Fundamental flaw in post-crash business model is bankers’ complacency & hostility to even slightest regulation

Two articles of faith in the banking class is that regulation always undermines growth and that financial crises are inevitable.   Both these claims are wrong and cannot be supported by the evidence of the last 70 years.   On the first, it was the absence of regulation which precipitated the epic 2008-9 breakdown.   Starting from 1971 when Nixon scrapped the US dollar’s link to gold, deregulation rapidly gathered pace with the removal of currency and interest rate controls.   Banking crises, absent in the previous era, quickly returned with the collapse of the Herstatt bank in Germany in 1974, the demise of the Mafia-linked Franklin National bank in the US, and the fringe banking crisis in the UK in the mid-1970s.   By the 1980s all the dodgy denizens in the financial zoo had been uncaged and roamed free into any financial niche that took their fancy.   Various financial catastrophes followed, peaking in the enormous credit crunch and global collapse in 2008-9.   So why are the government, let alone the banks, so anxious to resurrect a system that is a sure-fire loser?

Or to put the question in a slightly different form: why has so little been done to learn the lessons of the biggest crash for nearly a century and implement the radical reforms clearly necessary – unlike after the 1929-31 crash which led to deep and far-reaching changes?   All that has been proposed so far is, firstly, a very modest increase in the capital ratio to 3% (which is still extremely risky) and anyway has been postponed by Basel Accord III till 2019 – as though reform were just a leisurely canter; and secondly, a ringfencing between the investment and retail arms of banks – as though City of London lawyers and traders won’t get round this via regulatory arbitrage in no time.

What is really blocking reform is two things.   One is the dominant power position carved out by the banks during the 3 decade-long ascendancy of the banks under conditions of unrestrained free market capitalism.   It is a dominance they will not give up without a hard-fought bloody struggle, and the politicians (particularly the Tories who get half their annual income from the banks) show no signs of being prepared to take them on in terms of restructuring the industry and taking back from them control of the money supply into public hands.   Second, their greed and astronomic wealth generation for themselves has been on such a mega-scale that they will fight to the last banker standing to preserve it against all comers – which of course is why deep structural reform and appropriate re-regulation is now so desperately needed.

As to financial crises being inevitable (and hence complacent bankers will assert we shouldn’t get worried about what can’t be prevented), the quarter-century era of managed capitalism (1948-73) had no banking crisis to speak of, while in the equivalent period of no-controls capitalism (1983-2008) there were 6 major banking crises culminating in the historic crash of 2008-9.   Bankers’ airy dismissal of financial crises as inevitable is just pure special pleading with no supporting evidence at all.

One thought on “Fundamental flaw in post-crash business model is bankers’ complacency & hostility to even slightest regulation

  1. It’s not the bankers.

    It our completely rotten and mostly totally bent politicians.

    Of course the banks, (more accurately the various individuals who run then,) don’t want the regulation to properly enforced or to experience the natural consequences of their wrong doing or incompetence, but frankly much of what happened during the crisis and is still happening is already indisputably criminal anyway and even more so in the states, where the Sabaine-Oxley act, passed after the Enron fraud, (and intended to prevent a repeat of it,) already covers most of what happened to cause the crash and since.

    The problem is only partly lack of regulation, but far more lack of political will to pursue and prosecute these corrupt, (and corrupting,) over-mighty and too well connected wrong doers.

    Once again both political parties are equally culpable in this and in fact Milliband, (contrary to rhetoric above,) has already stated his own belief, (firm and personally very convenient,) that this is simply; “just the way the world is,” and that there’s nothing much he would want to do about and it and his intention, “not rock the boat,” or to upset his brother’s constituency by addressing theses issue as vigorously as he should be doing were he anything other than in it up to his neck, by association if nothing else.

    These are the same group of rapacious and unscrupulous people and institution who had Blair for breakfast,(anything but a financial genius and a man who even managed to loose money on a property in Islington at the height of the bubble,) and who took this country to the cleaners.

    Cameron and his colleagues are of course is simply a shabby, accommodating and wholly corrupt cats-paw of the exactly same people and institutions.

    Forget David Laws and co for just a moment and consider if you will the career of Stephen Baron Green, the by any sane criterion, completely discredited former chief Executive of HSBC, that not only went bust under his management, but was actively involved in every conceivable form of financial irregularity and massive and undisputed criminality, was fined a record $2 billion for laundering drug money for murderous Mexican drug cartels, fixing the LIBOR rate, facilitating tax evasion on huge scale particularly in Greece and much else besides.

    This is and once again, someone any normal person would expect to have been detained by the police pending serious criminal prosecution, if for nothing else gross professional negligence and misconduct, but no this wretched little man was, until very recently a senior government minster and involved in framing the latest tranche of toothless and almost entirely cosmetic financial regulation.

    Nor is it any coincidence that Osbourne has slashed the budget of the SFO and made any future prosecution dependent on his direct personal approval and that several major criminal prosecutions have collapsed or been quietly and conveniently dropped since he became chancellor.

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