Britannia Radio

Another person talking sense!   People who take risks should 
understand that they can lose as well as gain.  If they lose that's 
their problem and the rest of us need not worry!  If they gain, good 
luck to them provided they don't do false accounting or fiddle the 
books [That's what Brown does!]

Since the investment arms of the banks are what has caused the 
problem  let people invest in them separately if they want - win or 
lose.  But retail banking must play to very clear rules and be 
closely supervised.

I'm getting giddy with so many people talking sense.
xxxxxxxxxxxxxxxxx cs
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FINANCIAL TIMES 16.3.09
Capitalism needs a revived Glass-Steagall
By Nigel Lawson

That capitalism has been shown, in practice, to be endemically flawed 
should come as no surprise. That is the nature of mankind. What is 
more important is that history, notably the history of the world 
after the second world war, has demonstrated beyond dispute that 
every other system of economic organisation is far worse. So 
capitalism both deserves to survive, and will survive, just as it did 
after the even greater economic disaster of the 1930s.

But there is another lesson of the 1930s. It is that although 
capitalism survives it is capable of retreating behind a 
protectionist shell, at great cost to global prosperity. This is a 
real danger today. The "Buy American" provisions in President Barack 
Obama's fiscal boost are an ominous sign.

The impulse to resort to protection when economic hardship suddenly 
strikes is, of course, always present. But there is today a dangerous 
new factor which magnifies the threat. The leaders of some of 
America's largest corporations have already joined up with organised 
labour (the AFL-CIO) to urge Congress to impose tariffs against 
imports from countries (such as China, for example) which are 
understandably unwilling to bear the heavy costs of an obligation to 
curb their carbon dioxide emissions. There is considerable support in 
Europe, notably within the European Commission and in France, for a 
similar approach.

It is essential, both in the US and in Europe, that this is 
resolutely rejected. The first and most important requirement for the 
future of capitalism is the preservation of globalisation, and the 
massive benefits it confers on mankind, in particular in the 
developing world. There are, inevitably, costs of globalisation; but 
they are hugely outweighed by the benefits. So resistance to 
protection, whatever arguments may be used in its favour, must be 
rigorously maintained. Nor is this an exclusively economic argument. 
It is a moral imperative, as well. Moreover, a trade war with China 
could well have unpredictable, and potentially highly damaging, 
political consequences.

But will capitalism need to change in the future? Again, the lesson 
of history is that the answer is "not really". The economic cycle is 
endemic and inescapable, and everyone (with the exception of prime 
minister Gordon Brown) has always known this. What the current crisis 
does underline, however, is that a cyclical downturn associated with 
a collapse of the banking system is by an order of magnitude worse 
than a normal cyclical downturn.

So there does need to be a change to the banking system. In a 
nutshell, we need to return, in all major financial centres, to the 
separation of commercial banking from investment banking that was 
enforced in the US under the 1933 Glass-Steagall Act, until it was 
repealed by President Bill Clinton in the 1990s.  [Another politician 
with a multi-faceted disastrous legacy -cs]  This is all the more 
important since we now live in an age in which the acquisition of 
wealth appears to count for more than reputation.

Achieving this will not be easy or popular in banking circles, but it 
can be done. We have time to get it right: this is not firefighting, 
but fireproofing.

The overriding reason why this separation is essential is 
straightforward. It is only a commercial banking crisis that poses a 
systemic risk and can lead to the sort of mess we face today. It is 
folly to allow core banks to be in a position where they can be 
brought down by exciting but highly risky investment banking 
activities. But the idea that this can be prevented by judicious 
regulation of investment banking activities is a chimaera. In the 
real world, that is not possible: either the investment bankers will 
outsmart the regulators, or the regulators will respond with damaging 
overkill.

Thus investment banks should be left to their own creative devices, 
and subject essentially only to the discipline of the marketplace. 
This leaves a much more limited, and practicable, but still 
absolutely essential, role for bank supervision and regulation: 
namely, to ensure that the core commercial banking system is 
thoroughly sound and adequately capitalised at all times.

It is worth adding that it is the capital adequacy regime, and not 
primarily interest rate policy, which needs to be responsive to asset-
price bubbles.
What else (other than the maintenance of what passes for world peace) 
is needed to ensure that capitalism survives (as it will) and 
prospers (as it should)?

There is a danger in many parts of the world, and certainly in the 
UK, to imagine that since this is a global problem it requires a 
global solution, so the overriding need is for a global agreement. 
This may sound statesmanlike, but it is in fact a dangerous 
delusion.  [You at the G20- are you listening? -cs] The overriding 
need is for the authorities in each country to put their own house in 
order.

The threat from terrorism is an instructive parallel. Terrorism is 
indeed a global problem, and international co-operation is clearly 
desirable. But that in no way diminishes the overriding duty of 
national governments to do what is necessary to protect their own 
people.

The same applies to financial regulation. As the Basel II bank 
capital rules clearly showed, international agreement is slow in 
arriving and, when it does arrive, it is likely to prove inadequate. 
As far as the UK is concerned, Mr Brown's decision, as chancellor, to 
scrap the strengthened system of bank supervision I put in place in 
1987 and replace it with a system that has proved largely 
dysfunctional was not very clever. Without waiting for global 
agreement, however desirable that may be, we need to, and can, do a 
great deal better.
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The writer was the UK's chancellor of the exchequer from 1983 to 1989