The wrong questions are being asked about banking reform

How the Vickers Commission fluffed its lines.

It is extraordinary that more than three years into the biggest global economic breakdown for nearly a century, precipitated by a financial crash, virtually nothing has been done to reform the banks which were the major cause of it. It is even more extraordinary that the two initiatives that have been taken -- the Vickers Commission and Basel III -- are so ineffective as to be risible.

Vickers didn't even ask the right question, which is: how can public control of the money supply be regained? The question it did ask -- how can retail High Street banking be separated from casino investment banking? -- it fluffed, by proposing the erection of Chinese Walls which City financial engineering will have little trouble quickly getting round.

The international Basel Commission on Banking Supervision, a private body made up of (guess who?) central bankers as well as a few regulators, was little better. It proposed increasing capital ratio requirements on banks from 7 per cent to 10 per cent, though capital ratios have little influence over bank lending. Besides, it did not demand this change till 2019, even though the chances of another financial crash within the next 8 years are very real.

The reason why banking reform is urgent isn't just the risk of another finance conflagration, but because banking policy has played a major part in the continuing and relentless decline of the British economy over the last half century. Previously bank credit had been rationed by quantity, but from the 1971 Competition and Credit Control reforms it was increasingly rationed much more flexibly by interest rates.

That began the staggering rise in broad money in the economy from miniscule quantities in 1963, to £2.2trn today. Then in 1979 exchange controls were lifted, and at Big Bang in 1986 all controls over consumer credit were abolished and housing finance was de-regulated.

These measures have given the banks enormous powers and privileges. They can create wealth out of nothing simply by making loans to businesses and householders, and they can decide who uses it and for what purpose. If they fail to meet their liabilities, they are not even penalised; someone else pays up for them. The first £85,000 of an individual's deposits are covered by guarantee underwritten by the State, and even in the event of a major financial collapse they are bailed out by the implicit taxpayer guarantee. In the current crash, that amounts to over £70bn in direct bailouts and a further £850bn indirectly in loan guarantees, liquidity measures and asset protection schemes.

The charge sheet against the banks is that they have used these powers -- particularly in the neoliberal era since 1980 -- recklessly and in self-interest, which has done huge long-term harm to Britain's economy. By the issuance of loans they are now responsible for generating over 97 per cent of the money supply, and have used this privilege to allocate just 8 per cent to productive investment. This means that 11/12th of bank lending goes towards mortgages, real estate and business, foreign investment, high-risk speculation and financial intermediation.

This has been a significant cause of Britain's long-term decline. Last year the UK balance of payments deficit on trade in goods reached an unprecedented £100bn; equal to 6.8 per cent of GDP. British manufacturing, the lifeblood of the economy, has been systematically hollowed out. Britain remains low in productivity and innovation, and output per worker is still 40 per cent below US levels, and 20 per cent below Germany and France. Within the OECD only the UK had a lower share of GDP spent on research and development in 2000 than in 1981.

Of course, not all this can be laid at the door of the banks. But a great deal can. UK banks' relationship with industry is far more distant and unhelpful compared with Germany's Mittelstand.

The City has relentlessly driven short-termism at the expense of market share. The UK banks have used their control of the money supply to regularly generate unsustainable asset bubbles which destabilise industry and, when they crash, beggar the taxpayer. They have engineered a massive mis-allocation of global capital into tax havens which, worldwide, now shelter over £11trn of global wealth. They have exacerbated inequalities between the super-rich and the rest, the growing disparities between regions, and the crowding out of manufacturing by finance.

And by setting up a huge and powerful shadow banking system, buttressed by the proliferation of credit derivatives and securitisation, they have deliberately evaded public controls in order to boost their own selfish interests to the detriment of the nation.

So what should be done? Above all, control over the money supply must be brought back into the public domain. This is not a partisan objective. Direct credit controls have been used by many of the most successful countries over the last century; notably Japan, Korea and Taiwan after the Second World War.

Unproductive credit creation -- for example, speculative transactions like today's lending to hedge funds -- was firmly checked. Consumer loans which would trigger inflationary demand for consumer goods or draw in increased imports were discouraged. Priority was given to investment in plant and equipment, key services, and enhanced productivity via new technologies and R&D.

Of course other reforms are urgently needed too. These should include control by public authorities over potentially toxic and dangerous financial derivatives, a clean separation of retail from investment banking and specialist banks for infrastructure improvement; as well as development of the new digital green economy and reform of credit rating agencies.

But the key issue, so far ignored, is to restore accountability to the banking system via public control over the money supply.

Michael Meacher is Labour MP for Oldham West and Royton.

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The decline of the north's sporting powerhouse

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Now, things are different.

On a drive between Sheffield and Barnsley, I spotted a striking painting of the Kes poster. Billy Casper’s two-fingered salute covered the wall of a once-popular pub that is now boarded up.

It is almost 50 years since the late Barry Hines wrote A Kestrel for a Knave, the novel that inspired Ken Loach’s 1969 film, and it seems that the defiant, us-against-the-world, stick-it-to-the-man Yorkshireness he commemorated still resonates here. Almost two-thirds of the people of south Yorkshire voted to leave the EU, flicking two fingers up at what they saw as a London-based establishment, detached from life beyond the capital.

But whatever happened to Billy the unlikely lad, and the myriad other northern characters who were once the stars of stage and screen? Like the pitheads that dominated Casper’s tightly knit neighbourhood, they have disappeared from the landscape. The rot set in during the 1980s, when industries were destroyed and communities collapsed, a point eloquently made in Melvyn Bragg’s excellent radio series The Matter of the North.

Yorkshire historically acted as a counterweight to the dominance of southern elites, in sport as in politics and culture. Yet today, we rarely get to hear the voices of Barnsley, Sheffield, Doncaster and Rotherham. And the Yorkshire sporting powerhouse is no more – at least, not as we once knew it.

This should be a matter of national concern. The White Rose county is, after all, the home of the world’s oldest registered football club – Sheffield FC, formed in 1857 – and the first English team to win three successive League titles, Huddersfield Town, in the mid-1920s. Hull City are now Yorkshire’s lone representative in the Premier League.

Howard Wilkinson, the manager of Leeds United when they were crowned champions in 1992, the season before the Premier League was founded, lamented the passing of a less money-obsessed era. “My dad worked at Orgreave,” he said, “the scene of Mrs Thatcher’s greatest hour, bless her. You paid for putting an axe through what is a very strong culture of community and joint responsibility.”

The best-known scene in Loach’s film shows a football match in which Mr Sugden, the PE teacher, played by Brian Glover, comically assumes the role of Bobby Charlton. It was played out on the muddy school fields of Barnsley’s run-down Athersley estate. On a visit to his alma mater a few years ago, David Bradley, who played the scrawny 15-year-old Billy, showed me the goalposts that he had swung from as a reluctant goalkeeper. “You can still see the dint in the crossbar,” he said. When I spoke to him recently, Bradley enthused about his lifelong support for Barnsley FC. “But I’ve not been to the ground over the last season and a half,” he said. “I can’t afford it.”

Bradley is not alone. Many long-standing fans have been priced out. Barnsley is only a Championship side, but for their home encounter with Newcastle last October, their fans had to pay £30 for a ticket.

The English game is rooted in the northern, working-class communities that have borne the brunt of austerity over the past six years. The top leagues – like the EU – are perceived to be out of touch and skewed in favour of the moneyed elites.

Bradley, an ardent Remainer, despaired after the Brexit vote. “They did not know what they were doing. But I can understand why. There’s still a lot of neglect, a lot of deprivation in parts of Barnsley. They feel left behind because they have been left behind.”

It is true that there has been a feel-good factor in Yorkshire following the Rio Olympics; if the county were a country, it would have finished 17th in the international medals table. Yet while millions have been invested in “podium-level athletes”, in the team games that are most relevant to the lives of most Yorkshire folk – football, cricket and rugby league – there is a clear division between sport’s elites and its grass roots. While lucrative TV deals have enriched ruling bodies and top clubs, there has been a large decrease in the number of adults playing any sport in the four years since London staged the Games.

According to figures from Sport England, there are now 67,000 fewer people in Yorkshire involved in sport than there were in 2012. In Doncaster, to take a typical post-industrial White Rose town, there has been a 13 per cent drop in participation – compared with a 0.4 per cent decline nationally.

Attendances at rugby league, the region’s “national sport”, are falling. But cricket, in theory, is thriving, with Yorkshire winning the County Championship in 2014 and 2015. Yet Joe Root, the batsman and poster boy for this renaissance, plays far more games for his country than for his county and was rested from Yorkshire’s 2016 title decider against Middlesex.

“Root’s almost not a Yorkshire player nowadays,” said Stuart Rayner, whose book The War of the White Roses chronicles the club’s fortunes between 1968 and 1986. As a fan back then, I frequently watched Geoffrey Boycott and other local stars at Headingley. My favourite was the England bowler Chris Old, a gritty, defiant, unsung anti-hero in the Billy Casper mould.

When Old made his debut, 13 of the 17-strong Yorkshire squad were registered as working-class professionals. Half a century later, three of the five Yorkshiremen selec­ted for the last Ashes series – Root, Jonny Bairstow and Gary Ballance – were privately educated. “The game of cricket now is played in public schools,” Old told me. “Top players are getting huge amounts of money, but the grass-roots game doesn’t seem to have benefited in any way.”

“In ten years’ time you won’t get a Joe Root,” Rayner said. “If you haven’t seen these top Yorkshire cricketers playing in your backyard and you haven’t got Sky, it will be difficult to get the whole cricket bug. So where is the next generation of Roots going to come from?” Or the next generation of Jessica Ennis-Hills? Three years ago, the Sheffield stadium where she trained and first discovered athletics was closed after cuts to local services.

This article first appeared in the 19 January 2017 issue of the New Statesman, The Trump era