Scotland: ‘The banking crisis’…

MICROMANAGEMENT AND SEPERATE REGULATION

RESPONDING, firstly, to Iain Macwhirter, whose article entitled, “Do we want to end up like Iceland?” appeared on the website of the Guardian Newspaper, dated Saturday 18^th October, 2008.

Mr. Macwhirter writes:

… Bad news for the SNP: the banking crisis makes Scottish independence look rather less attractive than before.

ONE (REVISED):

MD:

Iain Macwhirter fails to mention that if banking in Scotland had been controlled and regulated entirely in Scotland, the crisis concerning the Bank of Scotland, for example, would certainly not have dissolved in the manner by which we have witnessed. With banks in the UK lying subordinate to the authority of the Bank of England, the central bank, how much say did Scotland really have in the demise of a proud and cultured institution stretching back more than 300 years?

Banking shocks in recent weeks and months, stemming primarily from the U.S. sub-prime mortgage and loan market, has hit Scotland in disproportionate terms probably harder than anywhere else in the world. With Scotland’s two most powerful institutions having succumbed to the volatility of financial markets, I do believe that had separate financial regulations been devolved to Scotland, the current financial anathema being felt by Scotland wouldn’t have been as acute. If regulatory control had been under the Scottish Government, I make the assumption confidently that many of the weaknesses and loopholes within financial services would at least have been better than what we previously had under the FSA. The FSA (Financial Services Authority) has been brutally exposed in recent days in just how far short its standards have fell in relation to proper and transparent accountability. It is an organisation that is constantly littered with bureaucratic rules and red-tape, but is far from complete in how it is meant to be monitoring and observing financial institutions across the board.

The breakdown of Scotland’s two largest banks is largely down to the incoherence of the FSA, and from this the UK Government must take the appropriate level of blame in failing to oversee the market when, quite clearly, free-markets within financial services has been a disaster waiting to happen. From bankers trading complex financial instruments such as derivatives, which many bankers do not fully understand, to the previous practices of short-selling which has left economic and financial turmoil, many of these weaknesses lie directly at the door of the UK Government and FSA? The irresponsible and inept practices of many bankers also lies central to the near collapse of financial markets as millions of people around the world have simply stared into the abyss watching tens of billions of pounds wiped off the value of investments and share portfolios.

Despite Ireland’s difficulties, Scotland cannot be compared on a similar level, as much as it gives political commentators an ego that Scotland would suffer similar failings. The socio-politics are, for example, different between the countries, and would remain so even if Scotland was granted independence. Whilst Ireland has some useful economic history to consider, such as its rapid economic growth from EU funding and block grants, political decisions taken in Scotland might well have been different, ceteris parabus. Scotland’s future investment and trading partners must look further afield, rather than being constantly inhibited by British foreign policy, if Scotland is ever to have a better future in realising her full potential. Central to this is banking and the autonomy that is required within an indigenous nation.

Scotland needs her own central bank, regulatory bodies and currency. If that was to happen, Scotland would be better protected and not as we currently have in playing second fiddle to a system that is distorted, over-bureaucratic and playing to the tune of a Westminster gig.

The issue of a wealth or oil fund being created in Scotland, similar to that which Norway operates, should be central in any fiscal autonomy that Scotland may enjoy in the future.

- The article written by Iain Macwhirter considers aspects of the recent collapse in the banking system of ‘Iceland’ as well as comparing Scottish models with ‘Ireland’.

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TWO:

RELATED [The price of stability], Chris Colvin: Guardian Newspaper, Saturday 18th October 2008

MD:

I’m not so sure regulation will stifle the markets, although it depends, now, on how enforcing the regulatory authorities will become. Investors and depositors money must be the mainstay by which the banking system exists, stability will be cemented once the excessive risks have either be eliminated or greatly reduced. Inevitably, whatever happens from here-on-in an element of risk will always still need to be assumed. Whenever banks lend money, either to their customers or to other banks through inter-bank lending, a risk exists in that loans advanced might never be recovered.

However, my view is that a new world order – a global “policeman” – is now urgently required perhaps in replacing the World Bank and IMF or by reconfiguring the Bretton Woods as we know it. Global financial stability very much depends on clear and unambiguous supervisory codes of governance. In general terms, world bodies are awash with inconsistencies and in urgent need of reform.

Traditional forms of banking, i.e. cash deposits used in making loans to worthy consumers, will always remain the safest and surest way of creating liquidity-flows. Loan spreads, the means by which banks make profit on transactions, should be variable, as they well can be; dependant on suitably qualified credit risks and assessments. Tightening areas within credit assessment, too, is a palpable factor in sustaining stability.

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THREE:

RELATED [Don't sell taxpayers short], Henning Meyer: Guardian Newspaper, Sunday 19th October 2008

MD:

I believe a long-term sustainable solution must be found by either reforming current institutions like the IMF and World Bank, or by reconfiguring from scratch a new Bretton Woods. Bretton Woods, of course, constructed in 1944 in the aftermath of the financial shocks after WW II, needs now to reflect modern day realities of the 21st century. The advent of globalisation which has spread rapidly throughout the world affects all areas of our lives whether that is in personal financial matters, wider banking or how we consume or acquire products. The nature by which we all do business is so very different to when Bretton Woods was initially formed: calls for a world governing policeman, in monitoring more robustly the actions of financial institutions, seems apt in the current financial climate.

Behind every transaction we conduct, the banking system lies central and, because of it, the safety and security of how financial markets are stabilised is as important to government, who now hold significant levels of ownership, as it is to the person who accesses his or her bank account in paying for goods and services on a daily basis. Essentially, that is the very essence by which liquidity-flows and why the banks actually exist.

My view on the overarching nature of Mr. Meyer’s article is that the government should retain large areas of share capital until the government is confident that many of the reckless and irresponsible banking practices of many bankers have either been removed or greatly reduced. The taxpayer expects, as a minimum, that the government eliminates, as far as is practicably achievable, any possibility of a re-occurrence along with a swathe of measures that restrict the very dangerous nature of open and free markets. Even given the current debacle, many bankers still cannot be trusted that, if things were left unregulated, their desires of seeking profit at almost any cost would not produce a repeat of the calamity we have all witnessed.

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© Mark Dowe 2008: all rights protected

mark.dowe@googlemail.com