Bashing banks is easy. But what comes after?

Sir Fred Goodwin last week reduced his pension to $875,000 to escape a court case. That is a bad bank story. When banks go bad, voters get angry and politicians are cats on hot bricks.

Sir Fred was chief executive of the Royal Bank of Scotland, a big and venerable bank which he made enormously bigger with reckless acquisitions and then crashed with a reckless attitude to risk.

Vast sums of regular folks’ taxes have been poured into keeping the bank afloat because it was deemed too big to fail. A handsome quantity of that hard-earned cash keeps Sir Fred in Krug. Lesser folk pay for serious errors with penalties and penury.

Rich, bad ex-bosses grate especially on the public when a bank is involved. In good times the public sees banks as necessary but not nice. In bad times, it sees them as granite-hearted leeches. Then the politics turns bad for banks.

In the 1930s depression banks’ repossessions of farms and homes helped fuel the Social Credit movement which lasted five decades and in 1981 scored 21 per cent and two MPs. During those decades there were tight regulations and the Bank of New Zealand was nationalised.

Now, as the recession grinds on, banks are a target again.

After banks were deregulated in the 1980s they lent to just about anyone who would borrow: mortgages, personal loans and credit cards. Much of that money came from the northern hemisphere, where money was loose.

Now the debt has to be got down — and at a time of tight money in the northern hemisphere because of the antics of the likes of Sir Fred.

At the same time, if the economy is to pick up again, businesses need credit. A high cost of credit or a lack of it will slow the recovery.

Interest rates are in fact way down from the good-times rates. But not low enough, say borrowers, the Reserve Bank and politicians from most quarters of Parliament. Bank lending rates have fallen less than the Reserve Bank’s official cash rate.

Banks retort that 40 per cent of their funds come from tight-money northern hemisphere money markets and the rates they pay for those funds in part determine the rates they charge borrowers here.

So Parliament’s finance and expenditure select committee focused on banks’ margins between their borrowing and their lending: The committee, chaired by ex-banker National MP Craig Foss, said: “We believe banks should not expect to maintain their usual rates of profitability in recessions, particularly when some sectors experience significant financial difficulties.”

There was a time when banks were getting their offshore funds at rates which meant they did not have to raise their lending rates to match the Reserve Bank’s high official cash rate aimed at pricking the house bubble. Parliament was less excited then. But there is a recession now and Labour’s David Cunliffe, shadow finance minister, needs publicity.

There are two parts to this.

One is that neither Parliament nor the Reserve Bank is actually going to do anything to the banks. While northern hemisphere countries are proposing tighter regulations, here it has not been the banks which needed new regulation, but the finance companies and financial advisers.

So the banks can ignore Cunliffe and Foss.

The key is the pivotal role of the finance sector, of which the banks are a central part, in making economies work. The invention of banking was an indispensable enabler of the rise of capitalism.

Constrain the bankers too much and the economy slows or seizes up. Northern hemisphere bankers themselves demonstrated this risk when their brilliant financial inventions of the 1980s and 1990s crashed and the banking system seized up. Governments had to intervene to keep the show going.

Banks are inherently risky businesses, borrowing short to lend long and backed by capital that is only a fraction of their liabilities. Too many loans going bad wipes out their capital if those who lend to them want their money back.

The second element is the unidirectional focus of Cunliffe’s and Foss’s concern.

One way for banks to cut lending rates would be to cut deposit rates. In fact, they have already about halved since a year ago.

Whom does that affect? To a large extent older people who have left the workplace and are living on savings, much of it, since the sharemarket tanked, in deposits in banks and elsewhere.

In other words, Cunliffe and Foss, by taking the side of younger borrowers, are attacking older lenders.

Moreover, and more important, they are doing this at a time when one of the biggest challenges to policymakers trying to encourage a lift in productivity growth is a lack of savings and skimpy capital markets.

In other words, Cunliffe and Foss have focused on short-term tactics when the need is for a long-term strategy to build personal savings habits and generate domestic credit for investment to grow jobs.

That doesn’t make the banks good guys. There are plenty more Sir Freds where he came from. But it does require deeper thinking than bank-bashing.