is how the banks evolved in the UK up to the first half of the 20th century. Joint-stock banks were forbidden for a long time into the 19th century, and I now think with good reason.

Chris Meakin, London

The Wild West Gone Global

The comments about British banking by Christopher Meakin on page 3 were supplemented on the same day by James Cumes (the "James C." mentioned by Meakin). Cumes’ book America’s Suicidal Statecraft was published this past winter and may be ordered through Amazon, where it is also described. He is a former Australian diplomat, among other qualifications, which may be reviewed in a biography available by entering "Gang8" in a search engine. Excerpts from his book are posted to Gang8 from time to time, and he has given permission for their wider dissemination. The remainder of this text is by him exclusively, with the addition only of subtitles.

Keith Wilde

Just like all the rest of us, the banks do as much as they can to boost their "take" and their power within the limits set by those who are supposed to "govern" or "regulate" them. If the government and its relevant institutions, such as a central bank, tell the banks and – even more importantly these days – the non-bank financial institutions, that they have open slather to grab whatever booty they can, from whomever they can and however they can, then that is what they will do.

There’s a lot about this process in America’s Suicidal Statecraft. To quote just one piece:

It was the gradual disillusionment with Keynesianism and then monetarism which, in Britain and then elsewhere, helped to lead policymakers through such concepts as privatization and deregulation to an overriding belief that the economy should be allowed to run ever more freely in accordance with market processes and that the banks should have maximum freedom within this free-market system. The sudden deregulation of banking, together with the floating of exchange rates (outside such devices as the European Union’s Exchange Rate Mechanism) and freedom of movement of funds into and out of the economy, brought a dynamic instability with which the banking systems of all countries were and still are – from a macroeconomic standpoint – ill-equipped to cope. However, from the point of view of the banks – and increasingly of financial institutions outside the traditional banking system – the dynamic instability was just what they might have prayed for. It opened up such opportunities for speculative profit that they were not going to permit any interference by governments or central banks who might be inclined to meddle with it.

In many ways, consequently, the banking system reverted to what we might imagine to have been the unregulated conditions that had obtained much earlier in the century, or in the Wild West days of nineteenth-century America; but it did so now in a much more sophisticated and technologically advanced financial environment in which changes could be and were sudden, perhaps "globalized" and – potentially at least – terrifyingly unpredictable. Changes in market trends and situations could take place without reference to what might have been traditionally regarded as clearly identifiable economic "rules." More and more, stock markets, currency exchanges and other financial markets were moved by speculation and the emotions – the euphoria and anxiety – that nurture speculation. This was not new: speculative fever has played its part in the volatility of markets from the beginning of time. But the size and complexity of the markets distinguished the situation, from the 1980s onwards, from anything that had ever been known before.

The Realm of Money and Finance is Not What It Used to Be

Markets were now huge, modern and, in a very real sense, globalized. No longer were they local cattle or other commodity markets or even stock markets of the kind that had existed in New York at the time of the Great Crash of 1929. Now there was speculation in the domestic markets and across the national frontiers in a dazzling variety of forms, using an equally dazzling array of financial and trading devices. Almost anything could be "hedged" and, if it hadn’t been "hedged" before, then as with credit derivatives in the past decade, there were plenty of inventive young financial operators ready and waiting to bring it within the scope of global markets without too much delay. In what was quite a rapid evolution – over two decades or so – these huge, varied and complex markets became so massive that they swamped normal trade and long-term investment transactions and converted a variety of exchanges into vast, twenty-four-hours-a-day casinos. The funds involved in the markets weren’t counted just in billions; in aggregate, they were counted in trillions of dollars and going ever upwards. The evolution – or revolution – has not slowed or stalled and, in the middle of 2006, is racing ahead more rapidly and powerfully than ever.

The result was that, from the mid-1980s, economies bolted off on a wild bucking-bronco ride that, although stimulating as compared with the prudent regulation of the period between 1945 and 1970 and although bringing advantage to some, mostly in the short-term, was more than either private banks or official regulators could competently control. For some years now, most operators and regulators have been out of their depth, except – perhaps – in the very short-term trading day or week, with no idea what they should do, either in their own self-interest or that of the society, beyond – perhaps – the period immediately ahead.

Financial Buccaneering has Even Become Socially Acceptable

The characters have changed to some extent. The adventurers, marauders and buccaneers of the 1980s, associated with such devices as junk bonds, have been thrown unceremoniously to earth after their exhilarating ride. But others have taken their place. Speculation has continued to thrive. Not only has it become entrenched on a massive scale, but it is now much more, and more honourably, institutionalized. It is no longer at the margin. It moves in the very best of circles: it has become part of the mainstream way of economic and financial life. It is not just the high life of the successors to the adventurers, marauders and buccaneers but staple nourishment for ordinary, everyday, formerly cautious and often nervous citizens, including of course the fabled widows and orphans, representing the most vulnerable in the society. They may not know it but they’re in there – right in the middle of the gambling parlour, sitting at the blackjack and roulette tables – with everyone else, their future dependent on a speculative frenzy whose outcome none of their advisers can, if they’re honest, predict or control. In other words, speculation is now – whether they know it or not – much more a feature of everyone’s normal, everyday economic life than in the 1980s or, indeed, than it ever was in the history of any human civilization, however dissolute, in the past.

In the ’nineties and since, speculation has come to be identified not so much with individuals, although some have made massive personal fortunes from currency and other deals and have become celebrities as a result. The institutionalization from the 1990s onwards, taking the place of a kind of personality cult that tended to rule in the 1980s, entails much greater and more persistent dangers for the world economy and society. The tendency for such authorities as the Fed – and its Chairman – to give explicit blessings to widespread speculation has conferred on it a respectable status – a solid, John Pierpont Morgan kind of respectability. On the other hand, to the Cassandras, many national economies and the world economy as a whole now appear, at almost every moment, to be teetering on an edge of financial disaster. Even short periods of calm only precede, as they imagine, the ultimate cataclysmic storm.

But They will Crash, as They Always Do

Ultimately, the banks and non-bank financial institutions will go too far for their own welfare or survival. They will try to grab too much from constantly more "efficient" instruments for gathering in the loot and they’ll destroy themselves – and oblige those who govern and regulate them to take back some – probably a mighty slice – of the freedom that they have misused.

This is not a possibility; it is a requirement in the ultimate analysis. If it were not – and were not seen as such – then the whole economy would collapse in a self-destructive, chaotic anarchy. We are pretty much at the point now at which this "ultimaticity" is/will be upon us. Records are being recorded pretty well everywhere in terms of peaks being reached and exceeded. There might be a little of the climb left to the ultimate peak but my guess is it can’t be much and the time it will now take to reach it will be pretty short – months, not years.

A Great Crash has to have a Great Peak if it is to have a Great Fall; and a Great Peak is most assuredly reached – and the path to it is most felicitous for the happy bands of mountaineers – if they are allowed enough rope, not only to pull themselves up the mountainside but to strangle themselves with it on the way down. I suppose it must seem odd to an objective observer on a nearby planet that the human species should act in these ways. It is odd, of course, but that eccentricity – that capacity for a kind of narcissistic self-destruction – is inherent in the human personality and its consequent behaviour. That seems to be the case anyway. The data from the past – in so far as we can collect it – seems to suggest that what we have done before to bring misery on ourselves in financial and economic terms – and indeed in political and strategic terms – we are doing and will continue to do again – over and over and over again.

Nothing will stop us.

All we can do is prepare plans as best we can to pick up the pieces and try to fit them into some sort of survival kit when – quite soon – we find ourselves knee-deep in the smithereens of our own creation.

James Cumes

– from Economic Reform, May 2007