I posted before about a great financial crisis, industry collapse and bailouts. Not the banks of today, but the railways of the Victorian age .
When the Directors of these gigantic enterprises that dominated the economy went to see the Prime Minister in 1867 to ask for the nationalisation of the railway companies to stop them from collapsing (with dread consequences for the whole British economy) because they couldn’t pay back their loans or attract new capital, they didn’t get the Gordon Brown, investment banker advisers, suspension of competition law and the tea and sympathy of today. Benjamin Disraeli told them to get stuffed: he didn’t see why the public should bail out badly run businesses.
Good man. And there’s another lesson worth learning from that crisis. Last year I read a paper from Andrew Odlyzko called “The Collapse of Railway Mania, the development of capital markets, and Robert Lucas Nash, a forgotten pioneer of accounting and financial analysis”. It talks about how many of the modern accounting methods that take for granted arose during that period.
The moral of the tale, such as it is, is that letting the railways collapse not only led to a stronger railway industry but it also helped other industries as well, because it meant that new standards for accounting and reporting were put into place. The banking crisis has followed an entirely different trajectory, where public money has been used to put things back exactly as they were before. Somehow, we were persuaded that the banks are a special case, not subject to the same rules of business, a point echoed by the noted economist John Kay.
We need to stop thinking of financial services as a unique business whose problems are sui generis, and whose economic role is one of special privilege. The historic deal, which limited competition in banking in return for an expectation of prudent behaviour, has been abrogated by the actions of banks and bankers. Today, both consumer protection and macroeconomic stability will be best served by the policies to promote competition which are rightly favoured in other sectors of the economy.
Hear hear. And surely one of the central policies to promote competition should be that people who make catastrophically bad decisions should go out of business. Another one might be to adopt a more robust approach to banking activities that turn out not be to strictly congruent with the letter (or spirit) of the law.
A $2.6 billion financial fraud that has shaken the government of Iranian President Mahmoud Ahmadinejad saw the heads of three of the country’s banks ousted on Tuesday as lawmakers threaten to impeach the economy minister. The biggest fraud in the 32-year history of the Islamic Republic could result in the death penalty for anyone found guilty of it and has become part of an increasingly ugly split in the conservative elite that runs Iran.
Tough on bankers, tough on the causes of bankers. It’s the only language they understand.
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