Banking Commission: A huge, missed opportunity to prevent economic failure

The Vickers Commission’s Interim Report on Banking is a huge missed opportunity; a betrayal, some might say, writes leading financial journalist Ann Pettifor.

Ann Pettifor  is the director of Policy Research in Macroeconomics (PRIME)

The Vickers Commission’s Interim Report on Banking is a huge missed opportunity; a betrayal, some might say. The report acknowledges the vast scale of the liabilities of the British banking system – private liabilities which at 450% of UK GDP eclipse Britain’s public debts of just 58% of GDP.

As Peter Boone and Simon Johnson wrote in the Daily Telegraph, these liabilities:

“…constitute a time bomb with the potential to create mass financial devastation.”

The Vickers Commission has so far recommended little to defuse these explosive devices.

We should not be surprised at their failure to act as an effective bomb disposal unit. Government, focused almost exclusively on the far lesser threat of public sector debt, has drawn their remit very tightly.

The commission’s terms are simply “to promote financial stability and competition”. To reinforce these limited aims, the government appointed two ex-bankers, and a competition economist – micro-economists all – and only one macroeconomist, Martin Wolf; the commission chair, Sir John Vickers, obtained his PhD in “Patent Races and Market Structure”.

As a result there is little attention in the report to historical context; nor does it explain the vast expansion of the finance sector since 1971 when Chancellor Anthony Barber first de-regulated finance under the guise of ‘Competition and Credit Control’ (dubbed ‘all competition and no control’ by economists).

Forty years of systematic de-regulation has inflated the banking sector’s “total balance sheet to more than four times (the UK’s) annual GDP”, according to the commission. Simultaneously, and because of the finance sector’s unrestrained usury, greed and speculation, Britain’s productive, manufacturing and agricultural sectors have systematically shrunk as a share of GDP.

One big disappointment is that commissioners and their advisers appear to lack a grounding in monetary theory. There is little evidence in the report of an understanding of the private (and shadow) banking system’s role in credit-creation, in fixing the ‘price’ of borrowing (the rate of interest) and in allocating credit.

Instead, commissioners treat credit as they would gas, or oil, tomatoes or corn – and dutifully attempt to promote competition in the supply of what Karl Polanyi once defined as a ‘false commodity’. They paint a quaint and antiquated picture of a banking system that uses:

“…funds deposited with them to provide loans to businesses to allow them to undertake productive economic activities, and also to consumers.” – Para 2.8 of the report

Competition, it is assumed, will ensure the fairer and more efficient allocation of customer deposits amongst firms and consumers. In other words, the commission ignores the existence of bank money, and the inter-relationships of bank money and credit and simply circumvents the role of credit in the economy – at a time when private sector credit/debts vastly exceed deposits in banks.

This is a fundamental flaw in analysis and approach, and dooms the commission to obscurity.

Of much greater concern is the role the commission will play in dooming the British economy, and the British people, to yet another financial crisis, and prolonged economic failure and suffering.

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27 Responses to “Banking Commission: A huge, missed opportunity to prevent economic failure”

  1. Knut Cayce

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  2. paulstpancras

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  3. James Mills

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  4. t hill

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  5. Pucci Dellanno

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  6. Martin Tiedemann

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  7. Former GONW Branch

    RT @leftfootfwd: Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z says @AnnPettifor

  8. Mark Stevo

    Ann’s in a world of her own. No one’s discussing these issues because no one is seriously considering abolishing fiat money. It’s a shame, because she makes some observations that I agree with (impending financial apocalypse in the US), but there’s not much in this article that’s remotely practical.

  9. Tim Worstall

    Can’t hide things from Ann, can you?

    “Forty years of systematic de-regulation has inflated the banking sector’s “total balance sheet to more than four times (the UK’s) annual GDP”, according to the commission. Simultaneously, and because of the finance sector’s unrestrained usury, greed and speculation, Britain’s productive, manufacturing and agricultural sectors have systematically shrunk as a share of GDP.”

    As one sector grows as a percentage of the economy other sectors shrink as a percentage of the economy. As the NHS has grown as a percentage of the economy manufacturing has fallen as a percentage of the economy. As the education system has grown as a percentage of the economy agriculture has fallen as a percentage of the economy.

    Just completely amazing how such things happen really. You might even think that it;’s a mathematical necessity….

  10. In which we praise the perspicacity of Ann Pettifor

    […] I don’t know how she does it you know. […]

  11. NewLeftProject

    Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProject http://is.gd/4qksaJ

  12. Ellie Mae O'Hagan

    RT @NewLeftProject: Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProje …

  13. David Wearing

    RT @NewLeftProject: Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProje …

  14. GuyAitchison

    RT @NewLeftProject: Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProje …

  15. Gary Banham

    RT @NewLeftProject: Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProje …

  16. HEATHER WAKEFIELD

    RT @NewLeftProject: Responses to the Banking Commission: @AnnPettifor at @leftfootfwd http://is.gd/AxT4q0 | Hugo Radice at @NewLeftProje …

  17. Daniel Pitt

    Banking Commission: A huge, missed opportunity to prevent economic failure: http://bit.ly/gVJi1Z #ConDemNation

  18. James Doran

    Banking Commission: A huge, missed opportunity to prevent economic failure, says @AnnPettifor http://bit.ly/fYpavJ

  19. scandalousbill

    Tim Worstall,

    You say,

    “As one sector grows as a percentage of the economy other sectors shrink as a percentage of the economy. As the NHS has grown as a percentage of the economy manufacturing has fallen as a percentage of the economy. As the education system has grown as a percentage of the economy agriculture has fallen as a percentage of the economy.

    Just completely amazing how such things happen really. You might even think that it;’s a mathematical necessity….”

    This statement is most curious considering the sector declines outlined by Ann occurred in real terms, (i.e. decline in revenue and output generated, human resources deployed, etc.), and not as mere proportion of GDP or by comparison with each other or other sectors. More a result of policy than mathematics.

  20. Luis Enrique

    I’d be very surprised if the authors don’t understand how banks create money, seeing as it’s taught in every first-year economics course in the country. Quite how that undermines the idea that the degree of competition has something to do with bank pricing power is beyond me.

    I’d be pretty bloody surprised if the authors didn’t understand the shadow banking system too, unless they were asleep during Northern Rock etc.

    As for a “betrayal”, the commission does have to work within the bounds of the possible, you know.

    Your priority appears to be to reduce the size of the financial sector’s balance sheet (at least, you appear to be complaining it’s too big) so what are you ideas here? Perhaps they could call in loans … does that sound like a good idea to you?

  21. Tim Worstall

    “This statement is most curious considering the sector declines outlined by Ann occurred in real terms, (i.e. decline in revenue and output generated, human resources deployed, etc.)”

    Err, no. Ann was most careful to state “as a percentage of the economy”. For to state that manufacturing (just to take one I know the numbers for in detail) has not declinded in either revenue or output generated.

    http://www.theregister.co.uk/2010/02/22/manufacturing_figures/

    Manufacturing output has risen in real terms by 25 % since that liberalisation of finance.

    As to a decline in “human resources deployed” this is known as a good thing. You know, rising productivity of labour? The thing which, in the end, makes us all richer?

  22. scandalousbill

    Tim Worstall,

    You say,

    “Manufacturing output has risen in real terms by 25 % since that liberalisation of finance.”

    As “proof” you offer your rather bizarre and meaningless “something called the Index of Production and it’s a chart of the value of manufacturing output in the UK since just after WWII.”

    You are careful to point out:

    “The first and most obvious thing is to point out that the Index isn’t measuring how much we make: it’s measuring the value of what we make. This is, of course, the only thing we should be interested in: increasing the value of what is produced means that there’s more value to be shared among all of us doing the producing…”
    “We’ve moved up the value chain, from simple stuff to complex stuff and people are willing to pay high amounts for that value we’ve created in complexity (that they are willing to pay is the definition of having created the value).”

    Employing the “index of production”, using the year 2005 as 100%, you further maintain in your Register article,

    “It’s an index and 100 is defined as the level of output in 2005. As you can see we produce some two and a half times what we did in the 40s,”

    So from a 25% increase since the liberalization of finance, cited by and as 1971, we have a 250% increase since the 1940s. WOW!! Impressive indeed!

    The problem is, for this model as you have constructed it, to apply accurately, the values of the 2005 pound must be the same as the value of the pound of the 40s. There is no adjustment in your model for inflation, which between the 40s and 2005, most, if not all, economists have agreed was substantial. Assessments based upon the raw values you have stated is therefore meaningless, the trend you have depicted is false.

  23. Tim Worstall

    “The problem is, for this model as you have constructed it, to apply accurately, the values of the 2005 pound must be the same as the value of the pound of the 40s.”

    Don’t be a fool. It’s an index. That’s why it’s an index, so as to adjust for the value of the pound, to adjust for inflation. Blimey, can someone do something about the education system please?

  24. scandalousbill

    Tim Worstall,

    What an arrogant response.

    You say:

    “Don’t be a fool. It’s an index. That’s why it’s an index, so as to adjust for the value of the pound, to adjust for inflation. Blimey, can someone do something about the education system please?”

    First point, you introduced it as an index and I gathered it was so (the title was a dead giveaway). I did not say it was not an index, I said it was false.
    You maintain that you have adjusted for inflation and the value of the pound. I have no disagreement with you setting your price index to 2005 sterling values, although I would be skeptical, given the diversities you outline regarding the increased complexity of UK manufacturing, to apply a law of one price implied by your model.

    The weakness of this approach can be gleaned by looking at global statistics from the WTO. With reference to the 1948 to 1998 period the note a few inconvenient truths against your prescribed growth rate of 2.5 times.

    Global “Merchandise trade grew by 6% annually, or 18 fold” during this period.
    “Aggregate world trade in 1998 was $6.6 trillion, of which $5.3 trillion (80%) was merchandise and $1.3 trillion (20%) was commercial services. (Merchandise trade in 1948 was $58 billion.)”

    http://www.wto.org/english/thewto_e/minist_e/min99_e/english/about_e/22fact_e.htm

    You maintain:

    “As you can see we produce some two and a half times what we did in the 40s, when absolutely everyone, to hear the stories told, was gainfully employed making whippet flanges. So at first glance it would seem to be untrue that we actually produce less than we used to….

    “So, the prevailing wisdom seems to be wrong in certain important respects. As in directly wrong, and entirely inconsistent with this universe…”

    To put it mildly, were the values stated in your index to apply as stated, the UK would have badly lagged behind global developments as opposed to rising to the fifth largest nation as many others have observed.

    Your index fairs no better when situated in the context of UK specific indicators. I refer you to the House of Commons RESEARCH PAPER 99/20 dated 23 FEBRUARY 1999 entitled “Inflation: the Value of then Pound 1750-1998” by Robert Twigger.

    http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-020.pdf

    Twigger’s historic comparisons cover a wider time period (1750 to 1998) than your index, and, as you can gather, do not cover the post 2000 period, but as you say that you are a person more concerned with trends than detail, the comparative scales are useful for discussion.

    He states:
    “Since 1945 prices have risen in every year with an aggregate rise of over 22 times.” In 1945, UK GDP was in the range of 9,816 million pounds, by 2005 it had risen to 1,209,334 million pounds. The proportional increase here, again is over 22 times and therefore coincides roughly with the inflation increases indicated by Twigger’s Research paper.

    Even considering that UK manufacturing in the late 1940s comprised roughly 44% of GDP, shrinking to circa12% by the post 2000 era, your central point again differs quite dramatically from these observed trends, For your index and growth proportions to apply from the standpoint of 2005 looking back, Your notation of 40% of 2005 values would imply that manufacturing values of the 1940s would exceed that of total GDP observed, from the standpoint of 1940s looking forward, the growth ratios you offers would be miniscule in the context of current GDP values.

    I say you have distorted these historical trends in constructing your index, your “findings” are therefore erroneous and lack an empirical base due to fundamental flaws in your approach.

  25. Tim Worstall

    It’s not my index. It’s from the Office of National Statistics. It is the measurement of the value of industrial production in the UK, adjusted for inflation.

    Let’s just get this straight. Manufacturing has fallen as a percentage of the UK economy. The UK economy has fallen as a percentage of the global economy.

    These are both true statements. However, so are both of these statements:

    Manufacturing output in the UK has risen. The size of the UK economy has risen. Yes, both after inflation.

    Why are you having such difficulty understanding these simple points?

    Further, we can also explain them all. Other economies have grown faster than the UK eonomy. Nothing very surprising there, India and china are, finally, getting rich, lifting hundreds of millions out of absolute poverty. It really isn’t surprising that a poor country grows faster than a rich one.

    Secondly, other parts of the UK economy have grown faster than the manufacturing part of the UK economy. For example, health care was about 4% of the economy in 1945. Now it’s about 10%. What, you think that’s a bad thing?

  26. scandalousbill

    Tim Worstall,

    Nobody would deny that growth has occurred in these sectors, so has population during this time period. This does not seem to be the salient point.

    It seems to me that Ann’s point about the systematic shrinkages observed is more than a functional simple relationship of the comparative measurement vis a vis other sectors. The increase in NHS comprehensiveness is a good thing.

    However, the transformation in the auto industry, for example, from a largely domestic in house multi tiered manufacture to the mere assembly centre of externally produced components, is a fundamental change, and I would argue, not such a good thing. The financial sector is not immune from the declined or under-investments in this sector. This decline has happened despite relatively favorably labour productivity levels as indicated by many analysts such as Mary O’Mahony.

  27. scandalousbill

    Sorry,

    Please add to the above,

    She noted the impact of higher investment capitalization in a comparison between the UK and Germany:

    ““Differences in the amount of fixed capital available to manufacturing in the two countries may account for some of the gap in labour productivity. Research at NIESR suggests differences in the skill levels of the work-force is an important factor determining relative productivity. …. “
    “The greater number of hours worked in British manufacturing is most pronounced in engineering, vehicles and metals implying an even greater productivity gap than on a per worker basis…
    the ratio of capital to labour input was 38 per cent higher in German than in British manufacturing in 1987 so a significant proportion of the productivity gap should be due to this greater German capital intensity…”
    http://www.allbusiness.com/human-resources/employee-development-employee-productivity/291281-1.html

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