If you want evidence of how reckless and desperate bankers and investors have now become in search of higher yields, look no further than the widespread decision to return to a variant of the mortgage-backed securities which precipitated the 2008-9 crash. Then it was sub-prime securities which were knowingly sold to households handicapped by low pay and insecure employment who predictably could not maintain their mortgage payments in a volatile labour market. Now it’s simularly financially disadvantaged individuals who are lured to take on non-prime mortgage-backed securities, those that do not meet even the minimum legislative standard. But of course they do offer high yields, and if the bankers can dispose of enough of these financial vehicles laced together with other dodgy securities, the risk has been passed on to some other half-witted investor.
Quite apart from the very real risk of paving the way for another crash, this latest trend reported in today’s FT is very revealing in where we are in bank and hedge fund regulation -hardly anywhere at all. It is almost incredible that the very financial instruments which triggered the colossal 2008-9 crash, from which the world has still not recovered and for which the innocent victims are still paying the heaviest price, have not been either banned or so tightly regulated as to prevent any further damage. It reveals how puny and superficial has been such reform as there is – mainly an increase in capital ratios, but not till 2019! The dark heart of the City of London remains intact, namely the exchange-traded funds, the ‘dark pools’, the rise of shadow banking outside regulation, and now a return to the exotic derivatives which triggered the global crash 7 years ago.
That’s why the Labour leadership election should have been about the fundamentals, the real factors that are causing the dire condition of our economy and society at the present time. The whole finance sector needs to be tightly regulated. There needs to be a major industrial/manufacturing revival over the next decade or more as the only means to pay our way in the world and to achieve real genuine sustainable full employment. There needs to be a determined attack on corporate pay excesses and industrial-scale tax evasion/avoidance as not only obscene, but holding back growth as even the IMF has now admitted. And the private market failures in housing, rail, water, pensions, energy, banking, to name but some, must be addressed, including a public sector role in reform.