Banks and the Governance of Credit

A bit about banks, and the pervasiveness of the belief that banks govern credit.

It was a political decision to allow credit to balloon. The means to effect this are within the control of the government. It was intentional. The origins of this political move was an on-the-surface reasonable desire to bring credit to the less creditworthy. The short term effects indeed did do this. The medium term effect was a ballooning of credit that was unsustainable, that only survived so long because the selected inflation it caused ( house prices rising in the UK and US ) was popular and vote-gaining. A loan that is secure against an asset rising at 20% per annum soon makes the borrower’s ability to repay insignificant.

House prices couldn’t rise forever, but no one had the political will to stop the party. There was no end-game. The road to hell is paved with good intentions.

Any viewpoint that tends towards “hang it all on the banks” has to explain why those exact same banks had no problems ( or “caused” no problems, depending on your belief ) in other countries, where the politicians by wisdom or ignorance didn’t play the same game. A single word answer is sufficient.


Those countries that let go of the governors ( regulations on lending, regulations on minimum reserve ratios ) did so deliberately. They boasted about the short term effect.

They made a mistake, with far-reaching consequences.

It is common to read or hear rants about “the banks” rather than perhaps, greeting the reintroduction of higher capital requirements with approval. I understand the temptation to make economic judgement through the lens of ones politics, but given a little economic knowledge, I find the reverse far more illuminating.

I am disinterested in politics in general. I do have a passing knowledge of the financial industry having worked in it in Europe, US and Asia for 15 years or so.

I think there is perhaps a knowledge gap in how the finances of the world work. This gap is revealed every day. I don’t claim superiority of knowledge in this area, but I do declare a curiousity. There are lessons to be learned. But first one has to understand how a thing works, before judging what has failed. If you do share a curiousity, there has has hardly been a better time to develop that interest into knowledge. Thanks to the crash, the amount of accessible literature on the subject is now copious.

The only challenge to better understanding is that the political lens is bottle-thick. Where argument and reason is replaced by emotion and venom, you can be sure that, whether a post on a forum or an article in a newspaper, you are looking through that lens.


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