I want to talk a little bit about Banks, those “custodians” of our cash that we all love to hate.
But it’s not just the bank on the high street I want to talk about, it’s about the concept of banking as a whole. We’ve all (I hope) heard how banking started, Initially, it was money exchange between countries and areas within countries, which expanded into merchants depositing excess funds with those money exchange people and goldsmiths and the like. These same people then made loans to other people, mostly keeping enough to cover redemptions if someone wanted their money back. If they didn’t, they were bankrupted as the inevitable borrowing short and lending long did its certain destruction of liquidity. So the first thing to remember about banks is that what counts is liquidity. It’s what sunk all those banks in 2007 and 2008. The confirmation it was liquidity – not malfeasance – is the fact that not one person lost one penny or cent in the bankruptcy of Lehman Brothers.
So the thought that our wonderful government is considering raising the bank levy from 3% to massively more should be a call to all thinking people to get out on the streets and storm Parliament and the Treasury. What do they think happens when you take money away from bank liquidity? Less can be lent out that’s what and right there is yet another brilliant anti-growth policy which this lot excel in.
But I digress. I suppose the biggest inter country and interbank transfers now are from the richer to the poorer countries in the EU. The excellent Mani Basharzad has written a clear and precise description of the impossibility of the EU Project. What happened was the weaker, less conservative countries of the EU went on a splurge when they could borrow cheaply and of course ran into real problems. Without being able to devalue their own currency, they had somehow to find another way. And give the EU leaders their due, they did. They transferred money from the more industrious and conservative countries to the party - party, bribe the electorate lot. This did two things. It suppressed growth in the countries where growth was both possible and expected. And it to a large extent allowed the party to continue. Interestingly, the worst offender (arguably Greece) eventually discovered that there is benefit in growth within your own economy and is now doing very nicely, thank you. As Mani points out in the good old days when there were smaller country units they all competed to outdo their neighbours and as a result the great Italian Cities burgeoned. Try to tax your elite a bit more than tzhe chaps next door and hey presto they moved there. So as ever, competition was an amazingly good way of making things work. Our present government in the UK should try to learn from history. Not that they will of course.
In a side-show, please note we have just or at least are just about to breach £3 TRILLION of indebtedness which works out at £100,000 per household in the UK. And it’s being added to at the rate of some £300 million PER DAY. You probably know we haven’t run a budget surplus since 2000-01.
But I digress again. Back to the banks. One of the more interesting facts is that in Australia the overwhelming lending is to mortgages. Roughly 65-70%. Yes you read that correctly up to 70% of all Australian lending is to residential mortgages. Typically, for business they encourage equity over loans as they do in America. In the simplest terms this makes decision making within companies easier and quicker. What the banks have to do have to do is balance their long-term liabilities (mortgages extending 30 years and beyond) with deposits that may only be overnight. That said, it is what they have done since inception so they are very good at it.
The real point here is that banks and their lending are central to the health of the economy. In case you disagree, if you are old enough to remember like me what happened in the secondary banking crisis of 1975-6, credit basically seized up for 6 months. The seventies were pretty much a lost decade for the UK economy, under both main political parties, and capital destruction was on a level not seen since The Wall Street Crash of 1929. In more than one case a piece of ground with no planning had a first a second and a third mortgage, all predicated on planning and build out. In the end, mortgages two and three were wiped out, in some cases wiping out the lenders, and the first mortgage typically ended up with about 20% repaid. The effective destruction of liquidity, repeated again and again, exceeded 80 to 90%. That’s LOST and unavailable for bolstering the economy or lending to profitable businesses.
But here’s a little wrinkle for the banks. You have a customer who makes £1m a year profit. Being a canny soul, he reinvests that in machinery for his business and as a result pays no tax that year. Bank gets zero. Fortunately, his brother, also making £1m per year, decides to build a factory costing £1m. Banker rubs his hands. The brother has to pay tax on £970,000 ie £242,500. So the banker can lend him a whole lot of money essentially at very low risk and pay himself a bonus for being terribly clever. And, of course, arrangement fees, break fees, etc etc.
I came across a horrific statistic this week. Japan has built lots of high speed trainlines of course which are an example to the world of how trains should be run. But they are also an example of how to build them in the first place. UK and Japanese labour rates are pretty similar and Japan is even more crowded that the UK. Yet they manage to build train lines at One-sixth – that’s at a cost of £1 in Japan to every £6 spent in UK. This doesn’t surprise me in the least as I recently wrote about how our infrastructure costs where essentially double anybody else’s. The reason is the UK’s institutional insanity over planning, health and safety and net zero. In case you are wondering, despite our obsession with ‘Elf and safety, we manage to kill around 32 people per 100,000 per annum in industrial accidents. In Japan, it’s about 2.5. And in France, where there is in effect no such thing as H&S, it is about 2. In France, you are responsible for your own safety, and boy does it show. The total stupidity of our regime was brought home to me the other day when I was sent a set of instructions for a very large and very dangerous machine. Alongside all the “how to” sentences there was one that stood out for me. It read “ Do not insert any part of your body into the machine, especially genitals.” You may laugh, but our system is such that if that WASN’T in the instructions somebody would do it and then sue everyone and his grannie because he wasn’t warned. Being stupid is no justification for not saying on Cadbury’s Fruit and Nut – “Warning, may contain nuts.”
Finally, a small paragraph you may have missed. The National Audit Office has refused to sign off the UK Government accounts for the third year running. If it was a company it would have been liquidated by now. And the Banks, who despite appearances are not stupid, would have called their loans.
