Libor: If you put a fox in charge of a hen coop don’t be surprised by the outcome

I wrote an article for today’s Guardian about the causes of the Libor scandal: Traders are the ruin of retail banking

Amongst the many comments posted on it were several which said it was wrong to blame the investment banking/trader/"casino" operations for these ills as retail banks like Northern Rock had also failed. Please note that I did not say that combining investment banking and retail banking was the sole reason that banks failed, but whenever they are combined; a) the traders end up in control; b) they always seem to suborn the banks retail operations and sell the customers toxic products and/or manipulate markets against them; and c) once they are combined you have to save both because they are linked like Siamese twins.

I also gave several interviews to BBC radio this morning:

BBC Radio 4 Today Programme
BBC 5Live (click to 2hrs 5mins 50sec)
BBC World Service (click to 17mins 50sec)

I made three main points:

1. With regard to Marcus Agius' resignation I gave the example of a submarine which sank when it was being refuelled because someone left a porthole open. The captain was court-martialled even though he was absent on leave. The point was that he was responsible for the culture of the crew that had led to the sloppy procedure. Of course it does not mean that the officer who was in charge of the refuelling shouldn't go too.

2. Retail and investment banking need to be split. This is now becoming a more popular stance, but I first said it publicly in the Daily Telegraph back in 2008 (Strong medicine needed to cure ills of cheap money).

3. It is no good blaming the culture of traders, you just need to keep them away from retail banking and the ability to fix or manipulate rates or benchmarks. Blaming traders for being greedy and manipulative in these circumstances i.e. where you put temptation in their way is like putting a fox in charge of a hen coop and then expressing surprise about the outcome.

Comments

[Stephen Bardle]

Mr Smith, an article in Moneyweek, February 2011, reports the following regarding your position on the Euro:
"So there is hope for old Europe. Does he think the euro will survive? Yes."
Is this still the case, as recently you seem to have taken a very bearish stance on the Euro?

[debra eddy]

Absolutely the banks need to be split.
Absolutely the Euro will split (latest polls in Germany indicate a distinct lack of appetite to support the peripherary countries; the fissure between Paris and Berlin may result in this playing out sooner rather than later).
Absolutely the UK is in for a day of reckoning. Government needed to follow the Canadian model and start with a blank sheet of paper and then empower taxpayers through tax cuts. No one had the courage to put forward the argument, although UK opinion polls suggest Brits are willing to hear it.
Thought your appearance on Question Time was uncharacteristically restrained, but lovely to see you starting to feature more widely on the BBC (yourself and Mr Farage seemed to suffer from the Beeb's left wing tendencies).
Go Terry, go,
Debbie

[Terry Smith]

Debra thank you for that comment. The Canadian experience is also an example of how politicians can tell people the unpalatable truth, implement difficult decisions and get re-elected, which we are told is impossible. I was restrained on Question Time: it’s an unusual format with a live audience which participates and it was clear from the untelevised warm up question that a) the audience is not balanced (there’s a shock); and b) they were massively on the side of Tony “Baldrick” Robinson’s cockamamie rants.

[Grumpy Oldman]

Terry for BoE governor!!
That is all.