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We’re going to miss him enormously

15 June 2013

Much the most interesting item in today’s Financial Times is Martin Wolf’s interview with Sir Mervyn King, headed “I’m going to miss it enormously”. I admire both men greatly, even though I disagree with them on many issues. But there were several passages I thought particularly noteworthy (in addition to the recommendation for one of my local eateries).

Regarding deposit insurance (where I have previously cited Sir Mervyn’s views which contradict those of the Chancellor and conflict with the outrageous clause 9 of the Banking Reform bill – see my note and earlier posts):

…I don’t think we’ve reached a final position yet in terms of deposit insurance. There will often be one day in their lives when individuals have a much larger sum of money in their accounts than usual – because of a house purchase, a divorce settlement, a court settlement or an insurance payout. What that means is that, on any given day, if a biggish bank got into trouble, then thousands of people would be in that position. And I don’t believe that any government would let them lose their money.

Indeed this is the Realpolitik. And so we all keep money in the bank on unsecured deposit at around 1% believing that the risk we are taking is minimal, while the banks use these amounts to fund the haircuts on secured interbank deposits on which their astronomical leverage depends – thus turning the deposits into subordinated junk. A very adult game of scissors–paper–stone as I have previously discussed.

I liked Sir Mervyn’s phrase “the audacity of pessimism”, capturing the Cassandra effect which makes reform impossible until it is too late. The phrase is not far from my “heroism of No”.

He is sound on borrowing to build, pointing out the scarcity of worthwhile projects, and justly sceptical of proposals that the Bank of England invest in riskier assets. And he is refreshingly honest in pointing out that

…we’re five years on, and still we’re debating about how we’re going to restructure the banks, which have been receiving so much support. This should have been done a whole lot earlier.

Hear, hear.

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