Following the Robert Peston BBC 2 documentary “Britain’s Banks: To Big to Save?” I was invited to appear on the Jeremy Vine Show yesterday (my segment starts 1 hour and 8 minutes in).
I was introduced as the fishmonger who wanted banks just to keep my cash in a safe. This was unfortunate, as I seek to have banks give their clients the option of safe keeping their money or lending it for a duration the depositor is happy with (3 months, 6 months, 9 months, 12, 18, 36, 60 months, etc), with an increasing rate of interest to reflect the sacrifice the depositor is making to suspend consumption now and defer it to a future date.
Robert Peston came on to explain the basic working of the banking system, i.e. we deposit, they lend out. This means the money is on the whole not in the bank, but lent to mortgage holders and entrepreneurs. If a number of people want it back all at once, then the bank will fail as it has lent the money out.
David Buik of BGC Partners came into explain the essential nature of this banking service. He explained the chief reason why this system fell apart at the time of Northern Rock: it was that the interbank lending market dried up and banks could not borrow short term money off each other to pay redemption requests from their customers. If we have more of a capital buffer to absorb losses and more reserves, this type of event, more than likely, will not happen again. This was his essential message.
I asked if he thought it was wrong that a bank can take your money and place it on deposit and tell you that you have instant access to it, in the sure knowledge that they have lent it long, sometimes for many years. He replied of course he did not agree to that.
Interestingly, the comments flooding into J Vine were more often of the variety, “if you kept all money in the safe / vault, there would be no lending”, the implication being that the world as we know it would come to an end.
There is an art to communicating that I must be lacking. It seems so simple to me, that instead of fumbling around in Switzerland dreaming up more and more regulation, more and more controls, and likewise doing that in each and every central bank and government around the globe, just do what was proposed in parliament recently.
Allow people to choose whether their money is safely kept in the bank’s vault (for a modest fee) or lent out, for a specified duration.
Then banks will have to lend money to people and enterprises and match their borrowing to their lending. Pension fund and Life companies that currently take in very long term savings (i.e. up to the duration of your life) are ideally placed to lend long to people who need long term debt. God forbid, we might even get back mutually-owned building societies where you historically saved long and they lent long.
What could be simpler?
Why have we made something as basic as banking, which should be a solid and boring thing, so complicated and so hard for people to understand?
P.S. The producer of the program gave me a hat tip to watch Inside Job, a documentary film that he had screened for his staff. Clearly, I am glad to say, the Beeb are taking their research into this matter very seriously. I can’t comment on the film, not having seen it, but from the reviews it does seem to be a must-watch for all people interested in what has happened and continues to happen to our money when it gets into these banks.
Mr. Toby Baxendale, you are a hero to many of us and keep doing the good work. I just heard your radio interview with Jeremy Vine and I must say…you are a patient man! You were very respectful and courteous. A role model indeed!
It’s amazing to see the degree of confidence with which most of the callers and people in general, put on their assumptions of the functions of the banking system. None of them seem bothered to address the fundamental issue of whether they care at all over of the ownership of their own deposits. Well, I guess maintaining “ficticious” house prices and guaranteeing credit seems a priority, even though you intelligently pointed the flaws in this logic. Foolish me, I thought people aspire to buy houses so they can live in them, not turn them into ATMs. I guess I’ve been living on another planet.
It baffles my mind that most people want on the one hand to direct their frustrations on the bankers and blame them for all their ills but yet at the same time refuse to change the system and subsequently opt for a much simpler, conservative plain vanilla banking system that is safe and morally sound. Enough with idolizing bankers, as Jim Grant put it “Greenspan is just a guy in business suit.”
As for the documentary Inside Job, insofar as exposing both the utter stupidity and complicity of the regulators and some “insiders” from academia, it did an amazing job. But like most documentaries, it fails to correctly diagnose the main problem and opts for the usual mainstream culprits “the deregulation of the banking sector during the Reagan years.” Yes, it does a better job than most currently out there but it leaves the average viewer thinking along the usual line of “if only there was better regulation….”
It’s not a surprise that we from the Austrian school do possess a solid understanding of the current mess but we lag in our delivery of this information in a much more palatable format for the public…just a well-made documentary explaining our take on the crisis, among other delivery media can, in my humble opinion go a long way towards educating the public on the correct understanding of the crisis and more importantly on the subject of economics.
Toby, you have just realised that the BBC is willfully ignorant of Banking and the exploitation of the masses through the income tax system, which is merely a method of wealth transfer from those who create it up to the elite. Peston’s ‘How Banks work’ doc was a classic in missing the point – that banks generate credit out of thin air at a rate of 20 times their deposits and this is what make them vulnerable when depositors ask for their money back. The BBC is just an arm of the GOVT and the Banking and Bureaucratic Elite and a change in the status quo would mean the licence fee goes and the BBC becomes a subscription service thus ending their anti competitive domination and spendthrift ways. “All authority is violence over the people” as Jesus said to Pilate. Not bad considering I am an anti religious athiest!
Part of Mr. Peston’s explanation of the banking system was correct insomuch as it was Utopian. I would agree with his explanation if there was proper enforcement to preserve that ideal. The ratings agencies were the stamp that sealed the path we are still on and until we – especially in the U.S.- begine to channel capital formation into businesses and not housing, then we will only have a repeat, but no doubt augmented credit crisis. I thought it was a fair conversation but not very well conducted. When you have ten minutes to make your point, your hope is that you can at least inspire curiosity in the listener to research this further and I do not know if that was achieved. Still, a chip in the armour of ignorance is a chip in the armour.