Three years on from the financial crisis, why haven’t we seen significant reform to the way that financial markets work (or don’t work, to be accurate)? We’ve seen the biggest financial disaster of my generation. Depending on who you believe, losses are around $3 trillion, and governments supporting banks to the tune of at least $14 trillion in 2010 (the figure, I suspect, now would be even higher).
Perhaps more importantly, we are now seeing the consequences of this level of state support for the banks. The biggest economy in the world, driven by what look like from the UK to be a bunch of barking-mad religious fundamentalists who know no history, has come pretty close to defaulting on its massive debts, a significant cause of which is the effects of the crisis on the economy. In the UK a coalition partner has been made a liar by tripling Higher Education tuition fees directly against pretty clear election promises, and supporting government policy hell-bent on incoherent reforms to the public sector, probably putting itself into the political wilderness as a result.
In March this year, the governor of the Bank of England expressed surprise there had not been more popular protest at the results of the crisis, and has made it clear that those that are bearing its burden are in no way responsible for it (http://bit.ly/igOLMM). After the Wall Street crash we saw the US government separate investment banking from deposit holding institutions, as well as imposing a range of other systemic banking reforms. Given the consequences of the financial crisis have been so huge, why haven’t we seen significant reform to the banks?
A number of explanations come to mind, none of them particularly flattering to the state of debate, or to our political systems.
One view, made very clear by Colin Crouch (http://amzn.to/neztaI) is based on misunderstandings that surround financial markets. Because they are portrayed as being dynamic, profit driven and profitable, we’ve lost sight of the fact that banking is in fact dominated by a few, effectively state-backed corporations with surprisingly little competition between them. Because we use the language of the market and the state, we forget the power that massive corporations like banks can achieve – they are a third form of organisation that are able to portray themselves as dynamic, entrepreneurial and market-based, when in fact they are in receipt of massive government underwriting, and lobby on a truly terrifying scale to get the laws they need to continue to make their profits. Instead of assuming banks are in a competitive marketplace where the best firms win, we should look a little closer. Banks have become massive lobbying operations – supporting politicians, and making it very difficult for them should they dare to pass reforms that go against bank wishes. The extent of this lobbying is perhaps made clearest in Robert Reich’s book ‘Supercapitalism’ where he goes as far as to claim we should abolish corporation tax and deny corporations any lobbying rights in Washington at all.
A second reason, related to the first, is the revolving door that has appeared in the last twenty years between politics and finance. Prominent bankers have become increasingly close to prominent politicians, often with a good deal of job movement following. In his wonderful book ‘Them and Us’ Will Hutton suggests that this has resulted in governments effectively becoming ‘captured’ by the financial services industry. Even if lobbying fails (the point above), finance can depend upon their former employees in government, especially in the US, not to work against banks’ interests. We don’t have to believe in a conspiracy to see how this might have happened – if you’re trained as a banker, you see the world in banking terms, and even if you subsequently end up in government for the most altruistic of reasons, you are likely to be heavily influenced by your training and background.
A third reason, and perhaps the one I believe most in, is that we are reluctant to pass laws restricting the behaviour of the banks specifically because of the mess they’ve caused. The problem is that the economies of countries such as the US and UK have become dependent on the financial sector to make profits, and to generate tax revenues as a result. We’ve become so dependent in fact, that we find it hard to come up with an alternative view. Think back to the 2000s – how many bankers were brought into advise government how to better to its job? Given the problems with debt we now face, and a certain lack of courage and imagination from our governments, they have been unable to think differently. They need the financial sector to generate profits to pay off the debts that the collapse in the financial services industry caused in the first place. If I were Chinese, I’d find this funny. I’m not Chinese.
Related to this is the argument that our deregulated financial sector has now got the poorest in society into so much debt that, if we re-regulated it, it would lead to widespread default, as well as preventing debt from driving the consumer-led growth which our economies now depend upon. It seems that we want to hold the real incomes of the poorest paid down at the same level as they were in the 1970s, but still expect this group to consume more goods and services to get us out of low growth. Regulating the financial industry would mean that getting the poor into debt wasn’t an option. So we’re not doing it.
Finally (for now), there is the complexity of the whole issue. This comes into play in lots of ways. I don’t think our regulators are fools – they are just trying to come up with rules to govern a banking system that is truly out of control. But one of the reasons its out of control is that we’ve allowed banks to lend ridiculous multiples of their capital in a bull market, and leave themselves all bankrupt when things went bad. I appreciate that to go in too hard with rules after the crisis would have probably brought even more banks down, but frankly, they’ve had long enough now to sort themselves out, and the evidence seems to be that they would much rather continue to invest in speculative financial assets – backed by government guarantees and based on quantitative easing – than invest in businesses trying to dig us out of the hole we are in. I understand that investing in business in a slow-growth economy is risky, but I’d much rather our banks do that than allow them to build us a new financial bubble in gold, oil or whatever other nonsense speculative money is running into that generates no good for anyone else.
The problem is that the financial services industry is so complex no-one really understands it in its entirety, and this means it is difficult to come up with good regulations. It also means that it is hard to have a public debate about this stuff. Whenever I start on how you move from a CDO to a CDS and then to a synthetic CDO people’s eyes glaze over. But these assets were a significant cause of the mess we are now in, and we need to take the time to understand the sheer bloody incompetence of the people who caused it.
Regulating against such nonsense will be difficult, but it’s crucial that we do. The consequences of the financial crisis will be with us for a generation because of the debt they’ve brought us, and that’s assuming the lack of adequate regulatory response doesn’t drag us all down again in a recurrence.