Nearly headless Nick Sarkozy wants to see a new Tobin tax, that’s a kind of global tax on bank transactions. The critics are already lining up, but surely in this respect at least he is right.

The idea of a Tobin tax was first proposed by the economist James Tobin back in 1972. The idea then was to put a tax on all currency transactions. His plan was never accepted and then, come the 1990s and noughties, market fundamentalism took over and we saw a preoccupation with the efficient-market hypothesis. In an age when markets are considered to be all-wise and perfect, any kind of tax on their activities would inevitably have been seen as an anathema.

But the tide has turned against market fundamentalism. Why, even George Soros, himself the ultimate market fundamentalist in the early 1990s, has written a string of books bemoaning the evils of the markets.

The efficient-market hypothesis is dead. The banking crisis shows without a doubt that when markets are given free rein, they can become self-destructive.

And then there’s bankers’ pay. Does anyone really believe multi-million pound bonuses can be justified? Okay, one can argue that we have to put up with excessive bank awards for bankers in the UK, or the City will lose its pre-eminence, but that argument should not be allowed to detract from the rights and wrongs of massive pay awards for people whose practices we now know can sometimes lead to global economic crisis.

The UK may be powerless to do anything about bankers’ pay on its own. The UK may be powerless to regulate baking practice across the world. But if anyone tried to enforce a form of global banking regulation, a global banking tax, and better still an attempt to restrict bankers’ wages across the globe, then surely that is a good thing.

Mr Sarkozy often gets it wrong, and this column has had fun in the past pointing out why. But on this occasion, his plan to use his chairmanship of the G20 to try and bring in global measures to restrict banks from their recklessness, is surely the right idea. You will read lots of articles to say why Mr Sarkozy is wrong, and no doubt there are faults in some of the detail, but the majority of criticism will come from those who refuse to accept that the efficient-market hypothesis has been proven wrong, and wrong without a shadow of doubt.

So the Chief Executive of RBS, Stephen Hester, is going to get his £9m bonus for 2010. It is thought that banks which are government owned, or at least partially government owned, have a total bonus pool of around £1bn. The Independent quoted a spokesman for David Cameron as saying: “We’ve made a broad statement which is about the need to see some restraint and some responsibility from the banks, but we are not going to set bonus pools for individual banks.” See: Tough talk on bank bonuses comes to nought

It’s unfair, of course it is, but what should the government do?

Yesterday, it was told here how total GDP in 2050 for the so called E7, that’s Brazil, Russia, India, China, Mexico, Turkey and Indonesia, is expected to be half as much again greater than total GDP for the seven countries that make up the G7. See: The world in 2050: India will be close to overtaking the US, and the UK will be a long way down the premier economic league

But the emergence of these economies is an opportunity for the UK, and it’s especially an opportunity for the City. If we play this one right, the City could bring in trillions of dollars to the UK exchequer over the next half a century; if, that is, we let it. And maybe allowing banks to pay out massive bonuses is essential for the City to fulfil its potential.

There are five snags with this pro banks and bonuses argument. Firstly, if the City is made less attractive, will banks really exodus? There isn’t enough space in Switzerland’s financial centres; the French and Germans are far more anti bank and massive pay awards than the UK. Bankers are hugely unpopular in the US, too. That leaves Asia, places such as Singapore. The government could try calling the bankers’ bluff, and say, okay then, try and find somewhere else. And this strategy may work, but it may not – it’s risky, and if bankers do indeed leave these shores, then UK plc will be a lot worse off.

The second snag relates to the risk of another banking crisis. Supposing we do indeed allow banks to fork out huge bonuses, and the City flourishes, growing so that it dwarfs its current size. Then suppose we have another banking crisis, and once again the UK government has to bail out the banks. If this happens, the UK may go bust. So maybe, encouraging a strong banking sector is too risky. And apologies here, for we are set to descend into a cliché-rife sentence. But maybe the City is not the goose that lays the golden eggs; rather, it is like a cuckoo, ultimately proving deadly to the other birds which inhabit the nest.

The third snag relates to the idea of snake oil. This was described by Robert Shiller and George Akerlof in their book Animal Spirits. Their point is this: back in the late nineteenth century, salesmen would travel around the US offering to sell some kind of elixir of life, or cure-all medicine, when in fact they had no such thing. What they had was snake oil. Maybe the City sometimes produces snake oil – products that do no more than shuffle money around, and create nothing. Don’t forget, Lord Turner, top man at the FSA, once said much of what banks do is useless. Does the UK really want to be dependent on a sector that produces snake oil?

The fourth point relates to whether or not the City really does help the rest of the populace. So during the City-dominated boom of the noughties, the UK economy grew, but households were hardly better off. Unless, that is, they bought into the snake oil dished out by the City: surging house prices which created the illusion of new wealth.

The fifth and key point relates to fairness.

We all have a sense of fairness. It’s hardwired into us, and developed during our evolution. The classic story which illustrates this relates to a train journey. We are sitting on a train next to a stranger, when a lady walks past and quite out of the blue offers the stranger £1,000. But there is a condition, the stranger must offer some of this money to you, and you must be happy with the offer. There can be no negotiation. If you accept the offer, then the lady gives out the £1,000, but if you say no, the lady walks away and keeps the £1,000. Now, suppose your neighbour offers you £10. What logical reason is there for you to refuse? You would be a tenner better off. But most of us would say no. Our sense of fairness had been assaulted.

And this final point is the key. It may or may not make economic sense to pay some bankers £1m plus bonuses. But it is blatantly unfair. And sometimes we say no to unfairness, even if we are worse off as a result. It’s just human nature.

And yet still the threat remains: You stop our bonuses, then we will move elsewhere. Singapore, for example, and London will be left to pick up the scraps.

And it’s a tough one. The FT waxed lyrical because JP Morgan has chosen to move into the old Lehman Brothers building. It shows the bank is serious about London, suggested the pink ’un. And yet not so long ago the bank was planning to have a building tailor made, a building planned to shine out over London, a beacon for the capital and those who think its streets are paved with gold.

And now there is talk that US and Swiss banks are to pay their top execs higher salaries in order to circumnavigate new regulations on bonuses.

And the banks say if you stop our bonuses, our top people will move out of London and that will be a crushing blow for the London economy.

Frankly, London is under threat.

On the other hand, the alternatives are not so attractive. Land is scarce in Switzerland. Anti-bank rhetoric is just as vicious in the US, but maybe in the UK it is more so. And maybe London’s mantle is set to be shaken, and very hard.

But the difficulty is that it really is questionable how useful some of the banks’ activities are. It is questionable how good for the economy high bonuses are, because the financial institutions suck the talent out of other, potentially more productive sectors. High bonuses lead to an explosion in house prices, and that is probably a bad thing.

But whether banks do good or bad, the fact is the forces that are at work are global. Bankers are well paid because global market forces make it that way. And the City does well if it can sit centre stage in this highly lucrative global business.

Does it matter if banks don’t do much good? Just suppose that playing with paper clips was a growth sector, and paid out huge salaries. As an industry it might not be useful, but the cities that can embrace this market will do well, all the same.

The truth is, the UK government is like flotsam and jetsam, powerless to make a mark upon global banking regulation. Regardless of whether it is the right thing to do, the government simply can not afford to tax banks by too much.

Alas, what we are seeing is the downside to globalisation. Globalisation means more wealth is created across the world. But it means the markets rule, regardless of whether they are right or wrong.

Banks, eh? At the best of times most of us moan about them, but when the national mood has become anti bank, blaming them for our troubles is all too easy.

Now a survey from eBay has claimed to name and shame the worst banking offenders, saying these banks don’t lend enough to business.

According to the eBay survey, only business customers of Santander seem to be coming out okay, with just 19 per cent of the bank’s customers surveyed saying credit has been refused.

By contrast, 37 per cent of customers surveyed who bank with RBS and NatWest said they had been refused credit, while 58 per cent of Lloyds customers said their bank has become less helpful. And HSBC got slammed, too, with 41 per cent of its customers who were surveyed saying they had to rely on an overdraft and were unable to get a loan, compared to just 19 per cent of Santander customers.

So eBay and its customers are not impressed with the banks. But the British Bankers’ Association wasn’t impressed with the survey. It said: “Banks are currently approving around 85 per cent of credit applications from small businesses and several recent independent surveys have confirmed this, so we simply don’t recognize the numbers that eBay is quoting.

“Small businesses play a vital part in the economic recovery. Banks fully recognize this and have committed to offering every assistance they can, including credit for viable businesses with demonstrable repayment plans. It’s important that businesses are not discouraged from coming to banks for vital business support and we would always encourage them to talk their plans through with their bank as their thinking develops.”

Now, it may be worth pointing out at this stage that the eBay survey related solely to customers who use its service, typically small online retailers. Maybe this explains the discrepancy between the BBA and the eBay figures.

But the fact is, there is too much anecdotal evidence from businesses saying their banks are unwilling to lend. For its part, the banks say they are willing to lend, but that their customers are not interested. But that argument may miss the point too. It has often been said that the only time a bank will lend you money is when you don’t need it.

But the problem lies deeper than that. Bank lending to business was awful during the boom too. At that time it was often easier to get a loan to fund a holiday than to create wealth.

On a case by case basis, lending to an individual with a steady job, regardless of what the money being lent is spent on, is often safer than lending to a small business. But if that approach is applied across the country, it’s the other way round. In fact, on a macro scale, not lending to business is itself risky.

So, an economy made up of banks that are willing to lend to business flourishes, and banks in a flourishing economy make good profits. By contrast, an economy made up of banks that would rather lend to fund spending by those on steady incomes than to small businesses, ends up looking like a bubble.

In time, economic evolution should work such that banks become more business friendly. In reality, banks are bailed out every time there is a banking crisis, perhaps caused by their bubble-creating approach to lending, and financial evolution is quashed.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

Lest we forget, it is worth recalling that in 2008 banks across the world were in a right royal mess. And while some may now look on and say they pulled through without government help, one has to question whether that is really so. So Barclays managed to survive without going cap in hand to the UK government; it went cap in hand to sovereign wealth funds from the Middle East instead, of course. HSBC, the very same bank that first drew our attention to sub-prime woe, came out the other end, its reputation enhanced. But don’t forget that if the UK government had not rescued RBS and HBOS, and if the US government had not thrown its troubled asset relief programme at its banks, it seems doubtful whether any of them would have survived.

The banks weren’t rescued because it made commercial sense on a deal by deal basis. They were rescued because of the fears of contagion, of a kind of domino effect. As such, just about every major bank in the West can count itself lucky that it did not end up under the total ownership of government.

And at the peak of the banking crisis, even Goldman Sachs, the very same bank that is so good at making money that an article in Rolling Stone magazine once said it “is like a giant vampire squid wrapped around the face of humanity relentlessly jamming its blood funnels into anything that smells like money,” even that same Goldman Sachs got desperate.

So bad had things got that it was forced to go down on bended knee, and ask Uncle Warren for help. So back in 2008 the Sage of Omaha chipped in with a cool $5bn. In return, Buffett gets 10 per cent dividend per year, netting him $1bn so far. Warren also inserted a clause that the bank’s top people had to retain 90 per cent of their equity in the bank for as long as Mr Buffett’s investment was in place. There is another snag too. Under the new Basel III regulations, Mr Buffett’s investment doesn’t even count as tier one capital.

And so it is that the bank has begun the process of trying to buy out its rich benefactor. It will take a while of course, because things like this, especially when regulators are involved, don’t happen overnight.

In addition to the 10 per cent dividend, Mr B also gets a 10 per cent premium on his stake, should the bank choose to buy it back. So, if the banks were to buy him out tomorrow, our Warren would have made a $1.5bn profit. Not a bad return in two years.

To put this in context, five-year bonds issued by the bank this summer pay 2.95 per cent annual interest.

Of course, Goldman Sachs was able to get leverage out of the Buffett name, and acquire additional investment soon after simply by boasting that they had the world’s most successful investor on board. And then, earlier this year, when Congress tried to haul the bank’s executives over the coals, they were able to respond by saying they didn’t need government money, they had Warren Buffett, who only invested in the bank because he saw it as a commercially sound move.

But this all does rather beg one question. If our Warren can do so nicely out of his bank stakes, why can’t our government?

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

Our Warren has this tendency to talk a good deal of common sense, and as ever he doesn’t disappoint.

But then again, just bear this in mind. The whole point of limited companies is to encourage risk taking without punishing the risk takers too much if things go wrong.

It may well be right that the balance of bankers’ risk is too one sided. But then risk is not always a bad thing. It is important that in the rush to blame one-sided risk taking by bankers, we don’t extend the argument. The logical consequence of making bankers go bust is that we end limited liability. And if we did that, the next casualty will be economic growth. See: Bring back risk – it’s too risky not to

Still with Buffett, he also had some things to say about the bonds versus equities thing. He said: “It’s quite clear that stocks are cheaper than bonds … I can’t imagine anyone having bonds in their portfolio when they can own equities.”

In other words, the time is ripe for a rally in equities.

It would be brave commentators who disagreed with our Warren. And no doubt he is right. Just bear in mind there are reasons to back up the argument that equities should pay out higher dividends than bonds; see: The cult of equities is still dead, claims bear

And that brings us to guru number three. Dominique Strauss-Kahn is the latest to warn of an impending currency war. See: IMF head Strauss-Kahn warns of currency war

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Actually, we kind of told a porky in the headline. Strictly speaking, Adam Posen is not a Bank of England man at all. Sure, he is a member of the bank’s Monetary Policy Committee, but he is an external member of the committee. In fact, he is an American, and people such as Mr Posen are recruited to the ranks of interest setters precisely because of their external point of view. Even so, his views are interesting, and since he influences monetary policy, they are important, too. This is what he said:

“The case I wish to make is that monetary policy should continue to be aggressive about promoting recovery, and, subject to further debate, I think further easing should be undertaken.

“Economic recovery following a financial crisis is a long process dominated by the interaction of unemployed resources, dysfunctional banking systems, and the degree of policy stimulus. We are a long way from home, and a long, long way from overheating.”

And then he made the telling comment about social upheaval: “The risks we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity.”

So that’s not very good.

He is the second MPC man to stick his neck out in as many days. Yesterday, it was told here how Charlie Bean, the Bank of England’s Deputy Governor, wants UK consumers to save less and spend more, even if that means eating into savings. See: Spend, spend, spend, demands Bank of England deputy governor

Of course, there has been a rush, of “Are they mad?” type articles and comments on blogs.

Speculation has also begun to focus on quantitative easing being extended so that central banks start buying up corporate or even mortgage debt.

And yet, a few thousand miles to the west and then a few thousand miles down, in Sao Paulo, Guido Mantega, that’s Brazil’s Finance Minister, gave a somewhat worrisome warning. “We’re in the midst of an international currency war,” he said.

Unless you have been a recent resident of the planet Mars, you will know that China has not been making itself many friends in Washington for its policy of keeping the yuan down. And for that matter, Japan’s recent attempts to sell the yen have not exactly been greeted with hearty congratulations from US politicians. In fact, they are furious.

But Mr Mantega was blaming someone else for the currency war. This is what he said: “The advanced countries are seeking to devalue their currencies.”

It’s quantitative easing (QE), you see. China reckons Uncle Sam is being hypocritical. The US criticises China for manipulating its currency, and yet from China’s point of view the Fed is deliberately trying to debase its currency.

Up to a point, both China and our Brazilian friend have a credible argument.

But then again, people are missing the point about QE. The purpose of this tool is not to inflate debt away, it is to promote borrowing and then spending. And if the US can be successful, and can indeed promote spending, there will be a rush of Americans going out and buying all things Chinese and Japanese.

Sure, QE may push the dollar down, but equally, it should push imports up. QE should be good for China.

The real snag with QE is that so far it has been almost completely useless. It has forced up bond prices, and maybe as a consequence, shares look cheap and have risen in turn. But in terms of promoting bank lending, QE has been a complete flop. The theory is that the return on bonds is so low that banks will start looking at alternative homes for their money, and may then start lending again. But it ain’t working.

Until central bankers are more imaginative – not something they are famous for, QE will fail. Buying government bonds is no good.

One idea still floating around is that central bankers should buy good quality mortgage debt. No … this is not a good idea. This would risk creating another bubble.

Unless QE leads to more business investment, then it is failing. And the only way this can be achieved is by central banks being far more proactive and buying bonds in institutions that are more geared towards providing finance for all types of business.

Meanwhile, QE is building up more resentment. The US resents China for currency manipulation; China resents the US for QE.

It’s not a pretty picture, is it?

Then, in Europe, politicians are coming up with a cunning plan to stop countries from getting into debt again. There is a snag. Their plan is half baked, misses the point, and is bound to create more problems than it solves. See EC sanctions miss their mark.

The Chairman of the Commission, Sir John Vickers, put it like this: “Questions about the structure of banking need to be debated in an open, rational way, and we would like to invite anyone with an interest to provide us with views and evidence.”

And that brings us to Saint Vince, the man who revealed poisoned bank rhetoric this week.

Was Saint Vince merely humming to the tune of a popular cause, or does he really mean it? Writers in the Telegraph have slated him. After all, it’s the City that pays out a fortune in taxes. If our banks leave these shores, what will happen to our tax receipts, they ask.

But where will they go? Barack Obama’s anti-bank rhetoric seems no less extreme than Vince’s. There’s no room in Switzerland, and will the world’s great banks really uproot to the Cayman Islands? But of course, there’s the East.

The snag is, the banks are in effect holding a gun against the UK’s government’s head. They are saying, stop ‘dissing’ us, or we will go. They say break us up, enforce the separation of investment and retail banking, and we will go. Try to force us to cut back on our bonuses, and we will go. And yet, if they stay, and their exuberance is not curtailed, is there not a risk they will create a new set of problems for UK PLC down the line?

Bankers have never been popular. Hence we have the roots of the problems for the Jewish people. In Medieval Europe, Christians were not allowed to become money lenders. So that role fell to the Jews, and some in Europe never forgave them.

The snag is this. Bankers are not popular at the best of times. But when they get it wrong, then there is no holding back public fury. When Lord Turner, top man at the FSA, says much of what banks do is “useless”, then the public ask why should we care if they do indeed uproot and leave?

A part of the problem with bankers is that they are not seen to create wealth. They shuffle paper around. How can that create wealth? And yet the function they serve is simply essential. Without banks, there would be no modern day economy.

But then again, there is simply not enough competition within the banking sector. The barriers to entry for new banks are too high. If banks had been allowed to fail, then capitalism, because that is its way, would have thrown up new banks The banking bailout that saved the banks was anti capitalist. And yet the banks argue that the rules of capitalism say they must be left alone.

And therein lies the problem. Banks are at once a curse, and essential. They at once facilitate the creation of wealth, but create the foundations of crisis. The rest of the world is jealous of the City. We dare not lose it, dare not risk losing it. And yet we simply must change it.

What’s up at HSBC? It all started innocuously enough, with HSBC Chairman Stephen Green announcing his intention to step down and take up the role of trade minister. No one had a problem with that. Mr Green is widely considered to be a good bloke. He penned the book ‘Good Value: Reflections on Money, Morality and an Uncertain World’, which was a good read and full of moralising, but no one was that worried about the fate of HSBC after his departure. We all thought Michael Geoghegan, CEO, would be next. That’s the HSBC way, promote from within. But then talk was that a non-exec, John Thornton, would be chosen as chairman. The rumour mill ground away, and then we heard that Mr Geoghegan was none too happy about that.

Well, it’s all changed. The new chairman will be the Finance Director, Douglas Flint. And now we hear there will be a new CEO, too: Stuart Gulliver, who is currently head of investment banking.

By all accounts Mr Gulliver is an impressive individual, and it was apparently common knowledge that he was the CEO in waiting. It is just that it’s all happened rather fast.

It’s the second time in as many weeks that an investment banker has been promoted to the helm, with Bob Diamond of course making the top slot at Barclays. Maybe it’s the chairman’s job, the money man, to keep tight reigns on the investment banker.

Stuart Gulliver new boss at HSBC

It is just that HSBC is not like other banks. While it was a division of HSBC that first revealed problems with US subprime debt, this is the bank that came through the banking crisis smelling of roses. While there is a view out there that Bob Diamond, boss man at Barclays, is dangerous (it was he after all who wanted the bank to buy Lehman’s before it went belly up), no such aspersions have been made regarding Mr Gulliver.

And that brings us to Saint Vince, the man who revealed poisoned bank rhetoric this week.
ICB in bank break up threat

In the battle between the hawks and the doves on the Bank of England Monetary Policy Committee, the doves seem to be in the ascendance, while just one lone hawk is left to make manoeuvres in the sky.

Andrew Sentance was once again a lone voice, or should that be lone squawk, in calling to raise interest rates. The rest were busy cooing to each other, with the minutes saying several members signed up to the view that “the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased.” Indeed, while the Bank of England’s man of punctuation (geddit?) has been fretting that there may be less spare capacity than previously thought, other members fear there is too much.

And on the news that the Bank of England dovecote was so strong, markets went out and bought UK government bonds. As a result the yield on UK ten-year government bonds fell sharply, dropping from 3.12 per cent a few hours before the meeting to 2.97 per cent at the time of writing.

But while QE has its critics who say it will inevitably lead to inflation, in reality QE has been about effective as a leadless pencil. Banks are still reluctant to lend, and the UK’s broad money supply is growing at a snail’s pace. In fact, M4 decreased by 4.1 billion pounds (0.2 per cent) in August, compared with an average monthly increase for the previous six months of 2.2 billion pounds. The Bank of England recently said: “The twelve-month growth rate fell to 1.8 per cent from 2.3 per cent in July. M4 lending (excluding the effects of securitisations etc.) decreased by 18.0 billion pounds (0.7 per cent) in August. The twelve-month growth rate fell to -0.5 per cent from 0.5 per cent in July.”

Critics of QE who say it will lead to inflation have failed to grasp the fact that in reality the money supply is barely rising at all. Banks have changed their attitude to risk. They are trying to shore up their balance sheets. The mad days of credit booms are over, and won’t return for a very long time. Given that, no matter how much money the Bank of England creates, the broad money supply, which is partially determined by credit, will be barely affected.

Other critics of QE say the government is secretly trying to use inflation to reduce its debts. But the figures on the UK’s public borrowing for August show why that argument is false. In fact, much of the UK’s current debt is funded by bonds that pay out yields linked to inflation. If inflation goes up, so do interest payments on government debt. This year’s high inflation figures led to a sharp rise in interest payments on debt, and as a result August just gone saw the highest level of government borrowing ever.

The problem with QE is that it seems to be ineffective. The Bank of England hopes that by buying government bonds it will push the price of these bonds up, make other assets look cheap, and therefore lead to a rise in asset prices across the board. This is where it makes its error. Who is to say what the right price is for assets? If the Bank of England tries to artificially manipulate asset prices, then it could be creating all kinds of problems down the line.

In reality, the bank should use QE to buy bonds drawn on firms that are more willing to scatter their money across the business world in the form of lending. Maybe the bank should engage in a massive funding of venture capital. But Mervyn King has made it clear that it is not the Bank of England’s job to pick where the money it creates goes. That is the government’s job.

But then the bank is doing precisely that at the moment. It is deliberately trying to manipulate asset prices. Would it not be better off deliberately trying to manipulate the process of wealth creation, something our banks seem quite useless at doing?