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Lord Turner Fights to Save the Incompetent FSA Banking System Regulator

Politics / Market Regulation Aug 27, 2009 - 02:47 PM GMT

By: Nadeem_Walayat

Politics

Best Financial Markets Analysis ArticleLord Turner, the ex-banker head of the FSA banking system regulator that repeatedly failed to regulate the UK banking sector over the boom and bust years that resulted in a near catastrophic collapse of the UK banking system requiring the tax payer to underwrite the whole banking system to the tune of £1.5 trillion and counting, today stepped forward with strong words criticising the financial sector as well as calling on for a new tax on transactions to prevent bonus abuse that allowed bank executives and boards to turn the institutions they worked for into hollow shells, after having banked billions in bonuses on fictitious mark to market profits.


Lord Turner stated to Prospect Magazine:

“If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits. And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions. The problem is that getting global agreement will be very difficult. But at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits and therefore have some chance of doing something about it. Insisting that someone ‘does something’ about bonuses, by contrast, is a populist diversion.”

Meanwhile the banking sectors representative Dame Angela Knight of the BBA on BBC TV News continued to tow the line of wanting to rebuild bank balance sheets and the offloading the responsibility for the economic depression that Britain faces off of the banks and onto the government and others. This, despite the fact this economic depression IS as a consequence of alleged systemic fraud perpetuated by the officers of the banks upon the tax payers for which NO ONE is being held accountable, which compares against the 150 year sentence awarded to Madoff for his £30 billion fraud across the atlantic. Perhaps only if such prosecutions were undertaken in the UK, would then the magnitude of the crimes committed by the banks against the British economy sink in as clearly by the actions of the banks, nothing so far has sunk in, where it remains a case of business as usual.

Bankrupt Banks Overcharging Customers

As I have voiced repeatedly over the past 6 months that the lack of market competition due to the creation of an artificial banking market that has in effect created a situation where the bad debt losses are dumped onto the tax payers whilst those banks that have managed to avoid bankruptcy i.e. nationalisation rake in profits at the expense of tax payers and customers as the spreads between the market interest rate 1.1% (LIBOR) and that charged customers on mortgages 5% to 5.5% has widened to historic extremes thus the banks are ignoring a constantly pleading Alistair Darling and Gordon Brown to lend more at rates in line with the base rate whilst the banks put business and ordinary customers under extreme pressure despite the fact that it is these tax payers that are covering all of the losses and injecting capital into the banks.

Typical overcharging is by the banks that have the greatest government stake with nationalised Northern Rock topping the list. The reason for this is that the banks are primarily being run with a view to repaying the government as soon as possible and thus returning to the private market as soon as possible, therefore the banks are being required to squeeze their customers as hard as possible to achieve this goal, which is contrary to the governments public announcements, which lends me to believe that a hidden agenda is at work i.e. publically announcing that the banks should lend more and at better rates whilst privately wanting the banks to maximise earnings so as they can be privatised and stakes sold off as soon as possible for political reasons.

Since the Labour government was hell bent on going down the nationalisation route instead of the natural order of the free market which is to let bankrupt banks go bankrupt, it would have been better to nationalise the whole banking sector and thereby take a more long-term view rather than an apparent rush for re-privatisaton. Wholesale nationalisation would also ensure that profits from some of the banks can offset some of the losses instead of the current situation where all of the losses are bourne by the tax payers whilst all of the profits are retained in an artificially tax payer supported banking system that are funneled out to bank executives with presumably later board positions offered to ex-politicians as a thank you following the outcome of the next general election due within 10 months.

There is no free market, there is no capitalism, there is not even socialism at work, what it all amounts to is simply FRAUD on the tax payers of Britain. FRAUD WITHOUT LIMIT OF LIBAILITIES, FRUAD THAT RISKS BANKRUPTING BRITAIN.

FSA Regulator Failure

The near collapse of the banking sector over the past 3 years illustrates the failure of the financial services authority to regulate. Yes the failure is over 3 years and not since the collapse of Northern Rock some 2 years ago, for the FSA first warned the British banks in 2006 following the peak in the US housing market to STRESS TEST their business models in the event of a 40% crash in house prices, coupled with mortgage defaults of 35% and to reign in excessive risky mortgage lending at too high salary multiples. However as we have seen, a decline in house prices of less than 15% by September 08 had brought virtually all of the British banks to the brink of bankruptcy only prevented by a tax payer bailout now totaling £1.5 trillion of liabilities to date which are expected to grow to £2 trillion !

Unfortunately the FSA talked the talk but DID NOTHING TO PREVENT OR REGULATE THE BANKS and therefore ensured the BOOM during the first 6 months of 2007 followed by the BUST that immediately wiped out Northern Rock in September 2007 and proceeded to wipe out bank after banks capital bases towards zero right upto September and October 08's Financial Armageddon panic that resulted in the across banking sector bailout and panic interest cuts by the Bank of England on the direct orders of the Prime Minster Gordon Brown, who announced the first 0.5% cut himself at Prime Ministers despatch box which sent the signal to the markets of exactly who now is in charge of setting UK interest rates, certainly not the Bank of England who's MPC had been sat twiddling their thumbs for the preceding 12 months of the crisis.

Fast forward to the present and we have recently had the FSA make announcements of regulating house prices lower by means of capping multiples. However the past 3 years have clearly illustrated that the FSA is a fundamentally flawed institutions that is incapable of regulating the UK banking system.

Banking System Reform

The British Banking system needs urgent reform as I have proposed many times over the pasty 18 months that the reform requires real independent regulation along the lines of the courts, until then once the banking system recovers it will be back to business as usual as we are witnessing following the results and the behaviour by the banks to hand out millions in bonuses that CONTINUES the trend towards leaving the banks the bank staff work for as hollow shells for the tax payers to pick up the pieces whenever they go bust.

Bankrupt Banks Bankrupting Britain.

As I have warned several times over the past 12 months and which is now starting to come to pass in that total liabilities are growing from £1.75 trillion at the end of 2007 to more than £3.9 trillion by the end of 2010 as a consequence of the £1.5 to 2 trillion of liabilities of the bankrupt banking sector being ceremoniously dumped onto the tax payers in addition to the public sector deficit spending of £600 billion on which the country will have to pay interest on which worsens the fiscal situation during each subsequent year hence the risk of an out of control debt spiral.

Way back in April 2008 when the bank of England first gave tax payer cash to the banks, I warned that this could eventually lead to a loss of as much as £200 billion to the tax payer, a huge sum of money by any measure, however not collectively Britain could stand to lose as much as £500 billion, that can only be covered by printing money to monetize the debt and hence leads to inflation and probable investors balking at government debt issuances.

Therefore we are looking at £600 billion of deficit spending PLUS £500 billion of bankrupt bank losses leading to a near tripling of Britians debt towards 120% of GDP, whilst total liabilities project to more than 350% of GDP.

The consequences of all this deficit spending and growth in bankrupt bank liabilities is highly inflationary as the Governments Big Idea of "Printing Money" WLL eventually lead to hyperinflation as 1920's Weimar Germany found out, so Britain IS sowing the seeds of much higher inflation, maybe not this year and for the first half of 2010 as earlier inflation analysis illustrated, but there will be a deficit spending and quantitative easing day of reckoning in terms of economic stagnation coupled with high inflation that will land on David Cameron's lap.

Subscribe to my always free newsletter to receive in depth analysis of the UK economy, house prices and interest rates.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 300 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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