What a crisis!   Bank profits + 20%, public spending – 25% (might it be – 40%?).   The nation (or at least the government) seems to have forgotten about ‘moral hazard’ – that if people aren’t punished or properly brought to book for their bad bahaviour, they may draw the lesson that they can do it again with impunity.   The City of London is certainly an immoral place, but we should hardly encourage it – yet that’s exactly what the government’s doing.   And it’s not just an abuse of morality, it’s hard-headed economics that is being abused, in two clear ways.

First, the government have not only not penalised the banks (the so-called £2.5bn banking tax will be easily avoided by balance sheet adjustments), even more reprehensibly they have made no reforms to prevent a repetition.   They plan to shift regulatory responsibility back to the Bank of England away from the FSA, but that’s little more than shifting round the tables in the casino unless the regulator has significantly more powers and uses them more robustly.

Extraordinarily the US, the citadel of capitalism, is being far more stringent on the banks than the pallid UK response.   The US Government is pushing through a giant Wall Street Reform and Consumer Protection Act, the biggest overhaul of finance since the Great Depression.   It numbers 2,319 pages and prescribes comprehensive reform in three key areas.   It requires fancy derivatives (the precipitating cause of the meltdown) to be traded on public exchanges, not dealer-to-dealer, thus reducing the opacity and leverage that they have previously imparted to the financial system.

It also deals, crucially,  with troubled banks that are too big to fail by authorising the federal regulators to seize any financial company whose failure threatens the financial system, pay off secured creditors, and then impose losses on shareholders and unsecured creditors.   And it improves regulatory oversight by creating a council to advise regulators on emerging threats, as well as pulling oversight of consumer financial products from mortgages to credit cards into a single agency.   Not perfect, and maybe not enough, but a vast improvement on UK lethargy and complacency.

But the perversity of displacing the consequences of the banks’ malefaction on to innocent victims in the public sector doesn’t end there.   It is bizarre that with a budget deficit of some £150bn, painful cuts are being imposed on  key public services when the Tax Justice Network has just published evidence to show that illegal tax evasion now accounts for some £70bn lost revenue, tax avoidance for another £25bn, and uncollected taxes for a further £28bn.

What makes this overlooking of the obvious way to cut the deficit much more piquant still is that government has been cutting the very department responsible for reclaiming this badly needed revenue.   Since 2006 HMRC, following heavy lobbying from corporate vested interests, has cut 21,000 jobs and is now closing over 200 local offices.   When a tax inspector brings in an average of £600,000 a year in tax yield after staff costs, to continue cutting is not only absurd but very clear evidence that these massive public spending cuts are not so much about reducing the deficit as ideologically shrinking the State.

Bookmark to: