People know we haven’t cracked the problem. Anaemic, faltering growth has brought a sense of greater security and well-being only to those in work or those with assets like shares and city property that have floated up on the rising tide of central bank liquidity. Since 2007 vast disparities of wealth have become even more glaring. Real incomes for the majority have fallen almost everywhere.
Central bankers say they are not to blame – or if they are, it is a necessary price to pay for preventing our economies from cratering. To say that things might have been worse is a pretty desperate argument.
The current G20 summit at Brisbane confirms there is no agreement on the diagnosis. The stuttering recovery – only in America is it really showing any sign of being self-sustaining – has been just enough to let the leaders off the hook. So they talk – and talk – about everything else under the sun, except what really matters. There is no consensus on the diagnosis. Government policies remain stuck. Bank regulations have been changed, but at the cost of tying the banks up in a regulatory maze that cramps their ability to lend and sustain growth; Jamie Dimon of JP Morgan has hired 13,000 new staff at the cost of $2 billion to deal with regulatory and compliance issues after paying fines of more than $20 billion last year – and that is one bank! It’s mad, bad and dangerous.
Even worse, they have failed to take action the public expects to punish bad bankers.
CEOs of banks that rigged markets must go
There is no sign that the increased regulation has been matched by any improvement in bank behaviour. The scandals go on unabated. Banks get fined for stealing customers’ and shareholders’ money, but customers/shareholders, not the culprits, pay the fines. So we just get stung twice instead of once. None of those who rigged the FX or LIBOR markets have gone to jail. Apparently price fixing and stealing is illegal for everybody except bankers. Governments like to keep bankers sweet as they are all in the same game.
Out of sheer decency and self-respect, the chairmen, CEOs, heads of audit committee and all those responsible at the big banks indicted for such theft should of course resign. None has.
Attempts to reform banks in the US and UK by ring-fencing critical activities have also got bogged down, ending up by simply infuriating those decent bankers who are trying to steer a course through the wreckage left by the crisis. Challenger banks are at last making headway but remain too small to make a difference to the system. The extra credit generated by central banks’ efforts has gone mainly to governments and large corporations.
Something must be done
One thing we can all do is to up the ante on shame:
Naming and shaming
Bankers want to see themselves as responsible members of society. They also see themselves as professional people. But finance did much better when bankers were not viewed as part of the professional occupations. In the 19th century they were not classed as professionals in British census reports. So they tried to persuade us that they were worthy of being admitted to the gentry, to respectable society. That was when they behaved themselves. Now they need to be downgraded again, shunned in polite society, until they learn better manners.
Business and consumer boycott
Boards of businesses that use the banks should tell management to boycott the worst offenders. I know it is difficult becuase all the big banks seem to be rotten. But business – their main customers – could still find a way of making its displeasure felt in the bankers’ pockets, where it matters. Consumer groups should boycott the worst offenders. We do not yet know the outcome with Barclays. Martin Vander Weyer, son of Eric, an honourable Barclays banker, whom I used to know when I was Editor of The Banker many years ago, one of the old school, has written of his sadness at the shaming of a once great institution.
Put the worst out of business
In a decent society, institutions that allow criminal activities to continue within their organisations for years on end would be put out of business.
The disgusting thing is, regulators feel they cannot put a globally systemically important bank (GSIFI) bank out of business. The cost would be too high – they believe. So they go on with their futile attempts to make them small enough to fail, which everybody knows they are not and can never be. This is appeasement.
By giving in to blackmail we will all lose much more in the end than by resisting them now.
Change the system!
Against this sombre background, the thesis of The Money Trap takes on added punch. Governments, other policy makers, economists and commentators have been looking in the wrong place. The problem is not fundamentally one of undercapitalised banks, or of under-regulated or even badly-regulated finance. So the answer cannot be more regulation. The banking system itself is fatally flawed. Nor is the problem a lack of monetary policy activism or Keynesian fiscal expansion. Cutting taxes and raising government spending are not the answers either, at a time of historically high public debt levels with massive pressures pushing public spending ever higher. It is as plain as a pikestaff that something is terribly wrong with a system that forces officials to gamble on a huge scale with public money, and that at the same time sustains high unemployment and promotes dangerous and unacceptable levels of inequality.
Paul Volcker has it right
As Paul Volcker has put it:
‘The erosion of confidence and trust in the financial world, in the financial authorities that oversee it, and in government generally is palpable. ‘
It is particularly dispiriting that the traditional Left has failed to pick up on this issue. It shows what a low opinion professional politicians have of the public. Despite the passions aroused by the protest movements a couple of years back, questions of the international monetary and exchange rate system and even of banking policy are considered far too complex to be popular politically. Yet people know they are being robbed – not only by bankers, but also by an unfair and inefficient financial system. In the UK, the Labour Party is facing a catastrophic fall in support at next year’s election. Yet all the leaders like Ed Milliband and Ed Balls can do is quibble with Government policies on taxing and spending – important yet essentially secondary issues.
Most people in the US are suffering too
After the crisis, the US exploited its position as top dog and the role of the dollar to gain a competitive advantage through QE, forcing up other floating currencies such as the pound and the euro, and forcing those with fixed rates to the dollar to import US monetary stimulus. So it has been the only large economy doing relatively well – a performance reflected in the recent strengthening of US market rates and the dollar. But even there US median household incomes remain 8% below their levels in 2007. And markets still fear it will end in tears – in either a further recession or a leap to high inflation (they remain mesmerised and unable to choose between which of the two evils is most likely). Central banks have suppressed short-term at the cost of increasing long-term volatility, i.e. the risks of another mega-crisis.
They say they had no option. Maybe they are right. That’s the money trap.
As I forecast in the book, failure to diagnose the problem and deal with this loss of trust at the right level is having far-reaching geo-political ramifications. It is contributing to a rise in nationalistic sentiment, especially in East Asia and Europe. As former UK prime minister John Major warned this week, there is a very real prospect of the UK leaving the EU, which British politicians wrongly blame for the UK’s economic problems. In fact it is due to the financial crisis and the failure of the Establishment to deal with it. There would be much less fuss about immigration if our economies were doing well.
Meanwhile, continued austerity in vulnerable countries of the eurozone can at any time trigger a political backlash in southern Europe. The spectre of the inter-war period stands as a constant reminder of the terrible effects that mistakes in such an apparently technical and arcane area as monetary policy can have.
A return to honest money
We badly need to return to honest money and a financial system that can again fulfil their classic functions in society. As long as we refuse to acknowledge this and do something about it, we lose the unique opportunities presented by financial and economic globalisation for enhancing material well-being and for promoting international cooperation. We are tempting fate.
G20 fails to act
CEOs of banks that rigged markets must go
People know we haven’t cracked the problem. Anaemic, faltering growth has brought a sense of greater security and well-being only to those in work or those with assets like shares and city property that have floated up on the rising tide of central bank liquidity. Since 2007 vast disparities of wealth have become even more glaring. Real incomes for the majority have fallen almost everywhere.
Central bankers say they are not to blame – or if they are, it is a necessary price to pay for preventing our economies from cratering. To say that things might have been worse is a pretty desperate argument.
The current G20 summit at Brisbane confirms there is no agreement on the diagnosis. The stuttering recovery – only in America is it really showing any sign of being self-sustaining – has been just enough to let the leaders off the hook. So they talk – and talk – about everything else under the sun, except what really matters. There is no consensus on the diagnosis. Government policies remain stuck. Bank regulations have been changed, but at the cost of tying the banks up in a regulatory maze that cramps their ability to lend and sustain growth; Jamie Dimon of JP Morgan has hired 13,000 new staff at the cost of $2 billion to deal with regulatory and compliance issues after paying fines of more than $20 billion last year – and that is one bank! It’s mad, bad and dangerous.
Even worse, they have failed to take action the public expects to punish bad bankers.
CEOs of banks that rigged markets must go
There is no sign that the increased regulation has been matched by any improvement in bank behaviour. The scandals go on unabated. Banks get fined for stealing customers’ and shareholders’ money, but customers/shareholders, not the culprits, pay the fines. So we just get stung twice instead of once. None of those who rigged the FX or LIBOR markets have gone to jail. Apparently price fixing and stealing is illegal for everybody except bankers. Governments like to keep bankers sweet as they are all in the same game.
Out of sheer decency and self-respect, the chairmen, CEOs, heads of audit committee and all those responsible at the big banks indicted for such theft should of course resign. None has.
Attempts to reform banks in the US and UK by ring-fencing critical activities have also got bogged down, ending up by simply infuriating those decent bankers who are trying to steer a course through the wreckage left by the crisis. Challenger banks are at last making headway but remain too small to make a difference to the system. The extra credit generated by central banks’ efforts has gone mainly to governments and large corporations.
Something must be done
One thing we can all do is to up the ante on shame:
Naming and shaming
Bankers want to see themselves as responsible members of society. They also see themselves as professional people. But finance did much better when bankers were not viewed as part of the professional occupations. In the 19th century they were not classed as professionals in British census reports. So they tried to persuade us that they were worthy of being admitted to the gentry, to respectable society. That was when they behaved themselves. Now they need to be downgraded again, shunned in polite society, until they learn better manners.
Business and consumer boycott
Boards of businesses that use the banks should tell management to boycott the worst offenders. I know it is difficult becuase all the big banks seem to be rotten. But business – their main customers – could still find a way of making its displeasure felt in the bankers’ pockets, where it matters. Consumer groups should boycott the worst offenders. We do not yet know the outcome with Barclays. Martin Vander Weyer, son of Eric, an honourable Barclays banker, whom I used to know when I was Editor of The Banker many years ago, one of the old school, has written of his sadness at the shaming of a once great institution.
Put the worst out of business
In a decent society, institutions that allow criminal activities to continue within their organisations for years on end would be put out of business.
The disgusting thing is, regulators feel they cannot put a globally systemically important bank (GSIFI) bank out of business. The cost would be too high – they believe. So they go on with their futile attempts to make them small enough to fail, which everybody knows they are not and can never be. This is appeasement.
By giving in to blackmail we will all lose much more in the end than by resisting them now.
Change the system!
Against this sombre background, the thesis of The Money Trap takes on added punch. Governments, other policy makers, economists and commentators have been looking in the wrong place. The problem is not fundamentally one of undercapitalised banks, or of under-regulated or even badly-regulated finance. So the answer cannot be more regulation. The banking system itself is fatally flawed. Nor is the problem a lack of monetary policy activism or Keynesian fiscal expansion. Cutting taxes and raising government spending are not the answers either, at a time of historically high public debt levels with massive pressures pushing public spending ever higher. It is as plain as a pikestaff that something is terribly wrong with a system that forces officials to gamble on a huge scale with public money, and that at the same time sustains high unemployment and promotes dangerous and unacceptable levels of inequality.
Paul Volcker has it right
As Paul Volcker has put it:
‘The erosion of confidence and trust in the financial world, in the financial authorities that oversee it, and in government generally is palpable. ‘
It is particularly dispiriting that the traditional Left has failed to pick up on this issue. It shows what a low opinion professional politicians have of the public. Despite the passions aroused by the protest movements a couple of years back, questions of the international monetary and exchange rate system and even of banking policy are considered far too complex to be popular politically. Yet people know they are being robbed – not only by bankers, but also by an unfair and inefficient financial system. In the UK, the Labour Party is facing a catastrophic fall in support at next year’s election. Yet all the leaders like Ed Milliband and Ed Balls can do is quibble with Government policies on taxing and spending – important yet essentially secondary issues.
Most people in the US are suffering too
After the crisis, the US exploited its position as top dog and the role of the dollar to gain a competitive advantage through QE, forcing up other floating currencies such as the pound and the euro, and forcing those with fixed rates to the dollar to import US monetary stimulus. So it has been the only large economy doing relatively well – a performance reflected in the recent strengthening of US market rates and the dollar. But even there US median household incomes remain 8% below their levels in 2007. And markets still fear it will end in tears – in either a further recession or a leap to high inflation (they remain mesmerised and unable to choose between which of the two evils is most likely). Central banks have suppressed short-term at the cost of increasing long-term volatility, i.e. the risks of another mega-crisis.
They say they had no option. Maybe they are right. That’s the money trap.
As I forecast in the book, failure to diagnose the problem and deal with this loss of trust at the right level is having far-reaching geo-political ramifications. It is contributing to a rise in nationalistic sentiment, especially in East Asia and Europe. As former UK prime minister John Major warned this week, there is a very real prospect of the UK leaving the EU, which British politicians wrongly blame for the UK’s economic problems. In fact it is due to the financial crisis and the failure of the Establishment to deal with it. There would be much less fuss about immigration if our economies were doing well.
Meanwhile, continued austerity in vulnerable countries of the eurozone can at any time trigger a political backlash in southern Europe. The spectre of the inter-war period stands as a constant reminder of the terrible effects that mistakes in such an apparently technical and arcane area as monetary policy can have.
A return to honest money
We badly need to return to honest money and a financial system that can again fulfil their classic functions in society. As long as we refuse to acknowledge this and do something about it, we lose the unique opportunities presented by financial and economic globalisation for enhancing material well-being and for promoting international cooperation. We are tempting fate.
Written on November 14, 2014 at 6:44 pm, by robert
Categories: Banking, Homepage, News and Comment, Official Money, RP's Diary | Tags: Bank of England, banking, central banking, central banks, Christine Lagarde, financial crisis, global financial system, Paul Volcker, robert pringle, The Money Trap