Anyone following the ongoing financial crisis (yes, it’s not over yet) closely these past few years has probably noted the markedly different rhetoric coming from two central banks on opposites sides of the Atlantic.
Is Mervyn out of his mind? I mean, however will London’s economy and the U.K.’s tax receipts survive if megabanks like HSBC relocate to Singapore?
The oft-repeated threat by Too ‘Bigger’ to Fail megabanks that they’ll leave town for lax regulatory and lower tax enclaves in Switzerland, Asia, etc. shouldn’t scare anyone. If in fact they do carry through on this threat I for one would be at the airport to wave them off goodbye.
For starters, many megabanks don’t pay much in the way of local taxes. But that’s not the main reason we should call the Too Bigger to Fail bankers’ bluff.
With respect to megabanks’ threatening to leave town, author Michael Lewis recently made the following analogy:
Your local utility is found to be poisoning the community’s water supply, which is making people sick. However, in order to continue providing electricity the utility says that it has to be allowed to poison the water. If the community doesn’t allow it to keep poisoning the water then it will leave town for another location which is ok with this.
The obvious response to this lunacy is to tell the utility to take a hike — our community can find someone else to provide non-polluting electricity!
Banks are like utilities. They both fulfil important functions. However, Too Big to Fail megabanks are not the only firms capable of providing banking services. If Too Big to Fail firms leave town then other smaller banks, which don’t poison the local water, would gladly step into their place. There is nothing so special that Too Big to Fail banks do that can’t be easily and quickly replaced. In fact, they are much, much easier to replace than an electricity utility.
Megabanks pose a risk to the health of the economy, just like the water-poisoning utility poses a risk to the well being of the community. When something goes wrong at the Too Big to Fail banks, like it did in 2007-2008, everyone suffers in the form of bigger deficits, higher taxes and lost jobs.
Meanwhile, it looks to be another record setting year for banker bonuses.
Between Governor King and the Independent Banking Commission’s Sir John Vickers it would appear that the U.K., unlike the U.S., has the right people in the right place at the right time.
Bravo, Mervyn! Keep up the good fight!
P.S. Interestingly, Mervyn in his pre-BoE life was Michael Lewis’ tutor at the London School of Economics.