What entered the crisis was, we now know, an ill-managed, irresponsible, highly concentrated and undercapitalised financial sector, riddled with conflicts of interest and benefiting from implicit state guarantees. What is emerging is a slightly better capitalised financial sector, but one even more concentrated and benefiting from explicit state guarantees. This is not progress: it has to mean still more and bigger crises in the years ahead....So what is the answer? Division of banking into a "utility" and a "casino" is Mr Kay's answer. The big idea is that insured deposits should be backed by "genuinely safe liquid assets" - known as 100 per cent reserve banking. In practice, these assets would be government bonds. This is the most rigorous form of narrow banking....In practice, however, we have gone much further than this. We have also explicitly guaranteed many deposits and implicitly guaranteed many more liabilities. Indeed, in the crisis, policymakers guaranteed all the liabilities of institutions deemed systemically significant. Today, the core financial institutions are, beyond doubt, a part of the state. Mr Kay's proposal is, in sum, to end the fraud: banks would be forced to hold assets as safe and liquid as their liabilities. ...The most important point is that where we are now is intolerable. Today's concentrations of state-insured private wealth and power must surely go. At present, the official sector believes tighter regulation, particularly higher capital requirements, can contain these risks. But this is likely to fail. If it does, we will need to be radical. Yet narrow banking would still not be enough. We would need to rule out quasi-banking. Otherwise, we would soon return to the world of fragility and bail-outs. Funds that replace banks would have to pass the risks directly on to the outside investors. The authorities will not entertain such radical ideas right now. But the financial system is so inherently fragile that radical reform cannot be pronounced dead. It is only dormant.
The authorities will not entertain such radical ideas right now. But the financial system is so inherently fragile that radical reform cannot be pronounced dead. It is only dormant.
So, if we accept that the existing system is deeply flawed and that the necessary and desirable reforms are seriously lagging, the next question is; who is going to do the lifting?...This leaves us with the EU. The EU's response to the crisis thus far clearly falls short of what Wolf is suggesting although a thorough analysis and reform program of EU policy for the financial sector is under way. The EU however possess the legal competence, the scope and the clout to undertake the kind of reforms that Wolf is suggesting although such a program would be as comprehensive and far-reaching as the introduction of the Euro and would entail a clear break with existing policies. Impetus for a grand projet to re-design the EU's approach to finance would have to come from the highest political level with the full support of Germany and France. With Merkel re-elected on a platform of financial reform, Sarkozy unthreatened on the domestic political scene and with support from the European Parliament and Commission, such a development could not be ruled out entirely. Since the IMF now estimates that we still have a 1,5 trillion in writedowns ahead of us, at least, politicians might soon have to consider all options, including Wolf's revolutionary ideas.
The most important point is that where we are now is intolerable. Today's concentrations of state-insured private wealth and power must surely go.
"Today's concentrations of state-insured private wealth and power must surely go"? Oh, please! It will only go when one or more, and perhaps all, of four things happen:
We do what we can and stay tuned. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
