We have another banking crisis.
The banking crisis of 2008 was, by consensus, caused by incompetence, although some of us argued that a corrupt demand for lax regulation had exacerbated the issue, backed by what we saw as at the very least deceitful use of offshore and other abuses of transparency.
But now we know that 2008 was not just caused by incompetence. There really was corruption - and not just of the hidden variety, but blatant, overt corruption to achieve corporate goals.
It's not the time to say we told you so. But it is the time to say that this has to be the end of the line. That line started in the early 1970s with relaxation of monetary controls, was enormously facilitated by the relaxation of capital controls in 1980 or thereabouts and in the UK was made possible by the Big Bang reforms of the City of London in 1986.
It is not chance that all happened under Tory governments.
Free market capitalism has led where many of us said it would. Let's even be honest, where Marx said it would (and I don;t consider myself a Marxist). It has reached the point where it is destroying itself, because that is very clearly what is happening now.
We now have naked, raw, aggressive capitalism as practiced by investment bankers consuming the value of their shareholders. That's as close as it gets to capitalist cannibalism. And in that case action is needed now to save capitalism itself. There is literally no excuse for inaction anymore, even on the right, not that means such action will be forthcoming from that direction.
For those - like me - who believe in the mixed economy which is the basis of my vision of The Courageous State then the need for action is even more pressing. As I argued in that book, banking needs to now be put back in its box.
Let's be clear: banking is vital, as are financial services. But the monstrous banking we have suffered that consumes the economy and even the banks on which 8t feeds has to be cut out of our economy like the cancer it is. It is literally killing us. And a government that does not realise that is failing us.
So, we need to ring fence investment banking. Not in 2018. By early 2013 at the latest. Murdoch had his business investigated this year. A month or so later he announces it will be split in two. If that's possible in the media its possible in banking. And let's be unambiguous: the High Street banks that will emerge will be streonger for it: their capital is being consumed by investment banking right now. Arguments to the contrary are just corrupt lies.
And heads need to roll. Whole rafts of senior bankers need to leave the industry: their mentality is corrupt and has to be swept away. There will be decent people who can take their places: have no doubt about it. But it will take leadership from a new type of non-exec director dedicated ti making banking work again that will let this happen. Again, I think such people exist; they're just the outsiders now. The farce that the Coop was told recently that its board was not suitable to run a bank because it was not made up of bankers has to go: it's precisely because people are not bankes that they may be suited to their new roles of making sure banks are clean, although competence will also be important too, of course.
But more than that, we need to change systems.
Banks need to wave goodbye to tax haven opacity.
Banks need to stop servicing the tax abuse industry in such places.
Banks need to be banks - and not pedlars of useless financial products.
Banks need to be rooted in communities: there is a good case for breaking up banks into regional operations again and to split organisations like RBS into separate brands once more.
Mutualisation needs state support to get it back on its feet.
A green investment bank is vital.
PFI debts should be traded in for state support. Their forfeiture should be the price for the implicit deposit guarantee banks enjoy.
Insurance and banking should be separated.
A new National Audit Office should audit the banks - the Big 4 have completely failed to hold banks to account and have grossly failed in their duties to report on whether their accounts are true and fair.
A UK bank with an operation in a tax haven that does not automatically information exchange with the UK should be told to do so or shut the operation. And that should apply to any bank trading in the UK: not just those incorporated here.
And we do, of course, need country-by-country reporting from banks.
Derivative and other trading must be better regulated. Liability risk must be properly accounted for.
Tax must be paid in the bright place at the right time. And be accounted for.
Unions must be represented on boards.
As should depositors.
I could go on: the reform needed is root and branch. It is possible. It can be delivered.
But not by a government that thinks a review of LIBOR setting is enough. That's a ludicrous excuse for inaction. And in the meantime the City will be collapsing, bankers will get away with it and somewhere this summer a young person will go to prison for stealing water worth £3.25 as their anger at their deliberate unemployment spills over, however much I will regret it doing so.
We have choices. We can tackle banking. We have to do so if markets are to survive and the mixed economy is to survive with them.But we have to act. And a government that refuses to do so will deserve to be consigned to history.
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Well done, Richard. Well analysed and a coherent way forward.
You posted a link to ‘A Manifesto for Economic Sense’ a few days ago. Succinct and clear account of what I think is a realistic account of our crisis. I’m forwarding it to my friends. Unfortunately newspaper comment columns are still full of nationalistic rants -esp. after Cameron has talked about a referendum.
I don’t come from a Left background but I would distinguish between the capitalism of the local builder, a company like Rolls Royce, or even an investment firm on one hand and the money manipulators on the other.
We do have choices. As Dumbledore says to Harry Potter in the Chamber of Secrets “it is our choices, Harry, who show who we truly are, far more than our abilities.”
I see that Marcus Agius – what have the Romans ever done for us? – has resigned.
As the BBC website describes him: “Marcus Agius, currently Chairman of Barclays PLC, was the first non-executive director appointment to the BBC’s new Executive Board, effective from 1 December 2006. He has taken up the role of Senior Independent Director for the Board…He holds an MBA from Harvard Business School.”
Now to Diane Coyle, Vice Chairman of the BBC Trust, again from their website: “Born and raised in the North West, Diane was educated at Oxford and Harvard, where she did a PhD in economics.” She wrote on her blog ‘A macroeconomist tells me off’ from June 20, 2012 (it was Portes doing the scolding) that, “this takes me to my second point, which is that it is hard to believe in the existence of a significant consensus about empirical truths in macro policy when the discussion among macroeconomists is so shouty.”
Harvard BBC economics is failed version of Whiggish history, and when those believers of progress see things go wrong they, like their Victorian forebears, fall back on the manliness of suffering (or other people’s suffering) as a test of their own character.
Which is why ‘A Manifesto for Economic Sense’ (see Krugman blog June 28, 2012 ‘A Manifesto for Economic Sense’) which has at least 24 pages of signatures, should be brought onto the BBC immediately for sustained discussion, a point I hope to be making with them this week.
Right, dead right.
And 200 million dollars to add to the 300 million pounds ?
http://www.youtube.com/watch?v=mDbbrjxbJXc&feature=player_embedded
Richard, spot on, as ever. But what politician or group of politicians has the balls to get up and say this?
Maybe the Greens
Interesting suggestions. I would like to ask you about a suggestion that I don’t think you mentioned here but you do mention in your book which is state control of the clearing system with banks paying a fee for it in lieu of seigniorage. The suggestion intrigued me, but you didn’t develop it in too much detail. I was wondering if you would be able to provide more detailed information on how it would work?
Surely criminal charges are going to follow. This was very simply a betrayal of the public and society at large?
Given that fraud is often difficult to prosecute, and this seems the only criminal route available – I Have my doubts as to whether such a cause of action would be effective. What should happen is that the FSA should use its powers to to disqualify the Approved Persons who were responsible for Barclays breaching the FSA’s principles. I suspect most of the derivatie dealers, senior management (including the CEOs of the entity concerned who has overall responsibility for controls) and the senor compliance people will be approved persons. The FSA has these powers and should use them.
It is worth remembering that the FSA’s notice identified over 250 requests from 14 derivative traders over 4 years to fix LIBOR (and that is only those that they were able to identify) and also made clear that senior management and the compliance department knew about it as well.
A solid proposal for dealing with the majority if abusers, I agree
Quick and effective too
I don’t believe this is a new banking crisis but just another symptom of the same crisis and it is largely attributable to the same factors that led to the . The problem with the financial sector is that they all too easily develop a herd mentality (something that can be seen all too often in the bovine comments of many of “true” believers which we have to bear ) which assumes that in the pursuit of the short term individual greed that the herd and its leaders are correct and that there exists no valid criticism of their actions. We saw it with sub prime and asset backed securities where no one questioned the assumptions used in designing the structures, which line management, senior management, compliance departments, internal and external auditors, lawyers and rating agencies didn’t thing fit to challenge because it went against the consensus and the short term financial gains with which they were rewarded — and then were not addressed by the regulators who bought into the deregulatory ethos). And now we see something pretty similar with LIBOR where again dealers were not effectively challenged by their line management, senior management, compliance departments, internal and external auditors and lawyers nor by other market participants (who in their willingness to defend free and unregulated markets are now saying that the market knew that LIBOR was rigged and chose to ignore it) — and that was all before the UK regulators eventually realised what was going on!
Now the Marxists might wish to say that this is all inevitable — but those of us who actually genuinely believe in markets as being a better allocation mechanism than commissars or similar realise that something needs to be done to change the mind set of those in the financial sector who are responsible for the conduct of key financial markets.
I am really not sure that playing around with structures such as ring fencing or separating investment banks, or yet another round of moving the regulatory deckchairs around for that matter, is in itself the solution to the problem. There has to be a big change in attitudes and culture as well. As with most herd diseases a certain amount of culling will be necessary if the disease is to be eliminated — clearly starting with those who are in denial that there is a problem in the first place.
One thing that is very noticeable from the FSA notice on Barclays is that it doesn’t mention action against the individual approved persons who were responsible for the breaches of controls within Barclays and Barcap. If anyone bothers to look at the FSA Handbook — it is pretty clear that approved persons as well as the firm are responsible, and in most cases the CEO of the regulated entity is considered to have overall responsibility. One would expect that given Barclays is co-operating with the FSA in order to get a 30% reduction in its fine that it should be co-operating with the FSA’s investigations into the role of individual persons and supporting such investigations — but I have my doubts.
Thanks
Stephen
If you go the BACP British Association for Counselling and Psychotherapy website and look Therapy Today (their journal) February 2012 there is an article Stress in the CIty by Leslie Chapman. it is available on-line. It deals with this issue.
I will quote part of the conclusions.
“I would argue that the City is a disaster waiting to happen:indeed, there are indications that such a disaster is already happening. What is particularly worrying, from a therapeutic point of view at least, is the apparent level of complacency or even denial about the damaging effects on mental health of working in this environment.”
Damage goes wider than the workers in the City of course.
Ian
I think you raise a very good point – there is clearly something in the CIty that encourages an unhealthy dominance of “Type A” personalities – who then becone the role models to which others will often slavishly aspire. The manner in which those who don’t conform are sidelined and worse also doesn’t lead a lot to be desired – which is why you don’t see many contrarians/free thinkers.
The “sabotage-the-economy” financial service industry employs a number of “professionals”.
The centre for fraud is embedded in the City of London, an impenetrable command bunker staffed by sharp bankers, lawyers, accountants, whose activities are camouflaged by sophisticated (and expensive) PR propaganda which attempts to persuade us that any intrusion will cause the immediate collapse of the UK economy.
Vital support for this deception is provided by the “establishment” (including senior politicians) whose vested interests are inextricably bound to the City which in turn relies on shifting financial trickery cloaked in opacity to offshore jurisdictions, like the Isle of Man Guernsey and Jersey, to be coated in more layers of secrecy.
Tax dodging is only one part of a gigantic fraud which can only be unravelled by an independent criminal investigation into ALL past and present activities in the Crown Dependencies — an investigation which will inevitably lead back to the City.
Prosecute and jail the lot of them.
Let’s not forget Labour’s role in this as well as the Bank of England….
A role yes
But far from a major one
It’s mistake was mot to challenge the Tory policy of assuming markets could be trusted
What you won’t hear from a lot of right wing commentators is that the relaxation of monetary controls in the early 80s and the subsequent deregulation of financial services in 1986 helped facilitate this.
I think had the Tories been in power when the last crisis happened things would been a hell of a lot worse. What’s more, tories will never admit to being wrong about anything.
Brown (with Balls in close support) regularly and enthusiastically worshipped at the Temple of Baal, Mansion House Chapter, devoutly chanting “light regulation is the truth and the way”, right up to the cliff edge and over it. A great deal more, I fear, than just failing to challenge the Tory assumption, a full-blooded embrace of it. A major role. Deeply asleep on watch.
Yes – they believed th guff
And for that they are culpable
But I am not sure I can shoot them for believing bankers were honest
They had a right to expect that
There is no getting away from the fact that Labour did a Faustian bargain with the City with regard to continuing light touch regulation in return for the additional tax regulations generated by the bubble. And I’m afraid it never really got into the subject of how regulation should be effective in a market based economy and it has not a few dinosaurs who believe that a bureaucratic drown them in regulations approach works best. If you actually listen to some of the more detailed pronouncements of Labour politicians you will see that some of the lessons have been learned and there is a glimmer of some fresh joined up thinking — but that said politicians of all ilk are never very good at mea culpas.
That said we really shouldn’t let the Tories/LibDems to get away with the rewriting of history which they seem to think allows them to carry on doing next to nothing. The biggest whopper is that everything in the regulatory garden was wonderful before the FSA — it wasn’t. There were getting on for 20 regulators in the financial sector — some of which were self regulatory. The styles of those regulators were many and varied — and it was well known that some of them were pushovers. It is true to say that there were problems with the trilateral approach — i.e the Bank, Treasury and the FSA didn’t take a co-ordinated approach and hardly talked to each other — but let us not pretend that the problems wouldn’t have been a lot worse with the previous regulatory structure (nor that the problem of co-ordination has yet been solved). The Bank of England had responsibilities involving general market supervision and prudential supervision of banks — and even though they were in the same building, the latter was pretty much the poor relation and the communication left a lot to be desired. If you don’t believe me look into the BCCI and Johnson Matthey failures. I’m also less than enthused by the approach to regulation by the Coalition since it came to power — where there is a repeated pattern of backing down to the City when reforms are proposed (e.g. The Remuneration Code, Vickers proposals etc) and a position in the EU of opposing improvements and extensions to regulation (look at how Hedge fund regulation has been watered down.
A further point on Regulation under the Tories — is to consider the impact of the Building Societies Act 1986 that allowed a number of mutual building societies to convert, largely so that the senior management could get increased salaries at the cost of a short term bribe to the members. Among those coverting were the following: Halifax, Bradford and Bingley, Northern Rock, Bristol and West, National and Provincial, Abbey National, Alliance and Leicester and the Woolwich. Girobank and the TSB were also allowed to become privately owned under other legislation. The next time Labour is asked to apologise for the FSA — perhaps the response should be only after the Tories have apologised for the rather more costly Building Societies Act 1986.
A very interesting CRESC report – download from here http://www.cresc.ac.uk/publications/scapegoats-arent-enough-a-leveson-for-the-banks
I have undergone Director’s Training for Credit Unions (which happens to be the smallest and least offensive of financial services) at least three times. This is required of volunteers by FSA. Is there anything comparable in the fully commercial world of banking and bonuses? Not strictly on topic but their claimed ignorance is appalling.
Chris
Somewhat amazingly the FSA’s principles for business and the high level standards for senior management (PRIN and SYSC in the FSA handbook from memory) are meant to apply all regulated entities – i.e credit unions and banks. The FSA being full of banking types – is I’m afraid somewhat patronising to volunteers such as yourself – and fears that you cannot grasp the finer nuances that the banking types are able to grasp. That said the FSA does require formal training for quite a number of approved persons (usually dealers and those in contact with the public as well as senior management) – and I’m sure that in most cases the formal training does include all the standard stuff on controls, compliance and risk management.
PS I do agree with you on credit unions and I do wish some of the QE funds could be used to encourage lending by bodies that know how to lend properly. Just a small allocation would go so far.
Andrew Tryrie was the man that allowed the FSA to withhold their report on RBS from both his Committee and the public. Rather than invoke Parliamentary privilege to compel disclosure, he appointed two City grandees to come up with a few more details of ‘systemic’ failures. This is the same Andrew Tyrie that said repeatedly last week that current legislation does not permit prosecution. ANDREW TYRIE IS NOT INDEPENDENT; IF HE WAS BOB DIAMNOND WILL NOT RUN TO HIM EVERYTHING HE IS IN TROUBLE. REMEMBER HE COMPLAINED TO TYRIE WHEN HMRC BLOCKED BARCLAYS AGGRESSIVE TAX AVOIDANCE SCHEME AND GOT A LISTENING EAR. TYRIE LAUNCHED AN INQUIRY INTO RETROSPECTIVE TAX LEGISLATION (OUTSIDE THE SCHOPE OF HIS COMMITTEE) BUT NOT ON AGGRESSIVE TAX AVOIDANCE (WHICH IS WITHIN THE REMIT OF HIS COMMITTEE).
The failure goes a lot wider than UK banks, our entire managerial/leadership class seem to have been infected with the desire to line their own nest at the expense of the public. That includes those at the top of public services and private sector businesses aswell as banks. Many of our MPs have demonstrated exactly the same tendency through their expenses claims. It would be good to think that we have some MPs who might be prepared to grasp the nettle and change things radically, but we were suckered by Tony Blair into thinking he was that man and look where we’ve ended up. Even more deeply cynical about politicians.
Sadly the desire of our politicians for Britain to punch above our weight on the international stage and act as cheer leaders for globalisation means that Britain is now seen for what it really is, the global centre of banking fraud. In alliance with American capital our banker boys have done their best to screw everyone in the best buccaneering tradition and when the roof caves in it will be seen as our fault.
So Cameron and Osborne are leading us hot foot towards pariah status and I see very little that is likely to stop the inevitable crash. Peoples lives will be deeply damaged all over the world, definitely not our finest hour and quite likely the exact opposite. Your reforms Richard definitely offer a a better vision of the future and if Milliband said he would deliver them pronto I would vote for him. I suggest he should table an emergency amendment to the government banking bill, with a Glass Stegall provision operative from 1 January 2013. Lets see some bold action, divide the Lib Dems and split the coalition.
I think that I agree with a lot of what you say. But I’m not so sure that governments, unions and depositors should be on boards of directors. What you are suggesting is similar to the cajas in Spain and they have proved to be the downfall of these local banks. I hadn’t realised how big a problem cajas were until in holiday in Spain I got caught up in a demo where locals were attempting to occupy a caja. I asked, in my limited Spanish about the demo (of a policeman) and he said they were demonstrating against the corrupt politicians and union officials on the board of the caja. I checked this out when I got back to the UK, and it seems it’s the the true facts. No matter your principles, it seems that heads are easily turned by money!
I don’t know the answer. But people going to gaol for a long time, and not bailing out bank losses, seems like a pretty good idea.
Regards another Chris (because there are other people called Chris on this thread)
And even today more examples of City greed and avarice are coming out.
Marcus Agius has decided the buck stops with him and he should take responsibility for the LIBOR fixing. He proclaims to be leaving with a heavy heart and praises Diamond as “one of the world’s finest banking executives” despite what he has done for Barclays share price. But don’t worry as well as a heavy heart, Agius will be leaving with a heavy wallet – a reported £750k pay off to be precise – not bad when your 66th birthday is later this month. Could all pensioners who want £750k for taking responsibility for all the failures in their life, especially if they are not as big as Marcus’s please form an orderly queue.
But Marcus is really only wanting small beer as his reward for failure – step forward Tan Chi Min who was sacked for gross misconduct for manipulating intermarket rates – but is now claiming damages of £1m in bonuses and £3.3m in RBS shares on the grounds that senior management condoned his collusion in rate fixing. He seems to be arguing that not only was he obeying orders but that he would like back pay for doing so.
When will these bankers start to realise what planet they are living on!
On the subject of market rigging – perhaps a liitle attention needs to be paid to the various commodities markets in London which have been the plaything of choice of many hedge funds in recent times, where there is a lot more price volatility and there are already a number of market abuses in the open (remember the guy who bought all the worlds copper production). There are also quite a few unregulated markets in distressed debt where strange things happen from time to time. The problem with such markets is that the results of abuse are often felt the most in countries where it really is a matter of life and death.
http://azizonomics.com/2012/07/02/the-great-libor-bank-heist-of-2008/
How to solve the banking crisis ?
Well……we could have another conflict……..
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/05-2/Naval_Update_05-23-12.jpg
[…] practiced by investment bankers consuming the value of their shareholders.’ (11) The 99.999% would also benefit by developing some […]