A billion pounds was wiped off the value of taxpayer-owned banks on Friday after Ed Miliband promised to bring “reckoning” upon the industry.
Business leaders warned Labour’s flagship economic plan to break up the major banks’ dominance of the high street could end in disaster, while the party’s own shadow business secretary admitted taxpayers would lose out.
Shares in the Royal Bank of Scotland and Lloyds dived as the Labour leader promised to force the big five high street lenders to shed branches.
Experts warned it could trigger a repeat of the doomed attempt by the Co-op to take over hundreds of Lloyds branches. The bid, overseen by the disgraced Methodist minister Paul Flowers, pushed the bank to the brink of collapse.
Well, we shouldn’t allow that last part of the story to stand. It wasn’t trying to take over the branches that busted the Co Op Bank. It was trying to do so that revealed the information that it was busted.
But think about what the market reaction to the plan is. There are two possible stories to tell here.
One is simply that the markets (and we must be careful not to reify them too much) think that any sector which the government decides to “manage” is going to be irretrievably fucked up and therefore to mark down any sector that gets that attention. I tend to like that explanation myself.
However, there’s a more logical story to tell. Which is that the market believes that those incumbent banks are indeed earning economic rents, excessive profits, as a result of the lack of competition. Thus the introduction of more competition will lead to the absence of those economic rents and thus the companies are worth less.
If we are to have the courage of our own opinions, believe that markets do indeed with their prices tell us things, this should at least be something we consider. And I’d guess that there’s a certain amount of truth to this story.
I think the lack of competition comes from the fact that we all tend to change our banks less often than we change our mortgages: it’s not that there isn’t competition, it’s that we’re unusually deaf to its siren songs. Quite how to change that I’m not really sure.
But, back to the main story: Miliboy says banks are an oligolpoly/cartel, he’s going to do something about it and bank shares fall. This is the market conceding that Miliboy does actually have a point. And the deliciousness of this argument is that those who are anti-market can only use it if they do indeed agree that market signals do in fact means something…..therefore, that they’re not really anti-market.