Quousque tandem abutere, Catalina, patientiam nostram? The Roman consul Cicero’s cry of anger at his victim’s obduracy – “How long finally will you abuse our patience?” – might well be applied to today’s banks as the economy crashes and the banks seem unmoved by anything beyond their own preservation. After the £500bn October bail-out package which was openly stated by the Government as intended both to rescue the banks and to get lending restored to 2007 levels (though this was over-stated), the banks actually reduced lending in the last quarter of 2008. They then announced that they were reducing lending still further in the first quarter of this year. This provoked a further £50bn credit guarantee support package from the Treasury in January, though without any sign yet that credit markets have been unfrozen. The Government for good measure then added a further £10bn scheme to provide guarantees covering 50% of loans to small businesses which the employers’ federation welcomed, but then added: “The key problem remains the banks’ willingness to lend to viable businesses”.
It is now clear beyond doubt that no amount of inducements to bribe the banks (already equivalent to nearly 40% of GDP) to start re-lending on anything like the scale required is going to work. The banks are effectively on strike, and the insatiability of their demands for more and more support is matched only by the Government’s obeisance in continually yielding to them. No other institution in the realm would be allowed to get away with such destructive self-interest. For the sake of stopping the growing, endless haemorrhaging of jobs, homes and incomes, the banks must be reined in from holding the nation to ransom.
It’s not as though the banks show any sign of reform. Virtually all those who presided over this monumental financial disaster are still in place. City bonuses, which embed the greed and recklessness, are still being paid at eye-watering levels – £13.7bn in 2008. The speculative trading and offshore activities are still continuing – Britain is still refusing to join the new international crackdown on financial secrecy and tax havens launched in January by more than 50 countries. A recent leaked letter by Alistair Darling exposed that the UK’s negotiating line at the G20 summit in April is that lightly regulated capital markets must be maintained – precisely what caused the present catastrophe.
Even the new feisty chairman of the Financial Services Authority, Lord Adair Turner, fell far short recently in his prescriptions. He called for more adequate capital ratios, monitoring to ensure short-term liabilities are not matched to long-term commitments, and treatment of the virtual world of structured investment vehicles and the other alphabet soup of financial derivatives as banks in their own right. But this does not begin to get to the root of the problem.
It is significant that there were no banking crises in the West after Bretton Woods introduced an era of managed capitalism involving strict regulation and international capital controls after the 1930s Great Depression. By contrast, this is now the sixth financial collapse since the birth of deregulated capitalism, sometimes called neo-liberalism, three decades ago. It is also by far the most serious because while previous crises damaged the margins of the international economy (in countries such as Mexico, Malaysia, Thailand, Korea, and Russia), this time it has struck its epicentres on Wall Street and the City of London which had previously regarded themselves as invulnerable. Further, the advent of globalisation has synchronised economic cycles more than before, thus exacerbating the severity of the downturn when it comes.
There is a growing consensus, which, sadly, Britain seems reluctant to accept, that the world’s financial system must be radically re-organised to reduce the inherent systemic risk. There are several inter-connected elements needed in this new global framework. First, the dark centre of the neo-liberal financial system, the $62 trillion market in credit derivatives and particularly credit default swaps, has to be brought under control. Its size is so vast – equal to double the GDP of the US, Europe and Japan combined – that it threatens constant instability in the system. We need a global authority (and should start with a national authority till we get one) which will supervise these markets, prohibiting the more toxic forms of derivatives, requiring approval for all new financial innovations, and enforcing transparency in such products whenever they are permitted.
Second, independent credit rating agencies are needed in order to assess risk objectively. It is one of the most shocking indictments of City deregulation that credit rating agencies were funded by those financial institutions whose creditworthiness they were supposed to assess. Similarly, auditors are not in reality appointed and remunerated by shareholders, but rather by company directors. Strict market regulation is also needed to deal with other conflicts of interest, more open disclosure, capital requirements, and market manipulation.
Third, the neo-liberal era has altered the balance of power far too much away from the supervisory State towards free-wheeling capitalist markets prone to reckless excess. Hedge funds and private equity – privately owned investment companies now responsible for half the daily turnover of shares in the London stockmarket – can often use their enormous resources and secretive ways of operating, through shorting and other techniques, to destabilise even well-managed and successful companies, for massive private gain against the wider public interest. They should be required to disclose their leverage/debt exposure, the source and amount of funds raised, and identify larger shareholders for all investment products. The biggest banks, which are (or rather were) enormous, should be broken up by anti-trust law so that we are never again forced to rescue banks simply because ‘they are too big to fail’.
Fourth, we need a wholly different corporate governance, especially in the financial markets, so that directors do not in effect award themselves bonuses for non-performance. We need remuneration structures that are not biased in favour of reckless speculation. There are good grounds for abolishing bonuses altogether because their effect is so often counter-productive, but certainly no City bonuses should continue without the explicit approval of the regulatory authorities – and the FSA needs to be much more robust and interventionist, on the grounds that recent experience has shown how much the markets are not to be trusted when left to themselves.
We need the banks, but operating a very different kind of capitalism, one that is more transparent, more tied to the public interest, and more committed to long-term growth rather than short-term greed.
This article first appeared in Tribune on 20 February 2009