December 16, 2016

It’s time to fix the banks

John Redwood believes Trump’s election presents an opportunity to turn our backs on excessive austerity banking, and to find international agreement on the future of banking regulation.

Many advanced economies, especially on the continent, have struggled since the crash of 2008-9 thanks to the failure to mend the commercial banks. The main authorities of the advanced world lurched from being far too lax with how much banks lent compared to their capital, cash and reserves, to being too tough. As a result we have had slow growth or no growth, depending on the relative weakness of the individual national commercial banking systems. The US and UK fixed their banks more quickly than the Euro area, but still demand levels of cash and capital that makes normal levels of credit expansion difficult in this cycle. On the continent in the recession ridden economies of Italy, Greece, Portugal and until recently Spain, past excess has led to a long period of credit starvation.

All this cramps growth and opportunity. No-one is suggesting the banks should lend more to individuals and organisations that can’t repay the last lot they borrowed. This credit squeeze is also preventing new loans to individuals and companies that are not over borrowed, and stands in the way of the normal use of credit to grow demand for larger ticket items, and to expand business capacity to respond to rising demand.

I have long argued that I would rather the governments and Central banks since 2008 had concentrated on fixing the banks, than on Quantitative Easing as a palliative for not fixing the banks. I can see that QE could be better than doing nothing. However, one of its adverse side effects was to lower long interest rates, making it more difficult for banks to make a profit. This delayed their balance sheet recovery, as they need more retained profits to provide the buffers against future losses they need before lending more.

The arrival of Mr Trump may change all this. It offers an opportunity to turn our backs on excessive austerity banking, and to find some possible agreement between the Europeans and the USA over what the next phase of world banking regulation should look like. Basel IV, the possible further tightening of demands for bank cash and capital, is in dispute now. At the same time Mr Trump’s team may soon develop proposals to amend Dodd Frank and the US bank regulatory code that came in following the crash. Mr Trump will want to expand the US growth rate in part by making more loans available for good projects in the US private sector. That will require a new bank fix.

I will write more about this in future posts. The way to end austerity and slow growth is to fix the banks sensibly and credibly. The authorities made two big mistakes between 2005 and today. All now agree they were too lax prior to 2007. It is now possible more will come to see they have been too tough and too unhelpful to rebuilding well financed expansion minded banks since the crash. People may not like banks, but trying to punish them as institutions is a kind of self-harm, as it depresses economic performance if the banks can’t lend.

4.20 avg. rating (84% score) - 15 votes
John Redwood MP
John Redwood is the Member of Parliament for Wokingham in Berkshire. He was formerly Secretary of State for Wales in Prime Minister John Major's Cabinet. He is currently Co-Chairman of the Conservative Party's Policy Review Group on Economic Competitiveness.
  • Shadow Warrior

    Hammond is continuity Brown. He is a hand-wringing lefty looking for clever wheezes to raise more tax in ways that people don’t immediately notice.

  • captainslugwash

    I predict the Budget will attempt to show the Left how caring the Tories are, and it will be funded by screwing over the working man.
    If Corp Tax comes down, I bet Divi tax will be going up.
    I would love to be wrong.

  • skynine

    We really need to look at tax credits, in particular in work tax credits that encourage people to work part time to preserve the benefits. 45% of women work part time and I would hazard a guess that tax credits are the main cause. This leads to low pay, low skill work in supermarkets and the retail sector including coffee shops. The government needs to get back to the employer paying people to do a job for economic reasons rather than to get onto the tax credit ladder. Like all government benefits it distorts the market and diverts government expenditure into non productive areas.
    The refrain that the government has cut expenditure is not true, it increases every year as more and more goes into welfare.

  • MrVeryAngry

    fat chance

  • MrSauce

    So, when wouldn’t we want a ‘budget for growth’?

  • Rob

    I note that the UK Government has just slapped on a 25% tax charge for anyone moving abroad and wishing to move out their private pension from the UK.

  • SonofBoudica

    The Remoaners will do their utmost to sabotage the Government’s negotiating position. They do not want a successful outcome; they want a failure. They want to be able to scream “Told you so!” from the rooftops.

  • EnglandLaments

    Thank goodness for Andrew Neil, the one media hack who scares the pants off the established politicians. He was spot on with Heidi Allen!

  • joshuafalken

    I had a very long, hard, studied and considered look at the hope, care and aspirations of all Europeans, before I voted to get the UK out of the toxic grasp of Brussels.

    The European Union and it’s charge of “ever closer union” has borrowed and spent its way to oblivion, whilst enslaving the working and middle classes in debt.

    The central control mantra of the unaccountable Brussels ruling elite, delivered through a mixture of socialism, globalism and corporatism is entirely responsible for the populist revolt by the millions of “Just About Managings” across Europe.

    We must remember the ultimate goal of socialists, globalists and corporatists is control, not prosperity. see—-not-prosperity.

    Social equality and economic growth always fail under central control and fighting against the Brussels doctrine on behalf of all Europeans is why I voted for Brexit.

    Britain has a long history of helping Europeans depose tyrants and Brussels is just the latest incarnation.

    Britain is the most racially advanced and accepting society on the planet. We welcome those in need and those that can help us with open arms and a smile; that will not change.

    We are also one of the most innovative, talented and open societies in the world, which why everyone wants to live here. However, we cannot fit everyone in, so we have to have clear, balanced and fair immigration policy which is where the arguments start between the monetarists and humanists will never be reconciled.

    I thought long and hard before coming to the conclusion that leaving the EU was in the best interest of all Europeans, as Brussels is toxic and cannot be reformed from within.

    Also, I find it insulting that people who voted Remain have insufficient faith in British ingenuity, compassion and skill to get a good deal for us and see the Europe that we love get a better deal from Brussels and the reform that European people deserve. and

    The politics of left verses right are dead because neither have delivered the promised economic growth and social mobility for anyone, but themselves. The populists are not selfish per-se, they just want to take back control of their own destiny that left/right politicians have freely given away and/or exploited for their own ends. In my constituency, the local residents group are taking over the councils as politicians ignore voters, so Westminster should beware of the well-organised, local resident independents at the next election. This is a peoples revolution which should be shouted from the rooftops, but liberals remained deafened by the socialist, globalist and corporatist “vested interests” that have spectacularly failed us and are obediently crying foul and fake.

    There will be an initial unpalatable inflationary cost to fighting globalism and rolling back central control that few appear to have factored in, but dismantling failed left/right vested interests should eventually free libertarian socially-conservative capitalism from the shackles of TBTF corporatism to feed economic growth and social mobility.

  • agdpa

    The EU usually makes the wrong decision – on immigration, on freedom of movement, on the euro, on the Ukraine, etc. etc. Little hope it will get Brexit right.

  • brownowl

    Eh? Reference please!

  • Neil2

    Sod caring. Screw the spongers and breeders. Kill HS2. Stop all “green” subsidies. Slash “foreign aid” and walk away from the EUSSR with immediate effect.

  • Rob
  • John C

    What a confused article. It conflates surveillance by the security services with poor defences against fraud.

  • John C

    Err, it’s the UK that’s leaving the EU, not vice versa.

  • John C

    Me, now. ‘Growth’ is a manic obsession.

  • La Face Nord

    Mr Redwood – are you aware of the Biased BBC website? It’s been exposing their agenda for a long time, but I imagine you’ve been well aware of the BBC’s agenda for quite some time…

  • Contact Rvtech

    The post is great

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