Category Archives: Politics

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A Visual Representation of the Zero Bound

I’ve been trying to understand the relationship between savings and interest rates in the economy. There are many theoretical models and constructs that purport to represent the relationship between savings and interest rates, but it is interesting to look at it from an empirical standpoint. This graph shows savings at depository institutions as a percentage of GDP against the Federal Funds Rate:

Mises

The actual cause of the desire to save rather than consume or invest is uncertain. Perhaps this is a demographic trend — with more people closing in on the retirement age, they seek to save more of their income for retirement. Perhaps it is a psychological trend — fear of investment in stock markets and bond markets, due to fear of corruption, or market crashes or a general distrust of corporations. Perhaps it is a shortage of “safe” assets — by engaging in quantitative easing, central banks are removing assets from markets and replacing them with base money, and deleveraging corporations are paying down rather than issuing new debt. Perhaps it is anticipation of deflation — people expecting that saved money will increase its purchasing power in future. Perhaps it is a combination of all these things and more. But whatever it is, we know that there is an extraordinary savings glut.

There have been a lot of assertions that interest rates at present are unnaturally or artificially low. Well, what can we expect in the context of such a glut of savings? Higher interest rates? Based on what?

There was a clear negative association between savings and interest rates up until interest rates fell to zero, while the savings rate continued to soar. Theoretically, lower interest rates ceteris paribus should inhibit the desire to save, by lowering the reward for doing so. But interest rates cannot fall below zero at least not within our current monetary system — there exist some theoretical proposals to break the zero bound using negative nominal interest rates, but these remain untested and controversial. Even tripling the monetary base — an act that Bernanke at least believes simulates an interest rate cut at the zero bound — has not discouraged the saving of greater and greater levels of the national income.

In the long run, the desire to save increasingly massive percentages of the national income will cool down. Sooner or later some externality will jolt the idle resources in the economy into action. But that is the long run. In the short run saving keeps soaring. Investors are not finding better investment opportunities for their savings and the structure of production does not appear to be adjusting very fast to open up new opportunities for all of that idle cash.

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Keep Inflation Unchained

Inflation

President Obama’s latest budget indexes cost-of-living-adjusted benefits like social security against chained-CPI, rather than the regular CPI that has been used case previously.

This is undoubtedly a cost-cutting measure — according to the numbers used, the measure “will reduce deficits by at least $230 billion over the next 10 years”.

But is Obama using the right numbers? Chained CPI is by definition not an apples-to-apples index. It tries to correct for what is called substitution bias, the idea that if prices are rising in apples, the basket of goods used to calculate inflation should be adjusted to include more of a substitute rising less fast. A truer measure of inflation would count the increase in the price of apples based on how many apples people were eating prior to the price increase, not just assume away the increase based on the assumption that people will switch to oranges. I like oranges. But if the price of apples is soaring, inflation figures should reflect this.

So chained CPI is a fudge, and a slippery slope. Taken to its logical conclusion  if the price of steak is soaring, but the price of pink slime (or, to give it its euphemistic name “lean finely-textured beef”) remains cheap then consumers may be assumed to substitute pink slime for steaks. That isn’t measuring the cost of living. That’s just an austerity fantasy.

Trying to appease the Washington Post editorial board is no substitute for sound economic principles. When we measure inflation, we should use the best data available. As far as I can tell, that’s MIT Billion Prices Project which indexes by far the largest range of prices. More data means more accuracy.

According to their methodology, the CPI is very slightly underestimating the level of inflation, not overestimating it:

BPP

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Is Bitcoin A Bubble?

One key hallmark of Bitcoin’s price rise from the beginning of 2013 to now, where it has just crept above $240 a coin — up $100 a coin from the last time I wrote about Bitcoin — has been the oft-repeated mantra that Bitcoin is in a speculative bubble, and its price may be due to imminently collapse. This has spawned article after article after article after article — people were calling Bitcoin a bubble at $30 a coin, at $60 a coin — yet the price keeps climbing (and those who were discouraged from investing at lower prices missed out on spectacular gains). It is certain that at some stage the sellers will outnumber the bidders and the price will fall or crash. But when?

I ended my last article on Bitcoin joking that Bitcoin had a much better chance of being part of the monetary future than Groupon did being part of the future of commerce, and that I wouldn’t be surprised to see Bitcoin at some stage trading at Groupon’s record market cap — enough to price Bitcoin at $2,000 a coin. But this was a joke. Bitcoin and Groupon are fundamentally different investments; Bitcoin is an experimental deflationary crypto-currency instrument and anonymous payments system, while Groupon is the equity in an experimental company. That means Bitcoin is a whole new asset class. And not a fantasy asset class, but one that is rapidly permeating the spheres of human consciousness, an idea that is replicating and multiplying at a rate far beyond its original audience of crypto-anarchists, heterodox monetary theorists, and black marketeers.

I don’t really see Bitcoin (and its crypto-currency siblings) facilitating trade a great deal in the future (although, its deflationary-nature might make it attractive to merchants who wish to hoard it). During Bitcoin’s recent run (or more accurately, hyper-deflation) Bitcoin’s velocity has actually fallen sharply as its rising value has encouraged hoarding. Gresham’s Law implies that whenever possible Bitcoin’s deflationary nature will subordinate it to fiat currency for transactions. State-backed currencies tend to depreciate year-on-year, encouraging spending and discouraging saving. That is treated by central bankers as an imperative of monetary policy. Yet Bitcoin’s deflationary nature encourages the opposite, implying that Bitcoin is not a threat to state-backed fiat but a complementary currency, an intangible, anonymous, global and infinitely mobile counterpart to tangibles like gold.

Gold remains a part of the global financial system, a savings instrument alongside its tiny role as an industrial metal and its larger role as jewellery. Credit-Suisse estimated that total global financial assets in 2012 were $223 trillion, of which gold makes up 0.6%, translating to a $1.338 trillion market cap for gold as a financial asset, (although a larger amount of gold — around $8 trillion total at current prices — exists in other forms like jewellery).

There are no fundamental ways to estimate the value of assets like gold or bitcoin, and their values are entirely in the eye of the beholder. But we know Bitcoin is presently vastly outperforming gold as a speculative savings vehicle, and in spite of the fundamental differences (particularly that one is tangible, and one is not) this may drive more and more investors — including institutional investors and funds looking to diversify into something slightly futuristic — into Bitcoin. If Bitcoin’s market cap were to rise to equal that of gold’s as a percentage of global GDP today, that would imply a price of $160,650 per Bitcoin, far, far higher than any price target I have yet seen. Even if Bitcoin were only to rise to 10% of gold’s market cap, that would imply a Bitcoin price of $16,065, still far higher than any price target I have seen. Even at 1% of gold’s market cap, Bitcoin would still fetch $1607 per coin, an almost-sevenfold increase over today’s price.

And gold is by no means a widely-held asset in today’s global financial system. If Bitcoin grew to 1% of the global financial system today each each coin would reach $267,600 in price.

These are, of course, fantasy figures based on back-of-an-envelope calculations, and should not be taken seriously. But what they show is that if the idea of Bitcoin continues to flourish — and if fund managers, and institutional investors begin to hunger for a slice of yield — then there is more than enough liquidity out there today to drive Bitcoin far, far higher.

On the other hand, if Bitcoin is outlawed worldwide by governments (perhaps due to concerns over money laundering and tax evasion) then of course any chance of it beginning to attract any such levels of interest are nil.  But the current government approach to Bitcoin so far appears to be one of attempted regulation rather than outright warfare.

At some stage Bitcoin may be supplanted by competitor crypto-currencies, but so far it is by far the most widely-adopted, and cryptography experts agree that its cryptography is sound, so there is no reason to assume that this may occur anytime soon. But judging by the birthrate and deathrate of social networks in recent years, a fast birthrate and deathrate for crypto-currencies is by no means out of the question. Technology is a fast-paced world where yesterday’s prize-pig is today’s turkey, and already there exist currencies built on similar technology to Bitcoin trading at much lower levels — Litecoin, Namecoin, Freicoin, PPCoin, Novacoin, etc. Whether these act as supplements or competitors remains to be seen, but it may be helpful to remember that while social networking sites today remain hugely popular, the early leaders in that field like MySpace and Friendster are nowhere to be seen. Is it possible that Bitcoin is the MySpace of decentralised crypto-currencies, and that the Facebook and Twitter are just around the corner? Yes — perhaps a platform with a more consumer-friendly interface than Bitcoin will come to dominate the field, making up a sizeable chunk of global financial assets, and Bitcoin itself will dwindle.  Certainly, the source code is available to larger organisations (Facebook? Google? Amazon? Banks?) who may wish to experiment with their own decentralised crypto-currency systems.

It is really hard to say what ultimately will occur, but Bitcoin does demonstrate the principle that anonymous, deflationary crypto-currency can be an attractive complementary proposition in a world where inflationary state-backed fiat currency has become the norm. I would caution that holders of Bitcoins — particularly those sitting on large long-term profits — should seek to diversify both into real-world assets like real estate, productive assets like farmland and factories, and index funds, as well as into new crypto-currencies as they emerge, particularly ones built with more consumer-friendly interfaces that may come to dominate the market. Bitcoin could easily end the year below its current price, but as Bitcoin grows in the public awareness this is decreasingly likely. In the long-term, a market cap target of 1% of gold’s market cap (currently, that would yield a price of $1607 per coin) seems viable, especially if larger players including institutions begin to experiment in the strange new world of crypto-currency.

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Ben Bernanke Must Be Hoping Rational Expectations Doesn’t Hold…

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In the theory of rational expectations, human predictions are not systematically wrong. This means that in a rational expectations model, people’s subjective beliefs about the probability of future events are equal to the actual probabilities of those future events.

Now, I think that rational expectations is one of the worst ideas in economic theory. It’s based on a germ of a good idea — that self-fulfilling prophesies are possible. Almost certainly, they are. But expressed probabilities are really just guesses, just expressions of a perception. Or, as it is put in Bayesian probability theory: “probability is an abstract concept, a quantity that we assign theoretically, for the purpose of representing a state of knowledge, or that we calculate from previously assigned probabilities.”

Sometimes widely-held or universally-held beliefs turn out to be entirely irrational and at-odds with reality (this is especially true in the investment industry, and particularly the stock market where going against the prevailing trend is very often the best strategy). Whether a belief will lead to a reality is something that can only be analysed on a case-by-case basis. Humans are at best semi-rational creatures, and expectations effects are nonlinear, and poorly understood from an empirical standpoint.

Mainstream economic models often assume rational expectations, however. And if rational expectations holds, we could be in for a rough ride in the near future. Because an awful lot of Americans believe that a new financial crisis is coming soon.

According to a recent YouGov/Huffington Post survey:

75 percent of respondents said that it’s either very or somewhat likely that the country could have another financial crisis in the near future. Only 12 percent said it was not very likely, and only 2 percent said it was not at all likely.

From a rational expectations perspective, that’s a pretty ugly number. From a general economic perspective it’s a pretty ugly number too — not because it is expressing a truth  (it might be — although I’d personally say a 75% estimate is rather on the low side), but because it reflects that society doesn’t have much confidence in the recovery, in the markets, or in the banks.

Why? My guess is that the still-high unemployment and underemployment numbers are a key factor here, reinforcing the idea that the economy is still very much in the doldrums. The stock market is soaring, but only a minority of people own stocks directly and unemployed and underemployed people generally can’t afford to invest in the stock market or financial markets. So a recovery based around reinflating the S&P500, Russell 3000 and DJIA indices doesn’t cut it when it comes to instilling confidence in the wider population.

Another factor is the continued and ongoing stories of scandal in the financial world — whether it’s LIBOR rigging, the London Whale, or the raiding of segregated accounts at MF Global. A corrupt and rapacious financial system run by the same people who screwed up in 2008 probably isn’t going to instill much confidence in the wider population, either.

So in the context of high unemployment, and rampant financial corruption, the possibility of a future financial crisis seems like a pretty rational expectation to me.

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On Stockman & Liquidation

David Stockman’s New York Times Op-Ed has ruffled a lot of feathers. Paul Krugman dislikes it, saying Stockman sounds like a cranky old man, and criticising Stockman for throwing out a load of meaningless numbers that sound kind of scary, but are less scary in context. Krugman is right on both counts, but what Krugman overlooks is Stockman’s excellent criticism of crony capitalism, financialisation, systemic rot and Wall Street corruption of Washington, something Stockman has seen from the inside as part of the Reagan administration.

The important part:

Essentially there was a cleansing run on the wholesale funding market in the canyons of Wall Street going on. It would have worked its will, just like JP Morgan allowed it to happen in 1907 when we did not have the Fed getting in the way. Because they stopped it in its tracks after the AIG bailout and then all the alphabet soup of different lines that the Fed threw out, and then the enactment of TARP, the last two investment banks standing were rescued, Goldman and Morgan Stanley, and they should not have been.

As a result of being rescued and having the cleansing liquidation of rotten balance sheets stopped, within a few weeks and certainly months they were back to the same old games, such that Goldman Sachs got $10 billion dollars for the fiscal year that started three months later after that check went out, which was October 2008. For the fiscal 2009 year, Goldman Sachs generated what I call a $29 billion surplus – $13 billion of net income after tax, and on top of that $16 billion of salaries and bonuses, 95% of it which was bonuses.

Therefore, the idea that they were on death’s door does not stack up. Even if they had been, it would not make any difference to the health of the financial system. These firms are supposed to come and go, and if people make really bad bets, if they have a trillion dollar balance sheet with six, seven, eight hundred billion dollars worth of hot-money short-term funding, then they ought to take their just reward, because it would create lessons, it would create discipline. So all the new firms that would have been formed out of the remnants of Goldman Sachs where everybody lost their stock values – which for most of these partners is tens of millions, hundreds of millions – when they formed a new firm, I doubt whether they would have gone back to the old game. What happened was the Fed stopped everything in its tracks, kept Goldman Sachs intact, the reckless Goldman Sachs and the reckless Morgan Stanley, everyone quickly recovered their stock value and the game continues. This is one of the evils that comes from this kind of deep intervention in the capital and money markets.

There are plenty of other writers who have pointed to this problem of propping up casino finance, including myself. But very few of them are doing so on the pages of the New York Times. So while it’s rather disappointing to see Stockman railing against deficits when the evidence shows capital and labour markets are still very slack even with large deficits, and while it’s rather disappointing to see him making technically-incorrect claims about the United States being “bankrupt” — sovereign lenders controlling their own currency cannot go bankrupt — we should not throw the baby out with the bathwater. Stockman is a cranky old man — but when it comes to drawing attention to real-world problems with crony capitalism, he’s doing a fine job.

Many will say that just letting the banks liquidate was not an option. I tend to disagree — depositors could have been protected, and a new part-nationalised banking system could perhaps have been built and capitalised just as quickly as the old dinosaurs were bailed out — but even if we assume liquidation to be impossible there are plenty of other options to bring the financial sector to heel. It is extremely disappointing to see the Obama administration fail to go after the banks in any meaningful way. The administration could have tried to break up the TBTF megabanks, reimpose Glass-Steagall, impose the Volcker Rule, fire failed management. Perhaps even try to impose the Chicago Plan. Without Fed liquidity, the US banking sector is toast, so almost any reform is possible.

Instead the banks took their bailouts without any discipline, and guess what? We’ve had even more systemic corruption, carrying on in the same pre-2008 mould — the London Whale, Ina Drew, Kweku Adoboli, the theft of segregated deposits by MF Global, even while financial sector stocks have soared. Central banks have reinflated the markets, but with the same people who created the last bust still in charge, it looks much more like a reinflated bubble than a road to lasting prosperity. Papering over the cracks…

The result of that is soaring corporate profits while employment and wages remain depressed. Feast for Wall Street, famine for Main Street. Obama may deploy plenty of populist rhetoric, but outcomes speak for themselves:

fredgraph (19)

Stockman has actually gone further in the past, criticising the toothlessness of Dodd-Frank in dealing with the problem of Too Big To Fail, and even endorsing a return to Glass-Steagall and the banning of corporate campaign donations. This 30-minute video is really worth watching:

 

In the long run, I think it will become patently clear that throwing liquidity at the financial system won’t solve anything other than immediate liquidity concerns. The rot was too deep. The financial sector needed real reform in 2008. It still needs it today.

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Whose Insured Deposits Will Be Plundered Next?

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According to Zero Hedge, it could be Spain:

 Spain, it would appear, has changed constitutional rules to enable a so-called ‘moderate’ levy on deposits.

New legislation in New Zealand suggests that depositor funds could be used to bail out banks there, too.

Far more worrying for American and British depositors though is this paragraph Golem XIV brings up from a joint Bank of England and FDIC paper from 2012 which points to the possibility of using deposit insurance funds to bail out illiquid banks:

The U.K. has also given consideration to the recapitalization process in a scenario in which a G-SIFI’s liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalization of the firm, as they may do under the Banking Act in the use of other resolution tools. The proposed RRD also permits such an approach because it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in, provided that the amount contributed does not exceed what the deposit guarantee scheme would have as a claimant in liquidation if it had made a payout to the insured depositors.

Of course, if deposit insurance money is used as a resolution tool to bail out a bank which then goes on to fail anyway (as we have already seen multiple times since 2008 — a bank receives a large liquidity injection, and goes onto fail anyway) depositors could end up moneyless.

As Golem XIV notes:

The new system makes the Deposit Guarantee fund available for use as bail out money.

The rationale is that if using your deposit guarantee fund for propping up the bank ‘saves’ the bank from collapse then you wouldn’t need that deposit guarantee would you? This overlooks the one lesson we have all learned from the bank bail outs of the last 5 years, that the bail outs are never, ever, ever, a one off. The first one fails to save the bank as does the second and third and and and.

So if I have read the above correctly – the new system raids the Deposit Protection scheme, gives it to the bank instead of you  and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme.

Now, in the case of this kind of scenario actually happening, it seems probable that governments and central banks would try to replenish the deposit insurance fund. Whether the fund would be replenished to its full extent, or whether insured depositors would suffer an effective haircut remains to be seen.

These kinds of policy suggestions coming from governments and central banks are extremely worrying for depositors, because it implies that what is happening to Cypriot depositors and Cypriot banks could be forced onto British and American depositors. In a worst-case-scenario, criminally minded bankers (of which there seem to be many) could even use this provision to intentionally run off with deposits.

We know that the TBTF banking sector (or G-SIFI’s — global systemically important financial institutions — as they are now known) remains fragile, over-connected and dependent on insider advantages. That means that over the next few years, it remains possible that there could be another severe banking crisis in Britain or America or both.

Just what in the world do financial regulators think they are doing even implying that depositor guarantee funds could be used to bail out banks under such an eventuality? Such a recommendation — and the attendant possibility of insured depositor haircuts — could severely impact confidence in the banking sector, just as it has done in Cyprus. The possibility that insurance money may go down the toilet to bail out illiquid banks will make some uneasy to invest their money in the banks. If a severe banking crisis looms, it could lead to bank runs, just as is happening in Cyprus. The trend, if events in Cyprus and Europe continue to escalate, and if other jurisdictions do not take steps to protect depositors from banker greed, is toward depositors losing faith in the banking system, and seeking other stores of purchasing power — mattress stuffing, bitcoin, tangibles.

Essentially, if there is to be any confidence in the banking system, the possibility of depleting liquidity insurance funds to bail out banks needs to be taken off the table completely. The possibility of insured depositor haircuts needs to be taken off the table completely. If banks need bailing out, the money must not come from insured depositors, or funds designed to compensate insured depositors. If banks fail, the losers should be the uninsured creditors.

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When All Else Fails, Housing Bubble

Last month I asked:

So what’s Osborne’s plan to generate growth?

Today we seem to have an answer.

As Anatole Kaletsky sarcastically put it:

That’s right — aside from an underfunded infrastructure pledge, a duty cut on beer and cigarettes, and a tiny and delayed corporation tax and national insurance decrease, George Osborne’s plan is to throw money at housing and hope for the best. 

Sounds markedly similar to the American strategy following 2001 when Greenspan “created a housing bubble to replace the NASDAQ bubble”, and we all know how that ended.

I’d tend to argue that the opposite is a much better idea. Instead of propping up the housing market, Cameron and Osborne should deregulate construction and planning (getting planning permission can be a long, costly task in the UK, and planning restrictions are estimated to add up to £40,000 to house prices) so that housing prices fall (if not absolutely at least priced in median wages) and Generation Y can start getting on the housing ladder.

As Faisal Islam put it:

But alas no. Instead of using the ultra-low interest rate environment and idle resources to invest in a quality business infrastructure  — high speed broadband, roads, railways, energy — and lower unemployment, Osborne has chosen to throw his stock in with the malinvestment-loving property speculators.

Unfortunately, pumping up credit bubbles can win elections (as we saw with Bush in 2004), so this may have improved the Tory electoral chances for 2015. But in the long run, we will see this as a dire move.

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“Get Your Money Out While You Can”

One can only wonder how long it will take before Europeans particularly in Spain, Greece and Italy, begin to take that advice.

The Euro system amplifies shocks. Monetary union without fiscal union, economic integration without high levels of interstate mobility, enforced austerity in the weakest economies. And now the precedent of deposit confiscation. The only indicator that seems to be rising throughout the Eurozone is the number of protest signs comparing Angela Merkel to Hitler.

Romano Prodi famously noted that the Euro system was weak, and that necessary reforms would be made when the time came in order to make it sustainable. Well, the Cyprus bailout and deposit levy, the national and international outcries and the subsequent “no” vote in the Cypriot parliament are all signs that in the wake of all the bailouts of the periphery that Europe is far from fixed. The necessary measures have not been taken. While the ECB may have taken measures to lower government borrowing costs in the periphery, the situation is in many ways — especially unemployment — still deteriorating. In fact, it seems like Eurocrats are trying to enforce the opposite of what might be necessary for sustainability — rather than installing a mechanism to transfer money to weakened economies suffering from high employment, Eurocrats seem to be trying to do everything to drive unemployment higher in the periphery, spark bank runs, as well as aggravate tensions with Russia.

This is a crisis of institutions and a crisis of leadership as well as a crisis of economics. Merkel cannot lead Europe and Germany at the same time, because taking steps to revive the ailing Southern economies hurts her standing with the German and Northern public.

The Eurocrats have asked for a bank run by demanding depositor haircuts in Cyprus. The public would not be at fault for giving them one. Farage’s advice is wise.

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Why Europe Is Still In Peril, In Two Charts

A lot of analysts, including myself, have given the European situation a rest since last year. There were certainly some signs that the ECB and IMF had slowed (if not stopped) the deterioration by providing liquidity backstops to the addled banking system. But perhaps that was just the calm before the storm.

In truth, things were still was probably just as perilous as ever up until yesterday when the ECB and IMF decided to start a banking panic by enforcing a haircut of up to 10% on bank depositors. That was literally the stupidest thing that anyone has done since the Euro crisis began, and while it may not lead to utter disaster, there is a significant chance that it will. Not only is it excruciatingly unjust (it’s theft!), it is also incredibly suicidal. Many, many Spaniards, Italians, Greeks and Portuguese will have looked at the Cyprus haircut in horror, and wondered “Am I next?” Some of those will withdraw their money from the bank and stuff it in a mattress or into tangible assets, furthering stressing the already-fragile and highly-leveraged European banking system. Even a 1% drop in European deposits would lead to over €100 billion of withdrawals.

The background to this is soaring European unemployment:

EuroUnemployment

The people running the European financial system and engineering the bailouts and austerity (ECB, EU, IMF, Germany) have ploughed on through with more and deeper austerity even as European countries (other, of course, than Germany) have run up to higher and higher unemployment levels. Spain and Greece are above 25%. Italy is above 10%, and Portugal above 15%. Hiking taxes and cutting spending is leading to more and more people in unemployment oblivion. That isn’t healthy. Let’s not forget what happened to Germany the last time when over 25% of its people found themselves unemployed:

Chart-German-Unemployment-and-Nazi-Links

If bank runs materialise across Europe next week, the unemployment situation is most likely to worsen even further. If that happens, expect more and more unemployed, underemployed and angry Europeans to start voting for increasingly radical political parties. This is suicidal. Europe needs to not only reverse the awful, stupid Cypriot haircut, but also to put fiscal consolidation on hold (it has, lest we forget, so far been counterproductive) and start worrying about unemployment levels.

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Sparkassen — A De Facto Glass-Steagall?

Ed Miliband has a very good idea to break the British lending freeze:

Ed Miliband is to make his firmest commitment to a regional-based economic policy when he proposes a network of banks around the country responsible for providing capital to businesses in their locality.

The proposals, due to be unveiled in a speech to the British chambers of commerce, mark a further attempt to map out a different industrial policy, some of which has echoes of plans for a revival of city regions set out by the coalition adviser Lord Heseltine.

Miliband will say it is time to stop tinkering with the banks and recognise a wholly new system is needed.

He will say: “We do not just need a single investment serving the country. We need a regional banking system serving each and every region of the country. Regional banks with a mission to serve that region and that region alone, not banks that are likely to say no but banks that know your region and your business; not banks that you mistrust, but banks you can come to trust.”

I would not support politicians interfering with the financial sector if the British financial sector was a successful model. But the country is still hurting from its utter failure in 2008. Back then, Ed Miliband’s predecessor Gordon chose to bail out the banking system. Had the financial sector been allowed to fail, then a new model would have been forced to emerge. But that wasn’t the case. Now, politicians must take responsibility for putting the banking system on a life support system. The current government’s attempts at reform have not succeeded in revitalising the economy.

Miliband’s idea approximates the German model of Sparkassen — publicly owned regional banks:

Supporters of the local banks claim that in 2011 total loans by the Sparkassen stood at €322bn (£280bn), whereas the total loan stock of Germany’s large commercial banks was only €177bn (£153.5bn). Like Britain’s large banks, Germany’s large commercial banks cut credit during the financial crisis; lending fell by 10% between 2006 and the middle of 2011. In contrast, the Sparkassen increased lending by 17%.

On the surface, regionalisation may be helpful in that British banks have become over-centralised and disconnected from the interests of their local customers. This may be one factor that can explain why local, small and new businesses are struggling to get credit.

But this is an even better idea than Miliband may realise. Why? Because so long as the regional banks behave solely as depository and business investment institutions, and not as investment banks, insurance brokers, hedge funds, shadow banks, or proprietary traders, or any of the other highly interconnective and risky activities favoured by today’s supermarket banks — then such a system acts as de facto Glass-Steagall-style separation between the riskier privately-owned national and international-level commercial banks, and the regional level business investment and savings banks.

Such a system also echoes the recommendation made by Nassim Taleb, to nationalise the parts of the banking system that act as a public utility, and deregulate the rest so it is free to gamble, speculate, succeed and fail without significantly destabilising business lending, public savings, and the wider economy.