The Bank of England has issued an important paper today. In summary it says:
The paper sets out three objectives for a well-functioning International Monetary and Financial Systems (IMFS): i) internal balance, ii) allocative efficiency and iii) financial stability. The IMFS has functioned under a number of different regimes over the past 150 years and each has placed different weights on these three objectives. Overall, the evidence is that today's system has performed poorly against each of its three objectives, at least compared with the Bretton Woods System, with the key failure being the system's inability to maintain financial stability and minimise the incidence of disruptive sudden changes in global capital flows.
It is quite literally impossible to argue with that: that's why the paper is important.
But when it goes on to consider causes and solutions although it considers opacity and although it considers imperfect markets and asymmetry not one does it mention the fact that the offshore world - of which in so many ways London is the hub - is a prime casue of all these things.
And for that reason the paper fails, badly. The BoE has acknowledged a problem. I cannot believe it does not know the solution. It must know to whom the capital controls to which it refers are a threat and yet it cannot say that tax havens are the problem creating this mess in the world's systems - at massive cost to many countries, as it rightly points out. We have a way to go yet.
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Richard, the BoE will never admit to the ‘real’ solution because in some respects they’re a part of the problem. I’m mainly speaking for the anglo-saxon countries when I say that there is an incestuous relationship between big business and government.
To change the perspectives of the BoE, we need left-leaning people in there; people such as yourself and many of your readers. However, many of the people (certainly in the top positions) who work at the BoE, Federal Reserve, Reserve Bank of Australia, etc went to school at the same places that people working for the top merchant banks, brokers, Goldman Sachs did. They socialise together, see eye to eye together. They were taught by the same academics who espouse the same ideas and philosophies that have gotten us into this mess.
Our socio-economic/political system is fundamentally corrupt.
More comment from Tony Shearer, former CEO of Singer & Friedlander, in evidence to the Treasury Select Committe on the Banking crisis, re the board of RBS (and other large banks) – memorandum dated 16 Feb 2009:
“… It is also a factor that these executives and non-executive directors live in heady worlds with peerages, knighthoods, feted by politicians and the media, membership of Government think tanks, trips to and parties in Downing Street, rewards beyond the dreams of avarice, and PR firms and departments to obfuscate and to promote them as individuals. All of this makes them believe that they have abilities and skills that they simply have never had.
Coupled with the fact that they are surrounded by auditors, rating agencies, lawyers, head-hunters, remuneration advisers, PR firms and non-executives who want to earn fees and who are getting rich off their patronage, and regulators who had come from the same backgrounds, it is no wonder that the whole system has failed.
The Select Committee’s interviews with the Executives and former Executives who are and were running our large banks showed that these people still have absolutely no appreciation that running these very large businesses was, and is, beyond their abilities. … ”
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144ii.pdf
Spot-on, Richard. The offshore system was of course instrumental in hastening the collapse of the Bretton Woods regime which had brought the stability that this report now recognises was lost. Although the Bank of England encouraged the emergence of the offshore system, it did have concerns about the effects on bank stability, which led to the creation of the Basle Committee, and eventually the capital adequacy regime. This has always been inadequate, succeeding only in providing false reassurance. In fact, the Basle regime helped to stimulate the erection of the edifice of CSOs and shadow banking, as documented in Gillian Tett’s excellent book. Now Basle III is helping to move us from a bank crisis, through a sovereign debt crisis, to a world recession. When will they wake up?
Richard, further on my earlier comments, a friend of mine pointed out that City of London represents at least 10% of Britains GDP. If true, then clearly this needs to be reduced.
On the BBC Cameron is quoted as saying “what we’ve done is squarely in Britain’s national interest” (http://www.bbc.co.uk/news/uk-politics-16114526). The City’s interests are not the interests of the British people but those of the banksters and financiers.
The current arrangement suits these guys. City of London remains free from the regulation and control that will turn Europe into a fascist United States of Europe, while at the same time they get to continue sending their bureaucrats to Brussels. In other words, the banking and financial elite will get to control Europe, but themselves be outside those regulations, based as they are in London.
I argue in The Courageous State that we boith need to reduce the size of the City and that we will benefit from doing so
Richard
There are at least two big problems with the way in which the importance of the City is talked up in political debate and the general media. One is that it confuses financial services in general with the rarified activities of derivatives trading and managing the offshore system. I have a nephew who has a back-office job with RBS, he works in Manchester and is paid little more than the minimum wage – never a sniff of a bonus. The other is the assumption that the kind of gambling that is done in the City actually contributes to GDP. Currently the most trenchant critic of this view seems to be Andrew Haldane of the Bank of England. His contribution with Vasileios Madouros on VoxEU http://www.voxeu.org/index.php?q=node/7314 calculates that if you take out bank balance sheet expansion, the UK’s financial sector is only 7.5% of GDP. Haldane makes the further point which should now be obvious but is generally ignored, that the banks don’t actually take any risk, since they are backed by the taxpayer. In his Wincott lecture, http://www.wincott.co.uk/lecture2011.htm, he estimates the value of the taxpayer guarantee to banks at hundreds of billions annually. Taken together with the protection given by limited liability, and the perverse incentives of the tax treatment of debt, the real reasons for the City’s power are obvious. The only regrettable omission from Haldane’s devastating analysis is any mention of the offshore system.
Agreed entirely Sol
No wonder the industry has stopped talking to the BoE
Thanks
The problem for years is the destruction of productive capacity and no real attempt to replace it. The better off have been getting away with billions in unpaid taxes as well.
The real cause of the problem though has been the creation of bigger and bigger mountains of private debt backed by smaller and smaller reserves.
The blue touch paper was lit over here when Thatcher deregulated the banks in 1980 and again in 1986 after the so called “big bang” deregulation of the city of London.
Of course, until there is politicians that will work on behalf of the people who voted them in rather than the markets, the banks and the financial sector, nothing will change.
More and more debt will be past onto the taxpayer via PFI schemes, social impact bonds, private pensions and privatised national assets.
Make no mistake! The intention is to suck as much money out of the public purse and put it into the hands of private enterprise.
And as long as they keep ordinary people poor, they will get away with it.