The horizon is not so far as we can see, but as far as we can imagine

Actually 1930s solutions stopped financial crises for decades and would work now

Mervyn King, the Governor of the Bank of England had the temerity to suggest that banks be broken up into retail banks and investment banks, thus reducing risk and making them smaller so they aren’t “too big to fail”.

Today the Labor government shot back that such a solution is a 1930s solution, but these days it wouldn’t work. The conservatives suggested that they would only follow King’s suggestion if every other country did too. Which is to say, they wouldn’t.

There’s a strange idea in Britain that the financial sector, which is to say “the City”, represents a comparative advantage for them. This idea mirrors the American belief. Both countries are wrong. What has happened instead is that over-sized fraudulent leveraged returns in the financial sector have driven out investment in the real economy. And since those returns were and are fraudulent, when the collapse came the real economy, aka: taxpayers, had to bail them out.

Over-sized, over-powerful financial sectors are parasitical on the real economy, and actually damage it. This is a clear lesson historically, where economic financialization of any country larger than a city state is almost inevitably disastrous.

What is occurring right now in England is a huge amount of slashing of basic services, as both Labor and Conservatives compete to cut, cut, cut. Huge amounts were spent on bailing out the banks, and now it will be paid for by ordinary people. This is a direct transfer of wealth from the real economy, to the financial economy.

England would be better off with a much smaller, weaker financial sector composed of banks small enough to be allowed to fail. If the possibility of them being taken over is Brown’s real fear (and it may well be) then simply create some ownership restrictions to keep them in British hands.

Splitting banks into retail and investment banks, keeping brokerages and insurance companies separate as well is part of a solution set which kept major financial crises like the recent one from happening for most of the second half of the 20th century. It was put in place by people who were experiencing the Great Depression and had learned the lessons of the roaring 20s.

The inability of our decision makers, whether British, American, Canadian or otherwise to understand those lessons and take action is why it is inevitable at this point that we will have an economic collapse. It is, at this point, all but inevitable, not because nothing could be done to stop it, but because no one will do what it takes.

Such a collapse may be as far as two economic cycles out, or it may be sooner, but it will happen. And the sort of non-argument made by Brown “not a 21st century solution”, which is content empty, is why. The real reason is cupidity. Both the British and American governments are completely captured by monied interests and will do nothing significant to reign in those interests, no matter what the costs or consequences for the majority of the population.

And so those consequences will ensure. By not making another financial crisis impossible, they are making another financial crisis inevitable, and next time it will be even worse.


Corrected: Support for Public Option (Does Not) Collapse If Real Public Option Polled


The Fed and the Pay Czar’s Executive Compensation Restriction Plans


  1. Break up the big banks, what a thought. Mr. Guru hisownself (Greenspan) recently made the same comment at some symposium he attended. He must have also attended a 12 step program and now sees the light. Glass-Steagal (sp) should be wholly reinstated; no exceptions. But, the problem is; these roulette wheel gamblers are addicted to there chosen poison and nothing short of complete regulation will reform their ways. Conclusion? We’re screwed and should alter our financial behavior accordingly. That kind of earth shaking behavior is beyond this nations ability because we can’t get together and agree on much of anything anymore. Cynical? You bet! And I earned it the hard way.

  2. Ian, did you see Frontline this week? It revealed something new to me and I almost fainted when I heard it. Apparently, Alan Greenspan did not even believe in any law against fraud. His take was that the market would sort out the fraudsters and government had no business interfering. His disciples are everywhere in power, even now. Is it any wonder the hands off approach is still in vogue (with the ironic twist that Greenspan himself is now calling for a breakup of the banks)?

  3. Capitalism is the system that favors the accumulation of capital and economic growth. Socialism is the system that favors equitable treatment for workers, including fair distribution of profits. Mixed economies attempt to reconcile the two. The US and UK are chiefly capitalistic countries and they will not voluntarily bridle their financial systems, since finance underpins capitalism.

    Economists like Joseph Schumpeter and Marc Faber he result for will be the same inglorious end that Soviet communism met, for different reasons. Faber sees the system melting down due to excessive debt. Michael Hudson agrees.

    In Capitalism, Socialism and Democracy (1942), Schumpeter offers a different analysis. Capitalism leads to corporatism, and corporatism, while espousing neoclassical principles, is actually anti-competitive and leads to oligopolies and monopolies. This will produce a backlash against corporate excesses as inequality increases, entrepreneurship declines, and workers force politicians to adopt the welfare state. (This could manifest as either socialism or a mixed economy.) According to Schumpeter, it will be “the intelligentsia” whose protests are instrumental in bringing about the change. (Of course, we now know the intelligentsia as the blogosphere.)

  4. @Paul: Actually, Greenspan’s “conversion” was hedged by his typically obscurantist language. I’ll see if I can find the link. But he hasn’t changed his stripes at all.

  5. @Paul: from the NYT:

    Alan Greenspan, the only other former Fed chairman still living, favored the repeal of Glass-Steagall a decade ago and, unlike Mr. Volcker, would not bring it back now. He declined to be interviewed for this article, but in response to e-mailed questions he cited two recent public statements in which he suggested that the nation’s largest financial institutions become smaller, so that none would be too big to fail, requiring a federal rescue.

  6. @ Sean Paul Kelley;

    Thanks for the clarification. I guess skunks can’t get rid of their stripes or smell.

  7. Here’s part 1 – 3 video clip with Elisabeth Warren, interviewed by Michael Moore regarding his new film. It’s an interesting perspective and brings up the subject of prosecution;

  8. S Brennan

    “[T]he Labor government shot back that such a solution is a 1930s solution, but these days it wouldn’t work.”

    Spot on Labor, I’ve noticed the same problem the same problem in science, things that worked in 1930 simply fail to work nowadays. We’ve had to chuck thousands of years of observations and theorem out the window because “these days it wouldn’t work”. For example F = GMm/R^2 at non-relativistic speeds just doesn’t seem to work any more because “these days it wouldn’t work”. Thank God the Labor party was standing by with some of Aristotle’s ideas on the subject or we all would have wound up floating off into space.

    Honestly, some of the crap that comes out of peoples mouth ought cause them to be declared legal imbeciles.

  9. Martin Wolf at outlining why he thinks that King’s solution won’t work.

  10. Ian Welsh

    Oh, bullshit. He draws the line in a stupid place “Kay says payment system and protection of deposits only”. That’s not what retail banking was restricted to in Glass-Steagall, or the 4 pillars system in Canada or any other system I’m aware of. They were allowed to make consumer loans, mortgage loans and so on, and reserve requirements were regulated strictly with no off the books bullshit.

    I usually like Wolf, but he’s too smart not to know that that he’s putting up a strawman argument then knocking it down. Not sure what his real objection is, but I can’t believe it’s the one he made.

Powered by WordPress & Theme by Anders Norén