It is almost incredible that a nation like ours – which prides itself on being rational, committed to public debate, willing to learn from past mistakes – can be drifting towards the next financial crash with eyes wide shut. Several events in the last few weeks cannot be explained in any other way. The Vickers Commission on Banking passed up the once-in-a-generation opportunity to split the retail arm of the banks from the investment arm, with no implicit taxpayer guarantee for the latter, so that no bank would be too big to fail and there would be no bailout for reckless speculation. The Vickers cop-out means we have learnt nothing: it will still next time be a huge bail-out or systemic collapse. There have been no checks imposed on bankers’ pay or bonuses, no deterrent to their recklessness, no increase in bank lending to businesses, no constraints on taxic derivatives, no regulation of the credit-rating agencies to remove conflict of interest, no action taken against offshoring or tax havens. But that’s not all.
We’ve now been warned by the Financial Stability Board, the global financial watchdog, that the sudden vast growth of exchange traded funds (ETFs) into a $1.2 trillion business now poses a new risk to global financial stability uncannily similar to the derivatives market in sub-prime mortgages that heralded the worldwide crash in 2008. Pension funds and retail investors have been drawn heavily into these schemes with the promise of low costs and high returns, especially into the soaring commodity markets with huge returns from repidly rising oil, gold and silver prices. The fear is that ETFs will pursue the same route as mortgage-backed securities, being packaged and sold on in bundles across the world, yet as opaque as securitised derivatives, but with excessive leverage to increase returns. Yet the warnings are being ignored, and nothing is being done to prevent or head off the utterly predictable next crisis.
The real cause of the last crash was that the bankers didn’t know the risks they were taking. They still don’t appreciate the risks of the next round of the securitisation carousel, or else are ignoring them because the profits from playing the game until the next crash occurs are just too great to miss – exactly what happened last time round. No measures are being put in place to control investment banks’ in-house hedge funds. No finance minister seems to understand that eliminating all barriers between different types of banking has increased the fragility of the finance system by making it more homogeneous. Like the Bourbons, we seem to have learnt nothing.