Michael Meacher - Labour's Future

Michael - your approach is one of better regulation but, with respect this does not get to the heart of things. If we were to have "better" regulation who would be qualified to do the regulation? Isn't it obvious it would turn out to be people, bankers, who had worked in the banking industry. There would be a revolving door between the banking industry and its regulators. I would not normally recommend the Daily Mail but this article, in which Nick Leeson, who broke the Barings Bank describes how, working alongside the "best brains" in the trading rooms competing fiercely and taking risks "are the grey men of the back office.... they are the second problem. They do the paperwork behind the traders' deals and run the regulatory systems. It is their job to monitor the markets and ensure checks and balances are properly applied. These bankers are invariably not up to it. The front end of the business is far more profitable. The brightest and best are seduced by the lure of big bonuses, leaving the thirdraters and burn-outs to take safe desk jobs in staid institutions such as the Bank of England."

http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=482060&in_page_id=1770

That is why others think the better approach is to impose a change in incentives on senior managers. I don't think this is the answer either but it will be the one that you are most likely to find coming up from most economists. In an article on the Financial Times web site Martin Wolf, their economics correspondent, argues that:

"The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system – on most counts, the world’s most sophisticated – four times during the same period: from the developing country debt and “savings and loan” crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitised-credit crisis of 2007-08.

No industry has a comparable talent for privatising gains and socialising losses. Participants in no other ndustry get as self-righteously angry when public officials - particularly central bankers – fail to come at once to their rescue when they get into well-deserved) trouble.

Yet they are right to expect rescue. They know that as long as they make the
same mistakes together – as “sound bankers” do – the official sector must
ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.....

It is the nature of limited liability businesses to create conflicts of interest – between management and shareholders, between management and other employees, between the business and customers and between the business and regulators. Yet the conflicts of interest created by large financial institutions are far harder to manage than in any other industry.

That is so for three fundamental reasons: first, these are virtually the only businesses able to devastate entire economies; second, in no other industry
is uncertainty so pervasive; and, finally, in no other industry is it as hard for outsiders to judge the quality of decision-making, at least in the short run. This industry is, in consequence, exceptional in the extent of both regulation and subsidisation. Yet this combination can hardly be deemed a success. The present crisis in the world’s most sophisticated financial
system demonstrates that.

I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself – across the globe. So it is time to start thinking radical thoughts about how to fix the problems."

Regulators should intervene in bankers’ pay http://www.ft.com/cms/s/0/73a891b4-c38d-11dc-b083-0000779fd2ac.html
By Martin Wolf

As it turns out Martin Wolf's radical measures are not radical at all- because radical means to go to the roots of things. For Martin Wolf "radical" merely involves regulators tinkering with the incentives for banker managers - so that their remuneration is based on their long run results rather than short run returns. "All bonuses and a portion of salary for top managers should be paid in restricted stock, redeemable in
instalments over, say, 10 years or, if regulators are feeling generous, five."

My own comment on this is that the money system is something that everyone in society has to use and benefits from. We have no choice over that. Moreover,since the money system was not invented by the brilliance of any individual or created by the hard work of any other individual or group, but evolved out of a long social-historical process involving the whole of society, rather like language or the legal system, it is hard to justify the idea that any individual or corporation should have the right to use the monetary system as if they owned it. Yet this is what bankers to. They have, in fact, privatised a social and cultural "commons".

This privatisation is obviously highly advantageous because it confirs the
right to create money. If monarchs or states have that right then their first use of money, seignorage, without having to give anything in exchange, means they can spend out of the social product (on wars for example). Bankers by contrast obviously create money because someone is prepared to sign a contract with them for a loan to be paid back with interest. (Or that was how it used to be before bankers earned fees for selling the loans they have created to some other sucker that carries the risk).

As Martin Wolf acknowledges there is clearly a conflict here. Precisely because the money system is a commons that we must all use it cannot be allowed to collapse. That means the institutions that create the money as debt in their private interest cannot be allowed to collapse either. Nice position to be in. As Wolf says we can all be held to ransom. That is not something that can be allowed to continue.

However this is not simply a problem of bankers failing to carry the can for
their mistakes. There is a deeper and more fundamental problem It is only if the economy is still growing that there is additional real output to be sold
to pay for the interest. Without the extra output there will be a lot of
foreclosures and re-possessions. In a non growing economy if bankers are going to get repaid with interest then everyone else is eventually going to end up having their possessions taken over by bankers at some rather vicious fire sale prices. Clearly that doesn't sound like a functioning economy with much of a future. Yet this is the implication of peak oil and gas and climate change.

In fact if the real economy doesn't grow (fast enough) then an expansion in credit and the banking sector is only possible through asset price speculation - which is bound to come a cropper eventually as it becomes more out of line with underlying economic fundamentals.

Neither Wolf's proposed reforms nor yours will solve this. Putting in some grey regulators from the industry or tinkering with the system of incentives and bonuses will not get to the heart of these more fundamental problems. The monetary system must be managed as a commons that serves us all. The banks right to create money as debt needs to be abolished.

Sadly I think there is little chance that the government and bankers will pay any attention to these kind of ideas - and they will certainly give no publicity to them. This means that if one wants to see an alternative monetary system one must create it oneself. If, as is not impossible, the financial and monetary system goes belly up over the next few years as the world economy overshoots the limits to growth, the need will be to develop local and DIY currencies to replace bank and debt money rather than "calling on" government and bankers to reform themselves(Some chance of them paying any attention to that!)

One approach is to issue local currencies starting them up as if they were book or gift tokens. In the initial stages they can be converted back into
the national currency at a fixed rate and are accepted as payment medium in a
local community just the same as national currency notes and coin. Once they are in general circulation and generally accepted as payment in a locality then, with general agreement, one can remove exchangeability. The key to getting a currency to function as a currency is acceptance and familiarity.
This depends on having a community based organisation that is trusted to manage the money system in the interests of all rather than in the private interests of bankers and individuals - bound by a constitution that keeps a check on the money makers....A currency based on tokens has been established in Totnes by Transition Totnes.

Local currencies spent into existence by local authories in Argentinia became generally accepted when there was a currency crisis in that country. They were withdrawn later as the central bank was frightened that Argeninia would break up. All such alternative systems eventually come under intense pressure to be packed in when the national currency and monetary system is on the
mend. This happened in Austria in the 1930s when a local currency system
succeeded in dramatically reducing unemployment in the town of Woergl in the Great Depression. Tough - it threatened the bankers and they stepped in to put a stop to it.

However, we should seriously think of the implications of this. The banking system is a major system underlying the growth economy. Once the growth economy is broken by peak oil and peak gas and climate change it is to be doubted that a debt based money system that requires and assumes growth is either viable or desirable....Doubtless the bankers may try to use the law to break local currency systems - but it is worth bearing in mind that while it is illegal to create money by trying to forge bank notes it is not illegal for bankers to create money by lending it into existence. As the noted economist JK Galbraith put it

"The process of money creation is so simple, the mind is repulsed"
-J.K. Galbraith

On the BBC today there was an article in which financial journalists talked
with enthusiasm about the financial crisis - because it was interesting. In a year or so it may be more than interesting it may be a source of mass misery. We should not forget the system that set this catastrophe in motion - it
needs replacing. People like Wolf realise that it will be seen as having a
credibility crisis and are already putting in place their alternative
political programme for banking. Something much more fundamental is needed that Wolf describes - and you too Michael!

Brian Davey

Further to my other comment - the failure of the control mechanisms and Societe Generale, although in France, suggests that suggesting greater regulation simply does not go far enough. If the banks cannot prevent such a massive fraud inside their operations what hope is there from outside? This article from the BBC web site suggests that the entire organisational culture of the banking system is thoroughly corrupted. That being the case proposing more regulation really won't solve the problem. As I said in my earlier post - we are being told over and over again "the banks do not trust each other" - so what conclusion can we draw from that other than that we must begin again, right from the beginning when it comes to a monetary system. In any case, if you take your own comments about peak oil seriously, the banking system, which depends on growth, is unlikely to be able to survive the impact. Here's the BBC article:

http://news.bbc.co.uk/1/hi/business/7207563.stm

Roger Steare, professor of rganisational ethics at Cass Business School, says that the trading scandal at Societe Generale is evidence of a wider malaise in the banking industry that used to have a reputation for honesty,trust and prudence.

In addition to the latest news, the banking industry is also grappling with
massive losses related to the crisis in the US sub-prime mortgage market. In
the UK, it is under fire for allegedly overcharging customers.

"There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry," says Professor Steare.

Professor Steare says he has undertaken integrity tests for more than 700
financial services executives in several major firms.

The results of these tests indicate that as a group, they score lower than average in honesty, loyalty and self-discipline, he said.

He compared traders to "mercenary hired guns", who regularly switch firms to
maximise earnings.

"Technology does help prevent these kinds of scandals, but it's people's
behaviour that counts," he says. "What leaders in the banking industry need to do is to ensure that the high-minded business principles that they all say they stand for become a reality in the behaviours of everyone they employ."