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.